JF2699: 3 Ways to Generate More Income Through Property Management with AJ Shepard

As AJ Shepard started taking on bigger multifamily investments, he knew he would need to find a way to generate more income to qualify for more financing. That’s when he realized he could start his own property management company and oversee his own investments as well as others, bringing in the necessary cash and then some. In this episode, AJ shares the benefits of not only being an investor, but also running your own property management company.

AJ Shepard | Real Estate Background

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JF2688: 3 Ways to Eliminate Competition in the Mobile Homes Market with Charlotte Dunford

What’s the best way to beat the competition? For Charlotte Dunford, it’s figuring out how to avoid it in the first place. Focused on mobile home parks with 50 or fewer units, Charlotte’s niche-down approach has allowed her more opportunities to find and close deals in the market than she would otherwise have access to. In this episode, she shares what is most important to look for in a mobile home park deal, as well as the importance of finding your niche in any market. 

Charlotte Dunford | Real Estate Background

  • Managing Partner at Johns Creek Capital, “creating wealth through mobile home park investments.”
  • Portfolio: 24 mobile home parks acquired through syndication, value-added and flipped 1 single-family home and 1 duplex. $4.2M AUM.
  • 3 years of REI experience
  • Based in Atlanta, GA
  • Say hi to her at: https://www.johnscreekcapital.com/
  • Best Ever Book: The Ultimate Sales Machine by Chet Holmes

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JF2674: This Strategy Helped Them Close Their First Two Deals in One Day with Jenny Gou and Steve Louie

Jenny Gou and Steve Louie both started out working in corporate with sales-focused jobs. After seeing the benefits of real estate investing, and the scaling they could have in multifamily, they partnered together and within 10 months, they had found and secured their first two deals as partners, closing on the same day. In this episode, Jenny and Steve share what makes their partnership a success, and the details involved with sourcing and managing these deals.

Jenny Gou and Steve Louie | Real Estate Background

  • Both Managing Partners at Vertical Street Ventures, which was established to help individuals achieve their financial goals through passive investing in real estate.
  • Jenny’s Portfolio: 1,650+ units across AZ, TX, and GA.
  • Steven’s Portfolio: 3,200+ units across AZ, CA, FL, and TX.
  • Based in: Brea, California
  • Say hi to them at: www.verticalstreetventures.com

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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to The Best Real Estate Investing Advice Ever Show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast where we only talk about the best advice ever, we don’t get into any fluffy stuff. With us today, Jenny Gou and Steven Louie. How are you two doing?

Jenny Gou: Great. Thanks for having us.

Joe Fairless: My pleasure and glad to hear that. A little bit about Jenny and Steven – both are managing partners at Vertical Street Ventures. Vertical Street was established to help individuals achieve their financial goals through passive investing in real estate. Vertical Street Ventures – they have over 1000 units as general partners, and then they each have passively invested in deals as well. They’re based in California. With that being said, do you two want to give us a little bit about your background and your current focus? Maybe, Jenny, do you want to go first?

Jenny Gou: Absolutely. A little bit about me. I’m currently a full-time real estate investor and syndicator. I’ve been doing this full-time for the last two years. Prior to that, my former life, I was in corporate America for 13 years, working as a Sales Director at P&G. I started with single-family investments just to diversify our retirement, all in Cincinnati,10 homes. They did well, but i wanted to scale quickly, so learned about multifamily, and then here we are. We started Vertical Street Ventures this year along with my partner, Steve, to help others get passive income, but then also share the wealth of knowledge that we have, so that others can achieve financial freedom.

Steven Louie: For myself, Joe, I’ve been a corporate America guy most of my entire life. W2 wage earner, I call it cubicle-to-corner-office; a successful career on the insurance and consulting side. Everything from sales leadership to underwriting, to running the entire office, my last role as a partner at a consulting firm. Halfway through my career, I started investing in real estate, started just like Jenny in single-family homes. That led, most recently, for the last five years, all into multifamily. That’s where Jenny’s husband and I met at a meetup, and the rest is history. We started Vertical Street Ventures and it’s all focused around multifamily investing.

Joe Fairless: I heard you, Jenny, you said you’ve been doing this full time for two years. You had 10 homes in Cincinnati and Steven… Do you go by Steve or Steven?

Steven Louie: Steve is fine.

Joe Fairless: Okay. Because I heard her say, Steve. Fair enough. Let’s call you how you want to be called, Steve. Steve, how long have you been investing in real estate? And then the same question for you, Jenny.

Steven Louie: I’ve been investing for over 10 years. Again, I started in single-family homes, and then most recently shifted over into multifamily exclusively. I built a pretty strong portfolio across the board from a passive investment standpoint. I started with passive investing, I have a portfolio of probably 25 passive investments, and then we’re general partners on over 10 to 12 general partnerships out there.

Joe Fairless: Okay. Jenny, same question. When did you buy your first house in Cincinnati as an investment?

Jenny Gou: Yes. Back in 2017, almost five years ago. I started with one, and then within a year and a half, caught up to 10. In fact, I closed on four on the same day, believe it or not, in the middle of the workday. But then since started multifamily two years ago.

Joe Fairless: Okay. Why did you leave single-family homes?

Jenny Gou: The same reason everybody else does. I think you quickly realize that it’s not scalable. It’s more efficient to jump into multifamily, it’s more beneficial from an income appreciation, tax benefits. And it’s actually the same, if not less work, depending on how you approach it. So it just made sense for us to make the switch.

Joe Fairless: Steve met your husband at a meetup, then dots were connected, you two formed Vertical Street Ventures. What was your first project together?

Jenny Gou: It took about 10 months for us to find a deal, because all of last year COVID was happening and things weren’t very open. So it took us about 10 months to find our first deal, and then one quickly joined afterward. We actually closed on two deals on the same day in December 23 of last year. One was a 28-unit in Glendale, Arizona, the other one was 176-unit in Tucson, Arizona.

Joe Fairless: Okay. Those are your first deals as general partners, correct?

Jenny Gou: Correct.

Joe Fairless: Wow. Congratulations on those. Did you have any paid guidance to help you get to that point?

Jenny Gou: Absolutely. That’s probably one of the Best Ever tips that I’ve received, advice, in this career… Specifically, to find a coach, a mentor. Whether it’s informal, or it’s paid and more formal, whichever you prefer, but it’s absolutely critical for you to educate yourself quickly, and then accelerate.

Joe Fairless: Who did you pay?

Jenny Gou: So I did the informal route. My mentor was actually Steve Louie.

Joe Fairless: I think I know that guy. I used to call Steven, but now I call him Steve.

Jenny Gou: Exactly. [laughter]

Steven Louie: We got closer.

Jenny Gou: Yeah. So when Ronnie met him, actually, Steve was speaking at a meetup. Right around the same time, I had just decided to leave my corporate job. I actually met Steve a few weeks later, we connected instantly, got talking, and at the same time, just in conversation, I said, “Hey, just to get real quick in this business, I want to go find a mentor. I’m willing to work for free, I’ll be someone’s intern.” Steve looked at me and said, “Well, I have properties in Arizona. Why don’t you come work with me for the next couple of months and help me manage my workload there?” as he was still working full-time. That’s how we came to be. We spent the better part of last year interviewing each other, him teaching me, we were underwriting deals – all of that stuff, before we actually decided to partner together on a project.

Joe Fairless: Who does what in the business?

Jenny Gou: Steve is excellent with building relationships. He’s got such a great network in the Arizona marketplace already. So his strength is very heavy in the acquisitions side of the business, building relationships with investors, all of that as well. And then I focus a lot more on asset management and the execution of the business strategy, as well as raise funds and capital for our projects, too.

Joe Fairless: Okay. And I heard in my mind, it was crystal clear – acquisitions, Steve, Jenny, asset management, execution. But then I heard you say that you both work on the investor angle, because you mentioned he is good with investors and that’s also something you do. How do you two divide and conquer that, if that is the case, Steven?

Steven Louie: From a capital raise perspective, I think the great thing is both Jenny and me have very complementary skill sets. At the same time, we have some skill sets that are very similar, too. Just both being in a sales-oriented role most of our careers allowed us to have a pretty strong network of folks that actually tapped into us from an investment standpoint.

Sometimes some of my investors I’ll give over to her, she might be a little bit better fit, and vice versa. We both have the ability to connect the dots with individuals to help move them along the multifamily investment timeline accordingly. So I would say everybody on the team, in some aspect, does some type of capital investment. When they get to a point where they need somebody else, either I or Jenny can come in and take over from that standpoint.

Break: [00:08:09][00:09:48]

Joe Fairless: 28 units and 176 units, first two deals closed, and it took 10 months to find them. Steve, will you just talk us through how you found those deals? I assume it was you because I heard Jenny say you were focused on acquisitions. How you found those deals, how much equity was raised, and where that came from.

Steven Louie: Absolutely. Just real quick from a background perspective. I joined a paid training program, and that was through [unintelligible [00:10:16].16] I joined that program probably about four years ago and learned all the different aspects of multifamily, and then even took down a couple of them myself, just personally, just smaller ones. From that standpoint, that’s how I developed strong relationships with the brokers in the marketplace. That’s one of the keys in order to achieve success in this area, it’s building those relationships with those brokers. By doing that they have funneled over different opportunities to us. The first one, the 28-unit one was because of a relationship, that was probably the fourth opportunity that we’ve done with that one particular broker, in some aspects in terms of relationships. That took off` — it actually came about when somebody fell out of a contract. They gave us a call and that call said “Hey, we’ve got this. You could take it down at this purchase price. Would you like it?” Boom, we did it, got a Freddie small balance loan on it in quick order, due to some of the relationships we had [unintelligible [00:11:18].19] and was able to close that one.

Then the second one was a larger opportunity in Tucson. I had a great partnership with another group out there. Kyle Mitchell was one of the individuals that I’ve been working very closely with. That one we worked very closely together and closed that one in Tucson as well. They coincided on the same exact day, and perfect timing for the end of the year, to achieve some bonus depreciation for all of the investors as well as the general partnership.

Joe Fairless: On the 28-unit when the broker said it fell out of contract, how long did it take you to say yes?

Steven Louie: Probably a couple of hours. We just came back as a team, do we want to do this? Then we had to make the decision – do we do it on our own? That was one of the things. Or do we do it as a syndication? And since this was the first syndication that we did together, we said, “Let’s do a syndication on that.” Obviously, the market has been great in that market, and the opportunity and the actual asset itself was a great asset, too.

Joe Fairless: How do you make a decision to purchase a property within a couple of hours?

Jenny Gou: A little more context to that… We actually toured the property back in July of 2020, and we were ready to buy. So the second we toured it, we underwrote it, we were going to put an offer, and the broker said, “I’m sorry, you’re too late. An offer was accepted.” So we walked away tail between our legs. Then come September, I get a phone call from that broker saying, “It’s about to fall out of escrow. Do you want it?” I had to quickly hop on the phone with Steve and some other folks and say, “Guys, it’s about ready to come back on. We need to take this.” The quick decision was kind of a no-brainer, phone call, and we called them back. Were we the first one he called back? Maybe, maybe not. But because we were able to respond so quickly, it was ours. That was really important.

Joe Fairless: Thank you for that. So you had seen it before, you were familiar with it, and you acted quickly. How much did you raise on that one, Jenny?

Jenny Gou: For the 28-unit, that was 1.6 million dollars. So a relatively smaller sized one.

Joe Fairless: But it was the first deal that you all did, and it’s impressive to raise that amount of money on your first syndication. How many people, if you remember, did that come from?

Jenny Gou: That was our first raise. Transparently, we raised it in 24 hours. It was our first friends and family deal. We had about 12 people, all in, come into that deal.

Joe Fairless: And you said it was friends and family for that one?

Jenny Gou: Correct.

Joe Fairless: As far as friends go, where are some of the places that those friends came from, that ended up having the trust in you to execute the business plan, take care of their money, and then grow it?

Jenny Gou: I think it’s the same for — I think it’s the same for both Steve and me. A lot of these closer friends are part of the deal. These folks have seen us and heard us talk about investing over the last couple of years, both our single-family and then our journey into multifamily. So it wasn’t a surprise; a lot of them had been waiting on the sidelines just to see what we would do. When this great opportunity came up, they were not hesitant at all to jump in with us into the deal.

Joe Fairless: So there’s a benefit to having two deals at once… But then there’s also, from the equity raise standpoint, there could be a disadvantage, and that is which deal do I invest in Steve? Which one’s better? Tell me which one’s going to make more money? How did you navigate that conversation with investors?

Steven Louie: That’s an excellent question. The great thing is multifamily is really a team sport. Jenny and I were partners on this one, and we also had a couple of other partners on our other deal too, which enabled us to raise some of those dollars. I think the initial focus as we were going through the process was let’s focus on ours right here, the smaller one, because that was the first one we kind of collectively did together. I’ve had multiple other opportunities with Kyle in the past. Some of that naturally took place with some of his networks as well. So that was the beauty of being able to close both of the deals at the exact same time as a general partner. So I’d say on the other deal, though, we were actually using a lot more for our net worth and liquidity requirements at that point in time.

Joe Fairless: Steve, I imagine that since you’ve taken down some deals on your own, multifamily deals — first off, what was the largest, in terms of unit size, deal that you purchased on your own?

Steven Louie: So we got a 176-unit, but I think–

Joe Fairless: I’m talking about personally, not syndicating. Because I heard you say earlier…

Steven Louie: So not syndicating – yeah, my largest one would be 35 units.

Joe Fairless: And that is large enough for lots of drama to take place, I imagine… So on your personal portfolio, what’s something that came up that you would do differently if presented a similar opportunity, and perhaps have used those lessons to apply towards your venture now?

Steven Louie: One of the key things is to choose your property management firm extremely well. So do a lot more due diligence on property management. In that particular case we did have to shift the property manager, actually a couple of times, just because we had some heavy lift. The construction was over $25,000 a door on that, and you need to have somebody managing that process.

Especially when I was working full time as a corporate executive, there’s not a lot of extra time during the day to spend on that, so you do have to rely heavily on your property manager. Fortunately, we were able to secure one that knew how to do everything and had their construction arm all built-in. We had weekly meetings to manage all of that. So in between my regular job, we were taking care of all of those details.

Break: [00:17:01][00:19:57]

Joe Fairless: You said you switched managed companies twice.

Steven Louie: Yes, we did.

Joe Fairless: What was the breaking point for switching the management company the second time? Because the first time, I imagined, it was tough. But the second time, it’s just got to be downright excruciating to do.

Steven Louie: First off, I didn’t know anything really about the property managers in town, outside of just spending a couple of days with them and having a bunch of phone calls. So I think you just have to get references out there to make sure that things are moving in the right direction.

The first move was a little bit more challenging, to be honest with you… And then the second one, they just weren’t following through from an asset management standpoint in the way that I’m used to from a corporate America standpoint. We have a lot of project deadlines and things like that that need to happen. So we found somebody that was a little bit more institutional-based. We were able to take advantage that they had some larger properties around the area, literally right around the corner, that we were able to tap into, that enabled us to use one maintenance person in addition to sharing it with another property owner. So making that decision the second time was pretty easy after knowing that they were already managing 120 units right around the corner.

Joe Fairless: Taking a step back – this question is for either one of you, whoever wants to answer… What’s your best real estate investing advice ever?

Jenny Gou: I would say, find the right partner. I’ve seen this multiple times with different sets of partnerships in teams, a lot of folks will jump too quickly into a partnership or a company and realize very quickly after that they’re not the right fit for each other. That’s true in any industry, but very specifically for real estate, because it is a team sport. It is not something you should be doing yourself, unless you don’t want any sleep at all. So finding the right partner… That’s why Steve and I didn’t do a project together for about 10 months, because we wanted to feel each other out and make sure we have the right values, we met each other’s families, we did background checks on each other… So it’s a very thorough process, and that’s one thing I don’t think people are doing enough of in this industry.

Joe Fairless: Was it awkward having a conversation, whoever brought it up, about “This sounds great. But I’d like to do a background check”?

Jenny Gou: Not at al. Again, I think it’s because of our corporate experience maybe. At P&G I had a background [unintelligible [00:22:13].29] all of that, same with Steve. So it wasn’t a surprise, at least for me. But I think it’s a necessity.

Joe Fairless: Who brought it up?

Steven Louie: I used to be — prior to getting into syndication, I was a licensed securities principal as well. So open book on me completely, and I said “I need to find out a little bit more about you. Can we run a background check?” There was no hesitation on her side, we ran it, everything came out clean, and we decided to build this company together, which is thriving. It’s super-fun when you have great partners moving in that same direction.

Joe Fairless: I hear you. Partnerships are critical, and what a great point that you brought up about doing a background check on your partner. And vice versa, having one on you too, for your partner, so that everything’s out in the open, nothing sneaks up after you two have put in a lot of time and effort together to do stuff, because you don’t want any surprises. Thank you for that. Now let’s do the lightning round. Are you two ready for the Best Ever lightning round.

Jenny Gou: Yes.

Joe Fairless: Alright. Sounds good. Steve, [unintelligible [00:23:10].24] lightning round, right?

Steven Louie: Sure.

Joe Fairless: Alright. What deal have you lost the most amount of money on?

Steven Louie: The most amount of money was a passive investment that I had with somebody. The whole project lasted about four years and it was breakeven, with no cash flow throughout the entire project.

Joe Fairless: What went wrong, high level?

Steven Louie: Leadership. I signed on the loan as a key principle, but I signed on with individuals that I really didn’t know very well. That kind of goes back to your other question, fear of missing out – sometimes you’re jumping onto deals that potentially aren’t the best ones because they’re fairly new syndicators.

So if you’re getting into the business, you probably have to go with somebody, if you’re going to be signing on the loan or even as a limited partner, somebody that has done this before and has a track record they can support some of the numbers. This happened to be their first syndication, as well as mine, that I signed on as a key principal.

Joe Fairless: What deal have you made the most amount of money on?

Steven Louie: Most recently, we just sold one in 23 months. That was over two multiples, in the Phoenix marketplace, for the investors. That was a great win most recently.

Joe Fairless: Nice.

Steven Louie: In addition, the cash-out refinances, too. Sorry, I know you said one, but we did a cash-out refinance, 100% going back all into the pockets of the investors.

Joe Fairless: That first deal was a 2X multiple to investors you said?

Steven Louie: No. That was probably my fourth deal.

Joe Fairless: I’m sorry, the first one that you just mentioned. You just gave me two.

Steven Louie: My bad. Yes. That one was back to the investors. Yes.

Joe Fairless: And how much did you make on that?

Steven Louie: How much money did I make on that? We did fairly well. It was a good amount, about three times that amount or so.

Joe Fairless: Like a million bucks…?

Steven Louie: Yeah. I would say just shy of that.

Joe Fairless: Just shy of that. And the reason why I asked is a lot of listeners are general partners, so they hear these numbers, and it’s nice to dig into how much general partners actually make on deals.

Steven Louie: I would say, yes, it was shy of a million dollars there, but it’s a great opportunity… That’s the nice thing about being a syndicator – you can make three, four, five, six times, depending on how the deal is actually structured.

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

Steven Louie: Giving back to the community… One of the great things is I give back to my local church here. I’m very active in that. I am a leader of the trustees now, so I’m kind of the president of that board, just responsible for all of the activities that go around that, specifically for myself.

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

Steven Louie: You can always connect with us on our website. We’re at verticalstreetventures.com. You can always schedule a call with us. We have that right there on our website. We’d be happy to have a discussion with anybody.

Joe Fairless: Partnerships, background checks, finding deals, profitability and property management challenges, and how to navigate them – all topics that are incredibly important to talk about, and I’m grateful that we did on this show. Thank you both of you for being on the show and sharing how you got to this point, and lessons learned along the way with specific examples. I hope you both have a Best Ever day and talk to you again soon.

Jenny Gou:  Joe, take care.

Steven Louie: Thank you, Joe.

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JF2656: Expanding Your Comfort Circle: From Youth Ministry to Multifamily with Slocomb Reed

From youth minister to now commercial real estate investor, Slocomb Reed isn’t afraid to take chances to grow. He’s taken his portfolio from the ground up and now owner-operates over 65 units. In this episode, Slocomb discusses his past deals and how risk taking has paid off big time.

Slocomb Reed Real Estate Background

  • Director of Investment Services for The Chabris Group of Keller Williams Seven Hills Realty, the largest real estate sales team in Greater Cincinnati by number of sales.
  • Began investing in 2013. Went full-time as a sales agent in 2015 while continuing to invest.
  • Portfolio: Owner-operates over 65 units ranging from single-families to apartment buildings with 20+ units.
  • Based in Cincinnati, Ohio
  • You can find him at www.linkedin.com/in/slocomb-reed-b7145b1a/

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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the Best Real Estate Investing Advice Ever Show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast where we only talk about the best advice ever, we don’t get into any fluffy stuff. With us today, Slocomb Reed. How are you doing Slocomb?

Slocomb Reed: Doing great. I’m grateful to be here, Joe. Thank you.

Joe Fairless: I’m glad to hear that and I’m looking forward to our conversation. Slocomb is the director of investment services for The Chabris Group of Keller Williams Seven Hills Realty. It’s the largest real estate investment sales team in Greater Cincinnati by the number of sales. He began investing in 2013 and he went full time as a sales agent in 2015 while continuing to invest on his own. In fact, he is an owner-operator who has over 65 units ranging from single families, to hold and flips, to apartment buildings with 20+ units. Based in Cincinnati, Ohio. With that being said, Slocomb, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

Slocomb Reed: Absolutely Thanks, Joe. I came to real estate investing as a full-time professional youth minister with a bunch of side hustles. I read Rich Dad Poor Dad in the spring of 2013, kind of in preparation for my wedding actually, which was in May of 2013. I fell in love with the Rich Dad books, read several of them, landed on the strategy of owner-occupying a two to four-family as my go-to side hustle. I didn’t know it was called house hacking at the time, because I didn’t find Bigger Pockets until a year or two later. I fell in love with real estate. We bought a four-family, closed on it on Valentine’s Day of 2014, moved in, it turned out I was a natural at dealing with tenants. I’ve never been handy so that was definitely the first thing I hired out, was fixing toilets and things. But I loved the math of real estate. It looked like a space where there was ample opportunity so I decided to dive full-time into real estate.

It looked at the time like becoming a residential sales agent was the best way to do that. I still think that’s a great move for a lot of people. Plus, a youth minister’s salary is pretty easy to replace. I kept a quarter-time youth ministry gig for a few years after that though, while I was in sales full-time. As I did that and used my experience as a sales agent to become a better investor, to represent investors, and learn about the market, the industry, build my own skills, continued investing, bought my second deal, which was a BRRRR deal, in 2016. I have been off to the races since then.

Joe Fairless: As a sales agent, you learned a lot about investing. What are some things you picked up as an agent? Because I ask that for people who are looking to become a real estate agent and transition to investing full-time. I just wanna hear what you learned.

Slocomb Reed: Becoming an agent gives you the opportunity to think like an investor and analyze deals like an investor, effectively for a salary. It’s a commission but you’re getting paid for getting deals closed, whereas most buy and hold investors are putting out money when they purchase. Part of what they’re putting out is going to you in the form of income. So it gives you the opportunity, when you get investor clients, to do a lot more deal analysis, to get yourself in front of other investors, learn what they’re doing, learn by helping them accomplish their goals. Also, when you have a lot of investor clients, you are in and out of a lot of buildings that you’re showing them, getting the opportunity to see what they think about the condition, what issues concern them, what issues don’t, attending inspections, and asking inspectors questions.

Basically, you get to dive head-first into some of the biggest decisions that real estate investors ever make without having the financial risk of putting your own money into them, and in fact getting commissions for doing it. It definitely accelerates the learning curve, for sure.

Joe Fairless: Do you make less money working with investors than you would non-investor clients?

Slocomb Reed: That’s a great question, Joe. I think the best way to answer that for an agent or a prospective agent is that you should find your niche, you should figure out what it is that you’re passionate about. In real estate in general, whether as an agent, some other service provider, as an investor, one thing that’s really helpful is finding the hard work a lot of people don’t want to do, that you enjoy.

For me, I needed time to swing into working with investors full-time, but I enjoy investors more. On a transaction-by-transaction basis, the most important thing for an agent, especially representing buyers – your ability to earn is not only linked to the purchase prices of the properties that your clients are purchasing, it’s also linked to how much of your time is used up representing your client in that transaction. As you get good at sales, and as you get good at understanding investors and their needs and their goals, I got to the point rather quickly where it did not take a lot of my time to help my investor clients find the properties that they wanted. So I would spend a quarter as much time helping my client buy $150,000 investment property as I would helping a $300,000 single-family owner-occupant homebuyer find their home, because I could dial into the investor’s mindset just looking at the property online; I knew which ones they needed to get into and I know which offers they needed to write. So I could get four times as many deals done in that $150,000 duplex range as I could with a $300,000 owner-occupant homebuyer. More income for me, because that was my specialty and that’s the work that I wanted to do.

Joe Fairless: You did single-family homes. When did you buy your first, we’ll call it, five-plus unit property?

Slocomb Reed: My first five-plus unit property was a six-unit, in April of 2019. I had been using virtual assistants in the Philippines to help me with lead generation. I build out a list that they call, and then they basically schedule follow-up appointments with me with the people that they’ve found to be motivated sellers. They scheduled a follow up call for me for a property like this, the amount that the seller wanted for it, made it a really good deal, so my partner and I took it down.

Joe Fairless: How many purchases had you made, either exactly or approximately, up until that point?

Slocomb Reed: That would be four.

Joe Fairless: Four purchases. Okay.

Slocomb Reed: Two house hacks and a BRRRR, a three family and a BRRRR duplex.

Joe Fairless: Okay. You and a partner on the sixth unit, how did you structure it?

Slocomb Reed: He was a client who I actually met when I was presenting at our local meetup here. This isn’t his Best Ever real estate investor mastermind. I was speaking, he came up to me and said, “Hey, it sounds like you need to be my agent.” I said, “Great.” I helped him buy a couple of things and he was hearing about these BRRRR (buy, rehab, rent, refinance, repeat) deals that I was doing, where I was getting all of my starting capital back, and then some, within 12 to 18 months of purchasing. For him, the math made enough sense that he proposed to me, “Hey, if you can find a deal for us to do together where I get all my money back within 12 to 18 months, I’ll fund the deal entirely and we’ll split it 50/50.” I said, “Yes, please. Thank you.” So I found it, I negotiated it, I did most of the management of it while we owned it, and he funded the deal. We ended up actually selling that one rather quickly. We bought it for 225, we sold it for the equivalent of 325 about 16 months later, without needing to do too much work to it in the meantime.

Joe Fairless: So like 5000 in improvement dollars, or if that…

Slocomb Reed: We probably spent 10 grand in improvement.

Joe Fairless: So all in 235, and sold it for 325. How quick was that turnaround, from buy to sell?

Slocomb Reed: It was about 16 months. We listed it in order to sell it, having owned it for just over a year, so we’ve paying long-term capital gains. But also, while we were in escrow, COVID-19 was announced as a pandemic and all the banks that were underwriting loans, at least in the Cincinnati area, started reconsidering those loans. Our buyer lost his loan, and we had to go back to the market. So we were really trying to sell it after 12 months, but ended up at like 16.

Break: [00:09:34][00:11:07]

Joe Fairless: What was the next deal after the six-unit?

Slocomb Reed: The next deal after the 16 was…

Joe Fairless: Did you say 16 or six?

