JF2166: House Hacking Together With Sam & Nick Riccio

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

 

Samantha & Nick Riccio Real Estate Background: 

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

 

 

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Best Ever Tweet:

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

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JF2164: Tips for Creating A Compelling Property Management Incentives Program | Syndication School with Theo Hicks

In today’s Syndication School episode, Theo Hicks, will be going over some tips on how you can create a property management incentives program. He will be giving you the process on how to go about creating your program and advice on the type of incentives you can offer.

 

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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JF2159: Creating Software For Landlords With Laurence Jankelow

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

Laurence Jankelow  Real Estate Background:

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

 

 

 

Click here for more info on PropStream

Best Ever Tweet:

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


TRANSCRIPTION

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Theo Hicks: How does your company make money?

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

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

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

Theo Hicks: Okay.

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

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

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

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

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

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

Laurence Jankelow: Yeah, let’s do it.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Laurence Jankelow: Thank you so much.

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JF2154: Understanding Your 401k and LLC Management With Jennifer Gligoric

Jennifer is the Co-Founder and COO of Leafy Legal Services, she has a great backstory, going from homeless to owning her own company. Her goal is to protect investors who are growing their business and to prevent them from getting sued and losing it all. She gives tips on what you should do to protect your assets and how to utilize your, LLC, to invest in future deals and she also shares how you can utilize your 401k to your benefit.

Jennifer Gligoric Real Estate Background:

  • Co-Founder & COO of Leafy Legal Services and co-host on Leafy Podcast
  • 20 years experience in real estate
  • From Galveston, TX
  • Say hi to them at: https://www.leafyassets.com/

Click here for more info on PropStream

Best Ever Tweet:

“Treat your real estate investing like a business” – Jennifer Gligoric


TRANSCRIPTION

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

Jennifer Gligoric: I’m doing great. It’s really wonderful to be on the show.

Theo Hicks: Absolutely, and thank you for joining us. I’m looking forward to our conversation focused around the legal aspects of real estate. So Jennifer is the Founder and COO of Leafy Legal Services, based in Galveston, Texas, and she has been helping entrepreneurs and real estate investors get started for over the last 20 years. She has a very harrowing back-story; she found herself homeless as a teenager and managed to put herself through college and become a successful business owner despite the odds against her, and she attributes her success to a mindset of abundance and paying it forward as the means to happiness. If you want to learn more about Jennifer and her company, you can go to leafylegalservices.com. So Jennifer, before we get started, do you mind telling us a little bit more about your background and what you’re focused on today?

Jennifer Gligoric: Yeah. Well, I actually have a pretty long background. My background started in crisis intervention for businesses. Well, I say that… I worked as a young kid. My mom had the longest-running employment agency ever type here in Houston, Galveston Metroplex. So I was the kid that would set up the secretaries that had cigarettes hanging out of their mouths, because that’s how they did it back then, instead of my [unintelligible [00:04:10].17] typing tests and things like that. So I already knew how to interview for a job, how to do the paperwork to get a job, which, if you’re a parent, teach that to your kids. They’re not teaching it in school, and I gotta say that that’s pretty critical. So I already knew how to do basic secretarial stuff and that, but the money was in sales. The money’s always going to be in sales. So I was very driven by the money. So I went into telemarketing and sales, and long story short, I ended up into crisis intervention for businesses.

With a heavy background in HR, I would get in and they would hire me to fix their widgets or, “Oh, we need more brochures. Our pitch is crap, redo it,” and then I’d get in there and it was never that; it was always HR that was tanking the company. They were hiring people at the wrong rates, putting them in the wrong positions, having them do the wrong things. So that was my career, is going in and fixing companies, but really I was fixing small business owners, teaching them how to be better managers, teaching them how to have better systems, how to hire people they can trust and let run to take a break every now and then.

Many small business owners, you ask them, “When was the last time you took a vacation?” or real estate investors, and they just give you this blank look, because they really are always working. Well, that’s not good. Some of your biggest breakthroughs in life are when you take a little bit of a break. You’re just going to run yourself into the ground and you’re going to drive everybody around you nuts when you do that.

About a decade ago, my specialty turned into helping companies scale using entirely remote workforces, but top talent; not $3 an hour VAs, people that had left the corporate world, and for whatever reason, they needed to be at home. Sometimes they wanted to raise children at home, sometimes they survived an accident that they were never meant to survive, or an illness that would’ve kill them five years ago, and they can’t be in commute. And I thought what’s better for the environment than helping people not clog up our roadways, adding to carbon emissions, to not having to build and do this sprawl. People can stay in their own houses. And it’s better for the local communities, it’s better for local businesses, and it’s better for the economy as a whole.

So I did some big scale-ups. I actually met the person I brought on to be my CEO because he hired me to scale up a very large digital marketing firm, and during that time, he was a real estate investor; I was getting into real estate investing because we were dealing with the likes of Than Merrill, Kevin Harrington; we were working with people that were putting them on stage, we were working these huge events, and scaling up very large, well-known marketers. Our first company, we took from three people to 221 people in 21 countries within 18 months, and that’s the power of virtual workforce when you don’t have the ridiculous overhead that you have with offices and everything else, and when you’re hiring the right talent; that’s also key.

Then about three or four years ago – I lose track of time – I was tasked to scale an asset protection law firm. Having already been in the real estate space, and working with some of the top names, it was a natural fit, and as I did that, I realized, “Wow, there is just a lot better way to do it. It can be a lot more cost-effective,” and I have a love of real estate investors and entrepreneurs that are just starting out, but also, there are people that grow and they start getting 10, 12, 13 houses, and they’re getting them all in their own name, and then they lose everything because of one lawsuit. So we have a mission to help unburden the nation’s court system from these vexatious lawsuits, which really piss me off. The idea that someone’s making money by suing other hard-working people really grinds my gears. So if I can stop that and make it very difficult for those people to operate, I want to do that.

So then we started Leafy Legal, and now we have this amazing team. We have attorney relationships across the country and we have the best paralegals with 98% of our clients are real estate investors; the other 2% are entrepreneurs, and we help them hide their assets, protect their assets, have the right structure in place so that they’re operating compliantly and legally, and they’re able to scale in structures that are meant for real estate investors, and then we help them tie that into some incredible estate plans. Plans that are made for people who are young and working, not something you slap together for 50 years from now or if you ever pass away. And then we help them become their own bank and think about money differently by having solo 401ks or SDIRAs. So that’s what I’m doing and I love it.

Theo Hicks: Okay. So let’s focus on the first part first, which is the asset protection and you mentioned how it really grinds your gears about the fact that people make a living off of suing other people. So what are some of the top tips, top strategies that people can start implementing or should start implementing, that maybe most people don’t necessarily know about? What are some of the hidden gems?

Jennifer Gligoric: Well, I think that most people know they’re supposed to have an LLC, at least, but yet they’re still doing things in their own name, and their name is on the LLC. Well, if your name is on an LLC, I can look it up. It’s public record, I can see that you’re a member of that. You want to operate using anonymous structures, and then you want to hold your assets in structures that are not tied to you. You want to have an asset holding company that has arm’s length agreements away from you; that you’re holding in another structure, and the way you operate and you do business and where you hold your assets are two separate places that someone can’t get to.

Theo Hicks: Okay, because I know when I was making an LLC for a property, I was like, “Well, I can just google the LLC, and then my name comes up,” and I don’t understand how that protects me. So can you explain that process for us from A to B? So I create an LLC, and then what am I supposed to do?

Jennifer Gligoric: Well, you’re supposed to go to a company that helps you create an agent trust that is listed on the LLC so your name is not a part of it. You are a beneficiary of that trust, which is a private document, so that’s not filed with the state. So [unintelligible [00:10:41].24] the name that you can find on the state is the name of your anonymous LLC, and you can do it in almost any state. Real estate investors, what you’re going to hear of most, you’re going to hear of Delaware, Wyoming, Nevada and Texas; those are the top four. Most real estate investors, if they’re any bit savvy, you’re going to live events and you’re talking to asset protection people, it’s going to be one or if not all those states. So we create entities in any of those states.

The way you scale your business depends on a couple of things. You need to write down “This is where I live, this is where my homestead is, my house, and this is which state or states I have property in, and this is where I want to grow my business, and this is what type of real estate investing I want to do.” Depending on your answers to all five of those depends on what structure is best for you and it’s different for everyone. Because there’s a million different ways to skin a cat for someone, depending on of course, your budget and where you’re looking to scale and what you’re looking to do.

Theo Hicks: Okay. So I have my agent trust, and then I have the LLC that I buy a single-family home with. Do I use that same LLC to buy all my properties, or do I always create a new LLC for each property?

Jennifer Gligoric: No, you want to use your fundable entity, which I’m assuming is that LLC that you’re trying to create a professional borrow profile with that’s not tied to your social security number, as your professional entity. If you’re still buying in an LLC, but everything’s tied to your personal social security number, you’re defeating the purpose of why you’re using an LLC for that, and a lot of people do that.

So a fundable entity is an entity that you create with the idea that you’re going to have your own credit and you can walk into a bank and you can get a fundable business line of credit up to $500,000, a million dollars, and it’s not tied to your personal credit, and that’s something you need to work on. So we help people create fundable entities, and then your operating company is your anonymous LLC. And then when you get that property, you immediately want to transfer it out of your name and into a trust.

Theo Hicks: Okay, perfect. And then the other thing you worked on was about, you said, being your own bank, and you talked about the 401k. So do you want to walk us through that process as well, if I want to get started being my own bank today?

Jennifer Gligoric: So if you have a solo 401k, you cannot have any employees. So that’s very important; you don’t qualify for this. So this is a specific financial instrument that is available to self-employed individuals who do not have employees, but you are allowed to cover a spouse. And in 2020, you can make a contribution up to $57,000 into your solo 401k, which is five to ten times the normal contribution limit that is for a normal traditional 401k.

For the solo 401k products that we use, you can roll everything but an IRA into a solo 401k. The reason that you want to use a solo 401k if you’re in real estate investing is that you can be your own bank, you can loan money to yourself on your own favorable terms. Because you’re your own bank, you have to pay yourself back; you have to pay it. You have to make the payments, you have to make the payments back on time, but you’re keeping all the interest. You’re also the one that has checkbook control on this. So unlike being pigeonholed by someone else controlling the 401k, say, the reserve, the mutual funds you’re allowed to invest in, these are the stocks you’re allowed to invest in, and here are these limited amount of products you’re allowed to look at, with a solo 401k, you can invest in real estate, you can hold a property in the name of the solo 401k, you can give yourself up to $50,000 or half the total value of your solo 401k, whichever is less (because the cap is 50) and then you can take that money however you need it. So let’s say someone comes to you and says, “I want to start a marinate business, and I just need $10,000, but they want to charge me 13% interest.” Let’s say your rate’s 3%, you charge them 6%, you’re keeping all the extra interest, and now you’re investing in the business.

Theo Hicks: Okay. So I get the 401k to not only buy my own properties, but I can use it to invest in someone else’s properties.

Jennifer Gligoric: That’s right. You can do it in other properties. There are certain restrictions on it. It’s not just the gamut of what you’re spending money on, but considering what is left to a regular W-2 401k, it seems like you can do whatever you want. So there are some prohibited transactions and we have a list of those, and prohibited persons, but for the most part, you can pay off high-interest loans, and then use that same payment at favorable rate and then you keep the interest for yourself. You can bypass UBTI tax and unrelated business tax by using a solo 401k, which is a huge tax benefit. You can invest in other types of businesses, you can invest in Bitcoin. A lot of instruments are available for you that are not available. So it’s very powerful. I was on the Chris Naugle show, the Risky Builders, and he does a money show and he’s like, “Stop having your money sit on the couch,” and I’m like, “Yeah, it’s just eating Cheetos, getting fat doing nothing. You want to make your money work for you,” and that’s a mindset too. That’s the difference between that poverty mindset and then the mindset that really rich people have. They think about money differently, they use money differently. That is not a scary thing for them. They’re like, “Oh, heck, yeah, I’m gonna use that instead of this other one.” But we are given so many fear tactics on money throughout our lives that gives us limiting beliefs. “Pay everything off; you don’t want to have any credit card debt, you don’t want to have any debt at all; you just want to buy everything and pay it off.” And then you go to get a loan and you have this credit score of 820 or 840, and you can’t get anything over $3,500, and you’re like, “How come?” Well because you’re a professional consumer who they’re not going to make a penny out of. So the 80 algorithms that they track you with have said, “You’re not someone that they’ll give money to.” And then you’ll see 680 walk in, and that person walks out with a $200,000 line of credit. Because your credit score is meaningless; it’s your borrower behavior. So when you start to change that and you start using a fundable entity and you start thinking about things different, you have a better structure. With your real estate business, you’re protecting your assets. Those are borrower profiles that are tracked, that are very attractive for banks and lenders; tier one banks and lenders, which is the ones you want.

Theo Hicks: Okay, so we’re gonna cite everything you’ve said so far because I’m sure a lot of that stuff is definitely best ever advice and I’m gonna have to listen to this again because this is a lot of new information and I don’t know how much I can grasp, but I’m sure it’s normal in a 15-minute fitting… But besides what you’ve said so far, what is your best ever real estate investing advice?

Jennifer Gligoric: Treat your real estate investing business like a business. Don’t shirk in the very beginning by getting your entity and everything set up and protecting yourself. So it is a business that you plan on being successful. Because of that, you need to protect yourself because you’re a successful business person. The people who do that ahead of time and get things set up, and they don’t skip step A and go all the way to step F, those are the people that are less likely to lose later on, and they’re more than likely to get respect with different institutions and the people that you work with, and you’ll be more successful.

Theo Hicks: Alright, Jennifer, are you ready for the Best Ever lightning round?

Jennifer Gligoric: Okay.

Break [00:18:31]:03] to [00:19:27]:09]

Theo Hicks: Okay, Jennifer, what is the best ever book — well, I usually we say recently read, but what’s the best ever book to learn more about what we’ve talked about today? We’re changing that up a little bit.

Jennifer Gligoric: Okay. To learn about what we talked about today, go to my website, leafylegalservices.com; you get a free ebook and it tells you all about it.

Theo Hicks: Leafy Legal Services free ebook.

Jennifer Gligoric: Yeah, that’s right.

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

Jennifer Gligoric: I would just keep the podcast. I have a really good podcast that I’m doing. I would probably monetize the podcast more, and I would keep my same team, because they’re amazing. I’d figure out a way to keep my same team. I don’t know; I’d just morph it.

Theo Hicks: What’s the podcast called?

Jennifer Gligoric: Leafy Podcast.

Theo Hicks: Boom, Leafy all around.

Jennifer Gligoric: Yeah.

Theo Hicks: What deal did you lose the most money on, and how much did you lose?

Jennifer Gligoric: Oh, it was a contracting deal, and the most I’ve ever lost was over $150,000. And the reason I lost it — and it was contracting with work with a client, and I lost it because I stayed working with someone that I kept thinking, “They’re not really going to screw me over. They won’t really do this to me. Look at how hard I’m working for them. Look at what I’m doing,” and I was waiting for months for them to be a different person than what they were showing me they were consistently, on a daily basis. Because they would give me these little hints of “they’re not evil”, and I think, “Oh God, you’d have to be evil to screw me over like this,” and the thing is they gave me every single red flag and I needed to go with my gut and I should have cut the cord a lot sooner. So my advice now is when you know it’s rotten, it smells rotten, it looks like rotten, cut the cord. Don’t wait for someone to automatically be a better person than they’re showing you that they are.

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

Jennifer Gligoric: Through work in jobs, like helping people with work in jobs, and then I give back– because I was homeless, so I give back to the homeless shelter that helped me so much – Covenant House. So anytime I can, I’m willing to help them.

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

Jennifer Gligoric: leafylegalservices.com. You just go there you can set up an appointment with me. If you want to talk to me, I give a free consult to anybody. I just want to help people.

Theo Hicks: Perfect. Best Ever listeners, make sure you take advantage of that. Alright Jennifer, I really appreciate it. I don’t think I’ve ever learned as much in 15, 20 minutes as I learned today about asset protection.

Jennifer Gligoric: I get that a lot.

Theo Hicks: So first, you broke down your background and you’ve definitely done a lot. You started as a young kid working with your mother’s company and you talked about the skill sets that you learned, learning how to interview and do basic secretary work that you recommend parents teach their children because they’re not getting taught in school. You went to telemarketing sales, transitioned to crisis intervention for businesses, which is where you ended up meeting your CEO, and you talked about all the different companies that — basically, you’d go in there, you’d help them know how to run a business.

Jennifer Gligoric: Yeah, and that’s what I do now. Even what I’m doing with asset protection right now with real estate investors, many of them, I’m just helping them run their business better. All of these structures – yes, it’s money and it’s a structure, it’s boring, la-la… But once you get it set up and your accounting gets set up with it, the right structure will streamline a lot of things for the investor and protects them, and therefore it allows you to be safer to make more calculated risks, and that really can springboard you not only, but then the money things that we teach them as well. So yeah.

Theo Hicks: Yeah, we’ll definitely have to bring you back for a Skillset Sunday class. I wanted to talk about that today, but we ran out of time. So maybe we can bring you back for another episode to talk about how to scale a business more step by stepwise.

So then we talked about the asset protection, and go back and listen to what she said, but you want to make sure that you’re not creating LLC with your name on it. So you want to create that agent trust that is listed on the LLC, which is a private document that people can’t get access to and see your name. You talked about some of the top states for asset protection – Delaware, Wyoming, Nevada and Texas. You went through some questions that you need to ask yourself to determine what the best asset protection structure is for you – Where do you live? Where do you want to invest? What types of property do you want to invest in?

We talked about the fundable entity so that you can start working on building up a reputation so that you can get a line of credit that’s not tied to your personal name or personal credit. We moved on to talking about the solo 401k which helps you be your own bank. We talked about how it’s for people who are self-employed who don’t have employees, but you can cover your spouse contributions up to $57,000 a year. You can roll everything into that IRA, you can loan yourself money, and then you can pay yourself back and keep the interest, and then you have complete– well, not complete; there are some restrictions you said, but you have complete checkbook control. So you can invest in real estate, you can hold a property in the name of the 401k, you can take a loan against your 401k, and then use that to buy real estate, invest in other business, buy Bitcoin, you said, and you bypass that UBTI tax.

You briefly touched on the mindset and about limiting beliefs of thinking that “Well, I need to pay everything off and have this really amazing credit score, but then going into a bank and I can’t get a loan because I’m a professional consumer”, and the algorithms say, “This person cannot get money.” Whereas someone comes in with a credit score that’s 200 points less than yours and they get a massive loan… And I like what you said – the credit score is meaningless; it’s all about your borrower behavior.

And then you gave your best ever advice, which is to treat your real estate investing like a business and set up the asset protection from the beginning and have the mindset that I am a successful investor who needs his asset protection from beginning, and by doing so, you’re protecting yourself, but you’re also getting the benefits of getting more respect from different people you want to interact with. So that’s just brushing the surface of what we talked about.

Jennifer Gligoric: You take the best notes. That is incredible. That is amazing. You must have been so good in school.

Theo Hicks: I did okay. I appreciate it. I’m gonna do a podcast on the best ever way to take notes in an interview.

Jennifer Gligoric: Seriously, that’s great. That is like the bestest. I love that. I love that thoroughness.

Theo Hicks: Well, I appreciate it, and I appreciate you for coming on the show and giving us all this solid asset protection and being your own bank. Just really solid, just personal advice as well, with the limiting beliefs; I liked that as well. Best Ever listeners, as always, thanks for tuning in and listening. Have a best ever day and we will talk to you tomorrow.

Jennifer Gligoric: See you later.

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

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

Scott Krone Real Estate Background:

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

 

 

 

Click here for more info on groundbreaker.co

Best Ever Tweet:

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


TRANSCRIPTION

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Scott Krone: 7 square feet of lockers per capita.

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

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

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

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

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

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

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

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

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

Joe Fairless: Okay.

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

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

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

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

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

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

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

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

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

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

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

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

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

Scott Krone: Square-footage-wise?

Joe Fairless: Yeah.

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

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

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

Joe Fairless: Your self-storage facility?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Scott Krone: Sure.

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

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

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

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

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

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

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

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

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

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

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

Scott Krone: Thank you very much.

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JF2145: Property Management Focus With Peter Tverdov

Peter is the Founder and CEO of Tverdov Housing, a management company in Central New Jersey. Peter goes into how he got started into real estate management and he gives some tips that may help you manage your own properties. 

Peter Tverdov Real Estate Background:

  • Founder and CEO of Tverdov Housing  
  • 6 years of real estate investing experience
  • Based in New Brunswick, NJ

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Don’t invest in a market you don’t know. Start in the area you live in.” – Peter Tverdov


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I’m Theo Hicks, today’s host, and today, we’re speaking with Peter Tverdov. Peter, how are you doing today?

Peter Tverdov: Good, Theo. Thanks for having me.

Theo Hicks: Yep, absolutely, and thanks for joining us. A little bit about Peter – he is the founder and CEO of Tverdov Housing, he has six years of real estate investing experience, he’s based in New Brunswick, New Jersey, and you can say hi to him at tvdhousing.com. Peter, do you mind telling us a little bit more about your background and what you’re focused on today?

Peter Tverdov: Sure. So I worked on Wall Street for 11 years, and in the middle of that got into real estate investing, and as soon as I got a taste of it, I absolutely loved it like a lot of real estate investors out there. I liked it so much that I began trying to come up with multiple income streams in addition to the passive investing that real estate offers. So long story short, I started doing property management for people on the side in my neighborhood. I didn’t really think anything of it, and grew it very slowly, deliberately, on purpose. And as I did that, when you think about it, it speeds up the experience you get as a landlord or a real estate investor, because you deal with so many different houses and so many different tenants and situations. And long story short, earlier in 2020, I left my job on Wall Street to run that business full time, and it’s absolutely exploded from that point, and I’m very happy with the decision I made.

Theo Hicks: So your full-time job now is running the property management company and you also mentioned that you passively invest in deals. So are you saying you passively invest in other people’s deals, or are you saying the deals that you buy is passively investing?

Peter Tverdov: I should probably clarify. So when people think of passive investing, it’s investing in other people’s deals, being a hard money lender or just owning your own property. I happen to own my own real estate investments and in addition to that, that’s when I also created the property management business for other people. So that’s what I meant by creating another stream of income.

Theo Hicks: Got it. So what type of properties do you own and manage?

Peter Tverdov: I realized early on that the riches are in the niches. So it took me a while to figure out what I wanted to do on the management side. So for management, we strictly manage single-family, two to four-family, small apartment buildings, probably no more than 25-30 units, and we only do that in three counties in Central New Jersey. So it’s Middlesex, Somerset and Union County. I know it might sound a very niche actually for an audience from a larger state, but between those three counties, there’s about 3 million people. So a lot of tenants to find, a lot of clients to make happy and so that’s what we do on the management side.

For my own personal investing – and this is how I started – everything I invest in is student rentals, because that is really all that I knew from a real estate investing perspective; but that stuff is still single-family, two to four-family. So it fits in with what we do on the management side as well.

Theo Hicks: And then how many doors do you manage and how many student rental doors do you own?

Peter Tverdov: I own ten doors, it’s all students, and those doors are included in the management business. The management business right now – we’re at about 110 doors and hoping to hit 120 to 150 by the end of the year. We’ve grown nicely and I’m looking to continue to do that.

Theo Hicks: What types of things do you do to grow your management company when you’re first starting out? So I know you mentioned that you started off by managing properties of people in your neighborhood. So maybe walk us through specifically what you did to get those properties under management, and then we can go on the next steps from there.

Peter Tverdov: One of the first things I would say is it helps to live in an actual rental neighborhood. So a lot of investors I come across, they make the mistake of buying a townhouse, for example, and they don’t want to sell it and they move out of state and they want to rent it and they barely cash flow on it. That was never meant to be a rental to begin with. So the neighborhood that I bought in, it was all multi-family. It was two families, three families, four families and some single families. So the zoning in that town was already encouraging rental properties, and because of that there was just for-rent signs everywhere, and after a while, I would just go up and down the streets and cold call people and say, “Hey, I saw your sign’s been for rent for a while now. I live in town, I do a really good job, I could do XYZ for you. Let me help you out. What have you got to lose?” and slowly I built up my client base that way, just good old fashioned cold calling; it didn’t cost me anything out of pocket either.

Theo Hicks: Is that how you found the majority of those 110 doors or is that just what you were doing that first?

Peter Tverdov: That’s what I did to start out. Frankly, I didn’t really spend money on advertising until this year. I do have to give my brother in law credit. Last summer, he mentioned digital media marketing to me and I really took to it, and that’s where I got more active on Instagram, I started to use an SEO company to help with my SEO on my website and get my ranking to be increased on Google and on Bing and search engines like that. So that has certainly helped a lot, and then we do a little postcard marketing.

So we use a lot of the same theories that people use when they’re trying to find deals, like the yellow letters, cold calling… It’s just we also do that for property management, because no one else is really doing that. Oftentimes, I wind up having decent conversations with these folks, and they remember my name and I check in on them periodically, and some clients, I’ve been speaking with them for two years, and they finally reach out to me and they say, “Hey, Pete, let’s do it.” So it’s something that’s taken a while, but the way I always think of it is that I’m planting lots of seeds. So the seeds that I’m planting today, I hope they result in a crop six months from now, a year from now. So in my mind, it’s always important to continue to plant seeds every day if you want to find clients, find deals or really find anything of value.

Theo Hicks: What type of things are you doing on Instagram?

Peter Tverdov: I’m kind of open kimono, I try to make it interesting for the audience. So I’ll do before and after pictures of rental rehabs that we do, I’ll do before and after pictures of my own property if I’m working on it. I’ll do instructional videos for tenants on how to read a gas meter, what to do if your power goes off, how to turn off the main water shutoff, or I’ll show architect drawings, I’ll show site plans, really anything that’s involving my business to engage the audience and also educate them. I’ve really taken a liking to it, because again, that’s another thing that’s free when it comes to marketing, and it’s helped my business become pretty well known in New Brunswick, and I look forward to continue to do that and to help that grow even more.

Theo Hicks: Is there a specific strategy you implement? I [unintelligible [00:09:52].26], but I know that there’s hashtags and stuff. So do you hashtag the specific areas you’re in to make sure you’re targeting that area?

Peter Tverdov: Yes, some of the staples are you have to post at certain times, and I guess that varies based on your industry. The hashtags are very important. I would say the most important thing is the photo. It has to be engaging, it has to be interesting, and that gets harder and harder, and frankly, it’s really time-consuming. A lot of the bigger people on social media, I’d say they probably have a VA doing that for them. I’m not there yet. I don’t really think I’ll be there for a while, which is fine. That’s not why I do it, is to have 50,000 or 100,000 followers. But for somebody just starting out, I would suggest using lots of hashtags and posting at critical times during the day. So first thing in the morning, or when people are getting off work or lunch break. That’s when people tend to look at Instagram the most, myself included.

