035 | Passive Profits: Brian Dohmen’s Guide to Building Wealth in Real Estate

Patrick Lonergan [0:06 – 0:44]: Welcome back to the Vital Strategies podcast. I’m your host, Patrick Lonergan. And in today’s episode, we’re joined by Brian Daman, a real estate developer, investor and one of our partners on the real estate side of our businesses. Brian talks through how he made the transition from private credit asset manager to real estate. We also discussed the real estate market and where the opportunities lie to stay to the end. To hear how real estate is not a passive investment and how to fix that, let’s dive into our conversation with Brian Daman. Brian, thank you for joining us here today. I’m looking forward to our discussion about real estate and sort of your background and the opportunities that you’re currently working on. So, yeah, thanks for joining us.

Brain Dohman [0:44 – 0:46]: Thanks for having me. I appreciate it.

Patrick Lonergan [0:46 – 1:01]: So Brian, you’re the founder and managing partner of Altitude Capital Partners, and your background is you’re in private credit as an asset manager, and now you’ve sort of made this transition to real estate development. Can you share with us a little bit of your background and experience there?

Brain Dohman [1:01 – 2:03]: I spent most of my career, as you mentioned, in private credit asset management, mostly in middle market. Started my career in traditional banking and over the years built a middle market institutional asset manager focused on managing money on behalf of insurance companies, institutional investors like pension funds, and then retail investors. I did that for the better part of 25 years and really focused on private credit and private equity. And over that same time period, in my own sort of portfolio, myself and my family and brothers were really focused on in our own accounts doing multifamily investing, whether it’s ground up development or adaptive reuse or value add, in a passive way with other family members. We built a pretty significant portfolio of multifamily assets, mostly in the midwest west. And that was really kind of where how the two worlds came together. I was headed this day job and then I had this sort of passive real estate portfolio that we built up over the same 20 plus years.

Patrick Lonergan [2:03 – 2:20]: Yeah, cool. So when did that realization come? Like, hey, this real estate, we’ll call it development piece, whether it’s from ground up or just taking existing operations and making it better. When did that realization sort of settle in? You’re like, hey, I think this is a better path forward. I’m going to get out of the asset management side and move into the real estate development side.

Brain Dohman [2:20 – 3:39]: There was really two reasons. One, the founders that I was working with at the previous fund had decided to sell the business. And for me, having done my sort of day job for 25 years, realized that I had a sort of a crossroads to take. And it occurred to me that I enjoyed sort of the non day job part of my life better. I got more satisfaction out of it, if you will. Just watching something be built is a lot more better than grasping leverage buyouts and money and things like that. You can actually see a building go up, you can’t really see anyone build a company. But the other interesting thing was having spent that time managing different parties money, even on the retail side, which are little mom and pop investors through their 401 ks and stuff, that was a big part of our business. People wanted access to real estate, and also a lot of my colleagues and people that I worked with over the years, they said, hey, I want to invest in your deals. And I was like, well, I got my own money and I have a day job, so I can’t really focus on yours. And so when I had that momentous five plus years ago, it occurred to me that I had this very large network of high net worth work individuals, some institutions and family offices that all sort of wanted access to real estate. And for better or worse, we had a big pipeline that had access to real estate. So that’s how altitude capital was born. It was just this aha moment that I’ve been managing money my whole career. I can manage money for people that want access to real estate instead.

Patrick Lonergan [3:40 – 4:29]: Yeah, I love it. You segued nicely into we’re actually working together on a project and the same thing happened on our end. We were involved in a number of real estate projects and our clients see the benefits of owning real estate. They like the tax benefits and all those other pieces, but they didn’t have the time or energy to go find the deal. Didn’t even really know what a good deal looked like. Just saw people making money in real estate and thought, hey, I want to get involved in that. And so when we look at where we own real estate and where altitude owns real estate, it’s like, okay, we’re in the same markets. This makes a lot of sense. Let’s put together an opportunity for people to invest alongside of us. So I do appreciate that opportunity. So lets talk a little bit about multifamily. Theres lots of ways to make money in real estate. You can make money in commercial, industrial, as a builder, lots of different ways. Can you talk a little bit about why you like multifamily?