Slocomb Reed: Sorry, six. Only six. My bad. The next deal after the six-unit was a 24-unit on the west side of town that I had actually found off-market for a client of mine who bought it. He’s a non-local investor, he was having trouble finding good management. So I ended up buying it from him about 18 months after he purchased it, and basically paid him what he had in it, and we took over to get it. It was at like 50% occupancy, and some of his tenants didn’t want to pay rent, so we had a lot of work to do to get it up to performing at market. But that was a really good deal for us.

Joe Fairless: Alright. You just bought a 50% occupied property. It’s the largest property you’ve ever bought, by four times. What gave you the confidence that you could turn it around, and then how did you do it?

Slocomb Reed: That’s a great question, Joe. I enjoy expanding my comfort circle, one rung at a time. I probably took on two to three…

Joe Fairless: That’s four; those were four rungs.

Slocomb Reed: I probably took on a couple of rungs of that one. The learning curve was steep to be sure because that was definitely a C-class neighborhood. So we’re talking affordable rents, for sure. There were a lot of things about managing in lower-income areas that I had to learn. But really, what we were looking at was that the deal was good enough on paper. Like what Robert Kiyosaki says, you make money when you buy. And we knew we were getting a good enough deal that no matter how difficult it was to get this place turned around, it will work out for us.

Let me give you an idea of those numbers and you can tell me if there are any more details you want to get into. We bought it for 635, the average rent was around 515 a month, 24 one-bedrooms. We were told that rent would never go above 575 in that area for a one-bedroom apartment like ours. We spent a little under $100,000 getting it totally up to snuff, so in it for around 735. We ended up filling all of the apartments at 650 a month.

Joe Fairless: Wow.

Slocomb Reed: Yeah, when we went for our cash-out refi to finish the BRRRR process. Because it’s a depressed area and there are very few comparable sales, because there just aren’t a lot of apartments in that part of Cincinnati, we were given an 8.6 cap. But even at an 8.6 cap, it appraised for 1.1 million.

Joe Fairless: Wooh, doggies! There we go.

Slocomb Reed: It was a juicy one. Yes, there was a lot of…

Joe Fairless: You said 1.1 million, and you’re all in at 735.

Slocomb Reed: Correct. At an actual eight cap, it would have appraised for one and a quarter. But we couldn’t get the appraiser down from that 8.6. This means it also has a sweet cash flow, because of how high the cap rate is. But yeah, that was a big one for sure, and we knew going into it — we didn’t know that we’d get 650 as easily as we did, we didn’t know that we’d get the 1.1 valuation; we were expecting to be in the high eights, hopefully. But even in the high eights, we knew that we’d have a really nice refinance and we’d have a great property. We actually put it on a 15-year fixed rate mortgage at 4%. Our plan at the moment is to actually let it get paid off and to own it free and clear 15 years from now, because 15 years from now my partner’s younger daughter and my daughter will be graduating from high school. So maybe the coolest phone call I’ve ever had in real estate was calling my parents right after that cash-out refi to tell them that I put a 24-unit apartment building in my daughter’s college fund.

Joe Fairless: Nice. That’s cool. That’s something I know she’ll appreciate, even if she can’t say it now. Or I guess she could say, but even if she doesn’t understand the benefits that will take place as a result that.

Slocomb Reed: I bring her to my projects whenever I can. I’m working on a 26-unit right now, she spent Sunday at Home Depot with me. I was carrying the paint buckets into the apartments and she was carrying the tape. Whenever she gets into a new place, she always says, “Daddy, this house – amazing.” Every time; it’s awesome, it’s adorable.

Joe Fairless: I’d like to get into some more details of how you’re able to turn it around though. Because there’s that 50% occupancy, and I’m glad that we went over the detailed numbers. So that’s what happened, but now let’s talk about the how. How did you go from — and you mentioned “we”. First off, who’s we?

Slocomb Reed: We is my partner and me. It was the same partner I bought the six-unit with. He actually did bring all of the funds to close the 24-unit. Then it ended up being my funds that did a lot of the renovating.

Joe Fairless: How did you do it? How did you get it occupied, stabilized, and get the right people in there, all that stuff?

Slocomb Reed: The first thing here, Joe, is that we got really good debt. I use a commercial mortgage broker here in Cincinnati named Kurt Weill, and he really has his ear to the ground with what local banks here – which ones are hungry to lend to real estate investors and apartment investors, which ones are going to get aggressive and give us really good terms, and which ones are really sitting on their hands and letting the market play out, based on the way that banks run their own numbers to determine what kind of risk they want to take. We were able to get a loan with interest-only payments for one year, and a construction second that covered a lot of that renovation cost. When we took over a 24-unit with 15 tenants in it, and only nine of them felt like paying rent, we had an interest-only mortgage which made it a lot easier to make those mortgage payments with the cash flow from nine of 24-apartments. But also, we had a construction loan with $70,000 of funds coming back to us after we did things like resurfacing the parking lot, replacing all of the original windows and sliding glass doors in these two 1978 12-plexes, and start turning apartments.

Financially speaking, the interest-only debt was really helpful. And the fact that the first 70 grand we spent came back to us from the construction note helped us accelerate that renovation as well. I am doing something similar with a 26-unit right now.

Kind of the steps in that process are 1) establish myself as new management, demonstrate that I respect the current tenant’s homes, and that I expect a level of respect from them that they have not needed to demonstrate before… Because I’m typically taking over from management that’s not as active as we are. The first thing I do is any major capital improvements that are needed. In both cases, this 24 we’re talking about and the one I’m doing now, the first thing is resurfacing the parking lot, getting rid of all the potholes, getting nice, good asphalt, restripe all the spaces, making sure we have enough parking spaces to meet the demand of all of our tenants having cars. In affordable lower-income areas, it’s really important to me that I know I can get tenants with cars… Because having wheels is effectively an employable skill especially when something like COVID happens, a lot of smaller businesses are closing, and a lot of bigger businesses like Amazon and Kroger, the largest grocer here in Cincinnati, are hiring like gangbusters. I want to know that my tenants are the ones who are able to go get those jobs when they get laid off. So resurfacing parking lots is a capital improvement that tenants feel strongly about. It also changes the aesthetics of the exterior a lot. Go ahead and make the property a nicer place to live, and then get the apartments on the market at the higher rent that I’m expecting. And when they start leasing at that higher rent and I know I can get that higher rent, that’s when I raise the rent on the inherited tenants, to whom I have already demonstrated that I’m going to make this a nicer place to live than they had when they moved in.

Joe Fairless: Resurface parking lot… What other things do you do initially to make it a better property that is noticeable to the tenants?

Slocomb Reed: A big part of what they notice, Joe, comes down to communication. We are very proactive in communicating with our tenants. For example, with the 24, when we replace all of the original casement windows and sliding glass doors with insulated vinyl, we made sure our tenants knew that that was going to bring down their electric bills, because these buildings have electric heat and electric air. So they are covering the expense of heating and cooling their own apartments. So not only are the windows and doors nicer, but they’re also going to reduce our tenant’s bills. We introduce it that way when we explain the hassle of having people come into their home and take out their windows, replace them with other windows, and then have to take care of the walls and the pain afterwards.

We did a lot of renovating individual apartments, putting down new LVP, swapping out tubs and vanities, some cabinets, some cabinets we left, and countertops, light fixtures, outlets, switches, covers, paint, of course… Then also, when we had the majority of the apartments renovated and it was time to raise the rent on the inherited tenants, we gave them the opportunity to move into a newly renovated apartment at that same raised rent, which would give us the opportunity to get into their old unit and get that one done, so we can get good rent there as well.

Break: [00:21:20][00:24:13]

Joe Fairless: Really quickly, that’s a 24-unit. The 26-unit, which I heard you say you’re doing a similar process that you did on 24-unit… How did you find the 26-unit?

Slocomb Reed: I’ve found the 26-unit through networking with property managers. I connect with property managers for a couple of reasons. One of them is I effectively am a property manager. I am the manager of my own property, so sometimes I have questions, issues that I’m working on, the opportunity to pick their brains and figure out if there’s something obvious that I’m missing within management and dealing with difficult situations with tenants… But also, I am asking property managers about the clients they have who are a pain. The ones who just want the apartments filled all the time and are never willing to fund renovations, or they’re only willing to fund half of what the property or the unit needs in order to command market rent, and then those owners panic when their only half renovated apartment sits empty for too long, so they ask the manager to put someone in below market just to get it filled so their expenses are being covered… I reach out to property managers to ask about those clients of theirs, and whether or not I can make an offer, let the property manager get the commission for representing the seller, and take the manager’s problem properties off of their hands. I take it over, I manage it, they get a juicy commission.

Joe Fairless: I love that. And you closed on a 26-unit with that approach?

Slocomb Reed: Yes, closed on it last month.

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

Slocomb Reed: My best advice ever is to do the thing that you’re thinking about. Go ahead and jump in the pool. Be willing to expand your comfort circle.

Joe Fairless: We talked about how you went from the 6-unit to the 24-unit, so putting your advice into action, and then recently closed on that 26-unit. We’re going to do a lightning round. Are you ready for the Best Ever lightning round?

Slocomb Reed: Let’s do it.

Joe Fairless: Best Ever way you’d like to give back to the community.

Slocomb Reed: I love being involved in youth ministry and the church. I also love doing things like hosting meetups and advising newer investors, people who are going where I’ve been.

Joe Fairless: What deal have you lost the most amount of money on and how much was it?

Slocomb Reed: You know, I haven’t lost money on any deals. Basically, I’ve held things long enough to profit on them. I have had contractors steal tens of thousands of dollars on a property. I bought it well enough that I held on to it long enough that it appreciated and I made a small profit.

Joe Fairless: What deal have you made the most amount of money on and how much was it?

Slocomb Reed: The 24-unit that we just discussed would be the biggest numbers, but frankly, I bought my four-family house hack for 170k in 2014, and just earlier this year, it appraised for 500k. When you look at the fact that I bought it on an FHA loan and I paid 170k for it, and now it’s worth half a million, I’m going to call that the most money that I’ve made on any one deal. I still own that, it was a cash-out refi.

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

Slocomb Reed: The best way to get a hold of me would be by email, at slocomb@tlp-management.com.

Joe Fairless: Best Ever listeners, I want to let you know first that Slocomb will be a new interviewer; he is currently an interviewee right now. He will be a new interviewer along with Ash Patel on the show. I’ve known Slocomb for eight years or so…

Slocomb Reed: Yeah, around six or so years six.

Joe Fairless: Six or so years. Okay. Thank you for fact-checking that. Around six or so years, and I know him originally through the meetup that we do here in Cincinnati. I can tell you that I handpicked Slocomb, and I’m grateful that he said yes to do interviews for this show. Because when I hosted that meetup – I don’t really host it anymore, I don’t really attend it often anymore… Slocomb now hosts the Cincinnati meetup. But when I was hosting it and I would be interviewing people in front of the group, Slocomb always would stand up and ask pointed questions that were very insightful, and I knew from that experience that he’d be a great person to interview guests on this show. In addition to that, as you heard through this interview, he is doing larger deals, and he’s doing them in a way that he’s getting hands-on experience, so he knows the owner-operator front and he’s doing them in a creative way too, which I thought would bring another good angle to the show. With that, I’m grateful to officially announce that Slocomb is going to be doing some interviews. I will still be doing interviews, but I’m scaling back the amount of interviews that I do. Ash and Slocomb are going to be doing more.

Slocomb Reed: Joe, I’d like to speak on this as well. I’ll be quick. We met because I put a super clickbaity post on Bigger Pockets to connect with as many investors in Cincinnati as would comment. Those investors were the people who were going to your meetup, and they told me that’s where I needed to be. Joe Fairless had a meetup in Cincinnati in-person, and there was a great opportunity for me to come, learn, ask questions, take notes, meet a lot of people. I met a lot of clients and a couple of business partners in that room. And as you grew that meetup, Joe, I took advantage of every opportunity I possibly could, to basically ride your coattails and build my own business through the meetup that you created. I was very grateful for the opportunity to start hosting that meetup when it was time for you to step away from that. I’m also very grateful to have this opportunity to be helping host the Best Real Estate Investing Advice Ever Show.

The saying “A rising tide lifts all ships”, Joe – in real estate investing, you’re the tide. And I’m very grateful for the opportunity to be one of these ships that have the opportunity to rise with the tide that you’re building through all the work that you’re doing – your podcasts, your books, your meetups. Thank you, Joe. I’m very grateful.

Joe Fairless: I appreciate that. Best Ever listeners, the quality of interviews will continue to be high and probably even higher, so I’m grateful that we’re able to bring someone on like Slocomb. With that being said, Slocomb – great conversation. Looking forward to everything we have together in the future as well. Talk to you again soon.

Slocomb Reed: I appreciate it. Thanks again, Joe.

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JF2654: Industrial CRE: Find Your Competitive Advantage with Neil Wahlgren

The industrial sector can be hard to market to potential investors, but Neil Wahglen has found a way to ensure his company stands out from the rest. From their sale-leaseback strategy, to their unique, storytelling marketing, Neil has been able to not only bring in but maintain long term relationships with high-net-worth investors. In this episode, Neil details how these strategies came together to help him find his competitive advantage in the industrial space.

Neil Wahglen Real Estate Background

  • Works full-time as COO at MAG Capital Partners and is an Industrial Sponsor.
  • He has 8 years of real estate investing experience and is both active and passive.
  • Portfolio: $350M of industrial, single tenant net leased (NNN) commercial.
  • Background: commissioned officer and pilot in the US Air Force and Navy.
  • Based in San Francisco, California
  • You can find him at www.magcp.com | neil@magcp.com

 

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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the Best Real Estate Investing Advice Ever Show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast where we only talk about the best advice ever, we don’t get into any fluffy stuff. With us today, Neil Wahlgren. How are you doing Neil?

Neil Wahlgren: I’m doing great. Thanks for having me, Joe.

Joe Fairless: I’m glad to hear it. It’s my pleasure. Neil works full-time as COO at Mag Capital Partners, they are focused on industrial products. He has eight years of real estate investing experience, both active and passive. Their portfolio is 350 million dollars’ worth of industrial triple net lease commercial. His background – he’s was commissioned officer and pilot in the US Air Force and Navy. Thank you, sir, for everything you did for our country, you, and your colleagues. I sincerely mean that. Neil is based in San Francisco, California. You can check out their website, magcp.com. It’s also in the show notes. With that being said, Neil, do you want to get the Best Ever listeners a little bit more about your background and your current focus?

Neil Wahlgren: Yeah, absolutely. Like you mentioned, a slightly non-standard track to finding commercial real estate. California native, I grew up just outside of San Francisco, I really grew up in the suburbs, a little bored out there… I decided I need some excitement, I went to the Air Force Academy, went on to fly a number of planes, but primarily the C-130, the Hercules. I flew that full-time for the Air Force, and then part-time for the Navy, and the reserves, been to over 100 countries, two combat deployments, to Iraq and Afghanistan. It was just a great, maturing and experiential process in my 20s. That was the right thing at the right moment there. Ultimately, I did that for altogether about 10 years, and kind of hit a transition point where you start looking, hitting that point your life, you’re like, “Alright, can I keep doing what I’m doing now and hit really my goals for all the things I want to do?”

The more I was in a flying world, the more and more I realized my time was stuck two hours in the cockpit, which was stuck to time away from home and not being able to build that family work-life balance that I was hoping for. That was my catalyst for effectively transitioning out of aviation and out of the military side, and somewhat serendipitously ended up running into a family friend, right at that transition point, who had built up kind of an equity-focused, really investor-focused arm of commercial real estate. They had a model where they would effectively partner with developers, operators, and brokers who had a very niche skillset for commercial real estate deals, but didn’t necessarily have that capital component. So we would JV with them on a deal-by-deal basis. That was effectively how I got my feet wet and jumped into commercial real estate about eight or nine years ago.

Joe Fairless: What was your role eight or nine years ago? I know it’s evolved. I assume it’s evolved since. What was it at the beginning?

Neil Wahlgren: At first, it was operations. Kind of bringing that very structured checklist – discipline, multi-component experience of flying, and really piloting and managing a multi-crew aircraft. The founder was skilled at certain parts, but that operational piece, he knew he had a hole to fill. I came in on that side, really just working internally, and then slowly grew and built out a team. Through that process, we ended up growing our holdings and portfolio in about four years by about 10x. So it was a really fast-growth profile, and I learned just firehose effects. We got to see and underwrite through everything, from multifamily, to industrial, to commercial, multi-tenant retail, even some ground-up development stuff… So I really got to see a ton of different types of commercial real estate and a bunch of different partners, and I really got to see and really hone in on what is the type of real estate that I love here, what stands out amongst the rest, and what operating teams do I find exceptional? Ultimately, one of those groups was Mag Capital, who I had the opportunity to join up with full-time about four years ago.

Joe Fairless: And we’ll get to that. Just so I’m clear, you said you first started doing operations, and slowly grew from there. What specifically were you doing when you started out?

Neil Wahlgren: When I first came in, it was a bit of chaos. It was just emails, it was a lot of projects. There was, I would say, ineffective communication going on between investment partners, between operator partners. Really it was just – start from the ground up and every day was “Alright, let’s build this checklist out to have a rhythm, a flow, monthly check in meetings, set up standards and consistencies with both investors and with operator partners, set up expectations, and really start delivering on time or early on what we said we would do.” That was really a major piece that was missing on this firm when I came in, and really setting up that relentless, methodical approach toward day-to-day operations, which slowly grew weekly, monthly, and an annual forecast was ultimately what allowed us to grow.

Joe Fairless: As COO, what are the KPIs that you’re evaluated by?

Neil Wahlgren: Great question. My primary focus is in capital markets. We’re vertically integrated at MAG. We not only broker and source our own deal opportunities, but we also fund with our internal investment partners. So I am graded and effectively judged by how well we can effectively pair those two pieces.

Joe Fairless: What two pieces?

Neil Wahlgren: Both the deal side and the equity side; cash and deals. Effectively, you need to be skilled and efficient at doing both, but more so you need to be balanced and be able to find the right flow to say “Hey, am I looking ahead? What’s my deal flow pipeline look like? Am I preparing adequately on the investor side?” It’s everything from, are we able to get the right deal flow for what our investors are asking for? How many deals per year are we able to fund effectively and quickly? Are we able to do it in a way that commitments turn into true-funded positions? All these granular details of a COO are probably the most important components of the position.

Break: [00:06:50][00:08:23]

Joe Fairless: That’s a lot of responsibility, first off. Assuming that I’m interpreting what you said correctly, does that mean that you’re responsible for finding the deals, and does that also mean you’re responsible for finding the money to fund those deals?

Neil Wahlgren: We have more the latter. So we have two principals, Dax Mitchell and Andrew Gi, who come from a brokerage, a broker background, and also from an effectively commercial real estate appraisal background. They run our acquisitions team, they’re sourcing, they’re using multi-decade relationships to put together and find these industrials, single-tenant, net-leased investments that we do. Then ultimately, as those opportunities come and work through the pipeline to the point where, if it makes it all the way through, they become an offering that we want to effectively bring into our investment group – that transition and that alignment of debt partners, equity partners, and ultimately getting a solid deal under contract, that is where my primary focus really is.

Joe Fairless: So I heard debt, equity, and then you said ultimately getting a solid deal under contract. Are you responsible for any part of the negotiations to get the deal under contract once the other two partners identify it?

Neil Wahlgren: Yeah, most of the negotiations are done on a principal level. Our primary way that we’re sourcing deals is actually somewhat unique, in that it’s through sale-leaseback. It’s a very niche way to create opportunities in that space. Unlike other commercial real estate asset types, these projects probably have more work that’s done upfront, because you’re negotiating not only the purchase price of your asset, but also the brand-new lease that you’re putting in place, and kind of the relationship between those two.

Joe Fairless: Elaborate more on that, will you? You said the primary way you’re sourcing deals is by sale-leaseback. So you’re finding them via leasebacks, or that’s just a mechanism that is used to… I don’t even know. Help me understand.

Neil Wahlgren: Sure. A high level of sale-leaseback is when you have… To use an example, the industrial space. Imagine you have a light manufacturing company that operates and owns its own real estate. So a sale-leaseback is when they sell off the real estate that they own and simultaneously lease it back as a tenant. We come in as a buyer and then we transition to the landlord. They are the seller who transitions to the tenant.

Joe Fairless: Got it. So how you find those deals is by seeking out businesses that currently own the land, reaching out to them, and say, “Hey, do you want to sell to us and just lease it back?”

Neil Wahlgren: Typically, not directly. A lot of it is done through broker relationships. Those types of companies — or what happens, most of the time those companies are recently acquired by private equity backers. Those private equity groups are intensely focused on growing the operational component of their new business, less interested in being real estate owners. They will often be the driving force. They’ll either connect with us directly or through broker relationships, and effectively say, “Hey, we just bought this company, we want to basically move the cash into the operation side to grow EBITDA, grow revenues, profitability, etc. So they will sell the real estate, prefer to be in a tenant position, and then redirect that capital into growth metrics.

Joe Fairless: So you’re responsible for debt and equity?

Neil Wahlgren: Yes. We have specific teams on both sides of it.

Joe Fairless: But you’re the one overseeing it?

Neil Wahlgren: Correct.

Joe Fairless: Okay, so let’s talk about equity. I think most of the listeners are interested in that primarily, but we will talk about that too, because that’s something that gets glossed over, but shouldn’t. Equity – what was the last deal you bought,

Neil Wahlgren: We just closed on a five-building 500,000 square foot industrial portfolio with a single tenant. That tenant was a powdered metal parts manufacture; kind of a neat industry. Imagine 3d printing with layers of plastics, but these guys did the same thing with layers of powdered metal. They effectively forge into these complex parts, sell to automotive, aerospace, heavy equipment, etc. We did a sale-leaseback transaction, buying five different buildings, all tenanted by the same company.

Joe Fairless: How much equity was required for that?

Neil Wahlgren: That one, I believe we raised about 10 or 11 million.

Joe Fairless: Okay, let’s say 11. Where did that 11 come from?

Neil Wahlgren: We effectively have really long-term investment partners. It’s a range of family offices, a range of high-net-worth individuals and retail investors, and we ultimately do multiple deals with the same folks.

Joe Fairless: Okay. So the $11 million came from both family offices and high net worth individuals?

Neil Wahlgren: Correct.

Joe Fairless: What percent do high net worth individuals make up of the 11? Approximately.

Neil Wahlgren: Probably the majority, I don’t have the exact numbers.

Joe Fairless: Okay, the majority. And how are you attracting the new individuals? Not the current ones, but new high net worth individuals.

Neil Wahlgren: Having been in this space a long time, my feeling on it is there are two extreme approaches. You can be more of a marketer, or you can be more of an effectively deep relationship, deal focused type of equity relationship. We’ve chosen to be the latter; so we really do very little outside marketing. Almost all of the growth, all the new investment partners that we’ve made are almost probably 99% referrals. It’s effectively devoting resources, devoting time to folks who invest with us on a repeated basis. They effectively bring friends, family colleagues, and that’s been almost 100% of our growth on that side.

Joe Fairless: How, if at all, do encourage or help facilitate referrals?

Neil Wahlgren: Everyone who invests with us is important. There are some people in our network that we’ve found over time really are just phenomenal partners. Not even necessarily the biggest check writers, but people that really believe in the product, believe in our model, believe in our team, and ultimately bring in what I call outsized referral sources. Those, what we’ve found, is really hyper-focusing on those people. Thank you’s, handwritten notes, gifts, taken out… It doesn’t need to be monetary-based either, but just putting attention back into the people that are really helping make you successful. We really put an emphasis on that as a team, and it’s paid dividends, in my opinion.

Joe Fairless: What system do you use to track that?

Neil Wahlgren: A lot of tags; we use a CRM coupled with our investor portal. We meet three times a week, myself and my equity team, and we outline who needs attention, what is the best way to effectively give back, what’s the best way to receive feedback, or solicit feedback… All those pieces done on a very repeatable consistent process is what we’ve found to be the best approach on that.

Joe Fairless: Which CRM do you use? And which investor portal do you use?

Neil Wahlgren: We use a portal CRM company called simPRO. We recently switched over to that system and I’ve been pretty happy.

Joe Fairless: What did you switch over from?

Neil Wahlgren: Juniper Square.

Joe Fairless: Why did you switch?

Neil Wahlgren: I think Juniper Square, in our opinion – not to get too much in the weeds – perhaps focus more on institutional investor relationships than for the type of relationships that we had. We felt we were able to effectively present opportunities, and manage in a more robust manner in terms of metrics, in terms of graphics, in terms of telling the story of these industrial investment opportunities with the simPRO platform.

Break: [00:16:15][00:19:08]

Joe Fairless: I’m glad you’ve found the right platform. And it’s okay to get into the weeds in this conversation. that’s alright. A lot of investors are looking at different options so this is helpful. As far as the focus, it might have been a little more focused on institutional investors. Can you just give a couple of examples for people who are trying to identify “Okay, here’s the type of portal I’m looking for”? Because most listeners for the show, they’re focused on high-net-worth investors as their investors, so this will resonate.

Neil Wahlgren: With any investment, it comes down to telling a story. Effectively, a system should be just a medium that you’re using that allows you to tell your story in a way that’s effective. If you’re effective, if you’ve told that story well in a clear and concise manner, and you have the right amount of trust and backing with your investors, really the equity will fall into place at that point. Industrial can be tricky. I’ll be honest with you, it’s not that sexy. It’s four walls, oftentimes it’s in secondary markets, it’s not flashy, it’s not on the front end of a new development center… Typically, it tends to be really the value and the beauty of it is the relationship between core dirty often manufacturing operations, paired with the real estate that allows that to happen. So to tell that story, we use drone footage, we use some nice imagery, and we like to pair the story of what operation is happening within these four walls, what type of manufacturing? What are the products? Where does this go? How is this integrated in the American industry? Then really couple this investment real estate around that, and pairing those two, using a lot of graphics. We’ve found that that particular platform allowed us to do it best.

Joe Fairless: What about on the debt side? How do you identify the right debt product for… Let’s use an example, the last deal that you did.

Neil Wahlgren: Sure. Honestly, we’ve found a lot of the industrial products that we’re buying – we find opportunity in the seams. We’re buying secondary markets or kind of what I call commutable secondary. It might be the labor force for this manufacturing is in, say, Des Moines or in Champaign, Illinois, some similar-sized city, and then ultimately the asset might be 10 miles outside of town, but that’s okay. If you have the right strength of tenant and the right credit behind it, that can be the most sleep easy, cash-flowing vehicle you can have. But to your point, those types of markets can be sometimes scary or overlooked by national lenders. So what we found is regional lenders, state-level, or Southwest oriented banks, or Midwest oriented banks who know those areas better, have tighter relationships with companies and individuals in those areas – those really, for our type of model and product, are absolutely the best kind of debt partners. So we do repeat business with typically smaller credit unions and banks.

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

Neil Wahlgren: I would say that the best advice that I have is find your competitive advantage. If you don’t have a competitive advantage, find out how you’ll get it. If there’s not a clear path to that, find a partner to invest with who does. I think relying on commodity skills without having some outlying advantage really leaves a lot of risk on the table for an investment. So I would say find someone who has an ultra-tight niche and specialty, does it well, and then either partner with them or emulate what they’re doing.

Joe Fairless: Is your competitive advantage the two principles and their background? Is it just being focused on industrial relative to the rest of the commercial real estate world that isn’t…? What would you say?

Neil Wahlgren: I think we as a team, I believe we put together better investments in single-tenant net-leased industrial acquired through sale-leaseback transactions than anyone else.

Joe Fairless: That’s a mouthful. You make that sentence long enough, of course you will be exactly that. [laughter] That makes sense, though. I’m glad that you talked about that. I’m glad that we touched on each of those aspects of it too, since that’s your competitive advantage. We’re going to do a lightning round. Are you ready for the Best Ever lightning round?

