JF2151: Construction Owner and Investor Point Of View With Jorge Abreu

Jorge Abreu decided to leave real estate because he was not passionate about working in the corp world. He ended up developing a construction company called JNT Construction and now is the CEO of Elevate, a commercial investment group. He is now a full time active and passive real estate investor with 14 years of experience. 

 

Jorge Abreu Real Estate Background:

  • CEO of Elevate Commercial Investment Group and owner of JNT Construction
  • Is a full-time active and passive real estate investor with 14 years of real estate experience
  • He has wholesaled 200+ properties, flipped 100+ and developed several construction projects from the ground up
  • Current portfolio consists of 1,720 doors as a GP and 1,400+ as a LP
  • Based in Dallas, TX
  • Say hi to him at: www.ElevateCIG.com 

 

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Best Ever Tweet:

“If a contractor doesn’t have a presence online, it is a huge red flag.” – Jorge Abreu

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JF2148: Self Storage Classified As A National Park With Scott Krone

Scott is the founder of CODA Management Group with experience in architectural design and development. Scott shares his journey in real estate and the reasons he determined to shift towards self-storage and now he owns a self-storage space that is now a national park location. He shares how he was able to get his building under the national park registrar. 

Scott Krone Real Estate Background:

  • Founder of CODA Management 
  • Has 25 years of development and design building experience
  • Portfolio consists of over 47 syndications, and 400,000 sq. ft with 2,750 storage units under management
  • Based in Wilmette, IL
  • Say hi to him at: https://www.codamg.com/ 
  • Best Ever Book: 

 

 

 

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Best Ever Tweet:

“Simplicity of product, we took the Henry Ford model, “you can have any color car you want as long as its black” – Scott Krone


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, Scott Krone. How are you doing, Scott?

Scott Krone: I’m doing well. Thanks for having us.

Joe Fairless: Well, I’m glad to hear that. It’s my pleasure. A little bit about Scott – he’s the founder and director of development for CODA Management Group. They focus on self storage facilities, and in fact, not only do they focus on it, they develop them. They’re in the process of closing on their eighth self storage facility. They have about 2,000 units right now with about 3,000 that are coming online soon. Based in Chicago, Illinois. With that being said, Scott, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

Scott Krone: Sure. I’d love to. My background began in real estate when I began getting my masters of Architecture, way back in 1991. So I’ve came online just as we were in the midst of the recession back in ’91, and I was involved heavily in multifamily at that point in time, and then 1998, I started CODA and we were a development, design-build firm, and we focused on single-family, multi-family, mixed-use apartments. Now, since ’13, we’ve been focusing on self-storage as our investment portfolio. So during that time, I’ve obviously seen the ’91 and the 2001 and 2008 recession, and it certainly looks like we’re heading into it at this point in time.

Joe Fairless: So development, design, build; originally focused on multifamily and single-family homes. Did I hear that correct?

Scott Krone: That is correct. When I got my master’s degree, I was working for a developer who owned an architectural design-build firm as well, and my master’s thesis was a 400-unit development that we worked on for six years, and I did other multifamily for him during that period of time.

Joe Fairless: Okay. What did you learn in that process that focused on multifamily development, design-build that you’re applying now with self-storage?

Scott Krone: Well, the way I view it is self-storage is just a more simplistic version of multifamily; it’s an apartment without toilets and sinks. But we have a greater diversification within the product type, but what I did learn is obviously, the importance of understanding the capital stack, how to leverage the capital stack in a conservative manner, but also to enhance our investors’ rate of returns, how to acquire, how to develop efficient designing of the units and the layouts so that we can maximize the rentable square footage of the building, and then obviously, I also learned throughout the construction, the best practices for building and how we can apply that to self-storage.

Joe Fairless: Well, let’s talk about a couple of those things that you mentioned – how to leverage the capital stack in a conservative manner, but also help yield good project returns to investors. Can you give some specifics on that?

Scott Krone: Absolutely. A few things that we’ve done is that we’ve acquired assets that had cell towers, and we’ve sold off the cell towers, other buildings that we’ve been able to acquire historic tax credits. So those historic tax credits get funneled back to the investors. We’ve done PACE financing, we’ve done opportunity zone funds. We’ve created two funds for our investors on that, so they can shelter their capital gains. We’ve worked with IRA investors… And the other one is obviously cost segregation. So something that we can do with cost segregation on an apartment or self-storage facilities that we couldn’t do with condominiums.

Joe Fairless: For the efficient designing of the layout to maximize the rent per square foot and just not overbuild unnecessarily, what are some things you learned there?

Scott Krone: Well, efficiency is the most important thing when we’re looking at something. So minimizing length of hallways, how to create variation within the unit product type. So the more regular the building that we have and the more regular the common spacing, the more efficient that we can get. So we have to balance the building code with the travel distances and egress and all those sorts of things, but how to lay out the units so that we can reduce those hallways and those travel distances so that we can get more square footages of rentable square footage of the building.

Joe Fairless: With what you’re doing now, self-storage, as you said, you look at it as a more simplistic apartment community; it’s an apartment that toilets and sinks. Why switch over to self-storage and why switch over at the point in time that you did?

Scott Krone: Well, we were coming off the crash of 2008, 2009, and everyone was jumping into multifamily. I felt that there was huge cap compression going on and there was a lot of competition within it. And when I began studying the self-storage, I couldn’t find a distressed self-storage facility. I could find plenty of distressed apartment buildings, but I couldn’t find a distressed self-storage. So that alerted me that something was different with this asset class. Once I got more involved with them, then I understood more of the demographics and how we can study the market to determine which areas need self-storage and which ones are oversaturated, and so it was easier to monetize or put a number to the product than it was within multifamily in terms of demand, where the supply is and what those indices were.

So what I see is that one, it’s a reduced risk because we can analyze it better; two, my operational costs, my capital expenditure’s about 10% of what it would be compared to multifamily to get the same number of units, and then the third one is it’s the simplicity of product. We take the Henry Ford Model that used to be famous for saying you could have any color car you want as long as it’s black. So with self-storage, I don’t have to worry about if the counters are the wrong color or the tiles the wrong color or the carpet is. You can have a white locker or you can have a white locker.

Joe Fairless: How do you determine the demand for self-storage? You were talking about that earlier; I would love to learn more.

Scott Krone: The metric is the number of square feet a locker per capita, and there’s services out there that can provide that, and it’s based upon a one, three and five-mile radius. So for the most part, across the country, the saturation level of square feet of lockers per capita is seven, and higher density markets like New York or places in Florida, it might be nine, or the South– the South is becoming very saturated now.

Joe Fairless: You said most markets. Is that based off of a one, three or five mile?

Scott Krone: Yes, they’ll look at each of those. So for instance, you might be high within one mile, but if three miles and you’re good, then they’ll broaden it to the three-mile, because most buyers are within three miles in a heavily urban setting. In a more rural setting, there’ll be five to seven and a half miles. Most people won’t travel more than seven miles to go to a self-storage facility.

Joe Fairless: Alright. So it’s number of square feet of locker per capita, and it’s based off of a one, three and five-mile measurement, and you said most markets are 7,000 square feet or what– you said, 7.

Scott Krone: 7 square feet of lockers per capita.

Joe Fairless: 7 square feet of lockers per capita. Got it. Okay. Give us some extremes for what would be above that, like a rural area, and below it, what those numbers are. What would New York City be, versus Green River, Wyoming be?

Scott Krone: Without knowing where Green River, Wyoming is —

Joe Fairless: I know the former mayor of Green River, Wyoming. That’s why I brought that up. [laughter]

Scott Krone: Okay. I’ll give you an example. We were at a conference one day and I was talking with a woman who was a multifamily and single-family developer in the Austin, Texas market, and she learned what we did and she goes, “Oh, I have a property that’s five acres. I’m planning on building 100,000 square feet of self-storage there,” and I said, “Have you done a saturation study? Have you done a feasibility study? She goes, “No, I figured when we do it, they’ll just tell us what we have to build,” and I said, “Well, before you start going venturing down this path too far, you might want to make sure what your saturation level is, because if it’s too high, then you’re gonna be wasting your money. In fact, you’ll be risking losing all your money.” So I said, “Where is it?” She gave me the address. So I plugged in the address in Austin, Texas, and immediately 18 facilities came up within three miles; I sent it off to our people that do our reports for us, and they came back and said it was nine without her facilities. So if her facility comes online, it would be around ten. So what that means is that you’re going to have slower absorption rates, you’re gonna have lower pricing and it’s going to put a lot more economic pressure on your feasibility model.

To put it in perspective, when we went into our market in Chicago, we had half a million people within three miles and the feasibility report came back at two. So if I’m going into a market at two compared to nine, I’m certainly going to take the market that was two. Now you might say, “Well, I see plenty of self-storage facilities in Chicago.” That’s true, but within three miles of this location, there was only two square feet of lockers per capita.

Joe Fairless: You said when you got her address or zip code, you plugged it in, and then you got initial information, then you sent it to your feasibility people. What are you plugging it into? What software program?

Scott Krone: Well, it’s very highly complex detail.

Joe Fairless: You’re setting me up. What have we got? Google? What are you doing?

Scott Krone: [laughs] Google Maps was my first.

Joe Fairless: Okay.

Scott Krone: It’s my first indicator. And when I do that, it’s always just to get a sense… Because everyone says, “Oh, there’s no self-storage around me,” and then I ask for the address and I put it in, and inherently, it’s a type of thing that people are not aware of. It’s like when you say you’re going to buy a blue car, then you notice every blue car around the neighborhood, but until that point in time, you’re not recognizing how many blue cars are out there. So the first step is just for me to plug it into Google Maps, and I put in self-storage near that address. I can’t do the zip code because that’s not even specific enough. I have to put in that specific address. So when I just look at it, if I get a sense of how many are around there, if there’s two or three, I’m like, “Okay, makes sense.” If I see it’s 10, 20 and it’s not a really urban area, then I’m going to think this is way too much, and that’s just the thumbnail test before we start really digging into the details and the nitty-gritty of the due diligence. If it doesn’t pass that first litmus test, then I’m not going to do it.

The second litmus test is then I’ll turn it to satellite and see what the product of housing stock is around that neighborhood. So if I see a lot of empty yards like farm country, this and that, or not a whole lot of homes or apartment buildings, that’s also another indicator. Take your Wyoming city, if I plug that in and I see it’s mostly rural and there’s five facilities, that’s not going to look real good for you, but if I say it’s incredibly dense area and there’s five facilities, then there could be probabilities or it could be possibility there.

Joe Fairless: One, put in the address and then look for self-storage nearby, then do a follow-up and see what type of housing is around it. Do you want more apartments than homes?

Scott Krone: What we want is density. So it doesn’t have to be necessarily apartments per se. So for instance, our property in Chicago– when the city of Chicago did away with public housing per se, like Cabrini-Green and Robert Taylor homes, etc., they went from this 60-story, 10,000 people per square mile density and they put them all in row houses. In Chicago, there used to be a three-story house and then they converted them to three apartments per house. So our project in Chicago is surrounded by homes like that. So we have 500,000 people in predominantly what we would classify to look at it as single-family homes, but they’re really apartment buildings because they have three units. So if we see a lot of tight clustered housing stock in and around there, then we’ll get a better sense of the fact that it’s a dense area. So for our Class A facilities, we’re looking for anywhere from 100,000 to 500,000 people in the radiuses, depending on what the saturation level is. If it’s only 100,000 people and it’s at seven, then it’s going to be very hard to fill it up. If we have 500,000 people, and it’s a two, then it’s going to be very easy to fill it up.

Joe Fairless: Then the next level analysis is, as you mentioned, sending it over to the team that does your feasibility study. So what are they looking at that you’re not?

Scott Krone: They just pull more resources. They’ll pull census’ tracks, they’ll pull what the growth is, what the medium income is and what the segment of the population is, and the reason why we do that is because the medium income and the other demographics, renters versus owners, will give us a sense of what type of locker to put in there. So the more affluent the community is, the larger the demand for bigger lockers. The less affluent the community is, then there’s a greater demand for smaller lockers. So we’ll get a sense of what configuration we need to do to put in that building in order to maximize the marketability, the saleability of our product.

Joe Fairless: What’s considered a large locker versus a small locker?

Scott Krone: An average locker is 90 square feet. So if you’re median income, 90 square feet is the average. So that would be a 10 by 10 as your basis point for what a typical locker is. We go up to 20 by 30, and we go as small as 5 by 5.

Joe Fairless: So let’s say it’s in a more affluent — or we’ll talk specifics. Let’s talk about the facility that you have that is in the most affluent of your areas, based off what you own. What’s the configuration there?

Scott Krone: Well, that’s a great question because we specifically went through this. We were having trouble leasing them up, and when we were talking with the sales team, they were saying, “We’re sold out of the 10 by 20s,” and we said, “We need more larger lockers,” and we were looking at the configurations, I said, “What happens if we convert the 10 by 10s into 10 by 20s?” and they said, “We will have that much more success.” Even though the person is renting the same amount of square footage, there was something in their mind that just said, “Okay, I need a 10 by 20.” So we took out the metal walls and we leased up all the 10 by 10s, [unintelligible [00:17:34].04] we convert them to 10 by 20s.

Joe Fairless: Wow. What does it take to do that conversion?

Scott Krone: Well, when we’re dealing with Class A, we’re taking existing commercial buildings, either office or warehouses or retail, and we’re converting them into self-storage, which means that our lockers go up to 8 feet. And once you get to 8 feet, then there’s chicken wire across the top, and the reason why we have chicken wire is we need to be able to get light, heating and more importantly, fire suppression in each individual unit. So all it is, is a corrugated metal wall. So it was a sill track that’s tapped into the concrete of the flooring. So it’s a matter of removing the wall, screwing that wall to the end wall and pulling up the track and keeping the track in the unit as well. So we had the ability of converting it back, but it was just a matter of relocating the single corrugated metal wall.

Joe Fairless: What’s the largest conversion you’ve done?

Scott Krone: Square-footage-wise?

Joe Fairless: Yeah.

Scott Krone: Well, to date, the largest one is our one in Milwaukee where we got historic tax credits, and we went through the process of converting that into a national park. So we will charge tickets if you want to– if you’re on a national tour of the Grand Canyon Yosemite, you can stop by our self-storage facility. That was 100,000 square feet.

Joe Fairless: Wait, timeout. What did you say?

Scott Krone: It’s in a national park. It’s gonna be registered. When you make a building historic, you get historic tax for it. You go through the Department of Natural Resources and they make it a national park.

Joe Fairless: Your self-storage facility?

Scott Krone: Our building that is now self-storage is going to be on the National Park register, yes.

Joe Fairless: Okay. There’s the trivia question… What was it prior to you doing this renovation?

Scott Krone: It was the first fireproof building in Milwaukee, and they used it for hard data files. So everything from banker boxes to election ballot tickets, all those sorts of things. Obviously, when people are going from a paper world to a digital world, companies didn’t need to run big floor spaces of storage because they had it all on a computer in a gigabyte or trillion byte or whatever the latest measurement of computer storage is. So by dividing it, then we can rent smaller spaces to the residential community as well as its commercial community, and so we’re just finishing up that process right now. We got SBA Financing on it, and we’re going to be finishing up in the next six weeks to get this thing done.

Joe Fairless: What’s the total square footage for that one?

Scott Krone: That one’s 102,000 square feet, and the project that we just went under contract for in Lowell, Kentucky is actually going to be 140,000 square feet, and we’re gonna make it a combination of mixed flex space, as well as self-storage. So we’ll have about 80,000 square feet-ish of self-storage and about another 60,000 square feet of flex space.

Joe Fairless: What was that building prior to what you planned on doing?

Scott Krone: Originally, it was a candy factory, and right now people have been using it for storage. They’ve been using it for making envelopes. They still make envelopes there with these presses from the 16th century, which is crazy, and I don’t know who they get to repair those things, but they have a Xerox copier there… We actually also have a church that is inquiring with us to begin planting the satellite campus at that location.

Joe Fairless: Taking a giant step back, what is your best real estate investing advice ever as it relates to your area of expertise?

Scott Krone: Well, I don’t think it’s just limited to my real estate expertise, but my mentor always told me to look at best case, worst case, and what most likely will happen. So I think a lot of people look at best case and then maybe what most likely will happen, but with stress tests and looking at the downside, if we can make it work with worst case, then that’s what we go forward with.

So we always try to be conservative and making sure that our numbers are accurate and as good as we can possibly get them, so that we have that worst case in mind. So that might be multiple exit strategies, that might be looking at if we lose rent, if we lose market share, each of those things, to make sure that we’re still able to perform.

Joe Fairless: The challenge I have with worst cases, regardless of however you’re modeling it in worst case, it’s never going to be the actual worst case, because I guarantee you someone – and I could probably come up with – but what if this happened on top of that? So how do you really identify when you say worst case? It’s never really the true worst case, but where do you stop? Like, “Okay, this is a reasonable worst case,” whereas that other worst case, you’re tripping on some drug and that’s never going to take place.

Scott Krone: Well, I think that’s part of the experience we’re going through now. We’re not quite into this fourth recession right now, but it’s all indications leading that it’s going to be heading that way. So I’ve been able to see what worst case looks like. The crash of 2008 was really, incredibly devastating from a lending perspective, and we had to alter and shift very quickly in order to survive during that period of time, but we also didn’t get over-leveraged and that was one of the things that kept us afloat. So with this one, I think, are we in a worst case right now where there’s no definitive timeframe of getting back on the highway here? There was a clear exit ramp, but there’s not a clear entrance ramp.

So if we’re going to look at what it takes to cover our debt service– so typically, before this new environment, we would say “How much product could come into the marketplace that would drive down our costs?” and that’s where we go back to our due diligence on the front end. And then in that case, what is the likelihood or the probability of a property getting rezoned, or the ability for another product to come up and be part of the competition? So we look at what are the barriers to entry in that marketplace and seeing how much resistance there is to that product.

For instance, in Milwaukee, we knew that they were not going to allow any new self-storage to be rezoned. So we were fortunate that our property had the zoning when we bought it; we didn’t have to go through that rezoning process. So what we do is, we look around there and say, “Okay–” So we will then look at raising the cap rate and seeing what the margins would be once we do that.

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

Scott Krone: Sure.

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

Break: [00:24:18]:03] to [00:25:02]:08]

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

Scott Krone: Well, one of the ways in which I do it is I’m part of a nationwide organization of about 35,000 people. We have a private Facebook group community, and I do a weekly Tuesday Tip. I go on there and people post questions, they post victories, they post what we call Celebrate Wins. So I go and just look for ways in which I can answer questions based upon my experience of now being in the street for 30 years, I bring a little bit more than most people have in that community. So I offer a different perspective. That’s one of the ways I enjoy doing, is just taking some time and answering people’s questions or helping them up or calling them up and just helping them through their challenges.

Joe Fairless: What’s a deal you’ve lost money on?

Scott Krone: It was a single-family house. The market crashed and we paid off the bank in full, but we didn’t get all of our equity back, and so that was a tough one.

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

Scott Krone: Well, the best ever deal, from a percentage point of view – and this is going back to before the crash and the crazy economic structure that was there – we bought a house for $600,000, I put $400,000 to build a new house, and I sold it for $1.6 million and I only had $60,000 down. So I did the whole thing, a $1.6 million house, I did with $60,000. So the rate of return on that one was phenomenal.

Joe Fairless: How can the Best Ever listeners learn more about what you and your company are doing?

Scott Krone: Our webpage is www.codamg.com. And you can certainly send us an email at info@codamg.com. One quick story about that house. I took my oldest daughter, we went and watched The Big Short, and she’s like, “Did that stuff really happen?” I’m like, “Yep, and it’s paid for your college right now.” [laughter]

Joe Fairless: Your timing was good on that one. Well, Scott, thank you for being on the show; I enjoyed our conversation. Thanks for talking about your self-storage tips and getting into the specifics of capital stacks and how to leverage capital stack, as well as feasibility studies and how to take a look at self-storage and some different considerations as well. So thanks for being on the show. I hope you have a best ever day. Talk to you again soon.

Scott Krone: Thank you very much.

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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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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: 

 

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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.

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JF2140: Unique Ways to Increase NOI with Shopping Centers With Alan Schnur #SkillsetSunday

Alan went from owning apartment buildings and hundreds of homes to now focusing on shopping centers. He decided to sell his portfolio of apartments and single-family homes because of all the work and challenges to scalability. Now he is able to scale and have a model of “set it and forget it” when it comes to dealing with fortune 500 companies and shopping centers.

Alan Schnur previous episode: JF1978

Alan Schnur Real Estate Background:

  • Alan has bought and syndicated more than 2,000 units and managed more than 7,000 units
  • Owns numerous medical, office, warehouse buildings, shopping centers, and custom builds multi million dollar homes
  • Based in Houston, TX
  • Say hi to him at www.gr8partners.com 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“For me, shopping centers are more scalable and more of the “set it and forget it” – Alan Schnur


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, Alan Schnur. How are you doing, Alan?

Alan Schnur: Hey Joe, I’m doing great. How about you?

Joe Fairless: Well, I’m doing great as well, and looking forward to our conversation. A little bit about Alan – he has bought more than 2,000 units via his company’s syndication platform and managed more than 7,000 units. He owns numerous medical office, warehouse buildings, shopping centers and custom-built multi-million dollar homes, based in Houston. Today, we’re gonna be talking about unique ways to massively increase NOI with shopping centers. So first, Alan, do you want to get the Best Ever listeners a little bit more about your background, and then we’ll roll right into the topic at hand?

Alan Schnur: Sure. Thanks for the background on me, Joe. Again, thanks for having me today. What can I say – I’m a New Yorker, I spend a lot of time in New York. Actually, I worked in the World Trade Center in 2001, and I was fortunate enough to have left the building the day before on a business trip, and that 9/11 event really changed my life in many ways. I worked in the 101 floor, and the company that I worked for lost 700 out of 1,000 people, and I lost 40 out of 44 teammates; spent a week by myself in Portland when I was trapped, trying to figure out what I was going to do next with my life after that event, and it brought me to Houston, Texas. And I stayed in the commodity business for a good 10, 15 years, and I was turning everything around at that time in my life, and I wanted to create multiple streams of income. So I started buying single-family houses. Believe it or not, I bought one a month for ten years straight. So I woke up one day, I had around 150 houses and a successful commodity firm. So I decided to sell the firm, double down on the houses which I did, so I had a few hundred houses, and then by then, the world started to turn; not only with the houses, but in the commercial real estate business around 2010. So I looked around and I saw that apartment buildings were on sale. So for a five year period, every 90 days, me or me in a syndication, purchased an apartment complex, and I woke up five years later and I realized I had around 2,000 apartment units, and I grew out a property management firm too where we managed around 7,000 units and 1,000 houses, and life was good. I was just looking for something a little more easier. Sometimes we get involved in this real estate dream, not realizing how much work it really is.

