JF2166: House Hacking Together With Sam & Nick Riccio

Sam & Nick Riccio have been in real estate for 3 years and currently own 6 doors consisting of a condo, triplex, and duplex. They are solely focused on house hacking, and they share how they went about house hacking their way to 6 doors and share why they decided to take this route instead of buying and renting out properties. 

 

Samantha & Nick Riccio Real Estate Background: 

  • 3 years of real estate experience
  • Currently own 6 doors, consisting of a condo, 3-family, & 2-family home
  • From Boston, Massachusetts 
  • Say hi to them at: www.eaglehill-properties.com 
  • Best Ever Book: The one thing

 

 

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Best Ever Tweet:

“Network and focus on your plan, don’t get caught trying to compare yourself to others.” – Sam & Nick Riccio

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JF2163: Anesthesiologist To Real Estate With Leslie Awasom

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

Leslie Awasom Real Estate Background:

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

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Best Ever Tweet:

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

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JF2160: Second Generation Investor Lessons With Pankaj Sharma

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

Pankaj Sharma Real Estate Background:

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

 

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Best Ever Tweet:

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


TRANSCRIPTION

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

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

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

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

Joe Fairless: How come?

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

Joe Fairless: Of course, yep.

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

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

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

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

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

Joe Fairless: Why?

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

Joe Fairless: Okay, but how does that help?

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

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

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

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

Pankaj Sharma: February, yeah.

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

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

Joe Fairless: There you go.

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

Joe Fairless: What was the purchase price?

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

Joe Fairless: Why is that?

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

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

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

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

Pankaj Sharma: Exactly.

Joe Fairless: He was one generation early.

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

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

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

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

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

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

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

Joe Fairless: What was the fifth one?

Pankaj Sharma: Fifth one was a high rise building.

Joe Fairless: Okay, how many stories?

Pankaj Sharma: I would say 11…

Joe Fairless: 11 stories.

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

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

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

Joe Fairless: What about elevators?

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

Joe Fairless: Are they expensive?

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

Joe Fairless: What’s a lot of money?

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

Joe Fairless: What else about high rise buildings?

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

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

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

Joe Fairless: Yep.

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

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

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

Joe Fairless: Oh my.

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

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

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

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

Joe Fairless: Congratulations, bravo on that.

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

Joe Fairless: Yeah, the pandemic.

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

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

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

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

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

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

Joe Fairless: Okay.

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

Joe Fairless: 70% to 94%.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Pankaj Sharma: Sure.

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

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

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

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

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

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

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

Joe Fairless: Is the KarmaKast your podcast?

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

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

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

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

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

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

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

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JF2159: Creating Software For Landlords With Laurence Jankelow

Laurence is the Co-Founder of Avail, an all-in-one software solution designed for DIY landlords. He initially was handling his real estate investment process with excel spreadsheets and after a while, both he and his partner figured there must be an easier way to be a landlord. They searched for different software and found that the majority of the ones out there were made for bigger landlords, so they decided to create their own for the smaller landlords. 

Laurence Jankelow  Real Estate Background:

  • Co-founder of Avail, an all-in-one- software solution designed for DIY landlords
  • Long-term real estate investor with a passion for 3-unit multi-family properties
  • Portfolio consists of two 3-units and 1 Car wash
  • Based in Chicago, IL
  • Say hi to him at: https://www.avail.co/ 
  • Books: measure what matters

 

 

 

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Best Ever Tweet:

“You make all of your money essentially on buying the right properties” – Laurence Jankelow


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners and welcome to the best real estate investing advice ever show. My name is Theo Hicks and today I’m speaking with Laurence Jankelow. Laurence, how are you doing today?

Laurence Jankelow: I’m doing well. Thanks for having me on. How are things going with you?

Theo Hicks: I’m doing great. Thanks for joining us, looking forward to our conversation. A little bit about Laurence’s background – he is the co-founder of Avail, an all in one software solution designed for do-it-yourself landlords. He’s also a long-term real estate investor with a passion for three-unit multifamily properties; current portfolio consists of two three-units and a carwash. He is based in Chicago, Illinois, and you can say hi to him at his website, which is avail.co. So Laurence, do you mind telling us a little bit more about your background and what you’re focused on today?

Laurence Jankelow: Absolutely. So my background– thanks for mentioning the three-flats. I’ve been a real estate investor for a while; the portfolio, it shifts and changes. Before I got into that, I had started down the finance track after college, now probably 15 or so years ago, and started with business in risk consulting, did that for just under five years, going from company to company, just taking a look at their operations in using data analytics, would try to help them determine where they can improve their business. From there, I went on to Goldman Sachs and did somewhat much the same for their portfolio managers and supported their hedge funds, alternate investments and private equity groups. I did that for so long that at some point, I wanted to try to get out of corporate America. So I tried to do the Rich Dad Poor Dad strategy, which was start building up some passive income through real estate, and almost worked my way through those quadrants; I can visualize it in that book now… I added the real estate and then eventually I thought, “You know what, the recommendation is to become a business owner.” So I started to think about, “Do I want to take my real estate from the six units to 1,000 units, or do I want to do something different?” and at that time, I saw that the way I was managing my rentals was totally ineffective, and I saw an opportunity to leverage software to make it better, and found that the best path for me was to quit my job at Goldman and focus on building a business around providing landlords of my size software that they otherwise didn’t have access to.

So that’s what I focus on now at Avail, is providing the tools and process and education for smaller landlords; those with nine or fewer units, to help do the day to day tasks of being a landlord and including listing syndication, to finding tenants, screening renters by hooking into TransUnion for credit reports, background checks, letting the tenants pay their rent online, drafting and signing leases online, those kinds of things. I spend a lot of my time just evolving that software.

Theo Hicks: So you mentioned that this company grew out of your own inefficiencies in management. So do you mind walking us through what those inefficiencies were, and then for each of those, how you were able to use software to solve those problems?

Laurence Jankelow: Yeah, it’s actually almost embarrassing now when I think about what I used to do. The person I started Avail with, Ryan and I used to share Excel files back and forth, and we’d make an Excel file where I’d merge cells together and paint them, and that would be our rental application. We’d print that out, we’d hand that to tenants, and that was how we screened them; we didn’t even realize that we should be pulling a credit report or eviction checks and those kinds of things… And it all evolved from that. At some point, we realized, “Hey, this is not working. Excel doesn’t make sense.”

We went looking online for software that would do what we wanted and we saw stuff like Yardi, which was really powerful, but Yardi’s really designed for a landlord with 1,000 or 10,000 units, which I’ve got six, Ryan had two, and the starting price of Yardi’s something like $10,000 a month. So that’d be more than our combined gross rents; it didn’t make sense. So we felt like if we wanted to solve these problems for ourselves, that there’s probably a business to be had here for others of our size. So that’s what we set out to do, really targeting, helping landlords with nine or fewer units, I’d say.

Theo Hicks: Perfect. So you had all these issues with your property, you went online to see if you could find an existing software, and there were software out there but they were too much, too much money or it’s for these larger buildings, whereas you wanted to find something for smaller. So take me from there to the start of the business. Did you and your business partner just sit down together and say, “Hey, here’s all the pain points of smaller landlords,” and then, “Okay, so here’s the different software that could potentially resolve those. Okay, let’s focus on these [unintelligible [00:07:17].27] ” How does the process of creating this type of company work?

Laurence Jankelow: Well, creating a company is pretty hard, and I think we didn’t realize that going into it. Everyone tells you it’s really hard, and then it’s something you don’t really acknowledge till you do it. But we started this in 2012; that’s when we quit our jobs. We quit with nothing but an idea on a napkin. We felt that we didn’t want to work on it while full-time. It wouldn’t really go anywhere if we had a full-time job elsewhere, and it wouldn’t be fair to our employer or ourselves to let our dream sit on the side. So we quit and we started day one, and then what we tried to do is find an engineer to help us build it, and you can imagine, we couldn’t find an engineer who wanted to build our dream for free or for equity, which was worth nothing at that point.

So Ryan and I decided we were going to have to build it ourselves, and we had no experience in that. So we ended up having to roll up our sleeves, we taught ourselves to code. In 2012 to 2014, I essentially wrote the first 500,000 lines of code that allowed us to syndicate listings to Zillow, or Trulia or hit the TransUnion API to get a credit report or those kinds of things… And we spent that first two years fumbling around, I’d say, trying to figure it out, really took that just do what it takes mentality. End of 2014, we felt like we had a pretty good product and we started getting traction, started getting customers, started hiring our first employees, really started seeing it as a business and starting to grow, and then from 2015 to 2020, we really saw some growth,. We’ve now got 600,000 landlords and tenants who use our system for the everyday purposes of being a landlord.

Theo Hicks: Wow. So what did you do for money in those two years while you were doing all that fumbling around, as you said? Did you have money saved up ready?

Laurence Jankelow: Yeah. Ryan and I consider ourselves to be super privileged in a way. I was at Goldman Sachs and he’s at a different investment bank. So we had some savings, not as much as you would assume you get out of investment banking, particularly because we were just coming out of the financial crisis of 2008. So we didn’t really get bonuses those couple of years, but we had enough where we could each put $20,000 into starting the business, and that $20,000 was essentially, for us to live on for those years. So those two years were very much the ramen noodles years, but we at least had something to feed ourselves. But I don’t look back on it as regret. I feel like we’ve learned a lot. I think learning how to code was probably one of the greatest achievements for me. It completely changed how I think about almost everything I encounter now.

Theo Hicks: Did you self-teach yourself on Google or did you take courses?

Laurence Jankelow: Taught myself. This is probably a popular programming language for anyone who does this, but it might not resonate with some of your listeners. I taught myself Ruby on Rails, I downloaded a tutorial, and essentially that tutorial just walked me through creating my own Twitter from scratch, and replicating that. What was awesome about it is you really start to realize, “Look, I’m getting stuck at this point. There’s no one to help me, and I can either give up or I can spend four weeks trying to solve something that a real engineer could probably do in two minutes,” and you spend those four weeks trying to solve a two-minute problem, you tend to grow by leaps and bounds, I’d say. That’s what happened for me, and I feel like that just fueled my hunger for learning more and attacking harder and harder problems.

Theo Hicks: Wow, that’s awesome. Did your business partner write any code or was it all you?

Laurence Jankelow: I’d say I wrote 95% of it, and Ryan did do 5%, but Ryan also had a really challenging task for him as well. So while I was writing that code, he had to convince a bank to allow us to pull money out of any account in the United States, essentially, to do withdrawals. Tenants want to pay their rent. So yeah, we have to get approvals from those tenants. It has to be super documented. So he had to work on convincing a bank and figuring out that process of what that has to look like, how does it meet regulations, all those things. He had to convince TransUnion to allow us to pull credit reports and sensitive data on people, and we’re not famous, we don’t have a pedigree to go and earn these things just by nature. So he really had a lot of convincing yet to do. So I applaud his efforts on doing that. It sounds impressive for me to go write 500,000 lines of code, but honestly, for him to convince people to take a chance on us for those other pieces – much more impressive.

Theo Hicks: So you said around the end of 2014, some of the code or the software was written, you started getting customers and hiring employees, and then flash forward six years, you’ve got 600,000 landlords. So you got your code written, the banks allowed you to pull money out of anywhere in the US, TransUnion allowed you to pull credit reports. How do you find your customers?

Laurence Jankelow: That’s always been a challenge for us. Our customers are the smaller landlord, nine units or fewer. So they’re not listed in a phone book. It’s not like I can go find them somewhere and oftentimes, they don’t identify as landlords. I didn’t either when I was at Goldman. If I went somewhere and people would ask me what do I do, I’d usually tell him I work at Goldman Sachs or I would not even mention Goldman because at that time, and even now, there’s just a lot of animosity maybe towards some of those investment banks. So I tell them, I work in finance. I would never mention I’m a landlord. So it didn’t resonate with me as that’s who I was as a person. So that’s always been a challenge, and so what we’ve had to do is figure out where are landlords going, looking for help, and I think in some ways, we’re lucky because they go to the internet for that.They’ll go to Google and they’ll search for ‘what should I do if my tenants’ rent is late’ or ‘how do I get a credit report on a tenant?’ or– I’m in Chicago, so this resonates with me, ‘how do I get a Chicago standard lease agreement?’, and we put out so much educational content that they’ll often find us through those Google searches. We tend to think of our product having a sixth arm in a way or sixth major service, which is the educational component, and we spend as much time on our educational piece as we do on any other part of the product. So they’ll typically find us by– it’s commonly called inbound marketing; that way.

Theo Hicks: So you didn’t pay for any Google Ads. It was all just SEO. You said you figured out what these type of people will be searching for on Google, and then you just wrote those articles, and then eventually, over time, people started finding your blog posts, and in theory, from your blog post, they found your service.

Laurence Jankelow: Yeah, our go-to market strategy has evolved a lot. So it started off with content marketing, which is geared at some of those keywords that they search for organically, and we don’t have to pay for it, but it did evolve. We do pay for high converting keywords now. We can recognize which ones are likely to be profitable for us. So we do pay for those now, and then we continue to pay for those. But by far and large, most of our customers are coming from some of that educational content.

Theo Hicks: Who is writing your content? Is that you and your business partner or is it somebody you hired?

Laurence Jankelow: Well, that’s also evolved. 2012 to 2015, 2016, Ryan and I pretty much wrote most of it. Around 2015 we hired some writers to help us, and you could see a huge improvement in the quality of writing when we hire people. The hard part is oftentimes you’ll find a writer and they don’t know much about landlording and Ryan and I just knew so much about it. So then the challenge is how do you impart a lot of that learning to the writer so that they can write really high-quality, effective content? Because last thing you want to do is put out 2,000 words of dribble. It has to add value, it has to solve a problem for someone.

Theo Hicks: How does your company make money?

Laurence Jankelow: That’s actually interesting. So our software is free. You can have unlimited number of units and use our software for all the features. So tenant screening, listing syndication, the leasing, payments, all that’s free. We do have a premium tier. So if you need a little bit extra, then it’s $5 per unit per month and extra meaning something like you want to set up automatically fees. So if a tenant is more than five days late, it automatically charges 50 bucks. On the free tier, you’d have to log in and manually do it. So there’s a whole bunch of things like that, that push someone into the premium tier or the plus plan as their business evolves, and they need more automation.

Theo Hicks: So the only way you make money is on that premium tier, subscription-based model?

Laurence Jankelow: We have a bunch of ways; that’s our largest way.

Theo Hicks: Okay.

Laurence Jankelow: We also make some money on some of the transactional stuff. So when we pull a credit report, tenants will oftentimes pay $55 for the credit report. Now the benefit to them [unintelligible [00:15:05].09] so it doesn’t hurt their credit report, and then they can also share it with other landlords, so that a tenant isn’t having to pay $55 for this landlord and $55 for another. They can pay it once and share it with any landlord, even though it’s not on our system.

Theo Hicks: Was the premium model the plan from the get-go, and then also, obviously curious, how do you know what’s included in the free plan and what to include in the premium plan?

Laurence Jankelow: That’s evolved a little bit, too. So initially — our pricing has changed a little bit, but we tend to think of breaking the tiers down by landlords who have essentially one unit, and those who have two or more, and tailoring the plans to them. So although the plans are both for unlimited units, we tend to see that landlords with one unit on the free plan or landlords with two or more are on the premium plan, and the reason for that is just how you think about your rentals. For Atlanta with one unit, oftentimes, they’re an accidental landlord or it’s just something they have, and then maybe they’re dabbling, they’re not sure if they want to be real estate investors or not. But folks with two or more units tend to be more deliberate. They didn’t just happen to become a two-unit landlord or more. So they may view themselves as a business a little bit more, and realize that tools and software are part of business, part of how you reduce expenses and maybe push up income. So for that reason, those folks tend to want a little bit more out of the software, a few more features and are also willing to pay. So we bifurcate it that way.

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

Laurence Jankelow: So many things to choose from here… I guess, I would start with– because we tend to focus on novice landlords or new landlords… Best real estate investing advice is when you buy the property. So one obviously, if one of your life goals is financial independence, then getting a rental property is great to do that, but you make all your money essentially, on buying the right properties. And if you’re looking into getting into it, you should really buy properties that are going to be cashflow-positive for you. There’s a tendency if you’re a first-time rental property purchaser to purchase in a manner where it’s akin to if you were buying a single-family home or something that you’re going to live in, and oftentimes those are emotion-driven. Here, you really want to focus on the numbers. So buy a rental property where the gross rent covers all of the operating expenses and the debt payments and has enough of a return where that’s your best usage of the cash, I would say. And if that property isn’t that, you put the cash somewhere else or in another property,

Theo Hicks: Okay, Laurence. Are you ready for the Best Ever lighting round?

Laurence Jankelow: Yeah, let’s do it.

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

Break [17:31:04] to [00:18:29]:06]

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

Laurence Jankelow: Well, I mentioned Rich Dad, Poor Dad, but that’s from a long time ago. So recently, the best one for us is Measure What Matters, and that’s essentially about a goal-setting framework that was developed maybe 30, 40, 50 years ago at Intel, and it’s essentially a structure that you can use to set up goals and how you measure the success towards that goals. And just for me at Avail, that was a pivotal moment for us adopting that framework and setting goals. And even if it’s not Avail, if it’s with your rental properties, you should set goals for the rental properties and how you want to measure them. So the key takeaway from that book is the measurement of those goals and making sure you have something that has a strict KPI in that measurement.

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

Laurence Jankelow: Great question. Well, I’ll probably start another one. Once you get bitten by the startup mosquito, you tend to want to get bitten more. So if Avail fail today, man, you’d have to take a hard look at why I failed, because I think we’re doing all the right things. But I would start the next one. I don’t know if it would be real estate, but I’ve got some ideas around investing in stocks that are similar to what we do for real estate, but for a stock investor. I think you’d have to keep going and keep building. Once you’re a builder, always a builder.

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

Laurence Jankelow: I’ve got two kids, a six-year-old and a four-year-old, both little girls, and for me, I try to teach them some things. One of the things that we try to do now that’s really small is we take the little red wagon and we go around our neighborhood and we use one of those little claws to pick up trash. We walk around the neighborhood and we pick up trash and we try to fill up a trash bag every so often just to clean up the area.

As far as real estate, I try to participate in online communities. I feel like there’s a lot I’ve learned just from the six units, but then also, from seeing how our 200,000 landlords manage their properties there’s a lot that we’ve learned, and I try to take the knowledge we’ve gotten there and I try to push comments out. We have our own community on our website that I try to get it to some of those Facebook communities where you see a lot of landlords trying to interact and figure out what to do.

Theo Hicks: What’s the best ever place to reach you?

Laurence Jankelow: You can learn anything and everything you want about what we do at our main website avail.co, but I also like people reaching out to me directly. I’m always happy to have a conversation. So if anyone wants to do that, they can reach me at my email laurence [at] avail.co. I encourage anybody to do it. I’ve done a couple of podcasts now and not one person has reached out to me and that’s disappointing.

Theo Hicks: Best Ever listeners, make sure that you reach out. I might have to email him just to make sure someone reaches out, but I think one of our Best Ever listeners will reach out especially after listening to this episode; very powerful. I really enjoyed the conversation.

I stopped taking notes in the middle of it, and was just asking questions. It was so fascinating to me how you’ve been able to build this business and learn how to code and go from really having no idea how to write software, how to run your own company to having 600,000 customers; that’s great to hear. So definitely worth re-listening, just to hear his process from quitting with an idea on a napkin, to learning to code, to his business partner working with banks to figure out how to let them pull money from any bank, and working with TransUnion to pull credit reports, to finally 2014 when you started getting customers.

We talked about how you were able to get customers through content, so through your thought leadership. It was always great to hear because we talked about that on this show a lot. Then you mentioned eventually you ended up evolving to paying for stuff, but that’s like a theme, where you start off doing everything yourself and eventually it evolves into being able to outsource some things. And then your best ever advice was if you’re gonna buy real estate, realize that you make money on the front end and that needs to be cashflow positive.

