JF2230: Recovering After A Tornado With Scott Lewis #SituationSaturday

Scott Lewis is the Co-Founder and CEO of Spartan Investment Group, LLC and has completed $100 million in assets under management and raised over $30 million in private equity. He is also a returning guest from episode JF1565 and today he will be sharing how he has handled a tornado event that damaged his mobile park property in west Texas. 

Scott Lewis Real Estate Background: 

  • Co-founder and Chief Executive Officer of Spartan Investment Group, LLC (SIG)
  • Previously on episode JF1565
  • SIG has completed $100M in assets under management and raised over $30M in private equity.
  • Based in Denver, CO
  • Say hi to him at https://spartan-investors.com/ 

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Best Ever Tweet:

“Plans are useful in battle but also dispensable” – Scott Lewis


Theo Hicks: Hello, best ever listeners and welcome to the best real estate investing advice ever show. I’m Theo Hicks and today, we’re talking with Scott Lewis.

Scott, how are you doing today?

Scott Lewis: I’m doing fantastic, Theo.

Theo Hicks: It’s good to hear. I’m looking forward to our conversation. Today is Saturday, which means it is Situation Saturdays; we talk about a sticky situation our guest has been in, what happened, how they got out of situation and lessons learned… Of course, with the purpose of helping you, the best ever listeners, avoid making the same mistakes, or if you happen to go face that situation, you have the tools to overcome it.

The situation we’re going to talk about today with Scott is Recovering After a Tornado has Hit your Property. But before we get into that, a little bit about Scott; he is the co-founder and CEO of Spartan Investment Group. Spartan has $100 million in assets under management and has raised over $30 million in private equity. He is based in Denver, Colorado and you can say hi to him at the website https://spartan-investors.com/.

Scott, before we get into that sticky situation, do you mind telling us a bit more about your background and what you’re focused on today?

Scott Lewis: Thanks, Theo. My background is in not only real estate, but I’m also an army guy. I have done some government service work and I started my career as a regional sales manager for a biotech firm. My past is kind of checkered with a little bit different experiences that I think when aggregated, maybe paved the way for some of the success that Spartan has had, just from the very experience in sales and then leading troops in combat and working for the federal government, which is very process-oriented. And then bringing all of those various skill sets, training and experience to Spartan Investment Group, that primarily focuses on self-storage. We’ll talk about an RV park today that was hit by the tornado, that we do own in the Permian Basin in West Texas. But that’s me in a nutshell.

Theo Hicks: Let’s get into the tornado. Maybe kind of walk us through what happened and then I’ll ask some follow-up questions.

Scott Lewis: It was actually this year, just a couple months ago. As I mentioned, that park is in the Permian Basin in West Texas. If you want to add some tornadoes, sprinkle on a little COVID-19 virus and then throw a dash of a massive oil route on top of it –  this made the last couple months at that RV park pretty fun. But what happened in regards to the tornado is that on March 13th, and I know that I have that date seared in my head, because it’s Friday the 13th… So for those of you that are superstitious, well, there you go. I got a text from a manager of an adjacent RV park actually, who was interviewing for the manager of our park role. She is actually the manager of our park. She’s like, “Hey, did you know that your RV park was just hit by a tornado?” And I was like, “Well, no. I appreciate you letting me know.”

So then we start calling our folks and yes, lo and behold, a tornado had come through and hit our RV park. Out there, there’s not a lot of infrastructure in an RV park. We have an office, we had some covers for the RVs out there, which are just metal legs with corrugated metal roofs, and then of course, the RVs. It was an F1 tornado, but it did a fair amount of damage. There were RVs flipped over and thrown, and I’ve got some pictures there that looks like a scene from The Walking Dead. But it did a fair amount of destruction. But 12 hours later, I was on the ground and starting the disaster recovery efforts out there.

Theo Hicks: I kind of want to look at this from a few different lenses. First, let’s talk about what you did between learning about what happened and then actually getting there. Maybe we can talk about what you did once you were there. And I also want to talk about how—I’m assuming this was something that you had raised capital for, so how you communicated that with your investors.

Let’s start with that first process. You learn about this, what are the first things you did once you finished reading that text, and after talking to everyone about what the issues were? And then go up to when you actually arrived in Texas.

Scott Lewis: So we’ll kind of talk with disaster recovery efforts and then communication efforts, although they were in parallel. At Spartan, we’ve got a pretty good team here and we have a pretty big team for what we’re doing. These efforts aren’t sequential; they were definitely in parallel.

The first thing that we did was try to get the best assessment we could from our team on the ground for life safety stuff. In any disaster recovery, the first thing that you need to do is focus on life safety. By life safety, it’s treating and triaging any major injuries. We were very lucky in that regard that we only had some minor scrapes and bumps, even though people were thrown in their RVs by the tornado. Luckily, nobody was killed out there. We were able to very quickly assess that there were no major life safety issues. We got the fire department out there to quickly disconnect the electrical, which is the other major life safety issue that you have in any disaster.

Once we verified no major injuries, and we secured the electrical systems out there such that there weren’t any additional life safety issues. Now, if you have a multifamily building or something like that, you could have some structural integrity issues or something along those lines that may present additional life safety issues. But for us in the RV park, really we just had the electrical. That was only the part that would pose future life safety issues.

Once we did that, then we circled the leadership team, both on the capital side of the house, to deal with our investors in regards to making sure that we communicated with them, and then also to deal with the property from the operations’ team side of the house.

Me, I had probably the most experience in disaster management, both from my government training and then also my army training. So I was on a plane the following morning at [6:00] AM to get boots on the ground there to start kind of running triage at the site. But in the meantime, the processes that were started were to start engaging our insurance company, engaging the on-site management to make sure that they had whatever initial resources that they needed, engaging all the local facilities and then immediately, right away, Ryan Gibson, our Chief Investment Officer, put out a message to our investors letting them know that, “Hey, this asset was hit by a tornado. However, here is our initial plan.” And that’s kind of how we started in the initial 12 hours, with me conducting movement down to the site, to then start orchestrating the initial phase of the disaster recovery on-site there with our management teams, and then all the local first-responders.

Theo Hicks: Once you got there, what did that process involve? Obviously, the life safety was already taken care of, the investors were notified. Were you manually, yourself, with first-responders moving debris, or were you kind of just like the person in charge of telling everyone what to do? What was that process like once you actually got there? What was going through your mind? What did you do?

Scott Lewis: I definitely wasn’t the guy moving anything, I was more of, I’ll call it, the commander, if you will, of the operation. I basically set up—in the military we call them TOC, a Tactical Operation Center, in our office down there at the facility, in which I coordinated both with our reach back team here in Denver to providing whatever assets and assistance they could from research or engaging various entities down there to support the initial recovery efforts. And then also on the ground, we were trying to help the folks out there who were in a bad way, because everybody down there is living in their RVs. This isn’t one of those RV parks where it’s a destination of RV park, all these guys are oil workers. A lot of them lost their homes that night, because that’s where they were living. So their belongings were scattered everywhere.

So one of the key things that I was coordinating down there was making sure that they had shelter and food. Through the managers on-site, and then through the various governmental organizations and non-governmental organizations like the Red Cross, trying to coordinate as much food and water to the site as we could, and then also coordinating with local hotel owners to try to provide our folks with some emergency housing. And I’ll say this, some of the hotel folks down there in Pecos, Texas were fantastic. They offered free rooms to our folks and then also discounted rooms for the long term.

That was my immediate 24-hour focus, was to make sure that our tenants down there that had lost everything had at least shelter, food and water for them and their families, while we could kind of sort through the mess.

Theo Hicks: How long were you there for, in Texas?

Scott Lewis: I was on site 96 hours, so four days I was on site.

Theo Hicks: Okay.

Scott Lewis: The recovery efforts – like I said, these folks were living out there, and some of the RVs weren’t damaged. It wasn’t total destruction out there. We got very lucky that at this particular park, there’s no water in this area, so we have set up what’s called a public water service. And there’s a 28,000-gallon water tank that’s out there that provides water to the park. The electrical infrastructure, we got really lucky – the tornado only hit one of our poles, but the main poles coming into the property were not damaged.

So within 24 hours, we were able to get probably about 30% to 40% of the RV park up and running to where there was power and water so that the folks that were living out there could move their undamaged RVs – because not everybody was damaged – they could move their undamaged RVs and hook up so that they had a place to live. That was my main focus, was trying to get power and water back onto as much of the park as I could to take care of the people that were living and working out there.

Theo Hicks: It sounds like 30% to 40% were able to, within 24 hours, get back to relative normalcy, and then other people had to go to the hotel. Is the park up and running 100% right now?

Scott Lewis: 100%.

Theo Hicks: How long did that take to do?

Scott Lewis: 30 days. For Spartan, we’re planners by nature, both myself with my military background, and then my co-founder Ryan is a commercial airline pilot. Both of us come from roles that if you don’t have a good solid plan when disaster hits, a bunch of people die.

