JF2666: Investing in Office Space During the Work From Home Era with Andrea Himmel

Andrea Himmel’s mother went from nothing to a multibillion dollar portfolio of office buildings and warehouses in New York City. Inspired by her mother, Andrea joined the family firm and now acts as Chief Investment Officer, hunting down great opportunities in Manhattan and the boroughs. In this episode, Andrea breaks down why she’s investing in office spaces during the work from home era, and how she’s able to close on these high-profit deals.  

Andrea B. Himmel  | Real Estate Background 

  • Career: Principal and Chief Investment Officer at Himmel + Meringoff Properties
  • Founded in 1978, they own a multibillion dollar portfolio of office buildings in Manhattan and last mile warehouses in the boroughs of NYC. They do not syndicate equity. They own their entire portfolio with their own equity.
  • Portfolio: Multi billion dollar portfolio of ~20 properties in NYC. Over the past 40 years, they have bought and sold over 5MM SF.
  • Based in: NYC, NY.
  • Say hi to her at: http://linkedin.com/in/ah-ny
  • Best Ever Book: A New Earth: Awakening to Your Life’s Purpose by Eckhart Tolle

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TRANSCRIPTION

Ash Patel: Hello Best Ever listeners. Welcome to The Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, Andrea Himmel. Andrea is joining us from New York City. She is the principal and chief investment officer at Himmel and Meringoff Properties, which was founded in 1978. It owns a multibillion-dollar portfolio of office buildings in Manhattan and last-mile warehouses in the boroughs of New York. Andrea has 14 years of real estate experience. Andrea, thank you so much for joining us in how are you today?

Andrea Himmel: I’m great. Thank you for having me. I’m honored to be here with you.

Ash Patel: The pleasure is ours. Andrea, before we get started, can you tell the Best Ever listeners a little bit more about your background and what you’re focused on now?

Andrea Himmel: Sure. I studied real estate undergrad at Wharton and knew I wanted to work in it, because my mother was actually in the industry. She had co-founded the firm I currently work at in 1978, and was really a pioneer in becoming a first-generation owner of a significant portfolio, coming from really not much. So I was very inspired by my mother. During college, I had multiple internships, one at Lubert-Adler, where I was working on real estate from a private equity angle, a lot of Opco/Propco kind of retail investing. I worked in CMBS at Morgan Stanley, and ultimately landed at Brookfield in 2008. I was a little underutilized, so I started interviewing around about two years later, because it had been a slow market, as you recall, that was with the recession.

So I interviewed and my mom said, “You know what? Get out of real estate. Get into a more sophisticated form of investing, so you can differentiate yourself. Because a lot of real estate owners are street smart, but not really financially sophisticated.” So I took a job for a hedge fund and I spent eight years there. I ended up managing their oil and gas portfolio that was about 10% of their 60 billion of assets under management; it was a long-term value fund. I learned how to value cash flow. Basically, businesses should be like lemonade stands – money in, money out, some form of capitalizing the business, and some way to distribute the proceeds. The skills I gained there, focusing on valuation, were 100% applicable to those that I use now today in real estate evaluation work.

Ash Patel: Well, you make all of that sound easy.

Andrea Himmel: I ended up starting a private equity fund. We hit a home run and raised 300 million dollars from Elliott Management, which is Paul Singer’s fund, and had a 96% return on our first fund, and a 3X multiple. Then at the time, since I was a startup, I was working out of one of my mom’s buildings. She had always told me “You can never work for me.” But I had earned her respect over the years, so she invited me to work for the company.

Ash Patel: Amazing. A lot to cover here. Your mom started this business in 1978 – was it investing in real estate in New York City?

Andrea Himmel: It was. A lot of it, however, because she didn’t have the cash to buy much, she was acquiring ground leases in the boroughs, and in emerging neighborhoods, such as Fourth Avenue, which is now Park Avenue South, or Harlem in 1979. They did a lot of ground leases because there’s no major initial upfront capital payment. She went on and purchased options, and ultimately [unintelligible [04:09] She got started doing that. She actually met her business partner at a lecture that Larry Silverstein was giving at NYU, and his guest was Harry Helmsley. Harry said, “Does the audience have any questions?” My mom’s hand went up and she said, “What’s your greatest accomplishment?” Harry Helmsley said, “What are you doing tonight?” Of course, that’s unacceptable today, I think, but it grabbed the attention of Stephen Meringoff, who later approached my mother and said we should team up and be owners together. So they borrowed recourse, which obviously we don’t do anymore, but they borrowed recourse up to 90%, because financing back then was totally different from the RTC days, and built a portfolio over a few decades.

Ash Patel: And Harry Helmsley, the owner of the Empire State Building, and from his wife, Leona Helmsley.

Andrea Himmel: Yeah, we were all family friends, and he became a mentor to my mom. My mom actually very confidently broke her way into real estate by sneaking into REBNY galas, which is the Real Estate Board of New York. She had gone to HBS and she said to many prolific developers at…

Ash Patel: HBS is Harvard Business School?

Andrea Himmel: Yes, it is.

Ash Patel: Got it.

Andrea Himmel: She said, “You know what? I’m putting together a real estate panel for Harvard Business School. Larry Silverstein, do you think you qualify for this? Harry Helmsley, do you qualify? Seymour Durst, do you qualify for my panel?” Instead, what that did was it turned them into her mentors over the years, and ultimately peers. She became a well-respected name, following in the footsteps of giants.

Ash Patel: Incredible. And your mom was a pioneer because in 1978, and even through most of the ’80s, New York was not what it is today. It was a rough place.

Andrea Himmel: But as Harry Helmsley told her, Grand Central is not going to get on rollerblades and go anywhere. There are still certain districts, certain neighborhoods, and we still feel the same today, that are emerging, even though they may be Grand Central, or Penn Station. But we think location, location, location, as well as leaseability and all sorts of things.

Ash Patel: Andrea, I don’t want to make this podcast about your mom, but one last question. You mentioned she did ground leases and then got financing. How does that work?

Andrea Himmel: So she did a lot of ground leases where…

Ash Patel: With no money?

Andrea Himmel: [unintelligible [06:50] back then it may have been a few 100,000 or 100,000 a year in your ground rents. There may be upfront key money, but usually, there wasn’t.

Ash Patel: Also, she was the lessor.

Andrea Himmel: Yes, she was…

Ash Patel: Not the owner.

Andrea Himmel: Not the owner of the fee. So she had run the property, operate it, bear all the CapEx, all that. And through refinancing and stabilizations of properties, she was able to amass a portfolio.

Ash Patel: Alright, so then you had a career in private equity. You were underutilized… Tell me about that.

Andrea Himmel: I just out of college was so overly zealous to have my brain pecked and my energy leveraged.

Ash Patel: And you wanted to rule the world, right?

Andrea Himmel: I wanted to grow, I wanted to make my world larger, and my brain larger… I was at Brookfield, which at the time — right now, they’re an incredibly dynamic and prolific company that’s very nimble. Back then it was a bigger public company, and I think I needed a more nimble environment, so I preferred to find somewhere where I would really be challenged intellectually.

Ash Patel: Yeah, a lot of us have first jobs where we’re under-utilized. Good for you for making the move. You then went to a hedge fund in the oil and gas space – was it a real estate play? Or was it a pure oil and gas business?

Andrea Himmel: At the time, I started with three and a half billion dollars of cash and to manage, and it ultimately is now 60 billion. We were investing in equities, so publicly traded companies such as Schlumberger, or Hess, or Exxon. At the time, it was less environmentally conscious, so we didn’t have a philosophical lean in any direction. But we sought undervalued companies for long-term holds, and based on true distress in the market, or anxiety among investors. I did that on the equity side. Then when oil prices in 2016 collapsed to $26 a barrel, from $125, I saw an arbitrage in the private market to buy assets that were priced as if oil were $26, whereas equities were trading as though oil were at $70. So I moved to the private side, raised a fund, it was rejected by 2000 investors, it took 2001 meetings to actually get a commitment… And our first one we tripled, our second fund is still being deployed. It’s a fascinating industry, it’s also a real asset, as far as it can be 1031’d. I think of it as real estate below grade… So it was applicable.

Ash Patel: Right now, you focus on warehouses and office buildings?

Andrea Himmel: Correct. We’ve been in the industrial space since 1986. We’ve been in the office space even longer than that. And we feel that there’s a tremendous amount of capital froth in the industrial space right now, so we’re focusing our efforts on growing our office portfolio. We like to zig one another’s zag. We’re contrarian investors, and we can do that because we can arbitrage time, because we have a balance sheet. So if we can be long-term holders and buy something that’s in distress, we’re a fortunate buyer. Not to mention we’re very nimble in structuring. So if the seller needs some sort of tax-efficient structure or some legal structure that an institutional buyer wouldn’t be able to accommodate, we’re able to do those sorts of things.

For example, there’s a warehouse in the Bronx that we loved, we bid on it… The owner’s problem was he couldn’t monetize the real estate without monetizing his plastic business first. So we made a bid with a private equity fund to buy both the business and the real estate, and do an Opco/Propco separation of the two, so that we can ultimately get to the real estate.

Ash Patel: And you ended up selling the plastics company?

Andrea Himmel: That did not execute that deal.

Break: [00:11:10][00:12:50]

Ash Patel: So you have the money of a hedge fund, but you have the nimbleness of a small company.

Andrea Himmel: We do always partner on deals with equity partners. So while we’ve done a few deals on our own, for example, we paid 25 million for a 120,000 square foot building in Long Island City, the noodle factory in 2017… We focus on really anything within office and industrial. I can get into like how we approached that.

Ash Patel: Let’s do it.

Andrea Himmel: So because I was trained in research at the hedge fund I worked at, we said that in the industrial space, we wanted a macro supply-demand thesis. We said we don’t even know what supply is in industrial. In New York City in 2003, when Mayor Bloomberg was in charge, 200 square blocks were rezoned from industrial to residential. A lot of factories converted to loft/resi or whatever. So supply, we know, was on the decline. Demand was rising, because the reason that the pandemic has accelerated, people want delivered items, and they want them delivered to them more quickly, so warehouses need to be located more central to the urban core, or to their end customer. That’s called last-mile delivery. We saw demand rising, we saw supply falling, and then set out to decide what are our parameters. Any site that’s between two and 20 acres, let’s call that M zone – we want to know about.

It turned out there were 1,500 of them. 500 of them were owned by government agencies from whom we would not be able to buy. 500 were owned by real estate investors, who are too sophisticated for us to buy from. The final third or 500 sites that remain are owner-occupied. Take the plastic frisbee guy, or a packaging company, someone who actually uses their space, recognizes at some point that the real estate is worth more than business, and decides whether they want to monetize on the real estate. We wanted to focus on that stock of folks, because they seem to be the least able to add value from a real estate perspective, and the most willing to transact. We entrenched ourselves in the world of owner-occupied stock. Whether that’s knowing the tool company really well, spending time with the principals who own the building, and understanding the tax issues they may face having owned it for 40 years under a trust, with six kids, or… We can get down into the gritty details and be pretty nimble with them. So that’s our industrial approach.

Ash Patel: Do these principles continue to operate that location?

Andrea Himmel: Yeah, they operate really because their business cash flow is dependent upon their labor, and their labor would quit if they announced that they were looking to sell the real estate or shut down the company; so they would immediately lose cash. What we’ve seen with a bunch of the owners is the fear that they lose their labor, and these are 3% of all warehouses in the US are actually at all robotized, so everything is a lot of labor.

Ash Patel: I don’t understand how that works. Do you buy the building, or do you get an option on it?

Andrea Himmel: You can structure it however you want, but it’s up to the seller. What does the seller want to do? Do they want a lease back for two years, while they figure out where their company can go and relocate? And then you own it free and clear, in which case you’re buying the fee. We’re not interested in the simple sale-leaseback, because that’s kind of like a poor return. We’re really focused on doubling our money on a deal at least, so we work with the owner and solve for whatever their problems are. So if they want something that’s tax-efficient because of low basis, we can say if it’s 100-million-dollar deal, we’ll give you 50 million as an option payment to buy it in 10 years at 100 million, and the 50 million option payment is nontaxable. So we do structures like that.

Ash Patel: Got it, okay. They can continue to operate their business for years to come, but you have the option to buy the building.

Andrea Himmel: Or we buy the building and they lease it back at some below-market rent for a few years while they try to find their new location, or shrink, or sell, or do whatever they’re going to do their business. Then we have been an empty property that we have to lease.

Ash Patel: Got it. With office buildings, what are you seeing today in New York?

Andrea Himmel: Distress on a vacancy level… But wow, is leasing activity up. The vacancy is about 6% higher than normal, it’s about 18%, and the average is about 12%. So we still have a fair amount of available space, and a large amount of that is sub-leased space. But anecdotally, just from within our firm, we just signed a 100,000 square foot lease with NYPD at 525 West 57th Street, a 70,000 square foot lease with NYU downtown at 411 Lafayette, in addition to maybe 13 to 15 leases in Chelsea, Noma, and Flat Iron area. That compares to zero activity last year at this time, so we’re seeing the market really pick up.

Ash Patel: What is MIPD?

Andrea Himmel: NYPD.

Ash Patel: Oh, NYPD. New York Police Department. Got it. Are you buying these at distressed prices?

Andrea Himmel: We only are willing to buy at distressed prices. We don’t value assets based on IRR or some return metric like that. We always measure return on invested capital as a multiple; we’re really basis-buyers who try to make money on the buy.

Ash Patel: You mentioned when you were with the hedge fund in the oil and gas industry, you learned a lot about cash flow. And I was going to ask the question, do you buy value-add properties if you’re so focused on cash flow?

Andrea Himmel: We’re not focused on cash flow. As an investor, I like to invest in companies that are profitable. That’s why I don’t know how to value venture capital from that angle; I don’t know how to value a company that has negative profits, I just don’t. But my perspective – ordinary income, the current yield, we don’t care about that. We can actually forego that if there’s a path to a reasonable yield. And if that means that it’s an unleased property, whether it’s office or industrial, we have the confidence that being a vertically integrated company, we can lease it up. We’re willing to take that risk, because that’s a business we’re in, and we have 40 years of experience doing the management, too.

Ash Patel: Andrea, when did the company go all-in on office?

Andrea Himmel: It’s a great question. I know that we had a property on 125th and I think Lexar Park, and it’s a major –now fully-developed site. But we were there in the ’70s, we’ve been in all the neighborhoods, we’re in Queens as industrial in 1986, and then office at least around 1986 or 1984.

Ash Patel: So in 2020, you suffered a bit of a hit.

Andrea Himmel: Yeah. We saw our buildings, just like the market, really hit 10% occupancy level. We had a lot of blend and extends, or at least conversations. But our arrearages have caught up; we’ve actually extended tenants to our accretion, to our benefit. We have a building that is highly leased to the entertainment industry and nonprofit for entertainment industry tenants, because it’s in Times Square. That building, I’d say, might have had more tenant requests to get rent abatements and such. But we worked with our tenants, we were very generous and we continue to try to be.

Ash Patel: Blend and extend is when you re-up somebody lease for maybe a discount in rent for a period of time.

Andrea Himmel: Yeah, and you just get more term. It’s great if you want to borrow against the asset, because having term allows you to borrow to a greater percentage of the capital stack. We’re conservative when it comes to debt, but it’s hard, for example, to finance month-to-month leases on one extreme, and it’s easy to finance a 50 or 30-year lease on the other.

Ash Patel: Andrea, was your office vacancy caused by defaults? Or was it caused by tenants just not renewing their lease?

Andrea Himmel: There are a few categories. Upon renewal, a few tenants just did not renew. But honestly, we’ve [unintelligible [21:32] spaces. Then there are tenants who tried to get out of their lease and we said no, and we have big security deposits, so they’re kind of stuck in that position. Then there are tenants who agreed to have a conversation and negotiate some form of an amendment to the lease, where we can both be mutually beneficial.

Ash Patel: And with your research background, what research went into your decision to double down on office?

Andrea Himmel: Great question. I think of our firm and what we’re looking at – it is above normal levels of vacancy. We’re in a cycle where we’re somewhere near a low, although there really has yet to be seen some distress. But we’re looking out to office — we could say, if we were really negative, “Wow, I have a building that’s 30% vacant, or 10% vacant, and it has 30% rollover, and five years of leasing risk, because who knows when people come back to work… And I have to carry the building, its taxes, its insurance, and everything else, the mortgage, for five more years… Screw it, I’m just going to Florida.” And that’s what we’re seeing.

I made a database – going back to database making – of private owners who are similar in size to us… Similar or smaller, like between 10 and 20 properties. So it started as a list of 2000 properties and 65 owners that we focused on, and then narrowed it down to a list of 15 owners each with an average of 10 properties or 150 properties. We are focused on certain neighborhoods, and we are focused on certain asset types. We think there’s great re-use potential in the garment district, which is totally distressed, from the life science perspective. We think that certain neighborhoods that are unsexy will emerge again.

Break: [00:23:38][00:26:36]

Ash Patel: Where do you get your data from?

Andrea Himmel: I use a few subscription apps or softwares. Like I use Reonomy, PropertyShark, and Costar. I also look at public tax records; ACRIS, in New York, is what you use. I sometimes follow court litigation to see if there’s a partnership in trouble. I track weekly transactions of properties to say “Oh, hey. Actually, so and so who we thought was never a seller is starting to sell assets. Maybe that’s a good data point.”

I track a lot of indicators. Obviously, the interest rates, the inversion of the 30-year coming below the 20-year a week ago or two weeks ago was a big trigger for me. Then obviously, all these data points we have on inflation… It changes the cap rates we’ll use to underwrite and discount rates to value.

Ash Patel: So with projected inflation on the horizon, you’re not using the norm for cap rates, you’re actually using a higher cap rate?

Andrea Himmel: Yeah. We’re conservative, but not conservative to the point that we’ll price ourselves out of the deal. For example, if something were today to trade on a four cap or let’s say a five cap, I’m talking 6% then; or five and a half percent. Nothing like on an exit, nothing crazy. If there’s an assumption that there should be cap rate compression, for example, the stabilization of the building offset by the growth in it.

Ash Patel: Andrea, you mentioned that you know the garment district is going to come back. Why?

Andrea Himmel: It’s M-zoned, meaning it’s manufacturing zoned. The buildings – not all of them, but some of them are built structurally so robustly, with [unintelligible [00:28:22].17] to HVAC systems, to ceiling heights, that they can accommodate life sciences clusters. New York City was the number one in the country last year for venture capital funding of life science startups.

Ash Patel: What is life science?

Andrea Himmel: Life sciences, anything from biotech to anything working with living organisms, basically. It’s research, its R&D. We have a building, 525 West 57th Street, it’s a life science-oriented building. It has the premier MS researcher, Dr. Sadiq, and he has a vivarium, which is where living organisms are studied, and requires certain very technical features on a lab level. We also have Genzyme LabCorp, and — I forget who it became later on. But we had a 200,000 square foot vacancy in that property, because CBS left after decades of paying very low rents. We leased half of that already to the NYPD, as I mentioned, and then we have another 100,000 to lease, but we think we’re close on leasing that, too.

Ash Patel: Do you just use leasing brokers?

Andrea Himmel: We have an internal leasing team, because we’re vertically integrated with a management company that’s dedicated just to our buildings. But we will always work with outside brokers if someone brings us a tenant. We aspire to integrity in the brokerage community, because I think brokers are the lifeblood of the industry, and are really undervalued and underappreciated. So we make sure that if someone brings us a deal or a contact, that we reciprocate in kind.

Ash Patel: What does your leasing team do that’s creative to try to get these tenants in?

Andrea Himmel: It’s a great question. We’re amenitizing buildings. Our buildings aren’t that large, they’re not million square foot buildings; they’re small, they’re 200,000 square feet, so we don’t have a great deal of space to dedicate as an amenity. The rooftop isn’t that large, or [unintelligible [00:30:27].01] So for us, it’s more about — we foresaw a strong location, a good building, meaning it has good ceiling heights, good light, good air, good infrastructure, and we’ve been proactively investing in its maintenance and capital over the years.

Ash Patel: Andrea, I read an article this morning that said, “Companies that offer a four-day workweek will have a huge competitive advantage in the future.” So all of this pressure to work from home, work less, what is that going to do to office space?

Andrea Himmel: It’s called a six-billion-dollar question with inflation. But we don’t know yet. We can’t quantify, and I’d be arrogant to say I could, the impact that work from home will have long-term on office demand. It will no doubt take away from office demand. However, there are countervailing forces that may cause some net positive effects, such as the de densification of office places. People want corners, they want windows, they want light, they want to be in their own offices; they don’t necessarily want to be sharing spaces or hoteling like some companies are doing, or hot-desking. We’re seeing a lot of it leasing in our portfolio, because our buildings are such that the windows are operable, which is rare, they often can walk to their floor, because these aren’t 80-foot towers, they’re 12 to 15 story buildings. Maybe not in the 15-story are they walking, but for the most part, tenants like these factors. Also, the floor plates are about 15,000 square feet in general for us, so that allows for one to two tenants per floor, which is good from the perspective of the tenant thinking “I don’t know the COVID policies of my neighbor.”

Ash Patel: Yeah. So my opinion is the work from home will not last because of the lack of collaboration, and at some point, lack of productivity.

Andrea Himmel: I’m most productive at my office. We’re closed down right now because we had a COVID case, but it was resolved and everyone else in the company is negative. But it’s amazing to me that… All week I’ve been out and about at conferences and meetings. You have to see people, this is a tangible business. We would never buy a building that we didn’t kick the tires on.

Ash Patel: Yeah. You’re like me, you think at some point, people are returning to the office and the work from home is going to be short-lived.

Andrea Himmel: Certain industries, it will be more work from home. Like, I foresee law, for example, doing that. Although I think it’s really hard for them to find talent, promote, and create upward mobility. Software, maybe they work from home. But the people that we see remaining working from the office actually require more square feet per person than when we included the ones that are now departing from the office.

Ash Patel: So no more cubicle farms.

Andrea Himmel: Correct. I hope.

Ash Patel: Andrea, what is your best real estate investing advice ever?

Andrea Himmel: Be over prepared. If it doesn’t work on the back of an envelope, using Excel to go get into the weeds too much is just going to create too much margin for error.

Ash Patel: Andrea, are you ready for the Best Ever lightning round?

Andrea Himmel: I’m ready.

Ash Patel: Let’s do it! What’s the hardest lesson you’ve learned?

Andrea Himmel: It’s a great question. The hardest lesson is, because I worked for my mother and her business partner, in the beginning years, I didn’t push back often. We had so many properties off-market that today are worth multiples of what they were. I knew, from analysis paralysis, as well as good analysis and gut, that these were deals we should have pursued. I should have pushed harder against their opinion. I’m at the point now where they take it more seriously when I have recommendations, and they often manifest in strategies… But at the time, I wish I had the confidence to push back more.

Ash Patel: Andrea, what’s the Best Ever book you recently read?

Andrea Himmel: A New Earth by Eckhart Tolle; it’s similar to A Power of Now.

Ash Patel: What was your big takeaway from that book?

Andrea Himmel: Be present.

Ash Patel: Andrea, what’s the Best Ever way you like to give back?

Andrea Himmel: I serve on the board of directors of Habitat for Humanity, as well as the Manhattan Chamber of Commerce. I mentor a lot of students, I’m a big sister to a little sister for 18 years now. I also support 10 women in Uganda in Sierra Leone through Child Fund, which is a nonprofit. I plan on starting a village savings and loans association. I really think philanthropy, giving is receiving.

Ash Patel: Andrea, how could the Best Ever listeners reach out to you?

Andrea Himmel: You can email me. My email is ahimmel@hmprop.com.

Ash Patel: Awesome. Andrea, thank you so much for sharing your story, with your mom being a pioneer in the ’70s, to you going a couple of different routes and coming back to real estate, and just dominating New York City real estate. It was a pleasure to have you on the show today.

Andrea Himmel: Thank you. It was my honor.

Ash Patel: Best Ever listeners. Thank you for joining us and have a Best Ever day.

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JF2653: What Their 12 Unit Purchase Taught Them About COVID Asset Management with Jeromie and Anne Marie Sheldon

In March of 2020, Jeromie and Anne Marie Sheldon closed on a 12 unit deal right as COVID-19 was taking the world by storm. The pandemic caused additional problems on top of the regular challenges that come with any property–rowdy tenants, delays, labor shortages–and yet one and a half years later, the Sheldons’ property is thriving. In this episode, the Sheldons discuss their business model and how they navigated being “COVID Closers.”

Jeromie and Anne Marie Sheldon Real Estate Background

  • Jeromie recently retired as an Air Force Pilot after 24 years of service and is now flying 747 overseas for UPS out of Anchorage, Alaska.
  • Anne Marie is a Licensed Physical Therapist.
  • They are both CREI, LPs in syndications, Active apartment owners.
  • Both actively and passively involved in CREI.
  • Portfolio: Started out with a SFR 2015 full cycle. Currently, Passive LP deals = 2000 + doors, Independent GPs on a 12 unit & 5 unit locally in WNY. 
  • Also own a townhouse- LTR (12 beds for pilots called “crashpads”) in Anchorage, AK.
  • Based in Grand Island, NY (close to Niagara Falls & Buffalo, NY)
  • You can say hi to them here:
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Follow Up Boss

 

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 fluffy stuff. With us today, Jeromie and Anne Marie Sheldon. How are you two doing?

Anne Marie Sheldon: Great. Thank you so much for having us on the show, Joe.

Jeromie Sheldon: Yes, Joe. Thank you. It’s an honor and a privilege to be on the show with you.

Joe Fairless: Well, it’s my pleasure. Just behind the scenes Best Ever listeners, I called in eight minutes late to this interview, and they were waiting very patiently for me, so I appreciate both of your patience and I’m looking forward to dive-in in my last interview [unintelligible [01:08]. Jeromie recently retired as an Air Force pilot after 24 years of service. First, officer, thank you for your service. I respect what you did for our country, you, and your colleagues.

Jeromie Sheldon: Thanks, Joe. It’s much appreciated. I’m so honored to have served our great nation, and just a blessing to be part of that team.

Joe Fairless: Anne Marie is a licensed physical therapist. They’re both commercial real estate investors, actively and passively. They focus on apartments. In fact, let’s talk about their portfolio. They started out with a single-family rental that they took full cycle in 2015. They’re currently passive investors in over 2,000 doors, and they’re independent general partners on a 12-unit and a 5-unit locally where they live, in New York. They live in Grand Island, New York which is close to Niagara Falls in Buffalo, New York. With that being said, you two want to give the Best Ever listeners a little bit more about your background and your current focus?

Jeromie Sheldon: Yeah, like I say, you kind of hit it there with our background, with me coming out of the Air Force, Anne Marie is a physical therapist, and she also helps teach our kids at home. We’ve got a busy home, with six blessings. But our big focus really is to grow a portfolio as many of your listeners are doing. We joined a program in 2018 and got into some limited partnerships.

Joe Fairless: Which program?

Jeromie Sheldon: It was the [unintelligible [02:36] program, and then we’ve also had some personal coaching with Anna Kelly, and then we were also part of a mastermind. That’s probably one of our main points is we’ve wanted to just focus on educating ourselves in this space. We’re both professionals and we feel that education is very important and would probably qualify [unintelligible [00:02:54].17] advice. And then, like I say, we’ve limited partners in about five deals across Arizona, Texas, and Florida, just saw one go full cycle and gave us significant returns. We’re very happy.

Joe Fairless: Nice. Congrats.

