From Banking to Multifamily:Lou on Secondary Markets,Distressed Deals & W-2 to Investor Freedom

Lou Pacelli (00:00)

Most loans are three to five years, seven years tops. So there are billions and billions of dollars come and due in this next year or two. And those are coming off three percent rates going into seven and eight percent rates. So there’s going to be a lot of distressed assets coming up.

Dylan Silver (01:50)

Hey folks, welcome back to the show. Today’s guest, Lou Pacelli is the founder and CEO of Sentinel Harbor Capital, a commercial real estate private equity firm partnering with syndicators for value add multifamily acquisitions and high quality secondary markets across the East Coast in Midwest. Lou, welcome to the show.

Lou Pacelli (02:10)

Thank you, thank you Dylan, thank you for having me. It’s a pleasure.

Dylan Silver (02:13)

It’s great to have you on here. Before

hopping on, we realized that we have a connection with both New Jersey guys, me originally, and you’re out there. I do want to get to that, but before we hop into talking about New Jersey, ⁓ how did you get into real estate?

Lou Pacelli (02:27)

⁓ Well, I’ve been in banking. I ⁓ was in finance and accounting ⁓ as a major in college. And since I got out of college, I went into accounting and then I went into banking. ⁓ And most of my banking career was in risk management and ⁓ portfolio management. ⁓

both in C &I, both in commercial and industrial ⁓ lending, as well as for the regional banks and the smaller banks that I’ve been part of were mostly commercial real estate portfolios. ⁓

That was a big part of their portfolio. So I learned how to underwrite. I learned how to structure and close deals through the banking system. And then I chose to leave banking because I really enjoyed real estate. So I jumped into real estate, buying it on my own while I was still working at the bank. you know, always commercial real estate, never really flipped like smaller stuff.

I mean, actually, did purchase originally back in 2017 or 2016. purchased some, I started out purchasing some properties in inner city properties, multi-family, two, three family homes. But then I quickly went into a larger commercial real estate deals, you know, in the area.

Dylan Silver (03:46)

I want to ask you about coming from the background in banking, how common is it that folks working with banks are real estate investors themselves? To me, seems like it would be a perfect fit, but is it quite common?

Lou Pacelli (04:47)

No, it’s not really common. The main reason it’s not common is because bankers are generally not very risk-oriented. I never really fit in with the banking world. I was always more into the real estate. So the risk was never in the finance and the accounting part of it. The risk was never really as big a fear for me.

Most people in banking are just tied to their W-2 and don’t really venture past that.

Dylan Silver (05:18)

want to ask you about specifically going from ⁓ W to real estate and at that point in time, and there’s so many listeners and I’ve been through this myself where you’re thinking, okay, I’m going to make this jump but also there’s so many people who are telling me this is maybe outside of the norm. What was that process like for you? Did you have mentorship at that point in time? How did you find your first deals? What was that whole process like?

Lou Pacelli (05:24)

you

Well, I found deals by simply just beating the pavement. Calling brokers, looking for off-market deals. And now they kind of come to me. I get them a lot more because I have people I know, relationships throughout the country. as far as making the transition, I made the transition not…

not very young in my life. I was working for probably close to 20, over 30 years before I decided to get into it. yeah, there were a lot of naysayers saying that you shouldn’t be doing this, you shouldn’t be doing this, but I found it to be more, I found a larger risk in staying in corporate. ⁓

than leaving because once I left it opened up a whole new world ⁓ of cash flow, multiple streams of income, which actually in retrospect is actually safer than relying on one W-2 income because especially in this market you can be laid off really easily.

Dylan Silver (06:51)

question. I want to ask you about the commercial side. You got in first in commercial. Was that your first deals?

Lou Pacelli (06:58)

No, no. I always worked in commercial with the banks. So I was very aware of it and I understood how to structure loans. The only piece I didn’t really get involved in too much is the piece I’m in now is the equity part. coming from a banking world, it was pretty easy.

⁓ structure it because now I’m doing a little bit differently I do finance I do negotiate and structure the loans the debt as well as the equity ⁓ but yeah what was new to me was structuring the waterfalls the waterfall and structuring ⁓ the ⁓ the payback to the to the equity investors

Dylan Silver (07:41)

to get a little bit granular here if we can. Maybe give away some of the gold but not all of the gold. When you were getting into real estate yourself and looking at your first deals, was it single family? Was it small multifamily? Were these off-market distressed deals?

Lou Pacelli (07:54)

They were usually distressed because I got in like probably shortly after 2010 when the market was ⁓ really bad. actually it was a good time to get in. I wasn’t really in the market at that time which is probably why I’m better off than most. ⁓ Because I actually was able to buy properties really really cheap. And not necessarily flip them because I work on them.

I wouldn’t flip them ⁓ within weeks or months. I would hang on to them, get them stabilized, and then maybe sell them in a year or two. ⁓

But yeah, that’s exactly how I got into it. And I was lucky enough to be able to buy them real cheap, because a lot of them were in foreclosure and some were even bank owned. And we’re looking at that scenario today now, where I think we’re going in. We had a hot market, but I know, for example, Florida is correcting right now. I’m talking to a lot of people and there’s a lot more distressed assets. And me being from banking, I also know how the portfolio is.

operate.

Most loans are three to five years, seven years tops. So there are billions and billions of dollars come and due in this next year or two. And those are coming off three percent rates going into seven and eight percent rates. So there’s going to be a lot of distressed assets coming up.

Dylan Silver (09:58)

When you were growing in your real estate journey, I’m imagining going from single family and now looking at the commercial space, there had to be some pivot points along the way or trends that you saw or deals that you ⁓ partook in. Can you walk me through some of those to how you got to where you are today?

