JF2100: Start Now With Heath Jones

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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 

 

 

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Best Ever Tweet:

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

JF2096: Going From The Medical Field to Investing With Victor Leite

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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/ 

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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

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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/

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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

Listen to the Episode Below (00:22:49)
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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/ 

 

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Best Ever Tweet:

“Make sure every deal you do is a good deal. Don’t settle for mediocre projects because you’re anxious to get started.” – Ken Holman


TRANSCRIPTION

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

Ken Holman: I’m great, how are you doing?

Theo Hicks: I’m doing great as well, thanks for asking and thanks for joining us. I’m looking forward to our conversation. A little bit about Ken – he is the president of Overland Group and National Association of Real Estate Advisors. He has 40 years of experience in real estate; he has brokered, developed, constructed and owned over 500 million dollars in real estate assets. Experienced in owning commercial and industrial properties, self-storage, golf courses, retail and apartments.

He’s based in Salt Lake City, Utah, and you can say hi to him at OverlandGroupInc.com. So Ken, do you mind telling us a little bit more about your background and what you’re focused on today?

Ken Holman: I’d be happy to. I guess the primary thing that I’ve been involved with over the years has been apartment development. I think I’ve done a dozen or more large apartment projects, ranging anywhere from probably 150 units up to 440 units. Along the way, that’s led to other opportunities. We’ve done several retail projects, mainly Dollar Store type investments… And built a golf course, done some other industrial and office properties. But the core business has been primarily apartments, and also self-storage projects.

What we’re doing today is we’re building an apartment project in St. George, Utah. 116 apartment units. We’re really excited about that. We raised about six million in investment capital on that real estate syndication… And we are doing a couple deals over in Mesa, Arizona. One’s a 580-unit self-storage project. We raised about 2,5 million on that project. It started construction this week, so we’re excited about that.

We’ve got a 240-unit apartment project we’re doing over there, and a 100-room hotel that we’re doing also in Mesa. We raised about 15 million, which has been fully-subscribed, on the 240-unit apartment development… And then the hotel – we haven’t started that raise yet, but… That’s what our company does.

We’re a fully-integrated real estate company. We do brokerage, construction development, capital raising through our syndication, and also property management. So we try to cover the whole gamut of real estate projects, from beginning to end.

Theo Hicks: Thank you for sharing that background. I think a lot of our listeners are gonna be interested in some of your money-raising tactics. You talked about a six-million-dollar raise, a 2.5-million-dollar raise, a 15-million-dollar raise… Do you mind giving us a few tips? Firstly focusing on someone who’s just wanting to get started raising money. And we’re gonna also talk about some tips on scaling to being able to raise over 15 million dollars for a deal.

Ken Holman: Yeah, that’s a big deal actually, to be able to raise that much on a single project… But I started out with my first deal being a little family Dollar Store that we were gonna build in Thermopolis, Wyoming, of all places. I needed to raise $150,000, and I started thinking “Okay, how do I do this?” You get a little reluctant going to family and friends, and trying to beg money from them… So what got me started was I had a self-directed IRA company approach me and ask me if I would give a presentation to them on that particular little family Dollar deal.

So we went over to Boise, Idaho, of all places, and gave a presentation, and walked out of there with 150k in commitments… And I thought “Man, this is pretty fun.” That was a cool way to raise equity capital, so we started getting pretty familiar with how to do self-directed IRAs. Then that branched into self-directed 401K’s, then we developed our expertise in doing 1031 tax-deferred exchange deals.

Then we started getting a reputation for being able to raise discretionary income, and that’s how it all began… It just started evolving. In fact, I don’t know that there’s anybody else out there doing this, because it’s a pretty sophisticated model. But we can take people with discretionary investment capital, with 1031 exchanges and with IRAs and 401K’s, and marry them all into a single project. It gives us a capacity to raise a lot of investment capital that way.

And then we’ve tied in with a couple money-raising funds that really love our projects… And that’s just expanded our capacity to be able to raise equity capital. So it’s been kind of a fun ride, and you’ve gotta have some good people around you to be able to put those deals together… But I think we do, and we’ve developed a really nice product.

Theo Hicks: That was another question I was gonna ask you, it was about your team… But I do wanna ask one follow-up question. Well, I guess two. One will be quick. So we talked about how you’re able to take 1031 exchange investors, IRA investors, 401K investors and wrap them into a single project. You mentioned that is very sophisticated… Just very quickly, if someone wants to do something like that, where can they go to learn more about how to do that process, or is that something they should talk to their securities attorney about? What advice do you have for that kind of person?

Ken Holman: I’ve had to educate some securities attorneys and some 1031 intermediaries on how to do this… So I don’t know that you can go to one single source and get some guidance on how to do it. I’ll give you a quick overview of how it’s done, but that’s where the secret sauce is. That’s why I want everybody who come to our company to be able to do that.

LLCs have the ability to sell basically units, ownership interests in the LLC, and you can bring in investor capital that way. Self-directed IRAs and self-directed 401K’s – the same thing; they can buy units or ownership interest in LLCs. But 1031 tax-deferred exchanges don’t have the ability to do that. They have to do like-kind exchanges; so you’re selling one investment property and buying another investment property.

We see a lot of people with smaller single-family homes, duplexes, fourplexes, that are kind of tired of doing management themselves and would like to get into bigger projects that have more potential, and the possibility of higher returns… So often we see them sell their assets and 1031 into one of our deals. I usually limit the amount of 1031 capital to basically the value of the land. So they can 1031 into the land that we’re acquiring or have acquired, and then we marry that all into what’s called a tenant-in-common agreement, or some people call it a TIC agreement.

TIC agreements in the past have been a bit of a dirty word for 1031 investors, just simply because they’ve been mismanaged, or you get somebody in there that doesn’t know what they’re doing. In our case, it just becomes the mechanism that we use to blend the 1031’s with the LLC investors. So that – you’ve got more than I tell anybody else almost.

Theo Hicks: [laughs] I really appreciate you sharing that with us. Okay, so my other question is you mentioned that one of the reasons why you’re able to do a sophisticated process like this, able to raise so much money is the team. Let’s say I’ve got a business and I’m ready to bring on my first team member; who’s the first person I should bring on?

Ken Holman: That depends… You’ve gotta have a good acquisitions person. That usually is me. I like to handle the acquisition side of our business. And then the supporting cast… I’ve got a son who’s a CPA, and he runs our accounting and our investor relations department, and he and I team up on the development side… So you’ve gotta have somebody that understands acquisitions, somebody that understands development… Reporting is a big deal when you’re raising investment capital. And I didn’t understand that early on, and that’s probably one of the bigger mistakes that I made – I just raised the money and thought “Okay, we’ll do this deal and I will tell everybody when it’s done and we’ll get going, and we’ll make distributions as the project stabilizes.” And we did that, but I have found that investor communication is a real key.

You’ve gotta keep them informed and let them know what’s going on every step of the way. If you do that, they begin to trust you and you develop a relationship with them where they not only wanna do one deal with you, they wanna do several deals with you. So that’s been a side of the business my son Mike brought into the program.

And then because we also do construction, you’ve gotta have a good construction team. Our model is we don’t try to self-perform all of the scopes of work on a construction project; we just oversee the whole project. So we do project management, project engineering estimating and superintending. So we put our superintendent on a project, but we don’t try to self-perform all of the sub-trades. That’s made it so we can move around the country and work in almost any state, which is really good. We’ve been in probably seven or eight states now that we’re licensed in, which is good.

Then you need a securities attorney, and there are different types of securities attorneys, frankly. There are some that throw more roadblocks up than actually are helpful in getting  the private placement memorandum done. And/or they’ll make the private placement memorandum, which is called the PPM, so darn difficult, and with so much legalese in it that it scares away the investors.

So you’ve gotta be able to work with a securities attorney that understands investing and how to work with investors, so that you get all of the disclosure in there that you need to, but you’re not putting so much difficult language in there that it scares people away.

And then obviously you need to develop several sources of fundraising. That includes doing your own webinars, things like what we’re doing here today. Also, any other funds that like to invest with you… And they’re out there, but they’re also looking for really experienced people. So they generally won’t work with a newbie right out of the gate.

Theo Hicks: Perfect. Okay, Ken, so for someone who wants to  be in your position and have been involved in over 500 million dollars in real estate transactions, what is your best ever advice?

Ken Holman: Oh, my gosh… Best ever advice maybe is two or three-fold. One, make sure that every deal you do is a good deal. Don’t settle for mediocre projects because you’re anxious to get started. That would be number one. Number two, do what you say you’re gonna do. When you’re raising equity capital, do the very best you can to inform them on what they need to do and how they need to do it and what your timeframes are, and then work really hard to stick with those.

And then I guess the last piece of advice is communicate. Just keep them informed every step of the way; whether you’ve got good news for them or bad news for them, make sure you’re always there, telling them where you are and what you’re doing, and if it’s bad news, just be straightforward with them and let them know where you’re at. They’d rather hear that than not hear anything.

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

Ken Holman: Oh, my gosh… I guess. Let’s try it and see what happens. I  may fail, but you never know.

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

Break: [00:16:36].23] to [00:17:20].15]

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

Ken Holman: What did I really like right now that I’m reading, I’m kind of excited about is a book called “Start With Why” by a guy named Simon Sinek. He talks a little bit about how great leaders motivate and inspire other people, so that’s been kind of a fun book to read.

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

Ken Holman: I’ve been in this business 40 years,  man… I’d retire. I’ve had some people already tell me I should retire, but I’m having too much fun, so I don’t see any reason to stop yet. But if my business were to collapse, I’d probably take a little time off, buy a new suit, and then I would probably get started again, doing exactly what I’m doing… Because I’ve learned how to do it, and frankly I’m pretty good at it, so… I think it’d be possible to do it again.

Theo Hicks: What deal did you lose the most money on? How much did you lose, and then what lessons did you learn moving forward?

Ken Holman: Well, I’ve been in the business enough years that I’ve been through more than one real estate cycle, and probably the hardest real estate cycle that we dealt with was back in the Resolution Trust Corporation days, when the 1986 tax reform act happened… And they didn’t even have what was called passive losses; they didn’t have those. But the losses that you generated in real estate through depreciation, you could write off against ordinary income. They disallowed all of that; it completely changed the business. 5,000 savings and loans went out of business, and we really struggled with properties. During that era, occupancies went from 90 down to 50, and we lost some properties back then, as did everybody else. Some of the big players went out of business… So that was just not a good era.

Today I see this Coronavirus and I see a few things happening, but what we’ve got going on right now in terms of its impact on the real estate business is just not that great compared to what some other downturns have had… So that’s my worst situation; it’s a long answer to a short question, sorry.

Theo Hicks: I didn’t know about that, so thanks for sharing that. So what is the best ever way you like to give back?

Ken Holman: I have two or three ways that I give back. I’ve been a member of Rotary International for a long time. I was one of the founding members of my club here that we formed, and they have a program called the Paul Harris Fellowship, which is with the Rotary Foundation, and you can contribute money to that, and then that goes into all sorts of humanitarian efforts.

I also contribute to a humanitarian program with our local church. And then I’ve helped organize several Blood Drives with the American Red Cross, which has been cool.

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

Ken Holman: Probably the easiest place to reach me is on my email address, which is kholman [at] overlandcorp.com. You reach me there at any time and Natalie, my assistant, just keeps on top of that, so we’re pretty good at responding when we get emails.

Theo Hicks: Well, Ken, I really appreciate you coming on the show today and sharing your advice, and I also appreciate you sharing your email address. So Best Ever listeners, make sure you take advantage of that. It’s rare that a guest with this much experience gives away his personal email address… So make sure, again,  you take advantage of that.

Just to summarize some of the biggest takeaways that I had – you kind of gave away your secret sauce a little bit about raising capital…

Ken Holman: Don’t tell anybody, okay?

Theo Hicks: I promise I won’t tell anyone. So you wanna relisten and listen to that. You also gave us some advice on what to do to get to the point of being able to raise such large amount of capital, and sort of how you started with a small $150,000 raise, and obviously are up to 15+ million dollar raises… It sounds like it is just slowly stepping your way up and gaining reputation, and as you do more and more, you learn more, you know more, and you attract more and you attract more people to you, assuming you’ve been successful.

Ken Holman: Yeah.

Theo Hicks: And then also you  mentioned how you eventually were able to work with funds as well, so I’m sure that was also helpful.

Ken Holman: Yeah.

Theo Hicks: You broke down the different team members that someone would need to do what you do, and then you gave your three-fold best ever advice for someone who wants to grow  up to doing 500 million dollars’ worth of transactions. Number one, make sure that every deal you do is a good deal, so don’t settle just because you’re anxious to get started into your first deal. Number two is to do what you say you’re going to do in raising capital; whatever you say that you’re gonna do to your investors – make sure you stick to that. And then number three was to communicate with your investors. Keep them informed every step of the way, with the good news and the bad news. They’re rather hear the bad news from you than not hear it until it starts affecting their money.

Ken, again, I really appreciate you coming on the show and joining us today. Best Ever listeners, as always, thank you for listening, have a best ever day, and we will talk to you tomorrow.

Website disclaimer

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

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

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

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

Oral Disclaimer

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

JF2081: Time Management in Finding Deals and Investors With Charles Seaman

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Charles is a managing member and Senior Acquisition Manager of Three Oaks Management LLC. In this episode, Charles explains why it was important for him to focus on what he enjoys and finding his niche in the market. He shares the value of building relationships with investors and spending as much or if not more time doing this as you are finding deals.

 

Charles Seaman Real Estate Background:

  • Managing Member and Senior Acquisition Manager of Three Oaks Management LLC
  • He actively works to locate high-performing multifamily real estate deals throughout the Southeast region of the United States.
  • Owns 92 units in GA
  • Based in Charlotte, NC
  • Say hi to him at www.3oaksmgmt.com 
  • Best Ever Book: How to Win Friends and Influence People 

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Best Ever Tweet:

“As much time as you find looking for deals, you need to spend equal time in building relationships with investors.” – Charles Seaman


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, Charles Seaman. How are you doing, Charles?

Charles Seaman: Great, Joe. Thanks a lot for having me on, and I’d like to say a big hello to the Best Ever listeners.

Joe Fairless: Yeah, I’m looking forward to our conversation. A little bit about Charles – he’s a managing member and senior acquisitions manager of Three Oaks Management. He actively works to locate high-performing multifamily real estate deals throughout the South-East, and he’s got 92 units in Georgia. He’s based in Charlotte, North Carolina.

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

Charles Seaman: Yes, absolutely. Prior to June of last year I lived in Brooklyn, New York, and I had the fortune of working for a commercial real estate investment for 14 years. During that time I was able to learn a lot, from acquisitions, to negotiating, leasing properties up, managing them… So I was able to pick up a lot of good skills, that have served me well in the multifamily syndication business.

I was there for 14 years, I hadn’t really done any investing on my own. I dabbled into single-family for a little bit, but I decided that it wasn’t really for me. And I said “You know what, I like these larger commercial and multifamily deals better”, so I said “How can I get into them?”

The one difference was the guy that I worked for had his own capital supply, whereas I didn’t. So I knew I had the skill and the expertise, I just didn’t have the capital, and that’s what really turned me onto syndication.

For all the Best Ever listeners out there, as I was just joking around with Joe before we started, it was Joe’s influence that really exposed me to syndication for the first time in my life.

Joe Fairless: So I met Charles in 2014 probably, maybe 2013, somewhere around there, when I was living in New York City and I did a class once a month or something on investing… And he attended. It was probably you and maybe three other people or so? [laughs]

Charles Seaman: Yeah, it’s probably between that on the high side, three on the low side, but it was a nice little group there you had.

Joe Fairless: Yeah. But you were reliably consistent with attending. You were one of the people who always attended, and you now own 92 units in Georgia… Tell us about that.

Charles Seaman: Sure. So it was a two-year process to get to that point. I started really learning about syndication and taking action with it in 2017. And between that point and the 92-unit deal I looked at probably somewhere between 150 and 200 deals, and there was a lot of brokers that were involved, a lot of underwriting, a  lot of hours, and ultimately what it came down to — there were a few things that I would say really helped me get to that point. One is focus. I think the problem that a lot of people have is that they don’t have focus. And I was guilty of that too when I started in this business, because I was looking at properties in a lot of different areas… And instead of really having a target area, one month I looked at a property in Ontario, another one I looked at a property in Indiana, and another one in Kentucky… Twice in Kentucky, actually. But the challenge with that is by not having focus you’re constantly spreading yourself a little too thin, especially just starting out.

So last year – actually, I guess 2018 now – around Thanksgiving time my partners and I decided to choose a target area, and that helped give us a little bit of focus, and also to really hone in on the types of properties that we were looking to buy. So gaining focus and clarity helped a lot, and that was a major step.

Another thing along the way that was really helpful was building good relationships. And again, that was something that I probably hadn’t thought as much of at the beginning. Initially, a few months after I started looking for multifamily deals to syndicate, I found a decent one in Ohio, but the only challenge was I didn’t have a sponsor. And for anybody listening that’s not familiar with that term, a sponsor or a key principal is somebody that’s going to sign on the mortgage for you… Which means if you’re taking out a mortgage on a seven or eight-figure asset, the lender wants to make sure that they’re giving it to somebody that has the net worth and the track record to back that up.

So it was a case where I found a deal, but didn’t really have any relationships with people in that class, that would sign on the loan for me. And it’s not the type of thing that you’re gonna call somebody out of the blue and say “Hey, Mr. Sponsor, would you sign on this seven-figure loan for me [unintelligible [00:07:14].04]” It doesn’t work, because nobody’s gonna lend you their professional track record and their reputation without personally knowing who you are and having a relationship.

So from that point on I went out and I built relationships with sponsors, and now my partners and I have  a couple that we have really good relationships with, so it’s helped us a lot. It actually ties into how we got our first deal, so we’ll get into that in just a minute.

The other thing in terms of relationships and network as far as business is related – investors. As much time as you spend finding deals, you need to spend an equal or greater amount of time finding investors. So between those things, that’s what really helped me get to the first deal, and then the relationship with one of the sponsors we had, actually the one that sponsored that 92-unit deal for us – he also bought the deal for us.

What happened is he knew that we were actively looking for deals, and we had looked at a few with them, we submitted offers on them, but for one reason or another we didn’t get accepted. Either somebody else had a higher offer, or any number of different reasons. So we had looked at a few deals over the course of a couple months, maybe even a year with him. He knew we were actively looking, and he came across this 92-unit deal [unintelligible [00:08:20].20] He’s very familiar with that area, because his primary territory is the Atlanta market… And he wasn’t really looking for himself, because he’s doing 200 and 300 and 400-units. So the 92-unit one, as big as it may sound to somebody who hasn’t done a deal, it’s on the smaller side when you get more experienced.

So he thought of us, and he sent it over to us and said “Listen, do you guys wanna take a crack at it?” So we looked at the numbers, we went through the underwriting and everything checked out, so he said “Okay.” He gave us the greenlight, and… Lo and behold, he found the deal, he brought it to us, and actually wound up sponsoring it, so it was a really good relationship that helped us out a lot.

Joe Fairless: How do you structure that from an ownership standpoint on the general partnership side, with a sponsor like that?

Charles Seaman: Sure. When you have a sponsor — and I’ve heard of sponsors taking anywhere from 10% to 50% of the GP, really depending on two things. One, their own personal preference, and two, how much you’re really expecting them to do. So if all you’re looking for them to do is just really sign on the loan dots, then some may go as low as 10% or 15%. In our case, our sponsor took 35%, but he did do a good amount for us. He helped us out from 1) bringing us the deal and consecutively signing on it, and he also owns his own property management company which is based in the Atlanta market, so we actually wound up hiring that. So he was very helpful to us, and he was a great partner to work with, so we were glad to have given him that 35% of GP.

Joe Fairless: Oh, absolutely. Found the deal, sent it to you all, signing on the loan, and has a management company that’s overseeing it. Worth every percentage point, that’s for sure. Very fair for you all, as well as for him

Charles Seaman: Yes, I would agree with that.

Joe Fairless: And that Ohio property – where was it in Ohio?

Charles Seaman: That one was in Northwood, Ohio, which is right outside of Toledo. And if I remember correctly, I think it was a 96-unit deal. I know that for a while you were dabbling in the Ohio market. Do you still [unintelligible [00:10:18].26]

Joe Fairless: I live in Cincinnati, so that’s what I was wondering… So when you had that deal identified, tell us how those conversations went when you spoke to potential sponsors who ended up not moving forward with you.

Charles Seaman: So the first thing I did with them was simply introduce myself. Having a background working for a commercial investment for 14 years, I said “You know what – nobody’s gonna really do anything like that for you, unless they know who you are”, so I said “Let me just start casually build some rapport with them.” And then after we’d lighten the mood a little bit, I would say “Listen, I have this deal… This is something you might be interested in.” So I sent it over to two or three people that actually expressed some interest, but either they didn’t wind up getting back to me, or they replied politely that they had no interest, which in retrospect I don’t blame them, because if I was in the position to sign for somebody and be a key principal on their loan, I wouldn’t wanna do that either, unless I was confident that they could actually perform. The last thing you wanna do is lend your professional reputation to somebody, that you worked very hard to build, and then realize that you didn’t do due diligence and they went out there and did a poor job and ruined it for you.

Joe Fairless: Yup. How did you find the people that you were reaching out to? None of them said yes, but I just wanna know what your approach was.

Charles Seaman: I actually got them through referrals. I got them through SEC attorneys and I got them through other people that I met at different real estate networking events… So I probably came up with maybe 5 or 6 of them initially, and there were two or three that expressed mild interest [unintelligible [00:11:48].13], but I’d say it was a good teaching point.

Joe Fairless: Interesting. That’s an interesting lead generation for co-sponsors or people signing on loans, SEC attorneys. Very logical. I don’t know if I’ve heard of that. Maybe, I don’t know, but it makes a lot of sense. Now, they didn’t say yes, but my follow-up question is have there been any sort of business transactions or any other business or anything evolve as a result of those conversations?

Charles Seaman: There actually has. One of the particular people that didn’t wind up doing anything on that deal is one of the sponsors that we have a really good relationship with nowadays, and generally speaking he has enough trust in myself and my partners that if we find a deal – obviously, he’s gonna do his own due diligence and vet it anyway, but he would usually be willing to sponsor just about anything we bring, because he knows that we really vet it pretty good.

Joe Fairless: And that was from an SEC attorney recommendation?

Charles Seaman: Yeah, that’s correct.

Joe Fairless: That’s pretty cool. I hadn’t thought about that. It’s a low-hanging fruit. So the 92-unit – how long have you owned it?

Charles Seaman: This one we own since September 5th, so a little over four months.

Joe Fairless: What’s the business plan?

Charles Seaman: The business plan is a 2 to 5-year hold. We were pretty fortunate that it was 98% occupied from the time we acquired it, so it was already a cash-flowing property… And we’re not looking to go in there and do any significant value-add, but the biggest value-add is really through operational efficiencies. A large part of what we’re doing is just implementing stricter collecting procedures, and having more available management. The seller had part-time management, they had a manager in the office about maybe 15-20 hours a week. We have a full-time person at 40 hours a  week, so that ways it gives tenants a different impression. One, it lets them know that somebody’s available if they have a concern, and two, it’s also somebody there on the property to oversee it, and have a set of eyes and ears on the property.

Another thing we did is just enforce stricter collecting procedures. The previous owner was very lax  with collections. A lot of the tenants paid, but whether they paid by the 3rd of the month or the 28th of the month didn’t seem to make much difference. So the first month we went in there, we had to file 19 eviction warrants, which was a pretty hefty amount on a 92-unit property… But what we did is we re-educated the tenants to let them know “Listen, we expect you to pay by this 5th. If you don’t pay by the 5th you’re gonna have a late fee, and if you don’t pay by the tenth, we’re gonna file an eviction warrant.”

So by the second month, in October, that went down. We were able to drop it to seven eviction warrants. Of those 19, only six of them actually wound up being evicted. Most of them caught up. And lo and behold, by December we were down to two eviction warrants. So litlte bit little, it’s going in the right direction. The rent is being paid in a more timely fashion, which is good, and we were also able to increase market rents in October. So for anybody listening, you can’t go in there and just raise rents on existing leases, but for people that go in there and move in as new tenants, you can start them at a higher rate. And for people renewing their leases, you can do the same thing.

So we realized that the rents were under-valued in comparison to the sub-market, so we implemented a $70 increase, of course, for various unit types, on October 1st.

Joe Fairless: From a collections standpoint, what are some things you’ve learned that have helped you with that process?

Charles Seaman: The biggest thing I would say from a collections standpoint is just being strict. You can’t be too lax with collections, because if you give somebody an inch, they’ll take a foot. And that’s just human nature. So if the tenants have a clear expectation that “Listen, guys, we expect you to pay by the fifth, and if not, you’re gonna have an extra $50, $75 fee. It’s amazing how many of them pay, especially when you have a C class asset, where a lot of them don’t have that $50 or $75 to pay.

Joe Fairless: Okay. Based on what you’ve seen so far in the four months, what’s been the biggest challenge?

Charles Seaman: I have to say, we’ve been pretty fortunate, knock on wood… It’s been pretty smooth so far, so I can’t complain.

Joe Fairless: There’s been a challenge, there’s been something that’s been unexpected, where it’s like “Oh, really?!” There’s gotta be something.

Charles Seaman: The biggest challenge was actually prior to closing – raising capital.

Joe Fairless: Okay.

Charles Seaman: A lot of people had told us that it’s harder than you think it is, and it’s one of those things that you don’t realize until you actually get in the driver’s seat and do it… So one of the things we do – my partners and I wrongly assumed that just because we know a network of people that have money, that we’d be able to easily go out there and raise money. We jokingly said amongst ourselves it was a very humbling experience… Which it was. But it also taught us that we have to be more diligent. We wound up completing the race, but it did take a lot more effort and a lot more diligence than we thought.

There were certain instances where we would send our brochure to different people that would be potential investors, and they’d tell us “Okay, I’ll take a look at it”, but the obvious scenario is that it’s not as important to them as it is to us. So you really have to  follow up and really be diligent.

So what we’ve done since then – we made sure to  make an effort to go out there and start expanding our network, and also increasing our investor database, so that way we’re constantly cultivating investors, as opposed to just really contacting them cold when we have a deal.

Joe Fairless: What are a couple of effective ways that you’ve found to identify new investors?

Charles Seaman: The biggest way that we’re actually knowing is our social media at this point. My partner, Adam, is a lot more video-friendly than I am, so he posts videos on Instagram and Facebook, and probably YouTube I’d say, at least every day, if not more than once a day a lot of times.

Myself – I’ve actually been doing it on Bigger Pockets, I use LinkedIn a bit… I’m kind of old-fashioned, so I do it through articles in written communication. I haven’t quite gotten in touch with modern times and started doing a ton of video.

Joe Fairless: [laughs]

Charles Seaman: So a lot of my stuff is on Bigger Pockets. That’s where I’m finding a lot of success personally. And one of the things I’ve done is I’ve been very active in the multifamily forums. So what I do is generally if I see something that I can provide value to, I do. A lot of the times people that post on those forums are relatively new, and what I’ll do is I’ll usually answer their questions and give them some insight.

I do it for two reasons. One, because I genuinely enjoy that and I do like helping people, and two, it usually works out well, because what happens is people that are more experienced than oftentimes passive investors will see that and then they’ll come to me and contact me and say “Listen, I saw you comment on such-and-such post. I’m a  passive investor. Would you be interested in talking?” And then from there it opens up the dialogue and we can start communicating and building relationships, so that way when we have future deals, we’re able to present them with those deals.

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

Charles Seaman: Be persistent, don’t quit. Oftentimes that’s very cliché. People are right around the corner from success and they don’t realize it. And what I’d say – especially in syndication there’s a lot of money, but there’s a lot of work involved, and there’s gotta be a lot of work before you see a lot of money. So I say don’t get discouraged by that; just have a realistic expectation, and know that you may have to work your butt off before you really start making the money. But eventually, as the money starts coming in and you start systemizing it, you’ll be able to put yourself and your business in a better position and live a more favorable lifestyle, where you’re not constantly working like an animal.

Joe Fairless: A book that addresses that is Three Feet From Gold. I love that book. I highly recommend that everyone reads it. Have you read that one, Three Feet From Gold?

Charles Seaman: I haven’t, but I’m gonna have to check it. That’s a good suggestion.

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

Charles Seaman: Sure!

Joe Fairless: Alright. First, a quick word from our Best Ever partners.

Break: [00:19:36].07] to [00:20:16].00]

Joe Fairless: Alright, Charles, what’s the best ever book you have read recently?

Charles Seaman: Best ever book I’ve read… I’m gonna give you two, actually. One is a pretty common one – Rich Dad, Poor Dad. I’ve always been a big fan of Kiyosaki. I think he has a gift of taking complex things and putting them in laymen’s  terms. And the second one I’m gonna say is actually not a real estate or finance book, but it’s How To Win Friends And Influence People by Dale Carnegie. That’s my favorite book of all times. I think it has a lot of common sense principles that need to be reinforced on a regular basis, and people need to implement it in their everyday lives.

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

Charles Seaman: The biggest mistake that I’ve made was assuming that people I knew with money would wanna participate and invest in our deals. So I didn’t do as good of a job at finding investors as I should have, which is why I learned that mistake the hard way, that you need to always be actively marketing for investors.

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

Charles Seaman: They can follow me on social media. Probably the best way to get me is actually on Bigger Pockets, but they can also reach me on LinkedIn, and they can search me by name on either one of those, Charles Seaman. Or they can also check out the website 3OaksMgmt.com.

Joe Fairless: Charles, thank you for being on the show, thanks for talking about your 92-unit deal, the challenges you had prior to that, what you learned from it, getting your co-sponsors or really the people signing on the loan in place first, having the SEC attorneys provide you with leads, and then ultimately partnering up on the next one, the 92-unit that you found via one of your connections, and the partnership.

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

Charles Seaman: Joe, thank you very much for having me and thank you very much to the Best Ever listeners.

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.

JF2073: How To Calculate Class A and B Return Projections | Syndication School with Theo Hicks

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In this Syndication School episode, Theo will first review the difference between Class A and Class B investors. Afterward, he will share with you how to calculate the projected returns for each class, and to follow along with Theo you can download his free excel document below.

Free Class A and Class B document

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

 

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TRANSCRIPTION

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

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

Theo Hicks: Hi, Best Ever listeners. Welcome to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I’m your host, Theo Hicks. Each week we air two podcast episodes that focus on a specific aspect of the apartment syndication investment strategy.

For the majority of these episodes we offer a free document. These are free Excel template calculators, free PDF how-to guides, free PowerPoint presentation templates, some sort of resource that will help you along your apartment syndication journey. All of these free documents, and past free Syndication School series are available at SyndicationSchool.com.

In this episode we are going to talk about how to calculate the returns to limited partners when you have a two-tiered path of investment structure. What does that mean? Well, generally when people get started as syndicators, they offer one investment tier to their investors, and it’s either a preferred return only, a profit split only, or a combination of the two, with the most common being an 8% preferred return, and then a 50/50 or a 70/30 profit split.

Now, as you gain more experience, or even at first, you might decide to offer two investment tiers – class A and class B. Our episode is focusing on what are the differences between class A and class B. I’m gonna do a quick refresher on that, talking about the advantages and disadvantages of each, and then I’m gonna talk about how to actually calculate the return on investment and the internal rate of return to investment tiers.

For this episode, I’ll be giving away a free document. It will be a  calculator that will allow you to automatically calculate the ROI and the IRR based on the steps I discuss in this episode. So I’ll talk more about that free document here in a little bit.

First, let’s just do a refresher on class A and class B. Class A, investors sit behind the debt in the capital stack, which means that when all expenses are paid, including the debt, the next cash goes to the class A investors. Class A investors are offered a preferred return that is generally higher than the preferred return offered to class B investors.

On Ashcroft deals, the class A preferred return is 10%. Class A investor have virtually no upside upon disposition or capital events, nor do they receive a split of the ongoing profits. So they are getting the 10% or whatever the preferred return is, and then that is it. But in order to be taxes the same as class B investors, they do get a very small piece of the upside, that varies from deal to deal… So they do get a small piece of the upside for tax purposes, but overall they’re not given a large upside in the deal.

In Ashcroft deals the class A tier is limited to 25% of the total equity investment, and the minimum investment is $100,000. So the reason why is because let’s say year one the project cash-on-cash return is only 7%, and you may say “Oh, well I can’t pay my 10% preferred return then.” Well, if only 25% of your investors are offered a 10% preferred return, then you can hit that preferred return of 10% to that portion of investors. I’m not sure exactly how that math will work out, but as long as these class A investors aren’t making up a large portion of your investor pool, then you don’t need to have a 10% project cash-on-cash return to distribute 10% to the class A limited partners.

Now, of course, other syndicators may offer a different preferred return, or have different equity percentages or different minimum investments. That’s just what Ashcroft does currently, and I just wanted to give you an example.

Class B investors sit behind class A, so all expenses go out, including debt, and then class A investors get paid, and then class B investors get paid with what’s left. But they sit in front of the general partners generally in the capital stack, so they get paid before the GP is paid.

Class B  investors are offered a preferred return that is lower than the preferred return offered to class A investors. On Ashcroft deals that return is 7%, compared to that 10% for Class A. If the full preferred return cannot be paid out each month, or each quarter, or each year, depending on what the payment frequency is, then it accrues over the life of a deal.

Class B  investors do participate in upside upon disposition or capital events. On Ashcroft deals the split is 70% of the profits up to a 13% IRR, and then 50% of the profits thereafter. The Class B  minimum investment for Ashcroft is 50k for first-time investors and 25k for returning investors. Actually, now that I’m thinking about it, I think that Ashcroft recently reduced the class A minimum investment to 50k. [00:09:04].21] and really all other types of tiers offered. Syndicators may offer different preferred returns, profit splits, different minimums for these class B investors.

So since class A investors are in front of class B investors in the capital stack, they are paid first, plus the class A investors are offered a higher preferred return, therefore the class A tier is a deal for investors who prefer a stronger ongoing cashflow… So they’re more likely to get this cashflow, and it’s higher than what it would be if they were class B.

Since class B investors are sitting behind the class A investors in the capital stack, they are paid what is left over after the class A have received their preferred return. So if the full preferred return isn’t met, it accrues and is ideally paid out upon disposition or a capital event. So class A investors are offered a lower preferred return, but they do participate in the upside upon disposition or capital events like  a supplemental loan or a refinance… So the overall return over the life of a deal is higher for class B investors, compared to class A.

Class A is gonna get 10% a year, or whatever that percentage is, class B might get less than their preferred return year one, maybe 5%, but maybe eventually their cashflow goes up to 9% or 10%, but then they’ll get a massive 20% return on investment at sale over the life of the investment. It’s really at the end where they surpass the class A investors.

So the class B tier is ideal for investors who want to maximize their returns over the life of the investments. And if I’m the person who wants both – if I want strong ongoing cashflow AND to participate in the upside, typically that passive investor will be allowed to invest in both. So if you have a passive investor that wants to do both and you’re offering class A and class B, they should be able to invest a portion in class A and a portion in class B. So that’s what class A and class B are, as a reminder.

Now, how do you calculate the returns? I recommend downloading the document and having it open right now in Excel, but I will assume that you don’t have it open, and I will do  my best to explain exactly how to calculate. At the end I will discuss in more detail how the free document works. So the first thing that you need to know in order to calculate the returns to class A and class B investors are 1) total equity investment. So this is the total amount of money that you as a syndicator raised from investors for the deal, because that’s what’s gonna be their capital account and that’s what their return is gonna be based on… And then assuming it’s a five-year hold, you need the project-level cashflow; that’s income minus expenses gives you the NOI. NOI minus debt service gives you the cashflow. So you need the cashflow for year one through year five, as well as the sales proceeds.

Basically, you have year zero a negative amount of money technically, because that’s what the investors are paying, and then year one, year two, year three, year four, year five you’ve got your cashflow coming in positively, and then for the sales proceeds it’s just the profit remaining after all expenses are paid at sale. If you’ve downloaded the simplified cashflow calculator, it should be as easy and copy and pasting these figures into this model. As a reminder, the sales proceeds is the sales price minus the debt owed to the lender, minus any closing costs you need to pay for, minus any other costs associated with the sale, like disposition fees, broker’s fees… And then what’s remaining is the total sales proceeds. So that’s one bucket of numbers that you need.

Next you need to determine what the structure is going to be for class A and for class B. So for each, you need to know what the preferred is going to be, and what the profit split is going to be. So for the purposes of this document, the preferred return to class A is 10%, and the profit split is zero. For class B the preferred return is 7% and the profit split is 70%.

Now, the next step is to determine what that preferred return amount looks like for class A and class B. Basically, for class A you need to determine of the equity investment which portion is class A. To keep things simple, in this calculator it’s just set at 25%; obviously, you can go in there and manually adjust it if you want to. Class B is set at 75%, but you can go in there and manually-adjust it, if you want to.

So you’ve got 25% of the equity investment, you multiply that by the preferred return percentage of 10% to get the preferred return amount. Same thing for class B. So Class B  you take 75% or whatever percent of the equity investment, multiply it by the preferred return, which is 7%, and you’ve got the preferred return amount owed.

Now, if you remember, class A is paid first. So when you’re looking at your year one cashflow number, you take your year one cashflow and you subtract the class A preferred return amount completely out of there. And then what’s left over is what goes to class B investors.

Now, let’s say that year one you are able to cover the entire preferred return amount to the class A investors, but the cashflow that’s remaining is not enough to cover the preferred return owed to the class B investors. Obviously, they’re still going to get paid, but it’s not gonna be full. So in the sample cashflow calculator that you download it shows that the class B investors only get a 3% return on investment year one, as opposed to 7% preferred return that they’re owed. Every time that happens, for every year that happens, you need to track how much of the preferred return is actually accruing. So if they’re given a 3%, then they’re owed an additional 5%. So that’s going to accrue.

Now, for this particular document the way I have it set up is that it accrues and then it is paid out at sale. I’ll talk about how that happens later, but it’s not gonna be paid out the next year, it’s gonna be paid out at sale. If you want to have it paid out the next year, you’re gonna have to do some manipulations to the cashflow calculator.

Basically, you repeat that process for each year. This is how it works in this cashflow calculator. Let’s say at year two you take your full cashflow  for year two, you pay your class A investors their preferred return if the remaining amount is greater than the preferred return owed to the class B investors. So class B gets their full 7%, so the profits remaining after the 10% is paid to the class A, after 7% is paid to class B, that extra cashflow is going to be split. In this case, 70% goes to class B and 30% goes to the general partners.

Now, typically, profits are considered a return of capital, preferred return is considered a return on capital. So whenever capital is returned to them, then their capital account reduces. Now, in Ashcroft deals the preferred return is always gonna be based on the original investment, and then the general partners will catch up at sale. So what that means is whenever the class B investors are receiving a profit split, you need to track that so that you understand “Okay, after five years I’ve returned a  total of $15,000 to investors from this profit”, because they’ve got $15,000 in profit, therefore they’ve been returned $15,000. Therefore at sale, I’m gonna return them their full equity minus that $15,000 they’ve already received.

Basically, the two things that you need to track whenever you’re paying out your class B investors is if they’re not receiving their full preferred return, how much is accruing that year, and then number two, if they received a profit split, how much profit do they make, because that’s something you need to track, because that’s considered a return of capital.

So you repeat that process for years one, years two, year threes, year four and year five. When you do that, you should have a total class A accrued preferred return number, and a total return of capital from the profit split for the class B investors.

Obviously, if you aren’t able to distribute the full 10% preferred return to the class A investors, then the same concept applies… But since they’re not receiving a split of the profits, you only need to focus on the preferred return accrual and not anything about them receiving a return of capital, because they’re not.

Alright, so now you sell the deal and you have your sales proceeds calculation… So you’ve already copied and pasted the sales proceeds into the cashflow calculator… So now you need to determine which portion of the sales proceeds goes to class A, and which portion goes to class B. If you remember, class A is in front of class B in the waterfall, so class A gets their equity back first. That one’s pretty simple, because class A did not get a return of capital, so they receive their entire equity investment back. So the sales proceeds are a little bit less.

Next is the money that goes back to the class B investors. If  you remember, they’re owed three things at sale. First, they’re gonna be owed their equity back. So the equity they receive is going to be their total equity investment minus whatever capital they’ve received thus far as profits. So if they’ve received $15,000 in profits, it’ll be their total equity investment originally, minus $15,000 which is returned.

The second thing that’s returned to them is the preferred return that they’re owed. So whatever the total accrued preferred return number is, that is also owed to class B investors. So it’s the equity owed, plus preferred return owed. Lastly, it’s going to be the profit split. So whatever is left over after the class A is paid, class B has received their equity investment back, class B has received their accrued  preferred return, the  remaining profits are split 70/30 between the class B investors and the general partners.

Now, if you have some sort of tier structure where it’s based on IRR, and once there’s a 13% IRR it drops to 50%, you’re gonna have to do that calculation on the back-end, because that’s not what this does. This is just a straight-up profit split, just to keep things simple.

So the remaining profits are multiplied by 70%, and that also goes to the class B investors. So if you’re got profits of class B investors, plus preferred return owed to investors, plus equity to class B investors. So now you have a total proceeds to the class A, which is just their equity investment, and a total proceeds to class B.

Now what you wanna do is you wanna create a data table so that you can do your IRR and your ROI calculations. The ROI calculation is pretty simple – it’s just their initial equity investment divided by the money that they’ve received each year; so year ones, two, three and four it’s just the cashflow they’ve received… So for the class A it’s always gonna be 10%, for class B it’s gonna be ideally 7%, maybe lower at first, and maybe eventually higher… And then same thing for year five, but this actually includes the sales proceeds as well, so it’s gonna be a number that’s ideally over 100%. Then you can average all those to get your annualized cash-on-cash return.

Then for the IRR calculation, it’s just an Excel function where you basically do =IRR and then you highlight year zero through year five, and then it’ll give you what the IRR is.

Now, let’s talk about how to use this model. On the document that you’ll see there are a few locations that you need to input data. Basically, everywhere you input data, it’s gonna be in red, to make it very simple for you.

So you need to input the initial equity investment year one, two, three, four and five, project-level cashflow, the total sales proceeds for project-level, and then the preferred return percentage and the profit split for class A and class B. Once you input those numbers, it’ll automatically calculate year one through five cashflow for class A and class B, as well as the return on investment and the internal rate of return. So it’s essentially a very simple calculator.

And again, where you get the equity investment year one, two, three, four and five and sales proceeds numbers from – that comes from your simplified cashflow calculator that you gave away a while ago now. So if you wanna find that, go to SyndicationSchool.com to download that document.

That concludes this episode of Syndication School. Thanks for listening. Make sure you download your free calculator for calculating class A and class B return projections. Check out some of our other Syndication School episodes and those free documents as well.

Have a best ever day, and I will talk to you tomorrow.

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

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

Inflation article

 

Travis Watts Real Estate Background:

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

 

 

 

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


TRANSCRIPTION

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Travis Watts: Let’s do it!

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

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

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

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

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

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

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

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

Travis Watts: Yeah, I invested in something I clearly didn’t know that much about. It was a distressed debt syndication fund. Sometimes I experiment outside of real estate; that was one of the first big experiments I did. I put maybe — I don’t even know; there were two funds, and I put maybe 175k in, and lost (to date) maybe 40%-50%. It could be a lot worse… It’s in a receivership now, so who knows what that will end up being… But it was a rough ride.

Theo Hicks: What about the best ever deal that you’ve done?

Travis Watts: The best ever deal was actually in the single-family space during — I think it was like 2014 to 2015. I bought a house from a bank, I paid 97k for it. I didn’t do anything to it. I just rented it out as is, and I sold it two years later for 215k.

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

Travis Watts: My time. Week to week I take calls with all types of people, not only investors, but people looking to house-hack, or do a fix and flip, or become a GP, sometimes an LP… I just love sharing experience, talking through things, handing off resources… I just mentioned the book you wrote with Joe – I gave that as a resource to someone just last week… So just sharing my time.

I just wish that there had been more people in my life when I got started, that I could have reached out to, to say that classic “Hey, let me pick your brain for 30 minutes.” I give people that opportunity.

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

Travis Watts: Probably email. Travis [at] ashcroftcapital.com. Or ashcroftcapital.com/passiveinvestor. I’ve got a free passive investing guide there and it connects you with me if you’d like to jump on a phone call as well.

Theo Hicks: Perfect. Best Ever listeners, make sure you take advantage of that, and make sure you check out the two articles that we talked about today. The first one is “How inflation can benefit you over the next decade”, and the second one is “The Mortgage Crisis: Will You Be Affected?” As Travis mentioned, the Mortgage Crisis one goes into more technical detail on that.

