JF2146: Lessons From A Buyout With Garrett Lynch

Garrett started wholesaling deals in the Chicago area and after realizing it wasn’t a sustainable model that he could grow into a business. He eventually had a business partner and acquired 3,400 units and due to some fallout between the two, he was bought out and took the lessons he learned to go on a break and came back strong with a new partner now owning 500 units.

Garrett Lynch Real Estate Background:

  • Full-time real estate syndicator
  • 9 years of real estate experience
  • Sold his portfolio in 2016 consisting of 3,400 units 26 properties
  • Currently owns 500 units 
  • Based in Scottsdale, Arizona
  • Say hi to him at https://nighthawkequity.com/



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Best Ever Tweet:

“Buy-sell insurance in place, I think everyone should probably have” – Garrett Lynch


Joe Fairless: Best Ever listeners, how are you doing? 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 where we only talk about the best advice ever; we don’t get into any of that fluffy stuff. With us today, Garrett Lynch. How are you doing, Garrett?

Garrett Lynch: I’m doing great. Thanks for having me, Joe.

Joe Fairless: Well, it’s my pleasure and glad you’re doing great. A little bit about Garrett – he’s a full-time real estate syndicator, he’s got nine years of real estate experience, he sold his portfolio in 2016, which consisted of 3,400 units in 26 properties, and he currently owns 500 units, based in Scottsdale, Arizona. So with that being said, Garrett, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

Garrett Lynch: Yeah, I started this business about ten years ago and I started out wholesaling deals in the south side of Chicago, just some of the rougher areas of Chicago, roughest in the country, probably. After that, I realized that that wasn’t really a sustainable model and decided to go work for a guy with 1,000 apartments, and in doing so, I learned the bigger business, and realized that we had resources to go and start syndicating deals.

So myself and my best friend at the time started a company in 2013. We started buying out portfolios of D Class properties, mostly Section 8 stuff, and then ended up converting into some larger multifamily deals. We started with a 50-unit and we did a 70, a 120 and then jumped to a 380-unit deal, and then after that, we’re like, “Oh, we can buy these bigger deals. Let’s just continue doing that because it seems to work a lot better,” and so we scaled that operation about three and a half years to about 3,400 apartments, self-managed the entire portfolio. We got screwed over by a couple of management companies early on in the beginning and decided to just start our own without really knowing anything about it.

So lots of lessons in doing that, but at the end of 2016, I got bought out of my part of the portfolio, and then since transitioned out. I went on a little bit of a hiatus for a couple of years, traveled around the world for a bit, then I came back and found Michael Blanc and [unintelligible [00:04:58].03]. They had a portfolio of about 800 units, and so I came on board with them as a partner to help them scale the business and add value to their operation. So that’s where I’m at now, and we had our last closing actually in December of 2019. We closed on a 276-unit deal in Huntsville, about a $18.1 million purchase price. So we’re still looking for deals even in this crazy COVID era, and our typical deal ranges anywhere from $8 million to about $35 million, and we target the south-east region.

Joe Fairless: Okay. Well, we got a lot to unpack here and thanks for sharing that. So let’s talk about — in no order of importance, but let’s talk about in 2016, you got bought out of your portfolio. So does that mean you all did not sell the properties, but you personally were bought out of your ownership in those properties?

Garrett Lynch: Yes. Just to be candid, it was a partnership fallout. So the partnership didn’t work, we got to [unintelligible [00:06:04].20] So there was a lot of things involved in that, but it just didn’t work out. When we got to that point, things changed and some things happened, and so we had to negotiate a buyout. So it was mostly done through lawyers and all that stuff, but we essentially defined the value of every property that we owned, and then I had a partner, my partner cashed me out.

On the other side – it was probably very lucrative. Obviously, I made a decent amount of money on that buyout. So it’s all the equity that I was owned was paid in cash for me to arrive at the values of each property and I got paid out on that. The downside is that I had to pay a lot of taxes on that, because I wasn’t able to attend 1031 any of those, and I had to pay out on depreciation recapture. So it was an interesting experience. I had to do that in order to get to the level that I’m at now, for sure, and it was a very challenging time, but I’m glad I went through it and I’m back here now.

Joe Fairless: On the buyout, when you’re finding the value of all the properties, and then here’s the percent I own and this is the value, is there a discount placed on what your value is, since you’re getting cash, and it’s not the value is the value of someone pays you for it?

Garrett Lynch: I did take about a 15% haircut, but it was more like a negotiating process. So it actually took eight months to agree on the pricing of every deal. So we went through every deal, and went “What is this worth? What is this worth?” on each one and then what do we pay for it, and then what is my percentage ownership in that? I owned a quarter of the GP on everything. So we had to go in, figure out what that looked like in cash, and then I took a natural discount because we were just trying to arrive at the pricing and how it all worked together. We had 25 assets that we had to basically agree on, so I couldn’t just sell all of them, it would have taken forever. So we just had to do our best at it, and it moved through surprisingly fast, considering all we had to go through, and so once we arrived at that number, that was just what happened.

Joe Fairless: And how do you determine the value of the property?

Garrett Lynch: We just went in and underwrote it as if we were going to sell it in the market. We got brokers opinions on each one, we came up with a big spreadsheet of every single asset, the mortgage, how much equity was in there, and then we just had to come up with a number and I had them throw out the first number. I always do that because it’s a sales strategy, just to see where they thought things were falling, and then if I had back up on any deals from broker opinion or anything like that as to where things would trade, I would include that as well.

We underwrote in an exit broker fee which– we didn’t need to do that. I think as part of the negotiation we did, it where it was 2% on any deal that was over $5 million and then 3% on a deal that was under that, or something. I can’t remember the exact details, but it was like a tiered brokers percentage that went into it. We were simulating a sale, essentially, on each deal.

Joe Fairless: That’s interesting. I’m grateful that you’re sharing this. It’s something that isn’t talked about a lot, and it’s something that when someone does come across this situation, what you’re saying now is incredibly valuable to those parties who are trying to navigate the buyout structure. So thank you for sharing this.

Garrett Lynch: Of course. Another way to just avoid that is to get buy-sell insurance in place, which I think everyone should probably have at a certain point. There’s a lot of things that can happen in a partnership. Let’s say your partner somehow, God forbid, passes away, and then their spouse is now your partner and you hate their spouse. So having that insurance in place, I think, can be helpful.

Joe Fairless: So knowing what you know now, with a type of partnership that doesn’t work, and I know you’re currently in a partnership, what are some lessons that you learned for the partnership that did not work? Maybe I shouldn’t say it didn’t work because clearly, you all had success…

Garrett Lynch: I think it was actually, Trevor McGregor that told me this that most partnerships lasts three to seven years, and I think the biggest thing that we didn’t anticipate– we went into it, we were friends, I was the deal-finding guy, and then my partner was more like the equity and accounting and finance guy, and I was the operation guy, too. So we did offset each other; that was good, I think, in a partnership. And I think what we don’t want to do going into a partnership is just go into it with your friends, unless they have a role that either complements you. You don’t want to do the same thing, you want to have different roles, obviously, in a partnership. But I’ve seen a lot of people that just structure deals and it’s all messed up. It’s a very tricky thing, it’s hard to navigate, and I think that we were very close friends, plus we did offset each other, but you have to be realistic about how things are going to change and evolve, and you have to be able to pivot as they do, and I think that we were lacking in that department.

Joe Fairless: For example?

Garrett Lynch: For example, we were taking on employees as we got larger, but some of the roles that myself or my partner should have maybe taken on, we didn’t really outline how we were going to do those in lieu of the new employees that we were able take on, and so what happened was maybe some of the roles that I used to before– I was wearing many, many hats, I didn’t wear as many hats, and so maybe I was perceived as being less valuable and really, maybe we should have pivoted into something else. That could have been part of it, and vice versa, with my partner, in some respects.

So having clarity around at what level and what roles and responsibilities you’re going to take on even with having employees, I think… People get into partnerships because they can’t afford to pay employees, that’s one reason. So they partner with someone and then they split it up, and then as you grow, you can afford to pay employees to do those roles, and that’s where you want to be. But keeping an open mind to structural changes as things progressed, I think, is what we didn’t do, and that’s something that you definitely need to look at as things pivot. Maybe there’s a partner that just doesn’t serve the partnership anymore as things progress, so having an exit plan in place is important in that respect. So it’s like, “Okay, well, if things go sideways, we hate each other, or whatever, what is that going to look like?” I think the easiest way to protect yourself is just keep things on a deal by deal basis. Personally, I think if we had done it more like that, it would have allowed for us to pivot in the proper way and things, maybe it would have worked out better.

Joe Fairless: So now let’s switch gears and talk about, you said earlier, you got screwed over by management companies. So let’s talk about that.

Garrett Lynch: Yeah.

Joe Fairless: Please tell us.

Garrett Lynch: So first off, it’s impossible to have D Class properties run by a third-party company; there’s too many moving parts. I think that was part of it for us. D Class– nobody really that we know are probably doing them right now;  maybe a few, but that’s where we started. So the property management companies, there’s really two types. There’s bigger assets, they’re running your property for 3% or whatever it is, plus you pay the payroll, but we had a portfolio. The other side is they’re going to charge you 10% and that includes payroll to some degree, and they’re managing multiple sites, and so you’re fighting for their attention in a lot of ways. So we had probably got screwed over by four different companies. The first time, they said they were going to [unintelligible [00:13:24].15] on our expenses. So if there was a lock that need to be changed by a third party company or something silly like that, you’re just supposed to absorb that exact cost. Well, they were taking the invoices and marking up 20% and changing – actually committing fraud – and then passing them through to us, and they’re keeping a 20% difference.

Joe Fairless: Wow.

Garrett Lynch: Yeah. So we caught that and we had a huge issue.

Joe Fairless: How?

Garrett Lynch: They made a mistake on one of them. They left both numbers on the invoice. They didn’t doctor it properly and we caught it. We went in and did– yeah, so stupid. So they didn’t doctor it correctly, we went in and then we started auditing and everything and we actually called the companies directly… A bunch of them that we found, that their actual invoices were less than the ones that we’re getting from the management company.

So that was a huge exit and departure from that company; that was the first one. And we had just one company that was actually finding all the vendors in the market, and creating their own LLC, and then doing something similar with billing us through their construction company or whatever, using the vendors that they found in the market; and similarly, they said it was going to be a pass-through situation, but all they did was find the vendors and then use them almost as subs under their LLC company, and then they marked everything up. So we found that out, too.

Joe Fairless: Wow.

Garrett Lynch: So it was just really silly stuff that was going on and we just had it right away — we had a bad taste in our mouth with third party management; we wanted more control.

Joe Fairless: Those are two different groups.

Garrett Lynch: Two different groups, similar issues; they just did it in different ways. Both groups, we thought were pretty repeatable, which was interesting.

Joe Fairless: Yeah. What made you think that initially?

Garrett Lynch: Just who they were affiliated within the marketplace. One of the groups is affiliated with auction.com. We’re like, “What? How did this happen with these guys?” So maybe we didn’t do enough digging or enough homework in the beginning, and I’m certainly not having that experience with our management companies now. So I’m not as afraid of them, but at the time, we were just like, “Look, we can’t even deal with these third party companies.” Silly stuff. So management companies don’t really make that much money, unless they figure out ways to make money. For example, there was one company that wanted to charge us 5% instead of the 10%. They’re like, “We’ll be nice. We’ll just charge you 5%,” and we’re like, “Okay,” and they were nickel-and-diming us on every single thing that happens. They’d go on a Section 8 inspection, they’d fail it, they’d charge us 200 bucks, then they’d have to do three more; charged us 200 bucks every time. Any maintenance, they’re charging us 250 bucks. So now they’re making money on piecemeal stuff in addition to the 5%. So it ended up adding up to 25% when you added it all up and it was just like [unintelligible [00:16:20].04] off where they’re just like, “Oh, well. Oh, landscape.” Their contracts are super simple sometimes, which is problematic, and they don’t tell you “Oh, this 10% includes this, or that, or whatever.” It was just– well, they made it up when you got in the situation.

So those were just learning lessons in the beginning, and it’s obviously much tougher with a property management company when you’re not doing large multifamily deals. But a lot of people are still doing 50 units, 20 units and they can run into the same issues.

Joe Fairless: If there are questions you could ask a property management company to attempt to mitigate that from taking place if you [unintelligible [00:16:58].22] properties?

Garrett Lynch: Yeah, I would dissect their entire operation, and I’d be like, “Listen, there’s two ways that property managers make money on an individual’s fees for visiting the site. Tell me about how that works, and then tell me what’s included in your actual percentage fee? What do I get with that? Does that include landscaping? Does that including unlimited access to your maintenance guy? How do those differ? And what can I expect as far as charges go?” and then I would try to get the redacted version of statements that they send out to other groups that they work with, and then of course, get references.

What I do now actually if I’m trying to get a third-party management company, instead of getting their references directly from them, I’ll go on their website and find the properties that they manage, and I’ll just point out five that are similar to mine and I’ll ask for those references… Because you know you’re going to get the best references if you just ask them for references… Which can be helpful, because you can dig into those references, but you want to just get unbiased random references. So if they can’t provide it, then that’s a red flag.

Joe Fairless: Yeah, good stuff. That’s a great tip. Just going on their website and then finding the properties that are similar, whether it’s the area or class, and then asking the management company to get you in touch with those owners so you can talk to them about their experience.

Garrett Lynch: Yeah, and I just did it with our company in Nashville, and they literally passed with flying colors. I checked, I think, six references and a random just point at on their website, and I checked [unintelligible [00:18:36].00] reviews and were having a great experience with them right now.

Joe Fairless: Imagine that. That’s a really good tip. Thank you for sharing that.

Garrett Lynch: Of course.

Joe Fairless: So you don’t buy D Class anymore?

Garrett Lynch: No.

Joe Fairless: Why not?

Garrett Lynch: D Class is like low hanging fruit. On paper, the returns look really attractive, but when you get into them, there’s a lot of unforeseen deferred maintenance issues typically that come with the tenant base that you’re working with. So we had a portfolio of 300 apartments; 150 of them in the beginning were this market rate, and half were– so 150 were Section 8 or around that. We had to convert the entire portfolio to Section 8, because people were losing their jobs so often on the other 150 market rate. Even good tenants, having a decent track record, they’d just lose their jobs. It’s typically more transient of an area and so you get that turnover. People don’t care about credit. You can’t screen people properly because credit’s just non-existent. So you’re dealing with a whole slew of issues.

Joe Fairless: What area, market and sub-market?

Garrett Lynch: Southside of Chicago. I was in Southside Chicago.

Joe Fairless: Okay, thank you.

Garrett Lynch: So over there, unemployment is really high, and people just switch jobs like it’s nothing, and so we had that experience. So the only way we were going to get paid is if we switch it to Section 8, and then when we got into Section 8, it’s very tough to figure out who’s a good and a bad tenant even if you get Section 8. So there’s those challenges in that, too.

Imagine if you rehabbed an entire house or an entire two or three flat, and then you put in the tenants and within a couple of weeks or a couple of months, they destroy the entire property. We saw that all the time. So you spend all this money to rehab it and now you’ve gotta rehab it again when they move out; or you fail an inspection because they didn’t get rehabbed property or because they destroyed something, and if you fail your inspections, you can go into abatement and you’re not getting paid. So there’s a lot of issues like that.

And then also the employees that you’re dealing with in those areas and those types of asset classes mirror the tenants. So you’re not getting the highest quality labor either. So this is the most distinct thing I remember. I had a staff– ten guys that were going around running these properties of the 300 units, and I was like, “You know what? I think some of these people are not working right now, they’re not doing their job properly,” and so I fired eight of the ten people, I kept two, and the properties ran exactly the same as if we had ten.

Joe Fairless: How’d you find out that eight out of the ten were not doing anything?

Garrett Lynch: I had a hunch because tasks were not getting completed on time that should have. I would just pop in randomly and go visit them. I’d figure out where they were and I’d just do random site visits and see what they had going on, and sometimes they weren’t doing anything or they’re just sitting around. So eventually, I just– it was more of a gut thing than anything and I was like, “You know what, I can hire these guys back if I’m really messing up now, but my payroll is insane from breaking even or losing money… I don’t really have a choice, so let’s just see what happens.” And so I just did it, and then sure enough, it ran exactly the same. Two guys could run this thing. It was just nuts. It was like a snowball thing. So we thought– we were like, “Oh, we’re not running properly. Things aren’t working, and we need to hire someone else. Oh ,we need someone else.” So we just kept doing it.

Joe Fairless: Okay, yeah. Because those guys were training each other. “So here’s what we do from 8 pm to 6 pm. We go in this little corner over here and have a little siesta.” [laughs]

Garrett Lynch: Yes, so it was just foolishness on our end… But any high crime area or anything like that, you’re dealing with a whole different set of rules, and it’s very tough to navigate it, because there’s so many tasks that you have to complete that you may not deal with on a B Class property, and it’s just based around the tenant base in the area that you’re in. A lot of variables that are unseen; and then there’s also very little equity. Of course a lot of your listeners know, but it’s like you have the lowest amount of equity in D Class deals, and then A can be the highest, actually. So it’s an inverse on that, but the D Class has the highest cash flow potential… Which is somewhat true, but you’ve still got to sell out of it at some point, and so when it came the time to sell all of these things–

Joe Fairless: Someone’s gonna buy it.

Garrett Lynch: –who wants to buy this garbage that Section 8 tenant left and destroyed the place? You’re not selling that thing for more than what you paid for it at that point. So the basis rose up way too high, and then when it came time to– actually, I think we lost money on a lot of them.

Joe Fairless: Taking a step back, and it might be something that we just talked about, but what is your best real estate investing advice ever?

Garrett Lynch: My best real estate investing advice ever, I would say, is to understand that this is a partnership business, and you need to figure out if you want to enter into this business, where you can add value to someone else’s operation and then just do it for little to nothing in the beginning; just add the value and do as much as you can. So you have to figure out what they need and bring it to them, and don’t expect compensation for it in the beginning. If you can just do something to learn the skill — the knowledge is way more important than actually making money in the beginning, and sometimes that’s tough for people to understand. But if your skill and knowledge level aren’t there, you’re not going to be getting paid anyways.

So for me, I started out making very little in the beginning. I didn’t know anything. I was just wasn’t that valuable to the marketplace, and it took time and surrounding myself with other like-minded people and trying to add value to their operation consistently to get to the level of actually making a decent amount of money. So I would say, don’t be afraid to go in that direction and add value with little to no compensation to get yourself ahead, so you can make a lot more later.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever lightning round?

Garrett Lynch: Yep.

Joe Fairless: Let’s do it. First, a quick word from our Best Ever partners.

Break [00:24:26]:07] to [00:25:43]:05]

Joe Fairless: What’s the best ever deal you’ve done?

Garrett Lynch: Best ever deal I’ve done was a 360-unit deal I found completely off-market in Columbus, Ohio. I think we bought it for $8 million, and in about a year, it was worth close to $15 million.

Joe Fairless: What’s a mistake you’ve made on a transaction that we haven’t talked about already?

Garrett Lynch: A mistake I made was we went for a loan — we were going to close a deal with Fannie, and we didn’t put a stipulation in the contract that they had to show 90% occupancy. So the seller decided to drop their pants on the deal and just let it go. So the occupancy fell from 95% to 88% in a couple of weeks, and that didn’t meet the lender’s criteria, and so I didn’t have anything in the contract to protect us from that, and our money had gone hard at that point. So learning from that, obviously, you want to put some language in there to protect you if you’re going after debt that requires a certain occupancy.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing?

Garrett Lynch: You can actually shoot me a text or a call, 630-709-8636, or email me at garrett@nighthawkequity.com.

Joe Fairless: Sneaky things property management companies can do. So thank you for identifying some things that have happened to you so we can look out for them, as well as how to approach partnerships, and when a partnership does go not as planned, how to navigate the buyout and getting into the specifics. Great stuff there, as well as talking about D Class properties. So thanks for being on the show. I hope you have a best ever day. Talk to you again soon.

Garrett Lynch: Thank you so much, Joe.

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JF2125: Early Problems With Out Of State Properties With Elenis Camargo

Elenis bought 5 rental properties all acquired sight unseen and from out of state. She shares how she managed the rehab process with her properties being in an entirely different location. During one of her first deals, her tenant abandoned the property and she talks about how she was able to handle this difficult situation.

Elenis Camargo Real Estate Background:

  • Works full-time as a digital marketing professional in healthcare
  • Portfolio consists of 5 rental properties, all acquired sight unseen and from out of state
  • From Brooklyn, New York
  • Say hi to her at: www.thirdstoneproperties.com 




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Best Ever Tweet:

“I talk to alot of people, I learn from a lot of people, and I teach people as well. This is a people business, and it’s really important to learn from and help each other out ” – Elenis Camargo


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 investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Elenis Camargo. How are you doing, Elenis?

Elenis Camargo: I’m doing great, how are you?

Joe Fairless: I am doing well, and looking forward to our conversation. A little bit about Elenis – she works full-time as a digital marketing professional in healthcare. Her portfolio consists of five rental properties, all acquired sight unseen, and from out of state, from Brooklyn, New York. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Elenis Camargo: Sure. Thanks again for having me. I’m originally from Miami, Florida. My husband and I moved to Brooklyn, New York four years ago, and after realizing how expensive it was to buy an apartment that we wouldn’t really love in Brooklyn, New York, we decided to invest in Florida, and narrowed down the market to Jacksonville, Florida.

So like you said, we’ve had five properties sight unseen. We focus on buy and hold investments, so most of our properties are rehabbed, and we add value by rehabbing the properties… And then we’ve also been helping other investors acquire properties in Jacksonville, since I’m licensed in Florida.

Joe Fairless: Okay… So a lot to unpack there. When I was reading your bio, it reminded me of what I was doing, when I was living in New York. I bought four single-family homes, all sight unseen, in Texas… So I can certainly relate to your story, even though you bought five and I only bought four that way.

So let’s talk about your approach, because one thing that I know I wasn’t doing is I was not rehabbing properties, except for one, and it was a disaster, one of the homes. So talk to us about a specific deal, and how you managed the rehab process, and just from start to finish.

Elenis Camargo: Sure. I’ll go into our first one. That one we acquired with an inherited tenant, and at the beginning — this was our first rental, this was February 2018. At the beginning we thought we had a great tenant, she was communicating great, and paying on time. A few months in she started having personal issues, started paying late, and eventually she pretty much just disappeared. I couldn’t reach out to her by phone, email, text; I tried everything and she wouldn’t answer… So we posted a [unintelligible [00:05:14].27] vacate notice.

Eventually, once we started the eviction process, she emailed me saying that she abandoned the property and that we can keep her security deposit. So as a new investor at that time, five months in, to  have our tenant abandon, it was a huge deal for us…

Joe Fairless: Right out of the gate…

Elenis Camargo: Exactly. Most people it takes time, but with us it was right off the bat. Luckily, I had met a contractor online. I had started talking to him, and he really was the one that helped me a lot throughout this process. We didn’t even have keys to the property that worked. He ended up climbing through a window, and getting in, taking pictures… My husband and I wanted to fly down there and get things fixed, but the reality was it would have cost us more money to fly down there, and get a hotel and all of that stuff, versus just having him fix it.

So he sent us pictures, and we made a list of the things we wanted to get done. She left the place a huge disaster, as you can imagine…

Joe Fairless: Of course.

Elenis Camargo: A lot of personal belongings, everything needed to be taken out… So we made a list. Our contractor gave us pricing, started working on things, and a few problems came up along the way, like – he noticed that the bathtub had some sort of water in between when he stepped in it, and it ended up being that it had a bath fitter that wasn’t installed correctly over the bathtub, so he ended up ripping that out, refinishing the bathtub… We did new flooring, we tore down some walls, cleaned up the place, and reglazed the bathroom tiles just to make them look new. We painted the outside… Just made it a fresher look.

And then after that I had already started interviewing listing agents as well, so I was kind of working ahead of myself a little bit. We didn’t have a team in place ahead of time. We only had our realtor; that was pretty much it.

We quickly got the property listed after the contractor finished the rehab. We spent around $8,000 on the rehab, so it wasn’t too bad, considering all the work we did… And our listing agent got someone in there in about 3-4 weeks, and we raised the rental value by 43%. So it was originally being rented for $1,050, and we raised it to $1,200. That was almost two years ago, so now it’s being rented for $1,250 with another set of new tenants that we got in there.

Joe Fairless: Well, it’s surprising to me that you only invested $8,000 to get all that work done. It seems like that was a pretty good deal for you.

Elenis Camargo: It was. We did vinyl flooring, and he got it on special. The house is around 1,300 sqft. I think the flooring was most of it, around $4,500 if I remember correctly… And painted all of the insides. He did a lot of work for that amount of money, for sure.

Joe Fairless: And just so I heard you correctly – because I heard you raised it by 43%, but then I think I heard the numbers and for some reason it’s not jiving for me, but maybe I’m misthinking it. You said you raised the rent from $1,050 to $1,200 – is that correct?

Elenis Camargo: Yes.

Joe Fairless: Okay, so you raised it $150.

Elenis Camargo: Yes.

Joe Fairless: Okay. And I think I heard that you say that yo met the contractor online… Did I hear you correctly?

Elenis Camargo: Yes, I did.

Joe Fairless: Okay. Please elaborate.

Elenis Camargo: I met him through a real estate forum.

Joe Fairless: Bigger Pockets?

Elenis Camargo: Yes, through Bigger Pockets. He was the first contact that we made on Bigger Pockets, and just luckily he just happened to add me as a connection. I reached out to him, seeing that he was a contractor, and we started talking on the phone. He was an investor as well, and I just kind of wanted to start the conversation just in case this tenant ended up moving out; we knew that the property needed work… So the connection started from there. He’s helped us a lot on many of our properties.

Joe Fairless: One of the benefits of meeting people through Bigger Pockets is there is social accountability. So if you had met a person on Craigslist, or even through a referral – because I think the contractor might not be as concerned about burning a bridge with one person… But if they are concerned about you lighting fire to the reputation on an online forum like Bigger Pockets, that’s a whole other issue… That’s why Bigger Pockets is such a great tool for investors.

Elenis Camargo: Definitely. It was a huge trusting experience, because I had just met him two months before, and here he was, climbing through a window in my house and fixing things for me… [laughter] So it was a pretty big deal.

Joe Fairless: How did you meet the listing agent?

Elenis Camargo: The listing agent was one of my sister’s best friends at the time, and she was in real estate for a few years. Oh, sorry, that was the realtor. She gave us the contact for our listing agent that we used at the time.

Joe Fairless: Okay. What did you buy the property for?

Elenis Camargo: That one was 90.5k. It appraised instantly for 108k…

Joe Fairless: Wonderful.

Elenis Camargo: …when we bought it. Then a few months later we did a HELOC on it and it appraised for 118k at the time. That was November 2018. I’m assuming now it should be a little higher than that.

Joe Fairless: So you had 98.5k all-in to the property, which is 1.2% of rent to all-in ratio. A lot of people say you’ve gotta at least beat the 1% rule… You’re 1.2%.

Elenis Camargo: Yeah. We usually do with all of our properties, except one where we purchased it with the intent of rehabbing it in the future. This other deal – we bought it for 123k, it had tenants in there that had been in there for 12 years, so we were pretty certain they wouldn’t be leaving any time soon… And the ARV for that one is 190k or more… But it needs a complete renovation inside: new kitchens, new bathroom, everything…

So down the line when we’re ready we’ll give the tenant sufficient time to move out, rehab it, and then either sell it for a profit, or maybe cash-out refi it.

Joe Fairless: What would it cost approximately to get it to that level?

Elenis Camargo: That one should be 25k or 30k.

Joe Fairless: Okay. So all-in 150k-155k(ish) with ARV around 190k?

Elenis Camargo: Right.

Joe Fairless: Okay. And what does it rent for now?

Elenis Camargo: That one is renting for $1,100, so that’s the only one that doesn’t meet the 1% rule… And that’s because they’ve never had their rent raised in 12 years that they were living there.

Joe Fairless: And what are your thoughts on that? So you inherited tenants who had been there 12 years, they haven’t had their rent raised, and now new owner comes in – how do you approach it?

Elenis Camargo: Right. That was a little bit of a difficult situation. They didn’t leave a security deposit. We knew that they didn’t have enough money to leave a security deposit or have their rent raised significantly; they were on disability. So we raised it very little, $5… Originally it was $1,095, so we raised it to $1,100 right off the bat, just to kind of start the idea “We’re gonna be raising rents every year.” And then this past year I think we raised it another $5. It’s very little, but just to get a little bit more income coming in. Probably next year we’ll raise it a more significant amount if we’re not already rehabbing it.

But it was difficult to speak with them. They were very skeptical. The property has passed through different owners over time, and the previous owners, as with all of our other inherited tenants – we’ve had three – they don’t take care of their tenants… And when we come in, they immediately have a list of things that are broken or need fixing… So with this property, they actually didn’t have hot water for a month. And as soon as I introduced myself, they told me that, and we had it fixed within an hour. It was something really easy to fix.

So we take pride in making sure the tenants are good, living in a clean home, and with things that are functioning. And I think that built a lot of rapport with them, where they trust us now and they know that we’re not just gonna throw the property away, or just not keep it maintained.

Joe Fairless: Wouldn’t that come up in an inspection report?

Elenis Camargo: That’s really interesting… Yeah, it didn’t come up on that. I’ve never even thought of that. [laughter] But it did not come up on the inspection report.

Joe Fairless: So that was one house, 123k purchase price; the other was 90.5k. How are you financing these, and where are you getting the equity? Is it from your W-2 job, so you’re taking money that you’re earning from your W-2 job and you’re buying these single-family  home investment properties?

Elenis Camargo: With conventional financing. So we’ve usually put down 20%. On that 123k deal we’ve put down 15%, and we’re paying PMI. The numbers just made more sense when we did them… But yes, pretty much our jobs fund our investments at the moment. Eventually, we’ll want to get [unintelligible [00:13:55].19] and get into doing more cash-out refinance deals so that we can continue to invest more without taking time to save up the money.

Joe Fairless: How have you improved your process? And that’s pretty broad, I understand that, and I’m doing that intentionally… From your first purchase to the fifth purchase?

Elenis Camargo: Great question. So my husband built originally a model that we used to analyze deals, so that’s been improved over time… Our process now is we get MLS listings, we also get wholesale deals, and we look through those every day. The ones that look more promising – we put them on the list, and then we look at those together. Versus before, we didn’t write anything down, it was just “Oh look, this house looks good. Let’s send it to our agent and see if we can get more information on it.” It was just kind of like one shot here, one shot there. Now we have a list of properties that we’re looking at, and writing down notes; we keep track of them, if there’s any price drops or price changes, so we can see that the seller is more motivated if they’re dropping the price. So we have more of a system in place now…

We also use other tools, versus at the beginning we weren’t really using any tools to track anything.

Joe Fairless: Like what?

Elenis Camargo: We use Cozy for payments and for property management repairs, and then we use Stessa for our expenses and keeping track of value accounting.

Joe Fairless: Oh, cool. I’m very familiar with both of those companies. The challenge that you might have come across is the renovation part and overseeing renovation  – even though it sounds like you hit a home run with the contractor, but you’re still in Brooklyn, they’re in Jacksonville… How do you oversee the renovation process? And the reason why I ask that is – one, for obvious reasons, but two, I mentioned that I bought four single-family homes while living in New York City, sight unseen, and the fourth one was more of a renovation project, and it was a disaster, because the renovation team was not doing what they said they were gonna do. They didn’t have much work, so they were all on the job for  a very long period of time, just kind of hanging out, milking the clock… And my sister happened to drive by and see them, and she’s like “Joe, how do you keep track of them?” and I’m like “I don’t really have  a process.” So can you talk about your process?

Elenis Camargo: Sure. I have two contractors that I use at the moment, and we’ve done three renovations and now we’re about to do the biggest one for another investor that just purchased three multifamilies and he’s rehabbing 3 out of the 7 units next month… So it’s more than just that one that I got lucky with; we have another one now. And there was one that we got rid of throughout the process, but… It’s also about not paying them in advance. So with one of them I do pay materials in advance, because I guess he doesn’t have the bandwidth to do the renovation without the materials, and then we pay the job when it’s done… And the same with the original contractor. We actually didn’t pay him anything upfront, so they’re more motivated to get the job done… And if it is a bigger job, like the ones that they’re doing next month, we’ll do payments over time; probably maybe two payments. But the key is just making sure that they’ve finished it as quickly as possible, staying on top of them…

I’m in constant communication with them during a rehab, pretty much every day, and my job is flexible enough where I can take calls and get on video chats with them or see pictures and go back and forth.

And then I also try to save money by ordering some materials myself online, and having them pick up the materials… So it’s pretty much a joint effort to get the rehabs done, and get them done quickly, so that they can get paid quickly and we can get the property rented out.

Joe Fairless: What deal, if any, have you lost money on?

Elenis Camargo: If you consider the money we’ve put into all of them, we still haven’t broken even on any of the properties… But it’s a long-term play for us, so…

Joe Fairless: Right. So you haven’t sold anything.

Elenis Camargo: We haven’t sold anything.

Joe Fairless: Okay. That makes sense. What deal is the most profitable so far? I guess it’s a poorly-worded question, considering your previous answer… So what deal has generated the most cashflow as a result of the income minus expenses, to date?

Elenis Camargo: Sure. I would say most likely our fourth property that we purchased with a partner of ours. That one didn’t need a rehab or anything. We just put in probably around $1,000, getting it cleaned up and painted… And then we had tenants in there within two weeks, that have been paying on time every month… So I would say that one.

We’ve put the least amount of money in that; we’ve put 30%, our partner put in 70%, and then we split everything down the road 50/50. Now, we haven’t had to obviously do any renovations or get many things fixed, so I’d say that one’s the highest right now.

Joe Fairless: How does the loan approval process work with a partner?

Elenis Camargo: It’s a little trickier, because usually all loans are set for two people, usually a married couple… So having a third person involved, it required having additional forms and making sure that he was on all the paperwork… And we all have umbrella policies if we’re buying these under our personal names with conventional loans. So he had an issue with his umbrella policy where he needed to be the first person on the homeowner’s insurance… So everything is set for two people, and here we were, trying to do things with three people. So we had a situation where we had to cancel our existing homeowner’s insurance policy and rewrite it with him as the first person on the loan. I think I was the second person and my husband wasn’t even listed on the homeowner’s insurance… And he was able to get his umbrella policy. So it was a little tricky, things like that…

We are planning on purchasing more properties. We’ll most likely just put his name and either mine or my husband’s name on it, and not do it with three people again.

