Tom Motlow

This transcript has been edited for better readability: Henry Harrison Podcast — Entrepreneurs, Business & Finance Guest: Tom Motlow Henry Harrison Hello, Tom. Welcome to the show, Entrepreneurs, Business and Finance. One of my longtime friends from Dallas, I met Tom not too long after I moved here, when we were both single. I was at your wedding, and that was before you had a son in college — before you even had a son at all. We met through a mutual friend, and then there were plenty of happy hours, some tennis, and over time I realized that you were a very smart real estate investor who later went on to become a builder as well. In addition to becoming good friends, you also organized one of the first larger investment partnerships I was involved in. You and some friends put together loans, equity, and guarantees, and we built a model home that was featured nationally in a magazine. We also built around 17 or 18 homes priced at over a million dollars, which would probably be two or three million dollar homes today. Your investors made a good return, and you’ve been a supporter of mine in many ways ever since. I wanted to have you on the show because in addition to being a great guy, you’re a very smart businessperson. I know you went to college, and when you graduated you eventually went into real estate. Would you like to talk a little bit about how you got started? Tom Motlow Actually, I didn’t go straight into real estate. Right out of college, I went into the medical sales business, selling pharmaceuticals and medical equipment. That’s what I went to school for, and I got a job down here in Dallas in 1980. I was given a car and a list of customers and started driving around selling for a Fortune 500 company. Over the next four or five years, I worked for several big companies like that. It was fine, but I wasn’t especially enthusiastic about working for a large corporation. You’re only as good as they want you to be for as long as they want you. You have to keep producing, and you’re always subject to being let go during a recession or anytime the company decides to make a change. You don’t really feel like you’re building anything. You’re just out there selling. Along the way, I met other young guys in Dallas who were doing real estate — everything from investment properties to land sales. Some were commercial brokers, and they were telling me how much money they were making, even back in the mid-1980s. I remember thinking, “I’m not even making that much in a year, and they’re making it on one sale.” So I decided to make the jump into real estate. I saved enough money to live for about a year, because if you’re going into a straight commission business, you need some cushion. I joined Henry S. Miller Company, which no longer exists in the same form, but at the time it was a major commercial brokerage company. Eventually it merged with Grubb & Ellis. I spent years selling commercial real estate all over Dallas — apartment complexes, shopping centers, land, and similar types of properties. I worked through several recessions, including the big recession in the late 1980s when the RTC, the Resolution Trust Corporation, was selling foreclosed properties from failed institutions. I brokered a lot of properties from the government during that period. So I got to experience the business in both good markets and bad markets. Henry Harrison And I know that somewhere along the way, working in brokerage started opening your eyes to the principal side of the business. You were dealing with so many investors, builders, and developers that eventually you started thinking, “I might want to be on that side of the table instead of just brokering deals.” Tom Motlow Exactly. While I was brokering deals, I was constantly seeing the other side of the transaction — the investors, the principals, the builders. I worked with everyone from small and medium-sized investors who might buy an apartment complex to large institutional investors and insurance companies buying very large properties. I also started working with builders who would build a property, lease it, and then sell it. I’d go over plans with them, see how they were putting deals together, and understand how they were building and creating value. Maybe six or seven years into brokerage, I started thinking that instead of always being only as good as my next listing or my next deal, I wanted to get into the principal side — whether that meant building or just owning property. So I began doing that gradually. Whenever I closed a commercial deal and cleared maybe $75,000 or $100,000, I would take that money and invest it myself. One of the first things I did was go over to Lower Greenville in Dallas and start buying duplexes and small rental properties. That area was attracting younger tenants, restaurants, and nightlife, and it was close to downtown but still affordable back then. I bought duplexes, many of which needed renovation, and I just kept adding to the portfolio. Sometimes I had to get very creative to buy them. There were times when I didn’t have a commercial deal closing and didn’t have cash sitting there, so I had to figure out how to buy a property anyway. I used creative financing, borrowed against stock, and in a couple of the earliest deals I even put down earnest money on a credit card. Over time, I accumulated 30 or 40 duplexes in that area. At that point it almost became a full-time job just managing all of them, even with outside management in place. But it was a great portfolio because it was in a desirable part of Dallas where rents were rising and demand was steady. Back then, I was buying those properties for $50,000 to $80,000. Today those same lots and properties are worth dramatically more. Henry Harrison That’s one of the things I’ve always found impressive. You didn’t just start building big projects right away. You built up knowledge and capital over time, first through brokerage and then through smaller investments. And eventually that evolved into development — especially townhomes and more complex projects. Tom Motlow That’s right. Over time, I started noticing that many of those older duplexes and properties in the Greenville area were becoming less efficient as rentals. The interiors were aging, renovation costs were going up, insurance was going up, and the land values had started rising much faster than the values of the buildings themselves. At a certain point, the lot became worth so much that it made more sense to tear down the old rental and redevelop the land. So I started building duplex-style new construction and then eventually townhome projects. One of the first townhome projects I did was down off Ross Avenue, closer to downtown Dallas, where the zoning allowed more density. I would buy teardown properties, clear the site, and build smaller groups of townhomes. You and I worked together on one of those projects — a development with eight units — and it was very successful. From there I built probably nine or ten complexes, maybe 70 to 80 units total, with the largest being around 18 units. Some sold, and many I kept as rentals. That led into larger and more sophisticated development. Today I’m still building townhomes, but I’m also building much more expensive product. In the Greenville and Lakewood areas, for example, I’m now doing three-story luxury duplex units with rooftop terraces that are selling for over $1.2 million per