Jeromie Sheldon: And then we also wanted to get our hands dirty a little bit with working with property management and just getting into the weeds of managing our own properties. So that’s why we got involved with the 12-unit and the 5-unit here in New York, just to make sure we kind of understand the full aspects of commercial real estate; really, before we felt comfortable trying to do a syndication and taking other investors money, we wanted to be able to make sure we understood all aspects of it. The long-term goal is to get into syndications, but we feel it’s a process of moving that forward, and growing our assets to a point where we kind of have a long-term vision of growing that asset. And then being able to start a retreat center. We won’t get into that, but that’s to minister and give back.

Joe Fairless: You were passively investing in deals, and then you decided to do some active deals, the 12-unit and the 5-unit. What did you think of that process?

Anne Marie Sheldon: Well, it was great to see the passive deals first and also to interact with a lot of different investors and learn through that. We could see that we were lacking an understanding of asset management. So with the 12-unit, when we jumped in, the first thing we were doing once you close the deal and the work begins, we started doing our CapEx projects. That was a great learning experience, because our property management company is helping us run that 12-unit. But as far as the large projects, like the parking lot, LED lighting, things like that, we really wanted to oversee that. We wanted to get the bids from the contractors and really be hands-on in that process. So that was a great learning experience there, just to kind of understand what it’s like to work with contractors, what it’s like to get into these bigger projects, what the money is going to be, and how that’s going to improve the NOI and the value of the property. So that was one big learning experience for us in the beginning.

Joe Fairless: What did you learn from working with contractors?

Anne Marie Sheldon: We learned a couple of things. Sometimes it’s straightforward, and other times — one issue we really ran into is it’s a 12-unit. So when you’ve got a contractor, like for a parking lot, maybe they’re a commercial contractor doing parking lots – they’re looking for at the mall parking lot, that large institutional parking lot. You’ve got a good-sized parking lot, much bigger than residential, so you’re not falling in that category, but you’re not exactly falling in the commercial category fully. So it’s not a big enough deal for some, but it’s too large of a deal for others. We found that sometimes a 12-unit was falling in that situation. For example, the stairs going into the building need to be replaced. But in order to do that, that’s concrete work, that’s removing concrete, and that’s building specific molds to go back to replace like-kind with like-kinds, so you don’t have to pull a permit and do a lot of different changes. Well, we find the contractors are wanting to do the regular molds they have for residential; or if they’re commercial, concrete, they want to do the big parking lot. That’s been a big struggle in the labor shortage too, because a lot of times they don’t have the workers that they used to have. So we’re getting backed up as well.

Jeromie Sheldon: So we got through about 10 to 12 concrete folks, and I think we finally have landed on somebody that can do the workforce next spring. But it’s been a struggle, like I say, with COVID, and the labor shortage; there’s not a lot of folks out there that want to do concrete, and the folks that are out there are so busy, a little job like what we’ve got doesn’t work for them.

Joe Fairless: I heard you say that you’ve got a property management company, but you wanted to invest time working on the CapEx. But wouldn’t your property management company have a contact that you could work with?

Anne Marie Sheldon: In fact, they did. They had about two contacts. One of them stood us up. We came to the property, they didn’t show. I got in touch with the owner of the property management company and he goes, “I got stood up as well.” He dropped them from our list. Then we went on to the next person, and they were too busy at the time. So I think that was a situation; we went through so many actually, but I think that was a situation where they couldn’t do those particular molds, because these are very unique stairs with a very narrow driveway, so you can’t use a standard residential step mold; you’re going to have to do something customized. Now we hit a wall with the property management company trying to find someone, so we just continue to go off contacts and off leads from other people.

Joe Fairless: We jumped into the details quickly, which is great… But if we can take a half step back just to get a little perspective on the 12-unit… What do you buy it for and how did you find it?

Jeromie Sheldon: We found it through a local broker here in [unintelligible [00:07:55].11] We acquired it at 60k a door, which is pretty decent for this area. It’s an all-bills-paid unit, so that was also a little bit into our factor. Location is what really drove it. It’s in a suburb of Southern Buffalo, and it’s right on the main street, and essentially, the crime, the schools, the High School is just down the streets, it’s a nine out of 10. It had been on the market for about a year; and the street appeal – the previous owners were pretty much doing everything themselves, so the street appeal was probably not good. We were able to work a pretty good deal; they were asking 750k and we got it for 720k.

Joe Fairless: Okay. How long ago was this?

Jeromie Sheldon: We consider ourselves COVID closers. So as the wave of COVID was coming across the world, we closed in March of 20.

Joe Fairless: Wow. Yeah, right there. Like right on the cusp of Armageddon.

Anne Marie Sheldon: Yeah. Everyone was going, “Do what?” Everybody was looking at us and going “Do you want to still do this deal?” [unintelligible [08:58] in a hurry. They were thinking we were going to back out.

Joe Fairless: Obviously, you got financing. Was that tricky? Maybe not, obviously… Did you pay cash? I guess I didn’t ask that?

Jeromie Sheldon: No. The financing actually was probably one of the easiest things. We used a local bank here in town. I think probably part of it is because we’ve got a W2 and we had the other assets. We had the stuff invested in the syndication, so we were able to show all that. So I think they were comfortable with us.

Then the other piece of it was I think the location; the bank president had actually looked at the property when it was for sale about eight years prior and was considering buying it, so they knew, location-wise, we wouldn’t have any issues with keeping it full. We’ve been blessed, through COVID, we’ve had no non-payers. Everybody has been paying rent, a couple slow, and then we did have one person… We talked about this same [unintelligible [09:48]. We did cash for keys, and we had one person that was causing a lot of issues right after we took over. We gave them some money and said “Hey, we’ll help you go find another place.” They took it and ran. We got to a new tenant in there, we fixed it up, and they’ve been great.

Joe Fairless: How did you determine how much money to give that person to leave?

Anne Marie Sheldon: That was interesting… Our property management company said, “Let’s just write him a check for $500, or something.” I said, “First of all, this guy’s not a check guy. This guy’s a cash guy. So we’re going to handle cash.” Not us, but the property management company. So here’s the situation… His rent was around — we bumped it since then quite a bit– but it was around 750 a month. What he was doing was he wasn’t paying rent, he was subletting it to someone; so he was actually getting rent, we found out through the grapevine, through the other tenants that he had a sublet that was paying him. So $500 a month when he was getting $750 or $800 from someone else wasn’t going to get him out. So we said, “Let’s go with $1,000, because we’re going to bump the rent on this unit to $950.” And this moratorium is just starting, so we’re thinking this is going to go on for a year. You potentially could lose $10,000 or more from this guy. So we felt like $1,000 cash was what was going to dangle the carrot for him.

The property management company said… He said he would think about it for a couple days, and when they said “We’ll give you cash”, then he signed the document to say he would agree to those terms. And then  when they gave him the cash, I guess his comment was “Cash is king, this is great.” [laughter] He was not just not paying and subletting, but he was in fact doing all kinds of things on the property – intimidating tenants, playing music super loud… It’s a really quiet community and village, and there were three other tenants threatening to move out, isn’t it? So we probably also could have lost rent from those other units as well. So $1,000 was kind of a drop in the bucket to get rid of that.

Break: [00:11:48][00:13:20]

Joe Fairless: Knowing what you know, having asset-managed the property, as well as gotten in there on some CapEx stuff for a little over a year or a year and a half, what would you do differently if presented a similar opportunity on your next acquisition? Maybe you didn’t do it wrong, but what would you do a little differently on the next deal if it’s the exact same 12-units, similar block, similar challenges, and now you’ve got another chance at operating it a little differently?

Jeromie Sheldon: I think one thing would be restructuring the deal so we didn’t have to come out of pocket for as much of the CapEx. We probably would have been willing to offer full price, or even a little more if we could have worked some of the CapEx into the loan proceeds. So I think that looking back – we had the capital, but especially going through COVID, the worry, and that type of stuff, it would have been nice to probably hold some of that back. But we felt we needed to do it to improve the place, to tell the tenants that, “Hey, new owners are here and we’re going to make improvements.” But it would have been nice to be able to finance fixing the parking garage and putting new lighting in. So in the future, I think we will definitely look at how we could get more proceeds out of the closing to go ahead and take care of some of the CapEx without having to come up with it straight out of pocket.

Joe Fairless: Anything come to mind for you Anne Marie?

Anne Marie Sheldon: I think another thing that we do differently is when we were looking at property management companies, we only looked at a few. Looking back now — and we’ve learned a ton over the last two years and we still have a lot to learn… But one thing we did learn is we didn’t really vet that the property management company properly. When I say vet, I mean we did ask them certain key questions, but we didn’t really get as transparent with our business plan as we could have. And I think we could have done a better job on the front end, saying “When a unit turns, this is what we picture happening with the unit, this is what we want to do, this is the rents we’re trying to achieve.” We did tell them what rents we’re looking at, but we didn’t really tell them the steps in between that we were looking to do. So I think we kind of caught them off guard on the first few turns, because when you take over a property, a lot of times a couple of turns happen right away, with new ownership. And immediately, the maintenance… It was a busy time, it was the summer when the first turns happened, and COVID happened, and they were short of some staff. But when we went to say “Okay, we want everything, from new flooring, to all the covers painted, to new vanities, new fixtures, new trim” it was more than they were used to. They were used to like the quick turns, just steam clean the carpet, do the small little ramp up, or no ramp up and just kind of keep going. I don’t think they foresaw that we were going to do moderate to heavier turns on some of the units… Because some of these units were neglected. It’s a 1960s building; they were not only neglected, but they were out of date. And to get the ramp-ups we wanted, we’re going to have to do some considerable changes to the unit. So I think just being more transparent and more direct with what we were trying to do instead of muddling through that on the first turn could have been even better,

Joe Fairless: What are the rent increases that you are achieving, and how much per unit are you investing on those turns?

Jeromie Sheldon: Most of the stuff that we’re turning, like for instance, we’re turning one right now that just moved out… They were paying $750, we’re going to bump it to $975. For this unit, we’re doing some of it ourselves. I think it gets back into ensuring that we’re real estate professionals, so we’re trying to show that active involvement. But for this unit, we’re going to put in probably about $3500 to get it… We’ll put in a new flooring, we’re doing the painting, doing some updates in the kitchen, and that type of stuff, the bathroom.

Joe Fairless: And you can get $225 rent increase on that $3500 renovation, not including your time?

Jeromie Sheldon: If we weren’t part of it, it would be more than $3,500.

Joe Fairless: Yeah, I get that. But not including your time, which is a lot of money. But just without including your time, it’s $3500 in order to get a $225 rent increase?

Anne Marie Sheldon: Yes.

Jeromie Sheldon: Yes.

Joe Fairless: That’s a 77% return. That’s a pretty good return. Again, not including your time, but still, those are some favorable numbers as an investor.

Anne Marie Sheldon: Yeah. We didn’t put a lot of time into this one. It depends on what your definition of that is. But the reason we chose to assist on this one is our kids. It’s kind of funny, but a quick side note… They want mountain bikes and want double suspension mount bikes, we have six children… And we were like “We’re not buying everyone just a brand-new double suspension bike.” [laughter] We said when they work at the units with us – which isn’t that often, it’s more in the summer – we pay them; we pay them all different hourly wages depending on their age. One of our sons, we pay him more than he gets in his job, more than minimum wage. So we said, “There’s a short spurt of time, three or four days, we’re going to go paint. If you guys want to get these bikes, if you have the money for the bike, you’ve got to raise the other half. Here’s your opportunity. You want to come paint or just clean up behind us, whatever, you can make half the money and we’ll pay you for it.”

Joe Fairless: I love it.

Anne Marie Sheldon: That’s why we did this unit this way. Typically, in the last few units, like in our 5-unit, we are not involved in the painting or the [unintelligible [18:45]

Joe Fairless: Got it. That’s great. That’s beneficial for many reasons. Is there also benefit there from a tax standpoint, paying your kids? I’m vaguely familiar with something where you can pay your kids and…

Jeromie Sheldon: I think you’re right. We’ve talked to our accountant, but I think we can pay each one of the kids, I think it’s up to $6,000, and that comes off of the business income. And they don’t have to worry about paying federal income tax on that money. So yes, it’s a way for us to pay our children through the company. It’s obviously an expense on the company that our kids get to take advantage of. We’re firm believers in this as a family business and everybody partakes in it.

Break: [00:19:27][00:22:21]

Joe Fairless: Anne Marie, how many hours a week do you work with your licensed physical therapist role?

Anne Marie Sheldon: Currently, I’m not working with the role. I’ve kept my license and my education up. I’m helping people pro bono on the side, friends and family that need help, but I’m currently staying home, homeschooling the kids.

Joe Fairless: Oh, wow, homeschooling. Okay. And you got six kids?

Anne Marie Sheldon: Yes.

Joe Fairless: Okay. Alright. So the question that I was setting up is still relevant. Because Jeromie, you retired, but you’re now flying 747s overseas for UPS, out of Anchorage, Alaska. So how do you two prioritize your time? Because you’ve got six kids… One of you definitely has a full-time job. Jeromie, I don’t know how many hours you’re doing, but I’m assuming it’s more than 10 per week on average. How are you prioritizing?

Anne Marie Sheldon: I think a couple of things… One, we learn to time-block. We knew about time-blocking, but not as detailed as Anna Kelly, our coach. She really taught us more details and models in our personal coaching time with her on how to do that. So I think that has really helped.

Also, with Jeromie being active-duty military, it was a lot busier in some ways than it is now, in that he flies 14 days a month now, but he has 14 days a month completely off. So the last three weeks, he’s been home, he’s been helping, and we’ve been doing more on the real estate side. We’re networking for things to grow our business.

For me, I’m doing homeschooling, from about the hours — that’s nine to three or nine to two. I do drive around for different activities, but my senior is driving now, so that helps. What I’ll do is your nine to midnight, nine to 11 shift, I do a lot of those things. Sometimes we’ll do the networking in the early evening, and I will do the asset management type things in the early to midafternoon. Sometimes you have to do things in the morning, and then the kids, I’ll direct them on what they’re doing independently, or two of them are helping each other. But it’s kind of a rotating juggling act a little bit there. But just kind of trying to find those blocks of time.

Joe Fairless: Taking a step back. What’s your best real estate investing advice ever?

Anne Marie Sheldon: I think for us, there’s a couple of things. We feel like there are some non-negotiables that we have, and it’s taken a little bit of time to develop. When we’re looking at a deal, when we’re looking at a partnership, we have certain foundational things that we agree on that we’re looking for. So I think sticking to those and not getting really excited about a deal, an opportunity, and jumping in too quickly, or a partnership. I feel like a partnership is a marriage with someone else. We want to be aligned and we also want to be transparent with our financial situation and their financial situation, so that you’re not jumping in and then finding out later that there’s a hitch in there and somebody’s finances aren’t going to work for that deal. So we feel like those things are foundational things. And it sounds really simple, and I think it is, but sometimes it’s hard to stick to your guns and stay with that when you’re in the excitement of deals and partnerships.

Jeromie Sheldon: Or there’s pressure to get into a deal. I think we’re fortunate that a lot of our real estate income that we’ve got, we’re not living off of that. That has helped us out as well as we’re able to vet the deals and say, “Does this really make sense for us as a family?” And then, like I say, the non-negotiables, if it doesn’t really meet that, and we’re okay, just passing on that, being patient and waiting for the next opportunity.

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

Jeromie Sheldon: We got into a deal, it was a flip of 4-unit in Dallas. This one was – essentially, we were providing the debt fund for it, and we got caught up in COVID, or the team of contractors got caught up in COVID. It was supposed to be in and out in a year; they were going to get everybody in, as soon as the leases were done, move them out, do complete rent-outs, then get them released up, and then have the entire place sold within a year. That didn’t happen, obviously, with COVID, contractors, lockdowns, all that type of stuff. The team finally got the last property sold in June, so it was almost a two-year hold versus a one-year hold, so we ended up losing about 20% on the money we put in to that deal.

Joe Fairless: How much did you put in?

Jeromie Sheldon: We each put in 100k. We lost about 20k each, so about 40k total to that deal, just because, really, the business model didn’t work because it got slowed down by an entire year.

Anne Marie Sheldon: Yeah, the flipping model.

Joe Fairless: If presented a similar opportunity in Dallas, would you do it, because you chalk it up to “Hey, that was COVID”? Or would you not do it because “Okay, it was COVID but also XYZ variables, and I’m not comfortable with that so I wouldn’t do that type of investment.”

Jeromie Sheldon: Yeah, it’s something that we would think twice about in the future. We didn’t do as good a job vetting the group either. We felt – the debt fund, okay, we’re just going to get X amount of return, we’re not into it for the equity. So I think we would really think hard and fast again about a model that is really predicated off of a one-year timespan. So yeah, probably do some more homework.

Joe Fairless: It sounds like you would pass…

Jeromie Sheldon: I think so. Yes.

Anne Marie Sheldon: Yes.

Joe Fairless: [laughs] Fair enough. We’re going to do a lightning round. Are you two ready for the Best Ever lightning round?

Anne Marie Sheldon: Yes.

Jeromie Sheldon: Yes, sir.

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

Anne Marie Sheldon: For us, we as a family, for Thanksgiving and Christmas, we join up with the regular Gospel Mission here in town. We go to different apartment complexes, like the lower-income section eight areas and we deliver meals with them. We bring joy to them, have conversations, how are you doing, pray for them. That’s one way we love to get back.

The second way is – our long-term vision, is to use the proceeds from real estate to purchase a wellness ranch healing place where we can continue to give back to veterans with PTSD, and help them get well and get back on their feet again.

Joe Fairless: Keep me posted on that. If there’s anything I can do to help out with that. How can the Best Ever listeners learn more about what you two are up to?

Anne Marie Sheldon: If they want to get in touch with us, we’re on Facebook, LinkedIn, Instagram, all the social media sites. Our email is sparrow@equitymanagement.com. Those are probably the best ways.

Joe Fairless: Jeromie and Anne Marie, thank you for being on the show. Thanks for talking in detail about your experience both as an LP, what’s worked, what hasn’t worked, and as a GP. Those 12 units, contractors, debt, closing, being COVID closers, the business model that you’re employing, and setting expectations with the property management company prior to closing. Thanks for all the insights you shared and your experiences. Hope you two have a Best Ever day and we’ll talk to you again soon.

Anne Marie Sheldon: Thank you so much, Joe. We appreciate it.

Jeromie Sheldon: Appreciate it, Joe. All the best. Thank you

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JF2646: Want to Host Your Own Networking Event? Check Out These Clever Tips to Elevate Your Meet-ups with Hayden Harrington

Hayden Harrington was tired of the meet-ups he kept attending. They were usually hosted in crowded, hard-to-hear areas where it was difficult to effectively network with people. That’s when he decided to create his own, unique events. In this episode, Hayden shares how he broke from tradition and created a successful in-person and online networking group.

Hayden Harrington Real Estate Background

  • Real estate entrepreneur focused on large-scale multifamily syndications
  • Currently has $30MM AUM and actively growing the portfolio
  • Managing partner at Momentum Multifamily, a commercial real estate group focused on buying institutional quality assets for their investors
  • Based in Richardson, TX
  • Say hi to him at: www.momentummultifamily.com
  • Best Ever Book: The E-Myth Real Estate Agent by Michael E. Gerber

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TRANSCRIPTION

Joe Fairless: Best Ever listeners how are you doing? Welcome to the Best Real Estate Investing AdviceEver 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 fluffy stuff. With us today, Hayden Harrington. How are you doing Hayden?

Hayden Harrington: I’m doing well. Thanks for having me on, Joe.

Joe Fairless: I’m glad to hear that and it’s my pleasure. A little bit about Hayden. He’s a real estate entrepreneur focused on multifamily syndications. His company has $30 million of assets under management. He’s a managing partner, speaking of his company, at Momentum Multifamily, based in Richardson, Texas. With that being said, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

Hayden Harrington: Sure. Thanks again for having me on. Like you mentioned, based here in Richardson, which is a suburb of North Dallas. I’ve been here for about eight years now. I’m originally from the Woodlands, Texas, down on the North side of Houston. That’s really where I got my start in real estate, doing actually fix and flips and rentals with my dad, growing up through my teenage years. That’s really where I was exposed to it and first got a taste for it. But ultimately, through doing some rehabs and flips with him, it kind of opened my eyes to wanting to go bigger. Obviously multifamily was that next natural step. It took me a while to kind of figure out how the game is played and how it works, but I finally landed that first deal earlier in January 2021. We currently got our second one under contract and are set to close actually next month. So we’re excited.

Joe Fairless: Congratulations on all the above. You said it took you a while to learn how the game is played. How long did it take and what did you learn?

Hayden Harrington: Good question. It really took probably four or five years. I started really setting my sights on the commercial side of things around 2016 or 2017. At first, I wanted to do everything myself, because that’s really all I was exposed to. On the single-family stuff, it was just me and my dad doing all the work ourselves. That’s really all I had ever seen, is just “We’ve got to do it ourselves and make things happen.” So for a long time I had that dream of I want to get into commercial, I’m going to find that one investor, he’s going to write me a million-dollar check, I’m going to go out and buy a commercial property, and I’m going to be off and running. That dream got me nowhere.

It was a lot of trial and error for a while, just understanding the reality of the commercial real estate space and educating myself on the different niches, like where I wanted to start… Because there are so many different places that you can start, whether that be development or buying existing multifamily, buying office, triple net commercial, and so forth. So I spent some time really just exploring and talking to people on each of those areas, and ultimately set my sights on multifamily.

From there, again, you have more challenges that you’re presented with and how to get a seat at the table of a syndication or become a general partner. There’s definitely a learning curve involved with that. For a long time, I knew proximity was power, I knew I just wanted to be around people doing deals… So I’d meet somebody that’s experienced and I’d offer “Hey, I’ll work for free.” I just want to be around the people that are making deals happen, because I knew that was the fastest way to learn. A number of doors actually closed on me, and nobody would accept that offer from me for a while, and I was kind of scratching my head like “Man, I’m smart and capable. What am I doing wrong here?” It wasn’t until I really put myself in their shoes and looked at it from their perspective of what I was actually offering when I had my lightbulb moment.

When I did that, I realized that what I was asking for was not offering them value. It was offering their time and resources and energy to educate me so it really wasn’t a great deal for them. Until I looked at it from that perspective, I really wasn’t making a whole lot of progress and I was just dealing with a lot of frustration.

So I began to look at it from a different angle and a different approach. I said “Okay, in my mind, what are the things that are going to speak to a syndicator or somebody that’s experienced?” The two things that popped up were deals and capital. In my mind, those were the two things that were actual tangible value to get a seat at that table. I knew finding a deal would be extremely difficult, especially when you’re just starting out. It’s hard to even know what a deal is, honestly. And if you’re looking at everything on LoopNet or Crexi, there’s a reason why most of those deals are there. So the good deals really are only sent to those that are experienced. A broker is not going to waste their time on somebody they’ve never heard of. I knew that, and so I really set my sights on the capital side, that’s ultimately how I was able to bring some skills to the table and get a deal done.

Joe Fairless: When you were originally looking for a deal by yourself, what type of deal were you looking for?

Hayden Harrington: Honestly, I was just scouring LoopNet and Crexi, those online sites, just trying to make sense of it. Like I said in the beginning, it was kind of looking at different types of assets but I wasn’t getting anywhere else. I was trying to make some relationships with brokers and so forth, I tried to make my own underwriting model, and a lot of it wasn’t great. So after not making a whole lot of progress, I just kind of discarded that idea. I said “Hey, I need to actually go and fine-tune this strategy, get around people that are actually doing deals so that I can be pointed in the right direction.”

Joe Fairless: Got it. Whatever the property type ended up being by yourself, how were you planning on funding it?

Hayden Harrington: Like I said, hopes and dreams of having some investor believing me enough to write me a big check. But obviously, that didn’t get me anywhere, so that was not a great approach.

Joe Fairless: Fair enough. Alright. You got the first deal in January 2021. What was it?

Hayden Harrington: It was a 228-unit property in North-East Houston. A property built in 2012. It was formerly called [unintelligible [00:06:08].18] Liberty Hills and we rebranded it as the Henry at Liberty Hills. It’s kind of our brand that we wanted to stamp down there in Houston on all the properties we buy down there. We bought it for just shy of about 30 million, 828 a door. We actually got it at a five cap, so looking back, we feel pretty good about that, especially where things are at now. But really kind of interesting, just to wind it back, my partner, Dustin and I, we’ve been teamed up for about three years now.

Joe Fairless: How did you meet Dustin?

Hayden Harrington: Just in my own educational process, and trying to understand how the game was played, I started networking. Like I said, I knew proximity is power, and I want to get around people. That was kind of my approach, to add value. I ended up meeting, Dustin and I threw out an idea. I said, “Hey, what if we start a networking group here and kind of make it a little different to help us stand out?” In that way, I can not only put him in a good light, but also, we can work together to build an investor list, or in other words, a pool of equity that we could potentially pull from when that deal eventually came. So we started working together in early 2019 and did the meetup for a little over a year until COVID shut us down… But we were getting 100 plus people out every month. That’s really how I was able to kind of get my name on the map, and we built a pretty sizable database from it.

Joe Fairless: That’s awesome. Let’s talk more about that. But just so I’m clear on where you met Dustin – you said networking, but what specific networking event did you meet Dustin at?

Hayden Harrington: There was a networking app, it’s called Shapr. We connected there and then I just threw it out. I was like, “Hey, can I take you out to lunch?” The app is kind of similar to LinkedIn, and I saw that he had experience in multifamily. I said, “Hey, I want to take you out to lunch if you have some time.” I just want to ask some questions. I think it was on our second lunch that we did that, because we kind of hit it off and got along right away. That’s when I threw the idea out there. I was like, “Hey, what if we start this networking event together?”

And honestly, that was a challenge for me because growing up, I was very introverted and very shy for a long time. I knew throwing that idea out there. I was like, “Oh, man. If I’m co-hosting a networking event, I’m going to have to speak in for all these people.” Honestly, I went back and forth in my mind whether or not to bring it up. I’m grateful I did, looking back, because so much has come of it. I think that’s a product of what happens when you take those chances, you take those risks, and you kind of believe in yourself. Because if not, a limiting belief that I held within my mind keeps me from achieving my goals. That’s when I was like, “You know what? Screw it. I don’t care how it goes. I’m going to throw this out there and put forth as much effort as I can and see what happens.”

Break: [00:08:45][00:10:18]

Joe Fairless: With that meetup, clearly, it was successful with 100 plus people shortly after you started it. You said you wanted to do something different. Tell us, what did you do?

Hayden Harrington: A couple things. Like I said, I was going around to different events too, just trying to understand how the game is played. I realized that the people that were putting the events on were the ones that were doing deals. That was a big realization for me. But the problem I saw was all these events were done at restaurants, bars, and crowded hard to hear places. They didn’t have a sophisticated way of checking people in, it was kind of a table that you do it yourself. I started to see all these things as opportunity. I was like, “I don’t have the best handwriting. I’m sure a lot of people out there don’t either. One simple thing, when you’re putting in your database, you put one wrong letter in an email address, that’s a lost lead.” So doing stuff like a digital check in where we had a computer or an iPad that would be on the backside of a website that I built for us that would automatically add people to a CRM. Just trying to minimize the room for error, maximize efficiencies, and then also doing automated follow-up emails from the time that they submit that form. Two hours later, when the event is over, and they’re getting home, they’re already getting hit with a follow up thank you email.