So I had an epiphany one day; I woke up and I said, “You know what, I want to slow down a little or–” not necessarily slow down, Joe, but figure out how I can scale. It was a little hard for me to scale with the multifamily. It was taking up a lot of my time and the stuff that I was managing. So I sold it all. So I’ve successfully syndicated, founded, started, grew, cash-flowed, held on to, and I bought around $50 million of apartment buildings during the downturn and we sold everything for around $80 million. I took my share and I got into the triple net leasing business, the commercial aspects side of real estate, which I’m sure we’re about to start talking about. For me, more scalable, more enjoyable, I like dealing with Fortune 500 companies, getting leases signed that go for 5 or 10 or 15 years; set it and forget it as much as possible when it comes to real estate. So what can I say? So after I got rid of all the housing, I really jumped into buying warehouses, storage facilities, building multimillion-dollar houses, and most importantly, that’s made the biggest difference in changing my life over the last five years, I started buying shopping centers – don’t believe the hype, ladies and gentlemen – started buying shopping centers; awesome cap rates, even better at borrowing the money, nice good spread there of 400 or 500 basis points, and dealing with Fortune 500 companies where the leases go for a long time. So that’s really a quick background on where I am and where I started, Joe.

Joe Fairless: So apartment buildings and exiting out along with those homes got you a chunk of change that you clearly had some money going into it in order to buy a house a month for a very long period of time.

Alan Schnur: Well, you know what, I got a little creative at the time, or I want to say early 2000s. You pick up houses for $20,000, $30,000 a pop here in Texas in the surrounding areas. So yes, I did whatever it took.

Joe Fairless: What was the average purchase price would you guess?

Alan Schnur: $35,000 a house. Maybe fix it up for $5,000. I cash-flowed them for a long time for a good decade, and then woke up one day and realized that I’m gonna have to either sink another $10,000, $20,000, $30,000 into each house to bring it up to true market value; these were all rentals. Or — I just started selling them off in tranches, and that’s how I built it. I’d buy ten houses at a time, hard money, borrowed money from friends and family, or money that I was making, do five or ten houses at a time, and then go get some commercial bank loan on those houses. So it’s like the shell game, I kept moving the ball. In this case, I kept moving the same money into the next five or ten houses.

Joe Fairless: Okay, so you sold those and you sold the apartment buildings and you got a chunk of money, and then you went into triple net leasing, which as you said, was more scalable, more enjoyable. The perception that I have, and we’re going to be talking about this, is yes, more scalable, more enjoyable, but less profitable. So let’s talk about that.

Alan Schnur: Okay, so let’s talk about a few different ways of making money in this triple net commercial leasing business. Well, I have a few choices here. You could buy something empty and pay an empty price, if you know what I mean. Maybe buy 10, 20, 30 cents on the dollar, because if it’s empty, there’s no net operating income. So someone’s going to sell it to you per pound, per price. So let me back up a second. So buy an empty warehouse. I just did one recently; I bought a 35,000 square foot empty warehouse relatively really cheap, like 10, 20 cents on the dollar off of an auction, and put a Fortune 500 company in there. So now it’s cash-flowing, it’s got at net operating income… And when you have these Fortune 500 companies and they’re healthy and the piece of real estate’s healthy, you can really start talking about trading that  stuff that at a 6, 7, 8 cap rate on the net operating income. So it’s a really great way of getting ahead in life. I can’t specify this enough. If you can take something broken, fix it, put a good tenant in there, figure out how you’re going to cash flow it, and then cap rate it out, you can really be off to the races and running.

Joe Fairless: Someone who’s listening to this thinks, “Well shoot, I have access to auction sites and sale sites, and I see a distressed real estate all the time, but when Alan talks about bringing in a Fortune 500 company, that’s where I have a block where it’s like, well, I don’t know, any Fortune 500 company contact people.” So what are your thoughts on that?

Alan Schnur: I know we have limited time here, so let me move the same example to the shopping centers… Because I find that question posed to me many times in the shopping center business, and it’s really just fear and intimidation. Well, how am I going to fill this spot if the tenant goes out of business or doesn’t pay their bills and leaves? It is quite different than the housing business where we can just stick up a sign and see if we can catch people driving by, which still does work in the shopping center business, but we rely more on national brokerage firms, the Colliers, the Marcus & Millichaps. There are specific firms in your area of town that do nothing but lease. It’s an awesome profession to be in. It pays out 3% to 6% commission on the life of the lease for the broker. So the broker is really incentivized to go out and get a tenant for you, and you’ll also find that a lot of these brokers are representatives of these Fortune 500 companies. So as bad as you want to bring them into your space, they’re looking for your space to create a transaction for both parties and get paid.

Joe Fairless: Okay, so what are some ways to make your space desirable for those types of companies?

Alan Schnur: Let me give you an example. I just got back from ICSC. It’s a shopping center foundation group. It’s a national group here in the United States, but it’s actually worldwide. So there was a few major meetings every year with ICSC, and it’s also nationally. So we just had our Texas meeting literally last week in Fort Worth, Dallas, and what you find is every brokerage shop and every retailer that’s interested in Texas will show up at this convention. And on the second day of the convention, for example, all the retailers actually set up a table; it’s very cool. So you have Starbucks, maybe you have Chick-fil-A, you have a major grocer, you have new franchises that are trying to break into Texas. So they all set up their table, and in this particular situation, there was around 100 booths set up for these retailers. So let’s just say, I have some vacancy here in Texas, which I always have a spot or two for a lease… I literally will walk up with a flyer, say, to Starbucks and say, “Hey, I’m on Westheimer in Houston, Texas. This is my block. This is the specific information about the shopping center. Would you folks be interested in taking a look at it?” and you’d be surprised, they move so quick. They know exactly where they are, they pull up all their data, and you’re probably going to start exchanging some drone footage of the property.

For example, I had a very successful meeting with Little Caesar’s pizza. I recently bought a shopping center here in Pasadena, Texas, and it comes with an outparcel, which is another way of making money with commercial real estate and shopping centers. This outparcel was a bonus when I was buying the shopping center.

Joe Fairless: For anyone who’s not familiar with an outparcel, what is it?

Alan Schnur:  Sure. An outparcel is a piece of land. Maybe it’s like an outlier in your parking lot, or maybe even take a piece of your parking lot that backs up to a major road, and that’s exactly what this situation was. It backed up to the corner of the shopping center where two major roads intersected. So if you see me here holding my hands or if you’re listening, just picture yourself, you have a parking lot and two major roads meeting and you own the parking lot. Well, you literally can take a piece of that parking lot and build an outparcel, build a pad site for some retailer to come in.

I’ll give you even another example. I recently did this with Krispy Kreme Doughnuts and another shopping center that I have in College Station. It’s a TJ Maxx shopping center, but what’s really cool is the parking lot is huge, and we took a portion of the parking lot that lies up to this road, and we did a 20-year land lease with Krispy Kreme’s. So we took the outparcel, we just took 40 parking spots that nobody was even using, and we just built up a square, if you want to say that, and a foundation, and Krispy Kreme Doughnuts came in, they built their own structure, they’re running their own business, under the intention that we signed a lease for 20 years at $8,000 a month, with me as the owner of the property, sure. So they’re fully responsible for everything.

Joe Fairless: So monetizing 40 parking spots that you weren’t getting money for anyway, and people weren’t parking their cars anyway unless it was probably some overnight people who weren’t permitted to be there.

Alan Schnur: And let me break it out into money. What that really means by taking that 30 or 40 spaces, which was bringing in absolutely no income into the shopping center; $8,000 a month, I don’t have to take care of their property, times 12 months is $96,000, and this is trading at an 8 cap, which is high, so 0.08– I don’t have my calculator, I’m gonna say it’s around $1.2 million of value we just added to the shopping center just by creating an outparcel in a parking lot, by a busy road. And that’s another way how you create value and money in retail shopping centers.

Joe Fairless: What type of approval process is typically required to get an outparcel?

Alan Schnur: Well, first of all, if you’re the owner of the shopping center, you have to make sure that you do have the approval; you have to look at your leases. For example, I have another shopping center that has a specific national chain doctor’s office in it, and it specifically says, “You cannot block our view from the street.” So you really have to look at the easements and you have to look into the leases and you have to work with your attorneys. So for sure, I’m gonna abide by the lease and play by the rules and not put something up in front of that doctor’s office, but just maybe 100 feet down or 200 feet down, I can. So you just have to check your P’s and Q’s and see what you can do and what you can’t do, and all the leases.

In this particular situation, it wasn’t really blocking anybody. It was just a far off, distant hard corner. Back to the Pasadena, Texas example that we started talking about with the Little Caesars – so I’m pretty excited, because Little Caesars, that will easily generate $9,000 a month on a land lease, and they’re talking about $1.5 million in valuation just on the outparcel there. So again, outparcels, great advantage, great opportunity to create extra income for your shopping centers.

Joe Fairless: Okay, so outparcels is one. What are some other ways to increase NOI with shopping centers?

Alan Schnur: Well, when I buy shopping centers, I’m really looking for a 20% vacancy or even more, 30% vacancy, because they really trade on a true net operating income number. So if no money’s coming in for the spot, then you shouldn’t be paying for the spot, and that’s how I run my business here at GR8 Partners.

Let me give you a real simplified way of understanding this. When I was starting out in shopping centers, I like to start off small and then work my way up big. I started off buying around 10,000, 12,000 square foot shopping centers, and let me just keep the math easy. Let’s just say there’s six storefronts, and say they’re 2,000 square feet apiece. The first shopping center I bought was 50% vacant. So I had three tenants, 2,000 square feet apiece. So I bought that shopping center for around a million dollars. I put 30% down, so call it $300,000 down, and I valued each slot at $333,000 apiece, just simple math here. So that’s the million dollars that I paid. I hired a leasing agent, the same way I just explained it a few minutes ago. Over a 12 month period, we found three more tenants, and not only did we find three more tenants, we found national tenants. So we went for the mom and pops, who may be a pizza place or a dry cleaners, to an AT&T. We put in a national hearing aid company, and the third one I believe, was a Taco del Mar. So now I’ve got six tenants, and one side of the shopping center is worth $333,000. The other three slots are going to be worth $333,000. So all of a sudden now, on an NOI number, not only did I just pay a million dollars for the shopping center, but I doubled the value of the shopping center. So now it’s worth $2 million, and I actually did do that and I actually did sell that. So that’s a way of filling up your shopping centers and making extra money by filling up your vacancies. Makes sense, right?

Joe Fairless: It does make sense. Why wouldn’t other people do that who were competing for the same property?

Alan Schnur: I have this philosophy, the evolution of a real estate investor, a little older and wiser, just recently turned 50 and been doing this for 20 years, and I went through the same processes as every body. I started buying the houses, I started buying the apartment buildings, and then I started buying the triple net leasing stuff. Everyone wants to go through the pain, they feel like they’re not ready or they’re intimidated about filling up their shopping centers, but I can tell you, here in Houston, having a lot of property management experience, the average C Class apartment building will turn 60% to 80% every year or you’re going to lose your tenants. To me, that’s more scary… The credibility of the tenants and not paying their bills and things breaking, compared to why not do the shopping centers, why not do the triple lease? The money’s more dependable. If something breaks on triple net lease, the  tenant’s paying for it. If taxes go up, the tenant’s paying for it. If insurance goes up, the tenant’s paying for it.

Joe Fairless: I think the hesitation that most people have is, one is just becoming familiar with how to assess opportunities with shopping centers, how to run the numbers, what pitfalls to look for and just the learning process, but then combine that with the second thing, which is, I just don’t know if I can find quality tenants or enough of them because I personally don’t know business owners who would rent from me. Whereas I know that apartment owners don’t think “I’m buying 100 unit property, so I know 100 different people who would rent from me.” I mean, clearly, that would be a ridiculous thought process, but I feel like that’s a mental block for people outside of just learning the process and learning how to do it. It’s just, are there really enough tenants to rent my space if the space is currently vacant already?

Alan Schnur: Yeah, I hear you. I agree with you, 100%.

Joe Fairless: I’m not saying that’s a legitimate reason. I’m just saying those two reasons combined are what allows you to buy more property.

Alan Schnur: Here’s what I’d say to that to help someone get over the fear, or to answer that question. The first thing I would say is, look, there’s a lot more building going on when it comes to apartment buildings and housing right now than retail shopping centers. We went through this lull over the last five years in retail shopping centers. Another reason why things weren’t being overbuilt. Ask yourself a question – when you’re driving down the road right now, how many vacancies do you actually see in shopping centers? We don’t see too much here in Texas right now. So part of the argument would be, there’s a lot less space available to build shopping center strips on roads. Every other block has a new 300-unit apartment building here in parts of Houston, Texas. So when I’m buying shopping centers, I’m looking for core areas of a community, I’m looking for density, where there’s a lot of population, and I’m looking for a high car traffic count. So you can just think of those three things that I just said.

Joe Fairless: How do you quantify those three things?

Alan Schnur: Well, I quantify it– when I’m looking to buy a shopping center, I like to buy shopping centers that have 30,000 to 50,000 cars going by every day. I like to buy near a hard corner where it’s just absolutely buzzing in traffic like you wouldn’t believe it. I like to buy shopping centers where there’s so many people you can’t help but do your dry cleaning there, or go food shopping there or stop off and pick up a Starbucks.

Joe Fairless: How do you quantify that third one – the so many people part?

Alan Schnur: Okay, so we call that population density, and there’s plenty of services out there. I use CoStar a lot, and we’ll get a one-mile radius, a three-mile radius and a five-mile radius of houses. So we’re looking for a good 30,000, 50,000, and even goes up to  — a five-mile radius, we’ll go up to 50,000 people. So you want to have a lot of people if that’s the business you want to be in.

Joe Fairless: For the one mile radius, what’s too low?

Alan Schnur: Well, you’ve got to be careful with the one-mile radius because there’s day time population. Maybe there’s an area that you’re thinking about where people drive to work and that’s what people do; they work in that area, and then there’s households and there’s household incomes. So the daytime population is important. I just finished doing an analysis on a property in California. The daytime work population was 200,000 people, but only 25,000 people live in the area. So you’ve got to take that into account, who are going to be your tenants. You’re probably going to do a lot of restaurant business, maybe fpr  lunches where people are going to go eat and drink coffee, as opposed to maybe you don’t want to put a grocer in that area; and then you do want to look at the household income.

What we focus on at my firm is we’re really buying shopping centers, Class C and Class B. We’re really looking for the household incomes are anywhere from $40,000 to $75,000. We like the discounters for tenants. Some of the tenants I have, for example, are TJ Maxx or a dry cleaners or a grocers or an AT&T or T-Mobile, something where people have to go to this neighborhood center to do their business.

Ask yourself a question, Joe. How many shopping centers will you stop off at in one day? People say it’s a dying business, but there’s people that just absolutely want the experience of shopping. There’s people that have to go and drop off their dry cleaning. Even doctors and dentists, they’re moving out of medical buildings and they’re setting up their cosmetic dentistry in a shopping center strip or an ER clinic, setting up in all these shopping center strips. So again, these neighborhood centers that our people are always going to be drawn to; they just have to, they can’t live without it.

Joe Fairless: Anything that we haven’t talked about that you think we should before we wrap up as it relates to increasing NOI with shopping centers?

Alan Schnur: So another thing that’s really cool about shopping centers is rent bumps are built into the leases. It’s really common. Let’s say I’ve got Starbucks. It’s really common for their rent to go up 1% to 3% every year, and most likely you signed a five-year lease with them. So you’re looking at a 15% increase over the life of that five-year lease, which, when you’re working out your NOI numbers, that’s a huge increase. It’s not that hard to just buy, hold and bank off of rent bumps, and turn around and make 50% on the shopping center when you sell it a few years later; and then of course, we’re always looking for cap rate compression. Maybe bring in some better names, like I mentioned earlier.

We’re in a situation right now, where we have a 40,000 square foot grocer paying a rent rate that’s so low, it’s ridiculous, and they’ve been there for ten years, their options are up and now we’re talking to national names right now that will pay triple the price. So just by going from 50 cents a square foot to a buck 50 a square foot, you literally can increase the value of your shopping centers by millions of dollars.

Joe Fairless: What a fun conversation. I love talking about stuff that I’m not currently focused on, with people who are, and hearing about your approach. So, Alan, thanks for talking to us not only about ways to increase NOI with shopping centers, a couple of examples, building outparcel, have those rent bumps built into the leases, but then also what you look for with shopping centers, and you gave four things – 30,000 to 50,000 cars driving by, having it on a corner, having a population density that fits what you’re looking for and pay particular attention to daytime work population versus people living there, and then the household income being about 40k to 75k, plus the other stuff we talked about. So I really enjoyed it, Alan. Grateful you were on the show, and I hope you have a best ever weekend. Talk to you again. Oh, wait. Actually, last question. How can people learn more about what you’re doing? I apologize for forgetting that.

Alan Schnur: Listen, we syndicate. We have lots of partners in our deals, and you could find us at gr8partners.com. There, you can find our portfolios and what we’re up to and read about us. We’re always looking for new partners. We’re always looking to share what we know, and that’s one way of reaching me.

Another way to reach me is I have a book out, it’s on Amazon. It’s called the Cashflow Mindset. It’s really about lots of stories that we talked about today and ways of making money in real estate, the cashflow mindset. It’s also on audible.com. And I always do this, people think I’m crazy, but my phone number is 713-503-5908. If you’re interested in getting involved in commercial real estate, send me a text.

Joe Fairless: Alan, thanks for being on show. Have a best ever weekend. Talk to you again soon.

Alan Schnur: Bye, Joe.

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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/ 

 

 

 

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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.

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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JF2113: Locking In Deals With Jesse Fragale

Jesse is a real estate agent and broker working in the commercial space. He is also an investor with experience in student rentals, single-family rentals, and apartments. Jesse also gives some ideas on how being a real estate agent can help you find good deals and shares with you a specific line he uses to lock in good deals.

 

Jesse Fragale Real Estate Background:

  • A commercial real estate broker and investor    
  • 10 years of real estate investing experience     
  • Located in Toronto, Canada
  • Say hi to him at: https://www.avisonyoung.com/ 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Noone is looking to sell but when you have an offer in front of them, maybe they are looking to sell.” – Jesse Fragale 


TRANSCRIPTION

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

Jesse Fragale: I’m doing great. How are you?

Theo Hicks: I am doing great, and thanks  for joining us. A little bit about Jesse – he is a commercial real estate broker and investor, has ten years of real estate investing experience, is located in Toronto, Canada, and you can say hi to him at AvisonYoung.com. Jesse, do you mind telling us a little bit more about your background and what you’re focused on today?

Jesse Fragale: Sure. My background in real estate is twofold. Like you mentioned, I’m a real  estate agent or broker. I work in the commercial real estate space, predominantly in office, but we’ll do industrial, as well as retail. As an investor, I have been investing for about approximately ten years. I got my start in student rental properties, so started out like everybody else, with one, and then slowly built a little bit of a portfolio on the student rental market. From there, I kind of grew towards over the last ten years continuing in student rentals, purchased a few single-family investments, condo investments, some assignments or wholesaling (depending on which nomenclature you use), and then moving into apartments today, and that’s what I do.

My partner and I – we’re always looking for multifamily apartments (the more units, the better) and we’re buy and hold investors. So that’s kind of the snapshot.

Theo Hicks: Do you still have a lot of those single-family rentals?

Jesse Fragale: No, not really. We have kind of transitioned. We’ve purchased some more condos. In my market it’s very tight – the Toronto market – it’s probably most similar to San Francisco, Boston, New York… The yield is very tight, and one thing we’ve had is a very big constraint on supply. Condos have kind of made up for the lack of purpose-built apartment buildings. There’s a few reasons for that, but fairly briefly, it’s the fact that we have in recent memory pretty tight rent control programs. One of the ways to avoid some of that rent control has been newer product.

The condo market has basically been there as kind of a shadow market for rentals, which is a little unfortunate, and hopefully in the future we already have started to build more purpose-built… Long story short – that’s why we’ve purchased quite a few condo rental investments. Those would be most similar to single-family homes in other markets.

Theo Hicks: So for the rent control, if you buy a newer condo then there are no rent controls?

Jesse Fragale: So the way it worked until fairly recently – 2017 was the change – was that provided that you had new construction, you weren’t subject to rent control. There was a policy – basically, buildings built after 1991 were not subject to rent control; buildings built before 1991 were subject to rent control, which basically meant that you had a certain guideline that the province in Canada (or the state in the U.S.) would allow you to raise it… And it would be indexed with inflation, which as you can tell, is very low. So what would happen is you’d wait for a tenant to move out, and then you could mark-to-market the rents. Then you could take the rent and bring it up to market value.

So what happened was we were in a little bit of area with our government a few years ago that they wanted to get rid of this policy that said new construction would not be subject to rent control. That was reversed in 2017. So what we have seen is actually a 40% increase in permitting applications for purpose-built. So that’s a good sign for Toronto, that we’re going to hopefully in the future continue to be building more purpose-built. The majority of the stock of rental properties in the Greater Toronto Area – and I’m pretty sure the province – were built prior to 1970. So we have just this old stock. The idea that you go to an American market and you see these AAA buildings, these beautiful apartment buildings is kind of foreign to us, because the majority of apartment buildings are old stock. So hopefully we’re moving in the direction of being able to  supply more apartment buildings.

Theo Hicks: So will that same concept apply to those newer apartment buildings? So if someone builds a new apartment building, it will not be subject to rent control?

Jesse Fragale: Yeah, and that’s why we’re starting to see a lot more builders – I’m not sure if RioCan or some other major builders that are basically focusing on building apartment buildings now that the rent control — they’re not subject to those kind of constraints. I think this year we’re allowed to raise on existing tenants 1.4%. At that point, why bother the tenant with the rental increase?