For this one, one of my key roles – and I did it on the flight down there and then finished it up once I had more situational awareness on the ground – I wrote a disaster recovery plan based on some of the Spartan’s principles for disaster recovery. We have three phases that we really focus on. That’s the life safety phase, which is right up front, and that’s just making sure that we secure the site and that everybody’s safe. We have IOC, which is your initial operating capability for any of our sites. That’s getting basic amenities back online, like water, sewer, electric, whatever it is. And then we have FOC, Full Operating Capability. That’s our last phase. And that’s getting the amenities back online, like Internet, all the cleanup, all the debris removed and everything else like that.

So we were at IOC within 24 hours. We got electrical crews out there and emergency folks to come out and fix the electrical lines. We were able to internally fix most of our plumbing lines ourselves. We did have to get some plumbers out there to fix some damaged underwater lines. And then we were at FOC, Full Operating Capability within 30 days.

Theo Hicks: So FOC is full operating capabilities. What was IOC again?

Scott Lewis: Initial Operating Capability.

Theo Hicks: Initial operating capability, okay. Obviously, not everyone has someone with former military experience and a commercial airline pilot, as you said, in both of those roles. When disaster hits you realize that you don’t have a plan that’s life or death, so what would be your recommendation for the everyday investor, who probably will not be able to react the way that you were able to react so quickly, based off of your background? What would be your recommendation for things that they do now, so that if disaster were to strike, they are already prepared, at least more so than they would be if they didn’t do anything?

Scott Lewis: There’s two quotes here that I really love that I think tie into it, and one’s by Mike Tyson. And I actually said this on stage at Best Ever 1, that “Everybody’s got a plan until you get punched in the face.” But at the end of the day, that quote ties into one from Eisenhower, in which Eisenhower said, “In preparing for battle, I generally find that plans are useless, but planning is indispensable.”

Regardless of the plan that you have or the planning background, whenever you get on-site, when you have a disaster or any complex situation that’s going out there with variables that you can’t control, your plan’s never going to work. However, the actual thought process that goes into the plan at least prepares you to some level to deal with the uncertainty and complexity that a disaster situation will provide you.

Disaster management plans aren’t special to the military and they aren’t special to the airline industry. In fact, most governments have home disaster plans that you could go down and you could get. What you do in a home disaster plan isn’t that much different than what you do in a commercial asset plan. If you google disaster management plans, there’s a ton of stuff out there. It might not be perfect, and you might not be able to execute like Spartan does, but at least you have a plan and at least you’re prepped so that maybe you can do 20% to 30% of what we were able to do because of the training that we had.

Theo Hicks: Sure. From an investor standpoint, so after that initial email that was sent out within — you said within 24 hours that email sent out to investors?

Scott Lewis: Probably one hour.

Theo Hicks: One hour. Okay. What was the follow-up communication like? When did you follow up with them again? What did you say? And then obviously it ended after 30 days – I’m just curious to see, was it a daily update, a weekly update? Was that whenever you transition from IOC to FOC? Kind of walk us through that.

Scott Hicks: The answer to your question is yes. During the life safety, it was every single day. I would make a video while I was down there every day and walk our investors through what we were doing every single day. When we got to IOC, it was still every day. I did it probably every day for about a week.

When we moved from IOC into cleanup, which was just like getting debris out of there, we went to weekly. where I would make a video weekly. And that video also came with a written message to say, “Hey, here’s what we did in the last seven days. Here’s what we’re going to do in the next seven days.” I did that until we hit full operating capability. All told, I bet you I did, in the 30 days, between myself and Ryan, between written communication and videos, we probably did 12 communications inside of those 30 days, keeping our investors up to speed on what was going on. It’s funny, we got handwritten notes, we got emails, we got calls from all of our investors, saying it absolutely blew them away with the amount of communication that we were doing for them.

Theo Hicks: Is there anything else that you want to talk about as it relates to this particular situation, where disaster hits your property, or anything else that you want to mention about your company before we wrap up?

Scott Lewis: I think just for any sponsors out there that get their selves in a situation where you have an emergency situation on it – in the infantry, we have a saying, “Take a knee, face out and drink water.” That basically just says pause before you react. Don’t necessarily jump in and react, because the first report you get will always be wrong. Take a knee, take a breath, kind of think through what you want to do before you just start acting. Because if you don’t take that breath, and you don’t really think through, your initial actions most likely will be wrong.

Theo Hicks: Okay, Scott. I really appreciate you coming on and going into extreme detail on what you and your company did in order to quickly resolve the disaster of a tornado hitting your property. You went into a lot of detail, but you kind of broke it down into three main steps, which is that life safety phase, where you secure the site, so you got there really quickly, you make sure that everyone is safe, you assess any injuries, you makes sure that the fire department comes in to disconnect the electrical. This was a mobile home park, so you mentioned there wasn’t a lot of infrastructure, but if there is infrastructure like at a multifamily, then that might be something you need to address as well, like make sure the walls aren’t going to fall down on people’s homes.

Once you get past that phase, you move into the IOC phase, which is the initial operating capabilities. That’s focusing on getting the water, the sewer and the electric working again, right? Things that people need in order to actually to live there. For this particular situation, you said you were able to get through the IOC phase in 24 hours. And then once you get past the initial operating capabilities, you go into the next phase, which is the FOC phase, the full operating capabilities, and that is essentially getting everything back to 100% operations; so clearing debris, getting all the things that aren’t necessarily needed to live off of, although it’s pretty important. But you said the things like Internet’s in that you’re able to get back to FOC within 30 days.

We also talked about the investor communications. You mentioned that the first email went out within an hour of you being notified of the tornardo having hit. And then during your first week, you said you made a video every single day of you basically walking around the site, and giving investors updates on what you were doing. And then after that, during the cleanup phase, you went to weekly videos, where you said, “Here’s what we did the last seven days. And here’s what we’re doing in the next seven days.” You also did a written communication as well. During that 30 day period, you said you did about 12 communications between video and written communication. And you mentioned that investors were really happy about this.

And you gave us two quotes; “Everyone has a plan until they’re punched in the face,” and then “Plans are essentially useless in battle, but they’re also dispensable.” You’re never going to have the perfect plan for when a disaster hits, but the process of actually creating a plan will help you a little bit more than if you did absolutely nothing in life-threatening situations. That’s important. You also mentioned that you can find some home disaster plans by googling it, because the government makes a lot of those.

The last thing that you said was that you want to make sure that whenever disaster hits,—and really this could apply to a lot of different things as well, is to pause, to take a deep breath before you react, because the first reports that you’re getting are most likely always going to be wrong. So you need to make sure you think through what you’re going to do before you actually do anything, because if you are taking action on false information, then you’re probably just going to make the situation a lot worse.

That basically covers everything you went over. Again, you went into a lot more detail on certain aspects, so that kind of hits the main point. Again, Scott, I really appreciate you coming on the show.

Best ever listeners, as always, thank you for listening. Have a best ever day and we’ll talk to you tomorrow.

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JF2209: Rising Insurance Rates With Bryan Shimeall #SituationSaturday

Bryan is a former real estate builder/developer and is now working with Multifamily Risk Advisors insuring units across the country. He was a previous guest on episode JF1595  and In today’s episode Bryan will be sharing info on how insurance rates are rising at historical levels and the rates are killing many new deals and hammering the profitability of existing assets at renewal. He will also discuss effective strategies to navigate the insurance market.

Bryan Shimeall  Real Estate Background:

  • Former real estate builder/developer
  • Joined Multifamily Risk Advisors 6 years ago; they insure about 200k units across the country
  • Based in Gainesville, FL
  • Say hi to him at:  www.tbmins.com   




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Best Ever Tweet:

“Losses, roof, and wiring, if those three things are positive I can get any property written pretty quickly ” – Bryan Shimeall


Theo Hicks: Hello, Best Ever listeners and welcome to the best real estate investing advice ever show. I’m Theo Hicks and today, we’re talking with Bryan Shimeall. Bryan, how are you doing today?

Bryan Shimeall: I’m doing great, Theo. How are you doing?

Theo Hicks: I’m doing great as well. Thanks for asking and thanks for joining us again. So Brian is a repeat guest. His first episode was Episode 1595, so make sure you check that out. Today being Saturday it’s going to be Situation Saturday, so we’re gonna talk about a sticky situation that our guest was in, but that you are probably in. But before we get into that, a little bit about Brian. He’s a former real estate developer and builder. He joined Multifamily Risk Advisors six years ago; it is an insurance company. They insure about 200,000 units across the country. He’s based in Gainesville, Florida, and his website is tbmins.com, which is in the show notes as well. So Brian, before we get into this sticky situation, do you mind telling us a little bit more about your background and what you’re focused on today?