Then a big thing was putting them in an environment that will help them network, getting them out of the restaurant, that was my number one criteria. I said, “We’re not doing it at a restaurant, we got to get it out of that.” Because the problem with that is you sit down at a table and you’re locked in that seat. You’re talking to the guy to your right or your left and that’s where you spend the next hour and a half. That’s a major issue when you’re trying to build your network. We said we’re done with restaurants. We started in a title company’s office up here in Dallas actually, Madison title. They were gracious enough to open up their office after hours, they actually catered food for us. It was great. Then to further that too, again, like I said, I was kind of naturally introverted. I wasn’t the best at networking. So I basically just solved the problem for myself, which was, we called it a graceful exit. Trying to get out of conversations can sometimes be very difficult when you’re networking because you don’t want to come across as rude.

We’ve essentially just addressed that problem that everybody’s thinking. Every 10 minutes, we force people to mix it up, we actually would bring a cowbell and that was their signal. Okay, times up, exchange business cards, go meet somebody else. People loved it. The first meetup, I think we had 20 to 25 people, then it was 45, then it was 70, then it was 100 plus. It grew very, very quickly. Essentially, we just wanted to help people network more efficiently. That was really the only problem that we were solving.

Joe Fairless:  That digital check in, is the attendee the one putting their info into the iPad?

Hayden Harrington: Yup, absolutely.

Joe Fairless: Describe the flow of the event will you, from the moment you go in to when you leave. As an attendee, what am I experiencing as far as content and different setups that you have structured?

Hayden Harrington: We eventually moved it to the Westin in Las Colinas here in the mid-city. It was a big conference room in a nice brand-new hotel. We’d have them come in and check in outside the room that we’re holding it in. Then we had somebody writing down their name tags. Everybody’s name tag was all in the same font, it’s clear and legible.

That’s another problem too that we solved, because sometimes it can be just hard to read people’s names and their handwriting. So we had somebody with good handwriting writing down their name tags, they’d be checking in, then they’d go and network for a little bit. We kind of introduce ourselves up on stage and some sponsors that we had. We then let people network for the next hour, rotating every 10 to 15 minutes. We gave them free food so there’s always food and drinks. Then the second hour of the event, we do a speaker. So we’d have the speaker come in, and we had Michael Becker come one time, James Kandasamy, John Montero. We had a bunch of pretty well known, especially around Dallas, people that would come and speak on different topics. You get kind of the best of both worlds. We’re not sitting down for two hours and just giving you a presentation, but we’re allowing you to connect with some people, and then also giving you some education to take home as well.

Joe Fairless: What’s the cost, if any, to attend?

Hayden Harrington: It was always free. We gave people free food and it was free to attend. That’s one thing. We didn’t want to put a price tag on it because honestly, we wanted as many people as we could possibly get out. So we left it free for people and I think they really appreciate that.

Joe Fairless: How would you promote it?

Hayden Harrington: Mainly just through social media, honestly, and Meetup. That was kind of our big avenues to promote it. Not anything special really. Once they’d be signed up, we’d obviously send reminders and stuff like that. I think that’s a big one just because people get busy. We were only doing it once a month so sometimes you put it on your calendar, or you register for something, and you kind of forget about it. So we made sure to send people reminders and make sure that they knew when and where it was.

Joe Fairless: How often would the reminders be?

Hayden Harrington: Normally we do a week before, then morning of, and then kind of like an hour before reminder. We do typically three, maybe four reminders kind of leading up to the events.

Break: [00:15:36][00:18:29]

Joe Fairless: You had a lot of people and then COVID hit. So now what are you doing with that Meetup?

Hayden Harrington: We transitioned to do a lot more online stuff. I think that was a big pivotal moment too because a lot of people, as soon as COVID hit, especially in our space, they just kind of stopped doing stuff. A lot of people had local meetups and they never really made the transition online. We started doing webinars and online networking events. We actually were able to build our list significantly faster than we were before and also expand our reach. We pivoted very quickly and just started doing monthly educational webinars, we do bi-weekly networking events with people all over the country. I think the first few months, we were getting at least double or triple the amount of people added to our list just because we could expand our reach. Especially up front, everybody was excited to hop on different network events. There was some definite Zoom fatigue over the subsequent months. But really, at first, we were getting at least twice if not three times as many more contacts added to our list every single month.

Joe Fairless: Now are you still doing those Zoom networking events?

Hayden Harrington: Absolutely. We just finished up a three-part series. We did kind of lifecycle of a deal. We did one video in the series per month. The first one we did, Dustin and I were on underwriting, then Gary Lipski came on the following month and did asset management webinar to our audience, and then Rob Beardsley of One Star Capital just recently did a case study on a full cycle transaction. Then we still do the every other week virtual networking on Zoom as well.

Joe Fairless: Are you doing this full time?

Hayden Harrington: Yup.

Joe Fairless: What’s been the biggest challenge? Actually, before you answer that, you were learning for four to five years how to approach getting a deal. How are you supporting yourself?

Hayden Harrington: Out of college actually, I started a nutrition company, did that and grew that for a few years. Then when I exited that, that’s really when I went all in on multifamily. I definitely had to make some sacrifices too because I knew in my mind, it’s the coffees, it’s the lunches, it’s those meetings that are spontaneous where all the value is found. If I was tied up too much, I’d miss out those opportunities, and I didn’t want that. So I had to do things like sell my car and just go all in on this bet on multifamily. I think that definitely paid dividends. But it’s very challenging to get off the ground because the barrier to entry is very high, especially for somebody that’s young. I definitely had to make some sacrifices along the way.

Joe Fairless: When you sold your car. How did you get around DFW?

Hayden Harrington: I drove my grandfather’s old Jeep around for a couple years. Thankfully I had that. But that kind of afforded me the ability to go and make that sacrifice. Not everybody has something like that. Thankfully I did and was able to go forward with that.

Joe Fairless: What did do you do with the money when you sold the car? Where did that go?

Hayden Harrington: Straight into savings. I have little savings, plus proceeds from that, did a couple of little jobs, and stuff. But that was all into savings, just try to keep myself afloat and keep the dream alive.

Joe Fairless: Wow, good for you on that nutrition company. What did you sell it for?

Hayden Harrington: I’m not able to disclose that but it was a good venture. We ended up growing it into about 90 different stores across eight different states.

Joe Fairless: A seven figure sale to you.

Hayden Harrington: Not quite, but we didn’t know…

Joe Fairless: Pretty healthy.

Hayden Harrington: Yeah, it was still a good business. I credit that business a lot because it actually taught me a lot. Especially the marketing and branding side because at first, frankly, we were broke. So I had to figure out how to build a website, how to design a product, all that stuff I had to kind of take on myself. A lot of those skills translated to real estate because a business is a business, ultimately your investors are customers and the same principles apply to selling a product as selling an investment.

Joe Fairless: If you speak to someone who says “Yeah, I want to get into multifamily,” but they were where you were years ago. What’s something you would tell them to do less of that you did and what’s something you would tell them to do more of that you did?

Hayden Harrington: I’d say don’t try to do it all yourself. Because for a long time, that’s what I tried to do and it got me nowhere. Be willing to specialize, be willing to focus on where you can add value, and not try to do it all. Multifamily is absolutely a team sport. Focusing on a role that you can be really good at and bring a lot of value to the table, I think that would definitely serve you well in the long run. Just to add to that, just be patient. These are long relationships, not only with the partners that you’re in, but also the properties, the deal itself. It’s not like you’re flipping these in a month, we underwrite to five year holds, so these are long term transactions, they take time to put together. I mean just the closing process could take two or three months, and that’s from getting your offer accepted. That doesn’t even factor in how competitive the space is. Just be patient, be willing to put in an enormous amount of effort and work, and good things will happen

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

Hayden Harrington: I think my best piece of advice really goes back to just believing in why you’re doing this. What’s your why to begin with? I think that’s the most important question to ask yourself is what’s your purpose behind that? Because you’re going to face a lot of closed doors, you’re going to face a lot of hurdles, a lot of objections, and your why’s are what’s going to keep you going. Having that the center of your focus, and having a lot of clarity around what that why is, I think is the best advice I can give.

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

Hayden Harrington: Yeah, let’s do it.

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

Hayden Harrington: That’s a good question. I really liked the E-Myth. I read that one recently. It kind of ties into what we’re talking about here as well.

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

Hayden Harrington: The best way to give back is we’ve actually done some charity events and that’s something we’re really excited about within Momentum Multifamily. It’s continuously giving back to not only our investors and getting them involved, but also the community as well.

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

Hayden Harrington: Check out our website momentummultifamily.com. Feel free to reach out at hayden@momentummultifamily.com as well.

Joe Fairless: Hayden, bravo on what you’ve done. Thank you for sharing your story. I know it will be inspirational and helpful to a lot of Best Ever listeners who are starting out especially in commercial real estate. Thanks for talking about at the Meetup, how you positioned it differently, proved upon the experiences that you had attending other Meetups, and are enjoying the results of those improvements with a lot of people attending. So nice work on that. Thanks for being on show. Hope you have a Best Ever day and talk to you again soon.

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JF2637: Sued for $68M: Cautions of Inflation and Risk Appetite with Ted Greene #SkillsetSunday

Ted Greene joins Ash Patel in a discussion of institutional purchases, interest rates, and inflation. Ted shares his earned scar tissue of being sued for $68M and losing money on a personal venture — and how you can position yourself for an impactful retirement.

Article mentioned: Buy with Conviction

Ted Greene Real Estate Background:

  • Investor Relations Manager at Spartan Investment Group
  • 20+ years of real estate experience
  • Portfolio consists of 14 properties, 10 of which have gone full cycle
  • Based in Golden, CO
  • Say hi to him at: https://spartan-investors.com/

 

Click here to know more about our sponsors:

 

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

Follow Up Boss

 

TRANSCRIPTION

Ash Patel: Hello, Best Ever listeners. Welcome to the Best Real Estate Investing Advice Ever Show. I’m Ash Patel, and I’m with today’s guest, Ted Greene. Ted is joining us from Golden, Colorado. He was a previous guest on a couple of episodes, so if you google Joe Fairless and Ted green, those episodes will show up.

Ted, we’re glad to have you back. Thank you for joining us, and how are you today?

Ted Greene: I’m good, Ash. Thanks for having me. It’s a pleasure. You guys are industry thought leaders, and I’m glad to be tagging along with you.

Ash Patel: Well, the pleasure is ours. Today is Sunday, so Best Ever listeners, I hope you’re having a great weekend so far. And because it is Sunday, we are going to do a Skill Set Sunday, where we talk about a particular skill set that our guest has.

Ted is the Investor Relations Manager at Spartan Investment Group, and has over 20 years of real estate experience. His portfolio consists of 40 properties, and 10 of which have gone full cycle.

Ted, before we get into your particular skill set, can you give the Best Ever listeners a little bit more about your background, and what you’re focused on now?

Ted Greene: Sure, happy to. So I’m in my early 50s, and out of college, I started a 24-year career. Most of that was with Merrill Lynch as an investment advisor, and the last six was Chief Compliance Officer of a fiduciary firm, registered investment advisor, and over the years, lots of lessons learned. A little bit of scar tissue, but lots of fun, too.

Ash Patel: Today we’re going to dive into institutional purchases of assets. What are your thoughts on that?

Ted Greene: I wrote an article for your group last summer… Because of my stock market history, I have a bit of a hangover where it’s an addiction, you just can’t turn it off and let it go. The Department of Labor, which oversees ERISA plans, which are 401(k)’s, 403(b)’s, 457 plans. The Department of Labor made a change last summer. In the article that I wrote for Joe Fairless, the article title I believe was Invest with Conviction. And in that article, I cite the actual Department of Labor regulatory code that allows large plans to, the first time — Ash, this is a big piece — for the first time, those massive pockets of money can now buy, own and control, not just publicly traded REIT assets in the publicly traded securities market, but rather specific assets.

So, think Exxon or Caterpillars, 401(k) plan – they own these specific pieces of commercial real estate. And again, that’s the first time. To really highlight this point, think about how big that retirement plan marketplace is, and think about the 1970s when we had — the hallmark of the ’70s was inflation. Maybe that’s coming around the corner for us. I’m not saying it is, but maybe it is. But during the ’70s, interest rates – they rose. Ronald Reagan gets into office. Paul Volcker is the chairman of the Federal Reserve Board. Interest rates get to 18%. So mechanically, as interest rates rise, bond values decline. Where are we now with interest rates? What might happen to bond value assets if we go back to, let’s just say, 10 on the federal funds rate, or a prime rate of 10?

So the point there is, interest rates potentially could rise. What happens to P/E ratios? Sneak peek preview, they compress. Right now we’re in the mid-30s. You could say 36 or 37 without stretching things. In 1982, the PE ratio on the Dow Jones was less than seven. Google it. It’s scary. So when interest rates rise, P/E ratios compress, bond values fall, and yet for the first time, last summer, August, the Department of Labor says, “Okay, biggest investing pockets of money in the world, you can go buy portfolios of commercial real estate.” So Ash, there you go. That’s it. That’s what’s going to be happening the next 20 years. This is the first inning of the nine-inning ballgame or seven-game series or what have you, but we’re just getting started on these institutional sales, I think.

Ash Patel: Yeah, that’s everywhere right now, and the goal for a lot of people that I’ve interviewed is, get your asset base big enough so you can sell to an institutional investor who’s going to overpay. So, on a smaller level, with Wall Street firms buying real estate assets and single-family homes as well, what do you think is the motivation behind that? Do you think it’s a hedge against inflation? Or do you really think they want to be landlords?

Ted Greene: They want assets. Think of it from the pension funds perspective. They have an obligation. So the retiree who’s in retirement, age 68, and statistically will live to whatever age dependent on gender, they have an obligation to them, and they can’t come up short. So, if P/E ratios have been stretched, because the last 10 years of quantitative easing to infinity, hockey stick everything, it doesn’t get any cheaper… What’s going to happen when rates rise?

Will P/E ratios compress the way they have every cycle in the past? So yes. They will. So it may be that it’s the least dirty shirt in the laundry, worst-case scenario. Best-case scenario, if you’re finding assets where the sponsor or the operator can actually grow that net operating income through organic expansion — with Spartan, we enjoy self-storage, and we’ll buy properties and put down additional units for lease, lease them up and carve that asset out and get it sold. So that’s organic net operating income growth.

So, if you can grow that NOI and defend that asset’s market value in the face of rising interest rates, you tell me, would you really rather have a large chunk in the stock market, or in bonds that yield in essence nothing? Or from the really intelligent investor, they’re going to be working with four or six sponsors, and they’re going to have everything; retail, industrial, core four, storage, and not really betting on any one specific sub-asset class… But the intelligent investor is going to say, “Yeah, these things cycle. I’m going to have a little bit of everything, because the next big cycle move – I don’t know if it’s going to be retail that comes on strong, or if it’s going to be multifamily, or triple net, or who knows what.” But the trillion-dollar pockets of money, they’re loaded to the gills with stocks and bonds, and for the first time, they can now come to commercial real estate of all types. It’s a big thing, and it’s just starting.

Break: [07:18] to [08:51]

Ash Patel: Is there evidence of that shift happening?

Ted Greene: That’s an interesting question. The article that I read last summer identified of all the plans that were pulled — it was an article that I pulled from Investment Advisor Magazine. Decent publication, goes to fiduciaries, and it spoke to the percentage of the plans that were pulled, the percentage that had begun the move to include actual specific properties in their 401(k) plan asset allocation. And I want to say that 3% or 4% of the plans that were pulled – and I’m going on memory, Ash. I’m going on memory… It may have been 175 plans, but I think 5% or 6% had started to take a bite. So Investment Advisor Magazine, I’m sure if we were to collectively internet search and find an updated article, I’m absolutely convinced those 401(k), 403(b) and 457 plans, as well as pensions, are moving into the space.

Ash Patel: So they’ve already started to dip their toes in the water.

Ted Greene: Yeah.

Ash Patel: So, I am a non-residential commercial investor, and a lot of my big retailers will sign 10-year leases, and that is a little scary, because they might have 3% rent increases or less over 10 years. So, from their standpoint, if inflation rises, they’re tremendously hedged. And then you see all these Starbucks and Walgreens out there on 10-, 15-, 20-year leases, with renewals built in, sometimes as far as 30 years. That’s a pretty chilling thought if inflation rises rapidly.

Ted Greene: Yeah. What’s the action item? Do you shorten that? I can’t imagine lengthening that, but you’re right. How do you position yourself so that you’re not impacted too negatively, but at the same time, you want that surety? It’s an interesting dynamic.

Ash Patel: Yeah. My only thought is you build in a CPI kicker or inflation kicker, where if the numbers go up significantly, the rent goes up by some kind of factor of that number. Historically, that’s never been done.

Ted Greene: Yeah, that’s a challenging question. You don’t want to disadvantage your tenant to your advantage, because there’s got to be fair value for both sides for people to want to continue to engage with you. Tough question.

Ash Patel: Yeah. The National Tenant Leases are trading at such low cap rates; you’re already barely getting by as it is. You’re parking money, essentially.

Ted Greene: It’s very fragmented. It’s like the 1980s in the banking sector, before Bank of America and Wells Fargo had bought up all the little regional banks. So you’ve got the individual investor out there who’s taking down their first fourplex. I think for the passive investor, the key for the passive investor who’s not going to roll their sleeves up and do it themselves is look for sponsors who are aware of what’s happening in the space, and who are marching towards or are transacting at that.

My best guess, from conversations around the halls of Spartan, that minimum is a $250 million transaction, likely to be predominantly Class A, with some A-minuses and B-pluses in there, but predominantly Class A assets. But if the individual retail investor is looking for their first $50,000 passive investment, it does not behoove you to be partnering with somebody who wants to do it on their side, because they’re 55 and they’re going to retire at 58, because they’re not going to be playing into that pool, where you transact in the high 3’s, or the low 4 cap range. If you just have one asset and you look to transact it, you may be buying at a 5 and selling at a 5 cap, and heaven forbid, interest rates rise and you get pinched a little bit, and you might get hurt.

Ash Patel: So that’s another strong headwind, is if interest rates rise, the price of assets is going to get lowered, because it’s more expensive to own that asset. So a lot of challenges, but yet, we still see real estate prices ballooning. It’s crazy.

Ted Greene: Yeah, you’re correct. It is crazy. I think the wisdom of the ages is to bear in mind, when we were all young, we all loved to win more than we hated to lose. Meaning, we took a lot of risk. At some point, we all, as investors, we wake up one day and we see the world just a little bit differently.

I got sued for $68 million when I was at Merrill Lynch, and it was a family that had close to $300 million with us, Merrill Lynch myself. That was scar tissue for me, were some dot.com stocks that had made the money on the way up, quickly lost, and now personally, I’m very much of the opinion, I hate to lose, much more than I love to win.

So back to your point. It’s stupid money right now. It’s been risk on for 10 years, no holds barred. Okay, that’s happening. It’s a thing. Take a little bit off the top, move a little bit more to cash, have some money in an actual bank CD, carry a little bit more cash than you’re accustomed to, because the world will change a little bit eventually, or a lot, eventually. It’s just the wisdom of the ages.

Ash Patel:  love that contrarian advice, because right now, cash is burning a hole in people’s pockets, right? Everybody’s looking to deploy capital as fast as they can, and especially now, as we’re approaching the end of the year, everybody’s trying to buy whatever assets they can. You and I have lived through a couple of these market cycles, and historically, I think we saw the writing on the wall. We chose to ignore it, because we were chasing returns. Do you see the writing on the wall now?

Ted Greene: The frenzy that we’re in right now legitimately could continue for five years. And these kinds of markets, they can outlast your conviction to be frugal, conservative [unintelligible [00:14:45].26] what have you. And it’s kind of like a margin call in the stock market on the way down, where it goes exponential on the way down. Market tops typically are formed with exponential movements on the way up, so I don’t know. And admittedly, I have been dead wrong on interest rates for the last five years, and that may be conservative, and it may be more like seven and my ego is getting in the way.

I remember in 2010, through 2012, I owned a business, it failed. My wife and I, we lost a lot of money. That’s more of my personal scar tissue, and I think that just being a good member of people’s community, with no regard to where they invest or what they invest in… Just think back to 2010 to 2012, you couldn’t give a home away; you could and you could sell a home. But the risk appetite right now – it’s extreme, and that should be cautionary. I think, at the most conservative level, it should be cautionary. Because it’s not a race to retire at 45 just so you can tell your friends you retired at 45. Now, maybe that pushes your button, but from an intellectual perspective, we all need, as investors, that stimulation of community, of rolling into bed exhausted, because you worked really hard, and you had a great time. Who would really want to give that up permanently? And I’m getting off track—

Ash Patel: Now I listen, I agree with you. What are you going to do when you retire? I don’t know why people look forward to that so much. If you love what you’re doing, you’re going to keep doing it.

Ted Greene: That’s it. That’s totally it.

Ash Patel: What advice would you give somebody starting out in real estate, actively doing fix and flips, or buying some small multi-families? And let’s say they’re in their early to mid-20s. They’ve got several market cycles ahead of them. What should they do?

Ted Greene: Don’t be in a hurry; really and truly don’t be in a hurry. Join a mastermind; these real estate conferences, Best Ever’s coming up after the turn of the year… You can find a mastermind group, which is just a collection of folks just like yourself, that get together every four or six weeks, to just compare notes on what they’re doing personally with their investment dollars, what sponsors they’re talking to… You get all kinds of sponsors out there. So, as good community members, we want to see people be successful, all of us.

So talk to folks, tap the brakes a little bit; the excitement in the adrenaline, it can cause you to maybe make a decision before you really should. And by visiting with others and learning from their experiences, you just really benefit from that. So some perspective of other people who don’t look like you, who don’t act like you, but have done stuff that you have not – there’s tremendous value from that. And, Ash, as you can tell, at the end of the day, I’m worn out and I need some downtime. But during the day, talking to investors, that’s the fun stuff. And I think a lot of us are like that. So tap the brakes, talk to people who are different than you, in different parts of the country… You don’t need to pay a dime for this kind of education. Just put the energy into it, and you will learn a tremendous amount, for free.

Break: [18:00] to [20:52]

Ash Patel: Now, let me flip the script. Somebody that’s a little bit later in life – they’re going to have that fear of missing out if they sit on the sidelines. What advice do you give that person? Let’s say they’re okay right now, they potentially could retire, but it’d be a lot better if they can keep writing this up; or do they conservatively sit out and wait for the next cycle?

Ted Greene: That’s an interesting question. Friends out there, Ash and I did not script this. I promise you.

Ash Patel: Yeah.

Ted Greene: The next article I’m working on is how folks that are in my generation – I’m early 50s – how do you transition from not having a dedicated source of income that will support you in retirement? How do you construct that? So, if you’re going to be spending – let’s just throw out a number; a modest $85,000. If you want to spend $85,000 in retirement, how do you begin to construct that, so that you can pull the W-2 job, just forego it. So what percentage of the $85,000 that you would like to live on should come from areas where you know you’re going to get those funds?

In my mind, because of what we’ve seen with our Federal Reserve chairs over the last 10 years, be it Bernanke, or current, Janet Yellen, you’ve got to start to put in place fixed and specific investments that have fixed and specific both pref and cash-on-cash rates of return. So take a bite of the apple. Divide the market up into the core four; you can google that. You’ve got some storage, you’ve got some life settlements… You can just kind of start to put into place specific sources of income, and as investors march to and through retirement, so the 50 year old to the 70 year old, or somewhere in between, you’ve got to methodically architect that.

So right now the cash-on-cash rates – they’re decent. So you may not make all the upside that the sponsor models for you currently, but you should get that cash-on-cash as long as that asset is performing. And if you’re able to get 6% or 7% cash on cash, the age-old rule of thumb, “Don’t take more than 4% of your net worth out of your investment portfolio on an annual basis.” Now, we can move that a little bit higher when we’re dealing with real estate assets, but maybe 5 or 5.5. You can architect that.

So put a line in the sand, “I’m going to retire or have the opportunity to do something different at 65,” or 60, or 54, what have you, and then map out where your sources of income will come from, incrementally, as you march toward that goal. So you’ve got to get started, I think.

Ash Patel: That is phenomenal advice, because I’m an extremist. So I’m thinking it’s either sit on the sidelines, or chase those massive returns. But you’re right, there’s a happy medium, and look for those conservative investments where you’re still growing your cash-on-cash, versus having it sit idle.

Ted Greene: Home run. Yeah. Just get started and learn as much as you can.

Ash Patel: Ted, thank you so much for your time today. We’re looking forward to seeing that second article. And how can the Best Ever listeners reach out to you?

Ted Greene: LinkedIn is a great tool for me. That’s where my community lives. So Spartan Investment Group. I’ve got an E on the end of Greene, and my first name is Ted.

Ash Patel: Awesome. Ted, thank you so much for joining us and giving us some great advice and a glimpse of what’s happened in the past and what may or may not happen in the future. So thank you again.

Ted Greene: My pleasure.

Ash Patel: Best Ever listeners, thank you for joining us and have a best ever day.

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JF2307: Investing During Covid-19 And Getting A Discount With Ian Ippolito #SituationSaturday

Ian is a serial entrepreneur; he has built multiple businesses over the years. In 2013, he exited his latest company and started looking for new ways to invest his money. That’s how he came across the concept of real estate crowdfunding. Many companies were promising the moon, but Ian wasn’t sure how to choose the one to trust. Having to manually vet and interview all these investment companies gave him an idea to start Real Estate Crowdfunding Review so that other people could take advantage of his rankings and research.

We chatted about the investors’ readiness to put money into the real estate market during Covid-19. Tune in to learn about the types of investors and the red flags that Ian has been dealing with lately.

Ian Ippolito Real Estate Background: 

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Best Ever Tweet:

“People are now looking at the one or two-year delay as an advantage” –  Ian Ippolito.


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 Ian Ippolito. Ian, how are you doing today?

Ian Ippolito: I’m doing great, Theo. How about you?

Theo Hicks: I am doing well, thanks for asking and thanks for joining us again. Ian is gonna be a returning guest; his first episode was episode 1294, which was over 2,5 years from when we’re recording right now, so it might be three years once it actually airs… So a lot has been going on since then, so we’re going to dive into that today.

Today is Saturday, so we’re doing a Situation Saturday, which is usually a sticky situation that the guest is in, but in a sense, this is a sticky situation that a lot of people are in… We’re gonna be talking about – at least at the time of this recording, the current pandemic, and we’re gonna talk about how people react to that, some of the good and bad, in a sense, asset classes as a result of the pandemic, and then talk about some forward-seeking predictions on where things are going.

Before we get into that, a refresher on who Ian is – he is the investor and founder of The Real Estate Crowdfunding Review, as well as the founder of The Private Investor Club, that has over 4,000 members with over 5.7 billion in investable assets. His website is TheRealEstateCrowdfundingReview.com.

Ian, before we dive into the situation, do you mind telling us a little bit more about your background and then what you’ve been up to since we last spoke about 2,5 years ago?

Ian Ippolito: Sure. My background is I was originally a tech entrepreneur… A serial tech entrepreneur, actually. And I built some businesses successfully, some not as successfully, but over time I kind of improved, and I eventually had a very nice exit at the end. That was around 2013.

I sold that company, and then now all of a sudden my job became “How do I invest my money?” The traditional advice was “Oh, you need to go and put this amount into stocks, and put this amount into bonds, and you’ll be ready to go.” And I do have some money, obviously, in these markets, but I wasn’t comfortable with the traditional advice. I had seen people who had gone through some very tough times following that advice…

I wanted to find something where I could reduce my volatility. That brought me to real estate and real estate crowdfunding, which at that time was just starting to come into fruition. The JOBS Act had passed… So it used to be that you would have to know somebody, maybe you would belong to a country club, or something like that where you knew somebody that could bring you the investment. Now all of a sudden you could just be anyone, and the entire public was basically accessing these investments… And it was really cool, because before maybe you needed to have five million dollars or ten million dollars to get into a piece of property, multifamily or industrial or whatever it was. But now all of a sudden you could put in 25k, or 5k, or sometimes even $500.