Brain Dohman [4:29 – 6:58]: Sure. There’s the age old reason. Why do you like multifamily? Its an inflation hedge, right. In times of rising prices, you can raise rent. In times of rising interest. Rates, you can raise rent, taxes go up, you can raise rent. And the nice thing about multifamily is we have a diverse set of tenants that leases are changing at different times. So you’re able to kind of raise rents and hedge inflation as things are changing in the underlying economy and your input costs. So that’s the first reason we find multifamily interesting. The second reason is there is a shift in the United States of what home ownership means, and it’s partially changing as a result of Gen Z and Gen Y. But what’s really forced it over the last couple of years is home ownership has become sort of an impossible dream. With interest rates where they are and construction costs where they are, it’s really hard for people to come up with a down payment and pay an 8% mortgage rate when they could go live somewhere that’s nice or as nice or nicer than what the house they could have bought in a situation where they’re paying rent instead of paying down a mortgage. And the thing that’s important about that is there’s been a mindset change. Aside from that, people don’t necessarily at a certain age, until they at least start to form a household and want to have kids in school. They don’t necessarily want to be tied to a house. They want to live somewhere for six months, live somewhere two years. And that’s really been the change in the underlying mindset of american consumers and then multifamily. I alluded to this a little bit, but four years ago, the average price of a home in the United States was around 200,000. Across the country, it’s now north of 400,000. And that’s in four years. You factor that into the slowdown and construction of new single family homes. The number of buyers that can’t buy them, they really don’t have a choice but to live in an apartment and rent. That sounds worse than it is, because the apartments that are available out there now, they’re very high for average rent. You’re getting a yoga studio, golf simulator, all kinds of stuff that you would never get in your starter home. And so it’s a different rental experience. And on top of all of this, if you take Covid, the run up in interest rates were about four and a half million units short of supply in the United States. And thats right now. When rates went up to where they went up in 2023, Im speaking to multifamily. There was almost no permits put in place for multifamily in 2023. So if you played ahead to 25 and 26. It takes two to three years to build these things. Youre going to have an even more limited supply. And thats why we feel good about the continued growth in rents and the demand for multifamily.

Patrick Lonergan [6:58 – 8:04]: Yeah, I love it. And I think theres also something to think about when it comes to multifamily. If theres a recession and I need to fill a multifamily unit, if I drop the rent 10%, it fills up. If ive got a commercial space and theres no business to go in there, I can put the rent to zero and nobodys going to occupy that space. Same thing with warehouse. If theres no products to go into that space, its like Im just left holding the bag. I feel like multifamily and you hit on so many good points, but like it sort of shifts. If people can’t afford to buy, they’re moving into multifamily projects. If they’re moving up in the world, they’re using multifamily. It’s such a flexible tool. And one other point to the Gen Z, it’s like we see this general mindset, not just in their housing, but even their employment. Like, I look back at our parents and their jobs, they would go to school, get a good job and work it for 40 years, retire with a pension, and it like all worked out. Now it’s like people are sticking in jobs for two or three years and they just like the flexibility that their lives offer them. And it’s like, I can move houses, I can move jobs, I can move cities, states, you know, all of those things. So, yeah, those are really good points.

Brain Dohman [8:04 – 8:24]: Further your point. In my previous life, we made an investment in a furniture company that was drop ship. It would go to right to their houses and they’d assemble it or whatever. And what we found through that investment is that they would buy furniture, and when they would move, they would just throw it all away. It’s just a different mindset in how they live and buy housing as well.

Patrick Lonergan [8:24 – 9:09]: Yeah, absolutely. So you touched on an important point that I want to go back to about how you got started in this game is you had a network of people that were interested in real estate. And we like to make the distinction that an individual buying a piece of real estate is not a real estate investment. It’s a real estate small business. Right. It takes your time and energy to manage that thing. If I go buy the s and P 500, it’s going to do whatever it does. I can come back ten years from now, and it’ll be up, it’ll be down, but I can’t influence the value of that. Real estate’s not that way. I have to be involved in the project. People don’t have the time and energy to put into a project. They’ve got their focus on their career, their business, or what have you. So can you tell me a little bit about the infrastructure that you’ve built at altitude and how you guys manage the business of the real estate? Sure.

