JF979: Why He Went Through FIVE Property Managers in FOUR Years

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His first investment purchase was a 62 unit building…out of state. Our guest went through 5 property managers in 4 years…but why? You’ll have to find out.

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Todd Tresidder Real Estate Background:

– Financial Coach and Owner of FinancialMentor.com
– Age of 23 his net worth was $0 and 12 years later he was a millionaire
– Retired at age 35 from Hedge Fund Investment Manager that was responsible for 20+ million dollar portfolio
– Financially independent from age 35 through investing – not marketing
– Based in Reno, Nevada
– Say hi to him at https://financialmentor.com/
– Best Ever book: The War of Art

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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluffy stuff.

With us today, Todd Tresidder. How are you doing, Todd?

Todd Tresidder: Doing good, Joe. Thanks for having me on the show.

Joe Fairless: Nice to have you on the show. A little bit about Todd – he is a financial coach and owner of FinancialMentor.com. At the age of 23 his net worth was zero bucks, and 12 years later he was a millionaire. He retired at age 35 from hedge fund investment manager that was responsible for a 20 million dollar plus portfolio. He’s done tax liens, he has had ownership interest in apartment communities, he’s bought a bunch of acreage, and he got out of all that stuff right before 2008. We’re gonna talk to him about that.

With that being said, Todd, do you wanna give the Best Ever listeners a little bit more about your background and your current focus and then we’ll rewind?

Todd Tresidder: Sure, my background is hedge fund investing. I’m a quant, so I came up through quantitative analysis of what I call paper assets – normal securities markets. I was one of the early pioneers of computer algorithmic trading, so I developed a lot of that. I started developing while I was in college. I had this crazy idea in an investments class that I took up to my investments professor. I was looking at all these charts of different stocks and stuff in investment books, and I went up to him and I said, “You know, I can make money off that mathematically, I don’t have to know anything about it.”

I gotta give you a context for this, because I’m a bit older… Computers were just brand new. The Apple were still being made in a garage, IBM was just coming out with the first PC, it was an 8088 processor, slow as snails… So for me to run around and say that I can do computer algorithmic trading was just completely hare-brained. But it worked. We built a whole hedge fund around it, and that’s how I built my wealth originally. Then we sold the hedge fund and I branched off into real estate, which is where this story picks up.

Joe Fairless: So you sold your hedge fund, went into real estate… Roughly how much did you have to invest at the time, after you sold your hedge fund?

Todd Tresidder: I don’t give exact dollar amounts, but it sits in excess of a million.

Joe Fairless: Okay, so you had over a million dollars. What did you do with it?

Todd Tresidder: Well, part of it I put into real estate. I wanted to diversify. I had a strong paper asset background, but I also had enough background to know that there’s risk, there’s volatility, and I wanted non-correlated sources of return. I also wanted cash-flow producing sources  of return. Real estate is obviously the natural avenue for that, so I started developing a real estate portfolio, and being the financial junkie that I am, I went into a variety of strategies. I did tax liens, I got hooked on this idea of acquiring real estate for pennies on the dollar, as all the marketing promotion says, for doing tax lien investing, so I went down that avenue.

Then I also had kind of an interesting insight – at least interesting to me at the time… Back then you could do non-recourse financing on large properties, so I figured out that I could buy a large apartment complex for about the same risk or less than I could buy a single-family home. So I went “Well, why would I do one versus the other?” So here I am, kind of a new investor, and I’m realizing the risk/reward is in favor of large apartment buildings. I’m fairly new to real estate, and I went straight to large apartment complexes. The first one I purchased was a 62-unit building, and the second one I bought was 101-unit. I did that with none of my own money, the second one. That was a completely leveraged deal, using investor money. All I did was assemble the deal.

Joe Fairless: Let’s talk about each of those real quick. The 62-unit building – that was all of your money?

Todd Tresidder: It was family money, as well. My mother-in-law – she’s passed away now, but she was a partner in that deal, as well. She was trying to get into real estate. I put the deal together, but she was a half investor and I was the other half.

Joe Fairless: Okay. What year was this, by the way?

Todd Tresidder: 1998.

Joe Fairless: 1998. Your first large deal on real estate is a 62-unit…

Todd Tresidder: No, let me be clear – it was my first investment real estate purchase.

Joe Fairless: Oh, you didn’t do tax liens before that?

Todd Tresidder: No, my first purchase ever was a 62-unit, with my own money.

Joe Fairless: Okay, and where were you living at the time and how far away was it from where you were living?

Todd Tresidder: That’s a great question, because that was actually my downfall. I was an out-of-town investor; I lived in Reno, Nevada, and I bought in Kansas City, Missouri. Again, the angle of this – because I’m a quant, I was driven by numbers; the numbers were obviously more compelling in the Midwest. The problem is – I’m sure you’re totally aware of this – the inefficiencies of running an operation from out of town were overwhelming. I built it into my budgets, but I was way off base.

I had no idea — I remember running across some information when I was creating my strategies and stuff where they talked about the dishonesty of property managers, but I just way underestimated the level of dishonesty involved. I went through five property managers in four years, and I wasn’t even getting lowbrow guys; these were like the top of the line in the area. I’m not gonna name names, because I actually won a $475,000 lawsuit against one of them.

Joe Fairless: Wow… [laughs]

Todd Tresidder: Yeah, for mismanagement. They had stolen so much money and mismanaged the property so poorly, and I actually documented it. I did a full forensic accounting, I presented it, and the insurance company just rolled over.

So I’m not gonna name names, but I went through five management companies in four years… And here’s the thing, because again, these were done on non-recourse financing, like I was saying earlier. One of the deals on that is you have to get changes in management approved, right?

It’s kind of a clerical process, but it was funny, because I’d gone through so many managers so quick that the woman that ran the portfolio that my property was in – we actually got on a first name basis, so I’m just gonna call her Jennifer for purposes of the interview… I call her up for my fifth management rollover – and this was the breaking point for me – and I said “You know, I’m replacing them again. I got another management company.” I told her, I go, “You know, Jennifer, I must be your stupidest owner. I cannot get this right.” I genuinely thought it was all about me, that I was just so dumb that I couldn’t get this right, that I couldn’t figure out how to manage the building and get an honest property manager in there… And she said to me, she goes “Todd, you? No, you’re the least of my problems. I’ve got a whole portfolio of this stuff and they’re all getting ripped off blind. The only difference is you’re watching so closely, you catch them all.”

Joe Fairless: Yeah, that is a great point that our fake-name-Jennifer mentioned. That’s what I wanted to ask you about – what were the signs that you identified? Because I guarantee that there’s someone in this situation who’s getting ripped off… So what did you identify that perhaps they can look for?

Todd Tresidder: Well, we could fill five interviews. It was like whack-a-mole. You’d figure out how to plug one hole, and they would open new ones. Let me give you the first manager, just to give you something concrete to work with. The first manager, they had a multi-property portfolio in an area, and they had a maintenance team, so you would pay pro rata, and it sold you on the basis of “This is gonna be efficient because you’re only paying for a portion of this maintenance team when they’re actually working on your property.” Well, how are the ways they steal from you? Well, they double-triple book the maintenance guys.

I actually got to know several owners within this portfolio of properties being managed in this area, so I networked to him — we had a conference call and we started figuring out that they were doing anywhere from 200%-300% billing on these two guys who we dubbed Tweedledum and Tweedledee.

One of the guys in the portfolio was flying out there anyway to check on his property, so he didn’t announce it to the management company – he flew out there and monitored Tweedledum and Tweedledee for two days, just followed them around, and we’re all getting double-billed while they’re in the Donut Shop, having coffee and eating donuts in the morning. So we figured out that angle, and then another angle was — in my due diligence, they’re not allowed to own property in the same area, because it’s conflict of interest; the management company can’t own personally property in the same area, but then they bought property after I hired them, and they were running maintenance expenses through my property that were being done on their property.

I could go on and on and on, the number of ways… The company that I actually won the lawsuit against, they were so egregious… I owned all the laundry equipment. Rather than leasing the laundry facilities, I owned them [unintelligible [00:10:09].12] is coming in. They claimed zero laundry revenue. They were just pocketing the quarters.

Joe Fairless: I’m sure – knowing you – you asked them, “Hey, what’s going on with the laundry?” the first month that you saw that. What was their response?

Todd Tresidder: They just said there was no laundry revenue. They’d lie. They all lasted six months. It takes you a while. You can’t just start off taking these guys to the grill. You’re trying to build a relationship; you’re out of town, you’re kind of dependent, so it’s not like you can just come in with both guns firing and claim these guys are idiots.

The other thing, too – the company that I won the lawsuit against, these guys were both accountants by trade, so they were trained accountants and they were cooking the books. Real estate is not rocket science. You’ve got gross potential income, you subtract your vacancies, subtract your delinquencies and you should have collected rents. None of the numbers reconciled, and they had these bogus accounting entries, and I would challenge them on it month after month, and I’d say “Look, I’m not rocket science at this, but you guys are trained accountants – this stuff’s gotta reconcile”, and it never did, and that’s when I started the forensic accounting. Once I got some of the documentation, Bam! They were fired and replaced.

But just to give your listeners an idea of how much this theft can cost you, I finally did get an honest company in there. I got one company as a young company – they weren’t established, and they had this young Hispanic couple that was really honest and really good-working. They took over my building, they put the young Hispanic couple in there, and these people were totally honest. They tracked everything. If I was getting a new carpet put it, I would spec out – it’s a new carpet, with new padding. And they would monitor the job as they would do it, and they’d call me up and say, “Mr. Todd, I wanted to make sure you said new padding, right? They’re trying to roll the carpet over the old padding, I just wanted to check with you.” I said, “Absolutely!” She would catch stuff like this.

Or I spec-ed out a new roof and I gave her all the details of the roof. They went up there and checked on it several times a day. She calls me up and she goes — she wouldn’t call me by my real name [unintelligible [00:12:00].00] She’d go, “Mr. Todd, I’m noticing that they hadn’t torn the roof all the way down to the plywood like you had specified when you wrote to me. They’re trying to tar over the new roof. Is that acceptable?” and I’d be like “Absolutely not!” She would document it.

Joe Fairless: Wow.

Todd Tresidder: My costs — I improved the building, and my costs dropped in a half with their management, my overhead cost. I wildly improved the building; they turned over the entire inventory in one year, and my costs were still half of what they were when the thieves were in there.

Joe Fairless: Wow. I wanna talk briefly about the 101-unit building, and then what happened to all these buildings. 101-unit – you certainly piqued my curiosity, and I’m sure the listeners’. You had no money in it, you raised all the money from investors, and then you had an ownership interest as a result of putting it all together?

Todd Tresidder: Yeah, so I got 10% of the building, so I got 10 units, basically… For no money, just for assembling the deal. What it was — I’d done a good job of negotiating, it was wellbelow market… Basically, these people, even with giving me 10% of the deal, they basically closed on double what they’d put into it. So they doubled their money at the closing table, with me having 10%, and I didn’t even have to manage it; one of the other partners managed it. So literally, I just assembled the deal and took 10 units for assembling the deal and negotiating it.

It was a very complicated deal, and that’s one of the reasons I got it. The seller was a very wealthy, aged attorney, and he had cleared out his entire portfolio as he prepared for death, and he was down to three large properties. He had a massive property portfolio. He sold everything, he was down to the final three, and they were all problem properties, so he was just done. The money was irrelevant to him; he had more money than he’d ever spend and he was just giving it all away anyway. So he just needed the thing done and he felt that I have the skill to get it done.

It was a really complicated loan package, because we had to get improvements and we had to package it all it and get the improvements done, get the investment money… It was a lot of effort, but in the end it was a fun adventure to get 10 units for just putting a deal together.

