JF1965: The Six P’s of Raising Capital Like a Pro with Reed Goossens #skillsetsunday

Reed Goossens has returned to the show with his Best Ever advice for raising capital. Reed is a real estate entrepreneur and Managing Partner of Wildhorn Capital. As a native Australian, Reed moved to the U.S. to pursue his investing career in early 2012. Reed is a qualified chartered structural engineer and project manager. Since 2007, Reed has been involved with large scale commercial construction and real estate development projects, with a combined worth over $500 million; in Australia, the United Kingdom, and the U.S.—highlighted by his work in London in anticipation of the 2012 Olympic Games.

Best Ever Tweet:
“People don’t remember a great pitch, they remember a great conversation” – Reed Goossens

Reed Goossens Real Estate Background:


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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 that fluffy stuff.

First off, I hope you’re having a best ever weekend. Because today is Sunday I’ve got a special segment for you called Skillset Sunday. And here is the skill – a lot of you are going to like this – it’s the six P’s of raising capital like a pro. With us today to talk through that, Reed Goossens. How are you doing, Reed?

Reed Goossens:  Good day, mate. Thanks for having me back.

Joe Fairless: Yeah, nice to have you back. And as I swig water, because I was choking on a bean that I was eating earlier, I am looking forward to our conversation. And you said, “Nice to have me back” and that is because you loyal Best Ever listeners know this – Reed was a guest on this show twice, actually. One, episode 102 titled “YOUR Blueprint for Getting Started in Real Estate.” And that was a long time ago. [laughter] And then, let’s see. Well, the date — okay, I’m looking at it… It aired December 13th, 2014.

Reed Goossens:  Wow…

Joe Fairless: We’ve known each other for a while… And then the next episode, Episode 593. It’s titled “Feeling Re-entitled? GOOD, Because Here is Why it Means Big Business!” and it’s a Skillset Sunday episode.

So today we’re going to be focusing on the six P’s of raising capital like a pro. Reed’s in the middle of his book tour. Reed’s also the founder of Wildhorn Capital, a large multifamily investing firm, host of the podcast Investing in the US, and author of two books. So first, Reed, how about just give us a refresher on your background and your current focus, and then let’s dive right into the six P’s of raising capital.

Reed Goossens:  Sure. So for everyone who didn’t listen to those many years ago, I’m originally from Australia, I moved out here in 2012. I just quit my job in Aussie and just wanted to follow a dream; I moved to New York City, I fell in love with an American girl, I fell in love with New York City. I came here, didn’t have a job, didn’t go to school [unintelligible 00:03:22.05] I found a job pretty quickly, and I think within six months of moving to United States, I had purchased my first triplex for 30,000 bucks. The barriers to entry are completely different in Australia than they are here in the US.

My background’s in structural engineering, and since 2012 I now control with my business partner Andrew at Wildhorn a $150 million worth of multifamily real estate, and I’ve been really enjoying the journey. I’ve obviously got my podcast as well and a couple of books out.

So that’s really the focus in the last seven years. And my whole mission and little motto is, “If I can move 10,000 miles across the globe and achieve financial freedom through US real estate, then so can the average Americans. Just gotta get off the fence.” So that’s a bit of the elevator snapshot, pitch, or whatever else you would call that.

Joe Fairless: What’s your latest book about?

Reed Goossens:  My latest book is called 10,000 Miles to the American Dream. About three and a half years ago I brought together a group of seven other Aussies – all Aussie blokes – who had made a pilgrimage to come across the Pacific and make a go over here in the United States. And I started a mastermind. Through that mastermind we just did a monthly call at the beginning, we met up a few times, and then we said, “Hey guys, we need to write a book, share our story with the world.” And each one of us wrote a chapter, and that book has just been launched on July 4th, 2019. We just started the book tour in Asheville, and it’s going really, really well. It’s called 10,000 Miles to the American Dream, our story of financial freedom, and again, there’s a lot of Aussie-isms in there. And if Aussie blokes can move halfway across the world and achieve financial freedom, then so can the average American.

Joe Fairless: Are there only eight chapters?

Reed Goossens:  There’s only eight chapters, but it’s quite dense.

Joe Fairless: Those are big, big chapters?

Reed Goossens:  They’re dense chapters.

Joe Fairless: How did you all divide and conquer? Are they chapters that stand alone or is there a flow to it?

Reed Goossens: Good question. Surprisingly, we all had our different niches in real estate. So one of the guys is into real estate technology. He came out here and started a real estate technology firm in Silicon Valley. Another guy is into mobile home park investing, another gentleman has started a complete fix and flip business in Texas, I’m also involved in multifamily and a bit about branding and raising capital… There’s a few other people who know about the philosophy of growing wealth and how to grow wealth… So really just different aspects. There’s a hotel investing chapter in there as well, because one of the gentlemen is in hotels in San Francisco… So a really wide range of stuff, but in and around my story of how I brought everyone together and really was just like, “Okay, let’s have a beer”. Being an entrepreneur’s kind of lonely, so I want to surround myself with other Aussies who are doing the same thing, so that’s what we did.

Joe Fairless: You are on your book tour now, you have a presentation, and that is the six P’s of raising capital like a pro.

Reed Goossens:  Yep.

Joe Fairless: I would love to learn that.

Reed Goossens:  Sure. So through just observation, when I first moved to United States, I saw all these people, including yourself, Joe, just emulating these six P’s. And I sort of sat down and wrote an eBook, and I actually started with four P’s, and then I added two more to them. So without further adieu, let’s just dive into it.

The six P’s are as follows – it’s Professionalism, Pitch, Practice, Profile, Platform and Patience. And I’ll go through them one by one. The professionalism part, the first P, is really about being professional. A lot of people are concerned and have these mindset barriers that “I can’t get involved in real estate because I don’t have all these years of experience.” Well, I mean to tell you that no one is born with 10 years or 15 years’ worth of real estate investing experience. We all have a story, we all have a journey… And that is where you have to lean on past careers or past journeys to bring a professionalism to the table that people are gonna wanna invest in. And that really starts by just rocking up, being punctual, dressing correctly, being on time, making sure you’re articulate in trying to get across a message. [unintelligible 00:06:40.13] people, one that some people tend to overlook, and it’s in and around mindset. The second P–

Joe Fairless: Well, a question on the professional part and dressing appropriately. So should everyone wear suits and ties, or really fancy dresses? …I don’t know, what women wear to make them look professional, but business pants or whatever?

Reed Goossens:  No. It’s uniquely you. This whole six P’s is about unearthing what is you, and really looking deep into yourself, and looking deep into what your brand is going to be, to then emulate it to the world. You obviously don’t look like a slob, but look at the Mark Zuckerbergs of the world. They coined the fashion of just wearing a hoodie and jeans on stage. So definitely, we live in a world where professionalism means a different bunch of things, and looking one way is just one part of being professional. Obviously, the way in which you host, your presence, being communicative with your audience, with your investors, and really laying the foundation to be a thought leader in your sphere.

Now, you don’t have to go out and be the next Tony Robbins or the next Joe Fairless, but you can be a key person of influence within your sphere, and that’s what you have to realize – that we’re all standing on a mountain of value, and that value needs to be shared with your sphere, and people will come to you as being the real estate expert, and that’s really the whole purpose of the first P.

Joe Fairless: Okay. Pitch.

Reed Goossens: Pitch. Awesome. So pitch is – I love this – pitching effectively is really quite hard, and in the chapter that I wrote, it’s all about pitching effectively. I’ve coined this little phrase – Pitching, there’s three levels of pitching… There’s social pitch, there’s a scheduled pitch, and then there’s a sales pitch. A social pitch is where you deliver that in a social setting. People never think when they leave a networking event or anything like that, that “Oh, geez! That was a really good pitch!” A really good pitch is really a good start to a conversation.

So the way in which I’ve formed the pitching formula is really quite simple. When you’re in a social setting, you want to have your social pitch ready, and we’ll talk about that in 30 seconds… But then, from a social pitch you want to get out your phones, and you want to get on a scheduled pitch, which is maybe a coffee or a beer, or get on the phone together… And that will be at some later point in time. And in that intermediary time, you’ve got to send them the pitch deck, a little bit of data about yourself, maybe direct them to your website…

And then the final pitch is the sales pitch, where you have a live deal and you’re answering investor questions and objections or whatever that might be. So pitching effectively and the whole ecosystem of pitching is really going from social pitch to scheduled pitch to sales pitch. And when we’re in a social setting, the whole Martin Luther King pitch, the “I have a dream”, you’re not going to change someone’s mind with one pitch, and your pitch will need to be practiced thousands and thousands of times. And like with Martin Luther King, he practiced it many, many times across the South before it became on the Washington Monument. And that’s the way we all have to pitch as well.

So I’ve come up with this little way of–  it’s a little form. It’s called Name, Same, Claim to fame, Goal of the Game. And I’ll repeat that, again, its Name, Same – so I’m Reed Goossens, I’m a real estate investor. My claim to fame originally when I first moved to United States was that I moved across the world, quit my job in Australia, and I moved to the United States to follow a dream. My goal is that I want to help 10,000 International folks realize the benefits of investing here in the United States in order to become financially free. So there is an effective pitch. It’s less than 30 seconds, it engages someone in a way that they wanna have a follow up conversation.

You never want to be pitching in a way where in Australia (or the British way) they pat you on the shoulders,  and go “Well done. Good luck.” You want to evoke emotion. So when you’re pitching at someone, people like to hear something big and bold. Like the Martin Luther King “I Have a Dream” speech. It was emotive, it got people — it stirred emotions within someone. And you can have obviously positive and negative emotions, but you want to be able to become emotive, so people are engaged in what you’re trying to do in order to get to a scheduled pitch, to then get to a sales pitch.

Joe Fairless: I love the fame part, because it really makes us think about what makes us interesting to other people. And if we’re interesting to other people, then people will tend to gravitate to us. Quite frankly, we’ll just be in a more enjoyable conversation, because your journey is interesting – I’m sure you enjoy talking about your journey – and other people will find interesting as well. What’s something that people mess up on within the pitch category?

Reed Goossens: So over the weekend, I just did a whole-day seminar on it, and people waffle. And the whole idea of name, same, claim to fame, goal of the game – it’s about getting that waffling to a very concise 30-second opener. Essentially, you’re trying to open a conversation to lead into “Oh, so you moved halfway across the world? What’s that all about? Why?” People don’t remember a great pitch, they remember a great conversation, and that’s really what you want to have. A lot of people waffle on for too long and people are standing there who are receiving a pitch, scratching their head like, “What are you? Are you an investor?” You never want to be pitching someone and they’re scratching their head going, “I don’t know what you do or what you are.” So the name, same, claim to fame, goal of the game is a concise way of getting to the point really quickly.

Joe Fairless: Cool. Practice? Is that next?

Reed Goossens: Sorry. Professionalism, pitch, profile… Would you want to talk a little bit about– it’s 2019. You’re going to be on Google. People are going to Google you. So that is where people are going to have to say, “Okay, well, I’m going to invest with this person”, so I’m gonna have to have a website. I’m gonna have to professional images taken of myself – headshots, logos. All that stuff contributes to bringing that professionalism across to the table.

It’s not a really massive P, but it’s a P that is sometimes overlooked, and making sure that your profile is coherent across all different social medias – LinkedIn, Facebook, Instagram – that your message is the same is really important… And making sure you have something to say on your website, so when people come and want to find a little bit more about you, they know where to go. And for whatever reason, people like to see things written down.

We live in a day and age where a website is essentially the new business plan. So people want to go to your website, they wanna find out who you are, they want to read a little bit more about you, they want to read some blogs that you might have done, your thoughts on x topic. So it’s really important to have a coherent profile, and that starts with headshots, logos, websites and stuff like that.

Joe Fairless: Okay, it makes sense.

Reed Goossens: Next one is the platform… The platform being about how you’re going to get your message out to people. Right now we’re talking on a podcast, and I know Joe you taught me in back in the day that you can leverage certain mediums like YouTube or iTunes. or you can leverage writing articles. Whatever you do, you have to be consistent and you’ve got to choose a platform in which you’re good at.

For me, I didn’t particularly like writing, so when I started my podcast – audio always came really quite naturally to me. I tried videos, videos were okay… But whatever platform you do choose to communicate with your investors with, you have to be consistent. So whether you choose just to do a simple monthly newsletter, with a couple of blogs that you’ve written – fantastic. But you have to be consistent with it. I think the biggest thing people fail is they start something like a podcast or a blog, and they just give up after six months. And Joe, you know this, after doing 700-800 episodes, how important consistency is, and choosing that right platform and medium to get across your message to your audience. So that’s the platform P.

Joe Fairless: Have you started anything from a platform standpoint that fizzled out and you took a different direction?

Reed Goossens: Yeah, videos. I had a YouTube channel, it’s not very popular… But I tried to go once a week on the top of Culver City Hill and try to set up a camera and try to not have bags under my eyes… It was a lot.

Joe Fairless: [laughs]

Reed Goossens: It was just like, “Oh, this is such a pain… And then I’ve gotta edit the bloody thing…” It was just too much, so I now just record some video with my podcast, and I just drop the podcast… But it just didn’t work out as successfully as I thought it would. It just takes a lot more effort with the video space, so I niched into being more in the audio space.

Joe Fairless: Okay.

Reed Goossens: So we’ve got professionalism, pitch, profile, platform… Practice. So the practice is about going out and doing that scheduled pitch with your investors, in a circle of people who know you best, so your friends and your family. It’s sitting down for coffee and presenting them a pitch book or a pitch deck. Essentially, it’s a business overview of what you’re trying to achieve. In real estate we are trying to invest in whatever the specific asset class that you’re in, so it might be multifamily, it might be mobile home parks… Whatever that is, there’s something that if you hand a pamphlet or a brochure to an investor over coffee, it makes it real for them. And it really is taking that website that you’ve already created and putting it into a pitch deck, and outlining you core values, your mission statements, what you’re trying to do in terms of your investment strategies, how the investment’s gonna work out for the investor, and maybe some structuring questions, maybe a hypothetical or an actual case study if you’ve been involved in any deals… And that is where you sit down and you practice with it. And you practice, practice, practice, practice.

And I remember when I raised my first bit of money with you, Joe, I thought to myself, “Geez, I’m gonna raise half a million bucks” or whatever it was, and I went out and approached 50 people, and only three people invested. And it showed how much I need to double down on getting to grow my audience. But it was a real cold shower in terms of that practice part of it. You have to be consistent with it. If you think “I’m going to approach 20 people and I’m going to get all 20 people to invest”, well, you’re wrong. It’s gonna take a couple hundred of people for maybe three or five percent of those people to actually invest in your deal. So having that mindset going on the front end… And that’s the practice part of it.

Joe Fairless: And lastly?

Reed Goossens: Patience, my friend.

Joe Fairless: But we want it now! We want it yesterday!

Reed Goossens: Of course, right? We always want it yesterday. But like anything… Tony Robbins famously says, “You overestimate what you can achieve in a year, but you underestimate what you can achieve in a decade.” And ten years ago, I picked up the book Rich Dad, Poor Dad. Now I’m living halfway across the world and I control $150 million worth of real estate. I don’t say it to boast, I say it because it’s wow. I pinch myself every day. I work for myself. I’m like, “Holy crap. This is incredible.”

So patience is a virtue, and it takes time and it’s a snowball effect, and combining with the five other P’s, it will take time and it will slowly build. You’ll feel like you’re pushing a boulder up a hill, but you will get to the top. Then once you get to the top, it will just cascade down the other side.

Joe Fairless: On the patience front, how do you know if you should exercise the patience or you really are being a lot slower than where you should be?

Reed Goossens: Yeah, it’s good question. We’re all trying to run our own race. With the social media age, we’re looking at other people and going, “Oh, I wish I was doing that. I wish I was doing this.” It is about running your own race, it is about looking at your own situation and understanding “Okay, well, I’ve got a full time job. I’ve got a family to take care of. I can squeeze in a little bit of real estate investing or building my brand, say ten hours a week.” Whatever that is, you have to be consistent with it.

So that’s the patience part of it, the patience side of it, because life happens. You’ve gotta keep food on the table, you’ve gotta keep a roof over your head. For many years I had a W-2 job plus trying to do deals on the side, plus trying to find investors… At one stage, I thought, “Jesus, it’s never going to happen”, but I had to have that mindset that it will take time. And anything worth building will take time. So that’s really the patience part of it.

Joe Fairless: Thank you so much, Reed, for sharing the six P’s of raising capital, and best of luck on your book tour. I have really enjoyed our friendship and looking forward to continuing to– I’ll interview you in five more years. That way, we’ll have our ten year anniversary of when your first interview aired.

And really, truly, thank you for being on the show. I hope you have a best ever weekend. How can the Best Ever listeners learn more about what you’ve got going on?

Reed Goossens: Easy. Jump over to reedgoossens.com. And Joe, thank you so much for allowing me to come back on the show.

Joe Fairless: Have a great weekend, and we’ll talk to you again soon.

Reed Goossens: Bye.

1964: Technology In Lending with Kirill Bensonoff

Kirill Bensonoff is the Chief Product Officer at New Silver. Kirill is a successful entrepreneur with multiple exits in SaaS and IT services spaces, investor with a focus on fintech and IT, advisor and host of The Exchange With KB Podcast.

Best Ever Tweet:
“Using data, looking at this property, looking at the neighborhood, looking at the trends, I think that will help them be more intelligent” – Kirill Bensonoff

Kirill Bensonoff’s Real Estate Background:

  • Chief Product Officer at New Silver
  • 5 years in an investor for a fund that does lending
  • Based in Boston, MA
  • Say hi to him at https://newsilver.com/

The Best Ever Conference is approaching quickly and you could earn your ticket for free.

Simply visit https://www.bec20.com/affiliates/ and sign up to be an affiliate to start earning 15% of every ticket you sell.

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.


JF1959: Owner Carry Financing 101 & Purchasing Heir Rights with Amy Lingenfelter

Amy is an active investor who – along with her husband and son, is buying properties through seller financing, and leasing them out as well. They also do fix and flips, wholesales, currently dealing with a mobile home park, and purchasing heir rights. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“When I could focus on the people and let them know I was on their side, they were able to let go” – Amy Lingenfelter

 

Amy Lingenfelter Real Estate Background:

  • From hairdresser to real estate millionaire
  • Bought first property at age 24
  • Is involved in a 147 unit syndication, currently negotiating her first mobile home park
  • Has flipped over 24 houses
  • Based in Portland, Oregon
  • Say hi to her at amyling2007ATgmail.com
  • Best Ever Book: You Are A Badass At Making Money

 


The Best Ever Conference is approaching quickly and you could earn your ticket for free.

Simply visit https://www.bec20.com/affiliates/ and sign up to be an affiliate to start earning 15% of every ticket you sell.

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.


 

JF1958: A Look Inside The Real Estate Banking World with Lindsey Johnson

Lindsey is in the mortgage insurance industry right now, but also has a background in banking. She’ll give us a look inside the mortgage industry, and share some things we may not know about it. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“The mortgage system that we have today has evolved over a decade” – Lindsey Johnson

 

Lindsey Johnson Real Estate Background:

  • President of U.S. Mortgage Insurers
  • Served as Director for the Federal Home Loan Bank of Atlanta, represented the bank in D.C. during several key legislative reforms including The Housing and Economic Recovery Act of 2008 and the Dodd-Frank Act.
  • Based in Washington, D.C.
  • Say hi to her at http://www.usmi.org/

 


The Best Ever Conference is approaching quickly and you could earn your ticket for free.

Simply visit https://www.bec20.com/affiliates/ and sign up to be an affiliate to start earning 15% of every ticket you sell.

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.


TRANSCRIPTION

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

Lindsey Johnson: I’m doing well, thank you. Thanks for having me on.

Joe Fairless: Well, I’m glad to hear that, and you’re welcome. I’m looking forward to our conversation. A little bit about Lindsey – she’s the president of U.S. Mortgage Insurers. She served as director for the Federal Home Loan Bank of Atlanta. She represented the bank in D.C. during several key legislative reforms, including the Housing and Economic Recovery Act of 2008 and the Dodd-Frank Act. Based in DC. With that being said, Lindsey, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Lindsey Johnson: Absolutely. It’s a mouthful, I know, and a lot of acronyms that could be boiled down in there, but… Yes, essentially I’ve been focused here in D.C. for a long time, mostly on mortgage policy and mortgage finance policy, and sort of done it on the business side, and also within the government… And just everything that we do as real estate professionals definitely si highly-regulated. It essentially comes down to the government, whether you’re talking about FHA (Federal Housing Administration) or you’re taking a conventional loan [unintelligible 00:02:28.18] government-sponsored enterprises – everything is gonna have some kind of government policy attached to it. So that’s really where I’ve been focused.

Now I’m with the mortgage and insurance industry, and we really are very proud of the role that we’ve played for more than 60 years in helping facilitate home ownership for millions of Americans.

Joe Fairless: So what is your primary goal right now, within your current role?

Lindsey Johnson: My primary goal is to really create a better environment for our companies – most of them mortgage insurance companies across the country. Just to make sure that they’ve got the best operating environment to help facilitate home ownership for people, with less than 20% down.

Borrowers who don’t come to the closing table with a hefty 20% are not only abused by lenders, but actually are  a higher credit risk profile than many other borrowers. But that’s where our company stands in, and we really bridge that gap between what they bring to the closing table, and what the lender would require. In doing so, we’re protecting that lender against those potential losses if the borrower was unable to repay that loan, and there’s not enough equity in the house to cover the amount that’s owed. So we really fulfill that really important facilitator role.

Joe Fairless: Okay. So what about policy now would you change, in a perfect world?

Lindsey Johnson: Well, look, the mortgage finance system that we have today has evolved over decades, and it was somewhat of a hodge-podge; there was no real rhyme or reason. A lot of the response that you’ve seen, even in today’s market, has come out of other crises and lessons learned. So they’ll make some adaptations and some changes.

I think one of the most important things that should be done, and that we as mortgage real estate professionals need to focus on is how do we connect the dots and bridge the divides for consumers where they are today? One of the craziest things to me is how complicated the home-buying or even the refinancing process could be, especially for homebuyers.

I went through a refinance process, and I’m still amazed every time I go through it. How is this so complicated?

Joe Fairless: I agree.

Lindsey Johnson: But you think about the profile of today’s and you’ve got millennials coming into the market, and they look and analyze information and data about the home purchase process in such a different way. Most of it is on their phone. And you think about their incomes being through gig economy… There’s just a lot of different things that are different today than they’ve been in the past.

You’ve got a very diverse population… Today’s generation is more diverse than any generation before it. They’ve got different cultural preferences for home ownership, they’ve got different challenges… But in the end their goals remain the same – they still wanna be homeowners, and they still wanna attain homeownership. So that’s where we’re really focused on informing them, getting the right information to them about different mortgage options, and then really are working with the rest of the industry to make sure that they’ve got the technology and the tools to keep up in the digital world for where they live.

Joe Fairless: I currently own three homes; my company is apartment investing, but my first four purchases on the real estate front were four single-family homes. I’ve sold one since, and I currently have three; I have equity in them. Do I hold on to them and continue to make $200/month until someone moves out, and then I love $5,000 for move-out stuff? That didn’t work, a). B) Do I sell them? C) Do I refinance, get some equity, and then hold on to them long-term? Well, c), the refinance, makes the most sense financially… But whenever I went to a bank and I starting talking to them about the process, it would have been three separate refinance loans, and the process of going through a refinance was just such a headache… And I just thought “You know what – I’m just gonna sell these and I’ll take that money and invest in our apartment deals…” But as you said, it’s such a complicated process to go through that refinance and home purchase. How would you streamline that to make it more simple and easy to go through?

Lindsey Johnson: Well, I think a lot of what my companies are doing today – and we work directly with GSEs and with lenders – we are really adopting a lot of great technology that’s gonna be more real-time in terms of getting rates; just being very competitive and being able to provide those rates to consumers in real-time. That’s something that the industry has been doing really over the last couple of years, but every day we see a little bit more evolution in this. So it’s faster, it’s quicker to the market…

I think generally in terms of verifying income of individuals – that’s something that just through the process has been very clunky, frankly…

Joe Fairless: Yup.

Lindsey Johnson: …going through this process. And you’ve gotta provide W-2s, and your income statements, and your pay statements, and then the process takes a couple months longer, so suddenly they ask for more income statements… You know, it’s a little bit of a labor process. And imagine that for someone who really is in the gig economy, or an Uber driver, or some of these other industries where you’re not just a normal W-2 earner… That becomes even more complicated.

So we are collaborating with many others, and the GSEs are taking a lot of the lead to streamline that process, to bring in new technologies, to have that done upfront and verified through technology, that everybody can trust and verify.

So it’s not taking any shortcuts around making sure that there’s still prudent lending, and that we’re understanding the risk profile, and verifying… But it’s gotta be done in such a way that it’s not gonna burden the consumer to the point where they walk away, like you’ve experienced.

In our industry a part of this is making sure that they’ve got the right understanding. The other really frustrating thing for us is we constantly hear, literally on a daily basis, and there’s research and surveys that will say consumers will cite down payment as the biggest hurdle. And I remember my dad telling me, drilling it in my head, “You gotta have 20% down before you’re going to that lender.” And that’s just simply not the case, and it shouldn’t be viewed as the only prudent way to get into a mortgage.

One thing that our industry has been keenly focused on is just educating consumers that you can get into a conventional loan for as little as 3% down. There are different options available conventionally, where you’ve got [unintelligible 00:08:39.05] you can get a government-backed FHA loan with 3.5% down, and both of those options should be on the table. Again, it’s one of those situations where I think that — for some people, they think “Well, if I wait and I save that 20% down, it can save me money in some areas”, but it could cost you money in other areas. And there’s some really great calculators out there where you can estimate “What am I gonna be paying in rent over that timeline horizon of saving for 20%, versus what I might be building in equity?”

It just took me a longer-term look, and through taking a look across the horizon, and what those payments are gonna be and what your long-term economic goal is. Those are things we think a lot of consumers just haven’t had the tools and the resources and the education to do so far.

Joe Fairless: So U.S. Mortgage Insurers – the business model that would help  your company (or group of companies) continue to thrive is more people getting loans at less than 20%, because then more mortgage insurance would be in play, therefore you all would make more money, yes?

Lindsey Johnson: Yes, absolutely. And then [unintelligible 00:09:45.28] you think about not just that home ownership is expected to rise between 8 and  10 million households by 2025, but low down payment lending has been on the rise, especially since post financial crisis. The median down payment today for all buyers, first-time and repeat, is 13%, and for first-time homebuyers the median down payment is about 7%. So it is a really important tool for a huge chunk of the market today.

Joe Fairless: So I know during the last couple years – I think it was 2015… Okay, so maybe not the last couple, because we’re in ’19, but… In 2015 and 2016 – I don’t remember seeing more recent data than this, but in 2015 and 2016, during the economic expansion, the percent of household renters increased. That’s not good for business for you… So what are your thoughts on that, when we talk about that?

Lindsey Johnson: Well, it’s funny, because I think that generally we wanna make sure that people are home-ready before they can do their mortgage. It’s not good if people are on the sidelines, and they’re home-ready and they’re not getting into the mortgage market, but it’s also not good – and we saw this pre-crisis – when people get into the market too soon, or are unprepared, or are making decisions that are just not based on their economic rationale, and their own position. We don’t view it necessarily as negative… What we do see however is a lot of people that do have the resources, that would be mortgage-ready, that are staying on the sidelines because they feel like they need those hefty down payments… And they’re kind of chasing a moving target.

Let’s just say that home prices rise 3% annually, which is relatively low compared to what we’ve seen over the last few years… But let’s just say it’s at 3% and someone is going to put $40,000 (which is 20%) on a $200,000 home. If they’re trying to save that amount, just in a couple of years, the target has definitely shifted, and it’s like $48,000 just a  couple years’ time. So we continue to just demonstrate that this is not a new situation, we’ve seen this in the past… Home prices do fluctuate. Sometimes they go up, sometimes they go down, so you don’t wanna just base it on the upside potential, and that’s why you’re gonna get into the market… But at the same time that you potentially lost some equity opportunity, you’ve also been paying a lot of rent.

So just understanding that whole dynamic I think is really eye-opening for a lot of folks when they sit down and they do the math.

Joe Fairless: What major group has an opposing stance to your group, and what are their counter-points?

Lindsey Johnson: That’s an interesting question. No real group has an opposing position to private mortgage insurance. Obviously, there’s competition in the marketplace, and we welcome competition all day, every day. If there’s a better mouse-trap out there, I think that’s great. Even to your point about the rental, and in fact even the single-family rental market – one thing that we saw during the crisis and after the crisis was you had some opportunistic investors who saw what was happening in the crisis and scooped up some of the real estate, and are using them for single-family rentals.

A lot of folks in D.C. were concerned, but I think some of that is really good and healthy, because it somewhat puts a floor in the market; home prices may start to have  a floor to the bottom. And then the other component is a lot of families that previously were homeowners may have been foreclosed upon, and are going to have a difficult time getting back into home ownership for a period of time… But they still want a single-family mortgage.

So we don’t necessarily view that as competition, we view that as sort of a healthy dynamic that’s occurred in the marketplace and is hopefully meeting a need.

I think that there’s a recognition that there are individuals, very credit-worthy and sustainable individuals who get into the mortgage finance market and completely be sustainable borrowers, that simply don’t have a hefty 20% to put down… So we really don’t have a lot of opposition. Competition – sure. But that’s healthy.

Joe Fairless: I would love to hear about a story about a challenging time you’ve come across professionally.

Lindsey Johnson: Many, here in DC, obviously. Anybody who experienced the financial crisis here in DC – it was a lot of focus on mortgage policy, and I think that this industry in general, and some of this predates when I was with the industry, but a lot of it we’ve been continuing to work on… But just everyone that’s part of this industry, taking a look at what works and what doesn’t work, and being intellectually honest with what needs to change… I can give you many examples, but just [unintelligible 00:14:12.12] and going through the financial crisis and really having to manage not just the downside risks that we had on the business side, but also the policy risks that we had here in DC, was enormous… And we were trying to work with policymakers who don’t necessarily understand the business. So it was an extremely challenging time.

This industry  –  I will say I came in in 2015, so it was after the crisis, but there was still a lot of uphill climb to do… So making sure that we were looking at new capital requirements, and the contracts that are between us and lenders and the GSEs, and how and when we take claims, and making sure that those things make sense going forward – those are all significant changes for an industry [unintelligible 00:15:04.04] for decades, and sometimes uncomfortable. But I will say I was extremely impressed with this industry coming in, at the willingness to look at that and make some of those changes to make it stronger going forward.

Joe Fairless: What were some changes?

Lindsey Johnson: Well, one big change was we basically doubled the capital that we were required to hold. Obviously, pre-crisis we were not just state-regulated, but we sort of had de-facto regulations from the GSEs, and 95% of the mortgage market goes to Fannie and Freddie. So we obviously insure loans that are going to Fannie and Freddie that don’t have 20% down, and one of the changes coming through the crisis was “We want you all to be even stronger, because you’re most exposed to some of this mortgage credit risk.”

So we’ve doubled our capital going into 2014 and 2015, and have made some even further enhancements since that time to our capital. But the industry is also doing a lot in terms of evolution of credit risk management. So they’re dispersing in some very sophisticated ways their credit risk on the back-end, to very highly and well-regulated re-insurance companies, and even to the capital markets to insurance-linked notes. So it’s not just a buy, hold and hope industry; it is really more of a sophisticated credit risk management started to occur.

Joe Fairless: Let’s take this down to a super-local, granular and specific level. I’m a real estate investor and I have three homes for sale right now… And I want to make sure that as many people know about getting loans for less than 20%, like you’re advocating and you’re trying to get the word out as much as possible, so that people know “Hey, I don’t need 20% down. I can do it as low as 3% or 3,5%.” What are some tools that either you all have I can leverage, or what are some tips you have for me as a real estate investor trying to generate more demand for the properties that I’m selling? …because some people don’t know that they can buy with as little down as 3% or 3.5%.

Lindsey Johnson: Well, I think first of all, just for agents and investors to know that not everyone does, and understandably; as I said at the beginning, it’s sort of a complicated process, and we’re just one of the many pieces. There are a lot of resources out there, and we are doing for our part a lot to just make sure that consumer and others know where to look. We’ve developed a website for consumers, and I think it’s great for real estate agents and others to get a lot of this information. It’s called LowDownPaymentFacts.com. And it’s not just from our industry; we’re pulling and calling from many other sources, so that folks really have information at their fingertips about how to be home-ready, and about their different options available to them for down payments.

So we connect these consumers to these different resources. Some are through our member companies… And our companies work mostly with lenders and business-to-business, but we wanna make sure that the information is there. And they offer these free mortgage savings calculators. So as a borrower, or an investor, or an agent, you really can look and very easily consider how different down payments can impact the savings rate, or the rent that you might save, the equities that you may build… Very customizable, so consumers can really take control. But it truly is, I think, one of the most helpful websites out there, that kind of breaks everything down in terms of down payments.

So again, LowDownPaymentFacts.com. There’s other resources out there, and I would just really encourage, whether it’s a real estate investor, or obviously an agent or others, to look at, to be educated on and to understand the options available to consumers.

Joe Fairless: Do you happen to know the percent of people who don’t realize that down payments can be less than 20%?

Lindsey Johnson: Yes, we do actually, because there’s a lot of surveys on this stuff, as you can imagine. There was a survey that was done in July that suggested 50% of people who are not homebuyers, who suggest that they wanna be homebuyers, say that it’s because of a down payment requirement of 20%.

A survey a couple years ago – it was at 40% said that you have to have a full 20% down payment. So there may have been a different way that they were asking the question, but as you can tell, it’s a significant number of people who are otherwise most likely eligible to me homeowners, that are citing that down payment as the number one obstacle.

Joe Fairless: Hm. I’m in my own little real estate world, because that just shocks me. I just thought everyone knew — I mean, clearly not everyone, but I thought 80% of the people that were wanting to buy a house, that they could get into a primary residence for 3%-5% through some loan options…

Lindsey Johnson: Well, the amazing thing is – and I’ve mentioned this before – once you start to look at those who actually go through the process, then you start to see that the majority are putting far less than 20% down. I think the challenges for those people who are just kind of teetering and tinkering around and thinking about it, they still have that in the back of their mind… So it’s sort of really limiting their willingness to go and actually get the information.

So we are trying to kind of push it to them and just make sure that they realize it’s not something that you’re required, that they’ve got a lot of options available to them, and that if that’s the one thing that’s holding them back, it shouldn’t be.

Joe Fairless: Anything else that we should talk about, that we haven’t discussed?

Lindsey Johnson: No, I think we’ve covered most of it. I think we’ve talked about — the private mortgage insurance helps lenders, we help taxpayers, we paid more than 15 billion in claims through the financial crisis… And those are claims that the GSEs, and therefore the taxpayers didn’t have to pay.

And then we help borrowers. I mentioned that we’ve helped more than 30 million borrowers over the last 60 years, but just last year we’ve helped a million borrowers. And if you really look at who those individuals are, 60% are first-time homebuyers and 40% have annual incomes of $75,000 or less. So it’s such an important component of the housing finance system, and we really are very proud of the work that we do to enable home ownership for millions of Americans across the country. So we wanna get the word out, we wanna make sure that people have the right information.

Joe Fairless: And the best place the Best Ever listeners can learn more, one last time?

Lindsey Johnson: Absolutely. LowDownPaymentFacts.com.

Joe Fairless: Excellent. Well, Lindsey, thank you for being on the show, talking about the mortgage insurer’s perspective, and mortgage insurance – clearly, most listeners on this show know what that is, so I’m glad we got into some of the policy that you’re championing, and then also some of your background through the 2008 crisis… So thanks for being on the show. I hope you have a best ever day, and we’ll talk to you again soon.

Lindsey Johnson: Thanks, Joe. Take care.

JF1956: Raising Capital & High Level, Complicated Deal Structures with Adam Finkel

Adam has been involved in over half a billion in debt and equity placements. We’ll hear details on some of the more complicated structures he’s worked with, what he learned, and what he can share with us. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Start small and build your track record” – Adam Finkel

 

Adam Finkel Real Estate Background:

  • Adam is the Founding Partner and Principal at Tower Capital
  • Since 2015, the firm has been involved in over $500 million in successful debt and equity placements on behalf of investors across all major asset classes
  • Based in Phoenix, AZ
  • Say hi to him at https://towercapllc.com/
  • Best Ever Book: Anything that Malcolm Gladwell writes

 


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Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.


TRANSCRIPTION

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

Adam Finkel: I am well, how are you?

Joe Fairless: I’m doing well, and looking forward to our conversation. A little bit about Adam – he’s the founding partner and principal at Tower Capital since 2015. The firm has been involved in over 500 million in successful debt and equity placements on behalf of investors across all major asset classes. Based in Phoenix, Arizona. With that being said, Adam, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Adam Finkel: Absolutely. I grew up in Boston, I went to Arizona State University for school. That’s how I ended up out in Phoenix. While I was in college I didn’t really know what I wanted to do, and I knew a couple of guys older than me that were in commercial real estate. The market was pretty good at the time – this was 2003-2004 – and I decided to check it out.

So I went and got my real estate license, got an internship going into my senior year of college. I was working for a boutique, full-service commercial real estate firm based in Scottsdale, Arizona. There I was representing landlords and tenants with their office leasing, doing some office, industrial, retail… A lot of smaller deals, but a lot of transactions and a lot of great experience, understanding what motivates tenants and landlords, and just how commercial real estate operates in general, getting exposed to some different asset types… And then I joined up with a larger, regional tenant rep firm called Travers Realty Corporation based out of L.A. They’ve since been acquired by Cresa. When I was out in L.A, I was only on the tenant side I was representing. A lot of law firms in San Fernando Valley, a lot of surgery centers in the Beverly Hills area, and then a lot of creative companies in the West L.A. and Hollywood area.

Well, I started to get burnt out on tenant rep leasing, to be honest, and I segued back to Phoenix and found myself a position over at Johnson Capital, where I was a commercial mortgage banker. I had known the partner that I was working with over there for many years, a guy named Neal Churney. He was president of our Central Arizona CCIM chapter, and he really mentored me and taught me the skills and underwriting, evaluating commercial properties, and I was financing mostly apartments while  I was at Johnson Capital.

Then a large publicly-traded company out of Bethesda, Maryland called Walker & Dunlop, who specializes in Fannie, Freddie and HUD loans for multifamily properties – they acquired Johnson Capital at the end of 2014. That’s when really the stars aligned for me to start my own structured finance firm that we named Tower Capital. And along with my best friend, Kyle McDonough, who I met at ASU, and we’d always wanted to do something together – he was on the private money lending side, and we joined forces and created Tower Capital… And that’s what I’m doing today.

Tower Capital is a boutique commercial real estate structured finance firm based  Phoenix. We finance a wide variety of different types of assets, whether it’s multifamily, office, retail, industrial, and from stable properties to transitional properties, ground-up developments, we financed large masterplan communities… Doing deals  pretty much all over the country, but our footprint is mostly West of the Mississippi. I would call ourselves a regional firm, and we let our clients take us to different markets.

Joe Fairless: I wanted to talk a lot about Tower Capital and what you are doing, but just to ask a follow-up question or two about your tenant rep leasing experiences… You were representing tenants like law firms and surgery centers – what are some tips that you have for tenants when negotiating leases with landlords?

Adam Finkel: Well, I think that when negotiating  a lease you really need to figure out what is most important to you. That maybe be getting the lowest rents, that may be getting the right buildout that you want, that may be having flexibility with having options to expand, or get out of your lease early…

I think sometimes what people try to do is they make the mistake of over-negotiating and not picking out what’s the most important to them. So what I would say is find out what’s most important to  you and then really focus on those areas, because it’s always a give and take. You can get a little here, but you might have to give a little someplace else.

Joe Fairless: Hm… Know what you want going into it, where your priorities are, and where you can give a little bit on the other side, with regards to those points. You mentioned rent, flexibility, buildout – another name for that is tenant improvement (TI)? Any other major categories to consider?

Adam Finkel: In what regards?

Joe Fairless: Just negotiating points, like “Hey, I wanna know what’s important to me, so here are some things to consider, and then I’m gonna pick and choose in order of priority which ones are most important.” You mentioned three of them. Are there any other major categories to consider?

Adam Finkel: Well, I’ll tell you one thing – one of the negotiating tricks that we used very often was extending the lease term. By committing a longer term to the landlord, they can justify quite often providing additional TI dollars, maybe additional free rent, that sort of thing. So sometimes people will go in and maybe they’re only thinking about doing a three-year lease, but if you can do a five-year lease, then you’re typically gonna get a lot more out of the landlords… So that was something that we utilized quite often – tenants have the ability to stay in the space longer.

Joe Fairless: And from a landlord’s perspective, is it the same thing – know what’s important to you? …or are there any other nuances to it?

Adam Finkel: Well, I think for landlords – they’re always trying to create as much stability in their properties as possible. Typically, unless they believe that we’re in a situation where rents are going to be increasing at a very positive [unintelligible 00:07:58.23] at a fast rate, they may want shorter-term leases, so that as the tenants roll, they can replace them with higher-picked tenants. However, quite often the landlords really want stability, so they’re pushing for longer terms. That’s really what I saw… And again, it comes down to just basic skills of negotiating, of knowing what’s most important to you and where you can give a little to get a little.

Joe Fairless: Let’s talk about Tower Capital. How do you all make money?

Adam Finkel: We make money when we successfully facilitate a loan funding. And we get paid by the borrower, out of escrow, upon closing of the loan, typically anywhere from 0.5% to 2% of the gross loan amount. That’s how we get paid; pretty simple, pretty standard.

Joe Fairless: What’s a typical client who comes to you? Who are they? I’m not looking for names, but just in general – who are they and what’s their scenario or situation where they then come to you and you offer the solution?

Adam Finkel: Absolutely. Our typical client is an experienced, high net worth investor; whether they’re a private investor or they may be part of a company, they have experience, they generally have several properties under their belt, and they’re looking to go out and either refinance or acquire additional assets.

Generally, our clients are based on the West Coast, many being located here in Phoenix. We have a lot of clients from Arizona, a lot of clients from California, and also Canada – Toronto, Vancouver… Arizona is a very desirable place for investment, because of the warm weather, the population growth. We’ve really expanded our economy out here since the downturn.

I believe that Phoenix is supposed to have the highest rent growth out of any other market. For the next five years I think that they’re predicting 5% to 6% rent growth… So it’s a very strong market, where a lot of people wanna be… So we seem to draw a lot from folks from the West Coast and Canada, where it’s gotten very expensive, and cap rates are very low… And people can still get more bang for their buck.

I don’t know if we’re considered the secondary or primary. I think we’ve been considered the secondary [unintelligible 00:10:15.10] primary, but the folks from the primary markets are chasing yield, and seeking higher yield, and secondary or tertiary markets is where the cap rates are higher.

Joe Fairless: And I see on your website that you have services that provide preferred and joint venture equity. Can you elaborate on that?

Adam Finkel: Sure. Being a structured finance firm, we are able to capitalize entire stacks. That’s going to include a debt piece and an equity piece. Typically, on larger projects we will assist our clients where we’re basically going out to one institutional equity source and we’re marrying them together and introducing them to our clients… And whether that’s general partner, or a limited partner situation, or a preferred equity situation… There’s a lot of ways to structure the deals, and typically you’re going to have the senior debt, and there’s gonna be a mezzanine financing piece or B-Note, and then you have your different equity layers.

We can get very complex when you’re really trying to push either loan-to-value or loan-to-cost, and there’s different types of capital sources that we can mix and match to find the best structure, that’s gonna be most in line with our client’s objectives.

Joe Fairless: Can you tell us a story of a project that you’ve worked on that was a complicated structure, and just walk us through it a  little bit?

Adam Finkel: Sure. We’ve recently financed a 212-unit ground-up horizontal multifamily property – otherwise known as single-family floor rent –  in the Northern Phoenix submarket of Deer Valley. That was about  a 52-million-dollar total project cost. We brought in a large national bank to come in for the 65%. So it was a 65% loan-to-cost loan. Then we brought in a private equity group to come in with an additional 20% preferred equity piece, and then we also brought in a general partner as well… So really going up the entire cap stack, from the debt all the way to the equity.

Joe Fairless: And for anyone that’s not familiar with loan-to-cost versus loan-to-value, and why you use loan-to-cost versus loan-to-value, can you elaborate?

Adam Finkel: Well, loan-to-value is typically going to come in when you’re  just buying an asset; usually, it’s a stable asset, you’re not doing any rehab, or limited rehab. Where loan-to-cost really comes in is on a construction project or a heavy rehab project where the loan is based upon the cost, not necessarily the value… But you will have different parameters. They may say “The loan amount isn’t going to be more than 80% of cost and more than 70% of stabilized value.” So the lenders are always going to want to know that they’re not over-levering and that the borrower will be able to either sell or refinance them out when the project is complete, and the lender will be made whole. So that’s why they set those limitations for loan-to-cost, as well as loan-to-value.

Joe Fairless: Then the second piece, you mentioned you brought in a 20% preferred equity piece. For anyone who’s not familiar with preferred equity, will you elaborate on what that is?

Adam Finkel: Preferred equity can be used in place of mezzanine debt, or subordinate or junior notes to the senior loan. What that basically means is you have your senior loan/first loan, and then if people wanna go higher up on the cap stack, quite often the senior lender will not allow a subordinate lien, or another lien against the property… So that financing has to be structured as equity, or what we called preferred equity, where typically the equity provider is receiving a preferred rate of return; call it 8%, or 10%, or 12%.

They’re gonna get that money first, before the sponsor gets any of their money. And then they may or may not have some back-end participation. Typically, most of the deals that we do, it’s really almost structured as debt can be paid current or at the end, and there’s really not (typically) a huge amount of back-end participation with the preferred. It’s really just meant to be a secondary debt piece where there’s just no lien, and they’re gonna get a set amount of yield, and that’s how it works.

Joe Fairless: And then you mentioned that you brought in a general partner… I was under the impression you all were brought into the deal, that there was a general partner in place; so is this partnering up with the current general partner that you brought in?

Adam Finkel: Yeah, so it was a co-GP that was able to provide the balance sheet that would qualify for the senior loan amount. When someone’s getting a loan on a commercial property, typically whoever is signing on the guarantees or the non-recourse carve-outs still needs to meet a minimum net worth equal to the loan amount. So sometimes when developers are out there and they’re trying to build a large project, they don’t always have the balance sheet on their own, so they need to partner and bring someone in that can provide that additional support for the financing.

Joe Fairless: So typically it’s net worth is equal to loan amount. What about liquidity?

Adam Finkel: Liquidity is typically going to be a minimum liquidity of 10% of the loan amount after the down payment. The lenders wanna know that the borrower isn’t putting every last penny into the property, and then if something goes wrong – they need to replace the roof, an air conditioning goes out – that the borrower has the funds there to complete those projects as needed.

Joe Fairless: You said “minimum 10% of loan after down payment.” What have you seen it go up to for that requirement?

Adam Finkel: It’s really kind of a case-by-case. Typically, on construction deals, the lenders wanna see additional liquidity; that could be 20% or 30%. It’s really all over the place and case-by-case.

Joe Fairless: And what are the main variables that that’s dependent on? Is it new construction, or are there other things besides that?

Adam Finkel: It’s going to be dependent upon the borrower’s experience, the property, where it’s located, and really just the lender’s overall comfort with the project in total and the borrower. If the borrower has a BK, or credit issues, the lender may require some additional liquidity.

Joe Fairless: Based on your experience, when you bring in a co-GP into a deal, who is a balance sheet person, what percent of the general partnership do they typically get for that?

Adam Finkel: It’s really a case-by-case. I believe they’re pretty much 50/50 partners. So it just really depends on the co-GP’s involvement and what they’re doing, not only in this instance where they’re providing a balance sheet, but they are also providing a lot of back-end/office support as well… So it just really depends on their involvement and how much the sponsor needs them, I suppose.

Joe Fairless: What’s been the most challenging project that you’ve worked on in your career?

Adam Finkel: I think in general, construction, along with equity raising is the most challenging. I can’t point out one project in particular, but as far as the equity goes, there’s a lot of pieces that have to be put into place to meet the capital provider’s box. If the sponsor doesn’t have experience in this particular asset class, like say they wanna go out and they wanna do an apartment project, but they have all of their experiences in retail… Or if they worked for a company where they were involved in commercial real estate, but they weren’t actually the general partner or the key principal…

The vintage of the property can make it challenging as well. In Phoenix, when we’re capitalizing a lot of these value-add apartments where maybe they were built in the ’70s or ’80s, the equity people don’t wanna see eight-foot ceilings. They wanna see ten-foot ceilings or higher… So that can be challenging if you don’t have an experienced sponsor.

Sometimes people try to bite off more than they can chew. What I always advise people is start small, and then build your track record, and then work your way  up. It gets challenging sometimes when people go in and the project is a bit too large, and they’re stretching… Those are always the most challenging situations.

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

Adam Finkel: My best advice would be to… Really, kind of what I’ve just said – start small, make your mistakes on a smaller deal, bring in people that can help you, that have experience operating that particular type of asset, and really take the time to learn the operations, and then really just build your track record. That’s gonna make it a lot easier for you to find capital partners, whether it’s debt or equity.

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

Adam Finkel: I am.

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

Break: [00:20:04.02] to [00:20:48.25]

Joe Fairless: Okay, best ever resource you read on an ongoing basis to keep you sharp on the industry?

Adam Finkel: Wall-Street Journal and GlobeSt.com.

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

Adam Finkel: Anything by Malcolm Gladwell.

Joe Fairless: Does he have a book our recently? I was reading him 6-7 years ago, but I kind of last track of his stuff.

Adam Finkel: The last one I read was David & Goliath. I’m not sure if he has come out with anything recently. I know he’s got a podcast now…

Joe Fairless: Yeah, I know he’s got a podcast, too… Okay, cool. Just wondering. It looks like Talking to Strangers is the latest; on sale September 10th, so it’s out… Talking to Strangers.

Adam Finkel: There we go.

Joe Fairless: There you go, Malcolm. You’re welcome, Malcolm.

Adam Finkel: You’re [unintelligible 00:21:25.24] material for me.

Joe Fairless: [laughs] What’s a mistake you’ve made on a transaction?

Adam Finkel: Getting too aggressive in my underwriting assumptions.

Joe Fairless: Will you elaborate on what assumptions were more aggressive and now you’ve reined it in?

Adam Finkel: I would say probably trying to push rents, or the other thing would be when looking at  a rehab deal, kind of knowing how much to really put into the property that’s gonna get you the most value, and not over-improving for the tenant base that you’re trying to attract.

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

Adam Finkel: I do a lot of charity work within the community, fundraisers… I’m always trying to get involved in different things, especially anything with kids. We’ve done stuff with Boys & Girls Clubs, we’ve done a lot of things locally here in town to support various types of organizations.

Joe Fairless: And how can the Best Ever listeners learn more about your company?

Adam Finkel: I would say go to our website, www.towercapllc.com. Anyone can feel free to email me directly at adam@towercapllc.com.

Joe Fairless: Well, Adam, thank you for being on the show, thank you for walking us through the 212-unit development deal, the capital stack and the nuances of the capital stack, and talking about your experience as a tenant rep leasing professional, and then some tips for anyone who is in the process or will be in the process of negotiating either with tenants, or with a landlord during whenever they’re securing or leasing a property.

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

Adam Finkel: Thanks, Joe. You too, have a good one.

 

JF1954: Nashville Broker Describes The Residential Market In Nashville with Josh Anderson

Josh is the owner of a brokerage in Nashville that focuses on residential real estate. He’ll describe the overall state of the Nashville market, and how he built his brokerage to what it is today. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Find the deal, lock it up, and then go find the investors” – Josh Anderson

 

Josh Anderson Real Estate Background:

  • Owner of the Anderson Group, a Nashville based real estate brokerage
  • Combines his 8 years of U.S. Army experience with his education and experience to deliver the most to his clients
  • Based in Nashville, TN
  • Say hi to him at http://joshandersonrealestate.com
  • Best Ever Book: The One Thing

 


The Best Ever Conference is approaching quickly and you could earn your ticket for free.

Simply visit https://www.bec20.com/affiliates/ and sign up to be an affiliate to start earning 15% of every ticket you sell.

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.


TRANSCRIPTION

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

Josh Anderson: I’m doing well, thanks for having me.

Joe Fairless: Well, it’s my pleasure, and I’m looking forward to our conversation. A little bit about Josh – he is the owner of the Anderson Group, which is a Nashville-based real estate brokerage. He combines his eight years of U.S. Army experience – thank you for your service, sir – with his education and experience to deliver the most to his clients. As I mentioned, based in Nashville, Tennessee. With that being said, Josh, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Josh Anderson: Absolutely. I’ve been in the business since April of 2006. I’m in the residential side, but do quite a bit of multifamily as well. So I’ve been in the business for a little over 13 years. Originally from Nashville, grew up in Louisiana, went to LSU, and then came back in 2004 and worked at an investment bank for a couple years, and then decided to get my real estate license.

Joe Fairless: Okay. And you have a brokerage, as you mentioned, and your focus is on the residential side, but you do multifamily… What’s a typical transaction for you?

Josh Anderson: Most of our business is single-family homes, but with that being said, we’re kind of building out our investor division. We’ve had it there for quite a while, bu with Nashville being as popular of a city as it is, and with as much growth and as much building that’s going on, there’s a lot of people in other markets where numbers don’t really make sense in their market… So we’ve got a lot of people moving, or at least buying here for the idea of buying duplexes, triplexes, quadplexes, and even small to medium-sized apartments. So a lot of them are doing 1031s, a lot of them are paying cash, or just putting 20%-25% down… So there’s a pretty active market as far as the multifamily side of things.

Joe Fairless: What are some reasonable expectations if I were to call your brokerage and say “I’d like to buy a fourplex and I wanna make sure it cash-flows”? How would you set my expectations?

Josh Anderson: Sure. So it’s really digging up a lot more questions as far as what somebody’s used to. It’s not out of the realm to get the 1% rule. So if somebody’s buying a million dollar property, they’re getting $10,000 of gross income. In cap rate terms, you can  pretty easily get a 6%, 7%, 8%. It used to be a little bit better than that; with the amount of people that are coming here and buying property, it’s gone down a little bit… But it’s not unrealistic to get a 6%, 7% or 8% in this market still, in the middle Tennessee area.

Joe Fairless: What are the areas of growth that you’ve seen so far in Nashville?

Josh Anderson: With regard to areas?

Joe Fairless: Yeah, what submarkets have growth?

Josh Anderson: Residentially speaking, the suburbs – Brentwood, Franklin, Hendersonville, Mount Juliet… These areas are growing probably a lot faster than Nashville proper… But people still want their investment properties, and there’s a lot of people that wanna be near the trunk of the tree with regard to being close to downtown Nashville. So you’re seeing a lot of these areas that historically have not been great areas, that have  transitioned pretty dramatically, that are close proximity to downtown… So Germantown and East Nashville – they’re all areas that are very walkable. People love the charm and character of the old houses.

We just listed a property – or it’s actually going live tomorrow – in 12 South, which is right by  Vanderbilt, and Belmont [unintelligible 00:04:55.01] universities, and it’s a 130-year-old Victorian. That property will probably get a lot of activity and a lot of traction.

So you’re seeing a lot of areas that historically just weren’t really great, that are really being cleaned up, and investors are coming in and flipping houses, or renovating… And you’ve got more multifamilies also in those areas, that are really getting cleaned up. You know, old, mid-sized apartment complexes, anywhere from 15 to 50 or 60 units that are kind of the sweet spot, that are getting cleaned up quite a bit.

Joe Fairless: You used to work at an investment bank, and then you got your real estate license… What did you learn while working for an investment bank that you applied towards your business today?

Josh Anderson: It takes about two weeks to a month to get your real estate license, which is kind of a joke, in my opinion… And I say that with regard to how big of an investment — it’s not like people are going to Walmart every day and buying a house… But it’s one of those things — I think that the investment background, graduating in finance and economics really helps me on the numbers side of things, and being an investor myself really allows me to talk at a different level with savvy investors… A lot of realtors really don’t understand cap rates, or they don’t understand the 1% rule. These aren’t hard things to understand or learn, but I think that there’s a lot of people that just don’t really get it, and don’t know how to talk in terms of investments, if that makes sense.

Joe Fairless: It does. You said you’re an investor yourself… What are you buying?

Josh Anderson: Everything I own, outside of a couple of commercial lots that I own in downtown Nashville, I own all multifamilies. I kind of started out buying duplexes and triplexes, and I’ve got several duplex, triplex, a couple of quadplexes… Starting in 2018 I got really intentional and purposeful about buying apartments, and kind of digging in and finding the sweet spot.

I think there’s too much competition in that 150+ units. That’s just a different buyer, and I  think that those things are hard to find. A lot of out-of-town investors are building those.

I’m focused on about 10-12 units, up to about 50-60 units. I’ve bought three apartment complexes since 2018, and I just got really purposeful about buying those… I guess it was about 2014-2015 when I started buying investment properties, which in hindsight I wish I’d been buying them all along. My motto to myself now is “I’m always a buyer first, I’m a listing agent second.” That’s kind of how my mind works.

Joe Fairless: Did I hear you correctly you’ve bought three apartment complexes since 2018?

Josh Anderson: Correct.

Joe Fairless: Let’s talk about those three transactions… Let’s talk about each one of them. What was the first one?

Josh Anderson: The first one was a 22-unit apartment complex. It was fully rented. We paid a million seven for that. It was about 60k-65k/door. So I bought that with a business partner.

Then the second one I also bought with a business partner, and it was 30 units. The second one is about seven minutes from downtown Nashville, and the area is predominantly industrial… And it’s transitioning, because industrial just doesn’t make sense to be that close in to downtown Nashville, so a lot of those industrial properties are being sold and transitioned into residential and/or apartment type properties.

Joe Fairless: It sounds like a really good long-term hold.

Josh Anderson: Yeah, I think they are. And then the third one – I actually haven’t bought this one yet, I’m under contract. It’s 17 units, in the Donelson area, which is near the airport.

I think that I was very purposeful in buying them, and I’ve since gotten very purposeful about finding them, if that makes sense. So really going into tax records and reverse-engineering, and really digging into properties that fit my parameters and criteria, and really starting to market to those a lot more.

I think it’s just getting started… A lot of people don’t have the money to do it, and I always tell people “Find the deal. The money is easy to find right now. The money is just too easy to find.” So find the deal, lock it up, and then go find the investors… And if you wanna syndicate it, or however you wanna do it, depending on the size, or go find a business partner… I think finding the deal is the hard part right now.

Joe Fairless: You mentioned going into the tax records and then doing reverse engineering – will you elaborate on that?

Josh Anderson: Yes. Reverse-engineering – before you even do that, I think that you really have to get dialed in on what your criteria is, and I think there’s a lot of investors, maybe novice, starting out, and they don’t really know what their parameters or criteria is or should be, and then I think that they also waiver off of those parameters once they figure out what they are, because they’re so hungry to find a deal that they’re just willing to  do something that doesn’t fit what formula makes sense for them. I think that’s where they mess up.

So for me, reverse-engineering – just really digging into areas, really digging into “How do I wanna go about finding these properties?” There’s different software out there that you can use… For example, I know one of the guys in my office uses Reonomy, and it doesn’t have any different of information, it’s just the way that it pulls information that gets to you. You can find information based on the last time it sold, when it was built, how many units, what MSA you’re in, what city within that MSA, what ZIP code… So you can really dig down deep into what you’re looking for.

For me, it’s more about — when I’m looking at investment properties and finding them, I’m not as worried about the area within Nashville, just because I know the areas so well. For me it’s more about “Do the numbers make sense?” and “Does it cash-flow?” Because I think things will appreciate, but I don’t think that there’s any guarantee of appreciation.

Joe Fairless: When you are looking for properties, what’s your criteria?

Josh Anderson: I try to keep it really simple. My criteria is I kind of look at the 1% rule and I just go “Does it hit the 1% rule?” If I paid two million dollars for it, is it bringing in at least $20,000 a month? And then from there, I dig in a little bit more, and obviously looking at the leases and the rent rolls and all the maintenance and the cost.

On some of these properties, the property taxes are really high, so it’s kind of digging into all of that. But as a general overview, I look at the 1% rule because it’s easy. It’s what works for me, and I know everybody’s got different parameters, but that’s just kind of what I’ve looked at as my initial. And then I really drive the area and determine how well I know it and whether I like it or not.

So that would be my one parameter that I look at the most, to see if I even like it or I send it on to investors.

Joe Fairless: Okay, so the 22-unit, 1.7 was what you paid. You did it with a business partner… How did you structure that with the business partner?

Josh Anderson: On that one we’re just 50/50 business partners. On that particular deal we did a Freddie Mac loan. I’m sure you’re familiar with it. It’s a really great program. It’s gotta be a one million dollar balance, and it goes up to (I think) 7.5 million… But it’s a two-year interest-only, non-recourse, it’s assumable… It’s a really good loan program. You’re putting 20% down. I’ve used that on two of the three deals that we’ve done.

It takes a little bit more time. There’s some more hoops (I guess) to jump through, but it’s been a really good loan program… If people that are listening to this aren’t familiar with it, it’s a great program.

Joe Fairless: You’re doing 50/50 with your business partner… Did each of you bring 50% of the equity, or how do you decide —

Josh Anderson: We did. 50% equity, and we’re 50% owners.

Joe Fairless: I imagine you found the property, yes?

Josh Anderson: I did.

Joe Fairless: Okay. So you brought half the equity, plus you found the property, so what else is your business partner doing, if anything?

Josh Anderson: He’s just a really great business partner. On those particular deals for myself I’m not taking anything as far as me finding the deal, because we’ve done other deals together… But I think if it was a different scenario, I would definitely do some kind of finder’s fee, or management fee, or if I was syndicating it and it was a bigger deal, I would definitely set it up differently. He’s been a business partner of mine on several deals, so we just haven’t structured it differently.

Joe Fairless: Now let’s talk about the 30-unit. Same business partner?

Josh Anderson: Different business partner.

Joe Fairless: Different business partner. How much did you two pay for it?

Josh Anderson: We paid 1.9, and it brings in 23k a month. It’s in pretty good condition overall, actually. We’re doing some updates on it; we’re spending about 5k/door to update it, and we’re gonna bring up the rents about $150 to $200 over the next 6 to 12 months on each one… So it’ll probably be bringing in more like 25k-26k this time next year.

Joe Fairless: And when you say 25-26 you’re saying 2,500-2,600, right?

Josh Anderson: No, 25 or 26 thousand.

Joe Fairless: 26 thousand.

Josh Anderson: Yes.

Joe Fairless: Got it. And the management of these deals, the 22-unit and 30-unit – how does that happen?

Josh Anderson: We have property managers on all of them. Same property manager, and they’re managing it for us at 8%. I think once we get to a tipping point of being at a certain number of doors, then I’ll probably bring the property management piece of it in-house. But right now they’ve just done a great job. They take care of everything, and we literally “Okay, yes or no” on certain things, and they do everything.

Joe Fairless: What’s something that hasn’t gone right on either one of those properties so far?

Josh Anderson: I’ll be honest – I’m gonna knock on wood real quick – they’ve been amazing. We haven’t had to do anything. There’s nothing that hasn’t gone right so far that we’ve anticipated… So maybe it’s beginner’s luck on apartments, but… I’m certain that something will not go right.

Joe Fairless: Agency loan on the 30-unit?

Josh Anderson: Yes.

Joe Fairless: Fannie Mae?

Josh Anderson: Yes.

Joe Fairless: Okay. And with the 17-unit, my guess is it’s not gonna hit that one million dollar threshold, so you’re gonna have to do a small balance loan, or what are you doing there?

Josh Anderson: Yes, the guy that did the Freddie Mac loans – his bank is doing it an in-house portfolio loan, and they’re gonna do a very similar structure. They’re gonna do an 18-month interest-only non-recourse. So it’s gonna be a similar setup, and we’re putting 15% down.

Joe Fairless: How did you meet your business partner who you’re partnering up with on the 30-units?

Josh Anderson: I met him in college, actually. He’s from New Orleans, and he wants to move to Nashville, and he wants to get into apartment syndication. He actually bought your Best Ever Apartment Syndication Book, and I’ve been sending him deals, and he said “Let’s jump on this one. Let’s do it.” He comes up to Nashville five or six times a year, and… Still lives in New Orleans, but we’ve known each other since our freshman year in college.

Joe Fairless: How did you structure it with him?

Josh Anderson: That one’s structured really the exact same. It’s 50/50, we both did 50/50 on down payment equity… So it’s all set up the same with him.

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

Josh Anderson: I think the best advice ever is your first deal – you don’t have to hit a home run. Just get started. Just do it. And I think that so many people are in analysis paralysis, and they never really get started.

I’ve got a guy that used to work with me; he’s been talking about buying an investment property for four years, five years, and he still hasn’t bought one. I was talking to him a couple days ago, I said “Man, just buy one. Even if it’s making $200/month. Who cares.”

Get the first one under your belt, and you can go from there.  You can always sell it, you can always fix it up and get a little bit more rents, you can always upgrade and get better properties. And that’s not to say “Go buy a terrible investment”, but if you’re gonna do it, do it; if you’re not, then sit on the sidelines… But you’re gonna look back in hindsight and go “Damn, I wish I’d bought X, Y and Z properties.”

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

Josh Anderson: Let’s do it.

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

Break: [00:17:07.10] to [00:17:49.07]

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

Josh Anderson: I’d have to default and say “The One Thing”, because it’s such an easy book (Gary Keller).

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

Josh Anderson: Best ever deal I’ve done… The 30-unit.

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

Josh Anderson: Let’s see… I lost the earnest money one time. That wasn’t good.

Joe Fairless: Will you elaborate?

Josh Anderson: I actually didn’t lose it. It just got lodged underneath my seat in my car… But I had to tell my client that I lost the earnest money, so they had to cancel it and send a new earnest money check. That was early in my career…

Joe Fairless: That’s not  a big deal. [laughs]

Josh Anderson: No, it didn’t affect the deal. It was just one of those things I had to tuck my tail between my legs and own it.

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

Josh Anderson: I have a nonprofit that every deal that I do, a certain portion of our commission checks go toward. And we go into the community and help fix up houses… On a small scale, similar to Habitat for Humanity.

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

Josh Anderson: They can visit my website, at JoshAndersonRealEstate.com. That’s the best way.

Joe Fairless: Well, Josh, thank you for being on the show and talking about the renewed focus with the apartment complexes. You said since 2018 you’ve been focused on it. 22 units, 30 units… Good luck on the closing, I hope it goes well on the 17 units. Thank you for talking about the structure that you have, why you picked those properties with the 1% rule, how you think about it and how you’ve used your background in financing and economics to further and really build your real estate business, as well as being a successful investor.

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

Josh Anderson: Thanks, Joe.