Brain Dohman [9:09 – 10:12]: So unlike some sort of pure, I guess, real estate developers, which I define as folks putting deals together, we’re a little bit different in that we built this business on the back of the portfolio that we’ve owned for the better part of 20 years. We’re vertically integrated into, given the fact that we manage our own property. So a lot of folks will put deals together. Your third party property managers that don’t necessarily align with the shareholders desires to maximize rent and make operations efficient. So that’s the first differentiator on development projects of certain sizes. We are our own general contractor as well, so we don’t have to be at the sort of whim of someone else’s contractor relationships or cost overruns and things like that, because we control all that ourselves. So having owned our own portfolio a long time before we started the business more than five years ago, gives us a little bit of an advantage, particularly when we’re buying something, not building it. We know where we can pull the levers and increase the cash flows on that business because we’ve got 20 years of data that shows us where expenses should be and perhaps where they’re out of whack on what we’re buying?

Patrick Lonergan [10:12 – 10:22]: That’s great. So we own property in the Midwest, you own property in the Midwest. Can you talk about the Midwest market compared to, let’s say, buying on the coast or down south? What your thoughts are there?

Brain Dohman [10:22 – 11:42]: I happen to have grown up in the Midwest, but what’s happened over the past, I’d say five to seven years, is population growth was shifting south long before COVID happened. It just got accelerated in Covid. And for a lot of reasons, institutions and different investors were focused on what they would call the smile states, the Sunshine belt. So they focus on the southeast. They focus in Texas because that’s where the population growth was going. And for a variety of reasons, right? There’s growing business, there’s growing opportunities for investment. The states have positive tax rules, all kinds of good things about the southeast. The problem is every single person tells you they’re buying in the same region. You can’t help but wonder how are the returns going to stay high when every single person is chasing the same type of asset or type of reason? If all the money’s flowing there, it’s going to close on the assets there and they’re just going to wind up producing less return. The Midwest has a similar dynamic in that it is positive population growth, low unemployment, huge health care and government economies and in many cases housing shortages or housing situations. They’ve got those dynamics and they just have been less focused on because institutions tend to think in groupthink and not necessarily where the best investments are and these are smaller markets, admittedly, but that doesn’t change the dynamics around growth and the opportunity to provide housing there.

Patrick Lonergan [11:42 – 12:08]: Yeah, I love it. So one thing that I think is important is you’ve done about a billion dollars worth of transactions and I think right now you’re currently invested in 100, 5160 million dollars worth of projects. So what that tells me is you’re interested in what I’ll call the velocity of money. Like how quickly can we get into a deal, increase the value, capitalize on it and move on to the next project. Can you talk a little bit about how you do that in the deals you’re looking at?

Brain Dohman [12:09 – 15:48]: Yeah, and ill step back just a second to provide some context of what were focused on. Now we are ground up development, which means you buy a piece of land and you build something from scratch. Thats become a little bit more of a challenge, particularly in the last two years, particularly since COVID with higher construction prices and the last two years significantly higher interest prices, its really hard to make something work. So where we focus, and weve done that historically, but where weve always focused alongside of that is what we call value add, whether it’s operational, meaning we can run the building better or we put some investment into it to get higher rents to make the units nicer or something that we call adaptive reuse. And that means we’re buying an asset, call it an office building or a hospital for way cheaper than we can build it for, and then we’re converting that into multifamily of some kind. So in these instances, in the adaptive reuse, we’re buying buildings from existing landlords. And I should say I’ll back up. I talked about the market dynamic of everyone sort of chasing the southeast. That’s true as well. When you’re not in the southeast and an asset gets marketed. So if someone’s owned a building for 40 years, all of a sudden they want to put it on the market, all of a sudden, 30 different investors are going to look at it, and someone’s going to pay the highest price, and it’s eventually going to drive the returns down on that. In 90% of the Deals that we do, we don’t buy market deals. So these are relationships that we have sometimes take three, four years to cultivate. We work directly with the landlords that own the building, and in many cases, have owned it for 50 years or more. Half of the rental stock in the United States is owned by mom and pop, individual landlords. And those are the guys that we focus on. So, to answer your question, how long do our deals take? It varies, but on the average deal that we’re focused on now, we’ll buy a building. It’s usually cash flowing, it’s not distressed. It just has been in the same family for a couple of generations. They’re not doing their best to advertise or collect rent or manage expenses. A lot of times they use these buildings, just their own sort of ATM machines, and they don’t really care about maximizing rent because sometimes they don’t even have debt on them. So many of the deals that we are currently invested in, we have twelve to 18 month turnarounds on them. So there’s really two aspects of what we do. Rents can be just below market, and there’s not a lot to do the building. So we buy the building and we properly market the rents, and we can get 25% to 30% increases in rent. In a mark to market scenarios, what we call that, or we take the next step beyond the mark to market, and that’s when we invest some money in each of the units. So maybe 15,000, maybe 20,000. But what we’re usually doing in that instance is upgrading kitchens, baths, putting in laundries, dishwashers, things of that nature. And we can generally do that on a cash flowing asset. In twelve to 18 months, we’ll usually do a third, a third, a third, depending on the size of the building. But when that’s done, you have created value because your value is based on your rental stream. Since 2019, our average increase in rent after our first turn of the rent roll is 54%, I think. So with that increase in your rent roll, you then go back to the debt markets and say, my building was. I bought it for this. It’s now worth this same loan to value. So you might have 70% debt on your acquisition, but now you have 70% debt on a building that’s worth probably 40 or 50% more. So what happens in terms of velocity of money? In many cases, the investor at the year twelve to 18 months would get a significant amount of their capital back because weve achieved value and returned it. And then its a question of holding it for two to three more years, collecting some cash flows out of the rental stream, and then selling it in year four. But by that time, youve gotten almost all your money back, plus some. In many cases, that doesnt even take into account depreciation aspect to it that certain people can take advantage.