Joe Fairless: Okay, yeah. What lender do you use to get that type of transaction done?

Elenis Camargo: This last time we used Carrington, and I pretty much followed my loan officer… We used a company called Ditech and they ended up filing for chapter 11, so that’s why we’ve got such great deals at the beginning… [laughs] With our points, and with fees, and things like that. So he went to Carrington and we ended up following him there. He tried to match the same rates he was giving us before. But with Ditech we were able to get origination fees waived, very low points and things like that just because they knew they were filing for chapter 11 down the road.

Joe Fairless: Hm… The inner workings of corporate America.

Elenis Camargo: I know, it was interesting.

Joe Fairless: Alright, so the fourth property has brought the most cashflow, for multiple reasons, it seems like. One is there was no rehab, or little rehab, up to $1,000. Two is you have less money in, but you’re getting a disproportionate amount of profits based off of your expertise and the work that you’re doing, correct?

Elenis Camargo: Correct. Our investor is completely passive. He trusts us to do all the work. I manage the property, obviously without charging the partnership any additional money, and he put in more money at the beginning of the deal. So it works out really nicely for us, and I think down the road we’ll be able to acquire more properties with him than if we were just on our own, trying to save up all the money.

Joe Fairless: For someone looking to buy single-family homes as investment properties, who’s listening to this but has no purchased their first one yet, what’s an activity that you recommend they take on in order to eventually  purchase that property?

Elenis Camargo: I would say at least analyze one property a day. I think a lot of new investors get hung up on trying to learn everything, or build their entire team before investing in their first property, and in our experience it wasn’t necessary to do that. We built our team over time. But I think analyzing at least one property a day kind of gives them an idea of what the current market is like where they’re wanting to invest, what the properties are like, and it just kind of gets them used to it and more comfortable… And I would say start placing offers. I know it seems scary for a new investor, but it’s free to place an offer. They can back out at any time. And then it most likely wouldn’t get accepted on the first shot anyway. We’ve never had an offer accepted on the first shot, so… It just gets them more comfortable with the activity of going through with a deal, versus just sitting on the sidelines and trying to learn.

Joe Fairless: And now, based on your experience as a real estate investor – and this doesn’t have to be directed towards first-timers, just overall, based on your experience… What’s your best real estate investing advice ever?

Elenis Camargo: Wow, that’s a good question. I would say don’t be scared to put in lower offers. That’s something that other people have asked – how much lower can they put an offer in for? And since I’m working with multiple investors as well, they’re scared to lose a deal by putting in too low of an offer… But I feel like you need to put in the offer that makes sense for you, and not fall in love with the property and get it just because you want another property. It has to make sense for you, and don’t be afraid to put in a lower offer than what it’s listed for.

Joe Fairless: Can you give us a specific example of what a property was listed for and what you offered, and the result of that?

Elenis Camargo: Sure. Our latest purchase was listed for 222k, and we originally offered 170k, so it was much lower than the listing price… And we ended up settling at 195k. We went back and forth a few times; our best and final was 200k, and their best and final was 210k. So after we told them we can’t go up to 210k, they waited a few days and then they came back to us and said “Okay, we’ll take your 200k deal.”

And at the time we wanted to delay the closing a little bit because of our job situation… I was switching jobs and I wanted to make sure that that was secure beforehand… So I asked them for a 90-day close, and the 200k price, and they agreed to that. And then eventually, down the road, during the inspection we realized there was foundation issues, and also the appraisal came in lower at 195k, so they agreed to the 195k price. We closed 30 days sooner than they originally asked for, and they paid the 5k foundation repairs; they put that in escrow for us. So we ended up with a much lower price.

But all of our properties – we’ve acquired them at least 10k below what it was listed at.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Elenis Camargo: Yes.

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

Break: [00:24:22].26] to [00:25:13].17]

Joe Fairless: Best ever resource that you use in your business?

Elenis Camargo: I would say people. I talk to a lot of people, I learn from a lot of people, and I teach people as well. So I would say this is a people business, and it’s really important to learn from each other and help each other out.

Joe Fairless: Best ever way you like to give back to the community.

Elenis Camargo: I would say the same way I talk to a lot of new investors, I write a lot of content, a lot of blogs, and I have a newsletter, so I like to give back to the real estate community by writing the knowledge that I’ve acquired over the past few years, and then a lot of new investors reach out to me and ask me questions, and I pretty much give them my time, just as I would have wanted someone to do for me when I was starting out.

Joe Fairless: And on that note, how can the Best Ever listeners learn more about what you’re doing and read that content?

Elenis Camargo: Sure. So they can sign up to our newsletter on our website, which is ThirdStoneProperties.com. They can also follow me on Instagram @investoremc. I post on there regularly and share our content on there as well.

Joe Fairless: Thanks for talking about how you’ve built your portfolio remotely, sight unseen, and how you have built your team on the ground to help you execute on those projects… And then how you got creative with a business partner to continue to grow the portfolio.

Thanks for being on the show. I hope you have a best ever day.

Elenis Camargo: Thank you so much.

Joe Fairless: Yeah, I enjoyed it. And talk to you again soon.

Elenis Camargo: It was great being on.

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JF2071: Marketing During The Coronavirus Pandemic With Jessie Neal

Jessie has 6 years of social media and digital marketing experience with a focus on Facebook pay-per-click ads. Jessie shares what type of message you should be marketing out during this pandemic and also some general advice that helps investors find more leads. 

Jessie Neal Real Estate Background:

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Best Ever Tweet:

“Consistency, be consistent with your message, with your postings, however, you’re helping people, be consistent. ” – Jessie Neal


Theo Hicks: Hello, Best Ever listeners, and welcome to the best real estate investing advice ever show. I am Theo Hicks, and today we are speaking with Jessie Neal. Jessie, how are you doing today?

Jessie Neal: I’m good. As I said, I haven’t had a haircut in six weeks, but we’re trucking along.

Theo Hicks: Yeah, I’m sure everyone listening can relate to that. So today we’re gonna be talking about marketing – social media marketing, digital marketing – and some of the things that are changing with it during this Coronavirus pandemic, as well as long-lasting digital marketing techniques you guys can apply once all this is over.

Before we get into that, a little bit about Jessie – six years of social media and digital marketing experience. He’s an expert in Facebook pay-per-click ads, creator of Attacking the Stack, from Fort Mitchell, Kentucky. You can say hi to him at swiftreilease.com/attack.

Jessie, before we get into the Coronavirus stuff, do you mind telling us a little bit more about your background and what you’re focused on today?

Jessie Neal: Yes. I went to school for computer programming and web development, and learned really quick when starting my own business as an entrepreneur that websites didn’t matter unless you could get them traffic. So real quick I had to learn what are the best traffic sources out there; I bought a million courses online and tried to figure it all out, and eventually I ended up getting trained from Facebook themselves six years ago. I got really good with PPC ads for traffic. They did better and were more affordable than your Google ads, your Google PPC. Over the years, that’s changed a lot, and here recently, with the new housing category, all real estate ads have to fall into, we really had to get creative around October and November, to figure out how in the world are we gonna supply leads for our clients and for our own in-house wholesale company the easiest way possible, without really breaking the bank.

We developed  a custom software and a system we call “Attacking the stack”, so what we focus on right now is how do we get around the housing category. Our software has API access to Facebook – hopefully nobody from Facebook hears this… [laughs] But our clients send us a [unintelligible [00:05:09].04] that’s been skip-traced, with all the motivation in the list, obviously. We upload it in our system, Facebook hashes out that list as potential clients, and then we’re able to run whatever ad we want to those people.

We know there’s motivation, it gets us around the housing category, we know we’re targeting very specific people that we’re looking for. But at the same time, we wanna pull all of the low-hanging fruit out of a list, because sometimes Facebook can take some time, and it’s expensive. So what we do is we also do text and RVM through our custom software, and then after that whatever doesn’t come from Facebook, text or RVM then goes  into a long-term email sequence for follow-up, until they’re ready to become a lead.

So our goal is how can we affordably for any investor just starting out that only has less than $2,000 of ad spend to spend on marketing, period – how can we get them anywhere between 80 and 100 motivated seller leads a month. So that’s what we do. It’s really effective. We kicked that off at end of November, and we’ve picked up quite a few clients. It’s killed in-house. We’ve got over 721 motivated seller leads in our own in-house, at [unintelligible [00:06:15].12] CRM right now, from using the exact same strategy… So we’re doing pretty good.

Theo Hicks: Nice. So we were talking about this a little bit beforehand, but how are the leads that are being generated by these Facebook advertising campaigns changing, or how have they changed during the Coronavirus pandemic, compared to six months ago?

Jessie Neal: So we’re actually seeing an increase in leads, and we’re actually seeing an increase on the investor side. Obviously, when you’re using an absentee vacant list you’re looking for out-of-state owners who own multiple properties in a local area that you’re trying to pick up… So now we’re seeing a lot of nervous newer investors who may have only been doing this for a couple of years, that maybe own 4, 5, 6 properties, even as much as 13 properties all throughout Ohio,  that are looking to liquidate, because they don’t know what’s going on. So we’re actually getting a lot of those leads coming in… And a lot of normal leads. People who are like  “Hey, we’re done with this investment property” or “Hey, we can’t finish this flip”, and are willing to negotiate to liquidate right now.

The only problem that we’re seeing in all of this is leads are increasing, but with banks and hard money lenders having all kinds of problems, and holding on to money, and then your title company is slowing down, and you can’t get enough done on the backend. So it’s slowing everything down, even though we’re seeing an increase in leads. We’re still waiting to see whether or not that’s a good thing or a bad thing.

On the lead gen side I think it’s freakin’ great, but obviously, if a lead goes cold because you can’t close on it in 14 days, or three weeks, or whatever, then that can cause a potential problem.

So that’s the main good and bad that we’re seeing during the Coronavirus… But we’re still doing business in-house. I’m still doing lead gen, and we’ve actually seen an increase in clients coming on board since all of this, so it doesn’t really scare me at all.

Theo Hicks: So you mentioned that these Facebook ads during this time are better targeted towards out-of-state owners, right?

Jessie Neal: Correct. So if you’re doing any kind of marketing, I would focus on out-of-state owners that own properties in your area. Find people that own more than 30%, 40%, 50% equity, that own the property for more than five years… More than five properties, more than five years, more than likely they’re probably looking to liquidate.

Theo Hicks: Is that something that I can target on Facebook?

Jessie Neal: No, you can’t. That’s our little trick – you can do ListSource, you can use Propstream, whatever software you wanna use. I’m not trying to put a plug for another company or whatever, but… You download your list, get it skip-traced, and pull your motivation from your list. Then we actually target that list on Facebook. Facebook has the ability — because we have API access, we can actually run Facebook ads just to people on the list. If you were doing this on your own, you probably won’t be able to do it from Facebook; you might be able to get away with it once, but your best bet would probably be to pick up a texting platform or an RVM platform and reach out… Or if you’ve got a cold call team, I would start cold-calling those types of lists immediately. You’re gonna have really good luck with them.

Theo Hicks: Perfect. Out-of-state, five years, more than five properties – that’s kind of the major things you target, using the listing services you mentioned, correct?

Jessie Neal: Yeah, Propstream, ListSource… There’s a ton of ways you can get property data. You can go to county records if you don’t wanna pay for a service. I’m a big fan of paying for a service; it saves time.

Theo Hicks: Since you mentioned that you’re in the wholesaling business yourself, I wanna shift gears slightly a little bit and ask you — first, for some context, are these single-family homes, duplexes, 100-unit apartment communities? What types of properties are we talking about here?

Jessie Neal: Yes, we’re talking single-family homes, smaller multifamily, two-units; on the occasion you  might get somebody with a smaller apartment package… But I would focus on single-family homes. You get a bunch of investors that 2, 3, 4, 5 years ago bought 5-6 properties in the area, have been using them for rentals, and now with the whole “Hey, we can’t charge rents, so this is all done”, people are getting scared, so they’re dropping everything.

Theo Hicks: That was my question… So if I’m in the market to buy a single-family rental right now, how am I creating my rent assumptions?

Jessie Neal: I don’t do rent assumptions… [laughs] So I wouldn’t know. On the lead gen side – I can help you there. But I guess if you’re gonna buy some rentals and hold on to them, you’re probably gonna wanna make sure that you’ve got enough cashflow to be able to keep your current tenants in there until this is all done.

Theo Hicks: So you flip them?

Jessie Neal: I’m a part [unintelligible [00:10:26].05] They’re the ones that actually do the wholesaling, and then Freedom Real Estate group, which is our umbrella, has their own turnkey company and has their own property management company. So I don’t know a whole lot about how that works; they’re the ones that actually got me into the real estate game, out of the medical field.

Theo Hicks: Okay, perfect. So you’re the marketing guy.

Jessie Neal: Yeah, totally marketing. Anything that has to do with lead gen, social media promotion… But I can speak highly on the in-house portion; it doesn’t just work for our clients, we actually use it ourselves.

Theo Hicks: Perfect. I actually talked to someone earlier today about Facebook advertising as well, so I don’t wanna repeat the things that he talked about. I wanna change it up a little bit. Let’s talk about not paid advertising, but just content that people are pushing out as real estate investors in general. What type of messaging should they be using during the Coronavirus?

Jessie Neal: Messaging that’s actually going to keep people calm and help people. As an investor, you need to be showing solutions in how you’re actually helping people, and letting them know that you’re not in this for the dollar. Obviously, we’re all business owners, we’re all entrepreneurs, we’re trying to make money, but we do that by providing real solutions for real people, that are struggling with real problems.

So I would show “How are you doing that”, and go live with it; get as many testimony videos as you can surrounding that topic. It’s probably gonna help you… Especially when all this calms down, people are gonna realize that you’re genuine, and it’s gonna help you long-term for your business.

Theo Hicks: What about just general digital marketing advice for once all this passed? What are some things that from your perspective you see that investors are doing that are really big mistakes, that are holding them back from getting more leads using online marketing?

Jessie Neal: Consistency. Be consistent with your message, be consistent with your postings, whether you’re doing paid ads or not. If you don’t have enough money to do paid advertising and you’re just posting on a page and posting in groups, whatever you’re doing, whatever your message, however you’re helping people, be consistent. Be in there every day. And if you can’t be in there every day, then you need to hire a virtual assistant or have somebody that’s going to help you be consistent.

It is really hard in today’s atmosphere, with everything being social and mobile, to really stand out in the crowd. The only way you’re gonna do that is by being consistent. You may not see results 4, 5, 6 months down the road with some organic traffic, but if you’re consistent over the other guy, then 8 months or a year from now people are gonna remember who you are, because you’re still around.

Theo Hicks: What types of posts do the best? Video? If so, how long? Pictures with caption?

Jessie Neal: It depends on your strategy. Realistically, in today’s market people would rather watch a video that’s entertaining and educating and helpful, than a  post. But in the manner of consistency, do both. It’s really hard for some people to hop on a video and think of something to say every single day. If you can’t, at least do a video once or twice a  week and then post something. Post anything. I don’t care if it’s text, I don’t care if it’s image, I don’t care if it’s a podcast, audio… But do something, every day.

Theo Hicks: Okay, Jessie, what is the best real estate investing advice ever? You can answer that, or you can do your best social media marketing advice ever.

Jessie Neal: Hm, best social media marketing advice ever… Facebook is complicated. Learn it. If you don’t want to hire somebody, Facebook has a bunch of free training that you can take. Learn it. Learn their groups, learn their social postings, learn how to run your business page correctly, get on there and learn paid advertising… It will highly impact once you figure it out and learn it correctly; it will highly impact your business.

Theo Hicks: Perfect. Are you ready for the best ever lightning round?

Jessie Neal: Let’s go, come on!

Theo Hicks: Alright, first a quick word from our sponsor.

Break: [00:14:06].10] to [00:14:54].10]

Theo Hicks: Okay, Jessie, what is the best ever book you’ve recently read?

Jessie Neal: Best ever book… Obviously, I’m in marketing, and I’m real big on not spending thousands of dollars on copywriting, and hiring a copywriter. I like to learn that kind of stuff myself, best headlines and stuff… So there is a book right now “Copywriting Secrets” by Jim Edwards. Anybody who’s an entrepreneur on Facebook – I’m sure that Russell Brunson and all of them have targeted you… But I’ve just picked it up, I’m three-quarters the way full, and I’ve paid for copywriting courses, and I’m telling you, for a free book (I’ve paid $7 for shipping) it has some of the absolute best advice that I’ve ever read. So I hate to do a plug for Russell Brunson and Jim Edwards, but it’s a fantastic book, man. I’d say pick it up, seriously.

Theo Hicks: Okay. If your business were to collapse today, what would you do next?

Jessie Neal: On the real estate side what would I do? I don’t see lead gen ever collapsing, but let’s say that it does… I would go and open up my software system that I own and I would pick another niche, and I would run $1,000 in Facebook ads and pick up clients tomorrow for whatever the new niche is.

Theo Hicks: What is the best ever way you like to give back?

Jessie Neal: Okay, that’s a good one. We’re obviously in Fort Mitchell, KY, and I’m actually from the Cincinnati, Dayton area, and I’m part of a group called Hope Over Heroin… And we have a drug rehab for men called Heritage House. So all through the summer I donate quite a bit of time, being their media and marketing director. I show up on site, hook up LED screens, and do all their media, all their on-site marketing – lights, sound, everything. So anyone who’s hearing this, it doesn’t matter if you’re nationwide, everyone knows somebody who’s struggling with addiction, you can go to HopeOverHeroin.com, or you can go to Cityonahill.com and look for the Heritage House link, and we take guys for free; you don’t have to pay.

So that’s how I give back, by helping both of those organizations financially and with my time.

Theo Hicks: I typically ask what the best ever or the worst deal is, but I’m gonna change it up a little bit – what is the worst marketing campaign you’ve ever seen?

Jessie Neal: Oh, Lord… I’m friends with a guy out in California by the name of Billie Gene. He has some courses called Billie Gene is Marketing. And back in the day, when we were both kicking it off, he had the worst ad I think I have ever seen in my life. It was back when the “Got Milk?” commercials were going on, and it was a picture of his face on a cow, and it said “Got leads?” And it bombed. It did horrible. But it was funny. Big ol’ black dude’s head, Billie Jean as marketing, “Got leads?” on the head of a cow. He ran it for  probably three weeks, spent a few thousand dollars and didn’t get anything from it. No traffic, no engagement whatsoever. So by far that’s probably the worst ad I have ever seen on the internet.

Theo Hicks: Alright, and then lastly, what is the best ever place to reach you?

Jessie Neal: Best ever place to reach me – other than my cell phone, you can find me on Facebook. You can go to Swift REI Leads on Facebook. Just search us. Reach to me on messenger. Or you can go to the website that I think you have posted, the swiftreileads.com/attack. I reach out to everybody who fills out that lead forum personally.

Theo Hicks: Perfect. Jessie, thanks for joining us today and giving us some of your best ever social media and digital marketing advice. A lot of practical things that people can do right now during the Coronavirus pandemic, but also things that people can do in the future, once all this passes.

Just to recap, some of my biggest takeaways – number one, if you are looking for leads right now, the best person to target are out-of-state owners who’ve owned the property for more than five years and have more than five properties. You mentioned for your service you’re able to take a list of motivated sellers and actually target them on Facebook, as opposed to me having to send them direct mailers, or cold-call them myself.

We talked about from a content perspective during the Coronavirus, making sure that you’re providing messaging that’s keeping people calm, and actually trying to help people, so providing solutions to people, and kind of how you’re going through this from what you’re doing, as well as doing as many testimonial videos as you can

We’ve talked about general mistakes that people make when it comes to advertising on social media, and it was really just a lack of consistency; inconsistent posting frequency, inconsistent messaging… You wanna make sure that you’re there, doing something every single day. The best types of posts really vary on what you can do, and the industry that you’re in, but you mentioned it is good to post a few videos every single week, but overall, you just need to do something every single day.

And then your best ever advice is that Facebook is very complicated, but you  need to learn it, and there’s a lot of free training that you can find on Facebook to make sure you’re taking advantage of their marketing as much as possible.

Again, Jessie, thanks for joining us today. Best Ever listeners, as always, thank you for listening. Make sure you check out Jessie’s website, SwiftREIleads.com/attack. Stay safe, have a best ever day, and we’ll talk to you tomorrow.

Jessie Neal: Thanks, guys.


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JF2065: Hard Work Niche Deals With Karl Spielvogel

Karl has done over 200 real estate deals focusing on the more difficult deals that no one likes to deal with because there typically is less competition, harder work, but a bigger reward. Some of the deals he likes are multiple heirs, title issues, excess proceeds, and partition sales.

Karl Spielvogel  Real Estate Background:

  • Real Estate Investor in Charlotte
  • Has done over 200 Real Estate Deals.
  • Specializes in Niche Deals/ Solving messy situations that lead to big profits.
  • Examples of niche: multiple heirs, title issues, excess proceeds, and partition sales: Some of the Profits from these deals have been 243k, 228k, 163k, etc..
  • Say hi to him at : www.UnclekarlsMastermind.com 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“These niche deals are a lot of work, but the profits are very high per deal. ” – Karl Spielvogel


Theo Hicks: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I’m your host today, Theo Hicks, and today we’ll be speaking with Karl Spielvogel. Karl, how are you doing today?

Karl Spielvogel: Doing great.

Theo Hicks: Great, thank  you for joining us. Looking forward to our conversation. A little bit about Karl – he is a real estate investor in Charlotte, NC. He has done over 200 real estate deals and he specializes in niche deals, solving messy situations that lead to big profits. Examples of niche deals would be multiple heirs, title issues, excess proceeds and partition sales. Some of these big profits from these deals is $243,000, $220,000, and $166,000. You can say hi to him at UncleKarlsMastermind.com. Karl, do you mind sharing a little bit more about your background and what you’re focused on today?

Karl Spielvogel: Yeah. When I first got involved in real estate, I owned some Subway sandwich shops and I was getting tired of that, and a buddy of mine said “Hey, there’s this course from Ron LeGrand.” He took me to that and I started learning and getting involved in that. I did real estate from 2000 to 2008, I did pretty good, but I went from (I thought) being a badass and lost everything in 2008 and became a dumbass, and then I did a used car business with my ex-girlfriend, another mistake, and then I got back into doing real estate again about four years ago.

We have about 5.5 million in assets right now, and we owe about 2.5 million. We like to do a lot of deals, like getting multiple heirs, partition sales… We also do land, we do variance, subdividing assemblage, anything that’s difficult. We wanna stay away from the stuff where somebody’s getting 20 postcards… We’ve found that by diving into these niche deals – they’re a lot of work, but the profits are very high per deal. We’re not a volume type person. We do maybe 3-5 deals a  month, but they’re typically bigger deals.

Theo Hicks: Of your portfolio of 5.5 million dollars, what is the main niche that you focus on? I know you talked about a lot of them, but what’s the main one, so they can dive into that one?

Karl Spielvogel: Well, we find most of our deals through tax delinquents, foreclosures, vacant properties, and then we use our GIS system. We’ll find some land that can be subdivided, we’ll look for a small lot that we’ll buy and get for cheap, and get a variance and make it buildable… We’ll look for a house next to a land, and then we subdivide the land off… But most of our stuff just comes by looking at the tax delinquents, the vacants, the foreclosures, and using the property look-up. That’s our main source. Then after that it’s about diving deep and solving the problems.

Theo Hicks: So you’ve got the tax delinquents lists, you’ve got the foreclosure lists, you have the vacants lists. What’s the next step?

Karl Spielvogel: Let’s say we’ve got the tax delinquents lists. We’ll typically skip-trace it, or we go out and knock on the doors… For example the tax delinquents – what we like to find is we like to pull up the tax delinquents and see if the people are passed away, because those are the best ones. Or if the house is vacant… So we look into that stuff and then we dive deep into it.

We even have one deal where there was six different people passed away; it was a vacant house. It had 23 heirs. We put it all together. We’re into that deal for about 65k and it’s worth 200k. So we dive deep into them, that’s how we get the big deals.

Theo Hicks: Let’s do an example. Let’s talk about the 23 heirs, 65k all-in price, worth 200k. How did you find it, and then how does that even work? How do you buy a deal with 23 heirs?

Karl Spielvogel: Well, we started out — I was basically driving for dollars. We had a property that we were looking at… I was driving by, and the grass was cut, but something looked funny about the house. I don’t normally do this, but the house didn’t look lived in, for some reason. So I jumped the fence, and went up and looked in the windows, and noticed it looked basically vacant. I noticed that the electric meter was missing.

After that, we pulled up our county GIS system, pulled up the owners, and found out that they haven’t been paying taxes for four years. Then we skip-traced them and found out both owners were deceased. After that, we started building the family tree out.

We built this whole huge family tree out, and then  we started calling all the heirs… And most of them didn’t even know they were heirs to a property. Basically, we just called them all up, told them they’re heirs to this property, that we wanted to buy their shares out, and then we just made deals with all of them and got them to sign.

It was sort of funny – we threw a little barbecue in South Carolina, where most of them met me. We went down and got everything signed there. One guy was a semi-homeless guy. We tracked him down in Chicago… But we just basically called everybody and signed it, and then we ended up owning the property.

Theo Hicks: You guys are like private investigators.

Karl Spielvogel: We’re more private investigators than we are anything else.

Theo Hicks: How are you funding these deals? Are you raising money? Is it your own money?

Karl Spielvogel: Yeah. Well, my business partner uses IRA money. We use private funds… We could always use some more (hint, hint). But private money and our own funds. Because we’re buying stuff with messy titles, we have to pay cash, and then we straighten the title out afterwards.

Theo Hicks: So I’m not sure you can answer this question or not, but — you own 5.5 million assets, you owe 2.5 million. Obviously, some of that is equity created. But of the equity put into the deal, what portion is yours and your business partner, and what portion is private money?

Karl Spielvogel: That’s a good question. I really don’t know. Probably private money is maybe 20%-25%. The rest is our money that’s invested in it, and my partner’s Roth IRA money.

Theo Hicks: Okay. So Joe does apartment syndications; they buy apartments that are stabilized, have some cosmetic changes, so it’s pretty easy to get the projections and present those to investors. How does that work for deals like this? It seems like the profit margins are so large, it seems like there’s a bit more risk… So what types of returns are you offering, and how are you calculating these returns?

Karl Spielvogel: For the private money, you mean?

Theo Hicks: For the private money, yeah. Or even for yourselves, I guess.

Karl Spielvogel: Yeah, for the private money we’re anywhere from 8% to 15%. Typically, people are loaning us money on the ones once we clear the title. But we’ve got people that will loan us money on the bad titles, because they know that we can clear it; that’s typically around 15%.

But most of these deals we’re in for very little money. That deal that we’re into 65k – that includes renovations and everything. What we do is we typically have people deed us the property upfront, when there’s a multiple heir situation, and they get paid later. We’ll pay them anywhere from 0 dollars to 500 upfront, our own money, and then when we clear the title, they get the rest.

So we’re getting into these deals for very little, because a 23 heir deal – who’s gonna buy a fraction of that? They know we’re the only game in town, so they’ll sign us over the property, typically for no money to $500, and they get paid when we clear the title.

Theo Hicks: Okay, so it looks like your most profitable deal was the 243k deal. Let’s talk about that one, kind of similar to this 23-heir deal. How did you find it, and then how much did you buy it for, how much money did you put into it, and how much is it worth, and what did you do with it?

Karl Spielvogel: That property – a birddog called us up that we know, Gerald. He does some work for us. He said “Hey, there’s a property that’s vacant. Some squatters in it, the guy passed away…” So we got it from a birddog. And the first thing we did was pulled it up — it’s in a very good area, and these squatters had moved in. So I’m like “This could be a huge deal.”

So the first thing we did was we built a family tree. Actually, for this one, even though we didn’t own it, I hired a genealogist, so we built a family tree. What happened was the wife passed away first, so her side was out… So the husband passed away, and when he passed away, his share would have gone to his brother. Well, his brother died in an airplane crash in Crete in 1973, so then it would have gone to his two sons, Jack and Louis. So they were the rightful heirs to the property.

So we skip-traced — we couldn’t find them, we couldn’t find them… We did so much investigation on this deal… I went to the funeral home where the guy was buried, I got the book everyone had to sign in, I called everybody there, and one of the people there told me that the mom from the two boys had remarried a police officer outside of DC. So we spent nine months just working this deal, trying to figure it all out, trying to find Jack and Louis.

Well, one night after probably ten beers, it sort of clicked that maybe the mom had changed her name when she got remarried, and Jack and Louis had a different last name. So then we had our genealogist do some more searching, and she found where the lady – I don’t wanna say their names – got remarried to the police officer outside of DC. Then we skip-traced the kids and found them.

Now, there’s a lot of other problems, too. There was a code enforcement letter, it was going for sale for taxes, and there’s also a niece that had a lease for a dollar a month, which we ended up buying that out. So it’s really important once you track these people down that you set the table.

Also, because he had passed away without a will, there was estate issues. So basically, we called the guys up, we said “Hey look, there’s a property in Charlotte, you guys are the rightful heirs, but there’s a whole bunch of problems. There’s squatters in the property, there’s code enforcement, there’s estate issues, and it goes to sale for taxes in two weeks. We can offer you $35,000.” “This is found money, first of all, and normally we’d negotiate, but since there’s so many problems, we’re gonna sell it to you for $35,000.” So we bought the property for $35,000, and then we had to wait nine months in North Carolina — we didn’t wanna open the estate, because were afraid there’d be claims and stuff, so we waited…

He had to be passed away for two full years, so we had to wait nine more months. We were totally into it in the $50,000 range. We did a couple little minor repairs to get it off the code enforcement list, paid out bonuses and everything, and we sold it for $310,000. So our net on that deal was $243,000, but it was a lot of work. We were basically private investigators, tracking down heirs that their names had changed. That’s how we ended up getting that deal.

My partner even a couple times said “Give up on it, give up on it.” I’m like “Nope, I’m gonna get this. I’m gonna figure it out”, and we got it done two weeks before it went to sale for taxes.

Theo Hicks: Wow, that’s a crazy story. I bet you have a lot of stories like that.

Karl Spielvogel: Yeah, everything from guns pointed to our head while knocking on doors, to being threatened by motorcycle gangs… It’s crazy.

Theo Hicks: Before getting into the best advice ever, what’s the craziest story you have?

Karl Spielvogel: The craziest story… I’m trying to think here. There’s so many of them, I can’t even think. This was sort of a funny; this will take a little time, but there’s a piece property that — again, I don’t drink anymore, but I used to drink a lot. So I was drinking at the bar, and my bartender said “Hey, my mom is going into foreclosure. Could you help her?” I’m like, “Yeah, we’d like to talk to her.” So I met with her, and she owned a piece of property in the county of York. It was surrounded on two sides – this piece of property – by the city of Tega Cay. Tega Cay is a very rich area, and if I could annex the property into Tega Cay, then it would be worth a lot of money, versus being in the county.

So I went and met with the city manager, and I said, “Hey, can you annex this piece of property into the city of Tega Cay? Because I wanna build some houses on it.” And I’ll never forget what he said. He said “Son, we’re not gonna do that.” I’m like, “Why not?” He goes, “Well, we’re building a baseball field. We’d like to buy your property, but we don’t really need it.”

So I came down and met with him, he said “I can give you maybe 85k, maybe 90k on this property.” I was like “Okay, well that’s a little bit low…” During the time we went back and we did a short sale on it. From 65k, we ended up getting it for 50k. So I went back to talk to the city manager and said “Hey, let’s negotiate on this property. Your price is a little bit low, but let’s talk.” He goes “Well, now I can only give you 65k for it.” I’m like “Why?” He said, “Well, that’s all we have in our budget. I can only give you 65k.” I was like, “Well, wait a minute… Your price went down. Let me ask you a question. You’ve just told me you have no jurisdiction. It’s in the county.” He goes, “Correct.” “You said you’re not gonna annex it”, he goes “Correct.” I said “Then I can open a freakin’ goat farm.” And he crossed his arms and said “Well, I guess you could…”

So what we did is we went and rented goats… You can actually rent goats. We went and rented three goats for two hours, and we had goat cupcakes, we had a big banner “Uncle Karl’s Goat Farm Coming Soon”, we had Goat Farm T-shirts printed up, we had a little party out there and we did this whole thing about how we were gonna open a goat farm in Tega Cay. We did a Facebook live… I even sent them emails saying “Hey, we’re getting ready to open a goat farm.”

We were just silly. We filmed a Facebook live, we had some neighbors come over, and we did this little whole production. We had a little ribbon-cutting ceremony, and had a little golden key made up… We got pictures; I’m gonna send you pictures. That day we got a $100,000 offer for the property, closed in seven days. So we ended up selling it for $100,000, closed in seven days.

So I guess the moral of the story is that — we positively extorted the town of Tega Cay. So that was probably the craziest deal we ever did.

Theo Hicks: Oh, man, this is very entertaining. I’m sure I could talk to  you for hours about some of these stories… So based on all these experiences, what is your best real estate investing advice ever?

Karl Spielvogel: Two things – focus on niches. We do a lot of land, a lot of stuff too, but find some niches that not everyone else is doing, learn those, and then also be relentless on your deals. I could tell you story after story where we were relentless… But also, pivot. Most of our deals we got stuck, and we were done, we couldn’t get them to go through, and at the last minute we pivoted. I could tell you crazy stories, like — we mailed out chocolate bars one time to this lady who kept telling us no, no, no… We said “Hey, you’re missing out on a sweet deal. Please give us a call.” She called us, we got the deal, two days before the foreclosure.

So you’ve always gotta be persistent, learn the niches, and then take that step back, pivot, and also collaborate. We spend a lot of time at our office, talking to people, trying to figure out how to put these crazy deals together, with multiple heirs, and partition sales, and buying liens and judgments.

So I would say that the persistence, pivoting, and learn niches.

Theo Hicks: Okay, are you ready for the Best Ever Lightning Round?

Karl Spielvogel: Yup.

Theo Hicks: Alright. First, a quick word from our sponsor.

Break: [00:16:52].24] to [00:17:55].03]

Theo Hicks: Okay, what is the best ever book you’ve recently read?

Karl Spielvogel: I like Traction, because my business is so disorganized and messed up… I’m trying to straighten it out, so it’s more organized and streamlined. So I’d say Traction is probably one of the best books.

Theo Hicks: If your business were to collapse today, what would you do next?