Lou Pacelli (10:17)

What do mean, you want me to talk about specific deals or ⁓ how to?

Dylan Silver (10:21)

Just general strategy or maybe, you know, pivot points in your journey where you said, okay, I’m in the single family space. I’m now seeing an opportunity in commercial. How did you end up getting into the commercial side?

Lou Pacelli (10:34)

Well, like I said, I always worked in commercial for banks, so I knew how to underwrite. I knew how to value large deals.

All asset classes, but what I did was I focused on one niche. I focused on multifamily ⁓ Because I felt that multifamily was something that was always needed ⁓ So that was a good niche to follow and it was similar to like if I was buying two three-family houses Which is what I was originally buying I’m buying two and three-family homes ⁓

and basically renting them up, it was not that different to buy like an 80 unit apartment complex or a 100 plus unit apartment complex. It was just a little more complicated to operate, but I would hire. I don’t actually operate the properties. I would partner with a property manager, but I do manage the assets. I structure the debt. I structure the equity. And those were all… ⁓

skills that I had those were all skills I had from my from my years in banking

Dylan Silver (11:46)

the banking.

I want to ask you about secondary markets. ⁓ Really, what defines a secondary market? And then also, you know, how do you identify a general broad strokes, thousand foot view? What are some things that you look for in deals?

Lou Pacelli (12:02)

Yeah, well that’s really where I’m looking right now. That’s why we’re in Illinois. We’re in parts of, ⁓ I like parts of Texas. Secondary markets are good because… ⁓

they give you an opportunity to buy something at a reasonable price and you still have significant growth. Now, what I consider and what I look at really for secondary markets or tertiary markets ⁓ is population, population growth, the general population. Like for example, we’re right outside of St. Louis. Now, St. Louis is a secondary market because the city is, you know,

fraction of size of Manhattan. ⁓ So that’s considered a secondary market. You go into the South, ⁓ it’s population, it’s household income. once you leave this area, house, income drops significantly and population drops. So then you have the.

biggest part of the country is our secondary markets.

Dylan Silver (13:13)

spent time in San Antonio, I spent time in Dallas. Dallas was very big. San Antonio, that be considered a secondary market, San Antonio?

Lou Pacelli (13:23)

Yeah, Austin is probably not, but San Antonio would be. ⁓ Well, yeah, Austin’s probably, well, it’s been a hot market, but San Antonio, actually I have a property in San Antonio. We’re looking to close in ⁓ November, mid-November. We still have like a $2 million to raise on that one. there’s 112 units in San Antonio that I’m working on now. ⁓

I like that market. That’s a good market. like the Texas market. Dallas, Fort Worth is probably not a secondary. Houston would be more of a secondary, but I’m not as crazy about Houston. If I had to be in Texas, I would want to be in the Dallas area, the suburbs of Dallas, San Antonio, or definitely Austin.

Dylan Silver (14:49)

do want to pivot a bit here, Lou, and ask you about New Jersey. As a Texas licensed realtor but ⁓ raised in New Jersey myself and my family’s in New Jersey, I think it’s interesting because I’ve spoken with investors, of course, from Texas, but then also from New Jersey, and it seems like a lot of the times you’ll have investors in New Jersey who are investing outside of New Jersey because it is a little bit easier, especially if you’re…

getting started and you don’t necessarily have the time and money and bandwidth to deal with evictions and this type of thing. Is there any, you know, potential ⁓ easing of this? Are we going to see more investors investing in New Jersey?

Lou Pacelli (15:29)

With New Jersey, the problem is, I mean, the population here is huge. I mean, there are some, like, there is some exiting, but New Jersey is such a huge, huge population and a huge employment market that, you know, even in 2008, the people didn’t, you know, we bought properties, but you know where we bought them? We bought them in Newark, you know, in the hood.

Essentially. you know, because the taxes are crazy, the taxes are crazy, are really, really expensive. So it’s really hard to ⁓ find anything. we did really well in Jersey City because in the 2010 market, that market, there was a lot of gentrification there where, you know, there was a lot of growth there. Newark didn’t do it fair as well. There’s not as much growth in Newark.

Dylan Silver (15:55)

Yeah.

Lou Pacelli (16:23)

Mainly because the politicians but you know, but Jersey City because of its proximity to Manhattan and its views of Manhattan did really well. Did really well from that point on. now what we would buy, a two family house for example or a three family house that we would buy for like $200,000 is worth a million dollars now.

Dylan Silver (16:37)

Hmm.

That’s right. That’s just how it happened. mean, if you’ve got the ability to hold on to it. I haven’t met a investor at East Coast specifically who’s told me that they regretted holding on to a property that they may be considered ⁓ having a quick sell early on, especially if it’s in the single family space and they were stacking ⁓ single family homes in a portfolio. We are coming up on time here, Lou. Where can folks go?

if they’re interested in reaching out to you, learning more about Sentinel Harbor Caps.

Lou Pacelli (17:19)

Well, you can find me online mostly ⁓ My website for Sentinel Harbor is sentinel harbor cap calm Sentinel Harbor CAP calm you could also find me on LinkedIn under my name Lewis Lou Pacelli ⁓ Or Sentinel Harbor Capital. There’s the business web. There’s a business ⁓ page there as well So I would say probably the best place would be LinkedIn ⁓ and I’m still building out the website, but it’s available now

Dylan Silver (17:48)

Lou, thank you so much for coming on the show here today.

Lou Pacelli (17:51)

Dylan,

thank you for your time. appreciate it.