Bryan Shimeall: Absolutely. As you alluded to there, I have sat on the other side of the table for a lot of years as an insurance buyer. I had grown up a pretty good-sized custom home building business with a little bit of light development. For the most part, I was doing custom homes, investing in real estate in a variety of different ways. And then along came ’08, and along came kids, and I started looking for other things to do and tried to parlay a lot of my real estate experience into the insurance world with a focus on real estate, which is what I’ve done.

So yeah, I understand the perspective of both being someone who sells insurance and someone who buys insurance. I can understand the complications a lot of people encounter and the difficulty a lot of times in understanding.

Theo Hicks: Perfect. Let’s talk about one of these potential difficulties. So we’re recording this in the beginning of August 2020. We’re still in the midst of the coronavirus pandemic, and as anyone who’s investing knows, insurance rates are going up. So the situation is increasing insurance rates, and then Bryan’s gonna go over the solution. But before we talk about any potential solutions, can you let us know what’s going on in the insurance industry? Why are the rates going up? When are people going to be affected by these rate hikes? How long are people gonna be affected by these rate hikes? Things like that.

Bryan Shimeall: Absolutely. If we would have done this podcast pre COVID, pre quarantine, a lot of the things that you’d be hearing, you would have also been hearing then. So my point being is that COVID has definitely not helped matters with the insurance markets or any industry, but definitely not the insurance market. I don’t think anybody completely knows the fallout from that. I think, in general, it serves everyone a good purpose to understand where rates were historically, where they got to and now, where they’re trending. For a lot of years there, we sat in what we call the soft market in the insurance industry, and that was the carriers were almost fighting for business if it was a buyers market. Most of my clients were grabbing the OMs off of deals and using whatever number the seller used the previous year for their own underwriting of their deal. As much as we did preach against that, for a lot of different reasons at that time, frankly, it usually was somewhat accurate.

And then about a year, a year and a half ago, the market really started firming up, driven by losses. Weather losses, GL claims across the board… Habitational insurance, whether you’re talking about property insurance to the casualty side with your general liability, it fell out of favor with most insurance carriers. A lot of the [unintelligible [00:07:31].17] specialize in providing coverage, and they just haven’t been profitable for a lot of years. So the market really started firming up. Rates started going up. People started getting increases, which was really had been due. People had not been experiencing that for seven, eight years before that. And along with the hard market, everybody’s always concerned about price.

But talking about sticky situations, it’s now a seller’s market. And the insurance carriers, the underwriters are being extremely picky with what assets they’re willing to insure and what assets they won’t. Their non-renewing, many properties that they currently insure, for a variety of reasons. It could be losses. You’ve sustained a sizable loss at a property, I would say the probability is you could probably see a cancellation from that, come renewal. So you get out in front of an [unintelligible [00:08:21].04]. As far as new deals that you’re looking at, the underwriters are looking at a variety of factors – the age of the building, the roof age, the wiring, its location, crime scores. They are really picking and choosing what they want.

In a lot of situations, especially if you’re buying a property that’s got a lot of deferred maintenance on it, it has a lot of loss, maybe it’s located in a poor area, you honestly might only be left with a couple of carriers, if any, quite frankly. But at best, maybe a couple of carriers that are willing to offer coverage on that, and they’re going to do that at the price that they’re comfortable with. And I can tell you that rarely ever is an insurer comfortable with the price that they’re throwing out there.

It’s a difficult, difficult time right now; there’s no doubt about it. I mean, there’s ways to navigate it and things you can do. These markets do go up and down. I always say that we’re a little bit like the stock market. The difference being the stock market fluctuates on a daily, weekly basis. Insurance markets tend to take a direction over a course of a year. They don’t make sudden, quick jumps, but once they take the directions, it’s like a big battleship. They continue to head that way for a period of time, and that’s what’s going on now.

And then you bring up where we are to date now with the quarantine. Again, I don’t think anybody knows the fallout from that, but between the riots that have gone on, civil disturbances, just the cost of litigating a lot of business income claims on COVID that are pretty clearly in most policies excluded in terms of coverage, it’s nonetheless going to shove cost into the industry. And the way that the insurance industry responds to that is they raise rates to cover that cost. So I don’t want to definitely start the show off and be a downer or anything like that… But if you’re looking at a new deal now or you’re renewing portfolio or properties, insurance is something that you most definitely want to get out in front of, because it can kill a deal right now, or it can really hurt the profitability on your portfolio.

Theo Hicks: So is there a number or a percentage that you would say insurance has gone up? Or is it going to be very deal-specific, property-specific?

Bryan Shimeall: It is very deal-specific. I would say, in general, if you’ve had a property or portfolio that’s been pretty loss-free, performed pretty well for the insurance carrier, you could be looking at single-digit increases… If the property’s got a little bit of loss or maybe it’s got some age or factors they don’t like, you could be looking anywhere from a 10% to 20% increase across the board. If you’ve sustained significant loss in a property – it could be a weather claim on a roof, it could be a large slip and fall claim on the GL, you could start seeing some rather substantial increases.

But it is situational too. So many times, if you were paying a lower rate than you probably should have been, if you’ve been grandfathered under a policy and then paying some pretty aggressive rates, you might see a really large increase. It might not feel good, but compared to the market, you’re probably not that bad. The flip side is, maybe you’re [unintelligible [00:11:13].02] in any place and quite the right spot and you were paying a little bit more than you should have last year, then you might start seeing a little bit less of an increase. It may not feel so bad for it. So it’s situational.

It’s definitely geographical driven. The Midwest right now, Texas, Oklahoma, Missouri, they are just getting killed with hail claims, and that’s probably the most difficult market. Out here in Florida, in the catastrophic market, which historically people talk about being very difficult… It is; there’s just not a lot of carriers that do it. But in terms of increases and in terms of placing insurance in a catastrophic area, believe it or not, it’s really not my most difficult market right now, compared to a lot of other places.

Theo Hicks: Something interesting you said was a COVID-related. The businesses that are impacted by COVID like retail businesses that shut down. Is that something that you see insurance companies attempting to take into account when they’re doing policies now, but also in the future? So I own a restaurant. Is my insurance going to likely go up a lot for that reason?

Bryan Shimeall: I think I understand what you’re getting at. It depends if you’re focusing on a premium or a rate. And what I mean by that is this. So many different types of industry– we’re outside of multifamily right now when you’re talking about restaurants, for example. The actual premium is a factor of the revenues. Or for example, work comp related policies would be based on payroll. So that’s one of the factors, multiplied by a rate, and then that will equal your insurance premiums. So my point is that, yeah, I think across the board, you’re going to see rate increases go up. Maybe not on the workers’ comp side, but property rates, liability rates, auto rates… There could be some argument that there’s a lot less cars on the road, maybe auto rates don’t go up as much. But I would pretty much assume that the rates themselves are going up. Now, if your payroll’s down, if your revenue’s down, you might not see your premium increase that much. But yes, in general, the answer to that question is yes. I just had to give a little clarification to it.

Theo Hicks: So we should be thinking about insurance, not as a flat rate, but as a percentage of income. Let’s say like a multifamily investor. So I’m just transitioning to multifamily. When I’m underwriting new deals now, am I setting it based off of a percentage of income? Or am I reaching out to you and saying, “Hey, here’s the situation. What’s my premium going to be”?

Bryan Shimeall: Well, if you look at multifamilies, you look at it from a per-unit basis. And yes, you could correlate to a variety of other figures, but day to day, you want to look at multifamily from a per door basis. And yes, your per door costs are going up almost across the board universally, across the industry, without a doubt.. Then if you begin to look at other asset classes, whether you’re talking about industrial or retail, those are really based primarily upon the values of the buildings. Well, multi families too, but at the end of the day, you could look at that as a percentage of that.

Theo Hicks: So what would be your piece of advice? What should I be doing when it comes to insurance for a new deal. If I got a new deal, and I look at the OM, and I’ve got a number… You said before, people were just using the OM, which obviously you don’t want to do, but it was fine, because they weren’t going up that much. Whereas now, when I’m underwriting a deal, I can put aside the other expenses, talk about specifically about insurance. What should I do?

Bryan Shimeall: I would say, right out of the gate, with us specializing in real estate, with a particular focus on habitational, we’re one of the few that truly specialize in it. So what I mean by that is most people do what I do. They cover a variety of different industries, and they try to do the best job they can. Our focus is more centric as to what’s going on in the real estate industry, which gives us some unique knowledge. It also allows us to provide some pretty unique services. And what I mean by that, to your question is, we try to become part our clients’ due diligence team. So if you’re looking at a new deal– let’s look at multifamily. First thing we’re going to ask, “Where’s the OM on the deal?” The OM’s going to supply all the information we need that tells us the physical characteristics of the building – the age, the location, the number of units, the square footage, all of these things go into helping the carriers come up with their rate on a property. So the OEM helps us tremendously.