Joe Fairless: In that type of structure, do you take an acquisition fee?

Todd Tresidder: No, I took the 10 units. In order words, I walked the talk with them. I positioned myself in alignment with the owners.

Joe Fairless: Got it. You didn’t have any money in it, but you got the equity via the 10%.

Todd Tresidder: Yeah, so they got access to a deal they never could have gotten otherwise. They didn’t have the skill or the connections or the resources to put it together. I had those, so they just put the money. It was really a stupid deal, Joe, when you think about it… Because I gave away so much equity. I would have been far better off using my own money and keeping all the equity for myself.

Joe Fairless: How much did you raise?

Todd Tresidder: It was a long time ago, Joe, I’m not recalling the exact amount.

Joe Fairless: A million, 200k, 10 million? Which number is closest?

Todd Tresidder: No, the deal was just under two million, because it was just under 20k/unit. It was a two million dollar deal and we sold it for about 42k/unit, 4-5 years later. Most of the equity was built at the closing table, because what we had done…

Just to give you a quick story on it – the property was one of those 1970s properties where they have the mansard roofs. It’s a two-story building, the mansard roofs go within about two feet of the ground. And these were particularly hideous, because the mansard roofs were practically falling off the property. So what I did was I went in, we tore the mansards off, recited the buildings, put all new windows in, redid the parking lot, put rod iron gating all around it, and new landscaping. So literally, the building was so transformed in its appearance that an old maintenance guy who was re-interviewing for a job passed the building and he didn’t even recognize it.

It was completely transformed, and as you know, most tenants’ decision is made before they ever walk into a unit. Well, this guy had put all his money on the insides of the units because it was gonna be such a hassle for him to fix the building up from the exterior, so the interiors of these units were beautiful. He had dumped money into them. They had new carpets, new appliances… That’s where all your money goes, right? He had never done the exteriors, but the exterior is where everybody’s judging your property.

I went in, redid the exterior, he had already dumped the money in the interiors, we didn’t have to do much to the units themselves, and the numbers on the building were transformed. Suddenly, we could get people in there, the occupancy went back up, and then Bam! We sold it a few years later for a fat profit.

And again, as I said, I was stupid, because I got ten units… I made 200k on it, but I left two million on the table. I threw away 2 million to get 200k, so the leverage wasn’t worth it. I would have been far better off keeping the deal. The value is in my creating the deal.

Joe Fairless: And the last question on this, and then I’d like to ask about you exiting these deals across the board… The 62-unit – what did you buy it for and what did you sell it for, if you can remember?

Todd Tresidder: Very similar numbers. It was about 18k/unit and about 42k a door. All these were out in the Midwest, and the analysis I had was I had strong job growth… As you know, the value of the properties is determined by the income growth of the area… So I had strong job growth in these areas that I was targeting, and they were low cost in terms of purchasing or acquisition. My analysis showed it was gonna take about 65k/door to build competing buildings, so I figured I had a pretty safe run for rent increases until values jumped up to the middle forties, and then I was gonna sell, which is exactly what I did.

Joe Fairless: These properties, plus some other stuff that you had, you exited out of at what point in time and why?

Todd Tresidder: I tried starting selling in about 2005, but as you know, you don’t move large buildings quickly. It takes a while, so I started really warming up to the idea of getting out of them in 2005. I had tenants in the buildings that didn’t even qualify to rent from me, their credit was poor, and they were getting 30-year loans for $300,000 houses in the area, and these apartments are running for like $600/month kind of thing. This guy didn’t even qualify to be my tenant. Of course, I know that because when he’s applying as a tenant, I see his credit history.

It was just a real wake-up call… This happened once, it happened twice… I was like, “If these tenants can qualify for a $300,000 loan, who’s left?” I already felt like I was dragging the bottom of the barrel just to try to fill the building, because again you’ve gotta go back in time… The credit environment was so permissive, it was kind of a go-go period, so it was really hard to get quality tenants back then. Most people weren’t renters; the better part of the people weren’t renters, they were buyers. Now all of a sudden the lowest quality was buyers.

The other thing too, I had a little bit of a privilege from being a coach – I was coaching people on building wealth; I’d been doing that for a long time, and I noticed that suddenly every client that was coming in wanted to get rich in real estate. I was analyzing deals with them, and the deals made no mass sense. Even the prices they were gonna offer me for the properties – I didn’t feel they were worth what they were offering me. I certainly wouldn’t have paid them, and I knew the buildings inside out.

So there were a lot of indicators, and I went “You know, I kind of did this wrong by buying out of town to begin with.”

I did really well on a lot of points – I bought them right, I negotiated them well, I got good prices on them, I had good loans on them… I did a lot of things well, but buying out of town was kind of my downfall. I felt like I really bought myself a headache, I was ready to get rid of them anyway, and I looked and I said “I don’t know if this is a top in the market, because nobody can call a final top”, but I knew the risk/reward was way out of balance, and I just said “I’m done with this. Let me start selling.”

Effectively, I think the first deal unwound in 2006, the second deal unwound late 2006, maybe early 2007… Then I had a lot of miscellaneous stuff, some houses and some acreage, and all that sold fairly quickly. So I got down to just the home I live in by the time the downturn occurred.

Joe Fairless: And now fast-forward to today, are you doing real estate investing? If so, why, or why not?

Todd Tresidder: I have not. I’m not comfortable with financial leverage at this time. The thing about financial leverage — and I missed out, right? You don’t hit all strikes in this business. Every now and then you miss them. So yeah, it turns out I would have been better off grabbing a falling knife in the 2009 bottom, but I really didn’t believe the government bailouts were gonna work, and I still feel like all they’ve really done is kick the can down the road and reinflated the balloon.
So the thing about financial leverage in real estate – I have a policy when I buy real estate; I really wanna get back in, but I have a policy which is when I buy it, I have to be comfortable being stuck with it. I have to feel like if the market goes illiquid, if the market turns down and I’m stuck with it, I gotta be happy owning that thing. [unintelligible [00:20:27].28] in my area, Reno – because I’m not willing to buy out of town again – the numbers don’t make sense to me.

Joe Fairless: As far as buying it and being comfortable being stuck with it, I would think if you’re making more rent and that covers your expenses, it doesn’t matter what the value is as it goes up and down…

Todd Tresidder: Absolutely. I agree with you 100%. If you’re positive cash flow with a margin of safety, who cares?

Joe Fairless: Right.

Todd Tresidder: But that’s not what I get here.

Joe Fairless: Got it, okay.

Todd Tresidder: These are premium markets; pricing here is akin to California, to give you a flavor. Pricing in my local market does not represent value.

Joe Fairless: Based on your experience as a real estate investor and also someone who has a broader background in investing, what is your best advice ever?

Todd Tresidder: Pay attention to the numbers. Wealth compounds through mathematics. Your wealth is determined by the expectancy of your investment strategy. Numbers drive the thing. Yet, with real estate if we’re gonna apply — my paper asset investing is primarily mathematical in nature. I’m very mathematically driven in real estate as well, but the thing is that real estate is an art form, too. Real estate isn’t just numbers. I have a thing, I call them “sick buildings.” You know what I’m talking about, Joe…? Where it doesn’t matter what you pay for a building, it’s never gonna work. And there’s other buildings that even if you pay the premium, over time they’re gonna work out.
So there’s an art form to real estate, too. You have to go beyond the numbers. You have to balance your numbers with insightful analysis.

Joe Fairless: If you’re not doing real estate investing now, what’s the primary thing you’re making the most money on?

Todd Tresidder: Well, business for one… My FinancialMentor business is profitable, as well as my paper asset portfolio, which I still use the same strategies I did back in the hedge fund days.

Joe Fairless: Are you ready for the Best Ever Lightning Round? First, a quick word from our Best Ever partners.

Break: [[00:22:15].20] to [[00:22:57].24]

Joe Fairless: What’s the best ever book you’ve read?

Todd Tresidder: Okay, so first of all you’ve gotta know something about me, Joe – I’m not a superlatives guy… So best ever book – there’s a lot of great books. I’ll just name one that I’ve gotten a lot of value out of, that I shared with a lot of people, which is The War Of Art by Steven Pressfield. The thing that’s amazing about that book is anybody that’s moving forward in their life is gonna run into this thing he calls “Resistance”, and it’s hardcoded into our DNA. This Resistance is a major factor in what keeps people from achieving their goals. It’s just a beautiful little book, quick little one-page stories and things that really gets you clear on what Resistance is and how it negatively impacts your life. It’s a great read for anyone.

Joe Fairless: From your real estate background or experiences, what’s the best ever deal?

Todd Tresidder: Best ever deal… I would say that deal I put together for investor money — no, hold on a second… No, it’s not. The tax lien deal. I got a perfectly rentable house – it’s not a great value; it was probably worth 60-80k, and I think I was into it for about $800 in back taxes. That was obviously the best deal ever.

Joe Fairless: If you were getting deals like that, I assume – maybe I shouldn’t assume, but I assume they were out of your city… Why wouldn’t you continue to do that?

Todd Tresidder: It’s an ugly, ugly business. In the end, you have to be happy and you have to like what you’re doing with your life and your energy and your time. I developed a strategy to sort out the high probability tax liens that would actually fall through the deed. I developed this system… There’s anecdotal evidence that correlates with fall through the deed, and so I would do all the research and find all the liens, gather them up and do all the processing and everything, and sure enough, I was right; it worked.

Joe Fairless: What was the main takeaway for the connection?

Todd Tresidder: Well, they had to be free and clear, which usually means easy come, easy go. Somebody got them easy come, easy go; they’re usually gifted or inherited, so people aren’t paying attention, and the generation that paid for it is usually not the generation that loses it to taxes.

And then you take that and combine it with some problematic life story – usually drugs, jail time, crime, whatever. There’s this sad story of human despair associated with a property that will fall through nearly always… If it’s valuable. You also have to be very careful of environmental disasters. You have to do your due diligence on each individual parcel, because a lot of them that fall through are falling through because they’re truly valueless or negative value because they have an environmental disaster. Assuming they’re valuable, they’ll fall through for totally all the wrong reasons, if you will.

So when you start gathering your wealth through a game plan built around that, it’s really ugly business. I went through several years of it, and I had one deal… It was a really sad story. A grandmother gifted a grandson a home when she passed away. Son lived in it with his lover, and there was guns, they were terrorizing the neighborhood, there was drugs, the grandson ultimately died of AIDS, [unintelligible [00:25:53].03] there was a lot of crime involved, and eventually the police came out… It was horrible. It was just this disgusting thing, and I’m in the middle of it, serving notices to the necessary parties… The family is coming back in saying they want it, but they have no title to it… It was just horrible. I finally said it’s just not worth it.

Joe Fairless: On a completely different note…

Todd Tresidder: On a positive note… [laughs] At least you can get an honest flavor for what would send somebody away from free and clear real estate for pennies on the dollar…

Joe Fairless: Yeah, absolutely correct. I’m glad you share that. What’s the best ever way you like to give back?

Todd Tresidder: Through education, the business I’m doing. I love sharing my knowledge and sharing it at cost-efficient price points so people get more value than they pay for. I love the difference it makes in people’s lives. There’s not a week that goes by that somebody doesn’t write an e-mail telling me how I changed their lives.

Joe Fairless: Thinking back to any of the real estate deals that you’ve done, what’s a mistake you made on a deal?

Todd Tresidder: Buying out of town, hands down. I did 9 things out of 10 right, and I did that one wrong… I was warned, I’d read it, but I just thought that there’s gotta be a way to find an honest property manager. Luckily, I did find one long enough to turn it around and sell it, but basically buying out of town is just so inefficient… It’s really hard.