Besides those two articles, the one other main takeaway that I got was you talking about the types of communications you’ve been getting from different sponsors… You’ve got some people who haven’t reached out at all, some people that are reaching out a little bit too much. The sweet spot is monthly communication, letting you know what’s going on at the property and being transparent and honest.

I think that is it… Travis, it’s been nice talking to you. Best Ever listeners, as always, thanks for listening. Have a best ever day, and we will talk to you tomorrow.

Travis Watts: Thanks, Theo.

 

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JF2057: Short Term Rental Funding Long Term With Avery Carl

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Avery is the CEO of The Short Term Shop and is in the top 1%  of real estate agents and a short term rental expert. Avery and her husband are focusing on short term rentals to help grow their long term rental properties. Five of their short term rentals funded for 19 other properties. In this episode, she will be sharing their story and how they grow their portfolio with this strategy.

Avery Carl Real Estate Background:

  • CEO of The Short Term Shop brokered by eXp Realty
  • Top 1% real estate agent and short term rental expert
  • Bought her first rental property at 26 and has scaled to 24 doors
  • Has connected investors with over $125 million in cash flow short term rental investments
  • Based in Pigeon Forge, TN
  • Say hi to her at www.theshorttermshop.com  
  • Best Ever Book: Ego is the Enemy by Ryan Holliday 

 

Best Ever Tweet:

“For people looking to bootstrap and cash flow, self-management remotely is a totally doable option and is really the way to go.” – Avery Carl

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

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

Travis Smith Real Estate Background:

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

 

Best Ever Tweet:

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


TRANSCRIPTION

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Travis Smith: Thanks, Theo.

JF2050: Managing and Dealing During The Coronavirus With Shannon Robnett

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

 

Shannon Robnett Real Estate Background:

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

 

 

Best Ever Tweet:

“Communicate early and often” – Shannon Robnett


TRANSCRIPTION

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

Shannon Robnett: Good, Theo. How are you?

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

Shannon Robnett: That’s for sure.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Shannon Robnett: Right, right. Exactly.

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

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

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

Shannon Robnett: That’s my understanding as well.

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

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

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

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

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

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

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

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

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

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

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

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

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

Shannon Robnett: That’s it.

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

Shannon Robnett: Thank you, Theo.

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

Shannon Robnett: Thanks, Theo.

JF2047: 2008 vs Coronavirus With Chris Clothier

Listen to the Episode Below (00:21:53)
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Chris is a partner of REI Nation and he personally owns $12-15M in residential holdings and commercial real estate. Chris has been on the show before on two other episodes, links are provided below. In this unique episode, Chris shares his thoughts on the differences and similarities in the 2008 crash and the current coronavirus pandemic.

Previous Chris Clothier episodes.

3 common mistakes forming a business partnership

Faith will ruin real estate business

Chris Clothier Real Estate Background:

    • Partner of REI Nation 
    • REI Nation manages an $800 million (M) portfolio consisting of single-family residentials
    • Chris personally owns $12-15M in residential holdings and commercial real estate
    • 18 years of real estate investing experience
    • From Memphis, TN
    • Say hi to him at: www.reination.com   

 

Best Ever Tweet:

“You need to be in planning mode, you have to plan for the 10 things that could happen.” – Chris Clothier


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 the fluffy stuff. We’ve got a special segment for you today. We’ve got Chris Clothier on the show and he’s gonna be talking about the differences between 2008 and the current real estate market with the coronavirus pandemic. So, first off, Chris, welcome and good to talk to you again.

Chris Clothier: Yeah, Joe. Thank you for having me. I appreciate the chance to just jump on here and chat with you a little bit.

Joe Fairless: Well, I always jump at the chance to talk to you. I have a lot of respect for you as a business person and as a human being, so I’m grateful for talking to you as well. A little bit about Chris – he’s a partner of REI Nation. REI Nation manages a $100 million portfolio consisting of single-family homes. He personally owns between $12 to $15 million residential holdings and commercial real estate. He’s got nearly two decades of real estate experience, based in Memphis, Tennessee. So, Chris, can you give a very, very brief refresher of your background, and what you do, just for some context for our conversation? …and then let’s talk about your thoughts on the differences between 2008 and what we’re currently experiencing with the coronavirus pandemic.

Chris Clothier: Absolutely. So for those who don’t recognize the name REI Nation, my family founded the company called Memphis Invest, and Memphis Invest rebranded as REI Nation when we moved into our seventh market for managing single-family homes for passive investors. So we started in Memphis back 2002, 2003 range. Today, as you alluded to a few minutes ago, we’re managing over 6000 single-family homes for passive investors, and really our specialty is what’s become known as the turnkey niche. So we are purchasing, doing high-end renovations, then placing long-term residents into those homes, and then we manage them once they are purchased by a investor that wants to be strictly passive. They just want to own the asset, have someone else manage the day-to-day. That’s what we do today. That’s about an $800 million portfolio spread across seven cities in the southeast Midwest area.

Joe Fairless: What are the cities?

Chris Clothier: We’re in Memphis, of course, where we started, and then we’re now in Dallas and Houston, Texas. We’re in Oklahoma City and Tulsa, Oklahoma. We’re in Little Rock, Arkansas, and St. Louis, Missouri.

Joe Fairless: Okay, got it. Cool.

Chris Clothier: And as you alluded to, we were a growing company in the very, very early days of the boom for passive investments, when it was becoming very popular across forums online and across the ability to use the internet to reach out, connect and due diligence on passive investments around the country. We were right there at the forefront of it before the first recession hit.

Joe Fairless: So how did tenants, how did owners react then versus what you’re seeing now?

Chris Clothier: Well, the interesting dynamic between the two is that back in 2008, there were a lot of people that were talking about a housing bust, that there was a bubble that had been created artificially, and that was through people that were buying property that had no business buying property, people that were highly, and even over-leveraged. You just had this inflation of value that there were a lot of people that were warning at the time that it was unsustainable, and then you had suddenly, this slow drip of bad news. It started, of course, with Bear Stearns crashing, and then – I’ve got my dates pretty close to accurate – about 15 months later, Fannie Mae pulling out of the investment market and dropping investors from, I believe, ten properties down to three properties that they would finance overnight. So from a Tuesday to a Wednesday, you went from having an approved loan and a property under contract, to your loan was canceled. Even if you had a closing set for 8 a.m. in the morning, it was no longer closing. So there was this slow drip of a crisis developing and all sudden, boom, one day you had the drop.

What’s happened here now is really a compression of just bad news and fear. But many of the hardships that are going to face the real estate industry as a whole, they’re still in front of us. They haven’t really hit yet. This is a whole new set of issues, from rent and mortgage abatement and some of these other things that are coming up, and the difference right now is that there’s no room to even take a breath. You’re talking about over a two-week period, we went from full occupancy and business as usual, to the likelihood of collecting percentages of rents rather than full rents. Whereas before, you had a little bit of time to prepare and you could see things down the road. This is one of those things that just smacked us all right in the mouth in a fairly short period of time.

Joe Fairless: So what’s your communication approach when, inevitably, you’ve got your customers reaching out to you personally? I know there’s got to be a chain of command where they’re reaching out to their point person, but they’re also reaching out to you too, saying “Hey Chris, what’s going on with my property?” So with 6,000 individual units– that’s a lot of owners. I understand that many owners buy multiple properties, but I’m sure you’ve got some approach where it’s like, “Okay, here’s my message now to my clients, and then here’s my approach, XYZ.” So can you talk about that?

Chris Clothier: Yes. There are 2,000 owners of those 6,000 properties. So you’re talking about a massive number of people, and all are going to have an individual situation to them. So the first thing that we did was we did not rush to communicate out anything. We took our time to absorb, to bounce a lot of ideas off one another. We spent a lot of time understanding what was happening rather than trying to react and put out multiple messages. And ultimately, the message we went out to our client base with was that we are preparing daily.

We remember what the 2008 crisis looked like, we remember the daily grind, we remember the fact that you had to have a plan A and a plan B and a plan C, you had to be thinking through every possible scenario and each way you could react, because there’s so many things happening. Whether you’re a single landlord or you’re a business owner with a smaller business, none of it matters. You have to be in constant planning mode, and what I mean by that is you can’t plan for what’s going to happen, you have to plan for the ten things that could happen, and then how do you react to those.

Then the bigger thing for us, I’ll tell you, we’re very confident right now. Mostly we’re confident because we feel that we have prepared as best we can. [unintelligible [00:07:38].20] I don’t know of anybody that I’ve spoken with out there that had a plan for it to stop a pandemic in this type of scenario. But all of us planned for if something bad were to occur. So all this was was we spent a lot of time ramping up, discussing, training, changing scripts, and by scripts, I mean, we have to know how to answer questions. Now you’re talking about from an owner and a resident standpoint, and we have to practice and practice and practice and practice what our message is, and make sure that we properly plan for the messages we’re giving, if that makes sense. I mean, you can’t just say something. You have to have a plan behind it. “This is exactly what we’re doing and why we think it’s gonna bring us and you the most success.”

Joe Fairless: What is your resident message?

Chris Clothier: The resident message was simpler than the owner message, I will tell you that. The resident message was that — we did not go out with a big message in advance of telling everybody of any plan. Every single resident in every one of our properties knew that rent was due on April 1st. So we did not communicate any mass message of what we were going to be doing in advance. What we chose instead was on an individual one-on-one basis, as residents are calling us, informing us of hardship, we have a list of resources for them, we have questions we have to go through with them, we have verification steps that we have to take, that are gonna verify that you are truly in a hardship. Then, the reality is that right now, housing is massively important to each of these residents. They don’t want to stress about housing.

So, the message becomes, “While rent is due, not paying anything right now really cannot be an option. You have to make some effort towards paying rent while we verify your hardship so that we’re able to fight for you on your behalf to an owner that they’ve done the best they can, they’re doing everything they can to meet their obligation, this is where they’re at.” We try and keep to a minimum the number of people that do not pay any rent for whatever the reason, valid or not. We’re trying to keep that to a minimum. So our message is one of compassion. We have a lot of steps we’re going to take, but you don’t take those steps until the month goes on. So again, nobody’s late with us until three or five days after rent’s due. So right now, nobody’s late.

Joe Fairless: Note to listeners – we’re recording this on April 2nd.

Chris Clothier: There you go. Sorry about that, Joe.

Joe Fairless: We took a similar approach, by the way, with no formalized communication to residents about rent in particular. We have apartment communities, so it’s a little bit different. Certainly, about amenities and social distancing among the community and staffing hours and all that, but that’s apples and oranges right now, so I won’t mix that up into this conversation.

But we took a similar approach where rent was due April 1st, and we’re going to have those conversations on an individual basis now. What about a different approach? Because I saw a post on Facebook – so it’s definitely true – where someone proactively gave all their residents 15% off rent, and they were getting at least from one resident, very positive feedback. For the record, we did not do this, so I’m not saying you should have. But I’m just asking, why didn’t you do something like that?

Chris Clothier: We discussed it. So here we are again, we’re recording on the morning of the 2nd April, and we already know that over 30% of our residents paid on time in full through the first day, and that percentage will grow through the second day and the third day; payday is Friday. There’s a certain percentage out there that are going to pay on time that are not having any issues right now. Heck, Joe, we had over 12% of our residents paid early, before the 1st. So their rent for April was in March, and most of them are paying the 28th, 29th, 30th, 31st those days. They’re making auto payments in their portal. So had we arbitrarily given a discount across the board, we have a fiduciary responsibility to our owners to make sure that we are doing what’s in their best interest too. There will be cases where we have to work with a resident. There are going to be cases where we’re going to have to do discounts and we’re going to have to implore owners to work with them.

So we chose, and we will continue this message to our residents, that those that can pay, should pay, and those that are in hardship should communicate, and that’s the route we’re taking… Because we don’t know what’s going to happen in May or June. So someone who could pay full in April may need help in May. I wouldn’t be able to give them the help that they need then, not arbitrarily cut it across the board. So we don’t know that we’re right, but we are very confident in our approach. So far, it’s bearing fruit. So far– in fact, we have a great plan for those that cannot pay on time, and we have a great plan for those that can, and we’re executing.

Joe Fairless: If I cannot pay on time, and I verified my hardship through the list of questions that your team asks, but I do make an effort to pay; say I paid 10% of whatever the rent is, what happens to the remaining 90%?

Chris Clothier: It’s gonna be again, on an individual basis, but I can tell you on the front end, we’re not here to make late fees and make life more difficult for anybody, and we’re not here to put anybody out of their home when the eviction proceedings are unfrozen. So there are a lot– I don’t have the exact number, but I know it was a good percentage of owners that proactively reached out to us and said, “Hey, I want to help my resident if they need help. I’m in a good position, so I don’t have to have full rent.” And what we’ve told all of our owners is, there will be a time and a place to make that decision. Let’s not proactively reach out, because there’s 6,000 residents here. Let’s not reach out to them to say, “You don’t have to pay.” Let’s review. It may be 30 or 60 or 90 or 120 days down the road when decisions have to be made.

And if we can communicate that the resident had great communication with us, they applied for all the assistance they could get, they applied as much of that assistance towards rent as they could, then I have a feeling that we’re gonna have a lot of owners that say, “Okay, that’s what I’m going to lose this year. Whereas I anticipated making a higher cash return, this year I may not make that cash return, but I reduced my principal, I’ve got an occupied property with a good tenant, I’ve worked at some goodwill, and we’ll just move forward.” That’s what I think a lot of owners are prepared and understand they’re gonna have to do this year, not all of them, but some. Some will be affected that way.

Joe Fairless: Looking back to 2008 and comparing it to today, you mentioned some of the differences at the beginning. But, what are some similarities that you see?

Chris Clothier: Well, I see the unfortunate effect of this compounding of issues that, if I were to guess, I would say that some markets, some neighborhoods, some areas, some classes of properties, however, you want to designate it, they’re going to be impacted by foreclosures months from now. They’re going to be impacted by an increase in vacancy and maybe a decrease in rent. Now this isn’t across the board and each market’s different, but you’re going to see those things happen. It happens slowly. Back during the crisis of ’08, by 2009, 2010, if your market was going to be affected on the real estate side, it was. It took a solid two years, but by then, there was no escaping. If your market was going to see an increase in foreclosures, a compression of rents, a compression of value, it had happened, and I think that’s going to happen again here. This is a completely different crisis, but now, the financial side is going to start taking its toll on the real estate, and people’s ability to maintain and stay in their homes and avoid foreclosure and eviction. So those things, they’re lagging, and hopefully it’s not massive, hopefully we can get through this… Which is a major difference from back then.

At least with a crisis like this, there’s hope of a cure to come out of it, a flattening of the number of people that are being affected… All these different things that we can see that didn’t exist in a way in ’08 and ’09. Back in ’08, ’09, we had no idea what was going to happen next. At least, now we know that with some degree of certainty that we’re going to get through this, and the faster we can, the less effect it’ll have on the number of foreclosures there are and where they occur, and rent rate compression and value compression. I don’t think it’ll be as widespread, but the longer this goes, you can see where that’s going to come 6, 9, 12 months down the road.

Joe Fairless: One interesting thing that I think will take place is the fire sale like we had, after the ’08 crisis – it won’t be nearly like that at the end of this, for many reasons… One of them being people have been squirreling away money, anticipating some correction. They had no idea, I don’t think anyone had the idea it would be a virus. You’d think that they thought that it’d be something else, but people have been squirreling away money and the distress properties that do come up, it is my belief, there’s going to be a lot of competition for those distressed properties. Whereas in 2009, 2010, there wasn’t nearly as much competition because of what you said, the uncertainty.

Chris Clothier: Oh, I think you’re spot on. You’re exactly right. So there’s not a liquidity crisis, yet. So as long as there’s liquidity in the market and there’s appetite for buying, I agree with you, 100%. We shouldn’t see that anyway. And look, between you and I and all of your listeners here, any investor that came through the ’08 and ’09, many of them that I’m talking to, they’re advising newer investors that this whole idea of “This is what we’ve been waiting for, now we can finally get involved in the market and prices are going to fall and I’m going to send out some great deals”, so many of us remember the destruction that came from ’08, ’09, ’10 to lives, to people individually. Certainly, none of us are hoping for that. Anybody that came through that is hoping for a calm, recovery and exit out of this, not something that’s volatile, with high losses. If you invest properly in real estate and you invest with good fundamentals, you can always find good deals. You don’t have to hope for or wait for some massive crisis to make your windfall.

Joe Fairless: Anything else we should talk about that we haven’t talked about as it relates to what’s going on right now compared to ’08 and just your overall approach?

Chris Clothier: The biggest thing I can implore everybody is that it’s not too late to plan. If you haven’t planned yet, that’s okay. Even by the time that you hear this, you need to be planning for what can come next, and worst-case scenarios and how do you navigate those issues. You need to be overly communicating with your partners, with your lenders, with your clients or residents. If this has shown us anything, it’s that we’re pretty weak when it comes to control, which actually is a very strengthening approach. We don’t know what’s coming next. So we get stronger by planning  for everything, so that we’re not surprised. So no matter what happens, we can look back and say, “I’ve got a plan for this and I’m going to execute that plan.” That’s the way we came through ’08 and ’09, and that’s exactly what we’ve done today. We have just very calmly said, “Let’s get to work.”

Joe Fairless: What you said at the beginning, you did not rush to communicate anything; you had conversations amongst yourselves and figured out the approach. What was your response to the owners, to their clients before you had that formalized communication ready to go? What were you telling them in the meantime?

Chris Clothier: Well, for us, we have for many, many years had a program where we call every one of our clients, every month. So we built up this massive goodwill through relationship. So for us, there was no need to rush out because we were already talking to every client, and the conversations that the clients had with us was, “Hey, I know y’all are planning and preparing. I just want you to know that I’m okay not getting rent or help my client out. Let me know when you know what you’re going to do.” So we didn’t have a clientele that was in the dark. We had a clientele that, because we call them every single month — and that was our message. “Hey, we called you every month for the last 12 years for this day, because this day would come, when there would be uncertainty and fear, and you needed to know that we were on top of it.”

So there was not a need for us necessarily to get something out quick, and when we did get something out, we chose to do it by video, which we posted a message that they could all get to. So we put it on a website page so they could get to the message, and the message again was very clear, that (again) we’re confident.

Joe Fairless: Who was talking in the video? Was it just you?

Chris Clothier: It was just me.

Joe Fairless: Just you. Got it. Well, how can the Best Ever listeners learn more about REI Nation?

Chris Clothier: We have a very active blog at reination.com. We have a video series out there to help investors learn and all of it’s free. There’s nothing behind a paywall, you don’t pay anything for it, that kind of thing. I’m also extremely active on social media sites and even on sites like BiggerPockets. So I think I’m pretty accessible. You can come to reination.com, learn more about our company. You can always reach out to me. You can connect to us through social media or through BiggerPockets, and we’re happy to do what we can to help investors today navigate, get through this.

Joe Fairless: Thanks for talking about the macro-level picture, as well as getting the specifics of how you’re communicating with the owners of the properties, as well as the residents. Enjoyed our conversation, as always. I hope you have a best ever weekend and talk to you again soon, Chris.

Chris Clothier: Thanks, Joe. Take care.

JF2044: Rent Collecting During The Coronavirus With Will Fraser

Listen to the Episode Below (0:21:01)
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Will has been a real estate investor for the past 3 years and has a portfolio of 23 properties all focusing on long term rentals. Will shares how his long term rentals have been impacted by the coronavirus pandemic. He shares the different plans he has in place to collect rent from his tenants and to make sure he helps them out at the same time. 

 

Will Fraser Real Estate Background:

    • A full-time real estate broker
    • 3 years of real estate experience
    • His portfolio consists of 23 properties, 4 he personally owns
    • From Oklahoma City, OK
    • Say hi to him at: will@craftsmanre.com 

 

 

Best Ever Tweet:

“This gives me an opportunity to build a strong and unique relationship with some of my tenants that I wouldn’t have the ability to do otherwise.” – Will Fraser


TRANSCRIPTION

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

Will Fraser: Theo, I’m doing great, man. Enjoying life here, and glad to be on the show. Thanks for the opportunity.

Theo Hicks: Oh, absolutely, and thank you for joining us. Today, we are going to be talking about how the Coronavirus is impacting Will’s business. Before we get into that, let’s hear about Will’s background. He is a full-time real estate broker. He just hit three years of real estate experience.

His portfolio consists of 23 properties, four of which he personally owns. He is from Oklahoma City, Oklahoma, and you can say hi to him at Will@CraftsmanRE.com. Will, do you mind providing us with a little more information about your background and what you are focused on today?

Will Fraser: Yeah, absolutely, man. Well, I took a circuitous path to real estate, like all non-traditional real estate investors did. I studied biochemistry, and that launched into a job overseas, which after I got deported landed me in Oklahoma City. I worked with a startup that was selling things to real estate agents. I realized that most real estate agents, respectively speaking, would not know the difference between a small dark place and a hole in the ground. And what I saw was I’ve got some skills that might mesh well with real estate, so let’s give this a shot.

One of my early clients was a real estate investor. So I saw some of the deals that he was doing, and I was like “Man, that really doesn’t seem that hard.” And I started just kind of emulating what he was doing. Little by little, that grew into what I’m doing today. I’m a residential real estate agent that helps people buy and sell their personal homes. I help investors buy and sell investment homes, and then I also manage my own portfolio that I have… Some personally, like you said earlier, and  some with partners.

Theo Hicks: You said you own four yourself, and then 23 – are those JVs?

Will Fraser: Yeah, what we did is we started out with a JV agreement, and then we started buying in an LLC that we jointly own. But the first batch of 15 properties were purchased with my business in a JV agreement. And then as that relationship grew, we were all going forward more confidently, and then we saw that “Hey, this is something we’d really like to scale together.”

Theo Hicks: Okay, and then are those single-family homes duplexes, triplexes…?

Will Fraser: There are two fourplexes, a triplex, about ten duplexes, and then the balance, our single-family.

Theo Hicks: Okay, and they’re all rentals.

Will Fraser: Yeah, that’s right.

Theo Hicks: Okay, perfect. And those are long-term, not short-term.

Will Fraser: Right. They’re all long-term. One of them – we leased it out to someone who’s Airbnb-ing it. We love getting to partner with other investors and creating win-wins. Somebody came to us and wanted to do an Airbnb in Oklahoma City, and we said “Hey, we’ve got a property that would actually work well for that.” So that’s one of them. So it’s kind of a mixture… It’s a long-term rental for us, but a short-term rental for our tenant.

Theo Hicks: Okay, perfect. So I guess the first question that I’ll lead with, with today being the first of the month that we’re recording this, is are you seeing any issues with rent collections from the Coronavirus on those long-term rentals?

Will Fraser: Definitely. And I think that there’s some of what we could have known is gonna come… Just what I would call the ostrich approach, of tenants burying their heads in the ground and pretending that there’s not a problem, and then you don’t see that rent come in on the first, you don’t see it coming on the second or third… So we’re already seeing some of that. But a lot of what I’ve been seeing that is surprising is tenants reaching out within the last three days to let me know that they’ve been furloughed, their hours have been cut, or they’re struggling… I’ve got a couple tenants that are in the oil and gas field right now, and they’re letting me know in advance “Hey, I’m paying my rent this month, but I just wanted to let you know I don’t know how long I can continue this.” I’ve been more encouraged by those than the people that I know are doing an ostrich right now.

But yeah, I think that everything we’re seeing right now is what we expected to see, but with a little more of the avoidance on the tenant side.

Theo Hicks: Okay. So for people who, as you mentioned, reached out, said that they’ve had some sort of financial hardship, they’re gonna pay rent this month, but they don’t know how long they can keep that  up – do you have any plans on what you are going to do if it gets to the point where they can’t pay the full rent?

Will Fraser: Yeah, that’s a great question. What I’ve discussed is a few different things – one, if they want to pay by credit card, I will eat the credit card fees; so I’ll allow them to put it on a credit card. I don’t encourage that as a Band-Aid, but I do know that credit card companies are offering some forgiveness platforms… That, frankly speaking, they can do because of their size, and I can’t do, because of my size. So I will offer that.

Then another thing that I’m offering is the ability to pay incrementally, and then amortize the balance that’s not paid over the rest of their lease. So with a tenant of mine that’s in oil and gas, I know that if he can skip a month next month, it’s going to put him having more cash on hand to weather a storm… Because he’s looking at Covid-19 and the shutdown – that’s definitely impacting the total economy; and oil and gas is — I have literally just filled up for 99 cents a gallon. That is crazy.

Theo Hicks: Wow…

Will Fraser: Yeah, it was absurd. Like, can we store this stuff, and flip it? [laughs] No, we can’t. But for him, he and I both acknowledged that “Hey, if you can skip next month and I don’t hit you with a late fee, or even a potential eviction”, then he can hold that cash and be a little more resilient in the face of an impending however many months of down… But we can amortize what he didn’t pay over the remainder of his 15 months left on his lease. And he felt like that was a really gracious thing.

He has proven himself as a tenant that communicates honestly and stands by his word, so I wanna be understanding and do the same thing for him.

Theo Hicks: That was a good transition with another question I had… So you’ve got, let’s just say, ten tenants reach out to you and say that “I’ve been furloughed, my hours have been cut, I lost my job, and I’m not gonna be able to pay rent this month.” Do you just take that at face value, or do you ask for some sort of additional documentation to confirm that what they’re saying is true?

The reason why I ask is because I would imagine that with the [unintelligible [00:07:56].10] evictions, people might take advantage of that and just claim that they’ve lost their job when they really haven’t. I was wondering if you’re doing anything extra to confirm, like requiring a financial hardship letter, or anything like that.

Will Fraser: That’s a great question. At this point I’m not, other than just taking note of who their employer is, and then asking some other people… Because Oklahoma City, honestly, is not that big of  a place. So if someone works at Dell and I hear that they’ve been furloughed, that’s  pretty easy to confirm through the grapevine… So just taking note of that.

But at this point I’m not asking for any of those things, and the idea being with tenants that have already proven themselves to be valuable – I hesitate to say valuable or invaluable, but ones that showed the right kind of character and communication tendencies, I wanna come alongside them and extend a trust that should be reciprocated in the months and years to come.

So it’s an opportunity to grab a depth relationally that we’re not gonna get otherwise in a tenant/landlord relationship, that should be great for the years to come. So that’s my idea of extending that trust… But for sure, it’s gonna be manipulated, and I’ve already had tenants reaching out, saying “Hey, I heard you don’t have to pay your mortgage, so are you just trying to play it all close to the chest and get us to  pay, even though you don’t have to pay?”  Like, hey, that was the governor of New Jersey, and the last time I checked, he’s not the governor of Oklahoma.

But there’s a lot of misinformation out there. It gives us a good opportunity to kind of level up and just call a spade a spade. What I told that tenant is “The moment my mortgage is forgiven, I will pay that forward.” Because there’s a reason — if the government froze all principal, interest, taxes, insurance and repairs and maintenance, there’s a real reason. So it would be in keeping with that to say “Hey tenant,  you don’t need to pay this month, because I don’t need to pay.”

But as it is, principal and interest are still due, taxes are still due, insurance is still due, and tenants are calling me more than ever to do repairs and maintenance, because they’re home more than ever. So explaining that to people, “Hey, do you see why all these things are still in play? Which is why we need to collect.” And then a secondary conversation is if for some reason you legitimately can’t pay and we’re prioritizing what we have to pay to make sense, then that’s real, too.

The oil and gas guy – he legitimately is having zero income right now. So yeah, I know no one’s calling you to come do whatever he does in the oil and gas, so that has a real effect… So I wanna live with him in an understanding way, but also communicate very real, so that they can understand the landlord’s side… Because I think a lot of times tenants live in this world as if being a tenant is somehow different than owning a house… Let me flesh that out a little bit. I had a tenant call and go berserk because they didn’t have hot water one night. And at the exact same time I didn’t have hot water at my house, because my hot water heater was out. It took my four days to get my own hot water heater replaced, yet the tenant’s expectation was that it was completely unacceptable for them to not have hot water for two hours. That’s not true if you own the house, so why on earth would you expect it to be true if you are a tenant in a house?

Anyway, so educating tenants on what reality is – we have an opportunity to do that now, that we don’t have day to day.

Theo Hicks: Yeah, and I think a lot of the things you said — I think one of the key advantages people who self-manage will have during this situation, than people who have a third-party company… They can’t have those conversations, because they don’t’ have a relationship with their residents. So I think a lot of the stuff you’re saying right now definitely applies to people who self-manage.

From other conversations I’ve had with people who self-manage – they’re saying that they’re having it much smoother (as smooth as it could possibly be, I guess) than third-parties.

I have  a couple other questions… This is taking a different track, but you have partners on some of your deals – how did those conversations go? At what point did you guys realize that this was something that was gonna have an impact on your business? I’m just curious to see how those conversations went. I’m assuming — was everyone on the same page right away, did everyone come at the realization at the same time? Were there any budding heads? What’s it like being in partnerships during this situation?

Will Fraser: It was kind of an evolving situation, because they came to me as clients, typical real estate clients, looking to buy rental properties… And one of the things that I try to do with everyone is walk through a series of discovery questions, because there’s a lot of different investing philosophies. If you had two different people who say “I wanna invest in real estate”, but one of them means “I wanna make the big bucks in flipping” and the other means “I wanna  buy properties that cash-flow and I wanna hold it for 27.5 years, and then keep swapping until we give our kids a huge gift” – that’s naturally gonna butt heads.

But a lot of people, when they hear about real estate investing and they really just get a hankering to get started, they come full of zeal, but not full of a lot of developed vision… So I try to walk everyone through the process of formulating — if you had a magic wand and you can wave it in ten years, in fifteen, in thirty years, what would be true of your real estate investments, and what role would you play in it?

As I started to do that with these guys, it just became evident that we were all looking at long-term wealth built through wise buy and hold investing. So I thought that was cool, that it had never occurred to us to partner until we started looking at specific deals… And what we’re seeing is the faster you can move on these deals, because the market has just been roaring in Oklahoma City, the better of a shot you have at actually taking it down.

So with them being out of town, with them being otherwise employed, and looking to deploy some of the capital that they generate into real estate… But me being a full-time real estate person, I was able to move a lot faster than they were, so we kept losing deals, because hey, there’s this gap.

So I had the idea – and I remember walking through one deal together, and the idea was “I can buy this and you can basically do hard money lending, or private money lending.” And option two was “You could buy this, and I broker it”, and then option three is “We buy this together.” And then they just kind of looked at me and were like “Huh. What would that one look like?” “I don’t know, let’s flesh it out.” So we just dove into the option of “We buy it together”, and we kicked around a bunch of ideas, and we saw that there was a synergy  there that they were pleased with, and I was pleased with. So we tried it with one deal first, and then we grew that, and then it’s turned into — gosh, I think we said like 30 units off of that one.

Theo Hicks: Okay, thanks for sharing that. But now, more recently, you’ve had these partnerships, and you’re kind of going through a crisis… I’m just curious to see what those conversations are like. Are you guys having weekly calls to figure things out? Was there a couple people who didn’t think it was that big of a deal at first, while other people thought it was a big deal? Were there any issues at all? And if so, how did you get through them, or how are you getting through them?

Will Fraser: Yeah, we’re having about two calls a week – which partially is crisis and partially is we’re all sitting in a very different pace than we have, so we wanna take the opportunity to really lay the groundwork and communicate more… Because most of the time, the partners are all running at a million miles an hour in different directions.

But I think I was the one that was not taking it seriously at first, because I looked  at it as “Hey, this is a coastal thing. We have very few cases in Oklahoma…” I don’t know if you noticed, but it’s not really a tourist destination, or an immigration hot spot… So typically, we’re not hit by the same things that affect New York and L.A.

So that kind of naivety was exposed by the partners, and we’re like “Hey, what are we gonna do when the tenants can’t pay?” I’m like, “Well, I don’t know that that’s gonna happen.” And our partnership – and I think this is in the nature of healthy partnerships, that really drives me to embrace them… Is when I was weak and short-sighted, my partners brought a seriousness that’s challenged me to step up and say “Okay, what are we going to do?” So we started diving deep into the numbers and saying “Okay, do we need to start having conversations with our lenders now?”, to say “Okay, when this happens and we can’t pay, what are we gonna do?” And we got to all get on solid ground with our approach…

And actually, things like that have given us an opportunity to go deeper in unifying our vision, which is going to continue to pay dividends… Because what we decided was “This presents us with an opportunity to grab credibility.” Because one of the things that we run into with the lending side is “Hey, you guys are relatively young and new, so we don’t know if we wanna continue to make [unintelligible [00:16:38].24] loans to you… So let’s weather it a little bit.”

So when you have something like this, where countless people who have been less disciplines are looking at it and they’re saying “Holy crap, we have no money here”, and they’re calling their banks, that creates a panic on the bank, and a stress on the bank. So when the bank calls us and says “Hey, are you gonna be able to make your payments?” and we do every time, on time, then we’re establishing credibility in the fox hole, like the war time, that is going to pay dividends in the peace time… But the partners and I, through these calls and through running stress tests and analyses, we’ve decided “Hey, we’ve got a lot that we can give up before we don’t pay the bank. Hey, we’re gonna give up personal profit.”

So we started going through that priority list of “How do we honor the commitments we’ve made, and establish credibility in this time, that’s gonna pay dividends in the peace time?” So I think it’s been a cool opportunity for that, and I’m thankful for my partners bringing the seriousness that I lacked, because it’s made us a lot more mature as an investing group.

Theo Hicks: Okay. Well, is there anything else that we haven’t talked about already, as it relates to the Coronavirus and your business, that you wanna mention before we sign off?

Will Fraser: I think the importance of communicating ahead of time. And I’m gonna say this as a reminder to myself. When we can see things coming, it does everyone better to communicate up front, as opposed to — I mean, when we ostrich and we stick our heads in the ground, and we’re like “Maybe it will go away”, the problems usually don’t go away without being resolved.

So let’s take these opportunities to have our partnership discussions, to have discussions with our vendors and our tenants, and our landlords if we’re tenants, and call a spade a spade, and talk about reality, and let’s wrestle through those hard things now… Because it’s gonna establish better rapport and better credibility.

Theo Hicks: Alright, Will, we really appreciate you  taking the time to come on the show today, and extra-appreciative for you talking about how you are dealing with the Coronavirus right now… So just to kind of recap what we’ve talked about – we’ve talked about rent collections; you’ve got a mixture of 4, 3, 2-units, and then a single-family home that are long-term rentals. We’ve talked about how you’ve actually had tenants reaching out to you, letting you know that they’ve hit that financial hardship, that they’ll be able to pay rent this month, but weren’t totally sure how long they’d be able to pay rent… So a few plans you have in place is let them pay with their credit card, and eat that credit card fee, although that’s not something that you’re going to encourage. Then allow people to pay their rent incrementally, and then amortize that over the rest of their lease.

You also mentioned that if you live in a smaller areas, it’s much easier to confirm that someone’s telling you the truth. If someone mentions  they worked at Dell, and claim that they’ve been laid off and you know that Dell are laying people off, then you’re able to confirm if they’re telling you the truth.

We also talked about how you approached your partnerships, and how you do two calls a week right now, and that you were proactively planning ahead of time, you and your partners, about what to do if your tenants cannot pay rent. You also mentioned something I thought was really wise, which was that this is a great opportunity to build credibility with your lender if you’re able to make your payments in full and on time. Once things start to come back to normal and you want to buy properties from people who maybe weren’t paying their mortgage payments on time, then you can get financing from your bank, because of all the credibility you’ve built up…

And then lastly, you talked about the importance of communicating ahead of time, as opposed to the ostrich approach that you mentioned, of sticking your head in the ground. That applies to the residents, as well as the investors, too.

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

Will Fraser: Thanks, Theo. Have a good one, man.

JF2043: The Benefits of Tertiary Markets During The Coronavirus With Solomon Floyd

Listen to the Episode Below (00:13:15)
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Solomon is the CEO and founder of Reunion Investments. His business focuses on tertiary real estate markets and they currently are working with the department of defense to provide military housing, which basically guarantees rent for his investors. He explains how he is able to help his passive investors get high returns in uncommon markets.

Solomon Floyd Real Estate Background:

  • CEO & Founder of Reunion Investments
  • Managing Director of the CTX Global Real Estate Fund
  • Served in the US AirForce as an Airman
  • Located in Dallas, Texas
  • Say hi to him at : https://www.reunioninvestmentsllc.com/ 

 

Best Ever Tweet:

“Look at these markets and how they operate now in this crisis, and how they handle these issues to be prepared for the future.”  – Solomon Floyd


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 we are speaking with Solomon Floyd. Solomon, how are you doing today?

Solomon Floyd: I’m doing great, man. It’s been a beautiful day here in Dallas, Texas, and to be honest, working from home has become a lot more manageable.

Theo Hicks: That’s good to hear. Today we’re talking about the Coronavirus and how it’s impacting Solomon’s business. Before we get started, a little bit about his background. Solomon is the CEO and founder of Reunion Investments. He is the managing director of the CTX Global Real Estate Fund. He has served in the U.S. Air Force as an airman. He’s located in Dallas, Texas, and you can say hi to him at Reunion Investments LLC.

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

Solomon Floyd: Yeah, absolutely. My background is, as you said – I’m an airman and entrepreneur from Dallas, Texas, who’s focusing primarily in tertiary markets, and utilizing military and municipal housing contracts to essentially get a form of guaranteed rent to my investors.

Theo Hicks: Alright, so tertiary markets… What types of programs are those, that guarantee rent to your investors?

Solomon Floyd: At the moment Reunion’s biggest focus has been our military rental program, where we use our DOD Housing Contract to house military members in exchange for what would be guaranteed rents. So in times like these, where a lot of landlords are scared, and like “Oh my god, what’s gonna happen to my rent?”, my investors aren’t really feeling that, because from the history of time, they’ve never not paid rent for military housing, and they’ve never not paid military members.

So now, my investments have the ability to wait this out and take their money out of the stock market, put it into more real estate that’s gonna house military members, and get them that guaranteed rental income every single month.

Theo Hicks: So the houses that these military members are investing in – people will come to you and say “Hey, I wanna buy a house that’s essentially guaranteed to collect rent”, and then do you help them through the entire process of buying the house, putting in a resident, managing it, and it’s just a complete passive investment for them?

Solomon Floyd: Exactly. We make it as easy as possible. Reunion understands that no one’s going to be able to make it out to these markets as easily as we are. We already have infrastructure there, our boots on the ground are there, our construction company is there, and our property management facilities are also there. So we make it as easy and as passive for most investors to say “Hey, I wanna help the community grow, and I wanna help these people who service every single day, but I also wanna make money.” That’s a very easy thing to do when you just factor in all the amazing possibilities that we can do.

Theo Hicks: So right now there’s been no issues with rent collection from any of these during the Coronavirus, correct?

Solomon Floyd: Exactly. It’s been a matter of we may have a  little issue on how many people are getting stationed and where now, just because some troop movements have halted… But the people who currently have rentals with us, their rental amounts aren’t being affected.

Theo Hicks: Perfect. I guess it’s really not much to talking about the Coronavirus, unless you think that might change in the future… But you expect it to not really have an impact at all, even in the future?

Solomon Floyd: [unintelligible [00:04:03].18] We’ve gone from doing originally maybe 35 deals a month, to now, we’re coming into April, and I’ve got 62 deals on my table. People have panicked, and Reunion offers them the ability to put their money someplace else. So as the Coronavirus goes – it’s not necessarily about Reunion, but when you really think about it, it’s a place about tertiary markets. Tertiary market investing is something that a lot of people overlook, because the distance is scary. There are so few distance investors out there, at least in these markets that are so small. And these tertiary markets provide you a great ability, especially from any investor’s standpoint; they don’t have Uber Eats, they don’t have Favor, like we have in Dallas. They don’t have a form of technology aspirations toward them… Which means now, they’re relying on the system that we are. Who’s gonna go deliver their food?

You see these people wait in line, and this offers people the amazing ability, especially now that we’re mimicking things similar to 2018, to innovate in these tertiary  markets. There’s still innovation that can be done, whether it’s the rentals technology, self-driving cars, whatever it is. That’s the best part about tertiary markets.

Theo Hicks: What types of returns do your investors make on these types of investments?

Solomon Floyd: For us right now, we are showing anywhere from 35% to 60%. That depends wholly on the investment, but we don’t do anything below 35% ROI when it comes to doing any of our real estate that we’re pursuing.

Theo Hicks: And this is for your company or for the investors who are investing?

Solomon Floyd: For the investors who are investing with us.

Theo Hicks: And that’s 35% cash-on-cash every year, or is that including profits from the sale?

Solomon Floyd: Profits from the sale go up a little bit more. Primarily, a lot of people use our housing for rentals. Sales are a little bit different; they’re a little bit higher, depending on who you’re selling to.

Theo Hicks: So you’re saying that if I invested 100k, I’d be making 35k to 60k every year, in cashflow?

Solomon Floyd: Absolutely.

Theo Hicks: So why isn’t everyone doing this?

Solomon Floyd: I think a lot of people, again, have that fear about these tertiary markets. I can take 100 people up to Wichita Falls, and maybe 25 of them are gonna be like “Oh, man. This is it for me.” I think it’s fear-based primarily, and the thing is, they don’t know much about that market. A lot of people are comfortable investing at home, especially in the economy that we had a couple of weeks ago… But not anymore. [laughs] Ideally, people are comfortable investing at home now.

A lot of people are part of Reunion, so I can’t say that no one’s not doing it, but I can say that more people are getting into it now more than ever.

Theo Hicks: And you said you do about 35 deals per month, and now it’s just exploded more? How are you supporting that deal flow? Have you had to change your marketing strategies, or have you always had more deals than you could buy?

Solomon Floyd: I think right now we’ve definitely had to change the marketing strategy. We were able to go to networking events, go to conferences, speak to people, and now we’re having to pivot to doing a lot more online digital marketing, which is odd for real estate companies, in my opinion… Because you can do most of that in-person. That’s where the connection is made. But getting people to do that next step over the internet I think will be kind of challenging. We’ll see what happens… But that’s just how it is.

Theo Hicks: So what types of online marketing are you doing now?

Solomon Floyd: We’re about to start hitting up YouTube and seeing if we can connect with our investor base ther. That’s where a lot of people are looking at  more real estate things as it grows. YouTube’s becoming a pretty popular channel for real estate investors to see what could happen, I suppose… So that’s what we’re gonna start marketing, as well.

We’re also about to do our first LinkedIn advertising, which apparently is very challenging… So we’ll see how my team does, but I’ve got complete confidence that they can make it happen, if they’ve got me this far.

Theo Hicks: And then what about finding investors? Do you have enough investors at the moment to support those number of deals that you’re needing to do, or are you also needing to pivot your investor lead strategies as well to online?

Solomon Floyd: I think we’re gonna have to definitely pivot the investor strategies online, as well. We are always looking for people to come in. Our newest product that we’ve created was in short-term JV deals that anybody could do in these tertiary markets… Because for us, there’s always gonna be a company that wants to buy these back here in the next couple of months, once everything flattens out, and convert them into a REIT. We’ve already had several companies approach us saying “Hey, if you can get us 100 cash-flowing properties, we’ll come by and buy them in July.” And they’ll put them under contract before everything else is really set in stone.

So it’s basically a guaranteed buyer, where all you have to do is go out and build homes, buy homes. Let’s say I need 100 – I’ll just contact a group of investors and say “Hey, I need help getting these 100 homes built/rehabbed/whatever”, knowing that there’s a buyer on the other end, as soon as they’re done. It’s kind of the perfect strategy for most people.

Theo Hicks: Do you focus on a specific market, or is this national?

Solomon Floyd: My DOD contract extends all over the United States, to every single military base, and tertiary markets exist throughout everywhere in the world, so yeah. Right now we’re targeting 18 markets. We’ve done about 12 overall.

Theo Hicks: If someone wants to do what you do, would they need to have previous military experience, or is this something that your average person could do?

Solomon Floyd: It’s something that your average person could do. For example, a buddy of mine – we were seeing what was happening in Flint, and we kind of thought to ourselves “The root problem would primarily be water filtration. How can you filter that water enough to put it in everybody’s home?” And the conclusion we came to was why don’t we just put three serious water filters in everybody’s front year, and run the water through there, so that way it’s clean on the other side?

We got about ten investors together, and we all put our money together, and I think we bought in total 30 homes. We replaced the plumbing all the way to the street, put in a three-series water filtration system, so that way the homes in Flint, Michigan had clean water. And we just rented it back out to the owners, or if the owners wanted the homes back, they’d buy them back from us. So anybody can do it. Tertiary markets exist for everybody.

Theo Hicks: And what about the DOD contract?