Theo Hicks: What are some of the biggest management mistakes that you’ve either done or that you see other people doing that anyone who’s wanting to start their own property management company should avoid?

Peter Tverdov: I’m going to answer the question a little differently. I would say the biggest management mistake anybody makes and it’s usually a mom and pop landlord is, they just don’t know how much it costs to run a rental property correctly. So I’ll give a couple of examples. I have a client who likes to use local electric and gas companies warranty contract. So if the tenant has an issue, that company will come out and they’ll put paper clips and band-aids on the problem. So it doesn’t really solve the problem, and then when it becomes a massive problem, they throw their hands up and say, “Hey, this is not our issue to solve.”

What people don’t realize about property management– so let’s say you hire a handyman and the guy’s done work for you before and he’s really cheap and he gets the job done. So when we bring out a new client, the person will say, “Hey, can I use my handyman?” and I’ll tell them, “No. If you want us to use them, then they need to be onboarded properly. Have you gotten a criminal background check on your handyman? Because we have to do that with ours, because there’s stories of people pulling a knife on somebody in a house. Or in one town, there was a guy who was a handyman, he was in prison for a decade. Oops… Didn’t know that, right?” So things like that, your typical mom and pop landlord don’t think about, or things as simple as fire safety inspections. Part of what we do is we do quarterly inspections, and the reason why we do is we check the smoke detectors, we check the carbon monoxide, we make sure the fire extinguishers are full. So each year– I shouldn’t say each year, but the regulations on that stuff always change and you have to be on top of it; and if you’re not and if you don’t have the ten-year smoke detectors in your house or if you haven’t gotten a fire safety inspection, you could have a major fire if there’s a fire, or God forbid, something worse.

So there’s a lot of attention to detail when it comes to property management that your average client doesn’t fully understand, but the good thing with my business is I’m also a real estate investor. So I get it. This is not a charity. You do this to make money and to create passive income for yourself, but at the same time, you just have to do it correctly. You have to spend the proper amount of money, and frankly, you have to buy at a good enough price where you’re not running a business on a shoestring budget because that’s just not gonna work in the end.

Theo Hicks: What is your best either real estate investing advice or property management advice ever?

Peter Tverdov: The best real estate investing piece of advice I would give to people is don’t invest in a market that you don’t know. If you want to be a real estate investor, start at your hometown, or start where you live now, and study the holy hell out of that area. That’s what I did, and I only personally invest in one market; and maybe that’ll change, but what I did is I wrote down every home sale for two years and what the rents were and what the price sold for. And obviously, there’s some variables based on the condition of the house, but based off of that, I knew what investors considered value in that town, and that’s going to vary. Value is different in New York, Detroit, Memphis, Atlanta, but if you’re investing in Memphis thinking that it’s the same value as in New York, you’re going to get smoked on a deal. And conversely, when you see a deal, you’re going to know it’s a deal because it’s going to be lower than what the average home prices are or the cap rates are. So that’s something I always tell people when they’re first starting out.

On the management side, I would say just do things right the first time. Don’t go cheap; you don’t have to get the most expensive guy — and I learned this myself from being a real estate investor and it came back to bite me in the butt, but don’t go cheap, do things correctly and you’ll have less headaches down the road.

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

Peter Tverdov: Sure.

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

Break: [00:14:35]:04] to [00:15:18]:02]

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

Peter Tverdov: One of my favorites that I like to recommend to people is called How Rich People Think, and it explains the difference between people who are multimillionaires and people who are not, and really the answer is right smack in front of you; it’s a book that I love. I’ve given that one to my younger brother to read. I gave it to him two years ago. I’m still waiting for him to finish up here. So hopefully if he got this far in the podcast, it’ll give him some motivation to finish, but it’s honestly a fantastic book. I would recommend that to anybody.

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

Peter Tverdov: Fight. Fall down six times, get up seven. Honestly, I’d probably make some calls in the investment banking world where I used to work and see if I can make something happen there, but I’ve always been a fighter and someone who just scratches and claws and just refuses to lose and I don’t think that’ll ever change.

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

Peter Tverdov: I played football at Rutgers for four years, and when I played, we went to four straight bowl games. We were AP top 25, 17 weeks in a row. My senior year, we knocked out eight starting quarterbacks. The last game I ever played was actually against Russell Wilson, and the dude was so fast, I had a cough for two weeks after the game; it was nuts. But we knocked his ass out too actually, and we won the game. That’s when he played for NC State. But anyway, I probably donate way too much time and money to Rutgers Athletics and the football program and gymnastics because it’s my wife who was a gymnast there, but I love the place, I love dealing with student athletes. I think they’re some of the best people you could hire. They’re tough, they’re coachable, they know how to work with different people… So it’s something I just really enjoy doing.

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

Peter Tverdov: The easiest way to reach me is on Instagram. My Instagram is @tverdovhousing, and besides that, you can reach me on our website, just use the contact form. I’m happy to help investors or potential clients. That’s why I started my business, was to help people either on the brokerage side, on the management side, and we’ve also started to get into a little construction management as well. So at the end of the day, if someone’s interested in real estate and interested in having somebody guide them, then I’m more than happy to help.

Theo Hicks: Well Peter, thanks again for joining us today and walking us through how you started and grew your property management company. A few of the big takeaways for me is one, you talked about your strategy to start a property management company, and number one was it is important to live in a rental friendly neighborhood, and you talked about a good indication of that would be seeing for-rent signs everywhere. So you went up and down the street and cold-called the for-rent signs to get your business going. You mentioned it was a free strategy. So anyone out there who wants to start a management company, that’s definitely a free way to do that.

And then you mentioned how you’re transitioning now into paid advertising, digital media marketing, and you talked about what you’re doing on Instagram, the types of things you’re posting, how hashtags are important, posting at the right time’s important, the photo is important, making sure it’s engaging and interesting.

We also talked about the fact that you’re doing the things that investors do to find deals, but you’re doing it as a management company and not a lot of people aren’t doing that, so there’s not a lot of competition… Whereas there’s lot of competition for those using those strategies for actually finding deals. We talked about some of the biggest management mistakes, which is not understanding how much it costs to run a company. Rather than solving problems, people just put band-aids on them, letting clients use their own people without the proper management company screening them properly, and then you mentioned not doing quarterly inspections.

And then your best ever advice, which was for investing – invest in a market that you know very well, that you live in and study that area. You mentioned how for two years you wrote down all the sales, how much they sold for, the rents… And on the management side, you said do things right the first time. So again, anyone who’s listening that wants to start a management company, you got all the tools right here. Peter gave you his Instagram information and said he likes helping people, so definitely take advantage of that. So thank you for that, Peter. Thanks again for joining us. Best ever listeners, as always, thank you for listening. Have a best ever day and we will talk to you tomorrow.

Website disclaimer

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

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

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

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

Oral Disclaimer

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

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JF2142: Improving Tenant Renewal Ideas With Brian Davis

Brian started investing before the 2008 crash and at the age of 24 had acquired 13 rental properties and ended up losing quite a bit during the real estate crash of 2008. He goes into how he was able to purchase 13 properties at such a young age and how he was able to recover from his loss and move forward. He shares a great idea of what to ask your tenants to help incentivize them to renew their lease. 

Brian Davis Real Estate Background:

  • Co-Founder of SparkRental.com
  • Has been a landlord for over 15 years
  • Based in Philadelphia, PA 
  • Say hi to him at https://sparkrental.com/
  • Best Ever Book: 

 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“One way to improve and increase tenant renewal is to think what upgrades will add value to your property while also improving the tenant’s experience in living there” – Brian Davis


TRANSCRIPTS

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice to 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, Brian Davis. How are you doing, Brian?

Brian Davis: I’m doing great, Joe. Thanks for having me.

Joe Fairless: Well, I’m glad to hear that, and it’s my pleasure. A little bit about Brian – he is the co-founder of sparkrental.com, he’s been a landlord for over 15 years. He and his family tend to travel a whole lot and we’ll talk about that; his company is based near Philadelphia, Pennsylvania. So with that being said, Brian, you want to get the Best Ever listeners a little bit more about your background and your current focus?

Brian Davis: Sure. So I got interested in financial independence with real estate from when I graduated college onward. I graduated college in 2003, so a little while ago now, and I was working for a mortgage lender, and specifically, I started doing hard money loans for them, for real estate investors; and this of course, during the bubble in the mid-2000s, and I started thinking to myself, “These guys are all making passive income from real estate. Why couldn’t I do this? Why can’t I invest in rental properties?” So I went on, bought a whole bunch of rental properties and overspent, and then lost a bunch of money when the bubble burst.

Joe Fairless: You and a lot of other people.

Brian Davis: Yeah, I got overzealous with it as a 20-something. I didn’t really know what I was doing, but I came out of that with a lot of lessons, many of them, learned the hard way, and I started working for a company that provided legal forms for landlords online. I was with them for a long time, and then–

Joe Fairless: What company?

Brian Davis: EZ Landlord Forms is the company that I was working for. So I managed EZ Landlord Forms for about eight years, and then in 2015, my wife and I decided that we wanted to move abroad. Now I was telecommuting when I was working with EZ Landlord Forms. So I figured it’d be no big deal to move abroad. My wife is an international school counselor, so we moved to Abu Dhabi. And right after moving, things just went downhill between me and EZ Landlord Forms. So I left and I talked to a former colleague of mine, [unintelligible [00:05:02].12] and we decided to split off and create our own company, Spark Rental, which focuses on helping everyday people build passive income from rental properties on the side of their full-time job with the idea of eventually building enough to be able to pay their bills and reach financial independence. So we do a bunch of different things on that behalf.

We do a lot of education, we have online courses about financial independence from real estate, we have online property management software that we feel is the best in the industry, or at least is about to be; that’s a long story in itself, which we can get into later maybe. So that’s a quick background on me and where I’m coming from.

Joe Fairless: So let’s talk about Spark Rental, and then let’s also talk about your 20’s, because there’ll be some interesting things to learn there. So we’ll focus more on Spark Rental but first, would love to learn more about how big was your portfolio and how much money did you lose?

Brian Davis: So my portfolio at the time of the bubble bursting was 13 properties. These were single-family homes in Baltimore City and they were largely in not very good areas in Baltimore City, and that’s one of the many lessons that I came out of that with, is just how the numbers on paper, especially in lower-end neighborhoods, don’t necessarily reflect the reality of what you’ll earn… Because particularly lower-end areas have some hidden costs that just don’t show up in your average cashflow analysis. So things like vandalism and crime, and even though in a normal cash flow analysis, people look heavily at vacancy rate, I think it’s very easy to underestimate vacancy rate, particularly in tough neighborhoods… And you end up underestimating the turnover and evictions and the costs associated with those turnovers and evictions.

So one of the things that Danny and I are really big on educating new rental investors about is how most of the expenses and most of the labor involved in owning and managing rental properties comes during turnovers. So a focus of ours is minimizing those turnovers, and especially in some areas– I’m generalizing a little bit here with lower-end areas, but there can be a combative relationship between landlords and tenants, and sometimes tenants will damage the property out of spite. I’ve had that happen many, many times in the midst of a very combative eviction.

Joe Fairless: Why don’t they like you? Why do all of them try to trash the place? What are you doing to these people?

Brian Davis: You’re just trying to collect the rent, but I’ve had a lot of professional tenants over the years, all of which has really turned me off of some of the lowest end real estate. Now granted, this was ultimately my fault for thinking that I was smarter than everyone else out there when I was 24 and going in and finding these great cap rates, and these deals that look fantastic on paper, not really understanding some of the hidden costs that come with these properties.

Joe Fairless: How did you get 13 properties as a 24-year-old?

Brian Davis: Well, it was over the course of a few years. It wasn’t all when I was 24, but it helps that I worked for a mortgage lender. So I had relatively easy access to capital, and I was living in a very and extremely affordable home. I had a pretty low-cost lifestyle, and that’s actually something that I still try to maintain to this day; I still do maintain to this day, is a very high savings rate. So I was making reasonably good money, but not spending a whole lot on my lifestyle. So I was able to funnel a lot of money into real estate investments.

Joe Fairless: So let’s talk about Spark Rental, because one thing you said about the lower-income areas that resonated with me is the cost of turnovers, and you said that your focus or one of the areas of focus is to minimize the amount of turnover that takes place at a property, and you said one thing that you do with Spark Rental was education. So what are some tips that you have for minimizing the amount of turnover that we have at our properties? Whether it’s– I don’t know if your tips are lower-income specific or if it’s just in general, but however you want to approach that question, I would love to hear your thoughts.

Brian Davis: Sure. Some of it is just about building a relationship with your tenants, and it doesn’t mean necessarily a personal relationship, and you don’t have to go out and friend them on Facebook and I don’t recommend that you do, but having a very courteous and kind and professional relationship with them. So things like we urge our students to just keep a very brief file on each of their tenants so that they can pull up whenever they pick up the phone to call them, and things like their children’s names, maybe you have their hobbies or what they do for a living, just so that even if it’s just 30 seconds of small talk when you first pick up the phone and call a tenant, “How is your son Bobby doing? Is he still playing baseball?” whatever it is, just to send the message that you consider them a human being and not just a source of a paycheck, and there’s a lot of things you can do to keep that relationship.

One of the things that we recommend is that landlords are extremely responsive. Even if you can’t make a maintenance request right away, for example, the important thing for your tenants is to stay in close communication with them so that they don’t feel like they’re being ignored, so that they don’t feel like you’re an absentee landlord who hasn’t heard them or haven’t gotten the message that there is a leak in the property or whatever it is… But just say, “Hey, I got your message. I’m sending someone over as quickly as possible. It may not be until tomorrow, but I am on top of it and I will stay in close contact with you.” So responsiveness goes a long way with building that relationship with your tenants and that trust.

We also recommend that landlords find incentives to extend their leases as long as possible with their good tenants. Now obviously, every landlord has some tenants that are not as good and you probably want to replace them when it’s convenient to do so and when you’re not going to end up in an eviction scenario, but just building those relationships, incentivizing your lease renewals and sending holiday cards, whatever you can do to build, that trust that professional relationship between yourself and your tenants.

Joe Fairless: What are some examples that you implement to incentivize the resident to extend their lease?

Brian Davis: One idea that landlords can do is they can offer to lock in either today’s rent amount or they can offer a less steep rent increase for renters who renew for a longer term, such as two years or even longer, or added flexibility. Sometimes what tenants really want is a month-to-month lease, and it’s the difference between them either exiting right now or staying with you on a month-to-month basis. So some of it is just about feeling out what is most important to that particular tenant. In some cases, it’s about repairs and upgrades to the property. So landlords can approach their tenants and say, “Hey, I can’t make any promises, but if you could wave a magic wand and have three repairs or upgrades made to the property that would really make you want to stay here, what would those three things be?” And then you can look at those upgrade ideas and pick one or two or whatever that will actually increase the value of your property, increase the market rent for your property and incentivize your tenant to renew longer.

Joe Fairless: What has been something that’s been– they’ve had that magic wand and they’ve waived it and then you reviewed? What’s something that you’ve done?

Brian Davis: Well, let’s see. One time, I actually put in central air for a tenant which– that was not a minor one, but I felt that the neighborhood was up and coming and the expense was justified. So I did end up pulling the trigger on that. But it could be anything from replacing the carpets which, in many cases, you’d have to do anyway if that tenant left, to painting to upgrading the kitchen or bathroom.

Joe Fairless: So replacing carpet, painting, upgrading the kitchen or the bathroom or just installing central air.

Brian Davis: It depends on the property and the neighborhood and the tenant. What makes sense for that property, what’s an upgrade that will add value to the property that will boost the market rents even if this tenant were to leave six months or a year later? So you just have to take it case by case with each tenant and each property.

Joe Fairless: Are the three main components of Spark Rental education, courses and property manager software?

Brian Davis: Yes, those are our main components.

Joe Fairless: What’s an example or course that you’ve got?

Brian Davis: Our flagship course is our Fire From Real Estate program. It’s all about reaching financial independence and retiring early with rental properties. So in that, we’ve had three main focuses. The first focus is on maximizing your savings rate, because if you spend every penny that you earn, then you don’t have any money to invest with. So whether you use real estate as your vehicle for reaching financial independence or something else, like index funds or dividend-paying stocks or whatever, your savings rate matters because that is what enables you to invest money in any income-producing asset. So that first section focuses on savings rate and areas where you can boost that. The second section is all about real estate investing and particularly investing in rental properties that generate maximum passive income or semi-passive income because rental properties aren’t 100% passive, as you know.

Joe Fairless: Sure.

Brian Davis: But yeah, so that second section is all about rental investing, property management and that side of the business, and then the third and final section is about preparing to take that leap to pull away from your full-time job if you’re ready to do so, to pull that trigger.

Joe Fairless: On maximizing your savings rate, identifying areas to save, what are some tips you have there?

Brian Davis: Well, if you look at government data from the Bureau of Labor, the three things that Americans spend the most money on are housing, transportation, and food, and those make up between two thirds and three quarters of the average American household, usually around 70% of the American household spending.

Joe Fairless: What percent?

Brian Davis: It’s around 70%; it fluctuates between around two thirds and three quarters of the average Americans’ household spending each year. So those three things offer the greatest room for maximizing your savings rate; the greatest opportunity for savings. So we focus first and foremost on saving money on housing. We get into house hacking and all of the many different ways that you can house hack. So for example, I’ve had housemates before when I was a young professional living downtown. I bought a house and rented out rooms housemates to cover the majority of my mortgage. Now, my wife and I live overseas and her employer actually provides us with free furnished housing. So that’s one way of getting free housing. My business partner Danny, she actually house-hacks with a foreign exchange student. So she has a Chinese high school student who lives with her and the placement service pays her a monthly stipend that covers most of her mortgage payment, and she’s done things like renting out storage space before, but you can do the traditional house hack of buying a small multifamily and renting out the other units. There are many different ways to house hack and not all of them are appropriate for all people, but the idea is to get creative with your housing and find a way to have someone else pay for it.

Joe Fairless: I love how you took the approach of hey, here’s what the Bureau of Labor statistics says we spend most of our money on, and those are obviously the main ways to take a look at to see if you can save money. So that’s housing. What about food? Make your lunch?

Brian Davis: Well, yes. It sounds simple and it is simple, but food that you make yourself costs a tiny fraction of food that you pay someone else to prepare for you. So if you make your own lunch every day, you’re looking at a cost of usually in between $1 and $2 or $3.50 or whatever cost to make your own lunch and bring it to work with you versus paying $7 to $15 to go out to even a cheap restaurant near your office; even if you go to Subway or whatever, you’re still probably going to spend $7, $8, $9, $10 dollars. So yes, you can save a massive amount of money by making your own food, and that goes for every single meal of the day. So we urge people to classify meals out or even meals in that you order like delivery or whatever. Any meal that you don’t prepare yourself, that should be classified as an entertainment expense. And there’s nothing wrong with that; I love dinners out as much as the next guy, but it falls under our entertainment budget. We don’t try to sugarcoat it in our budget by calling it food because food is necessary. Going out to a fancy restaurant is not necessary; it’s entertainment. So making every single meal or at least the overwhelming majority of your meals, breakfast, lunch and dinner, is an easy way to save on food and there’s a lot of other things you can do with that to get a little bit more creative.

My wife and I make enough dinner each night to have leftovers the next day for lunch. So I just take that with me for lunch the next day. One favorite thing that we’ve done before is we have Tupperware exchanges with friends where each person will make a big batch of food. For example, a huge batch of lasagna or some other meal that it saves well in Tupperware, and then you get together and you exchange all those Tupperware so that you don’t have six nights worth of lasagna for dinner in a week, you have one of five or six different things that you can just exchange with other people, and you can freeze whatever your don’t eat and get creative with it like that, and that saves time, too. You have one big batch that you cook, and then you have meals for the entire week.

Joe Fairless: Keeps it fresh too, because everyone’s got their own cooking style and you can taste different stuff.

Brian Davis: Exactly, and get some ideas for new recipes of your own.

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

Brian Davis: One of the main things that we focus on first, at least with new investors, is learning how to accurately forecast cash flow for any rental property; because if you get that wrong, then you open yourself up to negative cashflow, bad investments and a lot of lost money. So we actually make it a free tool on our website. We have a very detailed rental cash flow calculator that’s available for anybody to use; no login required, no email submission required. It’s just there on the website for anyone to use, because that is such an important thing, maybe to me in particular, because I got that so wrong when I first started investing. So we focus heavily on accurate cash flow forecasting, because if you get that right, then you’ll never make a bad real estate investment in your life again. You’ll always know the returns, at least the yield, that you’ll earn on a property before you buy it. So if I were to pick one thing, that would be my one thing. I can go on, but–

Joe Fairless: No, it’s good. Thank you. I know you said you had 13 properties in Baltimore City and they weren’t in good areas and you learned a lot of lessons as a result of what happened. How much money did you lose would you estimate?

Brian Davis: That’s a figure that I never went and calculated exactly–

Joe Fairless: Too painful.

Brian Davis: –because I didn’t want to know, but I would guess that I lost in the $150,000 to $200,000 range from that round of properties.

Joe Fairless: Psychologically, if someone is experiencing something like that, you’ve been through it, you’ve come out the other side, what advice would you give that person who is, say, in the middle of it?

Brian Davis: Well, first thing I would say is that all things come to an end; it’s going to be painful in the short term, but you’ll come out of it okay ultimately, and the most important thing is to learn from those lessons. That person just learned a very expensive lesson, it would be a shame to let that lesson go to waste; it’s tuition that you’ve paid for education. So in my case, I went on and I continued buying properties, of course, but I could have felt burned by real estate and said, “I’m never going to touch real estate again,” but that would have wasted on all those hard-earned lessons that I had learned. So I would urge people to consider it the cost of tuition. They will never make those same mistakes again because they got burned so badly. So they will be a much more conscientious investor moving forward.

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

Brian Davis: I’m ready.

Break [00:22:13]:05] to [00:22:56]:04]

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

Brian Davis: The best ever book that I’ve recently read– this is a business book, not a real estate book, but it’s Traction by Gino Wickman, and it’s all about systematizing your business so that it becomes less dependent on any one person, including you, and something you can scale and you can automate without having the business collapse if one person pulls away or it doesn’t require you to work 80 hours a week for that business to function and succeed. So Traction by Gino Wickman.

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

Brian Davis: Best ever deal I’ve done. This was a property that I bought originally to live in, and I bought it to eventually keep as a rental. This was in Fell’s Point in Baltimore, and it was an estate sale. There was one block from the harbor in the Marina. It had a rooftop deck overlooking this beautiful Marina with yachts. So I bought that for $150,000 and I – it’s a separate story – ended up putting a hot tub on the rooftop deck just for fun… And then we moved out and we rented that property for $2,400 a month in rent, and eventually, we sold it in the mid two-hundreds a couple of years later. It just ended up being more hassle than it was worth keeping with us being overseas, but it was fine. I had a lot of fun living there and then I went on to earn some good money on cash flow on it.

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

Brian Davis: Free education is one thing. So we recently did a free webinar with no sales pitch at the end. It was just pure education that was about the impact of the coronavirus pandemic on real estate investors, which is something that people kept asking us about and were desperate for more information about. So we did a two hour completely free webinar with no sales pitch whatsoever, and we got an incredible feedback from it of people just thanking us for spending all the time to put that together. But we have an extremely comprehensive blog with hundreds and hundreds of free articles; all of them very long.

So when I give money, I give it to libraries. I’m very big on the free transmission of knowledge, free education and particularly, in a human-driven way; and the internet is wonderful, but it’s no substitute for getting knowledge from a fellow human being.

Joe Fairless: This isn’t something I usually ask, but I know based off of our conversation before we started recording, you’re in Brazil. So do you typically travel, and if so, how are you able to do that?

Brian Davis: Sure. We try to hit around ten countries a year; we do a lot of traveling. This particular year is different because of the coronavirus pandemic, and because my wife is pregnant, so we can’t travel as much as we normally do. But there are so many ways to travel inexpensively beyond just staying at Airbnbs and trying to eat at locals’ restaurants. We use tools like Skyscanner to find inexpensive locations to fly to places that we never would have considered otherwise. So a quick example, we were living in Abu Dhabi for a few years and we just pulled up Skyscanner and said, “Alright. What are the cheapest flights from Abu Dhabi to anywhere in the world?” and then one of the cheapest ones that popped up was Bulgaria, and my wife and I looked each other and we said, “Well, what’s in Bulgaria?” We looked it up and we were like, “Oh, this is intriguing. Let’s go.” So we got round trip, nonstop flights for something like $150 a piece, and had an amazing week-long vacation in Bulgaria that, to this day, it generated a love for us for Eastern Europe, and we actually want to move to Eastern Europe at some point, that’s how much we love it.

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

Brian Davis: Connect with us either on our website, sparkrental.com, there are contact forms all over the site; they come directly to me or my partner or our immediate staff members, most of whom are either friends or family. We have very much a family business here. You can also connect with us through social media. We have a huge presence on Facebook. We actually have the largest Facebook group for landlords, with 30,000+ members and investors on there. But Spark Rental on Facebook, @sparkrental on Twitter, @sparkrental on Instagram or through our website, sparkrental.com.

Joe Fairless: I notice the pattern there… [laughter] Thank you for being on the show talking about the deals that did not go right and talking about what you’re currently focused on and how you’ve evolved from learning those lessons while you were in your 20s, and now what you’ve created with Spark Rental, and the lowering turnovers parts. Some very tactical things that we can do. Just be a human being with the resident, get to know them, hobbies, kids’ names, etc. Not to have a fireside chat with them, but just to make sure that they understand that we’re all in this together and that you care about them at some level, and then be extremely responsive and then give incentives to extend leases, and you talked about the magic wand and you said that you should always put a central AC in every unit regardless if that makes financial sense and I have to applaud you for that. [laughter] So thank you for being on the show; I enjoyed it. I hope you have a best ever day and we’ll talk to you again soon.

Brian Davis: Joe, thank you so much for having me.

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.

Follow Me:  
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JF2141: Short Term Rental App With Jon Crosby

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

 Jon Crosby Real Estate Background:

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

 

Click here for more info on groundbreaker.co

Best Ever Tweet:

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


TRANSCRIPTION

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

Jon Crosby: Good. How you doing?

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

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

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

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

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

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

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

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

Joe Fairless: Okay, monthly rent.

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

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

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

Joe Fairless: Really?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Joe Fairless: Wow.

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

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

Jon Crosby: It also has an address lookup.

Joe Fairless: Just punch in the address.

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

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

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

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

Joe Fairless: Wonderful.

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

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

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

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

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

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

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

Joe Fairless: Okay. So it’s delayed.

Jon Crosby: It’s delayed.