I don’t know what your experience has been on that or what you’ve heard from other guests, but my experience was very one-sided.

Joe Fairless: I guess the question I have for you on that is you made money on the 101-unit and on the 62-unit because you were buying properties that were cash-flowing in a different market than where you lived, so there was an opportunity cost there. If you don’t buy in out-of-town markets, then if you don’t have those opportunities in your market, then you wouldn’t have had that cash flow and those chunks of change.

Todd Tresidder: Well, let me clarify… I made capital gains. A lot of the cash flow got robbed in inefficiency from the dishonest management. So the buildings were rollercoasters. There were times when they would cash flow as the management was trying to impress me, and then as they went to thieving and they started lining their pockets, the buildings would roll over and go to negative cash flow. I’d fire them, I’d get a new one in, they’d try to impress me and it would go positive for a while, then it would go negative as they’d start stealing again, and on and on the circle went.

It was never great from a cash flow standpoint, even though I had extraordinary values and a lot of equity in the buildings, and it’s because of the thieving of the management and the inefficiency of the operation… But yeah, there was capital gains on the backside, but again, you have to understand I’m pretty good with paper assets, I don’t need the headaches to create the capital gains.

Joe Fairless: Where can the Best Ever listeners get in touch with you?

Todd Tresidder: FinancialMentor.com. I give away a free book and I have a free course called 52 Weeks To Financial Freedom. And no, you won’t get rich quick, but there’s a whole framework that I teach around the path to financial independence and how it works. It includes all asset classes, including real estate. It’s business entrepreneurship, real estate, paper assets, and it’s for free. It’s over at FinancialMentor.com.

Joe Fairless: Fascinating conversation. I could have talked to you about any one of these topics for a while, and I’m grateful that you were on the show… From how to bust a crooked property management company and the things to look for, like double and triple-booking maintenance people, to the successful syndications that you did with the 101-unit as well as the joint venture type of deal you did with the 62-unit. Then the tax lien information, pros and cons on both sides of that, as well as the things that got your spidey sense tingling a little bit about the deals – or the market rather – with the tenants being approved for $300,000 homes who could barely qualify to rent $600 apartments.
Thanks so much for being on the show. I hope you have a best ever day. Lots of lessons learned… We’ll talk to you soon!

Todd Tresidder: Thank you, Joe.

 

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JF952: $50MM In 3 States Using PHYSICIAN’S Money

Listen to the Episode Below (29:32)
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He has built a portfolio of multi family complexes funded by physicians on apartment syndications. He even wrote a book on it. I would take extensive notes listening to this interview if you were interested in multi family fundraising and selecting specific properties to purchase.

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Thomas Black Real Estate Background:

– Co-founder and Managing Partner of Napali Capital; a real estate investment company
– Currently regional director of 8 hospital Emergency Departments and practice clinically few days per month
– Napali Capital, LLC, owns nearly $50 million in multifamily real estate in Texas, Oklahoma and Wisconsin.
– Former Navy veteran, turned physician, turned real estate investor
– Based in Dallas, Texas
– Say hi to him at www.freedomintheblack.com
– Best Ever Book: Rich Dad, Poor Dad by Robert Kiyosaki

 

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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluff. We’ve spoken to Barbara Corcoran from Shark Tank, Robert Kiyosaki (Rich Dad, Poor Dad), and a whole bunch of others.

With us today, Tom Black. How are you doing, Tom?

Tom Black: Great, Joe. How are you doing today?

Joe Fairless: I’m doing well, nice to have you on the show. Tom, first and foremost – he’s a former navy vet turned physician, turned real estate investor, so thank you for your service in the navy, my friend!

Tom Black: Thank you so much! It was great!

Joe Fairless: In addition to the navy, as I mentioned, he is a former physician and a real estate investor. He currently is a regional director of eight hospital emergency departments, and I guess you’re currently a physician too, practicist.

Tom Black: I currently am. I’m practicing maybe one day a week or so, just to keep my finger on the pulse with things, should I say…

Joe Fairless: Sweet! In addition to that, more relevant to our conversation, he is the co-founder and managing partner of Napali Capital, a real estate investment company. His company owns nearly 50 million dollars in multifamily real estate across three states – Texas, Oklahoma and Wisconsin. Based in my hometown, Dallas, Texas. With that being said, Tom, do you wanna give the Best Ever listeners a little bit more about your background?

Tom Black: Sure thing. I got involved in real estate about seven years ago now; I was finishing up my medical training at the wonderful Indiana University, and was really hitting a time where the market, as you know, wasn’t doing so hot around the 2008-2009 period. I decided to rent my house up there instead and we moved down to the Texas area, and just rented out a residence. That really gave me insight to a depreciation, which is something that a lot of physicians don’t know about and/or don’t have, just because of the nature of our business and not having any assets to use.

I got into practice at [unintelligible [00:03:58].16] Texas. I designed and developed and built from the ground up a small apartment complex and did very well on it. I 1031 that into some commercial properties, and just completely got enamored by it and what it could do for physicians and other high net worth individuals, translating from a high income to a high net worth, which has been career-saving for me. The emergency department and other physicians in general tend to have pretty high stress careers, and there’s a longevity to that – you can only do it so long.

So I moved to the Dallas area and started doing some syndications, mainly with physicians and my brother, who is the former chief operating officer of Great Wolf Lodge, which is an indoor waterpark community and hotelier. Since then, it’s just been going off to the races, and I just finished a book, in fact, entitled The Passive Income Physician: Surviving a Career Crisis by Expanding Net Worth. It’s basically about my background from the navy, up into medicine, and then translating that and having a heck of a fun time doing it.

Joe Fairless: You designed and built a small apartment complex – can you elaborate and tell us the details about that?

Tom Black: Sure. In Longview, not a lot of economic pressure as far as big box places; a lot of local economic impact, and I found a three-acre plot that was on foreclosure through a bank, and I decided to jump in. I had read enough about real estate and I had owned numerous single-family homes that we bought as foreclosures and were using them as rentals, so I partnered up with a local custom homebuilder that had been building custom homes for about 20 years.

I started designing and doing the utilities – of course, that goes hand-in-hand with rezoning, which is not something that I would ever wish on my worst enemy, but learned a lot about the process. We took this thing from a pile of dirt up into just under 20 units; it took us about a year and a half, and then I was fortunate to sell it at a time where oil was starting to decline a number of years ago.

Joe Fairless: Okay. How much did you buy the land for and what were your all-in costs, in addition to the land?

Tom Black: The all-in land cost was only $35,000, and I bet somebody will probably out there dropping their jaws, but it is East Texas, for a couple acres, and it actually had a pipeline run through it. East Texas is of course known for a lot of oil, so there’s a lot of issues with engineering that need to go around that, and variances and things. We had to specifically design the apartment complex so that we could get around these pipelines.

All-in cost was just about a million dollars or so, right around there. With fees I think we ended up at about 1.2, and ended up selling for just under 1.9 million 18 months later.

Joe Fairless: That’s great. What type of financing did you get in order to build it?

Tom Black: On this, oddly enough, I didn’t know enough about multi-family, and built the units probably a little larger, looking back, than I should have, and used some really nice interiors of cedar, granite and stainless shell appliances. This was all done as a recourse note, on my back. Of course, now getting to educate physicians, it’s one of the paramount things that I discuss – recourse vs. non-recourse financing. At that time I didn’t really understand what that meant. For those that do know, the non-recourse with larger assets, you’re not limited having any financial liability unless there’s certain clauses that are met. That was all done as a banknote on my cheat.

Joe Fairless: With that exit, you 1031-ed it into what?

Tom Black: Light industrial properties near that area, that are all triple net leased to oilfield service companies. So we’ve managed to do very well on those; they’re anywhere from 5,000 to 20,000 square feet. We ended up building those as well, and have gone very well for the last three years; despite the decline in oil, oilfield service companies still have to operate, and there’s still a certain amount of measuring and calculations and other things that need to be done on existing oilheads.

So we did that, and we used that money then as I broke off and moved to the Dallas-Fort Worth area and fit the existing position I’m at, managing a physician group, and then in turn really focusing a lot on physician wellness and more passive income and professionals and people that may not know the absolute joy it could be to depreciate a large asset, at the same time creating passive income for yourself.

Joe Fairless: So with that 1031 you went into light industrial properties that were triple net lease and you built those from the ground up…?

Tom Black: One was a purchased existing, and what we did was a leasehold improvement on it for several hundred thousand dollars, because the tenant existing wanted some more office space. So we bought that building and that satisfied the 1031 requirement.

The other one we got was essentially a shell. So the land, the building had been developed, we just did not have a tenant in there, so it was kind of a building we built on spec, and luckily, a month after we signed the contract, we had a national oilfield service company out of Utah came in and started leasing that.

Joe Fairless: How did you attract the company that ended up leasing it?

Tom Black: Relationships. That’s the cornerstone of this multifamily and real estate… The gentleman that owned and developed the industrial park actually had relationships with a lot of places all over. He had had some people that already finished their business plan on a couple of these commercial buildings, so he offered them to me. It was just a gentleman in the community, and it’s a very small community, so I was fortunate to have made those relationships early on.

Joe Fairless: And you have a toehold in Longview, Texas, East Texas, and I have some friends who are from there, and I love hearing them talk; they have a different accent from a typical Texas accent… Why not focus on that market, albeit smaller, but you could dominate that market, versus going in larger markets?

Tom Black: At the time I built this area… That’s very possible, it’s just that there’s a decent amount of people that are doing a lot of different land plays and things like that, and of course oil and gas is very big there. The issue – it’s really only a town of 80,000, with traffic counts maybe to 110,000 during the day. So what happened is I had this great idea that I was gonna build something very nice, because there was no existing multi-family there that was available for rentals when I actually moved there. The last property had been built maybe in the early ’90s; still a class A, but really wasn’t up to par. There were consistently 99% waiting list.

What happens, when we started designing this complex, two major companies came in and put in about 800 units, and they grow in part of the community. The first one did very well, and leased out very quickly, as well as the majority of the second, but that pretty much absorbed all of those folks that would have been looking for nice places, which is where we built.

So at this point, there’s just no jobs for that class of folks and people are leaving that area, and it’s really tough to make that work.

Joe Fairless: On the 20-unit that you built from the ground up, why build from the ground up versus buy an existing property?

Tom Black: Well, really at first it was to satisfy my goals of creating housing that was something that I would wanna live in, which was probably my first mistake. The units were anywhere from a 1,000-1,300 square feet, almost like homes inside, so that was really the first thing… And I didn’t see anything out there in the community. It was kind of a private ownership at that time, whereas now I’m focused on my investors, my returns, while at the same time still doing a quality product in private ownership. But at that time I was very fixated on those classes only, and kind of had some blinders at point.

Joe Fairless: Okay, makes sense. And what year are we in when you moved to Dallas and you’re done with the Longview stuff?

Tom Black: I finished the Longview property about 2012, right around there… Actually 2013 we sold, and I moved to the DFW area in July 2014.

Joe Fairless: 2014, and now you have 50 million in multifamily real estate in Texas, Oklahoma and Wisconsin… What’s the largest property in terms of units and where is it?

Tom Black: We have 305 units on the North part of Arlington. We bought that in December 2014, and it has been — as you know, the DFW area is very hot right now, and there’s a lot of infrastructure and a lot of influx of jobs etc., so we’ve done very well on the property. That’s our largest asset right now – 305.

Joe Fairless: And how many total units? Roughly, if you don’t know off the top of your head, just so I get an idea…

Tom Black: Just including multifamily, we’re probably sitting at just over 900.

Joe Fairless: So you’ve got a third of them in that one property in Arlington, but you’re also in Oklahoma and Wisconsin… Why choose to branch out to those two states?