Karl Spielvogel: I would go back in, because I’ve made a lot of great connections… I would go back to everybody — because I lost everything in 2008.  I’d go back to say “Hey, I’m starting over…” I have the knowledge, I have the know-how, so I’d just reach back out to all my business partners… Because you don’t need money for what we do. We’ve just gotta find the deals, and we can go out and start doing the exact same thing. Going back after tax delinquents, foreclosures, using our property look-up system, and that kind of thing. That’s how I’d start back over.

Theo Hicks: So besides that $243,000 profit on that deal, what has been your best ever deal?

Karl Spielvogel: We did a $228,000 deal on a vacant house that was owned by a defunct corporation; they had a divorced couple, the wife had the rights to it. It had a $750,000 lien she thought was attached to it, but it wasn’t attached. So that was our second-best deal ever.

Theo Hicks: What about a deal that you’ve lost the most money on?

Karl Spielvogel: I was really stupid… I went off a Zillow value, and I put it under contract, and I had two partners with no money, and we ended up losing about $32,000, and I got sued… And had to settle a lawsuit. So that was being really stupid; not even a rookie would go off a Zillow. I just was trying to hurry and not paying attention, and I was just stupid.

Theo Hicks: And then lastly, what is the best ever place to reach you?

Karl Spielvogel: I’ve got a phone to call: 704 777 77777. That’s our office number. Leave a message. That’s probably the best way to reach me. Or send a friend request on Facebook. We’ve got Uncle Karl and Friends, or Karl Spielvogel. Or let me give you my personal number – 704 995 5385.

Theo Hicks: Well, Karl, this has been a very interesting conversation. I was muted while you were talking, but I was laughing a ton at your stories. Very entertaining, very interesting, and definitely all of the different stories and examples you gave hit on your best ever advice, which is focus on niches obviously, be relentless on your deals, pivot when you need to, and then obviously, when  you’re doing these kinds of complicated deals, to collaborate with people to brainstorm what to do.

Just to go over some of the examples you gave – there’s one that had 23 heirs, that you bought for 65k, that was worth 200k. Driving for dollars, you just found out that it was vacant… Both owners were dead, you build out a family tree, you called the heirs, made deals with each of them, even put on a barbecue to get that deal done.

You talked about your best ever deal, with a $243,000 profit, where a birddog calls you up, he found a vacant property where the owner passed away. You had to hire a genealogist and it took you a long time to find who the rightful heirs were. Then you talked to the about all the different issues and offered them 35k to buy that property because of these issues. They ended up selling it to you. Based off of the rules with the estate, you had to wait two years after the original owner had died, so nine more months before you could sell the property. You sold it for 310k.

And then my favorite, which is the goat story, where you found a property through a bartender. The property was surrounded by a very nice area, that you wanted to get annexed into the area, and the city manager said no, because they’re building a baseball field, and offered you money for it. Then he comes back with a lower offer, and you did your Goat Farm production, something [unintelligible [00:21:22].10] That same day you got a 100k offer that closed in seven days.

I’m sure you’ve got plenty more of this type of stories. I’m sure you’ve got some content on that on your website…

Karl Spielvogel: We have a podcast, Uncle Karl’s Crazy Real Estate Stories. And also the mastermind group, Uncle Karl and Friends Mastermind Group. It’s only $149/month and we dive into details on how we do these kinds of deals.

Theo Hicks: Yeah, and [00:21:51].15] because as he mentioned in his best ever advice, a lot of people are focusing on the single-family rentals and apartments. And while that’s obviously a great investment, if you do have the time and you are relentless,  you  can focus on these niches where there’s really no competition at all, it sounds like. It just takes time, takes effort, it takes some creativity… And you can make a lot of money, without having much competition in today’s market. So definitely take him up on that offer.

Alright, Karl, I really appreciate it. Again, very entertaining interview, I really enjoyed it.

Karl Spielvogel: Thanks for having me on, I appreciate it.

Theo Hicks: Absolutely. Best Ever listeners, thank you for listening. As always, have a best ever day, and we will talk to you tomorrow.


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This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

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JF2036: Coronavirus vs AirBnBs With Joseph Prillaman

Joe started off selling industrial equipment before going into real estate investing. In two short years, he grew his real estate portfolio to eleven units doing very well and now he is dealing with the novel coronavirus. Five of Joe’s eleven units are AirBnB’s, and in this unique epidemic, he is projected to lose a major part of his revenue if the coronavirus continues through the summer. Joe shares how he is preparing to survive this epidemic as a real estate investor. 

Joe Prillaman Real Estate Background:

    • 2 years of real estate investing experience 
    • Currently has 11 units, 5 Airbnb’s, and 6 single-family homes
    • From Carolina Beach, North Carolina
    • Say hi to him at www.anchoredinvesting.com
    • Best Ever Book: Ego is The Enemy


Best Ever Tweet:

“We try to find out what we can reduce right now and any additional revenue streams we can find” – Joe Prillaman


Theo Hicks: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I’m Theo Hicks, today’s host, and today we’ll be speaking with Joe Prillaman. Joe, how are you doing today?

Joe Prillaman: Just living the dream, Theo. Doing well.

Theo Hicks: It’s good to hear. A little bit about Joe – he has two years of real estate investing experience, currently has 11 units, five Airbnbs and six single-family homes. From Carolina Beach, North Carolina. His website is anchoredinvesting.com.

Joe has agreed to talk to us today a little bit about what he is doing to combat the current Coronavirus, and we’re also gonna talk about things that he did in preparation, so that hopefully he’s not as impacted as negatively as others who are not as prepared for a crisis such as this.

Before we get into that, Joe, do you mind telling us a little bit more about your background, and then we can get into what you’re doing today?

Joe Prillaman: Absolutely. I really cut my teeth in real estate investing in Fayetteville, North Carolina, doing the whole Buy Rehab Rent Refinance Repeat (BRRRR) model, but I originally got started — I used to sell industrial equipment across the South-East, and a lot of windshield time… I cover 11 states; probably 90% of my travel was in the car.

So two years before I’d ever purchased my first house, my sister’s fiancée introduced me to a podcast called The Bigger Pockets Podcast. I got to just hear about real estate, and I just got the bug for it.

Over the next two years I listened to as much as I could, and just through consistency and networking — I really got tons of information thrown at me,  but I was able to jump in and start buying Fayetteville. Since that time, we’ve got five properties there, all done through the BRRRR model. Four of them were purchased off the MLS, one of them was off-market, and the deals really just started to dry up at that time. This was the start of 2019. I just couldn’t find anything that made sense anymore.

So again, through networking and whatnot, we were just able to find a whole new niche in Airbnb, and my wife and I did a house-hack in Carolina Beach, and since then we’re up to five Airbnb units, and just rockin’ and rollin’, living the dream.

Theo Hicks: Perfect. So you’ve got the five in Fayetteville – those are just BRRRR rentals, single-family home rentals, and then you’ve got five in Carolina Beach that are Airbnb, right?

Joe Prillaman: Yes. And then we have our original — so we originally bought a single-family home in Wilmington, which we’ve since turned into a long-term rental as well. So that’s the six long-terms, and all five Airbnbs.

Theo Hicks: Perfect. So let’s start with the Airbnbs. I would imagine that since they’re shorter-term rentals, it’s not a beach, so I’m assuming a lot of the people who rent those are people that are going on vacation to the beach… And now with the Coronavirus happening, not many people are even allowed to leave their homes. So maybe tell us how those properties are impacted first, and then we can talk about some of the things that you are doing or have done in order to minimize a negative effect of the Coronavirus on those properties.

Joe Prillaman: Absolutely. The Coronavirus has definitely thrown a pretty major wrench in our operations. As of literally yesterday, Carolina Beach came out and they have banished Airbnb short-term vacation rentals from the island. Everything that’s less than a 90-day rental term – you’re just simply not allowed to have them at all… Hotels, motels, everything is shut down on the island. So that’s a pretty major reduction in what we’re able to do, and it’s really been crisis mode ever since the Coronavirus came out.

I’d say about 90% of our bookings come from Charlotte, Raleigh, Durham, really the North Carolina area, and travel has completely stopped. Not necessarily because of anything that we’ve done, but obviously the Coronavirus has just shut the whole world down.

Theo Hicks: So we were talking a little bit earlier, before we started, about some creative ideas that you’ve been floating around for those properties… So what are some ideas, whether they’re working or not, that you’ve come up with, for using those properties? Because again, maybe those ideas won’t work in North Carolina, but they might work somewhere else. Also, these might be ideas that once the Coronavirus is over, it might trigger something in someone else’s mind for a new way to use a single-family home. So what are some of the things you were thinking about once you realized that “Hey, we can’t use these Airbnbs anymore”?

Joe Prillaman: Initially, we hit the ground running with “Okay, is it possible to get long-term tenants in here?” but then also “How long is the Coronavirus actually gonna last?” So we immediately switched to “Okay, if we can’t put long-term tenants in here, because if this does pass”, we’re gonna lose a huge amount of revenue in the summer, which is our peak season… It’s a very seasonal market. We make the majority of our revenue from April until about October. So we’re like “Yeah, we don’t wanna put a long-term tenant in”, so immediately we started calling the hospitals, we started calling anyone that would be negatively affected by Coronavirus, to see if “Okay, can we use our rentals as quarantine units, or would it be possible to store people in it?” People that wanna self-quarantine… Really anything we can to generate income on these properties while they’re sitting vacant.

A lot of things that we did as well was we went through all of our processes, all of our systems to see where is money being spent. We canceled all our subscriptions, anything that is going out every month, we just tried to find out what we could reduce right now, and any additional revenue streams that we could find.

We’ve explored using some of our units as, if people are still getting photography done, as staging units, so that people can have family photos, but still be far away from each other… Just a lot of different ideas on “Okay, how can we utilize the asset that we still have, that we still have to pay for, in a time when we’re not allowed to use it for what it’s intended?”

And really, it comes down to sound investing – having adequate cash reserves for rainy days, because this is gonna pass, too. Coronavirus is gonna go away and we’re gonna have another great season, but it’s having sound investing throughout your entire process of “You’re buying for cashflow, you’re securing long-term low-interest debt, you’ve got adequate cash reserves.” That’s all Joe Fairless’ 3 Immutable Laws of Real Estate Investing. All of those type sound investment strategies play out whenever you have something that comes up that you couldn’t expect. And no one could have predicted that this would shut down my entire business right as soon as the most profitable time of the year started.

Theo Hicks: Yeah, I was gonna say, those three things sounded familiar. Joe’s 3 Immutable Laws of Real Estate Investing. So for the cash reserves, when you’re underwriting these Airbnb deals, it sounds like the majority of the income begins in April and then ends in October… So you’re just entering that now. So it sounds like you have adequate cash reserves in general, just to cover those months when you’re not bringing in money… But what specifically is your cash reserve? Is it a monthly thing, is it an upfront thing, a combination of both?

Joe Prillaman: A little combination of both. The original thought process behind the whole thing was we wanna have six months of if we don’t have any income coming in, that we can pay the bills. And that would be more than an adequate amount of time to figure out what we needed to do.

For our long-term rentals we’ve got a similar type fund, but our goal was to have about $20,000 per five units for our long-term. And for our short-term, we were like “Okay, well what would it take to cover all the mortgages, to cover everything and to keep the ship running for six months?” And that’s really what we established from the beginning, of what we needed, and now we’re really thankful that we actually did that.

Theo Hicks: So do you get three months upfront and then you save per month? When you’re initially underwriting the deal, when you say you wanna get six  months of bills covered, what does that actually look like? Is it three months upfront and then every month you save up until you have six months, or [unintelligible [00:09:12].22] you stop? Specifically, how does that work after you buy a property?

Joe Prillaman: Okay, so for us, I was still selling industrial equipment up until January of 2020. So we have been taking all of our income from our properties and from our long-term rentals as well and rolling those back into — kind of feeding the machine, trying to generate a snowball effect, so that we can continue to buy more rentals… And I’ve been living off of my W-2 income.

So for us, with our Airbnbs, what we would do is every time we made money on them, instead of immediately investing everything back we would take a big portion of it and put it into the emergency fund, until that emergency fund had built up to six months of adequate cash reserves. Then we would take that money and reinvest it into other properties, or just use it to make our systems better.

Theo Hicks: Just so listeners understand how important and how powerful having a reserve fund is, maybe walk us through what you would be doing right now if you didn’t have that reserve fund.

Joe Prillaman: Oh, man… Well, I am the crazy guy who’s been living on the beach for free; that’s kind of how my friends know me. But I might be the crazy guy living under the bridge for free. My whole process was I wanted to build up enough passive income and then enough “active” income, because I think Airbnb is definitely active income; it’s more work, it’s more like a job… So I was trying to build myself out into another job.

I went and got my broker’s license, and the whole plan was I wanted to shift into full-time real estate about now. And without those adequate funds like my industrial sales repping job, it’s gone. I’m not doing that anymore. So now this is really going to be – it was planned to be – the only source of income. So not having those six months of backing, I could have been in a really bad situation.

But thankfully, we built those up. I got my broker’s license, we’re gonna go out and figure out how to bring in other revenue streams and really hone in on the sales side… But if we didn’t have something like that right now in a Coronavirus situation, you could really be up a creek without a paddle.

Theo Hicks: Oh yeah, seriously. Right now everyone who talked about having reserves and had their reserves are looking like absolute geniuses. Before I got into the question, there was one thing I was thinking about -this is just me coming up with weird ideas… I was looking out my window and I saw into my neighbor’s office, and how obviously is working from home right now… And the office is set up for one person, but there’s two people in there; it just kind of looked really awkward and uncomfortable…

So I was wondering if anyone out there, any short-term rental people – if it’s even allowed – could rent out their house or rooms in their house as makeshift offices for people, so they’re not stuck at home… If they have to be on phone calls all day, they’re not hiding out in the bathroom with the water running, so they can’t hear the kids screaming in the background… So just an idea; I’m not sure exactly how that would work, or if it’s even legal, based off of the self-quarantining and stay-at-home [unintelligible [00:12:09].05] and whatnot… But just an idea that someone could possibly run with and… Give me credit for.

Joe Prillaman: [laughs] That’s the stuff, you’ve got to be creative in a market like this. When you have volatility, you have uncertainty, you’ve gotta go out of your way to make it happen. And the great part about doing real estate is it’s all about solving problems and helping people. It’s all about the people here. That is gonna carry past this minor dip in the craziness. Because it’s gonna get hard, and it’s all about solving those problems and coming out the other side, and helping other people do it.

I’m a huge proponent of helping other people get into real estate, but they’ve gotta understand that the reason we’re so conservative on our numbers, the reason that we’re all about making emergency funds important is for situations like this. And sure, this one’s a lot worse than anything that we ever expected, but that’s why we’re so conservative with our numbers.

Theo Hicks: Oh yeah, absolutely. Alright, Joe, what is your best real estate investing advice ever? And I think based off of our conversation I know the answer to this… But if you wanna repeat it again, you can; of you can come up with something else.

Joe Prillaman: Yeah, have adequate cash reserves… But I’d also say that probably the best advice is consistency, in my opinion. Being consistent. Go out and meet as many people as you can. You reputation will always proceed you in this business. And tell everyone you know what you’re doing. It’s all about being consistent, and that includes being consistent with your emergency funds. Make sure you have them.

Theo Hicks: Alright, Joe, are you ready for the Best Ever Lightning Round?

Joe Prillaman: Let’s do this!

Theo Hicks: Okay. First, a quick word from our sponsor.

Break: [00:13:56].16] to [00:14:41].17]

Theo Hicks: Alrighty, Joe, what is the best ever book you’ve recently read?

Joe Prillaman: Ego is the enemy, I’d say, by Ryan Holiday. Great book.

Theo Hicks: Yeah. I actually read that one about a year, a year-and-a-half ago. If your business were to collapse today, what would you do next?

Joe Prillaman: I would start a podcast in a niche type sales.

Theo Hicks: Besides your first deal and your last deal, what is the best ever deal you’ve done?

Joe Prillaman: First deal and the last deal, the best ever deal… Okay. So the best ever deal I did was an off-market single-family home in Fayetteville. It was a 4-bedroom/2-bath home down the street from one of the properties I own. I cold-called the owner out of the blue, she told me she had been wanting to sell it and couldn’t sell it, and two weeks later we had a great property under contract and closed. I ended up paying 61k for it. She was tickled pink, happy as can be to sell it, and it appraised for 97k.

Theo Hicks: What is the best ever way you like to give back?

Joe Prillaman: I’m really big on teaching other people how to do this. We host a meetup here in Wilmington, which is right outside of Carolina Beach, and since we’ve started (my wife and I) doing the house-hack, two more of our really great friends moved in Carolina Beach, doing the same thing. Hopefully they have adequate cash reserves right now… Also, we love giving back to our local church and volunteering.

Theo Hicks: And then lastly, what is the best ever place to reach you?

Joe Prillaman: Best place to reach me is through email at joe.prillaman [at] anchoredinvesting.com. Or find me on Bigger Pockets.

Theo Hicks: Alright, Joe, I really appreciate you coming on the show today to talk to us about your response to the Coronavirus. I think this is going to be obviously very topical right now, but I think what you’re doing is something that can be applied to – or should be applied to – everyone’s real estate investing business from now until whenever real estate investing (if ever) goes away… And that is to have adequate cash reserves.

You talked about how for your short-term Airbnb type rentals the goals is to have six months of bills covered, and then for your longer-term you wanna have 20k for every five doors, so 4k per door.

You talked about how you created this emergency fund, which is to take the income from all of your properties, and rather than reinvesting that back into the properties or paying yourself, taking a large portion of that and apply it to this emergency fund until you’ve reached your six months or 20k per door. You mentioned that you were living off of your W-2 income, and once you hit that number, you left that job.

You also mentioned that because you were doing the short-term rentals Airbnb in Carolina Beach, just yesterday (March 24th, 2020) they basically banished anything that has a lease of under 90 days… So obviously that affects your short-term rentals. You talked about how the first thought that you had was to get longer-term tenants, but since we are entering the most profitable months for Airbnbs (now through October), you decided that that’s probably not the best approach, because if it does go away in the next few months, then you’re gonna be losing out on all that summer money.

So the next thing you did was try to figure out how to generate revenue from these units. You called hospitals to see if they  need to use rentals as quarantine units, you are marketing them as self-quarantine for people to generate income… And then you also explored using the units as staging units, or for family photos. Then you also mentioned on the other end the expense, and you went through all of your processes and systems to see where money is going out and see what you can get rid of, and one example you gave was canceling all of your subscriptions.

Then you gave your best ever advice, which was 1) to be consistent, meet as many people as you can, tell everyone you know what you are doing, and then be consistent with your cash reserves, which was your other best ever advice for this Covid response, as well as just general real estate investing fundamentals.

Again, I really appreciate you coming on today and talking about your journey, and – since you’ve got those reserves, I know it’s gonna work out for you. Others out there, hopefully you’ve got those cash reserves as well. Stay safe, have a best ever day, and we will talk to you tomorrow.

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JF2033: SOS Approach to Managing Your Investment During Coronavirus | Syndication School with Theo Hicks

In this episode, Theo will give you a three-step approach to what you should do during a crisis event, and when it passes. The three-step approach will be easy to remember by using the acronym S.O.S, which stands for Safety, Ongoing Communication, and Summary. Theo breaks down each step so you will know in detail so you have a better idea of what you can do during today’s pandemic. 

To listen to other Syndication School series about the “How To’s” of apartment syndications and to download your FREE document, visit SyndicationSchool.com. Thank you for listening and I will talk to you tomorrow. 


Best Ever Tweet:

“Until this goes away you want to make sure your continuously communicating with your investors and with your residents” – Theo Hicks


Joe Fairless: There needed to be a resource on apartment syndication that not only talked about each aspect of the syndication process, but how to actually do each of the things, and go into it in detail… And we thought “Hey, why not make it free, too?” That’s why we launched Syndication School.

Theo Hicks will go through a particular aspect of apartment syndication on today’s episode, and get into the details of how to do that particular thing. Enjoy this episode, and for more on apartment syndication and how to do things, go to apartmentsyndication.com, or to learn more about the Apartment Syndication School, go to syndicationschool.com, so you can listen to all the previous episodes.


Theo Hicks: Hello, Best Ever listeners, and welcome back to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I am your host, Theo Hicks.

Each week we do two Syndication School episodes. Sometimes they’re part of a larger podcast series that’s focused on a specific aspect of the apartment syndication investment strategy. For the majority of these episodes we give away something for free. These are free PowerPoint presentation templates, Excel calculators, PDF how-to guides, something to help you along your apartment syndication journey.

All of the past syndication school episodes, as well as these free resources, are located at SyndicationSchool.com. Today is going to start a new longer series about the current Coronavirus epidemic we’re going through.

As I’m sure you’re aware, the CDC is responding to an outbreak of respiratory disease caused by a novel/new Coronavirus that was first detected in China, and which has now been detected in almost 70 locations internationally, including the U.S. as of today, which is March 24th.

The virus has been named SARS-CoV-2, and the disease it caused has been named Coronavirus disease 2019 (Covid-19). As a result, the main economic factor that everyone tracks, the Dow Jones, dropped more than 10,000 points over the past 30 days. It looks like as of this recording it has popped back up over 20,000, but still, essentially a 10,000-point drop.

According to the CDC, the best way to prevent infection is to avoid being exposed to this virus, therefore social distancing has been one of the main methods to combat the virus. Some states are issuing stay-at-home orders, like the state that I live in, Illinois.

As a result, many people are working from home, and others have been either laid off or furloughed, so don’t have money coming in.

As real estate investors, this is really one of the main concerns, in addition to obviously the safety of themselves, their team members and the residents… Are the residents – if you’re a multifamily investor/apartment syndicator – can the residents pay rent on time? So what’s gonna happen on April 1st if nobody pays their rent?

Obviously, this is a crisis, and from a business perspective whenever a crisis occurs, you need to have a process for approaching the situation. Since we are apartment syndicators, we need to have  a process for approaching our passive investors.

I’ve talked about this approach before, it’s called the SOS approach to managing an investment during a crisis. We originally came up with this during Hurricane Harvey two years ago, but the same overall concept applies. So this is the overall 3-step approach you want to use once a crisis like the Coronavirus begins, and then what you should do right away, what you should do during it, and what you should do once it has passed.

In the coming weeks, the goal would be to talk about more specific things that multifamily investors can do based on if people don’t pay their rents; what if you can’t pay your mortgage, should you be buying, should you be selling? We’ve kind of compiled a whole long list of questions that we plan on answering… And not only us answering, but we’re gonna share it on our Facebook group. So if you haven’t done so already, make sure you join the Best Ever Show community on Facebook and reply to those questions in order to add value to the community, provide others with solutions that you’ve come across, find solutions, as well as have the opportunity to be featured on the Best Ever Blog, as well as on the podcast.

The acronym for this 3-step process, as I mentioned, is SOS. It stands for Safety, Ongoing communication and Summary. The first step when  a crisis occurs is to ensure the safety of both the people involved, as well as the money. So from a people perspective, for the Covid-19 crisis, it involves the safety of your residents, and then your team members… So obviously reaching out to your team members and making sure they’re okay, offering to, if they don’t do so already – for real estate investors it’s a little bit easier, because they most likely don’t have an office, but offering or allowing them to work from home… And then when it comes to the residents, what we did is we sent out a couple of websites, as well as a note to all of our residents…

So I’m just gonna go ahead and read that note here, just so if you haven’t done so already, you wanna make sure you’re notifying your residents of anything they’re supposed to be doing, important safety information, and then what you’re doing to ensure that the virus does not spread at your apartment community. So our letter read:

“Dear residents,

With the recent reports surrounding the 2019 novel Coronavirus there is an increased concern with the health and well-being of our families, loved ones, and communities. We would like to take this opportunity to remind everyone of the resources in which you can follow the preparedness, prevention and developments. For the most up-to-date information on the Coronavirus, please visit the CDC website at *link to the CDC website* or international updates at *link to the WHO website*.

We are continuing to work closely with our property teams and vendors to take extra precautions. We would request that any resident that is experiencing symptoms of illness, stay home and contact their local health provider, in line with the CDC-recommended guidance.

Additionally, please do not enter any public common areas or leasing office on the property if you are ill, running a fever, or experiencing symptoms of Covid-19. If you require maintenance services and are experiencing symptoms of Covid-19, please advice the management personnel prior to their entry into your home, so appropriate precautions can be taken for the staff and other residents.

If you are Covid-19 positive, only emergency maintenance requests will be addressed, until further notice. We appreciate your understanding and efforts to promote healthy communities for everyone who lives, works and visits the community. We are committed to providing you with the highest quality of service and we will continue to stay informed about the situation to ensure recommended measures are followed. Should you have any questions, please do not hesitate to contact the property management through your resident portal, by phone, or by email.

Sincerely, our property management company.”

In addition to that we sent out a health flier, a workplace and home handout, as well as an additional letter to the residents.

So that covers the safety side for the residents and for the team members. Obviously, the other end of that would be the investors as well, which is kind of in line with the money aspect, because it’s the passive investors’ money from the deal, so you’re obviously worried about their health, but also making sure that you’re able to keep them from losing money.

At this point it’s difficult to tell what’s actually going to happen, how it’s going to impact multifamily… Obviously, the stock market has been going down; it’s briefly going up today, with talks of federal government intervention in the economy, but it’s still down overall for the past 30 days, which typically means that more money will flow into real estate. However, at the same time many people are losing jobs or being furloughed, which means they might not be able to pay rent on time. We’ll have to see how collections are impacted over the next few months and what people are saying… But one interesting strategy that we did come across as of now – and it is posted in our Facebook group – comes from Julie Fagan. Basically, she’s going to allow residents who have lost their jobs or lost income to use their security deposits to pay for rent.

For example, if a resident owes $1,000/month in rent and put down $1,000 security deposit – well, then she’s going to discount the rent to $500/month, and that security deposit will cover two months’ worth of rent.

Now, in exchange for this help, the residents are required to sign a new lease, so a new 12-month lease or a 6-month lease, depending on what the original lease was… As well as sign up for security deposit insurance. Basically, it’s an additional $10-$15 per month to cover the security deposit experience.

This is a good strategy, because it helps the residents, but it also allows you to not necessarily get your full month’s rent right now, but over time you make up the difference with that security deposit. I’m sure we’re gonna hear a lot of interesting strategies over the next few months, of what people are doing to collect rent in this time, so definitely stay tuned to our Syndication School series, as well as our Best Ever Show community on Facebook, because we’ll be having conversations with actual investors about that in the future.

So that covers S of the SOS, so Safety of the people. Safety of the money is something that’s to be determined, and we’ll really need to determine if your property is gonna be impacted by these lower rent collections.

Number two is Ongoing communications. Obviously, you initially let your residents know about the crisis, make sure they’re okay. Any initial safety precautions that need to be taken… And then obviously, on an ongoing basis, give them updates if anything changes. So if the local government or the state government or the federal government makes any changes at things that you’re required to do, any new safety information, make sure you’re continuing to communicate with your residents… But also make sure that you communicate with your passive investors.

For us, we’ve sent out one notification to our passive investors so far. It’s pretty similar to the information we sent to the residents about important safety information, but we also obviously talked about the money situation.

What we said in our email is:

“We have been working closely with our property management partners; it’s too early to tell what impact the pandemic will have on our properties, but we will have a better idea during the April monthly email update, and will provide a status update at that time. That gives us a chance to see how April rent collections look, and also what impact the virus has on the markets, and some markets where our properties are located. As a reminder, your monthly update is sent out by this date.

For March,  you will receive your monthly distribution as planned. If you would like to read the official communication our residents have received, you can click the links below to view documents that our property management companies sent out to residents” and then we’ve got links to those.

“Lastly, our team and our property management partners are getting updates via CDC and WHO, and local health departments in the cities and states in which we own. Our teams are then communicating the information to on-site staff to adhere to. Some of those updates are…” and we go through a list of things like “Stay home if you’re sick. Wash your hands with soap. Avoid close contact with people.”

Then we ended up with saying “We will send a more informed update on any business implications during our next monthly update, which will be received by this date.”

Obviously, that’s the first point of communication. Once we see how rents are impacted, we send another update in a month from that communication, so in about 20 days or so… And again, if any of the safety information changes, you obviously wanna include that in there. And then just continuing to monitor the situation, and letting them know that you’re continuing to monitor the situation. “Here’s what we’re actually doing to alleviate any issues if there are any problems that we come across” and then when you will contact them again.

Basically, the structure of the ongoing communication is make sure you’re addressing what you said you were gonna do before. In our first email we said “Hey, we’re gonna reach out on this date. And here’s the information that we’re gonna include in that correspondence”, so making sure that you are actually doing it on time, and doing what you say you’re going to do… And then also explaining in that email what you plan on doing in the future, and then when you’ll follow up with them again.

It’s hard to tell how long this will go on for, how long the ongoing communication, the O aspect of the SOS will continue for, but until this goes away, you wanna make sure that you’re continuously communicating with your investors and continuously communicating with your residents… But make sure you’re not over-communicating. You don’t wanna send daily updates. Make sure you’re only sending updates when you have substantive information to provide, as opposed to doing hourly updates or daily updates.

And then lastly, once we’re past this, a summary. Once things return back to normal, obviously send your residents a notification that things are going back to normal. We go back over things that had changed, that are now going back to normal – because who knows how long this will take [unintelligible [00:14:25].12] At the same time, with your  passive investors, you wanna summarize any actions that were taken during this time. If distributions or operations were disrupted, what the plan is to get those back on track, or how long it’ll take to get those back on track, and really anything else that’s relevant to your passive investors or your residents that is going to happen after this event has occurred that’s not usual; you’ll wanna let them know in the last summary email.

Overall, when a crisis occurs like the Coronavirus, you wanna follow the SOS approach – the safety of the people and of the money, the O is Ongoing communication to provide your investors and your residents with status updates, and then providing a summary once things return to normal.

As I mentioned, we’re going to be having a lot of conversations about the Coronavirus on our Facebook group, that is the Best Ever Show community on Facebook. Make sure you are following that, so that you can take advantage of not only all of the information that will be provided, but you can provide us with input as well… And then also have the opportunity to be on the podcast – this podcast – as well as on the blog.

Until then, make sure you check out some of the other syndication school series we have, download our free documents, stay safe, have a Best Ever day, and we will talk to you tomorrow.

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JF2027 : Strong Team of Three With Dan Handford #SituationSaturday

Dan Handford is a returning guest, who was in episode JF1609. Dan is an experienced businessman who went into syndication and in under 24 months created a portfolio valued over $220mil. He shares how he was able to put together a strong team of three total partners. In this episode, you see why it’s important to network and find mentors to help you grow at a fast pace. 

Dan Handford Real Estate Background:


Best Ever Tweet:

“In any business that I’ve started, it has never been just one thing that has helped us take off. It’s always been a multi-level approach.” – Dan Handford


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 investing podcast where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Dan Handford. How are you doing, Dan?

Dan Handford: Doing great, Joe. Looking forward to the call today.

Joe Fairless: I am too, and I’m glad you’re doing great. A little bit about Dan – he’s one of the managing partners with passiveinvesting.com, which is a national passive apartment investing firm based in the Carolinas. He’s led a successful apartment syndication company to acquire over 2,000 units, with a portfolio values over 222 million dollars in under 24 months. If you recognize Dan’s name, well, it’s like that you’re a loyal Best Ever listener, because he was on the show, interviewed in episode 1609. That’s is approximately about a year ago or so, so there’s some updates that we wanna talk about, and lessons learned from those updates… Because clearly, Dan and his team have been busy. Based in Columbia, South Carolina.

With that being said, Dan, do you wanna give the Best Ever listeners a refresher of your background, and then we’ll go right into it?

Dan Handford: Sure. I know we’ve got a lot to cover in a short amount of time, so I’ll keep it brief, and if they want more of an expanded version, they can go listen to that other episode. My background has been primarily in business and starting businesses from scratch, and just learning to delegate certain tasks to other people to be able to grow to the point where I can take what they call the Warren Buffett position, where I can check in with the CEOs and the people who are running those organizations.

I have a group of medical clinics here, non-surgical orthopedic medical clinics in South Carolina that I started from scratch, and I have good team running those for me, with about 50 employees. Then I have another company that sells all types of skeletons and skulls and brains and hearts called ShopAnatomical.com. They’re all plastic models, so don’t worry, Joe, I’m not gonna ask for your eyeball or anything.

That business started in the last recession in 2007-2008, and continued to grow year over year, and sort of allowed me to be able to start my first practice [unintelligible [00:02:50].12] debt-free. My background is actually in chiropractic, so I started as a chiropractor first, and then morphed into opening these medical clinics, and now I have these clinics debt-free as well because of that earlier business. Obviously, with that you have to pay a lot of money in taxes when you start to make some money… So multifamily was that ticket for me, to be able to help me from a tax standpoint. Then also from starting my own syndication business, being able to increase my revenue at the same time, helping other people reduce their taxes, as well as myself, and having a very big benefit from that.

Joe Fairless: You and your team are the lead general partners on that portfolio valued at over 220 million dollars, is that correct?

Dan Handford: Yeah, so to break it down a  little bit, when we first started the company, to kind of build our credibility and to build our track record we actually helped and co-GPed and co-sponsored with some other groups on the first couple of deals. Then after we started building that track record and experience, we started closing our own deals. So of that 220 million dollar portfolio, about 120 million of that is our own projects, and the rest is with other co-GPs.

Joe Fairless: So 120 million of your own projects in under 24 months is phenomenal. Let’s talk about what got you all to this point. What would you say are some components that allowed you all to get to this point in this period of time?

Dan Handford: I’ll kind of answer this in not an easy way… Because I had people ask us, “You have this group, passiveinvesting.com, and you have this large syndication stuff going on, you seem like you’ve got a lot of success… What do you do to build this up? Is there one magic thing that you’ve done?” and any business that I’ve started, there’s never been just one thing. It’s always been this multi-modal approach to marketing, it’s been a multi-modal approach to actually growing and scaling, and one of my biggest strengths is being able to have an overall strategy and a vision for the future, and being able to put certain pieces of the puzzle in place.

Obviously, being able to do that from other businesses, and taking that into this business was a big benefit for me and our group as a whole, but I don’t think it’s a secret, Joe – you are my mentor as well in the multifamily space, so I’ve modeled a lot of things that we do after your success that you’ve had, and it’s been for me great, because it’s helped me reduce our learning curve in this space.

