JF2239: Real Estate Is Not My Passion With Stephen Davis

Stephen is the Founder of Real Wealth Academy LLC, and started investing at 27 with wholesaling. He has experienced flipping, buying rentals, and now holds over 4,000 apartment units. He now focuses on consulting and mentoring people to help them begin in real estate, and today he shares advice, lessons, and what he believes people should have before looking for assistance.

Stephen Davis Real Estate Background:

 

 

 

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Best Ever Tweet:

“I love my real estate, but I don’t like managing it” – Stephen Davis

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JF2196: Underwriting Multifamily Acquisitions With Robert Beardsley #SkillsetSunday

Robert is the author of The Definitive Guide to Underwriting Multifamily Acquisitions and today he will be sharing the process of underwriting so you will be able to take away some ideas to implement into your underwriting process. 

Rob Beardsley Real Estate Background: #SkillsetSunday 

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Best Ever Tweet:

“On a larger property, a $100,000 additional expense on your cap-ex budget isn’t really going to make or break the numbers, but missing your rent pro forma by $25 can make or break your deal” – Robert Beardsley


TRANSCRIPTION

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. Well, first off, I hope you’re having a best ever weekend because today is Sunday, got a special segment for you – you know what it is – Skillset Sunday. Today on Skillset Sunday, you’re going to learn the process for underwriting multifamily acquisitions, and well, I figured we should interview the author of The Definitive Guide to Underwriting Multifamily Acquisitions, Rob Beardsley. How you doing, Rob?

Rob Beardsley: Doing very well. Thanks so much for having me on.

Joe Fairless: Well, my pleasure, and looking forward to our conversation. A little bit about Rob – he’s a principal at Lone Star Capital Group. In the past three years, he’s led over 100 million of multifamily acquisitions, based in New York, New York. With that being said Rob, first, do you want to give the Best Ever listeners a little bit more about your background just for some context, and then let’s go right into how to underwrite multifamily acquisitions?

Rob Beardsley: Absolutely. So the quick background in terms of real estate is I grew up in a real estate family. Both my parents worked at home, and I heard them on the phone all the time making deals, running a real estate brokerage firm in Silicon Valley. So I really absorbed a lot of real estate that I didn’t even realize until I actually got in the business later on… Because initially, growing up in Silicon Valley, my parents pushed me to go into tech and learn to program and go to school for computer science, and that’s what I did. Of course, eventually, I had to come back to my family’s passion and business, which is real estate, and the path I chose was multifamily. And shortly thereafter, I was very fortunate to meet my business partner at none other than the Best Ever conference.

Joe Fairless: I know what conference that is. I recognize that name.

Rob Beardsley: Yeah. So that’s been a very fortunate thing for us. Kevin and I founded Lone Star, as you said, and we’ve been enjoying the process.

Joe Fairless: Well, let’s talk about the underwriting process. So first off, why write a book about underwriting acquisitions for multifamily?

Rob Beardsley: It’s not the sexiest topic. It has gotten a little more interesting over time, but most people don’t write a book that’s pretty much a how how-to manual. So that’s something that I really wanted when I first started in the business, because there was just really no one resource that you could turn to and learn this. You could maybe take a $2,000 weekend workshop or find some other mentor who would maybe help you out, but there was no book, and I love consuming content through a book. So I started having a lot of people also ask me, “How did you learn and what book did you read?”, and I had nothing really to offer to them. So I told myself very early on that I would compile my thoughts and write a book on this, just because I felt that it was something that I’m passionate about, people are asking me a lot about it.

And then the additional point is the passive investor side. I think passive investors – they don’t even know that they don’t know this, and they should endeavor to get proficient at underwriting and evaluating deals if they want to actually be in the game long term, as a passive or active investor. So that’s something that I’m hoping to address which is a big need in the market.

Joe Fairless: So let’s talk about the way you structured the book, and then we’ll get into some specifics. So how did you structure the book?

Rob Beardsley: I tried to keep the book as short as possible. It’s not a memoir or anything like that. Like I said, it’s a very straightforward how-to manual. So I start out with just a quick introduction about what is underwriting, why is it important, and why should you learn it, and how should you go about learning it. As far as learning it, you can choose to build your own underwriting model, and whether that’s in Google Sheets or Excel or some other program, I recommend and say, “That’s perfectly fine. You’ll learn a lot doing that.” But if you don’t have the time, definitely just pick one that you trust. There’s many out there that you can get your hands on. I recommend getting all of them. So that’s the start of your journey. And then the actual process that I go through the book really starts from getting the information that you need, whether that’s directly from the seller or from the broker that you’re working with all the way through what data do you need in terms of websites and what should you be looking for, for key metrics, and then plugging that in. Every single input of my personal spreadsheet, I actually go over and give you guidelines on how to input it. So it really– it leaves nothing left out. Every single input is addressed, which I think would have been really helpful when I was first starting.

Joe Fairless: Every input addressed – is that every input for the spreadsheet that you use?

Rob Beardsley: Yeah.

Joe Fairless: Okay. And you mentioned earlier that you recommend getting all the versions of the underwriting spreadsheets that you can come across. How do you determine who’s right and which aspects you should include in yours and which ones you should not?

Rob Beardsley: That’s a great question, because not many people would think that there is deviations. You would think, “Well, this is math and this is cut and dry,” but it’s really not. There’s a lot of art and science and subjectivity, and I think why I recommend going out there and looking at all the different spreadsheets that you can get your hands on is because it will expose you to the different ways that people are handling certain assumptions and forecasts, and you can evaluate all of them and say, “I really like this. I don’t really like this.” One of the reasonings that I personally use in developing my assumptions and forecasts is  what’s the easiest to explain and what’s just the least complicated? Because if someone’s going to evaluate my deal or check my work essentially, I don’t want to have to come up with some crazy explanation about, “Well, I got to this number because I used the trailing three income, but then I also use the trailing 12 expenses, but then I adjusted the taxes.” So I favor simplicity.

Joe Fairless: So let’s talk about some things – and perhaps you mentioned them. Let’s talk about some things that you don’t like about other underwriting models that you’ve come across.

Rob Beardsley: I think a simple one that some people may overlook is your pro forma should be built on a monthly basis, because annually is just not granular enough and it’s more prone to make mistakes. As you’ll find, once you’re getting more involved with more deals and looking at different situations that are more unique, you’re going to want to have the control on a monthly basis, and having that monthly basis will allow you to tweak certain things such as renovation schedules and stabilization timelines. A big mistake people make is just being too aggressive with assuming they’ve got a 200-unit property on their hands, and they’re going to renovate all 200 units in the first year and the rents are gonna be up 20% in year one. That almost never happens. So on an annual basis, it may push you to make that assumption or push you to make the two-year assumption, so having a monthly can really let you be more accurate and potentially more conservative.

Joe Fairless: You mentioned earlier you go into what information you need to run your analysis. What information do you need to run the analysis?

Rob Beardsley: So the bare bones starting point is always a trailing 12-month profit and loss statement and a rent-roll. Both of those are very important and they’re different in their own ways. So quickly just to go over that if people aren’t familiar, a trailing 12-month profit and loss is also known as just a T12, and that shows the trailing 12 months of historical operations for the property, all the revenue, all the expenses to essentially come to a net operating income. So that’s a 12-month snapshot, whereas the rent roll is just one day, one snapshot in time. They complement each other, because the rent roll will tell you potentially what’s going on today or on a more recent basis, whereas the T12 gives that historical context, which is really important.

I was actually talking with a 30-year veteran in the business who said, “Yeah, I’ve probably forgotten more about evaluation than you know.” He said that “Back in the day, we would always look for the trailing 36.” They didn’t even call it a T12 back then. He’s like, “I don’t even know what you mean when you say a T12.” So they would look at the trailing three years, and he said, “Yeah, if you went that third-year back, you’d always see what the seller was potentially hiding.” I thought that was really interesting, because a lot of people these days aren’t even looking so much at the T12, and lenders and investors alike are willing to discount the later months in a T12. And really focus on the T3 or even T1, which – there’s some truth to that, but it is an interesting take.

Joe Fairless: So that’s the minimum… What’s the best-case scenario? You have a good friend who is selling you the property. They don’t care about money. They just want to make sure you make all the money that you possibly can by evaluating this property in its entirety, so they give you everything you could possibly wish for. What is that?

Rob Beardsley: That’s a really interesting question, because that’s starting to get into more of due diligence, which, obviously, we all know due diligence is hugely important. But in terms of underwriting, what I would potentially want to see is color to help inform my assumptions. For example, understanding the tenant base. Where do they work, and obviously, how much money do they make, and understanding the average tenancy, because if I know the average tenancy, I can calculate the turnover rate which will help me pin down my repairs and maintenance costs. If I know how much they make and where they work, I can better evaluate the risk of the income, and I can understand how far we can potentially push rents before we get into territory where there’s just unaffordability. So those would be helpful.

Looking at their maintenance log and seeing– this is actually very interesting, more on the due diligence side… But evaluating the maintenance log and seeing what are the most common maintenance requests, that might inform you of deferred maintenance and potential opportunities to cure deferred maintenance or potentially even create savings somewhere. So I would say, from the seller, those would be extremely helpful. Do you get them prior to executing a PSA often? No. But those would be helpful.

And then aside from what the seller can offer, there’s great public information and data services as you know, like CoStar and Yardi, that will provide a lot of that information. But we look at free information online as well, like Justice Map – highly recommend that resource – to really look at the incomes and the demographics on an extremely granular level.

Joe Fairless: CoStar is one resource to use. What paid subscription services do you use right now?

Rob Beardsley: CoStar and Yardi.

Joe Fairless: Why do you use both and not just one?

Rob Beardsley: Well, the simple answer is because we have the luxury of both. But really, they do the same thing. What I will say though if anybody’s considering them right now, Yardi does a little better job with sales and loan data and CoStar does not. This is specific mostly to Texas, so I can’t speak for all across the country, but that has been my experience. But CoStar does other things well.

Joe Fairless: You mentioned Justice Map as a free resource. What are some other websites you know you’re gonna go to, to check out a property’s area whenever you’re looking at a deal, that are free?

Rob Beardsley: I forget the exact domain, but it’s greatschools.com, I believe.

Joe Fairless: Yeah, Greater Schools or something, yeah.

Rob Beardsley: Right. So schools are hugely important, especially if you’re looking at a property that has larger floor plans like three bedrooms, schools are very important.

Joe Fairless: You’re actually right. It is greatschools.com.

Rob Beardsley: You were quick on that.

Joe Fairless: So greatschools.org, final answer. Alright, move on.

Rob Beardsley: So schools are important. Other places I like– I forget. I’ve got a bunch of links that I’ve just have copied and pasted into my underwriting model, so I can just click on them quickly from there. If I want to reference crime, I think it’s crimespot.com or something like that. So crime, schools, and then this is something that I actually heard you say on a podcast just the other day, which is looking at Reddit to understand where the hipsters get their coffee. I thought that was super interesting.

Joe Fairless: Yeah. I think someone I interviewed mentioned that. I don’t remember but yeah, I agree. That is very interesting. They really get the flavor of the community by going to Reddit, and take it with a grain of salt, certain profile people are on Reddit, but it’s just interesting. You mentioned that every input that you have in your underwriting model, you address it in the book. What are some inputs that you added to the spreadsheet that perhaps others might not have?

Rob Beardsley: That’s very interesting. So I’ll talk about the core model itself, and then maybe branch out to the sensitivity analyses and things that are more add ons. But I’ll talk about the core, which is one interesting component is the stabilization timeline, which in terms of value add, this is where models all start to deviate and they aren’t all the same. In terms of income and expenses, it’s pretty straightforward. Everyone’s pretty much the same. But the way that somebody projects how their value-add plan takes place over the first one, two, three years is very unique. So some people choose to input how many units they’re going to renovate per month, and then they have some schedule that they run, and then they calculate how many units are renovated and multiply that by the certain rent.

Rob Beardsley: So everybody’s got their own way, and again, going back to simplicity, the way that I have chosen to build that out is to simply have a stabilization timeline calculated with months. So you’d input a 12-month stabilization timeline, for example, and you would have your in-place rents and your pro forma rents. So right off the bat, you’re in-place rents would grow to your pro forma rents linearly over your stabilization timeline. So if you had, let’s say, $900 rents and your pro forma was $1,000 and your stabilization timeline was ten months, well, the model would just slowly build that rent up by $10 per month over those ten months, until it achieved the $1,000. Similarly, with your loss to lease, your vacancy, bad debt, concessions. The way that the model works is it all starts with the in-place numbers. So what’s currently happening at the property, and then it slowly linearly changes just like the rent to what our stabilized assumption.

So if we have 3% bad debt, but we think we can clean it up to one point, we’re not just going to go to 1% in the first month of ownership. The way we would do it is over our stabilization timeline, we would slowly linearly trickle it down. So that’s something I think is unique and really keeps it simple. But actually, if you compare it to some other ways, it’s quite a bit more conservative, just given the timeline. Obviously, you can use a faster timeline, but I think construction and project things typically take longer than you’d expect. So that’s one really important thing to address, because it actually has a lot of impact on the results of your underwriting more so than you’d expect. You wouldn’t expect that “Well, if I finished my renovations in 12 months versus 18 months–“, you wouldn’t expect that you’d get potentially a 2% bump in your IRR.

Joe Fairless: Yep, that’s substantial. One aspect that you mentioned was make sure that you’re factoring in monthly and not annual in your calculations, which yes, definitely, and I’m glad that you mentioned that. One thing it made me think of is, if you are doing monthly and you are getting granular with your assumptions, do you factor in the leasing period? For example the summer, you lease more units most likely than December?

Rob Beardsley: No, the simple answer is no.

Joe Fairless: How come?

Rob Beardsley: Well, again, coming back to simplicity. So one thing I like to say– and I could be wrong. There’s plenty of people much smarter than me. But one thing I like to say is my underwriting really isn’t trying to precisely forecast the future, including the depths of the winter and the booms of the summer. Similarly, if I think rent growth — obviously we all know rent growth isn’t just going to simply be 3% or 2% every year for eternity. But we use some more general assumptions like that to keep things simple and to just have a general understanding, and to — again, coming back to simplicity, I can easily compare apples to apples of different deals when I use more general assumptions and try to keep things as simple as possible. When I start really getting in the weeds and trying to get too specific, then it’s harder to compare to another property because you’re making so many assumptions. So my goal is to be as accurate as possible with as few inputs and assumptions as possible.

Joe Fairless: How do you know how to walk that line? And what is too granular, versus what is “You know what? I probably should go granular on this thing”?

Rob Beardsley: That’s a tough one, but I think the answer is understanding what is most sensitive to your outputs and your results. So an interesting example I give is people would be surprised to know that on a larger property that we’re used to dealing with, a $100,000 additional expense on your cap-ex budget isn’t really going to make or break the numbers. But missing your rent pro forma by $25, that could make or break your deal. So a $25 difference in your rents is a far greater impact than the $100,000 difference in your capital expenditures budget. So understanding what actually moves the model can tell you, “Okay, this is what I really need to focus on and make sure I get it right.” So we’re very, very focused on our rents and making sure that we’ve got our rents right, and that they’re defensible via comparables. That’s the next chapter of the book is once I tell you how to input every single input and say, “Okay, well, how do I prove that I’m right?”, and you need to do that with most importantly, rent and sales comps.

Joe Fairless: Rob, I enjoyed this conversation, and I know a lot of the Best Ever listeners have as well. How can they learn more about what you’re doing and get in touch with you?

Rob Beardsley: So the best way to check us out is at lonestarcapgroup.com. There, you can check out our articles, newsletter and most importantly, click the link at the top on the homepage and you’ll get a copy of my underwriting model that we talked about today emailed directly to you.

Joe Fairless: Rob, I enjoyed, as I mentioned, our conversation. I hope you have a best ever weekend and talk to you again soon.

Rob Beardsley: Thanks so much.

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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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Best Ever Tweet:

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


TRANSCRIPTION

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.

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JF2176: Developing Easier Ways To Invest With Jacob Blackett

Jacob is the founder of SyndicationPro and Holdfolio. He started investing in 2010 while in college and after some time decided to start companies that would help make investing easier, which is why he developed his two companies. Jacob talks about his second multifamily deal, a  50-unit that ended up making cash flow tight due to some unforeseen repairs.

Jacob Blackett Real Estate Background:

  • Founder of SyndicationPro and Holdfolio
  • Started investing in 2010
  • Holdfolio currently owns and manages 1,221 units across the midwest and southeast
  • Based in Columbus, Ohio
  • Say hi to him at: www.holdfolio.com 

Click here for more info on PropStream

Best Ever Tweet:

“I love leveraging technology to make investing easier” – Jacob Blackett


TRANSCRIPTION

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, Jacob Blackett. How are you doing, Jacob?

Jacob Blackett: I am doing well, Joe. Thank you.

Joe Fairless: Yes, my pleasure and glad to hear that. A little bit about Jacob – he’s the founder of SyndicationPro and HoldFolio. He started investing in 2010. HoldFolio currently owns and manages 1,221 units across the Midwest and the Southeast. Company’s based in Indianapolis, he’s based here in Columbus, Ohio. So with that being said, Jacob, do you want to get the Best Ever listeners a little bit more about your background and your current focus?

Jacob Blackett: Sure, Joe. So my background, as you mentioned, goes back to 2010, when I started doing some fix and flips back in college. I got the bug then and decided to go ahead and get right into fix and flips and wholesales in 2012, and just got a nice wholesale fix and flip model going and started holding properties, and then learned about multifamily and jumped into that realm. Currently, I own and operate HoldFolio. We purchase real estate, we do syndications, we create partnerships to profit from real estate, and then all of this also, we took the approach of sourcing money online starting back in 2013, 2014, after the Jobs Act was passed and loosened up; some of the first real estate crowdfunding sites came online, and so with that experience of managing all of this online, that’s where SyndicationPro, the second company that I own and manage, was born. So we license software to colleagues and friends and people all over the country and all over the world to help them manage their syndication business online.

Joe Fairless: Okay, elaborate more on that, will you? Is it a competitor to, say, IMS or Groundbreaker and companies like that, or is it something else?

Jacob Blackett: It does have an investor portal built in. So that’s a big piece to managing a syndication business, is making sure that you’re providing a service to your investors and you’re also streamlining your back office. So there’s a lot of automation and tools and streamline processes that are built in. So yeah, you’d consider IMS, Juniper Square as our competitors, certainly.

Joe Fairless: Okay. So you said there’s a component of that. Is there something else that SyndicationPro does that is not typical of a competitor?

Jacob Blackett: Yeah, we take a pretty holistic approach. So that starts on the front end when someone hears about Joe Fairless and thinks about potentially investing with you – how do we capture their details? How do we intrigue them to become a lead, a prospect to potentially invest in you? So that’s built into the software, being able to register and capture leads from your website and being able to facilitate those relationships. So how do we create automation so that when they register, they can set up a call with your team, and how do we bridge those gaps and track communication? So that’s the front end of it, and then of course, through that investment cycle, you start getting into asset management and just other parts of the business like underwriting. Those features are to come on the underwriting side, but just a bigger holistic approach.

Joe Fairless: Okay. Your goal is to have the all-encompassing software for doing syndications, versus a portal or an asset management software platform. It’s the whole kit and caboodle.

Jacob Blackett: Yeah, if we can integrate more tools and more functions of syndication business into one platform, I think that just drives bottom-line value for our users and for our business. So that’s our approach, our vision and what we’ve been delivering on.

Joe Fairless: Okay, and with SyndicationPro, when did you launch it?

Jacob Blackett: We launched a beta version of SyndicationPro in late 2018, and then we launched our current version in late 2019, in October of 2019.

Joe Fairless: What are the main differences between the two versions?

Jacob Blackett: So the first version was honestly, just more- -we built it out on WordPress, it was really just to get it into the hands of people and confirm. I was getting the request from colleagues in terms of how to replicate HoldFolio’s success. We’ve syndicated 18 individual deals over the last handful of years with just about 600 individual investments, and we don’t have a large investment management team. We do all of that through the software.

So that initial beta version was really just get the core pieces into the puzzle, get it in the hands of users, confirm that it’s different, it’s providing a unique service, and then once we got that good feedback and validated, then we doubled down. So the current software is built on JavaScript. It’s a scalable, institutional quality software. So I took all those next-level steps.

Joe Fairless: Let’s talk about HoldFolio and SyndicationPro. If you had a good thing going with HoldFolio, why shift your focus to another venture?

Jacob Blackett: Well, I think you can agree with me on this – the beauty about real estate is you put in the front end work to identify those assets, especially buy and hold multifamily, and you can support an A+ team to operate the business. So HoldFolio is in a place now where it’s more of a mature business model. We continue to acquire properties. We’ve acquired two properties so far this year; bit of a pause in the last 60 days. I’m sure you’ve been in the same boat there along with everyone else, but HoldFolio continues to operate. It’s a beautiful business. We have scale, it provides great income, but knowing that– really what happened, Joe, is in early 2018, I went ahead and demoed a couple of investor portal options, because when I started HoldFolio, there was no options. In 2013, 2014, it just didn’t exist; investor portal didn’t exist, and so I had no choice but to build my own website and build that out myself. So I was demoing in early 2018 in order to consider getting on to one of these investor portals, and what I saw was, unfortunately, not a solution that would work for me just because of design, bulkiness, complicated and expensive. So that’s really where everything came together and why we launched SyndicationPro. So yes, following a desire, I’ve got a knack, and I just love leveraging technology, and so HoldFolio is in a great place, and now it’s really having fun with a new business. I’m sure that you relate to that, Joe, with the different verticals that you provide a lot of value in the world too.

Joe Fairless: It makes sense, and I’d love to learn more about your start with HoldFolio and how you got to this point. With HoldFolio, you’ve got 1,221 units in the Midwest and the Southeast. Now, are those properties that you have direct ownership in?

Jacob Blackett: Oh, yeah. 15 of our 18 partnerships, we’re the only sponsor on those deals. So we’re fully vertically integrated, we take a very hands-on approach. We are licensed contractors, property management, real estate brokerage, we manage most of our properties ourselves, and then three of our partnerships, we partnered with other sponsors on as well. Especially as we got outside the Midwest, we leveraged other people who had those vertical integrations to get exposure to different markets.

Joe Fairless: So what was the last property that you purchased?

Jacob Blackett: The most recent property was in South Carolina, actually Columbia.

Joe Fairless: Will you tell us about it.

Jacob Blackett: Yeah, it was a 226 unit, and we partnered with a group out of New York who has other properties in Columbia. So the property is considered a B+ type asset. It was built in the late 90s – ’98 was the year built on it – and it’s in an area of direct growth. A little bit more suburban, a little bit more affluent area where the comps are newer-built properties, so it was the start out there in that area,. So what it presented was the opportunity to go ahead and provide the next level of renovations in order to make those units more comparable to some of those newer builds in the area, and a nice little value add. So a really high occupancy, spending roughly $8,500 per unit on renovations, doing things like refacing cabinetry, hardware, granite countertops, putting nest thermostats and bringing up the common areas to today’s standard to, in the end of the day, reposition a B+ asset to probably what you’d consider as an A-.

Joe Fairless: What’s been the most challenging deal?

Jacob Blackett: That’s a good question. So I’ve done hundreds of single-family home deals, but I’ll focus on multifamily. So probably the most challenging multifamily deal we’ve done was our second multifamily we purchased. It was a 50-unit.

Joe Fairless: Who’s we?

Jacob Blackett: HopeFolio.

Joe Fairless: HopeFolio, okay. Got it.

Jacob Blackett: Yeah, yeah, always talking about it as a team. So yeah, we purchased that property from an owner who had owned it for about 30 years, and it needed some help. It had deferred maintenance, it was built in the early 70s, and it was pretty much your classic value add deal. Bought a C Class property looking to reposition it to C+, and our biggest mistake on that is that we went and scoped all the units and put together our budget to get through the improvements that we planned, but we didn’t consider that for the first 18 months of owning that property we were going to have considerably higher repairs and maintenance. So we went through with our improvements on the units just fine, but we didn’t have enough cash to really take care of the other things going on at that property, and so it just made cash flow tight for the first 12 to 18 months.

Joe Fairless: And how did you eventually navigate that?

Jacob Blackett:  It’s tough. It’s your second multifamily deal, you’re still learning in certain senses… So we just stayed on top of things, we looked at every single expense, every single month and categorized it… We reached into our network and anytime you can get some feedback from experienced colleagues, and  that helped them… It was really just the function of the previous owner putting bandaids on things for 30 years, just not dealing with the plumbing stacks leaking, just patching it, not replacing the plumbing stack and the toilets. If everything’s good, you could replace a toilet for a couple of hundred dollars, but if the sub-flooring is completely caved in and plumbing is so old that you can’t turn on and off the valves and they just break, all of that just starts adding up a lot. So we wrote it out, it hindered our cash flow, but in the end, we were able to sell the property and return principal plus profits to everyone. So for a bad deal, it wasn’t so bad, but it was certainly stressful as we were doing it.

Joe Fairless:  What deal have you made the most amount of money on?

Jacob Blackett: Oh, man. Probably my shiniest deals probably came in doing fix and flips in some gentrifying areas in Indianapolis where in 2013 through 2015 we were buying homes for 10 to 20 grand, we were completely renovating them for $80,000 to $100,000. These are older homes, older vintage… And we’re selling them in the neighborhood of $200,000 to $280,000 dollars. So it was a good couple of year period.

Joe Fairless: What years?

Jacob Blackett: It was in 2013 through 2015.

Joe Fairless: What area of Indy?

Jacob Blackett: In Fountain Square.

Joe Fairless: Okay.

Jacob Blackett: There’s dozens of homes in that area that we had the pleasure of getting in, and you strip it down to just the sticks. You can see from the backyard to the front yard, and you just come in all-new, that new layout, and so that was fun and some crazy numbers.

Joe Fairless: Do you remember the deal when the gravy train stopped on that area, and you’re like, “Oh wait, I just put in 100, and it’s not getting the price that it’s been getting for last two years”?

Jacob Blackett: It was interesting, because I didn’t stay in it long enough to get to that point, and that neighborhood is still cruising along, although people are paying 80 to 120 grand.

Joe Fairless: Instead of 10 to 20.

Jacob Blackett: Yeah, yeah, yeah. So we wrote it out summer over summer, year over year, and we started selling these things for 160 grand, and when we exited, we were getting close to the 300 grand mark on those exits, and of course, we slowly started paying more and more. But quite honestly, it is right about when we started getting traction with syndications in late 2015, that we said, “You know what? The fix and flips are fun, but they’re risky, they’re super transactional. Every property you buy, you sell, you’ve got to go find another one.” So we were looking to build a portfolio, long-term, buy and hold. So we just washed our hands of the fix and flips and focused on rentals.

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

Jacob Blackett: I would say for anyone who is getting started or entering into a new investment or something new, leverage existing people. So I made that mistake early on with my first couple of fix and flips. I was trying to do everything myself, when I could have simply tried to find a deal for an existing person or JV with someone who’s already doing flips. So just find someone who’s doing what you’re doing, who’s doing it successfully, especially if you’re just trying to get started, and see where you can fit into that puzzle, even if it just means providing some capital and having someone who’s agreement is to let you be more involved.

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

Jacob Blackett: Sure, Joe.

Break [00:17:32]:09] to [00:18:35]:03]

Joe Fairless: Best ever book you’ve recently read.

Jacob Blackett: Quite honestly, I have my first baby at home, so I haven’t been–

Joe Fairless: Congratulations.

Jacob Blackett: Thank you very much. But I will say one book that I come back to continuously is The Four Agreements. It’s an amazing book to just stay on track and have a really good mindset and outlook on life.

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

Jacob Blackett: Big Brothers, Big Sisters.

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

Jacob Blackett: They can visit syndicationpro.com. Our contact information is on there.

Joe Fairless: Jacob, thanks so much for being on the show. I enjoyed our conversation about HoldFolio, how you were getting some grand slams in Indianapolis on the single-family homes, also the challenging projects that you’ve worked on, and then SyndicationPro too, and why you created it and your focus now, in addition to HoldFolio. I enjoyed our conversation. Thanks so much for being on the show. I hope you have the best ever day, and we’ll talk to you again soon.

Jacob Blackett: Thanks a lot, Joe. Thanks, everyone.

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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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JF2174: Working Harder With Gino Barbaro

Gino is the co-founder of Jake & Gino a multifamily real estate education company. He has also written three best-selling books and has a passion for educating others to help them be successful. He currently owns 1500 multifamily units and shares how having a growth mindset has helped him continue to grow at a fast pace. 

Gino Barbaro Real Estate Background:

  • Cofounder of Jake & Gino, a multifamily real estate education company
  • Best selling author of three books: Wheelbarrow Profits, The Honey Bee and Family, Food and the Friars
  • Portfolio consist of 1500 multifamily units
  • Based in St. Augustine, FL
  • Say hi to him at: www.jakeandgino.com
  • Best Ever Book: Pitch Anything Oren Klaf

 

 

 

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Best Ever Tweet:

“Education times action equals results” – Gino Barbaro


TRANSCRIPTION

Theo Hicks: Hello Best Ever listeners. Welcome to the best real estate investing advice ever show. My name is Theo Hicks and today we’re speaking with Gino Barbaro. Gino, how are you doing today?

Gino Barbaro: I’m doing good, Theo. Thanks for having me on.

Theo Hicks: Yep, absolutely. Thank you for joining us. So Gino is the co-founder of Jake & Gino, a multifamily real estate education company; he’s the best selling author of three books, Wheelbarrow Profits, The Honeybee and Family and Food and the Friars. His portfolio consists of 1,500 multifamily units, he’s based in St. Augustine, Florida, and you can say hi to him at jakeandgino.com. So Gino, do you mind telling us a little bit more about your background and then what you’re focused on today?

Gino Barbaro: Sure, Theo. I came up in the restaurant world, bought a restaurant eons ago, it feels like, over 20 years ago, with the family up in New York. I loved it for the first 10, 15 years; it was great. Great recession comes along and everything changes, and I just said to myself, “I need to be doing something different.” I was already getting into real estate, buying little fourplexes, I got into mixed-use buildings, I got into self-storage, and I had failed at all those, because I didn’t take the proper education. I was taking massive action… And 2009 comes along, and I meet Jake thankfully, and he is a pharmaceutical rep at our restaurant, getting drug orders to sell to the doctor’s offices, and he’s doing these pitches, he’s trying to sell them pharmaceuticals. And for me, I loved him because he worked really hard, he was motivated, he was a great sales guy and I just knew that we’d click. I knew that one thing if you know anything about real estate. So I just kept the relationship going and in 2011, he moved down to Knoxville, Tennessee. I had no idea where Knoxville was. All I knew is I whipped out the laptop, started looking at deals down there and I’m like, “Wow, these deals make sense as opposed to New York.” So we created that relationship, and 18 months after he moved – it took us 18 months, Theo – we got our first deal, a little 25-unit complex. From there three months after that, we got our second deal, and then it just kept snowballing.

So for Jake and I, we’re pretty fortunate. We had timed the market– we just got lucky. We started buying where we could actually refinance the proceeds out and put it into the next deal. So the first 1000 units, we were able to buy ourselves – just me, Jake and a partner, Mike. And then after 1000 units, we’re like, “You know what, everyone’s out there syndicating deals, raising money, let’s learn it.” So for me, it’s the mantra ‘education times action equals results’. I wanted to get educated and I started learning the syndication model, and then ultimately, you learn, you do and you teach. We did our first syndication around 18 months ago, and the next 500 units was from syndication. So that’s what we’re focusing on now; we’re focusing on raising capital. We’ll still do deals internally, depending on the deal size, the deal structure, where it is, and we’re looking to start a fund. That’s our main goal for Q3 and Q4 of this year.