Tom Black: We had, as you know, underwritten a lot of different areas and looking for where we could find value, and we were fortunate to go into the Tulsa market and find two properties that were owned and had fallen in disrepair, and really it came down to a management issue. Since then, we’ve taken over the properties and rehabbed both of them and we’ve done very well.

The Tulsa market, of course, is not as robust as the DFW market, but we’re still seeing great and strong returns. Looking at those other markets – such a strong underwriting, number one, and I think a very long underwriting period, so that we can essentially do a yield play. The loans – of course, they’re Freddie Mac loans, but they are 10-12 years, so we can underwrite for a long period just in case the situation changes.

Joe Fairless: With your Tulsa two properties that were in disrepair and there was a management issue – I think I know the answer… I think you’re gonna say “relationships”, but how did you hear about those two properties?

Tom Black: Exactly that – it was relationships! [laughter] One of them was being managed out of a company in Utah, and they had gone in and they’d done some great things with the property, but they just didn’t finish their business plan.

The other was another syndication of a gentleman in Texas; he didn’t put a dollar into that property, and just did some very one-off things… They hadn’t done a distribution to any of their investors in a number of I think two years, and they had just maybe over-analyzed the property where they couldn’t put back in the cash flow that they needed to to make the property really shine… And that’s where the key is – being able to have enough capital to go in and to do what you can and execute the returns that you need to.

Joe Fairless: As far as how you got in touch with those separate groups – was there a broker, or did you know those two groups personally and you did it off-market?

Tom Black: Yeah, it was one single broker, off-market. Tulsa is a funny market like that, there’s not as much competition brokerages. DFW probably has a lot of different brokers, but only five did the majority – kind of the 80/20 rule – whereas in Tulsa it’s very few times that the property is even listed, so they don’t go to best and finals or have [unintelligible [00:14:11].09]

Joe Fairless: Was it First Commercial?

Tom Black: No, actually it wasn’t. Right now I would love to be giving them a plug, and I cannot see their company name in front of me right now. [laughter]

Joe Fairless: That’s fine… I only know one group in Tulsa, it’s First Commercial. So it was basically a pocket listing where the broker had a relationship with you, and they had these two owners who were looking to sell, and the broker went to you because they knew you would close, and you made it happen. Okay, cool.

And Wisconsin… You’re in Dallas, you went to school in Indiana – Tulsa makes sense, but Wisconsin?

Tom Black: My brother, Tim – Tim and Tom, of course – who was the chief operations officer at Great Wolf… Great Wolf was actually headquartered in Wisconsin. Around that area of the university, he lives probably 20 minutes from there, so we have a couple of multifamily areas around there, too. He heads those up, and I try not to fly anywhere near Wisconsin unless it is July, August…

Joe Fairless: [laughs] How many units do you have in Wisconsin, and what city are they in?

Tom Black: They’re all in Madison, and probably only just less than 30, I believe.

Joe Fairless: Okay, and are they student rentals?

Tom Black: No, actually they’re not. There’s a 16-plex, and I believe a bunch of quadplexes that are nice, and they’re actually not student rentals.

Joe Fairless: How do you manage those 30 units, since they’re so far away?

Tom Black: That would be Tim. We’ve got a professional management company up there also.

Joe Fairless: Okay, just a third-party.

Tom Black: Yeah, right. I let him set his boots on the ground right there, and he’s able to manage all that; I try to not get involved with that as much as possible. They’re good friendvestors.

Joe Fairless: Okay. But it’s a third-party management company that he oversees. So you’ve got the 305 in North Arlington, you bought them in 2014 – what’s your business plan with those? You’ve had it for over three years, what’s the progress on that business plan?

Tom Black: I misspoke, I made a mistake – it was actually 2015. We’re 18 months into the process. Our business plan originally – 3-5 years execution plan on that. We started with the concept that 1) all the rentals were about $50 under for comps in the area, as well as they weren’t doing any kind of utility billback or RUBS. We’ve been able to recapture the grossly month from 170,000 collections, and this month we actually just hit our record of $217,000.

Joe Fairless: Great job!

Tom Black: Thank you. So we’ve taken that property up just in value by [unintelligible [00:16:40].16] approximately 5 million dollars in 18 months. We’ve been very happy with that.

Joe Fairless: Great, so from 170k to 217k in collections. How much did you buy it for?

Tom Black: Right under 13, I think we were at 12.8.

Joe Fairless: Thirteen million…

Tom Black: If you look at [unintelligible [00:16:56].13] using the same cap as we bought, we’re right at 17.1 million.

Joe Fairless: And I’m sure that cap is actually lower than when you bought, at this point…

Tom Black: [unintelligible [00:17:04].00] and I like to try and look at it realistically, and I think we look at about seven and a half. Although in net R, [unintelligible [00:17:11].02] it’s probably not unrealistic you get a seven cap or so.

Joe Fairless: Yeah, I agree. The way that you said you do a 3-5 year business plan – did that mean that you’re planning on exiting in 3-5 years?

Tom Black: Right. As soon as we hit those returns we had estimated – I know the first year we paid out our investors roughly 13.1% cash-on-cash; I think our business plan calls for a little bit more than that this year. When we typically hit around 100% return – which right now we’re in year three of that proforma – then we will try and execute, whether we look at it, go to the investors and say “Hey, we wanna do a supplemental here, that way we can get tax-free money out and then we’ll continue to cash-flow the property… Or do we sell the property outright or do we just continue to use the cash flow?”

At that point, I imagine at the 36 months, if the market is favorable – and certainly in Dallas I think it will be – then we look at it, because I think one of the keys is being able to sell it to somebody else and allow them to create some value there and continue on to improve the property and drive revenue.

Joe Fairless: I should have asked this, because this is a relevant question if you’ve increased value five million – how much did you put into it to increase it that five million?

Tom Black: We put about 600k in CapEx. Not too horrible. We’re still executing some of the smaller little details, but the major items have already been done – a caged soccer field, which for that community has been fantastic. We did a lot of repair, and really where it came down to was management customer service.

Joe Fairless: That is incredible. It’s less than $2,000/unit, and you have increased the value – five million dollars, according to your projections. I suspect you haven’t done interior renovations on unit turns.

Tom Black: Very few. We’ve done a little bit… We normally budget about $2,500/unit, and that’s where we went with this, for the 305. There wasn’t much to get caught up on as far as structural, or any kind of deferred maintenance.  We have some roof issues, but the unique thing about this property was that, like all areas around that Arlington location, all the units had tile already, and they were actually Sarana tile, so that saved a good amount of money. We do go in and when we’re turning the unit put in brushed nickel fixtures; the upstairs tends to get some faux wood vinyl floors, and we get two-inch blinds, and add a more palatable color scheme.

Really there wasn’t a whole lot that needed to be done to the units. We’ve been really fortunate.

Joe Fairless: Based on your experience as an investor who has bought triple net lease buildings and done ground-up development, now focused on multifamily syndication, what is your best real estate investing advice ever?

Tom Black: To no be afraid not to jump in. Fear will hold you back. All those years ago when I bought that land in Longview, I got seriously crazy looks not only from my family, from my wife, from other physicians… Something in me told me it was the right thing to do. Don’t let fear be a detractor from being able to jump in, even if at a small point. It will pay off dividends.

Joe Fairless: When you talk to, let’s say, your wife… And you’re talking about going into real estate more heavily than, say, renting out your residence when you were in Indiana – what are the talking points? And I ask this not because I’m interested in your relationship with your wife and the conversation, but for Best Ever listeners who need to have those crucial conversations with their significant others, how would you recommend it based on your personal experience?

Tom Black: It’s been a total team approach. We have four young children, so a lot of her job is obviously taking care of them… But she’s been super passive during the whole thing, she’s been fantastic. One of the things I did – because I’m a physician, of course, and for those listeners out there that don’t know, there’s certain requirements by the IRS to be considered a real estate professional; you have to spend at least 750 hours involved in that to be able to take those depreciations.

For me, of course, as a physician, I was not gonna qualify for that, so my wife actually went and got her Texas real estate license, which automatically qualifies her as a real estate professional, thus giving us the ability to depreciate a good amount of our taxable income, which has been very favorable. When she gets the ability to do that and she sees the dollar signs, then it’s a win/win, really.

Joe Fairless: Are you ready for the Best Ever Lightning round?

Tom Black: Okay, let’s do this!

Joe Fairless: Alright, let’s do it! First, a quick work from our Best Ever partners.

Break: [[00:21:27].03] to [[00:22:09].27]

Joe Fairless: Best ever book you’ve read?

Tom Black: Best ever book… Robert Kiyosaki, Rich Dad, Poor Dad, I would say. It changed my life.

Joe Fairless: Best ever personal growth experience and what did you learn from it?

Tom Black: It was in the navy. I had an appointment to the naval academy, and did something really stupid as a young, 18-year-old guy, and got that removed. I learned to never give up just because you’re down. There’s a lot of other roads that you can take that are just as profitable – if not better – for you in the long run.

Joe Fairless: Best ever deal you’ve done?

Tom Black: I would say the Arlington deal right now is just smokin’.

Joe Fairless: Best ever way you like to give back?

Tom Black: Volunteering as a physician is a big one. And as Napali Capital grows, we have some plans to contribute around to the community, and that’s something that I cannot wait to do – financially contribute.

Joe Fairless: What’s the biggest mistake you’ve made on a particular deal?

Tom Black: Don’t ever buy a piece of land and assume you can rezone it. That is a big mistake. Understanding zoning is very good. I bought a piece of land inn Kilgore, Texas one time, and I wanted to rezone a single-family over to a multi-family and build some very nice, small, little condos. The homeowners association that was adjacent to it absolutely went crazy, and I found myself in the newspaper and at town hall meetings being yelled at. I will never rezone any other — needless to say, I lost that battle, after numerous tries.

Joe Fairless: What were they saying in the newspaper?

Tom Black: Oh my god… It was “Evil doctor from next door [unintelligible [00:23:34].21] wants to put in rentals with druggies…” Everything that I was not planning on doing, they accused me of doing. In fact, there was condos or town homes right across the street that were rentals, and as you may know, they have to put out messages to the surrounding area of 200 feet. So they had people that were renters coming to these town hall meetings and accusing me of doing something that they were already doing. [laughter]

It made no sense, and town hall meetings are not something I’ll ever do. That’s why we have attorneys.

Joe Fairless: I don’t think you’re gonna be getting into ground-up development either…

Tom Black: It’s not gonna happen. I will willfully partner and be an equity component to that, but otherwise no. If you’re gonna develop, start on the ABCs of rezoning and knowing what you’re doing.

Joe Fairless: I don’t want any part of development at all, because of that. It’s funny, because you said earlier the type of finishes that you put into the 20-unit – it sounds like you went a little over and above what you should have, with granite… So they were actually way off base, because you were probably gonna put in stainless steel appliances into this…

Tom Black: Oh, it was over the top… These were nicer than a lot of my apartments; I could have said when I was in the navy… Heck no! I lived in some places that are B class. [laughs] Now, yeah… I did that; I probably could have gotten in about 400-500 units and really driven in [unintelligible [00:25:02].12] if I really would have understood that. But I was building that based on what I projected the rents to be, and from a meager percentage of increase as far as what we knew we could sell it for.

I was not sophisticated enough to even know what a cap rate was. Lucky, but that’s the schools of hard knocks. It was a great, great learning experience.

Joe Fairless: Yeah, you wouldn’t be here if you didn’t go through that. We have a lot of multifamily investors who listen to this show… What’s one learning experience or one thing you would do differently when given an opportunity, when it’s presented to you next time on maybe your 305 units, or the Tulsa deals? Just one little operational nugget.