Solomon Floyd: The DOD contract – that’s a little bit harder to secure, but that’s a matter of just doing your own research to figure out what each base is in need of. In fact, if you go through the process of becoming a government contractor, it’s really not that difficult. I wish I knew all the logistics behind that, because I didn’t actually do my process. Somebody else did it for me, and that’s what made my life a little bit easier. But definitely research more into that, because the government is looking for housing, whether it’s military, veteran housing, or any sort of housing.

In fact, the best one to do, that doesn’t require you to be a military housing contractor, or any DOD contractor, is VASH. The VASH is essentially Section 8 for veterans, except with way better perks. It’s only a year that the veteran gets the voucher. The rents are substantially higher, and if any damage is caused by the veteran, the VASH program covers that. So that’s a great one for people to get involved in and help out as well.

Theo Hicks: Okay, Solomon, is there anything else we haven’t talked about that you wanna mention as it relates to your business and the Coronavirus?

Solomon Floyd: No, man. I think ideally most people just need to start looking out for these markets, as that’s where the opportunity is gonna be. When this is all over, I don’t imagine that the real estate markets – they’re gonna pick up again. They’re gonna be exactly where they left off, and that’s exactly the case that we felt every single recession. So explore outwards and help these other communities, and  you’ll be able to see now they will become the benchmarks for investing in the future.

Look at them how they operate now, in this crisis, as a tertiary market, and how they handle these issues, and see where the benefit and the value is, for yourselves and for the people that live there.

Theo Hicks: Alright, perfect. Thanks for sharing that, and thanks for sharing all of your advice today. Solomon does DOD housing contracts that houses military members, and he said that military members have never not been paid, and their housing contracts have never not been paid… So his business is going to be — not necessarily unaffected by the Coronavirus, but it’s gonna be affected in a positive way, because it sounds like he’s getting more deals this month than he had in previous months, due to the fact that there has been an explosion of demand for real estate in his tertiary markets due to Coronavirus.

He mentioned that you can get a 35% to 60%  return on your investment. So people who are interested in passive investing should definitely check out his website and the deals he has to offer. Again, that’s ReunionInvestmensLLC.

We talked about how he has to change up his marketing strategies, which most likely we are gonna have to do as well,  due to the Coronavirus… Because you can’t go to meetup groups or in-person events anymore. So he mentioned he’s gonna use YouTube to connect with the investor base, he’s gonna use LinkedIn advertising as well.

Then he also mentioned an interesting investment strategy, which is to pursue VASH, which is essentially Section 8 for housing.

Solomon, thanks for joining us today. Best Ever listeners, as always, thanks for listening. Stay safe, have a best ever day, and we will talk to you tomorrow.

Solomon Floyd: Thank you so much, Theo. I appreciate it.

JF2039: Experience Shouldn’t Stop You From Starting With David Toupin

Listen to the Episode Below (00:23:18)
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Best Real Estate Investing Crash Course Ever!

David started investing when he was 19 during his junior year because he didn’t want to go the corp route. Broke, no money, no ability to get a loan, and put a 12-unit under contract. He had about 120-units syndicated before he graduated college. This is a must listen to episode If you want to learn how to overcome the objection “You have no experience.” 

David Toupin Real Estate Background:

  • Real estate investor and entrepreneur, Co-Founder of Obsidian Capital, a real estate investment firm
  • By the age of 24 he has acquired nearly 600 apartments valued at over $50M, and has a $10M new development projects working on now 
  • Based in Austin, TX
  • Say hi to him at https://www.obsidiancapitalco.com/

 

Best Ever Tweet:

“The answer to the question “You don’t have any experience, why should I invest with you?” The answer to this question was the numbers. Showing them proof that it is a good project” – David Toupin


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, David Toupin. How are you doing?

David Toupin: I am doing fantastic, man. How are you?

Joe Fairless: I’m glad to hear that, I’m doing fantastic as well. A little bit about David – he’s a  real estate investor and entrepreneur, co-founder of Obsidian Capital, which is a real estate investment firm. By the age of 24 he has acquired nearly 600 apartments, valued at over 50 million dollars, and has ten million dollars’ worth of new development projects that they’re working on right now. Based in Austin, Texas. With that being said, do you wanna give the Best Ever listeners a  little bit more about your background and your current focus?

David Toupin: Absolutely. Thanks for having me, man. I started investing – to give you the short version – when I was about 19, turning 20, in college. It was my junior year. [unintelligible [00:01:38].27] internships, didn’t wanna go the corporate route, so I started looking at buying multifamily properties. I was broke, had no money, had no ability to get a loan, and I put a 12-unit under contract in Michigan, near where I grew up… And that was like “Oh, crap. How do I buy this now?”

Joe Fairless: Where in Michigan?

David Toupin: It was in Metro Detroit, a city called Garden City, so a C area. Nothing sexy about this property at all, but it was something I ran some numbers on and it worked. I made an offer, and at that point syndication wasn’t really — I don’t know, were you doing your podcast in 2016?

Joe Fairless: Yes.

David Toupin: Okay. There weren’t as many podcasts and sources out there at that time as there are now for syndication… So I just kind of stumbled across a little bit of stuff and figured out I could put a PPM together, raise some money. Long story short, I raised a couple hundred thousand dollars, found somebody to sign on the loan, I bought that… Then I did it a couple more times. I had about 120 units syndicated before I graduated college.

Joe Fairless: How many units?

David Toupin: 120.

Joe Fairless: Wow. Before you graduated college… [laughs]

David Toupin: Before I graduated college.

Joe Fairless: Where were you going to college?

David Toupin: University of Detroit Mercy, studying finance. I didn’t really go all that often. I skipped most of my classes. My conversations with every teacher in the beginning of the semester went mostly with me telling them that I work a lot, and that real estate is my focus, so I’ll come when I can. [laughs]

Joe Fairless: Did you get a degree?

David Toupin: I did, yeah. I got a finance degree.

Joe Fairless: Nice.

David Toupin: And I just kind of kept doing that. I partnered up with a guy out of Texas after I bought about a little over 200 units. He had owned about 4,500 apartments throughout Texas, sold most of them; he was twice my age, extremely smart guy, very humble. We saw eye to eye morally and ethically, and had some bad experiences in the past, so we thought that it would be a good idea to partner up… So we did that. We bought a deal together in Houston, it went fantastic. 160 units. So we started Obsidian Capital together a little over a year ago, and we’re approaching the 600 unit mark together. We own some land and are doing some new development now.

Joe Fairless: Boy… We have a lot to talk about. Okay, let’s just go from a chronological standpoint… You were in college, you got the 12-unit under contract, you didn’t have any money,  you raised a couple hundred thousand dollars and you got a co-signer. Was the co-signer also someone who brought in some money?

David Toupin: Yeah, I think maybe 25k.

Joe Fairless: How did you meet the co-signer?

David Toupin: Just through networking. It was another local fix and flipper. I started doing some wholesaling and flipping, so that was someone I’d met and we partnered on that deal.

Joe Fairless: So you were doing wholesaling, and through the wholesaling business you met this fix and flipper, and then this fix and flipper co-signed. What was the liquidity and net worth required that you needed help with at the time?

David Toupin: So the purchase price was 560k; 45k/unit was the purchase price. So probably half a million in net worth, and a couple hundred in liquidity.

Joe Fairless: Okay. And the couple hundred thousand that you raised – who participated in that deal? Not names obviously, but just how you met them.

David Toupin: Yeah, we would call from friends and family category. Not really family, just more friends and people I had networked with. I think we had 6-7 people in at anywhere from 20k to 50k. The total amount was about 200k.

The majority of those were other local entrepreneurs, somebody who has owned an insurance agency, somebody who flipped houses… So just a couple of people who wanted to invest in something passively, and we were able to get them in on that.

Joe Fairless: What’s the answer to the question, when it was asked to you, “You don’t have experience. You haven’t done this yet. Why should I invest with you?”

David Toupin: The answer to that question was the numbers… And  I think that was a big thing for me, as I’m a big analytical/numbers person. The easiest way to overcome that objection was showing people proof that it was a good project. Showing them the price compared to other comparable sales, showing them the rents compared to where properties on that street were getting, so that I can increase them, and showing them the proforma… It really helped me to overcome the “Hey, you’re only 20 years old and you’ve never done a deal before” objection. I got that a lot, although [unintelligible [00:06:09].05] I don’t get it as much now, but through my third deal, where I had to raise 1.7 million on a 96-unit – and that was extremely difficult, overcoming the age and track record.

Joe Fairless: Say it’s a cynical investor and the numbers and the market data speaks for itself, and then they say “That’s great, David. The numbers do look favorable, but you’ve never executed on the business plan. Anyone can be a spreadsheet millionaire. Why should I believe you can execute the business plan?” What was your response to that?

David Toupin: My response is I’ve toured all of the comparable properties in the market, I’ve met with management companies, discussed the business plan, and the fact that it’s only a 12-unit project doesn’t leave a ton of room on the table for failure when it’s a high-occupancy market. And the property is already fully occupied. From there, it’s really me walking them step-by-step what the plan was gonna be. Getting tenants out one by one, as their lease is renewed, and offering them to stay at the new renovated rent mark. If they didn’t wanna stay, their lease would end, they would move out, and we would renovate it and bring in somebody else at that higher rent mark.

So just kind of walking them through that process made them more comfortable… But to  your point, there were a lot of people that heart that and said “No, I’ll pass”, and they weren’t comfortable with it. So it really came down to having a lot of people look at the project, to say “I’m interested. Yes, I’ll invest with you. I’ll take a chance.”

Joe Fairless: And how did you get to that number of people for your first deal? What were your avenues?

David Toupin: A lot of them were people through meetups, local groups… I would ask for referrals. The guy that signed on the loan – he brought in his network… So I think the key is networking.

Joe Fairless: That’s helpful, when you have a relationship with an influencer who’s signing on the loan… So in this case he believes in the project, clearly, otherwise he wouldn’t be signing on it. And then he’s already got connections with others. So what percentage of investors came through that investor’s connections?

David Toupin: I would say half and half.

Joe Fairless: Cool. That’s a great way of doing it. How did you structure it with that investor, in terms of general partnership fees and ownership?

David Toupin: We split it all evenly. So we did an 8% preferred return to investor, with 80/20 split over that. Then 3% acquisition fee on the purchase price, and then myself and him split all that down the middle.

Joe Fairless: Cool. Do you still have it?

David Toupin: We do not, no. It sold out a little over a year, and actually another 12-unit we bought just down the street from that – same thing, same structure, same partnership, and we sold that one as well.

Joe Fairless: Okay. That was deal number one. And then deal number two was — what did you say, a 20-unit?

David Toupin: Deal number two was another 12-unit, on the same street.

Joe Fairless: Oh, that one. Okay. We’ll skip that one. How about your third deal that you mentioned? I think you said it was a 1.6 million raise?

David Toupin: Yeah, so it was a 1.7 million raise…

Joe Fairless: Okay, 1.7…

David Toupin: And it was 96 units. We got it from a mailer… It’s a really interesting story. The guy owns over a billion dollars in real estate. He’s a local Michigan, old-school (71-72 years old now) investor, and he’s really heavily invested into senior living developments, and hotels, and stuff like that; class A apartments. This was a ’79 build, 96-unit, in a B minus area, that he had built 40 years prior, and owned free and clear, so he held it the whole time

We got a call from him, and he was open to selling, from a mailer. That was just a really simple “Hey, I see you on this property. Interested in making you an offer? Give us a call if you’d like to sell.” Timing worked out. We ended up building a good relationship with the guy, negotiated a good price, and we bought that one off-market for 43k/unit; we renovated it, we’re all-in for about 50k/door, and about six months ago sold it for 70k-71k a unit.

Joe Fairless: Bravo.

David Toupin: That one did very well. Thank you.

Joe Fairless: This was your third deal at the time; you’ve bought two 12-units up to this point. You’re sending out mailers, and the owner who owns over a  billion dollars of real estate calls you up. Were you a little nervous?

David Toupin: I had no clue, to be honest with you. My first conversation with the guy, I had no clue. He said he owned a lot of real estate. He was like “I own a couple thousand units free and clear, and I own this and that”, and I was like “Alright, maybe… Is this guy the real deal?”

Joe Fairless: That could go one of two extreme directions.

David Toupin: Exactly.

Joe Fairless: “Hold your wallet and hide your kids” or “Okay, this could be a long-term partnership thing.”

David Toupin: Exactly. And it was super-interesting. I ended up building a good relationship with the guy. And coming from those first two 12-units, I ended up partnering with the same game on this one as I did the first two 12-units. He sponsored the loan again, and we raised equity together… So I actually built a really good relationship with the seller, and I think that’s what really helped to get the deal done.

And Joe, I ended up living in this deal, and kind of house-hacked it. It was one of my greatest learning experiences. I was 21. We bought it in 2017, and I got in, oversaw about a half a million dollar renovation, which I had never done before… Self-managed the deal. Freddie Mac small balance loan. I’m not sure why they let us self-manage it, but they did… And I had an on-site manager and maintenance person. I took a two-bedroom, I kind of tricked it out, I lived in it, and it went really well.

Joe Fairless: What do you mean, you  tricked it out?

David Toupin: I renovated it, did kind of a cool renovation on it, and then I also paid the highest rent on the property.

Joe Fairless: [laughs] Got it. So you ended up buying this property and living there… What were some challenges overseeing that type of renovation project, having never had done that before?

David Toupin: I don’t even know where to start. It is a big process, managing that kind of a renovation. I will say, I got it done under budget, but it took probably six months longer than it should have.

Joe Fairless: Okay.

David Toupin: The biggest thing is — if I were to do it all over again, I would have vetted three general contractors to oversee the unit renovations, and I would have tried to put one group in place that could tackle all of the unit renovations from start to finish. When a unit moves out… They’d do 2-3 units a month, and when somebody moves out, they’d go in there and knock it out.

We tried out three different small-time contractors. One was a group of 3-4 brothers… We call them van contractors, that work out of a van. A couple guys. So it was just a hodge-podge of renovations. We ended up hitting the rents, but the unit turns took longer than they should have, it wasn’t the same quality level across the board… And if I were to do it all over again, I would have just hired one group to tackle all the unit renovations, to keep it consistent and to keep it easy.

Joe Fairless: You said you had bad experiences in the past, you and your new partner. So what was your bad experience?

David Toupin: The business partner I’ve had on some of these deals did not see eye to eye in a lot of areas… I’m very by the book, I would say, and reputation is important to me, and making ethical decisions is also really important to me. That’s kind of how I was raised, and I think that’s how you should act in business… And I didn’t see that from this partner, so I just decided “Let’s sell everything off, we’re gonna do well, and let’s part ways on a good note.”

Joe Fairless: Yup.

David Toupin: That’s kind of what happened… And it led me to find my current business partner, who sees eye to eye with me exactly, and it’s a really good situation. So no regrets. You have to go through that kind of stuff, to learn and figure out what works, what doesn’t work. And I guess if I have any advice or suggestions on that to other people – I know a lot of people getting into this business, syndicating or partnering, and starting groups and stuff… Just try it out. Do a deal separately, before you go and start a business with somebody; just test run it, and see how you operate together before going down that road.

Joe Fairless: Yeah. And you ended on a high note, and everyone made money, and then they brought you to the current partnership. What are some examples of the ethical dilemmas that you came across?

David Toupin: Situations where — let’s say, for example, we were to have the ability in an operating agreement… So this is the structure of that deal; the goal was to go in, renovate it, bring the value up within a couple years, refinance, get all the capital back to investors… Our equity would then go up to 50/50. Then we were gonna hold long-term, that’s what we told them.

So what was brought up was “Hey, why don’t we refinance, our equity goes up to 50/50, and then we sell the property?” I was like “Well, that doesn’t make a lot of sense and that doesn’t look too good on us. I don’t think that’s something that we should do.” It was pretty obvious that the goal was to refinance, our equity goes up, and then we sell it and WE make a lot more money. But that was not ethical in my mind. That wasn’t the plan we discussed. And if we’re gonna sell the property now or in the short-term, we should just sell it and give them the profits that they should get.

Joe Fairless: That would burn some bridges… [laughs]

David Toupin: It was a pretty clear [unintelligible [00:15:42].20] So things like that…

Joe Fairless: It was tactically sound, but come on… If you wanna do another deal, and just wanna look yourself in the mirror…

David Toupin: Yeah, good luck doing another deal with those investors.

Joe Fairless: Right. And there is a ripple effect with that too, word of mouth.

David Toupin: Absolutely, there is. It’s a small world, and you’ve gotta be really careful who you’re working with. Not to get  too deep into all that, but it’s something where — that kind of stuff is really important to me, to act in our investors’ best interest and by the book.

Joe Fairless: What was the challenge that your current business partner had in the past?

David Toupin: He had a business partner that — they owned about 300 million dollars in real estate together, and after a couple years he wasn’t really pulling his weight, and stopped showing up to the office a lot… And once they started making a lot of money, he was–

Joe Fairless: Jetsky-ing, and gallivanting around…

David Toupin: Exactly. He was going out and buying Ferraris instead of being in the office, putting together deals. So for him it just wasn’t working out anymore, and… Glenn’s a lot like me, he’s a very ethical guy, and there were just things that he was seeing that he didn’t like anymore… So they decided to do the same thing, “Let’s sell everything off.” So because Glenn and I went through a similar experience, we told our stories and we’re like “Man, we might as well try partnering, because we really went through the same thing and see the same way, and see eye to eye, so let’s try this out.”

Joe Fairless: Alright. You went to development – why are you doing development?

David Toupin: So I moved to Austin, Texas in the past year, so  I’m down here now where he lives… And we’ve found a piece of land, it had a good price, it was already entitled, ready to build… We’ve been wanting to get into development for a while. It’s a really, really good market down here for development. Absorption is great, solid rental rates here in Austin, and it’s just growing like crazy. Right in the path of progress where this project is, and it made a lot of sense.

To do this size, sub-100 units, to us was a great way to start getting into development. We didn’t wanna start doing a 200-unit project. The 50 to 100-unit range is a great starting place for that, because you can still do a HUD loan, and it’s easier to get in without having prior development experience.

Joe Fairless: How was it easier — I think that it’s just more units, but it’s the same process.

David Toupin: I just noticed after talking to a lot of lenders and other people who have developed before, they just suggested starting at that level is gonna be a lot easier to get into, and to qualify for a loan, and just to really cut your teeth on, as opposed to going into that 100-200 range to start.

Joe Fairless: On the project level, what are the projected returns for this development deal?

David Toupin: We’re in the high teen IRRs on a five-year. This is kind of our projection. But we plan to hold this long-term.

Joe Fairless: And that’s on a project level ?

David Toupin: No, investor level.

Joe Fairless: Oh, okay. Yeah, on a project level.

David Toupin: At project level it’s gonna be low to  mid twenties – 22, 23 internal rate of return.

Joe Fairless: And I’m assuming based on how resourceful you were in college and leading up to this point you’ve also been looking at other opportunities, existing product. First off, is that a correct assumption?

David Toupin: Yes, that’s mainly what we do, is existing.

Joe Fairless: So I imagine that you could find existing product with a value-add business plan that would be a similar project-level IRR projections… And if that is the case, then why go through the risk of ground-up development?

David Toupin: A couple of reasons. One is we have several investors that are really interested in new development, so that sparks our interest right off the bat, because we know that we have the equity behind us.

Second of all, it’s something that we’ve been really interested in, and we want to have as kind of a branch for our company going forward, the new development side of things. And then lastly, it’s not something that we’ll do anywhere; it really depends on the location. And for what  we’re doing and what we’re building, in Austin, for example, a B class product, if you’re buying an ’80s or ’90s product, it’s selling for anywhere from 120k to 150k per unit right now.

We’re building this for 108k a door, and it’s gonna be brand new. And with land, we’re closed to 130k. So we’re all-in in that mid-range of where a ’90s product is selling. So to us, that just clicked. It just makes sense. Why would we buy in Austin an ’80s product for 130k a door, when we can go and build brand new, higher-quality for around the same price?

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

David Toupin: Oh, man… My best advice ever in real estate is know the numbers. If you know the numbers, you will make smart decisions, as long as you’re conservative, and you will really be able to talk to anyone about it, from investors, to lenders, bankers, partners… Knowing the numbers is your greatest tool.

Joe Fairless: We’re gonna do a lighting round. Are you ready for the best ever lightning round?

David Toupin: Let’s do it, man.

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

Break: [00:20:55].09] to [00:21:39].10]

Joe Fairless: Best ever resource you use to stay up to date with what you need to stay up to date with, business-wise?

David Toupin: CoStar News.

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

David Toupin: A mistake I made on a transaction… Not going to the right lender from the start.

Joe Fairless: And what do you do now, what questions do you ask to determine what the right lender is, or which one is not the right one?

David Toupin: Well, I’ve learned which — project-specific… In the beginning I didn’t know about agency loans, so I went with regional bank loans, when we should have done agency, just because we didn’t know about it. So I guess that was a mistake that would have been solved by knowing the right lender to work with.

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

David Toupin: Educating other young people that are in their twenties, and in college, and that want to get into real estate.

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

David Toupin: You can follow me at Instagram @realestatejedi, Facebook – look me up, David Toupin, or website ObsidianCapitalCo.com.

Joe Fairless: Well, thank you so much for being on the show and talking to us about the early deals, the 120 units you had syndicated before you graduated college; fist bump to you, I’m raising my fist right now to you… And congratulations on what projects you have upcoming, as well as finding a business partner that aligns with the way you think and the way you wanna approach business.

I enjoyed our conversation, I learned, and most importantly, Best Ever listeners, I hope it was valuable to you. Thanks so much for being on the show; I hope you have a best ever day, and we’ll talk to you again soon.

David Toupin: Thanks. I appreciate it.

JF2028 : How To Attract Investors, Establish Credibility, and Fund Deals With Hunter Thompson #SkillsetSunday

Listen to the Episode Below (00:23:08)
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Best Real Estate Investing Crash Course Ever!

Hunter Thompson is a return two time guest from episode JF1545, and JF1220. In this episode, you will learn a ton from Hunter on attracting the right investors, how to establish credibility and fund your future deals. This exact same information has helped him raise more than 30Mil in private capital. He has a book called “Raising Capital for Real Estate” so be sure to check his book out to ensure you can get more info on this topic. 

Hunter Thompson Real Estate Background:

 

Best Ever Tweet:

“Content creation is one of the most efficient ways to build your brand but also raise capital.” – Hunter Thompson


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 we’ve got a two-time repeat guest, back for a third time, Hunter Thompson. Hunter, how are you doing today?

Hunter Thompson: Hey, Theo. Thanks again for having me on.

Theo Hicks: Absolutely. I’m looking forward to our conversation. Today is Sunday, which means it’s Skillset Sunday, where we go over a specific skill that our guest has. Today we’re gonna be talking about how to attract investors, establish credibility, and fund deals.

A little bit about Hunter before we begin – he’s the founder of Asym Capital, which is a private equity firm. He has raised more than 30 million dollars in private capital. As I mentioned in the intro, he’s been on the show two times before; listen to his episode 1545, “Seven due diligence items for passive investors and passive investing opportunities”, as well as 1220, “He took his money out of the stock market to syndicate self-storage and mobile  parks.” Both of those links will be in the show notes as well.

He just had a book come out. We’re recording this in the past, but when this episode airs, the book will be live. That book is “Raising Capital for Real Estate: How to Attract Investors, Establish Credibility and Fund Deals”. You can buy that book by click on the link in the show notes.

He is based out of L.A, and you can say hi to him at asymcapital.com. Hunter, before we get into the main skill of today, do you mind giving us a little bit more about your background and what have you been focused on since the last time we spoke?

Hunter Thompson: Yeah. So it’s interesting, there’s so many ways to make money in real estate. I mentioned earlier about conducting due diligence, which is obviously critical; if your deals don’t perform, no one’s gonna get paid… We talked about mobile home park businesses, self storage business… But in my opinion, this element of real estate is the most important, sought after and lucrative part of the entire business. I was at a conference recently where someone said “Is the money in the deal, or is the money in the money?”, and man – the money is really in the money.

Now, that could be the case that not everyone agrees with that and not everyone wants it to be that way, but it certainly is, at least for right now. In those earlier interviews I had been focusing on very much of the same; we have been focusing on the recession-resistant real estate asset classes, most notably mobile home parks, self-storage, and workforce housing, or C and B class apartments. I’m really comfortable with those, from my perspective. I know that a lot of people are more and more interested now  in the “recession-resistant” real estate asset classes.

From my perspective, it’s always a good time to invest in recession-resistant real estate, not just late in the cycle. Because when the economy is booming and the capital markets are loose, you’re going to get the advantages there. But when the economy is correcting or there’s a recession, you still get the advantages of the stable demand for that product. So more of the same – I experienced a lot of success and a lot of growth and a lot of scalability, and that’s what we’re really gonna talk about today.

Theo Hicks: And you wrote a book, which is a great accomplishment. I’ve written three, working on the fourth right now, so I totally understand the work and effort that gets put into that, so… It’s always great to talk to the fellow authors who’ve gone through that experience.

Hunter Thompson: I appreciate that. I’m going through the experience that most people go through when they write a book, which is — you know, I have waited a long time to build up the knowledge to feel comfortable sharing with people, because I want to make sure that I was bringing a lot of value to the table. So I wrote the 60,000 words in about 60 days… And I was like “Wow. When is the next one gonna be?” And then I started the editing process and realized “I’m never gonna write another book in my entire life.” That’s where I’m at right now.

But no, I’m really proud of it, and also I have been really fortunate in the sense that I’ve been able to give back to the community… But I’m really happy and looking forward to the response to this, because there’s so many key takeaways. I’ve spent $100,000 on legal fees in 2018. A lot of what I’ve learned in pursuit of that is in the book, and of course, the strategies and systems that I’ve outlined are what has enabled us to get to where we are today… So I’m really happy to hear both of those responses.

Theo Hicks: So the title of the book is, again, “Raising Capital for Real Estate: How to Attract Investors, Establish Credibility and Fund Deals”. You did kind of drop a bomb that you paid 100k in legal fees and you learned some lessons, so do you wanna walk us through what happened, and the lessons that you learned?

Hunter Thompson: Oh, jeez. If you wanna start with the securities law stuff, that’s gonna probably bore your listeners to death. It’s one of those things where — when you’re dealing in the world of securities, you’re entering a new dynamic, where not only pooling investors together has significant legal implications. You have to stay within the SEC’s guidelines. But as an investor, it’s very favorable, because not only do you get the economies of scale going along with pooling investors together… In the sense of if you lose $25,000 in a syndication, it’s very hard to pursue someone and spend less than $25,000 on legal fees. But if you cumulatively invest in a syndication, there’s much more ability to pursue someone if they act in bad faith… Because cumulatively, each person may invest $25,000 and you may cumulatively be able to come up with a quarter million dollars, which is gonna actually do it.

But from a big-picture perspective, I’ll give away something that took me a lot of money to realize – and maybe not everyone listening to this agrees with this, but I’m a huge proponent of the 506(c) offerings. Those are the offerings which allow you to publicly solicit. It doesn’t necessarily mean that you “don’t wanna know your investors” or that you’re actually interested in publicly soliciting investors… But the solicitation or the 506(c) offering requires that you have a third-party verification of your investor status as an accredited investor. I think that level of scrutiny really adds to the protection of the [unintelligible [00:06:48].05] the person who’s actually creating the deal.

I don’t have to worry about going on  a podcast or going on a webinar and conducting an in-person dinner – all of which I talk about in the book – I don’t have to worry about saying the wrong thing at those events, which can cost me later down the road. If you’re using 506(b) – and please don’t take this wrong, this is just my perspective – there’s so much grey area surrounding it that I just don’t feel comfortable with it. Once you do create your 506(c), I think you’ll never create another 506(b). Just my opinion, of course.

Theo Hicks: I actually just did an interview earlier today – I’m not sure if it will air before or after those one – with Ryan Gibson; he does 506(b), and he basically mentioned the exact same thing. He has a really good process for making sure that he is going by the book. So make sure that if you are doing 506(b) you check out that episode and learn his process for making sure that he has that pre-existing relationship with them. Alright, thanks for sharing that.

Let’s go into the book… Attract Investors, Establish Credibility and Fund Deals. In the context of — let’s say I have not done a syndication deal before, but I do have previous real estate experience. So I’m not a complete newbie; maybe I’ve done — let’s just use me as an example – I’ve done 15 units worth of multifamily before, and I want to scale up and raise capital for a 50-unit building, and I want to attract investors. What should  I do?

Hunter Thompson: I’ll tell you what I did, and you can use it as a playbook of what not to do, when I started thinking about scalability. Back in 2011 I saw a great opportunity in the mobile home park business. I spent about two years learning every single thing I could as an investor, flying around the country, doing due diligence, taking it very seriously, as a full-time job. By 2013 I figured I had established a track record, I had created some amazing relationships with some high-caliber operating partners, and wanted to create my first fund.

Basically, what I did is I had an investor luncheon where I invited extended friends and family and their plus-ones or plus-two’s (they had to be accredited investors), I went through a 30-minute presentation, and at the end of the presentation I handed out a piece of paper so that people could write how much money they are interested in investing. I agreed with my partner that we’d at least raise half a million dollars; I thought I could raise up to a million dollars. There was 30 million dollars of net worth in this room.

I went through the presentation, I was very comfortable speaking in front of people, I answered some questions, and resulted in me raising a total of zero dollars. This was heartbreaking. And really what the book is about is realizing what I did so wrong, and then creating the infrastructure to do the opposite of that.

What I did wrong was that I envisioned myself going out and finding investors, converting them to investors in real estate – which is basically like a pseudo-religious experience, to say “Okay, I’ve invested my whole life in the stock market…” Now in this 30-minute luncheon this person is gonna start investing in not only just real estate, but the mobile home park business.

So I’m thinking about it in the wrong way. I needed to create an infrastructure that attracted the right people, that were already interested, converted them through education and indoctrination to a certain extent, and then close them through this sales process. So there has never been a more favorable time to create that infrastructure now. So if you haven’t really started doing this content creation — it is so asymmetric; it’s one of the most efficient ways to build your brand, but also raise capital… Because if you go through the process of writing ten articles, which we can talk about in a second how to do that, just writing the articles alone will help you communicate more effectively to future investors, so much so that it’ll pay for your time. That’s if no one even ever reads the article. So the book is really about how to create that infrastructure and then funnel people through the sales closing process.

Theo Hicks: Alright, so let’s talk about the infrastructure for a second. Content creation – basically, what you’re saying is that  you want to have some sort of thought leadership platform where you pump out content, and then use that to educate people and attract people who are already interested in investing. Then once you have those people who are already interested, that’s when you close them.

Hunter Thompson: Exactly. And that’s how you create a system that’s actually scalable. Because a lot of these sales strategies may take you from closing 40% of your investors to 60%. That’ll be a remarkable increase. But if you only have ten people in the room, that’s going from four people to six people. I don’t wanna go from four to six. I wanna go from 4 to 4,000, and the only way to do that is to attract the right people.

One of the things I talk about in the book which is a reoccurring theme is time batching. I’m hyper-obsessed with productivity, so I like to do things only in increments of 60 minutes to 180 minutes. And I don’t like to shift gears cognitively when I do these tasks. So what I’ll do is I’ll block out the 60 to 180 minutes, and all I will write is up to 100 topic article titles. These are things like “Five reasons to invest in self-storage; is the mobile home park business actually recession-resistant; what does low interest rates mean for housing?” Those are three, so if  you wanna use those three, go ahead; you’re only gonna have to come up with 97 more.

And then I go and sort those articles up, put them in Excel, put them in numeric value in terms of how quality I think they are and how aligned with my business they are, sort in terms of numeric value and then write an article about the first ten. And that is the beginning of your lead nurture process. I’m telling you, just going through that process alone is gonna help you. And then if you still have some below that ten that are still compelling, I would write outgoing emails – these are probably 300 to 500 words – I would write those emails about those remaining topics. And you’ll probably work your way down to where it doesn’t make sense to write about topics about things that are low on the numeric value. Stop that, put those emails in an outbound drip campaign so that your new investors receive one every single week, and that’ll give you time to focus on other areas of your business.

Three months later you come back, you’ve gotten a lot more knowledge, you’ve got a lot more topic ideas… Do the same thing again and constantly push those emails that aren’t as aligned with your business out months and months and months, and eventually you’ll have an entire year of outgoing email campaigns, so that you can spend your year focusing on operating the actual real estate or other things regarding content creation.

Theo Hicks: That’s a fantastic strategy, very specific. I really like that. But that’s kind of step two, but first I need to have my list of these investors. So you said that what you did wrong was you were trying to find people who weren’t interested in real estate and converted them to real estate. Instead, you wanna find people who are already interested in real estate, educate them on the deals that you do… But it seems like that’s what the article part is. But how do I actually find these people and get them on my list in the first place?

Hunter Thompson: Yeah, so the way that I’ve been able to do this is in effort towards those content creation strategies. So we did  not do paid marketing. I used to go to 3-5 networking events every single week; that’s fine, but it didn’t really help the scalability. So from my perspective, the pursuit of actually creating that content will attract thousands of people.

Now, of course, the content has to be quality, but write the content with that in mind. The goal should be to write something that your friends and family, and also the people that are interested in investing are interested not only in reading, but sharing with your friends. This is how you get things to become viral.

Now, if you wanna supplement that with paid marketing, that’s totally reasonable. I know a lot of people that have done that and have had success, but that just hasn’t been the route that we’ve used. So from my perspective, really the creation of the content will attract the right people.

Theo Hicks: Perfect. So you create the content, you’ve got the emails going out, you’ve got the blogs going out, people are reading these… How are  you converting them into investors?

Hunter Thompson: You kind of work your way up in terms of sophistication. I’m a huge proponent of writing a really quality eBook. This is something that’s probably 10,000 words. If you  have a topic that you think is really compelling that’s kind of evergreen — like “Stock market versus real estate” I think is the name of Michael Blank’s book. It’s a great example. That’s always going to be something that he can use.

In an eBook I like to use more things like detail, data, graphs, back up the claims that you’ve made in some of the articles that you’ve mentioned, and be very aware of who your readership  is going to consist of. I don’t think it’s wise to hyper-niche yourself into “Single moms with dogs” type of stuff, but you definitely wanna have an idea of who your ideal investor and who  your ideal reader is.

Now, if you don’t really like writing, for example, you can outsource this. One of the things that we’ve done – and I know that you guys have done as well – is have a friend interview you on a topic that’s very specific, do a one-hour interview, then convert that interview into a transcripted eBook. Just go to Rev.com, it’s about a dollar per minute of audio. If you wanna email me at info@asymcapital.com, I’ll shoot you an email of one of our transcripted podcast interviews we’ve done… It’s the easiest way to do that.

By the time that someone goes through reading an eBook that you’ve written that’s in that 10,000-word range (about 45 minutes to read), they’re going to be very interested in moving forward with you. Then you can move forward with the actual sales process, and looking at the particulars of the deal… But from my perspective, having a combination of articles, maybe some interviews that  you’ve done on podcasts and this eBook will get you so far along the lines that by the time you get on a phone call with someone, if that’s required, you’re going to be basically answering questions that they have, as opposed to trying to hard-close them, which is not scalable and not a good idea in the real estate sector.

Theo Hicks: Do you wanna walk us through what a typical conversation would be like for someone’s who’s read your eBook, or read some of your blogs, and then you schedule a call with them and you’re kind of having a conversation with them to get them to invest? How would that conversation go?

Hunter Thompson: Yeah, certainly. I’ll start by saying this – not only is it good for credibility, it’s actually good for you and your time as well to make everything as systematized as possible. So if you’re gonna be doing anything, whether it be having a phone call, writing an eBook, writing some articles, ask yourself “Why am I doing this? How can I make this systematized?” So for calls, I like to say there’s only two reasons to jump on a call with an investor. It’s either to have an introductory call, which is usually 30 minutes, or a due diligence call, which is usually 30-60 minutes, depending on the types of questions that they’re asking.

So when I jump on that first introductory call, my goal is to listen to their story, establish if they’re accredited, I want to learn about their experience investing… And here’s the really important part – I wanna hear their motivations for investing. Now, if you do 100 of these calls, you’re gonna hear the same things over and over again, so don’t block out the actual answers that they say. Listen to the nuances, because the nuances are gonna come up voluntarily.

You may hear things like “I really like the cashflow, because I wanna pay off my expenses in order for me to retire.” Or “I wanna invest in deals that have predictable outcomes, as opposed to the stock market, which I don’t really trust.” Then the conversation will transition over to me, and I’ll talk about two really important things here – my last straw moment, whether it be in the stock market or when I realized that my other career wasn’t going to get me the financial freedom that I was looking for, why did I transition out of a typical lifestyle into the world of real estate.

The reason this is important is that we didn’t learn about alternative investments in high school and college. Everyone that’s having this conversation with you – they have that moment when they realize “This typical way of thinking about money  is not going to get me anywhere.” So I transition from the last straw moment to my key motivating factor, and really address what motivates me to help people invest like this.

Then I directly address their reasons to invest, whether it be the cashflow, the lack of predictability of the outcome, or the fact that they think the stock market is too high, and say “That is absolutely correct.” I affirm that those fears are genuine, but there’s another way… And that’s when I outline our general investment thesis, answer any questions that they have, and make sure to stick to the time commitment, which is that 30 minutes.

The introductory call – half of it is about creating that credibility, and the way to create credibility is ensuring that they know that your time is limited, as well as the investment availability. So that’s kind of a brief introduction to introductory calls.

Theo Hicks: Perfect. Is there anything else as it relates to how to attract investors, establish credibility and fund deals that you wanna talk about before we close out the call?

Hunter Thompson: Yes, I’ll say this – your willpower is limited. There’s been many scientific studies about this – people have limited willpower throughout the day, but also over the long-term as well. The reason I say this is that it’s absolutely critical to find a mentor that you can inspire them to share their playbook with you… Because that’s gonna help you get over those humps when you run out of that free will. You’re gonna feel exhausted. But if you have someone that you know has succeeded and they’re depending on you to succeed, it’s absolutely helpful to have them push you along. The number one way to inspire this is just to have a real significant sense of urgency about accomplishing your goals.

Mentors are so drawn to momentum… So if you can show that mentor you attract the right people… And that’s someone that not only has helped me in my career, but I’ve also helped other people, when I’ve seen their momentum and wanna help them along.

Theo Hicks: Well, Hunter, very powerful content. A lot of these things I hadn’t heard of before, I hadn’t thought of in this way, so it’s been a very good interview for me as well. I’m actually looking forward to taking a look at your book as well. Again, that is “Raising capital for real estate: How to attract investors, establish credibility and fund deals.” A link to that will be in the show notes.

Thanks again for coming on. Just to summarize — I can’t summarize everything, but some of the big takeaways that I had… I really liked your time batching concept. How you implement that is you will do things in increments of 60 to 180 minutes. The specific example you gave was you will write down 100 topics for articles in that timeframe, and then you’ll put them in Excel, and then assign  them a numeric value based on how powerful you think the article will be. Then you will write an article about the top 10 articles, and then you will write smaller, shorter emails about the remaining topics. You repeat this process every three months, with the goal of having a year’s worth of content, so you can focus on other aspects of your business.

Something else I really liked on the content creation was the eBook idea. If you don’t like to write, a perfect way to overcome that is to have a friend interview you on a topic that you want to write about, that you’re very knowledgeable about, have it transcribed and turn that into an eBook.

Then lastly, we talked about when you’re actually talking to an investor on the phone, and the only two times that you believe you should talk to an investor on the phone is [unintelligible [00:21:43].10] or a due diligence call, and you walked us through exactly what you will do during that due diligence call. Basically, the outcome is to figure out what their motivation for investing is, making sure you’re listening to those nuances, and figure out what they’re (in a sense) fearful of; then affirm that those fears are genuine, that there is another way, and that’s when you present your option to them, and always making sure that you stick to the time commitment.

So again, Hunter, really enjoyable conversation. Looking forward to checking out that book. Best Ever listeners, thank you for tuning in. Have a best ever day, and we will talk to you tomorrow.

JF2026 : Analyzing Storage Properties With John Manes

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

 

John Manes Real Estate Background:

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

 

Best Ever Tweet:

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


TRANSCRIPTION

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

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

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

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

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

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

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

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

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

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

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

Joe Fairless: Yup.

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

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

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

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

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

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

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

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

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

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

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

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

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

Joe Fairless: Wild West?

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

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

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

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

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

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

Joe Fairless: Why?

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

Joe Fairless: Okay.

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

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

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

Joe Fairless: Yup.

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

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

John Manes: That’s correct.

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

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

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

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

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

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

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

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

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

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

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

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

John Manes: Hit me!

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

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

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

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

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

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

Joe Fairless: What was the result of the lawsuit?

John Manes: We settled.

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

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

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

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

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

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

Joe Fairless: Yup.

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

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

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

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

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

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

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

Listen to the Episode Below (00:23:04)
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Anthony is the Co-Founder and Managing Principal of Red Knight Properties, a value add multifamily and mixed-use investing company. Anthony shares some insight on purchasing commercial real estate and explains the differences between multi-family and commercial properties. 

Anthony M. Scandariato Real Estate Background:

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

 

Best Ever Tweet:

“Try to find a niche.” – Anthony Scandariato


TRANSCRIPTION

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

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

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

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

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

Joe Fairless: Where in Jersey?

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

Joe Fairless: Okay.

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

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

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

Joe Fairless: Okay. Purchase price ranges were what?

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

Joe Fairless: Alright… Where was the 287 property?

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

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

Anthony Scandariato: About 5,5 years.

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

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

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

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

Joe Fairless: Entry-level?

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

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

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

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

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

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

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

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

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

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

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

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

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

Anthony Scandariato: Yes.

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

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

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

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

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

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

Joe Fairless: Why?

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

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

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

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

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

Anthony Scandariato: Correct.

Joe Fairless: So what was that first deal?

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

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

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

Joe Fairless: Next… What else?

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

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

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

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

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

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

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

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

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

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

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

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

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

Joe Fairless: Huh. How much?

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

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

Joe Fairless: What type of business is it?

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

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

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

Joe Fairless: Excellent. Over what period of time?

Anthony Scandariato: A year.

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

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

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

Anthony Scandariato: 100%.

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

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

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

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

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

Anthony Scandariato: Sure.

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

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

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

Anthony Scandariato: Knock on wood, nothing yet.

Joe Fairless: Best ever deal you’ve done?

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

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

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

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

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

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

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

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

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

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

JF2009: Going From Single-Family Homes to Active Syndicator With Spencer Hilligoss

Listen to the Episode Below (00:25:57)
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Spencer just recently went full-time real estate investor. He grew up with his parents both active in real estate and as a child didn’t find it as something he was interested in so he instead went into the world of Technology. During his journey in the Tech-Start-Up world, he landed in a real estate tech company and learned about real estate investing. He then started out in single-family houses and after about 6 investment properties decided it was to slow and started to research multifamily. 10 multifamily deals later he now has a successful real estate business with his wife as his business partner. 

Spencer Hilligoss Real Estate Background:

  • Co-founder of Madison Investing
  • Active syndicator, real estate investor, and executive leader
  • Retired from his technology career of 13 years, just 4 weeks ago to go full time in multifamily real estate
  • Has co-sponsored deals totaling more than 3000 units and $328 Million
  • Based in Alameda, CA
  • Say hi to him at https://www.madisoninvesting.co/
  • Best Ever Book:

Best Ever Tweet:

“Set a clear goal with specificity, because taking action is critical, but don’t take stupid action. Stupid action just means, your aiming at something and you haven’t even set the goal yet. Go slow to go fast. ” – Spencer Hilligoss


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, Spencer Hillgoss. How are you doing, Spencer?

Spencer Hillgoss: Doing great, Joe. Really an honor to be here, thanks so much for having me.

Joe Fairless: Well, I am glad, and I am looking forward to our conversation. A little bit about Spencer – he’s the cofounder of Madison Investing, he’s an active syndicator, a real estate investor, and executive leader. Retired from his technology career of 13 years just four weeks ago to go full-time in multifamily real estate. Has co-sponsored deals totaling more than 3,000 units in 328 million dollars. Based in Almeda, California. With that being said, do you  wanna give the Best Ever listeners a little bit more about your background and your current focus?

Spencer Hillgoss: Yeah, happy to, Joe, and thanks again for having me. I live out in the Bay Area, California. For those folks that are not familiar with Alameda, it’s this little island that is totally awesome, couched right between Oakland and San Francisco. I was born and raised here, but outside of moving around the country a couple times, this is where I have done most of my career growth.

I started in a real estate family; my dad was a broker. One of the top residential real estate brokers in the country, actually, back in the ’90s; we can talk more about that if the conversation takes us later… But I didn’t go down that path. I really ran away from that after  seeing what that entailed, and it forced me to run all these open houses when I was a teenager, and that didn’t leave a great taste in my mouth… So I ran into the local business. The local business here in Silicon Valley is technology. That is how I ended up going into this really fast-track journey, starting with the big corporate tech track of getting thrust into leading large teams of over 200 people at the age of 26 years old; way in over my head at the time, in hindsight.