Theo Hicks: Okay, perfect. So how many condos do you currently have as buy-and holds?

Jesse Fragale: Buy and holds  I believe it is seven condos right now… And the apartment building – we have one apartment building about an hour West of Toronto, and that’s an 11-unit apartment building, which we’re trying to put another unit on. To give you some context, for the apartment buildings down here, the average price for an apartment building per unit in Toronto is about 275k to 300k/unit.

Theo Hicks: Do you mind walking us through that 11-unit deal? How you found it, and then what you bought it for, and then what the business plan was. I know you already mentioned you’re trying to add another unit to it, but anything else about it, from a business plan perspective?

Jesse Fragale: Yeah, no problem. That particular apartment building we were generally looking in the area; if you think Brooklyn to Manhattan, that’s this place called Hamilton, just West of Toronto. So what we did like about it was the prices weren’t as crazy as the downtown Toronto market. It was a little bit in the periphery. I think initially it was actually a marketed property; I don’t think it was off-market. I think the gentleman that was marketing it – we were looking at a different property of his… So he said that there was this 11-unit he thought might be interesting to us. We went, we checked out the unit, and it was. It was under-rented, so quite a few of the rents were under-market, which we noticed. That was one checkmark for us, and it checked off one of the boxes.

One of the other things was that there was a motivated seller. Unfortunately, it was an older gentleman, and we didn’t know at the time, but I don’t believe his health was particularly good… So I think just managing and owning an apartment building was just too much for him at the time. So for better or for worse, that was a positive for the deal, obviously, because he was motivated… And basically, we looked at the apartment building and we saw that there was quite a bit of potential lift in the actual rent. We looked at it as a buy and hold strategy, but we kind of balanced the fact that it was still getting decent income. So we basically came from the perspective that we were gonna be able to get pretty good financing on it, which we did… So we went out to our mortgage broker, gave him the rent roll, the area, all the expenses, and  we were able to strike a good deal from the lending perspective.

Then come offer time, we put together what we thought was a great offer, with a little bit of back and forth, and we were able to secure the property. That was the pre-deal mechanics, and we were happy with the purchase. Looking back now, we wish we bought ten of them, because the market has continued to increase… But in terms of what we wanted to do initially – we did the roof, we did just some minor work, housekeeping things to get it up to where it should be; a lot of the fire code, all the electrical…

And then in terms of other value-adds, like I said, we are looking at adding another unit, but as of right now, we’re just trying to continue to raise the rents where we can, and go from there.

Theo Hicks: Perfect. So let’s talk about the condo deal next… It’s obviously a little bit different than the apartment, so maybe walk us through one of your more recent condo deals, and the same thing – how did you find it, what did you buy it for, and what was the business plan?

Jesse Fragale: Actually, the place I’m in right now, I can give you kind of an example. This was supposed to be a rental, which I ended up moving into just because of life circumstances… But we’ll take you back to — I believe it was 2016 that I purchased this deal. They’ve just finished building this about 4-5 months ago. It’s actually currently in construction right now… And it was 411k, pre-construction condo. For pre-construction, in my market, you typically ask to put 20% down over a certain period of time, so $400,000, 5% installments, getting up to $80,000 as a down payment.

In this particular market, these condos – just to give you an idea of how crazy our market has gotten – 2015, $411,000. Probably today I could probably get about $3,000/month, so just shy of $40,000/year on this condo. So $40,00/year, $411,000 purchase, 10 on a gross rent multiplier. If you work out the cap rate on that, I don’t know what that really would come to. Say you use like a 50% rule on $40,000, so you’re down at $20,000… You’re in a pretty decent cap rate environment.

Now, this particular condo, today you probably would not be able to buy this for less than $850,000. So just to give you kind of an idea of how the numbers just have completely stopped making sense from a cashflow perspective, and that’s why I mention that our market is much more similar to a San Francisco market than it is to, say, Memphis. That would kind of run you through some of the math of the condos. I genuinely don’t know how anybody is buying them today, unless they are just putting a massive down payment, or they’re just not concerned with cashflow.

Theo Hicks: I was gonna ask you – I’m assuming you’re not buying these types of condo deals anymore…

Jesse Fragale: Not in this market, that’s for sure. To give you just an example of a condo market deal, if it’s an hour-and-a-half away from Toronto – say it’s a student rental property, because they’re starting to build a lot more in condo form – then it’s a little different. You’re able to buy these condos at like 200k, 250k, while still not having a ridiculous low income… Even then, the reality is our market is just very tight, and cap rates  – just to give you an idea of cap rates on AAA office towers in the downtown area, they’re trading at 2.9%-3.1% cap rates. It’s very tight.

Theo Hicks: So you’re transitioning now to moving into apartments. You’ve got that 11-unit… What’s the next step? Do you have anything in the works right now, apartment-wise? What types of things are you doing to generate apartment leads, things like that?

Jesse Fragale: For us, basically we have a list of apartments… Like I said, Toronto, for rent – $300,000/unit. It’s very tough to just go out and buy 50 units. It’s just millions of dollars. So for us, we’re looking at anywhere from 15 to 30-unit apartment buildings. The way we’re reaching out is either direct mailers to apartment owners, or just as agents, we have the luxury of being able to look up CoStar, or Altus, different online programs that other people don’t necessarily have access to, because these subscriptions are so expensive… And we’ll call owners directly, basically ready to put an offer in.

Right now we’re looking at a ten-unit apartment building, but an hour from where I am, and we’re just kind of going through the process. This was a direct outreach to an owner. I wasn’t looking to sell. We knew where his apartment was, we called him, and we said “Hey–” We always come from the perspective that we would list it, which we would if it’s big enough as agents… And then we say “Listen, if we could bring you an offer tomorrow, at this amount, would it interest you?” And that’s how we basically did it with this guy. We gave an opinion of value, and he said “If you can bring me an offer in that range, I’ll take it seriously.” That’s kind of how we’ve been approaching it, and I guess we’ll see what happens… Given the current environment, with life on lockdown, at least in our world, it just gives you a little bit more time to reach out to these owners.

Theo Hicks: That’s a good strategy for those who are looking to get started and buy a deal in a competitive market – get your license and you’ve got access to all those subscriptions… Call them up, ask if you can list it for them, and then, as you just mentioned, say “If I can bring an offer tomorrow, would you be interested?” I like that strategy.

Jesse Fragale: Yeah. I always tell young guys in our office – you can’t leave the conversation by just asking “Are you looking to sell?” and they say no. It’s like, nobody’s looking to sell. But when you’ve got an offer in front of you, maybe you’re looking to sell.

Theo Hicks: Exactly. Alright, so the last question before the money question – how are you funding your projects? Maybe give us an example of a project in the past. Is it the same thing – is it your own money, is it other people’s money, strictly banks…?

Jesse Fragale: Right now I’ve been fortunate to continue to use our own capital – and when I say “our own”, my partner Jonathan – him and I have been investing in the last few years. We haven’t hit a wall yet, and I understand that for most people it’s not a matter of the idea that you’re just gonna keep using your own capital. You will hit a point where if you’re gonna continue to invest, you need to look at outside funds.

So for the apartment building, for instance, my partner John and I – we’re fortunate to make a pretty good income as agents, in commercial real estate, especially with the run we’ve been on for the last few years… So we have taken that money and invested it into investments. I think we both put in about 150k of our own capital. The rest went through a mortgage, and then I think we did a line of credit for $100,000… That was kind of the structure of that deal.

The condos – again, we’ve been using our own capital… But like I said, we were just talking before the show – Matt Faircloth has a great book on raising capital, and the reality is you will hit a certain point where you will have to use other people’s capital, and you need to make sure that you know how to actually raise capital, and you are right now making a track record for yourself… But yeah, we’re not at that point yet. As long as we can continue to fund these with our own capital, we’ll do so… But like I said, there will come a time where we start needing to use outside resources.

Theo Hicks: One more question – what percentage of your time is spent on investing-related duties, and what percent of time is spent on your full-time job as a broker?

Jesse Fragale: My 9-to-5 (air quotes) is as a broker. So that part, the Monday to Friday, coming into the office at 7-8 o’clock, leaving at 6-7 o’clock – that is my life as an agent. So I would say maybe 60/40 type of thing… As  you know, as an investor you can call it passive, but you never really turn off that part, because that is always happening. But in terms of actually looking for new acquisitions, managing current ones – yeah, I’d probably be a 60/40… Because everything we had is managed by a third-party property management company. So we’re not actively managing anything except the managers.

Theo Hicks: Okay. Alright, Jesse, what is your best real estate investing advice ever?

Jesse Fragale: My best real estate investing advice I would say by far is figure out what your strengths and weaknesses are in life in general. And it sounds kind of vague, but what I mean by that is there are certain areas, whether it’s attention to detail, whether it’s big-picture thinking, whether it’s doing the spreadsheets – there’s gonna be areas that you excel at, and there’s gonna be ones that are just not your forte… And the worst thing is going 5, 6, 7, 10 years and trying to do something that you should be outsourcing to somebody else. Once you do outsource that to somebody else, you start really seeing how  your business grows.

For instance myself, as much as I love the deal-level of the different investments we do, when it starts getting really into the minutiae, I’m not a detail-oriented person in that way. And I know that there are people that I work with that really excel at that… So identifying that person and delegating those tasks to that person – it’s just gonna save you so much time and headache in your investments… And I think, like I said, in life in general. Any task you do or anything that you kind of embark on that you’re trying to achieve, I think just understanding where you are in terms of your strengths.

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

Jesse Fragale: I think so.

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

Break: [00:18:49].24] to [00:19:41].24]

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

Jesse Fragale: Oh, recently? That’s a good one. You know what – I’ve read it recently; it’s kind of an older book… Not an older-old, but it’s basically The Morning Miracle.

Theo Hicks: By Hal Elrod?

Jesse Fragale: Yeah, Hal Elrod. That was a great book. It reminded me of just kind of like getting everything in order… But there is a really good book by Kelly McGonigal that I read recently called “The Willpower Instinct.” That’s a fantastic book. It’s not necessarily real estate-related, but I think it would benefit anybody that has goals they’re trying to achieve in their life.

Theo Hicks: If your business were to collapse today – and I guess in this case businesses – what would you do next?

Jesse Fragale: My real estate business – if everything collapsed again today, I’d probably take the knowledge that I have been fortunate enough to receive over the last ten years and probably apply it back to the beginning of how I got into real estate. That started at a bookstore; research what you’re interested in.

The biggest thing I find people don’t do, that you hear people give as advice, is get a mentor. It will fast-track everything. There is no substitute. Find somebody that you see what they’re doing, that you wanna do; find those people, because they will just save you years in your path towards that, if that’s your goal.

Theo Hicks: So besides the condo you’re in now, which was definitely an amazing deal, what was your best ever deal? It could be a condo, or it could even be one of your deals as a broker…

Jesse Fragale: The best ever deal would probably be first or second student rental property I bought, only because you learn so much on your first couple deals, and you don’t realize at the time that you’re going through a school of hard knocks with investing. So that would be one of the first properties I bought, $250,000. I think it was 2009, and I had five university girls living in there from one of the universities not too far from me. Basically, through that particular property… The reason I say it’s the best ever deal – it wasn’t the biggest return on investment, but when all was said and done, I think I sold that at $470,000 a few years after that. I think 5-6 years after that. But the reason it was great for me was I learned how to take an under-market property, bring the rents to market… I learned how to deal with tenants for the first time, and I’d never done that before.

I learned how to deal with contractors, ranging from going in the back and having the city make us remove 5-6 gigantic trees. I had no idea that the city could do that at the time, and how many thousands of dollars it takes to remove trees. It was a house that was build in the early20th century, so it was dealing with knob-and-tube electrical… Just everything you can imagine that a 20-year-old guy had no clue of at the time. It kind of shaped me up and made me think a lot more diligently and a little bit more thoughtfully about future investments… So call that one the best deal ever.

Theo Hicks: Yeah, I can definitely relate with that. The best ever listeners have heard this story a bunch of times, but I forgot to turn the utilities on and transition it to my name on my first property… So the first day I walked in there, there was a waterfall in the basement because the pipes burst. I totally understand; that was probably my best ever deal as well.

Alright, what is the best ever way you like to give back?

Jesse Fragale: The best ever way I like to give back… First of all, in downtown Toronto (and I’m sure in a lot of major cities) I’m trying to give knowledge to other people that are trying to get into our industry as well, and that’s why for me – I started as a contributor for the Bigger Pockets Podcast and YouTube videos – anytime I can give information that will help people… And I can’t remember who was saying this to me recently, but they basically said if you have an expertise in something, or if you even generally have more knowledge than the average person in something, he said that you have a duty to share that with people. I thought that was an interesting word. It wasn’t just like “Hey, take a YouTube channel and start saying stuff, or telling people”, but just an obligation to give that knowledge to other people.

Aside from that, trying to help out where I can with causes in Toronto… Avison Young is a big believer in a lot of the  major causes in the downtown area, whether it’s heart and strike, melanoma – we do what we can from that point of view as well. But yeah, just also carving out a little bit of time in your day, whether it’s ten seconds or ten minutes, to just think a little bit about gratitude and what you’re grateful for, and a little bit about the advantages I have, that other people don’t.

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

Jesse Fragale: Best ever place to reach me is probably go on Instagram or YouTube. On Instagram it’d be @jfragalz, and Jesse Fragale on YouTube. If you google that, I’m sure Google will explain how to spell it probably.

Theo Hicks: Do you guys always say zed for z?

Jesse Fragale: I go back and forth, but when you get some super-Canadian people, they’re just like “It’s not zee, it’s zed”, I’m like “Alright.|

Theo Hicks: I guess it does sound like C, and it can get mixed up.

Jesse Fragale: Yeah. It depends how close you are to — Toronto is like Chicago; you’re in a major market… Whereas if you go to Newfoundland or you go into some periphery markets, you start hearing a little different twang in somebody’s voice.

Theo Hicks: Good stuff, Jesse. Well, thanks again for joining us today to talk about your experience and your transition into apartments. Just to summarize what we’ve talked about – we’ve talked about how you’ve got ten years, started off with those student rental properties, purchased some SFRs and condos, dabbled in wholesaling and then moving into apartments. We talked about rent control and how new construction is not subject to rent control, so you’re seeing a pretty big uptick in purpose-built permitting applications.

You said you’ve got seven condos right now, and you’ve got the 11 units. We’ve talked about where you’re at – multifamily is pretty expensive, so you’re not looking at 50 units; you’re focusing more on the 15 to 30-unit buildings.

We talked about specifically your 11-unit building that was a little bit further out from downtown. It was initially on-market, you ended up getting it from a motivated seller who was in bad health, the buy and hold strategy. It was a few minor things – roof, fire code electrical, you were looking to add another unit.

We talked about your condo that you’re living in now, which you bought in 2016 for 411k, and now it’s worth $850,000, which is why you’re not focusing on condos as much anymore, because you really can’t get  cashflow at that price point. You talked about how, again, your plan now is to focus on those 15 to 30-unit apartment buildings, and the strategy I really liked was you’re a broker-agent, you’ve got access to some of the better, CoStar-type online applications and programs, so you’re calling owners directly, and as you mentioned, you don’t wanna just say “Hey, do you wanna sell us your deal?” and they say “No” and you hang up. You tell them, “Hey, if we have an offer, would you be willing to sell your deal? Would you be interested?” And you also look at it from the perspective as an agent, saying that “I can list this property for  you”, and then transitioning into submitting an offer.

You’ve talked about how personally you and your partner are funding your deals right now, but you eventually want to transition into raising capital, or will have to eventually transition into raising capital, and that your experience will make the process a lot easier, since you had that track record.

Then we talked about your best ever advice, which is to figure out what you’re good at and what you’re bad at, in real estate, but also just in life in general… So if you notice you’re not very detail-oriented, then make sure you’re outsourcing those types of things to other people, and then vice-versa.

Unfortunately, we didn’t get into any of the brokerage stuff. I’m sure you’ve got a lot of solid advice on that, so maybe we can get you back for a Skillset Sunday to talk about how to be a best ever commercial broker in a crazy market like Toronto… [laughs] But until then, thanks for joining us. Best Ever listeners, thanks for listening. As always, have a best ever day, and we will talk to you tomorrow.

Jesse Fragale: Awesome. Thanks.

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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.

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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.

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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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JF2089: House Hacking to Commercial Property With Tiffany Alexy

Tiffany bought her first property while in college by house hacking and has continued to house hack continuously and is currently in her fourth house hacking property. Tiffany shares a story of bad luck when she decided to venture away from house hacking and into flipping. She talks about a combined strategy of house hacking and BRRRR with her office property

 

Tiffany Alexy Real Estate Background:

  • Began investing in real estate at 21 y/o with a 4 bedroom condo that she lived in and rented the other 3 rooms
  • Today, owns 10 units of commercial and residential properties
  • Started her brokerage firm, Alexy Realty Group in 2017
  • Based in Raleigh, NC
  • Say hi to her at https://www.alexyrealtygroup.com/
  • Best Ever Book: Ninja Selling by Larry Kendell 

 

Click here for more info on groundbreaker.co

 

Best Ever Tweet:

“Be creative” – Tiffany Alexy


TRANSCRIPTION

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

Tiffany Alexy: I’m doing great, thanks. How are you?

Joe Fairless: I’m glad to hear that, and I am doing great as well. A little bit about Tiffany – she began investing in real estate at 21 years old, with a four-bedroom condo that she lived in and rented the other three rooms. Today owns 10 units of commercial and residential property. Started her brokerage, Alexy Realty Group, in 2017. Based in Raleigh, North Carolina. With that being said, Tifanny, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Tiffany Alexy: Sure. As you mentioned, I started investing in 2011. I purchased my first property as a senior in college, and I ended up house-hacking it… And that’s kind of what got me jump-started into my real estate investing career. I lived there for a couple years, and then I moved out, rented that one out  completely, and just kind of repeated the process, and have been doing so ever since about 2011.

Joe Fairless: What do you mean by “repeated the process”?

Tiffany Alexy: So after I rented that full unit out, I bought another one just across the street. It was a 3-bedroom/2,5-bath, and I lived in one bedroom and I rented out the other two… So I just continued house-hacking. I actually still house-hack today.

Joe Fairless: So the first one was a four-bedroom condo; the one across the street was a 3-bedroom?

Tiffany Alexy: Correct.

Joe Fairless: And you bought the first one, and then you got a loan and bought the second one, correct?

Tiffany Alexy: Correct.

Joe Fairless: And then what did you do after that?

Tiffany Alexy: I just kept doing it again and again, so now I’m in a three-bedroom townhome where I have my own room, and then I rent the other two bedrooms out.

Joe Fairless: Wow. How many properties have you purchased to do it.

Tiffany Alexy: I’m on my fourth.

Joe Fairless: You’re on your fourth – okay, cool. So you got  your first two that we talked about, and then you did it again, which was a – what?

Tiffany Alexy: It was a townhouse.

Joe Fairless: The third one was a townhouse. How many rooms?

Tiffany Alexy: It was a three-bedroom, and I rented one out. The roommates that I had at the time had access to the third room, so we used it kind of as a home office.

Joe Fairless: Okay. And then you’re on your fourth…

Tiffany Alexy: So I had one remaining in that one. Exactly.

Joe Fairless: And how many bedrooms is your fourth one?

Tiffany Alexy: It’s a three-bedroom as well. Same situation – I live in one and I rent out the other two.

Joe Fairless: Okay. And over how many years have you done this?

Tiffany Alexy: I started in 2011.

Joe Fairless: Oh, alright. I can do that math… [laughs]

Tiffany Alexy: So it’s been almost ten years. [laughs] Yeah, and there were some situations in between where I didn’t house-hack, but for the majority of the time I have been house-hacking.

Joe Fairless: Okay… So talk to us about the loans  that you’re getting on each of these four properties.

Tiffany Alexy: They’re conventional, owner-occupied financing. The first one I had to put 25% down, because it was one of those condo situations where there were a lot of investors to own the units, so it didn’t qualify for Fannie/Freddie financing… The Wells Fargo, Bank of America, the larger banks wouldn’t finance them. So I went through BB&T on the first one, and I had to put more down because of the investor concentration, essentially.

Joe Fairless: What about the next one?

Tiffany Alexy: The next one was the same situation – it was another high investor concentration, so I put another 25% down on that.

Joe Fairless: Okay. And when you say “high investor concentration”, will you elaborate on what you mean?

Tiffany Alexy: Sure. It just means the majority of the condo units owned in the neighborhood are investor-owned. So it’s not owner-occupied.

Joe Fairless: Okay. Even though you’re getting an owner-occupied loan.

Tiffany Alexy: Correct. I believe the rule is if it’s over 50% investors in the actual subdivision, then they require some additional steps.

Joe Fairless: Okay… I hadn’t heard of that.

Tiffany Alexy: Yeah, it’s called non-warrantable.

Joe Fairless: Non-warrantable, okay. Cool. So there would be an advantage to not have non-warrantable in the loan, because them you’d be able to have less money into the property, right?

Tiffany Alexy: Yes, and that’s exactly what happened with the second two of the townhomes. So the rules don’t apply with the townhomes. So my third – I was able to put 10% down, instead of the 25%. And then the one that I have now, I’ve put 3% down.

Joe Fairless: Wow. You’re getting better. [laughs]

Tiffany Alexy: Yeah, exactly.

Joe Fairless: How low can you go.

Tiffany Alexy: Exactly.

Joe Fairless: What is the reason why you were able to do 3% on this fourth one?

Tiffany Alexy: I don’t know, it was just a loan program. Conventional was going down as low as 3%.

Joe Fairless: Okay. Same lender on the 3% and the 10%, the last two?

Tiffany Alexy: No, different lenders.

Joe Fairless: Who did you get on the third one, and who did you use on the fourth?

Tiffany Alexy: The third one was First Citizen, and the fourth was Benchmark.

Joe Fairless: How do you find your lenders?

Tiffany Alexy: Honestly, they find me. It’s just word of mouth, networking, pretty much just organically.

Joe Fairless: Okay. So thinking back with benchmark, for example, what is the first time you came in contact with the point person that you ended up going with at Benchmark?

