Don’t Quit Your Day Job for Real Estate with John McNellis, Ep. 803

John McNellis is a veteran real estate developer and founding partner of McNellis Partners, where he has spent more than four decades developing over 100 properties across Northern California, primarily supermarket anchored shopping centers. He started as a journalism major, went to law school, and practiced litigation for less than a year before shifting into real estate law, where he learned to structure large transactions and met the people who would fund his first deals.

John built his first shopping center in 1983 alongside an older developer client and has worked with the same two partners, Beth Walter and Mike Powers, ever since. He is the author of Making It in Real Estate: Thriving as a Developer, now in its third edition, and writes a monthly column for the San Francisco Business Times and The Registry.

​​In this episode, John McNellis walks through 43 years of development, starting with a duplex he bought at 24 and ending with a firm that uses no outside capital at all. He explains how a law career gave him a shortcut into large deals, why he stopped raising money after his financial partners walked away during the early 1990s recession, and what he learned from losing a Sacramento shopping center in foreclosure. He also makes an argument most real estate podcasts avoid: keep your day job, because the failure rate in development is high and the cash flow takes years to arrive.

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Key Takeaways

• Learn large deal mechanics on someone else’s payroll before risking your own capital

• Partner for the skills you lack, and accept that good partnerships can still end

• Weigh the control you surrender before accepting outside capital

• Owning 100% of a small deal can beat owning 1% of a large one

• Do not overpay, over leverage, or over develop

Topics

From Journalism to Law to Development

• Practiced litigation for less than a year before moving to real estate law

• Legal work exposed him to eight figure deals, entity structures, and capital contacts

Early Deals That Funded the Career

• Bought a duplex at 24 for $25,000 with roughly $1,500 down

• Traded up to a fourplex and turned $1,500 into $90,000 in about two years

The First Shopping Center

• Partnered with a developer client who had construction expertise but could not sell

• John raised $1 million in equity at $25,000 per investor and handled the legal work

• Built in 1983, still owned today, mortgage paid off and renovated twice

Why That Partnership Worked, and Why It Ended

• The partnership ran 5 or 6 years, until neither needed the other

• Beth Walter and Mike Powers joined in 1983 and remain his partners 43 years later

The Developer as Conductor

• John says he still knows nothing about construction after 80 odd buildings

• Development requires an orchestra of partners, consultants, and contractors

The Capital Ladder and Its Ceiling

• Friends and family money is a booster rocket, useful until you run out of friends

• Institutional capital costs more and carries total control over timing and exits

What Non-Recourse Actually Means

• Deregulation of savings and loans pushed money into commercial real estate in the 1980s

• Financial partners walked away mid-project during the early 1990s recession

• Non-recourse protects you from them and protects them from you

Moving to Their Own Capital Only

• John chose owning 100% of a small deal over a minority stake in a large one

• The firm buys junk, fixes it, sells it as antiques, and funds the next deal

Why He Tells Developers to Keep Their Day Job

• Development can take three to six years before a property cash flows

• John practiced law through his first ten years of investing

• He cites a failure rate above 60% for development firms in their first decade

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Round of Insights

Failure that set John up for success: A Sacramento shopping center bought with his first partner. They overpaid, overleveraged with a savings and loan that funded 103% of the purchase price, and tried to over develop the site. The deal ended in foreclosure about ten years later and taught him not to overpay, over leverage, or over develop.

Digital or mobile resource: Google Earth.

Book recommendation: The Elements of Style by Strunk and White.

Daily habit: Getting out of bed before 7 a.m. and getting to the office.

#1 insight for making it in real estate: Persistence first, risk evaluation second. Real money requires real risk, but too much risk ends the business and none of it leaves you consulting.

Favorite restaurant in Palo Alto, CA: Evvia.

Next Steps

• Reach out to John via email: john@mcnellis.com

• Connect with John McNellis on LinkedIn, where he reposts his monthly columns

• Read Making It in Real Estate: Thriving as a Developer, available on Amazon and Barnes & Noble

• Follow his columns in the San Francisco Business Times and The Registry

• Audit whether your current capital structure gives you the control you need

• Pressure test purchase price, leverage, and development scope before you commit

• Identify the operating partners you need instead of trying to cover every role

Thank you for joining us for another great episode! If you’re enjoying the show, please LEAVE A RATING OR REVIEW, and be sure to hit that subscribe button so you don’t miss an episode.