Great learnings, a lot of scars that I look back on now fondly… But five software companies later I came to realize that there’s this wealth strategy that I was very subconsciously or unconsciously easing into… And I noticed everyone around me was doing this too, and it really just came down to this simple fact, Joe – people think that when they join tech companies out here, that they’re gonna get a meaningful share of that early-stage company equity… And they might be able to win that wonderful lottery that affords them a huge lottery, a huge liquidity event sometime in the future… And somehow that magical moment is going to give them a get-out-of-jail-free pass on all their prior sins financially.

So I finally woke up when I stumbled my way into a real estate tech company about four years ago… And I feel very fortunate to have done that, because a mentor kind of nudged me toward it, not knowing that it would end up being something to motivate me and educate me rapidly to pivot out of this technology career into multifamily, into syndication… Because that software company was very good to me, it was a rapid bootcamp if you will. I became a loan originator, I built a large team of loan originators; we did over 4 billion dollars in loans for fix and flip single-family homes.

We were doing 600 loans per month, so it was super-high volume… But I saw what flipping was, and I didn’t want anything to do with it. It was just a lot of work, the most active of active. So we really started off just passively investing and realizing “Wow, this is working well. This is a wealth strategy”, and over time we were drawn into many of the other appealing parts of multifamily. We’ve now built to the point where it’s not a side hustle anymore. After three years of building it up, it’s now become a thriving, growing business, and I’m just so humbled by the fact that people want to talk to us, want to work with us, and it’s a bless to wake up and talk about this stuff every day, and come on a podcast like this and talk to you, Joe.

Joe Fairless: You’ve said “we” a lot of times. Who’s “we”?

Spencer Hillgoss: We is my wife, my better half, and also business partner, Jennifer Morimoto.

Joe Fairless: Okay. With Jennifer, your business partner – is that your co-founder?

Spencer Hillgoss: She is my co-founder.

Joe Fairless: Okay. What do you all do, in terms of roles and responsibilities?

Spencer Hillgoss: Yeah, as you can imagine, I think that that was a little blurry when we started. I’d like to think that it’s just like building a clean, corporate business plan for a financial year… But it didn’t start that way. It was really a matter of aligning to strength. So if you had to align against core roles, I would say that Jennifer, my wife, is the digital marketing leader–

Joe Fairless: Oh, Jennifer is your wife… Okay, I thought there was two women involved here – a co-founder, Jennifer, plus your wife, someone else. But Jennifer is your wife plus your co-founder.

Spencer Hillgoss: Yes, sir. Yeah, exactly.

Joe Fairless: Okay, sorry. I wasn’t tracking. Okay.

Spencer Hillgoss: No, I explained it poorly. So Jennifer, my better half – she’s also my business partner. She’s a marketer by trade, so she has been doing that actually in the consumer packaged goods (CPG) industry for her whole career, and now she leads digital marketing for a pretty large company. So she does that stuff. She’s very strategic, and that’s her strength.

I bring in operations knowledge, I bring in business development and scaling. That’s really what I’ve done. We kind of carved the lines there, but I will say, we also tend to overlap on some of the analytics, on some of the back-office stuff, on some of the accounting with financial stuff, but we also lean on outsourcing, as one typically should. We use some relationships and partnerships for that stuff, as well.

Joe Fairless: What was the first deal  you all bought?

Spencer Hillgoss: Oh, man… I love talking about this one, because it was before we jumped to true multifamily. We bought a duplex; it’s local in California. It was way too much money for the cashflow it generated, and this was a great learning around how to set better goals… So we bought a $430,000 duplex… Because we live in the Bay Area. For those that are in the Midwest and South – you’re gonna sit there with your jaw on the floor probably, because you’re going “Why the heck would you ever do that?” It’s gonna appreciate, it already has, and we’re thankful for that. It is positive-cash-flowing from day one, but if I could go back–

Joe Fairless: It was positive-cash-flowing day one?

Spencer Hillgoss: It was.

Joe Fairless: How much was it bringing in day one?

Spencer Hillgoss: 250.

Joe Fairless: 250… Dollars.

Spencer Hillgoss: Overall. Yeah, 250 bucks. So it’s an appreciation play, with just enough to cover the monthly. We look back at that as our get on base move, but you’d better believe in hindsight we could have done over again. We hadn’t gotten clarity on the fact that we wanted that passive income, we wanted that cashflow on a monthly basis… So we spent too much of our cash.

Joe Fairless: How much did you invest in that deal?

Spencer Hillgoss: Oh, man… We’re talking probably a little under 100k.

Joe Fairless: Okay. So about 20% to 25% down payment?

Spencer Hillgoss: Yup.

Joe Fairless: Okay. And what’s it worth now though? I’m sure there’s a positive side of that story there.

Spencer Hillgoss: Honestly, I haven’t slowed down enough to go back and price it again.

Joe Fairless: What year did you buy it?

Spencer Hillgoss: I think we got it back in 2016.

Joe Fairless: Oh, alright. Well…

Spencer Hillgoss: It wasn’t that long ago.

Joe Fairless: Alrighty. And is it still making about $250/month?

Spencer Hillgoss: Yeah, it’s one of the steadiest things we have.

Joe Fairless: $250/month on a $100,000 investment.

Spencer Hillgoss: Wooh!

Joe Fairless: [laughs]

Spencer Hillgoss: You feel brilliant after you look at those numbers…

Joe Fairless: What is that, a little over 3% return, I think?

Spencer Hillgoss: Glorious. It’s funny, because in hindsight — there was so much competition for it, too. And you look at the numbers now on how you analyze a very complex larger property, which is where we focus now, and I’m like “That was a function of not truly understanding yet what it means to solve for cashflow, and just targeting a monthly income number.” Once we got that clarity, we went down through the very logical stumbling blocks and path that people tend to go down. We went to the Midwest, we bought some turnkeys… And we did all that and we then realized “Hey, our property manager headaches that we had locally  – which we do have some – just because we buy them out of state with a more established  property manager, that doesn’t mean that they go away.”

We still had to occasionally get on the phone, and we still do now, because we didn’t sell our Midwest turnkeys… We end up still having to pick up the phone for an occasional issue. And I’m like “That is not passive.”

Ultimately now what we wanna do is try to invest as much as we can, both on the active and passive side, and be able to scale our time… Because we have two young kids, my wife still works a full-time W-2 job, so I’m the full-time one on our business… And we have to figure out a balance to still have a full life, and not spend all of our available time just doing stuff that is ticky-tacky administrative stuff for properties. Our big focus now is on multifamily.

Joe Fairless: Do you self-manage that duplex?

Spencer Hillgoss: Nope. We use a property manager.

Joe Fairless: Okay. So duplex, 2016 – that was your first investment. Then what?

Spencer Hillgoss: And then right after that we went out and bought some turnkeys… And I think I was literally sitting there — I think I was in the hospital with my wife, having our second kid, when I was trying to negotiate on one of the loans for these things… Because we did it all in such quick succession. We went out and bought some turnkeys with a local turnkey provider I ended up connecting with, and we were one of their first clients, which was a red flag initially for me… But I was kind of able to backchannel, confirm that they were reputable people, they operated with integrity… And we bought a handful of turnkeys. I think we got them in Kansas City.

Joe Fairless: You think you got them — do you not know what city you bought them in?

Spencer Hillgoss: Kansas City, Joe.

Joe Fairless: [laughs]

Spencer Hillgoss: Kansas City.

Joe Fairless: I was like, “You truly are passive.” [laughs] You’re like “They’re in the Midwest… I’m pretty sure they’re in a state close to Missouri or Kansas… I’m not exactly sure though.”

Spencer Hillgoss: As one of the true to form Californians would say. It’s not California, so… Yeah.

Joe Fairless: [laughs]

Spencer Hillgoss: I’m not that jaded, but… It’s in Kansas City, and we’ve got five turnkeys out there.

Joe Fairless: You’ve got five. In a row, or at one time?

Spencer Hillgoss: In a row.

Joe Fairless: In a row. Wow. Over what period of time did you buy five?

Spencer Hillgoss: Very tight. It was 4-5 months in total.

Joe Fairless: Okay. And how much down per property on average?

Spencer Hillgoss: This was a little bit more digestible than the 430k…

Joe Fairless: Sure.

Spencer Hillgoss: This was a range of 50k-60k total per property.

Joe Fairless: Okay.

Spencer Hillgoss: And we had — let’s see… I think it was something like 15k-17k per property.

Joe Fairless: Oh, 50k-60k all-in price, and then you were putting in about 17k of your own money per property.

Spencer Hillgoss: Yeah, exactly.

Joe Fairless: Okay, alright.

Spencer Hillgoss: Shockingly, we were able to get loans on these things… [laughs]

Joe Fairless: Right, yeah.

Spencer Hillgoss: So we took that opportunity. The rates were still good, so we ended up doing that, and they’re cash-flowing well to this day. They are C class, so when you go C class – you know, it took longer to stabilize for a couple of them. Three of the five stabilized very nicely out the gate; two of them – you just have those headaches of higher vacancy. You get a tenant placement and then something happens, and then you have to get another one in.

Joe Fairless: You live in the Bay Area… This is not the Bay Area, or this is not California, as your people over there would say… Why go with a local turnkey provider who does not have a track record when you have others in that area who have track records, given that you’re not anywhere close to where your homes will be?

Spencer Hillgoss: There’s probably a caveat necessary there. We connected with a locally-managed management team for this turnkey provider that’s based in the Bay Area; they themselves have a very deep track record of a turnkey business and a flipping business across multiple different Midwest and South geographies. So their footprint is actually pretty established. But they had connected and integrated an already established property management company that is based in that geography.

So they basically bought and brought in that established property management, and then they created this turnkey offering because they already had a lot of strength on the rehab front, because they were just such savvy flippers, and they realized there’s a huge opportunity to go and offer these turnkey properties… And they kind of hit it from an angle of offering the right housing to help those in need, and it was improving communities. We are very values-based folks and we care about that stuff. So that resonated with us, in addition to the financial returns, so that’s what drew us to him.

Joe Fairless: Okay. And about how much are you making per property with those five, every month?

Spencer Hillgoss: $250/property.

Joe Fairless: Okay. Alright.

Spencer Hillgoss: [laughs]

Joe Fairless: The numbers are more favorable in that case, yup. It’s about 17.6% return, assuming you’ve got 17k all-in, and you’re making $250. Alright, so 3% on the original duplex. Now you’ve shot up to about 17.5% cash-on-cash on these five… Life is good. You’ve got these five properties, plus the duplex, you learned what you don’t wanna do and what you wanna do… Why did you shift?

Spencer Hillgoss: I think it was primarily speed and time. As an avid listener of your podcast and others, you hear a lot about time compression, and we talk so much about that in goal-setting when I’m coaching other people, too… Because I went into this thinking “I’m gonna ‘retire’ in 15 years or 10 years from my tech career”, because we will have generated enough passive income to be able to do that confidently. We ran those numbers, and I didn’t like the outcome.

The “build a single-family empire” roadmap is one that just takes more time. Some people can go and hit it really hard, but after signing all those individual property docs and loan documents, property by property, you sit there and you just have to ask yourself, “Isn’t there a smarter way to do this?” On the time component, that was the first determinant – “How do we cut this in half, at a minimum?” How do we cut 15 years down to 7,5, or something like that?

So the second one was going to be the time to management, and  I realized we still do have to manage the manager, and we still do have to think about this stuff, and we’d get these emails from our C class property managers and they would say “Hey, just to let you know, we have this other issue coming up, and I was like “I don’t necessarily think that the frequency and the tiny administrative nature of some of these questions would be coming up quite as much.” [unintelligible [00:14:27].28] economies of scale thing when you go up to very large properties… So it was really those two motivators, Joe, in addition to the fact I started to dig deep into the tax benefits of the multifamily side and commercial real estate, and I realized depreciation still exists very much so in residential, but it’s not quite as heavy-hitting as in the multifamily stuff.

Joe Fairless: Okay. So what did you buy next?

Spencer Hillgoss: Next, we actually just started analyzing and looking at and beefing up my ability to go and analyze the multifamily projects. Even before that, the one comment I wanted to make was I signed up for a couple underwriting coaching programs, because I know very well how to analyze deals within residential, but I didn’t have that skillset yet.

Joe Fairless: Which one did you learn the most from?

Spencer Hillgoss: Which coaching program on underwriting?

Joe Fairless: Mm-hm.

Spencer Hillgoss: I think he deserves credit for putting that darn calculator together.

Joe Fairless: That’s why I asked. Yeah, whoever it is, they deserve credit.

Spencer Hillgoss: I think Michael Blank. Michael Blank’s SDA calculator – that thing is worth every penny. It’s a nice template to get in and just quickly get in to grind on deals… And you’re able to pull it up, really get your own criteria that you can set, and then you can get just nerdy. You can get super-nerdy, and go in and start — knowing what you don’t know, and then starting the real learning from there.

So it’s just worth mentioning that, because I don’t think it’s necessarily as — I think the learning from the first property, that duplex, and then the turnkey, really hit home for me. This is not something that I wanna rush on. I’d rather measure twice to cut; actually, maybe measure three or four times figuratively before you go and cut once, when it comes to making investments into multifamily.

Then we started to go and invest passively. One of the first ones — because when we first started, we were not accredited. We were barely, barely not there. Then we became accredited, so we had to go and find deals that were actually gonna meet our status. So we had to be more selective, we had to go and reach out for a bunch of different sponsors, and kind of try to find those deals that would allow us to invest.

Joe Fairless: How did you find sponsors to reach out to?

Spencer Hillgoss: It started just with bigger pockets. Hitting those forums is incredibly helpful. There’s so many people that are willing to give their time and their expertise, and if you just track the people that are adding value on there, usually you can ping them directly with a direct message, and that’s as simple as it is. And you say “Hey, I noticed that you’re adding all this really great education and coaching out here… Do you mind if I ask, do you guys do deals, and who do you accept into your list?” That was it. It was really just reaching out to people and trying to get on as many lists that would accept non-accredited investors as possible, and then being able to look at the deals.

But there was also an element, of course, of fellow students within the coaching programs that I used, and just hitting them up and actually just building a relationship with them, and then having that very organically become something that I feel very open and willing to share. Another person says “Hey, I’m putting this deal together. Do you wanna come invest?” and then taking it from there.

Joe Fairless: Okay. So how many deals do you passively invest in?

Spencer Hillgoss: Now we’ve done ten. So it’s gone to the point where the speed of analyzing them is so much better… Because as soon as you have a framework, like everything else in life… The lesson I got from my technology career was you put together a simple framework and over time  it allows you to move more quickly, whether that’s scaling a team from one person to a team of 50, or if that’s making  a decision about going to invest in a new piece of software for your business… But in this case it’s going to make an investment.

The whole framework that we all talk about all the time, an operator market deal  – that is something that is really abstract at a high-level, but I got really specific with in terms of frameworking that out… So now it just lives in the spreadsheet for me; even 60-70 questions that I have just on the operator. That helps me build confidence that we’re about to go make a good decision with our own capital before we move forward and do that.

I wanted to hone in on that decisioning process, because I think that’s something that a lot of people tend to bypass. It deserved my attention, and I’m so glad that I’ve got the scars from the residential stuff to really truly understand the value of putting that together.

Joe Fairless: 60-70 questions… How many of those are you actually asking the operator versus you’re able to find out through your own research, without having a Q&A session?

Spencer Hillgoss: It’s gotta be realistically probably 5 or 10 questions that you need to ask the operator verbally.

Joe Fairless: What are some of them?

Spencer Hillgoss: I would say the most compelling one that ends up driving the best discussions and the most revealing qualities about the operator’s track record is the thing around failure of response. Just a very new rebranding, but here’s what it means to me… Failure of response to me means — I’ve worked with plenty of entrepreneurs in the technology industry who start companies, and they either win big or they fail and they go down, burning in flames, in a very dramatic way.

In multifamily there’s a lot of new operators that are amazing. They don’t have exits yet, let’s say; maybe they’ve kicked off a bunch of different deals, they haven’t had a five-year exit on their syndications… And you wanna believe in them. You see their deal. So how do you figure out, “Do they have the grit?” So what I ask them is “Walk me through a time that you have failed utterly on a business initiative, or a project, or something that was your core focus professionally. What happened? How did you respond? What were the key stumbling blocks that actually caused you to slow down or stop altogether to fail, and how did you overcome that?” Because what I’m trying to tease out with that type of question is their failure of response. Because if they’re sitting there with my capital, that 50k, then I wanna know they’re holding the wheel of this figurative car. Are they going to get distressed? Are they going to have a steady hand under duress?

It’s just a discussion. And like any other framework, Joe, in life and in business, there’s a set of guidelines. I don’t sit there like “Oh, you hit my checkbox today, therefore we’re going to move forward with the deal.” It’s more a matter of just informing the whole picture and making a risk-informed decision on “Are they gonna have a common sense grit about them?”

Joe Fairless: If you can think back to when you’ve asked that question with the operators that you’ve invested with, tell us about the worst answer that you’ve got to that question.

Spencer Hillgoss: The worst answer is “I can’t think of one.”

Joe Fairless: Okay. You’ve gotten that answer?

Spencer Hillgoss: Yeah I’m paraphrasing, but essentially yes. It’s the answer basically saying “I always hit home runs, and I’m lucky to say that that’s never happened to me.” I just don’t buy that… [laughs] I just don’t buy that, because you get to the point where you’re sitting there in life, and unless you’re like 18 years old, and just out of college, and maybe you’re a prodigy – I don’t know, I can’t think of the right profile of the person or background that could actually say that and back it up… I can’t. Everyone goes through challenge in life, whether that’s personal or professional.

Similar with a job interview. I’ll give a new college grad a chance to tell me a story about a project that they did if they don’t have any job experience to speak to. So in life, if you’re talking to someone who’s over 30 or older, I’m sure they have something they can talk about that’s been hard for them.

I don’t wanna get too personal here, but if I didn’t have an example to speak to, what I would probably bring up on a personal level is the fact that I lost my younger brother to cancer when he was about 15 years old, and I watched my dad’s brokerage fail, and our family had to downsize completely. It was an extraordinarily challenging financial situation for my family, caused originally by the death of the brother. I was departing college when that happened, and I had to somehow figure out how to get in the right headspace to go support myself in the working world.

So people can get however creative they want when they wanna address a question like that, but the point is – you’re still investing with people, and if you’re gonna go put your money into a crowdfunding platform, you’re not necessarily gonna go and have the ability to always ask that question to a human… And that’s also why you can put in a lower minimum. It just depends – how do we, and how do you as an investor want to decide to work with people? What matters to you in building that trust.

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

Spencer Hillgoss: Oh man, I knew I was gonna get that question when I came on here…

Joe Fairless: You said you listen to the show… I ask it pretty much every show.

Spencer Hillgoss: I know, it even has that cool sound right before it.

Joe Fairless: Yeah, yeah.

Spencer Hillgoss: I would say go slow to go fast. And what I mean by that is you should slow down and take as much weekend time as you need to set a clear goal, with specificity. Because taking action is critical, but don’t take stupid action. Stupid action just means you’re aiming at something and you haven’t even set the goal yet. So go slow to go fast is the best advice I can give you.

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

Spencer Hillgoss: Yeah, hit me.

Joe Fairless: Alright. First, a quick word from our Best Ever partners.

Break: [00:22:54].17] to [00:23:20].27]

Joe Fairless: What deal have you lost money on?

Spencer Hillgoss: Well, I would say that first one. It was the 430k duplex wonder.

Joe Fairless: Have you lost money on that?

Spencer Hillgoss: In the short-term, right? Because you’re basically cash out of pocket. So it’s the closest thing that I can come to to losing money on a deal.

Joe Fairless: Best ever deal you’ve done?

Spencer Hillgoss: Oh, boy… I would say two deals ago. It was actually a co-sponsorship deal that we did, and we ended up growing rapidly in our group. It was a large apartment community and we were able to help dozens and dozens of people, more than we’d ever helped before, to get into that [unintelligible [00:23:47].27] and we were really proud of that.

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

Spencer Hillgoss: Right now, my absolute favorite is just coaching on a pro bono basis on a weekly basis. We also give charitably financially, but I would say that the most fulfilling one is just coaching and mentoring people, because it’s something I’ve done for most of my corporate career, and it’s something that I get pinged often on these days. I don’t have a formal coaching program, but coaching people on a weekly basis is very fulfilling for me and I love doing it.

Joe Fairless: Best ever resource you use?

Spencer Hillgoss: I would have to say — this is pretty self-serving, but I would say your book, Joe. I promise I wasn’t paid by Joe to say this. Joe’s syndication book was one that I read cover to cover. When I first got into this stuff, I read two dozen different books, and Joe’s book basically combined six or seven different books of value into one, so… You’ve gotta give credit to Joe for writing that great book.

Joe Fairless: Glad to hear that. And what’s the best place the Best Ever listeners can get in touch with you?

Spencer Hillgoss: Just through our website, MadisonInvesting.com. They can also reach out to me, spencer@madisoninvesting.co.

Joe Fairless: Thank you so much for talking to us about how you’ve gotten to this point, your thought process, lessons learned on that initial duplex, then you’ve got those five turnkey properties, and then you and your wife made the decision to focus on larger deals, and you talked about why, from cutting the goal in half timeframe, to just time management, dealing with the properties and then tax benefits.

And then I really liked — on the first one, one of the lessons that you mentioned is target a monthly income number prior to putting money into a property, because then that will influence what type of property that you purchase… It’s just about being intentional.

Then I loved the question about the failure response that you mentioned, “Walk me through a time where you have failed utterly. What happened, how did you respond?” If people can’t own up to their mistakes in the past, then they’re certainly not gonna own up to mistakes – well, most likely they won’t own up to mistakes in the future. No absolutes, I guess, but most likely. So it’s a good indication.

Thanks for sharing your insights. I hope you have a best ever day, and we’ll talk to you again soon.

Spencer Hillgoss: Thank you, Joe. It’s been a pleasure.

JF1984: From the Military to Multifamily with Phil Capron

Listen to the Episode Below (0:22:51)
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Phil Capron went from running special ops missions with the Navy to purchasing his first property in 2010. His new book shows veterans and active duty personnel how, with a few strategic decisions early on in their career, they can acquire and manage enough real estate to separate from the military after a full career as a net-worth millionaire and, ideally, have a cash flow that would replace their active duty income. In this episode, Phil discusses how he conducts his multifamily missions with host Theo Hicks.

Phil Capron Real Estate Background:

  •     Purchased first property in 2010 while in Navy in Norfolk, VA
  •     Got real estate license, flipped homes, bought and held SFRs, got into MF a few years ago
  •     244 MF units
  •     Senior Mentor with Michael Blank
  •     Book: Your VA Loan and How it Can Make You a Millionaire
  •     Based out of: NYC
  •     Say hi www.philcapron.com

 

Best Ever Tweet:

“I’m not concerned about why something isn’t going to work, I’m concerned with how can we make it happen? How can we overcome this obstacle? And if you approach this business with that mindset, I believe you’re a lot more likely to succeed.” – Phil Capron

 

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

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

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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 Phil Capron. Phil, how are you doing today?

Phil Capron: Theo, I’m doing amazing. Thank you so much for having me.

Theo Hicks: Absolutely, thanks for joining us. Looking forward to our conversation. Phil’s background is that he purchased his first property back in 2010, while in the Navy. At that point he also got his real estate license, and then flipped some homes and bought and held some single-family homes. Then a few years ago he transitioned into multifamily.

He currently has a portfolio of 244 multifamily units. He’s also a senior mentor with the Michael Blank program. He has a book coming out, or it might be out once this episode airs, and that is “Your VA Loan and How It Can Make You a Millionaire.” Phil is based out of New York City, and you can say hi to him at PhilCapron.com.

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

Phil Capron: Yeah, for sure, Theo. Thanks. So that’s pretty much; I’ve just gotten out of special ops selection to become a Naval Special Warfare Combatant-Craft Crewman. It’s a lot of words basically for the guys that take Navy SEALs to and from their maritime missions on small, fast boats. We jump out of planes, shoot big guns, do some other pretty cool stuff.

I’ve just moved from Coronado, California to Virginia Beach, Virginia, and rented an apartment with a  couple of my buddies from my class… And I’d always instinctively known that there was something to this real estate thing. In 2010, looking back, obviously that was a pretty good time to buy… So I had to decide whether I got the two-bedroom/one-bath on the beach or close to, for what was my budget (about a quarter million), or whether I went into the city of Norfolk, which is slightly less desirable schools, and it just doesn’t have that Virginia Beach zip code, and get a four-bedroom/3,5-bath for the same price. So I chose that route, I moved my couple of roommates from my apartment in, as well as one other guy… They paid my entire mortgage while I lived there, and all my utilities… So of course, I reinvested all the money I saved into real estate. Just kidding. No, I didn’t. I wasted it on really dumb stuff.

The book that just came out, “Your VA Loan and How It Can Make You a Millionaire” shows veterans and active-duty personnel how with a few strategic decisions early on in their career they can acquire and manage enough real estate just with that program to separate from the military after a full career as a net worth millionaire, and ideally have a cashflow that would replace their active-duty income. So when they get out, they’re not forced to take a job that maybe doesn’t agree with them. They’ve spent a lot of time away from friends and family serving a country, and I believe that they have more to give; I want them to be financially free, so they can do things like coach little league, volunteer in their church, run for office, or even just chase a little white ball around or take their significant other on a cruise around the Mediterranean. I believe they’ve given enough, and via the VA loan I think that financial freedom truly is possible for these American heroes… And that’s what the book is about.

From there, as soon as I separated from the military, I started selling my buddies homes, and also listing them when it was time for them to transfer. I saw a lot of really bad advice was being dispensed. The saying that I have is “All men are created equal. All real estate agents are not.” So buying your first home is your largest financial decision to that point in your life; you’ve gotta make sure that you’re doing it right. It’s not like buying a car, or buying a jet ski, or something. There’s real consequences associated with it. And as many folks as I can get to understand how powerful of a vehicle it is, the better. So that’s my mission.

I sold a lot of homes, I got into flipping, did a few dozen flips over a handful of years, and actually locked in my first multifamily purchase. It was a 13-unit. I took one of my buddies who’s also a veteran and had about 30 units at the time; I took him to this property, listed around 900k, thinking this would be great, I’d get a 27k commission if I could get him to buy it.

They couldn’t make a deal, but then the other broker approached me and said “Well, if it was seller-financed, would you buy it? I said, “Well, I guess I’ve never considered that.” Long story short, I ended up buying it for 900k, 100k down, and negotiated seller financing for 30 years; a 30-year amortization and 30-year term, at 6%, without so much as a credit check, which is a pretty good result, in my opinion. Also, the first six months no principal payment. So the full  mortgage payment is just under $5,000; my payment the first six months was just over $800. So that enabled me to cash-flow just under $45,000 the first seven months.

It’s been some important lessons learned with that little property. It’s actually pretty difficult to manage, and I might consider selling it soon… But without it, I wouldn’t have acquired a little over 200 additional units in the last few years, so I’m very thankful for it. That kind of brings me to  present day, where I’m helping people get into multifamily, with Michael Blank and his program… And raising money and doing deals. I’ve been talking for a really long time, Theo… I’m gonna be quiet now. That’s everything.

Theo Hicks: [laughs] Thanks for sharing that. So for that 13-unit, with 100k down, how did you fund that? Was that your own money, or did you raise that capital?

Phil Capron: That’s a fun story in itself. I had a buddy who — we did a lot of flips together. He’s a military guy from the special ops. We went to class together… And I said “Hey buddy, here’s how this is gonna work – 50/50.” Two weeks before closing he said “You know what, I’m not comfortable with this, because my money is gonna be tied up for too long. I’m out.” So I now have to approach the seller and say “Hey, I actually don’t have the money anymore.” So he said “What CAN you do, young fella?” Because this guy was basically looking at the seller financing as retirement, and generational wealth for his kids. I had about 25k in the bank, or something like that, and I’m supposed to say something less than that, obviously; just simple math. But I got nervous, and I said “I could do 40k.” And he stuck out his hand and he said “Okay, let’s close in ten days, as planned.” I go, “Oh, no… Now I need at minimum 15k.” So I went on the hunt to other friends that we’d done real estate deals with in the past, ended up raising 35k, and I figured “Well, if I’m raising money, I might as well raise money.”

I closed on that transaction with $5,074 and one cent of my own money, which was pretty cool, being that we brought in 45k the first seven months. The ROI on that is solid. I don’t know how to compute it exactly, but it’s pretty good. So he gave me a second for 60k and a year to pay it back. So I did that at the end of year one, and now it’s not a killer-killer deal – it cash-flows about $1,500/month – but it’s extremely highly leveraged. And like I said, the law of the first deal, as Michael Blank likes to say; it got me into all these other deals because it’s a proof of concept.

Theo Hicks: Exactly.

Phil Capron: The rents start rolling in and I’m like “They were right! It just keeps coming. This is great!”

Theo Hicks: What about your second deal? Let’s talk about that.

Phil Capron: Okay. My second deal, a 108-unit portfolio, North of Virginia, six buildings. I’d learned a little bit on the first one, but still largely didn’t know what I was doing… But I was fortunate to surround myself with really strong partners. A commercial real estate broker with 30 years experience, one of the biggest residential brokers around, who owns a property management company… And then a classic contractor, the gentleman who I took to the original 13-plex to try to sell it to him to manage the construction. So we all put in an even amount of money, and took that down for what ended up being one of the lowest price-per-door sales of a stabilized transaction in the MSA’s recent history since maybe 2009, or something.

The great thing about it was that when the appraisal came in, it came in 1,55 million dollars higher than our purchase price, and the as-completed appraisal -because we did do about 500k in cap ex – was about 3 million dollars higher. So you could say that was kind of a grand slam.

From there I went on and picked up an 82-unit with a bunch of partners, and then I’ve picked up a couple 20-plexes since.

Theo Hicks: So it sounds like your ability to scale from a 13 to a 108-unit was because of your team, because you said you still really didn’t know what you were doing… But you found a really solid broker, a management company, and a contractor. Do you mind walking us through how you were able to find them, but more importantly, how you were able to convince them to come on your team with only having done one deal before?

Phil Capron: For sure. I like to bring things back to military analogies, because they make sense to me, and because I believe there’s a lot of value in there. When you’re conducting a mission, you need to understand what assets you need to execute the mission, and a multifamily deal is no different. In your Syndication School – guys, if you haven’t checked that out, definitely check that out. Fantastic information. You need obviously some cash to close, right? We needed about 1.3 million dollars. That’s one box we definitely needed to check.

Then the next box is with the loan, the first mortgage, we need a net worth that’s greater than what we’re seeking as a loan. That’s another box. We need somebody to manage, we need somebody to swing the hammer, because some of these units legitimately did need work.

And then, we needed somebody with the experience to keep the project on track and to anticipate problems before they happen, and to help us find the best solutions when they inevitably do happen. So my first priority was money and net worth. I achieved that with one partner.

Then the next partner was the construction piece. Then the next partner had the property management arm, instead of just a third-party, which – obviously, when you have a great property manager that’s  a third-party and you manage them, it can work out. But I’d much rather create that alignment of interest that they wanna see my project succeed as much as I do.

So once I had all those boxes checked and we negotiated terms within the partnership, away we went. I make it sound simple there; it wasn’t, to actually put it all together… But if you’re considering your first or next deal, I invite you to write it out – what do I need? Who do I need? What do I need them to do? Where do I fit in? What value am I bringing and what’s that worth to the marketplace? That’s the key to this whole business.

Theo Hicks: Okay, thanks for breaking that down. That’s really good analogy. I’m sure a lot of your skillset acquired from the military make you a fantastic investor, just by listening to you break that down like that.

So you said that the first piece was the money and the net worth, and that was one person. Who was that? Was it somebody you knew? Was it somebody you had to find?

Phil Capron: It was somebody I knew, and we were actually flipping houses at the time, so that was pretty easy, so to speak… And then I approached actually the contractor next, and he told me no. He’s like, “Phil, I love you, but do you really think that we have it to do this?” I said “Yeah, I do. This is a screaming deal. Deal of the century. Let’s do this.” He’s like “Well, I don’t know. The way you frame it looks pretty good, but I just don’t know.”

So then when I brought in the commercial broker, who also was gonna provide some net worth and that experience piece that we really needed, a little bit of guidance, I had my contractor come and walk him through our plan and improve my (at the time) planned improvements. It went really well, and afterwards I said “Hey guys, let’s go to lunch. I’ll treat you the lunch. I appreciate your time.” And the commercial broker said “Phil, I hope I’m not speaking out of turn here… This is a great deal, you’ve got a great deal, but the only way I’d be comfortable with it is if this gentleman (your contractor) is on the team, doing the work as an owner, not as an employee. And I said “Well, no offence, I invited him first and he told me no.” Then the contractor said, “Well, Phil, if he’s in, I’m in if you’ll have me.” And I said, “Alright, cool. We’ve got a deal. Let’s do it.”

Theo Hicks: So it sounds like you knew the first guy, the money/net worth, you knew the construction person… Did you know this commercial broker as well?

Phil Capron: It was a referral from my accountant. So I knew of him, and we got to know one another, and then I invited him down… Just actually more for counsel than necessarily as a partner, but it ended up unfolding perfectly. So did I get a little lucky? Sure. But luck happens a lot more often when you’re doing the kind of problem-solving that I described and you’re finding solutions.

Theo Hicks: Exactly.

Phil Capron: So many people, even students of mine, they’re like “Oh, I can’t buy this. The cap rate’s wrong.” Okay, why is the cap rate wrong? When we were going through the financials in-depth on another deal, the 82-unit, I found a discrepancy in the water. Two years prior it was 50k a year, then it jumped to 75k. So I asked the person, “What’s up with this?” This is pre-LOI even. “Can you figure out what the deal is?” And he said “Oh, they just sent the water company out and the meter was broken on the city side and just spinning, to the tune of $25,000/year.” At an 8 cap, what is that? It’s a lot more. So everyone else is lazy underwriting, didn’t catch that. We caught it, got to the bottom of the problem, had it fixed, and it enabled me to save several hundred thousand dollars on that particular transaction.

So I’m not concerned about why something isn’t gonna work, or why we can’t do it, I’m concerned with how can we make something happen? How can we overcome this obstacle or this problem? And if you approach this business with that mindset, I believe you’re a lot more likely to succeed. If you’re looking for obstacles, or even if you’re not, they’re gonna occur… But if you tackle them head-on with “How do we overcome this? I’m not accepting defeat.”

There’s actually another story on that point, with the 82-unit, if we have time… It’s kind of funny, but… Sorry, I’ll let you get back to it there, as I think I’ve tangented a bit.

Theo Hicks: I was gonna jump into the money question, which we maybe might have just been over, but… What is your best real estate investing advice ever?

Phil Capron: My best real estate investing advice ever is on that same kind of thread, or in that same vein… You have to not be willing to accept what is, you have to be able to think of what can be, and work to make it so. A lot of folks these days – again, if you’re playing in the big multifamily space, deals are really hard to come by, guys. Kind of like the special ops, we do missions that other units are incapable of doing, they don’t have the tactics, the training, the equipment, whatever… The personnel, most importantly. I look at a lot of the big operators and whatever their criteria is, mine is gonna be about the opposite, because I’m willing to do work that others in the marketplace aren’t willing to do, so I have access to deals that they don’t have access to.

So my advice would be if you are observing that it’s tough out there right now, what can you do different to basically create a little niche for yourself?

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

Phil Capron: Absolutely.

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

Break: [00:17:32].22] to [00:18:10].18]

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

Phil Capron: Best ever book I’ve recently read was a re-read, and it was The Millionaire Real Estate Investor, by Gary Keller. If you’re just getting started, it’s a fantastic overview of what it is to invest in real estate.

Theo Hicks: What deal did you lose the most money on?

Phil Capron: It was a combination of deals. I had five flips going at the same time, everything was going great, with a new contractor… So I was out in California, surfing with buddies, in Vegas, hanging out… They asked for money, I sent it; more money, we sent it, sent it… Eventually, I got back home and found out that really no work was done on any projects, and that cost me tens of thousands of dollars, by taking my eyes off the prize and not verifying. I certainly trusted, but I did not verify that everything was continuing to go well, even though the past projects had.

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

Phil Capron: The best ever way I like to give back – I actually have  a  charity called See Them Soar. I’m embarrassed to admit that we haven’t done an event in over a year, but our mission is to enrich the lives of cancer patients and their families by providing an opportunity to go indoor/outdoor skydiving at no cost to them. After the military [unintelligible [00:19:20].29] indoor skydiving center. As an instructor – I’m still an avid skydiver – I had the opportunity to take some cancer patients flying… And it’s a total transformation. It’s a vacation from everything they’re dealing with – their friends, their families are there… It’s an amazing experience. So I need to get back engaged and get some more events booked, because it’s very fulfilling to do those types of things.

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

Phil Capron: The best ever place to reach me – probably Facebook, embarrassingly enough. Phil Capron is my name. You can also go to PhilCapron.com. Hopefully, by the time this is out, your VA Loan and How It Can Make You a Millionaire is out, and doing stuff with that… So yeah, Facebook or the website. Just be patient with me. I’m kind of a one-man-band at this point. But I will get back to you if you reach out though.

Theo Hicks: Perfect. Well, Phil, I really appreciate you coming on the show today and sharing your experience, your advice… Just a few things that stood out to me – you talked about how you lucked into your first multifamily purchase. You were actually visiting a friend who couldn’t bring it on deal, and the broker offered seller financing. As you mentioned, your mindset is to not be willing to accept what is, and you took advantage of an opportunity to get into multifamily.

You mentioned you had some issues along the way, someone pulling out the funding last-second, but you were able to close on that deal. You might consider selling it, but as you mentioned, it’s the key that opened the door to multifamily for you.

We also talked about your second deal, the deal of the century, as you said, or at least the deal of the decade, because of the lowest price per door in the MSA’s recent history, and how it appraised for over a million dollars above the purchase price and three million dollars above the all-in price.

We talked about how you built your team, and you succinctly broke down exactly how you need to approach any type of project in life, which is to figure out exactly what needs to be done, and then where you fit into that, and then write out a list of all the people you need, and then prioritize them based on what you need most, and then work  your way down that list, and we went over that. The cash to close, you needed the net worth for the loan, you needed a management company, a contractor, someone with experience, so we broke down exactly how you did that.

And then lastly, your Best Ever advice, which I’ve kind of hit on already, which was you have to not be willing to accept what is, and think about what can be, and work to make it so. Then you kind of gave an example of you were looking at a deal where the water was really high, and you found out it was because it was a broken meter, which saved you a ton of money on the acquisition, as well as ongoing expenses.

Then you also mentioned that another way to approach this is to have criteria that’s the complete opposite of what everyone else is doing, and pursue opportunities that people are ignoring.

Again, really solid advice, very applicable, especially in today’s hot market. Best Ever listeners, thank you for stopping by. Have a  best ever day, and we’ll talk to you soon.

JF1968: What Is A Fair Commission For An Apartment Broker? Syndication School with Theo Hicks

Listen to the Episode Below (00:15:39)
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When you buy an apartment community, you’ll be paying your broker a hefty commission too. So what is a fair commission? Theo will cover how you can find that out, as well as some other ideas for getting the broker on your side. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Those are 4 ways to get the broker on your side”

 

Referenced episode with apartment broker Thomas Furlow:

https://joefairless.com/podcast/jf1353-win-over-apartment-broker-from-an-apartment-broker-with-thomas-t-furlow/

 


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

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

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


TRANSCRIPTION

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

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

 

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

Welcome to 2020. This is the first syndication school of the new year. So we will be continuing to do these syndication schools into 2020 for the foreseeable future. And we will continue to air the two syndication episodes every week that will focus on a specific aspect of the apartment syndication investment strategy. And we will also continue to offer the free documents that we’ve been offering for the majority of these episodes and series. All of the previous episodes, series and documents can be found at syndicationschool.com.

This episode is entitled, “What Is A Fair Commission To Pay An Apartment Broker?” I interviewed someone on 1813, Episode 1813. And we talked about different ways that an apartment syndicator can win over an experienced broker.

I’m pretty sure I did a syndication school episode on that, but I recommend listening to the conversation on that episode 1813 with Thomas T. Furlow, because we go into a lot more detail, plus it’s a lot better to hear from him, since he’s the one that’s actually telling you, “I’m an experienced broker and here’s what I look for when someone wants to work with me.” And this particularly is applied to syndicators who don’t necessarily have a high level of experience, or do not have a team with a high level of experience… Because as we all know, brokers care the most about closing, because that’s how they make their money, and therefore their main goal is to close on the deal. So if they’re listing a deal, whether it’s on market or they haven’t a pocket listing, they’re going to send that to people they know are going to close.

In that conversation, we talked about different ways that someone who has a little bit less experience, maybe even hasn’t done a single syndication yet, what they can do to position themselves as a person who is credible, and can position themselves as someone who’s able to close in the eyes of the broker.

And the four ways that we discussed was one, a consulting fee, so pay them a consulting fee for their time. When you’re asking all the questions and stuff, rather than just ask for that information for free, offer to pay them a few hundred bucks an hour for their time.

Number two was to visit their recent sales. So ask them for a list of their ten, five, whatever, most recent sales, and then go and visit those properties. Then tell the broker how those properties compare to the type the properties that you’re looking for, and then ask any follow up questions that you might have, just to give them an idea of what you’re looking for, but also show that you are putting forth the initiative. And again, all these things are to display your credibility to close.

Number three is to explain to them exactly how you plan on funding your deals. So how much money you have verbally committed, what types of financing are you pre-qualified for, things like that. And then number four is general, constant follow up. So whenever you perform any sort of task that brings you one step closer to putting a deal, let this experienced broker know, “Hey, I met with XYZ lender, and I told him about my business plan, and they told me that I can qualify for $10 million in financing,” for example.

So those were four ways– again, I kind of brushed over those quickly because we’ve talked about these before on Syndication School, and you can go listen to the 1813 episode where I talked to Mr. Furlow about those.

Now, the reason why I talked about those is because we have a fifth thing to add to this list now, and it has to do with the commission. So if you’ve read the Apartment Syndication Book that we released – I think it might be in 2018, so technically two years ago; it was less than that, more like a year ago, but since we’re in 2020, and it was 2018… Anyways, one of the sections talks about why it can be advantageous to buy and deal off market and not going through a broker in this, because of the cost to pay the broker. And you are able to avoid that cost by purchasing a deal that is off market, directly from the owner.

We had a few conversation with brokers just to get an idea of how much money can be saved by buying a deal off market, and we were told that one common structure would be a percentage of the purchase price up to a certain threshold, and above that threshold it’s a flat fee. Obviously, if you’re dealing with an $8 million property as opposed to a $100 million property, it’s really not that much more work on the broker’s side, but it’s over 10 times the commission. So in the book, we said that a common structure would be 3% to 4% of the purchase price up to $8 million, and then once you hit that $8 million mark and above it’s going to be a flat fee of say $150,000.

Now, one thing that structure is missing is alignment of interest, and we talk about alignment of interest all the time on this show, on the Joe Fairless content in general. So the fifth way to win over a broker is to offer a commission structure that is promoting alignment of interests, and is going to be beneficial to both you selling the property — this is actually on the sales end. So you benefit from the structure and they also have a way to make more money by getting you a better price.

This actually came from one of our consulting clients who has a property for sale for $42 million, and the broker is asking for a commission of 0.8%. So we’re above his $8 million threshold, and it’s actually not a flat fee, it is going to be a much smaller percentage of the fee compared to that 3% to 4% range. And so the client wanted to know, number one, is this fair to me and to the broker; two, “Should we cap that commission at a certain number?” thinking along the lines of our book; and then three, “Should there be any additional bonus structure?”

So right off the bat, you hear 0.8% and it may sound amazing, because you’re used to paying 3%, 4% for your traditional SFRs, your traditional duplexes, quadplexes, and even $8 million and below paying 3% to 4%. So 0.8% sounds great, but again, when we’re dealing with tens of millions of dollars, the approach is different. In one case it could just be a flat fee, but the way to create alignment of interest is to do it a different way.

One way to incentivize brokers to push for a higher price, but to also create realistic expectation is to negotiate a commission percentage that is less than the market commission rate. So in this case, something slightly below 0.8%, like 0.65%. And then base that off of whatever they believe the purchase price is going to be. So if the purchase price is going to be $42 million, that’s what the broker is telling you and that’s what the market is telling you, then you can set this lower commission for the $42 million number and then say anything above that you’ll get a commission that is significantly higher, say 5%. This way, if the broker is able to hit expectations, they’re still getting a fair commission, but they are incentivized to actually go above and beyond that purchase price and grind for the extra $100,000, $200,000, a million dollars because they get a larger chunk of that as a commission.