Tiffany Alexy: With Benchmark I actually found out about them through a client. I was helping a client purchase an investment property, and his lender was put in contact with me, because I was his agent… And I really liked the lender, because he was very communicative, always responsive, super on top of it. And my client got a great rate, so I was like “Okay, I’ll keep you in mind for the next one.” And it just kind of worked out that way.

Joe Fairless: Okay. You’ve been doing it for approximately nine years… What are some things that have gone wrong?

Tiffany Alexy: Oh, a lot has gone wrong… So I will tell you about a situation where I got in a little bit over my head as far as a flip. I purchased a 2,600 sqft. duplex in Ayden, North Carolina, which is about 15 minutes South of Greenville, where East Carolina University is. And you see HDTV and you think it can be easy… It’s not the case. I bought it from a wholesaler who had the contract on the property and was selling the contract. For that reason, I got it super-cheap; it was like 28k for this duplex. It needed a lot of work. I actually had FaceTimed my contractor through it, and she gave me an estimate of about $100,000 in work.

At that point I was like “Okay, that’s still not too bad, because I’m in for 128k, and it could rent for about $700/side.” So the numbers on that weren’t too bad. The only thing is the flip took a year. There were a lot of delays, just because it’s 2,5-hours away from me, so I didn’t have a lot of time to drive to the property and check on my contractor and make sure that he was running according to schedule.

Everything was just delayed. Windows took seven months to come in, and then one came in and it was broken, so we had to send it back and get a replacement… It was just a disaster. So after about a year I got a call from the town of Ayden fire department that it had actually caught on fire.

Joe Fairless: Ohhh… After a year, prior to you renting it out, after you’d completed the flip almost?

Tiffany Alexy: Exactly. So the flip was a little more than halfway done, and it just completely torched one side. It didn’t burn down, but the entire interior of the better side was gone. It was just up in flames. So that was kind of a learning experience, and at that point I was like “I don’t wanna put another 100k into this project. It’s never-ending.” We couldn’t even have utility to the property, because it has to pass inspection in order to turn on the utilities.

So it wasn’t an electrical fire. What I found out later was that somebody had broken in and had a party, they lit candles, and just left. They’d broken through that broken window.

Joe Fairless: Dang! They got in through the window that took seven months to arrive, that was broken, that you were waiting on a replacement?

Tiffany Alexy: Correct.

Joe Fairless: And then they burned the house down as a result of it.

Tiffany Alexy: Yeah, so that one was boarded up, and they just took it off.

Joe Fairless: Okay… Insurance?

Tiffany Alexy: So everything that could have gone wrong, went wrong. Yes, I had insurance, thank goodness. So I was able to get that money, and I was done. So I basically broke even, which is a lot better than what could have happened.

Joe Fairless: What was the insurance process like?

Tiffany Alexy: It had to be a vacant policy, because there was nobody living at the property. It was one that I had to renew every couple of months, because it was a vacant policy, and it was more expensive because of the risk associated… Which, obviously, for good reason.

Joe Fairless: Yup. Thank goodness you had that policy.

Tiffany Alexy: Yes, I’m very glad I did that.

Joe Fairless: What was the check amount that they cut you for the fire.

Tiffany Alexy: It was 67k.

Joe Fairless: Okay… So they cut you a check for 67k, and you bought it for 28k… What did you end up doing with the property?

Tiffany Alexy: I actually essentially just gave it to an investor I know, that was in the area. He was my property manager at the time as well, and I just wanted to wash my hands of it. So I sold it to him for $10.

Joe Fairless: Okay. [laughs] So you had put in 28k, and you got a check for 67k… So you had about 42k in profit. However, that doesn’t factor in paying the contractor, and holding costs and all that… So you’re saying essentially the 42k was wiped away? It was about that, it wasn’t anything more…?

Tiffany Alexy: Correct. It was between 40k and 45k.

Joe Fairless: People always ask “Well, why would someone give a house away? What are the circumstances?” Here’s a circumstance. You gave it for ten bucks.

Tiffany Alexy: Oh, absolutely. Yeah, it was just one of those where I didn’t wanna continue dumping money into it. I was busy with my brokerage at the time and I just didn’t have the time… And he was local, 10-15 minutes away from where he was, so it made sense for him, because he could get the property for very little, and essentially his money in would be all the repair costs, and then he could rent it.

Joe Fairless: Okay. And how long ago was that?

Tiffany Alexy: That was last summer. I sold the property to him in July.

Joe Fairless: Well, you “sold” (in air quotes), right? Ten dollars… [laughs]

Tiffany Alexy: Yeah, exactly.

Joe Fairless: And have you kept up with him and the status of the property?

Tiffany Alexy: No, I actually haven’t.

Joe Fairless: Aaagh…

Tiffany Alexy: I need to follow up with him and see what’s going on, see how he’s doing.

Joe Fairless: You haven’t talked to him since you got the $10 bill from him?

Tiffany Alexy: No. He sent me a referral or two, but I haven’t asked him what he’s done with the property.

Joe Fairless: That is a challenge, and thankfully you had insurance. I think that’s a big takeaway, having insurance on the vacant property. If presented a similar opportunity in the future, what choices would you make that are different from the choices you made on this deal?

Tiffany Alexy: First of all, I wouldn’t have bought it…

Joe Fairless: Why? Why wouldn’t you have bought it?

Tiffany Alexy: Well, I bought it sight unseen. That was my first mistake. Not necessarily that buying sight unseen is a mistake, but it was in a market that I didn’t know, and I just thought, “Okay, well, it’s 28k. Even if it goes South, it’s so cheap…” So I put it under contract sight unseen, which typically is not that big of a deal, especially in North Carolina, because you have the due diligence period, so you can still back out… But once I was under contract, I felt kind of obligated to purchase it. And not out of anything that anybody else was doing, it was just kind of my own feelings. So that was the first mistake.

The second mistake – I didn’t get a home inspection. It was primarily because I knew that it would need a lot of work. It was essentially gonna have to go down to the studs and be completely redone… So at that point I was like “Well, I don’t need a home inspection. I know that it’s gonna need a ton of money and a ton of work, so I might as well just save that money.” But what I didn’t know was the joists had been rotted out because of termites, so essentially it was about to go 20k over budget to replace the joists. And that’s what was partially why it took so long as well.

Joe Fairless: Windows and termites.

Tiffany Alexy: Exactly.

Joe Fairless: Thank you for sharing that.

Tiffany Alexy: Of course.

Joe Fairless: Those are takeaways that are applicable to a lot of people, and I’m grateful that you mentioned that. What else has gone wrong?

Tiffany Alexy: With that deal or with other deals?

Joe Fairless: With another deal.

Tiffany Alexy: That one was essentially my one and only flip experience. Everything else that I have has been buy and hold. So on the flipside, I’ll give you an example of one that has worked out really well. I currently have an office – it’s in Cary – and I kind of did a double strategy on this. We talked a little bit about house-hacking… If you’ve heard of the BRRRR method, which is the Buy, Rehab, Rent, Refinance, Repeat – I kind of combined the two on this office that I have, and it’s worked out really well.

Essentially, I bought it similar in a way to my owner-occupied properties. It’s just an owner-occupied office, because I was using it for my business. I’ve found it a couple of years ago, it was listed for 175k, and it needed a lot of work. These buildings were built in the late ’70s, so it was just really old, and hadn’t been touched since then. It still had a wood-burning stove in the main lobby area, that was connected to the chimney.

Joe Fairless: Well, that’s got some character.

Tiffany Alexy: Yeah. For sure, it does have character. Orange [unintelligible [00:16:59].03] carpets…

Joe Fairless: [laughs] Even more character.

Tiffany Alexy: Textured wallpaper… Exactly. So it was kind of an ugly duckling, but there’s not a whole lot of inventory as far as office goes here, so I snapped it up and paid the asking price. I’ve put in about just over 40k in work.

What I did was added the chair molding, the [unintelligible [00:17:23].26] put in luxury vinyl  plank floors, repainted everything… It has a lot of that intricate dental molding, it’s got that thick crown molding, and that was a pain to pay somebody to paint. So it took a lot of paint for that… But I essentially just redid everything, including the bathroom, and I rent out a couple of the other offices. So it’s got technically four office spaces. I use one. One of the other offices I rent for $500/month.

The upstairs is kind of an oversized office. I rent that for $650. And then the last office, that is not my own, is the largest one, so I turned it into a conference room. I use that for my clients, but I also rent it out on a website called LiquidSpace, which is similar to Airbnb, but it’s for office space… And it’s just like an hourly rate.

So between all that, I got it rented, and then I refinanced. So I was able to pull out most of my initial equity, because it got reappraised for 250k.

Joe Fairless: Awesome.

Tiffany Alexy: So it worked out really well for me… And of course, there’s a higher monthly payment, but because it’s tenant-occupied, I’m essentially breaking even on the payments.

Joe Fairless: Bravo! What tenants do you have in there?

Tiffany Alexy: It’s a digital marketing company and a software company.

Joe Fairless: Okay. What’s the square footage of the overall space?

Tiffany Alexy: It’s just under 1,400 sqft.

Joe Fairless: Alright… And how did you find the digital marketing and software company?

Tiffany Alexy: The digital marketing company – funny enough, I used to do property management, and they were one of my property management clients. And the software company – I believe it was just Craigslist, because I had posted a couple different ads online about the office space.

Joe Fairless: Okay. And the 40k in updates that you did – what was your role in those updates? Was it the money person, or were you the one overseeing it, or were you doing it?

Tiffany Alexy: All of the above. So I was the money person–

Joe Fairless: Oh, you did it?

Tiffany Alexy: Yeah. I hired a contractor, so I didn’t do the work myself… But I helped with the design process, picked out everything, I put up the money… So yeah, I was pretty involved.

Joe Fairless: Okay. What’s something that you learned from that experience, overseeing the contractor?

Tiffany Alexy: It’s definitely to have a contingency. I went in knowing that we were gonna go over budget, just because it always happens… But it turns out that there was a bay window in the back, in the conference room, and it was actually sagging, because it didn’t have a foundation… And this was something that my home inspector actually didn’t catch.

I kind of had two options. I could add a foundation to it, or I could just tear the bay window out and make it a regular window… So what I ended up doing was just tearing it out, because it was cheaper that way, and just putting a normal window in. But of course, my contractor had to reframe and tear out the actual bay that was sticking out… So that was another 5k that I was not anticipating…

So it’s definitely to have a contingency fund always over budget, because there’s always gonna be things that you will not know ahead of time.

Joe Fairless: How much should we over-budget when we put together a plan?

Tiffany Alexy: I usually just add 10% to the overall total.

Joe Fairless: Okay. So in this case, those 40k – what did you initially budget? Was it 40k, or was it 35k?

Tiffany Alexy: I initially budgeted 50k.

Joe Fairless: But you said you put in 40k, so–

Tiffany Alexy: Yeah, we still came in under.

Joe Fairless: You were under? Wow…

Tiffany Alexy: Yeah. So initially what I was thinking was 50k.

Joe Fairless: Okay…

Tiffany Alexy: So it worked out. But I always think more.

Joe Fairless: What caused it to be under?

Tiffany Alexy: There were a couple little tradeoffs… Let’s see. Upstairs, I initially was gonna put the LVP flooring, but I decided to go with carpet instead. One, for soundproof, and then also there were stairs that were a little bit narrow, so I didn’t wanna put the hard, slippery flooring, just in case. So I ended up putting carpet upstairs. That saved some money.

I got some quotes for the exterior, and I used a different contractor for the exterior, which saved me some money as well, because he actually was doing the office next door, so he was able to give me a better rate.

Joe Fairless: Okay. And how did you come in contact with that contractor?

Tiffany Alexy: The person who owned the office next to mine actually just sent me an email and said “Hey, I’m actually getting work done on my office. This is the guy that I’m using. He’s willing to help you out”, because he knew that I was doing work to my office as well.

Joe Fairless: Okay, cool. Good timing, and nice people, connecting the dots. Well, taking a step back, based on your experience, what’s your best real estate investing advice ever?

Tiffany Alexy: My best real estate investing advice ever would be to be creative. Situations where the office happens, everybody that hears about what I did with it – they’re kind of astounded that I did it, but it really wasn’t anything groundbreaking or magical; it was just a matter of me moving in and being creative and renting out the extra spaces that I didn’t need. So it’s creativity and efficiency, really.

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

Tiffany Alexy: Sure.

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

Break: [00:22:43].03] to [00:23:26].29]

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

Tiffany Alexy: Oh, gosh… So I would say the book Ninja Selling, by Larry Kendall.

Joe Fairless: Great book.

Tiffany Alexy: I read this book many times. I’m actually re-reading it again. It’s a great resource for those who are in sales, or sort some sort of sales-driven career, but who aren’t necessarily wanting to brand themselves as that salesperson, if that makes sense.

Joe Fairless: I highly recommend that book. One of the big takeaways I got from that book  is – using the example of a real estate agent – a real estate agent could do a very good job with a client, and then five years later, when that client goes to sell the house, they might not be the first person their client calls, because they’re just not top of mind. So it’s important that we have to be top of mind in a relevant way on an ongoing basis with our customers, in order to continue to earn their business.

Tiffany Alexy: Absolutely.

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

Tiffany Alexy: The best ever deal would be one of my rental properties on [unintelligible [00:24:38].18] It was one that I purchased — it was an estate sale. It wasn’t a great deal, but I knew that if I rented the rooms out individually, I could make more money.

I purchased it for 145k a couple of years ago, and I rented it out for $1,800 at the time. Since then, I’ve done renovations to it, and I actually bumped the rent up, so now it rents for $2,300.

Joe Fairless: Wow. And what would it rent if you just rented the house, not the rooms?

Tiffany Alexy: Probably closed to $1,600.

Joe Fairless: Huge difference. How much more work is it from  a management side?

Tiffany Alexy: It’s really not that much more work, and the way that I market it is I calculate how much per bedroom it would be, and then I give a slight discount. These tenants at $2,300 – the last tenants were at $2,100, but with the last tenants I had marketed it at $2,300, but they all came together; so it was four tenants, and I said “Hey, if you all sign a lease right now, then I’ll give it to you for $100 off. So between that, and then they signed a two-year lease, I ended up giving it to them for $2,100. But that’s still a huge difference from the $1,600 it would rent for otherwise.

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

Tiffany Alexy: My first actually hosts monthly get-togethers, and we always do it at local restaurants, or coffee shops, and I like to just support other local businesses with my marketing dollars, because we’re all in it together.

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

Tiffany Alexy: The best way would be Instagram. My Instagram handle is just @Tiffany.Alexy.

Joe Fairless: Thank you so much for being on the show. What a fun show, where I learned a lot, and there’s a lot of helpful information for people who are doing the house-hacking, and the type of financing to get, people who are doing commercial properties, and a case study for the office that you have, lessons on a fix and flip… I mean, you really covered a lot of asset classes today. [laughs]

Tiffany Alexy: Yes, I did.

Joe Fairless: This show has got a little something for everyone, so thank you for that. Again, I enjoyed our conversation, and I hope you have a best ever day, and we’ll talk to  you again soon.

Tiffany Alexy: Thank you for having me.

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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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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JF2080: Medical Real Estate Investing With Colin Carr

Colin is the Founder and CEO of CARR, one of the nation’s leading providers of commercial real estate services. He has personally completed over 1,000 transactions and has been in real estate since 2000. Colin goes into medical real estate investing and what it looks like in his business. 

 

Colin Carr Real Estate Background:

  • Founder and CEO of CARR, one of the nation’s leading provider of commercial real estate services
  • Has been involved in commercial real estate since 2000 and has personally completed over 1,000 transactions.
  • Licensed real estate broker in ten states
  • Based in Denver, CO
  • Say hi to him at https://carr.us/

Click here for more info on groundbreaker.co

 

Best Ever Tweet:

“I like to help healthcare providers maximize their profitability through real estate.” – Colin Carr


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, Colin Carr. How you doing, Colin?

Colin Carr: I’m doing great.

Joe Fairless: Well, I’m glad to hear that, and a little bit about Colin – he’s the founder and CEO of CARR, one of the nation’s leading providers of commercial real estate services. He’s been involved in commercial real estate since 2000, and has personally completed over 1000 transactions. He’s a licensed real estate broker in ten states, based in Denver, Colorado. So with that being said, Colin, you want to get the Best Ever listeners a little bit more about your background and your current focus?

Colin Carr: Yeah, absolutely. Well, first of all, thanks for having me on. Excited to be here. My background is exclusively real estate. I started managing apartment complexes when I was 19 – mid-rise, high-rise, rural; moved to Denver in my early 20s, kept managing apartments for a few years, got into brokerage, few years after that did Walmarts, Wendys, Blockbusters, a lot of national retailers, moved into other aspects of office, industrial, investment, healthcare, and then started a firm about 12 years ago, and we are now operating in about 40 states, and we touch a couple thousand transactions a year and have a pretty good pulse in the market.

Joe Fairless: What’s your personal area of focus right now?

Colin Carr: I’m the CEO of the company and I oversee over 100 agents. We have a healthcare division, we have a commercial division, an investment division and a senior housing division. So I oversee our agents’ best practices, and I do a lot on the investment and development side.

Joe Fairless: Alright, so I was typing as quick as I could… Healthcare, senior housing, and I know I missed a couple. What are some others?

Colin Carr: Yeah. Commercial, and then just an overall investment platform as well.

Joe Fairless: Okay. So when you say commercial, I think of senior housing facilities as commercial real estate. So what’s commercial? How is it defined here?

Colin Carr: So we would differentiate commercial being corporate uses, CPA’s attorneys, architects, oil and gas, financial services. So everything that we do is commercial real estate. We have a just traditional commercial division that also touches those focuses of commercial tenants and buyers, and then we actually have a senior housing division and then an investment division as well.

Joe Fairless: Okay, when I hear investment division, I think, ‘Well all of these are investments.” So how is the investment division different from senior housing investment or healthcare facility?

Colin Carr: Great question. Our investment division is going after investors that are looking for income-producing properties, and we’re helping them on the buy side, the sell side, the due diligence side. So our commercialization is corporations, helping them with their real estate. Our healthcare is helping healthcare providers with their real estate investments, income-producing properties with savvy investors looking to grow portfolios, acquire, dispose of, etc, and then same thing on the senior housing side – it’s investors, developers, operators. So a lot of these overlap though, there’s investment deals happening in all those sectors, and it’s a lot of overlap.

Joe Fairless: Which division is your least profitable?

Colin Carr: That’s a great question. All of our divisions are profitable, which is great. Senior housing is our newest one, so we’re touching a couple of dozen deals in that sector right now in a handful of states, but that’s our newest division that’s only a couple years old. So still got a great expertise there, but that’s one of our newer platforms.

Joe Fairless: What are some reasons why you created a new division for senior housing, and how do you hit the ground running in order to grow that quickly?

Colin Carr: So senior housing came to us because people knew how much healthcare work we do. We help a couple of thousand health care providers each year with their real estate. So we touch a lot of deals there, and so there’s a lot of investors and a lot of developers that are involved with medical office buildings, complexes, and they want to get into the senior housing game. So we get a lot of people that try to come to us for advice in that world, but that’s how senior housing came to be. It’s just very ancillary and complementary to our healthcare world.

Senior housing is an interesting niche because it’s not just the real estate component, it’s the operations, and really the operations drive the value, as you know. So that’s a world that just takes a little bit longer to get into. Whereas a lot of profitability, a lot of opportunities, the amount of product that’s needed in the senior housing market is one that literally cannot be met over the next 10, 15, 20 years. So there’s a huge opportunity there, but there’s more complexities too, with compliance and operations and licensing. So it’s a little bit different world.

Joe Fairless: From a broker standpoint, why is it harder to get into because of operations? This is my ignorance showing, but I wouldn’t think that you all would be involved in the operations part. So it’s like, alright, you’re selling a property, so why does it matter that the operations are really important with senior housing?

Colin Carr: That’s a great question. So to understand how to value a senior house facility, you’ve got to understand the operations, and you’ve got to actually get in there and get under the hood and figure out how the property is being run, because the operations are what drives the income. Whereas if you’re looking at an apartment complex or a multi-tone office building, you can look at a rent roll, and it’s pretty clear to figure out what’s happening. There’s so many different variations of senior housing facilities, and there’s a lot of concepts of, “Is it government subsidized?” There’s so many different facets of senior housing, and there’s different revenue streams in addition to just “What do they pay per month for that room? What are the other services that are provided?” So to understand or read a senior housing facility, you’ve got to understand how it’s operated.

Joe Fairless: And is that as simple as hiring one person or bringing on one person who knows the industry, and then he or she can train your team, and now you’re off and running, or is it more involved than that?

Colin Carr: It’s really more involved than that. It’s a skill set that takes, in my opinion, years to really understand and learn, and I’m not trying to make it larger than it is or more complex than it is, but there’s so many nuances. Is it independent living? Assisted living? Is it memory care? Is it a skilled nursing facility? Is it Medicaid? There’s so many aspects to that world. And then on top of that, from a buying and selling side, the facilities don’t get put onto a commercial MLS or listing service predominantly, unless it’s a really challenging property that is less than desirable.

Whoever controls the listings controls the opportunity. So it’s not one that you can get on to an online database and preview 15 facilities and see their income statements and rent rolls and balance sheets. You can’t do that. So you got to understand how to evaluate them, number one, and then you’ve got to figure out who controls the opportunity,  number two.

Joe Fairless: It makes a lot of sense how you got into it, given your connections with healthcare. So can you talk about your healthcare business or division and what’s a typical transaction look like?

Colin Carr: Absolutely. So our primary healthcare division represents healthcare providers. So dentists, physicians, veterinarians, and we help them with every aspect of their real estate interests. So finding land, developing properties, new locations, relocations, a lot of lease renewals… And in doing so, we work with a substantial number of landlords, large REITs, developers, and we work with a lot of owners trying to figure out how to make their properties more valuable, how to increase occupancy, etc.

Joe Fairless: What’s a recent transaction that comes to mind, or a recent deal, whether you’re finding the location or the actual property itself, or selling it? …just something that we can talk about.

Colin Carr: So an owner purchases a building, wants to attract healthcare uses, gets us involved in the process, figures out where’s the deal got to be priced at, what we have to do to make it attractive to healthcare providers, is it a viable healthcare option… And then if we can assist them in that process of bringing them numerous buyers, we can create a lot of opportunity out of changing a property from an office use to a medical use, etc.