Neil Wahlgren: Let’s do it.

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

Neil Wahlgren: I would say what we’ve talked about before – finding those who put in an outsized effect on your personal development and growth, finding those people, and giving back. So I think we find those folks and shower them with time, with attention, with appreciation, and listen. I think by really taking the interaction level to a higher level with a smaller group of people that are directly responsible for your success – I think that’s what we do best.

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

Neil Wahlgren: We have a lot of resources on our website, www.magcp.com. Or I’d love to hear feedback, comments, questions from folks as well. You can reach me directly at neil@magcp.com.

Joe Fairless: Neil, thanks for being on the show. I enjoy talking about a sector that I do not focus on in the commercial real estate world, because I love being educated on it. So I appreciate that. And hey, even if we’re not focused on this sector, there’s a lot of takeaways that you talked about that can be applied to any aspect of commercial real estate or any aspect of business, quite frankly. So thanks for being on the show. Hope you have a Best Ever day and talk to you again soon.

Neil Wahlgren: Thanks, Joe.

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JF2653: What Their 12 Unit Purchase Taught Them About COVID Asset Management with Jeromie and Anne Marie Sheldon

In March of 2020, Jeromie and Anne Marie Sheldon closed on a 12 unit deal right as COVID-19 was taking the world by storm. The pandemic caused additional problems on top of the regular challenges that come with any property–rowdy tenants, delays, labor shortages–and yet one and a half years later, the Sheldons’ property is thriving. In this episode, the Sheldons discuss their business model and how they navigated being “COVID Closers.”

Jeromie and Anne Marie Sheldon Real Estate Background

  • Jeromie recently retired as an Air Force Pilot after 24 years of service and is now flying 747 overseas for UPS out of Anchorage, Alaska.
  • Anne Marie is a Licensed Physical Therapist.
  • They are both CREI, LPs in syndications, Active apartment owners.
  • Both actively and passively involved in CREI.
  • Portfolio: Started out with a SFR 2015 full cycle. Currently, Passive LP deals = 2000 + doors, Independent GPs on a 12 unit & 5 unit locally in WNY. 
  • Also own a townhouse- LTR (12 beds for pilots called “crashpads”) in Anchorage, AK.
  • Based in Grand Island, NY (close to Niagara Falls & Buffalo, NY)
  • You can say hi to them here:
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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the Best Real Estate Investing Advice Ever Show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any fluffy stuff. With us today, Jeromie and Anne Marie Sheldon. How are you two doing?

Anne Marie Sheldon: Great. Thank you so much for having us on the show, Joe.

Jeromie Sheldon: Yes, Joe. Thank you. It’s an honor and a privilege to be on the show with you.

Joe Fairless: Well, it’s my pleasure. Just behind the scenes Best Ever listeners, I called in eight minutes late to this interview, and they were waiting very patiently for me, so I appreciate both of your patience and I’m looking forward to dive-in in my last interview [unintelligible [01:08]. Jeromie recently retired as an Air Force pilot after 24 years of service. First, officer, thank you for your service. I respect what you did for our country, you, and your colleagues.

Jeromie Sheldon: Thanks, Joe. It’s much appreciated. I’m so honored to have served our great nation, and just a blessing to be part of that team.

Joe Fairless: Anne Marie is a licensed physical therapist. They’re both commercial real estate investors, actively and passively. They focus on apartments. In fact, let’s talk about their portfolio. They started out with a single-family rental that they took full cycle in 2015. They’re currently passive investors in over 2,000 doors, and they’re independent general partners on a 12-unit and a 5-unit locally where they live, in New York. They live in Grand Island, New York which is close to Niagara Falls in Buffalo, New York. With that being said, you two want to give the Best Ever listeners a little bit more about your background and your current focus?

Jeromie Sheldon: Yeah, like I say, you kind of hit it there with our background, with me coming out of the Air Force, Anne Marie is a physical therapist, and she also helps teach our kids at home. We’ve got a busy home, with six blessings. But our big focus really is to grow a portfolio as many of your listeners are doing. We joined a program in 2018 and got into some limited partnerships.

Joe Fairless: Which program?

Jeromie Sheldon: It was the [unintelligible [02:36] program, and then we’ve also had some personal coaching with Anna Kelly, and then we were also part of a mastermind. That’s probably one of our main points is we’ve wanted to just focus on educating ourselves in this space. We’re both professionals and we feel that education is very important and would probably qualify [unintelligible [00:02:54].17] advice. And then, like I say, we’ve limited partners in about five deals across Arizona, Texas, and Florida, just saw one go full cycle and gave us significant returns. We’re very happy.

Joe Fairless: Nice. Congrats.

Jeromie Sheldon: And then we also wanted to get our hands dirty a little bit with working with property management and just getting into the weeds of managing our own properties. So that’s why we got involved with the 12-unit and the 5-unit here in New York, just to make sure we kind of understand the full aspects of commercial real estate; really, before we felt comfortable trying to do a syndication and taking other investors money, we wanted to be able to make sure we understood all aspects of it. The long-term goal is to get into syndications, but we feel it’s a process of moving that forward, and growing our assets to a point where we kind of have a long-term vision of growing that asset. And then being able to start a retreat center. We won’t get into that, but that’s to minister and give back.

Joe Fairless: You were passively investing in deals, and then you decided to do some active deals, the 12-unit and the 5-unit. What did you think of that process?

Anne Marie Sheldon: Well, it was great to see the passive deals first and also to interact with a lot of different investors and learn through that. We could see that we were lacking an understanding of asset management. So with the 12-unit, when we jumped in, the first thing we were doing once you close the deal and the work begins, we started doing our CapEx projects. That was a great learning experience, because our property management company is helping us run that 12-unit. But as far as the large projects, like the parking lot, LED lighting, things like that, we really wanted to oversee that. We wanted to get the bids from the contractors and really be hands-on in that process. So that was a great learning experience there, just to kind of understand what it’s like to work with contractors, what it’s like to get into these bigger projects, what the money is going to be, and how that’s going to improve the NOI and the value of the property. So that was one big learning experience for us in the beginning.

Joe Fairless: What did you learn from working with contractors?

Anne Marie Sheldon: We learned a couple of things. Sometimes it’s straightforward, and other times — one issue we really ran into is it’s a 12-unit. So when you’ve got a contractor, like for a parking lot, maybe they’re a commercial contractor doing parking lots – they’re looking for at the mall parking lot, that large institutional parking lot. You’ve got a good-sized parking lot, much bigger than residential, so you’re not falling in that category, but you’re not exactly falling in the commercial category fully. So it’s not a big enough deal for some, but it’s too large of a deal for others. We found that sometimes a 12-unit was falling in that situation. For example, the stairs going into the building need to be replaced. But in order to do that, that’s concrete work, that’s removing concrete, and that’s building specific molds to go back to replace like-kind with like-kinds, so you don’t have to pull a permit and do a lot of different changes. Well, we find the contractors are wanting to do the regular molds they have for residential; or if they’re commercial, concrete, they want to do the big parking lot. That’s been a big struggle in the labor shortage too, because a lot of times they don’t have the workers that they used to have. So we’re getting backed up as well.

Jeromie Sheldon: So we got through about 10 to 12 concrete folks, and I think we finally have landed on somebody that can do the workforce next spring. But it’s been a struggle, like I say, with COVID, and the labor shortage; there’s not a lot of folks out there that want to do concrete, and the folks that are out there are so busy, a little job like what we’ve got doesn’t work for them.

Joe Fairless: I heard you say that you’ve got a property management company, but you wanted to invest time working on the CapEx. But wouldn’t your property management company have a contact that you could work with?

Anne Marie Sheldon: In fact, they did. They had about two contacts. One of them stood us up. We came to the property, they didn’t show. I got in touch with the owner of the property management company and he goes, “I got stood up as well.” He dropped them from our list. Then we went on to the next person, and they were too busy at the time. So I think that was a situation; we went through so many actually, but I think that was a situation where they couldn’t do those particular molds, because these are very unique stairs with a very narrow driveway, so you can’t use a standard residential step mold; you’re going to have to do something customized. Now we hit a wall with the property management company trying to find someone, so we just continue to go off contacts and off leads from other people.

Joe Fairless: We jumped into the details quickly, which is great… But if we can take a half step back just to get a little perspective on the 12-unit… What do you buy it for and how did you find it?

Jeromie Sheldon: We found it through a local broker here in [unintelligible [00:07:55].11] We acquired it at 60k a door, which is pretty decent for this area. It’s an all-bills-paid unit, so that was also a little bit into our factor. Location is what really drove it. It’s in a suburb of Southern Buffalo, and it’s right on the main street, and essentially, the crime, the schools, the High School is just down the streets, it’s a nine out of 10. It had been on the market for about a year; and the street appeal – the previous owners were pretty much doing everything themselves, so the street appeal was probably not good. We were able to work a pretty good deal; they were asking 750k and we got it for 720k.

Joe Fairless: Okay. How long ago was this?

Jeromie Sheldon: We consider ourselves COVID closers. So as the wave of COVID was coming across the world, we closed in March of 20.

Joe Fairless: Wow. Yeah, right there. Like right on the cusp of Armageddon.

Anne Marie Sheldon: Yeah. Everyone was going, “Do what?” Everybody was looking at us and going “Do you want to still do this deal?” [unintelligible [08:58] in a hurry. They were thinking we were going to back out.

Joe Fairless: Obviously, you got financing. Was that tricky? Maybe not, obviously… Did you pay cash? I guess I didn’t ask that?

Jeromie Sheldon: No. The financing actually was probably one of the easiest things. We used a local bank here in town. I think probably part of it is because we’ve got a W2 and we had the other assets. We had the stuff invested in the syndication, so we were able to show all that. So I think they were comfortable with us.

Then the other piece of it was I think the location; the bank president had actually looked at the property when it was for sale about eight years prior and was considering buying it, so they knew, location-wise, we wouldn’t have any issues with keeping it full. We’ve been blessed, through COVID, we’ve had no non-payers. Everybody has been paying rent, a couple slow, and then we did have one person… We talked about this same [unintelligible [09:48]. We did cash for keys, and we had one person that was causing a lot of issues right after we took over. We gave them some money and said “Hey, we’ll help you go find another place.” They took it and ran. We got to a new tenant in there, we fixed it up, and they’ve been great.

Joe Fairless: How did you determine how much money to give that person to leave?

Anne Marie Sheldon: That was interesting… Our property management company said, “Let’s just write him a check for $500, or something.” I said, “First of all, this guy’s not a check guy. This guy’s a cash guy. So we’re going to handle cash.” Not us, but the property management company. So here’s the situation… His rent was around — we bumped it since then quite a bit– but it was around 750 a month. What he was doing was he wasn’t paying rent, he was subletting it to someone; so he was actually getting rent, we found out through the grapevine, through the other tenants that he had a sublet that was paying him. So $500 a month when he was getting $750 or $800 from someone else wasn’t going to get him out. So we said, “Let’s go with $1,000, because we’re going to bump the rent on this unit to $950.” And this moratorium is just starting, so we’re thinking this is going to go on for a year. You potentially could lose $10,000 or more from this guy. So we felt like $1,000 cash was what was going to dangle the carrot for him.

The property management company said… He said he would think about it for a couple days, and when they said “We’ll give you cash”, then he signed the document to say he would agree to those terms. And then  when they gave him the cash, I guess his comment was “Cash is king, this is great.” [laughter] He was not just not paying and subletting, but he was in fact doing all kinds of things on the property – intimidating tenants, playing music super loud… It’s a really quiet community and village, and there were three other tenants threatening to move out, isn’t it? So we probably also could have lost rent from those other units as well. So $1,000 was kind of a drop in the bucket to get rid of that.

Break: [00:11:48][00:13:20]

Joe Fairless: Knowing what you know, having asset-managed the property, as well as gotten in there on some CapEx stuff for a little over a year or a year and a half, what would you do differently if presented a similar opportunity on your next acquisition? Maybe you didn’t do it wrong, but what would you do a little differently on the next deal if it’s the exact same 12-units, similar block, similar challenges, and now you’ve got another chance at operating it a little differently?

Jeromie Sheldon: I think one thing would be restructuring the deal so we didn’t have to come out of pocket for as much of the CapEx. We probably would have been willing to offer full price, or even a little more if we could have worked some of the CapEx into the loan proceeds. So I think that looking back – we had the capital, but especially going through COVID, the worry, and that type of stuff, it would have been nice to probably hold some of that back. But we felt we needed to do it to improve the place, to tell the tenants that, “Hey, new owners are here and we’re going to make improvements.” But it would have been nice to be able to finance fixing the parking garage and putting new lighting in. So in the future, I think we will definitely look at how we could get more proceeds out of the closing to go ahead and take care of some of the CapEx without having to come up with it straight out of pocket.

Joe Fairless: Anything come to mind for you Anne Marie?

Anne Marie Sheldon: I think another thing that we do differently is when we were looking at property management companies, we only looked at a few. Looking back now — and we’ve learned a ton over the last two years and we still have a lot to learn… But one thing we did learn is we didn’t really vet that the property management company properly. When I say vet, I mean we did ask them certain key questions, but we didn’t really get as transparent with our business plan as we could have. And I think we could have done a better job on the front end, saying “When a unit turns, this is what we picture happening with the unit, this is what we want to do, this is the rents we’re trying to achieve.” We did tell them what rents we’re looking at, but we didn’t really tell them the steps in between that we were looking to do. So I think we kind of caught them off guard on the first few turns, because when you take over a property, a lot of times a couple of turns happen right away, with new ownership. And immediately, the maintenance… It was a busy time, it was the summer when the first turns happened, and COVID happened, and they were short of some staff. But when we went to say “Okay, we want everything, from new flooring, to all the covers painted, to new vanities, new fixtures, new trim” it was more than they were used to. They were used to like the quick turns, just steam clean the carpet, do the small little ramp up, or no ramp up and just kind of keep going. I don’t think they foresaw that we were going to do moderate to heavier turns on some of the units… Because some of these units were neglected. It’s a 1960s building; they were not only neglected, but they were out of date. And to get the ramp-ups we wanted, we’re going to have to do some considerable changes to the unit. So I think just being more transparent and more direct with what we were trying to do instead of muddling through that on the first turn could have been even better,

Joe Fairless: What are the rent increases that you are achieving, and how much per unit are you investing on those turns?

Jeromie Sheldon: Most of the stuff that we’re turning, like for instance, we’re turning one right now that just moved out… They were paying $750, we’re going to bump it to $975. For this unit, we’re doing some of it ourselves. I think it gets back into ensuring that we’re real estate professionals, so we’re trying to show that active involvement. But for this unit, we’re going to put in probably about $3500 to get it… We’ll put in a new flooring, we’re doing the painting, doing some updates in the kitchen, and that type of stuff, the bathroom.

Joe Fairless: And you can get $225 rent increase on that $3500 renovation, not including your time?

Jeromie Sheldon: If we weren’t part of it, it would be more than $3,500.

Joe Fairless: Yeah, I get that. But not including your time, which is a lot of money. But just without including your time, it’s $3500 in order to get a $225 rent increase?

Anne Marie Sheldon: Yes.

Jeromie Sheldon: Yes.

Joe Fairless: That’s a 77% return. That’s a pretty good return. Again, not including your time, but still, those are some favorable numbers as an investor.

Anne Marie Sheldon: Yeah. We didn’t put a lot of time into this one. It depends on what your definition of that is. But the reason we chose to assist on this one is our kids. It’s kind of funny, but a quick side note… They want mountain bikes and want double suspension mount bikes, we have six children… And we were like “We’re not buying everyone just a brand-new double suspension bike.” [laughter] We said when they work at the units with us – which isn’t that often, it’s more in the summer – we pay them; we pay them all different hourly wages depending on their age. One of our sons, we pay him more than he gets in his job, more than minimum wage. So we said, “There’s a short spurt of time, three or four days, we’re going to go paint. If you guys want to get these bikes, if you have the money for the bike, you’ve got to raise the other half. Here’s your opportunity. You want to come paint or just clean up behind us, whatever, you can make half the money and we’ll pay you for it.”

Joe Fairless: I love it.

Anne Marie Sheldon: That’s why we did this unit this way. Typically, in the last few units, like in our 5-unit, we are not involved in the painting or the [unintelligible [18:45]

Joe Fairless: Got it. That’s great. That’s beneficial for many reasons. Is there also benefit there from a tax standpoint, paying your kids? I’m vaguely familiar with something where you can pay your kids and…

Jeromie Sheldon: I think you’re right. We’ve talked to our accountant, but I think we can pay each one of the kids, I think it’s up to $6,000, and that comes off of the business income. And they don’t have to worry about paying federal income tax on that money. So yes, it’s a way for us to pay our children through the company. It’s obviously an expense on the company that our kids get to take advantage of. We’re firm believers in this as a family business and everybody partakes in it.

Break: [00:19:27][00:22:21]

Joe Fairless: Anne Marie, how many hours a week do you work with your licensed physical therapist role?

Anne Marie Sheldon: Currently, I’m not working with the role. I’ve kept my license and my education up. I’m helping people pro bono on the side, friends and family that need help, but I’m currently staying home, homeschooling the kids.

Joe Fairless: Oh, wow, homeschooling. Okay. And you got six kids?

Anne Marie Sheldon: Yes.

Joe Fairless: Okay. Alright. So the question that I was setting up is still relevant. Because Jeromie, you retired, but you’re now flying 747s overseas for UPS, out of Anchorage, Alaska. So how do you two prioritize your time? Because you’ve got six kids… One of you definitely has a full-time job. Jeromie, I don’t know how many hours you’re doing, but I’m assuming it’s more than 10 per week on average. How are you prioritizing?

Anne Marie Sheldon: I think a couple of things… One, we learn to time-block. We knew about time-blocking, but not as detailed as Anna Kelly, our coach. She really taught us more details and models in our personal coaching time with her on how to do that. So I think that has really helped.

Also, with Jeromie being active-duty military, it was a lot busier in some ways than it is now, in that he flies 14 days a month now, but he has 14 days a month completely off. So the last three weeks, he’s been home, he’s been helping, and we’ve been doing more on the real estate side. We’re networking for things to grow our business.

For me, I’m doing homeschooling, from about the hours — that’s nine to three or nine to two. I do drive around for different activities, but my senior is driving now, so that helps. What I’ll do is your nine to midnight, nine to 11 shift, I do a lot of those things. Sometimes we’ll do the networking in the early evening, and I will do the asset management type things in the early to midafternoon. Sometimes you have to do things in the morning, and then the kids, I’ll direct them on what they’re doing independently, or two of them are helping each other. But it’s kind of a rotating juggling act a little bit there. But just kind of trying to find those blocks of time.

Joe Fairless: Taking a step back. What’s your best real estate investing advice ever?

Anne Marie Sheldon: I think for us, there’s a couple of things. We feel like there are some non-negotiables that we have, and it’s taken a little bit of time to develop. When we’re looking at a deal, when we’re looking at a partnership, we have certain foundational things that we agree on that we’re looking for. So I think sticking to those and not getting really excited about a deal, an opportunity, and jumping in too quickly, or a partnership. I feel like a partnership is a marriage with someone else. We want to be aligned and we also want to be transparent with our financial situation and their financial situation, so that you’re not jumping in and then finding out later that there’s a hitch in there and somebody’s finances aren’t going to work for that deal. So we feel like those things are foundational things. And it sounds really simple, and I think it is, but sometimes it’s hard to stick to your guns and stay with that when you’re in the excitement of deals and partnerships.

Jeromie Sheldon: Or there’s pressure to get into a deal. I think we’re fortunate that a lot of our real estate income that we’ve got, we’re not living off of that. That has helped us out as well as we’re able to vet the deals and say, “Does this really make sense for us as a family?” And then, like I say, the non-negotiables, if it doesn’t really meet that, and we’re okay, just passing on that, being patient and waiting for the next opportunity.

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

Jeromie Sheldon: We got into a deal, it was a flip of 4-unit in Dallas. This one was – essentially, we were providing the debt fund for it, and we got caught up in COVID, or the team of contractors got caught up in COVID. It was supposed to be in and out in a year; they were going to get everybody in, as soon as the leases were done, move them out, do complete rent-outs, then get them released up, and then have the entire place sold within a year. That didn’t happen, obviously, with COVID, contractors, lockdowns, all that type of stuff. The team finally got the last property sold in June, so it was almost a two-year hold versus a one-year hold, so we ended up losing about 20% on the money we put in to that deal.

Joe Fairless: How much did you put in?

Jeromie Sheldon: We each put in 100k. We lost about 20k each, so about 40k total to that deal, just because, really, the business model didn’t work because it got slowed down by an entire year.

Anne Marie Sheldon: Yeah, the flipping model.

Joe Fairless: If presented a similar opportunity in Dallas, would you do it, because you chalk it up to “Hey, that was COVID”? Or would you not do it because “Okay, it was COVID but also XYZ variables, and I’m not comfortable with that so I wouldn’t do that type of investment.”

Jeromie Sheldon: Yeah, it’s something that we would think twice about in the future. We didn’t do as good a job vetting the group either. We felt – the debt fund, okay, we’re just going to get X amount of return, we’re not into it for the equity. So I think we would really think hard and fast again about a model that is really predicated off of a one-year timespan. So yeah, probably do some more homework.

Joe Fairless: It sounds like you would pass…

Jeromie Sheldon: I think so. Yes.

Anne Marie Sheldon: Yes.

Joe Fairless: [laughs] Fair enough. We’re going to do a lightning round. Are you two ready for the Best Ever lightning round?

Anne Marie Sheldon: Yes.

Jeromie Sheldon: Yes, sir.

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

Anne Marie Sheldon: For us, we as a family, for Thanksgiving and Christmas, we join up with the regular Gospel Mission here in town. We go to different apartment complexes, like the lower-income section eight areas and we deliver meals with them. We bring joy to them, have conversations, how are you doing, pray for them. That’s one way we love to get back.

The second way is – our long-term vision, is to use the proceeds from real estate to purchase a wellness ranch healing place where we can continue to give back to veterans with PTSD, and help them get well and get back on their feet again.

Joe Fairless: Keep me posted on that. If there’s anything I can do to help out with that. How can the Best Ever listeners learn more about what you two are up to?

Anne Marie Sheldon: If they want to get in touch with us, we’re on Facebook, LinkedIn, Instagram, all the social media sites. Our email is sparrow@equitymanagement.com. Those are probably the best ways.

Joe Fairless: Jeromie and Anne Marie, thank you for being on the show. Thanks for talking in detail about your experience both as an LP, what’s worked, what hasn’t worked, and as a GP. Those 12 units, contractors, debt, closing, being COVID closers, the business model that you’re employing, and setting expectations with the property management company prior to closing. Thanks for all the insights you shared and your experiences. Hope you two have a Best Ever day and we’ll talk to you again soon.

Anne Marie Sheldon: Thank you so much, Joe. We appreciate it.

Jeromie Sheldon: Appreciate it, Joe. All the best. Thank you

Website disclaimer

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

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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JF2641: Don’t Make These 4 Mistakes as a New Passive Investor | Actively Passive Investing Show with Travis Watts

“What mistakes did you make in your career that I should be on the lookout for as a new passive investor?”  Travis Watts answers this listener question by sharing four mistakes he made starting out as a passive investor that you can learn from:

  1. Location, location, location: You cannot overcome a bad area with good management.
  2. Understand that management is key.
  3. Make sure you understand the underwriting.
  4. Don’t do a deal just for tax reasons or because you see a lucrative fee split structure.

Want a more in-depth look at how to vet a team, a market, or a deal? Then check out our three-part miniseries starting with episode JF2396: Passive Investing Strategies | Actively Passive Investing Show With Theo Hicks & Travis Watts.

 

Click here to know more about our sponsors:

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TRANSCRIPTION

Travis Watts: Hello, everybody, and welcome. It’s Travis Watts with another exciting episode of The Actively Passive Show. This week, the topic came from actually a conversation I was having with an investor, and this investor asked me, being that I’m a full-time passive investor, he asked “What mistakes have you made, and what should I look out for?” He just basically, was looking to avoid some newbie mistakes, and I thought that’s an excellent question and I want to do it justice, I wanted to better articulate my point, so I made an episode out of it.

I want to share this information because it’s important you guys to balance the risk conversation with the reward conversation. Of course, everybody’s always out there talking about whatever it is they do, whatever their investment is, how awesome it is, and how great it is, and that’s fine. It’s also important to have the conversation about what risk you’re taking on or what mistakes could easily be made. So with that, I’m just going to walk you through four things I made mistakes on early on and mid-career so to speak, in regard to being a full-time passive investor. So we were talking about multifamily, private placements, syndications, being a limited partner.

So without further ado, let’s dive right into number one. Location, location, location. We all know the saying, we all know the phrase, it is a classic real estate line, but here’s the deal. I made a few investments early on. I say a few—well, yeah, it was a few. It was probably three, total. These were C-class properties, first of all. So the class of property, meaning, A class is new development, new construction, or not that old, very high end, luxury, very high creditworthy tenants, stuff like that. So we’ve moved down two spots on the spectrum down to C. This particular place that’s coming to mind right now  didn’t even have a pool, didn’t have a gym. This was just kind of living in the unit and paying the bare minimum rents in an area that we all found out wasn’t such a great area. And I will point out why that is so important.

You cannot overcome a bad area with good management. So at first, this operator was pointing the finger at the property management company. They had hired a third-party property manager, and then things weren’t going well, there was lots of problems, stuff wasn’t getting addressed at the property level. So they fired him, and then the whole quarterly update was how excited they were to bring in this new property management company. Well, guess what? The new property management company couldn’t really do any better. The same problems existed, and when I say these problems, what I’m talking about is there was a shooting on the property. Fortunately, nobody was even injured, but still there was a shooting, so obviously, people don’t want to live in an area like that. There was a stabbing, there was vandalism… They had put up a gate to make it a gated community, and someone ripped the gate apart and broke it. So it wasn’t even functional. There were squatters on the property in the vacant units that hadn’t been leased up. There was just so much stuff, and it all came back to the fact that we had bought a property in a bad area. Just straight up. It was probably a C-minus, D-plus kind of sub-market, and the property itself was probably a C property. So it wasn’t the worst. I think it was built in the ’70s.

But anyway, my point is that of all the deals I’ve done A, B, C – I have never done anything under C – the C properties just notoriously have a lot of problems. That’s just my experience. I’m not saying you’ll have the same experience with a C property; it depends on a lot of factors… But I’m just letting you know.

B class is my sweet spot. I like the 1980s, 1990s, early 2000s built, good markets, good areas, surrounded by good neighborhoods with a high price of single-family homes, high wages in the area, all that kind of stuff, and we’re just taking an older property and we’re improving it. We’re bringing it back to the market standards in the business model.

A class, very rarely have any problems. However, less cash flow associated. So I’ll leave it at that. The mistake I made was investing in bad area. So whether you’re active or passive and you’re looking at a real estate deal, single-family, multifamily, syndication, GP, LP, whatever it is, pay attention to location. Look at school ratings, look at the surrounding neighborhood metrics, look at the jobs in the market, read the stats, look at the crime stats.

Number two is understand that management is key. Now, I just alluded to that you can’t overcome a bad location or area with good management, but in a general sense, the profitability will come from the key management; their ability to advertise and screen for quality tenants, and take care of issues on the property. A lot of deals that are being purchased – not always, but a lot – in the syndication space, and this is probably true with anybody buying, often the management hasn’t done a good job, therefore, they’re not leased up properly, or the rents are well below the market, or maybe it is a mom-and-pop operator and they just refused to ever raise the rents wedge… It’s usually management-related. Or you get on Google, you type in the property and you look at reviews and you just see zero stars and one stars, “Management’s not doing this,” “Management that,” management, management, management.