Theo Hicks: Perfect. Thanks for sharing that. I definitely wanna talk about the more recent syndication side, but you mentioned education multiple times during your background; obviously, you’ve written books. You’re a co-founder of a real estate education company, and then you also mentioned that it took you 18 months to do your first deal and that when you met Jake, you didn’t know anything about real estate. So do you mind just telling us what was going during those 18 months? Why did it take so long? Why did you decide to focus on education, as opposed to just other [unintelligible [00:05:53].20] who just do it and figure it out?

Gino Barbaro: Great question, Theo. The last 18 months, Jake and I have spent over $300,000 on our education, on consulting. You can get to a certain point in life and that’s where you stop, and you’re going to continue to need to grow. So when you’re buying your first deal, it’s different than when you’re buying your fifth deal. Things change, sizes change, asset class change, the amount of capital you need to raise changes. So you’re in constant growth mode, and if you’re not growing, you’re dying, and the only way you grow is by constantly educating yourself.

I challenge everyone out there to read the book Mindset by Carol Dweck. What I love about it is you need to have a growth mindset, you need to be constantly growing. If you have a fixed mindset where you’re like, “I know everything. I can do it myself,” well, you know what? Chances are, you’re not going to do it yourself, you’re not going to progress. You can, but it’s going to be a lot slower, you’re gonna make a lot more mistakes, and it’s gonna be a lot more painful, and that’s why it took Jake and I 18 months to get our first deal. We didn’t have a community like Jake and Gino, we didn’t have that proper education. I really started flourishing in real estate, believe it or not, Theo, when I went to life coaching school and I became a certified life coach. And I love coaching because one of the things it taught me was to ask the right questions. I wasn’t asking the right questions and I didn’t have clarity in my life. Why was I doing multifamily? Everyone out there’s gonna say, “Yeah, I just want to make some passive income.” That’s not the real reason for me, ultimately. For me, ultimately, I did multifamily for a couple of reasons. I was able to leave New York, move down to Florida, I could do it anywhere I wanted to, I was able to create multiple businesses from multifamily and I was able to scale. So once I really started working on myself, on my personal development and on my mindset, I was able to transcend and remove a lot of those limiting beliefs that I had. It takes money to make money, money is scarce; all those limiting beliefs that I had. If you can believe you can do something, then you know what – you’re going to become better at that skill itself, you’re going to learn it better and you’re going to take more action.

So for me, that first deal took 18 months because we had no credibility. No one really believed in us. I don’t even think we believed in ourselves. We didn’t have the proper training. We didn’t have the proper ability to network with the brokers. We thought that the brokers were there to serve us. No, the brokers have the deals. We have to treat the brokers really well; we’re the ones who are selling ourselves to the brokers. That whole mind shift took a little while for us. When we finally realized that, that’s when the deals started coming to us.

Theo Hicks: Okay, it’s the book Mindset. My wife had to read that for work. It was maybe, I don’t know, three or four months ago.

Gino Barbaro: What’d she think about it?

Theo Hicks: She said a lot of things you’re talking about. All she was talking about was the growth mindset versus a fixed mindset for literally every single thing that she saw.

Gino Barbaro: Theo, do you know what’s amazing about it? For me, I’m a parent, I have six kids, and we homeschool our kids right now; not because we have to. We’ve been homeschooling for over 20 years. And for me, the way we teach our kids – and this is a way for everyone out there – if we tell our kids that yeah, you’re really smart, that’s one thing. When they get challenged in life and they can’t figure it out, they’re gonna fall back to the fixed mindset by saying, “You know what, I’m smart. I can’t figure it out. I’m just going to quit.” But when you teach your kids, “Hey Theo, you really gotta work hard. If you want something, it takes a lot of dedication and a lot of hard work, and if you came in third place, it’s okay.” My kids call second place the first loser, and it’s okay, because you didn’t win, you came in second place; there’s nothing wrong with that. If you want to get into first place, you just need to work harder, and the growth mindset is all about working harder, working harder. If we can teach our kids that, so when they come up against a challenge and they have the clarity, and they have the hard work mind ethic and not quitting up, patience and persistence and keep on going, I think that’s one of the best things that we can teach kids with education. That’s what really was stressed in that book Mindset, and for me, it’s been a game-changer as far as relating with my kids and helping the students in the community by saying, “There’s a lot of hard work involved. We’re all smart. There’s a lot of really smart people out there. Multifamily real estate is not rocket science, but you do need to work really hard and you need to create and learn certain skills.”

Theo Hicks: So one of those skills you mentioned, and you mentioned that you didn’t know this going in, and that you eventually learned it, was how to properly build a relationship with brokers, and that originally you thought that they were there to serve you, but then you realized it’s the opposite… And obviously brokers are great sources for deals, and the better relationship you have with them, the more likely it is that they’re going to send you an off-market deal or send you a deal before other people see it. So from your experience, what are some of the top two or three things that people need to do right away in order to build that type of relationship with the broker, on top of obviously realizing that they’re not there to serve you?

Gino Barbaro: That’s a great question. Let me preface that by saying, we talk about the three pillars of real estate. We talked about market cycle, we talk about debt, and then we talk about the exit strategy. The first thing you need to realize is the market cycle. When I got into it back in 2013, 2014, early 2000s, the market cycle was definitely a buyer’s market cycle. So brokers were a lot hungrier back then than they were in the last couple of years. So you have to figure out what part of the market cycle is.

Right now, all of a sudden, the light switch has been just slammed back down and hey, it’s a buyer’s market again. So we have to figure that out. But with brokers, you don’t want to become their friends. They don’t want to take you out for a cup of coffee. They want you to be able to close the deal, they want you to know what cap rates are, they want you to be educated on it. They don’t want you to waste their time; that’s the first thing. I think the second thing is if you’re going to be serious and you’re gonna be talking to a broker, opt into their list. Start opting into their lists and start receiving their offering memorandums, and what I like to say is you do diligence on the market, and start going and doing some property tours with them; that’s what they want. They want to see that you’re serious about the property, they want to see that you’re serious about taking the deal down; don’t waste their time. Now for us in the beginning, Jake was a sales guy. He was always thinking about that you have to sell the broker, and you really do. You have to sell the broker on what your credibility is, on what you can do. So we created something called a Credibility Book, which is a business plan laid out with our strategy, laid out with why we invest in a certain market, laid out with how we get our money back to our investors, laid out with our case studies… So when a broker sees it, he sees that we’re serious. You have the website, you have the credibility book and you’re able to speak to them, I think, intelligently and you show to them that you’re not going to waste their time, and always be on top of mind to them.

I would always say to them, “Get their phone number, start texting them every three or four weeks, just checking in, seeing how things are going. Not always pestering about the deal, but try to build a relationship with them,” because real estate, what it comes down to– I think every business, but especially real estate, it’s really about your network and it’s really about networking with people in the business; and the bigger your network grows, the more brokers you know, the more possibility of a deal landing on your desk.

Theo Hicks: Is that credibility book like a PDF or PowerPoint presentation?

Gino Barbaro: Yeah, what we do is you can go to jakeandgino.com/honeybee, and on that page, you’ll see a copy of our credibility book. It’s a PDF document. If you want to print it out, ours is about 20 pages long. When you first start out, it should be seven 7, 8, 10 pages. You want to really focus on what market you’re in. So we’re in Knoxville; you want to talk about why Knoxville, maybe talk about the job growth, the population growth, the number of employers. Really put some nice pictures in there and not too word-heavy because people are more visual. Then you want to talk about what your strategies are. So we’ve done owner financing, we’ve done refi roles, we’ve also raised capital. So talk what your strategy is; then if you’ve done a couple of deals, put your deals in the portfolio. Also, whether it’s are you a full-time investor, are you a W2, give your bio in the book, and then also talk about the case studies.

So on all our various deals – we’ve done different deals, whether we’ve owner financed them, we’ve raised NOI – talk about that. And then finally, ultimately, just give them your blueprint, your roadmap of what you’re going to do with their money, how you’re getting their money back.

Theo Hicks: Perfect. Okay, let’s transition into syndication now. So obviously, your situation is a little bit different because a lot of people want to start raising money right away. You already had 1000 units, and then moved on to syndicating afterwards. So let me ask you like this – if you could go back, would you still have waited until you had done this many deals before starting syndication, or do you think you’d have been capable of doing it at 500 units or 200 units, 100 units, or do you think you really needed to wait until you did?

Gino Barbaro: That’s a great question. I don’t know the answer. I probably would have started syndicating sooner, but limiting beliefs of “Wow, I’m taking investor money, I’m a fiduciary, I’m not sure if I can do that.” I think part of it goes back to the three pillars of real estate; it’s the market cycle. At the time the market cycle when I started, syndication wasn’t a big thing. The Jobs Act that just passed, it was a little bit more regulatory, it was a little bit harder, and the deals out there – they were great to syndicate, but I just said, “Jake, let’s start small. We want equity in these deals. We don’t want to bring investors on.”

We should have probably done it sooner, but I wasn’t ready. So for me, that part of the market cycle we’re in right now, it may be a little bit harder to syndicate, only because you have to come up with so much reserves for your financing. Is that going to last forever? I don’t think so. Probably, the next 6 to 12 months Fannie and Freddie will start loosening up. That’s why you don’t know what you don’t know, that’s why it’s important. I keep stressing that word education. If I’d known about syndication when I started out with Jake, maybe I would have gotten on to it sooner. I started listening to the podcasts, I started talking to other syndicators, I met Joe Fairless on the journey around ’13, ’14 and we had started discussing that… But for us, it’s just one tool in the toolbox. I think in the next 6 to 12 months, the big opportunities are going to be owner financing and community banks; that’s how we started out. Now for me, like I said, I had that limiting belief. I probably should have started sooner, but it’s okay. I’m here where I am right now, and I’m pretty happy where I am right now, and it’s just like we said, one tool in the toolbox and we will continue to syndicate.

Theo Hicks: Perfect. Thank you for sharing that. Once you were ready to raise money, you guys decided to go ahead were like, “Alright, we’re gonna do a syndication”, do you mind just walking us through what you started doing? Did you send out an email blast saying, “Hey, we’re raising money now. Come on and join us,” or what was your exact step-by-step process for raising money for that first deal?

Gino Barbaro: Well, I think Joe Fairless has got a great blueprint, and I think I must have followed it not even thinking about it. We’re all a brand out there, we all have to create our own brands, and we were Jake & Gino. We started the education just because we wanted to write a book, and then from writing the book, Jake says to me, having the great partner that he is, “Let’s start a podcast.” I’m like, “Okay.” I think next month  we’ve been doing the show for five years. So we just started the podcast and from there, people started listening to it every day, you start creating that brand, you start creating that likeness from people. They get to know you, like you and trust you, and in 2017, we had our first live event. First, live event, we started signing up investors. People start trusting you, they start looking at you, they’re like, “You know what? These guys have got credibility.”

So for us, I think in the beginning, just creating a brand, start putting things on paper, start having the credibility book, start getting clear on why you’re syndicating. What is the reason why you’re syndicating? Are you doing it because you want to hold these deals long term? Are you doing it because you want to get into it three to five years? You have to figure out what your model is, and I think ultimately, start the brand, start a podcast, start writing blogs, start doing videos on YouTube, start getting your name out there and start creating a list of investors… Because unfortunately, most people, what they do is they’re like, “You know what? I’m going to go look for the deal, and then I’m going to look for the money,” and if you do that, you get the deal, and you will not be able to find the money, because you need to create what we call a substantive relationship, and I’ve been doing that all along for the first 18 months before we did our first syndication.

And for us, another reason why we waited, we had so many irons in the fire, as they like to say. We had the property management company, we were managing our properties day-to-day, we had the education company. We didn’t have time to get on phone calls and start talking to investors. What we ended up doing is we ended up creating ramp partners, brought on a fourth partner, and he was taking care of all the investor calls, he was taking care of all the emails… Because we’d grown our list of over 600 investors and to call and speak to every single one of them is a grind. It’s grueling. And we’re running other facets of the business. That’s probably one of the other reasons why we had taken a little while to start syndication, because when you have multiple businesses going on, you need to know where to focus on and that wasn’t our focus. But when you start running out of capital, that syndication model looks really great. So for us, really, Theo – start creating your brand, start learning, doing and then ultimately teaching it to others. You’ll have the credibility, you’ll be positioning yourself as an expert, people will see you as an expert, and then start trying to build up your list and start connecting with all those investors out there.

Theo Hicks: Okay Gino, besides everything else you’ve given so far, what is your best real estate in investing advice ever?

Gino Barbaro: Wow, the best real estate investing advice ever… For me, I think the two words ‘due diligence’ are probably the two most important words in life. When you’re doing something, make sure that you’ve done your due diligence, and all the mistakes that we’ve done in our deals, especially my first couple of deals – I didn’t know what due diligence was. When you get into a property, you take the deal down, you’re looking at a deal, you need to really scrutinize that deal, look at it so many different ways, make sure you go through the entire process of due diligence, whether it’s your underwriting, whether it’s inspecting the property, whether it’s inspecting the sellers, you have to dive through it and you have to make sure, and looking at it from a logical objective point of view; get your emotions out of it. Don’t pencil whip the deal, as one of our coaches likes to say, to make the numbers up, to make them work. Really take a logical, unemotional approach and dive into due diligence. And if you can have a good due diligence process, it’s going to save you a lot of time and it’s going to save you a lot of mistakes, and ultimately, it’s going to save you a ton of money.

Theo Hicks: Perfect. Are you ready for the Best Ever lightning round?

Gino Barbaro: Yep.

Break [00:19:04]:03] to [00:20:06]:09]

Theo Hicks: Alright, so I think you already answered this, but maybe you’ll give me a different book, but what is the best ever book you’ve recently read?

Gino Barbaro: I’ve read so many books in the last two months being shut in and doing all the work… I think all the listeners out there talking about raising capital, they need to read the book Pitch Anything by Oren Klaff. We had him on our podcast, he is a really entertaining dude, but his book Pitch Anything is amazing. It’ll help you actually create a pitch for yourself and really speak to investors differently than you are right now. So go pick up that book, Pitch Anything by Oren Klaff.

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

Gino Barbaro: Rebuild it.

Theo Hicks: Alright, let’s talk about a deal that you lost the most money on. How much did you lose and then what lesson did you learn?

Gino Barbaro: I love that question, because that’s an easy one for me. 2006 November, bought a strip mall, 19,000 sqft up in Dutchess County, New York. It is about an hour and a half from New York City. It’s a dying market, I don’t know it – remember I said due diligence… I didn’t know what the market was, bought it in the wrong part of the market cycle, didn’t have an exit strategy, and the debt that I’ve gotten on it was terrible. So I made every mistake possible. I overpaid for it, and then I over-fixed the property, held it for ten years. And the worst part about losing half a million dollars in a deal was not the half a million dollars, because owning it for that long, you get a lot of learning lessons, you learn a ton about how to deal with tenants. The problem with owning something for ten years is the time that’s just sucked out of your life. Having that ability to not be able to focus on other things while I was worrying about this property – getting a call from the property manager every other day saying we’ve got a problem here. I should have cut bait and sold it sooner. One of the best things I ever did was sell the property for a huge loss, and got it off the balance sheet, got it off my mind, and I think about that property every three months now, which is great, so my mind can be used and spent on different things.

So for me, I’m beating the drum, Theo, but if I had really done my due diligence, if I’d really gotten educated, I would not have bought that property because it was in the wrong part of the market cycle, it was in the wrong market – no growth, no job growth, no population growth. I had terrible debt and I didn’t know why I was buying it. I didn’t know what I was ultimately going to do. Was I going to hold it long term? Was I going to refinance it? Was I going to flip it out? I didn’t think of any of these things before I got into the deal, and if I had, I would not have paid for that property, or I probably would have paid a couple of hundred grand less and gotten less. As far as pricing, I probably would have paid a ton less for it.

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

Gino Barbaro: For us, you referenced the book, Family, Food, and the Friars. When I was up in New York, I was a pretty big benefactor to the friars, Franciscan Friars of the Renewal, and I would go down to their friary and they’d have soup kitchens; they would deal with the poor in Harlem, or whether it was in Harlem, whether it was in Paterson, New Jersey, I’d just go down there and just spend time with them and cook, whether it was for the neighborhood or for them. I just love to spend time with them, because for them, it’s really giving to others. And I love being around them, because they’re in the service of others less fortunate, and for me, just to share that with my children and just to show my children that there are others out there struggling, for me, it was just a great feeling.

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

Gino Barbaro: jakeandgino.com and if you want to email me, it’s gino@jakeandgino.com. I answer all my emails, Theo.

Theo Hicks: Well, perfect. Thank you for sharing your email address and sharing your best ever advice today. I’ve got three pages worth of notes, just the top takeaways… And Best Ever listeners, make sure you relisten to this episode, a lot of powerful information… But you have a very strong focus on education first, before going out there and taking action. You have your formula, ‘education times action equals results’ and you don’t just mean educating yourself on real estate, but also focusing on the personal development side. You talked about how actually becoming a coach helped you figure out how to ask the right question, which ultimately helped you grow your business better. More tactically speaking, we talked about some of the best ways to build relationships with brokers. We talked about not wasting their time. They don’t want to be your friend, they want to know that you can close on the deal. So opt into their list, do property tours with them, show that you’re serious about taking on a deal, and then sell them what you can actually do by creating that credibility book, and you said that you can find a copy of your credibility book at jakeandgion.com/honeybee, and you gave us examples on what to put in that actual book.

And then always being top of mind – you mentioned getting their phone number and texting them every few weeks just to let them know what you’ve been doing. Again, not to just mindlessly bother them, but to have a specific reason why you’re reaching out to them.

We talked about your top tip for raising money, and that’s about creating a brand. So you talked about how you wrote a book, started a podcast, people started to know like and trust you, you eventually did your first live event, and because of all the previous work you’d put in with the book and the podcast, you were able to get investors from that event. And then also making sure you’ve got a clear understanding of, again, why personally you want to syndicate these deals. And then you also talked about you need money first before you actually find a deal to build that substantive relationship.

And then another really good way to raise money is to teach others how to raise money, because then you come across and portray yourself as an expert. And then lastly, your best ever advice which – it takes us full circle back to the education, which is understanding how to do proper due diligence, and that all the mistakes you’ve made has been because of not knowing what proper due diligence is. You gave us a perfect example of that property you did in November 2006. You gave us the exact specific date of when you actually did that property.

Gino Barbaro: That’s right. Painful, painful. November 6, bro. November 6th, 2006. I’ll never forget that. It is ingrained in my mind. That’s a good thing though, because if I hadn’t done that deal, then I never would have gotten into multifamily and I never would have dove into the education aspect. I would have continued to wing it.

Theo Hicks: Absolutely. And then the last thing you mentioned was about making sure you’re able to take the emotions out of the due diligence process, don’t try to– what was the words you used about penciling it in?

Gino Barbaro: Pencil whip. If you pencil whip a deal, you’re just making those numbers up. You’re making the deal work. And don’t fall in love with the deal, fall in love with the numbers.

Theo Hicks: Exactly. Be very logical and objective about it. So again, Gino, really appreciate it. Everyone, definitely relisten to this episode; very powerful. Thanks for joining us. 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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JF2163: Anesthesiologist To Real Estate With Leslie Awasom

Leslie is the Co-Founder and Director of Operations of Xsite Capital Investment LLC. He is originally from Africa and in 2008 started as a healthcare provider and eventually found his passion for real estate. Leslie shares the lessons he has learned through some of the mistakes he has made during his journey.

Leslie Awasom Real Estate Background:

  • Co-Founder and Director of Operations of Xsite Capital Investment LLC
  • 3 years of real estate investing experience
  • Bought first property in 2017 and in 2019 invested in a 192-unit apartment
  • Based in Hanover, Maryland
  • Say hi to him at: https://www.xsitecapital.com/ 

Click here for more info on PropStream

 

 

Best Ever Tweet:

“Always be ready for changes because things don’t always go as planned” – Leslie Awasom


TRANSCRIPTION

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, Leslie Awasom. How are you doing, Leslie?

Leslie Awasom: I’m good, Joe. How are you doing?

Joe Fairless:  Oh, I’m doing well and I’m grateful to have you on the show. A little bit about Leslie – he’s the co-founder and director of operations at Xsite Capital Investment, he’s got three years of real estate investing experience, bought his first property in 2017, and in 2019 invested in a 192-unit apartment community, he’s based in Hanover, Maryland. With that being said, do you want to get the Best Ever listeners a little bit more about your background and your current focus?

Leslie Awasom: Sure. Joe, by the way, thanks for having me here. So a little bit about me. I’ve been in the US for the last 20 years, came here from Africa 20 years ago, and in 2008, I started my career as a healthcare provider. I was there and I witnessed what was happening with the economy. I got to see some older nurses that I was working with lose a significant portion of their retirement as a result of the economic crisis of 2008, and that scared me and left a little bit of an impact on me. I wasn’t quite sure where to go or what to do, but at that point in time, I had made up my mind that I wasn’t going to find myself in the similar positions as those nurses.

So fast-forward a few years later after getting my masters and working as an anesthesia provider, I wasn’t really feeling like this is where I wanted my life to end. I loved the role that I was providing at that point in time, but I needed more. So I started just looking up and trying to read some articles about investing and other stuff, and I came across a book by Robert Kiyosaki called Second Chance at Your Life and Your Money; read the book and it really connected with me, my situation that I was in at that point in time, opened up my mind to the financial world and investing, in general. So from that book, I decided to take a plunge to educate myself more and then start investing in real estate.

So in 2017 I finally got the courage to purchase my first investment property. It was a rental, did the VRR model. It worked okay, made some errors right there with the first deal, but it worked great and it was a proof of concept for me. It showed me that I could do this, and I really, really enjoyed myself while managing the property and going through the renovation process. So that was the jolt I needed to dig in more into the real estate and keep pushing forward. So later on down the line I met my partner, Tenny Tolofari, and we connected on the real estate side and on finances and personal development, decided to partner up together and focus on multi-family investing.

So we started Xsite Capital in 2019, we started our meetup as well, started going out there, meeting people, connecting with other investors and other industry leaders like yourself, and in 2019, we were invited onto a 192-doors apartment community in Atlanta, which was our first investment; it went out great and this year we’re pushing forward. We now have another 49-unit on the contract that we’re currently in the raise portion for and hoping to close next month.

Joe Fairless:  So the 192-unit, are you two the only general partners on that?

Leslie Awasom: No, we have senior general partners in the deal. We got invited on the deal as general partners, but we were unable to meet the requirements as far as the ways were concerned. A couple of our investors backed out at the last minute, so we ended up as limited partners on the deal.

Joe Fairless:  In 2019 you had a meetup and also you started your company; that was after you did the BRRRR. Let’s just talk a little bit about the BRRRR, and then we’ll talk about some other things related to apartment investing… But with the BRRRR approach, you said it went well but you had some errors on it.

Leslie Awasom: Correct.

Joe Fairless:  What were some things that you learned?

Leslie Awasom: I learned that you’ve got to do estimates the right way. You cannot be over-optimistic when it comes to doing renovations. When I got the apartment, the realtor was– he’s a nice guy, but just [unintelligible [00:06:45].18] and he was the one that really encouraged me to get the property, which I’m grateful for… But he was just throwing out numbers, which I went by and which were not accurate, and I ended up spending double the numbers that he was throwing out. He just looked at the condo and said– he doesn’t think we’re going to spend more than $7,000 for the renovations. I ended up spending about $14,000. Tried hiring one contractor, that didn’t work out, ended up firing the contractor, ended up having to take some time off of work to be the project manager myself, which worked out great and I really learned a lot with that process as well.

Joe Fairless:  $7,000 to $14,000 budget to actuals, what was the difference?

Leslie Awasom: It wasn’t really an accurate estimate. It was just a guess, and that was one of the valuable lessons that I learned, that we have to treat this as a professional business and not just as a hobby. So we didn’t get a professional estimate right upfront. So we just went along with what needed to get done and brought a specialist to come in and look at that and give us an estimate.

Well, at least after the first experience with the contractor that got fired — because he came in and said he was going to do everything for $10,000, but then the first two, three days I was at the job site and he never showed up. So I ended up getting rid of him and then started doing it all on my own. I made some mistakes because there are certain things that I did twice that I could have done once, like doing the total breakdown and garbage disposal. I ended up doing one section first, then got to get rid of the garbage, then have to pay someone again to come and get more garbage from the other side. So just rookie mistakes, but I did enjoy the process; I like doing that.

Joe Fairless:  As far as the contractor goes, knowing what you know now, how do you approach the contractor conversations when you’re vetting them out?

Leslie Awasom: Now, off the bat, I don’t do single families anymore; we now focus on multi-family, and for this, we piggyback off our property managers and let them do a lot of the bidding. But if I were to do it on my own, I would get professional contracting companies and get bids from at least three different contractors and sign a contract with expectations of what I need from my own end and have the contractor give me an expectation of what to expect through the contract. But in the back of my mind, always be ready for any changes, because things don’t always go as planned.

Joe Fairless:  With apartment investing now, transitioning over to what you’re doing now – you’re a limited partner on a deal, so you personally invested in it. How did you qualify that deal? Because it sounds like that was your first limited partnership investment, correct?

Leslie Awasom: Yes.

Joe Fairless:  Okay.

Leslie Awasom: So like I explained, we initially got invited to have a general partnership position, so I got to underwrite the deal myself; I looked at the numbers of the deal, I had studied– credit to you, Joe, because I learned a lot from reading your book on how to classify markets and find the right neighborhoods to invest in, and that is the same format we use as we move forward and select the market, to select the neighborhoods to invest in. So this deal is in Atlanta; very strong market. The numbers on the deal were solid. It’s a B Class asset, which is what we were looking at that point in time in 2019, with everything that was going on, with the call for recession coming and everything coming. So we were focused on trying to invest in a primary market, in a B and above asset, and we had that opportunity to. So I did underwrite the deal, the numbers made sense from a general partner perspective and a limited partner perspective, that we were comfortable putting in our own money in the deal as well. And we try not to offer anything to investors that we’re not comfortable with investing in ourselves.

Joe Fairless:  Just looking at your experience over the last three years, what have been some eye-opening events that have taken place, one or two? Something like, “Oh, well, three years later, knowing what I know now, that’s surprising”?

Leslie Awasom: The first one was regarding that deal, we got caught up into the trap of focusing on finding a deal and thinking that once you have a deal, investors would show up. That is one, and the second one is just related to being afraid of certain things, having fear. A lot of growth has happened since I started this business as a person, and that is the one of the most important things I like about being part of the multi-family business. It’s not just about going out there and growing wealth, it’s about growing as a person. And a lot of that growth has happened from challenging myself to do certain things that I thought were scary at that point in time, and one of those things was sitting and talking to investors or putting myself out there to let people know what I’m doing, which is one of the reasons why we face challenges with raising money for that deal at first.

When we started, we initially spoke to a couple of investors and one of them said they were happy with the deal, they were going to put in some money; the others said the same thing. So we had promises of more than the amount of money that we thought we needed and we stopped raising, and now we’ve learned that you have to raise more than the amount that is required, just so if somebody backs out at the last minute, you have the capital to close as well. The other thing I’ve learned is in order to keep growing in life, I have to keep challenging myself to face uncomfortable situations, and that growth happens on a daily basis and I’m enjoying the process.

Joe Fairless:  What are some ways that you educate yourself from a personal growth standpoint?

Leslie Awasom: I read a lot of books. I listen to podcasts as well.

Joe Fairless:  We’ll get into some of your recommendations in the lightning round, I guess. So taking a step back, what is your best real estate investing advice ever?

Leslie Awasom: Get started. You’re going to have challenges along the way and you’re going to make some mistakes along the way; just learn from them. Don’t just jump into real estate because you think it’s a quick way to make a walk. It’s a long term business. If you’re really dedicated to real estate, get started, network with people, keep pushing forward and it’s all going to be worth it.

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

Leslie Awasom: Yes sir.

Break [00:13:03]:04] to [00:14:12]:09]

Joe Fairless:  Best ever book you’ve recently read.

Leslie Awasom: Best book recently read, I’ll have to say it’s The Compound Effect by Darren Hardy.

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

Leslie Awasom: By educating others about what real estate investing is all about and showing them possibilities of what they could do for themselves if they truly believe in themselves.

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

Leslie Awasom: I’ll have to go back to the same BRRRR model that we did. Again, it goes back to working, trying to find contractors for ourselves. I had somebody come and do the job, and didn’t do it right the first time because I went for the cheaper option. I ended up going back to the person that gave a higher bid, and no doubt, did a better job. So sometimes cheap is not always better.

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

Leslie Awasom: They can learn on our website, www.xsitecapital.com.

Joe Fairless:  Leslie, thanks so much for being on the show talking about how you have focused on real estate investing for three years now, and the couple of deals that you’ve participated in. Hope you have a best ever day. Talk to you again soon.

Leslie Awasom: Thanks.

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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JF2160: Second Generation Investor Lessons With Pankaj Sharma

Pankaj is a second-generation multifamily owner and operator with 20 years of experience in real estate. When he was young he was helping his father with properties, cutting grass, painting, and whatever was needed in terms of maintenance. He discusses the biggest deal he has ever done which was 800 units 5 properties. 

Pankaj Sharma Real Estate Background:

  • Second generation multifamily owner/operator with 20 years experience
  • His personal portfolio consists of 2000 units in 5 major cities
  • The host of KarmaKast – and YouTube’s Sharma’s Karma 
  • Based in Spring City, PA
  • Say hi to him at: www.sspropertiesinvestment.com  

 

Click here for more info on PropStream

Best Ever Tweet:

“Patience, it’s a long term game, it’s not to get rich overnight. Consistency and Patience.” – Pankaj Sharma


TRANSCRIPTION

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, Pankaj Sharma. How are you doing, Pankaj?

Pankaj Sharma: Hey, I’m doing good. How about yourself?

Joe Fairless: Oh, I’m doing great and welcome to the show. A little bit about Pankaj – he’s a second-generation multifamily owner operator with 20 years experience. Personal portfolio, well, that consists of 2000 units in five cities, host of KarmaKast, based in Spring City, Pennsylvania. With that being said, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

Pankaj Sharma: Right now, like I said, we manage about 13 properties in five metro, tertiary, second– I would say, secondary markets, and all in Pennsylvania, Allentown, Redding, Pottstown, Harrisburg, and Chester County. When I was about ten years old, my father bought his first property, no money down. He borrowed and he got owner financing, and he borrowed the rest of the money, about $90,000 down, for a property with 54 units. Well, now it’s 54 units but it was 52 units at the time. So I grew up painting apartments, cutting the grass and doing various things, holding the bucket for my father; he would do maintenance requests at times, fixing problems. So growing up, I didn’t think this is something I was going to get into, and I tried to get further as possible from it, but as I got older–

Joe Fairless: How come?

Pankaj Sharma: I just thought I had another calling, I had my own journey to go through, and always like the grass is greener on the other side type of thing.

Joe Fairless: Of course, yep.

Pankaj Sharma: So they always tell you to follow your passion, follow your passion stuff, and that confused me for a while. I realized that I can invest my passion, I can turn on the switch of passion anywhere with anything, and I can be passionate with what I’m doing as an investor. I saw everything from a different angle and perspective, and as I grew older, my perspective and my angle started to change.

I would only see the problems. I didn’t see where this is going. I saw the problems and the headaches and that kind of thing. Which is good; I’m glad I had that background and basis. So I’ve done everything from painting apartments to managing a property myself to doing those things. I never loved property management; I got into it, I poured my blood, sweat and tears into it, because we would take over properties at times and it was really in bad shape. So we’ve made a portfolio consisting of buying mismanaged/distressed properties, buying them at a good price and fixing them up and keeping for the long haul, and building a portfolio like that. Collectively, our family has a portfolio of 4,500 units. My brother, he has about 2,500 units and I got about 2,000 units.