Joe Fairless: What are some questions that you ask the owner during your due diligence process to determine if that office can be used for medical?

Colin Carr: Some of the initial stuff– we go through all the zoning, we go through those concepts, but really it’s does the owner have a desire to invest heavily in the process? Medical office is a very attractive asset class of property. Markets go up and down, the economy changes, it will correct; everyone knows that. So if you’re an owner, you’ve got to look at it and say, “Who do I want on my property?” You want a franchise that maybe has thin or no margins, and they’re just trying to buy a market share to see if they can later sell, and it’s not really a long term viable option.

Are you concerned if you have a retail center and you’ve got a bunch of apparel and soft goods, and you can pull up their income statements and realize these guys are losing money quarter after quarter, and what’s going to happen when you lose the 20,000 square-foot Forever 21 store that doesn’t renew and how do you backfill that with four or five other people and who’s going to backfill it? Or do you look at a medical opportunity and say, “You know what, even when the market goes down, that dentist is not going to decide to start a landscape business. Or the plastic surgeons, they might tighten the belt, they might trim some staff, they might work four days versus three days a week, but they’re probably not going anywhere, they’re probably not gonna change industry.”

So we do a lot of education with landlords on why it makes sense to invest more money into a healthcare deal. Why if you can lock down a ten-year deal, the tenants are gonna go in there and pump a couple hundred thousand dollars into the space; they’re more invested, they’ve got more skin in the game – why that makes sense to stretch further to make that deal, and why that deal, even though you might have to put a little bit more money into it or invest more, why that deal actually ends up being a safer investment for you.

You put more money in, so some people would say, “Well, no, that’s more risky,” but you’re securing a more valuable blue-chip tenant in a lot of scenarios. So we do a lot of education with landlords and developers on why they want these deals, and then you get the right tenant, they sign a ten-year lease, they’ll probably be there for 20, 30 years. So you can literally do a deal and not always – there’s definitely changes, – but a lot of times, you put that thing to sleep for a couple of decades.

Joe Fairless: You mentioned asking the owner, do they have a desire to invest money into it, but then you talked about how the tenant will put in a couple hundred thousand to get it to fit their exact needs… So what is the owner putting money into the property to do, versus a tenant?

Colin Carr: Good question. So the tenants put a lot of their own money into the spaces because landlords are typically not going to front the entire cost of the buildout or the finish. We do ask the landlords to contribute as well. We’re looking for both sides to be invested in it. So a traditional office deal or industrial deal or retail deal, the landlords are going to put money into the space to attract good tenants.

A lot of times on the healthcare deals, we ask them to put in a little bit more than they would for a traditional office use or retail use, but we, in turn, put in more money than the traditional user as well, and a lot of times we’re doing longer-term leases, and we’ve got a much lower default rate. Most of our healthcare uses have less than a 1% default rate, so it’s a more secure investment. So we ask the landlords to put more money in because our clients are putting more money in, and they’re willing to do longer-term leases, and they carry a higher success rate, lower default rate with them.

Joe Fairless: Is the landlord putting in money prior to getting a tenant?

Colin Carr: Typically, we tell them, “Don’t touch the space on a healthcare deal until the actual healthcare provider or tenant shows up”, because you think they want that type of lighting or ceiling or walls or bathroom, and then they want to change the location of the finishes… So we don’t like landlords to put money into spaces. A lot of times, landlords will try to put into a vanilla shell format or vanilla box, and we don’t want that, because they’re going to upgrade it almost every time. So that’s another way for landlords not to waste money on vacant spaces. Wait till the tenant shows up, don’t spend money in advance.

Joe Fairless: Is it usually 50-50 on improvements or what?

Colin Carr: No, it’s usually a per square foot basis that comes into line with the lease rates to where some landlords say, “Hey, I’m not going to put in more than one year of total rent into the deal” if it’s new construction and they’re financing the money, and they’re going to turn around and sell it in a couple of years. They might put in two, three, four years of rent into that initial space. So it depends. Is it first generation? Is it second generation? Are they a long term owner? Are they gonna try and sell it? Is it the cash they’re putting into it, or are they going to finance it? So it just depends on who the owner is and the structure, but typically, on most healthcare spaces, it’s between one to two and a half years of total rent usually gets put into the concession package of TI allowance, free rent, stuff like that.

Joe Fairless: So for someone listening to that, and if they’re thinking, okay, so, in a medical transaction, where you bring a health care provider, if I’m a landlord, I’m gonna have to put in, on average, one to two and a half years of total rent that I receive. So I’m not making any money for one to two and a half years. Why would I ever do that? You mentioned it already, long-term, but is there anything else that we should be thinking about where it’s like, “Oh man, the first two years are gone. I’m not making any money.”

Colin Carr: A lot of landlords are going to finance that tenant improvement allowance and a lot of lenders are going to be more prone to give money for that tenant improvement allowance, especially if it is a healthcare use and a long term lease. So there’s definitely owners that want to put cash in upfront and not go to the bank, but if you’ve got a loan on the property already, which most landlords do, most lenders are going to give money for that tenant improvement allowance to secure that tenant. So at that point, it’s [unintelligible [00:16:25].25] game.

The other thing that comes into play too is for the landlords that are willing to put money into the space, they’re going to typically capture a higher lease rate, which means the property is worth more. So whether you look at it as having a long-term owner, that’s fine, but most people are always looking at “What’s my exit strategy?” and so the higher the lease rate, the better the cap rate, the higher the property. A lot of landlords are looking at properties, “Hey, if I could buy this property, and let’s just say it’s getting $20 a square foot for rent, and if I were to put a little more money into it and get a healthcare use in there, I could maybe get $23 a square foot in rent. Well, $3 a square foot on a six cap or seven cap, all of a sudden my property’s worth 200 grand more, 800 grand more, whatever it is, depending on the size of the property.”

So it’s a numbers game of “Can I put more money into this space to attract better tenants, longer-term lease, and then a better cap rate, because it’s stronger credit tenant, lower default rate, and then can I raise the value of my property?” So that’s the game – if you’ve got a property and you’re normally getting local mom and pops retailers or short term office leases, and you can attract the long term healthcare use, you can raise the value of your property substantially by getting healthcare in there.

Joe Fairless: What’s been one of the more challenging transactions you’ve personally worked on?

Colin Carr: How many hours do we have for me to run through that list? Almost every commercial deal we do has some–

Joe Fairless: A specific one. I’m looking for a specific example that you can tell us a story about.

Colin Carr: Man, that’s a great question.

Joe Fairless: It could be a recent one. I’m just looking for a story from you about a transaction where there was a challenge, you overcame it, and here’s some things we can learn from it.

Colin Carr: I would say, a specific deal I’m thinking of right now is, you find a landlord – and this is a specific deal – they bought a building a number of years ago, the tenant had an above-market lease rate when it was purchased, annual increases push the lease rate up 3% every year, and then you come to the lease expiration date, and you get ready to do a lease renewal, and the landlord is 100% set on not reducing the lease rate because they don’t want to discount their cashflow and discount the value of the property… But the deal is way over market, the tenant’s not going to stay. So you end up in an arm wrestling match with the landlord, and they’re assuming that the tenant’s not going to move, but the tenant has to move, because they can’t pay that type of rent.

So the landlord has come to grips with the fact that they didn’t do good due diligence upfront and it was an above-market lease rate, and they can’t capture and maintain that rate moving forward. And once that lease is over and that tenant moves out, they’re going to have to come to market with the real deal for the next person. So that’s a traditional deal, that’s what I’m thinking of right now, is “Hey, you’re 20% above market. I know it looks good on paper, I know you bought it thinking it was a great cash flow, but it’s not real.”

So it’s kind of a pro tip – you’ve got to make sure that you’re not dealing with inflated rents that are not renewable in the future, and if you lose that tenant and you have to go to market, you’re gonna have to come up with a real deal.

Joe Fairless: What a great piece of advice mentioning that… Because if I go to look at deals, and I see an office building and the seller says, “Hey, the market is X amount of dollars, but I got you even better at Y.” I think, “Ah, that’s awesome. This is gonna be a better deal than I’ll get it anywhere else, because I’m getting better market rents,” but as you said, there’s some pitfalls to that when the lease expires.

So then what I would need to do in order to make sure that the deal still makes sense is determine what type of market demand there is for that type of tenant, and if there’s a whole lot of demand for that tenant, then — I guess, I still shouldn’t assume that I’ll be able to get above-market rents upon the lease renewing, but at least there’ll still be more tenants to fill in if this one leaves.

Colin Carr: Absolutely. You’ve got two sides of the coin. You got, “Why the lease rate’s below market?” and “Is that really the lease rate?” They say, “Well, this is a below-market lease and you’re gonna be able to bump it up on a renewal.” “Well, alright, show me that you’ve achieved that the last couple leases you’ve done and show me where the market’s at, so that I have the track record that you’ve been able to do that.”

The other side of the coin is, “Hey, look at these lease rates. They’re capturing premiums, and these are a lot higher than our competing properties in the market or other comps.” And the question is “Is that sustainable in the future? Do I need to discount that value and underwrite it differently?”

The same concept applies with – you get a property as a 100% leased, you’ve got to put a vacancy factor in there and assume that you’re gonna run a vacancy over time and on average. You’ve got to put a 5% or 10% vacancy factor in there. So yeah, there are definitely pro tips as far as if it’s below market – why? If it’s above market, why? I think really the question comes down to what’s sustainable, and that’s where you’ve got to tap market experts to give you that advice and just make sure that you’re doing your due diligence.

Joe Fairless: Based on your experience as a real estate professional, what is your best advice ever for real estate investors looking to purchase, or in the industry of buying healthcare, or having commercial properties that cater to healthcare professionals?

Colin Carr: My advice would be just find the people that are the most likely to bring you those tenants. So when you’re talking about buying a medical building, and you’re talking to the seller, look at what they’ve done as a track record, because that’s a great indication of hopefully what you’ll be able to accomplish as well, too… But it’s really easy just to talk to the selling party and let them give you all the information, all the play by play. But at the end the day, they’re not going to be the ones to try bringing you the new people for your space, or helping you to renew those people. So I would say, find an industry expert like a company that represents healthcare tents and buyers, and then ask them, “What would be your objections to bring in your clients to the center? What would we have to do to attract your clients for the property? Do you think the market can sustain these lease rates? What type of TI allowance do I need to do to put into these deals?”

Get a perspective from the other side of the table with someone who’s not involved in that transaction. Not the listing agent, not the seller, but talk to somebody who is viably going to bring you an option or bring you a tenant for the future and get their perspective on it, because it’s going to be very different than what the seller’s selling you, trying to sell you the property.

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

Colin Carr: I am.

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

 

Break: [00:22:55]:04] to [00:23:38]:03]

 

Joe Fairless: What’s a bad piece of advice that you’ve received over the years?

Colin Carr: Thinking the market’s not going to change. Thinking that, “Hey, we’ve got this the last five years, it’s gonna continue to be that way”, and just not realizing the market is gonna shift.

Joe Fairless: What’s a best ever resource that you use in your business that is really helpful for you, whether it’s an online resource, an app, some website, something like that?

Colin Carr: The same answers two times ago – talking to the market expert who’s not involved in the transaction to give you an independent third party perspective on how viable is this location, this space, this deal, this price, and how would you critique it for your clients if you bring us a tenant or buyer for this?

Joe Fairless: What’s been one of your favorite transactions that you’ve done?

Colin Carr: Favorite transactions… I would lump them together as beginning deals in the business, grinding out the dirtiest, lowest-priced, worst location industrial deals you can possibly imagine, and just learning how to put together a deal, learning how to treat people, learning how to figure out how to solve problems, and just thinking back to the worst property you’d ever want to go to, and then getting that deal done and making no money on it whatsoever, but realizing you found a way to make a win… And at the end the day, even though it was a down and dirty property, the tenant was happy to be there, and learning how to do deals.

Joe Fairless: How do you not make money when you transact a deal, even if it’s a bad deal and a bad area?

Colin Carr: As a broker, you’re paid usually upon– it could be a per-square-foot commission, but a lot of times it’s a percentage. So I’m thinking of the 1,100 square foot machine shop industrial deal with a $4 lease rate, where you spend months on a deal and you make a couple hundred bucks or something like that, where you look at your time and you’re like, “Wait a second, I think I ‘ve made $1.50 an hour on this deal.”

We’ve got monster success stories of making a ton of deals, and that’s great, but honestly, it’s the deals that you learn to cut your teeth on, and even the ones where maybe, you lost some money, but you learned a lot. Those are my favorite because that’s the foundation you build upon.

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

Colin Carr: I love sharing information and helping people take what I’ve learned, and then help them become more successful… Because that’s really what I’ve done over my career – I’ve had the benefit of picking people’s brains, asking the exact questions you’re asking now, getting their insight, and then taking a lesson that a guy took 20 years to learn, and then he shares it with me and saved me all the heartache and pain. So doing the same thing of taking my information, the skillset, the contacts, introducing people to those same people, those lessons, and then helping them to build upon the foundation that I’ve laid, which is really the foundation of hundreds of other people before me.

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

Colin Carr: Website is carr.us, and in the upper right hand corner, you can find an agent. So if you want to talk about the viability of a deal or get a perspective from us before you buy a property or invest in and pick someone’s brain, our team, our agents are happy to do that. We do it every day. They won’t charge you for it. They’ll just give you free advice and give you their thoughts, and you can get in touch with someone locally that could give you a lot of information that could help you to process.

Joe Fairless: You’re a wealth of knowledge. It’s so nice talking to people who are so knowledgeable about what they do, and it is very clear that you know your industries that you’re in, and it’s just fun. I love talking to people like you. So thank you for being on the show, talking to us about the four divisions of your company, talking about how you got into senior housing as a result of being in healthcare, and then going deep into healthcare in particular, from an investor standpoint, and what to look for. So thanks for being on the show, really enjoyed it. I hope you have a best ever day, and we’ll talk to you again soon.

Colin Carr: I appreciate that. Thanks so much.

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JF2062: Commercial Real Estate During The Coronavirus With Tim Karels

Tim is the Owner of Falls Real Estate, he owns and manages $15-20M in commercial real estate and has over 9 years of experience. The coronavirus has impacted everyone in the market and today Tim explains from a commercial real estate perspective how he is handling rent collection and making property improvements 

Tim Karels Real Estate Background:

  • Owner of Falls Real Estate 
  • Falls Real Estate owns and manages $15-20M in commercial real estate
  • Over 9 years of experience in real estate investing
  • Based in Sioux, South Dakota
  • Say hi to him at https://fallsre.com/
  • Best Ever Book: Richest Man In Town

 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“We have to emphasize with everybody but we also have to remember we have our own investors and mortgages to pay and we should look at how we can work together as a team.” – Tim Karels


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 Tim Karels. Tim, how are you doing today?

Tim Karels: I’m pretty good. How about you?

Theo Hicks: I’m doing good, thanks for asking, and thanks for joining us and being willing to talk about what everyone is talking about, which is the Coronavirus. Today we’re gonna talk to Tim about how his business is being impacted by the Coronavirus, and just all things Coronavirus.

Before we get into that, a little bit about Tim. He is the owner of Falls Real Estate, which owns and manages 15 to 20 million dollars in commercial real estate. He has over nine years of experience in real estate investing. Based in Sioux Falls, South Dakota. You can say hi to him at FallsRE.com.

Tim, before we start talking about the Coronavirus, do you mind telling us a little bit about your background and what you’re focused on today?

Tim Karels: Yeah, a little bit about myself – I am born and raised in South Dakota. I’ve been here my whole life, and I absolutely love it here. Our real estate is all focused in South Dakota as well. Right now we’re really just focusing on potentially looking what we can do to improve our properties. It’s really hard right now to look at investing in properties, given the situation that we’re all experiencing… But the labor force is looking for projects and for stuff to do, so how can we use that labor force, often at a cheap rate, to improve our properties, and also try to help the economy and keep people in business.

Right now it’s status quo on the investment properties, but how can we improve those, and focus on how to collect the rent, and the best way to deal with people that might be put into a bad financial situation based on the virus.

Theo Hicks: Perfect. Thanks for sharing that. So before we dive into our tactics, I wanna just set some more context, so people understand what your portfolio is. It’s 20 million dollars in commercial real estate… Do you wanna walk us through how many properties that is, what they are – is it retail, office, medical, multifamily? That way we have a little bit more context, and then hone in more specific questions.

Tim Karels: It’s really just four large properties, mainly consisting of office space. We have some downtown — Sioux Falls is a metropolitan area of about 200,000 people, so it’s not very big, but it’s the largest in South Dakota. We have some loft apartments, we also have some retail, some restaurants, and some event centers.

So it’s a mixture – probably about 75% office and 25% in that specialized retail and apartment and loft. So kind of a mix of basically everything.

Theo Hicks: Perfect. So your two main areas of focus right now are 1) improving your existing properties, and 2) making sure you’re able to collect rent. I actually haven’t talked to anyone who — because most people I’ve talked to are just multifamily… So maybe we can focus on the rent collection part first. Obviously, a lot of retail places are shut down because of the stay-at-home orders and the essential business  orders and things like that… So maybe walk us through how you’re approaching collecting rent on your retail properties specifically.

Tim Karels: We’re definitely working with our retailers. The PPP program that’s come out has 75% to be used for payroll and 25% to be used towards rent and utilities. It’s our focus to try to help as many small businesses in the retail sector succeed, as much and long as possible, understanding that we have to keep the lights on and the building at working condition, even if we’re not getting rent, and knowing that we have our own mortgage to pay. So what we’ve been doing is working on a case-by-case basis, giving these retailers some context in the banking world, the financial world, to allow them to apply for the PPP. We’re not really telling them that they should do it, we’re saying “Hey, you have to do this, especially if you cannot pay rent.”

Once they do apply for that PPP — I know the banks had a hard time rolling it out. It sounds like we’ve already hit 250 billion out of the 350 allocated, and by Friday that’s gonna be hit… So if these retailers did get their PPP in, they got funded. We’re working with them on a case-to-case basis on how we can collect rent, while they utilize the ratios that the SBA has allocated for how they can use those funds.

If they haven’t applied, we’re telling them to apply, and if the funding does run out, we’ll have to probably just defer the payments until they can get that PPP. If they’re not gonna apply for the PPP, then unfortunately they’re not gonna try to help themselves. We will probably just gonna have to go through the legal realm of what happens when somebody doesn’t pay a rent.

So we have to empathize with everybody, we have to try to help everybody as much as we can, but we have to also understand that we have our own investors and our own mortgage to pay, so how can we all work together as a team. Usually, it is on a one-by-one case type thing.

Theo Hicks: Thanks for sharing that. That makes a lot of sense. I know that PPP program is very helpful for a lot of people right now. What about office? My wife works for a corporation who has an office in a downtown area, and they’re all working from home… I guess it depends on what type of a renter you have, but it might just be a little bit different for an office; those corporations can just work from home. The company is still making money, so I’m assuming they can still pay rent… But obviously, you would know more than me, so correct me if I’m wrong, if there are any problems with rents. So what types of things are you doing to collect rent on those office buildings?

Tim Karels: For the most part, everyone at the office/individuals has paid. South Dakota – we’re one of eight states that don’t have a shelter in place order. Now, the city of Sioux Falls – I don’t know if you just saw on the news; we have the Smithfield Pork Processing Plant, which has now become the number one hotspot for Coronavirus sources in the nation… So our mayor and the city council is trying to put together a stay-at-home shelter ordinance for the Sioux Falls city ordinance.

So the economy here was very strong; the offices that we rent out, those companies were all very strong, so I think in the short-term they all had cash reserves to pay for the rent. They too can apply for the PPP program. They don’t rely on foot traffic nearly as much as the retail, the restaurants, and bars, and event companies and whatnot… But how this is different from the financial collapse is that every business is getting affected. Some of them are reaping the benefits, for example exercise equipments at home, beer sales, distribution sales, liquor sales are going through the roof. If you look at even smaller things, such as planning events or wedding and all that stuff are going through.

So there are some offices that might be semi-retail that are struggling, but I think overall, they’re gonna be fine. They’re probably not gonna make nearly as much money, but I think that they’re gonna be fine, given that they can also apply for the PPP, and that it’s not affecting them like some of these retails, that literally overnight went from 100% full-blown/let’s go/balls to the wall, to they lost 90% of their business in 12 hours. It’s just crazy.

Theo Hicks: Yeah, totally. I figured that’d be the case, where retail would be a little bit harder hit than office. I guess depending on the retail too, because as you mentioned, if you were renting to a liquor store, then they probably have no issue; maybe you can ask for a little bit more rent from them, or something. [laughs]

Something else you mentioned too that I really like, and it’s funny, actually my mom was talking about this stuff – what are you gonna do during this time to improve and come out the other side better… And you mentioned that one of your focus, since obviously acquisitions are slowing down  – what can you do to improve your existing portfolio. So you’ve got office, retail, apartments… You can either go one by one, or just overall improvements you’re making. Give us some examples of things that you’re focusing on right now to improve your current portfolio.

Tim Karels: Like I said, we have some exercise rooms and facilities in some of our real estate, and people are feeling uncomfortable going out to exercise facilities that are off-site, and they might even feel uncomfortable going here, but we do have our cleaners go in… So we’ve been buying new equipment; if there’s some shoddy or old equipment, we’ve been replacing that… We’ve been looking at what type of things that will bring some more bang to the buck.

It literally could be just simple things, such as painting, things that you don’t need to bring in a whole crew, because — keep in mind, we don’t have that shelter in place quite yet, so business that are deemed not essential still can come in to work. So we are trying to keep our tenants as comfortable as possible by not bringing in a whole crew, and demolishing and putting up new stuff… But if we can paint, replace countertops, replace flooring, elevator panels, the equipment rooms was a big one… And just stuff that will make a small difference and make the tenants maybe feel a little bit happier, knowing that we’re not bringing in a  whole crew to do it and risk their health.

Furthermore, there’s people out there looking for work. I’ve just had my HVAC system go out in my house, and I called an HVAC company because it’s 28-30 degrees out at night, so we still needed some heat… And I had a guy come in 15 minutes and he basically just said “We’re sitting on our butt, we’re looking for work. If you need some stuff to get done, now is the time, because we can probably get you a good deal, at least on the labor side of stuff.” So I think it’s those kinds of improvements that you can look to do without jeopardizing much health for your tenants.