I also like to get hold of things like rent rolls. We can even be looking at vacancy rates. So we can either navigate it if there’s a vacancy issue with the carrier, or really try to push it as a positive. But if you get 95%, 98% rented out, we’d like to leverage that as much as we can with the carriers, and that all comes out of the rent rolls.

Most importantly right now I think are losses. It’s finding– the most difficult part of my job, without a doubt, is my clients collecting accurate and complete loss information. What I mean by accurate and complete is, the losses need to be generated by the carrier; even the seller’s losses, because the rate you pay is going to be based upon the seller’s losses, and we can talk about that later, but that is just the fact.

You need up to date losses, meaning the losses have been generated by the carrier in the last 30 to 60 days, so the new carrier is confident that they’re looking at an accurate picture of if the loss history has been on it. The most difficult part of my job as obtaining these losses.

A lot of time my clients, especially new clients, they just don’t really understand the importance of this. It is funny, it’s because it’s one of the easiest things that you can get. If the seller wants to transact the property on a new deal, all they have to do is just send an email to their agent and say, “Give me five years. If you can’t get it, three years  is the minimum. But as much as I can, give me five years of loss history for the property insurance and for the GL insurance.” It’s 30-second email, and you should have it within 24 to 48 hours. That gives all carriers a clear picture of what’s occurred on the property. And again, with this being a hard market — because they’re not giving you a whole lot of leeway with that. If there’s a missing year here or they’re dated, they might just decide not to quote. Or if they do decide to quote it, they might factor in some for the unknown there if they do it. So the losses are big.

So getting to my point about being part of the due diligence team – we work hand in hand with clients on the front end, help them collect all this information we can so we can paint the best possible picture we can to the carrier. And also, during this process, we can give you an accurate indication of what the insurance costs are going to be for your own underwriting. So if there’s any retrading in the deal or something like that… I had a deal a couple of years ago where I had the same conversation with clients begging for losses, please get the losses. Oh, we can’t get them. Finally, it was like “Well, he said no losses.” And well, I could base our estimate on that. And then lo and behold, when we finally needed the losses… It was a week before closing, and they finally had to present the losses. There had been $3.5 million to $4 million worth of loss on the property. And the insurance rate went from $375 a door to $500. I think $60, $70 a door is just substantial. The client ended up having to walk away from the money they put down, because they couldn’t qualify for the loan. And that’s probably a worst-case scenario that could happen, but it absolutely can happen. There’s no getting around these losses.

Another big factor, too, is consulting with our clients on some physical characteristics of the building that not only affect insurance premiums, but also might affect capital expenditures that you have to undertake on a property. Specifically, that usually revolves around roofs and wiring. This one’s a little tough to maybe wrap your head around, so if I’m not clear, get me to clarify a little bit. But your insurance carrier wants to know the age of the roof. But believe it or not, they’re willing to offer coverage, pretty much, on a property, regardless of the age of the roof. But they might only be willing to do that by factoring in depreciation. So what I mean by that is this. If it’s got a 20, 25-year-old roof on it, they might give you coverage on it, but if there ever comes to be a claim, they’re gonna factor in depreciation. So there’s going to be almost no coverage for the roof.

As opposed to not factoring in depreciation, which is called replacement cost, which they are willing to do, most carriers… I mean, everyone’s different. But for the most part, if that roof is 15 years of age or less, then you can get replacement costs. So if the roof blows away the first day you insure it, they’re going to come up with a brand new roof on it for you, and they’re not going to factor in depreciation. So our clients would be fine with the depreciation factor. The problem is that Fannie and Freddie aren’t. So there’s at least two deals a week that I look at to where it needs new roofs, some of the roofs are 20 years old, they’re going with agency financing on it, and we have to have the same conversation and say, “Look, you’re gonna have to fix these roofs.” And then you get into the quandary of “Well, can they do it in the first 30 days of ownership? Does the seller need to do it before you can buy?” And with the market getting more difficult and more difficult, most of these conversations are, “Hey, this seller might have to replace them.” And so he could be neck deep into a deal and only come to find out at the 11th hour that you’ve got a roof problem. Fannie and Freddie do not give a waiver one that; it doesn’t happen. Never got one, never will.

Some carriers have a little bit of leeway with it, but their leeway is so tiny on it. It’s not good. And with regards to it– I’m probably talking too much about it, but so many people waiting on the PCA. But I will tell you, every PCA I’ve ever read, whoever goes out there, will never state the exact age of the roof. They allude to estimated ten years of life remaining, estimated 15 years a life remaining. And if the lender or the carrier or somebody finds out what the true roof age is, it can give you problems. So just as important as losses, find out who knows roofs were last replaced, because it’s a big, big deal.

And then wiring doesn’t have near the lender problems that roofs do. But your wiring is either copper, and you have no problem with any carrier. It’s aluminum, which means you can have a lot of problems with carriers. There’s only a few willing to do it. And then you can have remediated aluminum, which opens our world up a little bit. If it’s truly remediated aluminum, then we can most likely handle that with the carriers. But time and time again, if you just verbally asked the seller, “Hey, has the wiring been remediated?” “Yes, it’s been remediated.” The next thing you know, you own the property, then out comes the insurance carrier to inspect it and they come to find out it hasn’t been remediated or it hasn’t been remediated properly. The problem is now you own it, and now you’re in a situation where it’s a known condition. And really, people don’t have much choice other than to remediate it, which again, it can be a large capital expenditure.

I would also say Stab-Lok panels – I don’t know if you’ve ever heard of those, but Stab-Lok panels is an old electrical panel that went through a lot of lawsuits, a lot of claims, and a lot of carriers just will not cover Stab-Lok panels. A lot of times, I see people that buy properties, and the next thing you know, they have the Stab-Lok panels. So losses, roofs and wiring, if those three things are positive, I can get any property written pretty quickly. But lacking any one of those pieces of information can make it real difficult.

Theo Hicks: Perfect, Bryan. Well, thanks for walking us through all the current state of the insurance industry, about how rates are going up, and the types of things we need to do when we’re looking at new deals, and making sure we have a specialized real estate insurer on our due diligence team, so we’re not screwing ourselves over after we acquire the property.

So thanks for joining us. Thanks for going over this with us. Again, Bryan’s website is tbmins.com,  and is also in the shownotes. Best Ever listeners, as always, thank you for listening. Have a best ever day and we’ll talk to you tomorrow.

Bryan Shimeall: Thank you.


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JF2188: Fake Rent Checks With Jack Gibson #SituationSaturday

Jack is the President & Co-Founder of High Return Real Estate and also a returning guest from episode JF1252. Before he started into real estate, Jack started off by selling products for a multi-level marketing company, taking him 9 months to make his first commission check of $14…and after sticking it through and learning the business his business is now generating around 20 million in sales. In this episode, he goes into a sticky situation that he recently ran into by working with a company and finding out he was receiving “fake” rent checks.

Jack Gibson  Real Estate Background:

  • President & Co-Founder of High Return Real Estate
  • Returned guest from episode JF1252
  • Portfolio consists of 80 turnkey properties
  • Based in Indianapolis, IN
  • Say hi to him at: https://highreturnrealestate.com



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Best Ever Tweet:

“The number one lesson I have learned is to trust, but verify” – Jack Gibson


Theo Hicks: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I’m Theo Hicks and today, we are speaking with a repeat guest, Jack Gibson. Jack, how are you doing today?

Jack Gibson: Great, Theo. Thanks for having me back. Appreciate the opportunity.

Theo Hicks: Thanks for coming back. I’m looking forward to our conversation. So today is Saturday which means it is Situation Saturday, so we’re going to be talking about a sticky situation that Jack was in, what happened, lessons learned moving forward, so that you can apply that to your business and not get in the same situation in the future in your business. But before we get to that, let’s talk about Jack’s background. So he’s the President and Co-Founder of High Return Real Estate. Make sure you check out his first episode, which was Episode 1252, where he talks about his turnkey portfolios; right now, his portfolio consists of 60 turnkey properties. He is based in Indianapolis, Indiana, and you can say hi to him at his website, which is highreturnrealestate.com. So Jack, before we get into your sticky situation, could you tell us a little more about your background and what you’re focused on today?

Jack Gibson: Yeah, I got started in entrepreneurship when I was 19; I’m 42 now. I was going to college, living in the dorms. My parents said, “Get good grades, study hard.” They checked up on me, went to all my parent-teacher conferences in college, if that gives you any type of idea of what household I grew up in. It was great, but there was high expectations.

One day, I get this flyer while sitting in my dorm room about an opportunity to sell nutrition products in a multilevel marketing company. At first, I thought, “Man, this is probably a scam, this isn’t gonna work, how am I going to sell this?” So I just threw the flyer to the side, and then I don’t know, something hit me and I said, “Why not just take a look?” This is how opportunities are found, is that you really could just take a look and research and see. So I looked into it and I was excited. So I signed up, and that business today– it was a rough start. I think it took me nine months to get my first commission for 14 bucks. So I was selling some products and making a little bit of money along the way, but I didn’t get my first official commission check until nine months in. But from that point, I started figuring things out and that became a million-dollar business by the time I graduated college. So I’ve been doing that ever since, and now I think this year we’ll probably hit close to $20 million in sales in that operation. So it’s been amazing.