Patrick Lonergan [15:48 – 17:04]: Yeah, I love that. That makes those ROI calculations pretty tricky to do when you dont have any cash invested or theres so many numbers long, it’s like, okay, that’s a lot of fun. And I think one thing that you pointed out that our listeners need to fully comprehend is, like, I can buy a single family home, and the value of that is based on what somebody will pay for it. The value of investment, real estate, multifamily projects, commercial industrial, what have you, is cash flow based? So when I increase the net income by, I don’t know, 2030, 40% now, the value of my project just went up dramatically because people are buying cash flows when they look at these deals. So you can force the appreciation in a way that you just can’t do it in a single family residential type scenario. And so that’s a skill. It takes a lot of work to develop it. You got to have the right people in place. And we’ve learned over the 20 years we’ve been in real estate that we screwed quite a few things up along the way. But now we’ve got into a position where we can identify an asset, almost pay market value for it based on the cash flow, and then come in and force a bunch of that appreciation. So one thing I think would be really interesting to talk about is just conceptually like, there’s a project you’re working on that you got such a great deal on the land and why that works from the development perspective. So do you want to just talk through the foundational pieces of that and what that deal sort of looks like because you got such a good deal on the land?

Brain Dohman [17:04 – 18:45]: So we have a deal. It’s in a town called Eau Claire, Wisconsin. It’s about an hour from Minneapolis St. Paul. Again, typical drivers in the market, population growth, housing shortage, health care and government. The Mayo health clinic system is the second largest employer there, and there’s a University of Wisconsin campus there. So a lot of positive things. Menards home improvement is the biggest employer. So that’s a growing chain as well. Through a relationship that we had with someone locally, we were able to purchase infill, which means an empty piece of land right in the neighborhood, and it contained ten acres and an empty hospital building. So we bought all of that for, I think, about $625,000, and we’re putting 200 apartments there. What’s been prohibitive, as I mentioned earlier, about ground up development, this is a little bit of an in between, because we’re repositioning the hospital into apartments as well. What’s made ground up development prohibitive is interest rate costs and construction costs, and that hasn’t changed for us. We’re exposed to those just like anyone else’s. But we successfully bought the land for $625,000 on a significant. I think it’s $30 million project cost. And so when you factor that in, your price of land per door, because land in any building project is one of the biggest input costs there is. So for us to build an apartment now for $150,000 a unit, and $150,000 contains the land cost, which is $3,000 a unit or more, maybe slightly more than that, a lot of times, the land cost can be a third to a half of the development costs, and we don’t have that here. My point is, we solved for a lot of other things that make this more feasible by being able to source this off market and at a very attractive price.