So Laurence again, I really appreciate you coming on the show, I learned a ton, and I’m sure the Best Ever listeners will as well, and if they have more questions, take advantage of him giving you his email address. It’s not every day that our guests do that. So Best Ever listeners, as always, thank you for listening. Have a best ever day and we’ll talk to you soon.

Laurence Jankelow: Thank you so much.

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JF2152: Which US Markets Shine for Rental Homes and Why With Adiel Gorel

Adiel grew up in a family who was involved in real estate and was privileged to dinner conversations where he learned valuable principles. He shares how he went from starting in silicon valley and switching to different markets like Las Vegas, Portland, Phoenix, and Oklahoma sharing all the lessons he learned through being in different markets and why he was so nimble. 

Adiel Gorel Real Estate Background:

  • CEO of ICG, a real estate investment firm
  • ICG has purchased over 10,000 properties 
  • Based in San Francisco, California
  • Say hi to him at: https://icgre.com/ 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“My first area of focus to invest in is sunbelt states, large metropolitan areas, and where the ratio between rent and price works” – Adiel Gorel

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

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

 

Jorge Abreu Real Estate Background:

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

 

Click here for more info on groundbreaker.co

Best Ever Tweet:

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

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

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

Scott Krone Real Estate Background:

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

 

 

 

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Best Ever Tweet:

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


TRANSCRIPTION

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Scott Krone: 7 square feet of lockers per capita.

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

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

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

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

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

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

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

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

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

Joe Fairless: Okay.

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

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

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

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

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

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

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

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

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

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

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

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

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

Scott Krone: Square-footage-wise?

Joe Fairless: Yeah.

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

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

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

Joe Fairless: Your self-storage facility?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Scott Krone: Sure.

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

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

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

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

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

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

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

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

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

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

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

Scott Krone: Thank you very much.

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JF2146: Lessons From A Buyout With Garrett Lynch

Garrett started wholesaling deals in the Chicago area and after realizing it wasn’t a sustainable model that he could grow into a business. He eventually had a business partner and acquired 3,400 units and due to some fallout between the two, he was bought out and took the lessons he learned to go on a break and came back strong with a new partner now owning 500 units.

Garrett Lynch Real Estate Background:

  • Full-time real estate syndicator
  • 9 years of real estate experience
  • Sold his portfolio in 2016 consisting of 3,400 units 26 properties
  • Currently owns 500 units 
  • Based in Scottsdale, Arizona
  • Say hi to him at https://nighthawkequity.com/

 

 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Buy-sell insurance in place, I think everyone should probably have” – Garrett Lynch


TRANSCRIPTION

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

Garrett Lynch: I’m doing great. Thanks for having me, Joe.

Joe Fairless: Well, it’s my pleasure and glad you’re doing great. A little bit about Garrett – he’s a full-time real estate syndicator, he’s got nine years of real estate experience, he sold his portfolio in 2016, which consisted of 3,400 units in 26 properties, and he currently owns 500 units, based in Scottsdale, Arizona. So with that being said, Garrett, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

Garrett Lynch: Yeah, I started this business about ten years ago and I started out wholesaling deals in the south side of Chicago, just some of the rougher areas of Chicago, roughest in the country, probably. After that, I realized that that wasn’t really a sustainable model and decided to go work for a guy with 1,000 apartments, and in doing so, I learned the bigger business, and realized that we had resources to go and start syndicating deals.

So myself and my best friend at the time started a company in 2013. We started buying out portfolios of D Class properties, mostly Section 8 stuff, and then ended up converting into some larger multifamily deals. We started with a 50-unit and we did a 70, a 120 and then jumped to a 380-unit deal, and then after that, we’re like, “Oh, we can buy these bigger deals. Let’s just continue doing that because it seems to work a lot better,” and so we scaled that operation about three and a half years to about 3,400 apartments, self-managed the entire portfolio. We got screwed over by a couple of management companies early on in the beginning and decided to just start our own without really knowing anything about it.

So lots of lessons in doing that, but at the end of 2016, I got bought out of my part of the portfolio, and then since transitioned out. I went on a little bit of a hiatus for a couple of years, traveled around the world for a bit, then I came back and found Michael Blanc and [unintelligible [00:04:58].03]. They had a portfolio of about 800 units, and so I came on board with them as a partner to help them scale the business and add value to their operation. So that’s where I’m at now, and we had our last closing actually in December of 2019. We closed on a 276-unit deal in Huntsville, about a $18.1 million purchase price. So we’re still looking for deals even in this crazy COVID era, and our typical deal ranges anywhere from $8 million to about $35 million, and we target the south-east region.

Joe Fairless: Okay. Well, we got a lot to unpack here and thanks for sharing that. So let’s talk about — in no order of importance, but let’s talk about in 2016, you got bought out of your portfolio. So does that mean you all did not sell the properties, but you personally were bought out of your ownership in those properties?

Garrett Lynch: Yes. Just to be candid, it was a partnership fallout. So the partnership didn’t work, we got to [unintelligible [00:06:04].20] So there was a lot of things involved in that, but it just didn’t work out. When we got to that point, things changed and some things happened, and so we had to negotiate a buyout. So it was mostly done through lawyers and all that stuff, but we essentially defined the value of every property that we owned, and then I had a partner, my partner cashed me out.

On the other side – it was probably very lucrative. Obviously, I made a decent amount of money on that buyout. So it’s all the equity that I was owned was paid in cash for me to arrive at the values of each property and I got paid out on that. The downside is that I had to pay a lot of taxes on that, because I wasn’t able to attend 1031 any of those, and I had to pay out on depreciation recapture. So it was an interesting experience. I had to do that in order to get to the level that I’m at now, for sure, and it was a very challenging time, but I’m glad I went through it and I’m back here now.

Joe Fairless: On the buyout, when you’re finding the value of all the properties, and then here’s the percent I own and this is the value, is there a discount placed on what your value is, since you’re getting cash, and it’s not the value is the value of someone pays you for it?

Garrett Lynch: I did take about a 15% haircut, but it was more like a negotiating process. So it actually took eight months to agree on the pricing of every deal. So we went through every deal, and went “What is this worth? What is this worth?” on each one and then what do we pay for it, and then what is my percentage ownership in that? I owned a quarter of the GP on everything. So we had to go in, figure out what that looked like in cash, and then I took a natural discount because we were just trying to arrive at the pricing and how it all worked together. We had 25 assets that we had to basically agree on, so I couldn’t just sell all of them, it would have taken forever. So we just had to do our best at it, and it moved through surprisingly fast, considering all we had to go through, and so once we arrived at that number, that was just what happened.

Joe Fairless: And how do you determine the value of the property?

Garrett Lynch: We just went in and underwrote it as if we were going to sell it in the market. We got brokers opinions on each one, we came up with a big spreadsheet of every single asset, the mortgage, how much equity was in there, and then we just had to come up with a number and I had them throw out the first number. I always do that because it’s a sales strategy, just to see where they thought things were falling, and then if I had back up on any deals from broker opinion or anything like that as to where things would trade, I would include that as well.

We underwrote in an exit broker fee which– we didn’t need to do that. I think as part of the negotiation we did, it where it was 2% on any deal that was over $5 million and then 3% on a deal that was under that, or something. I can’t remember the exact details, but it was like a tiered brokers percentage that went into it. We were simulating a sale, essentially, on each deal.

Joe Fairless: That’s interesting. I’m grateful that you’re sharing this. It’s something that isn’t talked about a lot, and it’s something that when someone does come across this situation, what you’re saying now is incredibly valuable to those parties who are trying to navigate the buyout structure. So thank you for sharing this.

Garrett Lynch: Of course. Another way to just avoid that is to get buy-sell insurance in place, which I think everyone should probably have at a certain point. There’s a lot of things that can happen in a partnership. Let’s say your partner somehow, God forbid, passes away, and then their spouse is now your partner and you hate their spouse. So having that insurance in place, I think, can be helpful.

Joe Fairless: So knowing what you know now, with a type of partnership that doesn’t work, and I know you’re currently in a partnership, what are some lessons that you learned for the partnership that did not work? Maybe I shouldn’t say it didn’t work because clearly, you all had success…

Garrett Lynch: I think it was actually, Trevor McGregor that told me this that most partnerships lasts three to seven years, and I think the biggest thing that we didn’t anticipate– we went into it, we were friends, I was the deal-finding guy, and then my partner was more like the equity and accounting and finance guy, and I was the operation guy, too. So we did offset each other; that was good, I think, in a partnership. And I think what we don’t want to do going into a partnership is just go into it with your friends, unless they have a role that either complements you. You don’t want to do the same thing, you want to have different roles, obviously, in a partnership. But I’ve seen a lot of people that just structure deals and it’s all messed up. It’s a very tricky thing, it’s hard to navigate, and I think that we were very close friends, plus we did offset each other, but you have to be realistic about how things are going to change and evolve, and you have to be able to pivot as they do, and I think that we were lacking in that department.

Joe Fairless: For example?

Garrett Lynch: For example, we were taking on employees as we got larger, but some of the roles that myself or my partner should have maybe taken on, we didn’t really outline how we were going to do those in lieu of the new employees that we were able take on, and so what happened was maybe some of the roles that I used to before– I was wearing many, many hats, I didn’t wear as many hats, and so maybe I was perceived as being less valuable and really, maybe we should have pivoted into something else. That could have been part of it, and vice versa, with my partner, in some respects.

So having clarity around at what level and what roles and responsibilities you’re going to take on even with having employees, I think… People get into partnerships because they can’t afford to pay employees, that’s one reason. So they partner with someone and then they split it up, and then as you grow, you can afford to pay employees to do those roles, and that’s where you want to be. But keeping an open mind to structural changes as things progressed, I think, is what we didn’t do, and that’s something that you definitely need to look at as things pivot. Maybe there’s a partner that just doesn’t serve the partnership anymore as things progress, so having an exit plan in place is important in that respect. So it’s like, “Okay, well, if things go sideways, we hate each other, or whatever, what is that going to look like?” I think the easiest way to protect yourself is just keep things on a deal by deal basis. Personally, I think if we had done it more like that, it would have allowed for us to pivot in the proper way and things, maybe it would have worked out better.

Joe Fairless: So now let’s switch gears and talk about, you said earlier, you got screwed over by management companies. So let’s talk about that.

Garrett Lynch: Yeah.

Joe Fairless: Please tell us.

Garrett Lynch: So first off, it’s impossible to have D Class properties run by a third-party company; there’s too many moving parts. I think that was part of it for us. D Class– nobody really that we know are probably doing them right now;  maybe a few, but that’s where we started. So the property management companies, there’s really two types. There’s bigger assets, they’re running your property for 3% or whatever it is, plus you pay the payroll, but we had a portfolio. The other side is they’re going to charge you 10% and that includes payroll to some degree, and they’re managing multiple sites, and so you’re fighting for their attention in a lot of ways. So we had probably got screwed over by four different companies. The first time, they said they were going to [unintelligible [00:13:24].15] on our expenses. So if there was a lock that need to be changed by a third party company or something silly like that, you’re just supposed to absorb that exact cost. Well, they were taking the invoices and marking up 20% and changing – actually committing fraud – and then passing them through to us, and they’re keeping a 20% difference.

Joe Fairless: Wow.

Garrett Lynch: Yeah. So we caught that and we had a huge issue.

Joe Fairless: How?

Garrett Lynch: They made a mistake on one of them. They left both numbers on the invoice. They didn’t doctor it properly and we caught it. We went in and did– yeah, so stupid. So they didn’t doctor it correctly, we went in and then we started auditing and everything and we actually called the companies directly… A bunch of them that we found, that their actual invoices were less than the ones that we’re getting from the management company.

So that was a huge exit and departure from that company; that was the first one. And we had just one company that was actually finding all the vendors in the market, and creating their own LLC, and then doing something similar with billing us through their construction company or whatever, using the vendors that they found in the market; and similarly, they said it was going to be a pass-through situation, but all they did was find the vendors and then use them almost as subs under their LLC company, and then they marked everything up. So we found that out, too.

Joe Fairless: Wow.

Garrett Lynch: So it was just really silly stuff that was going on and we just had it right away — we had a bad taste in our mouth with third party management; we wanted more control.

Joe Fairless: Those are two different groups.

Garrett Lynch: Two different groups, similar issues; they just did it in different ways. Both groups, we thought were pretty repeatable, which was interesting.

Joe Fairless: Yeah. What made you think that initially?

Garrett Lynch: Just who they were affiliated within the marketplace. One of the groups is affiliated with auction.com. We’re like, “What? How did this happen with these guys?” So maybe we didn’t do enough digging or enough homework in the beginning, and I’m certainly not having that experience with our management companies now. So I’m not as afraid of them, but at the time, we were just like, “Look, we can’t even deal with these third party companies.” Silly stuff. So management companies don’t really make that much money, unless they figure out ways to make money. For example, there was one company that wanted to charge us 5% instead of the 10%. They’re like, “We’ll be nice. We’ll just charge you 5%,” and we’re like, “Okay,” and they were nickel-and-diming us on every single thing that happens. They’d go on a Section 8 inspection, they’d fail it, they’d charge us 200 bucks, then they’d have to do three more; charged us 200 bucks every time. Any maintenance, they’re charging us 250 bucks. So now they’re making money on piecemeal stuff in addition to the 5%. So it ended up adding up to 25% when you added it all up and it was just like [unintelligible [00:16:20].04] off where they’re just like, “Oh, well. Oh, landscape.” Their contracts are super simple sometimes, which is problematic, and they don’t tell you “Oh, this 10% includes this, or that, or whatever.” It was just– well, they made it up when you got in the situation.

So those were just learning lessons in the beginning, and it’s obviously much tougher with a property management company when you’re not doing large multifamily deals. But a lot of people are still doing 50 units, 20 units and they can run into the same issues.

Joe Fairless: If there are questions you could ask a property management company to attempt to mitigate that from taking place if you [unintelligible [00:16:58].22] properties?

Garrett Lynch: Yeah, I would dissect their entire operation, and I’d be like, “Listen, there’s two ways that property managers make money on an individual’s fees for visiting the site. Tell me about how that works, and then tell me what’s included in your actual percentage fee? What do I get with that? Does that include landscaping? Does that including unlimited access to your maintenance guy? How do those differ? And what can I expect as far as charges go?” and then I would try to get the redacted version of statements that they send out to other groups that they work with, and then of course, get references.

What I do now actually if I’m trying to get a third-party management company, instead of getting their references directly from them, I’ll go on their website and find the properties that they manage, and I’ll just point out five that are similar to mine and I’ll ask for those references… Because you know you’re going to get the best references if you just ask them for references… Which can be helpful, because you can dig into those references, but you want to just get unbiased random references. So if they can’t provide it, then that’s a red flag.

Joe Fairless: Yeah, good stuff. That’s a great tip. Just going on their website and then finding the properties that are similar, whether it’s the area or class, and then asking the management company to get you in touch with those owners so you can talk to them about their experience.

Garrett Lynch: Yeah, and I just did it with our company in Nashville, and they literally passed with flying colors. I checked, I think, six references and a random just point at on their website, and I checked [unintelligible [00:18:36].00] reviews and were having a great experience with them right now.

Joe Fairless: Imagine that. That’s a really good tip. Thank you for sharing that.

Garrett Lynch: Of course.

Joe Fairless: So you don’t buy D Class anymore?

Garrett Lynch: No.

Joe Fairless: Why not?

Garrett Lynch: D Class is like low hanging fruit. On paper, the returns look really attractive, but when you get into them, there’s a lot of unforeseen deferred maintenance issues typically that come with the tenant base that you’re working with. So we had a portfolio of 300 apartments; 150 of them in the beginning were this market rate, and half were– so 150 were Section 8 or around that. We had to convert the entire portfolio to Section 8, because people were losing their jobs so often on the other 150 market rate. Even good tenants, having a decent track record, they’d just lose their jobs. It’s typically more transient of an area and so you get that turnover. People don’t care about credit. You can’t screen people properly because credit’s just non-existent. So you’re dealing with a whole slew of issues.

Joe Fairless: What area, market and sub-market?

Garrett Lynch: Southside of Chicago. I was in Southside Chicago.

Joe Fairless: Okay, thank you.

Garrett Lynch: So over there, unemployment is really high, and people just switch jobs like it’s nothing, and so we had that experience. So the only way we were going to get paid is if we switch it to Section 8, and then when we got into Section 8, it’s very tough to figure out who’s a good and a bad tenant even if you get Section 8. So there’s those challenges in that, too.

Imagine if you rehabbed an entire house or an entire two or three flat, and then you put in the tenants and within a couple of weeks or a couple of months, they destroy the entire property. We saw that all the time. So you spend all this money to rehab it and now you’ve gotta rehab it again when they move out; or you fail an inspection because they didn’t get rehabbed property or because they destroyed something, and if you fail your inspections, you can go into abatement and you’re not getting paid. So there’s a lot of issues like that.

And then also the employees that you’re dealing with in those areas and those types of asset classes mirror the tenants. So you’re not getting the highest quality labor either. So this is the most distinct thing I remember. I had a staff– ten guys that were going around running these properties of the 300 units, and I was like, “You know what? I think some of these people are not working right now, they’re not doing their job properly,” and so I fired eight of the ten people, I kept two, and the properties ran exactly the same as if we had ten.

Joe Fairless: How’d you find out that eight out of the ten were not doing anything?

Garrett Lynch: I had a hunch because tasks were not getting completed on time that should have. I would just pop in randomly and go visit them. I’d figure out where they were and I’d just do random site visits and see what they had going on, and sometimes they weren’t doing anything or they’re just sitting around. So eventually, I just– it was more of a gut thing than anything and I was like, “You know what, I can hire these guys back if I’m really messing up now, but my payroll is insane from breaking even or losing money… I don’t really have a choice, so let’s just see what happens.” And so I just did it, and then sure enough, it ran exactly the same. Two guys could run this thing. It was just nuts. It was like a snowball thing. So we thought– we were like, “Oh, we’re not running properly. Things aren’t working, and we need to hire someone else. Oh ,we need someone else.” So we just kept doing it.

Joe Fairless: Okay, yeah. Because those guys were training each other. “So here’s what we do from 8 pm to 6 pm. We go in this little corner over here and have a little siesta.” [laughs]

Garrett Lynch: Yes, so it was just foolishness on our end… But any high crime area or anything like that, you’re dealing with a whole different set of rules, and it’s very tough to navigate it, because there’s so many tasks that you have to complete that you may not deal with on a B Class property, and it’s just based around the tenant base in the area that you’re in. A lot of variables that are unseen; and then there’s also very little equity. Of course a lot of your listeners know, but it’s like you have the lowest amount of equity in D Class deals, and then A can be the highest, actually. So it’s an inverse on that, but the D Class has the highest cash flow potential… Which is somewhat true, but you’ve still got to sell out of it at some point, and so when it came the time to sell all of these things–

Joe Fairless: Someone’s gonna buy it.

Garrett Lynch: –who wants to buy this garbage that Section 8 tenant left and destroyed the place? You’re not selling that thing for more than what you paid for it at that point. So the basis rose up way too high, and then when it came time to– actually, I think we lost money on a lot of them.

Joe Fairless: Taking a step back, and it might be something that we just talked about, but what is your best real estate investing advice ever?

Garrett Lynch: My best real estate investing advice ever, I would say, is to understand that this is a partnership business, and you need to figure out if you want to enter into this business, where you can add value to someone else’s operation and then just do it for little to nothing in the beginning; just add the value and do as much as you can. So you have to figure out what they need and bring it to them, and don’t expect compensation for it in the beginning. If you can just do something to learn the skill — the knowledge is way more important than actually making money in the beginning, and sometimes that’s tough for people to understand. But if your skill and knowledge level aren’t there, you’re not going to be getting paid anyways.