Tom Black: Operational – less so. I would say relationships again. I know we keep harping on that, but make sure that if you’re getting involved with somebody, or you’re doing the investing, just know who you’re getting in bed with, because it’s very, very important. Vet them out thoroughly; sometimes personalities conflict.

Operationally – I would just say have a very strong operations team in place and know your third-party management and really understand what a P&L is and how it operates, so that you can take full advantage of your asset and being able to turn the highest priority in the interest you wanna bare.

Joe Fairless: Do you have a particular program or software that you use to vet people out?

Tom Black: You mean as far as investors?

Joe Fairless: Well, you said “Pick your partners wisely”, so I’m wondering if you have a certain process you use.

Tom Black: No, we’ve honed it after trial and error; we learned some really big lessons and we’ve ended up with a core that’s really important. Because once you develop your team – it’s all about the team. Investing is not just for you to go out there — as a single person it’s very difficult. Make sure you have a team around you to do it properly, because not doing so, having the correct attorney that understands what they’re doing… If you’re doing some syndications or investing with a syndicator, [unintelligible [00:26:54].00] track record, as well as CPAs, things like that.

Joe Fairless: Thinking back to a team member who now today you’re like, “Oh, man… No way, not on my team again”, but they were originally on your team in some capacity, what would you look for now, that you didn’t look for then?

Tom Black: I’d look for somebody who operationally complemented, who had a very good insight maybe into a part that I was weak in if it’s in operations, or maybe if it’s an analytics part – somebody that is able to go in and garner those sides that maybe I didn’t have a strong hold on… And understanding that. Because at the end of the day, when we’re sitting around the table, having a consenting voice is always a very good thing, albeit in the right manner. Now, somebody that’s abrasive, that destroys relationships – that’s not gonna work.

When you’re dealing with brokers, or even investors, you have a very serious obligation to do what’s best for them first. Not the brokers, the investors. [laughter]

Tom Black: Brokers will be fine! They’re looking after their own interest, so… [laughter]

Joe Fairless: They always land on their feet.

Tom Black: Right, they will. They’ll be doing fine.

Joe Fairless: Well, Tom, I really enjoyed our conversation. Where can the Best Ever listeners get in touch with you?

Tom Black: The easiest – I have a blog called FreedomInTheBlack.com, as well as www.napalicap.com. The book actually just came out on 1st March on Amazon. It’s called The Passive Income Physician: Surviving a Career Crisis by Expanding Net Worth. If you just google my name, Thomas Black MD, it will indeed pop up.

Joe Fairless: Outstanding. Congratulations on the recent book launch, and congrats on your transition and multitasking abilities, as well as surviving the ground-up development and doing well on the first one, and learning your lesson on the rezoning stuff in (I think you said) Kilgore… And getting in the newspaper and all that stuff, as well as, most important, the macro level – the properties that your company has: 50 million dollars in assets under management, the 305-unit in Arlington, as well as the other couple large properties in Tulsa.

Interesting stuff, especially the lessons learned along the way – team members, and underwriting, and how you approach relationships. I’m grateful we had a conversation.

I hope you have a best ever day, and we’ll talk to you soon.

Tom Black: Thank you so much, Joe! I appreciate all your time.

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JF940: Why VALUE-ADD Multifamily Properties ROCK!

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Best Real Estate Investing Crash Course Ever!

He likes C class and B class value add Multi family deals, and he surely knows how to sniff them out! Here why large multi family properties make sense and what metrics he uses to validate a proper internal rate of return. If you’re looking to level up in real estate, this episode is for you!

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Steve O’Brien Real Estate Background:
– Co-founder and Chief Investment Officer of Arcan Capital
– Responsible for acquisition of over 20 multifamily assets totaling close to $200 million in the last five years
– Placed nearly $100 million in financing with FMNA, FMAC, HUD, bank and insurance company sources
– Prior to Arcan, Mr. O’Brien was with CBRE
– Based in Atlanta, Georgia
– Say hi to him at http://www.arcancapital.com
– Best Ever Book: Outliers by Malcolm Gladwell

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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate podcast. We only talk about the best advice ever, we don’t get into any fluffy stuff.
With us today, Steve O’Brien. How are you doing, Steve?

Steve O’Brien: I’m doing great. How are you?

Joe Fairless: I’m doing well, and I am looking forward to our conversation, because you are a multi-family investor on a large scale, and I’m looking forward to learning as much as I can from you, and I’m sure the Best Ever listeners are, as well. Steve is the co-founder and chief investment officer at Arcan Capital. He is responsible for the acquisition of over 20 multi-family assets totaling close to 200 million dollars in the last five years. He’s placed nearly 100 million in financing through various loan programs and sources, and prior to co-founding this company he was with CBRE. He’s in Atlanta, Georgia.

With that being said, Steve, do you wanna give the Best Ever listeners a little bit more about your background and your focus?

Steve O’Brien: Sure, absolutely. Thanks for having me, Joe, I appreciate it. I got into real estate at CBRE as an analyst. My background goes back to the numbers and the analytics; I started in the debt and equity finance group, so I got introduced to real estate on that side, and got an opportunity to do a ton of underwriting and see a lot of deals with CBRE.

I also got to see that market crash from up close in 2008, which was a great opportunity to learn about what was done right and what was done wrong. After that, my business partner and I got together and started Arcan Capital to invest in multi-family assets in the South-Eastern U.S., and we have a focus on value-add investing.

Joe Fairless: Based on your experience in underwriting through CBRE and your own practical experience, what are some ways that your underwriting has evolved, from when you started to where you are now?

Steve O’Brien: I actually think it’s a constantly evolving process. We do have our own model that’s an Excel model, and I think just about everyone has something that they rely on from a modeling perspective. I think I learned something new on every deal.

One of the interesting things about real estate is that it doesn’t happen overnight. Getting a deal done soup to nuts can take years; it can take a year to close a deal sometimes. I think if you aren’t constantly evolving and changing with the market, you’re gonna end up stale and missing some things. I’d say our model is a living document that we change based on every deal, but we just try and stay true to our foundations.

You can make a model say almost anything you want it to say; it’s about the data you put in it, and making sure your assumptions and results are correct.

Joe Fairless: What are some of the foundations that are always constant?

Steve O’Brien: I’d say the way that we make the calculations, we try to focus on keeping the math consistent and trying to stay away from some of the tricks in the underwriting that you can do, since income’s supposed to always be higher than expenses. If you grow your income and your expenses at the same rate, you’re gonna create a positive wedge. So just recognizing things like that and being aware of where your model can overestimate and underestimate things based on the numbers you put in it… That’s where we try and be the most consistent. Never let yourself get too far out of your fair way and out of your comfort zone from the underwriting.

Joe Fairless: As far as some things we might overestimate or underestimate, specifically based on your experience, what are the things in the past that you have specifically either overestimated or underestimated and you’ve tweaked since then?

Steve O’Brien: I think you always start with the rent growth. In general, when somebody is presenting you with data on a property, a Trailing Twelve, or even if it’s just a Trailing Six, you should be able to come to your conclusion about what the income has been pretty easily, so it’s all about projecting. Especially in the market that we’re in right now, you’ve seen really high rent growth figures in markets throughout the South-East and throughout the country, but I think you can get caught up in really juicing those figures and assuming that five and six percent annual rent growth is going to continue to occur.

The reality is it’s always gonna come back to the mean, so we try and be very careful — if we can’t justify a rent increase or we can’t verify exactly what the current market rent is, we’ll go back to the data and say “Where did they sign a lease last month? Where are they getting rents today and what are the comps getting?” From our value-add perspective, we’re always trying to go into a property and improve something, so that we’re not simply relying on market timing.

When we get into the property, if I replace all the appliances, if I replace this, if I replace the light fixtures, how much rent is really on the table? Because if it’s only $50 and I assume it’s $100, then that can really ruin your deal. So it all starts with rent growth and rent assumptions.

Joe Fairless: How do you gather that data and information to accurately project the rent as much as you can, knowing that you don’t have a crystal ball?

Steve O’Brien: Well, I think you do your best with analysis. There are a lot of companies out there like REIS or CoStar that provide you with that sort of data. At the same time, we think real estate is really a local business, so we’ll focus heavily on the comps. You get to know the area and determine who your real comps are and determine where they’re going.

Just because rents are going up in Atlanta or in Charlotte doesn’t mean that in your particular market you’re going to get that same rental increase. You may have several brand new properties being built right down the street, or you may have a property that’s really old that got torn down that’s going to increase your demand. So we try to focus on the micro-market and make sure that we get as much data as we can on the comps and the specific properties that are competing, and how they relate to our property.

Joe Fairless: How do you determine who are the real comps? Because I’m sure brokers present comps to you and then you look at that, but then I’m positive that you also do your own assessment of who the comps are. So what do you look for to make sure that the property that you’re underwriting is being compared against the real comps?

Steve O’Brien: Actually, that’s a great question, and I love what you said with the real comps… As you mentioned, and having been at CBRE and starting there, I can tell you the way the brokers look at comps is they’re looking for things that support their analysis, and I think that’s what everybody’s doing, but as an investor you need to have more of an open mind, and I think you need to be willing to look for things that don’t support your hypothesis, so that you’re willing to walk away from something that’s not a good fit.

The nice part about multi-family is it’s pretty open from a data perspective, and if you call a property, you’d be surprised at how much data they’re willing to give you. We will tour properties, we will call and say we’re doing a market survey, and in general, multi-families are a fairly tight-knit community. You’ll find some properties that may not be a hundred percent honest with you about occupancy and rental rates, but in general, if you drive around the properties and you get a feel for what type of property your property is, you can compare it not dissimilar from how an appraiser might – age and quality…

Then you can call them and say, “Hey, what are you getting for a two-bedroom? What are you getting for a one-bedroom?” and it’ll become pretty clear to your whether the numbers that you were given, whether it’s by a broker or even by an appraiser are realistic.

That’s one of the great parts about multi-families – in general, there is an incentive for everyone to share this information… So you can get it, you just have to ask for it.

Joe Fairless: As far as what you’ve just said, age and quality – can you elaborate on that? The reason I’m asking is let’s pretend a multi-family investor just got a deal sent over to her, and she is looking at the deal and she’s like “Okay, now I need to know where are the rent comps.” It’s an off-market deal, but she has access to databases as well as her car, so she can drive around. How does she initially qualify the rent comps? What are the specific factors?

Let’s say this property was built in 1980 and it’s in a B class area. How does she go about actually finding the rent comps?

Steve O’Brien: I think that there’s a big, broad process that you can go through, but we have some very specific categories that you probably wanna focus on. Number one is distance. The reality is something that’s ten miles away probably isn’t one of your real comps. Now, in some of your very small markets, maybe one of the advantages you see is that there are only two comps within ten miles. But in general, I’d say proximity is a very important factor, and age is a very important factor.

Constructions, just like almost anything else, as the time goes on, things change. As we’ve all seen, if you go look at deals that are built in the ’60s and ’70s, they can be very different from deals that are built in the ’80s and ’90s. One of the things that we try and focus on from a value-add perspective is identifying similar age, similar construction quality, whether it’s two-storeys versus one storey.

One of the new buzzwords in multi-family is ceiling height. Nine-foot ceilings is a big deal right now for newer products, because a lot of the older products have eight-foot ceilings. It’s up to you to determine whether something can be a comp if it’s a nine-foot [unintelligible [00:11:58].00]. I think you can, and you can make adjustments up and down, because that’s what your clients are gonna do. Residents are gonna go back and forth and they’re gonna put a value on specific things.