Patrick Lonergan [18:45 – 19:33]: That’s fantastic. And when you talk about Eau Claire, we’ve got a multifamily project that we own in Eau Claire, and we have some of those institutions you were talking about coming to us. There’s community college, there’s the university coming to us saying, hey, there’s no inventory. Can we just guarantee leases for you? And so it’s like, we just want to hold these for the people that are coming to school here, hospital. Same way. It’s like, hey, we just want to take a block of these so we can hire some people in the area. So I think there’s, like, 2% vacancy rate in the city, which is effectively zero, because between people moving in and out, it’s really hard to find units. So that sounds like it’s an awfully good deal. Brian, can you tell us a little bit about how people can come alongside you and invest in your deals? I know you’ve got some limited opportunities there, but let’s say somebody’s like, hey, I think what you’re doing is really cool. How does that generally work?

Brain Dohman [19:33 – 20:30]: So, at any given time. We’re probably working on four investments or so and in different stages of investment. But if this sounds interesting to you, we have a client investor portal that people can log into and view the deals that we have available to invest in. You can reach out to me directly. We can be connected with someone here internally that can walk through each of the deals. But the important thing is we’ve got a wide range of the type of deals that we’re working on. So certain people want to make certain investments in these deals. We have deals that might only need a couple million dollars of equity. Then we can take smaller investors at 50,000 or something like that per check, and then we’ve got ones that have ten to $15 million of equity. And of course, we’re open to smaller check sizes, but we’d like to see bigger check sizes as they go on. So they’re all sort of similar these days, under managed, good locations, very little downside, with a lot of upside, just due to mismanagement, lack of historical investment. So that’s the easiest summary I can give you.

Patrick Lonergan [20:30 – 20:35]: Cool. No, that’s great. And just a little bit on your track record, how many deals have you done that have lost money?

Brain Dohman [20:36 – 20:36]: Zero.

Patrick Lonergan [20:36 – 20:38]: All right, that’s good.

Brain Dohman [20:39 – 21:15]: That’s not to imply that none of this has risk, but the point I’m trying to make, when you’re buying something below replacement cost in a good market, that’s cash flowing. It takes a lot of the risk. Out in the spectrum of real estate, it’s like the lowest end of the spectrum. For the returns that we’re getting, we’re targeting mid teens returns, almost two times your money on average. And that’s sort of indicative of our track record. We’ve done the ground up and we’ve done the riskier end of the spectrum. But there’s so much opportunity, just given the generational change in what’s going on with the mom and pop landlords, that we’ve got more pipeline than we can consume for the near and long term.

Patrick Lonergan [21:15 – 22:19]: Yeah, I love it. And we’ll make sure your contact information and how to get in touch with you is in the show notes and we’ll put a link out there if people want to get on. I know we’re working on a deal together, but I get your emails, too, on the opportunity that pop up. So we’ll make sure we pass that information on to anybody that submits their email. And I think it’s important to also point out accredited investor status. So just to outline what that is. So to be involved in these deals. Generally, it makes sense to be accredited investor, which means if you’re an individual, you have $200,000 of income, or a married couple at $300,000 of income for the last two years, and you just expect that to keep moving forward, or a net worth of a million dollars at the time of your investment, and that can’t include your personal residence. Some of those pieces matter. We don’t want somebody taking every last dollar they can scrape together and putting it into the deal. It’s relatively illiquid for the short term. People get their money back in three or four years like we were talking about. But what we don’t want to have happen is somebody puts the money in, they call you in three months and say, hey, I need my dollars back. So credit investor status is important piece there. Brian. Anything else we need to talk about as far as the opportunities out there in the marketplace or what you have going on? Brian?

Brain Dohman [22:19 – 22:55]: Yeah, one thing I failed to mention earlier, I think we did, but we’re in the midwest, as I said, but we’re focused on Wisconsin, Minnesota. We’re selectively looking at Iowa and Indiana and then selectively Chicago. Chicago’s a little bit more challenging, but because of some of the headlines, there’s some really good opportunities there. And your goal is to find something under manageable, low replacement costs with some easy operational fixes. It doesn’t really matter what the headlines are when you go in that way. So we appreciate your time on this. We see a huge opportunity here. We’re growing as a firm, 30 or 40% a year, and I think with what we have in the pipeline, there’s plenty of opportunity for us to continue to do that.