So for me, I started out making very little in the beginning. I didn’t know anything. I was just wasn’t that valuable to the marketplace, and it took time and surrounding myself with other like-minded people and trying to add value to their operation consistently to get to the level of actually making a decent amount of money. So I would say, don’t be afraid to go in that direction and add value with little to no compensation to get yourself ahead, so you can make a lot more later.

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

Garrett Lynch: Yep.

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

Break [00:24:26]:07] to [00:25:43]:05]

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

Garrett Lynch: Best ever deal I’ve done was a 360-unit deal I found completely off-market in Columbus, Ohio. I think we bought it for $8 million, and in about a year, it was worth close to $15 million.

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

Garrett Lynch: A mistake I made was we went for a loan — we were going to close a deal with Fannie, and we didn’t put a stipulation in the contract that they had to show 90% occupancy. So the seller decided to drop their pants on the deal and just let it go. So the occupancy fell from 95% to 88% in a couple of weeks, and that didn’t meet the lender’s criteria, and so I didn’t have anything in the contract to protect us from that, and our money had gone hard at that point. So learning from that, obviously, you want to put some language in there to protect you if you’re going after debt that requires a certain occupancy.

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

Garrett Lynch: You can actually shoot me a text or a call, 630-709-8636, or email me at garrett@nighthawkequity.com.

Joe Fairless: Sneaky things property management companies can do. So thank you for identifying some things that have happened to you so we can look out for them, as well as how to approach partnerships, and when a partnership does go not as planned, how to navigate the buyout and getting into the specifics. Great stuff there, as well as talking about D Class properties. So thanks for being on the show. I hope you have a best ever day. Talk to you again soon.

Garrett Lynch: Thank you so much, Joe.

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JF2141: Short Term Rental App With Jon Crosby

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

 Jon Crosby Real Estate Background:

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

 

Click here for more info on groundbreaker.co

Best Ever Tweet:

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


TRANSCRIPTION

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

Jon Crosby: Good. How you doing?

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

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

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

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

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

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

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

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

Joe Fairless: Okay, monthly rent.

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

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

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

Joe Fairless: Really?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Joe Fairless: Wow.

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

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

Jon Crosby: It also has an address lookup.

Joe Fairless: Just punch in the address.

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

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

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

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

Joe Fairless: Wonderful.

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

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

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

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

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

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

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

Joe Fairless: Okay. So it’s delayed.

Jon Crosby: It’s delayed.

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

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

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

Jon Crosby: I am.

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

 

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

 

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

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

Joe Fairless: Best ever deal you’ve done?

Jon Crosby: My first short term rental.

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

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

Joe Fairless: What happened?

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

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

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

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

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

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

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

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

Jon Crosby: Thanks, Joe. Appreciate it.

Website disclaimer

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

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

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

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

Oral Disclaimer

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

 

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JF2132: 100 Years Of Experience With Dean Marchi

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

 

Dean Marchi Real Estate Background: (SWEEPSTAKES WINNER)

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

Click here for more info on groundbreaker.co

 

 

 

Best Ever Tweet:

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


TRANSCRIPTION

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Dean Marchi: That’s a great question.

Theo Hicks: Does that make sense?

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

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

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

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

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

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

Dean Marchi: Sure, yeah. Let’s go.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

So again, Dean, I really appreciate you coming on the show. I learned a lot; glad you were our sweepstakes winner. Best Ever listeners, as always, thank you for listening. Have a best ever day and we’ll talk to you tomorrow.

Website disclaimer

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

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

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

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

Oral Disclaimer

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

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JF2131: Going From Singles To A 20 Unit With Nate Shields

Nate is the Co-founder of School Dispatch and has been investing for 4 years with a portfolio consisting of 28 units in 3 states. Nate’s goal is to have 100 doors in 10 years before taking money from his properties. So far during his progress, he has faced the challenge of de-converting a duplex into a single-family home and also the fortune of finding a miss-marketed deal which helped them snag a winner. 

 

Nate Shields Real Estate Background:

  • He is the co-founder of School Dispatch
  • Has been Investing for 4 years
  • Portfolio consists of 28 units in 3 states
  • He has also flipped 6 properties
  • Based in Madison, Wisconsin
  • Say hi to him at his Youtube channel: Dude Real Estate
  • Best Ever Book: Zero to One by Peter 

 

 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Investing in a single-family home to a 20 unit isn’t as difficult as it may seem. At the end of the day, it’s just bigger numbers” – Nate Shields


TRANSCRIPTION

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

Nathan Shields: I’m good, Joe. Thanks for having me.

Joe Fairless: Well, my pleasure, and I’m glad that you’re good, and a little bit about Nate – he’s the co-founder of School Dispatch; he has been investing for about four years, his portfolio consists of 28 units in three states, he’s also flipped six properties, based in Madison, Wisconsin, and he’s got a YouTube channel called Dude Real Estate. So with that being said, Nate, do you want to get the Best Ever listeners a little bit more about your background and your current focus?

Nathan Shields: Sure. I come from a marketing background, but as the previous recession hit, I was looking to do something a little bit different, something a little more entrepreneurial, and I wanted to get into real estate. So I started off as an agent in 2013, and after a couple of years, I got the investing bug and started educating myself and joined up with my buddy. We’re still 50-50 partners on all of our rental properties. So we just slowly climbed that ladder and still are climbing that ladder. So as you said, we’ve got 28 units in three states now.

Joe Fairless: So the last recession, depending on where you lived was ’08, ’09 timeframe. You said you were an agent in 2013. So what were you doing between ’09 and 2013?

Nathan Shields: I was doing marketing for a law enforcement training company, and we were affected by the recession just like everyone else. So my hours got cut, my pay got cut, benefits got cut, and I was just looking for something else that I could support our family with, and something that I was a little more passionate about, too. So I really always thought real estate was a great avenue and I wanted to start in the sales side, both to get me out of my job, but potentially to help me understand the process of buying rental properties. I just always had this dream of owning 10 or 20 properties. It just made sense that you put a renter in, they pay your expenses on it, and then you get cash flow on top of that. So it just made sense in my head and that’s why I think a lot of people gravitate toward that because it’s very easy to understand.

Joe Fairless: Your new partner, what’s your partner’s first name?

Nathan Shields: Troy.

Joe Fairless: Okay. You and Troy have 28 units in three states. What are the three states?

Nathan Shields: Illinois, South Carolina and Alabama.

Joe Fairless: Well, I would have guessed Wisconsin was one of those three. Okay, good. Throwing me a curveball this early in the conversation. I like it. [laughter] Alright, Illinois, South Carolina and Alabama; those are the three states. Where was your first property?

Nathan Shields: We were both in the Chicago area when we started. So that’s why we have Illinois on the list. So we bought our first few properties there. Then my partner Troy moved to South Carolina, and he sourced a duplex there, and then we were just looking for something a little larger, so we found a 20-unit building in Alabama, and then our property managers just brought us another four-unit building down there as well.

Joe Fairless: Okay. Well, South Carolina, Alabama, closer than Wisconsin, Alabama. So now It’s making more sense. How did you learn about the 20-unit in Alabama, and where in Alabama is it?

Nathan Shields: Yeah, it’s about an hour outside of Huntsville, and Troy, he found it on LoopNet, which is where a lot of people say deals go to die, but you can still find some stuff on there. The thing that caught his attention was actually the numbers just looked awful, almost too bad. So he dug a little bit deeper, and once we looked at the rent rolls and the tax returns and all that stuff, we’re like, “Oh, no, the numbers are wrong on the LoopNet side. We like this deal,” and it ended up being a really good deal for us.

Joe Fairless: Can you think of a specific example of a number that was way off?

Nathan Shields: The revenue, based on what we knew the rents were– I think the rents were roughly– and this is very low, but it was $350, $375 for the units in the 20-unit building. You do the math and figure out what the–

Joe Fairless: It’d be $500.

Nathan Shields: –what the revenue should be, but it looked almost half that. So we just knew right away that there was something else going on. Either they’re not telling us something or it’s mismarketed.

Joe Fairless: It was just mismarketed?

Nathan Shields: Yep.

Joe Fairless: Great. I’m glad we’re talking about this. So it was mismarketed. Was it listed by a broker or was it direct from the seller?

Nathan Shields: It was listed by a broker, and she had some experience. She owned some properties herself, but she wasn’t a commercial broker, so I don’t know if she knew exactly how to market, technically, a commercial property correctly. She was a little bit older, the sellers were also a little bit older, they were pretty motivated because they needed to 1031 into a property in California for personal reasons, and so they were pretty motivated to sell it. It was listed at $575, we got it for $475 and it immediately appraised at $573.

Joe Fairless: Okay, got it. So despite them listing it incorrectly, they had about the right valuation.

Nathan Shields: Yeah, I think they were close, and they were able to get a quick sale out of it.

Joe Fairless: Okay, and how did you buy it – all cash, or with financing?

Nathan Shields: Financing. In a sense, it was almost 100% financing without having the seller financing part of it, because we had a line of credit from our lender already. So essentially, we used the lender to underwrite it, but then we were also able to use our line of credit as the down payment.

Joe Fairless: Will you elaborate on what type of lender that is?

Nathan Shields: It was a commercial lender that we pretty much worked with from the beginning. So when we first started with them, we brought some capital to the table, but we needed a little more to get started. So what they did for us was they essentially held our funds as collateral and gave us a multiplier on our money for a line of credit. So that’s how we started, and we used the BRRRR method on the first couple of properties, and then got an extension on that line, and we were able to use that for essentially 100% financing on that apartment building.

Joe Fairless: Wow, that’s great. Was that lender the one that you two came in contact with, in Chicago?

Nathan Shields: Yes.

Joe Fairless: So they’re local to Chicago?

Nathan Shields: Yeah, Troy had already had some dealings with them on some other stuff. So when we talked with him initially, it just made sense for us to continue working with them, because they gave us some good terms.

Joe Fairless: So it’s just a local community bank or credit union to Chicago?

Nathan Shields: Correct, yep.

Joe Fairless: They were comfortable lending the line of credit, which I guess it’s line of credit, and you can do whatever you want with it, that’s my guess, but–

Nathan Shields: Yep, pretty much. You can do whatever you want.

Joe Fairless: Okay, fair enough. So just so I’m clear, you bought it with a line of credit, and then did you put a loan on it after that?

Nathan Shields: Yes.

Joe Fairless: What are the terms on the loan?

Nathan Shields: I believe–

Joe Fairless: High-level.

Nathan Shields: Yeah, probably looking at– it was a 20-year amortization and probably around 5%, something like that. High level there.

Joe Fairless: Alright, fair enough, fair enough.

Nathan Shields: I don’t remember exactly.

Joe Fairless: Yes, you’ve slept since then. So you and Troy were going along, picking off singles, and then all of a sudden, bam, a 20-unit. That’s a gigantic step, maybe a 20 times multiplier of what you were doing. What did you do to prepare for the purchase of a 20-unit when you’ve been doing single family?

Nathan Shields: So he had a little bit of experience in the commercial space. So that combined with our experience and my experience as a realtor – we did have to educate ourselves a little bit, but at the end of the day, it’s just some bigger numbers, and we’re pretty good at running those numbers.

So we were looking for a deal just in any decent metro market, pretty much anywhere in the country. So we were looking all over for about six months, and then we landed on this one. So our biggest concern was not the deal itself. It was more finding out more about the management, the demographics of the area. So once we got it under contract, we popped down there, took a look at the building, which was not a surprise at all to us; we knew it was a C class property, and really just wanted to meet the property manager. So the property manager had been managing that building for ten years, and we felt very comfortable with him. So we kept him on and he’s been great ever since, and he brought us this four-unit that we just closed on last month.

Joe Fairless: Does the property manager manage other properties?

Nathan Shields: He does.

Joe Fairless: Okay. So it’s a third-party management company. It’s not a resident who lives there.

Nathan Shields: Correct.

Joe Fairless: What does the property manager charge to manage this 20-unit?

Nathan Shields: 8%.

Joe Fairless: Anything else?

Nathan Shields: Nope, just flat 8%.

Joe Fairless: Okay. What was the business model for this 20-unit purchase?

Nathan Shields: What do you mean by that?

Joe Fairless: Are you doing a value-add play where you’re renovating the interiors or are you just you bought it, you’re sitting tight, you’re renting them out, you’re making them rent ready, but you’re not increasing the rent?

Nathan Shields: Right. So we set out immediately the rents were artificially low. The last owner didn’t really ever raised them. So we saw an immediate opportunity to get those up to market as we had turnover. So like I said, they were $350 to $375 per door, and we’ve been raising those up to $425 to $450. No problem.

Joe Fairless: Without any major improvements to it.

Nathan Shields: Correct. We did some exterior improvements, very minimal, some landscaping, power washing and stuff like that. The interior, we’re actually going to start experimenting as we turn over a couple more units to maybe spend $3,000 to $4,000 and freshen them up with some new flooring, new lighting, new vanities, stuff like that, and see if we can even push to say for $475 or $500.

Joe Fairless: Did you bring money and put it in the bank account for that cap x work or would that be out of pocket to try and test that business plan?

Nathan Shields: Yeah, we don’t take any income from our portfolio. It’s a long term portfolio for us. So everything that we make in cash flow from all of our properties goes back into either capital improvements or funding our next purchase.

Joe Fairless: At what point will you two decide, “We’d like to have some money from these properties now”?

Nathan Shields: That’s a good question. Initially, our first goal when we first sat down to brainstorm was 10 years, a 100 doors, and at that point, maybe we’ll reconsider where we’re at. But I think it’s just every year or two, we just look at what we got, look at where we want to go. Certainly, at some point, we will; we’re both about 40. So once we hit that 50 mark, I think for sure, we’ll want to start taking some cash off the table.

Joe Fairless: What’s a lesson that you’ve learned based on it not working out, and then you’ve course-corrected?

Nathan Shields: One of the properties, we failed with due diligence; both us and our attorney. It was a duplex, and we thought it was zoned for that, and we never actually checked, because we just assumed–

Joe Fairless: That it was a duplex, right.

Nathan Shields: –that it was a duplex. There were two units, and there were other multi-unit properties on that same block, and I never actually checked the zoning… And what we ended up having to do is deconverting to a single-family.

Joe Fairless: Dang. When did you find out about having to convert to a single-family?

Nathan Shields: We bought that one all cash, and we wanted to refinance out of it once we got it stabilized. So we did some work to the upper unit, since that one was vacant, and then when the appraiser came, he said, “I can’t appraise this because it’s technically not what it is.” So when we found that out, we had two choices – we could leave it as is, but all of our cash would have been stuck there, and we really wanted to refinance out of it.

So luckily, the downstairs tenants were about to move out and that place needed a little freshening up too. We took a brand new kitchen that we had just put in the top unit, and we actually were able to save the cabinets and the appliances and put them into the unit downstairs and freshen that kitchen, and then we just had to cut some stairs in, do some painting, a couple of other little things, but it probably cost us about $10,000 to do that; and time of course, too. So the lesson wasn’t as expensive as it could have been.

Joe Fairless: It used to be a kitchen upstairs. What is it now?

Nathan Shields: It’s really just a landing area. So the stairs were cut up right through the kitchen.

Joe Fairless: Okay.

Nathan Shields: It’s just a little landing area before you get into the living room up there.

Joe Fairless: How did the valuation and cash flow get impacted?

Nathan Shields: The cash flow definitely got hurt. We were expecting probably $1,600 a month in rents and that dropped us down to about $1,350. Valuation was probably roughly the same, and it became such a problem property for us. anyway… We ended up selling that a few months ago.

Joe Fairless: Oh, yeah. Alright. What did you buy it for?

Nathan Shields: We bought that for $72,000 and we put roughly $22,000 into it. We sold it for $125,000 or something like that. It wasn’t a great market; that was part of the reason we were getting out of it.

Joe Fairless: Well, you made $10,000 to $20,000 on it.

Nathan Shields: Right. After all that hassle, yeah.

Joe Fairless: It’s surrounded by duplexes. Was it just sandwiched in between duplexes?

Nathan Shields: Well, there were single families, but yeah, there were also some duplexes and fourplexes on the same street.

Joe Fairless: Oh, man. What did your attorney say whenever you asked him or her about it afterwards?

Nathan Shields: Yeah, he said he made a mistake. He should have checked that too and he didn’t, so. He’s a good guy; he’s honest.

Joe Fairless: Yeah, I respect that. I respect when people own up to that stuff. Well, that was something that is certainly valuable for a lot of Best Ever listeners. What deal have you made the most money on?

Nathan Shields: Boy, I mean, at the end of the day, I think it is the 20-unit building because on paper, we made $98,000 at closing, and it’s just been a really great cash flow property, and as we increase our NOI and cap rates at the moment, they’re still decent. So the value has gone up. So I think we’ll hold that one for a fair amount of time. We’ll either refinance in the next year or two here, potentially sell it. We’ve had a couple of unsolicited offers, but it’s just a really great property for us.

Joe Fairless: Yeah, I think I heard you say that that property manager has since referred another property to you two; a four-unit. So you got the 20-unit, you got a bite of the apple, but then you went down to a four uni. Do you have any baseline for the amount of units per transaction that you’re buying, or are you just accumulating and it doesn’t matter if it’s 1, 2, 4, 20, it doesn’t matter?

Nathan Shields: I think we’d like to move, still bigger. That four-unit was just really nice because it was one town over. Our property manager had already managed that property as well. He brought it to us, we got a good deal on it. We liked that area, and we have boots on the ground there, so it makes sense to continue buying. I don’t think we’d go smaller than a four-unit at this point, and we actually talked about getting into more commercial stuff, whether it’s self-storage or potentially more like a double or triple net lease, things of that nature.

Joe Fairless: How long did you own that duplex that turned into a one plex?

Nathan Shields: Let’s see; about three years.

Joe Fairless: Okay. So you made $20,000 plus on that, and ultimately it was a single-family house. So why not buy single-family homes, and then do a quicker turnaround and then use that to pump money into larger stuff?

Nathan Shields: I think we just don’t like single-family homes at this stage of the game.

Joe Fairless: What don’t you like about them?

Nathan Shields: I think the biggest thing for me is just that they’re comp based. We’d rather go in and be able to add value and have a true commercial asset instead of rely on comparable properties.

Joe Fairless: Right. You have more control over the operations and the business plan direction. Okay, I get that. What has been something that you’re most proud of since forming this partnership with Troy and buying these properties?

Nathan Shields: I think it’s our ability to maintain a partnership. A lot of people– you get two sides of the coin where people do a lot of partnerships or they’re really scared to do partnerships, and the people that are scared probably got burned at some point, and we both have our stories too of bad partnerships. So we understand what makes a good partnership, what makes a bad partnership, and we both had to essentially get out of bad partnerships along the way. One for him was a business partnership, one for me was another real estate partnership, and sometimes you’ve just got to understand that your goals aren’t aligned, your values aren’t aligned, and we’re lucky that our goals and our values and our time horizons are all aligned pretty perfectly.

Joe Fairless: Goals, values and time horizons. I think values is pretty self-evident in what you’re talking about there, but as far as goals and time horizons, will you elaborate more?

Nathan Shields: Sure. So when he had his partnership that went south, his partner was 20 years older than him. So Troy’s long term goals were really the other guy’s short term goals. So it just didn’t really line up, because he was trying to do things that made things more immediate, and Troy was thinking more long term. So eventually, they had to dissolve that partnership.

And then as far as goals go, it’s just we have a goal to buy a bunch of real estate, and there’s a lot of different asset classes to choose from, and it’s just like a side retirement vehicle for us. And honestly, it doesn’t take that much time. We spent a couple of hours a week on it, maybe. It gets a little more intense if there’s a buy or a sell, but it’s not that hard to do. I think a lot of people think it’s a lot of hard work, and I suppose it could be, especially if you’re doing all the painting and landscaping and managing everything, but we try to outsource as much of that as possible.