So that allowed me the opportunity with a cash flow business like that with very little expenses to be able to invest into real estate, and that’s when I started about five years ago with a turnkey property myself. So I bought from a turnkey buyer.

Theo Hicks: Perfect, thanks for sharing that. So let’s talk about your sticky situation. So I’m just gonna let you tell us what happened. Tell us your story, and then once you’re done, I will jump in with some follow up questions. The mic is yours.

Jack Gibson: Yeah, I just finished this book by Keith Cunningham, I thought it was fantastic, called The Road Less Stupid. I feel by sharing this, I’m sharing the road more stupid. But look, I’ve found that sharing transparently and sharing your successes and your failures and your mistakes and your stupid decisions and all of the bad things that happened to you along the way – that makes you more relatable. People really like that, because they probably all have their own similar story, maybe at various levels of stupidity, and have bad, sticky situations. But that original turnkey buyer that I bought from was called OceanPoint, and they sent me a mailer, and at that time, I had just done a trip into Indianapolis about three hours from my house here in Michigan, and I was looking into just buying a property that was already done and already performing. Their price to rent ratios were incredible, so I started buying up properties. I got up to 15 units with the owner-operator and I was getting really nice rent checks, over 20% returns. So naturally, we built up a really good trust, a lot of relationships with people over the last 20 years of doing business, and they know how I show up and I said, “Look, this is working for me. This is a good operation; I went in and checked it out. I’ve met him a few times, I’m getting rent checks every month,” and I started posting that on social media and just telling colleagues, friends, family, neighbors, and I sold $5 million. I referred $5 million in cash business in the first 12 months just from that.

So that was about– I don’t know how many investors maybe 20 to 30, somewhere in there, and we had about 130 units, including mine altogether. So it turns out, none of us got inspections. Maybe there was a couple of people that did and those did check out, but the vast majority of us that bought, including myself, we didn’t get any inspections. We just trusted the owner, and it turned out a lot of the rent checks were fake. So he was operating a Ponzi scheme almost, and we didn’t even realize it; none of us. So once everything crashed, and eventually that’s what happens in those types of situations; it’ll eventually crumble. They run out of money to keep paying investors, or whatever happens. Once we all realized the condition of our properties and how much they had been neglected, it was just a disaster. So everybody was looking to me to fix their situation, and I took responsibility for that. I look back now and I’m like, “Man, I ruined two years of my life taking on so much responsibility.” But that’s when you operate at a high level of integrity, you take full responsibility and just figure out what can we do? How do we get out of this?

So over the course of about the last two years, we just went back in and got contractors, fixed up all the properties, found new management, and then we found another management company after that, because the next one didn’t work… The contractors, a lot of them screwed us over again. So it’s just a really tough situation because we were left with essentially all these properties that were in bad shape, that were not performing, and we didn’t have the connections and trusted resources to be able to fix them back up and get them performing again. So it was that whole process, literally… And the bulk of it, I got done in about 24 months, and I still have my very last property today, three months later.

Theo Hicks: Wow. So Oceanpointe, how do they operate? You said that once you figured out what was going on, you got new management, you got contractors in there… So you bought the properties through Oceanpointe, and then were they also full service, they were managing it as well?

Jack Gibson: Yeah. Well, when you buy a property at a tax sale for $10,000, and then you sell it for $40,000 with a promise to do $20,000, $25,000 worth of rehab on it, then instead of doing $25,000 worth of rehab, which to get the bones of the property fixed up, which of course be the major cap-ex items – the roof, the foundation, the electrical, the plumbing, when you don’t do any of that and you just put lipstick on a pig and make it look good on pictures, and then you’re sending rent checks out, he was able to hide the lack of quality of the property. So we would look at the pictures, the pictures looked great, but what we found out later is that not one property had working plumbing or electric. Not one property was fully functional. Almost every property needed a new roof, too. So those are very expensive items, especially if you’ve already “paid for them” when you bought the property. So now you have to do that all over again. So now you have to put another 20, 30 grand into a property, and now you’re way over market value.

Theo Hicks: Yeah. Were the properties supposed to be renovated already when you bought them?

Jack Gibson: Yes.

Theo Hicks: Okay. So you were told that hey–

Jack Gibson: Well, some of them, but a lot of them were — you’re buying them pre-rehab; say you’re buying it for $20,000 and you give them $20,000 in rehab, or whatever the case. Maybe you bought it for $30,000 and you gave them $30,000 in rehab for a duplex type thing.

Theo Hicks: So probably what’s happening was this, he was saying, “Hey, I bought this for 10 grand, you buy it for $40,000, and I’ll do 30 grand renovations,” but instead of doing the renovations, he was just paying you rent checks from that 30 grand.

Jack Gibson: Exactly. You got it.

Theo Hicks: Okay. So once you figured out what was happening, you told me that it took you some time. Well first, before we get into that actually, before I ask you questions about how you found the contractors, how you found the property management company and maybe tell stories about how you had issues there too, tell me from the time you figured it out to after you talked to all the people – how did those conversations go? Did they call you? Did you call them? What did you say? How did they react?

Jack Gibson: One day I, all of a sudden, got five to ten texts or emails from people that were “Will you buy my property back, or can you help me sell this?”, and I’m like, “What happened?”, and every single one of them, their rent had dropped by about 70% to 80%. So what happened was he didn’t actually have a property management license. It had been revoked a year or two or more before. So he was operating under the management license of another broker. Well, that broker got really uncomfortable with what he was doing. In some cases, not even turning water on for tenants; that’s documented. We know that to be a fact. So now, he pulls the management away. So now you’re left with “Okay, who’s actually really paying?” So all of a sudden, it just dropped like a rock. Everybody’s messaging me and I’m like, “What just happened?” So then we realized that it hit the fan. Everything had just collapsed all of a sudden.

Theo Hicks: So you said you realized… So did you — at that point, once you started getting all these texts, did you call this guy? Did you go out to the property right away and see that they were in complete disarray? How did you actually 100% knew “Okay, this is bad”?

Jack Gibson: Well, we had some suspicions that things weren’t on the up and up, so at that time we were making plans with a new property management company to switch everybody over. So we knew that something wasn’t right, but we did not know by any stretch that it was to the level that it was at, because everybody was still getting rent checks. So if they’re still getting rent checks, we’re like, “Okay, I mean, we have no reason to believe that this isn’t real tenants paying. Why would anybody pay out fake rent?” Well, he was paying out fake rent to get people to buy more properties, to lure them in. So as long as the sales kept going, then he had enough money coming in to keep paying off the fake rents. Well, when the sales all of a sudden just dried up, his main guy stopped selling because he realized what was going on. Well now, he doesn’t have any income to pay out the rent.

So yeah, when that happened, I was calling him, texting him, but he wasn’t answering. He just went dark on everybody. We lawyered up and FBI has been to his home, and under indictment and probably got about 20 to 30 lawsuits coming at him right now. So that’s pretty extensive, the level of hot water he is in, but that didn’t do anything to make us whole. We had to figure it all out on our own.

So I went into town, got some contractors that I didn’t know, I started getting quotes from them. We had so many properties all at once that there just wasn’t a lot of time — we were under duress, so we didn’t have that much time to vet them as well as we would have liked. We’re just like “Here. You go here, you go here, you go here and let’s get these done and get these back performing again”, and that didn’t work, because they just took advantage of the situation and they didn’t really do a good quality of work. So then, finally I met up with a contractor. He’s my number one guy to this day. He is just an awesome guy. He’s a structural engineer and he went into every property that we still could salvage and he got them squared away.

Theo Hicks: How did you find this guy?

Jack Gibson: It’s funny. He bought a house on land contract from me… Because I was going to buy one of his houses that he had for sale. He had some back taxes on it and whatnot and he wanted to get that cleared. So he fixed up the house that I sold him on the land contract, did a great job, and I said, “If you ever do some jobs with me, I got plenty.” So it was about a few months and then finally came back, he’s like, “Yeah, I quit my job. They don’t appreciate me. I’d love to go to work for you.” So I just started giving them jobs left and right, and he slowly – I was very cautious this time around, but I gave them small jobs, and he did that well, and then started feeding him bigger and bigger jobs until the trust was established, and now I trust him as much as I do pretty much any human being on the planet. This guy, I can send him money and I know what I’m getting.

Theo Hicks: What about the property management? So you said that you had your suspicions before everything hit the fan, and you were already working with a management company to transition over to, but then you also mentioned that just like the contracting issues, you had issues with the next management company as well. So I’m assuming that that’s the management company you’re talking about. So maybe walk us through what happened there, how you found them, what the issues were, and how you ultimately found the management company that you’re using today.