Patrick Lonergan [22:55 – 24:06]: Yeah, I love it. And I think the way this fits well with the entrepreneur is their focus is on building their primary asset, and that’s the business we look at. One of the best wealth building tools outside of the business is real estate. You get the benefits of appreciation, amortization, forced appreciation, like you were talking about. You know, there’s tax benefits that are tremendous that you can utilize to even offset in the right situations, you know, active income in the business. We love real estate for all of those reasons. It’s, I think, sort of stood the test of time as far as a wealth building tool. And back to your point on Chicago. Ive got a family member thats been investing in, well, call it the Lincoln park area. It was a really rough area in the late seventies, but he saw the growth sort of coming back out of the city. And he went, okay, hey, theres opportunity here, and started picking up assets, and theyve been cash flowing. And hes just had tremendous wealth generation over those years, both from cash flow and asset value. I remember him driving me by. It was a three flat. And he was like, I bought that one for 45,000. I sold it for 60. I thought I made all of the money in the world. He was like, it just sold for 800,000. And that was like a decade ago. So its probably worth two or $3 million right now. And he was like, thats my one regret. The good news is he held on to dozens of other properties like that.

Brain Dohman [24:06 – 24:56]: Trey, the one final point I would make, and I meant to do this earlier, but in terms of recession, theres all kinds of talk about recession. There has been for twelve plus years. The one thing I will point out is with the cubs of multifamily and it comes to recession, I would say, unlike last time, I think you recall I mentioned the supply shortage that we have now, the 4.5 million unit of supply shortage, we didnt have that before. And I would say recession aside, in my opinion, its certainly not likely to hit residential real estate because theres just no place for people to live. And weve had these negative supply shocks with COVID and interest rates that are perpetuating that. So sometimes people, we forget that the reverse was there in 2008, oversupply investors that didnt have cash in it. People actually have money in these deals now and were still short the significant amount of supply. So thats why were pretty bullish on being able to improve this housing and bring it back into the market.

Patrick Lonergan [24:56 – 25:34]: Trey? Yeah, I love it. I think one thing weve glossed over but we should touch on is real estate is a fantastic inflation hedge. The government printed all sorts of money during COVID and were seeing that inflation and its like we get inflation in the asset value, we get inflation into rents. But the cool thing is our mortgage debt stays level or actually declines as it amortizes. So we think if the government’s just going to keep printing its way out of problems, owning more real estate is a fantastic way to offset that, because our cash, our dollars in the bank, even if we’re earning 5% on our money market, if inflation’s at six, seven, eight, we’re losing ground there. So love real estate as an inflation hedge as well.

Brain Dohman [25:34 – 25:34]: Absolutely.

Patrick Lonergan [25:34 – 25:38]: Good. All right, Brian, anything else before we wrap up?

Brain Dohman [25:38 – 25:46]: Brian? Nope, I think that’s good. I think to the extent people are interested, happy to have a conversation even if it’s just about the markets we’re in and things like that, not necessarily deal. Happy to do that.

Patrick Lonergan [25:46 – 25:56]: Sure. Fantastic. Well, appreciate your time. Appreciate your partnership on the opportunities we’re working on together and this is a valuable conversation for our listeners. We’ll make sure all of your contact information is available. You have a great day.

Brain Dohman [25:56 – 25:57]: Appreciate it.

Patrick Lonergan [25:58 – 26:59]: Thank you for listening to the Vital Strategies podcast. If you’re interested in investing in real estate but don’t want to have to figure out how to manage the property, deal with tenants, but want the cash flow and all the benefits of real estate, go to vitalstrategies.com realestate. Again, that website is vitalstrategies.com realestate and we will make sure to get you on the email newsletter for when opportunities become available. You’ll be the first to know. I want to remind you to rate and review the Vital Strategies podcast on your favorite platform. Your feedback helps us towards our goal of saving our clients and listeners over $1 billion in taxes. Those dollars are better used in your hands versus the government bureaucracy. Thank you for listening and for being a vital entrepreneur. You’re vital because you are the backbone of our economy, creating opportunities for your employees and driving growth. You’re vital to your family, fostering abundance not only financially, but in all aspects of life that matter. Finally, you’re vital to me because you strive to build wealth, make an impact through your business, and live a great life.