Joe Fairless: What’s been a challenging conversation that you’ve had with Troy over the years that you two resolved that, hey, if you didn’t have as strong of a partnership as you do, it might not have been resolved and you might have parted ways?

Nathan Shields: I think the biggest ones are probably buy or sell decisions. So I was putting a little bit of pressure on him to sell our Illinois properties, and we did sell that one. So there are times where we just have more intense conversations; they’re always friendly, because we want the best thing for the business and the best thing for us. So I really can’t think of any really intense conversations that we’ve had. One of the other things I forgot to mention was when it comes to partnerships, personalities matter too, because if you can’t get along with someone and understand how they operate–we’ve been friends for 20 years, so we know each other really well.

Joe Fairless: Right.

Nathan Shields: So that’s another thing too, we just get along, and when it does come down to it, we have the best interest of each other in mind and the business.

Joe Fairless: Four things in partnerships – goals, values, time horizons and personalities to make sure we get along. Thank you for that. I appreciate it, and I’m sure a lot of other listeners who are thinking about partnerships or are in one and just assessing each of those boxes appreciates that, too. Taking a step back, based on your experience as a real estate investor, what’s your best real estate investing advice ever?

Nathan Shields: I think the best advice I can give is, definitely get with a real estate investing networking group. If there’s not one in your area or there’s not one that you like, start your own. That’s what I did back in Illinois. It’s a great way to meet people with different skill sets, and you can end up partnering with people on deals. Our group here in Madison is very collaborative; people lending to each other or bringing deals or– it’s a great group of people to be associated with. So definitely hook up with a real estate investing group.

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

Nathan Shields: Let’s go.

Break [00:22:54]:04] to [00:23:47]:03]

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

Nathan Shields: If I can mention two, there’s one called Zero to One by Peter Thiel. It’s more about the startup culture, but the way I process it as looking for from getting from owning nothing to getting that first property is a super important step, and that’s why I like to make sure that people know, especially when they’re starting out, that if you can get that first deal, it’s pretty much all downhill from there because that’s the biggest hurdle.

Joe Fairless: You said two?

Nathan Shields: Oh, yeah, I do have another book – Built to Sell, which is more of a business book, but it really helps you think about your business as “Is it an asset that someone else would come along and actually want to buy?” For a lot of real estate investors I don’t think that’s necessarily the case, because they might not have an attractive real estate business. So just be thinking about systems you can put in place, how to make your assets more desirable to someone who might want to buy them in the future.

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

Nathan Shields: As far as giving back, especially to the real estate community, I do have my Youtube channel. I just offer advice and tips and hopefully people can learn from my failures as I shared one of them. I have many more, but you can also see those on my channel. I also offer on my website, duderealestate.com, you can click a link there to just get a free phone call with me. So especially if you’re new, I think I add a lot of value just in helping people figure out what is the next thing that they have to do to get to that first property, whatever that hurdle might be.

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

Nathan Shields: There’s a couple ways – they can go to Dude Real Estate channel on YouTube, they can also find me on BiggerPockets. I’m a blogger for BiggerPockets, so you can find my articles there; that’s another way I give back. But just look me up Nate Shields on BiggerPockets.

Joe Fairless: Nate, thanks for being on the show. Thanks for talking about the 20-unit, thanks for talking about four things to look for in partnerships, which is goals, values, time horizons and making sure personalities align, and some lessons learned on the deals and partnerships that have helped you get to where you’re at, and also some lessons or things that you wouldn’t necessarily do again or you look out for.

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

Nathan Shields: Thanks, Joe. Appreciate it.

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JF2117: Big Renovation Projects With Joseph Bramante

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

Joseph Bramante Real Estate Background:

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

 

 

 

 

Click here for more info on groundbreaker.co

 

Best Ever Tweet:

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


TRANSCRIPTION

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

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

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

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

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

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

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

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

Joseph Bramante: Right.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Joseph Bramante: Let’s do it.

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

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

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

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

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

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

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

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

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

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

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

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

Joseph Bramante: Thanks, Theo.

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JF2114: Creating A Deal Through Nurturing With Robbie Faithe & Tosh Hoshino

Robbie & Tosh, are partners who have 13 years of combined experience. They share a story in finding a mobile park deal that was attained by nurturing a relationship over an extended period of time. You will learn how they determine if a mobile home park is a good deal or not and what they like to focus on.

Robbie Faithe & Tosh Hoshino Real Estate Background:

  • Robbie has 11 years experience in real estate
  • Tosh has 2 years in real estate
  • Robbie current holdings consist of 66 doors mix with single family, Multi-family, & a Mobile Park
  • Tosh has 59 units under management including 1 single family
  • From Albuquerque, NM
  • Say hi to him at: www.Robbiefaithe.com 
  • Best Ever Book: Everything Store, Pitch Anything

 

 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Find out where you want to be, and find a mentor who is crushing it. Listen to podcasts, and always educate yourself. ” – Robbie & Tosh 


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I’m Theo Hicks, today’s host, and today I’ll be speaking with two guests. Today we have Robbie Faithe and Tosh Hoshino. How are you guys doing today?

Robbie Faithe: We are doing great!

Tosh Hoshino: Thanks for having us.

Robbie Faithe: Yeah, thanks for having us. Great to be here.

Theo Hicks: Absolutely. Thanks for joining us. I’m looking forward to our conversation.

Robbie Faithe: A little bit more about their backgrounds – Robbie has 11 years of experience in real estate, and Tosh has two years of experience in real estate. Robbie’s current holdings consist of 66 doors that are mixed between single-family, multifamily and a mobile home park. Tosh has 59 units under management, including one single-family home. Both are from Albuquerque, New Mexico. Say hi to Robbie at robbiefaithe.com. Do you guys mind telling us – maybe start with Robbie – a little bit more about your current background and what you’re focused on today?

Robbie Faithe: Yes, absolutely, and thank you again for having us on. It’s an honor to be here. So I got started in real estate actually when I was in college; I got my real estate license when I was finishing my undergrad degree at the University of New Mexico. This was about 2009 at the time. The market was not doing so well, and I had accumulated  a couple homes, and I decided the best thing to do at this current point in time was to sell the homes, and I decided rather than to hire a real estate broker to sell my homes, I just reallocated that money into my own education and got a real estate license. That’s how I got started as a broker, and I’ve been selling real estate ever since.

So I started with a brokerage that focused on distressed sales. So I really cut my teeth on the REOs and distressed sales, short sales as well, and just kind of built my business from there.

Right now, as you’ve mentioned, I’ve got about 66 doors that I currently own. It’s a mix of single-family, multifamily and a mobile home park, and the focus now is starting to get more involved in some of the larger multifamily properties, with the most recent acquisition being that mobile home park.

Theo Hicks: Thank you for that. Tosh, what about you?

Tosh Hoshino: For me, I think probably like most of the people, I just bought a residential property to live in, and met my wife, and moved in with her… And since day one had a tenant, who’s lived with me, and I guess 14 years later I still have a tenant, and the house is paid for. That’s how I got started. And the recent acquisition of the mobile home park with Robbie… And for me, I’ve been a commercial real estate broker for two years now, and before I joined this industry I was in the car business. My qualifying broker recruited me after I’d decided that I just did not wanna be in the car business any longer… And it’s been just eye-opening every day, just learning about the industry.

My focus is mobile home park acquisitions and dispositions. I sold three mobile home parks currently, and trying to find a good deal, which is pretty tough to come by nowadays… But analyzing deals, and trying to get more under our belt.

Theo Hicks: So how are you two involved together? Is it just that mobile home park deal?

Tosh Hoshino: I’ll answer that, Robbie, if it’s cool with you.

Robbie Faithe: Yeah, go ahead, Tosh.

Tosh Hoshino: So the car business that I was telling you about – I met Robbie through that relationship. He’s bought two cars from me, and he was in real estate at that time, and after I’d decided to leave the industry and join the commercial real estate world, I read — just doing research about what are good investments, and mobile home parks kept coming up. We have always kept in touch, but – I mentioned about the mobile home park, and I think at that time, around the same time or right before he was really getting into it… So when this opportunity came up, we’ve known each other — and of course, not business-wise, but I think just understanding his character, and we just decided to partner up and jump in it. That’s how this happened.

Theo Hicks: So you were interested in becoming a broker, and decided to pursue the mobile home park deals. You found this deal and presented it to Robbie, and you guys both agreed to go in on it together?

Tosh Hoshino: It’s actually the other way around.

Theo Hicks: Oh…

Tosh Hoshino: So Robbie, why don’t you fill in on that part?

Robbie Faithe: Yeah, so I’ve been researching mobile home parks, and it’s a very interesting asset class… I decided to start out by building  a database… I decided just to kind of go down this road and see what I can do to find an opportunity. So I built out a database of local mobile home parks, I was able to skip-trace the owners, and I just started cold-calling.

This park actually was the second phone call that I made, and it took months and months of nurturing the relationship before we even got to the point where the seller was comfortable enough providing me with information… But that’s pretty much how it happened. I just cold-called someone in my database that I built out, and just asked simply if she was interested in selling, the answer was yes, and we immediately scheduled a coffee meeting, and built rapport, and eventually got it under contract.

After it was under contract, I was really interested in bringing on someone who may have a little bit more experience in this realm, and I did. Tosh was already more versed in mobile home parks than I had been at the time, so we decided to partner up on it.

Theo Hicks: You said it took you a long time to nurture that relationship… Do you mind explaining maybe let’s say from the first phone call – what you said on the call, and then what steps were taken with that individual until you eventually got the deal under contract?

Robbie Faithe: Absolutely. It was just a very casual conversation. I simply called the seller up, and she happened to answer, and I just told her who I was, and I asked her if she was interested in selling that park. The answer was “Well, maybe…” So the conversation was just very casual, I just was trying not to be too intrusive and ask too many personal questions; I just kept it very casual, and decided that the best thing to do was just to get the seller more comfortable with me. So I decided just to see if we could schedule a coffee meeting. We met at Starbucks, and it probably took about 5-6 different meetings for her to get comfortable enough to disclose some of the financials on the park.

It was definitely a process. We were in escrow for about ten months after we got it under contract, because this is a typical mom-and-pop operator, very sweet lady, we still keep in touch post-closing… But she didn’t have the best records, so it was a little tricky to obtain all the necessary information that we needed to make an educated decision. Eventually we got there, but that’s kind of how the conversation started.

Theo Hicks: One follow-up question on the actual back-and-forth… So you said you had that initial coffee meeting, and then you guys met 5-6 more times. Was it just quick coffee meetings, just catching up on life things, was it just talking about  the property itself? Because you mentioned it took a while to actually get numbers on the property, so I’m just curious what you guys talked about all those times.

Robbie Faithe: Yeah, she was pretty good about just giving me some general information. I had a bunch of questions about the property. So it was a lot of discussing how the property was being operated, who was managing it, her involvement, what her goal was in the case that she would want to sell it… Just so I can get an understanding for what the motivation was.

Then a lot of the rapport building was just kind of talking about where she came from, her family, a little bit about myself and my family… So by the time we were into the second, third, fourth meeting, we established a pretty good friendship, and that really helped enable us to get the terms that we were looking for. We were able to get some wonderful seller financing terms, and that was partially because during those conversations I was able to find out what her motivation was. She was at the point where she was looking to divest, and she didn’t want to be involved anymore in the operational aspect of the park. She was just interested in receiving monthly income, so it worked out perfect. That was a great segue for owner-financing; she was educated on it enough to feel comfortable pursuing that… So that’s how we were able to get those terms.

Theo Hicks: Thanks for sharing that. I think it’s gonna be very helpful, because a lot of people talk about “You need to cold-call people, and built rapport”, but not many people get into the specifics; you went into a lot of specifics there, so thanks for sharing that.

So you also mentioned that you were in escrow for ten months after getting the property under contract. It sounded like it was difficult getting all the information you needed to fully underwrite the deal… So either one of you can answer this – do you mind telling us overall what types of things people need in order to fully underwrite a mobile home park? And then maybe you can also talk to us, if this is true, about how to make assumptions when all the data isn’t there. Because it sounds like a lot of these are owned by mom and pops who aren’t using the fancy property management software and they track every single line item. So the two questions are “What do I need to underwrite?” and then “How do I get all the information if it’s not readily available from the owners?”

Tosh Hoshino: As far as the “What do you need to underwrite it” – rent roll is definitely important, and just checking that along with the bank statement; make sure that the income is coming in… And just the operating expenses – what is the seller paying, and what are the tenants paying, and what are the maintenance and repairs and any cap ex items that has been done in the last few years. Let’s say if some of those items are missing, then – it’s not a rule of thumb, but if it’s tenant-owned homes, then you would typically use 30% to 40%, 40% being that if the water and sewer is not charged back; and if it is, then you use typically 30%. So that’s some of the things that we use… But both of us actually underwrote it, and just  kind of comparing notes and make sure that we were on the same stance as far as the financials.

Robbie Faithe: Yeah. He’s talking about expense ratios when he’s saying 30% to 40%.

Theo Hicks: Okay. So rent roll, along with the bank statement… So is that something that you can get before you put the deal under contract, or is that after?

Robbie Faithe: I think it’s on a case-by-case basis, depending on how the property is being operated. In this particular instance we had an idea what the general numbers were… And this was just purely off of conversation, when we were talking. She was able to eventually share some of the financial information about what the monthly gross scheduled income is… And sometimes that’s just what the sellers are willing to share with you. But in this particular case, we were able to get some supporting documents after contract; it does sound a little backwards, but before we went into contract I made sure just to have a conversation with the seller, that “I understand you’re not wanting to share a ton of financial information for me at this point; I’m okay, I’m going ahead and putting together an offer for you based off of the numbers that you’re representing. In the case that there’s some inaccuracy here, I just need you to understand that we’re gonna need to adjust the price again.” And that’s actually what happened.

Initially, we went under contract and it was based off of a monthly figure that she had given us that was not accurate. After we went under contract and we obtained rent rolls, tax returns, it turned out that she didn’t intentionally misrepresent the property, but she was factoring in some of the utility bill-backs into the gross scheduled rents… So after incurring the utility costs she wasn’t actually collecting that monthly amount… So we were able to actually negotiate $100,000 off immediately, before we even really began physical due diligence on the property.

Theo Hicks: That was my follow-up question, which is “What types of contingencies did you put in place, or conversations did you have before putting the deal under contract?”, when you don’t have everything; but you mentioned what to do there, so thanks for sharing that as well.

Alrighty, for the money question – what is your best real estate investing advice ever? Let’s start with Tosh.

Tosh Hoshino: I would definitely say that listen to a podcast, always educate yourself… There’s an invaluable amount of information out there. So that’s the advice that I would give to anyone.

Theo Hicks: And Robbie?

Robbie Faithe: It’s a really good question… My perspective on that is find out where you wanna be, and find somebody who’s just crushing it in that area. If you can find a mentor who’s already in a position or a place where you see yourself or where you envision your business going, then that’s the most valuable think you can do – get a mentor who’s already at a place that you wanna be at.

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

Tosh Hoshino: Yup.

Robbie Faithe: Yes.

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

Break: [00:16:19].21] to [00:17:10].26]

Theo Hicks: Okay, so – Lightning Round. Both of you guys can answer these questions in whatever order you want. The first one is what is the best ever book you’ve recently read?

Tosh Hoshino: For me it’s “The Everything Store”, about Amazon and Jeff Bezos, and just his vision about being customer-oriented, looking for the future, and just not letting anyone getting in the way of his vision.

Robbie Faithe: Yeah, that’s a great one. For me it’s “Pitch Anything” by Oren Klaff. This is a fascinating book. It kinds of links science and psychology into sales, and there’s a lot of value there for folks who are in sales, and just people in general.

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

Robbie Faithe: Tosh, do you wanna get that one?

Tosh Hoshino: That is a good question, “What would I do…?” I don’t know. I’ve never thought about that. I’ll let you answer that, Robbie.

Robbie Faithe: I think that having done a decent amount of deals, I really learned and discovered that you don’t necessarily have to have the money to be able to put together a good deal. You have to find the opportunity. So I would just continue to do what we’re doing, deal sourcing; I think that’s kind of the top of the food chain. Once you can secure a deal, the money always tends to flow… So if I had to start over, I would just focus 100% on just finding opportunities, and bringing the people together to be able to make that come to fruition.

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

Tosh Hoshino: I would say that just be available to anyone who reaches out to you, and just give advice as much as you can, that you’re competent of. That definitely will come back to you to help you as well.

Robbie Faithe: Best ever way I like to give back is I do some casual one-on-one coaching on the side. I’ve been able to create financial independence for myself, and I’m super-passionate about how real estate has enabled me to create that lifestyle. I love to educate others on how real estate investing can do the same for them.

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

Robbie Faithe: The best ever place to reach me – I’ll go ahead and give out my email. It’s Robbiesellsabq [at] gmail.com.

Tosh Hoshino: And for Tosh it would be thoshino [at] gmail.com.

Theo Hicks: Alright, thank you guys for sharing your personal email addresses. Hopefully a lot of Best Ever listeners take advantage of that and reach out and ask some questions about mobile home parks and other things you guys are experts in.

Just to summarize what we’re talked about today – we talked about how you guys both got started in investing, and how you guys met (interestingly) at a car lot, where Robbie bought a few cars from Tosh… And then for the mobile home park that you guys worked on together, Robbie decided to do mobile home parks, started building a database to find opportunity, skip-traced to find the owners, started cold-calling and found a mobile home park on the second call.

You talked about how you initially met this person for coffee and it took multiple months to nurture the relationship… And we talked specifically about what you did. You called them, had a casual conversation, asking if she was interested in selling. She said “Maybe.” You guys met for coffee, you had about 5-6 different interactions after that. She talked about how the property operated, who managed it, what her goals were, you talked about her family, where she came from, your family… Just to build a personal relationship, but also get information about the deal.

Eventually, she began disclosing the financial information; you guys put the property under contract… And something that you mentioned is that usually you’re not gonna have all the information that you need to underwrite the deal – the rent roll, the bank statements, the operating expenses, the cap ex… So you make assumptions based off of what you were told, and then based off of the 30% or 40% expense ratio rule, and then let them know that “We’re basing this off of what you’re saying; if it turns out to not be true, we’re gonna have to adjust the price”, and you mentioned that you were able to adjust the price by $100,000 right off the bat, because of some misinformation… Not purposefully, but just misrepresenting something on accident.

You mentioned that the property was in escrow for ten months as you ended up buying it, and so we talked a lot about that deal. Then we also talked about your best ever advice; for Tosh, it was to listen to podcasts and always educate yourself, which if you’re listening right now, you are on the path towards doing… And then Robbie’s best ever advice was to find out where you wanna be, find someone who’s there already, and attempt to bring them on as a mentor.

So Robbie and Tosh – I really appreciate you guys coming on the show and sharing your story today about the mobile home park. Best Ever listeners, as always, thanks for tuning in Have a best ever day, and we will talk to you tomorrow.

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JF2107: Brothers Working Together With Chris & Ashton Levarek

Chris & Ashton are brothers and the owners of Valkere Investment Group, LLC a multi family real estate investment firm. These brothers explain how they were able to grow their business through raising capital, to doing their first deal, and tips on being able to overcome inexperience. 

 

Chris & Ashton Levarek  Real Estate Background:

  • Owners of Valkere Investment Group, LLC a multifamily real estate investment firm
  • Currently have 42-units
  • Chris is from Phoenix, AZ
  • Ashton is from Portland, Oregon
  • Say hi to them at:https://www.valkeregroup.com/

 

 

 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Networking is very important, find the person who is connected and it will make your job easier.” – Chris & Ashton Levarek


TRANSCRIPTION

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

Ashton Levarek: Good. Thanks for having us.

Chris Levarek: Doing great. Good to be here.

