JF2734: 3 Creative Ways to Find Commercial Development Deals ft. Glenn Kukla

In part two of our interview with Glenn Kukla, CEO of Kukla Capital Partners, Glenn answers audience questions about pivoting his business during the 2008 recession, the most creative ways he’s found deals, and his ultimate strategy for networking.

Listen to part one of this series here: JF2729: 2 Effective Ways to Work with Lenders During a Recession ft. Glenn Kukla

Glenn Kukla | Real Estate Background

  • CEO of Kukla Capital Partners, a real estate development company and investment fund.
  • Portfolio: $4M in net value. Over $50M in real estate projects he has developed and/or financed.
  • Grown and privately held his investment fund over 40% annually since 2009.
  • Based in: Cincinnati, OH
  • Say hi to him at: LinkedIn

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TRANSCRIPTION

Slocomb Reed: Best Ever listeners, welcome back to Cincinnati’s Best Ever Real Estate Investor Mastermind. We are here for part two with Glenn Kukla. This is a Skillset Saturday. We’re going to talk about the skills that helped him in his commercial development business to get through the Great Recession. We’ll also have some Q&A for those people who are here, attending the meetup live, in this episode as well. Glenn, let’s dive right in.

All the Best Ever listeners just heard you discuss your career on the whole, with some of the highlights and probably low lights of the Great Recession. We talked about the clear skill that you have developed in building relationships with key partners and critical people, that have not only brought you deals, both buyers and sellers for your deals, but also helped you get through some of the properties during the Great Recession that went cashflow-negative when you weren’t able to make your mortgage payments. Tell us more about how you went about building relationships with commercial lenders for those development deals, ’04, ’05, ’06, that brought two-thirds of them to want to keep working with you when they weren’t getting their payments.

Glenn Kukla: Sure. There’s the old saying that there’s only one thing in this life that you have complete control over, and that’s your integrity. I believe if you conduct yourself in a manner of integrity, early on in the process, middle of the process, later in the process, eventually you will catch up and pay dividends. I feel that when we were putting together these real estate deals and requesting money from these different lenders, it was building on our portfolio of previous properties and showing that we were doing good work, we were being honest, we were being good partners in the community, developing good real estate that was good for the community, bringing in good tenants – that helped build the character of our company and that’s what allowed lenders to keep coming back and giving us money. That’s also what allowed us to get a lot better cooperation when we did have to default on some mortgages. So it’s that transparency when you talk to those people.

Slocomb Reed: What else were you doing to demonstrate that integrity to potential lenders for your deals? Is it really just transparency, open your books, show them everything? Is that the secret, or were there other things that were required of you to build these relationships?

Glenn Kukla: Networking is a big part of it. Before I was a real estate developer, I was actually a commercial loan officer with Cincinnati Development Fund. They’re still around to this day, they’re a great private nonprofit lender, based downtown, and they pull money from other lenders to do deals that each lender wouldn’t do individually. These lenders like Fifth Third Bank and PNC pull their money to take on risks they don’t want to individually take. When I worked for that bank, I got to meet a lot of these commercial lenders; so when I went to private development, I already have a relationship with those commercial lenders. So just getting out there, again, just networking… Even if you network by means of having a different career, but that career pivots you into what you ultimately want to do.

A lot of people start out as realtors, which is a great way to network, and they end up becoming very successful landlords. I’ve met some realtors here tonight, and that’s a great way to build that network and prove your integrity to the community. Some of it also, honestly, is just the quality of the work that you do. These lenders have gone through and done construction inspections, and when you borrow money and they want to see the work in progress, they can kind of tell… Cincinnati is a big city, but every community is small, whether it’s the building inspector, the construction inspector, or even just subcontractors, they figure out pretty much right away if you’re a shitbird or if you’re a good guy. And the good guys seem to be the ones that keep getting the good deals, and word gets out. So again, it’s just conducting yourself in a good way and doing good work… But also just being outgoing, and going to things like these meetups, and listening to Slocomb’s podcast every week. I had lunch with Ash Patel about a month ago, and every time I have lunch with him, I feel like I’ve networked with 10,000 people. Just don’t be afraid to open your wallet and buy lunch for people; I’ll buy you a beer, I’ll buy you lunch, I’ll buy you coffee.

Slocomb Reed: Did Ash let you pay for lunch?

Glenn Kukla: No, he didn’t, although he should have, because I offered. But always offer to pay for lunch; just bribe people to go out with you for beers and lunches and having that kind of connection. If you’re an introvert, it’s going to be harder. There are other ways to build wealth and build a portfolio of real estate if you’re an introvert. But if you’re an extrovert, whether you’re naturally an extrovert or you can fake it, it helps; I’m not going to lie.

Slocomb Reed: Yeah. If you’re an introvert, fill the tank at home and then go network. Another piece to integrity that you talked about in our last conversation – I’m paraphrasing you, Glenn, so correct me here… Part of operating with integrity and valuing your relationships is confronting your problems. When you know that you’re not going to be able to come correct in a business relationship, you haven’t shied away from that. You said there were times when you wanted a property to take the keys back, because you didn’t see a future of cash flow. But when you knew that you weren’t going to be able to perform sufficiently for your lenders, to be able to make your payments to your lenders, a part of your success came from approaching those lenders to say, “We’re not going to make it. We still believe that we’re the best person to operate this asset. [unintelligible [00:08:15].17] still in best hands with us, even when we’re not making our payments.”

Glenn Kukla: That’s exactly what we do. We were proactive. The moment that we knew we couldn’t pay the mortgage, we went to them right away and said, “This is why, and here’s all the bookkeeping, here’s the P&L, and the balance sheet.” Not just in real estate, but in life – if you cause a problem, but you’re the first one to say “I own this problem,” you’re going to get a lot more forgiveness from the other side than if you try to run and hide and then they bust you trying to cover up and lie about it. There are times where you time the information that you want to get out. You don’t want to be so transparent that you’re explicit with information that would be better timed if you waited for a day or two or something to change.

I’m not saying that you have to be transparent about everything all the time; sometimes you do need to be discreet. But in terms of problems, the best way to resolve financial problems is to own them, and you immediately get a lot more cooperation out of the other side. The same thing for contracting. If you hire a contractor and the contractor is not doing a good job because it’s something you caused, and you go to them and say “I’m sorry, I caused this.” I feel like you cand get a lot more cooperation from that contractor and they’re going to be a lot more flexible working with you, versus getting into that blame game thing.

Slocomb Reed: You shared previously about a development deal in Newport, Kentucky, which is just across the river from downtown Cincinnati, where the cost to develop a warehouse into 41 apartments and a bunch of retail was like 5 million, and you ended up being able to buy the note on the property for 2.5. Talk us through the steps in that process. The building is developed, partially occupied, not cash-flowing, you had to go back to the bank, Chase Bank, they agreed to let you continue in operation and make partial payments, and then they sold the note for… Take over from there.

Glenn Kukla: We never found out, but I think they sold the note for about 25 cents on the dollar.

Slocomb Reed: Was it a $4 million note?

Glenn Kukla: Well, there were a couple of lenders involved, so I think some of the lenders just wrote off their piece. But everything got bundled, I think, by Chase, and they sold the whole deal to a private capital company called Silver Point out of the East Coast somewhere. We don’t know what they sold it to them for; we’re guessing 20 cents on the dollar or 30 cents on the dollar.

After we defaulted on the loan, but told Chase Bank that we wanted to work through this and we still wanted to manage the property, they said “Yes, you can manage the property. Just send in your P&L, your profit loss statement, and send it in 92% of your cash flow.” They then sold it to the private capital company who basically was our new lender, so we started sending them the mortgage payment.

They actually adjusted the mortgage down, they said, “Okay, now your mortgage is 2.5 million, so your payment is only $8,000 a month, not $12,000.” At that point, rents were going back up and we were like “Great. We can start doing the full monthly payment of $8,000, now that the payment is lower. So we got in their good graces and we communicated with them very well. We were always in contact with them, sharing all of our financials, letting them inspect the property. And then I think it was just kind of luck. After about a year and a half, they said, “Well, if you want to just go ahead and buy the note from us, you can buy the note. It’s 2.5 million bucks.”

Slocomb Reed: How did you finance the purchase of the note?

Glenn Kukla: We went through First Financial Bank, which is a great lender. First Financial Bank is like one of those lenders, I think, that they’re big that they can do big deals, but they’re based in Hamilton, so you’re dealing with local folks. First Financial Bank did the refinance to take out Silver Point Capital.

Slocomb Reed: And what did that debt look like?

Glenn Kukla: That was about 2.5 million bucks, and I think it was like a 20-year amortization; I can’t remember the rate back then, but it was probably 4.5%.

Slocomb Reed: So you got 100% financing to buy off the note?

Glenn Kukla: Yeah, we did get 100% financing, because at that point, the building had then started slowly appreciating back, so maybe it was worth 3.2 million. We got 80% loan to value, it worked out great. I think maybe we put a couple hundred thousand dollars of cash in, and we built up a little bit of money, putting it back in those deals.

Slocomb Reed: Hopefully, all of our Best Ever listeners and all of you here at the Best Ever Mastermind have learned something about the value of building relationships. We are going to take questions. If any of you would like to get up and go to the mic… Anything that’s come from either of our conversations with Glenn that you want to ask about, feel free to go ahead and get up and ask. And feel free, also, if you want to introduce yourself, just your name should do it.

Todd Kelsey: Todd Kelsey, thank you for your time. I appreciate the insight tonight. Slocomb mentioned most of us are here are residential investors. Could you give us some insight on holding costs and expenses when you’re waiting for that unicorn tenant, as you said, for the school or the other property, that you did when you’re developing those?

Glenn Kukla: You have to budget for those, you have to factor that in because you’re going to pay for those costs as you go in. A lot of times you defer those costs because you don’t put money in until the unicorn comes along, and then you build to suit. So for the storefronts that we would develop, we didn’t do a full development, we’d do a white box, which means you’re essentially turning it into a white box. You’re cleaning it out, you’re putting up some basic drywall, painting in white; you’re not installing a furnace, you’re not installing plumbing, maybe you’re bringing plumbing into the building. So you lower your carrying costs. Your carrying cost is as low as possible until you get that unicorn tenant, and then you build it out to what they need. But other than that, you do have to pay; you can’t go to the bank too early in the process and say “I don’t have any money.” You have to wait until they’re on, when you truly don’t have the money.

Slocomb Reed: Glenn, a follow-up question on that. You find an opportunity to buy a unique property that’s going to require a unicorn tenant. How do you determine how much you’re willing to pay for that property upfront?

Glenn Kukla: As little as possible. Really, sometimes it comes down to the deal, but…

Slocomb Reed: You’re the one with the background in finance; do you have a ceiling for this? Do you have a way to calculate how much you’d be willing to pay? I’m not asking for exact dollar amounts, because it’s possible that someone who’s listening would be a seller. But is there a formula? Do you have calculations for figuring out how much you pay for unicorn properties?

Glenn Kukla: Sure. The three approaches to valuation. There are comparable sales, there’s the income approach, and there’s the replacement value. I think generally you would look at either the comparable sales or the income approach, and you say “Okay, if one’s just like this building are selling for 300,000, 300,000, 300,000, maybe I’ll offer them 250,000.”

Break: [00:14:24][00:16:20]

Slocomb Reed: Did you have a lot of sales comps for a school building in an economically depressed part of Cincinnati?

Glenn Kukla: Not many. That’s why I offer very little. But if I were to come across a nicer school building…

Slocomb Reed: You actually paid 20,000 times more than the asking price for that property.

Glenn Kukla: I did, it was very foolish.

Slocomb Reed: For anyone who didn’t listen to the first episode…

Glenn Kukla: They offered to sell it for $1 and I countered with 20,000. Why did I do that…?

Slocomb Reed: So when you don’t have sales comps, and you don’t know what the income is going to be, because you’re waiting on a unicorn, the first thought that comes to my head is, if I’m buying this, it needs to be cash that I have sitting in an account that doesn’t require anybody else to trust in me, that doesn’t require me to borrowing any money… It’s just a personal gamble that I’m taking, and I know that I’m going to want to keep it small. But I don’t know how to size that bet. So when you don’t have the income approach, when you don’t have sales comps, are you just going with your gut? Are you just keeping the numbers as low as you can? Is it just about, “Okay, for $20,000, I can have some fun putting this together?” What is it?

Glenn Kukla: Sometimes, for $20,000, “It’s fun, I can put it together, so why not just take a chance?” Other times it is, if you don’t know what it’s worth, but you’ve got a motivated seller – that’s when I like to do the pay now some and pay some later, where I’m going to pay you whatever it is you need now to pay off your bills and keep your wife happy and whatnot, but we’re going to share some of the equity on the upside. We don’t know what that upside is. So I’m sharing some of that unknown with the seller.

In a situation like that, I don’t know how much the commercial building is worth but I know the seller is motivated. I’m going to fight like hell to get you to agree to the “I’m going to pay you some now and we’re going to share profit later.” I think that’s almost the only way you can carve out that deal. If you don’t know what the comparable sales are, you can’t do the income approach, because you don’t have a tenant yet, you really don’t know what the building is worth, but they want to sell it, they want to do something with it, then you do the partnership thing.

Slocomb Reed: Have you ever had a situation like that? I’m imagining some of my own residential-like single-family investment deals… The seller wasn’t willing to just do it on a handshake, so there was some sort of seller carry-back financing. So I like these terms, but I want a lien on the property for X amount. Has that ever come up?

Glenn Kukla: No, it has not. It could come up, and it would, but I usually talk them out of it. I like to be in control, and that’s the key, because the property’s in my name and I’ve paid cash. Sure, if you want to put a seller-held financing on it or something, that’s fine. You can get around — I don’t want to say get around that, but you can say “Well, let’s do an operating agreement.” When I did a deal with Jim Carmichael and [unintelligible [00:18:48], put together an interest in the fund that I used to buy the property. So they’ve got some recourse, they’ve got some sort of way to claw back that money if I’ve screwed them over. So they didn’t have the title of the property or the lien on the property, but they had an interest in the money that I used to buy that property, if that makes sense. That got them comfortable.

Slocomb Reed: That also makes more sense, effectively sharing a portion of the company, selling a portion of the company, or giving a portion of the company that purchased the property. It makes a lot more sense too if what you’re offering is a percentage of the profits from your sale, because their profits would just equal their percentage ownership of the company. So that makes way more sense than my idea. Thank you, Glenn.

Glenn Kukla: You don’t need to be on the side, let’s not worry about that. It’s called the ownership of beneficial interests. It’s a legally binding document that protects that person. And you want to get the other person comfortable. You want to say, “Hey, look, I truly have your back. We’re going to make money together. I’m going to give you a little bit of money now, but let me do my thing, and then we’re all going to have a big pile of money at the end of the rainbow. How we get there, we don’t know. It may take one year, it may take three years, it may take five years, but you’re going to be protected and we can put in writing with the beneficial interest document.”

Part of it is just negotiating and selling like, “Look, trust me. I want to be your buddy. We’re going to make money together.” There’s a little bit of puffing up like, “This can be great if we just all play together nicely.”

Garth: Hi, Glenn.

Glenn Kukla: Hi, Garth.

Garth: Building relationships is important, dealing with city people and the government is a different animal… So give us some advice on how you approach building relationships with mayors and those kinds of people. Because you’ve done a great job in Covington and Newport. And obviously, dealing with those people is a little different. Great job with tonight, by the way.

Glenn Kukla: We can break it down into two buckets, at least. Let’s start off with building inspectors first. I’m sure some of you have had building inspectors you tried to deal with. If anybody can smell bull, it’s a building inspector. And once you get on their radar, you’re never going to get off it. So if you’ve got to do things right, it’s with a building inspector. I hate to say it; we hate building inspectors that make us do things we don’t want to do, and it doesn’t make sense half the time. But my God, if you get on their bad side, it takes forever to get back on their good side. So you’d better just go ahead and do the right thing. I think a lot of people get in trouble with building inspectors because they don’t hire an architect and they should have, or they didn’t get a permit and they should have. I know where the gray area is and I’ve pushed it to the gray area, but I’ve never pushed it so far where it pissed off a building inspector. So make sure you treat those people right.

The other bucket would be elected officials. A great way to network with elected officials is to contribute to their election campaign. It’s not bribery, but you’re giving them money. [laughter] Again, this also gets back to networking. If you want to network with people, go to a fundraiser for a candidate and contribute to their campaign by writing a check when you enter that fundraiser. Meet their people, meet that official; they might get elected, and then you know them. So again, that’s the power networking, but it also comes with writing a check. Our lender was famous for it; if there were nine people running for city council, it didn’t matter what party they were in, they all got $50,000, because he wanted them to pick up the phone when five of them got elected.

Slocomb Reed: How has your networking with politicians been advantageous to your development deals?

Glenn Kukla: It’s not like you’ve got people in your back pocket, it’s just you’re putting your networking out there. Whether you’re networking with politicians or just people you meet at a meetup, it’s just one more layer of getting out there and networking. So I wouldn’t say that networking politicians give you some kind of special favors or any kind of magical powers, it’s just one other layer of people you’re networking with, who are keeping their ears open for deals for you. And if you ever need to call them, you get a call back, because politicians are just like other people. Most politicians don’t make enough money to retire on this. Most politicians, especially local city council people, local city mayors, it’s [unintelligible [00:22:31].00] volunteer.

Slocomb Reed: Does anyone else have a question they’d like to ask?

Participant: Thank you for tonight. Question – how did you stay motivated through that whole downturn of 2008? Can you talk a little about that, and how you just kept going? Because it was, obviously, a rough point for everyone.

Glenn Kukla: Honestly, I had nothing else going on. I mean, I had no other alternatives. Part of it is you get emotionally invested. When you own a house or you renovate a building, and you’ve gone through that creative process, now it’s your baby; you don’t want to let go of your baby. There is kind of an emotional attachment. I would say the emotional attachment kept me going. And also just knowing that if you stick to it, things will work out. I’ve read The Art of The Deal by Donald Trump and he talked about that sometimes you actually do want to go through bankruptcy, because then you can renegotiate better terms. So maybe in the back of my mind I was like, “Okay, somehow this chaos is going to bring some kind of opportunity. As long as I’m in the middle of the chaos and not completely checked out of it.” Part of it is just you have to always be tenacious, you have to practice being tenacious by never giving up.

Darren: Hi, Glenn.

Glenn Kukla: Hi Darren.

Darren: We talked a lot about networking and building relationships, so I was curious about the most creative way you’ve ever actually found or gotten a property.

Glenn Kukla: There are a lot of creative ways I’ve gotten properties. One story I like to share was the guy that would cut my hair told me that a house had burned down in Kenton Hills, which is a beautiful neighborhood right by [unintelligible [00:23:53].23] Woods, great view overlooking the city. This guy burned down his house, nobody can get hold of him, the neighborhood is all mad… So I found out who the owner was, and he was this crazy recluse. I went to his house to knock on his door and make him an offer. It was like Silence of the Lambs. It was like, “Hello?” Actually, he wouldn’t even answer the door, but there were about 300 beer cans in his front yard. He would just drink his Busch Light and chuck it out the window. I looked in his window and he was a hoarder. He had these pathways through the garbage in his house.

I saw the back of his head, he was watching TV. I’m knocking on his door, “You better answer, because I want to make an offer on your house”, and he wouldn’t answer, he wouldn’t answer, he wouldn’t answer. I left. So I bought a 30-case Busch Light, and I hired DHL or CityDash to courier it over. But before I sent it over, I typed up a letter and I put it in a weatherproof sheet protector, because I didn’t know it was going to rain that day. The letter said, “Dear Mr. Corman, I’m interested in your house at 1111 sunset. I would like to make you a generous offer.” I used the word “generous”, because it’s ambiguous enough… Generous in favor of who? I don’t know, but it’s going to be a generous offer.

So I had city dash deliver the 30-case Bush Light, and I think it was around December 20th, because he called me back on December 21st and said, “Glenn Kukla?” I said, “Yeah.” He goes, “This is Robert Corman.” I was like, “Oh, I’ve been trying to get a hold of you.” He goes, “Thanks for the Christmas present. Let’s talk about selling my house.” So that’s how I got his attention. He was literally a recluse that nobody could get hold of him because he didn’t want to talk to anybody. But I found the one thing that got his attention.

Now, he also went dark about a few weeks after that, because again, he just was in and out. So I bought the tax liens on the property, knowing that if he ever tried to sell it to someone else, at least I’d have some kind of way of getting hold of him, at least later on in the process. I really wanted that property.

I also got hold of his brother, and again, this is kind of a relationship thing. I didn’t know his brother, but I knew he had a brother who was an investment advisor and lived in a nice part of town. I got hold of his brother and said, “Your brother is going to go to jail, because he’s neglecting this property. It’s burning down, it’s got tax liens, it’s got work orders against it. I will buy it from him and make this problem go away. I will take away all his problems and all your family problems if you just tell your brother to sell it to me.” So the sane brother called the insane brother and said, “Sell the property to Glenn.” The insane brother sold it to me. Part of it is just getting to know the people around the seller, befriending them, and saying “Look, I have a solution to your problem.” The solution is money. But it’s also taking away all that pain.

Slocomb Reed: Awesome. Well, thank you, Glenn, and thank you Best Ever listeners for tuning in to our part two with Glenn Kukla at Cincinnati’s Best Ever Real Estate Investor Mastermind. If you liked this episode, please do follow our show and subscribe, leave us a five-star review and share this and part one with someone who you think could gain a lot of value out of learning how Glenn Kukla has built his real estate development empire through building relationships. Thank you and have a Best Ever day.

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JF2722: 3 Benefits to Investing in Mixed-Use Developments ft. Sam Bates

In this episode, Sam Bates—CEO and Founder of Bates Capital Group—shares the advantages of investing in mixed-use developments. He also walks us through the details of his first commercial development deal, the challenges he’s faced, and how he scaled his business to $190M in AUM.

Sam Bates | Real Estate Background

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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, Sam Bates. Sam is joining us from Dallas, Texas. He is the founder and CEO of Bates Capital Group, which has $190 million of assets under management. Sam has a 12-year track record of real estate investing experience. Sam, thank you for joining us, and how are you today?

Sam Bates: I’m doing great, Ash. Thank you for having me. Looking forward to discussing real estate with you.

Ash Patel: It’s our pleasure. Sam, before we get started, can you give the Best Ever listeners a little bit more about your background and what you’re focused on now?

Sam Bates: Definitely. From an early age, I was always intrigued by money and started investing when I was 11 or 12 with the help of my grandpa. I went and got my undergrad in finance, worked at UBS as an investment analyst, and thought I was going to do that for the rest of my career. I decided to go back and get my master’s in personal financial planning, and I got an MBA during that time period. I quickly realized that the financial planning route – they said they’re fiduciaries, but they aren’t. They just stick people in the same investments, or at least back then, if they had 250,000 or 10 million. After the stock market crashed in ’08, I realized I needed to find another avenue and I started investing in real estate. I love real estate, just because you can truly add alpha. People in stocks and equities talk about adding alpha, but I feel like buying assets or developing assets so you can surely add that return that people can’t get in an investment. I think that’s why syndications and private placements are so great.

Now we’re focusing on acquisitions, developments on multifamily, we develop single-family, we do lot developments, we do a lot of different things. We’ve owned some commercials, RV parks… So just anything where we can find value, we’ll look at it.

Ash Patel: That’s a lot of ammunition you just gave me. Can you explain to our Best Ever listeners what adding alpha is, or chasing alpha?

Sam Bates: Chasing alpha is basically providing more return than what the index or the market can give. The higher the alpha on a stock, the higher the return probability is, but also the higher, essentially, the volatility is. I think with real estate, you can correlate it — especially if you have a stock portfolio, you can correlate it where it’s actually more diversified and create higher returns than you might just with a regular mutual fund or ETF portfolio.

Ash Patel: Thank you. Sam, can you give me an idea of the timeline from when you got into the finance industry – how many years later was it that you got into real estate?

Sam Bates: I started in 2005 at UBS, and then I got my master’s, and I was in consulting actually, doing tax consulting and optimizing business operations for a few years, and I started investing as a limited partner in 2009, then did a lot of single-family homes on my own, the BRRRR strategy, fix and flip… I did a development, and I realized that you couldn’t scale in single-family as you can in multifamily, so I transitioned to multifamily as a general partner in 2016, and have been doing it for six years.

Ash Patel: Got it. Sam, you walked away from a pretty lucrative future in banking, being a personal financial planner, very well-educated. Was that a hard decision, to leave all of that behind?

Sam Bates: It was, but at the same time, I didn’t feel fulfilled, honestly. I knew that there had to be a better way to, I wouldn’t say make a living, but just to enjoy life and to make an impact. Ever since I was little, I’ve always wanted to make an impact. I grew up on a farm, where everybody in the community was farmers, or very blue-collar people. I didn’t quite understand business at that time and I always thought you only could make an impact being in the medical field. For a long time, I thought it’d be a doctor. But now I’ve realized that the US, and really the world in general, needs a large helping hand with financial literacy. We don’t get that from our educational systems. Luckily now, with podcasts like yours and all these other podcasts that have popped up on educational platforms, people are getting more educated on how to invest. But the mass majority of people still have no clue on how to invest. I love being able to share my wisdom about real estate or other private placements that they don’t know anything about.

Ash Patel: Sam, I’m glad you shared the issue with being a fiduciary. I’ve had the luxury of interviewing a number of former financial advisors and planners, and I always ask them, “When you were in the finance industry and you found out how great real estate investing is, why didn’t you recommend that type of investing to your clients?” Most of them, right off the tip of their tongue, will tell you, because there was no way for them to make money on it. There are no kickbacks, there are no instruments where they get bonused on how many real estate investments they put their clients in… So what a huge gap that they have there.

Sam Bates: Yeah, that’s exactly the case. I think they don’t get compensated, so they aren’t going to recommend clients into that. Also – and this was myself when I was a financial analyst – most of them don’t understand real estate. Financial advisors are glorified salespeople, and they’re trying to push a product, sell a product, and every sales position has numbers they have to hit, and financial advisors have to hit different numbers. I saw 15 to 20 people will get fired because they weren’t hitting numbers in a couple of years. So it’s more about meeting those goals and objectives than truly doing what’s right for the client, unless you own your own RIA or small investment firm; but the big brokers, it’s all about numbers.

Ash Patel: Just churning and burning.

Sam Bates: Exactly.

Ash Patel: Did you leave your career after you became successful in real estate, or were you in the beginning phases of it?

Sam Bates: I spent 12 years basically in corporate America, and I was doing it in tandem. After grad school, I worked at a consulting job for five years, then I worked at an energy company for five to six years, doing tax planning, tax strategy, business optimization. Concurrently, I was invested in real estate, because I didn’t want to stay in tax for the rest of my career. I saw how lucrative real estate could be, and I saw the freedom it gives… When I say freedom, I don’t necessarily mean time freedom; I spend as much time working in my business now as I do than ever. But I’m spending two months in Colorado, where if I had a job, I couldn’t do that. It just gives you a lot of flexibility, and you get to make an impact. Hopefully, the investors that you bring up, and essentially create a better life for them, will also help invest in different organizations, charities, or whatever that they think is worthwhile and suits them.

Ash Patel: Sam, a great little nugget of knowledge there. A lot of people might have the misconception that if you get into real estate, you can work a lot less. But most of the people that I know work a lot more than they did in the corporate grind. But it’s just a lot more fulfilling, a lot more satisfaction.

Sam Bates: I completely agree. I think a lot of the “gurus” or people that are trying to sell a program say you just have to work two hours a week, five hours a week, or whatever. And maybe you can do that if you have a portfolio and it’s stabilized. But I feel like if you have investor money, it’s your fiduciary duty to make sure you’re getting the best return; and I also want to grow the business and grow the company. I’ve worked a lot, but I enjoy it. I’ll tell anybody that if they’re wanting to get into real estate, don’t get in it for just the money, because you aren’t going to make money right away. You should follow your passion and follow whatever you like and enjoy, because you’re spending 50, 60, 70 hours a week maybe on working whatever business or career you decide.

Ash Patel: We’ve both been in real estate for over 10 years, and we’ve seen those people that did it for the wrong reasons not have the staying power. You truly have to be passionate about this to make it a success. So yeah, great point. Did any of your former financial colleague’s defect with you into real estate?

Sam Bates: Not to my knowledge, but I’ve had quite a few different former colleagues and clients invest with me as a limited partner. They’re still doing their W2, in either a finance job or accounting tax job, but they’ve started to invest with me. I think it just shows… It’s interesting how some financial advisors will invest with me, but they’re telling their clients to invest in the stock market.

Ash Patel: I introduced a really good friend of mine who is a very successful financial advisor… And I told him about Joe Fairless and these syndications that I’m investing in – this was years ago. I just made an introduction, they had a meeting, and then my buddy calls me and he says, “Wow, what an incredible opportunity.” I said, “Are you going to put your client’s money in it?” He says, “Ash, I have no way to get paid on these deals, but I’ll put my own money in it.” So yeah, good point.

I’ve got to ask you, you have $190 million of assets under management, and all we’ve talked about is you investing in a couple of single families and one syndication. So if you don’t mind, give me the journey of how you got here.