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

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

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

Jon Crosby: I am.

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

 

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

 

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

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

Joe Fairless: Best ever deal you’ve done?

Jon Crosby: My first short term rental.

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

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

Joe Fairless: What happened?

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

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

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

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

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

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

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

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

Jon Crosby: Thanks, Joe. Appreciate it.

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JF2120: Jumping In The Market With Patrick Menefee

Patrick served in the army for 6 years and is the founder of Invest DGP. Patrick started investing in June of 2019 and has acquired 12 units. Patrick is very open to sharing some of the hard lessons he learned from jumping in the market quickly and how he was able to improve his units and double his rent collections. 

 

Patrick Menefee Real Estate Background:

  • Founder of Invest DGP
  • Served in the Army for 6 years
  • Started investing in June 2019
  • Owns 12 units
  • Located in Charlotte, North Carolina
  • Say hi to him at : https://www.investdgp.com/ 

 

 

 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Never have your inspector and appraiser go out to your property at the same time.” – Patrick Menefee


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, Patrick Menefee. How you doing, Patrick?

Patrick Menefee: Hey, Joe, I’m good. How are you?

Joe Fairless: Well, I’m doing well and looking forward to our conversation. A little bit about Patrick – he’s the founder of Invest DGP, he served in the Army for six years – so thank you, Sir, for that – and he started investing in June of 2019. He owns 12 units, and he’s located in Charlotte, North Carolina. So with that being said, Patrick, you want to give the Best Ever listeners a little bit more about your background and your current focus?

Patrick Menefee: Absolutely. Thanks, Joe and thanks for having me on. So like you mentioned, six years in the Army right out of college, and then I ended that in about February 2018, transitioned into financial services consulting, working with banks, financial institutions, traveling every week for the last two years. As I moved and transitioned to Charlotte, that was when I realized that I wanted to get involved in real estate in some facet or another; I just wasn’t quite sure what. So I turned 30 towards the end of 2018, and that was when I started setting some goals for myself, realized what I wanted to get to, and I spent a lot of time over the next six to seven months doing a lot of education, networking, listening to podcasts, meeting as many people as I could, reading all the books that I could get my hands on… And it was in, as you mentioned, June of the following year 2019 that I really decided to start taking action, and then within about five weeks, I had 10 units under contract. They were all small multifamily; one of them a fourplex, another one was a portfolio of three duplexes that were all side by side. The fourplex, I did it down by myself and then the duplexes were all with a partner.

So once I had a little bit of a foundation, once everything was– I actually made a decision to take action. Everything happened rather quickly after that. So as you mentioned, now I own 12 by the end of the year. The other two units are also small multifamily with a partner as well, and that’s really been my focus right now. It’s been small multifamily property. Ultimately getting into some of the bigger commercial, but primarily small for right now.

Joe Fairless: You were doing a lot of education, and then when you decided, okay, now it’s time to rock and roll, in five weeks, you had 10 units under contract. What was the tipping point where you made the decision now it’s time to go buy some property?

Patrick Menefee: Actually, I’d purchased my own primary residence back in March, and the company and the guy that I bought it through, they were having a networking event. I still remember the day; it was June 6th, and I was networking with people, talking to some people. I had my plan initially, which was going to be to use the VA loan and [unintelligible [00:05:36].02] houses and slow roll it and live in a house for a year, rent it out; that was my plan, and maybe pick some up along the way that made sense. But there was one couple that I was talking to. I can’t even tell you exactly what they said, but it was the exact conversation that hit me, and I realized that they had a couple of condos that they were renting out. They were actually doing what I wanted to do, and something right there just really kicked me and said, “Why aren’t you just taking action?” After that conversation, I doved in, and that was when I found– I actually had the fourplex. I technically didn’t get under contract until July, but I found it about a week later and started the negotiations with the seller. So it happened very quickly.

Joe Fairless: Okay. So it sounds like you had just built up knowledge and things were bubbling, bubbling, bubbling, and then there was some breaking point, and perhaps in retrospect, it’s an insignificant conversation. Maybe it was similar to other conversations that you had previously, but you were just ready. It was just that time and this conversation just happened to be at the right point and place and time where it just made you have that decision.

Patrick Menefee: Yeah, it definitely did. I probably had some more conversations, five or six times a month before that, but that one just did it.

Joe Fairless: Well, let’s talk about your purchases, those 10 units. You did the fourplex yourself, you said, and then you got three duplexes side by side with a partner. How did you structure those transactions with the partner?

Patrick Menefee: It was interesting. It was a mix of– by accident when that finally worked out, and then just some overall planning. I was looking for a partner on it, and I’d been doing a lot more networking and branding to let people know what I was doing. So as a result, some people from work were interested in working together on a deal.

So I was talking to one of my really good friends that I was in the army with, and we were talking through some of the options for how I might split this up and how I might pull off a partnership with him, especially because the guy was going to be someone out of state, was primarily just going to be investing cash. We worked out some terms that we thought made sense, and then at the end of it, I could work with this guy, but I didn’t even think to ask, “Do you want to do this and do you want to get involved instead?” and he said, “Sure.” So we worked out the terms, he brought the majority of the cast to it, and I did everything else. So it ended up– because it was six units, and this was something I wasn’t totally prepared for at the time, but since it was six units, I couldn’t get a conventional mortgage, so I had to get a commercial loan; and then on top of that, the way that we worked out the negotiation, the way we worked out the partnership was he was providing the majority of the cash, but I was going to be primarily on the loan. So that was not something that I could typically do going through most of the normal Fannie/Freddie loans, because if you provide that money, it either needs to sit in your account for two months, or it needs to be from someone who’s also on the loan. So we structured it that way, and then we split the equity accordingly. Me doing all the management and all of the activities and all of the primary effort and some of the bigger portions, but we worked it out in a way that worked out perfectly for both of us.

Joe Fairless: Reminds me of the saying, “If you ask for money, you get advice. If you ask for advice, you get money.”

Patrick Menefee: I have to write that down. It’s a good one.

Joe Fairless: That’s what happened here, right? You’re asking him for advice, and you got money.

Patrick Menefee: Yeah, that’s absolutely what happened.

Joe Fairless: Well, you said you got a larger portion of– is it each of the three deals based off of your responsibilities?

Patrick Menefee: Yeah, it’s very close to 50-50, but yeah.

Joe Fairless: How do you structure it? So 60-40?

Patrick Menefee:  It’s 55-45.

Joe Fairless: Okay, got it. Very close.

Patrick Menefee: Yeah. We, on this one — it worked out really well. We said– based on the fact that I was going to be doing all the work, we set the all-in cash as a percentage of the investment. So we said, “50% of the investment is going to be for the cash. So if you bring 100% of that, you get 50% of the deal. If you bring 50% of that, you get 25% of the deal.” So that was how we worked it out. He brought 90% of the cash and got 45% of the deal.

Joe Fairless: With the three duplexes – are they located in Charlotte?

Patrick Menefee: They’re just North of Charlotte. They’re about 45 minutes north in Statesville, North Carolina.

Joe Fairless: Okay, and what about the fourplex?

Patrick Menefee: That one’s just west. All of mine are just surrounding the Charlotte area, just because multifamily is hard to come by with solid cash flow within Charlotte. So the fourplex is in Gastonia.

Joe Fairless: Okay. How did you come across the fourplex?

Patrick Menefee: It was on the MLS, actually. It had been sitting on the MLS for almost six months.

Joe Fairless: Why do you think it wasn’t snatched up?

Patrick Menefee: As I’m still dealing with it, because it was a nightmare. They had it listed way too high. It was an older couple that had a large portfolio that they were selling. So this was one of them. They had it listed at $210,000. I ended up– after negotiating with them, I ended up getting it down to $160,000, which was fantastic, but they [unintelligible [00:10:29].22] did $210,000. Yeah, I think that was a big part of it, too. A lot of people saw $210,000 and said, “Absolutely not. I’m not interested in that,” because it was way overpriced at that, but at $160,000, it worked out. So I think that was a big part of it; and it’s also a 100-year-old house. They didn’t take care of it all too well. It just got neglected over time, and it was an old farmhouse that got converted into a fourplex. So it was the perfect storm of not too great, but a great opportunity.

Joe Fairless: So, talk to us about some challenges that you’ve had with it?

Patrick Menefee: Oh boy, where do I start? How long did you say we have? [laughs] I had problems from the acquisition part initially, not even getting into what the house was. So after I got it under contract, I started going through the due diligence process. I got it under contract at the beginning of July and was supposed to close at the end of July; I wound up closing on September 13, instead of July 29. Yeah, I almost lost the deal a couple of times. I had four closing dates scheduled and I had three different appraisals done.

Joe Fairless: What’s going on?

Patrick Menefee: The first time around, the first appraiser, I learned one very important lesson that I will, at any point, share with as many people as I can, and that’s – never have your inspector and your appraiser go out to the property at the same time. I now will base all of my properties around that, because the inspector looked at some of the stuff at the house. He was just having a casual conversation with people that were around them, pointed out a bunch of problems…

Joe Fairless: They love to talk.

Patrick Menefee: But he happened to point–

Joe Fairless: They love to share their knowledge.

Patrick Menefee: Yeah, and he’s a great guy, and he’s inspected all my properties, but he just said it to the wrong guy.

Joe Fairless: Yep. He was doing his job. He was inspecting the property and documenting everything, right?

Patrick Menefee: Yeah, absolutely. Unfortunately, the appraiser also documented that. So I had it under contract for $160,000, and he appraised it at $160,000, but he appraised it as– I think it was a C4 or a C5, so it was in too poor of a condition for banks to loan on; and I went in the inspection report, and it wasn’t like he cited specific things, he just cited comments from the inspector. So aside from getting it reappraised, I couldn’t go fix a certain thing and then get it back. So I went a different route, got a different appraiser. The next appraiser did the inspection. I actually went out and got the inspection done, and then no one ever heard from him again; just fell off the map. Very strange.

Joe Fairless: That is very strange. Okay…

Patrick Menefee: And then I finally got a third one. He did do the inspection; was very slow about all of it. He actually submitted the report, but when he submitted the report, he left the address off, which then took another week to get.

Joe Fairless: Goodness gracious!

Patrick Menefee: I don’t know how he left the address off of the report. Yeah, that could have been a sign upfront of things to come… But finally got it closed. It had tenants in it, which I thought at the time was a good thing, because I could go one by one and keep producing cash flow while rehabbing each one of the units. That turned out to be a huge problem. I evicted two of them. Dealing with the units themselves has been definitely challenging just because of how poorly they were taken care of, and then one of the tenants, on the way out, she, I think, I would say out of spite, she never registered any maintenance requests or anything like that, but on her way out, she called the city and registered a complaint. So I had a city inspector out there and all that stuff.

Joe Fairless: What was the complaint?

Patrick Menefee: It was just a general complaint of code violations. I had interacted with her before when I was out there doing some other work, and she had also said in other cases, she had talked about the lease and said how the lease was full of landlord-tenant violations. I have a other property manager that manages all of that, and I was asking her about it. It’s not something that we want to do… What’s wrong with it? What do we need to do? She said, “Well, it’s just old.” So it’s one of those lessons in dealing with tenants. So there’s nothing that’s ever going to be right.

Joe Fairless: Yep, some people you can’t please, no matter what.

Patrick Menefee: Yeah.

Joe Fairless: Alright. So where are you at with the business plan right now?

Patrick Menefee: Overall, on the six units, we initiated the refinance yesterday.

Joe Fairless: On the three duplexes?

Patrick Menefee: Yes.

Joe Fairless: Right. No, I’m talking about the fourplex. You were talking about the fourplex before, right?

Patrick Menefee: Oh, I’m sorry. Yeah, I’m sorry. When you said the business, I thought you meant overall.

Joe Fairless: Oh, sorry, yeah. So with the fourplex, where’s the business plan at?

Patrick Menefee: That one, I have two units that the rent has been increased. I made modest updates to them. I would eventually like to go in and do a little bit more, but kept the current tenants in and got a pretty good ROI on the improvements that I did make. I almost doubled the rent for each of those two units.

Joe Fairless: Tell us the numbers, please.

Patrick Menefee: Yeah, so when I took over, all four units were at $350 a piece. So $1,400 dollars a month total rent. I’m now getting from the two units that I did — I put a probably about $3,500 into those two units, and increased rent to $1,350 between the two. So pretty solid return on investment.

Joe Fairless: Wait, I want to make sure I’m hearing that right. You put in $3,500 per unit, correct? So $7,000 total?

Patrick Menefee: No, no, I’m sorry. $3,500 total.

Joe Fairless: Okay, even better. So you put $1,750 total, and… Let’s just do unit by unit. That one unit is now renting for how much more?

Patrick Menefee: One unit is up to $650. The other unit’s up to $700.

Joe Fairless: Wow, that’s incredible.

Patrick Menefee: Yeah, it’s a pretty solid return on investment.

Joe Fairless: Yeah, so let’s just do the $700 one. So that’s doubling your rent from $350 to $700. Wow, it’s quite the increase. If you hadn’t improved those units, and you just turned them over to a new tenant, could you have increased the rent at all from $350, and if so, by how much?

Patrick Menefee: Yeah, I could have. I probably could have turned them to about $500 or so.

Joe Fairless: There was already value-add built into it.

Patrick Menefee: Yeah, there absolutely was. Those units had been– I mean, I think the rent had been kept the same for– I can’t even speculate. I have no idea– for a very long time; that hadn’t been touched in a while. So there was definitely room to start with.

Joe Fairless: Nice. So you increased the rent $350 and you put in $1,750, correct?

Patrick Menefee: Yes.

Joe Fairless: So that’s 20% return on those renovation dollars. Nice job.

Patrick Menefee: Yeah, I can’t really complain about that. The other ones are getting to be a little bit more — and the one thing that I will say as a caveat is because they are lived in, there was a lot of stuff that I wasn’t doing. So I didn’t rip out and replace all the cabinets. I just updated what was there, and did some stuff in the bathroom, and replaced flooring where I could and all that stuff. But doing a full sweep of it, it will definitely, when I eventually get there, it’ll cost a little bit more, but it’ll also further increase rent by probably another $50 to $100 a month.

Joe Fairless: That area supports those additional rent increases?

Patrick Menefee: Well, I guess, given the current situation, I don’t know how much rent increases are gonna happen, but generally, yes.

Joe Fairless: Okay, got it. Well, now I interrupted you on the financing for the three duplexes. Will you pretend I did not interrupt you? What were you saying about that?

Patrick Menefee: Yeah, sorry about that. We had gone through the commercial loan — because they were all three on the same property when I bought them, the first thing that I did was subdivide them. So they’re all each on their own property now, and that way, I have a lot more flexibility if I need to sell one off to recoup some cash or whatever I need to do. So I’m refinancing them also into a 30-year fixed. So I initiated a refi last night; it’s definitely not a full BRRRR. Neither of them are going to be. Definitely not going to pull out everything that I put into it, but on this one, and especially that the six units, because I only put in 10% of the down payment to start with, I’m not going to see personally a big return, but I’m going to get my investor about somewhere between $15,000 to $25,000 back. I know that’s a– I had to give him a range, but with the whole electronic appraisal and everything that they’re doing with the virus, I’m less confident in my numbers now than it was a couple of weeks ago.

Joe Fairless: Yep, and just for the Best Ever listeners, we are recording this in the middle of the Coronavirus pandemic. So I recognize that this episode airs many months after we actually record it. So when he says virus, that’s what he’s referring to.

So the interesting thing that I heard, or one of the interesting things that I heard from you is that one of the first things you did was subdivide the three so that you have more flexibility. I thought I heard you say that you got a commercial loan on it initially. If I heard that correct, how did the conversation go with the lender where you said, “Hey, I know I’m getting this commercial loan, but I actually like to subdivide it and break it up”?

Patrick Menefee: That’s a great question. The one that I used is a regional lender. So I had the conversation with him upfront. I let him know what ultimately I was trying to do, and weighed out essentially the full roadmap. I’m looking to purchase these, I’m looking to subdivide them, I’m looking to rehab them and then ultimately look into refinance into a fixed loan. So I’ve had multiple conversations with a lot of different lenders before I settled on this guy, and a lot of places weren’t okay with it and understandably so, but as long as– it was, as long as when I refinance, everything is done at the same time, and they’re made whole on the back end, everything was A-OK.

Joe Fairless: What gave you the idea to subdivide?

Patrick Menefee: That’s a good question. I knew the conventional 30-year fixed route, and I knew that that was a way to get there. So that was really the only plan that I really had all along. But as far as what triggered it out at the very beginning, I think it was just because that was mostly what I knew, and I realized that it was a possibility that would likely add value, but also give me a lot of flexibility.

Joe Fairless: Absolutely. In my opinion, it’s an advanced thought process for you to think that way. So bravo to you on that, and it’s always good to have more flexibility than less, and especially if you can get more favorable residential financing even better… And get some of your money back out. I mean, there’s so many instances — and I would guess that more than 50% of investors would miss that part of the process and not subdivide; first off, not think about it, and then secondly, if they thought about it, not go through the process that’s required in order to subdivide. So bravo to you on that.

Patrick Menefee: Well, I appreciate it. I think that’s one of the big takeaways for anybody. I had no experience with subdividing, I had no idea what I was doing, but everything is easy enough if you just start taking action and figure it out. So I made a couple of calls and I started asking people and–

Joe Fairless: Who was your first call?

Patrick Menefee: I called my real estate agent and asked him if he knew anybody that did subdivision or anybody that he had worked with as a surveyor. Then next call after that was to the city to ask them what they recommended and what needed to be done.

Joe Fairless: And then who ultimately was the point person that you got a lot of help from?

Patrick Menefee: Everything after I had that initial conversation with the city planner, and she just laid out what needed to be done, I used the contact that my real estate agent gave me, who was a surveyor, and he took care of everything. He went out, and about the only involvement that I really had– my initial thought was, I didn’t even necessarily know if I wanted to separate all three individually, and I wasn’t sure if I could because of some of the setbacks. So we had a couple of conversations on that and he just showed me some of the property lines from before – because it used to be split as well. So he showed me some of those options and said that we can just revert back to what it was; and not only did I get all three split out, but I also saved money from what I thought I was going to pay, because he just went back to the previous one. So credit the enemy, did a great job and took care of all that for me.

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

Patrick Menefee: I think the biggest thing is what I mentioned before, just dive in and start taking action. You can spend all day trying to figure everything out like I did before, but the second that you jump in and decide to start taking action, a whole different world opens up to you and you learn a lot as you go.

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

Patrick Menefee: Yeah, let’s do it.

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

Break: [00:22:48]:05] to [00:23:41]:04]

Patrick Menefee: Best ever book you’ve recently read.

Patrick Menefee: Tribe of Millionaires. I just finished it a couple days ago. I read it about two hours, couldn’t put it down. Speaking about the importance of accountability and mastermind and really being involved in something bigger than yourself. So it’s got me on the path to start some accountability groups.

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

Patrick Menefee: On that fourplex, the one thing we didn’t talk about is I didn’t listen to what the inspector said. I think I got a little bit excited and blinded by the first deal and the numbers on paper. His recommendation was to get everybody out there, all the contractors out there, plumber, roofer, electrician, all of that. I didn’t end up getting all that stuff ahead of time, and now I’m working through all those pieces as I pull some of the other two units apart. So definitely not listening to an inspector.

Joe Fairless: Best ever deal you’ve done so far.

Patrick Menefee: I think those three duplexes have got to be the best one. They’ve produced consistent cash flow the entire time. Having six units, if I have a vacancy, I’ve got five other units to cover it up, and it’s really been a very solid investment and a very good learning experience between the subdivision, the partnership, the commercial loan, the refinance. I’ve really run the full gamut on that one.

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

Patrick Menefee: Probably the two best places are going to be my Instagram account. I try to post on there regularly with lessons learned and always respond to anybody that I can; so that’s @investDGP. And then my website, investdgp.com, where I try to share a lot of what I’m doing; and then also anybody can reach out to me at any time, patrick [at] investdgp.com.

Joe Fairless: Patrick, thanks for being on the show. Thanks for talking about some moves that you’ve made in your real estate ventures, one of them being buying three, side by side duplexes that were all on one lot, and then subdividing it and maneuvering around the financing, as well as partnering up with a friend of yours to get those deals done; and then also your business plan for the fourplex and the 20% return on the renovations that you’re doing and the challenges that you overcame in order to get to that point with the inspectors and the appraiser and a couple other things. So thanks for being on the show. Hope you have a best ever day. Talk to you again soon.

Patrick Menefee: Thanks Joe. Really appreciate the opportunity.

Website disclaimer

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

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

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

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

Oral Disclaimer

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

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JF2112: Verifying Applicants Through Software With Stephen Arifin

TRANStephen is the founder of The Closing Docs, a software company based in Seattle that provides automated income verification for property managers and lenders. He explains how he evolved his software over time to cater towards property managers, he explains how they started inserting certain pieces of data to help provide more clarity and reliability for the lenders and managers.

 

Stephen Arifin Real Estate Background:

  • Founder of The Closing Docs, a software company based in Seattle that provides automated income verification for property managers and lenders
  • They handle income verification for over 600,000 properties and growing
  • Based in Seattle, WA
  • Say hi to him at https://www.theclosingdocs.com/ 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“We’ve tried a lot of things to find what works and now we see a compliance rate of 97%” – Stephen Arifin


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, Stephen Arifin. How are you doing, Stephen?

Stephen Arifin: Hey, Joe. I’m doing great.

Joe Fairless: I’m glad to hear that, and looking forward to our conversation. Stephen is the founder of The Closing Docs, which is a software company based in Seattle that provides automated income verification for property managers and lenders. They handle income verification for over 600,000 properties, and growing. First, Stephen, do you wanna give the Best Ever listeners a little bit more about your background and your focus, and then we’ll go from there?

Stephen Arifin: Sure. My name is Stephen Arifin, and my focus right now is taking technology to help automate tasks in the real estate industry. I was born  in Texas and lived there for 21 years, and now I live in Seattle. I’ve spent several years at Microsoft as a software engineer, and learned how to build and scale software. Now I’m taking my learnings into the property management industry. Now I’m building The Closing Docs, where we’re focused on automated income verification for property managers during the tenant screening process.

Joe Fairless: What brought you into real estate and property management in particular?

Stephen Arifin: To be honest, I had no background in property management. I was really looking for a business idea and how I can use technology to streamline an outdated industry. I usually look for industries that have a lot of paper and pencil processes, and I know that there is a lot of innovation in those industries. So I knew that it was this upcoming tech where financial data providers and banks are opening up their information to the consumer, with their consumers’ permission, so I figured that there might be an opportunity here in the lending space to help verify income using this new technology.

And while I started in the lending space, there was a lot of regulations that I could really dip my feet into, so I went into property management. I found a partner who is also based in Seattle and owns a property management company. We partnered together and I wrote the software for his property management company to verify income, and he became our first customer. Once we nailed the product down, we started selling it to property managers all across the nation.

Joe Fairless: Ah, good for  you two. That sounds like a very logical progression. When you first created the software, what did it do or not do, compared to its current state today?

Stephen Arifin: Let’s see… That was ways back.

Joe Fairless: How long ago was it?

Stephen Arifin: It was about 2,5 years ago.

Joe Fairless: Oh, come on. That’s nothing. [laughs]

Stephen Arifin: That’s true.

Joe Fairless: Many iterations ago though, right?

Stephen Arifin: Right, right. It took a long time to get the data that property managers wanted to see in a report. So I was new to this industry back then, and I was learning as I went… And I learned what type of data property managers wanted to see when they were verifying an applicant for income. For example, we would just print out the annual net income for an applicant. The annual net income and the monthly net income. But we didn’t really have the data to back it up, or we didn’t show that data in the report. So as we got more feedback, property managers were like “Hey, I see this number, but I don’t really see where is the proof of this number.” So we started adding in all of the transaction  data and the direct deposit data to back up that claim. That was one of the ways that we helped improve the product.

Another way was that the applicants themselves – we were a little bit hesitant, because in order for you to use our service, it’s consumer permission data, so the applicant has to give permission to pull the data from their bank. And we were like “Will any applicant do this? Is it easier for them to get pay stubs, or W-2’s, or the traditional ways of verifying income?” and we found that with the correct messaging and many iterations the applicants actually love it, because it’s super-easy for them. They don’t have to dig around for pay stubs, or W-2’s or bank statements, and it takes them about 30 seconds. So we think we really streamlined the income verification process.

Joe Fairless: I imagine that messaging was pretty tricky, because you’re basically asking “Can we get access to your personal bank account?” Right? That’s basically what you’re asking.

Stephen Arifin: Correct. Just read-only access. We just take a snapshot. But yes, it was tricky.

Joe Fairless: How does that work? Do they have to give you their password?

Stephen Arifin: Yeah, so essentially we’ve partnered with a lot of data providers that handle this, so we actually never see sensitive credentials… But the way they authorize their bank for us to pull data is that they just log in to their bank account. Sort of like Mint. I’m not sure if yo’re familiar with Mint.

Joe Fairless: Yeah, I am. I signed up for Mint more than ten years ago. I don’t use it anymore… But remind me how that works again, with Mint.

Stephen Arifin: So Mint is a financial aggregator and an investment aggregator. You can see all of your investments and your accounts in one place. They’ve fixed the issue for manual data entry by just automatically linking to your bank account. So you can sign into your bank and then they will consistently pull transactions, and Mint will show you an overall snapshot of your finances.

I think that sort of helped our service with the acceptance, because more and more people are starting to realize that this is actually a thing, and they’re more willing to authorize their bank for us to do this.

Joe Fairless: What messaging at the beginning did not work?

Stephen Arifin: I think it would be easier for us to say which messaging did work, because we’ve tried a lot of things…

Joe Fairless: [laughs] A lot of it didn’t work, and then you landed on the right messaging, and now it’s pretty smooth?

Stephen Arifin: Yeah, we’re actually seeing a compliance rate of 97%.

Joe Fairless: Wow…

Stephen Arifin: It’s blowing my mind as well.

Joe Fairless: What did it use to be, in the worst of the days?

Stephen Arifin: We didn’t explain to the applicant really what was going on. We were sort of like “Hey, sign into your bank. Okay?”

Joe Fairless: “Trust us.”

Stephen Arifin: And everyone was like “What the hell?” But now what we do is we help educate the applicant of what’s going on…

Joe Fairless: How do you do that? I understand the wording you said… You train the staff, or do you have a pamphlet, or is it an email, or what?

Stephen Arifin: So during the income screening request, how it works is that the property manager sends a screening request, and what that does is it sends an email or a text to the applicant, and they get directed to our site. And before the actual screening request occurs, we break down this process; it’s a three-step process. The first thing you do is you connect your bank, and you do that by authorizing your bank account by logging in… And then once you connect your bank, we’ll actually show you the income report and the income data to the applicant. They’re not able to change it, but we show it to them, for one, to comply with FCRA, and also number two, it gives them more of a reason to authorize their bank.