So it was a very exciting time. That’s kind of where I came into developing, in 2013, when it was all starting… But at that time there wasn’t much available from the investor point of view. Everyone was saying they were so great, and I was like “Well, which one of these do I trust and put my money in?” So I spent a long time, I spent several months and I hired an assistant, and we went through and we interviewed all the platforms, and I went through all their legal documents, and I interviewed investors, and said “Did you like this one, or did they mess up?”, which was really crucial, because they all said that they’re wonderful. So it created kind of this ranking for myself.

And the word got out that “Hey, Ian has created this… You should ask him for it.” So I gave that out a few hundred times, and I got tired of emailing that out to people… So I said “Look, I’ll just put it out on a website.” Then I created this website, called the Real Estate Crowdfunding Review. The whole point was to evaluate all these different investments.

So that kind of grew, and the industry changed, obviously, over time. It went through some ups and downs. There was a period where funding dried up for a lot of these companies, so there were a bunch of [unintelligible [00:07:00].14]  a bunch of them went out of business… So some bad things happened. Now a little bit more of an upturn after funding is coming back in…

And the deals thing, since you question was what I’ve been doing – so since the last time, I now have the Private Investor Club, which I might have talked about briefly the last time, but basically it’s what you talked about, which is a place where I as an investor, and others, can go, where we source deals. It’s so hard to find good deals. So we bring good deals in, and then we hammer on them. We do due diligence on them, and when you have that many people looking at something, you’ll find the problems, and then we will invest.

So that’s what I’ve been up to. Of course, I didn’t even mention the elephant in the room, which is something big has happened, which obviously is the Covid-19 pandemic…

Theo Hicks: Yes. I’m really looking forward to this, because I’ve talked to people who are active investors, how they’ve reacted to the pandemic, but you’re a passive investor; you get this massive group of passive investors, so you’ve got insight not only from your experiences, but from everyone else that’s in your group’s experience. So let’s dive into this sticky situation…

At the onset, in early 2020, what was the reaction from you and from the passive investors? What was your thought – were you were like “I’m done, I’m not investing anymore. I’m gonna wait” or were you like “Oh, this is not a big deal. Business as usual”, or somewhere in between?

Ian Ippolito: I think the first reaction with almost everyone was just shock, because no one was expecting it… And then maybe when it first started, everyone thought “Well, maybe it’s not gonna be that bad…” And then cases started climbing, we saw what happened in New York and New Jersey, and then all of a sudden we had lockdowns, and businesses were shutting down, and everyone said “Oh, this is for real. This is not gonna be something that [unintelligible [00:08:36].21] five or six other times where there was a virus, and it just never really affected us. So at that point, it was shock. And the majority of people, 99% said “Whoa… Let’s just stop. I’m not investing in anything, if I was thinking of investing in anything… I’m scared about myself. What’s gonna happen to my family, my streams of income? If I have a job, I’m a passive investor with a job, what’s gonna happen there? I might get laid off…” So a big halt was the first thing that happened.

And then on the crowdfunding platforms even, a couple of them were like “We don’t know what’s gonna happen.” They had massive layoffs, and they had been hiring up pretty aggressively, some of them right into it, because business had been so good… They were hiring.

So that was the first thing, which was just “Whoa, this is really dangerous. I’m worried about  myself. I’m not ready to put in any money”, and all the deals that people were looking at were just like “No.” We had a couple of deals that were in progress that people were looking at, and they said “No, no, no.” And those just ended.

Theo Hicks: How long did that period last? Or is it still ongoing for some people?

Ian Ippolito: It’s a good point. For some people it still is, although I think for the majority of people it’s not that way. And it’s because it’s been a very uneven recovery; they call it the K-shaped recovery. Generally, when you are in the upper income, which is the type of person that’s investing passively, most have not been hit very hard. Many of them can work from home if they’re working, or their income is still going good – they’re not affected as badly as some people on the lower-income scale, who’ve been hit very hard.

So at this point in time there’s only very few that are still in that mode, but they’ve kind of switched. So it took about a month, I would say, for people to start processing it. And then you kind of had different camps. We had a group of people that were like “You know what – this seems really terrible, but I think it’s gonna turn around pretty quickly.” So these people were full-steam ahead, probably about a quarter of people, after about a month into it.

Then you had others who were like “I think it’s gonna take longer, but probably in a year or two we’ll be out of it, and these are long-term investments. They could be five years, seven years, ten years… So I’m willing to go into an investment right now, if they have a plan to get across what might be a lean time. Maybe I can get a discount on it; I’m willing to go forward.”

And then you’ve got those that were like “No, it’s too risky. I really can’t see what’s going on; I really can’t understand. How do I underwrite?”

I’ll give you an example – with multifamily, at the beginning when this happened, all we knew is that we had millions more people unemployed. So on one hand, very bad. Normally, horrible for real estate. But then we had all this stimulus happening, where people were getting paychecks, and we had extra-unemployment… But then there were also stories about how that wasn’t getting to the right people, and things like that… So how does all this play out? Really, really complicated stuff. So no wonder everyone had different opinions about it.

Theo Hicks: Sure. So let’s go with the camps of the people who are camp number one, which is like “Full-scale ahead. Let’s go!” and then camp number two, which is like “I don’t really know what’s going on, but it seems like this might be over in a few years, and these investments are 5-10 years, so maybe I can get a discount, or something.” So for those people, what are they choosing to invest in, and then what are they choosing to avoid and not invest in, and then why?

Ian Ippolito: And even there, there’s different tracks people are taking, depending on how much risk they’re willing to take. In any dislocation there’s gonna be distressed opportunities, and then if someone is willing to take the risk of those, it can be very profitable, or it can be a disaster. So you’ve got kind of like the conservative investors, and you’ve got the ones that are more aggressive, in each of those categories.

If we take a look at the conservative investors – they’re looking at multifamily and they say “At the beginning we thought it was gonna take a huge hit. All these multifamily things were just going to go down the toilet.” But so far, that hasn’t really happened. At least not on the class A and the class B. Now, class C is a different story. These are dealing with the types of tenants that have very customer-facing jobs, dealing with retail… These people are experiencing heavy job loss, so class C has not been doing good. But B and A  have held up; a lot of the people in the A can work from home, they can do all that sort of stuff… And with those stimulus checks, a lot of the times the rent has continued to come in.

Oh, I’ll add one more little complication here, which is the fact that a lot of the support, this stimulus and the extra unemployment – it’s about to run out. So when we talk about that third category, people that say “I don’t know what’s gonna happen”, they’re taking that into account.

A lot of people don’t realize this, but there are millions of people that are unemployed right now, especially where I am typically, with investors, and kind of living in that K-shaped world, where everything is fine. There are millions unemployed. And these benefits are running out, moratoriums are about to expire in December or January, so they’re estimating maybe 6 million or 7 million people who are behind on that rent and cannot catch up.  You’ve got millions more who are behind on their mortgage payments and cannot catch up. And  that’s the other thing, they’re like 3-4 months behind. One month behind is probably okay. If you’re 3-4 months behind, it can be big trouble. So there’s probably no way for these people to ever catch up.

Now, that expires in January. There’s been this push  in Congress… They would have to pass a law, to have more stimulus, to extend the moratoriums, to add more unemployment… But there’s been no agreement. And every week I’m looking and saying “Did they finally do it? Did they do it?” No. No. And every week, it hasn’t happened yet. So that’s a big unknown, and that’s driving that third category of people, which are like “You know what – it looks okay now in a lot of classes, but I don’t know what’s gonna happen in January.” So they’re holding off.

Back to the other people – so you’ve got others that are… Maybe I should explain further that you’ve kind of got different asset classes that have done well so far, and ones that have not. And there’s opportunities in both.

You’ve got the ones that have done really well, which are like multifamily, self-storage, mobile home parks – all of these have held up; rents have been doing well. And when I say multifamily, I mean A and B, not C. So people who are ready to continue will continue to put money in those. People who are a little bit more cautious, but are looking at the 1-2 year have gone through an interesting strategy where — okay, rather than buying a class B multifamily, they will look at a brand new construction of multifamily, with the idea of “I’m gonna build this, and in 1-2 years when it’s built, I think all this is gonna be gone, and then I won’t have to worry about it.”

Theo Hicks: That’s interesting.

Ian Ippolito: Yeah. In normal times, that would be a riskier strategy, because “Are you gonna build it on time? Are you gonna be able to make a balloon payment at the end of it and lease up, and make the balloon payment on time? Or will you lose a whole bunch of money?” There’s all these steps. But people are now looking at 1-2 years later as an advantage, and a way to play the whole uncertainty, and to kind of get into it. So you’ve got those.

Then you’ve got the people who are even more aggressive, who say “Okay, what are the things that are doing really badly right now?” That’s hotels. A lot of the retail is doing really badly with these restaurants that are shut down.

At first, some of the medical stuff was doing bad, because they shut down all the elective surgeries, and stuff like that… Still, even hospitals and stuff like that are having a difficult time. So there are a lot of distressed assets out there. So for the people that are really aggressive, they look at those and say “Hey, maybe this is buying at the right time. Maybe this is like being in the Great Recession and this is like buying right at the bottom of 2009. I’m gonna just ride this thing up when things turn around.” But there’s a danger there, because we don’t understand this recession. It’s different than anything else that’s ever hit us before, in our lifetimes anyway. The causes of are very different, and every past recession has these after-effects that have been very difficult to predict. And this one especially so. So there’s a little bit more risk than usual in going after some of these… So someone has to be comfortable with that.

Theo Hicks: One thing I wanna dive a little bit deeper into before we get to this next section, which you’ve already kind of hinted at, which is the future – but just really quickly… When you’re looking at these different deals – let’s take multifamily, for example… What are some red flags that you would see that the sponsor is doing, even if it’s a class A or a class B property? You’re like “Whoa, whoa…” It might be a good deal, but something in their underwriting that they did that was a really aggressive assumption that you were just not on board with – what would be a few of those?

Ian Ippolito: Well, what’s interesting is there’s actually a lot of those I’m seeing right now, where they come back and they just don’t look right. A lot more deals that just aren’t passing the sniff test. Personally, I wanna see a Covid-19 discount. I wanna see something that is compensating me for the possible risk that things could get worse. And what’s interesting is when the pandemic first hit, you had the sellers who were way up here, and then the buyers who were down here… And neither side was willing to budge. Buyers were like “I need a discount.” Sellers were like, “No, no, no. Just a month ago I could have gotten the full price.” So nothing happened. And the volumes on all these sales just went down into the basement.

Well, volumes are still pretty low, but starting to come together a little bit closer. So it is possible now to get Covid-19 discounts, which is nice. For me, if I was gonna go forward with something, I wanna see a seller that is willing to come down, so a Covid-19 discount… It might be 10% or 15% now. Not the 30% maybe that some people are wanting… So if that’s what they’re wanting, this is not the time to buy.

And the other thing is because I think a lot of the people are being forced to purchase at a higher price maybe than they want to in order to go forward, they’re having to structure a lot of these deals with — we’ll call it “extra financial engineering.” Structuring a lot of these extra investor classes, where from an investor point of view you’re taking on more risk than in a plain vanilla deal, with a single class. Single class, you’re first in line to the stream of the profits… Versus these, now you’ve got multiple, and you’ve got someone in front of you that’s taking some because there’s a preferred equity portion, and you get the remainder… And again, it depends on the investor, because if they’re looking for a higher return, that can be it. But I’m a conservative investor, so for me, I see those and I’m like “No, that’s a red flag for me. I’m looking for something more basic.”

And like you said, looking at the proforma, I wanna see the most conservative sponsors right now. I’ve seen some of them saying “No rent growth whatsoever for the next two years.” When I see that, I feel pretty comfortable that they’re gonna hit their projections… Versus other ones that are like “Oh, well, we haven’t been hit so far, so let’s just keep projecting up, up, up.” That for me is another red flag.

Theo Hicks: Thank you so much for sharing that. So let’s wrap up by talking about future predictions, where you see things going from your perspective, plus what you’ve gotten from your group. I was gonna ask you this, but you’ve already talked about it – what would be your prediction if the eviction moratorium and the stimulus runs out, versus what would happen if it doesn’t, and it gets renewed longer? Because I guess those are really the two future scenarios. And which one do you think will happen?

Ian Ippolito: Yeah, that’s the million-dollar question, for sure, and it’s like a  huge polar opposite on what will happen. I guess we’ll go with the worst-case scenario – let’s say we come into January, so now the eviction moratoriums are gone, there’s no assistance for any of these people who cannot make up their rental payments and their mortgage payments.

So you’ve got renters that are gonna be evicted, you’ve got homeowners that are gonna be foreclosed, and the amounts are just scary, because they are in excess of what the Great Recession was. So we’re talking millions and millions of people.

And the other side of this is that there’s been no aid also for landlords, even during these moratoriums. There’s been landlords that have gone 6, 7, 8 months without any rent because of the moratoriums, so they’re hurting, too. So a lot of people hurting. Not even just the people that are paying.

And I’ll add one other piece to that, which is the fact that the other thing that expires – there’s been a moratorium on student loan payments, and that’s been trillions of dollars. So if those start going in, now someone who is unemployed – or maybe they were on the bubble – now all of a sudden they’ve gotta make the student loan payments again. That’s gonna hurt as well.

So worst-case scenario, there’s no help in that, and I can kind of walk you through that. Basically, Congress is not able to pass anything in this lame duck session right now. We have a new Congress that’s gonna be coming in in January; very possible it could be a divided government, in which case very little might get done… So in that case, it may not pass. It’s a real risk.

If this happens, a lot of asset classes are gonna get hurt. These multifamily deals – the C has already gotten hurt. Class C is gonna get hit the worst, because class C is typically the lower income. This economy has just been lower-income people — the recession has been lower-income people get hit worst. But the thing is, when that many people get hurt, it has secondary effects. So now it’s no longer just the person that is working in a restaurant; okay, they lose their job. But now when enough of those people lose their jobs, now the accountant who was okay before and had a higher-paying job – now his firm is no longer doing the accounting for that restaurant. So now his job is in danger. And it just goes up the food chain. So when you have a large enough number, it’s dangerous. So I would be very uncomfortable being in even class B… And it definitely could go all the way up to class A, as far as multifamily.

You’ve got self-storage, which has done very well so far… That one could be okay… Because let’s just say millions of people are losing jobs… In past recessions, sometimes when a person loses their job – let’s say they have to downsize; they lose their house, or maybe they move to a smaller place – they will get a self-storage unit to store their stuff.

Now, if things get bad enough, they will not be able to afford the rents on that; so it’s possible self-storage could do well, but again, hard to say. So probably maybe in that scenario self-storage is looking a little bit better than some of these multifamily deals.

Mobile home parks, which have historically done very well in recessions – unfortunately, the way mobile home parks have done so well is because they’re at the very bottom of the income. The idea is that people can’t afford to move out; there’s no other place to go, so people make their payments. But if this starts  hitting, mobile home parks could for this recession no longer have that special status that they’ve enjoyed.

And then, of course, the ones that are already doing bad – hotels, retail and stuff like that… The more people that lose their jobs, there’s no stimulus payments to pay money… People are not gonna be going to restaurants, people are not gonna be doing that.

So across, real estate I think would be very bad, and in that case probably an investor is gonna wanna be in non-correlated assets, that are non-correlated to the business cycle. There’s things like litigation finance, where it’s based on whether a case wins or loses, and how good you are at picking a case, which has nothing to do with whether the economy is doing well or tanking. That sort of thing is gonna do well no matter what.

Investing in music royalties, which actually ironically in this recession everyone’s at home, and they’re listening to more music. Music has actually improved life settlements, which is this concept of you invest in — I’ll go really quickly, I don’t wanna go over time, but… Basically, you purchase a life settlement policy – someone who wanted to get life insurance and could no longer afford to do it. You purchase their policy, you keep paying it until they pass away, and then you collect. So it’s just a matter of people just dying or not dying. It has nothing to do with the economy, again…

So these are all things that if things go way downhill are still gonna continue to do well. I think there are investors who are positioning themselves right now for that eventuality, where that goes downhill.

Theo Hicks: Let’s end on a positive note, so let’s talk about the other end of the spectrum…

Ian Ippolito: [laughs] Yes, exactly. Because it’s so dire, a lot of people are saying “Look, Congress is going to have to do something about this, no matter what.” So let’s look at that. They’re gonna get together, they’ll pass something… Maybe it’s new stimulus, maybe there’s gonna be a bunch of checks for everybody, we’re gonna have new unemployment benefits for those who don’t have jobs, there’s gonna be an extension of the moratorium, so we don’t have millions of people out on the streets at once… And in that case, things have gone remarkably well so far. So it basically would just be a continuation of the same… Then we have a vaccine – at this point it looks like we’ll probably have two, maybe more; there’s a possibility of a Johnson & Johnson vaccine coming, so there might be three… And maybe this fourth vaccine, the Oxford vaccine… So we’ve got a bunch of vaccines coming, we’ve got some treatments, and things like that… People are expecting things to turn around there maybe in the summer of 2021.

Some of the schedules are getting pushed back. Operation Warp Speed has had some issues with — they didn’t purchase as much of the winning drugs as we would have liked in retrospect, so maybe it’ll get pushed back to fall of 2021… But by then, it might be a complete return to normal, and if we have that protection, a lot of these investments could look at this recession as one of the most mild.  So it really is kind of crazy that there’s just that huge range of possibility.

Theo Hicks: It is, yeah. Well, Ian, thank you so much. This has been very informative. I’ve really enjoyed this conversation; very timely, too… Just to kind of quickly summarize what we’ve talked about – we’ve talked about the initial shock, and then some good and bad investment classes, and then the future predictions.

Is there anything else that you wanted to mention as it relates to what we’ve talked about today, or where we can learn more about you, or where we can learn more about what we’ve talked about today? You are very knowledgeable; I’m sure this is all on your blog, but anything else that you want to mention before we sign off?

Ian Ippolito: Sure. If someone wants to learn more, there’s all sorts of free articles and content on the Real Estate Crowdfunding Review, on real estate cycles, and looking at history, and what tends to happen, and what doesn’t tend to happen… And there’s also the Private Investor Club for those who are interested as well in learning more, and also learning from other people. So I’d recommend someone do those. For contacting me, they can also contact me in those places too, as well.

Theo Hicks: Perfect, Ian. Thank you again so much for joining us today. 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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JF2216: Pre-Covid Deals With Charles Seaman #SituationSaturday

Charles Seaman is the Senior Acquisition & Asset Manager of Three Oaks Management, LLC. He is a returning guest from episode JF2081 so be sure to check out that episode to get his full background because today he is going to be sharing his experience with a deal he had before COVID and how he dealt with it after COVID.

 

Charles Seaman  Real Estate Background:

  • Senior Acquisition & Asset Manager of Three Oaks Management, LLC
  • 14 years of real estate experience
  • Portfolio consist of 92 unit apartment in Georgia, & a 48-unit in South Carolina 
  • Based in Charlotte, NC
  • Say hi to him at: https://www.3oaksmgmt.com/

 

 

 

Best Ever Tweet:

“During COVID I learned that If you persist, and you negotiate well, you can get yourself a nice deal ” – Charles Seaman


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 Charles Seaman. Charles, how are you doing today?

Charles Seaman: Fantastic, Theo. How are you today?

Theo Hicks: I am doing well. Thanks for asking and thanks for joining us yet again. Charles’ first episode was Episode 2081. So make sure you check out the episode to learn more about his background and what he is focusing on today, because in this episode, being Saturday, we’re going to talk about a sticky situation that Charles was in, what the situation was and how he was able to get out of it, and the lessons that he learned.

Before that, as a reminder, Charles is the senior acquisition asset manager of Three Oaks Management. He has 14 years of real estate experience, he has a 92-unit apartment in Georgia, and then the deal we’re going to talk about today is a 48 unit in South Carolina that this sticky situation is about.

He is based in Charlotte, North Carolina, and you can say hi to him at https://www.3oaksmgmt.com/.

Charles, let’s just jump right in to the situation the Saturday. Tell us about this 48-unit deal.

Charles Seaman: Yes, absolutely. As everybody’s aware, the world’s changed quite a bit in the last couple of months. We had this deal under contract, we first looked at it in late January. We got it under contract in mid-February. At that point, the world was in a much different place. Initially, it was a deal that was mismanaged, that had, of the 48 units, 12 vacant units, and it was something that was an operational play that we were able to go in there and do better management; part of our play was going to be filling in the vacant units, and then also pushing market rents, because it’s under-rented compared to what it could be.

Being that it had so many vacant units, it was initially a deal that was going to be bridge financing. What happened is we had a bridge lender on board, we gave them an application fee, we were ready to proceed. And then on St. Patrick’s Day, that was a few days after the pandemic officially was declared, our mortgage broker gave me a call and said, “Hi, Charles. I got some big news here, the other lenders shutting down their entire bridge program, and it has nothing to do with us or with the deal. But just with the overall market conditions, there was too much uncertainty, and they didn’t want to lend to anybody at that point.”

That was the case with most bridge lenders, not just this particular lender, but many bridge lenders in the market.

At that point, we were faced with the situation because we were trying to figure out, “Okay, what do we do?” We were in the middle of our due diligence period, our money had not went hard yet, but we really had two options. Option one was either to terminate the contract, get our money back and get out of the deal, or option two was to work with the seller and see what we could do to potentially make it work for both sides.

The agreement that we came to is, we liked to deal and we wanted to move forward with this deal, but we extended the due diligence period by 60 days, and we also extended the amount of time that our money would not go hard for it. The thought was that with the extra 60 days for due diligence, even though all of our due diligence was really done, basically, it was just a waiting game to see if market conditions would change, and if we’d be able to get bridge financing during that time.

Lo and behold, we’re midway through the extension, and at this point, surprisingly, during the pandemic, the property actually got stabilized and filled up. Around early May, the property became stabilized and we no longer needed bridge financing, so we were now able to qualify the agency debt, which for anybody brand new is Fannie Mae or Freddie Mac. As that happened, it opened up opportunities, because to a point, Fannie and Freddie were more or less the only two major lenders that were actively funding multifamily transactions. So at that point, the property became stabilized.

Also in that period we were able to negotiate a price credit with the seller, because initially – while I’m not a fan of retrading, it was something that I thought we really had to do, because pretty much anybody that had a deal on the contract pre-COVID got some type of credit for it if they still decided to go through with it. I said we’d be foolish not to. We got a reduced purchase price, the property got stabilized and then all of a sudden, we go and we end up applying for agency debt with one lender. The lender gave us a term sheet for 75% LTV, which for the tertiary market was pretty good. We weren’t initially expecting it to be that high, but that worked out great, and they were projecting a 3.7 rate.

All of a sudden, the deal was looking better and better, because initially, we were looking at it as having to get bridge financing. Now we were qualifying for agency debt, we’ll have better leverage, we’ll have lower rate and just overall better terms, so it was starting to look better and better. Initially, we engaged with this first lender, and what happens is they go out there, they do their third-party inspections, the appraisal comes back much better than any of us anticipated it would… And overall, most of the boxes that the lender wanted checked, got checked.

Lo and behold, about a month and a half, two months later, they come back to us, and they tell us that their commitment’s only going to be for 65% LTV, which very much surprised us, because we were saying, “Well, how did we go from meeting most of the criteria that you have, starting off with 75% on a terms sheet, and now we’re at 65%?” We said, “Listen, we’re this far in, and the last thing we want to do is go out and start with somebody else,” because that means just negotiating an extension again with the seller, and just overall delaying the process and spending more money. But unfortunately, we couldn’t get them to budge. I don’t know if it was just overall nervousness from the market conditions the last few months due to the pandemic… But they wouldn’t budge, and 65% LTV wouldn’t work for us, because that would make our returns not as favorable as they were.

Lo and behold, we wound up nixing that deal, and we went ahead with a different agency debt lender. As of right now, we’re recording this, the deal isn’t actually closed, but we should be closing within the next two weeks, so it looks like everything is moving forward.

With this particular lender, they’re going to be right around the 75% LTV and pretty much the same great terms. So what happened is we have a deal that initially started with bridge financing, and that wound up not happening because of the pandemic, and it actually winds up getting better during it.

The real lesson I think I got out of this was that if you persist and you negotiate well, you can get yourself a nice deal.

Theo Hicks: That was a great lesson. Congratulations on still being able to hold on to that deal. Let’s go back a little bit. I just have got a few follow up questions. You said that you got that call, and then you had to brainstorm of what the next move was going to be. How much longer did you have until that money went hard?

Charles Seaman: We had about two weeks.

Theo Hicks: Two weeks?

Charles Seaman: I got the call from our broker on St. Patrick’s Day, March 17th, and our money would have went hard on April 3rd, so roughly two weeks left.

Theo Hicks: Perfect. So you went back to the seller, and you were able to renegotiate an extended due diligence and a hard money date. Did that require additional money down, or did they just accept it, because they wanted to start [unintelligible [00:11:14]?

Charles Seaman: They accepted it. They could see that we were serious buyers, they could see that we had already done over due diligence and everything we really needed to on our end, and they understood it was just a byproduct of the market, and unless they found the buyer who was going to come in there and buy with all cash, that they were probably going to experience the same thing with anybody else.

Theo Hicks: My main question is, talk about luck that the property was able to be stabilized – was that something that you knew they were working on? Did they do that because they knew they wouldn’t be able to sell it to you if it wasn’t stabilized, or was it just kind of a happy coincidence?

Charles Seaman: It was a happy coincidence. We definitely weren’t expecting that, but it gave us another option. Because even in early to mid-May, we were still debating, “Are we really going to be able to qualify for bridge financing?” As soon as we heard the deal was stabilized, we said, “That’s great.” Now we can go agency, and that’s a non-factor.

Theo Hicks: What would have happened if it wouldn’t have been stabilized? Do you think you would have been able to do the deal or would you have had to back out?

Charles Seaman: I think we would have backed out and terminated the contract, because the bridge terms weren’t great beforehand, just because it was a tertiary market. But with the amount of bridge lenders that temporarily suspended their programs, and post COVID-19, the charms would have been even worse, or rates would have been higher, or leverage would have been less, and it just wouldn’t have made sense for us to go through with it.

Theo Hicks: At what point in the process was that purchase price reduced?

Charles Seaman: That was actually reduced right before we decided to go through with it. Right before we told them, “Okay, we’re going to go through with it and not terminate.” I wanted to make sure we can get a reduction because I said it just seemed like we’d be leaving money on the table if we didn’t.

Theo Hicks: Did you do the price reduction because you needed to do that in order for the deal to make sense, or was it a, “I know I can do this because of where we’re at and this is more meat on the bone for us”?

Charles Seaman: It was more just that I knew we could deal because of where the market was at. We could have probably still made it work with the initial number, but it’s even better with the lower one.

Theo Hicks: How does that negotiation process work? Is it just you tell your broker, “Hey, we want to reduce price,” and then they negotiate with the broker and then it kind of comes back to you, the traditional negotiating back and forth on the purchase price? Is that how it works?

Charles Seaman: Exactly, yep. What I do is I initially sent the broker an email with the breakdown of the additional costs that we would have went with, because at that point the property still wasn’t stabilized when we had started that negotiation. We said if we went with bridge, this was the cost compared to what it would have cost us before, and we gave them a list of everything in particular, the lender required reserves.