Sam Bates: Well, I started looking for multifamily back in 2014, and for the first year and a half or two years, we weren’t winning any deals. We were told that we were too young – because, at that time, I was in my late 20s to early 30s or something like that, and they didn’t trust that we could close. After about two years of banging my head against the wall, I partnered up with a couple of guys. One had development experience, and our first syndication was a mixed-use development of 60 apartment units and 10,000 square feet of retail space. That went really well. Since then, I’ve been a general partner on 14 projects, mainly multifamily, but some, as I mentioned earlier, just different asset classes, mainly in Texas and throughout the Southeast.

Ash Patel: What types of asset classes?

Sam Bates: Mostly apartments and multifamily. I have 1025 units of multifamily throughout Texas and the Southeast. But we have done commercial development, and we’ve done some lot developments. I just bought into a company that they build about 150 homes a year, and we’re going to try to scale it to 1,000 homes over five years. So just dipping my hand in different pots to diversify and hopefully give myself and investors more diversification than just investing in the standard B or C class multifamily acquisition.

Ash Patel: Well, let me play devil’s advocate. What do you say to those people that tell you to be hyper-focused on one thing? You’re all over the place.

Sam Bates: Yeah. Well, I think real estate, especially multifamily acquisition development is very similar. If you understand the details, you can understand it from a high level. But I’ve always surrounded myself with great partners. I have four partners, one’s been a developer for almost 30 years, one was [unintelligible [00:15:06].11] and worked in tax with financial institutions, one is an attorney and used to work in private equity, my other partner is an investment banker… So we bring a wealth of knowledge, and I feel like there’s not one thing we can’t figure out. I know it’s good to focus — they say the riches are in the niches. But at the same time, I feel like we can look at other asset classes. In one of our developments, we 4X-ed our money, and on an acquisition you aren’t going to do that in today’s day and age.

Ash Patel: I agree with you 100%. I will look at anything that makes money. I don’t care if it’s real estate, a startup, or anything. I agree with you. You mentioned that in 2014 you weren’t winning any multifamily deals. Looking back, with all of your experience now, why was that? What were you doing wrong?

Sam Bates: Two things; they always say the first deals the hardest to get. I will say that, because if you don’t have a track record, brokers are going to take a chance on you. Also, back in ’14, the masses were saying we could have a correction in ’16 or ’17. So I’ve always been conservative, and that’s why we only take down a couple of deals a year. But my underwriting was very conservative back then, and if I just knew what from ’14 to now would have held… Hindsight is 2020, but we were looking at deals in DFW for 30,000 to 50,000 and we thought that was high. Now those same deals are probably showing at 150k.

Ash Patel: Well, you weren’t alone; a lot of people had the same fear of an economic collapse a recession. But you got over that. If you were to give some of the Best Ever listeners advice, that are looking for their first deal, and you don’t want them to repeat what you did, what would you tell them?

Sam Bates: I think you need to be obviously tenacious, because you’re going to have pitfalls and you’re going to have struggles that you have to jump over. But what we didn’t do and I wish we would have done was to talk to experienced people. We were doing a lot of underwriting with rule of thumbs, and it just wasn’t working. If we could have tweaked our underwriting, reduce expenses, or increased income a little bit more and not be as conservative as we were, we probably would have got several deals that year. But I’m glad, because I’ve been able to get into development. I think if I would have gotten a few acquisitions, I would have never gotten into development, and I would have never met a couple of partners that has changed my work life, by far, for the best.

Break: [00:17:44][00:19:54]

Ash Patel: Sam, your first deal was a big development deal. Can you walk us through that?

Sam Bates: Yes. We did a 60-unit apartment and 10,000 square feet of retail space. We sold off the retail space pretty much a year and a day after it was occupied, just to pay long-term capital gains instead of short-term capital gains. But we still have the 60-unit apartment. It’s in Kerrville, Texas and it’s been a phenomenal deal.

During the development process, there were a lot of struggles; that year, during the development phase, it rained a significant amount, so we postponed some of the development timelines we had. We had to fire a contractor, we had to fire a property manager… There were just a lot of hurdles we had to cross. But once we provided a great return to our investors on the commercial side, we refinanced and provided our investors over 100% of their initial capital back, now it’s cash flowing. We’ll probably hold on to it for another 10 or 15 years and just continue to cash flow. It’s in a very stable market, it’s in a market that has a high demand for apartments, so we’re always that 98% to 100% occupied, and it’s a very easy asset to manage.

Ash Patel: What was the time difference between when investors funded the deal to when they got 100% of their money back?

Sam Bates: That’s actually a good question. They funded probably in March or April of ’16, and then we sold the commercial deal in July of ’18, and then we refinanced the apartment in November of ’18. So two and a half years or so.

Ash Patel: How did you find tenants for the commercial property?

Sam Bates: Luckily, we had two tenants before we built it out. We built a suite for Keller Williams, it was a triple net lease, and then a gym which was going to be an Anytime Fitness gym, but the owner decided to back out, so we brought in another gym, and it was also a triple net. We had leases and we had gradual rental increases per square foot over every couple of years. We were planning on holding on to it for five to seven years, but we got an offer that met our seven-year projection, so we felt like it was a good time to sell.

Ash Patel: Sam, you guys profited tremendously by selling brand new commercial units with fresh leases in them. Why not do more of that?

Sam Bates: That’s not our bread and butter. The Keller Williams triple net leases – we’ve done a couple of them and those have fallen into our laps. But nobody on our team is out there looking for retail clients or retail land. I’m more of a multifamily expert, so we’ll do it… We’ve built office buildings, we’ve built medical complexes, but it’s usually when the tenants reach out to us.

Ash Patel: And when you say Keller Williams, was it Keller Williams Realty, or did they have a client for you?

Sam Bates: It was Keller Williams Realty.

Ash Patel: Okay. They set up an office there.

Sam Bates: Yeah, they set up an office in the building.

Ash Patel: And right now, while multifamily is trading at very low cap rates, why not consider selling?

Sam Bates: We’ve actually sold four or five deals in the last couple of months. I think it depends on the whole period. We just sold a deal last Friday that we held for two years. We were planning on holding it for five years, but we’re able to do a 54% IRR to our investors, so it made sense. But there’s some other deals we’ve done with joint venture partners that we knew from the get-go they’re going to be legacy assets that will hold 10, 20, 30 years. So I think it just depends on the plan and who your investors are. When you do syndications, it’s harder to hold longer, when you have 30 or 40 investors or 100 investors. Obviously, everybody has different ideas and conflicting ideas. Usually, syndications are being held for a lot shorter duration than maybe a joint venture or something that you do on your own. But I was actually reading an article this morning that’s saying experts are predicting most real estate bills to be held for double or triple the time that they have currently been. This is because of inflation, unevenness, or unknowing of what the future might be.

Ash Patel: Sam, a crazy mixed-use development, a huge project – how did you get investors for that?

Sam Bates: That was, by far, probably the most difficult raise we’ve had. But we went to friends, business colleagues, and a couple of family members. All of us that were the GPs in that deal had a 10-year track record or longer of experience as a professional, and we had built credibility in other industries where they felt like they could trust us with their money. It paid dividends and I think we’ve compensated them, reimbursed them significantly for it. On that deal, we didn’t take any fees, we didn’t even take an asset management fee, the split was 80/20, so it was very favorable to the investors.

Ash Patel: The split was 80/20 to the LPs.

Sam Bates: Yes.

Ash Patel: Was there a preferred return?

Sam Bates: No, there was no preferred return, but there wasn’t an acquisition fee, a development fee, or an asset management fee. We did the construction at cost, so it was very investor friendly.

Ash Patel: Have you continued to use that model in the future, or has it changed?

Sam Bates: Our structures change significantly depending on each deal. We’ve done joint ventures where it’s 50/50 splits, we’ve done 80/20 with no pref, we’ve done 70/30 with a pref, we’ve done 60/40 with a pref; it just kind of depends on the structure of the deal.

Ash Patel: That’s a very impressive property that you guys built. What were some of the hard lessons you learned?

Sam Bates: I think the hardest lesson was — it was five hours away from us, and working with new people that you hadn’t trusted or had a relationship with before… Even though they’re recommended, they didn’t turn out to be what they said.

The first property management company, we fired because we found out she was in essentially embezzling from us. We were going to give her the lease-up bonus, but she took it before we gave it to her and she took it without asking. She just took it from our operating funds. We had to fire her for that. There are just a lot of lessons. The cable issue, the property management company was going to take care of it, but we learned that they didn’t take care of it, so we had to go and reach out to the cable provider. It was probably a 60-day back and forth that occurred during the lease-up, but it should have been done before the lease-up. There was just a lot of things where we learned that we need to have better controls and better checklists to make sure everything was getting done on time and according to plan.

Ash Patel: Would you develop a mixed-use building again?

Sam Bates: Oh, yeah. At least half of my projects have been developments. We have for developments in our pipeline this year. All of them are multifamily, except one, which is multifamily and single-family subdivision. But if a mixed-use development came open, I would definitely entertain it.

Ash Patel: Alright, Sam. You were skeptical about the economy four years ago; you have to be more skeptical today. How are you preparing for what could come?

Sam Bates: That’s a really good question, and I wish I had a crystal ball. Back then I was probably more skeptical, honestly, than I am now, because I just didn’t know as much as I know now. With the Fed and the other governments around the world printing $40 trillion in the last couple of years, I don’t know how the economy is going to go in the future. I think a lot is going to depend on the midterm elections, and then maybe even the election in 2024. I’ve listened to a lot of experts and some think that we’re going to go through a continued expansion until maybe the end of the 20s. That just seems crazy, since we’ve been in an expansionary time basically since ’08 to ’11. To have 20 years of good times is hard to believe. So I’m not going to predict if it’s going to crash or not. But to answer your question on how to hedge against it, I’ve become very selective in acquisitions.

I think people that are paying three or three and a half caps on the 1970s and ’80s deals, they could get taken out if the tide changes. We’re focusing more on developments. People say that developments are risky, but I could easily argue it’s a lot less risky, and we de-risk the investments when we can build at seven, eight, or nine caps, and sell it at four or five caps, or even three caps in some markets. I think you just have to be cognizant, you have to be a fiduciary, and pay attention to the markets. Each market is different. Dallas is different than Atlanta; those are two of the markets we invest in.

So I think you just have to have intimate knowledge of each market. One thing I’ve learned over the years, and it’s happening a lot now, is people are trying to get as highly levered as possible. They’re taking out bridge loans, putting on pref or mez, and they’re levering up to 90%. I think that could be a monumental failure for a lot of syndicators. So trying to have the right debt and just making sure you can cash flow throughout any correction.

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

Sam Bates: That’s tough. There’s so much. I would say be educated, surround yourself with great and experienced people, and just be passionate and focused. If you stay focused and surround yourself with great people, you can do some great things.

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

Sam Bates: Yes, I am.

Ash Patel: Alright, Sam. What’s the Best Ever book you recently read?

Sam Bates: The most recent book that I think changed my life is Who Not How. I’ve always been a person that’s a doer but now I’ve realized that I can’t keep doing everything if I want to grow and expand. We’ve brought in a lot of employees over the last six to 12 months and it has taken a lot off my plate. I can focus on the $2000 an hour task or $250,000 task, instead of a $15 an hour task.

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

Sam Bates: There’s a lot of different charities that I like to give back to. I’m a Christian so I support the church I go to. Also, there’s a friend from high school and then some nonprofits that I met in Dallas that focus on a lot of different areas, economic empowerment, child slavery, women slavery, expanding the Gospel. I give back in a lot of ways. I also talk to people who are interested in real estate, I know everybody has to start somewhere. When I started back in ’08 or ’09 reading books, I knew nothing about real estate so I like to help people expand their horizons.

Ash Patel: Sam, how can the Best Ever listeners reach out to you?

Sam Bates: You can reach me at batescapitalgroup.com, or by email at sam@batescapitalgroup.com.

Ash Patel: Sam, thank you again for sharing your story with us. Coming from the financial industry, having your master’s degree, being a personal financial planner, then finding real estate, and having $190 million of assets under management. Thank you again.

Sam Bates: Thank you for having me. It was a pleasure.

Ash Patel: Best Ever listeners, thank you for joining us. If you enjoyed this episode, please leave us a five-star review and share this podcast with someone you think can benefit from it. Please also follow, subscribe, and have a Best Ever day.

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JF2720: 4 Things to Know Before Your First Development Deal ft. John McNellis #SituationSaturday

Are you interested in entering the commercial real estate development space but have no idea what to expect on your first deal? Return guest John McNellis walks us through different financial scenarios you might encounter on your first deal, their outcomes, and how to best set yourself up for financial success.

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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, John McNellis. John is joining us from Palo Alto, California. He was a previous guest on a number of episodes. If you Google Joe Fairless and John McNellis, those episodes will pop up. John, we’re glad to have you back. Thanks for joining us and how are you today?

John McNellis: Ash, I’m great. I’m absolutely great.

Ash Patel: Thank you.

John McNellis: Omicron here in Palo Alto seems to finally be going away. It turns out it didn’t seem like it was that big a deal. Life seems to be returning to normal.

Ash Patel: Glad to hear that. Today is Saturday. Best Ever listeners, I hope you’re having a great weekend so far. Because it is Saturday, we are going to do a Situation Saturday show, where we discuss a specific situation our guest has encountered. The goal is to give you the knowledge should you encounter a similar situation. John is a principal at McNellis Partners and has been involved in over 80 development projects. John, before we get into your particular skill set, can you give us a little bit more about your background and what you’re focused on now?

John McNellis: Sure. I went to school here in the Bay Area, I went to Berkeley, I went to a fancy law firm in San Francisco in the mid-70s, and quickly decided that I needed to practice law. I was in a real estate commercial practice and managed, with let’s say a lot of effort, to gradually shift out of law into business. I teamed up with an older partner who was a shopping center developer. For the last 40 years, we have been primarily shopping center developers. Our focus has been in Northern California; basically, it’s like a two-hour drive from San Francisco in all directions, except maybe West. The centers tend to be, give or take 100,000 feet, give or take 10 acres, supermarket anchored, Walmart anchored, all single stories, surface part… And I didn’t realize how brilliant that was, and it certainly wasn’t a strategy until two years ago when COVID hit. Then I learned somehow that we were essential retail. Unlike the big boxes that you see and the enclosed malls, our portfolio and that of all my competitors in the same niche, that is supermarket anchored neighborhood centers, came out essentially unscathed. We had to give up rent for our small tenants in 2020 and continuing to 2021, and even still today a little bit… But a vast bulk of our tenants, 75% to 80% of the supermarkets, drive-throughs in particular, did fine. Also, just to round it out, we had to do a little bit of investing in Silicon Valley, office buildings, and sort of high-end small residential projects.

Ash Patel: What do you want to talk about today, John? We’ve covered so much in our past conversations… What would give our audience some value today?

John McNellis: Okay, I’m assuming, Ash, that our audience are young guys like you that want to get into the development business… So what I want to talk about is that first deal, for the first couple of deals where let’s say you’re a broker, let’s say your attorney, a banker, whatever it is, but you hanker to become a developer. You find a deal, and oh my God, it is so good. And I’m going to give you, slightly disguised, a specific deal that good friends were involved in, so this is a real thing.

You find a deal, let’s say it’s $15 million dollars – it was – and let’s just say you’re absolutely certain Ash that in a year you can make it worth 20. It’s an existing project, it doesn’t matter whether it’s an office building or a shopping center, but single tenant. The lease is coming up, the sellers are old, they’re nervous, they decided to sell it at a discount. You know that if you can extend that lease for 10 years, you can turn around and have a value of $20 million. So you want to keep as much of that as possible.

Then just this background, and… It’s in my book. But typically, this is what I call a paint and petunias deal, where the project is leased or unleased, there’s no construction risk, there’s no entitlement risk; essentially, there’s a leasing risk. On a deal like that, in my experience, the best you could hope for as the equity partner, or the young developer, is maybe an 80/20 split, sometimes even 90/10. Sometimes, if you don’t have enough control, the financial partner kind of muscles you aside and says, “Okay, kid, we’ll give you an extra point or two on the commission, but you’re out of the deal.” Let’s say 80/20. But you think this is such a great deal that you want to get a better deal than that, and you want to get 60/40. And it’s a good enough deal, so you go to your financial partner and you say, “This is a killer deal. There’s $5 million on the table. All we have to do is buy it, lease it, sell it or refinance it.” The natural partner agrees and he says, “Whoa, you’re right. This is a good deal. The chance of getting this thing leased – 100%.” He says, “Here’s the deal, kid. 80/20, 8% preferred return on the money.” You guys all know how this works. First, there’s the 8%, then there’s the repayment of the capital, and then it’s the 80/20 split. You counter and say “No, this is such a good deal. I want 60/40.” The money guy says, “60/40 – you’re really pushing it. I tell you what, if you’re that convinced that you can get in and out in a year, I’ll do it. But I want the high end of the financial partner preferred returns, I want an 18% preferred return.” So that’s your dilemma as a young developer, do you take 60/40 after an 18% return, or 80/20 after an 8% return? With me so far?

Ash Patel: I am.

John McNellis: Okay. Any questions so far?

Ash Patel: No. I have a deal that’s very similar to this. We’re doing an 18% preferred return and a 70/30 split. So I’m really intrigued to learn more.

John McNellis: Oh, so you should have watched this episode…

Ash Patel: Before I did the deal. Yes. [laughs]

John McNellis: That’s one of my favorite lines, experience is something you acquire just after you need it. Anyway, so 80/20, 8%, 60/40, 18%. So let’s just walk through the numbers, and I think I can do this in my head. Let’s first do it. And then you tentatively say to the guy, “I think I want to go the 60/40 route.” He says, “Well, work through the math.” So a year out, 18% on 15 million, and let’s assume this is a last-minute deal; you’re going to sell or refinance it, so there’s no debt, it’s just all equity. So 18% on 15 million is 2.7 million. So a year out, 2.7 million; that leaves 2.3 million in profit. What’s 40% of 2.3 million Ash, tell me that?

Ash Patel: Roughly a million.

John McNellis: I actually wrote it down. It’s more roughly 920,000 on your deal if you hit your marks. Now let’s go the other route. In the 80/20 deal with the 8% return. 8% on 15 million is 1.2 million, which leaves a $3.8 million profit. 20% of that is how much? 760,000. So if you can get in and get out on that one year, you’re 160,000 to the good on the aggressive 60/40 after 18% deal; you’re 100% to the good. I was actually thinking about this… I know you’re well versed in IRR or internal rate of return, and I’m guessing most of your audiences is as well, if they’re going to listen to this technical real estate stuff. And as I was thinking about our talk, I think you know already, we have zero faith in the IRR. It’s a silly metric, but it’s one that all the financial guys use. So they say “We want an 18% IRR and then you get your money.” But it occurred to me that IRR could stand for “I ruin rookies.” [laughs] Keep that in mind. In fact, I think I’ll put that in a newsletter.

Ash Patel: It’s a t-shirt.

John McNellis: It’s a t-shirt, I Ruin Rookies. Alright, so we just walked through the math. At one year, the aggressive approach works great. But this is real estate folks – let’s just say there’s a delay. What happens on that same deal at 18 months? It looks like there’s a six-month delay; you can work through the math, but add another six months at 18%. Suddenly, you’re at 4,050,000 of preferred return; there’s only 950,000 left to split. 40% of that is 380,000. If you’ve gone the other way, if you’ve taken the 80/20 deal, the 8% is, again, at 18 months, that’s up to 1,800,000, there’s 3,200,000 left to split, so suddenly you’re at 600,000. So that’s the point – let me underscore that, folks. If you hit your marks exactly and you’re in and out one year, you’re way ahead. If you only have a six-month delay, you’re behind. You’d net 600,000 on the more conservative way, 380k on the 60/40; you’re up 220,000. If you carry this out to the next level, a one-year delay – at a one-year delay, the developer’s out of money. 2,700,000 times two is 5,400,000; that’s all the profit in the deal goes to the financial partner.

Ash, you may say, “Well, John, has that ever happened to you?” I’d say “Yes. It has.” Not quite so dramatically and not where I had a choice. But simply where, in the early days we would do a deal at a 10% preferred return, a development deal. It would turn out well, but not perfect, and we’d be producing a 9% return on the investment. The preferred return was 10%, so each year we’d fall behind 1%, and then next year 1.2%, and so on. Have we done deals that only benefited the financial partner? Yes, about three or four. I think we’ve talked about this before, it’s kind of off the topic, but that’s one of the reasons we decided once we were able to, to no longer have financial partners; to just do small deals on our own and not get ourselves behind this snowball.

Now, the situation that I’m personally aware of – the young developers chose the 60/40, 18%, and here’s what happens. They were really smart guys, really competent; everything that they had said that was going to happen actually did happen. But delays occurred in getting the lease extended, and then COVID occurred. Suddenly, things were jammed and, sure enough, they ended up out of the money entirely. Had they gone with the more conservative approach, they would have made at least a couple hundred thousand dollars. So you can draw from that what you want. You can say, “Gee, I think I’ll take the conservative approach and make a little less money maybe if everything goes great, but I’ll cover my bets.”

Break: [00:14:47][00:16:56]

Ash Patel: That makes a lot of sense, and we’re doing the exact same thing. You don’t know this, but our story is exactly what you said. It’s 18% preferred return to our investors, and it’s a 70/30 split, 30% goes to the LPs, 70 to the GPs. And it’s the same thing, it’s a $5 million strip center, that we have two LOIs on leases to lease up the remaining vacancy. If all goes well, it should be a huge win.

John McNellis: I hope it will.

Ash Patel: If all goes well. [laughs]

John McNellis: If all goes well. California is the home of delays. Is that in Ohio?

Ash Patel: It’s in Ohio. One of the delays is one of the tenants coming in is Ace Hardware. They have a six-month delay in getting shelving for new stores. We knew that going in. The other reason we’re confident about this deal is the operating capital is enough to pay the investors preferred return. Sorry, the operating income and the profit.

John McNellis: You bought it at a current 18%? return?

Ash Patel: Correct.

John McNellis: Okay; then you’re not going to suffer the same way. As long as you can keep it current, that’s great. In this case, the one that I mentioned, that wasn’t the case.

Ash Patel: Okay. This is pretty conservatively underwritten. We won’t make any money if we just maintain the center as it is. But the upside will add a tremendous amount of value.

John McNellis: Well, that’s great. And there’s a bigger picture – as a young guy starting out, even if you don’t make money, if the financial partner does and the financial partner likes you, it’s on your portfolio; it’s another stripe or another battle ribbon. For your next deal, you can say “Yeah, we did this shopping center. We bought it for four and sold it for five.” It adds to your credibility, and of course, it adds to your experience.

I guarantee you’re not going to make money, to listeners out there, on every single deal. We have certainly lost money more than once. But even on the losers, you gain something, you gain a lot of valuable experience. And again, what I used to call “kiss sisters,” but it’s no longer a happy term, I guess… It’s where you’re absolutely breakeven; again, that works out okay in the long run.

Ash Patel: I agree. If the investors make a killing on this, awesome. Have you ever done deals where it’s a combination of development and buying existing, standing structures, so expanding a shopping center?

John McNellis: Oh, sure.

Ash Patel: The underwriting for that, how was that? How do you underwrite that for investors?

John McNellis: Well, again, we don’t use investors anymore, but we underwrite it for ourselves. I’ll give you an example – two recessions ago, if we say that COVID caused a small one… So in 2010, we bought a little shopping center, a 50,000-foot center in Modesto, California, out of foreclosure. Let me think about this. It was 70% vacant, and 30% leased. What was vacant was the anchor, the 30,000-foot-anchor, just to simplify things, and there were 20,000 feet of shops. Ash, what we liked about what we saw was the shops have been there forever and they were paying for Modesto with very low rent. We bought it on a 5% immediate cash on cash return. So kind of like what you just described, I said to myself — and remember, banks then were just like banks today, they were paying thumb and forefinger interest. It wasn’t that much, it was a couple of million dollars. So I said, “Guys, we can buy this, we have an immediate 5% return, which is okay. Cap rates weren’t that far, they were maybe six or seven then. And we have 70% of vacant spaces upside.” So if you go in where you’re at breakeven and there’s a big upside, I love doing deals like that.

Ash Patel: So those scare me, because if I see a vacant anchor, my assumption is one by one the rest of the tenants are going to leave when their leases are up. Is that not the case?

John McNellis: Good point. As a general rule, yes. But what intrigued us about this site was the little tenants, the coffee shop, the insurance, the pizza place, the nail salon, and so on – they had been there for years and years, and the anchor had been vacant for years. So they had survived just fine without the anchor. So we were pretty sure we weren’t going to lose them. Also, it was such a strong location.

One of my friends likes to say the two-word key to success in real estate is supply constrained; you want to be in an area where the competition can’t come in and build a better mousetrap. But in this particular location, a mile in all directions was totally built out, so we knew there wasn’t going to be another shopping center coming in.

And the other thing – I don’t know how many people have pools in Ohio, but pools in California are a good indicator of nice solid income, at least middle income, maybe a little better. And what indicates pools in a neighborhood? Leslie’s Pools, or one of the pool supply companies. We had Leslie’s in some of our other centers, so I called them and I said, “How are you doing here?” They said, “We do just fine.” So I liked that as kind of a bellwether or canary in the coal mine telling us, “Yeah, this is a good location.”

Ash Patel: Can I pick your brain on a couple of deals that I’m working on?

John McNellis: Sure.

Ash Patel: If you go back to that one example, would you subdivide that giant, vacant space from the previous anchor? Or would you just try to find another big-box anchor?

John McNellis: Actually, I simplified it a little bit; I went the other way. I had 25,000 feet vacant, and as it turned out, it was 25,000 feet of one space that was vacant, and there were another 5000 feet in line that was vacant. So Walmart came along, and we have worked a lot with Walmart in the last 30 years. Walmart’s been great, by the way; they’re a great business partner. They came along and said, “We need 30,000 feet.” It was complicated. I’d move one tenant, build him a new space, and then when he moved, we had to move another tenant into that space; when that tenant moved out, then we could build out the 30,000 feet for Walmart.

Ash Patel:  That’s a huge win.

John McNellis: Yeah, it turned out. We still own it 10 years later and it’s a good property for us.

Ash Patel: Best Ever listeners, forgive me for asking this question. It’s on a property that I own, but hopefully, you get some value out of this as well. John, that $5 million strip center, 100,000 square feet, it has a giant parking lot that we don’t need all of. Building an out-lot, in a conversation with a broker right now, he’s convincing me to just sell the out-lot, versus trying to build something and collect rent on it. What are your thoughts on that? Across the street, there’s McDonald’s, Burger King, Taco Bell, everyone’s there.

John McNellis: Did you pay 5 million all cash?

Ash Patel: No, a million cash, it was 20% down.

John McNellis: 20% down. So it’s just a million that’s getting the 18% return, correct?

Ash Patel: That’s correct.

John McNellis: And then you’ve got a $4 million loan at three, four, or five percent?

Ash Patel: Four and a quarter.

John McNellis: Four and a quarter. Okay. We do that a lot, actually. We’ll buy a shopping center — because, again, that’s our primary business, or a piece of land, we’ll subdivide it, and then we’ll sell off almost immediately one or two parcels in order to bring our basis down on the balance, and then we’ll keep that. We like having very little debt. So what that would enable you to do — a pad here in California, like what you’re talking about, would probably sell for close to a million dollars. Let’s just say you could sell for a million dollars; in all good conscience and honesty, you can allocate. Because you just bought the center for five, this year, [unintelligible [00:25:01].05] months, you can immediately turn around and sell that one pad for a million and you can allocate a million dollars as a basis to that. You can say to the IRS, “Look, guys. We didn’t do anything. We just bought this and we sold this for a million. Clearly, that part was worth a million.” Then you allocate that, so you can pull that million out, essentially, without attacks, you hand the million to your financial partner, no more 18% return on your end for 70/30 on all the cash flow. I love that idea.

Ash Patel: Okay. So sell it, versus trying to become a developer and build on it.

John McNellis: You can go either way. They’re a little tricky. We did a Super Walmart in another town and we ended up with four pads, after we did the 18-acre Super Walmart. We developed one for 711, we’re selling another to a Starbucks developer, and we’re ground leasing a third to an oil changer. So basically, all three options – build a [unintelligible [00:26:02], ground lease, sale. Usually, you don’t have the luxury of choices. Do you guys have In-N-Out Burger?

Ash Patel: No, unfortunately.

John McNellis: Okay. In-N-Out Burger always says, “We’re buying. Otherwise, we’re out.” They’re the flavor of the month, everybody loves In-N-Out Burger. In-N-Out Burger always insists on buying. Chick-fil-A, another darling in fast food, is happy to ground lease. So it all depends. Chances are that the tenants will dictate, but all three options work fine.

Ash Patel: Okay. That helps a lot. Awesome. John, thank you so much for being on our podcast again. It’s been a pleasure. I learn a lot every time we have you on here. How can the Best Ever listeners reach out to you?

John McNellis: Probably the easiest way is on LinkedIn. I’m there, John McNellis; you’ll find me there.

Ash Patel: You’re not going to plug your book but I am. This is the most gifted product I’ve ever purchased. I’ve bought dozens of these. It’s called Making it in Real Estate: Starting Out as a Developer by John McNellis. A phenomenal book; in my opinion, and one of the few incredible commercial real estate books. Thank you for that, it’s been a great resource.

John McNellis: Thank you, delighted you like it.

Ash Patel: Best Ever listeners, thank you so much for joining us. If you enjoyed this episode, please leave us a five-star review, share the podcast with someone who you think will benefit from it, follow, subscribe, and have a Best Ever day.