Back when, even before this – I was talking about single family real quick – I had a property and, come on, guys, quite frankly, I was a bad property manager; and when I say that, I mean, I didn’t know what I was doing. So I was making mistakes. It wasn’t like I was mean to people or doing things that were illegal. I’m just saying, I wasn’t effective. I would rent to a tenant, and let’s say they worked at my company. So, they were more of like an acquaintance or a co-worker, and they were going to rent my property. Sometimes I would just forego the screening process. “Ah, I know you. You work where I work. It’s all good.” Well, huge mistakes came from that.

I had a couple tenants that would always pay their rent right at the deadline, if not a day or two late. I wouldn’t be an enforcer of the late fee. It’s like, “Ah, it’s the 6th or 7th; at least you paid it, we’re all good,” and then notoriously, they would do that then every month thereafter, knowing they’re not going to get penalized. So why not pay it on the 8th instead of the first, because there’s no repercussion. Bad idea!

There was one property I had that was so bad, I hired a property management company to take it over, I was fully transparent about the issues and the tenants and what was happening to this point and why I had hired them in the first place, we signed the contract, we moved forward, about 2.5, 3 months later the property manager quit. They quit on me, because the tenants were so bad; and I take full responsibility for me putting them in there in the first place. But I’m just telling you, if you don’t have good management, you will not have a good performing asset.

So when you’re looking at these pro formas, and these overviews, I rarely hear a lot said about the management. It’s all about the deal, the deal, the deal, the deal, this structure, and it’s made of brick, and it’s in this neighborhood, and it was this many units. Talk to me about the management; ask questions about the management.

If you’re going to invest with a firm that’s what we call vertically integrated, meaning that they manage their own properties, just take a look at their track record or their current performance on the existing properties that they’ve acquired – totally cool to be vertically integrated. Lots of great reasons to do that. But if it’s a brand new group, and they’ve never managed properties, and they’re like, “Oh yeah, we’re vertically integrated. We’re just going to wing it and try to manage our own stuff,” probably a bad idea. You probably would want to start with a more experienced group to come into the picture, help you out, learn from them, and then possibly go vertically integrated later.

Again, not telling anyone to do that specifically, but be aware as an investor of who the property manager is, whether it’s third-party or in-house, and what their experience is in managing that kind of asset.

Break: [08:31] to [10:04]

Travis Watts: Number three mistake that I made is not understanding the underwriting. And here’s the thing – not all of us are underwriters, not everyone wants to go stare at Excel sheets and find the misnomers… And one word of caution upfront, don’t get caught in analysis by paralysis. So many people do this. I’ve done this… Where you’re just digging and digging and digging and thinking and thinking and thinking, to the point where you miss out on the deal altogether, right? It fully subscribes or you don’t have a chance to even participate.

So, here’s my philosophy. You and I, and anyone listening – we’re never going to know 100% of everything to make a decision to move forward. So if I can know, maybe 60%, 70%, ideally more like 70% of the details and the data and the underwriting, at that point, I’m comfortable myself moving forward with a deal. I’ll learn the rest along the way, and I’ll never get to 100 anyway.

But here’s the mistake I see most commonly made is – look, you and I and anyone else can make underwriting look good on paper; just the difference in saying, “Well, we were going to take a 70% loan-to-value mortgage on the property, but let’s move it up to 80%.” Well, now the numbers look a lot better, don’t they? But now we’re possibly overleveraging the property.

Another thing I’ve seen is a group’s going to come in and buy something at say a 5 cap, and then they’re going to underwrite to sell it at a 4 cap. So they’re going to go very aggressive with the exit strategy, when in reality, that’s in none of our hands, okay? The way cap rates are fluctuating and interest rates – that’s not going to be in our control. So I like to see the opposite – you’re buying at a five cap, you’re going to exit at potentially a six. You don’t actually want that to happen. A higher cap rate means a lower purchase price. So that’s not a good thing. That means the market has softened up. There’s many ways and reasons that could happen. But what I’m telling you is when you’re looking at the pro forma, ask the question, if it’s not already preemptively stated in the overview, what cap rate are you buying at? And what cap rate do you anticipate selling at? In my opinion, as an investor, I’m always looking for a higher exit cap rate, not a lower one, for underwriting purposes, so that I know this is conservatively underwritten.

Another thing when it comes to underwriting that I see is aggressive rent pushes. And yes, we’re seeing it now and over the last maybe 6-12 months we’ve seen a big uptick in rent; some markets are 12%, 13% 14% year over year rent increases, which is incredible… But guess what? It’s also not the norm. So, if I see that — just making this up, for example, purposes, but let’s say Tampa, Florida. That’s one of the really hot markets right now. Let’s say, it’s got a 10% year-over-year rent growth, at least for the last 12 months. Well, what you don’t want to see in the underwriting is a new deal being purchased in Tampa, and they say, “Yeah, we’re going to get 10% year over year rent increases for the next 5-7 years.” No.

When you see big spikes, like we see right now, there’s usually a leveling off, sometimes even a slight sinking; I’m not saying that will happen. I’m just saying that can happen; you’re not likely to see 10% a year or year after year for the next decade.

So what I’m looking for is either very little rent growth in year number one as they do renovations, or maybe just a conservative 2% or 3% a year rent growth in the projections. Again, you don’t really want that to happen. You want a higher number than that, and hopefully, you get it, but you’ve got to be conservative too, because if you’re basing your overall return, which is most people are investing based on the overall return projections, you want to know these are conservatively underwritten, or else that’s not going to happen.

And the last thing I’ll say about underwriting is take a look at the capital expenditures budget. If you can, try to get a line by line, and ask questions about it. Why is the landscaping $300,000 per year? Why is it $8,000 per unit? And then look at the breakdown – how much of that is flooring, countertops, cabinetry, appliances. If you feel like they’re being a bit skimpy, like given the inflation right now and the supply chain issues, maybe those appliances are going to be on backorder, or they’re going to cost 30% more than they did last year. Just take that into consideration.

‘Same with property tax and insurance. I’ve seen huge volatile swings in these prices, where it’s underwritten as a 5% a year increase to the insurance or the property tax, but it ends up being 25%. These things can throw off the overall numbers to the investors.

And if the operator has it, I always ask for a sensitivity analysis or what some people call a stress test, and that just shows that they’ve put this projected pro forma through hypothetical stress testing. So in other words, what if interest rates are 4% today, but they go to 6% over the next few years? What if our occupancy today is 95%, but it falls down to 80%? Then what, and what it shows you often is what happens to the overall investor returns should these things occur… So that can be very informative to help you decide how conservative they’re being on these numbers.

Break: [15:20] to [18:13]

Travis Watts: Alright, number four. A lot of people are out there talking about tax advantages of real estate, multifamily, and a lot of people are out there promoting their fee structures, saying “Oh, we have super low fees versus our competitors or whatever.” Number four is don’t do a deal just for the tax reasons or just because you see a lucrative fee split structure. Here’s the way I look at it – yes, tax advantages are excellent in my experience in real estate in general, and having a nice fee structure can be nice as well. But if the deal you’re investing in is aggressively underwritten, or the operator can’t actually execute the business plan anyway, what use are the tax advantages or the low fee split structure if you end up with 4% or 5% return in the end, when you hope to get more like a 15 or 20? It’s definitely a secondary consideration.

I see some people getting caught up in those and saying, “I would never invest with this group over here, because of their fee structure”, and that’s fine to have that opinion… But you guys – I think I mentioned this on a previous episode… I’m in a deal – this is not a multifamily deal, this is a different private placement – and the operator is getting about 66% of the profits and the limited partners are getting about 33% of the profits. Just rough numbers there; but for years, I’ve still been getting overall a double-digit return, on an annualized basis. So, I’m okay with the quote unquote “unfavorable fee structure” because to me in the end, that deal’s still helping me accomplish my goals. So that’s the way that I frame it. That’s the way I look at it.

So the difference between the 80/20 split, or 70/30, or 50/50 and I’m looking more at the office operator, their track record, their ability to actually execute the deal… And generally speaking, if you’re going to invest with a group that has a longer track record and more experience, they probably aren’t going to have as low of a fee split structure compared to maybe a brand new group that’s just getting started, who’s trying to be competitive and gain investors.

So with all of that in mind – I told you this would be a shorter episode, I just want to conclude by saying that Theo Hicks and I recorded last year, it’s about a year ago, you can check it out on YouTube or joefairless.com, how a passive investor vets a team, a market, and a deal. So we did a three-part mini-series. I think each episode is roughly 30 minutes long, so it’s an hour and a half of content, where we go in much more detail about how to actually vet the team, the market and the deal.

I highly recommend that you guys check out that three-part mini-series if you haven’t already, because I could talk all day long, about risk and reward and experience and all this kind of stuff, but every week, I’ve got to pull it back, I’ve got to tone it down, I’ve got to just give you some key elements and hopefully inspire you to do some more research on your own so that you can conduct proper due diligence before you invest.

Thank you guys so much, as always, for being here. I truly appreciate you. I truly appreciate you tuning in to these informative little rants that I that I do. My passion is to help other people like yourselves understand the risks, the rewards, the pros, the cons to real estate investing. It’s made such a profound impact in my life that I want to share that and I want to help other people. So reach out anytime, joefairless.com, travis@ashcroftcapital.com. If I can ever be a resource for you guys, I’m all over LinkedIn, social media, Facebook, whatever, happy to do so.

Have a best ever week, we’ll see you next time on the Actively Passive Show.

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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JF2639: How to Plan and Execute Your Multifamily Renovation with Van Sturgeon

Growing up, Van Sturgeon witnessed firsthand how his parents saved their rental property during a rough economic period through the use of meticulous budgeting and planning. Now, as an entrepreneur with over 30 years of real estate experience, Van uses this knowledge to help people overcome their fears of renovating and rehabbing by helping them break down the details and costs of their project. In this episode, Van shares his best tips for finding good renovation properties and how to create a realistic Renovation Calculator to properly execute your next multifamily renovation.

 Van Sturgeon Real Estate Background:

    • Entrepreneur, real estate investor, land developer, and owns a number of businesses in real estate 
    • Currently owns and manages over 1,000 units in Michigan, Ohio, New Brunswick, and Florida 
    • Based in Toronto & Miami Beach, FL
    • Say hi to him at: www.vansturgeon.com

Click here to know more about our sponsors: Deal Maker Mentoring | PassiveInvesting.com | Follow Up Boss

Click here to know more about our sponsors:

 

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

Follow Up Boss

 

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, Van Sturgeon. How’re you doing, Van?

Van Sturgeon: I’m doing very well, Joe. Thank you very much for having me. I’ve been looking forward to having this chat with you.

Joe Fairless: Well, I’m glad and I’m looking forward to having this conversation as well. A little bit about Van and then we can get into it. He is an entrepreneur, a real estate investor, a land developer, and he owns a number of businesses in real estate. He currently owns and manages over 1000 units in Michigan, Ohio, New Brunswick and Florida. He’s based in Toronto, as well as Miami Beach, Florida.

So with that being said, Van, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

Van Sturgeon: Sure, I’m a product of the 1960s. I was born and raised in Chicago, to immigrant parents who – we, along with my younger brother, lived in a one-bedroom apartment in Chicago, and like every person, I guess, my parents had dream of owning their own home. They were saving as much money as they can to put toward that purchase, and along the way, they discovered or learned that the apartment building that we were actually living in, had gone up for sale. So instead of actually buying their dream home, they took the less traveled road and decided to become landlords.

So they scurried all their money together and borrowed some from friends and family, put their downpayment and they bought this apartment building.

Joe Fairless: Good for them.

Van Sturgeon: Yeah. And at that time, it was a great, fully occupied building in a nice part of Chicago, but subsequently, things started to change pretty dramatically in the late ’70s. Joe, you’re too young to remember probably, but inflation was crazy skyrocketing, even more so than it is today. Unemployment rate, the economy, everything – it was just a malaise in the economy. That was just a miserable time. And unfortunately, this apartment building, this wonderful building that my parents had purchased, all of a sudden started to experience vacancies. The whole neighborhood started to deteriorate. You had gangs and prostitution and drugs and all that kind of elements started to move into the neighborhood.

Joe Fairless: Where in Chicago? Just for anyone who is familiar with Chicago.

Van Sturgeon: Northside of Chicago. In particular, the Edgewater community, uptown Edgewater community. So I’m sure you’ve got lots of folks listening over there in Chicago, and if they lived there during those times, they’ll know the area, and exactly what I’m talking about.

Anyway, it got so bad that landlords were literally torching their buildings. I remember walking around the neighborhood and there was a number of buildings that were just literally — landlords couldn’t take it anymore, the vacancy, they couldn’t handle it, and they would just be torching buildings, to collect on the insurance money.

And we were in a precarious situation ourselves. Our building was 40%, 50%, 60% vacant at the time. And as a family, this was our sole investment, and we had to do everything that we could to hold on to it. As a result, we did everything on our own, from painting, replacing carpets, to doing the roof work, whatever it required for us to do to be able to cut out that contractor or subcontractor or trades out, we did.

So it was during that period of time that we were able to get through, it was a difficult time. But nevertheless, it was a heck of an investment that my parents made, and they did very well from it. We got out of that period of time, and then I went off to university, graduated, and unfortunately, I disappointed my parents. They had these dreams of having their baby boy be a lawyer or something like that, but I decided that I didn’t want that life, and I got into opening up my own company and being a general contractor.

So out there in Chicago in the late 80s, early 90s, I was out in the hustle, trying to build a business, and slowly but surely, I kept acquiring clients and I kept running into the same people; these real estate investors that are running around, either flipping properties or actually buy and hold. That’s when I got started, in the early ’90s, and started  doing flips. That’s how I got started, and then started acquiring rental portfolio.

It’s been a hell of a ride over the last 30 years. I’ve literally done thousands of renovations and I have opened up a number of successful companies associated with it. I never planned this out, but one thing led to another, so from property management to land development to subdivisions… I’ve done everything that you can think of in terms of renovation, construction and real estate. Right now, I’m at the latter stages of my life. I’m in that semi-retirement stage, and I enjoy coming to podcasts like yours to be able to talk about specifically the issues associated with how do you plan and execute a successful renovation, whether it’s on a single-family or multifamily. It seems there’s a lot of confusion out there.

A lot of folks talk about having a successful trade is to be able to find that deal, and that’s great. You need to have that skill set. But another one that’s even as important is actually being able to execute on that renovation rehab, because [unintelligible [00:05:10].17] properties that require some type of work. We’re looking to buy that diamond in the rough, or that’s ugly duckling that requires some type of improvement on it. And where we are able to pull money out, do that BRRRR strategy, or meet the projections that we have, on the syndication side, maybe go to our investors where we say, “Over the course of 3-5 years, this is what we’re going to do.”

So unfortunately, there’s a lot of trepidation with regards to that renovation side, and that’s why I like talking about it,  because I’ve got, as I’ve mentioned, over 30 years of experience in doing it, and then there’s a right way and there’s a wrong way in terms of the systems and processes, and you need to institute it in order to be able to carry forward a successful renovation rehab on any project.

Joe Fairless: And we will talk about your plan and your execution for renovation for multifamily; if we can stick to multifamily versus residential… That’s what most of our listeners are focused on is commercial real estate or want to be focused on it. But before we get to that, this will tie into or segue into the plan and execution… But let’s say we’re looking at a multifamily property, and we can see that there’s rent bumps that we can generate for the property, because the comps are generating those rent bumps of, say, 200 bucks. How do you think about the renovation process whenever you are initially assessing an opportunity? Not the actual execution of it, but when you’re initially assessing deals, is there something that you’re thinking of that perhaps others who aren’t as savvy with the execution of the renovation process are not thinking of?

Van Sturgeon: Well, every successful investor that I know, or just any successful person in general, needs to establish some sort of a process, a system to be able to go in and quickly evaluate a property and make a decision on whether to move forward to invest the time and effort. Because we come across a lot of opportunities. So do you, Joe. And you can’t afford to spend time evaluating a property, because there’s another five or 10 more that come down the chute for you to look at. Time is of the essence in most cases because of this overheated real estate market that we’re in.

So, with regards to how we process or how I recommend individual process it – we have a checklist and we have sort of like a renovation calculator that we use in order to be able to go in, whether that’s the multifamily side… And also, there’s a lot of wrinkles associated with multifamily, from balconies, to underground parking garages… There’s a lot of wrinkles associated with the cost of getting a capital improvement put in, but we start off using that as a basis to be able to figure out quickly what the cost is going to be associated with turning this investment around or this potential investment around, and then based off that number, then we are able to determine whether we would like to actually spend even more time associated with doing our due diligence, putting an offer in. Does that make any sense? I’m hoping that I answered your question.

Joe Fairless: Yeah, yeah. So what are some things on the checklist?

Van Sturgeon: Well, it starts from the exterior, from the roof, all the way down to the actual common areas and individual suites. It’s an actual checklist with a formula associated with it, whether it’s in linear feet square footage… And we plug that number in to be able to spit out a generalized number. And based on that number, then we can apply that to the overall number of calculations that determine whether it’s something that we should move forward on.

Break: [08:24] to [09:56]

Joe Fairless: What’s an example of a couple line items on the checklist? And I heard you say roof, and I heard you say common areas, but can you just say a couple line items? I just want to get a good idea.

Van Sturgeon: Sure. There’s a line item on the linear feet of countertop. So, based on the type of countertop that you want to repair, whether it’s granite or a Formica top, there’s a unit number there that you entered the linear feet, and then it’ll turn out a number. Square footage on paint – if you entered the actual unit, it’ll spit out a number. Those are the types of things that we try to generalize as best.

Joe Fairless: And how do you get that number, square footage on paint? That’s the square footage of the walls that you’ll be painting?

Van Sturgeon: No. Again, Joe, this is just a rough estimate associated with the cost of paint. So, it would just be on the floor. We’re estimating, I think, a standard eight-foot high floor to ceiling… So, there’s a number assigned to that, the floor square footage. So it would be — on a typical one-bedroom apartment, it would be $500, and we would assign a value, paint and material included. So, I think it’s like [unintelligible [00:10:55].25]

Joe Fairless: Got it.

Van Sturgeon: Yeah, you’re having the same issue as we do, that you’re constantly looking at opportunities. So oftentimes, you don’t want to get bogged down on them, so you need to do an overall assessment, plug in some generalized numbers to be able to see, “Hey, is this worthwhile for me to be able to move forward on actually devoting some serious effort into determining it?” and then that’s when you start to find the numbers.

Now, part of that also is that there’s buildings that have balconies, and there’s, as I mentioned, there’s buildings that have pools, and things of that sort. So those are tougher numbers to be able to figure out in terms of does this is require some repair or renovation, too.

A lot of this is also experience, and Joe, you’ve done this many a times. So there’s a wealth of experience that we draw upon to be able to put out numbers, to be able to get a sense of where you can take this property, and how much this renovation or these rehab’s going to end up costing… That new folks that get into that aren’t able to put a number to, and they struggle with that. and unfortunately, there isn’t a book out there or some type of resource to be able to buy to get to that point.

Joe Fairless: So let’s take a step back… Where do people who do not have an experienced team, where do they fall short as relates to renovations compared to the opposite team?

Van Sturgeon: Well, oftentimes, on the multifamily investor/syndicator sides, especially on the syndication side, your projections that you put together associated with this property is going to eventually generate over a course of a period of time, and is based on those numbers you’ve sold that to your investor group. Those individuals, based on those numbers, through relationships you’ve created with these individuals over a period of time, are the ones that put money toward this purchase.

That relationship is different than the relationship that you have with yourself… Meaning, the amount of money that you put into an investment, if something goes wrong, you’re the only person to blame, versus if you take somebody’s hard-earned money and you look them in the eye and they trust you with their money, to be able to carry this forward, that in itself is even more weight on your shoulders associated with making sure that you care for the renovation process and making sure that it’s successful.

So, as you bring those projections and put those together, the numbers associated with it, you need to start to fine-tune the association with what it is that you’re actually going to do to the property, and what you can’t do. Because we all live within budgets. There’s only a certain amount of dollars put aside in order to make sure that this renovation rehab is successful, and it’s going to reach your projections. That’s when the difficulty comes, especially first-timers, because everything is 10x in terms of moving from a single-family to multifamily. And the cast of characters associated with the individuals that will be part of that also change as well. You’re not going to go to a general contractor driving around in a small little beat-up pickup truck. You’re going to have to elevate and go to fair size contractors that can handle this type of renovation, whether it’s from a 10-unit up.

So as a result, there’s a lot of fear and anxiety associated with making that right move to be able to reach those projections when you’ve done your underwriting and you’ve gone to your investors, and they’ve signed off on that. So those are where, unfortunately, experience is really required to be able to make that determination as to what it is that you can do and you can’t do, and the capital improvements that you’re going to make to be able to get the highest ROI. Oftentimes, I find that these are difficult decisions that syndicators and investors have to make, because there’s only so much money in the kitty to be able to put toward raising the property value. And that’s where folks like myself come in and help in the process, because of the experience that I’ve been able to gather, and be able to help folks through that process and being able to determine exactly what it is they need to do to the property, and the cost associated with that, if that makes sense.

Joe Fairless: What’s something that’s typically underbudgeted for?

Van Sturgeon: Well, oftentimes, I find that there isn’t enough dollars in the actual unit itself, that in particular kitchens are miss—often are not calculated properly. There’s a significant cost involved in upgrading a kitchen, whether that’s not just the cabinetry, but there’s electric needs to be moved around. If there’s an introduction to putting in a dishwasher, there’s plumbing that’s involved… There’s a number of tradespeople that are involved in that whole kitchen renovation that if you walk in thinking that’s going to cost $3000 to $4000, all of a sudden, it comes up significantly more.

Joe Fairless: Thank you for those examples. That’s helpful. What is something that you’ve seen more often than not people get right, from a budget standpoint?

Van Sturgeon: On a budget standpoint, what they get right… Fortunately, I tend to see that there’s a lot of stuff that is—

Joe Fairless: What is more commonly right than the other stuff? What is [unintelligible [00:15:36].28] on than the other stuff?

Van Sturgeon: Typically, these are stuff to be able to calculate; like, it doesn’t take rocket science to be able to determine the cost associated with replacing a carpet or putting [unintelligible [00:15:47].03]. Those types of things, on a supply and install basis, you can easily figure out what that is. Unfortunately, if you really dig into each of those, in particular LVP, if you have an older building, and if you have areas where you’ve got floors that are all over the place, then there’s a cost associated with having to do some type of leveling, that often folks will miss that number. And depending on the area that’s required to have little bit of leveling done, then we can talk about some significant dollars for that.

Joe Fairless: What’s something that we haven’t discussed that you think we should as relates to renovations?

Van Sturgeon: I think that what’s incredibly important in the planning out and executing a renovation process is actually creating a detailed scope of work. And I find that lots of folks that get involved and start that whole process don’t plan it out properly and put that whole process down in writing, and creating that detailed scope of work. In detailing the type of paint, the color of the paint, appliances, toilets – all of those things that, in order to be able to get out there in the marketplace, an apples to apples comparison from contractors or tradespeople, you need to have that detailed scope of work. And it takes time, but it’s something that’s required. Because if you just generically send out, make a couple of phone calls to contractors to ask them to give you to price out work in your individual suite, you’ll have a wide variety of numbers associated with that, and also, you’ll have a number of folks that are not interested in quoting.

Coming from the background as a general contractor myself, I’m bombarded with requests of people to price out their jobs, whether it’s on the residential or commercial side. And I am careful in who I do business with. So I learned right from the beginning that I wanted to deal with professionals associated with all of these types of renovations, because I make the most amount of money in the turns that I do, and the amount of renovations that I do. So I don’t get money getting bogged down on a renovation.

So I’m always looking for professionals who know exactly what they want. And if you don’t have a detailed scope of work where you have identified exactly what it is that you’re looking to accomplish in this particular renovation, then I don’t want to deal with you. And that’s one of the struggles that I find new real estate investors, syndicators, when they’re out there trying to tender their jobs, trying to find contractors to quote on their work, a lot of good quality ones won’t, because they’re not prepared. They don’t have their decisions figured out ahead of time.

And so that’s one of the things that I find in the marketplace, whether it’s a single-family and multifamily. There’s a lack of that detailed scope of work put in there to determine, to make sure that you get exactly what you’re looking for, and you can get good quality contractors who are interested in quoting your work, and also being competitive, that you can look at quotes and compare apples to apples.

Joe Fairless: What is your best real estate investing advice ever?

Van Sturgeon: When I got started – I didn’t realize this, but now looking back, I strongly encourage folks when they get into this, that they, especially in the multifamily side, that they’re acquiring properties for cash flow, because that’s what—that’s investments you’re looking for, and you’re able to pay for improvements and put money aside… But eventually, what you’ll need to do in order to create real wealth is acquire properties that will appreciate, and that’s where real wealth is created. There’s pockets all across North America that have a little bit of both, and that’s one of the recommendations that I’ve found, is acquire properties that cash flow. And the numbers don’t lie.

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

Van Sturgeon: I’m ready. Go ahead.

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

Break: [19:19] to [22:07]

Joe Fairless: What’s something that you do differently from a renovation standpoint, that you weren’t doing, say, five years ago?

Van Sturgeon: Always looking for improving systems and processes. So I’m constantly looking at improving, whether it’s through technology, and there’s been tremendous strides even over the last several years with regards to that. So that’s in the South, where I’ve seen improvement on, is improvement on the technology.

Joe Fairless: What technology are using now that you weren’t using before?

Van Sturgeon: Twilioo is one where your projects are put it in and you can monitor the progress associated with that. There are some proprietary stuff that, in terms of like payment schedules and progress schedules that we have with contractors and trades, that helps in terms of accountability, ensuring that we get what we’re supposed to be paid for.

One of the things that I find, Joe, that I really want to — like, there’s this notion out there that in order to reserve the services of a general contractor like myself, that you need to drop 50% down, and then over a period of time, obviously, you make more payments as work progresses.

But I’m a strong advocate not to do that, in that when you’ve made that type of commitment to a contractor, that you’ve lost all control associated with your renovation project when you put up that kind of money. 50% upfront is an outrageous sum, and the only place that I would be paying that kind of money upfront is when I walk into McDonald’s. McDonald’s requires you to be able to buy your hamburger and you stand off to the side to get your hamburger prepared. None of these guys are a McDonald’s. So I’m a strong proponent of real estate investor syndicators keeping as much of your money in your pockets, maybe perhaps for mobilization and material costs you give them 10% down, but other than that, it’s outrageous. I’ve heard people that have deposits down to 70%. And how do you retain control of your rehab project when you’ve giving that much money upfront?

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

Van Sturgeon: I love being on podcasts like yours. I’ve written a number of articles that have been picked up, and I just really want to bring out the good word on like how to properly successfully plan and manage the renovation, because I find so many folks constantly — every day, I get phone calls from individuals that are struggling, their contractor has skipped out and hasn’t returned to do work or… Just a lot of horror stories out there. In fact, there’s TV shows that are dedicated to these types of horror stories with contractors and tradespeople. So I’m doing everything that I can to be able to get the good word out, and I really am enjoying that process.

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

Van Sturgeon: I’ve got a website, vansturgeon.com that folks are more than welcome to go visit. There’s a wealth of information there. I also have a renovation calculator that folks can download, to be able to sort of accelerate that checklist, and also a calculator, and I’ve been on a number of great podcasts like yours that talks about how to plan and execute a successful renovation. So that’s definitely the place where folks can learn more about me.