side. And beyond that, I’m now also working on custom single-family homes in the $2 million to $2.5 million range. So yes, it has definitely evolved. Henry Harrison I didn’t even realize you were doing that many different things right now. You’ve always had a lot going on. And I think it’s worth pointing out that you didn’t have some big builder training program the way I did when I worked for a large company. You really learned this by doing — by watching, by investing, by taking risks, and by gradually moving into more complicated projects. Tom Motlow That’s true. A lot of it really was trial and error, plus learning by watching other people who were already doing it. But over time, once you’ve bought, renovated, rented, built, sold, and managed enough properties, you start recognizing what makes sense and what doesn’t. And the projects today are definitely more sophisticated. For example, in the old Greenville area, the first new duplex-style project I did sold for under $600,000 per side. Those were around 2,500 square feet and two stories. Now in that same general area, I’m building 3,300 to 3,400 square foot, three-story units with rooftop terraces, and they’re selling for roughly double that. The only way that works is because the land is so expensive now that you have to build enough square footage and enough quality into the project to justify the price. That’s really the challenge in development today: land is expensive, materials are expensive, and interest rates are high. You have to hit the right price point or the deal simply doesn’t work. Henry Harrison That leads into the part of the business that most people don’t see. Real estate development looks glamorous from the outside sometimes, but it’s a long-cycle business. By the time you buy the land, plan the project, line up financing, go through construction, and finally sell it, a lot can change in the economy. And I know you’ve lived through multiple recessions and difficult periods. Tom Motlow Absolutely. That’s one of the realities of this business. A house may take 9 to 12 months to build, but the planning and setup often starts six months before that, so from beginning to end you may be looking at 18 months to two years for a single project. If it’s a larger project, it may take two to three years or more. A lot can change in that time. You can start in a great market and find yourself finishing in a recession. I’ve lived through at least four recessions, and two of them were very bad. During the 2008–2009 recession, I had multiple properties under construction. Some were intended for sale, but the market froze. In one project, we sold half the townhomes and then the market just died. Nobody was buying. We had to rent out the remaining units, and not at good rents — just enough to help carry them. That wasn’t the original plan at all, but it kept the project alive. I also had to go back to partners and lenders and make capital calls, which is never a fun conversation. You have to tell everyone, “We all need to put in more money right now or we risk losing the property.” Lenders generally do not want your property back if you’ve been a good customer, but they do expect some concessions. So you need to be prepared for that. That’s just part of the real estate business if you stay in it long enough. Henry Harrison You’ve also put together partnerships over the years, including the one we did at Lake Forest, where a group of investors put up equity and guarantees so we could build homes together. And I know you’ve done that in townhome projects as well. Tom Motlow Yes, several times. At Lake Forest, we had a group of investors, arranged financing, bought a number of lots, and built homes. That worked out well. I also did similar things in townhouse partnerships. Sometimes the partnership approach made sense because no one person wanted to carry the entire project alone, and it allowed us to combine capital, guarantees, and expertise. Those projects could be very profitable, but again, timing is critical. If the market cooperates, it works beautifully. If the cycle turns on you, then you’d better have good partners and enough flexibility to survive it. Henry Harrison One lesson I think you’ve lived very clearly is that this is not a “get rich quick” business. It’s much more of a Warren Buffett-style, buy-and-hold, build-over-time kind of business. It takes patience. Tom Motlow That’s exactly right. It’s a great way to build wealth over time, but it’s not quick. It takes patience, discipline, and the ability to weather difficult periods. The longer you can hold quality property, the better your odds generally become. And over time you also learn something very important: the best areas eventually become too expensive, so you have to start looking for the next area that’s going to improve. That takes time too. But if you get into the right area and you’re patient enough, values will rise. Inflation alone pushes values and rents higher over long periods. So if you buy well and manage well, the property is very likely to be worth more in the future. Henry Harrison You also mentioned something before we started recording that I think is worth repeating: when you look back, you’ve sold many properties over the years, but in hindsight you almost always wish you had kept them. Tom Motlow That’s true. I’ve bought and sold many more properties than I currently own. At the time I sold them, I usually thought I was getting a good price and making a smart decision. And in many cases I was making a profit. But if I look back today, almost every one of those properties is worth far more now than it was then. So in hindsight, if I had kept everything I ever owned, my net worth would be a lot higher. Of course, that’s not always realistic. You still have to sleep at night. You still have to manage what you own. You still have to deal with the work and stress that comes with it. But the general principle is very true: good real estate tends to go up over time, and holding quality property for the long term is usually rewarding. Henry Harrison Before we wrap up, I know you also got involved in some multifamily apartment properties with other investors along the way. Tom Motlow Yes, I did. That was more during my Grubb & Ellis days, when I was seeing apartment deals all the time. That’s one of the best ways to learn — being a broker in a given property type. You see dozens and dozens of deals, and over time you start recognizing what’s a good value and what isn’t. A few times, with a group of investors, we saw apartment deals that we thought were just too good to pass up. They were usually value-add opportunities where we could buy them, improve them, raise rents, and sell a few years later. We bought a 127-unit property, another around 74 units, and another around 100 units, all in different parts of town. We held them for maybe four or five years and then sold them for good gains. That was more opportunistic, but it worked well because we were already in the business and exposed to the opportunities. Henry Harrison That’s a great note to end on. Tom, you’ve offered a lot of insight, and it’s really an interesting story. Thanks for taking the time to come on, and I look forward to seeing you on the tennis court and at lunch sometime soon. Tom Motlow I do too. I’ll try to find time for both. And thanks, Henry. I’ve always enjoyed talking with you. Henry Harrison Likewise. Bye. Tom Motlow Bye.