Theo Hicks: Okay. Is there anything else that you wanted to mention as it relates to the Coronavirus and your business, before we move into the lightning round?

Tim Karels: I don’t think so. I think it’s interesting, because most financial institutions when it comes to mortgages that are due – I think if you’d have someone have good relationships with them and you are struggling with cashflow, a lot of the institutions will hopefully do an interest-only, or maybe defer some payments or move them to the end of the loan… But I really think it’s important that landlords do work with their tenants as much as possible.

I see some tenant strikes going on in the bigger cities, but I also see some landlords that send out unreasonable letters to their tenants… And I just hope that as Americans we see the bigger picture; we know that we’re all struggling, so how can we help each other, and what can we do?

On the residential side, I think the government is taking care of most people, whether you agree with it or not… But with that being said, there’s still gonna be  independent contractors or people that own small businesses that haven’t got the PPP, or they’re a seasonal business and they can’t get what they need, that are still gonna need to be worked with.

So I just hope that other landlords have the passion to work with these tenants, but I also hope that tenants don’t always [unintelligible [00:13:36].21] tenant strike, and hurting landlords that are providing housing, and trying to help people with their businesses, and stuff like that. That’s really all I had to say, and hopefully we can get through this together.

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

Tim Karels: Yes, sir.

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

Break: [00:13:55].19] to [00:14:57].28]

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

Tim Karels: There’s a book called The Richest Man in Town. It’s actually written by a guy from Brookings, SD. An individual that worked at Walmart his whole life, who absolutely wasn’t rich, but had the best personality… And it’s changed my life, and it made me look and be more humble.

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

Tim Karels: Probably go camping for a month, and just let my mind get clear. I’ve worked hard, and hopefully it doesn’t collapse, but I also deserve a break, I think.

Theo Hicks: Do you go camping in South Dakota somewhere?

Tim Karels: Probably I have to because of the restrictions, but it’s a little cold. So if it collapsed today, I’d probably wanna go somewhere down South.

Theo Hicks: What deal did you lose the most money on, and how much did you lose and what lessons did you learn?

Tim Karels: Probably just trying to get into the house flipping. I didn’t really lose that much money because of the appreciation that houses had, but when you put in your time and effort on it, and you have to pay your property taxes back, pay a real estate agent back, pay short-term capital gains… I looked at the amount of money I was making versus the time I spent, and it’s “What can I do better and become more efficient?” To be honest, it scrapped the whole idea altogether. I think because I learned from it quickly, it saved me tons of money in the long run.

Theo Hicks: And then lastly, what is the best ever place to reach you, and anything else you wanna mention before we wrap up?

Tim Karels: Just my website, www.fallsre.com. Fill out a Contact form if there’s anything to talk about. I don’t know, I just like talking to other people about the investing world. I own a couple other businesses too, and I just kind of like to stay in touch with everybody about anything business. So if there’s anything to talk about, feel free to contact me. If you’d like to have a phone call or if you’re in the area when this whole thing gets done, have a coffee or a beer or something.

Theo Hicks: Alright, Tim, I really appreciate you coming on the show today and being willing to talk about the Coronavirus and how it’s impacting your business. To just quickly summarize what we’ve talked about – your portfolio consists of mostly office. We’ve talked about how most people have been paying their rent; office is not gonna be as impacted as retail is. You kind of walked through what you’re doing on some of your retail properties, which is mostly asking and telling your tenants that “Hey, you guys need to apply for this PPP program, so you can use 25% of that loan to pay for your rent and utilities.”

I also really liked when you talked about how you’re focusing on how to improve your existing portfolio during this time, as opposed to just writing it out, not doing anything. You basically mentioned that you’re trying to do things that make a small difference and make your tenants happy, not having to bring in a full crew to stress them out about potentially catching the Coronavirus.

So again, I really appreciate you coming on the show. Best Ever listeners, as always, thanks for listening, stay safe, have a best ever day, and we will talk to you tomorrow.

Tim Karels: Thanks. You have a great day, too.

 

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JF2055: Open Air Shopping Centers With Chris Ressa

Chris is the COO of DLC Management Corp and he currently oversees DLC’s a portfolio of $3 billion. Their goal is to buy value-add properties that are underlease or undermanaged. He explains in detail what a value-add property is and how they analyze if it is a good buy or not. 

Chris Ressa  Real Estate Background:

    • COO of DLC Management Corp
    • Currently oversees DLC’s asset portfolio of $3 billion
    • 15 years of real estate experience
    • Located in Elmsford, New York
    • Say hi to him at:https://www.dlcmgmt.com/ 

 

 

Best Ever Tweet:

“Don’t be seduced by the price dropping.” – Chris Ressa

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JF2051: Real Estate Tribes Approach During The Coronavirus With Travis Smith

Travis is the CEO of Tribevest and shares the story of how Tribevest came to be and explains how they are being impacted by the coronavirus pandemic. He also shares what he is noticing in other tribes and how they are approaching the market. 

Travis Smith Real Estate Background:

  • Founder and CEO of Tribevest
  • He is a partner in several investment groups that invest in single-family rentals, multifamily, and commercial real estate
  • From Columbus, Ohio
  • Say hi to him at: www.tribevest.com

 

Best Ever Tweet:

“When everyone is panicking and selling, our tribes are pulling capital together, so when the time is right, they will be able to take advantage of great deals.” – Travis Smith


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 Travis Smith. Travis, how are you doing today?

Travis Smith: Good, Theo. Thanks for having me; glad to be here.

Theo Hicks: We’re glad to have you and thanks for being here, looking forward to our conversation. As everyone knows, we are in the middle of the Coronavirus pandemic, so we’re going to be talking about that today with Travis, how it’s impacting his business, his thoughts on it and what he is doing to combat it. But before we get into that, let’s go over Travis’s background.

He is the founder and CEO of TribeVest, which he will talk about here in a little bit. He is a partner in several investment groups that invest in single-family rentals and multifamily and commercial real estate. He is from Columbus, Ohio and his website is tribevest.com. So Travis, do you mind telling us a little bit more about your background and then what you are focused on today?

Travis Smith: Absolutely. TribeVest, first of all, just a little bit about the platform. We’re really a collaboration platform for investor groups. You can think of us as an operating system and a banking platform designed for real estate investors to come together, assemble, form and bank together, and ultimately do more as a result of pooling resources and pooling capital. So I’m really excited to talk about that. A little bit of my background – I come from the FinTech space, so digital banking and payments processing was where I came up, and then in 2017, 2018, came full time being the founder of TribeVest.

Theo Hicks: Okay. So do you mind elaborating a little bit more? Give me an example of what I have — I don’t know, $500,000, and I’m interested in investing in real estate, how would I use TribeVest to use that capital?

Travis Smith: Yeah, let me go back to the beginning, which is very relevant today. TribeVest was born from the last global crisis, the financial crisis, the Great Recession in 2008 and 2009. My brothers and I, we were on a fishing trip, quite frankly one that we couldn’t afford, and we were seeing the world changing around us. In fact, my uncle, who we had all looked up to and admired because he had a great job, worked for HP, was traveling the world, and after the Great Recession kicked in, he was laid off and was unemployable at the age of 55. It made us realize that everything we had been told to go to school, get good grades, get a good job and retire and die gracefully wasn’t going to work for us. We always saw real estate as a way to hack wealth without having to give up our day jobs, but we had that same problem that we all have – to break into private markets, to break into real estate, you need capital, lump sums of money that we just didn’t have.

On that fishing trip over a few beers, we had a breakthrough. We said, “Listen, guys. Let’s quit talking about doing real estate deals and address the problem right in front of us – lack of capital.” And in that moment, we said, “Let’s each agree to a manageable and monthly contribution of $500 each.” That was a stretch for us back then, but it was manageable, and between the four of us that was $2,000 a month, $24,000 a year, and that was how we broke in. One investment led to another led to another and led to another, and we look back and we’ve realized that by forming and funding that investor group, that tribe, we unlocked a future we could have never dreamed of, and over time, we were changing our future.

About three years ago, people started to notice, and they said, “Wait a minute, you’re investing in what type of deals? How are you doing this?” Then they would say, “Well, wait a minute, I have a tribe. We have shared financial goals. Can you help us form an investor group too?” And that’s when we thought about it, and said, “Is there a market here?” And of course, we realized, we looked back and we thought, “Gosh, what would we have done differently?” and we would have done a ton differently. Ultimately, that’s how we came up with our initial product, that now hundreds of investor groups are using to form and fund whatever their venture.

Theo Hicks: Okay. So your website’s like a fishing boat in a sense, where people come together who want to collaborate on some particular venture deal, let’s say, a real estate deal… And so they all just put their money together on that platform and then go off on their own to buy the deal? I’m confused on that aspect.

Travis Smith: No, I’m glad you’re clarifying this. Right now, we are deal-agnostic in that most of our tribes and our customers are coming with a pretty good idea of the deal they want to get done, whether it’s a single-family rental down the road that they’re putting together with their neighbors, or they’re participating in a multifamily syndicate, or a commercial deal syndicate, or whatever, it literally could be anything and that’s a fun thing to get into on what our tribes are investing in. But really, they bring the dream, they bring the deal or what their goals are, and we’re helping them facilitate. I think it’s important to point out here, Theo, and maybe you’re picking up on it – what we’re doing is nothing new. We’ve been surviving and thriving as a tribe since the beginning of time, and certainly in real estate, since the beginning there too, people have been coming together, forming groups to get deals and bigger deals and more deals done.

So we didn’t invent the idea of tribe investing, but what we are providing that was missing out in the marketplace, was a neutral third-party platform that took the burden off the members of the group, especially the initiator. It was always trying to figure out how to market the tribe and the deal and, “Hey, this is my deal” and “Come on in”. And now there’s a platform that takes the burden off of everybody, where the initiator could come in, build a vision and a mission for the group, and then share that out to prospective members and invite them in to collaborate, co-create, “Are we aligned?” Then we’re just as proud of the groups that go on to achieve awesome deals as we are the ones that never get going, because we feel like we’ve done our job.

When we are looking back at our initial tribe, when we said, “Hey, what would we do differently?” one of the big things was, “I wish we would have taken more time to align and qualify and agree on our expectations.” We always say more important than the rules are the rules upfront – the how much, the how long, then what, and what if; all those things you don’t necessarily want to talk about or you feel like you don’t really need to – well, you do, and TribeVest helps you do that in a very fun and systematic way.

Essentially, what we’ve done is we’ve mitigated emotion by making sure that you’re taking care of those things upfront. I think you’re picking up on it. Our main value here is we keep the relationship the main priority – more valuable than any of the deals you’re going to be getting done. It’s more valuable than any of the deals or anything are those relationships. Anybody that’s been around long enough or been in the business long enough would have a hard time arguing that.

So this platform is designed for you to come in, align, assemble, agree, and then all those other things that are out there, but we’ve just streamlined them. We made them super easy, we’ve automated. You can file for your LLC in all 50 states. A really unique thing, at least for business partnerships, is once you have your EIN, your LLC, you can open up an FDI business bank account online with your partners, and have access to this tribe view dashboard with all your documents, all your banking activity, your balance. You can propose deals, you can discuss those deals, vote on those deals. So just a true collaboration platform that happens to have the entity formation and the business banking part of it too.

Theo Hicks: Thanks for sharing that. I understand a lot better now what you guys are doing over there. So your company name is TribeVest, so you obviously have a massive network, a massive tribe. I want to transition now to talking about the Coronavirus. So what are the people in your tribe thinking about this right now and how did things affect their investing, their jobs? You mentioned that a lot of people who do this are also working full-time day jobs? So can you just walk me through where your head’s at and where your tribe’s head is at currently?

Travis Smith: My tribe aside, what are we seeing out there across our network and our community is really interesting. I think one of the things that we’re seeing is, we’ve seen a surge in registrations, just over the last three weeks since this happened, and we’re attributing that to a couple things.

First, I think people are thinking about ways to connect with people they care about, and knowing that we can’t do that physically, we can’t do that or get together and socialize in person, we’re figuring out ways to leverage technology platforms that bring us together, and TribeVest also does that. My brothers and I, our tribe, not only is it the reason why we’ve been able to build wealth and be in the position we are, but it’s also our most favorite thing we do together. We’re spread all over the country and it’s what brings us together. It’s the reason why we’re talking on a weekly basis. So just an interesting thing that we’re seeing is this surge in registrations.

I think the other thing that we also empathize with is there’s this mass consciousness happening right now. It doesn’t happen all the time, and usually, it happens during these moments of crisis, especially global ones, where we’re all in similar situations and observing the same news and have the same fears, and it’s an incredible time to rethink your future. Like my brothers and I, during the last financial crisis, we didn’t want to be a slave to our paycheck, we didn’t want to be dependent on our 401(k) on Wall Street, and everybody we knew that was independently wealthy and had true financial freedom was investing in real estate, but we didn’t know how to start.

That’s one of the main things, Theo, that TribeVest enables people to do. It gives people the ability to start; you can form with people you know, like and trust. So there’s confidence and safety in numbers, and then being able to pull capital in a manageable and monthly way, is super powerful.

So one of the things that we do is, even before you form your LLC, or before you open up a business bank account, before you formalize, we give you the ability to start contributing capital in parallel together. So I’m putting $500 a month or $1,000 a month into my personal FDIC savings account. But, Theo, you’ve agreed to that too, and so has Sue and so has Jeff, and we all log into the same dashboard, and we can see collectively how much capital we’re pooling, so that when opportunity does knock, when a deal does come across our table, we have capital and we can answer the door and the opportunity.

So that’s one way that our tribes are taking advantage of it. While everybody else is panicking and selling, our tribes are pulling capital in a manageable monthly way so that when the time is right, they’ll be in a position to take advantage of great deals and build wealth that way.

Theo Hicks: Is there anything else as it relates to your business, your dealings and the Coronavirus that you want to mention before we sign off that you haven’t talked about already?

Travis Smith: Yeah. I think we touched a little bit about it – from change comes opportunity. And the winners of the next year, two years or three years, whatever this is going to look like, are going to be the ones that have capital and are able to reinvest or invest in different opportunities that come from this change. No doubt, we don’t know what this is going to end up looking like, but things have changed, which again means there’s opportunity. So just keeping that mindset and always looking to grow for that opportunity.

Theo Hicks: Perfect. And then where can people reach you to learn more about TribeVest?

Travis Smith: Tribevest.com. They can follow me at @TribeTrav at Twitter. We’ve also built a landing page for your audience at tribevest.com/bestever, and we’ll have special information for them there.

Theo Hicks: Perfect. Well, Travis, thanks again for joining us today and telling us about your platform TribeVest, as well as your thoughts on the Coronavirus. So just to summarize – and I’m pretty sure I fully understand how TribeVest works now – it’s a collaboration platform for investor groups. You call it the operating system and banking platform designed for real estate investors to pool resources and capital. Basically, I, me and a few friends have an idea of a business idea, or maybe we just have a particular deal that we want to do, we don’t know exactly how to get started, we can come to TribeVest and they can help us with all of the things that we need to do to set ourselves up for success including, it sounds like, strong focus on creating an upfront business plan with the correct rules, the correct expectations and the correct vision, and basically help us facilitate that deal.

You mentioned how the idea was born from the 2008 recession, and that you realized that you needed capital to break into real estate. So rather than focus on finding deals, you focused on ways to get capital, and you and your brothers each agreed to do $500 per month, and that’s how the business started. Then what you also mentioned, that I really liked, is that the one thing that’s more valuable than the deals and really anything else are going to be the relationships. You try to focus on that a lot at TribeVest.

Then more COVID-related, you mentioned that you’re seeing a surge in registrations over the last three weeks and you attribute that to number one, people needing ways to connect virtually because they can’t do it physically in person. And then also, the fact – and this is a very true point – that everyone’s really in the same situation; the news is the exact same for everyone, it’s always about Coronavirus. So everyone has the exact same fears, which means it’s a great time to rethink your future and what you are going to be doing once this eventually ends, and that the winners of the next few years and after this ends are going to be the ones that have capital to invest in the different opportunities that come from this change. Obviously, that starts with, as you mentioned, the most valuable thing, which is your relationships and your network.

So again, Travis, thanks for joining us. Best Ever listeners, as always, thanks for listening. Everyone, stay safe, have a best ever day and we will talk to you tomorrow.

Travis Smith: Thanks, Theo.

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JF2050: Managing and Dealing During The Coronavirus With Shannon Robnett

Shannon has 25+ years of real estate experience owning 500+ properties, experienced builder, and syndicator. His family has always been in real estate where dinner conversations consist of real estate deals. In this episode Shannon shares the ways he is approaching his investors and residents to make sure they are all taken care of and his business stays safe. 

 

Shannon Robnett Real Estate Background:

    • 25+ years of real estate investing experience
    • Developer, builder, and syndicator in multi-family and industrial
    • Currently owns 500+ properties
    • From Meridian, Idaho
    • Say hi to him at: www.shannonrobnett.com  

 

 

Best Ever Tweet:

“Communicate early and often” – Shannon Robnett


TRANSCRIPTION

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

Shannon Robnett: Good, Theo. How are you?

Theo Hicks: I’m doing good, thanks for asking, and thanks for joining us. Today, we’re gonna be talking about the coronavirus, which seems like everyone is talking about today.

Shannon Robnett: That’s for sure.

Theo Hicks: So we’re gonna ask Shannon how the coronavirus is impacting his business and the things that he is implementing in order to combat it. But before we get into that, let’s go over Shannon’s background. So he has 25+ years of real estate investing experience, he’s a developer and builder of all types of real estate, as well as a syndicator; he currently owns 500+ properties, and he’s from Meridian, Idaho, and you can say hi to him at his website, which is shannonrobnett.com. So Shannon, before we start talking about the coronavirus, do you mind telling us a little bit more about your background and what you’re focused on today?

Shannon Robnett: Sure, Theo. So I grew up in a real estate family, so I watched my parents do deals at the kitchen table and talk about if we sold this, we could buy that. My mom is a third-generation realtor, my son is a fifth-generation realtor, and my dad is a general contractor. So I kind of got that growing up. I didn’t really see that there was much option for me with that background. So I’ve always been about doing deals and putting things together, and we’ve just been able to continue to grow a business that meets the needs of our clients, meets the needs of our community. So with that, it’s definitely kept me busy and given me a lifetime’s worth of work.

Theo Hicks: Perfect, thanks for sharing that. As you mentioned before, you’ve started — so you’re a builder and developer. So you build all types of properties – commercial, industrial, multifamily, retail, but then you mentioned that you don’t own those. But you own 500+ properties. What are those? Are those multifamily, or are those something else?

Shannon Robnett: Currently, we just finished 180 doors. We’re in process, right now, of constructing one particular project of 191. We’ve got another project at 36, and then we’ve got two other projects that total another 200 doors that are under construction. So we develop those, we find the ground, we put the deals together. I also own industrial space. We’ve got multi-tenant industrial buildings all over the valley. But the retail business, the office business is just a little bit different business, and is just one that I’ve chosen to stay out of, and we’re seeing a decline in retail, we’re seeing a decline in shop space, and things like that. So that’s just an area that I’ve stayed away from.

Theo Hicks: Okay, and then all of the other multifamily projects you were talking about, will you then own those or manage those afterwards, or do you then sell those?

Shannon Robnett: Our goal is to build them up and then sell them, essentially to another one of our entities that is a syndication entity. I also do have a property management company, so I keep real tight control on what value my tenants are getting, making sure that we’re more concerned about the bottom line, giving the tenant the experience that they’re willing to pay for, because we all know, at the end of the day, that affects the value of the property through the cap rates. So we’re always, always managing our own.

Theo Hicks: So, for your syndication business, are you raising capital from other people to fund those deals?

Shannon Robnett: We are raising capital from other people. We’ve got a pretty good network. Obviously, we’re always willing to have other people join our projects, but we’ve been pretty good with that. Myverticalequity.com is where our capital raise is centered out of, but our investors that are on our syndications are in the mid-20s for their returns, in their IRR.

Theo Hicks: Okay, yup. So the reason why I was asking you all of those questions is I wanted to see what you were all involved in, so I can figure out what type of questions to ask with the coronavirus. But it seems like you’re involved in everything, so can we take this really in any direction. So let’s start with property management. So you said you have your own property management firm. Before we start talking about communicating with tenants, let’s talk about the operational perspective. I know a big thing right now is collecting rent. So we’re recording this on April 8th. So April 1st was the first of the month, when rent was due. So maybe walk us through how that went, what type of things you did to make sure you were able to collect the rent, what types of concessions that you guys came up with for your residents, or really just walk us through what happened.

Shannon Robnett: Okay. So when this whole thing started coming out, we sent out a memo to our people. It was about the 25th of March, and we hand-delivered it, actually put it on everybody’s door, letting them know that we were interested in understanding if they were affected by it and if they could let us know that there had been some change; maybe there was a letter from their boss or their unemployment filings or medical notice, we were willing to work with them.

So our approach was always to reach out to our tenants first, because we want to maximize that experience for them. So contacting them about this early really put us ahead of the curve, because we started hearing rumblings, we started having tenants come to us, and everybody is afraid of the unknown. They don’t really know what’s going to happen next. They don’t know how secure their job is. So just being able to come and talk with us.

Then when it progressed a little further and we started seeing states shut down and things like that, when we closed our amenities, we immediately told the tenants that in April, that we would not be collecting for the RUBS, nor would we be collecting for the cable, and the internet. So the tenants felt like they were being compensated for not having the amenities. So from there, we were able to really build a bridge with them and begin to continue the conversation. Moving forward, we had about five people come forward and most of them were interested in how this month was going to go, but how next month was going to go. So we were able to build a bit of a forbearance where we reduced the rents here, and then extended them by another year in the property, and spread out the discounted rent over that time period. So they were able to feel like we heard them, they had a choice in how that was going to go, we weren’t looking for a raise for next year, but we were able to spread out the discount of this month and next month over that period of time.

Theo Hicks: Okay, so we’ve talked about the residents side of things. What about your investors? So how did you handle communication with the investors? So these are deals where you, obviously, raise money from people, they’re used to getting their returns, they’re used to things just going as normal. From here on out, you really don’t know what’s going to happen by the end of the month, so what types of conversations, emails, phone calls have you had with them?