Even after we went agency, with the lender required reserves it’s still going to be much more than what it would have been before. Now granted, as long as the loans and compliance and whatnot, we do get that money back after a certain point, but it’s still additional money that has to come out of pocket for it at the beginning. I said I understand that’s not the seller’s problem, but ultimately, it can’t be only our problem, because they said if we’re raising all that extra money and [unintelligible [00:14:03].00] the lender for a year or two years or however long it maybe, it’s still money that somebody is coming out of pocket for, so it lowers what we’re able to pay for that property.

Theo Hicks: And then last question, so you said that you had the bridge loan, you didn’t do that anymore. You found an agency loan that had great terms and they changed their mind for some reason, and you had to go with a different lender, which gave you kind of the original term that the first lender gave you.

How long did that process take? Traditionally, it takes two months to go through that entire process. Did you kind of go through that expedited phase?

Charles Seaman: With this particular one what happened is from start to finish we went seven months. So I joked around and told people, it was probably the longest closing we’ve ever had before the deal was closed. But from the time we first looked at it, it was January and we’re going to be closing it late August, so seven months from start to finish.

Thankfully, the second lender was willing to reuse the appraisal report the first lender had gotten, so that saved some time, and it also saved some money, so we didn’t have to pay for a new appraisal. They did require a new environmental, but at least the appraisal was done and they were able to reuse that, so it got the ball rolling and allowed them to get a jumpstart on it.

Theo Hicks: Perfect. Okay, Charles, anything else you would mention about this deal or about your company before we wrap up the episode?

Charles Seaman: Nothing else about the deal, but [unintelligible [00:15:17].24] shout out if they have any other questions? Otherwise, I’ll give people a quick way to reach me.

Theo Hicks: Oh, no other questions. Feel free to let people know where to find you and learn more about you.

Charles Seaman: Sure. Sounds good. One of the things I would say just to give a quick plug, every Saturday afternoon on Zoom I do an underwriting session. For anybody who wants the chance to go through and underwrite a multifamily deal and learn how we usually do it, feel free to reach out. You can either send me a text message at 347-306-3378 or an email, Charles@3oaksmgmt.com, and let me know that you heard me on the Best Ever show, and that you’re interested in joining the Saturday underwriting session.

Theo Hicks: That’s a really good idea. A lot of people want to learn how to underwrite multifamily deals, it’s really cool that you talk people through that, and actual live deals that you’re working on.

Charles, thanks for joining us, again, in this Situation Saturday and walking us through how you’re able to go from having a deal under contract pre-COVID to COVID hitting, and then having to figure out how to get new financing; originally had the bridge loan, that was not going to work out because the lender shut down its bridge loan division, and you only had two weeks until the money went hard. So you had the option to terminate the contract or work with the seller. You extended the due diligence and the hard money date, so you can kind of wait and hope that the market turned around. It didn’t, but there’s a happy coincidence that midway through the extension, the property was stabilized, and so you now qualified for agency debt, so you didn’t have to back out, and you were able to also, at the same time, negotiate a reduced purchase price.

Then you had another obstacle where the original agency lender reduced their LTV from 75 to 65, which obviously is a massive increase in the amount of money you needed to put down. which reduces the return percentage, and they wouldn’t budge, so you went with a different lender, who was able to get you not only better terms than the first one, but they were also able to expedite that loan application process.

The overall lesson was just to be persistent, and do what you can to continue working, grinding, don’t give up and just back out of the deal at the first sign of trouble. And if you are persistent, you’ll be able to do a really good deal, like you did, with better terms, better purchase price, and then you’re buying the property at a higher ROIs.

Charles, thanks for joining us today. Appreciate it. 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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JF2195: Future of Shopping Centers Post Covid19 With Beth Azor #SituationSaturday

Beth was a guest in a previous episode of JF1974 so be sure to check out her first episode to learn more about her. In today’s situation Saturday she will be sharing what it is like to be a shopping center investor during the Covid19 era. 

Beth Azor Real Estate Background:

  • Owner of Azor Advisory Services, Inc. 
  • Has 30 years of investing in retail shopping centers
  • Portfolio consist of 6 centers currently $80 million
  • Based in Fort Lauderdale, FL
  • Say hi to her at: https://www.bethazor.com/ 

 

 

Click here for more info on PropStream

Best Ever Tweet:

“As a landlord, the COVID19 recession is completely different than the ‘09 recession” – Beth Azor


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’re speaking with Beth Azor. Beth, how are you doing today?

Beth Azor: I’m doing great, Theo. Thanks for having me.

Theo Hicks: Thanks for joining us again, actually. So Beth is a repeat guest. Her last episode was Episode 1974. So make sure you check that out. And today is Saturday, so we’ll be doing Situation Saturday, talking about a sticky situation that our guest is in and lessons learned, things she’s doing to get out of it. So before we get into that, let’s go over Beth’s background as a refresher. So she is the owner of Azor Advisory Services. She has 30 years of experience investing in retail shopping centers. Herr current portfolio consists of six centers valued at $80 million. She’s based in Fort Lauderdale, Florida, and her website is bethazor.com. So Beth, before we get into the situation Saturday, do you mind telling us a little bit more about your background and what you’re focused on today?

Beth Azor: Sure, Theo. So my background has been mostly retail, 35 years in the industry, started investing about five years in, so 30 years is correct. I’ve owned and operated shopping centers solely in South Florida. My six that I own today are within ten minutes of my house. So I definitely have some market knowledge there and some control. I like to have control. I also train leasing agents, how to lease vacancy around the country for large REITs, private investors, wealth funds, institutional clients, and I’ve canvassed knocking on doors over 10,000 hours.

Theo Hicks: Well, that’s a lot of door knocking.

Beth Azor: That’s a lot of door knocking.

Theo Hicks: So as I mentioned, it is Situation Saturday. So we’re going to talk about the future of shopping centers post COVID. So Beth, I’m gonna let you just take it any direction that you want to start off, and then I can ask some follow-up questions after that.

Beth Azor: Sure, Theo. So in March, when COVID hit, and some of the tenants started calling us, the landlords, crying, “We might not be able to pay our rent,” I held my first rent relief reduction webinar with over 700 people that attended, and I was very firm. “Let them go to their business interruption insurance, hold firm, tell them no”, and I had three since, so I’ve had four in all. And boy, what a change things have made. When the government shuts down your retail and the nail salons cannot open and the hair salons cannot open, the landlords have to pivot, because if those tenants aren’t taking in a dollar, you can’t really be the tough old landlord that we might have been in ’09. People ask me all the time, “How’s this recession compared to ’09?” It’s completely different. It’s a million percent worse, because the government shut down the retailers. They told them, “You cannot open.”

So I had acres and acres of parking lots with no cars in them, and it was very challenging. I went from talking local tenants, mom and pops off ledges crying to me on the phone, to talking to national tenants who had huge balance sheets, who were being rude and saying, “Sorry, we’re not going to pay rent for the next year.” As a landlord, after about three or four weeks of that, probably in the April to May range, I decided that I had to have the local mom and pop day of phone calls and the national phone calls, because I literally had to change my strength and armor and empathy depending on who I was speaking to, and that’s something that, in 35 years, I never thought I was going to have to do. Okay, so today’s my day where I’m going to talk to all my mom and pop, hair salons, barbershops, little coffee shops. Now tomorrow, I’m going to talk to these big-box retailers who have the balance sheet, who can pay me my rent, so that I can pay the mortgage, but are just choosing to be jerks and not doing so.

So that has been a huge, huge challenge, and just looking back and seeing how day one, “We need to be tough”, to now day, I don’t know, five months later, where we’re really propping up some of these mom and pop tenants, because if we don’t, we will end up with 20% to 30% to possibly 40% more vacancy than we had five months ago. And there will be a lot of landlords and lenders having big discussions, because I’m not sure if the lenders want to take back these properties full of vacancy. It’s really sad and scary.

Theo Hicks: So for the mom and pops, when you say helping them out, propping them up, can you get a little bit more specific on exactly — not just what the conversations are like, but what’s the results of the conversation?

Beth Azor: So again, back in the beginning, we were like, “No waivers. Tough landlords. We’re not going to give any waivers. We’re only going to do deferrals,” to now five months later, where we have to give waivers. I had hair salons and nail salons that literally were not open for over two and a half months, not pressing the cash register. So we can pretend to defer the rent for them to pay back later at some future date. But in reality, they’ve lost those sales forever, they’re never getting them back. And even if we were smart enough or the tenant agreed to a 12-month payback of a deferral, how likely is it that they are going to recover to where they pay that back? So we are doing waivers for tenants that weren’t open. Now, I have a sub shop guy that is doing 50% more business during COVID. Dining rooms closed. He has an app, he’s doing deliveries, he’s doing curbside, and he’s killing it. So he’s doing double the sales that he did pre-COVID. So he’s not getting any waiver or deferral and nor is he asking.

So the tenants that are asking, smart landlords are helping and we’re helping in ways of either deferrals and or waivers. With the national tenants, what we’re doing, and even with some of the locals, is if we make a deal, it’s as short term as possible. So hopefully we’ll all get back to some semblance of order soon; and if we can get something in return for the waiver, or the deferral, that would be great.

For example, I had a lease with a Panera Bread, and they wanted to defer, I think, April and May’s rent or half 50% of April and May’s rent to first quarter 2021. So I said, “Sure, but your lease is coming up in two years. I want you to renew now your second five-year option,” and they said, “No problem.” So now I have a seven-year lease left, which is great for me, and all I did was be their short term lender, where I just postponed getting my rent till first quarter 2021.

Theo Hicks: And then in order to get the information to know – so this is more for the mom and pops – to know what situation that they’re in. Is that what you’re talking about on your phone calls and getting an idea of where they’re at, what they can do so you can figure out what the best course of action is?

Beth Azor: That, and then requesting their sales reports. So actually knowing what they’ve done… And there are some tenants that, like the national, some don’t report, and there’s this new tool called geofencing, which is mobile data. I’ve had some national tenants reach out and say, “We’re doing horribly. We are the worst in the chain,” and then you can fill up the geofencing tool and actually see that their traffic is back to where it was pre-COVID. So it’s amazing how technology can help the landlords, much to the tenants’ unhappiness. I did have a few nationals that tried to play a little game with me and then I was able to say, “Hmmm. Look at this geofencing report. I can see how many people were at your store yesterday, and it matches to February’s traffic. So it’s not going to help.”

Theo Hicks: You said that was geofencing, like a fence?

Beth Azor: Yes, geofencing, and it’s mobile data. So in retail, for the last 35 years that I’ve been in business, demographics is hugely important. So when you’ve got a Starbucks or a Panera or a TJ Maxx, or even some local tenants, they come to your shopping centers and they’re interested in leasing space, they want to know what is the income, what’s the daytime traffic, the employee base in the area, what are the traffic counts, etc, etc. Now there are tools… Uber has one and a company called Placer.ai, and they have the ability to target your shopping center and tenants inside your shopping center, and they can provide you with a report that shows how many people were at your Panera Bread or your Starbucks up till yesterday.

Theo Hicks: Wow, that’s crazy.

Beth Azor: It’s crazy, and demographics for the last 35 years were always based on census data, which is only done every ten years. So for us, in the retail industry, to be using census data today that’s based on 2010 in South Florida is completely full of errors. So to have this tool where I know exactly how many people drove into my parking lot up till midnight last night is very, very, very valuable.

Theo Hicks: Perfect. So we talked about what you’re going through right now. What is– and I know this is probably an impossible question, but… So I positioned it to say what are your expectations for shopping centers moving forward, both from the perspective of your existing portfolio and then what your plan is to whether acquire or get rid of some of your existing portfolio?

Beth Azor: So I’m not going to get rid of anything because I love all my projects and they’re performing regardless. But looking forward, my big wish is that we get our kids back to school because the parents need to work and that gives them disposable income to be able to come back and shop at our shopping centers. And while they’re stuck at home, helping their kids homeschool is a problem for the retail world and the economy. So I’m praying that that happens. But to defend against that, I’ve been encouraging and even myself, putting tutoring places even at no rent almost like a PSA, a public service, in any vacancy in a shopping center where we could have a Zoom setting where we hire a college student, and parents can drop their kids off and get a couple hours reprieve at home because if they can work, they’ll get more disposable income and that will filter down to us. They’ll be able to eat out more, go shop more, etc. So it’s schools. If schools aren’t open, what can we as shopping center people with vacancies do to mitigate that and then bring employees back? Because a lot of my small tenants said, “I can’t get my employees back because they need to be at home with their kids.”

So that’s what I’ve been preaching – How can we in the real estate industry help schools and help parents so that we can get people shopping again? I’m predicting 30% of the malls in our world have closed are indoor malls, and I’m predicting that 50% of those never reopen. So us outdoor shopping center, strip center, power center, lifestyle center owners need to shift and start talking to those mall tenants. For example, Sephora and footlocker, those tenants in those markets where their malls have closed will start looking for alternative opportunities and that will be to us, the non-indoor mall people. So I do think that it will shift and you’ll see “Oh, I used to go to that store in the mall”, and you’re going to start seeing that be in a more outdoor, strip center, power center opportunity.

Theo Hicks: And then what about buying? So were you– or what’s your overall recommendation for people who are currently investing in shopping centers or want to get into shopping centers. Is now a good time? Should we wait? Should we not invest? What would you say back to that?

Beth Azor: I think that in the next year to two, there will be a lot of opportunities, especially with CMBS loans because as all of our community lenders have worked with us as our tenants didn’t pay, the CMBS lenders did not. So if you have a loan with the CMBS, a commercial backed security mortgage, there was no deals made, and I think that the tenants don’t make it. There will be a lot of CMBS loans going into default and those will be opportunities. So my recommendation to anyone that’s listening that would like to invest in retail, is retail’s very community neighborhood-based. Like I said my six centers are within ten minutes of my house. So I know those centers, I know the market, I know the other landlords and I know the tenants. I shopped in these markets.

So for anyone that’s interested, pick a little area that you know well. Maybe you own a mobile home park down the street, maybe you own multifamily nearby, maybe you own office buildings. So pick an area that you know and start researching who owns this property. The more vacancy in the asset, the more likely that that’s going to go back to the bank or the lender, and you might have an opportunity to pick that up, and just start talking to retail leasing agents around that property to get information and get knowledge. If your instinct is this was successful before, it’s probably going to be successful again. When I buy, I look for strip centers that are parallel to busy streets. So there’s no L-shaped corner spaces. They’re just flushed to a main street.

I like high-income neighborhoods, high-income demographics where people have a lot of money. So even if they’ve hit a little bit of a hard time, they still have disposable income, and I like smaller– I don’t like power centers, and I’m not really a grocery-anchored center investor. I’m not going to compete with all of the REITs out there that need to invest their money in grocery-anchored. So I look for the multi-tenant, smaller strip centers, 20,000, 30,000, 40,000, 50,000 square feet that are right on the road, lots of traffic, great visibility. That’s where the retailers want to be. They want to have great parking, they want to have great visibility to the main area where there’s a lot of daytime traffic, lots of employee traffic nearby to feed the businesses and the restaurants.

Theo Hicks: Going back to what you said about the properties that have CMBS loans on them, that there weren’t any deals made with those lenders, and so you expect there to be properties going back to the banks. If I want to keep a lookout for that, how do I find those properties? Is there a website I go to, I need to talk to a leasing agent as you said, or someone else?

Beth Azor: I think that you can reach out to the CMBS loan lenders themselves. You can find mortgage brokers and capital market’s investment brokers in your area. Ask the leasing agents who are the top investment sale brokers. They can probably get you in, but it’s really a who you know game there for sure. I don’t think they published lists. There are watch lists, but you need to know who to call to get that information, and it’s a very tight club.

Theo Hicks: Okay, Beth. Is there anything else you want to mention as it relates to shopping centers and COVID or any other call to action you have before we conclude the interview?

Beth Azor: Well, my call to action is go shop local, go out and pick up from your local restaurants, shop your local tenants. Those are small businesses who support our economy all across the country. So shop local, love local. And then if you have any other questions or want any more information for me, I have a website called www.azoracademy.com, and that has a ton of free information. I have over 150 free videos on YouTube under Beth Azor. So anything about retail, leasing, you can find all of the information on either YouTube, bethazor.com or azoracademy.com.

Theo Hicks: Perfect. I’m actually following your advice right now. I’ve got Uber Eats on the way from a local restaurant. So I’m doing what you told me to do already.

Beth Azor: Alright. Good job.

Theo Hicks: Alright, Beth. Thanks for joining us again and providing us with your insights into what you’ve been doing since the onset of the COVID outbreak. The biggest takeaway that I got was you had your days where you talked to the mom and pops where you were more open and listening and sympathetic, and then you put your arm around to talk to the national tenants. You mentioned that you weren’t necessarily just listening, but you were also confirming what you were hearing with the mom and pops. It was by requesting the sales reports to confirm that their revenue had actually gone down or was non-existent.

And then you mentioned that technology called geofencing to check the mobile data at some of your national tenants who claim to have reduction in traffic, whereas in reality, it didn’t. And then you mentioned some of the things that you want to see happen in order to help your residents, people going back to work, how you mentioned how you’re putting up free tutoring in some of your vacant units.

And then you also mentioned that you think that a lot of the malls that closed down aren’t going to reopen. So there’s going to be opportunities for shopping center landlords to bring on new tenants that are traditionally in the mall and you gave some examples of that. And then opportunity wise, in the next few years, you think there’ll be a lot of properties that currently have CMBS loans that will be foreclosed on because there weren’t any deals made with the lenders and in the end, the owners.

And then you also mentioned that if you are interested in buying, make sure that you are buying on centers that are parallel to busy streets, high-income neighborhoods. You don’t like the power centers, you don’t like grocery-anchored, and then it’s very community and neighborhood-based. All of yours are within ten minutes of each other. So pick an area that you already know well. Maybe you already own property there, maybe you live there, and then start figuring out who owns those properties, what their vacancy is right now, how did they perform pre-COVID. Ask your leasing agents to get this information to see if it makes sense to buy.

So Beth, thanks again for joining us. Best Ever listeners, as always, thank you for listening. Have a best ever day and we’ll talk to you tomorrow.

Beth Azor: Thanks, Theo.

Website disclaimer

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

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

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

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

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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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JF2095: Coronavirus Impacts On May 2020 Rent | Syndication School with Theo Hicks

Coronavirus has impacted the real estate market in many ways from home buying, selling, to collecting rent payments. In this episode, Theo Hicks will be sharing information on how May rent collection was with so many Americans out of work.

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


TRANSCRIPTION

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

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

 

Theo Hicks: Hi Best Ever listeners. Welcome to another episode of The Syndication School series, a free resource focused on the how-tos of apartment syndication. As always, I’m your host, Theo Hicks. Each week, we air two podcasts episodes that focus on a specific aspect of the apartment syndication investment strategy, and for the majority of these episodes, we offer a free resource for you. These are PowerPoint presentation templates, Excel template calculators, PDF how-to guides, some resource to help you along your apartment syndication journey. These free resources as well as past Syndication School episodes are available at syndicationschool.com.

Today we are going to return to talking about the Coronavirus. So we’ve taken a break from that the past few weeks, but I wanted to do an episode that goes over how rent collection was during the month of May.

So I’m recording this on May 20, the data is in. Definitely check out some of the episodes that I recorded last month, either late April or early May, about the Coronavirus and how that is impacting apartments. Those are also at syndicationschool.com or if you just go to joefairless.com and search Coronavirus, you’ll see all the blogs and podcasts we’ve got about that topic. But today, we’re gonna talk about how the Coronavirus has impacted rent collection for landlords, more specifically how it has impacted rent collections for the month of May, because obviously, it has caused a lot of uncertainty for landlords, property management companies, really anyone involved in real estate in general, but we’re gonna focus on apartments obviously, and this is due to things that have to do with rent collections and people losing their jobs, and evictions, eviction halts and foreclosure halts.

So in an attempt to help tenants who may be struggling financially, many states have restricted evictions. It has been a scary time for a lot of investors, because that might translate to less income if you are not able to evict a tenant who can’t pay rent. So obviously, because of all these changes in the rent collections, we’re expecting a lot of people who are saying it’s gonna go down a lot, or it’s not gonna change a lot. Now we have data to support and determine who’s right, and fortunately, it seems like according to the recent rent collection data, landlords may not be as impacted as some people initially expected, and it shows that rent collection is down by only a few percentage points. So just because while the new eviction laws seems scary, the data shows that it’s not as bad as it seems, at least not yet. So let’s go over the data and see how rent collection has been impacted.

So first of all, well, rent collection is down. So it has dropped, but as I mentioned earlier, this was expected. Whenever you’re going into a recession, whether it’s caused by some financial instrument like it was in 2008, or a pandemic, like it is now, typically that means people are making less money, and when people make less money, that means they can’t pay the rent sometimes. But luckily, as I mentioned, the rent collection has not been affected as much as compared to previous economic downturns, and it really has not been as affected year over year either.

So this is for rent collection as of the 6th May. Basically, people who are paying their rent on time. In 2019, by April 6th, 82.9% of rent payments were made, and the next month in May, by the 6th of 2019, 81.7% of rent payments were made. So from April 2019 to May 2019, it was down about a percentage point.

Now moving to 2020, April 6th of 2020, the percentage of rent payments made was 78%, which was about a 5% drop year over year. However, by May 6, 2020, 80.2% of rent payments were made. So it actually went up from April to May. So obviously, April 2019 to April 2020 is down, and May 2019 to May 2020 is down very slightly, but a promising part is that April was lower than May. So rent collections actually went up from April to May. So this increase from April to May seems to be promising, and also for the time being, the spread of virus seems to be slowing down, additional steps seem to have been taken to get the economy rolling again. So in the short term, the worst may be over. April, May have been the worst month. Of course, we don’t really know for certain. Nothing is a fact yet, but what we do know is that rent collection is only slightly down. From April to May, it’s actually going up.

So why is this happening and will it get worse? Well, the obvious reason that the rent collection went up from April to May are those government stimulus checks hitting people’s bank accounts. People get their stimulus checks towards the end of April allowing them to pay their May rent on time if they weren’t able to pay their April rent on time, but of course, right now, as of this recording, this is the only confirmed stimulus check going out to Americans. With our talks right now, I just looked up today, they’re still talking about potentially sending out a second round of stimulus checks, which would obviously be very helpful for June rent, especially because data is showing that 63% of Americans will require a second stimulus check in order to pay bills within the next three months. Although we do know that people do pay their housing bill first, so this is just bills in general… But it’d still be helpful to these people.

So depending on whether the economy reopens, the next few months could potentially be unstable compared to April and May, but the good news is that many states are ramping up unemployment efforts since 15% of the country’s unemployed. So just because they’re not getting stimulus checks on a national federal basis, states are also helping with unemployment benefits. So with all this federal and state help citizens are currently receiving, it’s hopeful that rent collections won’t be fluctuating too much, but again, disclaimer, none of this can be said for certain.

So what about the evictions we’ve talked about earlier? What’s perhaps more important is to know when the current rent collection numbers might go up or down. So not all states have implemented new eviction laws, but many states have, and so it’s important to know which ones they are. For example, there was a recent case in Minnesota where a landlord was criminally charged for evicting a tenant during the pandemic. So states are beginning to require a landlord to allow tenants to live in their properties even if they cannot pay rent. Right now, 15 states have to suspended or changed their eviction laws until further notice with really no end date in sight. So each state’s eviction laws are a little bit different, so make sure that whatever state you’re in, you’re up to date on that. So if you go to Google, then you can set up a Google Alert to “evictions” and then your state name. Each day, you’ll get a Google Alert will send to your inbox, updating you on the eviction laws in your state or examples of landlords getting charged or whatever.

Most states have changed their eviction laws to require landlords to keep tenants in their homes even if they cannot pay rent. So in New York, for example, they declared an eviction and a foreclosure moratorium and prohibited late fees for up to 90 days, allowing tenants to use their security deposit to pay past rent.

So luckily, as I mentioned earlier with the April, May 2019, 2020 data, these eviction laws haven’t seemed to change rent collection too much, but the disclaimer here again is yet; it’s still something that might happen in the future, especially if there’s not a second round of stimulus checks, if these halts on evictions are extended for many months; it really just depends.

I talked about this on some of those previous Coronavirus episodes. Just make sure you’re trying to work with your tenants as much as possible during this difficult time, just because even if you’re allowed to evict them, it might be hard to find a resident currently. So just work with them, help them out as much as you can.

So the last thing I want to talk about is just because you got these eviction changes and rent collections seem to be down year over year, rent growth is slowing down, people are unemployed, everyone just keep in mind that this is going to be temporary. We don’t know when, but eventually, the economy will recover, things will get back to normal and we hope, and we’ve got an article on our blog about this, it’s called, Will Apartments be Stronger in the Post Coronavirus World? Ideally, apartments are going to be stronger after all this is over and we come out of this pandemic, recession, whatever you want to call it.

So overall, rent collections have been slightly affected, but it’s nothing too concerning as of now. Obviously, these are just average numbers. So some places aren’t affected at all, other places are affected a lot worse, but on average, these rent collections have been slightly affected. I should’ve just said on average a little bit earlier. So just be sure that you’re staying up to date on your state’s eviction laws, foreclosure laws, really any changes in laws to the Coronavirus pandemic, and then think of practically how that’s gonna affect rent collections come June, July, August, etc.

So that’s an update on the rent collections. Again, just to go over the data one more time, these are all percentages of rent payments made by the 6th of the month. So April 2019, it was 82.3%, May 2019 was 81.7%., April 2020 was 78%, May 2020 was 80.2%. So year over year, April was down about 5%, May was down about a little under 2%, but looking at the 2020 data, the rent collection in May was higher than it was in April. So we saw a bump, again, due to stimulus checks, but it’s still a good thing to see from a landlord, from a property management company, from a apartment syndication perspective.

If you want that data, it’s from the National Multifamily Housing Council. So you can find June data for there as well. And depending on how June goes and depending on if the Coronavirus is still top of mind topic, we’ll do another episode talking about the June 2019 and June 2020 rent collection data by the 6th of the month here in the next few weeks.

So a little shorter episode, but that could give you time to check out some of our other Syndication School episodes available at syndicationschool.com. We’ve also got our free documents there as well. Thank you for listening, have a best ever day and I’ll talk to you soon.

Website disclaimer

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

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

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

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

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2086: The Many Ways Investors Handle COVID-19 With Scott Westfall

Scott started his real estate career while in college managing properties for others and eventually found a passion towards real estate and began helping others through his own company called CGP Real Estate Consulting where they help identify, purchase, and operate investment properties. Scott works with many investors through his company and has seen how many different ways investors are handling situations during the coronavirus pandemic.

Scott Westfall Real Estate Background:

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Best Ever Tweet:

“Real estate is a business, and if you can take the emotion out of it and go into it with a solid business plan, you should be able to weather these uncertain times” – Scott Westfall


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 Scott Westfall. Scott, how are you doing today?

Scott Westfall: Doing well, Theo. Thanks so much for having me on.

Theo Hicks: Oh, absolutely. Thank you for joining us. I’m looking forward to our conversation. Today we’re gonna be talking about the Coronavirus, how it’s affecting Scott’s business, how it’s affecting investors that he works with, the business, some of the challenges they’re facing, and then things that they are implementing to solve those challenges, and that hopefully will help you during this time as well. But before we get into that, a little bit about Scott – he is the owner of CGP Real Estate Consulting, ten years of real estate experience, six being a realtor, based in Virginia Beach, Virginia. You can say hi to him at cgprealestate.com. So Scott, before we dive into the Coronavirus, can you tell us a little bit more about your background and what you’re focused on now?

Scott Westfall: Yeah, certainly. So I got into real estate and then business, learned it from the inside out. In my freshman year of college, I met a couple who had just inherited a real estate brokerage that was focused on vacation rentals and property management and sales at the oceanfront in Virginia Beach.