Jack Gibson: They’ve done some acquisitions for us in terms of being able to find us houses that we could then sell, do a rehab and sell to investors. So we had a relationship with them, and they had property management experience, having their own portfolios in Indy. So they decided to start the management company to try to help keep investors happy that we needed to transition over promotion point. So they just couldn’t get the job done. I think they put a good effort in, but they were in way over their heads with the skill sets that they have organizationally. So I just had a lot of investors that just weren’t happy with the communication and the tenant placements weren’t being screened right.

So we went to a national company called Great Jones and they’ve been incredible because they have systems, they have technology, they are fully staffed, they have and so many resources, and they don’t mark up any construction. So that’s a very different approach and model compared to all the other property managers that we had interviewed in Indy. They all make– most of their money is by marking up tenant turns, marking up maintenance calls, marking up any construction costs… Which I don’t have any issue with that. That’s certainly– they’ve got to make money somehow. But with Great Jones, they have enough volume where they could just make the money off the 10% management fee and the tenant placement, and all the other stuff is just at the cost that they’re quoted. So that really puts all of our investors that we moved over there in a much better cash flow position.

Theo Hicks: If you could summarize for the listeners, what would be your top two to three to five lessons learned that you applied moving forward after going through this entire experience?

Jack Gibson: Well, I think that number one, the most important lesson is trust, but verify. So if we would have just done that and gotten these inspections, then we would have seen what kind of properties that we were dealing with. But I always tell– because I have younger guys that come to me because they know I have a pretty big real estate portfolio, and now it’s performing; it’s awesome. The rent checks that are hitting today are– it’s very exciting, but it took a while to get to that point. I tell them, “Look, you got to make sure that– there’s three major mistakes that you got to watch out for. If you don’t make these mistakes, then you should be in a really good position buying real estate.” Number one is don’t pay too much for the condition of the property. It’s okay to buy a property that needs a lot of work. You’re probably going to get your best equity position on those types of deals, but you got to make sure that you understand the market and understanding what’s out there and that you’re not overpaying… Because the stuff that we see, nine out of ten of them were passing on, because they’re just way too much, they’re not realistic for how much actual work the property really needs to get it to be a quality long-term property.

So then the second part is you got to be really careful with your contractors. There’s some great contractors out there and there’s some real shysters. So you can pay for a contracting, and then if you have to pay for all that same work a second time or even a third time – man, that’s crushing. So just having good quality contracting partners is critical, and then I think probably the third and most important thing for the long term performance of your property is the property management. They’re gonna make or break you on the cash flow with how they screen and place tenants, how they take care of their tenants, all the things that they do to get your property and keep your property performing.

So if you’re really paying attention to those three things– I mean, it’s not easy. If it were easy, everybody would do it. It’s much easier to just go buy stocks and just pray that they go up. That’s a lot easier proposition. However, I don’t like that plan because I’m not in control and I can’t control that much what’s happening, and the Board of Directors makes a decision and I just don’t have any say. So all I’m doing is just buying and praying that it goes up. Whereas with real estate, if I buy smart and get it rehabbed smart and have the right teams behind it, I’m gonna make some really nice cash flow every month and it’s going to be consistent.

Theo Hicks: Perfect. Okay Jack, is there anything else that you want to mention about this story, about your business that you haven’t talked about already before we wrap up?

Jack Gibson: Well, I think, it’d probably be good for me to at least show a little bit of positivity in terms of what we offer. Yes, we’ve made mistakes, but not only did we– I feel like, we stepped up to the plate in a big way and we took money out of our company and I took money out of my own account to help investors get funded… Some of them I gave back all of the commissions that I made when I sold the properties to the Oceanpointe, and partnered up with them. I gave all the commissions back and then some to the ones that really needed it in a bad way.

So I feel like, as far as doing business with us, we’re going to operate in the highest level of integrity. If something does go wrong, we try to stand behind it. Obviously with real estate, it’s never going to be perfect. You can do your best to put everything together the right way and it doesn’t mean you’re guaranteed, of course, any positive returns at any time, but you can put yourself in the driver’s seat where you have a really good strong chance of it…

But we learned a lot of lessons. We’ve got an awesome team and a lot of systems in place that helps us to make sure that the property is a very quality property. I mean, we put it through third-party inspections. It goes through the Great Jones test. They’re going in and they’re picking the property apart and finding all the things that need to be done prior to a tenant being placed. So there’s multiple steps of quality control to make sure that what happened with Oceanpointe never ever comes close to happening again. So those are the properties that we sell to investors. We are working very hard on scaling and creating our own portfolio, much more so now than before where we were focused more on the turnkey sales process. We still do offer turnkey properties, but we want to build up our own rent checks and our own holds. It’s shifted in terms of our focus. So if we do release a property, it’s something that we would be willing to hold for ourselves for the next ten years.

Theo Hicks: Perfect. Well Jack, I appreciate you coming on the show and being willing to share your story with all the listeners, as well as tell us your lesson. So just to quickly summarize the story… You bought turnkey properties from a person who ended up being a fraud, and once you found out that they’re a fraud after you and some of your colleagues had invested, you grinded to reverse the issues, to find contractors to resolve the issues, to find a new property management company, and then after all that is said and done, your top takeaways are one, the most important takeaway was to trust, but verify. A specific situation is applied to turnkey rentals is that make sure you’re actually doing the inspections and that not trusting the operator.

And then you also talked about the three mistakes to watch out for which was don’t pay too much for the condition of the property, which means, number one, you don’t necessarily have to buy a turnkey property because you can make a lot more money buying a property that needs a lot of work, but at the same time, just because the property needs a lot of work, it doesn’t mean that the price is still right. So make sure that you’re still buying right, understand how much money you need to invest into that deal so that you’re not overpaying. The second one was be careful with your contractors because just because you find someone who’s the cheapest option, if they don’t end up working out right, you have to pay someone else. So it’s better to pay maybe the middle of a higher option once then pay multiple people two, three, four times. And then lastly, you talked about how the property management company makes or breaks the cash flow at the deal. So again, Jack, really appreciate you coming on the show. Best Ever listeners, as always, thank you for listening. Have a best ever day and we will talk to you tomorrow.

Jack Gibson: Thanks, Theo.

Website disclaimer

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.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, 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. For more information, go to www.bestevershow.com.


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JF2184: 21 And Syndicating With Kyle Marcotte

Kyle is a 21-year-old syndicator, finished 119-unit syndication at 20 years old. Dropped out of UC Davis to pursue full-time apartment syndication. He explains how difficult it was at first when he was pursuing syndication as a young man and how he was able to overcome some of the hurdles most would fear. 

Kyle Marcotte  Real Estate Background:

  • 21-year-old syndicator
  • Syndicated 119-units at 20 years old
  • Left UC Davis to pursue apartment syndications
  • Located in Austin, Texas
  • Say hi to him at :https://kylemarcotte.com

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“There was a tremendous amount of pushback when I was looking to leave school and go full-time syndicator” – Kyle Marcotte


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 Kyle Marcotte. Kyle, how are you doing today?

Kyle Marcotte: Good. Thank you for having me on.

Theo Hicks: Absolutely. Thank you for joining us. A little bit more about Kyle – he is a 21-year-old syndicator, he syndicated his first 119 units between two different deals at 20 years old, and he actually left UC Davis to pursue apartment syndications, currently located in Austin, Texas. You can say hi to him at kylemarcotte.com. So Kyle, could you tell us a little more about your background and what you’re focused on today?

Kyle Marcotte: So a little bit about my background. I was a pre-med student at UC Davis and playing division one soccer out there, and was just giving a lot of my time to other people and pursuing things that I wasn’t fully passionate about, and I just started to realize that in order to put the time in that’s necessary to be really successful at something, you have to really enjoy doing it as well. So I just knew that I was doing the wrong thing and I didn’t know really where I was going to find this passion or this thing that I could start pursuing, but ended up finding real estate through Rich Dad Poor Dad. I know, very cliche, but that is what happened. I was in my apartment in college, my sophomore year early on, and I just read the book and it put words to the feelings that I was having, which was I didn’t want to trade my time for money all the time especially as a doctor; you go to school for God knows how long and you’re in quite a bit of debt and you trade quite a bit of your time… And it’s a noble profession and I love the service aspect of it, but I just couldn’t see that being something that was going to light me up inside. So I found real estate and quickly jumped into it and then found multifamily through Jake & Gino and realized that that was going to be the best way to scale out of my business so that I could run a 107-unit deal one hour of the week is really all it takes, because you have a full-time property management because of the scale, and that just made a lot of sense. And by my mid sophomore year, I did a 107-unit deal in Louisville and then I ended up actually dropping out of school and pursuing this full time.