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JF2709: 5 Tips for Multifamily and Self-Storage Development ft. Dallon Schultz

Multifamily and self-storage development can be stressful to navigate. For Dallon Schultz, it became even more complicated when he had to juggle both his real estate business and his full-time job in the medical field. In this episode, Dallon shares his success habits for ground-up development and best practices for scaling your business.

Dallon Schultz | Real Estate Background

  • Founder/Owner of REV Equity Group LLC which focuses on investing in apartments and self-storage assets.
  • Portfolio: GP of $6.5M multifamily development in Arizona and a 140 space RV and Self Storage development.
  • Hosts a multi-state monthly meetup to bring those looking to scale their existing portfolio or those interested in learning how to become actively involved.
  • Based in: Phoenix, AZ
  • Say hi to him at: http://investwithrev.com | FB: REV Multifamily Meetup | IG: @revmultifamily | dallon@revequitygroup.com
  • Best Ever Book: Best Ever Apartment Syndication Book by Joe Fairless

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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, Dallon Schultz. Dallon is joining us from Phoenix, Arizona. He is the founder of Rev Equity Group, which focuses on apartments and self-storage assets. Dallon’s portfolio consists of $6.5 million, and he’s also the host of a multi-state meetup. Dallon, thank you for joining us, and how are you today?

Dallon Schultz: Ash, I’m excited to be on this call. I’m doing great. Thanks for having me.

Ash Patel: It’s our pleasure. Dallon, before we get started, can you give the Best Ever listeners a little bit more about your background and what you’re focused on now?

Dallon Schultz: Yeah. I guess a little bit about my background – I didn’t start in real estate; I don’t think a lot of us have. If you talk to most people that are actively involved, they transition from something. In my case, it was the medical field. I actually have a bachelor’s in nursing, and I worked two years full-time in an emergency room and in a cardiac unit. Long story short, I didn’t find that safe and secure job that I thought I would find in the medical field through some personal things that I went through, and I realized I had to change my path. I wanted something different that could provide me the stability and the ability to really grow. That’s kind of what sparked my desire for real estate.

I listened to podcasts, read that purple book, we’ve all read it, Rich Dad Poor Dad, and two weeks later, we bought our first fourplex without any of our own money. A few months later, we bought our second one, and then it just kind of snowballed from there. About a little over two years ago, I left the medical field completely, and I’ve been doing real estate full time.

Ash Patel: Your very first real estate purchase was a fourplex, with no money out of pocket.

Dallon Schultz: Correct.

Ash Patel: So you took all of that knowledge to the extreme and applied it. How’d you do that? You had no experience, how do you convince somebody to give you money when you have no track record?

Dallon Schultz: In this case, I didn’t have any experience or knowledge, like I’m telling you. I listened to some podcasts, read the book, knew what I wanted, and figured out a way to make it happen. I learned as I went. In this case, we started with friends and family; that’s usually one of the easiest places to start when you’re looking for investor capital, because they know you. Fortunately for me, one of our family members had been involved in real estate for a long time, so he became what I would consider my first mentor. That was my grandfather. At his busiest time, he owned about 300 units, and my father actually managed them. So I grew up around real estate, but I was just doing all the dirty work. I was doing all the maintenance, the roofing, summers in New York, cleaning toilets, sink drains… That was my vision of real estate, and I’m like, “No, this is not for me.” That’s why I transitioned to the medical field.

But coming full circle, when we did gain that interest, I reached out to my grandfather and said, “Hey, there’s this property we’ve found. The seller wants to do a carryback.” We were able to pick it up at 50,000 door, so 200k for the property; the seller only wanted 25,000 down, and then he was going to carry the remaining 175k. That 25,000 down is what we presented to my grandfather at the time.

We worked out a short-term five-year loan that we would pay monthly off onto the side. Looking back, it was kind of scary, because we were 100% leveraged on this deal, and I didn’t know what I was doing. If I knew what I knew now, I don’t know that I would have done it. But you don’t know what you don’t know. I wanted to get into the game, so we made it happen. That deal ended up working out great for us.

Ash Patel: Was your dad and grandfather unhappy when you went into the medical field because they lost their go-to labor guy?

Dallon Schultz: No. It was summer work for me throughout high school. But no, my parents and immediate family have always been supportive of whatever it was I wanted to do. I had these grand visions of specializing in the medical field and becoming a nurse in Ephesus, making a few hundred thousand a year, and then I would start my real estate career. That was my mindset, if you will. After reading Rich Dad Poor Dad, I realized I don’t need to wait; I can start now, and there are creative ways and opportunities, you just need to go out and find him. That first deal, I called up a previous landlord that owned a fourplex. My wife and I when we were first married actually lived in one of the units. I called her up and I said “Hey, are you looking to sell?” She’s like, “I’m not. But the guy next to me is.” She gave me his number, I called him, and a week later we were under contract.

Ash Patel: How did you progress beyond that?

Dallon Schultz: A couple of months later, we bought a second one. We told a local agent there, “Hey, we’re in the game. We’re looking to buy” and purchased it, in a very similar way as the first one. Then we attended a large multifamily conference out in Texas. That was a few months after our first deal. I’d never been to a conference in my life and I attended that. That’s when I was introduced the idea of syndication, buying these larger properties, and coming together as a team. That resonated with me. I remember heading home after that conference, almost in depression. Because at this time I was six to nine months into my nursing career, I spent years and thousands of dollars getting that degree, and I wanted to be done, I wanted to be done with it. So we attended that, and then we pushed pause on purchasing properties, just because at that time I realized I really had to get into the education and build a strong foundation. So it took about a year attending conferences, networking, joining mentorship groups, and I’m so glad I did. The most value I got out of any of that was probably the relationships that I built along the way. That led us into some of our current deals that we’re actively working on, which is some ground-up development of some multifamily and some self-storage assets.

Ash Patel: What area is this in? This is in Phoenix?

Dallon Schultz: Yeah. Just south of Phoenix. It’s about halfway between Tucson and Phoenix, actually.

Ash Patel: How many units are you developing?

Dallon Schultz: It’s a 30 unit, there’s eight existing on the property, and then we have a 140-unit RV and self-storage that sits on about two and a half acres that we’re developing right next door to that. The opportunity just kind of came as a package deal, and we decided to go for it. It is our first development deal, so we didn’t want to take on something too large that we don’t feel like we can handle.

Break: [00:06:55][00:08:33]

Ash Patel: Here, let me play devil’s advocate. So you just bought a couple of fourplexes, you educated yourself for a year, you learned about syndication and now you’re developing. What makes you confident that you’re going to be able to pull this off?

Dallon Schultz: Our team, 100%. Like I said, over that last year – yes, we were reading books, podcasts, attending conferences, but it’s really the relationships that are key and critical. I think anyone can speak to that. Finding the right relationships, people with more experience than you, and then coming together. In this situation, I’ve been doing all the heavy lifting, all the leg work, I’ve been going to the town meetings, planning and zoning, meeting with the City Council, reaching out to the contractors, reaching out to the engineers, architects. That’s kind of been my role. Then some of our partners who are involved in this deal, one of them already owns an RV storage facility, the other one has developed some multifamily. So that’s how we came together.

Ash Patel: How did you build this team? How did you identify your partners?

Dallon Schultz: I guess it started with common interests. Like through our networking, we found out experiences, what each of us was good at, what we were willing to do, what we needed to make it happen, and just kind of presented the idea, and we kind of pieced it together.

Ash Patel: And somebody has development experience on this team…

Dallon Schultz: Correct.

Ash Patel: Awesome. Are you raising money for this deal as well, Dallon?

Dallon Schultz: This one we may not have to, actually. There’s someone we connected with. We were going to go the traditional financing route, but through our network and connecting with people, we have someone that’s open to potentially funding the entire project, which is about a six and a half million-dollar project. We’ll see.

Ash Patel: Would that be a joint venture, or would that be more of a syndication?

Dallon Schultz: Correct. That’d be a JV model.

Ash Patel: Okay. Awesome. What else is on your plate?

Dallon Schultz: Development is great. I don’t know if the listeners will see our video or not, but I don’t have much hair… I did 12 months ago before we started this; I kind of looked like you, Ash. So development – it’s challenging, but there’s a lot to learn from it as well. And it’s a much longer process. There are a lot of things that are out of our control. For example, we were ready to submit one of our major site plans for one of the projects a few months ago, it’s a smaller town. The supervisor that made sure all these things got through the city, quit; he left. They were just being overwhelmed, he was asking for help, they don’t want to give it, so he left.

So the planning and zoning meetings for the next three months were just canceled. We had everything ready to go but it was completely out of our control. Things like that happen, it comes up in development. If you talk to anyone that’s gone through it, they’ll often say, “Yeah, whatever you think it’s going to take you, double it.”

As we’ve been going through this for the last year, it’s been an awesome learning experience. But we need to cover our overhead, we need to generate operating capital, so we decided to pivot and focus more on the value-add play. So we’re currently looking at 100 units plus, Phoenix, New Mexico, we have a couple of LOIs out, and we’re just actively offering on those deals, just to get something moving a little bit quicker. Then the development will work out when it works out.

Ash Patel: RV sales have gone through the roof over the last year or two. You’re in Phoenix, so you’re in a hot weather state. What is it that people are looking for? Just covered RV parking, or do they want indoors?

Dallon Schultz: At this point, they’re looking for anything. There’s not enough out there. The storage development that we’re working on, due to setbacks in the area, we can only do part of it covered. All we’re doing is a large metal canopy. You will find complete enclosed garage storage units here, you’ll find everything in Phoenix. But here, and I’m sure in a lot of places with a lot of subdivisions and cities, the HOAs don’t want you parking campers in your front yard and the backyard. They don’t want that. So RV storage, boat storage, and contractor for park trailers – there’s a huge demand for it just because we all live in these cookie-cutter neighborhood suburb-type homes. Yeah, there’s definitely a demand for it.

Ash Patel: HOAs don’t want RVs in your driveway, but municipalities don’t want RV parks as well, right? How do you get by with that?

Dallon Schultz: So this isn’t an RV park, it’s just storage. There are no hookups, it’s not a campground, it’s nothing like that. This is just, “Hey, we need somewhere to park our RV before we take it out on the weekend.”

Ash Patel: Is that a challenge for zoning, getting that approved?

Dallon Schultz: No. It’s very common. In this particular case, it was already zoned for what we needed, so we don’t have to go through a rezoning process or anything.

Ash Patel: Your ground-up development that you’re doing – what’s your goal when you go to these planning and zoning meetings? What advice would you give the Best Ever listeners? If they’re doing development, how do they efficiently navigate through the zoning process?

Dallon Schultz: One of the best things we did early on is we contacted the city, we contacted the supervisor. In larger cities, you’ll actually do a pre-application, pre-authorization, and you basically present to the city like “Hey, this is what we’re looking to build, this what we’re wanting to do.” They’ll say, “Yeah, that should fit given this information. Let’s move forward with it.” In this case, with a smaller town, they don’t do that. But we went to the planning and zoning meetings a few months prior to us submitting our plans. Because we wanted to get to know the board members, we want to get to know some of the city council, some of the supervisors. So we went there and just shook hands, spoke to them face to face, introduce who we were and what we were looking to do. We were able to build that relationship. Because of that, prior to our meeting, our initial plan, they actually counseled us and helped us be able to maximize the land and actually get more units, which is going to generate more revenue than what we’ve initially projected. I’d say if there’s anything you can do, connect with the city prior to that first meeting; shake hands with the people, and get to know them.

Ash Patel: Great advice. In terms of raising capital, what are some of your best-kept secrets?

Dallon Schultz: That’s a good question, my best-kept secrets. I don’t have any, Ash. I’d say be yourself and be genuine. People want to invest with you because they know, like, and trust you. A quote that I remind myself of quite frequently is “Be yourself, because everyone else is already taken.” There are certain attributes or certain personality traits that you have that are going to enable you to connect with certain people. You have to be okay knowing that not everyone is going to say yes. In fact, most people are probably going to say no. But have confidence in yourself, your personality, your traits, the strengths that you can bring to a team, and get to know people. Be genuine, be yourself, and you’re going to connect with the right people, and you’ll start attracting those types of people that want to do deals with you. Those are the ones that you typically decide to work with.

Ash Patel: Since you left the medical field, what’s the hardest lesson you’ve learned?

Dallon Schultz: Being my own boss. Especially being a registered nurse, you show up to work, you’re assigned the patients that you have for that shift. You have a list of “Here they are, here are their medications, this is when they’re due, here’s your assessment”, and you got to chart all of it. I’m not sitting here saying that you don’t have to critically think, because we absolutely do in the medical field, especially when conditions and people can change so quickly. But all I had to do was show up to work and it was basically spelled out for me. Once I left that, nobody was telling me what I had to do. So learning to prioritize, effectively manage my time, determine what is the best use of my time today or in this hour, and what’s actually going to move the needle – that’s one thing that completely blindsided me when I transitioned into this space. But I have grown to really, really enjoy it, appreciate it and, the challenges, and always trying to fine-tune what it is that I need to do to get to that next level.

Break: [00:16:45][00:19:41]

Ash Patel: What are some of those things that helped you? Because a lot of people are in your shoes where they transition from a career to full-time in real estate. And it’s hard, you have this entire day in front of you, you’ve got a bunch of work to do, but then you also have squirrel syndrome. So how do you stay on track? How do you stay focused? What’s helped you?

Dallon Schultz: That’s hard and we’ll often find ourselves keeping really busy. But then a month goes by and we’re like, “What the hell did we just accomplish over the last month?” That’s what you need to try to avoid. One of the best tools that I’ve implemented, it’s actually the time management matrix from Stephen R. Covey’s book, The Seven Habits of Highly Effective People. I won’t go into depth with it, I’ll introduce it. You basically create these quadrants of things that are important, not important, urgent, non-urgent, and you prioritize your tasks and what you need to do. That’s really helped me focus on “Okay, these are the tasks that are actually going to move the needle. This is the stuff that’s most important.” Quite often, it’s the stuff that we don’t want to do, and that’s why we avoid it, so we do other little tasks because it makes us feel good and we feel productive, but it doesn’t move the needle. So that’s helped a lot. That’s probably one of the biggest things, is just having that time management matrix and just prioritizing your time. If I don’t schedule it, it’s not going to happen. If it’s not in my calendar, it’s not going to happen.

Ash Patel: Another thing that helped me was having that pyramid, where in the top is dark green, then it’s light green, yellow, orange, red. It’s basically a money pyramid; what tasks are going to make you the most money. I shouldn’t be implementing that. In theory, it’s great, but I just need to be a little bit more diligent about it.

Dallon Schultz: I host the largest monthly meetup in Arizona, and we talked about this at our meetup last night, about tools. We have this time management matrix, this pyramid that you’re referring to. There are tons of different apps out there; we have these tools all around us that can help us remain focused and be productive, but they’re only as good as whether you use them or not, and if you use them the right way. So there are a lot of useful things out there but ultimately, it comes down to us taking that action. Things might point us in the right direction, but we’re the ones that have to take the steps forward.

Ash Patel: Yeah. Dallon, what is your best real estate investing advice ever?

Dallon Schultz: Best Ever real estate investing advice? I feel like this is the moment where I should have a really powerful quote prepared or something.

Ash Patel: Just be you remember.

Dallon Schultz: Yeah. You definitely want to be yourself. But I think naturally, I know for me, I am my own worst critic. I’ve realized that typically the only person that we’re in competition with is ourselves. If you can continually work on improving yourself, personally, professionally, mentally, spiritually, physically, the real estate investing, the business aspect, it’s going to follow suit. If you don’t have your personal life on track, if you don’t have yourself together, you’re not going to make it professionally. In this case and on the show, it’s those of us wanting to do real estate investing. So get yourself in check first, I’d say.

Ash Patel: Good advice. Dallon, are you ready for the Best Ever lightning round?

Dallon Schultz: Let’s do it.

Ash Patel: Let’s do it. Dallon, what’s the Best Ever book you recently read?

Dallon Schultz: Hands down, Best Ever Syndication Book. That’s actually what inspired me to start our meetup here. Now we’re taking that meetup to multiple states. I talked about establishing that leadership platform and I know Joe Fairless did the podcast. For me, I don’t feel like I have a radio show host but I love hosting events and having that in-person interaction.

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

Dallon Schultz: Education and inspiring people. I transitioned, I left my W2 transitioning into a kind of an unknown area. Any way I can share my experiences and challenges and help people experience that mindset change, I go after it.

Ash Patel: Dallon, how can the Best Ever listeners reach out to you?

Dallon Schultz: The best way is email. They can reach me at dallon@revequitygroup.com. They can also follow us on Instagram at Rev Multifamily, that’s where we put out some additional content. We have information about our events and it’s just a great place to connect with other like-minded people.

Ash Patel: Awesome. Dallon, thank you so much for taking time out of your day and sharing your story with us. Coming from a family of real estate entrepreneurs, going into the medical field, then coming back into real estate, and being very successful doing it. Thank you for sharing your story with us.

Dallon Schultz: Yeah. I appreciate being on. Thanks for having me.

Ash Patel: Best Ever listeners. Thank you so much for joining us. If you enjoyed this episode, please leave us a five-star review and share this podcast with anyone who you think can benefit from it. Please also follow us, subscribe, and have a Best Ever day.

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JF2667: 4 Best Self-Storage Growth Tips for 2022 with Ben Lapidus

In the past year, Ben Lapidus’ company grew from 13 self-storage operations to 51, with a portfolio of $100M AUM. Working through COVID-19, and looking to the future, Ben Lapidus provides his insight on the self-storage industry and what his strategy is for tackling the new year.

Ben Lapidus Real Estate Background

  • Chief Financial Officer for Spartan Investment Group LLC
  • Portfolio: 51 operation, $100M AUM 
  • Founder and host of the national Best Ever Real Estate Investing Conference and managing partner of Indigo Ownerships LLC
  • Say hi to him at www.spartan-investors.com

Best Ever Book: Covariant Loop Quantum Gravity: An Elementary Introduction to Quantum Gravity and Spinfoam Theory by Carlo Rovelli

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TRANSCRIPTION

Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed. This is the world’s longest-running daily real estate investing podcast. Today we have Ben Lapidus with us. Ben, how are you doing?

Ben Lapidus: Doing well. Thanks for having me.

Slocomb Reed: Great to have you here. Ben is a partner and the chief financial officer for Spartan Investment Group LLC, where he has applied his finance and business development skills to acquire the company’s current portfolio, build the corporate finance backbone for the firm, and organize hundreds of millions of debt capital. Ben is also the founder and host of the National Best Ever Real Estate Investing Conference, and managing partner of Indigo Ownerships, LLC, where he sponsored 40 plus single-family and multifamily real estate transactions. Ben, you were just telling me, you’ve put together a pretty big deal here just last month. Why don’t we start there? What do you have going on right now?

Ben Lapidus: Sure. Spartan is a self-storage development and syndication company. We focus all our energy on self-storage assets. We’ve had a pretty big breakout year, we went from 13 operations to 51 operations this year, we’ve 5X’d our acquisition take-down, we’ve 8X’d our revenue, we’ve 6X’d our employee headcount, and that was kind of capstoned with a $100 million portfolio, 18 properties in Texas. The day before Thanksgiving, we finally closed. A 100-million-dollar total project costs, almost a 60-million-dollar loan.

Slocomb Reed: That’s exciting. That’s a lot of big numbers. You’ve got a lot going on. It sounds like explosive growth for Spartan. Talk me through that. That’s just in the past year, those numbers?

Ben Lapidus: Yeah, that was one deal, the 100-million-dollar deal. But we did 260 million dollars of takedowns this year.

Slocomb Reed: Gotcha. That 260 million – how many deals is that?

Ben Lapidus: 12 transactions.

Slocomb Reed: Gotcha. That’s exciting stuff. Tell me, with this 100-million-dollar portfolio – you said it’s in Texas?

Ben Lapidus: Yup. The 100-million-dollar portfolio is in Texas. It’s all around the Dallas-Fort Worth area, in Tyler, Texas.

Slocomb Reed: Awesome. I assume these deals came from brokers. Have you found that particular broker relationships have been more fruitful for you than others?

Ben Lapidus: For sure. Not all of our deals have come from brokers; some have been direct sellers. But yes. In the storage industry, it’s a little bit different than multifamily. There are more multifamily brokers in Dallas-Fort Worth than there are storage brokers in the US. So you want to build strong relationships with all of them. I mean that very literally, all of them. But yes, there are some that we tend to find that our transaction methods and our values for doing business match their values for doing business more so than others.

Slocomb Reed: That’s awesome. So this 100-million-dollar portfolio – tell me more about what makes it so exciting aside from just the size.

Ben Lapidus: Well, we’re excited about the opportunity to execute Spartan’s business plan, our standard kind of bread-and-butter business plan, which is to identify self-storage assets that have existing cash flow, but extra land, and market conditions that allow us to expand with low risk, so that we can take advantage of the cash flow from our existing structures, build new cash flow on top of the vacant land, and allow the cash flow from the existing supply, the existing structures, to cover the debt service on the expansion, so that we can essentially have the margins of a ground up development, with the risk profile of a cash-flowing asset.

We have, in this 18-property portfolio, five assets that we’re planning on expanding right away, but 11 of them can be expanded. Six of them, we did not believe were quite prime for expansion quite yet, but there’s at least five assets that we can expand on.

Typically also in self-storage we have 30-day lease cycles as opposed to 12- month lease cycles in multifamily, or a three to 10-year lease cycles in office, industrial, and retail. So we’re able to push rents very quickly, and on average, we’ve been pushing 15 to 20% in collections in nine months. So we could take 100,000 of rents and push it to 115 to $120,000 of rents in about nine months. We’re excited about the opportunity to do that.

We’ve also [unintelligible [00:05:13].11] these 18 assets down on top of a preexisting portfolio of about 12 assets that we already had in the area. We’re really excited about the economies of scale and economies of scope that can be achieved by adding these new assets and new team members in the region.

Slocomb Reed: So you’ll have 30 sites in the Dallas-Fort Worth area. Is there a sense that there’s a certain critical mass, a percentage of the market share or something like that, that gives you more control over what self-storage looks like in Dallas-Fort Worth?

Ben Lapidus: Absolutely. There’s more self-storage facilities in the United States than McDonald’s, Burger Kings, Starbucks, all combined, all three of those combined. So there are over 50,000 self-storages knocking on the door, 60,000 self-storage facilities in the US. It’s really difficult to take over markets like DFW. However, in Tyler, Texas with a population of 150,000 people, we’ve just added our fifth facility and we’re looking to have more. So we’re going to be the largest owner operator in Tyler, Texas, and the most sophisticated operator, which is great for search engine results and for competitive landscapes. We anticipate being the highest profitability operator in the region of Tyler, Texas. It’s easier to take over a market like Tyler, Texas, or Chattanooga, Tennessee, or Bentonville, Arkansas, than say a DFW, or Denver, or Seattle. But yes, there is a way to hit critical mass in some of these markets.

Slocomb Reed: Got you. You have a value-added business model. I don’t know if value added is the term that you’re going to use. You said you’re looking for ground up development type deals, but with cash-flowing asset financial structures… Do you see more opportunity in larger metro areas where you have vast competition? Or is it the Tyler, Texases that give you a better opportunity to do that?

Ben Lapidus: Right now, our investment thesis is focused on secondary markets and suburbs of primary markets. We’re not interested as much in competing with REITs. If I’m in Atlanta proper, I’m competing with — 92% of my competition is going to be REITs. Companies like Extra Space, Cubesmart, U-Haul, Public, Prime Storage, StorageMart, the last two being privately owned companies. But these are the top 10 largest operators in the world of self-storage. The majority of them are publicly traded, and they have access to much cheaper capital than us, and we would lose in a price war. And that happens.

During COVID times we owned a mall conversion in Fort Worth Texas proper, like downtown Fort Worth. It was a mall that is still in the process of being revitalized into different utility, the existing purpose. Across the street was an Extra Space, a mile north was an Extra Space, a mile south was an Extra Space, and something like 87% of the square footage in a 15-minute drive radius was REIT managed.

When COVID happened, Extra Space said “We’re cutting all rates nationwide by 50%.” Not the most intelligent play for all of their assets. They had assets that were 99% full, that went to 98.5% occupancy, that they still slashed rates 50% on. It didn’t make any sense, but that was still a policy they did. So across the street, where they had 99.6% occupancy, they slashed their rates 50% for six months. We invested a ton of money into search engine optimization, which is a typical playbook strategy that usually works. In Fort Worth, it wasn’t working, because Extra Space is spending a whole lot more.

So we tend to avoid heavy REIT competition areas and focus more on secondary markets. That’s a fear-based strategy. But the winning strategy that accompanies that is these REITs don’t really have the attention and capacity to take down five-million-dollar assets in a Tyler, Texas. They do, however, have the capacity to take down a billion-dollar portfolio. So we’re seeing a cap rate arbitrage between a 10-million-dollar transaction and a one-billion-dollar transaction, with exactly the same operational structure, the same avatar of ownership.

So you could buy a 10-million-dollar deal at a 5.5 cap and see the exact same billion-dollar portfolio that’s just comprised of a hundred 10-million-dollar assets, trade at a 3.75, or 4.0, or 4.25 cap rate, without changing anything to the operation, doing zero value add, zero rent pushes. So we’re seeing an arbitrage play by portfolio composition of concentrating our assets in secondary markets where we’re the largest operator, because it allows the top 10 ownership groups to get in at scale. So our portfolio thesis is to build a one to two-billion-dollar portfolio concentrated in the secondary markets that are attractive, to allow one of our big brother competitors to enter that market by buying a portfolio, if we choose to let that happen.

Break: [00:10:02][00:11:41]

Slocomb Reed: It sounds like you’ve found maybe not a niche, but you’ve found a property size or an asset size that really works well for you guys. There’s probably a limit where something is too small to make sense for you, but you have an upper limit where you don’t want to be competing with REIT money that can handle those three-caps. And correct me if I’m wrong, Ben – what you guys are doing is amassing portfolios from smaller properties to get them to the size that REIT money becomes interested in them and you’re able to sell them at a severely compressed cap rate?

Ben Lapidus: That’s right. And we’re often repositioning these assets, too. We’ll take over something that looks like a dog from an owner operator that wasn’t interested in investing in deferred maintenance. We’ll refresh it, we’ll push rents 20% in the first year, even if there is no expansion potential on the asset… And just the aesthetic appearance makes the coastal money more attracted to the asset, just by swapping out the first impression on the frontage. Which also improves our ability to increase rents, because tenants show up and they say, “Oh, this looks nice, it looks safe, it looks secure, it looks well managed and taken care of.”

Slocomb Reed: A little easier to do that with self-storage than it is with apartments, isn’t it?

Ben Lapidus: That’s right. Yes, it is.

Slocomb Reed: Gotcha. Do you see this business plan, this skill set that you all have put together in self-storage, do you see it translating to other asset classes?

Ben Lapidus: For sure. We don’t consider ourselves to be self-storage operators, we barely consider ourselves to be real estate investors. We consider ourselves to be students of business operations, and to combine our unique competencies as a team, and deploy them under a strategic thinking planning process that allows us to attack any business challenge. So we just happen to have decided, have landed on self-storage today, because that looks like the best opportunity in front of us… But we can take our business operation and mold it into any other asset class, really any other business model inside of the investing landscape.

Slocomb Reed: Gotcha. Ben, you’re a friend of the show, you’ve been on the podcast a few times now, I believe, and people know you from the Best Ever conference… But I don’t know that you’ve been on the podcast since COVID became a pandemic. How has COVID impacted the demand and possibly the supply of self-storage in America?

Ben Lapidus: Yeah. In the reverse way from what you think, it’s made everything a lot more attractive and a lot more lucrative in self-storage. COVID became the highest performing asset class in commercial real estate outside of data centers. After about a year, it even surpasses data center. So self-storage…

Slocomb Reed: This is self-storage during COVID?

Ben Lapidus: This is self-storage during COVID. I made mention of the first six months, how in primary markets it got really competitive as everybody kind of waited and buckled down for “shit to hit the fan”, but it didn’t. There was more new self-storage built between, I want to say, 2015 and 2020 than the previous 30 years of the industry combined. In that five-year period, a massive amount of new self-storage came to the market, peaking in Q3 of 2018 is when construction completions peaked. Everybody anticipated it was going to take three, four or five years for all this new supply to get incorporated into society. There was even an asset in Denver that was selling for 40 cents on the dollar that nobody purchased. A year later, it went back on the market for two and a half X and they got taken down within a month.

In Denver, it was probably the second most concerning city in terms of oversaturation of new storage supply. But all of the new supply got eaten up; the demand was there to match it in about a year or year and a half, more than twice as fast as the best predictions. Consequently, rents nationwide increased from June of 2020 to June of 2021 by 12%, while occupancy went up by 4.6%. So just massive rent growth over the year.

And new construction has gotten more difficult. Wood skyrocketed, metal tripled in cost, labor went up 20%, all in about a year. So our construction for a flat-graded site in Texas went from about 40 bucks a foot, for climate control, single story buildings, to about 60 bucks a foot, climate control, single story buildings. So a 50% increase in overall costs, which is just nuts. It’s making new construction more difficult; it’s making markets like Tyler, Texas, where the rents are lower than DFW, almost impossible to build new in, unless the rents are increased. That’s what started to happen, because there’s no additional supply and there’s this great migration pattern happening and people moving to Tyler, Texas. Rents are increasing as occupancy increases. It’s making the identification of assets much simpler. Three or four years ago, we used to say Denver is oversaturated, but you can find a good deal. It’s an intersection specific play, it’s a convenience play. So if you find the right intersection in an oversaturated market, you could do very well.