Through college, I did maintenance and contracting and project management with them. When I graduated in 2014, I got my real estate license and became the full-time property manager and really vacation rental manager for 120+ properties. I did that for about three years, and through that experience, I got to work with individual and large investors. I got to learn really what makes landlords and investors successful and what mistakes they can make. Through that experience, I came to a point in 2017 where I felt it was time to take the experience and the knowledge that I had and do something a little bit different. I saw a need growing in Hampton Roads for a different service in real estate, and I knew I was passionate about helping others build wealth through real estate. So I decided to put my license in my LLC’s name, CGP Real Estate Consulting, and today we are focused on being the leading expert in area in identifying, purchasing and operating investment properties in Hampton Roads.

Theo Hicks: Perfect. So identifying, purchasing and managing, correct? Those are the three–

Scott Westfall: That’s correct.

Theo Hicks: Perfect. So now that we’ve got our three categories to talk about today, I think the first one we should talk about is managing, and then we’ll work our way back. So how has management changed during these past few months with the Coronavirus pandemic, and maybe also tell us some of the major challenges you’re seeing investors face, and then the types of advice you’re giving them to address those challenges?

Scott Westfall: Yeah. So I would actually break it down into two subsets; really standard yearly rentals, and these presented their own difficulties, and then really a lot of investors I work with, with short-term rentals, vacation rentals, and they’re facing a whole different set of challenges.

So with the yearly rental is really, in Virginia Beach, in April, we only saw out of 60 tenants, four or five paid late, and as a management company, we gave those tenants really to the end of the month to pay their rent without charging a late fee, and made sure we communicated with them upfront.

I have some individual investors who are self-managing their properties, who have had tenants who are unable to pay rent because they’ve been furloughed, and those owners have fortunately been lucky enough to contact their mortgage companies and put things in the rear, so that they’re not missing out right now. And really, a lot of them have still charged late fees,or  are saying they’re charging late fees, but are being very lenient with the whole how they’re going to repay the rent that they owe back. So we can talk more about yearly rentals…

On the short-term rental side of things, those owners are freaking out a little bit. It looks like the summer, which is a bulk of their income here in Virginia Beach and Norfolk, really anything on the beach, seems to be non-existent or very spotty, and so I think those owners are starting to scramble. We’ve seen owners who have gone to just switching these fully furnished properties to long term rentals. They’ve really gone for yearly, and then we’ve also seen some people who are just holding out, waiting to see what happens, hoping to make the best of the summer. I think that right now, conversations we’re having is how can you get creative with your property and still continue to produce income and not let it sit vacant through the rest of this year.

Theo Hicks: So it sounds like, at least, from your circle, of the standard yearly rentals, it sounds like April was maybe, a little bit worse than most months, but nothing too crazy. I’m just wondering, do you have any expectations for May collections and maybe even into June? What do you expect to happen during those months? Then maybe based off of that, also what types of things should investors be doing now if you do believe that collections are still going to be lower during those months?

Scott Westfall: Great question. So I would say that my colleagues were definitely more concerned about May and definitely June, just depending on how long this goes. I would expect that we see the numbers of late payments or non-payments in May to increase, and really the reason that I would say that is because of the feedback we’re getting in communication. I think that would be my biggest piece of advice to every landlord out there, would be to communicate with your tenants and find out what their situation is; let them know that you’re not out to get them, but you also need to plan and protect yourself, and I think knowing where your tenants are will really set you up to prepare for what’s coming in May in June.

Theo Hicks: So just calling tenants, putting notes on their doors. I was talking to someone and it sounds like self-managers are gonna have a little bit easier time communicating because they can actually go out and do it themselves whereas people that have property managers have to rely on their management company to do that, because they don’t really know their residents. Is that what you’re saying too – it’s easier to communicate with the residents and get that feedback that you need if you’re a self-manager, and then how do you ensure you’re able to get that feedback if you aren’t a self-manager?

Scott Westfall: That is a great question. I would say that it definitely does depend on your property manager, and if you do have a property manager, how much communication you’ve been in there with him… But you’re correct in the assumption. Self-managing owners have definitely had an easier time and a closer relationship with their tenants, and getting that information and feel from where their tenants are.

From the management side, we, as a company, have really tried to stay on front of it and have a lot of resources to use to communicate with tenants and to communicate quickly and efficiently. So to that point, how many of them are responding? That is a question. So if you are an owner that is with a property manager, I would say continue to contact them and put the pressure on the tenant to respond and let you know where they are at this time.

Theo Hicks: Perfect, and then switching to the short-term rentals, because when I first started doing these COVID interviews, I felt like everyone I talked to was doing short-term rentals. So I’ve heard some very interesting, creative ways that they’re using their short-term rental properties to continue to make some income.

So you already mentioned people are– they’re switching them to long-term rentals, or they’re just holding out and waiting… Because from all the short-term rentals people I’ve talked to, May, June, July, August are the money months. So what are some other creative things you’ve seen people do to make sure they can bring in some income on their short-term rentals?

Scott Westfall: One interesting one up front that we’ve seen down here is we’ve actually had an influx of people from the North East who have rented the short term rental properties that have been available for March through May, for two months, and have come down in quarantine here, which has really been an interesting thing. But going into that, there is very much an emerging market, at least here in Virginia Beach, for a lot of these vacation beach destination towns for increased service monthly rentals over the summer. So it’s maybe transitioning, and it would be more than what you’d get as a standard yearly rental, but not as much as you would make with nightly rents throughout the summer, but if you can find somebody who’s willing to come and have a whole month-long beach vacation for $6000 when you were making $9000 that month, I think that is a good way to offset it. So looking for people who are looking to spend their summer months at the beach for an increased rate is good option.

The other option too is in real estate, you have price, location and condition, and if there’s no demand, you’ve got to have to use your price lever. So see where the market is at and test the market and see where you start to get inquiries, because there are still people out there looking and hoping to take advantage of the summer being a little bit empty to be able to have a less expensive vacation.

Theo Hicks: Perfect. Okay, so let’s transition into the other two things you focus on – identifying deals and then actually buying deals. So maybe tell us the general feel from the investors you work with. Are they more interested in buying deals right now, just waiting to see what happens, or selling their portfolio?

Scott Westfall: That’s a great question as well. Right now, the demand is more than ever. Real estate investing, in general, has just become so mainstream. So I have not seen the demand slow down. The demand has been there, and it’s the supply across the nation that’s been low, and has continued to remain low. So I feel like it’s been a tightening of supply, but the demand has stayed the same when it comes to investors looking to put their money into real estate right now.

Theo Hicks: It sounds like the demand for the buying is still there, and obviously if the supply is tightening, then people aren’t actually selling. So my next question would be, you focus on single-family homes, right?

Scott Westfall: Yes, single-family, and really smaller multifamily, so 4-units.

Theo Hicks: And then using those as rentals, correct?

Scott Westfall: Correct. Yes, sir.

Theo Hicks: Perfect, okay. So I want to buy a duplex right now. What are some of the main changes that I need to make when underwriting these deals?

Scott Westfall: I think that building into your models and your projections when you’re looking at properties, building in that vacancy rate and even making that vacancy rate a little bit bigger, planning for these unexpected times of no income… I think that what I’ve learned in my experience in real estate is that real estate is a business, and if you can take the emotion out of it and go into it with a solid business plan, you should be able to weather these types of things. So first thing I would just say is tighten up how you are analyzing deals and what you’re being very specific on what you need to cash flow moving forward.

Theo Hicks: Perfect, and then last question would be, people always say that when there’s times of economic uncertainty and people don’t really know what’s gonna happen, and typically once that ends, there’s going to be great opportunities to make some money. So if you had a crystal ball– and again, you don’t have to be perfect here, you can be very general if you want to, but it can be just one thing if you want it to be, or it can be multiple– some of the biggest opportunities in real estate investing that you see in the next, let’s say, six months to a year.

Scott Westfall: The first one is going to be is – on the short-term rental side, whoever can look ahead and see what the renters want, the demand is going to come back, but it’s going to look different, and whoever can look ahead and get ahead of that is going to be successful. So apparently, if you own a short-term rental, get ahead of it, start to think about what it’s going to look like after, because the demand is going to surge back.

In regards to just investing and identifying properties and looking forward, I think the supply is going to increase, but again, the demand is the same. So being patient and being prepared financially for a deal to come. Can you ask me that question one more time, Theo?

Theo Hicks: Yeah. So in the six months to a year from now, what do you think is going to be the next big real estate investing opportunity?

Scott Westfall: Man, that’s a great question.

Theo Hicks: What does your gut tell you?

Scott Westfall: My gut tells me that it’s going to be more of the same, and I think that investors will need to be wiser when they make choices about what properties they’re purchasing. I think there will be tightening on the lending side, but again, there’s going to just still be more of the same people wanting to put their money into real estate, because real estate is a solid long-term investment. Where we are specifically, I would say that, again, more of the same – we’re such a huge military area where it’s very cyclical, and we’re a little bit different than the rest of the nation in that regard.

Theo Hicks: Perfect. So is there anything else as it relates to the Coronavirus and real estate investing that you want to talk about before we wrap up?

Scott Westfall: The last thing I’d say then is that real estate, again, is a business, and if you have a solid business plan going into it, you can weather the storm. I know that it’s tough right now. If you are a homeowner in Hampton Roads or an investor in Hampton Roads and you’re looking to get creative with your property, to figure out how to make it through this storm, and then to continue to be successful moving forward, visit my website, www.cgprealestate.com. I’d love to hear from you and hear how you are handling that.

Theo Hicks: Perfect. Well, Scott, thank you very much for joining us today, and Best Ever listeners, make sure you take advantage of Scott’s offer. Just a few of the big takeaways I had today is you told us how your business is broken into three buckets. You’ve got identifying properties, then buying properties and then managing properties. You mostly focused on managing, because I think that’s where most people are facing challenges today with the Coronavirus.

So you mentioned how it was different for your standard yearly rentals and your short-term rentals, that you do think that May and June are probably going to be a little bit worse than April, most likely… Again, no one can really predict the future, but most likely based on the current trends, May and June collections are going to be a little bit more difficult than April… Therefore it is very important that you are communicating with your residents, so that you know specifically what their situation is, so you’re prepared and you’re not waiting until the end of May and realizing that no one’s paid rent that month. So that’s one big takeaway.

Second was if you’re a short-term rental owner, a lot of them are freaking out, but making sure that real estate, as you mentioned, is a long-term play. So sure, you might not be getting any income right now, but you do believe that demand will come back for short-term rentals, and that whoever is able to predict what that new demand will be like are going to be able to set themselves up for success.

Then lastly, when it comes to identifying and buying new deals, it’s very important for you to make sure you’re underwriting a larger vacancy rate for unexpected times of no income like today.

So Scott, again, really appreciate you coming on the show today and being willing to talk about some of the challenges you’ve seen other people facing in real estate investing. I know it’ll be a value add to the listeners. Best Ever listeners, as always, thank you for listening. Have a best ever day and we’ll talk to you tomorrow.

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JF2077: Coronavirus and Asset Protection With Brian Bradley

Brian Bradley is a returning guest from episode JF1811. He has been in law for over a decade and in this episode, he wants to help you understand the best ways to protect your assets and also give some advice specific to today’s coronavirus pandemic.

Brian T. Bradley Real Estate Background:

  • Asset Protection Attorney for Investors, Self-Made Entrepreneurs, Business Owners, High-Risk Professionals, and Affluent Families
  • Sets up systems and strategic teams for our client’s asset protection and wealth management
  • Based in Portland, OR
  • Say hi to him at https://btblegal.com/
  • Best Ever Book:

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Plan before you need it, don’t wait till after an attack happens.” -Brian Bradley


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’re speaking with Brian Bradley. Brian, how you doing today?

Brian Bradley: I’m doing great, Theo. Thanks for having me back on and I look forward to jumping into a little bit of a different talk about asset protection today.

Theo Hicks: Absolutely. So as he just mentioned, he is a repeat guest. So if you wanna check out his first interview and hear his best ever advice and the best way to protect your assets, check out Episode 1811. So this is going to be a Skillset Sunday. So we’re gonna talk about a specific skill that will help you in your real estate investing journey. So we’re going to talk about all things asset protection, and more specifically, we are going to talk about how the advice that Brian can give today relates to the Coronavirus. So before we dive into that, Brian, do you mind giving the Best Ever listeners a reminder about your background and what you’re focused on today?

Brian Bradley: Yeah. So a little background about me – got into law and practice of law around 2008 back when the economy tanked, and I just had to sort of jump into court and figure it out how to sink and swim on my own. So I spent the first three years just purely in court, representing clients for free, which was a great experience. So I got more trial experience and litigation experience in those first three years than most people have in 25 years of experience, just because if you’re representing people to organizations for free, who’s not going to use you?

So then that just trickled down into – well, I like money, I like financing, I like investing on my own, and I got tired of seeing problems walk in the door when it was too late. So I started incorporating asset protection into my practice because I wanted to help people keep what they have and have a stress-free life, knowing when something bad were to happen or negligent happened, that they can sleep soundly, a little bit better, knowing they have the system and teams in place beforehand. So I started building a secondary portion of my practice around asset protection, but higher levels of asset protection for investors and doctors and real estate investors, higher net worth clients, generally around that million-dollar net worth mark or more, or for people who are trying to be full-time investors and how to scale them up to that protection level down the line. I just wanted to get ahead of the problems for people so that they know that there’s solutions for them.

Theo Hicks: Perfect. Thanks for sharing that. So one of the questions I have for you is about lawsuits that you see coming down the line for business owners and investors due to the Coronavirus. So maybe we could talk a little bit about that, but more specifically, in addition to that, maybe you can mention some of the things that people haven’t done that they should have done leading up to this moment that is the result in them being affected by these types of lawsuits.

Brian Bradley: Absolutely. It might be a little long-winded answer to cover some of that, but I’ll try to jumble through it without boring anybody. But it’s a great question and it’s obviously a really big topic, and it’s a really polarizing issue, but people are gonna have to go to work and have to invest at some point, and whenever these regulations start getting lessened, you’re just gonna have to do it the right way. So the key in any crisis is first, you’re gonna have to weather the storm; and what’s obvious is that if income goes down without expenses going down in the same amount, then you’re gonna start depleting your assets. You’ve gotta have some control over your expenses. What’s also critical though, is your assets, and especially your hard assets like real estate, because they give you the ability to subsidize and reduce income to ride out of that crisis. So the last thing that you need is to have a creditor attach a lien or tell you how you’re going to use that asset, when you potentially need to use it to ride out a bad crisis.

So the sad thing is that we now also have to add the liability and cause of COVID-19 to the list of things that investors and business owners need to start planning for. So you want your assets and equity safe. You want to protect your future and your legacy. You didn’t spend all your time building this for it to just go away, but a lot of us just don’t know how to do it. It’s a common pattern that pandemics and recessions or fear of recessions bring on substantial increases in lawsuits. Just look at how many lawsuits were filed in 2008 to 2010 during that recession.

So what we’re looking at through legal bar associations and the litigation arena is a really big concern of a substantial rise in what’s called casualty claims and employee claims, and there’s going to be supply chain disruptions and that’s going to cause projects to not be completed, or just money not be available to pay… So you’re gonna have those lawsuits coming there through breach of contracts, and inability to perform… A lot of other breach of contract claims and administrative claims and internal liability claims of businesses.

For example, we have general liability claims that alleged negligence for failing to protect a customer, or invitee or a tenant, especially if a death is involved, and that can be extended to a family member, not just that individual employee or guests. So what we’re talking about is also a potential rise of casualty insurance claims for negligent acts, and we’re also preparing for a possibility that the insurance industries may experience what’s called negative coverage. So as some carriers are already excluding COVID-19 from general liability coverage because it’s been classified as an epidemic and global emergency, so that gives them that wiggle room out. So that’s going to put you on the personal liability hook because of the World Health Organization classifying COVID-19 as a global health emergency. That’s also going to affect your employer’s liability coverage, and you’re most likely not going to be able to use that as coverage in an event of an illegal incident happening.

So all this makes asset protection and preventative planning even more important, because you don’t want to wait around for something bad to happen. You can’t be ahead of the game; you want to protect yourself before something bad happens and mitigate the risk. So what asset protection does, in this case, is it creates the legal barriers that you’ll need. It levels the playing field if you ever were attacked, and what you need to do as investors or syndicators, landlords or general partners or high-risk professionals like doctors or if you have a high net worth, is talk to an asset protection attorney and start practicing conservative methods of protection and be preventative. Plan before you need it; don’t wait for after an attack happens.

So a breakdown of a few steps that you can take are to recognize if your income is reduced and your expenses aren’t. That’s going to shorten the amount of time that you can meet your obligations, like paying bills and paying payroll and things like that. So next, you need to take steps to protect your hard assets, because those are critical to giving you the ability to weather any storm. You can’t afford, like I said, to let a creditor decide how to use those assets. You need to be the one deciding what you need to do with them.

The final step is to create a plan. So first, you need to reduce your expenses quickly and efficiently, but don’t handicap your business to the point that you’re not even going to be able to give yourself a chance to evolve and thrive. You don’t want to deplete yourself of revenue coming in to actually have a business that can function. So these first few steps you can do on yourself.

The second step is legally securing your assets and protecting them from having a claim attached to them, and that’s asset protection – that involves legal professionals. So some good questions to think about and ask yourself are – do you have employees that are located or traveling to areas where there’s been documented and diagnosed cases of COVID-19? Most likely everyone’s going to say yes to that. Does your business increase the probability of employees exposed to infected individuals? Most likely, yes. Do your employees work in close proximity with vendors or other partners who have given employees a greater potential to contract COVID-19? Potentially, yes. Most likely, yes.

So if your answers to any of those or all of those are yes, then you need to come up with a potential contingency plan on how you are going to manage your business to mitigate these risks. You’re going to have to think about these and talk to some experts and start making a plan to go forward to stay in compliance with the federal guidelines in your state and local guidelines, so that you can decrease these negligent claims. At the end of the day, you want to be able to keep doing business, but you need to keep doing business smartly.

Theo Hicks: Well, thank you for all that. That was all great information and I appreciate how you broke down it. Because I was gonna ask you, “Well, what’s the next step?” So you told us that. “What’s a question to think about?” Well, you told us that too. So I guess my follow up question would be – so you mentioned those three steps, which is, number one, to determine if your income is reducing more than your expenses are, step two is to protect your hard assets so that you’re able to decide what you can do with them, and step three was to create a plan to reduce the expenses, but making sure you’re not handicapping your business. So steps one and three, you said that people can do on their own. Step two, you need to find someone. So how do you find this someone, and then also, can you just find anyone who does asset protection, or is there a certain question that you should be asking these types of people to make sure I’m finding the person who is the right fit for me?

Brian Bradley: That’s a great question. So you’re not going to go to a general estate plan attorney, like someone who just is drafting revocable living trusts and wills, and medical directors, because that’s not asset protection; that’s just traditional estate planning. So you’re going to want to find an attorney who specializes and specifically does asset protection, which is using asset protection trusts, LLCs, business organization type of structures, but specifically to protect your assets.

You just want to find out what percentage of their business is purely asset protection, or are they just dabbling in and then dipping their toes in it? I really wouldn’t want to recommend someone go to a person who does 20% of their practice as asset protection, because they’re not going to be really familiar with the language and the liability and how to mitigate all the risks properly. You want to go to someone whose main focus of their practice purely is asset protection, and then what type of clients do they have. Do they have clients similar to your level of assets that need to be protected, your specific circumstances? If you’re a doctor, how many doctors do they have? If you’re a real estate investor, how many real estate investment clients do they have? What kind of different systems do they use for each? Or are they just trying to sell you one size fits all systems? Nobody’s one size fits all, everybody has a personal issue. So everything has to be created personally.

So I would just say, ask those type of questions and make sure you go to a specialist, just like you would a doctor. You’re not going to go to a general doctor for brain surgery, you’re going to go to a brain surgeon.

Then one of the things we were talking about back before we started recording was the potential recessions and what to do, and it ties into COVID-19 because people have no idea. Are we going to go into a recession or not? I can’t tell you, I don’t know. Half my wealthy clients think that there’s not going to be a recession. Some of them do. Some of them are over panicky and conservative. I see a mix, so I can’t really tell you personally what I think, because I see a different spectrum of opinions… But I’d say it’s just human nature to panic when things are uncertain. But the first thing is just stay calm, don’t make rash decisions based off of news clips.

We’re in a geopolitical instability, but there’s nothing new. We also have things going on with oil in Saudi Arabia, trying to push a lot of cheap oil to hurt Russia out there and take them out of the market. Combine this with COVID-19 and Corona, and we have a really crazy, poisonous geopolitical cocktail going on. So even when you think the world and economy is on fire, like it was just a little bit of time ago, what did we just learn? We can throw a monkey wrench in it for things that we have no idea who saw COVID-19 coming. Then all of a sudden, the economy’s on hold; no one’s working.

So the issue is just be proactive, protect your assets beforehand, even when times are good. And when times are potentially bad, and we see recessions, to recession-proof our assets, one, talk to your financial advisor. Diversify – that’s a great thing, but diversification doesn’t protect your assets. You’ve got to put them into mechanisms like asset protection trust that we talked about in the past, or business organizations, or combining the two of them together to actually give you the protection that you need. It’s not a matter of if a claim is against you, it’s a matter of how collectible you are. So that’s something that you can control, is your collectability. No matter if there’s a recession or good times or bad times, that’s something that’s in your control.

Theo Hicks: Perfect. Then going back to those steps that you can take. So create a plan, reduce expenses, but don’t handicap your business. I’m assuming you work with real estate investors, correct?

Brian Bradley: Oh, yeah. Most of my clients are in real estate.

Theo Hicks: Okay. What types of expenses do you see them focusing on reducing the most?

Brian Bradley: Right now, their biggest concerns are potential financing issues or supply chain issues. Most of them are all business as usual, especially the syndicators and large developers, and my clients that have apartments. Honestly, I haven’t had a single client that hasn’t been able to collect a rent check yet, and we’re not really seeing anyone slow down. Every one of my clients– and we have, I think, overall in the whole system, over 3000 clients, and I haven’t had anybody yet say that they’re having an issue building or collecting rents. So what they’re looking at is just potential supply chain issues with current developments, and what they can potentially do to alleviate that concern right there. Some people are talking about force majeure arguments, and that’s not really going to work. That’s like acts of God, and trying to use COVID-19 as a pandemic as an act of God. That’s going to be a state by state argument, but even those are going to potentially fall through. That’s a whole other episode of a conversation right there – a dive into force majeure as a legal argument.

So I would say other steps that they would do is just practice social distancing, making sure that tools are clean, worksites are safe… Whenever you’re sending out an employee to go, just make sure that you’re sending them out with the equipment that they need, to make sure that they potentially mitigate the contact that they have with COVID-19, and then start working on your supply chain, making sure you stay ahead of it… Because one of the things with  litigation is always, “Well, what did you do to mitigate your risk?” So you’ve got to be planning on this down the line. So that would be maybe talk to your contract attorney on that and come up with some alternatives to your supply chain in case it gets disrupted.

Theo Hicks: Perfect. Is there anything else as it relates to asset protection and the Coronavirus that we haven’t talked about already that you want to mention?

Brian Bradley: Not really about the Coronavirus, specifically, but there is one principle I think real estate and any investor needs to understand. It’s just about legal authority over practical authority, because this is what it comes down to when you ever do get sued… And just the reality is that a judge can do and does do whatever a judge wants, whether you have an LLC or LP. Yeah, they’re governed by state statutes, but those state statutes don’t transfer to other states. So you hope that everything works out in theory.

For example, I have a Nevada LLC and I’m being sued in California – you would hope that those internal shields would hold up, but theory and practicality don’t really ever work out. Practical authority is the power a judge actually has to make decisions, and judges have very, very broad powers and they have a superpower called the court of equity, and they can reach into your assets and seize them, place some liens on them, foreclose them, ordering sheriff’s sales, clearing title… There’s a lot of things a judge can do, and the problem is judges even without legal authority do these things all the time, and even if it’s in direct contradiction to statutes and case law, especially when they’re exercising their magic power, the court of equity.

So the solution to this really is to just try to level the playing field and then hindering the judge’s practical authority over your assets, so that they can’t circumvent the legal process. And you do that with just preventative and strong asset protection planning and having asset protection trusts in place and different layers of protection. So that would be my last caveat of why we really care – the legal system’s messed up. It’s not what it was 30 or 40 years ago. Things we did 30 or 40 years ago don’t apply today, because we’ve had this massive litigation shift by attorneys being able to take on clients commission-based for a percentage, which wasn’t allowed in the past, and attorney advertising, which wasn’t allowed in the past… So it turns the legal field into a business and an industry with a billion-dollar (B) market point. So we just need to realize the system’s not what it used to be anymore, and you need to protect yourself against the dysfunctional system now.

Theo Hicks: Thanks for adding that. So if the Best Ever listeners want to learn more about what we talked about today, learn more about the services you have to offer, what should they do?

Brian Bradley: They can jump on my website, www.btblegal.com, and I have lots of educational videos on there, and pamphlets and brochures to browse through. They can just email questions to me brian [at] btblegal.com. I do free consultations, just because I’d rather have people get educated on what their liability is, and different options; even if you don’t use from me. Most people are afraid to talk to lawyers because they don’t want to pay a consultation fee when they want to shop around, and I just find most people just become google lawyers and are getting bad advice, because they’re not getting advice. So just start reaching out to lawyers and don’t be afraid to contact them, and most lawyers will do free consultations, and that’s what I do, just to educate people.

Theo Hicks: Best Ever listeners, make sure you take advantage of that. Brian, I really appreciate coming on the show today and talking to us about asset protection and Coronavirus. From my perspective, one of the biggest takeaways is that obviously, right now you want to try to do what you can to weather the storm, but at the end of the day, the people who are going to do fine or better during this time are the ones who, as you mentioned, were proactive and protect their assets when things were all fine and dandy, when everything was going smoothly, as opposed to trying to do it now.

So you talked about a few steps we can take – creating a plan to reduce expenses, because obviously if income goes down and your expenses don’t go down, that’s where people get into trouble… But really, as I said, at the end of the day, it sounds like the assets need to be protected. So I guess, do that now, while you still have the chance, because as Brian mentioned, he expects there to be an increase in lawsuits coming down the line, which is typical for recessions and pandemics like this. So Brian, again, I really appreciate you taking the time to talk to us today about this asset protection advice during the Coronavirus.

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

Website disclaimer

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

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

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

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

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2074: Underwriting Adjustments During COVID-19 | Syndication School with Theo Hicks

Theo is back with another Syndication School episode and this time he is going over the adjustments to make when underwriting deals during this pandemic. 

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

Click here for more info on groundbreaker.co


TRANSCRIPTION

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

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

 

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

Each week we air two podcast episodes that focus on a specific aspect of the apartment syndication investment strategy. For the majority of these episodes we offer a free resource that will help you along your apartment syndication journey. All of these free resources, as well as free Syndication School episodes can be found at SyndicationSchool.com.

In this episode we’re going to go back to talking about the Coronavirus. We took off about a week or so, and we’re gonna jump back into it because today I want to talk about some of the changes that Joe and Ashcroft Capital are making to their underwriting of value-add apartment deals during and then probably after the Coronavirus pandemic.

The purpose of this episode is going to be to outline the four main changes that Ashcroft Capital is making to the underwriting of new deals currently, and then for the — I won’t say foreseeable future, but at least for maybe the next few months after the Coronavirus pandemic is over.