The very first property we acquired was 130 units, and the value of that property was over nine million dollars. That particular property, personally, it was my first acquisition into any type of real estate outside of my own home. So for us, I don’t think that we could have done something like that if we didn’t have somebody like you to be able to help us and guide us along that entire process…

And you know that we’re on calls all the time, discussing things, and earlier on it was more like 2-3 times a week we were on a call, and now it’s more like on an as-needed basis. Then I also have some regularly-scheduled calls with you as well on a monthly basis… But really [unintelligible [00:05:38].17] of having a mentor and then be able to match that with being able to implement systems and procedures and processes has been a big benefit… And then also the flexibility of being able to go full-time, full-bore into this business and not have to maintain a secondary job or a corporate job has been a big benefit for us as well.

Joe Fairless: Okay, so three things that I heard – vision for where you’re headed (1), modeling others (2), with access to those models, and then (3) being able to focus on it full-time. And as you said, I have the benefit of having seen you go from where you were in real estate to where you are now, so… There are some things I’ve noticed, and I just wanna ask you about maybe one or two of them.

One would be the team that you currently have, and the strengths that everyone brings to the team. So can you talk about passiveinvesting.com and how you and your partners interact or complement each other on certain strengths that each of you have?

Dan Handford: Sure. So I have two podcasts. One is a multifamily podcast which is called Multifamily Investor Nation, and I have another one which is more entrepreneurial related called Tough Decisions for Entrepreneurs. And on that Tough Decisions for Entrepreneurs podcast one of the things we ask about is what are some of the tough decisions that people have had to make in business? The number one thing we always hear from people is about partnerships. And one of the biggest reasons why partnerships fail is because there’s a misalignment of interests and desires, and they’re overstepping each other too much.

When you’re creating a partnership, you have to be able to find, like you  mentioned earlier, these complementary traits that allow you to be able to succeed together… But what’s also important is that each person, even with those complementary traits, needs to understand and know what the inner workings are of that other person’s role is, and responsibility, so that they can see that the decisions that they make – how that impacts the other person.

And then also, we have investors that will ask us, they’ll say “What happens if one of you dies, or gets in a car accident, or something like that? Can the other ones take over?” and the answer is yes, we can. Would there be a lot more things and responsibilities that we have to take over? Absolutely. But the biggest thing that we did, or that I kind of formulated in the very beginning was this partnership that we have.

One of my partners – his name is Brandon Abbott, and he actually goes to my church here in Columbia, South Carolina. He’s married, he’s got four girls, and I’m married and I have four children, and our families are really close, and go to the same church, at the same private school together, and things like that… And I had a conversation with him one day about what I was doing, and then  his background fit really well with what I was needing… And I wasn’t necessarily looking for him. I never asked him to join us, but three or four weeks later he called me up and he said “Listen, I’m tired of what I’m doing. I love what you’re doing. Can I join you?” And of course, I’m like “Well, I can’t pay you anything, because there’s no revenue coming in right now, but if you wanna be one of my partners, then let’s try to formulate a partnership there.” And he’s like “I’m all in.” So he quits his job, and he’s with us full-time.

Joe Fairless: What was his background that you said was needed at the time?

Dan Handford: Sure. His background was in construction management, and then for the last 6-7 years he’s been working with some of the larger insurance companies as an independent adjuster for lost claims. So that really fit with us, because I don’t have a lot of background in that. So when I go look at a property, I don’t have that major benefit of being able to throw a drone up in the air, and a roof, and see if we have to replace a roof, what’s gonna cost us, and be able to create a lot of those — we call it our pre-LOI inspection. So he kind of goes in ahead of time, before we even put an offer on something, and sees what are gonna be some of those major cap ex items that we might need to look at and to consider.

Then he’s also helping to put together the cap ex budget for the renovation plan, and then he’s also working very closely with the property management companies to make sure that they’re actually performing based on those budgets.

Joe Fairless: Okay.

Dan Handford: And then the third partner that we have is Danny Randazzo. His background is as a financial analyst. He used to work for one of the top financial consulting firms in the country. At the time, he was working full-time with that group, and he was looking to make a switch and a transition. He is also one of your mentors, and that’s how him and I got connected and got to meet up.

He’s located in Charleston, South Carolina, so it’s about 1,5-hour drive, not too long. So Brandon and I took a trip down there; we actually were looking at a property and wanted to get his opinion on some stuff… And he started to see some of the things that we were doing… And he actually reached out to me and said “Hey, would you be interested in me joining your group?” and I’m like “Absolutely! I need somebody that’s really strong in finance, and underwriting, and due diligence, and asset management.” So he fits that role very well.

So we have this triad partnership where he’s managing and doing the financial underwriting and modeling and asset management and financial due diligence, and working with the attorneys and the lenders and all that kind of good stuff… And then we have Brandon doing all of the acquisitions and broker relations, and cap ex budgeting and modeling and monitoring the properties. And my role is primarily from an investor relations and an overall marketing strategy, as well as from an overall operations standpoint as well, because of the success that I’ve had in some of these other businesses, trying to put a lot of these systems and procedures and processes in place; it’s been a very big strength of mine.

Joe Fairless: What responsibilities have changed or evolved from when you all initially created the structure, to what it looks like today?

Dan Handford: Honestly, from the three different roles it’s been fairly consistent. One thing that we have made some decisions to change on is — our goal with the group is not to try to create another full-time job for ourselves, which right now that’s what we’ve created. So we’re actually in the process now of hiring people that can actually start to delegate a lot of these tasks to, and still be the managing partners, [unintelligible [00:11:24].09] but the higher-level decisions about when to buy, when to sell, a lot of these major decisions… But the day-to-day operations we can turn over to a full-time analyst and a full-time asset manager, and also put in place a full-time marketing person and investor relations part. So going into 2020, that’s kind of our goal.

We’ve already hired our full-time marketing director, and already hired a full-time investor relations person that’s helping me and my assistant… So right now we’re in the process of doing interviews, and in the first quarter of next year, Q1 and Q2 2020 we’re gonna be hiring our first full-time asset manager, and then later on the year we’ll hopefully be hiring another one of those as we continue to grow and scale, if it’s needed, and then also a full-time analyst.

Joe Fairless: What’s the full-time investor relations person do?

Dan Handford: The full-time investor relations person works very closely with me. So whenever we have a project and a deal that we’re actually in the process of raising funds for, she is actually very closely with the investors. She’s local. So this one position that if you’re gonna do virtual — I prefer it to be local, at least in the United States, I mean. I wouldn’t want that person to be over in the Philippines and having access to a lot of the financial information that we get from investors on these documents.

She manages the process of making sure all the PPM documents are signed, and the information on those documents is accurate and correct, and then she also makes sure that all the wires come in from all the funds, she notifies the investors as soon as possible whenever they come in… And we’re very good about a wire comes in, within an hour of us receiving it we’re sending a message back to the investor, so that they can be at ease that we’ve actually received their funds.

When we’re in the process of raising funds for a particular project, she’s very busy. And then in between projects we have various tasks that we have her doing, as far as updating records, calling in and getting status updates from investors… So when we do a first distribution on the property, reaching out to those investors, “Did you receive your distributions?” things like that.

And then also, as you know, we are in a project, there’s things about updating ACH, and entity transfers, and things like that that go inside of each one of these projects. She’s pretty much handling all of that piece of it.

My primary role is to have a lot of these investor conversations and these investor communications with these investors on the frontend, and then also while they’re in the project if they have any questions, I’m that person as well.

Joe Fairless: You have three business partners in PassiveInvesting.com. How many business partners with an organization would be too many?

Dan Handford: Hm… It’s a good question. I would say it depends. Are we talking about any organization, or this type of an organization?

Joe Fairless: Yeah, let’s go this type. Good clarification.

Dan Handford: In this type of an organization I really feel like three is probably a good number, except for maybe one other position; maybe if you had another position where you have like a vertically-integrated property management company, and you can have another person that’s managing that piece of it. Or if you parceled off the asset management piece and you had another person in there from an asset management perspective… But I think three is a good number, and I think it’s good from the perspective of investors as well.

One thing that I’ve seen with some operators – this doesn’t happen all the time, but I’m sure you’ve probably heard of these stories as well, Joe, where an investor has put money into a project, six months down the road they can’t get a hold of the operator; they just like fall off the face of the Earth. It doesn’t happen very often, but I’ve seen that lately… And it’s usually a one-off operator, and it’s just them; there’s nobody else.

To me, I do passive investments myself. I’m actually in 19 different syndications right now, and with eight different operators, and I make sure that there’s not just one person in the partnership. I  like to see at least two, but three is my preference, because if something happens with one, there’s still somebody else there to take over the business if something happens to them.

Also, if I can’t get a hold of one, I’m pretty sure I’m gonna get a hold of the other ones. So for me it’s a mitigation standpoint as well, from  a passive investor standpoint, too.

Joe Fairless: You’re in 19 syndications, with 18 different operators as a passive investor… Think about the last deal that you came across for passive-investing in, but you did not invest in it. Why did you not invest in it?

Dan Handford: It’s the market. One of the biggest things that I look for is the market… And I have a subscription to certain data analytics that I use for our syndication group, that allows me to look up some of my passive investments and verify different things and stuff like that… But the biggest thing I look at is the market.

So even if I like an operator, if I don’t like the market they’re going into, then I’m not gonna follow them in that market. So I don’t really care how good that operator is, I’m a   big believer in the market dynamics as well. So that would be one of the biggest things I do not invest in.

But a couple other things that I would say is preferred returns… I won’t invest in a deal unless it has preferred returns, because to me there’s a big alignment of interest when you have those preferred returns. That’s how we treat our investors with our deals as well – we have those preferred returns, and we wanna make sure we treat our investors very well, because we don’t wanna just do one deal with them. We wanna be doing multiple deals for many years, and continue to produce these legacy wealth assets and plays, so that we can grow together.

I think the more you treat your investors that way, the more they’re willing to refer their friends, and the more they’re willing to invest with you on multiple projects. So those are just a couple of things – the market, looking for preferred returns… I actually do like the 70/30 splits, because when you have to start to go down below 70/30, to go 80/20 or 90/10 on some of your equity splits, the deal to me is not strong enough. It’s a weaker deal, which is  why they have to give up some more of that equity in order to do that. So to me, I like to have that 70/30 split, I like to have those preferred returns in there, and I also like to have monthly distributions. There’s a few of them I’m in as quarterly. but I prefer to have those monthly distributions as well.

Joe Fairless: What’s something that hasn’t gone right during the last 12 months of business?

Dan Handford: It’s a good question. I’ve had a few investors ask me this question, so I can answer it very quickly here. One thing that we did on a property is we underwrote for — I don’t know the exact figure; I’m gonna say a $200 rent bump. It was gonna cost about $10,000 a unit, to renovate the unit to get that rent bump. I’m just giving you general numbers, not exact.

So we went in, bought the property, had projections, had return numbers out there, and renovated the first two units at 10k/unit, and come to find out we could not achieve that rent bump. And the nice thing is we only renovated two units. So we’re not gonna just go in  and renovate 30% of the units before we figure out if we’re gonna achieve the rent bumps.

The reason why we balanced the rent bumps with the property management companies in the market, and doing a comp analysis [00:18:00].13] and it was one of those properties I was kind of on the fence of class B, class C area… So we just didn’t do a very good job of really scaling that number down. But what we were able to do to mitigate that is that we only did two units, so it wasn’t a major hit as far as the cap ex funds and the cap ex budget.

What we were able to do is to kind of reset and go “Okay, what can we do to reduce the renovation budget to still achieve the returns for the investors if we have to lower the rent increase?” So we were able to go in there and reduce the renovation budget, even though we had to reduce the rents, but we were still gonna be able to achieve and surpass the original projections that we had on that particular property, based on the projections that we have now.

Joe Fairless: Basically, you have the same ratio, it’s just different dollar amounts.

Dan Handford: Correct.

Joe Fairless: Do you remember what you did – one or two things – to reduce the expenses, like go from granite to something else?

Dan Handford: Yeah, so there was a wall in the kitchen area that we decided just to leave up, even though [00:18:56].16] we decided to reduce that… And then we also went from stainless steel to black appliances, and then from granite to Formica.

Joe Fairless: Got it. That’ll do it.

Dan Handford: So those are the main things. Yup, it will.

Joe Fairless: You have, as you mentioned in the beginning, some very successful entrepreneurial ventures – the medical clinics, the online business, you’ve got the syndication business… Have you had an entrepreneurial venture that has not made money and  you abandoned it and then you moved on to something else?

Dan Handford: I haven’t had an actual venture do that, but absolutely in my practice that I have – my medical clinics – and even in my other businesses, I’ve done certain things that we thought were gonna make money, but we tried them, they didn’t work, and we stopped. We didn’t necessarily lose a bunch of money, but we were constantly monitoring and putting KPIs in place and kind of checking those metrics and making the decision of if it’s not working, let’s just stop early instead of just trying to continue to bleed this thing.

So really the biggest lesson that we’ve learned there is just making sure that you’re measuring and monitoring everything that you’re doing, so that you can pivot sooner rather than later. When we started to expand from one clinic to four clinics, we started to open up new clinics and at the time we were only looking at our numbers on a quarterly basis… And if you know anything about data analytics, if you’re looking at it on a quarterly basis it is actually a retrospective analysis, and by that time it’s usually too late to pivot to make any impact on that quarter. Usually, it’s hard. You never can make that change.

So for us, we started to do monthly data analytics on our clinics, and then once we started to go to that third clinic and fourth clinic, even monthly wasn’t enough, so we started doing weekly and daily analytics, to make sure we can make those decisions quicker and faster, instead of waiting until we’ve already lost a lot of revenue and we can’t make it back up, because the time has already gone past.

Joe Fairless: Based on your experience, what’s your best real estate investing advice ever?

Dan Handford: Learn to delegate. Because one of the things that I learned early on in my entrepreneurial journey is that I had to learn how to delegate things that I knew I could do — because I have a flaw, that I feel like I can do everything better than anybody else. And yes, I understand it’s a flaw. A lot of entrepreneurs have that flaw… But you have to come to the realization of your flaws in order to fix them.

So I had to sit back early on in my entrepreneurial journey and owning businesses and say “Even though I know I can still do it better than anybody else, if I can find people that are really solid and really strong, and they can do it at 80% to 85% the level that I can do it, then I’m happy to turn it over to them, train them, get them to start to do it. Then I don’t have to do it, and I can focus on things that I’m better at, and  continue to grow the companies.”

Joe Fairless: You mentioned you’re hiring a decent amount of people for your company… What’s the good place to find those qualified applicants?

Dan Handford: Sure. For a general marketing person, things like that, non-real-estate-related, I usually a lot of times find them on Indeed. It’s kind of my go-to place right now, Indeed.com. Virtual assistants I’ve found on Upwork.com, and then from a commercial real estate standpoint we’ve been using the SelectLeaders.com platform for that.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Dan Handford: Let’s do it.

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

Break: [00:22:01].28] to [00:22:52].06]

Joe Fairless: Best ever resource you use in your business to keep you up to date with industry trends?

Dan Handford: CoStar.

Joe Fairless: Best ever way you like to give back to  the community.

Dan Handford: I’m actually starting a non-profit myself, that will help to improve the quality of Christian private education across the country.

Joe Fairless: What’s the best ever deal you’ve done?

Dan Handford: Best ever deal that I’ve done, in real estate – I would probably say it’s our most recent deal. We did a deal that was a pretty large deal; it was our largest one to date. It was a 51,5 million dollar acquisition. We’ve only been into it for about two months at this point, but it was really nice to be able to get an appraisal back in the process of the due diligence in that particular acquisition, and be able to have almost two million dollars of increase in the value from the actual appraisal, to where we are when we actually acquired the property.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing?

Dan Handford: Sure, thanks Joe. They can go to our website, passiveinvesting.com.  You can also shoot me an email if you have any questions for me, or if you wanna jump on a phone call and have a discussion… You can shoot me an email at dan [at] passiveinvesting.com.

Joe Fairless: Dan, I enjoyed it. I hope you have a best ever day, and we’re gonna talk to you again soon.

Dan Handford: Thanks, Joe.

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JF1999: How to Identify The Right Partner With Ryan Groene #SituationSaturday

Returning guest Ryan Groene from episode JF1686 shares a great learning experience around partnering with the wrong group of individuals. Ryan explains how quick partnerships on a single deal or two is significantly different from partnering to grow a business. He shares 5 great questions he plans to ask before deciding to partner with a future individual and how important it is to get to know them at a more personal level. 

Ryan Groene Real Estate Background:

  • Full-time Mobile Home Park Owner and Operator
  • Has owned 3 mobile home parks totaling 175 spaces, 
  • Based in Charleston, SC
  • Say hi to him at ryan.groene55ATgmail.com 
  • Best Ever Book: What it Takes By Stephen Schwarzman

Best Ever Tweet:

“You kinda have to find somebody who matches your lifestyle, and somebody you don’t mind spending a lot of time with, whether it’s virtual over on the phone, email back and forth, texting back and forth or even in person.” Ryan Groene

The Best Ever Conference is approaching quickly and you could earn your ticket for free.

Simply visit https://www.bec20.com/affiliates/ and sign up to be an affiliate to start earning 15% of every ticket you sell. 

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.


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 investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. First off, I hope you’re having a best ever weekend. Because today is Saturday, we’ve got a special segment for you called Situation Saturday.

Here’s the situation – you want a partner. You then go get partners, and then you might have a different vision for where you need to go once you get into a partnership… So what do you do, how do you approach it, and what are some things you can put in place prior to that partnership, to help make things smooth whenever you do part ways.

With us today, we’re gonna be talking to someone who has gone through that process, learned a lot of lessons, and is wanting to share it with us. I’m looking forward to that conversation, Ryan Groene. How are you doing, my friend?

Ryan Groene: I’m doing great. I hope you’re doing well, Joe.

Joe Fairless: I sure am, and I am grateful that you’re back on the show. Best Ever listeners, you can just search Ryan’s first and last name and my name, and I’m sure his other episode will come up, where he gave his Best Ever advice.

A little bit about Ryan – he is a full-time mobile home park owner and operator. He has owned three mobile home parks totaling 175 units, and I say “he has owned” because now 1) he sold his interest in two of them, which is part of the main part of this conversation… So he’s no longer in two of the partnerships, but he still has one. He’s based in Charleston, South Carolina. With that being said, Ryan, first, do you wanna give the Best Ever listeners a refresher on your background, and then we’ll go right into it?

Ryan Groene: Yeah, my background is basically right out of college I worked in finance; I had a W2, like most of the Best Ever listeners. Then I made a transition to full-time mobile home park owner/operator/investor. About a year and a half ago, right before we [unintelligible [00:03:16].02] Basically, the past year I have owned three parks, bought three parks, like Joe said; I’ve also operated a portfolio with Buckeye Communities in Ohio.

We had about ten parks, about 500 spaces or so, and then I also had my 175 spaces. So I  was operating that portfolio the last year. We’ve since scaled that back. We’ve sold a handful of those parks, we still have a couple, and I’m still doing that, but I’ve also changed locations, so my role has kind of changed a little bit. Still looking for more parks to buy, and I’m kind of gonna get into what transpired the last year with my partnerships with buying parks, and stuff like that.

Joe Fairless: Tell us the story.

Ryan Groene: Basically, I had bought one park, my 75-space community in Fayetteville. Then through that I have met some other potential partners. They were interested in mobile home parks. They had never maybe necessarily owned one, or they had limited knowledge, or they were looking to get into this space… So basically, we bought two parks together. I had relationships with the deal, and I am the operational piece to the partnership side of things.

Long story short, we were looking to basically scale a business, grow a business, and put about 500 to 1,000 pads under our management and ownership. And building a business is a lot different than who we partner with, than doing one deal together. Because  when you just do one deal together, you maybe only talk to each other a few hours a week. Building a business together when you have large amounts of work to do, you’re around each other a lot more, communicating a lot more. So establishing those boundaries upfront is pretty important.

I would advise everybody to get to know somebody, not just in a working relationship, but also on a personal level, because you wanna find out what is their lifestyle, what is their work schedule, what is their communication schedule, what is their life goals, where are they at in their lives… And when you’re building/scaling a business – do they have that ability or want to do that? That buying one deal together, or even a couple deals, is a lot different than building a massive portfolio together.

And then, when you get past all that – we had known each other relatively short timeframe. We knew each other really less than a year; they were the capital pieces, I was the operational piece. I had also found the deal. And really, you wanna have an operating agreement going in; that’s really just a fail-safe for partnerships. You wanna have clear, defined roles, what’s everybody’s expectations… And then if something happens, life happens – people get sick, people have kids, people pass away, their spouse passes away, if they have a regular job, their work gets real busy, so they can’t devote as much time…

You kind of have to find somebody that matches your lifestyle,  and somebody that you don’t mind spending a lot of time with, whether it’s virtual, on the phone, emailing back and forth, texting back and forth, or even in person. And it is kind of like a marriage, but you’re playing with a lot more money… And in marriage, while you’re playing with money, people sometimes can get ugly. It gets ugly when things go bad. Luckily for me, we had a pretty good split. There were no lawsuits involved, or anything. We kind of realized that maybe we weren’t the correct fit to build a  larger business, so that’s kind of why I sold my partnership rights. It’s just easier for everybody.

I may have lost some money in the short-term, but in the long-run it’s probably better for my mental capacity, in order to focus on new things, versus bringing up the past and always having to deal with it.

Joe Fairless: What was happening that resulted in you saying “Okay, I think we need to part ways”, and with them agreeing that that was the case?

Ryan Groene: When you’re trying to build a business, like forming a partnership to build something larger, you have discussions, right? People’s goals come out, people’s lifestyles come out… And most of my partners – I was full-time, and some others were full-time, but they also had other jobs or other commitments…

Joe Fairless: How many total partners?

Ryan Groene: There was five.

Joe Fairless: Five. Well, there’s the first mistake.

Ryan Groene: Yes, I agree. Too many people. You should limit it — most of the good partnerships, kind of like you see Warren Buffet and Charlie Munger, just to name a clear example… There’s two people. So that was the first problem; there was a lot of people, and everybody had their own lives and their own time commitments. And then once you start putting pencil to paper and starting to look at more deals and buy stuff, you start to figure out maybe who’s committed and who’s not. If they are committed, maybe they want something a little bit more, that you’re not necessarily willing to give up… Whether that be equity, time, whatever it might be.

So first of all – yeah, we had too many people. That was probably the first mistake. But you don’t learn that until you go through it. And then the second thing was just maybe our communication styles weren’t the same. Maybe one guy needs everything right away, and the other person, while they have other stuff going on, they may take a little bit more time to do it. So expectations, communication styles, and also just who is doing what. We have to establish that upfront… Whether you establish different reports, and you go over it, you measure it, and then you discuss it, versus trying to micro-manage the situation from afar.

Joe Fairless: What’s your preferred method of communication?

Ryan Groene: It depends on what we’re talking about. If we have to have a phone conversation, that’s perfectly okay. When you have that many people, a lot of times it takes a long time, and you have to have drawn-out conversations, conference calls…

Joe Fairless: Way too many people. [laughs]

Ryan Groene: Yeah, it’s too many people to make a decision. So you have to have the person that can make the decision, or two people that can make a decision. My preferred method, depending on what the decision is, is to get on the phone and talk about it… Because I think you get tones, you get a lot more truth than behind a screen.

Joe Fairless: Yes…

Ryan Groene: When you read a text or read an email, it’s hard to decipher what that is… Because I’m not a very good texter. Or if I text, it might not be how I talk in conversation, I misspell stuff sometimes… So it can kind of get lost in translation. There’s a million different things… Versus actually having a conversation – the flow of the conversation, and tones and all that plays into it.

Joe Fairless: I agree. Alright, partners — going into it, you found the deal, and you were on the operations side… What were the other four doing? You said money, but were they all four money people, or what?

Ryan Groene: Yes and no. Everybody had their own roles, had different experience with different things. One guy was maybe better at scaling a business, one guy was good at finding deals, one guy maybe had the balance sheet… On the deal specifically they weren’t necessarily all money (I played a little bit of it), but they had key strengths that maybe I didn’t necessarily have, or I had something they didn’t have… So we all kind of played a role, we all kind of knew each other, and we were trying to buy a bunch of stuff… And it kind of just snowballed into that organically. Then when we were starting to move and look to buy things, things came out that maybe it wasn’t the best, because people have lives. Like I said, life happens.

This was a transition of 4-6 months, give or take… So it wasn’t just like a weekend type of thing. It was a longer, drawn-out process, and we had thought about it a lot… And like I said, life happens and you start thinking about it… When you pull away from the calls and emails, you start thinking about it, “Can this actually work?” and most of the time when you have that many people it doesn’t necessarily work. It’s hard to make it work.

Joe Fairless: But the two deals that you sold your interest in – were they performing well?

Ryan Groene: Yeah, the deals were performing. There was nothing wrong with the deal.

Joe Fairless: Why not just ride those two deals out, and then just choose not to partner up on other stuff?

Ryan Groene: Because the reason being I think it was an easier decision, just like I said, split and not have to deal with the headaches. For me it was more of a mental type of thing; I don’t wanna keep having a conversation… And then it was just more of like still continuing to be friends with an ex-wife, an ex-girlfriend, an ex-boyfriend, whatever. There’s always a little bit of tension. Maybe you don’t talk about it, but it’s hard to get past the emotional side of things a lot of times.

Maybe you partnered on these deals, and the deals were performing, but then when you’re trying to build a business and build a larger portfolio, those things stumble into those deals.

Joe Fairless: Alright.

Ryan Groene: They were performing financially, they were good assets, and everything about that. We had bought them right… I’m mainly a turnaround, big value-add, buy-at-discount type of investor, and we were starting that process, and it does take a lot of effort to do that… So it was easier just to part ways, just so we could all focus on new things and not have to worry about it. We’re not talking millions of dollars, we’re talking enough to where somebody could maybe write a check and just be done with it.

Joe Fairless: Okay. And you got into those deals with no money of your own?

Ryan Groene: Correct.

Joe Fairless: Okay. You told me that before we started recording, that’s why I wanted to just mention it. So you got money when you exited out, so you did come out ahead financially, just perhaps not how much you would have if you had stayed in it through its completion.

Ryan Groene: That is exactly correct. My piece, while I may have some money to invest in certain deals — basically, I had found the deal, some equity based on finding the deal, and then also operating the deal… The day-to-day in charge of the asset, and in charge of the on-site manager.

Joe Fairless: What are five questions that you’re gonna ask your next partner, either directly or indirectly you’ll get the answer to? What are five questions you would ask?

Ryan Groene: One, “What is your goal for the next five years, when it comes to investing in real estate? What is your lifestyle? Are you investing because you want passive income and you wanna sit on the beach, or do you wanna build a large business?” Two, “How do you communicate? How do you manage problems?” Four, I’d probably say “What is your time commitment? Do you wanna be active or passive? Do you want an active role, or what role do you want and can you play?” And that kind of translates into “What are your strengths? What are your weaknesses? How do we line up?”

And five would be “Let’s become friends first before we start a partnership together. Do we have similar interests in your personal life? Do you have kids, and maybe I don’t have kids? Or are you a golfer and maybe I’m a golfer? Do we have similar interests that aren’t just real estate related?”

Joe Fairless: Okay, I like that. “Goals for next five years/what’s your lifestyle that you wanna be?”, number one. Two is “How do you communicate and manage problems?” Three, “What’s your time commitment? Do you wanna be passive or active?” Four, “Strengths and weaknesses?” and five, “Let’s get to know each other on a personal level.” You can ask questions about interests, but really that can just develop over time, to see.

What about also when the chips are down and there’s a — well, I guess you already asked that; you’re one step ahead of me. “How do you manage problems?” I guess what I’m really getting at is the character of the person. How would you go about assessing if they’re a good person or not? Because it’s one thing “How do you manage problems?” “Oh, well, I identify the root of the problem, then I take steps to resolve it, and then I see if it’s gonna be reoccurring or not.” That doesn’t at all get to “Am I going to lie to you about the problem? Am I going to steal money from you or the partnership?” How would you go about qualifying that when you’re in the honeymoon stage?

Ryan Groene: Yeah, that question you could get a little bit more clear, because that can translate into a whole set of other questions, scenarios. For me, I’m very transparent about my past, about what I’ve done, partnerships that have gone bad or that have done well, my strengths, my time commitment… So I would ask people that, I would try to get to know them. Your reputation is what it is, and people talk, whether it’s for good or bad.

I would probably ask around, kind of “Hey, have you ever done a deal with this person? What are they like? What is his personal life?” You try to get to the root of the problem… And people are deceiving at times. I’m not saying deceive somebody for the benefit of doing a partnership together, but it comes back to the personal interest and kind of hanging out with the person. You do get to know their character when you get to hang out with them a lot more.

So that comes back to the getting to know a person, both on a  professional level, and also a personal level… Because most  of the time, people can put on a fake facade when they’re in their professional life; you can fake it for an hour or two when you’re hanging out with a person. But when you hang out with a person repeatedly, when you go tour properties together, when you get on calls, when you hang out with the person, maybe you go do something that’s not related to investing at all… You start talking about personal interests and you can find how that person is… And then also just watching their demeanor, how do they treat people, how do they talk with people, and the reputation when you start asking around. It definitely comes out a lot of times.

Joe Fairless: A couple other ideas I had just now while we’re talking about this is 1) looking them up on social media, which is probably an obvious thing, but something that deserves to be mentioned here… Because if they’re posting whacky posts on Facebook about some controversial thing that you are completely against… One thing I’ve noticed is if someone is posting things and then the comments are people cussing a lot to them, or just talking in ways that I wouldn’t want to be associated with those commenters, then most likely the person who’s posting it, who has all these people commenting in whatever capacity that I’m not agreeing with, I’m probably not gonna agree with the person posting that stuff, too. It’s probably not someone who I’d wanna be associated with, if they’re associating themselves with a bunch of people who are talking in ways that I wouldn’t wanna be around… Even if the person posting is putting on a front that “Hey, we’re all good. I don’t act this way”, if their friends are acting that way, that’s indicative of how they probably are.

And then on a related note, in addition to looking them up on Facebook and Instagram and wherever else… And if they have their account private on Instagram, for example – well, that could be  an indication of something, as well… But then also asking them “Hey, who are a couple of your really good friends? How do you know them?” Just getting a sense of who they are currently connected with, how they know them, and then even a step further, having lunch of dinner or drinks or something with those friends and you, and maybe a couple of your friends, or something like that.

It gets a little weird if you say “Hey, why don’t you bring your best friends and I’ll bring my best friends, and we’ll hang out?” That’s just a weird thing, so I understand that, but it isn’t weird if there is a happy hour, and everyone’s at a happy hour together… Or you just go hang out with their friends if they’re going somewhere. There could be a less weird scenario where you could hang out with their friends. Because ultimately, you’re a product of those who you surround yourself with, and it’d be good to know that.

Ryan Groene: Exactly. Yeah, and I’m not talking like become best friends with them, and go have sleepovers and all that; that stuff that we did as kids. I just mean you have to get along with the person. This is mainly when we’re talking about active joint venturing with people. I’m not talking about syndicating from a general partnership/limited partnership type of relationship, because that could be a little bit more professional… And as you know, you still wanna qualify people, and you still wanna get to know them, but that’s a little bit different, as you definitely talked about and had a lot more experience with. I am talking from an active joint venture, where everybody has an active role as defined by the SEC. The active role could be weekly meetings, weekly calls, or just a monthly call… But they are all general partners.

Joe Fairless: Mm-hm. Ryan, how can the Best Ever listeners learn more about what you’re doing?

Ryan Groene: I am on all social medias. I’m on LinkedIn, Facebook, I’m also on Instagram… You can email me, ryan.groene55@gmail.com [unintelligible [00:18:51].20] questions. Also, you can follow me on all the social media platforms. And I appreciate you having me on the show.

Joe Fairless: I appreciate you sharing what you’ve learned from your first-hand experience. That’s the best way for us to learn. Well, the best way for us to learn is for us to experience ourselves, but we might not want to… So sometimes it’s good to learn from others who have experienced it, and then that is the purpose of this show – to learn from others who have experienced it, so we can all do bigger and better things.

I appreciate you talking about some questions that you would ask potential partners. Really quick – what are your goals for the next five years? What type of communication style do you have and how do you manage those problems that come up? What’s your time commitment look like that you want to have in this venture? Is it active or passive? Strengths, weaknesses? And then lastly, “Let’s learn about each other personally/ Similar interests” etc. And don’t phrase that  last question that way… “Ryan, let’s learn about each other…” [laughter]

Ryan Groene: Yeah, exactly.

Joe Fairless: Well, everyone gets it. Okay, cool. Well, Ryan, thanks for being on the show. I hope you have a best ever weekend, and talk to you again soon.

Ryan Groene: You too.

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JF1908: Reinventing Yourself After A Traumatic Experience #SituationSaturday with Logan Freeman

Logan is coming back on the show to provide us with even more value. Having always been an athlete, that is how Logan identified himself – an athlete. When that life ended and he was released from his team in the NFL, he had to reinvent himself. As many of us know, reinventing or changing your identity is not an easy thing to do. We’ll hear tangible tips on making a transition from one life to another. We may not all be athletes trying to transition into “normal life” but, we all go through things that force us to change in some way. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


Best Ever Tweet:

“Don’t throw yourself into the deep end without a plan” – Logan Freeman


Logan Freeman Real Estate Background:


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Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.


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JF1873: Working Through A Sticky Real Estate Investing Situation #SituationSaturday with Colin Douthit

Colin and Theo will work through a situation that Colin is currently going through right now. A 16 portfolio of 16 homes is giving Colin a tough time and he’s currently trying to refinance as this project has cost him too much money and time. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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“Our biggest takeaway has been doing the construction loan up front” – Colin Douthit


Colin Douthit Real Estate Background:

  • Real estate investor, general contractor, and property manager
  • Owns 70+ doors all acquired in the past 24 months, manages 50+ doors for other real estate investors
  • Based in Kansas City, MO
  • Say hi to him at colinATatlas.rentals


The Best Ever Conference is approaching quickly and you could earn your ticket for free.

Simply visit https://www.bec20.com/affiliates/ and sign up to be an affiliate to start earning 15% of every ticket you sell.

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.


Theo Hicks: Best Ever listeners, welcome to the best real estate investing advice ever show. I am your host today, Theo Hicks, and today we have a repeat guest. We’ll be speaking with Colin Douthit. Colin, how are you doing today?

Colin Douthit: I’m doing well, Theo. And yourself?