Joe Fairless: Van, thanks so much for talking about the renovation process and some red flags. I hope you have a Best Ever day, and we’ll talk to you again soon.

Van Sturgeon: Thanks very 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.

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

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JF2372: Generating Off-Market Deals Through Broker Relationships With Chad Sutton

Chad quit engineering because it pigeonholed him into a very narrow career path. Real estate, however, offered him plenty of opportunities without limits. His family had a real estate business, and he followed in their footsteps.

He started by acquiring a 35-unit multifamily property. It was an off-market opportunity, and the business took off from there. Since then, Chad has taught several classes on how to approach real estate brokers and leverage your perceptual position into getting off-market deals even if you’re a first-time investor.

Chad Sutton Real Estate Background:

  • Full-time real estate investor, formerly Aerospace/Mechanical Engineer
  • 2 years
  • Portfolio consists of 138 units, 5 properties
  • Based in Nashville, TN
  • Say hi to him at: www.thequattroway.com 
  • Best Ever Book: The Honey Bee

Click here for more info on groundbreaker.co

Best Ever Tweet:

“What you really have to do is build that perceptual position” – Chad Sutton.

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JF2364: How To Go From A Commission Chaser To A Problem Solver With John Chin #SkillsetSunday

John cut his teeth as a traditional real estate broker. He escaped the “hamster wheel” of chasing sales thanks to a mentor who put him on the fast track to investing. That paradigm shift made him see licensed agents as problem-solvers for homeowners rather than just salespeople.

Now John teaches real estate agents how to leverage their license into creating 8-10 various income streams as opposed to relying on commission alone. In this episode, he talks about his lead intake process that helps licensees make the most out of their leads.

John Chin Real Estate Background: 

  • John and Ron are the founders of Investor Agent
  • Together they have done 2,800 rentals and flip properties (mostly short sales, foreclosures, and REOs)
  • Closed over $260 Million in residential investments
  • He currently manages over 470 cash flow rentals
  • Based in Orlando, FL
  • Say hi to him at www.investoragent.com 

Click here for more info on groundbreaker.co

 

 

Best Ever Tweet:

“You’ve got to look at your listing as just one tool in your tool chest. It’s not the main driver of your business ” – John Chin.


TRANSCRIPTION

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

John Chin: I’m doing awesome, man. Thanks for having me again.

Theo Hicks: Yeah, no problem. Thanks for taking the time to speak with us. And today being Sunday, we’re going to be doing a Skillset Sunday. We’ll talk about a specific skill set that can help you in your real estate business, and we’re going to talk about how you can go from being a real estate agent who chases commissions to being a real estate agent wolf. John’s going to explain what that means, where the word wolf comes from, because he told me a really funny story before we got on. I want him to tell again where it came from, to have this concept hit home for you. Before we get into that, a refresher on John’s background.

He is the founder of InvestorAgent, and InvestorAgent has done 2800 rentals and flips, mostly short sales, foreclosures, and REOs, closing over 260 million dollars in residential investments, and currently manages over 470 cashflow rentals. He’s based in Orlando, Florida, and the website is investoragent.com. So John, do you mind telling us a little bit more about your background and what you’re focused on today?

John Chin: Yes. I cut my teeth in traditional residential real estate brokerage. Then, like a lot of us who end up in the investment business, where we’re flipping houses, buying rental properties, building cash flow portfolios, and serving investors to do the same thing, there was a pivotal relationship in our past – we met somebody, and they kind of set us on a fast track of doing deals, and kind of got us off of that. We call it the sales hamster wheel, where you are in perpetuity unemployed and chasing the next closing or closings. So I was fortunate enough to have that kind of relationship, and pivot the trajectory of my real estate career to actually doing deals, and then using my license as a way or just a tool to solve problems for sellers. So it’s kind of a paradigm shift.

That whole wolf story came from Pulp Fiction, where we kind of liken ourselves to one of the characters in Pulp Fiction, Mr. Wolf. Anybody who’s listening who saw that movie, there was that accident in the back of the car, they ended up at Quentin Tarantino’s character’s house, and he was going through the roof, he was upset because he had a dead person in his garage… So the boss guy sent his problem solver to the house to fix that problem, and his name is Mr. Wolf. He shows up in the tuxedo at the front door, and he says, “Hi, I’m Mr. Wolf. I solve problems.” And he comes in and cleans up the whole situation. So that’s what we kind of do for sellers.

I think the biggest paradigm shift I had that helped me transform from being somebody who just tried to chase more closings and more listing and buying commissions, to somebody who was actually building wealth, was the paradigm shift from being a salesperson to being a true problem solver for homeowners or property owners. This means that you go from only being able to make money one or two different ways as a licensed salesperson, to actually being able to make money maybe eight to 10 different ways on a property, while solving problems for homeowners that are a little bit more flexible, that most licensed agents can’t do. So you end up making more money, you end up getting more deals for yourself, and you end up solving more problems for sellers.

Theo Hicks: Perfect. Then you were talking about in order to start this process of solving the homeowner’s problem is to properly doing the seller intake. You talked about a form that you have, that people use. Can you explain at what point of the process is this used? Is it when I find a lead? And then maybe tell us what people usually do if they’re not doing seller intake.

John Chin: If you get into the mind of a traditional licensed agent who’s working what we call the retail business,  that’s all they do exclusively – they work with buyers and they work with sellers. When you talk to a homeowner in that space, what you’re trying to do is turn that phone conversation into a listing presentation or an appointment at the seller’s house or at your office to list their property. And to do a CMA form a lot of times, you do your formal listing presentation… Basically, how I can help you sell your house as quickly as possible, for the highest net proceeds as possible, that’s kind of the goal.

Everybody heard the expression, if you’re a hammer, everything looks like a nail. Well, everybody looks like a nail to a licensed commission salesperson who’s just trying to do that all day. So we bring in this process like the number one thing that helps you shift from being a commission earner to being a problem solver dealmaker is when you do that initial intake call a little bit differently.

So if you just do this one thing really well, number one, you’re going to look a lot different to that seller… Because most people aren’t coming to them as an advisor/consultant capacity. What they’re really trying to understand from that seller, “Look, you’re at point A right now and you’re trying to get to point B in your life, and your house is a mechanism to help you get there.” That’s the difference, the way you’re looking at that situation with the seller, as opposed to somebody who says, “Okay, I know you’re just trying to sell your house as quick as possible, for as high proceeds as possible.” That conversation looks different than the former. So if you do a proper, what we call a lead intake consultation with the seller… And this is the template that we use. I’ll kind of walk through what we’re trying to accomplish in that template. But it’s just a different line of questioning.

If you follow that line of questioning in a specific chronology or a specific order, then number one, you’re going to sound like a consultant, a lot different than most agents, because you’re really trying to get deeper into the life situation of the seller. Then the house just becomes a tool or a mechanism to help them get from point A to point B.

Theo Hicks: That makes sense. Let’s talk about this lead intake consultation form. So just explain, if you’re on the phone with the seller, do just read straight through it? Or is there I guess a script that you do? Or is it like, if they say this, then you say this, like a logic tree type of deal? How does it tactically work?

John Chin: Okay, so it’s a worksheet. And I always have a paper copy printed up, and it’s a front and back worksheet. So I literally can just print one up and I can fill out the front and I can fill in the back. All of the students that we work with, our trainees and our licensed agents that we support, they literally fill this out, take a picture of it, the front and the back, and then they can send it off, and now we can huddle to figure out how to best solve a problem or turn that into a deal. Or maybe it’s a better short sale listing, or maybe it’s a better traditional listing… But the sheet helps you get there, to that if-then prognosis, if you will.

So to answer your question, you just start at the top of the sheet, you go down and you just fill in the blanks. Now, the blanks just prompt you of the type of information you want to ask. As you get skilled at using the sheet, the second and third-level type questions will follow the answers you get from just the blanks. In other words, the sheet serves as a wedge for you to get what we call first-level answers from these sellers.

For example, I could ask you, “Why are you selling the property?” and someone says “Well, because I just evicted the tenant. The place is kind of trashed, and I want to get rid of it now”, for example. Well, then I don’t just stop there, even though the sheet just prompts me to find out why they’re selling. What I want to do is then go second and third level, because that’s where the juice is, that’s where you get the real nuggets that are going to help you find out what the true problem is for that seller, and help you monetize that deal.

In that situation, it would prompt me then to not just leave it with that answer, but then for me to ask, “Well, tell me about that experience with your last tenant. What happened there? How’d you end up getting that as a property, as a rental?” So all kinds of solutions come out of the info you get when you go second and third level with the sellers.

It’s a huge paradigm shift, because most people want to just get facts. And a lot of investors too, they want to just get facts, because they want to get to understand is there equity in this house? Or is there no equity in this house? They just want to go for the jugular and they take five to 10 minutes, because they’re spending more time qualifying than they are actually trying to solve a problem for somebody.

So that’s the benefit of what we do as licensees are. We have so many tools in the tool chest; you’ve got to look at your listing as just one tool in the tool chest. It’s not the main driver of your business, for example. That’s the major shift from people who are on the hamster wheel to actually evolve into problem solvers and dealmakers. But you could almost look at this sheet as a marriage between what cash investors who are looking for motivated seller leads, what they do on the phone, combined with what your typical licensee does on the phone with the seller.

You combine the two because they both offer unique solutions that they both bring to the table. But even your cash investor who talks to motivated sellers – they’re a hammer too, because all they’re trying to do in most cases, they’re trying to find out how much equity you have, build rapport, and then make a lowball offer and throw a bunch of spaghetti against the wall with maybe 15 to 20 sellers to get the deal or the discount they want. Well, if you’re a licensee and you take a consultative of approach, you can monetize maybe three or four of those out of 15 or 20, as opposed to just one out of 15 or 20. That makes sense.

Theo Hicks: Yeah. So is that where the eight to 10 different ways of making money comes from? You’re going to have a higher success rate? Or are you saying that there are eight to 10 different ways to make money on a particular deal?

John Chin: Both. So the former is what we emphasize, because of the latter. In other words, because you’re able to solve a problem a few different ways with the seller, there could be two or three ways to make money with the seller. Now there’s only one ideal way that’s a happy marriage or medium between what they’re trying to accomplish in life and the profit motive you may have as a real estate professional. So you want to find that one highest and best answer, if you will. If you’re able to have multiple ways to do that and there’s a highest and best answer, then to the latter point there, you can take more leads and turn more leads into deals.

So if you’re concerned, like a lot of us are, about our lead generation spend… Because you know, depending on where you are on the spectrum – if you’re a cash buyer, you’re spending anywhere from low competitive market $50 to $100 per paid lead, up to $200 or $300 per paid lead. If you’re in the retail sales space, you’re spending anywhere from 20 bucks a lead, five bucks a lead, on up to $100 or $200 a lead, too. So if you’re in a business that you’re trying to scale, and you’re sensitive about your lead gen cost, then you want to take as many of those leads and monetize as many of those leads as possible. Well, if you’re a hammer and you only have that one solution, whether it’s on a cash buyer side or on the listing side, you can’t monetize many of those leads. So it’s both.

Theo Hicks: Got it. I wanted to circle back to that… But I first want to hit on what’s actually on the form. I don’t want you to walk us through every single question, but what are some of the ones that are pretty unique, that maybe people don’t typically think about asking?

John Chin: Okay, let me give you the overarching philosophy here. We call it the four Ps. When you’re using the form, what the form does in two pages with about 50 different questions, or lines of questions, or fields that you have to fill in – what that does is it actually just answers or addresses four Ps that we’re trying to uncover. The first two Ps – and I’ll break them down, because it’s an acronym for four different things that you’re trying to uncover. The first two Ps you get done in the first few minutes of the phone call, and that’s “Is it a property type that I can deal with?” In other words, if you don’t do vacant land, then you don’t have solutions for vacant land or commercial properties, then you want to qualify that right upfront. It’s kind of a knockout question.

Second thing is, “Are you talking to the person,” that’s the second P, “who has control of that property? Are they entitled to the property? Or are you talking to a friend of the owner?”, for example. So you have to not waste your time and obviously address those right up front. Those are the two easy ones.

The second two Ps are a little bit more in-depth. And the sheet – it does a couple of things. Number one, because of this line of questioning, it allows you to build rapport with somebody by virtue of your seeking to understand them with a line of questioning they’re not used to from commissioned salespeople. You build rapport with them and it helps you agitate some pain and urgency, because you have to break this inertia of them doing nothing with their property, to get them to act… And that involves people getting emotional, and getting into what we call that negative fantasy that keeps them up at night when they’re worried about what this property, if they don’t get rid of it, is going to do to them in life.

The second two Ps are pain and profit. That’s what really takes up the bulk of the sheet. The magic behind the methodology is the profit is self-evident, it’s obvious. If I want to find out what kind of profit potential I have on this as a dealmaker, then I’ve got to understand what the cashflow opportunity is, are they willing to leave the loan in place, for example, on a subject-to acquisition? Is there potential, because they don’t need to sell it right, now for us to lease option it? What would the spread be between what market rent is and my carry costs on the property if I was going to structure something like that for a cash flow deal, for example?

So the profit potential, that line of questioning gives you permission and helps you build rapport naturally, and gives you the actual facts that you need to determine if there’s profit potential from a cash flow perspective and/or equity position.

Then the other P is pain, or urgency. The questions are designed so that you want to agitate the pain to build the urgency to get them off the couch, for example, to actually take action, whether that’s getting the property listed or getting it under contract. You have to agitate that pain, because if you’re going to get a deal, people only leave equity or cash-flowing deals if they’re making an emotional decision, so you have to stir the emotion. And that’s where I think people fail the most.

Our typical lead intake is going to take anywhere from 30 to 45 minutes, assuming we know the first two Ps we have checkmarks with – they are in control of the property and it is the type of property that we want to deal with, that we can monetize. If we know those first two Ps, then the rest of the conversation should take about 30 to 45 minutes if you’re doing it correctly. I’ll tell you that when it relates to the pain portion of the questionnaire, the type of questions that elicit that pain and agitate the emotions to get them to take action – I’ve asked somebody what they want to get for their property on the front end of the phone call, and I’ve compared it to what I can get them to sell their property for at the end of the phone call. It’s like a 10 to $15,000 difference, just by virtue of making that pain front of mind for them.

I’ll give you an example, coming back to your initial question, what are some questions on here that maybe somebody doesn’t ask; or maybe they do ask, but they don’t take it third level. So for example, somebody says they just inherited the house. You’re going to see a lot of that; we have two million houses in the probate pipeline with the boomers dying off right now. There’s a lot of heirs or siblings that don’t want to contend with those properties. If you’re talking to somebody, for example, who just inherited a house, they’re in another state, and they’re trying to unwind the legacy of this property owner, their deceased family member, or parent… And they’re telling you that that is how they have the property. Then what I’m not going to do is just leave it there. I’m going to say, “Well, what happens if you can’t sell it? Who’s helping you with this probate case, or to help liquidate all these assets?” And then they’re going to tell me — I’m going to uncover more of their pain and more of their situation that is going to be more agitating to them. So it’s not even the questions on the sheet, it’s kind of the mindset you have. The sheet gives you permission to go second and third level to agitate pain, to get them to take action.

Theo Hicks: Very interesting. You mentioned that once this sheet is completed, then what are the next steps? It sounds like for you, you have people that use this and they can kind of come back to you and your program and talk through it. What about people who don’t have access to this? What should they do once they’ve finished out their intake?

John Chin: That’s a good question. So as you evolve as a licensed agent, [unintelligible [00:18:55].07] having somebody you can link into that can help you put all this information together into a practical solution. I’ve never had that question before, because the people that we work with, we work with on a consistent basis. They’re around the country; so I don’t want to get into a pitch here, but… If you don’t have somebody that can help you put those tools together, I guarantee you the way you find them is you can just do on Google and find people who are spending big money for leads like this, that have dealt with sellers in urgent situations. So if you’re a licensee and you want a quick low-hanging fruit way to find those people, you can go to your local REIA meetings and find somebody who helps people with different deals, that does coaching programs. They’d gladly get on the phone with you to help you unpack one of these after you finish it, so that you can get their feedback on how to do it. Because a lot of times, they’ll either provide the funding for it, or they want to JV with it, or there’s an incentive there to turn into a deal, and to take you by the hand and walk you through that process.

Another way to do it is to go on Google and just type in “sell my house cash,” and you’re going to see all the people who pay big money for Google AdWords to be found by sellers who you’ve already started working with. You can collaborate with that person, and they’d be happy to do it, because the incentives are there to partner with you on a deal. I’d say that those are the two easiest ways to do that.

You could also just look at the mail you get at your own house. A lot of people get direct mail from people who will pay cash for houses. Or just google cash for houses in your local area and you’ll find people who market in your geography that want leads like this, that will partner with you. So I would say lean on somebody like that.

If I was in that situation, and I had one of these done… By the way, I’ll walk through the structure of the type of information you’re getting without going into the exact questions… If I had that already done and I could take a picture of it, the front and back of that sheet, and send it off to that experienced cash investor or that deal maker, and then I jump on the phone with them, they have everything they need right there to unpack the deal. Because I’m actually collecting more information than chances are they’re even getting on their intake phone calls.

Theo Hicks: That makes sense. I’m glad we talked about this, because I think this clearly applies to real estate agents, but as you kind of mentioned a few times, it really applies to anyone who’s talking to owners and attempting to get them to sell their house. So that applies to anyone who’s generating off-market leads.

Some of the big takeaways that I got is – first of all, this is kind of obvious, but making sure that right off the bat on the phone call, you’re asking the questions that will automatically let you know if you’re talking to the right person and if this deal meets your criteria. That way, you’re not going to waste time in the meaty part of the conversation which is the profit potential, and then the pain and urgency.

It sounds like, in a sense, you’re trying to tap into what would make them motivated to sell the property, or why they’re motivated to sell the property. It’s most likely going to be some emotional reason, that’s going to be an emotional decision, which is what’s going to help you not only get leads, but get the best types of deals. And then overall kind of shifting your paradigm from just intaking a bunch of facts and then leaving it there, as opposed to approaching and saying, “Hey, you said you’re at point A and you want to get to point B. Let’s figure out how we can use your house to get to that point.” And then going through a solid seller intake form, but not just relying on those questions only, but using those questions to catapult into the second level and third level questions. You kind of gave us an example of that.

Then you talked about how can you create this form, and then once you have this form, how do you know what to do with it? Well, you really need to find someone who’s the expert. I like the advice you gave, you can just Google “sell my house cash,” and you’ll find all the companies that are trying to capture these leads, and you can work with them. So John, is there anything else want to mention before we sign off?

John Chin: Yeah, I’ll give you one last juicy tactical nugget. It’s the setup of that phone call. So literally, when you first talked to that seller on the phone, my question is have you ever worked with a licensed professional who takes more of an advisory approach to solving problems as opposed to only listing houses? Right off the bat, that sets a different tone with you. So they say, “Well, no, I haven’t.” Because they never have. “Well, let me tell you what I do. I solve problems for sellers, in various situations, various scenarios, in various life situations, whether it’s divorce, or they’re missing payments on their house, especially in today’s environment. Sometimes listing your house isn’t the best thing. My intent with this phone call is to get as many of these puzzle pieces on the table of information about your situation where you’re trying to go and what you’re trying to accomplish, so that we can together put our heads together and figure out how to put these pieces together to get you from point A to point B. So with your permission, I’d like to ask you some questions about your house and your situation, and then we’ll be able to solve this problem for you. Is that fair?” That’s the intent statement that we use to set up that actual phone call. Then you have permission to go into everything, because they know what you’re trying to accomplish now, and you clearly are different than your competition.

Theo Hicks: Yeah. Instead of just going straight into the questions. That totally makes sense; making sure you have that solid intro to set the foundation for the conversation. Thank you for sharing that, John. Well, alright Best Ever listeners, thank you for listening. You can learn more about john at investoragent.com. Thank you for tuning in. As always, John, thanks again for joining me today. I enjoyed our conversation. Have a Best Ever day and we’ll talk to you tomorrow.

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JF2348: A&E’s Flipping Boston With Dave Seymour

Dave Seymour was a firefighter for 16 years and is now a full-time real estate investor who also was on the A&E’s hit TV show “Flipping Boston”. Dave has done millions in real estate transactions and now manages a 100 million dollar fund investing in multi-family.

Dave Seymour Real Estate Background:

  • A  firefighter for 16 years and now is a full-time real estate investor
  • He was acclaimed as the star of A&E’s hit TV show “Flipping Boston” 
  • Has done millions in real estate transactions
  • Now manages a $100 million dollar fund investing in multi-family 
  • Based in Boston, MA
  • Say hi to him at: https://www.freedomventure.com/ 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Educate don’t speculate” – Dave Seymour


TRANSCRIPTION

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

Dave Seymour: I’m well, Joe. How are you, man?

Joe Fairless: Well, I’m glad to hear that. I am well also and looking forward to our conversation. A little bit about Dave. He’s been a firefighter for 16 years and is now a full-time real estate investor. He was on the A&E show Flipping Boston, he was the star of that show, and he’s done millions in real estate transactions. Now he manages $100 million fund investing in multi-family. And that’s what we’re going to spend a lot of our time focused on. Based in Boston, Massachusetts. So with that being said, Dave, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

Dave Seymour: Yeah, absolutely. It’s kind of interesting when you hear somebody describe a 10+ year journey in two or three sentences right there… But I was a firefighter and a paramedic for many years here just North of Boston, a city called Lynn, Massachusetts. I found myself in some financially challenged positions, and transitioned into real estate. I had some construction experience, Joe. Firefighters tend to have that second and third job, and mine was in construction, and that was my first taste of investment. I got to see investors. Their clothes were cleaner, their cars were nicer, they smile more than I did while I was digging ditches. So I kind of thought to myself, what are they doing that I’m not? And I figured that out, and it was an education for me. It’s crazy, man. I attended one of those seminars that were traveling around the country back then, invested, and actually did what I was taught to do. And the results from that spoke for themselves. It got me out of some financial jackpots I was in, just through financial illiteracy.

Spending more money than you earn is probably not a great policy. But I learned through real estate what an appreciating and a depreciating asset was, and a lot of the single-family stuff that most people are familiar with – the eating popcorn on a Saturday morning, watching HGTV; it looks so easy, doesn’t it? But in the real world, real estate investing takes expertise. It takes practice. It takes some guts. But if educated, and then implemented what I learned – it took me on a pretty dramatic journey.

One day I’m sitting in a firehouse watching the show, and the next day I’m on TV creating a show. We did about five years of Flipping Boston, which was great. It was a lot of fun, it was also a lot of work; it wasn’t financially what most people think reality TV is.

Joe Fairless: What do you get paid for that?

Dave Seymour: Yeah, look at you asking me such a personal question… It’s fine. Here’s what I didn’t get paid. I didn’t get paid Kardashian money. You know, we started out at about $1,500 bucks an episode, myself and my partner. And at the height, it was probably around $30,000 an episode. But you’ve got to remember, we weren’t doing fluff and puff, we weren’t doing garbage flips. In New England where we are, our stock is pretty old. The majority of our properties that we buy, fix and flip, were turn of the century 1910, 1920, ’30, ’50, ’60s. So they had a lot of deferred maintenance. Plus you’re bringing all of that up to code. So it was a lot of work, but the national exposure was the real value in doing that TV show.

Joe Fairless: So many questions, and we’re going to focus a lot on your 100 million dollar fund, but just a little bit of context for your background. You said you were in some financially challenged positions. How bad, financially, did it get?

Dave Seymour: I was working 120 hours a week. So I would work full-time in the fire department, full-time construction on my days off, and then part-time nights and weekends. And I came from a very blue-collar background job. I was never taught what money really was, which was a tool. I was taught that saving was smart. I was taught to just trade time for money. And when you’re continually trying to keep up with the Joneses,  I crossed that threshold where I had about $60,000, $65,000 in unsecured debt, depreciating debt, cars, boats, leather coats…

Joe Fairless: Leather coats? You don’t seem like a leather coat kind of guy to me.

Dave Seymour: [laughter] You know, that’s just — I use that as a term.

Joe Fairless: So you didn’t buy any leather coats?

Dave Seymour: Well, I might have had one. I didn’t look that good in it, Joe. [laughs] But being a consumer rather than an investor. I think we trained that way, Joe. I think it’s how America is driven. And for me, I was 2006-2007, I’d refinanced my primary residence I think three times in 18 months, because they told me my house was a bank, and it was always going up in value. And then I found myself in late 2007 in a pre-foreclosure, potentially working on a short sale. That’s when I actually started in real estate. The first job I tried to do was save my own house. Very pleased to say I was able to do that.

So it was bad… It cost me a marriage, it cost me a relationship. When you’re working that much you can’t really show up and be present for the people that you love, because you know, I’m riddled with fear, doubt, and insecurity every day, like, “Oh my god, can I make ends meet?” So I never forgot that. And it’s kind of interesting, Joe, because I carry that sense, if you will, that feeling into everything that I do today in dealing with our investors. Because I know that they’re probably feeling a lot of the things that I felt, like what is five years, 10 years, 15, 20 years going to look like on their financial landscape? So I’m very cognizant of that. I think my own journey has been a huge benefit to me and to my investors, rather than a deficit, like “Oh my god, that guy nearly lost his house. Why would I invest with him?” That’s probably the best reason to invest with a guy like me, because I take every dollar seriously as if it was my own when it comes to investing.

Joe Fairless: How did you get on the show?

Dave Seymour: I was a seminar student. I was a product of a three-day class and then some mentorship. It was amazing…

Joe Fairless: Was that Rich Dad, Poor Dad, or what?

Dave Seymour: Well, it was a different company. It was actually the Russ Whitney group. And Rich Dad, Poor Dad actually bought them out. So it’s the same kind of organization. It’s crazy, man; that world is a different animal in and of itself, buy… It really is, Joe. And I got to be on the other side of that curtain because they asked me to start teaching because I was doing so well, and I’m like, “What, are you crazy? I’m just coming out of a pre-foreclosure scenario. Now I’m going to get on the stage and teach?” They said, “No, just share that it works. Don’t lie. Don’t say you’re a billionaire. Just tell the truth.” And I found that people resonated with that.

So because I was recognized as a teacher and a trainer, somebody in that world suggested that I put in an application for a TV show. It was a company out in New York, it was a vanilla application that you could download… And I just did it for [unintelligible [00:09:17].07] and giggles, Joe, to be very honest with you. I loaded the application with profanity, so that I knew somebody would at least pay attention to it… And yeah. They picked up the phone, they kind of laughed at me. They said, “You’re either a genius or you’re crazy putting all these incredibly unpleasant words in your application.” And I’m like, “Look, dude, they got you to get on the phone, didn’t it?” And I said, “Why don’t you come up to Boston? I’m a firefighter. We do this real estate stuff the same way I fight fires – when everybody else is running out, we go running in.” I said, “I’ve got a great crew, we can have some fun. And if we don’t, okay, I’m still going to do houses.” And it was like that posturing I think was important as well. They came out, shot a little sizzle reel (they call it), sent it to the guys at A&E. And it’s funny, the guys at A&E their comment was, “That big English guy looks like he could get pretty angry. We want to see more of that.” And that was it, man. That was it. So the game’s began.

Joe Fairless: Now let’s fast forward, let’s jump ahead to a hundred million dollar fund. Have you raised all the hundred million dollars?

Dave Seymour: Oh, I wish. No. I could spend 100 million tomorrow, if somebody wants to write us a check. We’re about 80% of where we want to be right now, but we are in acquisition mode.