JF1933: When To & When To NOT Work With Private Equity Institutions | Syndication School with Theo Hicks

After you’ve done a deal or two, you may have the opportunity to work with private equity institutions. Joe and Ashcroft Capital choose to not work with them ever, but that doesn’t mean you shouldn’t. Theo will cover why we do not work with them, and when it might make sense to work with them. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“If you’re unable to raise money from the fund, you’ll lose your earnest deposit, unless it’s refundable, and your reputation will take a hit”

 

Relevant Blog Post:

http://bit.ly/institutionalmoney

 


The Best Ever Conference is approaching quickly and you could earn your ticket for free.

Simply visit https://www.bec20.com/affiliates/ and sign up to be an affiliate to start earning 15% of every ticket you sell.

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.


TRANSCRIPTION

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

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

 

Theo Hicks: Hi, Best Ever listeners. Welcome back to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I’m your host, Theo Hicks. Each week we air two episodes of the Syndication School series on the best real estate investing advice ever show on iTunes, as well as in video form on YouTube, and we focus on a specific aspect of the apartment syndication investment strategy.

For the majority of the series, especially our earlier series, we offer free documents. These are PowerPoint presentation templates, Excel calculator templates, PDF how-to guides, some sort of resource for you to download for free, that accompanies the episode or the series. All of these past series and these free documents can be found at SyndicationSchool.com.

In this episode we’re gonna talk about when to work with and when not to work with private equity institutions. First I’m gonna define what these are, and then we’re gonna go over what to think about when you are considering raising money from private equity institutions.

Private equity is an asset class composed of pooled private and public investments in the property markets. That’s the textbook definition. What that means is that private accredited institutions such as pension funds and non-profit funds and other third-party asset managers who invest on the behalf of institutions will invest in these private equity real estate funds that are then used to buy real estate. One way that it could be used to buy real estate is to invest with an apartment syndicator of some sort, whether it’s a developer, a value-add syndicator, distressed syndicator, turnkey syndicator, or whatever.

A caveat would be that this is really only gonna be relevant to people who have done deals before, so you’re not going to be able to get a line of credit or funding from a private equity institution if it’s your first deal or your second deal. You’re gonna wanna have a track record, because they’re going to base their funding on the deal, but then also on you. But if you’ve done some deals, then you can consider working with institutions. We’re not gonna talk about exactly how to work with institutions here, but we’re gonna talk about when it makes sense to work with them and when it makes sense not to work with them.

Joe does not work with private equity institutions because of the way that his deals are structured. It really depends on how your deals are structured to determine if it makes sense to work with them.

We’re gonna go over the reasons why Joe doesn’t work with then, and then we’re also gonna talk about reasons why if his deals were different in this way, then this is how he would be able to work with them.

The first thing is that the private equity institutions are only going to review a deal that’s under contract. Once you’ve got your PSA signed with the seller and you already have your relationship with this institution, it’s only at that point that they’re going to actually perform their due diligence on the deal to determine if they’re going to provide funding. So they’re not going to do due diligence and let you know that they’re gonna fund the deal before you put it under contract. So you’re doing all of your upfront due diligence, underwriting, and then once you determine that the deal makes sense, only then will they actually look at the deal to see if it makes sense to them, to determine if they’re going to provide you funding.

This could pose a pretty big problem, especially if you’re working in a pretty competitive market that requires a non-refundable earnest deposit… Because generally, if you’re raising money from just regular passive investors and not a fund, you don’t have hard commitment, but you have an idea of how much money you’re capable of raising beforehand; it’s what we recommend, at least – you wanna have the money before the deal. So you wanna have verbal commitments, you wanna have a list of investors, and then know how much money that they are capable of investing, and then based on the summation of that list, you can determine what size deals you can look at. If you’re capable of raising a million dollars, then you can assume that you’ll probably have to put down between 30% to 35%, so you can look at deals that are three million dollars and lower.

When you’re working with an institution – sure, you might have an idea of the line of credit that they’ll give you, how much money they’re willing to fund in total, but since you don’t know if they’re actually going to fund the deal or not beforehand, and you put down a non-refundable earnest deposit, if they don’t fund it, then you’re gonna lose that earnest deposit.

Obviously, it’s possible  to lose the non-refundable earnest deposit by raising capital from a group of individual accredited investors, but the probability is going to be lower, because as I mentioned before, you already have an idea of how much money you’re capable of raising, plus ideally you’re not going to push that ceiling. Obviously, it’s good to push yourself, but if you’re capable of raising a million dollars and you only need to raise 500k, well you’ve got a lot of options to raise money from people. Only half of the investors need to actually invest the amount they said they would invest in order to hit that threshold… Whereas if you’re doing it with a fund, it’s just one entity that’s investing… And if they say yes, then you’ve got the money; if they say no, you’ve got no money. And then obviously, if you are able to close, then you’re gonna lose that non-refundable earnest deposit. So that’s one thing.

If you need to go non-refundable, it might not make sense to use private equity. If you do go refundable, then the next thing to think about is this next point, which is that private equity institutions typically will not approve their funding until a minimum of 30 days after contract. So you put the deal under contract, they do the due diligence – they’re not gonna instantaneously come back to you in one day and say “Oh yeah, we’ll fund this deal” or “Nah, we’re gonna pass on this deal.” It takes a while to do due diligence, so expect for it to take at least 30 days for them to approve or deny funding after the deal is placed under contract. And of course, this is an issue if you don’t have  a long contract-to-close time period. Typically, it’ll take anywhere from 60 to 90 days to close on a deal; so PSA-to-close, 60-90 days.

Well, for Joe’s deals, the formal funding period usually will begin a few weeks after placing the deal under contract, so say day 14. And then the goal is to secure all the money that’s required to close by at least 30 days prior to closing. So if it’s  a 60-day close, then day 14 to 30 hopefully they get all the money at that point, or at least the majority of the money.

Now, what happens if you raise money from institutions and you have a 60-day contract-to-close? Well, you do all your due diligence, you’re preparing to close, and then they don’t get back to you until day 30, and they say “Oh, we’re not gonna close on this deal.” Now you only have 30 days to fund your deal from your individual passive investors, whereas on the other hand, if you raise money from individual people, you would have 45 days to raise money. So that 15 days is gonna be pretty important. If they decide to obviously fund the deal, then no problem, but… There’s also the possibility that they won’t fund the deal.

If that’s the case, well then you have a condensed timeline to raise money from your list of private investors. And hopefully you can get it done, but again, the probability is lower of getting it done in that compressed timeframe. If you’re unable to raise money, you can’t close on the deal. If the earnest deposit is refundable – great, you get it back. If it’s non-refundable, well then you’re going to go ahead and lose that non-refundable earnest deposit.

Now what happens if “I have a refundable earnest deposit, so I’m not really worried about any of this, because even if they say no and I can’t raise the money, I’ll just get my money back.” Well, that’s not necessarily the case, because there’s more than just the earnest deposit that’s on the line. There’s other money on the line, but your reputation is also on the line. So when you are 30 days or more into the due diligence process – again, it takes 30 days for them to approve or deny it; or at least 30 days, maybe even longer. It could take two months. You might not get an approval until you’re supposed to close. But let’s just say on the fastest end 30 days. Well, at that point you’ve done inspections, you’ve done appraisals, different surveys, and these things aren’t free. These things cost money. And if you close, you’re gonna reimburse yourself if it comes out of your pocket, but you’re probably gonna be 5k, 10k, 20k out-of-pocket depending on how big the deal is.

You’ve also got legal costs as well, putting together PPMs in other contracts, creating the LLCs… Those aren’t free. And if you fail to close on the deal, even if you have a refundable earnest deposit – sure, you’ll get that back, but you’ll also lose all of that upfront due diligence costs and legal costs if you’re unable to close. There’s really nothing you can do about that at that point. That can happen in general if you don’t close, you’re unable  to raise money… But as I mentioned before, the probability of raising money from your pool of investors is higher than raising money from one specific fund, because only one entity is making the decision on whether or not they’re gonna fund the cost of the deal.

But again, it’s not all just money that’s on the line as well. Your reputation is gonna be also at stake. If you were to pull out of a deal because you couldn’t raise enough money – either the private equity people back out and then you can’t fund the deal from your passive investors – well, your reputation is gonna take a hit, first of all, with the seller, so the person that you’re buying the deal from. And if that seller owns multiple apartments in that area – well, if they go to sell another deal in the future, you’ve reduced the likelihood of being awarded that contract, because the last time you weren’t able to close.

Also, if the seller is pretty involved in the local real estate market, knows a lot of real estate professionals, other investors, brokers, things like that – well, your reputation might also take a hit in the eyes of those other professionals of the greater real estate community in that area, because you’re gonna be known as a person who can’t close on deals. Even if it happens just one time, the word gets around.

Additionally, your reputation is going to take a hit from the listing broker as well, for very similar reasons. This could potentially be even worse, because the seller might own maybe five deals, so you’ve kind of lost on those five deals, but the broker might be listing hundreds of deals in their lifetime… And if you’re unable to close on one of those deals, you’ve reduced the likelihood of being awarded another deal that is listed by that  broker, because similarly, you didn’t close, and they think of you as someone who wasted their time and was unable to close on the deal.

And then similarly to the seller, the broker also has a relationship with other brokers in the area, other investors in the area, and it’s kind of like a domino effect where you also might have issues getting deals from other brokers as well. Not all brokers, obviously… But again, the entire point of this is that if you do not close on a deal that you put under contract, at the very least you’re likely not going to get awarded another deal by that broker or that seller, if the reason why was because yo could not follow up on your commitment. If you had to  back out because there’s a problem with the deal, that’s different. But if you could not qualify for financing and you couldn’t raise enough money, that’s different than backing out because of some environmental issue or something like that.

So if you’re unable to raise money, which is more probable if you’re raising money from a fund, then it’s a double-whammy. You’re gonna lose your earnest deposit, unless it’s refundable.  But even if it’s refundable, you’re gonna lose all the upfront due diligence costs, and your reputation is also going to take a hit.

So when should you work with a private equity institution? The main factor would be if you have a long contract to close timeframe. You’ve got a lot of time before you close, so you don’t have to worry about waiting a month or two for the institution to get back to you and let you know if they could fund it. And if they say no, you have plenty of time to raise money from your list of private investors; ideally you have that, and you’re not just relying solely on private equity. But again, since you’re likely experienced, you’ve raised money from people before so you do have a network of passive investors that you can tap into, if you’re unable to quality.

So the main thing would be if you have more than 90 days, so like 120 days plus maybe a few 30-day or 15-day contract extensions, that would be good time to use the private equity institution. If you don’t need to go non-refundable on your earnest deposit, similarly, because if you’re unable to secure the funding from the private equity institution because they denied funding, and you’re unable to get money from the passive investors, then you could at the very least get your earnest deposit back… But again, you still have the issues with the upfront due diligence costs, as well as the reputation. So ideally, you have a long timeframe, so that if you’re denied funding, you can raise money from your passive investors.

Overall, the three reasons why Joe personally does not work with institutions is 1) they don’t review deals unless they’re under contract; 2) they deny funding until at least 30 days after the deal is under contract, and 3) if you’re unable to close, you lose money and reputation. So that is when to work with and when not to work with private equity institutions.

Until tomorrow, check out some of our other Syndication School episodes on the how-to’s of apartment syndications, make sure you download the free documents we have available as well. Both are available at SyndicationSchool.com.

Thank you for listening, and I will talk to you tomorrow.

JF1932: How To Find & Close 120 Units With Seller Financing with Joe McCabe

We’ll cover a lot more than just finding deals and getting the owner to agree to seller financing. Joe has been around many facets of real estate, from buying/selling real estate, mortgage brokering, insurance, and his own investments. We’ll dig in on the 120 units from seller financing about half way through the conversation. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Just getting out there and taking action is so crucial” – Joseph C McCabe

 

Joseph C McCabe Real Estate Background:

  • Real estate broker in PA, NJ, and DE; Owner of REMAX Experts, Home Front Mortgage, Keystone State Abstract, LLC and Allstate Insurance Company
  • US Army veteran
  • HOME Front Mortgage is a nationally growing and expanding mortgage broker opening 9 interstate location adding millions in volume
  • Based in Philadelphia, PA
  • Say hi to him at http://homefrontloans.com/

 


The Best Ever Conference is approaching quickly and you could earn your ticket for free.

Simply visit https://www.bec20.com/affiliates/ and sign up to be an affiliate to start earning 15% of every ticket you sell.

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.


TRANSCRIPTION

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

Joseph McCabe: Hey! Good, Joe. How are you?

Joe Fairless: I am doing well, and looking forward to our conversation. A little bit more about Joe – he is a real estate broker in Pennsylvania, New Jersey and Delaware. He’s the owner of REMAX Experts, Home Front Mortgage, Keystone State Abstract, LLC and Allstate Insurance Company. He’s a U.S. Army vet and HOME Front Mortgages, a nationally growing and expanding mortgage broker, opening nine interstate locations, adding millions in volume. Based in Philadelphia, Pennsylvania. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Joseph McCabe: Sure. You hit on most of it. I’m pretty much invested in real estate in almost every way, except for buying paper. We also have currently about 120 units in our portfolio, we’re adding another 300 by January; they’re already under contract. So we’ve got  a significant real estate portfolio, and then right now we have 71 realtors out of our Philadelphia REMAX office, and nationwide we’re opening a little over 13 offices, most of them are already in licensing. We’re basically creating joint ventures with other real estate brokers on the mortgage company to provide them with some ancillary income.

So yeah, that’s the big piece of it. I kind of got started in real estate as a salesperson with Keller Williams, and I realized quickly on, and mainly in the army that I don’t think I’m good at working for other people… So I decided–

Joe Fairless: The army will make that come to the surface very quickly, I think.

Joseph McCabe: They made that come clear. And luckily, I got a good job real quick; I became a military police investigator, so we kind of got to work on our own. I was in a smaller unit, and there weren’t as many egos, so… It was less frustrating for me. I just got out of the military in January, so I’m all done with them.

When I started with Keller Williams about 5-6 years ago, I saw the scalability in real estate, so I started my title company… I did all the normal things that a broker does. I started the title company, I started the insurance company… Almost fell for recruiting to the downline thing, but then I realized I should just own my own brokerage. So my next step was to buy a REMAX, open up my own franchise, and then the doors really opened for me and I realized there were so many things that I was still missing out on.

That’s when we created our own mortgage company, and eventually Allstate Insurance, title and everything else. Then I started buying property. I think that maybe that’s probably the most important thing I could tell your listeners about today – everything that we’ve purchased on the real estate side was seller-financed at one point. And we very quickly refinanced out of that seller finance debt… But I’ve just been really, really good at finding those deals and making that attractive to the sellers, and kind of building a level of trust there. And partly that’s because my exit strategy is performed by the mortgage company that I own, so that’s attractive to them, of course. Now we have a track record of almost 400 units where this has been done or is in the process of being done… So that’s always been cool.

Joe Fairless: Will you elaborate a little bit on what you mentioned earlier, where you said you started the title company, you started the insurance company, and you almost started recruiting for the downline thing, but instead you opened up your own brokerage?

Joseph McCabe: Oh yeah, recruiting to your downline in Keller Williams is one of the models… The EXP model to that is maybe a little more attractive…

Joe Fairless: Will you just elaborate? What does that mean, “recruiting for the downline”?

Joseph McCabe: Oh, sorry. What Keller Williams does is if you recruit someone to Keller Williams and they join, you can make residual income based on that agent’s income for the next few years. You’ll get a percentage of all the deals they close, of the company dollar. I think EXP does something similar to that as well. But I realized – I was like “Yeah, I guess I could do this, or I could just start my own company and keep 15%-20%, and then get title, insurance, mortgage and everything else, and build a real team.” But it’s a way to build residual income, and I kind of mimicked a lot of what Keller Williams is doing, in a less watered-down way, because they have so many agents. I offer shares in our Allstate Insurance company, and I offer recruiting incentives. They just get a 1% commission if they recruit someone off the top of all that agent’s deals forever, and they never really have to do anything; just set a meeting with me and I’ll close the deal. So it’s plain and simple.

But I just realized, in the real estate industry, 1) if you have a real estate company, there’s so many other things that you need to tap into, and there’s so much income that you really don’t have to do if you set it up right.

I have a partner that runs each and every single ancillary company that we have, and we still keep most of the profit… And then not only that, but obviously being a broker there’s a lot of deals on the MLS, and a lot of times you’ll find deals, you’ll get calls for listings, or other agents will put out listings pre-MLS, that kind of gives you an early look at some of these deals that you could access. So what I just realized is that I could have my hand in so many pots, but not really have to do any extra work, and really build — I hate to say “passive income”, because nothing’s really passive, but income where I don’t really have to do as much work, and really that is owning properties, and then having a title company, and everything else. The realtors – they drive me nuts though [unintelligible 00:06:26.26]

Joe Fairless: [laughs] We clearly need to talk about the 120 units, and the seller finance deals. Before we do though, you did pique my curiosity when you said the insurance company you’ve got – all they need to do, someone within your team set up an interview with a prospective new team member, you’ll close the deal, and then they get 1%, right? That’s what you said?

Joseph McCabe: Yeah, exactly. I tell my realtors [unintelligible 00:06:51.22]

Joe Fairless: I get that, but my question is “How do you close that deal?”

Joseph McCabe: As far as recruiting, and stuff like that?

Joe Fairless: Yeah.

Joseph McCabe: We have some pretty attractive value-adds in the company, and obviously one of them is the agent’s ability to buy into the Allstate Insurance company at a very low fee, right off the bat. That’s attractive to them, because a lot of times if you’re a realtor, you kind of have that investor mindset, or at least you should, because you’re about to be self-employed…

Joe Fairless: [laughs]

Joseph McCabe: So hey, you should have it, but sometimes they don’t, and that’s why they don’t work out. But they have that option coming into it, so that’s one of our value-adds. Secondly, we start everybody at 85% commission, and then they’re capped at $15,600. So once they pay the company $15,600, they go to 100% commission. And that’s about half of what everybody else is in our industry. So that makes it an easier sell for me. And when you have all the ancillary services, you can do that.

So they like that, they like that we have in-house mortgage; that’s a huge selling point. The loan officers are right there, they can build relationships with them… I also provide all the realtors with performance-based leads. So the faster, the more responsive they are, the more leads they get. Some of my realtors get 25 to 30 leads a week. Again, now they’re getting leads with essentially no risk. If they don’t work, it was their own fault, and they don’t have to shell out the upfront money or the upfront cost for those leads. So I kind of subsidize their leads, and we don’t take an additional split for that, because they’re still cost-effective for us.

So those are pretty much the two biggest things. The other thing is, again, every realtor wants to be an investor, so I tell them “Hey, if you’re looking to learn how to flip properties, build new construction, purchase large real estate portfolios, just build a small portfolio of ten properties. I can help you do that.” I’ll dedicate my time to do that, I have recorded trainings, I run at least a quarterly training on how to purchase properties, seller-financed, how we’ve done it, how to analyze a deal, what’s a good deal – at least from our perspective what to look at, what to look for… And I always make it clear to them, “You’re gonna hear me say that, and then you’re gonna go talk to a guy who will tell you to only buy trailer parks.” There’s so much different information out there.. But it’s helpful for them, because a lot of people aren’t sharing that information, and a lot of real estate brokers are not as diversified, and a lot of times real estate brokers are not also the owner of the company. In some states they are, but in some cases, especially larger companies, it’s someone that’s paid a salary to kind of manage the brokerage.

Joe Fairless: Got it.

Joseph McCabe: So they get to interact with me, and I think it’s very helpful.

Joe Fairless: So let’s talk about the 120 units, all seller-financed deals… You said you’re good at finding them and making them attractive to sellers. What’s the best way to find them, and what’s the best 2-3 talking points to make it attractive to the sellers?

Joseph McCabe: Sure. What I do always is I try to pitch a quick exit strategy for the seller. So what I’ll do is I’ll usually just go on LoopNet or CREXi. CREXi is probably my favorite website; it’s easy to submit a letter of intent… And I’m kind of doing a mass LOI submission. I’m looking at what’s the cap rate, which is probably bullshit, but what’s the cap rate they have up there, what’s the sales price, and how many units do they have.

I like to buy 26 units, just for laws of averages purposes, and I like to buy at a 9% cap and up. And preferably things that — if it’s a single-family portfolio, obviously not a value-add, because that doesn’t really add to the value… Although I’ve seen a lot of them really trying to advertise that way…

Joe Fairless: [laughs]

Joseph McCabe: I’m like, “It doesn’t help. It’s not a value-add, dude.” Just throwing money. Or maybe you increase the market value. So that’s what I’ll do, I’ll just find properties to meet that low criteria – more than 26 units, higher than the 9% cap rate, and ones that don’t necessarily need renovations.

So what I’m doing is I’m  getting them to 100% seller-finance them. So I’ll buy them, I’ll roughly run through some numbers, look at some market values, and figure out “If I purchase this portfolio, what would leave me with 25% equity in the property?” And then I’m gonna write an offer based on that number. So if it was a million dollars, I’d write the offer for $750,000, and I would stay firm on that price, but then I would add a bunch of additional contingencies in there.

So I’d say “I’m gonna do full inspections, mortgage contingency, I need 90 days for the initial close”, and then maybe I’ll say “I need you to hold the seller finance note for five years.” Now, of course I’m not going to do that, but they’re always gonna counter me on price, and normally I counter them back and say “Look, the price is the price, and here’s why. Here’s the value, and here’s what I’m trying to do, and I’m doing this to protect your seller.” Because I wanna be able to get the seller out of this as quickly as I can and get him his money. And the best  way to do that is to buy at a 25% discount, which is — any other investor who pays cash is gonna want a 35%-40% discount. So it’s usually in their best interest anyway.

Once I do that, usually the agent calls me, tells me I’m nuts for writing a 100% seller finance deal…

Joe Fairless: [laughs]

Joseph McCabe: …that’s usually the next step. And then I explain “Hey look, how many properties do you own?” “Well, I don’t know [unintelligible 00:11:48.21]” “Well, we have 400 that we’re doing this way. And it works, and it’s attractive to a lot of sellers. So just be open-minded and pitch it.” It’s just another way to close the deal. And all we do then is we have this seller finance loan, maybe we hold it for 90 days, and we refinance out of it, because we already know where the market values are gonna come in. So we know it’s gonna appraise for a million, we can get 75% loan-to-value, and then we pay off the seller, and everyone goes on their own ways.

The coolest thing about our structure is we’re obviously collecting a real estate commission, we’re getting paid on the mortgage side and we’re getting paid on the title side. So we’re recouping most of our costs.

Joe Fairless: I think you said that you don’t need renovations, it’s a 9% cap and at least 26 units, right? You said those three things? Why not just get financing out of the gate?

Joseph McCabe: I always tell them right upfront, I don’t wanna put down 25%-30%. I don’t wanna go through that, I don’t wanna go through the extra scrutiny… A purchased deal has a lot more scrutiny than a  performing  refinance. One thing about refinancing a property is even if it’s seller financed, if you can show performance on the note, you’re good to go. Plus, it gives us a few extra months to get a better understanding of the books, stabilize some things… Because a lot of times, if someone agrees to this type of structure, they’re usually not sophisticated sellers. They’re probably a guy that built a really nice portfolio, and they cash-flow really good, but he’s probably self-managing, he’s taking a lot of cash… The books just aren’t on the up and up that a banks wants to see. So it gives us time to go in there and stabilize those things, maybe make some renovations to increase the market value if we have to, get some tenants out that we need to get rid of…

And that’s why we like to buy in rent states, because there are chances where when they’re self-managing, they know these people, they feel bad for them, they start cutting deals, and the next thing you know it’s six months later and he still hasn’t paid his rent, “But he’s gonna.” They keep telling he’s gonna pay, he’s gonna pay… So we have to go in and get a professional management company, and that transition can just take time, from self-managed to professional, or even from a professional that sucks to a professional that’s really good. That can take even more time. That’s happened to us a few times.

Joe Fairless: Thanks for walking through that process and how you position it to them, and also the back-and-forth that inevitably will happen with their agent that’s representing them. I asked also how to find them, and you said two things – CREXi and also LoopNet. Are those the two primary sources you’ve used to close deals?

Joseph McCabe: Yeah, that’s it. Actually, the only website I’ve ever closed a deal off of was actually CREXi. Sometimes there’s off market opportunities, but to be honest, sometimes those get so convoluted… Especially in Philadelphia – I’ll find a property and I’ll look it up, and it’s on the MLS for a million, but by the time the six wholesales who are selling it got done with it, the final price is like 1.6, and I’m not gonna deal with them. I’m gonna go straight to the broker… But then I find out the broker is also a wholesaler, so I get frustrated with those types of deals, and  a lot of times those are the smaller deals. But 36 units and up, or 26 units and up – you’re usually dealing with a large commercial firm, who won’t deal with wholesalers. You just get a more direct approach.

A lot of times these commercial brokers have seen crazy structures like this, and a lot of times they’re really not blown away, especially in the single-family world. Because with single-family all of these properties were acquired in some creative fashion. A lot of times these sellers will be like “Oh, it’s really cool. I haven’t seen this in forever. That’s actually how I bought most of my properties.” So it’s always cool to hear that.

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

Joseph McCabe: My best advice – and I just ran a training in the office for this – is just get out there and do something. Everyone’s always wondering “How do I jump into real estate? What do I have to do to get started? Where do I start? Let me research this, let me talk to this, let me go to this course…” and it’s like “How many courses are you gonna go to before you finally do it? I started the real estate company, the title company, the mortgage company, Allstate, and I bought my first 73 units in one shot, without ever having done that before, without any mentors. I’m not saying that’s the right way to do it, I took a lot of freakin’ hits, but I did it, and there’s thousands of people out there still thinking about doing it.

So I think just getting out there and taking that action is so crucial… And if someone gives you information like this and tells you that it’s possible, just go out there and try it. There’s nothing that can go wrong.

I have a friend right now who is a contractor in Iraq, and I was speaking to him today, because he’s buying a property in Philadelphia, and he’s like “Yeah, I’ve got a portfolio… I heard your podcast on Brad Lea’s show, Dropping Bombs, so I went and got a portfolio under contract in Iowa.” And I was like “See, that’s perfect.” That’s someone who listened… They’re like “Okay, wait… I don’t know everything, but I can figure this out.” And he called me and he said “Hey, the lender is asking for this. What do I do?” And I guided him through that process. So yeah, you’re not gonna know everything, but there’s people out there that’ll ask, and if someone were to DM me… I don’t even know my Instagram; I think it’s @josephcmccabe… I’ll respond if they have a question. Usually, I’ll even give them a call. I’m always willing to help people like that. There’s plenty of money to go around.

Joe Fairless: I agree. We live in a world of abundance.

Joseph McCabe: Yeah.

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

Joseph McCabe: Yeah.

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

Break: [00:17:07.28] to [00:17:49.20]

Joe Fairless: What’s a deal or business transaction that you’ve lost the most amount of money on?

Joseph McCabe: Actually, my first two – and this is why I have a minimum unit rule. I will never buy less than 16 units; that’s my actual minimum. I bought two duplexes on my first deal, when I first got into real estate… And you lose one tenant and then the next thing you know all four are leaving, too. You can’t make that payment on your own when you’re just starting out selling real estate and everything else.

My first two duplexes that I bought in not the best area in Philadelphia – luckily, I was able to sell them and make some money, but that only helped me recoup the monthly payments that I had to shell out.

Joe Fairless: When the dust settled, what was the result of the dollars out.

Joseph McCabe: Oh, I probably still lost 2k-3k on that… And that’s where I said “You know what – worst-case scenario, even if you are buying in a bad area, at least have more units and increase your chances of not having that problem.”

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

Joseph McCabe: Right now we do a lot of stuff for Police, Fire and Military, since I’m a veteran… I partner on most of these real estate deals as a Philadelphia cop, and my whole family is cops… So any way that we can give back to the Police, Fire and Military community, we do that all the time. Sponsoring events in Philadelphia… And then also – I like to give back to other realtors and other people. I think that sometimes we forget that Police and Fire – they all stick together, and so does the Military… And sometimes in real estate everyone focuses on this competition that really doesn’t exist, and… I like to help everybody out; I’ll pick up the phone for anybody and guide you through your real estate career and see how i can help. I love to shoot back for other people in the industry and help them out.

Joe Fairless: And how can the Best Ever listeners learn more about what you’re doing and get in touch with you?

Joseph McCabe: They can reach out to me on Instagram, @josephcmccabe, or they can shoot me an email at joe@homefrontloans.com, or go to one of our websites; you’ll see stuff on there. I also have a podcast, and I’ve been on a lot of other podcasts; on Brad Lea’s podcast, Dropping Bombs, that we talked about… All the mortgage stuff, and then on Pat Hiban’s podcast, where specifically we talked a little bit more about how we bought these properties. So my information is out there in multiple places, and I’d be happy to share it.

Joe Fairless: Well, Joe, thanks for being on the show, talking about the 120-unit portfolio, the seller financing, how you’re finding them and then also how you’re positioning that to the seller, and the seller’s representative (the real estate agent) as well as how you’ve grown the business, and the different ancillary income streams that you have. Also, thank you for your service, sir; I really appreciate that.

I really enjoyed our conversation. I hope you have a best ever day, and we’ll talk to you again soon.

Joseph McCabe: Yeah, thanks  Joe. I appreciate it.

JF1929: Using Credit Union Loans For Real Estate Investments with Mark Ritter

Mark is a credit union and business lending expert. He’s joining us today to talk to us a little bit about credit union loan products. Sometimes people are not aware that credit unions loan money for real estate investments. Mark will tell us how to approach credit unions and what the pros and cons of using them are. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Do what you know and understand the product that you’re getting into” – Mark Ritter

 

Mark Ritter Real Estate Background:

  • CEO of MBFS and an expert in credit unions and business lending
  • Ran a business lending program that was #4 in the country among federal credit unions in number of loans funded
  • Based in Berwick, PA
  • Say hi to him at https://mbfs.org/

 


The Best Ever Conference is approaching quickly and you could earn your ticket for free.

Simply visit https://www.bec20.com/affiliates/ and sign up to be an affiliate to start earning 15% of every ticket you sell.

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I’m Theo Hicks, I’ll be your host today. Today we’ll be speaking with Mark Ritter. Mark, how are you doing today?

Mark Ritter: Great! I hope you’re doing well. Thanks for having me on.

Theo Hicks: Absolutely, and we appreciate you coming on. I’m looking forward to learning more about what you’re focused on. Before we get into that though, a little bit more about Mark’s background. He is the CEO of MBFS and is an expert in credit unions and business lending. He ran a business lending program that was ranked number four in the country among federal credit unions in the number of loans funded. Currently based in Berwick, Pennsylvania. You can say hi to him at mbfs.org.

Mark, if you don’t mind, could you tell us a little bit more about your background and what you’re focused on now?

Mark Ritter: Sure. I am in the business lending and primarily commercial real estate and residential investment lending business, and I am a native of central Pennsylvania. I got into credit union business lending when it was a spec of dust in the lending market. When I got into the credit union business lending there was just a few million dollars of business loans in Pennsylvania where I’m located, and now there’s multi-billions.

Today I’m the CEO of a company that is owned by ten credit unions, and we work with dozens of credit unions all throughout the nation. Essentially, what we do is run the credit union business lending program and help them make loans for commercial real estate and investment real estate, and we also work with investors, businesses to connect and get them loans through the credit unions. Our biggest challenge today is sometimes people say “What do you mean — I can’t believe credit unions do that. I didn’t know.”

Theo Hicks: Yeah, so for those people that don’t know about credit union loans, do you mind telling us a little bit about the types of the loan programs that a commercial real estate investor can secure from a credit union, and how that’s different from your standard Fannie Mae/Freddie Mac loans?

Mark Ritter: Sure. First, I’ll step back one moment… A lot of people say “What exact even is a credit union?” A hundred million people in America today belong to credit unions, and sometimes they’re just a place where your parents signed you up, or you signed up there because you worked at a particular organization, and they’ve really grown and expanded quite a bit… So what a credit union is is just a cooperative financial institution. We are owned by the membership, we’re run by a board of directors elected by the membership, and over the years many credit union members have real estate investment needs… And we do small, 1 to 4 family residential property loans; maybe you’re just starting out. Last year we did financing up to 30 million dollars for class A office space in major markets, and everything in between.

One of the nice little niches about us that I love to tell people is when you work with a credit union nothing we do ever has a pre-payment penalty, and that’s for every federal credit union if you work with one; they can’t put a pre-payment penalty even if they want to. So we’ve just had quite a big drop in rates, and our people and loans have the flexibility to make that a moving target, and you’re not locked into the loan in this declining rate market.

Theo Hicks: Do you guys do loans on apartments?

Mark Ritter: Certainly. We do apartments, we do multifamilies, we do warehouses… We work with dozens of credit unions here at MBFS, and have networks with hundreds of other credit unions throughout the country. So when somebody asks “Do we do something?”, the odds are yes, in our network of people.

Theo Hicks: So if I am a multifamily investor – let’s say I’ve got a 30-unit building that is currently stabilized, and I want to do some sort of value-add renovation program to it… Do you guys have loan programs that include those rehab costs?

Mark Ritter: Sure. We do consider the as-is value today, renovation costs, along with taken into what the as-completed value will be.

Theo Hicks: When you are qualifying someone for one of these loans, what are some of the things you look at? Going back to the example – if I bring you that deal, what information do you need from me in order to qualify me for a commercial loan on that 30-unit?

Mark Ritter: One of the things that’s a little bit different about credit unions, even as you move up the food chain in commercial lending, is we wanna know who we’re dealing with. We’re not just simply a Wall-Street fund or an investment company, a life insurance company. We want to know who you are and your story… So we’ll sit down and have coffee, and if you wanna come in and meet the CEO of the company, that usually happens. So it’s much more of a relationship-based program, even for a seven-figure loan request. And past that, I hate to say it, but my dollar is the same as everybody else’s dollar.

We’re looking for the financials of the property, we’re looking to learn about you, we’re looking to learn about your experience… Our underwriting process is pretty similar to many community banks, regional banks, but where we differentiate ourselves is to be able to have those conversations on the story of what you’re looking to do, rather than just looking at cold, hard numbers and spitting out a loan request to you.

Theo Hicks: I know for community banks and for regional banks the more loans you do with that bank and the more you get to know them, the better loans you’ll get, the more opportunities you’ll get for refinances, and things like that. Does that hold true for credit unions as well?

Mark Ritter: Certainly.

Theo Hicks: Are the terms very flexible compared to the rigid standards of your agency debt?

Mark Ritter: Absolutely. Much more similar to a large community bank, kind of the smaller regional banks – very similar lending process. That first one – I always say it’s kind of like the eighth-grade dance; we’re staring at each other and nobody knows what to do. Then after a little bit, let’s get things moving and get to know each other. The second deal is obviously much easier than the first, and we do look and value that relationship.

One nice thing about the credit union community is that it’s a very cooperative community. Even though you might be dealing with, let’s say, a 500 million dollar local credit union, we work cooperatively together and have funding capabilities well beyond just the individual financial institutions that you may see on the street corner.

Theo Hicks: What types of loan programs do you have for people who already own a property? Let’s say I’ve already got a bridge loan or some sort of loan on my property that I’m looking to refinance out, or pull out some equity. Do you guys work with people who already own a property, or is it mostly just people who are looking to buy a property?

Mark Ritter: No, absolutely. There’s nothing that makes us happier when you come in and say “I have this property, it’s stabilized. Here are the financials. This is the tenant.” We know what it is.  We can get those in/out the door, rapid speed, and get you an answer. And like I said, if you wanna come in and meet the people and talk about what’s going on…

Most of what we see today is your basic sort of five-year fixed period, amortizations. In the 25-year range — we’ll go a little bit higher, depending on the nature of the property. So we really look to sit down and say “What works for you, what works for us.” We tend not to lend in a box, maybe — as you’ve mentioned, the agency debt… We have a lot more flexibility. We’re lending out our money, we’re not borrowing money. We’re lending off of our balance sheet, so that gives us the flexibility to sit down with somebody and say “What makes sense for you?”

Theo Hicks: Is there any particular type of property or particular type of person you won’t lend money to?

Mark Ritter: Anybody we can show that’s gonna pay it back, we wanna have that conversation with. There are some particular credit unions — we just closed on a hotel loan; there are some credit unions that don’t finance hotels. That’s okay, we have many that do. There’s some places that won’t do any other restaurants or hospitalities; we have some people who like that. We have some that love strip centers, some that won’t.

So what we are is we’re a credit union-owned company, so the credit unions are working with us to put together the deal and then match it with a credit union in the region or in the country that it makes sense to do.

Theo Hicks: If I’ve found someone who’s either looking to buy a property, or already has a property, and I’m looking to work with a credit union, what’s the best way to find the credit union in my area? Or can I use a national credit union? The question is “How do I find a credit union to work with?”

Mark Ritter: In different markets there’s a lot of credit unions. There’s three times as many credit unions in this country as banks. So there’s a lot on the street, and if you’re walking door-to-door just cold, it’s really difficult to know who does what. MBFS is what’s called a CUSO, which stands for Credit Union Service Organization. Think of us as an aggregator for the industry… And there’s about 10-12 of us in the country that just focus on commercial real estate. So when you visit us, it’s like visiting with 60 credit unions. And there’s other organizations like us that are regionally throughout the country, that can really save you a lot of time and hassle in searching and trying to match up with a credit union.

Here at MBFS we have relationships with these other organizations like us. So maybe if you come to me from Montana, I might not have somebody there, but I have a sister organization out West where we can get you hooked up with the financing you need for your commercial real estate, or your multifamily, whatever you need.

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

Mark Ritter: Being the lender that I am, I’m gonna go where I’ve seen the most failure and flubs. Really, my advice to everybody is do what you know. Understand the project that you’re getting into. If you just hear a sales pitch and it doesn’t make sense to you, then don’t do it. Focus on what you understand from your professional background, from your experience… If you don’t know a market, don’t just take it on a whim, or google up the area and say “Oh, that seems nice.” If you’re not comfortable, spend some time and spend the time on the due diligence, and don’t just hop into something that you don’t understand based off of somebody else’s opinion.

Theo Hicks: Solid advice. Alright, are you ready for the best ever lightning round?

Mark Ritter: Sure.

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

Break: [00:13:18.01] to [00:13:59.19]

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

Mark Ritter: Freakonomics.

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

Mark Ritter: Professional wrestling promoter.

Theo Hicks: For the WWE?

Mark Ritter: Certainly. Or somebody else. I’d go out on my own.

Theo Hicks: Best ever WWE wrestler?

Mark Ritter: Oh, Macho Man Randy Savage.

Theo Hicks: There you go. I used to play those wrestling games back in the day when I was younger, and he was definitely one of the characters in there, one of the fun ones. Alright, what is the best ever deal you’ve done? This could be a best ever loan you’ve done, or you can take that any direction you’d like,

Mark Ritter: As crazy as it sounds, a church ground-up construction. Best thing, proudest I was ever of.

Theo Hicks: And what about on the other end of the spectrum? What’s the worst deal you’ve done?

Mark Ritter: Oh, that’s my easiest question ever. I did a family entertainment complex that you could do ten episodes about, where I could tell stories about what could go wrong.

Theo Hicks: Could you give us one of those stories?

Mark Ritter: Well, the day it opened, the majority partner decided to run up three million dollars in bills and change orders that he didn’t tell anybody about, including me.

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

Mark Ritter: Youth sports coaching, even if I don’t have a kid there. I loved to do it before, and I still like it.

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

Mark Ritter: MBFS.org. I love my LinkedIn account. I stay away from Facebook. Mark Ritter on LinkedIn, from MBFS. I’m really active on our LinkedIn profile.

Theo Hicks: Alright, Mark, I really appreciate you stopping by, and I know the Best Ever listeners did as well, and giving us a crash course in credit union lending. Just to summarize what we discussed in this episode – we started off by talking about what a credit union is; you mentioned that over 100 million people belong to credit unions, and you called them cooperative financial institutions that are run by the members, so the people who have their bank accounts there, and their elected board of directors.

For your particular aggregate company, you lend on single-family homes, up to four families, up to 30 million dollar class A office space… And something interesting that I did not know, which is that credit unions do not have pre-payment penalties. That’s definitely a huge advantage to investors, over standard agency loans.

You mentioned that you do offer multifamily renovation loans that are based on the as-is value renovation cost and the stabilized value. The qualification process and the underwriting process is very similar to other banks, but the biggest differentiator is the relationship side of it. So you want to know exactly who you’re dealing with, you wanna know who they are, their story, you wanna meet them face-to-face, whether it be them coming into your office, having coffee with them…

Then of course you go through the typical financials of the property, the borrower’s background, things like that. You mentioned that credit unions have a lot of flexibility when it comes to lending. On the first loan it’s gonna be pretty standard, but after that, once you’ve done more loans and you get to know them better, the loan programs have a lot more flexibility. You don’t lend into a box, because of the fact that you’re lending out your own money.

You mentioned that the best situation for you is someone that comes in and already owns a stabilized property and they’re looking to just refinance and do a new loan. You mentioned that maybe not every single credit union you go to will offer the exact loan program that you need, but there is a credit union out there that will.

Then we talked about how to  find credit unions, and you said the best way is to find one of the CUSOs, which is an aggregator. It reminds me of a mortgage broker who will go out and find you the best credit union for your particular investment strategy.

Then lastly, you provided your best ever advice, which was to do what you know, focus on doing things that you understand based on your background and experience, and if it doesn’t make sense or you don’t understand it, don’t just do a quick Google search and do it. If you are gonna do it, make sure you do your detailed due diligence, so that you do actually understand what you are getting into.

So again, I really appreciate you stopping by, Mark, and providing us with your lending expertise. Best Ever listeners, thanks for listening. Have a best ever day, and we will talk to you tomorrow.

 

JF1928: Getting High Production From Millennials & Using Institutional Money #FollowAlongFriday with Theo and Joe

The guys are back again with more lessons learned from interviews for the podcast. We’ll hear about how one investor (Chris Tuff – episode releases 3/1/2020) gets the most out of his millennial workers, and why it is important to work with them to get the most production. Then We’ll hear about the pros and cons of using institutional money (from Michael Merideth) for your deals. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“It wasn’t just working from home, but flexibility with hours”

 

Related Blog Post On Institutional Money (and why Joe doesn’t use it)

http://bit.ly/institutionalmoney

 


The Best Ever Conference is approaching quickly and you could earn your ticket for free.

Simply visit https://www.bec20.com/affiliates/ and sign up to be an affiliate to start earning 15% of every ticket you sell.

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.


 

JF1924: How Low Cost VA’s Can Help You Scale Your Business with Brad Stevens

Brad is the CEO of a company that helps entrepreneurs and real estate investors find and work with great virtual assistants. We’ll hear about where the VA’s are based, and why, what kind of roles they thrive in, and how to train them to work in your business best. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Everything in business is about ROI, it’s all about how you value your time” – Brad Stevens

 

Brad Stevens Real Estate Background:

  • Founder and CEO of Outsource Access
  • They provide Entrepreneurs and Commercial Real Estate Agents with highly trained, low cost virtual assistants
  • Based in Atlanta, GA
  • Say hi to him at https://outsourceaccess.com/
  • Best Ever Book: Fast Forward Mindset

 


The Best Ever Conference is approaching quickly and you could earn your ticket for free.

Simply visit https://www.bec20.com/affiliates/ and sign up to be an affiliate to start earning 15% of every ticket you sell.

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners. Welcome back to the best real estate investing advice ever show. I am your host today, Theo Hicks, and today we are speaking with Brad Stevens. Brad, how are you doing today?

Brad Stevens: Fantastic, Theo. Thanks so much for the opportunity to be here.

Theo Hicks: Oh, absolutely. I appreciate you stopping by. I’m looking forward to our conversation. Before we get into that conversation though, a little bit about Brad – he is the founder and CEO of Outsource Access, which is a company that provides entrepreneurs and commercial real estate agents with highly-trained, low-cost virtual assistants. He is based in Atlanta, Georgia, and you can say hi to him at OutsourceAccess.com.

Brad, before we get started, can you tell us a little bit more about your background and what you’re focused on now?

Brad Stevens: Sure. I’m originally from Atlanta, which is kind of rare these days. We have quite the melting pot and huge growth in the city here. I grew up in an entrepreneurial family, and I kind of knew that was the path I was gonna take after college… So after graduating I actually went to work [unintelligible 00:02:27.04] I came back to Atlanta. The last 20 years all I’ve done is build and grow companies in different industries. Some product-based business, service-based businesses… And as anybody knows, as an entrepreneur it’s quite the journey up and down along the way, but you learn a ton. Along that path I actually learned about this whole world we’ll be talking about today.

Growing my last company I had some challenges, and I had to figure out how to  get lean, make dollars stretch. Nowadays I heard about this whole world of outsourcing and VAs, and people that have read Tim Ferriss’ 4-Hour Workweek back ten years ago… I just was intrigued by it, and it just absolutely changed the game once I really took all my perceptions and really learned what that world is, and who these people are, and the incredible competency and what they’re able to get done; super-quality, super low-cost… It just completely changed my life and my business.

So I launched Outsource Access, which we’ll talk about — it’s a whole company based in the Philippines, and why we chose that as a country, which is really unique… And now I get the chance to do speaking as well, under Brad Stevens training brand; I get to speak all over the world now. I’ve got about 30 speak engagements throughout the year… Just bringing this information to small business owners, entrepreneurs; Best Ever listeners, a lot of them out there I’m sure are in the same boat, of “How do you get more done with less in today’s world?” So now I live and breathe it, and speak, educate on it, and have a whole platform where we provide some of these resources as well. I absolutely love it, and it’ll be what I do through the end of my career.

Theo Hicks: There you go. So you mentioned that the virtual assistants that your company provides – you said they’re in the Philippines, and you said that you have a reason behind choosing that country. Why is that?

Brad Stevens: When I first started — and a lot of listeners maybe have heard of platforms like UpWork, and Fiverr… There’s over 300+ platforms out there where you can find people all over the world to do things, where the American dollar has a strength from a currency standpoint… I work with a lot of different countries for different types of things. For India, for example, I do a lot of website development and graphic design and stuff… But I’ve found that particularly in my world I used all these tactical freelancers out there, but I felt I needed a rock-solid right-hand person that I could afford… And most small businesses – the entrepreneurs can’t afford a full-time executive assistant or an admin to help in everything, from managing email, and travel, and scheduling, and then to take on and manage other tasks…

So I learned about the Philippines, and basically, relative to the rest of South-East Asia, it’s very Americanized. The U.S. kind of controlled it up until 1946-1947, and English is actually their second language; they have an American education system and they’re highly talented, very skilled individuals. I visited there back in April, visited 20 facilities. You walk down the streets of Manila and you feel like you’re right in the U.S. They have Starbucks, and steakhouses, and so forth. So it’s a very Americanized culture they get, so it’s very easy to work with in terms of culture and language and so forth… But the minimum wage there is still $1 to $1,5 per hour. That’s why for years many companies have had their call centers over there.

What we do – we’re able to pay and they’re able to make multiple, multiple times the minimum wage, and work from home, have flexibility. They’re very appreciative for work, they work super-fast, they learn super-quickly, and you don’t have the language barriers.

So we used that for our general VAs, to manage and do everything from scheduling and email and research and data scraping for leads, and social media management… I have one that lives in my LinkedIn account full-time, just kind of helping me grow and manage our LinkedIn account… But then they also manage all the other skilled stuff. You need a brochure done – you have your VA go and manage someone to go get a brochure done for you. Or you need a mobile app built – your VA will source and manage it, and manage the project. So they kind of become your quarterback project manager. We’ve found the Philippines is the best place for that particular role… And then we use other countries as well for other specialized skills.

Theo Hicks: That’s very interesting. I did not know how Americanized the Philippines was. I’ve definitely seen a lot of VAs out of that country, so that really makes sense to me now. So in my mind I’m kind of thinking through the process… So if I want to hire a VA, what are the steps I would go through. In my mind, the first step would be determining when would be the right time to hire a VA, and then actually find the VA, and then screen the VA. I kind of wanna walk through that process with you… So whether you’re talking to a client, or just from your perspective as a real estate investor, when do you think is the right time to bring on a VA? What point in their business should they be at, or what point in life should they be at, when it’s time for them and they go “Okay, I can actually hire a VA now”?

Brad Stevens: Well, everything in life is about ROI, both in business and your personal life… So I’ll speak to two points. One is “When is the right point for it?” It’s all about how much you value your time and what your time is worth, and what you’re able to do with your time, which is the highest and best use of your capability… And a lot of people struggle with finding clarity on that.

To give you one point of reference – with VAs, when we provide VAs, we charge $1,450/month. When you average — and we provide a whole bunch of back-end culture and support, and they have this thing in the Philippines called the 13th month, where they get a full additional pay in December, a whole other month’s worth, so you’ve gotta normalize that all out… But that’s kind of what the cost is for somebody working 40 hours a week for you, and doing a whole variety of things, everything from personal email management, follow-up, scheduling, research, and generating leads… Particularly from an investing standpoint, which we’re people in this field, it’s data scraping prospects; all the public records are out there, and if we’re doing wholesaling, VAs can go and aggregate all that information, and even do email outreach to hard money lenders, they can go into Facebook groups where all these different people live and exist, and go in and look for opportunities to engage… Managing your LinkedIn account and do a whole bunch of things there… There’s a whole laundry list of stuff, and I can share at the end kind of a short video training I got a chance to do actually for the Global Conference for Real Estate, SIOR Group…

But when you see all those different things and you look at $1,450/month for example is what our cost is, with commercial real estate — we work with a lot of commercial real estate agents… And if they close one additional deal, that can be worth $25,000-$30,000. So if I got back that amount on my time and I had a VA working for me 40 hours/week… And a lot of people think “Well, I don’t have 40 hours of work to begin with.” Well, you may not to start with, but you kind of grow into it very rapidly, is what we find with everybody. And if you got your time back so you could focus more on the relationship building, which for most people (in real estate investing or otherwise) it’s all about that personal connection, relationship building, and then just getting market intelligence.

If you could spend your time focusing on strategic direction relationship building, evaluating data versus actually doing a lot of that, what I call administrative operational clutter – I kind of call it death by paper cuts, which is not the best use… And we all know what it is when we wake up and do that stuff; we’re like “This is not worth my time…”

You get somebody that’s plugged in, that learns super-rapidly, and they take that off your plate. With commercial real estate, they close one additional deal. If you looked at a VA full-time for the entire year, that’s just under $18,000/year; if they close one additional deal, that more than double pays for a VA for the entire year.

So it’s about how you value your time and opportunity cost. When you say yes to something, you’re saying no to something else. So it’s looking at it through that lens, and how you value your time. And if you got X back, could you just get one more deal? Or how many deals do you need to close to pay for it? Everything should be in terms of ROI.

And on the personal… It blew my mind what VA’s could do on the business side, but then like in our house, we actually had a natural gas leak in our house, and we had to rip out all the drywall and repair all our gas lines… And it’s gonna take hours and hours of my time (or my wife’s) to go research vendors, and find people that could do drywall repair… So I literally just took a video of it. I went and took a video of it, and recorded “Hey, this is the problem.” I sent the video to my VA, she took it, and she went and posted on HomeAdvisor, Angie’s List and so forth, and went and found people, emailed back and forth to get quotes, and then teed up the candidates for me. It saved hours of my time.

My watch was broken. I took a picture of it, sent it to her, she took the picture, zoomed in, found a repair  place online, went and filled out all the paperwork, went in my UPS account, created a shipping label using a tool called Dashlane, which we’ll talk about how you can share your password without ever giving your password away to a VA… And had it all in my inbox the next morning.

So how you value your time is kind of when the decision point is of getting things off your plate. Most entrepreneurs and people continue to wear more and more hats, because they can’t afford a typical resource or what it would cost; this makes it affordable, and they can actually get things delegated.

In terms of the process, it’s all about vetting. What we’ve found, and myself – I have been doing this for ten years now – just like in the U.S, it’s the same thing internationally; there’s good quality work and quality folks, and there’s poor quality. So it’s about setting a very high bar. So kind of what we do, with Outsource Access, and the way we’ve evolved, and  just from learning about all the failure points, what I’ve seen people experience directly – I talk to thousands of businesses about this all the time – it’s about setting a really high bar, putting people through a rigorous assessment in terms of their intelligence, competence, emotional intelligence, grammar proficiency, their project management skills, giving them test tasks and seeing how well they do with vague instructions, and how well they ask questions, and can take vague instruction and finish a task… And then doing intensive interviews. We do like four intensive interviews with our team to make sure that they meet the criteria… And then we actually have them go through a whole bootcamp. So we make sure people are highly qualified and highly trained to be VAs. So I recommend whether it’s us or anybody you explore, make sure that they have a very good vetting process to really set a high bar.

I’ve found that having them a part of  a company, versus just being an individual working, we’re able to provide culture and support and education and training that’s really important. And I’ve found in the past, going just purely through job awards and finding somebody that’s working with these countries from home, remotely, long-term there tends to be some challenges sometimes.

And then it’s critical that these people know how to work with these resources. A lot of people fail with working with VAs or other people like this, because they get frustrated because they can’t get stuff out of their brain over to them. So we talk about tools like Screencast-O-Matic, and we talk about ways that you can easily get things out of your brain and quickly get it communicated to a VA to understand.

We actually make clients we work with go through a short 30-minute training that teaches them best practices on how to work with these resources, so they can do it effectively.

Theo Hicks: Yeah, perfect answer. You actually answered one of the questions I was gonna ask, which is “Why is it better to work with a company who places VA’s, versus finding one on your own?”, and you definitely hit the nail on the head on that.

The last follow-up question I have before we get to the money question, which is – you mentioned the things that you do upfront to vet them. Are you also vetting them on an ongoing basis, to make sure that they are continuing to perform, or is it just the upfront assessments, and bootcamp trainings and interviews, and then from there you just assume that they’re top-notch?

Brad Stevens: Oh, no. I mean, it’s just like for anybody that’s built a business or hired employees every in their life. You’ve got to provide the ongoing support. That’s a big part of what we do, and that’s why people are drawn to come work for our business, because we have a whole business in the Philippines. It’s a company with a whole management team and so forth, providing ongoing training.

A couple Saturdays ago all of our VA’s that work with clients of ours – I paid and had a high-end quality speaker that’s very sought out to come in and do a whole half-day workshop with all of our VA’s, just to take their training to the next level. We have tons of training that we do ongoing… And part of it with it is something that we do differently – instead of having a VA, or everybody has had an assistant that was kind of twiddling their thumbs about “What do I do next?”, we’re there to constantly be an execution ninja for you and bring ideas to the table and things that we can do to help you based on what you’re trying to do in your specific business.

So it’s all about the culture, the training, the back-end support… Because that’s what I’ve found – you get people engaged [unintelligible 00:13:26.12] And people are concerned about safety, and privacy, and all of that, and that’s all kind of addressed in terms of how you work with these people in a secure environment. You use tools like Dashlane and LastPass to share access without ever giving your password away, and making sure they’re feeling engaged… It’s just like culture, just like in the U.S. We actually have a whole Virtual Assistant Gives Back program, where — our VA’s are making good money, so we actually fund and pay for shoes and educational supplies for children in these lower-end villages there, and our VA’s volunteer their time to go deliver those supplies that we purchase.

So it’s just like in the U.S, we’re trying to build culture. Every big leadership book talks about culture, culture, culture; it will kill everything else if you focus on that first, so we’re big on that on the back-end also.

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

Brad Stevens: Obviously, as far as from my angle specifically, on what we do and in working with people in a space, everything from people that are in residential, or in wholesale, or commercial, it’s just protect your time, and value your time. Think about everything in terms of opportunity cost, because that’s where a lot of people get caught in this constant “paddle, paddle, paddle”, keeping their head above water, and aren’t able to scale and do things on a larger level. It impacts ultimately their family relationships, their firm relationships, their health, because they’re working non-stop, trying to keep their head above water, and aren’t able to ever make it to the gym…

So it’s just really people sitting back and valuing their time, and thinking about everything in terms of opportunity cost. What am I giving up when I don’t make my kid’s next baseball game? What am I giving up when I’m sitting here until 2 AM, trying to copy and paste from a Google Sheet for the next set of prospect opportunities… And value what you could get when you get that time back and do it on “What is the highest and best use?” I call it kind of “highest return on time” for what you are most suited for… And just thinking of everything through that lens, and then seek out opportunities to capture that back as quickly as possible.

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

Brad Stevens: Let’s do it!

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

Break: [00:15:30.28] to [00:16:28.15]

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

Brad Stevens: I’m actually just wrapping up one called Fast-Forward Mindset. It’s by a guy named David Schnurman, that was the president for Entrepreneurs Organization for New York; it’s an organization I’m actually a part of… Fantastic book; audio it’s three hours, it’s not like nine hours, like some of these are. It’s high-impact, great experience in growing and building this business. It’s been a good one.

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

Brad Stevens: As far as that question – being in a different industry?

Theo Hicks: You can take it any way you want.

Brad Stevens: That’s the cool thing that I always share about having this mental inventory about what I know and how you can leverage these resources, and how quick and fast, and high-quality, and low-cost… I can literally launch a business in two weeks, with less than $500, in pretty much many, many different industries. But if I were to shift gears from an industry standpoint, probably in education. My wife is a third-grade teacher for 13 years, and I just see a huge need. I have an almost three-year-old myself now, there’s a lot that needs to be fixed and addressed in education… So probably something in that arena, and leverage some of our resources to help there.

Theo Hicks: Yeah, I have a four-and-a-half month old, and it definitely changes your perspective on things, that’s for sure, once you have kids. What is the worst deal you’ve done? This could be a real estate deal, or it could be a business you started.

Brad Stevens: In terms of just a crisis experience I had – I kind of shared a part of what kind of got me to learning how to do all this stuff; as I was referencing, in my last business we were in the teeth whitening space, and we had sold I think close to 50k units of one of these teeth whitening products that we were selling all over the U.S, that you could brush on your teeth to whiten your teeth. We sold it to dental offices, and spas, and medical spas… And our next order of units, one of the manufacturers changed one of the components in it, and it caused it to react with the teeth whitening gel in these teeth whitening pens.

We had about 10k units that we shipped all over the country, that started exploding in people’s purses, and on shelves… And we had just had great success and sent it to all the major editors of all the major publications, and this teeth whitening pen started exploding and oozing out. So I had a disaster on my hands nationwide and globally actually, and that’s what forced me to get lean. You never know what life is gonna give you on these crises, but it’s what taught me how to learn how to do all this stuff, so that it’s my life’s work now.

Theo Hicks: And then lastly, what is the best ever place to reach you? I guess you can plug the course you were talking about earlier here if you want as well.

Brad Stevens: Two things. For anybody out there that has conferences – I love speaking at conferences and events, and so forth. For that you can go to bradsteventraining.com, and that shows my speaker background and so on. I love sharing this message, and case study-driven for audiences…

And if anybody is looking for learning more about this whole outsourcing and virtual assistant world, outsourceaccess.com is our website. If you wanna just send an email, you can put “Best Ever” in the subject line to an email that we created: best@outsourceaccess.com. You don’t have to write anything in it, just send the email and put “Best Ever” in the subject line. We’ll get it, and I’ve got some VAs as you can imagine to manage that, and I will send you a link to the exact presentation that I did for the SIOR Conference, the top commercial real estate conference in DC, back in April this year, where I walk through and show step-by-step examples and case studies of a lot of things that I alluded to here… And I’ll give you a whole link of all kinds of other books and resources that we recommend around it. So it’s best@outsourceaccess.com, shoot us an email and we’ll send that link to you.

Theo Hicks: Yeah, thank you for offering that to the listeners. I really enjoyed the conversation. I learned a lot about the process for – essentially the ultimate blueprint when it comes to VAs. Just to summarize what we’ve talked about so far – we’ve talked about why the Philippines is one of the best countries for VAs, and it’s because it was basically America; it was very Americanized, English is the second language, they’re very easy to work with as a result, and the American dollar goes really far in the Philippines.

Then we went through the actual process of hiring the VA, so in order to determine when is the best time to bring on a VA, it comes down to ROI and how you value your time… And you gave a really specific example, which is “Alright, so it’s gonna cost you about $1,400/month to hire a VA… How much money will you be able to make by focusing your time elsewhere?” So if you’re a broker, if you close on one extra deal per year, then the cost of the VA essentially pays for itself, just because you can spend more time on the important aspects of the business, which are relationship building, strategy, and then evaluating data, as opposed to pulling data.

And then it can also help you with things in your personal life as well, so it’s not just the business, the return on time, but also the personal return on time, and you gave the example of the natural gas leak; you sent the picture to your VA, and they took care of everything for you and saved you hours and hours of time.

When you’re ready to hire a VA, how you find them – it’s all about vetting. Your company sets very high expectations and a high bar for people that you hire. You mentioned that your interview process is — you do emotional intelligence, grammar tests, you put them through an intensive interview process (four interviews), and then from there you put them through a bootcamp training to make sure you’re setting them up for success.

Then you also mentioned that the people that are hiring VA’s need to know how to work with VA’s, and how to get all the information in their head to a VA’s head, so that they understand what you need them to do. Then you also mentioned that it doesn’t stop there; you also do ongoing support, so you offer ongoing trainings and workshops and just bring them ideas on how to help them stay busy.

Then we also mentioned why does it make sense for an investor to use a company who places VA’s, as opposed to finding one themselves, and it has to do with all the things you put them through before you hire them… So people that are hiring a VA through your company or a similar company knows the vetting process they’ve gone through. Again, opportunity cost – do you wanna spend your time hiring a VA, or would you rather have someone that hires them for you? Then we also talked about the importance of culture.

And then lastly, the best ever advice comes down to thinking about everything in terms of opportunity costs, and that’s essentially why you wanna hire a VA in the first place. So again, I really enjoyed the conversation, Brad. Very informative.

Best Ever listeners, thanks for stopping by, and make sure you take advantage of the offer Brad mentioned. His email will be in the show notes of this episode. Again, thanks for listening. Have a Best Ever day, and we’ll talk to you tomorrow.

JF1915: How A Broker Evaluates Deals For Himself & Clients with James Dainard

James has seen a lot of transactions and has had a lot of his own real estate investing experience. We’ll hear about some of his own deals, adding bedrooms, and how he looks at deals not only for himself, but also for his clients. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Don’t let the contractor dictate the budget” – James Dainard

 

James Dainard Real Estate Background:

  • Co-founder of Heaton Dainard, a full service real estate brokerage specializing in building long-term wealth and financial stability for clients
  • Honored as Co-Founder of one of Washington’s Fastest Growing Private Companies in 2013, 2014, 2015, and 2016, and Inc. 5000’s fastest growing companies in America
  • Based in Bellevue, WA
  • Say hi to him at https://www.heatondainard.com/
  • Best Ever Book: The Book On Rental Property Investing

 


The Best Ever Conference is approaching quickly and you could earn your ticket for free.

Simply visit https://www.bec20.com/affiliates/ and sign up to be an affiliate to start earning 15% of every ticket you sell.

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.


TRANSCRIPTION

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

James Dainard: I’m doing well, man. Thanks for having me on. I’m excited to talk to the best listeners ever.

Joe Fairless: That’s right. Well, I’m looking forward to our conversation. A little bit about James – he is the co-founder of Heaton Dainard, a full-service real estate brokerage specializing in long-term wealth and financial stability for clients. He was honored as co-founder of one of Washington’s fastest-growing private companies in 2013, 2014, 2015, 2016, and Inc. 5000’s Fastest Companies in America. Based in Bellevue, Washington, a place I spent a decent amount of time in six years ago. I would always go to [unintelligible 00:01:41.07] offices in Bellevue… So with that being said, James, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

James Dainard: Yeah. My background is I actually started in real estate when I was a senior college, 22 years old; I was waiting tables and I started working for an investment company in the wholesale market… Going out and knocking on doors, getting them contracts and selling them off. What my main focus is is really working with investors on identifying how to maximize the returns in their current portfolio, or finding them new portfolios to acquire, whether it’s 1031 exchanges to increase their annual cashflow, or to just increase their portfolio with liquidity, cashflow rentals… And then we do a lot of fix and flip properties and training with investors, kind of teaching them the guts of it about construction management specs, and then getting them sold.

Joe Fairless: Wow, okay. So let’s talk about maximizing returns on a portfolio… What are some mistakes you see investors or people make?

James Dainard: Some mistakes, and mistakes that I’ve done myself, is sometimes creating an asset – if I have a current performing asset, and it maybe gets me a 7% or 8% return, and I go to buy something new, or trade in with something new that might give you a 10% return.

One thing I learned over the last couple of years – and we’ve kind of adjusted our strategy based on this – is once you buy that next building, you might get a nice equity position, you’re increasing your cashflow, but you’ve gotta pay attention to the dead time on your money. How long are you out that income when you make that trade to get the repairs and renovation done?

So what we kind of do now is we factor in our dead time of loss of income for that 10-12 months that these projects can take. So that’s one thing investors should always pay attention to – it’s not just the cashflow, but what’s your overall return over a 10-year basis.

Joe Fairless: And what are some tips you have for people listening in order to calculate that accurately?

James Dainard: Build yourself a good spreadsheet. We have a good rental spreadsheet… So when we do a trade, we don’t just break down the cashflow, but then we break down the cashflow and loss of income during the renovation period… So for us, we actually have everything set up on a two-tier refinance calculator. One when we enter the new asset with hard money, and then holding times during that time, calculating your annual taxes, utilities – all costs that you might overlook at first…

And then it then turns it into a refinance, where we go into the BRRRR type strategy, where we’re refinancing out all of our cash, or a majority of our cash, or how much cash we were weaving in… But based on that first set of free finance calculations, we can really see what our loss of income is during that time. I’m more than happy to always provide that spreadsheet to people, but it’s about really just paying attention and then building your financial tools around your business model.

Joe Fairless: And just to give us an example of a couple transactions you’ve recently done… What are some examples?

James Dainard: An example… Recently when I did a trade – I actually sold four rental properties, and then I 1031-exchanged them into a triplex/pseudo-rooming house… So two units will be conforming units, and then the third unit is gonna be an 8-bedroom rooming house. It’s right next to the University of Washington, so it has high rent potential… So like I was just talking about, one thing I had to get comfortable with and make sure the trade was worth it is I took three properties that were making about 7%-8%, and then I have about 12-months’ worth of renovation, of dead time… So I’m losing about 60k in income on all three properties… But I went from making a 7%-8% return to now after the property is completely stabilized I’m going into a 14% cash return, with a really good equity position, in a really good neighborhood (I’m also trading into a better neighborhood). So for me the dead time and the money was worth the trade.

Now, if it would have been a 10% return trade, I probably would have passed on it at the end of the day. So I had to really adjust my numbers for this scope of work that I was doing.

Joe Fairless: You probably would have passed a 10% even though it’s in a better area, and that dead time is a one-off variable, not a constant variable?