Joe Fairless: So your bread and butter is buying mismanaged, distressed properties, getting them to stabilize, and holding for the long haul. What was the last property you purchased? Let’s talk about that.

Pankaj Sharma: So the last deal we did was in July of 2019. It was the biggest deal we’ve ever done, which is over 800 units. Five properties in the city of Harrisburg, which is the capital of Pennsylvania. The deal came to us and it wasn’t really that interesting. It was really mismanaged, really distressed properties, two high rise buildings, and I’ve had a high rise building for a while. But we came very close to signing the property, and then I just at the last minute backed out. I was away on Thanksgiving vacation [unintelligible [00:05:51].03] and the deal was all ready for me to sign. It was being pushed through. It wasn’t one of those deals where you could do a whole lot of due diligence. It wasn’t even on the market; it was off-market deal, and I backed out at the last minute. I just had this really gut-wrenching feeling that something was not right, and I backed out.

A few months later, the property came to us again, but it came and it was wholly different. The owner was more relaxed; he wasn’t desperate, I guess, and he was more relaxed and it wasn’t the property management company anymore. He was managing it himself, which is a lot easier to do a takeover when you have something that’s self-managed, as opposed to a property management company.

Joe Fairless: Why?

Pankaj Sharma: Because we self-managed all our properties. When we’re buying a property, we’re not just looking at the investment figures of it, we’re looking at the operational aspect as well.

Joe Fairless: Okay, but how does that help?

Pankaj Sharma: The way it helps is because it’s an easier transition. When the property management company– they don’t have an investment in the new owner because they know they’re going out. So they’re like hi and bye, and then it’s a harder thing to fill the roles. But if the person’s managing themselves, those people want to work with you. So you’ve already got a team there, and then you can sift through the team and work out. So you have time, whereas those property management companies are gone, and it’s a big operation like that, five properties across the city, and to bring in a team and hit the ground running, it’s a really tough time.

Joe Fairless: So the two things – one is just the staffing and then two is the attitude?

Pankaj Sharma: Yeah, the property management company, they don’t have an investment in the property. They’re out of the job now that you’re coming and taking over their property. They have no investment; and property management – they don’t have investment in the property period anyway. So even when they manage the property itself, they’re not as attached to it as the owner would be.

Joe Fairless: So you backed out last minute around November. A few months later, came back to you–

Pankaj Sharma: February, yeah.

Joe Fairless: –and what did those terms look like, compared to the original terms?

Pankaj Sharma: Well, we got the price dropped a million dollars.

Joe Fairless: There you go.

Pankaj Sharma: I think we could have went for $2 million, but we definitely — that’s a really good term. The owner was really trying to push through the deal in 30, 60 days, doing a quick close, do your due diligence upfront and once you sign, you can’t get out of the deal. It was really a lot of pressure, and even when we signed the deal in February, it wasn’t till July that we could finally close on this deal, because there was so much going back and forth between the lawyers and the legal work and looking at things and checking out violations, and that kind of stuff. So it was a crazy deal to get through all those months, and to get to the closing was very extraneous.

Joe Fairless: What was the purchase price?

Pankaj Sharma: So the purchase price was $50 million. So we go it for about $60,000 something a unit; $50 million, 828 units, approximately. The numbers changed. Originally, we went in 828 units; now it’s 820-something else. That’s the other thing.

Joe Fairless: Why is that?

Pankaj Sharma: They’ll add units. Because they’ll add a unit here or there. So you realize it’s a few here and a few there, so there’s definitely a difference. So I don’t remember what the last total was, but it wasn’t– 828 was sealed in my brain because that was the number. So I always did– what is it, $50 million divided by 828. Yes, it was about $60,000 a unit. There’s no inventory here. Joe, there’s nothing on the market. So the guy was wanting to sell and we needed something.

Joe Fairless: Why was he in a distressed situation, to the best of your knowledge?

Pankaj Sharma: He was also a second-generation, and he moved a lot of his money into New York City, and so he was a distant manager. He never really came to Harrisburg, he never came to the locality. A property management was managing most of the properties for him, and he kept the one property that was pretty well stabilized, he kept that for himself. And he was always constantly moving his money to New York. He was always taking the money from Harrisburg and moving it to New York. So he wanted– and now looking at the whole situation, if we didn’t come and get the property at some point, I think he would have even lost the property. He was also a second-generation multifamily owners, as myself.

Joe Fairless: Well, it’s the second generation. Second-generation’s supposed to grow the business; the third generation’s supposed to lose it all.

Pankaj Sharma: Exactly.

Joe Fairless: He was one generation early.

Pankaj Sharma: Yeah, I wouldn’t say he’s losing it all, but his management style was very different from us, and then it was a real story because a lot of vendors were not paid, and a lot of bills were not paid. So you got a high rise building and it’s over $40,000, the electric is due and they want to come and shut off the electric. So a high rise building with 270 units, the gas company wants to come off, shut off the gas, these things. Our understanding was that all these things– well, I’ll get to this later because you’re gonna ask me what’s the biggest mistake I probably made at some point [unintelligible [00:10:30].07] I’ll get more into that, but yeah.

Joe Fairless: Well, just mention it while we’re on the topic. What were you gonna say?

Pankaj Sharma: So we’ve never taken over a property and the person who was the previous owner just left so many people high and dry. And then you have all these people coming to you and we’re just like–

Joe Fairless: [unintelligible [00:10:47].13] want their money.

Pankaj Sharma: “Well, we bought the property. We didn’t buy the debt on the property,” but some places you had to break out deals and work. So luckily, we had a good reputation in the area and some of the vendors just knew us because of our name, and that gave us the benefit of the doubt that we weren’t gonna do them dirty.

Joe Fairless: So the distressed high rise building, I heard you, you said five properties across the city. How many of those five are high rises?

Pankaj Sharma: Two of them are high rise, and one high rise in particular — people were interested in buying three or four of the properties, but nobody wanted the fifth one.

Joe Fairless: What was the fifth one?

Pankaj Sharma: Fifth one was a high rise building.

Joe Fairless: Okay, how many stories?

Pankaj Sharma: I would say 11…

Joe Fairless: 11 stories.

Pankaj Sharma: 118 units, it’s two different towers. It’s a pretty old building, built in the 30s. Most of our stuff is in the 70s. So we put a lot of work into that building. There was no cameras or anything. It was a lot of all kinds of shady activity going on there. It’s come a long way in a short period of time, and I’ve had a high rise for over 20 years. That was a foreclosed property that we had originally bought for $2 million as a foreclosed property. I had 96 units in it. Today, we built another 60 units because there was two floors of empty commercial space that we added 60 units about five years into the property. And today, that property is worth a lot of money. So high rises, if you manage them properly — but they’re more intense as far as… They’re more management intensive.

Joe Fairless: Please elaborate. I’ve never owned a high rise. What should we be aware of when we look at high rise buildings versus garden style?

Pankaj Sharma: Yeah. Elevators is an important issue, because that’s what’s gonna be [unintelligible [00:12:16].06] Everybody’s gonna be traveling in the elevator. So if it’s older building elevators, it’s a really key thing.

Joe Fairless: What about elevators?

Pankaj Sharma: The condition of the elevators, the maintenance of the elevators, how well they’ve been maintained, how old they are. If you buy a building that was built in the 70s, if it’s got original motors and everything is 50 years old, at some point stuff starts to go. So elevators is a key.

Joe Fairless: Are they expensive?

Pankaj Sharma: Oh, yes, elevators can be very expensive to refurbish and to modernize. I think it could take a lot of money.

Joe Fairless: What’s a lot of money?

Pankaj Sharma: Depends on the elevator, but you could easily spend $100,000 easily. We’ve spent, I don’t know, $50,000 for motors and parts in different times. So we were lucky with this building Bellevue towers because the building was shut down prior to us buying it and he had to redo the elevators and he had to do a lot of work in the elevators, so we weren’t stuck with that.

Joe Fairless: What else about high rise buildings?

Pankaj Sharma: The other thing that’s very important to look at is the boiler operations, because if you’re in a high rise building, you’ve got huge mechanicals. So the elevator’s a huge mechanical– you’ve got a boiler system, the heating system, those are huge mechanicals as well. Some buildings will have independent heat, hot water, HVAC per unit. Some even might have a collective, depending on when it was built. So I’ve got a high rise here in Pottstown, the 156 unit, the one I told you about. The hot water is collective. The Bellevue Towers, the hot water and the heat is collective. So that’s the other thing. You’re going to be paying for the hot water, the heat, those things as well.

Joe Fairless: So as a resident, it’s an all bills paid property?

Pankaj Sharma: They just pay their electric. Bellevue Towers, that property the heat is included as well. It’s one of those baseboard heat system.

Joe Fairless: Yep.

Pankaj Sharma: You’re familiar with it; it’s a new thing for me. But we spend a lot of money updating and working on the system as well because it’s– these bigger operational mechanicals, if they’re not well maintained and sometimes people will do cheap fixes or patches, and it gets very crazy at times.

Joe Fairless: It’s got to be an interesting transaction whenever– it’s February and he comes back to you, and then you don’t close until July. So what are a couple of things that– I imagine the closing was pushed back a couple of times. So what are a couple of things that pushed back the closing?

Pankaj Sharma: Well, there was a lot of blame going on with the title company. They were blaming the title company. The title company was out to lunch. So getting a good title company– we’ve never had that experience before, but the title company that was used, that was our lawyer’s title company, was really out to lunch, and it took a while for them to get their gears spinning. And because of the amount of issues, the city had sued this guy at one point. He took the city to court and he lost, and even at the end, he was laughing with these like, “They got a warrant for me in Harrisburg. I can’t even go to Harrisburg.”

Joe Fairless: Oh my.

Pankaj Sharma: So the violations, and things of that nature… Because the city there, they monopolize the trash, like they can only get the trash to the city. So you pay more trash-wise for these properties in this location than you would another property, because there’s no competition. It’s all through the city of Harrisburg. So he tried to fight that, and I guess he lost.

Joe Fairless: That was in the middle of it being under contract?

Pankaj Sharma: No, no, no. I think he did these things before. So it was a mess with the title company and then lawyers and then– luckily we refinanced another property and that’s why we were able to close this deal… Because the property itself didn’t have strong fundamentals that it could finance itself. Most of the time, you buy a property, you’re able to put 30% down or whatever down and then you’ll be able to finance the rest. Here, this wasn’t the case, because the property wasn’t that strong. It didn’t have a strong tenant base, it wasn’t well managed, it didn’t have a strong rent roll.

So even when we took over in July, in August, the collections were about 70 some percent, and then there was a lot of weeding that was going on because they filled a lot of the units with people that could fog the glass or fog a mirror for whatever reason, but it was to beef up the rent roll. For whatever reason, people that were not adequately qualified to be residents were given apartments. So we had to do a lot of cleaning out as well, but now– we moved fast and we went from something that was in the 70% mark of collections and occupancy, to – just last month, we reached 94% collections.

Joe Fairless: Congratulations, bravo on that.

Pankaj Sharma: And then all of a sudden, we’re hit with this whatever we’re hit with, this whole thing.

Joe Fairless: Yeah, the pandemic.

Pankaj Sharma: But luckily, we were able to build a strong base prior to that, because if we hadn’t, something like this could really take us down. Our mortgage on just on those five properties is $400,000 a month, principal, interest and taxes.

Joe Fairless: So you refinanced another property to purchase this portfolio, but then you just mentioned you have a mortgage. So how much down–

Pankaj Sharma: It was highly leveraged and the person probably wasn’t at this point able to pay the bills. The reason why the bills were left unpaid was because he couldn’t pay them at the end, I’m pretty sure. Because if the rent roll total is about $625,000, which now it’s at $627,000, the gross rent, and $400,000 of that is mortgage, how are you going to pay the rest of the bills? So luckily, added our $400,000– I don’t know how he had his finance, but we do a 15-year loan. Obviously, we’re going to be paying a lot more per month than most investors, because we’re paying off 15 years so our mortgage payments are higher; but we’re getting equity faster as well. By the time that 15 years is over, we’ve got a building that’s paid for that then is worth usually two to three times more than what we originally bought it for, and then you can take that money back out and then buy another property.

So the one property we had bought a long time ago, I think in ’96, we bought for less than $5 million, 296 units. That property itself today could easily– well now, who knows, with the corona thing, but prior to just last month, if I were talking to you, I could say you could easily get $100,000 a unit for that property. So that’s over $20 million. We took $15 million out of that property and refinanced. That property was paid off a couple of years ago.

Joe Fairless: So what percent down did you have on the $15 million?

Pankaj Sharma: So $15 million plus another $5 million is to 20 million right there, and then bank financed the other $30 million, which is 60%.

Joe Fairless: Okay.

Pankaj Sharma: So we just had to put $5 million now cash, plus the closing costs, which was another million and a half, 0.7 million or something like that.

Joe Fairless: 70% to 94%.

Pankaj Sharma: So check this out. What industry can you buy something for $50 million with $5 million cash?

Joe Fairless: Hey, I picked real estate for a reason. Yeah, good thing whenever you were looking at other passion projects, you ended up back here.

Pankaj Sharma: Right. Now with my understanding, I realized  – what business can you operate like this, where you can get something for $50 million dollars, which is probably worth a little more than that; we got it at a good price – only $5 million cash, and then 15 years, a big chunk of that is gonna get paid off.. .Because we had two loans. The one loan for the $30 million is 25 years this time, but the other refinanced one’s 15. And then you got another property that’s paying off that portion of it; the $150,000 mortgage paid off from the refinance. So the five properties themselves are only paying about $250,000 of the mortgage.

Joe Fairless: How does your team go in and change collections from 70% to 94%, and over what period of time was that?

Pankaj Sharma: So we’re looking at August, six, seven months; eight months total. It was really just being laser-like, going in, putting the money to do some of the capital improvements to fix up the outside, get the curb appeal up, start creating an energy that the change is here, and people that realize that they’re not going to be able to stay here because of the improvements going on, they just start leaving. And the ones that don’t leave that just can’t pay, you have to go through that process. So you have to clean the house, you have to weed the garden. Apartment investing is a lot like gardening or farming. One seed grows into many seeds, but you got to maintain and nurture the crop. You got to do the weeding, you got to clean out the weeds, and then you got to prune the tree in a fruit tree scenario, so that you can bear more fruit from it.

Joe Fairless: You mentioned curb appeal. Is that the first thing that you do?

Pankaj Sharma: We had to pick our battles, because there was so much going on. So in this situation, I did curb appeal, but then there’s other things like new roofs that were put on, and things of that nature that were not something that you could see from an aesthetic point of view, but that was necessary needed to go in.

There was sidewalks that were really bad. There’s just one sidewalk, I think I spent $40,000, $50,000 just for doing a whole block of sidewalk; it was really bad, and the trees were bringing it up, so you don’t want the trip hazard. But doing those types of things created news in the area, as well. The mayor was seeing what we’re doing, the mayor wanted to meet with us, and it never happened, but at least the word was out that somebody new is in town and they’re taking care of business, they’re being responsible. Because a big part of, like I say, investing, is not just looking at the numbers, but changing a community. When something is mismanaged, distressed, just the darkness comes in. And to be able to go in there and bring light and to make this place a little bit more beautiful, a little more safer, a little more pleasant to look at – it’s a positive thing, it’s making the world a better place.

Joe Fairless: Taking a step back, based on your experience, what’s your best real estate investing advice ever?

Pankaj Sharma: Patience. It’s a long term game. It’s not a get rich quick or get rich overnight scheme. It’s consistency and patience. That’s what I’ve seen, what my father has done, and then what we’re able to continue is just being consistent and not giving up.

It’s also a game where you need balls, you need courage. It’s not for everybody. It’s not for the weak at heart; because you’re going to see things, you’re going to go through situations that are really going to test you. So you need some grit, you need some guts. A lot of people through the years have come to our family and asked for advice and wanted to get in real estate, but they really didn’t have the courage. My father was able to — he didn’t know nothing about apartments when he started out, and I’m really amazed at the courage and the faith he had and going for it.

Joe Fairless: Wow. 828 units, five across Harrisburg, distressed, two of them high rise buildings. That takes some faith and some courage, that’s for sure. Especially whenever you are refinancing out a successful project and using that money as a down payment for this, because I’m sure there were some internal dialogue about “Do we really want to do that, or should we just be happy with this $15 million refi and not plunk it down into this major major challenge ahead of us?”

Pankaj Sharma: That city, when we first bought the property that we did the refi is Allentown, Pennsylvania, and where that city was 15-20 years ago and where it is now, it’s amazing, the shift that’s happening. So Harrisburg is behind, but we can see that even the growth there in the last ten years– my brother has been there for ten years, and he’s seeing the growth that’s happening there.

Now there’s all kinds of cranes and stuff in Allentown. There’s no cranes or anything in Harrisburg, except for they’re building a courthouse. So that long term game of 15-20 years, we just see the evolution of how real estate continues to evolve and grow over a long period of time.

Joe Fairless: I like your business plan, with the 15 years, and then just doing your business plan, self-managing and then refinance out at that point, and then do it again or do something else with it. We’re gonna do a lightning round. You ready for the Best Ever lightning round?

Pankaj Sharma: Sure.

Break [00:23:46]:05] to [00:24:56]:03]

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

Pankaj Sharma: Like I said earlier, giving back is investing in a mismanaged, distressed property and bringing the neighborhood to a place where it’s safe, where it’s harmonious, where there’s peace, there’s not unrest, and I never saw that before until this last year, really seeing how investors can make the world a better place.

Joe Fairless: We talked about a challenge that you’ve come across. How can the Best Ever listeners learn more about what you’re doing?

Pankaj Sharma: We started a YouTube channel a few months ago when we were getting into all this crazy stuff with this test deal, and it’s called Sharma’s Karma on YouTube.

Joe Fairless: Oh, cool. I’ll check it out.

Pankaj Sharma: We’ve got videos, we got our podcasts on there as well, and we show what we’re doing.

Joe Fairless: Is the KarmaKast your podcast?

Pankaj Sharma: The KarmaKast [unintelligible [00:25:44].17]. This one’s Sharma’s Karma.

Joe Fairless: Alright, I will put that in the show notes as well; the Sharma’s Karma YouTube channel. I’d like to check that out. I’d like to see what type of projects you are working on, like see them in person — or not in person, but through video.

Pankaj Sharma: The last video, we did a $20,000 rehab on an apartment. This guy had lived there for over 20, 30 years and it was just terrible. It was like the walls were yellow with smoke and everything from cigarette smoking and the apartment was so– there was no breathing [unintelligible [00:26:13].24] So we showed the before, during and after with that project.

Joe Fairless: Enjoyed our conversation very, very, very much. I loved talking to you about what you’re doing. Grateful that my team found you, however they found you; grateful that I found you.

Pankaj Sharma: Shoutout to Jerome Myers. I think he connected me with you.

Joe Fairless: Okay, well grateful for that, and thank you for telling us about the 828-ish unit portfolio in Harrisburg and just your overall process. Enjoyed it. I hope you have a best ever day. Talk to you again soon.

Pankaj Sharma: You too, Joe. Thank you so much.

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JF2141: Short Term Rental App With Jon Crosby

Jon is the CEO and Founder of Click2Flip, a mobile app to instantly analyze rentals and short term rentals. Jon loves to create streamlined processes that help make his short term rentals pretty much self-automated. He shares all of the automation he has done for friends, clients, and himself to create a smooth process and experience for both him and his guests.

 Jon Crosby Real Estate Background:

  • Founder and CEO of Click2Flip
  • Started investing in 2015
  • Owned and managed 4 short term rentals
  • Limited partner in 2 multi-family LLCs and 1 air medical hanger commercial investment
  • Based in Rockland, California
  • Say hi to him at https://clik2flip.com/
  • Best Ever Book: 

 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“I created the app to quickly instantly give me a high-level return to see if the deal was worth investing in further” – Jon Crosby


TRANSCRIPTION

Joe Fairless: Best Ever listeners, how 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, Jon Crosby. How are you doing, Jon?

Jon Crosby: Good. How you doing?

Joe Fairless: I’m doing well, and I’m glad to hear it. A little bit about Jon – he’s the founder and CEO of Clik2Flip, he started investing in 2015 after a company that he worked for ended up being purchased, he owns and manages four short term rentals, he’s a limited partner in two multifamily LLCs and one air medical hangar commercial investment, based in Rocklin, California. With that being said, Jon, do you want to give the Best Ever listeners a little more about your background and your current focus?

Jon Crosby: Yeah, thanks again for having me on the show. It’s an honor to be here. Currently, I, as you mentioned, own Clik2Flip mobile app. It’s a mobile app to instantly analyze flips, rentals and short term rentals. Also, in addition to the real estate investment that you mentioned, I’m also a partner in an assisted living facility project here in the Sacramento area, which has been a bit of on hold at the moment because of what’s going on with the COVID crisis. So my day job is a technology consultant for Fortune 100 companies where I focus on app development management, managing app dev teams, and I did that in my previous career in the company that sold. So I was laid off from that job. It gave me the opportunity to bridge my passions, and I brought technology and real estate passions together with the Clik2Flip app. I created it because I wanted something that was in between the 1% rule and 70% rule, but I didn’t want to have to do full underwriting on all the properties I was looking for. So I created the app to quickly, instantly give me a high-level return to see if a deal was worth investing in further.

Joe Fairless: You said between the 1% and the 70%. Is that 7-0 %? What is the 70% rule?

Jon Crosby: It’s the 1% rule for flippers. So that is yet to be a really good one for the short term rental markets. I’m hoping Clik2Flip can actually help bridge that gap as well.

Joe Fairless: What is a 70% for flippers? Will you educate me? I might have heard of it, but I can’t remember what it is.

Jon Crosby: Yeah, the 70% rule just says that the max allowable offer should be 70% of what you expect the ARV to be, the after repair value.

Joe Fairless: Okay, got it. And then, Best Ever listeners, 1% is taking the rent that you’re getting on a annual basis and dividing that by the all-in cost. Is that right?

Jon Crosby: It’s the monthly rent versus when you purchase, the purchase price of the property in a nutshell.

Joe Fairless: Okay, monthly rent.

Jon Crosby: Back in the day, we were left in– it used to be the 2% rule, but it’s whittled down to the 1% rule, and in California, you’re not going to find any 1% rule.

Joe Fairless: Right. I remember when I had my single-family homes, I only had, at most, at one time, but then I had 3 for five to seven years, however long it was. They were all around 1.3%, which is nice, until someone moved out. Then I don’t know where that percent would have plummeted, but that’s why I’m doing what I’m doing. Let’s talk about you and your short term rentals. Do you currently own four short term rentals?

Jon Crosby: Yes, I liquidated two of them. I have one, and the other one was one that I helped manage with somebody else. So I’m down to one right now. I was trying to liquidate, get some capital for this next round that I was hoping was coming… Because I wanted to expand. I was mostly focused in the Lake Tahoe area. So I wanted to be able to diversify a little bit, but I currently still have the one, that’s doing well… Not right now. It’s turned off up there at the moment, but I believe after this crisis is over, we’ll have quite a bit of pent up demand. So I’m taking the time to do what my other passion is, and that’s creating business automations. So I’ve built a lot of automations into my short term rental models so that literally for any booking, I don’t spend more than 30 seconds.

Joe Fairless: Really?

Jon Crosby: Yeah, I plug it into two spots, and then I have email communications, I have door locks to trigger, I have comms back and forth to my housekeeper setup, and I did bare-bones almost online. I’ve done some pretty complex ones for some friends that included even a signed addendum that once they signed it versus in a DocuSign, it automatically sent their instructions to check-in and can coordinate the door locks. So it can get really sophisticated and I just love doing that stuff. It’s really fun to optimize those processes when I can.

Joe Fairless: Now when you said you spend 30 seconds on each rental, is that literally?

Jon Crosby: I timed it once. It’s more like a minute, maybe a minute and a half and that’s just me plugging it into a calendar, and then the rest happens on the back end. Now don’t get me wrong, if toilets break and somebody doesn’t know how to work a door lock, you’re going to get a phone call. But I’ve easily gone five to six bookings in a stretch without ever even knowing anybody was up there.

Joe Fairless: What were the main timesucks that you automated?

Jon Crosby: One was communication. So notifying guests – going to Tahoe can have some treacherous travel, so I wanted to have consistency so that everyone had the same pre-travel communications. So that helped there as well as just–

Joe Fairless: What did you do? What did you do exactly with that?

Jon Crosby: For that one, I set up an email that goes out the day before their check-in, and it provides them with the information. It provides the links to Caltrans to click this button, make sure you check your travel, any road conditions before you head up the hill. Here’s another link for weather conditions… Just as much info as I could that I had found I was giving them personally before I built this, and I just laid it out in an email template.

Joe Fairless: Okay, and you send it the day before they check in. You don’t send any other automated emails prior to that?

Jon Crosby: No. I do have one company called Evolve that handles the initial booking and payment processing piece that they get an email for. So I take over managing as they approach the check-in time, and so that’s where I’ve focused all that email communication; but I can build it if we didn’t have that piece with its own. I’d do it for the whole process.

Joe Fairless: So is there anything check-in related the day before the check-in that sent that they might be wondering prior to the day before, that they’re asking you about? And I’m thinking of my wife in this example, by the way. We rented a place in Florida and she was reaching out to the host, because my wife had questions about the check-in process and other things, and she was wondering about that weeks before, not a day before check-in. So I’m wondering, to address curious cats like my wife who wanna make sure everything’s set up properly, do you communicate with them before that?

Jon Crosby: Yeah, so they get something 30 days before check-in, that’s a little bit high-level. It has my contact information as well as my wife’s that they would use if they have any questions, and I do [unintelligible [00:10:10].25] things like that that they want to know; should they pack coffee, or things like that. So that we can certainly answer for them; and then on the day of check-in, they also get a full welcome email. Go check the binder on the coffee table, this is where you can have all your information. Here are some of our favorite restaurants… All the stuff that they need to be successful and relax once they get there.

Joe Fairless: So that is one part of the process that you automated, the guest communication, that was taking up a lot of time. What else?

Jon Crosby: The other part was the housekeeping communication. So the housekeepers, as soon as they get a booking, an automated email goes out to them that says, “Hey, Joe Fairless booked May 5th to May 9th, please schedule and reply once you confirm it’s locked in.” So that way, I get confirmation that they got confirmation that they have it in their system, and we’re often running on that part, and then the other part is the automated door locks. So every guest that I have, it’s always their code to get in is the last four digits of the phone number they booked with. So creating that consistency makes the automation much easier to facilitate, as well as the email communication part.

Joe Fairless: Got it? How do you program the lock?

Jon Crosby: There’s two tools. Usually [00:11:29].07] is the actual hardware, and then we can connect it through Nexia, which is a home automation hub. But a newer one that I’m using, I can actually automate totally seamlessly now. Whereas, the Nexia one, I had to actually spend an extra 30 seconds to go plugin. But on this one, I can actually even skip that step, and that’s using the Samsung SmartThings Hub. So that one’s fully dialed in.

Joe Fairless: A rough segue into something that I mentioned at the beginning in your bio – you’re a limited partner in one air medical hangar commercial investment. Please talk to us about that.

Jon Crosby: Yeah, that’s an interesting investment. It’s a friend of mine who’s a commercial real estate broker named Greg Geary, great broker out here in the Sacramento area. He started a niche building out these air hangars that were needed for medical lifeflight helicopters and planes and such and crew quarters. So what he built was this system or, I guess, process, by which they can be built very quickly. He’s partnered with some construction company that allows these to be built very quickly. They’re even mobile to some extent, so that if they want to take it down and move it somewhere else, that’s possible, and then rest of it’s a lease commercial investment type scenario with payouts. There’s cash flow in the lease payments, and then there’s equity buyout after I think seven to ten years.

Joe Fairless: What gave you the confidence to invest in that and how long have you been an investor in it?

Jon Crosby: I’ve been in about six months now. They’ve already spun up their first hangar and lease payments have just started flowing through. So that’s been really positive. I think with most investments, it’s the operator. It’s the person running the investment. Greg, I’ve trusted him, I’ve seen his track record. He was actually part of the real estate team that was part of the company I worked for for 20 years as well. So there was trust, and he just has some great experience and insights in the industry.

Joe Fairless: Let’s talk about your company. Clik2Flip. You mentioned what it does. It initially helps with initial analysis of flips, short term rentals and rentals. I think that’s what you said when I was taking notes. What differentiates it from an online calculator that if I googled quick flip analysis spreadsheet?

Jon Crosby: The difference is, as far as I know, it was the first of its kind to not require any data entry. I built it so you can walk up to a house, geolocate, hit the address and it will go pull all my API data and feed it back in to give you the high-level return cashflow analysis.

Joe Fairless: Wow.

Jon Crosby: Yeah, so some of the magic is in the API. To get even more accurate of a return, you would at least go into your settings one time to just program your particular investment metrics. So things like, if you’re a flipper and you have an average price per square foot for rehab costs, you want to put that in there rather than use the default that it has. Or if you have a property manager that’s only charging you 5% and it defaults to 8%, those are the little things you’ll want to just fine-tune one time, and then every time you analyze a property thereafter, you’ll get that instant analysis.

Joe Fairless: Now, a lot of the times, someone’s not going to be in front of the house, they’re gonna be in front of their computer. So how is it working then?

Jon Crosby: It also has an address lookup.

Joe Fairless: Just punch in the address.

Jon Crosby: Yeah, you just punch in the address, and even it will do — you can even put in parking numbers as well and it’ll pull those down for you. Additionally, we added the ability to view up to 20 local comps for the property, as well as a place for an itemized rehab worksheet if you want to get in that level of detail.

Once again, as I mentioned, it’s not a full underwriting tool, but it’s a tool so that you don’t have to go do a full underwriting on every single property that you’re interested in. You have a smaller subset to go take it to that next level of underwriting.

Joe Fairless: I like that; that is a true differentiator, and you’re clearly positioned as “Hey, this initial analysis and it’s going to save a lot of your time, and then you can go do your more extensive analysis should it check out.”

Jon Crosby: Yeah, and I’m actually excited. I’m adding one more component later this month, and that’s the ability to send a postcard mailer.

Joe Fairless: Wonderful.

Jon Crosby: Yeah. So I think that’ll be a really nice one-two combination. You see a property, you get a really high level “Hey, this looks good. I’m going to go ahead and just send a mailer out right now while I go into due diligence”, and so you can just stay ahead of the competition as much as you can.

Joe Fairless: That’s great. I definitely see a need for it, and the way that helps investors save time and now connect the dots whenever you have the mailer component. What has been the biggest challenge with this app?

Jon Crosby: I think what I learned is double down on your strengths and pay people to do the other things. I tried to do too much. I tried to learn everything I could about marketing, I tried to learn everything I could about UX design, just things that I’m not either passionate about or didn’t even have the time to try and focus on. So I probably wasted more time than I needed to going in and getting help on those pieces.

Joe Fairless: Taking a step back, what is your best real estate investing advice ever?

Jon Crosby: Whatever the pro forma says is never going to come to; it’s never going to be like that. So trust in– do your due diligence on the operator, because that’s going to be where the successes and plan for probably either a six-month delay in whatever payouts you see, or definitely not as quite as the rosy returns that are showing in the pro forma; and if you still want to do that deal and you still think it has a good risk to reward ratio, then go for it.

Joe Fairless: What’s a deal where you’ve lost the most amount of money on?