Shannon Robnett: Well, Theo, we used the same philosophy with our investors as our tenants, and that’s  communicate early and often. So we reached out to them with an email, letting them know that we didn’t know what was going to happen. However, we reminded them that we did have cash reserves that we could pull from, that we weren’t in trouble of not making our payments this month, nobody had issues with any of those things. And really before they ever got concerned, we took the proactive step with them and just let them know there was no reason to be concerned. And then after that, as always, we’ve really tried hard to stay in front of them, and most of our investors aren’t that concerned, because we are always communicating often.

Theo Hicks: So you sent an initial email. After that first email, how often were you sending emails? Every day, every week?

Shannon Robnett: We gave them an update on the fifth, and then we’re starting to do a weekly wrap up. Hey, here’s how many people we had come in looking for some assistance, here’s what we think to do, here’s how we’re going to handle it, here’s how that would potentially affect cash flow. So we’re going to start doing that on a weekly basis as we move on, just so that we over-communicate and don’t run into issues.

Theo Hicks: Okay, and then what about on the opposite side. We talked about deals that you already completed, that you have a property management company, have tenants, have investors. You mentioned that you’re working in a few development deals. Are those being impacted at all or are those still on schedule, everything is going smoothly?

Shannon Robnett: Well, construction is considered an essential service. So our contractors have been on site and moving forward as scheduled. It has given people a time to pause, as far as jumping into our deals, but it’s also been a funny time because we’ve seen a lot of people wanting to get out of the stock market and coming to us and saying, “I decided I want to invest with you guys now.” So we’re seeing both sides of the spectrum there, where we’ve got people coming into our deals faster than we thought, on stuff that we have shovel ready that we’re moving forward on. Some of the stuff that’s in planning that’s out six to nine months I don’t think is going to be bothered, but right now, we don’t know.

Theo Hicks: Okay. As you mentioned earlier about forbearance – are those conversations you’re having with your lenders?

Shannon Robnett: No, we’re not in a position where we need to have a forbearance conversation with our lenders. We’re just doing that with our tenants and we’re structuring it… Because everybody’s hearing that word in the media, and tenants like to get what everybody else is getting. So having them talk about, “I’ll give you half off of April and half off of May, and then we’ll add it on to June and July and spread it out over the next 12 months. And maybe that requires a lease renewal, but we’re great [unintelligible [00:10:32].28].”

Theo Hicks: Alright, and then another question. Obviously, they recently passed– it was last week, I don’t know time is like a time warp right now…

Shannon Robnett: Right. You’re running in quicksand.

Theo Hicks: I saw a funny meme – January is 31 days long, and then February is really short, it’s 28 days long, and then March is 6000 days long. Something like that.

Shannon Robnett: Right, right. Exactly.

Theo Hicks: But anyways– so they passed the CARES Act. I was wondering if you have investigated it or are taking advantage of any of the loan programs – the EIDL, the PPP loans at all?

Shannon Robnett: Yeah, we have applied for both the PPP and the EIDL loan program, and the reason that we’ve done that is because our employees were really excited when we applied for the PPP program, because they knew that there was an opportunity for additional protection for them, and it also puts us just in a stronger position on a balance sheet to have those funds available if we need them. They’re grants that can be paid back, but if you’re not applying for them, you’re definitely not going to be eligible. So having the opportunity to get the cash while it’s available is definitely, I think, prudent business.

Theo Hicks: Yeah, and then for the EIDL, that $10,000 advance is considered a grant. I don’t think you got to pay that one back, is that right?

Shannon Robnett: That’s my understanding as well.

Theo Hicks: It’s confusing, but it’s my understanding too.

Shannon Robnett: Yeah, and that’s the thing. We’ve applied for this and I’ve stayed in touch with our lenders on this. Everybody’s trying to get to the bottom of it. I know that– typical government, they say, “We’re going to do this,” and then they throw it off onto another agency that’s got to sort out how that actually gets implemented. But from the standpoint that cash flow right now or cash in hand right now is what everybody’s looking for, any opportunity to increase that and have that to work with later is definitely a great option.

Theo Hicks: Okay then the last question, I’ve been asking this to everyone who I’ve talked to this about… Where do you see your industry – let’s just call it, I guess, development – in six months or a year from now or once this is all over? Do you think it’s gonna snap back to normal or do you think there’ll be any changes, and if so, what do you think those changes will be, and then are there gonna be opportunities, just like there were after the 2008 recession that people should be aware of?

Shannon Robnett: I think that we’re going to snap back fairly quickly. The biggest difference between right now and 2008 is that there’s inventory shortages everywhere. So with the inventory shortages, I think we’re going to see it snap back pretty quickly. I don’t think that we’re going to go into an 08′ type recession, because that had a lot of product available. But I do see that there are some people that shouldn’t be in real estate, that are going to get removed fairly quickly… But those of us that have been here for a while that are about staying the course, I think you’re going to be just fine.

That’s the way it is with development. We’re always looking 12 to 24 months down the road anyway. So I see that we’re going to see some positive changes in how the lending market is going to respond to this, because I think that, like most things, lending has been getting a little bit loose and a lot of people that maybe shouldn’t be doing this are getting in the waters which is making it a little muddy.

Theo Hicks: Yeah. I think that’s a common theme that everyone thinks that this is going to, in a sense, weed out the fakers, so to speak, that shouldn’t be investing in real estate. So I guess that’s probably a plus plus, once they do leave and they’re trying to sell their properties. Those are opportunities for people to take advantage of.

Shannon Robnett: Yeah, like Warren Buffett said, “When the tide goes out, you can see who’s swimming naked,” and I think that there are going to be opportunities, but I don’t believe that they’re going to be the opportunities that we saw in ’08, ’09, because most people, if they’re not in a cash flow position right now, they’re not far from it, because they’re not dealing with the vacancy that would require a lot of discount in multifamily. Single-family is still selling very well. In most areas, there’s not enough inventory of that. So if their single-family product comes back on the market, they’ll get snapped up pretty quickly.

Theo Hicks: Alright. Well, Shannon, I really appreciate you coming on the show today and sharing your background, first of all, but also how the coronavirus is impacting your business and some of these solutions you’re putting in place. Just to summarize, from a resident-tenant perspective, you mentioned that you initially sent out a memo, hand-delivered memos – first time I heard about that – to all of your tenants asking them to let you know if they’re going to be affected financially by the coronavirus.

So you reached out to them first and early; it was a theme with communication. You mentioned that once you closed the amenities, you told residents that you would not be collecting for the RUBS or internet or cable. So they felt like they were being compensated for not having the amenities, because as everyone knows, those aren’t a monthly fee or anything. They’re just built into the rent. I thought that was a very solid approach. And then, you mentioned that people who needed help, you extended their lease by a year, and then spread their delayed payments over that timeframe. So that was your repayment strategy.

For the investors, you mentioned that you sent them an email on 5th of April that you don’t really know what’s going to happen, but here’s all the measures we have in place that makes us think we’re going to be okay. We have reserves, we’re not getting any trouble paying any expenses. So just like the tenants, you acted quickly. You mentioned that you’re also doing a weekly wrap up emails. I really like that. So just mentioning, “Hey, here’s what happened this week, here’s who needed help, here’s we’re going to do, here’s how it’s gonna impact the financials, but we were still okay.” So just trying to stay in front of them as much as possible.

You mentioned from a construction perspective — I didn’t know that construction was considered an essential service, so you’ve got your contractors are still there working. You got some people who are not interested in investing, but then you’ve got more new people coming in who want to get out of the stock market because of how poorly that’s been performing.

You mentioned that you applied for both the PPP and the EIDL loans, that your employees were excited about the PPP because of the extra protection that they’ll get, and that it’s good to just to have cash right now, because you have stronger balance sheets.

We talked about your post COVID predictions, that you don’t think it’s gonna be as bad as 2008 because the fact that there are inventory shortages right now, and that you think that once it’s all over, people who shouldn’t be in real estate will have been kicked out, and that there’s gonna be positive changes in lending and lending requirements because it’s been a little loose, which just allowed these people to come in… And again, that you don’t think it’s going to be like 2008 because vacancy was much lower then and inventory was much higher then. So I think that covers everything we’ve talked about.

Shannon Robnett: That’s it.

Theo Hicks: Again, really appreciate you coming on the show and being willing to talk about this stuff.

Shannon Robnett: Thank you, Theo.

Theo Hicks: I’m glad to hear that you’re doing okay. I’m glad to hear that you’re safe. Stay safe. Everyone listening, stay safe. Have a best ever day and we will talk to you tomorrow.

Shannon Robnett: Thanks, Theo.

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JF2026 : Analyzing Storage Properties With John Manes

John is the CEO and Co-Owner of Pinnacle Storage Properties and Pinnacle Storage Managers. John gives an example of how he looks at a deal and determines if it’s worth his time and money. His goal is to buy a storage property that can run without the necessity of him being there. You will learn the formula John uses to evaluate each property he finds before making an offer. 

 

John Manes Real Estate Background:

  • CEO and co-owner of Pinnacle Storage Properties and Pinnacle Storage Managers
  • Has been involved in self-storage since 2005, has raised over $35 million in private equity to build a $100M+ portfolio
  • Based in Houston, TX
  • Say hi to him at Pinnaclestorageproperties.com 

 

Best Ever Tweet:

“Can you be successful? Yea, but you’ll trip over yourself doing it and your going to make mistakes that might be very costly” – John Manes


TRANSCRIPTION

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

John Manes: Doing great, Joe. How have you been?

Joe Fairless: I’m doing well as well, and I’m glad to hear you’re doing great. A little bit about John – he’s the CEO and co-owner of Pinnacle Storage Properties and Pinnacle Storage Managers. He’s been involved in self-storage since 2005, has raised over 35 million in private equity to build a 100 million plus portfolio. Based in Houston, Texas. With that being said, John, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

John Manes: Sure. I started my career in retail, spent 17 years working for people like the Walmarts and Kmarts of the world. Got burned out on that, and applied to a job with self-storage as a district manager, with this little tiny storage company called Uncle Bob’s self-storage, the fourth largest self-storage company in the United States, and who are now Life Storage.

Ended up doing so well they promoted me to regional vice-president. I started with them in ’05, got promoted in ’08, and from there I went on to be the COO of a privately-held self-storage company here in Houston, that had 55 self-storage properties. I did that for about five years. Four years ago I went out on my own, create Pinnacle Storage Properties, and currently have 20 properties under ownership, two that we’re raising money on right now, and we’re getting ready to partner on eight others.

We have ground-up development on top of that around Texas, and a conversion deal in Temple, Texas. So by April we’ll be 32 properties.

Joe Fairless: Wow. The conversion deal – what are you doing with that?

John Manes: So we’re buying a 25,000 sqft. single-span building that used to be a youth sport building. We’re putting a mezzanine in it and an elevator for two stories, so it’ll be a 50,000 sqft. footprint right off the bat. It comes with four acres of land, it’s right on I-35 at the exit, in Temple, Texas, just north of Austin.

We were brought that deal off-market. It’s under contract – the building and the land – for $18/sqft. So we can’t build it for less than $35/sqft. It’s one of those ones that you find every now and again, and it was brought to us by another storage operator that was able to do the conversion, but not raise the equity or be able to sign on the debt, because it’s such a large project… So we partnered with him, and here we go. We’re already in the process of permitting and everything like that right now.

Joe Fairless: The youth sport building, from the ones I can think of, I wouldn’t think that a conversion would be too much to do, because a lot of times they’re just boxes with some dividers, and maybe some nets and stuff. Was it tough to do? I know the other operator was involved on that more so than you, but  do you know the details?

John Manes: So we haven’t started construction yet. We’ll probably start construction in the next 30 days… But to your point, it is a single-span building, which means there’s no pile-on posts in the middle. It’s just one big, huge, open room. The challenge to that is we’ve gotta put a second floor in the middle of it… So you will end up with those posts and everything on the first floor. But we’ve got some great construction people that we’ve dealt with for the last ten years, that have done all that kind of stuff. So from that standpoint, it’s a matter of getting the right engineer, the right architect, and then getting the right construction guys, put all them in place and let them do their magic. Rely on the people that know what the hell they’re doing, right?

Joe Fairless: Yup.

John Manes: So the painful part of that is going through rezoning and permitting and things like that, because you’ve gotta get it switched to be storage zoning versus an operating business like a sport athletic center would be.

Joe Fairless: In this case, when the operator came to you all and said “Hey, I have this opportunity. Here’s what I need”, what are the first five or so questions that you asked the operator, to just quickly assess if you should have more conversation about  it?

John Manes: That’s a great question, because we do some creative things on partnerships, and we get approached a lot on these types of projects… And mainly the reason people approach us is because they want somebody to help them raise equity. So to me, I always say “If you’re just looking for me to raise equity, I’m gonna raise  equity on my own deals.” So if you’re looking to operate it afterwards, or you’re looking to just put non-recourse debt on it with no risk on debt…

They always say there’s four components to a deal – you find the deal, you raise the equity on the deal, you sign on the debt, and then you operate the deal after it’s done. If you’re looking for me to just raise equity on the deal, it just doesn’t have much interest to me, because I can do that for my own deals, and I have 100% of the deal.

So the questions I ask, most importantly, is what are their needs? What are you looking for? What do you need help with? And I know you’ve been doing these for a long time, and you’ve probably had storage people on your podcast, but the reality is not everybody knows how to run and operate storage like they would in single-family or multifamily environments.

So they come to us for those needs. If I ask them the question of what they need and they need help operating it and they need help raising the money, then I perk up a little bit more. So I try to find out what their needs are. Because we’re a full-service shop, right? One of my business partners, Eric, handles all of our construction-related stuff, and he’s navigated the cities probably 15 times already… So he’s got those reps that have been painful to other people for the first go-around. He knows how to navigate those. So if they need help with construction, that gives us an idea. If they need help with raising money, that gives us an idea; or if they need help signing on debt, or if they need help managing it when it all said and done… Those kinds of things – that’s really when I perk up.

Joe Fairless: That’s helpful to know. So that’s from a partnership standpoint. What about from the deal standpoint? What are some main questions that you’ll initially ask or information you’ll initially ask just to get a sense of the opportunity, or if there is not an opportunity?

John Manes: I ask the basics – what do they have it under contract for, how many square feet is it… You asked earlier what is our specialty – our specialty is buying under-managed, under-enhanced, under-expanded self-storage property. So we buy the mom and pop. That’s what we’re known for. We’re not known for ground-up development, we’re not known for conversions, things like that. We’re known for fixing the mom and pop up, and running it better, and adding value that way.

So my questions generally revolve around “How many square feet is it? Is there room for expansion? What type of sales volume are they doing on a monthly basis? Why type of ancillary income do they do?” All the basics to see — because we’ve underwritten 350 self-storage properties in the last 14 months, so we can look at a deal and do the math in our head to find out whether that’s a good deal or not… So by asking those basic questions, we’re not class A cashflow buyers that have a self-storage property at the corner of I-10 and 45 in Houston. That’s not our bread and butter.

So when I ask the basic questions, “Where is it at? How big is it? What’s it doing per month? Is there room for expansion? Who owns it?”, those are all the basic questions that I ask right out of the box. On the conversion deal, I wanted to know how many square feet it is, how much land comes with it, what’s the potential for doing expansions; then if we do expansions, do we have to have detention, do we have to put a detention pond it, which eats up an acre, an acre and a half of your land…  All the things that allow you to know whether the purchase price equals the amount of revenue you can create.

Joe Fairless: Okay. For the detention pond, when would you not need one, versus need one? Generally.

John Manes: We focus on secondary, suburban, and some tertiary markets. So because of that — I live in Katy, Texas, which is a suburb of Houston. Almost everything around here is going to be required to have a detention pond to it, because of all the flooding from Hurricane Harvey, and things like that… So they want you to hold back as much water under your property as you can, for a temporary amount of time, so it doesn’t flood your neighbor’s property.

So when you’re dealing with suburban markets, chances are you’re gonna have to have some type of detention. When you get into the secondary markets, it becomes a little looser, and it’s not 100% of the time that you need detention… But in those areas, they might want you to have a fire hydrant on your property instead of detention. So if you have a fire, they can put it out, things like that. But then when you get into the tertiary type of markets, there’s so much–

Joe Fairless: Wild West?

John Manes: Yeah. There’s a lot less regulation. But everything’s relative. Inner city environments, urban core, you’re getting $1,50-$2 per square foot on rental rates, but you have a lot heavier cost in detention and things like that. Then when you get to suburban areas, you’re getting $1,10-$1,20 per square foot, and you’ve got a little bit less. You go to secondary markets, you’re getting a dollar, and you have less… And then you get out to tertiary markets – you’re getting $0.75, but it’s kind of a free for all. But to go build out there, it’s harder to make your numbers work, because you’ve still got the same building costs… So this is what you do downtown, urban market. Your buildings will cost you the same amount of money.

So it’s all relative to how you buy, how  you build, how you expand, but it all plays around what the zoning and the cities will allow you to do or not allow you to do.

Joe Fairless: When you’re initially qualifying a deal and you said you can do the math in your head, if  it’s a good deal or not and just run some rough numbers by asking those questions about what’s it under contract for, square footage, room for expansion, monthly sales volume, other income… Would you just run through an example? You can make it up, or a real one, and I would love to hear the thoughts that are going on when you’re thinking about “Hey, here are the numbers. It does work/doesn’t work based on this.”

John Manes: Okay, but I’m warning you, Joe, you’re getting inside of [unintelligible [00:12:31].23]

Joe Fairless: [laughs] Well, as long as we can exit out of it… We’ll exit out of it quickly thereafter.

John Manes: [laughs] So to me it’s pretty easy… In storage I’m gonna use $20,000/month, which is $240,000/year. But how I equate it in my head, pretty easy, and it’s not a perfect math, is if you’re doing $20,000/month, then you’re looking at a property that’s doing $20,000/month, you’re gonna pay around two million dollars for that property.

Joe Fairless: Why?

John Manes: I’ll just use basic math – you have 240k a year, your expense ratio on a small property like that is typically around 50%. 240k divided by two is 120k. If you divide that by a 6% cap, it’s two million dollars.

Joe Fairless: Okay.

John Manes: So basic math on a 20k a month – there’s not ten months in a year, so it doesn’t equate perfectly to two million dollars, but it does equate to a 6% cap. And then secondary, suburban type of markets, like a Katy, Texas, you’re sitting around a 6% cap. Now, if I’m looking at a tertiary market that has a population of 10k people, it might be a 1,8 million dollar buy on that 20k/month, because it’s a 7% cap. So what I do is I start with — if it’s doing 20k, the purchase price should be around two million. If it’s doing 10k, your purchase price should be around 750k. So when you go down in monthly sales volume or revenue, the smaller the number gets below 20k. Above 20k, when you get to 30k, your purchase price is gonna be about a 3.3 million dollar. And the reason is because your expense ratios in storage stay the same, whether you have 50k/month or whether you have 20k/month; they’re relatively the same.

We buy off a cashflow, so because of that, when you’re doing 30k/month it’s not a 50% expense ratio, it’s 42% expense ratio. So because of that, you’re paying more for the property because it has more cashflow that goes along with it, and you’re trying to stay about the same.

So if you come to me and you go “Hey, I’ve got this property, it’s in Tyler  TX” and I go “How big is it?”, you go “It’s 40k sqft.” I go “What are they doing?”, you go “They’re doing 33k/month”. I go “Okay. Ancillary income?” You go, “No, they’re not doing any ancillary income.” U-Haul? No. They don’t sell, boxes, insurance? Nope. I go “Alright, so let me guess… You have that property under contract for 3.5 million dollars?” and they go “No, I have it under contract for 4.2.” I go “Well, you’re paying too much.” Just like that.

Joe Fairless: Yup.

John Manes: So to me it’s an equal balance inside my head. You said you wanna get in my head.

Joe Fairless: Yeah. And I reserve the right to exit out whenever I want… [laughter] But did I heard you right, that the expense ratio in storage stays the same, regardless of how many units you have?

John Manes: That’s correct.

Joe Fairless: So if I buy a 100-unit versus a 1,500-unit, the expense ratio is gonna stay about the same?

John Manes: Yes and no. If you brought me a 100-unit property that did not have any land for expansion, that was doing $10,000/month, I would not buy that property. And the reason I would not buy that property is I do not wanna buy a job. So you can get an expense ratio in that property of 25% or 30%. You’re the one answering the phone, you’re the one meeting the customer out there, renting this space, and showing this space and so on, and you have no payroll. And then you have no website, you have no marketing… Right? So all of that expense ratio gets driven down.

But if I’m going to buy that 100-space property and it comes with 3 acres of land, and I can add another 40,000 sqft. to it, I’m going to spend 50k/year in payroll, whether it’s 400 spaces, or… I’ve got a property in Nacogdoches that’s 1,000 spaces, and we run that property with 2,5 people, versus 1,5 people. So we spend about 85k-90kin payroll in that store, versus a 400-space property that has 1,5 people to it and they have 50k work of payroll. So everything is relative, and there is a point that you have to add labor to it, or take away labor from it…

But if you’re looking at running and buying a self-storage property that is an investment asset, like most of your listeners are looking for, then the expense is relatively gonna be the same from a 250-space property all the way up to an 800-space property, which is the meat and potatoes of the self-storage industry.

Joe Fairless: Based on your experience in self-storage, for someone who is looking to get started in self-storage, what is your best advice ever for them?

John Manes: My best advice – and I give this all the time, because we get a lot of people that wanna get into the industry… My best advice to them is find somebody that already knows how to operate these things. I don’t think the operators of self-storage get enough credit against the value-add of these assets.

Let’s say that somebody in your audience that’s listening right now is a finance guy, or a broker that can find these things, or something. Go out and find somebody — when I meet people one-on-one, I say “It doesn’t have to be us, but go find somebody that knows how to operate these things…”, because that’ll make you more money, and it’ll make you more money faster. Can you be successful? Yeah. But you’ll trip over yourself doing it, and you’re gonna make some mistakes that might be pretty costly.

Joe Fairless: What are some common mistakes that someone with that lack of experience would make, that an experienced operator wouldn’t?