Today, it’s not as necessary. Almost every intersection is either neutral or slightly under supply. As opposed to a couple years ago, we assessed it to be oversupplied. So there’s more opportunity out there; the ride, the wave of self-storage is not over. More than $40 billion of dry powder has entered the space in the last year and a half. Blackstone, KKR, Brookfield have all gotten into the business. Bill Gates and Singapore sovereign wealth funds just funded StorageMart, Prime Storage just launched another three-billion-dollar fund that they just finished raising… There’s just so much dry powder. Public storage sat and waited for about three or four years without buying anything, and it took down two billion and a half dollar portfolios this year. It’s just a massive shift in the last year for storage, and cap rates have compressed despite interest rates going up.

Slocomb Reed: That’s a lot of great information, Ben. A couple of things – you said during COVID, your cost to build went from $40 a foot to $60 a foot. That’s a 50% increase. What is the rent growth during that same period? Is it proportional?

Ben Lapidus: No. 12%.

Slocomb Reed: Okay. And that’s 12% in Tyler, Texas as well as Dallas Fort Worth?

Ben Lapidus: No, it varies entirely. Yardi is the number one data provider of nationwide shifts, macroeconomic shifts in self-storage. I don’t remember the number one city, but I remember the number two city on their top 25 lists, with Atlanta, and it had 24% rent growth. So it’s all over the place, but on average, it’s 12%. In Tyler, Texas — like I said, we’re finding ourselves pushing collections by 15 to 20% in the first nine months of almost every asset that we’re buying, whether it’s Georgia, or Texas, or Colorado, or Wisconsin, or anywhere else that we’re buying. But a lot of those assets that we’re buying have rents that were under market even a year ago. So it’s difficult to tell exactly based off of our own acquisitions. Tyler, Texas is not a metro that Yardi measures, but at least 12% in Tyler, Texas.

Slocomb Reed: So for someone who wants to get into self-storage now, end of 2021, early 2022, you’re describing compressing cap rates, increased construction costs, outpacing rent growth, although the rent growth is solid… Where do you see opportunity for someone who wants to get into the self-storage game now?

Ben Lapidus: It’s fairly difficult.

Slocomb Reed: Let me ask, Ben, is there a property that is too small for you and your team? You guys play underneath the “big money?” Are there people who can get into a space underneath you and still get really good returns?

Ben Lapidus: For sure. We typically look for assets that can generate at least a quarter million dollars a year in revenue. We do own a few – they’re smaller, maybe they do 100k or 150k in revenue, but there’s expansion potential and we know that they can improve there. If you have a 20,000 square foot asset in Harlingen, Texas or in Tea, South Dakota, it’s not really a place that groups like myself or the big REITs are going to identify as an acquisition target. There are some groups our size that do go after assets like that. KO Storage is very good at operating in rural areas with smaller purchase prices. But for the most part, groups like ours don’t attack those.

So yeah, a 20,000 square foot asset that’s generating $100,000 in revenue – there’s just not enough revenue there to support the overhead, the cost to operate it the way that we’d like to operate it from a centralized location in Denver. If you’re right around the corner, you could end up doing very well and have a very lucrative business operation. Just know that it’s not just buying passive real estate, it is a business operation that does require a time investment, and does have a burden of ownership, just like any other real estate. It is more hands on than retail or office, but not as hands on as multifamily or mobile home parks.

Slocomb Reed: To that point, Ben, that it’s not as management intensive as multifamily or mobile home parks – how big does a self-storage facility need to be to justify a full-time employee on site?

Ben Lapidus: It brings up another can of worms conversationally about where the industry is going to a contactless experience, which is more efficient from a cost standpoint. But right now, we typically target 200k to 250k in revenue is our minimum that we’re looking for to support our operational model, which does include somebody on site. That typically is around 35,000 square feet in a market like Florida, or maybe as much as 45,000 feet in Gary, Indiana.

Break: [00:21:09][00:24:05]

Slocomb Reed: Do you think there’s opportunity for people who want to get into self-storage, it sounds like, if they’re willing to owner-operate in a smaller than that space?

Ben Lapidus: Yeah, for sure.

Slocomb Reed: And it sounds like the opportunity you guys are taking advantage of is buying the assets smaller than what the REITs are interested in, in order to do some construction, do some new development and some building a portfolio of assets in an area large enough that the buyers at the lower cap rates will be interested in buying it from you at a multiple of what you’ve got in it.

Ben Lapidus: Yeah. And one clarification there is that we do have some assets that the REITs would love – they’re beautiful assets, 15 to $20 million – but they’re in markets that the REITs aren’t already in, so it’s more of the scale inside that market that’s too small.

Slocomb Reed: Got you. They need scale, so you are bundling scale for them to sell it to them at a multiple of what…

Ben Lapidus: Exactly.

Slocomb Reed: What is your Best Ever advice?

Ben Lapidus: Best Ever advice is to focus on people’s why’s, and then to identify who have why’s that complement your why, but have different competencies to support you. I think everybody focuses too much on the how. There’s a great book, Who, Not How by Dan Sullivan, and there’s a great book Start With Why by Simon Sinek. When you combine those two together, they are magical. Identify people’s why’s, incentivize them, and empower them to achieve their why by making them your who to achieve your mission in your life.

Slocomb Reed: Awesome. Ben, are you ready for a lightning round?

Ben Lapidus: Let’s do it.

Slocomb Reed: Awesome. What is your Best Ever way to give back?

Ben Lapidus: Right now, I’m 100% concentrated on scaling our business. We’re trying to create a great place to work. Our big, hairy, audacious goal in progress – so it might change, but our big, hairy, audacious goal in progress is to create wealth for every Spartan, and 100,000 active investors at Spartan investment group. The creating wealth for every Spartan component is where I’m most concentrated, creating a great place to work. We’ve grown to 70 employees and we’re targeting 300 in the next year or so. So identifying where we can improve the lives of our people – that’s where I’m currently focused. I’d like to broaden that scope as I age in life. Right now, I want to stay very, very focused on my team.

Slocomb Reed: That’s awesome. What is the Best Ever book you’ve recently read?

Ben Lapidus: Ah, man, I’m going to be a little bit off the beaten path, but Carlo Rovelli is an Italian physicist that specializes in gravitational loop theory. He has made gravitational physics accessible for the layman like me who has never taken a physics course. It’s changed my entire concept about time and space and purpose of life. Physics has become my new religion. I think that everybody should be a student of quantum particle gravitational physics, because it is the most interesting subject matter in the human experience.

Slocomb Reed: Ben, do you see direct correlation between what you’re learning, reading about gravitational loop theory from Carlo Rovelli with what you’re doing with real estate?

Ben Lapidus: Yes. People ask me that all the time. They’re like, “Why are you concentrated on that?” I think that too much of us in the business world focus on business books, self-help books, psychology books… And I’ve done a ton of reading on leadership in the last couple of years as we’ve grown our team. But when you’re a leader, you have to start thinking about different psychology and philosophy of conversations and interactions, so now you start studying things like stoicism, nihilism, and different ways of holding yourself, and interacting with others. Then you kind of think about like, “Why be a stoic? What’s the purpose of life behind that?” Gravitational physics helps give me a grounded sense of reality as I explore different philosophical postures in my interactions and expand my emotional intelligence to be a leader with my people. That’s all helping coagulate our team to drive in a particular mission, in a particular direction. It doesn’t help me be a better investor. I read the Economist, I read the Wall Street Journal, I’m a student of economics, but that’s a different subject matter. But in building a team and leading them, I’m way too introspective and way too cerebral to just say “Do this thing, I expect you to do it.” I have to understand the why behind all of my individuals, what motivates them, I have to understand the why behind myself. How do I optimize my own energy flow throughout the day? How do I not get decision fatigue? So I read Marcus Aurelius, and – I don’t know, I’m blanking on other philosophers, but I read those books…

Slocomb Reed: Lucius Seneca maybe.

Ben Lapidus: Exactly. Thank you.

Slocomb Reed: I have a philosophy nerve too. Back into the lightning round. Ben, what is the most money you’ve ever lost on a deal?

Ben Lapidus: The most money I’ve ever lost on a deal was two flips in the Chicagoland area for about $180,000.

Slocomb Reed: Those are single-family flips?

Ben Lapidus: Single-family flips. Yeah, not a great solo flipper.

Slocomb Reed: Gotcha. What about the most money you’ve made on a deal?

Ben Lapidus: The deals not over yet, but 24 million.

Slocomb Reed: Talk about that. That’s the money you’ll make on a deal you’re doing now?

Ben Lapidus: Yeah. So on a $100 million portfolio, we might generate four million dollars of revenue in our first year, which we did, and anticipate $20 million of upside to our ownership group after hitting all of our return targets and beyond for our investors. The second deal…

Slocomb Reed: What’s the hold period on that?

Ben Lapidus: Five years. A better option – we built a mobile home park in Sequim, Washington. It started in February of last year, we purchased the land, we just got our CFO last year, we’re under contract to sell it in two weeks, we’re more than double our cost basis. We’re generating about $13 million of upside in about a year and a half.

Slocomb Reed: Awesome. What does that return look like for your investors?

Ben Lapidus: Spartan is going to earn a couple of million dollars on that, but our investors are getting 175% return in about 18 months approximately.

Slocomb Reed: That’s awesome. Where can people get in touch with you, Ben?

Ben Lapidus: ben@spartan-investors.com or ben@besteverconference.com.

Slocomb Reed: Yeah, the Best Ever Conference is coming up soon. We are soon going to release an episode exclusively about the experience of the Best Ever Conference. We’ll get into that more here soon. But for today, Best Ever listeners, we hope you have a Best Ever day. Ben Lapidus, thank you again for all the insight you’ve given to us. We will see you again tomorrow.

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JF2643: The 5 Secrets to Closing Your First Deal with Michael Blank

Starting off on your first deal can be daunting. How big of a deal should you aim for? How do you build a good team? Where can you find a good network? Host Joe Fairless and guest Michael Blank share their top five secrets to closing your first deal.

Michael Blank Real Estate Background

    • Entrepreneur and investor
    • Helped investors purchase over 9,500 units valued at $445M through his training programs
    • As CEO of Nighthawk Equity, he controls over $200M in performing multifamily assets 
    • Based in Atlanta, GA
    • Say hi to him at: www.themichaelblank.com

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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, and we’ve got something for you today. And I’m sure you are wanting to dig in, because you probably read the title of this episode. So I’m going to just tell you right now, The 5 Secrets to Closing Your First Deal. That’s what we’re going to talk about today with Michael Blank. How are you doing, Michael?

Michael Blank: Hey, Joe. I’m doing great.

Joe Fairless: Well, I’m glad to hear that. Five secrets to closing your first deal is what we’re going to talk about. You know, Michael Blank; either you’re a loyal Best Ever listener or you’ve come across him in other circles, but I’m just going to give you a quick refresher and then we’ll get into it.

He has helped investors purchase over 9,500 units valued at $445 million through his training programs as CEO of Nighthawk Equity. He controls over $200 million in apartment communities. He’s based in Atlanta, Georgia. His website, themichaelblank.com, you can go to it, it’s also in the show notes.

So, today we’re going to talk about The 5 Secrets to Closing Your First Deal. And just a quick personal note, that is the most important deal, the first deal. There’s so much power and momentum when you get one deal done, and I know Michael subscribes to that same philosophy, and that’s why we’re going to be talking about this.

So with that being said, Michael, how should we tee this up? What have you found are the five secrets to closing your first deal?

Michael Blank: Yeah, I’m going to use the first one of five. We only go for five, right? But the first one is you’ve got to operate with total integrity. Here’s what I mean by that. You’ve got to stay true to yourself. Integrity means different things to different people. What it means to me is you’ve got to stay true to yourself; don’t try to be someone else… And that includes, for example, looking at your strengths and weaknesses. What are you good at, what do you love to do? …and focus on those things. For example, maybe partner with someone who doesn’t have those strengths.

It also means, obviously, doing what you say. That’s one of our company’s values, is always do what you say, and it’s amazing how many people don’t do that. And the third component real in operating total integrity is serving other people; looking for ways to serve other people. Because I’ve started this whole entrepreneurship thing from more of a financial aspect, like how much money can I make, so I can quit my job. It was financially-driven. There was really no element of service in there. And what we’re doing getting into the syndication business is we’re literally building a multi-million dollar business. It’s a foregone conclusion. But how in the process can you serve other people? How can you serve your passive investors? How can you educate them to this asset class, right?

So the bullet number one for me is operating with total integrity, not only for yourself, but also as you evaluate partners, for example, or support groups, or anybody else. So that’s number one for me.

Joe Fairless: Yeah, and I’m glad it’s number one, because people are smart and people have emotional intelligence, and most people can pick up on if someone is not being true to who they are, if they’re trying to fake something. And I’ve always said, I have a great amount of respect for bands, artists who write their own lyrics. I might not agree with what they’re singing, but man, they’re writing it, and that’s what they’re feeling. That’s who they are. Same with this. Be true to who you are. People might not like it, and they might not agree with everything you say, but most importantly is just be true to who you truly are, versus trying to be someone else. What’s number two?

Michael Blank: Number two, is to follow a specific, proven process. When I got started, and when you got started, there wasn’t a lot out there. There was maybe one person doing a seminar, there was one book. In the meantime though, so many years have gone past by, that there’s actually proven processes out there. So find a specific proven process that has been shown to work – I just call it the dealmaker blueprint – and then just follow that process. You wrote a great book about syndication, you’re outlining steps that lead to a deal. That’s a great process.

So in other words, educate yourself. Don’t do what I did, trying to figure this thing on my own. You’ll eventually get there, but it’s super painful… Versus instead, why don’t you try to follow a process that already exists, that’s maybe worked one or two times?

Joe Fairless: Makes sense. Number three?

Michael Blank: Number three really is purchase large properties, and you probably don’t disagree with me on this. It’s just because that is just they’re more profitable, they’re more stable, you achieve your goal faster, and it’s also more fun. Now, having said that is a caveat, because I’m not necessarily a go big or go home kind of guy. It’s not like that, like, “Well, if you’re not going to do 100+ unit deal, then you might as well not even get started.” That’s not what I’m saying. What I’m saying is you should do the largest possible deal that you can, and normally, that is limited by your comfort zone, by your mindset. I’m not even saying it’s limited by your resources or who you know; it’s actually not the case either. It’s really your comfort zone or your mindset.

There are ways that you can expand your comfort zone, to get into larger and larger deals. So you want to figure out ways to do that, to push your comfort zone so that you can get into the larger deals. Regardless, if you don’t do 100 units right out of the gate, they’re going to progressively get larger anyway. All I’m saying is to really make an impact, you want to do the largest possible deal that you can, because that is the most impactful, and there’s various ways we can do that, which really leads me to point number four, which is to build a team.

Joe Fairless: Before we get into number four – do the largest deals possible, and it’s limited by comfort zone. But what if someone has a comfort zone or a mindset of, “Michael, I’m good. I have a mindset. I want a 250-unit deal. I’m comfortable doing a 250 unit deal, but I only see this sixplex that is available. Should I invest my time and money doing the sixplex, and have there be an opportunity cost where I won’t have the time to look for that 200-plus-unit deal? What should I do?”

Michael Blank: Yeah, that’s a temptation, right? You get a lot of people who have invested in single-family houses that deal with this temptation to just do another house, to just buy another house, flip another house. But like you said, there’s an opportunity cost because for every hour that you spend, on flipping the house, it’s an hour you can’t spend on actually doing what you really should be doing, which is an apartment building deal… Meaning, looking at deals, analyzing deals, talking with investors. So the opportunity cost is enormous. Is a six-unit a lot easier to do than a 250-unit? Yes, that can be true, but it also huge opportunity costs if you do that.

So if you have your comfort zone around a large deal like that, like you did. You somehow develop this confidence that, “Oh my gosh, I can do 176-unit.” So  if you have a confidence around that, you’re also going to have a plan around that. Therefore, you should avoid shiny object-itus of flipping another house or buying a sixplex.

Break: [07:19] to [08:51]

Joe Fairless: Let’s change a sixplex to a 15-unit. Is your advice still the same way for that 200-plus unit, don’t do that 15-unit?

Michael Blank: No, it’s not. It’s really that value of the first deal that you mentioned earlier. I call it the law of the first deal; that’s so powerful, because once you do that first deal, everything changes and the second and third deal basically come to you automatically. People also [unintelligible [00:09:16].27] you that want to invest with you. So, the value of that first deal – it far exceeds any kind of money that you can make. Therefore, the goal is not to do the possible largest deal you can, but the goal is to do a deal. And I kind of give myself 12 months to do it. Twelve months gives you enough time to do a deal that is achievable, but also meaningful, and you’ve got to pick whatever that is for you. If you can’t wrap your head around anything bigger than a duplex because my gosh, you’re only making $2,000 a month, and it’s going to take you a year to pull that off – my gosh, a duplex is the right size for you, because that is far outside your comfort zone.

On the other hand, if you’re a high-income earner, a 15-unit or 25-unit might be a great first deal for you, because it’s not a no-brainer, and it’s going to take you a while to raise the money. On the other hand, you don’t want pick something so big or so specific that it’s going to take you three years to get that deal done. Most people don’t have that kind of runway.

Also, don’t make your criteria so specific. Don’t say, “I want a 45.5 unit in this sub-market, in this city.” Don’t be that specific either. Be a little bit opportunistic. Also, be more open to different kinds of partnerships. For example, do you always have to be the lead operator out of the gate? Or could you be a junior partner, for example? So being a little bit optimistic, but making sure that you get yourself into the largest possible situation you can first in the 12 months.

Joe Fairless: Okay. Segueing into number four, I think, right?

Michael Blank: Yeah, which is building a team. I never understood this in the single-family house, even though I had people working with me and for me. It’s not really a team approach, and it took me a while to wrap my head around that. You understood this right out of the gate, for some reason, Joe. It took me a little while to learn that, but multifamily syndication specifically is a team sport. It’s highly unusual to find just a lone wolf out there. They do exist, but if you study them closely, they take a lot longer to scale their portfolio, because they’re doing everything themselves… Versus if you have joint ventures with two or three partners for example, that one plus one far exceeds two, which means that the joint ventures that work really well are complements of each other. For example, we talked about operating with total integrity; be who you are. What are you strong at doing? “Well, gosh, I’m a numbers guy. I’m very detail-oriented, but I’m kind of an introvert.”

Well, that kind of person would be more attractive to finding deals – finding deals, analyzing deals, making offers, doing the due diligence, possibly managing the asset… But there’s another kind of person in relationship to people. They’re extroverts, and the sight of a spreadsheet makes them break out into a cold sweat. Well, those people are great for raising capital.

So those two, for example, make fantastic partners; unbelievably great partners. So one plus one is by far greater than two, because now one person is focusing on what they love to do and what they’re really good at, and so is the other, and that becomes very powerful.

So building a team is very, very powerful, and also now, it gets you into larger deals, because if I’m like, “My gosh. I’m struggling with finding capital”, but there’s surely someone out there who has the opposite problem. They have a network of dentists or attorneys or whatever, professional athletes, but they don’t have deal flow. But getting with those guys, and now you can raise $1 million or $2 million, and now you’re in the game as well.

But the other thing also is credibility. You need to have a team around you to get credibility with brokers and investors. If I just call them up and I’ve got no track record, they’re going to ask me for proof of funds, they’re going to ask me for my resume, they’re going to ask all those qualifying questions. But if I have a property manager, a lender, an SEC attorney, a CPA, an advisor, and a pigeon—I don’t why [unintelligible [00:12:40].20] I was thinking carrier pigeon… But you have this team behind you, you have a lot of credibility. So point number four is to build a team around you.

Joe Fairless: Let’s go back to the example of the introvert who is really good at underwriting and perhaps finding deals; maybe they’re really good at some sort of system that attracts owners’ interest, and they can find a lot of deal flow in the market. How can that person find the complement to his or her business?

Michael Blank: It’s about networking. I think a lot of people—

Joe Fairless: Where? Where do you network to find those people?

Michael Blank: There’s a variety of lists. Now, with COVID, there’s actually in-person conferences like yours or ours, and now we all have virtual components, probably, to attract more people. So there’s literally conferences that you can join. It’s great way to meet people. There are now meetups that are online as well. There’s different online communities. BiggerPockets has some online communities, we have online communities; you can use LinkedIn to search for specific people.

I remember interviewing one person, we get on these virtual conferences, and they would write down everybody in there on the Zoom call, and they would reach out to them later, and then they would set off one on one zoom calls after that. This was a couple that lived in the UK, American couple, and they raised literally $750,000 and bought property remotely by using this thing.

So you can do this virtually. It’s just a matter of being a little more systematic, and being more intentional when you go out there. You have to know what your strengths are, and who you’re looking for. “Man, I’m a deal finder, I’m a hustler, I can find deals, but I really struggle with finding capital”, then go find someone who’s strength is people and finding capital.

The other one is signing up with some kind of educational programs. There’s a variety out there; we have one as well and when you get into those ecosystems, there’s also a network inside of them. So there’s a variety of different ways that you can meet people, you just have to be intentional about what you’re looking for.

Joe Fairless: Number five.

Michael Blank: Number five is invest in mentoring, and at minimum, a support network of some sort. There’s different support networks. One is a peer-to-peer support network. Those are people that are around you; imagine like a mastermind. These are people that are at around your level, they’re trying to do what you’re trying to do and you’re basically just supporting each other. That’s super valuable, right? That’s part of your support network. And number two, we talked about partners. That’s part of your support network. And the third one is advisors and mentors. And this is very, very powerful. If you study professional athletes or successful leaders, a good number of them have coaches or mentors.

And this is a mistake I made, Joe, is when I got started in both restaurants and apartment buildings, I had no mentors at all. And as a result, it took me 10 years. Well, in the process, I lost over a million dollars, almost lost my house, and delayed my journey by a decade. Imagine what would have happened if I had a mentor back in 2005 when I quit my job; that mentor probably would have talked me out of restaurants and possibly talked me into something like multifamily. Imagine if you and I got started 10 years earlier with what we did; that would be crazy.

On the other hand, you hired a mentor and fast-tracked your success; you didn’t lose a decade and lost a million dollars. In fact, I did a 12-unit deal. That was my first deal. And that was basically me, myself and I doing the best I can, learning on the job… And you’re like, “Yeah, that’s for the birds. I’m going to invest in a mentor” and did a 176-unit.

Joe Fairless: Those are for the pigeons.

Michael Blank: Those are for the pigeons. This is the difference in mentorship. And the thing is, the problem with mentorship is that of course it costs money, and it does. And if you don’t have money for mentorship, then obviously it’s not for you. But there’s a good number of people who have money. For example, they want to invest a certain amount of money in their first deal. “Oh my gosh, should I use this money to invest in a deal? Or should I buy this mentorship program?” Or whatever. And the answer is always the same – investing in yourself is far better than investing any one deal, because the ROI is much, much higher.

So if you’re watching or listening to this and can afford mentorship, then align yourself with someone that you resonate with; and there’s a variety of them out there, everyone’s a little bit different… But if you can do that, what it does is, it kind of fast-tracks your outcome. Number one, it does push your comfort zone, because if you’re working with a mentor who’s done this before, well, they’re probably going to try and talk you out of doing a duplex, and they’re also going to help you avoid the big mistakes. For you, clearly, they must have done something to your comfort zone, because you didn’t come out of the womb going, “I’m going to get myself 176-unit old apartment building.” You know what I mean?

Joe Fairless: Right. When you say “invest in mentoring,” is there a point where the investment is, “Wait a second. That’s way too much”, or would you say, “A million dollars for a mentoring program”, because if that mentoring program teaches you how to do 300-unit plus properties, then you will likely make that back within two deals. At what point is it too much or is it not too much? Is it always just an ROI thought process that, based on your opinion?

Michael Blank: Well, to be specific here… If you do a million-dollar deals, we pay ourselves, let’s say a 3% acquisition fee of these deals, which is pretty normal, and you have no other partners because you’re doing a million-dollar deal. That’s $30,000. A lot of people with some education, especially with a mentor, can probably raise $250,000, $50,000 from five people. That is in the realm of possibility, to get do your first deal. Therefore, if your mentoring program cost $30,000, you get that back in your first deal, not your second deal. But that doesn’t include the experience you get coming through that first deal, it doesn’t include the asset management fees, the equity, and certainly not the profit in 3-5 years when you sell the [unintelligible [00:17:59].22] thing. Therefore, even on your first tiny deal, you already get an ROI, and that doesn’t even count a second or third deal. So it’s a pretty basic kind of math, if you look at it that way.

Joe Fairless: That makes sense. Very easy to think of.

Break: [18:13] to [21:06]

Joe Fairless: When evaluating mentoring programs or mentors (maybe they don’t have a program), you just think, “Hey, that person knows a lot. Maybe I should approach them to see if they’ll be my mentor.” How should we look at evaluating how to pick which mentor to approach or go with?

Michael Blank: That’s a good point. You don’t always have to pay for mentorship either. If you can convince someone to meet with you take your underwing, that’s fantastic. There’s a lot of experienced syndicators out there who would love to mentor someone else.

On the other hand, I’ve found a lot of syndicators don’t want to mentor someone else. Or they wanna teach other people, it’s just not something that they’re passionate about… So you don’t have to necessarily pay for mentors, but either way, you want to look for someone, and there’s really five points that come to mind… One is you do want to find someone who operates with total integrity. I think that’s super important as well as you bring on new partners.

And number two, you want to find someone who has done what you want to do, meaning – they have, of course, done their first deal, but more importantly, because you’re on a path of financial freedom, ideally, you want to work with someone who’s actually quit their job… Because the mindset around actually transitioning from a full-time job to full-time real estate – there’s a lot of mindset things going on, and you’d really like to know someone who has actually started at least a scalar portfolio. So working with someone who does this full time would be something that would be important. Also, you want to work with someone who’s focused on results, and not necessarily a cheerleader. A cheerleader is more like a little bit like a coach, like “Yes, you can do it. Here’s some ways you can hack your mindset.” And that’s useful, but I want to work with someone who’s focused on my results, who really knows how to get results.

And then number four, someone who follows a proven system. I wouldn’t just hire a mentor who just kind of a good guy or a good girl, who’s done this before, but is there a methodology or system that we’re working?

And then number five, what would be important is if I’m going to invest in a mentoring program is I’m investing in an ecosystem, right? So what does that network of peers, what does that network of partners or capital raisers or deal finders – what does that look like? So, when you’re looking at mentorship programs or even just aligning yourself with a volunteer, those are some of the things to consider.

Joe Fairless: I have three comments on that. One, you said you don’t have to pay for mentors. I would argue that is the exception.

Michael Blank: Yeah.

Joe Fairless: Because from my experience, if you’re not paying a consultant, then question number one, question number two, question number three that you send them might go answered, but question number four is likely going to be a slower period of time for them to get back to you. And then question number 5, 6, 7, 8, 9, 10, it comes to a point where unless they’re a family member or a very close family friend, you’re taking, taking, taking, taking, and you’re not giving them much if you’re not paying them. And at minimum, it’s going to trigger some sort of guilty feeling on your part. It’s like, “Man, I keep asking this person all this stuff.”

And the other part and perhaps more bottom-line oriented, is if you are feeling guilty that, “Hey, I’m not giving them anything”, then you might second guess asking them questions, and then your growth is stunted, because you haven’t been giving them stuff. So I would argue there are some exceptions where you don’t pay for mentors, but by and large, in real estate, I think you pay for mentorship, from my experience.

The second thing I want to mention is – I remember listening to Tim Ferriss, and he talks about how it’s great if someone who’s great at something is great at it, but can they teach others how to be great like they are? So you mentioned a proven system as the fourth thing here. I agree, they’ve got to have a system in place where, yeah, they’ve done it before, but they know how to replicate their results. I remember Tim Ferriss specifically talking about that on one of his episodes, and I think that’s a great point.

And then the third thing I want to mention is that you talked about the “invest in the ecosystem.” Whatever value someone thinks they’re getting as a result of the mentorship program and the education, they likely do not understand, because it’s nearly impossible to understand the value of the network of the peer group that they’re going to be plugged into, should there be a peer group within that mentoring program.

So I would say whatever mentoring program you decide on, I would implore you to make sure that there’s lots of others in that group that you can connect with… Because probably, that’s going to be the biggest value of the mentoring program, and it’s the most overlooked value.

Michael Blank: I can’t disagree with anything you just said. So I’ll let you keep talking.

Joe Fairless: Well, those are my three things. So do you have a mentoring program? I know personally, from people that worked with you, that it has proven to be successful for them… But I’d love to just quickly have you talk about what’s an overview of your mentoring program for anyone who might be interested.

Michael Blank: I appreciate that, and again, there are variety of quality mentoring programs out there. The thing that is a little bit different around us is that if you value mentorship, you have the ability to actually work one on one with a full-time syndicator. We don’t have any part-time syndicators. And these people are really hard to find, to attract and to keep, because they don’t really need a job in many cases, and the only reason they’re doing is because they share my passion for helping other people.