Jon Crosby: I don’t want to say I’ve lost it, but — I haven’t lost it… I’m in a note deal right now that the principal is due back in January, and that still has come back.

Joe Fairless: Okay. So it’s delayed.

Jon Crosby: It’s delayed.

Joe Fairless: So for everyone listening, that’s about four months from the past.

Jon Crosby: So that kicks into a whole new cycle that– I had confidence that will come through. I actually like those note investments; but I’ll say that my biggest loss has been — and it wasn’t too bad, but it was the assisted living facility I was working within was broken up into a real estate component and the actual business component, and I ended up liquidating the real estate side, which I didn’t want to but I wanted to use those funds to continue my short term investments. So I did take probably from the equity side a 10k-15k hit on that.

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

Jon Crosby: I am.

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

 

Break [00:18:12]:06] to [00:18:55]:03]

 

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

Jon Crosby: Raising Capital for Real Estate by Hunter Thompson; I had great insights.

Joe Fairless: Best ever deal you’ve done?

Jon Crosby: My first short term rental.

Joe Fairless: What’s a tactical mistake you’ve made on a transaction?

Jon Crosby: Not getting a plumbing inspection; always get a plumbing inspection.

Joe Fairless: What happened?

Jon Crosby: I can’t tell you how many things were going on there, but I had put in an entire hardwood floor only to find out there was a root in the middle of it, had to rip it all out, dig 16 inches through concrete to fix six inches of pipe, and then put the floor bathroom.

Joe Fairless: It sounds like it’s still painful for you to talk about.

Jon Crosby: It is. I’ll never make that mistake again.

Joe Fairless: Well, just to pour a little salt on your wounds, how much total did it cost you?

Jon Crosby: I think it was more ego than anything, but it still costed a good 6-7 grand.

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

Jon Crosby: You can check me out at clik2flip.com. I’m also on Facebook, Twitter. You can find me at LinkedIn. Just search for Jon Crosby.

Joe Fairless: Well Jon, thank you for being on the show. Thanks for talking about your business, Clik2Flip. Thanks for talking about different ways you’ve automated your short term rental business model with guest communication, housekeeping communication and the door locks as well as the note deal and how to qualify the operator or really how to qualify a deal. It’s primarily the operator based on what your feedback is, and how to think about it from a limited partner standpoint was your best advice. So thanks for being on the show. Hope you have the best ever day and talk to you again soon.

Jon Crosby: Thanks, Joe. Appreciate it.

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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JF2132: 100 Years Of Experience With Dean Marchi

Dean is our sweepstakes winner! If you were not aware, we did a sweepstake for the first time ever for a lucky listener to enter for a chance to be on the show with Theo Hicks and ask questions or discuss their story. Dean was randomly picked and is part of a family with over 100 years of real estate experience. Dean focuses on development deals for multifamily and buyers of apartment buildings. 

 

Dean Marchi Real Estate Background: (SWEEPSTAKES WINNER)

  • Full time in real estate development 
  • His family started in Manhattan in 1929, but Dean bought his first deal outside of the family in 2005 and did his first development deal in 2009
  • Portfolio outside of family properties consists of 4 multifamily properties, 2 development sites, flipped 26 apartments
  • Based in New York City, NY
  • Say hi to him at: www.GrandStreetDevelopment.com 
  • Best Ever Book: Best Ever Apartment Syndication Book 

Click here for more info on groundbreaker.co

 

 

 

Best Ever Tweet:

“Focus on every deal your involved in, build up a track record and people will begin to talk about it and you will find investors” – Dean Marchi


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners and welcome to the best real estate investing advice ever show. I’m Theo Hicks and today, we are speaking with our sweepstakes winner. So if you didn’t know, we did a sweepstake where you could enter, all you had to do is subscribe to the newsletter and you have the opportunity to be interviewed on the podcast, and we are speaking with our winner today, his name is Dean Marchi. Dean, how are you doing today?

Dean Marchi: I’m great and I’m very happy to be here.

Theo Hicks: We’re happy to have you and again, congratulations on winning the sweepstakes. Maybe we’ll do it again in the future, so someone listening right now can be in your place in the next few months… But before we get into the conversation with Dean, we’re just gonna do a traditional interview, because Dean does have a strong real estate investing background. He’s full time in real estate development, his family started investing in real estate in Manhattan in 1929, so almost 100 years of experience in his family of real estate investing… But Dean bought his first deal outside of his family in 2005, and then did his first development deal in 2009. His portfolio outside of family properties consists of four multifamily properties, two development sites, and he’s also flipped 26 apartments. He’s currently based in New York City and his website is at grandstreetdevelopment.com. So Dean, do you mind telling us a little bit more about your background and what you’re focused on today?

Dean Marchi: Absolutely. So I really only do two things – I focus on either buying apartment buildings or building apartment buildings. And on the buy side, I’m mainly focused on Class B apartments in Class A or B areas where I see some upside outside of the building itself, and we try to do value add and bring our operational experience to improving them… Just focused on cash flow, and we always pray for appreciation. And on the development side, primarily we focus on what we call infill development in hot neighborhoods. So we’re focused on an area in Philadelphia called Fishtown, which has  a lot of similarities to what we did in Brooklyn, the development deals, the properties that we built there – Williamsburg, Brooklyn and Greenpoint in Brooklyn. We have a particular design, focus and style, but those are more Class A properties, exceptionally well located, and we try to bring a little flair to them; we’ve done well. So we’re regional developers of multifamily and regional buyers of apartment buildings.

Theo Hicks: When you started talking about the building – what did you call them again, infill?

Dean Marchi: Infill development sites. So in cities– so we don’t really do, what I would call, suburban walk-ups. Those we buy, but what we build is more of mid-rise apartment buildings in vibrant cities, whether it’s in Philadelphia, Brooklyn or northern New Jersey, where you can walk out the door, get on a subway, get your coffee, come home, there’s a wine bar or restaurant outside your door, that kind of development.

Theo Hicks: Sure. Okay, so you’ve got four multifamily properties and two development sites. So are those four multifamily properties to buy, and then the two development sites to build?

Dean Marchi: Yes, we’ve sold some that we built, and we’ve obviously sold those flips that you mentioned. There are 26 apartment buildings that we bought after the Great Recession, primarily REOs or short sales from lenders who took them back. We fixed them up and put them back into the market, stabilized them and ended up selling them. But we’ve held on to the rental buildings that we’ve built, and we also bought an existing apartment building, about 186 units outside of Baltimore, a suburban walk up as well. So we own and manage and outside of the family stuff, those buildings as well, ten apartment buildings in Manhattan as well.

Theo Hicks: Perfect. So how are you funding these deals?

Dean Marchi: Friends and family in, what I would call, super high net worth. So obviously on the equity side, we’ve only done one institutional deal; I would say more of an institution as opposed to a high net worth family office or just individuals.

So the first deal we did, I raised a few hundred thousand dollars from my parents, my uncle and my cousin’s girlfriend’s parents. So just very typical, sitting in people’s living rooms, raising a few dollars to get the deal done, and up to and including — quite frankly, there are a couple of billionaires who’ve invested with me, because with some humility, I’d expect my parents to give me a little bit of money if it was a good deal, but think of super high net worth people – they have tons of options, and for them to trust me with their money and like the deals that we do, that gives me a lot of confidence and a great deal of satisfaction.

Theo Hicks: For these billionaire super high net worth people, you did mention family office– are they through family offices or are these individual billionaires who are investing you in real?

Dean Marchi: Individual, yeah. There’s one deal that we did that is a family office that acts like an institution. So they’re so wealthy that they’ve set up a team of people to invest their money on their behalf. The ones that, in the past, have invested with us and continue today are people we’ve known through the years or met through friends and family and others who’ve recommended us and referred us. So it’s a pretty broad mix, to be honest. It’s great; it’s awesome.

Theo Hicks: Do you have any tactics, any tips, any piece of advice for someone who wants to eventually work their way up towards having these super high net worth, billionaire family offices investing in their apartment deals?

Dean Marchi: The best advice that I would give anybody is  focus on every deal that you’re involved in; the more successful the individual deal is, the more people around you are going to hear about it. So you build up that track record and then people start to talk about it, and whether it be the lawyer involved in the deal, or the broker who sold it or leased it up, whatever it may be, and you build a reputation. But it’s deal by deal; I don’t think you can leapfrog it; I think people trust in two things – the track record, and the person. So if you don’t have the track record, maybe one thing to do is to partner with somebody who does, and borrow their track record, if you will. Even if you get a small piece of a deal, it’s better because you’re building the track record, and over time, you can point to that experience. The other is that I think that people really do look to the individual. So if somebody likes you and trust you and you come referred by other people that worked with you in some capacity or another, that is really helpful for people, and quite frankly, I don’t think that changes from somebody investing $50,000 to somebody investing $5 million. I think those are the two things that people care about.

Theo Hicks: Something else you’ve mentioned too, and again, you might have the same answer – the track record and you a person, but you mentioned that these super high net worth people clearly have a lot of people wanting money from them. So obviously, I could have a really strong track record, and I could be a really good person… So did you meet these people just naturally, just word of mouth, eventually you got to them? But I would imagine that happens a lot. A lot of people are doing big deals, but not everyone has these super high net worth people investing, so once you’ve got that massive track record, what are the types of things, at least from your experience, that set your deal apart from, say, someone else who’s done the same number of deals as you, but is not attracting that type of money?

Dean Marchi: That’s a great question.

Theo Hicks: Does that make sense?

Dean Marchi: Yeah, it’s a great question. So I don’t do a ton of deals. As I said, I’ve been at this for a fairly long time and I haven’t done 100 deals. I do think that we are able to find better than average deals, and there’s no secret to that; it’s pounding the pavement; it’s driving the streets; it’s making the phone calls. But yes, we find, I would say better than average deals, but again, I just think it’s that track record, and what we try to do is to act like an institution in the middle market. So what I mean by that is, we like to do mid-size deals. So for example, the last building we built was 52 units. There are people who are putting up 800+ units in the same neighborhood. There are also a ton of people putting up four or five or six  or ten-unit buildings. So we like to be as sophisticated in our reporting and our approach to how we design and the team that we hire as the guy putting up 800 units, and make our deals though – because they don’t require hundreds of millions of dollars of investment – to make a deal available to somebody who has $100,000 or as I said, $5 million to invest.

So as I said, it’s probably true that we don’t really bother doing a deal that is, what I would call, an average deal, and beyond that, it’s just relationship management. It’s just the same thing, just talking to people, making sure they understand we have the same problems with our deals as somebody doing big deals or small deals, or the same kinds of deals. They’re not without issues, and we have had, fortunately, a track record where quite honestly, Theo, in the 90 years that we’ve been in the business, we’ve never even been late on a mortgage payment, and we started in the Great Recession, having gone through the Great Recession and COVID-19 related issues, and we’ve never even been late on a mortgage payment. So when I say it’s deal by deal, collectively over time you ended up with a track record of good performance, and we don’t oversell. Thank God, we’ve never lost money on a deal. All of our deals have performed at least as well, if not better than our pro forma. So people trust in that. And I always tell people, any deal that we’re going to do, eventually, something’s going to go wrong. We can’t keep it going forever. But I give them my solemn promise that I will treat their money more seriously than my own, and no matter what comes up, I will have at least three solutions for it. We’ll choose the best one at the time with all the information that we have, and try to make right. So people appreciate that and give us their money. So yeah, that’s it. It’s not that complicated, I guess.

Theo Hicks: That’s certainly perfect advice. Alright, Dean, what is your best real estate investing advice ever?

Dean Marchi: Well, I think there’s three things that I would say. Number one is buy apartment buildings… And not to be over simplistic about it, but Theo, what I would tell you is the first human being who decided to walk out from under the open sky and into a cave found that that was probably better than being out in the open, and I will say that if one day, human beings are living on Mars, I suspect that they’ll want a roof over their head. So it’s one of those essential needs, and I think you can’t go wrong with it… Subject to number two, which is not to use too much debt. I’ve seen people lose buildings, I know people who’ve lost their buildings when events beyond their control, such as the Great Recession or other events – it’s because they took too much debt. So there was a time before the Great Recession where you could buy an apartment building with no money down, all debt. So I would say, be cautious about taking on too much debt.

And then the third bit of advice would be to really think about holding it for the long term. That’s where you have really the greatest return. If I tell you what my grandfather paid for his first Manhattan building and what it’s worth today, it would spin people’s heads, but hold it for as long as you can, and I guess a little bonus bit of advice is try to get with people like you, quite frankly. Learned from your awesome book; wherever you can get with people who have experience in whatever you’re going to do, whether it’s real estate or anything else, that’s a goldmine that quite frankly, I think too many people overlook. Those are my three bits.

Theo Hicks: Perfect. Alright Dean, you ready for the Best Ever lightning round?

Dean Marchi: Sure, yeah. Let’s go.

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

Break [00:15:01]:08] to [00:15:50]:04]

Theo Hicks: Okay, I’m gonna do the normal question, but I do have one question that I would like you to answer as quickly as possible, but I’ll get to that one in a second. So first, what is the best ever book you’ve recently read?

Dean Marchi: So without sounding like because I’m on your show, but certainly I would include in that answer The Best Ever Apartment Syndication Book by you and Joe. And one that’s overlooked, if you don’t mind my saying more than one, is Powerhouse Principles by a man, a hero of mine, Jorge Perez. He’s the CEO of Related Group in Florida. It’s development focused, but there’s a ton of good advice in that book. And then the Steve Berges book, The Complete Guide to Buying and Selling Apartment Buildings; those are three favorites.

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

Dean Marchi: I would go and do exactly what I have always done. I would go and talk to everybody that I know and start over and do exactly what I’ve been doing for my life. Wouldn’t change a thing, just start over.

Theo Hicks: So the next question I want to ask you – I don’t know exactly how to ask this, but you hear stories all the time of how the one generation makes all the money, and then the next generation maintains it, and then the next one loses all of it…

Dean Marchi: Yes, 100%. I know exactly, yeah.

Theo Hicks: Yeah, you’ve got your grandfather who started the business, your parents are in the business, you’re in the business, all of you guys are successful… So what’s been the main thing that you can think of that has allowed your family to do that and not fall into the cliché trap that I just mentioned?

Dean Marchi: Wow, Theo. Awesome question. Honestly, my whole life, I don’t think anybody ever asked me that, and I think that the immediate answer is that one thing that’s really important to all of us throughout all three generations is that core family. It’s exactly what you said, it’s a business, but first was the family. So my grandfather passed along a lot of really strong Italian principles, if you will, which is where my family is from. Through my father– my father always taught me those lessons and I teach those lessons to my children. And the way I approach the business is that I am giving it and I am preparing what I do to be handed off to the next generation. So we build with incredible quality, we approach everything very honest with our tenants, we really try to honor them and to treat them well, so that when it goes to the next generation, if God Willing it happens, that the buildings, the business is well prepared for that transfer. And of course, I try to pass along every bit of advice that I gather from people like you and others and from my own experiences on to my children and make sure that they understand that they now have the responsibility when that handoff occurs, that they have the responsibility to prepare it for the next generation as well.

And always to remain humble, I think that’s the other thing. Nobody’s bigger than the market; that’s really important too. The way you phrased the question, that oftentimes the son screws it up, if you will, or the daughter goes and blows the business up… I think if you have some humility with what you’ve been given and a sense of responsibility to pass it off, you perhaps avoid some of that hubris that can lead to a business collapse.

Theo Hicks: Perfect. Great answer. I’m surprised no one’s asked that before. I had [unintelligible [00:19:06].25] but I forgot.

Dean Marchi: No, that’s awesome. I appreciate it very much.

Theo Hicks: Okay. And then lastly, what’s the best place to reach you?

Dean Marchi: Probably our website, which is grandstreetdevelopment.com. But my email is dean [at] grandstreetdevelopment.com, or we also have an Instagram page, which is @GrandStDevelopment; those would be the best ways to get me.

Theo Hicks: Perfect. Alright Dean, I really appreciate you coming on the show today. I learned a ton from this conversation. Some of the key takeaways that I got – number one, you talked about some tactics for being able to attract that money from the billionaires, the super high net worth people, the family offices, and at the end of the day, it really just comes down to, as you mentioned, the two things, which is the track record you have and then you as a person. So it’s just focusing as much attention as possible on every single deal to make sure that it is as successful as possible… Because then, once you’re successful, people start talking about you, you start building up a reputation, and it’s a snowball effect where eventually people know, like and trust you enough… And you’ve been referred enough times that you’re able to reach those higher echelons of investors. So you said it’s step by step; there’s really no hack or shortcut or cheat. It’s just going deal by deal and making sure each deal is as successful as possible.

A couple other things you mentioned too, that have helped your track record is, you said you act like an institution in a middle market. So you bring the institutional quality, the reporting and the relationship management; rather than focusing on these thousand unit deals, you do the middle 50-unit deals. Or you mentioned, you got very sophisticated reporting, and then for your family business, in the 90 years of business, you’ve never been late in the mortgage payment, never lost investors money on a deal, have always at least met the proformas… And then I really liked what you said is that you told them that if any issue were to arise, you always come back to them with at least three solutions, and one of those will obviously be used to fix the problem.

We talked about your best ever advice, which is threefold – number one, buy apartment buildings; housing homes are always going to be an essential need. I was just doing a syndication school episode today where they did a survey and asked people, “What’s your priority for paying expenses?” and above groceries, above car payments, above utilities was paying rent. So I could definitely reinforce that. Next was don’t use too much debt, and then thirdly was to think about holding for the long term, because that’s where you realize the greatest returns. And then you also talked about what sets your family apart from other family businesses – the cliché of the grandparent creates it, the dad maintains it and then the son destroys it. You said that it’s really about passing along strong values, and then I really like what you said, which is preparing to hand off the business to the next generation.

So not really taking any shortcuts to make money for yourself now that will screw over your kids in 30 years. Instead, you’re using good quality construction, you’re always focusing on having good relationships with your residents and the people you work with, and then passing along any advice that you get, but also included in that advice is letting your children know or the next generation know that, hey, you need to be prepared to pass it on to the next generation as well. So preparing them early on for that next-level transition… And then just being humble, as you mentioned, as well; no one is bigger than the market.

So again, Dean, I really appreciate you coming on the show. I learned a lot; glad you were our sweepstakes winner. Best Ever listeners, as always, thank you for listening. Have a best ever day and we’ll 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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JF2118: Broad Experience With Alix Kogan

Alix is the President of Ashland Capital Fund and has 20 years of real estate experience owning 1,700 apartment units, single-family rentals, commercial and developments. He started in high-end custom homes and more recently has been focusing on student housing deals. Alix shares one of his new strategies which is investing in second lien mortgage debts.

Alix Kogan Real Estate Background:

  • President of Ashland Capital Fund
  • 20 years of real estate experience
  • The portfolio consists of 1,700 apartment units, single-family rentals, commercial and developments
  • From Chicago, IL
  • Say hi to him at:https://ashlandcapitalfund.com/ 

 

 

 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“My broad experience in real estate has helped me tackle new projects” – Alix Kogan


TRANSCRIPTION

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, Alix Kogan. How you doing Alix?

Alix Kogan: I’m great, Joe. How are you?

Joe Fairless: Well, I’m doing well, and I’m glad to hear that. A little bit about Alix – he’s the president of Ashland Capital Fund, he’s got 20 years of real estate experience, the portfolio consists of 1,700 apartment units, single-family rentals, commercial and developments. He’s based in Chicago, Illinois, and he has now turned his focus towards student housing. So we’re going to talk about his background, what his focus has been, and then what his focus is now. So with that being said, Alix, do you want to first, give the Best Ever listeners a little bit more about your background and what you’re focused on now?

Alix Kogan: Sure. So I started in high-end design build, building custom homes for clients in south-west Colorado, ran that business for almost 20 years and I had a successful exit late last year in December. So pretty recent, but I have a parallel track for a good 18, 17 years or so. I started developing a single family portfolio, did some ground-up development, townhomes, condos, small subdivisions, and then as of three years ago or so, pivoted into multifamily, and that is, of course, how you and I met, and I’ve been doing that.

I’ve been partnering with groups as a key principal, lending out my balance sheet, and let’s see– distressed debt is another asset class I invest in, and then as of late, I’ve been pursuing some student housing deals; I’m excited about that opportunity as it’s not tied directly to the market’s economy as much as multifamily is. So it’s just another asset class to diversify for me.

Joe Fairless: When you said you were doing development for townhomes and condos, what are some differences from that versus the high-end custom homes?

Alix Kogan: It’s really completely different. The high-end custom homes, we always build on client’s land, there’s really no risk per se. It’s really — we’re working for a fee. So transitioning into development is a whole other world. Of course, it’s still a construction, but you’re assessing risk, you’re assessing the market. So really, it took a completely different mindset and skillset candidly to do that; the common thread, of course – we’re building. So it was interesting; it was good, and we rode the tailwinds of a great economy up until, of course, the recession of ’08, ’09. Then we ceased all development activity and concentrated on custom homes and rode through the recession. Well, a lot of our clientele actually came from Texas, and that market was doing very well. A lot of our clients were already the tail end of their careers that made their money, they put their money away, so they were still on a place to retire and build their retirement dream homes, and continue down that path and not be too affected by the recession.

Joe Fairless: You said you’re now focused on looking at student housing. What are some things you’re doing now in student housing?

Alix Kogan: We’re pursuing a couple of different deals currently. It’s a similar play, I suppose, to multifamily. What I like about it is in recessionary periods, like we’re likely heading into now with everything that’s going on, a lot of people go back to school, or they stay in school longer. So you’ve got that natural protection, as opposed to say A class multifamily where I think, where you could have some higher economic occupancy with that asset class — but student housing is an interesting plan. So we’re pursuing that. There’s some opportunities out there, there’s some groups that got over-leveraged, and looking to get out of their assets. So it’s an interesting time. So that’s what we’re– no, I wouldn’t say we’re completely focused on that. It’s just a second asset class in addition to multifamily that we’re looking at.

Joe Fairless: How are you coming across groups that are over-leveraged? Where are you getting those connections from?

Alix Kogan: We’ve made a great connection with a best-in-class property manager, and they of course, have connections with owners all over. They’re also an investor, as well as a property manager as well. So they are an interesting group where they understand the investments side as well as the management side, and they have a very specific buy box for a number of reasons with their business plan. But they’re running into portfolios or individual assets that don’t meet their buy box, and I’ve developed a good relationship with them where they’re bringing me those deals, so it’s a win-win. They get to property manage the asset if we are successful in taking it down. So there’s some good synergies in that relationship.

Joe Fairless: So I’ve never bought a student housing project. Educate me and perhaps some listeners on what would be a buy box. What components are in a buy box for student housing, and then what your buy box is compared to, say, the property management companies?

Alix Kogan: Sure. So the first one would be pretty easy to answer. So the relationship that I have there, they only buy core A Class assets, and they have to be pretty significant size to execute their business plan and to comply with their investors’ buy box, in essence. So in terms of what I look for, I can buy a smaller deal. I don’t have a specific buy box in terms of has to be a large deal, although I can take down a large deal; we’ll look at — for example, right now we’re looking at an opportunity about the $7 million acquisition range. That is considered somewhat small for some of the large players. They’re going to be in that 15+ million acquisition range.

In terms of what we look for, and that’s fairly consistent from whether you’re buying large or small, you’re looking for a successful school with growing enrollment, and that’s pretty key today to be successful. I think, that’s one of the biggest metrics. So not only does the asset have to be a good asset, you’ve got a school that’s got a great sports program; so tier one schools. So you look at that, you look at the asset itself, you look at similar dynamics; you’re of course looking at your rent comps, are you under market, amenities is also a big factor in terms of your rent growth and where you are in the market. So those are some of the big things that we look at.

Joe Fairless: Based on your experience with high-end custom homes and townhomes and condos and investing in multifamily, what do you think, from that experience, is most relevant to help you be successful in student housing?

Alix Kogan: I would say I’ve been fortunate that I’ve had a broad experience in different asset classes, and the common thread is real estate. So I don’t know that there’s one thing other than I may just have a broader view, I may look at different things. So I can’t think one major skill set other than just the broad experience.

Joe Fairless: Let’s narrow it down then. For the high-end custom homes that you did for 20 years and you said you exited successfully, what were some ways that your company differentiated itself from your competitors?

Alix Kogan: That one’s pretty easy – we were very early to the game in design build. So while a lot of my competitors were typical, what we call bid build, where they’re bidding on plans through architects or through clients directly, that have plans drawn… We adopted the design build model right out of the gates 20 years ago, where at first, we partnered with some outside resources. We’d outsource some of the design work, but really controlled the whole process from design to build, and then eventually became much more fully integrated with architects, interior designers. So that was certainly a key to our success.

In addition, of course, doing great design and won more awards than anybody in the area in south-west Colorado, and organically grew. Building a great team – no surprise, when you become the largest in the area, you need a great team behind you. So I was fortunate to have a great team to do that with. But those were some of the — great design, great team and the design build model that many people tried to follow, but fewer successful in doing it.

Joe Fairless: You mentioned distressed debt. What have you done with distressed debt?

Alix Kogan: That’s been an interesting space. I started down that road with non-performing notes. So buying defaulted mortgages in large pools and then working them out. So I’ve been doing more of a niche portion of the distressed debt, which is buying non-performing second liens. So rather than buying first liens, which– it’s a bit counterintuitive, but if you understand my business plan and the plan that we’ve been doing, which is buying non-performing seconds behind a performing first.

So I’ll give you an example. If you have a $500,000 house, you might have a $400,000 mortgage of $100,000 worth of equity, and then you also took out, say, a $100,000 home equity loan to finish your basement. You fell on hard times, you stopped paying in your home equity, but you continued to pay in your first mortgage. So those are what I’m buying as the second mortgages.

I like them because, obviously, it’s been demonstrated that the borrower still has some financial capacity because they’re paying on their first; and because I’m buying the second lien, the non-performing lien or note, at such a discount, I have the ability to go back to the borrower and help them stay in their house and say, for example, “You’ve been paying, $500 a month before you defaulted. Can you afford to pay $250 a month?” So because I’m buying at such a discount, I can work with them, help them stay in their home and get them current, and that’s been a really good investment class. It’s not the easiest business to learn, a pretty high barrier to entry, but once you get it dialed in, it’s a very interesting business model.

Joe Fairless: What discount are you buying those second liens on?

Alix Kogan: It’s a broad range. It also depends on what state. Every state’s got different foreclosure laws and timelines. So I would say anywhere from 5% of the unpaid balance up to 50% of the unpaid balance, and everything in between. So you literally have to underwrite each individual asset separately. How much equity does it have? How nice of a property is it? Because that, in essence, is your ultimate security; it’s that asset. Because you can, of course, foreclose from a second position subject to the first.

And then there’s more of a qualitative analysis of the borrower profile. You really have to understand who the borrower is, look at their credit, look at their specific situation, and somewhat assess what is the percentage that that borrower can do work out with you. So that goes into the pricing as well, of course.

Joe Fairless: So you said 5% to 50% that you’re paying. So just so I’m understanding correctly, depending on the state, depending on the situation, if it’s $100, you’re paying between $5 to $50 for that second lien position.

Alix Kogan: Yeah.

Joe Fairless: Wow. So your discount is between 50% and 95%?

Alix Kogan: Yeah. I’ve bought some assets where there’s a lot of risks, and  I’ve even bought them at 1%.

Joe Fairless: Alright. Give us that example, that specific example. Tell us a story about that property.

Alix Kogan: Something that you bid that low, there is no equity.

Joe Fairless: How much you pay for it?

Alix Kogan: So that borrower is completely upside down. So that’s one of those that you’re likely not going to pursue. You might take that asset, put it on the shelf and just wait until that borrower sells the house, and you may be in a position where you get a payoff. So that’s obviously very high risk; but if you have $100,000 unpaid balance and it’s still secure and you’re buying it for $1000 bucks, you can afford to just stick that in a drawer and just wait… Versus other loans that have equity, and the borrower is obviously more motivated to protect and keep that equity. They’re obviously motivated to do a workout with you. So those you’re going to pursue more aggressively, and spend time placing that with a servicer, or spending money investing in whatever legal you need to invest in, so that you could monetize that loan.

Joe Fairless: I know you said you’re buying large pools. So are the large pools of these defaulted mortgages, are they grouped into varying risk profiles, or…?

Alix Kogan: No, no. They generally are just sold in a pool. So you get a spreadsheet with a bunch of assets, and it’s really — you’re doing your own group and you’re assessing the risk and you’re saying, “Okay, 20% of these are in a judicial state, New York, for example, and the foreclosure time is very lengthy and expensive.” So I’m going to price that portion of the pool at whatever it is. 20 cents on the dollar versus, say, for example, California loans, which is a non-judicial state, and very quick foreclosure time. I may price those at 45 cents. So it’s all over the board.

Joe Fairless: Did you say California is quick to–

Alix Kogan: Yeah, believe it or not…

Joe Fairless: That– I would have missed that on a true-false test.

Alix Kogan: Right, exactly. With all the legislation and everything that happens in California, it actually is a non-judicial state. So you can foreclose and get at the asset in 90 to 120 days. So it’s a much faster process in California.

Joe Fairless: Tell us a story of a defaulted mortgage, either a pool of mortgages or an example or two where you’ve lost money.

Alix Kogan: Sure. I had a recent loan that– and fortunately, we were pretty careful. I don’t buy really high-risk loans, but in order to buy a pool of loans, apparently, you have to buy some loans that are higher risk; but I try to keep those at a minimum. So I only honestly have one that was recent; a Kentucky loan that basically foreclosed and we got wiped out by the first lien and completely lost. It was a $7,000 investment, [unintelligible [00:17:37].26] a million dollars that we took down. So that can happen, but if you’re careful, that’s pretty rare.

Joe Fairless: Yeah. So how can you be careful and make that rare if you’re buying a large pool of loans, and it sounds like that’s just gonna happen during the course of business?

Alix Kogan: Well, one, they’re gonna price them at a risk price. So it’s all modeled into it. Think of it as you’re buying a portfolio of single-family homes, you know you’re going to have some delinquencies in one home. Somebody stops paying rent, but you have the income from the other homes to offset that. It’s really the same principle. I’m going to make money, I’m going to hit home runs on some. I mean, I’ve had some that I’ve made 200% return on my investment, and then I have one that I lose $7,000 on. So you just price the risk into it, and then there’s some people that specialize in unsecured and no equity loans. It’s just their business model. So I would even resell some of those loans, and just get my money back and focus on the good loans that I prefer to work.

Joe Fairless: Okay. Tell us the story of, on the flip side, one that you’ve made 200% on or just done really well, just a specific example.

Alix Kogan: Sure. Just recently I invested $113,000 in an asset in California. The house is worth $270,000. We, unfortunately, had to foreclose, got that house back, and up until just a couple days ago, I had a contract for $270,000. So you can do the math on that. That would have been a great exit strategy. Unfortunately, with what’s going on in the world right now, that buyer fell out of contract.

So we’ve got the house, it’s worth $270,000. I can turn it into a rental. I’m hopefully going to sell it to somebody else, but you can see the return is huge if I can obviously monetize, which I’m sure I will… And that whole timeframe was about seven, eight months.  Okay. So let’s talk about the team. I don’t think you’re the one tracking down all these owners and having conversations based on what I know about you… So who’s your team? How do you structure it? How are they compensated, that sort of thing? Sure. I’m on the acquisition side, so I’m developing relationships and finding the assets. Once I find the assets, I have an asset manager in California that works remotely. He’s got 30 years experience in servicing the distressed debt space.

Joe Fairless: How’d you find that person?

Alix Kogan: Just the whole networking, talking to different people, and I met him, and that’s been a great relationship. So he’s literally working out of his house.