John Manes: Hiring the wrong website people. A lot of these guys wanna just go to GoDaddy, create their own website, it doesn’t interact with your software, there’s no prices online… Things like that. And Google doesn’t give you any credit for not having any content, or anything. Believe it or not, 80% of our customers touch us online some way, whether it’s they look at stuff on their phone, and then drive to our store, or they look at prices online on their PC or  on their telephone… They touch us somehow online. And a lot of them try to be cheap, because they’re doing 10k/month and they don’t wanna spend $300/month on having an effective website. But your effective website drives demand to your property. The more demand you have, the higher your prices can be, and eventually it pays for the $300.

Joe Fairless: What’s a URL to one of your websites?

John Manes: Mystorageplus.com.  It’s a many aggregator type of site that has [unintelligible [00:20:24].17]

Joe Fairless: Okay, cool. We’re gonna do a lightning round where I’m gonna ask you some quick-hitting questions. Are you ready for the Best Ever Lightning Round?

John Manes: Hit me!

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

Break: [00:20:40].03] to [00:21:30].27]

Joe Fairless: Alright, John, what deal have you lost the most amount of money on?

John Manes: The good news is I’ve not lost any money on any deal, so I can’t answer that. Have some of them gone sideways? Sure. But we’ve not lost money on it, and that’s the beauty of storage. It tends to be recession-resistant. We had a project that we bought 20,000 sqft, we expanded 63,000 sqft, and the construction company was eight months behind delivery on the product. So we were paying the mortgage rate months without having cashflow, we ended up in a lawsuit with them… That’s the bad news.

The good news is we were able to restructure that deal, get an extension of our interest-only payment on our loan, we borrowed an extra $150,000 from our investors in the form of a loan to be able to support the interest-only payment for an extended period of time, and now we’re back on track.

Time healed that wound, and so did increase in occupancy. We didn’t lose money on it, we just didn’t make as much money as we thought.

Joe Fairless: What was the result of the lawsuit?

John Manes: We settled.

Joe Fairless: And knowing what you know now about that experience, when presented a similar situation in the future, how would you approach it a little bit differently?

John Manes: Honestly, I don’t know that I would have approached it differently. I’ve been in a relationship with the contractor for eight years, so… The obstacle became that the construction company grew too fast and took on too many projects at one time, and ours was one of them. So I personally could have never predicted that, particularly knowing the individuals involved.

So doing it differently – I’d have to say pick a different contractor, but how do you know that, particularly when they’ve done a tremendous amount of work for you in the past, right?

Joe Fairless: Yeah, that’s a tough one to identify. Best ever way you like to give back to the community?

John Manes: I have a servant’s mentality. Right now I’m in the process of creating a mastermind group of professional athletes. The reason that we’re doing that is because like myself, most of these guys grew up poor, and all of a sudden they have money, and they just don’t know how to handle it or what to do with it. I like to educate people on how money works, from the simplest form of how to compound your money, to how to create a budget, and all those different things that people like Dave Ramsey teaches.

I love to give back in the way of the knowledge that people have given my and us as a company. We teach our store manager team how to go buy a self-storage property if they want to. So we try to take care of the people that take care of us, at the same time as the people that just don’t know. You hear a lot of people say “If I knew 20 years ago what I know now…” Okay, well, go teach somebody that.

Joe Fairless: Yup.

John Manes: That’s why I volunteer a lot for these podcasts. I have rooms full of people that I teach, not only storage, but basic financial principles around credit scores, and how credit works, and all that kind of stuff. I love giving back through teaching, and the knowledge that we’ve been blessed to be exposed to.

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

John Manes: They can call me – 210 818 1496. They can go to PinnacleStorageProperties.com, or they can email me at john [at] johnmanes.com. They can go to my YouTube channel and watch a bunch of my YouTube videos that talks about a lot of this stuff, why storage is a good investment, and all the stories about how me and my partners grew up with nothing, and have created something. All that is on YouTube.

Joe Fairless: Well, John, thank you for being on the show, talking about self-storage, and in particular talking about a deal that you’re working on, and also how you qualified that initially… And then taking a step back, how you qualify opportunities, and the questions that you ask. And then I’m officially jumping out of your head… [laughter] So you can be one with yourself, and I can go about my way, too. But I really did appreciate your conversation, and I’m grateful that we talked.

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

John Manes: Thanks, Joe. I appreciate it, buddy.

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JF2025 : The Differences Between Commercial & Multi-Family With Anthony Scandariato

Anthony is the Co-Founder and Managing Principal of Red Knight Properties, a value add multifamily and mixed-use investing company. Anthony shares some insight on purchasing commercial real estate and explains the differences between multi-family and commercial properties. 

Anthony M. Scandariato Real Estate Background:

  • Co-Founder and Managing Principal of Red Knight Properties, a value add multifamily and mixed-use investing company
  • They have over $500 Million of Commercial Real Estate acquisition experience and control 9 properties
  • Based in NYC, NY
  • Say hi to him at http://redknightproperties.com

 

Best Ever Tweet:

“Try to find a niche.” – Anthony Scandariato


TRANSCRIPTION

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

With us today, Anthony Scandariato. How are you doing, Anthony?

Anthony Scandariato: I’m doing pretty good, Joe. And yourself?

Joe Fairless: I am doing well, and looking forward to our conversation. A little bit about Anthony – he’s the co-founder and managing principle of Red Knight Properties, a value-add multifamily and mixed-use investing company. They have over 500 million dollars’ worth of commercial real estate, acquisition experience, and currently have 9 properties with their company. Based in New York City, New York. With that being said, Anthony, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Anthony Scandariato: Sure. That was a great overview, Joe. I appreciate it. And for your listeners, we’re actually right outside of New York City, based in New Jersey; about a half an hour outside of Midtown Manhattan.

Joe Fairless: Where in Jersey?

Anthony Scandariato: [unintelligible [00:01:46].29] Morristown area.

Joe Fairless: Okay.

Anthony Scandariato: So we’re pretty close to New York… And we started our company – my partner and I – about  a year ago. In terms of the acquisition experience, I worked for an institutional real estate operating company in New Jersey, where bought office buildings up and down the East Coast, where we were renting to Fortune 500 companies and doing value-add plays, but on the office side. I kind of realized that for a long-term investment strategy, or even a short-term investment strategy, that office wasn’t the best thing to be in, at least in this point in the cycle… So I kind of decided to start buying a few deals on my own, deals that I could just buy and build a track record, and then bring on additional partners and investors once some of these deals came to fruition and returns were actually realized, to feel comfortable to actually be taking the leap doing this full-time at Red Knight in 2020.

Joe Fairless: You bought office buildings up and down — what did you say, the East Coast? Did I hear that right?

Anthony Scandariato: Yeah, we bought anywhere from pretty much New Jersey, all the way down to Florida.

Joe Fairless: Okay. Purchase price ranges were what?

Anthony Scandariato: For your listeners, very big range. It was anywhere from 10 million to 287. That was our largest.

Joe Fairless: Alright… Where was the 287 property?

Anthony Scandariato: It was a building in downtown Charlotte, Wells Fargo Center. Great market, for sure, for any asset class, I would think.

Joe Fairless: How many years were you working at that institution?

Anthony Scandariato: About 5,5 years.

Joe Fairless: 5,5 years, okay. And what was your role during those years, and did that role evolve or change at all?

Anthony Scandariato: Absolutely. So I graduated from college actually in ’14, so it was essentially a role out of school; I started out as a very low-level analyst, analyzing different opportunities for the company’s investment strategies. Then I kind of evolved into taking over the acquisitions department, and also at the same time getting involved with a boutique company and seeing everything from the acquisition, to the asset management, to property management, to development, to negotiating with lenders… Almost like running your own within the shop. So a great experience, and I’d recommend it to any of your listeners who are thinking to get into commercial real estate on their own long-term, but kind of want the experience beforehand, and kind of learn from really good mentors who have been successful.

Joe Fairless: To use your words, “a low-level analyst” – what do you do exactly in that role?

Anthony Scandariato: I wouldn’t really call it low-level, maybe that was the wrong term… But more of–

Joe Fairless: Entry-level?

Anthony Scandariato: Entry-level, yeah. Entry-level market studies, feasibility reports, comparable reports… Almost like a basic form for appraising properties. And then after you master that skill, you can look at analyzing investment opportunities for the company, and presenting to the company if this is a good opportunity to pursue, and if we’re gonna pursue it, are we gonna partner on it, and who are we gonna partner with… And kind of run it soup to nuts. It kind of just evolves from there.

Joe Fairless: Talk to us about a feasibility study that you would do, just the components of that please.

Anthony Scandariato: Sure. So you would obviously do a market study, which could be broken down by obviously started with the state, and then it could be broken down by submarkets is what we call them, in certain regions in different states… And as you dig deeper – it depends what asset class you’re looking at, but you look at historical trends for vacancy, you can look at historical trends for rent growth, and average rental rates, look at trends for any new construction, any new development coming on the line, looking at historical sales data, price per square foot… For a lot of your listeners, multifamily is price per unit, and cap rate… Many different metrics to determine if it’s a good investment to underwrite and present to either a limited partner, or another general partner you’re trying to acquire the property with. Nothing else starts without that general feasibility study.

Joe Fairless: Those different data points that you were talking about are variables that are assessed… I imagine that you all had a subscription to some third-party research company or database to pull a lot of that information. Is that correct?

Anthony Scandariato: Yeah, that’s the benefit of also working for a larger company. You have the [unintelligible [00:06:25].18] which is, as you know, the largest commercial real estate information company, at least in the country right now, and they’re trying to take over more… Reis is another good resource, primarily more catered towards the multifamily… And obviously, different news cycle reports, we could speak to different brokers on historical market reports… There’s many ways to get market intel.

Joe Fairless: So as an analyst you go get this information, but I imagine that doesn’t take very long to run these reports, because you’re just logging and running the reports… What are you doing with the information as an analyst?

Anthony Scandariato: So once you’ve found that information, typically — it depends on what asset you’re looking at, and what asset type it is. For example, I was buying office buildings. Typically, they come with an offering memorandum, which is the same that you  see in multifamily properties. You go through that, verify all the information the brokers are presenting to you are correct and accurate from your third-party sources, and then putting together after that a comprehensive financial analysis [unintelligible [00:07:38].18] you can use, and also working for a larger company, they’re able to buy subscriptions to software such as Argus, which is very expensive relatively speaking to just a general simple Excel spreadsheet.

With office properties there sometimes could be a hundred tenants at the property with different reimbursement methods, and different lease expirations, and [unintelligible [00:08:03].09] and expense caps… So it’s pretty comprehensive software. I haven’t really seen an office building modeled on Excel from scratch, but if anybody’s ever done that, I’d love that template. [laughter]

So  you kind of gather all the market information, verify what the broker is presenting to you is accurate, underwriting the property in either Excel or Argus to the best of your assumptions, and then seeing based upon your return criteria seeing if it’s a good investment or not, and then kind of presenting to your internal investment committee, and then it kind of goes from there, depending upon how you’re structured.

Joe Fairless: When you’re looking at the third-party research information and cross-referencing it with the information the brokers provided to verify that it is correct, when it is not correct, what are they typically fudging the numbers or their facts on? What categories or what stuff does that typically involve?

Anthony Scandariato: The number one thing I’ve seen is rent growth. Whether you’re buying a hotel, or self-storage, whatever it is, typically the brokers like to fudge those numbers, so that’s the first thing I look at – what did they assume for rent growth? Let’s just say you have a tenant paying $1,000 for a one-bedroom unit; did they assume that you’re gonna get a 7% increase year one, and then year two a 5% increase, without any renovations or justification for it? Even if you wanna compare that to your historical data, most of the time generally cut that in half, what the broker is saying… But it depends on every asset class, and where the properties are located.

If your property is located in a hot market like Charlotte, for multi I had to look at the 10-year historical average year-on-year rental growth there, and see if whatever they’re underwriting makes sense. And if it doesn’t, we adjust, and then we see how our numbers shake out, and we would go to the broker then and make an offer; sometimes it’s accepted, sometimes it’s countered, or sometimes it’s not accepted at all. That’s generally an overview of how we come up with an analysis.

Joe Fairless: For 5,5 years you were focused on buying value-add office buildings, correct?

Anthony Scandariato: Yes.

Joe Fairless: And you learned within a structured organization, but you were able to get a lot of really good hands-on experience, and have different roles over that period of time… And then you decided “I’m gonna take this experience and I’m gonna pivot in the multifamily.” Now, earlier you briefly mentioned that you moved to multifamily because office near and long-term wasn’t as good as multifamily… But let’s talk about that more. Why not office? Because as you were totally aware, I know, office is not as competitive – at least my perception of it; I’ve never purchased an office building. My perception is multifamily is much more competitive than office… And if you have that skillset of being in the industry for 5,5 years, it seems like that would be a great play for you to just double down on office, since you’re bringing that skillset already…

Anthony Scandariato: That’s a good point. What I would say to that is if you’re looking to pivot asset classes, I would try to find a niche within the asset class you’re trying to pivot to, that not many people are looking at. For example, for many obvious reasons [unintelligible [00:11:36].01] multifamily historically has been very recession-proof, and we can go into those details, but we’ll spare them for another time.

It’s more the fact of you kind of have to know your local market, and understand where all the investors are flocking to, and where some of the investors aren’t, because they’re not aware of the areas.

For example, I live in New Jersey, which we mentioned, and it’s very close to New York City, within half an hour… A lot of investors in New Jersey won’t touch anything West of the waterfront, which is Jersey City, Hoboken… Basically Hudson County. So we don’t stay in those markets at all. We like to go West of that, because that’s number one where we live, and number two where we know, and number three where we’re able to focus on kind of the middle market deals, anywhere from — a small scale we did was a million; we’re closing on our first syndication now which is 5,5 million, we just got another one under contract for 7,3…

So if you’re in between that 1 to 20 million dollar range, if you bought in Hudson County and you had that type of money, you’re probably gonna be buying only 15 to 20 units, whereas if you go further West, you can start to get in the 50 to 100-unit properties, with less competition and buying from very non-institutional owners, where you can really create value, and not many people are looking right now in those areas. But once the waterfront gets heated up, everything trends West, historically as well.

But office in general, to answer your question, you could be really good at repositioning office buildings. It takes a lot more time to do that, in my experience, than repositioning multifamily…

Joe Fairless: Why?

Anthony Scandariato: Vacancy… It depends where you’re at. I’ve done deals anywhere from Jersey to (like I said) Florida, Atlanta, Charlotte, Louisville, Baltimore… Even if you’re in a pretty hot market, lease for office buildings take sometimes months to negotiate, even if they’re only 10% of your rent roll and they’re signing a three-year lease. Sometimes it’ll take four months to negotiate a lease… And then you have to deal with the construction, which could take another 2-3 months, or potentially even six months, depending on how big the tenant is. And then they start to pay rent… And then you’ve gotta do it again. You’ve gotta keep constantly doing it…

So it’s a little different than multifamily, where traditionally you had your leases, and just kind of an expected turnover rate every year, and you kind of forecast that as you build your portfolio and you’re able to plan for it. So office is very fluctual, especially when you have a downturn as well.

Joe Fairless: If you were forced to only buy office, what would your approach be?

Anthony Scandariato: I’d say pretty similar to the multifamily – trying to find a niche. Stay out of C, B, D locations, in gateway markets such as New York City and Chicago and Boston. I would go to secondary markets, which we have, very similar to what we’ve been doing. The cap rates in terms of the spread between multifamily and office – they’re getting tighter. I’m seeing about 100 basis points spread right now on a stabilized property between office and multifamily, which is not anything to write home about.

Joe Fairless: Did I heard you correct, for your first couple deals you’ve used your own money?

Anthony Scandariato: Correct.

Joe Fairless: So what was that first deal?

Anthony Scandariato: It was a two-family house… [laughs] I still own it. I think it’s a great way to start out. It could be relatively affordable…

Joe Fairless: We’re gonna skip past that. What’s the next one?

Anthony Scandariato: Okay. Two-family house, and then I bought another two-family… [laughs]

Joe Fairless: Next… What else?

Anthony Scandariato: Another two-family, but I sold it…

Joe Fairless: [laughs] You got three two-families.

Anthony Scandariato: Basically, I started with three two-families, and then I met my partner through a mutual friend. My partner played for the NFL for eight years, Brian Leonard. He’s a great partner to have. He played for eight years as a fullback, so he’s local to the area that I live in. So we ended up partnering on our first deal. It was a very simple split between the two of us.

Actually, we bought a mixed-use building together. It wasn’t 100% multi; it was about 60% retail, 40% multi… A year ago, which we just turned around and did a really nice cash-out refinance.

So we went from the two, two, two, to essentially a ten. Then we bought another ten, and then we bought a 13, and then we bought a 20, and then we bought another 20, and then now we’re closing on a 51, which was our first syndication, and now we’re doing a 64… So you see the progression.

Joe Fairless: Yeah. Is the 60% retail, 40% multifamily the only mixed-use you’ve purchased?

Anthony Scandariato: No, we actually have three mixed-use properties, but the first property we bought was very local to the area I live in; I knew the building and I was very comfortable with the retail. The other two properties that we have, that have retail only, have one or two tenants, whereas the first building we bought had four retail, so the income from the residential and the other ones were anywhere between 70% and 80%… So it looked less risky.

Joe Fairless: Right. Okay. On that first one that you bought, that is 60% retail, what did you do that the person you bought it from did not do?

Anthony Scandariato: Sure. It’s a great case study. We bought it from a farmer family. They actually had 9 siblings that owned the property. Then what happened was there was a fire at the building a year ago, prior to when we bought it, that occurred. One of the tenants left the candle in the curtain over night, and the next thing you know the whole building was on fire.

It was a little bit of a disaster, but structurally, the building was still sound. They had a nice insurance claim that they collected on, and redid essentially the whole building. But this family is very non-sophisticated, and what they ended up doing was they kept everybody’s rent the same after that occurrence, even though you had brand new apartments and brand new retail space now, that they paid for. So everybody’s rent – let’s just call it $800 or so, on the market is more like $1,400. So we went in there and obviously we were able to increase rents, and we also were able to add a little bit more upgrades that the insurance company didn’t add.

So we added some upgrades, we got a substantial rent increase from all the residential, in addition to leasing up some vacant retail that was sitting vacant for years.

Joe Fairless: How do you go about leasing up vacant retail?

Anthony Scandariato: It depends how big the space is. With a local broker. In this instance it was 1,000 sqft. It was actually like a lot style, it was kind of lower-level… We didn’t even think we would rent it, to be honest, for a while, unless we gave it away… But we rented in two weeks after we bought it, and we just put it on the market with the broker.

Joe Fairless: Huh. How much?

Anthony Scandariato: We got $10/sqft, so about $1,000… But if [unintelligible [00:18:06].16] you just add a lot of value to your building, with one lease. So that happened, and there was also a retail tenant that was below market, that we knew was leaving. Every time we buy a building, we like to interview the tenants, if it’s retail or office; obviously, it presents more risk than apartments, and we like to see what’s going on.

So we knew they were gonna be leaving, but their rent was $500 below where somebody else new would come in… So they ended up telling us they were leaving, so we kind of planned. We had the broker market the space already while they were still occupying it. When they left, they got somebody paying actually $550 more than the previous tenant, with no turnover, no vacancy. That was really a slam dunk deal.

Joe Fairless: What type of business is it?

Anthony Scandariato: The new tenant – it’s like a curated goods for men’s supplies. They have men’s deodorant… It’s kind of a cool, crafty space. The space before that was a high-end women’s boutique.

Joe Fairless: Okay. Last question on that, and then I’ll ask you the question I ask everyone… How much did you buy it for? …and I believe you said there was recent refinance – what did it appraise for on the refi?

Anthony Scandariato: Sure. Pretty crazy numbers, and we weren’t expecting this… So we bought it for 1.285 million. Our all-in basis was around 1.3. It appraised for $2,110,000.

Joe Fairless: Excellent. Over what period of time?

Anthony Scandariato: A year.

Joe Fairless: Wow. I’m glad that you talked about what you all did, because that is what attributed to the value increase. Anything else that you didn’t mention, that attributed to the value increase?

Anthony Scandariato: People were flocking over the building when we were making offers. I think we positioned ourselves well. I was friendly with the broker, and we showed a proof of funds, and it was kind of a no-brainer… But we were very fortunate. Maybe it was a little bit of luck and market timing, but very fortunate to have bought that, and really looking to that as a case study for our future success… Even though every deal is not gonna be like that, but… A really good start.

Joe Fairless: What percent of money did you get out on the refi?

Anthony Scandariato: 100%.

Joe Fairless: And how much of that was Brian’s versus yours?

Anthony Scandariato: It’s a very simple 50/50 split.

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

Anthony Scandariato: Like I said before, find your niche, and find your niche asset class. Know your local market and where you think you think you can add value if you wanna be a value-add investor, which I’m assuming a lot of your listeners do. For cashflow reasons you could buy a very safe product that’s not gonna go anywhere, but you’re probably only gonna make maybe 5% to 6% on your money. Some people might be okay with that, but… I would say find your niche if you’re trying to create value, and eventually syndicate and bring on other partners… Find your niche.

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

Anthony Scandariato: Sure.

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

Break: [00:20:52].15] to [00:21:39].13]

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

Anthony Scandariato: Knock on wood, nothing yet.

Joe Fairless: Best ever deal you’ve done?

Anthony Scandariato: I don’t think anything could beat the deal I’ve just described right now…

Joe Fairless: What’s the best ever resource you use in your business?

Anthony Scandariato: I think Costar is a really good resource for market intelligence.

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

Anthony Scandariato: We do a charity event every year for children with cancer, that my partner runs. We like to donate a part of the profits to that. And we run it in New York City every year.

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

Anthony Scandariato: You can visit our website, RedKnightProperties.com. Like us on Facebook, or you can add me on LinkedIn. I really appreciate the time, Joe.

Joe Fairless: Yeah, I appreciate you sharing the office experience that you have, and how you’ve applied that to apartment buildings, as well as some mixed-use projects that you’ve done, and how you and your business partner have created the company. I love the case study, as well as just talking about your approach when you were an analyst, how you approached the feasibility studies and the different components of it, and what you look for… And then trust, but verify on those offer memorandums brokers provide, especially the rent growth; as you said, that’s the number one thing you wanna make sure is accurate, is those assumptions.

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

Anthony Scandariato: Great. Thanks a lot, Joe. I appreciate it.

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