Theo Hicks: I am doing fantastic, I’m looking forward to speaking with you again. This time, as you guys know, it’s Saturday, so we’re doing Situation Saturday. We’re going to talk about a sticky situation that Colin is currently in, and dive into the details on that, some lessons learned that can hopefully help you avoid a similar situation in your real estate business. But before  we begin, a little bit of background.

Colin is a real estate investor, general contractor and property manager. He currently owns over 70 doors, which he’s actually acquired in the past 24 months, as well as manages over 50 doors for other real estate investors. To learn more about how he was able to acquire those 70+ doors in 24 months, make sure you check out his first episode, which aired on October 6th.

Colin is based in Kansas City, Missouri, and you can say hi to him at ColinATatlas.rentals.

Colin, before we get into the situation, do you mind providing us a little bit more about your background and what you’re focused on now?

Colin Douthit: Sure, Theo. As you stated, I started off as an investor, I started acquiring properties, and as I was going along, I was having some troubles finding reliable contractors… So I went ahead and started a contracting company that really just focuses on rehabbing rental properties and working third-party maintenance as well for any other investors that are out there, or property management companies that need that service.

With that, we just kind of specialized in what we knew, and what we were comfortable with, which was rental properties. Additionally, we had  already incorporated a Buildium, so a property management software that we had been using, so we decided to go ahead and roll that out as well to investors, so we could be a one-stop-shop for out-of-state investors if they needed to do a rehab on a home, to do property management, or whatever they needed, to help take care of them… But it was really developed out of my own personal needs.

Theo Hicks: And again, if you wanna  learn more about Colin’s background, we talked about how to find property managers, how to find GCs, about raising money… We talked about all that on the episode on the 6th of October, so definitely check that out. As I said, on this episode – it is Saturday, so we’re gonna talk about a specific situation that Colin is actually currently in. Colin, do you mind just diving in and kind of painting a picture for us about this situation?

Colin Douthit: Yeah, absolutely. We were looking to acquire properties – this was back in 2018; we were still buying a lot, and buying as fast as we could find them, frankly… And we were presented with a package of homes in a smaller town near where we live. We do co-investing in the city, in Kansas City, as well as out in some of the smaller, rural towns. This was in one of those smaller, rural towns; there was a gentleman that was getting out of the real estate business. He had a number of investment properties, but due to health reasons he was leaving the business and the industry… So we said “Okay, let’s do some analysis on this.” There were 16 single-family homes in this package.

So we did our analysis, we did our cash-on-cash return, it was great… We had plugged in 20-year amortization on our calculator, making sure we’re gonna have plenty of cashflow. We knew that there was  a lot of deferred maintenance. They were class C properties, and we have every intention of taking them up to a class B property, so that we had a nicer asset. We would add value and we’d be able to increase the rents over what they currently were.

During that process we didn’t really get a hard commitment from the bank, and when we were on the banking side of things, we said “Okay, we’re just gonna take out a loan for the purchase price. We’re not gonna have any additional funds out there for rehab or construction, because most of the properties are occupied.” We thought we’ll just cashflow the rehab; it won’t be a big deal. We’d just spend a few thousand dollars on each one, and that’s all that needs to be done.

As that process goes along, we get to the closing table, and we didn’t have an LOI or a commitment from the bank. They had just been kind of wishy-washy, “Yeah, that’s what we’ll do. 20 years, that’s all good…” And we get to the closing table and they throw a 15-year amortization at us. So that was the first issue that we came into – on the closing day we get that 15-year instead of 20-year amortization. We look at the cashflow, we know that we’re gonna take a hit on cashflow, but we still feel like it’s a good deal, so we still continue to pursue it, and go ahead and go through the closing process, and buy it… Because it was really either we lose all the money and time we had into it at that point, or we just go ahead and go forward with it.

We buy the properties, and then as we are going through the rehabs of these properties, taking them over and starting to do management, we start getting a few more vacancies than we were expecting. It turns out the previous landlord was a very poor landlord, and had upset quite a few of the tenants just due to deferred maintenance, due to lack of contact, or any host of reasons… He was just really poor landlord in general, so we start getting these vacancies.

Then we start going in them and seeing what needs to be done, and our initial estimate on what needs to be done was maybe a little bit lower than what was actual, but we were banking on having more cashflow, so it shouldn’t have been a problem. But when you compound the fact that we have a shorter amortization and higher vacancies, that starts to make the cashflow a real issue for getting into these rehabs.

So the next step is – that kind of brings us up to present day, and right now we have been cash-flowing a number of these rehabs as they go along, doing what we can to add value to these properties as soon as they become vacant. We paint, we repair, fix broken stuff, and then when the major things come along, that’s when we really notice and really miss not having had done that construction loan initially, which is what we would have done looking back and knowing what we now know to be able to tackle some of these bigger items – putting in all new HVAC systems, putting on numerous roofs.

What we’re doing right now is we’re actively searching for another bank to work with us to do a refi out on it. We do have a lot of equity in there; plenty of equity that we could still go up to 70%  loan-to-value and have a large chunk of money to then put back into the properties, and have them up and running at full speed and where we want them relatively quickly. However, not all the bankers want to lend in a smaller rural town, with a little bit lower price point on all these houses [unintelligible [00:08:19].10] closer to the city by about 30 minutes, we’d have no problem with it.

So that kind of summarizes it and brings us up to date, and that’s kind of the whole back-story on this situation that we are in.

Theo Hicks: Alright, I appreciate you going into extreme detail on that situation… So it sounds like these few challenges were 1) the loan itself, and then 2) the previous owner, and then 3) the deferred maintenance. Let’s take a step back and — so you’ve mentioned that this is an owner who was leaving due to health reasons… Was this an off market deal that you found, or was this owner actually listing these properties for sale?

Colin Douthit: This was brought to us by a realtor. It was on the MLS. They had each property listed individually, but then they had — essentially, they wanna sell this whole thing as a package was the goal.

Theo Hicks: Okay.

Colin Douthit: And the realtor knew that we were looking; he is a realtor out in one of these small towns that we work in. I actually live in one of the smaller towns, but then work in the city… So he was the connection, and that’s how we came across it. The owner actually was a realtor on the side. He basically had it just so he could buy and sell rental properties.

Theo Hicks: Yeah. Okay. So before the closing table, what sort of due diligence did you do on these 16 properties? Did someone go out and inspect all of them? Did you guys go look at all of them? What was your overall due diligence on these properties?

Colin Douthit: A little bit of background on myself – I am an engineer, and I was a project manager for commercial construction companies, and then my partner on this job as well; we actually met in school, he’s an engineer as well, and he’s a practicing structural engineer, so we have a fairly good handle on any major structural issues and general construction practices… So we were walking through the house, we went and walked every single house, we took pictures and we made notes on “Hey, this is what will need to be done once the property becomes vacant.” We didn’t note any major structural issues. We did note “Okay, these roofs are probably on their last leg, and they’re gonna need to be done pretty soon. These interiors on these units are pretty rough, but we’re not gonna go rock the boat and kick tenants out right away to start rehabbing these units.” Our due diligence was essentially just walking all the properties, taking photos and making notes.

Theo Hicks: Okay. So compared to your initial estimates from that entire process — or not even really initial estimates, but just a list of things like “Okay, here are the 20 things that we need to do”, after you took on the property, did that list remain that 20, it’s just the prices were wrong? Or did that list grow from 20 to 30 or 40? Were there things that you didn’t identify upfront that ended up being an issue after you actually closed? …just from a strictly renovations standpoint.

Colin Douthit: Yeah, from strictly a renovations standpoint I would say that it was some of the unseen stuff that  really started getting us. Water leaks, soft spots in the floors that we weren’t expecting… Once we got the previous tenants out – stuff we hadn’t seen before. HVAC issues was another one that came up and was an oversight on our part for not inspecting them thoroughly enough. It’s now something that we take a much harder look at, and try [unintelligible [00:11:22].13] and budget; even if it doesn’t need to be done, we now budget for those.

I actually just had a phone call with my A/C repairman today, that a compressor on one of the houses that’s vacant right now [unintelligible [00:11:30].28] and the air conditioner wouldn’t fire off… And the air conditioner compressor is completely locked up, so we’re actually having a new compressor installed this week.

Theo Hicks: Best Ever listeners know, I can totally relate with the HVAC issues. I don’t wanna talk about it too much, but I bought three fourplexes and the boilers were all completely shut, so I had to drop like 20k in the first few months to get the boilers to actually work… So I totally understand. Moving forward, I’m getting a boiler expert and an HVAC expert to inspect all of that stuff. So I can relate with you on that front.

Moving forward, just to wrap up with renovations – what are some things besides obviously making sure that you’ve got an HVAC person (or  you) inspecting those more…? Do you have any other lessons you’ll apply moving forward? Do you need to have a contingency just to cover these unexpected things?

Colin Douthit: Yeah, we’ll put a much larger contingency in the construction budget, knowing that on a class C property there’s gonna be more stuff that you don’t see, that’s gonna pop up once you get the tenant out and start digging into it. There’s gonna be roof leaks or pipe leaks that you weren’t expecting, HVAC is probably gonna be dated… Single-pane windows or storm windows are really common out in this area with a certain aged home, so if you replace all those, are they all working? A larger contingency and a larger construction budget would be what we would do now, going forward.

Theo Hicks: Alright, so that was one of the aspects. The other one was the loan. You’ve mentioned that you didn’t necessarily have a hard commitment from the bank up until closing, because they kind of pulled a switcheroo on you, and said one thing and ended up doing another thing… So what are some lessons learned, some safeguards to put in place for a future deal, so that you don’t have that switcheroo happen at closing?

Colin Douthit: Basically, now that bank still has our loan, but we’re not pursuing any new loans with this bank… But we are making sure that the lenders will give us some sort of commitment, an LOI if it’s a bigger package or commercial loan. Even if it’s a smaller property through a hard money lender, they give us a terms sheet; they analyze the property and give us a terms sheet within 24 hours, and say “Yeah, here’s what we can do, here’s what you’ll need to bring to the table, here’s what your monthly payment is gonna be, and here’s what your interest and amortization are.”

Theo Hicks: Yeah, because 20 to 15 – that’s a huge difference in debt service, for sure.

Colin Douthit: Yeah, 15 to 20 is a bigger jump than 20 to 30. So yeah, that was a real kick in the teeth.

Theo Hicks: And then on the construction loan aspect – so you’re looking at a deal… How are you going to determine in the future whether you’re going to do what you did for this deal, which was just take out a loan for the purchase price and just front the renovations with the cashflow, or maybe a budget threshold or a per-unit threshold that you say “Okay, we’re gonna go ahead and include renovations in this loan and then refinance out once we’re done”?

Colin Douthit: It’s very much a case-by-case basis. If it’s gonna be a property that just needs $5,000, maybe a fresh coat of paint and a little bit of touch-up here and there to get it rent-ready, we’d probably just roll it right into a typical, traditional 30-year loan. If it’s something that’s gonna need more extensive work, we are starting with construction loans right away, putting together estimates, putting cushions on those estimates, and then making sure all those numbers still work when we put it in our proforma, to make sure it’s gonna be a good deal and that we have plenty of give…

And frankly, when we are doing a lot of stuff for our turnkey or hyper-turnkey customers that we work with (out-of-state investors), we’re gonna tell them “Hey, let’s start out with a rehab loan here, and if we think the work is gonna cost 15k, we’re gonna put 20k-25k on the spreadsheet to make it work”, and hope that we can overdeliver and cut their construction costs.

Theo Hicks: Exactly. Alright, and then the third point was — I guess we’ll call it previous management. Obviously, when you’re dealing with single-family homes… I know on the one hand you can look at this as a 16-unit building, but it’s really not, because on a 16-unit building you’ve only got one roof, maybe a few water heaters, a few boilers or HVAC systems, whereas for SFRs you’ve got one of everything: 16 roofs, 16 HVACs, 16 yards… So whether you’re looking at multifamily or you’re looking — I guess my point of saying that is one vacancy on 16 single-family homes is a lot bigger deal than one vacancy on a 16-unit building, especially when you’re doing rehabs.

Colin Douthit: Yeah, it can be. At the end of the day though, we have enough (and still try to have enough) cushion that we can sustain a 25% vacancy rate and still be just fine.

Theo Hicks: Okay.

Colin Douthit: But one vacancy – it is very similar if you have a 16-unit multifamily building, just from the debt service aspect and the financial aspect… You’re still getting paid the same note, because it’s a portfolio loan. If you have 16 different individual loans, they’re owned by different LLC, if you put each property in an LLC; then you might feel the pinch a little bit more. But since it’s all in one company… We own a few other properties – this is the bulk of the properties that this company owns – we can  kind of wash the vacancies out a little bit. While we’re not gonna be making the money that we want to be making, we’re still gonna be able to cover all of our expenses and then continue to slowly cashflow the rehabs on the other properties.

Theo Hicks: Okay. Earlier we talked about the physical due diligence of a property… Is there anything you can do to determine the mindset of the tenants that you’re inheriting, and estimate “Okay, on average, if we’re buying 100 units, we expect 10 to leave. But if we do this, and find more details, and we figure out that the previous owner was really bad, a lot of deferred maintenance, half the tenants have issues that haven’t been addressed in years, so instead of 10 people leaving, let’s project that 25 are going to leave.” Is there anything you can put in place to do that, or is that something that’s just kind of random, and if it happens, you’ve gotta figure it out?

Colin Douthit: I think that you need to go into it with a plan, instead of just winging it. And we’ve done this on future renovations, with properties that we’ve owned, as well as with out-of-state investors that we’ve worked with. Personally, we’re working on the rehab of six duplexes, all in one package, all in one area, and a lot of deferred maintenance; 60% and — 75% vacancy, actually. So there was only four occupied units at the time of the purchase, and we knew we were gonna be getting rid of them… So we did cash for keys for one, and then one split, one is still there, and one just decided to leave recently as well.

But if we’re rehabbing this property and bringing it up probably two levels, to be honest with you – if you’re gonna be doing that and you have an extensive renovation, and you have properties that are really dilapidated, and it’s multifamily, I would go ahead and plan on kicking all of them out, or asking them to leave, or cash for keys; if they’re month-to-month, give them a 30-day notice. We’re doing that with an out-of-state investor that’s got an 8-unit building and had one vacancy… So we’re starting this week on the rehab for this one vacant unit, but we’re gonna go ahead and give 30-day notices to two of them, probably the two lowest-paying tenants, and start rehabbing those units, and then start doing two at a time… So we’ll get two vacant, rehab those… It won’t take too long – about a week, a week-and-a-half per unit –  then get them back on the market and get them occupied, and give the 30-day notice to the next set. We’ll kind of phase it in and out… But I would plan ahead of time on a complete turnover, and that’s what we plan on all the future projects. If it’s already occupied and we’re gonna be bringing it up a class level and renovating it, I’d just plan on at some point having every unit go vacant.

Theo Hicks: Well, Colin, is there any lesson learned as it relates to this situation that we haven’t talked about already?

Colin Douthit: I would say no, not really. We dove into all aspects of it. Our biggest takeaway has honestly been just doing the construction loan upfront, instead of trying to cashflow it. That’s the most important thing that we learned. When we were coming up and learning the game a year ago, we hadn’t been exposed to that idea. Then we got exposed to the  idea and it made total sense. So I guess it’s one of those “learn the hard way” things, but we try to share it with as many investors as we can.

Theo Hicks: Alright, Colin, I appreciate you coming on the show and sharing this situation with us. Again, some of the lessons you learned from this deal, as you’ve just mentioned – pursuing that construction loan if there’s going to be a lot of repairs that need to be. You’ve had the switcheroo from the bank at closing, so the lesson there was to get an LOI or some sort of harder commitment from your bank, so you know specifically what the debt service is going to be, what’s the amortization, down payment… Essentially, all the loan terms before you go to closing, so you’re not surprised and feel rushed and have to make that decision around the closing table.

We’ve talked about from a vacancy perspective – if you’re doing a value-add, going in there with a plan, and that plan might be getting rid of all the residents, and renovating all those units and bringing in people completely new.

And then lastly, we talked about the actual physical due diligence, and some of the things that you look at in more detail now, as well as making sure that you are having a contingency budget, especially when you are looking at the C-class, lower-class properties.

Again, Colin, I really appreciate it, I enjoyed the conversation. Again, as always, Best Ever listeners, thanks for listening. Have a best ever weekend, and we will talk to you tomorrow.

Colin Douthit: Thank you, Theo. Have a good night.

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JF1761: What To Do When Your Lender Backs Out At The Last Minute #SituationSaturday with Michael Beeman

Michael is coming back onto the show (previous episode below) to share a situation he recently had in his business that taught him a lot. He had a lender back out of his deal THE DAY OF CLOSING! This was a 62 unit deal, and Michael was left scrambling to get this deal done. Hear how he overcame the situation and what he learned in the process. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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“If you’re starting out, mortgage brokers can be an asset for you” – Michael Beeman


Michael Beeman Real Estate Background:


If you’re a passive investor wanting to learn more about questions to ask sponsors in order to qualify the opportunities, sponsors, and the markets opportunities are in, visit BestEverPassiveInvestor.com.

We created this site just for passive investors to have a free resource providing the questions to ask and things to think through. BestEverPassiveInvestor.com


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 investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff.

Because today is Saturday, we’ve got a special segment for you; this is gonna be  a fun one… Situation Saturday, here’s the situation – you are about to close on a multifamily property, and uh-oh… Lender backed out. What the heck, what’s going on? Well, if you come across this situation – hopefully you don’t, but if you do, then fortunately we’re gonna hear about a situation just like that, that actually happened, with our Best Ever guest, how he overcame it, so that should you come across this situation, you’ve got a roadmap. How are you doing, Michael Beeman?

Michael Beeman: Hey, I’m doing great. How are you?

Joe Fairless: I am doing well, and looking forward to our conversation. A little bit about Michael, really quickly – he began his real estate investing career in May 2017 with 52k to invest. His company holdings now include ownership and management of over 120 multifamily units. He was a guest on this show in episode 1345, titled “Another real estate success story. 31 units with $60,000.” Now we’re gonna talk about a  situation that he was recently in; it’s a 62-unit that the lender backed out. I’m not going to give any more information about that. I think now we’d love for you Michael to just tell us the story about the 62-unit.

Michael Beeman: Okay, so how we came across it was that I had searched around online and I had inquired about a property that a broker had, and we went back and forth (the broker and I did) on voicemails that were left about every 3 or 4 days… Because he didn’t  know who I was, and when you get into that realm of things, generally brokers want to feel you out and have an understanding that you’re not just a big waste of their time.

So I wasn’t early enough on the first property, but he came down, visited me, [unintelligible [00:02:50].16] our operation, really believed in what we were doing, and I had a couple of investors – one that actually had heard me on your first podcast and wanted to partner with me.

Joe Fairless: Oh, cool.

Michael Beeman: Yeah, that was wonderful. He’s actually invested with us twice now, and we’re looking at doing another investment together on some smaller stuff… Because we do a wide range – we have stuff all the way down to duplexes, and then we have this 62-unit. But going back to the 62-unit, I had the investment money lined up; I had about 18 months track record with my own stuff, and this was last November and it was supposed to close… We had gotten the thing under contract, done our due diligence, gone through everything, figured out that we’re buying this at a 9% cap, where our value add was… We were going to separately meter the water, plus the rents – we were averaging about $55/door low, and the water metering was gonna save us $37,000. That, with increasing about $11,000/year, and lowering some of the other expenses, like maintenance and such. We had a nice half a million dollar value-add on something we raised about half a million dollars for.

It wasn’t a big purchase. This was in Springfield, Illinois… And I get to the day of closing; I’m driving there, and I’m like “Huh, it’s weird that nobody has called me this morning”, because it was a two o’clock closing in Springfield, Illinois, which is about two hours from me… And I said “It’s weird that nobody has called me this morning”, because I was told I was gonna get a confirmation phone call of exactly where the meeting place was. But I knew the name of the title company, so I just put it in Google and started driving.

Joe Fairless: “Everything must be going perfectly”, you thought. No issues.

Michael Beeman: Yeah, everything must be going perfectly.

Joe Fairless: No one’s calling you for any issues.

Michael Beeman: Yeah. I didn’t see any issues… And then I got a call from the mortgage broker, which is the lender that had worked out with this financial institution… The mortgage broker on these large properties; if some of your listeners don’t know, there’ll be mortgage brokers that shop around for the right bank for you and get you a deal, and then they throw on half a point or  a point on your note… But sometimes if you are starting out, they can be an asset to you.

So he calls me up and I’m about 30 minutes from the site and about an hour from close, and he calls me up to say the bank has called him this morning and they backed out; he has no idea, they wouldn’t give a reason… He suspects it was because it was right towards the end of the year and they had an overrun or an overload on multifamily loans, and they decided they weren’t doing anymore until the new year, and… Good luck with it. That was it. I was like “Whaaat?!”

Joe Fairless: That’s disgusting.

Michael Beeman: I lost my mind. I was like “What in the world?!” I’ve got investor money, I’ve spent at least $50,000 on my syndication attorney and my inspections and everthing else, which is gonna have to come out of my pocket, because I’m gonna have to return the investor money, because the investor money is sitting in an account, but I’ve got $50,000 in my dollars that’s gonna go down the tube, at least – maybe closer to 70k; if I look back, I could probably get the exact number, but regardless of that… I’m talking to him, like “What the heck do I do?” So I call my syndication attorney to tell her, and she says “Call this guy.” So I called this other mortgage broker that was really good, and then I called my local bank.

My local bank was actually somewhat interested in it… But it was their monthly meeting for purchases over a  million dollars where their board gets together, so they wanted to go to that meeting… And then when they went to the meeting, they decided that this wasn’t the right time for them to do this right now, that they didn’t really trust us yet, and they didn’t feel we had enough time. They were afraid of the distance from us, and everything else, even though we had an on-site manager there that came with the property.

Basically our system is set up where everything is online. Tenants pay bills online, they apply online, we advertise online, especially on Facebook Marketplace, Craigslist, our software puts it out to Apartmens.com, so… It’s not like the old days where you really have to be on-site. You could do a lot of stuff from a distance, especially if you have somebody on-site that does nothing but show apartments and give out five-day notices, and you have local maintenance.

So we actually felt like we had a very good organization, much better than the previous owner, who was just a mom-and-pop owner, and he basically was doing everything, with the metal box, and people dropped their cash in on the side of the door… It was a very mom-and-pop in that thing; just a sign hanging out front with his cell phone number on it… So we thought we were much better than that, so they backed out. Now we’re getting up into late January…

Joe Fairless: Well, time out before that, because you went through the moment you got the phone call…

Michael Beeman: You’re wondering how did I get the seller to go this far?

Joe Fairless: Well, there’s a whole lot of things I’m wondering, so time, real quick… Let me just ask a couple questions before we get into months down the road. We just heard you got a phone call; you were on the way to closing, and your mortgage broker says “Bank backed out, and I don’t know why. Good luck!” Did you ask that mortgage broker “Well, what are some other options for other lenders?”

I had talked to him, and in fact he was trying to find other lenders… So he was working behind the scenes, but by the time he said “Good luck!”, he realized that my contract was expiring within two weeks. So my $20,000 I had down, plus all my expenses, was going to just vanish…. So he realized all of that situation, and he said there’s no way I can get somebody within two weeks to do this.

Joe Fairless: And how much money did you need for the financing?

Michael Beeman: There was about a 1,5 million dollar finance.

Joe Fairless: Okay, so 1,5 million dollar financing, which is kind of touch, because it’s a little too large for most people, if they were to pool a couple people’s funds together, for them to take down… But not large enough for a lot of interest with–

Michael Beeman: Yeah, because one was a 36, and one was a 10, and one was a 16 – it was a portfolio – and they weren’t close enough to combine them and call them agency debt. So I could get agency debt either.

Now, they had a lot of cashflow opportunity because of that, and I was buying at a 9% cap and there was a ton of value-add… So I had a lot of things going for me with the property that I really liked, but I had that going  against me. So I’m discussing with the broker, because I got this through the Marcus & Millichap broker, and he has convinced the seller to not just take it off the market or go to anybody else, he has convinced the seller we are still a solid buyer… And he’s the one that really helps salvage the deal with me; we talk to the seller and he said “Okay, well I’m just gonna keep running it as is. It’s making more money for me now than it ever has”, because he had finished up a bunch of repairs and remodels… So new tenants were coming in at almost $100 higher than his current tenants.

So he was not upset at that point; he just realized that he was in his ’60s and he didn’t wanna be doing this forever.

Joe Fairless: And what if anything did you have to give him in order for him to agree to–

Michael Beeman: I did… I had to increase the price about $20,000 to get the large extension that needed.

Joe Fairless: And how did you all come up with that $20,000 figure?

Michael Beeman: Well, he basically came back to me saying “Look, I’ll do it for X amount of dollars”, and he was at like 50k. I said “You’re out of your mind. That’s $50,000. I’m not doing that.” So I bluffed and said I’d walk away, which I probably would have done at 50k.

So I bluffed and said I was gonna walk away and deal with the broker; I said “This isn’t gonna  kill the deal.” I said “Let’s bluff him and see how low I can get this number down, because he seems like a really reasonable guy, and I don’t want to spend an extra 50k. That throws off my projections on my returns by almost a full percentage point.” So I talked to the Marcus & Millichap broker and he communicated with the seller; he got me to agree to 20k, because I had been all the way down around 10k, but we agreed somewhere around $20,000, and I got an extension. Now, I closed on the very last day of that extension, and that’s a whole other story…

So I’m trying to salvage this deal, so from there I’m talking to this mortgage broker; now that I’ve got this extension, I’m talking to a mortgage broker…

Joe Fairless: The new one.

Michael Beeman: A new mortgage broker. His name is Eric Stewart, he’s great. He’s a great mortgage broker for large multifamily… Anyways, I’m talking to him and he thinks he’s got a lender that would specialize in this type of situation… Because he realizes my value-adds, so he says “You probably don’t want long-term debt that’s gonna cost you a lot of money, and you don’t want debt that’s going to cost you a lot of money to refinance out of, because I can see what your goal is here. You want to get all this water meter, get your rents up, and you want another 18-24 months to be able to refinance your investors to cash out…”, and I said “Exactly.”

So we’re talking, he thinks he’s found someone, but they’re dragging their feet at the moment, and he said “Go ahead to your local bank, and if you think they’ll do it, then try.” I mentioned before that they just didn’t like the management setup, plus they were a smaller bank and that was a lot of money to them.

Anyways, going forward – he’s found this bank, we got through the whole process again, we go through everything, give all of our information, which is reasonably close at this point, because we had all the information for the other bank, we were already at a closing… So we basically found a lender that would take on the property with 24 months of interest-only; so I get a little bit higher interest rate doing that, but then I still have time to refinance out at the end of 24 months, and on the one property that’s 36 units we believe we will have a valuation over a million dollars, which will allows us to put agency debt on it. The other two properties we’ll have to switch to more traditional financing whenever we refinance out.

So he gets that put together and we are on the last day at closing. My mom is one of the signers with me, she’s one of the largest investors; of our $500,000, she had brought 190k, because like I said in my previous, I started this company and my mom put in 20k of that original 52k I had, and she now owned one quarter… So whenever I came to want to do something big, she had belief in me, because she had seen what I was already capable of… So whenever I had this opportunity, she wanted in, so she was one of the signers on the deal, and then I was on there… And she’s on vacation, which is just perfect. She’s in Florida, we’re trying to do–

Joe Fairless: [unintelligible [00:13:13].22]

Michael Beeman: [unintelligible [00:13:15].09] my mom’s in Miami, Florida on vacation, and she’s supposed to sign this paperwork… And she’s driving all over Florida in an Uber to different places because she doesn’t know how to use some of the simple things that most of us know how, like CamScanner, to where you can just take pictures and scan the doc and it runs a scanning app, and you can send these documents back…. So she’s running to different banks to see if somebody will help her out with scanning these documents back to us, signing and scanning them back, and making sure she fills them out correctly on her end… So then there’s confusion on where she’s supposed to overnight them, so they got overnighted to the lender instead of closing, because that’s where she swore that lady [unintelligible [00:13:55].17] where to send them…

Joe Fairless: [laughs]

Michael Beeman: So I’m pulling my hair out on the day of closing… And finally they say — because this was the day before the closing; the day of closing I find out all this and I’m pulling my hair out because FedEx said they couldn’t reroute it, because it was overnight delivery… And even though the day before, whenever I figured this out, I had called them and they said they can reroute it, but that lady didn’t realize it was overnight delivery…

So the lender gets it, they call title, they say “Okay, we have everything. Do you need this?” and they said “No. If you’re saying you have everything and you’re gonna send us money”, she said “I have everything I need for title closing. I don’t understand why you guys wanted to send the documents here first anyways.” So they said “Okay.” So that problem was taken care of, and we finally got to closing there at the end, but it was just one of those things where you got to the end and you were just like “Nothing can go right…!”

It was a learning experience; there’s a  lot of tips I could give to people going forward…

Joe Fairless: What are they?

Michael Beeman: One of them is I should have been in much better communication with the lender to find out what the issue was from the very beginning to try and overcome their objection. The second time around it wasn’t as difficult for me to overcome objections because the mortgage broker I was working with, Eric Stewart, was in great contact with the lender, and he was like “Okay, here are their objections. Here’s how we can handle them.” So he kind of took me under his wing in a way to show me exactly what to say when I got on the call, tell me exactly how I was gonna do things, to say what they wanted to hear… And I never had that with my first mortgage broker.

So I will say that if you have the right team, that is 100% your most important thing. Then finding out what your objections are and how to overcome them. That worked out in my favor, having him on my team, in that same situation. That deal would have never got closed without him, and I would have been out 50k for trying a syndication.

Joe Fairless: And also having a broker from Marcus  & Millichap be able to navigate that conversation with the seller….

Michael Beeman: Yes!

Joe Fairless: Because he was representing the seller, right?

Michael Beeman: Yup.

Joe Fairless: Okay, so he was representing the seller, but he was just trying to make sure the deal…

Michael Beeman: Got done.

Joe Fairless: Yeah. And how many months delayed was it for closing?

Michael Beeman: It closed in early April. That was essentially 3,5 months late.

Joe Fairless: So it was delayed 3,5 months.

Michael Beeman: Yes.

Joe Fairless: And the only thing you had to do to get that additional time was increase the purchase price by $20,000.

Michael Beeman: Yeah, that was the only thing I ended up having to give up in the deal, which was amazing.

Joe Fairless: Yeah. If you had not closed within that 3,5 month time period and it expired again, would you have lost out on — the original 50k obviously, but then the additional 20k? Or was it just 20k tacked on to the purchase price?

Michael Beeman: No, that was my thing – I didn’t tack it on to the purchase price, because this was not a sophisticated seller. This was his only 62 units, he was selling them, he’d owned them for 14 years, and he had bought them in a partnership with some partners, and within 2-3 years realized he didn’t like the partners and bought them all out… So he had this property, he was self-managing. He was asking originally for 50k in increased price.

Joe Fairless: Right, right.

Michael Beeman: So he still had some belief by saying that to me, in my opinion, he had strong belief and belief in his broker that said “This guy will get the job done.” So he still had strong belief in his broker at that time in my opinion to just say “50k increased price”, instead of “Bring me 20k or 50k cash, so that if you don’t close, I have an even bigger pile of cash in my pocket to put the thing back on the market.”

And that put me in a safer situation going forward as well, because I didn’t have to put out any more cash, except for the $12,000 that the lender wanted me to plump forward for their appraisal/due diligence stuff, which the new lender cost me that 12k and it cost me 20k on the price, which ended up being about $32,000. So all in all I can’t complain too much. The mortgage broker and the broker from Marcus & Millichap really helped me, and then a little bit of me just basically not willing to quit, and just tried to figure out how to overcome every objection with the lender, overcome objections with the seller, and try to get something to the finish line, and we did.

Our team is up there right now, starting on their rehabs on some of the things and the metering of the water.

Joe Fairless: Well, I thoroughly enjoyed this story, and I’m glad that all is well that ends well… Thank you for sharing, and thanks for coming back on and updating us with a situation that took place that was very challenging. Best Ever listeners, if you liked this episode, then I did an interview with Mark Mascia, episode 599 – so that was like 1,000 days ago; longer than 1,000 days ago – and it’s titled “Big money raised, investor partners set, and on closing day the lender says…” Well, spoiler alert, same thing happened; in that case it was a large medical office building in Nebraska, and it was as storybook ending as yours is with his deal… [laughs] So if you’re curious about how it could have gone, then you can listen to episode 599.

Thank you for being on the show… How can the Best Ever listeners get in touch with you?

Michael Beeman: My e-mail is michaelbeeman@beemanandsons.com. I talk to a lot of people all the time; some people that have heard me on your podcast, and others, and I try and help them out. We partnered on deals… My number is 217-508-8185. That’s a good way to reach me, and if you just shoot me a text message, I give you a call most of the time. I’m like everybody else, I’m a bit busy, but you should me a text message, ask for a time to have 15 minutes of my time; I love helping people out. I also love hearing about real estate stories all over the country, and I get to hear those whenever I get to talk to people, so I have a good time with that as well.

Joe Fairless: Thanks for being on the show again. I enjoyed learning more about this story. I hope you have a best ever day, and we’ll talk to you soon.

Michael Beeman: Alright, thank you Joe.

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JF1682: Private Securities 101 Common Mistakes & How To Avoid Red Flags with Steve Rinaldi

Steve is a long time attorney who specializes in private offerings and securities. A huge insight he drops on this episode, state securities agencies are like profit centers for state governments, and one of the easiest ways for them to make money is go after anyone who didn’t follow security laws. That is an eye opener, and gives you a great idea of what you are up against. You may also be surprised to learn that a lot of investors are actually offering a security, not filing with the SEC, and could get in some trouble because of that. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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“The consequences of violating securities law are astronomical” – Steve D. Rinaldi


Steve D. Rinaldi Real Estate Background:

  • Attorney specializing in private offerings of securities
  • Has handled private offerings of securities for 29 years
  • Based in Bethesda, MD
  • Say hi to him at http://stevenrinaldilaw.com/ or (240) 481-270six
  • Check out his services for syndications & private placement deal sheet http://bit.ly/2UKSRo7


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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 investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Steve Rinaldi. How are you doing, Steve?

Steve Rinaldi: Very good, very good.

Joe Fairless: I am glad to hear that, and looking forward to our conversation. Steve is an attorney specializing in private offerings of securities. He’s handled private offerings of securities for 29 years now. He’s based in Bethesda, Maryland. His law firm – you can go check out their website, stevenrinaldilaw.com, and we’ll put that in the show notes as well, so you can just click the link.