Joe Fairless: 80% of where you want to be. So you’ve raised 80 million dollars?

Dave Seymour: We’re 80% of where we want to be. There is not 80 million in the bank either right now. A lot of the money — I’m not trying to avoid anything, Joe. But a lot of the…

Joe Fairless: No. Fair enough. Yeah.

Dave Seymour: …a lot of the capital is coming through what’s called qualified funds. So I could say 80 million, but because it’s qualified funds, I might only land 50 million of it. But we’re consistently in a capital raise mode, because of the amount of apartment complexes. They’ve gone through our underwriting funnel job. They’re primed and ready to go. But the reason we transitioned into this world from where I was, is because the landscape demanded it. COVID has created an unprecedented opportunity. And that word unprecedented is used pretty much in every conversation today. Unprecedented that our kids don’t go to school, unprecedented that the restaurants are shut down, unprecedented medical front; it applies everywhere. So if you’re doing the same thing now that you were doing late 2019, then you’re probably not doing the right thing.

And we looked at it and we said pre-foreclosures will hit, the forbearances will be lifted, and people will be hurt. Unemployment is still three and a half times what it was pre-COVID. The moratorium on tenancy is going to be lifted, people will be evicted and they will need to be reassigned to new housing. We need to be ready for that. And it’s a case of he or she who controls the capital in this chaos is going to win the race. And the amount of dry powder – and we refer to dry powder as the capital dollars on the sideline – has grown exponentially as I’m sure you’re aware. So we have a responsibility to be in that position to put that capital to work. Double-digit returns, which is what we target out.

Joe Fairless: And when you say qualified funds, are you talking about retirement accounts?

Dave Seymour: Yeah, correct. So that’s your self-directed IRAs, your solo 401K’s. That money funnel, if you will, has got a lot of checks and balances along the way. I work solely with one company, Horizon Trust, so I have a great line of communication, and our systems integrate, so we can take maybe a couple of weeks off of the general timeline that it takes to get that capital into the fund. Because as soon as it’s in the fund, my goal is to get it out the door and on the street into a property as soon as possible. So yeah, that’s what we mean by qualified funds.

Joe Fairless: Why is a lot of the money through qualified funds?

Dave Seymour: That’s a great question.

Joe Fairless: Firefighter connections is my guess.

Dave Seymour: Yeah, it’s partly that. It’s an interesting world. Fearless real estate is kind of like our topic here, but at the end of the day, I’m now in finance more than I am in real estate. So these kinds of funds, what’s called a regulation D 506(c) fund – because I’ve gone through the SEC compliance process, I’m allowed to market to the general public for my fund. Well, there are really two kinds of investors; there’s what we call the retail investor and the institutional investor. The institutional investor are the smaller hedge funds, pension plans, things of that nature. They are very comfortable with 10, 20, 30 million dollar commitments into a fund, but they shy away when it’s a new fund or a first fund.

So the qualified funds for us are coming through the retail investor pool. I’m 54 years old, so I have a lot of commonality, for want of a better term, with my investor pool… Because we’re in their late 40s or early 60s age group where we’re starting to think significantly about “Will the retirement capital honestly get to the finish line for us?” The number one fear is having the money die before you do. It’s interesting, medicine has extended our life and yet our financial fortitude doesn’t meet life expectancy anymore. People are still just plunking money into 401Ks, are not paying attention to their expense ratios inside of there, and they talk about compound returns, but they never refer to compounding costs.

So that’s why we attract that kind of capital, I think. We have various marketing funnels, Joe, that are out there. And it’s a wide net that we cast. But it’s the retail investor that puts their hand up, because I think they just identify with the message. If you’re sitting on three and a half million, four million dollars right now, is that really enough? And most economists say it’s not enough money to get there. So I’m not necessarily interacting every day with the pension funds and the smaller hedge funds, although I do have a lot of conversations with those guys.

You know, it’s funny, man – you get to a point where you show them your PPM, your private placement memorandum, which is a legal document that explains the business model for the fund. Why we invest, where we invest, what’s that criteria, returns, etc, etc. And these funds are looking at it and saying, “I love what you’re doing. It all makes sense. You know what though? You’re only 100 million, you’re way too small for us. Please call us when you’ve got fund two up and running, with half a billion, and then we can write you a check for 75, 80, 90 million dollars.” So the business model isn’t what’s being overly scrutinized, it’s actually the size of the fund, which is pretty interesting.

So that’s why I think it’s commonality, it’s people resonating with the message that we put out there as to why wouldn’t you let somebody else do all the work, Freedom Venture Investments, and you the investor participate passively in those double-digit returns that we target on the fund when we execute and bring the assets in? Does that make sense?

Joe Fairless: It does. You mentioned marketing tactics, you’ve got a bunch of them. What’s been the least successful and the most successful at bringing in the accredited investor?

Dave Seymour: Yeah – the least successful is thinking that just because you have the TV guy status, that people are going to write you a check. [laughs] I think that’s kind of interesting. We brought in Kevin Harrington to be head of business development for us. Kevin Harrington was one of the original sharks on Shark Tank. And Kevin is a fantastic asset to the company. But you look at it and you think, why is this so much work? And you can’t just have a fund and think the money is going to come. So what we did was we stepped back after a couple of weeks and said, “What more that we need to be doing?” And for us, the most successful funnel, if you will, that we have, is actually building out an online education piece that brings the investors awareness and competencies up the gradient enough so that when we have the offer in front of them, it makes a lot more sense to them. And we do that through various online social media type platforms, and things of that nature. That’s been the number one spot.

And then the second spot is where we’re at right now, which is actually doing in-person presentations for our accredited investors. We do one down in Tampa, which is where the majority of our assets are, in the Gulf Coast region in Florida. We just go to a really nice steakhouse, we do an hour and 20-minute presentation, gauge the interest in the audience, and then start to work with them and bring them up the gradient, so that they can feel comfortable about making an investment. I’ve always done well live and in person, Joe, and it’s so hard right now with COVID. The very best restaurants — Tampa is a little looser than we are up here in Massachusetts. Our offices in Tampa are firing on all cylinders. But up here in Mass, I think I’m down to about 18 to 24 butts in seats. But again, look, my minimum investment is $100,000. It’s two, three, four thousand dollars to put on a decent event, feed your potential clients, gauge their interest… This isn’t a hard sell.

Joe Fairless: How do you find them? Like the in-person one.

Dave Seymour: Yeah. Direct mail. We pull a list of accredited investors, we can go in and base somebody’s accreditation on earnings. It’s amazing how much information is out there when you know how to go find it.

Joe Fairless: Who do you use for direct mail?

Dave Seymour: My marketing team does it. Blockbuster, or Big Block, I think, is a postcard that we use. A little bit bigger. And again, that’s where we get a little pop for the TV thing, because you get to be able to use you know the face and the names, and people are like “Oh, that’s a little bit different.” It’s just separating yourself from the noise, Joe. If you can do that… Just like I did using profanity to get a TV show… I now use the TV show to separate myself from the other funds that are out there that are vying for this retail investor capital.

Joe Fairless: And I know this is more the marketing team, but if you do have knowledge of this, we’d love to learn about it. On the direct mail piece, do you have a frequency in what you send those direct mail pieces to the credit investors?

Dave Seymour: Yeah. Let’s say I pull a list of 1,000 accredited investors from direct mail marketing. It’s not like 1,000 pieces one time; you want to segment that out. So we’ll do either a three or five-touch campaign over, I think it’s a three to four-week period. I’m not exactly sure how often they send them out. But we commit to that. I’m not a great marketer, I know the basics. So with direct mail, my response rate for these kinds of events is probably around three and a half, 4%. We haven’t done too much split-testing with these pieces because we haven’t really needed to yet. But it’s trial and error. Marketing is all trial and error. It seems to be in such an intangible world sometimes for me; I’ve learned my lessons over the years with online marketing companies and stuff like that. I like tangibles. I want to see dollars out, customers in, cost of acquisition. Again, the marketing team does all of that. But it’s not just a “one list, one time, I hope it works.” Its three to five-touch campaign is what you generally need to get that kind of response rate.

Joe Fairless: And you said three to five touch campaign over roughly a three to four-week period. Just so I’m tracking right, does that mean about one per week?

Dave Seymour: Yeah. Approximately one a week. It’s the consistency that really gets it done.

Joe Fairless: Different postcards each week, or the same ones?

Dave Seymour: Well, we haven’t needed to split-test yet.

Joe Fairless: So the same one over and over?

Dave Seymour: Yes. So the same one. We back that up locally here in the Massachusetts market. I have a radio show that runs on Saturdays, like a talk show piece. It’s a one hour show called Real Estate Revealed. So I also use that as an education and a traffic-driving platform as well. I bring in Kevin Harrington and interview him, and I interview my custodian from Horizon Trust, and that kind of stuff. It’s all angles. It’s all angles.

Joe Fairless: It’s a fun conversation, I appreciate you sharing the inner workings of how you’ve put together the fund. Have you purchased any properties with the fund money yet?

Dave Seymour: Yeah. We’ve got a smaller asset class that’s just about to come into the fund. And there’s approximately, I would say, another 15 or 18 million that has been underwritten and has been walked, and is right on the cusp of coming into the fund. It’s interesting, because what we’re seeing now is practically zero outbound marketing for leads for properties. My partner Walter Novicki, he has over 25 years syndicating multi-family apartment complexes in the Gulf Coast region… So he’s known as the guy to call when the you know what hits the fan. And we’re actually getting pre-foreclosure leads now… Because we deal with a smaller asset class, Joe; I don’t like these 200, 250, 500-unit complexes. I’m going to let Wall Street and all the big boys fight over those. And then what we’ll do is we’ll pick up all the crumbs, because the verticals are exactly the same for us.

Joe Fairless: What size units are you targeting?

Dave Seymour: We target 40 to 150, we’re in that range.

Joe Fairless: Got it.

Dave Seymour: And again, because the verticals are there, property management, construction, those kinds of things for repositioning, we almost look at it as if it is (and it is) all one fund or one real estate strategy for each of these complexes inside the fund. It’s inbound calls.

I was talking to a fund manager the other day, and he deals with international pension funds for teachers. And he asked me bluntly, he said, “Your fund is 100 million.” He said, “If I write you a check for 100 million, how long can you put it to work?” That’s a hell of a question to have somebody ask you. And I quickly dialed in my CIO, Walter, and I said “If I give you 100 mil tomorrow, how long can you put it on the street?” He said, “I can buy 300 million of cash flow and assets within the next 30 to 45 days.” And that’s a pretty powerful statement to make. But again, it only comes through longevity and expertise in a market, being able to execute on that stuff. So that conversation is still going on. I wish I could tell you with all confidence that we pulled that one off, but it’s interesting the way that they’re looking at this stuff. They’re looking for a lot of distressed debt right now, and that’s probably part of the fund too for us, is bringing distressed debt into the fund and working some of those angles as well.

Joe Fairless: Just taking a step back, based on your experience in real estate investing. What’s your best real estate investing advice ever?

Dave Seymour: Educate, don’t speculate. Really, it’s that simple. There are so many investors out there who think they know what they’re doing. I’m watching a lot of speculative investments going out there right now. People got hurt in 2008, 2009, 2010 because they did the ostrich thing. You know what I mean, Joe? They put their head in the sand and said, “Nah, we’re going to be alright.” No, you’re not. You’ve got to pivot, educate. Do you know what’s going on in the marketplace? Do you know what the yield is on a T-Bond right now? Because that’s important. Do you know how many mortgages are in forbearance right now? That’s important. You know, all of the easy data that they throw out there needs to be analyzed with a professional mindset, and a lot of people just kind of wing it. And I’ve seen a lot of people get hurt. I’m very proud to say I have never ever in my career, missed one payment or lost $1 of investor capital ever, ever. I’ve always done that from an ultra-conservative standpoint. I don’t do skinny deals. I educate myself first before I execute. So yeah, sorry to get long-winded man, but it’s important. Educate, don’t speculate.

Joe Fairless: We’re going to do a lightning round. But first, are you ready for the lightning round?

Dave Seymour: Whatever you’ve got. Bring it on, Joe. I’m feeling strong. I’m on a roll.

Joe Fairless: I know you — you can handle anything. First though, a quick word from our Best Ever partners.

Break: [00:24:21][00:25:08]

Joe Fairless: Alright, let’s do a lightning round… Real quick, Best Ever way you like to give back to the community?

Dave Seymour: Tunnels for Towers. It’s a charity close to my heart that supports 9/11 victims, and veterans, and first-responders.

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

Dave Seymour: Freedomventure.com, look us up online. You can find out who we are, what we do, and how we can help you.

Joe Fairless: Dave, thanks for being on the show. Thanks for talking about your fund. Thanks for talking about a little behind the scenes action on the show Flipping Boston, and your personal story, along with ways that you’re currently attracting accredited investors to your fund, the focus of the fund being 40 to 150 units, and why that is the case. So I appreciate that. Hope you have a Best Ever day, and talk to you again soon.

Dave Seymour: Thanks, Joe.

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JF2345: Financing Commercial Real Estate With Anton Mattli

Peak Financing CEO, Anton Mattli, has decades of experience in commercial and investment banking, private equity, and commercial real estate. Throughout his career, he and his team have closed over 5 billion commercial transactions.

Anton Mattli  Real Estate Background: 

  • CEO of Peak Financing
  • He has 20 years of real estate experience 
  • Personal portfolio consists of 200+ units (not syndicated)
  • Based in Dallas, TX
  • Say hi to him at www.peakfinancing.com 
  • Best Ever Book: Tipping Point

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Focus on cash flow” – Anton Mattli


TRANSCRIPTION

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

Anton Mattli: Very good. Thanks, Theo, for having me.

Theo Hicks: And thank you for joining me as well. A little bit about Anton’s background. So he is the CEO of Peak Financing, and has 20 years of real estate experience, with a personal portfolio of over 200 units, not syndicated. He is based in Dallas, Texas and his website is peakfinancing.com. Today we’re going to talk about commercial real estate financing as it relates to the Coronavirus. Before we talk about that, Anton, do you mind telling us more about your background and what you’re focused on today?

Anton Mattli: Sure, happy to. As your listeners can hear, even though I’m based in Dallas, Texas, I’m not from Texas. I was born in Switzerland, and right after school, I studied finance, economics, I went into banking, worked for UBS in New York, then Tokyo, and Hong Kong, and then I left banking. So I have worked all around the world, always in real estate related activities and other financing activities. And after that, I started helping high net worth individuals and family offices with their direct investments. I have been involved in this now for roughly 20 years. And separately from that, we also have founded Peak Financing, which is a financing intermediary. Essentially, we are a commercial mortgage broker, and we find the best financing solutions for commercial real estate based on the asset, where it’s located, as well as the sponsors, and we make sure that there is a certainty to close, which is a crucial piece to the puzzle, as you know.

Theo Hicks: Before we go into the financing part, you said that you manage money for families and then high net worth individuals?

Anton Mattli: Yes. My focus on that is no longer as strong as it was in the past. My focus always was on direct investments, whether it was real estate or other types of alternative investments, as they’re also called. So the non-traded securities, obviously, real estate and commercial real estate always made up a big bulk of it. But some of the other investments were also industrial firms, as well as oil and gas, and similar types of investments.

Theo Hicks: Okay. Let’s talk about commercial real estate financing. I’m going to be selfish and focus on multi-family. So do you work with all types of apartment investors, or do you only do agency debt or only bridge debt? Is there a certain unit number you want to see, or a minimum loan amount that you want to see? I’m trying to get a picture of what types of loans you do.

Anton Mattli: Sure. Generally speaking, we prefer to be above the one million mark, ideally above the two million mark, but we have done a lot of deals with a property value of over a million and a half to two million, too. In that space, so only agency debt, whether it’s Freddie SPL, or Fannie, or [unintelligible [00:06:23].20] as long as the property is stabilized. If not, then it’s typically a bank loan. As a property gets larger, we have been doing also a lot of bridge loans. Over the last six months or so, since COVID-19 hit, not as many of those, because a lot of bridge lenders stopped lending. But still, for good sponsors, and good locations, good assets, with a true upside potential there are still bridge loans available. We are also doing CMBS loans, life insurance companies for lower leverage loans, mezzanine loans in certain situations, typically for larger deals, for more experienced sponsors… So we essentially find the right financing solution for a particular situation.

Theo Hicks: Okay. So you do it all then.

Anton Mattli: Yes.

Theo Hicks: Over a certain size.

Anton Mattli: That’s correct. Yes.

Theo Hicks: So let’s talk about the bridge loans first, because you mentioned that in the current environment… And I’ve heard this too, and many people listening, you’ve probably heard this as well, that bridge lenders – some of them have stopped entirely, other ones have slowed down. But you mentioned that there are still some available to good sponsors, good market, stabilized deals. So let’s talk about what you mean by a good sponsor. So if someone comes to you and they’ve looked at a deal that isn’t going to qualify for agency debt, or they want a bridge loan, maybe to cover renovation costs, what types of things are you checking off the list to make sure that, “Okay, this person is going to qualify for a bridge loan right now” or “Okay, I know this person is going to get rejected”?

Anton Mattli: So in the past, because there were so many players that came into the markets for bridge debt, it was very easy to get bridge debt virtually for anyone. As long as you had financial strength with a minimum net worth and liquidity, we were able to do it. And the reason for that really was that most bridge lenders that were out there, did it similar to CMBS loans. So they originated a loan and then they sold it into the CLO market, which is essentially collateralized loan obligation. So it was securitized today; it didn’t really stay on the book for more than maybe three to 12 months maximum. Because the CLO market really has collapsed since COVID-19, most players that are still active, that have a strong balance sheet, and they are willing to keep these bridge loans on the balance sheet if they are not able to securitize it. As a result, they want to focus on sponsors that have a true experience with these types of assets. So they’re really looking for someone who has already done it in the past, or partners up with someone who has already experience with true value-add properties, rather than someone who just feels, “Well, here. I want to have a value-add deal.” And as you know, particularly in the syndication space, everyone is looking for that. That’s not really for newcomers to the game. It’s very hard to get a decent bridge loan. But the benefit is, as you also know, and many of your listeners know, is you can partner up with someone who brings that experience to the table.

Theo Hicks: Is there a specific number of years, or number of units, number of deals? Or is it more on a case by case basis? Or is it just, “I’ve done one value add deal, so now I qualify for it”?

Anton Mattli: Yeah. Obviously, the more, the merrier, right? But at least one that went full circle; they want to see ideally in the same market where the new deal is being targeted, as well as the similar size.

Theo Hicks: Perfect. And then let’s talk about the agency debt now. I know one of the big changes is the upfront reserves that are required. So do you want to talk about that a little bit?

Anton Mattli: Obviously, that’s on everyone’s mind. And it makes it tough, particularly for syndicators; they need to achieve a certain cash on cash return in year one and year two, and they need to raise more equity. There is just no other way around it. Depending on the leverage, and again, for syndicators specifically, most long to go for maximum leverage, so the reality is, for most of these agency loans, it will be nine months to 12 months of principal and interest, and if it’s a smaller loan on the small balance Fannie side, then it’s still 18 months. At least on the Freddie SPL side, it’s 12 months. So that’s certainly a benefit to go with Freddie SBL. Frankly speaking, whenever it’s possible, in that sub $6 million mark and it fits into the Freddie SBL box, I would generally advise to go with Freddie SBL anyhow, compared to Fannie.

But coming back to these reserve requirements that need to go into escrow – it obviously is a hard pill to swallow. But frankly speaking, other than the fact that the lender controls these funds, rather than you as a borrower, you should really, in my opinion, raise those funds, regardless. Even if the lender didn’t require you to raise escrow –this 12-month or nine-month, or whatever it may be– of principal interest, it’s really advisable to have that raised anyhow. Because at this point, we still do not know how the situation will evolve after the election and into 2021. So if you have a new deal, it’s really worthwhile to have plenty of cash cushion.

Theo Hicks: Sure. So if the lender does require the reserves, and I raise 12 months principal and interest, what happens to that money? Do I have access to it after a year? Do I have access to it until the deal is sold? When do I have access to this capital?

Anton Mattli: Yeah. So generally, with Freddie, you can get it back a little bit later. The rule there is – it needs to be, essentially, for 90 days all the restrictions have to be lifted, and then you need to be sure that your property has been performing for two quarters. So I would say in the best-case scenario you may get that money out within six to nine months, but realistically speaking, it’s probably more than 12 months to a year and a half, unless you’re in a just perfect situation.

So I would anticipate if I raise money, that that money potentially sits with the lender for a year to a year and a half. Now, if you need that money for debt service, you actually can have access to it. It is really meant as a principal and interest reserve. So if for whatever reason, due to COVID-19 or other reasons – it’s very hard to tell, but whether it’s very specific to COVID-19 or not, but if you have collection issues, if you have occupancy issues and you, in turn, have cash flow issues, that makes it harder for you to service your debt… You can ask the lender to pull from these funds to service the debt, right? Obviously, you cannot just decide that on your own, but you can make that request.

Theo Hicks: That’s what I was going to ask you… So I’m assuming that they’re going to check to make sure you actually need it. This might not be something that changed during the current pandemic, but when it comes to these reserves, these upfront reserves are different than ongoing lender reserves or…?

Anton Mattli: That is correct. That’s completely separate. Yes, so that’s definitely completely separate; you still have the replacement reserves that you have to fund. If the lender also requires you, and that’s depending on the program and how the lender assesses the risk, you may also have to escrow insurance and/or taxes. Very often you don’t have to do that. But the replacement reserves definitely have always to be funded separately from that principal and interest.

Theo Hicks: And that is that then kind of held by the lender for the entire hold period, or…?

Anton Mattli: Well, it’s really meant for replacements, right? So as you do replacements, you can draw from these. So essentially, it’s money and money out, eventually. So as you spend more, you can request to get money back for proven replacements that you have done. And all the while, you continue to do your monthly debt service that also includes a certain amount for replacement reserves.

Theo Hicks: So besides the bridge loan and the agency loan, you mentioned a few of the other loan programs that you do. I imagine that bridge loans and agency debt are the most popular. So correct me if I’m wrong, but assuming they are, what’s the third most common loan program that you see apartment syndicators specifically will use for their deals?

Anton Mattli: Pre COVID-19, I would say in the non-recourse space, CMBS loans were really popular. Whenever they didn’t fit into the agency box, whether it was a sponsor that was too weak or the property was close to stabilize, but just did not meet agency standards in terms of location, or repairs, or condition of the property… With CMBS loans also having fallen off the cliff in March, they have come back a little bit, but it’s still a very tight market to actually put deals into it. It can be done, but it’s still not something that is nearly as readily available as before.

For syndicators, other than that, bank loans are still a valid option. Obviously, under the 1 million mark, most indicators actually go with bank loans, even though they are non-recourse. But we have also done bank loans above the million mark, for various reasons, even though there might be recourse. Some banks are doing non-recourse if the leverage is a little bit lower, but the majority is recourse. But some still prefer to go with a bank loan rather than a bridge, because you have much less restrictions compared to a bridge loan, you have much less upfront cost… And some also go with a bank loan, because they don’t want to get into the prepayment penalty issues that you have with agency loans, so they are happy to go with a five, or seven, sometimes 10-year bank loan, even though the amortization is typically 20, 25 years. But they can easily refinance later, or sell the property without any issue.

That typically only happens when a syndicator is strong enough to partner up, or do it by him or herself, or partner up with someone who is strong enough and who also feels comfortable to go with recourse. Most syndicators cannot do it, because they have to rely on other financial backers that insist on non-recourse loans. But there’s only a pocket of syndicators that are perfectly fine with that.

Theo Hicks: Okay, Anton, what is your best real estate investing advice ever? And I’m going to add context to that and say, apply it to apartment syndicators looking to do deals during COVID-19.

Anton Mattli: Sure, absolutely. I would say I have applied that rule since I started investing personally, and I see it over and over again with syndicators – it’s focus on cash flow. Do not focus on appreciation potential. If you get it, it’s a cherry on top, but you need to focus on the cash flow… The in-place cash flow, as well as the projected cash flow, and make sure that the projected cash flow is realistic, rather than just a number that you need to get to in order to entice investors to invest with you.

Theo Hicks: Perfect. Okay Anton, are ready for the Best Ever lightning round?

Anton Mattli: Sure.

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

Break: [00:18:45][00:19:35]

Theo Hicks: What is the Best Ever book you’ve recently read?

Anton Mattli: Well, there are a number of them. Once in a while, I read The Tipping Point by Malcolm Gladwell. And particularly now with COVID-19, I think it’s a perfect book to reread, with COVID-19 really creating that type of tipping point that no one anticipated. But certainly, I think it’s very worthwhile to mention, since it’s a syndicator show [unintelligible [00:20:02].12] it’s a Joe Fairless show, I have enjoyed the Best Ever Apartment Investor Syndication Book by Joe too, which I think is really worthwhile for any upcoming syndicator to read. But there are some others, like Frank Gallinelli has written a book about cash flow in real estate. He’s probably done that 20 years ago, but he has [unintelligible [00:20:26].05] on his book and that’s more technical, but it’s really also importantl and again, for cash flow, for me, it’s so crucial for syndicators. So that book by Frank Gallinelli is also worthwhile to read.

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

Anton Mattli: Pick up the pieces and restart. I have been an entrepreneur – or business owner, whatever you want to call it – for 20 years. I have my failures with ventures I attempted, and the only thing that you can do is pick up the pieces, and move on, and restart.

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

Anton Mattli: Because we have been involved in multi-family and particularly also in workforce housing, we obviously meet a lot of people that are in need, and a lot of them are in need not because of their own fault, but because of just bad luck… And we support a homeless shelter that is local to us, that has a very unique approach to them. It’s a Samaritan Inn in McKinney; that’s just North of Dallas. And it’s not the typical homeless center, but they are actually bringing in families and teach them to get back to independent living. So it’s not just, “Okay, here you have a roof over your head. Here you have food.” But rather, actively help them, everyone in the whole family, to get back out and live an independent life.

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

Anton Mattli: I would say the best is probably by email. My email is anton@peakfinancing.com. I’m also very active on Facebook, I’m on LinkedIn… So I’m really easy to reach.

Theo Hicks: Perfect, Anton. Well, thank you for joining me today and going into lots of details and updates on commercial real estate financing, specifically multi-family financing, due to the current virus… And we talked about the bridge loans, and kind of the reasons behind those that have slowed, down but how they still are available, but only available to sponsors that have true experience… Whether that be me, or you, or the individual themselves, or a business partner. And more specifically, what you mean by true experience would be doing at least one deal in the same market, similar size, same business plan, and have it gone full cycle. So not just buy, but manage, and then disposition on the backside.

We talked about agency debt and the upfront reserves, how those have gone up, and how that affects syndicators. But you recommend raising those funds regardless of whether they’re required or not. We’ve talked about the best-case scenario – you have access to those funds within six to nine months, whereas 12 to 18 months is more realistic. And then you’re still required to do the ongoing replacement reserves. So they’re separate from the upfront reserves. And that’s a pay-it-and-take-it type of account.

You also said that the CMBS loans were the next most popular before COVID-19, but obviously, that’s not the case anymore. And then you also talked about some of the pros of bank loans over the other programs, and when it might make sense to go for a bank loan over an agency loan or a bridge loan.

And then your Best Ever advice to syndicators during these times, and all times, is to focus on cash flow and not appreciation, which as you know from our book, is one of the three immutable laws – buy for cash flow, not for appreciation. Appreciation is the cherry on top, whereas the in-place cash flow and then a realistic projected future cash flow is the cake in that analogy.

So Anton, thanks again for joining me today and sharing your knowledge on financing. Best Ever listeners, as always, thank you for listening. Have a Best Ever day and we’ll talk to you tomorrow.