Number two, we do actually follow a proven system, which we call the Dealmaker Blueprint, and we’ve had hundreds of people go through that. It’s just—I wouldn’t say cookie-cutter, but it’s a very methodical way to get to your first deal and scale your portfolio. And then not only do we focus on results, we actually guarantee results as well. So the bottom line is look at ours, of course—

Joe Fairless: What’s your guarantee?

Michael Blank: Well, it’s a guarantee that you’re going to do your first deal in the first 12 months—

Joe Fairless: Or what?

Michael Blank: —and if not, we’re going to continue supporting you until you do.

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

Michael Blank: Yeah, we’ve set up a special code to find out more about our mentoring program. If you text the word “Joe” to 66866, we’ll send you a quick link, and you can just check out our mentoring program and see what it’s about. You can set up a call, see if it’s right for you. So that’s a great way to do that. So, it’s “Joe” to 66866.

Joe Fairless: Michael, thanks for sharing the five secrets to closing your first deal. Thanks for getting into the specifics of each one of those, and then also highlighting the mentoring aspect of it, which is, by and large, you know, having that community is one of the most important parts of the process. And quite frankly, it makes the process much more enjoyable when you’re doing it with a lot of other people, versus trying to be a lone ranger. So thanks for being on show, hope you have a Best Ever day, and talk to you again 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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JF2380: Finding A Unique Approach For Each Market And Project With Moneeka Sawyer

Moneeka was aware of the real estate business opportunities since she was a child. Following the American Dream, her parents saved their hard-earned nickels and dimes to buy properties. She graduated college during the recession and started a real estate business of her own.

Moneeka used cash gifted at her wedding as a downpayment for her first property. From then on, her real estate business took an intuitive path. 27 years later, Moneeka’s portfolio value is over $12M. Being based in San Jose, California, she specializes in buying executive houses for great long-term renters, and she secures her renters before investing her money into a new property.

Moneeka Sawyer  Real Estate Background:

  • Full time Podcast host and Investor
  • 27 years of investing experience
  • Portfolio consist of 5 executive homes, also started a ground up construction project
  • Current portfolio value is about $12M
  • Based in San Jose, CA
  • Say hi to her at: www.blissfulinvestor.com 
  • Best Ever Book: The One Thing – Gary Keller

Click here for more info on groundbreaker.co

 

Best Ever Tweet:

“Everybody has stress and money issues. Do you want poor people money issues, or rich people money issues?” – Moneeka Sawyer.


TRANSCRIPTION

Ash Patel: Hello Best Ever listeners. This is Ash Patel, and today I am speaking with Moneeka Sawyer from San Jose, California. Moneeka, how are you?

Moneeka Sawyer: I am so great. Thanks for having me on the show, Ash. Nice to be here.

Ash Patel: Good. So you’re a full-time podcast host and investor with 27 years of experience in a $12 million portfolio.

Moneeka Sawyer: Correct.

Ash Patel: I’ve got to hear the story. Tell me how you got started.

Moneeka Sawyer: I actually got started in real estate kicking and screaming. My parents actually came to this country as immigrants with $200 in their pocket and a dream to make a better life. They had heard that the golden ticket to wealth was to buy real estate. So once they had me, they’ve been here for a couple of years, they started saving all of their nickels and dimes… Because now they’ve got a child and their lives were filled with love and hope and excitement. So they started saving their nickels and dimes and bought their very first rental property. So that’s how they got started. Now fast forward 18 years later, and they paid for my college education through real estate. They did the same for both of my sisters, they paid for our weddings… Real estate really provided a huge amount of flexibility and choice for my parents and freedom. So it did a really good thing for them.

But I also saw with my dad, the level of stress that he went through, the toilets, the tenants, the mortgages, all of that stuff. So at a very young age, I decided no way, I’m not doing that, not worth it. Money is not worth that level of stress. Then I graduated from college, and it was a recession. We couldn’t get a job and I was starting to freak out. I had a conversation with my dad one evening that completely changed my life. I was telling him that I was so stressed out, and how was I going to make it on my own? I wasn’t sure how to do this adult thing. What was I going to do about money? He said to me over the dinner table, he said, “You know, Moneeka, everybody has stress and everybody has money issues. Do you want poor people’s money issues, or do you want rich people money issues?” My first thought was “Rich people have money issues?” [laughter] But then I decided, yes, I was going to do the rich people money issue. So kind of kicking and screaming, going against my will I decided, “Okay, I’m going to try this whole real estate thing.” So that’s how the whole thing started.

Ash Patel: So this was right out of college…

Moneeka Sawyer: Well, it was a couple of years after college, after I had been struggling really hard.

Ash Patel: And did you start out on your own? Or did you take over some of your parent’s properties?

Moneeka Sawyer: Good question. So actually, what I did was my husband and I got engaged. He wasn’t my husband… Anyway, my boyfriend and I got engaged, and for our wedding, we asked everybody for cash. So at the wedding and that year we got about $10,000 in cash. So we put down, I think it worked out to 5% on our very first primary residence. Then from there – this is kind of an intuitive path. From there, once that appreciated, we took equity out of that house, and then I bought another primary residence and rented this one out. Then I did that again in another four years. Then we hit 2008 and 2009. Out of that equity line, I was able to now buy five houses, and I also bought a piece of land. So that’s kind of how it all grew. I just started with gift money.

Ash Patel: Is your husband in this business with you?

Moneeka Sawyer: No, he’s a software programmer. He knows nothing about it.

Ash Patel: So you dove in, and I’m assuming you caught the real estate bug, and at some point fell in love with this.

Moneeka Sawyer: Yes, absolutely. Yeah.

Ash Patel: Okay. So what are you doing now?

Moneeka Sawyer: I’m kind of doing the same thing. My whole approach is to keep it as simple, and easy, and blissful as possible. I want it to be just a kind of inflow. So I do executive homes. I’ve started with our starter home and then grew it and grew it. So now all the properties that we have are executive homes.

What I love about that are the tenants. I kind of did this the backward way. I decided who I wanted to do business with, which – your tenants are your business partners. So I decided I wanted to be in business with people that didn’t need me, they just wanted a nice home. So I decided on executives, bought properties that they would want to live in, then just kind of turned it over to them. I did a little bit of the training, but they handle everything. I never get the phone calls for the toilets, or whatever it is that might go wrong, the termites. I don’t get calls because rent isn’t going to be on time. Everything just kind of is inflow. So that’s what I’m doing now.

Ash Patel: So executive homes – is that just higher-end homes?

Moneeka Sawyer: That’s just higher-end homes.

Ash Patel: And is it short-term renters or longer-term rentals?

Moneeka Sawyer: Longer-term. So the smallest amount of time I’ve had an executive there is two years. Most of them surprisingly lived there 10 years or more, and I don’t understand it. Why were they not buying their houses? But most of them are coming from Japan or other parts of the country, or whatever, they decide to stay here, they love the job, and then they just feel like they can’t get into the California market.

Ash Patel: How often does the individual pay the rent versus their corporation?

Moneeka Sawyer: It’s always the individual.

Ash Patel: Okay, so you don’t have any company contracts? It’s always just individuals. How do you market for that audience?

Moneeka Sawyer: I don’t. What happens is… This is a really cool thing – with an executive, they have executive parties, which is why they want to have a nice house. When one of the executives is moving, they start to tell all of their friends that they’re going to be moving. The wives have been at the house a lot. Wives make decisions on houses, that’s what everybody says.

Ash Patel: Absolutely.

Moneeka Sawyer: And one person starts thinking about moving, and the other wives think about “Maybe I could move then.” So I haven’t actually had to market a property in years.

Ash Patel: So 27 years and $12 million. What does your portfolio consist of today, in addition to the executive homes?

Moneeka Sawyer: Just the executive homes mostly. I have six executive homes. Actually, I have a property in Belize. I’ve got a couple of properties, small-time properties that I’m carrying notes on. I’m in a couple of syndications and I’m also doing a construction project, which itself is worth about five and a half million dollars.

Ash Patel: Tell me more about that, the construction project.

Moneeka Sawyer: Yeah, that’s actually new. So when you talk about the $12 million, that does not include the construction project, just so you know. This is kind of a new thing. But basically, we bought a piece of land that was in a redevelopment area in Los Altos, California. Got it for a song, because the zoning wasn’t right. Nine years later, we figured out the zoning. We just started construction about two months ago, so we’re really excited. We just poured concrete last week.

Ash Patel: Amazing. So did you have to fight the entire nine-year time period?

Moneeka Sawyer: We fought. We fought and fought. But it’s not fighting constantly. Once a month, we’d go to a council meeting. In between, we have a couple of conversations with our engineer, or architect, or whatever. So it wasn’t nine years of fighting. It took nine years to kind of get through the whole process.

We did not have to rezone, which was great. But the council, because they’re trying to figure out exactly what they wanted to do with that area, kept changing their minds. I will admit, it was an insanely frustrating experience. Had we known it was going to take us nine years, we would not have done that. But on the other side of it, I’m really glad we did. My heart is really about making communities better.

Ash Patel: Awesome.

Moneeka Sawyer: So even with my executive homes, I buy distressed homes in good areas and fix them. So this is another one of these things – we’re going to be building executive homes, we’re going to be upgrading an area… I love that.

Ash Patel: Good. Were there any tactics that you use to coerce that city council?

Moneeka Sawyer: I was a woman on the team and it was really interesting… And for you ladies listening, I really want you to hear this… The council, and the planning, and engineering – all of these departments are used to dealing with construction workers, contractors, and builders, who are mostly men. Men have a different way of approaching things. They tend to be a little bit more aggressive, they tend to be a little bit more to the point, they tend to get frustrated when they hear “no” 10,000 times. My approach was much softer. I went into every single meeting and I started the meeting just reminding everybody, “We’re on the same team, we both want to upgrade that area. We just need to find a place where we can meet.” That was the approach every single time. When I would go into the council meetings and stand up in front of the council, I will tell them, “I’m trying to upgrade the area. We’re not trying to make every single nickel we can out of this. Tell us what you need.” They would complain about something and I would say “I’m going to make it beautiful!” So the way that I talked about it, I think was a breath of fresh air from what they normally hear. Do you know what I mean?

Ash Patel: Good for you. I don’t know that I could have been patient for that long.

Moneeka Sawyer: I don’t know that I could have either if I hadn’t been prepared.

Ash Patel: Good for you. So with all of your years of experience, you love executive homes. What are your challenges with those types of homes?

Moneeka Sawyer: I only carry six properties. So if I end up with a vacancy, it’s a big deal. Each place gets a rent of about $6,000. So that disappears. When you have more properties, you have a lot more diversification, vacancies aren’t a big deal. I will say in the last five years, I’ve only had one month of vacancy, but that one month was not comfortable. You’re kind of stressed out. But my systems are now so easy and so streamlined that I don’t worry about it too much. But I think that would be the thing, when I have a vacancy. Or in 2008 when I’ve lost values on all my properties. I lost 50% of the value. That was millions of dollars. So that was stressful.

Ash Patel: Right now you’re fully rented. Are you doing anything to continue to get the word out about your executive homes? Maybe try to line up future tenants? Or will you worry about that only when the time comes?

Moneeka Sawyer: I usually only worry about it when the time comes. People know that I do a show. They know on Facebook what I’m up to, so people know, so they’ve got their eyes on me anyway. Usually, I get about two to three months’ notice when someone’s going to leave, because when they’re moving to something else big, they have to prep. Their friends are hearing about it that early. Often I have it rented two weeks before they even leave.

Ash Patel: Awesome. Would you recommend other investors go into those higher-end executive homes?

Moneeka Sawyer: It really depends. It’s an expensive market to get into, and I certainly did not start there. I started on the smaller properties and worked my way up. If you can work your way up, it’s like a dream. The only time I hear from my tenants is if there’s a big problem like a fence blew down in a storm recently, or for Christmas and my birthday. It’s really, really a lovely way to run a business.

Ash Patel: Great. So tell me about your podcasting.

Moneeka Sawyer: Yeah. The podcast is called Real Estate Investing for Women. We talk about real estate strategy, obviously, but my whole approach is about bliss. So I want people to have a holistic approach to business and to real estate so that they can live a really joyful, blissful, simple life. I don’t want all the stress of real estate. That’s how I started. So on the show, that’s what we talk about. We talk about mindset, we talk about heart set, we talk about strategies, we talk about money smarts, so all the different ways that you can invest, get money, like  self-directed IRAs. There are lots of different ways that we get private money, all of that stuff.

So we talked about all of those things, but definitely from a woman’s perspective because like I said, we bring something special to the market and I think women don’t understand that we’re so powerful. I will tell you that Los Altos had decided at one point to turn our property into a parking lot. Not a built-up parking lot, a flat parking lot. We would have lost a million dollars. It was because of my skill of communication that it turned around. Us women bring amazing things to the market. I think my show really helps to amplify our strengths.

Ash Patel: So when you started out with the podcast, was that your intention? …to get women into real estate, get them into investing, get their finances up to par? What are your biggest accomplishments in doing that?

Moneeka Sawyer: Yes, that was the thing, is I really want to empower women to have the freedom of choice, and financial freedom gives us that freedom of choice. So what were my biggest accomplishments?

Ash Patel: With your podcast and maybe some of your guests.

Moneeka Sawyer: Yeah. So some of my guests. I’ve talked to Hal Elrod, I’ve talked to Leeza Gibbons, I’ve spoken to Dr. Joe Vitale, I’ve spoken to many of the big names in real estate. So that’s been amazing. One of the questions you sent me was what are my Best Ever resources… It’s my guests, they’re amazing. I’m talking to these genius people every single day; they’re so much better at what they’re doing than I am and so they lift me up. So that’s one of the biggest things, is that I just have become such a better businesswoman, and it has increased my own wealth through the resources that they offer. So that’s one thing.

But the other thing is, every single day, I get either a new review, an email, or something on Facebook or whatever, saying how I’ve changed someone’s life. Someone started in real estate and now look at what they are. I had one woman that said, “I’ve been looking at buying real estate for two years, I started listening to your podcast, and now I have 10 properties.” So that is the thing that I love the most about it. That’s what keeps me going.

Ash Patel: Crazy question – if you had to pick one, the real estate investing or the podcast, which would you choose? You can only have one.

Moneeka Sawyer: Oh, so hard. I would have to pick real estate investing. And I’ll just say this as to why – I’m on my retirement track. The honest truth is that David and I could retire right now if we wanted to. I want to have a little bit more of a cushion because we have aging parents and some other things that I wanted to get taken care of. So we’re kind of looking at retiring in two to five years. The podcast is a hobby that gives me a lot of meaning, but the real estate is what’s going to give us the life that we want once we retire. I can’t really walk away from that. Yeah.

Ash Patel: So are you continuing to look for additional executive homes?

Moneeka Sawyer: Absolutely. I’m actually looking for a couple more executive homes and also one more building project. I’ve got my eyeballs on a piece of property that I’m in love with. Never fall in love with a property, ladies, or anybody. But I’m going to try on this one and we’ll see what happens. But I am looking for another building project.

Ash Patel: So what is your next executive home? What are you looking for and how are you going about finding it?

Moneeka Sawyer: I did the traditional route. This is another thing that I’m sure nobody else says on your show, but I use the MLS and Realtor, and I tell them areas that I’m looking at. We have some really big growth areas in the San Jose area right now. One of our malls is going from sort of mid-tier to high-tier and then we have a Google campus coming in. Now, we don’t know what’s actually going to happen on the other side of COVID, but we have a big Google campus stated to go in there. I’m looking in those areas for homes for the kinds of people that would be living around the Google campus or in this sort of higher-end area. It’s a little bit up and coming.

Ash Patel: An executive home is it just so much more expensive than the average home in the area? Or is it one of many homes in a high-end neighborhood?

Moneeka Sawyer: It’s usually one of many homes in a high-end neighborhood. I am never the best home in a neighborhood, ever. I like to be mid-tier for the neighborhood.

Ash Patel: And what are your typical cash on cash returns for these executive homes?

Moneeka Sawyer: That’s a good technical question that I don’t actually know.

Let’s say this – I have invested over 25 years, about $250,000 in these homes. I bring in about $5,000 a month on those homes. Now the equity is significantly higher. This is a thing that when you talk about retirement, you talk about how we have huge amounts of equity in California real estate – how are we going to now turn that into cash flow? That’s the project for the next two to five years. I don’t actually know how to do that yet, because I’ve never done it. So that’s the next piece.

Ash Patel: Passive investing.

Moneeka Sawyer: That’s right. Well, it’s always been passive investing. But now we’re going to move into cash-flowing passive investing, as opposed to equity growth.

Ash Patel: Awesome. Moneeka, what’s your Best Ever real estate investing advice?

Moneeka Sawyer: Be persistent. Don’t give up. The market will throw you some zingers, things get tough, sometimes you wonder what the heck you’re doing… But stay persistent and stay the course.

Ash Patel: And you’ve proven that with your nine-year fight with the city council.

Moneeka Sawyer: That’s right.

Ash Patel: Awesome. Are you ready for the Best Ever lightning round?

Moneeka Sawyer: Sure.

Ash Patel: Wonderful. First, a quick word from our partners.

Break: [00:20:02][00:20:24]

Ash Patel: Alright, what’s the Best Ever book that you’ve recently read?

Moneeka Sawyer: I would say my favorite is The One Thing by Gary Keller. It really keeps me focused.

Ash Patel: What’s the Best Ever way you’d like to give back?

Moneeka Sawyer: I actually am a founding member of the She Angels Foundation. We basically fund nonprofits run by women. I’m heavily involved in them. I absolutely love it.

Ash Patel: Awesome. So a VC firm for female-led organizations.

Moneeka Sawyer: That’s exactly right. We’ve got two avenues. One is nonprofit and one is profit. I think it’s sheangels.com or something.

Ash Patel: Wonderful.

Moneeka Sawyer: I should know that. [laughs]

Ash Patel: And how can the Best Ever listeners reach out to you?

Moneeka Sawyer: Go to blissfulinvestor.com.

Ash Patel: Got it. Monica, what an incredible podcast today. It’s great for you to share your story about your parents coming to this country as immigrants. You had no desire to go into real estate, you went in kicking and screaming, and you’ve done amazing things with your podcast, your foundation, your success in real estate… Thank you for sharing your experience with the executive homes. What a great podcast. Thank you so much.

Moneeka Sawyer: Thank you so much for having me, Ash. This was a pleasure.

Ash Patel: Have a great day.

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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JF2379: How To Expand Your Market Reach By Going Virtual With Lauren Hardy

Lauren started working in real estate right out of college. Her journey began in a corporate environment, and she was mostly dealing with commercial properties. Once she had a child, Lauren decided to leave her job and work for herself. At the time, her brother was flipping houses, and he offered her to join the business. In 2016, she started looking for properties outside of the competitive southern California market in order to expand her business. Now, Lauren has a coaching program for those who’d like to go virtual and reach markets all over the country regardless of where they live.

Lauren Hardy Real Estate Background:

  • Real estate investor, coach, and host of wholesaling Inc. Podcast
  • Over 10 years of real estate experience
  • Has invested in 100s of properties, including developing spec houses, and flips
  • Based in Orange, CA
  • Say hi to her at: https://www.wholesalinginc.com/virtual/

 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Flipping the house opened up a lot of ways that you could get ripped off by contractors” – Lauren Hardy.


TRANSCRIPTION

Ash Patel: Hello, Best Ever listeners. This is Ash Patel, and today I’m speaking with Lauren Hardy from Orange County, California. She’s a real estate investor, a coach, a podcast host and has 10 years of real estate experience, where she has invested in hundreds of properties and developed spec houses.

Lauren, how are you today?

Lauren Hardy: Hey, I’m good. How are you?

Ash Patel: Good. You’ve got a crazy amount of experience. I want to hear it all. Tell me your background, how did you get started with real estate?

Lauren Hardy: Well, I got started right out of college. I started working in more of the corporate real estate space in commercial. I graduated college the day we went into a recession, so it was an interesting time to be in commercial real estate, because it was really getting hit. So that’s where I got my start.

When I was working though at the corporate world, I had my first kid, and I learned very quickly that working corporate life and having a child is very, very difficult… So it became my mission to become self-employed any way I possibly could. I really didn’t care what I was going to do. And it just so happened that my brother was flipping houses at the time. I think he had flipped maybe three or four houses in Southern California. So he just made the suggestion, “Why don’t you look into flipping houses? You probably only have to flip a couple of these things a year and you’d make the same amount of money you’re making in your corporate job.” So that’s where it all began. It really evolved in the last eight, nine years. It’s evolved to a whole different thing, but that’s where I got my start.

Ash Patel: So did you go to college for commercial real estate?

Lauren Hardy: Yes, sort of. I was a finance major and I did take real estate courses within that major. I went to a college that offered it; not all the colleges do. So I did take some real estate courses. But yeah, I knew I was going to get into real estate.

Ash Patel: And you took your brother’s advice and started flipping houses during a recession?

Lauren Hardy:  Yes. Well, let’s speed up a little bit. So I graduated during the recession. When I started working corporate real estate, that was mainly in the recession, when we were really at the bottom. I didn’t start flipping homes until we started coming back up around 2012.

Ash Patel: Okay, so the timing was perfect for flipping homes.

Lauren Hardy: It was perfect.

Ash Patel: Okay, and how did flipping homes evolve into your next step? And what was that next step?

Lauren Hardy: So the first goal I had was I wanted to quit my full-time job. So I started flipping houses on the side, while I was working a full-time corporate job. The goal was flip enough houses, make enough money to save up a year salary so I can quit. It took me a year, but I did it. And after then, it was definitely difficult. I thought it would be easier than it was. I had a new baby. So I had my first daughter already, she’s now two and a half, and then I had had a baby during this time.

So my whole thought process was, “I’m going to stay home with my kids, and I’m going to flip houses. I’m totally going to be able to do this. It’s going to be awesome.”

Well, it was not. It was very hard to be at home with two little babies and also manage the direct-to-seller marketing that I was doing. I was getting these deals via direct-to-seller marketing, so it was a lot of direct mail, talking to sellers, making offers every day… So I had thought I could juggle all that while the kids were taking naps, but it turns out that kids don’t take naps just like we take them… So it was really hard. But it really did evolve. I started out with just sort of flipping a few homes here and there. Slowly, I started pushing my kids into daycare, as I realized it was getting a little bit unmanageable.

But the real turn in my business came around 2016. By the time 2016 hit, we were doing pretty well in our real estate market in California, and there was less and less distressed inventory. So to put it into perspective, when we were in a recessionary time, like 2009, 2010, 2011, you could go to the courthouse steps and pretty much pick up a distressed property if you really wanted to; if you had the cash and the means to do it, you could just stand there, raise your hand and pick one up. By the time 2016 hit, it was very competitive at the courthouse steps, there wasn’t very many distressed homes, and there was a lot of hungry investors. So it became really difficult to buy houses that had enough of a margin where I could flip it for a profit here in Southern California, where I lived.

So I had to make something work. I had two options – I could either quit and get a job again, which felt like death, or I could figure out how to make this business work in another market. Because I noticed I had friends in other areas, other territories that were not having the same issues that I was having. So I made that choice to change and to go virtual. And my first market I chose was Nashville, Tennessee. And the first projects I worked on were spec houses, so I was buying lots and building homes ground up.

Ash Patel: Wait a minute, hold on… You could have just bought houses, turnkey, but you decided, in Nashville, to build spec houses. Help me understand that decision process.

Lauren Hardy: Okay, so that—

Ash Patel: Because, you know, there’s an easier route with real estate – just buy ready-made homes.

Lauren Hardy: Okay, so that was the name of the game at the time. That was the way to make money in Nashville. Nashville was going through a development boom. So the way it all came about – and I’m telling you, it was the most random story. I just happened to be vacationing in Nashville, and I’d had this idea that I need to go to another market, because California is getting really hard. So I thought, “I’m going to drive around and look at some houses that appear to have been flipped.”

I pulled a list off of ListSource and I pulled every home that was purchased by investors, like, LLC corporate-owned in the last month. And I got those addresses down, got my rental car and I started driving around. I started noticing something, I was like, “Wait, this neighborhood is strange.” There’s these old homes, but then there’s homes being knocked down where it said there was a purchase, but now there’s no house… And they were in all various stages of construction on these streets, all over the place. And I, coming from Southern California, had never seen anything like this before. It was really weird to see an old home built in 1920 and then right next to it, you would have two tall skinny houses right next to it, brand new.

So I kept driving, and I found a construction crew outside. And I found a guy that appear to look like the project manager, so I just pulled over and said, “Hey, what is going on here?” And he’s like, “Do you not know that Nashville is number one real estate market right now and this is the hottest neighborhood? So developers are just hungry for lots and they’re buying lots and we’re building homes, as many as we can fit on each lot.” So they were maximizing the value of every lot that they could buy.

Ash Patel: So to me, that seems like it’s more competitive than Southern California. How did you score a deal in a super hot market?

Lauren Hardy: Okay. At the time, I didn’t know that, because I thought, “How can anything be more competitive than California?” And the house prices were still, to be fair — these brand new homes were going $350,000. So California, at that time, on average house price was maybe $650,000.

Ash Patel: Okay.

Lauren Hardy: So there was still a big discrepancy there. So I’m telling you, it all started on the side of the road. And I’m talking to this guy, I’m like, “What are you, a general contractor?” He’s like, “Yeah, I’m building this house for this investor, but I’m an investor, too. I’ve got projects in the same neighborhood. Let me show you around.”

So I follow him. I didn’t get into his car, because that’s creepy. But I’ve followed him around and he took me to four job sites. And I said, “Okay, review the numbers with me. You bought the lot for what? How much did it cost to build how many homes, and you built four homes on this lot?” I was just doing the math and I  wrote it down on my piece of paper. And I was like, “Oh, my gosh, these returns are crazy good.”

And then the key question I asked was, “How are you getting these deals?” He’s like, “Oh, there’s this guy that does this secret marketing stuff and he gets these things under contract, and then this other guy tells me about them, and then we just buy it from that guy.” So that was literally how he described it. And I was like, “Oh, like a wholesaler.”

So then that told me, okay, there’s still an opportunity here, because he’s able to buy them from wholesalers and he’s not making it sound like it’s that difficult. So I sized the guy up. I said, “Okay, if he could do it, so can I.” Right?

Ash Patel: Awesome. Yeah.

Lauren Hardy: So I looked at him and I said, “Hey, Phil, find me some lots. And I’ve got money.” And that was it. I had California money, I had a ton of private money investors.

Ash Patel: Yeah.

Lauren Hardy: So he found me some lots, just like that, from a wholesaler. And then he built them for me. And it was so much easier than, say, flipping a house from a distance, because you have no ways that contractors can lie to you and say, “Oh, we didn’t see that in our first inspection.” The first bid is the first bid. There shouldn’t be very many change orders after that when you’re doing ground up, unless you didn’t accurately price out the fixtures that you were going after. Maybe you decided to go higher-end and you start changing your mind, but I [unintelligible [00:12:55]

Ash Patel: Right.

Lauren Hardy: He built enough of these things where I said, “Just make it look like those”, and it was actually ridiculously easy.

Ash Patel: So did you get your friends or colleagues or acquaintances to be joint ventures on these deals? Or did you syndicate it? Or did you just give them a fair return on the deals?

Lauren Hardy: I just gave them the returns. So I got construction loans, because in Nashville, they were giving out crazy good construction loans; very low-interest rate loans. So I got a construction loan for the bulk of it. And then any remainder, I was just getting my private money lenders — what I would do is, I would tie their funds in with a deed or trust, and I would offer them hard money rates. Anywhere from maybe 10% annualized return.

Ash Patel: Got it.

Lauren Hardy: So it worked.

Ash Patel: And how many years did you continue developing in Nashville? Or are you still doing it?

Lauren Hardy: Not doing it anymore. This business – it takes you for a lot of turns. So this sweet spot that I got in was perfect. It was great. But then, like anything, the news got out that Nashville was exploding, and every Tom, Dick and Harry started building in Nashville; even people that had zero experience in real estate, if they owned a lot, they’d just build some homes. They would figure it out how to do it and did it. So it was like the hot thing to do. I got in, made some good money.

But what that led me to do was wholesale other lots to other people. So while we were developing these homes, I started doing the direct-to-seller marketing and wholesaled lots, other houses, I worked outside of Nashville, the other areas… There were hedge funds buying there too, so there was just a lot of business to be done at that time. So I worked it for a couple years. But it then started feeling very similar to California vibes. And I was thinking, “Okay, it’s starting to feel like I just went from one California to another California, except for now this place is really far.”

Ash Patel: Yeah, so what was appealing about wholesaling? Why did you go that route?

Lauren Hardy: Okay, so I tried wholesaling, I tried flipping and I tried developing. So we’ve got the three exit strategies. Developing, that was actually pretty easy. Wholesaling, pretty easy. Flipping the house – it opened up a lot of ways that you could get ripped off by contractors. So you’re buying an old home, you’re not even there to inspect it. So you have your contractor go there, he could lie to you about what it needs right then and there, or he could undercut to get the job, and say, “Oh, no, I could do this for $50,000,” whatever. You go, you buy the deal, because your contractor verified that price.  The next thing you know, once you start construction, the contractor starts finding things in the walls and finding things with the foundation and the plumbing. And that just kept happening to me when I kept flipping homes over there. After a while, I just got so over it and I said, “Okay, I’m either doing ground up or I’m wholesaling these things and that’s it. I don’t want to flip another house.”

Ash Patel: And do you wholesale in California, or everywhere?