So in other words, you offer them something that would be slightly below market up to the purchase price, and then anything above that strike price would be offered an additional larger commission structure.

Using this $42 million deal as an example, if the deal were to sell for $44 million, and it was negotiated as, “Okay, the market commission rate is between 0.75% and 0.8%, so I’m going to give you 0.65% up to $42 million. Then anything above $42 million, you’ll take a cut of 5% of that.” So if the deal were to sell for $44 million, then their commission would be the $273,000 from the first $42 million, which is 0.8% of the $42 million, plus an additional $100,000, because of the $2 million above the strike price. And that $100,000 is coming from 5% of $2 million. So in this case, the total commission would be $373,000.

Now, if you were to just do the basic market commission of, say 0.75%, and you were to sell a deal for $44 million, then the broker would actually make $330,000, so about $40,000 less than what they would have made with this competitive structure, even though the initial commission percentage was lower than what they would have gotten if they wouldn’t have that bonus.

So to answer the question about “Is it fair? Should you offer something additional? Should you cap it?”, the compensation structure that is most advantageous isn’t one that’s just a commission up to a certain number and then a flat fee after that, because if that’s the case, what’s the point of selling the deal for, in this case, $44 million? Because it doesn’t matter to them. I mean, yeah, they’ll make slightly more money, because it is percentage based… It is actually probably the worst if it’s a flat fee, because then it doesn’t matter at all. Whereas if they are able to sell for $2 million more, they’re only going to get 0.0065% of that. Whereas if they are given a compensation structure that incentivizes them to get a larger percentage of the moneys above the strike price, the purchase price, the market rate, whatever, they’re more likely to push for that higher number.

So the best way to win over a broker is to offer them some competitive compensation structure. So rather than just offering them a basic compensation structure of a percentage or a flat fee over a certain threshold, offer them a slightly lower percentage up to a certain number, and then offer them a significantly higher percentage commission above that strike price.

So again, now we’ve got five ways to win over an experienced broker. And obviously, you benefit from this by selling your deal for a higher price, which – in turn, your investors benefit by making more money on the back-end, your brokers benefit because they’re also making more money, and it’s just a win-win all around and that’s what alignment of interests are. I win, you win, everyone wins, as opposed to one party winning and the other one not necessarily winning. Because if that’s the case, then sure, they might be a good person who’s going to put forth that effort, but they’re not incentivized to put forth that extra effort.

In summary, the fifth way to win over an experienced commercial real estate broker is to offer them fair compensation.  What’s fair compensation? A structure that incentivizes them, that promotes alignment of interests and allows them to take a larger cut of the purchase price above a certain threshold, in this case, the strike price, whatever the list price is going to be.

Again, I recommend listening to the episode 1813 with Mr. Furlow, where we talk about the four ways, and then now you’ve got the fifth way. And we’ve also got a blog post if you’re a reader – Four Ways To Win Over An Experienced Apartment Broker, that is also available on the website. So just google “win broker” actually and then it’ll be one of the first things that come up, and you’ll find the blog post as well as the conversation I had with Mr. Furlow.

That concludes this episode. Until next time, make sure you check out some of our other Syndication School series about the How-to’s of apartment syndication. Make sure you download the free documents we have available. Those are, of course, available at syndicationschool.com.

Thanks for listening and I’ll talk to you tomorrow.

JF1960: Starting A Real Estate Investing Business & Growing To 245 Units with Collin Schwartz

Like so many investors before him, Collin caught the real estate bug from reading Rich Dad Poor Dad. He started looking for deals while still working full time, eventually leaving the job to be a real estate investor full time. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“If you’re not constantly learning, you’ll soften a little bit” – Collin Schwartz

 

Collin Schwartz Real Estate Background:

  • Real estate investor who began investing in 2017
  • Currently owns 245 rental units (with another 70 units under contract)
  • Based in Omaha, NE
  • Say hi to him at 402-204-5552 – collinschwartz1ATgmail.com
  • Best Ever Book: Shoe Dog

 


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TRANSCRIPTION

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

Collin Schwartz: Doing awesome, Joe. Doing awesome.

Joe Fairless: I’m glad to hear that. A little bit about Collin – he’s a real estate investor who began investing in 2017, currently owns 245 rental units, with another 70 under contract. Based in Omaha, Nebraska. With that being said, Collin, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Collin Schwartz: Yeah. I kind of moved all over as  a kid… In 2007 I decided to move up to Nebraska, start working on my MBA. I was working at a grocery chain for about six years [unintelligible [00:02:03].17] Left there to pursue the corporate world, more of the 9-to-5 gig, got married at the time, was gonna start a family… I started working there; it was in insurance, I was in marketing, and then I started doing some IT work. I really found that I was enjoying or thought I had made it with the 9-to-5 gig, good paycheck, but was being left very unsatisfied and unfulfilled…

So as many other investors out there, I read Rich Dad, Poor Dad. That was January 1st, 2017. I knew I had to make a change, so right from then, I basically started networking, got on Bigger Pockets, started listening to your podcast, started listening to everything I could, read every book I could… And then April 24th I closed on my first threeplex with a partner.

Joe Fairless: April 24th of 2017?

Collin Schwartz: Of 2017, that’s correct. So about four months later I was able to close on it. It was a pocket listing. I actually met the agent through Bigger Pockets, he reached out to me… So it was a good start. I was in a good location. It needed some rehab, the rents were way under market. So I went through, did that rehab… At the same time, I was having trouble finding leads, I think as a lot of new investors do. Brokers don’t give you a lot of respect in the front-end, and maybe rightfully so, until you kind of prove yourself.

Joe Fairless: Sure.

Collin Schwartz: So I started sending a bunch of letters I handwrote. I think it was 191 letters. I got the list from ListSource, I filtered it down to multifamily owners that had owned their property for — I believe it was over five years… And I wrote a simple letter, sent those out. I got six deals out of that…

Joe Fairless: Huh! [laughs]

Collin Schwartz: Yeah, it was a great return on my investment. It was kind of funny, because I was still working at my full-time job then… So I would be having to leave meetings, taking phone calls, and figuring out how to negotiate… A whole new realm for me. But that actually worked out really well.

Fast-forward, I have continued buying… As you stated, I have 245 rental units. Over about 20 properties we started purchasing bigger units. One of our last ones was 87 rental units; the two that we have under contract are 48 and 23-units. I self-manage about half of those properties, a little more than half of those units, kind of trying to find the right balance as we’re growing the team, and what we can keep up with, as most of these properties need a lot of repositioning, a lot of remodeling… And now I’m just kind of looking forward to continuing to purchase more and more, and meet with other investors.

About 15 months ago I started a meetup group, and that’s been great. We have about 500 members with regular attendance of about 100 people every month.

Joe Fairless: The 101 letters that you handwrote, you got six deals from it… What were the terms of those deals?

Collin Schwartz: They were kind of all over the place. One of them basically I got a referral fee of $2,000 for passing it on. Another one was a sevenplex, and it was just me direct with the owner. I purchased it for 369k. It was a seven-unit. Rents at the time were, I think, 4,200. I went through quite a decent repositioning process. Purchased it through bank financing, I should say that. And then within – I think it was 8-9 months, we were able to refinance out of it and got it valued at 525k. So it was kind of all over the place. Almost all of them I purchased with a partner. There was one duplex I did purchase by myself.

What’s kind of funny – those six deals that I got, I’ve also gotten recommendations from those sellers, for other properties… So I’ve been able to purchase neighboring properties based on the previous landowner telling the other landowners that I actually purchased their units… So I was really looking at going in and raising the rents, and using bank financing for the 80%. For my 20% I was using a home equity line of credit.

Joe Fairless: Okay. You live in Omaha… Are these properties in Omaha?

Collin Schwartz: Yeah, everything’s in Omaha, especially when I first started. Now I have two little kids, but at the time when I started I just had one… I also help with another business as well, plus at my full-time job… And I also realized right away that if I was going to effectively do it, especially on these smaller-scale properties, I was gonna need to self-manage… So I chose things that were near my workplace. It happens to be kind of a downtown area, that’s gentrifying, expanding, going through a lot of improvements, so it was a good area to look… But there’s still a lot of tired landlords around, so everything that I started buying was in basically one-hour walking distance from my work. So if I needed to go meet a contractor over lunch, I’d hop in my car and basically run on over there and get it taken care of.

So I knew that at first if I was getting a call, I needed to go handle a situation that was two hours away from me, I was gonna get burnt out really quickly.

Joe Fairless: Sure. Did that initial list focus on that highly-targeted area?

Collin Schwartz: Yes, it was two ZIP codes that I put in there. I was around my work, and basically another ZIP code that followed the line of the Interstate, which I would have to drive back anyways to and from work, so… I kind of made it in the convenience manner, but also an area that I saw a lot of growth potential as well. It wasn’t just for that convenience.

Joe Fairless: Okay. And you said the first deal – I heard you say that it was a triplex and you did it with a partner. Is that correct?

Collin Schwartz: That is correct.

Joe Fairless: Okay. And who is this partner?

Collin Schwartz: Steven Sykes.

Joe Fairless: And how do you know Steven?

Collin Schwartz: This is kind of funny… I was sitting there with my wife – this was January/February 2017 – just saying “Who do you know that knows something about real estate?” Well, she’s like “Hey, talk to my cousin’s fiancée.” He was an attorney, he recommended me to another agent, and another agent recommended me to Steve. He had about 50 rental units under management and ownership at the time, so we just started really hitting it off; we had multiple conversations, we started talking about our goals, what we were looking for… I found this property, brought it to him and said “Hey, will you walk through this with me? What do you think?” We got along really well, so we decided to partner on it.

He had the experience, he knew some contractors… And it was absolutely paramount, because when I walked through the property, I just looked at the current rents, saw things that I had no idea what to do with, and “I don’t think this makes sense.” And lo and behold, it did. It appraised at the time of purchase for about 50k or 60k more than–

Joe Fairless: Oh, awesome.

Collin Schwartz: Yeah, and that was just that initial purchase, before we even did anything to the property.

Joe Fairless: That’s great. So he clearly brought the more seasoned experience. I imagine you brought the cash?

Collin Schwartz: We actually both brought cash to that deal, so we were 50/50 on the cash.

Joe Fairless: 50/50 on cash, okay.

Collin Schwartz: Yup. And I did the management for the property.

Joe Fairless: With all your years of expertise managing properties…

Collin Schwartz: Exactly, exactly.

Joe Fairless: [laughs]

Collin Schwartz: At first I had no plan on managing. I’d read everything about passive income, this and that… That was my goal, and he said “It’s probably gonna be good for you. If in three months you don’t like it or you don’t see it’s valuable, I’ll take it over and manage it.” Well, I ended up really liking it, which is not of the norm…

Joe Fairless: What do you like about it?

Collin Schwartz: Something’s different every day, it’s challenging. I’m also somewhat of a control freak, so having that control, being able to fill vacancies a lot quicker, being able to be more effective on the turns… Actually putting something together and being able to mold that property… And now I purchase a lot of properties in that area, and being able to mold the overall client base that’s in there, and have kind of reputation, or whatever you call it, having quality property… So yeah, it’s kind of a control thing, but it’s the same reason that I don’t prefer to invest in stocks anymore, is why I wanted to manage it myself. Because if I was gonna let somebody else manage it, it was a similar scenario. I was giving up control, similar to the reasons why I don’t enjoy the stock market as much.

Joe Fairless: I’d love to learn more about filling vacancies quicker. What do you do that would be different from a property management company that you’d hire?

Collin Schwartz: We do a lot of things that are similar. I think I incentivize the people that work with me a little bit better, but we really push getting professional photos, we post it on all social media accounts… We do all that normal stuff, but we also try to contact our residents and have them provide us referrals, customer service… And then even goofy things, like me and my son dressed up like T-Rexes for Halloween… So  I decided “Well, what better use, dress up like a T-Rex and take photos and videos of the properties…?” That just increases the viralness of the actual property itself… So instead of somebody viewing it 200 times, you’re getting 5,000 views. So just things like that can really help with it.

Joe Fairless: Were you two in the unit, and people were taking pictures of the T-Rexes in the unit?

Collin Schwartz: It was actually just me and my son, and being a two-year-old, three-year-old, he was not cooperating at the time… But I had a professional photographer come in and we did funny things. Me pulling something out of the oven, taking a shower in a T-Rex costume… So just kind of a bunch of goofy stuff.

Joe Fairless: Okay.

Collin Schwartz: But yeah, do something different… And what made me think of that is actually when I was walking around with him on Halloween, and probably 50% of the people had a wow, amazement about the costume… I was like “Okay, there’s some wowness left to it. I’m gonna use it for some marketing.” It was a $50 costume, I might as well use it again.

Joe Fairless: [laughs]

Collin Schwartz: Just kind of fun stuff like that, but really pushing social media, really pushing relationships with my vendors so that they’re sharing, they’re telling other people about it… And the fact that I do self-manage and have a small management company that we manage all the properties which we own, our responsiveness is typically much faster than others.

Joe Fairless: You mentioned earlier you might incentivize more than others… What exactly do you do  from this standpoint?

Collin Schwartz: I think most property management companies just pay their leasing individuals, whether it’s a salary, and they do other things, that’s kind of secondary… At least some that I’ve talked to. I give them half a month’s rent; that’s exactly what we take in, so they get bonuses on that… And that’s if they fill it within ten days of being ready. If it’s not ready within those ten days, then it drops to 25% of first month’s rent. But that really increases the intention to get out there and lease them up right away, especially when you flip a whole building at once. So we may have ten units, and that’s a possibility for a bonus of $3,000.

Joe Fairless: That’s a large incentive.

Collin Schwartz: Yup, so that’s worked really well. At first I was just doing 25% a month, and vacancies were sticking out there, and then I said the 50%, and lo and behold the next day we have five vacancies filled.

Joe Fairless: Oh, my gosh… 50% – they had to have a signed lease within ten days, or they had to–

Collin Schwartz: They need to have the deposit from that individual, that signed lease.

Joe Fairless: A deposit…

Collin Schwartz: They need to have money from that individual.

Joe Fairless: Did you notice any decrease in qualifications once you upped it from 25% to 50%?

Collin Schwartz: I have not noticed anything yet, but that is something obviously that I’m looking at… [laughter] I’m still the one who reviews all the background checks, and credit reports, and everything like that. [unintelligible [00:12:59].14]

Joe Fairless: Sure. Yeah, you do. 245 units and you’re the person who still reviews that on all vacancies?

Collin Schwartz: That’s correct.

Joe Fairless: What system do you use within the business? Taking a step back, not just background check, but what systems do you use to help you manage 245 units?

Collin Schwartz: We used Buildium. That’s a property management software. You can enter in all the tenants, they can pay online through the portal there, it has an accounting feature, you can send off background checks… We also utilize what’s called PayLease; it’s a CashPay card. Lots of our residents are primarily Spanish speaking, or they don’t have checking accounts or anything like that, primarily cash payers they were typically (or they were before). We switched them over to a PayLease card. They can go to the local Walmart, pay with cash, and that money gets wired over… Similar to an ACH.

Joe Fairless: And PayLease?

Collin Schwartz: Yup, PayLease.

Joe Fairless: Okay, got it. When you think back with your triplex, what are some things you do differently from an acquisition front now, that you weren’t doing before?

Collin Schwartz: I would this is probably my first 7, 8, 9, 10 deals, what I would do differently… And it’s very similar to the triplex. Well, I guess there’s two things… One, always ask if they filed a hail claim. If they haven’t, get that assigned over to you. Have them open up a claim with their insurance policy. This is in the due diligence process, have them assign it over to you. The worst that happens is there’s no claim.

Second is always get a construction budget and factor something in there for something else going wrong… Because it does happen. I think we kind of put ourselves a little bit backwards, and relying on — I think we each put in an additional 5k or 10k, and we were relying on that to rehab the whole property, plus with the cashflow… Well, there’s just numerous expenses that come up, and it just creates a lot of stress. And if you can have that leveraged construction line, meaning that at closing you’re putting down an additional 20% of the 80% of the construction line that you could have access to – that provides a tremendous amount of help in getting projects done quicker, more effectively, and with less stress.

Joe Fairless: Triplex to 245 units… How did you have the money to scale to this degree, in this period of time?

Collin Schwartz: I didn’t… [laughs] Cash runs out really quickly in this business… I think I had some savings, and I had my home equity line of credit… So I think at about 18 units I started basically running out of money. And I had partnered on at least half of those units by then. So what I started doing – and I started getting a little creative – I was finding a lot of these deals off market, so I’d bring a  partner in and then I’d add acquisition fees. Now, the acquisition fees were factored into the overall purchase price, and then basically in the details I would put that XYZ LLC receives 5% acquisition fee at closing.

That would actually be consumed by the bank. I would be paying, say, 10% of the overall, my partner would be paying 10% of the overall, and then the bank would be paying the 80%. So I’d receive a chunk of that at closing, and that helped.

I’ve done about a dozen flips or so, so that has helped… A little bit of wholesaling… I’m not a professional on that, just more of if I find an opportunity and a buyer and a seller, I kind of link them together. And then obviously, the BRRRR strategy has been huge. That’s been one of the biggest ones.

And then there’s also private money, people taking second positions on the loans… There’s been quite a few different ways.

Joe Fairless: Yeah, and I’m glad that you listed those out. Has the BRRRR strategy been the biggest one where you were able to get chunks of equity out and then place in another ones? Or is there another one that would be in the first place?

Collin Schwartz: If I was looking at a dollar standpoint, it would be the BRRRR. Especially with what I have in the pipeline right now – I have a lot of things that, since I only started two years ago, there’s things that are just kind of hitting that year seasoning mark, that we’re refinancing with Freddie… But yeah, it was definitely the BRRRR strategy. But the other ones kind of came at opportune times, where I’d possibly have to pass on the projects, because I did not have the down payment, but was able to get somebody to provide a second-position loan in which I paid them 1% monthly interest, which they’d get ACH-ed into their account, with the assumption that after we reposition the property, that there’ll be that spread in there, so that I can pay them back their initial investment as a promissory note in the second position.

Joe Fairless: So you’ve found yourself in times where you needed to be really resourceful, because you didn’t have the cash in the bank account, and you saw an opportunity… Any tips for someone who is at 18 units, and now they’re out of money, what you suggest they do first, just to get started in the more creative realm of getting equity?

Collin Schwartz: I think there’s a couple different things that lead up to that. It’s definitely networking, obviously. If you don’t have the money, you need to find somebody that has the money. Start finding and really bird-dogging and searching for deals. When you find the deals, and when they’re actually deals that you can see a 30%, 40%, 50% upside in, people are gonna be attracted to that.

One of the reasons and one of the things that helped me get so many partners, I believe, is because I was doing the property management myself. Most third-party property management companies aren’t as good as the owner, and a lot of people saw that as value, so they would wanna partner with me… And some partners have paid for 100% of the down payment, which I paid back on the refinance portion… But I know property management isn’t for everybody, so I’m not telling everybody to go manage their own properties… But if you do have that bandwidth, if you’re good with people, you’re good with systems, that’s a really good route, and it’s attractive for other investors.

One other way that I’ve gotten money is hard money; so I’ve actually used just a hard money lender. But in those positions they take first position; if it’s a good enough property, you can go refinance out and get them paid back, and still own the property. So I think it’s multiple things, but networking, and — this business is all about adding value, whether it’s adding value to your properties, adding value to your partners, anything like that. Anything that you can do to add value to others.

Joe Fairless: Taking a step back, looking at your portfolio that you’ve acquired, what property have you lost the most money on and how much did you lose?

Collin Schwartz: Well, fortunately I have not lost yet, so… I just knocked on the table right here.

Joe Fairless: I’ve heard it. [laughs]

Collin Schwartz: I have not lived through a downturn yet, so that’s the reason why I’m trying to keep my property’s cash reserves into the bank, in case something does occur, and not necessarily relying on the cashflow for living purposes.

So I have not lost money yet… Now, I’ve been ready to turn my hair grey and pull them all out on quite a few properties, but… So far I have not lost money.

Joe Fairless: What was the last challenge you came across where you wanted to pull your hair out and your hair turned grey?

Collin Schwartz: [laughs] There’s a few of them, but I guess one of the first properties that I purchased – it was a duplex. Great deal, I purchased it for 100k. It was through one of those letters. It was off-market… And I did the [unintelligible [00:20:08].11] somebody had shown up; I had a For Rent sign… They showed up at the property and said “Hey, we’re really looking for a place to stay, and…”

Joe Fairless: Need it quickly?

Collin Schwartz: They needed it quickly, they had cash… But I was going on vacation the next day, the other side was vacant, and I was gonna have to tell my wife that instead of being a real estate investor, I was starting to make a second mortgage payment outside of our house…

Joe Fairless: [laughs]

Collin Schwartz: So like any foolish, young investor, I took the money. Well, six months of overdoses–

Joe Fairless: It sounds like we’ve got some professionals here…

Collin Schwartz: Yeah… You know, they actually paid rent, which was surprising, but overdoses, bed bugs, police getting called, domestic violence reports… Just about every type of nightmare. And not only that, the building was older, so some pipes burst during that time… So I highly, highly considered selling it. I was gonna sell it; I bought it for 100k, put about 15k into it… I was like, if I could sell it for 130k and make a net of 10k, that’s more than I make in a month and a half on my job. That’s not a bad deal.

Joe Fairless: Yeah…

Collin Schwartz: Anyways, I kept telling myself “I’m just gonna stick with it.” It was a couple of weeks that took me to that point… So I stuck with it, but I was able to refinance it at a valuation of 205k. But it was very, very trying and stressful during that time.

Joe Fairless: What happened with the residents?

Collin Schwartz: Oh yeah, we agreed to have them leave. It was about six months in. I told them “This is over. You guys have gotta find a new spot.” They did; with all the police reports and everything, they left… And now I have some excellent, excellent renters in there. 750 credit scores, retired individuals… So it’s very much a turnaround. But also, rather than the first person with cash, I probably went through 20 applicants this time.

Joe Fairless: Right, I imagine you went the opposite end of the spectrum with the next ones…

Collin Schwartz: Yeah. So I think even going back to what I would do differently, like that construction loan portion – if I would have had just a little bit of a buffer right there, I don’t think I would have made that rash decision. And if it was attributed to the property… But at the same time, I didn’t wanna make a second mortgage payment.

Joe Fairless: Right. Having a healthy marriage is important as well.

Collin Schwartz: Yes, absolutely. Absolutely.

Joe Fairless: [laughs] Details… So based on your experience as a real estate investor, what is your best real estate investing advice ever?

Collin Schwartz: There is a couple things, and I think it keeps changing for me, but I always go back to “You’ve gotta keep learning, you have to keep networking. You can’t stay complacent.” There’s just so much information out there that if you’re not constantly reading, if you’re not going to seminars, if you’re not listening to podcasts, you’re just gonna soften a little bit. Also, have a good daily routine, have a strong morning. For me, I get up and exercise, and it just gets the day right. So education and a strong morning routine…

Joe Fairless: You’ve got 70 units under contract… I don’t wanna talk about that one, because you haven’t closed yet, but I think I heard you say you have an 80-something unit as the largest one in your portfolio?

Collin Schwartz: Yes, we have an 87-unit property.

Joe Fairless: An 87-unit. How many partners you have on that one?

Collin Schwartz: That we have four partners. Me and another partner are the managing members, and then we have two other partners.

Joe Fairless: Okay. Money people?

Collin Schwartz: Money people, that’s correct.

Joe Fairless: Okay. So how is that structured?

Collin Schwartz: Basically, they get the equity based on what the dollars that were put in. We receive an asset management fee for managing the manager; that is one that I don’t manage in-house, so we’re actually managing the manager… There was an acquisition fee at the time of closing as well… So that’s the basic structure. It’s very simple.

Joe Fairless: And you have your managing members, so you have a portion of ownership in the general partnership as well?

Collin Schwartz: That’s correct. So we did bring equity to the deal as well.

Joe Fairless: Cool. And what’s the business plan for that?

Collin Schwartz: We actually purchased it under Freddie Mac, so we’re two years interest-only, 30-year amortization. I think it’s 7 or 10-year fixed, but… Basically, the property was in really good condition as it was, but there’s still a delta that we can raise the rents, at least 25%… So we’re going through now, we’re updating the units. They’re about 15-year-old updates, whether it’s the LVT, or the plank flooring… Just kind of more of the grayish look, versus the brown, as that’s kind of more the [unintelligible [00:24:16].25] It’s next to a university. We’re going through there, we’re repositioning, and then within two years — we can start the process at 18 months with, I believe, just a small penalty from Freddie Mac… Refinance, pull out all of our cash – that’s the obvious goal, and that’s what our projections say. Roll into another 30-year amortization, 10-year fixed, with three years of interest only.

Joe Fairless: Why have a third-party management company manage this?

Collin Schwartz: Honestly, at the time I had purchased numerous, numerous properties. It was all within one week, and those other properties required probably 30 units that needed to be updated, and the third-party management company had the place basically stabilized at that point, so now we just had to go through and raise the rents… So they already had a good system in place, and I did not have the resources at the time to bring on something like that in what I deemed an effective manner.

It doesn’t mean that at some point that won’t come in-house, but at the time it made more sense to not ruffle it, and my office is a couple blocks away, so I can still head over there, I can help with the turnovers… I can still be involved in that sense, but without having to take on the resource of another 87 residents and maintenance requests, and collecting rent, and if it was a different process – moving over leases, and everything like that.

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

Collin Schwartz: Ready.

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

Break: [00:25:45].02] to [00:26:29].13]

Joe Fairless: Best ever book you’ve recently read? You mentioned you’re a learner…

Collin Schwartz: Yup, so there’s a few of them. Shoe Dog, everybody should read that… And then the Art of War by Sun Tzu. Those two books.

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

Collin Schwartz: I’d like to start doing more, but the meetup group – I do spend a lot of time… We don’t charge for it. I’ve invested a lot of time, a lot of nights away from the family… And then I try to communicate with as many investors as possible, and help investors in the community as well.

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

Collin Schwartz: You guys can give me a call, 402-204-5552. Find me on Instagram, or Facebook. Otherwise, BrickTownManagement.com.

Joe Fairless: Well, Collin, thank you for sharing your story, how you went from using your own money and your own resources up to 18 units, and how you scaled from 18 to 245, and going through the list of tactics that you used – partnering with people… You did that all along the way, right out of the gate. Off-market deals, adding acquisition fees to those, flips, wholesaling, the BRRRR method, private money and hard money… And then talking about your approach for management and filling vacancies quicker than what’s typical… So thanks for being on the show.

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

Collin Schwartz: Awesome. Thanks, Joe. I appreciate it.

 

JF1947: Developing, Acquiring, & Syndicating 1,900 Affordable Multifamily Units with Scott Choppin

Listen to the Episode Below (00:30:32)
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Scott Choppin is here today to give us an insight into how to build and run a growing real estate business. In this episode you’ll hear his most challenging deal in the past five years, what he ran into, how he got through it, and what the big lessons learned are. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Sellers are usually attached to their property, they think their land is the best piece of land” – Scott Choppin

 

Scott Choppin Real Estate Background:

  • Founder of Urban Pacific, a real estate development and advisory company
  • Has been involved in the development, acquisition, or syndication of 1,900 affordable multifamily units
  • Based in Long Beach, CA
  • Say hi to him at https://www.urbanpacific.com/

 


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


TRANSCRIPTION

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

With us today, Scott Choppin. How are you doing, Scott?

Scott Choppin: I’m doing good, Joe. Nice to meet you.

Joe Fairless: Yeah, nice to meet you too, and looking forward to our conversation. A little bit about Scott – he’s the founder of Urban Pacific, a real estate development and advisory company. He’s been involved in development, acquisition or syndication of 1,900 affordable multifamily units. Based in Long Beach, California. With that being said, Scott, do you wanna give the Best Ever listeners a  little bit more about your background and your current focus?

Scott Choppin: Absolutely. Our company and my background has been in real estate development really for my entire life. I come from a multi-generational family in the real estate development business, so my family has been in real estate development in Southern California since 1960. So I grew up around the business, it gave me a background on what real estate developers do, how you make it a career and how you be profitable in it.

I’ve worked for a couple major companies. I’ve worked for a subsidiary of what used to be known as Kaufman & Broad, now KB Home, and that division was in the apartment syndication and development arm of that major Fortune 500 building company.

Then I worked for a company called Sares-Regis Group, which is a regional apartment development company in Southern California, based in Orange County. So my entire career history family background, and now 19 years of having formed and running Urban Pacific Group – all is laser-focused on the real estate development space.

Joe Fairless: What does Urban Pacific Group do exactly?

Scott Choppin: We are a real estate developer that has focused, since I started the company in 2000, on urban infill real estate development. Urban is what everybody would expect; infill, for those who don’t know, is basically finding sites that are vacant or under-utilized in an already existing urban metro area, and then putting a real estate development project together on that piece of land, on that asset, with the intention of producing new construction, apartment projects that we either sell (merchant build style) or own long-term, with all the advantages of being in urban locations.

Joe Fairless: What’s the most challenging project in the last five years, that you’ve worked on?

Scott Choppin: Great question. I’ll give you an example of what we did… We worked on an asset in Westminster, Colorado, which is about halfway between downtown Denver and Boulder. That was a 16-acre site that in fact the city of Westminster owned, and we took on the development of that project under the auspices of the city’s vision of creating a new downtown node.

That ended up being about a 10-year project, 5 years of which were ’07-’08 recession, at which time we were not working on it…

Joe Fairless: Oh, my…

Scott Choppin: But we came back in 2013 and finished, and actually entirely reentitled the project – redesigned it to be coherent with the now new trend, although it’s been going for a while, of infill apartment assets in the Denver market. So that one was certainly one of the longest, I would say.

Joe Fairless: Did you have to pivot in the vision of what you were initially planning on doing?

Scott Choppin: We did, actually. We started working on the project in 2004, and at that time, as everybody knows, the market was very strong, and in particular condo projects were much more viable in that ’04, ’05, ’06 time period. So we entitled the original project as something like 700 or 800 units of predominantly condo, although we had a little bit of new construction apartments in there; mid, and not quite high-rise, but pretty dense… Which worked at the time, because the sale prices of condos supported that land price plus that build cost.

Then the recession came, and as everybody also tracked, condos were probably one of the worst-hit portions of the market, at least in the spaces and domains that we work in, urban infill.

So when we came back in 2012-2013, it was a completely different market. We had learned lots of lessons in the recession and applied those, so basically pivoted to doing the project entirely as a slightly lower-density, purely apartment development project.

Joe Fairless: Okay. Did you have any mixed-use in there?

Scott Choppin: You know, this project in particular, Joe, was interesting because it was right next door to a major retail project called the Westminster Promenade, that was anchored by Dave & Busters, and an Edwards theater, lots of retail… So we didn’t have to do mixed-use in the way I think you’re meaning. I might call this a horizontal mixed-use, which is next door. It’s not stacked over. But you could walk out your front door and be at the movie theater in five minutes, and the surrounding area around that had been developed with a lot of urban amenities, parks, a skating rink, and some hotel assets. So we didn’t need to do the vertical retail below. It made all the sense in the world to have very walkable, on-grade apartments. Plus, simpler to execute on the construction.

We ultimately did a joint venture with Lennar’s, what’s called the Multifamily Communities Investment arm, which is their apartment arm… Lennar, the home builder. That asset completed probably about three years ago.

Joe Fairless: And why bring in a JV partner?

Scott Choppin: It was a big project. Probably [unintelligible [00:06:49].24] about 100 million dollars in a single project… So we do this quite often, where we’ll joint-venture with others to bring in capacities that maybe we have, but it allows us to do bigger projects, more projects, more volume… And spread risk.

Joe Fairless: Right.

Scott Choppin: At that time — let’s see… This would have been about 2014-2015 that we completed the reentitlement process, and at that time downtown Denver and Denver Metro Area had something like 15,000 units of apartment assets in the pipeline. So you look at the marketplace and you go “Okay, we have to judge at the time what’s the appropriate course of action. Do we build it, do we JV it? Maybe we just entitle and sell it”, that’s sometimes an option; like, not build it all. So in this case, it made sense.

And Lennar was hungry. Their division was new, and they were trying to accomplish a certain production volume for their investment dollars, so us JV-ing made sense to them and to us.

Joe Fairless: So in that case, would then there be three partners? The city, plus the new partner, plus you all?

Scott Choppin: In this case, the city was just the land seller.

Joe Fairless: Oh, okay. Got it.

Scott Choppin: So we bought the land from them, and then did the development project.

Joe Fairless: Okay.

Scott Choppin: Although – interesting dynamic of having the city, who’s the approving body, give you the entitlements, and they own it…

Joe Fairless: [laughs] Right.

Scott Choppin: At the time, the staff and the council were very aligned with what we had produced as the original urban infill vision as part of this horizontal mixed-used. They were very ambitious.

Most cities don’t buy land speculatively, so at that time, that staff and that council was very aggressive, in a positive way, so we just happened to come together with them, with our urban infill style of development, with their visionary of producing a mixed-use, horizontal type [unintelligible [00:08:44].05] town center type situation.

Joe Fairless: And when you bring in a joint venture partner on this type of scale, what is the typical way you structure it?

Scott Choppin: Well, as you know, having structured all the deals that you’ve done over your career, there’s an infinite number of ways to structure it… In this case, it was just some version of participating shares in the LLC that developed the project, with each party basically being rewarded by their back-end profits as to what they brought.

Generically, we might say “Hey, look, Urban Pacific brought the relationship with the city, delivered the entitlements, has the land and site control, and then Lennar brings heavy-duty financial capacity, brought their own equity… So we just negotiated a back-end share based on those capacities that are brought to the table.

And I say it that way, Joe, because in speaking with people who are trying to form joint ventures, or in some cases when we advise people, as we do in our advisory teams, there’s no set standard of how one might do it. Now, some investors may say “Hey, I only do JV’s this way, I only do this split. Here’s what I offer”, but there’s an infinite number of ways to negotiate a structure. Obviously, everybody’s looking for a win/win… And sometimes I’ve had lots of JV offers that weren’t accepted. They said “No, we can’t fit that with how we wanna do it.” We approached a lot of landowners to do land JVs; that’s a pretty typical move that we make… Although the ratio of success in land JVs, at least in our experience, is fairly low.

Joe Fairless: Why is that?

Scott Choppin: Land sellers – they wanna sell, if they’re sellers. So the idea of participating on a longer timeline… And also, on a land JV they would participate their land into the partnership, which puts them at some risk. They lose control of it, or at least in the sense that they don’t own it directly. They own shares in an LLC that owns the land now, after the JV is formed.

Some land sellers – they just don’t have that appetite for risk… And no fault of theirs. They’ve said “Hey, here are our philosophies. We wanna sell.” Although I do say, Joe – being a land seller is actually really hard… Because me as a buyer, as a developer, I can always basically move on. If it doesn’t work, if it doesn’t underwrite, if it’s too expensive, if the entitlements are too hard, I move on to the next one, assuming my real estate acquisition team is doing the work that they’re supposed to, which is producing lots of new opportunities to look at… Whereas a land seller, if you really have decided to sell, then you can only sell. So there’s a certain emotional attachment that most sellers have, or many do, and they of course all think their land is the best piece of land around… So the value should be commensurate with that.

Joe Fairless: Well, speaking of emotions, 2004 is when you started this project, and then the recession hit, in 2007-2009. Had you purchased the land, or were you in the entitlement process where the purchase was contingent on it being entitled?

Scott Choppin: Great question. We as a standard practice never close on land unentitled, for this exact reason. The scenario of ’08 was exactly why you don’t close land and then go get your entitlement. So the deal we had structured with the city was contingent. We would close only upon granting of entitlements… And then this certain period of time afterwards.

If I recall, the city had actually approved the project; we had gotten through City Council, and they had done all that they were supposed to do, and we were in that time period between that and the closing, and then September of ’08 – obviously, the world split apart, so we just approached the city and said “Hey look, the economy is off. It’s not an appropriate time. It’s now too dense, too expensive, the condo market is off.” That was the narrative that we spoke to the city. And we said “Hey, we love working with you guys, it’s just not the right time to do this.”

It also helped that we probably left hard deposits in the deal, that they got, of about 200k… So we don’t wish to lose that deposit, but it’s better than we lose 200k than bought a five million dollar piece of ground that is no longer viable, right in the middle of a recession. So that’s the trade – do you do option money, escrow, hard, unrefundable deposits and pass-throughs, or do you buy the land and take that risk? I’ll always take the deposits, and ostensibly assume we lose those, but we’re protected on the downside, because we don’t own the land.

Joe Fairless: Right. And since you had the 200k non-refundable, I imagine you weren’t able to negotiate – maybe you were – a better price, since the value (I’m guessing) was lower than what you originally had the option to purchase it for?

Scott Choppin: It’s a good question… Two things came out of it. When we came back in 2012-2013, a couple of other developers had tried to work on the site, but they had really not the vision that we had. And it was the same staff, same Council, and they recognized that they were gonna make a choice. Either we choose to go with somebody whose vision we agree with, like ours, or other developers can come in and maybe they get the vision, maybe they don’t… But leaving the 200k built goodwill with the city. Typically, I think most developers would say they would fight it, they might go legal… Not all, but some.

So our orientation is always for the long-term; we build and hold assets for the long-run, we wanna have long-term relationships with cities, have these kinds of deals… So that was a part of the calculus that we did when we left the 200k in. We said “Look, we like this deal, we like working with you, we like the location…” It was really a once-in-a-lifetime location. So we did the math and said “This is what we’re willing to bet.” And when we came back in 2012, it was after having talked to other groups that they saw what we had offered was better still on the project, but also there was this [unintelligible [00:15:00].13] on the 200k, we built goodwill, and when we came back in, we actually got the same purchase price that we had… But here’s the trick, Joe – this was the purchase price from 2004.

Joe Fairless: Oh, okay.

Scott Choppin: It was still a very good value, and it was still unentitled at that point… Or at least unentitled in the sense of what the new market was in 2012, which is all apartments… And they didn’t really politically wanna do all apartments. Westminster is one of those cities, as many are, that “Hey, we would rather have for-sale homeowners.” The political weighting is always gonna lead towards homeownership. But they were very intelligent people, and we walked them through the story of why apartments versus condo in particular doesn’t work, and the site was never gonna be single-family; it was too low-density.

So we basically went back in at the original purchase price, which even given the units – I think we ended up with 453 units entitled on the second go-around – was still good value.

Joe Fairless: And were  they affordable housing?

Scott Choppin: They were not. That was actually entirely a market rate project. So there was no inclusionary requirements, no affordable housing. The city just politically wasn’t oriented that way. Now, if we talked to them today – new Council, new staff – I think they would be oriented around wanting some affordable housing… But at the time that we negotiated the deal, that was not a requirement.

Joe Fairless: Okay, I’m on Google Maps, I’m at Westminster, Colorado, Dave & Busters… What do I search on Google to find this place?

Scott Choppin: If you just go straight North from Dave &  Busters, you’ll see a parking lot, and then you’ll see a brand new apartment project; you’ll see the freeway on your left, to the West…

Joe Fairless: Yup, yup.

Scott Choppin: …and that was one of the reasons it made it an irreplaceable location – the market window of that 36 Turnpike of people commuting back and forth from Denver to Boulder, or the interlocking corridor, which is a little North of our site, was just perfect, from an apartment ownership standpoint. [unintelligible [00:16:55].08] sign “If you lived here, you’d be home.” I say that jokingly, but that’s exactly why you have that market window, is people can see it… And it was, interestingly enough, far enough away that as you go North, you see the freeway diverges from the edge of the project, so that started to sort of set back — because noise is an issue when you’re right next to the highway.

Joe Fairless: And you mentioned that other developers didn’t have the same vision… So why wouldn’t a developer who wanted some business just go in, talk to city officials and say “Oh, you want this? Okay, I can roll with that…”?

Scott Choppin: It’s a great question… A couple of different answers. One is the companies that were approaching in this interim period would be very large apartment development companies, so not exactly — people like Trammell Crow, Holland Partners, Wolff companies would be an example… And they just had their model. They just said “Look, we build this type of apartment, and maybe we lay it out differently, and these buildings go East, and those buildings go North, and the pools in the middle…”

Westminster and the staff at the time, particularly the Planning Department, was very, very particular about how they wanted the project to be. And in fact, when we went back the second time, they were still insistent that we have a parking structure underneath the buildings, like a (what I call) podium below-grade parking, or at least en-grade with the units stacked on top, like  a concrete parking structure… And we had to really fight quite hard to eliminate that, because what that does is it drives the cost structures up of the build. You’re getting more units, but you’re paying a lot more to build the building. So as a developer, it’s always a trade-off between how much density can you get, versus how much it costs to build that density and the rents that are produced from it.

In fact, our new UTH Workforce Housing offer and our math is a good equilibrium point between max density that’s the simplest to build, yet produces the best rental income. So we wanna look for those equilibrium points where you can build a certain product that’s in demand, preferrably into under-supplied markets and under-supplied market segments, and then build it efficiently. That equilibrium is a measure of efficiency of max rent, at lowest cost.

Joe Fairless: In the news, when we read about a new development, the reporter usually says “This is an 85-million-dollar project, or a 100-million-dollar project.” As someone who is not in development, how can we estimate approximately how much the developer is making on a project based on the dollar amounts that is reported for the total project?

Scott Choppin: That’s a great question, Joe, and I’ve never had anybody ask me it that way, but I appreciate it. There’s no standard answer to the question, and that’s why it’s not commonly asked…

Joe Fairless: [laughs]

Scott Choppin: Because it would be the same as when you buy a value-add deal, and whether you’re in Nashville or Columbus or Houston – each are gonna have different cost structures to buy the units, the rents are different, operating expense, NOIs all different. And then you get into this sort of magical zone of how your book says “Hey, buy for cashflow, not appreciation.” Developers have the same sort of thought process, although there’s additional or different metrics that we have to deal with. We still underwrite rents and operating expenses, NOI – that’s sort of category one. Category two is what is the zoning, entitlements, build costs, new construction, rent up process. And then third, which we all in this business aspire to do well, is how do we exit, and when do we exit.

So the difference between value-add and new construction is that second component – the build cost. And that’s really where what I mentioned earlier about that build efficiency is. I’ll give you different examples. If you built a single-family home, you rented it, that’s the lowest cost to build, but lowest rental, maybe on a whole-dollar base as the way to think of it, depending on the square footage. On the opposite end of the spectrum you’ve got a high-rise in San Francisco; it’s getting very high rent, but it’s got exceptionally high development impact fees, and build cost and land are incredibly high.

So the answer of the profitability of it is always inside the deal, and when you put all the variables together, you see that it works or not. That’s why in the development domain running proformas is the early measure of a deal’s potential for success, versus not. And there’s a fair amount of judgments – each variable of rent, and build cost, and land cost are all put into that proforma… But that’s what we have to do and make our decisions based on.

Now, you guys do the same thing in the value-add space, but ours is trickier, because the cost to build from market to market is so different, whereas assessing rents and assessing operating expenses I think is more straightforward, because there’s more historical data; there certainly should be lots of good comps in a major urban metro area.

So the answer to your question is in the development space we really wanna be in the low twenties IRR or above. That’s really the metric that we use. So our job as a developer working with investors is we have to make an offer to investors to invest in our new construction projects that is market superior to whatever other choices they have, as all investors have choices. So we have to recognize that we’re a different offer than a value-add.

I have this conversation all the time. People are like “Hey, I’m looking at five value-add deals and I’m looking at your development deal, and how do they compare.” So a big part of my speaking to different investors, to people like yourself is to sort of highlight the differences between a value-add and a new construction… Because I think new construction is a viable place to invest capital now. It’s not gonna be everywhere, with everyone… Where I think commonly value-add deals – you could probably assess on a market-by-market, compare nationally, demand characteristics, rents, what are the population growth characteristics. For us, we’re always gonna be in Southern California, where the demand is very high, and we’re under-supplied. Politically, getting new projects approved in California and actually building them cost-effectively enough to produce a yield is a pretty high challenge…

Joe Fairless: I bet.

Scott Choppin: …but our offer of UTH is exactly that, to say “Hey look, we’re a unique, uncommon offer. We’re in a niche, contrarian space, being in workforce housing”, and we’ve come up with this three-story townhome model that is different than all your other choices in the new development space… And because of all these variables that come together, we’re regularly producing mid-twenties IRR and above, sometimes as high as 30% or 40%, depending on the timing; of course, IRR is time-sensitive.

So speaking as to address the differential between what investors have as a choice in the marketplace… And we have to do that to be relevant and competitive in that space.

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

Scott Choppin: In my space as a developer, we’ve always focused on looking for niches and contrarian spaces. I’ll give you an example… In 2016 we sold off our last set of development deals that were in that high-density, mid-density podium space, and we started to look around… So what we identified was that everybody was building to the millennial and Gen Z marketplace. That cohort is the largest in the history of the United States. It’s the right place to be demographically, if you’re building apartments; lifecycle, big demographic cohort.