Joe Fairless: If you can think back to who introduced you to him, I’d love to know exactly how you found him. You don’t have to name names, but just throw us the breadcrumbs.

Alix Kogan: I think the trail started on LinkedIn or I connected with somebody on LinkedIn, and they had pointed me in his direction for just networking, and that he may know sellers, and one thing led to another, where you think you’re going to buy an asset or get some referrals for sellers, and before you know it, you’re talking to a guy who actually is an asset manager that may have excess time and be able to develop a relationship. So that’s what we did.

It started off as — for him, I was somewhat of a side hustle in addition to other asset management work that he was doing, and as my portfolio grew, he’s come on board nearly full time with a little bit of consulting that he still does with outside funds and outside investors.

Joe Fairless: Wow. So you were randomly reaching out to people on LinkedIn based on what they have in their profile, asking them about distressed debt?

Alix Kogan: Yeah, specifically targeting sellers of distressed assets at that time, and just happened to run it across the guy. So there’s multiple ways that you can do this, and you also, of course — to answer your question fully in terms of the team, there’s also third-party servicers that we use. So they’ll do some of the work, and then my asset manager will serve an oversight with them as well as borrower outreach and talking to the borrowers as well. So it’s really a small team, a small little boutique firm, if you will, in that asset class, and I’m soft capitalized, I don’t have investors in that world. So it’s really a third bucket of my business plan – student housing, multifamily and distressed debt.

Joe Fairless: Based on your experience as a real estate investor, what is your best real estate investing advice ever?

Alix Kogan: Learn the asset class well. It seems very obvious, but in terms of investing in different assets, learn that asset class well before you invest. Then if you have an opportunity to invest passively, learn as you go. I think that’s a great way, and you’re a prime example. I invested with you early on and got my feet wet in multifamily until I got comfortable enough to start looking at my own deals, and I think that’s a great way. And that’s also what I did with distressed debt. I invested passively in a more of a joint venture with a guy when I first started and learned the business, and then of course, the natural progression – I felt that I could do it on my own, and hire an employee that knows more than I do, and that’s just the way you scale and grow.

Joe Fairless: That’s a pretty good formula for people – invest passively to learn the ropes, plus build your ally group up so you can form allegiances, and then you learn the business simultaneously as well as actively learning, then go active and then hire someone who has more experience than you. But now you’ve got some experience and you know the ropes, you just don’t know the intricacies of someone who’s been in the business for decades. That’s a really good formula. I’m glad that you walked us through that. We’re gonna do a lightning round. You ready for the best ever lightning round?

Alix Kogan: I guess.

Joe Fairless: All right. Well, we’re gonna do it anyway. So hopefully you are. First though, a quick word from our Best Ever partners.

Break: [00:23:39]:05] to [00:24:34]:03]

Joe Fairless: Alright, what’s the best ever book you’ve recently read?

Alix Kogan: A book name Lifescale, which is interesting; a book that I’m halfway through.

Joe Fairless: Okay, Lifescale. Okay, got it. What’s a mistake you’ve made on a transaction?

Alix Kogan: Bad partner. Easy to say in the rearview mirror. He looked good on the front end, but I think more due diligence on the partner than the asset class is important. I got myself in trouble a few years ago with — and fortunately, we unwound that well, but… More due diligence on the partner than the asset.

Joe Fairless: What are some questions knowing what you know now that you would ask prior to engaging in a future partnership?

Alix Kogan: I think it’s more time getting to know someone, really as much as you can learning how they think, definitely more reference checks… But I think it’s time, and unfortunately, we’re in a business that moves pretty fast, whether it’s notes or multifamily or student housing – the deal comes up and it comes to you from a potential partner. So I’ve learned to slow down and only move forward when it feels right and I have enough of a comfort level with a partner. So as you know, I’m a KP on deals and people bring me deals all the time, and I really have to just slow that process down to get to know them better.

Joe Fairless: On that note, how can the Best Ever listeners learn more about what you’re doing and get in contact with you?

Alix Kogan: Ashlandcapitalfund.com is my website, and my direct email is alix [at] ashlandcapitalfund.com

Joe Fairless: Alix, thanks for being on the show talking about your areas of focus that you’ve had, and then now what you’re focused on, the three areas, with one of them being student housing and why you’re focused on that; you also talked about non-performing notes in your process there. Thanks for being on the show. I hope you have a best ever day. Talk to you again soon.

Alix Kogan: Thanks, Joe. Take care.

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JF2117: Big Renovation Projects With Joseph Bramante

Joseph is the co-founder and CEO of TriArc Real Estate Partners. He purchased his first multifamily property in the US in 2011 sight unseen and now his portfolio consists of 1100 units. He shares his story on how he started out buying a 26-unit apartment complex and almost went bankrupt during his first deal and he ended up making a 207% return on the refi. 

Joseph Bramante Real Estate Background:

  • Co-founder and CEO of TriArc Real Estate Partners
  • Purchased first multifamily property in the US in 2011 sight unseen
  • Current portfolio consists of 1100 units, increasing net operating income by over 80% on average within 48 months post-acquisition
  • Based in Houston, TX
  • Say hi to him at: https://www.triarcrep.com/ 
  • Best Ever Book: Raising the Bar

 

 

 

 

Click here for more info on groundbreaker.co

 

Best Ever Tweet:

“The books give you this 30,000 view of the industry but its a completely different ball game when you are out there in the field executing” – Joseph Bramante


TRANSCRIPTION

Theo Hicks: Hello Best Ever listeners. Welcome to the best real estate investing advice ever show. My name is Theo Hicks, and today we’ll be speaking with Joseph Bramante. Joseph, how you doing today?

Joseph Bramante: Hey, man. I’m doing well. How about yourself?

Theo Hicks: I’m doing well too. Thanks for asking and thanks for joining us on the show today. A little bit about Joseph – he is the co-founder and CEO of TriArc Real Estate Partners, purchased his first multifamily property in the US in 2011 sight unseen; current portfolio consists of 1100 units, and they focus on increasing net operating income by over 80% on average within 48 months post-acquisition. He is based in Houston, Texas, and you can say hi to him at triarcrep.com. So Joseph, do you mind telling us a little bit more about your background and what you’re focused on today?

Joseph Bramante: Sure. So I’m an engineer by trade, spent the first five years of my career with Exxon, as well as overseas when I bought that first property; I’ve lived in some pretty cool places. I was in Australia for a year and then Papua New Guinea for two years. I was working on a $22 billion project, of which a billion was the cost that I was managing directly. I got into the industry in 2011, purchased that first property sight unseen. I originally was trying to buy 80 foreclosed houses, and then after all these banks kept telling me no, they finally said, “Just go buy an 80-unit apartment complex,” but I couldn’t afford a 80-unit apartment complex, but I could afford a 26. So that’s how I jumped into the industry with the first 26-unit property, and almost went bankrupt on that first deal and turned the whole thing around by performing a $30,000 per door renovation… Which was really nuts considering one, that was my first deal and two, it’s a large rehab. In general, most people don’t even do those big of rehabs, let alone, on their first deal. And I turned the whole thing around, made a 207% return on the re-fi. I still own it today. We’re actually talking with architects right now, getting ready to scrape it and redevelop it to a mid-rise. So that property is going to be paying us three and four times what we made on it.

So that was the start, and then through that, I met my current two partners. We formed TriArc Real Estate Partners; originally the foundation of the company was back in 2013, but then rebranded in 2016 as TriArc, and our MO has just been these big value-adds. Started with the first one at $30,000, added 22 and 18, and we’re currently doing a $37,000 per door renovation over 220 units. So we really mastered that, and that’s how we were able to produce such big NOI growth in the first 48 months, like you quoted, because we’re doing these big rehabs on our deals. We’re not just doing base hits, because that’s just– one, that was what was available. You guys know, back in 2012 and 2013, there was a lot of property to renovate. Now it’s harder and harder to find those deals. People know how to resurface and whatnot by now, so it’s very rare you’re going to find something that hasn’t been through at least one or if not two renovations about the time you’re getting it. So we’ve transitioned more into the lower value-add, which is fine. If you’re really good at doing big rehabs, you’re gonna be even better at doing smaller rehabs.

So from there, we further expanded in 2016 into new development. So I saw that the spread between new construction and renovated assets was shrinking, and it was only a matter of time before new development was gonna make more sense than buying existing and renovating. So we started exploring that area and we’ve got our first 500-unit two-phase project, garden style; we’re breaking ground on later this year, and then we’ve also got two other new developments that are in the pre-planning phase. They’re gonna be mid-rises; one’s nine stories, the other is 12 stories, Class A plus properties. So it’s been interesting.

New development’s certainly, completely different than acquisition, in that there’s really no roadmap for it. It’s very much an open book, and it’s hard to find mentors and whatnot for it, and we’ve had to figure a lot of this stuff out on our own, but finally, three, four years into it, we’ve really gotten the right people around us who’ve done this before and helped us… And that’s what really real estate, in general, is all about. It’s all about the network, having good people around you, who’ve been through different components of whatever you’re trying to do, and forming teams. And that’s how, really, we formed our company. I’m a co-founder, I’m one of three, and that’s been really advantageous for us, because it gives investors and lenders a lot of confidence knowing that between the three of us, we’ve owned or operated over 43,000 units and 1.7 billion in assets in the last 30 years. So we have that history behind us, so that when we’re going forward, while our company is still growing, we do have quite a deep bench of experience.

Theo Hicks: Thanks for sharing your entire story there. I want to dive in and unpack a few though. So one thing that you said, the first thing you said that piqued my interest is that on that first deal you bought sight unseen was a 26 unit property, that you did the 30k per door renovation, and then resulted in a 207% return on the refinance. So that was the first deal right?

Joseph Bramante: Right.

Theo Hicks: So you said that you did the 30k in renovations, and then now you’re looking to go back and put in even more money into that deal, to bring it up to another level. So do you mind just walking us through– so was the original business plan to take it from C to a B, and now you’re going from a B to an A? Did you know going in that, that is what you’re going to do or that’s something that evolved later on, based off of the market that the deal was in? So maybe walk us through that thought process a little bit.

Joseph Bramante: Sure. So the original plan – it left a lot to be decided. There really was no plan. It was my first deal. The broker had said that it needs $3,000 per door in renovation, so that’s what we budgeted for. And then we get into the deal, and it’s a really long story, but just to keep it short – within the first six months of owning it, our property had gotten down to 85% occupied. We had four units down for renovation that we had taken sheetrock down on, we were renovating, we were installing central ACs, and then as part of the permitting process for that, we had to do an environmental, because we were idiots and we didn’t do one on the closing like every other one of your listeners knows to do, and of course, it came back hot for asbestos.

So we’re six months in, four units down, we have asbestos, we’ve had fraudulent insurance… The broker that sold us insurance – well, he sold us insurance from a company that was a fraud. So we don’t have insurance, we’re going into hurricane season, and then I lose my job at Exxon on top of all that. So it was really a very dire situation I was in, and I joined a local real estate group because that’s what you did back in 2012; there were no podcasts or anything like that… And all the mentors of that group were like, “You’re screwed. Sell the property, take a loss, lesson learned; don’t do that again.” But that didn’t really sit well with me, for a couple of reasons. One, I would have to lost five years of my life at Exxon, and that would have not been good. I’d have done all that work for nothing. And then two, I would have had a negative track record to go and raise money for. So that would have meant I had no career in multifamily either. So that was also not good. So I rolled the dice on that first one.

Me and my business partner who I had met out of that group, she had done large renovations before for other owners. She was a property manager, and she said, “Look, you’re in a great location.” That was the one thing that I did right. Two, actually. Location, and we knew it needed new roofs, because that’s what the PCA said. So those are the only two things I’d give us credit for. But location is everything; everybody knows the real estate motto – location, location, location. So we were in a prime location in Houston, and we’re surrounded by these million-dollar homes. So we did this massive renovation, went all in. I cashed out my 401k, took the penalty, all in. I stayed unemployed for six months and just focused on the real estate, took a bunch of courses, and we executed this rehab, and it was the craziest moment of my life, because our rehab was $700,000, the purchase price was $650,000. So it was just insane to think of, you’re doing a rehab that’s greater than the purchase price of this property.

We had to vacate the whole property down to zero, because it’s really not a good look to have guys in hazmat suits walking around while you’re doing an asbestos abatement with residents on site. You’re just asking for a lawsuit. So we vacate the property, we did the abatement, came in behind them, we did the big renovation, then leased it all up, and that was probably the most stressful nine months in my life, and it worked. We doubled the rents, we leased it up, stabilized it, refinanced it… And it’s just an amazing feeling on that first refi when you get that money back, because until you’ve actually done it, it’s all just stories and theories and whatnot for you, and when it was proved positive for me, that’s when I knew I had a new career interest, and that was multifamily. So that was our first deal, and then that was supposed to be the end of it. The plan was to hold it and maybe sell to a developer. That was our thinking in 2014, because we knew we were on prime real estate; and then in 2016, 2017, we started developing the skills to be developers, and now, here we are in 2020, we’re working with some of the top architects in town to scrape our entire complex. So just bulldoze the whole thing and come up with a mid-rise design and raise all new equity for it etc, and expand it to include not only our site, but the neighboring sites around us on our block. We’re going to do a JV with them to all partner together and do this mid-rise construction.

Theo Hicks: I’m really glad that you shared that six to nine months journey that you went through. Just one last follow up question on that deal and then I want to transition to the other thing we talked about, which is increasing net operating income by over 80%. So it was a $700,000 rehab – all that came out of your pocket?

Joseph Bramante: It was me and one of the partners. So we were 50-50 partners on the deal and we financed the rehab, so we had a bridge loan.

Theo Hicks: Okay. So you cashed out your 401k and used that as a down payment for bridging back on the rehab? Okay.

Joseph Bramante: Exactly. The first time I didn’t though. The first time, I was paying cash for the rehab, because I didn’t know any better. My education in real estate at that time was I read about six books on multifamily, and some of the good ones… David Lindahl is always on your list. Multifamily Millions, that was one of the books I read, and a couple others… And they give you this 30,000 foot level understanding of the industry, but it’s a completely different ballgame when you’re on the field and you’re out there executing in your specific market.

Theo Hicks: Perfect. Okay, so let’s transition into your bread and butter business plan now, which is increasing the net operating income by over 80% on average within 48 months. Correct me if I’m wrong, but you can’t just pick any deal to do this on. So obviously, the front end is making sure you’re selecting the right deal. So you already mentioned location, so we don’t need to talk about that again. Is there anything else that you have? What’s your checklist when you’re looking at a deal or a piece of land, so that you know going in that you’re going to be able to increase the net operating income by high double digits?

Joseph Bramante: For us, we’re really just focused on doubling our investors’ money over five years. We keep it simple, we target a high single digits cash-on-cash and double their money in five years; and for the most part, we’ve been very successful at that.

Now, part of the reason we’re at 80% is because we’ve had some really big deals. We’ve had about three or four big deals that have really skewed those results. We just closed on a 2015 construction about a year ago, and it’s more of a base hit deal. We’re exiting right at about a 2x multiple, but we’re not increasing NOI by 80%. Also part of that, just to be honest, is because I was buying smaller deals. So when you’re buying smaller deals in the beginning, it’s very easy to magnify and grow that NOI by a very large number, because that’s just how the math works. It’s the percentage and denominator factor.

So as I was buying these large deals like that first deal we did, I think we increased NOI by 400%. It was something stupid, because there’s 26 units, and the guy was really mismanaging it really badly, and we more than doubled the rent. So it had just a stupendous growth to the NOI there. But then of course, eventually what happens on all value adds is eventually the taxes catch up with you, which we’re just now, six years later, dealing with that effect. But to your point though, we’re not targeting 80% NOI growth. It’s just something that happened on its own, because we have big deals. Our targets for deals are high teens IRR, 2x multiple and high single digits cash on cash five year holds.

Theo Hicks: Perfect. So what you’re doing is you’re finding these deals, you’re putting them through an underwriting model and you’re finding what the purchase price is that results in that return, and then if the purchase price makes sense, you offer, if not, you pass.

Joseph Bramante: Yeah. And I would say the only difference between us in regards to why we’ve had some of the big home runs is because we’ve positioned ourselves in our market as the guys that buy the big hairy deals. So the one we’re doing right now, which is $37,000 per door across 220 units on the rehab, that came straight to us. We were the first people to see that deal, because the brokers already know that we do these deals, and if anybody’s going to do a big hairy lift like that, we would be the ones to do it.

Theo Hicks: This goes back to your first deal, or this could be just in general… How do you find the right contractor for these $30,000 plus per door renovations?

Joseph Bramante: Well, I’d say we’re a bit unique in that we’ve got construction in house; that’s as of January of this year. But we’ve been through two or three GCs, and unfortunately, it’s a lot of recommendations, a lot of tried and tested and just going through the motions. So you’ve got to hire these guys, try them out and really hold their feet to the fire on deals. But my background’s with Exxon with project management, so we had a little bit of a leg up on managing GCs and contractors, because that’s what I did for a living for five years. So for us going into these deals, you’ve got a big primary GC, then you might have a couple of other subs below doing other stuff that you feel like you can handle yourself and do it directly, and you don’t want to deal with their markup. So we’re going to have a detailed contract for the primary contractor, whereas the other guys might just be a PO or something like that.

So it’s really all about what you put up in the contract, setting expectations, putting a schedule, putting good terms in and developing a relationship with GCs. So we’ve been through, as I mentioned — I think our current GC we’ve hired is our third GC; they don’t all work out. My first two, they were great people, I have nothing against them, but they just have different price points, different quality levels… And it’s not necessarily the GC. I think what people need to understand about a GC is they’re more of staff contractors than construction guys, because all they’re really doing is they’re managing all the subcontractors. They’re not physically doing the work. Some of them might have their own crews, but they’re supplementing their crews depending on the size of the project with additional subcontractors. So if you’re getting bad work on a deal, it may not be the GC’s fault, it may just be that the sub that he hired did a bad job.

Theo Hicks: Okay, really quickly, how did you start raising money for deals? Was that after that first 26 unit deal?

Joseph Bramante: Yeah. After that first 26 unit deal, I had a pretty solid track record at that time. I was one for one and my first setback was a home run, at the ending. I mean, during the play, it looked like I was about to fall on my face pretty badly, but after that first deal is when I really started raising capital quite heavily, and started targeting these big value-adds.

The other thing I would say, just as a side note, is that doing a big value-add, once you’ve done one, especially on my first one, very few things scare you. And so I think a lot of what– the hesitation is for people to do value adds is that it’s scary. There’s a lot of unknowns, a lot of risk, a lot of things can happen, but once you’ve gone through it a couple of times, you get used to and are more comfortable with that risk, and you know how to respond in real-time to what’s happening; then you’re not as afraid of doing it. I think that’s probably, just my guess on why people don’t do as many big value adds, because they say they’re risky. But the reality is, in some ways, this big rehab we’re doing is actually less risky than a smaller rehab, because we’ve got so much money behind us on the rehab that any little nuance things that we discover have very little impact to us because of how much weight or how much money we’re spending on per unit basis; it’s easily absorbed by the GC.

Theo Hicks: Okay, Joseph, what is your best real estate investing advice ever?

Joseph Bramante: My best advice would be patience. I think there’s so many people who want this really quickly, they want to grow… And we’re only just over 1000 units, 1100 units, which isn’t really that big, to be honest. There’s some guys with these monster portfolios, and we’re more of a small to medium guy, to be honest. But that’s okay, we’re going at our own pace, and we’re doing deals that we feel comfortable with, and I feel like a lot of people – they’re rushing, they’re trying to get in quick and build these massive portfolios quickly, and the danger is, if you’re a syndicator trying to do that, that you’re growing and learning along the way. So if you quickly buy a bunch of deals when you’re still learning, then there’s a risk that you’re going to buy a bunch of deals and make the same mistake on those same several deals, versus just the progressive nature and maturing of you as an investor by taking your time, that if you bought those same deals over a five year period, by the time you’re [unintelligible [00:21:04].15] comes around, you’re buying that last deal, you’re underwriting and your execution on that deal is going to be significantly better than it is on the first deal.

So I think that’s the huge risk that people run into, and if you’re a passive, and you’re doing the same thing, trying to grow very quickly and deploy a whole bunch of capital, I think you run the risk of one, picking bad deals to go into, and two, you miss some market cycles. I think one of the benefits that people have is by– like right now, if you had dumped all your money last year, you would have been in a really bad spot, versus if you would paced yourself and done your investments over a couple year timeline, then you would have been taking advantage of potentially some really good deals that are about to hit the market.

Theo Hicks: Perfect, okay. Are you ready for the Best Ever lightning round?

Joseph Bramante: Let’s do it.

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

Break: [00:21:51]:03] to [00:22:46]:05]

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

Joseph Bramante: The best ever book I’m actually currently reading is a book called Raising The Bar by Gerald Hines. Hines Development is one of the top developers in the country. Gerald Hines is 95 years old. He started the company himself back in the 50’s, and he’s based here in Houston, his office is up in Williams Tower, which is right next to my house, and I hope to one day, get him to sign my book… But it’s just really inspiring to see his whole biography and his story and how he started and growing his company, which has 100 billion AUM; it’s just absolutely incredible. He’s strictly done development his whole life, and he’s an engineer like myself, so I gravitate towards that side of it as well… But it has been a really cool book to read, because I like to read books about great people who’ve done great things in my industry.

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

Joseph Bramante: So I’m a member of Rotary, it’s a business charity group. It’s one of the oldest charities I believe, or it has some significance in regards to that fact. It’s been around for a while. But I like Rotary because it allows me to give back in a variety of ways, both with my money and with my time, and the cause that goes back is always a different cause. We do a lot with housing, but we also do a lot with schools and helping kids and various other initiatives; it’s great. I’m a busy person and I don’t necessarily have time to do a lot of the research, so Rotary does a great job of vetting a lot of the charities beforehand, allowing us to give and know that it’s going to a good cause, and then also, like I said, get involved with our time and really get hands-on, which is really something special.

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

Joseph Bramante: The best place to reach me would be on LinkedIn. I’m on there, I’m pretty active on LinkedIn. The other way is, just send an email to info [at] triaarcrep.com and it would eventually make its way to me. But LinkedIn, if you want to get directly in touch with me is the best way. And if you do reach out to me on LinkedIn, let me know that you heard me on this show and I’d be glad to hear from you.

Theo Hicks: Perfect, Joseph. I really appreciate you coming on the show today and sharing your best ever advice, but I think what’s gonna resonate with people the most is you telling a story about buying your first property sight unseen. So you bought that 26-unit building; the original plan was, like you said, that there really wasn’t a plan at first. You were just modeling what the broker said, which is 3k per units in renovations, and then six months in, you had four units down that you were renovating and found asbestos once you did an environmental on it, and then you had some fraudulent insurance, and on top of that you’d lost your job.

So you joined a local real estate group, and it sounds like people there were telling you to just sell the property and take a loss, but you realized that not only would you have lost all the money you had saved up from your job, but you would have that negative track record. You [unintelligible [00:25:38].20] for one and would have a hard time raising money after that. So you met someone at that actual meetup who ended up being your business partner, who specialized in those large renovations, and told you that you’ve got a great location and that you could do a large rehab project and turn the property around. So you cashed out your 401k, got a bridge loan and did the $700,000 rehab, even though the purchase price was $650,000.

You vacated the entire property, and after the rehab, you were able to double those rents and refinanced, pulled some money out. You also mentioned, what sparked this whole conversation – now the plan is actually knocking the entire thing down and develop a brand new property because of the location. I really appreciate you sharing that story.

And then you also mentioned a few things about how you’re identifying deals. So you gave us your return targets, and that you really just positioned yourself in the market as being the team that does these big deals, and so brokers actually bring these deals to you, which was just very beneficial. You gave us some tips on finding the right contractors; obviously, you’re doing an in-house now, but it really just comes down to just getting in contact with a few recommendations and just testing them out, holding their feet to the fire, making sure you’re setting proper expectations with the contract and setting a schedule, but at the end of the day, it’s really just trying it and seeing how they do. And you mentioned how you’ve gone through a few contractors. Then lastly, you gave your best ever advice, which I really like – just to be patient. So again, Joseph, I really appreciate you coming on the show. Best Ever listeners, as always, thanks for listening. Have a best ever day and we’ll talk to you tomorrow.

Joseph Bramante: Thanks, Theo.

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JF2111: Going From Duplex to 89-Units With Brock Mogensen

Brock is 2 years into real estate and essentially started after seeing his dad owning 2 duplexes and how it can help with your income. His first deal was a house hack on a duplex and afterward, he saw the potential and took off running. Now he has a portfolio consisting of an 89-unit apartment, 20,000 sq ft of retail space, and 18,000 sq ft office space. 

Brock Mogensen  Real Estate Background:

  • Principal at Smart Asset Capital
  • Portfolio: 89 unit apartment, 20,000 sq ft of retail space, and 18,000 sq ft office space
  • Investing in real estate for 2 years
  • Located in Milwaukee, WI
  • Say hi to him at: www.smartassetcapital.com 

 

 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Partner with people that lack your strong suit and vice versa because I think those are the best partnerships where each can complement each other” – Brock Mogensen


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners, and welcome to the best real estate investing advice ever show. My name is Theo Hicks, and today we’ll be speaking with Brock Mogensen. Brock, how are you doing today?

Brock Mogensen: I’m doing great. How are you doing, Theo?

Theo Hicks: I’m doing great as well, thanks for asking and thank you for joining us. Looking forward to our conversation. A little bit about Brock – he is a principal at Smart Asset Capital. He has 22,000 sqft. of retail space and 18,000 sqft. of office space. He’s been investing in real estate for two years, is located in Milwaukee, Wisconsin, and you can say hi to him at SmartAssetCapital.com. Brock, do you mind telling us a little bit more about your background and what you’re focused on today?

Brock Mogensen: Absolutely. I’m about two years into real estate, so somewhat new compared to the more seasoned people… But essentially, in a nutshell, I got into real estate after seeing my dad having on two duplexes. So on a smaller scale, he owned that and I just saw what it can do for your income. So I knew right away, as soon as I got to college, I’d save some money up, buy a duplex, and get going. So I did that about two years ago, I saved some money, bought a duplex, house-hacked it. After I did that, it really just opened up my eyes, like “Wow, there is massive potential in this space.” And from there, I kind of spent some time on “Which route do I wanna take? Do I wanna do the wholesale thing? Just accumulate a portfolio of single-family and duplexes? Do I wanna flip houses?” And I ultimately ended up on syndication.

From there, I kind of spent 6-7 months just really learning it, paying for courses, going to the events, reading books, podcasts, all of it… And just kind of spent some time really learning it. Specifically, I focused on the underwriting side. I come from an analytical background, so that’s where I thought I could provide the most value. So I spent some time learning that.

From there, once it came time where I felt confident, I kind of realized I don’t have the background, I don’t have the net worth, I don’t have any of it to be able to go out and buy these larger deals. So I did some networking, and ended up finding two partners that do have the experience and everything needed to get into it… Through the component of underwriting, the analytical side of real estate I went in where they lacked their knowledge in, and we created Smart Asset Capital.

After that duplex – it was about 6-7 months after that, where we ended up getting this 89-unit deal under contract, closed that… So that’s about a year ago now. Then from there I just kind of saw, based on — you kind of heard that I have some retail, and office in our portfolio… We kind of just came across those opportunities, and they made sense. Multifamily still remains to be our core, but we kind of took advantage of those situations, and now we kind of have different asset classes and are willing to pivot where we see right opportunities.

Theo Hicks: So you went from the duplex as your first deal, and then decided to scale up… And the next deal about 6-7 months later was a 89-unit deal, and you did it with two partners. Let’s go step-by-step and let’s focus on the partners first. How did you find them, and then how did that conversation go? Either they convinced you to come on board, or you convinced them to come on board and partner up…?

Brock Mogensen: Finding the partners was actually through Bigger Pockets. I’m just always on there, messaging people, networking… I had been meeting up with one of my partners a few times for coffee, and at the beginning stage we were always talking “We wanna go big”, and we were talking about it… And through those six months we kind of both had the same vision, and we were like “Well, we have the same idea. Let’s partner.” So us two partnered.

Then we came across the 89-unit deal and we realized we might be biting off more than we can handle. He had another buddy that already had a big portfolio, has a full property management in-house, the whole thing. So it was like “Let’s bring him on.” We did, and that’s what created the three partners in Smart Asset Capital that tackled that 89-unit deal.

I think that my first partner I had already kind of convinced, but the one that brought the experience to allow us to do that deal – I definitely had to do some convincing, because obviously I have a duplex, I don’t have a lot of cash in the bank to be able to get on the GP right away… My convincing came through the aspect of my corporate background and what I’ve kind of studied so far.

I consider myself strong in the side of reporting, underwriting, and then [unintelligible [00:07:13].18] most stuff that takes place behind the computer is what I like doing. So I handle all investor reporting, all that stuff. They saw the value in that, where they didn’t necessarily wanna do that side of it, or that wasn’t their strong suit, and they kind of saw the value in bringing me on. So that’s kind of where I found myself getting on the GP.

Theo Hicks: Okay, perfect. So there’s three people on the GP. It sounds like you focused on the upfront underwriting, and then the ongoing — I guess, in part, asset management, and investor relations…?

Brock Mogensen: Correct, yeah.

Theo Hicks: Okay. What do the two other partners do, and then could you tell us a GP breakdown? What percentages did you get, what percentages did the other two get?

Brock Mogensen: I’d say they both are definitely more heavy on sales. They both come from the sales background, so obviously that goes hand in hand with having a bigger investor database. That’s definitely where they’re strong. But I think different than a lot of other syndicators – we all intertwine our roles, we all put a hand in on asset management… Although I handle most of the reporting and KPIs on a weekly basis, we all kind of lend a hand there.

So I won’t say we have specific, defined roles and they don’t cross paths, but yeah, as far as their strong suits, they’re more on the sales side, and they’re able to bring in investors better than me. But yeah, I think that’s really what I’ve found, and I tell people – partner with people that lack your strong suit, and vice-versa, because I think those are the best partnerships, where you can each complement what others lack.

Theo Hicks: And how did you decide who got what percentage of the GP?

Brock Mogensen: We split it a third, a third, and a third. It was just real basic. We didn’t really [unintelligible [00:08:42].08] each other on that. We just split it 33.3% each.

Theo Hicks: Perfect. Do you mind telling us what your normal day-to-day is like as an asset manager? I think not many people focus on talking about that, so maybe getting in the nitty-gritty details… When you wake up on a Monday, and then you go to bed on Friday, what do you do in-between, work-wise?

Brock Mogensen: Yeah, great question. I agree, not many people talk about the asset management. That’s one of the most important things, I’ve come to learn. I think really on a weekly basis — we have a weekly call with our property manager on Monday night, and every Monday morning I put together an extensive KPI report, where we pull all of our information off AppFolio – pretty much everything you can think of that you wanna track on a weekly basis.

We recently hired a virtual assistant. Previously, I was handling creating that report every Monday. It only takes an hour or so to put together, if that… So I’ve kind of trained our virtual assistant and handed that off to him, so he runs that report every Monday morning, and it hits our inbox. We’re able to see all the KPIs.

And then on a weekly basis, what I will do is I will keep a running Word document each week… And as I’m always in AppFolio – every other day, pretty much, looking at the numbers, and going through there… And I’ll just keep notes throughout the weekly basis, like “Oh, this and this… I wanna ask our property manager about this.” And I’ll create an agenda. So throughout the week I’ll just tally up some notes, Sunday I put it together in a nice format, drop it in a Google box, our VA attaches that in the weekly Monday morning email, so right then and there on our Monday night call we go off of that email. We have our KPI report we’re reviewing, plus that agenda, and that’ll go through every topic that we need to talk about. From there I’ll take notes, and then just kind of ever-evolve and keeping that agenda going.