Theo Hicks: Alright, thanks for sharing that. So before we get into specifics of some of the deals, I just had to ask a follow-up question. Most people that are doing this are older, and for them, it’s about leaving a job. For you, it was about leaving college. Most people, they’re leaving, and then you talked about this in Rich Dad Poor Dad, what you’re “supposed to do”, that you get a lot of pushback from people. So what was the hardest part about deciding to quit, in this case, college, not necessarily a W-2 job, in order to pursue apartment syndications?

Kyle Marcotte: So there was a tremendous amount of pushback, as you said. My parents, for one, were not the biggest fans. I don’t think that parents are super excited to hear that their kids dropping out of school their sophomore year, especially when it’s an out of state school… And I’ve been pursuing soccer my whole life too, so telling my soccer coach that “Hey, thanks for recruiting me all the way from Austin to the Sacramento area and spending money on me, but I’m no longer going to finish out the year with the team, and everything like that.” So that was probably the hardest conversation for sure, just because soccer had been a part of my life since I was very little. It was the one thing that I had poured my heart and soul into, and to have to move on from that was definitely difficult, but there’s a great quote that says, “Be willing to sacrifice who you are for who you want to be at any time,” and you have to be able to see that change is inevitable and change is often a good thing, so you just have to embrace it and step into it if it’s what your heart’s telling you to do.

So even though literally nobody believed in me for a six month period where I hadn’t really done any deals and I was not going to school anymore, and getting the parents behind everything was difficult, and even my roommates were judgmental because from their point of view, it was me saying that I was smarter than them and I didn’t need school and that they did… And that’s not actually what it was; it was just that I was pursuing something I was passionate about. Yeah, it was definitely one of the hardest six months of my life, having pretty much no one really believing me and even myself not believing my own self at times. So it definitely taught me a lot about life and a lot about sticking to your guns and believing in yourself, but it was definitely not an easy road for sure.

Theo Hicks: Did you leave college after you had done the 107-unit deal or, or was that six months the period in between the first deal and the second deal?

Kyle Marcotte: Well, I hadn’t officially unenrolled from college in that six month period, but I had stopped going to classes, because you didn’t have the time necessarily… Because I was going and speaking at meetups at night and researching all day, reaching out to brokers all day, going to meetings all day, and I’d fully committed myself to this, but I hadn’t officially enrolled because it was mid-quarter, and on UC system, it’s the quarters. So we have three little sections of school, and then summer, but I was in the middle of, I guess, the spring quarter, and I just decided to stop going, and that was definitely difficult. And then we had that 107-unit I got under contract, and I unenrolled or whatever, but I hadn’t closed it, because escrow takes a little bit of time; raising money and all the hiccups that can come there.

So it was definitely a risky decision, but it was just one of those things where I was just listening to my heart and everything felt right and I just decided that if I’m not going to do it now, then I’m never going to do it. People always say that they’re just waiting for the perfect time to do things, but there really is never a perfect time. The only time you can really do it is now. The longer you wait, the less likely it is that you’re going to actually take the jump.

Theo Hicks: Exactly. So you already mentioned that you were networking brokers to find these deals. So I’m assuming you found this deal through networking with brokers, correct?

Kyle Marcotte: Yes, that’s correct.

Theo Hicks: Okay. So what was that like, talking to brokers as a, at the time, 20-years-old?

Kyle Marcotte: It’s insanely difficult, and it’s also not only the brokers. I’d say the hardest part was the raising capital part. The brokers is over email correspondence, so they don’t necessarily ask your age off the bat, and if you’re providing really good underwriting back to all their deals, following up on a bi-weekly basis and putting them in a system to where you know that you’re going to be following up on them, you have a good CRM, so you know their daughter’s name and that they play soccer or that they are a Girl Scout, and you can follow up in a personal basis and make sure that you’re developing a relationship, they probably thought I was 30, 40 years old on the email, because it just didn’t come up in conversation until I had built a decent relationship with them, and then they were like, “Okay, I really don’t care how old you are. This correspondence has been very professional and official.”

But looking at someone in the face and asking them to invest in you and them seeing that you are, obviously, 20 years old, that is the hardest part for sure, and they’re like, “Have you ever done this before?” Obviously, you can’t say yes, because you’re 20. What — were you doing this at 16?” It’s not possible. So telling people that I’ve never done this before, but I was going to work extremely hard and put everything I had into this and then I was putting so much on the table, I think that people just decided to take a leap of faith with me, but overall they’re just super blessed that they decided to do that.

Theo Hicks: So that process for good underwriting, following up on a bi-weekly basis with personal notes… Is that something you read in the book, you learned naturally, did you get that through Jake & Gino? How did you come up with that process?

Kyle Marcotte: I think I read it in some book. I think it might have been maybe the [unintelligible [00:09:11].04] book and then the real estate agent guy from New York, I think it might have been that book. But I read just so many books that first year. Honestly, I probably read at least a book a week, including the Best Ever Syndication Book, and just a lot of different books that talk all about business relationships and how to do especially real estate, but also business in general, because I’ve found that it’s important to know business, not just real estate, and the relationship side of things and the systematic side of things as well is super important, and that’s from books like E-Myth teaching me not to be auto emailing those people, but try to set up some system. Yeah, I was really just reading a bunch of books and just copying what other people had already been successful with.

Theo Hicks: Let’s focus on the raising capital part. So you mentioned that you were putting a lot on the table. Can you be more specific about what you meant by that?

Kyle Marcotte: Yeah, putting a lot on the table means to me is I’m giving up my dream of playing soccer, I’m dropping out of a really good school, one of the best public schools in the country, and taking a complete risk on my future to pursue this thing. So I’m against the wall. It’s like, if this doesn’t succeed, then my life goes down the hill. So when people are in that position, we often show up and rise to the occasion. It’s just human nature. There’s no real option other than to succeed. So people can see that in your eyes and hear that in your voice when you’re talking to them too, because at that point, I was at a level of commitment that was pretty noticeable to other people when they were talking to me, and I think that that made up for the lack of experience; it was just that they were like, “Wow, this kid’s really going for it. Let’s give him a chance.” These people really do want to help other people out and I definitely knew what I was talking about as well. I was speaking the lingo and showing people models and showing people my detailed underwriting and also them coming to the table and saying how committed I was, it made up for the obvious age.

Theo Hicks: So how much money did you raise for this 107-unit deal?

Kyle Marcotte: I had partners on the deal, but I raised over half a million dollars, somewhere around $600,000.

Theo Hicks: Okay, how many investors was it?

Kyle Marcotte: It was about four investors.

Theo Hicks: Four investors. Do you mind telling us who those four investors were and how you found them?

Kyle Marcotte: Yeah, so the main investor was a guy named Lalo, who I met at a local meetup. I had slowly become an expert in the area just by positioning myself at a meetup. So I would go in and at first, I would just say, “I like this meetup. I found it this way,” and tell them a little bit about the marketing, and then I would go and I’d bring a friend and say that I’ve been telling people about it and that it’s a good meetup, and then they were like, “Okay, cool. This kid’s bringing me some value, bringing people to my meetup,” and then I’d come back again and I’d ask, “Hey, can I start checking people in and maybe scheduling some speakers for you in the future?” Just doing little odd jobs, helping clean up after the meetup, and the guy was like, “Yeah.” I did that for about six meetups, seven meetups, and then I’d just ask, “Hey, can I start speaking on stage maybe, 10, 15 minutes, just about multifamily?”, and then he says yes to that, and you start to get on stage and you’re holding a mic, and people take you more seriously, and that’s actually how I met Lalo, and then he introduced me to a couple of his friends from work, and then that snowballed, and that’s how I raised almost all the capital – from him and then through his connections, and they also ended up liking me as well.

Theo Hicks: That meetup strategy is very solid. I think that’s very practical advice for people who want to raise capital and don’t have a lot of experience. So thank you for sharing that. So before we get to the money question, can you give us the numbers and some of the details on that 107-unit deal? So you’ve already talked about how you found it – maybe go through that again, what the purchase price was, what the business plan is, and then how it’s doing today, and when you bought it and things like that?

Kyle Marcotte: Yeah, of course. So the purchase price was four and a half million, $4.55 million, to be exact. It’s about 42k per door, and the business plan was really that we had actually bought it thinking it was 106-units, but we found a down unit fully plumbed, just had a bunch of storage in it. We quickly moved the storage out and converted the unit back to being operational and that adds $12,000 NOI on an annual basis, and then on a five cap, that’s quite a bit of value on the back end. So that was a home run day one, and then another big business plan – the main thing, the reason we bought it was because the payroll expense was almost double the market because the manager on site was actually the owner’s relative. So it was somewhat of a charity case and he was getting paid a decent salary to be an onsite manager, double the market rate, and we were like, “Okay, we can cut payroll day one,” which is amazing for adding quite a bit of value there, and then the down unit was just icing on top. But right now, it’s doing pretty well. We’re thinking about either doing a refinance or just holding it through the five-year term, but it’s pretty much stabilized at this point and we’ve been providing the preferred rate of return to our investors and things have been going pretty smoothly.