Overall, the underwriting changes really need to be on a deal-by-deal basis, because different markets have different rules as it relates to Coronavirus. This means that the economy is being impacted differently… But there are a few items – four items in fact – that Ashcroft thinks are important to consider.

First is going to be year one operations. It should be expected that there will be an increase in things like vacancy, bad debt and concessions throughout 2020. And then once things settle down a bit and the economy reopens, it is also possible that some residents will no longer be able to afford living at the property. So the two things – number one, some of the income loss items, like vacancy, bad debt and concessions. When you’re making your assumptions, you should be projecting that they will be higher than usual. Based off of the T-12 or current market rates, you can’t really use those for vacancy, bad debt and concessions right now, because it’s a different environment, and once the Coronavirus ends, it will also likely be a different environment.

Secondly, once the economy reopens, the residents that are currently living at that property – so if you buy a property now, once rent repayment programs are ended, or rent delays are ended, evictions are allowed again, maybe expect to have to evict more tenants than you usually have to, because they’ve just been living there and maybe paying partial rent, or just doing what they could… But once it’s over, they can no longer pay the full amount. That’s year-one operations.

Number two is rent growth. The rent growth for 2020 in the vast majority of markets is projected to suffer, as unemployment rises. But the silver lining is that most of any rent lost in 2020 is expected to be recovered in 2021. From my understanding – I believe I’ve talked about this in one of the episodes – the rent growth is supposed to suffer; rent growth isn’t gonna go negative, it’s just going to be less. I’m pretty sure the most recent calculation I saw was about 1.3% percent, as opposed to 2%, 3%, 4% we’ve been seeing for the past decade or so.

Apparently, this dip is supposed to be temporary… So this dip in rent growth to the 1% range is temporary, and then in 2021 it’s supposed to go back to what it has been before. Obviously, when you’re underwriting a deal, the year one rent growth and year two rent growth should reflect the immediate area and the demand in the market. So obviously, you don’t wanna just use the 1% average. You wanna figure out “Okay, what do the experts think will  happen to rent in this specific market in the next two years?” And then probably be even more conservative and assume that it might be less than that. That way if it’s better, great. If not, then you’re still able to hit your returns to your investors.

Where does this information come from? Your management company. We’ve talked about the importance of your property management company, how to find a property management company, so you can find all that information at SyndicationSchool.com.

Number three is going to be debt. As of right now, most private lenders – these are basically the bridge lenders; the ones that do the 2-3 year renovation type loans – are taking a pause from lending. But lenders that are still active are being extremely conservative with their loan proceeds and terms.

I talked in a previous Syndication School episode about JP Morgan Chase, for example, has changed their lending criteria; this is for residential loans, I understand that, but it’s just an example of a lender becoming extremely conservative. They’re only lending to borrowers with a credit score of 700 or more, and who can put down 20% or more. So that definitely limits the pool of people who can get residential mortgages.

Similarly, other lenders are doing the same for commercial loans. I think one of the biggest changes is the reserve amounts that are required. Now, the agencies are lending, but they are also being conservative on their underwriting and requiring large upfront reserves for debt service payments. So the reserve requirements are changing. Typically, you create an  upfront reserves account called an operating account for unexpected things that happen at the property, but now in addition to that you need another upfront amount of reserves that are a lender requirement.

So more conservatives proceeds should be underwritten, and the underwriting needs to include these upfront reserves, as they will  impact the equity required to fund. So you’re gonna need to raise additional money now from your investors, even though the cashflow is not going to be going up. Typically, if the deal is cash-flowing $100 per door and you need to raise X amount of money, well now that deal might be cash-flowing $75 per door and you need to raise even more money from your investors. That’s why if you’re looking at deals right now, you’re gonna have to negotiate a lower purchase price because of these new lending criteria, and the rent growth, and the year-one operations that I’ve talked about previously.

So what does that mean more practically? Make sure that you ask your lender or your mortgage broker about the new loan-to-value requirements, the new upfront reserves requirements, and other terms that you need before you submit an offer on a deal. So you need to have an understanding of whatever lender you’ve been using or you plan on using, what are the terms of the loans they’re offering, what are the LTV terms, how much money do you need to put down, how much money do you need as upfront reserves, what are the interest rates, what’s the amortization? Is there anything that I need to  know that’s changing, so that I can underwrite my deals properly? Because if you don’t know what the debt is going to be, it’s gonna be impossible to submit correct offers on deals.

And then lastly, for value-add deals, depending on the deal, many owners are pausing their interior renovation programs until the market is restabilized… So when you’re underwriting a deal, it may be wise to assume that the value-add program does not start until the overall market stabilizes.

Now, this is something that’s gonna be obviously up to you, depending on the state you’re investing in, or the local area you’re investing in, if construction is considered an essential service, if construction companies are still working, things like that… But you need to think about “Okay, I plan on going in there, renovating all these units and doing all these exterior upgrades”, but what are the typical ways that you renovate interiors? Exterior renovations are likely fine, assuming that business is essential in your state, but interior renovations is the one that might be delayed because of the fact that residents aren’t able to move out right now.

So again, to summarize, the four changes that Ashcroft are making – and again, these four points came straight from the director of acquisitions at Ashcroft Capital – is the year-one operations. Things like vacancy, bad debt and concessions should be assumed to be higher, at least during year one. Rent growth should be assumed to be lower than  previous years, so whenever you’re underwriting your annual rent growth increases, or even when you’re determining what your rent premiums are going to be, you need to have a detailed conversation with your property management company to determine how to calculate that. So annual income growth is typically 2%-3%. You definitely wanna be underwriting maybe a 1% or 1,5% at least for year one and year two… And then when it comes to rent premiums, again, you have to see what’s the demand for those units in the immediate area? What are the prices on the newest leases in that area? It can’t be leases from a year ago or six months ago, or really even two months ago. It needs to be probably within the last few weeks to a month – what are the rents being demanded for those specific units?

Number three is debt, so making sure you have a conversation with your lender, so you know exactly what types of terms they’re offering on their loans now, including what sort of upfront reserves requirements are needed.

And then lastly, for the value-add deals, understanding that you’re likely going to need to delay any interior renovations until the market restabilizes and Covid is gone, because you’re not allowed to evict people, tenants are probably moving a lot less because of the Coronavirus… So those are four things to keep in mind when underwriting deals.

Obviously, if you are out there underwriting deals, I’d love to hear from you what you’re doing, so we can maybe add to these four points. So if you have any advice, any things that you’re doing differently when underwriting, please let me know by emailing Theo@JoeFairless.com. And of course, anyone who reaches out and I include their information – obviously, it won’t be in this episode, but I’m gonna turn this into a blog post, so I  will definitely give you a contributor status for the blog post, since you contributed to underwriting advice to the document.

That concludes this episode. To listen to other Syndication School series about the how-to’s of apartment syndication and check out some of our free documents, please visit SyndicationSchool.com.

Thank you for listening, have a best ever day, and I will talk to you soon.

Website disclaimer

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

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

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

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

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

 

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JF2072: Facebook Marketing During The Coronavirus With Tristen Sutton

Tristen is a certified Facebook digital marketer who is also a consultant for Facebook. He teaches businesses how to effectively use Facebook and Instagram ads. In this episode, he shares many different strategies to increase your leads and how to correctly target the higher conversion client.

Tristen Sutton Real Estate Background:

  • A consultant for Facebook and a certified Facebook Digital Marketer
  • Teaches businesses how to effectively use Facebook and Instagram ads
  • Based in Houston, TX

 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Make sure you know who your target market is and always put a call to action in your ads.” – Tristen Sutton


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. My name is Theo Hicks, the host today. Today we are speaking with Tristen Sutton. Tristan, how are you doing today?

Tristen Sutton: I’m doing good. I’m staying safe, sane and sanitized.

Theo Hicks: The three S’es, there you go. Well, today we are going to be talking about marketing, and more specifically we are gonna talk about the things you should be doing from a marketing perspective on Facebook, Instagram, social media, during the Coronavirus pandemic. That’s gonna be the topic of discussion today.

Before we get into that, a little bit about Tristan – he is a consultant for Facebook, and he’s a certified Facebook digital marketer. He teaches businesses how to effectively use Facebook and Instagram ads. He is based in Houston, Texas, and you can say hi to him at TristanSuttonConsulting.com.

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

Tristen Sutton: Absolutely. I’m a marketing strategist, like you said, based out of Houston, Texas, and I work with small business owners, and specifically real estate agents, and teach them how to use Facebook advertising to expand their brand, generate leads  and increase open house attendance. I’m a licensed [unintelligible [00:04:18].10] instructor, so the course I teach, Ads University, provides real estate agents five hours of [unintelligible [00:04:24].29] along with an actual training, so they learn how to market for themselves. I’m really passionate about helping this niche out.

Theo Hicks: Perfect. Do you work with specifically real estate agents? Do you work with investors as well, or is it specific to the agents?

Tristen Sutton: Actually, yes, in some of my classes I’ve had several investors attend the course, and they said the things that I’ve taught them in that course has helped them get more leads to some of the properties they’re selling and investing in.

Theo Hicks: Perfect. Obviously, the Coronavirus has impacted real estate in general… Let’s maybe focus on real estate agents first, and then we can talk about investors second… Unless you think that the lessons apply to both. I’ll leave that up to you. So let’s start with agents. Maybe first tell us some of the biggest things that are changing right now, or maybe the most important things that agents should be changing when it comes to the way they’re advertising on Facebook and Instagram and other social media platforms.

Tristen Sutton: Great question. Really what I want agents to understand right now is that it’s a pay-to-play strategy. Posting and hoping on your profile or your business page isn’t gonna get you the leads you need to get to the transactions that you want. We’ve gotta stop using a blockbuster strategy in a Netflix reality, and realize that Facebook suppresses your posts, so you need to put money in some advertising if you wanna reach your target audience.

The second thing would be understanding that Facebook changed the rules. So a lot of the targeting that used to be available for agents is no longer there. That doesn’t mean the platform is obsolete now, you just have to be strategic with your retargeting. So getting people to watch your videos or click on your links, regardless if you’re a buyer or a seller agent, and then retargeting those people… Just like when you click on a website and then all of a sudden she follows you around on Instagram and Facebook – that’s what we need to be able to do to make sure we get our transactions for the  year.

Theo Hicks: So agents can’t just have their Facebook page that they have and just post free content to people, and hope to get leads that way? They need to actually create a paid advertising campaign on Facebook?

Tristen Sutton: Right. So if anyone’s listening right now, look to your Facebook business page, and look at your last 5-10 posts. You’ll see that, regardless of how many likes/followers you have, less than 5% of those people ever saw your posts. It’ll be at the bottom  left, and it’ll say “Page Views” or “Content Views”, and then you’ll realize that “Hey, if I have 1,000 followers but only 20 people saw my post, I can’t grow a business or sustain a business with that kind of reach.” So if you wanna use this platform, you have to adapt with it and realize that to reach the people you want or need, you’re gonna have to put some behind it now.

Theo Hicks: I know that Facebook has different types of paid campaigns… One’s pay-per-click, and then there’s a different one. Is there one that you advise people to use over the other? Is pay-per-click better than just paying per campaign?

Tristen Sutton: No, there are several different objectives. There’s approximately 9 or 10. The four that I recommend for realtors is the reach objective, traffic, which drives people to your website, video objective, which gets people to watch more of your content, and then the last one would be Event RSVP – so if you have open houses, seminars, workshops, anything where you need bodies in a room, run that type of ad. That goes for the agents and the investors as well for the workshops they do.

Theo Hicks: Okay, so you said Reach Ad, Traffic Ad, Video Ad, and RSVP Ad. So I think that Event RSVP and Video are pretty self-explanatory… What is Reach Ad and what is Traffic Ad?

Tristen Sutton: So Reach Ad is more of like a digital direct mail campaign. This is gonna show your content, your face, your brand to as many people as possible in your market or your farm, but it’s not optimized for clicks or cost. So there’s none of that going in. This is more of an advertising play versus a marketing play… Marketing is lead generation, and things like that.

So you can spend at the time of this reporting maybe $5 a day and reach maybe 3,000 a day on their phones, tablets and computers, as long as they have a Facebook or Instagram account.

The Traffic one is optimized to show your ads first to the people most likely to see your ad and then click on your website. So those are the two that a lot of agents use  because they wanna get their brand out there. But then they wanna drive traffic to their listings, or the lead capture sites, things like that.

Theo Hicks: Perfect. And the Video is just a video ad. And then RSVP is advertisement for a specific deal?

Tristen Sutton: Right. So with Video Ad most people don’t know the strategy – you use the video ad to warm up a cold audience. People do business with who they know, like and trust, so the easiest way to do that right now is with video on social media. So you get someone to watch maybe a 30-second video and then on the back-end you can go on Facebook and say “Hey, everybody that watched this video that I’ve just sent out on their phone, retarget everyone that watched at least 50% or more.” Because if they watched half of it, they’re halfway interested, they’re halfway familiar with your brand, and you’re gonna get a much more higher conversion with people that are already familiar with your brand than a cold audience.

Theo Hicks: Yeah. And then the RSVP?

Tristen Sutton: I encourage everyone, whether you’re an investor and you’re hosting workshops, or an agent hosting open houses, seminars, things like that – create a Facebook event page (it’s free). It’s kind of like the Facebook’s version of Eventbrite. You put your information, your picture, a registration link in there… But you can  run ads to drive traffic to that event page, and spend maybe $3 to $5 a day and reach hundreds if not thousands of people. It encourages people to RSVP, and you can use that event page as an incubator to put testimonials, keep content in there… And really, that event page now – you’re using it as your way to do a virtual open house.

So if you can go to your house, social distance, do a video of it professionally on your phone, put the video in that Facebook event page, and now as you’re driving traffic to it, people get to virtually tour the home from the comfort of their home, and then they may schedule an appointment and say “Hey, once this is over…” or “Hey, can I schedule a tour in-person?”

Theo Hicks: What about the actual content of these ads? How has that changed during the Coronavirus?

Tristen Sutton: Hopefully people are doing more video, but unfortunately, people aren’t able to go to the barbershop or the salon, so they may be a little apprehensive about putting their face out there…

Theo Hicks: Seriously…

Tristen Sutton: Right now my beard is out of control. But right now video is still king/queen on social media, and it’s the best way to connect with your audience and the best way to get in front of them. And you don’t have to do long video. You can do something along 15 seconds, 30 seconds, never longer than a minute for an ad. Now, if you just wanna post videos, Facebook favors three minutes. But for ads, I recommend 15-30 seconds. And it doesn’t take long. Introduce yourself, identify your audience, identify a pain point to provide a solution, and then give them a call to action, “Click call or send a message”. That’s it, that’s all it takes.

Theo Hicks: So from these four types of ads, is this something where you wanna have one Reach ad, one Traffic ad, and then one Video ad, and then just continually push those? Or is this something that you refresh every day, every week, every month…?

Tristen Sutton: Great question. I wanna preface that with everyone’s situation is gonna be a little different… But a Reach ad – that’s more branding, so that’s something you just keep on going, and maybe just change your image maybe every 30 days. That way, people in your market area are gonna be familiar with you because they’re gonna see you all the time.

Traffic – that’s gonna be depending on what you’re driving traffic to. Are you driving traffic straight to your listing? Obviously, you’re gonna move those properties, so you don’t need to keep those up if you don’t have the inventory. Or if you just have a general lead capture form, you can always drive traffic to that open house, obviously only when you have a property to tour. So you may not have those going at all times.

And then the Video ads – that’s another branding strategy, so you can always have that going. I recommend leaving ads running for 30 days once you optimize them, to make sure that you’re getting the traffic and the clicks that you want.

Theo Hicks: Perfect. And then – I guess this applies to both agents and investors, but is there anything that applies to investors as it relates to marketing on Facebook  during the Coronavirus that we haven’t talked about already?

Tristen Sutton: 99% of the people I work with are agents, so I don’t have the full aspect of what the investor needs… But regardless, everyone is at home right now, staring at a phone, tablet or computer. So if you know that you have an opportunity, you can reach them right now. And ads are cheaper, because a lot of the large corporations have kind of backed away. Facebook is saying “Hey, we need to still keep this revenue going”, so your money goes a lot further. You spend $5/day and you may reach 800 people now, and on some variables you can reach maybe 1,200 to 1,800 people from the same $5. So now is the time, because you have the access to their attention, it’s where everywhere’s spending time right now, and it’s inexpensive.

Theo Hicks: So basically, everything we’ve talked about so far is what people should be doing… On the flipside, what are some of the biggest mistakes you see people making right now? And this could be as it relates to actual paid ads, or it could just be content that people are pushing out on Facebook or social media in general.

Tristen Sutton: Oh, man… A handful of things. Get quality graphics. It doesn’t have to be a $500 or $1,000 flier image, but use something like Canva.com and just make — crisp, quality graphics are gonna represent your brand. If that’s not your ministry, you can user Fiverr (fiverr.com) and just spend maybe $20 to get a nice, professional-looking graphic.

Videos – people are using videos that are too long. Like I said, you wanna be between a 15 and 30-second timeframe. If it goes longer than that, people’s attention span isn’t there and they’ll scroll past it.

Always put a call-to-action. I always see something like an ad that says “Hey, we have this beautiful 4-bedroom house for sale.” Okay, now what do you want me to do? Do you want me to call you to talk about it? Do you want me to email you? Do you want me to go to the website? Always put a call-to-action, and then just be very concise with your messaging and your advertising, too. Make sure that you know who your target market is, and you stick with that.

Theo Hicks: Perfect. Okay, Tristen, what is your — typically we say “best real estate investing advice”, but we’ll just go with “What is your best ever marketing advice?” And something that you obviously haven’t talked about already.

Tristen Sutton: Stop boosting. Stop hitting that little blue Boost button. Because typically what happens is people don’t typically have a strategy. So my top marketing advice is before you launch any kind of advertising or marketing campaign, write your strategy down. Who do you want to see that ad? What do you want them to see when they see that ad? When they click on the ad, where do you want them to go with it? What do you want to happen?

Most people just say “Hey, I just did a live video tour of this home I have listed. Let me just spend $50 on a boost” and just shoot it out there. And then it’s like “Okay, well who did you send it to?” “I don’t know, I just hit the blue button.” So have a strategy before you spend any money.

Theo Hicks: Would you say Facebook is the best platform for marketing for real estate professionals? I know in your bio it said Instagram as well. Is Instagram just not as good as Facebook?

Tristen Sutton: I’ve actually seen better results with Facebook between my advertising and my clients’ results. Instagram is more of a show and tell, Facebook is more of an engaging opportunity. Plus, Facebook is Instagram’s daddy; they own them. Facebook has 1.6 billion people logging in every day, versus 600 million with Instagram, at the time of this recording, of course.

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

Tristen Sutton: Let’s go!

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

Break: [00:15:48].14] to [00:16:35].09]

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

Tristen Sutton: I’ve recently re-read The Millionaire Next Door. It just kind of puts everything in perspective about how to live below your means and invest in your opportunities that are going to yield you money, like real estate.

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

Tristen Sutton: I’d probably go get my real estate license and [unintelligible [00:16:53].05] since I know how to market it. [laughs]

Theo Hicks: So I usually ask “What’s the best ever deal or the worst ever deal you’ve done?”, but I’m gonna change it up a little bit. I know that you give talks on marketing… What is the most unique group of people you’ve spoken to?

Tristen Sutton: I would say it was probably one of my first trainings; it wasn’t real estate related, it was just general business owners… And it was just a lot of individuals that didn’t even know how to use Facebook. Some of them didn’t even have a Facebook business page. So where I’m coming in expecting just to train them “Hey, this is how you generate leads”, it’s like “Well, hey, let’s set up a Facebook Ad account, or a Facebook business page for you, and upload your picture.”

So I would say my first training to general business owners who did not know much about social media.

Theo Hicks: Yeah, it is interesting that we’re living in an era right now where the younger people have always had the internet, and the older generation didn’t. [unintelligible [00:17:44].20] massive disconnect between — you give an iPad to a 5-year old and he can do everything. If you give it to a 7-year old, they can’t do as much as the 5-year-old. It is interesting.

Tristen Sutton: Very much so.

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

Tristen Sutton: Of course, I’m a speaker and trainer, but when this pandemic came, I just started reaching out to business organizations, real estate organizations, and started just offering free resources, and  training. I did a Facebook Live and shared it with a bunch of business owners and agents, that “Here’s the tools I’ve used to still market my business. Here’s my lighting setup, my camera setup, all the above.”

When I heard that restaurants were crashing, I did a free training for restaurants where I was saying “Hey, here’s a 30-minute crash course how you can make sure you stay in front of your audience and still get those to-go orders or pick-up orders, so you can still keep your doors open through and after this.” So just giving some free advice and training to those in need.

Theo Hicks: Yeah, there’s actually a bread vendor that just rented a van and just drive around the different hot spots for half an hour increments, and people will still drive up there to do their bread. I thought that was interesting. Kind of like that for restaurants, too.

Tristen Sutton: You know, one of my phrases is “Pivot or perish.”

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

Tristen Sutton: I wanna do a 2 for 1. So they can text to get a free Facebook Ads workbook to teach them how to set up their own. They can text “freeguide” to the number 31996. That would give them access to the website. It’s a workbook, and we all win.

Theo Hicks: Perfect, Tristen. Well, thanks for joining us today and thanks for giving us your advice and wisdom on Facebook marketing and how it relates to real estate agents and real estate professionals in general during the Coronavirus pandemic.

We talked about how it’s transitioning from — I like your little sayings… “Posting and hoping”, to the “Pay to play” strategy. If you go to your Facebook  business page, you can see that if you aren’t doing paid ads, then you’re getting very low engagement on your posts… And it’s because of the fact that Facebook has kind of changed their rules on that.

We talked about the four different types of ads – the Reach ads, the Traffic ads, the Video ads and the Event RSVP ads.

Something you also mentioned is that when you’re making advertisements for videos, you  wanna make sure that they are between 15 and 30 seconds, never longer than a minute. Then when you’re making content, you want that to be 3 minutes. That’s kind of the sweet spot. And when you’re making these ads, once they’re optimized for 30 days, you mentioned that some of the biggest mistakes people are making for advertising is poor graphics, so make sure you get high-quality graphics. Videos that are too long, as I already mentioned. Not having a call-to-action, and then not having concise messaging and concise targeting of an audience.

And then your best ever advice was to 1) stop hitting the Boost button, and then also make sure that before you  start a strategy, you write it out. Who do you want to see the ad, what do you want them to see, and then what do you want them to do once they’ve actually engaged with the ad.

Again, Tristen, thank you for all that advice and thanks for joining us. Best Ever listeners, as always, thank you for listening. Stay safe, 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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JF2071: Marketing During The Coronavirus Pandemic With Jessie Neal

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

Jessie Neal Real Estate Background:

Click here for more info on groundbreaker.co

Best Ever Tweet:

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


TRANSCRIPTION

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Theo Hicks: So you flip them?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Jessie Neal: Let’s go, come on!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Jessie Neal: Thanks, guys.

 

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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JF2068: Experience Investor Danny Randazzo Shares His View During The Coronavirus

Danny is a Managing Partner at Passiveinvesting.com and Author of Wealth Lessons for Kids. He is also a multi-return guest and can be found on previous episodes JF1447 & JF1684. As you know, the Coronavirus has been impacting several investors and In this episode, Danny goes into how he is handling his business during this pandemic. 

Danny Randazzo Real Estate Background:

  • Managing Partner at Passiveinvesting.com 
  • Author of Wealth Lessons for Kids
  • Became a millionaire at 29
  • Controls over $225M in real estate
  • Based in Charleston, SC
  • Say hi to him at: https://www.passiveinvesting.com/

 

 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Over the past year, I have really had the opportunity to work “ON” the business instead of “IN” the business.” – Danny Randazzo


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 a multiple repeat guest, Danny Randazzo. Danny, how are you doing today?

Danny Randazzo: Theo, I am doing great. Thank you so much for having me on. I am excited to be back, and hopefully add some value to the Best Ever listeners.

Theo Hicks: Yes, and I think you’ll be able to add value, because we are going to talk about some of the challenges that Danny is facing during the current Coronavirus pandemic. For context, everyone, we’re recording this on the 29th of April.

Before we get into that, a little bit about Danny’s background. He’s a managing partner at PassiveInvesting.com. He’s the author of Wealth Lessons for Kids. He became a millionaire at age 29, and controls over 225 million dollars in real estate. He is based in South Carolina, and you can say hi to him at PassiveInvesting.com. Great website URL, by the way. Did you just find that right away, or did you have to pay [unintelligible [00:03:58].27] for that URL?

Danny Randazzo: We invested in that URL for an undisclosed sum of money, but it has been tremendously worth it when you think about the brand that you and Joe have really built around Best Ever. For us to have PassiveInvesting.com is a huge piece when we talk about what we do in the multifamily syndication space.

Theo Hicks: Oh yeah, I bet. Before we get into some of the challenges that you’re facing with the Coronavirus, let’s catch up, and you can tell the Best Ever listeners what you’ve been up to the past year. So maybe start and say how much you controlled a year ago, and then how many deals you’ve done, any developments that you’ve done in the past year, and then I can ask some follow-up questions on that.

Danny Randazzo: Perfect. Over the past year – and I’ll add in these first four months or so into 2020 – so between 2019 and today, we’ve acquired 120+ million in multifamily assets across the South-East U.S. If you go back and listen to my first episode of kind of how I got started, I wanna say it was episode 961, but Theo, maybe you can correct me if I’m wrong there… It’s been an incredible journey. Over the past year it’s really been the opportunity to work ON the business, instead of IN the business, if you will.

So a couple of high-level and strategic decisions that we made leading into the beginning of 2019 was to solely focus on multifamily and really tighten in on our scope and hone in on our specific property types and property locations. What that allowed us to do was be looking for really good deals in very specific  market and investment criteria in order for us to best serve our investors with great investment opportunities. And having that very specific focus and strict investment criteria has really allowed us to be successful and has carried us through that 2019 period into today, where we really focus on buying assets that are 150 units or greater, built 1990 or newer, in excellent markets like Charlotte and Raleigh, North Carolina, and Greenville, South Carolina, that are priced between 30 and 60 million dollars.

Having that focus has allowed us to acquire about 120 million in multifamily over the last year, and we’re slated to continue that growth in 2020, and as we continue through, to finishing the year.

Theo Hicks: Perfect. Thanks for sharing that. So let’s transition into talking about Covid. One thing that I’m curious about — so you do have a business partner, and I know a lot of people when they talk about finding about business partners that complement each other… I was wondering, so during a time like this, how are you and your business partner deciding what’s the best line of action? Maybe tell us what these conversations are like. Does one person have more control over certain aspects of the business right now, or are you both coming to these decisions together? I’m just wondering what that communication is like.

Danny Randazzo: Yeah. In terms of the business itself, we have a full team of people at PassiveInvesting.com. You have myself and two other managing partners, Dan Handford and Brandon Abbott. And then we have a director of design – that’s my wife, Caitlin, who helps with our value-add projects. We have Brian, who is the director of asset management, and he brings many years of experience. He worked with Aimco, overseeing over 175,000 units under management… So he brings a ton of experience to our asset management team. And then we’ve got Melissa, who is our director of marketing, and Ann, who’s our director of investor relations.

One thing that I always hone in on is the value of a team. Investing in large multifamily properties to have a successful business that buys hundreds of millions of dollars of properties, you need to have a strong team around you. So it’s not just two of us, it’s not three of us, it’s a whole team of people… But we, again, spend time investing and working on the business over the year of 2019, and even into today, where we are allocating roles and responsibilities so we’re not falling behind, and we’re always being proactive in 1) managing our current portfolio, and making sure investors are very well informed and up to date as of the current happenings in the economy, and just in the country in general, with the Covid pandemic.