Theo Hicks: Absolutely. Thanks for joining us, looking forward to our conversation. A little bit about Chris and Ashton – owners of Valkere Investment Group, a multifamily real estate investment firm. They currently have 42 units. Chris is from Phoenix, Arizona, Ashton is from Portland, Oregon, and you can say hi to them at ValkereGroup.com. Do you guys mind telling us a little bit more about your background and what you guys are focused on today?

Ashton Levarek: Go ahead, Chris.

Chris Levarek: Okay, so as you said, we are brothers; we got started in 2018, started with a duplex, and just investing in multifamily ourselves. We partnered a lot with private lenders, we did joint ventures, and did some LLC joint ownerships, and we scaled up to now doing syndication. We just did a 16-unit in North Carolina, and right now we’re focused mainly on scaling up to the next level, so doing just bigger and better apartment syndications. 30 to 60-unit is our next target. Is there anything you wanna add, Ashton?

Ashton Levarek: No, that’s about right. It’s a good summary.

Theo Hicks: So for the duplex – was that a house-hack situation? Did you guys live in it together, or did you guys just buy it and rented it right away?

Ashton Levarek: We bought it, we joint-ventured with another individual. We bought it, rehabbed it and then rented it out. Initially, we started trying to BRRRR (buy, rehab, rent, refinance, repeat), but then we got into the syndication. The first few were all purchased and then rehabbed and rented out.

Theo Hicks: How did you meet the JV partner?

Chris Levarek: I’ll take that one. It was actually a co-worker of mine, nice guy, and we had an existing relationship, of course. I’d known him for about five years. I started getting into the Bigger Pockets scene, and getting more involved in real estate. I didn’t have all the funds I needed to pull an acquisition of over 150k or 200k cash, which is what we were trying to do just to be able to renovate it… So I started that dialogue, I started presenting “Well, here’s how we would do it”, started showing how an attorney, and a deed of trust, and a promissory note might work… And just giving that credibility, and then it kind of expanded from there and we worked together.

Theo Hicks: What were the numbers of that deal? What did you buy it for? Was it all cash? What did you put into it, what did you sell it for? And then maybe tell us a bit about –there’s of you on the deal, so tell us how the profit structure worked.

Chris Levarek: Sure. On the first one – yeah, it was a private loan arrangement. We did 70% funded by a private lender; it was an all-cash purchase. The purchase price was 209k, and then we did 172k or 170k private lender, at 9%, promissory note. They got a deed of trust and a promissory note. And we actually did a joint venture agreement just to get all the lines crossed.

Then my brother and I, we got HELOCs (home equity lines of credit) on our house; we used that money to fund the rest of the renovations, as well as the down payment, the difference between 170k and 209k. I think we did get an additional private loan, and used some of our Roth IRAs as well, distributions. We pulled out of Roth IRA and were able to use those tax-free.

Theo Hicks: What were the profits on that, and how are those split?

Chris Levarek: So the private lender got a 9% interest for about eight months… The renovations were done in 4-5 months, but it took about 7-8 months to get that refinance back out. They refinanced out… So we bought them at 209k. It was two duplexes, actually, so each duplex was 104.5k, and then when they were done with renovations, renovations totaled about 95k, so it was a good 47k each. So when all was said and done, their ARV value was 240k each, so a total of 480k ARV, which means we were able to refinance to get a loan of about 336k. That covered all our costs, so we were able to pay back the private lender, we were able to pay back our HELOCs, and basically have a  cash-flowing asset. It wasn’t amazingly-cashflowing for us, but we were the sole owners on that deal, so… It was something like $300 cashflow after everything is said and done with that new mortgage.

Theo Hicks: Just to confirm – the private lender was the co-worker, correct?

Chris Levarek: Correct.

Theo Hicks: Okay, perfect. So from there you did a 16-unit next?

Ashton Levarek: 16 was the biggest deal. Then we did a couple duplexes, a five-plex, a 13-unit, and then the 16.

Theo Hicks: What was your first syndicated deal?

Ashton Levarek: It would be the 16-unit. That’s officially syndicated. We partnered with other people’s money on every deal, actually… But our  first official syndicated deal was the 16-unit.

Theo Hicks: Let’s talk about that deal. We’ll first focus just on the acquisition aspect, and then we’ll focus on the raising money. Same question – what did you buy it for, how did you find it, and what was the business plan?

Ashton Levarek: So how we found it was we had been building up relations with commercial brokers in the area. He had actually brought us the 13-unit prior to that one, and we could close, and he brought us the 16-unit. I think initially they were asking 1.1, after negotiations we got it down to 960k, and then after we got it under contract, we closed it for 950k, I believe that’s right. And then – what was the last question?

Theo Hicks: What was the business plan after acquisition?

Ashton Levarek: It’s a value-add play. There was a lot of deferred maintenance, rents were below market, so it was kind of an easy, age-old strategy of just buying it, making all the repairs that needed to be done, repainting, that kind of stuff, and then raising the rents as we go. We’re still in the process of doing that, so… We have 3-4 units finished right now, because we’ve only just bought it in February.

Theo Hicks: This would probably be a better question for that 13-unit, because this 16-unit deal came from a broker… And the reason why they brought it to you was because they knew you could close, because yo closed on another deal… But how did you win that deal, and if it involved building a relationship with them, what were some of the things that you did to build that relationship, to show them that you had the credibility and the ability to close?

Ashton Levarek: Well, I know they’d seen that we’d done a bunch of smaller multifamily – a 5-unit, two duplexes, and then two other separate duplexes prior to that… But I’d also been to several meetups, been talking to him, and talking about how we raised money… Additionally, thanks to my brother, he’s really strong and we have our own website, we had our Facebook page, Instagram, and just building credibility that way on the social side as well. I think that helped out a lot. And then being able to secure those loans, and talking to the right people as far as building the team on the backside. We had the property managers, the contractors… All the people that had the experience that we didn’t have, that we could really rely on to make those good decisions. He saw that when we were asking the right questions, and when we were looking at the property.

Theo Hicks: I’m gonna back-track again, because you mentioned something that brought up a question that I was gonna ask earlier… So on those first two duplexes – it sounds like it was a pretty hefty renovation. Do you mind telling us a little bit about how you were able to find the right contractor for that job? I know an issue that’s kind of recurring is finding that right contractor, that right GC for your deals. It sounded like it worked out well for this first deal, so maybe give us some advice on how the Best Ever listeners can replicate that success.

Ashton Levarek: Absolutely. And I can speak to that, because I was there the day we interviewed five different contractors, two different property managers… So we had them all come to the property at different times, and I was there all day, and we walked the property, and let them take measurements, putting together quotes for us, really. But what really helped us was finding the property manager. The property manager had all those connections already. When we found that rockstar property manager, it was five different contractors, one of which never talked to me again or answered my phone calls, and two – I think they sent me quotes, but they were way above what I wanted… And then – I can’t remember what happened on the last two… Maybe two didn’t show, or something like that. But it was kind of disappointing at first. But Chris found a property manager on Bigger Pockets, and he’s the one who came through… He recommended a couple of contractors, and we went with his recommendations actually.

For anyone starting out, I think that if you can find the right people that know the right  people, that’s the way to go. Networking is the way to go. You don’t know what you don’t know, and relying on those people that work in that field all the time is the way to do it. So developing those relationships – that’s how we did it.

Theo Hicks: Exactly. You find one solid team member, and then let them find the rest. It’s a good strategy. Alright, going back to that 16-unit deal… I understand that you’ve raised money in the past, so maybe you can apply this to all of your deals if it wasn’t different, but maybe tell us a little bit about your money-raising process… Again, overall, or for that specific deal. For that specific deal, what was the compensation that you offered to those investors, for that 16-unit deal?

Ashton Levarek: Chris, do you wanna take that one?

Chris Levarek: Sure. For the money-raise it was pretty important for us — on the 13-unit we had done a co-ownership LLC with a single investor, and we started to see that if we’re gonna scale up to these bigger properties, we need to build that pipeline of connections and that network for investors before we find the next deal. So I really started doing that; we started systematizing how we’re in-taking those calls from people interested, or reach outs on Bigger Pockets, and we really built out about — I wanna say we built out about 100% of what we needed, and then we tried to build up to about 150% of what we thought we needed. So if we thought we were gonna close on a million dollar property, which was our target range, we needed to come up with either 500k on that raise, just to be safe. So we aimed at that, and then when we hit that number we started pulling the trigger on some of these offers on bigger properties, and that’s kind of how we structured it.

Did everyone we had in the pipeline close? Not really. I would say more than half, when the deal was getting fully documented and ready to go, to be signed upon, we had quite a few people lose interest at that time, or we didn’t maintain the contact, or they went a different direction. This was all happening actually over the holidays, so that was a great time to do a capital raise. So we learned a lot in that process, but we were able to continue to offer the deal up to different people through our network. It was a 504 syndication, so we actually weren’t advertising, of course.

What it turned out to be – what was projected was a  13% return. We were very conservative, so this one will probably go up to a 15% return… But we added in a lot of numbers. We got confirmation on market rents from three different property managers, and really checked our numbers on the renovations, of what we could hit, accurately… But it was more about building in those buffers, the reversion cap rate, really making sure we’re selling at a cap rate a lot higher, just to be able to ensure what’s gonna happen in a couple months, or a year, or two years, after we get this deal done. So we really built it in as 13%, and our investors were comfortable with that, but I believe we’ll hit around 15.7%, actually.

Theo Hicks: Okay. And then all these investors – did you know them, or were they friends and family, or were they people that you found… Because you mentioned that you had a process on Bigger Pockets – was it through that? And if so, what was that process?

Chris Levarek: Sure. I’ll speak, and then I’ll let Ashton… So Ashton at the time was stationed in Fort Bragg, North Carolina, so it was good that he was close by, but he was also building his network (I’ll let him talk on that). On my end, it was co-workers, friends, family, it was people I met at meetups… I’d go to three different meetups a month. I’m very active on Bigger Pockets, and I think there were about 3-4 different people from Bigger Pockets alone on this deal… In total, about 14 different investors. So that’s kind of how we built that connection. Not all the friends and family that committed joined along, so we actually had to just keep going through meetups and Bigger Pockets and getting new connections as we were even doing the process, so… Do you wanna speak to how you did it, Ashton?

Ashton Levarek: Yeah, I think something we’re leaving out too is while we had only done so many of these smaller deals – and I’m sure there’s a lot of guys that are gonna listen to this that have done bigger ones, but… When you walk into a room when you have the confidence to talk about what you’re doing, people wanna work with you. We had done a lot of studying, a lot of looking at markets… Joe Fairless’ book was a big guiding factor in that, of course… But that’s what really built it up.

So I know that my brother in the Phoenix market, and then myself over in North Carolina – we’d been going to a bunch of meetups, we’d given talks on how to BRRRR and how we’re doing different things with real estate, and that really helped out a lot as far as credibility, and then people wanting to work with us on this deal. But it was the same for me, and it was friends and family, of course, and then co-workers… A lot of co-workers actually got involved, which is really cool to see… But yeah, networking.

Theo Hicks: And then the last question before the money question – I thought it was interesting, because I know it’s very important to confirm the market rates with your property management company, but you mentioned that you got it from three management companies, and I’m assuming you don’t have three management companies working at the properties, so how did those conversations go?

Chris Levarek: Myself and one other partner, actually — we just had them come over and walk the property with us to give us their opinion on what we could get for rents, and what we would have to do to get them up to those market rents… And we just set appointments with three different property management companies. Is that best practice? I don’t know, but it really helped us out, because we didn’t know the market as well as they did, and we didn’t wanna just rely on one property management company. We wanted to see how they work… Not only their opinion, but how they work, what management software they’re using, how many contractors they’re working with, how they turn a unit, that kind of stuff. So it was really important to  us to talk to as many experts in that market as possible.

Theo Hicks: I think that’s a fantastic approach, because I think most people will interview management companies – three management companies, let’s say  – and then pick the best one, but they do this before they have a deal… You guys had a deal and then you interviewed them, so you could get a lot more information out of them, to help you not only with that specific deal, but also learn “Hey, which one should I choose?” I think that’s a really good strategy.

Alrighty, so what is your best real estate investing advice ever?

Ashton Levarek: For me, I like that quote, “No one is smarter than all of us”, so I really think my best ever advice is to really get out and network with the people that are down in the business you wanna get into, and learn as much from them, and then bring them in on your team. Try to build up that team of people you’re gonna work with.

Chris Levarek: Yeah, I agree with that. I think you’re only as strong as the people that you’re surrounded with. They’ll not only elevate you, but they’ll support you in your weaknesses. I would say — I’m in IT in my W-2 job as well, on the side, so I do love the systems and the processes, and I think a big part of it is if you come into an area that you’re weak, or you hit a roadblock, it’s fine to get through that roadblock and that challenge, but how do you correct it in the future? You’ve gotta create some kind of process or system that then in the future will either simplify that challenge, or make sure that doesn’t occur at all. Then you’ll be able to get through to whatever goal you’re trying to achieve without hitting those same roadblocks every time.

I think that’s a big part of it, because a lot of people just “Oh, well, I’ll get to that next time. I won’t worry about it.” And then when it comes up again, they’re like “Dang it! I wish I had corrected this from the last time. I forgot how I did it.” So just creating those minor tweaks in those systems and processes are huge for investing in real estate, so you don’t keep repeating the same mistakes.

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

Ashton Levarek: Let’s do it!

Chris Levarek: Let’s do it!

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

Break: [00:18:33].01] to [00:19:22].24]

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

Ashton Levarek: Vivid Vision.

Chris Levarek: The One Thing.

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

Ashton Levarek: Start over. Keep pushing.

Chris Levarek: Pivot. Try something new.

Ashton Levarek: Yeah. Failure is not an option.

Theo Hicks: Perfect. I’m gonna change this one up a little bit… So it’s gonna be either the best ever thing, or if you want the worst ever thing in regards to working with your brother. [laughter]

Ashton Levarek: You can’t control him. And the competitiveness.

Chris Levarek: Yeah… The unpredictability. I like systems and I like that predictable, and I like repeated consistency, and Ashton is fun because he keeps it unpredictable. [laughter]

Theo Hicks: He keeps you on your tones. Some of the guys definitely complement each other very well.

Ashton Levarek: Exact opposites, yeah, on the — what is it, the DiSC profile?

Chris Levarek: Yeah.

Theo Hicks: Okay. What’s the best ever way you guys like to give back?

Ashton Levarek: Right now, talking to new investors. We’re still fairly new, but super-motivated, and I really like seeing other people get involved. I’m finishing up 20 years in the military, and talking to a lot of military members. If I could do it again, I would have started a lot sooner, while I was in the military. So that’s where I focus a lot, giving back to or teaching other military members how they can get involved and start building up that extra stream of income.

Chris Levarek: Yeah, I would agree on that. We give out a lot of content. I’m probably posting on Bigger Pockets five times a week, and even now I’m working with two investors on a duplex, just a side project, and just constantly teaching in that regard… We do like to do veteran charity projects; we’re doing [unintelligible [00:20:55].12] here in Phoenix, Arizona, so just doing a fundraiser for that… But yeah, we really like to spread the knowledge, because both of us didn’t have any idea about this kind of thing until 2-3 years ago, and we’d like to let everyone else know that this is an option, and stocks and 401K’s are not the only way to go.

Ashton Levarek: Yeah.

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

Ashton Levarek: You can reach out via our website, but we’re also on Facebook, we’re also on Instagram, and then Bigger Pockets.

Chris Levarek: If you just look up our names, Chris Levarek on Bigger Pockets, or Ashton (same last name). Otherwise, our handle on Instagram, Facebook, at Valkere Investment Group. We’re pretty active on those, and we’re on LinkedIn as well… But the website probably is the best just to get an access to all that, so just go to the website ValkereGroup.com.

Theo Hicks: Alright, guys, thanks for joining us today. I enjoyed this conversation a lot, and I learned a lot as well. Just to summarize some of the things we’ve talked about – we’ve talked about your first deal, two duplexes; it was a JV deal with you two, and then a  private lender who was a co-worker of Chris’s. You bought the deal all-cash; to  renovate it, the lender funded 70%, and then between a HELOC loan, as well as your IRA, you funded the rest. ARV allowed you to get a loan for 336k, which covered all the costs. You paid back the lender, you paid yourself back, and you have a cash-flowing asset.

We’ve talked about your 16-unit, your first syndication. You got the deal through a broker you had done a deal with previously. It was a value-add deal, and you were able to knock the purchase price down from 1.1 to 950k. The value-add was deferred maintenance and below-market rents, so bread and butter value-add… And again, you mentioned that in that 13-unit deal you were able to get on the broker’s side by the fact that you’d done a lot of smaller multifamily deals, you had the experience aspect, but you also talked to them a lot in-person at meetup groups, as well as the branding side of it – your website and your social media presence all portrayed your ability to close on the deal.

We talked about your process for providing contractors… You set up appointments for five different contractors – and this is those duplexes – and had them come out, and that’s how you were able to narrow down which contractor to use, but you also mentioned that you guys had a lot of success finding a property management company and then using them for all the connections you needed thereafter… And you found them on Bigger Pockets.

We talked about the money-raising… On your 13-unit deal you had one investor, you realized you need more, so you systemized a process to make sure that you were able to get 150% of the money you needed to close on the deal. It was from co-workers, friends, family, and people at meetups.

I’ve done three interviews today and every single person I’ve talked to today has had some massive success from meetups groups… So people, get out there and go to meetup groups. There’s a lot of opportunities out there.

You also mentioned that the fact that you’d done previous deals and done a lot of research, your confidence in presenting the deal also was able to convince a lot of people to come on board and invest.

And then lastly, we talked about your best ever advice, which was 1) all about the team, so “No one is smarter than all of us”, and you’re only as strong as the people you surround yourself with. You talked about how you wanna go out there, network with people who are doing what you wanna do, and then bring them in on your team. And then the other best ever advice was if you ever face some sort of issue or challenge, figure out a process to put in place so it just automatically doesn’t happen again, as opposed to pushing it down the road and letting it potentially happen again.

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

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JF2103: Part-time Out Of State Investing With Nick Giulioni

Nick has 3 years of real estate experience, working full time in e-commerce sales for a large tech company. While working full-time he has acquired a 48 door portfolio consisting of singles, duplexes, and triplexes in Indianapolis, and he is based in San Francisco. He explains how his W-2 has helped him pursue real estate investing because of the insurance of a guaranteed income.

Nick Giulioni Real Estate Background:

  • 3 years of real estate experience 
  • Works full-time in eCommerce sales for large tech companies
  • Has a 48 door portfolio consisting of singles, duplexes, and triplexes in Indianapolis
  • From San Francisco, California 
  • Say hi to him at: https://giulionirealestate.com/
  • Best Ever Book: Never Split the Difference by Chris Voss 

 

 

 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Trying to make my partner happy and get them across the finish line was my top priority.” – Nick Giulioni


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, Nick Giulioni. How are you doing, Nick?

Nick Giulioni: I am doing so well. I appreciate you having me on.

Joe Fairless: Well, it’s my pleasure, and I’m glad you’re doing well. A little bit about Nick – he’s got three years of real estate experience, but get this, he’s got a 48-door portfolio consisting of single-family duplexes and triplexes in Indianapolis. He’s based in San Francisco though, so we’re gonna talk about that. He works full-time in e-commerce sales for a large tech company.

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

Nick Giulioni: Absolutely. I have been extremely lucky over the last several years. I got into my first investment down in Southern California. Actually, it was a house-hack that my wife and I bought just about two weeks after we got married. If that didn’t prove that we can make it, nothing will. And since then, I’ve really invested myself into learning more and more about out-of-state investing. I’ve built an incredible network out in Indianapolis, and done a variety of different strategies, including portfolio acquisitions and seller financing to balloon my portfolio in that time and really be able to give back a little bit more.

Joe Fairless: Portfolio acquisitions and seller-financing. It sounds like you’ve got a couple tricks up your sleeve for how you’ve gotten to 48 units in three years, versus plodding along doing one deal of a single-family house at a time. So let’s skip to the good stuff – portfolio acquisitions and seller financing. Talk to us about maybe a specific example for each of them.