We looked at that space and we had just finished a slate of projects that mapped that, but we were early. We started in 2012, and pretty much had sold everything off by 2015-2016. We looked at that and said “That’s a great space to be, but it’s also highly competitive. So the answer  I’m giving you is  always compete in spaces that are not competitive, and that would be you’re in a new, innovative area, you’re in a new (maybe) micro-trend that even leads the other major trends. We’ve always worked to exploit those niches.

We were urban infill, Joe, before urban infill was even anything anybody talked about. 2000-2001, urban infill – people thought we were a little crazy… So innovating and being ahead of the marketplace is not for everybody, the development marketplace… And I think real estate generally is one of trends, and people following trends. We’ve always looked to exploit new niches and new areas of market drift where everybody else isn’t… So maybe it’s the Warren Buffett methodology or real estate development… And I think people listening to me go “Of course. Why wouldn’t you do that?” The trick is how do you identify those?

Joe Fairless: Right.

Scott Choppin: What practices are you in of economic research and market research, and then just sheer creativity of innovating something new? That’s the space that we’re in. So the bottom line answer is always try to compete where others are not, where there’s strong demand, or under-supply, or a new market trend. For us, that’s multi-generational apartment homes that are built to house families, that are multi-generational. That’s our niche right now.

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

Scott Choppin: Yeah, let’s do it.

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

Break: [00:26:54].06] to [00:27:29].22]

Joe Fairless: Alright, you mentioned big contrarian investing, and seeing investing where there’s opportunity but others might not see it; what’s a research resource or two that you like to reference?

Scott Choppin: Two quick ones… One is a blog called Calculated Risk. That’s written by a guy named Bill McBride. He is not an economist in the classic way. He’s very housing-centric and has sort of a good, pragmatic, corporate-level executive view of the housing industry. Great resource for seeing the trends.

Then there’s another economic research tool that’s published by a website called EconPi, and they have this bar graph analysis that’s a great economic cycle tracker, and I would recommend anybody go there and look at that.

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

Scott Choppin: Good question. I’m always trying to stay where I have the best skillset, knowledge, and that’s real estate development. So we regularly pro bono advise nonprofits that are looking to develop real estate. That would be in the affordable housing space. We advised a local nonprofit that was trying to build their headquarters, so we went in there and advised them pro bono in the real estate development space, where we could [unintelligible [00:28:36].22] some benefit for them.

Joe Fairless: Best ever deal you’ve done?

Scott Choppin: Best ever was the Westminster deal, the one we talked about before. That was one of the biggest we ever did. The market timing was perfect,  Lennar was a great partner, great location… Once-in-a-lifetime deal.

Joe Fairless: And how can the best ever listeners learn more about you and what you and your company is doing?

Scott Choppin: Go to our website, that’s www.urbanpacific.com. Take a look at the resources we have there; investor education. We have a great blog… Sign up for our weekly newsletter, which we are always trying to publish articles that track market trends in the economy related to real estate, advice and insights on the economic cycle etc.

Joe Fairless: Scott, thanks for being on the show, talking about the Westminster deal, the peaks and valleys of that, and getting into the specifics of it. I love that, and I’m sure a lot of Best Ever listeners did as well… Just getting into the details, as well as the emotional (perhaps) rollercoaster; maybe not as much, but still, 200k is 200k, that you had hard… And the recession hits, and it’s like “Ugh… Okay, how do we make this happen?”

So I really appreciate you sharing that, and thanks so much for being on the show. I hope you have a best ever day, and we’ll talk to you again soon.

Scott Choppin: Yeah, thanks, Joe. I appreciate you as well.

JF1941: Growing A Real Estate Investing Business With Family & Friends with Rome Lingenfelter

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We’ll hear Rome’s investing story today, he has been  a full time real estate investor for the last year. His wife is also full time investing with him and they are growing the business together. We’ll also hear what Rome is doing with his 12 year old son to teach him some of the business. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“We follow a checklist when we got to purchase something” – Rome Lingenfelter

 

Rome Lingenfelter Real Estate Background:

  • Real estate investor, growing business with family and friends
  • Has a passion for educating others and helping them reach financial freedom
  • Is involved in a 147 unit syndication, currently negotiating her first mobile home park
  • Has flipped over 24 houses
  • Based in Portland, Oregon
  • Say hi to him at romeling2007ATgmail.com
  • Best Ever Book: The Creature From Jekyll Island

 


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

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

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


TRANSCRIPT

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, Rome Lingenfelter. How are you doing, Rome?

Rome Lingenfelter: I am excellent today, thank you for having me on.

Joe Fairless: My pleasure, and glad to hear it. A little bit about Rome – he is a real estate investor, has been growing his business with family and friends, has a passion for educating others and also helping reach financial freedom. Based in Portland, Oregon, and his wife has been on the show as well… So they have a 12-unit building, also have been involved as a limited partner on a 147-unit syndication, and they’re negotiating their first mobile home park, as well as they flipped over 24 houses. With that being said, Rome, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Rome Lingenfelter: Sure, absolutely. Originally, my wife and I started our business about seven years ago. We have made the majority of our growth in both the size of our business and our profits mostly because we’re in an equity market… So in fixing, flipping and wholesaling. But I would say that we’re repositioning now into more multifamily, and as you’ve mentioned, the mobile home park. And we’re looking more and more into the multifamily markets.

Joe Fairless: Okay, got it. Are you full-time in real estate? And if so, what were you doing prior?

Rome Lingenfelter: I am full-time in real estate now. I stepped away from a corporate position. I was a manager with a national grocery store chain for about 16 years, and my wife and I started our real estate business and just built it up over time. She stepped away about three years ago, and I stepped away about a year ago… And this will be our best year so far.

Joe Fairless: How did you determine when it was time to leave the corporate world?

Rome Lingenfelter: I didn’t have enough bandwidth to do both. The corporate world was easy compared to this, but just balancing time — I was scrambling on every break and every lunch to field calls… And we are not the traditional pair; my wife tends to be the contractor and negotiates the deals, and I tend to be the numbers and kind of contracts, back-office type stuff… And I was spending way too much time trying to catch up, and not enough time with my family. I have a great son, Max, that we just all enjoy doing stuff together as a family… From working in our business, to camping, hiking, and all that great stuff.

Joe Fairless: How old is your son?

Rome Lingenfelter: He’s 12 now.

Joe Fairless: What are some things you’ve done to teach him  the business?

Rome Lingenfelter: It’s a really good question. I’ve really gone to his strengths. Because he’s an only child, he’s always been around adults, so he relates to adults as well or better than he does with kids his age. So we did lots of door-to-door sales with him, so he’s very confident in those circles. I’ve had him help me on some rehabs… Things that are adequate for his age. But he started getting into social media, so he’s started to do some work on our social media, which is still growing, still pretty rough…

I would say one of the things that was kind of a sea change event for me was not just reading Kiyosaki’s stuff, but playing his Cashflow 101 game. I’m a hands-on guy, so I started Max at a very young age – probably about 4 or 5 – on Cashflow. And even tonight we’re gonna go to one of the local REIAs and play Cashflow. It’s something he really enjoys doing. And he sent out his own  mailings this last year, and got some good responses. We haven’t bought any properties from it, but he had really good responses from it.

Joe Fairless: So you mentioned among a lot of things door-to-door sales, and that to me – holy cow; adults have a hard time — I would have a hard time with that. Tell me about that process with him. So in our neck of the woods the way the Cub Scouts (before they go to Boy Scouts) raise money is through Christmas reeds sales. When I was a kid I think they had us sell candy. But I’ve just gone around with him, and he’s incredibly courageous. He loves people, so just going up, knocking on the door, practicing his little script, getting it wrong, getting it right… And it’s hard to say no to a Boy Scout who’s in a uniform and whatnot…

I think the second year in he had one of the highest sales of anybody in his troop, and his last year that he was in, he won. He was the top salesman for selling Christmas reeds. And he’s actually taking on his own. So now, being a Boys Scout, they grind up Christmas trees, but he has still continued on, because he has so many faithful clients who are like “Please come around.” So even now he raises money that way.

Joe Fairless: Taking a look at the properties that you’ve worked on, what has been the most challenging one for you?

Rome Lingenfelter: Boy, we’ve had lots of challenging ones. I would say probably the one that we learned a lot from was my wife and I – and we had a third partner – went in on a property that was almost a million dollars. It’s in one of the hottest areas in the Portland market, and our third partner just raved about this, and it looked like the numbers were gonna pencil out. So we borrowed some money to put a down payment on it, which we never recommend that you do… And not only did we have to pay interest on the borrowed money, but the person who was selling it to us – even though we said “Hey, we went through the inspection period” and we [unintelligible [00:06:33].18] money back – the doctor who owned the property decided to sue for the earnest money; he thought he deserved it. So of the 25k that we put down, I think we got 10k back. And then we had to pay interest on the rest of it, so… That was ugly.

Joe Fairless: Given a scenario where you’re in that situation or about to be in that situation again, what are some things you’d do differently?

Rome Lingenfelter: I’d make sure that the numbers were more correct going in. I would make sure that things were tighter. If I didn’t have the money to put down on it, I would put  a lot less down, and if they weren’t interested, I would walk away. I think everybody says it’s not the deals that you don’t get that [unintelligible [00:07:13].16] it’s the ones that you get and shouldn’t have. And this was definitely one of those. So I would just walk away from it. If you’re not willing to take 5k or 10k down, then we’re not willing to continue forward. That was my big lesson there.

Joe Fairless: What’s been a challenge growing the company, now that you two are full-time and have been full-time for a little while?

Rome Lingenfelter: I would say our biggest challenge has been marketing, and just getting our systems up and running. I think that’s what we still struggle with. We know where to get deals and we know how to work through it, but I think our plate gets so full… I think right now we have about five projects going on right now, and when we’re neck-deep in projects and getting things out to market, which is where you realize the money that’s coming in, that our marketing wheel kind of grinds to a halt. For this winter, if things kind of quiet down, that’s really where I’m gonna put a lot of time and energy – just getting the systems so it’s just that smooth-running wheel, which I don’t have at the moment.

Joe Fairless: What are some things you plan on doing?

Rome Lingenfelter: I’m going to break my processes up so no one person has access to all of it. I’m going to hire a VA, or maybe two. I really think that because of how busy my wife Amy is, I think we’re gonna get an assistant for her. And mostly, just breaking it up into pieces and just being clear of every step, and then assigning those, and then revisiting. I have good experience managing, but designing systems is not something I’ve ever done before.

Joe Fairless: And you mentioned you have good experience managing that… I imagine it comes from your corporate experience prior to doing this full-time.

Rome Lingenfelter: Yes, correct.

Joe Fairless: What are some tips you have? Or better maybe, what are some things you implement that you learned in the corporate world, that you do now?

Rome Lingenfelter: I think clarity is super-important. Making sure that everybody knows what their role is. In the beginning Amy and I used to bump up with each other, like “Hey, stay out of my lane.” She is a much better contractor; she has really good vision, so making sure that I let her do what she’s incredible at, and stay focused on my parts.

I’m a hands-on person. I tend to like to swing a hammer, I tend to like to do physical work, and I have to step back from that and really look at jobs that would be better for us to hire out. So that’s one thing – let people do what they’re good at, so putting the right people in the right positions I think is definitely someplace that that’s been helpful.

And again, customer service. Always taking care of people, whether you’re buying houses, or selling houses… Communication followthrough – I think that’s huge. I think a lot of people miss out on that. They get so caught up in the numbers that they miss out that it’s a people business.

Joe Fairless: From a management side, what are some ways you bring the people business component to life?

Rome Lingenfelter: I always do my best to [unintelligible [00:10:09].00] somebody, regardless of — if I’m selling a house, I usually give a basket, or some thank you gift. I think the last impression — I think somebody a lot smarter than I said “The last impression is a lasting impression.” Making sure that there’s just a pop of “Hey, that was a really good experience.” Even if the rest of the experience was bad, if your last contact was really positive, I think that’s good. And then just follow through and follow up.

I think there’s so many deals that we’ve landed that have come years after initial contact. Just that follow up, follow up, follow up. And I think Amy is really brilliant at that. That’s something I’ve learned and gotten better at from a management, but — just those systems in place, of making sure that those things we do do well are done on every project.

Joe Fairless: Based on your experience as a real estate investor and entrepreneur, what’s your best real estate investing advice ever?

Rome Lingenfelter: Making money when you buy. I would say in the beginning if you can find somebody who wants to lend you money or be a part of it, you probably have a deal. If you can’t find somebody, it’s probably not a deal… And there have been so many times that we’ve been learning new aspects of our business, that we were able to fall down and make some big mistakes because we got such a good deal on the front side.

So I would say make your money when you buy; just always be aware of what you get it for, and don’t be willing to walk away from something that you want to be a deal, but may not be a deal.

Joe Fairless: And what are some of those big things that happen that you could recover from because of how you purchased it?

Rome Lingenfelter: We bought a property out in the middle of the country. It was an old 1930’s cabin. We picked it up for 40k, and we initially thought we were going to owner carry finance it, and that didn’t work… And it ended up that we needed to sell it for cash, but there were so many things wrong with the property we didn’t know about. It needed a septic system, and everything that was involved with that… It was pier and post construction, rather than on a foundation… And because we had bought it for such a screaming deal, when we turned around and sold it for 140k, because of all of the money we had dumped into it, we were still able to walk away with about 40k in profit on it. Whereas if we would have bought it for a “reasonable” price of 100k, we would have lost our shirts.

Joe Fairless: And what part of your due diligence process now will attempt to uncover that? Or maybe what have you done to enhance your due diligence process, to try and mitigate some of those things from creeping up again?

Rome Lingenfelter: Sure. Just making a checklist. If you’re gonna buy in an area that you don’t know, figuring out the right questions to ask… I had never bought a property with a septic tank before, and the person who sold it to us said “Oh, the septic tank was new in 2000”, and we didn’t go back and check. So just having a due diligence checklist. When somebody tells  you – it’s not new advice, but it’s meaningful advice – listen to everything that people say, but just follow up and do your due diligence.

So just having a checklist and checking the septic system; pier and post – other houses in that area, do they have pier and post? Because then it’s not as big a deal. But definitely following a checklist when we go to purchase something.

Joe Fairless: What’s the most recent thing you’ve put on that checklist?

Rome Lingenfelter: The most recent thing… Let’s see. Making sure that I am insulated from lawsuits. So setting up either a good relationship with a lawyer, or an accountant, and making sure that every way that I can protect myself, I am. Because much like California [unintelligible [00:13:48].18] becoming more and more of a litigious environment, and even when you do the right things and you take care of people, people will sometimes wanna come after you, so… That due diligence list is make sure you have a good lawyer in place.

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

Rome Lingenfelter: Absolutely.

Joe Fairless: Alright. First,  a quick word from our Best Ever partners.

Break: [00:14:11].13] to [00:14:49].01]

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

Rome Lingenfelter: Recently read… I really liked the Creature From Jekyll Island. I thought that was an incredibly well done book.

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

Rome Lingenfelter: We wholesales a duplex and made about $160,000. So that was pretty incredible.

Joe Fairless: Yes, that is. Tell us how you found it and how that went down.

Rome Lingenfelter: Sure. We found somebody who was way behind on their taxes, and they also owed money to the local municipality. And just through [unintelligible [00:15:16].01] and the only contact information for this person was — I believe it was in New Mexico. So we had mailed to them, and the mail had bounced back to us… And I would say any of those things that bounce back – those are gold. So I dug into it, I did some skip tracing, I followed relatives, I finally tracked this guy down…

He lives in California and he hadn’t seen the property in over ten years. He had had a lady who lived there most of that time. Seriously a cat lady – she had over 30 cats. She had poked a hole from one side into the other side, and the cats lived in the other side. And for him – he had left his old life behind, ex-wife and all that… But my wife was able to negotiate a deal with him, and he was happy with it, and then we negotiated down with the city on the liens, and it penciled out. It worked out incredibly well.

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

Rome Lingenfelter: I really love to educate, so I started with my son, and we’re doing more and more stuff with Cashflow. I think the future for people to be wealthy is to think bigger, think that they can, and think like an entrepreneur, rather than an employee. So I think Cashflow is a great way to adjust people’s brain, especially at a younger age. So definitely financial education.

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

Rome Lingenfelter: You can visit our website, we’re at www.rmrealestatesolutions.com, or you can reach out to me at romeling2007@gmail.com. We always have new and interesting projects coming up, and we absolutely love to help people learn more about real estate. We’re passionate about it.

Joe Fairless: Well, thank you so much for being on this show and talking about – from a management side of things – how you take your corporate experience and how that translates into now you being a full-time real estate investor. Some challenging projects along the way, and things that you do to mitigate the risk moving forward, as you build that due diligence list, some things that you’ve added recently.

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

Rome Lingenfelter: Thank you  so much.

JF1935: Six Unit Value-Add Nashville Deal Analysis with Felipe Mejia

Listen to the Episode Below (00:27:49)
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Felipe is joining us today to tell us about his real estate investing journey so far. The journey includes buying, adding value, and selling a six unit apartment building. Joe will dig in on that subject, asking about the numbers, how he found it, what he did to add value, and how was the selling process. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Make sure you are earning while you are learning” – Felipe Mejia

 

Felipe Mejia Real Estate Background:

  • Entrepreneur, real estate investor, and small business owner
  • Scaled from a $3,000 mobile home to owning 10 units
  • Based in Nashville, TN
  • Say hi to him at https://www.sideguymovers.com/
  • Best Ever Book: Lifeonaire

 


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

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

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


TRANSCRIPTION

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

Felipe Mejia: I’m good, brother. How are you doing?

Joe Fairless: I’m great, and looking forward to our conversation. A little bit about Felipe – he’s an entrepreneur, real estate investor and small business owner. He scaled from a $3,000 mobile home to owning ten units. Based in Nashville, Tennessee. With that being said, Felipe, do you wanna give the best ever listeners a little bit more about your background and your current focus?

Felipe Mejia: Yeah, man. Absolutely. Currently right now we run about 14 doors. We just sold our six-unit apartment complex. I own a small moving company here in Nashville. Aside from real estate, I am a father, I have a young son, and I am married here in Nashville, Tennessee. That’s about it.

Joe Fairless: Okay, well you said you’ve just sold a six-unit building?

Felipe Mejia: Yeah, man. We’ve just sold a six-unit apartment complex about an hour outside of Nashville, Tennessee, in a little town called Cookeville, TN.

Joe Fairless: Cool. And you owned that property, and then you decided to sell it?

Felipe Mejia: Yeah, I decided that it was time to get out. We kind of pumped that up as expensive as we could, we added as much added value as I think we could… I couldn’t see any way other to squeeze out anything else, and I was like “Alright, it’s time to sell it.” I think we’re at a good place in the market. I usually actually don’t sell any of my property, so this is just way too good. “You know what – I’m gonna go ahead and do it.”

Joe Fairless: And in addition to the six-unit you sold, you also have ten units that you own, correct?

Felipe Mejia: Correct, in Nashville. All single-families.

Joe Fairless: Okay, cool. So tell us about the six-unit. What did you buy it for, how long ago, what was the business plan?

Felipe Mejia: Sure. That was purchased about two years ago. I think the purchase price was 120k. We ended up selling for 260k. The main reason we got it was “Okay, it’s just good cashflow. It’s doing about $1,000/month, it’s next to the college.” The university was doing really well, so we cash-flowed on that for about a year and a half, almost two. After we reached $100,00 in equity in  a year and a half, we were like “Okay, are we gonna BRRR, are we gonna HELOC? What’s the gameplan with it?” and we decided that that was, believe it or not, the property that was doing the least amount of money and causing the most amount of headache for us… So we said “You know what – let’s sell it. Let’s reinvest that money here in Nashville, and kind of provide more houses here.” We saw the market was growing faster in Nashville than it was in Cookeville, so we decided to bring our money home.

Joe Fairless: How far away is it from where you live?

Felipe Mejia: It’s about an hour out. It’s where I went to college.

Joe Fairless: Okay, cool. And what college is that?

Felipe Mejia: Tennessee Tech University.

Joe Fairless: [laughs] You sound very proud of that, I love it.

Felipe Mejia: Well, I’m the first to go to college in my family, as a first-generation college kid, and I’m really proud that I was able to go there, and I love that I have that degree. It’s funny though, I don’t use that degree as I thought I would. I made a video recently on Instagram where I show my degree and I show the books that I’ve read on real estate, and how my real estate books have brought me way more income than my college degree ever will.

Joe Fairless: Right. If you had to pinpoint a couple benefits of doing the college experience that have gotten you to this point, what would those one or two benefits be?

Felipe Mejia: I think that college more than anything taught me how to – and I know this is gonna sound dumb – read and study. Instead of just taking a test, if you will, college allowed me to learn what I’m gonna get out of the book, versus just trying to “Okay, I know this is gonna be a question on the test.” In college I realized my passion for reading, and then I turned that passion into financial gain as well.

Joe Fairless: And let’s talk about that six-unit – what did you do to add the value?

Felipe Mejia: Sure. That unit, luckily, since it was in a city that I knew, I knew that the college students were looking for; most college students like to live with their friends in two-bedroom/one-bath apartments… One-bed/one-bath apartments weren’t doing well, so in the six-unit complex that I had, two of the units downstairs were one-bedroom/one-bath, and we would rent them out to college students, and in the living room they would set up another room… So we kind of allowed that to be a way to have more tenants come in, as well as making it more accessible to the college, as in we had friends that opened up coffee shops close to there. We partnered with them by giving discounts at our place, more college students were like “Oh, we can just go down to the coffee shop.” We offered them Wi-Fi, obviously…

You have to understand that it was a really small town. No one ever leaves, so we had to make it a very comfortable home living place where we knew that college students didn’t go home for the summer, they didn’t go home  on the weekends. This is a place where you came and you stayed all four years, and then left. So we just added as much value as a comfortable living area for college students; they really liked the space.

One of the other reasons we decided to sell it was there was a huge apartment complex that came to the town, and they raised rents by $100 a unit overnight. It was ridiculous, and everyone was moving. And rents were going up at most of the units around, just because that added value came in… And I said “I’m not gonna wanna compete with them at a later date”, and as of now we’ve been able to raise the rent to keep up with that.

Joe Fairless: So the large apartment community that was brand new was actually a benefit initially to you.

Felipe Mejia: Right, but I could see that maybe in the near future it might hold us back. We might have to  compete in pricing going forward. I don’t know that I would have had to actually drop my prices, but I knew that — they did market research as in there wasn’t enough apartment complexes, there wasn’t enough living spaces, so they knew that there was tons of people renting, so that’s why they brought 100 units to a little town like Cookeville, Tennessee. So I rode the way up, but I knew that eventually I would have to compete with them, so I said “Okay, I rode it up, my rents are up as high as I can, in competition with  them (about $25 off), but I know that their units are brand new, they have a pool – I’m never gonna compete with that”, so I said “Let me sell it tippy top that I can.” That was another reason we did it.

Joe Fairless: It sounds like, if I heard you correctly, the two things that you did was 1) you just allowed another person to live in the living room, which allowed you to increase rent… Did I hear that correctly?

Felipe Mejia: Yeah, a lot of the communities around, if it was a one-bedroom, they would only allow two people in the apartment on the lease etc. But for us, we would allow two people per room, including the living room, so they would be able to have four college students, and then we would charge per college student. If you’ve heard any of the interviews that I’ve done, you know that I focus a lot on per-bedroom, not necessarily per house.

I’ll give you a  quick example… One of the houses that we do in Nashville, for instance – we have a three-bedroom/one-bath house that we’re adding three bedroom downstairs, which literally doubles my rent in cashflow, and that’s kind of our niche in Nashville. We’ve learned a little bit of that at the six-unit apartment complex, and that’s another reason we decided to come  back to Nashville, because I could add more rooms in a single-family home with a two-car garage, versus an apartment. Like I said, I kind of capped out on the apartment complex.

Joe Fairless: Okay. And were there any local ordinances you had to double-check before saying “Yeah, more people can live here, and we’ll just put them in the living room”?

Felipe Mejia: Sure. It was a little easier because it was a college town… So when we went to the fire marshal and asked if it was okay to have 3-4 people living in this space area, the fire marshal just came out and as long as everything was up to code, they were fine. All the college students were doing it at all the other houses as well. They would have had to tear down every single house in that area if they were gonna deny me.

Joe Fairless: So that was one component of the value-add approach… And then you said the second one was just getting in with local businesses and offering discounts to your residents for the local businesses? Did I hear that correctly?

Felipe Mejia: Right. So we would market it as super-close to the local coffee shops that would give our tenants discounts to come in – half price off the coffee on the weekends, and obviously free Wi-Fi… But a lot of the times our college students didn’t wanna stay on the campus to do so, so they would go to the local coffee shops. They were really booming in Cookeville, and we were able to offer some pretty good discounts for them to stay locally close to our apartment complex, which — let’s say we lost a tenant for whatever reason; it was always at the coffee shop where we would get our next tenant, because they would all intermingle. So when people were [unintelligible [00:09:33].02] I’m like “Do you see that coffee shop walking down the road?” Boom.

Joe Fairless: So how does that work, with the discounts? Did you approach the coffee shop owner and talk to him/her about it?

Felipe Mejia: Right. So we went down to the coffee shop and let them know that we were the new owners of this property, and we wanted to build a relationship with them, and how could we add value to them. And obviously, they’d just — I mean, they’re selling coffee, they wanna sling coffee left and right. And we told them “Well, how about if we put your brochure in every one of our welcome packets into our units, and offer whatever discount you want, whether it’s five coffees and one free, or 15% off, however you wanna do that, and we’ll tell our tenants in their welcome packets about your location down the road, and how you’re college kid-friendly, to the tech students if you bring your tech ID you get certain discounts…”

A lot of our college students like that, because the complexes that were in Cookeville now had been there forever, and it was just like “Oh, this is your rent. This is what you’ve gotta pay”, and they were super-stringent with the students. They saw them as [unintelligible [00:10:35].21] So for us, they found more comfort in us, that we were good with the locals… They saw that maybe we didn’t live in Cookeville, but we were pretty local. And then the college students that used to live there, they were like “Oh, you went to tech?” and we were able to build relationships with the local little communities around there, whether it be coffee shops, or breakfast areas… And we would just offer that in their welcome packets.

Joe Fairless: So coffee shop was one of them, and then how many other businesses did you do that with?

Felipe Mejia: There were three. There was Poet’s Coffee Shop, there was Grandma’s Pancake, and there was a Mexican restaurant that we used to go to, and we offered their extremely large Burrito at a discounted rate for the college students that were living in our apartment complex, in our six-unit.

Joe Fairless: And were any of those discounts available to other people publicly?

Felipe Mejia: No. They offered tech discounts on Sunday nights, or something. Any college student could come in… But our little six-unit apartment complex had a nicer discount, especially at the coffee shop. Grandma’s Breakfast would do some pretty good discounts on their pancakes to the people that lived in our apartment complex, and then the Mexican restaurant loved to have our people over with the Mexican food.

Usually, Wednesday and Thursday night was tech nights, but our guys could come in and get that discount at any time. And they knew our tenants, because of them came in [unintelligible [00:11:51].25] they would let them know “Hey, we’re living [unintelligible [00:11:55].15] Street with Felipe”, and they would say “Oh, absolutely.” And they would bring their little brochures from their welcome packet, and that would start their relationship. After that it was really up to the restaurant to provide the great service, but we would definitely make that connection. And if college students were coming in from out of town, it automatically introduced them to the best coffee shops, to the best Mexican restaurant there, and where to get breakfast.

Joe Fairless: And they’d show proof of residency by giving them the welcome packet?

Felipe Mejia: There was a card in the welcome packet that said who they were, and they would come in to the restaurant. [unintelligible [00:12:25].16] an Airbnb, there’s like a list of local restaurants… That’s kind of what we offered them upon arrival.

Joe Fairless: Right. But how would the restaurant know that they lived at your house?

Felipe Mejia: In the welcome packet we had a card that kind of specified that, for each restaurant, and the restaurant would give it to us to give it to them.

Joe Fairless: Oh, okay, cool. So they had some special card that the restaurant or Grandma’s Pancakes or the coffee shop – each of those locations had a special card that they gave that to you, and then you put that in the welcome packet, and then the resident showed that to the business whenever they arrived.

Felipe Mejia: Right, exactly. Yeah. Kind of like when you go to  [unintelligible [00:13:03].20] and you get the little punchcard… Kind of the same concept.

Joe Fairless: And each of those three places of business had those cards already?

Felipe Mejia: Right. It wasn’t something super-fancy or something super-laminated. It was something that if I’m not mistaken they just printed out, and they gave to us to put it in their little welcome packet as people went in and out of the unit, or whenever we had new tenants, or whatever the case was.

Joe Fairless: Cool. So you bought it for $20,000/door, you sold it for $43,000/door… Nice work on that one. And that was over a two-year span.

Felipe Mejia: It was [unintelligible [00:13:38].11] We know it.

Joe Fairless: Yeah. Anything else that you did to add value, or were those the three components? You got to add more people in the rooms, putting two people in the living rooms, you have relationships with local businesses, so you constantly have leads coming in, and you’re building a sense of community within the resident base, and you had a brand new apartment community that jacked up the rents in your area, so rising tides lift all boats – anything else other than those three things?

Felipe Mejia: Man, I think that was really it. We hadn’t even gotten to doing an asphalt driveway, or [unintelligible [00:14:17].16] certain parking spaces… We hadn’t even gotten to what we were going to do, before we saw — when that apartment complex came in, we rode their tide up with rents, and then we  knew that eventually, or coming soon in the next six months we were gonna have to compete with those… And that’s what we didn’t wanna do. We saw $100,000 in equity in a year-and-a-half, close to two, and we were like “Man, let’s just pull the trigger on it and move our money closer to home.” And I’m bringing in the same cashflow almost with a single-family in Nashville.

Joe Fairless: Help me understand your thought process for why you’d have to compete with a complex in the future… Because typically, when new construction takes place, they do rent concessions in order to get through the lease-up period. Once they get out of their construction loan, then they put on long-term debt, and then that’s where the lease-ups and the concessions that they did initially then go to the wayside and they start increasing the rents significantly.

Felipe Mejia: Right, and this is what I knew being from that college town – I knew that rents would go up percentage-wise, or just based on what was around, what was growing. I saw the city was growing, and I saw that I would have to continue to pump money into that property to be able to keep up with what was coming in. You have to understand, in Cookeville – it’s a little city, potent town, there’s farms everywhere, and all of a sudden this apartment complex that comes in with the nicest, newest pool, with the best Wi-Fi, right beside the Fairgrounds; if you could see it — it looks like it doesn’t  belong there, it’s so funny. It’s such a nice apartment complex. I knew that rent was gonna keep going up for them, and people were gonna continue to pay… But they were going to be leaving the other apartment complexes. I mean, this was way advanced compared to any of the other apartment complexes there, including my six-unit.

I honestly think that they were either going to buy out the other apartment complexes, or squeeze them out based on rent. Or you had to keep pumping money into your apartment complex to make it that much nicer, to keep up with the rents… Or you were going to have to stay stagnant. You weren’t going to be able to raise your rents. Well, I guess you could, but you weren’t gonna be able to force your rents up by just adding value. You were going to have to compete with that next apartment complex. I would hear it on and on and on, “Well, we got a quote from them for this much, and you’re charging only $50 less.” I would have thought about moving to a nicer apartment complex if that was the difference… And I knew that they were gonna keep on raising it, and they were gonna keep on raising the bar. Was that a negative thing? No. But for me, I saw $100,000 in equity that I could bring closer to home, that I could 1031 into a couple single  families and add value there, easier and quicker than I would be able to in Cookeville.

Joe Fairless: Let’s talk about the 1031 process. What are a couple things you learned?

Felipe Mejia: Sure. So the 1031 process was stressful… Something that I probably wouldn’t advise anybody newer to do, or I would definitely hire a coaching  or mentoring through that process… Luckily, my sister works at a law firm where one of the lawyers also does closings. He has a branch of foundation title, and he was able to walk me through that process… But it’s not easy in that you have to claim the property and you have to do your due diligence quick. And if you don’t know that process already, you really need to have someone walk you through it.

One of the things that I learned right away was it helps to have processes already in place to make that go smoother.

Joe Fairless: For example…

Felipe Mejia: Sure. For me, when I was buying a single-family home, luckily I knew that I was gonna buy in a small sub-city inside of Nashville called [unintelligible [00:17:49].08] Tennessee, and I knew that most of those houses would have a three-bedroom/one-bath up top, and a two-car garage on the bottom. I don’t know one person that has a three-bedroom house that’s only 1,600 sqft. that needs a two-car garage. So I was able to quickly claim the properties that I wanted to purchase, because I knew that in [unintelligible [00:18:09].17] I would be able to add two bedrooms to a single-family house downstairs, because 80% of the properties were like that. So I didn’t have to wait and say “Okay, well I’m gonna go look at that property and spend more time analyzing that property.” I was able to pick 50% out of my analyzing on the property out, because I already knew that area. And if I only had 30 or 45 days to claim one of the properties in a 1031, that would have taken time away from that, where I could have done other due diligence. I was able to do two single-families out of that one, I think… Yeah, I think it was two single-families.

Joe Fairless: And just so I’m tracking correctly, it was a two-car garage and you converted one side of that two-car garage into — I thought I heard you say three bedrooms downstairs…?

Felipe Mejia: Right. So what we do is we convert the full two-car garage into three bedrooms, because also in the downstairs there was always a loft area… Imagine a bonus room on top of a garage, but this was on the downstairs of the house. So the houses in [unintelligible [00:19:08].17] 80% of them are built this way. They have three bedrooms and one bath upstairs. Downstairs they have a small loft area, and that’s about 15×20, and then a two-car garage. So I  blow out the middle wall, and then I create three bedrooms, a small kitchen area, and a shared bath. And then what I do is I rent out each room individually to the construction workers in Nashville because of the boom we’re having in construction.

Joe Fairless: Very cool. Let’s talk about numbers. Just price going into it is — let’s use a specific example, one of the two… It was how much?

Felipe Mejia: Sure, let’s just go with the recent property. The purchase price was 180k.

Joe Fairless: Purchase price 180k, and that gets you a three-bedroom house, two upstairs, with a two-car garage downstairs, with a little loft area, correct?

Felipe Mejia: Correct, yeah.

Joe Fairless: Alright. So 180k is what you buy it for. How much does it cost to do the conversion of the two-car garage into three bedrooms, a little kitchen and a bathroom?

Felipe Mejia: Sure. This is gonna blow your mind, and I want your listeners to get this… This is where I used what I thought was my weakness as my strength. I only knew construction families growing up. So I didn’t know your rich uncle banker, or your friend that his mom works at the bank to get loans, or — I didn’t have those connections; I wasn’t able to borrow money as easily as maybe other people… I don’t know. But what I did know was I wasn’t going to use that as a crutch. I was going to find a way to use that and leverage at its value. So knowing only the construction workers has allowed me to purchase labor at what I know their contractors pay them.

So this is gonna blow  your mind – I can build three bedrooms, a small kitchen and a bathroom for right under $8,000. That’s electrical, plumbing, construction work, drywall, everything. That’s about $8,000, and then maybe $3,000 or $2,000 in material. I’m always under $10,000 by a long shot.

Joe Fairless: That is good. [laughs]

Felipe Mejia: And that is only because I know those people, and they’re friends of the family as well. While I was in college I worked on a construction site, picking up sticks, cleaning construction sites. I didn’t have any specialty, I didn’t know how to frame, or hang drywall, or do plumbing, but I tell you what – I knew every single gentleman on there and I would sit there under the sun and have lunch with them during some of the days, while I was just cleaning up after them. That’s what I knew how to do; I can sweep really well. And even to this day, when they’re building my downstairs, you can ask of my tenants – I go in and I’m sweeping. My construction site is very clean, because that’s all I know how to do, as funny as that sounds. But I know this framer, and I know that this framer makes $200-$300/day, so I can pay him and he’ll frame me three rooms in 1-2 days. That’s $500.

I know the plumber, who’s gonna charge me $1,000 and he’s gonna build me a whole bathroom. He’s gonna drop in piping, he’s gonna drop in everything. And a lot of times they bring in the material from their job site and they give it to me half price, because the owner there is throwing half this stuff away anyways. I remember, I used to throw it away. All the two-by-fours that go in, I’m not kidding. This blows my mind. All the two-by-fours – “You’re throwing this away. Do you mind if I take this with me?”Absolutely. So I just took it with me, and there’s my material. And it goes on and on and on – electricians, drywall guys… I know what their date rate is, and I’ll offer them that, plus $100, or plus $50, and they love to work.

Joe Fairless: So how much was it bringing in before the renovation and how much does it bring in after the renovation?

Felipe Mejia: The if the purchase price is 180k, I’m typically gonna rent each room for probably about $450. So pre-renovations you’re looking at $1,350, if I’m doing $450. That usually covers all my expenses on the property, completely. Let’s say that I add three rooms downstairs, so now you have six rooms renting at $450. That’s $2,700.

Joe Fairless: That’s some good math, especially when you can recoup that investment of $10,000 so quickly.

Felipe Mejia: Yeah, in the first year I’ve made all my money back when it comes to any of that stuff.

Joe Fairless: Yeah. Well, taking a step back, what’s your best real estate investing advice ever?

Felipe Mejia: Learn while you earn. And the reason I say that is because a lot of people want to learn and then start earning. And I say “Look, take the plunge, buy your first rental property. Just do it, and learn as you’re earning.” One of the advice that someone once gave me was “If you buy a rental property and you make $200/month on it, you’re doing great, because you’re also getting equity, you’re also getting tax incentives…” There’s a lot more there than just the $200/month. Plus the loan paydown.

I always tell anybody that I coach or that I mentor, I say “Look, make sure that you’re earning while you’re learning. Because if not, if you’re gonna split the two, you’re gonna learn for a year and then start earning. Or learn for two years and then start earning. No. Learn and earn at the same time.”

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

Felipe Mejia: Let’s do it!

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

Break: [00:24:21].04] to [00:24:57].06]

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

Felipe Mejia: Life on Air.

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

Felipe Mejia: Not reading the fineprint. Read it. The dirt is in the details.

Joe Fairless: What fineprint burned you?

Felipe Mejia: [laughs] Giving up equity where I knew that I probably should have waited on it. I gave up 10% on a deal because — she gave me an option of what I wanted to pay upfront, give 10% at the end of the deal, or just pay a fine for letting me borrow the money, and I decided to do 10%, and I was like “Okay, I’ll pay 10%. That’s fine.” And then we ended up selling the property and having to completely fork over 10%. That one still hurts.

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

Felipe Mejia: What’s *a* deal that I’ve lost money on?

Joe Fairless: Yeah.

Felipe Mejia: No real estate deal. Real estate is really forgiving. Anything I’ve lost money on is in the purchase of  a car.

Joe Fairless: Fair enough.

Felipe Mejia: I’m very picky on my real estate. I’m stingy, whatever you wanna call it, but I try not to make a mistake. The biggest mistake I made was, like I said, buying my sports car when I was 18.

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

Felipe Mejia: Sure. I volunteer at my church in my youth group here in Smyrna, Tennessee, and I do small-time coaching and mentoring on my Instagram as much as I can.

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

Felipe Mejia: Absolutely. @1team_felipe on Instagram.

Joe Fairless: I really enjoyed our conversation, learning about how you’re adding value by adding bedrooms and by building relationships with people to offer them an opportunity to make more money than they typically make, and get you a really good deal as well on that, with the construction.

We talked about the three things that influence increase in value from your six-unit – the adding more tenants approach, two was having discounts to local places and partnering up with them, you also got a lot of leads from there, and then three was just luck, the apartment complex being new… But still, you put yourself in a position to be lucky by purchasing the property…

Felipe Mejia: That’s the key, Joe.

Joe Fairless: And that’s the key, exactly. That’s what a lot of people who are on the sidelines – they don’t necessarily understand as much. But when we put ourselves in a position to be lucky and we’re doing the right things, then good things tend to happen. So thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you again soon.

Felipe Mejia: Thanks, Joe. It was a pleasure to be on. You’re amazing. Continue doing what you’re doing.

JF1930: Building A Real Estate Investing Business & Apartment Syndication Breakdown with Mauricio Ramos

Listen to the Episode Below (00:18:28)
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Mauricio has been building his real estate portfolio and is invested in passively in other deals. He currently owns 48 units, we’ll hear about his first 16 unit apartment syndication, and what he’s learned along the way. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Take action, don’t wait until you have learned everything on the subject” – Mauricio Ramos

 

Mauricio Ramos Real Estate Background:

  • Full time real estate investor and accredited investor
  • Founder & Managing Member of de Medici Group
  • Currently controls over $2M in multifamily assets
  • Based in San Antonio, TX
  • Say hi to him at https://www.demedicigroup.com/

 


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TRANSCRIPTION

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

Mauricio Ramos: Hey, Theo. Doing great. Thanks for having me. It’s a pleasure.

Theo Hicks: Absolutely. We appreciate you coming on the show today to share your expertise. Before we get into the conversation, a little bit more about Mauricio’s background. He is a full-time real estate investor and accredited investor, founder and managing member of de Medici Group. Currently controls over two million dollars in multifamily assets. He’s based out of San Antonio, Texas, and you can say hi to him at demedicigroup.com.

Mauricio, do you mind telling us a little bit more about your background and what you’re focused on now?

Mauricio Ramos: For sure, and thanks for the space. My names is Mauricio Ramos, I’m from Merida Yucatan, Mexico. I grew up in Matamoros, Tamaulipas, which is also in Mexico. I went to school through high school all the way in Mexico, and I came to Texas for college, under a student visa, and obtained my civil engineering degree from Texas A&M University, and worked for ten years in the construction industry as a project manager, under different work visas.

Currently, I’m 34 years old, I live in San Antonio, like Theo mentioned, since 2014. I’m married to my wife, Dominga, since 2018. She’s a mariachi director here in San Antonio ISD. Currently, my wife and I own and manage de Medici Group, a multifamily real estate investing firm here in San Antonio.

We are currently invested in 234 units, and recently just got another 28-unit apartment complex under contract. A little bit of how I got started – I got introduced to real estate by one of my interns when I was in construction, and it  really caught my attention. I started educating myself and changing my mindset, like many people who read Rich Dad, Poor Dad and Cashflow Quadrant, and those kinds of books. So definitely  a lot of mindset changing for about a year; not really a lot of deals, but just mindset changing.

With the help of my first mentor I bought my first deal. It was  a mobile home. So I bought a mobile cash, fixed it up, and owner-financed it out in 2017. Right after that I did another mobile home, wholesaled a few single-family homes, and then this is when I came across multifamily, and I immediately fell in love with it. I started educating myself, reading books, listening to hundreds of hours of podcast, and going to seminars to start learning.

I decided to start doing my first direct mail campaign in September 2017, so by December 2017 I bought my first my first ten-unit apartment complex in Lexington, Texas, which is 34 minutes South of San Antonio. This was a seller finance deal, 0% interest, 7% down. It was a very good deal, and actually, this property — I just went full-cycle on this property 18 months later for a 159% return on investment.

Theo Hicks: Alright, thanks for sharing that story. Of the current 134 units, are those all properties that you own yourself, or is it a combination? Because I know that you said you’re an accredited investor as well. Is it a combination of deals that you own outright yourself, obviously with the loan, and deals that you are a passive investor in?

Mauricio Ramos: That’s correct. It’s 234, and it’s a combination of passive and syndicator, and that 10-unit was just me and my wife.

Theo Hicks: Of that, how many do you own yourself?

Mauricio Ramos: Currently, 48.

Theo Hicks: Okay. How many different buildings?

Mauricio Ramos: There’s a 16 and a 32-unit apartment complexes in McAllen, two separate properties that we’ve syndicated.

Theo Hicks: Okay, so you actually syndicated those deals. Do you wanna walk us through — which one was your first deal, 16 or 32?

Mauricio Ramos: The first syndication was the 16.

Theo Hicks: Alright, do you wanna walk us through that? Before you’d even found the deal, what types of things did you put in place? Did you have the capital first, did you have your team in place first, or did you find the deal and did that later? Walk us through the process of acquiring that deal.

Mauricio Ramos: For sure. At this point me and my business partner Adrien – we continued sending direct mail (postcards) to McAllen and different other cities which we were familiar with… And we found this 16-unit apartment complex. This is in a very good area in McAllen, Texas. We bought it for $570,000, and we brought four other investors, and Adrien and myself, and we just got a long-term loan on it. The plan is to hold it for 3-5 years.

Theo Hicks: How did you find those four investors?