So it’s like, “I’m gonna authorize my bank… I’m gonna see my data first, before the property manager sees it, and I’m gonna make sure it’s all correct.” And once the applicant confirms that their data is correct, they produce the report, which gets sent to the property manager, and a copy gets sent to the applicant. And really, just breaking down those three steps in the very beginning has really helped a lot.

Joe Fairless: So let’s talk about income verification and what specific things that you provide. You mentioned that you provide the proof needed to show the annual monthly net income… What if someone does not have a typical salary/direct deposit job? Is there any way that you can verify income through a non-traditional employment?

Stephen Arifin: That’s a great question, Joe, and we get that question a lot. So we have algorithms running, and it can classify which deposit streams are regular deposits… And those are usually the easy  ones. The pay stub every two weeks, like clockwork. But a lot of renters don’t have that steady income, and they could be receiving income by check, they could be cash-based earners, tip-based earners, like waiters and waitresses… And we actually have a classification in our income report called Irregular Deposits. So what that does is it classifies all of the deposit history that don’t come in at a regular time. This can include tax returns, alimony deposits, and check deposits. So we try to classify which deposits are recurring, but we don’t filter any other deposits out… Because I think it helps paint a better picture. Not everyone makes a paycheck every two weeks.

Joe Fairless: What’s a couple other updates that you’ve made recently, if any?

Stephen Arifin: We’ve added the ability for the applicant to add a comment or an explanation to the income report, and that really helps, where they can say “Hey, I’ve been on vacation for the past three months” or “I’ve been paternity leave for the past three months, and that’s why you see a gap in our income between these dates”, which just helps the property manager spend less time… Because the property manager would ask “Hey, I see a gap. What’s with this?” and then they would have to have a whole email correspondence. Instead, the applicant can just put in some comments, and it would appear on their income report. We’re all about trying to have the property manager save time.

And a change that is in the works is that we want to support multiple banks. Many people split up their direct deposits between different financial institutions, and we want to be able to collect the whole holistic picture of their financial snapshot. So that’s coming in the works.

Joe Fairless: When someone works with your company, how much does it cost?

Stephen Arifin: Our retail price is $10/report.

Joe Fairless: And when you say “retail” – I guess there is a bulk order, or how do you structure that?

Stephen Arifin: Yes, we partner with a lot of software companies, and they look at us and say “Hey, everyone’s got credit screening, everyone’s got background screening, but we wanna include your income verification into our products and be able to provide that to our landlords and property managers. So that’s how we grow really fast, and doing wholesale sort of partnerships where they can order our income verification from their software. It’s a really tight integration.

Joe Fairless: Anything that we haven’t talked about that you think we should as it relates to the income verification process that you all provide?

Stephen Arifin: I would say the biggest thing that really made us take off and our customers start to love us is when we started building integrations with other property management software companies, like AppFolio, Buildium, Yardi, RentScreener – all the popular ones. We made it so that property managers can request income screening requests directly from, let’s say, AppFolio. So they no longer have to open a new window, just have some sort of disaggregate workflow. It can be directly from AppFolio’s site, and that makes it really easy to train their staff about this new tool… Because every time you use a new tool, you have to change your process a little bit. And I think what has helped the uptake with our income verification tool is that it’s so simple. It’s really simple, so we wanna keep it that way.

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

Stephen Arifin: They can email me at Stephen [at] theclosingdocs.com, or they could just go on our site, and we have a contact form there, at theclosingdocs.com.

Joe Fairless: I enjoyed learning about this. I always love talking to entrepreneurs. I have a lot of respect for entrepreneurs, and the process in which you came to this point is such a natural evolution, and it makes sense for why you’re offering what you’re offering, and clearly there’s a lot of need for that… As you said, you looked for paper and pencil processes and ways to automate that so it’s not the case, and it saves us all time and money, and actually could make money too on that.

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

Website disclaimer

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

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

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

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

Oral Disclaimer

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

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JF2104: Financial Samurai With Sam Dogen

Sam Dogen is the founder of Financial Samurai and has been providing content to the world through his free blogs and articles around topics that will help you with your financial literacy and goals. He Has also been in the real estate investing experience for 17 years and shares some of his experiences with this and his personal journey.

 

Sam Dogen Real Estate Background:

  • Founder of Financial Samurai
  • Has 17 years of real estate investing experience
  • Owns multiple properties in San Francisco, Honolulu, and Lake Tahoe
  • Commercial real estate portfolio consists of 15 properties
  • Based in San Francisco, CA
  • Say hi to him at: https://www.financialsamurai.com/ 
  • Best Ever Book: Thinking in Bets

 

 

 

 

Click here for more info on groundbreaker.co

 

Best Ever Tweet:

“I love the green marble theory.” – Sam Dogen


TRANSCRIPTION

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

Sam Dogen: Good. How are you?

Theo Hicks: I’m doing great, and thanks for joining us. A little bit about Sam – he is the founder of Financial Samurai. He has 17 years of real estate investing experience, owns multiple properties in San Francisco, Honolulu and Lake Tahoe; he has a commercial real estate portfolio consisting of 15 properties. He’s based in San Francisco, California, and you can say hi to him at his website, FinancialSamurai.com.

Sam, do you mind telling us a little bit more about your background and what you’re focused on today?

Sam Dogen: Sure. I actually grew up overseas, all across Asia and in Africa, because my parents were in the U.S. Foreign Service. I came to high school in the United States, and then I went to college at William & Mary in Virginia. Then I went to work on Wall Street in 1999. So I worked in finance, mainly international equities from 1999 to 2012, and in 2012 I decided to negotiate a severance and get out of there… Because after the global financial crisis in 2008-2009 it just wasn’t fun working in finance anymore. We were always the bad guys, even if we had nothing to do with the housing market.

Again, I was in international equities, specifically Asian equities, and it just didn’t feel good to work in that field anymore. Also, the pay wasn’t commensurate with the performance anymore. You could have done really well with your clients, generate a lot of business, but you wouldn’t have gotten paid commensurately, because Wall Street finance was busy subsidizing a lot of money-losing departments. So I decided “You know what – it’s been a good career.” Originally, I wanted to work until I was 40, but instead I left the industry when I was 34, and I decided to travel, spend more time with my wife, and focus on FinancialSamurai.com, which is a personal finance site I started during the depths of the previous financial crisis, in July 2009.

Theo Hicks: So Financial Samurai is like a blog where you post personal finance advice… Does that tie into real estate? Is your advice for people to go out there and buy real estate, or is it dependent on their personal situation?

Sam Dogen: FinancialSamurai.com is a personal finance site. I talk about everything from investing in stocks, to real estate, to early retirement, to career, to negotiating your layoff, to family finances, insurance and so forth. So I try to cover every aspect of what someone would think about in their lives. And money really touches upon all of us.

Real estate is about 40% of my net worth, and is something that I’ve been doing since 2003, in San Francisco… And real estate is my favorite asset class to build wealth, because it’s a tangible asset, it generates income; it’s pretty sticky on the way down during tough times, and you get to benefit from the upside, and it provides utility.  What an amazing asset class to be able to enjoy it, to provide shelter for your family, experience great memories, and maybe even make some money in real estate. So real estate has been my favorite asset class to build wealth.

Second has been stocks. I was in the stock market, in that business for 13 years. However, I think my favorite after stocks is online real estate, so owning web properties such as FinancialSamurai.com.

Theo Hicks: Nice, I never thought of it like that, online real estate; I like that terminology. Okay, so you have 15 commercial properties… Is that your entire portfolio? Are those the ones that are in San Francisco, Honolulu and Lake Tahoe?

Sam Dogen: No, the property that I owned in San Francisco, Honolulu and Lake Tahoe are physical real estate properties that I’ve bought, and that I enjoy, and I use, and I rent out, and I’m an active landlord there. And regarding my commercial real estate portfolio, it’s essentially through real estate crowdfunding, where after I sold one of my main San Francisco rental properties in 2017, because I wanted to simplify life and diversify out of San Francisco, I basically invested in a fund that had 17 commercial real estate investments, and two have exited, and there’s still 15 left.

So my thesis was to diversify across the heartland of America, because back then I was thinking to myself “Well, the cap rates are so low in San Francisco…” We’re talking 2% – 3% cap rates… And it’s just so expensive here, and I have so many investments already that I needed to diversify.

So with the proceeds that I got from the sale, I decided to diversify across the nation, and the thesis was that work from home would be more and more prevalent, telecommuting, people would be able to go to lower parts of the country to still earn a similar amount of income, but save a lot on costs. And with the lockdowns and the global pandemic I think that trend is definitely accelerating, and I’m excited to see what happens next.

Theo Hicks: How did the returns from that fund you invest in compare to your rental properties?

Sam Dogen: In San Francisco real estate has been going up; at least since 2012 it’s been a bull market. Real estate is about 80% to 100%, and now it’s probably plateauing right now… So San Francisco real estate probably increases by 6% to 7% a year. It has been. And that’s been pretty good. Obviously, let’s say with 20% down, so you have leverage… So a 6% return times five, that’s 30% return on your cash… So that’s great. But it slowed down in 2018, and 2019 was kind of “Meh…” and it started picking back up at the end of 2019. In early 2020 it was pretty good, until everything started getting locked down. So now everything’s in a wait and see mode.

In terms of commercial real estate, since about 2015-2016 when I started investing – because I invested before; I’d sold my main San Francisco rental property in 2017 – the returns have been around anywhere from 12% to 16% a year, which is great, especially if you don’t have to manage the property. And that’s one of the things that I like about investing in these properties – because it’s 100% passive income; you’ve got a professional manager there, you’ve got the lawyers and all those people doing the stuff, and  you just collect income and then you have to file the taxes.

Now, in 2020, things have obviously changed a lot due to lockdowns. So I will have some losses on properties that are in the hospitality space. For example a hotel. Surely, that property’s gonna be going down in value because nobody’s going at the hotel. It’s like an airport hotel, a Sheraton in Dallas. But the portfolio is 15 properties, so I’m assuming there’s gonna be some losses, but overall I think it’s gonna do well. If we can rebound and get out of this lockdown phase sooner rather than later, hopefully third quarter of 2020, I’m optimistic that things will get back on course.

Theo Hicks: Just to confirm – that fund of 15 properties, you’re getting 12% to 16% per year?

Sam Dogen: Yeah.

Theo Hicks: Wow. How did you find that fund?

Sam Dogen: Well, there’s a lot of real estate crowdfunding platforms. Financial Samurai is a relatively large website; it’s got about one million visitors a month organically… So there’s a lot of opportunity; you just have to go wade through a lot of opportunity. But there are many real estate crowdfunding platforms out there. I’ve been able to talk to a lot of the top ones and a lot of the big ones, and some of them don’t make it, frankly… But some of them do. And the assets they allow you to invest in are separate LLCs that continue to go on regardless of what the platform does.

So in the old days you would basically invest in a real estate fund through your network. You have a friend who’s in real estate development, he wants to raise some money, you participate, you’re a limited partner etc. Today you can go online, you can obviously buy REITs, you can buy private REITs, and you can go directly through these platforms that connect you with other sponsors.

Theo Hicks: So you’ve found this deal through your website. Someone came to you with the deal, or someone posted it on your website?

Sam Dogen: Yeah, through my website, for sure.

Theo Hicks: One thing that we stress a lot is about building a brand – our’s is a podcast website – for building a real estate company. You talk about personal finance. Is that something that — you also mentioned owning online real estate, owning websites… So what’s some advice you have for someone — well, I guess then you also have a million organic views per month… So what’s your advice for someone who wants to start getting into what you call the online real estate and owning a website? Should they build their own, should they invest with someone else’s website? What does investing in someone’s website even look like? …things like that.

Sam Dogen: I think one of the key things you have to do is own your brand and build your brand. You don’t want another platform to own your brand, for example Facebook, Twitter, LinkedIn, whatever. They are already huge companies, and they’re getting rich off your content and your brand. So instead of spending all your time tweeting about random stupid things on Twitter, build your own brand and start your own website, and start talking about all the things you care about on your website. It’s the green marble theory that I like to think about and say, and that is if you have a green marble, maybe it’s the ugliest green marble in the world; you put it on eBay and someone will find that green marble and wanna buy it. So if you put yourself out there, based on your own brand and what you care about, you’re going to find your tribe organically eventually. Google obviously has been around for over a decade now. They’ve done their algorithms very well. They’re gonna help people who are looking for stuff that you like, and connect. And that is really key, to build your brand and do it on your own platform.

The other thing is you need to be consistent. You can’t give up before the roses bloom. Too many people I see just work for six months, maybe a year, and then they stop doing it… But they stop right before things start getting good. So I believe the secret to success is to do something very consistently, for 5-10 years. After about three years you should definitely start seeing some results, but too bad people can’t stick with things for more than one or two years, because they just want instant gratification. But this is a long game, and if you plan to be alive for decades, then you have plenty of time to build your brand.

Theo Hicks: That’s really good advice about building your website, but specifically the 5-10 years, thinking in terms of decades rather than days and weeks and months. So you did mention about not going out there and tweeting your thoughts, as opposed to building your own website and then you’ll [unintelligible [00:13:37].23] organically. So do you recommend just posting on the website and that’s it, and then letting people find you on Google organically? Or should I still be sharing the content from my website on social media?

Sam Dogen: Of course, you create the hub. You create your pillar, awesome content, whatever it is you wanna talk about. If you wanna talk about real estate, go ahead. If you wanna be a real estate specialist, go ahead. If you wanna be a personal finance generalist, or just focused on stocks and real estate and family finances… Whatever you wanna do. The world is big enough; there’s billions of people on the internet. Focus on what you care about and you are best at. And then the spokes are social media; make sure what you’re doing on social media is helping you build your brand, not hurt your brand. A lot of people have blown themselves up on social media saying things and then just getting fired, or just crushed.

So think about the spokes after you build your hub, your own brand. So the spokes are maybe doing a podcast, getting on a podcast like this one. Social media. Maybe speaking at conferences, if they ever come back. But focus on the hub.

Theo Hicks: Okay, Sam, what is your best real estate investing advice? You can also apply it to personal investing advice too, but what’s your best ever investing advice?

Sam Dogen: In terms of real estate, I would say be patient. Every time you see an amazing property, it’s just human nature to get all excited and say “I’ve gotta buy this. This is amazing. Please, nobody else bid against me. I’ve gotta buy! Buy, buy, buy, buy!” But the reality is if you miss this one, it’s okay; there’s gonna be another amazing property that’ll come along. So I really stress patience and running the numbers, especially during a turning point where we don’t know what’s gonna happen with the economy, with 40 million-plus people unemployed. Is the government really gonna support us indefinitely? Are we gonna find a vaccine within the next 12-18 months? There’s a lot of uncertainty, so right now patience is a virtue. Don’t rush, don’t go panic-buying, don’t go panic-selling. You’ve really gotta run the numbers and think things through. If you miss out, it’s okay; there’s gonna be other opportunities along the way.

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

Sam Dogen: Sure.

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

Break: [00:15:53].00] to [00:16:42].07]

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

Sam Dogen: Let’s see… I have been recently reading Annie Duke’s “Thinking in Bets.” I think it’s an excellent book and an excellent way to think about investing. There’s never a 0% probability or a 100% probability. There’s always going to be some kind of grey area, and you’ve gotta think in bets, think in percentages.

So right now, with the S&P 500 at 3,000, for example, it’s rebounding by over 32% from the mid-March lows… What is the expectation or probability that it’s gonna go up back to its record high, another 10% up from here? I would say maybe 30%. But that also means 70% is not gonna get there. So in that regards, I position my portfolio according to the probabilities that I believe in. So thinking in bets.

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

Sam Dogen: Right now I have about 250k-265k in passive income, excluding my website, except for 50k. 50k comes from selling a severance negotiation book… So if my website collapsed today, I would have about 200k to 215k a year in passive retirement income. So that would be a 20% loss to my passive retirement income. Then I would basically look at my budget and make sure I’m spending within my means… Because that’s obviously the bottom line of personal finance – spend within your means.

Now, in terms of the active income I was making from Financial Samurai through advertising and so forth, I would first take a moment to grieve, because I’ve been working on this for 11 years, and then I’d take a moment to be thankful that it’s given me so much back in terms of community, in terms of learning from other people, in terms of doing something that provides me joy… And then I’d think about maybe taking a six-month break, and then I would think about maybe starting something else better or newer, and learn from my mistakes.

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

Sam Dogen: In terms of giving back, I think the best way to give back is to write on Financial Samurai. Every single article is free, there’s no paywall. I talk about highly, highly pertinent things in our lives right now, whether it’s “What should you do after the stock market has rebounded by 32% from the bottom? Should you buy, hold, sell?” I talk about “Should I apply to pre-school and spend $2,000/month? Yes or no. Should I save x amount in my 529 plan so my child can go to college in 18 years, when everything will be free and college will be completely not worth its value?” I talk about these important things for free, and to help people engage and to encourage the audience to share their perspective, so that we can all learn from each other… Because nobody knows everything, and we all only know from our experiences and how we can do things better.

So I think that’s the best gift – to share what you know, consistently, for free, to as many people as possible? Because so many people will just go through and live the same thing that you went through just the past 5, 10, 15, 20, 35 years, and they could avoid all those landmines if the experienced people spend some time sharing what they did wrong and what they did right. That’s my plan.

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

Sam Dogen: Oh, just financialsamurai.com. I’m always reading the comments, you can always leave a comment. It doesn’t matter how old the post is, I’ll see it. You can go on Twitter if you want, but Twitter is something that I try not to spend too much time on. Basically, those two places are probably the best.

Theo Hicks: Perfect. Sam, I really appreciate you coming on the show today and providing your best ever advice. I think the biggest takeaway for me was your advice on owning websites and your analogy of the wheel, and how you don’t want to let other larger online platforms own your stuff. So you don’t wanna just be posting on Facebook or LinkedIn or (as you mentioned) Twitter. Instead, you want to be the hub yourself, so have your own website, focus on what you care about and what you’re best at on that website. And then the spokes are the secondary outlets, things like social media, podcasts, getting on a podcast, speaking at conferences. So those things are not the hub. The hub is you and your own website. So start working on your own brand and building your own brand, and make sure you’re the owner of it.

And then how to actually grow that – you talked about the green marble theory; you’ve got a green marble, and even if it’s really ugly, you put it on eBay and someone’s gonna want that green marble. So if you put yourself out there and you talk about what you care about, and you do it consistently, and you don’t give up before the roses bloom — and by consistently you mean 5-10 years… Not giving up after a year or two years or three years – then eventually you’ll find your own tribe organically.

And then obviously you talked about your real estate portfolio, the types of returns you’re getting on it, how real estate is your favorite asset class to build wealth, followed by stocks, followed by owning real estate… So again, Sam, I really appreciate you coming on the show. I look forward to reading through some of your content. I really liked what you said about the college thing; I hadn’t thought about it like that before… But again, thanks for coming on the show.

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

Sam Dogen: Great. Thanks a lot.

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JF2102: From Military to Millionaire With David Pere

David Pere is a full-time active duty Marine and the founder of “From Military to Millionaire”. He has bought and sold 54 units, holds 13 rentals, and is a general partner in a 146-unit apartment. He discusses one of his deals that he had a headache within creative financing and shares what he would have done differently. David also goes into his process of mailing to absentee owners.

 

David Pere Real Estate Background:

  • Active duty Marine
  • Started investing in real estate in 2015
  • Founder of “From Military to Millionaire”
  • Has bought and sold 54 units (one of them being a 40 unit), holds 13 rentals, and is a general partner in a 146-unit apartment
  • Based in San Diego, California
  • Say hi to him at: www.frommilitarytomillionaire.com 
  • Best Ever Book: Like Switch 

 

 

 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Stuff isn’t always going to go your way, don’t invest money you can’t afford to lose.” – David Pere


TRANSCRIPTION

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

David Pere: I’m doing well, brother. I appreciate you having me on. I love your show.

Joe Fairless: Well, I thank you for that, and I’m glad to hear it. First off, you’re active duty marine, so thank you, sir, for everything you do, and you and your colleagues letting us have this time to be free and have these conversations… So first and foremost, I have a lot of respect for you and all of your colleagues.

Dave started investing in 2015. He’s the founder of From Military to Millionaire. He has bought and sold 54 units, 40 of those 54 being a 40-unit property. He holds 14 rentals and is a general partner in a 146-unit apartment community. Based in San Diego, California. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

David Pere: Absolutely, brother. As you mentioned, I mentioned the Marine Corps in 2008. Sometimes, I would say a lot of the world, like it’s a great thing, sometimes I’d say too much of the world… But I had a lot of experience just with people in different cultures. In 2015 I was a recruiter in the Midwest. Someone handed me the book Rich Dad, Poor Dad, I told them I don’t read, kind of joking… Like, “I am a marine… What do you think? I’m hard-headed.” And the guy literally pulled a CD disk out of his pocket and was like “Well, you spend a lot of time driving in your car, so here you go.” And I was like “Ahh, he got me. I’ve gotta listen to this.”

Within three months I had closed on a duplex, house-hack – living in one side, renting the other, doing that good thing… And then about six months later I got orders to Hawaii. I was like “Man, it’s a lot more expensive over here.” I got a bunch of offers declined, I couldn’t find anything that worked to buy… So I just kept buying in Missouri. I started a long-distance thing. I had the duplex, then I bought a single-family that we did the BRRRR strategy before I knew what that was. We renovated it, then we rented it out, and then a few years later — we didn’t refinance, we pulled a HELOC on it, and we used that HELOC to buy a ten-unit.

I then bought a 40-unit, did some  stuff on it, I got rid of the 40-unit, turned around, flipped a house… So during this, I’m partnered on a couple of flips in San Diego, small partnerships here and there made some money, and then flipped a home in Missouri… And then I’m currently under contract on a duplex; so that’ll be 14 and 15 that I just plan to hold indefinitely in that little market.

Then a general partner came in the last few months. So the big trend for me is just trying to balance being a full-time marine, traveling all over the place, with investing in various markets, with a lot of just sight unseen stuff, building teams, and networking, and relationships. So that’s a little bit about me… I’m just continuing to grow all of that.

Joe Fairless: Let’s talk about that 40-unit, since you’ve taken that full-cycle… Tell us about how you’ve found it, what the business plan was, what you bought it for, what did you put into it, what did you sell it for… All that good stuff.

David Pere: We bought this thing for about 150k down. We bought it at a 2.795, with some great financing options. So that one’s just kind of a strange ordeal. Realistically, that one wasn’t a huge profit. That one ended up being something that we got out from under, because it was a deal that didn’t quite work out to what it was supposed to be… So that’s probably the one deal in all of this that — I haven’t actually lost anything on it yet, but I got out from under, because it just did not work out.

So the guy didn’t uphold his end of the contract, things went super-sideways… And in essence, a year and a half later in a fun legal battle I was trying to pull all of our original capital back out of it.

So I may say full-cycle on that one, but that was the one big mistake — it’s funny, because one of your Lightning Round questions is “A big mistake you’ve made on a transaction”, and that was gonna be my answer to that…

Joe Fairless: [laughs] I sniffed it out right out of the gate.

David Pere: Yeah, so that’s good.

Joe Fairless: That was just dumb luck on my part.

David Pere: No, it’s totally good. I thought about bringing all that up before we got on the call, but… In essence, the gentleman that I was under contract with – there were things that were very clear in the contract, like “This needs to be done by this date” or “Seller owes buyer this”, and it just didn’t happen.

Joe Fairless: Like what? What’s an example?

David Pere: The roof needed to be replaced by the 90 days after closing, or seller owed buyer $100,000.

Joe Fairless: Okay.

David Pere: 120 days into the deal, it’s December and I’ve got commercial tenants — it was a mixed-used; it was 25 residential, 15 commercial on a four-story building in the South-West… And in essence, the two commercial tenants on the fourth floor broke their lease, because come December they have a leaky roof and no HVAC, and the two things in the contract were “Replace the roof and put HVAC on the fourth floor.” And it’s December in the Midwest, so it’s snowing outside, and I have a wedding venue and it’s 45 degrees inside this building; we’re done. Some crazy stuff.

There were four units that were in the contract; they were supposed to be finished with renovations by 45 days after closing, and when we brought the city inspector in, he’s like “We’ve put a cease-work order on this four months ago” and they finished it without a permit. So all of those walls needs to be removed, that plumbing needs to be removed,  and the guy was basically like “Well, the contractor said I had to finish them.” “Um, they’re not finished.” “No, they’re done.” “No, no. They have to be finished up to code…” So it’s things like that.

What we did was we just basically offloaded it and we said “Hey, we want our down payment back, plus–” Because it had been cash-flowing up until we lost the commercial tenants. At that point, the guy had had 30 days to pay us for the work he hadn’t completed, and we were just getting the same “Oh yeah, I’ll get to it.” “No, that’s not quite how this works.” So we broke the contract, asked for the down  payment back, got told it was non-refundable, and we have a court date set for July, finally, to finish all that out…

But I guess the biggest thing I would say for that, if we’re talking as far as lessons for your listeners, because I have no problem being the guy to talk mistakes, is document everything… Even if it’s a phone call, follow-up with an email “Hey, this is what we agreed to you while negotiating on the phone call. Please reply to confirm.” Because there’s one or two emails that I should have sent, that I didn’t…So we have “He said/She said” addendums to the contract, that were made afterwards, that there’s just no record of… Which isn’t gonna screw me, but it’s gonna make things very difficult.

Joe Fairless: Yeah.

David Pere: So I would just say document everything like that, and… Hey, stuff’s not always gonna go your way. Don’t invest money you can’t afford to lose… Because this didn’t stop me. I’ve bought three more rental units since then, flipped a house, and partnered up on a GP for a big apartment complex… Because it was money I could afford to lose.

So don’t go in over your head, and just have a plan. Stuff’s gonna go wrong, don’ let it stop you from investing.

Joe Fairless: This is interesting, because it’s creative financing, and that is talked about in a positive light the majority of the time when you’re talking about real estate transactions. In this scenario, because it was creative financing, it did not work out, because there was another party involved due to the creative financing… Whereas if it had been traditional financing, then you wouldn’t have that person involved. But on the flipside, you would have had to get the work done yourself, and get it budgeted and get it financed, or some sort of financing or cash out of pocket and do the work.

So my question is if presented another deal, that’s a very close cousin to this, other than it’s just a different seller, how would you structure it to make the deal work? If it would be creative financing, then what are some things that you’d make sure you had in place?

David Pere: That’s a great question, I love that. I’ve done a lot of thinking about this, because the reality is looking back, you can kick yourself about all the things that went wrong, but if I knew everything I knew going forward, I would probably still close on that property. I don’t know any other way that I would have gotten 4%. This is in 2018, where interest rates were not as low as they are now, but 4% interest for the duration of the loan, and interest-only for the first year – those are some pretty competitive terms for commercial financing in 2018.