A 2000-built property can be a comp with a 1980 property, it just depends on the other things that they offer. What are the amenities? Pool, fitness, tennis courts, fitness center… So it’s basically creating a list of property information and comparing that side-by-side, no different than when you’re going online and you’re trying to compare different software programs, and you’ve got the checks by all the different things this software program does versus the other. We do it in a very similar way.

Then, of course, you can get as detailed as possible. You can compare the size of pools, you can compare the number of parking spaces, and covered parking vs. garage. So you can really take it down to a very micro-level, but when you’re looking for your comps, I think you need to stay a little bit more broad as far as age and construction quality and location.

Joe Fairless: Generally, what have you found is the right distance to look for from the subject property?

Steve O’Brien: Everybody’s different. I think that if you were just gonna pick a number, I would say that it’s within a couple of miles. The problem becomes — it depends on your density, and every market is different. I think the answer to that question is based on where you are. It can be a great benefit that you draw a radius outside from your property location, and in that two-mile radius you only have one comp – that could be a great thing. It could also be a bad thing. It can be a sign that there’s not a lot of demand in your area.

I think it’s more about understanding your area, but we try to look in denser areas within a mile radius. In larger areas, we would typically draw the line around a five-mile radius, because in general if someone is looking to live in an area, it’s our opinion that five miles is about as far as they’re going to live once they’ve made a decision of “Hey, this is the spot. This is where I wanna be.” You probably aren’t gonna go too much further than five miles, but you may have to expand that to get enough comps… And who knows what enough is? Is it 4-5, or is it 10? I think everybody has to determine that on their own.

Joe Fairless: I’d love to hear you elaborate a little bit more about your example that you said where a 2000-built property can be a comp with a 1980 property, depending on the amenities. Can you elaborate on that?

Steve O’Brien: Absolutely. I think in general there are certainly some construction changes between a mid-1980s product and the 2000s. Materials get better, but I think you also hear people say that they don’t build them like they used to. So I can have a 1980s pool (that was built in the 1980s), but some of the new pools, they call them resort-style pools – it’s a little bit bigger, a little more deck space, maybe you’ve got grills out there… So it’s about taking that single item — the tennis courts… What conditions are the tennis courts in? I can take a tennis court, and for a relatively small amount of money, I can make it look and feel almost brand new. But if I have a 2000 deal and no one’s touched that tennis court for 16 years, my 1980s tennis court could be better than the 2000.

So I think it’s about identifying what those specific amenities are, and comparing them side-by-side. I think fitness centers are one of the big ones, because in the 1980s fitness centers weren’t really a thing; that was at properties. Now it’s a major component of a lot of the new deals that you’ll see. Large fitness centers that you don’t even need a gym membership anymore. If you go back and look at a 1980s deal and you have a little thousand-square-foot room that they’ve put some equipment in and they call it their fitness center, then that’s not really fair to compare to some of these big 5000-square-foot with free weights, ellipticals and all the different machines. Just because they both have a fitness center doesn’t mean that it’s fair to compare them apples to apples.

I think that’s what I mean by amenities – it’s something other than simply the living quarters and the units themselves. Dogwash stations, dog parks, car wash stations… We’ve seen some of the new deals – particularly student housing, which is a little outside of the multi-family logs, but some of the new student housing deals are a maze of full-club houses with flat screen TVs and video game systems and pool tables…

Not everything is created equal, so it’s not just as easy as saying, “Yes, we both have a pool.” I think you have to take a closer look at that pool and you have to take a closer look at those tennis courts, instead of just assuming that the 2000 deal was better. That’s probably a safe guess, but that’s why you gotta go put your eyes on it.

Joe Fairless: What year properties do you wanna buy now?

Steve O’Brien: I’d say right now we really like somewhere between 1980 and 2005. The reason we like that is because we like to add value to things, and it’s hard to add value to something that was built six years ago. You can, and there are some markets where it certainly happened, where the growth has been so much that you’re going from Formica countertop and black appliances to granite countertops and stainless appliances, because you can get substantially more rent for those upgrades. But in general, we like to focus on deals where we can make [unintelligible [00:17:19].20] transformations.

We like to take before pictures and after pictures, and have a real wow factor, and you need some age in order to do that. It’s hard to create a wow factor for properties that are much newer than 2000-2004. But you can go into some properties that age, in 1984, and it feels like a generation ago, and it was. I’m sure you’ve seen them too, the old cabinets that you’ll see in some of those 1980s deals, when everybody liked the original wood grain look. Now everybody likes  the bright-starred white kitchen.

Things change, and I’m sure in 15 years they’ll go back and look at deals and say, “Oh man, that was built in the 2000 teens”, because of this style and that style. So we like to create that transformation, and you need a little age in order to do that.

Joe Fairless: And then real quick, clearly you can have some wow factor if you buy a 1960 property and you do the renovation, so why 1980 versus 1960 or 1970?

Steve O’Brien: I think we see a lot of similarities between the construction – not all of it, but you can sometimes find a 1985 deal, garden style apartment that’s built very similarly to how they would build it today. That’s what you’re looking for to really create that transformation and to increase the age of the asset, or the perceived age of the asset… It’s “Can I make this look new?” A lot of the ’60s and ’70s deals (especially the ’70s) you get some of that modern architecture, and it’s hard to bring that property out of the ’70s, to make it look like it’s no longer a ’70s feel.

The same is true for some of the ’60s properties as well, where there are just changes that you can’t make. Meanwhile, in the ’80s, with vinyl siding, or T1-11 wood, or cedar siding, it’s pretty easy in the scheme of things to rip that off and put on the new hardie siding or cement board siding and give it a fresh, new look and make it look like it was built in the last 10 or 15 years.

That’s why we try to stay away from a little bit older products. There are also a ton of other issues you can run into with aluminum wiring, asbestos, all sorts of environmental potential concerns that frankly people didn’t know about in the ’60s and ’70s. Now that you know that, it can be a real pain to deal with those issues if you can avoid them.

Joe Fairless: Let me pose a hypothetical scenario to you. You just got a lead from one of your friends in the business, and he said “Hey, I’ve got this portfolio of 1960s properties, 300 units. They’re in a B+ area that’s trending towards an A.” What do you do in that scenario?

Steve O’Brien: Well, I think rule number one for us you have to go see the real estate. That’s rule number one, because there are a ton of deals that if you don’t go put your eyes on them, you don’t get the real assessment for what they are. I would go to those properties and then I would start asking some of those bigger picture questions – are there any environmental concerns? Copper wiring, polybutylene plumbing, asbestos – those different materials from the past, that can cause problems.
But some of the coolest deals around now are currently [unintelligible [00:20:50].29] deals that were formerly old warehouse and mill space, and they’ve been completely remediated and they’ve been completely remediated and they’re beautiful deals, with no environmental concerns.

I think rule number one is if something sounds interesting to me and it’s a good area, I’m gonna go see the property. Then I’m gonna start asking the big miss questions, the things that can really hurt a deal, and try and check off those big problems off my list, so that I can focus on the little problems.

Joe Fairless: You mentioned some of those questions – environmental concerns, the wiring… Just off the top of your head, what are some other questions that you would ask that would the big ones that might kill the deal?

Steve O’Brien: It’s all the major systems, especially for the older deals. Does it have central air or is it a wall unit? Because that’s something that is really hard to get around, not having central air, and you just need to know that; it doesn’t necessarily make the deal a bad deal, you just need to understand that part of it.

I would say roofs, the age of the siding, wiring, plumbing and electrical systems in general. If the wiring is just old and needs to be replaced, that’s a very expensive problem. Same thing for plumbing. It’s really hard to get into the walls of a property. To the extent that you can verify that those things either have been remediated or are in very good shape, you can really avoid a big miss.

Missing on one unit that turns out to be down is a relatively small miss on a reasonably sized property, but if it turns out that you have to rewire your whole property, or you need to put new roofs on your entire property, that’s gonna cost you something substantial, and that’s gonna really change your return.

Joe Fairless: Steve, what’s your best real estate investing advice ever?

Steve O’Brien: My best real estate investing advice ever is to use debt to your advantage. I think there’s a reason they call it leverage, and a lot of people jump into loans… It’s a great idea to structure those the right way, and it can save you a lot of time and pain in the long run.

Joe Fairless: I’d like to do a follow-up conversation with you about debt and leverage if you’re open to that. Would you be open to that?

Steve O’Brien: Sure.

Joe Fairless: Cool. We’ll have you on the show one more time so you can talk about that specifically. Are you ready for the best ever lightning round?

Steve O’Brien: Absolutely.

Joe Fairless: Alright. First, a quick word from our Best Ever partners.

Break: [[00:23:07].09] to [[00:23:49].23]

Joe Fairless: Best ever book you’ve read?

Steve O’Brien: Outliers by Malcolm Gladwell.

Joe Fairless: Yes, that’s a good one. One of my favorites. Best ever personal growth experience and what did you learn from it?

Steve O’Brien: I would say it was the market crash in 2008. I’m sure you get that a lot. While you’re going through it it’s really painful, and I think though you learn more in the down markets than you do the up markets. That was a great opportunity to experience a lot of pain, but almost everything that I do in my underwriting comes from the failures I saw during that time. I learned a lot of what to avoid during that time.

Joe Fairless: And what specifically do you do now in your underwriting that you weren’t doing before?

Steve O’Brien: I think it’s some of the stuff that we talked about earlier – the rent growth figures, and just the understanding… I mean, it’s amazing to go back and think that during that time no one ever thought values would go down. Just remember that that’s possible. I think justifying all of your numbers, as opposed to just penciling in a figure – “Oh, rent will go up this much” or “Sure, I can get that figure”… It’s really actually finding some data to back it up.

Joe Fairless: What’s your favorite data source?

Steve O’Brien: We use CoStar, but there’s so much news available on the internet, that whether it’s the local business journal or Bureau of Labor Statistics… There’s a ton of data out there. In fact, there’s probably too much data, so that’s why we like to focus on CoStar and one particular source, so that we’re at least consistent. Because it doesn’t feel right to just pick and choose “Today I’m gonna use this, and tomorrow I’m gonna use that” just to prove your point.

We like to pick one and stick with it, and that choice for us has been CoStar, but there are a lot of great companies out there like REIS and other analysis sources that people use and trust.

Joe Fairless: Best ever deal you’ve done?

Steve O’Brien: Definitely the deal we did in suburban Atlanta. It was actually a duplex community, and the property was being run more like a single-family neighborhood than a multi-family property. It was in big distress, so we came in and purchased the property all cash, because it was a mess, so it wasn’t financeable. To give an example, it was in such bad condition after the foreclosure that there were residents who instead of reporting a termite infestation would just put posters up over the holes in the wall, and wouldn’t even report it because they didn’t think anybody would fix anything. So we really had to sell the vision on that one of what we could turn it into, the transformation we could make.

We were able to do it four years later; it’s worth about three times what we paid for it, and we were able to finance out all of our capital, and it’s been a great deal. We basically turned it from a single-family neighborhood into a multi-family property.

Joe Fairless: What’s the biggest mistake you’ve made on a deal?

Steve O’Brien: It’s actually on my own personal house. I bought a house at the absolute worst time in 2006. I always laugh about it, because I’m a real estate person and I still bought a house in 2006, at the absolute worst time. Just going back and thinking about it, it’s funny… I think we all ignored a lot of the signs that some of this stuff didn’t make sense and we all paid the price, but hopefully we came on the other side better for it.

Joe Fairless: What’s the best place the Best Ever listeners can get in touch with you?

Steve O’Brien: The best place is our website, www.arcancapital.com.

Joe Fairless: Sweet. Steve, very informative and educational conversation – I know for myself, as well as some Best Ever listeners. Thank you for being on the show, spending some time with us talking about how your underwriting process is constantly evolving, and how to find the real rent comps when we’re looking at opportunities, and the three ways to find those rent comps: distance, age and construction quality, while taking a close look at the amenities, because as you said, a 2000 property could be a rent comp for a 1980s property. We really have to look into some of the specifics.