One thing that was really important to us as a group was making sure transparency and information is always shared with anyone who invests alongside of us in these projects… And putting your money to work is a huge commitment. And then if you have an operator or a general partner who may not be sharing or may be giving quarterly updates, or all of a sudden distributions are stopping because of the Covid pandemic, and you don’t know why, that would be a red flag to me. I’d be asking a lot of questions of that operator.

So one thing that we always really strive to do is just overcommunicate things… And I’m pleased to say that in the month of April our portfolio collections average greater than 96% for April income, and we were able to pay out monthly distributions exactly as planned, from our performance.

So it really speaks to the quality of our management teams on-site, at each property, the quality of our resident base, just having very strict renting criteria in terms of qualifying a potential applicant, making sure that their income, their job history and their credit score are solid to live there… And then number three, it’s having a great property, in a great location, where you know people want to live and choose to live.

So having that team absolutely made it such a smoother process going through the Covid scare. I could not imagine being a single shingle, single-person operation at that time, where 1) you’re trying to manage the asset, 2) you’re trying to communicate with investors, 3) maybe you’re doing some marketing to keep your sales funnel or business funnel going – that would just be very overwhelming in a time like Covid… So to really highlight what we’ve done, Theo, we’ve had a great team in place and we’ve been building that team over the years to get to where we are today. I think one tip for the Best Ever listeners – if you are a single operator and you want to own a lot of single-family properties, or you wanna own thousands of multifamily units, you need to have a strong team around you… So I would heavily invest in building that team.

Theo Hicks: Thanks for sharing that. Let’s transition into something else. How have your underwriting standards and your due diligence process changed on the deals that you are looking at, that you are doing, over the past few months? Because obviously, you did 120 million dollars in acquisitions over the past year and 3-4 months, a year and a half… So obviously, you’re still doing deals, so I’m just curious what changes you’ve made to your underwriting process, to your due diligence process during this time when you don’t really know what rents are gonna be a month or two months or three months from now.

Danny Randazzo: Yeah… Two huge things that stand out to me. Number one from an underwriting perspective is your debt service assumptions. Currently, what has happened since the middle of March through today, the volume of lenders in the marketplace lending on multifamily properties like your size that we look at (150+ units) has drastically been reduced. A lot of CMBS, private lenders, bridge lenders, life companies have hit the pause button in their business. These lenders don’t just lend on multifamily assets, but they also lend on hotel projects, retail shopping centers, restaurants, other things like that… So I would imagine they hit pause in their business to see how their collections would be in terms of servicing their current debt on their balance sheet without needing to give out more loans and increase that debt and increase that volume of servicing.

So the debt underwriting assumption is a huge thing right now. It is a challenging time in the multifamily space to do value-add deals with bridge or private lenders. So one thing I would just encourage the Best Ever listeners to be is very cautious on what type of debt is feasible today. And hopefully, over the coming weeks and months, the lenders will stabilize. We are seeing some good indications that people will be getting back into the business, kind of unpausing, now that Covid has kind of settled in and the hysteria has died down a little bit.

So hopefully, some of these lenders come back into the game and force the agency lenders Fannie and Freddie to be a little bit more competitive. Over March and April of 2020 Fannie and Freddie increased their spreads in rates, because they were really the only lenders doing business, and there was a huge demand from buyers looking for new deals, or buyers looking to refi existing properties… So the rates went up.

We are seeing good signs that rates will stabilize, but if you are looking at an 80% occupied property that requires a couple million dollars in cap-ex renovations, I would be very inquisitive about what type of debt you’re gonna get. Is a bridge loan feasible? What sort of commitment can that lender give you? So that would be a huge thing for underwriting, is get your debt right, because the debt will kill the deal before closing, potentially, or it’ll kill the deal after closing, if the debt is not right.

Number two, it’s really that stabilization time period that we’ve updated in our underwriting. So even if we have a very strong property, with very strong occupancy, fundamentals, and job growth and population growth projected, we’ve done some minor adjustments to our underwriting to be even more conservative with the impacts of Covid. People may not move around as much, potentially, so that could impact occupancy. People could be moving back in with relatives, giving their apartment up for a couple of months if they’re laid off or furloughed… So those are just some considerations.

Our investment philosophy is to always be conservative when we’re underwriting a deal. So if we can increase the vacancy rate in which we are expecting the property to be at, it gives us a lot of comfort and cushion in the investment business plan to ensure that we can maintain the occupancy at the property and be able to run and stabilize the asset, given we don’t really know what’s gonna happen with Covid over the coming months.

Theo Hicks: Maybe you could quickly give us an example of what you mean by change in vacancies… So what have you been typically underwriting, and what are you underwriting as vacancy now? I know it’s gonna be very market-specific, so if you can just give us a ballpark…

Danny Randazzo: Yeah, in terms of a ballpark, let’s say if you were historically underwriting deals at 93% occupancy, when you close and maintain, and let’s just say the property has on average maintained a 94%-95% occupancy rate over the last few years, I would adjust and look at the occupancy with maybe a 7% drop. So maybe you’re looking at 85%, 86% occupancy at  the property, just to give you a level of comfort… And maybe you underwrite that to only remain for the next six or twelve months… And then we can kind of comfortably say in 6 or 12 months the market should be back to normal, so we’ll then assume a 93% occupancy once we stabilize.

Theo Hicks: Thanks for sharing that. Obviously, you’re director of marketing, so you guys are still actively looking for deals… Over the past 3 months or so, have you seen more owners wanting to sell, less wanting to sell, or has it been the exact same?

Danny Randazzo: I would say over the last two months, really when Covid broke in early March, the deal volume has kind of slowed down, where sellers may not be able to sell if they have huge pre-payment penalties with their in-place debt. Number two, buyers may not be able to buy because the interest rates have gone up, the volume of lenders has gone down… And a lot of investors, even if you think about it, whether  you invest with friends and family and private investor money, or if you go with private equity or institutional equity, a lot of those people have kind of just said “We’re gonna pause, we’re gonna see what happens over the next 60-90 days in the marketplace before we make an investment decision.” And while that makes sense in theory, I think there’s still good deals to be done.

We’re in the process of closing an active acquisition right now, which has been a fun learning process for us, going through due diligence with Covid… But I think there’s still really sound investment opportunities out there, and the biggest scare to me is just having money in the stock market when it goes up and down by 20%-30% in a day, which I think would give people a  lot of heartburn, potentially.

Theo Hicks: Okay, and what about from your investor relations standpoint, or whoever is responsible for finding new investors? Are you finding more people interested in investing in apartments, or less, or the same?

Danny Randazzo: Yeah, as the stock market continues on this rollercoaster and really scares a lot of people, we’re seeing a reasonable increase in investor interest. A lot of people are looking for stable investments that 1) are a secure place to store your equity, where it’s not gonna go anywhere overnight. You’re investing in a physical, real asset. It’s not a fictitious piece of paper or an internet technology-based thing. This is a  real asset. You can go there, you can see it. It’s not gonna go anywhere.

Number two, it’s investing in multifamily for the cashflow. So having great cashflow-producing assets — I always think about Benjamin Graham, the mentor and coach to Warren Buffet, educating about compound interest. So if you have money sitting on the sidelines, not doing anything, you’re really technically losing money, because you have the opportunity cost to invest that money, while it may be at a good rate of return; that would b an opportunity cost to sitting on the sidelines.

So if you sit on the sidelines for one year, where your money is not compounding, it really ruins the future value of that equity when you think about what it will be valued at in 30 years if it compounded at 6% or 7% interest year over year.

So having money and having a safe place to put it, like multifamily, is one reason why I invest. Of course, monthly cashflow is great, and the tax advantages that come with multifamily as opposed to really zero tax advantages coming from active investing or from the stock market – it’s just another plus that kind of is a good indicator for my family and my personal wealth to be invested in these assets.

Theo Hicks: Perfect. And then the last question, I guess more on a personal note – what types of things are you doing to make sure you stay sane, stay emotionally grounded during this Covid time? Because it’s pretty crazy out there. I’m just curious, do you have like a ritual you do every night before you go to bed, or what types of things are you doing just to kind of relax?

Danny Randazzo: I love to read. When I was growing up, through high school, I was never a big fan of reading stories or the required school books… But in high school, I stumbled upon Rich Dad, Poor Dad, and other investing books, and real estate books, and I love to read those books. So I stay pretty in-tune and mentally sharp by just reading more.

I’ve got four books that I’m working on right now, simultaneously. One is a shorter story that is less than a hundred pages, and I am about halfway through it. I’ve got another longer book – it’s the story of Jim Clayton, First a Dream. It’s an excellent kind of autobiography story about his Clayton homes, the mobile home manufacturing company, but they are so much more than that, and I’m loving that book right now. I’m almost finished with it.

And then I’ve got two other books that are on my nightstand. So that’s what I enjoy to do. It keeps me sharp, it keeps me sane, and it gives me great ideas for us to implement at PassiveInvesting.com.

Theo Hicks: Alright, thanks for sharing that, Danny, and thanks for joining us today again, and sharing some of the — I don’t wanna say ‘challenges’, but things you’re going through right now with Covid, and some of the changes you’re making to your business. We talked about your underwriting changes, we’ve talked about marketing, and more investors coming in… Overall, really solid advice.

As Danny mentioned, he’s been on the podcast before. He hit the nail on the head with his first episode number, it was 961. So if you just go to joefairless.com and go in the Search function and you type in Danny Randazzo, he’s got his own full page of content on our website, from all the interviews he’s done… So make sure you definitely check that out, so you can learn more about how he’s gotten to where he is, and then you can learn more about him and his business at passiveinvesting.com.

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

Danny Randazzo: Thank you, Theo.

 

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JF2064: A Passive Investors Perspective During The Coronavirus With Travis Watts

 Travis is a full-time investor and the director of Investor Relations at Ashcroft Capital. Travis has written some articles on our blog to help investors during the Coronavirus pandemic we are all going through today. As a full-time passive investor, Travis gives his perspective on what he is seeing in the current market and what he is keeping an eye out for. 

Inflation article

 

Travis Watts Real Estate Background:

  • Full-time passive investor
  • Director of Investor Relations at Ashcroft Capital
  • In 2009 he started investing in multi-family, single-family, and vacation rentals
  • Based in Denver, Colorado
  • Say hi to him and grab a free passive investor guide at Ashcroft Capital

 

 

 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“There is always a silver lining, there will always be opportunities that pop up. Look at this as an opportunity to educate yourself” – Travis Watts


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 Travis Watts. Travis, how are you doing today?

Travis Watts: Hey, Theo. I think I know you from somewhere, don’t I?

Theo Hicks: Yeah, I think I know from somewhere as well. If you guys don’t know, Travis is the director of investor relations at Ashcroft Capital. That’s how I know him. I met him at our first quarterly meeting. I’m looking forward to our conversation, because I haven’t been able to have a long conversation with him yet, so I’m looking forward to getting some advice… Just like you guys are looking forward to it as well.

A little bit more about Travis – he’s a full-time passive investor, as well as the director of investor relations at Ashcroft Capital. In 2009 he started investing in multifamily, single-family and vacation rentals. He’s based in Denver, Colorado, and you can say hi to him at AshcroftCapital.com. You guys should all be able to spell that by now.

Travis, before we begin, we’re gonna be talking about the Coronavirus today. Travis has some really good articles on our blog right now, so we’re gonna talk about one of those in particular, and maybe talk about the other one as well.

Before we get into that, Travis, do you mind telling us a little bit more about your background and what you’re focused on today?

Travis Watts: Sure, I appreciate that intro. So I got started in real estate, as probably a lot of people do, probably the majority of real estate investors – single-family. It kind of led to trying to scale that portfolio up… The problem that I had personally, which isn’t applicable to everyone, but I was working a full-time W-2 job, more importantly a 98-hour workweek job, where I was away from home, completely dedicated to that… And as I started trying to scale the single-family on the side, doing some flips and vacation rentals, things like that, it just got to be too hands-on for me, which — I had to go back to the drawing board, learn how to become a completely passive investor, what strategies and assets and things like that existed… And that’s where I ran into syndication investing in real estate.

I made a complete transition around 2015 through 2016, where I was selling all my single-family, I was going all-in into multifamily and syndications… So that’s brought us to the last 5-6 years. I came onboard with Ashcroft to just help spread education around passive investing and what benefits those can have for certain people’s lives.

Theo Hicks: Perfect. Thanks for sharing that. One article that I really liked was your article about inflation, and how people can benefit from the inflation from printing off two trillion dollars in cash… Do you wanna summarize that article? And then if there’s anything else you wanna talk about as it relates to inflation.

Travis Watts: Yeah, and again, I think that article is out there both on the Best Ever Community – I put it out there I think under my Bigger Pockets as well, things like that… So check it out. But the concept is pretty basic, really. This is a topic we could have talked about a year ago, two years ago, five years ago… And that’s just this idea that the Federal Reserve is printing money, every time we’re going into these crisis situations – 2008-2009, now this pandemic here being probably the worst in terms of what we’re gonna see in money printing… But that’s devaluing the purchasing power of the dollar.

There’s a lot of scary headlines out there that you read, about the mortgage crisis, and just what’s unfolding, and all this scary bad news, but here’s a way to look at it in the light of real estate, whether we’re talking single-family, multifamily, whatever. When you’re acquiring debt, so you’re going out to get a mortgage, you’re hopefully getting some long-term fixed-rate debt, depending on what you’re doing, meaning that you’re locking in a payment every month, that’s gonna be due. Let’s just call it $1,000/month for a owner-occupied home, that’s your mortgage payment. So that payment, on the debt side, is never gonna change for 15 years, 30 years, whatever kind of mortgage you get.

The idea is as we move forward and the Fed continues printing and printing, and the purchasing power of the dollar is going down and down and down, you’re basically using cheaper dollars to pay off that debt. So what is $1,000 in today’s money could be worth $200 down the road in the future. So it’s gonna make it much easier to pay off that debt long-term, and more specifically in terms of investment real estate, where tenants are paying that off anyhow. So that’s what the article is kind of about, from a high-level, for those that may not be tuned in. Yes, the Fed has already printed a couple trillion dollars, and that can quickly escalate to 4, 6, 10. I hear all kinds of numbers out there.

The scary thing to think about is — this is how inflation is created. Basically, inflation is the cost of goods going up year after year after year, so it takes more and more dollars to purchase the exact same thing, years down the road. So the crisis here, in my opinion, if you wanna look at the negative side of things, is we’ve got 2019, four trillion dollars in circulation. That’s like our money supply. So if the Fed’s gonna go and print four trillion dollars as an example, then theoretically we’re gonna have some massive inflation kicking in at some point, theoretically a doubling in price… Maybe not today or tomorrow or next year, but down the road.

So if anything, look at this in a positive light – we’ve got all-time low interest rates; it’s a great time to be refinancing projects, and potentially getting involved with real estate, if that’s something that you haven’t done yet or that you’re currently doing. So a little long-winded… There’s still hopefully some value in reading that article, but that’s the high level.

Theo Hicks: Obviously, it makes sense to get debt, but since I’ve got a $1,000 payment and I’ve got 100k (let’s say) sitting in my bank right now, and five years from now that 100k is gonna be worth 10k… Practically speaking, should I pay down my debt on my properties?

Travis Watts: Yeah, that’s a good question. The way I look at it is “What’s my alternative?” In general right now we have a lot of low interest rate debt for things like real estate, whereas a lot of folks might have at this time high interest rate debt. They might have personal loans from a bank, or credit card, or retail debt… Things they’re paying 10%, 15%, 20%, 25% annually on. That’s what I’d be focused on right now paying down.

And what I mean by alternatives – if you’ve got a 3,5% mortgage today, could that money be better utilized if you were to invest it in something that could produce a higher return? Like a 8%-10% annualized cashflow return. So I’m not giving any kind of financial advice to anybody, but it just depends on your situation, what kinds of debt you have, but certainly for the folks that are saying “I have $100,000 in the bank account. I’m just gonna let that sit and ride for the next 10-20 years as my little reserve account”, you’re most certainly gonna be losing a lot of that purchasing power over that time, so I’d be looking for ways — while safely and conservatively keeping your emergency fund in place, certain months of living expenses (3-6 months is what you commonly hear), I’d be looking at places to park that capital, things like real estate, that are kind of a hedge against inflation, somewhat.

Theo Hicks: Okay, thanks for sharing that. Changing gears a little bit – so you are a full-time passive investor… Most of the people I’ve talked to about the Coronavirus are actively investing, so we talked about rent collections, and making sure they can pay their mortgage payments, and asking how much cash reserves they have… But something that I’d be interested to ask you about as a full-time passive investor is are you still seeing opportunities to invest in right now, or has that slowed down? And if so, what’s your strategy over the next 6-12 months as a passive investor? Are you kind of in a holding pattern, are you still looking for deals? Things like that, if you could talk about that for a little bit.

Travis Watts: Yeah, absolutely. I guess the unique perspective or the benefit of not only being an investor with one group like Ashcroft, but being an investor with 14 different groups is I get invited to a lot of webinars, a lot of conference calls, I get a lot of email updates, I get a lot of “Here’s what we’re doing in terms of Covid” and all this kind of stuff… So I have a bit of a broad perspective on what a lot of folks are doing out there.

In general, this interview is taking place mid-April. This is our first real impacted month. This whole Corona thing got real serious towards the end of March, and then rent was due April 1st. So my opinion here is that a lot of people were already kind of set up and primed to pay their rent anyway. They already had it in the bank, or in their savings account… They were ready to go for April. I’m a little more concerned maybe with May and June, and however long we’re in this lockdown, and the economy is shut down, and things like that.

What I have seen more specifically, to answer your question, with these different syndication groups in general is a little bit of wait-and-see right now. It’s a little too early to start calling the shots, it’s a little too early to start saying “Oh, there’s all these new deals popping up, things like that.” It’s hard to look at a T12 statement and have that make a lot of sense, looking at 2019 numbers, when now we’re in this state where we don’t know what our collections are gonna end up being. So I’m a bit of the same mindset.

I did invest in some recent deal that have closed through the March timeframe, and I think one in April… But at this point I’m focused more on making sure I have adequate cash reserves personally on hand, in case things pop up; capital calls, whatever. Or best-case scenario, I just hoard a little bit of cash and then maybe by late summer there’s some deals popping up that make a lot of sense to get involved with, and we’ll have the cash to do it.

So that’s kind of where I sit. It’s a little bit of sit-and-wait probably through April and May, and hopefully we’ll know a whole lot more in June, and hopefully the numbers start making sense again, and the economy starts reopening. But we’ll see. Who knows.

Theo Hicks: Exactly. So definitely wait and see right now. So you mentioned that you’re getting a lot of communications from either deals you’re investing in with all types of sponsors… Do you mind walking us through, as a passive investor, what types of communication you’re getting from syndicators? More specifically, maybe tell us what a good communication looks like at a time like this, and maybe some things that you see and it’s kind of making you worry when you consider a bad communication.

Travis Watts: Something I’d talk about on the podcast is why I like syndicate groups that not only distribute monthly distributions, but hand-in-hand they report monthly. I think in a time like this it means a lot. No one wants to sit here 3-4 months to wait on an update to see how their property is doing.

Some groups to this point that are quarterly that I’ve invested with have literally sent out one communication since this whole thing started to unfold… And I don’t appreciate that. I’m all about transparency and proactiveness, communication… So what does that prompt investors to do? Call. Email. Just bug you to death. So why don’t you just get the information out?

What am I seeing is a lot to do with helping the tenants, helping educate how they can file for unemployment if they’ve lost their jobs, how they can maybe get on some kind of payment plan and maybe make a half payment on the first and a half payment on the 15th, resources for companies hiring in the local area… There’s obviously some businesses somewhat thriving right now. It’s kind of a weird word to use… Amazon’s hiring, grocery stores are hiring… There’s a lot of opportunities. I invest mostly in workforce housing, B and C class properties, so a lot of these folks are in an income range of 30k to maybe 60k/year household income… So a lot of opportunities are available for folks like that, depending on the area where your property is located.

So in general, that’s the communication I’ve been getting – let’s wait and see how collections pan out, and here’s where we are as of today, and how does that compare to the previous quarter. Look,  I don’t need a communication every day, because it doesn’t make a lot of sense, but I think at least a monthly communication is ideal. A lot of groups have been doing webinars, Q&A calls, things like that… And I think that goes a long way as well in a crisis situation like this.

Theo Hicks: Another article that you wrote on the website – and I’m sure it’s on LinkedIn and your Bigger Pockets profile as well – is about the mortgage crisis. Do you mind talking about that for a little bit?

Travis Watts: Sure. That one’s a little more technical. I think there’s a lot of key elements that are just probably better read through the article itself… But basically, what you’ve been hearing a lot in the headlines is things like this mortgage forbearance, or people aren’t paying their mortgages, they’re not paying the rent… Well, the thing is there’s a chain effect here. It starts with, let’s say, the homeowners saying “I’m not gonna make my mortgage payment”. But then what a lot of people don’t understand is that mortgages are often sold. And they’re sold, they’re wrapped up into collateralized mortgage obligations, investments basically that people can invest in, where you’re investing in different tranches, and things like that…

So you’ve got the bank or the lender, you’ve got the tenant, and then you’ve got the investment, then you’ve got the investors behind the scenes there… And it’s like “Who’s left holding the bag here?” That’s kind of what the crisis is – trying to figure out what kind of stimulus is coming for who exactly; it’s gonna start with probably the person that’s supposed to be paying their rent or their mortgage, and then it’s gonna go as a trickle-down effect. But it could completely implode parts of the lending industry… So it really is a crisis in a sense, but… Anyway, there’s much more detail that’s probably better found in the article… But yeah, that was another recent one that I’ve just put out.

Theo Hicks: You don’t have to answer this question if you don’t have to, because I’m putting you on the spot, but I did read recently that Chase changed their mortgage criteria… So they’re only lending to people that have a credit score of 700 or higher, and then 20% down payments… Which seems to be one of the first residential lending institutions to make changes such as that.

I guess my question would be “Do you think that that is gonna be an opening for other lending institutions to also change their lending criteria?” And if yes, what kind of effect do you think it’ll have on the overall real estate market?

Travis Watts: Yeah, I’m happy to give a high-level overview… And that’s kind of how that article ends, that I wrote – what are the practical takeaways here? Well, if you’re selling a home, it may be a little bit harder, for obvious reasons, to get a buyer, just because people aren’t getting out as much, or they  may not be in the investment market space as much right now… But more importantly, to your point, someone who’s qualified. So which lenders are still lending? And if they are, like you said, I think that banks are gonna be tightening up quite a bit right now… Obviously, to lower their risk. They don’t want any defaults, and there’s probably a lot of defaults coming their way.

In fact today – maybe yesterday – was the earnings report for a lot of banks, and they’re in a bad place right now. They see a bit of a grim immediate future here, at least talking through the next quarter. With all of this mortgage forbearance, and people not paying, and unemployment spiking… It’s a tough time to be a bank.

If you’re buying – to your point – you may have to have a little bit better credit, you may need to put a little bit  more down… If you’re selling, it’s a little harder to find a qualified buyer… Obviously, that’s gonna have an effect in the residential space, of course, 100%. But in no way, shape or form, in my opinion, are we talking about something similar to ’08, ’09 housing real estate crisis. That’s not exactly what’s happening this time.

Theo Hicks: Thanks for sharing that. Is there anything else you wanna mention as it relates to the Coronavirus and real estate that we haven’t talked about already before we hop into the lightning round?

Travis Watts: There’s always a silver lining to this stuff. Even ’08, ’09 — yes, it’s bad news, and there’s negativity everywhere, and nobody knows, and where is the bottom, but there’s always going to be opportunities that pop up… Not only in the syndication space, in the publicly-traded stuff… Look at this as an opportunity to 1) above all, educate yourself. This is a really great time to educate yourself. Figure out what your goals are… And it’s a great time to get started. As you alluded to in the beginning of this podcast, I got started in 2009. Well, that was not quite the absolute bottom of the market, but it was pretty near and close to it. And riding the way up over the next decade is helpful, for a lack of better words. It wasn’t the perfect time to get in, but it was a pretty decent time… So just hopefully you can keep your job, and your income, and your business running through this. Hopefully the stimulus money can help soften the blow on that front, and then wait and see what opportunities can come over the next 6-18 months or so.

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

Travis Watts: Let’s do it!

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

Break: [00:19:48].09] to [00:20:50].16]

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

Travis Watts: I think you just said the title of it – it’s the Best Ever Apartment Investing Book that you and Joe wrote. That’s actually a really great book that you guys wrote. I actually just bought that the other day and gave it to someone who was looking to be a GP themselves.

One that’s kind of a classic, that I’ve recently re-read is Awaken the Giant Within, a Tony Robbins book. I don’t even know when he wrote that. Probably in the ’80s. But man, is it just timeless; great insight and info for self development.

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

Travis Watts: What would I do next… I’m trying to make this as short as possible, but I’ve always been a huge advocate of the FIRE Movement (Financial Independence, Retire Early), which has a lot to do with reducing your expenses and overhead, making as much money as you can make, and investing that into things that produce passive income. I would stay on the passive income route, I would just look for an opportunity to make as much income as I could, and put my focus back there again.

Theo Hicks: Do you mind telling us about a deal that you’ve lost the most money on? How much you lost, and the lesson that you learned.

Travis Watts: Yeah, I invested in something I clearly didn’t know that much about. It was a distressed debt syndication fund. Sometimes I experiment outside of real estate; that was one of the first big experiments I did. I put maybe — I don’t even know; there were two funds, and I put maybe 175k in, and lost (to date) maybe 40%-50%. It could be a lot worse… It’s in a receivership now, so who knows what that will end up being… But it was a rough ride.

Theo Hicks: What about the best ever deal that you’ve done?

Travis Watts: The best ever deal was actually in the single-family space during — I think it was like 2014 to 2015. I bought a house from a bank, I paid 97k for it. I didn’t do anything to it. I just rented it out as is, and I sold it two years later for 215k.

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

Travis Watts: My time. Week to week I take calls with all types of people, not only investors, but people looking to house-hack, or do a fix and flip, or become a GP, sometimes an LP… I just love sharing experience, talking through things, handing off resources… I just mentioned the book you wrote with Joe – I gave that as a resource to someone just last week… So just sharing my time.

I just wish that there had been more people in my life when I got started, that I could have reached out to, to say that classic “Hey, let me pick your brain for 30 minutes.” I give people that opportunity.

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

Travis Watts: Probably email. Travis [at] ashcroftcapital.com. Or ashcroftcapital.com/passiveinvestor. I’ve got a free passive investing guide there and it connects you with me if you’d like to jump on a phone call as well.

Theo Hicks: Perfect. Best Ever listeners, make sure you take advantage of that, and make sure you check out the two articles that we talked about today. The first one is “How inflation can benefit you over the next decade”, and the second one is “The Mortgage Crisis: Will You Be Affected?” As Travis mentioned, the Mortgage Crisis one goes into more technical detail on that.

Besides those two articles, the one other main takeaway that I got was you talking about the types of communications you’ve been getting from different sponsors… You’ve got some people who haven’t reached out at all, some people that are reaching out a little bit too much. The sweet spot is monthly communication, letting you know what’s going on at the property and being transparent and honest.

I think that is it… Travis, it’s been nice talking to you. Best Ever listeners, as always, thanks for listening. Have a best ever day, and we will talk to you tomorrow.

Travis Watts: Thanks, Theo.

 

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