Mauricio Ramos: People that I knew from when I was in corporate America, people  that knew that I was doing real estate and they saw how I was making progress, and having success. Then I quit my job last year, so during the last few months they said “Hey, the next one – I wanna jump in with you.”

Theo Hicks: Did those first four investors actually come to you, seeking out the opportunity, or did you bring the opportunity to them?

Mauricio Ramos: I brought the opportunity to them.

Theo Hicks: Can you walk us through how you presented that to your co-workers? Did you do it at work? Did you do it at a bar after work? I’m just curious… I know a lot of people that are listening probably have their W-2 jobs, have a lot of people who are the ideal passive investor, but might not necessarily know how to properly go about presenting deals, especially when they’re still working at  the company… So do you wanna walk us through that process?

Mauricio Ramos: For sure. I put a package together, my investor package, which is a ten-page deal where I explain all the ins and outs of the deal. I presented it to my investors, met for lunch with them and said “Hey, I have this opportunity. This is how much I’m looking for, this is the return on your money. If you’re interested, this is how it’s gonna look like”, and they decided to jump in. But it was definitely a combination of doing things while at work, then at lunch, and then definitely a lot of work after five, after my job.

Theo Hicks: Yeah, I figured. And what was your structure for those passive investors? What types of returns did you offer them?

Mauricio Ramos: This one is a 9% cash-on-cash average, and 96% ROI over the life of the project, for a 3-5 year hold. It’s a 70/30 split GP/LP.

Theo Hicks: So the GP gets 70%, or the LP gets 70%?

Mauricio Ramos: The LP gets 70%.

Theo Hicks: Okay, okay. Are those the actual numbers? Is 9% cash-on-cash, 96% ROI over the life of the project, or is that what your projections were, that you presented to them, and said “Hey, if you invest, here’s what our projections are.”

Mauricio Ramos: Those are the projections. We’re six months into the deal, so we’re still working through it.

Theo Hicks: You said 96% ROI?

Mauricio Ramos: Yes.

Theo Hicks: So essentially doubling your money, okay. What about the second deal? Do you wanna walk us through that one?

Mauricio Ramos: For sure. This 32-unit we found through cold-calling. We called the seller (he’s out of state). After probably two months of following up, we finally agreed on a number, got it under contract… And this one is a little over a million, so we were able to get agency debt on it. Similar situation, 70/30 split, brought seven investors, and then my business partner and I, to the deal.

This one is a little better, because since it’s an off-market deal, the price was pretty good compared to the area… So this is a 10% cash-on-cash average for 3-5 years the life of the project, and 100% return. We’re pretty confident that this one — we should be able to turn it around in two years max.

Theo Hicks: Why did you decide to transition from the direct mail to the cold calling?

Mauricio Ramos: We had both going on… We just had the resources to do some skip tracing and have some good properties to call. So we just had the resources to do it.

Theo Hicks: So you’ve done three deals so far: the 10-unit, the 6-unit, and the 32-unit that came from a combination of cold calling and direct mail. How many marketing contacts – combination of direct mail and cold calling – would you say you did in order to get those three closed deals?

Mauricio Ramos: I’m gonna back up real quick, and I’ll get to the question; it’s a great question. So after I did my 10-unit through direct mail, I found an 8-unit in Kingsville, Texas, and I wholesaled that for a five-figure fee. Then I found a 24-unit in downtown San Antonio, and with that one I did a six-figure fee, which was twice my annual W-2 income… So this is the one that really put me in a different position to be able to get into some mentorship programs, get into a couple of Airbnbs and get some additional cashflow. I also basically quit my job. At that point is when I decided to marry my wife, and quit my job and just went full-time into real estate.

So to answer your question, I’d say the response of the postcards is pretty good compared to what typically single-family people see. I’d say probably 5%-8% response. We have a good 150 to 200 leads that got offers in our system to get to those five deals or so.

Theo Hicks: Do you wanna walk us through that 24-unit that you got the six-figure fee on? Obviously, you mentioned that you got it through your direct mail… Why did you decide to wholesale it, as opposed to buy it yourself? And then how did you find the person who ended up buying that property from you?

Mauricio Ramos: For sure. And a little bit of that I have prepared to one of the questions further, but I’ll try to not spoil it…

Theo Hicks: It’s your best ever deal… You can go over it now, and I’ll ask a different question.

Mauricio Ramos: Okay, I’ll just go through it. We found it through a postcard, it was a mom and pop owner… They were just tired. My postcard was delivered just at the right time. It was actually the right color. My postcard is pink, and the owners of the property are gay, so for some reason they decided to call my postcard. So they called my postcard, we met, great people, they liked me, and we went under contract.

I wasn’t sure what I was gonna do with it. I was going to either wholesale it, or try to kind of syndicate it, bring some investors in and do it. It was a very old building; there’s two buildings, one of them built in 1896 and the other one in 1928… So there’s a lot of historic character in it.

I wasn’t prepared to syndicate it at the time; I didn’t have the resources to do it. So at the same time I attempted to wholesale it. I put a package together, put it on Facebook, and within 24 hours I had it under contract to sell.

Theo Hicks: That’s amazing. And then you said you got a six-figure fee. Was there negotiation back and forth, or did you just say “Hey, this is how much money I want for wholesaling this”?

Mauricio Ramos: I double-closed, so the buyer didn’t know how much I was making until the very end… But I double-closed, and actually there was my asking price, and the buyer really wanted it; it’s a buyer from California that has a strong presence in San Antonio. They really wanted it, so they were like “What do you need to put this under contract with us right now?” So I said “Alright, just throw in 50k and then I’ll do it”, and they did.

Theo Hicks: Perfect. Alright, so before I ask you the money question, I had asked you — for those who are listening, I’ll describe it, but those watching will understand… So Mauricio has a whiteboard behind him, with a bunch of different color codes on it. I can’t read it, but it’s got a statement at the top. Do you wanna walk us through what that is?

Mauricio Ramos: Yeah, the statement at the top says “Keep God first place.” I’m a Christian, and ever since I really started taking that to heart and really putting God first, my life really started making a transition and making a change for good.

Theo Hicks: But below that, are those like your goals, or is that strategies for your business? Is that like a goal board/vision board?

Mauricio Ramos: No, it’s really just everything that I have going on in my mind… Everything just floating in my head, I put it on the board, and that way I get everything every morning, and I just know where I’m at. Just different things that I have going on at the same time; so it’s not necessarily goals, but just ongoing deals.

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

Mauricio Ramos: Best advice for the Best Ever listeners is to take action. Don’t wait until you have learned everything, all the ins and outs on the subject. Just take action, jump, and build the parachute on your way down. Just do it. For example, you don’t have to wait to learn how to do a 1031 exchange if you haven’t even submitted an offer on a property.

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

Mauricio Ramos: Ready.

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

Break: [00:14:07].26] to [00:14:50].05]

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

Mauricio Ramos: It’s called “Am I being too subtle?” by Sam Zell.

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

Mauricio Ramos: I would go straight into  multifamily.

Theo Hicks: What deal have you done that you’ve lost money on?

Mauricio Ramos: I haven’t done a deal that I’ve lost money on, but maybe I can think of a few deals that I could have done it, I just wasn’t ready; I didn’t have the knowledge at the time to do them. So now that I know, it’s like “Oh, man, I could have done that”, I just didn’t know.

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

Mauricio Ramos: Anonymously. I believe in Matthew 6, so I give to my church and other charities, but I don’t announce it to social media.

Theo Hicks: I like that. What is the best ever place the Best Ever  listeners can reach you?

Mauricio Ramos: It’s on my Instagram. I’m at @maurms, and my webpage, demedicigroup.com, and mauricio@demedicigroup.com.

Theo Hicks: Mauricio, I really appreciate you coming on. A very inspiring conversation; you’ve come quite the journey. I’m sure things are just getting started for you. Just a summary of what we talked about – we went into how you got into real estate, and you were actually introduced to it by an intern at one of your companies. That’s a first I’ve ever heard that one. You mentioned how you started off with buying a mobile home, which you owner-financed out after you bought it, and then you wholesaled some single-family homes before you came across multifamily.

You started sending out your direct mailing campaigns, and your first deal was that 10-unit in Texas. Again, another seller finance deal, 7% down, sold it 18 months later for a very high return on investment.

We went through two of your syndication deals. One was that 16-unit, which was your first one; you got that through direct mail. Four investors, all co-workers, and you kind of walked us through how to present investment deals to people that you’re working with, while still at that company. You also gave us the returns on that one.

We talked about your second deal, which was that 32-unit that you got through cold-calling back and forth for two months and ended up putting it under contract. It was a better opportunity because it was off-market, and again, you walked us through the returns on those as well. You told us that you get about a 5% to 8% response rate on those direct mail that you sent out, and for those five or so deals that you either bought yourself or wholesaled, you said that you had to go through about 150 to 200 offers before you got those five.

Then we also talked about your best ever deal, which was that six-figure fee on the 24-unit. Mom and pop owner who you sent the pink letter to, so perfect letter, perfect timing… You didn’t really know whether you’d wholesale it or syndicate it. Older building, historical building. You decided to wholesale it. A company came to you once you posted on Facebook within 24 hours. You got to add a nice little $50,000 fee to that to close it quickly.

Then you talked about your whiteboard, which I like how you’re just kind of like journaling, but you see it; it’s much more present in your office. And then your best ever advice, which was to take action. I liked how you said “Don’t wait until you know everything. Just jump and then build your parachute on the way down.”

Mauricio, I appreciate you coming on the show. Great advice, again. Best Ever listeners, thanks for listening. Have a Best Ever day, and we will talk to you tomorrow.

Mauricio Ramos: Thanks, Theo. Thanks for having me. It’s such a pleasure.

JF1927: Everything You Need To Know About Sales Assumptions When Underwriting An Apartment Deal | Syndication School with Theo Hicks

Listen to the Episode Below (00:21:38)
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When underwriting a potential deal, you’ll need to have set assumptions that will help you determine how much cash you will receive at sale. After investors are paid back, you’ll be splitting the profits with them according to how you structure the investment. Theo will break down how Joe and Frank underwrite their sales assumptions for Ashcroft Capital. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“You want to determine what  the closing costs are going to be as well how much debt you will owe. Subtract those two factors from the sale price, and that gives you your profits at sale”

 

Free Resource:

http://bit.ly/salesassumptionoutline

 


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


TRANSCRIPTION

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

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

 

Theo Hicks: Hi, Best Ever listeners and welcome to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I’m your host, Theo Hicks. Each week we air two podcast episodes; they are available on the best real estate investing advice ever show in podcast audio form, as well as available on our YouTube channel in video form.

These episodes focus on a specific aspect of the apartment syndication investment strategy. For the majority of these episodes we offer some sort of free resource. These are PowerPoint presentation templates, these are Excel calculators, these are PDF how-to guides, these are resources that will help you in your apartment syndication journey, that accompany the specific episode or series that we are discussing. Of course, these are free, just like the Syndication School episodes are free. Both of those are available to SyndicationSchool.com.

In this episode we are going to talk about sales assumptions. This episode is entitled “Everything you need to know about sales assumptions when underwriting an apartment deal.” If you harken back to our discussion about underwriting value-add apartment deals or just underwriting really apartment deals in general, one of the many assumptions are going to be your sales assumptions. That is the assumptions the assumptions made about when you actually sell the deal on the back-end.

The purpose of this episode – it’s going to outline how to think about in more detail these assumptions that you’re setting when you are initially underwriting the apartment deal. So all of these assumptions are a part of the disposition summary that is outputted for you at the end of your underwriting process, which basically tells you how much cash you’re going to get at closing. That’s gonna be very important for you when you’re raising capital, because you’re obviously offering your investors some sort of ongoing return, whether it’s a preferred return, a profit split, or a combination of the two, class A, class B… But a large portion of the return – and maybe even a majority of the return – actually comes at sale. So you add value to the property, you force equity up and up and up, you sell the property for a large profit, and then after you have returned equity to your investors, the remaining profits are split between you the general partner, and the limited partner. The return goes from maybe 8% to 10% annualized, up to 20% plus annualized, once you take into account those profits at sale.

As we’ll dive deeper, the actual profit at sale calculation is very sensitive. So you could change the assumption just a little bit and it could increase your sales price, which would in return increase your profits. So it’s very important to be specific, to be conservative when you are making these underwriting assumptions on the back-end. Once I get to that part of this episode, I’ll explain what I’m talking about.

This disposition summary flows like this – so you decide to sell the property, you have a  net operating income at that date… So I guess going in you have in your mind a projected hold period of, say, five years, so in five years you plan on selling the property. In your model you have a year five ending net operating income, as well as the exit cap rate assumption that you think the cap rate will be at year five, and then you divide the net operating income by the cap rate to get the projected sales price of the property, the value of the property, which you assume is gonna be the sales price of the property.

Then you take the closing costs expense, as well as any debt that you still owe to your lender if you’ve got a mortgage on the property, and you subtract that from this projected sales price… Because those are gonna be expenses paid out at closing. And then you determine based off of that what the sales proceeds are going to be.

So the six assumptions here that we’re making is 1) the net operating income, 2) the exit cap rate, 3) the sales price, 4) the closing costs, 5) the remaining debt, and then 6) the sales proceeds. So we’re gonna go ahead and go through all six of those, and discuss (again) how to think about setting these assumptions.

First is the net operating income. As you know if you’ve been listening to the Syndication School – and I mentioned this a few seconds ago – the value of the apartment is based on the net operating income. That is one of the two factors that goes into the value of the apartment calculation.

The value of the apartment equals the net operating income, divided by the second factor, which is the cap rate. So to calculate the projected sales price, the first thing you need to do is determine what the net operating income is at the sale. So you’ve got your deal fully underwritten — this is assuming you’ve already underwritten the entire deal, and the last thing you need to do is set these last assumptions. In our underwriting process, this is actually one of the last things you do, because a lot of the formulas that are used in this disposition summary are tied to the five-year business plan, and things like that.

The first assumption that goes into your net operating income is obviously the hold period. So when you’re initially underwriting the deal, you need to know how long you plan on holding on to the property. Again, the profits at sale are going to be a large chunk of your investors’ profits, and if you don’t have an end in sight, you’re not gonna have that profit in sight, so you can’t just hold on to the deal for an indeterminate amount of time, unless of course that’s what your investors want… But most likely you’re gonna want to sell the property at some point, so you can return their equity, as well as give them that profit. So five years, six years, seven years, eight years, nine years, ten years – whatever you wanna do, but you need to set that assumption in your underwriting model.

Now, in the simplified cashflow calculator that is hardwired in, you can’t change it. It’s set at five years. But obviously, as I explained in those episodes, you wanna use this as a guide, and then from there using your Excel skills (if you have those) and making it more detailed.

So that’s one, the hold period. And then obviously, once you know the hold period, then you can pull that net operating income number and use that for your calculation. And of course, the net operating income calculation is based off of the income and the expenses, but usually, since it’s gonna be year five, it’s actually based off of the stabilized income and expenses that you underwrote, plus whatever annual income and annual expense growth that you assumed; your rental growth is gonna be based off of how quickly you do renovations… So obviously, there’s a lot that goes into the net operating income calculation. I’m not gonna go into extreme detail on that right now, because we’ve already talked about that a ton in our episodes on how to underwrite the deal.

The one thing that I did wanna stress is the hold period; the NOI at the end of year five is gonna be different than the NOI at the end of year three, which is gonna be different than the NOI at the end of year ten… And since those are all gonna be different numbers, the value of the apartment at year three, year five and year ten are also gonna be different. Hopefully, the NOI is higher at year three than it was in year five and year ten. So once you set that hold period assumption, then you can pull that NOI number from your five, ten-year projections. So that’s the first assumption.

The second one is the exit cap rate. That’s the other part of the value calculation to get that sales price. So in the simplified cashflow model, the assumption is that the exit cap rate is 50 basis points higher than the in-place cap rate at acquisition. So whatever you paid for the property and whatever the net operating income at the time was, is used to calculate the in-place cap rate. So it would be the NOI divided by the purchase price.

So the assumption is that the exit cap rate is going to be 50 basis points, which is 0.5% higher than that in-place cap rate… Which is assuming that the market is worse at sale than at purchase, which is a conservative assumption. Because if the market is the same or is better, then that’s just extra value that’s created. But if it’s worse, then you’ve already accounted for that. If it’s way worse, well then you’ve already accounted for at least some of that.

Now, this 50 basis points assumption that we use is based on a five-year exit. So if you want to have a lower one, if you’re gonna make the exit cap rate the exact same as it was in place, if you wanna make it less than, greater than, it’s really up to you. This is just what we do. But if you make that change, then you wanna make that change reflected in your cashflow calculator. So however you’re calculating your exit cap rate in your cashflow calculator… If it’s gonna be 50 basis points greater than the in-place cap rate, then the formula would be in-place cap rate plus 0.0005. If it’s something else, then you wanna change that plus number… And if you’re just inputting a different number entirely that’s not based on the in-place cap rate at all, then you’ll wanna just input that.

Now, there are a few scenarios where you can’t just base the exit cap rate on the in-place cap rate. There’s really two that come to mind. The first is if you bought the property below market value, and the second is if you are updating the property to such a degree – and this kind of ties into yesterday’s episode, or if you’re listening to this in the future, the Syndication School episode before this one, about underwriting a highly-distressed apartment deal… So if you’re adding  a ton of value to an apartment, that actually brings it from class B to class A, or class C to class B, or class D to class C, so it’s going up in class ranking – then you’re also gonna want to not base the cap rate on the in-place cap rate.

So in the first scenario, if you’re acquiring the property below market value, then the in-place cap rate is going to be a lot higher than what the actual market cap rate is… Because the value is lower, the NOI is the same, so therefore the cap rate is higher, since it’s in the denominator of that formula… So you need to figure out what the actual market cap rate is, because your transaction is not actually at market cap rate.

So this is speaking with your property management company, or your broker, and reading the various market cap rate reports by institutions such as CBRE, to help you determine based off of the stabilized product what is the market cap rate. And then you can base your exit assumption on that number, as opposed to the in-place cap rate.

The other time, again, is if you’re taking the apartment to a higher asset class. Generally, the cap rate of class A are less than the cap rates of class B, which are less than the cap rates of class C, which are less than the cap rates of class D. So if you are buying a class C at a higher cap rate, and you convert it to a class B, at that lower cap rate, well then you’re not gonna wanna base your exit cap rate on that class C cap rate; you’ll wanna base it on that class B cap rate. So again, where do you find that? Same place you find any market cap rate, which is your property management company, brokers, and the various commercial real estate reports. Once you find that number for the new asset class, then you can base your exit cap rate assumption on that number. So that’s assumption number two, exit cap rate.

Assumption number three is the sales price, which technically isn’t really an assumption. I mean, it is, but it is based off of two other assumptions. So it’s based off of your NOI at exit assumption and your exit cap rate assumption – again, NOI divided by cap rate gives you the value. In your cashflow calculator that’ll most likely be automatically calculated. It is in our simplified cashflow calculator that you can get at SyndicationSchool.com for free.

Number four is the closing costs. These are the expenses that are associated with selling the apartment, and in the simplified cashflow model we just have it set to 1% of the sales price. It’s not necessarily a placeholder, but it’s just assuming that all it is is these lending closing costs; the closing costs paid to the lender, which may be lower or higher than 1%.

So there are other expenses that might be incurred at sale, depending on your business plan, depending on the loan that you’ve got… So here’s a breakdown of some of those other potential expenses. If these are something that you believe might be incurred at sale, well, make sure you’re accounting for these in your disposition analysis.

First is the commission. If the deal on the back-end is listed for sale by a broker, they’re gonna take a percentage of that purchase price. That’s gonna be based on the sales price, so you need to account for that in your disposition analysis. So ask the broker you expect to use what they would charge to list the property on the back-end. Usually, it’s gonna be a percentage, but it might also be a flat fee, depending on if you’ve exceeded a certain dollar threshold… So it kind of varies, depending on the sales price of the deal. But you can get that information from the broker, whether it’s a flat fee or a percentage. That’s gonna be something else that’s subtracted from the sales price when making the sales proceeds calculation.

Two is a disposition fee, which is kind of like a back-end acquisition fee charged by you, the syndicator, for the process, the work involved in actually selling the deal. 1% of the purchase price is standard, but again, you may or may not charge this fee.

The pre-payment penalty and yield maintenance and defeasance are all kind of wrapped into one. If there is a yield maintenance, a defeasance, a pre-penalty clause in your mortgage, and you sell your property before that clause expires, well there’s gonna be some extra fees that are gonna be paid to the lender for exiting the deal. I’m just gonna leave that there, because we’ve talked about pre-payment penalty, yield maintenance and defeasance in the Syndication School episode “Everything you need to know about pre-payment penalties.” So for more information on that and what those numbers/costs might be, make sure you check out that episode.

Next are closing costs. And now I’m saying “Well, how is closing costs a category of closing costs?” Well, these are the costs that are associate with ending the mortgage that your lender charges. Whenever you sell a deal, there’s always closing costs; these are what’s associated with that. To get those numbers, talk with your mortgage broker or lender, to get an estimation of what those will be; is it a percentage of the purchase price, a flat fee? Things like that.

And then lastly, legal costs. Since you’re putting a syndication together, there is steps that need to be taken to end that syndication partnership, which requires the work of a real estate attorney or a securities attorney… So that’s also an extra cost you might have to pay, depending on your contract with them. So you’ll wanna also talk to them, your securities attorney and your real estate attorney, to determine what’s the process for ending the partnership and any costs associated with that.

All those combined add up to the closing costs expense, which is subtracted from the sales price. The last thing that’s subtracted from the sales price, or I guess the second thing that’s subtracted from the sales price is the remaining debt. So you secured a mortgage, and you paid a principal towards that mortgage, so the remaining debt is the initial loan balance minus all the principal payments. Maybe you had three years of interest-only and no principal was paid down, so maybe it’s like two years of principle; maybe it’s five years, maybe it’s ten years, maybe you paid extra, for some reason… Whatever that happens to be, there’s going to be an amount that you still owe to the lender to pay off that loan… And that also comes out of the sales price.

That is something that, again, is tied back to the holding period assumption. So if you plan on holding on to the property for 4-5 years, then based off of whatever the amortization schedule is, you will know how much of the loan you should have paid off, unless something crazy happened and you can’t pay the loan off. This is something that’s gonna be a maximally certain assumption, shall we say, that you should be able to know how much debt is gonna be remaining based on when I sell.

If I have three years of interest-only and I sell at year three, then I owe all of the debt back. If I sell at year ten and I have five years of interest-only, then those five years of principal paydown, which are gonna be on kind of a sliding scale, since you pay more interest upfront, and gradually pay off more principal over time, you can look at your amortization schedule and it’ll tell you “You’ve paid this much principal in year two, this much in year three, year four, year five”, therefore all those together have paid down the mortgage, so whatever is left over is what you owe. That is the remaining debt.

The last assumption, which again, is kind of like the sales price assumption, is actually based off of the previous two assumptions, or the previous three assumptions, or I guess all five assumptions, is the sales proceeds. So the sales proceeds is going to be the sales price minus the closing costs, minus the remaining debt. And again, in your cashflow calculator, this is most likely gonna be automatically calculated for you, if you set it up properly. And then whatever that number is, a portion of that is going to go to your investors…

So however much equity you owe them — it depends on how you structure it, but typically it’s either all of their equity, if you offered a preferred return,  or if you did a refinance, or if you had the partnership structured such that any profits above the preferred return are considered a return of capital, then those profits above the preferred return in addition to the refinance proceeds are typically considered a return of capital… So that’ll be subtracted from whatever equity is owed, and then the remaining balance will be owed, and the  rest of those sales proceeds that are remaining, the profits that are remaining are split amongst the GP and the LP based off of what was agreed to.

So overall, you need to know what the exit operating income and the exit cap rate is at your projected sales date, so those are two assumptions you set. Based on that,  you can determine what the projected sales price is gonna be. Then you also want to determine what the closing costs are going to be, as well as how much debt you’re going to owe based on that sales date… Subtract those two factors from the sales price and that gives you your profits at sale, which a portion goes back to paying your investors, and the rest is split as profit, and that will go into your IRR and cash-on-cash return calculations.

So that’s it for this episode… That is everything that you need to know about setting the sales assumptions when you’re underwriting an apartment deal. Until next week, check out some of the other Syndication School series episodes that we have about the how-to’s of apartment syndication. As I mentioned in the beginning, lots and lots of free documents as well. All of that is available at SyndicationSchool.com.

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

JF1926: How To Underwrite A Highly Distressed Apartment Deal | Syndication School with Theo Hicks

Listen to the Episode Below (00:22:53)
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We’ve covered underwriting for more “normal” value add apartment syndication deals. Now we’re going to hear the differences between underwriting those deals, and underwriting highly distressed apartment communities. Theo will cover how you should underwrite highly distressed deals. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“The point is to have a contingency budget and have it be at least 10% of the deferred maintenance cost”

 

Definitions & Example Deal:

http://bit.ly/highlydistressed

 


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

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

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


TRANSCRIPTION

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

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

 

Theo Hicks: Hi, Best Ever listeners and welcome to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I’m your host, Theo Hicks. Each week we air two Syndication School episodes on the best real estate investing advice ever show podcast. You can also watch them in video form on our YouTube channel. These episodes focus on a specific aspect of the apartment syndication investment strategy.

For the majority of these series we offer some sort of resource. These are PowerPoint presentation templates, Excel calculators, PDF how-to guides, things that accompany the episode or the series. And of course, these are free for to you to download. All of these free documents can be found at SyndicationSchool.com, as well as all of the past Syndication School episodes.

This episode we are going to talk about how to underwrite a highly distressed apartment deal, today’s episode, and then the next Syndication School episode is gonna be focused on underwriting.

When you are underwriting your normal value-add or turnkey apartment syndication deal – we’ve covered that already in Syndication School. In fact, we did I believe a six-part series, or maybe even an eight-part series on underwriting… So if you want to learn how to underwrite those types of deals, go to SyndicationSchool.com, or just go to JoeFairless.com, type in “underwriting”, and then you’ll see all of those Syndication School episodes where we went over in great detail how to underwrite deals, we gave away a free simplified cashflow calculator, as well as some other documents to help guide you through the underwriting process.

This process is a little bit different. This isn’t an actual calculator. You can technically use the cashflow calculator that we provided, but you need to make some manipulations, just because when you are doing a highly-distressed deal, the upfront assumptions of underwriting are gonna be slightly different.

So we’re gonna find a highly-distressed deal that is something that has a low occupancy rate, so something that’s not stabilized,  so below 85%, but it could as low as 50%, or it could be completely unoccupied. It’s also something that has a lot of deferred maintenance; this isn’t a deal where it’s already got the deferred maintenance cured, and your plan is to either go in there and just continue to operate how it currently is, or if your plan is to go from that foundation and implementing some value-add business plans like renovating the units, adding some exterior amenities to increase the rent. This is different; this is when those things need to be done, obviously, but there’s also the added thing of a lot of deferred maintenance. Another example would be thing that have very big tax liens on them.

Basically, this is a deal that requires a lot of upfront capital to even get it to the point where you can start collecting money. So when you are underwriting a distressed property that fits that criteria, rather than just starting right away with “Okay, all my cap-ex are gonna be to add value”, you need to take a different approach… And we have a formula for calculating the max purchase price; the formula is going to be the stabilized value, minus the deferred maintenance expense, minus the stabilized expense loss, minus contingency, minus an equity fee, minus other expenses. I’m gonna go ahead and define all those, obviously, and then we’re gonna give away this document that I’m using as a guide for this for free, just so you can have that without having to have an audio form… So you can just be like “Alright, I’ve got a highly-distressed deal. What do I do? Oh, I’ve got this document in handy, that walks me through that entire process.”

So let’s go ahead and define the inputs and the outputs of this formula. Obviously, the output is the max purchase price. That is what you are calculating, and that is going to be the maximum amount of money that you’re willing to pay for the property. So what is the highest purchase price you’re willing to offer for this highly-distressed property? That’s number one.

The next thing – this is really the only positive input, which is the stable value of the property. This is gonna be the value of the property when it is fully operational. So you’ve addressed all the deferred maintenance, all the other issues… It is stable, so you’ve got an occupancy rate that’s at least 85%, and to calculate this number you want to divide the stabilized net operating income by the market cap rate.

To get the market cap rate you wanna talk to your broker, property management company… There’s lots of reports out there that talk about what the cap rates are for particular markets, but it’s gonna be pretty specific to what you expect the stabilized product to be; is it a class A, class B or class C market? All those things go into what that market cap rate is going to be, so it’s gonna take some research on your point, because I can’t just give you a general number and say “Hey, it’s gonna be a 5% cap rate”, because I don’t know where you’re investing, I don’t know what class the property will be once you’re done curing deferred maintenance and doing renovations… So make sure you have a conversation with your experienced property management company, the broker… They should give you an idea of what the market cap rate is for — not what the market cap rate is for the property in its current condition, but what’s the market cap rate for once this property is actually stabilized.

Then for the net operating income – this is why I mentioned that you can use the simplified cashflow calculator that we gave you, but there’s upfront work before you’re gonna input data into that. So once everything is stabilized, once all the deferred maintenance is cured, you can underwrite the deal like any other deal… And when you do that, you’ll have your one-year, two-year, three-year, four-year, five-year etc. income projections, expense projections, and then your net operating incomes.

And even when you’re underwriting a regular value add deal, you start how it currently is operating, and then you say “This is what I plan on doing, and based on what I plan on doing, this is the new income based on the rents and other incomes being collected. Here’s the new expenses based on how it’s currently operating and how I expect to operate it, and here’s my net operating income.”

So you wanna follow that same process to calculate what is going to be your projected net operating income once you’ve taken this property from highly distressed to stabilized. This is not a five-year NOI, this is — alright, let’s say for example the property is at 50% occupancy, and that’s really the only issue. Well, what’s the next operating income once you get it up to whatever your occupancy projection is?

If you project an 8% vacancy rate, then what is going to be the net operating income at 92% occupancy with everything at market rents, and the expenses being whatever you decide the expenses to be based on, again, how the property is currently operating and the conversation with your property management company and how they can operate it.

I go into a lot more detail on that in the episodes about underwriting a standard deal. You can use the advice I gave there plus what I’ve just said to figure out how to calculate that stabilized value. But overall, it is gonna be based on the market cap rate once that property is stabilized, and the NOI once that property is stabilized. That’s the positive input. Now, everything else is gonna be subtracted from that stabilized number.

First you wanna just subtract deferred maintenance. What are the costs to cure all the deferred maintenance issues, both interior and exterior? These are not going to be things that are value-add, these are things that are gonna be things that need to be done to get the property actually functional.

Maybe there’s a bunch of units that are completely down, that can’t even be rented. That’d be an example of deferred maintenance. Maybe half the roofs are really old and leaking. That’s deferred maintenance. Those are things that are required to be addressed in order to make the property livable. So tally up all those costs. Obviously, that requires going to that property, doing your due diligence… So you’re not gonna have an exact number upfront, but we’ve talked about, again, in previous Syndication School episodes on how to determine these things before you actually put the deal under contract.

That involves going to the property, talking with experts, getting some high-level quotes from experts as [unintelligible [00:10:10].11] having conversations with the property management company to figure out what these items are, and then what the cost of these items are. And then you can also ask the owner, but again, you can’t totally accept what they say to be true for deferred maintenance, because they might not necessarily be giving you all of these correct information, or all of the deferred maintenance issues.

So subtract deferred maintenance from the stable value… You’ll also wanna subtract what we’re calling the stabilized expense loss. Let’s say that it takes you one year after buying the property to get it stabilized, to actually start collecting rent. Well, there’s a lot of money that’s going to be lost during that time, so you can’t just start your proforma at end of year one; there’s a whole entire year of you paying insurance, of you paying utilities, of you actually using rental income that’s coming in. Not only are you not making any money, but you’re actually paying money. So you wanna account for all of those things  as well – all the rents that are being lost, all the income that’s being lost and all the expenses that are being paid need to be included in this formula. So you wanna also subtract that number from whatever that stable value is.

Next is contingency. You’ve got your deferred maintenance budget, you’ll also want to have a contingency budget, again, just in case you weren’t able to identify all of the deferred maintenance issues, because that’s going to be impossible until you actually get in there. Sometimes you need to actually break into walls and you realize “Oh my god, there’s so many more issues.” You hear stories about that all the time.

For this particular formula, we recommend having at least 10% of that deferred maintenance budget as contingency. Sometimes people do 50%, sometimes people do 20%, 25%… It’s really what you’re comfortable with, but the point here is to 1) actually have a contingency budget, and 2) have it be at least 10% of the deferred maintenance cost. So if deferred maintenance is $100,000, then you wanna have an extra $10,000 as contingency for a total of $110,000 between the deferred maintenance and the contingency expense.

You’ll also want to account for equity fee. So you’re putting in all this effort into turning around this property, and in return for the effort you should want to get paid for that. Obviously, you’re not going to be getting paid from rents, so the way that you recapture that risk you put into the deal is through an equity fee. This is going to be a percentage of the stabilized value. How much equity do you want to have built up in return for your efforts? …and you subtract that from your purchase price. So rather than paying a million dollars, if you want to have $100,000 in equity, you pay $900,000 for your efforts. So you’re getting in at a discount because of all this effort and risk that you’re putting into the deal.

And then lastly is other expenses, so really anything else. As I mentioned in the introduction, talking about what types of deals can be considered highly distressed, it could be things that have tax liens on them. So if there are delinquent taxes, then you’re gonna wanna go ahead and make sure that you’re accounting for  that in your purchase price. So if you have to pay $100,000 or $50,000 in tax liens, you’re gonna  wanna reduce your purchase price by that $50,000 number, so that you’re not actually paying for the mishaps of the current owner.

These could be also things like financing fees, if you’re getting a loan on the property and not paying cash, acquisition fees… The acquisition fee would be something that you would charge if you’re raising money for this deal, or it’s just kind of your typical closing costs; things you need to pay for during due diligence, any of those upfront costs that you need to pay to actually close on the deal. Those are pretty standard across really any apartment deal. The specifics here would be any sort of delinquent taxes or some other type of lien on the property that needs to be paid off before it can even be sold.

So again, the formula is max purchase price, which is the maximum amount of money that you can pay for the deal, equals the stabilized value, which is based off of the cap rate and the NOI, minus all deferred maintenance, minus stabilized expense loss, so all the things you’re paying for while you’re actually stabilizing the property, minus contingency, which is a percentage of the deferred maintenance budget, minus an equity fee, which is the amount of equity you want to make based off of your efforts and taking the risk, minus all other expenses, whether they’re liens or the standard closing costs.

Before we close, let’s just go over an example. This is not a real-life example, this is something to show you how to calculate what the max purchase price would be on a highly-distressed property.

Let’s say you’re looking at a 100-unit apartment community that is currently 50% occupied. And again, we’re gonna give this to you for free, so I’m not gonna bring out my calculator and show you all the math. I’m just gonna say “This plus this equals this.” So you’ve got a 100-unit apartment community, half the units are vacant. So 50% of the units have already been remodeled for $5,000 each, and they’re all rented for $100,000 per month. So half the units are all fully renovated, remodeled, renting for $1,000/month, and it costs $5,000 to renovate those units.

Of the 50 vacant units, half of the units are flooded, and you’ve determined the cost of deferred maintenance is $1,000/unit, plus the additional $5,000 in renovations required after the water damage to bring it up to that remodel level to achieve that $1,000/month in rent… So a total of $6,000 needs to be invested in those 25 units.

Then the other 25 units need just to be remodeled to get that $1,000 market rent, so $5,000 is required for those. So really only 25% of the units are actually messed up, 25% are just not renovated, so it’s more of like a value-add play… And then 50% are actually done, ready to go, being rented. Also, let’s say you calculate the exterior deferred maintenance. Let’s say maybe the roofs in these 25 units are all leaking, so you need to spend 30k to fix those roofs.

Then you spoke to your contractor, they said “You know, it’s gonna cost  you 30k, you’ve got the 5k costs for the renovations, it also costs 1k to fix those water damages, and  it’s gonna take us six months to complete.”

Let’s also say that the owner has 50k in delinquent taxes. Those are kind of all the inputs you need to know. Then you talk to your property management company, you talk to your broker, and based on current listings of a similar product once it’s stabilized, you have the market cap rate of 10%… Which is obviously pretty, but that just makes the math a lot easier on our end.

You calculate that the stabilized annual expense per unit is gonna be $6,840. So the expense per unit for this deal is $6,840, and times a hundred, overall that’d be about $684,000. So how do we calculate the max purchase price? Again, I know I went through all that really quickly. We’re gonna give this away for free so you’ll have all the information in front of you, so you can have an idea of how to calculate these numbers.

Obviously, I just said exterior deferred maintenance is 30k; there’s a lot more that goes into that than just pulling the number out of a hat. You have to go to the property, you have to talk to contractors, things like that. But we already talked about that earlier.

So the stabilized value is going to be the annual income, so you need to figure out what the annual income is first, then figure out what the annual expenses is first, and that’ll help you determine the NOI. So the annual income is based off of 90% occupied, times 100 units, times $1,000/month, times 12 months, is about one million dollars. So this is $1,080,000. That’s the total income once this thing is 90% occupied, and then you’ve got the units being rented for $1,000. The annual expense, as we’ve mentioned, is $6,840/unit, times 100 units, is $684,000; that’s gonna be your expense… So your net operating income is the subtraction of those two, so you’ve got $396,000. The stabilized value based on a 10% cap rate is 3.96 million, which is $396,000 divided by 10%.

So you’ve got your stabilized value of, again, 3.96 million dollars. That’s one input. Deferred maintenance – so you’ve got interior deferred maintenance on the 25 units that just had the water damage, which times $1,000 is $25,000. You need to rehab the interiors of those 25 water damaged units, as well as the 25 units that have not been renovated, so $5,000 times 50 is $250,000. You’ve got your exterior deferred maintenance of — I say 50k here, but it should be 30k… And then you’ve got the deferred maintenance, which is a total of all of those; again, part of that is value-add, but that’s $25,000 plus $250,000, plus $50,000 now for the exterior deferred maintenance (I misspoke earlier). So a total of $325,000 for deferred maintenance.

For the stabilized expense loss we’ve got the 50 units that are vacant, times the six months that they’re vacant, times $1,000, which is $300,000… So that’s accounting for the income that’s lost; we’ve already accounted for the expenses… We’ve got the contingency, so we’re gonna do 10% for this case. 10% of the $325,000 deferred maintenance is an additional $32,500.

Let’s say that I want 10% equity for all these  efforts, so take 10% times the stabilized value of 3.96 million dollars, so the equity that I want is $396,000. And then other expenses – you’ve got your delinquent taxes of $50,000, closing costs of (let’s assume) $50,000, and let’s say you’re raising money for this and you want an acquisition fee of $50,000… For a total of $150,000.

So the max purchase price calculation is that stabilized value minus all these numbers. So 3.96 million minus the 325k in deferred maintenance, minus the 300k in the stabilized expense loss, minus the 32,5k in contingency, minus the 396k in equity, minus the 150k in other expenses… Brings you to the max purchase price being 2.7565 million.

Now, just to maybe reiterate, or just to say that this is obviously a very, very high-level… So a lot of these numbers — again, I kind of just said “Hey, here’s an example”, but again, underlying those numbers is a lot of extra effort to get the numbers. And then obviously, once you’ve done all this, you’ll also want to fully underwrite the deal. “Alright, so it takes me six months in this case to get it stabilized.

Once I’m there – alright, how does this deal perform based off of this purchase price?” Then you could actually adjust that purchase price even lower from there. Again, this is a max purchase price… But at the end of the day the deal might not make sense at this purchase price if you start to underwrite it out fully, look at a five-year proforma, and have a specific return goal in mind for your investors, in that case. This isn’t really taking into account the ongoing ROI; that’s something that you wanna do after you’ve come to this conclusion for the max purchase price.  But this is a great place to start… Of course, all of these deals need to be underwritten on a case-by-case basis.

As I mentioned in the beginning, this document that I’ve used as an outline for this episode will be available for you to download for free, in the show notes or at SyndicationSchool.com, so definitely take advantage of that. We’ll be back tomorrow, or if you’re listening to this in the future, the next Syndication School episode is going to be talking about the sales assumptions when you’re underwriting a deal. So what to assume about your exit when you’re actually initially underwriting the deal.

Until then, make sure you check out some of the other Syndication School series about the how-to’s of apartment syndication. Make sure you download this free “How to underwrite a highly distressed deal” document. All that is available, again, at SyndicationSchool.com.

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

JF1923: From 0 to 82 Units In Just 3 Years with Jens Nielsen

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Jens is focusing on building his rental portfolio via value add deals. While he’s building his portfolio, he’s also still working full time. There are a lot of people in the same situation – wanting to or currently building a portfolio while working full time, with hopes of being a real estate investor full time in the long run. Hear how he’s going about scaling his business, the deals he’s finding, how he’s finding them, how his business is structured with his partners, and a couple of deal specific case studies. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“We don’t have any investors, we’re just a group of people that are long term buy and hold investors” – Jens Nielsen

 

Jens Nielsen Real Estate Background:

  • Denmark native, been in the US since 1996, investing in multi family real estate since 2016
  • Owns 82 units in New Mexico and Colorado, all value add deals
  • Based in Durango, Colorado
  • Say hi to him at https://opendoorscapital.com/
  • Best Ever Book: Begin With Why

 


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


TRANSCRIPTION

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

Jens Nielsen: I’m doing quite well. How are you, Joe?

Joe Fairless: I am doing well, and looking forward to our conversation. A little bit about Jens – he is a Denmark native, been in the U.S. since 1996, investing in multifamily since 2016, owns 82 units in New Mexico and Colorado. They’re all value-add deals. Based in Durango, Colorado. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Jens Nielsen: Absolutely. I should just mention – I grew up in Denmark, been here since 1996, and I actually moved to London in the early ’90s, and then to the East Coast of the United States in Maryland, and then on to the West Coast through Albuquerque, New Mexico, and now Colorado.

I followed the traditional path – go to school, get a good education, get a job, saving in a 401K… That’s what I was supposed to do, until I got the wake-up call a few years ago and realized that probably was not the path for sustainable wealth and income… So I kind of had a mindset shift a few years ago.

Joe Fairless: What takes your focus now? What are you doing?

Jens Nielsen: I still have a W-2 job, but my focus really is a couple of things… When I had that realization a few years ago, I started out buying some smaller properties just because “Hey, let me put my own money at risk and see how this goes.” So I did that, and that’s worked out pretty well. I connected with some local investors, and then they told me to reach out to this broker, and he helped me a lot; an older gentleman who wants to help newer investors. He helped me a lot with sourcing deals, and rehabbing, and everything.

So I did that, I started with those smaller properties, and then since that it has kind of moved into some joint ventures, bought some larger properties with some friends and family, and then actually doing some syndications in the last year. It’s kind of progressing… Once you get that real estate bug, you can’t really stop, right?

Joe Fairless: Yeah, that is very true. Let’s talk about the 82 units you have in New Mexico and Colorado. What’s the largest deal of those 82?

Jens Nielsen: 38 units. That’s the one we bought about a year and a half ago.

Joe Fairless: Let’s talk about that one. Where was it, purchase price, business plan, all that stuff.

Jens Nielsen: So that’s in Albuquerque, NM. It’s a ’70s vintage, classy property, probably in a B- area. We bought that for 1.2 million dollars. “We” – that’s my broker/property manager, and a couple of friends, a group of five of us that brought capital to the deal.

Joe Fairless: So you, the broker plus three friends?

Jens Nielsen: Yeah.

Joe Fairless: Okay, got it.

Jens Nielsen: That thing was listed at 1.55, and we ended up getting it for 1.2 million. It was one of these situations where the owner was out of state, they hadn’t really put any money back into the deal, so it was just deteriorating. Plumbing issues, and delinquencies, and just kind of falling apart. We were able to get it at a reasonable price, but also with the realization it needed a lot of work. I think we only got a 50% loan-to-cost at that time, and then we brought another 600k to the deal. Then we got a construction loan from the bank, so we’ve been using that  600k to really fix up the property… Which is new roofs, because for some reason every roof in New Mexico is flat, which is a pain. They always tend to leak.

Joe Fairless: They have some mansard roof, too?

Jens Nielsen: What kind?

Joe Fairless: Mansard, where the shingles are on the front of the building, not just on the top… It looks hideous.

Jens Nielsen: No, it’s typically parapets, where you have built-up stucco, and then you have the roof a foot below that, with canales (as they call them) where the water runs off… But back in the day they all tended to be flat, and it’s hard to have any slope on this; a lot of issues with standing water, and so forth. We ended up putting a whole new membrane roof on there, and replaced all the windows, did new stucco, new — it’s a two-story, so new exterior decking, new parking lot… And then we’ve just been tearing up the units and pretty much gutting them to the studs. So a lot of work, a slow process… Not your typical slight value-add, where you’re trying to invest in a couple years. This is a longer-term hold, for sure.