James Dainard: Yeah, because for me, if I’m gonna make the trade, I wanna make sure it’s a next-five-year trade. So anytime I’m looking at maybe some awesome assets – and I liked my three rental properties that I had; they weren’t under-performers by any means, and they were in good locations, but for me if I’m gonna go through selling off all my assets, putting it in and having that dead time, I wanna make sure it’s worth it. So for me, I always factor about a 4% increase on my trade.

Now, if it would have been a lot easier building, which I could have renovated in a three-month period, I would have gone for a maybe 10%-11% trade. But the scope of work dictated the return I was trying to trade.

Joe Fairless: Talk us through the renovation project, please.

James Dainard: The renovation – one unit is very straightforward, I’m doing electric plumbing. It’s a one-bedroom/one-bath unit. I can’t do a whole lot more with that, so  I’m just hitting all the systems, getting them safe, getting it updated to maximize rents. The current rents on the property were $1,395, and I can get them up to $1,995 with about a $20,000 renovation.

The second unit is a two-bedroom/one-bath that the guy had partially demo-ed already… It’s about 900 sqft, and I’ve kind of laid out how I can get a three-bedroom/one-bath unit, which takes a lot more framing  and design layout. I basically have to gut the whole thing upstairs… But it takes my rent potential from being about $2,200 to $3,400. So for me doing the [unintelligible 00:07:00.26] that third bedroom brought a substantial more income to me on that unit.

And then the third unit is actually a two-bedroom/one-bath, that brings in about $2,100/month, and I’m actually converting that out into an eight-bedroom rooming house… Because it’s a triplex, it only allows me to get eight bedrooms per unit. In this one I had a large, unfinished basement, so I’m digging out part of the basement and adding about six bedrooms in the basement area. It’s a very substantial renovation.

How I had to plan that renovation – it takes so much time, effort and resources that I wanted to make sure I got that return out of it. But that eight-bedroom rooming house will rent for about $995/room. So that bottom unit alone is gonna bring in $8,000. The one-bedroom/one-bath is gonna bring about $1,895, and then the top floor unit is gonna bring in about $3,200 to $3,400/month.

Joe Fairless: So the first one, the one-bedroom/one-bath you’re doing electric and just some mechanical stuff, you’re increasing rent from basically $1,400 to $2,000, and you’re investing 20k into the renovations. Does that include your time, or are you not involved in it?

James Dainard: No, I’m pretty involved in my own personal rentals, especially in these buildings that we’re trying to maximize the rentable square-footage. So it takes a lot of time laying out each bedroom in a very strategic way to maximize that space. In the very beginning I’ll be very involved, as far as the first 30 days planning. My plan is done, and then from there I actually a have a full-time project manager that takes over from there.

Joe Fairless: So does that 20k factor in the full-time project manager’s costs?

James Dainard: Our project manager usually does about 60 projects a year for us, so the net cost on him, what we pay our project manager is close to about $100,000/year. So his cost or investment is usually about $3,000 to $5,000 for him to oversee.

Joe Fairless: Okay, got it. So 33% return on the one-bedroom/one-bath, and then the two-bedroom that you’re converting to three-bedroom – you’re going from $2,200 to $3,400 in rent. Did I hear that right?

James Dainard: Yeah, that is correct.

Joe Fairless: And approximately how much will you be investing to do that?

James Dainard: In that top unit I’ll be about $50,000 to $55,000 just for that one. One thing — because it’s a rooming house, so I wanna make sure all the systems and everything is totally up to a new safety code of students living in there… So I am hitting everyone of the systems in there, redoing all the electrical, redoing all the plumbing… And then the cost is a little bit more for that unit also because I have to reframe out most of the structure to squeeze that third bedroom in.

Joe Fairless: Okay. And I think I actually did my math wrong… That one though, the one we’re talking about now, is 26% return, and then the other one, $2,000 to $1,400 – that’s $600, times 12, $7,200, and $20,000 – that’s 36%. It’s a little bit better than what I was saying earlier.

Okay, and both very good returns for each of those units. Now with the rooming house, it’s currently bringing in $2,100, and then what will it bring in after you’ve completed the renovations?

James Dainard: The bottom unit, the two-bedroom/one-bath brings in $2,100. After I’m all done, I’m gonna get eight bedrooms in there, so it’s gonna bring in $8,000. The renovation is gonna cost me about $125,000 just to do that unit, because I do have to dig out a part of the basement and pour a new foundation in that section.

Joe Fairless: A hundred and how much?

James Dainard: About $110,000 to $120,000 for that bottom unit alone.

Joe Fairless: Alright, so it’s a difference of $5,900 in rent per month, times 12 months, $70,000. These are gonna be very favorable numbers for you, as you know already… So that’s a 59% return on your investment.

James Dainard: Yeah. So at that point it was worth the work for me. I was like “Okay, this is gonna be a lot of work…” A lot of permitting issues, with a city as Seattle it takes a lot of time… But for me to get in a very core location and get those kinds of rents… Because I paid $975,000 for the building when I purchased it. So my all-in cash on the building is gonna be about 1.2 million, but it’s gonna bring in about $12,000, $12,500 in rent monthly.

Joe Fairless: When will it be completely renovated, and your new tenants will be ready to move in?

James Dainard: We’re doing framing and electrical right now. Actually, what I did to streamline some of the income is I pulled two separate permits for two of the units, the more easy, cosmetic ones… And then what this allowed me to do is those will be available for rent in about two months or so. The third unit, because it’s digging out the basement and it’s structural, I pulled a separate permit on its own for that part of the renovation, because in the city Seattle it takes about 4-5 months to get your building permit when you’re doing any kind of structural permit… So this allowed me to pick up the income.

Now once those two units are stabilized in two months, I’m gonna be able to collect about $4,000/month in rent as I’m waiting for my permit to complete the rest of it.

The rooming house will be complete probably in July/August of next year.

Joe Fairless: So about 12 for the rooming.

James Dainard: Yeah, about 12 months for the rooming house.

Joe Fairless: Okay. What’s something that if someone were doing this project — or I’ll make it less subjective… If you were taking on this project five years ago, what would you have done differently? Perhaps you would have overlooked a certain aspect of the project that you no longer overlook, or you would have budgeted differently? What have you done differently that you wouldn’t have done five years ago if you had this project.

James Dainard: It really comes down to the construction execution. About five years ago we would have just pulled a permit on the full building, but then what that would have done is I would have a loss of income on two of my units for 12 months as well… So that would have cost me $48,000 this year in rent income. So we kind of learned — it’s always nice to get into a building and do it all at one time, but with the permit process you can get around and streamline and speed up your construction projects by planning out each unit individually. You pay about triple in permit costs; it’s about 5k more in permit costs to do it that way, but you get things done so much quicker, and you can get the property stabilized a lot faster.

If I would have permitted the whole building all at one time upfront, I wouldn’t have been able to start on the whole building for 5-6 months, whereas right now I’m in the middle of two units already, after 30 days of owning the building, and then I’m waiting on the third unit to get permitted. So it’s all about how you structure your permits and your processes to get your job side going.

Joe Fairless: One of the recognitions your company has is Inc. 5000’s Fastest Growing Companies in America… How do you qualify for that?

James Dainard: It’s all based on income growth. You have to be in business for over three years, and then after three years they look at your net income on what’s your growth potential. You have to have three years of proven financials, and then they look at your third and fourth year to get the growth, and then ask to be signed off by a CTA and a certified accountant.

Joe Fairless: Cool. Well, congratulations on the growth and that recognition. What’s a project that you’ve lost money on?

James Dainard: It’s about 500 homes in the last 10 years… So I’ve lost plenty on a lot of homes. Recently I took a pretty big hit on a project I wouldn’t have thought I would have lost money on. It was in Shoreline, Washington. We paid 180k for a house in King County, Shoreline, which is very hard to find… The reason we lost money is we just ran into a ton of contractor issues. We just had a bad stream of them.

The guys that I’d work with for a long time – they all just ran into money problems, all at the same  job, it seemed like… So I ran into two generals explode, and then a subcontractor explode, and then I did underestimate — there was a driveway they had to install because the grade was really steep, so you couldn’t really pull a car down to it; that’s how we got it so cheap… And I thought I grade it and create my driveway, and it ended up being a huge structural renovation project. We ended up having to spend about 35k on this driveway, putting in structural concrete walls… And then it was a major road too, so it had [unintelligible 00:15:08.28] The permit and the driveway cost alone were about 50% of my total budget that I had projected…

Joe Fairless: [laughs]

James Dainard: I just way under-budgeted… I thought I could get it done quickly, and it didn’t happen. And then the same time we listed last July, which was right when in Seattle the market kind of slowed down for a little bit, and there was a price adjustment about 10% off peak in these neighborhoods that were hyper-appreciating…

So it was just bad contractor, underestimated a huge structural permit issue for the driveway, and then a market slowdown, and I ended up losing about 75k on the house.

Joe Fairless: I would imagine the contractor issues, since you had pre-existing relationships with them – you’ve just gotta chalk it up with “Hey, that’s what happens sometimes in the business.” And same with the last thing, the market softening at some point in time, and then it corrected, and now it’s stronger, or whatever it is… But the middle thing, driveway being too steep and you thought you could grade it – that’s probably something that you can apply for future deals. Am I right in that assessment?

James Dainard: Yeah. Sometimes I think I get a little Superman complex; I’m like “Oh, I can fix this. I’ve done anything.” And you get in that [unintelligible 00:16:20.12] where you see that good deal and you want it so bad, but as an investor, you just need to slow yourself down sometimes. Going out and buying the cheapest thing isn’t always the best thing. Also, as you’re looking at these upfront – okay, it’s a structural item; what that also does do when you have any kind of foundation work or anything, you get to pour a lot of concrete rebar – most cities slow your permits way down. So not only did I have the other issues because I underestimated the driveway, but it cost me about four months of holding time just to get that permit, because it was a structural… Which equated out to about $25,000 in hard money costs.

So there were all these factors that going in I under-budgeted, and I under-budgeted my timeline. I had it as a six-month project, which is pretty typical for us, that kind of project, but it ended up taking 12 months because of all the additional permits and contractor issues.

So I definitely underestimated the driveway. It looks scary and it looks like a big deal. I should have spent a little bit more time really measuring out the grade, and I could have avoided the whole thing.

Joe Fairless: When you’re walking on the property and you take a look at the driveway before it got fixed, what did it look like

James Dainard: Let me put it this way – one of my project managers accidentally totaled his car in there…

Joe Fairless: Accidentally totaled his car?

James Dainard: He actually thought he could pull in the driveway… Because it didn’t look that bad when you look at it from the curb. You’re like “Oh, yeah, you can grade this down.” But then once you get on the other side of it, you’re like “Oh man, it’s a big drop.” So he pulled in and it literally just fell down across the front… So then he had a tow-truck  try to get him out, and the tow-truck ripped the axle right off the car.

Joe Fairless: Oh, my gosh… [laughter]

James Dainard: So from the street it didn’t look as scary, but when you get down, it looked a lot worse. So it was something very noticeable if I would have just taken the time. I was more focused on the house, rather than the site around me… And if I really would have just paid attention to that, I would have avoided probably a nasty loss.

Joe Fairless: And when something like that happens on the job, who pays for the new car?

James Dainard: Well, his insurance covered it.

Joe Fairless: Okay, thank goodness.

James Dainard: So I got pretty lucky at that point. Yeah… But some of our guys drive our own trucks, trucks we provide them with, so they do it definitely on my dime and my insurance.

Joe Fairless: Yeah. It could have been $75,000 and a new car that was taking a hit on this…

James Dainard: Yeah, I guess it could have been a lot worse.

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

James Dainard: The best advice I can give to people is just slow down sometimes, especially as you’re getting in. A lot of people hear from friends that have this huge success story on a flip, or a rental, and they just kind of jump right in before they build out their systems. Really, before you make that first purchase, get a good, dependable brokerage that can help you analyze the deals correctly, that speak an investor’s language, and they know how to crunch numbers, not just look at houses… And then find a good construction team to work with. Whether it’s a general and a bunch of subcontractors you can work with… For me, I kind of got away from general contractors doing everything, because it just creates too much liability. Even in that Shoreline house – if I wouldn’t have had a general doing it twice all the way through, I could have prevented a bit loss.

So just build your system, get a general that can maybe take on 50% of the work, and then bundle the rest up with other good, dependable subs that you can bring in, and then know their pricing. Don’t let the contractor dictate the pricing of what the budget is. Give them a template to work off of, know what the construction should cost, and then work it with the contractor that way.

And then find a very dependable money source. Who’s gonna be able to fund that deal for you in 24 hours, 48 hours if you find a really good deal in front of you? Or who’s the bank that you can work with, that you can get better rates and terms on if you can get longer closing terms? So build up your core people. Your brokers, your deal sourcing team, your construction team and your money team.

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

James Dainard: I’m ready for the Best Ever Lightning Round.

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

Break: [00:20:22.00] to [00:21:19.01]

Joe Fairless: Okay, best ever book you’ve recently read?

James Dainard: Recently, I actually just read Brandon Turner’s Cashflow Rental book. I actually was just at a mastermind meetup with him.

Joe Fairless: Oh, cool.

James Dainard: I had never read his book, so I figured I need to read it… I actually listened to the audiobook on the way home. It was really good. And plus, I needed to read it, because I have  a ton of clients coming into our office that speak Brandon Turner’s language, so I had to make sure I was up on all the latest terms.

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

James Dainard: The best deal I ever did was actually a vacation rental property in Suncadia, Washington. The reason I say it’s the best ever is because I decided I wanted a vacation place for my family, but also make income; I researched different markets that have been deeply depressed, I targeted homes that I could buy below the replacement cost, and I ended up buying a vacation rental for a million fifty. I made about 25k/year for a couple years just on cashflow, and got a vacation there for free, and then I sold it two years later for 1.45 million, and I had to do basically no renovations on it.

Joe Fairless: Oh, man… Why did you sell it?

James Dainard: Because I saw about 150 building permits get pulled in the area… And the last time that area appreciated was because it just got overbuilt. And I was kind of  looking at the rents that I could charge, and if there’s an oversupply, my rents are coming down, and then the value is gonna come down… So it was a really good profit deal, and now I’m looking for my next one.

Joe Fairless: How long ago?

James Dainard: I sold it last October, so it’s been about six months… But I do miss it though. It’s a fantastic area, just incredible.

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

James Dainard: They can check out my social media. It’s @jdainflips. I go through a lot of daily walkthroughs on job sites, flip tips, different types of current construction projects we’ve got going on… We do about 50 flips at a time and have about [unintelligible 00:23:07.13] for renovations for buy and hold… And then also check out our website, www.heatondainard.com. We put out a ton of free education on just tools for investors to prevent losses down the road.

I’ve lost a lot of money over the last 12 years. I’ve made a lot, but I’ve also lost a lot, so we always like to show the public how we prevent those in the future and teach them the hard lessons before they have to experience them themselves.

Joe Fairless: And thank you for doing that. I’ve learned some things from this conversation, from mitigating risk on deals… For example, if you’re gonna do renovations on a building, don’t pull the permit for the full building. Get the permit in phases, that way you can still cash-flow on certain aspects of the building, if applicable. And then also thanks for talking through the deal that didn’t go according to plan, in many ways, and the $180,000 that was purchased that you lost 75k on, and what took place, and how you could have lost even more if that was your company’s car… So I’m glad the insurance paid for it for your project manager. Thanks for being on the show.

James Dainard: That was the only luck I had on that project.

Joe Fairless: Yeah, right. [laughs] Well, we’ll take it, because you could have doubled your losses relatively easy, depending on the type of car he was driving… So thanks for being on the show; I’m really grateful. I enjoyed our conversation. I hope you have a best ever day, and we’ll talk to you again soon.

James Dainard: Thanks, Joe.

JF1913: Everything You Need To Know About Filing An Insurance Claim | Syndication School with Theo Hicks

Whether it’s damages from a tenant, fire, water, winds, etc, if you own enough properties, at some point you will likely have to file an insurance claim at some point. The process can be super meticulous and involved. Theo will explain what to do and how to do it when it comes to filing your insurance claim. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Take as many pictures as you can and write a detailed description of what you are seeing”

 

Related Blog Post:

https://joefairless.com/s-o-s-approach-managing-investment-crisis-like-hurricane-harvey/

 


The Best Ever Conference is approaching quickly and you could earn your ticket for free.

Simply visit https://www.bec20.com/affiliates/ and sign up to be an affiliate to start earning 15% of every ticket you sell.

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.


TRANSCRIPTION

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

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

 

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

Each week we air two podcast episodes that are focusing on a specific aspect of the apartment syndication investment strategy. For the majority of these episodes – or if they’re a part of a larger series – we offer a document  to you for free. These could be PowerPoint presentations, these are Excel template calculators, they’re PDF how-to guides… Some sort of document that accompanies the episodes or the series, that you can use to help you further your apartment syndication business.

All these documents, which again, are free, as well as the past free Syndication School series, can be found at SyndicationSchool.com. And in this episode we are going to talk about insurance. This is everything that you need to know about filing an insurance claim.

A few Syndication School episodes ago – maybe about a month ago, or if you’re listening to this in the future, it’s probably 20-30 episodes ago – we talked about the SOS approach to a major issue that occurs at your property, and it was talked about in the context of Hurricane Harvey; what do you do if a massive hurricane comes and smashes into your apartment community? And we talked about the SOS approach, which is Safety — I can’t remember what the other two were, but basically we talked about the high-level process that you as the investor want to do. I think it was Safety, Ongoing community, and then Solution.

So first you figure out “Is everyone safe?” Then you figure out the condition of the property, and then you communicate that to your investors, and then you have some sort of solution in place… And most likely, that solution, if there is a big issue, is gonna be filing an insurance claim. So this episode will be very helpful in explaining, going into more detail on that third S in the SOS approach. Or for anyone that owns a property and needs to file some sort of insurance claim, they need to know if they should file an insurance claim, what is covered by the insurance claim, and things to not do to avoid delaying your insurance claim. So those are the three things we’re gonna talk about – the claims process first, then what a typical commercial property insurance policy covers, and then we’re gonna talk about tips for avoiding a delay.

The process, typically, the commercial property insurance claim entails restoring the property to the pre-lost condition, within the limits defined by whatever insurance policy you purchased. Then it should also help you maintain the business during the time it takes to rebuild or repair that property. That’s the overall purpose of the insurance claim. So it should 1) bring the property back to its pre-loss condition, and 2) while it’s being brought back to its pre-loss condition, it shouldn’t impact the business, which is really the money coming in.

Here’s a general overview of the process. Again, it depends on  what actually happened, your insurance policy, but in general, this will what will happen. First, some sort of catastrophe happens; a hurricane, a flood, a fire, a storm… Something like that. Once that happens, step two is called mitigation of damages. So you are required to protect the property from additional damages, to mitigate the extent of physical and economic losses. What this means is that you may need to make temporary emergency repairs out of pocket. For example, if there’s a crazy hurricane and a bunch of windows shattered, trees fell through your roof, maybe doors blew off the hinges, you are gonna be required to go in there and cover with a board any windows, any doors, any roofs, any sort of opening, because if it rains, the animals can get in there, people can get in there, which would result in further damage done to the property. So you need to mitigate ongoing damage that occurred from some sort of catastrophe.

Number three is gonna be evaluation of coverages. Once a catastrophe occurred and you’ve mitigated the damages, covered up all the holes, then you want to review your insurance policy to understand the terms and conditions, including the coverage limitations, how they value certain things, the time limitations, and then your duties and responsibilities for filing the claim. Basically said, three is read your policy.

Four is the evaluation of damages, claim preparation and documentation. So before anyone touches anything, you’re gonna wanna document the extent of the damage. If there’s a hurricane, you’re gonna wanna take pictures of all the shattered windows, of all the doors blown off the hinges, of all the holes in the wall, of all the water damage, of all the trees that have fallen on the roofs, things like that. Take a lot of pictures, from as many angles as possible, for each of the damaged areas or items.

You wanna write detailed descriptions of the damages for each of those pictures, and then you wanna include when this actually happened, and then include any questions or concerns you have about any potential hidden damage. So overall, there’s no such thing as too much documentation. The pictures, questions, written explanations, predictions on what else might be wrong…

Additionally, you’re gonna want to reach out to licensed contractors and obtain estimates and bids to repair these issues. Because you’re gonna be required to submit an itemized, detailed claim, with expert reports and estimates to your insurance broker, or who your insurance provider is. This should include information about the property damage, as well as any sort of business interruption, loss of income, rents, as well as any extra expenses needed to continue operations. Include that in your claim to your insurance broker.

If your ten units are down because of this hurricane, and those people need to move out, how much rent are you using? And then are you putting these people in a hotel? How much money is that costing you, to put them in a hotel? So the loss of rent would be an example of the loss of income, and then the example of extra expense would be putting these people in a hotel until everything is fixed.

And then we’re going to give away a free document, because this is Syndication School, and it’s going to be a sample claims report. It’s gonna be something you can take a look at that is an example of what you need to prepare and send to an insurance broker. This is commonly referred to as a proof of loss statement. So that’s number four.

Number five is negotiations and settlement. Once you submit your claim, your insurer will audit your claim and detail and make any adjustments based on whatever policy that you have… Because every single thing may not be covered by your insurance policy. And then also based off of the expert opinions.

Number six is going to be restorations of the property and the operations, which is the last step. Do not proceed with any permanent work until you’ve reached an actual agreement with your insurer. Once the negotiation and the settlement is reached, then you can begin to restore the asset to its pre-loss condition. That’s kind of the overall six-step process of how it’ll work.

If something bad happens, you make sure nothing extra bad happens, you evaluate the damage that occurred from that bad thing happening, you figure out how much it’s gonna cost to fix the damages from that thing happening, you have a negotiation back and forth with your insurer to come to agreement on the costs and what will be covered, and then you actually fix the property.

So what types of things are typically covered by your insurance policy? Again, you’re gonna wanna read your insurance policy, you’re gonna wanna have a conversation with your insurer before you even accept their insurance. You wanna figure out specifically what is covered by your insurance policy. Sometimes they’ll have a nice little simple one-page cheat sheet they can send you, that says “Hey, if you’ve got this insurance policy, here’s every single thing that’s covered.” But obviously, in your very long policy, your book-length policy, it goes into a lot more detail on what that actually means. But here are some of the most common things covered – and I’m gonna go through this pretty quickly, because most of the things are pretty self-explanatory.

Number one is property damage. This includes the buildings, fixtures, machines, the furnishing, raw materials and inventory.

Business interruption – which is intended to place an insured business in the position it would have attained had the loss that caused the interruption not occurred. So it should provide funds necessary to sustain the ensured business whilst operations are suspended as a result of damage caused by a covered peril. It typically pays a business’ profit and continuing operating expenses, including payroll for a specific period of time.

Something else is extra expense, which covers expenses incurred in mitigating the business loss, which I gave an example of earlier. Or increased costs in continuing a business in the wake of a catastrophe. It can reimburse a policy holder for money spent, moving a covered business to a different location while the covered property is restored, is intended to offset expenses associated with returning to normal operations.

Equipment breakdown coverage is often available with this coverage and should be purchased if a customer’s business is dependent on certain equipment. That’s not necessarily important for apartments unless you’ve got like a maintenance [unintelligible 00:11:15.01] that gets destroyed, with a bunch of maintenance equipments in there.

Something else is contingent business interruption, which is usually an extension of the business interruption coverage. Contingent business interruption provides the insured with benefits to cover lost profits and extra expenses resulting from damage to a third-party’s property, typically in four situations. One, when the insured business relies on a third-party to deliver materials or product. Basically, this is business interruption based off of a third-party you’re using. Let’s say you’re using a property management company who’s also affected by the hurricane. I’m not gonna go into more detail on examples of that. It’s basically just third-parties as well.

Something else is ordinary payroll coverage. Pretty self-explanatory. It provides for salaries as a continued expense. Loss of rents – self-explanatory. Extended period of indemnity – it provides business interruption and extra expense benefits beyond the period of restoration defined in the standard business interruption policy.

Something else that might be covered is extended period of indemnity, which provides business interruption and extra expense benefits beyond the period of restoration defined in the standard business interruption policy.

So you’ve got business interruption, which is during the time it takes to get the property restored; there’s contingent business interruption, which is something that covers third-parties while it’s being restored, and there’s also the extended period of indemnity, which extends this business interruption beyond the time it takes to restore the property, if you’re still negatively impacted.

Civil authority coverage provides business income benefits when a civil authority prohibits access to the insured property due to direct physical loss or damage at the property. It’s most commonly triggered during mandatory evacuations.

You’ve got utility services, which extends business income and extra expense insurance to protect against losses caused by interruption of services from a specific utility; that provides a business with water, power, communications.

Then lastly, loss of ingress or egress, which provides benefits when as a direct result of a covered peril. Ingress to or egress from real and personal property is prevented.

So those are all examples of things that are covered. Obviously, there’s more than just that, and then obviously not every single policy is gonna cover all of that… So again, make sure you’re reviewing your policy, so that you know what is and isn’t covered.

The last thing we’re gonna talk about is just some tips to avoid having your insurance claim delayed… Because if you have a major issue, you’re gonna wanna get  it fixed as quickly as possible, so you can get back to your normal operations. So here are things you can do to make sure you get the claim done as quickly as possible.

Your policy does state that your insurer is legally bound to process your claim and pay you what is owed from your damages in a timely manner, but timely manner is pretty subjective. It’s not saying “Within 10 days or within 30 days”, it’s more subjective… So it can be delayed for lots of different reasons, and again, here are some things to do to avoid some of the most common reasons why a claim will be delayed.

Number one is to know your policy, which is pretty self-explanatory. Your property insurance policy is going to be packed with enough legal jargon to make anyone’s head spin. Even seasoned claim professionals routinely argue over business insurance policy interpretation… So it’s very important for you to read and understand what your policy covers, what it includes, what it obligates you to do, and the process you must follow to settle your commercial property insurance claim successfully.

If you have gaps in your understanding of your policy, then seek help from a business insurance claims professional, which is probably what you’re gonna wanna do anyways, to help you create your claim. These are called licensed public insurance adjusters, and they can review your claim and advise you on how to achieve the maximum settlement under the terms of your specific property insurance policy.

Number two is to take immediate steps to mitigate additional damage, which you’re required to do; to make temporary emergency repairs to prevent additional losses resulting from the original damage. So this is a no-excuses step you must take, as your policy provides coverage for the cost. Make sure you’re mitigating the damages… Because if you don’t, then this is gonna delay your claim.

Three, collect abundant documentation of all the damage. We’ve kind of mentioned this – before anyone moves almost anything from your damaged property, make sure you take pictures, as many as you can, from all different angles, of each damaged area and item; write detailed descriptions of the damage you observe, that correspond with those pictures. Include when the loss occurred, and then have any extra questions you might have, or reasons you have, to suspect that there may be hidden damage somewhere else.

This additional documentation is gonna be very valuable when you develop your proof of loss statement that you submit to your insurer.

Number four is to get multiple bids from repair contractors. Some insurance carriers may encourage you to  believe that you have to select a specific contractor from their list of preferred contractors. Others may suggest that you’ll save a lot of money by using their chosen providers… But just because they say that doesn’t mean it’s true, and you have the right to pick your own provider as long as they’re licensed. So just like you did when you did your interior and exterior renovation budgets, get multiple bids and make sure that you are not necessarily going with the contractor that’s the cheapest, but the ones that are able to return your property to the pre-loss condition the best, and the fastest.

Number five is submit a proper proof of loss statement. Developing this proof of loss statement, the thing that you submit to your insurer, is one of the most important steps that you can do to make sure you get your claims process resolved quickly. Your company will send you a proof of loss form, which you will then need to fill out accurately and thoroughly. This is a time in the process where people knowingly or unknowingly short-change themselves — well, I guess they wouldn’t knowingly do that… But they unknowingly short-change themselves on their claim settlement amount, because they provide insufficient information, they didn’t document properly, they don’t have enough evidence for their losses.

So when you’ve taken all of your pictures, you’ve got all of your written descriptions, your questions and reasons for things that might be hidden, you wanna organize all of these photographs and written explanations of your damages to show what happened, when it happened, where it happened, the resulting damage to the property, to your inventory, equipment, personal property etc. You wanna provide copies of the estimates you obtained and the value for the full extent of your losses. And this – as I mentioned earlier – is where  a licensed public adjuster can be very helpful; to fill it out properly, to make sure you’re maximizing the money you get back to cover all the issues that have been found.

Number six is to keep a journal. Filing a claim takes a lot of time, a lot of effort, a lot of knowledge, determination and communication, so throughout the process it’s wise to keep a claims journal, so when you need to go back to any step in the process, you have detailed notes on what happened, when it happened, who said what and who did what. And then whenever possible when you communicate, try to communicate as much as possible through email. If you are contacted by someone or speak with someone on the phone, make sure you note in your claims journal the date and time of the call, the person’s name and title, what you have talked about, the conclusions that were reached, any additional steps needed, who is responsible for taking those steps, and any deadlines set.

Get that person’s personal email address, and follow up with the call by emailing them a summary of that call, and then ask them to review it and then kind of reply back and say “Yes, this is what happened” or “No, this is not right. Here’s what’s right”, so you have documentation and evidence of everything.

If you’re talking to someone and they say “Well, we’re gonna cover this” and then you didn’t really have any documentation of that, then when the time comes and it’s not covered – well, if you didn’t document it, if you didn’t get them to agree that that’s what they said in writing, then you’re kind of out of luck.

And then lastly – and this is just a general advice, which can really be applied to anything – be respectful, but firm. Achieving a fair settlement for damages to your business is not gonna be a very easy process. The insurance company is not just gonna give you whatever you want… So remind yourself that if you are having issues, if they aren’t giving you what you want, take a deep breath and remind yourself that you have the right and the obligation to stand up for yourself and your business. The more organized, direct, respectful and firm you are throughout your entire process, the better chances there are of avoiding delays and achieving fair compensation for your loss.

So just because they tell you something, don’t just take it at face value. Just because they say “Well, this is not what this actually means. Business interruption doesn’t mean you get this, this and this.” If you believe that that is the case, then be firm about it; just say something, don’t just accept it. So that’s the last thing that I wanted to talk about.

Again, make sure you check out the episode about the S.O.S. approach – Safety, Ongoing communication and Summary – because that will give you an idea of how to approach a major issue to your investors… But this episode is focused more on “Okay, something bad happens [unintelligible 00:20:29.27] now what happens?” Well, this is what happens – you file an insurance claim. This is everything you need to know about filing an insurance claim on your apartment community. And then again, you’ve got that free sample proof of loss statement that you can download for free in the show notes, or at SyndicationSchool.com.

Until tomorrow, make sure you check out some of the other Syndication School episodes about the how-to’s of apartment syndications and download that free proof of loss statement document. All that is available at SyndicationSchool.com.

Thank you for listening, and I will talk to you tomorrow.

JF1909: Adding Value & Finding Solutions For Real Estate Taxes with Brett Swarts

Brett is a real estate tax expert who is coming on the show today to help us with any tax problems we may have. Joe and Brett will get into the details of real estate taxes, and we’ll hear some stories of investors saving money on taxes with Brett’s help. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Find somebody who is a specialist in that area and diversify” – Brett Swarts

 

Brett Swarts Real Estate Background:

  • President of Capital Gains Tax Solutions, LLC
  • Provides trustee services which helps real estate and business owners gain tax deferral, freedom, liquidity and diversification with their funds so they can create and preserve more wealth
  • Based in Sacramento, CA
  • Say hi to him at https://capitalgainstaxsolutions.com/
  • Best Ever Book: Crucial Conversations

 


The Best Ever Conference is approaching quickly and you could earn your ticket for free.

Simply visit https://www.bec20.com/affiliates/ and sign up to be an affiliate to start earning 15% of every ticket you sell.

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.


TRANSCRIPTION

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

Brett Swarts: I’m doing well, Joe. Thanks for having me on the show.

Joe Fairless: Well, my pleasure, and looking forward to our conversation. A little bit about Brett – he’s the president of Capital Gains Tax Solutions. He provides trustee services which helps real estate and business owners gain tax deferral, freedom, liquidity and diversification with their funds, so they can create and preserve more wealth. Based in Sacramento, California.

With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Brett Swarts: Yes. Thanks, Joe. I started out in real estate as a young child, with my dad, helping him build custom homes in Fremont, San Jose, Northern California area. Rentals have always been in my life. I studied business in college, went on to Marcus & Millichap as an internship, and was with them for five years as a commercial real estate broker, helping clients buy and sell apartment buildings mainly.

From there I went and kind of started my own two companies, Commercial Realty Apartment Advisors and Capital Gains Tax Solutions. That’s kind of the business background. I’m married, five kids, I played basketball in college, [unintelligible 00:02:32.03] in particular, and I love playing that as much as I can…

Joe Fairless: Marcus & Millichap real estate broker, and now you’re working with owners of properties to set up their business, so they can defer the capital gains… How did you make the conscious choice to transition?

Brett Swarts: At Marcus & Millichap at the time when I was first starting in 2006, I was still in college, but graduated in ’07, the market shifted quite a bit in ’08, and things changed… And the manager at the time in my Marcus & Millichap office in Sacramento – he brought in a gentleman to speak on the deferred sales trust as an alternative or a back-up plan for a failed 1031 exchange… And we were looking for ways to help clients solve these issues.

The biggest stat that he left with us at the time was there’s about – according to the American Bankers Association – 17 trillion dollars that will pass from one generation to the next in the next 20 years… And this is known as the baby boomers. It’s the largest wealth transfer in the history of the world, and 50% of America’s net worth is tied to high-end primary homes, commercial real estate, and also private equity or businesses.

So they’re faced with the [unintelligible 00:03:41.12] liability and looking for alternative ways to get out of real estate. So he approached us with that strategy, and I started to study it and look at it, and I obtained my series 22 and 63… But really, my approach, Joe, has always been to add value and find a solution for what my clients were looking for. And as the years passed by and the marketplace has really grown in appreciation, everything has kind of shifted from these baby boomers who don’t wanna be in debt, who are tired of the 1031 exchange, who don’t necessarily wanna overpay for a property in a  highly appreciated marketplace…

So I launched a company in partnership with the Estate Planning Team to really focus on commercial real estate owners, syndicators, business brokers and high-end luxury real estate agents to help them grow their business. So it’s kind of a natural progression, if you will, from focusing just on the 1031 exchange, to now the deferred sales trust as another option.

Joe Fairless: Okay, so the deferred sales trust – I guess that’s the unique thing that you bring to the table from a consulting standpoint, and help set up… Is  that correct?

Brett Swarts: Exactly.

Joe Fairless: Okay. And what exactly is that?

Brett Swarts: A deferred sales trust is just a manufactured installment sale, Joe. It’s like a seller carryback, except we’re using a third-party trust to buy your property. Let’s say you have a deal you’re selling for ten million – they’re gonna give you a  zero down payment in exchange for a note… But immediately we’re gonna sell it to the cash buyer that’s already lined up for ten million, and therefore we can defer all the tax, because you haven’t received any actual or constructive receipt… So it’s just a manufactured installment sale; it’s tied to IRC 453, which is a 90+ year old tax law.

We’ve been doing it – we collectively, and there’s thousands of professionals now across the U.S, financial advisors, CPAs, tax attorneys, QI companies, syndicators who use our strategy. A 23-year track record, over thousands of trusts have been closed, 14 no-change IRS audits… So it’s just an installment sale, but it’s unique in how we do it.

Joe Fairless: Okay. So will you give maybe an example of a client of yours that you can share, that they did, and then just walk us through some numbers and the process?

Brett Swarts: Of course. A recent one, just a couple weeks ago, a gentleman named Peter – he’s out of Marin, California, long-term commercial real estate investor, mostly with multifamily, but he’s also a residential broker himself – so he sold an 18-unit apartment complex in Sacramento; so he’s driving up from the Bay Area, he’s knocking on doors, he’s collecting rents… It’s kind of a tough neighborhood he’s going into Sacramento… So he was stuck with a property that he didn’t wanna own, but he also didn’t wanna 1031 exchange. And the way he put it was “I’d rather have 18 problems. I don’t want 36 problems. I actually just kind of wanna retire. I’m older now, and I wanna get out of debt, and I wanna diversify… And I actually want a passive income stream, but I don’t wanna have to do it myself.”

The property itself is only about 18 units, so it’s hard to hire property management to get scale and make sense of the numbers there… So he learned about the deferred sales trust and he liked the fact that he could sell it and he could pay up all of his debt, so now he’s debt-free… He had about $500,000 of debt.

Joe Fairless: On the property, or separate from the property?

Brett Swarts: On the property, yeah.

Joe Fairless: Okay, alright.

Brett Swarts: So he was selling for about 1.8, and he had about 500k in debt… So he was gonna net about 1.3 into the trust.

Joe Fairless: Okay.

Brett Swarts: He had a basis that was pretty low too, because he had done exchanges into this property… So he had another 500k in liability for tax liability. That’s state, federal, Obamacare; it’s about 37% if you add that up in California, plus the depreciation recapture, which can be as high as 40% or so… Or even higher.

Joe Fairless: 40% on top of the 500k, or in total?

Brett Swarts: Yeah, so he was faced with two things – he had debt of 500k, and then he had a tax liability of 500k… So he felt completely trapped. He goes “I have to do a 1031 or something else, because by the time I pay off my debt and pay off the capital gains tax I’m just gonna get wiped out. It makes zero sense. But again, I don’t wanna have 36 problems. I already have 18 problems. I don’t know what to do.”

Joe Fairless: Right.

Brett Swarts: That’s where a lot of my clients have been over the years – they feel trapped between over-paying for property, taking on more debt, chasing deals that otherwise they wouldn’t pay for if it wasn’t for their 37% to 50% of their gain being wiped out by the capital gains tax… So enter the deferred sales trust – he was able to sell, put 1.3 million into the trust, become debt-free, defer that $500,000 in tax as well that he owed… And now he’s invested in stocks, bonds, mutual funds of his choosing… But his real passion is to put it into commercial real estate syndication deals with different operators across the U.S, where he can diversify within that portfolio about 80% of the funds.

So it solved his “Hey, I don’t like the stock market.” It solved his “I can still be in commercial real estate”, and the biggest one is he can buy whenever he wants to. He doesn’t have to buy tomorrow or day 180. He can wait on the sidelines until deals make sense.

Joe Fairless: Okay. And who’s paying the 1.8 for the property that’s participating in the deferred sales trust?

Brett Swarts: Just a buyer. Especially in California and Sacramento – it’s one of the hottest multifamily markets in the nation, and there’s tons of 1031 buyers and tons of buyers that wanna pay a price for the property.

I think the deal traded around about a 6,25% cap. It was a C deal, C- location… So yeah, just a cash buyer that’s lined up. It can have a lender… They take title the same way they would have, as if Peter was gonna do a 1031 or a deferred sales trust.

Joe Fairless: Got it. So from the buyer’s standpoint it’s not that different from buying it if they were doing a 1031.

Brett Swarts: Correct. It’s like a simultaneous close. It’s actually an assignment of sale. So what Peter did is he just put language into the document that states that he has the right to a deferred sales trust or a 1031, and no additional cost to the buyer. And he did consider that, by the way, going for a 1031 and looking for  a deal… Because the deferred sales trust is actually a back-up plan for a failed 1031. So it actually empowers people too to go out there and search for a deal, and if they can’t find it, they have a back-up plan. And it also doesn’t take up one of their positions either for the exchange rules.

Joe Fairless: Okay, so you have to have the money with an intermediary during the process when you’re looking for a 1031 exchange… So as long as you have that with the third-party, then you can still do the deferred sales trust if your 1031 falls through?

Brett Swarts: You got it. It’s a constructive or actual receipt. So the way a 1031 works, Joe, as you probably know and your listeners know, is instead of having the funds sent to (say) Joe from escrow, we wanna send it to a QI company who holds the money to maintain non-constructive receipt for you… And then at that point you can move the funds to another property and perfect the exchange. The same concept is true here – instead of the funds being sent directly to Peter or Joe, they’re gonna be sent to the trust, which is gonna maintain non-constructive receipt.

Joe Fairless: Got it, okay. What are some questions investors have about this, that are common, that you address?

Brett Swarts: The first one is “How do we know it’s legal? It sounds too good to be true.” Those  are the two biggest things. The first thing we would say – it’s a 90-year-old tax law; thousands of trusts have been closed. We have thousands of business professionals… And it’s just an installment sale; we’re just creative on how we use it.

The next one is “Where are the funds held?” Well, the funds are held at Bank of New York Mellon, Charles Schwab, TD Ameritrade… You can hire your own financial advisor or you can use one of our professionals that we work with across the U.S. to manage the money. They can put it into stocks, bonds, mutual funds of your choosing; very conservative allocations.

My favorite part is they say “Well, can I go back into real estate?” and the answer is “Absolutely.” You can go in tomorrow, or whenever you want to, and then you can diversify it. So those are the main ones… But we encourage everybody to bring in their trusted advisors, Joe. We recognize that this is a new concept for people, so we actually say “Hey, don’t just trust what we’re saying; bring in your brain surgeons.” And who are the brain surgeons? Those are the CPAs and tax attorneys that you trust. Have them speak with our CPAs and tax attorneys before moving forward.

My role  as a third-party trustee – I can’t ever move the funds; the funds only ever move with the client’s signature. The client has 24/7 access to view the funds. But my role is to educate and be the offensive coordinator in this scenario, where I’m working with a commercial real estate broker, the financial advisor, the CPA, the tax attorney, and the client. So we all work together as a team to make this transaction work.

Joe Fairless: And what are some things that you pay attention to within your role of the transaction?

Brett Swarts: My role is just to give them all the options. By the way, my company is Capital Gains Tax Solutions, plural, so I like to present the 1031 exchange, the pros and the cons, and then the deferred sales trust, the Delaware statutory trust, the charitable… And really just empower the client with the information and with the tool.

I liken it to this, Joe – imagine it was 25 years ago and you’re just learning about the 1031 exchange for the first time. Before you knew about it, you were just buying and selling properties and paying the tax. Then all of a sudden somebody empowered you with the strategy, and then once you understood it, you were able to create and preserve more wealth… So I really see my role as that – just empowering and educating, kind of being the guide for the client, so that they can create and preserve more wealth with the strategy. Hopefully that answers the question.

Joe Fairless: Got it, okay. And with the different options that someone has – let’s go with the deferred sales trust, to be specific… How are you compensated?

Brett Swarts: By the way, it works for a business, a high-end primary  home,  commercial real estate, collectibles… Anything you can think of, the deferred sales trust works for, whereas the 1031 only works for investment property mainly. So when they sell and the proceeds go into the trust, we get a recurring fee. So a first fee is about 50 basis points on the initial amount, and then once a year we get paid again, as long as the funds are in the trust. Most of our trusts go for ten years, but at the end of ten years you can renew for another ten, and then renew for another ten, and just keep going for as long as you want. Then you can pass it on to your kids.

Most of our notes earn 8%, and after fees they net about 6.5%, which is where the other fee comes in – that’s to your financial advisor. They charge somewhere between 50 basis points and 100 basis points, which is  0.5% to 1%… So just depending on where and how the funds are invested.

The last fee is to the tax attorneys. It’s 1.5% on the first million and 1.25% on anything above that. That includes audit defense for the life of the trust… But what we’re really focused on is what is your actual tax liability? So if you’re selling a ten million dollar deal, Joe, and you have a four million dollar tax liability (let’s imagine you had a zero basis), we’re gonna focus on that four million, and that’s a big number. We would say that that’s substantial; you’re gonna wanna do a 1031, or a Delaware, or a deferred sales trust, or maybe  a mixture of all three, depending on your scenario… So we’re really gonna dissect what’s going on. Do you have a mortgage over basis? Do you have some liquidity needs? Do you wanna get rid of the [unintelligible 00:14:48.08] liability? Do you want to stay in real estate with local operators that you trust and know?

So we’re really gonna ask a series of questions to decipher where the risk tolerance is, and also what their outlook is, and how comfortable they are with different asset classes… And then from there recommend one, two or three strategies, or maybe just one strategy.

Joe Fairless: What’s a potential client that’s come to you and  you just couldn’t help them for X, Y, Z reason? Can you just talk about that?

Brett Swarts: Yeah, so if you come to me, Joe, and you’re selling your business, and the buyer has removed all contingencies, it’s too late for us. We need to be able to be there before he does that. Now, commercial real estate is unique. Even if they remove all contingencies, we would just tell you to send it to a 1031 company, and that 1031 company at that point on day 46, we can help you, up until day 181. But if you take constructive receipt or actual receipt, it’s too late. So the next thing is working with a 1031 company, which will  give you both options.

There’s certain 1031 companies who haven’t heard about this. The big banks sometimes don’t move outside of their lane… So we’re still educating a lot of different QI companies. So  I would just recommend you make sure you have the language in your exchange agreement, because if you don’t, they may not cooperate and they may just send you the check from the QI company and then you’re gonna owe the tax. Those are the two main ones.

The other one has to do with just lower tax liability. It’s just a small amount. If you’re selling a 10 million dollar deal, Joe, and you only owe 50k or 100k in tax, we’re gonna tell you “Just pay the tax.” Take the 9.9 and go look for a deal for when it makes sense. So we’re gonna try to make a holistic approach to financial — within the actual strategy there’s some rules we have to follow.

Joe Fairless: I think you mentioned this tax code for deferred sales trust has been around for 90 years… Did I hear you correctly?

Brett Swarts: Correct. IRC 453, which is just a seller carryback… That’s the foundation of the tax code.

Joe Fairless: So what happened recently that brought this to light, that now it’s being discussed and you’re working with clients on it?

Brett Swarts: Yeah… Even a better question would be “How have you survived the IRS audits?”, which I think will answer the question you’re asking… So there’s been 14 no-change IRS audits; the biggest one was for over a 100 million dollar deal, and absolutely no issues whatsoever. These are random audits for just clients who are high net worth and they happen to find the deferred sales trust and look at it.

The last audit was a formal audit of the structure itself, of the law firm who created it, and the co-founder of the deferred sales trust with the estate planning team… And the first hour of the audit they said “Look, this is just an installment sale. You guys are being creative on how you’re applying the law, by using this third-party trust, who’s in it for a business purpose, who’s an unrelated party, and who can make a profit”, which those things are all true. As long as you’re following those rules, it works. So that’s the best answer I have. We’ve been able to do it thousands of times, and it’s been reviewed by national law firms. It’s not until you meet somebody who’s gonna educate you on the strategy that you’re gonna hear about it.

We also don’t necessarily mass-market it to everybody. I’m only one of 13 exclusive trustees across the U.S, Joe, so we’re very protective of the strategy… Although we’ll share it with a non-disclosure agreement, no problem… But we don’t want it getting into the wrong hands, where somebody might abuse the structure and we lose it for everybody… So we’re very particular about who and where they see the secret sauce, if you will.

Joe Fairless: Okay… And I guess because I didn’t sign an NDA or anything to have a conversation, you’re publicly talking about this —

Brett Swarts: Oh, this is fine. All the stuff we’re talking about here is fine, yeah.

Joe Fairless: So what aspect is more in the NDA component of the conversation?

Brett Swarts: It’s the actual execution of this. I mentioned a couple of things: business purpose, third-party unrelated trustee… And then it’s also the  ability to keep the funds safe, liquid, with an investment advisor. Those are the main areas, if I’m somebody approaching this for the first time, that I’d wanna understand. And then the brain surgeon is the law firm who created this; they can talk about these things. A lot of the times they don’t even really come up; people just say “Oh, it’s an installment sale, it works…” So hopefully that answers the question without giving too much away.

Joe Fairless: Based on your experience in the real estate industry, what’s your best advice ever for real estate investors?

Brett Swarts: Buy at optimal timing. Buy when deals make sense. We make our money on the buy side; we make money when we can find value-add, forced appreciation deals that make sense. And you may wanna consider diversifying outside of your single product type, and your single location, and find somebody who’s an operator, who’s a syndicator, who’s a specialist in that area, and diversify outside. The deferred sales trust allows you to do that.

Don’t overpay just because you only know the 1031 exchange. Get out of debt now and take on smart debt when the market is low, when you can buy properties at a discount. Risky debt stays in and keeps ride up, but don’t go into dumb debt when you overpay for properties just because you’re deferring the tax through a 1031 exchange. Make sure the fundamentals of the real estate make sense; if they don’t, figure out a way, or in a different location, with a different operator, and a different product type that does.

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

Brett Swarts: Yeah, let’s go.

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

Break: [00:20:05.20] to [00:20:41.29]

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

Brett Swarts: Best ever book I recently read… Crucial Conversations.

Joe Fairless: I love that book. What’s a mistake you’ve made on a transaction?

Brett Swarts: A mistake I’ve made on a transaction… Not saying yes to the client who wanted to bring in a partner on a deal, in the 12th hour; I should have just said “Yes. Whatever you wanna do, let’s work together.” I had too much pride and wanted to do it myself.

Joe Fairless: Best ever deal you’ve done?

Brett Swarts: Best ever deal I’ve done… Let’s see. We’ll talk about brokerage – it was an 8.2 million dollar value-add multifamily here in Sacramento, representing both sides, and it was a win/win because there was still some meat on the bone for the buyer, who was my client, and the seller had an up-leg lined up… So he bought it for 8.2, and now it’s worth 13 million and it’s only been a year and a half.

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

Brett Swarts: Go to CapitalGainsTaxSolutions.com, or search me on YouTube, Bigger Pockets, LinkedIn… Connect with us. We have a deferred sales trust calculator;  you can put it in there and it’s totally free; it will give you a side-by-side comparison. And/or schedule a one-on-one call with me and I’ll walk you through our strategy more.

Joe Fairless: Brett, thanks so much for being on the show, talking about deferred sales trusts, as well as the approach and a couple use cases. I hope you have a best ever day, and we’ll talk to you again soon.

Brett Swarts: Thanks, Joe.

JF1861: How To Raise $1 Million To Fund A Fix And Flip Business with Rocco Montana

Rocco left his sales job that was leaving him unfulfilled and underpaid. Real estate investing was what he wanted to do, and now he is a successful real estate investor, syndicating deals and flipping houses. We’ll hear a lot about how he was able to raise over $1 million to fund his flips. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:
“Be grateful for how far you’ve come” – Rocco Montana

 

Rocco Montana Real Estate Background:

  • Created a multifaceted real estate business from scratch in just over 2 years
  • He is an active realtor, AirBnB Superhost, house flipper, and multifamily investor
  • Raised over $1 million in private capital to fund his flips in his first year
  • Based in Boulder, CO
  • Say hi to him at https://www.jrocproperties.com/
  • Best Ever Book: Never Split the Difference 

 


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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, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff; we hate that fluffy stuff, so we don’t get into it.

With us today, Rocco Montana. How are you doing, Rocco?

Rocco Montana: I’m doing good, Joe. Thanks for having me.

Joe Fairless: Well, it’s my pleasure, and looking forward to our conversation. A little bit about Rocco – he has created a multifaceted real estate business from scratch in just over two years. He and his wife are active investors. He is an active realtor, he is an Airbnb superhost, he is a house flipper and he is a multifamily investor. Raised over a million dollars in private capital to fund his flips in the first year. Based in Boulder, Colorado. With that being said, Rocco, will you give the Best Ever listeners a little bit more about your background and your current focus?

Rocco Montana: Yeah, absolutely. My wife and I are both active realtors. I had success in a variety of different sales roles, different industries over a few years, and got kind of tired of working hard and making everybody else money, and getting a really small piece of the pie, and figured I’d make a bigger pie and take small pieces. That’s kind of what drove me into real estate, and multifamily is the future for me as well.

I can’t do any of this without my wife. She has a master’s degree, actually; she’s managed eight-figure budgets for a private university, she worked for DU for a while, and hundreds of employees… She’s kind of the operations, I’m a little bit more of the face. She’s kind of like my right arm, I couldn’t do anything without her.

We both come from sales, we met in a sales job together, and… Yeah, Airbnb was kind of our start, and I got licensed, she got licensed, we’re passive investors, we’re gonna syndicate our first deal this year to GPs, and… Yeah. Where do you wanna go from there?

Joe Fairless: Well, I’d like to know how you raised a million dollars in private capital to fund your flips in the first year.

Rocco Montana: That’s a great question, and I’m happy to share… I’m gonna write a book at some point when I build up a little bit more experience, and it’s gonna be something along the lines of creating success or creating your business one beer and coffee at a time. It really just comes from networking. My wife and I invested in a coaching program…

Joe Fairless: Which one?

Rocco Montana: Fortune Builders.

Joe Fairless: Okay.

Rocco Montana: [unintelligible 00:04:25.15] do wholesaling, then do flipping, and then do buy and hold. And that helped me get in front of a lot of people. Then I created a meetup based here in Boulder. Actually, some of you might know who Adam Adams is. He created the Real Estate Lunch Club of Denver. I run the Creative Real Estate Lunch Club of Boulder, and honestly, most of it came from there. My family was not my first investor, but I’ve got my family on board now, so that helps… And yeah, the meetups, and getting out there.

It was so hard for me to believe even investing in something like Fortune Builders and meeting other successful people of varying degrees and varying asset classes in real estate… “Where do you find your deals, where do you find your capital?”, and they all say networking. It’s underrated, and I think a lot of people are doing it wrong. There’s not always an intention. They refer to it as edutainment. You take these classes, you go to these groups, you invest in these programs, and you’re having fun and you’re learning, but are you actually executing? Having an intention with networking, knowing who you’re looking to meet, researching the group that you’re going to see, the people that are gonna be there and having an intention and goal…

I heard an interesting statistic not too long ago from one of the coaches I was working with – 95% of people never make a follow-up call after a meetup.

Joe Fairless: I believe it.

Rocco Montana: All these business cards you hand out or receive… If you actually schedule a coffee or schedule a phone call, you’re in the overwhelming minority.

Joe Fairless: Yeah, it’s pathetic, but I believe that it’s true… Which is good — and pathetic, because people should do it, but it’s good because people who do do it, surprisingly, they stand out. They shouldn’t, but they do, because most people don’t do that… So yeah, I’m glad that you mentioned that. It’s the small things that can help.

Let’s get into a little bit of the specifics of that million dollars in your first year though. I hear you on you joined Fortune Builders, you co-host a meetup, you’re intentional when you are attending places to know what you’re looking for, but now let’s talk about the actual million dollars within your first year. How many people approximately did that comprise of?

Rocco Montana: Honestly, a surprisingly few amount. It’s only about four.

Joe Fairless: Four people, okay. So on average 250k, or was one person 900k and the others were a smaller amount?

Rocco Montana: I’ve got one person over 500k, and the other three comprised the other 500k.

Joe Fairless: Okay, cool. So you’ve got one person at over 500k, and – the other three over 100k each?

Rocco Montana: One is about 200k, and the other two 150k.

Joe Fairless: Someone invested a good chunk, you’ve got another person investing about 200k-250k, and then you’ve got two others that are doing about 150k. Alright. So how did you meet that person who has invested over 500k?

Rocco Montana: It’s kind of the little things, like we said earlier, Joe… I tapped somebody on the shoulder, I was working with a hard money lender for a  flip, and the timeline didn’t work out, even though the hard money lenders can close fast… I needed a little bit faster or I was gonna lose the deal. I already had earnest money up… And I tapped them on the shoulder after they were in my meetup for about a year. We built a relationship, a little bit personally, but mostly meeting once a week. This year we’re doing once a month or twice a month in Denver and Boulder meetup… And she had faith in me and gave me an opportunity.

In that first deal she went first position, took up the whole loan, purchase price and repairs, for 280k, and now she’s in four other projects with us.

Joe Fairless: So you approached her when you had a deal and the timeline wasn’t working out with the other hard money lender? Did I hear that right?

Rocco Montana: Yeah, so I clarify the difference between a hard and a private money lender as the hard money lender is like an asset-based lender, that’s typically a fund or something like that, private equity funds that focus on fix and flip real estate… And the private money lender is exactly that – a private individual. The hard money lender – I was pre-approved, I had worked with them, and I was kind of ready to go with my first big flip. I did a small flip, a little [unintelligible 00:08:38.27] I actually lent personally on it, with a little experience from the lender side as well… And I just reached out and they were like “Yeah, we can’t really quite move that fast.” I thought they could.

I tapped this woman on the shoulder, who was becoming a close friend of ours as well, which had been part of our business, and she said “Yeah, I’ll help you out. You can secure me with a lien and a promissory note.” The return sounded awesome – double-digit annualized returns, backed by insured, hard assets…

Joe Fairless: So path A wasn’t working, path B ended up working… You said you had known her for a year… How did you initially meet her?

Rocco Montana: Through the meetup that I was hosting.

Joe Fairless: So you were hosting a meetup for how long? At least a year, I guess… Prior to you doing this first big flip.

Rocco Montana: January 18th I started my meetup, and tapped this lender on the shoulder in July or August. This was a weekly meetup, she was a regular attendee. She manages a small portfolio of condo rentals in Boulder, and she was looking for more passive opportunities. She had been self-managing so many units, and it was a lot of work, she was kind of doing 30, 60, 90-day rentals because they have short-term rental regulations in Boulder and Denver, so she couldn’t give the nightly stuff… And it was a lot of work. She had some capital, and she took a chance.

My sales experience definitely helps in negotiations, and being able to communicate with people and articulate your point, and a value proposition… Stuff guys like you and I do all the time in raising capital or meeting new partners. She was into it.

Joe Fairless: And in January when you started your meetup, did you start it as a result of something else taking place, to give you the idea to start it?

Rocco Montana: So Adam Adams, who is a multifamily syndicator himself, based out of Denver, started the Creative Real Estate Lunch Club of Denver, and he wanted to expand it to other places. We know that Boulder is a pretty affluent area, and it was a fairly affluent city as well, and he said “Well, why don’t you take lead and host a Boulder chapter, if you will?” He was doing every week on Thursdays through 2016 and 2017 – or maybe just 2017 even – and then in 2018 I started in Boulder, another guy started in Fort Collins, and they tried to start one in Colorado Springs… Today it’s just Denver and Boulder that still exist.

Joe Fairless: Okay, so you’re holding strong, and you have seen the benefits of doing it… So I’m glad that we dug in there. What value did you see for starting that meetup in Boulder, that perhaps others did not?

Rocco Montana: The value we see is providing value to others, and meeting other people. It’s like a two-way street, right? We provide value first, create something that brings people together… Our format was a different speaker for every week. All the different sorts of real estate. No sales pitches, no “Sign up for my consulting program”, no “Buy my book.” Just “I’m a specialist in 1031 exchanges. We’re gonna talk about that for 40 minutes.” “I’m a specialist in multifamily syndication. We’re gonna talk about that.” “I flip” etc.

We did that, and it brought people together to talk about real estate, people that are interested in real estate. And then the other side is I knew by providing value first, that in some way, shape or form, even with not a clearly defined goal  at the time, I would receive value in return. It’s karma, if you will, and you can call me a Boulder hippie if you will, but it’s just karma, and putting good energy out there and helping other people and bringing people together. That comes back twofold, and it has, in a short time.

Joe Fairless: Segueing to something else, unrelated – you’re an Airbnb superhost… How much Airbnb stuff do you do right now?

Rocco Montana: We have two properties. We listed six different listings with just two properties. That could definitely be a fairly long conversation in itself. It is mildly passive. We airbnb our condo in Boulder. Sometimes my wife and I literally sleep on our couch and rent out our two bedrooms. Another thing that people think we’re nuts, but it’s temporary and it’s helping us get to our other goals, and it just generates enough revenue that it’s worth it. And we have a nice couch in front of the fireplace… [laughs]

So we’ve been doing that for about 2,5 maybe 3 years now, over about 500 guests, 260 stays, maintaining that superhost rating, so we’re in the top tier of feedback… And we got into that because we did Uber/Lyft for a little while, while starting out, just being young, newly married business owners… It was difficult to just keep food on the table, especially because real estate has a bit of a longer sales cycle, as you know and most of the Best Ever listeners would know. It’s not a weekly paycheck, like the 9-to-5 deals. And there wasn’t a lot of value in it, dollars versus time.

Airbnb really gaining popularity about three years ago, we figured we’d try with one bedroom, then we’d try it with two bedrooms, then we actually put our whole house on Instant Book, after we had purchased another property… That was actually a bad partnership, and we bought a partner out and ended up keeping the asset. It was supposed to be a buy and hold, like a BRRRR method; we were gonna buy it, renovate it, refinance it, rent it, repeat. It didn’t work out so well with the partner. We bought it… It was in a floodplain, after the fact; standard rent wasn’t really gonna cover it, long-term rent [unintelligible 00:14:17.03] so now we airbnb that house as well, which – in our experience, Airbnb brings in 1,5x-2x what long-term rent does.

Joe Fairless: In terms of profits or in terms of income?

Rocco Montana: Gross income. Gross income is typically 1,5x to 2x for short-term than it is for long-term rentals. I wish I could cite where I’m getting some of the data from… But there’s less wear and tear on short-term rentals. People show up, they shower, they shave, they sleep, and they go out. Especially in Boulder and Denver.

We learned the hard way, through a certain price point; [unintelligible 00:14:54.08] come to Colorado to smoke weed and sit on your couch. [laughs] It can’t go less than $50/night, or you’re gonna get that clientele. [laughter] More than $50/night per bedroom, people come that go out to dinner, they go to a show, they go to a conference, they go to CU, their kids are there,  a graduation, a show in town… It’s endless, the amount of stuff to do in Boulder and Denver.

Joe Fairless: And then they come sleep on your couch?

Rocco Montana: No, they sleep in bedrooms. My wife and I sleep on our queen-size pull-out couch.

Joe Fairless: Oh, got it. You two sleep on your couch, and they sleep in your bedrooms. And you said you had six listings with two properties. Help me with that math.

Rocco Montana: Yeah, so we have the whole house listing in Boulder, and then we have two individual bedroom listings. So either you get a private bedroom in a shared house, or you get a private two-bedroom condo. And then the other property has three bedrooms. We actually keep one bedroom for ourselves, so we do a lot more sleeping in that bedroom now than on the couch… So we have two separate bedrooms there that we rent out, plus the whole house listing.

So two houses, at least two bedrooms for rent, could actually be six listings – as individual bedrooms or as whole house listings. The calendars sync up, so if one’s blocked, you can’t get the other one etc.

Joe Fairless: Let’s go back to the million dollars in the first year of flipping. We talked about the first person… What about the second person, who brought about 250k or so? How did you meet him/her?

Rocco Montana: The second person was actually a family; a successful investor in their own right. They created a business, did really well, we showed them that we were executing on the bigger vision. We actually approached the family first, when we first started. We invested in Fortune Builders, and… Some people hear the term “friends, family and fools”, so we started off–

Joe Fairless: [laughs] I’ve never heard that before.

Rocco Montana: Oh  yeah, you start off with friends and family, and they’re like “Yeah, that sounds really great. Show us something.” And it’s like “Well, I’ve invested in this education program”, and pamphlets, and brochures, and… The sort of blue-sky thinking, if you will. “Oh, it’ll work out.” And once we started to do deals, then a family member was like “Cool, I’m there for you.” Obviously, they get a rate of return, just like any other private investor, so it’s mutually beneficial.

Joe Fairless: What’s something that has gone wrong in your path so far, in the last couple of years in real estate?

Rocco Montana: Something that has gone wrong is I let a small amount of earnest money go hard, and lost if, because I had enough information to be dangerous, but not enough to complete the execution. Part of it might have been fear at the time. So one of my first deals I lost my earnest money on a single-family house.

Joe Fairless: How much?

Rocco Montana: $2,500. But when you’re starting out and you’ve only got so many resources… My wife and I were still both working full-time, and it hurt. But we got through it, because we also did a wholesale in the same day and made 16k. So we didn’t feel it as bad.

Airbnb – we had our first negative experience with guests about two months ago. They really trashed the whole room. We had to replace linens, pillows, carpet even, the mattress we threw away… I don’t know what they were doing, but Airbnb covered almost all of it, which was really cool… Which not everybody can say.

Joe Fairless: Were you staying there with them at the time?

Rocco Montana: We were staying there, they were in the bedroom, we smelled something funny… It definitely wasn’t marijuana. We addressed it, we tried to not be judgmental of the people based on [unintelligible 00:18:20.29] It was a last-minute booking; we don’t get a lot of them… I’m talking like same day… We have a cut-off at 9 PM. So you can book at 8:50. “Hey, I’ll be there in ten minutes.”

And our success came from being a little loose in the beginning with the guidelines, and letting people come in. Now we’ve tightened it up a little bit, and we haven’t seen any lack of business, because we have great reviews and a great experience.

Yeah, they trashed the whole room, and I don’t know what they were doing. And it was a bit of a nightmare, because it’s our primary residence in Boulder where we live, and it was just like “Oh, my gosh…” We had other bookings, and we just kind of grit our teeth and bear it… Being in flipping, we were able to get the carpet replaced in 12 hours. We made a phone call and  a guy showed up with four samples, and ripped out the carpet and redid it.

We own a design company, Jmix Design – my wife and a girlfriend of hers started that. It helps with staging and design in our flips, and as retail brokers, as real estate agents, which is kind of our day-to-day stuff, it puts food on the table today, while we build our long-term future in multifamily and flipping and all that. But that was pretty crazy.

Joe Fairless: What’s your best real estate investing advice ever?

Rocco Montana: It might be life advice, but gratitude, hard work and patience is something my wife Jami and I live by. Everything stems from “Be grateful for how far you’ve come. Put in the work to get to your next level, and then have patience to let it all play out.” Gratitude, hard work and patience is what we live by.

Joe Fairless: I like it. I think that is a wonderful recipe, in my humble opinion. We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Rocco Montana: I am ready.

Joe Fairless: Alright. First, a quick word from our Best Ever partners.

Break: [00:20:02.13]

Joe Fairless: Okay, best ever book you’ve recently read?

Rocco Montana: Never Split the Difference, by Chris Voss, about the strategy of negotiation, and a lot of psychology around it. A former hostage negotiator with the FBI wrote this book. Again, Chris Voss. He’s got great stuff on YouTube, and I believe he’s in a TED talk… Fantastic book on negotiation.

Joe Fairless: Yeah, he’s been a guest on this show as well. Best Ever listeners, you can just search “Chris Voss Joe Fairless” and you can listen to that interview. What’s a mistake you’ve made on a transaction that we haven’t talked about already?

Rocco Montana: Being too personal almost. Not wanting to give bad feedback to a client because of fear of their reaction… And I think we could have served that client better by being a little bit more direct. It’s a deal we actually never fully executed on. It was a listing, we were selling a property for somebody; they were in a difficult situation, and I was more concerned with the emotion, as opposed to just being like “Hey, we’re professionals, this is what we do. This is their experience, and this is the next step to get to success based on your wants and needs.” We didn’t handle that appropriately.

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

Rocco Montana: Best ever deal I have done is marrying my wife, Jami. [laughs] Punching outside my weight class, as they say; she’s just a phenomenal woman and business partner and friend… But I’ve got a kind of little bit of a shameless plug for the love of my wife there.