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

Steve Rinaldi: Yes. I’ve been focused on private offerings of securities, including but not limited to real estate syndications for over 29 years. I handle all the business law aspects of the syndication, including obviously the formation of the Delaware LLC, the writing of the operating agreement, the writing of the private placement memorandum, writing the subscription agreement and the filing of Form D. Recently in my practice I have gotten more and more into the formation of opportunity zone funds.

Joe Fairless: Yes, that is a hot topic, that’s for sure. So you’ve got 29 years of experience. Clearly, you’ve seen a whole lot in the industry… What has changed from what you do from a legal standpoint, over the last 15 or so years?

Steve Rinaldi: I think the biggest change is obviously Rule 505 is no longer there.

Joe Fairless: What was that?

Steve Rinaldi: Rule 505 was a rule that allowed the private offering of securities to 35 or fewer unaccredited investors with a dollar limit of five million.

Joe Fairless: Okay.

Steve Rinaldi: Not too many people made use of 505, and more people seemed to be using 506(b) anyway. So that’s kind of more of a technical change… 506(b) is superior in that it allows the same 35 or fewer unaccredited investors, an unlimited number of accredited investors, but an unlimited dollar amount.

We’re seeing a lot of 506(b) offerings. I am seeing the occasional 506(c) offering as well, which is an offering to accredited investors only, that permits some limited advertising.

Joe Fairless: How would you describe your client profile who chooses to do 506(c) versus 506(b)?

Steve Rinaldi: I would say 506(c) tends to be a much larger dollar amount, and they have relationships with people who are able to invest 200k, 300k, 400k, 500k. The 506(b) offerings tend to be 10-15 people investing about 50k, which gets you a total of 750k, and the project sponsor or the syndication is going out and getting a bank loan for 1,5 million. The 506(c) deals tend to be much larger, and they may be buying multiple multifamily complexes.

Joe Fairless: I know with 506(b) you need to have a pre-existing relationship with anyone who sees your opportunity… How is pre-existing relationship defined?

Steve Rinaldi: The SEC refuses to define it.

Joe Fairless: Isn’t that fun?

Steve Rinaldi: It’s kind of like the Supreme Court when they decided the pornography case in 1971 – they kind of know it when they see it.

Joe Fairless: Right, yup.

Steve Rinaldi: Most attorneys, and even if you ask the SEC people [unintelligible [00:05:11].10] if you talk to somebody in a REIA for a couple of months, that’s fine. If you’ve gone together with the person before, say as co-owners on a property, you bought it for, say, half a million dollars, you each put up 75k and you borrowed 350k from a bank – that’s fine. If you’ve done a transaction with somebody before, that’s fine. But they have not really defined it, and it is a murky, grey area.

What we’re seeing in the 506(b) realm is intended to be family and friends, or people in the same investment group, who have been pursuing different deals, but they’ve been talking about deals among themselves for years. I’ve never really ran into a red flag, even though it’s very ill-defined.

Joe Fairless: What about if someone who runs in your circle — or let’s even go one step further; what about if it’s your second deal, and you have investors from your first deal who are very pleased  about what you’re doing, and they say “Hey, I’d like to refer my best friend Kim”, and they copy Kim on an e-mail with you… Is that a pre-existing relationship? I don’t think it is, but if it’s not, then how do you establish that with Kim?

Steve Rinaldi: If you’ve been talking to Kim over a course of about two months or so about your deals, what you’re doing, “This is what I’ve done in the past”, then at that point you might be able to argue there’s something.

Joe Fairless: What are some errors you see investor make from a legal standpoint? Of course, they’re not your clients, so if they were, then they wouldn’t be making them, but… When you just shake your head and you’re like “Oh my god, seriously? They did that? They didn’t know they couldn’t do that?”

Steve Rinaldi: The biggest mistake I’ve seen somebody make is saying something is not a security when it is. That is probably the most colossal blunder you can make, because the consequences of violating securities law are astronomical.

Joe Fairless: What are they?

Steve Rinaldi: Well, even if you’ve raised less than a million dollars, the state securities agencies will come in and they will demand that you refund money to all the investors, whether you have it or not. And  obviously, if you don’t have it, they will go after your house, your bank accounts and everything you have. And it’s an obligation owing to the state, so the state comes first in line, not your mortgage company. So the moment your mortgage holder on your primary residence sees the state securities agency coming after you for something, they’re gonna panic, like crazy. That’s for starters.

It is a fraud action, it’s non-dischargeable in bankruptcy. And obviously, actions filed against you by the state are not dischargeable in bankruptcy either, so you have to pay the money back… And in addition to that, the state is going to fine you. That fine will easily be in the amount of their attorney’s salary, healthcare, pension, 401K contributions related to that time period…

Joe Fairless: Paid vacation…

Steve Rinaldi: Yup. State securities agencies are very much profit centers for state governments… And one of the easiest ways for them to make money is go after anybody who didn’t follow securities laws. To be a security, you have to  have four things – an investment of money, a common enterprise (which it obviously is) with the expectation of a profit (nobody invests money unless you expect a profit) and to be derived in whole or substantial part from not the investor’s effort, but rather from the promoter’s effort. And obviously, derived in whole or substantial part meaning if the promoter is the one negotiating the mortgage with the bank, if the promoter is the one leasing the apartments or leasing the office space or leasing the warehouse space, the promoter is the one talking to the attorneys; he or she is the one opening and closing the bank accounts, talking to the real estate closing attorney… Then you’ve definitely got a security. At that point, you have to comply with one of the various private offering exemptions.

Joe Fairless: So that gets violated tons, because tons of people who I talk to, they bring on investors and they’re not registering the security. I agree with you, that’s something that happens. For the record, all of our deals are registered, just so I get that out there.

With a security, when you register it, there are costs involved in order to register it. If you can, think of yourself as a real estate investor for a moment. You don’t have a specific deal yet; you are looking at deals. And you need to decide when does it make sense financially, knowing that there will be costs involved in order to register a security – when does it make sense financially to bring in investors passively, so it would be a security, and I need to go to register, versus doing a joint venture with some other business partners, and it is not a security that needs to be registered?

Steve Rinaldi: I would say it’s not so much the money, it’s the psychology, and the dynamics between the people. If you’re bringing on five or six people and you’re gonna give them the type of control that would be in a joint venture, where every single person has the right to veto a lease, every single person has the right to veto the refinancing of a bank loan, or any single person has the right to veto the plumber coming and making $1,000 in repairs… Basically, if starts to become a cackling henhouse, you’re better off spending the money on a securities attorney to go through a full-blown registration.

You can use the Rule 504 exemption, which is still somewhat costly. You can use 506(b), you can use 506(c)… You could even use crowdfunding, but that’s the most costly and the most restrictive.

Joe Fairless: Good point. This is a little fuzzy in my mind, but I believe I heard this once from someone… I think they did a joint venture, and I don’t think I’m getting it exactly right, but maybe you can talk about the concept of this. They did a joint venture, they said in the operating agreement that such and such management company would handle those decisions, and then either they owned that management company, so really it was this one partner was handling the decisions, and they had full authority over management decisions, or they were overseeing the management company… So basically it was a roundabout way of saying “All you other partners, you don’t have to weigh in on these decisions, nor do you have the ability to, because it’s this management company, and then I’m the one person who has control over that.”

Steve Rinaldi: That’s a security, because that sounds awfully lot similar to the Howey case. Howey was leasing orange groves in Florida, and it was actually Howey’s management company who was operating them. The SEC and the Supreme Court saw right through that and said “No, the control is coming from Howey and Howey’s management company.” These people out in New York, and in Ohio, and wherever, who bought into these orange grove interests, what control do they have? They’re not deciding when to fertilize the ground, when to water, when to pick the oranges… So there’s no control.

Joe Fairless: Yeah. And it’s just common sense. You said the Howey case, but does it pass the sniff test? [laughs]

Steve Rinaldi: Exactly.

Joe Fairless: Yeah, it didn’t pass the sniff test.

Steve Rinaldi: The moment a state securities agency sees the term “management company” and sees the management company making all the day-to-day decisions, that’s a total red flag.

Joe Fairless: Cool. What are some other things that you’ve seen people do to either violate security law, or any other interesting things that you’ve come across?

Steve Rinaldi: The misdefinition deciding something isn’t a security when it is is number one. The other thing I’ve seen is people try to hire someone to be a finder to go get investors, and the person is not a licensed broker-dealer, and they offer to pay that person a commission based on the money raised; that starts to run afoul of the Exchange Act of ’34, because the only person who can get a commission on the sale of a security is a licensed broker-dealer. And that one’s really easy to remedy – you can just make the person your director of investor relations and you can just give him 1% or 2% profit stake. You’ll be completely in the clear if you went that way. But I see that a lot.

Sometimes I’m starting to see now in the case of funds you have to do an investment advisor filing with about 35 to 45 of the states, depending on how the private fund is structured. I see that a little. The penalties for that one aren’t as astronomical as the first two. State agencies will just say “Okay, go ahead. You did everything else in compliance with the law. Just get yourself an investment advisor and file Form ADV.”

Joe Fairless: Okay. With doing a fund compared to doing a one-off 506(b) offering, what are the costs involved in each of those?

Steve Rinaldi: Well, the fund is gonna be more expensive, because if you look at the federal laws and regulations you’re gonna be okay, because invariably a lot of the private funds that you and I are talking about have less than 100 investors. Far less. They’re down below 35 in almost all cases. So you’re not gonna be running a mutual fund; you don’t have to worry about compliance with that whole area of law. But you do have to comply with the state laws and the state regulations, which means in addition to all the work I mentioned earlier – forming a Delaware LLC, writing the operating agreement, writing the private placement memorandum, writing a subscription agreement and filing Form D, you’re also gonna have to have an investment advisor agreement, and you’re going to have to have that investment advisor file Form ADV.

Now, there are exceptions. Some states, if there are fewer than 5-6 investors and they’re all accredited, you don’t have to go through that whole rigmarole. Some go as high as 15. One exemption – New York will let you go up to 115 million without having to file. But most states, if you’re doing a fund, you’re looking at an investment advisor and having to file Form ADV. You’re probably looking at about another $1,000 in costs.

Joe Fairless: So all-in, what’s the range to do the legal work for a 506(b)?

Steve Rinaldi: 506(b) all-in is probably about $8,500, maybe a little higher if you have investors in a lot of different states.

Joe Fairless: Okay. And all-in, what’s the range for doing a fund?

Steve Rinaldi: Closer to $10,000.

Joe Fairless: That seems really cheap. So when you’re saying $8,500 for 506(b), what does that include?

Steve Rinaldi: It includes forming the Delaware LLC and all the Delaware filing fees, plus your state qualification fee. It includes the operating agreement, it includes the private placement memorandum, it includes the subscription agreement, and it includes filing Form D in every state in which you have investors.

Joe Fairless: And then once you close on the deal, don’t you have to file it with the SEC?

Steve Rinaldi: 15 days from the day you raise your first dollars from an investor.

Joe Fairless: Okay. That is included in this?

Steve Rinaldi: Yes, that is included.

Joe Fairless: What you were just saying, all those things – what part is that part of?

Steve Rinaldi: That’s the Form D part.

Joe Fairless: The Form D, got it. Form D in every state. Got it. And then the 10k for the fund – what does that include?

Steve Rinaldi: That includes all the above services that I just mentioned, plus the investment advisor agreement, and usually the investment advisor will go ahead and file Form ADV, which they’re doing on their own anyway. So that extra amount reflects one more agreement that I have to write.

Joe Fairless: Did I hear you correctly with the fund, that you’re saying usually there are under 35 investors?

Steve Rinaldi: Yeah, I’m saying in a private fund under 35. Now, remember, with a fund you’re gonna have to meet not only the 506(b) exemption, or 506(c) exemption if they’re all accredited, but 506(b) exemption has 35 or fewer unaccredited investors… But you also have to meet the standards of the Investment Advisor Act and the exemptions of the Investment Company Act.

Joe Fairless: Yeah, I would think that for a 506(c) it would be the opposite… I’m thinking about our business –  I’ve always done 506(b), and if I did 506(c), the only reason why I would do it is to be able to publicly advertise an opportunity; that way it would bring in more investors, and likely at a lower amount… So that means I’d have even more investors in a fund, or like a 506(c), so I would have 100, or 200, or 300 investors, versus if I was doing my normal 506(b).

Steve Rinaldi: Well, you just hit a big [unintelligible [00:18:39].19]. You just hit a couple rocks. If you go at or over 100 in your fund, you now become a mutual fund.

Joe Fairless: Wow, okay.

Steve Rinaldi: The Investment Company Act. You don’t go over 100.

Joe Fairless: Huh.

Steve Rinaldi: You don’t wanna go over the 3(c)(1) exemption. There’s also a 3(c)(7) exemption for real estate funds, but most of those as a back-up tend to stay under 100. Private offering securities for 29 years – anytime it’s been a fund type situation, I’ve never had someone even come close to 100.

Joe Fairless: Okay. Because they don’t wanna–

Steve Rinaldi: Don’t wanna be a mutual fund.

Joe Fairless: Because then – tons of red tape, and…

Steve Rinaldi: In addition to complying with the exemptions under the 33 Act, the 506(b) and (c) or 504 exemptions, you also have to comply with the Investment Company Act as well. So now you’re throwing — basically, yeah, it’s all securities law, but it’s too radically different areas of securities law. You’re just complicating your life tremendously.

Joe Fairless: [laughs] I don’t wanna do that. Okay, that’s helpful. That’s new information. As you might be able to tell, I’ve never done a fund before; we always have done 506(b)–

Steve Rinaldi: Yes, that’s why you’ve had no issue.

Joe Fairless: Right. Interesting. Okay. One question that comes up with 506(b) is if you choose not to take on non-accredited investors… So no sophisticated investors, no non-accredited, even though you could take up to 30-35, if you choose not to take on any, does that benefit you from a regulatory standpoint in any form or fashion, if you’re only taking on accredited investors in 506(b)?

Steve Rinaldi: Where it can really benefit you is under the fund, if you’re doing a fund. That’s where it can really benefit you, because in about 15 states you can argue you don’t need an investment advisor.

Joe Fairless: I’m talking about just 506(b).

Steve Rinaldi: You still wanna give people the same private placement memorandum. If you look at the black-letter of the regulation, it says “Unaccredited investors have to get a private placement memorandum”, but if you look at the securities act itself, or the authority where the regulations come from, it says all investors have to receive all material information. The practical matter – if you have to give all investors all material information, you’re not saving yourself any time or money by saying “Oh, I’ll limit this to accredited only, and not pay for writing a PPM.” Because if the deal goes sour, the accredited investors will sue you anyway under the securities act, saying “You didn’t disclose all material information to me. You didn’t tell me what the rental rate was, you didn’t tell me that you had to pay pre-payment penalties on the mortgage, you didn’t tell me that the inspection said you needed a new roof…” They’ll find something, anything, and it’s pretty easy in real estate investment for a judge to say “Yeah, something is material, and you didn’t tell them that.” You don’t derive much benefit.

Joe Fairless: Okay. So if you are doing 506(b), assuming that you have the disclosures in there – which you should, if you’re doing 506(b) – you don’t really have an additional benefit from a regulatory standpoint by only bringing on accredited investors. You could also fill in some of the non-accredited spots.

Steve Rinaldi: No, none at all.

Joe Fairless: Oh, sophisticated.

Steve Rinaldi: Right.

Joe Fairless: Yeah, sorry. I forgot I was [unintelligible [00:22:04].10] Sophisticated investors –  you can fill in those 35 spots of sophisticated investors.

Steve Rinaldi: A trick on that is sophistication has never clearly been defined.

Joe Fairless: [laughs]

Steve Rinaldi: What my practice has been – if a person knows something about real estate investing, they’ve done some flips before.

Joe Fairless: Yeah, but how do you qualify someone… If you have a 506(b) offering and they say “Hey, I’m a sophisticated investor”, how do you qualify them?

Steve Rinaldi: Okay, are you an attorney who’s dealt with either business law or real estate law in the past? Are you an accountant who’s had business or real estate clients? Do you have any investment properties? Have you participated in any investment in the past? Have you at least gone to a REIA actively, openly, and gone through all their educational sessions the last couple of months?

Joe Fairless: Does it have to be recent? Or if they’re like “Yeah, I went to one 2-3 years ago.”

Steve Rinaldi: Developments change. I would feel more comfortable with recent.

Joe Fairless: Okay.

Steve Rinaldi: Usually, what I’m encountering is most of the people who are investors in these deals have invested in past deals, or if they haven’t, they own investment properties.

Joe Fairless: Sure.

Steve Rinaldi: They’re basically looking to up their game.

Joe Fairless: Yeah. Because most of the attorneys I come across are accredited, and accountants… Well, most of the investors I come across are accredited, because they know we only work with accredited investors, but I’d say owning investment properties – that’s gonna qualify a whole lot of people to be sophisticated… Because usually, from my experience, you don’t wanna passively invest in an apartment community or some other 506(b) offering unless you have some sort of real estate experience, because you won’t know what the heck that is… If you don’t have some sort of real estate experience, you won’t even be having the conversation with the syndicator… From my experience.

Steve Rinaldi: Exactly.

Joe Fairless: Cool. Well, this has been so informative… Anything else that you think we should mention as we close out here, that we haven’t discussed?

Steve Rinaldi: Yes, the new development in opportunity zones. I’m starting to see people coming in, requesting that I set up opportunity zone funds. That is obviously — you’ve got in addition to securities law you’ve got the tax law [unintelligible [00:24:22].08] as well. I’m starting to see that more and more, getting more and more questions.

Joe Fairless: Yeah, and that will keep on coming at you, I’m sure. So you do set that up, for anyone who’s looking to create a fund, or something…?

Steve Rinaldi: Absolutely. If you wanna go the opportunity zone fund direction, I can definitely assist them.

Joe Fairless: Well, how can the Best Ever listeners learn more about what you’ve got going on and get in touch with you?

Steve Rinaldi: Obviously, they can e-mail me at my e-mail, stevendrinaldi@msn.com. An even better way is to go on my website, StevenRinaldiLaw.com, and look at the private offerings of securities page, and see all the work I’ve done. My recent deals are on there.

And definitely, another thing is obviously to call me directly at 240-481-2706.

Joe Fairless: Great stuff, I learned a lot. I loved this conversation. I’m sure anyone who is passively investing or actively putting together deals got something from this, probably many things. Steve, thank you so much for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Steve Rinaldi: Thank you very much, Joe.

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Best Ever Show episode 1649 flyer with Terry Lammers

JF1649: Scaling A Business With A Successful Exit #SituationSaturday with Terry Lammers

Growing a business takes a lot of time and effort. Sometimes, your efforts can have a negative impact if you’re not making the right moves. Today, Terry will help us understand how businesses are valued, so that we can focus on the activities that have the highest returns. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Terry Lammers Real Estate Background:

  • Co-founder and managing member of Innovative Business Advisors, advising business owners on the sale of their company
  • Had 11 different companies he grew to $40 million in annual sales before selling in 2010
  • Based in Fallon, IL
  • Say hi to him at http://www.innovativeba.com/bestever


Sponsored by Stessa – Maximize tax deductions on your rental properties. Get your free tax guide from Stessa, the essential tool for rental property owners.


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 investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

First off, I hope you’re having a best ever weekend. Because today is Saturday we’ve got a special segment for you called Situation Saturday, and here’s the situation – you’ve got a real estate business, and you want to scale that business, but here’s what you are thinking… You’d like to scale that business and the exit out of the business with a successful sale of the business. Today we’re talking to Terry Lammers about how to scale our real estate business and prepare it for a successful exit.

First off, how are you doing, Terry?

Terry Lammers: I am fantastic. How are you, Joe?

Joe Fairless: I am fantastic as well, and nice to have you on the show. A little bit about Terry – he’s a co-founder and managing member of Innovative Business Advisors, advising business owners on the sale of their company. He’s had 11 different companies he’s grown to 40 million dollars in annual sales before selling in 2010. Did I say that right? Help me with that fact.

Terry Lammers: I grew up in a family oil business; we were dealing with gasoline, diesel fuel, lubricants, stuff like that, so I came back to the company in 1991, took it over, and over the next 19-20 years purchased, acquired 11 other companies. Then I exited the business in 2010.

Joe Fairless: Oh, cool. Alright, thank you for that. Based it Fallon, Illinois.

Terry Lammers: Innovative is based in Fallon, Illinois, and the oil company was in Pierron, Illinois. We’re about 30 miles East of St. Louis, Missouri.

Joe Fairless: Cool. With that being said, will you give the Best Ever listeners a little bit more about your background and what your focus is now?

Terry Lammers: Sure. So a family oil business, growing that, I grew up in it; purchased 11 companies, grew it to over 42 million dollars a year in sales, sold it to Growmark, which is about a six billion dollar agronomy company in 2010. I had to work for them for six months, and then I was done. I had not planned for what I was gonna do after I sold the company, so I sat around the house for about three months, and my wife informed me that I was gonna get a job.

Joe Fairless: [laughs]

Terry Lammers: I did commercial banking for 3,5 years and kind of got my entrepreneurial spirit back, and in July of 2014 my partner and I started Innovative Business Advisors. I got my CVA designation, which stands for Certified Valuation Analyst. CVAs values businesses, and that’s a national  designation.

Innovative basically does three things – we help people buy and sell businesses; since I’m a CVA, we do a lot of business valuations, valuing businesses for a variety of reasons. A lot of the reasons we value businesses is for the business owner to know is the company worth enough for them to exit? And then we also do some coaching and consulting.

Joe Fairless: How much does it cost to have you put a price tag on a business?

Terry Lammers: We do two different types of valuations. One is per NACVA standards. NACVA is the National Association of Certified Valuation Analysts. And then we do a summary valuation. The NACVA valuation – for their standards it has a lot of write-up in it. There’s a write-up on the company, the management team, the industry, all the adjusting entries – there’s documentation why we did that, and that’s gonna cost you between $5,000 and $10,000. We charge $10,000 for it. There’s just a lot of work to it.

For the same number, you’re gonna get the same value – we’ll do the summary valuation, and that’s what most people are doing, because if you’re the business owner you don’t need to know about your management team, you don’t need to know about the industry and you don’t need to know about your company. You’re living it, right? So we kind of cut straight to the numbers, and we do that for about $2,500.

Joe Fairless: Will you say the industry again – is it NACVA? What was it?

Terry Lammers: NACVA, it’s an acronym for National Association of Certified Valuation Analysts.

Joe Fairless: Got it, cool. Just wanted to make sure I had the acronym correctly. When you’re doing the summary evaluation to put a price tag on what that business is worth, what goes into that?

Terry Lammers: It’s mainly getting to the true cashflow of the company. One of the main things that I preach when I’m doing public speaking and stuff like that – in school, everybody focuses on sales and net income, and it’s really not about sales and net income, it’s about gross profit and cashflow. Because of the depreciation and amortization, those are non-cash expenses that are on your income statement, and you need to add those back into the net income to get you the true cashflow of the company. So you’re really valuing the cashflow of the company, that’s what it boils down to.

Joe Fairless: If a company has been around a while and is not making money, but has a product and just hasn’t been able to be profitable, but has a product and maybe we’ll say they have a patent on the product, how do you put a value on that company?

Terry Lammers: That is very tough. I will tell you there are two types of valuations. We do financial valuations, so we’re valuing the cashflow of that business and determining what financial sense would it make for, say, you to buy my company. The other type of valuation would be a strategic valuation. So if I create an app that Google thinks they can buy, and spread it across the world, what is that really worth? Now, if you are a potential buyer of a company and you come to me and you say “Terry, I’m thinking about buying this company, and strategically I wanna know what is it worth”, we can sit down and talk about that – what your potential market is… But there’s no way to financially justify those types of valuations. That’s really tough. So I tell people that all the time – when I’m doing a valuation for your company, I’m doing it from the perspective of “Does it make financial sense for somebody else to buy it?”

Joe Fairless: So excuse the ignorance with this question, but it seems like it would be pretty easy to do a financial valuation of a company if you have the profit and loss statement, because it’s already done for you if all you’re looking at is the gross profit… So you just look at the financials they give you and then you put some sort of multiple on that?

Terry Lammers: Yeah, so the tricky part can be to get into the true cashflow of the company, because unfortunately people get very complacent with their financial statements… And I get them, and I’m a fresh set of eyes on those things, and I’ll find a lot of things that’s like “Why is your accountant doing it like that?” and most often, the answer is not that it’s a bad accountant, it’s just nobody has brought it up to them, and “This is the way we’ve been doing it for the last ten years, so that’s the way it’s always gone forward.”

Joe Fairless: For example? What would that example be with an accountant, why they’re doing something like the way they’re doing?

Terry Lammers: The cost of good sold is always a section where — the proper things aren’t in the cost of good sold section. Or there’s a lot of personal expenses on the financial statement… It’s fine, their own personal expenses; I hope auditors aren’t listening to this, but if you [unintelligible [00:09:00].12] through your company, that’s your prerogative, but when it comes time to sell it, you wanna be able to clearly identify those things so you can add that back into the cashflow. So you’re gonna want to add back into the cashflow any expenses that a prospective buyer would not have when they take over the company. But I’ve seen mislabeled items on the income statement. Income statements that are eight pages long – that’s ridiculously long; nobody can analyze that. They need to be condensed.

So those are the kinds of things that you start to look for. On the top side, the revenue side, there’s one revenue item, and they’re selling multiple products and they don’t have that split out. So really going through and – that process is called normalizing the financial statements – getting to the true cashflow of the company. But then one of the things – especially if the company has less than a million dollars in cashflow, so it is a bankable deal, I hang my hat a lot on the fact if I put a number on the company, can you realistically go to the bank for a reasonable down payment and have enough cashflow to service that loan?

Joe Fairless: And then once you’ve normalized the financial statements and you have the true cashflow, how do you determine what multiple to put on it?

Terry Lammers: Really I don’t say that you’re putting a multiple on it. Once you’ve come up with the value, you can determine what the multiple came out to by dividing it by the value, by the seller’s discretionary earnings, or two times revenue, or something like that, but you really don’t come to it with the approach of “I’m gonna value this business at 3x revenue.”

A common way to value a company is called the discounted cashflow. What you do with that is you’re thinking about what type of return should I get on this company. When I was buying companies, my trigger to buy a company was if I could pay for it in 3-5 years. So if I’m gonna pay for that company in three years, that means I’m getting a 33% return on my income. If I’m gonna pay for the company in five years, that’s a 20% return on my income. So if you divide 20% by the cashflow of the company, that will give you a value. Same if you divide 33% by the cashflow of the company – that will give you a value. Then from there you can determine if that value is a bankable number.

A small business – you should get a better rate of return than, say, what you could invest in the stock market or something like that. So you’re determining what rate of return will trigger me to want to buy this business. The bigger the business is, the lower the rate of return somebody will accept to buy that business, which increases the multiple of that business. So 16% would be a multiple of 6. Does that make sense?

Joe Fairless: Yeah, that does.

Terry Lammers: I’m [unintelligible [00:11:44].25] through my book – the name of the book is “You don’t know what you don’t know”, the byline is “Everything you need to know to buy or sell a business”, and I think it’s in the second or third chapter that I lay out that formula on how to do that.

Joe Fairless: And for a real estate investor who has a company, and — when I say “has a company”, they have some people who work for them, and they’re thinking “Hey, I like what I’m doing, but I want a little bit more freedom with my time, so I’d like to scale this wholesaling business, or this fix and flip business (or whatever business they’re in) and sell it to someone in a year or three years”, what are some questions they should ask themselves in order to make sure they’re prepared for an exit to make their business as desirable as possible for a buyer?

Terry Lammers: Are you specifically talking about a real estate business, or any business?

Joe Fairless: Yes, we’ll talk specific to real estate.

Terry Lammers: Okay. Specifically to real estate, one is you wanna have decent financial statements. When I sold my oil company, we had a fleet of trucks. I had a three-ring binder for every truck. So for every property you have in a real estate portfolio, where is it financed? This may sound silly, but the address, the rent rolls…

Joe Fairless: Well, I’m not talking about property, I’m not referring to someone selling their portfolio of their properties. What I’m referring to is if someone has a company where they’re wholesaling deals, or their company is to fix and flip deals; so they’re not buy and hold investors, but rather they’re investors who purchase properties and they have a business model to fix and flip deals – what questions do they ask themselves? These questions are probably the same that any business owner asks themselves for how do they prepare to get their company ready for a sale in a year or two years down the road.

Terry Lammers: Really everything comes back to cashflow, but there’s some things that I can tell you that are non-financial and financial. On the financial side, really have your house in order; do you have very accurate financial statements? If you’re flipping houses, you’re probably gonna have some work in progress, and stuff like that, so making sure that that is all cleaned up… But the profitability, having good cashflow is what ultimately is gonna value that business. So non-financial things that can really kill a business like that – if you’re the one buying and flipping houses, are you doing that personally, or do you have work crews that can do it? We coach using a value-builder system, and they call that the hub and spoke. Are you the owner of the hub of the company, meaning that all the customers are coming to you, you’re doing most of the work, you’re doing all the selling, so the company is all about you? If I’m from out of town and I’m gonna buy that company and you disappear, who’s left to run the company? So if you have a crew of people out doing that work, that’s gonna be a much more sellable company.

Joe Fairless: And with your business that you sold – it was a family business; how long did your family have it prior to you joining?

Terry Lammers: My dad bought the company (I believe) in 1975, so I pretty much grew up with it. I say it’s a family business, but by the time I sold it, there really wasn’t any other family in the business besides my wife. I was able to have three operations managers and an office manager, and I could walk away from the business for two weeks and everything would be just fine. That really helps from a non-financial standpoint of making a company sellable, that the owner isn’t intricately involved in with the company.

Joe Fairless: When you got involved back with the company in more of an adult capacity, where was it at in sales? We know where it ended up being, at over 40 million, but where was it?

Terry Lammers: Yeah. So the first year I came back it was just  my mom, my dad and myself, so it was the three of us, and I’d say — we had two trucks and it was a good day if they both started. So I think the first year back our sales were about $750,000.

Joe Fairless: Wow. How did you grow it?

Terry Lammers: My starting salary was zero. The company was in rough shape, and we had the opportunity to buy another company, and I knew if we bought that company, we would put it back in the black. I was working in St. Louis at the time for a bank, in credit card finance, wearing a suit every day, and that didn’t really fit my fancy… So I came back to help mom and dad out, and in April of 1992 I purchased my first oil company, and recreated — my dad’s company was Highland Pierron Oil Company and I created Tri-County Petroleum, and we eventually merged my dad’s company into mine, and we took off with Tri-County. That was for a banking reason that we did that.

Joe Fairless: So the growth in the sales was primarily through strategic acquisitions?

Terry Lammers: Absolutely. It really was. That’s a great way to scale a company.

Joe Fairless: And with the 11 acquisitions that you did, were all of them projected to pay all of your money back within 3-5 years?

Terry Lammers: I would say all but one, and it probably still did. The acquisitions that we did were strategic in nature; a lot of times we were expanding geographically, as much as anything… But I did have a situation with one company that was — in the later years we had grown quite large and I had two offices 30 miles apart, and there was another oil company right smack dab in the middle that wanted to sell… It was a small operation, but it had a bulk plant. A bulk plant is a storage facility for gasoline and diesel fuel, and if I’d bought the company, I was gonna tear down that bulk plant; nobody else would build a new one there, it just wasn’t economically feasible. But what I was worrying about is if the competitor bought that, now he could have a bulk plant right in the middle of an area where I had very high customer concentration. So in my opinion, the guy wanted about $100,000 too much for that company, but it was very strategic to me. So did I pay him for it? Heck yeah I paid him for it, because I didn’t want anybody else to come into the area.

Joe Fairless: You’re playing defense by doing some offense.

Terry Lammers: Correct. So what I would tell your listeners is think about that – sometimes you have to look at a deal from a strategic standpoint, and it may not make the most sense, but that is where when you hear about some of these companies selling for ridiculously high numbers, it’s because it was a very strategic operation for somebody.

When I sold my company to Growmark, one of the reasons that they were very interested in buying  it was 1) I was the largest competitor in Southern Illinois, and 2) which I didn’t know about until after I sold the company, and where I probably could have demanded a higher number, they had just bought a lubricants blending facility in Council Bluffs, Iowa, and they wanted to get into the bulk oil business in Southern Illinois. Well, they could either start from scratch, or if they purchased my company, we were selling about half a million gallons of lubricants, and had a lubricants selling facility… So by buying me, they were in the lubricants business and were able to add to what they had to offer.

Joe Fairless: Yeah, I find that stuff really interesting. Thanks for giving those details. Anything else that we haven’t talked about, that we should talk about as it relates to preparing our business for an eventual exit?

Terry Lammers: Let me add one more thing to when you’re buying a company, because I think this would apply to real estate also. Say somebody is gonna buy out another management company, or something like that – one of the things you need to think about when you’re buying another company is all the operating expenses that you’re gonna wipe out. Typically, when I’m valuing a company, I’m valuing the cashflow that that company is generating. If you’re looking at buying another company and you’re in that same industry, really look hard at those bottom line operating systems, because you’ve already met your liability limits for insurance… That’s a big one that I was always able to strike out. Obviously, you probably already have a computer system in place, so all their support expenses for their computer software system is probably gonna go out the window. So you may be able to drop 30% or even 40% of the operating expenses of that company that you’re looking to buy, which if you added that to cashflow would make the company worth a lot more money. That’s where you’re really able to scale.

So when it comes to selling a business, it’s really about getting your ducks in a row. Financially, the company’s biggest driver of value is gonna be the cashflow. But when people start looking at it and the financial statements are a mess, they’re not being done timely, that’s something that just kills me. People wanna sell their business next October, and they don’t have tax returns done from the year before. You’ve gotta get them done in a timely manner. You need to have your financial statements done in a timely manner.

All those loose ends (who owns the property?), you get into a larger company and all of a sudden there’s several LLCs, and it becomes fuzzy who owns what. It really is about getting your ducks in a row.

Joe Fairless: How can the Best Ever listeners learn more about what you’ve got going on?

Terry Lammers: Read my book. The name of the book, like I said, “You don’t know what you don’t know: Everything you need to know to buy or sell a business.” It’s on Amazon for the print version, or you can download it free on Kindle. The book basically walks you through the process. I start out talking about buying businesses, then a simple way to value a business – what we talked about, with the discount cashflow; the process of buying a business, and then I talk about building your team… So there’s chapters on bankers, attorneys, financial advisors, CPAs, I talk about bankability and what makes you bankable… There’s really two sides to each loan, in its simplest for: collateral and cashflow. Then we get into building value in the company through those non-financial things that I said – really start to add value to the company. Then I get into “What am I gonna do with this thing? I’ve built it, now what do I do?” and the exit process, and the steps you need to take; I talk a lot about confidentiality. The last chapter I called “Don’t be like a dog that caught the car.” Basically, how to plan for your life after you sell your business.