Theo Hicks: Are you doing this full-time, or do you have another job?

Brock Mogensen: I do have a full-time W-2 in marketing… So yeah, balancing both – it’s possible. I think it requires a lot of work. To my benefit, I’m a single man, no family, so I have more free time than most people… But I think that’s a lot of people’s limiting belief – I don’t have time/I have a full-time job.

When I got started – I’m working a full-time corporate job; at the time I was finishing up my MBA, so I was taking three classes at once for that… And I closed that 89-unit deal, all at the same time. So it’s possible. I think people that say “I don’t have time to do it” are just making excuses. If you really wanna do it and you’re set on it, you’ll make time to get it done.

Theo Hicks: Do you have a plan of what point you’d be able to quit that job, or do you plan on just continuing to work and doing this part-time?

Brock Mogensen: I go back and forth on it. I do have a cashflow goal; I think I kind of laid that out, what I wanna hit to be able to support my expenses and my lifestyle… So I think once I hit that goal, then I’ll kind of make the decision. But for now, I do alright. My corporate job – I’m able to have both streams of income coming in. It definitely helps to have that second stream… So I don’t have a definite plan as of right now. I think one day it is the goal, absolutely, but I think right now I’m just kind of taking it step by step and seeing how it goes… And if I can balance doing both right now, why not have two sources of income?

Theo Hicks: Perfect. Do you mind telling us more about that 89-unit deal? You and your first partner found the deal… Can you tell us how you’ve found it, and then what you bought it for, and what the business plan was?

Brock Mogensen: We found that one on LoopNet, actually. I actually saw it first come through off-market, from a broker; so it was from a broker. And we kind of had our eye on it; the price wasn’t right for us, and I kind of kept my eye on it. 4-5 months later I see it pop up on LoopNet. We stay in touch with the broker, we  were emailing him saying “Oh, what’s going on with this deal?” It happens to be that it fell out of contracts, and we kind of saw that opportunity. We were like “Let’s put an offer in at the price that makes sense for us.” We did, the seller was over it and wanted to just get rid of it, so we ended up picking it up for a discounted price, just purely from following up with that broker, knowing that it was under contract, but you never know what happens… So we did that.

We ended up picking it up for 3.55 million… So yeah, 89 units, in the Milwaukee, Wisconsin area, C-class. The value-add we saw on that — it wasn’t a huge value-add. Essentially, what we saw was expenses were ran super-high… So having the in-house property management has allowed us to not bring it down by a huge amount, but by a certain percentage point that over the long term we saw it as a value-add play.

Theo Hicks: And then what about the capital for that deal? Out of a four million dollar purchase price, how much money did you raise and then where did that money come from?

Brock Mogensen: Our total raise on that was 830k. We did agency debt on that. That was purely raised through private equity, mostly through my partners’ connections. We each raised a portion of it, and then we also bought 10% on the LP side, just because it kind of aligns our interests when we’re talking to investors. I’m personally putting an x amount of dollars into this deal, so I have vested interest, not just our free equity, you could say. So that’s essentially how we did it.

Theo Hicks: How much of that did you raise?

Brock Mogensen: Not much. Under 100k. It was around there.

Theo Hicks: Who did you raise that from?

Brock Mogensen: Just existing relationships. People I’ve met throughout the past few years at meetups, and stuff, a few family friends… So not necessarily a large amount of the raise, but my partner brought most of his connections for that.

Theo Hicks: Okay… So you got 89-unit deal, and then you’ve got 20,000 of retail space, 18,000 of office space… Is that one building, multiple buildings?

Brock Mogensen: Two different buildings. Those were both bought in the past couple months, and those were kind of just bought through my partner’s relationships. He has  a full-fledged brokership as well, so he was able to source those deals off-market, direct to owner.

Theo Hicks: How was the asset management different on the apartment versus the retail and the office space?

Brock Mogensen: The KPIs are gonna switch up a little bit. None of us are experts in either of those spaces, but we’re learning a lot around structures. We have triple net leases; that’s a great part of it that we were able to bake in, and we’re also learning more about how that works operationally.

The asset management – we’re doing the same structure, with weekly reports, weekly calls… But I think it’s still kind of ongoing, learning more about  both of those spaces. We just kind of saw an opportunity to pivot when cap rates are so low in the multifamily space. There’s obviously great deals out there; we actually have another one under contract right now… But I think we just kind of pivoted and saw a good opportunity there, against the risk, so we pulled the trigger on both of those.

Theo Hicks: Alright, Brock, what is your best real estate investing advice ever?

Brock Mogensen: I’d go back to just — if you have your mind set on wanting to get into syndication… I know there’s people who think you can’t do it, you have to have experience, you have to have this… I think my story kind of just goes to show that if you wanna do it, you can make it happen. I always tell people, the best way to do it, and just kind of going off of how I did it, is find one aspect of syndication — there’s many different aspects… Find one aspect of it and become an expert in it. Spend a lot of time just becoming an expert in that aspect, and then you’re gonna have to find partners if you don’t have the experience. Do like I did, find partners that lack that component, and just [unintelligible [00:15:15].24]

Theo Hicks: Alrighty. Are you ready for the Best Ever Lightning Round?

Brock Mogensen: I am.

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

Break: [00:15:26].10] to [00:16:18].15]

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

Brock Mogensen: I think the best one I’ve recently read — I’m reading “Trump Style Negotiations” right now. That one’s pretty good. It’s all about his attorney and different real estate deals he’s done, and how he’s negotiated them.

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

Brock Mogensen: What I’d do, and what we’d kind of go in, especially going in the timing right now going in, we keep strong reserves, so I always make sure to have enough reserves on-hand to cover any uncertainty… So a big component is making sure you have the reserves in the bank to cover stuff.

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

Brock Mogensen: Right now it’s through education. I’m always available to get on a call with people that are looking to get into syndication. Any time people wanna ask question about it or are looking to get into it, I’m always willing to make time for that. In the future I do have bigger goals of giving back monetarily, but until I get to that point, that’s the way I’m giving back.

Theo Hicks: Okay, I’m gonna make this one up on the fly, and it’s gonna be about asset management… So what’s the one component of asset management that you think is the most neglected?

Brock Mogensen: Incorporating data. When it comes to asset management, the most important thing to me is data. You have to be able to first have the tools to access that data. That’s usually through a property management software. So if you’re hiring a property manager, make sure they have a system in place to where you wanna see real-time data, and then being able to take that data and incorporate it into models that display in real time your KPIs. That’s why I’ve kind of developed a KPI template on my website, actually, that people can access if they wanted to. But yeah, just being able to track on a real-time basis I think is the most important part.

Theo Hicks: Perfect. And that is at smartassetcapital.com?

Brock Mogensen: Correct, yeah. At that website you’ll see at the Education tab I have a few different eBook downloads, and that asset management template there for people to download.

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

Brock Mogensen: Through the website. That will prompt me to get an alert. Otherwise, my email is brock [at] smartassetcapital.com. I’m happy to talk to anyone.

Theo Hicks: Best Ever listeners, definitely take advantage of that one, whenever someone provides their personal email address. Brock, thank you for joining us today. You are a testament to the fact that you not only don’t need a lot of experience to get into syndication, but you can also do it while having a full-time job. I think those were the two biggest takeaways that I think the best ever listeners will get from this conversation.

Just to summarize our conversation – we talked about how you got into real estate because your dad actually owned two duplexes, and you saw what it could do for your income. So you got your first deal through a house-hack, so a great way to get into real estate is through house-hacking a duplex, which is owner-occupying it. You ended up moving on to syndication about 6-7 months later, after a bunch of education… And this goes into your best ever advice, because you focus specifically on underwriting. So find something about syndication that you can become an expert on, focus on that.

Then you found two partners that had a lot of experience but were lacking underwriting. So find your area of expertise, and find partners who lack that area of expertise. Then you talked about how you’ve met your two partners, how you met the first one on Bigger Pockets, and then you met him for coffee… Classic Bigger Pockets is reaching out to people and meeting them for coffee and finding a business partner or some sort of opportunity out of that, so I’d love to hear that. Both came across the 89-unit deal and decided to bring on a third partner, who had the experience with doing deals in the past. They had sales experience, they could also bring on the investors… And then you talked about how the GP is split a third each way.

You talked about what your week is like as an asset manager… So weekly call with the property management company every Monday night, you do your Monday morning KPI report, which is created by a full-time VA, and during the week you have a running Word document that you use to keep notes, with questions, to create an agenda for that call. Then we went into specifics about your 89-unit deal, the importance of continuing to follow up with brokers on deals that aren’t necessarily able to secure upfront. Then we talked about how the asset management is a little bit different for retail and office. You use the same structure, but the KPIs are different.

Brock, thanks again for joining us today. Best Ever listeners, thank you as always for listening. Have a best ever day, and we will talk to you tomorrow.

Brock Mogensen: 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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JF2104: Financial Samurai With Sam Dogen

Sam Dogen is the founder of Financial Samurai and has been providing content to the world through his free blogs and articles around topics that will help you with your financial literacy and goals. He Has also been in the real estate investing experience for 17 years and shares some of his experiences with this and his personal journey.

 

Sam Dogen Real Estate Background:

  • Founder of Financial Samurai
  • Has 17 years of real estate investing experience
  • Owns multiple properties in San Francisco, Honolulu, and Lake Tahoe
  • Commercial real estate portfolio consists of 15 properties
  • Based in San Francisco, CA
  • Say hi to him at: https://www.financialsamurai.com/ 
  • Best Ever Book: Thinking in Bets

 

 

 

 

Click here for more info on groundbreaker.co

 

Best Ever Tweet:

“I love the green marble theory.” – Sam Dogen


TRANSCRIPTION

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

Sam Dogen: Good. How are you?

Theo Hicks: I’m doing great, and thanks for joining us. A little bit about Sam – he is the founder of Financial Samurai. He has 17 years of real estate investing experience, owns multiple properties in San Francisco, Honolulu and Lake Tahoe; he has a commercial real estate portfolio consisting of 15 properties. He’s based in San Francisco, California, and you can say hi to him at his website, FinancialSamurai.com.

Sam, do you mind telling us a little bit more about your background and what you’re focused on today?

Sam Dogen: Sure. I actually grew up overseas, all across Asia and in Africa, because my parents were in the U.S. Foreign Service. I came to high school in the United States, and then I went to college at William & Mary in Virginia. Then I went to work on Wall Street in 1999. So I worked in finance, mainly international equities from 1999 to 2012, and in 2012 I decided to negotiate a severance and get out of there… Because after the global financial crisis in 2008-2009 it just wasn’t fun working in finance anymore. We were always the bad guys, even if we had nothing to do with the housing market.

Again, I was in international equities, specifically Asian equities, and it just didn’t feel good to work in that field anymore. Also, the pay wasn’t commensurate with the performance anymore. You could have done really well with your clients, generate a lot of business, but you wouldn’t have gotten paid commensurately, because Wall Street finance was busy subsidizing a lot of money-losing departments. So I decided “You know what – it’s been a good career.” Originally, I wanted to work until I was 40, but instead I left the industry when I was 34, and I decided to travel, spend more time with my wife, and focus on FinancialSamurai.com, which is a personal finance site I started during the depths of the previous financial crisis, in July 2009.

Theo Hicks: So Financial Samurai is like a blog where you post personal finance advice… Does that tie into real estate? Is your advice for people to go out there and buy real estate, or is it dependent on their personal situation?

Sam Dogen: FinancialSamurai.com is a personal finance site. I talk about everything from investing in stocks, to real estate, to early retirement, to career, to negotiating your layoff, to family finances, insurance and so forth. So I try to cover every aspect of what someone would think about in their lives. And money really touches upon all of us.

Real estate is about 40% of my net worth, and is something that I’ve been doing since 2003, in San Francisco… And real estate is my favorite asset class to build wealth, because it’s a tangible asset, it generates income; it’s pretty sticky on the way down during tough times, and you get to benefit from the upside, and it provides utility.  What an amazing asset class to be able to enjoy it, to provide shelter for your family, experience great memories, and maybe even make some money in real estate. So real estate has been my favorite asset class to build wealth.

Second has been stocks. I was in the stock market, in that business for 13 years. However, I think my favorite after stocks is online real estate, so owning web properties such as FinancialSamurai.com.

Theo Hicks: Nice, I never thought of it like that, online real estate; I like that terminology. Okay, so you have 15 commercial properties… Is that your entire portfolio? Are those the ones that are in San Francisco, Honolulu and Lake Tahoe?

Sam Dogen: No, the property that I owned in San Francisco, Honolulu and Lake Tahoe are physical real estate properties that I’ve bought, and that I enjoy, and I use, and I rent out, and I’m an active landlord there. And regarding my commercial real estate portfolio, it’s essentially through real estate crowdfunding, where after I sold one of my main San Francisco rental properties in 2017, because I wanted to simplify life and diversify out of San Francisco, I basically invested in a fund that had 17 commercial real estate investments, and two have exited, and there’s still 15 left.

So my thesis was to diversify across the heartland of America, because back then I was thinking to myself “Well, the cap rates are so low in San Francisco…” We’re talking 2% – 3% cap rates… And it’s just so expensive here, and I have so many investments already that I needed to diversify.

So with the proceeds that I got from the sale, I decided to diversify across the nation, and the thesis was that work from home would be more and more prevalent, telecommuting, people would be able to go to lower parts of the country to still earn a similar amount of income, but save a lot on costs. And with the lockdowns and the global pandemic I think that trend is definitely accelerating, and I’m excited to see what happens next.

Theo Hicks: How did the returns from that fund you invest in compare to your rental properties?

Sam Dogen: In San Francisco real estate has been going up; at least since 2012 it’s been a bull market. Real estate is about 80% to 100%, and now it’s probably plateauing right now… So San Francisco real estate probably increases by 6% to 7% a year. It has been. And that’s been pretty good. Obviously, let’s say with 20% down, so you have leverage… So a 6% return times five, that’s 30% return on your cash… So that’s great. But it slowed down in 2018, and 2019 was kind of “Meh…” and it started picking back up at the end of 2019. In early 2020 it was pretty good, until everything started getting locked down. So now everything’s in a wait and see mode.

In terms of commercial real estate, since about 2015-2016 when I started investing – because I invested before; I’d sold my main San Francisco rental property in 2017 – the returns have been around anywhere from 12% to 16% a year, which is great, especially if you don’t have to manage the property. And that’s one of the things that I like about investing in these properties – because it’s 100% passive income; you’ve got a professional manager there, you’ve got the lawyers and all those people doing the stuff, and  you just collect income and then you have to file the taxes.

Now, in 2020, things have obviously changed a lot due to lockdowns. So I will have some losses on properties that are in the hospitality space. For example a hotel. Surely, that property’s gonna be going down in value because nobody’s going at the hotel. It’s like an airport hotel, a Sheraton in Dallas. But the portfolio is 15 properties, so I’m assuming there’s gonna be some losses, but overall I think it’s gonna do well. If we can rebound and get out of this lockdown phase sooner rather than later, hopefully third quarter of 2020, I’m optimistic that things will get back on course.

Theo Hicks: Just to confirm – that fund of 15 properties, you’re getting 12% to 16% per year?

Sam Dogen: Yeah.

Theo Hicks: Wow. How did you find that fund?

Sam Dogen: Well, there’s a lot of real estate crowdfunding platforms. Financial Samurai is a relatively large website; it’s got about one million visitors a month organically… So there’s a lot of opportunity; you just have to go wade through a lot of opportunity. But there are many real estate crowdfunding platforms out there. I’ve been able to talk to a lot of the top ones and a lot of the big ones, and some of them don’t make it, frankly… But some of them do. And the assets they allow you to invest in are separate LLCs that continue to go on regardless of what the platform does.

So in the old days you would basically invest in a real estate fund through your network. You have a friend who’s in real estate development, he wants to raise some money, you participate, you’re a limited partner etc. Today you can go online, you can obviously buy REITs, you can buy private REITs, and you can go directly through these platforms that connect you with other sponsors.

Theo Hicks: So you’ve found this deal through your website. Someone came to you with the deal, or someone posted it on your website?

Sam Dogen: Yeah, through my website, for sure.

Theo Hicks: One thing that we stress a lot is about building a brand – our’s is a podcast website – for building a real estate company. You talk about personal finance. Is that something that — you also mentioned owning online real estate, owning websites… So what’s some advice you have for someone — well, I guess then you also have a million organic views per month… So what’s your advice for someone who wants to start getting into what you call the online real estate and owning a website? Should they build their own, should they invest with someone else’s website? What does investing in someone’s website even look like? …things like that.

Sam Dogen: I think one of the key things you have to do is own your brand and build your brand. You don’t want another platform to own your brand, for example Facebook, Twitter, LinkedIn, whatever. They are already huge companies, and they’re getting rich off your content and your brand. So instead of spending all your time tweeting about random stupid things on Twitter, build your own brand and start your own website, and start talking about all the things you care about on your website. It’s the green marble theory that I like to think about and say, and that is if you have a green marble, maybe it’s the ugliest green marble in the world; you put it on eBay and someone will find that green marble and wanna buy it. So if you put yourself out there, based on your own brand and what you care about, you’re going to find your tribe organically eventually. Google obviously has been around for over a decade now. They’ve done their algorithms very well. They’re gonna help people who are looking for stuff that you like, and connect. And that is really key, to build your brand and do it on your own platform.

The other thing is you need to be consistent. You can’t give up before the roses bloom. Too many people I see just work for six months, maybe a year, and then they stop doing it… But they stop right before things start getting good. So I believe the secret to success is to do something very consistently, for 5-10 years. After about three years you should definitely start seeing some results, but too bad people can’t stick with things for more than one or two years, because they just want instant gratification. But this is a long game, and if you plan to be alive for decades, then you have plenty of time to build your brand.

Theo Hicks: That’s really good advice about building your website, but specifically the 5-10 years, thinking in terms of decades rather than days and weeks and months. So you did mention about not going out there and tweeting your thoughts, as opposed to building your own website and then you’ll [unintelligible [00:13:37].23] organically. So do you recommend just posting on the website and that’s it, and then letting people find you on Google organically? Or should I still be sharing the content from my website on social media?

Sam Dogen: Of course, you create the hub. You create your pillar, awesome content, whatever it is you wanna talk about. If you wanna talk about real estate, go ahead. If you wanna be a real estate specialist, go ahead. If you wanna be a personal finance generalist, or just focused on stocks and real estate and family finances… Whatever you wanna do. The world is big enough; there’s billions of people on the internet. Focus on what you care about and you are best at. And then the spokes are social media; make sure what you’re doing on social media is helping you build your brand, not hurt your brand. A lot of people have blown themselves up on social media saying things and then just getting fired, or just crushed.

So think about the spokes after you build your hub, your own brand. So the spokes are maybe doing a podcast, getting on a podcast like this one. Social media. Maybe speaking at conferences, if they ever come back. But focus on the hub.

Theo Hicks: Okay, Sam, what is your best real estate investing advice? You can also apply it to personal investing advice too, but what’s your best ever investing advice?

Sam Dogen: In terms of real estate, I would say be patient. Every time you see an amazing property, it’s just human nature to get all excited and say “I’ve gotta buy this. This is amazing. Please, nobody else bid against me. I’ve gotta buy! Buy, buy, buy, buy!” But the reality is if you miss this one, it’s okay; there’s gonna be another amazing property that’ll come along. So I really stress patience and running the numbers, especially during a turning point where we don’t know what’s gonna happen with the economy, with 40 million-plus people unemployed. Is the government really gonna support us indefinitely? Are we gonna find a vaccine within the next 12-18 months? There’s a lot of uncertainty, so right now patience is a virtue. Don’t rush, don’t go panic-buying, don’t go panic-selling. You’ve really gotta run the numbers and think things through. If you miss out, it’s okay; there’s gonna be other opportunities along the way.

Theo Hicks: Alright, perfect. Are you ready for the Best Ever Lightning Round?

Sam Dogen: Sure.

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

Break: [00:15:53].00] to [00:16:42].07]

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

Sam Dogen: Let’s see… I have been recently reading Annie Duke’s “Thinking in Bets.” I think it’s an excellent book and an excellent way to think about investing. There’s never a 0% probability or a 100% probability. There’s always going to be some kind of grey area, and you’ve gotta think in bets, think in percentages.

So right now, with the S&P 500 at 3,000, for example, it’s rebounding by over 32% from the mid-March lows… What is the expectation or probability that it’s gonna go up back to its record high, another 10% up from here? I would say maybe 30%. But that also means 70% is not gonna get there. So in that regards, I position my portfolio according to the probabilities that I believe in. So thinking in bets.

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

Sam Dogen: Right now I have about 250k-265k in passive income, excluding my website, except for 50k. 50k comes from selling a severance negotiation book… So if my website collapsed today, I would have about 200k to 215k a year in passive retirement income. So that would be a 20% loss to my passive retirement income. Then I would basically look at my budget and make sure I’m spending within my means… Because that’s obviously the bottom line of personal finance – spend within your means.

Now, in terms of the active income I was making from Financial Samurai through advertising and so forth, I would first take a moment to grieve, because I’ve been working on this for 11 years, and then I’d take a moment to be thankful that it’s given me so much back in terms of community, in terms of learning from other people, in terms of doing something that provides me joy… And then I’d think about maybe taking a six-month break, and then I would think about maybe starting something else better or newer, and learn from my mistakes.

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

Sam Dogen: In terms of giving back, I think the best way to give back is to write on Financial Samurai. Every single article is free, there’s no paywall. I talk about highly, highly pertinent things in our lives right now, whether it’s “What should you do after the stock market has rebounded by 32% from the bottom? Should you buy, hold, sell?” I talk about “Should I apply to pre-school and spend $2,000/month? Yes or no. Should I save x amount in my 529 plan so my child can go to college in 18 years, when everything will be free and college will be completely not worth its value?” I talk about these important things for free, and to help people engage and to encourage the audience to share their perspective, so that we can all learn from each other… Because nobody knows everything, and we all only know from our experiences and how we can do things better.

So I think that’s the best gift – to share what you know, consistently, for free, to as many people as possible? Because so many people will just go through and live the same thing that you went through just the past 5, 10, 15, 20, 35 years, and they could avoid all those landmines if the experienced people spend some time sharing what they did wrong and what they did right. That’s my plan.

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

Sam Dogen: Oh, just financialsamurai.com. I’m always reading the comments, you can always leave a comment. It doesn’t matter how old the post is, I’ll see it. You can go on Twitter if you want, but Twitter is something that I try not to spend too much time on. Basically, those two places are probably the best.

Theo Hicks: Perfect. Sam, I really appreciate you coming on the show today and providing your best ever advice. I think the biggest takeaway for me was your advice on owning websites and your analogy of the wheel, and how you don’t want to let other larger online platforms own your stuff. So you don’t wanna just be posting on Facebook or LinkedIn or (as you mentioned) Twitter. Instead, you want to be the hub yourself, so have your own website, focus on what you care about and what you’re best at on that website. And then the spokes are the secondary outlets, things like social media, podcasts, getting on a podcast, speaking at conferences. So those things are not the hub. The hub is you and your own website. So start working on your own brand and building your own brand, and make sure you’re the owner of it.

And then how to actually grow that – you talked about the green marble theory; you’ve got a green marble, and even if it’s really ugly, you put it on eBay and someone’s gonna want that green marble. So if you put yourself out there and you talk about what you care about, and you do it consistently, and you don’t give up before the roses bloom — and by consistently you mean 5-10 years… Not giving up after a year or two years or three years – then eventually you’ll find your own tribe organically.

And then obviously you talked about your real estate portfolio, the types of returns you’re getting on it, how real estate is your favorite asset class to build wealth, followed by stocks, followed by owning real estate… So again, Sam, I really appreciate you coming on the show. I look forward to reading through some of your content. I really liked what you said about the college thing; I hadn’t thought about it like that before… But again, thanks for 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.

Sam Dogen: Great. Thanks a lot.

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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JF2102: From Military to Millionaire With David Pere

David Pere is a full-time active duty Marine and the founder of “From Military to Millionaire”. He has bought and sold 54 units, holds 13 rentals, and is a general partner in a 146-unit apartment. He discusses one of his deals that he had a headache within creative financing and shares what he would have done differently. David also goes into his process of mailing to absentee owners.

 

David Pere Real Estate Background:

  • Active duty Marine
  • Started investing in real estate in 2015
  • Founder of “From Military to Millionaire”
  • Has bought and sold 54 units (one of them being a 40 unit), holds 13 rentals, and is a general partner in a 146-unit apartment
  • Based in San Diego, California
  • Say hi to him at: www.frommilitarytomillionaire.com 
  • Best Ever Book: Like Switch 

 

 

 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Stuff isn’t always going to go your way, don’t invest money you can’t afford to lose.” – David Pere


TRANSCRIPTION

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

David Pere: I’m doing well, brother. I appreciate you having me on. I love your show.

Joe Fairless: Well, I thank you for that, and I’m glad to hear it. First off, you’re active duty marine, so thank you, sir, for everything you do, and you and your colleagues letting us have this time to be free and have these conversations… So first and foremost, I have a lot of respect for you and all of your colleagues.

Dave started investing in 2015. He’s the founder of From Military to Millionaire. He has bought and sold 54 units, 40 of those 54 being a 40-unit property. He holds 14 rentals and is a general partner in a 146-unit apartment community. Based in San Diego, California. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

David Pere: Absolutely, brother. As you mentioned, I mentioned the Marine Corps in 2008. Sometimes, I would say a lot of the world, like it’s a great thing, sometimes I’d say too much of the world… But I had a lot of experience just with people in different cultures. In 2015 I was a recruiter in the Midwest. Someone handed me the book Rich Dad, Poor Dad, I told them I don’t read, kind of joking… Like, “I am a marine… What do you think? I’m hard-headed.” And the guy literally pulled a CD disk out of his pocket and was like “Well, you spend a lot of time driving in your car, so here you go.” And I was like “Ahh, he got me. I’ve gotta listen to this.”

Within three months I had closed on a duplex, house-hack – living in one side, renting the other, doing that good thing… And then about six months later I got orders to Hawaii. I was like “Man, it’s a lot more expensive over here.” I got a bunch of offers declined, I couldn’t find anything that worked to buy… So I just kept buying in Missouri. I started a long-distance thing. I had the duplex, then I bought a single-family that we did the BRRRR strategy before I knew what that was. We renovated it, then we rented it out, and then a few years later — we didn’t refinance, we pulled a HELOC on it, and we used that HELOC to buy a ten-unit.

I then bought a 40-unit, did some  stuff on it, I got rid of the 40-unit, turned around, flipped a house… So during this, I’m partnered on a couple of flips in San Diego, small partnerships here and there made some money, and then flipped a home in Missouri… And then I’m currently under contract on a duplex; so that’ll be 14 and 15 that I just plan to hold indefinitely in that little market.

Then a general partner came in the last few months. So the big trend for me is just trying to balance being a full-time marine, traveling all over the place, with investing in various markets, with a lot of just sight unseen stuff, building teams, and networking, and relationships. So that’s a little bit about me… I’m just continuing to grow all of that.

Joe Fairless: Let’s talk about that 40-unit, since you’ve taken that full-cycle… Tell us about how you’ve found it, what the business plan was, what you bought it for, what did you put into it, what did you sell it for… All that good stuff.

David Pere: We bought this thing for about 150k down. We bought it at a 2.795, with some great financing options. So that one’s just kind of a strange ordeal. Realistically, that one wasn’t a huge profit. That one ended up being something that we got out from under, because it was a deal that didn’t quite work out to what it was supposed to be… So that’s probably the one deal in all of this that — I haven’t actually lost anything on it yet, but I got out from under, because it just did not work out.

So the guy didn’t uphold his end of the contract, things went super-sideways… And in essence, a year and a half later in a fun legal battle I was trying to pull all of our original capital back out of it.

So I may say full-cycle on that one, but that was the one big mistake — it’s funny, because one of your Lightning Round questions is “A big mistake you’ve made on a transaction”, and that was gonna be my answer to that…

Joe Fairless: [laughs] I sniffed it out right out of the gate.

David Pere: Yeah, so that’s good.

Joe Fairless: That was just dumb luck on my part.

David Pere: No, it’s totally good. I thought about bringing all that up before we got on the call, but… In essence, the gentleman that I was under contract with – there were things that were very clear in the contract, like “This needs to be done by this date” or “Seller owes buyer this”, and it just didn’t happen.

Joe Fairless: Like what? What’s an example?

David Pere: The roof needed to be replaced by the 90 days after closing, or seller owed buyer $100,000.

Joe Fairless: Okay.

David Pere: 120 days into the deal, it’s December and I’ve got commercial tenants — it was a mixed-used; it was 25 residential, 15 commercial on a four-story building in the South-West… And in essence, the two commercial tenants on the fourth floor broke their lease, because come December they have a leaky roof and no HVAC, and the two things in the contract were “Replace the roof and put HVAC on the fourth floor.” And it’s December in the Midwest, so it’s snowing outside, and I have a wedding venue and it’s 45 degrees inside this building; we’re done. Some crazy stuff.

There were four units that were in the contract; they were supposed to be finished with renovations by 45 days after closing, and when we brought the city inspector in, he’s like “We’ve put a cease-work order on this four months ago” and they finished it without a permit. So all of those walls needs to be removed, that plumbing needs to be removed,  and the guy was basically like “Well, the contractor said I had to finish them.” “Um, they’re not finished.” “No, they’re done.” “No, no. They have to be finished up to code…” So it’s things like that.

What we did was we just basically offloaded it and we said “Hey, we want our down payment back, plus–” Because it had been cash-flowing up until we lost the commercial tenants. At that point, the guy had had 30 days to pay us for the work he hadn’t completed, and we were just getting the same “Oh yeah, I’ll get to it.” “No, that’s not quite how this works.” So we broke the contract, asked for the down  payment back, got told it was non-refundable, and we have a court date set for July, finally, to finish all that out…

But I guess the biggest thing I would say for that, if we’re talking as far as lessons for your listeners, because I have no problem being the guy to talk mistakes, is document everything… Even if it’s a phone call, follow-up with an email “Hey, this is what we agreed to you while negotiating on the phone call. Please reply to confirm.” Because there’s one or two emails that I should have sent, that I didn’t…So we have “He said/She said” addendums to the contract, that were made afterwards, that there’s just no record of… Which isn’t gonna screw me, but it’s gonna make things very difficult.

Joe Fairless: Yeah.

David Pere: So I would just say document everything like that, and… Hey, stuff’s not always gonna go your way. Don’t invest money you can’t afford to lose… Because this didn’t stop me. I’ve bought three more rental units since then, flipped a house, and partnered up on a GP for a big apartment complex… Because it was money I could afford to lose.

So don’t go in over your head, and just have a plan. Stuff’s gonna go wrong, don’ let it stop you from investing.

Joe Fairless: This is interesting, because it’s creative financing, and that is talked about in a positive light the majority of the time when you’re talking about real estate transactions. In this scenario, because it was creative financing, it did not work out, because there was another party involved due to the creative financing… Whereas if it had been traditional financing, then you wouldn’t have that person involved. But on the flipside, you would have had to get the work done yourself, and get it budgeted and get it financed, or some sort of financing or cash out of pocket and do the work.

So my question is if presented another deal, that’s a very close cousin to this, other than it’s just a different seller, how would you structure it to make the deal work? If it would be creative financing, then what are some things that you’d make sure you had in place?