Nick Giulioni: I’ll tell you a little bit about a combination that I did. It was my most recent large deal I’ve done, and it was actually a 32-unit deal that was on the market for about 2.2 million dollars. I looked at it and really realized there was no way for me to be able to take it down, and went and negotiated with the seller a little bit; I negotiated down to a price that I thought was a little bit more fair, in the 2.15 range. I was able to bring a partner in to come buy six of those doors on their own, through traditional financing, and have the seller actually seller-finance the entire rest of the acquisition just to myself over the course of 20 years.

Joe Fairless: Okay, let’s unpack that… Let me make sure I’m writing that down correctly… A 32-unit, originally listed for 2.2?

Nick Giulioni: 2.2 million, yeah.

Joe Fairless: 2.2. You then said “No, I don’t want 2.2, I want 2.15”, so a decrease of approximately $50,000, because you said it was about that… You said the range…

Nick Giulioni: Yeah.

Joe Fairless: So you now have an interested seller at 2.15… But do you have the money to purchase that?

Nick Giulioni: This is actually an interesting one… I had no money.

Joe Fairless: You had no money. So you did not have any money to purchase anything… [laughs] Let alone a 2.15 million dollar property. So then you brought in a partner, that partner purchased six of those, and then the remaining units were seller-financed over 20 years.

Nick Giulioni: Yeah, that’s correct. So really, what I did is I sat down and I tried to have empathy for everybody involved. I kind of sat down and looked at it from everybody’s shoes… So this seller was in a position where he probably didn’t want to vacate the units, individually sell them, deal with all of the hassle associated with that… So he wanted a single transaction in order to get it all done.

Then I looked at it from my partner’s point of view – they were looking for a great deal. They weren’t looking for as much leverage or as much risk as I necessarily was… He just wanted to buy something below market value and add it to their portfolio… And for me, I wanted as many doors and as much cashflow as I could possibly get. So really, I just kind of had to look at it from all sides, and from the seller’s perspective, my partner coming in with traditional financing – that actually looked like cash to pay off their outstanding notes. So in all of this, I was able to piece something that was pretty darn special together.

Joe Fairless: Got it. So was it two separate transactions, or…?

Nick Giulioni: It was two separate transactions contingent upon one another.

Joe Fairless: Okay. Did the both close on the same day, or the same week?

Nick Giulioni: They did, they closed on the exact same day. It was actually one of the smarter moves I’ve made recently. I actually had it closed on the second of the month, and by doing that, I actually received a check at closing for prorated rents and taxes and all that stuff… So I actually got a check of $30,000 to take down all of these doors. About 1.6 million dollars of property.

Joe Fairless: Right. You say 1.16?

Nick Giulioni: No, 1.6 million.

Joe Fairless: Got it. So it was like 550k for those 6 units?

Nick Giulioni: Yeah, my partner brought in about 550k.

Joe Fairless: And he paid it all cash for those six units?

Nick Giulioni: They did use cash off of a HELOC of an existing property they had.

Joe Fairless: Got it. And when we say “partner”, is this person in the seller finance deal with you as well?

Nick Giulioni: Nope. Completely separate transactions.

Joe Fairless: So when we say “partner”, it’s really he bought his thing, you bought your thing, and then you went about  your separate ways.

Nick Giulioni: That’s correct, yeah.

Joe Fairless: Okay. Wow, props to you on this. The seller financing terms – can you talk to us about that? You mentioned it was over 20 years, but any other details?

Nick Giulioni: Absolutely. It is a 20-year amortization, 20-year term, so I don’t have to worry about it over that period. The rate was actually on the higher side, at 6%, but this was actually about 9-10 months ago. I’ve actually gone to the seller since then and asked if they would be willing to renegotiate those terms, given where current market conditions are. Now, this have gotten a little wonkier here in the last couple days, but generally, rates are in the low-fours to five, and I have actually gone back to them and we are currently negotiating a refinance to change that to over 30 years, and a 5% rate.

Joe Fairless: Okay. And what is their position, where they were amenable to doing this type of structure. You said they wanted the ease of transaction, but can you talk a little bit more about why they would do this?

Nick Giulioni: Yeah – for them, they needed to move out of the Indianapolis area, and they had been self-managing for years, and were really just looking to retire. So from their perspective, this looked like a continued passive income; it meant that they didn’t have to necessarily pay capital gains all at once across their entire portfolio that they had spent decades putting together… And it was an easy transition for them. They knew that at some point there was a decent chance I may end up refinancing and they could get cashed out… Or they may just carry it to term.

Joe Fairless: Okay. And approximately how old are the sellers?

Nick Giulioni: They’re on the older side. This was definitely a retirement play for them.

Joe Fairless: Okay. So 50, 60, 70…?

Nick Giulioni: I would say in the late 60s.

Joe Fairless: Late 60s, okay. And the property – I think I picked up on that based on what you’ve just said, that these units are spread out over Indianapolis… But will you elaborate? I might be misinterpreting it.

Nick Giulioni: No, these were actually all very close to each other; they’re in a neighborhood called Irvington. Definitely one that’s on the upswing quite a bit. It’s been appreciating quite well for me. It’s an area I’ve loved for actually a long time, and this just happened to fall in my lap, so it was pretty convenient, from my perspective… Actually, several of them are on the same block. There’s this one block in Irvington that — basically, I own the entire thing, on both sides.

Joe Fairless: The gentleman who used a HELOC to get the six units for about 550k – how did he choose the six units that he chose?

Nick Giulioni: That was a lot of horse-trading going out throughout the entire situation, and making sure that there was enough equity within the pieces without putting me into a negative equity situation… So it really just came down to “Hey, where do we think these are all worth? Let’s figure out how to build some equity for you on the buy, because I’m getting so much value with the 100% seller financing.”

Joe Fairless: Okay. So during that horse-trading, what are some lessons that you learned or some observations that you had as a result of those conversations? …because a lot of people haven’t been in that type of situation, with this type of structure.

Nick Giulioni: I probably could have been a little bit harder and been a better advocate for myself. I was just feeling so lucky that this whole thing was working out that I wasn’t being too tough, or anything. At the end of the day, I was trying to be fair to everybody involved, and I felt like I was getting one heck of a deal, no matter what happens. So for me, trying to make my partner happy and  get them across the finish line was my top priority… But there were several ways I could have probably improved it for myself, and gotten a property that I would have preferred… But in the grand scheme of things, it’s a small price to pay.

Joe Fairless: Doing some quick math – and correct me if I’m wrong, but $550,000 is $91,000 a door.

Nick Giulioni: Yup.

Joe Fairless: And the difference is 26 units remaining, and that is a 1.6 million dollar all-in price, which is 61.5k/door. So your per-unit cost is significantly less than what his per-unit cost is in a similar area… So what am I missing, where it sounds like you’ve got a really good deal, because you’re paying much less per unit?

Nick Giulioni: That’s a great question. I definitely took on some of the lower-end properties that needed a little more work, and  have thus invested since then to get them up to my expectations. I also took on more of the multifamilies. There were quite a few duplexes and triplexes in this, and the per-unit on those were significantly lower, where my partner was more interested in the single-family space.

Joe Fairless: Okay, got it. Where does the money come from to rehab the ones that need help?

Nick Giulioni: So I was being a little flippant when I said I didn’t have any money to invest. I actually did, and at that point I had 20 doors, give or take… So I was essentially using cashflow to do it. And like you talked about, I am extremely lucky to work in e-commerce sales, and am able to throw that W-2 in there. My wife and I live well below our means, and are trying to accelerate this as quickly as humanly possible.

Joe Fairless: You live in San Francisco. Are you from Indianapolis?

Nick Giulioni: I am not from Indianapolis. I do have family out there… I just listened to way  too many podcasts early  on, and found out that Indianapolis was a pretty strong market, and opted to lean in there.

Joe Fairless: Why did you pick Indianapolis?

Nick Giulioni: A variety of reasons why I like it. Number one, it’s affordable, and when I was starting out, I definitely had less capital to work with… So that was a good starting point. It cash-flows fairly effectively. The 1% rule tends to work on almost every deal there, assuming you’re not in a super A-class neighborhood. And in the grand scheme of things, it’s actually a pretty cool city. I know a lot of people probably that are listening here haven’t actually been there, but it’s a darn cool place to go hang out. And if I get to see family AND I get to make money, it’s a win in my book.

Joe Fairless: How did you find the deal?

Nick Giulioni: This particular deal actually came to me from a seller’s agent who I’d worked with in the past on a different portfolio acquisition, and actually had come to the table with a relatively similar transaction style… So this agent knew “Hey, Nick’s a creative guy. Even if he doesn’t have the money, he’ll figure out a way to get it done and bring some partners into the equation. She actually brought it to me off-market.

Joe Fairless: And how did you initially have that relationship with her again?

Nick Giulioni: We had done a 13-unit deal together about a year earlier, and had come up with a similar type of arrangement… She had found my buyer’s agent at that point, and honestly, it was just luck and happenstance that  that first transaction actually occurred… And then the second one followed just given my reputation at that point.

Joe Fairless: What deal have you lost money on?

Nick Giulioni: Oh, yeah… My second deal in Indianapolis – gosh, that one still hurts! I had done one awesome triplex deal with this new hungry agent, and had done very well with it, trusted him, and he said “Hey, this duplex is a slam dunk. Go for it.” He gave me some estimates… It turns out that he didn’t really inform me that he was representing both sides of that deal. And I remember getting into the house after investing about 50% more than his rehab budget, and just looking around and sitting there in tears.

Joe Fairless: You literally cried?

Nick Giulioni: Yeah, I was literally crying in the place and realizing I could never let somebody live here… So that’s when I called my new buyer’s agent, who I’d had brief interactions with, and I said “Hey, we’re listing this one.” I think I lost about $5,000. And I’ve gotta tell you, best education I possibly could have had was that $5,000, because I learned a variety of things… How to build a  more effective network, how to make sure that you have different parties that are watching your backs that are not related… It was a very cheap education as compared to a lot of it out there.

Joe Fairless: And when to cut your losses.

Nick Giulioni: Absolutely, yeah. We closed on that house the day before Christmas Eve. It was the best Christmas present I possibly could have asked for that year… And definitely, I sent the guy — because the guy was moving in actually on that day… I made sure that he had a Christmas tree delivered on his front porch when he got there.

Joe Fairless: Oh, that’s pretty cool. Okay, so the real estate agent was representing both sides, didn’t disclose it, or wasn’t announcing it very transparently if it was disclosed somewhere… But from a numbers standpoint, regardless of if he was repping both sides, it still boils down to the numbers, and if the deal makes sense… So what about your process have you changed in order to validate the numbers?

Nick Giulioni: I’m no longer trusting agents to give me any estimates of rehab. That certainly has changed. Or at least if I do trust their initial estimates, I’m always making sure that prior to closing and prior to my inspection window closing I always have one of my contractors go through and check it out, and actually give me at least a little bit more detailed scope of work. So that’s definitely an important lesson in that one.

On top of that, I will oftentimes now have my property manager check out the house, check out the area prior to that inspection window closing, making sure that they’re comfortable actually representing in that particular area, and just kind of validating, making sure that there’s a certain amount of accountability. The agent obviously wants to make the sale. That’s how they make their commission. But then you have to make sure everybody else along the chain is holding that individual accountable for what they say.

Joe Fairless: I’d love to learn about your process when you come across a deal, and how you verify the deal is a good one, knowing that you don’t live in that city… So let’s just pretend — or maybe even use an example, the last deal you closed on; you heard about it, then what took place to say “Yup, I’m definitely making XYZ offer.”

Nick Giulioni: My most recent is a condo. I purchased it from a buddy of mine who’s actually a wholesaler. I think he’s an incredible, incredible guy; we’ve been friends now for about a year… But I’ve gotta tell you, I wasn’t gonna trust his numbers without having him validated…

So he’s a wholesaler… I had him actually walk out there with my inspector (that I paid for), and go through this house and put together “Hey, these are the challenges with the house.” I had then my contractor, who wasn’t able to get in there prior to closing – I had him actually look at the inspection report and put together a scope of work based on that. And to be honest, the repairs that I would wanna do were slightly above where my buddy’s estimates were… And that’s okay, because the two of us chatted it through and made sure the numbers made sense… Because this is one that I’m hoping to BRRRR, and then do  short-term rentals on. It’s an incredible condo. But I just had to make sure that he understood that the $5,000 estimate wasn’t where it was probably gonna come in. It was probably gonna come in closer to 10k-11k, in that range, and just make sure the numbers made sense on those new criteria.

Joe Fairless: What’s been a surprise that you’ve come across, that we haven’t talked about, while purchasing these properties?

Nick Giulioni: Yeah, there’s a lot of challenges that I’ve faced that have been surprising. I’ll tell you the most recent of which – and I apologize I’ve gotta be a little more vague than I’d like to… I recently had a property manager go out of business pretty immediately. And unfortunately, there was no warning and there were no funds to get my security deposits back, get my rents, anything like that. Currently, we’re exploring options with insurance, and stuff like that, to get it fixed, but… This happened actually right before this last Christmas, and having to scramble there on the 18th of December to find new property management for not just my properties, which obviously was tough, but trying to protect all the other investors out there who were affected. That was definitely a challenge I hadn’t accounted for. And you don’t build that into your proforma; that’s not something that exists in any of those Bigger Pockets calculators.

Joe Fairless: [laughs] How were you notified that they’re closing the doors?

Nick Giulioni: I was informed by one of the employees, and validated it with a different employee. The funds were no longer there, and the company was shutting down.

Joe Fairless: Oh, wow… And besides insurance options, are there also legal options that are being considered?

Nick Giulioni: They’re definitely being considered. I think at the end of the day nobody wants to end up in court… So I think finding the insurance option is probably everyone’s best bet.

Joe Fairless: What type of insurance would cover a property manager disappearing in the middle of the night?

Nick Giulioni: It would potentially be called errors and omissions insurance. All agents should have that insurance. I’m learning a whole lot more about this currently…

Joe Fairless: [laughs] More than you wanted to…

Nick Giulioni: Way more than I wanted to… So maybe that’s a follow-up call. Once I’ve seen this whole thing through, you and I can talk a little bit more about what it looks like on the other side.

Joe Fairless: What’s the most profitable deal that you’ve got so far?

Nick Giulioni: I’ve gotta tell you, that one I was telling you earlier, about the big seller finance deal, where I was able to get 26 units – that thing’s been absolutely incredible. From a high-level, I actually don’t really cash-flow on it all that effectively, given how highly leveraged I am, and being at 6% interest rate… It cash-flows a couple hundred dollars, but if we really look at the total internal rate of return on that one – I have no money in the deal; I actually got paid, so I have negative money in the deal…

Joe Fairless: What about the renovation though? I thought you were renovating the units…

Nick Giulioni: Yeah, you’re right; I’ve probably invested about 50k.

Joe Fairless: Well, that’s a lot of money…

Nick Giulioni: That’s a lot of money, but I got a check for 30k at closing, so let’s consider that 20k invested, which again, is real money… But then my monthly paydown, just all my loan by itself, is in the range of $5,000 at this point… And I’m still getting a couple hundred dollars of cashflow. On top of that, the houses have actually appreciated, and I believe will continue to appreciate even in these kinds of crazy times. So I would say that for $20,000 locked in a  deal, I’m certainly making out like a bandit in that one. Heck, I think I’ve paid for it just in the loan paydown in the last couple months.

Joe Fairless: Props to you for putting that deal together, and having the creativity and the resourcefulness to get it done by bringing in the partner to buy cash, and then doing seller financing.

Based on your experience, for someone who is wanting to educate themselves about portfolio acquisitions and seller financing, what’s your best advice ever to that person?

Nick Giulioni: I think I said it earlier, but you’ve gotta have empathy, and really sit down and try and understanding it from everyone’s point of view. One of the books that really resonates with me – I actually read it after this particular deal, but I’ve found it very helpful in understanding the mechanisms by which I was working – was actually “Never Split the Difference”, by Chris Voss. It’s one of the best books I’ve read. I probably re-read it every quarter or so, just to remind myself… There are so many tactics that are just absolutely incredible. And it’s not necessarily just about portfolio acquisitions, it’s about negotiating in general and having empathy for those you’re working with.

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

Nick Giulioni: I’m so ready!

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

Break: [00:22:49].13] to [00:23:24].08]

Joe Fairless: What’s the best ever book you’ve recently read, besides “Never Split the Difference” by Chris Voss?

Nick Giulioni: Man, a tough one… I definitely love to read; I try and read at least a book every single week, and write up a book report… So I’ve gotta say the most recent one that I’ve really enjoyed was “The Infinite Game” by Simon Sinek.

Joe Fairless: Well, you can’t just slip in there you write a book report about books that you read and then me not ask a follow-up question… [laughter] What is the outline for the book report that you write?

Nick Giulioni: I actually just kind of free-form it as I go, and try and find what the most important points are, and just [unintelligible [00:23:52].05] for myself. I read so much, and I’m trying to learn so much that it’s easy to forget things. So if I’m able to just kind of go back and quickly reference the key points… I actually send this out to a couple of friends that hold me accountable, but… The general approach is to just get a couple of key points so that I can remember what was actually important in everything I read.

Joe Fairless: Do they send you their notes on books they read?

Nick Giulioni: Not as many as I should be getting. I should be giving them a much harder time.

Joe Fairless: [laughs] But it’s understood that this group of friends or this group of people exchange reports on books that are read…

Nick Giulioni: No, I’m just the weird one that actually sends out an email blast.

Joe Fairless: You’re the one, okay. Got it. Alright. [laughs]

Nick Giulioni: I’m just the weirdo over-achiever.

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

Nick Giulioni: In my infinite wisdom once, in a portfolio acquisition that I did – it was four units. I was trying to think ahead and realized that if I got them all on individual notes from the same seller, then it would be easier to refinance, versus having to refinance all of them simultaneously. What I didn’t realize is that by doing that, I was actually taking up one of those 10 golden slots that you talk about when doing conventional financing… So in my infinite wisdom of trying to make it easier to refinance, I basically screwed myself up for conventional loans moving forward.

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

Nick Giulioni: I love reaching out to people and helping people get started in real estate. My wife has started helping me with a blog, but I hop on calls with people, 5-10 different investors every single week, trying to help them get started… So that would be my way of giving back.

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

Nick Giulioni: You can reach out to me on Bigger Pockets, you can find my website at giulioni.com; I hope it’s in the show notes, because it’s got a lot of vowels… And I would love to help anybody who would like to reach out.

Joe Fairless: Is giulionirealestate.com also your website?

Nick Giulioni: That’s correct, yeah. They both go to the same place.

Joe Fairless: Good stuff. Nick, thanks for being on the show, talking about your portfolio acquisitions and seller-financing deals, how you structured it… One key thing that you do for any deal, and that’s have empathy for all; one resource for practicing that – Never Split the Difference, by Chris Voss… And getting into the numbers of the deals, which we all love.

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

Nick Giulioni: Thanks so much.

Website disclaimer

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

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

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

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

Oral Disclaimer

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

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JF2100: Start Now With Heath Jones

Heath is a Neuroscientist for the US Army, helping the soldiers reduce hearing loss through studying and testing. Heath jumped in with both feet when he started into real estate, buying a 4-unit and a 16-unit back to back. Heath mentions that his confidence to jump in came from many free resources available online, including the Best Ever Show.

Heath Jones Real Estate Background:

  • Neuroscientist for the US Army
  • He started investing in February 2019 purchasing a four-plex
  • Now he has 5 properties: 4-unit, 16-unit, and 3 rentals SFRs
  • Located in Enterprise, Alabama
  • Say hi to him at:  www.hsquaredcapital.com 

 

 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Start now, it’s never too late to start, and there are no real good reasons not to start.” – Heath Jones


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, Heath Jones. How are you doing, Heath?