Lauren Hardy: Now, I wouldn’t say everywhere, but I am in some key markets in the Midwest and in the South. And right now, I’m not very focused on California, just because of where we are in the market. I’m getting better returns on my marketing dollars spent in other markets. But at this time, yeah, I was wholesaling in California as well, wholesaling in Nashville, and then I started trying out different markets.

Ash Patel: So how does somebody go about wholesaling 2,000 miles away from where you live? How do you make that work?

Lauren Hardy: You know, it’s not that hard. A lot of people have this limiting, belief like, “Oh, man, that must be impossible; that must be so difficult, because don’t the sellers want to meet you in person before they sign a contract?” And I thought that as well. But I was fortunate when I was doing business in California to have the experience that I did, which was, I was talking to sellers that owned properties all the way in LA, and I lived in Orange County.

So LA, if you know – I don’t know if you’ve ever visited, but it could be two hours in traffic to get to that seller’s home, because traffic is so bad on the 405 freeway. So I got to a point where I wouldn’t really meet the seller or agree to meet with the seller unless they gave me their word that they were going to accept my offer the day I met them. And I would let them know, “I’m going to have to drive in traffic, it’s going to be two hours, so I really want to make sure you’re firm on this price, and if I come with a contract, you’re going to sign this.”

So it started with that. I started honing in on my negotiation skills and learning how to take control of the conversation to where the seller just goes, “Oh, well, this is just how she does it.” And they don’t even question it. So years of doing that, I really refined that script and now I can train my team on that script. I literally have the script down of how you’re going to take control and tell them how things go. You just tell them how it goes. “This is how we work. I don’t get out of my desk until we have an agreement signed.” So it turned in from ‘I have your word’ to now ‘I don’t leave until you sign the agreement.’

Ash Patel: So I grew up in New Jersey, you’re from California, do you think that being on the coast, with that coastal mentality helps you deal with people in the Midwest a little easier?

Lauren Hardy: People in the Midwest are way nicer than people California.

Ash Patel: Yeah.

Lauren Hardy: If you want to have a bad day, go send some direct-to-seller marketing to a California seller or go start cold calling on a California list and you will want to kill yourself by the end of the day. They are mean. We always joke around within my company, my team, like anytime somebody new comes in, “At least you never had to talk to California sellers.” They’re so I mean.

So there are some competitive advantages that I noticed, especially in the South, too. California – we’re faster; we answer the phone. If a seller leaves us a message, we call them back within an hour or a couple hours. We wouldn’t let four days go by. But our competition – slower pace, slower-paced culture in the Midwest and in the South. So our competition will take few days to call sellers back, but we already locked up the contract by that.

Ash Patel: So you’ve got the edge?

Lauren Hardy: We have the edge.

Ash Patel: Awesome. So you mentioned the team – tell me what systems you have in place to help you with this wholesaling?

Lauren Hardy: Oh, lots of them. So right now me, personally, I’m not very active working in my wholesaling company or in my investment company. I actually have a coaching program and I host a podcast, so I’m pretty split. So I have some key implementers on my team that really help me out. I’ve gotten really lucky using virtual assistants as well. So I can touch on that, if you’d like to talk about—

Ash Patel: I’d love to hear about that.

Lauren Hardy: —VAs for life. My VA game is strong.

Ash Patel: I want to hear everything about that.

Lauren Hardy: Okay, so I do have an implementer. He’s the guy that’s worked with me for six years. And he’s my right-hand man; I think of him like family. He knows everything about the business. So he really has taken place of myself in my company. So I’ve been able to know that the business is still running and making money with him watching over it and I can work on my coaching platform and hosting the podcast and everything. So I’m very, very lucky on that. My investment company – I maybe work five hours a week dedicated to that company.

So I have virtual assistants that do a lot of different things for me. I have some that are based in the Philippines, and they do everything from checking my email and just flagging that ‘these are the things you need to see’, and that’s it, and letting go of everything else, deleting everything else, or answering the questions if they know the answers.

So for our marketing, we do a lot of cold calling and a lot of text message blasting, so she sets up all the campaigns in there and all the phone numbers stuff, and she checks the voicemails… We have all the voicemails get dumped in one voicemail box, from every single campaign we do, so she’s checking the voicemails and making sure that they get called back by one of our sales reps… So she’s doing all sorts of things behind the scenes, backend stuff that I don’t even know how to do anymore. If you said, “How do you load a campaign in Mojo Dialer?” My eyes would glaze over, I wouldn’t know what to tell you. I’d say, “You ask my virtual assistant how do you do it.” So we have a lot of support with VAs.

I also have VAs that – they’re Mexico-based, but they did live in the United States at one point. So they have very good English and understand our culture very well, and they’re doing a lot of the cold calling and the pre-qualifying with the seller. So kind of like the frontend acquisition, or some people call that role like a lead manager.

Ash Patel: Okay.

Lauren Hardy: It depends on how you want to slice and dice it. I actually now came up with the term sales rep. So I call them sales reps. So I work with them, and then I do have a sales rep that’s US-based here; I have two girls here. So I am trying to lean more into the virtual stuff, for obvious reasons.

Ash Patel: So you have an incredibly well-oiled machine… Lauren, what were some of the growing pains or the pain points that got you here? Because you didn’t think about doing the VAs early in your wholesaling. Was there a lot of pain that you went through to get to this point where you offloaded these tasks? Or were you very smart about it in the beginning and knew that you’re going to need help and brought people in?

Lauren Hardy: Honestly, it’s such an organic process and evolution, really. I would not say I was very smart. I’m not smarter than anybody. I definitely had a lot of growing pains. In fact, I still have growing pains. It’s never perfect. I’ve noticed with a sales team, a company that is based primarily with sales representatives, outbound sales in particular, even inbound – you’re managing people. And managing people is very hard, because there’s a lot of variables. And they’re things that they can do to manipulate systems, to make it look like they’re working when they’re not, and then you find that you’re playing investigator to figure out what they’re doing and how they did it and why you’re not seeing the results that you should be… So it’s difficult. I don’t want to make it sound like I have it all put together and that it’s easy, because this is my Achilles heel, managing the sales staff.

Ash Patel: So that’s your bottleneck right now?

Lauren Hardy: That’s the bottleneck. Right.

Ash Patel: So Lauren, you mentioned you had an integrator that’s your right-hand person. Out of curiosity, did you read the book Rocket Fuel?

Lauren Hardy: No, but I heard the term integrator from someone else that read Rocket Fuel.

Ash Patel: Yeah. So the book talks about you being the visionary, and the visionary cannot be successful without an implementer or an integrator. I’d love to hear about this person; what they do for you, how you came about hiring for that position…

Lauren Hardy: Okay, I hate the term, but I’m going to say itl it’s going to make me barf… I hate “serial entrepreneur”.

Ash Patel: Yep.

Lauren Hardy: I hate that term. You’ll never hear me saying that. But I need it just for the sake of this podcast – I have multiple businesses now. It wasn’t always like this. Two years ago, I only have my investment company. We now have a coaching program, I’m launching some software companies, so I’m now a serial entrepreneur. I hate that.

So the growing pain where I stand right now is I need multiple integrators… So I’ve found the integrator for that sales focus business. Like, real estate investing, wholesaling, flipping – it really is sales and marketing. It’s not this HGTV life that is portrayed in TV, it’s sales and marketing, that is it. So I’ve found an integrator who is so thick-skinned in sales, it blows me away. He is so emotionless when it comes to rejection… He does not care.

Ash Patel: That’s a talent. That is a talent.

Lauren Hardy: It is a talent. It does not ruffle his feathers at all. He can ask sellers for a price reduction, like it’s not a big deal. He doesn’t get embarrassed. He can lowball a seller, it doesn’t give him that feeling in his stomach that still gives me. So I found the perfect integrator personality for the sales company. Where I am today is now I’m working on integrators for all the different companies. My social media – I’ve found a creative; she’s creative, but she’s also very good at figuring out Instagram, what’s the social platform that I need to be on, what’s the trendy thing that I need to be doing right now and dropping videos on right now… I’ve found that girl integrating that side of things. So she is – I call her my creative director for the coaching program and the podcast and everything. So I think you can have multiple integrators. You’re not going to just find this one person that can do, for the serial entrepreneur, the multiple different businesses. I don’t know if you’re going to find that one person. If you know them, please let me know. But—

Ash Patel: That’s a great point, because I always assumed it’s the right-hand man or woman would be one person. But having multiple is even better. That’s a great perspective.

Lauren Hardy: And you know what someone recommended to me actually a week ago – because I actually reached out for some help, because I was going through growing pains. I was going, “Okay, I’ve got Hailey,” she’s the integrator for social media coaching, podcast, that side of things. I’ve got [unintelligible [00:26:47].21], who’s with the investment company… There needs to be someone managing them.

Ash Patel: A VP of Ops.

Lauren Hardy: A VP of Ops, right?

Ash Patel: Yeah.

Lauren Hardy: So I’m thinking like, “Gosh, this must be a very expensive person that I’m going to have to pay something. This is going to be someone that I have to pay six figures to.” So I reached out to someone that I know, that has this sort of person in mind, I reached out to that girl, I got in contact with her, and I said, “Tell me everything you do for him. What do you do? And let me share with you my issues right now. These are my big rocks, help me.” And she’s like, “Oh, you need an operations manager.” Oh, that’s what they’re called. Okay. Operations Manager. What does an operations manager cost?” And she’s like, “You can easily find someone who’s virtual for probably $20 an hour.” “Wait, what? I was thinking this was a $200 an hour person.” She’s like, “No, you just need somebody who is very operationally minded, they can pull your KPIs, they get you organized… That’s it.” So I think that’s my next hire; maybe ask me in a year and see if I’ve done it and tried it out.

Ash Patel: I would love to. Yeah, you’ve got an amazing ride that you’ve been on so far. So tell me more about the coaching. What got you into that?

Lauren Hardy: Nothing ever in my life has ever fell in my lap. I’ve had to go find it. For Nashville, I had to get out of the car and talk to some stranger. The coaching thing was an amazing opportunity that I still to this day pinch myself. So I was wholesaling virtually, and I reached out to my good friend Brent Daniels, and I said, “You know, I saw they’ve been on the Wholesaling Inc podcast and you host it… Why have I not been on that thing yet?” And he’s like, “You’re right. Let’s get on a schedule.”

So Brent’s a coach with Wholesaling Inc and he’s got this awesome program called TTP, a lot of you guys probably know or heard about it.  And I got on the podcast and I just talked about all things virtual wholesaling. And virtual wholesaling was a needed coaching program within that platform, because there were a lot of students in high-priced markets that were having a very difficult time implementing these same strategies that everybody else was in the nation, but they weren’t working in California. New Jersey – I’ve got clients in New Jersey, New York, Miami, Seattle, high-priced areas, the students were going “Help, we need help, we can’t be in this market.” So they needed a virtual coach.

After that podcast launched, one day I got a text message from the owner of the podcast, Wholesaling Inc, his name’s Tom Kroll and of course, I knew who Tom was. I was like shocked to get this text message; I almost like fell over. He’s like, “Hey, we need to talk.” I was like, “What about?”

And so he gets on the phone with me and just says, “What do you think about coaching virtual? Would you put together a coaching program?” And I was like, “Okay, yeah.” He’s like, “You’ve got a week to think about it. But that’s it. Yes or No, you’re in or out?” I think I thought about it for 24 hours. I was like, “Yeah, I’m in. Great idea.”

So I put a coaching program together, we beta-tested it for a while, made sure we had success, coached students for free on the platform… And then we actually officially launched the program March of 2020. So we’re almost coming up on my year.

And I’m hosting the podcast as well… So I do one day a week on the podcast, we’ve got a cool YouTube channel if you guys want to check out our videos… So a really, really great group. I’m super-honored to be a part of it.

Ash Patel: That is incredible. So what’s next for you? You need another giant challenge to keep this thing going.

Lauren Hardy: I’m literally a masochist. I’m always like, if you cannot say yes to one more thing, you’re done. This is it. I’ve said yes to two more things, there’s two more things I’ve said yes to, and I’m done for the rest of this year. I’m not saying—I’m not opening up any more businesses, I’m not—. So there’s a couple software companies that we’re not releasing just yet, that I’m very excited about. One is something I’ve worked on over a year; it should be launching very soon. And then there’s another one that just came about… And they’re partnership opportunities. So it wasn’t me behind the operations, but I’ve kind of the creative vision, and very excited.

Ash Patel: Visionary.

Lauren Hardy: I’m the visionary, I am.

Ash Patel: Yeah.

Lauren Hardy: Like, I am so good for ideas, but when it comes to actually executing them—I’m very good at getting the energy to like, “Let’s execute it!” and then like, “Okay, but you do all the details.” Like—

Ash Patel: Yeah.

Lauren Hardy: I’m not very detail-oriented. But I am very much a visionary, for sure.

Ash Patel: So we have to have you back in about a year or probably less to see what else has come your way. Lauren, what’s your best ever advice for, I would say real estate people, but your background is so varied, so for just people in general. Best ever investing advice, growth advice, real estate advice… You pick.

Lauren Hardy: Honestly, seek help. Anytime I ran into an issue or a problem, whether it was personal, whether it’s business, real estate, house flipping, find someone who’s killing it in that area and ask for their help. Ask them a question, whatever it is. Offer to pay them, “I’ll pay you $1,000 to talk to me for three hours.” I’ve done that. I’ve done that this entire time. Every time I needed help, I’d say, “Hey, I’ll do whatever I need to do, I’ll pay you whatever. Help me solve my problems.” Don’t try to go in alone and just solve your own problems. It is so much easier to just cut the learning curve, go straight to an expert, and in one hour, you could probably figure out the solution to your issue or problem, and you will then be able to overcome it, and then exponentially grow much faster than if you tried to do it all yourself.

Ash Patel: That is great advice. I know that would have helped me a lot, and I’m sure it’s going to help a lot of other people out there. Lauren, are you ready for the best ever lightning round?

Lauren Hardy: Okay.

Ash Patel: Awesome. First, a quick word from our partners.

Break: [00:33:05] to [00:33:29]

Ash Patel: Alright, Lauren, what’s the best ever book you read recently?

Lauren Hardy: The Road Less Stupid by Keith Cunningham.

Ash Patel: Tell me about that. What did you learn from that?

Lauren Hardy: Other than Keith Cunningham, is hilarious, his writing style is very funny and engaging, it’s just advice from a CEO of a multi-million-dollar company. So it’s just advice, how to not be stupid. Stop paying dumb taxes. And it really boils down to one daily practice that anybody and everybody can do… And it’s thinking time; just taking time to think. It’s amazing how many stupid mistakes we make because we didn’t think something through and—

Ash Patel: I’m adding that to my list. Awesome.

Lauren Hardy: I call it five-figure mistakes. All my five-figure mistakes were because I just didn’t take an hour to maybe say, “What if this goes wrong?”

Ash Patel: Right.

Lauren Hardy: Or “What’s very likely that could happen?” So… Thinking time.

Ash Patel: Great advice. And Lauren, what’s the best ever way you like to give back?

Lauren Hardy: Well, recently, I gave back to a charity. One of my students – oh man, great guy… He got into wholesaling houses because he wants to make enough money so him and his wife don’t have to take from their charity. So they have an amazing charity in India, it’s called The India Mission. It’s orphanages for children in India, they help clothe, feed the hungry… It’s an amazing organization that they’ve put together, and they have these children’s homes, these poor children in India… But as they run a charity, they have to take a salary. It’s not much…

Ash Patel: Yeah.

Lauren Hardy: …but they have to. So he got into wholesaling houses so they hopefully will not have to take their salaries out… And I couldn’t even imagine a better cause, right? So it was really cool to be able to donate a proceed of my profits to his charity this year.

Ash Patel: That’s great. Lauren, how do the Best Ever listeners reach out to you?

Lauren Hardy: I am pretty active on my Instagram. If you guys want to follow me, my handle is @thismomflips. If you guys happen to be interested in the coaching program, check it out at http://virtualinvestingmastery.com/ and I host the podcast wholesaling Inc if you guys want to check me out there.

Ash Patel: This is an incredible podcast. Did you ever thank your brother for getting you into real estate?

Lauren Hardy: Oh yeah, for sure…

Ash Patel: You’ve had an amazing ride with the initial fix and flips, the Nashville spec houses and the wholesaling, the systems you’ve put in place, a software company… We have to have you back. Thank you so much for your time.

Lauren Hardy: Thank you so much for having me.

Ash Patel: Have a great day, Lauren.

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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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JF2366: Using Old-Fashioned Tactics to Find Buyers and Sellers with Frank Iglesias

From the music industry to IT, and then to real estate, Frank has always been fond of receiving education and learning something new. While working in IT, he picked up a few properties on the side. In 2011, he walked away from the corporate world and became a full-time investor.

Back then, he started by utilizing the power of tried and true methods of reaching people such as direct mail and networking. In 2020, people are still happy to share what they do in a casual conversation and get on the phone to discuss a deal, so old tricks do work when used properly. 

Frank Iglesias  Real Estate Background:

  • Full-time investor 
  • 11 years of investing experience
  • Portfolio consist of several rentals, construction projects, has completed 100s of deals as a wholesaler & flipper 
  • Based in Atlanta, GA
  • Say hi to him at: www.buyinvestmentassets.com 
  • Best Ever Book: Think and Grow Rich

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Surround yourself with the best people you can afford” – Frank Iglesias.


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 Frank Iglesias. Frank, how are you doing today?

Frank Iglesias: I’m doing outstanding.

Theo Hicks: Great. That’s good to hear and thank you for joining us today. A little bit about Frank. He’s a full-time investor with 11 years of investing experience. His portfolio consists of several rentals and construction projects. He has also completed hundreds of deals as a wholesaler and a flipper. He is based in Atlanta, Georgia. His website is buyinvestmentassets.com. So Frank, do you mind telling us some more about your background and what you’re focused on today?

Frank Iglesias: Absolutely. Thank you for having me on the show, I just appreciate the opportunity to share my background. I was actually a music guy when I was younger, in high school, in college, and went to college for music… I thought I was going to rock the world on drums and that sort of thing. Then we realized that maybe that wasn’t the best avenue or the best chance of success, so when I left college and actually got into the IT industry. So for all intents and purposes, I was a computer geek for 15 years. I kept the music up on the side, so I did a lot with education. I’ve always been around the education aspect of whatever I’ve been involved in. Even in the IT space I did, along with the engineering that I got involved in, I was also a consultant, and when you’re a consultant there’s a lot of education involved. So that’s kind of been a consistent thread between those careers.

In a nutshell, I actually started getting bored with IT. We were part of a really great team, and it got to where the joke we had internally was if we do this much better, we’re going to automate ourselves out of a job. You hear that sometimes in the world today, and you’re like “Wait, that actually can happen”, and I realized the challenge was no longer there. Around that time, I’d actually picked up three or four properties by then, just while working my IT days. Like so many investors, I heard about Rich Dad, Poor Dad. I actually don’t even remember how I heard about it. I went to the seminar, of course, it got the bells and whistles turning in my head, and light bulbs going off… Once I left the IT industry, I really dove into real estate full-time. It has been quite a roller coaster since then. Certainly a journey and adventure, very different than corporate life. That’s how I got to today.

Theo Hicks: Perfect. Thanks for sharing that. How long ago was it that you left the IT world and started real estate investing full-time?

Frank Iglesias: At the end of this year, we’ll be at nine and a half years. It was the beginning of July of 2011. Right smack in the middle of the year we walked away from that world. Back then I had heard of Preston Ellie, and he was talking about preaching freedom. And I literally came home, and my children who were young at the time took LEGO blocks and they built the word freedom and put it on our mantle. It was a really cool experience as a dad.

Theo Hicks: Nice. So nine and a half years ago you left the IT world, and at that point you said you had three to four properties?

Frank Iglesias: Yeah, we had learned the wholesale a little bit, but primarily we were buy, fix and rent. It might have been five or six – I’d have to go back and look – that we had rented. Back then you could rent them and I had a full-time job so the banks like lending to you. You were the ideal person to give a mortgage to under great terms. That was in the middle of the crash, of course.

What was interesting was, as the market was crashing, I really didn’t understand it. I would hear that the stock market was crashing, because that would be what my corporate clan would talk about… But nobody really talked about the real estate market crash. I didn’t really start to understand that until once I was in it full-time. Up until then, it was “Oh, look. Oh look, we could buy houses, they are kind of cheap. This is cool.”

Theo Hicks: Yeah. So a lot of people I talked to who transition from working a full-time corporate job to real estate, they either have built up a portfolio so that they were generating enough cash flow to replace their corporate income and then they jump into it full-time… Or the second one is usually the case where they kind of just burn all the bridges and just jump into real estate, and they just figure it out. Which of those two categories do you fall into? Are you somewhere in between? Like, were those three to six properties giving you enough income that you felt comfortable leaving your job? Or was it less of a financial decision, more of like “I’ve got to get out of this IT world?”

Frank Iglesias: You know, it really was a little bit of both. We had some savings, we had a little bit of passive income, and we had done a few wholesale deals. Back then wholesale was still kind of new to us, so it was like, “Oh, look, I could just go do this and make five or 10 grand, or whatever.”

But I was bored in IT. I remember walking into my manager’s office and I said, “This is a fantastic place to work. Great job, great benefits, great opportunity, and I’m bored, so I know it’s time.” It wasn’t just time to leave the job, it was time to leave the industry. So it was definitely a mix of things. But you’re absolutely right, to your point.  You’re right, most people do the latter, they just dive in. I would actually add a third option and say they get fired. I know a couple of guys that just got let go and said “Forget it. I’m just going to stay fired and go for it.”

Theo Hicks: So after you had left your job, what was your first main focus in order to grow your real estate business?

Frank Iglesias: My focus for the first few years was heavy on wholesaling. We really focused really hard on that. I really had a good time, I did very well with that. I wish I had known how to scale, because that’s probably what I would’ve done. I would have done more of that in retrospect. But that was fun, that was really a lot of fun, just really diving into wholesaling. I learned from Lee Kearney how to do it, and to this day, I still use most of his techniques for wholesaling and it just works. So that’s been really nice. We still did some rehabbing though; we never not rehab it’s always just been a matter of to what degree.

Theo Hicks: Okay, do you want to go over some of those wholesaling tactics you talked about? Maybe kind of walk us through, from beginning to end. How you find the deals, and what type of thing you’re doing to get them under contract, negotiate the right price, and then how are you finding the buyers in the back end.

Frank Iglesias: Obviously, there are different techniques. Direct mail used to work really well back then, now it’s a little bit more of a different approach. But the one thing I would say that worked for buyers in particular and for sellers was just networking. Really telling everybody what you do.

When I say networking, I mean actually talking to them. Not texting them, not emailing them. Literally, picking up the phone, and talking to people. It’s so powerful. I feel like as technology has evolved, that still gets lost more and more. I don’t know, maybe people have other experiences, but I’ve never met someone that’s like, “Sure, I’d love to do $200,000 worth of business,” over text messaging. I just have not had that experience. It just always seems to go back to getting on the phone with people and just being real with them. People sense sincerity, people sense when you’re real with them. It’s just built into us as humans. So when I’m talking to other wholesalers or sellers, sometimes sellers will refer someone… There are so many people that you talk to you that will send you a great deal, just because they feel like they can do business with you, and same on the buyer side.

Just this year, as an example, someone wholesaled to us just a great deal, someone that I had spoken to and had a good conversation with several months ago. It’s been quite some time. He literally calls me out of the blue and sells me this wholesale deal. I couldn’t believe it, it was a unicorn deal, because the deal had 100 grand in equity. I’m like “Who wholesales me a deal with100 grand in equity?” I said that’s relation right there. Because my average email that comes from someone I don’t know doesn’t have those kinds of figures. And they made good money on it. They just negotiated an outstanding deal, and gave me an outstanding deal, and I’m like, “That’s all networking right there.”

Theo Hicks: I definitely understand the talking on the phone and networking. But kind of taking it just one step back, how do you know who to call, or how do you get the contact information? Who are these people you’re talking to? Give us an example. Are they wholesalers? So you’re finding out who the other wholesalers are and talking to them? Or is there another strategy you have?

Frank Iglesias: I always made it a point to talk to every wholesaler. A lot of people tend to write off new wholesalers. I love talking to them, because for every 10 new wholesalers you talk to, you’ll find one or two that are really, really eager to learn, and it’s great to connect with those people. So I always say, talk to all the wholesalers.

In all the years I’ve been doing this, the wholesale deals I get from people are not great deals, that’s never changed. That’s okay. Just keep talking to them, because you’re going to find the ones that do good, and they’re willing to learn, and they’ll start sending you deals more and more.

I just had someone from Chicago, send me one today. It actually looks pretty decent, so we’re going to look into that. But beyond that, how do you find them? Obviously, there are forums, you have Facebook, and all that. But really, the best place I like to go is into the public records. Because everybody talks, but when you go on public record, you can start seeing “Who’s closed 100 deals in 2020? Who closed 100 deals in 2019?” I’m just picking 100 as an arbitrary number. You can actually see it in the public record. I’m in Georgia, so it will actually sort, “Here’s who the biggest buyers are in descending or ascending order”, so I can see who they are. And what was interesting when I did this a few years ago, the biggest buyer in Atlanta right before the hedge funds came in, the biggest buyer in Georgia actually lived 10 minutes from me. If I told you his name, you’d probably know who it was. But a few years ago, he was the biggest buyer, and he bought hundreds of properties. I’m like, “Oh my gosh, I had no idea.”  I would have wholesaled him a few deals, nut I had no idea he was buying that much. What I have learned is a lot of the busiest people don’t tend to be out there, they tend to be much more quiet. That’s my experience.

Theo Hicks: Hm, interesting.

Frank Iglesias: Now again, a lot of this was pre-social media. Social media now has changed that dynamic a little bit, but it still seems to me that the people that do the most business, you don’t tend to hear about them a lot. But they’re in the public record and if you get in there, skip trace them, nowadays, you can skip trace companies so you can find these people. It’s pretty cool. Technology is making this business so much easier to find people. There’s a lot of people quite honestly that do like to be found when they sense that “Hey, this guy is real. This guy is sincere.”

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

Frank Iglesias: My best advice ever? Well, if there’s one thing I can say I’ve learned, and there’s nothing revolutionary about it, but I’ll echo it because I would agree, is surrounding yourself with the best people you can afford. I can’t put into words how valuable that is. And having a coach. We’ve had some great experiences, but I will tell you that not having a coach at some specific points in our career, that’s cost us a lot of money that we could have had on the right side of the bank account. So I think to surrounding yourself with the best people and having a solid coach. I cannot emphasize that enough.

Theo Hicks: I think I might know the answer to this question, but answer it anyway, which is how do you find these people? How do you find your coach? How do you find the best people you can afford?

Frank Iglesias: Oh, it’s actually a good question. It’s not easy. I am a huge believer in the 80/20 rule. 20% of people do 80% of the business, that sort of thing. I would say 20% of the people are really good at what they do, and the other 80% – I don’t want to say they’re bad at what they do, but they’re not your top tier. I would even say, it’s probably more like 90/10 or 95/5.

I’ve just learned that really, really good people are really hard to find. It takes talking to a lot of people. Like many investors, I’ve seen no shortage of webinars, and ads, and that sort of thing. As an example, the builder I use for our new construction projects, we were building houses for five years before I found them. Once you have them, you’re like, “Oh, my gosh, where were you four years ago when I needed you?” But that’s okay. It’s part of the evolution.

So it takes a lot of talking and just really exploring a lot of avenues… Not just real estate avenues, I would even say look at other business avenues. Sometimes your best people may not be completely all about real estate.

For example, I’ve got a business coach, and we talked a little bit about real estate, but really, it’s more about this is how you run a business. When I hired him – it’s been over a year now that I’ve been with him – it’s completely changed how we look at our business. Things that, quite frankly I never heard in real estate circles, all of a sudden became very, very real. He’s got a different perspective on it.

So I’ve got a real estate coach, I’ve got a business coach, I’ve got a life coach… I think you need those specialists to help you — start with real estate because that’s what you’re doing, but then as your business grows, get that business coach. Make sure you get that life coach, so you don’t lose perspective on things, because things can get crazy in this business, as you know.

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

Frank Iglesias: Best Ever lightning round. Sure.

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

Break: [00:17:12][00:17:52]

Theo Hicks: Okay Frank, the first question is, what is the Best Ever book you’ve recently read?

Frank Iglesias: I recently read, Think and Grow Rich again. I think that book is truly timeless. What I would say is don’t just read it, really apply it. When you really apply what Napoleon Hill is talking about, it will challenge you, but it really opens your eyes, especially if it’s not the first time you’re reading this. It gets more impactful every time I read it.

Theo Hicks: If you’ve ever lost money on a deal before, how much did you lose and what lesson did you learn?

Frank Iglesias: Oh, my. Yes, I’ve definitely lost money on a deal before. I think that’s an experience. No one wants to lose money on a deal, but we also learn a lot when we go through tough experiences. We lost over $100,000 on a rehab. The biggest lesson I learned from that was – I worked with a designer who also did project management at the time. She was an excellent designer, by the way; she was absolutely excellent. It was kind of a trust a little too much, but not enough verification… And that design thing can get away from you. It totally got away from us. We actually had a house design, and in a nutshell, once the design came back, she literally said it’s ugly. I kid you not, it was that simple. It’s ugly. So she really wasn’t excited about it. And the market was appreciating at the time.