Joe Fairless: How long was the loan?

David Pere: I had eight years to the balloon payment, but it was amortized for 25…

Joe Fairless: Got it.

David Pere: But those are some fairly competitive terms for commercial property, and the deal – at the time I bought it, it was only 80% occupied, and it had a lot of room to grow… And it was below market. There was a huge value-add.  It was a really cool property, it had a lot of history in the town, a lot of people knew the building… I don’t know that I would change the fact that I bought it, and honestly, given the same options going forward, I would probably still do it. For sure, the first thing I would do is all of the “Do this by this date, or owe this much money”, I would escrow all of that cash upfront. I would say “That’s great, but I want all of this into the escrow fund, so that if you don’t do what you’re supposed to do, I still get my cash.” And you can do the work out of the escrow fund, that’s totally fine, but it’s getting escrowed, so we don’t have a “Oh yeah, I’ll get to it” payment. That would be the first thing I would do.

The second thing I would do – and this is a little bit on the smaller scale – is I would bring my personal management team in immediately. And this might just be a personal thing because of the experience, but the manager seemed incredible when we took over the place. I just didn’t realize that the manager was getting an under-the-table commission portion of the sale. So while the manager wasn’t terrible, they weren’t nearly as good as they made themselves out to be… So going forward, I’d probably just say “Hey look, I trust you. You look awesome,  you seem great, that’s wonderful, but my team is gonna take over this going forward, because I know them, I trust them, and no matter how good you seem, I’m taking a risk on what you might be like after the fact, while they’ve already been tried and tested.

So those would probably be the two biggest things I would change. And as far as the creative financing, I’ve bought other properties and they’ve all gone really well. I think it’s less of the financing model and more of just the people involved, that can sometimes be the make or break… Which is unfortunate, but I guess maybe I would just do a better job of background checks… But even then, the few references I had and the little bit of a track record I had in town, the gentlemen checked out, so… I don’t know if maybe I just got unlucky, but it is what it is.

Joe Fairless: On the flip side, what deal have you made the most money on?

David Pere: The most money I’ve made probably so far is my 10-unit, which I still own. The 146 will ultimately end up being the most money, but it’s just a little bit newer in the cycle… So the 10-unit – this is Missouri prices, so it’s fairly affordable, but it was valued at 240, I bought it at 212, and it was under market rent, and I got the bank to bring in 86% financing, seller to carry ten, and I came out somewhere in the 4% to 5% range for down payment. So I was able to get in super-creative, super-low… This was my third purchase, so I still was fairly strapped for capital. I was still in the “Please help me so I can save for money.” So I bought it and it cash-flowed about  $1,200/month on average from day one. So about 100% cash-on-cash return. And we’re up to about $1,600/month that it cash-flows.

At the 18-month mark I refinanced, paid off the seller financing… And I didn’t pull cash out really for myself, I pulled just enough out to cover my down payment… So at this point, 2,5 years later I’ve got nothing in it, I have no seller financing, I’m at about 69% loan-to-value, and I’ve got $92,000 in equity, and it cash-flows about $1,500 to $1,600/month.

Joe Fairless: Wow… That’s a grand slam.

David Pere: Yeah, it was awesome.

Joe Fairless: How did you find it?

David Pere: Ironically, I was mailing out to absentee homeowners about duplexes. And basically, I got this phone call, and he was like “I got your letter.” I’m like “Oh, awesome.” He’s like “I don’t wanna sell my duplex.” And my first thought was like “Why are you calling me? Thanks… You just didn’t have to–” Anyway.

Joe Fairless: [laughs]

David Pere: He’s like “But… I have this other property.”

Joe Fairless: He could have been lonely.

David Pere: Yeah, it may be. If it was during quarantine, I’d be much less skeptical.

Joe Fairless: [laughs]

David Pere: But he says “But I’ve got other properties.” And I’m like “Okay, great. What do you have?” And he shot me a couple different things, and they just didn’t really work. I was like “Okay, that’s cool… If you ever come across any other multifamily, or–” At this time I was still looking for duplex, single-family properties…

Joe Fairless: Yeah.

David Pere: He’s like “What about 10-units?” “Well, I’m interested. Talk to me.” And he gave me a price of 235k, and we went back and forth on it… And then we went under contract at 225k, which still would have been a great deal for me… But throughout inspections and stuff we were able to negotiate a little bit more of that down. So it all worked out. He was great for seller-financing, and the cool thing is – I don’t know that he understood paper, or that he really just didn’t need the cash, but when I refinanced, he let me go no prepayment penalty, no nothing. So ultimately, over that year-and-a-half I think I paid like .75% interest on my seller financing to him, because I had only paid down 1.5% of the seller financing by the time we refinanced, and he didn’t ask for interest on any of the remainder. So it was basically free money for me to buy a property, so it was pretty cool.

Joe Fairless: Yeah. You were mailing out to absentee owners about duplexes… Will you describe the process that you used?

David Pere: Yeah, I’m a pretty simple guy… So I just go into ListSource and I just really dive down into a specific zip code, or you can even draw out on a map a square block or whatever that you want… And you can just narrow down in there to absentee homeowners. As you know, people who don’t live in the home, but they own it… And you can pick out equity percentages, you can pick out age of the property… And basically we were just mailing out to people who had owned the property since right around the crash or longer; so the people who had owned it for at least ten years, who theoretically would have at least 40% equity hopefully, and be able to negotiate a little bit… Because I knew that I was gonna try to at least get some angle on the seller financing, whether that was 100% seller finance, or part of the down payment… Because I was in the bootstrapping phase of the business.

So I had narrowed it down to length of ownership, equity percentage being over 40%, absentee homeowner, and really at the time I just put 2-4 units because I didn’t know anything about the commercial stuff and it was kind of intimidating to me… So the 10-unit was a stretch for me going as a first property, but the numbers made sense, so I just let myself jump off the cliff. I guess that would be the short answer to that.

Joe Fairless: What did the note say? And was it a postcard, was it an envelope with a letter inside of it?

David Pere: At this time I was not doing mass, so I literally had a yellow piece of paper, and I remember I had  a 24-hour duty shift which we do in the military here and there, and I sat at this desk during that 24-hours and handwrote 110 letters of “Hi, my name is David Pere. I’m a real estate investor in your market, and I’m interested in your home at Such-and-Such address. I can close fast, please contact me for more information.” And I got a great return. I probably got 19% or 20% callbacks on all those handwritten letters. They were in blue inks… I would throw one or two pennies in the envelope, I would throw a picture of my family in the envelope, and I would hand-sign every letter… So I’m sure every single one of those got opened. But I’ve learned very quickly that that is miserable; so I never did that again.

At this point, if I’m driving around and I might see a property that looks like it has a ton of potential, or if I’m targeting a specific home or two, I’ll handwrite everything. Otherwise, what I did was I basically found a font that looked somewhat like my handwriting, and I’ll print that out on paper and then I’ll sign it in blue ink… And I still to this day will hand-address the envelopes, because I think that definitely speaks volumes for how much your envelope gets opened. And I still stuff in  an envelope and go; I’m not sending thousands and thousands of mailers out, but that’s kind of my go-to. My open rate has definitely dropped. It’s probably 5%, maybe on a good day 10%…

Joe Fairless: You mean your response rate?

David Pere: My response rate, yes. Sorry.

Joe Fairless: Okay.

David Pere: But I would rather send 500 and get 10% responded or 5% responded than handwrite 100 of them (that takes me two days) and get still less responses in the grand scheme of things, even if it’s a higher percentage.

Joe Fairless: The picture of your family – are you wearing a military outfit?

David Pere: It depends on where I’m mailing to. When I lived in Hawaii, for instance, that didn’t really hold any weight, because everybody around the base was military. So I would just go with a normal picture, like a fun in the sand, beach, Christmas photo that I have of us, all in pajamas, on the beach, and Christmas stuff…

Joe Fairless: Okay.

David Pere: If I’m mailing somewhere like the Midwest though, where they’re very military-friendly, then yes, it’s generally gonna be something with — either in a Marine Corps shirt, or hoodie… I generally don’t enjoy the uniform; there’s just something about that that seems kind of cringy to me as a service member… But I will at least have a picture where I’m in a big, very obvious Marine Corps hoodie, with the family. So it’s more focused on the family than the military service, but maybe some subtle hints in there.

Joe Fairless: What about the pennies? Is there a reference there in the note to why pennies are included?

David Pere: No, I totally should do that though. That’s a great idea. I should put a line in there that just says —

Joe Fairless: No, don’t do it — what you’ve got is right; don’t let me mess it up. I’m just asking questions.

David Pere: [laughs] So the pennies, for those of you who aren’t listening – it’s really just because if you’ve got an envelope in the mail and something was rattling around in it, would you open it?

Joe Fairless: Or I’d call the FBI… [laughs]

David Pere: Yeah, one or the other. But hey, the FBI will open it and tell you what it says, so either way you’re gonna read what I wrote.

Joe Fairless: [laughs] Okay, that’s cool. I’m glad that you talked about this in detail. It’s a way that can help others get their letters opened and noticed. Did you ever consider having an assistant who’s time is $10/hour or much less to write those?

David Pere: I actually have several virtual assistants for various things. I have yet to make my administrative one write my letters for me… But I will tell you  a funny story from a good friend of mine, who basically ran a letter sweatshop out of his office. If you ever get him on the show, I apologize [unintelligible [00:21:33].21] Basically, he had 2-3 marines come over, and he would provide alcohol and pizza, and they would spend eight hours handwriting letters in his house. It was only scalable for a month or two before he couldn’t convince anyone else to come do it anymore… But that’s probably my favorite.

This guy probably put out 2,000 letters one weekend, and he had six guys over, and basically was just like “I’m providing alcohol, I’m providing food… This is gonna be fun.” But no one ever returned, so he said it wasn’t worth the relationships he might be ruining.

Joe Fairless: [laughs] Well, he’s given them food and alcohol…

David Pere: I would do it, but I might be crazy. Taking a step back, based on your experience, what’s your best real estate investing advice ever?

Joe Fairless: Man, just get out there and do it. I tell people from the military — I have a safety net, so I’m allowed to take really big risks, in my opinion, because if all else fails, I’ve got housing and food and clothing etc. taken care of, and a fairly stable job. Basically, when I tell people my favorite advice, this is always like “Learn, network and take action”, but my best advice is get out there and take risks, but just make sure that whatever risk you take  won’t break you. It doesn’t matter how many times you fail as long as you’re able to recover from that risk. And as long as you’re  not gonna get broken by whatever risks you’re taking, the pay-off will always end up being bigger in the long run.

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

David Pere: I am ready for the Lightning Round.

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

Break: [00:22:58].23] to [00:23:34].17]

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

David Pere: The best ever book I’ve recently read – I would have to go with either Like Switch, which is a book dedicated completely to how to build relationships through body language… It’s another FBI agent writing a book about body language, but it’s a super fun read, and really intuitive, and just little things you can do to make yourself a little bit more likable.

And I’m just gonna plug Big Debt Crisis by Ray Dalio, because I’m reading it right now, and it’s fairly applicable to where we’re at in the economic cycle. It’s a heavy read, but it’s good.

Joe Fairless: Yeah, I will buy Like Switch. I have not heard of that, and I am looking forward to reading that. What is the best ever deal that you’ve done? It doesn’t have to be monetarily, because we’ve already talked about that, the 10-unit… But just best ever deal. If it’s the 10-unit, then that’s fine, we can move on.

David Pere: That’s a good one, but I think the best ever deal I’ve done – this is gonna be super-cliché, because we already  mentioned the actual deal-deal… It’s gonna be the word “networking”. I have gained more out of whether virtual or in-person relationship building, so I would venture to say that the relationships I’ve built are probably the best deals I’ve ever made.

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

David Pere: Free content and helping others. I’m out here just trying to help others avoid some of the mistakes I’ve made along the way. So if I can help someone avoid a  mistake or answer a question for them, that’s the easiest way for me to add value.

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

David Pere: My social media handle is @frommilitarytomillionaire, but if you google “military millionaire”, I’ll pop up all over the place… And the hope is just to help other service members, vets and normal people learn how to build wealth through real estate and entrepreneurship.

Joe Fairless: Well, Dave, thank you for being on the show, talking about your 40-unit and the creative financing and a couple things that you do differently if presented a similar opportunity like the escrow fund, as well as bringing your own management team to the property immediately, regardless of how well the pre-existing team checks out.

And talking about 10-unit too, the grand slam 10-unit – that’s phenomenal. Congratulations on that. And then also talking about direct mail, too. Lots of really interesting and actionable items from this conversation for everyone, myself included. Thanks for being on the show. I hope you have a best ever day, talk to you again soon.

David Pere: Thanks, brother. I appreciate it.

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

Victor and his wife both started off in the medical field and started to feel burned out after working 70hr work weeks for 5 years. They both decided to leave their jobs to go backpacking and upon their return, they decided to purchase their first home and discovered it would need a lot of work. This started their journey into real estate investing, and now they have a business with 17 investors. 

 

Victor Leite Real Estate Background:

  • Entrepreneur and investor who owns multiple rental properties
  • Portfolio of rentals includes a mix of single-family homes and multifamily properties
  • Manages a high volume Fix & Flip investment group, they successfully completed over 100 rehab projects in 2019 – mostly with funds from private individuals
  • Based in Virginia Beach, VA
  • Say hi to him at https://www.lvrinvestments.com/ 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Difficult roads often lead you to beautiful destinations.” – Victor Leite


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I’m your host today, Theo Hicks, and today’s guest is Victor Leite. Victor, how are you doing today?

Victor Leite: I’m good, Theo. How are you?

Theo Hicks: I’m doing great. Thank you for joining us today. I’m looking forward to our conversation. So Victor is an entrepreneur and investor who owns multiple rental properties. His portfolio of rentals includes a mix of single-family homes as well as multifamily properties. He also manages a high volume of fix and flip investment group. Their project has successfully completed over 100 projects in 2019. Most of the funds come from private individuals. So we’ll be talking about that. And he is based in Virginia Beach, Virginia, and you can say hi to him or learn more about his company at 258capital.com. Alright, Victor, do you mind telling us a little bit more about your background and what you’re focused on today?

Victor Leite: Yeah, sure, Theo. My background is not like most traditional stories. I was born in San Paulo, Brazil, which is one of the largest cities in South America, and during the late 70s, Brazil went through a lot of political-economic turmoil. So my family, we immigrated to the United States towards the idea of achieving that American dream. So I followed the traditional paths – I went to school, I got good grades, I worked multiple jobs, I went to university, I went to medical school, I got my various degrees and accolades, and I thought I finally had reached that level of American Dream that everybody’s in search of. But after five years or so, working private practice, working 60, 70-hour workweeks, being on overnight call, the corporate structures with the pressures from the medical business world, it started really taking a toll on me, and really felt that burnout coming than most medical providers feel. My wife also practiced medicine; she agreed.

One day after a long day, I came home and had a strong conversation about our lives and what we really wanted. So we decided that we needed to make a change, and we decided to press the reset button. So we literally packed our lives into two small backpacks and decided to take off to travel the world for a year; nomad style.

So during these travels, we did a lot of soul searching and during the process of soul searching, I did a lot of reading. I read a lot of the motivational books, the Tony Robbins, The One Thing, The 4-Hour Workweek that took me to the Rich Dad, Poor Dad, and then I started listening to a lot of podcasts, including the Best Ever Show. I listened to it; it’s a great show. And what really started resonating with me is that in real estate, it’s a place where anybody can get started, with or without any experience or money, and then with a little bit of hard work, it can really bring you some form of financial freedom.

So once we got back from that year-long travel, we had a little bit of money saved up and so we decided that we’re going to buy our first little home. It was a fixer-upper to us, and it was located in Virginia Beach, Virginia. So we got all of our small little items out of storage. We drove down to Virginia Beach, we had the keys in hand, really excited, put the keys in the door lock, we open up that door, and our mouth and our hearts just dropped. The whole entire first floor of the house was flooded. We think that the pipe had burst in the wall a few days prior and just ruined everything, and we were completely devastated. We didn’t know what to do.

So there’s that saying that difficult roads often lead you to beautiful destinations. So we brushed ourselves off, we became motivated, and we decided to connect with local contractors, handymen that really helped us repair and elevate this property to a state that it wasn’t even close to before. And we did such a great job that we actually turned this one into our first flip.

And then we thought to ourselves after finishing this experience, why can’t we just replicate this over and over again? So we began our process. We educated ourselves on this vehicle of real estate investing, we networked heavily, we became close contact with local contractors who focused on rehabs, we met with local brokers and agents who focused on foreclosures, HUD homes, VA homes. We networked with wholesalers who brought us off-market deals, we networked in JV with a few investors, and we finally got to do another project of our own. And then, like that law of those first deals, it snowballed, and two became four, four became eight, and so on, and now, which is point here today, just like you said, we’ve done numerous of projects, and now today we’ve transitioned our model over into the commercial multifamily space.

We had a thesis that we wanted to prove and that thesis was that we can take our systems from the residential rehab side and transition over to the commercial side, specifically multifamily, and we feel like we did a great job so far, and we’re looking forward to growing our goals and continue scaling upwards.

Theo Hicks: Thanks for sharing that. So a few questions… Before we talk about the multifamily, let’s about the fix and flips. So you mentioned in your bio that you raised money for these deals. So at what point did you tap out of your own funds, and maybe talk to us about that decision-making process to go from funding the deals yourself to raising capital?

Victor Leite: That’s a good question. In the beginning, we had a little bit of money left over. So we were able to start slowly by ourselves and we leveraged a little bit of the money with credit cards and things like that, but we got to the point where we looked at our funds, and we looked at the project that we were going to do and we hit a roadblock. So we reached out to our network and we reached out to family, reached out to friends, and we showed them our business plan, we showed them what we were doing and they believed in us. They came in and started investing with us, and then from there on, we wanted to scale even further out. So we really began a philosophy of OPM – other people’s money. So we started with word of mouth, going off to friends of friends and college friends and co-workers and things like that, and we’ve definitely been using private money to get our business scaling to the point that we are today.

Theo Hicks: How many investors do you currently have?

Victor Leite: Currently, our company holds about 16 total investors. They’re a mixed bag – they’re retirees, they’re self-directed IRA investors, they’re cash investors… A very mixed bag of people investing with us.

Theo Hicks: Okay, and then what I’m leading to is I want to know what types of returns you’re offering to them, but I guess I’ll ask it in a little bit different way. So you say you’re transitioning into multifamily. So what has changed about your approach towards your investors from fix and flips to multifamily? So when you were doing the fix and flips, what was the compensation structure, what were the returns offered, what was the frequency of those returns, and then now that you’re doing multifamily, how has that changed?

Victor Leite: Okay, so in regards to residential real estate, we really began with more of note lending. So we were trying to offer something that was competitive with the market, but also not too high that we couldn’t guarantee those returns. So we went initially between some years ago, but we started at 5%, 6% returns, up to 10% to 12% returns for investors in residential real estate, and then now when we’ve transitioned over to the commercial space, we really try to push for larger returns with our investors in the low to high teens, and we try to give them their regular mailbox money returns, and then our goal is to run a product through the whole cycle and give them a return also in the end.

 

Theo Hicks: Then what types of conversation did you need to have with those investors when you transitioned from the fix and flip to the multifamily? …just because again, the returns are different for both. So were they onboard right away, did you guys do something convincing, or how did that conversation go?

Victor Leite: That’s another good question. We’ve developed these relationships, and everybody trusting us with their investments, and the majority of our conversations was that we really wanted to scale into a larger space where we had better returns, better asset protection, more consistent returns. We had depreciation and deduction opportunities for everybody… And because of the relationship that we’ve built, they were trusting of us to really follow through with what we were seeing, since we had done it so far over the last years that we’ve been working with them.

So we explained to them the differences of benefits from a residential fix and flip investments from a long term commercial buy and hold investments that we’ve been discussing with them. So that’s more of the differences in conversation. There was not much fight from that standpoint. Everybody was really happy to really have their investments grow for long-term.

Theo Hicks: How many multifamily deals have you done so far?

Victor Leite: So as a company, we’ve only done one official multifamily deal by ourselves. We have been working on junior venture partnerships, general partnerships and limited partnerships with other operators, but us as ourselves, we’ve done one so far in 2020.

Theo Hicks: Okay, and can you tell us about how you found the deal, purchase price, how much money you raised and the returns you offered to those investors and how many investors you have in that deal?

Victor Leite: Okay, so we did a small multifamily. We found this through a lead that we had, through one of the brokers we had a relationship with. It’s a small project. It’s a six-unit in Downtown Norfolk in Virginia. It’s literally a block from the hospital, a block from the university, a block away from the downtown shops and restaurants. We purchased this deal for $400,000, so it’s a $67,000 per unit, and like I said, we developed the same system to fix and flip and we moved it over to the multi.

So when we purchased this property, two of the units were vacant because they couldn’t get them rented out. It was the two top units. So what we did, we decided to go in there and we did our full interior upgrades of the units like we always do, and I can go into details about that if needed, but we did a full interior upgrade of the units, we brought them back up to pretty much be the best units in that building. We did two units and we found that there was a basement area of this property that in the entire history of this property nobody has ever utilized.

So we went there and we’re looking at opportunities of whether we can put a unit down in that basement, and the city gave us a little bit of a tough time doing that. So we transitioned over to our plan B which we turned it into an amenity. We did washer dryers, we did storage lockers, we did bike hookups, we did seating area, TV down there and we put a [unintelligible [00:13:08].12] on the outside, things like that… And we got all this done in ten days. We spent a total of $12,000, and we took the rents from where they were, which were $700 per unit, which was about 85 cents per square foot, and we moved it up to now they’re $1,000 per unit which moves our rent per square footage at $1.66. So we were pretty happy with how it turned out.

Theo Hicks: So you bought it for $400,000, you put 12k into it… Can you tell us a ballpark of what it’s worth now?

Victor Leite: Yeah, we had it appraised. It appraised at $510,000. So we have a little bit of equity left in it.

Theo Hicks: So when you bought that deal, did you bring investors in it, or was this out of your own pocket?

Victor Leite: This was out of my own pocket, because we wanted to show that we could transition our teams over fluidly without any hiccups… And it was a smaller deal so we really didn’t need any private investing for this deal. But now we’re using it as a case study for all of our future projects.

Theo Hicks: Perfect. The future plan– is the next deal you’re gonna buy on your own or are you gonna raise money?

Victor Leite: No. Next deal, like I said, right now we’re currently working on general partnerships on a 100-unit deal, on a 96-unit deal, on an 80-unit deal with partners in our Mid Atlantic region, and we’re going to try to be a strong partner. What I didn’t mention is that 258 Capital is our Capital Group, but we also have in-house, 258 Contracting. So we’re an all in one investment group where we have in-house contracting and labor force that can really go into a deal, and we can really make a really nice deal, a really great deal by controlling the renovations.

Theo Hicks: That makes sense, how you were able to deal with those two units and all that stuff in the basement, for 12 grand. I was like, “Wow. 12 grand…” are you just saying the basement or is that all in? Because it sounds like you were talking it was all in.

Victor Leite: All in.

Theo Hicks: It sounds like it’s definitely an advantage of having the contractor.

Victor Leite: Correct.

Theo Hicks: Alright, Victor. What is your best real estate investing advice ever?

Victor Leite: Okay, best advice ever. So I mentor a lot of young investors and things like that, and I say, the best advice I can give somebody ever is don’t be afraid to just take the action. Going back to my story, if we let our situation really discourage us, we would never be to the point we are today. I took action without really knowing where it really would lead us. So I say to the listeners that are listening now, you’re learning a lot of information, you’re taking it all in, but if you’re doing nothing with that information, information is just worthless.

So taking action on the information, whether it’s educating yourself on the vehicle of investment that you want, or developing or building your team. I can’t do this alone; I have a large team behind me that backs me up, and I’m talking about not just from contractors, but from partners, from project managers, from attorneys, CPAs, from my landscapers – everybody’s got a piece to play in this game. And then also you’ve got to network with like-minded individuals who are doing what you want to do. It will really raise your standard and your standard bar.

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

Victor Leite: I’m ready.

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

Break: [00:16:03]:03] to [00:16:48]:06]

Theo Hicks: Okay, so you said you like to read a lot of books… So what is the best ever book you’ve recently read?

Victor Leite: Okay, so I’ve read a few books recently. Now I gotta say, you guys are not paying me this or anything like that for the plug, but the Best Ever Apartment Syndication Book, we as a group just finished that and that book is awesome. It is a roadmap to really doing an apartment syndication from different angles, that other books don’t really talk about. So y’alls book is really a great book that you put out there. And I read a lot of mindset books, and The Power of Positive Thinking – I just recently just finished that. It really was a great mindset shifting book to really focus on confidence and restoring confidence and focusing on what are your fears and attacking those fears so that they don’t hold you back from inaction.

Theo Hicks: Well, thank you for that shout-out for the book.  It’s  The Best Ever Apartment Syndication Book, pick it up on Amazon, people. Okay, if your business were to collapse today, what would you do next?

Victor Leite: So if our business were to collapse today, which we have a lot of diversity, so we hope it never happens, but I think we’d go back to what really inspired me to do real estate in the first place. I’d go back to traveling again. Traveling opened up our eyes to different cultures and different mindsets and really allowed us to really press that reset button and get off our ridiculous crazy hustle, 9 to 5, and just say, “Hey, what is really truly important to us?” Also maybe, possibly volunteer. Volunteer medical services abroad. When we traveled, we saw a lot of people who are in need. There’s a lot of people in need all over this world. So I think that’s what we would do next.

Theo Hicks: What is the best ever travel destination?

Victor Leite: Oh, do you want my top three?

Theo Hicks: Yeah. Quick top three; just give them to me.

Victor Leite: Okay, quick top three. So obviously, I’m from Brazil. So a lot of people don’t know Brazil because Brazil doesn’t speak a lot of English, but the Northern part of Brazil is some of the most beautiful coastlines you would ever see. Also, Brazil is vast. So there’s a lot of things to do, but secondarily, if not Brazil, I would say, Vietnam. I know the US and Vietnam are not the best of friends based on history, but Vietnam – also beautiful landscape, beautiful ocean, beautiful people and great food. And lastly, we really enjoyed spending time in Bali. We really were able to really spend time in doing all that reading and tapping into our mindsets and focusing on ourselves. So those are my top three for your listeners who are looking to cut the cord and travel.

Theo Hicks: Perfect. I had to switch out one of the other questions because you answered it already.

Victor Leite: Oh, I did? Okay.

Theo Hicks: Yeah… Which is a good thing. So thank you for sharing that. So what deal did you lose the most money on and how much did you lose?