Joe Fairless: Speaking of wives, mine – as you probably saw – was coming in and out. She was wonderful enough to make me lunch, so… She did not know we were doing video. [laughter] If you can rewind it, anyone watching on YouTube, you’ll see her expression as soon as she realizes we’re doing video and she was not aware of that.

Best ever way you like to give back to the community?

Rocco Montana: My wife and I are CASA advocates. That’s the Court Appointed Special Advocate program. It’s in a lot of counties, a lot of states; I don’t know how big it is… But we are the only non-biased, one case-focused advocates for children who are victims of abuse and neglect. So as you’re 18 years old, the judge here in Boulder county likes to have a CASA appointed. I’m like  a therapist, or a lawyer, or a case worker for a social services person.

We’re not trying to fit these kids in a box. We just meet with them a on a minimum of once a month; my wife and I pride ourselves on more than that… We figure out what their needs are at a human level. We only get one case at a time, and then they report back to the court. Kind of like a mentoring program, guidance, if you will… But we’re really passionate about helping out our community.

I’ve got some family that had some issues with drug abuse, and we don’t need to get into that, but it’s a really personal way for us to give back. My wife loves it, I love it, and we just like to help other people.

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

Rocco Montana: JROCProperties.com. Jami and Rocco. You can also reach me directly; I’ll give you my cell phone even – 908-420-4052. I would love to talk to any of you about investing, real estate, life, whatever… Networking and small things make such a big difference, like I said.

Joe Fairless: Well, Rocco, thank you for being on the show, talking about your journey, talking about  how you got into it, and over the last couple of years how for the year one you raised a million bucks. How you did that – well, you started a meetup, started to add a whole lot of value to people on a weekly basis… I think there’s a key there – it’s not only that you started a meetup with a friend of yours (an extension of a friend of yours, of Adam Adams), but you did it weekly. And then when you had an opportunity – and really a challenge, but then also an opportunity – for someone to partner with you, you had the network already built, and you simply offered an opportunity where it was mutually beneficial.

And now, fast-forward the year after that – ish, if I’m getting the timeline correct – she’s brought over 500k to your deals, and you have other investors who have as well, so I know that’s important to talk about… As well as interesting stuff about Airbnb. I did not think about the shorter-term rentals have less wear and tear than longer-term, and I agree with that. I know you talked about the horror story with people doing meth, or crack cocaine, or whatever the heck they were smoking… It wasn’t pot, apparently, according to  you… But I agree – short-term rentals probably would have less wear and tear, and I never thought about that. I think it’s counter-intuitive, so I’m glad that you mentioned that.

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

Rocco Montana: Thanks, Joe.

JF1860: New Investor Buys 30 Units With Other Peoples’ Money with Colin Douthit

Since Colin is still a newer investor who has successfully used OPM to purchase real estate, we’ll hear a lot about how he met investors and convinced them to invest in his real estate deals. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“If they say they’ll invest anywhere then they are willing to invest in areas that are bad and not guide you properly” – Colin Douthit

 

Colin Douthit Real Estate Background:

  • Real estate investor, general contractor, and property manager
  • Owns 70+ doors all acquired in the past 24 months, manages 50+ doors for other real estate investors
  • Based in Kansas City, MO
  • Say hi to him at colinATatlas.rentals
  • Best Ever Book: Bible

 


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TRANSCRIPTION

Theo Hicks: Hi, Best Ever listeners. Welcome to the best real estate investing advice ever show. I’m your host today, Theo Hicks, and today I will be speaking with Colin Douthit. Colin, how are you doing today?

Colin Douthit: I’m doing well, how about yourself, Theo?

Theo Hicks: I am doing great, and I am looking forward to our conversation. A little bit about Colin – he is a real estate investor, general contractor and property manager. He currently owns over 70 doors, which was acquired within the past 24 months. I’m looking forward to diving in how you were able to accomplish that… He’s also a property manager and he manages over 50 doors for other real estate investors. Based out of Kansas City, Missouri. You can say hi to him at his email address, colin@atlas.rentals.

Colin, before we dive into your background, could you tell us a little bit more about your background and what you’re focused on now?

Colin Douthit: Yeah, sure thing. I haven’t been in the real estate game my entire life; I’m kind of new to it. I was actually an engineer by trade, I did project management for construction companies, [unintelligible 00:03:21.25] of engineering school. I decided to kind of split ways with the corporate world, so I started acquiring rental properties. We started buying them because that was the goal, and I had some extra capital; that was kind of the initial seed for it. We had saved up some capital, had a little bit of a life insurance money to get going there.

That really got us through the first 12 months of acquisitions, but things for me really got interesting on the second 12 months – the last 12 months, I would say – because essentially we’ve been able to buy 40 doors with 100% OPM, which has really been huge in our growth, as well as capital preservation.

Along the way, with my construction background, I started to provide my own GC services for rehabbing the rental properties. I couldn’t find people that I could depend on… And then since we were already in the property management space, because I was having to manage all my own doors while we rolled that out as well, I got a property manager onboard who’s helping me out, and we’re servicing outside customers now as well. That’s how we got to where we are at.

Theo Hicks: So let’s go one by one… Let’s talk about the previous 12 months. You mentioned how you had that seed money from your life insurance fund to fund those first 12 months worth of deals, and then after that you were able to raise capital from other people to fund those projects… First, walk us through who these people are, how you found them, and how you presented the opportunities to them and convinced them to come onboard and invest their capital.

Colin Douthit: Yeah, absolutely. I think the whole thing with any business, especially real estate is networking and how you know people, and then just hitting up your friends and family. Honestly, I had some family members that had some capital sitting aside, so what I essentially offered them was a second lien position or personal guarantee, and we used their money for a  down payment and our wholesale purchase, or just the whole purchase of the property, depending on how much the property was, and paid them essentially interest-only. We make extra principal payments on that interest-only loan on a monthly basis, and a lot of times we used them for the down payment, which allowed us to leverage that even further.

So we made sure we had plenty of debt coverage on the monthly income that was coming in, and then paid them on a monthly basis as well, with the goal of at year five doing a refinance that should them pay them off completely.

Theo Hicks: Do you mind walking us through how you are presenting these opportunities to them? Are you just calling them on the phone and saying “Hey, I’ve got this deal. Do you want it?” Or is there a more specific process?

Colin Douthit: A little bit. These are people I’m close with – parents, some other family members, some close family friends that we know have money, that do some investments in other real estate, that have some successful businesses, that have some capital they’re looking to deploy… And I’m just always talking about what I’m doing in the real estate space, and “Oh, look at this proformas I’ve put together. Look at this deal.” And they started to see the success and the growth, and with that track record I was then able to say “Hey, let’s go ahead and see if we can work something out. We’re looking to fund this next deal… Do you have an interest? We’ll give you 8% interest-only.” And they’re like “8%? That’s pretty good.” They start penciling the numbers… Like, “Okay, that’s about what I’m getting in the stock market, so I might as well place it with you guys, with a physical asset”, and then they get the whole principal back in five years.

Now, I was just talking to a lot of people, and I didn’t really have to push a hard sell on them too much. We gave them a personal guarantee, and they were pretty excited. People see the stock markets continuing to rise, but they’re also apprehensive that it’s gonna pull back, because there have been some major pullbacks, and they’re like “Man, I’ve lost tens of thousands or a hundred thousand dollars over this last week… I’d rather just place it somewhere I know I’m gonna get the 8%.”

Theo Hicks: Do you ever plan on expanding to — not strangers, but people outside of your current network, like maybe building a brand to attract other investors, or do you just plan on sticking with the people that you already know, just because they have enough capital to fund your deals?

Colin Douthit: I’ve entertained the idea of expanding. I haven’t had to reach that far yet outside my network, to be honest with you. I know that you start running into some — you wanna make sure you’re not playing with the syndication rules, or some of the legal rules, so I don’t wanna try to stray too far into that area without knowing all the rules they play by over there… So I don’t really wanna get in over my head in that department.

Theo Hicks: For those 30-40 doors – it doesn’t have to be an exact number, but approximately how much capital have you raised for those deals total?

Colin Douthit: About 250k-300k. We had a couple big purchases, a number of properties, low class B, high class C properties that we needed to value-add. The price was right, we could get a good down payment going for it, and we were able to be like “Okay, we need $80,000 for the down payment on this chunk of properties”, and we were able to raise that here, and $10,000 there, and $30,000 there, so…

Theo Hicks: Okay. Let’s move on to the second thing you talked about, which is being a general contractor. Did you start this general contracting business just because it was your background and you wanted to save some money, or did you just have issues with the GCs you were using?

Colin Douthit: Really just having a hard time finding people that I could  depend on. There were multiple reasons. One was having a hard time finding people that I could depend on; that was a challenge. Trying to pay people on a regular basis, or have to upfront make these large payments sometimes wasn’t always ideal.

Also for the legal protection, if I’ve got a bunch of 1099 guys running around and we have multiple different LLCs set up to protect the different assets – if I have to pay each of them out of this different one, each of those is exposed to a liability if something gets hurt. So if I roll it into the GC and then I can have my general liability insurance through one company, then I don’t have to worry as much about my exposure if I’m hiring the guy to come in and lay some flooring. It’s just some 1099 guy that I know from town, or whatever. But if I am the GC, then I have to worry about that legal liability [unintelligible 00:09:03.08]

Theo Hicks: So  instead of hiring a GC to find these subcontractors, you just find them yourself? Or are you actually going in there and doing the stuff yourself?

Colin Douthit: We’ve got a  number of guys that work for us full-time now.

Theo Hicks: Okay. And is this something that you just do for your own deals, or do you also provide this service to your property management clients?

Colin Douthit: Yeah, we also provide it to property management clients, and I would say almost — the GC came for two reasons. One – I needed my own guys, because we had so much work, and then B was for the property management side of things. When we’re working with our customers that are property management related, we can provide the maintenance service for them quickly, because we have it all in-house, we don’t have to rely on a third party vendor additionally, which I think we might touch on here in a little bit… Kind of the full-service that we offer to some of the investors as well – it allows us to be a single point of contact for investors, so they don’t have to worry about coordinating work and everything from halfway across the country, or even internationally.

Theo Hicks: Yeah, we’ll transition into property management, but just one more question – have you found that you’ve been able to either do more deals, or offer a higher amount of money on deals just because you know that you are not going to be spending as much money as your competitors because of the fact that you’re keeping all of this renovation in-house, so I’m assuming it’s gonna be less expensive to do these rehabs, compared to someone else who has to hire someone like you to do it for them?

Colin Douthit: Yeah, absolutely. We’ve got a couple guys that are working out there for between $15 and $20 an hour, doing even some grunt labor at $12/hour… We can get that done a lot quicker and a lot cheaper than if we have to pay a GC that’s gonna bill everybody else out at a minimum $35/hour. Then if I can get a guy that I can trust, that can do some of the stuff like plumbing, and the hot water heater, and I can pay him $25/hour for one of my skilled guys, then I’m really gonna save a lot of money in the long-term, over a plumber that’s gonna come in and bill me $65/hour.

Theo Hicks: Would you say that if someone has their own business like you, and they don’t have the construction background, do you think that they could do what you’re doing? Do you think that they could be the GC and find some contractors, or do you recommend they just find a GC and kind of just take those disadvantages, but also benefit from the fact that they’re not gonna fail because they don’t know necessarily what they’re doing?

Colin Douthit: I would  probably lean towards the second option, of hiring somebody. My background in construction was purely commercial, so me getting into the residential side was a large learning curve for me. I took a lot of licks trying to figure some of this stuff out, on the estimating and stuff like that, and hitting my head against the door with permits, and everything with the cities, and codes… I do have a knowledge of codes, which has helped me a fair amount, especially if we’ve had to do something structural-related.

Honestly, I would say it’d probably be a safer bet for somebody just to build a relationship with a good GC, that has all the insurance and can do all the permits and everything else like that that you need. It’s been an interesting challenge… And then you don’t have to worry about hiring and keeping employees happy as well.

Theo Hicks: So you mentioned insurance… What are some other things that they recommend investors look at when they’re trying to find a GC? Because obviously, as you mentioned, you’ve had a hard time finding people to depend on, so [unintelligible 00:12:09.15] unless they have that background, specifically residential, and even if it’s commercial, it’s still gonna be tough… If I need to go out and find a GC, behind making sure that they’re insured, what else should I be looking for?

Colin Douthit: References. Get references from other people. Make sure that they are comfortable with the scope of work that you’re asking them to do, and that they’re not overqualified sometimes for what you’re asking them to do. Our focus is solely on long-term buy and hold rental properties. We’ve done some flips, but we really wanna focus on what we know best, which is rental properties.

So if you’ve got a GC out there that’s used to finishing high-end homes, and they’re gonna come in and help you update your rental property that’s $750/month or $900/month, the level of finish and the expense that you’re gonna incur with them is probably gonna be way higher than you need to have for that property.

Theo Hicks: Yeah, I remember when I first got into real estate I was convincing my now wife, then just girlfriend, to buy a property… And she had three contractors come out to quote for a duplex, and one of them was this higher end, and he quoted triple what everyone else did. They were like “We can do this, and –” [unintelligible 00:13:13.13] take a step back… No one’s gonna rent this. They’re gonna rent it, but you’re not gonna make that money back. So making sure they’re not overqualified is good advice.

Let’s talk about your property management company. You were telling me beforehand how you have a turnkey service for people who wanna invest out of state. I personally have had issues with property management companies in the past, and since this interview is not gonna be airing for a long time, hopefully I’m out of the weeds at that point… Because I do have my properties under contract when we’re recording this; hopefully they’re gone by that point… But what’s some advice you have about making sure you find the right property management company for your specific property you’re buying, or specific deal, or specific investment strategy?

Colin Douthit: Make sure first that they’re familiar with the area that you’re gonna be investing in. People can have a wide area that they’re comfortable managing – the whole metropolitan area… Or ask them “Where would you not invest?” Because if they will say “Oh, we’ll just manage anything, anywhere”,  then that means they’re also willing to not guide you properly into investing in areas that are bad. If you’re trying to stay out of some low class C, class D neighborhoods that might have a rougher demographic, they’re saying “Yeah, we’ll just go anywhere. We don’t have any exclusions on where we invest.” Then I would be a little concerned there.

I’d also make sure that they can be full-service for you on what they offer. All these programs now, the property management softwares are getting so advanced and so web-based that you can get a really high level of service from the property managers, get all  the information that you need to get from them through these web-based applications and reports that they can run… So I’d say make sure that they’re up to date on how they’re doing things.

Theo Hicks: And then what about on an ongoing basis, what are some of the things you recommend investors do to make sure that they’re — obviously, you’re gonna ask them “Are you familiar with this area?” and they say “Oh yeah, of course.” And then ask them “Will you offer full-service?”, they’re like “Yeah, of course.” How do I make sure that that’s actually the case? Specifically on that latter part, which is that they’re full-service, that they’re taking care of maintenance issues quickly, that they’re making sure they’re filling vacancies… What are some things that I can do as an investor to make sure that they are actually doing what they say they were going to do?

Colin Douthit: I would ask for some of the properties that they have under management, maybe go drive by and see a couple of those. I would ask what services they do provide. Are they coordinating the maintenance for you? Are they charging you for that? How often they’re inspecting the units, what are some of the systems they have in place, how do they handle a maintenance call coming in during the day, how do they handle a maintenance call coming in after hours, who answers the phone after hours. Let’s see some pictures of some of the properties that you do have listed right now, and then maybe say “Hey, how long have these properties been on the market? What are your average days of vacancy from when somebody leaves? How long does it take you to get the unit turned over, and then how long is it on the market?”

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

Colin Douthit: This was a tough one, I had to think about this one… It’s probably you didn’t lose or you can’t make money on a deal you never had. You can’t lose money on a deal you never had. If you’re under contract to buy something and it falls through, you never made the money and you never lost the money.

Theo Hicks: Solid advice. Alright, are you ready for the Best Ever Lightning Round?

Colin Douthit: Yeah, let’s go ahead.

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

Break: [00:16:28.03] to [00:17:13.24]

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

Colin Douthit: There’s two. Bible, number one. That’s a huge part of my life. And then number two, Atlas Shrugged, by Ayn Rand.

Theo Hicks: Nice. Is that where the Atlas Rentals comes from?

Colin Douthit: Yes, and a lot of my LLCs that own my properties have names from different characters in the books.

Theo Hicks: Is the movie as good as the book?

Colin Douthit: No.

Theo Hicks: Okay.

Colin Douthit: But you’ve gotta make it through the first 200 pages of the book before it gets good.

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

Colin Douthit: I would start sourcing money from other investors, and I would probably start another service-based business like property management to get the income rolling in without having to outlay a bunch of capital.

Theo Hicks: What is the best ever deal you’ve ever done?

Colin Douthit: I bought a set of dilapidated duplexes out in the country near a college town, near [unintelligible 00:17:59.24] rehabbed them, I borrowed the down payment from somebody, like we were talking about, started the rehab process, did a refinance, repaid the down payment after I got the appraisal, which came back stellar, so now I own six duplexes for zero dollars.

Theo Hicks: Wow. What’s the best ever way you like to give back?

Colin Douthit: I like to donate my time and energy to the church here. I work with a lot of the [unintelligible 00:18:20.09] and we do community service projects.

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

Colin Douthit: Probably either find me personally on Facebook, or Atlas Property Management on Facebook, or shoot me an email.

Theo Hicks: Alright, Colin, solid information presented in this conversation. I really appreciate it and I enjoyed it. We hit on three major areas… One was using other people’s money, and you just mentioned it’s all about networking, and you in particular focus on friends and family. You said that specifically you offered them an interest-only – I think it was 8% – and you gave a personal guarantee, and you also do some principal payments as well on top of that, I’m assuming depending on how the deal performs. Then the exit strategy is to do the refinance at year five to pay them back in full.

Then you mentioned that you were able to rely on your track record to raise that capital. So you’re always talking about real estate. You’re telling them “Hey, look at this deal I did, look at this proforma”, and then eventually you say “Hey, if I find a deal that can pay you 8%, would you be interested?” So it’s presenting it like that, asking that question… If they say yes, then you can come back at a future date and present them with an actual deal. They’ve already said they’re interested, so they’re more likely to invest. Then you said that so far you’ve raised about $300,000 in capital.

Then we transitioned into talking about your general contracting business, and why you started your own – in particular, you had a hard time finding people to depend on, so we talked about some ways to make sure that you are finding someone you can depend on, like making sure they’re insured, make sure you get references, make sure that they’re actually comfortable with the scope of work, and make sure that they aren’t actually overqualified for what you’re doing… So don’t find a luxury residential homebuilder to do your D class renovation.

And then we also talked about your property management business and some things that you’ll want to look for when you’re hiring  a property management company to make sure that they are doing what they’re supposed to do. Ask them for a list of properties that they currently have under management and drive by those properties, maybe ask for a few of the properties that are vacant, ask them how long units are typically vacant, how long it takes to turn them around and how long it takes to actually lease them, ask them the services they provide… Something that stood out was asking them how they handle maintenance, in particular the difference between how they handle maintenance 9 to 5, versus someone calling at one o’clock in the morning because their house is on fire, or whatever.

And then finally, your best ever advice, which was very succinct – you can’t lose money or make money a deal you never had. To me, that means you just gotta go out there and do it, do a deal. You can’t really fail if you’re not doing anything, but you also can’t make money if you’re not doing anything either, so I think that’s really solid advice and it’s applicable to all aspects of life.

Colin Douthit: Yeah, absolutely. You can get emotionally wrapped up in a deal that you lose, but at the end of the day you didn’t lose or gain anything, too.

Theo Hicks: Exactly. Alright, Colin, I appreciate it. Best Ever listeners who tuned it, I appreciate it as well. We will talk to you soon.

Colin Douthit: Alright, thank you so much.

JF1857: 5 Creative Ways To Raise Money With A 506c Offering | Syndication School with Theo Hicks

Theo will get into some creative ways that people will raise money with 506c offerings. It’s always a good idea to hear as many different ways to raise money as possible, you never know when you’ll need another way to get capital. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“People tend to like investing locally”

 


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TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


TRANSCRIPTION

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

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

 

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

Each week, every Wednesday and Thursday, we release Syndication School series on the Best Real Estate Investing Advice Ever Show Podcast. They’re also available in video form on our YouTube channel as well. Each of these series is focused on a specific aspect of the apartment syndication investment strategy. For the majority of the series we offer some sort of resource for you to download for free, whether it be a PDF file, a PowerPoint presentation template, an Excel calculator – something for you to download for free to help you in your syndication journeys.

This episode is going to be a standalone episode, entitled “Five ways to raise money with a 506(c) offering.” These tips come from a syndicator who raises money for development deals, and he focused on 506(c) offering type, as opposed to the 506(b).

A quick rundown of those differences – we do have a Syndication School series that focuses on that, which you can find at SyndicationSchool.com, searching “506(b) 506(c).” The main difference between the two is that with 506(b) offering the money-raiser (sponsor, GP) must have a pre-existing relationship with the passive investors, whereas for the 506(c) you can raise money from strangers and advertising for your deals are allowed.

This episode is going to be five ways to essentially advertise for money from investors. Again, this comes from a developer; his name is Mark, and he actually developed over a billion dollars’ worth of deals before he started transitioning to raising money for his deals.

So these are the five ways to raise money with the 506(c), and before I go any further, keep in mind – obviously, we’re not attorneys, so when you are raising with money with 506(b) or 506(c), or raising money for some other offering type, make sure you consult with a securities attorney to make sure you are following all of the proper laws.

Number one is crowdfunding. The first way Mark uses to obtain new investors is through crowdfunding. He says “For every deal we do, we do a portion of it crowdfunded, which is really nothing more than just advertising online through one of these third-party platforms for new investors.”

You likely know what a crowdfunding platform is. If you want to learn more about crowdfunding, we actually have a crash course available on our website. It’s episode 152, so one of the earlier episodes, entitled “Every single answer to every single crowdfunding question you have.” It’s a four-part podcast; I believe it’s four parts… And it’s Joe interviewing the people over at Patch of Land, which is a crowdfunding site.

So essentially, what you do is you put your deal on a crowdfunding site. Mark doesn’t have a particular crowdfunding site that he thinks is best. At the time he used CrowdStreet, there’s also Patch of Land… If you just google “real estate crowdfunding” you should be able to find one. Go on their website to find the procedure for posting your deal on their website to generate money.

Mark said that a benefit of crowdfunding is that he can find investors that he would not have been able to find otherwise. He says “These are people that I would otherwise have never met in my life, that are interested in investing with us, and some of us have already invested with us. It’s a great opportunity to grow your network of individuals that either might be interested or are definitely interested in investing.”

Since it’s online, he can get his deals in front of people all across the United States, people that he might not have found through one of these other four tactics I’m gonna go over today. The crowdfunding for Mark is basically filling in the gaps and just making sure that his deal gets in front of as many people as possible. So that’s number one, putting the deal up on a crowdfunding site.

Number two is Facebook. For a recent project, at the time we interviewed Mark, it was the first time he opened up his deal to Facebook. He said he was gonna try Facebook because “We’ve heard in the past a lot of great reviews from friends about how they acquired investors that way, because you can be super-targeted.” We know very clearly that 90% of our investors are 40 years and older, live all over the country, but mainly in population centers of 100,000 or more…” So Facebook advertising allows you to hyper-target a specific audience. Mark knows his passive investor demographic – in this case 40-year-olds who live in population centers of over 100,000 people, so when he creates his Facebook advertising, he types in 40 years old age, location – population over 100,000; other factors to target would be educational attainment, so people that have a college degree, and then people who are working professionals: doctors, lawyers, executives and small business owners are also their criteria.

So Facebook advertising in general could be a great way to generate leads no matter what you’re doing, but when you’re allowed to raise capital for your deals, you can explicitly use the Facebook advertising function. You don’t have to be subtle about it, you don’t have to [unintelligible 00:08:15.03] The way that they would use Facebook is creating content and displaying their expertise, answering questions passive investors have, with the goal of directing them and pushing them up their funnel into capturing their contact information and then talking to then, building relationships with them, and then raising money that way… Whereas for 506(c) you can forego all of that and just go straight to “Hey, here’s a deal that we have. Do you wanna invest?” and you don’t have to worry about not advertising and being subtle about it. So that’s number two, Facebook advertising.

Obviously, for the Facebook advertising there’s a dollar amount associated with that; pay-per-click, or other charges… So make sure you take that into account if you are gonna use Facebook advertising.

Number three – and this is kind of unexpected, but the way that Mark explains it, it definitely makes sense… They advertise their deals in newspapers. Mark puts up advertisements in local newspapers. You guys know what newspapers are, right? So Mark says “We are also trying old-school newspaper advertising, because our investor base tends to be a bit older. In some cases we have investors 70, 80, 90 years old, and newspaper still happens to be a very relevant source for those people.

In this case, Mark is thinking about what his target demographic uses. As he mentioned before, the average age is about 40, but he does have investors who are 70, 80, 90+ years old, and those people are likely not using the internet. Obviously, they’re on the internet, but they probably still like their tangible newspapers, and magazines, and maybe even TV to get their information.

So just focusing on crowdfunding and just focusing on Facebook you’re gonna miss out on some opportunities because of the demographic that isn’t on Facebook, or isn’t on crowdfunding websites. They don’t know how to use those websites. So Mark got around that by putting his deals in newspapers.

For a recent deal they did, they took out ads in North and South Carolina for a deal that was in South Carolina. He says “I’ve taken ads out in markets that are very close to these areas. Charlotte is in our way, Greenville is about 45 minutes way, Charleston… Those types of things, because people tend to like investing locally. Even though long-term I that’s a bad strategy, it’s a great gateway if they can drive by the property and see it.”

Mark is saying that from his perspective only focusing on deal locally isn’t the best strategy if you wanna grow your capital, but that’s how people tend to think; they want to invest in something that they can actually go drive by and see. So he’s advertising in these newspapers because people like a tangible thing to read their news.

Similarly, they want to actually see the property; they’re maybe not okay with investing in a deal all the way across the country, at least not right off the bat. Maybe they can be convinced to do so based on the returns. And he was explaining to them the ways you mitigate risk of investing out of state… But to find these first-time investors through the newspapers, they are more likely going to invest in the local area. So if you’ve got a deal, in this case in South Carolina, then you’re gonna wanna focus your newspaper ads in North and South Carolina, rather than taking out an ad in California to get the most bang for your buck. So that’s number three, the newspapers.

Number four are webinars. So in addition to crowdfunding, Facebook and these newspaper ads, the fourth thing that Mark does to generate money from passive investors using the 506(c) offering is to host webinars. In adherence to the “Be everywhere” blanket or carpet bomb marketing strategy, you wanna advertise on as many platforms and have as much marketing as possible. That obviously makes sense from a cost standpoint.

Mark says that “The webinar was helpful because we get one-on-one questions, we get a bunch of people and interest built around that specific concept of hosting a webinar, and you can record it and then send it out to others… So it gives you sort of a platform and another contact point to reach out to investors.”

So as you know, we’ve talked about the new investment offering conference call that you wanna host if you’re doing the 506(b) or 506(c). If you’ve got a new deal, you create your investment summary and then you present the deal, you go over the highlights of the investment summary in this new investment offering conference call, which of course, is a Syndication School episode – both of those, creating the investment summary and the how to make a new investment offering call; that’ll be at SyndicationSchool.com. And in fact, for the investment summary we provide you with a free PowerPoint presentation to use as a guide to creating your own.

The conference call obviously is just audio. The webinar is going to be audio and video. And he’s saying that he’s creating these educational webinars directed at passive investors to get people who are interested in passive investing to come into the webinar. For example, maybe he is advertising on Facebook and in newspapers, and then once he gets a lead from there, he directs them to either a live webinar or a recorded webinar, and then from there they get a little more comfortable, they know a little bit more about the deal, about the business plan, about the team, and they end up investing in one of the deals… Which is why it’s important to do this in combination with the other three methods – the crowdfunding, the Facebook and the newspaper ads are generating leads, and then you’re pushing the leads to your webinars so that they are more comfortable investing in your deals.

Lastly, number five – and this really holds true for raising money using any offering type, and that is referrals. Mark’s final strategy is the good old-fashioned referrals. He says that “The referral is probably in everyone’s experience why you start you with your friends and family, because they know you; if you perform for them, they will refer you to their friends and family, and so on and so forth. That’s been typically the best source for us overall.”

So you can do referrals for 506(b), just making sure, again, that you have to create a relationship with that individual before you bring them on as an investor, whereas for 506(c) all you need to do is get the referral and you can automatically bring them on as an investor. So if someone comes to you through a newspaper ad, for example, they invest in one of your deals, you hit all your return projections, they’re happy, they tell their brother, their sister, their best friend about you, and they reach out to you and say “Hey, I wanna invest”, you can take their money right away; you don’t have to worry about building a relationship with them.

So referrals – obviously a great way to have that snowball effect where you’re bringing in all these leads from crowdfunding, from Facebook, from newspapers, you’re pushing those leads to your webinars, they invest in your deals, and then those people, rather than you having to find more people through the previous four methods, they just refer their colleagues to you, they invest in your deals, then they refer people, and so on and so on.

So the referrals are obviously something that you always wanna focus on, and think of ways to generate referrals. Mark says that when he’s finding investors through referrals, the most effective method he’s found to generate these referrals is through social proof. So Mark says “What I’ll try to do is some of the family offices that didn’t know each other – I introduce them to each other. Now they know each other, so when I say ‘XYZ Family Office is investing, don’t you guys want to invest as well?’, they go ‘Oh yeah, of course. If they’re invested, we’ll do it, too.’ So there’s a little bit of trying to get people in the same room, or some social network of some sort, even if it’s just because I introduced them, so that there’s that social proof aspect where people feel obligated or inclined to invest because of someone else.”

That’s why the referrals are so important, because they’re already getting the proof of concept, the social proof from their friend. So Bob invests in Mark’s deals, Bob likes Mark’s deals, Bob likes the returns he’s getting, Bob tells Bill “Hey, you should come invest in these deals. I’m doing it.” Bill says “Oh wow, if you’re doing it, I trust your judgment, so I’m definitely gonna invest in these deals.”

On a larger scale, what Mark is saying is that he has a family office investing in one of his deals, and he wants another family office to invest in the deal; rather than going to them directly and maybe sending them a webinar, or just sending them a sample deal explaining them the ins and outs of the deal, explaining their business plan, explaining their team – instead, he just gets the family office that’s already investing in his deal to meet with his other family office so that he can provide social proof to that other family office. So if this one family office is investing, they’re getting the returns that they want, well then why wouldn’t XYZ family office also invest in that deal? Because it’s working perfectly fine for this other family office.

So those are the five methods for raising money and generating private capital using the 506(c) offering. Again, 506(c) – allowed to advertise; 506(b) – not allowed to advertise. So if you are doing 506(b), then you can’t use these strategies specifically, but you can still use referrals, you can still use webinars, you can still use Facebook. Newspapers – you can probably figure out a way to do that. Crowdfunding probably won’t work, because you can’t explicitly advertise for your deals… But these do work for 506(c), because you are allowed to advertise.

Again, if you wanna use newspapers, Facebook, crowdfunding, webinars, referrals, whether you’re 506(b) or 506(c), make sure you run your marketing strategy by your securities attorney first, before you implement any type of strategy or marketing plan.

Alright, that concludes this episode. Again, it’s “Five creative ways to raise money with a 506(c) offering.” Until next time, check out some of the other Syndication School series about the how-to’s of apartment syndication. I mentioned a lot in this episode, so you could start with those… Or you could start from series number one and work your way through. I think this is series 30 or 31, so we’ve got a lot of them that you can listen to… And for most of those there are also some free resourced for you to download.

All of those episodes and free resources are available at SyndicationSchool.com. Thanks for listening, have a best ever day, and we’ll talk to you tomorrow.

JF1856: 4 Tips To Raise More Money From Passive Investors | Syndication School with Theo Hicks

The most frequently asked question that we get is “how can I raise more money?”. Well Theo has put together a list of four ways you may not be currently using. Even if you are utilizing one or two of the ways, you can raise more money by using all four ways. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

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

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

 

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

Each week, every Wednesday and Thursday, the Syndication School series air on the podcast Best Real Estate Investing Advice Ever Show. We also post these a little bit later in the week on YouTube in video form, so you can listen or watch, either on the podcast or on YouTube.

Each of these episodes or overall series focus on a specific aspect of the apartment syndication investment strategy. For the majority of these series we offer a resource for you to download for free, whether it be a PDF how-to guide, an Excel template calculator, a PowerPoint presentation template – some sort of resource for you to download for free. All of these free resources and past Syndication School series can be found at SyndicationSchool.com.

This episode is going to be a standalone episode entitled “Four tips to raise more money from passive investors.” This is actually a response to a very common question that we receive. In fact, it was the most common question that we received at our Best Ever Conference, which actually you can buy tickets right now at BEC20.com (the third annual conference). This time I think we’re doing a ski resort actually, so that’s gonna be pretty cool; I’m looking forward to that. But one of the obstacles that a lot of investors had was how to raise money and how to find more off market deals.

We’ve put together a list of ways to raise more money, to find off market deals, and these are actually kind of matched together into four tips that’ll help you today start raising more capital from investors… And then one of these strategies will actually help you find more deals, as well as more investors.

Let’s jump right into it – the first tactic is to focus on building your sphere of influence. When Joe interviewed THE Robert Kiyosaki, Rich Dad Poor Dad, which is probably the number one response we get when we ask guests what’s their best ever book… This is episode 262. Joe got him on the podcast within his first year of podcasting, which is pretty impressive… But one of the things that Robert Kiyosaki said is that the richest people in the world build networks, everyone else looks for work. What this means is that the most important thing that you can do, short-term, long-term, in general, is to play the long game when it comes to real estate investing. And to play the long game, make sure that you’re staying relevant. To make sure that you are continuously building and growing your business, and not just doing a few deals and falling off, is to focus on building your network.

What we’ve found is that the best, most effective way to build your network, and what Joe attributes his success to a lot, is to create a thought leadership platform. Best Ever listeners, we are not going to go into how to build a thought leadership platform in this episode, because we’ve talked about this a ton on Follow Along Friday, and we’ve also got — it’s probably a six or an eight-part Syndication School series on how to build a thought leadership platform, why to build it, how to grow it… But just to quickly summarize what we’ve talked about in 2-3 hours of content on Syndication School, and probably another 20 hours of content on Follow Along Friday, is a thought leadership platform is going to be an interview-based online platform, like a podcast, which you’re listening to right now, a YouTube channel, which you might be watching right now, a blog, or an in-person event.

The keys to having a successful thought leadership platform, that has the purpose of, again, building your network and playing the long game, is number one, consistency – so whatever thought leadership platform you do select, make sure you’re doing it on a consistent basis… Whether that’s every day, multiple times a day, a few times a week, once a week – whatever it is, pick  a time frequency that you’re going to create this content, and then stick to that for at least a year before expecting to see any crazy results.  This is gonna be, again, a longer-term strategy. That’s why we have the world’s longest daily running real estate podcast… I believe we’re in the 1800’s now, so we’ve had an episode air for 1800 straight days.

Next is to identify what your unique angle is going to be. Don’t just have a generic, vague podcast or YouTube channel or thought leadership platform. Make it unique to you. Make it unique to your skills, make it unique to your experience, make it unique to your background. One example is that Joe has two clients that have a military background, and one was in the army and the other was in the airforce, so they created a YouTube channel called Joint Ops. It focuses on teaching people how to do lease options. Once they launched that, they were able to raise over six figures in money from passive investors by launching this brand.

So if you’re an engineer by trade, then have your thought leadership platform focused on some aspect of engineering when it comes to real estate. If you’re in sales, talk about sales techniques. If you’re in marketing, talk about marketing techniques. But you can be even more specific than that. If you’re in a certain type of sales, just talk about that sales technique, or just be creative in thinking about what your unique angle is going to be, using this Joint Ops, people with military backgrounds as an example.

Next is to start within your sphere of influence. When you’re starting out your thought leadership platform, as I’ve mentioned before, you’re not gonna see crazy results right away. You’re not gonna launch your podcast and then have a million downloads in the first month. I’m sure it’s possible and I’m sure it’s been done before, but if you’re starting from scratch, you’re gonna start at zero and will have to slowly work your way up… So focus on sharing your content with people within your sphere of influence.

It takes a lot of time to gain the trust and gain the viewership of strangers… But you can get instantaneous results by sharing it with your current sphere of influence. So send it to all of your family members, send it to all of your friends; you can even send it to your work colleagues, depending on if there’s some sort of conflict of interest and you don’t want them knowing that you’re spending all this time on real estate… Then don’t do that. But focus on your sphere of influence that you already have.

For example, for Joe’s first deal, he raised a million dollars from a combination of his work colleagues, people he knew from volunteering, people he played football with, played softball with… But actually none of it came from his family members. It came from friends of family members, but none of it actually came from family members. So focus on not only trying to grow your thought leadership platform within your current sphere of influence, but heck, try to raise capital from them as well.

And then lastly, to tie it into a larger distribution channel. This is pretty simple, and it’s kind of something that you’re naturally gonna do anyways, but… Whatever content you’re creating, make sure that it is on a platform that already has a large built-in audience. For example, if you’re gonna do videos, YouTube. If you’re gonna do blogs, post them on Bigger Pockets, post them on LinkedIn, post them on Facebook. If you’re gonna do a podcast, do it on iTunes. Leverage the existing channel of these large networks to grow your thought leadership platform.

So that’s the long way of saying that one tip for raising more capital is to build your network, and the best way to build your network is through a thought leadership platform, because you can network with people all across the world while you’re asleep. That’s probably one of my favorite things to say.

Number two is to ask better questions. What does that mean? Joe was talking to a client, and he asked them to tell them what’s the best thing that’s happened to them since the last time they spoke. And the client in particular said “Oh, since the last time we spoke things haven’t been too bad.” And while that may seem kind of innocuous and not really telling, if you kind of dive into it, what they’re actually saying is that things aren’t going good, at all… Or at least they’re not going good, because they’re saying “It’s not that bad.” So the point of that is to focus on the language and the words that we’re using.

Even though this person said that things aren’t that bad, they’re still using the word “bad”, which is a negative word… And Joe is a big believer in that using these negative words, using “bad”, “poor”, “don’t”, “can’t” put us in the wrong mindset. So the same thing applies to you. So you’re asking yourself “Why can’t I raise more money?” or “Why can’t I find a deal?” or “What happens if I raise money and I don’t find a deal?” or “What happens if the deal doesn’t work out?” or “What happens if I can’t raise any money at all?”

So instead of asking yourself those questions, or rather than having these negative questions, these “What if I can’t do something?”, “What if this doesn’t happen?”, “What if something bad happens?”, instead focus on asking better questions. These are questions that don’t have the built-in assumption that something is going to go wrong.

To reframe some of these questions, you would say “How do people who are great at raising investment capital and finding deals do it?” That generates more creative, generates better answers, more positive answers, because you can say “Oh, well Joe makes a thought leadership platform, so maybe I should make a thought leadership platform.” Whereas if you ask yourself “Well, what happens if I raise money and I don’t find a deal? What happens if I can’t raise money?”, you’re thinking about “Well, then I’m not gonna meet my financial goals, and I’m not gonna be able to afford my house, I’m not gonna be able to eat, and I’m gonna starve, or be homeless, or something.”

So you’re kind of spiraling downwards into a negative rabbit hole, as opposed to spiraling upwards into a positive rabbit hole by asking yourself “Okay, well what can I do to raise money? What are the people who are successful at raising money doing?” That’s gonna generate much more positive thoughts, which is going to put you in a better mindset, which is going to increase the likelihood of you actually raising the capital… Whereas saying “Well, what happens if I can’t raise capital?”, you’re more likely to not raise capital at all.

So that’s something you can quickly do by shifting your mindset into asking these better, more positive questions, as opposed to these negative-sounding questions.

Number three is to create opportunities. This is something that can apply to both raising money, as well as to find deals. So what can you do to create the most amount of opportunities, that will allow you to raise more money. So what are things you should be doing that will give you the opportunity to raise more money? Not necessarily 100% definitely walk away with a million dollars in commitments, but something that has the chance of getting you more private money investors – volunteering, going to meetup groups, doing a conference, starting a thought leadership platform, going to Bigger Pockets forums, starting a blog. All these different things are you putting yourself out there, putting content out there; it’s not necessarily directly going to get you private money right away, because you’re not walking up to someone and saying “Hey, do you wanna invest?”, but you are creating the opportunity to eventually get leads and raise capital.

Now, when it comes to finding deals, the same thing can happen. Rather than sitting back and passively waiting for deals to be sent to your inbox, you can go out there and create opportunities. You can go out there and proactively find deals, through off market marketing strategies, like direct mail, cold-calling, things like that — but think more unique than that. Here’s an example to kind of get the juices flowing… So one way that Joe was able to find a deal in a hot market was they were looking at an on-market apartment opportunity; I forget the deal’s details specifically, but it was something along the lines of the on-market deal was made up of two and three-bedroom units. Since it was on market, the price kept getting bid higher and higher. But the market was great, the value-add opportunity was there, and they really wanted this deal.

Now, there was also another opportunity across the street, that was made up of mostly one-bedroom units, and they thought that it would be a great natural referral source if someone comes to the two to three-bedroom units and says “Well, the two-bedrooms are a little bit outside my price range, and I don’t really need that much room.” Well, if you own the property across the street, you could say “No problem, we’ve got a property across the street, same area, same management team, same amenities. The only difference is [unintelligible 00:15:45.09] over there.”

Plus, because of the economies of scale and the ability to get the off market deal at a reduced price, they wanted to pursue that opportunity for those benefits… So their broker reached out to the owner, and ultimately they ended up buying the deal across the street, as well as the on-market deal. So they bought the on-market deal, and the off market deal… And because of the benefits, the advantages of the off market deal, they were able to pay a little bit of a higher price for that on-market deal.

Now, if they didn’t create the opportunity by reaching out to the owner across the street, they probably wouldn’t have bought either deal. But by being creative, thinking strategically, reaching out to the owner across the street, they were able to turn zero deals into two really amazing deals, which I believe they still own to this day.

So this is a more general piece of advice about creating opportunities. I gave a couple of specific examples, but the way you create opportunities is gonna be unique to you… So again, ask yourself better questions, and ask yourself “How can I create more opportunities to find more investors? How can I create more opportunities to find off market deals?”, and then see what answers you come up with… Rather than saying “Well, what happens if I can’t find any deals? What happens if I can’t raise any money?” Because they’re all kind of connected to each other.

The fourth tip to raise more money from passive investors is to partner up. So rather than trying to go at things alone, find a business partner. When Joe was a solo investor and he was working on his business all by himself, he was able to purchase four single-family homes and one large apartment building, and then he says that his business was a little stagnant for a few years. But once he partnered up with someone – and when it comes to partnerships, we’ve got some Syndication School episodes, as well as blog posts about partnerships… So if you just go to JoeFairless.com, type in “partners” in the search box, all of those blog posts and Syndication School episodes will come up… But you wanna find a partner who complements your strengths and helps you with your weaknesses. So what you aren’t good at, they are good at. What you are really good at, they’re not necessarily the best at.

Well, when Joe partnered up with this individual – as you guys know, Frank – his business skyrocketed. Now they have over — I believe they have 700 million in apartments under management. So he went from four single-family homes and one apartment, to 700 million dollars in apartments under control, by in a sense partnering up with someone else.

One more piece of advice on partnering is that if you wanna find  the perfect partner – as I mentioned, it needs to be someone  who complements your strengths, as well as helps you out with your weaknesses – well, you need to know yourself. You need to know what you’re good at and what you’re bad at, you need to objectively analyze yourself… Because obviously, everyone has weaknesses. So if you’re saying “Well, I don’t have weaknesses at all”, well you probably don’t know yourself and you’re not gonna be able to find the best partner… So figure out what you’re not good at, or what you don’t like doing; that way you can find someone who does like doing that, and is good at it.

It’s gonna take some time to know yourself in the context of real estate investing, if you haven’t done a deal before or haven’t done many deals… But as you do deals and you experience the ups and downs of buying the deal, underwriting it, due diligence, closing, managing, selling, you’ll start to realize what you like and what you don’t like, what you’re good at and what you’re not good at… And then look in the mirror and ask yourself “What am I good at and what am I really bad at?” Then build your team around those answers, and once you do that, your business is going to begin to skyrocket.

For example, for Joe, after his first syndication deal, he realized that he was really good at raising money and really good at marketing, but he was not so good at underwriting and asset management. Well, he found a partner who has an institutional background, so he’s phenomenal at underwriting and phenomenal at asset management. As a result, they complement each other perfectly, which is why they were able to scale so quickly. Whereas if Joe thought he was really good at underwriting, thought he was really good at asset management, and brought someone on to do capital and marketing – well, they might not have scaled, he might not have done any more deals just because he’d be pulling his hair out from underwriting, because I know how much Joe does not like underwriting deals.

So those are the four ways for you to raise more money from passive investors. Some of them are longer-term strategies, but some of them are instantaneous things you can do right away. Number one is to build your network by creating a thought leadership platform, which is one of those longer-term strategies. Number two is ask better questions, so shift your mindset from asking negative questions like “What happens if this bad thing happens?” to “Well, how can I make this good thing happen?” or “What are successful people doing that result in this good thing happening? …raising money, find deals.” Number three is to create opportunities. So instead of sitting back and waiting for money to come to you, waiting for deals to come to you – well, go out there and create opportunities, the example being Joe going out and reaching out to the owner across the street and buying the package of deals, as opposed to just the on market deal.

And then fourth is to partner up with someone who complements your strengths, as well as helps you out with your weaknesses, which requires you knowing what you’re good at and what you are bad at.

That concludes this episode. Until next time, make sure you check out some of our other Syndication School series episodes about the how-to’s of apartment syndication. Download our free documents. All those can be found at SyndicationSchool.com.

Thank you for listening, have a best ever day, and we’ll talk to you tomorrow.

JF1851: Working With Big Investors & Who Are Accredited Investors? #FollowAlongFriday with Joe and Theo

A couple of lessons coming at you today from Joe’s interviews for the podcast. We’ll hear his favorite two lessons he learned, which were from Bob Lachance (https://revaglobal.com/) and Shoshana Winter (https://www.iintoo.com/). If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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“They’ll get more relevant information for them”

 

Free Document:

LOI Examples: http://bit.ly/loiexamples2

 


Evicting a tenant can be painful, costing as much as $10,000 in court costs and legal fees, and take as long as four weeks to complete.

TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


TRANSCRIPTION

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

We’ve got Theo Hicks with us. Theo, how are you doing, sir?

Theo Hicks: I’m doing great, Joe. How are you doing?

Joe Fairless: I’m doing well, just got done with the run, feeling good. Still sweating a little bit, but I showered, so I’m nice and clean for you. Looking forward to our conversation. We’ve got Follow Along Friday, and the purpose of Follow Along Friday is to talk about some things that I learned, or if you did the interviews the previous week, that you learned, and how it can help everyone hanging out with us today.

The focus of today’s conversation is gonna be about who are accredited investors, and really dissecting some information about how to think about accredited investors… Because it’s likely that, Best Ever listeners, you could benefit by bringing in more money partners into your deals, and accredited investors are the ones who have money to partner up with you. So we’re gonna talk a lot about who are accredited investors, and it is inspired by an interview that I did with Shoshana Winter, and we’ll talk about that.

First, a quick unrelated note to accredited investors, but more along the lines of just being helpful for anyone, regardless if you’re looking to partner with accredited investors – Bob Lachance; he is an active business owner and he has been a real estate investor since 2004. He’s actually an ex-professional hockey player. I really enjoyed my conversation with him. He seems like a great guy. Easy to smile, at least — I didn’t see him smile, because it’s only audio, but I could just tell he’s just an easygoing guy and he would be a cool guy to hang out with… But that’s not why I’m mentioning him. Why I’m mentioning him is when he was leaving professional hockey – he played overseas some, and he played professional for eight years; when he’s leaving professional hockey, he’s gotta create a new identity for himself, he’s gotta create a new profession, he’s gotta create a new way of making money and supporting himself and his loved ones… And he chose real estate.

The way he transitioned into real estate is he went to a real estate meetup group, and he asked everyone in the group who is the top shortsale investor in Connecticut (he lives in Connecticut). He asked a lot of people, because he wanted to get into shortsales; he’d done some research and wanted to do that… And they all mentioned one person. He then reached out to that person, and he said “Do you have any openings? Because I’d like to work for free.” Boom. And by doing that, he — of course, the gentleman (I think his name was Pat) said “Yes, I do have an opening. Here’s a list of people, and their addresses, here’s their script – go knock on some doors.” So he knocked on doors for almost one year, and that was his first job in real estate.

I mention that because there are a couple of things to take away from it, in my opinion. Maybe more, but a couple that stand out. One is when we’re transitioning into something new, it’s important to identify who is at the top of the game that you want to get into, and you identify that through word of mouth. Once you do that, then you go throw yourself into an opportunity where you can add value to their life. In this case, he offered to work for free. By offering to work for free, he was given an opportunity to actually make money by door-knocking; so he did not have to work for free, although I believe it was just commission-based… So you eat what you kill, so to speak.

But one, when we transition in something, identify who’s the top person through word of mouth, and then throw yourself in there and offer to work for free… That’s number two. And I’d say number three is, regardless of what that position is, just do it, and do it well and learn from it, and identify what you can take away from it that you can apply to future opportunities as you grow in the business… Because I’ve never — have I ever door-knocked? Not in a real estate capacity, I don’t think I have. Maybe as a young kid, but that’s completely different. So I’ll say I’ve never door-knocked before… And that’s gotta be terrifying. So props to him for taking a position that has got to be uncomfortable at minimum, and doing it for almost a year because he wanted to get into the business, and then off he went after that.

Theo Hicks: You never sold any candy bars or anything when you were a kid, and going door-to-door? And magazines?

Joe Fairless: I did, but I don’t count that, because kids are cute and people give them money just for sympathy, or they’re with their parents, or something… I’m sure I did, that’s why I kind of hesitated, but as an 18+ year old person, no, I haven’t door-knocked.

Theo Hicks: It’s definitely different. The cute factor is there for sure.

Joe Fairless: Yeah, yeah.

Theo Hicks: That’s interesting, and we’ve talked about it on this show before, how to work with someone who’s top in the industry… Obviously, offer to work for free; they happened to have an opening open for him to work for free, but… Just because someone says no if you ask them to work for free doesn’t mean you just stop. We’ve talked about this before – try to find a way to proactively add value, so do some research on them beforehand, figure out what they might possibly need help with, and then just do that for them…

And then when you reach out to them, introduce yourself, mention that you’re interested in working for them, and then use whatever this thing you did for them as evidence as to why you’d be someone worth bringing on. Sprinkle in there that you’ll work for free as well is also a good way, because I know, Joe, if someone came to you right now and offered to work for free, if you don’t have a job opening, you’d probably just say no. And if that person kept pushing, maybe they figure something out in their mind, that they thought would add value to you, and they did that, even it maybe didn’t, you would just see that they put forth that effort, and might be willing to give them a chance.

So I guess my point is that if you do follow this strategy and they say no, don’t just give up. You can go to the second-best person, but you should also continue to pursue the top person; you just have to think a little bit more outside the box, to figure out how to actually get in the door with them.

Joe Fairless: Excellent point. Thank you for bringing that up. It’s one thing to ask someone, “Hey, what can I do? I’d love to help you out.” And people do that. They send emails to me, or to the Contact Us page, and they ask “Hey, I’d love to work for free”, but it’s not free, because they’re looking for me to mentor them or help them along, and that’s my time, which is the most valuable thing, and it’s the most valuable thing for you and everyone else… So it’s the opposite of free, it’s actually the most costly thing out there. We only have so much time on Earth.

So by taking your advice, Theo, if they proactively create something, that helps me get an idea of the skillset they already have, and that they can bring to the table, and the value that they can add, and then I can start seeing them positioned within the structure of the company and how they could help, and then that gets my wheels turning. And I think you did that, right? Didn’t you do that?

Theo Hicks: It was a hybrid of that strategy. I was gonna add to that and say if they ask you to do something, don’t just do exactly what they said; do that, and then go above and beyond that is another strategy as well, besides proactively adding value. I think I did more of that than just doing something beforehand. Because you did have something you needed help with already. You said “Hey, Theo, I need help with this”, whereas this situation – this is someone proactively reaching out to you and saying “Hey Joe, do you need help with anything?”

And I was gonna mention it, but you already said it – you’ve gotta remember, if you’re reaching out to Joe, if you’re reaching out to, in this case, [unintelligible 00:09:40.05] you’ve gotta remember that they don’t know who you are, they don’t know what you’re good at. They have no idea if you are an MBA-level person, or a boots-on-the-ground level person… So as Joe mentioned, by proactively adding value and creating something for them, they can look at that and they can use that to determine what skillsets you have, and then begin thinking about how you could fit into their business. That’s also another benefit of doing that – they know what you can actually do.

Joe Fairless: Yes, thank you. I completely agree. The next thing that we wanna talk about – and this is related to what I’ve mentioned earlier – is who are accredited investors? This conversation is inspired by Shoshana Winter. She is a digital media veteran; she’s got 30 years of marketing management experience, and she’s at iintoo, based in New York City… And she said they have a database of 200,000 accredited investors. And it depends on what study you look at, but she mentions there are about 13 to 15 million accredited investors in the U.S. So there’s not a whole lot… I think there’s more than that, but regardless, there’s not a whole lot of people who are qualified as accredited investors.

So as a company that is partnering with accredited investors, it’s important to know who they are. And I think a lot of the times we go to the demographic information of accredited investors. They tend to be 45+ year-old, they live in business hubs like New York City, Dallas, Miami, those types of MSAs, versus Prosper, Texas, or some random area in Ohio. And the demographic information is important to know; what level of education do they have? Well, most of them have an undergraduate degree at a minimum. That’s important to know, but I think where it gets really interesting is when we look at the psychographic information.

She is coming at it from – as I’ve mentioned earlier, she’s got 30 years of marketing experience at companies in New York City, and working with companies that have achieved some pretty tremendous things… I think she said she worked at Audible before; I think Amazon owns Audible now, so before Amazon purchased Audible. I believe that, but I might be misquoting something right there… But you get the idea.

So with psychographic information, she said she took a look at their database and she said they tend to be more progressive thinkers, because syndications aren’t something that most accredited investors know about. And quite frankly, a lot of accredited investors don’t know the term “accredited investor”, so they don’t know what they have access to by being at a certain income level or a certain net worth level.

One of the things to think about is — when we talk about they tend to be a more progressive thinker, what does that mean? Well, it means that they tend to be more of an early adopter. They are using Uber. And again, I recognize that Uber isn’t something that only early adopters are using, because a lot of people are using it now, but in the early days they were one of the first ones using Uber, and they are more on the cutting edge of technology, or at least they try things out on the earlier stage, relative to the general public.

Now, anytime we’re talking about 13 to 15 million people, anything you say about 13 million people will not apply to all 13 to 15 million people. So if you are an accredited investor and you’re listening to this, and you’re like “I don’t use Uber” or “I’m not an early adopter”, I get that; I’m just talking more in generality, because that’s what Shoshana was talking about, just more general statements of them. Because I can tell you that from my experience, I haven’t looked at this, so I don’t have the exact statistic, but I’m gonna estimate that 90% of our accredited investors own real estate besides partnering with us. So they are people who already have experience doing these types of deals, so they’re more familiar with them and more comfortable with them. And the people who have not done any real estate outside of syndications – it’s a much different conversation than if they’ve done deals, even like a small investment property.

So thinking about from a psychographic standpoint how you position your company, know that they’ve likely done real estate deals in the past, they’re likely a  progressive thinker, most likely more of an early adopter, it helps you create more relevant information for the investors. And then what you can do with that – and I have not done that; our company has not done what I’m about to say, but in the future we will… What we can do with that is we can segment our email list so that if they have invested in the last six months, then there’s a certain message.

If they have never invested in real estate at all, then we know it’s more of a long-term play with them, because we’ve gotta educate them about syndication, so we put them in a certain segment in the email list where it’s more of an education email series… Whereas if they’ve done multiple syndication deals, then it’s a different track of segmentation, so we have different messaging for them.

It’s just interesting to think about the different psychographic information and characteristics of investors, because then we can start segmenting our email list a certain way to really speak to each of the segments based on who they are and their experience, or their thought process, and their interests… And it’s a more relevant message to them, which leads to more business, for them and for us.

Theo Hicks: That’s a really good point. I’ve never even thought about that before. Obviously, you segment your email based on who’s investing in what deal, but not necessarily what type of information would resonate with them the most.

I see here you have “Have they invested recently or not?” That could be obviously one segment. But “Do  they own real estate or do they not own real estate? How much do they know about real estate?” This is more personally, but one of the hardest things is figuring out how detailed to make the content; I’ll say a word that to me I know  what it means, but maybe other people don’t know what that word means, so do I define it? Am I wasting people’s time who already know what that word means?

Now, if you break it up and just “Okay, these people have never done a deal before, so we’re gonna keep things very high-level, whereas these people have done 20 deals, they’ve invested in every single deal, so they need something more specific. Let’s dive into data, because that will be more relevant to them”, and then segmenting that out so you can send them each a different piece of content.

That’s actually a really good idea, that I hadn’t thought of before. That will be more valuable for them, for the reason I mentioned. It will likely result in more engagement in the emails, and increase the likelihood of them sharing it with people in their circle of influence.

Joe Fairless: And the key there is to have that information in the first place. That can be the challenging part. When you’re having initial conversations with your prospective investors, making sure that you’re collecting the right information, either in the conversation, and/or during the initial outreach form that the investor fills out, or however you’re doing it, but being intentional about collecting certain information.

For example, when I speak to prospective investors, in my notes – because I’m taking notes during our conversation – if they’re an entrepreneur, if they have any business at all outside of a W-2 job, then I’ll write in my notes “entrepreneur”, and then we have a snail mail newsletter called “The Best Ever Report”, that gets mailed to our accredited investors for Ashcroft Capital… And we profile one of our investors in that newsletter, and usually they’re entrepreneurs. So my team will search the notes and they’ll just search the word “entrepreneur”, and they’ll confirm that that person has invested with us – because we only profile people who have invested with us – and assuming they have, then they’ll be contacted to be highlighted in the newsletter.

So there are things that you wanna be intentional about doing when you’re getting to know your prospective investor, that way you can then use that information to then build a relationship with them even more by segmenting them in a certain email segment, and having more relevant information to them, or putting them in a report like we do.

Theo Hicks: Yeah, so one of the big takeaways here is that 1) when you’re actually talking to your investors upfront, make sure you’re asking the right questions, so you know about them. And then once you know about them, you can put them in their categories, so that when you are creating content, you can figure out which segment they should be in, so you’re sending them the correct, relevant information.

Alright, good stuff. Really quickly, trivia question – the first person to answer the trivia question correctly will receive a free copy of our first book. Last week’s question was “What large city has the most diverse economy?” This is based off of industry diversity, occupational diversity and worker class diversity, and surprisingly, the answer was Sacramento, California. And even more surprisingly, I think 4 of the top 10 were California too, which I personally did not expect. So if someone got that correctly, Sacramento, they will be getting a copy of the book.

This week’s question is “What U.S. city has had the most multifamily completions so far in 2019?” This was in a very recent study.

Joe Fairless: New York City.

Theo Hicks: Okay. So if you wanna answer this question, it’s either in the YouTube comments, if you’re watching this on video, or info@joefairless.com if you’re listening to this on the podcast.

Joe Fairless: I’m pretty confident about that one.

Theo Hicks: Okay. And then the last thing is the free apartment syndication resource of the week. As you know, Best Ever listeners, we do Syndication School every Wednesday and Thursday; the focus is on the how-to’s of apartment syndications. For the majority of these series we offer free resources: PDFs, templates, PowerPoint presentations, something to help you scale your apartment syndication business… And we’re highlighting some of those documents on the Follow Along Friday.

This week’s document is from series 15, which is how to submit an offer on an apartment syndication deal. If you wanna listen to that series, it begins at 1716, and the free document for that series are four letter of intent templates. They’re actually examples that you’d have to copy and paste and add in your own personal information… But that [unintelligible 00:20:48.03] episode explain to you everything you need to know about creating a letter of intent, which is the non-binding agreement you send to a seller, with the intent to purchase their property with your purchase terms. If you want to download that, 1716, or in the show notes of Follow Along Friday.

Joe Fairless: And still have an attorney look over any type of legal document. Any template we ever share with you that would be considered a contract with a buyer or a seller, have an attorney look over it, just to be on the safe side.

I hope you enjoyed our conversation, got some value from it. We will tlak to you tomorrow.

JF1844: Negotiating Labor Prices, Getting To The Truth, & Finding Deals #FollowAlongFriday with Joe and Theo

More Best Ever Lessons coming at you today from Joe’s interviews. Today’s lessons are coming from William Robison (https://www.kansascityinvestmentrealestate.com/), DJ Scruggs (https://realbluespruce.com/), and Jens Nielsen (https://opendoorscapital.com/). If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“You can still find deals if you are resourceful enough”

 

Free Document:

Rental Comparable Analysis: a template for completing Step 6 to 8 of the underwriting process: http://bit.ly/besteverrentalcomps

 

Referenced in this show:

https://joefairless.com/8-step-process-for-finding-the-owner-of-an-llc/

 


Evicting a tenant can be painful, costing as much as $10,000 in court costs and legal fees, and take as long as four weeks to complete.

TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


TRANSCRIPION

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

We’ve got Follow Along Friday today, talking about some insights that I learned from the interviews that I did last week. This is just a handful of insights; these interviews have not gone live, they’ll go live in 3-4 months, so I wanna give you a sneak preview – and more than a preview, I wanna give you some things that will help you out, since it’ll be a little while before they air… And then you can listen to them in detail whenever they come out.

First off, Theo Hicks, hi.

Theo Hicks: Hey, Joe. How’s it going?

Joe Fairless: It’s going well. We’ve got Theo Hicks with us, and we’re gonna talk about these insights… So let’s go ahead and dive right into it. First one is if you are looking to come up with a deal with contractors where you get economies of scale, basically, you get a discount for having a high volume of work with them, you might think that you just go to them and say “Hey, I’m gonna bring you X amount of work. It’s gonna be more than what someone who doesn’t have a business will bring you, so  let’s negotiate some sort of discount.” You might think that by bringing them a high volume of work, it’s a no-brainer that they would accept that… And the reality is that the trades are in high demand – plumbers, electricians etc. They’re in high demand, and a lot of times they can pick and choose who they work with, and can be more selective… Because those industries, generally speaking, people aren’t growing up and saying “I want to be a plumber, I want to be an electrician”, although those are very good professions to be in, and there’s a lot of business and a lot of money you can make as a result of having those types of companies.

So the interview I did with William Robison, who’s been in real estate for 15 years… I actually interview him in episode nine, the ninth interview I’ve ever done; episode nine, “One critical component of building a real estate business.” He works with a lot of contractors, and he gets volume pricing from contractors and suppliers, and he said “Well, I’ve got the volume pricing now because I’ve formed these relationships.” And I said “Well, how many phone calls did it take to different plumbers in order to get this type of agreement?” and he said “Dozens.” That’s important to take note of, because it’s not like you work with a plumber and you say “Hey, I want a volume discount because I’m gonna bring you X amount of business.” He or she might not be as interested, because they’ve already got business, and retail pricing is better than volume pricing. However, here are three selling points, talking points, three things you can mention to the potential partner about how to convince them that you should get volume pricing.

One is having more consistent work. So yes, you might have a lot of work, but is it consistent? Is it very reliable? I can provide you with more consistent work, too. How much are you spending on advertising right now? Because whatever you’re spending now, you don’t need to spend nearly as much, if at all, because now you’ll save that money by having more consistent work with me. And number three, my work tends to be within the hours that you want to work – 8 AM to 5 PM, Monday through Friday. You won’t get the type of calls from me — for the most part; there will be exceptions, but for the most part you won’t get the type of calls from me that are emergency jobs in the evening. My work can be done during the time you wanna work.

So those are the three selling points should you want to approach tradespeople for volume pricing. One, more consistent work, two, less advertising budget, and three, we’re working within the timeframe that you actually want to work.

Theo Hicks: And based on my interactions – with plumbers in particular, and probably electricians, too – I think that third point is probably gonna be the biggest selling point… Because I just had a leak in my personal house, and the plumber had to come out on an emergency call. He didn’t get here until late; he just kept complaining about how “Yeah, I can fix the problem, but it’s getting late, and it’s Friday, and I kind of wanna get back to my family.” I’m like “No problem, but you’re probably gonna have to come tomorrow, and it’s Saturday.” He’s like “Well, I don’t wanna come on Saturday, because it’s the weekend…”

So while you were explaining this, I was kind of thinking — these are obviously the three best ways to convince them, but it’s really just kind of listening to them… Because from my experience, working with plumbers, electricians, contractors – they’re very honest, and they’ll tell you exactly what they’re thinking. So if they say that they want more consistent work, they’re saying they’re spending too much money on advertising, they’re saying they wanna work between certain hours, just listen and they typically will tell you what they want, and you can use that to, in a sense, convince them to give you those bulk discounts.

Joe Fairless: Yeah, identify what their pain points are initially – consistent work, the hours, profitability, whatever it is. They might not get into profitability of their business, but identify that, just like you would if you were approaching a seller and you’re looking to buy their property. You wanna learn what the pain points are, if any, so you can structure the deal accordingly.

Another thing that William mentioned is he doesn’t usually provide multiple bids on jobs to his clients, and a lot of his clients know that… But on occasion, some new clients might say “Well, I wanna get multiple bids on this job”, and that’s fine to do… But he said one thing to keep in mind is if someone has a business where they do a high volume of work, then they likely have already gone through the vetting process with their vendors, and they’ve negotiated the rates down to a certain points, and they also are combining that information with the service that they received from those vendors… Because it’s not always about, as we all know, the lowest price; it’s also about “Will they get the job done, and will they do what they say they’re gonna do? Will it be done right?”

So he said he’s not against multiple bids, but something to keep in mind if you are working with someone who has volume discounts from other vendors is just maybe initially give them the benefit of the doubt of saying “Hey, maybe they did already do their due diligence to make sure that this is the best price, combined with the best service.” And if you don’t want to go with that assumption, then just perhaps ask the person, “Hey, did you already negotiate the rates down to a competitive level, and are you confident in the service that this vendor is gonna provide if you do have questions?”

Theo Hicks: Yeah, I think one of the better contractors I worked with already had everything pre-negotiated, and whenever you asked him to do something, he would send you a very detailed document that had the quantity of what you’re doing and then his predetermined price already, very clean… Whereas the other contractors are like “It’s $500.” It’s like, “Well, how are you getting $500? Where is that coming from? Is that coming from materials, services…? I don’t understand.” A little bit different than what you’re talking about here, but it is nice when you’re working with contractors to have already negotiated prices, and you can see exactly how much you’re spending on labor, how much you’re spending on the actual materials that they’re using.