David Pere: That’s a great question, I love that. I’ve done a lot of thinking about this, because the reality is looking back, you can kick yourself about all the things that went wrong, but if I knew everything I knew going forward, I would probably still close on that property. I don’t know any other way that I would have gotten 4%. This is in 2018, where interest rates were not as low as they are now, but 4% interest for the duration of the loan, and interest-only for the first year – those are some pretty competitive terms for commercial financing in 2018.

Joe Fairless: How long was the loan?

David Pere: I had eight years to the balloon payment, but it was amortized for 25…

Joe Fairless: Got it.

David Pere: But those are some fairly competitive terms for commercial property, and the deal – at the time I bought it, it was only 80% occupied, and it had a lot of room to grow… And it was below market. There was a huge value-add.  It was a really cool property, it had a lot of history in the town, a lot of people knew the building… I don’t know that I would change the fact that I bought it, and honestly, given the same options going forward, I would probably still do it. For sure, the first thing I would do is all of the “Do this by this date, or owe this much money”, I would escrow all of that cash upfront. I would say “That’s great, but I want all of this into the escrow fund, so that if you don’t do what you’re supposed to do, I still get my cash.” And you can do the work out of the escrow fund, that’s totally fine, but it’s getting escrowed, so we don’t have a “Oh yeah, I’ll get to it” payment. That would be the first thing I would do.

The second thing I would do – and this is a little bit on the smaller scale – is I would bring my personal management team in immediately. And this might just be a personal thing because of the experience, but the manager seemed incredible when we took over the place. I just didn’t realize that the manager was getting an under-the-table commission portion of the sale. So while the manager wasn’t terrible, they weren’t nearly as good as they made themselves out to be… So going forward, I’d probably just say “Hey look, I trust you. You look awesome,  you seem great, that’s wonderful, but my team is gonna take over this going forward, because I know them, I trust them, and no matter how good you seem, I’m taking a risk on what you might be like after the fact, while they’ve already been tried and tested.

So those would probably be the two biggest things I would change. And as far as the creative financing, I’ve bought other properties and they’ve all gone really well. I think it’s less of the financing model and more of just the people involved, that can sometimes be the make or break… Which is unfortunate, but I guess maybe I would just do a better job of background checks… But even then, the few references I had and the little bit of a track record I had in town, the gentlemen checked out, so… I don’t know if maybe I just got unlucky, but it is what it is.

Joe Fairless: On the flip side, what deal have you made the most money on?

David Pere: The most money I’ve made probably so far is my 10-unit, which I still own. The 146 will ultimately end up being the most money, but it’s just a little bit newer in the cycle… So the 10-unit – this is Missouri prices, so it’s fairly affordable, but it was valued at 240, I bought it at 212, and it was under market rent, and I got the bank to bring in 86% financing, seller to carry ten, and I came out somewhere in the 4% to 5% range for down payment. So I was able to get in super-creative, super-low… This was my third purchase, so I still was fairly strapped for capital. I was still in the “Please help me so I can save for money.” So I bought it and it cash-flowed about  $1,200/month on average from day one. So about 100% cash-on-cash return. And we’re up to about $1,600/month that it cash-flows.

At the 18-month mark I refinanced, paid off the seller financing… And I didn’t pull cash out really for myself, I pulled just enough out to cover my down payment… So at this point, 2,5 years later I’ve got nothing in it, I have no seller financing, I’m at about 69% loan-to-value, and I’ve got $92,000 in equity, and it cash-flows about $1,500 to $1,600/month.

Joe Fairless: Wow… That’s a grand slam.

David Pere: Yeah, it was awesome.

Joe Fairless: How did you find it?

David Pere: Ironically, I was mailing out to absentee homeowners about duplexes. And basically, I got this phone call, and he was like “I got your letter.” I’m like “Oh, awesome.” He’s like “I don’t wanna sell my duplex.” And my first thought was like “Why are you calling me? Thanks… You just didn’t have to–” Anyway.

Joe Fairless: [laughs]

David Pere: He’s like “But… I have this other property.”

Joe Fairless: He could have been lonely.

David Pere: Yeah, it may be. If it was during quarantine, I’d be much less skeptical.

Joe Fairless: [laughs]

David Pere: But he says “But I’ve got other properties.” And I’m like “Okay, great. What do you have?” And he shot me a couple different things, and they just didn’t really work. I was like “Okay, that’s cool… If you ever come across any other multifamily, or–” At this time I was still looking for duplex, single-family properties…

Joe Fairless: Yeah.

David Pere: He’s like “What about 10-units?” “Well, I’m interested. Talk to me.” And he gave me a price of 235k, and we went back and forth on it… And then we went under contract at 225k, which still would have been a great deal for me… But throughout inspections and stuff we were able to negotiate a little bit more of that down. So it all worked out. He was great for seller-financing, and the cool thing is – I don’t know that he understood paper, or that he really just didn’t need the cash, but when I refinanced, he let me go no prepayment penalty, no nothing. So ultimately, over that year-and-a-half I think I paid like .75% interest on my seller financing to him, because I had only paid down 1.5% of the seller financing by the time we refinanced, and he didn’t ask for interest on any of the remainder. So it was basically free money for me to buy a property, so it was pretty cool.

Joe Fairless: Yeah. You were mailing out to absentee owners about duplexes… Will you describe the process that you used?

David Pere: Yeah, I’m a pretty simple guy… So I just go into ListSource and I just really dive down into a specific zip code, or you can even draw out on a map a square block or whatever that you want… And you can just narrow down in there to absentee homeowners. As you know, people who don’t live in the home, but they own it… And you can pick out equity percentages, you can pick out age of the property… And basically we were just mailing out to people who had owned the property since right around the crash or longer; so the people who had owned it for at least ten years, who theoretically would have at least 40% equity hopefully, and be able to negotiate a little bit… Because I knew that I was gonna try to at least get some angle on the seller financing, whether that was 100% seller finance, or part of the down payment… Because I was in the bootstrapping phase of the business.

So I had narrowed it down to length of ownership, equity percentage being over 40%, absentee homeowner, and really at the time I just put 2-4 units because I didn’t know anything about the commercial stuff and it was kind of intimidating to me… So the 10-unit was a stretch for me going as a first property, but the numbers made sense, so I just let myself jump off the cliff. I guess that would be the short answer to that.

Joe Fairless: What did the note say? And was it a postcard, was it an envelope with a letter inside of it?

David Pere: At this time I was not doing mass, so I literally had a yellow piece of paper, and I remember I had  a 24-hour duty shift which we do in the military here and there, and I sat at this desk during that 24-hours and handwrote 110 letters of “Hi, my name is David Pere. I’m a real estate investor in your market, and I’m interested in your home at Such-and-Such address. I can close fast, please contact me for more information.” And I got a great return. I probably got 19% or 20% callbacks on all those handwritten letters. They were in blue inks… I would throw one or two pennies in the envelope, I would throw a picture of my family in the envelope, and I would hand-sign every letter… So I’m sure every single one of those got opened. But I’ve learned very quickly that that is miserable; so I never did that again.

At this point, if I’m driving around and I might see a property that looks like it has a ton of potential, or if I’m targeting a specific home or two, I’ll handwrite everything. Otherwise, what I did was I basically found a font that looked somewhat like my handwriting, and I’ll print that out on paper and then I’ll sign it in blue ink… And I still to this day will hand-address the envelopes, because I think that definitely speaks volumes for how much your envelope gets opened. And I still stuff in  an envelope and go; I’m not sending thousands and thousands of mailers out, but that’s kind of my go-to. My open rate has definitely dropped. It’s probably 5%, maybe on a good day 10%…

Joe Fairless: You mean your response rate?

David Pere: My response rate, yes. Sorry.

Joe Fairless: Okay.

David Pere: But I would rather send 500 and get 10% responded or 5% responded than handwrite 100 of them (that takes me two days) and get still less responses in the grand scheme of things, even if it’s a higher percentage.

Joe Fairless: The picture of your family – are you wearing a military outfit?

David Pere: It depends on where I’m mailing to. When I lived in Hawaii, for instance, that didn’t really hold any weight, because everybody around the base was military. So I would just go with a normal picture, like a fun in the sand, beach, Christmas photo that I have of us, all in pajamas, on the beach, and Christmas stuff…

Joe Fairless: Okay.

David Pere: If I’m mailing somewhere like the Midwest though, where they’re very military-friendly, then yes, it’s generally gonna be something with — either in a Marine Corps shirt, or hoodie… I generally don’t enjoy the uniform; there’s just something about that that seems kind of cringy to me as a service member… But I will at least have a picture where I’m in a big, very obvious Marine Corps hoodie, with the family. So it’s more focused on the family than the military service, but maybe some subtle hints in there.

Joe Fairless: What about the pennies? Is there a reference there in the note to why pennies are included?

David Pere: No, I totally should do that though. That’s a great idea. I should put a line in there that just says —

Joe Fairless: No, don’t do it — what you’ve got is right; don’t let me mess it up. I’m just asking questions.

David Pere: [laughs] So the pennies, for those of you who aren’t listening – it’s really just because if you’ve got an envelope in the mail and something was rattling around in it, would you open it?

Joe Fairless: Or I’d call the FBI… [laughs]

David Pere: Yeah, one or the other. But hey, the FBI will open it and tell you what it says, so either way you’re gonna read what I wrote.

Joe Fairless: [laughs] Okay, that’s cool. I’m glad that you talked about this in detail. It’s a way that can help others get their letters opened and noticed. Did you ever consider having an assistant who’s time is $10/hour or much less to write those?

David Pere: I actually have several virtual assistants for various things. I have yet to make my administrative one write my letters for me… But I will tell you  a funny story from a good friend of mine, who basically ran a letter sweatshop out of his office. If you ever get him on the show, I apologize [unintelligible [00:21:33].21] Basically, he had 2-3 marines come over, and he would provide alcohol and pizza, and they would spend eight hours handwriting letters in his house. It was only scalable for a month or two before he couldn’t convince anyone else to come do it anymore… But that’s probably my favorite.

This guy probably put out 2,000 letters one weekend, and he had six guys over, and basically was just like “I’m providing alcohol, I’m providing food… This is gonna be fun.” But no one ever returned, so he said it wasn’t worth the relationships he might be ruining.

Joe Fairless: [laughs] Well, he’s given them food and alcohol…

David Pere: I would do it, but I might be crazy. Taking a step back, based on your experience, what’s your best real estate investing advice ever?

Joe Fairless: Man, just get out there and do it. I tell people from the military — I have a safety net, so I’m allowed to take really big risks, in my opinion, because if all else fails, I’ve got housing and food and clothing etc. taken care of, and a fairly stable job. Basically, when I tell people my favorite advice, this is always like “Learn, network and take action”, but my best advice is get out there and take risks, but just make sure that whatever risk you take  won’t break you. It doesn’t matter how many times you fail as long as you’re able to recover from that risk. And as long as you’re  not gonna get broken by whatever risks you’re taking, the pay-off will always end up being bigger in the long run.

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

David Pere: I am ready for the Lightning Round.

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

Break: [00:22:58].23] to [00:23:34].17]

Joe Fairless: Alright, what’s the best ever book you’ve recently read?

David Pere: The best ever book I’ve recently read – I would have to go with either Like Switch, which is a book dedicated completely to how to build relationships through body language… It’s another FBI agent writing a book about body language, but it’s a super fun read, and really intuitive, and just little things you can do to make yourself a little bit more likable.

And I’m just gonna plug Big Debt Crisis by Ray Dalio, because I’m reading it right now, and it’s fairly applicable to where we’re at in the economic cycle. It’s a heavy read, but it’s good.

Joe Fairless: Yeah, I will buy Like Switch. I have not heard of that, and I am looking forward to reading that. What is the best ever deal that you’ve done? It doesn’t have to be monetarily, because we’ve already talked about that, the 10-unit… But just best ever deal. If it’s the 10-unit, then that’s fine, we can move on.

David Pere: That’s a good one, but I think the best ever deal I’ve done – this is gonna be super-cliché, because we already  mentioned the actual deal-deal… It’s gonna be the word “networking”. I have gained more out of whether virtual or in-person relationship building, so I would venture to say that the relationships I’ve built are probably the best deals I’ve ever made.

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

David Pere: Free content and helping others. I’m out here just trying to help others avoid some of the mistakes I’ve made along the way. So if I can help someone avoid a  mistake or answer a question for them, that’s the easiest way for me to add value.

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

David Pere: My social media handle is @frommilitarytomillionaire, but if you google “military millionaire”, I’ll pop up all over the place… And the hope is just to help other service members, vets and normal people learn how to build wealth through real estate and entrepreneurship.

Joe Fairless: Well, Dave, thank you for being on the show, talking about your 40-unit and the creative financing and a couple things that you do differently if presented a similar opportunity like the escrow fund, as well as bringing your own management team to the property immediately, regardless of how well the pre-existing team checks out.

And talking about 10-unit too, the grand slam 10-unit – that’s phenomenal. Congratulations on that. And then also talking about direct mail, too. Lots of really interesting and actionable items from this conversation for everyone, myself included. Thanks for being on the show. I hope you have a best ever day, talk to you again soon.

David Pere: Thanks, brother. I appreciate it.

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JF2092: From IT Sales to Multi Family Investing With JP Albano

JP started in IT sales and later found an interest in multifamily investing. Today he owns 70 units in Houston, Tx, and 165 units across the metro Atlanta area. His first deal was partnered syndication, where he learned a lot of lessons that he implemented in his journey forward in acquiring multiple properties. He shares some of the lessons he learned from a deal where he lost over six figures.

 

JP Albano Real Estate Background:

  • Owner, of JP Albano
  • He started in IT sales and later found an interest in MultiFamily investing.
  • Today he owns 70 units in Houston, TX, and 165 units across the metro Atlanta area which are currently undergoing successful repositioning.
  • Resides in Serenbe, Georgia
  • Say hi to him at https://www.jpalbano.com/

Click here for more info on groundbreaker.co

 

Best Ever Tweet:

“Partner with a more experienced person in a group and seek to offer value in some way.” – JP Albano


TRANSCRIPTION

Joe Fairless: Best Ever listeners, how 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, JP Albano. How you doing, JP?

JP Albano: I’m doing wonderful. I’m so excited to be here, Joe.

Joe Fairless: Well, I’m glad to hear that and I’m glad you’re doing wonderful. A little bit about JP – he started in IT sales, found an interest in multifamily investing because he wanted another way to provide for his family. Today, he owns 70 units in Houston, Texas, and 165 units across the metro Atlanta that are currently undergoing repositioning, so we’re going to talk to him about that. Based in Serenbe, Georgia. Did I say that right?

JP Albano: You got it, Joe.

Joe Fairless: Serenbe, Georgia. So with that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

JP Albano: Absolutely. So background, as you mentioned, has been IT sales; I got into multifamily as a way of trying to figure out how I can generate – I’m doing air quotes, but passive income. I’m still waiting for the passivity to kick in, but what I didn’t realize is number one, how much I would enjoy pursuing multifamily deals, and just how incredibly rewarding it is to work in an industry where everybody wants to partner and everyone wants to get things done. Compare that to my sales career, it’s a bit of an uphill battle. You’ve got customers who don’t want to talk to you, competing partners that want to sell competing products… So it’s a refreshing place where I can come into it and pick up the phone and call people and welcome the opportunity to partner and grow and build together. So where we are today, we look at assets that are B and C class. We do the value add. like everybody else.

We have a different spin on multifamily than most people. We really want to dial-up and change the way multifamily is done today by adding up higher levels of customer service, and really treating the people that live there with more dignity and respect than they’re otherwise getting today, and we’ve got a whole business model around how we do that. We look for properties that are 250 units in size, across a variety of markets here in the south and southeast.

Joe Fairless: Okay, so up to 250 or 250 plus?

JP Albano: 250 plus.

Joe Fairless: Okay, have you closed on a 250 plus?

JP Albano: No, the biggest we’ve got right now is almost 100 units. Well, we’ve had a 100-unis and a 60-unit, so in total, that’s the 165. But the biggest we have so far is a 96-unit.

Joe Fairless: Okay, biggest is 96. So why aren’t you focused on other 96 units?

JP Albano: It’s a great question. In order for us to really demonstrate our ethic and our core values for our business here at significant lifestyle communities, to demonstrate that customer service level, we really need to support the staff, and we found that in order to do that, we need properties that generate enough revenue to support the payroll “burden”, and 250, that’s the sweet spot.

Joe Fairless: Okay, so you’ve got 70 units in Houston and 165 across the Atlanta area.

JP Albano: Yes, sir.

Joe Fairless: What came first of those two?

JP Albano: The Texas properties.

Joe Fairless: Texas properties. Okay, tell us a story about the Texas properties.

JP Albano: So my first deal was really more of a key principle or limited partner in a deal. The idea going into that was that I was going to get some experience or at least talking points that I can use to leverage that with brokers and get access to more deals. What I found that is 1) it gave me more confidence, but 2) it didn’t really necessarily lead to more door openings; maybe it did, maybe it didn’t. But my real, real first deal for the Best Ever listeners here is a 28-unit property in Houston, Texas, that me and three other gentlemen, we pulled down, we syndicated. That was our first deal that we really did on our own. We syndicated the deal on top of that. Talk about baptism of fire. There’s a lot of learning opportunity there and a lot of growth that happened. What really got me excited was the personal development that came from that; coming from most people when they’re getting into active real estate investing, getting rid of a lot of limiting beliefs, the idea of “asking people for money” instead of looking at it as providing opportunities for people to get great returns; just going through all those sorts of things. But that was about a $2 million acquisition price. We raised about $700,000. We got a number of friends and family with about $20,000, $25,000 or so, and the property is currently undergoing a really successful repositioning. We had some battle with a third party property manager that seemed like he was saying all the right things and doing the right things. The problem was they weren’t really delivering. So that was a really good learning opportunity that came out of that.

Joe Fairless: Okay, please elaborate.

JP Albano: Yeah, sure. So we had a property where our business plan was to go in and renovate the units, increase the rents, the normal stuff. The problem was we weren’t getting tenant showings. People weren’t biting on the higher rent increases, our renewals were falling through, and we had very little visibility into what the current third party PM was doing. We had a portal that we can log in, we could see leads, but they use a different system outside of that to actually nurture the leads. So we couldn’t see that. So as far as we could tell, we’ve got people putting emails and phone calls in and no one really following up.

Then we found ourselves in a funny spot where we tried to move away from them and suddenly realized that that size property, 28 unit, is a funny place. It’s not small enough for the single-family people to want to care about, and it’s not big enough for the bigger real property managers to wanna deal with. So we almost were forced to take over property management ourselves, which we ended up doing. So we bought some big boy property management software, which we’re moving the rest of our portfolio into, and one of my partners who’s local to the deal took over the day to day management. I’ve gotta say, it’s probably one of the best things we ever did because in a matter of, I want to say, two to three weeks, we got all of our vacant units rented up, and we have a waiting list for our property.

Joe Fairless: You said the first deal you did was at 26 units. Did I write that down correctly?

JP Albano: Yeah, this one we’re talking about right now was 28 units.

Joe Fairless: 28, sorry. 28 units, and you syndicated it…

JP Albano: Yes.

Joe Fairless: So how much equity did you raise in the syndication?

JP Albano: The total raised was about $700,000 to $800,000 if I remember correctly.

Joe Fairless: Okay. What was the purchase price?

JP Albano: It was a $2 million purchase price. So we also raised money for the capital improvements and there was an extra, above ordinary closing costs.

Joe Fairless: Okay. Do you know about how much the legal fees were to syndicate that?

JP Albano: It wasn’t that bad. I want to say it was between $8,000 and $12,000. Yeah, it wasn’t awful.

Joe Fairless: Okay, cool. So with that deal, it was you and how many partners?

JP Albano: It was four of us total. So three other gentlemen.

Joe Fairless: Okay, and how did you split up your roles and responsibilities?

JP Albano: That was a good learning opportunity as well. That when we split up pretty much evenly amongst ourselves. Everyone got 25% from an ownership standpoint. As far as responsibilities go, we didn’t really define who would be doing what, we just had the understanding that each of us is going to contribute in whichever way was possible or wherever we need help; that sort of mentality. It worked out fairly well. As time went on, we saw that the property required a lot more care and feeding than we were expecting, simply because we were under the impression that our third party PM that we were paying money for was gonna be managing the property, but the reality was we were working on the property almost every day for the first four to six months.

Joe Fairless: Okay, so that was your first deal. Do you still partner with those same three other people on deals that you’re working on now?

JP Albano: We are still in communication on other opportunities as they come up. Absolutely, yes.

Joe Fairless: Okay, so what’s the last deal you bought?

JP Albano: Last deal we bought was – oh, this is an interesting one… This one was in October, it was a 57-unit in Hapeville, Georgia, which is a city inside of Atlanta. It’s just north of the airport in Atlanta.

Joe Fairless: Okay. Did you have the same three partners on that one?

JP Albano: No, that was a different deal, different opportunity. I partnered on that one with my current business partner, Matt Shields, on that one, and a few other friends and family. We did not syndicate that one, we just raised money from about eight other people because we bought the property for a song.

Joe Fairless: Okay, got it. So it was a joint venture then.

JP Albano: Exactly, exactly.

Joe Fairless: Okay, so you had a joint venture on that one. So tell us the business plan on that, and first off, how’d you find it?

JP Albano: That property was interesting. My real estate coach, Bill Ham, had notified me. He knew I lived in the area, and he knew that there was something that I and my team could take down. He was at the same time closing, he found himself in a situation where he was closing two properties at the same time. This one would require a lot more work, so he was a little disinterested in it. So his offer was, “Hey, pay me a finder’s fee and you guys can have the contract.” So that’s what we did. We call it a unicorn, really. It was an original owner for 60 years. You wouldn’t even tell this property existed, because when you get off the highway to get there, it’s down the street of a dead-end road. So unless you venture down the street a little bit past the trees, then you’re greeted by this oasis of a smorgasbord of different houses.

The gentleman that was running it previously, was running it as a weekly rental property, again, for the last 60 years. Rents for about $100 a week or $400 a month, and this is in a submarket where a one-bedroom apartment was average rents are $915. So we saw an opportunity to increase the rents, not necessarily to $400, but somewhere in the $500 to $600 range. We had a variety of challenges around not having actual financials. This was the definition of mom and pop. So things were written on carbon copy paper. There were no systems in place, there was very little documentation, so we had to underwrite that with really good finger in the air assumptions on things and being very aggressive with respect to what losses we can expect, things like that.

I can happily say so far, knock on my thick  Sicilian head, that things are turning out a lot better than we ever anticipated. There’s been a tremendous amount of demand for that type of housing. People have the ability to pay weekly because frankly, these people are in a financial situation where they just can’t manage their money well enough to be able to do monthly rents. And they like the area, they like the job opportunities that are there. They like being close to Atlanta. We have a waiting list and we haven’t even advertised any of the property.

Joe Fairless: With that deal, what’s been something that surprised you in a bad way about it?

JP Albano: In a bad way? I would say that– I guess I didn’t recognize or realize that the people that do live there — well, I feel like they’re trying to do their darndest best. A lot of them have sorted and troubled histories and backgrounds. I’m not surprised. I think there might be a few registered sex offenders that live there. So as a family man and a father of two children, two girls, I should say there’s that part that doesn’t sit super well with me, but at the same time, they are human beings. I’m sure that they have atoned for their sins in the legal system. So that’s probably how I would answer that question, Joe.

Joe Fairless: What deal have you lost the most amount of money on?

JP Albano: Oh, it’s a good question. So this was a deal that, as of last Monday, I should say that I learned that the deal was dead. It’s been dragging on for almost a year now. It was a 300-unit student housing property that I was part of the earnest money and due diligence contributor in the GP team; that was my contribution. The team that was running the deal lost the contract. It’s through a variety of mishaps, not being able to raise the capital, some shaky business with the loan, with the deal sponsors themselves. It’s a story for another day, but yeah, I lost a six-figure amount of money on that deal. Pretty sad.

Joe Fairless: I’m sorry that happened.

JP Albano: You know what the good part about is, Joe? It’s a good story to tell to other people in my community and other investors and show them, hey, bad things happen. And it’s okay because you grow from it, you learn from it, you make the best of it and you try to learn from those things, and that’s how I really moved on past it. Honestly, it doesn’t really bother me anymore. It’s just more [unintelligible [00:14:05].18]. It was more of a giant waste of time than anything else, and that’s really the biggest sucky part of it; just a waste of time, for no reason.

Joe Fairless: I get that. So knowing what you know now, if you were presented a similar opportunity somewhere else–

JP Albano: Oh, yeah.

Joe Fairless: –what questions would you ask, now that you know what you went through?

JP Albano: You ready? How much of your money, Mr. Deal Sponsor person or Mrs. Deal Sponsor person, are you putting in the deal? How much of your skin is in this game? And that was the problem; they didn’t have any skin in the game.

Joe Fairless: Got it. So they worked with partners. Those partners did put up the earnest money, they did not, deal fell out of contract, partners who put up earnest money lost money – is that basically what happened?

JP Albano: Exactly, exactly.

Joe Fairless: Got it. That’s a big question to ask. Any other questions? Because let’s say they say, “Oh, I’m putting in 50k of my own money.” Anything else you would ask about that?

JP Albano: I would, yeah. “Let’s also do a personal guarantee on that.” I would be comfortable with that, the personal guarantee, and also understanding how much they are on the hook for as well, and I think that’s fair. And maybe even hashing out a plan, a go-forward plan. Let’s say there’s a couple of partners in the deal and JP is being asked to contribute 20 grand or 30 grand for some due diligence stuff, whatever. “Okay, guys, what happens if we lose the 20 grand? Is everyone gonna contribute $15,000 or some amount of money to help recoup the cost?” I think that’s a fair way of doing it, and just having that conversation about, okay, what happens worst-case? Because those go down; it’s part of life.

Joe Fairless: Well, let’s reverse the focus, and let’s talk about the deal you’ve made the most money on.

JP Albano: That’s lining up to actually be this 60-year-old original owner property.

Joe Fairless: Well, let’s talk about money in the bank, as of this moment, out of all the deals that you’ve done. So the most amount of money in the bank you’ve earned from a deal to date. What is that?

JP Albano: That’s a hard one to answer because all of the money in the deals coming out of them are anywhere from $500 to $1,000 of distribution, which I’m extremely appreciative, Universe, but it hardly is that a number where anyone’s going to crash their car or hit repeat on their smartphone.

Joe Fairless: By crash their car, they’re crashing it because of excitement.

JP Albano: Actually, they’re staggered, they’re staggered.

Joe Fairless: Okay, I was wondering why they’d– that’s a lot of money. Okay, I’m gonna end it on a high note; go find the tree. [laughter]

JP Albano: The funny part about it, Joe, is I’ve been doing this for a number of years and I totally recognize this as a long, long haul game. I’m sure you’re in the same boat, and I’m okay with the very, relatively speaking, small returns right now, because I’m building something that’s going to be bigger than myself and bigger than the partners that I’m working on it.

So I see that there’s a lot of upside and a lot of impact that we can make on the people that we affect and touch in our communities and our investors’ lives as we make amazing returns to them. So that’s the part I’m more excited about right now, and the financial part will catch up to me later on.

Joe Fairless: On the 96-unit, for example, $500 to $1000 a month – I assume it’s from the 96-unit because it’s the largest one, but correct me if I’m wrong.

JP Albano: Yeah.

Joe Fairless: Was there not an acquisition fee? Is there not any–

JP Albano: Oh, yeah, you’re right. Yeah, you’re right. There was, actually. So the fee we got was a $30,000 split from that. So you’re right. Thank you for prompting my memory on that.

Joe Fairless: Okay. So you got probably like–

JP Albano: My portion was 30k on it.

Joe Fairless: Oh, well, there you go. Who needs 30k? Yeah, 30k is nothing, right?

JP Albano: I’m so good at spending money on building this business and scaling out a team that it’s really not.

Joe Fairless: Fair enough. Well, let’s talk about you’ve got the portfolio and you’re focused on finding another acquisition that’s twice as large–

JP Albano: Yes, sir.

Joe Fairless: –as what you’ve acquired, and you said at the beginning of our conversation, that you pride yourself on higher levels of customer service. Will you elaborate on how you deliver on that with the community level?

JP Albano: Yeah, that’s a great question. There’s a couple of aspects of that. One is really making people feel like they are part of a community, and I know that’s an often thrown around term, community and belonging and stuff like that. We’re building a business where that is a core, core function of our membership coordinators. The people that are greeting the prospective members and the people that want to express interest in living there.

For example, we have our people go out of their way to introduce a prospect to any other members of our community that might share similar interest, because you really want to show them that, hey, there are other people just like you that live here as well. Isn’t this wonderful? You want to learn about, ask questions about the people that are expressing interest in living in that community. And what I found is when I’m doing my secret shopping, going to different apartments, I can count on maybe one hand how many times a leasing agent actually asked my first name or even what brought me in today. The first question out of their mouth is usually, “When can you move in?” or “When do you need the unit by? How many bedrooms?” It almost goes without fail, and so I don’t feel that the industry is really delivering on this idea of excellent customer service. Especially in the workforce class housing product, where blue-collar people, hard workers, they’re honestly not used to being treated like if you were a resident at the Ritz Carlton. I don’t know if it has to be that extreme, but that’s just the direction that we choose to operate our business on. So it’s a tremendous opportunity there.

Joe Fairless: So a couple of questions that the person who greets the prospective resident asks out of the gate… What are some other tactical things that if a Best Ever listener’s listening to this and they want to implement something, what are some tactical things we can do?

JP Albano: Very basic questions, greeting them with a smile, standing up and maybe instructing your staff to be able to make it clear that they are excited that someone came in and is inquiring about your property. So asking the basic questions, what’s your name, greeting them by that name, showing a warm and caring welcome, ask them what brings them there today, and then easing into the topic rather about what brings you in and what answers can we provide to you about our community that you want to know about it.

Because reality is 80% of a person’s decision to move into your property is made when they pull up; that’s the whole curb appeal thing. The rest of the experience is either going to move the needle further in the direction of yes or it’s going to dissuade them from wanting to live there. So I just see a lot of properties falling short on that.

The other part of it too is really if your leasing agents are speaking with a prospect and Mrs. Smith walks by, and then in your conversation with this prospect you learned that they like gardening or they like dogs or whatever, have the leasing agent to go out of the way and introduce Mrs. Smith to this prospect. “Hey, Mrs. Smith, I wanted to introduce you to JP. JP here loves gardening.” What that shows you is it shows the prospect that, hey, this is a community that I can fit in, I can get plugged in right away and really have a sense of belonging. I think that’s what’s missing in multifamily housing today.

Joe Fairless: Once they are in the door, and they say, “I love to rent,” and they do rent, do you have anything within your system that delivers on that customer service aspect, that may be outside of — or when you were talking about it, were you really thinking about that initial interaction and impression with them?

JP Albano: Yeah, the initial interaction and impression is the biggest part, because they’re really just not going to get that anywhere else. At least not that I have experienced thus far.

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

JP Albano: If you’re early in your (we’ll call it) active investing or real estate investing career, you really need to show that you can close deals with brokers to win deals. It’s a very competitive market. So you’ve got two options, in my opinion – either buy a small property and you grow bigger over time. Eventually, you’ll gain credibility and the experience to show that you can close deals, and incrementally growing the unit size and your account a bit at a time.

Alternatively, option two is you partner with a more experienced person or group. Maybe you seek to add value in some way, offer help to raise capital by introducing your friends and family to them so they can start to build relationship with those deal sponsors. I guess, in a short time, you’ll start being part of the general partnership pool and you can point to those deals while you build up your investor base, allowing you to have more street cred, if you will, with those brokers, and give you the opportunity to really scale your business and scale your real estate career a lot faster.

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

JP Albano: Bring it.