Victor Leite: We’ve done numerous rehabs, and to be honest, we’ve never really lost money. We’ve not made the returns that we were projecting. There was a deal where we made 1,000 bucks, but we didn’t really lose any money because we bought the deals right. We don’t just buy everything and anything that comes on the table; we have certain specific criterias that we look at with our business model and we try to avoid making mistakes, especially from others, who just think they can do anything and sell anything. So we’ve really not lost much. We just haven’t really met the marks we really wanted to on certain deals.

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

Victor Leite: Alright, so to reach us, you mentioned it, 258capital.com. It’s a place where you can reach out to us with regards to the commercial space. Lvrinvestments.com, that’s our rehab fix and flip business. You can see the projects we’ve done there. We can do a lot of stuff on social media now. We have Instagram and Facebook @LVrealty; you can follow us there. And right now, we’ve been really working on providing educational content on YouTube, so we started a platform called Thinking Thursdays, and that’s where we really try to interview high-performing people and try to learn their various habits that drove to their successes. So those are the areas that you can reach out to us and we respond pretty quickly.

Theo Hicks: All right, Victor. Well, again, thank you for joining us today and telling us about your journey into real estate investing. You talked about how you started off doing the typical corporate job and then ended up a nomad for about a year, and then eventually got into real estate, bought your first fixer-upper in Virginia Beach. It didn’t initially start off as planned, but you were able to connect with local contractors, fix the property up and now it’s your first flip, and you asked yourself, “Why can I just do this same thing over and over again?” So that project lead to another project and it has snowballed into a fix and flip business, and then you talked about how you wanted to essentially take the systems and processes that you created for your fix and flip business and use that in multifamily. That’s what you’re focusing on today.

We talked about raising money, and how you started focusing first on family and friends, showed them your business plan, they started investing, and then when you wanted to scale further, you reached out even more to friends of friends, college friends and co-workers. So you have 16 investors [unintelligible [00:21:28].00] retirees, self-direct IRAs and cash. You talked about the differences between the returns offered on residential and multifamily and that you were able to transition those investors into multifamily because they trusted you and you were able to tell them about better returns, better asset protection, and you really just followed through on what you said you were going to do in the past, so they trusted you to do it again in the future.

We went over your multifamily example where you bought a six-unit in Downtown Norfolk, Virginia. That came through a broker relationship, bought it for 400 grand, two units were vacant, you upgraded those units and then added some amenities to the basement. All in 12k because of your in-house contracting and labor force, and you were able to increase the rents from $700 a month to $1,000 per month increasing the value of the property to $510,000, so a great success story in the first deal.

And then your best advice was threefold, which was one, don’t be afraid to take action; two, make sure you develop and build your team and recognize that everyone has a role to play and you can’t do it all yourself; and then three is to network with like-minded individuals who are doing what you want to do.

So again, thanks for joining us, very solid advice. Best Ever listeners, as always, thank you for joining us. Have a best ever day and we will talk to you tomorrow.

Website disclaimer

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

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

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

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

Oral Disclaimer

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

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

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

Click here for more info on groundbreaker.co

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


TRANSCRIPTION

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Website disclaimer

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

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

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

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

Oral Disclaimer

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

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JF2093: Bad Decisions To Good Decisions With Will Harvey

Will is a Principal at CEO Capital Partners and recently left his W2 job to do real estate full time. He shares a great story of how he had a life of making some bad decisions in college related to alcohol and because of a great friend he was able to overcome this and now is a successful investor. 

Will Harvey Real Estate Background:

  • Will Harvey is a Principal at CEO Capital Partners
  • From Ashburn, Virginia
  • He started in real estate in 2016.
  • Personally owns over 1.5MM  in real estate mixed between rentals and Airbnbs
  • Recently left his W2 job to do real estate full time.
  • Say hi to him at : www.wealthjunkies.com  

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Seek advice from qualified people.” – Will Harvey


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, Will Harvey. How are you doing, Will?

Will Harvey: I’m doing well.

Joe Fairless: I’m glad to hear that, and looking forward to our conversation. A little bit about Will – he’s the principal and CEO — he’s a principal at CEO Capital Partners…

Will Harvey: That’s right. Most people mess it up and say it how you originally said it…

Joe Fairless: Yeah, I was like “Wait, there’s a preposition there.” At CEO Capital Partners. He’s based in Ashburn, Virginia, right outside of DC. He personally owns over 1,5 million in real estate in the DC area, which is a mix between rentals and Airbnbs. He’s been investing in real estate since 2016, and recently left his high-paying W-2 job, so congrats on that. With that being said, Will, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Will Harvey: Absolutely. Growing up, I was always on top of my dad. He’s been in business a long time… And he always taught me that — I’d go to a restaurant and I’d be like “I wanna work here one day.” I’d go to Chipotle when I was really young, and I’d be like “I wanna work here. The food is so good.” And he would always teach, “Now, you don’t wanna work here. You wanna own it.” So I was always instilled that whole “Own the ladder, instead of go up the ladder mentality.” So that was good.

I had a bunch of side hustles as a kid. I started out selling golf balls. I would find golf balls, clean them up, and sell them at a nicer course. As I went along with selling stuff  on eBay for people, and cut grass… And getting into high school I started going down the wrong path. I got into drugs and alcohol. Once I got into college, it got ten times worse. I just got real strung out on a bunch of stuff… I was there for three total semesters. My last semester was just a train wreck. I ended up pulling out of school, I came home…

Joe Fairless: What happened in that last semester?

Will Harvey: The main thing was just blacking out all the time.

Joe Fairless: It’s important to be conscious during college.

Will Harvey: Exactly, yes.

Joe Fairless: You’ve gotta be conscious during class time too, right?

Will Harvey: That’s right. So blacking out, and driving, and just doing all kinds of stupid stuff. Anyways, I came home, and I was actually home on winter break, and had just a total God moment. My Christian faith is what got me through everything that I went through. A family friend was in my parents’ driveway; I was living with them at the time. After a real bad blackout, my friend had punched me in the face a couple times, because I was trying to drive, and I was saying stuff about them… So the next day my face was all swollen and messed up, and this guy saw me and he’s like “What happened?” I was like “I don’t really remember.” And he thought about it — at the time he was sober 18 years; he was an alcoholic himself. So a couple days later he reaches out to me and he’s like “Hey, I was thinking about you over the last couple days, and I think this might be a little bit bigger than you think… So I would love to sit down — I’ll just tell you my story  and we’ll just go from there. No pressure.” And again, by the grace of God, I was kind of at the bottom, so to speak, so I agreed to meet with him.

Joe Fairless: And how did you come across this person in the first place?

Will Harvey: He was a family friend, lived in my neighborhood…

Joe Fairless: Okay.

Will Harvey: So I went and met with him. His story was identical to mine. I was sitting, talking to him, and I was like “Well, if he’s alcoholic and his story is exactly like mine, then what does that make me?” Two days later we told my parents; I admitted that I had a problem with alcohol, and ended up making the decision to pull out of school and get sober. I started going to AA meetings, and  all that.

Joe Fairless: Good for you.

Will Harvey: Yeah, I appreciate it. It was very humbling. Most 19-year-olds are not doing that, so it was very humbling, moving back in with your parents when you had the freedom of living at school and doing all that. Anyways, fast-forward–

Joe Fairless: And I’d say that everyone has areas in life that they need to have that sort of awareness and about-face; we’ve gotta do something else. It’s just that certain things, like alcoholism, drugs, other things – it’s more obvious from the outsider standpoint. But we’ve all got that stuff, right? Everyone has that.

Will Harvey: Right. Admittedly, now I’m addicted to work…

Joe Fairless: Well, your website is wealthjunkies.com, which after knowing this story — I was gonna ask you why you called it WealthJunkies.com.

Will Harvey: Exactly, that’s right… So fast-forward, after I was home and living with my parents, about a year and a half later I ended up walking on and playing football at a school in Ohio.

Joe Fairless: Which one?

Will Harvey: It was Ohio Dominican University.

Joe Fairless: Nice.

Will Harvey: It’s in Columbus, overshadowed by the other school in Columbus. [laughter] But I ended up playing there, and that was great, until I had double hip surgery. Then I came home and I kind of started my real estate journey. So I got into the mortgage business; a family friend got me into the mortgage business in 2015. I learned the business for about a year, and at the end of 2016 is when I went off into sales. So 2017 was my first year. I did well, and it was phenomenal; I lived it, breathed it, slept it… And it was actually before I started in sales. I was able to buy my first house.

The way that it all happened was I was in the mortgage business, and I didn’t know a ton about real estate, but I knew that it was a good thing, and I knew that I should buy a house, because I can  start building wealth. But I was making $30,000 at the time, and living in the DC area, you won’t qualify for [unintelligible [00:08:11].16]

So I went to my dad and I said “Hey dad, I have a potential opportunity for you.” And he’s like “Oh, great. Here we go.” So I showed him his house, and I was like “Look, I can’t qualify on my own, but I’ve done my research. This is the rental income that I can get. I’ll live in one room, I’ll rent out the other two. Can I borrow your ability to qualify?” So he agreed, and signed on the loan. I was able to get the house.

In the first month with two tenants – one was my brother and one was another family friend… The first month they paid me the rent, it almost covered the entire mortgage, and I was hooked on real estate. Hook, line and sinker. It was a house-hack before I ever discovered Bigger Pockets or anything like that… And I highly advocate that to anybody that I talk to, especially if they’re single and don’t have kids, or anything. I highly advocate for doing that.

Fast-forward a little bit more, I started originating and I started making good money, and at the end of ’17 I bought another house. Then fast-forward another eleven months from there I bought another house. Again, the houses here are ridiculous in price. One of those rental properties was over $400,000.

Joe Fairless: Dang. And you were putting like 20%  down?

Will Harvey: I put 10% down, because I moved into it. So each property I bought, I bought as a primary residence and moved into it. I had the lender’s consent, used the same lender, and they were cool with it. So that helped. All the rates are in the three’s, which is nice; I wasn’t having to do investment loans.

But after I got to three, I just realized that there was a serious scalability problem with what I was trying to do, and that’s kind of what led me into multifamily. So that’s when I started learning about it and going from there. If you wanna ask some questions based on all that…

Joe Fairless: Sure, yeah.

Will Harvey: Or I can keep going. What do you want me to do?

Joe Fairless: Well, your “personally owns” part – mystery solved  there. Because I introduced you as personally owning 1.5 in real estate in the DC area. Three homes, 400k(ish) a pop. There’s that. Is that all the portfolio, or is there something else?

Will Harvey: I actually have one more, and I had one that we sold; it was a flip. And then there’s another flip I’m doing with a partner right now… That was just a killer deal. I own it, but it’s in a company, and it won’t be owned for long; it’s not a long-term house.

Joe Fairless: Okay. And just to get an idea of cashflow, just pick one of the four homes, please, and tell us what’s the income, what are the expenses, high-level, and what are you making per month?

Will Harvey: Yeah, sure. I’ll pick the second one. It was the most expensive one. The cool thing about this one is that it was bleeding at one point. So I was able to kind of use the knowledge that I learned from multifamily and apply it to this. That’s what helped.

Joe Fairless: Oh, okay… Yeah.

Will Harvey: So I did have one person renting the majority of the house, and then I had Airbnb in the lower level; it was a separate entrance. The house was perfect for that… And I put a lock on the outside of the door, so they couldn’t access the rest of the house. It’s like a separate unit, essentially. And I had someone else renting the rest of the house. But what I did – once their lease was up, it was a three-level townhouse.

Instead of just doing the Airbnb and renting the rest of the house out as one lease, I kept the Airbnb and I did two separate leases for the two bedrooms that were upstairs. And by doing that – it was crazy; it turned it around phenomenally. Now it’s cash-flowing about $400/month… Which doesn’t sound like a lot, but since I’ve bought it, it went up in value $50,000. So it’s a high appreciation area. I know you preach the three rules – not to go for appreciation…

Joe Fairless: Right. Well, my approach is buy for cashflow, and then increase the value through value-add plays… And here you go, a value-add play. You kept the Airbnb, but then you changed it from leasing the other one as a regular rental to leasing it by the bedroom…

Will Harvey: Exactly.

Joe Fairless: …and then you separated that out. Let’s compare the Airbnb income per month, versus one-bedroom per month. What’s the difference there?

Will Harvey: The Airbnb is about $1,100/month. If you average it out, that’s what it comes out to. So it’s about $1,100/month.

Joe Fairless: Income?

Will Harvey: Income, yeah.

Joe Fairless: Okay.

Will Harvey: And then from that $1,100 — there’s not a whole lot of expenses. Let’s say about $60/month in expenses. There’s a cool app I’ve found where you can get a turnkey cleaner; it’s pretty cool. It’s called TurnoverBnb, for anybody listening…

Joe Fairless: Thank you. I wasn’t gonna ask that, but I should have, so thanks for offering that…

Will Harvey: No, absolutely. TurnoverBnb. So that’s about $1,100. But that room is so much smaller than the rooms that I’m doing a lease. So apples to apples, it’s hard to compare them… But it’s still more than what I’m doing for the leases.

Joe Fairless: What’s the bedroom rent?

Will Harvey: The master is $1,000, and then there’s another — there’s like a master two, and that one is a little bit smaller than the true master; that one is $950. So the Airbnb is better. The Airbnb is tiny compared to both of those rooms, and I’m still getting more rent.

Joe Fairless: So the reason why I asked that question was because of the follow-up, which is why not have all three be Airbnbs?

Will Harvey: Because it’s more of a headache to do it that way. I see it as more of a headache. Airbnb is not passive. People are coming… And I have it very passive now; I’ve been doing it for over two years, so I’ve kind of worked out all the glitches and have  it pretty automated… But one of the renters in the house I know very well, and she kind of oversees everything. So I’m giving up a little bit of income by not doing Airbnb for the sake of having peace of mind.

Joe Fairless: What, if anything, does she get compensated for overseeing it unofficially?

Will Harvey: If it’s something where I need her to clean it, she will, and I’ll just knock $50 off a rent. If it’s an emergency cleaning and the TurnoverBnb can’t do it in time, or there’s something that comes up with a guest, and they need something – then she’s there, and I kind of compensate her as I go. It’s a good arrangement that we have.

Joe Fairless: In terms of the process, with the Airbnb over the last couple of years you said you’ve got it down more or less to a smooth system… What are some major changes that have taken place over those two years?

Will Harvey: Getting rid of the stupid keyless entry that was giving me so many problems…

Joe Fairless: Oh, really?

Will Harvey: That’s a huge one, yeah.

Joe Fairless: Getting rid of it?

Will Harvey: Yup. It sounds crazy. That’s the reason I got it, was because I thought that it was gonna be so easy, nobody will lose a key, they [unintelligible [00:15:00].14] but it created so many problems.

Joe Fairless: Which one did you have?

Will Harvey: It was Schlage. They’re a name brand product, and it would always mess up. I’m not trying to dog on them, but…

Joe Fairless: You’re just speaking facts.

Will Harvey: Yeah, exactly.

Joe Fairless: So the battery went down sometimes, or…?

Will Harvey: No, it actually wasn’t the battery. It was really — I know I’m kind of getting in the weeds here, but there was this part inside, and it was like a little disk, and it would slip, and basically it would just spin freely, and it wouldn’t turn it. So I’d have to take it apart…

Joe Fairless: So why not just get a refund and get a different type of keyless entry?

Will Harvey: I don’t know, I bought it a while ago, and everytime I’d go over there I would just wanna fix it and be done with it and move on. So I’d youtube it, try to figure out how to do it… It would work for a little bit, but then a month later it would go bad. So the solution there was get a lockbox and have a key. So far, the good old-fashioned keyed entry has been fine.

Joe Fairless: Okay. What else?

Will Harvey: Another thing is I have a virtual assistant who handles all guest communications. A big thing with Airbnb is being a super-host, so you wanna do that… You wanna become a superhost, and in order to do that you’ve gotta get a bunch of reviews, and you’ve gotta be really good. So I had a virtual assistant – she’s awesome. Her name is April. And I’ve put together a process where as soon as someone books, she sends them a message and says “Hey, here’s the Wi-Fi, here’s this, here’s that.” There’s those frequently asked questions, so we kind of answered all of those questions in this first message.

So she would send that, she would say “If you need anything, let us know.” On the day they arrive, she would message them again, and basically reiterate that and say “If you have any issues with check-in, let us know.” And then while they’re there, for the long-term people, every Thursday she would message them and ask if they need anything. And then when they leave, there was a sequence where she would message them and try to get them to complete the review.

So that’s huge, in automating it… Because I was always too busy to ask for reviews and do all that. So having a system in place where she would do it was very helpful for me.

Joe Fairless: How did  you find the VA?

Will Harvey: UpWork. Neal Bawa motivated me to do that.

Joe Fairless: And how many VAs did you work with until landing with this woman?

Will Harvey: She was the very first one…

Joe Fairless: Wow.

Will Harvey: Yup. There’s a lot of people that have gone through a lot of VAs and not been satisfied, but knock on wood, she’s awesome.

Joe Fairless: Where is she located?

Will Harvey: Philippines.

Joe Fairless: And how much per hour?

Will Harvey: Five dollars and five cents.

Joe Fairless: And any bonus for doing stuff?

Will Harvey: I’d give her a Christmas bonus… If she makes a decision and it’s thinking outside of the box, she does something that’s impressive, I’ll give her a bonus. 10 bucks, 25 bucks, somewhere around there.

Joe Fairless: Had her for how long?

Will Harvey: I’ve had her since July or August of 2019.

Joe Fairless: Wow. Good. I’m glad to hear that.

Will Harvey: Yeah. It’s going great.

Joe Fairless: So now your focus is what?

Will Harvey: Multifamily.

Joe Fairless: Where are you at with that?

Will Harvey: Myself and four partners – we started a group about a year ago… And we got involved as a co-sponsor on a few different deals, and we were able to raise money on our first one. We raised about half a million dollars… And then about three weeks later there was another opportunity that came up, where we were able to co-sponsor… And that’s where we’re at now. We have one that we’re working on, and as this records, it’s under contract in Columbia, South Carolina… Which is pretty cool, because it’s the school that I was at, where I was a colossal screw-up, where I was getting into all the drugs.

Joe Fairless: Is that the Gamecocks?

Will Harvey: Yeah, University of South Carolina.

Joe Fairless: Yeah, nice. Now they’re USC.

Will Harvey: Yeah, exactly. That’s right.

Joe Fairless: I’m sure I’ve just made a lot of South-Caroliners upset when I said that… [laughter]

Will Harvey: Absolutely. That’s what everybody says.

Joe Fairless: Alright. Well, I’ll just join the crowd then and just blend in and run away.

Will Harvey: [laughs] You’re good.

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

Will Harvey: When I was in the mortgage business and I started learning about multifamily, and I knew it was something that I wanted to do, like you said in my bio, I was high-paid, I was making a couple six figures, and I was in my early twenties… But I just wasn’t happy. I wasn’t enjoying it. I felt like a hamster on a wheel. And I would ask people advice. And everybody that I was asking was in a position where they weren’t financially independent, they weren’t financially free or anything like that. They were working. So the advice – what I’m getting at is seek advice from qualified people.

Everybody I was seeking advice from was not in a position where I wanted what they had, so why was I asking them for advice? That’s my advice – try to find people that are actually qualified to give you  advice on what you’re asking about.

Joe Fairless: That’s a good reminder… Because there’s all different areas of life that we need advice on, and we might have a trusted friend that we always go to for advice, but is that trusted friend qualified in that particular area of life to give advice on? That’s interesting…

Will Harvey: You’re not gonna go to somebody and ask them about your marriage if they’ve been divorced five times… You know what I mean?

Joe Fairless: Well, it would be good to hear their advice and then just do the opposite.

Will Harvey: Yeah, that’s a good point. [laughter] That’s right.

Joe Fairless: Alright, we’re gonna do a lightning round. Are you ready for the best ever lightning round?

Will Harvey: I am.

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

Break: [00:20:35].17] to [00:21:20].03]

Joe Fairless: Alright, what’s the best ever resource you currently use in your business, that you couldn’t live without?

Will Harvey: I would say with the personal portfolio I have – I will keep it with that – I would say the TurnoverBnb and the VA. So two.

Joe Fairless: Yeah. We talked about obviously you go over to TurnoverBnb – that’s an easy Google search – and then for the VA you talked about going to UpWork and finding a VA.

Will Harvey: That’s right.

Joe Fairless: What’s a deal that you’ve lost the most amount of money on, if any? I don’t think there is one based on what we’ve talked about. Maybe a flip, or something.

Will Harvey: No, there was no actual deal where I’ve lost money, but I’ve lost money when I first got into multifamily. There was a deal that I was trying to do on my own. It was a 14-unit property in a rural part of Virginia. I had deal goggles on, I wanted to close it so bad, and it was a pain in the butt. The seller was asking for stuff that was unreasonable. Long story short, I had the attorney do the contract over and over and over. The deal ended up dying, and then I got the bill for the attorney, and it was $9,000.

Joe Fairless: [laughs]

Will Harvey: That wasn’t fun.

Joe Fairless: What were some unreasonable deal points that the seller was asking for?

Will Harvey: I was so naive and inexperienced… He wanted to save money on closing costs; instead of doing a traditional purchase, he wanted me to purchase the underlying LLC that owned the property. I was getting advice from everyone saying that’s such a bad idea. You don’t know if he’s in litigation with someone… So it just created a lot of billable hours.

Joe Fairless: Yeah, that’s a pretty hefty attorney fee for a purchase and sale negotiation contract.

Will Harvey: That was my “Welcome to billable hours” moment. I wanted to throw up when I got that bill.

Joe Fairless: It sounds like you  had a very responsive attorney.

Will Harvey: Yes… [laughs]

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

Will Harvey: My mom started a non-profit, and you guys actually featured it on the Best Giving, or Best–

Joe Fairless: Best Ever Causes, yup.

Will Harvey: Best Ever Causes, yeah… Helping Haitian Angels. It’s an orphanage in Haiti.

Joe Fairless: Oh, yeah. That was fairly recently. Best Ever listeners, you can go to BestEverCauses.com. If you click on Recent Causes – I’m on there now – you can see that organization Helping Haitian Angels. Good, I’m glad to hear that.

So how can the Best Ever listeners learn more about what you’re doing?

Will Harvey: They can go listen to our show. We got our motivation from you, Joe, like we were talking before this started. I got roped into doing a daily podcast because of something Joe talked about at the conference… So thank you so much for that, Joe. It’s a lot of work, as you know…

Joe Fairless: Yes… Yes, it is.

Will Harvey: It’s awesome stuff. Our podcast is Wealth Junkies, you can find us there; or you can just shoot me an email, will [at] wealthjunkies.com.

Joe Fairless: Thank you, Will, for sharing your story, some challenges, some ways you overcame it, some lessons learned, like make sure we ask advice from people qualified in the area that we’re looking to get advice on, your Airbnb approach, TurnoverBnb, the VA, adding value to one of the properties that you own; it was losing money – what do you do? Let’s rent out by the bedroom, and let’s make sure we have that Airbnb rockin’ and rollin’. Some really applicable stuff, as well as what you’re focused on now with the multifamily.

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

Will Harvey: Awesome. Thank you, Joe.

Website disclaimer

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JF2089: House Hacking to Commercial Property With Tiffany Alexy

Tiffany bought her first property while in college by house hacking and has continued to house hack continuously and is currently in her fourth house hacking property. Tiffany shares a story of bad luck when she decided to venture away from house hacking and into flipping. She talks about a combined strategy of house hacking and BRRRR with her office property

 

Tiffany Alexy Real Estate Background:

  • Began investing in real estate at 21 y/o with a 4 bedroom condo that she lived in and rented the other 3 rooms
  • Today, owns 10 units of commercial and residential properties
  • Started her brokerage firm, Alexy Realty Group in 2017
  • Based in Raleigh, NC
  • Say hi to her at https://www.alexyrealtygroup.com/
  • Best Ever Book: Ninja Selling by Larry Kendell 

 

Click here for more info on groundbreaker.co

 

Best Ever Tweet:

“Be creative” – Tiffany Alexy


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, Tiffany Alexy. How are you doing, Tiffany?

Tiffany Alexy: I’m doing great, thanks. How are you?

Joe Fairless: I’m glad to hear that, and I am doing great as well. A little bit about Tiffany – she began investing in real estate at 21 years old, with a four-bedroom condo that she lived in and rented the other three rooms. Today owns 10 units of commercial and residential property. Started her brokerage, Alexy Realty Group, in 2017. Based in Raleigh, North Carolina. With that being said, Tifanny, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Tiffany Alexy: Sure. As you mentioned, I started investing in 2011. I purchased my first property as a senior in college, and I ended up house-hacking it… And that’s kind of what got me jump-started into my real estate investing career. I lived there for a couple years, and then I moved out, rented that one out  completely, and just kind of repeated the process, and have been doing so ever since about 2011.

Joe Fairless: What do you mean by “repeated the process”?

Tiffany Alexy: So after I rented that full unit out, I bought another one just across the street. It was a 3-bedroom/2,5-bath, and I lived in one bedroom and I rented out the other two… So I just continued house-hacking. I actually still house-hack today.

Joe Fairless: So the first one was a four-bedroom condo; the one across the street was a 3-bedroom?

Tiffany Alexy: Correct.

Joe Fairless: And you bought the first one, and then you got a loan and bought the second one, correct?

Tiffany Alexy: Correct.

Joe Fairless: And then what did you do after that?

Tiffany Alexy: I just kept doing it again and again, so now I’m in a three-bedroom townhome where I have my own room, and then I rent the other two bedrooms out.

Joe Fairless: Wow. How many properties have you purchased to do it.

Tiffany Alexy: I’m on my fourth.

Joe Fairless: You’re on your fourth – okay, cool. So you got  your first two that we talked about, and then you did it again, which was a – what?

Tiffany Alexy: It was a townhouse.

Joe Fairless: The third one was a townhouse. How many rooms?

Tiffany Alexy: It was a three-bedroom, and I rented one out. The roommates that I had at the time had access to the third room, so we used it kind of as a home office.

Joe Fairless: Okay. And then you’re on your fourth…

Tiffany Alexy: So I had one remaining in that one. Exactly.

Joe Fairless: And how many bedrooms is your fourth one?

Tiffany Alexy: It’s a three-bedroom as well. Same situation – I live in one and I rent out the other two.

Joe Fairless: Okay. And over how many years have you done this?

Tiffany Alexy: I started in 2011.

Joe Fairless: Oh, alright. I can do that math… [laughs]

Tiffany Alexy: So it’s been almost ten years. [laughs] Yeah, and there were some situations in between where I didn’t house-hack, but for the majority of the time I have been house-hacking.

Joe Fairless: Okay… So talk to us about the loans  that you’re getting on each of these four properties.