Joe Fairless: Another interview I did, DJ Scruggs. I love DJ’s first and last name. I think that flows really well. He is the CEO of Blue Spruce Holdings. Based in Denver, Colorado. Entrepreneur, started in the customer service software for email industry, sold his company in 1999. He talked about some lessons learned there… And what I wanna mention here is when he works with other businesspeople and he feels like someone is trying to pull one over on him, then he says one thing he’s learned is that you don’t have to be a jerk, but you can always ask the question “Why?”

So if someone is trying to tell you something that you know is not right, or you don’t think is right, you don’t have to be a jerk about it; you can instead just keep asking the question  “Why?”, and obviously you need to craft it a little bit better than just saying “Well, why is that? Why is that? Why is that?” You can continue to just be curious and ask questions about it, and then that will help get you to the answer of what you’re looking for, to identify if it is legitimate what they’re saying or not.

I thought that was just an interesting approach if something like that is taking place, to build on the relationship should you end up having a relationship with this person, versus kind of attacking them and tearing it down and not having any opportunity  to have a relationship.

Theo Hicks: Yeah. It just says here, “How to figure out when someone is BS-ing you” – it reminds me of something related to what you’re talking about here… It reminds me of a show where there’s a character and they’re asking him why something isn’t happening [unintelligible 00:10:45.11] and he says a line, and they go “Well, it doesn’t make any sense. Why isn’t this happening?” and he literally says the exact same thing again, but slower. So the way they reply to the why – you can tell if they’re pulling one over on you, or if there’s something going on underneath what they’re actually saying. In this case, this person had no control and was just saying whatever he was told to say…

But yeah, if you can’t naturally read someone and tell if they’re lying to you or if they’re pulling one over on you, BS-ing you, asking why and asking them to explain why I should invest in this deal, why I should buy this deal, and see what they say, and if they don’t really have a specific answer, or they kind of say very high-level, generic things, then you can kind of dig deeper into that. If they don’t have any answers, again, you don’t have to be a jerk about it; you can just say “Okay, I don’t think I’m interested in investing in that deal…” Just because they might be new, they might not know what they’re doing, they might not have the information because the seller didn’t give it to them… But maybe in the future they do actually come up with a deal that you can buy, or invest in, or whatever. And if you’re a jerk, then they’re not gonna bring that deal to you ever again. It’s basically keeping as many doors open as possible.

Joe Fairless: Exactly, that’s a great way to put it. It’s just having an opportunity to build a relationship with that person, should your initial perception be off about them trying to pull one over on you.

Then DJ also mentions since he hasn’t been in the real estate industry as long as he’s been in other industries, he still needs to demonstrate competency in real estate… And he said ideally he would have a 20-year track record of performance in real estate, but since he does not, he demonstrates it in other ways, like being respectful and respectable, he talks about.

So by being respectful to others, but then being respectable – that’s where it comes into play where he is establishing a thought leadership and being an authority figure, which is one of the reasons why he was wanting to be interviewed on the podcast; and his company has multifamily holdings, so we talked about that… But it goes back to what you and I have talked about extensively, so we won’t get into it in detail here; the thought leadership platform – if you don’t’ have that type of track record, then interview people who do have that, and then as a result of interviewing them, you learn more, you build your relationships, and then you’re associated with those people who do have that track record, and then you can build from that, in addition to bringing on the right team members on your team, who have that skillset… Even though it might not be in partnership with you, but at least they have that skillset and that track record so that you can then build off of that.

Theo Hicks: And really a big thing too is just more people are aware of who you are. They know who you are. I can’t tell you how many people that I knew before I started working for you, that will call me or text and be like “Oh my god, I realized you know Joe Fairless, you’re on Joe’s podcast.” Obviously, that’s a really massive one, but it’s just interesting to see how many of them are getting into real estate and know who I am, and they always say how this can be very powerful for my brand, and very powerful for when I start doing deals again… So yeah, 100% – a thought leadership platform is super-important; not just for the expertise and what you talked about, but also just people knowing who you are. The more people that know you, hopefully saying good things about you, whatever investment strategy you’re implementing, you’re gonna be more successful, because people are gonna wanna work with people because they know who you are.

Joe Fairless: Yeah, absolutely. It all is connected together, and that is the right way to approach. And lastly, [unintelligible 00:14:23.27] Nielsen… I just wanna give a quick reminder that you can still find deals if you’re resourceful enough and you put in the work. [unintelligible 00:14:32.04] Nielsen closed on a 16-unit; it was him and his wife. They found it through direct mail. How did he direct the direct mail? He did not buy a list, he created his own list; went to Apartments.com, got the information from Apartments.com. He said they could see the unit size on the rental site. Then he went to the assessor’s office to see who the owner was, then he went to the State Business Registration to see who the owner of that was; if it was an entity, then he mailed out the direct mail pieces.

It was just basically saying “Mr. & Mrs. So-and-so, I like your property and I’d like to buy it. Here’s a picture of me and my wife”, and he mailed out 200-300 letters. He did that every 2-3 months for about one year, and then he got a 16-unit as a result of that.

Theo Hicks: One thing I did wanna mentioned based on this strategy – obviously, he hustled and found the deal, but if for example he pulled his list, and then on that list half of those properties are owned by LLCs, and he just mailed it to whatever address the LLC said, which is most likely a PO box at a UPS somewhere, or a post office somewhere, he might not have gotten this deal.

I thought there was a blog post, but there’s not, so I’m gonna post this as a blog post – how to find the owner of the LLC. You mentioned about going to the State Business Registration,  but specifically what you do is whatever state that you’re in, you go to the Secretary of State, and then somewhere on that website you have the ability to search the entities, search the corporations. They’re gonna call it corporations or entities; you type in whatever the LLC name is, and then the LLC will come up. Then, depending on the Secretary of State site, it will have the information you need right there – owner’s name, owner’s address. If not, there should be some area on there to download the articles of the organization and then on the articles of the organization you’ll find the actual owner of the LLC’s name and their address.

So you wanna make sure you’re mailing to that address, not the PO box that’s listed on the assessor’s site, if it’s owned by an LLC.

Joe Fairless: Great information. Detailed, as always, and helpful nuances, because it’s one thing to know the concept, and it’s another to know the actual process. You said we’re gonna do a blog post on that…

Theo Hicks: Yeah, I’ll post this today, and then we’ll put it in the show notes and release it on Friday.

Joe Fairless: Wonderful. Alright, cool. So those are the insights I wanted to talk about, and that I thought would be helpful.

Theo Hicks: Alright, trivia question time. Last week’s question was “According to the most recent census data, what city grew its millennial population more than any other city?” The answer was Seattle. I think you said the answer right, and then you changed it to something else, like Dallas maybe. You said “Seattle”, and then “No, wait… Dallas.”

Joe Fairless: I don’t know if I said Seattle, we’ll have to listen to that again. I know I ended up with Dallas, so… Oh, well.

Theo Hicks: Yeah. This week’s question — and again, as a reminder, the first person to get this question correctly will receive a copy of our book. Submit your answer either to info@JoeFairless.com, or in the comments of the YouTube video below. “What large city has the most diverse economy?” This is based on industry diversity, occupational diversity and worker class diversity?

Joe Fairless: Well, I know it’s not Vegas…

Theo Hicks: It’s not Vegas, correct.

Joe Fairless: I hate to use Dallas-Fort Worth as all my answers… So if I had to put money on it, I’d say DFW, or I guess if they’d make me be more specific, I’d say Dallas. But since I don’t wanna use that as my answer for everyone, I’ll go with Atlanta.

Theo Hicks: Atlanta. Alright, so we’ll have that next week, as well as another trivia question for you to have the opportunity to win a free copy of our book.

Lastly, the apartment syndication resource of the week… We do Syndication School every Wednesday and Thursday on the podcast, as well as on YouTube. For most of these series we offer a free resource or document for you to download, that helps you learn how to do apartment syndications.

Last week we talked about series number 14, how to underwrite a value-add apartment deal, starting at episode 1653. One of those free documents was the simplified cashflow calculator, which you can download in the show notes of last week’s episode.

The other free document that we gave away for that episode was the rental comp analysis calculator. On one hand, you need to underwrite the deal, and you also want to do a rental comp analysis in order to determine what your rental premiums are going to be. This template helps you input the properties that you’re using as comps, the square footage and the rents of those comps, and then it will automatically calculate an average dollar per square foot, which you can then use to determine what the rent will be at your subject property based on the square footage. So that is gonna be available for download, again, in that series 14, which is episode 1653, or in the show notes of this Follow Along Friday.

Joe Fairless: I enjoyed our conversation, Theo. Best Ever listeners, I hope you got some value from this, and we’ll talk to you tomorrow.

JF1841: From Trading Commodities To Trading Real Estate with Allan Szlafrok

With the advancements in technology, Allan’s job as a commodity trader was shifting from the yelling and screaming on the trading floor to behind a computer screen. With many people in his position losing their jobs to technology, Allan decided to explore real estate investing. It was not a tremendous start, but Allan overcame some bad deals and relationships to ultimately succeed, and he keeps on succeeding. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“The reason it wasn’t a great deal is because I didn’t know enough about the neighborhood” – Allan Szlafrok

 

Allan Szlafrok Real Estate Background:

 


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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, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Allan Szlafrok. How are you doing, Allen?

Allan Szlafrok: I’m doing well, Joe. How are you?

Joe Fairless: I am doing well, and looking forward to our conversation. A little bit about Allan – he’s been investing in real estate for nine years. He’s been involved in over 100 real estate transactions ranging from single-family homes to multifamily apartment buildings. Based in Long Island, New York. With that being said, Allan, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Allan Szlafrok: Sure. I was working as a commodities trader out of college on Wall Street, and the industry kind of pivoted away from floor traders. I used to be one of those guys who did all the screaming, and throwing the papers on the floor, and making hand gestures, sometimes not the nice hand gestures… But that business kind of got disrupted and it went electronic, and I was forced to look for a new job. I was fortunate to have a little bit of capital saved up, and I’d always wanted to get involved in real estate… And I had some friends who were involved in the industry and I started investing alongside them.

Eventually, I went out on my own and I’ve been buying smaller multifamily properties across the country – well, really in Northern New Jersey – ever since, and I was involved in the tax deed space also, down South in Atlanta, and I’ve bought a few properties also outside of my geographical area. That’s what I’ve been doing ever since – I’ve been using the BRRRR method, I’ve been building my portfolio, and now starting from that point [unintelligible 00:03:37.06] when I wasn’t sure exactly where I was gonna go, I’ve built up a nice portfolio, and this is what I do full-time now.

Joe Fairless: Well, I would love to dig in here… So let’s talk about you investing alongside your friends to start and get acclimated. What were some deals that you invested in?

Allan Szlafrok: That’s actually a funny story, and it’s a little bit covered in my book.

Joe Fairless: What’s your book title?

Allan Szlafrok: The name of the book is “How not to make money in real estate.” It’s available on Amazon. Basically, it’s a lot of tough lessons I learned in this industry, being in this industry for so long, starting from a place where I had no idea what I was doing, to where I am today. It’s pretty humorous, some of the stories, and some of them are pretty scary, but definitely some lessons from investors in there that I think people should definitely take heed to.

Joe Fairless: Okay. So let’s talk about that, investing alongside with friends.

Allan Szlafrok: Basically, all I was doing was giving the money that I had earned, and they were investing it for me and flipping the properties in some of these lower-income areas. They were doing well, but partnerships did not end well, because they weren’t really buying these properties. It was a little bit of a Ponzi scheme, whatever… Long story. But the bottom line is —

Joe Fairless: [laughs] Can I just quote you on that? “It was a little bit of a Ponzi scheme… Whatever.” What?! We can’t just skip over that. Please, elaborate a little bit more.

Allan Szlafrok: It seems that what was happening was that — this is after I got out and I started going out on my own; they were just taking properties for investors, saying “Hey, I bought this and this house”, wash-rinse-repeat, keeping the money, and they left a lot of investors on the hook. That’s pretty much what happened. I didn’t necessarily get burned; I was already out well before some of this stuff started to happen…

But here’s where I cut my teeth though – I would go to properties and I would check them out and get a feel for the market, and how these renovations work, and what I should be looking for… So it wasn’t the worst thing for me. I got a little bit lucky not getting hurt.

Joe Fairless: Did they go to jail?

Allan Szlafrok: No. Not that I know of.

Joe Fairless: Huh.

Allan Szlafrok: I don’t keep in touch, I don’t have search alerts on these guys; I don’t care, I don’t wanna know.

Joe Fairless: Right, fair enough. Alright, so you were investing alongside people who were allegedly flipping properties. It turns out they weren’t but you got out… You said you were looking at the properties, so you were attempting to follow along as they were allegedly doing their business model?

Allan Szlafrok: Yeah. And again, I think it started off just like a lot of these things do – it started off where these things were legit, and then eventually they got to a point where they got in trouble, and then they just started taking on new investors to pay off the old investors. That wasn’t when I was around. But that’s when I started to understand the process of renovating and flipping houses. Eventually, I would transfer to the BRRRR method so I can grow my portfolio.

Joe Fairless: Alright, so then we’ll transition into that part of your investing career. So you had been investing passively, learning a little bit, and then you went into your own deals. What were the first couple deals that you did on your own?

Allan Szlafrok: Well, the first deal I did on my own was actually an absolute nightmare. It’s in the book. It was a three-family home, I got a really good deal on it; it was a short sale. It was in really good condition, move-in condition; I was paying about $120,000 for it. Three units, that were each gonna rent for about $1,000/piece. It’s a grand slam as far as the BRRRR method, the 1%, 2% and even 3% rule.

Joe Fairless: And where is it located?

Allan Szlafrok: It was located in Northern New Jersey.

Joe Fairless: Okay. What’s the town? Just curious.

Allan Szlafrok: This one was in Newark.

Joe Fairless: Newark, alright. That can be a tough area.

Allan Szlafrok: It can be, but you’ve gotta know the block, and the different neighborhoods there, because there’s a lot of opportunity there, but you really need to be specific on where you’re investing. At that time I did not; I just took someone’s word for it, like “Yeah, yeah, it’s a great block”, and it was not a great block.

We were closing on a Friday, and I went to do the walkthrough on Thursday, because I didn’t have to be there on Friday for the closing; it was a close-by-mail kind of thing. So we go there on Thursday, we try to get into the house to do one final check-up, and the keys are locked in the lockbox, and the broker can’t get them out. Okay, the place is secure; I looked in the windows – no damage, nothing going on in there, no floods… Fine.

So I don’t show up on Friday because I don’t have to, it’s a close-by-mail… So I come back on Monday, and I need to get the keys, but it turned out I didn’t need the keys, because over the weekend somebody had kicked in the door, destroyed the entire house, took out all the heating elements, all the electric elements, took a sledgehammer to everything, for no apparent  reason. There was no profit for them just to destroy my kitchens and bathrooms. I understand they were trying to get to the pipes and everything, but they did way more damage than they had to do.

They threw these 150-pound cast iron radiators down the stairs, again, for just the metal value… Destroyed the entire stairs. They wound up doing as much damage to the house as I’d paid for the house. That’s how much the repairs cost.

Joe Fairless: Oh, my god.

Allan Szlafrok: I didn’t make [unintelligible 00:08:11.24] like it sometimes happens with insurance claims… But that’s just how much the insurance claim was. I hired an adjuster and it took another six months to get the renovations done, to get the tenants in… And then, since it wasn’t the best neighborhood, I had problems with tenants. I wound up selling it for a little more than I paid. It wasn’t a great deal, and the reason it wasn’t a great deal was because I didn’t know enough about the neighborhood to know that this wasn’t really a great place to invest. And on top of that, I didn’t secure the place fast enough.

What I do is when I buy a vacant house, especially in an area that’s kind of rough, is we’ll put on those metal gates that I’m sure you’ve seen around. We didn’t even use plywood; they’ll just take that right off, like some of the banks do. We’ll put on those metal gates, secure it, and at that point it becomes too much of a hassle to break into, and they’ll move on to another house.

Those are some of the lessons I learned from my very first deal, which wound up obviously being a little bit hairy.

Joe Fairless: The insurance claim – will you elaborate a little bit more on that? …how you were having to be out-of-pocket 120k?

Allan Szlafrok: Well, the cost to repair the damage that they did was 120k. The entire inside of the house had to be rebuilt, and that’s what insurance paid me, and that’s roughly what I paid out… Because it was a lot of damage. And this was in the pit of the crisis. This was when properties were really cheap, so I was buying a house for 120k. Off the bat it was worth 200k, so I was already getting a good deal. That’s without me putting a nail in the wall.

Joe Fairless: So the insurance company paid you 120k, and it cost you 120k to do those repairs… So it was a net zero effect.

Allan Szlafrok: Yeah, exactly.

Joe Fairless: Okay, got it.

Allan Szlafrok: Which is what they want.

Joe Fairless: Right. So you got reimbursed for everything.

Allan Szlafrok: Yeah, I was covered… Minus the deductible, whatever.

Joe Fairless: Alright. So it was an inconvenience, and it also delayed your renovation plan.

Allan Szlafrok: Yes, but it was also an educational delay, because I learned a lot about what I’m not supposed to be doing, and what I should be doing going forward.

I’ve made a lot of mistakes in this business. Every investor does. And one thing – I say it in the book – is that I never make the same mistake twice. I learn from it and I move on and I do a better job next time.

Joe Fairless: Alright. So deal number one, nightmare, starting out. What about deal number two?

Allan Szlafrok: Deal number two is actually a property that I still own. It was also in not the best area, it also needed a lot of work, and we had issues with break-ins, and things like that… But this was a newer construction, so it was a little bit easier to fix. The renovation cost wasn’t that high, and at that point I decided some of these properties — because this was before the market really started to rally. I’m talking about 2013, especially like Northern New Jersey; the market only really recovered within the last few years, because of the long foreclosure process – there was still a back-log of those.

So at that point, once I did the renovations, there wasn’t enough spread in there for me to flip it, so I decided “You know what – I’ll keep this, I’ll rent it.” I’m in for very little, and now it’s six years later and it’s been doing very well for me. So that was kind of when I started thinking of pivoting towards being a landlord.

Joe Fairless: So with your BRRRR method, you mentioned that you’ve been doing the BRRRR method… How many properties have you done the BRRRR method on?

Allan Szlafrok: At this point probably around 20-25.

Joe Fairless: And you’re not living in each of those properties, you’re just renovating them and then refinancing out and moving on.

Allan Szlafrok: Right, exactly. I had some capital and I raised a little bit more to start this, and now it’s just — once the ball starts rolling downhill with the BRRRR method, it gets easier and easier. It’s the first few deals that are always the hardest to get and the hardest to finance, and just the hardest to get started in this business. But once you do the first few, or once that ball gets rolling, it just snowballs and your business can really increase.

Joe Fairless: So let’s talk about — you said in addition to the properties that you’re doing in your area, you also did tax deeds in Atlanta. How did you get into that, and can you just describe the business model?

Allan Szlafrok: Yeah. I had a buddy of mine who was in that business a few years before we got in. Basically, they go down and what they do is you’ve got a tax lien on the property – most people are familiar with tax liens; somebody doesn’t pay their taxes – the government will put a lien on the property for the amount due, plus interest. Now, once those liens go unpaid, in a lot of deed states – for example, Georgia is one; I believe Texas is one… Most states use tax deeds eventually, but it’s not necessarily a viable business… So they will auction off the deed to the property in a place like Georgia for the amount owed in taxes, plus the premium that you pay, plus a 20% interest on top of that. At least that’s what it used to be; I’m not sure if they changed it, so nobody come shoot me about that.

So we’d go down there, and let’s say it was a property that was worth $50,000. If I buy that tax lien at $25,000 and I wind up having to foreclose on it – which you can do after a year – and I’m only gonna be in it for $25,000 plus the court costs, and those foreclosure fees will be about 7k… So I’m in for $32,000 on a 50k house – I’m doing pretty well. And I would just wholesale them and sell them. Or on that $25,000 I would get a 20% interest penalty, which is state-mandated – it can’t be lower, it can’t be higher. I mean, you could negotiate this stuff, but there’s no reason to. So I’d be getting an extra $5,000 on top of my $25,000 investment.

Joe Fairless: How did you get into that, and are you still doing it today?

Allan Szlafrok: Again, a buddy of mine was doing that, and we went down there and we started doing our research; attended a few auctions before we bought. And it was a little bit of a pain for me to fly down from New York to Atlanta, but I was going there once a month. Once we learned the business, we bought a few, and then we took on some investors, and we bought a bunch more… And we were managing this portfolio of tax deed properties. We had our legal team down there, we had people there to do the renovations, secure the properties after we bought them.

I was doing that for a while, but it became a little bit of a hassle for me to fly up and down there. It also got really competitive, and a lot of money was coming down from New York and the other coast, trying to invest in that as well… And I really wanted to focus on building a portfolio of long-term wealth, because we were making money, we were paying investors and we were making a living, but I wasn’t building any equity really, because I wasn’t hanging on to the houses; and I didn’t wanna hang on to the houses down there, because out of state it just seems  a little bit cumbersome for me. So I wanted to pivot and focus towards my home market.

Joe Fairless: So you live in Long Island… A lot of investors who are in the New York City area would say – and I was certainly guilty of this when I was living there… I lived in New York City for ten years… I would say “It’s just too expensive to buy around here. I’m gonna go to the South, to the Midwest, South-East.” But you’re buying in New Jersey… Describe the process for how you find deals please, and then the typical numbers on the deal.

Allan Szlafrok: You’re definitely right about that. A lot of people in New York find it extremely difficult to buy here… And it’s not just because it’s expensive and taxes are high, [unintelligible 00:14:34.22] but it’s super-competitive. There’s a lot of money here chasing very few deals… And it’s New York, people hustle. It’s really hard to find deals here. But what people didn’t realize was that in their own backyard there was a really excellent market, who was just showing a ton of growth over the last years, and that’s some of the cities in Northern New Jersey, like Newark, like Jersey City, like Elizabeth.

People say “Oh, it’s New Jersey, it’s terrible”, and all these things, but there was a huge opportunity over the last few years, and people kind of missed out on it. Since New Jersey and New York also have the longest foreclosure process in the country (judicial foreclosure process), there were still REO deals – a lot of the – up until let’s say two years ago… Which suppressed prices, and also gave investors  a little more time to get into deals than they would have in other parts of the country. So that was one of the advantages sticking it out here and being in this business since 2010-2011, waiting for that appreciation. Also, I got bank-owned deals, which I think are a lot harder to come by in other parts of the country.

Joe Fairless: What’s the last deal you purchased?

Allan Szlafrok: I actually just closed on something last week in Jersey City. It’s a two-family house. Most of my properties there are two-family houses because that’s just the way the housing stock is made up; there’s not a lot of single-family houses in these cities, and the ones that are just aren’t profitable. When you’ve got two units, you tend to get more rent per square foot than you would for the same amount of beds and baths on a single-family. That’s just the way it is. So the two-family – it needs a lot of work. Our tenant’s in there, we’ve just contacted them; I’m not sure if they’re staying or not, but it’s fine if they don’t, because I know that I can go in, do the renovations, force appreciation, do a couple other things that need to be done…

There’s an oil tank to be removed that we already have a quote on; [unintelligible 00:16:10.28] needs to be replaced, which I already have a quote on… And we’re gonna either rent it or we’re gonna sell it, depending on how the numbers work out. And I’ll tell you this, I got a call from a broker yesterday – she wanted to buy something else from me, that I’m not selling, and she can get me already $40,000 more than I paid last week… So it’s always nice when you hear that, but we’ve gotta see. I’ve gotta do the renovations, force that appreciation, because that’s really the only way to make money, especially in a super-competitive market like New Jersey. You have to find things to renovate and force that appreciation, and therefore force up the rents, if that’s what you’re doing. Otherwise there’s really no way to make money.

Joe Fairless: What’s the purchase price for that two-family house?

Allan Szlafrok: It was around $310,000.

Joe Fairless: $310,000… And when you’re running the numbers to force appreciation and think about where you’re headed with the property, what numbers are important to you?

Allan Szlafrok: Basically, the rent roll and my cost of money. I’m fortunate that I’m able to get really good financing from community banks… And again, that’s something that gets easier with time. You’re not gonna be able to do that the first one, two, three deals you do. Once you get a reputation and you’ve got some seasoning on your property, and you’ve got some seasoning on your own career, you’ll find that you’ll be able to get better financing.

So as far as the numbers are concerned, it’s not impossible to get that 1% rule in Northern New Jersey… But as long as I’m around there, I know I’m getting a good deal because that’s just the way the market is here – super-competitive, the rents are high and so are property values. So that’s just a rule of thumb. But I need to [unintelligible 00:17:31.23] my cost of money by about 4%. I used to have a saying, “I don’t get out of bed for less than 10%.” You know that famous supermodel who said she didn’t get out of bed for less than $10,000/day… But I used to say I never get out of bed for less than 10% on a deal. But it doesn’t always work out that way, especially now that the market is a lot higher.

Joe Fairless: And it’s 10% annualized cash-on-cash over the lifetime of the project, including the exit, or is it just cashflow?

Allan Szlafrok: Just cashflow.

Joe Fairless: Just cashflow.

Joe Fairless: As far as the exit is concerned, I don’t necessarily project appreciation. It’s kind of like a happy accident if that happens. I never used to even think about it really, because I thought we’d be in a slump forever… Or at least I just played my cards that way, because it’s a  lot safer to do it that way. And then one day you wake up and you’ve got all this equity and I’m like “Wow, it’s time to start pulling this out.” I’ve been able to pull out my money, plus, on a lot of my deals, which has been really nice.

Joe Fairless: So talk to us a little bit about the numbers on this two-family house. You’re buying it for 310k, and then what’s the rent roll come out at right now, and then how much are you gonna put into it…?

Allan Szlafrok: The rent roll right now is very low, but the tenants are probably leaving. They’ve stated that, which I kind of knew before we went in there. The current rent roll is $2,500, which is not a lot. Renovated, those units rent for about $1,600 for the first one, $1,800 for the second floor. So $3,400.

Joe Fairless: Okay.

Allan Szlafrok: So renovating the units economically, putting in a new heating system, I’ll probably put in another $40,000, so I’m in for 350k… And I’m pretty close to that 1% rule. And in this particular area – again, a lot of people don’t pay attention to the New Jersey market, but there’s some areas of explosive growth… Specifically in Jersey City, which I think is gonna be one of the hottest in the entire country, but nobody pays attention to it. So I know that my property is worth a lot more than I paid for it, which is nice, too. So I’ll be in at around that 1% rule.

Joe Fairless: You said you’ve got an oil tank removal quote… For how much?

Allan Szlafrok: Here’s what I did… In the book I talk about some of the nightmares I’ve had [unintelligible 00:19:23.13] “I don’t care. It’s gonna be $2,500 to pull out.” But if that thing’s leaking, you could be looking at 30k, 40k, 50k, and there goes your entire project. And that did happen to me once.

So now, [unintelligible 00:19:32.06] “I don’t know if there’s an oil tank.” I’m like, “Okay, I’m gonna pay for an oil sweep.” $200 for a tank sweep, fine. They discover a tank. Now, before I closed, I decided I wanted to do a soil test as well, which I paid for out of pocket. That was another $600. They put it in, and then at that point they were able to tell me that the tank is not leaking, and they gave me a guarantee on the tank, and it’s gonna be another $2,500, plus because the tank was pre-filled, it’s gonna be another $900… Whatever, all this nonsense. It was gonna cost me about $5,000 to remove the tank. But that’s a lot better than $30,000, and then when you wake up to a surprise like that, it ruins your entire project.

Joe Fairless: Is that common in that area, to have oil tanks?

Allan Szlafrok: Far more common than not. 8 out of 10 houses built before 1960, which is most of the housing stock in Northern New Jersey. This place has been developed and lived in for a long time. These aren’t new communities. Anything built before 1960 you should definitely do a tank sweep on, especially a lot of stuff is turn of the century; this house was built in 1911, for example. That tank might be 100 years old… But for some reason they thought it was a good idea to bury these things underground, as opposed to just sticking it in the basement, where if it leaks, it doesn’t cause an environmental disaster. It’s very common.

Joe Fairless: And it cost you 20k-30k on that environmental disaster scenario before?

Allan Szlafrok: It has, yeah. And I had to abandon the project. That, and there were some break-ins there… And that was actually my worst deal ever, it was because of that oil tank and a couple of other things that happened; I wound up having to call off of the property.

Joe Fairless: What were the couple other things that happened on that worst deal ever?

Allan Szlafrok: Again, this is something that was a little bit earlier in my career, and I bought it on an auction website. I didn’t check it out; it was fully occupied, so you couldn’t get in, which is the case in most auction properties – you won’t necessarily have interior inspection.

There were a lot of break-ins, and they came in and they destroyed the work that we had done.

One time I come in and I see the side door is busted open, I see that they’ve torn out some carpets, they’ve torn out some electric systems… And I go back outside and I see the cops, and I wave them down; I’m like “Hey, officer, officer, come here. I’ve been robbed!” And he comes into the house and looks around me; I’m like “Okay, I’d like to file a report”, and the cop’s like “Could you not? It’s just more paperwork for me, and we’re not gonna catch the guys anyway.” I’m like “Seriously?” “Yeah, don’t bother. I’m just gonna submit the report and we’re not gonna talk to you ever again.”

Joe Fairless: [laughs]

Allan Szlafrok: So I didn’t even submit the report, and the damage at that point I think was probably less than deductible, so I just had to eat it. And we were just having all sorts of problems — one of the subcontractors didn’t pull permits, they shut us down… That property was a nightmare. That was the worst-case scenario, I think. But the bulk of that was that oil tank, which cost me $30,000.

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

Allan Szlafrok: I think the best advice ever I’ve ever received probably came from my commodity trading days. My boss would always say “Know your downside.” The upside always takes care of itself, especially in a rising market. You’re gonna make money, but you need to know what you can lose, what could go wrong… And let’s say you don’t know what you don’t know, but you’d better know what you can know, what can go wrong – like an oil tank, like problems with break-ins, bad neighborhoods, foundation issues… Things that you can detect before you buy a property.

If your downside risk doesn’t include those risks, you need to rethink your numbers and how you’re going about this business. And also, if you’re investing money that you can’t afford to lose, and the worst-case-scenario does happen, you probably shouldn’t be investing at this point in your life.

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

Allan Szlafrok: Sure, let’s go.

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

Break: [00:22:51.14] to [00:23:33.25]

Joe Fairless: Alright, Allen, best ever book you’ve recently read?

Allan Szlafrok: Against the Gods, by Peter Bernstein. It’s a book about the history of insurance. Really interesting. More interesting than it sounds.

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

Allan Szlafrok: How about the time in Atlanta when I was at a tax deed auction and I thought I was buying a single-family house, and I didn’t read the parcel number correctly at the auction, so I wound up bidding on what was actually the common area of a condo development. Basically, the driveway to get into the condo development, for [unintelligible 00:24:00.18] So I was coming up with all these crazy ways how I’m gonna make my money back… “Oh, well, I’ll just build a toll, and the people who live there will have to pay me a toll to get to their house.” That’s crazy illegal.

Joe Fairless: [laughs]

Allan Szlafrok: But it turned out I got bailed out big-time, because somebody was foreclosing on the entire HOA, the entire condo development, and they needed my parcel to complete the transaction, so I actually got my 20% [unintelligible 00:24:23.04] whereas I thought I lost $40,000, I wound up making a little money. It was 20% of the purchase price, so I think it was about $40,000 and I made 8k instead of losing 40k… It doesn’t get much better than that.

Joe Fairless: [laughs] I would have liked to have seen you try to implement the toll for people to come in and out of their condo.

Allan Szlafrok: Don’t think I didn’t think of that…

Joe Fairless: I know you did, you clearly did. [laughter] What’s been the best ever deal you’ve done?

Allan Szlafrok: I like to think of that one as my luckiest, therefore it’s my best… But the best deal – and they happened more than once – is when I was able to buy a property… Specifically, I’m thinking of one in Jersey City which is actually around the corner from the one I bought last week… I bought it for next to nothing, and renovated it, and now I’m pulling out like 120% of my money. That’s the holy grail of real estate, if you can do that… So on that particular property, that’s what’s happening now, and then I’ll have that capital to reinvest in a similar property.

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

Allan Szlafrok: One thing I really like to do is I like to talk to newbies, people who are just getting involved in the industry, and give them advice. I’m always happy to do it, and that’s really why I wrote the book; I barely make any money off this, believe me. If you buy from Amazon, I make like $4. It’s not gonna make or break my life. But I really do enjoy educating new investors about some of the pitfalls in this industry, ways you can go wrong, and how I got to where I am, because I wanna see them get to where I am as well.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing and get in touch with you?

Allan Szlafrok: I like to be reached on Bigger Pockets; it’s obviously a great forum. My name is right there, Allan Szlafrok. You can connect to me there. I’ve got a LinkedIn page as well, and on Facebook I’m at OG Property Investments. Occasionally I post things there. I don’t bombard people’s feed with 1,000 inspirational quotes a day, I’m not interested in that… But I do like to keep in touch with people and I’m happy to talk to people.

Joe Fairless: I think it would be a good investment of time and money to get your book, “How to not make money in real estate.” Thank you for sharing that. I’ve thoroughly enjoyed these stories with the oil tank removal, with the three-family home, with the deals that you are making money on and you have made a lot of money on, and how you’re approaching the transaction.

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

JF1838: From Financial Ruins To Real Estate Success In Any City with H.J. Chammas

H.J. has a system, or a blueprint for his real estate investing that he says works in any city. He didn’t just come across this system, it comes from years of hard work and acquiring properties all around the world. When H.J. first started with real estate investing, he was in financial ruins, now he has a portfolio worth over $8 Million. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“My property manager wasn’t filling the vacancies so that I wouldn’t make money and be forced to sell at a discount” – H.J. Chammas

 

H.J. Chammas Real Estate Background:

 


Evicting a tenant can be painful, costing as much as $10,000 in court costs and legal fees, and take as long as four weeks to complete.

TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


 

JF1837: Investment Spreadsheet Mistakes, Monetizing Hotels, & BRRRR Key Models #FollowAlongFriday

Joe has another round of Best Ever Lessons to share with us today from doing the podcast interviews last week. Theo has another trivia question, be the first to answer correctly and receive a free copy of their first book. The lessons this week are coming from Peter Knobloch (http://www.pknobloch.com/), Nicole Stohler (https://www.therichergeek.com/), and Ali Boone (https://www.hipsterinvestments.com/bestever/). If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Some of these concepts don’t just apply to hotels”

 

Free Apartment Resource:

http://bit.ly/bestevercalculator

 


Evicting a tenant can be painful, costing as much as $10,000 in court costs and legal fees, and take as long as four weeks to complete.

TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


TRANSCRIPTION

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

We’ve got Follow Along Friday today, with Theo Hicks. Theo Hicks, hello sir.

Theo Hicks: How’s it going, Joe?

Joe Fairless: It’s going well. Follow Along Friday, as a refresher, Best Ever listeners, we’re gonna go over stuff that I learned through the marathon of interviews that I did last week, on last Thursday; that’s when I do all my interviews, one day of the week, and that is on Thursdays usually. I’m gonna pull some things from those conversations and talk about them, because I think they’ll be helpful for you, and because those episodes won’t be airing for a handful of months from now.

The first one was with Peter Knobloch. He’s a third-generation real estate investor, and he’s got experience in multifamily office space, hotels, restaurants and sporting clubs… And one thing he talked about – because he’s really honed his expertise on underwriting – is he built his own underwriting analyzer from scratch, and he said one mistake make when they’re creating those spreadsheets, and even one thing you should look out for when you’re purchasing the spreadsheet… I don’t think his is for sale either, so it’s not like he was trying to sell his or anything, I don’t believe… He said make sure that you have the ability to put in when leases expire for each of the units that you have.

This is assuming we’re talking about an apartment community, but the same principle applies for office and retail. And he said the reason why is a lot of calculators have an assumption that when you increase rent by X amount for renovations, you’re gonna renovate units, it assumes that you’re gonna do all of them at the same time, but in reality everybody listening to this conversation knows – and Theo, you know – that it doesn’t happen magically overnight, it happens incrementally, as leases expire. And it’s important to be able to plug in when leases are expiring into your calculator, that way you can have a true staggered approach for what reality looks like, versus what you would ideally like, which is all at once at the beginning of the year.

Theo Hicks: Yeah, one hundred percent. Another way to go about doing that without having to plug in all the lease expiration days in the cashflow calculator is to have in mind how long you think it’s gonna take to renovate all these units – 12 months, 18 months… Obviously, it’s not gonna be zero months; it’s not gonna be you buy the property and instantaneously every single unit is renovated [unintelligible 00:04:44.20] when you’re underwriting in the beginning – obviously, you wanna do this eventually, but it’s to assume however long it’s gonna take, let’s say 12 months or 18 months, and then make sure that the rent is gradually increasing from day 0 to month 12. If it’s 12 months, by one-twelfth, so if the overall rent increase is gonna be $12,000, then each month it goes up by $1,000, rather than $0, $0, $0 and then all of a sudden up $12,000… Because that will mess your model up.

I did wanna mention too that that’s kind of an advanced underwriting tip. Me and you did do an episode where we talked about some other advanced underwriting tips. That’s episode 1445, and then we continued at 1480. So we did ten tips — I think we did two episodes; the first episode was the first five tips, the second one was the next five tips. I don’t think this was one of them, so I guess now we have 11 advanced underwriting tips.

Joe Fairless: Theo, I love how prepared you are. Busting out with the episode numbers…?

Theo Hicks: I just pulled that while you were talking about it.

Joe Fairless: Man… You’re the man, nice job. We’ve got a professional show going on right now, I love it.

Theo Hicks: We do, we do.

Joe Fairless: Let’s keep going and see what else Theo has in store for us. The next insight I got from last week’s interviews – Nichole Stohler. She’s the founder and host of The Richer Geek Podcast. She’s got over 90 units and has a 64-room hotel under contract. Her focus is not multifamily, it’s hotels. I don’t know a whole lot of people who are focused on hotels, and I wanted to talk to her about why she likes hotels. She gave some examples or some reasons why, and she said you have higher profitability per room versus multifamily, with hotels.

She elaborated more on that and she said “Because you can monetize hotels, because they have a different clientele than, say, C-class apartment communities.” She said you can offer free Wi-Fi, but then you can have an opportunity to upgrade that Wi-Fi. And as most of us have noticed on planes, when you go buy Wi-Fi, a lot of the times it says “Here’s free Wi-Fi, or here’s a set price for Wi-Fi if you just wanna browse the internet, and here’s a higher price should you want to watch movies or download larger files.” Same concept here.

She said other ways to monetize hotels – when someone logs into the Wi-Fi, you can have a splash page, and then sell advertising to local restaurants on that splash page.

Then she got to other examples, like there’s a breakfast space that you can rent out for events when it’s not being used… She gave a list of things. But one thing it made me think of is some of these concepts don’t just apply to hotels, they also could apply to multifamily. For example, the splash page example made me think of  – well, okay, most hotel guests are logging into Wi-Fi, and they’re being exposed to this advertising… What about apartment communities? What do most apartment residents do? Most of them pay their bills, so how is the rent presented to them, and is there a way to incorporate some sort of advertising component to that and sell that space? So if it’s an online bill, does it have to just be an invoice, or something that is sent to the tenant on some accounting type of template, or can it be something that also has a local restaurant?

This isn’t gonna be big bucks, unless you have a large apartment community, but you could drive some incremental revenue, and you could also be giving your residents some exclusive discounts to these restaurants, so it could help with your retention, which I would argue would be more valuable from a bottom-line standpoint than any type of advertising dollars you’ll receive for selling that space.

Theo Hicks: Yeah, it’s always interesting to hear how other seemingly completely disconnected real estate niches are able to – in this case – monetize to make money… And then try to pull the underlying concept of how they’re doing it and see how you apply it to real estate. You did exactly that. The free splash page – the underlying concept is just advertising. So what ways can you incorporate advertising into your apartment to make more money? Your example was to somehow have an advertisement on maybe the portal that is used to collect rent.

Another example I remember from the podcast way back in the day was someone put up a billboard on the decor of one of their buildings and leased that up for advertising dollars.

So for these three right here – the Wi-Fi upgrade is offering some sort of upgrade, so what can you offer at your apartment that’s typically free or not expensive, and then something else on top of that. Maybe it’s a regular unit and a furnished unit. Maybe you can somehow offer a free Wi-Fi upgrade or a cable upgrade, or something like that.

Then the other one was the events. If you have a big apartment community, you might have a really nice clubhouse, or a really nice business center, or a conference room that you could rent out to people who live there – for not a lot of money, but for whatever event they want to put on… So kind of looking at these types of things at a deeper level I think is good, and it’s exactly what Joe just did.

Joe Fairless: Yeah. Even if it’s $1,000/month extra, which might not seem like a lot… But $1,000 at an 8-cap, that’s $150,000 worth of increased value that you created  for your apartment communities. $1,000 times 12, $12,000, divided by 8 (8%), is a $150,000. So you can see how by doing a handful of these extra things you get well into six figures, and even into seven figures, just by being more intentional about it.

Lastly, Ali Boone, founder and owner of Hipster Investments – she was interviewed on our podcast five years ago. Episode 40. Four zero. Craziness. Just craziness. I remember interviewing her… I was in New York City in my East Village apartment, in my bedroom, which was the size of a shoebox; my bedroom only had space for a bed and a dresser where I put my clothes, and I had a closet… So I either did my interviews literally with my head sticking into the closet, with pillows all around me, that way the noise from the city – the windows were right there – wouldn’t distract listeners, or I would just do it sitting on my bed, because I didn’t have a desk, and there was no living room in that apartment that I lived in for nine years… So it just brought back memories…

But the thing that I learned from this episode with Ali – five years now since the last time I spoke to her on the show – is she has an idea for doing a combo of a BRRRR and turnkey deal… So BRRRR Key could be a term; I’m not sure about that, but just combining those two, that’s what I came up with… Or maybe she came up with it.

The way to do it is talk to turnkey providers and say “Hey, can I fund the renovations? And I’ll be at risk if the renovations go over”, but at least this way you’re getting some of the upside on these renovations. And my question to her was “Well, I thought that’s where the turnkey companies made their spread.” If I’m a turnkey company, I make the money by finding deals that are undervalued or distressed, renovate them, make the spread on the construction, and then whenever I sell it retail to the investor… And she said I’d be surprised by how low those margins are for turnkey companies. So they don’t really make their money as much on the spread, but more on the management.

So there’s that… If that’s helpful for anyone who’s working on those types of deals, then perhaps look at doing a turnkey/BRRRR Frankenstein approach.

Theo Hicks: Is this something she has done, or it’s just an idea that she had in her mind?

Joe Fairless: I should know the answer to that question; I don’t remember, during our conversation… I’m 90% sure that she has multiple people who have done this. I’m 90% sure, because I think we talked about it… But for some reason I can’t 100% recall.

Theo Hicks: But definitely an interesting strategy, and just kind of another unique, creative investment strategy. It’s always interesting… Something else I wanted to say, too – just kind of off-topic a little bit, but I love the titles you had on your earlier episodes. They’re great. [laughs]

Joe Fairless: Oh, yeah… Yeah, you’re referencing what I titled episode 40, which was “Love is in the air…” [laughs]

Theo Hicks: I love the show notes, because I remember for the first book we went through the first hundred episodes, and the titles are great. [laughter]

Joe Fairless: You really have to think long and hard about what I’m actually talking about when I wrote those titles. They’re not intuitive for what it is… But yeah, that was me doing titles.

Theo Hicks: Heck yeah, I like it. Alrighty. Great lessons, as always. So this week’s trivia question – if you’re the first person to get these trivia questions correctly, we’ll give a free copy of our first book. Submit your answer either on the YouTube comments below if you’re watching on video, or if you’re listening to this on the podcast, you can just email us at info@joefairless.com.

Last week’s question was “What is the best city to work in tech in 2019?” This was based on not just how much money you get paid in tech, but it was based on the cost of living in that location, the tech employment concentration, so the proportion of the population who’s employed in tech, unemployment rate, ratio of average pay to tech pay… And the answer was, surprisingly, Columbus, Ohio.

Joe Fairless: Huh. Alright… What did I say, do you remember? It wasn’t Columbus. Oh, I said Pittsburgh.

Theo Hicks: Yeah, you said San Francisco first, and then you said Pittsburgh, because I mentioned all the caveats.

Joe Fairless: Yeah.

Theo Hicks: This week’s question is “According to the most recent census data, what city grew its millennial population more than any other city?”

Joe Fairless: Okay, so it’s percent increase, not total number, right?

Theo Hicks: It’s actually total number.

Joe Fairless: Okay. Grew millennial population, total number… I’m not gonna say anywhere in Florida. There’s a lot of people moving to Florida, but I think they’re a bit older. Although millennials – hell, I’m a millennial and I’m 37 years old, so I’d say I’m old, too…

Theo Hicks: [laughs]

Joe Fairless: Let’s go with Dallas-Fort Worth.

Theo Hicks: Dallas-Fort Worth. Alright, so the first person to get this correctly will get a free copy of our first book. YouTube comments, info@joefairless.com.

The last thing – very apt, because we talked about underwriting earlier in this episode – is the free apartment syndication resource of the week… And this week’s resource is related to underwriting. Series number 14, 8-part series – so eight different episodes where we talked about how to underwrite a value-add apartment deal from start to finish… I really enjoyed recording that, because I like underwriting… That starts at episode 1653, and then the eight Syndication School episodes after that as well, and the free document is the Simplified Cashflow Calculator. This is — we’ll call it a basic, standard template to underwrite a value-add deal. So you can underwrite a value-add deal to completion, but some of the assumptions are locked in, and we’ve got those assumptions on the cashflow calculator.

The purpose for it is to, firstly, give you something to start with, so that you can underwrite a deal starting today,  but secondly, it’s recommended for you to create your own model, and customize it based on your specific business plan, how your mind works, your experience level with Excel, things like that… And it’s also something you can use as a starting point, without having to input every single thing yourself.

So that’s the simplified cashflow calculator, available for download in any of those episodes. But I would just go to episode 1653, or you can just download it in the show notes of this episode.

Joe Fairless: Best Ever listeners, I hope you got a lot of value from our conversation, and we will talk to you tomorrow.

 

JF1830: Getting Money Back From Contractors, Seller Financing, & MHP Investing #FollowAlongFriday with Joe and Theo

We’re going to hear Joe’s top three favorite lessons learned last week when doing the interviews for this podcast. Lessons learned are coming from Amanda Cassiday (https://www.amandacassiday.com/), Peter Conti (https://realestate101.com/), Andrew Keel (https://www.andrewkeel.com/). If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“If they are looking to grow their business, and you follow these five steps to get your money back after being burned, you increase your odds of getting it back”

 

Free Apartment Syndication Resources:

Example T12: http://bit.ly/bestevert12

Example Rent Roll: http://bit.ly/besteverrentroll

 


Evicting a tenant can be painful, costing as much as $10,000 in court costs and legal fees, and take as long as four weeks to complete.

TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


TRANSCRIPTION

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

This is Follow Along Friday. Theo Hicks, I learned a whole lot last week during these interviews… And as a reminder, Best Ever listeners, the purpose of Follow Along Friday is to pull out some insights that we learned – in this case I did the interviews last week, so I learned last week – and share them with you as a sneak peek, and also so that you can (should you choose to) start applying them sooner, since they interviews that I did this past week will go live probably in 4-5 months from now; we’re that booked out.

So Theo, do you want me to just go ahead and get into it?

Theo Hicks: Yeah, let’s jump right into those lessons, Joe.

Joe Fairless: Alright, cool. Holy cow – his name is [unintelligible 00:03:01.05] What an impressive human being, from a real estate standpoint. I met him through this interview, so I don’t have any preexisting relationship with him; he’s a 24-year-old real estate investor based in New York City… And as a sophomore at NYU, he identified a need for a student-run brokerage. He went out, got his brokerage license, and he and some friends were leasing apartments to fellow NYU college students, and I’m sure other college students.

He was making six figures a summer, for three months of work. Six figures. I have a hard time putting myself in that place when I was at Texas Tech as a sophomore, having an idea for a business and then earning over $100,000 for three months’ worth of work. Just an incredible entrepreneur. I asked him how much did he have by the end of his senior year, how much was in his bank account, and he said it was between 250k to 350k.

Theo Hicks: Wow…

Joe Fairless: As an undergrad who just got their degree, this person had over 250k in his bank account, and he had a college degree. Just so impressive. So one is if you are in college, and you’re looking to create a business, this is a potential opportunity. He capitalized on the New York City market, and  the way it’s structured, where you’ve gotta go through a broker to get an apartment… I know having lived in New York City, New York City is its own animal, so perhaps this exact strategy won’t be applicable to Best Ever listeners who are in college looking to create something, but… It’s just inspirational, at minimum. Perhaps some tactical components need to be reconfigured, but just incredibly inspirational.

Here’s a tactical thing that he talked about for how he has since then (surprise, surprise) grown his portfolio (he’s 24 years old) to 60 single-family units, 12 multifamily — so I should say 60 single-family houses, 12 multifamily units, and a self-storage facility. And the self-storage facility – I was like “Tell me about it.” He’s like “Well, it sounds more impressive than it is. It’s 20 garages, 4,000 square feet.” I’m like “That’s impressive. That’s very impressive.”

He bought that for $120,000, and he found it on the MLS. He talks about that during the interview, so I won’t go into that. But the tactical thing I wanted to mention is how he found 60 single-family houses and 12 multifamily units is by working with REO companies and getting deal flow through them.

And I said, “Okay, I’m not gonna ask you which companies you’re getting deal flow from, because that gets into your competitive advantage, and I don’t wanna steal your thunder on that, but the question I have is if you were starting over and you didn’t have the current relationships that you have with REO companies, how would you go about replicating this process?” and he said that an attorney helped him get connected to the REO companies. So he said what he would do is he would focus on networking with attorneys, telling them what he’s looking for and seeing if they have any connections they can give him.

He said another tactical thing you can do is by looking at the deeds and the mortgages and see who’s selling a lot of stuff on the county website, and if they’re selling a lot of stuff, they might be an REO entity. So those are two tactical things that anyone can do to identify these REO companies that might be a good lead source for him to buy directly from.

Theo Hicks: [unintelligible 00:06:49.24] I remember all the way back, when I was close to his age, I did that for Cincinnati… So I know there’s a way to do it for all the county, but for Cincinnati in particular you can get access to the back-end of the auditor’s site. [unintelligible 00:07:05.08] every single property in Cincinnati. In this case you would just filter by — they actually have recent sales too, so you just download the recent sales and filter it by the name of the person selling property, and just see “Okay, this person sold 50 properties in the past month. Maybe they’re an REO company.” Maybe they’re just a big owner who’s selling properties too, so it’s not just necessarily REO companies.

And then going back to the school one – that’s interesting, because most people will graduate with as much money that he had in his bank account in debt. So he did the exact opposite of what people typically do. For me — I was in mechanical engineering, so I’m sure I probably spent a lot of time on school, compared to maybe other majors, but I still had so much free time that I spent on doing stupid things, that I could have spent on obviously doing something like this.

I’m not sure if people think this or not, but they might think “Well, I am a full-time student. How am I gonna have time to do this?” But if people really think about it, you’ve got way more time when you’re in college than you do when you actually graduate and get a real job. So it’s definitely possible, and as you mentioned, this is pretty specific to New York. I didn’t realize that you had to have a broker represent you to lease an apartment. But yeah, this is kind of more inspiration, to get the wheels churning in your mind to think of ways you can add value as a real estate investor to college students… Because every college student is renting, looking for a place to live; you can even be some sort of consultant the same way, even though it’s not a requirement.

This guy sounds like he’s very smart, and very entrepreneurial, and obviously it’s working out for him.

Joe Fairless: I believe it was the book “Things I wish I knew when I was 20.” It’s written by an Ivy League professor, and she talks about different things that she wish she knew when she was 20. I believe it’s this book – she mentions that she gives her students a challenge at the beginning of the year to make as much money as possible with $100. So she gives them $100 and like “Okay, go.” It’s an entrepreneurial class. “Go make as much money. Create a business. Whoever makes the most money wins”, and there’s other prizes, too.

Some people created a business around selling gadgets around campus, others did laundry services… But the winning team that earned the most money — I think it was a shorter period of time than a year. I think it was about a month. The winning team that earned the most money actually did something ingenious… They sold the time that they had to present to their fellow students their business plan and their business. So instead of creating a business, they simply identified a company within that area that would love to have a captive college student audience for 30 minutes, and then they sold their time to that business, and that business presented to the students, and as a result they got access to the students; and the students that had that idea earned the most money.

So along the lines of, hey, Angad’s business, if you’re not in New York City, that exact business might not work, but it’s the mindset of how do we maximize the resources that we currently have available – that’s what this is all about, and that example really came to mind whenever I was thinking about Angad.

The second thing – Philippe [unintelligible 00:10:41.19] He’s an entrepreneur; he scaled from a $3,000 mobile home park to owning ten units now. Based in Nashville, Tennessee. I wanna mention two things about my conversation with Philippe. One is that he had a six-unit that he has now sold, and it was in a college town. One thing that he did to increase the value – he bought it for $120,000, and two years later he more than doubled it in value. He sold it for $260,000. So actually I’ll give you two things that he did, and then I have another lesson learned from him. One is he changed it from [unintelligible 00:11:20.23] the amount of beds that you can have within the residence. So he didn’t focus on “How many tenants should I have”, he  focused on how many — well, I guess I’m saying it incorrectly. He added more beds in the house. So he added two more beds in the house, and as a result he started charging per person, instead of per-bedroom. I guess that’s the proper way to say it.

So he literally made the living room a place where two more people could live. So one, he changed it from a per-bedroom to a per-bed. Two – and this is what I thought was really interesting – is he had relationships with local vendors, and those vendors would send leads his way, because they’re popular spots for college students, and in exchange he would send his residents to those vendors. Some specific vendors – there’s a Mexican restaurant; a place called Grandma’s Pancakes, and a local coffee shop.

And he would put in the welcome packet for his residents when they moved in, he’d put these cards that the vendors/restaurants gave him, and the residents would show the cards to the restaurants whenever they arrived, and then they’d get exclusive discounts as a result of living at his place. So it was  a win/win. I did something like this for one of my properties, where I reached out to local businesses. I had a card that I printed out.

And surprisingly, it was challenging for me to get local businesses on board. I offered discounts in general, but also I’d like to offer discounts that weren’t publicly available. But I went to tanning booths, or tanning salons, I went to a pet groomer, I went to a payday loan company… They were very interested; they were actually the most engaged. Surprise, surprise. I went to restaurants… And for some reason – maybe my approach wasn’t the right approach, or maybe the market wasn’t right, or something, but I didn’t have that  much success.

However, from a percentage standpoint, from the couple of companies that I did connect with – Dickey’s Barbecue was one of them; they were really on board because there’s an entrepreneurial guy who owned that franchise location… The couple of them that were on board – they really helped me have selling points for residents who wanted to move into that apartment community, and it was a win/win.

So I’ve done this approach… It might take more effort than you initially think, but it was a good use of the team’s time to create something like this… Especially if you have a smaller-sized apartment building and you’re not looking to do this in multiple locations. Or maybe it’s actually — if you have one geographic location where you own a lot of properties, that’s good. If you are spread out across multiple markets, then it might not be an effective use of your time, because it just takes a whole lot of time to do it. But in my experience, it was worth it.

I’ll stop there. Theo, do you have any comments there?

Theo Hicks: I was gonna say – do you know if he had preexisting relationships with any of these companies, or did he just reach out to them randomly?

Joe Fairless: He went to the Mexican restaurant a whole lot, he said, so they might have known him. But I don’t think he had a preexisting relationship with them in a formal capacity.

Theo Hicks: I was curious… Because I’m sure that would probably be helpful. If you’re thinking about applying this strategy, think of the places you just go to frequently, and then bring that up in the natural course of conversation if you’re talking to that owner, or whatever.

Joe Fairless: True that, yeah.

Theo Hicks: I was gonna mention something else – we were talking about this on Follow Along Friday; it might have been when we were discussing someone who had a question about buying a smaller apartment, or that didn’t have any amenities on-site, around like a bunch of massive apartment communities that had top-notch fitness centers, and things like that… We talked about you can leverage the local businesses, like fitness centers, movie theaters etc. and try to get discounts from them, and then you can present your property as like a luxury experience, without the luxury price. “So a fitness center isn’t here, but because of that your rents are gonna be lower. But we’ve also got discounts at this coffee shop, this movie theater, this tanning salon, this whatever.” That’s another way that you said you can present this type of concept to your residents as well.

Joe Fairless: Yeah, we’re actually buying a property right now that fits into that category, where there is a fitness center on-site, however literally right next door there’s a state of the art fitness facility, and the management has negotiated only an $8/month membership fee for those residents. And that is an exclusive arrangement that our property has with the fitness center. I think that more stuff like that – exclusive perks… Because then you start moving away from being a commodity and you start differentiating your apartment community in a way that others can’t compete, because you’re not going back and forth on price; you’re actually talking about these additional amenities and relationships that they don’t have.

One other thing I’ll say about the interview with Philippe – this reminds me of the example you brought up a couple times, Theo, of the gentleman who looked for properties that had a busted foundation. He would actually seek them out and he had a solution for it, where others would run away. In this example Philippe talks about how he noticed that the homes in a certain area had a double garage; they’re two-story, and the downstairs was a double garage. He would convert that double garage into three additional bedrooms. He had three bedrooms, a kitchen and a bathroom that he’d convert the double garage into, and he rents it out to construction workers.

So the house – upstairs it has three bedrooms, downstairs it has a double garage; well, now it’d have three bedrooms upstairs, and then downstairs it’d have three additional bedrooms, and he rents it out on a per-bedroom basis.

So just looking for situations in our market where there’s opportunity to reconfigure the layout of the property, and if you identify a bunch of homes that have a similar configuration and you have a certain business model like that, then you have the opportunity to make twice as much cashflow as someone else.

Theo Hicks: And the same thing can technically apply to apartments, too. Obviously, there’s demand for those larger units, but if you’re in a market where you find an apartment that’s got massive units, and the dollar per square foot doesn’t necessarily make sense, and you can just convert that to two bedrooms instead of one bedroom, and get way more money… Obviously, it depends. Same thing with an extra living space that might not necessarily be in demand in that market, converting that to a bedroom, or keeping it the same… Again, depending on the market.

Joe Fairless: [unintelligible 00:18:23.10] He is an investor based in Phoenix, Arizona. He specializes in wholesaling. They do over 70 wholesale deals a month. Their business model is to be the wholesalers’ wholesaler. When a wholesaler has an opportunity, cannot find a buyer, they go to Jameill’s group, and Jameill’s group has a list of 80,000 buyers with a 30% open rate, who he and his team send it out to.

The business model is not to be as focused – or nearly as focused – as finding the opportunities, but more focused on having a buyers list that is robust, and being the solution to wholesalers’ challenges if they don’t have buyers for their properties.

Clearly, I had to hone in on how did he create a list of 80,000 buyers with a 30% open rate when he sends out an opportunity. And he says he thinks of themselves as a tech and data company (surprise, surprise), and they have a two-step process. One is his business partner has a software background, so he has a software that they created that scrapes social platforms and the internet for a list of potential people who might be qualified buyers. Think of accredited investors – they look for that type of person.

And then Jameill’s team will actually personally reach out to these people and send them a note through that platform. He talks about what that note says. I didn’t write that down in my notes, but he sends them an intro message, and just by sheer volume of the amount of messages through that software platform that they initially find all these leads, they get a lot of people to say “Yes, I’d be interested in being on your list.” And he’ll search for #azdoctor, for example, he’ll search for lawyers, he’ll search for accountants, Facebook groups… They’ll see what you have liked and map that back to if you’d be a likely real estate investor.

So just 1) having a business that is a solution for other people in your industry, who could be perceived as competitors; that’s interesting to me. That could be applied to any business. So one, quick, think of all your competitors. Two, how could you actually be of service to them, so that they pay you for your service. That could lead to some interesting stuff. That’s what he did. And then two is the one-two approach that he and his team take to building that big list. One is you write a software, two is you have individuals reach out to these people.

Theo Hicks: Is his business partner doing it, or do they have VAs doing —

Joe Fairless: VAs. Yeah, it sounded like they have an army of VAs.

Theo Hicks: I was gonna say, I can’t imagine him sending out 8,000 messages to people.

Joe Fairless: No, it’s 80,000 people on the buyers list. That’s an email that gets sent out.

Theo Hicks: It’s probably more than that.

Joe Fairless: But you’re right, if there’s 80,000 people on the buyers list, good point – they probably sent out half a million personal messages.

Theo Hicks: I think on MailChimp the average open rate for the real estate category – and again, this is just MailChimp – is like 10% maybe. So they’re three times what it usually is. So obviously that person will touch them, and rather than just stopping at step one and saying “Okay, here’s who we want to target”, and then kind of just like creating content and sending it out and hoping they see it, they proactively just go after that one specific person and send them a message… And obviously, that seems to be working out.

I bet it’s a very interesting interview, if you go into specifics on how he’s finding these people on Facebook, using the hashtags, or whatever software that he’s writing. Obviously, not every single person is gonna write the software, but everyone can navigate the Facebook, the Twitter, the LinkedIn search function. It might take a little bit extra time, but again, it sounds like they’re using VAs, and 30% open rate is pretty amazing.

Joe Fairless: It is. And I asked him “Do you send that list anything other than deals?” He says “No. I absolutely don’t.” That’s how we approach our private investor list. I don’t send them anything other than opportunities. There has been one exception where I asked them for thoughts on the book that we’re writing – what would they want in that book – because we were writing that book for them, to help them on how to think about passively investing in apartment communities. But besides that, I don’t believe I’ve ever send an email to my private investor list about anything other than opportunities that we have available.

Cool. And then lastly, Jason Parker – he is an investor in Seattle, Washington, but he’s also a financial advisor with a focus on retirement planning. I enjoy talking to people who aren’t exclusively focused on real estate, so that we get a broader perspective. One thing he says when he sits down with potential clients – he asks them “What is the purpose of your money and why do you have it?” And when he was asking that question, I was like “Man, that’s a  good question.” What is the purpose of my money and why do I have it? I thought about it a little bit (not a whole lot) since then, and I view money as simply a  tool to exchange and to help build lifestyle and do things with.

It’s not powerful to me, it’s simply a tool. And by thinking of it as a tool, it allows me to feel good about value exchanges, it allows me to invest in myself by going to a Tony Robbins program… And it’s just a tool to help me become a better person, in that example, or give to all the non-profits we give to at BestEverCauses.com…

So I think it’s just an important question to ask ourselves, “What is the purpose of our money and why do we have it?” I don’t know what the right answer is, but it hit me as something that is a question or two questions that we should ask ourselves, so I just wanted to make note of it.

Theo Hicks: I see it on here, “Not too concerned [unintelligible 00:24:38.18]”

Joe Fairless: Yeah, so you’re looking at some notes that I had during the conversation… And he said that potential clients, when he asked them that, they tend to not be too concerned about leaving money to their kids. They wanna have the same standard of living that they’re accustomed to. But they’re like “You know what – we’ve done what we needed to do for our kids, and at this point, kids, you’ve gotta make it happen or not.” Generally, that’s the sentiment from his potential clients.

Theo Hicks: That’s interesting, because you hear a lot of times people’s goal is the legacy, family wealth, leaving it to their kids… I have a five-month-old, so it might change, but I’m definitely on board with this guy. We could probably talk about that for hours, so… You can move on.

Joe Fairless: Cool. Alright. I think that’s all. That’s all I wanted to mention on that.

Theo Hicks: Okay. Those were really good lessons. I really liked the college guy. It reminded me back to when I was in school, and I did a few things — nothing like this, but I was slightly entrepreneurial while I was in college, to make some  money, just because I didn’t have anything and I didn’t wanna work a regular job at that time.

Joe Fairless: Colleen and I were on our walk the day after I did these interviews, and I was like “And he had $300,000 in the bank account after he graduated college…!” I was just so blown away. I still am. Very impressive.

Theo Hicks: Alrighty. Well, let’s move on to the trivia question. This is the Jeopardy month. Last week the question was “The U.S. state that is home to the two cities that have the lowest cost of living.” The answer was “What is Texas?”

Joe Fairless: Oh, Texas…! My backyard.

Theo Hicks: The two cities – I don’t know if you recognize these… Harlingen and McAllen.

Joe Fairless: Yeah, Harlingen is by the  border. I think they’re both by the border.

Theo Hicks: Okay. The cost of living was 20% below the national average, and way below the highest, which was obviously New York.

Alright, this week’s question is — Yardi Matrix (they’re a real estate research company) just released their biannual rental growth information… So this week’s answer is “The U.S. city with the highest year-over-year rent growth as of June 2019, 8.4%.” So what’s the question? What is that city?

Joe Fairless: Say that again?

Theo Hicks: The U.S. city with the highest year-over-year rent growth as of June 2019. The number is actually 8.4% rent growth in 12 months.

Joe Fairless: Okay, so in the last 12 months trailing June, so from June to June?

Theo Hicks: Yeah.

Joe Fairless: The U.S. city with the highest rent growth, 8.4%… I’ll go with Orlando.

Theo Hicks: Orlando. So the first person to get that answer correctly – you can either submit your answer in the YouTube comments, or you can send an email to info@joefairless.com – will get a copy of our first book.

And then lastly, the free apartment syndication resource of the week – I actually just finished recording the last series of the first part of Syndication School, which goes over the entire process… So we just talked about how to sell your deal. That will be coming out next week. Then we’re gonna go back over Syndication School and go into more detail on some of those episodes, some of those steps.

But anyways, we give away free documents for Syndication School, so we’re highlighting those on Follow Friday at the end. This week’s free document we’re gonna highlight is from series number ten, which is how to structure the GP and the LP compensation. That starts at episode 1597; I believe it’s a two-part series, so 1597 and 1598. First we go over how to structure the compensation for the general partners, so how the GP makes money, and then next one is how you as a  syndicator can structure the compensation with your limited partner.

To help you with that, the free document is the LP structure decision tree. It’s basically a series of yes or no questions that you answer, and based on the answer to the previous question we’ll ask another question, and ultimately you’ll land on what’s the idea partnership structure with your investors, whether that’s debt equity, preferred return, profit split, what the limit should be… Things like that. You can download that in the show notes of 1597 and 1598, or in the show notes of this Follow Along Friday.

Joe Fairless: Well, very valuable resources, and they’re free, so definitely if you’re in the industry or wanna be in the industry, take advantage of that. Best Ever listeners, I hope you enjoyed this, and most importantly, got a lot of value from it. We will talk to you tomorrow.