Joe Fairless: Yeah, let’s talk about that. How do you make the decision to gut the units to the studs, versus just spruce it up some?

Jens Nielsen: Just because the cabinets were in poor shape, we had some plumbing issues, so we had to go into the walls to fix the plumbing… Flowing was — sub-floor in the upper stories were not very solid, so we had to put some backer down, and then put those vinyl plank flooring in… We didn’t tear the drywall out on every wall; if it was in good shape, we left that… But there were a lot of places we were in the studs, especially for the plumbing issues.

The decision was really —  we don’t have any investors, we were just a group of people that are long-term buying and hold… So if it takes us a few years to start seeing a return, that’s totally fine, because we know the long-term value is there, and we just wanna keep it as a long-term cashflow type thing.

Joe Fairless: How do you define long-term?

Jens Nielsen: 10+ years.

Joe Fairless: Is that how the rest of the four are defining it as well?

Jens Nielsen: Yeah, that was how we entered into it. It was basically “Hey, this is gonna be ten years at least in order for it to be worthwhile putting all that money into it.”

Joe Fairless: Okay. And how much money do you have in the deal?

Jens Nielsen: Personally, or…?

Joe Fairless: Yeah, personally.

Jens Nielsen: About 100k.

Joe Fairless: Okay. And does everyone have about 100k?

Jens Nielsen: It varies a little bit. Some have slightly less, some have slightly more… But I own about 20% of that deal personally.

Joe Fairless: And how did you all determine who brings what amount of money?

Jens Nielsen: We just sat down and negotiated. “Here’s what we need to raise”, and what people were interested in bringing to the deal. It was kind of an organic discussion; we just said “Hey, this is what I can bring, this is what I can bring”, and we just came up with the money. We needed the 600k, and that’s how we got to it.

Joe Fairless: Any challenges in putting together a partnership with five people that you’ve come across?

Jens Nielsen: I think some people want to be more active and have a more hands-on — but really, the rehab is being run by a property manager; he has a construction company… And he calls the shots. At times we’re questioning some of the decisions, like “Hey, why did you do this? What was the rationale behind it?” [unintelligible [00:07:35].01] and then try to understand that. I think that’s the major thing.

Joe Fairless: And what are the roles of everyone on the project? Because you talked about the broker/ property manager; that’s clear. What about you and the other three?

Jens Nielsen: I’m actually heading there this afternoon. I do the site visits, and see how the rehab is going. We have some of the other guys who look over the monthly expenses and summarize those, and tax returns, and other things. Some are more active than others for sure, but everybody takes an active role in what’s going on.

Joe Fairless: So that is the largest unit size, 38 units. What’s the next-largest?

Jens Nielsen: That’s a 16-unit that we’ve just closed on in May, and “we” are now in this case my wife and myself. We just bought that outright. I mean, not outright; we had the down payment and got a loan on it. It was interesting, because that was one that I found through direct mail, I sent out some letters?

Joe Fairless: Really?!

Jens Nielsen: Yeah.

Joe Fairless: Good for you.

Jens Nielsen: Everybody talks about it, but this actually worked out. It was a gentleman that had owned it for about ten years, and he was just — typical mom and pop type of managing it and dealing with his tenants… We negotiated for like eight months before we finally had enough relationship that he was willing to sell it to me, I guess… So that was interesting.

Joe Fairless: Oh, man… Let’s talk about this. Direct mail – where did you buy the list?

Jens Nielsen: Well, people are gonna think that this is crazy… I actually created my own list, me and my wife, a  few years ago. We just sat down and started looking at Apartments.com and just started looking “Where are the apartment buildings? The area we liked? What are the sizes?” and we started creating our own list from scratch, essentially. We figured out who the owners were… This was time-consuming, but also, New Mexico is a non-disclosure state, so it’s not super-easy to find that information… So we  just did it the hard way, created the list and started writing Mail Merge letters, and handwrote the envelopes, and that was the process.

Joe Fairless: So how did you find the information if it’s a non-disclosure state?

Jens Nielsen: Well, we could see somebody’s rental site, we could see what the unit size was, and then we could go to the assessor’s office and figure out who the owner was, and if it was an LLC we could go to the state’s business registration to figure that out and try to google a bunch of stuff. We didn’t have any information about when it was last sold, or what it was sold for… So I’m sure we sent letters to people who had just sold it, or had owned it for a short period of time. It wasn’t a lot of letters; probably 200-300 at a few different intervals.

Joe Fairless: What was your interval?

Jens Nielsen: Every 2-3 months we would target them.

Joe Fairless: Okay, every 2-3 months. How many intervals did you do before you got your first deal?

Jens Nielsen: This gentleman said “I’ve had your letter for a while, and I wasn’t ready to sell, but now I’m ready.” So I don’t know if we only sent one or two to him, but he didn’t get a whole bunch. [unintelligible [00:10:21].23]

Joe Fairless: That’s great.

Jens Nielsen: Yeah, absolutely.

Joe Fairless: So how many intervals have you done to date?

Jens Nielsen: I stopped again when I got more involved in syndications, because I realized — a 16-unit is great if you’re one or two people buying it, but you can’t syndicate it, and I kind of didn’t have a whole lot of capital left, so I stopped doing it… But I may start it up again if I wanna buy some smaller properties again, which is not really on my radar at this point.

Joe Fairless: Okay. So about how many intervals have you done then?

Jens Nielsen: Probably 3-4. It was about a year where we were sending them out every 2-3 months. It wasn’t a ton. I have a few other people that reached out to me, that I still have kind of in my backpocket, that maybe at some point I can reach back out to them and see if they’re willing to sell.

Joe Fairless: What did the letter say?

Jens Nielsen: It said something like “Dear Mr. John, we saw your property at 123 Main Street. We’re real estate investors in your state and we’re looking to buy your property if you’re interested in selling” and then a picture of me and my wife, and an email, and a phone number… So just very simple, clearly something that was hand-made, if you will… So it didn’t look like the postcards you may get dozens and dozens of.

Joe Fairless: Right. Do you have any children?

Jens Nielsen: No children.

Joe Fairless: Okay, and what type of attire were you and your wife wearing in the picture?

Jens Nielsen: I think it was a picture of us on vacation somewhere, very casual.

Joe Fairless: Okay. And did you address the person by name?

Jens Nielsen: Yeah, “Dear John”, and then the address of the property.

Joe Fairless: Okay. Eight months of negotiation… How did the first call go?

Jens Nielsen: He called me and said “Hey, I’ve had your letter for a while. I wasn’t ready to sell, but now I’m looking to sell…” And I think I made some mistakes there. I’m an analytical guy, so I wanted to go straight to “Hey, what do you want for your property? Let’s see if we can make a deal.”

Joe Fairless: Right. [laughs]

Jens Nielsen: So it was a mistake, and I’ve learned that since… Because I said “Well, that sounds interesting. Send me some info.” He shared his P&L and stuff like that. It was handwritten by him, but it was still pretty accurate, and I could see “Well, that actually kind of makes sense.” I went down there and he showed me the property… And then I think I probably offended him by trying to lowball him a little bit.

Joe Fairless: You couldn’t even get that out. You felt embarrassed almost. You’re like “I was trying to, um… Well, I lowballed him.” [laughs]

Jens Nielsen: Because I realized it needed some work. It really was a little bit tired, and stuff…

Joe Fairless: Did he have a number initially?

Jens Nielsen: He wanted somewhere close to $800,000 for it.

Joe Fairless: That’s what he told you initially?

Jens Nielsen: He said he had gotten a broker’s opinion on it, which was $780,000 or $800,000 or something.

Joe Fairless: Okay, and what was your offer?

Jens Nielsen: I think it was in the low 700k, because–

Joe Fairless: Your first one?

Jens Nielsen: Yeah.

Joe Fairless: That’s not an embarrassing low offer…

Jens Nielsen: People get very emotionally attached to something, because I know he paid — when I saw his loan pay-off, he had paid over 800k for it in 2008, or something like that. I said “Okay, well you’ve also had your 10+ years of rent income, and payoff of your mortgage, and everything else…” He said to me “Well, I guess we have nothing else to talk about…” [laughter]

Joe Fairless: How do you respond to that?

Jens Nielsen: I said, “Well, I’m sorry”, and then I just left him alone for  a bit, and then I was like “Okay, let me maybe be more realistic about my numbers.” I came back and I said “Okay, I’m thinking around 740k, I can probably do…” Because I had talked to the bank and they were willing to roll some rehab costs into the loan, and so forth. That’s what we ended up buying it for, it was 740k.

Joe Fairless: How long did it take for you to follow up with him on your revised offer?

Jens Nielsen: It was probably a month, or something. I thought the deal was dead, and– I just couldn’t get it out of my head, because I liked the property. So it was a while, I can’t remember exactly… But he cooled off, I cooled off, and we were back on speaking terms, you know… [laughs]

Joe Fairless: Was that a phone call, or was that an email, where you had the revised offer?

Jens Nielsen: I think it was an email and then following up with a phone call. Then he started kind of like “Yeah, I think that works out…” And I went back and I took my property manager and we toured the units… Because we wanted to make sure we weren’t overpaying for it in terms of the amount of work it needed. It was kind of a conversation that — I continued to develop that relationship I should have developed earlier, I guess.

Joe Fairless: So eight months timeframe… How long once you had it under contract did it take to close?

Jens Nielsen: Well, that actually took a while too, because he’s an attorney and he was off traveling, doing some work out of state… So from the LOI to actually closing was probably about four months, or five months, or something… So just because he was dragging his feet, and then the bank was kind of taking it slowly. But it actually worked out, because interest rates were kind of high late last year, so the interest rate actually ended up dropping by the time we closed on it in May, so that helped a lot.

Joe Fairless: Oh, wonderful.

Jens Nielsen: Yeah, right?!

Joe Fairless: Yeah. And with that 16-unit — was that when you made the decision,  “Okay, I don’t have much capital left to invest, so now I want to turn my focus to syndication”?

Jens Nielsen: Yeah, I think I have a kind of two-pronged approach. I like to have some properties that are just mine/ours; we don’t have to answer to our investors, and we can just keep them to give us some cashflow that will just continue to come in. I like that. And then syndications, investing – I’ve been investing in that passively for years, and some people reached out to me and said “Hey, we’ve seen the work you’ve done. Are you interested in being on the GP on one of our deals?” That was super-interesting, going from 38 to 205 units; it was pretty exciting, and it’s a whole different ball game.

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

Jens Nielsen: I think it’s basically creating — if you’re trying to work with individual investors, to create a relationship with them before you try to get to the bottom line.

Joe Fairless: Yeah, that was something that came true on that 16-unit, right?

Jens Nielsen: Exactly. I think if you’re buying a very large property, it may not make that much of a difference, because it’s strictly a business transaction, but if you’re trying to buy a smaller property, creating a relationship with the seller is hugely important, if it’s a direct to seller type thing.

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

Jens Nielsen: Absolutely.

Joe Fairless: Alright. First, a quick word from our Best Ever partners.

Break: [00:16:38].12] to [00:17:36].17]

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

Jens Nielsen: Start With Why, Simon Sinek.

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

Jens Nielsen: I think the 16-unit is turning out to be a really good deal.

Joe Fairless: In what way?

Jens Nielsen: We’re actually 10% above our projected rents in the units we’ve rehabbed already, and we’ve gotten it painted and everything else, and it just looks really awesome. And it’s in a great area, so I think it’s gonna be a long-term, great cashflowing asset.

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

Jens Nielsen: I think initially I was buying properties in areas that weren’t that great, because “Oh, they’re cheap, so what could possibly go wrong?” Well, in reality, just because  it’s inexpensive and it looks good on paper doesn’t necessarily mean it’s gonna make money in the long-term.

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

Jens Nielsen: I do some coaching. I have some students that I help coach, new investors, and stuff like that. That’s a great way to share some of my knowledge and help them grow.

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

Jens Nielsen: My email is jens@opendoorscapital.com. I like to offer people — if they wanna schedule a call, go to my website, OpenDoorsCapital.com/call and schedule a call with me if you wanna chat about real estate.

Joe Fairless: Jens, thank you so much for being on the show and talking about your advice. The 16-unit – holy cow, I love hearing about the direct mail approach, and how that worked out for you, and the specifics for how you did direct mail… So thanks for being on the show. I hope you have a best ever day, and we’ll talk to you again soon.

Jens Nielsen: Okay. Thanks, Joe. I appreciate your time.

 

JF1916: How This Investor Grew His Portfolio to over 125,000 Units with Jeff Klotz

Listen to the Episode Below (00:24:08)
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Jeff is not only an investor, but also a broker who helps others grow their own portfolio. He struggled in the beginning to grow his business, so he focused on that until he was having some success. Now Jeff shares his knowledge with his clients and with us on today’s episode. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“If you buy right and you have the right business plan and business strategy, you should be able to survive another 2008 crisis” – Jeff Klotz”

 

Jeff Klotz Real Estate Background:

  • Serial entrepreneur, real estate investor and developer
  • Klotz’s investments have included 125,000 apartment units, 42 developments, and numerous other real estate projects
  • Founder of over 100 companies
  • Based in Jacksonville, FL
  • Say hi to him at http://theklotzcompanies.com/
  • Best Ever Book: 10X Rule

 


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

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TRANSCRIPTION

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

Jeff Klotz: I’m doing great.

Joe Fairless: Well, I’m glad to hear that, and looking forward to our talk and our conversation. A little bit about Jeff – he’s a serial entrepreneur real estate investor and developer. Klotz investments have included 125,000 apartment units, 42 developments and a bunch of other real estate projects. He’s the founder of over 100 companies; based in Jacksonville, Florida. With that being said, Jeff, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Jeff Klotz: Okay. Well, my background is interesting – I started out in real estate, literally straight out of high school. I actually bought my first investment property while still in high school. I fell in love with the multifamily business, and I guess the rest is history. For 24 years we’ve been intimately focused on the multifamily industry, and have built a platform called the Klotz Group, which is basically a group of wholly-owned subsidiaries that provide pretty much everything from concept through completion, along the way of both a multifamily value-add strategy, renovation, rehab, modernization, to a ground-up development strategy.

Like you said, that body of work over the last 24 years has been a little over 125,000 units of multifamily throughout the South-East, and just over 40 projects completely full-circle… And then of course the platform itself provides a whole series of services, including brokerage, property management, mortgage banking, construction, development, investment banking, and a handful of other (what we call) ancillary service providers that have probably racked up transaction volume into the billions.

So it’s been an interesting track record and an interesting 24-year stretch in the industry, and I still love it today as much as I loved it when I joined.

Joe Fairless: So you own companies like a mortgage brokerage within your portfolio? Did I hear that right?

Jeff Klotz: That is correct, yes. We are in the mortgage banking business, which is predominantly a commercial mortgage brokerage; I’d say 90% of that body of work is strictly multifamily.

Joe Fairless: So what made you want to be vertically integrated, versus just being focused on development?

Jeff Klotz: Well, for me, early stage I really struggled to grow. As a teenage entrepreneur, my challenge for business and business growth was probably the same as almost everyone else starting out – access to capital, capital constraints. I think experts will tell you the number one reason why most small businesses fail is a lack of capital… So I certainly battled that. As a kid, it’s hard to access capital. I didn’t grow up rich, I didn’t know any rich folks. I was kind of knocking on doors the hard way.

Early on, I really wanted to perfect my portfolio, and I needed to grow my business, and the best way to grow the business was to produce what I’ll call “ancillary revenue” from all these different services. But I started to become more successful, and then later on I began to really understand capital markets, and started to really solve my access to capital problems, it was almost the exact opposite.

We perfected the platform and really broadened the reach and the scope of all the different platform services to really serve our own needs, because that was the best way we found to control the results and to deliver superior results and returns by really controlling your own destiny. We learned along the way that it was next to impossible to rely on third-parties and get the same type of results if you were relying on yourself.

So long story short, I probably don’t desire to be in all these different businesses, but to some extent it’s a necessary evil.

Joe Fairless: Yeah, I get that. So how many companies do you actively oversee right now?

Jeff Klotz: The Klotz Group has as many as 12 subsidiaries that are in the real estate business. I’ve got some other investments, and we’ve got a family office that focuses on some philanthropic efforts and things like that, but probably for the focus of this call there’s 12 wholly-owned subsidiaries under the Klotz Group umbrella that provide all different types of services, pretty much a soup to nuts or an A-to-Z, or a concept through completion strategy in what we’ll call multifamily real estate investment.

Joe Fairless: And the purpose of those businesses is twofold, it sounds like. One is to help you and your team do your deals, but then also you might as well have other customers and clients outside of your company if you’re gonna have a business anyway. Is that the thought process?

Jeff Klotz: That’s exactly correct. The strategy is really a 50/50 strategy. I think that a healthy business is one where you’ve got diversification. About half of our business comes from what we call captive work, which is our own investments, and then the other half comes from the third-party marketplace. So that does a lot for both the industry and the organization. It allows us to have a lot of different touchpoints to the entire industry, and it really helps us grow the business. We meet a lot of really great people, and can help a lot of really great people…

You kind of hinged on the mortgage banking business – a lot of our clients come to us looking for debt, and for whatever reason they’re staking 75% leverage and we might only be able to get them 70%, because that’s what the deal qualifies for, so they might be 5% short on a deal, and we end up stepping in and becoming their partner, owning a piece of the deal and helping them get it across the finish line… And then of course, by that time they’ve figured out they can leverage a lot of our other services and really add value to the deal.

Joe Fairless: What’s the most and what’s the least profitable of those 12?

Jeff Klotz: Oh, boy… I’d say property management is probably the least profitable… And included in those 12 is the investment subsidiary, which is by far — the gain on sale, or the gain on real estate investments is by far the most profitable.

Joe Fairless: Okay.

Jeff Klotz: Many of those businesses are loss-leaders. They really contribute to the overall investment result. I might make X in the construction business, but I’m creating 10x at the property level because of my efforts on the construction side.

Joe Fairless: Yeah, it makes sense. And I imagine over the years you’ve created a business as a result of [unintelligible [00:07:15].09] loss-leader, but even — it wasn’t something that you wanted to be in the  business anymore. So you created one, then shut it down because you thought you needed it, or thought you wanted to be in it, but you didn’t… What’s an example of that? If there is an example of that.

Jeff Klotz: Okay. Well, there’s a couple of times… In 2001 we sold the construction business. We were able to stay out of that for a couple of years. In 2006, if you remember, the market was on fire. You couldn’t help but trip and fall and make money in the real estate business… So we thought we didn’t really need to be in the property management business, so I sold the property management company, only to really be forced back into the business a couple years later by my partners and investors, who said “Look, Jeff, this isn’t working. We’re not seeing the same results or returns from the properties and from the projects like we were when you were running it, so… Get back in the business”, basically. He who has to go makes the rules, right?

Joe Fairless: And with where you see your group of companies headed, do you see a new business coming up that you are gonna be creating, or maybe putting more emphasis in a current area that you have?

Jeff Klotz: Well, our business – we really hit a reset button back in 2015 after building a portfolio of (we’ll call it) C-class housing. We were one of the most active operators and groups focused on (what we’ll call) middle market C-class housing throughout the South-East. We’d built a portfolio close to 40,000 units, and that was the goal; so we accomplished our goal, but we really couldn’t celebrate the accomplishment because it was just a really tough struggle. That’s a tough business to scale, and it’s a really tough portfolio to operate… So we really kind of hit the reset button, spent the next couple years exiting that business, and really focused on a cleaner, more quality body of work. So for us it was testing and proving the concept in a much newer, higher-quality asset class [unintelligible [00:09:00].06] create the same type of results and returns.

Over the last couple of years we spent proving that concept out, so today the real focus is just growing that strategy. So we find ourselves doing a lot more luxury ground-up development today. It’s a different type of development than we’ve done previously. Previously we were just looking to get something built, and it was more workforce housing, and what have you. Today we’re able to develop some of what I’ll call best in class in several different markets.

The strategy today is not necessarily get into new business, but it’s just continue to grow the business both vertically and horizontally, so that we can once again — we were once upon a time the largest residential landlord in about 13-15 cities throughout the South-East, and that’s our goal, to do that again, just with a little different quality of assets.

Joe Fairless: And I’m sure you get this question a lot, but I’m gonna ask it anyway… When a correction takes place, what’s your thought about being in ground-up development luxury?

Jeff Klotz: Well, you’ve probably heard this, and I’m sure every one of your listeners have heard that – you make your money on the buy. That can mean a lot of different things, but it’s kind of an old cliché in real estate. It took me a long time to even really figure out what that meant… But being well-protected by your bases on the way in, so that you have what I’ll call “a lot of screw-up room” or a lot of mistake room, is really one of the founding principles that we operate by. So if you buy right and you have the right business plan and the right business strategy, you should be able to withstand another catastrophic event like in 2008.

Joe Fairless: What’s a quantifiable example of buying right? How do you stress-test that?

Jeff Klotz: Well, I think today this concept of value-add – that’s probably one of the bigger buzzwords in the multifamily industry, and a lot of times it’s a lot more complex than just buying a piece of real estate and raising rents. You’ve really gotta understand the asset, the asset class, the market… And I think you’ve gotta buy right. You’ve gotta buy at — I’ll still call it a discount. I’ll tell you what is not lining up through an internationally-marketed brokerage effort and participating in first, second, third round, best and final, and winning an option – the concept of who pays the most wins, I have always had a hard time understanding that. So almost all of the deals that we do are privately negotiated, they’re off-market, they’re situational acquisitions and they’ve got a good story.

Even in today’s very frothy real estate market, you look at the last 12 acquisitions that we’ve made  – they’ve all been what I consider below market value. I think there’s good deals out there, you’ve just gotta really know where to find them and where to look. Our platform, which has many touchpoints to the industry, helps to contribute to putting us at the right place, at the right time, and being able to have access to those deals that otherwise might not be available to us.

Joe Fairless: And just maybe one or two more follow-up questions on this, and then I’d love to learn more about the 40,000 units and the scaling challenges with the C-class housing. A lot of people will say when a correction takes place, class A is gonna get hit first, because they’re the ones who are gonna lose their jobs, so those residents are gonna then go down to class B… So you don’t wanna be in class A. And then the people will also say that ground-up development is riskier because there’s no income that’s being generated until you get out of the construction loan and you’re completely leased up in your long-term financing. What are your thoughts on those two points?

Jeff Klotz: Well, I agree with those two points, to some extent. In fact, that was the thesis of some of our early real estate funds, and that was the pitch. And again, we were focused on C-class… And I think, for the most part, that’s  a real concern, right? But we always like to shoot for a much shorter strategy. A long-term strategy – you have a greater chance of getting stuck holding the ball, or whenever the music stops, without a seat… So I think the merits of a project are strong. Again, if you buy or build the project plan with a lot of screw-up room, or mistake room, or whatever you wanna call it, it should pass the stress test for a softening in the market, or what have you.

The bottom line is people will always need a place to eat and sleep and call home… But there’s always gonna be a cyclical nature to our business and almost every other business, so I think you have to be afraid of that. You have to plan for that. When we underwrite a deal, when we go to acquire a deal, when we go to build a deal, there’s always a sense of urgency, and we always plan for the worst, but work for the best. So it’s always a concern of ours, which is one of the reasons why we have a short-term strategy.

We were a large multifamily owner going into 2008 in the recession/downturn/crash, and our strategy then was to really just protect the asset; if we were the best operator, with the best service and the best performance in the market, then we were well-protected… So we were fortunate enough to survive the downturn without losing any assets. In fact, we were quickly able to start a growth process.

I think it’s just a quality operator, with a quality project, in a quality location, with a quality credit risk. So the stronger your residents are, the more protected they are from a recession, and things like that. So I think there’s a whole series of merits that you really have to pay close attention to.

Joe Fairless: Let’s talk about the 40,000 units. What were some specific challenges that you had in scaling and executing on that level of collection of units, with that type of classification of property and resident base?

Jeff Klotz: Well, first of all it wasn’t so much the class of asset, but  it was. And what I mean by that is to succeed at C-class multifamily operations – it’s a lot more staff, or manpower, or people-intense. You’ve really gotta check the boxes and  dot the i’s and cross the t’s. You need a lot more people to succeed in that effort. We built a team of over 1,000 employees, and we went from 100 to over 1,000 really quick. So just that type of scale was really difficult. We were consistently chasing the growth.

And then to top it all off, the business strategy that we had – we were buying and selling quite quickly… For about five years in a row we were buying over 8,000 units/year on average. So to have that type of portfolio churn, you’re always moving. It’s hard to build a team, it’s hard to build consistency… And then of course, the assets themselves – yes, they’re challenging. They were in rougher neighborhoods… So it’s harder to find good people, it requires more training, it’s harder to find good residents, it requires a lot better screening and tenant evaluation or qualification. Even the municipalities started to neglect those types of neighborhoods, where there’s lower income. So it’s a tougher, longer, harder grind or battle or fight, and you almost had to fight for every bit of success, every good resident, and what have you. So all in all, the entire effort is more difficult.

On a personal level, I really underestimated or probably was naive in how difficult it really is to build and scale a business. I’ve found building a real estate portfolio easy. In fact, growing is easy. But actually building a business around all that growth, and building the right type of team, and the right types of policies and procedures and structure – that was probably the most challenging part of it all.

Joe Fairless: Thank you for that. I appreciate that insight. That’s very, very helpful. And one thing that I’d love to learn more about is if you were to have a 300-unit class C apartment building, in a class C area, and a 300-unit new development – picture whatever you’re building now, that 300 units – how many people would it take to staff each of those?

Jeff Klotz: There’s an old rule of thumb in the industry – 2 per 100. So in theory you’d need 6 people. Three in the office, and three in the field, on the maintenance team. I think that in a C-class operating property… Was the A-class a new build, new construction?

Joe Fairless: Yeah, it’s one you’ve just completed. We’ll just say one you just completed.

Jeff Klotz: I think on the property itself there’s probably only a slight difference in the amount of manpower needed. But we’ll call it the corporate oversight, or the regional/district oversight – you definitely need a whole heck of a lot more oversight on the C-class asset than you do the A-class asset.

Joe Fairless: Got it. Taking a giant step back, based on your experience in the industry – you’ve bought your first place while you were in high school; that is pretty close to a record, I think, from the 1,800 guests I’ve interviewed… What is your best real estate investing advice ever?

Jeff Klotz: Oh, boy… That’s a hard one. I think the real estate business is not a get-rich-quick plan/strategy. All these late-night advertisements for “You too can be rich like me” – it doesn’t work that way. I’ve been doing this for 24 years, and it took a long time to create success. It is a get-rich-slow business, by the way. It’s a lot of hard work, it’s a long late-night grind…It’s difficult, and it’s tough to think that yo can create success as a hobby or a part-time business. It’s a lot like the gym – there’s no shortcuts. Nothing takes the place of hard work and effort if you wanna get in shape. You can try all the latest, fad this or fad that, but you’ve gotta do the work.

I see way too many people enter this business thinking that they can do it part-time, or in-between a day job, or after a day job… And I think if you’re gonna be a passive investor – sure, that works. There’s a whole other topic of how do you make good passive investments; probably the least successful deals I’ve ever done were called passive investments… But  I think just preparing somebody for the time it takes to learn the business and what have you – it sounds pretty basic, but that’s where I see most people making a mistake; it’s the inability to really truly commit to the time, effort, energy and hard work it takes to be successful in this business.

Joe Fairless: And over the period of time that you’ve done it.

Jeff Klotz: Right.

Joe Fairless: Yeah, it’s a shiny object for some people, and then they find something else… Whereas put in decades – then you can see some results if you do things consistently that are the right thing, right?

Jeff Klotz: Right. And I think whether we’re talking real estate or we’re talking anything else in business, I think that part of our culture today is that of things happening quickly, and there’s almost a sense of lack of patience, and I can go on and on… But I just really think that you’ve gotta really be realistic with the goals, and the time it takes, and of course the effort it takes. There’s an old saying, “If it were easy, everybody would be doing it”, right?

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

Jeff Klotz: I’ll give it my best.

Joe Fairless: Alright. First, a quick word from our Best Ever partners.

Break: [00:19:15].10] to [00:20:13].09]

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

Jeff Klotz: Oh, boy… I’m not a big book reader. There’s an interesting story behind it… But I’ve just recently read some of Grant Cardone’s stuff, and I was amazingly shocked with just how relatable it was, and just how great the content was. That was kind of an interesting experience for me.

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

Jeff Klotz: That would have been a passive investment. Once upon a time, prior to really committing to grow the entire platform vertically and horizontally, I thought I could leverage some other operators and other sponsors. I wasn’t in a good pick of a couple different guys. I had no control, and so therefore the outcomes weren’t that good.

Joe Fairless: And knowing what you know now, if you were to passively invest and you were to interview them again about the opportunity, what are some questions you would ask now that you didn’t ask before?

Jeff Klotz: Well, I’d really wanna understand the track record, their true experience in actually controlling outcomes… There’s a lot of sponsors out there that have worked for other folks, or have been alongside other sponsors, or have been on teams with sponsors, but I  really wanna see someone who has a solid track record of doing it themselves, signing on the debt, having real skin in the game, and really a solid commitment to the business.

I think nowadays there’s a lot of folks that think it looks a lot easier than it really is, so I think that might be the tone of what I’m saying here… I’d spent a lot more time getting to know the individual and the organization and understanding what their theories and philosophies and their ideas are for how they operate real estate.

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

Jeff Klotz: Well, the next deal, right? In this business you’re always as good as your last deal, so we continue to get better and better. I think that really my next deal will be the best deal I’ve ever done.

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

Jeff Klotz: Years ago I’ve formed a family office called the Klotz Family Office. We have three main philanthropic efforts, including a faith-based not-for-profit named Save Your Communities, which is focused on creating and preserving, as well as providing sustainable [unintelligible [00:22:10].08] affordable multifamily housing. That’s a big part of our mission. I also have a Central-American-based foundation called [unintelligible [00:22:16].17] which basically serves the needs of those living in poverty, most likely as a result of natural disaster.

Then we have a third effort, which is basically an entrepreneurial scholarship. So once a year we pick a young individual who I think might possess some real serial entrepreneurial traits, and we try to partner with them and mentor with them, and help them get themselves in the door [unintelligible [00:22:35].20]

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

Jeff Klotz: Well, they can visit our website, TheKlotzCompanies.com. They can email me at jklotz@theklotzcompanies.com.

Joe Fairless: Cool. Well, Jeff, thank you so much for being on the show, talking about your experience, talking about your approach, what your focus is now, and the challenges that you came across on the passive investment, as well as when you achieved the goal of 40,000 units… Not really having time to celebrate, and then reconfiguring the structure of your focus. And what you’re doing now, building the luxury ground-up development.

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

Jeff Klotz: Thanks, Joe. I enjoyed it.

 

JF1904: Residential Broker & Multifamily Investor Gives Us The Details On Nashville Investing with Josh Anderson

Listen to the Episode Below (00:19:52)
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Nashville has been and still is a thriving city, especially for real estate investors. Josh has a background in investment banking which serves himself and his clients well when helping them find a property. We’ll hear some Nashville market details as well as getting a look inside of Josh’s business and investing portfolio. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“I bought three apartment complexes since 2018” – Josh Anderson

 

Josh Anderson Real Estate Background:

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

 


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

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

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


TRANSCRIPTION

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

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

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

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

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

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

A lot of them are doing 1031s, a lot of them are paying cash, or just putting 20%, 25% down… So there’s a pretty active market as far as the multifamily side of things.

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

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

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

Josh Anderson: With regard to areas?

Joe Fairless: Yeah, like what submarkets have growth?

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

People love the charm and character of the old houses. We just listed a property – it’s actually going live tomorrow – in 12 South, which is right by Vanderbilt and Belmont Universities, and it’s a 130-year-old Victorian… That property will probably get a lot of activity and a lot of traction.

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

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

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

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

Josh Anderson: Everything I own, outside of a couple of commercial lots that I own in downtown Nashville, I own all multifamily. I kind of started out buying duplexes and triplexes, and I’ve got several duplex, triplex, a couple of quadplexes… And starting in 2018 I got really intentional and purposeful about buying apartments, and kind of digging in and finding the sweet spot. I think there’s too much competition in that 150+ units. It’s a different buyer, and I think they’re hard to find. A lot of out-of-town investors are building those…

I’m focused on about 10-12 units, up to about 50-60 units. I bought three apartment complexes since 2018, and I just got really purposeful about buying those.

I guess it was about 2014-2015 when I started buying investment properties, which in hindsight I wish I’d been buying them all along… So my motto to myself now is I’m always a buyer first, I’m a listing agent second. That’s kind of how my mind works.

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

Josh Anderson: Correct.

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

Josh Anderson: So the first one was a 22-unit apartment complex, and it was fully-rented. We paid, I believe, a  million seven for that. It was about 60k, 65k a door. I bought that with a business partner. Then the second one I also bought with a business partner and it was 30 units. The second one is about seven minutes from downtown Nashville, and the area is predominantly industrial, and it’s transitioning, because industrial just doesn’t make sense to be that close in to downtown Nashville… So a lot of those industrial properties are being sold and transitioned into residential and/or apartment type properties.

Joe Fairless: Sounds like a really good long-term hold…

Josh Anderson: Yeah, I think they are. And then the third one – I actually haven’t bought this one yet; I’m under contract. It’s 17 units, in the Donelson area, which is near the airport. So I think that I was very purposeful in buying them, and I’ve since gotten really purposeful about finding them. Really going into tax records and reverse-engineering, and really digging into properties that fit my parameters and criteria, and really starting to market to those a lot more… And I think it’s just getting started. A lot of people don’t have the money to do it, and I always tell people “Find the deal. The money is easy to find right now.” The money is just too easy to find. So find the deal, lock it up, and then go find the investors… And if you wanna syndicate it, or however you wanna do it, depending on the size… Or go find a business partner. I think finding the deal is the hard part right now.

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

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

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

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

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

Josh Anderson: I try to keep it really simple. My criteria is I kind of look at the 1% rule and I just go “Does it hit the 1% rule?” If I paid two million dollars for it, is it bringing it at least $20,000 a month? And then from there, I dig in a little bit more… I’m obviously looking at the leases and the rent rolls and all the maintenance and the costs. On some of these properties the property taxes are really high, so it’s kind of digging into all of that. But as a general overview, I look at the 1% rule because it’s easy. It’s what works for me, and I know everybody’s got different parameters, but that’s just what I’ve looked at as my initial…

And then I really drive the area and determine how well I know it, and whether I like it or not. So that would be my one parameter that I look at the most, to see if I even like it or I send it on to investors.

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

Josh Anderson: On that one we’re just 50/50 business partners. On that particular deal we did a Freddie Mac loan. I’m sure you’re familiar with it. It’s a really great program. It’s gotta be a one million dollar balance, and it goes up to (I think) 7.5 million… But it’s a two-year interest-only, non-recourse, it’s assumable… It’s a really good loan program. You’re putting 20% down. I’ve used that on two of the three deals that we’ve done, just because it takes a little bit more time; there’s some more hoops, I guess, to jump through… But it’s been a really good loan program; if people that are listening to this aren’t familiar with it, it’s a great program.

Joe Fairless: You’re doing 50/50 with your business partner… Did each of you bring 50% of the equity?

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

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

Josh Anderson: I did.

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

Josh Anderson: He’s just a really great business partner.

Joe Fairless: Okay

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

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

Josh Anderson: Different business partner.

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

Josh Anderson: We paid 1.9. Right now it brings in 23/month. It’s in pretty good condition overall, actually. We’re doing some updates on it. Per-door we’re spending about $5,000, to update it, and we’re gonna bring up the rents about $150 to $200 over the next 6-12 months on each one. So it’ll probably be bringing on more like 25, 26 this time next year.

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

Josh Anderson: No, 26k.

Joe Fairless: 26k.

Josh Anderson: Yes.

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

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

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

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

Joe Fairless: Agency loan on the 30-unit? Fannie Mae or Freddie Mac loan?

Josh Anderson: Yes.

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

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

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

Josh Anderson: I met him in college, actually. He’s from New Orleans, and he wants to move to Nashville and he wants to get into apartment syndication, and he actually bought your Best Ever Apartment Syndication Book. I’ve been sending him deals, and we just said “Let’s jump on this one. Let’s do it.”

He comes up to Nashville 5-6 times a year, and still lives in New Orleans, but we’ve known each other since our freshman year of college.

Joe Fairless: How did you structure it with him?

Josh Anderson: It’s structured really the exact same. It’s 50/50; we both did 50/50 on the down payment equity… So it’s all the same.

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

Josh Anderson: I think the best advice ever is your first deal you don’t have to hit a home run. Just get started. Just do it. I think so many people are in analysis paralysis, and they never really get started. I’ve got a guy who used to work with me; he’s been talking about buying an investment property for five years, and he still hasn’t bought. I was talking to him a couple days ago, and I said “Man, just buy one. Even if it’s making $200 a month, who cares?” Get the first one under your belt, and you can go from there. You can always sell it, you can always fix it up and get a little bit more rents, you can always upgrade and get better properties.

And that’s not to say go buy a terrible investment, but if you’re gonna do it, do it; if you’re not, then sit on the sidelines… But you’re gonna look back in hindsight and go “Damn, I wish I had bought X, Y and Z properties.”

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

Josh Anderson: Let’s do it.

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

Break: [00:17:07].28] to [00:17:43].13]

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

Josh Anderson: Best ever book I’ve recently read… I’d have to default and say The One Thing, because it’s such an easy book. Gary Keller.

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

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

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

Josh Anderson: I lost earnest money one time. That wasn’t good.

Joe Fairless: Will you elaborate?

Josh Anderson: I actually didn’t lose it, it just got lodged underneath my seat in my car. But I had to tell my client that I lost the earnest money, so they had to cancel it, and send a new earnest money check. [unintelligible [00:18:13].25]

Joe Fairless: That’s not a big deal.

Josh Anderson: Well, it didn’t affect the deal. It was just one of those things I had to tuck my tail between my legs [unintelligible [00:18:23].01]

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

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

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

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

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

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

Josh Anderson: Thanks, Joe.

JF1903: How This Investor Scaled To 15 Units In 2.5 Years with Melchor V. Domantay

Listen to the Episode Below (00:21:15)
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For many newer investors, the goal is to create enough real estate income to have the option to leave their job if they choose. Melchor is well on his way as he has grown his portfolio from zero to 15 units in 2.5 years. Great episode for newer investors, but we also dive into some deal specifics for a little higher level insight. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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“If you know your why, then educating yourself become easy” – Melchor V. Domantay

 

Melchor V. Domantay Jr. Real Estate Background:

 


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


TRANSCRIPTION

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

Melchor Domantay:  Hey, how are you doing, Joe? Thanks for having me.

Joe Fairless:  Well, it’s my pleasure, and looking forward to our conversation. A little bit about Melchor… He is a controller of a non-profit company in Chicago, a CPA who a couple days ago got his CPA license – congrats on that – and a real estate investor. In just 2,5 years he has built up a portfolio of 15 units. Based in Chicago, Illinois. With that being said, Melchor, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Melchor Domantay:  Yeah, thanks Joe. I was born  in the Philippines and came here when I was 17. I’m 29 now, so – regular American dream, just trying to go to college, have a full-time job… But I had a great mentor, who was actually my boss… And he told me to buy real estate. I didn’t listen to him for five years, and after that I bought my first house. It was a two-flat house-hack, and I had a great tenant. I got that first check, and then just the light bulb — you know, that investor/landlording light bulb came off. Then from there I started researching everything, educating myself, looking for the right people in my team, and then with their help I acquired 15 units in the last 2,5 years.

Joe Fairless:  Well, I don’t wanna fast-forward too much… So you went from a two-flat house-hack, and in 2,5 years you have 15 units. The two-flat house-hack – how much did you buy it for, what did you have into it as a down payment, and improvement costs?

Melchor Domantay:  The first house was really kind of like a training wheel. I bought it fully rehabbed, $280,000. I put 3,5% down… I had a good realtor at the time, and she taught me about doing a credit. I had a 3% credit, so really, to be honest, I probably brought all-in $7,500.

Joe Fairless:  What’s the 3% credit you’re referring to?

Melchor Domantay:  It’s a seller’s credit that they gave me. It was a probate, and [unintelligible [00:03:32].22] just wanted to get rid of it, so they gave the 3% credit to me… So it was a cool structure.

Joe Fairless:  Okay. And is that 3% credit something that’s typical on a transaction, or how did you go about asking for it?

Melchor Domantay:  To be honest, most of my deals I always ask for a credit. The reason I do is because it’s an advantage for a person to not bring a lot of money to the closing table. For example, easy math, $100,000, if you’re putting down 5%, that’s $5,000, plus any closing costs. And if you ask for 3% credit, which most lenders I think will allow – that’s the cap – then that’s $3,000 off that you don’t have to bring to the closing table… So I try to do that structure as much as possible.

Joe Fairless:  Okay, so that was the two-flat. That was about 2,5 years ago. And then what did you do?

Melchor Domantay:  Then after that I found a realtor from Bigger Pockets that’s also an investor, so that helps a lot.

Joe Fairless:  Who?

Melchor Domantay:  John Warren. I’m not sure if you’re familiar with him. He helped me a lot, he added a lot of value… And seven months after I bought a foreclosure property, a two-flat in the West suburbs of Chicago. But the cool thing about it is there’s people living in there, so it was livable. But it was a foreclosure. I bought that for $80,000. Great deal. Then I put about $15,000 of work, and that kind of like propelled me and gave me a lot of confidence to do more real estate… Because I think my mortgage at the time was $750, and I was bringing in about $2,100, so it was great.

Joe Fairless:  It is. That is a great ratio there… The property was a foreclosure, but it had people living in it. Were those the people that were being foreclosed on?

Melchor Domantay:  Yeah, I think they were the owner, and they just couldn’t pay the mortgage. I asked them to stay, actually… So they can just stay there, and not worrying about moving, but I think a week before I closed they left already.

Joe Fairless:  Okay. So you made it a point to say it was a good thing that people were living in it… But if they moved out before you closed, what was the benefit of them living in it?

Melchor Domantay:  For me, the benefit of living in it — usually, a foreclosure property, an REO, usually they have been left behind for a long time… So when people are living in it, the advantage of it is there are still some people who live in it, and that means it’s livable. Most foreclosure properties have a leaky roof, or leaky pipes, and grass is five feet tall… So that’s the advantage of me saying that it’s great that there’s people living in it.

Joe Fairless:  Did they trash the place on their way out?

Melchor Domantay:  No, it was a Hispanic family and they were really nice. I got to talk to them when I was under contract. I had a conversation with them and they were really nice. I asked them, “Okay, why is that you’re getting foreclosed?” and they shared with me that something happened in the family and they just couldn’t pay the mortgage.

Joe Fairless:  And you put $15,000 into it… Did you do the work yourself and pay for supplies, or did you hire contractors?

Melchor Domantay:  I tried, but I’m just not a handyman. That’s not my strength.

Joe Fairless:  Me neither, by the way.

Melchor Domantay:  I hired a lot of people. It was – keep in mind – seven months after I bought my first property, and I think I was making $35,000, so I wasn’t making a lot of money. I was still a staff accountant at the time, and… I just hustled, man. I came up with the $25,000 to close, and another $15,000 to repair it… I hustled. I was driving Lyft before work, driving Lyft after work. It’s a good thing I worked in downtown Chicago. The parking here is hard, but I was fortunate that I can park right at my office. So it was a lot of hustle, a lot of driving Lyft… Because that’s not my skill. My skill is I can drive Lyft. So if I was making $20/hour driving Lyft, and in turn I can just pay a contractor to do the same job $30/hour, I feel like that’s okay, because I don’t have to do all the learning process, being skilled about it; that’s a lot of time. So I feel the right decision for me at the time was to just drive as much Lyft as possible, and pay the contractor to do the work.

My model was always get the property as fast ready as possible, because every time the property is vacant, you’re losing money.

Joe Fairless:  Did you have a general contractor who then hired subcontractors?

Melchor Domantay:  No, there was a lot of handymen at the time. I couldn’t hire a GC because there’s a margin the GC charges. So it was a lot of building relationships with all my handymen, and a lot of it came from my realtor. So having a great realtor, who’s an investor as well – they would know a lot of other people.

Joe Fairless:  Yes. Very important, especially with construction workers, to go through references, and good thing that you had that person. Okay, so that was the next two-flat, so at this point you have four.

Melchor Domantay:  Yeah.

Joe Fairless:  What did you do after that?

Melchor Domantay:  After that – I think November of 2017 – I bought a three-flat, another foreclosure, again, around the same area.

Joe Fairless:  And you’re making $35,000/year, you said, at the time.

Melchor Domantay:  Yes, at the time. I was still focused on my full-time job too, while doing th