Tiffany Alexy: They’re conventional, owner-occupied financing. The first one I had to put 25% down, because it was one of those condo situations where there were a lot of investors to own the units, so it didn’t qualify for Fannie/Freddie financing… The Wells Fargo, Bank of America, the larger banks wouldn’t finance them. So I went through BB&T on the first one, and I had to put more down because of the investor concentration, essentially.

Joe Fairless: What about the next one?

Tiffany Alexy: The next one was the same situation – it was another high investor concentration, so I put another 25% down on that.

Joe Fairless: Okay. And when you say “high investor concentration”, will you elaborate on what you mean?

Tiffany Alexy: Sure. It just means the majority of the condo units owned in the neighborhood are investor-owned. So it’s not owner-occupied.

Joe Fairless: Okay. Even though you’re getting an owner-occupied loan.

Tiffany Alexy: Correct. I believe the rule is if it’s over 50% investors in the actual subdivision, then they require some additional steps.

Joe Fairless: Okay… I hadn’t heard of that.

Tiffany Alexy: Yeah, it’s called non-warrantable.

Joe Fairless: Non-warrantable, okay. Cool. So there would be an advantage to not have non-warrantable in the loan, because them you’d be able to have less money into the property, right?

Tiffany Alexy: Yes, and that’s exactly what happened with the second two of the townhomes. So the rules don’t apply with the townhomes. So my third – I was able to put 10% down, instead of the 25%. And then the one that I have now, I’ve put 3% down.

Joe Fairless: Wow. You’re getting better. [laughs]

Tiffany Alexy: Yeah, exactly.

Joe Fairless: How low can you go.

Tiffany Alexy: Exactly.

Joe Fairless: What is the reason why you were able to do 3% on this fourth one?

Tiffany Alexy: I don’t know, it was just a loan program. Conventional was going down as low as 3%.

Joe Fairless: Okay. Same lender on the 3% and the 10%, the last two?

Tiffany Alexy: No, different lenders.

Joe Fairless: Who did you get on the third one, and who did you use on the fourth?

Tiffany Alexy: The third one was First Citizen, and the fourth was Benchmark.

Joe Fairless: How do you find your lenders?

Tiffany Alexy: Honestly, they find me. It’s just word of mouth, networking, pretty much just organically.

Joe Fairless: Okay. So thinking back with benchmark, for example, what is the first time you came in contact with the point person that you ended up going with at Benchmark?

Tiffany Alexy: With Benchmark I actually found out about them through a client. I was helping a client purchase an investment property, and his lender was put in contact with me, because I was his agent… And I really liked the lender, because he was very communicative, always responsive, super on top of it. And my client got a great rate, so I was like “Okay, I’ll keep you in mind for the next one.” And it just kind of worked out that way.

Joe Fairless: Okay. You’ve been doing it for approximately nine years… What are some things that have gone wrong?

Tiffany Alexy: Oh, a lot has gone wrong… So I will tell you about a situation where I got in a little bit over my head as far as a flip. I purchased a 2,600 sqft. duplex in Ayden, North Carolina, which is about 15 minutes South of Greenville, where East Carolina University is. And you see HDTV and you think it can be easy… It’s not the case. I bought it from a wholesaler who had the contract on the property and was selling the contract. For that reason, I got it super-cheap; it was like 28k for this duplex. It needed a lot of work. I actually had FaceTimed my contractor through it, and she gave me an estimate of about $100,000 in work.

At that point I was like “Okay, that’s still not too bad, because I’m in for 128k, and it could rent for about $700/side.” So the numbers on that weren’t too bad. The only thing is the flip took a year. There were a lot of delays, just because it’s 2,5-hours away from me, so I didn’t have a lot of time to drive to the property and check on my contractor and make sure that he was running according to schedule.

Everything was just delayed. Windows took seven months to come in, and then one came in and it was broken, so we had to send it back and get a replacement… It was just a disaster. So after about a year I got a call from the town of Ayden fire department that it had actually caught on fire.

Joe Fairless: Ohhh… After a year, prior to you renting it out, after you’d completed the flip almost?

Tiffany Alexy: Exactly. So the flip was a little more than halfway done, and it just completely torched one side. It didn’t burn down, but the entire interior of the better side was gone. It was just up in flames. So that was kind of a learning experience, and at that point I was like “I don’t wanna put another 100k into this project. It’s never-ending.” We couldn’t even have utility to the property, because it has to pass inspection in order to turn on the utilities.

So it wasn’t an electrical fire. What I found out later was that somebody had broken in and had a party, they lit candles, and just left. They’d broken through that broken window.

Joe Fairless: Dang! They got in through the window that took seven months to arrive, that was broken, that you were waiting on a replacement?

Tiffany Alexy: Correct.

Joe Fairless: And then they burned the house down as a result of it.

Tiffany Alexy: Yeah, so that one was boarded up, and they just took it off.

Joe Fairless: Okay… Insurance?

Tiffany Alexy: So everything that could have gone wrong, went wrong. Yes, I had insurance, thank goodness. So I was able to get that money, and I was done. So I basically broke even, which is a lot better than what could have happened.

Joe Fairless: What was the insurance process like?

Tiffany Alexy: It had to be a vacant policy, because there was nobody living at the property. It was one that I had to renew every couple of months, because it was a vacant policy, and it was more expensive because of the risk associated… Which, obviously, for good reason.

Joe Fairless: Yup. Thank goodness you had that policy.

Tiffany Alexy: Yes, I’m very glad I did that.

Joe Fairless: What was the check amount that they cut you for the fire.

Tiffany Alexy: It was 67k.

Joe Fairless: Okay… So they cut you a check for 67k, and you bought it for 28k… What did you end up doing with the property?

Tiffany Alexy: I actually essentially just gave it to an investor I know, that was in the area. He was my property manager at the time as well, and I just wanted to wash my hands of it. So I sold it to him for $10.

Joe Fairless: Okay. [laughs] So you had put in 28k, and you got a check for 67k… So you had about 42k in profit. However, that doesn’t factor in paying the contractor, and holding costs and all that… So you’re saying essentially the 42k was wiped away? It was about that, it wasn’t anything more…?

Tiffany Alexy: Correct. It was between 40k and 45k.

Joe Fairless: People always ask “Well, why would someone give a house away? What are the circumstances?” Here’s a circumstance. You gave it for ten bucks.

Tiffany Alexy: Oh, absolutely. Yeah, it was just one of those where I didn’t wanna continue dumping money into it. I was busy with my brokerage at the time and I just didn’t have the time… And he was local, 10-15 minutes away from where he was, so it made sense for him, because he could get the property for very little, and essentially his money in would be all the repair costs, and then he could rent it.

Joe Fairless: Okay. And how long ago was that?

Tiffany Alexy: That was last summer. I sold the property to him in July.

Joe Fairless: Well, you “sold” (in air quotes), right? Ten dollars… [laughs]

Tiffany Alexy: Yeah, exactly.

Joe Fairless: And have you kept up with him and the status of the property?

Tiffany Alexy: No, I actually haven’t.

Joe Fairless: Aaagh…

Tiffany Alexy: I need to follow up with him and see what’s going on, see how he’s doing.

Joe Fairless: You haven’t talked to him since you got the $10 bill from him?

Tiffany Alexy: No. He sent me a referral or two, but I haven’t asked him what he’s done with the property.

Joe Fairless: That is a challenge, and thankfully you had insurance. I think that’s a big takeaway, having insurance on the vacant property. If presented a similar opportunity in the future, what choices would you make that are different from the choices you made on this deal?

Tiffany Alexy: First of all, I wouldn’t have bought it…

Joe Fairless: Why? Why wouldn’t you have bought it?

Tiffany Alexy: Well, I bought it sight unseen. That was my first mistake. Not necessarily that buying sight unseen is a mistake, but it was in a market that I didn’t know, and I just thought, “Okay, well, it’s 28k. Even if it goes South, it’s so cheap…” So I put it under contract sight unseen, which typically is not that big of a deal, especially in North Carolina, because you have the due diligence period, so you can still back out… But once I was under contract, I felt kind of obligated to purchase it. And not out of anything that anybody else was doing, it was just kind of my own feelings. So that was the first mistake.

The second mistake – I didn’t get a home inspection. It was primarily because I knew that it would need a lot of work. It was essentially gonna have to go down to the studs and be completely redone… So at that point I was like “Well, I don’t need a home inspection. I know that it’s gonna need a ton of money and a ton of work, so I might as well just save that money.” But what I didn’t know was the joists had been rotted out because of termites, so essentially it was about to go 20k over budget to replace the joists. And that’s what was partially why it took so long as well.

Joe Fairless: Windows and termites.

Tiffany Alexy: Exactly.

Joe Fairless: Thank you for sharing that.

Tiffany Alexy: Of course.

Joe Fairless: Those are takeaways that are applicable to a lot of people, and I’m grateful that you mentioned that. What else has gone wrong?

Tiffany Alexy: With that deal or with other deals?

Joe Fairless: With another deal.

Tiffany Alexy: That one was essentially my one and only flip experience. Everything else that I have has been buy and hold. So on the flipside, I’ll give you an example of one that has worked out really well. I currently have an office – it’s in Cary – and I kind of did a double strategy on this. We talked a little bit about house-hacking… If you’ve heard of the BRRRR method, which is the Buy, Rehab, Rent, Refinance, Repeat – I kind of combined the two on this office that I have, and it’s worked out really well.

Essentially, I bought it similar in a way to my owner-occupied properties. It’s just an owner-occupied office, because I was using it for my business. I’ve found it a couple of years ago, it was listed for 175k, and it needed a lot of work. These buildings were built in the late ’70s, so it was just really old, and hadn’t been touched since then. It still had a wood-burning stove in the main lobby area, that was connected to the chimney.

Joe Fairless: Well, that’s got some character.

Tiffany Alexy: Yeah. For sure, it does have character. Orange [unintelligible [00:16:59].03] carpets…

Joe Fairless: [laughs] Even more character.

Tiffany Alexy: Textured wallpaper… Exactly. So it was kind of an ugly duckling, but there’s not a whole lot of inventory as far as office goes here, so I snapped it up and paid the asking price. I’ve put in about just over 40k in work.

What I did was added the chair molding, the [unintelligible [00:17:23].26] put in luxury vinyl  plank floors, repainted everything… It has a lot of that intricate dental molding, it’s got that thick crown molding, and that was a pain to pay somebody to paint. So it took a lot of paint for that… But I essentially just redid everything, including the bathroom, and I rent out a couple of the other offices. So it’s got technically four office spaces. I use one. One of the other offices I rent for $500/month.

The upstairs is kind of an oversized office. I rent that for $650. And then the last office, that is not my own, is the largest one, so I turned it into a conference room. I use that for my clients, but I also rent it out on a website called LiquidSpace, which is similar to Airbnb, but it’s for office space… And it’s just like an hourly rate.

So between all that, I got it rented, and then I refinanced. So I was able to pull out most of my initial equity, because it got reappraised for 250k.

Joe Fairless: Awesome.

Tiffany Alexy: So it worked out really well for me… And of course, there’s a higher monthly payment, but because it’s tenant-occupied, I’m essentially breaking even on the payments.

Joe Fairless: Bravo! What tenants do you have in there?

Tiffany Alexy: It’s a digital marketing company and a software company.

Joe Fairless: Okay. What’s the square footage of the overall space?

Tiffany Alexy: It’s just under 1,400 sqft.

Joe Fairless: Alright… And how did you find the digital marketing and software company?

Tiffany Alexy: The digital marketing company – funny enough, I used to do property management, and they were one of my property management clients. And the software company – I believe it was just Craigslist, because I had posted a couple different ads online about the office space.

Joe Fairless: Okay. And the 40k in updates that you did – what was your role in those updates? Was it the money person, or were you the one overseeing it, or were you doing it?

Tiffany Alexy: All of the above. So I was the money person–

Joe Fairless: Oh, you did it?

Tiffany Alexy: Yeah. I hired a contractor, so I didn’t do the work myself… But I helped with the design process, picked out everything, I put up the money… So yeah, I was pretty involved.

Joe Fairless: Okay. What’s something that you learned from that experience, overseeing the contractor?

Tiffany Alexy: It’s definitely to have a contingency. I went in knowing that we were gonna go over budget, just because it always happens… But it turns out that there was a bay window in the back, in the conference room, and it was actually sagging, because it didn’t have a foundation… And this was something that my home inspector actually didn’t catch.

I kind of had two options. I could add a foundation to it, or I could just tear the bay window out and make it a regular window… So what I ended up doing was just tearing it out, because it was cheaper that way, and just putting a normal window in. But of course, my contractor had to reframe and tear out the actual bay that was sticking out… So that was another 5k that I was not anticipating…

So it’s definitely to have a contingency fund always over budget, because there’s always gonna be things that you will not know ahead of time.

Joe Fairless: How much should we over-budget when we put together a plan?

Tiffany Alexy: I usually just add 10% to the overall total.

Joe Fairless: Okay. So in this case, those 40k – what did you initially budget? Was it 40k, or was it 35k?

Tiffany Alexy: I initially budgeted 50k.

Joe Fairless: But you said you put in 40k, so–

Tiffany Alexy: Yeah, we still came in under.

Joe Fairless: You were under? Wow…

Tiffany Alexy: Yeah. So initially what I was thinking was 50k.

Joe Fairless: Okay…

Tiffany Alexy: So it worked out. But I always think more.

Joe Fairless: What caused it to be under?

Tiffany Alexy: There were a couple little tradeoffs… Let’s see. Upstairs, I initially was gonna put the LVP flooring, but I decided to go with carpet instead. One, for soundproof, and then also there were stairs that were a little bit narrow, so I didn’t wanna put the hard, slippery flooring, just in case. So I ended up putting carpet upstairs. That saved some money.

I got some quotes for the exterior, and I used a different contractor for the exterior, which saved me some money as well, because he actually was doing the office next door, so he was able to give me a better rate.

Joe Fairless: Okay. And how did you come in contact with that contractor?

Tiffany Alexy: The person who owned the office next to mine actually just sent me an email and said “Hey, I’m actually getting work done on my office. This is the guy that I’m using. He’s willing to help you out”, because he knew that I was doing work to my office as well.

Joe Fairless: Okay, cool. Good timing, and nice people, connecting the dots. Well, taking a step back, based on your experience, what’s your best real estate investing advice ever?

Tiffany Alexy: My best real estate investing advice ever would be to be creative. Situations where the office happens, everybody that hears about what I did with it – they’re kind of astounded that I did it, but it really wasn’t anything groundbreaking or magical; it was just a matter of me moving in and being creative and renting out the extra spaces that I didn’t need. So it’s creativity and efficiency, really.

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

Tiffany Alexy: Sure.

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

Break: [00:22:43].03] to [00:23:26].29]

Joe Fairless: What’s the best ever resource that you use in your business, that you couldn’t live without?

Tiffany Alexy: Oh, gosh… So I would say the book Ninja Selling, by Larry Kendall.

Joe Fairless: Great book.

Tiffany Alexy: I read this book many times. I’m actually re-reading it again. It’s a great resource for those who are in sales, or sort some sort of sales-driven career, but who aren’t necessarily wanting to brand themselves as that salesperson, if that makes sense.

Joe Fairless: I highly recommend that book. One of the big takeaways I got from that book  is – using the example of a real estate agent – a real estate agent could do a very good job with a client, and then five years later, when that client goes to sell the house, they might not be the first person their client calls, because they’re just not top of mind. So it’s important that we have to be top of mind in a relevant way on an ongoing basis with our customers, in order to continue to earn their business.

Tiffany Alexy: Absolutely.

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

Tiffany Alexy: The best ever deal would be one of my rental properties on [unintelligible [00:24:38].18] It was one that I purchased — it was an estate sale. It wasn’t a great deal, but I knew that if I rented the rooms out individually, I could make more money.

I purchased it for 145k a couple of years ago, and I rented it out for $1,800 at the time. Since then, I’ve done renovations to it, and I actually bumped the rent up, so now it rents for $2,300.

Joe Fairless: Wow. And what would it rent if you just rented the house, not the rooms?

Tiffany Alexy: Probably closed to $1,600.

Joe Fairless: Huge difference. How much more work is it from  a management side?

Tiffany Alexy: It’s really not that much more work, and the way that I market it is I calculate how much per bedroom it would be, and then I give a slight discount. These tenants at $2,300 – the last tenants were at $2,100, but with the last tenants I had marketed it at $2,300, but they all came together; so it was four tenants, and I said “Hey, if you all sign a lease right now, then I’ll give it to you for $100 off. So between that, and then they signed a two-year lease, I ended up giving it to them for $2,100. But that’s still a huge difference from the $1,600 it would rent for otherwise.

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

Tiffany Alexy: My first actually hosts monthly get-togethers, and we always do it at local restaurants, or coffee shops, and I like to just support other local businesses with my marketing dollars, because we’re all in it together.

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

Tiffany Alexy: The best way would be Instagram. My Instagram handle is just @Tiffany.Alexy.

Joe Fairless: Thank you so much for being on the show. What a fun show, where I learned a lot, and there’s a lot of helpful information for people who are doing the house-hacking, and the type of financing to get, people who are doing commercial properties, and a case study for the office that you have, lessons on a fix and flip… I mean, you really covered a lot of asset classes today. [laughs]

Tiffany Alexy: Yes, I did.

Joe Fairless: This show has got a little something for everyone, so thank you for that. Again, I enjoyed our conversation, and I hope you have a best ever day, and we’ll talk to  you again soon.

Tiffany Alexy: Thank you for having me.

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JF2079: Money in Low Income Housing With Johnny Andrews

TTJohnny was an emergency room nurse turned real estate investor. He was able to build his portfolio to 114 single family homes with his brother in 7 years while working full time. He focuses on lower-income housing and shares why property management has been a key part of his success in this niche.

Johnny Andrews Real Estate Background:

  • ER nurse turned real estate investor.
  • Currently owns 114 single-family homes with his brother
  • Was able to create his portfolio in 7 years while working full-time as a nurse
  • Based in Baton Rouge, LA
  • Say hi to him at john@redstickbrothers.com    

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Management, management, management. If you’re not hands-on in management, and you don’t stay on top of your game, it will bite you in the butt in the end.” – Johnny Andrews


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, Johnny Andrews. How you doing Johnny?

Johnny Andrews: I’m living the dream man. Thank you for asking.

Joe Fairless: Well, I’m glad to hear that. A little bit about Johnny – he’s an ER nurse turned real estate investor, currently owns 114 single-family homes with his brother, and was able to create his portfolio in seven years, while working full time as a nurse. Based in Baton Rouge, Louisiana. So with that being said, Johnny, you want to get the Best Ever listeners a little bit more about your background and your current focus?

Johnny Andrews: Yeah, man. I would like to amend that number… Just signed a purchase agreement on another six more this weekend. So we’re going to be at 120, and I’m pretty excited about it… But I just want to do amend that number. Basically, this is my full-time gig now. I was working part-time as a nurse and I got injured in November of last year, so I can’t be a good nurse. I just get to ride around with my cane and crutches at the moment. My main focus is single-family homes in the Baton Rouge area, and the bulk of them all lower-income houses. We’ve got a bunch of Section 8, but we cater to a crowd that’s working class, and it’s done very well for me and my brother.

Joe Fairless: Well, we’ll go with what you’ve acquired so far. So in seven years, you acquired 114. That is 16 a year, which– it’s weird that math, it would seem like it’d be more a year, but 16 homes a year times seven years, 114. So what have you and your brother been doing to acquire so many homes? I heard you when you said they were lower-income, so I believe that means they’re also a lower price point, but can you just talk about your business?

Johnny Andrews: Yeah, man. So I think in 2006, 2007, I was working like a dog in an emergency room, not making too much money, and I knew there would be something different, there’s got to be something else out there. So I was looking at some houses. I was going to buy one for $100,000, put some money into it and flip it. And this might sound a little hyperbolic, but the housing market seemed to crash overnight, and I would have gone bankrupt if I would have bought that house. So I ended up not doing anything, and a couple of years passed, and I just was looking around for houses. I saw houses around me that were selling for $30,000, $40,000 of a rent, and between $700 and $900 a month. So everybody thought I was crazy. Nobody wanted to do anything with me. Everybody tried to talk me out of it. So I went and bought my first one by myself.

Joe Fairless: How much was it?

Johnny Andrews: I think it was 33k. I put a renter in it for $750 a month, and at the end of the year, I had a pile of cash. For me, I was making $45,000 a year. A third of that is a pile of cash to me. So somebody had four more houses. I went to buy these four houses. I told my brother about it. My brother’s like, “Let’s do it.” So we pulled the $25,000 that we saved up our entire lives together and we bought those four, and we’ve just been rolling ever since. It was a struggle at first. What I’ve learned about the low-income housing is that it’s management, management, management. If you’re not hands-on in the management and you don’t stay on top of your game, it will bite you in the butt in the end. So we ended up starting our own little management company, too. Now, we don’t manage anybody else’s properties, but we have an office in the area and we do our own management.

Joe Fairless: Did you ever try to hire that out to a third party?

Johnny Andrews: Oh, yeah. We learned our lesson.

Joe Fairless: [laughs] Crash and burn?

Johnny Andrews: Yes, we did, man. We did. My ability to explain – it sounds smooth, but it didn’t go smooth. We bought them from someone who was turnkey. So we bought from him, he’d managed it for a discounted rate. He would find the properties, fix them up, turnkey, here you go, we’ve got renters in them. Well, we didn’t do our due diligence, and these were nightmares, and they were terrible homes, they were empty. Our collections were in that low 60%. We were barely making the taxes and the mortgages.

So the only way we could avoid bankruptcy was we bought a tax sale house on the main drag in Baton Rouge, put a sign out front and took over our own property. We took them from them. At that time, we had 19 of them, and my mom is coincidentally retired; she used to run hospitals. So she does her books and she’s in the office, and ever since then, it’s been a fantastic move on our part to open up our own office and do our own management.

Joe Fairless: What must you enjoy doing in order to be successful managing these types of properties?

Johnny Andrews: I like the people. I like my tenants. I grew up in Baton Rouge. I like the culture. I like the area. Some of them are my tenants, and not only that, they were also my patients. So I have a relationship with a lot of them. I like helping out. There’s a lot of single moms. We have a lot of Section 8 properties which are my favorite, hands down. I love Section 8 properties. And just being my own boss, working with my brother, working with my mom is fantastic. I couldn’t imagine my life without doing this actually now. I’m glad I stumbled into it.

Joe Fairless: With Section 8, you said you love it. It’s probably because you get the payments on a consistent basis, but then there’s the flip side of that, as I know you’re much more aware than I am, of if you get an inspector who is having a bad day, then that could hold you up for a long period of time, or if there’s a grudge. Have you experienced any of the bad side of Section 8?

Johnny Andrews: I didn’t know inspectors could have good days. [laughter] So I have definitely experienced it, but I have the inspectors’ phone numbers. We talk, we communicate… And it’s hard at first to establish a relationship, because there’s a lot of carpetbaggers and scalawags that go in and out of these neighborhoods, and that are truly skullduggerous landlords. And they’re bitter, probably just like police officers, sometimes; they think everybody’s a criminal. But they finally over the years– I’ve developed a relationship with them, but don’t get me wrong, they will still break me in half when they have to, but I have good properties and I have good tenants. So the last five inspections I had, I didn’t have to do anything. So it hasn’t been terrible the last couple of years.

Joe Fairless: What’s been the biggest challenge that you’ve had within the context of managing lower-income housing?

Johnny Andrews: On our cash clients, collecting rent in a timely manner. I would say, maybe, 25% to 30% of our cash clients pay rent between the 1st and the 5th. Again, not being hyperbolic, it is crazy. We get the bulk of them between the 10th and the 15th, but a lot of that has to do with when the government sends their social security checks or disability checks out. Our cash clients, they make it complicated, but the hardest thing we’ve ever had to deal with was in the 2006, they had a gigantic flood, North Baton Rouge, and it flooded 20 of our properties, and it was awful. Those people were in a bind, and we were in a bind, but we pulled through… But collecting money from the cash clients is very hard. I went to eviction court today, by the way.

Joe Fairless: Okay. What are some tips that you have for solving that?

Johnny Andrews: Oh, you have to stay on top. You abide by the lease and force them to abide by the lease. I think that a lot of the landlords’ take what they can get in the area that I am in, and if you sign the lease, and you say you’re gonna pay between the 1st and the 5th and you don’t, we file evictions. Over the last few months or years or however long we’ll have to work on it, we’ll get the bad ones out and get the good tenants in, and right now, we are doing fantastic. Of all those properties, we have two vacancies. That’s it. I’ve never had anything like that. This has been an amazing year and a half.

Joe Fairless: If someone were to buy homes at that price point and work in similar areas that you’re working in with your properties, what are some tips that you’d give them before they start out?

Johnny Andrews: Subway is hiring. No, I’m joking. You have to stay on it. You’ve got to be hands-on. You got to be willing to knock on doors, and you have to hold people accountable. And finding a decent management company in such a labor-intensive market is really, really hard. I’m under the impression it might be different in other parts of the country, but where I am, you need to be the one knocking on the doors. They need to know who the owner is. That’s just what I’ve experienced.

Joe Fairless: So that’s not a scalable model, or is it?

Johnny Andrews: No, I wouldn’t think so. We have to be geographic, and that’s just where I’m willing to go. The good thing about it is the cashflow will allow me and my brother to diversify, which we’re looking forward to doing. Just right now, we bought a big package in October of last year that we’re trying to get settled in, and once I get settled in, we’re going to start broadening our wings.

Joe Fairless: Why diversify? I know I’m going against what I was just saying, where it’s not that scalable, but on the flip side, I’m going to be devil’s advocate for myself… Why go into other things if you’ve clearly had success with this?

Johnny Andrews: Of course, we’re going to continue to expand to doing exactly what we’re doing, where we’re doing it, but it would also be nice to have other income streams where we don’t really have to worry about too much. If we could put up a pile of money together with me and my buddy or families and maybe buy an apartment complex in a higher-end area, maybe even in another city somewhere in Florida, somewhere in Oklahoma or Kentucky and have a property management company run that bad boy, I’d like that a lot. Plus, I like staying busy, so that’s why I’m gonna keep doing what I have around. I live a mile from my office; it’s fantastic.

Joe Fairless: What’s a typical day look like for you?

Johnny Andrews: I lay in bed at night, wondering how I’m gonna pay all my bills. Then I wake up really early in the morning, and I make my rounds, I check out all the properties that might be vacant or where I sent somebody to go clean, or maybe I set my maintenance man to go patch some holes or hang some doors. I go check out all the stuff that was done the day before, and then I go in the office, check my Dropbox answer my emails, and then I just feel phone calls all day long. As soon as I get off with you, I got to go check out a tree fall on the house last night. So I got a bunch of properties that’s just got to babysit constantly.

Joe Fairless: How do you and your brother divide responsibilities?