Thanks for being on the show, I hope you have a best ever day, and we’ll talk to you soon.

Steve O’Brien: Great, thanks so much for having me.

 

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JF938: Ultimate Beginner’s Guide to Buying Property Number One

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Sunny Burns Real Estate Background:

–  26 year old real estate investor
–  First real estate deal a quadplex, was his best ever deal that has allowed his wife to stay-at-home
–  Property is 20 min from NYC, found off the MLS in 2015, cashout refied all $67k of their initial investment
–  Based in Garfield, NJ
–  Say hi to him at http://www.famvestor.com

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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate podcast. We only talk about the best advice ever, we don’t get into any fluffy stuff.

With us today, Sunny Burns. How are you doing, Sunny?

Sunny Burns: Good, how are you guys?

Joe Fairless: I’m doing well, and I’m channeling the Best Ever listeners, and they’re doing really well as well, because we’re gonna be talking to you, and learn more about what you’ve got going on as a 26-year-old real estate investor who’s first real estate deal was a quadplex, and the property is 20 minutes from New York City, where you’re based.

Let’s talk a little bit about that, but maybe before we dig into that deal, do you wanna give the Best Ever listeners a little more about your background and your focus?

Sunny Burns: Sure. I’m a mechanical engineer – that’s my profession, that’s my 9-to-5. I work for the Department of Defense as a prototyping engineer, I do some cool stuff there. I recently printed a 3D grenade launcher.
My wife and I recently got into real estate. We really started diving into it about two years ago, and wanted to create some financial freedom for ourselves, so that’s why dove in and we bought that four-family, to create that passive income. My wife was an art teacher, but she was able to retire (…I like to say) and stay at home with our two sons – we just had another son two weeks ago.

Joe Fairless: Congratulations on the new arrival.

Sunny Burns: Thank you!

Joe Fairless: Alright, let’s talk about the quadplex, because that is your one and only deal, right?

Sunny Burns: That is.

Joe Fairless: Okay, cool, so let’s dive into that, because this is going to be really beneficial for real estate investors who are starting out, and learning how you got your first place. When in New York City do you live?

Sunny Burns: Well, we don’t live in New York City, we live actually in Northern New Jersey, in Garfield, New Jersey. There’s trains right into the city, it’ll take you 35 minutes to get into the city via train or bus – bus two blocks away.

Joe Fairless: Okay, cool. So you’re in Garfield. Are you from the New Jersey area?

Sunny Burns: Yeah, born and raised here, so I’ve been here all my life. That’s why we were looking local.

Joe Fairless: Okay, you looked local… How did you find the property?

Sunny Burns: Basically just off the MLS… We were just looking at realtor.com, and I got regular e-mail from them; one day I just got an e-mail for this 12-bedroom, 4-bath quadplex, and I looked at my e-mail and was like “Wow, this is the property we’ve been looking for.” I showed it to my wife, and I’m like “Let’s buy this thing.”

Joe Fairless: Okay. 12-bed, 4-bath quadplex… What criteria were you looking for on your search?

Sunny Burns: Ideally what we wanted was a property that was gonna cash flow at about $1,000/month. That was our basic, very bare bones criteria, but we were searching for a long time for something to meet that. That was after we kind of left the unit and everything was fully rented out, because right now we’re still owner-occupying.

Joe Fairless: Alright, you’re living in it, you’re renting out the other three units.

Sunny Burns: Yeah.

Joe Fairless: Cool. And you did that because you got an FHA loan, is that correct?

Sunny Burns: No, we actually did conventional financing through a smaller bank; we put 10% down. We went with the smaller bank because they don’t charge you borrower-paid PMI (they take care of the PMI) and we got a great rate at 4%, which we’ve since refinanced to a 3,5%.

Joe Fairless: Cool. They don’t charge you borrower PMI, so you did a smaller bank, 10%… What was the purchase price, how much did you have to put in – if any – to get everyone moved in, and what’s the rent?

Sunny Burns: The purchase price was $430,000. We put down 10%, so $43,000, and then we put about $20,000 in materials. We did all the renovations ourselves. Then for rent – so we live in unit one. Unit two we rent out to my in-laws actually, for $1,000/month, and the other two units we rent out for $1,700 each. So in total it’s about $4,410/month, while we live in one of the units.

Joe Fairless: $1,700 each, $4,410…

Sunny Burns: $1,710 for one of the units, and $1,700 for the other unit.

Joe Fairless: Oh, so don’t forget the $10!

Sunny Burns: Yeah…

Joe Fairless: You are a true engineer. You know your numbers, you get on to me if I miss $10… I love this.

When I jump on investor calls and I’m having a conversation with an investor, they don’t even need to tell me what their occupation is, because I will know if they’re an engineer or not based on the type of questions they ask. That is the only profession – not accountants, not lawyers, not doctors, but engineers… Engineers ask the most detailed questions and exhaustive list of questions out of any type of investor.

Sunny Burns: I would definitely agree with that.

Joe Fairless: Alright, so what was that number…? $4,410…

Sunny Burns: Yes.

Joe Fairless: $4,410 divided by, you’ve got 450 into it… Alright, cool, that’s right at the 1%. And then, once you move out…

Sunny Burns: Yeah, we can definitely get $1,500 for our unit easy, and then another $500 for my in-laws unit easy, once they’ve moved out.

Joe Fairless: How long are you gonna be living there?

Sunny Burns: Until we find our next quadplex that we can also house-hack and move into and rent out as well. We’re looking for another triplex or quadplex, that’s what currently I’m searching.

Joe Fairless: Okay, cool. Tell us about the renovations – what did you need to do? Did you have to learn yourself how to do that stuff?

Sunny Burns: Yeah, definitely YouTube really helped a lot in a lot of things, but also my wife is amazing – she grew up in a really old Victorian with her family (I think it was the 1890s), so they had to repair it all the time, and she kind of just grew up really handy. I’m pretty handy myself, but I was more into car mechanics and that side of things. Learning house repair, that was definitely a learning curve, but YouTube, and she had a lot of knowledge, as well…

Joe Fairless: You know, if people asked me what would I have done differently starting out – I wouldn’t have done it differently, so perhaps that’s the wrong way to phrase it, but I was living in New York City and I bought homes in Texas in 2009… It was perfect timing – I didn’t know it at the time, but it was perfect timing. What I also wish I would have done was buy a duplex or fourplex, live in one side, rent out the other. I couldn’t make the numbers work.

It’s a little bit different because you’re from New Jersey, so it’s probably gonna be an easy answer, but I’m just gonna ask you anyway: do you feel like you’re sacrificing a New York City experience, since you’re not living in New York City, you’re 20 minutes away?

Sunny Burns: No, honestly… Personally, I can only be in New York City maybe one day a month, and then I’m tired and I gotta go back to some trees and land. I don’t know, I can’t live in that urban lifestyle too long.

Joe Fairless: Okay, cool, so that’s not how you’re made up anyway.

Sunny Burns: Yeah. But I definitely recommend that house hack – if you buy a single-family house, depending on how much you make, half your income could be going straight into that house (mortgage, taxes, repair costs), so buying that duplex at least can offset some of that money and can get on that track towards financial freedom and you’re not a slave to that house.

Joe Fairless: You mentioned that you did a refinance on it… When did you purchase it?

Sunny Burns: I purchased it in 7th October 2015, and we refinanced 10 months later.

Joe Fairless: How did that work out for you?

Sunny Burns: It worked out great. We purchased it for $430,000, we put that $20,000 into it in repairs, and I think it was under market when we bought it, so it appraised for $550,000, so that was $120,000 over what we purchased it for. We did a cash-out refinance, so we pulled out $67,000, and that was pretty much the $43,000 that we put into it and the $20,000 repair costs, and I think some closing costs wrapped in. So we just wanted to pull out every dollar that we’d put in; we wanted to pull out that money for our next investment, which we’re looking for right now.

Joe Fairless: That’s beautiful. Bravo!

Sunny Burns: Thank you. Yeah, it worked out beautifully. We only put 10% down, but right now, even after taking out that $67,000, we have 20% equity in it, which is a lot more than we initially put down.

Joe Fairless: Are all of your deals throughout your life gonna be like this?

Sunny Burns: I can only wish…

Joe Fairless: What type of luck are you having with your search right now on your next deal?

Sunny Burns: We haven’t found anything… It seems like the prices are just so high. We were looking at another house last week and went to an open house – it was like $600,000 for another quadplex, in the same town of Garfield, with two bedrooms and one bath. We have four 3-bedroom units, so we’re getting good money for a [unintelligible [00:10:44].26] unit, but I don’t know… The numbers don’t work as well, but we haven’t given our hundred percent in the search yet, so I’m still hopeful.

I think we won’t be able to get as great a deal, but we could probably have to settle a little bit.

Joe Fairless: For a Best Ever listener who’s looking to do what you just did – I’m not asking for your best advice, because I’m gonna ask that in a little bit… But just for someone who’s listening and like “Yes, I want that!”, what are some suggestions you would have for them?

Sunny Burns: Prior to us putting an offer on this house, we had put an offer in a week before on another quadplex in the same town of Garfield, and the advertised price was $500,000. Three days after it was listed we put an offer for $525,000. That was an offer $25,000 over asking, and we were quickly outbid by other investors. If the numbers work, other investors want in.
A guy put a cash offer over ours, and we put an offer 25k over asking… So my suggestion, how we got this property I really believe is because it was an REO, and it was owned by Wells Fargo and they have this first-time homebuyer’s program. For the first 12 days, they wouldn’t let any investors bid on it. Only people who were gonna owner-occupy and live in the property were able to put a bid in. So I think we were only competing with two other people. We just put an offer in, $5,000 over asking and we got it. I don’t think we would have gotten it any other way, especially because this is such a cash cow.

Joe Fairless: Okay, that’s similar to a hack – maybe it’s the same thing – the HomePath program…

Sunny Burns: Exactly, I was looking at a lot of that, as well.

Joe Fairless: Does that still exist, the HomePath loan?

Sunny Burns: It did two years ago…

Joe Fairless: Okay, cool. I got my second house through the HomePath program, and I only had to put 10% down. I didn’t, but there was the first-time homebuyers — or actually not even first-time buyers… If you were buying it to live in, you got the first crack at the REO property, and then it was police officers and veterans and firefighters – they got the second. If that passed through, then feeding frenzy with investors takes place, and I got it through that.

Sunny Burns: Sounds like a similar deal. When we visited this property, there’d be investors crawling all over… Every time we came there were three or four people just looking in the windows, looking around… Because it was completely vacant when we got it.

Joe Fairless: Let’s go back to $20,000 – that’s a significant amount of money to put into something and to do your own work on a property when you’re learning on YouTube, even though your wife is handy and you know car mechanics… [laughter] So talk us through that.

Sunny Burns: We redid the whole kitchen; we pulled out all the old cabinets, all the appliances – which I think there was just an old stove at that time… And we actually bought a used kitchen off Craigslist for $1,100 with the stone and sink and everything, and it magically fit exactly in our unit, so that worked out quite well.

Joe Fairless: What would you have done if it didn’t?

Sunny Burns: Well, we only bought it because it fit. We saw three or four of them… But it worked out so well. Anyway, I’m sure we would have cut the stone here or there, trying to make it work. It had an excess of cabinets, so we could kind of tetris it together.

So we did kitchens, we repaired the sidewalk… What else did we do? A lot of little repairs here and there; we painted a lot of walls. In the attic we made some storage space by putting down just plywood. We had to repair the chimney – it was kind of leaning over and falling down.