Throughout the book I try and keep it humorous and tell stories about things that I did right and things that I should have done better. It’s a process, and you need to build the team.

Joe Fairless: Terry, thank you so much for being on the show, talking about how to value businesses, the two approaches – the NACVA, the summary evaluation; those are deliverables, but the two types are financial and strategic. And all roads lead back to the true cashflow of the company, so if we are looking to sell a real estate company in the future years, we’ve gotta have the good financial statements, we’ve gotta be timely, we need to have systems in place so someone can take it over when we’re not there.

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

Terry Lammers: Thanks, Joe, and thanks to your listeners for listening. Have a great day!


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Joe Fairless episode 1648 banner with Theo Hicks

JF1648: Top 4 Lessons Learned From A Week’s Worth Of Interviews #FollowAlongFriday with Joe and Theo

For Follow Along Friday this week, Joe is sharing some favorite lessons he learned while doing his interviews for the podcast last week. You’ll hear tips from multiple investors, all with a different skill set as it relates to real estate investing. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


Lessons Learned:

Alan Fruitman: Stay in your lane

Jake Stacy: Having proper insurance

Jason Palliser: Executing on deals

David Greene: Cash flow is the defensive mechanism in the single family space


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Joe Fairless with Guest Paul Moore Expanding and Growing Your Strategy

JF1594: Expanding & Growing Your Strategy When Deal Flow Slows #SkillSetSunday with Paul Moore

Paul is back with us today to tell us about his pivot into self storage from multifamily. For anyone who wants to get into self storage but don’t have any knowledge this is a great intro to the major points on self storage vs. multifamily. If you do have some knowledge on the subject, it’s never bad to learn more! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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 Theo Hicks:  Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. Today I’m your host, Theo Hicks, and I am speaking with Paul Moore today. Paul, how are you doing?

Paul Moore: I’m doing great, Theo. Thanks for having me on the show again.

 Theo Hicks:  No problem, looking forward to our conversation and learning more about what you’ve been doing since we last had you on, which — if you wanna listen to Paul’s first interview, it was two years ago this month as of the recording; so it might be a little bit over two years when you’re actually listening to this, but that is episode 809, entitled “Creating a 10-million dollar fund, building a hotel and focusing on multifamily.”

Today is Sunday, which means it is Skillset Sunday, so we’re going to be discussing a certain skill that Paul has, and we’re gonna be focusing on value-add self-storage. But first, a little bit of background on Paul – he is the founder and managing director of Wellings Capital. He was the two-time finalist for Michigan Entrepreneur of the Year. He’s based in Lynchburg, VA, and you can say hi to him at WellingsCapital.com.

Before we go into the specific skill in regards to self-storage value-add, can you tell us a little bit about what you’ve been up to since we last had you on the show?

Paul Moore: Absolutely. We have had a hard time — we are apparently not as good at acquisitions as Joe and his team, and admiringly watching Joe over the last 2-3 years and seeing his growth and his spectacular amount of deals he’s done, and the investors… I really admire him. We have not been able to pull that off. We have felt that the deals we have seen, mostly publicly marketed in multifamily, have been overpriced. The market is generally overheated, so it was hard for a guy who wrote a multifamily book called “The Perfect Investment”, which is still selling on Amazon and on our website, it’s hard to say “Hey, guys, we’re gonna expand into self-storage”, but that’s what we’re doing. We’re doing that for a number of reasons. One is the fragmented market.

Now, in multifamily there are only 7% of the 50+ unit apartments in the U.S. are owned by small operators, mom and pops. They’re almost all owned by more sophisticated, larger companies, 70%. But in the self-storage world, between 65% and 75% are owned by mom and pop or independent operators. There’s 53,000 self-storage facilities in the U.S. That’s the same as McDonald’s, Subways and Starbucks combined – I checked it myself – and about 40,000 of those are owned by independent operators and mom and pops, and they’re not maximizing revenue. They don’t need to. A lot of them bought or built these facilities a decade or two ago, and they’re clipping coupons, they’re happy to be 70%-80% occupied, or at the other extreme, they haven’t raised rates in years and they’re maybe 100% occupied and they’re happy. But there is a huge difference between a mediocre self-storage unit facility and a well-run one, and that’s where the opportunity is. This fragmented market is one of the reasons we jumped into this. That’s what we’ve been up to the last year or two.

 Theo Hicks:  Okay. And have you done any self-storage deals yet?

Paul Moore: What we decided is that self-storage is somewhat overheated as well, and we thought “Do we really wanna jump into this and take tens of millions of investor money before we have had experience in this?” So we decided the best way to do this would be for us to partner with operators who are already really good at this, who have gone through several market cycles. We spent the last 8 months actually interviewing and vetting sponsors; we’ve flown all over the country, I was in L.A. last week, Florida this week, I was in Atlanta several times before this, interviewing these self-storage syndicators, and we are actually co-investing with them. We co-invested almost three million dollars with one this summer, and we’re getting ready to do two more deals starting in the next month or so. By the time this is live, we’ll probably have a couple other opportunities available for investors.

 Theo Hicks:  Great. Can you talk about the numbers on the self-storage deals? Because people know how fix and flips work, and smaller rentals, and even larger apartments, but how does the process of analyzing the deal, what types of return metrics do you look at? … things like that, for that specific deal you’ve invested in.

Paul Moore: Absolutely. What we’re looking for in a deal is we’re looking for a property that’s on a major road, with a lot of traffic; it’s visible on that road, it’s not behind another building or down in a valley, and we’re looking to draw a radius around the facility and we’re looking at the population density versus the number of square feet in that radius. We like a 3 mile and a 5 mile radius. So we’ll draw that circle and then we will see where we’re at with that. Our goal is to be under about seven square feet of storage per person in that three or five-mile circle. If we’re under that, we’re likely under the national average, which means we’re likely in an under-supplied market. Now, I say “likely” because it’s not completely scientific. Places like Florida, Texas and California – they use more storage, they have virtually no basements, and they don’t use their attics often for storage, because especially in places like Florida, it’s really hot and it can ruin your stuff. So there’s a higher demand for stuff around Florida, especially around the coast, where there’s more income and more recreational toys.

So we’re looking to be under 7 square feet per person. As far as the metrics, it could be a development deal, and that would be different, but if it’s a regular value-add, cash-flowing deal, we’d be looking for 5% to 9% return to the investors annually, and then look for an appreciation in principal paydown, which brings the total return to about 18%-22% annually. That’s what we’d be generally looking at, and it’s very similar to where multifamily has been, especially in recent years passed.

 Theo Hicks:  Thank you for going over those specifics. Let’s talk about value-add, because you mentioned it a little bit before we went live that you were surprised that there was such a thing as value-add self-storage… Do you wanna talk about your discovery of this asset class, as well as some of the main things that are a value-add on self-storage?

Paul Moore: Well, one of the benefits of self-storage is you don’t have to deal with things like toilets, tenants and trash, but when I looked at self-storage – and I actually looked at it 19 years ago originally, in 1999… When I looked at it, I thought “Wait a minute… It’s just concrete, steel, and rivets. That’s all it is. What are the value-add opportunities?” I didn’t know what that was in 1999, but then in the recent years I did.

Apartments have carpeting, or hardwood flooring, and lighting, and paint, bathrooms and kitchens to upgrade, appliances – all these beautiful things. Self-storage is steel boxes, so where’s the value-add? I was surprised to find that there really is a significant set of value-add opportunities, that an experienced, really good operator can take advantage of. Some of these, by the way – they’re policy and procedure changes that add tremendous income and value.

For example, you can add U-Haul. U-Haul (or Penske) has all these independent distributor agreements with facilities, and they will often [unintelligible [00:09:33].09] will sign a deal with a self-storage facility. I was at one in Florida this week on Tuesday, and they were making $5,000/month in revenue from U-Haul. It took a little bit of extra work, but it wasn’t enough work to hire an additional person; so it didn’t cost much, and they were getting $5,000 in commission income. Well, multiply that by 12 – that’s $60,000/year, divide it by the cap rate, and let’s say that cap rate is 6,5%, that adds almost a million dollars in value to that facility.

Now, if it’s a five million dollar facility and you just added a million dollars, it sounds like  a 20% appreciation, and that’s true at the asset level… But you know what, Theo? That’s not true at the investor level. At the investor level, because of leverage, that 20% appreciation looks more like 60% appreciation in a typical leveraged deal. That’s a pretty amazing thing from just changing a policy and produce and adding U-Haul. But there’s a lot of other stuff you can do. You can add a nicer showroom, more point of sale items like boxes, scissors, locks and tape. You can sell insurance, you can have administration fees, late fees… Typically, mom and pops don’t like to do that.

You can also do a lot better job marketing. 50% as of a year ago – 50% of people who found a self-storage facility reported that they found it by driving by. They might have seen it on their iPhone or on Google maps first, but they drove in and that’s how they found it. Well, that’s a huge opportunity because using the online world, getting digital, having a website, doing Facebook marketing, Google AdWords, other online outreach is an opportunity to get in front of some of those mom and pop operators locally who are doing a terrible job marketing.

We looked at a self-storage facility in Raleigh (Raleigh, of all places), very hip and trendy city, that didn’t have a website. The lady said, “Why would I need a website? I’m 100% full.” Well, that says a lot right there. But anyway… Other things you can do is you can raise rates; that’s obvious, but it’s not necessarily as obvious as you may think. If you have $1,000/month apartment and you raise the rate 6%, somebody’s thinking “I’m gonna be here for years. That’s an extra $60, $720/year… I don’t wanna stay”, and they might move for that $60. But if you have $100 storage facility, they’re probably not gonna take a Saturday, pack up a rental truck, go and hire a few friends to move all their stuff down the road because you raised the rent by $6. So the tenants are inherently sticky.

Another factor with that is most tenants in self-storage think “I’m only gonna be here two or three more months.” You can survey them and they’ll say that, “I’m  just waiting till I can sell this stuff on eBay” or “I’m waiting till I move to that other house” or “I’m gonna put it back in my basement’, but often because it’s hitting their credit card, they don’t care as much, and it’s honestly there for years.

One investor we talked to in self-storage says “I decided to invest. When I was thinking about investing, I realized I had a self-storage unit for seven years I hadn’t even thought of. It’s just been hitting my bank account/credit card, and I hadn’t give it a thought.” That’s when he decided to invest. So there are lots of other things that can be done as well, but those are some of the main value-add drivers.

 Theo Hicks:  Okay. And then how do you actually find these self-storage deals? Are they on LoopNet, is there an MLS for these things, or do you have to be more proactive with your lead generation?

Paul Moore: Yeah, it’s probably somewhat similar to apartments… There’s letter writing campaigns, there’s driving by and stopping in; that sometimes works, but it’s a lot of work though. There are actually brokers just for self-storage facilities, and like in the apartment world right now, those brokers don’t want [unintelligible [00:13:41].00] they’re gonna be going to their friends, they’re gonna be working with people they already know, who will close, people that won’t embarrass them… So this is kind of the “Rich get rich, poorer get poorer.” Kind of what Joe has done with apartments – he’s got an inside track on lots of off-market deals; well, the people who are experienced in self-storage have a great inside track and a great benefit over beginners in this space, because the brokers are gonna call them first.

I just hung up the phone before this podcast with a guy named AJ Osborne. AJ Osborne was on the Bigger Pockets podcast that came out July 4th, 2018, and he talked about how he had 7,5 million dollars invested in a Kmart, and he had converted it to self-storage and he was on the verge of getting an offer (possibly within a day or two) for 25 million for that Kmart that he had retrofitted – while he was in a coma, by the way – and that’s only 40% leased up.

Guys like AJ are going to get deals that most of the rest of us will never see, and that’s one of the reasons we’re partnering with people and we’re raising up a fund to invest in other operators like that that have great experience.

 Theo Hicks:  You kind of touched on this already, but I wanna ask you anyway, so we can get a more detailed, specific answer… What advice would you give to someone who is listening to this podcast and they’re like, “Oh, self-storage sounds interesting to me. I wanna learn more. That might be a future potential investment vehicle”? What would your advice be to them in order to get started?

Paul Moore: Well, there’s actually seven ways to get started in multifamily or self-storage, and I go over this in a lot of detail on other venues. Quickly, they’re being a deal-finder, being a money-finder, just jumping in at a really high level, working your way up from really small to larger, going and getting a job for another operator and learning the business, or finding a mentor. I think that’s all seven.

I would recommend that you pick one of those and go for it. Become a deal-finder, for example, and take those deals to another company and say “Hey look, I’ve found this deal, and I’d love to partner with you and learn the ropes along the way.” Another thing you can do is you can find a mentor. There’s a guy named Scott Meyers in Indianapolis, and he’s got a great mentoring program. He teaches people to do self-storage. Apparently, they’ve had about 75-80 people go through their masters level program, and a lot of those people have become millionaires in a very short time. So those are two of the things I would do…

Oh yeah, the seventh way to invest (I thought I missed one) is to invest passively. That is to learn the ropes by investing, let’s say, 50k or 100k with another syndicator who’s doing the business, and ask them if you can learn from them along the way… Or maybe you just wanna stay passive and keep investing, and that’s a great way to do it, too.

 Theo Hicks:  What is the biggest difference you found between multifamily investing and self-storage investing?

Paul Moore: Well, that’s a hard question… I’m trying to think of a major difference, there’s not a lot. They have a similar Sharpe ratio, which is the return versus the risk ratio, and I talk about that a lot in my book. They have fairly similar value-add opportunities. Some of them start at 5%-10% cash-on-cash return, and then they have a total of, let’s say, 20% return, where multifamily lately seems to be a little bit lower, because it’s overheated somewhat, as we have all seen.

I’d say one difference is there are more ground-up development opportunities in self-storage, which can be great, but it can also be a curse. So if you get in on a ground-up opportunity in self-storage – and you can do that in apartments, too – you might not get your first distribution check for a couple years, but then there’s a really strong windfall on it. And of course, that’s possible in multifamily, but it’s not the kind of multifamily that I think Joe or I do, which is more of a momentum play or a value-add, stabilized class B multifamily.

But like I said, some of the self-storage deals we’ve been looking at and starting to invest in are like that Kmart that AJ has, where there’s no distribution at all for, say, 1,5 to 3 years, but then there’s a very large payoff after that. But there’s more risk with that, as well.

 Theo Hicks:  Is there anything that we haven’t talked about as it relates to entering the value-add self-storage investment industry?

Paul Moore: Yeah, just like multifamily, I think it’s really important not just to jump in. It’s a rough time in late 2018. Interest rates are higher, cap rates are staying low, which means the values are staying very high, and it’s a time for a newbie to get burned. So I would say be really careful. If you’re gonna invest passively, invest with a pro, somebody who’s been through several market cycles, which is, again, what we’re doing… And if you’re gonna do it on your own, be very, very sure that you have really evaluated it carefully and that you are in a situation where you’re not gonna get burned by paying too much.

Don’t let a banker and don’t let a broker tell you how much this is worth. You need to figure it out on your own, and if you’re not qualified yet, then make sure you are partnering with somebody who is.

 Theo Hicks:  Great advice. Paul, I really appreciate you joining us today on this Skillset Sunday. To summarize what we discussed – you explained the reason why you expanded into the self-storage industry, or at least one of the reasons why; it had to do with the fragmented market, and that a very small percentage of multifamilies over 50 units are owned by small operators, whereas a larger percentage  – I think you said 65%-70% – of self-storage are owned by small operators… So it opens up the opportunity for more of those value-add deals… And you mentioned that you got started with a partner who is very experienced, rather than jumping in on your own.

In regards to what you look for in deals, it needs to be visible on a major road, and then you draw a 3 and 5 mile radius around the self-storage facility and you wanna see a population density of under 7 square feet per storage per person…

Paul Moore: There are tools online that do that, that already draw that radius for you.

 Theo Hicks:  And then you mentioned the returns for the value-add plus appreciation plus principal paydown. Then you mentioned that a really good market for self-storage is Florida, which I can agree with, because I live in Florida now and I don’t have a basement, so we kind of just shove things into closets… And once we have kids, I’m sure it’s gonna get more and more difficult.

Paul Moore: Absolutely. And the deal we just invested in, by the way, this summer, is just South of you by a few miles… It’s in Lakewood Ranch area.

 Theo Hicks:  You also explained some of the value-add opportunities [unintelligible [00:20:41].06] You said add a U-Haul, a nicer showroom, more points of sale, like scissors, and tape and boxes, sell insurance, better marketing, and you can raise the rates.

How you find these deals – pretty similar to multifamily: direct mailing campaigns, driving for dollars, and brokers who work specifically with self-storage facilities… But like multifamily, they’re likely gonna go to their friends first, so you have to build rapport with this broker, and we’ve got plenty of episodes and blog posts about how to do that.

Then lastly, you went over the seven ways to get started as a self-storage investor, which was be the deal-finder, the money-finder, jump in at the high level, education-wise, start small and then work your way up, work for another operator, find a mentor or invest passively.

The biggest difference between self-storage and multifamily is that ground-up development – there’s more of that in self-storage, but besides that, the two asset classes are fairly similar. And then lastly, your advice for others who wanna get started is to 1) don’t just jump right in, because we’re at a point in the market where a newbie could definitely get burned… So if you want to become a self-storage investor, make sure you’re working with a pro, and do not rely on the bank or the broker for the valuation of these self-storage facilities. Make sure you figure that out yourself.

Paul, I really appreciate you talking with us today. Have a best ever day, and we’ll talk to you soon.

Paul Moore: Alright. Theo, thanks… It’s been a real honor to be on the show again. I hope you have a great day.

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Joe Fairless with Greg Rand Finding More Deals Than You Can Handle

JF1587: Finding More Deals Than You Can Handle & Scaling Your SFR Portfolio #SkillSetSunday with Greg Rand

Today we welcome back Greg Rand who has told us about investment markets before on the show (link to that episode is below). Now he is the CEO of a platform that has an abundance of deals for single family investors. At the time of recording, they had $200 million in assets for sale on their website. Hear how they find all these deals and take notes to use for you own deal searching, or buy something from their site. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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 Joe Fairless:  Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. As you can hear, this is not Joe, this is Theo. Joe is taking a break, because he just had a baby, so congrats to him. Today I will be speaking with Greg Rand. Greg, how are you doing today?

Greg Rand:  I’m doing great, Theo. How are you?

 Joe Fairless:  I’m doing amazing, and thanks for joining us. Today is Sunday, which means it’s Skillset Sunday, so we’ll be discussing a specific skill with Greg, that you can apply to your real estate business. Before that, a little background on Greg. He is the CEO of OwnAmerica, which a single-family resident investment company with 21 billion (with a B) in total assets on the platform; they have 200 million dollars in assets for sale, as well as 490 million dollars in total assets sold. He is currently based in Charlotte, North Carolina, and you can say hi to him at ownamerica.com.

Greg is a repeat guest. He was actually one of the first 300 people to be interviewed on the podcast, so make sure you check out his first interview, which is episode 300, “Why every market you invest in is essentially the same.”

Before we dive into the very specific skill, Greg, do you mind giving us a little bit of an update on what you’ve been up to since we last had you on the show?

Greg Rand:  Sure. Thanks for having me on again. Yeah, so that was three years ago, the episode that I joined you on… A lot has changed. We recognized right around that time that there was a segment of the real estate economy in this country that was unrepresented, and that was the single-family home that was already occupied by a tenant. So the realtors of our country and their MLS and the Board of Realtors, all the way to Zillow and Trulia and Realtor.com presumed that a home is going to be vacant when it sells. So the whole super-structure that sells houses presumes that an owner-occupant is gonna be the buyer of the house, and so those houses are vacant, and you can test that theory by going to any real estate broker, agent or major portal and try to search for occupied rental properties. In other words, don’t buy a vacant home and rent it out, but actually buy a rental home that’s already being occupied and rented, and has a performance history, which has a lot of advantages.

We realized  that that product was kind of an orphan, so we’ve built OwnAmerica.com to represent buyers and sellers of rental properties that are already rental properties. We focused initially on the institutional and professional investor, because that was the world we were in, those were the people that we had the relationships with; Wall Street came in about 6-7 years ago, and came in very strong into the single-family space for the first time… So we had the opportunity to build the data sets and the analysis techniques and the systems to help those companies analyze the whole country, figure out what pockets they wanted to invest in, find assets in those pockets, analyze them, size them up, acquire them, renovate them if it’s necessary, rent them out and then manage them. Doing that at scale was unprecedented, so we had the opportunity of being part of that innovation bonanza that took place back in 2011-2014…

But then we realized that only 2% of all the single-family rentals that exist in the country are owned by institutions; the vast majority are owned by entrepreneurs, or just everyday people that see single-family home rentals as the ideal way to secure at least part of their financial future… And there was no marketplace to buy and sell these occupied properties. So we built version one in 2016; it’s been a success, and it’s largely a testament to the fact that if you’re gonna buy rental homes, buying houses that are already rental homes is a really good way to go, because you’re cash-flowing from day one, and you’ve already got a track record, so financing rental homes that are already rental homes is easier than financing vacant ones, where the income is not proven.

And of course, if you wanna sell a home that’s already a rental property, it’s a really good idea to sell that home as an occupied rental, if you can, because then you cash-flow all the way through the closing. So the seller wins, because they have no vacancy issues, they don’t have to spend any money fixing the place up in order to sell it; the buyer wins because they can buy a property and they’re starting to make a profit on day one, and the tenant of course wins, because they’re being kicked out of a house they like at the end of their lease just because the seller wants to liquidate. So it’s kind of a win/win/win situation; we saw that back then, built a platform for it, and people like it so far.

 Joe Fairless:  Yeah, I totally agree with those benefits of the buying the single-family home that’s already occupied. Before we went live we were talking about a new development that you’re working on, but before we get into that, since it’s Skillset Sunday, let’s talk a little bit about how you find these deals. Obviously, you’ve got a ton of assets for sale… What types of systems and automations do you have in place to make sure that you always have a consistent pipeline of these single-family deals?

Greg Rand:  That’s a great question, thanks for asking it. I mentioned a moment ago that we learned how to sort of get our arms around big-scale data on housing valuations, rental valuations, analytics on yields, analytics on forecasting and projection and price appreciation… We learned all that stuff with the big REITs, as they master this asset class on the Wall Street scale. So we spun that around and created something that takes all that institutional expertise and makes it available for free to anybody who wants to use it.

So the way that we tracked people, number one, is that we give a bunch of cool stuff away. It’s the age of Google, right? You wanna get people to use it, give it away, and figure out a way to monetize them later. So we had something we called The Portfolio Visualizer. If anybody who is listening wanted to go to OwnAmerica.com, you can look at the way we present portfolios for sale, and there’s a version of that Portfolio Visualizer that you can have for free for your own portfolio, or for a fantasy portfolio you’re thinking about building. You basically can put any address in in the country, or upload a spreadsheet of addresses of a portfolio and get charts and graphs and maths and photos and projections and interactive calculators and all this really cool stuff about the market fundamentals, like population growth, employment trends and long-term price appreciation trends.

You  get all of that for free, and you tend to appreciate us for giving you all that cool, free stuff… And then some of you, around 9%, will wind up saying “Hey, I think I do wanna sell.” And about 15% will say “Hey, I think I wanna buy.” So by virtue of giving away the portfolio visualizer in a free account, we’ve been able to build just a level of appreciation out of the gate, that somebody says “Hey, these guys cared enough to spend the money to build this technology, they’re giving it to me”, and that little level of appreciation has a chance to turn into loyalty over time, by virtue of the people then being able to use it over time, and then become sellers of buyers… And we began targeting them.

We offered this out through traditional marketing means, but because we have a good handle on the data, we know who owns what investment property in America, and we’ve been creating accounts for them by the thousands.

Let’s say you own 17 rental properties in Orlando. We know that, because it’s public record, and we’ll go out and get our hands on that public record data, create that online investment account around your 17-unit portfolio, and then try to track you down and tell you about it. So we’ll send you mail, we’ll telemarket to you, we’ll try to find you digitally via social platforms to say “Hey, you’ve got 17 units in Orlando. We think it’s worth about 2.45 million. Go to this URL to check it out”, and that’s worked. People are like, “How do they know all this about me?”

We haven’t gotten the reaction, Theo, that I thought we might, from some people, like “Big Brother is watching me… How do you know this? How do you know I own these properties?” I think most folks know that it’s public record. We just go through the trouble of creating the account for them, and then try to track them down to show it to them. They smile, and then if they wanna take any kind of action to buy or sell, now we’ve got the beginnings of a relationship.

 Joe Fairless:  So you actually create an account for them in this portfolio visualizer? Is that what you’re saying?

Greg Rand:  That’s right. We create the account for free, with their properties in it, and basically they can just look at it. We use automated valuations, automated rental analysis… So if we think the rental is is $1,125 and it’s actually $1,200, they can change it, to see a more accurate depiction of their yield… And they do. We kind of give them a starting point. We make it so that 80% of the way there, their portfolio is now loaded in.

It’s almost like — imagine you go to Schwab, or Fidelity, or some other site that sells investments, and if it knew what stocks you owned, and you went there and you opened up a free account and you saw your stock portfolio staring you in the face, and you could track the value of it… It’s kind of like that, but it’s with real estate instead.

 Joe Fairless:  Let’s say for example I want to find all of the single-family portfolio owners in Tampa, Florida, because that’s where I live… How exactly are you going about doing that?

Greg Rand:  How do we find the owners in Tampa?

 Joe Fairless:  Yeah, how do you find not only the owners, but know that they have this many properties? Are you doing a search on the auditor sites? Do you have access to some paid software? How are you going about building this database?

Greg Rand:  It’s paid data. The national housing database was digitized back in ’90s and 2000s. It was done mainly by title insurance companies. I was around back then; they were literally going by municipality and digitizing whether it was index cards, or microfiche, or some of them even had it in a database. So they created that public record database, and of course, whenever you buy a property, the deed gets recorded, and there’s an indication of whether it’s owner-occupied or non-owner-occupied. We’re able to track the non-owner-occupied properties, and then we focus on people that own at least five.

If you have an entity – either it’s your name, or it’s Theo LLC, and you own 16 properties under that LLC, our data sifting allows us to identify you, your entity, your address, the addresses that you own, and then we add to that what they’re probably worth, what they probably rent for, what they probably cost to operate, and the population and market trends and so forth.

So we pull data, starting with who you are and what you own, which is in the public tax records, and then we append it with all this other data, to create the Portfolio Visualizer for you.

 Joe Fairless:  That makes sense. Going back to your giving away a bunch of free stuff to generate leads – obviously, the majority of people listening to this won’t have a very technical portfolio visualizer to give away, which can be very impressive… What types of tips do you have to someone who’s maybe just starting out and wants to apply this concept of giving  before you receive? What advice would you have for that person?

Greg Rand:  I have to think about that… If you’re starting out in real estate investing, the first place to start is to try to figure out what market you wanna invest in, and what your long-term goals are. I’ve never been that obsessed with the idea of finding a deal, and that makes me kind of unusual in this space. I approach investing in real estate as – you’re buying the market, you’re buying Tampa, or you’re buying some subset market of Tampa. That’s why we call the company OwnAmerica. We have this philosophy that you’re literally accumulating an ownership stake in the country. The country is in demand, the population is growing, so if you hone in on a place like Tampa, which is in demand and growing, and you find neighborhoods and school districts within Tampa, you’re gonna win no matter which house you buy. In fact, usually the risk that people take when they buy the house that’s discounted — I’ve seen a lot of people focus on what they wanna buy before they worry about where they wanna buy it… So they buy a house they’re getting a great deal on, but they’re buying a junker, and they’re taking renovation risk, and they may not be capable of doing an efficient renovation. They may be new at this, so they’re going with the riskier approach to investing.

I’ve seen professional investors make the mistake of choosing what to buy based upon getting a deal on and finding out later they wish they hadn’t had bought that, because they bought something in the wrong place. So my advice would be not so much using our methodology of using public record data to attract leads to them for buying property, but use the data that us and other people are now willing to give you to identify the markets that you think have the best lift-off in the future, based upon your own intuition of the trends of people – where are people going, why are they going there, are they staying, are jobs going there, what are those macroeconomic trends that are gonna give an entire market lift in terms of property value and rental demand?

And then honestly, I don’t think I’ve ever gotten a great deal on a property in terms of the price. I get great deals on buying properties in places that I have intuition are gonna rise in value and be in more demand rent-wise, more than the other markets around them. I’ve got a sixth sense by having spent so much time looking at this data over time, that my approach has been proven at least to me and my clients to be spot on… And I’m not forecasting the future. I’m just watching what people are doing right now, and if businesses are moving in and people are moving in and they’re staying, and the data reflects that, and then the human intelligence on the ground, people that you actually talk to kind of validate and reinforce that, that’s what we call a winner. That’s a  buy. And then you can just go buy a nice house in a good school district in that area and you’re going to win because you picked a winning market and just got a standard property in that winning market.

 Joe Fairless:  Okay, so let’s talk about the market for a second then… And I guess this is multiple questions in one – let’s say you are going to enter a new market; I know you mentioned a ton of different metrics and factors that you look at, but what would you say would be the top three macro factors you would look at?

Then my secondary question is, do you look at these factors just for the MSA or the city level, or would you then after analyzing these three factors for the entire MSA or city hone in on a specific neighborhood and submarket, and do the same thing? Or do you analyze the MSAs and the neighborhoods differently?

Greg Rand:  We do it slightly differently. The data that we have — to your first question, the three things that we look at, in this order… Number one is the long-term price appreciation performance of the market; and there it’s helpful to go at the MSA level, or at least the county level. The reason is that when you get too close to the ground you could see some wild swings in median price growth, because if one really cheap house or one really expensive house sells you get this weird blip on the chart and you lose the trending on it.

We use 20-year price appreciation data. You can actually see a place like Tampa during the late ’90s, into the wild times of the early 2000’s where it went up like a rollercoaster on the way up, then it crested in 2005-2006, and then it came down… But what you can see is when it came down it kind of made its way back down to where it probably would have been had there never been a rollercoaster ride in the first place. That gives you a sense of equilibrium that the market is very healthy; it deviated from a trendline on the high side, it came back down to the trendline on the low side, and then made its way back to the gradual upward trajectory, which tells us “Okay, the market remedied itself”, and I can get a sense of how Tampa performed during a stress test.

When you have a heart murmur, they put you on the treadmill; they wanna see how your cardiovascular system handles the stress. Well, I can see over a 20-year period how a market handled the stress test of the last 20 years, and it tells me a story that if I compare Tampa to, say, Oklahoma City or Cincinnati, I can see and draw different conclusions based upon the way the peaks and the troughs actually play out. But it also then gives me a 20-year average. We focus on that average, and here’s why.

In most places in the country, if you combine the 20-year price appreciation average – for the country it’s 3.4%. Let’s say in Tampa you’re gonna get 4.6%. Okay, so now you’re beating the country; that’s a good thing. But when you add the price appreciation to the yield – and most of your listeners probably know that yield is what your cap rate is, what your percentage of profit in a given year is, compared to how much money you have sunk into the property. Most places around the country are ranging between on the low side a 4% yield, and on the high side an 8% yield. That’s all-in, every expense counted, even a maintenance reserve, a very conservative and responsible expense load will give you somewhere between 4% and 8%. When you add the yield on a property with the long-term price appreciation that market has performed at, you usually end up at about a 9%… Meaning Tampa is gonna be today a 5.75% yield and a 3.75% or 4% price appreciation average – it puts you in the 9% range. Between 8% and 10%.

You go to Charlotte, North Carolina, you’re gonna get a 5% and a 4%. Same thing with Dallas. You go to Raleigh or Austin, you’re gonna get a 4% and a 5%. 4% yield, prices have gone up kind of high, but at the same time the prices have gone up kind of high, so you get a higher appreciation rate.

Think of the United States single-family homes are around a 9% ROI, yield plus appreciation. So when you find a 10%, you found a winner. When you find an 11%, like Charleston, South Carolina – it’s north of 10%. The combination of yield and price appreciation puts you into the double digits even before you put any leverage on, you put a mortgage on, or anything like that.

So that’s what we do, we take a look at that combination of things – the cashflow yield, plus the appreciation, and try to find a place that is already performing, above a 9%, or even above a 10%, and then I wanna try to understand why, so I’m gonna look at the job growth. The job growth is a great harbinger of population growth. Companies come in, they plan on being there for 25 years or more. They don’t do that stuff frivolously; they’re gonna go in based upon cost of living, quality of live, advantageous tax situation, a pro-business environment… When they do that, people come for a lot of the same reasons, but with an additional reason they come for the jobs that are going there… And if you can get a feel for how the property and the market perform as a baseline right now and you get a 10%, and then you get a sense of “Are the reasons why the market has done so well likely to continue? Are they still in favor, are they gonna continue?” and you focus on population and job growth and all the things that go into that, that’s going to give you a really comfortable place for a 25-year hold, which is what we’re all focused on here. None of what we do is about flipping; it’s all about owning America, building your own little real estate empire, however big you want that to be – 3 properties, 300 properties, whatever.

Those are the techniques that we use with big Wall Street funds, and now we’re teaching it and providing the tools for everybody else to use it.

 Joe Fairless:  That’s great information. Last thing before we wrap up is something that — I guess me personally, and I’m sure others might have this same thought, but I accumulate a massive portfolio of single-family homes, and I own them for 25 years let’s say, and I get ready to sell… Will I be selling them one by one, or will I be able to sell them as an entire portfolio?

Greg Rand:  That’s a great question, because that has changed a lot since we spoke last. It used to be — and today, if you call up ten real estate companies in town and say “I have 25 houses I wanna sell”, after they get done celebrating, you tell them “Oh, by the way, they’re all occupied by tenants”, they’ll probably tell you, 9 out of 10, if not 10 out of 10, will tell you the way to sell those houses is to wait till the leases are up, boot the tenants and then fix them up and sell them on the MLS.

What’s changed about that is that we’ve been able to demonstrate – not just us, the industry has been able to demonstrate that occupied rental properties are a thing; there are 16 or 17 million – depending on whose data you look at – existing rental properties in America… Just to put some context around that, that’s 12% of the population. So there are more people living in single-family rental homes than drive SUVs. So it is a big market segment, much bigger than most people thought.