Heath Jones: I am doing fabulous, thanks for asking me.

Joe Fairless: Well, my pleasure, and I’m so glad that you’re doing fabulous. A little bit about Heath – he’s a neuroscientist for the U.S. Army. He started investing in February 2019, when he bought a fourplex. Now he had five properties – a 4-unit, a 16-unit and three rental single-family homes. He’s located in Enterprise, Alabama. With that being said, Heath, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Heath Jones: Yeah, so my day job is helping to protect hearing of soldiers by doing research and experiments to test apart things that may be contributing to hearing loss, and finding ways to reduce that. I started investing in real estate because at one point I was a contractor for the DoD, and then I transitioned to a more permanent role with the federal government; that came with a decrease in annual salary, but loads of benefits…

But that crunch month-to-month was definitely gonna be a big chunk, so my wife and I had started talking about ways of increasing our monthly income, and started doing research and came across real estate as a potential option. That really spoke to me, because I don’t understand stocks and bonds; it’s all Matrix code to me, on a ticker tape… But I do understand going to a property, seeing a building, and then cashing a rent check each month. So that really spoke to me.

We started looking at getting rental property. This was Thanksgiving of 2018; we were talking to some friends who had done this, one single-family a year for ten years, and they had a 10-home portfolio. We were like “Oh, that seems like a good idea. Why don’t we do that?” So we started to look at properties. That was Thanksgiving 2018. I’m from Texas originally; we go home for Christmas, we’re driving back to Alabama, and we’re like “Alright, one property a year, five years – we’re gonna do it.” When we got back, we started looking at single-family homes, and trying to run the numbers and find a way to make the deals work, but all of our analysis – the best we could squeeze out of a place was maybe 200 dollars extra a month. I was like “Man, that’s a lot of upfront capital to put into  a place to just make 200 extra dollars a month. Why don’t we try to look at multifamily?”

So we started looking at four-units, how much they were going for; there weren’t any on the market at that time… And as soon as the first one came up – it was a triplex. We ran the numbers, it worked, we put in an offer, but we didn’t get that one… Luckily. It was actually overpriced, as we learned later.

Then we did the four-unit. It came on the market at 3 PM, we had an offer to selling agent by [5:30] that day, and had it under contract by the next morning. After that, I was looking for other properties that were multifamily. I found a 16-unit and I showed it to my wife; she’s like “Oh, that’s a good five-year goal…”

Joe Fairless: How soon after that?

Heath Jones: Oh, I actually had the 16-unit under contract before we closed the four-unit.

Joe Fairless: Wow! Okay, please continue.

Heath Jones: So I kept telling her we could do it, and at that time I was listening to your podcast, I was listening to Michael Blank, I was watching Matt Faircloth’s videos on YouTube, the DeRosa Group. So from what I was researching, from the things I was reading, the content I was consuming, it seemed very possible to me for us to acquire that 16-unit. I just had to get my wife on board. So the strategy I used was I started watching the videos while we were laying in bed together just loud enough for her to hear… [laughter] So I’d be listening to something and she’s like “Hey, they just said X, Y and Z. What do they mean by that?” So I’d pause the video and I’d start talking to her about it… And she was like “Well, if you actually make the 16-unit happen, I’ll be all-in with you.”

So I worked hard; I had to raise about 120k, because all of our money was tied up in the four-unit… So I did research about setting up a PPM, and getting investors, and it seemed like it was gonna cost $15,000 to have lawyers draft up a private placement memorandum… So what I ended up doing was going to friends and family members and saying “Hey, I’m starting a real estate business…” And this was primed, so over the course of several weeks I would mention that I was doing real estate. “Oh, we’ve got this 4-unit under contract. We’re looking at multifamily.” So I had prepped my family to know that I was doing this, and then at one point I was like “Hey, I was wondering if I could set up a personal loan in which I would guarantee you–” For all my loans it was 5%. I was like “It’s not as good as you can find in other places, but we’ll keep the money in the family instead of going to some hard money lender…” Because I told them “I’m gonna make this happen, with your help or not. I just wanna get this first big property acquired.”

So I set up personal notes with all of them. So I have little loans for the down payment, which we’ve been paying off over this first year of owning it.

Joe Fairless: So how much in total were the loans?

Heath Jones: 120k.

Joe Fairless: Okay, so that was the equity.

Heath Jones: That’s correct.

Joe Fairless: So you’ve still got another loan on the actual 16-unit.

Heath Jones: Right. I have it on a seller-financed note. I negotiated with the seller to do seller-financing for 5.5%, with a five-year term, with a balloon payment at the end of five years. But we also wrote into the contract that I could get an extension if I needed to for a rate of no less than 6%. So by the time the fifth year comes up, I’ll have to either refinance, or exercise that extension… But the property needed some work; I’ve done a lot of work to it to begin with, and hopefully getting the rents up. I got a lot of bad apples out that weren’t paying rents.

That was one of the first lessons I learned – the difference between economic occupancy and actual occupancy. So they were full, but there were three people that hadn’t paid rent in 2-3 months, and I kind of inherited those headaches… But I got it all turned around, and rockin’ solid now.

Joe Fairless: Well, let’s talk about that… You said the seller financing note after five years is “no less than 6%.” Is there a cap?

Heath Jones: The language actually states that it will be whatever the market rates are. I wish it would have just stayed like that, because then I would just refinance with all the rates now… But I think at the same time they didn’t want it to be lower than the 5.5% or 6%.

The way it’s structured is that if the rates jump up to 6.2%, 6.3% or something like that – I think that’s what it would cap at, whatever the market average is… But if the market average is lower than 6%, then because I’m asking for a five-year extension, then that’s kind of what I’ll have to pay to keep the note [unintelligible [00:10:15].19]

Joe Fairless: Oh, it would be an additional five years?

Heath Jones: Yes.

Joe Fairless: So in total it could be ten years.

Heath Jones: That is correct.

Joe Fairless: Wow. Okay. And I was wondering about the 5% loan on the equity, what lender would allow you to borrow money like that for the equity… But mystery solved. It’s a seller-financed deal.

Heath Jones: Correct. Typically, most lenders won’t carry the first if you’re carrying a second note… So that was alleviated by the fact that I’m financing the property through the seller themselves.

Joe Fairless: Okay. And as far as having the conversation with the seller about seller financing – was that your idea, or his/her idea?

Heath Jones: That was my idea. So the way I went about it – I actually found this deal on LoopNet. This was — just getting started, you just use the resources that you have available. You don’t have any connections, there’s not really anybody at my local real estate meetup who are doing multifamily… All the agents here are mostly single-family homes, so they  might sell some four-units, or they might try to sell a 16-unit, but they don’t really know the ins and outs for the transactions of this size.

So I found it on LoopNet, and what I ended up doing is I didn’t wanna go through the broker that was listed there, because I knew that was gonna be a large amount of money for the seller… So I actually went to the county records, and I found out who owned the building. They had an LLC listed, I looked up the LLC, and of course, there was a number online. I called, and spoke with the secretary of the owner, told him I was interested. I got a call back maybe 20 minutes later from a broker friend of the seller, who – we were then talking and I was like “Hey, would you be okay with seller financing?” And they said “We would have to discuss it. We need to meet you. We like that you’re local in the area, and that you’re there.”

They said they had gotten 8 or 9 LOIs (letters of intent) on the property, but whenever I sent them mine, they knew that I was gonna be their guy… Because I had not only included in my letter of intent the terms that I was looking for, but I also included an amortization  schedule, what it would look like, how much they would make in interest payments over a 5-year, how that added to the balloon at year five, and got them close to what they were asking for.

They were asking 635k for it, and I had evaluated it based on what I thought the cap rate was for this area to be — what did I say…? It was 45, and I told them I would give them 500k for it… And we met at the middle at 560k. But then after the due diligence process there were some things like the insulation needed to be brought up to code, little things like that that kind of added up… So I was able to negotiate another 20k off the price.

So all in all, I got it for 540k, with the 120k down payment seller-financed for a 30-year amortization at 5.5%, with a 5-year balloon, and the extension.

Joe Fairless: Bravo on navigating that. That is not a cookie-cutter deal, especially as your largest one.

Heath Jones: Well, I have to say I wouldn’t have been able to do it if it wasn’t for your podcast, your YouTube videos, Michael Blank and Matt Faircloth… The information that I got from reading your guys’ articles and watching the information you’re providing – I don’t know if I could have navigated it as easily. So I’m just so grateful that you guys have been doing what you’re doing… And to be a part of it today, it feels pretty amazing. So I thank you again for having me on.

Joe Fairless: Well, it’s one thing to listen and to read, it’s another to put into practice. And you put it into practice. Let’s talk about challenges that have come up on the 16-unit since you’ve taken over. How long ago did you close on the 16-unit?

Heath Jones: We closed on the April 4th, 2019.

Joe Fairless: Okay. So what are some challenges that you’ve come across.

Heath Jones: A couple of the challenges is finding contractors to do work that you need done, and having them be reliable and not overcharge you… When you do find contractors, it’ll show up consistently them pricing it up a little bit more, because they know they’re consistently showing up… They get the job done… I’m a little OCD, I have to say, so there’s a lot of times where I watch them do the job, or I come and look, and I’m not really as happy with the work, but they did meet the statement of work, what I asked for.

Another challenge was — since I was self-managing, I did everything by myself. I do have to say, my wife was one of the big reasons we got the extra 20k reduced. She is a negotiation master, and helped guide me on that side of things. I couldn’t have done it without her. But I was the one who was going to the property and knowing on doors and asking people to pay rent. And that’s not really what I was used to, but I wanted to take the first year to understand how to property-manage, I wanted to learn what I could ask a property manager to do if I was to invest in a property that’s far away or out of state… I wanted to see what it would take to actually try to increase rents… More specifically, I also wanted to know if they were going to be taking me to the cleaner’s for flooring, and paint jobs… I now have a better sense of how much things cost.

But the challenge was getting the bad apples out, trying to do things without evictions… I didn’t have to do cash for keys, luckily, but eventually the persistence of asking them for the rent, remaining in constant contact with the bad apples kind of made them know that the management was different, and that the Notice to Quits – we were about to take action; so they ended up moving out anyway.

Now I’m screening a lot more stringent than the previous property management company, so my tenants are good, paying rent in time… So just interacting with the tenants was something that I hadn’t thought about while I was filling out my Excel sheets and making phone calls, and things like that. So that was a challenge for me that I had to get past.

I have one year experience as a property manager, and I do have to say, for the good property managers out there – they deserve a lot of credit. They do a thankless job sometimes, and… They are making their share for doing that job, but I’ve got a lot of props out to the good property managers that are out there.

Joe Fairless: Here’s a hypothetical scenario – tomorrow you come across a 16-unit in a similar area. What are a couple things that you might do differently on this next approach? Whether it’s on the negotiation side, the terms side, the execution side, budgeting side… What are a couple of things you would do differently?

Heath Jones: The one thing that I would do differently is I would also build up a capital expenditures reserve account. My number one goal was first get the down payment; at any cost, I need to get the down payment to close this deal. So that was the watermark on the wall that I was trying to hit. With that being said, since I knew that trying to raise additional money for any of the fixes – what I ended up doing was I also asked the seller and I negotiated it to have deferred payments for the first three months. So what I was anticipating was that for the issues that I knew about, I would need X amount, and the gross income at that time would cover most of those. So I was gonna pay for the repairs out of those first three months of the rental income.

And of course, you always have more repairs than you anticipate, and you always have more issues that come up, that cost more than you thought… So the one thing that I would do differently is to build in a bigger budget, or raise more money for the capital expenditure budget and reserves.

At that time I hadn’t really come across interest-only payments, so deferred was kind of the strategy I employed… I might defer payments for a little bit longer, or I might ask for interest-only payments during the first year, while I fix everything and get the bad apples turned.

Joe Fairless: How much would you build into the cap ex reserve account for that hypothetical 16-unit?

Heath Jones: Oh, man… I would feel comfortable — and this is assuming that you don’t have to replace roofs, or HVACs, or anything like that. Well, I would feel more comfortable if I had maybe 20k to 30k in a reserve, that I could deploy if an HVAC went down for some reason, or the roof started leaking and insurance wouldn’t cover it. Turning the carpets — so what I’m trying to do as well is I’m trying to move away from having carpets in the units, so I’m trying to put in LVP that is sectioned, so if there is some damage, I can just remove a particular panel and then not have to redo the whole floors… That is running anywhere – depending on if I also have to do the carpets upstairs, which I wanna do LVP upstairs as well – between 2k and 3k for the apartments right now.

And painting as well. Painting costs a lot more than I thought it did, and it’s either gonna cost you in sweat and agony if you’re doing it yourself, or it’s gonna cost you to have someone go do it for you. So I guess a little long-winded response to why I would wanna keep at least 20k or 30k for the 16-unit in reserves, and then keep replacing that whenever I don’t have any issues. That way it’s still there in case I need it.

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

Heath Jones: Oh, man… Start now. It’s never too late to start, and there’s no real good reasons not to start. Just excuses. Everybody I’ve read, or watched, or talked to, they all say the same thing. They all say “I wish I would have started sooner.” You would be amazed and surprised at what you can accomplish if you make the decision to start and you set your mind to completing that particular goal.

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

Heath Jones: Yes, sir.

Joe Fairless: Alright. First, a quick word from our Best Ever partner.

Break: [00:21:30].20] to [00:22:05].23]

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

Heath Jones: I’ve read a lot of real estate books, but just getting close to the finishing is Crucial Conversations.

Joe Fairless: I love that book. What’s the best ever deal you’ve done?

Heath Jones: The best ever deal I’ve done is the 16-unit. I got it for a really good price and a lot of favorable terms in the way I financed it.

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

Heath Jones: Oh, man… I have a five-year-old and a three-year-old. My daughter is in Girl Scouts, so we give back to the community through Girl Scouts. They just finished doing all their cookie sales, and we’re still dropping off cookies at places… So I’m helping the community through her Girl Scouts. I’m a former Eagle Scout, so that kind of fits the way I have done things in the past, and that’s how I like to deal with that.

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

Heath Jones: You can find our Facebook group, the Multifamily Real Estate Experiment Facebook group. My partner Hutch (the Marine Investor) and I, we started that Facebook group. We have a podcast with the same name, you can find us there. You can also email me at heath [at] hsquaredcapital.com. You can also go to our website hsquaredcapital.com. I’m on Bigger Pockets… I actually took your advice from the Best Ever conference this year and I’ve started going in and posting and trying to answer questions that I might have some information about, or try to start discussions… So I’m on Bigger Pockets. I’m also on LinkedIn… So any type of way, feel free to connect; I’m more than happy to talk real estate, talk strategies… I’m just here to help other people improve their lives as well, through real estate or any other means.

Joe Fairless: That 16-unit is just a spectacular case study for how to manufacture a deal. You found it on LoopNet, you have seller financing, you got creative with how to get the down payment (with the promissory notes), and then you were not the only LOI in the game, according to the seller’s broker (there were about 8 LOIs), but you put the amortization schedule in there and you were very detailed… And should you come across a similar opportunity, a couple things that you would do differently is in additional to deferred payments have interest-only payments for X period of time, as well as build up a cap ex reserve account and bring that to the deal (about 20k-30k).

Thank you for being on the show, I enjoyed it. I hope you have a Best Ever day, and we’ll talk to you again soon.

Heath Jones: Sounds good. Thanks for having me again.

Website disclaimer

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

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

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

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

Oral Disclaimer

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

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JF2096: Going From The Medical Field to Investing With Victor Leite

Victor and his wife both started off in the medical field and started to feel burned out after working 70hr work weeks for 5 years. They both decided to leave their jobs to go backpacking and upon their return, they decided to purchase their first home and discovered it would need a lot of work. This started their journey into real estate investing, and now they have a business with 17 investors. 

 

Victor Leite Real Estate Background:

  • Entrepreneur and investor who owns multiple rental properties
  • Portfolio of rentals includes a mix of single-family homes and multifamily properties
  • Manages a high volume Fix & Flip investment group, they successfully completed over 100 rehab projects in 2019 – mostly with funds from private individuals
  • Based in Virginia Beach, VA
  • Say hi to him at https://www.lvrinvestments.com/ 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Difficult roads often lead you to beautiful destinations.” – Victor Leite


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I’m your host today, Theo Hicks, and today’s guest is Victor Leite. Victor, how are you doing today?

Victor Leite: I’m good, Theo. How are you?

Theo Hicks: I’m doing great. Thank you for joining us today. I’m looking forward to our conversation. So Victor is an entrepreneur and investor who owns multiple rental properties. His portfolio of rentals includes a mix of single-family homes as well as multifamily properties. He also manages a high volume of fix and flip investment group. Their project has successfully completed over 100 projects in 2019. Most of the funds come from private individuals. So we’ll be talking about that. And he is based in Virginia Beach, Virginia, and you can say hi to him or learn more about his company at 258capital.com. Alright, Victor, do you mind telling us a little bit more about your background and what you’re focused on today?

Victor Leite: Yeah, sure, Theo. My background is not like most traditional stories. I was born in San Paulo, Brazil, which is one of the largest cities in South America, and during the late 70s, Brazil went through a lot of political-economic turmoil. So my family, we immigrated to the United States towards the idea of achieving that American dream. So I followed the traditional paths – I went to school, I got good grades, I worked multiple jobs, I went to university, I went to medical school, I got my various degrees and accolades, and I thought I finally had reached that level of American Dream that everybody’s in search of. But after five years or so, working private practice, working 60, 70-hour workweeks, being on overnight call, the corporate structures with the pressures from the medical business world, it started really taking a toll on me, and really felt that burnout coming than most medical providers feel. My wife also practiced medicine; she agreed.

One day after a long day, I came home and had a strong conversation about our lives and what we really wanted. So we decided that we needed to make a change, and we decided to press the reset button. So we literally packed our lives into two small backpacks and decided to take off to travel the world for a year; nomad style.

So during these travels, we did a lot of soul searching and during the process of soul searching, I did a lot of reading. I read a lot of the motivational books, the Tony Robbins, The One Thing, The 4-Hour Workweek that took me to the Rich Dad, Poor Dad, and then I started listening to a lot of podcasts, including the Best Ever Show. I listened to it; it’s a great show. And what really started resonating with me is that in real estate, it’s a place where anybody can get started, with or without any experience or money, and then with a little bit of hard work, it can really bring you some form of financial freedom.

So once we got back from that year-long travel, we had a little bit of money saved up and so we decided that we’re going to buy our first little home. It was a fixer-upper to us, and it was located in Virginia Beach, Virginia. So we got all of our small little items out of storage. We drove down to Virginia Beach, we had the keys in hand, really excited, put the keys in the door lock, we open up that door, and our mouth and our hearts just dropped. The whole entire first floor of the house was flooded. We think that the pipe had burst in the wall a few days prior and just ruined everything, and we were completely devastated. We didn’t know what to do.

So there’s that saying that difficult roads often lead you to beautiful destinations. So we brushed ourselves off, we became motivated, and we decided to connect with local contractors, handymen that really helped us repair and elevate this property to a state that it wasn’t even close to before. And we did such a great job that we actually turned this one into our first flip.

And then we thought to ourselves after finishing this experience, why can’t we just replicate this over and over again? So we began our process. We educated ourselves on this vehicle of real estate investing, we networked heavily, we became close contact with local contractors who focused on rehabs, we met with local brokers and agents who focused on foreclosures, HUD homes, VA homes. We networked with wholesalers who brought us off-market deals, we networked in JV with a few investors, and we finally got to do another project of our own. And then, like that law of those first deals, it snowballed, and two became four, four became eight, and so on, and now, which is point here today, just like you said, we’ve done numerous of projects, and now today we’ve transitioned our model over into the commercial multifamily space.