We pulled up all the rugs and refinished them to hardwood floors, we put in new vanities… Just kind of minor cosmetic tweaks here and there. We put in a centralized coin-operated laundry room… Things like that.

Joe Fairless: What repair was the most challenging to learn how to do?

Sunny Burns: Probably that kitchen. There was an L kitchen, and the sink wasn’t exactly where the hot water and cold water lines were, so we had to finagle some things here and there, but it worked out really well. I learned how to [unintelligible [00:14:41].28] copper pipes, and had to learn a lot of things on that one – hang up and make sure the cabinets were leveled, I had to put travertine backsplash, things like that.

Joe Fairless: When you are looking at these repairs or how to do them on YouTube, was there a particular channel that you were looking at, or you just do the search and whatever video pops up?

Sunny Burns: I did the search, looked for the highly rated, highly viewed ones.

Joe Fairless: Okay, got it. Now the money question – what is your best real estate investing advice ever?

Sunny Burns: Honestly, I’m just gonna give that generalized advice to those beginners in the audience who are looking to make a step towards financial freedom – don’t go and buy that single-family house if you haven’t already. Buy at least a duplex. You don’t wanna become a slave to your house. You don’t want half of your paychecks to go there, because it’s hard to get out of that and grow from there. But if you can buy something like a duplex, a triplex or a quad, you can really start to almost live for free.

We actually live for free, and then make a couple hundred dollars after that. It’s really an awesome thing, and we’re able to grow so much quicker because of that.

Joe Fairless: Was there any convincing needing to be done with your significant other to buy a quadplex versus a single-family?

Sunny Burns: There was at the very beginning because she was really hesitant about working with tenants; she was really scared about tenants – they’re gonna sue you, they’re gonna cause all these headaches… We did credit score checks on every single tenant, we did background checks on every single tenant, we made sure that they had at least two times the rental income coming in, and we did a lot of thorough things.

Through the processes I outlined that we’d do with these tenants, I was kind of able to lower her fears and now she’s a huge fan and tries to tell all our friends to do the same thing.

Joe Fairless: Are you ready for the Best Ever lighting round?

Sunny Burns: Let’s do it!

Joe Fairless: First, a quick word from our Best Ever partners.

Break: [[00:16:30].06] to [[00:17:12].15]

Joe Fairless: Best ever book you’ve read?

Sunny Burns: I just read this one – I love reading books; I read books all the time, but this is my most recent one and I really loved it… It’s called Outwitting the Devil, by Napoleon Hill.

Joe Fairless: Yeah, that is the one that has recently come out, right?

Sunny Burns: Yeah, he died a long time ago, and he wanted to publish it, but his wife didn’t want to publish it because she thought it was too controversial. Then the family inherited it, they didn’t want to publish it, and then they finally published it. But basically, the synopsis is Napoleon Hill sometimes somehow manages to capture the devil and coerce an interview on him… So he asks the devil how  he uses all these devilish tricks to ensnare humanity and never get them to succeed. It’s really an intriguing book, and I definitely recommend it.

Joe Fairless: That’s interesting. I love reading too, and I really like a lot of Napoleon Hill’s stuff. I did not like that book. I just couldn’t get into the dialogue, it just lost me. That’s interesting… To each his own. What’s your best ever personal growth experience and what did you learn from it?

Sunny Burns: I’m gonna have to say it’s buying this quadplex. It’s been about a year and a half now since we bought it. We had to do so much work to it… We really took ownership of it and we really did a great job, I feel. Our tenants really love their units, we do a good job maintaining that tenant/landlord relationship with them… So just this whole experience of stepping towards financial freedom – this experience has been great for the both of us, as a family.

Joe Fairless: What’s the best ever way you like to give back?

Sunny Burns: My wife are assisting young adult pastors at our local church, so we give back that way. Recently, I’ve been getting very much into mentoring people through breaking habits from pornography – that’s recently what I’ve been diving into.

Joe Fairless: What would you say is a mistake you made on the deal?

Sunny Burns: I’d say a mistake was really doing all that work ourselves. We had a lot of holding costs… It was completely vacant when we bought it, so it took us like three months to do all that work. Honestly, I think we could have probably saved some money if we had hired some contractors to help us out. Because I’m working full-time, my wife was actually on maternity leave with a baby, so it’s hard for her to do a lot of things…
If we had hired contractors, yes, we would have had to pay them a lot of money, but we were also paying the mortgage, the taxes, the insurance – all of that without having any tenants to help us out. That was kind of painful.

If I were to do it again, I’d definitely do some of the work, but I’d hire a lot of it out as well.

Joe Fairless: Well, you definitely have given a lot of the listeners who are looking to buy their first place some inspiration and some tactical advice. Where can the Best Ever listeners get in touch with you if they want to?

Sunny Burns: I have a blog, FamVestor.com where I’m talking about creating passive income for the purpose of investing in your family. You can leave me a message there.

Joe Fairless: Alright. Well, thanks so much for being on the show, talking about your first deal – and your only deal, but boy, it’s an inspirational deal because this is the way to get started, Best Ever listeners. If you are getting started and you’re thinking about house-hacking, get a fourplex – better than a duplex, better than a three, because you’ve got more income coming in. If you can do just a little bit of work, and also even without doing work have equity built in and then do some work with the refinance after you get it all leased up, and be able to pull all your money back out, then you can put that money back into another deal. Holy cow… Do it all over again, rinse and repeat! And especially since you did it through a smaller community bank or credit union at 10% down..

Sunny Burns: Trustco Bank. Actually, they have branches in Florida, Massachusetts, New Jersey, New York… So check them out. 10% down, no PMI – you can’t beat that, especially on a four-family. Even my credit union wanted 25%.

Joe Fairless: Yeah, those are some great terms. Thanks so much for being on the show. I hope you have a best ever day, and we’ll talk to you soon!

Sunny Burns: Thanks!

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JF805: His SECRET to Finding and Closing 24 OFF MARKET Multi Million Dollar SYNDICATIONS After Only Having $7 in His Pocket

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After you pick up your jaw off the floor, just know that closing over 24 multi million dollar syndications was only possible through hard work, connections, consistency, and constant learning. Our guest has made it in the multi family syndication space, but there is a lot going on behind the scenes. Hear what he did to close a few and hear the secret behind him getting all off market deals.

Best Ever Tweet:

Vinney Chopra Real Estate Background:

– Founder & CEO OF MONEIL INVESTMENT GROUP
– Facilitated 24 successful syndication offerings controlling $125M in Multifamily
– Presently owns single family homes and multi-family units in Texas, California, Arizona and India
– M.B.A. degree from George Washington University after coming to USA with only $7 from India
– Based in San Francisco, California
– Say hi to him at vinney@moneilig.com
– Best Ever Book: Think and Grow Rich by Napoleon Hill

Want an inbox full of online leads? Get a FREE strategy session with Dan Barrett who is the only certified Google partner that exclusively works with real estate investors like us.

Click here: http://www.adwordsnerds.com to schedule the appointment.

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JF800: How Getting Involved in Your Local REIA Leads You to BIG Deals

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Business is primarily made of solid connections, and what better connections are made in real estate than your local REIA? Join our guest as he walks us through some deals that are large syndications he would not have found without the help of the connections he has.

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Denny Troncoso Real Estate Background:

– Investor Relations at Apartment Holdings USA; acquires apartment buildings in need of reposition
– Purchased 1st investment property in 2011; since started two companies focused on acquiring real estate properties
– As a broker he has produced over $400,000 of sales revenue within 5 years
– Ranked One of Top 25 Independent Agents 4 years in a row from group of over 300
– Based in Orlando, Florida
– Say hi to him at http://www.apartmentholdingsusa.com
– Best Ever Book: The One Thing by Gary Keller

Want an inbox full of online leads? Get a FREE strategy session with Dan Barrett who is the only certified Google partner that exclusively works with real estate investors like us.

Go to http://www.adwordsnerds.com strategy to schedule the appointment.

Subscribe to Joe’s YouTube Channel here to learn multifamily and raising money tips: https://www.youtube.com/channel/UCwTzctSEMu4L0tKN2b_esfg

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JF776: How He Raised Over $1MM On His FIRST TWO Syndicated Deals!

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Being new in the deal syndication game, it’s not likely that you would be able to raise over $1 million on the first two deals, but today’s guest did! He gives credit to a few networks that you need to hear about, turn up the volume and learn who you need to talk to!

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Dave Thompson Real Estate Background:

– Full time multifamily real estate investor
– Raised $1 million on his first two multifamily deals
– Over 5 year’s experience in purchasing single family properties before switching to multifamily
– Left full time high corporate position last year to pursue full time investing
– Based in Austin, Texas
– Best Ever Book: The One Thing by Gary Keller and Jay Papasan

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Get a FREE strategy session with Dan Barrett who is the only certified Google partner that exclusively works with real estate investors like us.

Go to http://www.adwordsnerds.com strategy to schedule the appointment.

Subscribe to Joe’s YouTube Channel here to learn multifamily and raising money tips:
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JF764: How He Rolled His Capex Into a Multifamily Loan and Earned HUGE Cash on Cash Return

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Are you nervous about dumping your capital into fixing up your brand-new purchase? Today’s Guest enters deals very safely as he includes the cost of all capital expenditures into the loan. Hear how he ran into some road bumps but was covered due to the terms of his loan and check out his cash on cash return!

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Mark Walker Real Estate Background:

– Founder & President of Luxmana Investments LLC, which focuses on residential and multifamily investments
– Active real estate investor since 2004; began part-time while holding full-time job in high tech
– Built a multi-million dollar portfolio in less than four years
– Acquired 22 properties with an average cash-on-cash return greater than 20% in the first year
– Own property in four different states
– Based in Denver, Colorado
– Say hi to him at www.luxmana.com
– Best Ever Book: Rich Dad Poor Dad by Robert Kiyosaki

Want an inbox full of online leads?

Get a FREE strategy session with Dan Barrett who is the only certified Google partner that exclusively works with real estate investors like us.

Go to http://www.adwordsnerds.com strategy to schedule the appointment.

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JF759: 5 Reasons Why Joe Bought a 296 Unit Apartment Complex #FollowAlongFriday

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Joe and Theo share their thoughts on Joe’s recent investment of a 296 unit apartment complex in Dallas, Texas. Growing rents, gentrification, migration of big companies to the Dallas area, already done for you remodel, and other reasons why sparked the idea to buy this property, tune in and hear the details!

Best Ever Tweet:

Want an inbox full of online leads?

Get a FREE strategy session with Dan Barrett who is the only certified Google partner that exclusively works with real estate investors like us.

Go to http://www.adwordsnerds.com strategy to schedule the appointment.

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JF704: When it’s OK to Use a $100,000 Earnest Money Deposit NONREFUNDABLE #situationsaturday

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He aggressively bid on a large Multifamily deal, and won the transaction. Hear the long purchase process that included providing credibility, aggressive offers, and being willing to lose a large deposit. Our guest shares all the ups and downs during the underwriting and purchase, tune in!

Best Ever Tweet:

John Cohen’s real estate background:

– Founder of JC Property Group
– Started in real estate buying tax deeds
– Based in Queens, NY
– In 2014 switched to multifamily and recently closed on a 48-unit syndicated deal in Columbus, Ohio
– Prior to that worked at Marcus & Millichap as a multifamily specialist in Brooklyn/Queens
– Played baseball at Queens College and Mercy College
– Say hi him at www.jcpropertygroupinc.com
– Hear his Best Advice Ever here: http://joefairless.com/blog/podcast/jf345-your-guide-to-direct-mail-cold-calling-and-multi-family-purchasing/

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