Anton Mattli: It was a pleasure.

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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JF2342: Military Couple Powers Through Real Estate With Lindsey Meringer & Amanda Schneider

Lindsey Meringer and Amanda Schneider are the power couple of the month with Lindsey being a green beret and an operator in the 10th special forces group, and Amanda was also in the military and later decided to become a full-time real estate agent. They began their journey into the world of real estate in 2016 and currently have a portfolio of 5 single-family rentals, a triplex, and working on growing their portfolio even more.

Lindsey Meringer & Amanda Schneider Real Estate Background:

  • Lindsey is an operator in the 10th Special Forces Group (Airborne), a green beret
  • Amanda is a full-time real estate agent
  • They started their real estate journey in 2016
  • Portfolio consists of 5 single-family rentals, a Triplex, and currently working on a duplex to turn into a 5 unit
  • They have added 11 doors in the past 12 months with 14 overall with the goal of reaching 20 by end of 2020
  • Based in Colorado Springs, CO
  • Say hi to them at: www.TheVeteranREaltor.com 
  • Best Ever Book: The One Thing

 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Both mentorship and your community is important.” – Lindsey Meringer & Amanda Schneider


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners, and welcome to the Best Real Estate Investing Advice Ever Show. I’m Theo Hicks and today we’ll be speaking to two guests. We have Lindsey Meringer and Amanda Schneider. How are you two doing today?

Amanda Schneider: Great! Thanks.

Lindsey Meringer: Doing great. Yeah. How are you?

Theo Hicks: I’m doing well, thanks for asking and thanks for joining us today. A little bit about their background. So Lindsey is an operator in the 10th Special Forces Group (Airborne) and is a green beret, and Amanda is a full-time real estate agent. They started their real estate journey in 2016 and their portfolio consists of five single family rentals, a triplex, and they’re currently working on a duplex that they’re going to convert into a five unit. So they’ve added these 11 doors in the past 12 months, with 14 overall, and their goal is to reach 20 doors by the end of 2020. They’re based in Colorado Springs, Colorado, and their website is www.theveteranrealtor.com.

So starting with Lindsey, could you give us some more information about your background and what you’re focused on today?

Lindsey Meringer: Yes, so I grew up in a small farm town, and that kind of life has helped us a lot in where we are today, in that I have a very extensive construction background, from roof framing, I worked in a finished cabinetry shop, so pretty extensive in the construction world, and I’ve been able to leverage that into real estate; joined the military in 2010 and since then, Special Forces… I’ve truly been all over the world from Africa to the Middle East and Europe and just kind of living that life as we’ve been W-2 entrepreneurs, and just pushing forward.

Amanda Schneider: Yeah. I was also in the military, and then I came out to Colorado Springs to be a contractor for the military, and that’s when I met Lindsey. And I had read the book Rich Dad Poor Dad, which kind of made me realize how lucrative real estate could be as far as that passive income.

So when Lindsey and I started dating in 2015, we had taken a road trip and we called it our all-or-nothing road trip… That if this worked out well for us, we were probably going to get married and move on with our life. If not, we were going to break up. So during that road trip, we listened to a ton of real estate podcasts. I think we may have even listened to Rich Dad, Poor Dad on that one, too. So that kind of spawned our investing from there. We got married and the next day we went looking for our first house together.

Lindsey Meringer: Yeah.

Amanda Schneider: Yeah.

Theo Hicks: Perfect. So I kind of want to talk about this duplex deal. So you are currently working on a duplex, and then the plan is to convert it into a five-unit. So maybe walk us through from the conception of the deal to where you are standing as of today.

Lindsey Meringer: Yeah, I think part of the conception – it is important to start at the beginning, because one little piece of advice I’ll give is to please trust your wife. We had a search setup, we were looking for multifamilies, and we look at zoning applications that are single family, zoned R-4, looked for potential… And I had actually trashed this duplex on the search, because it was a really expensive duplex. She messaged me and said, “Hey, I found this great duplex,” and it was zoned R-5, and it was 3,300 square feet. And she actually got me to kind of look into it more and it ended up having a lot of potential as a project.

So we went and  looked at it, and saw a duplex split level, and they had actually at one point converted a porch, done trusses over it and enclosed it; it has like these couple of weird storage areas next to a two-car garage and then a detached one car. And that porch has an outdoor patio area. So when we walked into it, we’re like, “You know what, this would be a really great conversion to four smaller units. We can break off the back of the property and we’re going to end up with a two bed, two bath; a two bed, one bath; a one bed, one bath and two studios.”

Theo Hicks: So from a manager’s perspective, it sounds like Lindsey saw this deal and was like, “Ah, nah, I’m good.”

Lindsey Meringer: “Nope.”

Theo Hicks: And you saw it, and  I guess — you saw it separately and thought that it was good. So what was it about the deal that made you interested in it?

Amanda Schneider: Well, Colorado Springs is an exploding market and we have tons of investors here. So we have five single families, so we’re like, “Hey, we really want to break into the multifamily.” But it’s so tough here, because we have lots of cash investors that are just coming, they’re paying over market value… So we wanted to find a creative way that we could possibly make a multifamily out of either like a single-family or a duplex or something. So we had a specific search setup where I would go on MLS and specifically search for properties that were zoned for more than the actual doors that were on that property. So that’s really what appealed to me.

Yes, it was priced a little high as a duplex, we did negotiate a little bit, we got the price down a bit… But I just saw that we could turn this into five units, and I just thought about the potential. And it’s in a really up and coming area of Colorado Springs, so that was another huge draw for me.

Lindsey Meringer: Yeah.

Theo Hicks: Could you maybe walk us through how you financially analyze a deal like that? How do you know how much you can pay for a deal that you’re going to ultimately convert into something completely different?

Lindsey Meringer: We just analyze everything as an end state, and the numbers work or they don’t. We had two contractors walk it. So there is actually some hiccups with this that we can talk through… But as far as the base analyzing of it, we just looked at rehab costs and conversion costs, funding fees, lending fees and then what we could rent everything for on the backside, and if the numbers made sense, they made sense. So even though it was kind of a big project and thinking outside the box in the use of the property, the base analyzing of it was pretty straightforward.

Theo Hicks: Sure. So if you don’t mind, walk us through some of these hiccups that you just mentioned.

Lindsey Meringer: Well, I think one thing to highlight before the hiccup is kind of creative way we financed it. So as opposed to using hard money, I went around to a ton of local commercial banks and just talked to the head of lending and all of them and told them the way I wanted to go about this, the vision I had for the project. It was great, because I got that face to face time and that recognition. But then I found a great local bank that was willing to be super creative with lending. So what we actually ended up doing is doing a commercial loan on the front, kind of as a hard money lender at a one point and 7%, which anyone who’s used hard money knows that would be an incredible hard money rate. But the way the lending works on it is the same principle. It’s an interest-only loan on the front side, and then we have residential on the backside. We’re doing four units, we’ll cash out, refi, roll it into a residential, and then down the road, we’ll pay out of pocket and just convert the single-car into a fifth and make it a commercial property.

So it’s been kind of fun learning a lot with this in the funding application to it, and kind of the way the fiscal tie in. But then yeah, with hiccups. We had a contractor that we ended up going with – we get a call one day that he is backing out. Then the next day, the plumbers and electricians back out. So yeah, we’re a month in and I had done all the demo myself just to save some money, so we were back to ground zero.

I had a great commercial contractor come in, he’s become our contractor for all our properties now. But he was like, “Yeah, this $78,000 property, a rehab is more like 140k.” So that was kind of a little bit of a heartache. But we’ve managed to push through it and we’ve kind of brought that budget down a lot as we’ve worked through and gotten creative. And the numbers on the backside with the rental are still so great that even that heartache and that raising the cost of rehab – we’ve still managed to make it work as a pretty solid deal.

Amanda Schneider: Yeah, and one thing I wanted to add too is there were some other things that this original contractor — it was ultimately our fault, because he had never done such a big project for us. So we just had faith that he could. But he was not versed in what it takes to convert something into more than a duplex. And the city, even though the lender looks at four units and under as residential, the city does not; it looks at it as commercial. So it also took a couple weeks of Lindsey calling around to different departments within the city to make sure we could do what we wanted to do. Do we need a development plan? If we need a development plan, that was going to be 15k… There was so much more that we had no idea that we had to do in this conversion.

Lindsey Meringer: Yeah.

Theo Hicks: Just going back a little bit… We talked about your search on the MLS – you’re looking at things that are zoned above what they actually are.

Amanda Schneider: Yes.

Theo Hicks: Is that something that anyone can do, or is that something that you need to have access to the MLS? So you need to do it through an agent?

Amanda Schneider: To make it the easiest, access through the MLS is the easiest. You could find an address, you can look it up on the county assessor’s website and see what is zoned. So I guess theoretically, if you found something on Zillow and you were just curious, you can always find that on the county assessor, and I would assume every city makes that public knowledge.

Theo Hicks: Yeah.

Amanda Schneider: But obviously, using the MLS is much easier, because I can just set up a simple search.

Theo Hicks: Alright. Something else I wanted to talk about too is maybe some tips, some advice on people who want to get into real estate investing with the person that they are married to. What are some pros and cons of that?

Amanda Schneider: Yeah.

Theo Hicks: Well, we may be a bad example, because we truly see eye to eye on most things with real estate. I thing that’s the thing, is we truly share this passion as our way forward in life. Our whole life revolves around real estate; granted, I’m still in the military, but if I’m not actively at work or deployed or something, I’m working on a job site or analyzing future deals… So sharing that common bond is absolutely crucial. I think we’ve heard plenty of stories through podcasts where the husband wants to buy a house, an investment property, and the wife isn’t on board. And I think the biggest thing that happens there is that nothing happens. They never take that leap.

Amanda Schneider: I would say the one thing that maybe we butt heads about sometimes is the fact that Lindsey does have all of this background knowledge about construction, but I’m kind of a type-A personality, so I like to have control and I like to know a schedule and a timeline. So sometimes I get to the point where I’m questioning a little bit too much about the subs that he’s running.

So one thing that I would say for advice is to find your lane and then stick within that lane, even though it can be really hard. So I do a lot of the finding of the properties and the finance, figuring that out. And Lindsey runs the subs, meets with them. He does that part of it. And that has worked really well for us, is not trying to get in each other’s lane… Because Lindsey can also freak out about some of the financing, where I know our way forward and how we’re affording things… But when he goes and looks at our bank account or something, he’s like, “Oh my gosh.”

Lindsey Meringer: Yeah, because I see the day-to-day and I’m pretty sure we’re broke all the time.

Amanda Schneider: Yeah. So just kind of just defining your own lane and staying in it.

Theo Hicks: Sure. So once you have these lanes defined, does that mean that Lindsey has the final say on everything related to his lane, and then Amanda has the final say, or do you guys still come to these decisions together? Or are they completely separate?

Lindsey Meringer: Yes and no is the answer to that. I’ve learned she is a genius with finances. She’s so organized. So in things like that, I’ll voice my opinion if something sounds super strange. But for the most part, I just have complete faith in her. When it comes to stuff on the building and design side, then sometimes I’ll just make the command decision, but a lot of times it’s really us looking at things together and making that kind of functional decision. But I would say the only thing that is truly just mostly hands-off is the financial. I really just trust her.

Theo Hicks: So Lindsey, you mentioned that you’re still in the military. Are you still working a separate job full-time? You said you’re a contractor for the military. Are you still doing that? Are you a full-time agent, or are you full-time in the real estate business?

Amanda Schneider: No, I’m a full-time agent and then we property-manage all of our properties, so I kind of do a lot of that, too.

Lindsey Meringer: Yeah.

Theo Hicks: So what happens when Lindsey is deployed, who takes over his duties? How does that work?

Amanda Schneider: Well, it’s been okay so far, because we haven’t really purchased the property that would need a full rehab when he wasn’t here. And that’s really where I rely on him the most, I would say.

Lindsey Meringer: Yeah, I’m currently in the process of a medical board for medical retirement from injuries, so I’m non-deployable now. So we’ve been fortunate in that. And I think that’s why we started in 2016, but we’ve added 11 doors in the past year, is because I’ve been here, and we’ve been able to approach everything together.

The first couple of years—we’re pretty much experts in the VA loan at this point. We got four properties under the VA loan, or five, I guess, now. And we would do one and then when I’d redeploy, we’d do another one, and then I’d deploy and redeploy and do another one. So we just kind of spaced it around deployments. But now that I’m home, we’ve been able to accelerate.

Theo Hicks: Perfect. Okay, starting with Lindsey, what is your best real estate investing advice ever?

Lindsey Meringer: Definitely the people around you, both mentorship and community. And there’s that rule, the sum of five, I think it is. You had a gentleman on your podcast, Nick Giuliani; I talk to him every single day, just for motivation. He’s farther along than I am and kind of chasing them at this point, but we bounce stuff off each other. We’ve surrounded ourselves with like-minded investors; there’s a couple of buddies that I have in special forces that are investors, and we do meetups and everything. And we’re just so driven every day by their social media posts, their text messages, everything. If we got down on ourselves a little bit or a little frustrated, we just look at our community around us and are immediately reinvigorated to go.

Amanda Schneider: And then I would say, don’t be afraid of doing your first deal or doing additional deals, even if you don’t have money, because you can make it work. And that’s one thing that just this last year has taught us. We’ve found, other than what Lindsey said about approaching the commercial banker and being able to use some of the equity from our other houses, we’ve also been able to borrow some money from our IRA creatively, and we’ve just found ways to make it work. If you find a deal and it’s amazing, you’ll find a way to make it work.

Lindsey Meringer: Yep.

Theo Hicks: Perfect. Okay, are you both are ready for the best ever lightning round?

Lindsey Meringer: Let’s do it.

Amanda Schneider: Yep.

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

Break: [00:17:36] to [00:18:28]

Theo Hicks: Okay, so for each of these questions, we’ll start with Lindsey and then we’ll do Amanda. So what is the best ever books you’ve recently read?

Lindsey Meringer: So I’m a big podcaster. But if I went for books, The ONE Thing is my book.

Amanda Schneider: Yep. And mine is going to be Profit First. It’s not really a real estate book, but it’s just an entrepreneur business book overall that teaches you how to make sure you’re also getting a profit from your business from the beginning.

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

Lindsey Meringer: So that’s kind of easy for me, because I do for now do W-2 entrepreneurship. I’m in the military. And then as I Med board out, I’m transitioning into the space world here. So I will have a full-time career.

Amanda Schneider: Yeah. And I would say, I can’t imagine my business completely collapsing, but if the real estate market collapsed, I think I would just shift my focus towards working foreclosures, short sales, things like that. I would keep grinding, because I can’t imagine doing anything other than real estate.

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

Amanda: That would be a couple properties ago… Security, Colorado, 80911 – there’s a report recently it’s the number one appreciation real estate market in the country. And then we bought a house there; it was next door to another house that we actually lived at. I found the guy, he was out, moving stuff out of his house. I just approached him, asked him what was going on.

Long story short, we were able to work a deal where they could leave the house in the condition it was in. The yard was full of stuff, they just needed to get out and get [unintelligible [00:19:49].23] for some security reasons. And the return on that was in the 20% range, but we have turned $57,000 into that, into about $145,000 in equity in a one year period. So it’s been pretty incredible.

Amanda Schneider: Yeah. And the one thing I would just add to that deal is that we were also able to get the sellers to cut us checks at closing that equaled about $15,000 towards our contractors. That was just part of the deal, too, which was pretty sweet.

Lindsey Meringer: Yeah.

Theo Hicks: Nice. What about on the flip side? Have you guys lost money on any deals? If so, how much did you lose and what lessons did you learn?

Lindsey Meringer: So we have not. Fortunately, a bunch of our first deals were VA loans, which gives you a super low barrier to entry. And then the Crestone property, the duplex conversion, the rehab budget has close to doubled, but we will still not lose money on that property, the numbers are so good. So knock on — I don’t have any wood around me, but we’ve been pretty fortunate.

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

Lindsey Meringer: We started about six months ago doing host home providing for intellectually and developmentally disabled persons. And it’s been stressful at times, but extremely rewarding, and that is something that we love doing.

Amanda Schneider: And then I’m part of an organization called Angels of America’s Fallen. It supports children of any kind of first responders/military that have passed during their service. It provides them up, until the age of 18, with extracurricular activities, so we donate a lot of money to that every year, we participate in their yearly gala, including volunteering for that.

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

Lindsey Meringer: So I’m kind of a child at heart, so on Instagram, I’m Calvin J. Hobbs. You’ll see a picture of me, Amanda, and our dog. Then on Facebook, I’m just my name Lindsey Meringer.

Amanda Schneider: Yep. And you mentioned my website at the beginning… So the  https://www.theveteranrealtor.com/. You can message me there, but then I’m also on Instagram as @the_veteran_realtor.

Theo Hicks: Perfect. Lindsey and Amanda, thanks for joining us today and giving us your best ever advice. A few of my biggest takeaways – I like the idea of when you’re in a really competitive market and you want to get into multifamily, rather than buying a multifamily, trying to find something that you can convert into a multifamily or into a commercial property.

You mentioned how Amanda has access to the MLS, and you search that, looking for properties that are zoned something that is higher than what the property actually is. So something zoned R-5, that’s a duplex; R-4 that’s a duplex. So that’s the deal you guys are currently working on. And even though the renovation costs have increased because of this conversion, because of the strength of the market, you’re still be able to make money.

We talked about how you’re able to secure some pretty creative financing, and that was by simply going to local banks and talking to all the heads of lending about your vision for the project.

We talked about a few tips about starting a business, growing a business with your significant other, and making sure, as  you both share in the passion for real estate, realized that it is kind of your financial driver, in a sense. And then make sure that you’re defining what each of your roles are, and then whoever is the best at that thing is the person who’s the ultimate decider if you guys don’t agree… Or you can just follow Lindsey’s advice, which is that you always trust your wife, and let her do everything—no, I’m just kidding.

Lindsey Meringer: Hey, happy wife, happy life is a motto that I live by.

Theo Hicks: Exactly. And then lastly, your best ever advice – Lindsey’s was about mentorship and community, both in person and online for that motivation. And then Amanda’s was not being afraid to do a deal, do more deals without necessarily knowing exactly where the money will come from, because we’ve been able to make it work. If it’s a good deal, the money will follow. So thank you both for taking time out today to speak with us.

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

Lindsey Meringer: Thank you so much.

Amanda Schneider: Thanks.

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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JF2338: Laid Off to 200 Single Family Homes With Sakar Kawle

Sakar is originally from India and immigrated here in 1997 to pursue MS in Clemson University. He is a full-time real estate investor who started back in 2000 after being laid off. He now has 20 years of experience and a portfolio of 200 single-family homes so some would say his “laid off” was a blessing. 

Sakar Kawle Real Estate Background:

  • Full-time real estate investor since 2001
  • 20 years of investing experience
  • Portfolio consists of 200 single-family rentals
  • Based in Ellicott City, MD
  • Say hi to him at www.premiumcashflow.com 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“You will find the scalability plays in the investors favor the more you study multifamily ” – Sakar Kawle


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, Sakar Kawle. How are you doing Sakar?

Sakar Kawle: I am good, Joe, thank you. I appreciate you inviting me on the show.

Joe Fairless: Well, of course. And I’m grateful that you’re on the show. A little bit about Sakar. He’s got 20 years of investing experience. Portfolio consists of 200 single-family rentals. That’s 200 single-family rentals. He’s based in… Oh man, I forgot the pronunciation. How do we pronounce this city in Maryland?

Sakar Kawle: Ellicott City, Columbia area.

Joe Fairless: Ellicott City, Columbia area. Thank you for that. Sakar gave me the pronunciation before. I even spelled it phonetically in my notes, but I butchered it either way. Ellicott City, Maryland. And with that being said, Sakar, do you want to give first the Best Ever listeners a little bit more about your background and your focus, and we’ll get into it a little bit?

Sakar Kawle: My story is a typical immigrant student who comes to US in 1997. I did my [unintelligible [00:03:55].20] in Clemson University, and after a brief working stint for a couple of years, I got laid off. I shifted my focus to cash flowing rentals, and basically, since I got my full-time job here in Maryland just outside the Baltimore area, I discovered that Baltimore was a cash-flowing state. Very good city to invest. So I pretty much started investing in Baltimore back in 2001 or so… And slowly but surely been accumulating houses – one, two, sometimes a lot more; in the post-2008, 2009 crash we were accumulating probably 12 to 14 houses a month at that time. So collectively, we are at about close to 200 houses and some midsize apartments and things like that as we stand right now. So that’s in short, you can say, my snapshot.

Joe Fairless: All in and around Baltimore?

Sakar Kawle: Correct. So it’s majorly concentrated in probably four or five zip codes here in Baltimore, which gives us a decent scale from a management perspective and things like that. So it just helps out in terms of lots of things, as you can imagine.

Joe Fairless: What’s the average house value worth?

Sakar Kawle: Sure. So average values worth here are depending on the area, Joe – anywhere between 160k to 225k, and things like that. So if you want me to clarify some acquisitions, and things like that…?

Joe Fairless: Sure. Please.

Sakar Kawle: So back then, you know, we bought houses anywhere between let’s say, 50,000, 55,000 to 70,000, 75,000. There were some houses I bought for close to 100,000 as well. But that’s just the acquisition. But then in every single house, we would spend anywhere between 20,000 to 30,000 just from a renovation standpoint. So we would have completely new kitchens, bathrooms, refinish basements, and things like that.

So that gives us a good position that you kind of harden all the surfaces and stuff. And once you do the house right, as you know, tenants stay longer, their satisfaction level is great, your maintenance also is much less. So that helps out in a lot of respects, basically.

Joe Fairless: Let’s talk about the model. What is your business model with the direction of the portfolio? Is it what you just described, where you’re buying at 55k to 75k,  you put in 25k or so and then you just hold on to it long term? Or is there something else that you’ve been doing?

Sakar Kawle: Sure. So typically, Joe, my mindset always had been buy and hold for the longest time. And then as I was collecting houses and the cash flow numbers were going up, there were many years I would see that I would have lots of cash in my bank. So back in 2018, we ended up purchasing about 15 units, two apartment buildings right next to each other, right at the heart, right next to the university, and things like that. Then again, turned around in three, four months, bought another 66-unit portfolio, all by myself. And during that time is when I saw that, yes, you can place a large amount of capital as well in multi-family buildings… As you can imagine, like someone who’s been sort of rehabbing and renting houses for a number of years.

But when I came to multi-family, you’re dealing with smaller units, of anywhere between 600 to 900 square feet and things like that, you’ve got one-level apartments. So here you’ve got a house guy who’s been doing renovations, and when you throw me into a small box of apartment, if I may call it, I got really excited. I said, “You know what? I mean, such a small place – we can turn it around.” And just the whole dynamic about commercial valuation versus house valuation comps, and things like that… That really resonated with me. And the more you study multi-family, you find, yes, the scalability, the management and things like that, the best days, as I said, the commercial cap rate evaluations and stuff like that – that really sort of plays into investors’ favor.

So as far as the direction of the portfolio goes, Joe, since I have held on to the houses for a much longer time, my LTV is quite less right now. So eventually, we might sell it and maybe completely transition into multifamily as well. But since I have such a larger portfolio, I recognize that it may not be as easy as boom, you shift gears and sell off two, three houses, or 10 houses, and off you go, in six months you will transition off completely. It may not be like that. There may be a transition of two, three years where we are slowly unloading and perhaps, you know, moving forward.

So that’s what I would say. But the nice thing also, Joe, is that we own and manage everything ourselves, right? So we can always say that, yes, there is a bit of overhead involved as well. But the cash flow, the type of renovations that we have done, and stuff like that – we have no qualms or misgivings about the portfolio that we currently have. It’s just that, yes, multi-family will probably give you more bang moving forward; that may be the direction. But again, as we know, we are in such a low cap rate environment. Even if let’s say the multi-family ramp up takes a little longer, I still have my good bit of all this portfolio by myself, that we can still bank upon and move forward. So those would be the general points, I would say, for all of this.

Joe Fairless: Boy, we have so much to talk about. I love this. Let’s first talk about the loans that you have on the single-family homes. Is it one, or do you have one per property? How do you structure it?

Sakar Kawle: Sure. That’s a good question. So, Joe, typically when folks are newbies, they wouldn’t recognize the power of your credit unions or nearby banks, and things like that. But the more you start in this business, you realize that you don’t have to go to your typical big banks, Bank of America and Wells Fargo, and things like that. In fact, it’s quite the opposite, that the bigger the banks you go, they do not know how to do the investment portfolio financing.

So coming back to the portfolio that I have, my loans are mostly commercial loans. They are probably portfolio loans, as you can call it. So they are pretty much held on by credit unions or smaller banks, and things like that. And they’re all mostly loans comprising of, let’s say, 10, houses, 12, houses, eight houses, things like that. So that’s how it is.

When I initially started, I did smaller loans, maybe three properties, one loan, four properties, one loan, and things like that. But as things started to ramp up, I would pretty much discover that I’ve got to scale big, and then I would present a much larger loan package. So for example, just to give you a brief snapshot, you would bundle let’s say, 12 houses for, let’s say 800k, 900k. And as you can tell, on a per-house basis, you’re mostly less than 100k of sorts. So from a cash flow perspective, even from a debt balance perspective as well, it’s very conservative. So it really is a win-win for everyone, honestly.

Joe Fairless: Let’s say you have a lender and they say, “Okay, Sakar, I’d like to lend to you. But we need at least 10 properties.” Well, you’re looking at property number one, and number two, but you don’t have properties three through 10. So in that case, are you just getting a one-off loan and then transitioning it into a portfolio loan later?

Sakar Kawle: Sure, that’s a good detail there. So what happens, typically, Joe, is that you would acquire them first. And you have to have the properties. There’s no such thing as you’re starting a loan package of 10 and you don’t even have the properties ready. So just to give you an idea how it played out on the street for us is that I would buy properties from my own cash, or perhaps through hard money loans, and things like that. And as we were renting them out, and things like that, we would go approach the bank, saying that we are looking at eight to 10 properties loan. And how that would play out is that typically, we play a lot into Section 8 and [unintelligible [00:12:18].06] base programs.

And the reason I bring that up is that the inspections and by the time you rent the house, typically you’re talking sometimes maybe two months by the time someone submits their paperwork, and you’re going through inspections, and you sign a lease. Typically, it can take one and a half to two months easily. And in that case, what would happen is that in that hypothetical example of 10 properties that we were discussing, you would have eight properties ready, but looking forward, you would submit the package to say that, “Yes, we have these other two properties that are coming on the books in the next 60 days or so.” And you would present that.

So the answer to your question is that you definitely need properties upfront. You cannot have a fictitious case where you are doing a 10 properties loan, but you don’t even have tangible assets to present or show to the bank, and things like that.

Joe Fairless: Cash flow. When listeners hear about 200 properties they’re thinking, “Wow, what does that bring in a month?” So what does 200 properties bring in a month in cash flow?

Sakar Kawle: It’s crazy, Joe. I honestly haven’t even counted, because one of the biggest things that I’ll tell you – maybe you can understand this in this manner… Just the property management alone, I probably make $15,000 to $17,000 just on the property management fees. I’m not even talking net cash flow or anything.

Joe Fairless: Those fees are coming from who?

Sakar Kawle: From our own portfolio. So we own and manage ours, right? But at the same time, I want to make sure that… Sometimes you know how numbers get all sort of commingled and you don’t realize what’s happening, and all of that… Although I have these eight to 10 entities between all this portfolio, right? So sometimes you don’t know how numbers are playing out. So it’s very important to sometimes just make sure that not only you’re doing it right, but at the same time from an accounting perspective, that management fees and some of the utilities and all of that that come with all of this, you’re accounting it correctly.