We had a thesis that we wanted to prove and that thesis was that we can take our systems from the residential rehab side and transition over to the commercial side, specifically multifamily, and we feel like we did a great job so far, and we’re looking forward to growing our goals and continue scaling upwards.

Theo Hicks: Thanks for sharing that. So a few questions… Before we talk about the multifamily, let’s about the fix and flips. So you mentioned in your bio that you raised money for these deals. So at what point did you tap out of your own funds, and maybe talk to us about that decision-making process to go from funding the deals yourself to raising capital?

Victor Leite: That’s a good question. In the beginning, we had a little bit of money left over. So we were able to start slowly by ourselves and we leveraged a little bit of the money with credit cards and things like that, but we got to the point where we looked at our funds, and we looked at the project that we were going to do and we hit a roadblock. So we reached out to our network and we reached out to family, reached out to friends, and we showed them our business plan, we showed them what we were doing and they believed in us. They came in and started investing with us, and then from there on, we wanted to scale even further out. So we really began a philosophy of OPM – other people’s money. So we started with word of mouth, going off to friends of friends and college friends and co-workers and things like that, and we’ve definitely been using private money to get our business scaling to the point that we are today.

Theo Hicks: How many investors do you currently have?

Victor Leite: Currently, our company holds about 16 total investors. They’re a mixed bag – they’re retirees, they’re self-directed IRA investors, they’re cash investors… A very mixed bag of people investing with us.

Theo Hicks: Okay, and then what I’m leading to is I want to know what types of returns you’re offering to them, but I guess I’ll ask it in a little bit different way. So you say you’re transitioning into multifamily. So what has changed about your approach towards your investors from fix and flips to multifamily? So when you were doing the fix and flips, what was the compensation structure, what were the returns offered, what was the frequency of those returns, and then now that you’re doing multifamily, how has that changed?

Victor Leite: Okay, so in regards to residential real estate, we really began with more of note lending. So we were trying to offer something that was competitive with the market, but also not too high that we couldn’t guarantee those returns. So we went initially between some years ago, but we started at 5%, 6% returns, up to 10% to 12% returns for investors in residential real estate, and then now when we’ve transitioned over to the commercial space, we really try to push for larger returns with our investors in the low to high teens, and we try to give them their regular mailbox money returns, and then our goal is to run a product through the whole cycle and give them a return also in the end.

 

Theo Hicks: Then what types of conversation did you need to have with those investors when you transitioned from the fix and flip to the multifamily? …just because again, the returns are different for both. So were they onboard right away, did you guys do something convincing, or how did that conversation go?

Victor Leite: That’s another good question. We’ve developed these relationships, and everybody trusting us with their investments, and the majority of our conversations was that we really wanted to scale into a larger space where we had better returns, better asset protection, more consistent returns. We had depreciation and deduction opportunities for everybody… And because of the relationship that we’ve built, they were trusting of us to really follow through with what we were seeing, since we had done it so far over the last years that we’ve been working with them.

So we explained to them the differences of benefits from a residential fix and flip investments from a long term commercial buy and hold investments that we’ve been discussing with them. So that’s more of the differences in conversation. There was not much fight from that standpoint. Everybody was really happy to really have their investments grow for long-term.

Theo Hicks: How many multifamily deals have you done so far?

Victor Leite: So as a company, we’ve only done one official multifamily deal by ourselves. We have been working on junior venture partnerships, general partnerships and limited partnerships with other operators, but us as ourselves, we’ve done one so far in 2020.

Theo Hicks: Okay, and can you tell us about how you found the deal, purchase price, how much money you raised and the returns you offered to those investors and how many investors you have in that deal?

Victor Leite: Okay, so we did a small multifamily. We found this through a lead that we had, through one of the brokers we had a relationship with. It’s a small project. It’s a six-unit in Downtown Norfolk in Virginia. It’s literally a block from the hospital, a block from the university, a block away from the downtown shops and restaurants. We purchased this deal for $400,000, so it’s a $67,000 per unit, and like I said, we developed the same system to fix and flip and we moved it over to the multi.

So when we purchased this property, two of the units were vacant because they couldn’t get them rented out. It was the two top units. So what we did, we decided to go in there and we did our full interior upgrades of the units like we always do, and I can go into details about that if needed, but we did a full interior upgrade of the units, we brought them back up to pretty much be the best units in that building. We did two units and we found that there was a basement area of this property that in the entire history of this property nobody has ever utilized.

So we went there and we’re looking at opportunities of whether we can put a unit down in that basement, and the city gave us a little bit of a tough time doing that. So we transitioned over to our plan B which we turned it into an amenity. We did washer dryers, we did storage lockers, we did bike hookups, we did seating area, TV down there and we put a [unintelligible [00:13:08].12] on the outside, things like that… And we got all this done in ten days. We spent a total of $12,000, and we took the rents from where they were, which were $700 per unit, which was about 85 cents per square foot, and we moved it up to now they’re $1,000 per unit which moves our rent per square footage at $1.66. So we were pretty happy with how it turned out.

Theo Hicks: So you bought it for $400,000, you put 12k into it… Can you tell us a ballpark of what it’s worth now?

Victor Leite: Yeah, we had it appraised. It appraised at $510,000. So we have a little bit of equity left in it.

Theo Hicks: So when you bought that deal, did you bring investors in it, or was this out of your own pocket?

Victor Leite: This was out of my own pocket, because we wanted to show that we could transition our teams over fluidly without any hiccups… And it was a smaller deal so we really didn’t need any private investing for this deal. But now we’re using it as a case study for all of our future projects.

Theo Hicks: Perfect. The future plan– is the next deal you’re gonna buy on your own or are you gonna raise money?

Victor Leite: No. Next deal, like I said, right now we’re currently working on general partnerships on a 100-unit deal, on a 96-unit deal, on an 80-unit deal with partners in our Mid Atlantic region, and we’re going to try to be a strong partner. What I didn’t mention is that 258 Capital is our Capital Group, but we also have in-house, 258 Contracting. So we’re an all in one investment group where we have in-house contracting and labor force that can really go into a deal, and we can really make a really nice deal, a really great deal by controlling the renovations.

Theo Hicks: That makes sense, how you were able to deal with those two units and all that stuff in the basement, for 12 grand. I was like, “Wow. 12 grand…” are you just saying the basement or is that all in? Because it sounds like you were talking it was all in.

Victor Leite: All in.

Theo Hicks: It sounds like it’s definitely an advantage of having the contractor.

Victor Leite: Correct.

Theo Hicks: Alright, Victor. What is your best real estate investing advice ever?

Victor Leite: Okay, best advice ever. So I mentor a lot of young investors and things like that, and I say, the best advice I can give somebody ever is don’t be afraid to just take the action. Going back to my story, if we let our situation really discourage us, we would never be to the point we are today. I took action without really knowing where it really would lead us. So I say to the listeners that are listening now, you’re learning a lot of information, you’re taking it all in, but if you’re doing nothing with that information, information is just worthless.

So taking action on the information, whether it’s educating yourself on the vehicle of investment that you want, or developing or building your team. I can’t do this alone; I have a large team behind me that backs me up, and I’m talking about not just from contractors, but from partners, from project managers, from attorneys, CPAs, from my landscapers – everybody’s got a piece to play in this game. And then also you’ve got to network with like-minded individuals who are doing what you want to do. It will really raise your standard and your standard bar.

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

Victor Leite: I’m ready.

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

Break: [00:16:03]:03] to [00:16:48]:06]

Theo Hicks: Okay, so you said you like to read a lot of books… So what is the best ever book you’ve recently read?

Victor Leite: Okay, so I’ve read a few books recently. Now I gotta say, you guys are not paying me this or anything like that for the plug, but the Best Ever Apartment Syndication Book, we as a group just finished that and that book is awesome. It is a roadmap to really doing an apartment syndication from different angles, that other books don’t really talk about. So y’alls book is really a great book that you put out there. And I read a lot of mindset books, and The Power of Positive Thinking – I just recently just finished that. It really was a great mindset shifting book to really focus on confidence and restoring confidence and focusing on what are your fears and attacking those fears so that they don’t hold you back from inaction.

Theo Hicks: Well, thank you for that shout-out for the book.  It’s  The Best Ever Apartment Syndication Book, pick it up on Amazon, people. Okay, if your business were to collapse today, what would you do next?

Victor Leite: So if our business were to collapse today, which we have a lot of diversity, so we hope it never happens, but I think we’d go back to what really inspired me to do real estate in the first place. I’d go back to traveling again. Traveling opened up our eyes to different cultures and different mindsets and really allowed us to really press that reset button and get off our ridiculous crazy hustle, 9 to 5, and just say, “Hey, what is really truly important to us?” Also maybe, possibly volunteer. Volunteer medical services abroad. When we traveled, we saw a lot of people who are in need. There’s a lot of people in need all over this world. So I think that’s what we would do next.

Theo Hicks: What is the best ever travel destination?

Victor Leite: Oh, do you want my top three?

Theo Hicks: Yeah. Quick top three; just give them to me.

Victor Leite: Okay, quick top three. So obviously, I’m from Brazil. So a lot of people don’t know Brazil because Brazil doesn’t speak a lot of English, but the Northern part of Brazil is some of the most beautiful coastlines you would ever see. Also, Brazil is vast. So there’s a lot of things to do, but secondarily, if not Brazil, I would say, Vietnam. I know the US and Vietnam are not the best of friends based on history, but Vietnam – also beautiful landscape, beautiful ocean, beautiful people and great food. And lastly, we really enjoyed spending time in Bali. We really were able to really spend time in doing all that reading and tapping into our mindsets and focusing on ourselves. So those are my top three for your listeners who are looking to cut the cord and travel.

Theo Hicks: Perfect. I had to switch out one of the other questions because you answered it already.

Victor Leite: Oh, I did? Okay.

Theo Hicks: Yeah… Which is a good thing. So thank you for sharing that. So what deal did you lose the most money on and how much did you lose?

Victor Leite: We’ve done numerous rehabs, and to be honest, we’ve never really lost money. We’ve not made the returns that we were projecting. There was a deal where we made 1,000 bucks, but we didn’t really lose any money because we bought the deals right. We don’t just buy everything and anything that comes on the table; we have certain specific criterias that we look at with our business model and we try to avoid making mistakes, especially from others, who just think they can do anything and sell anything. So we’ve really not lost much. We just haven’t really met the marks we really wanted to on certain deals.

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

Victor Leite: Alright, so to reach us, you mentioned it, 258capital.com. It’s a place where you can reach out to us with regards to the commercial space. Lvrinvestments.com, that’s our rehab fix and flip business. You can see the projects we’ve done there. We can do a lot of stuff on social media now. We have Instagram and Facebook @LVrealty; you can follow us there. And right now, we’ve been really working on providing educational content on YouTube, so we started a platform called Thinking Thursdays, and that’s where we really try to interview high-performing people and try to learn their various habits that drove to their successes. So those are the areas that you can reach out to us and we respond pretty quickly.

Theo Hicks: All right, Victor. Well, again, thank you for joining us today and telling us about your journey into real estate investing. You talked about how you started off doing the typical corporate job and then ended up a nomad for about a year, and then eventually got into real estate, bought your first fixer-upper in Virginia Beach. It didn’t initially start off as planned, but you were able to connect with local contractors, fix the property up and now it’s your first flip, and you asked yourself, “Why can I just do this same thing over and over again?” So that project lead to another project and it has snowballed into a fix and flip business, and then you talked about how you wanted to essentially take the systems and processes that you created for your fix and flip business and use that in multifamily. That’s what you’re focusing on today.

We talked about raising money, and how you started focusing first on family and friends, showed them your business plan, they started investing, and then when you wanted to scale further, you reached out even more to friends of friends, college friends and co-workers. So you have 16 investors [unintelligible [00:21:28].00] retirees, self-direct IRAs and cash. You talked about the differences between the returns offered on residential and multifamily and that you were able to transition those investors into multifamily because they trusted you and you were able to tell them about better returns, better asset protection, and you really just followed through on what you said you were going to do in the past, so they trusted you to do it again in the future.

We went over your multifamily example where you bought a six-unit in Downtown Norfolk, Virginia. That came through a broker relationship, bought it for 400 grand, two units were vacant, you upgraded those units and then added some amenities to the basement. All in 12k because of your in-house contracting and labor force, and you were able to increase the rents from $700 a month to $1,000 per month increasing the value of the property to $510,000, so a great success story in the first deal.

And then your best advice was threefold, which was one, don’t be afraid to take action; two, make sure you develop and build your team and recognize that everyone has a role to play and you can’t do it all yourself; and then three is to network with like-minded individuals who are doing what you want to do.

So again, thanks for joining us, very solid advice. Best Ever listeners, as always, thank you for joining us. Have a best ever day and we will talk to you tomorrow.

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

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

 

JP Albano Real Estate Background:

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

Click here for more info on groundbreaker.co

 

Best Ever Tweet:

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


TRANSCRIPTION

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

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

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

JP Albano: You got it, Joe.

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

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

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

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

JP Albano: 250 plus.

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

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

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

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

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

JP Albano: Yes, sir.

Joe Fairless: What came first of those two?

JP Albano: The Texas properties.

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

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

Joe Fairless: Okay, please elaborate.

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

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

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

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

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

JP Albano: Yes.

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

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

Joe Fairless: Okay. What was the purchase price?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

JP Albano: Exactly, exactly.

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

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

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

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

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

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

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

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

Joe Fairless: I’m sorry that happened.

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

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

JP Albano: Oh, yeah.

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

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

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

JP Albano: Exactly, exactly.

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

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

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

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

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

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

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

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

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

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

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

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

JP Albano: Yeah.

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

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

Joe Fairless: Okay. So you got probably like–

JP Albano: My portion was 30k on it.

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

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

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

JP Albano: Yes, sir.

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

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

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

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

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

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

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

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

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

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

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

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

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

JP Albano: Bring it.

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

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

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

JP Albano: Neighborhood Scout.

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

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

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

JP Albano: Becoming Supernatural by Dr. Joe Dispenza.

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

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

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

JP Albano: Check me out on jpalbano.com.

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

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

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JF2082: Four Decades of Raising Capital With Ken Holman

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

Ken Holman Real Estate Background:

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

 

Click here for more info on groundbreaker.co

Best Ever Tweet:

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


TRANSCRIPTION

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Theo Hicks: [laughs] I really appreciate you sharing that with us. Okay, so my other question is you mentioned that one of the reasons why you’re able to do a sophisticated process like this, able to raise so much money is the team. Let’s say I’ve got a business and I’m ready to bring on my first team member; who’s the first person I should bring on?

Ken Holman: That depends… You’ve gotta have a good acquisitions person. That usually is me. I like to handle the acquisition side of our business. And then the supporting cast… I’ve got a son who’s a CPA, and he runs our accounting and our investor relations department, and he and I team up on the development side… So you’ve gotta have somebody that understands acquisitions, somebody that understands development… Reporting is a big deal when you’re raising investment capital. And I didn’t understand that early on, and that’s probably one of the bigger mistakes that I made – I just raised the money and thought “Okay, we’ll do this deal and I will tell everybody when it’s done and we’ll get going, and we’ll make distributions as the project stabilizes.” And we did that, but I have found that investor communication is a real key.

You’ve gotta keep them informed and let them know what’s going on every step of the way. If you do that, they begin to trust you and you develop a relationship with them where they not only wanna do one deal with you, they wanna do several deals with you. So that’s been a side of the business my son Mike brought into the program.

And then because we also do construction, you’ve gotta have a good construction team. Our model is we don’t try to self-perform all of the scopes of work on a construction project; we just oversee the whole project. So we do project management, project engineering estimating and superintending. So we put our superintendent on a project, but we don’t try to self-perform all of the sub-trades. That’s made it so we can move around the country and work in almost any state, which is really good. We’ve been in probably seven or eight states now that we’re licensed in, which is good.

Then you need a securities attorney, and there are different types of securities attorneys, frankly. There are some that throw more roadblocks up than actually are helpful in getting  the private placement memorandum done. And/or they’ll make the private placement memorandum, which is called the PPM, so darn difficult, and with so much legalese in it that it scares away the investors.

So you’ve gotta be able to work with a securities attorney that understands investing and how to work with investors, so that you get all of the disclosure in there that you need to, but you’re not putting so much difficult language in there that it scares people away.

And then obviously you need to develop several sources of fundraising. That includes doing your own webinars, things like what we’re doing here today. Also, any other funds that like to invest with you… And they’re out there, but they’re also looking for really experienced people. So they generally won’t work with a newbie right out of the gate.

Theo Hicks: Perfect. Okay, Ken, so for someone who wants to  be in your position and have been involved in over 500 million dollars in real estate transactions, what is your best ever advice?

Ken Holman: Oh, my gosh… Best ever advice maybe is two or three-fold. One, make sure that every deal you do is a good deal. Don’t settle for mediocre projects because you’re anxious to get started. That would be number one. Number two, do what you say you’re gonna do. When you’re raising equity capital, do the very best you can to inform them on what they need to do and how they need to do it and what your timeframes are, and then work really hard to stick with those.

And then I guess the last piece of advice is communicate. Just keep them informed every step of the way; whether you’ve got good news for them or bad news for them, make sure you’re always there, telling them where you are and what you’re doing, and if it’s bad news, just be straightforward with them and let them know where you’re at. They’d rather hear that than not hear anything.

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

Ken Holman: Oh, my gosh… I guess. Let’s try it and see what happens. I  may fail, but you never know.

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

Break: [00:16:36].23] to [00:17:20].15]

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

Ken Holman: What did I really like right now that I’m reading, I’m kind of excited about is a book called “Start With Why” by a guy named Simon Sinek. He talks a little bit about how great leaders motivate and inspire other people, so that’s been kind of a fun book to read.

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

Ken Holman: I’ve been in this business 40 years,  man… I’d retire. I’ve had some people already tell me I should retire, but I’m having too much fun, so I don’t see any reason to stop yet. But if my business were to collapse, I’d probably take a little time off, buy a new suit, and then I would probably get started again, doing exactly what I’m doing… Because I’ve learned how to do it, and frankly I’m pretty good at it, so… I think it’d be possible to do it again.

Theo Hicks: What deal did you lose the most money on? How much did you lose, and then what lessons did you learn moving forward?

Ken Holman: Well, I’ve been in the business enough years that I’ve been through more than one real estate cycle, and probably the hardest real estate cycle that we dealt with was back in the Resolution Trust Corporation days, when the 1986 tax reform act happened… And they didn’t even have what was called passive losses; they didn’t have those. But the losses that you generated in real estate through depreciation, you could write off against ordinary income. They disallowed all of that; it completely changed the business. 5,000 savings and loans went out of business, and we really struggled with properties. During that era, occupancies went from 90 down to 50, and we lost some properties back then, as did everybody else. Some of the big players went out of business… So that was just not a good era.

Today I see this Coronavirus and I see a few things happening, but what we’ve got going on right now in terms of its impact on the real estate business is just not that great compared to what some other downturns have had… So that’s my worst situation; it’s a long answer to a short question, sorry.

Theo Hicks: I didn’t know about that, so thanks for sharing that. So what is the best ever way you like to give back?

Ken Holman: I have two or three ways that I give back. I’ve been a member of Rotary International for a long time. I was one of the founding members of my club here that we formed, and they have a program called the Paul Harris Fellowship, which is with the Rotary Foundation, and you can contribute money to that, and then that goes into all sorts of humanitarian efforts.

I also contribute to a humanitarian program with our local church. And then I’ve helped organize several Blood Drives with the American Red Cross, which has been cool.

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

Ken Holman: Probably the easiest place to reach me is on my email address, which is kholman [at] overlandcorp.com. You reach me there at any time and Natalie, my assistant, just keeps on top of that, so we’re pretty good at responding when we get emails.

Theo Hicks: Well, Ken, I really appreciate you coming on the show today and sharing your advice, and I also appreciate you sharing your email address. So Best Ever listeners, make sure you take advantage of that. It’s rare that a gu