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

Break: [00:22:45]:03] to [00:23:33].10]

Joe Fairless: What’s the best ever resource that you use in your business that you couldn’t live without?

JP Albano: Neighborhood Scout.

Joe Fairless: What do you use it for? Neighborhood research? [laughs] As soon as I asked that question, I was like, “Oh, that’s a dumb follow-up question,” but will you elaborate a little bit?

JP Albano: Glad to. So Neighborhood Scout is a great first pass tool to use to help get a sense of what a neighborhood or a market looks like where a property’s located without physically being there. Especially if it’s a market that you’re unfamiliar with, it’s a great way to get a sense of what the crime rate looks like, what the schools look like, what’s the median income… All the basic things you want to know before you make a decision if it’s worth to go physically there and visit this property.

Joe Fairless: Best ever book you’ve recently read.

JP Albano: Becoming Supernatural by Dr. Joe Dispenza.

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

JP Albano: So I’m an accountability coach with the Jake & Gino group. I enjoy helping students, I’m super passionate about real estate and also growth and personal development. So I like helping get them into the game. I also really enjoy pointing people in hopeful directions around health-related issues, as I’m very passionate about bio-hacking and health and fitness.

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

JP Albano: Check me out on jpalbano.com.

Joe Fairless: JP, thank you for being on the show. Thanks for talking about how you’ve built your portfolio, how you’ve partnered with others, some lessons learned on that 300 student housing project for what to do, questions to ask, and then just your overall approach to business. So thank you for being on the show. Hope you have a best ever day. Talk to you again soon.

JP Albano: Thank you so much show. I really appreciate you.

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JF2082: Four Decades of Raising Capital With Ken Holman

Ken has over 40 years of real estate investing experience and has done all types of real estate deals like self-storage, industrial properties, golf courses, retail lots, and apartments. Ken has had to raise money multiple times and during this episode, he shares some advice on how he raises capital and the insights he has learned over the years.

Ken Holman Real Estate Background:

  • President of Overland Group and National Association of Real Estate Advisors
  • 40 years experience in real estate
  • He has brokered, developed, constructed and owned over $500 million in real estate assets
  • Experienced in owning commercial, industrial properties, self-storage, golf courses, retail, and apartments
  • Based in Salt Lake City, UT
  • Say hi to him at: https://overlandgroupinc.com/ 

 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Make sure every deal you do is a good deal. Don’t settle for mediocre projects because you’re anxious to get started.” – Ken Holman


TRANSCRIPTION

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

Ken Holman: I’m great, how are you doing?

Theo Hicks: I’m doing great as well, thanks for asking and thanks for joining us. I’m looking forward to our conversation. A little bit about Ken – he is the president of Overland Group and National Association of Real Estate Advisors. He has 40 years of experience in real estate; he has brokered, developed, constructed and owned over 500 million dollars in real estate assets. Experienced in owning commercial and industrial properties, self-storage, golf courses, retail and apartments.

He’s based in Salt Lake City, Utah, and you can say hi to him at OverlandGroupInc.com. So Ken, do you mind telling us a little bit more about your background and what you’re focused on today?

Ken Holman: I’d be happy to. I guess the primary thing that I’ve been involved with over the years has been apartment development. I think I’ve done a dozen or more large apartment projects, ranging anywhere from probably 150 units up to 440 units. Along the way, that’s led to other opportunities. We’ve done several retail projects, mainly Dollar Store type investments… And built a golf course, done some other industrial and office properties. But the core business has been primarily apartments, and also self-storage projects.

What we’re doing today is we’re building an apartment project in St. George, Utah. 116 apartment units. We’re really excited about that. We raised about six million in investment capital on that real estate syndication… And we are doing a couple deals over in Mesa, Arizona. One’s a 580-unit self-storage project. We raised about 2,5 million on that project. It started construction this week, so we’re excited about that.

We’ve got a 240-unit apartment project we’re doing over there, and a 100-room hotel that we’re doing also in Mesa. We raised about 15 million, which has been fully-subscribed, on the 240-unit apartment development… And then the hotel – we haven’t started that raise yet, but… That’s what our company does.

We’re a fully-integrated real estate company. We do brokerage, construction development, capital raising through our syndication, and also property management. So we try to cover the whole gamut of real estate projects, from beginning to end.

Theo Hicks: Thank you for sharing that background. I think a lot of our listeners are gonna be interested in some of your money-raising tactics. You talked about a six-million-dollar raise, a 2.5-million-dollar raise, a 15-million-dollar raise… Do you mind giving us a few tips? Firstly focusing on someone who’s just wanting to get started raising money. And we’re gonna also talk about some tips on scaling to being able to raise over 15 million dollars for a deal.

Ken Holman: Yeah, that’s a big deal actually, to be able to raise that much on a single project… But I started out with my first deal being a little family Dollar Store that we were gonna build in Thermopolis, Wyoming, of all places. I needed to raise $150,000, and I started thinking “Okay, how do I do this?” You get a little reluctant going to family and friends, and trying to beg money from them… So what got me started was I had a self-directed IRA company approach me and ask me if I would give a presentation to them on that particular little family Dollar deal.

So we went over to Boise, Idaho, of all places, and gave a presentation, and walked out of there with 150k in commitments… And I thought “Man, this is pretty fun.” That was a cool way to raise equity capital, so we started getting pretty familiar with how to do self-directed IRAs. Then that branched into self-directed 401K’s, then we developed our expertise in doing 1031 tax-deferred exchange deals.

Then we started getting a reputation for being able to raise discretionary income, and that’s how it all began… It just started evolving. In fact, I don’t know that there’s anybody else out there doing this, because it’s a pretty sophisticated model. But we can take people with discretionary investment capital, with 1031 exchanges and with IRAs and 401K’s, and marry them all into a single project. It gives us a capacity to raise a lot of investment capital that way.

And then we’ve tied in with a couple money-raising funds that really love our projects… And that’s just expanded our capacity to be able to raise equity capital. So it’s been kind of a fun ride, and you’ve gotta have some good people around you to be able to put those deals together… But I think we do, and we’ve developed a really nice product.

Theo Hicks: That was another question I was gonna ask you, it was about your team… But I do wanna ask one follow-up question. Well, I guess two. One will be quick. So we talked about how you’re able to take 1031 exchange investors, IRA investors, 401K investors and wrap them into a single project. You mentioned that is very sophisticated… Just very quickly, if someone wants to do something like that, where can they go to learn more about how to do that process, or is that something they should talk to their securities attorney about? What advice do you have for that kind of person?

Ken Holman: I’ve had to educate some securities attorneys and some 1031 intermediaries on how to do this… So I don’t know that you can go to one single source and get some guidance on how to do it. I’ll give you a quick overview of how it’s done, but that’s where the secret sauce is. That’s why I want everybody who come to our company to be able to do that.

LLCs have the ability to sell basically units, ownership interests in the LLC, and you can bring in investor capital that way. Self-directed IRAs and self-directed 401K’s – the same thing; they can buy units or ownership interest in LLCs. But 1031 tax-deferred exchanges don’t have the ability to do that. They have to do like-kind exchanges; so you’re selling one investment property and buying another investment property.

We see a lot of people with smaller single-family homes, duplexes, fourplexes, that are kind of tired of doing management themselves and would like to get into bigger projects that have more potential, and the possibility of higher returns… So often we see them sell their assets and 1031 into one of our deals. I usually limit the amount of 1031 capital to basically the value of the land. So they can 1031 into the land that we’re acquiring or have acquired, and then we marry that all into what’s called a tenant-in-common agreement, or some people call it a TIC agreement.

TIC agreements in the past have been a bit of a dirty word for 1031 investors, just simply because they’ve been mismanaged, or you get somebody in there that doesn’t know what they’re doing. In our case, it just becomes the mechanism that we use to blend the 1031’s with the LLC investors. So that – you’ve got more than I tell anybody else almost.

Theo Hicks: [laughs] I really appreciate you sharing that with us. Okay, so my other question is you mentioned that one of the reasons why you’re able to do a sophisticated process like this, able to raise so much money is the team. Let’s say I’ve got a business and I’m ready to bring on my first team member; who’s the first person I should bring on?

Ken Holman: That depends… You’ve gotta have a good acquisitions person. That usually is me. I like to handle the acquisition side of our business. And then the supporting cast… I’ve got a son who’s a CPA, and he runs our accounting and our investor relations department, and he and I team up on the development side… So you’ve gotta have somebody that understands acquisitions, somebody that understands development… Reporting is a big deal when you’re raising investment capital. And I didn’t understand that early on, and that’s probably one of the bigger mistakes that I made – I just raised the money and thought “Okay, we’ll do this deal and I will tell everybody when it’s done and we’ll get going, and we’ll make distributions as the project stabilizes.” And we did that, but I have found that investor communication is a real key.

You’ve gotta keep them informed and let them know what’s going on every step of the way. If you do that, they begin to trust you and you develop a relationship with them where they not only wanna do one deal with you, they wanna do several deals with you. So that’s been a side of the business my son Mike brought into the program.

And then because we also do construction, you’ve gotta have a good construction team. Our model is we don’t try to self-perform all of the scopes of work on a construction project; we just oversee the whole project. So we do project management, project engineering estimating and superintending. So we put our superintendent on a project, but we don’t try to self-perform all of the sub-trades. That’s made it so we can move around the country and work in almost any state, which is really good. We’ve been in probably seven or eight states now that we’re licensed in, which is good.

Then you need a securities attorney, and there are different types of securities attorneys, frankly. There are some that throw more roadblocks up than actually are helpful in getting  the private placement memorandum done. And/or they’ll make the private placement memorandum, which is called the PPM, so darn difficult, and with so much legalese in it that it scares away the investors.

So you’ve gotta be able to work with a securities attorney that understands investing and how to work with investors, so that you get all of the disclosure in there that you need to, but you’re not putting so much difficult language in there that it scares people away.

And then obviously you need to develop several sources of fundraising. That includes doing your own webinars, things like what we’re doing here today. Also, any other funds that like to invest with you… And they’re out there, but they’re also looking for really experienced people. So they generally won’t work with a newbie right out of the gate.

Theo Hicks: Perfect. Okay, Ken, so for someone who wants to  be in your position and have been involved in over 500 million dollars in real estate transactions, what is your best ever advice?

Ken Holman: Oh, my gosh… Best ever advice maybe is two or three-fold. One, make sure that every deal you do is a good deal. Don’t settle for mediocre projects because you’re anxious to get started. That would be number one. Number two, do what you say you’re gonna do. When you’re raising equity capital, do the very best you can to inform them on what they need to do and how they need to do it and what your timeframes are, and then work really hard to stick with those.

And then I guess the last piece of advice is communicate. Just keep them informed every step of the way; whether you’ve got good news for them or bad news for them, make sure you’re always there, telling them where you are and what you’re doing, and if it’s bad news, just be straightforward with them and let them know where you’re at. They’d rather hear that than not hear anything.

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

Ken Holman: Oh, my gosh… I guess. Let’s try it and see what happens. I  may fail, but you never know.

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

Break: [00:16:36].23] to [00:17:20].15]

Theo Hicks: Okay, what is the Best Ever book you’ve recently read?

Ken Holman: What did I really like right now that I’m reading, I’m kind of excited about is a book called “Start With Why” by a guy named Simon Sinek. He talks a little bit about how great leaders motivate and inspire other people, so that’s been kind of a fun book to read.

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

Ken Holman: I’ve been in this business 40 years,  man… I’d retire. I’ve had some people already tell me I should retire, but I’m having too much fun, so I don’t see any reason to stop yet. But if my business were to collapse, I’d probably take a little time off, buy a new suit, and then I would probably get started again, doing exactly what I’m doing… Because I’ve learned how to do it, and frankly I’m pretty good at it, so… I think it’d be possible to do it again.

Theo Hicks: What deal did you lose the most money on? How much did you lose, and then what lessons did you learn moving forward?

Ken Holman: Well, I’ve been in the business enough years that I’ve been through more than one real estate cycle, and probably the hardest real estate cycle that we dealt with was back in the Resolution Trust Corporation days, when the 1986 tax reform act happened… And they didn’t even have what was called passive losses; they didn’t have those. But the losses that you generated in real estate through depreciation, you could write off against ordinary income. They disallowed all of that; it completely changed the business. 5,000 savings and loans went out of business, and we really struggled with properties. During that era, occupancies went from 90 down to 50, and we lost some properties back then, as did everybody else. Some of the big players went out of business… So that was just not a good era.

Today I see this Coronavirus and I see a few things happening, but what we’ve got going on right now in terms of its impact on the real estate business is just not that great compared to what some other downturns have had… So that’s my worst situation; it’s a long answer to a short question, sorry.

Theo Hicks: I didn’t know about that, so thanks for sharing that. So what is the best ever way you like to give back?

Ken Holman: I have two or three ways that I give back. I’ve been a member of Rotary International for a long time. I was one of the founding members of my club here that we formed, and they have a program called the Paul Harris Fellowship, which is with the Rotary Foundation, and you can contribute money to that, and then that goes into all sorts of humanitarian efforts.

I also contribute to a humanitarian program with our local church. And then I’ve helped organize several Blood Drives with the American Red Cross, which has been cool.

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

Ken Holman: Probably the easiest place to reach me is on my email address, which is kholman [at] overlandcorp.com. You reach me there at any time and Natalie, my assistant, just keeps on top of that, so we’re pretty good at responding when we get emails.

Theo Hicks: Well, Ken, I really appreciate you coming on the show today and sharing your advice, and I also appreciate you sharing your email address. So Best Ever listeners, make sure you take advantage of that. It’s rare that a guest with this much experience gives away his personal email address… So make sure, again,  you take advantage of that.

Just to summarize some of the biggest takeaways that I had – you kind of gave away your secret sauce a little bit about raising capital…

Ken Holman: Don’t tell anybody, okay?

Theo Hicks: I promise I won’t tell anyone. So you wanna relisten and listen to that. You also gave us some advice on what to do to get to the point of being able to raise such large amount of capital, and sort of how you started with a small $150,000 raise, and obviously are up to 15+ million dollar raises… It sounds like it is just slowly stepping your way up and gaining reputation, and as you do more and more, you learn more, you know more, and you attract more and you attract more people to you, assuming you’ve been successful.

Ken Holman: Yeah.

Theo Hicks: And then also you  mentioned how you eventually were able to work with funds as well, so I’m sure that was also helpful.

Ken Holman: Yeah.

Theo Hicks: You broke down the different team members that someone would need to do what you do, and then you gave your three-fold best ever advice for someone who wants to grow  up to doing 500 million dollars’ worth of transactions. Number one, make sure that every deal you do is a good deal, so don’t settle just because you’re anxious to get started into your first deal. Number two is to do what you say you’re going to do in raising capital; whatever you say that you’re gonna do to your investors – make sure you stick to that. And then number three was to communicate with your investors. Keep them informed every step of the way, with the good news and the bad news. They’re rather hear the bad news from you than not hear it until it starts affecting their money.

Ken, again, I really appreciate you coming on the show and 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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JF2074: Underwriting Adjustments During COVID-19 | Syndication School with Theo Hicks

Theo is back with another Syndication School episode and this time he is going over the adjustments to make when underwriting deals during this 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. 

Click here for more info on groundbreaker.co


TRANSCRIPTION

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: Hi, Best Ever listeners. Welcome 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 air two podcast episodes that focus on a specific aspect of the apartment syndication investment strategy. For the majority of these episodes we offer a free resource that will help you along your apartment syndication journey. All of these free resources, as well as free Syndication School episodes can be found at SyndicationSchool.com.

In this episode we’re going to go back to talking about the Coronavirus. We took off about a week or so, and we’re gonna jump back into it because today I want to talk about some of the changes that Joe and Ashcroft Capital are making to their underwriting of value-add apartment deals during and then probably after the Coronavirus pandemic.

The purpose of this episode is going to be to outline the four main changes that Ashcroft Capital is making to the underwriting of new deals currently, and then for the — I won’t say foreseeable future, but at least for maybe the next few months after the Coronavirus pandemic is over.

Overall, the underwriting changes really need to be on a deal-by-deal basis, because different markets have different rules as it relates to Coronavirus. This means that the economy is being impacted differently… But there are a few items – four items in fact – that Ashcroft thinks are important to consider.

First is going to be year one operations. It should be expected that there will be an increase in things like vacancy, bad debt and concessions throughout 2020. And then once things settle down a bit and the economy reopens, it is also possible that some residents will no longer be able to afford living at the property. So the two things – number one, some of the income loss items, like vacancy, bad debt and concessions. When you’re making your assumptions, you should be projecting that they will be higher than usual. Based off of the T-12 or current market rates, you can’t really use those for vacancy, bad debt and concessions right now, because it’s a different environment, and once the Coronavirus ends, it will also likely be a different environment.

Secondly, once the economy reopens, the residents that are currently living at that property – so if you buy a property now, once rent repayment programs are ended, or rent delays are ended, evictions are allowed again, maybe expect to have to evict more tenants than you usually have to, because they’ve just been living there and maybe paying partial rent, or just doing what they could… But once it’s over, they can no longer pay the full amount. That’s year-one operations.

Number two is rent growth. The rent growth for 2020 in the vast majority of markets is projected to suffer, as unemployment rises. But the silver lining is that most of any rent lost in 2020 is expected to be recovered in 2021. From my understanding – I believe I’ve talked about this in one of the episodes – the rent growth is supposed to suffer; rent growth isn’t gonna go negative, it’s just going to be less. I’m pretty sure the most recent calculation I saw was about 1.3% percent, as opposed to 2%, 3%, 4% we’ve been seeing for the past decade or so.

Apparently, this dip is supposed to be temporary… So this dip in rent growth to the 1% range is temporary, and then in 2021 it’s supposed to go back to what it has been before. Obviously, when you’re underwriting a deal, the year one rent growth and year two rent growth should reflect the immediate area and the demand in the market. So obviously, you don’t wanna just use the 1% average. You wanna figure out “Okay, what do the experts think will  happen to rent in this specific market in the next two years?” And then probably be even more conservative and assume that it might be less than that. That way if it’s better, great. If not, then you’re still able to hit your returns to your investors.

Where does this information come from? Your management company. We’ve talked about the importance of your property management company, how to find a property management company, so you can find all that information at SyndicationSchool.com.

Number three is going to be debt. As of right now, most private lenders – these are basically the bridge lenders; the ones that do the 2-3 year renovation type loans – are taking a pause from lending. But lenders that are still active are being extremely conservative with their loan proceeds and terms.

I talked in a previous Syndication School episode about JP Morgan Chase, for example, has changed their lending criteria; this is for residential loans, I understand that, but it’s just an example of a lender becoming extremely conservative. They’re only lending to borrowers with a credit score of 700 or more, and who can put down 20% or more. So that definitely limits the pool of people who can get residential mortgages.

Similarly, other lenders are doing the same for commercial loans. I think one of the biggest changes is the reserve amounts that are required. Now, the agencies are lending, but they are also being conservative on their underwriting and requiring large upfront reserves for debt service payments. So the reserve requirements are changing. Typically, you create an  upfront reserves account called an operating account for unexpected things that happen at the property, but now in addition to that you need another upfront amount of reserves that are a lender requirement.

So more conservatives proceeds should be underwritten, and the underwriting needs to include these upfront reserves, as they will  impact the equity required to fund. So you’re gonna need to raise additional money now from your investors, even though the cashflow is not going to be going up. Typically, if the deal is cash-flowing $100 per door and you need to raise X amount of money, well now that deal might be cash-flowing $75 per door and you need to raise even more money from your investors. That’s why if you’re looking at deals right now, you’re gonna have to negotiate a lower purchase price because of these new lending criteria, and the rent growth, and the year-one operations that I’ve talked about previously.

So what does that mean more practically? Make sure that you ask your lender or your mortgage broker about the new loan-to-value requirements, the new upfront reserves requirements, and other terms that you need before you submit an offer on a deal. So you need to have an understanding of whatever lender you’ve been using or you plan on using, what are the terms of the loans they’re offering, what are the LTV terms, how much money do you need to put down, how much money do you need as upfront reserves, what are the interest rates, what’s the amortization? Is there anything that I need to  know that’s changing, so that I can underwrite my deals properly? Because if you don’t know what the debt is going to be, it’s gonna be impossible to submit correct offers on deals.

And then lastly, for value-add deals, depending on the deal, many owners are pausing their interior renovation programs until the market is restabilized… So when you’re underwriting a deal, it may be wise to assume that the value-add program does not start until the overall market stabilizes.

Now, this is something that’s gonna be obviously up to you, depending on the state you’re investing in, or the local area you’re investing in, if construction is considered an essential service, if construction companies are still working, things like that… But you need to think about “Okay, I plan on going in there, renovating all these units and doing all these exterior upgrades”, but what are the typical ways that you renovate interiors? Exterior renovations are likely fine, assuming that business is essential in your state, but interior renovations is the one that might be delayed because of the fact that residents aren’t able to move out right now.

So again, to summarize, the four changes that Ashcroft are making – and again, these four points came straight from the director of acquisitions at Ashcroft Capital – is the year-one operations. Things like vacancy, bad debt and concessions should be assumed to be higher, at least during year one. Rent growth should be assumed to be lower than  previous years, so whenever you’re underwriting your annual rent growth increases, or even when you’re determining what your rent premiums are going to be, you need to have a detailed conversation with your property management company to determine how to calculate that. So annual income growth is typically 2%-3%. You definitely wanna be underwriting maybe a 1% or 1,5% at least for year one and year two… And then when it comes to rent premiums, again, you have to see what’s the demand for those units in the immediate area? What are the prices on the newest leases in that area? It can’t be leases from a year ago or six months ago, or really even two months ago. It needs to be probably within the last few weeks to a month – what are the rents being demanded for those specific units?

Number three is debt, so making sure you have a conversation with your lender, so you know exactly what types of terms they’re offering on their loans now, including what sort of upfront reserves requirements are needed.

And then lastly, for the value-add deals, understanding that you’re likely going to need to delay any interior renovations until the market restabilizes and Covid is gone, because you’re not allowed to evict people, tenants are probably moving a lot less because of the Coronavirus… So those are four things to keep in mind when underwriting deals.

Obviously, if you are out there underwriting deals, I’d love to hear from you what you’re doing, so we can maybe add to these four points. So if you have any advice, any things that you’re doing differently when underwriting, please let me know by emailing Theo@JoeFairless.com. And of course, anyone who reaches out and I include their information – obviously, it won’t be in this episode, but I’m gonna turn this into a blog post, so I  will definitely give you a contributor status for the blog post, since you contributed to underwriting advice to the document.

That concludes this episode. To listen to other Syndication School series about the how-to’s of apartment syndication and check out some of our free documents, please visit SyndicationSchool.com.

Thank you for listening, have a best ever day, and I will talk to you soon.

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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JF2073: How To Calculate Class A and B Return Projections | Syndication School with Theo Hicks

In this Syndication School episode, Theo will first review the difference between Class A and Class B investors. Afterward, he will share with you how to calculate the projected returns for each class, and to follow along with Theo you can download his free excel document below.

Free Class A and Class B document

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. 

 

Click here for more info on groundbreaker.co


TRANSCRIPTION

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: Hi, Best Ever listeners. Welcome to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I’m your host, Theo Hicks. Each week we air two podcast episodes that focus on a specific aspect of the apartment syndication investment strategy.

For the majority of these episodes we offer a free document. These are free Excel template calculators, free PDF how-to guides, free PowerPoint presentation templates, some sort of resource that will help you along your apartment syndication journey. All of these free documents, and past free Syndication School series are available at SyndicationSchool.com.

In this episode we are going to talk about how to calculate the returns to limited partners when you have a two-tiered path of investment structure. What does that mean? Well, generally when people get started as syndicators, they offer one investment tier to their investors, and it’s either a preferred return only, a profit split only, or a combination of the two, with the most common being an 8% preferred return, and then a 50/50 or a 70/30 profit split.

Now, as you gain more experience, or even at first, you might decide to offer two investment tiers – class A and class B. Our episode is focusing on what are the differences between class A and class B. I’m gonna do a quick refresher on that, talking about the advantages and disadvantages of each, and then I’m gonna talk about how to actually calculate the return on investment and the internal rate of return to investment tiers.

For this episode, I’ll be giving away a free document. It will be a  calculator that will allow you to automatically calculate the ROI and the IRR based on the steps I discuss in this episode. So I’ll talk more about that free document here in a little bit.

First, let’s just do a refresher on class A and class B. Class A, investors sit behind the debt in the capital stack, which means that when all expenses are paid, including the debt, the next cash goes to the class A investors. Class A investors are offered a preferred return that is generally higher than the preferred return offered to class B investors.

On Ashcroft deals, the class A preferred return is 10%. Class A investor have virtually no upside upon disposition or capital events, nor do they receive a split of the ongoing profits. So they are getting the 10% or whatever the preferred return is, and then that is it. But in order to be taxes the same as class B investors, they do get a very small piece of the upside, that varies from deal to deal… So they do get a small piece of the upside for tax purposes, but overall they’re not given a large upside in the deal.

In Ashcroft deals the class A tier is limited to 25% of the total equity investment, and the minimum investment is $100,000. So the reason why is because let’s say year one the project cash-on-cash return is only 7%, and you may say “Oh, well I can’t pay my 10% preferred return then.” Well, if only 25% of your investors are offered a 10% preferred return, then you can hit that preferred return of 10% to that portion of investors. I’m not sure exactly how that math will work out, but as long as these class A investors aren’t making up a large portion of your investor pool, then you don’t need to have a 10% project cash-on-cash return to distribute 10% to the class A limited partners.

Now, of course, other syndicators may offer a different preferred return, or have different equity percentages or different minimum investments. That’s just what Ashcroft does currently, and I just wanted to give you an example.

Class B investors sit behind class A, so all expenses go out, including debt, and then class A investors get paid, and then class B investors get paid with what’s left. But they sit in front of the general partners generally in the capital stack, so they get paid before the GP is paid.

Class B  investors are offered a preferred return that is lower than the preferred return offered to class A investors. On Ashcroft deals that return is 7%, compared to that 10% for Class A. If the full preferred return cannot be paid out each month, or each quarter, or each year, depending on what the payment frequency is, then it accrues over the life of a deal.

Class B  investors do participate in upside upon disposition or capital events. On Ashcroft deals the split is 70% of the profits up to a 13% IRR, and then 50% of the profits thereafter. The Class B  minimum investment for Ashcroft is 50k for first-time investors and 25k for returning investors. Actually, now that I’m thinking about it, I think that Ashcroft recently reduced the class A minimum investment to 50k. [00:09:04].21] and really all other types of tiers offered. Syndicators may offer different preferred returns, profit splits, different minimums for these class B investors.

So since class A investors are in front of class B investors in the capital stack, they are paid first, plus the class A investors are offered a higher preferred return, therefore the class A tier is a deal for investors who prefer a stronger ongoing cashflow… So they’re more likely to get this cashflow, and it’s higher than what it would be if they were class B.

Since class B investors are sitting behind the class A investors in the capital stack, they are paid what is left over after the class A have received their preferred return. So if the full preferred return isn’t met, it accrues and is ideally paid out upon disposition or a capital event. So class A investors are offered a lower preferred return, but they do participate in the upside upon disposition or capital events like  a supplemental loan or a refinance… So the overall return over the life of a deal is higher for class B investors, compared to class A.

Class A is gonna get 10% a year, or whatever that percentage is, class B might get less than their preferred return year one, maybe 5%, but maybe eventually their cashflow goes up to 9% or 10%, but then they’ll get a massive 20% return on investment at sale over the life of the investment. It’s really at the end where they surpass the class A investors.

So the class B tier is ideal for investors who want to maximize their returns over the life of the investments. And if I’m the person who wants both – if I want strong ongoing cashflow AND to participate in the upside, typically that passive investor will be allowed to invest in both. So if you have a passive investor that wants to do both and you’re offering class A and class B, they should be able to invest a portion in class A and a portion in class B. So that’s what class A and class B are, as a reminder.

Now, how do you calculate the returns? I recommend downloading the document and having it open right now in Excel, but I will assume that you don’t have it open, and I will do  my best to explain exactly how to calculate. At the end I will discuss in more detail how the free document works. So the first thing that you need to know in order to calculate the returns to class A and class B investors are 1) total equity investment. So this is the total amount of money that you as a syndicator raised from investors for the deal, because that’s what’s gonna be their capital account and that’s what their return is gonna be based on… And then assuming it’s a five-year hold, you need the project-level cashflow; that’s income minus expenses gives you the NOI. NOI minus debt service gives you the cashflow. So you need the cashflow for year one through year five, as well as the sales proceeds.

Basically, you have year zero a negative amount of money technically, because that’s what the investors are paying, and then year one, year two, year three, year four, year five you’ve got your cashflow coming in positively, and then for the sales proceeds it’s just the profit remaining after all expenses are paid at sale. If you’ve downloaded the simplified cashflow calculator, it should be as easy and copy and pasting these figures into this model. As a reminder, the sales proceeds is the sales price minus the debt owed to the lender, minus any closing costs you need to pay for, minus any other costs associated with the sale, like disposition fees, broker’s fees… And then what’s remaining is the total sales proceeds. So that’s one bucket of numbers that you need.

Next you need to determine what the structure is going to be for class A and for class B. So for each, you need to know what the preferred is going to be, and what the profit split is going to be. So for the purposes of this document, the preferred return to class A is 10%, and the profit split is zero. For class B the preferred return is 7% and the profit split is 70%.

Now, the next step is to determine what that preferred return amount looks like for class A and class B. Basically, for class A you need to determine of the equity investment which portion is class A. To keep things simple, in this calculator it’s just set at 25%; obviously, you can go in there and manually adjust it if you want to. Class B is set at 75%, but you can go in there and manually-adjust it, if you want to.

So you’ve got 25% of the equity investment, you multiply that by the preferred return percentage of 10% to get the preferred return amount. Same thing for class B. So Class B  you take 75% or whatever percent of the equity investment, multiply it by the preferred return, which is 7%, and you’ve got the preferred return amount owed.

Now, if you remember, class A is paid first. So when you’re looking at your year one cashflow number, you take your year one cashflow and you subtract the class A preferred return amount completely out of there. And then what’s left over is what goes to class B investors.

Now, let’s say that year one you are able to cover the entire preferred return amount to the class A investors, but the cashflow that’s remaining is not enough to cover the preferred return owed to the class B investors. Obviously, they’re still going to get paid, but it’s not gonna be full. So in the sample cashflow calculator that you download it shows that the class B investors only get a 3% return on investment year one, as opposed to 7% preferred return that they’re owed. Every time that happens, for every year that happens, you need to track how much of the preferred return is actually accruing. So if they’re given a 3%, then they’re owed an additional 5%. So that’s going to accrue.

Now, for this particular document the way I have it set up is that it accrues and then it is paid out at sale. I’ll talk about how that happens later, but it’s not gonna be paid out the next year, it’s gonna be paid out at sale. If you want to have it paid out the next year, you’re gonna have to do some manipulations to the cashflow calculator.

Basically, you repeat that process for each year. This is how it works in this cashflow calculator. Let’s say at year two you take your full cashflow  for year two, you pay your class A investors their preferred return if the remaining amount is greater than the preferred return owed to the class B investors. So class B gets their full 7%, so the profits remaining after the 10% is paid to the class A, after 7% is paid to class B, that extra cashflow is going to be split. In this case, 70% goes to class B and 30% goes to the general partners.

Now, typically, profits are considered a return of capital, preferred return is considered a return on capital. So whenever capital is returned to them, then their capital account reduces. Now, in Ashcroft deals the preferred return is always gonna be based on the original investment, and then the general partners will catch up at sale. So what that means is whenever the class B investors are receiving a profit split, you need