Instead of just doing it, because ugly houses sell every day too, everything doesn’t have to be the Taj Mahal… We actually ended up delaying the whole project, changed it to a pretty house. By the time we built the pretty house, it was more complicated. And it was a nicer house, but more [unintelligible [00:19:31].26] way over budget. At the end of the day, we lost 100 grand. Whereas if we built the ugly house, we would have made money. It was crazy.

Theo Hicks: And then on the flip side, what’s the Best Ever deal you’ve done?

Frank Iglesias: I think my favorite deal I’ve ever done, that’s the best – because some of the ones I bought back in the early days of 2009, 2010, there was nothing glamorous about them, but I held them. In fact, we sold one earlier this year that we owned for nine years. For nine years we created 150,000 in equity, and we were able to do a 1031 exchange into something better. So when I look at all the other deals I’ve done, I’m like, that to me is the best deal. I just had a handful of those; buy and hold, build that equity, because it’s really nice what it can turn out. Now, of course, you want to make sure in a market where that can happen, and across Atlanta has been that market. But that’s what I would say.

Theo Hicks: What is the Best Ever way you’d like to give back?

Frank Iglesias: I have a background in education, I’ve always been involved to some degree, and I enjoy teaching real estate, I enjoy speaking, I can do the hype thing and be excited, but also when I share, at a lot of meetings, I like to just get real with people. Because a lot of people again, just want the sincerity, “Hey, what really happens. This is not HGTV. There’s a lot of real work that goes into this.” Nothing wrong with HGTV, by the way, but there’s just a lot you don’t see. So when a new person is coming in particular, they really want to know what’s happening. Or if you have someone that got involved and they got burned, they still want to do real estate, they’re excited about it, but they really don’t like the feeling of being burned, “Can you help me?”

So I love sharing in those types of situations in particular, because it really allows you to connect with people, you feel their pain, they understand that you understand them…  And it gives them a lot of confidence, a lot of hope, and really restores their, “Yes, I can do this.” That’s really rewarding.

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

Frank Iglesias: The best place to reach me – you can email me, it’s frank@workingwithhouses.com. Or you can call our office at (678) 408 2228. Those are the best ways. You can message me on Facebook as well, or Instagram, but email and phone are definitely much more likely to get me.

Theo Hicks: Awesome, Frank. Well, thank you so much for joining us today and providing us with your Best Ever advice. We focused a lot on wholesaling, but I think most of the things we talked about, if not all of them, can be applied to any real estate niche.

At first, we talked about you leaving your job, and the two options, and you added the third option, for people to leave their jobs, which is they have enough money to leave their job, they burn the bridge, or they get fired. So you were the got bored with what you were doing at your work and jumped into real estate full-time.

And then those timeless universal tactics that you talked about for wholesaling was networking, so talking to everyone you know about what you’re doing, and then actually talking to them on the phone, as opposed to just text or email or social media, things like that. Making sure you’re honest, you’re real because people can sense that. Making sure you’re talking to everyone, not just the established guy, but also the newbies, just because you might find that one out of 10 person who ends up being a real go-getter and brings a lot of business.

Then you talked more tactically specifically about wholesaling and finding buyers, like just go into the public record and seeing who’s closed on the deals, find the biggest buyers and skip trace them. And then your best ever advice was to surround yourself with the best people you can afford and having a coach. You kind of talked about how you start off with a real estate coach, but eventually when you find a specialist for business, and then a life coach as well. And you did mention that it’s really hard to find these best people. But just like you mentioned him with networking, you’ve got to talk to a lot of people. Then something I really liked was that you don’t necessarily have to just focus on talking to real estate people, because some other business might also be a good fit for you, whether they be a mentor, or a partner, or someone that’s going to work with you.

So a lot of solid advice was given in this episode. We really appreciate it, Frank, and thanks for coming on. Best Ever listeners, as always, thank you for listening. Have a Best Ever day, and we’ll talk to you tomorrow.

Frank Iglesias: Thank you.

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.

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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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JF2365: Embracing Mechanical Repairs with Mike Bonadies

Like many other real estate investors, Mike started his journey at a corporate 9 to 5 job. His buddy suggested branching out and becoming a landlord. Since then, has Mike grown his portfolio and has now become a property manager. Most of his properties were built before the 1940s, and few construction companies in the area could handle that kind of work. That’s why he opened his own construction company. He now has a nice cash flow coming from these adjacent fields, and his companies are working in synchrony with each other.

Mike Bonadies  Real Estate Background:

  • Full-time landlord and owner of Side By Side MRO, a construction company that specializes in pre-1940 construction & property preservation
  • Co-owns TerraVestra Property Management
  • 5 years of construction experience 
  • His personal portfolio consists of 25 units 
  • TerraVestra manages 250 doors, and his construction company works with 600 rental units
  • Based in Sewell, NJ
  • Say hi to him at www.sidebysidemro.com 

 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“The system includes more problem-solving in pre-1940s construction.” – Mike Bonadies.


TRANSCRIPTION

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

Mike Bonadies: Thanks, Joe. I’m really looking forward to being on today’s show. Greatly appreciate you having me on.

Joe Fairless: It’s my pleasure. I’m looking forward to it as well. A little bit about Mike. He’s a full-time landlord and owner of Side By Side MRO, which is a construction company that specializes in pre-1940 construction and property preservation. He also co-owns TerraVestra, which is a property management company. They manage 250 units. He’s got a personal portfolio of 25 units, so he’s an active guy; very, very active guy. So let’s talk about that. He’s based in Sioux, New Jersey, by the way. So first, Mike, you want to give Best Ever listeners a little bit more about your background and your focus, and then we’ll go from there?

Mike Bonadies: I started off like a lot of other real estate investors, in a corporate job, doing nine to five work. It was for Dewalt Power Tools, so at least I saw construction unfold. As I spent more time there, a buddy of mine who was in the cubes with me was a landlord, and he said, “Hey, Bonadies, just check landlord-ing out. It’s a lot like what we do for here, but you can make more money for yourself.”

One thing led to another, I became a landlord. Quickly from there, I grew my portfolio, ended up becoming a property manager, and then from there getting my own construction company and have a nice little trifecta going of multiple cash streams, but within the same industry, all complementing themselves.

Joe Fairless: I love talking to people who own their own construction company. Yours specializes in something interesting, in my opinion. It’s pre-1940 construction and property preservation. So can you talk a little bit about that?

Mike Bonadies: Yeah. A lot of construction companies out there, they might do new construction or… BiggerPockets always talks about, “Hey, get properties that are over the age of 1952 after the Construction Code was established.” Well, I decided “Hey, why don’t we just go the opposite direction and doing exactly what everybody else isn’t doing?” We specialize in pre-1940 construction, and more specifically, multifamily pre-1940 construction.

Part of that is a byproduct of the area that I work in investing. I’m in the swamps of South Jersey, so there’s a lot of towns here where the average age of the original construction is 1880 to 1920. So if you’re going to buy a house in this area, you’re already looking at older construction.

Furthermore, from a business perspective, we saw that there weren’t a lot of contractors or individuals who were specializing in these older homes. There was a large demand for people that could do construction in these homes, and renovate them, and get them up to snuff. Just because there was a lack of supply, we said, “Why don’t we fill that gap and specialize in this? I think this could be quite lucrative.” I was already a landlord, my partner who is my partner in crime in almost everything, Drew Side, he was a landlord as well, and almost all of our properties was pre-1940.

So we already had some familiarity, and we decided, “Alright, let’s just work on this.  If we’re going to continue to be landlords and grow our portfolio, we’re going to have to know pre-1940 construction, and we’re gonna have to be good at it.”

So we started rehabbing properties that are in that age range, and building out crews that know how to operate on those properties and the difficulties of those properties, because they are definitely not your run-of-the-mill construction jobs. A lot of these properties are built like jigsaw puzzles, and they were built three or four times over by someone’s great-great-grandfather, who built it without power tools, and kind of just doing however they wanted to do. So now there’s a large amount of demand in this for South Jersey, and a lot of the, let’s say, landlord-friendly buildings or good deals in South Jersey are of this age group. So it really complemented everything quite well.

Joe Fairless: So let’s talk about that, because you’re focused on an area that there wasn’t a lot of other focus, or maybe no other focus from other construction companies. But if you were to ask them, I imagine they’d say, “Well, yeah. Because, Mike, it’s just tough work.” There’s a path of least resistance in other places to make money and to do well. Can you get into some more specifics? You said jigsaw puzzles and built many times over by multiple people… But what were some real challenges that you all came across with this business, and how did you solve those challenges?

Mike Bonadies: Where to start there…?

Joe Fairless: Maybe the companies that looked at this opportunity… Because I imagine some construction people said, “Oh, yeah. There’s an opportunity there.” But they’re like, “I don’t want to mess with that.” What would be the top two or three things that pushed them away, but pulled you to it?

Mike Bonadies: I would say the biggest difference between post-1940 and pre-1940 construction is the focus on mechanicals. If you think about your average construction company, it’s very easy to drop flooring, install a new kitchen, demo out something, hang new drywall, to make it look pretty. There’s a lot of people that are very good at doing that, and it’s rather a cookie cutter. You can just say, “Okay, tear up the floors, put new ones down, just got to measure it out, and we’ll just get away [unintelligible [00:08:18].12]” Pre-1940 construction you have that element, but the focus is much more on the mechanicals… Because a lot of times the plumbing is absolutely janky, the electrical might have cloth wiring, you might have a ton of knob and tube, you might have wires completely ran to the wrong box if you’re in multifamily construction.

So you have to have a level of comfort troubleshooting and running diagnostic work on what works currently in a property, or just stripping it all out and understanding “Okay, look, this piping is completely shot. I’ve got an [unintelligible [00:08:51].24] sewer main going out the front of the property that’s completely deteriorated. We’re just going to know that we’re going to have to replumb everything, and we are going to have to just tear everything out and get started with it.”

So I think that comfort working with mechanicals and enjoying working with mechanicals. It’s not necessarily as enjoyable as cosmetics… Because with cosmetics you can see the work that you’re doing, you can plan it out in your head very well, and then you can see a finished product, and you’re like, “Oh, this looks way prettier than when I started.” Mechanicals, if you’re running new HVAC ductwork or if you’re re-plumbing the place, there’s not that level of satisfaction that comes at the end of it, cosmetically. You’re like, “Well, there was a pipe here before and now there’s another pipe here. But this pipe works better.”

Joe Fairless:  The new one is shinier.

Mike Bonadies: Yeah, exactly. So I think that’s the biggest differentiator between the two. That cascades down to problem-solving, too. With a lot of the, let’s say, your generic flip construction,  again, it’s more about cosmetically pleasing something, and that doesn’t require a lot of problem-solving elements to it. If you have pre-1940 multifamily construction, you might have wires that are going to the incorrect boxes, and now you have to figure out how are you going fix one wire over here to make it make sense without having to tear down a wall or something like that.

Or on another hand, boilers are pretty common in South Jersey in the construction we’re doing. So we might get there into a basement and it looks like a kraken. There are just pipes going everywhere, leading to the boiler systems, and you’re looking at it and you’re trying to figure out, “Alright, do we need to replumb these boilers because everything’s on a common system? Or do we want to have them be independent? And if we do that, we have to rethink how we’re going to lay out some of these units, or rehab it.” So there’s definitely more problem-solving. It’s not like one of those things where you know how to do it a couple of times over, and then you just create a system around that. The system involves problem-solving more often in pre-1940construction. I think that scares away a lot of people from doing that kind of work, if that makes sense.

Joe Fairless:  Why 1940? Why not 1930? Or Why not 1950? What took place in 1940 that you’re focused on pre-1940?

Mike Bonadies: Well, from the late 1940s into the early 1950s, the construction codes started to get solidified. Now you had a state Construction Code that clearly outlines “Hey, this is how you’re supposed to do construction.” When you hit that early 1940s and before, there weren’t these big developers that were creating standardized homes. Your family was building a home, and it was however the person that knew the most about putting things together was developing that home or building that home. So nothing is standardized before that date.

Now, I know that may change from state to state, but generally speaking, I think most of the codes were developed in like 1952 or late 1940s. So when you hit early 1940 and before, it’s all custom construction, and there weren’t a lot of big developers. For instance, in New Jersey, Levitt is pretty well known. Levitt town and all that kind of area, they had standardized homes that they built for everyone. When you’re in that earlier timeframe in the United States, nothing was standardized. I walked into 50 different homes and seeing 50 different ways of putting together a house in some of those older constructions.

Joe Fairless:  Let’s switch gears and let’s talk about your personal portfolio. You have 25 units. Are they all single-family homes? Tell us a little bit about it.

Mike Bonadies: Yeah, I have 25 units and they’re all small multi’s; either duplexes, triplexes… And I’ve got two mixed-use buildings. We decided to go to the multifamily route because we thought it was a little bit less risk-inducive if things go sideways. We look at it as, again, putting my construction hat on, there’s only one roof; there’s potentially one furnace or two furnaces. There are less objects that can break down over time in multifamily. So the long-term play is to get multifamily… Even though you might get a little bit less rent. And people say that your tenants will stay a shorter amount of time in multifamily versus single families. I disagree, but we thought that the margins were higher on multi-families, and there were less things that would break down over time.

So I don’t own any single-family houses. I have just multi-families, all in the South Jersey area. I do tend to buy white elephants, so all my multi-families are really strange in one way or another… But they’ve been very lucrative deals because of that. Some may have cost me more money than others, but if you can problem-solve around it, you buy the deals that less people are looking at, and therefore you can get it at a better price.

Joe Fairless: Well, you’ve piqued my curiosity. Tell us about a couple of those.

Mike Bonadies: One of them is a mixed-use triplex that used to have a bar on the bottom and two residential units on top. The bar was converted into a residential, we went through the zoning process of that, and we turned it into an apartment in the downstairs. The building has like seven sides to it. It doesn’t look like your traditional house at all. I think back in the day it used to be a train station, 100 years ago. No one wanted to buy it because it had zoning issues that we had to work through, and no one wants to get a potential mixed-use property and convert it to residential in a highly regulated state like New Jersey. It does have its own unique challenges, because it used to be commercial, the mechanicals was set up for a commercial, so you had things like two sewer cleans leaving it versus a traditional one sewer clean leaving the property. And the gas meter–

Joe Fairless: And why is that a problem?

Mike Bonadies: It’s hard to trace problems. If something’s backing up, and the backup’s out in the street, you’re going to have to test more things to problem-solve it. That’s the core.

Joe Fairless: Okay. So in that case do you convert to one, or…?

Mike Bonadies: No, we leave it as is, and we just [unintelligible [00:14:48].07] over time. If you’re an out-of-state investor and if you’re not involved with your properties pretty directly every day and a sewer problem comes up for that particular property, you might have to spend more money getting someone to troubleshoot the problem and diagnose what’s the issue. If you know the properties that you buy incredibly well, like what we do – we try to really understand the properties that we buy. Well, when someone says, “Hey, we got this problem coming up”, we’re like, “Alright, well, we already troubleshooted it a bunch of times. I know exactly what this problem is based on how it was constructed. We knew it was a bar previously, so therefore, the problem is probably here.” If that ends up being what it is, great, you solved it. If not, you’ve got to do some more troubleshooting. So it’s a little bit more active than some other investments, but it can be very lucrative.

Joe Fairless: What did you buy it for?

Mike Bonadies: I bought this one for $140,000.

Joe Fairless: And how much did you put into it?

Mike Bonadies: I want to say 32,000 bucks, and I probably spent an additional $20,000 on top of that, because of zoning variances… And I had a sewer line collapse after the fact, so another 50K, we’ll say. My gross rents on it are $3,400 bucks a month, which is pretty decent for South Jersey.

Joe Fairless: So let’s see, you’re about 190k all-in, and $3,400… Yeah, 1.7%. You’re almost at the 2% rule on a place in South Jersey. What do you think it’s worth now?

Mike Bonadies: We just had it appraised for I think it was like 235k or 245k. So I was able to pull out all of our money; we’re in the money for nothing.

Joe Fairless: How long did it take to get the zoning fixed? Or changed, I should say.

Mike Bonadies: It took us about a year.

Joe Fairless: Okay. Knowing what you know now, would you do it all over again?

Mike Bonadies: Absolutely. I learned so much. I think the biggest learning factor there is a lot of other states don’t have a lot of complexity around zoning, like New Jersey does. Zoning is very tough in New Jersey. This deal gave me my first taste of politics and real estate and their intersection. I had to go up in front of the zoning variance board, I had to talk to the mayor and the town councils and get their votes. It was a great interaction, and I learned a lot.

Joe Fairless: What’s one thing you would do differently knowing what you know now, if presented a similar opportunity?

Mike Bonadies:  Scope your sewer lines, oh my gosh. If you’re going to buy a property, and it is older than 1952, scope that sewer line, because the half-life of iron pipes are somewhere between 65 and 85 years. If you’re buying around that 1950, 1940, 1930 timeframe, that means the original cast iron pipes are decaying, are corroding and they’re getting close to a collapse. Now I scope all sewer lines if I’m buying a property.

Joe Fairless: So that’s one deal, the mixed-use triplex; you had a bar downstairs, two residential upstairs, you changed the bar into a residential unit… I’m just curious, you have seven sides to the building, so how did you close off certain sides? I mean, if it was a bar, I imagine there’s a bunch of windows. The resident doesn’t want people peeping in.

Mike Bonadies: We were relatively lucky here… There was only one commercial door in the property. The bars here in South Jersey look a lot like Cheers does, so there’s not a lot of Windows, and there weren’t a lot of entrances and exits. So that wasn’t really a concern. But we kept the commercial door in there. Some people look at it as a unique character-building item to the property. We had a lot of interest when we were renting it out, because it still has those commercial doors, it has these giant commercial glass storefront windows, and people think that’s pretty neat. It also had an ATM still on the outside of the property, that gave it some character. It’s a brick building, so it really gives a unique feel when you’re moving in there. It’s not for everybody. It’s not your standard like “Oh…

Joe Fairless: You kept the ATM?

Mike Bonadies: …but it gives it character.

Joe Fairless: So you kept the ATM?

Mike Bonadies: Yeah, kept the ATM.

Joe Fairless: What do you make on that?

Mike Bonadies: I don’t make anything, because it’s not functional. But we jokingly collect the rent through the ATM every month.

Joe Fairless: Why don’t you make it functional?

Mike Bonadies: I do it for the sake of the tenants. It is right next to their door. I don’t want to have people just coming up.

Joe Fairless: Why don’t you remove it?

Mike Bonadies: Again, for character aesthetics. When we were showing the unit, people were fascinated by the ATM still being there. And the tenants have access to the guts of the ATM, so we made it a joke that when we pick up the rent, we collect it through the ATM.

Joe Fairless: Alright. What about another white elephant?

Mike Bonadies: Which should we go at next? Mixed-use properties are always great white elephants.

Joe Fairless: Yeah. They’re fun to talk about.

Mike Bonadies: They are, and they’re super unique, because the funding for them can be pretty difficult, too. But I have a mixed-use property that’s a mile away from the other mixed-use property. And this was a property — when we bought it, it was one single commercial storefront, and then two residential units on top. So it was actually a triplex when we got it. I think if you look at how the property was originally built, it was built as two blocks and lots, so two duplexes that over time someone must have got the zoning variance to fuse them together to make a triplex. Then we tore down the commercial storefront and we made them two different commercial storefronts. So we turned it back into a quadplex.

That one was a unique challenge, just because the process of going from a triplex back into a quadplex, splitting up the utilities again, and dealing with a commercial storefront instead of just residential units – it always presents a learning opportunity. It’s just something not cookie-cutter, like residential is. In residential you have kitchens, bathrooms, bedrooms. Everybody needs them. With commercial storefronts, you’re trying to build a vanilla box that someone else can then come into and turn into their own.

We had to do a lot of electrical work there, we had to rewire most of the building, redo the HVAC… And that was a challenge, because the building was not set up to be a quadplex for at least the past seven to 10 years. What makes that a little bit more of a white elephant is it’s a mixed-use building and it still was a mixed-use building. So when we had to do lending, it had to be a commercial loan, but the ARV of the property was $235,000. When you have a mixed-use commercial loan that is under $500,000, it’s a very small subset of lenders who will do long-term financing for that type of property.

If I look back at the other mixed-use property we just spoke about, that was a fully residential building when we were done with it, therefore we could get residential multifamily lending against it. If it’s a mixed-use property still, we have to get a commercial loan.  So we had to do a little bit more shopping around, we had to work more with local banks on getting the financing on there, because there’s just such a small subset of individuals who will do long-term lending for under $500,000 commercial loans, at least in the South Jersey area.

Joe Fairless: Let’s talk about the numbers on just your initial analysis when you’re looking at the opportunity. How do you determine to do those renovations and put all that work and time into it, compared to just renovating and sprucing up how it currently exists and finding tenants for the units?

Mike Bonadies: We look at it as a cost per door. In South Jersey, taxes are a pretty massive element of your equations, because taxes are higher than most of the other states in the United States. So if we’re looking at, “Okay, we can buy a property for less than $50,000 a door and we can put enough rehab in it so that our all-in cost is under $75,000 per door”, we know that between the taxes and the rents, we will have very good cash flow on the property.

So to go back to the first property we spoke about, with the bar conversion element… South Jersey is a lot of small towns, it’s not super urbanized, very rural, so we didn’t like the prospects of commercial rentals for that property, just because we didn’t think that demand was incredibly high. We said “Okay, look, this building is priced at 140. That hits our standard for residential purchasing, and it would be in the deal for less than 75K a door for each of the residential units. Our total net price was less than 75K door, and we know what the taxes are. So, therefore, if we convert it over to residential, it’ll cashflow like a monster.” That’s kind of the way that we look at properties in the South Jersey area, just because we know, given the South Jersey level of taxes, if we’re into the doors for less than this, we know that it will cash flow.

And it changes from county to county. So if I go to another county that I do a lot in, maybe we’re not all-in for 75 for the door, maybe we’re all-in for 50k for the door. And this is what the standard of taxes are in this area, so we know that this is a good deal. So it’s a little bit different than most people, but I would say we’re still relatively similar to what you would see other conventional wisdom saying to buy properties are.

Joe Fairless: Oh yeah, all-in per door thought process, plus keeping in mind whatever your largest expense is going to be, or one of your largest expenses, which is taxes. That might vary depending on the municipality within the state, but all in per door thought process is really helpful, regardless of where we live. Taking a step back, what is your best real estate investing advice ever?

Mike Bonadies: I’m going to say that knowing your neighborhoods and knowing your properties. Knowing where you do business is so critical. Knowing every detail of where you do business, especially if you plan to grow a lot there. We know our neighborhoods and we know the buildings that we buy like the back of our hands. It allows us that when a problem comes up, we can understand is this a symptom, or is this a core problem? Whether it’s maintenance-related or even tenant relations-related. I operate mainly in C and D neighborhoods, so there can be a decent amount of crime in our area, and maybe a problem that the tenant is complaining about. You can identify and solve for those problems very easily, if you know the areas.

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

Mike Bonadies: I like it. Let’s go.

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

Break: [00:25:02][00:25:42]

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

Mike Bonadies: I’m going to say 4-Hour Workweek. Even though I hated that book when I first read it, I reread it every once in a while. It really helps me understand how to cut the excess headaches from my business.

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

Mike Bonadies: I host webinars and podcasts for my local REIA, and then I’ll often spend time with the newbies after those webinars or podcasts to help them understand specifically the South Jersey area.

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

Mike Bonadies: You can reach out to me on Facebook, we post a lot there. It’s either @SBSMRO or @TerraVestra Rentals.

Joe Fairless: Mike, thanks for being on the show, talking about your construction company, talking about how you’ve built your portfolio, and why you focus on, as you call it, white elephants, properties that a lot of other real estate investors would shy away from. Really, it’s the same thought process for the construction company and your personal portfolio. It’s like, finding the opportunity where others either shy away from, or just don’t know of the opportunity, because they haven’t really looked at it.

I’m glad that we talked about your desire and your enjoyment for problem-solving of the jigsaw puzzles that the properties present, as well as just being really knowledgeable about how to work the mechanicals inside and out. So thanks for being on the show. I hope you have a Best Ever day. Talk to you again soon.

Mike Bonadies: Thanks Joe, I greatly appreciate it.

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JF2362: Cherry-Picking the Deals with Gary Spencer-Smith

Gary’s father’s death pushed him into the real estate investment path. In 2007, he emigrated to Canada from the UK, and that’s when he got serious about doing real estate full-time.

Utilizing his electrical engineering background, Gary became an owner and a contractor of several single-family properties. Through joint venturing, he managed to create a portfolio, eventually refinancing and moving on to a different phase of his life.

Gary Spencer-Smith  Real Estate Background:

  • A full-time investor for the past 8 years
  • 20 years of investing experience
  • The portfolio consists of 24 single-family homes, 5 cabin holiday resort, 110 person restaurant, houseboat, and converted a 24,000 sqft dealership into offices, storefronts, storages, and a warehouse,
  • Based in British Columbia, Canada
  • Say hi to him at: www.revnyou.com 
  • Best Ever Book: Sapiens

Click here for more info on groundbreaker.co

Best Ever Tweet:

“I looked at what real estate could do for my life, and that was like a switch.” – Gary Spencer Smith.


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 Gary Spencer Smith. Gary, how are you doing today?

Gary Spencer Smith: I’m doing fantastic. Thank you very much for having me on. I appreciate your time and effort to put this together for everybody.

Theo Hicks: Thank you so much. I appreciate you taking the time to speak with me today. I’m looking forward to our conversation. Before we get to that conversation though, a little bit about Gary… He is a full-time real estate investor for the past eight years and has 20 years of investing experience in total. His portfolio consists of 24 single-family homes, a five-cabin holiday resort, a 110-person restaurant, a houseboat, and a converted 24,000 square foot dealership, converting that into offices, storefronts, storage, and a warehouse. He is based in British Columbia, Canada. You can say hi to him at his website, which is revnyou.com. So Gary, do you mind telling us some more about your background and what you’re focused on today?

Gary Spencer Smith: Sure. I guess people will hear the accent and think that doesn’t sound Canadian… So I was born in the UK. I grew up normal. I say normal upbringing – normal in these days, with divorced parents; single mom… Didn’t have that silver spoon start that a lot of people have. I got to 18, thought I don’t know what I want to do. Ended up going into the military, served 11 years in the Royal Navy, served in the Afghanistan conflict, Iraq conflict, Bosnia… I got to go to over 100 countries in the world. That gave me a real perspective on, I guess, life in general.

My father passed away when I was 21, which enabled me, but it kind of started me on the real estate path ahead of the curve then. I managed to purchase a house. I did 11 years in the Navy, got injured while I was in service, and in 2005 I was pensioned out of the military. In 2007, I immigrated over to Canada. A couple of years after that was when I really started investing seriously, following a plan, and had a goal in mind when I was doing it. So that’s kind of my life in a nutshell.

Fast-forward to now, I’m a full-time investor, and I guess all my income is generated around my real estate businesses. I kind of get to live the life that I planned when I was 16 years old. So I’m pretty lucky and grateful for where I’ve got to, and the challenges I’ve had along the way, and the lessons they’ve taught me.

Theo Hicks: So when you first started to invest – you kind of went over your portfolio – what was your original focus?

Gary Spencer Smith: I’ll take a quick jump back. My first investing [unintelligible [00:05:52].13] impressionable age, maybe I was 18 or 19. He said, “Oh, such and such has rentals, and he gets X amount of dollars per month.” And something just triggered in my head.

When I had my house, the first house I purchased after my father passed away, and my wife at the time, I was like, “Let’s just rent this out when we move” and she said “I don’t want to deal with rentals. Rentals are a headache. You’ve got to deal with tenants,” that story that people say. I listened to it and I didn’t do that.

Then when I left the military, I had a house down the South Coast of England, and I’m like, “You know what? I’m keeping this and I’m renting it out.” It was purely a mathematical choice. It was just, I figured out where I’m moving to and renting, and what I would get for rent there, and I was like 200 bucks a month better off. There was no plan around it. Subconsciously, I wanted to have about three houses over my working career. Retire at 60, I would have my military pension and three houses. That was kind of my goal. I don’t know where that came from or how that was planted in me.

Then I emigrated to Canada. I bought a single-family townhome, and that was for my kid’s college. That was the idea behind it. My kids end up not going to college, and we can get into that a bit deeper if we want. But I guess I was looking for a way to create income within houses. I didn’t want to do the job I was doing when I emigrated. I just used that to get to Canada, which was a life goal. Then I’m like, “I don’t want to do this till I’m 60.” So I kind of looked at real estate investing and how I could generate revenue.

We started doing single-family homes and from those single-family homes, we would actually go in, act as the general contractor… Now, a little caveat to that, I do have some skills. I’m a qualified electrical engineer, so I have an ability (I’m a certified electrician) that I brought to the table, so I utilized those. I didn’t have money so I started joint venturing really early on. Through joint venturing, that’s where I managed to create a portfolio. We were doing like two to three single-family homes, buying them, [unintelligible [00:07:50].11] in them, and then refinancing and moving on to the next. The BRRRR type strategy; it wasn’t exactly that, but it was a variation of that.  That’s what got me to a point where I’m like, “Okay, I guess I’m full-time at this.”

Then in the last few years, again, you look at life, you get to each stage, and you get to each goal that you achieve. I was kind of like, rather than going out and looking for real estate, I looked at what I want real estate to do for my life. That was like a switch, and that’s how we ended up buying the resort that’s on the lake. Even though it’s a business, it was a real estate purchase, because the assets themselves, the land assets, the property assets are worth the same price as the business we were buying, effectively.