JF1826: Saving Tax Money On Short Term Rentals & Other Properties with Robert Stephens

Taxes are a major expense for real estate investors, and Robert is here to explain some of the taxes that we may not know about, and how to save money on those taxes. In the short term rental area, there are lodging taxes. Much of the conversation focuses on that today. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“A lot of people think since they’re not running a hotel that the lodging tax doesn’t apply to them” – Robert Stephens

 

Robert Stephens Real Estate Background:

  • Co-founder of Avalara MyLodgeTax (formerly HotSpot Tax), formed in 2002 out of his own necessity to understand and manage compliance with his rental property.
  • Helps homeowners, hotel operators, and other businesses with short term lodging tax regulations
  • Based in Englewood, CO
  • Say hi to him at https://www.avalara.com
  • Best Ever Book: The Big Short

 


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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, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Rob Stephens. How are you doing, Rob?

Rob Stephens: Great, thanks for having me, Joe.

Joe Fairless: Well, I’m glad to hear it, and looking forward to our conversation. A little bit about Rob – he’s the co-founder of Avalara MyLodgeTax, which was formed in 2002 out of his own necessity to understand and manage compliance with his rental property. He helps homeowners, hotel operators and other businesses with short-term lodging tax regulations. Based in Englewood, Colorado. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Rob Stephens: Sure. You touched on it, but… 20 years ago I purchased a second home in Vail, I wanted to generate rental income on it, because I needed to do that to be able to afford the property, which is pretty common. I put it up on some of these short-term rental sites, which were very new at the time. It worked great, but through that experience I realized there’s a bunch of other things I need to do to be successful at this, one of them being [unintelligible 00:03:15.23] remitting lodging taxes, which I didn’t know really anything about at the time. So it was really through that experience we built what we think is a very simple solution for people that are engaged in short-term rentals, and that’s really our focus – leverage technology to provide cloud-based or internet-based very simple solutions for people to be charging the right taxes, collecting them from their guests, paying into the jurisdictions at the right time. We handle all of those tax tasks for people, so that’s really our purpose – helping people with that kind of back-office function of tax, that are involved in short-term rentals.

Joe Fairless: Okay, let’s talk about this. I’d love to learn more. What are lodging taxes, and aren’t they already accounted for on the site that you have your house on?

Rob Stephens: Great question. Two-part question. The first is what are lodging taxes… So really the same taxes that hotels pay. By and large, the hotel is going to be paying the same sales and lodging taxes that a short-term rental apartment, single-family home, condo, whatever the property type is… With a few exceptions. Generally, it’s the same types of taxes. It’s called different things – sometimes it’s sales tax, sometimes it’s hotel tax, room tax, lodging tax, accommodations tax. It’s a tax on short-term renting, and I think some people miss that at the beginning; they think “I’m not a hotel, this doesn’t apply to me.” If you actually read the law, it’s pretty broad. Any type of property where you’re providing overnight accommodation is gonna trip these taxes.

Secondly, yeah, there’s a lot of change going on in the short-term rental industry. One of those things is the big platforms, one of them being Airbnb, starting a couple of years ago, have decided to collect and remit some of the taxes on their own. So in certain markets they are collecting and remitting some of the taxes. Usually, they’re doing state taxes… And I don’t know how in the weeds we wanna get, Joe, but a lot of these taxes, for most locations in the U.S, there’s a state tax you have to pay, at the Department of Revenue, but then there’s very often a city or county tax you have to pay, too.

What’s happening now is Airbnb is paying most of the state taxes, but they’re not paying the city and county taxes. That then leaves the host the responsibility to collect and remit some of these taxes. And they’re really the only platform right now broadly paying taxes. So if people are on VRBO, or Booking.com, or TripAdvisor, they’re gonna need to collect and remit the taxes, because that platform isn’t handling it.

Joe Fairless: How much are we talking? Just specific, maybe use an example for a certain market.

Rob Stephens: Sure. I think these taxes are a lot. The average I would tell you is 10%-12%, and that’s of gross rent. So if you’re charging a guest $200 a night, or $2,000 for the week, it’s an extra 10%-12% on top of that. When you get in urban markets, the taxes typically are 15% or higher. Chicago actually has over a 23% tax on short-term rentals now… So if you get into big, urban cities… Kind of like rental cars, hotels – it’s easy for those big municipalities; it’s a good revenue source for those cities to tax those types of activities, because it’s not residents, it’s travelers and guests tom the community.

So these taxes tend to be very high, and if you’re missing it, you’re not doing it, it can add up to be a pretty significant amount over time if you’re not collecting it from your guests.

Joe Fairless: I would imagine the majority of people are not accounting for this, or even paying it. What would your guess be?

Rob Stephens: That’s a great question. We have that debate here internally, and I generally think you’re correct. Look, it’s gotten a lot better; I’d say in the last couple of years there’s a lot more awareness and focus on this issue… And look, short-term rentals have really become a mainstream part of the travel segment. I suspect a lot of your listeners are engaged in this, or they have long-term properties… They may be actually looking at getting into that market. And I do think, by and large, there’s some people doing it, but I think there’s a pretty high non-compliance rate. Now, whether that’s 80% non-compliance, or 50% – I don’t think anybody knows for certain, but we’re hoping to help with that. There’s a lot more room to go in terms of being compliant, and I believe it’s just a matter of time. If we’re gonna be a real, legitimate industry, protecting our property rights in these cities and these communities, one of the things we’re all gonna have to do is make sure we’re paying these taxes.

Joe Fairless: What are the consequences of not being compliant as  a rental property owner?

Rob Stephens: Your obligation is to collect the tax… And typically, the way to think about this is the guest, the traveler – they pay the tax. If it’s a 10% tax, you charge that guest an extra 10%, they pay it. Your obligation as an operator is to collect it and then remit it to the different agencies.

I always tell our customers, “Look, this isn’t really an economic cost to you. This is kind of a passthrough; it’s your cost for doing business, you have to collect these taxes from your guests.” But if you’re not doing it, typically what they’ll do is audit, or inquire and go back typically at least 2-3 years – typically not more than 4-5 years, unless they believe there’s some sort of fraud or something like that involved – and they’ll look to pull your income tax returns or whatever records they can to validate how many rentals you had… And then if it’s a 12% tax and you’re doing $30,000/year in rent – which is pretty typical for a short-term rental – you’re looking at $3,000-$4,000/year in tax. So the liability can add up quickly, and then they’ll slap on penalties and interest on top of that, which can unfortunately be pretty significant. Those penalties can be easily 25%-50%.

We’ve seen it happen unfortunately to customers, or new customers coming in with the problem. It could be thousands of dollars of back-taxes, plus penalties and interest.

Joe Fairless: What’s the worst scenario that someone’s come to you with?

Rob Stephens: The worst scenario… These governmental agencies have a lot of power. In the tax world, in your market, or multifamily or long-term rental markets, every property has a property tax; and if you don’t pay your property tax bill, ultimately the tax agency can put a tax lien on your property. Same thing in the hotel tax, lodging tax world – if you’re not paying your taxes, they can make an assessment against your property for back-tax due, and if you don’t pay it, they’ll put a  tax lien on the property, and then anytime the property is sold, that’s when they can step in there and recover their funds. Obviously, the worst case is they’re seizing the property.

I don’t know that we’ve ever seen a property seized, but we’ve certainly seen people with tax liens, and had to sell their property just to get out from under that liability.

Joe Fairless: Tell us more about what you all have come up with as a solution.

Rob Stephens: Historically, all these taxes – it’s a manual process. If somebody’s short-term renting, they have to go to the state site, figure out the state requirements, go to their city site, figure out what the requirements are for the city, maybe even go to the county… So there’s multiple agencies involved, multiple forms, you have to register with these different agencies, you have to pay tax, usually monthly and quarterly to these different agencies… So there’s a fair amount of moving parts and complexity.

What we were talking about earlier, Joe – the rank and file person involved in this space just has never dealt with these types of taxes before, so they’re not aware of it. So what we’ve really tried to do is really just with technology solve all of that. Sometimes I’ll use an analogy – think of it like TurboTax, but for hotel taxes. We have a software platform, the customer can sign up, they put in the property address that they’re renting, we immediately tell them what the correct, accurate tax rate is to charge from the guest, then they [unintelligible 00:10:51.12] Airbnb account, or VRBO account, they collect the tax from the guest, we handle all the moving parts of registering them, filling out the paperwork, get all that in place, whatever licenses are needed… And at that point they’re really all set up; it becomes a monthly cadence of just they report whatever the rent was for the month, so there’s automated processes around this; they report their monthly rent, and then based on that we calculate the taxes, file and remit them on their behalf.

So from our customer perspective, really all they have to do is come to the website, sign up, put in their profile, their address, some of their profile information, and we take it from there – rates, we register them and file and pay the tax… And we just make sure everything’s done on time, correctly.

The way we describe it is it’s really a way for a host or a homeowner or an investor just to put al this on autopilot and make sure these taxes are done… And at a price point of $20/month/property. We think it’s good value, and leveraging technology to solve what’s kind of a headache for most people.

Joe Fairless: Oh, absolutely… Big-time headache for most people. And if it’s not a headache for them, then they’re probably not doing it, so then it will be a major migraine in the future.

Rob Stephens: It’s funny you say that, because some of our best customers – the most eager to sign up – are often people that have been doing this on their own and understand the monthly filings that have to be done, and some of the paperwork, or have tried to do it on their own are were confused, or frustrated… Or simply don’t have time. At a $20/month price point they’re happy to say “You know what – put this on autopilot, take care of this for me.”

Joe Fairless: Yes. With certain markets, one of them being close-ish to you – Denver, Colorado – moving away from short-term rentals and then being more medium-term (over a month), because regulations are against the short-term, what are the tax implications and reporting implications for medium-term rentals versus short-term ?

Rob Stephens: Sometimes it’s really good on the tax side, for Colorado… So we’ve talked about taxes on short-term rentals; in most states, in most locations, that’s 30 days. Once you flip over and you use the term “medium-term”, so once you’re doing monthly rentals or longer, you’re gonna be out from under, having to collect and file all these taxes. That’s the good news, that bad burden is gone. Now, in some states like New York, New Jersey, Massachusetts, it’s 90 days. Big travel states, like Florida and Hawaii, it’s 180 days. So some states do have longer definitions of short-term. But to use your example, Denver would be a city where if you’re doing monthly rentals, then you wouldn’t have to deal with the hotel tax portion of it. So that’s good.

Now, I always tell people – unfortunately, short-term rentals are in high demand, and I’m sure you have a lot of your listeners that have realized that in certain markets they can generate very high rents on kind of a nightly, weekly basis, relative to a long-term rental contract. So yeah, it’s great – 30 days you avoid the complications and expenses, administering these taxes, but I think most people in this market realize that short-term is certainly the most lucrative… But again, there’s increasing regulation and limitations in certain cities on people’s ability to do that.

Joe Fairless: What else should we talk about that we haven’t talked about already, as it relates to your business and real estate investors in short-term rental tax?

Rob Stephens: I would say — I’m a short-term rental property owner myself, which is how I got into this… I suspect your listening audience probably has mainly long-term investors, but I’m sure a lot of those people are getting in the short-term rental space… What I would say is a couple things. I think the big platforms – Airbnb, VRBO – they’ve invested a lot of money over the last decade; it’s getting easier and easier to do. So if people are thinking about this, I would encourage them to take the leap.

The other part of it is you hear lots of noise about tax and regulation… There is some of that. Again, there’s services like ours that can cover the tax fees; I think that regulation sometimes is overstated. I mean, there are cities where there’s real challenges, but in most places across the U.S. you can still short-term rent without too many problems.

And the other thing is sometimes people have — look, we’re in a community. We have tens of thousands of short-term rental property owners; I go to conferences, there’s often angst about wear and tear, or partiers, or what that short-term rental crowd is gonna be like… And I can tell you, by and large these are responsible travelers, higher than average incomes. A lot of times it’s families going to events, or vacationers if you’re in a ski market, or a beach market, or a lake market… The issue of high turnover in your property, or damage — I’ve been doing this for 20 years and I probably have one instance where there was some sort of issue that I had with a guest.

So again, if people are thinking about it, I think a lot of people are very successful at it. It’s a hot space. The nightly rents can be very attractive. Again, I’m a short-term rental advocate; I would encourage people that are looking at it to not hesitate. Give it a try.

Joe Fairless: You’ve been doing short-term rentals for 20 years?

Rob Stephens: Yeah. That means a) I’m old, but yeah…

Joe Fairless: You’re experienced.

Rob Stephens: Yeah, we’ve bought this in 1999 and put our property in Vail on VRBO. So I’ve seen a lot of change; it’s a completely different industry, obviously, than it was 20 years ago.

Joe Fairless: Oh, my goodness. Yeah. Airbnb wasn’t around, right?

Rob Stephens: Yeah, Airbnb came around I think 2009 or 2010.

Joe Fairless: Yeah.

Rob Stephens: There was no online booking, nobody took credit card payments… You had to call somebody or email somebody. It was a much more difficult experience. Kind of one of my points – it’s becoming easier and easier, and travelers love it, and it’s getting easier for travelers, because the travelers want that instant book. They wanna have that same hotel-booking experience with a vacation rental, which is pulling more travelers into this segment. So it’s a  lot of progress, a lot of exciting things happening.

Joe Fairless: Let’s talk about your short-term rental. How many do you have right now?

Rob Stephens: I have one short-term rental and one long-term rental.

Joe Fairless: One short-term and one long-term, okay. So with the short-term — have you have multiple short-terms at one point in time?

Rob Stephens: I have not. I’ve had multiple different short-term rentals, but not multiple at one time.

Joe Fairless: Okay, got it. So this one that you have now is not the one that you started with 20 years ago.

Rob Stephens: Correct.

Joe Fairless: Okay. Tell us about how your thought process for buying one, selling it, and then continuing to go until you’ve reached today the one that you have now.

Rob Stephens: Sure. I live in Denver. For a lot of us on the front range, that grew up in Colorado, lifelong skiers, owning mountain property or property in the ski resorts is a big goal. So for us, that first purchase was I would say as much or more a lifestyle decision than it was investment, and I think when you get in the short-term rental space, especially the vacation rental segment of that, that’s a lot of the mindset. People are like “I like to go to Myrtle Beach” or “I like to go to South Florida” or “I like to ski in Vail. I’m gonna purchase a property there, anchor there. I’m gonna go there… I’m gonna build equity over time there.”

There certainly was the investment thesis too that if you looked over time, real estate in a market like Vail was phenomenal, and it just gets more and more expensive. So my psychology – and this was 20 years ago – was at some point you’ve just gotta jump in, make that commitment. And when we did that at the time, we could afford just to own a second property on our own and pay that mortgage, so we needed the rental income to basically help cover the carrying costs. So that’s what we did, and it worked great.

We looked at using a property manager at the time. Property managers in Colorado at the time took about 50% of your gross rent for their management fee, so… We were looking for a better option, and that’s when we found the websites, VRBO, and for really nominal dollars put it on there, and it rented up very successfully.

So that was 1999. We ended up selling that one to our partner in 2007. Joe, you’ve been in real estate [unintelligible 00:18:48.05] 2007 was probably the peak of the real estate bubble, so we saw a huge appreciation. The property tripled in value in about 7-8 years. So when you reflect back on that, you say “Well, that was great… Probably a bubble.” So we turned it around and bought another one in Vail. This is the Best Ever Show – that second one was probably the worst ever investment. We bought it at the absolute peak of the market.

I remember doing the financing at the time, which — mortgages seemed to just give away; we had perfectly fine credit, and all that, but we were starting to struggle getting a mortgage, which was at the time a bizarre experience. Little did we know behind the scenes the mortgage markets were really melting down. Anyway, we closed that one, but bought it at the peak of the market…

Joe Fairless: What did you buy it for?

Rob Stephens: That was about $850,000.

Joe Fairless: Okay.

Rob Stephens: It dropped precipitously. I think the market just came back. It took about ten years to come back. It just came back recently. In fact, we’ve just sold it a year ago for a little bit less than $900,000.

Joe Fairless: Good for you.

Rob Stephens: But we’ve put about $100,000 of improvements into it, too.

Joe Fairless: Oh, there’s the catch!

Rob Stephens: And the first several years we had to support it operationally. Again, this is my worst deal ever, and anybody who does anything – not everything always works out great.

Joe Fairless: Yup.

Rob Stephens: But we sold that one and then bought a very tired, rundown property in the heart of Vail, which is a great location… And kind of immediately saw the opportunity. I had a contractor that had done some remodeling projects with us in Vail, and immediately — we gutted the place last summer, ripped out everything… So we’ve put in all new everything. It’s a small unit, 850 square feet, but a great location. It’s 75 yards from the Gondola… We’ve put it on the short-term rental market, and that type of central location – the rentals were just super-strong, and the property turned out great. The rentals are super-strong and we’re personally excited to be really close in where we can walk to restaurants, and the slopes, and bars, and that type of thing. But from a real estate perspective – we’ll see over time, but I’m excited about getting in… This property was very beaten up, and I think we got it at a great price, put in the work and dollars to improve it, and I think we’re well-situated now on that one.

Joe Fairless: Nice. Lessons learned, that’s for sure. When you think about your experience as a short-term landlord, and then also you have one long-term, what is your best real estate investing advice ever?

Rob Stephens: I was in this camp for years. I’ve always [unintelligible 00:21:12.02] myself. Joe, I’m sure you’re a real estate expert; I have a couple of properties and I’m in the short-term rental space, but we have this tax automation solution… But I still think of myself somewhat as a real estate novice, or did for years… And I’m always kind of looking at doing things, but not pulling the trigger. So my advice is to just take action, jump in, do something. That doesn’t mean you wanna do anything stupidly, obviously, but I was just talking to one of the young folks here; they’re looking at buying a house in Denver. Denver has become  a very expensive market for real estate over the last several years, and I was talking about — the first time [unintelligible 00:21:45.13] 25 years ago, and I got married, and we upgraded, and that whole story… I said “Look, this was the mid-90’s. We thought it was all super-expensive and super-hot then.” I remember friends telling me “I wouldn’t get on this market”, and the first time we bought in central Denver, we sold 3,5 years later for 60% appreciation.

So I guess my point is you can also look to time the market, or wait for the next correction or crash, but just take action. If you have an interest, you have some capital, you think you have a sound investment plan… It’s obviously important to have a plan, and run the numbers and the math and make sure it makes sense, but… At some point you’ve just gotta jump in and take action.

Joe Fairless: And I think with that taking action, it’s also having a fallback plan, or at least a reserve or something, because if you do accidentally time it for a 2007 purchase, then you’ve gotta be able to float that property for a period of time, right?

Rob Stephens: That’s a very good comment. You can’t necessarily go all-in; you need to be capitalized such that if the rental market doesn’t materialize as expected, or rates drop, that you do have the capital or the staying power to ride it out. You don’t wanna be over-leveraged, or that mortgage payment too high, or extend too much for a property; that’s gonna put you in a really bad position. So absolutely, there needs to be a level of prudent planning and thoughtful analysis that goes into these.

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

Rob Stephens: Let’s do it.

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

Break: [00:23:24.23] to [00:24:03.06]

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

Rob Stephens: The Big Short.

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

Rob Stephens: Not enough due diligence.

Joe Fairless: Best ever deal you’ve done?

Rob Stephens: That would probably be my first condo in Vail. It tripled in value over eight years.

Joe Fairless: And with not enough due diligence on the mistake – will you elaborate? An example of where you didn’t do enough due diligence?

Rob Stephens: Just not researching the market well enough, and maybe understanding the property well enough.

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

Rob Stephens: This is gonna be self-serving, Joe. I’m an entrepreneur, I started a company, so I think employing people is very powerful. For the people that work here – I really take care of them, I give them an opportunity.

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

Rob Stephens: Anyone interested – go to our website, MyLodgeTax.com, and learn all about our tax automation solutions.

Joe Fairless: Well, thank you so much, Rob, for being on the show. It sounds like you’ve got a great out-of-the-box solution for short-term rental landlords to help them make sure they’re compliant with the taxes that they will need to pay; whether they know it or not, they need to pay them. And I did not know the taxes were so high. You said the average tax is 10%-12% of the gross rent, and in some markets 15% or higher if it’s an urban market. And Chicago… Oh, Chicago. It doesn’t surprise me that they’ve got [unintelligible 00:25:30.29] tax on this.

Rob Stephens: Yeah.

Joe Fairless: They’ve got some things to work out…

Rob Stephens: Indeed.

Joe Fairless: But thank you, Bob, for being on the show. I hope you have a best ever day. I really appreciate your time, and we will talk to you again soon.

Rob Stephens: Happy to do it. Thanks, Joe.

JF1823: Online RE Auctions, Value Tactics, Finding More Money & More Deals #FollowAlongFriday

Joe and Theo are back in the studio today to tell us about the best things they learned last week. Specifically, Joe will share his lessons from three interview guests, and Theo will offer a little bit of follow up to Joe’s thoughts. The lessons we’ll be hearing about are from Joe’s interviews with Don Wenner, Jeffrey Gitomer, and Collin Schwartz. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“If Henry Ford asked people what they wanted, they would have said a faster horse”

 

Free Document:

http://bit.ly/dealfindingtracker

 

Due Diligence Resource Joe referenced:

https://joefairless.com/ultimate-guide-performing-due-diligence-apartment-building/

 


Evicting a tenant can be painful, costing as much as $10,000 in court costs and legal fees, and take as long as four weeks to complete.

TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


 

JF1820: Real Estate Investor & Financial Advisor Helps Us Reach Goals & Protect Assets with Bruce Mack

Bruce will be talking a lot about asset protection and tax mitigation through trusts. He and his team not only follow their advice, they help others set up the proper structures in their investing businesses too. There are many different trusts, which one is best for real estate investors? Learn that and more in this episode! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“I can’t say they won’t sue you, but I can say they won’t be able to collect from you” – Bruce Mack

 

Bruce Mack Real Estate Background:

  • Owner and founder of Platinum Financing Group
  • Helps business owners achieve financial freedom and helps them find the right funding option for their business
  • Has been involved with over $92,000,000 in transactions
  • Based in Woodland Hills, CA
  • Say hi to him at https://www.platinumfinancinggroup.com/

 


Evicting a tenant can be painful, costing as much as $10,000 in court costs and legal fees, and take as long as four weeks to complete.

TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


TRANSCRIPTION

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

With us today, Bruce Mack. How are you doing, Bruce?

Bruce Mack: Fantastic. Thanks for asking.

Joe Fairless: My pleasure. I wanna know how you’re doing, so that we set the stage right out of the gate. A little bit about Bruce – he is the owner and founder of Platinum Financing Group. He helps business owners achieve financial freedom and helps them find the right funding option for their own business. He’s been involved in over 92 million dollars in transactions. He’s based in Woodland Hills, California. With that being said, Bruce, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Bruce Mack: Sure. Again, licensed financial advisor. I am an active and have been an active real estate investor [unintelligible 00:02:58.03] period of time. I bought, rehabbed and flipped 160 properties. We had three teams, 28 employees, and we were going like a house of fire. So I understand what it is when it comes to real estate investing, and it’s really my life’s mission to help people from a financial perspective not only attain their goals, but to protect their assets… Because there are so many people that  are predatory, and unfortunately, I’m seeing about 50% of the folks that are real estate investors, at one point in time or another, they’re getting involved with a lawsuit from somebody who wanted to take the hard work that they worked so hard for and put it into their backpocket, unfortunate as it may be.

Joe Fairless: So how do you do that?

Bruce Mack: Great question. I’ve been on the quest for the Holy Grail of trusts for decades, and I’ve been involved with trusts and working in the capacity to see what’s the absolute best trust that’s out there. And what I came to find out was that entry-level trust is a living trust, and you may have heard of it who are on this call, and you may actually have a living trust; that’s a non-grantor trust, and it is good for two reasons. Reason number one – for probate avoidance, and it does a good job at that. Reason number two, for directing from the hereafter where you want your assets to go, who you want your heirs to be. But unfortunately, when it comes to asset protection, there isn’t any, because it is a grantor lease, and it doesn’t have the type of clauses that it needs to and provisions in it for asset protection… And certainly, the other ideal aspect of a properly constructed trust like the one that we have, which is a proprietary and copyrighted document, there is not tax mitigation capabilities or components to that trust as well.

So further research took me to finding about land trusts, which many of you may have heard of, and potentially even have some of your properties in. The land trust idea is not a bad idea. It’s a glorified [unintelligible 00:05:16.21] and it can help. The idea of a land trust is to take the property, and therefore at the recorder’s office your name is not on it, therefore if a predatory lawyer is trying to find you, ideally they can’t, because you’re not on title. However, unfortunately, good lawyers do good research, and they do many more things other than utilizing, say, LexisNexis, and these types of asset search kinds of tools, and they’re gonna find you, they’re gonna tie you to the property, and unfortunately they’re gonna go after you..

The third thing that I’ve also seen is a lot of people mistakenly think that an LLC or a one LLC for one property is a great idea, because you’re gonna contain the virus. Usually though, at the end of the day I come to find out that most LLCs are what we call tightly-held or closely-held entities. They’re held by you, you and a partner, or you, your partner and your wife, which may be your partner as well. But the case is that the unfortunate reality is that the alter-ego approach to piercing the corporate veil can be invoked, and once that is proved to be the case, that you are literally hiding behind the corporate shield and it was really you masquerading as you, as crazy as this may sound, if that corporate veil can be pierced, then the assets can be gotten, and this fallacy of one asset per one entity invokes the ability to shield all of your assets is also quite nonsensical… Because they can’t go after other entities; they can come  after you for future wages and earnings, and this can all become a horrible, horrible scenario.

I know this because I myself was sued for $175,000; it was an unfortunate situation, and it just couldn’t have and/or wouldn’t have happened if I had the type of trust that I am aware of, and that we work with the real estate clients on a day-to-day basis to protect their assets. So the component of having a trust absolutely negates, iron-clad, the ability for  a lien or a judgment to attach to you at any time whatsoever. I can’t say that they’re not gonna sue you, but I can say that they’re not going to be able to collect from you, and/or invade the trust to attach that asset and take that asset away from you, which is a  bold statement and true with the provisions that we have and in the type of trust.

And then there’s the other component, and actually I wanted to take a breath and ask you, Joe – did you wanna jump in for a second? Because I wanted to transition to the other aspect of the trust, which is the tax mitigation position, and the stand of the information that is relative to that.

Joe Fairless: What’s the name of this trust that you’re referring to?

Bruce Mack: We call it the Titanium Asset Protection Trust.

Joe Fairless: What a name! The Titanium Asset Protection Trust. Okay, so I’m not a lawyer. I’m not an asset protection lawyer. Are you a lawyer?

Bruce Mack: I’m not a lawyer. I’m a licensed financial advisor.

Joe Fairless: Okay, you’re a licensed financial advisor.

Bruce Mack: Yes.

Joe Fairless: What would a typical asset protection lawyer call your Titanium Asset Protection Trust?

Bruce Mack: My gosh. They may say a bunch of things, but there are a multitude of provisions that are in there, and the trust was granted 58 copyrights. So they might say some nasty words because they cannot copyright the trust, and the copyrights were granted going back to 1999. There are [unintelligible 00:09:18.05] provisions, non-grantor provisions, [unintelligible 00:09:21.01] provisions and a number of other provisions that are in the trust that give it the absolute impenetrable strength that it’s got, along with the fact that the IRS code 643 has been woven into the fabric of the trust, and as such there are huge tax advantages… And there’s an irrevocability clause I should also mention. That irrevocability clause is one of the pieces that adds the tensile strength of the ability to crack into it. But irrevocability does not mean that you can’t modify it, meaning should you wish to change the beneficiaries, and/or change trustees at any time, you can, with the stroke of a pen. But the other pieces, that IRS 643 has been woven into the fabric of the trust, which offers huge tax advantages for investors.

Joe Fairless: So what approach would you give listeners who are hearing this and they’re like “Wow, this sounds great… But I’m not a lawyer. I don’t know how to validate this and make sure that it is what it’s intended to do, or what Bruce is saying.” Because if a lawyer looks at it, they’re going to see all these copyrights, and they may or may not be able to give advice on “Yes, this is the way to go.” Is that the best way for someone to do their due diligence on if this is right for them, to just have their lawyer look at it?

Bruce Mack: You know, that’s a question I get asked all the time. We went one step further. The law firm that I work with has an opinion letter; we’re delighted to furnish that to any individual when we do a consult with them. And in the opinion letter it also says if there was any issues, they’re willing to take on and shoulder the defense. So that 19-odd years with 30,000 trust clients, not having had, with all the tax preparers that we work with, having had one audit with the trust, speaks volumes as to the integrity and as to the viability that this trust is really something special that the law firm is willing to put the reputation in and the money where their mouth is.

Joe Fairless: And you were able to do that by having them draft if, and then they approved it as a result of them working with you and drafting it [unintelligible 00:11:49.26]

Bruce Mack: Exactly. I have a distribution agreement with the law firm. Most people know that I cannot remarket and sell – nor would I – law work. That’s a big no-no; I could get a major slap on the wrists, and I don’t. Rather, what I am involved with is marketing and selling of the copyrights, which is a  totally permissible act. And as such, I consult with potential clients, I go through a presentation, talk to them about the different components of the trust, including the tax advantage components, and then we move forward from there, get the trust paid for, and then the law firm actually drafts the trust… And then we get them with one of our tax professionals. And we’ve got enrolled agents with the IRS on staff, tax attorneys, we have CPAs… We have a plethora of people, and then those people actually do the day-to-day consulting with the client for one full year if they have any questions, along with doing the tax work; doing the 1040, the 1041, or whatever the other necessary tax work is for the client. So it’s all-inclusive for the client.

Joe Fairless: Yeah, that sounds really intriguing… And you’ve obviously talked about this before, but I’m glad that you talked about the other types of trusts – the living trust, the land trust, and the LLC, and the pros and cons for each of those… And I’m sure a lot of the LLC owners have had a wake-up call for the easy-to-pierce-the-corporate-veil part, because it absolutely it is easy to pierce that corporate veil. There’s all sorts of things that you are likely doing that would allow someone to pierce that corporate veil.

Bruce Mack: I couldn’t agree with you more, Joe… Including, unfortunately — I’ve taken a look at tons of LLCs; about 50% of them are easily pierceable, even without going into this whole ultra-ego and facade scenario, just on the fact that they’re not exercising the correct corporate governance of the LLC, which is a requirement, to keep your records and keep them up to date, and have your minutes, and this and that, and so on and so forth. They’re not doing it, and boom – you’re going to court and you don’t have your LLC up to snuff, you’re done.

Joe Fairless: What else that you work on would be relevant for us to talk about?

Bruce Mack: Well, briefly let me talk about the tax implications, and then I’ll scoot over to that other piece. There’s a tax component which is huge to the trust, and that’s for tax deferral. Most of us are getting hit with long-term and short-term capital gains because we may be flippers, and even if we’re a buy and hold, at some point in time we wanna sell. And usually, most people these days are either contemplating taking [unintelligible 00:14:46.06] and getting the long or short-term capital gains, or they’re doing a 1031 exchange and they’re trying to defer it out, but that’s unfortunately a hamster on a treadmill type of an approach, because you have to stay on it, otherwise you get hit with the tax. Ours is very different, because of the perpetuitous tax deferral component.

We don’t use 1031 exchanges, and/or need to. And when you’re selling properties, we have the ability – because of IRS 643 – to defer out the taxes, as well as the rental and lease income. This is a huge component, guys… In perpetuity. In perpetuity means that the tax does not become due until the trust distributes, and the trust distributes 21 years after the last of the beneficiary’s and the beneficiary’s heirs decease. So I am talking about a huge opportunity for real estate investors to be able to have more access to more cash, because on an annualized basis they’re paying less in tax, because it’s deferred out in perpetuity. And this is the other part of the value proposition of the trust.

But moving from there, we also have our other division. We really have two divisions – we have our trust division and we have our financing division. Our financing division specializes in doing unique types of financing. One of them would be we have a revolving lines of credit program, which features 0% APR for up to 21 months, and it’s a stated program, and there’s no collateralization, so you don’t need to tie up a property or do cross-collateralization.

We have our term loan program, which [unintelligible 00:16:37.06] anywhere from $1,000 to $50,000 and you can stack those; it’s FICO-driven product. Again, it’s not asset-based or asset-driven program.

Then we also have an IRA and 401K rollover program that is very different than your traditional self-directed [unintelligible 00:16:55.19] capabilities. We have checkbook capabilities, but we have the ability because it is a hybrid of one of those programs, where the person does not have the self-dealing restrictions that they normally have imposed on them with their traditional IRA or 401K rollover. You can work with your family, and likewise, you can also do and take on recourse loans with this type of structure with our business directed retirement account… Which again, is a huge win, because in a normal self-directed environment you can only take on a non-recourse loan, and many, many banks — there’s only a few out there that will even do non-recourse loans, and if they do, they’re at higher APRs, as well as the fact that they are also unfortunately only gonna lend you about 50% of value.

So this is another huge win. If you have an IRA or a 401K and it’s rollable, or it’s been rolled to one of the third-party administrators, and you would like to be able to free up that money to be able to use the money for any business purpose – not just highly defined ones like real estate or stocks and bonds, but any business purpose – then this is something else that might be of interest for us to have a discussion on, because it’s a great program and it’s worked for many, many of our clients.

Joe Fairless: What’s the downside to it, relative to the other programs that’s typically used?

Bruce Mack: There really isn’t any downside to it, other than getting it set up. We have our [unintelligible 00:18:30.01] attorney, and they do have checkbook capabilities… So there’s really no downside. There’s a $110 monthly administration cost, but you’re gonna have an administration cost in any event if you’ve got a self-directed. They usually take a percentage of how much you’ve got in there, on annualized fees… So I’m scratching my head on that one in order to come up with a negative. I’d like to, but I can’t, and I haven’t for years, so we keep utilizing and going back to the [unintelligible 00:19:01.14] phenomenal, phenomenal program for clients.

Joe Fairless: Well, taking a step back and just assessing based on your overall experience as a advisor, as well as an investor, what is your best real estate investing advice ever?

Bruce Mack: Wow… What’s my best real estate investing advice ever… To take your deals if you’re a newer investor – take all of your deals to not one, but two people that you highly respect and trust, that are more seasoned real estate investors, and have them tell you why they don’t like the deal, or what is it in the deal that might not work, so that you’re fully apprised and assessed of what it is that you’re looking at, and you don’t have what I would call the financial stardust in your eyes, and are going into the deal without knowing what the potential downsides are. If you do that and you hear those negatives and you flesh them out and you still like the deal, then by all means, proceed forward with the deal.

Joe Fairless: Wonderful advice. I hadn’t heard that. I love that approach. The taking it to two people – I was like “Okay…”, and have them look at the deal… No, no, no. You said “Why they don’t like the deal, and why the deal might not work.” I love framing it that way. Thanks for sharing that.

Bruce Mack: Absolutely.

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

Bruce Mack: Alright, let’s rock!

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

Break: [00:20:40.08] to [00:21:41.13]

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

Bruce Mack: Oh, my gosh… So many. One-Minute Manager.

Joe Fairless: What’s a mistake you’ve made in business?

Bruce Mack: Not having a trust and protecting my assets, because I got my butt sued, and boy, did it hurt financially.

Joe Fairless: Did you lose that 175k?

Bruce Mack: I lost the 175k.

Joe Fairless: What happened?

Bruce Mack: I was doing a lot of pre-foreclosures. I was in the Vegas Metroplex. I had a door-knocker who actually was a previous client, who got an equity split and he was out there, pounding the pavement. We found a guy who was a couple weeks away from losing his house; he brought him over to the office, we signed the paperwork, did the tabletop closing… Everything was great, and then I got sued. In the points and authorities the guy alleged – are you ready for this?

Joe Fairless: Yeah…

Bruce Mack: That he was kidnapped, and he was incarcerated and was being held at our office under duress, and that he was also drunk as a skunk.

Joe Fairless: Huh.

Bruce Mack: I had to obligate myself during this time to keep the mortgage payments current, because of course it would have flipped into foreclosure and then Lord knows, it would have been a multi-million-dollar suit… I had to pay the gardener, I had to pay the pool guy, I had to pay the utilities, and I had to deal with this trauma which was the mental anguish of this was worse than the financial anguish, which would have not been there had I had a trust, and this whole thing could have gone away.

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

Bruce Mack: Oh, my gosh… Other than some apartment buildings where I was able to receive in excess of a half a million dollars, two very quick deals come to mind. One was a design build… When I was living in Las Vegas I bought the dirt, designed the house (it was a 7,500 sq.ft. house) and did a turnkey for 1.2 million dollars, lived in the house for a couple of years and sold it for 3.4. So it was a really good payday.

And from rehab and flips, on an equity split from a distressed homeowner we turned over $150,000 upon a property, and were able to pay out similarly to the other party, as well as save the guy’s bacon from foreclosure.

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

Bruce Mack: By helping people and educating them, so that they truly can experience financial freedom in all ways, shapes and forms.

Joe Fairless: Best ever way the listeners can get in touch with you and learn more about what you’re doing.

Bruce Mack: Sure. You can email me, bruce@platinumtrustgroup.com. I’m fearful, but I love to talk to people. And should you wish to, I’ll give  you my direct line. Please use it, but I also like to put a caveat – please don’t abuse it. My direct line is 702-371-2345. Likely, your best solution is to get onto platinumtrustgroup.com and book an appointment for a complementary consultation. I’m delighted to sit down and learn about you, learn about your situation and see how we can save your assets, and also help you potentially with it some tax advantages that we’re aware of, that we would like to tell you about.

Joe Fairless: Well, Bruce, thank you for sharing what you and your team have come up with. The Titanium Asset Protection Trust – very intriguing. And also talking through the pros and cons for the other trusts or other entity structures, as well as the tax benefits that you mentioned, and then the best ever advice – regardless of if you’re looking for asset protection, if you’re a real estate investor, take the deals to two people who are more seasoned and ask them what they don’t like about them, what in the deal might not work. That’s a great way to have a litmus test for your deals built into it.

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

Bruce Mack: Thanks so much, Joe, and I really appreciate the opportunity to come on the show today.

JF1819: He Just Quit His Full Time Job To Be A Full Time Real Estate Investor with Sean Pan

Sean is joining us today to share his real estate investing story. We’ll hear how he acquired his first deal, how he evaluates his flips, and ultimately how he was able to scale his own real estate investing business to a level that sustains his lifestyle and he was able to quit his full time job! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“I lost so much money on a deal that I ended up in Bloomberg magazine” – Sean Pan

 

Sean Pan Real Estate Background:

  • Real estate investor located in the Bay Area
  • Started his real estate investing career by buying a small portfolio of cash flowing rentals in Jacksonville, Florida and has since completed 5 flips in the Bay Area
  • Based in San Francisco, CA
  • Say hi to him at seanpanrealtyATgmail.com or www.everythingrei.com
  • Best Ever Book: Best Ever Apartment Syndication Book by Joe Fairless

 


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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, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Sean Pan. How are you doing, Sean?

Sean Pan: How’s it going, Joe? Thanks a lot for having me on your show today.

Joe Fairless: Well, it’s going well, and you’re welcome. I’m looking forward to our conversation. A little bit about Sean – he’s a real estate investor located in the Bay Area. He started his real estate investing career by buying a small portfolio of cash-flowing rentals in Jacksonville, Florida, all across the country. And since he has completed five flips in his backyard, in the Bay Area. With that being said, Sean, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Sean Pan: Absolutely. Thanks again. My name is Sean Pan, I started as an engineer over in Los Angeles, making satellites for the government. I just realized over some time that this isn’t where I wanted to be 30 years down the road, and I wanted to find a way to get that financial freedom and be able to do things that I wanted to do. And that’s how I stumbled into real estate investing, and that’s how I stumbled into purchasing cash-flowing properties over in Jacksonville, Florida, and then later on I moved over up to the Bay Area. The Bay Area is a little bit different. People here are more interested in flipping homes. And just by hanging around so many flippers, I became a flipper myself.

Joe Fairless: Did you have a full-time job when you bought that portfolio in Jacksonville?

Sean Pan: Exactly right. I had a full-time job, I was saving money…

Joe Fairless: Do you still have it, or are you doing this full-time now?

Sean Pan: Actually, I just put my two weeks in…

Joe Fairless: Alright, congratulations!

Sean Pan: Yeah, thank you so much.

Joe Fairless: Wow! Alright, so you had your full-time job when you found the cash-flowing properties in Jacksonville, and then I interrupted you. Sorry, I just wanted to ask you… So please, continue.

Sean Pan: So then  I started hanging out with a lot of flippers in the Bay Area, going to a lot of the meetup groups in the area, and learning how to flip properties, and that’s just how I got into flipping houses.

Joe Fairless: Okay. Let’s rewind a little bit to the Jacksonville portfolio. When I say portfolio, I’m just repeating what I see in the show notes. What exactly did you purchase?

Sean Pan: Right now I have two single-family homes and one fourplex.

Joe Fairless: Okay, so two singles, one fourplex – six  total units. What was the total purchase price?

Sean Pan: Oh, geez. First one was about $80,000, the second one was an auction home, so $40,000 on that one; we’ve put another 15k to rehab that one. And then the last one was a fourplex we bought for about 250k.

Joe Fairless: Okay, so 250k fourplex, and 80k, and what was the other one?

Sean Pan: 40k.

Joe Fairless: 80k and 40k. One was from an auction?

Sean Pan: Yeah.

Joe Fairless: So you bought them separate times then.

Sean Pan: Exactly. It’s a portfolio that I bought over time.

Joe Fairless: Okay, cool. Auction – that was your second purchase?

Sean Pan: You know how it goes, when you buy the first one, you just want another deal…

Joe Fairless: Right, of course.

Sean Pan: So I bought my first one and I was like “Alright, this is pretty good.”

Joe Fairless: The $80,000 one?

Sean Pan: Exactly. I was like “It’s pretty good.” I bought it for 80k and it rents for $900. About the 1% rule, so… Good enough. My friend said he had a connect who actually worked on Auction.com, and he has a list of what the banks actually want for a property… So even though something says $60,000 as the estimate, they know that banks only want 40k, so I was like “Alright.” I put in a bid at 40k and we got it.

Joe Fairless: Okay. What did you do with the property once you purchased it, in terms of renovations and renting it out, or costs, the rent price, all that stuff?

Sean Pan: My property manager – he’s a god-sent. He took care of everything, basically. He went in there, it was a wreck. There was someone living there, a squatter. Luckily, we were able to do cash for keys. He just got six crisp $50 and just kind of wafted it in her face, like “You want these? Get out.” So she did, she got out for only $300, so we got pretty lucky there.

A $15,000 remodel in Jacksonville goes a very long way. We rehabbed it and we were able to rent it for $850.

Joe Fairless: Good for you. So all-in 55k, and… Six $50 bills? Did I hear that right? So $300. So all-in $55,300. And you are renting it for $800?

Sean Pan: Yeah, $850.

Joe Fairless: $850, sorry. I didn’t mean to short-change you on that. Okay. And then you bought a fourplex.

Sean Pan: Then I bought a fourplex.

Joe Fairless: How long ago was this?

Sean Pan: This was about two years ago.

Joe Fairless: Only two years ago? Alright. What were the numbers on the fourplex? You said you bought it for 250k. What about rehab and income that it generates?

Sean Pan: That one was pretty stable already. When I bought it, it was going for about $650/door. After we turned the units, now it’s about $750/door. Again, my property manager is the one that is doing all the work. Of course, we do repairs here and there, but nothing too major on the fourplex.

Joe Fairless: Okay, so you haven’t put substantial money into it for cap ex, or anything. You just bought it for 250k and you’ve been making any improvements from the cashflow of the property.

Sean Pan: Right.

Joe Fairless: Okay. What type of financing did you get on each of the three?

Sean Pan: The first one I wanted to get the deal. It was actually listed for 100k and I said “How can we negotiate down?” So I actually bought it with cash, and then we did delayed financing. So after we closed with cash, then I did a loan to get paid back.

Joe Fairless: Okay.

Sean Pan: The second one was a pure cash play.

Joe Fairless: Sure, yeah.

Sean Pan: The third one was traditional financing. For multifamily it was 25% down.

Joe Fairless: Okay. Have you since put a loan on that $40,000 auction house?

Sean Pan: I was going to, but then I got too lazy. And it cash-flows good enough, so it’s just there.

Joe Fairless: Yeah, I hear ya. So you’re in San Francisco, these properties are in Jacksonville. How did you end up in Jacksonville?

Sean Pan: I’ve been going to all these real estate meetup groups, and consistently Jacksonville hit those top ten “Best markets to invest in”. All of the other ten, I was like “I’m not sure about the weather here, I don’t know about snow, I don’t know about tornados…” And I thought, “Oh, Florida. It’s sunny, hurricanes aren’t that common”, and of course, after I bought them, Irma hits, and the other one recently hit as well… But luckily, none of my stuff got affected.

Joe Fairless: What type of expenses do you have on the properties, in terms of anything that is higher than what would be in other areas, to the best of your knowledge? For example insurance, or property management fees. You said your manager is really good. Can you just talk  a little bit about that?

Sean Pan: Sure. I’m not gonna lie, I’m pretty sure I’m paying more for my property manager. I’m paying him 10% a month. But it’s worth it. Property management is a  hard job, and at the end of the day, what’s 10% of a couple thousand dollars, right? Versus 8% that some people get.

Insurance is definitely higher because of the hurricane risk. It’s about $1,000 per door.

Joe Fairless: Okay. When you take a look at your portfolio in Jacksonville, you are cash-flowing, and it’s making you some money. Why did you decide not to continue to build that out in Jacksonville, and instead focus your efforts on San Francisco flips?

Sean Pan: I’m sure everyone has the same story, where they love buying rentals, but after a certain point they run out of capital. So what do you do after that?

Joe Fairless: Yeah, details… Right.

Sean Pan: You could raise the money, which I had no capability of doing that at the time, because I didn’t know anything about it… So I thought “How can I get more capital?” By hanging around investors here, there are a lot of people that I know personally that are making over seven figures a year flipping homes here in the Bay Area. And just talking to them, learning the strategies, it seemed “Okay, not too bad.” That’s why I focused on that.

Joe Fairless: Let’s talk about the first flip. What are the numbers, and – will you tell us about the project?

Sean Pan: Oh, yeah. The first flip was so interesting, because I spent maybe two years spinning my tires, sending out letters, cold-calling people, and nothing was happening. But it just so happened that I used to volunteer at a meetup group, and my co-meetup volunteer, my friend who sat next to me every time, she had a deal that she couldn’t handle because she had too much on her plate already… And she actually sent it to the other investors who didn’t want it, because I guess the numbers looked tight for them. For me, I knew the area pretty well, I thought it was pretty good, so I jumped in with her. We partnered on the deal.

We bought that one for 865k. 865k for a rehab, which might surprise a lot of your listeners, because to us that’s really cheap, for you guys it’s super-expensive.

We’ve put about 75k into it – complete rehab, changed everything; kitchen, bathrooms… And when we sold it, we sold it for 1.4 million dollars.

Joe Fairless: That’s a big profit.

Sean Pan: Yeah. So we got a huge profit on our very first deal. So here I am, sitting pretty, thinking “Oh, making money is easy.”

Joe Fairless: Well, let’s talk about it. You bought it for 865k, right?

Sean Pan: Yup.

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

Sean Pan: 75k.

Joe Fairless: 75k. So you’re all-in for less than 950k, and you sold it for 1.4. What were your carrying costs?

Sean Pan: We paid 2.5 points upfront, and I believe it was 9% annualized interest.

Joe Fairless: Do you know what roughly that amount totals up to be?

Sean Pan: I don’t remember the exact details on that one.

Joe Fairless: 50k, 20k, 100k?

Sean Pan: Probably about 30k… Because we held it for only three months.

Joe Fairless: Yeah, so you all killed it on this one.

Sean Pan: Oh yeah.

Joe Fairless: What do you think the difference was between what people at your meetup were seeing and what you saw?

Sean Pan: First of all, the other investors – they get tons of deals that come on their table, so they’re able to cherry-pick the very best ones. And of course, when you’re at the high level, everyone’s super risk-averse, so if they don’t need to take on a deal, they won’t take it. This one I guess just didn’t fit their criteria, and at the time maybe the [unintelligible 00:11:34.28] was a little bit smaller.

We definitely got even luckier, because when we bought it, and to the point where we sold it, the market actually increased about $100,000 in that neighborhood, just because it was so crazy at that time.

Joe Fairless: How did you line up the financing for this one on your very first flip?

Sean Pan: I reached out to my network on Facebook, asking if anyone knew a hard money lender. When you’re brand new and you have no connections, it’s pretty hard to get stuff done. But I was able to connect with a hard money lender down in South California, who worked with me even though it was my first deal.

Joe Fairless: Cool. Alright, so that was the first one. Then out of the five that you’ve done, which one was the least profitable or not profitable?

Sean Pan: You wanna hear some horror stories?

Joe Fairless: Yes, please.

Sean Pan: Alright, here’s some horror stories. Actually, my latest claim to fame is that I lost so much money on a deal that I ended up on Bloomberg Magazine. You may know me as that guy that lost a bunch of money on a  flip.

Joe Fairless: Okay, I haven’t read it, so please elaborate.

Sean Pan: I’ll send you the link later on.

Joe Fairless: Okay.

Sean Pan: Alright, long story short – for people who wanna skip to the end…

Joe Fairless: We don’t need to skip to the end. [unintelligible 00:12:44.15]

Sean Pan: Alright, we’re not gonna skip to the end; I’ll tell you the story. I bought this house in May of 2018. This is the peak of the market last year. This property was two blocks away from Apple’s brand new campus. Beautiful location.

Joe Fairless: Seems like a home run so far.

Sean Pan: Seems like a home run so far. The property was at first listed on the MLS for two million dollars; they contacted us because that house was sitting on the market and no one was buying it. So we went over and we thought “MLS property? There’s no way this is gonna be worthwhile.” But we dug deeper. We saw “Oh, the listing agent is from Turlock”, which is like two and a half hours away from where the property is located, so he wasn’t gonna come over to do open houses. He said “No open houses. If you wanna go inside the house, contact the seller directly.” No one’s gonna do that for a two million dollar house.

Second of all, he took pictures with a very old camera, and they didn’t even stage the property. They were still living there. So all that combined, we thought – okay, this is the reason why it’s not moving. It’s just unattractive because it’s marketed incorrectly.

Down the street there was a home that was being listed for 2.5 million dollars. Our house is a little bit smaller. We thought our ARV could be 2.2-2.3 million dollars. So based on our numbers, we thought “Okay, if we can get it for 1.8 million or lower, that’s a slam dunk right there.

Joe Fairless: Yup.

Sean Pan: So we actually put an offer for 1.7, kind of low-balling for a little bit, and they straight up rejected us. I was reading this book by Chris Voss called Never Split the Difference. Have you heard of that one before?

Joe Fairless: I have, I interviewed him.

Sean Pan: Yeah, great book. So he says that if you wanna negotiate and you want a lower number, use actual numbers. So you don’t end your bid with 000 in the thousands, because that just seems like you pulled that number out of nowhere. So instead we bid 1,747,923. I remember that number because it’s so weird…

Joe Fairless: [laughs]

Sean Pan: And when they got that offer, they looked at it like “What is this number? How did they settle on this number?” And they accepted it. Then the listing agent said “Alright, they accepted it. Write up the offer.” And so right there I was shocked. I was like “Oh my goodness, this guy doesn’t realize that we intended to use him as the buyer’s agent to represent us.” He told me to write the offer, and I have a license but I don’t really practice, so I learned on the spot how to write a contract. And just by doing that, we gained an extra $45,000, because we got 2.5% of that sales price.

Joe Fairless: Okay.

Sean Pan: So we thought we were sitting pretty. We basically got this house that we wanted for 1.8, for about 1.705 all-in.

Joe Fairless: Alright.

Sean Pan: So we thought we were good. There was a house across the street that someone was trying to wholesale for 1.825, that was in a worse condition, and on a smaller lot. Long story short, we thought we were great.

But then we started getting creative; we thought “What if we take down this wall here? What if we make an open kitchen layout?” That involves getting architects, and structural engineers, and more inspectors. All that stuff takes time. So after being delayed and working on this project for months, finally we were ready to go on the market.

Joe Fairless: What did you do that you hadn’t done in previous projects, that took a little bit longer, besides knocking down a wall?

Sean Pan: That’s basically it. We’d never worked with architects before, we didn’t realize that structural engineers could hold you back so long… Just all these serial tasks make it so that you project goes longer that you need it to be.

Joe Fairless: So how long did it take from when you had it under contract to when you were listing it?

Sean Pan: We bought it in  middle of May, and we listed it in the first week of November.

Joe Fairless: Okay.

Sean Pan: We thought we’d be in and out within two months, and here we are 4-5 months later…

Joe Fairless: So a total of 4-5 months…

Sean Pan: Yeah. But the thing about that is that’s when the market turned. See, peak to trough in our area was a 25% drop… From the hot of June 2018 to the low of November 2018. 25% delta. And when we listed the property, that same weekend we had these fires up in Paradise, California.

Joe Fairless: Oh, yeah…

Sean Pan: No one was walking around, or wanna go to open houses. I laughed that I was going to a restaurant with my friend and I was like “How come we don’t have to get a reservation today? It’s great.” So after a while — this house just sat on the market, no one was looking at it…

Joe Fairless: What’s a while?

Sean Pan: Surprisingly, a while was only two weeks.

Joe Fairless: Okay… [laughs]

Sean Pan: In the Bay Area if your property isn’t sold within ten days, then there must be something wrong with it. There’s a stigma to this property now.

Joe Fairless: Alright…

Sean Pan: So people started finding excuses why no one else was bidding on it, and they said “Oh. I noticed this two million dollar property has no garage.” In the Bay Area garages aren’t necessary, and for the most part, people don’t park their cars in the garage. They park their stuff. So that became a big anti-selling point for most people. They said “Oh, I love that house. It’s beautiful, the location is great… Oh, but no garage? Deal-breaker.”

Joe Fairless: Did the one that was — I think you said 2.5… Did that have a garage?

Sean Pan: That one did have a garage. And that  one ended up selling for only 2.3. Again, the market shifted, as well.

Joe Fairless: Okay.

Sean Pan: And don’t get me wrong, this property has parking. This property has a lot of parking, it has a carport, and it has a giant shed in the back. But because of setback laws, we weren’t even able to add a garage if you wanted to.

Joe Fairless: Okay.

Sean Pan: So we were basically stuck.

Joe Fairless: You said it has a carport?

Sean Pan: It has a carport.

Joe Fairless: Can you not enclose that?

Sean Pan: Unfortunately not, because of the setback laws.

Joe Fairless: Oh, alright…

Sean Pan: Yup. So basically it’s an overhang, but there’s no way I can add a wall in there because of setback laws.

Joe Fairless: Okay.

Sean Pan: So we went over the winter break, we just kind of had it on the MLS… We decided to take it down for a whole month, so that we could reset the days on market, to make it seem like it’s a brand new listing…

Joe Fairless: Is that what it takes? You’ve gotta take it down for 30 days in order to do the reset?

Sean Pan: That’s correct.

Joe Fairless: Okay.

Sean Pan: And we put it back on the market and it was still not moving. And this whole time I’m paying holding costs on a 1.7 million dollar hard money loan.

Joe Fairless: Yeah… That’s rough.

Sean Pan: And I was laughing.

Joe Fairless: Especially due to the time of year, too. Because it’s not just a little downturn in San Fran, but I believe you’re in November, December, January at this point in time, which – that’s not exactly peak buying time.

Sean Pan: Yup. Seasonality affected us as well. It just wasn’t moving.

Joe Fairless: What were the holding costs every month?

Sean Pan: For that one property I was paying $11,500, not including staging costs, or utilities, or those beautiful green envelopes called “Supplemental taxes.”

Joe Fairless: So all-in what were you paying a month, would you say?

Sean Pan: I leased 12,5k because of staging, and then supplemental taxes are these beautiful, green envelopes that say “Hey, you owe these extra taxes based on what you’ve bought, and what the previous owner had to pay in taxes.” Those were like $15,000 checks as well.

Joe Fairless: How often?

Sean Pan: Those only happen once or twice. It’s not recurring.

Joe Fairless: Once or twice over 5-6 months?

Sean Pan: Like the year.

Joe Fairless: Oh, wow. Okay.

Sean Pan: Do you know what supplemental taxes are?

Joe Fairless: Educate me.

Sean Pan: Basically, when the previous owner bought the property, he probably bought it 20 years ago for $300,000, so he property tax is based on that $300,000, and based on a [unintelligible 00:19:57.11] that property tax can only increase by about 1% a year. So he was paying a couple thousand a year for his property. But now here I come, new buyer. I buy it for 1.7 million dollars, so now I owe property taxes on that 1.7 number, versus $300,000. So that delta of property taxes – they send you an envelope saying “We need you to pay that difference.” That comes in these green envelopes, and that’s called supplemental taxes.

So I got that one the day of my Thanksgiving party, and I was very unhappy. [laughter] It’s like, “Alright, Sean, another $15,000.” I was like “Damn it…!” [laughter] And don’t get me wrong, I did very well my first flip, I did well in my career and investing in other things, but at this time I was invested in multiple projects at the same time and they were all going south. So it wasn’t just this 11.5k. I was paying 30k total a month, all my holding costs.

I was joking, because I went to Asia and I was hanging out with a friend in Taiwan, and I was asking her about her base salary. And I was like “Oh my god, I’m paying your base salary in holding costs alone every single month… I kind of feel like a boss, it’s pretty cool.”

Joe Fairless: Right. [laughs] So then what happened with the deal.

Sean Pan: It did not move.

Joe Fairless: [laughs]

Sean Pan: We basically held it on the market for five months, from beginning of November until March. It didn’t move, so we had to drop the price significantly, get off the books, and fire-sale it. We eventually got someone who came in and offered us — the best offer we got was $100,000 less than what we even bought it for.

Joe Fairless: Okay… So 1.6…

Sean Pan: We got 1.675.

Joe Fairless: 1.675.

Sean Pan: Yeah. So imagine, a whole year’s worth of holding costs on hard money. All the repair costs that we did, and the purchase price. We basically lost $400,000 on this one project.

Joe Fairless: Was it someone who was moving in, or were they also a real estate investor?

Sean Pan: Oh no, it’s a family.

Joe Fairless: Okay. So it’s their primary residence.

Sean Pan: This is a primary residence. And when we checked up on it a couple weeks later, we saw that they were making even more renovations, so… We were like “Great! Good for them.”

Joe Fairless: [laughs] Well, they had a two million dollar budget, and they were able to get a really good deal, so they had some money invest back into the property.

Sean Pan: If you’re willing to sacrifice a garage – yeah, you can get a great deal in the Bay Area, apparently. And it’s funny, too – so I told my story on Bloomberg Magazine, I got published, it became the number one read article, I got a bunch of people listening to me… A lot of [unintelligible 00:22:32.06] obviously. Like, “Oh, this guy’s stupid.” But whatever, it was fun.

The agent who helped buy that house actually contacted me and now I’m gonna get lunch with him next week. So you might as well get a connection while you’re at it.

Joe Fairless: Right, exactly. What’s done is done. You’ve done five flips; what number was that?

Sean Pan: Number three. Basically, number three and four are losers. Number five – I’m still in it, and it’s probably gonna be a big L as well.

Joe Fairless: Okay. Well, taking a step back now, this is the perfect time for this question, “What’s your best real estate investing advice ever?”

Sean Pan: My best real estate investing advice ever is that real estate investing is a business. I think this is being said very often, but it needs to be taken more seriously. Think about creating Facebook or LinkedIn – you probably don’t do this on the side, or just part-time. If you’re gonna do this seriously, you do this with determination, and you do it with extreme focus. My biggest mistake was that I outsourced too much responsibility. I thought that it was easy based on the experiences on my first flip, where you can rely on the other party to take care of everything. But your money is at risk, so you should be the one making sure that you have everything in line, and make sure everything runs smoothly.

Joe Fairless: And on that deal number three, the main thing was the delay, where instead of two months you’re in and out, it was four to five months, and then you finally listed it. That wasn’t outsourcing the process, but it was incorporating a new part of a process… So was that your idea, to knock down the wall and then try and do a different layout, or was that someone that you spoke to and they were like “Yeah, we should do this” and you’re like “Yeah, sure, let’s roll with it”, and then you just kind of sat back and watched it unfold.

Sean Pan: I take full responsibility for everything that happened. I don’t remember if it was my idea per se to knock down that wall, but once we all agreed on it, we did it. But what I should have done is I should have followed up… Because we had some issues in the middle. Basically, in the plans there was a specific choice that needs to be put down for the foundation, and I guess the foundation width was different than planned… So the inspector said “Get the structural engineer to write this document.” It took that structural engineer about a whole month to do it, because he had his own personal issues going on, he had too much work… That ended up being only three sentences, but that delayed us by a whole month.

Joe Fairless: Oh, my…

Sean Pan: So if I knew about it, if I was there, I could have 1) talked to the structural engineer and say “Hey man, it’s three sentences. I’ll write it for you, you just sign it.” Or 2) I could have found another structural engineer.

Another thing is that I thought I knew a lot, because I was successful, but I didn’t. I thought that not having a garage was no big deal, because I grew up in the Bay Area, in a different city, but we don’t care about garages. But if it’s like a two million dollar home, now they have their nice-looking cars – they probably want a garage. I didn’t know about that. I was just learning as I was going.

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

Sean Pan: Let’s do it! I know you’re ready. First, a quick word from our Best Ever partners.

Break: [00:25:40.29] to [00:26:42.21]

Joe Fairless: Okay, best ever book you’ve recently read?

Sean Pan: The best ever book is the Best Ever Apartment Syndication Book by Joe Fairless!

Joe Fairless: Alright! You like that one, huh?

Sean Pan: I do, I do.

Joe Fairless: I’m glad to hear it. What’s the best ever deal you’ve done?

Sean Pan: The best ever deal is that first one I did in Sunnyville, where I made around $300,000 in profit.

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

Sean Pan: Right now I am also a podcast host for the Best Ever Real Estate Investing Show. I’m also a meetup group leader, where I bring people together to talk about events and different strategies… And I love just giving back, and writing blog posts, and giving out free notes. When I go to conferences, I just give away free notes for everybody, because I know they’re too busy to take their own.

Joe Fairless: That’s cool. And what is the best way the Best Ever listeners can get in touch with you?

Sean Pan: The best way to get in touch with me is by sending me an email at seanpanrealty@gmail.com, or check out my website, everythingrei.com.

Joe Fairless: Thank you so much for sharing your story. I know you’ve shared it already; I wasn’t aware of your story, but clearly you’ve shared it already in other channels… But thanks for talking about it, and then talking about the lessons learned… And boy, that structural engineer comment really resonates with me, because it’s about being educated on the process, and then also being tenacious and following up with certain team members who are holding up the process and offering up some solutions to them.

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

Sean Pan: Thank you, Joe. Take care.

JF1817: How To Get Top Dollar For Your Home With Minimal Improvements with Caroline Carter

Caroline and her team help homeowners sell their homes quickly and for the highest amount possible. They do through through a process called Total Home Transition, and they also help with packing and unpacking at the next house. Hear her best tips for getting a home ready for market. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“It’s not about the seller when you’re selling your home, it’s about the buyer” – Caroline M. Carter

 

Caroline M. Carter Real Estate Background:

 


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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, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Caroline Carter. How are you doing, Caroline?

Caroline Carter: Hey! Good, Joe. How are you?

Joe Fairless: I am doing well, and looking forward to our conversation. A little bit about Caroline – she’s the founder and CEO of Done In a Day. She’s helped more than 2,000 families repair their homes to sell for top dollar and avoid the chaos and stress of moving. Based in Washington DC.

With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Caroline Carter: Sure, absolutely. I’m happy to. I was a middle child, one of four. I grew up in New Jersey. I had some high-achieving other siblings. I never expected to be a high achiever myself. There was not much really expected of me. I was an average student; I’m sure you’ve heard this before. But I was very tenacious, very driven, very OCD, a little bit of a clean freak, and I was organized to a fault. So I thought “Hm, what can I do? What are my special skills and abilities that I bring to the table?” And one of the things that I realized very early on is that I was a nurturer. So I started babysitting as a mother’s helper at eight years old, and amassed $400 in the bank by the time I was 12. So that’s kind of how I grew up… My parents were not helicopter parents at all. As a matter of fact, they were just the opposite.

I remember my mother saying to me, when I was very young and struggling with making a decision about something… She said “You know, Carrie, I don’t worry about you. You always land on your feet.” And I thought, “Okay, that’s the worst thing you could possibly tell a child”, because I didn’t have the tools necessarily to figure out what I was struggling with, but yet, I remembered that through the years as I’ve gone through more difficult periods in my life, and had to really dig deep to figure out “You know what, I am gonna land on my feet, and I’ve just gotta figure it out.” So in essence, I’m glad that I didn’t have helicopter parents, looking back.

Joe Fairless: So you are the CEO and founder of Done In a Day.

Caroline Carter: Yes.

Joe Fairless: Will you describe your business model?

Caroline Carter: Sure. We focus on total home transition. The process is called total home transition. You’re gonna say “Well, what does total home transition mean?” Total home transition is the process that we all go through, from the moment we decide to sell a property until the moment we’ve unpacked the last box in the next house.

Essentially, what we do is we partner with agents – realtors, real estate agents – to work with their clients to guide and educate them how to make the best use of their time and money as they walk through this process. There’s really two phases of it.

The first is understanding how to package your property to sell. Now, a lot of people say “Oh, you’re a home stager.” Well, staging is only one part of it, and I’m sure you’re familiar with — are you familiar with home staging, Joe?

Joe Fairless: I am.

Caroline Carter: Okay. So most people believe that that’s really what it’s all about… But you can’t stage a home – which is in essence bringing in furniture to highlight the house – until you’ve  actually performed a non-emotional buyer-based assessment of the structure and property… Meaning you’re going to look at the house to figure out what it is that you need to fix; anything that beeps, squeaks, creeks… So essentially, I’m a visual marketer, right?

Joe Fairless: Right.

Caroline Carter: I was with someone the other day and we were walking out on their back patio… And the door to the back patio wouldn’t open. He said “Hold on, I actually just have to jiggle it up a  little bit.” I said “Okay, John, that’s something that we’re gonna wanna take care of.” So the visual packaging of a home, which includes painting, carpeting, visual and cosmetic updates – that’s the first portion of the process to position it to sell. So we work along with the agent to provide this assessment.

Then you go into kind of no man’s land, when the house is on the market and we have to keep everything perfect, and we’re living in this hotel-like home… Once you have a ratified contract, you then move into the Move portion of the sale. That’s really figuring out “How am I going to move this family, get the best deal on the move, the best to organize it and supervise it, to get them  unpacked in the new home?” Essentially, you’re trying to work with this family to smooth the transition.

Joe Fairless: Okay. And on that front, I’m sure you get sometimes “Well, I’ll just hire a moving company, so what do I need you for?”