Johnny Andrews: Well, my brother is in the oil business and he’s pretty busy. He runs a company. If we have to get financing or if he needs to wrangle emails or– he does office stuff every once in a while, but I’m the hands-on guy. He’s still running a company right now. We’re not to the point where he’s going to come on full time.

Joe Fairless: Okay. How much on average, factoring in expenses and vacancies and your gas to go knock on their door and all that, how much on average does a home of yours make per month?

Johnny Andrews: Cash flowing, between $250 and $275.

Joe Fairless: Okay, got it.

Johnny Andrews: I have a secretary, I have a full-time maintenance man, I’ve got some expenditures… And then these are all C class home, so it’s a lot of maintenance.

Joe Fairless: So that $200 to $275, does that factor in those other expenses, or you’ve also got to factor those in too?

Johnny Andrews: No, no, no, that’s what I put in the savings account.

Joe Fairless: Okay, about $250 a house?

Johnny Andrews: Yeah.

Joe Fairless: Okay.

Johnny Andrews: $250 to $275. Yeah, some really good ones out there do better than that, but across the board, that’s what I’m averaging.

Joe Fairless: Okay, got it. It’s a very profitable business, because 250 times 12 times 114, $342,000 a year. What would you say the homes are worth right now?

Johnny Andrews: On average $38,000 to $42,000.

Joe Fairless: Are you getting financing?

Johnny Andrews: Yes, sir.

Joe Fairless: What kind of financing do you get on it?

Johnny Andrews: Five year balloons, 20 year amortization. We don’t really have to put too much down anymore, because I have an investor that lets me borrow. I buy in cash, do some work to it, go to the bank and finance it, so I don’t have to put money down. And it’s all on a 20-year. We would love to have all this under one big portfolio loan. We’re in a process to try to figure out how to do that. We’re in the infancy stages in knowing what we’re doing. You’ve got to bear with me on that one.

Joe Fairless: Yeah, I get it. So the elephant in the room that probably is keeping you up more so than the bills and stuff, which they are obviously making money, so I know that was tongue-in-cheek a bit… But it would be the five year balloon, because that’s probably the biggest financial focus of yours, I would imagine, is getting these out of the five year balloon payments.

Johnny Andrews: Yes, sir. It’s still really not that bad, because if the banks ever come to it, they don’t want to take over 114 homes, especially where ours are. So we’ve got leverage, and we’ll make it work, I’m sure. We’ve already had to resign on the dotted line. So it’ll be not that stressful, I guess.

Joe Fairless: Okay, and what has been one of your favorite properties and why?

Johnny Andrews: How about favorite package? Because we’re buying packages now.

Joe Fairless: Sure. Yeah, package. Alright, cool. Let’s go with that.

Johnny Andrews: Okay, I guess in October of last year, we came across 38 houses from a couple of guys out of California that just got in over their head, and my brother and I were able to buy these. These are all ten year old houses. It had every appliance, central air and heat, planned houses, only ten years old. We bought all 38 of these for $1.1 million. Out of pocket, $250,000 for the down payment, which my brother and I had to squeeze together, by the grace of God, and some blood banks, we were able to do that.

Joe Fairless: [laughs] Sell your plasma. You get more money for that.

Johnny Andrews: Yeah, it’s good to know man [unintelligible [00:15:51].01].

Joe Fairless: My roommate in college would do that on a weekly basis or as frequently as he could.

Johnny Andrews: We would save money too back when I was in college; we’d go give blood, and then go to the bar. [unintelligible [00:16:00].10] so much to get drunk. Three beers and we were laying out in the grass to cool off. The good old days.

Joe Fairless: [laughs] That’s $29,000 a door. That’s pretty good. $1.1 million– Yeah, 38 homes, right?

Johnny Andrews: Yes, 38. It is absolutely amazing. Our cash on cash return is 70%. I got lucky. I was severely injured in November. We bought the houses in October, and I was working part-time as a nurse to pay the bills, and I guess I lucked out. I picked a good time to get hurt, because me being able to buy those packages, I now can afford to not be a nurse anymore, or work a second job. Not that I couldn’t before, but now I could comfortably do it, keep the lights on and my wife won’t leave me. So it’s been a blessing, this last package, and we’re super proud of it, and we got very lucky. The timing was impeccable.

Joe Fairless: So that one, you and your brother got the down payment out of your own pockets.

Johnny Andrews: The only time we ever did it.

Joe Fairless: The only time you did it. Okay, so now the business model for you, if I heard you correctly, is you borrow from one investor, then you do the work, and then you refinance it with the bank so that you have no money in.

Johnny Andrews: Yes, sir. That’s exactly what we’re doing.

Joe Fairless: Does the money for the rehab come from the initial investor who’s fronting the money to buy?

Johnny Andrews: No, sir. We have cash reserves just from our business, from cashflow, and we don’t take money out. We live very frivolous lives.

Joe Fairless: What are the terms for that one investor who you’re borrowing money to buy the homes?

Johnny Andrews: I don’t want to say it out loud because everybody listening is gonna be jealous, but it’s only 6%.

Joe Fairless: Okay. Any points?

Johnny Andrews: Nothing. 6%.

Joe Fairless: There you go. Yeah, so if the property takes you, say, six months to do a refinance, then it’s six months annualized. So really, you’re paying them 3%?

Johnny Andrews: That’s it. Yes, sir. The longest we’ve ever held any money for him was probably 60 days. We’re so lucky. I embarrassed myself for about six years trying to get him to do it, and finally, he did and I love him for it.

Joe Fairless: What do you mean by that?

Johnny Andrews: I wanted to do it this way. I wanted to be able to buy houses cash, because I know it gets better deals. I just didn’t have access to it. So I kept begging the investor to just lend me. He didn’t want to do it. He didn’t want to do it, he didn’t want to do it, and then finally, he sat me down at breakfast one day, me and my brother, and said, “Okay, I’ll give you $250,000. You can do whatever you want with it,” and then we got the $250,000 and we immediately paid him back within a few weeks and we just kept rolling since then. It’s how we built up to [unintelligible [00:18:33].03] we were able to do that way.

Joe Fairless: Wow.

Johnny Andrews: Yeah, we got really lucky. We’ve got some good people in our lives, that’s for sure; couldn’t have done it without them, or it would have taken a lot longer.

Joe Fairless: Well, based on your experience as a very hands-on real estate investor, which I love talking to hands-on investors, because just completely different perspectives from people who are not, what is your best real estate investing advice ever?

Johnny Andrews: Just stick with it, and the numbers don’t lie. You’ve got to be consistent, have a plan and stick to that plan. Know that sometimes you’re gonna have overages for your remodel and sometimes things will be a lot cheaper than you thought, but you need to stick to your plan and absorb and talk to anybody you can that does this, whether it’s somebody that’s been doing it for 30 years or whether they’ve been doing it for 20 minutes, everybody has something to offer, you just got to listen. Read that book Rich Dad, Poor Dad. It got me started on it. Not so much real estate, but it just gets you in the right mindset. Just stick to a plan and always listen to advice. Just try to get knowledge from investors or builders or whomever.

Joe Fairless: So you mentioned that numbers don’t lie. I do remember you mentioning the turnkey seller that you’re buying from, it ended up being 60% of collections, and I can guarantee that you did not think it would be only 60% of collections. So if a Best Ever listener is considering buying it from turnkey provider, what are some questions that knowing what you know now, you’d make sure you would ask him or her, the turnkey provider?

Johnny Andrews: All the questions I had were all answered concisely and precisely. I didn’t put my eyes on the property. I didn’t crawl under the house and climb in the attic. I just saw the numbers that coincided with a picture. I didn’t get my knees dirty and my fingernails dirty looking around at the product, and I should have, especially in the market that I’m in. I guess I can understand if you’re buying $200,000 homes in Orlando, where snowbirds are moving to, but where I am, in particular, you have to go look at the houses and make sure there weren’t termite damage, make sure that it’s not the 80 year old galvanized pipe. And then when they say they did a roof, they did a roof; just don’t take a man at their word. You’ve got to go check. That’s what I would recommend, in my situation.

Joe Fairless: Noted, and thank you for that. So I’m putting myself in someone’s shoes who is looking at turnkey properties, and they’re likely not the type of person who is going to want to and/or have time to go get under the house that they’re potentially looking at, and that’s why they’re using a current turnkey provider. So perhaps for them, they could pay someone locally to go look at it for them and just give an objective perspective on the area. So we just wouldn’t take the turnkey providers word on face value. Instead, we’d have an objective third party go physically look at it and just give a report on the area itself.

Johnny Andrews: I could never argue with that. Yeah, having a relationship with a broker or a realtor out there… Maybe you can take pictures and you could send them that– and you said objectively can look at something. That would be fantastic actually. I think you talked me into doing it.

Joe Fairless: [laughs] No, no. You keep getting [unintelligible [00:21:49].16]

Johnny Andrews: You’re pretty good, Joe.

Joe Fairless: No, it makes for more entertaining interviews. So you keep being the hands-on. I like it.

Johnny Andrews: I got your back man. Call me. I’ll have tales from the hood every three weeks for you.

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

Johnny Andrews: I am, man.

Joe Fairless: Alright, let’s do it.

Break: [00:22:12]:07] to [00:22:55]:03]

Joe Fairless: Alright. What’s the best ever resource that you use in your business? Something that you couldn’t live without because it really helps you get the job done.

Johnny Andrews: MLS, actually. The MLS that everybody and their brother uses. I find fantastic deals on the MLS.

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

Johnny Andrews: Buying sight unseen. I’m gonna stick with that one, even though we talked about it. That clearly bit me in the butt fairly significantly.

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

Johnny Andrews: I’m not as quick with my ambitions as I should be. No, I’m joking. My brother and I, we give to his church and his school for his son a lot of money. I wish it was less, but it’s a really good school and they take really good care of his two kids. I don’t have any kids, so I live vicariously through him. And then I’ve been a nurse forever. I love people. I’ve been taking care of people for a long time. I guess that’s how I give back. Just being me.

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

Johnny Andrews: They can email john [at] redstickbrothers.com or call me at 225-227-2512, and I’d love to talk shop. I would enjoy it immensely.

Joe Fairless: I enjoyed this conversation. Thank you for talking about your business model, how you are buying packages of homes, the financing from the equity. Well, actually, I guess it’s the double debt. One is you do a loan from a private investor, then you refinance it out and you put a longer-term loan on it once and you cash out the original investor. And the tips that you have for managing lower-income properties, as well as the focus for where you see the financing headed and how you’re looking to get ahead of that with a larger loan that encompasses all the property. So thanks for being on the show. Hope you have a best ever day and talk to you again soon.

Johnny Andrews: Yes, sir. Thank you, Joe.

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JF2075: Part-Time Real Estate Investor Benefits With Erik Schaumann

Erik is a part-time real estate investor who began in single-family rentals in 2012, and since then he has bought 12 homes and is involved in multiple limited partnership deals and has a portfolio of $1.7M.  Erik has been able to leave his W-2 by being a part-time investor and has continued to be a part-time investor because he has recently traveled the world with his family. He shares with you what you should be asking yourself when it comes to leaving your W-2. 

 

Erik Schaumann Real Estate Background:

  • Part-time real estate investor
  • Began investing in single-family home rentals in 2012 while he was living overseas in Brunei, working for Shell Oil Company
  • Over his investing career, he has bought 12 homes and sold 3
  • Is currently invested in multiple LP syndication deals with over $1.7 million in AUM
  • Because of his REI passive cash flow, he was able to retire from his oil company job after 20 years and travel the world with his wife and 6 children
  • Based in Orem, Utah
  • Say hi at etsenterprisesllcATyahoo.com and www.8suitcases
  • Best Ever Book: 5am Revolution  

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Be realistic in what you are going to need, what’s that final number? Be realistic, don’t overshoot it because if you leave your job there are always ways to make money” – Erik Schaumann


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, Erik Schaumann. How are you doing, Erik?

Erik Schaumann: I am great, thanks.

Joe Fairless: Well, I’m glad to hear that. A little bit about Erik – he’s a part-time real estate investor. He began investing in single-family home rentals in 2012, when he was living overseas, working for Shell. Since then he’s bought 12 homes, sold three, also has multiple limited-partner ownerships in deals, and in total owns 1.7 million in his real estate portfolio, which is a combination of his limited partnership stakes, as well as the single-family homes that he owns.

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

Erik Schaumann: Yeah, thanks. It’s great to be on your show, Joe, and I appreciate being able to talk to your Best Ever listeners. As you mentioned, I started investing in 2012. I was living overseas… And living overseas, I was working for Shell, so we had some income available to invest; we started investing in single-family homes through a turnkey provider. We invested in one, and then another, and then another, and it just snowballed until we got to 5-6. Then we sold two, and we bought four… So we had some nice equity gains. Those original houses were in Phoenix, and Phoenix in 2012 was the low point, and as it came back up… So we were able to sell two and buy four.

I’ve listened to your podcast for a long time, and you have so many professional investors that started companies… I’m kind of the small fish in the big pond, I’m just  a part-time investor. But those investments, the home investments gave us a passive income such that the company I worked for – I left Shell at the end of 2017, and we were able to travel. So we traveled full-time as a family, we literally went around the world.

Then when we were done traveling, after 18 months, I came back, and now I’m just working in a  small business, helping my mom literally with her business… And I haven’t needed to go back to work for an oil company, because we’re essentially living off of the passive income that our real estate investments provide.

So we’ve been successful in that regard, to give us the income we need to leave the rat race and leave the 9-to-5 and come back and do something that’s helping other people in a way that I wasn’t able to do before.

Joe Fairless: One tricky part with human nature is that when we achieve a goal, then we want to have another goal that we achieve, therefore we’re constantly reaching for something bigger… And the downside to that is when someone has a W-2 job and they’re looking to exit out, and they have a number in mind, and then they hit that number, they might think “Oh, well I don’t know if that’s actually do what I want it to do for my life, so I’m gonna wait, still have this job and make that number larger.” How did you think about that process prior to leaving your W-2 job to be like “Okay, you know what – I’m good, our family’s good. We’re gonna just do this thing.”

Erik Schaumann: It’s a great question, because we really did go through that type of thought process. I was working for Shell, I was overseas, I was making great money, and it was pretty easy money honestly, because it was 9-to-5, and it’s a big company… I did what I did, and I did it well, but they paid me really well to do it. And we got to the point where I literally said to myself “When is enough enough? When is my 401K large enough, is my real estate portfolio large enough? I can always build more, but when is enough enough?” For us, it was a timing issue, because we were at a point where we loved to travel, and my son had graduated from high school and he had taken a gap year, so he was still at home with us…

And my daughter was in college, but she was in a position where she could take a gap semester, and we kind of hit it right at the point where we could all travel as a family together again… And we took the leap. We did some financial planning, we said “This is what our cashflow will be over time”, and we decided that we’re doing it. And I left Shell. I was lucky to leave at the right time.

The other thing that plays into this situation for me was I left Shell at a time when I was offered a nice severance package… So it would have been financially better to stay  with Shell and keep working, of course, but at the time I was able to leave, I was able to leave with a nice severance package. So there was a severance to walk away, our investments had come to the point where we were comfortable, we have six kids, and timing-wise we were able to all continue traveling as a family, with my daughter back with us… And it was the last time that would be able to happen. So a number of things came together to make it such that we were comfortable taking the leap.

Joe Fairless: You have a portfolio of homes, and you also invest in apartment syndications… Why not focus on one, versus the other?

Erik Schaumann: All of my homes have been with investment money that was not retirement dollars… And when I left Shell, I took not just the severance, which was after-tax money, but there was some retirement money I had as well… So I decided to take that retirement money and I realized I could have put it into some homes, but I decided to just kind of take another route and diversify a little bit… So that’s when I found these limited partner/syndication deals. It’s with Ashcroft, actually.

Joe Fairless: I know Ashcroft.

Erik Schaumann: Oh yeah, you’re familiar.

Joe Fairless: [laughs]

Erik Schaumann: So it was just that chunk of retirement money that I decided to put into these other syndications.

Joe Fairless: But the Phoenix home(s) you sold – they did well; they got a chunk of cash, and you were familiar with homes, and you had the teams (I imagine) already in place. So why not just continue to do that?

Erik Schaumann: A couple of reasons… Number one, the houses did do really well, but from a cashflow perspective they haven’t panned out quite as well as I hoped. And I guess when I say that – they haven’t done as well as the paper said they were gonna do. You get the proforma from the turnkey, and they give you a number, and they say “Yeah, cash-on-cash you’re gonna probably do 7%-8%”, and I just never found that to be true. So I was looking for something different. That’s not to say I won’t buy more single-family homes, because I probably will, but I just wanted to try something different.

Joe Fairless: Any deals you lost money on?

Erik Schaumann: I haven’t actually lost money, but the worst deal I did was when I decided “You know what, these turnkey guys – they’re great, but I think I can do a little better.” So I went to Indianapolis and I answered an ad… I don’t know if you’re familiar with the Indianapolis market…

Joe Fairless: Not very.

Erik Schaumann: Okay. There was a guy [unintelligible [00:10:18].22] in Ocean Point, which was a bit of a fiasco. And I turned out much better than many investors. I got some class C properties from him, and I was used to dealing with class A and class B with the turnkey, but the numbers on the class C looked much better. You’re buying for 40k and you’re renting for $650-$700/month. I got the properties, but after a while — it’s kind of when Ocean Point went South, and they stopped communicating, and I just got nothing, so I had to change property managers… And that was major headache. When I finally got the new property manager on, I come to find out the renter that’s in my property is a criminal… He was wearing an ankle bracelet when they rented to him. We finally got him evicted, but he had done $17,000 in damage to the house. He had run it as a drug house, so I had to do all these renovations… And the changes and the rehab that had been communicated to me just wasn’t quite accurate, so I had to spend additional money to rehab it, to put it into a place of actually being able to be rented.

So that took some time to make that back. Those properties are now rented, and they’re cash-flowing pretty well now, but all that costs that I had to put into it and the major headache was not a fun thing

Joe Fairless: How has your thought process evolved when looking at new opportunities from when you first started investing?

Erik Schaumann: Definitely you need to look at other people who are investing with the person you’re thinking of going with. So I did do some due diligence — I didn’t go to Indianapolis, but I sent my mom, actually; I sent her to Indianapolis to meet these guys when I bought the homes… And they put on a pretty good show, but I never really talked to anyone else who was their customer; I didn’t ask for any references, I didn’t do that back-side due diligence, and that’s something I would definitely do again… And I have done in other deals as I’ve tried to do, is get some customers who are already working with them and find out what their opinion is.

And then also, I don’t think I’ll go into the class C market again. The numbers do look really nice, but you are dealing with renters that are in a much different situation, and it can be difficult.

Joe Fairless: For a high-income earner having a W-2 job, who wants to put together a plan to exit out, travel with his/her family, just like you, your wife and your kiddos did together, what are some suggestions you would have to him/her as they’re putting together their plan?

Erik Schaumann: A suggestion would be time travels a lot quicker than you might think. So when you’re starting out, it’s easy to think that you wanna get to the place faster than it really takes, but actually once you finally get to that place, you look back and you think “Oh wow, that seemed faster than it was.”

When we started investing in 2012, we knew it wasn’t gonna be immediate that we’d have a portfolio of nine homes. But little by little, you buy one house, and then you buy another, and then you buy two homes a year, and then you buy three homes a year, and if you have a five-year plan or if you have a ten-year plan, and ten years just feels like it’s gonna take forever to get there, when you start out it does feel like forever… But by the time you actually reach it, you just turn around and say “I can’t believe how fast that passed.”

So be realistic about how long it’s gonna take you, but don’t get discouraged if it seems a little longer than you want in that moment, because it’s always gonna be a little bit farther away than you think when you’re starting… But also recognize “Guess what – time flies, and it’s eventually gonna come.” So don’t get discouraged.

And the other thing is, like we said, be realistic in what you are going to need. What’s that final number and what’s that final amount of cashflow that you think you’re gonna need? Be realistic, don’t overshoot it, because guess what – if you leave your job, there’s always ways to make money. You may not make as much as you were going to, but you don’t necessarily have to be 100%  passive cashflow, able to do everything you wanna do when you leave… Because there’s gonna be opportunities along the way to make some more money and to supplement what you’re doing.

Joe Fairless: That’s a great point. I certainly was guilty of that whenever I had my W-2 job, and I was wanting to transition out. I was making 150k base salary at the time, and I was like “I’m just not going from 150k to zero, and then zero in perpetuity until I create a business.” I didn’t think at the time I could make money doing certain things that related to what my W-2 job was, it just wouldn’t be as much. So you don’t have to go from 100% to 0%; you can go from 100% to 25%, and then go from there.

Erik Schaumann: When we were looking at “When is enough enough?”, when I was working for Shell, we were saving towards our kids’ college, we were saving towards our own retirement… We were trying to be really frugal in what we did, and we were saving  a whole lot of money… And when you leave, you stop saving all that money, but that means you don’t have to earn that money to save it, either.

Joe Fairless: Yeah… [laughs]

Erik Schaumann: So let’s say you’re saving 20%-30% of your salary… When you stop saving 30% of your salary, that income is not necessary anymore.

Joe Fairless: Yup.

Erik Schaumann: So it sure would be nice to keep putting money in our 401K, but that’s the reason we left, is that I wouldn’t have to work to earn that money to put in the 401K. I’m letting the 401K work by itself, and we’re living with less, but our time is what I have instead of money.

I talk [unintelligible [00:16:04].24] all the time, and when we talk about traveling now, we think about  “Well, what do we have more of – time or money?” When you have more money than time, you buy the expensive, direct flight. But when you have more time than money, you can buy a cheaper flight, that takes longer to get there.

Joe Fairless: Any other suggestions for people who are looking to do something similar, or observations about your experience that would be helpful to share?

Erik Schaumann: Yeah, when we started full-time traveling as a family — there’s so many people who are doing it, and there are so many blogs out there that can give you advice and can give you some inspiration. It’s really nice to meet other people who are doing the same thing as you. And it seems like a very exotic thing to do – and I don’t deny that it is – but there’s just a community of people who are there to give you support and to help you out. So while we were traveling, some of our best experiences were just the people we met down in Guatemala, and down in Santiago, Chile, and when we were out in Bali, and Spain… All these people that we get to keep in contact with. There’s just some real joy that comes from that. So that’s one thing to think about.

And then another thing to think about is if you choose to leave your W-2 9-to-5, you just have a lot of time. There’s a lot of time to do other things. You may think like “I just wanna sit on the beach, with a drink in my hand, and the waves at my feet”, and that’s fantastic.

Joe Fairless: For half  a day… [laughs]

Erik Schaumann: For as long as you’re at the beach. But then you come home, [unintelligible [00:17:30].17] home temporarily in Orem, but then we’ve put our kids back in school, so I just have time again to think. You continually need to reinvent yourself. I’ve kind of spent a year doing something, and now I’m gonna need to reinvent myself to do something else… Which is an exciting challenge, but it’s also something that you need to think about. It’s not just once you leave work, and travel and  passive income – that’s not gonna be the rest of your life. There’s other things that you’re gonna need to think about.

Joe Fairless: How do you make sure that you remain sharp from a personal development standpoint?

Erik Schaumann: Well, I listen to a lot of podcasts, I try to educate myself that way. I have taken on something — when I came back and started to work at my mom’s company, that kept me sharp in terms of learning new things. I’d never worked for  a small business, so I had to learn all of these tricks and tips about working in a  small business, and advertising, and all the things that we do for sales.

So I think it’s just making sure that I’m doing things that keep me learning and keep me educating myself, so I’m always doing something new.

Joe Fairless: Based on your experience as a real estate investor, what is your best real estate investing advice ever?

Erik Schaumann: My best real estate investing advice ever would be if you want to invest in SFRs through a turnkey provider, just find one that you trust. Find one that is gonna do what they say they’re gonna do. Actually, I’m working with Done For You Real Estate in Utah – they over-communicated, they showed me all the books, they showed me exactly what they were making… And it was just something that you could latch onto and say “Okay, these guys are gonna do right by me”, which is not what I got from the bad deals I did. So I didn’t learn at the time, but I have learned since – find someone that you really feel like you can trust.

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

Erik Schaumann: Yeah, let’s go.

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

Break: [00:19:25].03] to [00:20:10].21]

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

Erik Schaumann: The book that has changed my behavior the most was the 5 AM revolution by Dan Luca. I really enjoyed what he had to say, and I started waking up at 5 AM.

Joe Fairless: Okay. That’d be a  huge game-changer. How long ago did you read it?

Erik Schaumann: I’ve read it about  a year and a half ago, maybe  a little more; maybe two years ago. There’s just a lot to get done in the morning, and I’ve really enjoyed the time in the morning.

Joe Fairless: On average, how many days a week do you wake up by 5 AM? And I know your wife is sitting in on this interview, so she can fact-check it.

Erik Schaumann: Definitely Monday through Friday I wake up at 5 AM every morning, and then Saturdays and Sundays I give myself to sleep-in.

Joe Fairless: And what’s sleeping in?

Erik Schaumann: [7:30] or 8.

Joe Fairless: What time do you go to bed during the week?

Erik Schaumann: I try to get to bed by 10, but [10:30] stretches it.

Joe Fairless: What deal have you made the most amount of money on? Probably the Phoenix deals, right?

Erik Schaumann: Yeah. The first home I bought in Phoenix in 2012. I paid 95k for it in 2012. I’m putting it on the market next month for 240k. So that’s been a fantastic house.

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

Erik Schaumann: A mistake on a transaction has been not following up well enough with the property manager to just really understand what’s being done. Often they have a clause in there that says if it’s more than $500, we’re just gonna do it right away. And sometimes you can have a hand in that and say “Wait a minute…” So just kind of letting them too much without checking has been a problem.

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

Erik Schaumann: I love being near my alma mater, BYU. I like to go back and do presentations for the students, telling them about  my career… I work with a church youth group here, so I love to work with the young men… And then while we were traveling, especially in Guatemala, we did some work with some non-profits and built some houses, and did some gardening projects… I really liked working with the locals down in Guatemala.

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

Erik Schaumann: The best way is to email me. I’m at ETSEnterprisesLLC [at] yahoo.com. And if anyone’s interested our travel blog was 8suitcases.com.

Joe Fairless: 8suitcases.com. Erik, thank you so much for being on the show, talking about your and your family’s journey, how you all have got to this point, some investments that did not go well, what you learned, some investments that have gone well, what you’ve learned, and the variables that were in place in order to stop having that W-2 job, and moving forward into travel and spending time with your family, how you wanna spend it, and having more of that… Because it’s pretty much the main question that most people have, is “How can I spend the time how I want to spend it?” That’s ultimately what we wanna do, whether we verbalize that or not; that’s basically what it boils down to.

I’m really glad we had this conversation. I hope you have a best ever day, and we’ll talk to you again soon.

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Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated wit