Now my focus looking forward is just to keep growing properties. But I have a different strategy. I’m not involved in the day-to-day real estate as much as just looking at the bigger picture stuff, and I guess cherry-picking the deals.

Theo Hicks: Thank you for sharing that. So after the single-family homes, the next non-single family home purchase was the holiday resort?

Gary Spencer Smith: No, it would have been the dealership. It was an old Ford dealership from the 50’s, so it had the car mechanic shop, the body shop, the paint shop, the warehouse, the showroom. The lady who owned that building… I was actually at a funeral and we’re sitting at the table, and I’m from a smallish town, people know everyone in it, 25,000 people in the town… And she said, “Oh, would you look at my property? I’ve been trying to sell it.” I was like, “Sure I’ll look at it.” Honestly, I was being polite. I was going to look at it, but I had no intention of buying it. I’m walking through the property and I’m just looking at the space going, “Well, this is a space that would rent individually. This is a space that would rent individually. I could put a mini storage here, here, and here.” So I’m just doing the math in my head is a walk around… And then we walked into this huge warehouse, like 3,000 square foot, 35-foot ceilings, and I was just like, “Wow.” I was blown away.

This building was made from all first-growth fir wood, so even if you knocked the building down, you could probably sell the wood and get back the money that we were paying for the building. And I was like, “Well, this makes sense.” So then I made a few phone calls to some investor friends I have, we each put in $100,000 and bought it for 500,000. So that was the next one after single-family homes.

Actually, when you deal with single-family homes, there’s a certain lifestyle that comes around that. Especially if you’re managing it, which we weren’t. We had a property management company, which looked after that, plus another 50 doors. The commercial real estate was just so much better. It seemed to be for me, for what I wanted to do for it to get some time back. The tenants are great, they’re all professional people in all the different spaces. We’ve got plumbers, electricians, roofers, they’ll rent different spaces within the building…

And the holiday resort, that came about a year after purchasing the commercial space. It was actually the local pub and restaurant on the lake where I was living anyway. It’s a houseboat marina, there are 12 houseboats that go out, there’s a marina… We knew the owner, we knew he wanted out, so we had a conversation, we looked at the books, and it made sense. It was like a switch, it’s like, “Okay.” Because we lived on the lake, but I didn’t enjoy the lake, because I was always doing something else, albeit real estate related… And I love what I do, by the way, don’t get me wrong. I’m not complaining about anything I’ve done. But this gives me the chance to actually live and work in the location that I want to spend my life.

I was like, “Wow, this is just a slam dunk. So why would we not do this?” So we got creative, we raised some capital privately, we had some joint venture partners, we got a vendor takeback on the mortgage, you name it, the strategies were involved in the purchase of that property. So it wasn’t very straightforward, but it was everything I’d learned from the single-family homes, that skillset that I could transfer to enable us to buy that business.

Theo Hicks: Going back to the old Ford dealership… It sounds like a lot of work. How did you know that “Oh, this would be good for stores. Oh, I could put offices here. Oh, storefronts. Oh, the wood.” You saw the wood. How did you know all that?

Gary Spencer Smith: I seen her outside, she was having a smoke outside and I was driving past, and I remember thinking in my head, “Oh, I said I will go look. So I should.” Because that’s what I said I do. So I just did a U-turn and went back, and it looks like three little single-story storefronts from the road that you drive past every day. So I thought it [unintelligible [00:11:52].14] in a strip mall, it looked like that.

Then I go inside and I’m looking, and they’re each individually located. So where the garage used to be where they’d repair the cars, that had its own unit; it had three big garages, its own office, its own washroom. Then the showroom had its own office, its own area… Then there was a middle room that I guess would have been management, like the middle building, and the same thing, had its own office, all broken down already. Then she showed me the outside space; it was under the deck that was the body shop, and I’m like, “Wow, this could fit six vehicles in here, at least. Or someone could use this space.” It’s actually a fabric company that’s in there now. But it’s a good usable space, and had its own office. So everything was already compartmentalized.

But what she’d been doing was using the main showroom for herself, just for her little sewing business, and then she’d been renting the warehouse out to fisheries. That’s all she has done with the building. Everything else, she was like “Oh, I’ve got some stuff in there. I’ve got a friend that’s got some stuff.” Then she showed me the middle floor of this building [unintelligible [00:12:55].04] side on side, butted up against each other. I know it’s fair, you can tell, and the time it was built… ANd I was just looking at it going “You could park a tank on this roof.”

So then we got the drawings to the building and I’m like, “Wow, the amount of material that is in this to create the strength, what they used at the time – there is huge value in that.” So I was, “Well, it makes sense.” I did the math and the building itself [unintelligible [00:13:16].25] six and a half, but I think you’d be running between 10 and $12,000 based on market rents. For $500,000, that 1% rule, it absolutely crushes that. So I was like, “Well, why would we not do this?” So we moved our personal offices into this and we set up our studio for doing our YouTube channel stuff, and then we rented the rest of the space out in the building to cover costs and make a profit. I wish I could say it was an open space and I designed the idea, but it was already set up.

Theo Hicks: Okay. So you bought it for 500k… How much did you put into it to get it ready to go?

Gary Spencer Smith: $200,000.

Theo Hicks: 200K. Okay. Who did the work? Was it just your contractors you had met through the single-family business, or did you need to find someone new? How did you find the people that did that work?

Gary Spencer Smith: I’ve got a pretty good team from doing the single-family homes. We got to where we were doing three or four properties a year, plus all the odd jobs that come with managing 50 to 60 units. So I’ve got my backup plumber, electrician, backup electrician, framer, drywall – all those people were in place. We did do some of it ourselves, Chris and my business partner, when it came to our office space. And when we were looking through the building, the old big glass sliding doors that they would have had on the showroom, they were actually downstairs in the storage. So we just framed up a two by six wall and put the big glass sliding doors in, and that’s our office. It’s through all these big sliding doors at the back of the showroom, so we have our own sectioned-off space. That’s the only thing we did ourselves, was set that up. But for the most part, it was pretty much set up ready to go. A couple of partition walls, and an upgrade on the hydro, and some new lights and escape lights for the separate spaces. That was it. It doesn’t sound like a lot, but that 200l – $70,000 of that was a new roof. It’s a huge space, and we did this silicone roof on it. It’s got a 50-year warranty. So that was a huge chunk of the money was that. And then hydro was probably about $30,000. So 100k just on those two things, and the rest $100,000 was pretty quick, once you do in flooring, and trim, and a little bit of work.

Theo Hicks: Got it. Very fascinating stuff. Alright, Gary, what is your best real estate investing advice ever?

Gary Spencer Smith: Actually, take steps and do it. Don’t sit and wait. Get some knowledge, which is free. You’ve got awesome podcasts like this that you can listen to. You don’t have to pay tens of thousands of dollars for the knowledge. Get the knowledge that you can for free, pay a little bit of money to get some more refined knowledge, and then go take action. That’s it. Action will teach you more than any mentor or coach.

The second tip would be to find a good mentor. You don’t have to pay for that. That would be someone that’s done it, successful, who is willing to let you take them for dinner, take them for a coffee, bounce some ideas. If you can get a good mentor, you’re going to jump leaps and bounds ahead of everything else, and listen to what they say.

Theo Hicks: Alright, Gary. Are you ready for the Best Ever lightning round?

Gary Spencer Smith: Okay, let’s go.

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

Break: [00:16:04][00:16:44]

Theo Hicks: Okay, Gary, what is the Best Ever book you’ve recently read?

Gary Spencer Smith: I so wanted to plug my own book right there, [unintelligible [00:16:51].05] which is about human evolution. I actually use that when I’m discussing with my JV partners, just about how we think; it’s a mindset. Because real estate managing, buying, it’s all about the mindset. I’ve actually used part of that book where he talked about human evolution to help people understand about where we’ve got to and why we do the things we do. People are like “Wow, that’s so good.” We didn’t even talk about real estate, but they became a joint venture partner through discussing that book Sapiens.

So it’s crazy – not a real estate book, but I think one of the best books is written by Julie Broad, called More Than Cash Flow. That book is fantastic. Because I think anybody who goes on their real estate journey, that is pretty much the journey that most people will go through. You read the books, you sign up for the courses, you pay some money, you make some mistakes, you keep going, you achieve success.

Theo Hicks: And that first book you said, I think I might have missed that. What was the first book?

Gary Spencer Smith: Sapiens.

Theo Hicks: Okay, Sapiens.

Gary Spencer Smith: By Harari. It’s actually about humanity and the evolution of us as a species. But I actually used parts of that book when I was discussing mindset with people who were looking to be joint venture partners. That conversation they even said to me, was a turning point for them, understanding their own belief systems.

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

Gary Spencer Smith: You know what? To start with, I’d go get a job at McDonald’s, so I’ve got some money, and I can have a roof over my head and have some food. Somebody said to me once, if you lost everything, what would you do? Not that there’s anything wrong with working in McDonald’s, but I’m willing to go do anything to put a roof over my head and put food in my mouth, and for my family. So if I’m willing to do that, why would you not take the risks to go try something better, and even big? So I would go get a job first, then I would start looking for new joint venture partners, and I would move the business on and start again; you just keep going. If it fails, you start again and keep going. It’s like picking yourself up from walking, right? Like what would you do if you fell over? You pick up and you keep going.

Theo Hicks: What is the Best Ever deal you’ve done?

Gary Spencer Smith: It was probably my first joint venture. That was the house I bought when I came to Canada. I bought it individually. I put $6,000 down, then joint-ventured with my cousin a year later; he gave me $20,000. There’s a whole story behind this, but he gave me $20,000. He didn’t have to qualify, I managed the property. But I use that money to take my family for a trip back to the UK and have three and a half weeks over Christmas. And that one transaction made me look and go “Wow, I put $6,000 in, I got $20,000 back a year later, and I still own half the property. That’s a 333% ROI.” I didn’t really understand ROI, but this opened my eyes to the real percentages you can make using real estate, using joint ventures, and that was it.

I just said myself “How do I do that more?” And that was that one there, my first property in Canada, because that opened my eyes to ROI and huge returns, and it ignited the fire.

Theo Hicks: What is the Best Ever way you like to give back?

Gary Spencer Smith: I had a leadership company — well, I still have a leadership company that we do from time to time, and I work with a lot of youth at risk. So I help the youth at risk develop their leadership skills, just so they can do simple things like go get a job, go find a place to rent. A lot of them I’ll talk about getting their first place to rent, and how they should show up, and how they should answer people, communicate with people, shake their hands.

So I like working with the youth at risk, those 15 to 19-year-olds that are on the verge of going one way or the other. Hopefully, if you can give a tiny bit of guidance to even one person like that, you have no idea how far that ripple can go, where it can change someone’s life. I know that was done to me at an early age, and that’s why I like doing it.

Theo Hicks: And then lastly, what is the Best Ever place to reach you?

Gary Spencer Smith: I think if people email us at info@revnyou.com, or connect with us on Facebook, it’d probably be best.

Theo Hicks: You said you have a YouTube channel, right?

Gary Spencer Smith: We do, yes. Same as well – Revnyou With Real Estate. I think we’re about 7,700 subscribers right now.

Theo Hicks: Nice, good stuff. Well, thanks, Gary, for joining me today and going over your background and your journey to how you got to where you are today from in the UK, in the military, to moving to Canada and becoming a full-time real estate investor.

We talked about how you got started in single-family homes through JVs, as well as doing some of the rehabs yourself as a GC, as well as eventually the management company, which made you realize that commercial real estate was a better play for you. So you did the old Ford dealership, which you found at a funeral, of all places. And you talked about how much it cost, how you analyzed the deal when you’re walking through it.

And then after that was the holiday resort, which again, you walked us through how you got that deal as well, and how that made you start to think about how to use real estate to get what you want out of life. I thought that that was solid advice.

And then your Best Ever advice was to really just take action. Don’t sit and wait. Get some knowledge that you can now get for free pretty easily online. The different websites, and YouTube channels, and blog posts, and podcasts. If you need to, maybe pay a little bit of money to get some more refined knowledge, and then start taking action… Because that action will teach you more than any mentor or coach will teach you. But you still also said that it makes sense to get a mentor, but you don’t necessarily have to pay a lot of money. Just find someone who’s done what you are trying to do, and then the goal would be to take them out for dinner or coffee to pick their brain and get some advice on how to end up where they’re at.

So thanks again, Gary, for taking the time out of your day to speak with us today. Best Ever listeners, as always, thank you for listening. Have a Best Ever day, and we’ll talk to you tomorrow.

Gary Spencer Smith: Thank you very much, Theo. Have a great day, and it’s been a pleasure. Thank you very much.

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JF2328: HighSchool Vocational Class to Real Estate Developer With Kevin Palka

Kevin is the CEO of MVP Equities, a multifamily real estate developing company. In high school, he was fortunate enough to have a vocational program where the school would bus the students off-site to build a house from scratch and eventually auction it off for charity. Now he focuses on helping his investors acquire land, entitle, develop, and build for a profit.

Kevin Palka Real Estate Background:

  • CEO of MVP Equities a multifamily real estate developer
  • 18 years of real estate experience
  • MVP focuses on acquiring land, entitle, develop and build.
  • Based in Vienna, VA
  • Say hi to him at: www.MVPequities.com   
  • Best Ever Book: The Road Less Stupid

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Find a partner or mentor to work with you on your first project” – Kevin Palka


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 Kevin Palka.

Kevin, how are you doing today?

Kevin Palka: I’m doing fantastic, Theo. Thank you for having me.

Theo Hicks: Absolutely, and thank you for joining us. A little bit about Kevin—he is the CEO of MVP Equities, a multifamily real estate developer. He has 18 years of real estate experience, and MVP focuses on acquiring land, entitle, develop and build. Based in Vienna, Virginia. You can learn more about Kevin and his company at https://mvpequities.com/.

So Kevin, do you mind telling us some more about your background and what you’re focused on today?

Kevin Palka: Sure, I’d love to. So my background is at 45 years young — I started in the construction industry when I was 15 years old. So I’ve been living and breathing the construction industry a large portion of my life. I started out as a carpenter’s helper at 16, building houses. I was fascinated with stick-building and wood and just cutting things and putting things together. I was the kid that always took things apart and tried to put them back together and just had a technical mind. So I just always had a natural draw to the construction industry and real estate.

So I began my career just working through the trade, through high school. I was fortunate enough in high school where we had a vocational program where we actually built a house off-site. So every Tuesday and Thursday, we would get bussed off-site and go build a house that we auctioned off for charity, and that was the start of my career. And my carpentry teacher’s son was a homebuilder, so he actually saw me working on this house through school and decided that I had a knack for framing and building houses, so he hired me on during the summers.

So I eventually just kept building houses and working in residential construction, graduated high school and then actually went to school in upstate New York, and got my master’s degree in construction management and then just focused into and fell into commercial construction, and just basically worked my way up through different companies and project management roles, superintendent roles, so being on-site and traveling, and just working on various job sites, and that transitioned into multifamily.

So I had a long, extensive background in doing residential single-family, then went to multifamily and a mix of commercial as well, which got me through the first 6-7 years of my career. I eventually decided in 2002 to move to the Washington DC, Virginia area since it was a dream of mine as a kid to build high rise condominiums or high rise buildings and apartments. The Washington DC market was a very strong residential and multifamily market, and it just provided an opportunity for me to work for a development company at the time, back in 2002, all the way up to 2008 when the big crash happened. And from that point, I had put under my belt several large-scale projects ranging from $100 million to $200 million projects, 15 story buildings, things like that, that just had a lot of mass, in urban areas around Washington, DC. So it provided a lot of experience for me, a lot of growth, I learned to do some larger-scale projects and just really fine-tuned my skills.

And as 2008 came in, the crash happened and I got laid off, that’s when I started my own company. So in 2008, Asset Construction Services was born as a general contractor builder, and we worked in, again, Northern Virginia, Washington DC area, throughout the metro area, building commercial spaces, multifamily spaces and a little bit of residential here and there.

Ultimately, I just got back into development over the last 2-3 years from 2017, all the way up till now and we’ve developed several different multifamily buildings, as we established a healthy balance sheet to use as equity in our projects. And within the last three years, MVP Equities was born and spun off of that as a sole development company.

And right now, our business plan is to build, develop and acquire – or in the reverse order, acquire, develop and build – about 500-700 apartment units per year. And currently right now, that’s what we have in our pipeline. We have a 224-unit projects in Richmond, Virginia, that’s in permitting. We’ve designed that project with an architect firm, we get it entitled, meaning getting the permits, and then we obtained the financing, and then we work with other contractors, usually third-party GCs, on projects of this size, to build it for us as we construction-manage, and just execute the project as a whole and get it to stabilization.

We also have a 500-unit project in Charlotte, North Carolina – same process. We’re currently in rezoning, and out raising capital for it, syndicating and getting these projects to permit stage, so that we can execute, close on the loans and build the project. 500-700 units a year is our target, and that’s currently what we have, and it’s going really well.

Theo Hicks: Kevin, thank you for sharing your background. So a few follow-up questions… You mentioned that, really, the main reason why you got into development was because of your schooling and your knack for building things, and I was just wondering – do you feel or do you find that development has other advantages over buying existing properties, or do you think both are good strategies? Or do you just do development because of your background? Or is there another reason why you chose development over buying existing properties?

Kevin Palka: Well, that’s a fantastic question, Theo. And my answer would be it’s been in my blood to build new. We have a background in renovating as well, but from the standpoint of building new – because when I moved to Washington DC, I got very conditioned to build new projects. So it’s more along the lines of it being in my blood, starting with a new canvas; you get to paint the picture, you get to design it, you’re not stumbling over somebody else’s path… Not mistake, but just challenges that you face when you get an existing property.

So we just love the challenge of building new. We think that the talent that we have and the ability we have to not only understand the construction process, but the development process as well… And where we add value is we’re just very good at getting the best and highest use of the piece of dirt to maximize its value, not only from a monetary standpoint, but to improve the neighborhood that we’re building in. And that’s a large part of why we pick certain projects, is they are in up-and-coming neighborhoods, and they are transitioning and helping transform that neighborhood to be a little bit better.

Theo Hicks: Okay. So another question, since you have a lot of experience with construction management, obviously it’s what you’re masters in, and it sounds like you’re using third-party GCs for your deals. So other people who are doing massive construction projects, or something as simple as having a contractor help you flip a house or do renovations on your house. What are some tips you have on managing those contractors? Because we’ve all heard the horror stories of paying a contractor and never hearing from them again, or the contractor not doing great work. So kind of what advice do you have for people big and small, some kind of universal advice for managing contractors to make sure you’re getting the most out of your money?

Kevin Palka: Yes, it’s a great question, and then like you said, it can apply to flipping a home all the way up to a large project. But my advice would be, as cliche as it may sound, is do your homework. And breaking that down is one, interview the contractor, and really, really get to know them on a personal level, and visit their past job sites. Go look at their works, see what they’re doing, touch and feel their products, speak to their previous clients or who they’re currently working with; that’s a big one. There’s no better reference than their current clientele. So if they dance around that, that’s a sign that you shouldn’t probably work with them.

Ask for a qualification statement. There’s a document that you can get online called an AIA A305, and it basically lists out the qualifications of the contractor, from financial strength to previous project history, so you have a paper trail of what they are committing to and what they said they have done. So investigate that, do your homework. When you do start the project, meet with them weekly, take meeting minutes, take photographs. You can’t just leave your contractor on an island and expect the project to be done, or trust that it’s going to be done. You have to be there, you have to show your face, you’ve got to have a presence. And when you have a presence on the job and that people know that they’re being held accountable, you usually have a higher chance of success. So doing all that homework will definitely help your chances of success and helping you have a successful project.

Theo Hicks: And then transitioning to funding… Do you mind walking us through how you did your background, do the same thing, but tell us how you fund your deals, how that has evolved, I guess, since you started your own company in 2008?

Kevin Palka: The funny thing is, when I started my company in 2008, I had cashed in my 401(k) – or what was left of it – to start my construction company. We really just needed a little grindstone, as they say; just really hustled and saved money and built up our balance sheet over a period of a good 9-10 years. And what that did was it established a track record for us. Really, people saw what we were doing, and then they looked at our previous history with my previous employers, and they saw that long project list that I had accumulated over 15-18 years, and knew that we could perform, knew that we could execute. And then when we started going out and doing a development deal again, which back in 2017, when we put that hat back on, we started raising money through friends and family, we started just getting the word out there… I’m a mover and a shaker. I love to meet people, I love to be in front of people, shaking hands and just introducing, and just one thing leads to another. And we actually did a hard money loan on one of our first projects. And that guy who gave me the hard money loan actually invested in my project that I had after that. And that just set up another slew of introductions and it snowballed into just a bigger project with traditional bank financing. He had a huge relationship with some of the national banks, some of the local banks, that got us really good clean financing, and it helped us im, put in some equity; he brought in another partner, we raised some more equity and it just really snowballed into people just executing on that project, that one being a success and now to where we are today. We’ve actually just accumulated more and more investors by doing webinars, podcasts; we started a 506(b) fund to raise money from accredited investors. So we’ve gotten really legit with the way we do it.

We’ve also worked with different relationships with debt and equity brokers that helped us come in and just open doors. Some of the national players have gotten involved with us just to make introductions and source equity for us, source debt… And just bringing in the right people to really guide us and help us so that we do it in the right manner, we do it according to all regulations of the government, the SEC, and making sure we do everything properly and just having the right counsel in that respect. So just a large networking that we built over the last 3-4 years, it’s really got us in a good position right now, and we think we’re going to be able to execute rather efficiently with all our capital stacking.

Theo Hicks: So from 2008 to 2017, during that eight to 10 years, there was no money raised at all, it was just your own personal money that you saved up?

Kevin Palka: Correct. We were just using our own funds at that point.

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

Kevin Palka: My best real estate advice ever is to either find a partner or a mentor or coach to work with you on your first project. That will definitely help you flatten that learning curve, and really let you learn a lot quicker from somebody that’s been there and done it in the trenches.

Theo Hicks: Okay, so a quick follow-up question on that. So let’s say I want to do a development project, I want to do a first deal and I listened to you in this podcast and I go, “Alright, I need to get a partner or a mentor,” how do I get that person on board with my deal? And again, you can say that it’s not possible either, but let’s say I’ve not done deals before. I have a W-2 job that I’m working, and I want to get into real estate; how am I able to get that person on board? Do I pay them? How does that work?

Kevin Palka: What I would recommend is for some people to network through local events. For example, in our neck of the woods in Northern Virginia, there’s a program called GRID and they have a local meeting with mentors and coaches in real estate, individuals that actually often market that they will partner with you. You can go to those meetings, start to get to know people, start to get introduced… There’s guys that we know, for example, that have government IT jobs that are doing their first two or three-unit, four-unit condo flip. So they get involved with an architect, the architect makes some introductions… And offer to partner. You can just start networking with other professionals and offer a joint venture, a 50/50 ownership structure; or if you have three people, a third, a third and a third.

It’s really just getting out there, shaking hands, getting to know people. Get out there and go to events. Obviously, in COVID right now, it’s a lot more difficult, but everything’s gone virtual. So you can do it from the comfort of your home now. Do your research and find out.

I’m a grinder, I go out and just look online and I just don’t stop until I find what I need. So real estate is not for everyone, but you’ve got to have that passion, you’ve got to have that grit to be able to go out and find what you need. So just getting out there and shaking hands, or anybody can reach out to us, and if we know somebody, we’d definitely be happy to point you in the right direction.

Theo Hicks: Alright, Kevin, are you ready for the best ever lightning round?

Kevin Palka: Let’s do it.

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

Break: [00:17:06] to [00:17:54].

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

Kevin Palka: This one’s awesome. So I read The Road Less Stupid, believe it or not. The Road Less Stupid by Keith Cunningham. It’s a book for any entrepreneur, real estate, whatever business you’re in that gives you amazing advice on how to look at your business strategy; no matter what you’re doing, whether it’s real estate or something else, it gives you amazing outlook on how to really break things down and make really good decisions and think about things. He focuses in the book about thinking time and spending the time and really thinking about what you’re doing. So I highly recommend it.

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

Kevin Palka: I would reach out to all my current mentors and coaches that I have and current partners that I’ve worked with, and just because I love my business, I would want to rebuild it. And I would surround myself with people, because when a man or individual is alone and working by themselves, that’s their lowest level of temptation management. So you want to be surrounded by people, you want to be encouraged, you want to be re-coached and you want help. And other than that, I would go and help [unintelligible [00:19:01].29] shelters for dogs and things like that if I really changed careers.

Theo Hicks: Tell us about a deal that you lost the most money on, how much is lost and then what lessons you learned.

Kevin Palka: I’ve never lost money on a real estate deal, although we did come close. In 2007 we had bought a piece of property in Arlington, Virginia, and I did it with two co-workers, and we built a spec house. And then 2008 happened and we should have made over $100,000 apiece, we ended up making about $30,000 apiece; but we came really, really close to losing money.

What we learned from that was — we were a lot younger then, and just learning more about what the cycles are and paying more attention to other signs in the economy and what’s going on in the world, to be able to better make judgments about your timing and how you’re going to approach a project and how long you want to stay in it.

And the biggest project I’ve ever made money in was a project we did last year in Arlington, Virginia, called the [unintelligible [00:20:01].01] We had a significant profit on that, did very, very well, built a high-class condo building… And what I learned from that was just location, location, location. We were very close to Washington DC, it was about a two-minute drive here in the city… So that old saying holds true. So it was a very successful project.

Theo Hicks: Perfect. You’ve preemptively answered my next question, so I’ll skip that one, what’s your best ever deal, and move on to what is the best ever way you like to give back?

Kevin Palka: In my community church, we do a lot of volunteering work. My family, my wife and I, and our two kids, we do volunteering work for homeless shelters through our local church. We like to raise money for Catholic Charities, we like to raise money for Black Lives Matter… We do a lot of different stuff with different organizations to try and do our part and contribute to society. We like to donate clothes and toys, we teach our kids to do that, so that they understand that there’s other kids that need help, they need clothes, they need toys as well… So we try to pass that along to our family, to pass that along through our family and the kids, and definitely benefit others as well.

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

Kevin Palka: The best ever place to reach us is to go to our website at https://mvpequities.com. Our phone numbers are on there, our emails are on there and you can schedule a call with me at any time.

Theo Hicks: Perfect, Kevin. Well, thank you for offering that, and thank you for joining us and for providing us with your best ever advice. So very succinct – I like how you just provided everything, boom, boom, boom, in a list. So we talked about, first, why you selected development over some other real estate strategy or buying existing properties. Really, it was just something that was conducive with what you wanted to do, what you liked to do, and with your background. So anyone who listens to this podcast knows you can be successful in really any real estate niche, so just pick one you like, and then do that.

Kevin Palka: Exactly.

Theo Hicks: The other one was about the construction management advice; I really liked this… So it was do your due diligence on the contractor, which involves interviewing them, it involves looking at their previous projects, it involves speaking with people that they currently work with and people that they’ve previously worked with, as well as doing the qualification statements (you said AIA A305). And then once you actually hire them, just make sure that you’re there, that you’re present, show up at the job site. If they know you’re showing up, well, they’re going to know they’re going to be held accountable, and they’re more likely to do a good job, as opposed to you just leaving them there for months and months on end.

You talked about funding and how it just kind of organically grew from you funding with your own money, kind of building and establishing a good track record, and then starting with family and friends. You said you got a hard money loan, that that person ended up investing, and then through that network you’ve met more people, and then now you have very professional webinars and podcasts, and you raise money from debt and equity brokers. And then once you get to that point, make sure you have the right people on your team, the right counsel, so that you’re raising money by the book.

And then your best ever advice was to find a partner or a coach, mentor for your first project. You can find them through local networking events; sometimes there’s people who are explicitly marketing that they want to partner with you. And then in order to attract them onto the deal, get them to help you with the deal, just do JV, give them half the deal, because half of something is better than all of nothing.

Kevin Palka: Well said.

Theo Hicks: You’re going to have to grind and get out there and be passionate enough to keep hustling until you find what you need, until you find that business partner, and be willing to do whatever it takes to get them onto your first deal.

So Kevin, I appreciate it; thank you for joining us again. 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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JF2202: Adding Another Asset Class Your Portfolio With Vinney Chopra #SituationSaturday

Vinney is the CEO of Moneil Investment Group and Moneil Management Group and is also a returning guest from episode JF805. In today’s episode, he will be going over how he decided to start developing a new niche in multifamily and why. He will be discussing new ground-up construction of luxury assisted senior living.

 

Vinney Chopra Real Estate Background:

  • CEO of Moneil Investment Group and Moneil Management Group
  • A full-time investor with 35 years of experience
  • Over the past 12 years has completed 28 syndications; 14 of those in the past 3 years
  • Controls over $330 million, and 4,100 doors
  • Based in Danville, CA
  • Say hi to him at: http://vinneychopra.com/ 

 

 

Click here for more info on PropStream

Best Ever Tweet:

“Senior living has been outperforming apartments for the last 10-15 years” – Vinney Chopra

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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.

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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JF2194: Important Development Deal Steps With Shane Melanson

Shane is a full-time commercial real estate developer who started investing in 2004 and dived into commercial real estate in 2007.  Shane goes step by step on how he goes through a development deal by utilizing one of his very own deals