Caroline Carter: Sure. What’s interesting about home transition – and I work with many, many people who are heads of their individual industries. When it comes to our home, we all of a sudden lose our ability to think without emotion.

Joe Fairless: [laughs]

Caroline Carter: No, seriously.

Joe Fairless: I know, I agree with you.

Caroline Carter: [unintelligible 00:07:10.28] and it doesn’t matter if it’s 1,000 sq. ft. or 12,000 sq. ft. This has happened with anybody and everybody, from sports figures, to [unintelligible 00:07:20.18] high-ranking government officials… And all of a sudden you start talking to them about how to non-emotionally look at this process, and they say “No, I get it, but…”

Joe Fairless: [laughs]

Caroline Carter: So it’s a problem, because when it comes to your home, people don’t understand that this is a discoverable process, meaning after having worked with over 2,000 families over the last 14 years, we know that there is a process of about ten steps that each family walks through. These are identifiable steps. We know by educating our sellers on what to expect, we know it’s a total rollercoaster. We know where the high points are, we know where the dips are, we know where they’re going to falter, so we prepare them for that, so they approach it in more of a business-like fashion, as opposed to winging it, which most people do. They separate the sale of their home and the move, whereas Done In a Day looks at it as one continuous process… Because it really is, rather than two separate processes.

Joe Fairless: So help me understand a little bit more specifically in my own mind, and perhaps some listeners… When I mentioned, “Well, I will just hire a moving company”, then you talked about “There’s an emotional process involved, and there’s ten steps that each family goes through…”, but what is it that’s more complicated than “Well, I will just hire a moving company. They’d move things from A to B”? And where is emotion involved in that process? I guess I’ve just missed that connection.

Caroline Carter: Okay, I’m sorry. I get over-excited about my process… Because it really does affect everybody. So when you make the decision to sell your home, that is a very personal decision. You may have made it because of a death, divorce… It’s one of the huge life-changing events, for all of us. Now, the U.S. Census Bureau says that Americans, more than any other country, move an average of 11 times over their lifetime. Think about it, 11 times you’re packing up your Kitty Karry-All and taking it on the road. So these moves become very complicated.

So you make the decision to sell… Typically, you reach out then to a realtor,  or  a real estate agent, right? The National Association of Realtors says that still, 87% of us will engage the services of a realtor. What’s a realtor’s job? A realtor’s job is to sell your home, right?

Joe Fairless: Yup.

Caroline Carter: Okay. Have you ever met anybody that didn’t wanna make the most possible money on the sale of their home?

Joe Fairless: I have not, no.

Caroline Carter: Right. So that’s where I come in. It’s visual packaging, meaning we look at the property, the interior and the exterior of the home, and we create what I call the perfect listing. The perfect listing is a listing that presents as updated, clean, with the buyer’s wants and needs and preferences in mind… Meaning it’s not about the seller when you’re selling your home, it’s about the buyer. It’s about understanding what today’s buyers are looking for, and speaking to that.

In order to actually get to that point, we each have to go through our homes – if we’re doing this correctly – and sift through the roughly 300,000 items, according to the L.A. Times that we have in our home. Now, of course, I’m counting the plastic tupperware we used to put our– right?! But we all have storage areas, and garages, and basements, and attics, and even if you’re living in an apartment, you have a storage area in the basement maybe. So what you wanna do is by combining the move and the sale of the home into one process, you’re actually sorting, purging, donating, packing to store, and ultimately move, so that you’ve gone through your home as part of this process, you’ve touched everything once and made a decision about it… Right?

Joe Fairless: Yup.

Caroline Carter: So you are at the end of packaging the house to sell. You’ve also packed to move. You’ve packed the things that are not necessary to the packaging of your home, so when your home is on the market. Everybody will tell you, put away your personal photos, and your tombstones, and so on and so forth. The total home transition process goes much deeper into the process. So it’s helping you to sell your house, walking you through the emotion of making these decisions, making good, solid, non-emotional business decisions, so that you’re looking at everything you own and deciding what it’s gonna cost for your to keep it, what it’s gonna cost for you to store it, and whether or not you need to and want to. It’s a very organized process. Does that make sense?

Joe Fairless: That does make sense. What’s an example of maybe a client that you worked with who had some items that you gave a suggestion to do something with, whether it’s remove it or highlight it…? Just to kind of give some specific examples of clients; I think that’d be helpful, too.

Caroline Carter: Sure. The way that we start every single project is through  a consultation. These are paid consultations, where we go in and meet with the seller and talk about the scope and schedule of the project… The schedule being “When is it that you intend to list your house for sale?” and the scope being “Let’s see how the house currently presents and let’s see what we need to do to create a house where a buyer is going to immediately identify and wanna find out more about this house.”

I had a situation recently where a woman had lived in this home for about 25 years, and she was looking to downsize. It was actually a beautiful home. It was all painted yellow, which was a very prominent color about ten years ago. There were personal photos everywhere. She basically intended to leave the house just as it was, meaning she didn’t believe in visual packaging, she didn’t believe in the power of the buyer, who’s really actually driving the sale. She dug her feet in the sand and said “Really, this is about me. I’m not changing anything.”

Anyway, she had a hallway – which many people do – of portraits and  pictures of trips and so forth with her family over the years. And I suggested to her that one of the most important things is to allow a potential buyer when they’re walking through to see the width and depth of a particular area or hallway without drawing attention needlessly to photographs, and artwork that was just placed there just for our pleasure, but had no real reason to be there.

Joe Fairless: Okay.

Caroline Carter: I suggested that she remove and pack away this portrait hall. And she said “I think you’re great, and I’ve heard a lot about you, but I’m not doing anything.” And when I left that consultation, I thought to myself “She’s gonna sit on the market”, because she is absolutely someone who cannot remove herself emotionally from the bricks and mortar. She still thinks of it as her home, instead of a marketable product that we need to package and sell. It needs to be updated, so that it can relate to today’s buyers. She was still very attached.

So the moral of the story is she changed nothing. Her pictures online of the property, where we know that’s where we first come into contact when we’re looking for a home – we put in our coordinates, “I’m looking for this”, and up pops five, ten, fifteen listings. How are we gonna decide what we wanna see? We decide visually first. We go through and we go “Ewgh, ewgh, ewgh… Uuuh, this one looks good!”

So anyway, she did not change a single thing about her house, and it sat on the market for three months, until her agent suggested that she do a sizeable price reduction, which was about $150,000 on this particular property. So instead of anticipating and addressing these objections ahead of time with me, three months before, she was not interested, not ready, and that cost her $150,000 for not addressing the emotional aspect of moving. It is very emotional, but it’s really not about you, it’s about the buyer.

Joe Fairless: You live in Washington DC now… Do you work with clients in the DC area, or in the North-East, or all across the country?

Caroline Carter: We focus pretty much on the DC Metro Area.

Joe Fairless: Okay, got it. So how do you identify what type of buyer you want to attract for a particular house?

Caroline Carter: That’s a great question. The interesting thing is that even though people think “one size fits all” and they’ll throw out things like “You have to paint the entire interior, and you have to recarpet, and you have to replace appliances”, that’s not always the case. If you are able to look at your house in a non-emotional way, and you understand who your target buyer is – that’s really important, Joe… Because today – we know today’s buyers are very, very distracted; they’re extremely distracted by their social media. They’re always on their phones… They’re able to identify with one click what perfection means to them. So “Oh, master bathroom – click. That’s the one I want.” So they’re able to identify it, and they have these preconceived notions in their mind… So what my job as a visual packager is is to get that particular listing as close as possible, so that it will appeal to today’s buyers.

Joe Fairless: What are some things that are tried and true, that appeal to today’s buyers?

Caroline Carter: The first one, the most important, is to be able to neutralize the walls. When we move into our homes – this relates to the emotional [unintelligible 00:18:07.18] throughout our homes… It’s the way we make a house a home; we design it to our taste. But when you go to sell it, it’s totally different. We wanna speak to that buyer.

So the most important thing is to show value visually and physically. What do I mean by that? When a potential buyer is walking through your home, they need the bricks and mortar, what they’re buying, to actually speak to them, without the bricks and mortar saying  anything. It sounds funny, right? They need to be able to see the width and depth of each room or area, the height of the ceilings, the play of light… You wanna highlight the unique assets in the house, and one of the ways is to neutralize the paint. Well, people have been saying this for years and years. Some people think that their home is the exception. It’s not the exception. No one’s home is the exception.

The second thing is you’re going to want to declutter. That’s the big buzzword today. But as we talked about earlier, decluttering is not just cleaning out your closets, it’s making mindful decisions about everything you own, so that yes, you’re cleaning out your closet for the benefit of the buyer, but you’re also beginning to dump, donate, pack to store, and that sort of thing, for yourself; you’re taking charge of the process.

The other thing is you’re gonna look for fast and inexpensive updates. Kitchen cabinets – you might put a white coat of paint on your kitchen cabinets and upgrade your hardware. The knobs and pulls on the outside of your kitchen cabinets. You might also reface your appliances. Let’s say your appliances are in good shape, but they’re all white-faced, or they’re all black-faced. Did you know that you can get sheet metal cut and cover the front of them, instead of replacing the whole appliance?

Joe Fairless: That’s pretty cool.

Caroline Carter: Yeah, it’s totally cool, and a lot of people didn’t know that. So if you’re talking about replacing a Sub-Zero refrigerator just because you don’t like the color… So what we do is we look at each and every house and we figure out “How do we maximize this space? How do we highlight the unique assets of this particular property, show value to this potential buyer in a way that they can relate to?”

So you’re not actually changing the house, you’re merely polishing it. Deeply polishing it, obviously, with paint, and white towels… There are all sorts of tricks. White bedding… What’s gonna photograph well and what’s not…? But essentially, what you wanna do is you want to guide a buyer’s visual tour of the property, so that you’re placing artwork, you’re tablescaping to guide that buyer… Because buyers are very distracted, so you wanna make sure that you’ve got their attention from beginning to end. And they’re gonna give you less than 10 minutes, period. They’re there to check it off their list.

Joe Fairless: Anything – and this might not be as relevant where you live; perhaps it is, but anything from a landscaping standpoint, or backyards, that you look to address?

Caroline Carter: Absolutely. Again, we talked about the interior and exterior. Regardless of how much yard you own… When I was growing up – of course, I’m 55 – we called it the backyard. Now they call it outdoor living room. They’ve got all these crazy ways to refer to it. Essentially, what you want to do is you want to look at the exterior as closely as you look at the interior. Very often that will require you looking at the color of the paint of the exterior of the house, the shutters, the front door, the quality of the hardware on the front door.

Here’s another interesting point for your Best Ever listeners. Have you ever looked at a door — I had a door recently on a two million dollar house, and the hardware (the handle etc) looked cheap to me; and it’s on a two million dollar house. And one of the things I suggested was “Let’s get some new door jewelry. Let’s make this door look as solid, secure and reflective of the price point of this property. Because right now it doesn’t look secure, it doesn’t look impressive…” And that’s what we did. So it’s visually tuning up the outside, whether it’s replacing shutters, painting shutters, so that you’ve created this beautiful, valuable visual. And it doesn’t matter, your house doesn’t have to be a 12 million dollar house, or a one million dollar house… It’s about making the best of what you have, focusing on your unique asset.

Sure, you’re going to have to trim trees that block the facade from the street, or overgrown bushes, or dead limbs on trees. You’re gonna have to edge and mulch, you may need to put in sod where grass is not growing. Essentially, you want to show value, both inside and outside, so that the buyer feels that they’re really getting a good deal for what the house is listed at.

Joe Fairless: Taking a step back, but on a related note, what is your best advice ever for investors who are selling their homes? I know you’ve talked through a lot of your advice, but maybe more macro-level.

Caroline Carter: Sure. I think the best advice I could give any seller or any agent who is working with sellers is to understand that this is not about you, it’s about the buyer. And it’s a visual game. Sure, it’s financial, sure, it’s still your home, no question; but we live in a visually-driven world, and we also live in a world where these buyers today expect perfection, they know exactly what they want, and they are determined to find it. So if you’re able to understand what that target buyer is looking for, speak to them and you will sell your home.

I just recently went through this in my own home, and had to package the home to sell. Very, very different than designing to live. I did this to my own home, and I sold the home for full price in eight days. So… I have to put my money where my mouth is. But essentially, to understand that this is a discoverable process, and you simply need to remove the emotion from it. You will not make good, quality decisions about the sale of your home, and the move, unless you remove the emotion from it.

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

Caroline Carter: Absolutely.

Joe Fairless: Alright. First though, a quick word from our Best Ever partners.

Break: [00:25:09.01] to [00:26:10.07]

Joe Fairless: Okay, best ever book you’ve recently read?

Caroline Carter: Best ever book… One of my absolute all-time favorites is Think and Grow Rich, by Napoleon Hill, and my dog-eared copy is always pretty close to my desk. But I recently read one this Sunday, with a cup of coffee, called “Find your lane’, by Bruce Waller. The book is very easy to read (I’ve read it in one sitting) and it’s all about digging deep to understand the why behind your life focus. And while I’ve read millions of these books, this one came at a good time, and it helps you to really ask yourself some basic questions about the balance in your life, and why you’re doing what you’re doing.

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

Caroline Carter: I’d have to say that’s an easy one… The Best Buddies Organization, working with differently-abled children and adults. I’m a single mom of three kids, and we’ve always been involved with the Best Buddies Community, locally and nationally.

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

Caroline Carter: They can connect with me in a variety of different ways. They can also purchase, if they’re interested in hearing more about this process or how to survive during a home transition, they can purchase my new book which I just wrote, called Smart Moves, available on Amazon. But they can connect with me at CarolineCarter.com, Facebook Caroline Carter Smart Moves, LinkedIn Caroline M. Carter. I’m on Instagram and Twitter too, and if they wanna email me, if they have specific questions, they can get me at Caroline@CarolineCarter.com.

Joe Fairless: Outstanding. Congratulations on your book, Smart Moves: How to Save Time and Money While Transitioning Your Home and Life. I see it on Amazon right here. I will be purchasing it.

I really enjoyed our conversation, Caroline. Thank you for getting into the specifics of how to visually package our product when we are selling our home, and thinking about it from the buyer’s perspective. It’s not about us, it’s about them. And then you got into some really tactical things that we can implement after listening to this…

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

Caroline Carter: Thanks, Joe. I appreciate it.

JF1816: Making $100k In 3 Months As A College Student, Building A Buyers List, & Financial Future Questions #FollowAlongFriday

We’ll be hearing Joe’s favorite lessons learned last week during his interviews. He’s sharing lessons from Angad Guglani (http://cooperacq.com/), Felipe Mejia (https://www.sideguymovers.com/), and Jamil Damji (https://keyglee.com/). If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Working with REO companies and getting deal flow through them”

 

Free Document:

http://bit.ly/thelpstructure

 


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TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


TRANSCRIPTION

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

This is Follow Along Friday. Theo Hicks, I learned a whole lot last week during these interviews… And as a reminder, Best Ever listeners, the purpose of Follow Along Friday is to pull out some insights that we learned – in this case I did the interviews last week, so I learned last week – and share them with you as a sneak peek, and also so that you can (should you choose to) start applying them sooner, since they interviews that I did this past week will go live probably in 4-5 months from now; we’re that booked out.

So Theo, do you want me to just go ahead and get into it?

Theo Hicks: Yeah, let’s jump right into those lessons, Joe.

Joe Fairless: Alright, cool. Holy cow – his name is Angad [unintelligible 00:03:01.05] What an impressive human being, from a real estate standpoint. I met him through this interview, so I don’t have any preexisting relationship with him; he’s a 24-year-old real estate investor based in New York City… And as a sophomore at NYU, he identified a need for a student-run brokerage. He went out, got his brokerage license, and he and some friends were leasing apartments to fellow NYU college students, and I’m sure other college students.

He was making six figures a summer, for three months of work. Six figures. I have a hard time putting myself in that place when I was at Texas Tech as a sophomore, having an idea for a business and then earning over $100,000 for three months’ worth of work. Just an incredible entrepreneur. I asked him how much did he have by the end of his senior year, how much was in his bank account, and he said it was between 250k to 350k.

Theo Hicks: Wow…

Joe Fairless: As an undergrad who just got their degree, this person had over 250k in his bank account, and he had a college degree. Just so impressive. So one is if you are in college, and you’re looking to create a business, this is a potential opportunity. He capitalized on the New York City market, and  the way it’s structured, where you’ve gotta go through a broker to get an apartment… I know having lived in New York City, New York City is its own animal, so perhaps this exact strategy won’t be applicable to Best Ever listeners who are in college looking to create something, but… It’s just inspirational, at minimum. Perhaps some tactical components need to be reconfigured, but just incredibly inspirational.

Here’s a tactical thing that he talked about for how he has since then (surprise, surprise) grown his portfolio (he’s 24 years old) to 60 single-family units, 12 multifamily — so I should say 60 single-family houses, 12 multifamily units, and a self-storage facility. And the self-storage facility – I was like “Tell me about it.” He’s like “Well, it sounds more impressive than it is. It’s 20 garages, 4,000 square feet.” I’m like “That’s impressive. That’s very impressive.”

He bought that for $120,000, and he found it on the MLS. He talks about that during the interview, so I won’t go into that. But the tactical thing I wanted to mention is how he found 60 single-family houses and 12 multifamily units is by working with REO companies and getting deal flow through them. And I said, “Okay, I’m not gonna ask you which companies you’re getting deal flow from, because that gets into your competitive advantage, and I don’t wanna steal your thunder on that, but the question I have is if you were starting over and you didn’t have the current relationships that you have with REO companies, how would you go about replicating this process?” and he said that an attorney helped him get connected to the REO companies. So he said what he would do is he would focus on networking with attorneys, telling them what he’s looking for and seeing if they have any connections they can give him.

He said another tactical thing you can do is by looking at the deeds and the mortgages and see who’s selling a lot of stuff on the county website, and if they’re selling a lot of stuff, they might be an REO entity. So those are two tactical things that anyone can do to identify these REO companies that might be a good lead source for him to buy directly from.

Theo Hicks: [unintelligible 00:06:48.24] I remember all the way back, when I was close to his age, I did that for Cincinnati… So I know there’s a way to do it for all the county, but for Cincinnati in particular you can get access to the back-end of the auditor’s site. [unintelligible 00:07:06.08] every single property in Cincinnati. In this case you would just filter by — they actually have recent sales too, so you just download the recent sales and filter it by the name of the person selling property, and just see “Okay, this person sold 50 properties in the past month. Maybe they’re an REO company.” Maybe they’re just a big owner who’s selling properties too, so it’s not just necessarily REO companies.

And then going back to the school one – that’s interesting, because most people will graduate with as much money that he had in his bank account in debt. So he did the exact opposite of what people typically do. For me — I was in mechanical engineering, so I’m sure I probably spent a lot of time on school, compared to maybe other majors, but I still had so much free time that I spent on doing stupid things, that I could have spent on obviously doing something like this.

I’m not sure if people think this or not, but they might think “Well, I am a full-time student. How am I gonna have time to do this?” But if people really think about it, you’ve got way more time when you’re in college than you do when you actually graduate and get a real job. So it’s definitely possible, and as you mentioned, this is pretty specific to New York. I didn’t realize that you had to have a broker represent you to lease an apartment. But yeah, this is kind of more inspiration, to get the wheels churning in your mind to think of ways you can add value as a real estate investor to college students… Because every college student is renting, looking for a place to live; you can even be some sort of consultant the same way, even though it’s not a requirement.

This guy sounds like he’s very smart, and very entrepreneurial, and obviously it’s working out for him.

Joe Fairless: I believe it was the book “Things I wish I knew when I was 20.” It’s written by an Ivy League professor, and she talks about different things that she wish she knew when she was 20. I believe it’s this book – she mentions that she gives her students a challenge at the beginning of the year to make as much money as possible with $100. So she gives them $100 and like “Okay, go.” It’s an entrepreneurial class. “Go make as much money. Create a business. Whoever makes the most money wins”, and there’s other prizes, too.

Some people created a business around selling gadgets around campus, others did laundry services… But the winning team that earned the most money — I think it was a shorter period of time than a year. I think it was about a month. The winning team that earned the most money actually did something ingenious… They sold the time that they had to present to their fellow students their business plan and their business. So instead of creating a business, they simply identified a company within that area that would love to have a captive college student audience for 30 minutes, and then they sold their time to that business, and that business presented to the students, and as a result they got access to the students; and the students that had that idea earned the most money.

So along the lines of, hey, Angad’s business, if you’re not in New York City, that exact business might not work, but it’s the mindset of how do we maximize the resources that we currently have available – that’s what this is all about, and that example really came to mind whenever I was thinking about Angad.

The second thing – Philippe [unintelligible 00:10:43.19] He’s an entrepreneur; he scaled from a $3,000 mobile home park to owning ten units now. Based in Nashville, Tennessee. I wanna mention two things about my conversation with Philippe. One is that he had a six-unit that he has now sold, and it was in a college town. One thing that he did to increase the value – he bought it for $120,000, and two years later he more than doubled it in value. He sold it for $260,000. So actually I’ll give you two things that he did, and then I have another lesson learned from him. One is he changed it from tenants to the amount of beds that you can have within the residence. So he didn’t focus on “How many tenants should I have”, he  focused on how many — well, I guess I’m saying it incorrectly. He added more beds in the house. So he added two more beds in the house, and as a result he started charging per person, instead of per-bedroom. I guess that’s the proper way to say it.

So he literally made the living room a place where two more people could live. So one, he changed it from a per-bedroom to a per-bed. Two – and this is what I thought was really interesting – is he had relationships with local vendors, and those vendors would send leads his way, because they’re popular spots for college students, and in exchange he would send his residents to those vendors. Some specific vendors – there’s a Mexican restaurant; a place called Grandma’s Pancakes, and a local coffee shop.

And he would put in the welcome packet for his residents when they moved in, he’d put these cards that the vendors/restaurants gave him, and the residents would show the cards to the restaurants whenever they arrived, and then they’d get exclusive discounts as a result of living at his place. So it was  a win/win. I did something like this for one of my properties, where I reached out to local businesses. I had a card that I printed out. And surprisingly, it was challenging for me to get local businesses on board. I offered discounts in general, but also I’d like to offer discounts that weren’t publicly available. But I went to tanning booths, or tanning salons, I went to a pet groomer, I went to a Payday Loan company… They were very interested; they were actually the most engaged. Surprise, surprise. I went to restaurants… And for some reason – maybe my approach wasn’t the right approach, or maybe the market wasn’t right, or something, but I didn’t have that  much success.

However, from a percentage standpoint, from the couple of companies that I did connect with – Dickey’s Barbecue was one of them; they were really onboard because there’s an entrepreneurial guy who owned that franchise location… The couple of them that were on board – they really helped me have selling points for residents who wanted to move into that apartment community, and it was a win/win.

So I’ve done this approach… It might take more effort than you initially think, but it was a good use of the team’s time to create something like this… Especially if you have a smaller-sized apartment building and you’re not looking to do this in multiple locations. Or maybe it’s actually — if you have one geographic location where you own a lot of properties, that’s good. If you are spread out across multiple markets, then it might not be an effective use of your time, because it just takes a whole lot of time to do it. But in my experience, it was worth it.

I’ll stop there. Theo, do you have any comments there?

Theo Hicks: I was gonna say – do you know if he had preexisting relationships with any of these companies, or did he just reach out to them randomly?

Joe Fairless: He went to the Mexican restaurant a whole lot, he said, so they might have known him. But I don’t think he had a preexisting relationship with them in a formal capacity.

Theo Hicks: I was curious… Because I’m sure that would probably be helpful. If you’re thinking about applying this strategy, think of the places you just go to frequently, and then bring that up in the natural course of conversation if you’re talking to that owner, or whatever.

Joe Fairless: True that, yeah.

Theo Hicks: I was gonna mention something else – we were talking about this on Follow Along Friday; it might have been when we were discussing someone who had a question about buying a smaller apartment, or that didn’t have any amenities on-site, around like a bunch of massive apartment communities that had top-notch fitness centers, and things like that… We talked about you can leverage the local businesses, like fitness centers, movie theaters etc. and try to get discounts from them, and then you can present your property as like a luxury experience, without the luxury price. “So a fitness center isn’t here, but because of that your rents are gonna be lower. But we’ve also got discounts at this coffee shop, this movie theater, this tanning salon, this whatever.” That’s another way that you said you can present this type of concept to your residents as well.

Joe Fairless: Yeah, we’re actually buying a property right now that fits into that category, where there is a fitness center on-site, however literally right next door there’s a state of the art fitness facility, and the management has negotiated only an $8/month membership fee for those residents. And that is an exclusive arrangement that our property has with the fitness center. I think that more stuff like that – exclusive perks… Because then you start moving away from being a commodity and you start differentiating your apartment community in a way that others can’t compete, because you’re not going back and forth on price; you’re actually talking about these additional amenities and relationships that they don’t have.

One other thing I’ll say about the interview with Phillippe – this reminds me of the example you brought up a couple times, Theo, of the gentleman who looked for properties that had a busted foundation. He would actually seek them out and he had a solution for it, where others would run away. In this example Philippe talks about how he noticed that the homes in a certain area had a double garage; they’re two-story, and the downstairs was a double garage. He would convert that double garage into three additional bedrooms. He had three bedrooms, a kitchen and a bathroom that he’d convert the double garage into, and he rents it out to construction workers.

So the house – upstairs it has three bedrooms, downstairs it has a double garage; well, now it’d have three bedrooms upstairs, and then downstairs it’d have three additional bedrooms, and he rents it out on a per-bedroom basis.

So just looking for situations in our market where there’s opportunity to reconfigure the layout of the property, and if you identify a bunch of homes that have a similar configuration and you have a certain business model like that, then you have the opportunity to make twice as much cashflow as someone else.

Theo Hicks: And the same thing can technically apply to apartments, too. Obviously, there’s demand for those larger units, but if you’re in a market where you find an apartment that’s got massive units, and the dollar per square foot doesn’t necessarily make sense, and you can just convert that to two bedrooms instead of one bedroom, and get way more money… Obviously, it depends. Same thing with an extra living space that might not necessarily be in demand in that market, converting that to a bedroom, or keeping it the same… Again, depending on the market.

Joe Fairless: Jameill [unintelligible 00:18:26.10] He is an investor based in Phoenix, Arizona. He specializes in wholesaling. They do over 70 wholesale deals a month. Their business model is to be the wholesalers’ wholesaler. When a wholesaler has an opportunity, cannot find a buyer, they go to Jameill’s group, and Jameill’s group has a list of 80,000 buyers with a 30% open rate, who he and his team send it out to.

The business model is not to be as focused – or nearly as focused – as finding the opportunities, but more focused on having a buyers list that is robust, and being the solution to wholesalers’ challenges if they don’t have buyers for their properties.

Clearly, I had to hone in on how did he create a list of 80,000 buyers with a 30% open rate when he sends out an opportunity. And he says he thinks of themselves as a tech and data company (surprise, surprise), and they have a two-step process. One is his business partner has a software background, so he has a software that they created that scrapes social platforms and the internet for a list of potential people who might be qualified buyers. Think of accredited investors – they look for that type of person.

And then Jameill’s team will actually personally reach out to these people and send them a note through that platform. He talks about what that note says. I didn’t write that down in my notes, but he sends them an intro message, and just by sheer volume of the amount of messages through that software platform that they initially find all these leads, they get a lot of people to say “Yes, I’d be interested in being on your list.” And he’ll search for [unintelligible 00:20:24.25] he’ll search for lawyers, he’ll search for accountants, Facebook groups… They’ll see what you have liked and map that back to if you’d be a likely real estate investor.

So just 1) having a business that is a solution for other people in your industry, who could be perceived as competitors; that’s interesting to me. That could be applied to any business. So one, quick, think of all your competitors. Two, how could you actually be of service to them, so that they pay you for your service. That could lead to some interesting stuff. That’s what he did. And then two is the one-two approach that he and his team take to building that big list. One is you write a software, two is you have individuals reach out to these people.

Theo Hicks: Is his business partner doing it, or do they have VAs doing —

Joe Fairless: VAs. Yeah, it sounded like they have an army of VAs.

Theo Hicks: I was gonna say, I can’t imagine him sending out 8,000 messages to people.

Joe Fairless: No, it’s 80,000 people on the buyers list. That’s an email that gets sent out.

Theo Hicks: It’s probably more than that.

Joe Fairless: But you’re right, if there’s 80,000 people on the buyers list, good point – they probably sent out half a million personal messages.

Theo Hicks: I think on MailChimp the average open rate for the real estate category – and again, this is just MailChimp – is like 10% maybe. So they’re three times what it usually is. So obviously that person will touch them, and rather than just stopping at step one and saying “Okay, here’s who we want to target”, and then kind of just like creating content and sending it out and hoping they see it, they proactively just go after that one specific person and send them a message… And obviously, that seems to be working out.

I bet it’s a very interesting interview, if you go into specifics on how he’s finding these people on Facebook, using the hashtags, or whatever software that he’s writing. Obviously, not every single person is gonna write the software, but everyone can navigate the Facebook, the Twitter, the LinkedIn search function. It might take a little bit extra time, but again, it sounds like they’re using VAs, and 30% open rate is pretty amazing.

Joe Fairless: It is. And I asked him “Do you send that list anything other than deals?” He says “No. I absolutely don’t.” That’s how we approach our private investor list. I don’t send them anything other than opportunities. There has been one exception where I asked them for thoughts on the book that we’re writing – what would they want in that book – because we were writing that book for them, to help them on how to think about passively investing in apartment communities. But besides that, I don’t believe I’ve ever sent an email to my private investor list about anything other than opportunities that we have available.

Cool. And then lastly, Jason Parker – he is an investor in Seattle, Washington, but he’s also a financial advisor with a focus on retirement planning. I enjoy talking to people who aren’t exclusively focused on real estate, so that we get a broader perspective. One thing he says when he sits down with potential clients – he asks them “What is the purpose of your money and why do you have it?” And when he was asking that question, I was like “Man, that’s a  good question.” What is the purpose of my money and why do I have it? I thought about it a little bit (not a whole lot) since then, and I view money as simply a  tool to exchange and to help build lifestyle and do things with. It’s not powerful to me, it’s simply a tool. And by thinking of it as a tool, it allows me to feel good about value exchanges, it allows me to invest in myself by going to a Tony Robbins program… And it’s just a tool to help me become a better person, in that example, or give to all the non-profits we give to at BestEverCauses.com…

So I think it’s just an important question to ask ourselves, “What is the purpose of our money and why do we have it?” I don’t know what the right answer is, but it hit me as something that is a question or two questions that we should ask ourselves, so I just wanted to make note of it.

Theo Hicks: I see it on here, “Not too concerned [unintelligible 00:24:38.18]”

Joe Fairless: Yeah, so you’re looking at some notes that I had during the conversation… And he said that potential clients, when he asked them that, they tend to not be too concerned about leaving money to their kids. They wanna have the same standard of living that they’re accustomed to. But they’re like “You know what – we’ve done what we needed to do for our kids, and at this point, kids, you’ve gotta make it happen or not.” Generally, that’s the sentiment from his potential clients.

Theo Hicks: That’s interesting, because you hear a lot of times people’s goal is the legacy, family wealth, leaving it to their kids… I have a five-month-old, so it might change, but I’m definitely on board with this guy. We could probably talk about that for ours, so… You can move on.

Joe Fairless: Cool. Alright. I think that’s all. That’s all I wanted to mention on that.

Theo Hicks: Okay. Those were really good lessons. I really liked the college guy. It reminded me back to when I was in school, and I did a few things — nothing like this, but I was slightly entrepreneurial while I was in college, to make some  money, just because I didn’t have anything and I didn’t wanna work a regular job at that time.

Joe Fairless: Colleen and I were on our walk the day after I did these interviews, and I was like “And he had $300,000 in the bank account after he graduated college…!” I was just so blown away. I still am. Very impressive.

Theo Hicks: Alrighty. Well, let’s move on to the trivia question. This is the Jeopardy month. Last week the question was “The U.S. state that is home to the two cities that have the lowest cost of living.” The answer was “What is Texas?”

Joe Fairless: Oh, Texas…! My backyard.

Theo Hicks: The two cities – I don’t know if you recognize these… Harlingen and McAllen.

Joe Fairless: Yeah, Harlingen is by the  border. I think they’re both by the border.

Theo Hicks: Okay. The cost of living was 20% below the national average, and way below the highest, which was obviously New York.

Alright, this week’s question is — Yardi Matrix (they’re a real estate research company) just released their biannual rental growth information… So this week’s answer is “The U.S. city with the highest year-over-year rent growth as of June 2019, 8.4%.” So what’s the question? What is that city?

Joe Fairless: Say that again?

Theo Hicks: The U.S. city with the highest year-over-year rent growth as of June 2019. The number is actually 8.4% rent growth in 12 months.

Joe Fairless: Okay, so in the last 12 months trailing June, so from June to June?

Theo Hicks: Yeah.

Joe Fairless: The U.S. city with the highest rent growth, 8.4%… I’ll go with Orlando.

Theo Hicks: Orlando. So the first person to get that answer correctly – you can either submit your answer in the YouTube comments, or you can send an email to info@joefairless.com – will get a copy of our first book.

And then lastly, the free apartment syndication resource of the week – I actually just finished recording the last series of the first part of Syndication School, which goes over the entire process… So we just talked about how to sell your deal. That will be coming out next week. Then we’re gonna go back over Syndication School and go into more detail on some of those episodes, some of those steps.

But anyways, we give away free documents for Syndication School, so we’re highlighting those on Follow Friday at the end. This week’s free document we’re gonna highlight is from series number ten, which is how to structure the GP and the LP compensation. That starts at episode 1597; I believe it’s a two-part series, so 1597 and 1598. First we go over how to structure the compensation for the general partners, so how the GP makes money, and then next one is how you as a  syndicator can structure the compensation with your limited partner. To help you with that, the free document is the LP structure decision tree. It’s basically a series of yes or no questions that you answer, and based on the answer to the previous question we’ll ask another question, and ultimately you’ll land on what’s the idea partnership structure with your investors, whether that’s debt equity, preferred return, profit split, what the limit should be… Things like that. You can download that in the show notes of 1597 and 1598, or in the show notes of this Follow Along Friday.

Joe Fairless: Well, very valuable resources, and they’re free, so definitely if you’re in the industry or wanna be in the industry, take advantage of that. Best Ever listeners, I hope you enjoyed this, and most importantly, got a lot of value from it. We will talk to you tomorrow.

JF1810: How Can You Build A Short Term Rental Business With Other People’s Properties? With Michael Sjogren

Michael has been building his company for the past few years and has seen success in a niche that almost anyone can do. He prefers doing short term rentals, and he doesn’t even own the properties (usually). Hear how he builds his business with property owner partners. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“You can do it yourself, but what is your time worth?” – Michael Sjogren

 

Michael Sjogren Real Estate Background:

  • Michael and his wife Krysten are the founders of Occupied, LLC, a short-term rental investment and management company
  • They have a portfolio of six properties across three markets and are actively expanding across the northeast
  • Recently launched an education platform called Short Term Rental Secrets to help real estate investors launch their own STR business
  • Based in Boston, MA
  • Say hi to him at  https://www.occupiednow.com/
  • Best Ever Book: The Millionaire Fastlane

 


Evicting a tenant can be painful, costing as much as $10,000 in court costs and legal fees, and take as long as four weeks to complete.

TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


 

JF1783: Infinite Banking?! #SkillSetSunday with Gary Pinkerton

Joe has used himself to test this method of investing/storing cash. He went to Gary and has been working with him for a few months now, it has been a good experience and Joe wanted to share with everyone. So tune in to hear about this strategy you may have never heard of before. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Almost all of the whole life insurance companies that do this, will put the money in a general fund” – Gary Pinkerton

 

Gary Pinkerton Real Estate Background:

  • Wealth strategist at Paradigm Life
  • Has funded over 100 rental units using OPM with private banking since 2011 and has helped his clients do the same
  • Former captain on nuclear subs in the Navy
  • Based in Jersey Shore, NJ
  • Say hi to him at https://paradigmlife.net/ or gary@garypinkerton.com

 


Evicting a tenant can be painful, costing as much as $10,000 in court costs and legal fees, and take as long as four weeks to complete.

TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


TRANSCRIPTION

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

Here’s a concept that we have touched on on this show, and I mentioned during multiple Follow Along Fridays with Theo a while ago that we would go into it in more detail, but first, I would put myself in the ring and I would do it, that way I had some first-hand experience before talking to someone about it… And I have done it. That is the concept of infinite banking.

It’s a concept that requires a smart person – much smarter than me  – to talk about, and talk through. So what we’ve done is I’ve brought on Gary Pinkerton, wealth strategist at Paradigm Life, who I worked with to set up the infinite banking. We’re gonna talk about the concept, and  — by the way, disclaimer, I make no money; if you work with Gary or don’t work with Gary, if you do this or you don’t do this – I don’t make any money from it. I’m just sharing a concept that I found interesting enough where I’ve put my money where my mouth is, and figured we might as well share it with you, Best Ever listeners, so you can decide what the heck you wanna do with it.

I was introduced to Gary from an investor of mine with Ashcroft Capital. He invests with us, he’s actually invested in multiple deals, and is someone who I trust implicitly, so that’s how I got to know Gary. First off, Gary, now I’ll stop talking about you and I’ll actually talk to you – how are you doing?

Gary Pinkerton: I’m doing great, it’s a true honor to be on your show. I’m really looking forward to it, Joe.

Joe Fairless: Yeah, I’m looking forward to our conversation as well. And first off, Best Ever listeners, sorry – this is a Skillset Sunday episode; we’re gonna be talking about a specific skill, and the skill is infinite banking – what it is, how to do it, and questions to ask if you’re working with someone to set it up for you.

Gary is a wealth strategist at Paradigm Life. He has funded over 100 rental units using other people’s money with private banking – this infinite banking – since 2011, and has helped his clients do the same. He’s a former captain on a nuclear sub, so he was in the Navy before. He was a captain on nuclear subs; thank you, sir, for what you did for our country. He is based in Jersey Shore, New Jersey.

With that being said, Gary, first – what is infinite banking?

Gary Pinkerton: Sure. It’s a way to use uniquely designed whole life insurance policies to store and grow your wealth. Everyone has a need to store cash somewhere; that’s really a combination of a lot of things. It’s your emergency savings for your family, it’s property reserves, it’s business reserves, and it’s money you’re setting aside and growing for future investments – your upcoming property purchase, or really whatever. I store just about all of my cash that I absolutely need in the future, that I can’t take a risk of it being lost… Even my kids’ college money.

Basically, we’re all storing and growing that money (if we’re prudent) somewhere, and a lot of times it’s just in the same as our checking account. So this is an opportunity to get both a much faster growth – let’s say 4%-5% – tax-free on your money, while still having full access to it… And you get a lot of life insurance protections. So you’re getting both the foundation of your personal financial wealth, meaning life insurance protection of your future income for the family, as well as a better place to store. It’s simply a different place to store your cash. A lot of people talk about it as an investment; it’s really not. It’s just a much more efficient place to store and grow your wealth.

Joe Fairless: Okay, so let’s unpack those statements that you’ve made. 4%-5% tax-free growth, with full access, plus life insurance protection. That is why I chose to do it, but that sounds way too good to be true. So how about let’s dig into each component of that – the percent growth (4%-5%), then the tax-free part, and then the full access part, and then the life insurance. So those four parts.

Gary Pinkerton: Sure, absolutely. You may have to remind me what part we’re on, but… Let’s start off with the growth —

Joe Fairless: Yeah, 4%-5% tax-free growth.

Gary Pinkerton: Sure. So we work with only whole life insurance companies. You can do this with universal to some levels of success if you know what you’re doing. I don’t believe there’s value there in doing it; there’s not a track record. So we go with whole life. It’s a very simple product. Insurance companies are collecting premiums, growing those premiums, and then handing them back to the beneficiary one day.

Well, starting in the 1930’s they give you access to the value of that cash that’s in there. So if you have $100,000 sitting in your policy that’s growing, you can go to them and borrow $100,000 from them. The borrowing and accessing side of it is not the growth. The growth side for whole life insurance is a combination of guaranteed increase. So if you look at the policy illustration that you got, there’s a table in there, and on the left-hand side there’s  a column for the guaranteed worst-case growth, even if there’s no profits, if the company is not profitable. But since we work with a mutual insurance company, which is a private company – meaning that there’s no shareholders to distribute profits to every year, so those profits are just handed back out to the owner of the company, which in the case of life insurance are just the policyholders. So you kind of get it back on a pro rata basis, based on how big your cash is that given year.

So you have a guaranteed increase, which – I tell people, big-picture, it changes over your life as you age. Essentially, it’s 2% a year guaranteed after covering all of the costs covering the insurance. So about 2% on the guaranteed side, and another 2%-3% today in profits being handed back. But these profits or dividends are completely dependent upon what the lenders out there in the world can get. Banks right now are lending at 5%-6%. Insurance companies are doing the same thing – they put your money to work in the economy, lending out to major corporations. Right now they’re getting 4%-6% returns, which means that after covering expenses, you’re seeing another 2%-3%.

Summarizing that, a couple of percent guaranteed annually, and then 2%-3% in this zero-interest-rate world we’re in. In the 1980’s the dividend was 8%-10%, if that makes sense.

Joe Fairless: Okay. So when you implement this policy or this strategy, do you have to do anything than buy the policy in order to gain that 4%-5% growth? Do we have to manually manage it and do transactions, or just magically because you’ve purchased a policy it achieves that 4%-5% growth?

Gary Pinkerton: Almost all of the whole life insurance companies that do this – there’s probably 25 mutual companies; I work with ten… Generally, I work with 4-5 of the best, most easily designed companies… But all of them will put the money that is being collected and protected – they put it into a general fund, and they put it to work in the economy. Mainly, they’re lending it out to major corporations for decades at a time. They’re also funding as a debt partner in large real estate developments and commercial buildings… So most of the time there’s nothing for you to do to see that type of return.

There is one company that I work with – and actually, Joe, it’s the one you went with – that they give you the ability, from time to time, if you want to, to tie your profits (the dividends) to the performance of the S&P 500, and you can get a little bit of a boost if you want to actively manage it. I don’t have any clients doing that right now, primarily because we’re all kind of foreseeing a little bit of a correction or a pullback… But bottom line, most of the time it’s on autopilot. You’re simply just carrying out the plan that you’ve put in place, and reaping the benefits and using the cash value from time to time when you want to.

Joe Fairless: Okay, that was the percent growth. What about the tax-free statement you said?

Gary Pinkerton: Sure. Your dividends/profits will grow inside the policy without tax being applied. If you physically withdrew them someday – and some people do – then you would be taxed. But there’s  taxation for life insurance – it’s really the only thing out there that enjoys this, and it’s called First-in/First-out taxation. That basically means that if over time you’ve contributed $200,000 in contributions to this, then the first $200,000 you pull out would not be taxed. Beyond that, it would be taxed just like interest you earned in your savings account.

So most people wouldn’t do that; they would maybe withdraw the basis, or the original contributions when they get into retirement and want to do withdrawals… But throughout your life you can borrow against the thing, borrow the insurance company’s money pledging yours as collateral, and access the full value, even that part that is growth/profits, without any taxes being applied. So theoretically, what you do is you borrow against it during your working years, you perhaps withdraw the contributions and borrow against the rest in retirement, and then pass it on, tax-free, as a death benefit.

It’s very similar to real estate, in many aspects. But if you think about a 1031 tax-deferred exchange, that you go from property to property and then eventually it gets a step up in basis at death, that’s what happens with life insurance.

Joe Fairless: The full access part.

Gary Pinkerton: Gaining full access – so if you remember, I was talking about your cash value in the policy is a combination of what you’ve contributed, what the insurance company has boosted by the guaranteed crediting of dollars every year to it, and then the dividends. So for very simple math, let’s say that you’ve contributed $200,000, and you look at your cash value and there’s $300,000. That’s a combination of $50,000 that came from guaranteed increased over the years, and $50,000 that came from the dividends or the profits that got credited. So of that $300,000, $200,000 were your contributions. You can withdraw that to get access to it if you would like, but the full $300,000 you can access by borrowing an equivalent amount of money from the insurance company.

It’s the equivalent of going into a bank, putting $100,000 on deposit, and then going to them and using that as collateral for borrowing money from them. Now, you would never do that at a bank because there’s no advantage to do that. With a life insurance company, because your money is in there growing/compounding without taxes, at equivalent rates of what you’re gonna borrow the money for, it makes a big difference over time.

Joe Fairless: So just for my own clarity, to restate it – I put in $100,000; so with my policy I did $110,000, I think. And I am able to get access to most of it (90-something percent of it) immediately. Let’s call it $95,000. I can borrow that $95,000 and do whatever I want with it. And that initial – $110,000, or whatever I put into it – is still making the 4%-5% growth. So even though I took out 95k, that initial 110k is still making a 4%-5% growth. So there is the difference in doing the bank thing that you said, versus doing this… Not to mention having the benefits of life insurance protection.

Gary Pinkerton: That’s right. I was just doing an example with a client; it’s a pretty common example that single-family investors or people who are investing minimal amounts into larger syndicated deals might do. Say you have $25,000, and for this example it’s a $100,000 house, and your down payment with closing costs is $25,000. So you have a choice – you can either put that into the property, and in 30 years maybe sell it and take it back out, or you could have an insurance company put their money in there, and you just put yours in your policy and allow it to grow and compound there.

So in the house – you have $25,000 sitting in the house; yes, it enables a lot of growth and appreciation, and tax deductions, and the cashflow, but essentially it itself is just kind of parked there. If I could get my next-door neighbor or best friend to put their money into my property instead of me, that would be far better off for me, because I have given up its ability to grow. Whereas the other person who has an identical house, but put their money in their policy, after the 30 years that I used in the example, theirs has grown to $93,000. The $25,000 turned into $93,000. They did have to pay $22,000 to the insurance company in that example for the interest, but they earned well over $70,000. And that’s the power of being able to borrow somebody else’s money and not have the opportunity cost of yours being locked up without earning.

Joe Fairless: And then in terms of paying back that loan, in the example — we’ll go with my example, when I borrowed 95… If I die before I pay it back, then it simply gets deducted on the insurance proceeds my family gets from the life insurance policy, and it’s as simple as that, right?

Gary Pinkerton: That’s correct, yeah. Your insurance amount, your death benefit is always gonna be substantially larger than the cash value. So as a result, you can even max out your cash value and still be comfortable knowing that there’s still a large amount of insurance tax-free, that will pass to your family.

Joe Fairless: The last part that you mentioned initially in our conversation is life insurance protection. We just touched on that, but anything else that you think we should talk about in terms of the life insurance protection?

Gary Pinkerton: From time to time I come across people who are single, they really don’t have anyone that they wanna leave it to, and sometimes they see that as a detraction from using this process, like “I would use it if there wasn’t the life insurance.” However, remember – the performance I talked about, the 4%-5% in this 1%-2% savings account world – the 4%-5% you’re getting here without the impact of taxes is already covering the insurance. So you may today decide you don’t like it or don’t want it, or see it as a detraction, but it’s already factored in. That’s one comment. But that’s a very minor number of people that I ever meet with.

Most people, as they get older and get nostalgic, they will either have grandkids or they will have a little neighbor kid that they’ve mentored, or they have a favorite charity or church that they really have valued receiving benefit from and wanna give back to… So I’ve really actually never, in the end, seen anyone who didn’t have a place that they wanted to give that money to… And it will come out  tax-free. There’s wonderful things you can do by owning it, or having the beneficiary be a trust, a family trust, for multi-generational planning, for legacy.

For me, early on, and for a lot of my clients – and I think, Joe, you’d probably agree – it is really comforting knowing that I have personally taken on five or so million dollars of (I call it) good debt; fixed-rate, long-term debt. And my wife was a bit uncomfortable with it when we first started, but she was greatly comforted by the fact that there was early on three million dollars of life insurance – and considerably more now – totally there, just because it was the vehicle in which I’m storing and growing cash from my real estate portfolio.

Joe Fairless: Yeah. So when you pass away, then  the debt will be paid out from the life insurance — what is called, a premium…?

Gary Pinkerton: The death benefit, yeah.

Joe Fairless: Thank you. So your debt will be paid off by the death benefit, and then there’ll be more on top of that for her and any other loved ones.

Gary Pinkerton: Right. Or she can walk away from the real estate properties if she wanted, but if she paid off the debts with the — you were saying the amount that I borrowed against. That’s true. But with that level of insurance, she could have easily paid off the properties as well, and have a bunch of cash-flowing, unencumbered properties if she wanted to do that, and it would immediately replace her concern for not having my income coming in anymore.

Joe Fairless: So let’s close this out with a specific example of maybe just a single-family home.

Gary Pinkerton: Sure.

Joe Fairless: Now that we’ve gone through the concept, how have you done this just on one single-family home?

Gary Pinkerton: Sure. So what I do is I go get conventional financing – or just commercial, but so far I’ve used conventional 30-year fixed-rate mortgages, and I will get those at 75% to 80%, depending on the interest rates at the time… Let’s say 80%. So a $100,000 property, 80% loan from a bank, and then I’ve got the 20% down, plus maybe $5,000 in closing costs, so $25,000.

Then I would pre-stage my money in my personal banking system, and then go to the insurance company and borrow their money. I know that, Joe, you’ve gone through this process, but it should be a very quick 2-3 day process where the money shows back up in your personal bank account, whatever traditional bank that you’re doing your banking at… And then you just treat it as cash from there. When you go to the closing table, the lender recognizes that your money in the life insurance is your cash, and they see this money that you’ve borrowed as your cash.

There’s some Fannie Mae guidelines that came out in 2008 that this works just fine. It’s really the only way you can borrow other people’s money to fund a down payment on a property.

So I borrow the $25,000, I close as if it’s cash, and then as I receive cashflow back, I make a personal choice to just send that back and pay down my loan. Because the moment I pay $1,000 back to the insurance company on their loan, it frees up $1,000 of cash in my bank, that I can – again – either withdraw or borrow against again. So pushing my money back in there – it reduces my loan and it causes my cash to be available again for the next one… So really it’s a much higher velocity than I experienced before I started doing it this way.

Joe Fairless: And when you said earlier you would pre-stage your money, what do you mean by that?

Gary Pinkerton: I just meant that — sometimes people will say “Well, I don’t have $25,000 yet in my cash value. Can I still get the loan?” So rather than leaving my money in my checking account to use as cash as a down payment, I contribute it to my life insurance policy. I’ve built the cash value, and now it’s available pre-stage there as money that I can use to go and pledge as collateral to borrow from the insurance company.

Joe Fairless: Got it. So when you identify a property, you make sure that you have the amount that you need to close with the loan as cash value on your life insurance policy, so you can borrow against it, get that cash out and use it for the property.

Gary Pinkerton: Exactly. And as I mentioned at the beginning, I’m storing other money there, so I never go up against my actual cap. I’ve got a ledger – or actually I use Quicken – and I keep track of how much money that’s staged in my policy (cash value) is actually dedicated as family emergency money, as property reserves and as business reserves. So I don’t touch that money; I kind of make it off-limits, and then whatever is available as the remainder is my investment capital.

Joe Fairless: What’s a good rule of thumb, in your opinion, for what that percentage should be with available cash, versus cash that — well, it’s available, but you just don’t wanna touch?

Gary Pinkerton: It’s really not a percentage thing for me, it’s just an actual dollar amount. For me – I’m pretty conservative, so I actually use six months’ worth of my personal after-tax income. And then for properties – I used to use four months principal interest tax and insurance; I’ve reduced that down to two months as I got over ten properties. I just think it’s unreasonable that they’re all gonna have the same problem at once. So I use two months there.

And then for business reserves – it’s highly dependent on what your business is like. I have about $5,000 marketing expenses every month or so, so I kind of hold that back in reserves to have it available.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing, and Paradigm Life, and infinite banking?

Gary Pinkerton: I would love for the Best Ever listeners to go to gary@garypinkerton.com, and then they can also check out Paradigm Life specifically by sending me an email to gpinkerton@paradigmlife.net, and there’s a tremendous amount of resources directly at ParadigmLife.net for them.

Joe Fairless: Cool. So the first one that you gave was your email address, right?

Gary Pinkerton: My email address, gary@garypinkerton.com, and the website garypinkerton.com has a lot about me as well.

Joe Fairless: Cool. Well, Gary, thank you for talking about a concept that I have read books on, I have interviewed people, and you explained it very thoroughly and in a straightforward fashion, which is necessary for something in my mind that’s so damn confusing as this… But once I started understanding it, it made a whole lot of sense, so that’s why I did it. Plus, as I mentioned at the beginning of our conversation, you were referred to me from a mutual friend who I great respect, and I know he’s financially savvy and connected. He knows what he’s doing, too.

Thank you for being on the show. I enjoyed getting a refresher for why I did this… [laughter] And looking forward to continuing our friendship. I enjoyed our conversation. Thanks for being on the show, and talk to you again soon.

Gary Pinkerton: Absolutely. Thanks so much, Joe. Best Ever listeners, go get it!

JF1781: Breaking Into The Industry, Creating Partnerships, Building A Team, & Raising Capital #FollowAlongFriday with Joe and Theo

Joe and Theo are back it for another #FollowAlongFriday. Theo did the interviews for the podcast last week, so we’ll be hearing his favorite lessons that he learned while doing those, with additional thoughts from Joe. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“He found all the inefficiencies from their P&L and told the boss about them”

 

Free Document:

http://bit.ly/freepropertycomparisontracker

 


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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, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff.

We’ve got Follow Along Friday, I’m with Mr. Theo Hicks… He’s gonna talk about two lessons he learned from the interviews that he did last week, and we’re gonna obviously apply this to you, in order to help you with your real estate endeavors. So let’s go ahead and get right into it, Theo.

Theo Hicks: Alright. As Joe mentioned, I did the interviews last week; lots of good conversations. Again, as Joe always says, I learned way more than this; these are just the two that kind of stuck out to me the most, I thought were interesting and I wanted to bring up on the episode today.

One interview was with Donato. His name is Donato and I asked him if there was any relation to Donatos pizza; he said no, but one of his answers in the Best Ever Lightning Round was if he were to lose everything and had to start over, he would start a pizza place, just because it’s his first name.

But Donato is a managing partner at [unintelligible 00:03:04.13] He’s managed projects over 3 billion dollars, and he builds skyscrapers for a living, which I thought was in and of itself interesting; I’d never met someone who builds billion-dollar projects. So I asked him “How did you get in this industry? How did you know you wanted to do this, and how does one get into a development team to build these skyscrapers?” And specifically, he was able to be on the team that built one of the tallest skyscrapers in New York… And what he said is that first he went to school for engineering, and then based on that education that he received, he was able to work for a smaller construction firm; he was able to intern for a smaller owner, who developed smaller projects in New York City, and because of that experience he gained from that, he was able to get picked up on larger projects of these skyscrapers.

He said that the smaller partner that he worked for – one of the people that invested in that company was his larger construction company, and they kind of saw him and saw how well he was doing, and asked him if he wanted to join their team… And he did a few projects at first; he actually worked on the Yankee Stadium, as well as Madison Square Garden, which eventually allowed him to get pulled into this super-intense team for building this huge skyscraper.

The reason I thought it was interesting is because we talked about “How do you break into the industry? What do you need to do to get into the industry?” everybody says “Education and experience”, and that’s literally exactly what he did. He got the education from the engineering school, as well as working at a smaller firm, and then he also got obviously the experience from that, and he was able to leverage both of those to literally work on one of the biggest projects in New York City history.

Joe Fairless: Yeah, and it sounds like he was a shining example within the group that he was working, of how to do your job the right way… And then he got handpicked to then go somewhere else and do well.

Theo Hicks: Yeah, exactly. It’s always amazing when you hear the “intern, to working on this massive skyscraper.” Then something else he talked about too was about partnering. Once he worked on all these skyscrapers, he wanted to transition into doing his own deals, for all the reasons people like doing their own deals – for more control, more upside… And he partnered up with a friend, so I asked him some advice on partnerships in general, but more particular “How do you know if your friend is the right person to partner up with?” Because I’m sure you guys can hang out at the bar or whatever, or workout together, but going to business together is kind of a completely different animal… And he just said that they literally just did deals together where they had their own entities for a full year first, just to test the waters, make sure that they could actually work together.

Then once they realized that “Okay, we can work together”, they made an entity together and had a really strong operating agreement to make sure that things continued to go smoothly moving forward, so… I guess just a few tips on partnering as well.

Joe Fairless: Yeah, it’s such a relevant tip, because I get that question a lot, and I’m sure you come across it a lot, too… People ask “How do I know this is the right partner? How do I know that I should create a business with them?”, and the answer is you shouldn’t, initially, do any of that. You should simply do what Donato mentioned. Donato is his first name?

Theo Hicks: Yeah.

Joe Fairless: Okay. You simply do what Donato mentioned, and have separate entities when you’re starting out… And partner up some deals. Then after you partner up on them, then you get to see how they work, what they’re like if there are any challenges on the deal, what type of character do they have, how do they react to mistakes that are made on the team, or issues that take place, what do they prioritize – do they prioritize themselves, do they prioritize the business, do they prioritize the investors? Do they just not focus as much on the business, on the deal?

There’s all sorts of things that we’ve got to find out about potential partners. What’s their communications style? Can I get a hold of them? Do I wanna get a hold of them? Do I need to get a hold of them? Is that something that’s important to me? Are they always texting me whenever I’m trying to call them, and they don’t answer…? There’s all sorts of stuff, and it’s impossible to know what person is gonna be a good business partner when you haven’t done deals with them. Even if you’re, as you said, drinking buddies or something, you just don’t know what it’s gonna be like when there’s a snowstorm and all the pipes burst, and now you have to file an insurance claim, and you’ve got people who need to get into new apartments because of that, and you’ve got to coordinate with the management company, and it’s just all hands on deck. You just don’t know. Or a hurricane comes in the market that you’re in and increases the prices of contract labor, and then as a result your budget goes up, so now how do you handle that? What do you do?

Just simply date instead of going straight to proposing and getting married with potential partners, and be intentional about it, because this also applies to people who are creating podcasts, or thought leadership platforms like YouTube channels, or blogs, or whatever else. I see this mistake happen time and time again, where people make their podcast dependent on having a co-host, because they’re “business partners”. Well, one of you is likely gonna flake out. That’s just how it is. One of you is gonna have more drive than the other as it relates to the thought leadership platform… So if you’re creating something, don’t make it reliant on someone else. Just “I’m gonna create this, and then whenever you come on the show, or whenever I interview, or whenever you write a blog post, we’re gonna be even better together, and it’s gonna be a dynamic duo. But I’m gonna go ahead and take the lead on this”, and same with the business partnership stuff, especially starting out. Then, once you get a feel for them, and if you do like all the stuff that you experience with them, then you can get a deeper and deeper relationship with them and then do something formal.

Theo Hicks: That’s really solid advice. Just one thing to add before I move on to the next lesson… I think this advice obviously applies to all types of partnership, but this is how I felt, and I know a lot of people feel the same way, too – when we first find out about real estate, you’re really excited, and you’ll go and you’ll tell someone else; or maybe they tell you, and you’re both really excited about real estate. Then you say “Okay, how are we gonna start? Should we do it individually?” “Oh, no, we’ll just partner up.” I feel like that is where you run into a lot of problems, because you’re in what’s called the honeymoon phase, when you’re both super-jacked-up about real estate, and so you both aren’t acting how you would act in the long-term. Maybe you don’t act that way for years on end. So that’s why instead of partnering up instantly, kind of keep things separate so that once that honeymoon phases, you can see how that other person really is, and technically see how you really are as well.

At the end of the day, obviously you want someone who’s going to have as much drive as you, but also, if you’re honest with yourself, if you see that you’re not having as much drive as them, then that’s not really fair to them, and you’re not really setting yourself up for success in the long-term if they’re actually outworking you. So I guess it kind of goes both ways.

Joe Fairless: One other thing – more than four partners is way too many. More than three is pushing it… The ideal partnership is two people. And I see that mistake all the time.

Now, I wanna be on the record saying – having four people in a partnership, that can work. Having three people can work. I’m just saying the more people you introduce to a partnership, the more complicated it gets, because there are more people. So it’s just purely a human dynamic, and it’s just something to keep in mind.

Theo Hicks: Exactly. Alright, so lesson number two… I guess that was 1.a) and 1.b), so here’s 2.a) and 2.b). I interviewed Chris Salerno, who actually I think works with you, Joe…

Joe Fairless: Yeah, he’s a client in my program.

Theo Hicks: He is a very successful real estate agent. By the age of 25 he had sold more than 40 million dollars. He was the number one salesperson on his team in North Carolina.

Joe Fairless: Charlotte, right?

Theo Hicks: In Charlotte. He was actually named Charlotte’s 30 Under 30, and then he transitioned from being an agent to raising capital for deal… And the two things that he talked about – one of them I thought was great; I thought it was really funny. I asked him how was he able to obviously [unintelligible 00:11:05.22] at such a young age, and he mentioned that before he was even a manager or any sort of a success, he started working with the company and he goes to the person in charge and asks for the P&L (profit and loss) statement for the company…

Joe Fairless: Whow…

Theo Hicks: And then literally reads through it and finds all the different inefficiencies. Then he goes back to the boss and presents what they need to do in order to fix this marketing line item, this advertising line item etc. Obviously, that in and of itself is awesome…

Joe Fairless: Dang…! That’s bold. Nice work, Chris. And props to the boss for being open-minded enough to 1) give the P&L to Chris at that time, and then 2) to listen to advice from someone who probably didn’t have experience doing that stuff.

Theo Hicks: Yeah. He mentioned that before this, he really enjoyed studying businesses that had failed… And he looked at his real estate company that he worked for, as well as value-add deals at failing businesses… When he looked at the P&L, he was like “Alright, this business is failing. How can I turn this around?” But besides just looking at the P&L, I guess the overall lesson – I know we’ve talked about it before, but a lot of people ask “How do I get some successful investor to let me work for them?”, and we always say that you need to proactively add value to their business. This is a perfect example of him doing something that’s not in his job description whatsoever; he didn’t have to do this, but he wanted to do it, and he knew that he’d be adding value to this company; he’d probably make his boss look really well if his boss then took that and presented that to his boss… And then ultimately, because of this, he was able to work his way up through that company, and was able to be the number one real estate agent in that company. I thought that was interesting.

And then the second one, talking about how he transitioned into raising capital – something interesting that he said, that I want to get your take on, Joe… He has his massive list of, let’s say, 1,000 investors. Then he finds a deal, he presents that deal to the investors, and maybe 20% of them are on board to invest, another 50% say “I have no interest whatsoever”, and maybe 30% say “Hey, this is your first deal; I wanna see how this deal does first, and then I might invest in the next deal.”

So what he did is instead of segmenting off that 20% only that’s investing in the deal, and then providing them with ongoing updates, he also included that percentage of people that said “I wanna see how this deal goes first, so that if it goes well, I can invest in the next deal.” I thought he was doing it for the fear of missing out; you keep seeing all these updates, and how great the deal is going… But for him, he just wanted to educate them on the process, and – I guess, in a sense, the fear of missing out – showed them that he knows what he’s doing, he is credible, the deal went smoothly, and hopefully that increases the chances of them investing on the next deal. I thought that was interesting, and I was curious what your thoughts were on that.

Joe Fairless: It’s a savvy move. I hadn’t thought of doing that, so therefore I have not done that… And I think that’s a really good idea. Props to him for that.

Theo Hicks: Again, this was specifically in the context of him doing his first deal, and the reason why they didn’t wanna invest was because he hadn’t done a deal before. I thought that was an interesting strategy to — I guess not necessarily help you with your first deal, but help you with your second deal, to get more money on the second deal.

Joe Fairless: Yeah. And one thing I noticed about Chris is he puts himself in a position to build long-term relationships and then he delivers on adding value to those people who he puts himself in their company. I’ve just seen him time and time again — because again, he’s in my private consulting program, so I’ve seen him time and time again place himself in relationship with others who are playing at a different level, and then he adds value to their life, and then it makes people want to root for him, want him to be successful, and – oh, by the way, they are also achieving more success because he’s being more successful, because he continually gives value back to them.

He does a really good job — not a really good job, he does an outstanding job of building long-term relationships and adding value to people who are within his circle… And he’s got tremendous drive; he’s just very tenacious. Those are qualities that it takes to be successful in any business, and especially apartment syndication.

Theo Hicks: Yeah. When that interview comes out in the next few months – we went over a few examples of what you’ve just mentioned, about him adding value to relationships, and being very successful because of it.

So those are the two lessons. Moving on to the trivia question. Joe, you haven’t been here the past two months, but it’s international trivia question month, so if we’re playing Jeopardy —

Joe Fairless: [laughs] We have a theme every month now?

Theo Hicks: Yup. Right now we’re at International, for 300… So last week’s question was “What global city has the highest monthly rent?” This was based on the two-bedroom rents. I can’t remember what Danny said, and I don’t wanna throw him under the boss, but I thought he might have mentioned a country, not a city; I could be wrong. You’ve gotta fact-check me on that one next week. I thought he said Singapore.

Joe Fairless: You realize 99.5% of our audience are U.S.-based, right?

Theo Hicks: Yeah, yeah.

Joe Fairless: Okay, alright.

Theo Hicks: We’re doing these fun trivia questions…

Joe Fairless: I know, I know.

Theo Hicks: The answer was actually Hong Kong. I believe second place was San Francisco… So Hong Kong and San Francisco are the only two cities in the world that have an average monthly rent for two bedrooms over 3k.

Joe Fairless: Dang.

Theo Hicks: I think San Francisco was like in the $3,100 range, and then Hong Kong is actually $3,685 in U.S. dollars.

Joe Fairless: There was a rumor — I have a client who lives in California, and I haven’t looked into this, but he owns more than ten million dollars’ worth of real estate in California, so I assume he’s well plugged into this… And what he told me is there’s something on a ballot in California to make California rent-controlled option for local municipalities, to then vote and say “Yeah, we want this to be rent-controlled”, similar to what New York did,

Theo Hicks: Interesting.

Joe Fairless: That would put  a stop to San Francisco being at the top of this list with Hong Kong.

Theo Hicks: So this week’s question is “What country has the highest percentage of renters?” Now, before you answer, Joe, last week I was more specific with the question, just because there’s a lot of countries… So this is a European country. So that kind of narrows it down slightly.

Joe Fairless: Yeah… France.

Theo Hicks: France. Alright, so the winner of this question gets a free copy of our first book. You can submit your answer to this question either at info@joefairless.com, or in the YouTube comments below, and we will go over the answer next week.

Lastly, to wrap it up, we are going to discuss the free apartment syndication resource of the week… So make sure you check out Syndication School, which is a free podcast series we do each week, where we go over some specific aspects of the apartment syndication investment strategy… And we are always giving away free documents that accompany each of those episodes, and we’re gonna go over those on Follow Along Friday, so everyone can take advantage of those.