Theo Hicks: What was the compensation structure you offered to those four investors?

Kyle Marcotte: So there was more than those four, because my partner Eli also helped raise a little bit of money as well, but the structure was 70-30 split with an 8% preferred rate of return, with 70 in favor of the LP.

Theo Hicks: Do you mind just quickly telling us about your business partner, how you found him, and then maybe how you two split the general partner duties?

Kyle Marcotte: So me and Eli actually met at a Jake & Gino event in Jacksonville, and there’s a longer story behind how I actually afforded that plane ticket to Jacksonville, but long story short is that I actually applied for jobs in my college town. The only person hiring was an elderly living facility and I had the 6 am shift to noon shift, where you’re waking up the tenants who live there and getting them ready for the day and that means showering and everything like that. So it was definitely a rough job, but it was the only one who would hire and I had to make the money to make this plane ticket in a one and a half month period, and I ended up getting a red-eye. I think it stopped in Dallas, Charlotte, and then Jacksonville finally three hours before the event that morning, and I ended up meeting Eli there. We got to know each other a little bit better, and then about a month later, he was like, “Hey, I got this deal in Louisville. I think it’s gonna be huge. Could you raise any capital for it?”, and I just said yes before I knew that I could, and committed, and then figured it out, and the rest is history.

Theo Hicks: Last question before the money question, I promise. What’s your structure with Eli? How does the compensation break down? Because it sounds like you’re specifically raising capital and he is doing everything else?

Kyle Marcotte: He didn’t do everything else, but he definitely did the majority of the underwriting and some of the financing, things like that. This is actually where I learned the majority of the process-based tasks as far as building your team around it and securing financing and things like that. But we split the GP up where capital raise typically gets about 30% of the GP and then the asset manager partner gets around 50%, and then you have some leftover percentage for the KP, which is people who are going to sign on the loan and also put up risk capital; I think that’s something that you guys are doing. The GP is not putting up risk capital. Risk capital, meaning money you’re not going to get back if the deal does not close. So that’s inspection costs, lawyer fees and some other things like that. So we actually had an LP come and put that in. So we gave him extra GP share, I think it was about 10% of the GP just for signing on the loan and putting up some risk capital.

Theo Hicks: Okay, thanks for sharing that. Alright Kyle, what is your best real estate investing advice ever? Let’s answer it for people who want to get started in apartment syndication so they’re more specifically raising money with really no experience doing it.

Kyle Marcotte: I think the best advice I have is either that meetup strategy or just getting on social media and posting as much as you possibly can. I personally post almost ten times a day on LinkedIn, Instagram and Facebook. I think it’s just really important to establish yourself as an expert in the industry. So in real life, the meetup strategy, I laid it out earlier in the episode, but it’s first you come to the meetup, you’ve got nothing to give other than telling that guy how you found this meetup, because that gives him really valuable feedback on his marketing, and where he can start spending more money and less money. Then you bring a friend the second time, which shows him that you’re talking positively about his meetup in public, you’re bringing people to it, you’re liaisoning people to his meetup that makes him feel like you’re adding value again, and then the third time is just picking up all the odd jobs that I’m sure this guy does not what to do, which is scheduling people, sending out the weekly emails, putting people’s name tags on and just basic things like that, check-in… And then once you start establishing that relationship with the guy, you’re adding value over time, you can start to build up the goodwill to ask the big question, which is, “Hey, can I speak for just 10 to 15 minutes?” Don’t say, “Hey, I want the whole meetup. Give me the whole stage for an hour.” No, just ask for 10, 15 minutes, establish yourself as an expert, and if you can’t do that, because you live in a place where meetups don’t exist, either start your own or focus on social media, which would be LinkedIn, for sure, is huge right now… And you’ve got to post more than once a day. I know it’s really difficult, but if you do it for three weeks, it’ll become supernatural, and you’ll stop questioning if you’re capable of posting. You’ll just start doing it automatically, and then over time, people start to take notice and immediately just associate you as an expert in the space.

Theo Hicks: Yeah, that meetup strategy is essentially how I got my job working for Joe about four and a half years ago. So it definitely works. If you want to accomplish at a meetup group, they’re great places to find jobs, find partners, find deals, things like that. Alright Kyle, you ready for the Best Ever lightning round?

Kyle Marcotte: Yeah, let’s do it.

Break [00:17:18]:04] to [00:18:31]:03]

Theo Hicks: What is the best ever book you’ve recently read?

Kyle Marcotte: The best book I’ve read right now would probably be DotCom Secrets. It’s a book about sales funnel and marketing copy and things like that. It’s been huge for me and my business for sure.

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

Kyle Marcotte: I would probably just go out and try to get another deal and make it happen again. If it was to collapse due to pricing, I would assume that the rest of the market would be rather cheap, and I would try to galvanize people to invest in a new deal and try to offset any of the loss that we got from the 107, because I would be assuming that that would mean the market would go down and our price point would no longer make sense, and we wouldn’t be able to meet our debt coverage. Honestly, the best thing to do would be counterintuitive, but it would be to buy more, and I think I would try to go and find another deal, and hopefully make some asymmetric returns on that and make people whole again.

Theo Hicks: So this question’s besides your first deal and your last deal, what is your best ever deal? But you’ve done two, so you can’t do your first or your last… So just tell us a little bit about that 12-unit deal.

Kyle Marcotte: So the 12-unit deal was a group deal with some students in the Jake & Gino community, and we did a 12-unit in Austell, Georgia, which is outside of Atlanta. It was another home run, easy deal. The only thing we’ve had problems with is the management, but we’ve recently remedied that problem, and we’re deciding to maybe demolish the single-family home that’s actually on the property as well and maybe selling that land or doing something with that as well.

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

Kyle Marcotte: Me personally, I go to Bible study on Friday mornings and just giving back to that group of guys and everybody just coming together and talking about our faith and grounding ourselves in real reality in real truth, which is that we’re not as big as we think we are and that maybe we should take our lives a little bit less seriously. So on Friday mornings, I like to come back to that group of guys and just to feel grounded with them.

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

Kyle Marcotte: Probably kylemarcotte.com, because you have all my resources there and some links to my social media. But yeah, kylemarcotte.com is definitely the best place to reach me.

Theo Hicks: Well Kyle, thanks again for joining us today; a very inspirational conversation. It’s always great to hear about younger people getting into real estate. I got into real estate when I was about 23, I think; so similar to you. So props to you for getting into real estate. You talked about the hardest part about quitting and leaving school was getting a lot of pushback from your parents, even some of your roommates were pushing back, having to tell your soccer coach that “Hey, you brought me out here, but I’m leaving to go on and do things.” So everyone listening who’s quit their job can definitely relate with going through that… But you came out the other side and did the 107-unit deal.

We talked about how you were able to network with brokers, which was easier than raising capital because networking with brokers was more virtual, and when you actually met them in person, you’ve done their legwork where they were going to take you serious, regardless of how old you were. So specifically, you provided a good underwriting feedback on their deals, you had a good system that you followed up on a biweekly basis, with personal information about them, about their lives or family, and then all the processes that you used. You read a book per week and just tried to copy what other people are doing.

We talked about how you were able to raise capital, and it really came down to you putting a lot on the table and burning all bridges behind you and needing to succeed, and the people took the leap of faith and invested with you, and it’s working out for them and as well as for you.

You said that you found the main investor at one of the meetup group, and you walked us through your meetup strategy, which is step one, to show up; step two, to bring a person to the meetup to add value that way; and then thirdly, to do some of the smaller tasks that they probably don’t wanna do themselves – check people in, schedule speakers, clean up afterwards, and then eventually you took it a step further, which was to asked to speak on stage for 10 to 15 minutes about multifamily.

We talked about your 107-unit deal, $4.5 million deal. The two biggest value add plays was finding an extra unit that was down, and then you converted it to an actual unit and added about $12,000 to the net operating income, and then the payroll expense was abnormally high because of a relative situation. And then you met your partner Eli at Jake & Gino event. You talked about how you paid for your ticket by working at an assisted living facility for about a few months, getting up super early and doing some tasks I’m sure you didn’t want to do, but you grinded it out, got that ticket, met your partner. He found a deal, asked you to raise capital for it. The split was 30% to you, 50% to him, and then you had some allocation left over for the KP and the person who paid for the upfront costs.

Lastly, your best ever advice besides the meetup strategy already mentioned was to get on social media and post as much as you can. You post ten times a day to LinkedIn, Facebook and I think you said Instagram, and your advice on how to get that as a routine is you do it for three weeks and it’ll become second nature, it’ll become easy. So post as much as you can on social media to get to position yourself as an expert, and then follow that meetup strategy as well. So thanks again, Kyle, for joining us today. Best Ever listeners, as always, thank you for listening. Have a best ever day and we will talk to you tomorrow.

Website disclaimer

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.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, 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. For more information, go to www.bestevershow.com.

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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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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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