Now that Wall Street has gotten involved, there is a massive, decades-long consolidation underway, where right now only 2% of all the single-family rentals are owned by big Wall Street firms. But 55% of all the apartment buildings in America are owned by big Wall Street firms. It didn’t use to be that way in multifamily either. I know it’s hard with numbers sometimes over the podcast, but there’s around 3,5 trillion dollars worth of apartment buildings in this country. There’s around 3,1 trillion single-family rentals. So they’re both 3 trillion dollar asset classes. More than half of multifamily is institution-owned, only 2% of single-family. The reason for multifamily’s consolidation is there was a big commercial real estate distressed situation that went on back in the late ’80s into the early ’90s. That distressed real estate situation caused a lot of capital to come in, to buy up all this distressed real estate; Wall Street bought a lot of real estate, liked what it saw, continued to acquire… And then you blink your eyes, two decades go by, and now more than half of all the apartment buildings are owned by big pension funds, insurance companies and other institutional sources of capital.

We see all the indicators that the same kind of thing is happening now. The housing crisis was distressed real estate, Wall Street came in to buy up distressed property, liked what it found, learned how to operate it at a very, very high margin, and now all the major companies that owned thousands and thousands of single-family homes are freshly capitalized, but have billions (with a B) more capital into the space now. They’re all doubling and redoubling their holdings, and I don’t see it changing.

What that means is that if you have three properties and eventually you have 50, there’s going to be an exit for you when the time comes where you don’t have to disassemble and destabilize your 50-unit portfolio; you can actually package it up and then roll it up to a larger player intact.

 Joe Fairless:  That’s good to know. I was actually attempting to wholesale a single-family portfolio, and I wish I would have known what you’ve just explained now. Greg, I really appreciate you coming on for our Skillset Sunday. In fact, it was more of a skillsets Sunday, as you provided a lot of skills. You’ve talked about how you find deals, which one way is to give away things for free, in the hopes that they will appreciate that free giveaway and will use you to sell their property or allow you to buy their property.

You also talked about how you would use the digitalized public record information from the title companies and you would find non-owner-occupied properties that had the owners owning at least five properties, and then you would add other datasets to that, to reach out to those owners to buy their properties.

We also talked about the metrics that you use to analyze markets, you talked about the long-term appreciation trends for 20 years, and using that as a stretch test, as well as a comparison tool to other markets. You talked about the yield, and combining the yield and the appreciation together, to determine what’s a good market to invest in… And also you wanna look at the job growth, because it’s a great indicator of population growth, because massive companies aren’t gonna move to a bad market, because they plan on being there for a while. And you talked about how it’s important to understand why those trends are happening, and if they will continue. And then lastly, we talked about the new trend of the ability for these single-family portfolio owners to sell their portfolios to institutions, rather than having to sell them off one by one.

Lots of information. I could definitely keep talking to you, but you’ve gotta go. It was great having you on the show. Have a best ever day, and we’ll talk to you guys tomorrow.

Greg Rand:  Thanks very much.

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Guest Jordan Fleming on a Best Ever Show banner

JF1586: Want To Scale Your Real Estate Biz But Need Some Help? #SituationSaturday with Jordan Fleming

As a Podio expert, Jordan is constantly working with investors and property managers to help them scale their businesses. He specializes in helping others automate some aspects of their business so they can concentrate on the activities that are most important to their business. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Jordan Fleming Real Estate Background:

  • CEO of Gamechangers, one of the top Podio partners in the world
  • Builds systems for investors to help investors automate tasks, tack data and KPI’s, and accelerate sales
  • Over 50 investors are using their SmrtPhone phone system for Podio (https://www.smrtphone.io/)
  • Say hi to him at http://wearegamechangers.com/en/main/


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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 investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

First off, I hope you’re having a best ever weekend. Because today is Saturday, we’ve got a special segment for you called Situation Saturday… And here’s the situation – you wanna scale up; you want to take your real estate business to the next level, and with us today we have a gentleman who will help you do just that, and learn how to do it. Jordan Fleming, how are you doing?

Jordan Fleming: Great to be here, and nice to be talking to the Best Ever listeners.

Joe Fairless: Yeah, looking forward to our conversation. A little bit about Jordan – he is the CEO of Gamerchangers, which is one of the top Podio partners in the world. He builds systems for investors to help investors automate tasks, track the task and the data, as well as the KPI’s, and accelerate sales. Over 50 investors are currently using their Smartphone phone system for Podio, and we’re gonna talk about how to scale up our business as real estate investors with Jordan. With that being said, Jordan, first, do you wanna give the Best Ever listeners a little bit more about your background, just so we have some context?

Jordan Fleming: Yeah, so I’ve been doing Podio systems for a number of years now, and then quite honestly, the real estate market and property management market boomed for us about 18 months ago. Before then we were working with a couple people, and now it’s about 80% of our portfolio. And it’s all about getting that technology in their hands, so that we can get them moving faster, doing more deals, and building the empire the way they wanna do it.

Joe Fairless: Okay, so you are a property management company in addition to a technology company, is that correct?

Jordan Fleming: No, I’m just a technology company, but we do work with technology in both property management and real estate investors.

Joe Fairless: Oh, got it. So that’s what I was missing. So when you say you do property management as well, you’re talking about your technology is integrated into property management software.

Jordan Fleming: Precisely. Yes, sir.

Joe Fairless: Okay, alright. That makes more sense. So what’s your software? Tell us about it.

Jordan Fleming: We primarily build all of our systems on the Citrix Podio platform. Now, a lot of the Best Ever listeners know real estate seems to be  focused on Podio a lot. Podio has become a real staple, because it’s so flexible and it can do so many things. That means we can bring every part, from acquisitions, to rehab, to sales, we can bring in property management elements, we can do the contracting, the leasing – all those sorts of things, all in one platform, with a huge amount of automation, and making sure that you’re efficiently doing all those things.

Joe Fairless: Okay. So what are some ways, taking a giant step back… As real estate investors and listeners to this show, you’re clearly tied into the technology space with investors and property management, so what are some things that you’ve learned that can help us take our business to the next level?

Jordan Fleming: Absolutely. Well, number one – I’m actually gonna focus on data and KPI tracking… And that’s because I think a lot of investors — I am not an investor, but I’ve now worked with guys who are just starting in the game, and I’ve worked with guys who are at the very top. And what I’ve noticed is that the guys at the very top dispassionately look at the data. They try and take the emotion out of the decision-making, and in order to do that you need to get the right data and be analyzing it the right way. So is this deal really the one you’re supposed to buy? Run the numbers, and do it smart. Don’t try and force a transaction because you want it; make sure the numbers stack up. That’s what’s really key about data.

I was just the other day speaking with a group of probably twenty pretty top investors, and it was all about “How am I running these numbers? How am I getting these numbers? How am I making the best data-based decisions?” …either through KPI tracking, so that I can see what are my team doing? Are they doing enough of this? Are they doing it the right way? Or simply being able to use data to analyze transactions and spot the ones they want to know.

To me I think that’s one of the key things systems can do – it can bring this data and this decision-making and they can make it a very dispassionate, sensible one, so that you’re getting the best sort of results, and making the best decisions.

Joe Fairless: Let’s talk about KPI tracking. What are some popular KPI’s (key performance indicators, for anyone who is not familiar with that acronym) that top investors use, based on what you’ve seen with your technology?

Jordan Fleming: Definitely time to follow up on leads. That’s key. Particularly, it seems to me that the market is starting to change again. Everything I’m seeing is indicating that we’re going into a slightly different market over the next couple of years… So speed of action is gonna be critical. How fast and how light can you move? We see a lot of KPI’s around how fast we’re picking up leads, how fast we’re getting back to people, how fast are we actioning those leads? We definitely see that.

We see a lot of KPI’s around the different team efficiencies, because for a great investment company to grow, you’ve gotta have a great team. And to have a great team, you’ve gotta see what they’re doing and make sure you’re giving them the best opportunity to thrive. KPI’s around their activities, around their speed, around what they’re getting accomplished every day are ones that you can see on the wall and measure everyone around.

Joe Fairless: So a KPI on following up… What are a couple other KPI’s that you see a top real estate investor have in there, and really focused on?

Jordan Fleming: Definitely finances in terms of the deals they’re doing. Are they getting the return? Measuring those, so that they’re making sure that every decision they’re making, they’re tracking it against where they want to be, and not just stacking deals up for no purpose. It’s great to have lots of deals, it’s great to have lots of turnover and lots of things happening, but are you getting the profit out of them that you want? And by being able to measure that and aggregate that across your whole portfolio on a real-time basis means you can spot when you start seeing gaps; you can start to see “You know what – my margin, the profit I want, I’m not getting it anymore. Why? What is that? What transactions are taking me down?”, and then hopefully try to avoid them. Definitely finance ones.

Another one that I’ll add in there, that kind of goes into my communication management is KPI’s around identifying good and bad calls. That sounds a bit weird, but one of the things we’re encouraging a lot of guys to do now is every week take a few leads you’ve lost and review the calls. If you’re using a system – which you should be – to tracking those calls against those leads, making sure you manage them all, review them and understand what’s going on, and then place them in the dashboard so you can start to see “Where are we getting the best performance internally? Which of our agents are doing the best? Because if we’re seeing some problems, are they in the wrong seat? Are they in the wrong job?”

Joe Fairless: Okay, that’s helpful. So that’s data and KPI tracking. What’s the second thing?

Jordan Fleming: Automation. Automation is definitely one of the areas where the more time you can save across your organization, the more time you can get people out of the grunt work and back into the sales element, the better. So we see little things like automation of sequence follow-ups. Do you know how many people don’t both following up a lead more than once? It’s kind of frightening. The last three days I was with a bunch of investors, and we’ve sort of asked for a show of hands how many people follow up two or three times… And the higher up you go, of course, the hands start coming down; but the truth is that’s really bad, because a ton of times you’re not gonna win that lead until the sixth or seventh touch. But if you’re not prepared to make those touches, or more importantly, if you don’t have a system that is making sure you do those touches, then you’re probably getting rid of 40% of your potential opportunity, your potential buy.

Joe Fairless: Where do you get that 40% stat from?

Jordan Fleming: From the guys we talked about in this room, the last three days. This was purely just with investors, and these were pretty good guys. We were getting an astonishing amount of understanding around how important the actual follow-up sequences are, and how few people are doing them in the way they should be. And follow-up sequences, some of which can be automated if you use a good system – drip an SMS out there, dripping an e-mail out there, checking in, checking in… Making sure there’s a follow-up. How many times do people assume because it’s under offer from someone else, “Oh, I guess I don’t have to follow that up again.” Well, deals don’t always go through… So being able to make sure you’ve got that follow-up sequence there, so that you’re not letting anything slip – that has been seen, from our client base certainly, as an enormously important part of it.

Joe Fairless: And the third thing to help us take our business to the next level?

Jordan Fleming: Speed of sales. The communication I touched on with the reviewing calls, and of course, I think that’s a really important thing to do that not enough people do. They record the calls, but they’re not actually reviewing them from a quality point of view and for training.

The second part of that is speed. You need a system that allows you to blast through as many leads as possible. Now, whether through an auto-dialer… Our system’s got a four-line auto-dialer, so you can do four calls at once, and hopefully make four times the sales, but even just having a system where you can very quickly go through a series of leads and make those communication calls. The faster you can make calls, the faster you can get guys working those leads, the less they go stale and the more chance you have of hitting them when you have a chance of.

Communication management and the speed of communication is one area where a good system, regardless of what it is, should be really enhancing it, and can really help increase the sales.

Joe Fairless: This is a good segue into your Smartphone phone system. What is that exactly?

Jordan Fleming: Smartphone is a system we launched about a year and a half ago. It’s a VoIP phone system which integrates into Podio, the platform we build on, allowing us to control SMS inbound and outbound, and phone calls. That means that, of course, any time someone calls, if they’re not in the database, they get in the database quick. We can then track every single communication element – a text message, a phone call, inbound or outbound – against there, so we can see and track all those communications our team is doing… But we can also, of course, automate that.

Then the flip side of just a normal transactional is where you’re using something like an auto-dialer. Obviously, I’m sure the guys that are listening have used auto-dialers, we’ve seen them before, but an auto-dialer is an amazing way of blasting through 1,000-2,000 leads. A four-line auto-dialer, what it does is basically it queues up four numbers at once; whoever picks up first gets the call. And the moment you hang up, it starts dialing again. So you’re minimizing that time between calls and maximizing the time your guys are actually speaking to people.

Joe Fairless: Wow. For the people who pick up a second after…

Jordan Fleming: [laughs]

Joe Fairless: You thought about this [unintelligible [00:12:41].29]

Jordan Fleming: Yeah. Well, the answer is — and this is a bit sneaky… Number one, obviously you’ve gotta make sure auto-dialer is FCC-compliant; so if they’ve got a Do Not Call list, or they ask you to take them off the list, then our system takes them off the list and you should make sure that. But for the people who pick up that second later, we’ve got something that’s called a call-back recording that you put in. And I kid you not, that’s usually you going “Oh–yeah–hey–hello–so–I can’t hear–I’ll call you right back.” It’s a bit sneaky, but it is a way of making sure that — then the auto-dialer puts them in to Dial Next.

Joe Fairless: That is ridiculous… [laughter]

Jordan Fleming: You know, it works. You’ve also got voicemail drop, so that if you get to voicemail, you’re just dropping them a voicemail automatically, as opposed to having to leave one.

Joe Fairless: If someone drops you a voicemail automatically, how do you remove them from being able to do that again? Because I get that every now and then, and I wanna stop having them call me.

Jordan Fleming: Well, there are programs that you can get, Do Not Call… When we get a request for Do Not Call, the only way we can deal with that in our system is if you’re on a call with someone and they say “Please don’t call again.” The Do Not Call in our system then basically stops anyone in your entire organization from calling them again. It won’t make the call. And that’s important.

Joe Fairless: Got it. What else that we haven’t talked about should we talk about, as it relates to helping investors set up things in their business to take them to the next level?

Jordan Fleming: I think absolutely critical is if you’re kind of at the starting end of this, what you don’t want is over-complication. There are lots of things out there, and your eyes can be bigger than your stomach… Because you can buy the biggest system in the world, but if you’re not using it, then you’re wasting your money and wasting your time.

I like to make sure that people are thinking very small – what are the things I need to start at? Maybe it’s just simply tracking my leads, actioning them quickly. Maybe I don’t have to bring in rehab yet; maybe I don’t have to bring in a lot of other things. By starting small and picking the one or two things that are gonna massively help you, you can then bring other bits in later, but you can get used to working in this system… Because a lot of the guys we find when they first start, they’re used to using Excel, and e-mail, and phones, and that’s it, and there’s a bit of a learning curve to get into a system which is actually kind of driving you. So it’s much best to start small, and then grow with time.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing and get in touch with you?

Jordan Fleming: The website, wearegamechangers.com. Feel free to drop us a line in there. We’ve got lots of resources, we can send them, and some learning – we can send them too, as well.

Joe Fairless: Well, Jordan, thank you so much for being on the show. Three ways for real estate investors to take it to the next level – one is making sure we have the right data and KPI tracking; you talked about some important ones being the time to follow up on leads, and obviously tracking the finances, and then looking at what calls went well and what calls did not go well, so that you can apply those lessons learned.

Second is automation – tying back to the follow-ups, having an automated system to do follow-ups for you. I’m picturing the room when you’re asking “How many people follow up once/twice/three/four/five/six times?” and as hands keep going down and down, perhaps the people who still have their hands up on number seven, because it’s automated, are the ones who are making more money than the ones who put their hands down after number one… I would certainly bet money on that being the case.

And then lastly, speed of sales, and having some sort of system to help you with that. Really interesting stuff, Jordan. Thank you so much for being on the show. I hope you have a best ever weekend, and we’ll talk to you soon.

Jordan Fleming: Thanks very much.

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Scott Lewis and Joe Fairless on a flyer for the Best Ever Show episode 1565

JF1565: How To Execute On A RV Park In The Middle Of Nowhere #SituationSaturday with Scott Lewis

Scott is back on the show for a special segment today. We’re going to be talking about a deal he has going on. He found an RV park in the middle of nowhere, bought it, and is now telling us his business plan for the park. If you ever buy an odd property, you know you have to get creative sometimes, let’s learn from Scott’s experience and apply it to our own businesses. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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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 investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

First off, I hope you’re having a best ever weekend. Because today is Saturday, we’ve got a special segment called Situation Saturday. This is a fun one… You come across an RV park in the middle of nowhere, and there’s a lot of challenges involved with that… What do you do? How do you take it down? How do you execute the business plan?

Well, fortunately, we have a guest on the show today who has acquired an RV park in the middle of nowhere, and has implemented a business plan at that property, and we’re gonna talk about the challenges and the individual disciplines within the team members that are required in order to do this type of deal.

With us today, again, how are you doing, Scott Lewis?

Scott Lewis: Hey, Joe, and Best Ever listeners, and happy Saturday out there! Great to be back on the podcast. I’m doing outstanding, I just got back from a couple of days in Las Vegas, at a mastermind out there that was fantastic, and I’m happy to be on this show.

Joe Fairless: What mastermind did you go to?

Scott Lewis: It was a self-storage mastermind.

Joe Fairless: Okay. Who put it on?

Scott Lewis: Scott Meyers.

Joe Fairless: Cool. Good stuff. What was the takeaway that you got from it?

Scott Lewis: I don’t know that there was any one thing that I was taking away from it, other than as a company we’re doing all the right things to be able to acquire self-storages.

Joe Fairless: Well, it makes sense, and we will transition into the RV park… But first, I want to give a brief overview of Scott’s background — and you might recognize Scott from our previous interview, which was episode 965. It is titled “Why he sold all he had, went to war, then returned to develop land and syndicate big deals.”

A little bit about Scott – he’s the co-founder and chief executive officer of Spartan Investment Group. Spartan Investment Group has completed six million dollars in development projects and has 30 million more underway; has raised over 10 million in private equity. Those numbers might even be higher… I’m not sure what the latest is on those numbers. Also based in Denver, Colorado. With that being said, Scott, do you wanna give the Best Ever listeners just a brief refresher of your background, and then roll right into this RV park?

Scott Lewis: Thanks, Joe, and Best Ever listeners. I came to real estate by way of the military and the Federal Government. I’m still an active reservist, out here in Colorado, which is fantastic; I do a lot of good training that helps me be successful in my role as the CEO for Spartan Investment Group.

I started in real estate when I was in high school, building houses, and that’s kind of how I put myself through college as well, as a framer. I became a — I’ll say a “reluctant investor” in 2007 when I joined the military, because I bought a condo in 2005, and everybody’s aware of the history… I still own that condo. I won’t say it’s the bane of my existence, but it’s definitely a third leg that’s not all that helpful.

And then really just kind of got started in DC, bought a really crappy rowhouse, and flipped it, and that’s really what started our company, and we’ve just been growing ever since.

Joe Fairless: And one part of the growth was an RV park that you all came across. Tell us the story about that.

Scott Lewis: Yeah, it’s really an interesting story. It’s a story of — maybe we can call it an epic adventure, so we need some really cool instrumental music in the background right now…

Joe Fairless: You’re setting the expectations really high…

Scott Lewis: [laughs] It came kind of on a tangent to a two-property portfolio in self-storage that we were looking at taking down. Our primary mission right now is to purchase self-storages… However, that particular deal fell apart, and the agent was really impressed with our acquisitions process and how we handled that, and he was like “Hey, you guys gotta take a look at this… I’ve got a deal for you. It’s an RV park.” We were like, “Um, what?” He’s like, “It’s an RV park.” We’re like, “Okay, where?” “In Gardendale, Texas.” “Say again?” “You know, Gardendale…” “No,  we don’t know it.”

Joe Fairless: Everyone knows Gardendale…

Scott Lewis: Yeah, so we’re like “Alright, can you orient us to where we need to look?” He’s like “Oh, it’s just North of Odessa, Texas.” So for Best Ever listeners that aren’t geographically sound with Texas, Odessa and Midland are approximately about five hours South-West of Dallas, maybe about 4,5-5 hours… Pretty much do West of Austin, kind of in West Texas.

For the listeners that aren’t familiar with what West Texas is, it’s oil… And it’s actually called the Permian Basin, and it’s the second-largest oil shale outside of Saudi Arabia; it’s one of the main reason why–

Joe Fairless: Friday Night Lights?

Scott Lewis: Absolutely. Midland and Odessa were featured in a movie Friday Night Lights. That’s where it was. And it’s everything that you would think it would be – there’s tumbleweeds, lots of cowboy boots… A Prius could fit in the cab of every single pick-up truck that’s driving around down there…

Joe Fairless: Yeah, I was gonna say, there are no Priuses in Gardendale, Midland or Odessa, Texas.

Scott Lewis: Yeah. For any listeners that are down there, if you rent a Prius, a Dodge Ram or a big Ford  F-150 will eat your car.

Joe Fairless: Yeah, yeah… [laughs] If you’re driving a Prius in Odessa or Midland, your safety is in danger, I believe.

Scott Lewis: You are incredibly in danger if you’re driving a Prius down there, so do not do that. But just a quintessential, solid Texas town. Good community, good, solid, hardworking Americans that are working in the oil fields down there. So when the agent first proposed this, our director of acquisitions brought it to us, and we said no. No way in hell. And he started running the numbers on it, and they were offering it at a 16-cap, which for an RV park is a little high, but it’s not outrageous.

Our acquisitions director started running the numbers and that cap rate started creeping up. So by the time he was done running his analysis, it was right around a 20 or 21-cap. So that started to pique our attention. That’s when we really started to dig into “Well, what is this about?”, so that we understood the underlying reasons for the sale. It was a group of cousins and friends and brothers that had formed to buy and build the park, but they just weren’t really getting along, and it was just time for them to part ways and get rid of the park.

They didn’t have great management systems just because it was kind of a fractured relationship, and that’s not really what [unintelligible [00:09:07].16] We’ve actually become good friends with them, and they’re just good, solid, hardworking Americans. They do dirt work and paving. That’s what they specialize in, not operating real estate assets. So the park had kind of been run down a little bit, it wasn’t being operated very well, and it had just kind of become a thorn in the side for some of the partners, and they decided that they wanted to sell. So it was a really good situation.

So right out at the beginning, once our director of acquisitions convinced us to do this deal, we’re up against a cash offer, and the cash offer was offering to close really quick. This was in November of 2017. Well, we went back with an innovative strategy to say “Listen, you actually don’t wanna do that. You wanna take our offer, which will be private equity and debt, and we’ll close on January 5th, so that you can delay your taxes an extra 18 months, versus having to pay the taxes in 10 months if you close in 2017, since we’re so close to the end of 2017.” And they were all over that. So that’s a potential strategy, Best Ever listeners; if you are trying to close a deal in the end of the year, you may be able to add value by just waiting a couple of weeks, because it’ll allow the seller to basically have a tax-free loan for up to 20 months, or 18 months, whatever it is, if they extend their taxes. So it’s a tactic that you can use to potentially win deals with not being the highest price offer.

But anyway, so we went under contract with that, and it was heavily contingent on financing. It was going to be a very, very tough deal to finance, because it’s an RV park in Odessa, Texas. However, when we did the feasibility work, it had fantastic fundamentals from a feasibility standpoint, and the Permian Basin when compared to other oil producing areas, had the most resiliency through boom and bust cycles. They’ve been doing it for 80 years.

The people of the Permian are resilient, they’re tough, understand how to ride those waves out. So even in the worst times, when oil was in the $25/barrel area, unemployment was still 5% to 7%, versus up in North Dakota or Wyoming, where unemployment reached double digits.

So we decided to go forward, and we decided to go out and raise private equity and take down the park. The price of the park was 1.71. We had negotiated a $40,000 credit to fix some [unintelligible [00:11:37].21] stuff, so we were gonna raise about a million dollars to do some repairs and maintenance, and then we were gonna take down a loan for a million bucks. We called EVERYBODY. Everybody and their mother, and we couldn’t get it financed at all. The financials were a mess, the record-keeping wasn’t good… It was very, very hard for us in our due diligence to even understand what we were gonna be getting into, and it was even harder for banks to understand.

So at the last minute we found a hard money lender that agreed to lend us money, and we were able to raise the private equity. It’s a pretty good return; our investors are earning 26% cash-on-cash on that particular deal, and it’s supposed to be a four-year deal, so it’s about 100% return over four years… Pretty darn good return, and really good cashflows along the way, but it was the debt financing that was really tough,

Here’s where we really kind of shined as a team – our director of business intelligence had put together a phenomenal feasibility study. Just really good, really easy to follow, and our investors loved it. The debt lender loved it, as well. It was all juiced up, ready to rock, and then about a week or so before we were ready to close, they just up and decided not to fund us, at all.

Joe Fairless: Why?

Scott Lewis: That was really interesting. They told us that the financial part didn’t make sense; we weren’t strong enough as a buyer, and they didn’t like the fact that we didn’t live there. What was really annoying about this is they had everything, all of that information, for a month before they decided just to pull out at the last minute. So what we think is that those buyers failed on their side and they couldn’t get it done, and instead of acting with integrity, they blamed it on us.

I’m not gonna say their name, because I just don’t wanna deal with the legal ramifications of it, but when we have an opportunity to give a recommendation for these folks, it will not be positive. We do not believe they were good people, and they did not act with integrity at all.

Joe Fairless: Imagine coming across that in commercial real estate. Shocking.

Scott Lewis: I know… It was really irritating, because they could have told us no a month before. There was absolutely nothing new that they discovered.

Joe Fairless: So that was two weeks before the scheduled close?

Scott Lewis: About a week or so… A week and some change.

Joe Fairless: About a week before scheduled close. How much money and time did you have into this deal at that point?

Scott Lewis: We had gone hard on our earnest money, and we had pulled some studies, and this and that… So it was about 50k.

Joe Fairless: Okay. What was the earnest money?

Scott Lewis: 30k-35k, somewhere in there.

Joe Fairless: Okay. And then how much time would you estimate that you all had put towards it in total number of team hours?

Scott Lewis: Oh, in total number of team hours? Between trips, acquisitions, capital, finance… Maybe 100.

Joe Fairless: Wow. Alright, so you’ve put a lot of time and money into this deal, a week before closing financing falls through from the debt side. Equity side is still strong, right?

Scott Lewis: It is. Fully raised.

Joe Fairless: Okay… So now what do you do?

Scott Lewis: Well, as we mentioned at the beginning of the podcast, I’m a military guy, so I am fanatical about planning, and I’m fanatical about planning worst-case contingencies. In the military, in a planning process you have the most dangerous course of action and the most probable course of action. Now, from a military perspective, that’s based on what the enemy is gonna do. So when we look at our deals, we have a couple of different enemies, and one of them is always the lender. The lender in our deals is always one of our enemies… Another one being government bureaucrats, or something along those lines. Not a quintessential enemy, but someone that could act in such a way that it would damage our ability to execute our mission.

So for this particular one, our acquisitions director had gone through and analyzed the most dangerous course of action and the most probably course of action for the lender. The most dangerous course of action that we had built out two months earlier was that they would pull out a week before closing.

Joe Fairless: [laughs] Wow…

Scott Lewis: It was already in our system… And then with each one of these most dangerous and most probable courses of action, we have mitigation strategies to take care of it if those come to pass. So the plan was already written.

We basically just did nothing for 24 hours, reviewed our plan, and the plan that we had written was that banks were going to fail, so we would have no choice but to raise our own private debt instrument from our investors. That’s the only thing that we could do. We had never done it before, we didn’t know how to do it, but that was our plan.

96 hours later we  had a promissory note written, a deed of trust written, and a million dollars raised at the same terms that the hard money lender was gonna give us, and we closed the deal.

Joe Fairless: Wow… What are those terms?

Scott Lewis: They were miserable. 12,5% interest-only loan.

Joe Fairless: What was it, 12,5%?

Scott Lewis: It was.

Joe Fairless: 12,5% interest-only loan… For how long?

Scott Lewis: It had a three-year payback, but if we went to years two and three, we got hit with an additional point each year, plus we had to give up equity positions to the debt guys if we went there. So it was basically 12 months to get our act together and get different financing on  it.

Joe Fairless: Okay. How long ago did you purchase this property?

Scott Lewis: We closed March 1st.

Joe Fairless: Okay, so we’re still in the 12-month period; I’m very excited to hear how it’s going… But I don’t wanna fast-forward too much. Alright, you all found the person for the hard money… And how did you know this person?

Scott Lewis: It was actually 12 of our investors. They were our normal equity investors that just took a debt position on the property. We actually had maybe two or three investors that actually took a straddle position to where they had equity and debt. They did both.

Joe Fairless: And the original lender backs out… A little shock, but you have that in the worst-case scenario for your contingency plan… What did you do to communicate, or rather how did you communicate to your investors the fall-out and what you needed in order to close?

Scott Lewis: It’s a good question. For the equity side we really didn’t even have time to communicate. We sent out an e-mail basically saying “Hey, this is what’s happened. Here’s our course of action going forward. Anybody that’s in on the equity side, are they interested on the debt side?” So we had a couple of people raise their hand right away. We had very, very little time and we executed the strategy in four days or so. 96 hours I think it was when we had closed the million bucks on the debt side.

Then we just opened it up to our regular list. We put it out to our list of our personal investors that know us; we had personal relationships with all of them… And we just put it out to our list, and we had an overwhelming coming back to  say “Yeah, we’re gonna do this with you guys.” Everybody loves 12,5% interest for the first lien position on an asset.

Joe Fairless: And why did you go with those terms, instead of a little bit less than that?

Scott Lewis: Good question. We had very, very little time, and we really didn’t have time to struggle with the raise. We wanted to make sure we could take this down, because it was a good deal, as I’ll get into here in a minute, for the operation side of the house here. It was a really good deal, and we wanted absolutely zero probability that we wouldn’t be able to execute.

So we kind of took it on the chin a little bit upfront, knowing that we were gonna be successful in our business plan and that we would be able to take it out later.

Joe Fairless: So you’re about 7-8 months into it… What’s been the result?

Scott Lewis: The operations have been fantastic. Our business plan was to do a number of different upgrades to the park, stemming from cap-ex, like improving electrical, to just vanity upgrades, by putting in a fence around it and just really making it a much better environment, to operational upgrades such as digital management software, better marketing, a call center, you can pay by credit card… All the barely standard improvements that you would do to a particular asset to take it from a class C to a class A asset, as much as an RV park can be a class A asset.

We plan to add additional spaces. The park started out with 102 spaces, and we are in the process of finishing up 14 more, so we’ll have 116. We actually installed a propane dispensing station on-site and got our managers trained, so people can stop by and buy propane at our facility now. We’ve just done a number of different upgrades, which has allowed us to raise rents… I’m not sure what the percentage is, but it’s over $100/month per spot, and that’s really driven the NOI up a lot, by a factor of probably double or triple.

Joe Fairless: You’ve still got the loan on it?

Scott Lewis: We’ve just executed the refinance on the loan…

Joe Fairless: Oh, bravo! What a relief…!

Scott Lewis: It was. And we were able to do it in a fantastic way, as well. We went out and we engaged some lenders, and we actually got a really good bank down in the Midland area. They were really awesome to work with, and they gave us a term sheet, and it was our plan all along to go down and see what we could get from financing. When we have an opportunity to pay people, we wanna pay our own people.

The bank gave us good terms. They were a great fit for us. The terms we cut was 5.5% interest, amortized over 15 years with personal guarantees. So the interest rate – fantastic; the personal guarantees we were really kind of ambivalent to. We didn’t really care. But the amortization over 15 years – it really didn’t do the greatest for the cashflow for the park.

Joe Fairless: Right.

Scott Lewis: So what we did is we went back to the investors that had done the loan with us in March, and we had told them all along that our primary objective here is to refinance this loan out as fast as we can, because we have a fiduciary responsibility to our equity investors to make the park produce as best as possible, and one of it is to get rid of a very high-interest loan.

So we went together and we put together a new terms sheet for them, and we offered 8% interest-only, because that’s what we felt was good for our investors, we liked the interest-only, we wanted to take care of our people, it reduced the burden of debt on the park by $3,800/month in debt service, and it allowed us to take care of our internal people.

100% of the investors said “Fine, modify the loan and we’re good to go.” So now we are at 8% interest-only, versus 12,5%, and we did that in about six months.

Joe Fairless: That’s beautiful. And it’s amortized over 30 years?

Scott Lewis: It’s just an interest-only loan–

Joe Fairless: Yeah, it’s interest-only so it doesn’t matter.

Scott Lewis: Yeah. It’s really been good that — you know, people are still getting a solid 8% return, and the equity investors are getting a lot more as well.

Joe Fairless: What’s the term of the loan?

Scott Lewis: It has a balloon at five years, with extension periods to six and seven years with one point. At seven years, if something has happened and we can’t refinance it, then in addition to continuing to receive that higher interest, the debt investors get equity positions that comes out of Spartan’s stake on the deal. So not only will they have a debt position, but they will also get equity positions as well, if we can’t refinance them out.

Joe Fairless: Wow. I love this story, this epic adventure, and I love this case study. How can the Best Ever listeners learn more about what you all are doing?

Scott Lewis: They can find us on Facebook, Spartan Investment Group on Facebook. You can go to our website at www.spartan-investors.com, or you can reach out to me at scott@spartan-investors.com.

Joe Fairless: Or they can meet you…

Scott Lewis: Oh, absolutely. We’re gonna be speaking at the Best Ever Conference. I believe it’s February 23rd and 24th, 2019. We’ll have a booth there. Best Ever listeners, and those of you that are new to the Best Ever podcast, I wanna say from a participant in every single Best Ever Conference that it is by far the best ever conference that I’ve ever been to, and I do not like conference at all. Joe puts on a fantastic conference.

So don’t worry about the cold in Denver… A little secret here – sometimes it’s 50 degrees, 60 degrees in February. Anybody that comes to that conference will have an absolutely amazing time, and I don’t care how long you’ve been in the business, you will learn a ton.

Joe Fairless: So meet Scott at the Best Ever Conference, February 22nd-23rd. You can go to besteverconference.com.

I enjoyed our conversation today and loved learning about this case study on the RV park. Then also I enjoyed your presentation last year at the conference… In your presentation last year you talked about the planning for how you look at worst-case scenarios, and lo and behold, here you go, now you put it in action.

Thanks for talking about this case study, thanks for being on the show. I hope you have a best ever weekend, and we’ll talk to you soon.

Scott Lewis: Thank you, Joe. I appreciate it, as always, being on the show.

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