For episodes 1527 and 1528  we went over how to perform an in-depth analysis on your target investment market. So you pick a market, and this is when you understand that market on a street-by-street, neighborhood-by-neighborhood level… And one of the ways to do that is you literally find a list of 200+ properties and track all the different rent factors, when it was built – things like that, about that property. And in order to do so, you need a spreadsheet. We’ve provided you with that spreadsheet; it’s called the property comparison tracker, and you can find that either in the show notes of 1527 and 1528, or in the show notes of this episode that you’re listening to today.

Joe Fairless: Thank you for that, Theo. Best Ever listeners, we enjoyed our conversation, and I hope you got a lot of value from it. We’ll talk to you tomorrow.

JF1778: Gettin’ That Trailer Cash with Jay & Samera Harvey

Jay and Samera are both entrepreneurs at heart. They had a couple of different businesses, and also worked full time for others throughout the years before finding real estate investing. Today we’ll hear about their investing journey and investing niche, which is investing in mobile homes. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“If they can’t give you proof or referrals, that’s a red flag” – Jay and Samera Harvey

 

Jay & Samera Harvey Real Estate Backgrounds:

 


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JF1755: Learn About A Loan Product We Have Never Discussed: HUD 223F #SkillSetSunday with Judah Rosenberg

Judah is joining us as a very accomplished Vice President for a huge lender that we’ve probably all heard of, Greystone. Not only does Judah deliver amazing value today with the knowledge of the HUD 223F loan, but he’s also demonstrating his mindset that has helped him succeed at such a high level. You’ll hear Judah’s stutter in this episode, which is part of his story of overcoming his stuttering and putting himself in uncomfortable positions (like doing this podcast) a great episode that everyone can learn something from. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“One other catch, HUD only allows for bi-annual distribution. If you’re syndicating, you’d only be able to pay your investors twice per year” – Judah Rosenberg

 

Judah Rosenberg Real Estate Background:

  • Vice President Greystone, a national commercial real estate lending, investment, and advisory company.
  • Greystone’s affiliated businesses include a $32 billion loan servicing portfolio, $2 billion in completed property development projects, and a portfolio of over 8,000 affordable housing rental units and 3,000 skilled nursing beds.
  • Based in New York, NY
  • Say hi to him at https://www.greyco.com/ or 917.204.8854 or judah.rosenbergATgreyco.com

 


If you’re a passive investor wanting to learn more about questions to ask sponsors in order to qualify the opportunities, sponsors, and the markets opportunities are in, visit BestEverPassiveInvestor.com.

We created this site just for passive investors to have a free resource providing the questions to ask and things to think through. BestEverPassiveInvestor.com


TRANSCRIPTION

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

Judah Rosenberg: I am great, thank you, Joe.

Joe Fairless: My pleasure, glad to hear that you’re great. A little bit about Judah – he is the vice-president of Greystone, which is a national commercial real estate lending investment and advisory company. Everyone knows Greystone, right? Greystone’s affiliated businesses include a $32 billion loan servicing portfolio, $2 billion in completed property development projects, and a portfolio of over 8,000 affordable housing rental units and 3,000 skilled nursing beds. Judah is based in New York City. With that being said, Judah, do you wanna give the Best Ever listeners a little bit more about your background and your current focus within Greystone?

Judah Rosenberg: Sure. First off, I actually moved from New York to Los Angeles about four years ago. It’s been a great move. Historically, since the company is headquartered in New York, our West Coast footprint wasn’t as large; there was just a tremendous opportunity to not only help grow the business on this side of the country, but also the weather here isn’t too bad.

Joe Fairless: [laughs]

Judah Rosenberg: I actually started at the company probably about eight years ago. Interestingly, I started by analyzing new deals for debt. At that time, because of my stutter, I had a tremendous fear of picking up the phone. The phone would ring, and I just could not bring myself to pick up the phone. So while analyzing deals is obviously a really crucial learning process, in my heart I knew that I really wanted to be in a sales role, but my fear was so intense that I avoided the phone at all costs.

Fast-forward to today — I actually moved into a sales role a few years back, because what I knew inside is that I absolutely loved to build relationships; I love to make new connections… So right now I focus most of my time originating HUD, Fannie Mae Freddie Mac and bridge loans for the Greystone debt platforms.

Joe Fairless: Got it. So for the last couple years you’ve been in a sales role… So what’s a typical client transaction look like for you right now?

Judah Rosenberg: I spend probably about 75% of my time focused on growing our HUD platform. I’ve had this affinity for the HUD programs, and it’s probably because a) they are unique; the terms, in my mind, for a long-term holder – I think the terms really can’t be beat. And it’s a specialized product; there’s not many groups out there who are doing it well. Over the last few years I’d say that we’ve been the lead innovator in this space.

I guess you’re probably thinking now “So what are these great terms?”

Joe Fairless: Yeah, exactly. Please tell us.

Judah Rosenberg: Okay, sure. The first thing which I would say is that the biggest misconception about HUD that I run into all the time with even very large groups is that HUD is not only for affordable properties. HUD is absolutely for market rate properties… And actually, a large percentage of our HUD volume is in HUD financing for market rate properties.

The HUD finance programs can be used for multifamily and healthcare, new construction, refinance and acquisitions. I think that the program which I would like to share the terms with now are the HUD 223(f) program. The terms are it’s an 85% LTV loan, it’s a 35-year term, 35-year amortization; it’s non-recourse, it’s fixed rate, with rates below 4%. It’s assumable. There’s a 10-year step down prepay, so there’s no yield maintenance, there’s no [unintelligible 00:08:02.13] feasance, and after 10 years there’s no prepay.

One thing about the program which is great is that HUD is agnostic to location. Even if you’re in a tertiary market where perhaps Fannie or Freddie or some of the banks either don’t wanna lend in, or will not be that aggressive on their terms, HUD will still be at that same LTV, and all the terms will be exactly the same in all markets.

The next interesting thing is that HUD does not have a net worth and liquidity requirements. What that means is that you can take advantage of the really spectacular terms even if you don’t have a high net worth and  a ton of liquidity. Those are the general terms of the loan

The transactions that excite me most have to do with  a really interesting nuance for value-add. HUD has this really cool nuance, where if you renovate somewhere between 15% and 20% of the units at a property, then HUD will allow us to underwrite all of the unrenovated units to those future rents, assuming that those unrenovated units will get renovated through the financing of the HUD loan. So what that means is that even though you only have 15% to 20% of the units at your property renovated, you’re achieving 80% LTV of the stabilized value.

Joe Fairless: Wow. This loan sounds tremendous. There’s gotta be some reasons why people don’t do it. Let me just ask a couple questions, and then I’d love to hear your thoughts… Can you get a supplemental loan on this loan?

Judah Rosenberg: You can get a supplemental loan. However, the supplemental loan has to be used for improvements at the project. You cannot use a supplemental to cash out. However, through this value-add strategy, because you’re financing based on the improvement plan, you can really get close to 90% to 100%, because we are utilizing the numbers in the proforma.

Joe Fairless: And with the HUD 223(f) loan, how much time does it take to get approved for the loan? The reason why I’m wondering is if I find the property, I like it, what do I need to negotiate with the seller in order to make sure I have enough time?

Judah Rosenberg: Sure. That is a great question. Okay, so it has been taking us somewhere between 4 and 6 months to close the 223(f) HUD loan. So what we do… So there’s no seller — I’m not gonna say “never”, but it’s very rare to find a seller who will wait that amount of time for the new buyer to put a HUD loan in place. So what we do is we have a bridge to HUD execution. What we do is we will close on our balance sheet bridge, while we simultaneously process the HUD loan. So what you can do – for the value-add plan you can close on the bridge, you can renovate a sample size of the units, so you can prove out the higher rents, and then put a HUD loan in place.

Joe Fairless: Okay, that’s good to know. So with that process I imagine that increases the cost of getting the financing, because you’re doing a bridge loan to a HUD 223(f) loan – one, is that true? And then two, what are they doing for 4 to 6 months if they’re not looking at your net worth and liquidity?

Judah Rosenberg: [laughs] Right. So the thing I would say is that only a few years ago — it used to take about 12 months to close. But through some technology that we built, we’ve really been able to cut down the processing time. Our goal is to be able to close a HUD loan as quickly as you can close a conventional loan.

So there are absolutely added costs to doing a bridge loan, and then you have to weigh those costs compared to getting 90% to 100% financing for your project.

Joe Fairless: Right… Which is a fair trade-off.

Judah Rosenberg: Yeah, I would say so. To add to that, there are higher costs associated with getting a HUD loan done. I would say that the first cost is called mortgage insurance premium. HUD is acting as an insurance company. They are taking the risk, and are saying that “In the event of a default, we will cover 100% of the loan amount, and repay the lender.” In exchange for that, HUD will charge either 25 basis points  annually, if you go green. If you don’t go green, then it’s a 60 basis point fee annually.

Today, with rates where they are, you could potentially lock a HUD loan at a 3.75% rate. That rate is locked in, it’s a fixed rate for 35 years. If you go green, it would be 25 basis points on top of that rate. And if you don’t go green, it’ll be a 60 basis point fee annually.

Joe Fairless: Okay. Most people go green, right?

Judah Rosenberg: Yeah. When you talk about the difference between 25 BPS versus 60 BPS over the course of — even if you’re only gonna have the loan in place for 10 years, that’s a significant amount of money to be saved.

Joe Fairless: Yup. This has been very informative, the HUD 223(f) loan. We’re gonna actually make this a Skillset Sunday episode, so that investors who are interested in learning more about a great long-term loan for a project, whether (as you said) it’s a new construction, or a new finance project acquisition, then this is a great option.

Anything else as we wrap up that you think you should talk about as it relates to the HUD 223(f) loan?

Judah Rosenberg: Yeah, I’d say the one other catch is that HUD also only allows for bi-annual distributions. So if you’re syndicating, you’d only be able to pay your investors twice a year. As you can see, this program really excites me, and I’ve seen groups who are growing their portfolios, who don’t have a ton of net worth, who don’t have a ton of liquidity, and they’re doing so well using this strategy to grow their portfolios, especially if they’re focused in some markets where other lenders are not that excited about.

And then on the flipside, we have some older investors who love the idea that they could put on a fixed-rate 35-year loan, and because it’s fully-amortizing and there’s no balloon payment, that they can potentially pass down a debt-free property to their kids, and to their great-grandkids.

Joe Fairless: Thanks for mentioning that. That’s something that should be underscored for sure, the fully-amortizing 35-year term. Well, thank you so much for being on the show, Judah. How can the Best Ever listeners learn more about you and get in touch with you?

Judah Rosenberg: The best way is either a call – my number is 949-734-2665. My cell – I’m pretty easily accessible – is 917-204-8854. My e-mail address is judah.rosenberg@greyco.com.

Joe Fairless: Judah, thanks for being on the show. I hope you have a best ever day, and we’ll talk to you again soon.

Judah Rosenberg: Okay, thanks Joe.

JF1742: New Investors Run Out Of Money, Find Money Partner At Local Meetup with Grant Warrington

Grant and his wife set out to be real estate investors, started buying properties but quickly ran out of money. He went to a local meetup where he met a young successful investor (Josh Sterling) who gave him tips on how to move forward. They took his advice and ran with it, getting up to 11 units in two years, after thinking they were out of money to move forward. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“If we’re going to stay on this path, how many houses would we need?” – Grant Warrington

 

Grant Warrington Real Estate Background:

  • Started investing in real estate in 2004 – bankruptcy followed, restarted in 2014
  • Currently owns 20+ units with is wife and business partner, Monika
  • Oversees the operations of 736 units for Epic Property Management
  • Based in Detroit, MI
  • Say hi to him at https://bluerockcapital.net/

 


If you’re a passive investor wanting to learn more about questions to ask sponsors in order to qualify the opportunities, sponsors, and the markets opportunities are in, visit BestEverPassiveInvestor.com.

We created this site just for passive investors to have a free resource providing the questions to ask and things to think through. BestEverPassiveInvestor.com


 

JF1741: Investing In Distressed Debt #SkillSetSunday with Joshua Jaouli

Joshua is joining Theo on the show today to talk with us about distressed debt. We’ll hear about his overall strategy, including how to find the distressed debt to invest in, how to evaluate them, and ultimately how to invest in the debt. A great episode for an intro into the distressed debt investing field, also a very informative episode with nuggets for even an experienced investor. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Distressed debt is a space where not only do you need to have a lot of capital lined up ready to go, it’s something that takes a more sophisticated buyer” – Joshua Jaouli

 

Joshua Jaouli Real Estate Background:

 


If you’re a passive investor wanting to learn more about questions to ask sponsors in order to qualify the opportunities, sponsors, and the markets opportunities are in, visit BestEverPassiveInvestor.com.

We created this site just for passive investors to have a free resource providing the questions to ask and things to think through. BestEverPassiveInvestor.com


 

JF1731: How to Secure Financing for an Apartment Syndication Deal Part 4 of 4 | Syndication School with Theo Hicks

We’ve heard Theo explain in great detail all the different loan options we have as apartment syndicators. How do you decide which is best for you? Luckily, Theo is going to cover that today so get your pen and paper ready to take notes! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“A good starting approach is to reach out to your mortgage broker and tell them what you plan on doing”

 

Free Loan Program Spreadsheet:

http://bit.ly/toploanprograms

 


If you’re a passive investor wanting to learn more about questions to ask sponsors in order to qualify the opportunities, sponsors, and the markets opportunities are in, visit BestEverPassiveInvestor.com.

We created this site just for passive investors to have a free resource providing the questions to ask and things to think through. BestEverPassiveInvestor.com


TRANSCRIPTION

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

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

 

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

As you know, each week we air two podcast episodes, every Wednesday and Thursday, that are a part of a larger podcast series that’s focused on a specific aspect of the apartment syndication strategy. For the majority of these series we offer a document, spreadsheet, some sort of resource for you to download for free, that accompanies that podcast series. All of these documents, as well as past and future Syndication School series can be found at syndicationschool.com.

This episode is going to wrap up a four-part series that is entitled “How to secure financing for an apartment syndicated deal.” If you haven’t so already, I recommend listening to parts one through three. In part one we talked about the two different types of debt, which are recourse and non-recourse. We had a conversation about how to approach qualifying for the loan as a loan guarantor, either as yourself or finding someone else, and if you’re finding someone else, how to compensate that person/people. Then we also introduced the two main categories of financing, which are the bridge loans and the permanent loans.

In parts two and three we went over the top most popular/most common loan programs that apartment syndicators secure for their apartment deals. In part two we discussed the Fannie Mae and Freddie Mac loan program, so we discussed the agency programs. Then in part three we discussed the remaining top loan programs, which were the HUD, the CMBS, the traditional bank and the life insurance companies. Then we also had a discussion on how to approach assumable loans, as well as how to approach supplemental loans.

Now, I wanted to begin this episode by finishing off the last episode, which is to talk about what documents you need to bring to the lender in order to begin the process of qualifying and securing that loan. Then we’re gonna conclude with walking you through the thought process of selecting the ideal loan for you.

Really quickly – the things that you need to provide to the lender to initiate the process of securing that loan… Number one is your biography. Taking a step back, some of these things you might have already sent to the mortgage broker or the lender that you’re working with prior to finding a deal. So if you remember back in an earlier Syndication School series we talked about putting your team together, and one of those team members is going to be a mortgage broker or a lender… So you should already have a list of potential mortgage brokers to reach out to, that should already know who you are, that should already know what you’re trying to do, but now you actually have a deal, so the information you need to provide to them needs to be more specific.

So if you haven’t done so already, they’re gonna need a biography, they’re gonna want to know about you and your team members, and the information they wanna know about you and your team members needs to be relevant to the deal and the business plan. I’ll talk about that here in a second.

Next you’re gonna need to send them your personal tax returns. Pretty simple. Then you’re gonna need to provide them with a personal financial statement for each loan guarantor. Anyone who’s signing on the loan. If it’s just you, then you send them your personal financial statement. If it is you and someone else, then you’re gonna need to get your hands on their personal financial statements as well.

Typically, the mortgage broker should send you a template to fill out, maybe the Excel spreadsheet to fill out with all the information, prior to you finding a deal, just so they can qualify you preliminarily for a loan amount… But at this point, they’re gonna want actual documentation and actual evidence to support the information you already provided. Obviously, if you didn’t provide the information already, then this is when you do so.

They’re also gonna request the financials for the subject property. Typically the T-12 and a current rent roll. Then they’re gonna want a breakdown of your budget. This might mean they just want you to send them your cashflow calculator, which probably is not going to happen because all cashflow calculators are different… But they’re going to want to see your hold period projections; if it’s a five-year hold period, they’re gonna want to see the proforma for that, so an itemized list of the incomes and the expenses, and then the NOI at the end.

They’re also gonna want to have a list of what you plan on doing to the property after acquiring it, as well as the costs. That’s going to be your cap ex budget. A list of the interior upgrades, the estimated costs, a list of the exterior upgrades and the estimated costs, and then any contingency budgets that you’re accounting for, and anything else that you plan on raising capital for.

Then lastly, they’re gonna want to know what your business plan is. This can be a formal business plan, or you can just describe to them “Hey, I plan on buying this property, I plan on investing a million dollars into the interiors, and based on these rental costs we’ll be able to demand a premium of $150. I plan on stabilizing the property at a 95% occupancy within 24 months, and I plan on selling after 5 years at this cap rate, and here’s how much money I expect to make at sale.”

So depending on what your business plan is – let’s go back to the biography here for a second. If your business plan is to add value and then sell, then in your biography you’re going to want to provide evidence that supports your ability to execute that business plan. So if you have experience with that specific business plan, outline the experience; maybe even provide some case studies. If you don’t, that’s when you need to rely on the experience of your team members. If you have a consultant or a mentor, if you have a partner, if you have a property management company, that’s when you want to talk about them.

So that’s generally what you’re gonna need to give the lender. They might have additional items that they request, so make sure — and I believe I mentioned this during the Syndication School series where I talked about types of questions to ask the mortgage broker and the questions they’re going to ask you… Ask them what information they need from you in order to qualify you for  a loan once you actually have a deal under contract.

Now, to the conclusion of this series is — alright, so you gave me all the information about all the different loan types, the pros and cons of each, what I need to bring to the lender… But how do I know what loan to get? Which loan program is going to be a deal for you. Of course, like the majority of answers to these general questions, like “What’s the best thing for me to do?”, is it really depends.

Obviously, if you remember from parts 3 and 4 when I went through the different loan programs, they all have different requirements, they all have different terms… So you’re gonna want to go through a list of questions, so to speak, to ask yourself; based on your responses to those questions, you will eventually land on the ideal loan. We’re gonna go through that right now.

First, I wanted to mention something which is an issue that I ran into, and I’m sure others have run into as well… If you talk to a lender and they say “Hey, these are the types of deals I’m looking for. Can you give me some estimated loan terms for this value-add deal at this size?” They might say “It’ll be between 70% and 80% LTV. The interest rates right now are around 5.5%, so they’ll be somewhere around there… The loan term can be anywhere between 5 and 12 years.”

Now, when you’re underwriting a deal, before you actually have the deal under contract and you’re getting specifics from the lender, how do you determine what your debt service is going to be? I spoke with a lender and he gave me a very interesting solution to this problem. Essentially, what you wanna do – and this is after you fill out your cashflow calculator, following the steps that I outlined in a previous Syndication School episode… And if you don’t know what your interest rate is going to be, you don’t know what the LTV  is going to be, there is kind of a workaround to calculate the debt service. There’s a term “debt service coverage ratio” (DCSR), which is a ratio that is a measure of the cashflow available to pay the debt obligations. This ratio is calculated by dividing the net operating income by the total debt service.

As we learned in algebra, or maybe it was calculus, if you have a formula with three variables, as long as you know two of the variables, you can calculate the third variable. At this point in the underwriting process you have your net operating income, so you have the current net operating income based on the owner’s financials, and then you also have a debt service coverage ratio. Now, at this point you need to have an idea of what loan program you’re going to be pursuing. Fannie and Freddie? Are you going to be going for some sort of renovation loan? This is all based on your business plan, and we’ll get into that in a little bit… But once you know which loan program you’re going to pursue, then you know what their minimum debt service coverage ratio requirement is.

For example, if you’re pursuing an agency loan, then the debt service coverage ratio is 1.25. That’s the minimum. Since this is a ratio, when I’m gonna say “minimum debt service coverage ratio”, that’s actually going to be what your maximum debt service is going to be… Because as the debt service coverage ratio goes up, the debt service goes down. So again, based on the calculus, if you know the current net operating income and you have an idea of what the minimum debt service coverage ratio is going to be, you can calculate what is going to be the estimated or really the maximum amount you’re gonna have to pay for debt.

Again, if you don’t have all the terms for the loan while you’re underwriting the deal before you put it under contract, a simple way to get an idea of what your maximum debt service is going to be is to take the current net operating income and divide it by that debt service coverage ratio. That will give you an annual debt service. Divide that by 12, and that is going to be your monthly mortgage payment.

Now, this is a worst-case-scenario analysis, so if the deal doesn’t make sense at that debt service, it doesn’t mean you should automatically eliminate that, because you might be able to get a lower debt service once you’ve actually talked to a lender. So this isn’t perfect, but it’s better than just making up a number yourself, and it’s better than leaving it blank, and it’s better than just not looking at a deal at all until you know exactly what your loan terms are gonna be, because they always change.

Now, with that out of the way, let’s talk about how to select your ideal loan. The first thing that you’re going to determine is if you qualify for a non-recourse loan. That happens by having a conversation with your mortgage broker. Ask them, based on that personal financial statement that you provided, based on how you plan on raising money for this deal, based on the types of deals you’re looking at, do they believe you can qualify for non-recourse debt? Because if you can’t qualify for (let’s say) agency non-recourse debt, then you’re either going to have to pay a loan guarantor a lot more money, because they’re going to be personally liable, or you’re gonna have to find a loan that you do qualify for the non-recourse. Or you’re gonna have to figure out what you need to do in order to qualify for that agency non-recourse loan.

Let’s say you qualify for non-recourse. The next question you’re gonna ask yourself is “How long does the loan need to be?” If you’re a long-time Best Ever listener or if you’ve read the blog, or if you’ve read any of our books, you know about Joe’s three immutable laws of real estate investing – law number two is to secure debt that is longer in term than the hold period. That means if you have a five-year projected hold period, which means you’re planning on selling the property after five years, then you’re gonna want your loan to be able to be greater than five years.

Now, if you remember in the top loan program episode, some of those renovation loans, those bridge loans had a term of three years. So if you plan on holding on to the property for five years and the loan term is three years, then according to the three immutable laws of real estate investing, that alone will not work for that project.

However, you have to remember the extensions. So if you do have a five-year hold period, then you can secure a bridge loan or a renovation loan with a three-year term, and the ability to extend it by a year two times. That means that the total potential length of the loan is five years, and that does meet the three immutable laws of real estate investing… Which is actually — it needs to be equal to or greater than the project hold period. The reason is because you don’t want to be forced to refinance or forced to sell at a loss.

Once you have that question answered, that might eliminate some loans from contention. If you wanna hold on to the property for 10 years, then a loan program that has a maximum loan term of (say) seven years isn’t going to work.

Next is you’re going to want to ask yourself if you want the renovations to be included in the loan or not. The first thing that you need to ask yourself about that is what is your budget per unit. If you remember, some of the renovation loans, or some of just the regular agency loans, have a minimum or a maximum per unit cap ex cost. So if the maximum per unit is, for example, $6,500, which I believe is what it was for the 221 HUD loan, and your budget is $10,000 per unit, then that HUD loan is automatically disqualified.

You also want to keep in mind that if you do not include the renovations in the loan, then you’re gonna have to raise capital to cover the renovations. So if you have a large renovation budget and for some reason you can’t qualify for a renovation loan, it’s going to throw off the cash-on-cash return to your investors by a lot… Because rather than, for example, getting a 80% or a 75% loan to cost renovation loan, or to bring 25% down of the total project costs, instead you’re going to be stuck with, say, an 80% LTV loan. So you put down 20%, plus you have to raise an additional 10 million dollars for renovations.

Now, sometimes that might come out to be lower than the down payment for your renovation loan, but more likely than not it is going to be higher. And if the deal still makes sense by you raising money, then great. If not, then you’re gonna have to consider getting one of the renovation loans that meet all of your requirements.

Something else you’re gonna want to ask yourself is if you want a fixed rate or a floating rate. As I mentioned, the fixed rate means that the interest rate stays the same throughout the entire hold period. For the floating rate, it is typically based on the one-month LIBOR rate. We’re going to be doing a “Ask the expert” blog post on the pros and cons of the fixed interest rate versus the floating interest rate. That should be live by the time this episode releases.

But just at a high level, both are good options. One’s not absolutely bad and one’s not absolutely good, but at a high level you’re typically going to want to pick either fixed or floating based on your business plan. For deals that you plan on adding a lot of value to and drastically improving over time, then a floating interest rate might make the most sense, because it provides the most flexibility for you to sell or refinance the deal once you complete that business plan… Whereas for deals that you plan on maybe improving a little bit or not improving at all, then it is likely going to be better to have a fixed interest rate… Because it might be a little bit more difficult to refinance the fixed interest rate early on. You’re gonna be able to offset that by securing a supplemental loan to capture some of that value instead.

The reason why it’s more difficult to refinance the fixed interest rate compared to a floating rate is based on how the lenders actually create their loans. The longer-term loans like Fannie Mae and Freddie Mac, that offer the fixed interest rates, they tie their loans to Treasuries. And since these lenders have priced their loan with the expectation of that loan being in place for a long period of time, there’s going to be a higher pre-payment penalty to either sell or refinance the loan early… Which again, it doesn’t make it difficult to do, but it makes it costly to you, which I guess in turn makes it difficult… Whereas as I mentioned, the short-term lenders who offer the floating rates, tie them to them one-month LIBOR rate; since it’s tied to such a short-term security, they offer a lot more flexibility for refinancing or selling, without that large of a prepayment penalty.

Again, based on your business plan, fixed and floating rates might be better. And then if you determine that  “Okay, I plan on holding on to this property for a while, and I’m not necessarily doing a lot of improvements, so I wanna go with a fixed interest rate”, then you’re gonna find a loan program that has that long-term fixed interest rate.

Something else to keep in mind in regard to the floating interest rate – which is typically going to be lower than the fixed interest rate at the start – is that since it’s floating, you might want to consider purchasing a cap. In that case, again, it’s kind of crystal-balling here, but you wanna ask yourself, “Okay, do I think this interest rate is going to shoot through the roof? And if it does shoot through the roof, how much more will I be paying per year compared to how much money will it cost to just buy a cap of, say, a few percentage points instead?” So it’s kind of a pros versus cons, risk versus reward analysis.

Something else you wanna consider is if you want to do interest only. For interest-only — let’s say you buy  a property that is not stabilized at all, and you still want to be able to distribute some cashflow during the renovations process; then doing an interest-only loan might be your best option, because as the name implies, you’re only paying interest on the principal, rather than paying down the principal, so your debt service is going to be lower, which means your cash-on-cash return is going to be lower.

And it might even make sense if the property is stabilized, and you plan on drastically increasing the rents, and you still wanna hit that preferred return year one, get an interest-only loan for one or two years while you’re doing those renovations, so that you can distribute cashflow. Then by the time that interest-only period expires, you’ve increased the income to the point where the increase in your debt service does not eat into your cashflow.

Something else to keep in mind about the interest-only as well is that as I’ve mentioned, one of the return factors is the IRR. All things being equal, if you give me $10,000 and I give you $1,000 at the end of year one, versus $1,000 at the end of year two, the IRR in scenario number one is actually higher because of the time value of money. Similarly, with the interest-only, since your debt service is going to be lower, if you look at the difference between “Okay, so if I have an interest-only loan, it’s $10,000/month, whereas if I don’t have an interest-only loan, it’s $15,000/month”, you’re able to distribute that $5,000 earlier on in the business plan, which again, based on the time value of money, is worth more than paying down that principal, paying down that $5,000 and then distributing that $5,000 five years later, at sale.

So when you think about interest-only, you wanna think about “If I do interest-only, will I be able to distribute my preferred return to investors earlier?” and also you want to consider that time value of money.

If you decide to go with the interest-only loan, like all the other factors I’ve discussed, then you’re gonna have to pursue a loan program that offers interest-only, and the ones that do not, automatically get eliminated from contention.

You also want to consider whether or not you want an assumable loan – and I recommend listening to part three for the pros and cons of the assumable loan – essentially, it might make your deal more competitive on the back-end when you sell, if all the pros are in place. If the terms now are better than they are at sale, and if the buyer can actually qualify for that loan.

Based on all those factors I discussed, you’re gonna be able to narrow down the programs that are right for you. A really good starting approach is, again, to reach out to your mortgage broker, tell them what you plan on doing, give them background on yourself, and then ask them what they believe is the  best loan program for you, and then ask them what are a couple other loan programs that you think would be a good fit as well, and then what you can do is you can create a loan matrix. You can do that upfront, but then you’ll also wanna do that on the back-end, when the deal is under contract, and you’re going out to different mortgage brokers and lenders and sending them all that documentation, asking them to provide you with a quote. You wanna drop all those quotes into the loan matrix as well.

Then we’re also gonna be giving away another free document, which will be a loan matrix template, where essentially you input all the loan terms and it spits out your monthly debt service. You might not necessarily wanna go for the one that has the lowest debt service, because other factors need to be considered, like interest-only, fixed versus floating interest rates, are there renovations included in the loan or not, how long are the loans, is it recourse versus non-recourse? Things like that. That’ll give you a snapshot of the various loan, and you can look at those, analyze those and then move forward with the best loan for you, again, based on your specific business plan. Of course, you can download that free document at SyndicationSchool.com, or in the show notes of this episode.

That concludes this podcast, as well as the overall podcast series for how to secure financing for your apartment syndication loan. In the next episode we’re going to be talking about the second thing you should be doing during the contract to close period, which is performing your due diligence. We’re gonna take a deep dive into that process. Then, as I mentioned, the third thing you’ll be doing from this contract to close period is securing those commitments from your investors, which will be the podcast series directly after the next one about due diligence.

In the meantime, I recommend listening to parts one through three of this podcast series, as well as the other Syndication School series we have on the how-to’s of apartment syndication. Make sure you download your free loan matrix, as well as the other free documents we have available at SyndicationSchool.com.

Thank you for listening, and I will talk to you next week.

JF1730: How to Secure Financing for an Apartment Syndication Deal Part 3 of 4 | Syndication School with Theo Hicks

We’ve covered the two different types of debt (recourse and non-recourse) in part one of this series. Theo talked about the two most popular forms of financing and the most popular agency debt available. Today, we’ll hear about the other loans that are available to finance your apartment syndication deals. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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“Time from contract to close with these programs is at minimum 120 days and 6-9 months is common”

 

Free Loan Program Spreadsheet:

http://bit.ly/toploanprograms

 


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TRANSCRIPTION

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

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

 

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

As you know, each week we air two podcast episodes that are typically a  part of a larger podcast series that’s focused on a specific aspect of the apartment syndication investment strategy. For the majority of these series, we will be offering a document, spreadsheet, some sort of resource for you to download for free, that accompanies that podcast series.

All of these free documents, as well as the free Syndication School podcast episodes can be found at SyndicationSchool.com.

This episode is going to be a continuation of last week’s series. This is going to be part three. That series is entitled “How to secure financing for  an apartment syndication deal.” Just for a refresher, if you haven’t done so already, I recommend listening to parts one and two. In part one we first discussed the two different types of debt – the recourse and the non-recourse. We described those, and the pros and cons of each.

We also discussed the loan guarantor or the key principal – the person who signs on the loan. We talked about the requirements of the loan guarantor to qualify for the loan, as well as how to compensate that person or group of people if you yourself are not able to fulfill that loan guarantor role. Then we introduced the two main categories of financing, which are the bridge loans and the permanent loans, with the bridge loan being the shorter-term loans, and the permanent loans being the set-it-and-forget-it loans.

Then in part two we began to discuss some of the top loan programs out there that apartment syndicators use on their apartment deals. The first two that we talked about – or I guess the only two we talked about – in part two was the Freddie Mac loan programs and the Fannie Mae loan programs. Those are the two agency loans; those are permanent loans, but they also offer some renovations loans as well… Technically, it could be considered a bridge loan. But if you want the characteristics of those loans, I recommend listening to part two.

We are also giving away a free document for this episode, which is going to be the Top Loans Program Matrix. It’s a spreadsheet that has the top loan programs, and it describes the loans and goes through some of the loan terms, as well as the pros and cons.

Now, in this episode, part three, we are going to finish up discussing some of the top loan programs that apartment syndicators use on their deals, and then we are also going to discuss what types of information you’re going to need to provide to the lender in order to secure financing for your deal.

Now, keep in mind thus far in the Syndication School series we’ve essentially gone in chronological order of how to complete a syndication, so at this point you should have a deal under contract. This is when you are now going to work three different things. Number one is securing the loan, number two is performing due diligence, and number three is securing commitments from your investors. This series, as I’ve mentioned, is focusing on number one, securing the loan, and then in the next two podcast series we’ll talk about due diligence, as well as how to secure the money from your investors.

Continuing with the top loan programs… Another top loan program – or common loan program – that you might come across is HUD. Those are government loans, and there are really two loans that you will secure, that we’re gonna discuss in this episode, and then we’re also gonna talk about the loans that they have for refinances, as well as the supplemental loans.

The first loan, which is the permanent loan, would be the 223(f). It’s gonna be very similar to the agency loans, except for one major difference, which is the processing time. Plus, the loan terms are actually a little bit longer.

For the 223(f) the loan term is going to be lesser of either 35 years or 75% of the remaining economic life. So if the property’s economic life is greater than 35 years, then your loan term is actually going to be 35 years, and it’ll be fully amortized over that time period. So whatever the loan term is is what the amortization rate will be.

Loan size – the minimum is going to be one million, so if you’re dealing with a smaller apartment community under the one million dollar purchase price, then this is not going to be the loan for you.

In regards to the loan-to-value (LTVs), they will lend up to 83.3% for a market rate property, and they will also lend up to 87% for affordable. That’s another distinction of the Housing and Urban Development loans, which is they are also used for affordable housing.

There’s going to be an occupancy requirement, like most of these loans. They define it as stable occupancy for six months. The assumption is that’s around 80% to 90%.

The interest rate will be fixed for this loan, and then you will have the ability to include some repair costs using this loan program. For the 223(f) loan you can include up to 15% of the value of the property in repair costs, or $6,500/unit. If you’re doing not necessarily a minor renovation, but if you’re spending about $6,500/unit – overall, so that’s not just for the interiors, but overall – then you can include those in the loan.

For the pros and cons based on what I’ve just mentioned, the pros for this loan is that they have the highest LTV. Again, you can get a loan where you don’t have to put down 20%. You can actually put down less than 20%. It also eliminates the refinance, as well as the interest rate risk, because it is a fixed rate loan, and the term can be up to 35 years in length. So you don’t have to worry about refinancing, or the interest rate going up, if something were to happen in the market.

Like most of the loans we’ve discussed, these loans are non-recourse, as well as assumable, which helps with the exit strategy.

Number four, another pro is that there’s no defined financial capability requirements, no geographic restrictions and no minimum population. So there’s no limitation on them providing you a loan for a deal if the market doesn’t have a lot of people living in it, or the income is very low, things like that.

Also, supplemental loans are available, and we’ll discuss that here, later on in the episode. Then as I mentioned, funds are available for renovations.

Now, the list of cons/drawbacks or things to think about when you’re considering a HUD loan is… Number one, as I mentioned, the longer processing times. The time from contract to close is at minimum 120 days, and 6 to 9 months is actually common… Whereas if you remember for the Fannie and Freddie debt, those processing times are between 60 and 90 days.

So these loans take a little bit longer to process. They also come with higher fees. You’ll also be required to pay mortgage insurance premiums, and they are also going to be annual operating statement audits. That is the most common HUD loan, the 223(f).

The  other one is the 221(d)(4). These are for properties that you either want to build, so these loans can be secured for development… Or if you wanted to substantially renovate an apartment building, then this would be an ideal loan for you. Similar to the 223(f) loan, these do have very long terms. The length of the loan will be however long the construction period is, plus an additional 40 years, and that is fully amortized.

Now, this isn’t for smaller deals, because the minimum loan size is going to be five million dollars. If you have a deal that you want to renovate and it’s got a one million dollar purchase price, you’re going to have to look at some other options.

Similarly, this is for market rate properties, as well as affordable properties; the same LTVs of 83.3% and 87% respectively. These loans are also assumable and non-recourse, as well as fixed interest rate, with interest-only payments during the construction period.

Now, the cap ex requirements are essentially the opposite of the 223(f). For the 223(f) it was up to 15% or up to $6,500/unit, whereas for the 221(d)(4) loan it actually needs to be greater than 15% of the property value, or greater than $6,500/unit. Again, these are for — not necessarily heavy renovations, but these are for properties that you need to invest a good amount of money into to stabilize.

Now, some of the pros and cons – again, they’re pretty similar to the 223(f) pros and cons. You’ve got that elimination of the refinance and interest rate risk because of that fixed rate and a term of up to 40 years. They’re also higher-leveraged than you traditional sources. Again, you can put down less than 20% in order to secure this loan. And they are non-recourse and assumable, which will help you on the exit.

The cons are, again, those longer processing time and closing times. There’s gonna be higher fees, and you also have those annual operating audits and inspections.

Now, HUD also offers refinance loans, as well as supplemental loans for their loan programs. Their refinance loan is called the 223(a)(7). Essentially, once you secured the either 223(f) loan or you secured a 221(d)(4) loan, you’re able to secure this refinance loan. So it has to be one of those two; it can’t be going from a private bridge loan to this refinance loan. That’s now how it works.

So the loan term for the refinance loan is up to 12 years beyond the remaining term, but not to exceed the term. That means if your initial term was 40 years and you refinanced at 30 years, then this refinance loan will only be ten years, because it can’t be greater than 40 years. For the loan size, it’s either the lesser of the original principal amount from your first loan, or a debt service coverage ratio of 1.11, or 100% of the eligible transaction costs.

These loans are also fully amortized, and the occupancy requirements are going to be the same as the existing terms for the previous loan. These are also going to be assumable and non-recourse, with that fixed interest rate.

Now, they also have the supplemental loan program available, which is the 241(a). Again, these are if you already have a HUD loan, so that 221(d)(4) or that 223(f). I wanted to take a step back and talk about what a supplemental loan is… First, let me discuss the actual terms of this loan, and then we’re gonna discuss overall what a supplemental loan is and how you actually secure a supplemental loan.

The loan term is coterminous with the first loan. Whenever you acquire it, it’s just going to be the length of the remaining loan, so you’re essentially just adding a  million dollars to five million dollars to your existing loan.

The loan size can be up to 90% of the cost of the property, so essentially a 90% LTV. So you need to have at least 10% of equity in the property at all times. It’s gonna be fully-amortized, again… They’re also gonna base the loan size on a debt-service-coverage ratio, so it needs to be 1.45. Again, that’s the ratio of the net operating income to the debt service. And then the minimum occupancy requirements are going to be the same as whatever the terms are for the existing loan. Like all the loans, they’re assumable, they are non-recourse, and the interest rate is fixed.

Now, what is a supplemental loan? If you don’t know what that is – it is a multifamily loan that is subordinate to the senior indebtedness. So that means that it is positioned behind the original loan. Typically, the supplemental loan can be secured after 12 months from the origination of the original loan, or sometimes you can get multiple supplemental loans. If that’s the case, then it must be 12 months after the origination of the first or the most recent supplemental loan.

A supplemental loan is not the same as a refinance, because for refinance you’re getting a brand new loan, whereas for a supplemental loan you’re effectively getting just a second loan in addition to your existing loan.

The benefits of getting a supplemental loan compared to simply refinancing is there’s going to be a lower cost associated with it. Going through the process of getting a brand new loan is more costly than the cost of going through the process of securing a supplemental loan. There’s also the certainty of execution. You might not necessarily know if you’re gonna be able to actually secure the refinance once you actually buy the property, because you don’t necessarily know what the market is gonna be like, whereas you’re gonna know upfront when you can secure a supplemental loan, and how much you’re gonna be able to get with a supplemental loan.

Then the processing time is a lot faster, because again, you’re not going through the process of being qualified by a new lender or the same lender for a new loan.

Generally, I guess this is a requirement – the supplemental loan must be secured from the same debt provider as the original loan. So if the original loan was Fannie Mae, the supplemental loan comes from Fannie Mae. Same with Freddie Mac, same with HUD.

I believe in the first two episodes — I believe in the previous episode we discussed the top loan programs. When I discussed the top loan programs and we talked about Fannie and Freddie Mac, I believe I discussed the terms of the supplemental loans.

Now, how do you actually secure a supplemental loan? I know we’re kind of getting ahead of ourselves, because at this point we just have a deal under contract, and you’re not necessarily securing a supplemental loan until after the deal is purchased… But essentially, you’re able to request the supplemental loan any time after your original loan has been seasoned for 12 months. So 12 months and one day is when you’re able to secure that first supplemental loan. And in order to do so, you reach out to your mortgage broker or the lender, whoever provided that original loan, and ask them what they need from you in order to underwrite and size out a supplemental loan.

Typically, they’re gonna want a trailing 12 months operating statement (T12), they’re gonna want the year-end operating statement of the most recent full year, they’re gonna want a current rent roll, and they’re gonna want a list of the capital expenditures that you invested into the property since acquisition.

At that point, they are going to perform an appraisal, as well as what they call a physical needs assessment, which is essentially a property condition assessment, which – you don’t know what that is yet, because we haven’t talked about that yet, but essentially it’s an in-depth inspection of the property, with recommendations for what you need to do, as well as the costs. That’s what they use in order to determine the size of the supplemental loan.

You’re also gonna want to ask your broker or your lender upfront how many supplemental loans you’re able to actually get, and then how long you need to wait between those two loans. For some deals you can just get one supplemental loan, others you can get two, others you can get more than two. So that’s essentially all you need to know about the supplemental loan.

Something else I wanted to go over as well, because I kept mentioning assumable loan… I just wanted to discuss what that means, as well as the pros and cons of the assumable loan.

An assumable loan – I guess it’s kind of self-explanatory, but if you’re buying a property and the loan is assumable, that means that you can just take over the loan at those existing terms. And if you’re selling the property, then a buyer can take over the property with the same loan, at the existing terms.

Again, for most things there’s not really any absolute pros and cons, or benefits and drawbacks; it really is based on the buyer’s financials, their experience, the terms of the existing loan, the type of the existing loan, the market conditions, the person’s business plan… So there’s a lot that goes into it, but just  high level, these are some of the potential pros and cons of assuming a loan.

Some pros – obviously, time-saving. An assumable loan can be approved in as little as 30 days, maybe even sooner, whereas some of these loans can take up to 9 months (HUD loans) to finish and be secured.

Next is money savings. Since the loan process for the assumable loan is shorter and requires less documentation, the costs are also going to be lower. There’s the opportunity for better terms, because if you’re buying a property and the current terms in the property are better than the market terms, then your debt service is going to be lower, and therefore your cash-on-cash return is going to be higher.

Maybe there’s a lower interest rate, maybe it’s a fixed interest rate, whereas you can only qualify for a floating interest rate… Maybe the term is longer than you can qualify for, maybe it’s non-recourse and you can only qualify for recourse… There’s lots of different ways that the terms can be better. We’ll talk about the opposite side of that in the potential cons.

Next, it could be a lower down payment. When a buyer assumes the loan, the down payment is equal to the difference between the amount owned in debt and the sales price, so essentially the equity. So if the owner doesn’t have a lot of equity in the deal, the down payment may be lower than the down payment of a new loan.

And then five, you can just make the deal more attractive. If you yourself are selling your property and you have an assumable loan, because of those potential pros that I just went over, your deal might be more attractive to other people… Whereas if they had to secure a brand new loan and the interest rates are really high, then they might not be able to buy your property at the price that you want.

Now, for the potential cons — and in reality, the reason why I call these “potential” is because all of those pros can be cons as well. The approval process might actually be longer if the current loan is overly complicated. So it could take longer to secure this assumable loan than it would be to get a brand new loan.

Also, there’s another potential con – you’re only dealing with one lender. The buyer – either you, or a buyer of your property – who’s assuming  the loan is really forced to work with that one lender that holds the debt, so that could be a potential con.

The pro could be a lower down payment, but it could also be  a higher down payment if the owner has a lot of equity in the deal. There could also be worse terms, if the market was worse when the current owner or you secured the loan, than it is in the current time.

And then lastly, you might not even qualify for the assumption, or the buyer might not qualify for the assumption. Lenders have pretty broad discretion when qualifying a buyer for an assumable loan. For example, they are gonna want the buyer’s financials and experience to be similar to those of the owner. If that’s not the case, if the owner is very experienced and the buyer isn’t, then they might not be able to qualify for that loan assumption.

Overall, because of these potential cons, make sure that if you’re a buyer and you are under contract with the financing being the assumable loan, make sure you have a financing contingency in place in your contract, as well as a few lenders on back-up just in case you don’t qualify for that assumption.

I should have covered the assumable loan, as well as the supplemental loan in the last episode, but I covered them now, so we got that out of the way and you know generally how to approach supplemental as well as assumable loans.

Now, the last three top loan programs I wanted to discuss quickly are the CMBS (commercial mortgage-backed securities), the traditional bank loans, as well as loans from life insurance companies.

For the CMBS loans – these are essentially for loans that don’t fit into that agency box, that Fannie or Freddie box, or that require maybe faster closing times, or maybe you don’t wanna have a lot of red tape, or things that are more focused on the property income than the borrower, or the current condition of the property, then the CMBS financing might be the ideal loan for you.

Loan terms are 5, 7 or 10 years. Loan sizes are a minimum of 3 million dollars. The pros and the cons of the CMBS loan… Pros – it’s non-recourse. There are attractive fixed rates for the relatively longer-term loans. The loan size – there’s a wide range of loan sizes, so there’s no maximum loan size. And then you also have the ability to do a cash-out refinance with the CMBS loan.

The cons – there’s less autonomy in the operation of the property, and limited flexibility to deviate from the terms of the loan documents. These loans have lots of structural requirements for what you do with the property than other loans. There’s also difficulty in releasing collateral. They are expensive to exit (high pre-payment penalty), and taxes, insurance, replacement reserves and leasing costs reserves are required for those loans.

Next is the traditional bank loan, like getting a loan from PNC for your property. If you wanna know the loan terms for those, check out that top loan program document. The pros will be that they will do smaller loan amounts. The minimum for this is 2 million dollars, and there really is no ceiling. They can finance distressed assets, so again, more flexibility on the entrance, and the closing time is faster than that of agency debt.

The cons – occasionally more rigid down payments, income verification and credit score requirements. The max LTV for a traditional bank is 75%. Sometimes the loans are going to be recourse, so they’re not necessarily going to always be non-recourse. The amortization period may be shorter, and the fixed interest rate times might be shorter than CMBS, than agency loans. They’re also stricter with cash-out refinances. For traditional banks, it can really be all over the place. It really just depends on the bank.

And then lastly, our life companies. Life companies offer an interesting alternative to Fannie and Freddie Mac financing. They have longer loan term options, and as they say, “exceptionally competitive rates.” Loan terms are 10 to 25 years or longer than agency. Loan size is a  minimum of two million dollars.

Some of the other pros for the life company loans – they will consider loan modifications or special requests during the loan term. So you can kind of go back and negotiate the terms of your loan throughout your hold period, rather than being something that doesn’t change from day one. And then they’re also non-recourse.

The cons – they tend to be less aggressive on max dollar deals. These are better for relatively smaller deals. They tend to focus on just higher asset classes, so not necessarily good for C or D class properties… And they’re less likely to do cash-out refinances.

That’s the conclusion of the top loan programs. As I mentioned, you can download that free top loan program document and you can review all of the pros and cons, as well as the terms that I discussed in part three, this episode, as well as part two, the previous episode.

Now, we’re gonna stop there for today. I know I said at the beginning of this episode that we were going to talk about the documents and information you need to provide to the lender in order to qualify for your loan. We are going to discuss that in the beginning of tomorrow’s episode, as well as also talk about how to select your ideal loan based off of our discussions in parts one through three.

In the meantime, I recommend listening to some of the other Syndication School series, where we focus on the how-to’s of apartment syndications. Make sure you download that free Top Loan Programs document at SyndicationSchool.com. Or for the Top Loan Programs document – you can also download that in the show notes of this podcast episode.

Until next time, thank you for listening, and I will talk to you tomorrow.

JF1729: Investor Starts With Only $10k, Now Cash Flows $700 Per Month with DJ Cummins

DJ and his wife are a real estate investing team, and they’re just getting started. They have purchased and sold a four unit multifamily building, as well as bought a couple of other deals and are currently holding those. Hear how they got started with little cash to invest, and how they plan on continuing their real estate investing careers. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Don’t do it yourself, know what you’re good at, and find yourself a team” – DJ Cummins

 

DJ Cummins Real Estate Backgrounds:

 


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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, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, DJ Cummins. How are you doing, DJ?

DJ Cummins: I’m great, thanks for having me.

Joe Fairless: My pleasure, nice to have you on the show. A little bit about DJ – he started investing in 2015, and has purchased three properties, a total of six units, and has now approximately $85,000 in equity in those properties, with a current monthly cashflow or roughly $700/month, and all with an initial investment of $10,000. Based in Bethalto, Illinois. With that being said, DJ, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

DJ Cummins: Sure. In 1998 I was in high school and I’ve heard a lot of people on your show talk about the Carlton Sheets program.

Joe Fairless: Yup.

DJ Cummins: As a junior in high school I got the cassette tapes and I listened to them, I thought he was crazy, and that was the end of that. And then I guess about six years ago my cousin and I were on a fishing trip, and he was talking about real estate, and him and his wife had a few apartment buildings. They’re about my age, and they were talking about possibly retiring early. It all seemed crazy, and it got my interest sparked again… So what was less than a year from then, even my wife and I started investing.

Joe Fairless: What was the first step you took?

DJ Cummins: Well, we did a lot of research, because at the time we didn’t have a lot of extra money. The $10,000 we started with was about every penny we could scrounge up. We started a partnership with my wife’s cousin and his wife, and the four of us bought a fourplex in 2015. Then we bought two more single-family houses after that.

Our market just isn’t great for multifamily. There’s not a lot of choices in the good areas, and we’ve found a lot more success with the single-families since then.

Joe Fairless: Do you have a full-time job?

DJ Cummins: I do. I’ve been in the mortgage industry for 10-12 years now. I’ve been a loan officer, an underwriter, an appraisal analyst… Now I’m kind of an operations support, in the background of a mortgage company, and then Erin does the purchasing for a steel [unintelligible 00:02:51.17] So she’s good at finding deals and buying stuff.

Joe Fairless: Erin, your wife?

DJ Cummins: Yeah, Erin is my wife, yeah.

Joe Fairless: Okay, cool. Well, that’s good, your background especially… And Erin’s too, but you’ve been in real estate as a W-2 employee or as a professional for a while before you started investing.

Your initial investment was $10,000, and that was with your wife’s cousin and his wife. That was the fourplex that you still have?

DJ Cummins: We actually sold that about a month ago. It’s the first time we’ve sold anything.

Joe Fairless: Should I say congratulations?

DJ Cummins: Sure. We’re kind of adjusting what we have going on, and we did good on it, and we’re looking forward to the next purchase coming down the pipe.

Joe Fairless: Great. What did you buy it for initially?

DJ Cummins: We bought it for 95k. Two units were vacant at the time, but the rents would have been $1,700. Then we sold it for 118.5k four years later. It was bringing in roughly $2,000/month. We raised the rents and we made some money out of it, and decided the partnership – we were gonna kind of go different ways. Erin and I have some money now to invest on our own in something.

Joe Fairless: Okay. So it was more the partnership structure was driving the sale, and less the property profitability. It was profitable, clearly, but it was more you wanted to go your separate ways.

DJ Cummins: Yeah. The property was cash-flowing $400-$500/month, so it was doing well, especially for a $95,000 investment… But we were just gonna go different ways with the partnership. A partnership is great when you get started, because there’s someone there to cut your back on stuff… But it can also turn a great deal into an okay deal when you’re just cutting that equity in half and you’re cutting the cashflow in half, so… It was time to go our own way.

Joe Fairless: How much did you net from that transaction that you’re able to now put into something else?

DJ Cummins: I think ours was a little over 19k-20k.

Joe Fairless: Okay. So you put in 10k initially, so you doubled your money in four years?

DJ Cummins: Yeah, we doubled our money in four years. Plus, we had the cashflow in between that.

Joe Fairless: Sure. Well, that’s a pretty darn good return.

DJ Cummins: I would do it again, yeah.

Joe Fairless: Yeah. Not including the cashflow, that’s 25% return, just on the profits from the sale. Okay, and your two single-family homes – what were the purchase prices for each of those?

DJ Cummins: One had been on the market too, and we’re gonna try and take some money from that one once we sell it… But that one we purchased for $43,000, and… These were all in a good area where we’re from here; so it was purchased at 43k, it was renting at $850/month, and we only had about 8k to 10k into it as far as fixing up the property.

Right now we owe about 29k on it, and we actually had an offer last week for 64k that we were gonna take, and then the offer fell through, so… Roughly, we should walk away with another 30k or so from that one.

Joe Fairless: And thanks for mentioning how much you’ve put into it; I should have asked on the fourplex how much you’ve put into it… Did you put much into it, since two units were vacant?

DJ Cummins: We pretty much redid all the flooring, all the paint, several new refrigerators, a couple of air conditioners… So we’ve put in quite a bit of things. Two of the apartments were completely redone, were gutted and started over on. So we’ve put in a lot, and then the cashflow did some of that work for us.

Joe Fairless: Okay. And how much all-in would you say you put into it? You bought it for 95k, and then how much on top?

DJ Cummins: We’ve probably put 15k-20k in it. We had one tenant that tore up a little bit on us, and that cost us 9k just on a 500 sqft. apartment rehab.

Joe Fairless: Dang! After you did the renovation?

DJ Cummins: Yeah, we had done some renovations, and then we pretty much had to start all over. We were getting ready to do an eviction, so he didn’t want us to go on the property, and he had a water leak in his bathroom and he had a pair of [unintelligible 00:06:40.20] and I guess it busted, and he never told us… So there were some mold issues in two of the three rooms… It was pretty bad.

Joe Fairless: That’s gut-wrenching. That makes me sick for you. When you came across that, what was the process to resolve the issue?

DJ Cummins: Well, we had some [unintelligible 00:06:59.24] and luckily the mold hadn’t sat there for a long time, so we had to cut out some pieces of wall, but we got it fixed pretty quick. We found some great contractors along the way, that have been with us [unintelligible 00:07:08.13] They got it turned around, and it still took longer than a month… But still, when it rents out for $500 and then you have to spend 9k to fix it up, it’s kind of gut-wrenching, like you said…

Joe Fairless: Yeah. The money from the rent go to these fixes that you did, or did you have to come out of pocket for anything?

DJ Cummins: That one we came out of pocket some on, just so we didn’t drain our business bank account, and then we kind of paid ourselves back over time. And after the sale of the property we got some back, but… Technically, the company paid for part of it, our LLC, and then we’ve put in a little bit out of our pockets too, just so we didn’t drain the bank account [unintelligible 00:07:44.22]

Joe Fairless: Of your two single-family homes, you said you bought one for $43,000, and you’re all in for around 54k… What about the other one?

DJ Cummins: The other one is a little bit larger, and that’s probably my favorite one that we have. We bought it for 55k, but we got a $3,500 closing cost assistance. We had to put some work into the place. I think we’ve put 12k into it, and that was more than we had planned on, because the inspector missed something on the foundation, and we had to have the addition jacked up in the air about six inches. They just put the foundation on cinder blocks, on the dirt. The kitchen was just slowly settling down into the ground, and we had to pour some footers in…

That wasn’t gonna be a huge rehab. It was gonna be a paint job and flooring and it was good to go, but then we had to jack the floor up, so that was kind of  a scary thing. Now we’re into that for about 62k-63k, and it’s worth around 80k.

Joe Fairless: Okay. What’s it rent for?

DJ Cummins: It rents for $950.

Joe Fairless: $950. How come you’re selling the other single-family home?

DJ Cummins: That one was also in a partnership.

Joe Fairless: Okay. And the 63k one was not?

DJ Cummins: That one was just my wife and I.

Joe Fairless: Hallelujah! You’ve gotta keep one.

DJ Cummins: Yeah, we don’t have to start all the way over. We’ve paid our dues and we’ve learned what we’re doing; we’ve got a team, we’ve got some ideas about what we wanna do in the future, and we’re looking at some — I call those chameleons, because we’re up for anything. We’ve looked at car washes, storage facilities, laundromats – which terrified me, looking at the laundromats – apartment buildings… We’re chameleons, we’re up to change to do whatever we have to do to make the money. That’s why we’re selling off the two in the partnership, just so we’ve got a little bit more freedom to do what we want, and not have to run it by anybody else, or anything like that.

Joe Fairless: Did you do the renovations yourself when you had to get the units ready?

DJ Cummins: Well, that was one of our big mistakes. At first we were trying to do it ourselves, and… Anybody can paint. When I say anybody, I mean anybody but me… [laughs]

Joe Fairless: And me.

DJ Cummins: So we did okay, but it takes so long to do it yourself… I’m working 40-50 hours/week and I’ve got a 10 to 15-hour commute, and then trying to put in a floor at nighttime, or fix a toilet here and there… We did a lot of it ourselves at first, and we had an eye-opening experience. The apartment we turned over a couple years ago – we did it ourselves, and it took us 4 months to do; we saved on labor costs with the contractor, but the contractor could have finished that job in probably 1,5 to 2 weeks.

Joe Fairless: Oh, my gosh.

DJ Cummins: Yeah, so we saved $1,000 and lost $2,000 at the same time, pretty much… So we learned our best asset is not doing things ourselves. We’ve figured that out pretty quick.

Joe Fairless: What took so long? And by the way, if I was doing it, it would have taken six months. You got it done four months faster than I personally would have been able to do. But looking at it, now that you’re reviewing the process, what was taking you all longer than a contractor?

DJ Cummins: Well, a few years ago I had to google the difference between a flat-head and a Phillips screwdriver.

Joe Fairless: [laughs] Okay, I’m past that, at least…

DJ Cummins: [unintelligible 00:10:51.00] but it’s just a learning process if you’re working on cabinets. Or the painting was a pain, and the guy was a smoker, and it was like a four paint job type of place. And we got the cheap paint to be cost-effective, and that stuff didn’t work at all. It was like putting white out on the walls. We took 4-5 different colors to get it on there, so we’ve learned not to use the cheap paint.

It’s a learning process, so… I guess we weren’t in that big of a hurry to get it turned over, though we should have been. At that point we were treating it more as a hobby than as a business, and then we realized we were hurting ourselves in the long run financially, and it was hurting my back. I was down there doing all kinds of stuff.

Joe Fairless: And you wrote a book about landlord life. In fact, it’s called “Landlord Life: a Diary of a New Real Estate Investor.” What’s in the book?

DJ Cummins: Well, we did a lot of research before we got started, and I’ve read a whole lot of books, and tons of blog posts, and different websites and podcasts…. And podcasts are awesome these days. But I just thought I wasn’t getting [unintelligible 00:11:51.07] for what being a landlord was gonna be like. Some books are great, some books are not so great, and I thought what I was most curious about was what the day-to-day was gonna be like, and what actually it was like to be a landlord. You find a lot of books on how to sign deals and do deals, but what do you do once you got that deal?

[unintelligible 00:12:09.00] writing the book… It was six months before we bought our first property, so I kind of jumped the gun on the book a little bit. But anytime we did something with the business, it’s in the book. It’s literally like a diary. There’s no chapters, it’s literally — anytime we did something with the business, there’s a diary post, and we laid it into a book.

Joe Fairless: Huh. It’s not only helpful for others to see the play-by-play, but it’s helpful for you as you’re going about the process… I keep a daily journal, and I’ve been doing it for 3-4 years, and it’s just eye-opening to read what I was working on a year ago today, two years ago, three years ago, and thoughts…

Have you kept up a journal or a diary since publishing the book?

DJ Cummins: I still catch myself writing stuff down, even though I’m not writing a book anymore, yeah. It did help. I had several times, like around tax time, that we forgot this and that, and what was this money for, and which LLC was this receipt for… And we were able to just pull up that Word document, and there it was; I wrote about it in the book, so we could figure out where it was coming from. Even if someone’s not writing a book, it’s not a  bad idea to keep a journal with what’s going on on a day-to-day basis.

Joe Fairless: For real estate investors who are starting out, what’s your best real estate investing advice ever?

DJ Cummins: Well, like I said, don’t do it yourself. Know what you’re good at and find yourself a team. You don’t have to start off with 1,000 units; get yourself one house if you have to, and find the people that are gonna be good at what they do. We’ve got an HVAC guy, we’ve got a painter, we’ve got carpenters… We’ve got a little bit of everything to help us now. Now we can keep on keeping on, and not have to worry about anything else. Knowing what you’re good at is the biggest thing to me, and avoiding what you’re not.

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

DJ Cummins: Yeah, sure.

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

Break: [00:13:59.18] to [00:14:42.01]

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

DJ Cummins: Well, the copout answer would be my book, or one of your books, so I don’t wanna give the copout answer…

Joe Fairless: I want the real answer.

DJ Cummins: [laughs] Well, it wouldn’t be fair to come on here when no one knows who I am and say my book’s the best one in the world… Two that I really like – I have to mix in two… The Book on Investing In Real Estate with No (and Low) Money Down, from Brandon Turner. In my opinion, that book was kind of like Rich Dad, Poor Dad was. A lot of people talk about how Rich Dad, Poor Dad changed their mindset… Well, Brandon’s book kind of took it a step further and did specific examples on “Hey, this is how you can do this without having a ton of money”, and I thought that was a fantastic book.

Then Mark Ferguson, “Build a rental property empire.” I’m not sure that I wanna have my own empire, I don’t wanna have 40 or 50 houses; we’ve had three properties the last few years and I’ve had a few extra grey hairs pop up… But just seeing how he’s done it — it’s just kind of an eye-opening book. It’s possible to put your mind to it. It’s a great book.

Joe Fairless: Best ever deal you’ve done out of the three?

DJ Cummins: All three deals we’ve done – they all pretty much have similar cash-on-cash returns, and all that kind of stuff. I really have decided that I like the single-families more, so the most recent one that we just bought a couple years ago (2017 is when we bought it), it cash-flows $300/month, we’ve got about 20k of our own cash into it, give or take a few dollars, and we’ve got 20k to 30k extra equity built into the property already.

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

DJ Cummins: The biggest mistake — one for us is not having a property manager. Someone that has a full day to dedicate to [unintelligible 00:16:19.09] and someone that’s okay to be the bad guy; I am not very good at being the bad guy. We found that out. So that was a big mistake for us, not having a property manager.

We’ve got good tenants where we’re at now, and I think we’re okay with who we’ve got, but anything going forward is gonna be under property management for us.

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

DJ Cummins: We’re both volunteering at our church, we’re both on a couple of boards at the church; I’m on the financial board, for example, and… A passion of ours is helping out with the church.

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

DJ Cummins: Well, anyone’s free to reach out to me on Facebook or LinkedIn under DJ Cummins. And I actually started a blog a couple of weeks ago, www.ragstonicerrags.com.

Joe Fairless: [laughs]

DJ Cummins: I’m not a rags to riches kind of guy; I just wanna have nicer rags… So that’s kind of where I’m at [unintelligible 00:17:10.10] But I feel like I’ve learned a lot in the last few years, and I wrote a 400-page book, so I feel like I know a thing or two about a thing or two now… And I wanted to share it. I’m not on there to sell anything to anybody. It’s kind of a way to get the word out from what we’ve learned.

Joe Fairless: Well, DJ, thank you for sharing what you’ve learned, and the experiences from your first three deals. The lessons from the renovation process, taking it over versus bringing in a property management company or contractor, to partnerships, and the challenges that you can come across with tenants who just go berserk, and qualifications for screening tenants – all that stuff. And also, as you’re building your portfolio, where your focus is going.

Thank you very much for being on the show. I enjoyed our conversation, and I’m sure a lot of the Best Ever listeners who are looking to get into real estate or just get going got a lot of value from this conversation, so I really appreciate it. I hope you have a best ever day, and congrats on the book, and we’ll talk to you soon.

DJ Cummins: Okay, thanks so much, and thanks for all that you do for everyone out here.

Best Real Estate Investing Advice Ever Show Podcast

JF1014: Why Haven’t You Considered Crowd Funding Your Real Estate Deals?

Imagine a Go Fund Me or Kickstarter campaign for real estate. That’s similar to what Patch of Land offers! Hear one of their sales leadership explain the process, break down how a deal works, and the growth they have seen recently at the firm.

Best Ever Tweet:

[spp-tweet tweet=”Know what all your costs are going to be before making a decision in real estate, especially the costs you don’t see.”]

Ben Shaevitz Real Estate Background:
– Senior Vice President, Loan Production at Patch of Land
– Over 13 years of experience managing sales and customer acquisition in real estate lending organizations
– Spent 6 years at Bank of America as a top producer in third largest loan production office across 50 states
– Holds MBA in Finance from California State University, Northridge
– Based in Los Angeles, California
– Say hi to him at https://patchofland.com/bestever
– Best Ever Book: Do You by Russell Simmons

Click here for a summary of Ben’s Best Ever advice: http://bit.ly/2sBFaxp

Made Possible Because of Our Best Ever Sponsors:

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Ben Shaevitz on crowdfunding

 

Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into that fluffy stuff.

With us today, Ben Shaevitz. How are you doing, Ben?

Ben Shaevitz: I’m doing great, Joe. Thanks for having me.

Joe Fairless: My pleasure, nice to have you on the show. A little bit about Ben – he is the senior vice-president of loan production at Patch of Land. He’s got over 13 years of experience managing sales and customer acquisition in real estate lending organizations. He’s got his MBA in finance from Cal State, Northridge, and he’s based in sunny Los Angeles, California. With that being said, Ben, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Ben Shaevitz: I grew up in a real estate family in Silicon Valley. My dad has been a real estate broker since the ’60s and my mom worked as a real estate agent for [unintelligible 00:03:12.23] for almost 30 years. I grew up sitting in open houses and learning from my parents the tricks of the trade, and just kind of fell in love with real estate from an early age.

After college, after moving to Hawaii for a brief stim to just chill out for a while I got my real estate license and immediately just dove right into it. I started working for Bank of America as a loan originator back in 2004. I worked there for seven years, worked my way up the corporate ladder there, and then I worked for another public entity (one of the largest lenders in the country) for seven years after that, and I decided to switch over to private lending, and have been with Patch of Land for almost a year and a half now.

Joe Fairless: What’s your responsibi