So maybe three, four years ago, I wasn’t doing this, thinking that, “Hey, this is my own portfolio. Why do I need to do it?” But then suddenly, you start to realize that when it comes to the time of taxes and things like that, you realize that, “Geez, there are all these details that are asked”, and you’ve got to account for them properly.

So I started to do all of that, and then suddenly I realized that hey, you know what – we were doing management the whole time ourselves, but we were not really paying ourselves, because we were constantly renovating and pulling the cash out and putting it back into businesses, and things like that, right? So we were not doing that. Bust to answer your question, just property management alone is upwards of 15k to 17k just on the fees itself.

Joe Fairless: That’s awesome.

Sakar Kawle: And then probably over well over 50k or so in pure cash flow, and stuff like that. And my story is a slightly different, Joe, wherein I am very debt-averse. So what I also do is just the power of compounding and writing the debt down really. On every single loan that I have, I typically pay a minimum of $1,000 every month extra principal. That’s just automatically that goes to the bank. And those are the things that I don’t even see. So sometimes I’m okay with not having that much cash flow. But to me, as we all know, that all the banks review their loans quarterly and on a semi-annual basis, and things like that… And once they see the performance of some of the investor portfolio – boy, really good things happen when they start to see that, hey, not only their portfolio is performing well, but look at the amount of writedown that they’re doing on their loans, and things like that.

So that puts you in a lot of good position in front of lenders, because all this game of cash flow, in general, all of this, it’s a kind of a close-knit entity where you’re not running too far from the known players. It slowly pretty much starts to become a close-knit circle where bankers, the VPs, and all these folks know each other, and they’re talking about, “Hey, I know this investor, he’s great” or “He’s not so great.” “I love him”, and things like that. And the more you mature, you start to realize that these are the aspects that you really have to look forward to, you know… You know, how you communicate, how you behave, how you’re servicing the loans, or communicating, even with the back office people at the bank, and things like that. And that goes a long way, and you suddenly start to open doors or get things done, which otherwise would be quite difficult.

Joe Fairless: Oh, absolutely. And thanks for going into those details. It’s good for the listeners and myself to just learn from someone who’s got this size of portfolio with single-family rentals. Let’s talk about – you and your team do your own management, so God bless you for that. Let’s talk about some bad deals. What deal have you lost the most amount of money on?

Sakar Kawle: Sure. So we have had tough times, many times. Typically, our pain has always been is that, gosh, it’s taking so much time to renovate. We would sit on renovations for like four months sometimes. And it sounds crazy, but the right thing that I have learned is that you’ve got to do the right thing in terms of renovations, and stuff like that. And in that aspect, Joe, as far as losing the money and stuff like that, I clearly remember there was one time where we were very close to getting the house done, and then we found out that the mechanical inspector had changed upon us. Some new inspector came along, and he had us change a lot of plumbing and HVAC as well. We ended up losing about almost 35,000, 40,000 on that deal because  we  were redoing all of that. And we were big enough at the time, meaning we had lots of things going on…

So in those cases, your run rate goes down; you don’t suddenly collapse to the ground. But it’s just a headache sometimes. And like you have people who’ve been doing the business for 30 to 40 years, who are doing the plumbing, HVAC, electric, and then as you know, a lot of municipalities, you’ll notice that all these young inspectors who show up with the rulebook, and they think they know better than the 30-year veterans who are doing the job. So it’s one of those classic cases that we had gotten into, and we were like, “Fine, let’s just do what is told, and let’s just move on.” So that ended up costing us a lot of cost overruns, and things like that. That’s kind of what you call the tip of the mountain, so to speak. That’s the most we have seen. But otherwise, as you can relate, in real estate, in renovations, and things like that, if your cost overruns are not happening – boy, you’re really doing something wrong… Because cost overruns are like always the everyday norm, you know…

Joe Fairless: Yup. And as far as management goes, did you always manage your own properties?

Sakar Kawle: For the large part. And when I say that Joe – I started full time doing this, I was doing pretty much double duty with my W2 almost until 2014 and 2015. That’s when I quit. But during the interim years, I think around 2009 or so, we took a brief detour where we hired a property management company for a year, a year and a half. But then we quickly realized that not that we were out of the woods at the time; we were still present. But since we were already doing the renovations and managing the tenants to some extent all the time, we discovered that whatever properties we have given to the property manager, we would do the management or even the maintenance and things like that much better. So we took that property management from the other company also in-house at that time.

So you can say that, yes, we’ve been managing mostly in-house. If you want to maybe say the staff, in general, we have about four maintenance people and about two back-office people right now. And that’s good enough. Not everybody’s so busy, because the properties are fixed up very well, so we don’t tend to always have folks running around and doing different things, and things like that. So it’s been a blessing for sure.

Joe Fairless: Let’s pretend you’re still buying single-family homes. When you first started buying them, to what you know now, if you were to go back and tell yourself, “Hey, keep in mind these things. Because I’ve learned these things over the last 20 years”, how would your buying criteria have evolved?

Sakar Kawle: Sure. So over time, what I have matured into, Joe, is that… And these were tough learnings, quite honestly. These were natural intuitions that I got, and I gravitated towards that… And now they have become my strong beliefs. And it goes by saying that anybody lives in a neighborhood first, and then a house.

For example, you can get a cheaper house in a not so great neighborhood – you wouldn’t be successful. So for someone listening or watching the show, I would say that, it’s always better to pay more to be in a good and better neighborhood, rather than just looking for a deal. That deal can sometimes really crash and burn you and you would probably lose your shirt, and things like that. So sometimes stability and having that occupancy sort of ride you out; that behooves you and works in your favor for the long term… Rather than just looking for the highest cash flow and ending up in a not so great of a neighborhood. That’s what I would say. And that’s what I kept on doing.

Initially, I was buying properties for 40,000, 50,000, then slowly, I discovered that I’m buying for 60k, 70k. And until the time I was actively buying the properties, those select properties, I still bought for about almost 90,000 a door, and things like that. And as long as the cash flow works conservatively, that’s the good matrix.

And then of course, in your career  sometimes you can say that “Hey, I’m looking for slightly greater cash flow”, so you’re buying not that great of a neighbor, but still safe neighborhood type of property. That also works. Where you don’t want to swing the pendulum is that it goes completely the other way and just buy really bad properties in really bad neighborhoods.

Joe Fairless: So if you have to choose between a better neighborhood with less cash flow, or a worse neighborhood with better cash flow, you’re going to go with a better neighborhood with a little worse cash flow?

Sakar Kawle: Sure. And close second also comes, Joe – real quick I’ll say also that you have to do the renovations correctly… Because maintenance, vacancies, turnovers, as everyone can relate – that kills this business. So once you acquire, if you can renovate it in a great shape, and keep that maintenance down, that itself is extremely powerful for you. Because the cost of not only the maintenance, but the opportunity cost of if you’re doing something X and then you have to move your maintenance folks to all over the place, that has a lot more premium as well; you don’t want to be running [unintelligible [00:23:18].01] fixing just maintenance problems. And that quite frankly becomes one of the bigger points why people don’t scale, or people hate single-family rentals as well… Because people would have done the business in the wrong way, and they would have probably done very sub-standard work, and things like that, to begin with.

Joe Fairless: Based on your experience. What is your best real estate investing advice ever?

Sakar Kawle: I like to always say, Joe, that it’s a people business. Keep on learning all the time, networking, and podcasts like this, or mentors, and things like that. Those are actually the pillars of your success. Sure, you have the real estate side of it, but the whole mindset about how you can improve yourself, have great people around you… Sometimes it’s not the resources, it’s really your resourcefulness to gain information or gain an edge into learning and things like that. So I always say that you have to keep learning different things and learn from the experiences of different people. That to me stands out the best and greatest above all.

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

Sakar Kawle: Sure.

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

Break: [00:24:33][00:25:22]

Joe Fairless: Okay, we talked about the deal you lost the most amount of money on. Now let’s talk about some fun stuff. What’s the Best Ever deal you’ve made the most money on?

Sakar Kawle: Back in the days I bought a single-family home, typical foreclosure and stuff like that, for around $62,000 that had been rented for a long time. And then I decided to sell it. And recently, I sold it for about $210,000. So I guess I made some money along the way. I had my own share of headaches as well, so… It goes. But that’s what I would say. And then recently, when I bought the portfolio of 66 houses, the average price on that was about 78k a door. And now when I’m selectively selling some of those houses, those are also I’m selling for around 200k a door. So it’s been great. I lucked out in some cases, for sure.

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

Sakar Kawle: I love to network and share advice. Here in Baltimore, where I’m based, I started our own community organization way back in 2008, and 2009. So we celebrate festivals, do all the giving back activities as well. So we do that. I donate a lot as well. So there are a lot of different ways how I give back to the community as well.

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

Sakar Kawle: My website is premiumcashflow.com. Folks can learn all the information there. I’m readily available on Facebook, LinkedIn, Instagram, and things like that. So if viewers want to reach me, drop me an email at info@premiumcashflow.com. There I host a podcast as well, focusing on commercial real estate, premiumcashflow.com. That’s where a lot of experts come on share their advice as well. So that would be another great place to learn some information as well.

Joe Fairless: Sakar, thank you for being on the show, talking about how you’ve built your portfolio, how you approach the cash flow, the debt, the business model for how you’ve evolved your approach to buying properties, put a premium on the better neighborhood over cash flow… Thanks for being on the show. I hope you have a Best Ever day and talk to you again soon.

Sakar Kawle: Great. Awesome. Thank you Joe. I appreciate it. Thanks a lot.

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JF2337: 4 Decades Of Real Estate Experience With Paul Montelongo

Paul is a full-time investor and entrepreneur with 40 years of real estate experience and a portfolio of 555 units. Paul started when he was 17 years old and through the course of his career he did the whole gambit; wholesale, single-family, fix and flip, etc… and now he focuses on multi-unit-properties.

Paul Montelongo  Real Estate Background:

  • Full-time Investor and entrepreneur 
  • 40 years of real estate experience
  • Portfolio consists of 555 Units
  • Based in San Antonio, TX
  • Say hi to him at www.PaulMontelongo.com 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Get a mentor, I’ve been fortunate to have 3 mentors in my career” – Paul Montelongo


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 is today, Paul Montelongo. How are you doing Paul?

Paul Montelongo: Really good, Joe. How about yourself?

Joe Fairless: Well, I’m glad to hear that, and the same. I appreciate you asking. A little bit about Paul. He’s a full-time real estate investor and entrepreneur. He’s got 40 years of real estate experience. 40 years, four decades worth of real estate experience. His portfolio consists of 555 units, and based in San Antonio, Texas. He’s got a website, paulmontelongo.com. With that being said, Paul, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

Paul Montelongo: Sure. When you say 40 years experience, that makes me sound like an old guy, doesn’t it?

Joe Fairless: It’s impressive. That’s why I said it multiple times.

Paul Montelongo: Well, I did my first deal when I was 17 years old. My father said, “Buy real estate”, so I believed him and I did. But anyway, through the course of my career, you know, I’ve done all the single-family residence stuff, and flip, and wholesale and cash flow, that kind of thing. And then about seven, eight years ago, someone introduced me to multi-unit properties. And I thought “Now, that’s a cool idea.” So I just took the life experience that I had, the career experience that I had, contacts, network, etc. and just started acquiring multi-unit properties. And so that’s brought me to here, 2020. That’s what I do full time, just looking for multi-unit properties. And I still do single-family and I still do that arena, but my primary focus is the multi-unit property.

Joe Fairless: Okay, let’s go back in the time machine. Seven years ago, what were you doing from a real estate standpoint that was generating the most income, prior to buying multi-family?

Paul Montelongo: Single-family flips, and I was in various areas of the country. In late 2008, 2009, 2010, 2011 I did flips in California when the market was really calling for opportunities… So we did that. But when I got into multi-unit, I was doing single-family flips and wholesales. And I think a lot of people who listen to your program — we were in the single-family and you flip one, and then you go find another and you flip one, and you go find another. I mean, even if I were doing five or six or seven at a time, you’re still basically on a one-off situation. So when I was introduced to the multi-unit concept, I’m like, “Oh, that makes sense.” So one acquisition and multiple streams of revenue. I’d heard about it; obviously, being in the real estate business, I’d heard about it. But it seemed too big to me, it seemed too overwhelming to me. And what I’ve discovered is that a lot of people who come into this space, at one point they did seem to be like “How do I go raise millions of dollars? How do I manage hundreds of doors and the toilets that break with that?” You know, these paradigms, these preconceptions that you have because you don’t know any different. And then once you know different, or once you learn differently, well then – ah, the world opened up. The world becomes your apartment oyster.

Joe Fairless: Were you living in San Antonio seven years ago?

Paul Montelongo: No. I was actually living in Las Vegas, doing real estate in California and some in Las Vegas, but mostly in California. I’m originally from San Antonio, I’ve been born and raised here. And then in 2009, I moved to Las Vegas for a real estate opportunity. And I had some transitions in my life, so I moved to Las Vegas and I spent eight years out there. And then I acquired a property in North Carolina, and moved to North Carolina, and moved there for a couple of years. And then two years ago, I moved back to Texas. Came back to my roots in San Antonio, and my current deal is in San Antonio. So that’s kind of been my journey, my path there.

Joe Fairless: How were you doing a flip in California when you were living in Las Vegas?

Paul Montelongo: Partners, competent partners, confident contractors.

Joe Fairless: Yeah, how do you structure that?

Paul Montelongo: I was the money person. So the deal would be presented to me, I’d bet the deal, I would check out the numbers on the deal, and if the deal made sense to me then I would fund the deal. And then I would have a competent partner that would run the contracts and run the contractors. And I was involved along the whole process, but in terms of actual day to day or even week to week operations, it was the boots on the ground people. And then I would visit about once every 30 to 40 days, check on the projects.

That’s when I really understood the power of what’s going on with the internet. Doing your homework on the internet, sending job photos on the internet, paying all of your bills… Because everything is virtual, right? That really helped. And that’s when I really got an understanding of what the virtual world is about. So since then, I’ve been able to use the virtual world, obviously, like you and most people, to do this business.

Joe Fairless: And want to spend some time on the 555 unit portfolio… But just a follow-up question on that joint venture structure. What percent ownership do you get of that deal on a fix and flip? Or is it just debt structure?

Paul Montelongo: It would depend, but usually it would be a 50/50. So as the money partner, someone would bring the labor, and someone would bring the money. So as a money partner, that’d be a 50/50 joint venture partner. 50% of the profits. Sometimes I get a little interest on the money, but usually, if I brought the gap, and if I brought the rehab, then 50/50 partner on the profits.

Joe Fairless: How much were you putting into one deal?

Paul Montelongo: At the time, the values in California had really nosedived. So we could buy a deal for 200k, and then put 40k or 50k into it, and then it would sell for 350k. I’m using round numbers. But why that was so cool is that the Californians would see a house, and it would be for sale on the market after rehab for $350,000. But just 2, 3, 4 years earlier, that same house would have run 550k, 600k. So in my experience, Californians were like, “Oh, this is a good deal.” Even though it was by most terms around the country — it was a small house, it was 1,200 square feet, maybe 1,400 square feet, that sort of thing. But Californians would be “Oh, that’s a good deal.” So there was never a vacancy of buyers because of values.

And now, the values of those homes have met or exceeded the potential market value. We call this a hypermarket. In other words, all the elements were right for flips. There were low days on market, usually 30 or less, the banks were letting go of foreclosures, there was a pool of buyers, and it was hyper at that time.

Joe Fairless: It was good eating.

Paul Montelongo: Yeah, it was. If you had some sensibility and didn’t get greedy; at least that’s how I felt.

Joe Fairless: What area of California?

Paul Montelongo: Mostly in the Inland Empire. Orange County and the Inland Empire.

Joe Fairless: Now let’s talk about 555 units. What’s the largest deal?

Paul Montelongo: I am a passive investor of 192. So the other ones I have partnerships in four others, and they range from 80 units, 58 units, 120 units, that kind of thing.

Joe Fairless: Which one do you have the most active role in?

Paul Montelongo: One that I have the most active role in is — up until about a year or so ago, it was at a marina RV park out in North Carolina. I call it 158 units. And the way I reasoned on that was…

Joe Fairless: Is that the one you moved to North Carolina for?

Paul Montelongo: Yes, it is. So I moved over there to help stabilize it and to put in place on-site management. So I was there two years and then moved on, after became stabilized. But I always classified a boat slip in a marina as a unit, like an apartment door, and an RV space as a unit, like an apartment door. Now you receive your money a little bit differently, but to me they were still units. So I believe the total number of that one is 158.

Joe Fairless: You lived there for two years.

Paul Montelongo: I did. It was great, because it was on the lake, and I had an office that overlooked the lake, and every morning — this is a great period of my life, because most days when the weather was right, I’d go to work in shorts and flip flops and a company T-shirt, look over the lake, and do the business of the business, because that was acceptable attire. In fact, if you went in any other kind of outfit, you know, the locals would go, “What’s this guy up to?” So that was a cool experience.

Joe Fairless: On the general partnership side, how many people were on the general partnership? And can you, high level, describe what everyone’s role was?

Paul Montelongo: Are you talking about the marina, or are you talking about just in general my other ones?

Joe Fairless: Yeah. So I’m specifically talking about the marina.

Paul Montelongo: Four. Two had a minor role. One was a mortgage guy and knew everything there was to know about the mortgage, and helped us with a mortgage. And another one was someone that helped us raise money for it. And then another partner – her role was marketing, administrative, the paperwork involved in managing a business. And then my role was the actual building out the business model to get the place stabilized and up to speed.

Joe Fairless: Okay. Did all partners put in money?

Paul Montelongo: Yes.

Joe Fairless: Okay. How much money did you have in that deal?

Paul Montelongo: That one I had $55,000 in. And then since then, I have $75,000. I still have part of that $75,000, $76,000 actually, that is out to the property as a loan for cash.

Joe Fairless: So you all still have that one?

Paul Montelongo: Yeah.

Joe Fairless: I’ve never bought a marina… And this is an RV park and marina, is that correct?

Paul Montelongo: Here’s the cool thing. So originally, it was an RV park, right? It was  zoned for an RV park. So we had the concept of replacing the RVs with tiny homes, for nightly rentals. So what I discovered – and I didn’t know then, I now know – is that the RV park zoning designation is the same as a tiny home designation as long as that tiny home is 400 square feet or less, and as long as it sits on an axle, and it’s transportable. So when a tiny home sits on an axle, is transportable, 400 square feet or less, it is designated by the United States for Recreational Vehicle Association, it’s designated as a recreational vehicle, thus it can be placed in an RV park.

And they get more on a nightly basis through Airbnb, VRBO, TripAdvisor, any of those kinds of services, right? They get more per nightly rental than you would, say, to put an RV in there. For example, you put an RV on the pad and you might get $45, $55 a night; you put a tiny home on the pad, you could get $250 a night depending on its location and depending on the time of year. Now, you’re going to invest $55,000 or $65,000 for a tiny home. But the business model was, I believe, 65% of the year occupancy. So at 65% of the year occupancy — it could be somewhat seasonal. At 65% of the year is occupied, at say $200 a night, then you pay for the tiny home, its infrastructure, furnishings, and so forth, just shy of three years. I think it was two years, nine months, something like that. Then beyond that, then it’s just a cash-flowing asset.

Joe Fairless: Who came up with that idea? That’s next-level.

Paul Montelongo: It’s a group effort, okay? So what’s cool about this is we’ve looked at a lot of different models. Everything from keeping it an RV park to making it an airstream park, which is a thing, you may notice. It’s an airstream park…

Joe Fairless: I don’t know that. Aren’t airstreams RVs?

Paul Montelongo: They are. Classic air streams is a thing. So people will go stay at classic airstreams at an RV park just because of the… What’s the word I’m looking for? The ambiance. They’re vintage, usually. So we looked at that. We also looked at yurts, we also looked at tents, we also looked at little tiny cabins, and we finally settled on tiny homes.

Joe Fairless: Why not yurts?

Paul Montelongo: Maintenance. They get dirty, and the tent material, I discovered, needs to be replaced usually in a three to five-year period, depending on its usage. And you can’t put bathroom facilities into it. You have to walk down the hill to go to the community bathroom. So these tiny homes, they all have kitchens and bathroom facilities, air conditioners, mini-split units. Most of them have lofts. A number of them have balconies that overlook the lake. That’s a slick deal. Let me ask you this, Joe, how many lime green jeeps do you see on the road?

Joe Fairless: Lime green jeeps?

Paul Montelongo: Lime green jeeps.

Joe Fairless: Don’t remember the last lime green jeep I’ve seen on the road.

Paul Montelongo: Precisely. Now that I pointed it out to you, you’ll be looking for lime. You’ll see “Oh, there’s a lime green jeep. There’s a lime green jeep.” So…

Joe Fairless: Is that the reticular activating system?

Paul Montelongo: Yes, yes, yes, yes, yes. So now since I’ve discovered tiny homes, they’re everywhere. So tiny home parks and tiny homes, and so… The lime green jeep, right? And the reason I used lime green jeep is because my wife wants a jeep, and I keep telling her she needs to buy a lime green jeep. We’re having that conversation, and of course, everywhere we go, we see lime green jeeps. But yeah, you have an awareness.

It’s the same thing in multifamily. I’ll go back to my story – I didn’t have that awareness prior to seven or eight years ago. I mean, I had this cursory knowledge that was out there. I’d obviously lived in an apartment when I was younger. I had this knowing that it was out there. But once I stepped into it, now – guess what? You’re the same way, I’m certain. Everywhere you drive, everywhere you go, “Oh, there’s an apartment. It’d be cool to have that apartment. I wonder what that apartment costs. I wonder how much that is per door. I wonder what they had to do that one?” It’s the lime green jeep.

Joe Fairless: You initially put in 55k. You said now you’ve got 76k. That’s 21k as a loan. So what happened that was unexpected that you put in an extra $21,000?

Paul Montelongo: Let’s see. How can I say this…? We didn’t account for some of the overages in infrastructure. Some sewer and water services. More was required than I anticipated.

Joe Fairless: Was that tiny home-specific? …where if you didn’t use tiny homes, and if you did the yurts, then you wouldn’t have had that?

Paul Montelongo: That’s correct.

Joe Fairless: Okay. So what about the tiny homes–

Paul Montelongo: Because each of these tiny homes has a bathroom. So when you build out a community, let’s say of houses, you do a load test on what that community is going to require for sewer and water capacity. And we underestimated; that’s all there is to it.

Joe Fairless: How’s the project doing?

Paul Montelongo: Well, it’s doing well. So I haven’t been an integral part of it for a couple of years. I get an overview on it, and as I said, my money is still invested in it. And it’s doing well. Let me put it to you this way – it survived COVID. And kind of an odd, unexpected thing happened. Since people were on lockdown and in their houses, they looked for places to go that were “safe.” So an outdoor park, an outdoor nightly facility seemed to make sense to people. So it was able to be sustained through that time.

Joe Fairless: What type of loan do you have on it?

Paul Montelongo: Oh, you’re going to ask me the hard questions here. It’s a permanent, and I believe it’s a 10-year with a 25-year am. And it’s somewhere in the 6%.

Joe Fairless: So you’ve got some time to hold on to it. What’s your plan for an exit, if any plan of exit?

Paul Montelongo: The plan for that one is to build out some more amenities in it, and then refi, take some cash, and then either sell, or keep and cash out. So sometime in the next three to five years.

Joe Fairless: How many tiny homes have you built on that…

Paul Montelongo: 38.

Joe Fairless: 38 of them. Dang.

Paul Montelongo: Yeah. I like to talk about it, because it was a unique deal to me. Most of my life…

Joe Fairless: [unintelligible [00:18:51].06] deal to everyone who’s listening to this. Changing an RV park to a tiny home village…

Paul Montelongo: Yeah. Right now, currently, all over Central Texas, I’m in search for an RV park. Because I like–

Joe Fairless: To do the same thing?

Paul Montelongo: To do the same thing.

Joe Fairless: Good for you.

Paul Montelongo: So there’s a set of conditions that it has to be. It has to be zoning friendly, there has to be something major close to it that’s an attraction – a theme park, a lake, a river, some kind of entertainment that causes people to want to come into your area. In Charlotte, there was the lake, it’s a big NASCAR community, so there were always people coming in for NASCAR and they needed a place to stay. The city can hardly hold the crowds that come in on big weekends. So Charlotte’s a booming metropolis, right? So what I’m in search of now is, maybe not a major metropolis area like that but right on the outskirts of a San Antonio, of an Austin, of a Houston, somewhere in Central Texas. I like to be boots on the ground, right? So somewhere that I can find an RV park.

Here’s the thing, Joe, about an RV park. If it has RV pads, and it has trailers on it right now — and I say trailers, right? …it will begin to cash the day you close. Maybe just a little bit of marketing to get some people on those pads… While you convert it progressively to a tiny home park. So a tiny home – they’re manufactured, and from the time you ordered it, it takes a couple of months. But when they actually put them on the assembly line, it only takes three days to build the tiny home.

Joe Fairless: Who do you order from?

Paul Montelongo: There’s a company in Virginia, they’re called Pinnacle Park Homes. And they are a combination of Pinnacle Homes who built, if I remember correctly, mobile homes, and Cavco. Cavco built RV recreational vehicles. So they put their two heads together, they have an assembly line, they have a really cool warehouse, and they feed these down a railroad track, and they have little ants crawling all over them just building them, and they can pop them out in about three days. They deliver them with a big trailer, you level them up and skirt them, you connect all your infrastructure and furnish them…

So anyway, I learned a lot. And the key thing is though, you’ve got to have a zoning-friendly tract of land, so that RV could be converted to tiny home. Because like I said earlier, the zoning is the same… Or an agricultural piece of land that has little to no zoning or deed restrictions, so that you can immediately go in and start putting infrastructure in and pads in, and start filling it with tiny homes. And then, of course, you put some amenities around it. You put a pool, and you put a bathhouse, and a dog park, and those sorts of things. Google tiny home parks. They’re peppered all over the country.

Joe Fairless: I will. I’d like to know where the closest one is to where I live in Cincinnati.

Paul Montelongo: Where do you live? Cincinnati?

Joe Fairless: I live in Cincinnati, yeah. So I’ll do some research on that. I could go see a village.

Paul Montelongo: Yeah. That’s what they call them too, villages.

Joe Fairless: They should. That’s an appropriate term for a tiny home community.

Paul Montelongo: Yeah. It was a different type of project. It was more development than rehab. So a very cool project.

Joe Fairless: And that’s why I wanted to talk about it so much, and thank you for humoring me. And I’m sure it was very interesting for a lot of the audience as well.

Paul Montelongo: Yeah. The Discovery Channel, they came out and did two episodes out there on the property, because we had a resident that brought her own tiny home and placed it out there, that she had built. So they did a couple of episodes on the Discovery Channel. And we’ve actually had tiny homes come through the property and park for a couple of nights… And then they move on down the road. So like I said, it is a thing,

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

Paul Montelongo: Get a mentor. I’ve been fortunate to have three men that have mentored me. And not only have they mentored me in the technicalities of the business, but they’ve helped me go through the ebb and flow, and the ups and downs, the tides of the emotions that investors can get involved in.

And very early on my father was a mentor to me, as well. He was in the real estate and construction business, and he’s the one that originally told me to buy real estate. And he’s a businessman, so he also taught me how to operate a business, manage people, set a goal, stick to the goal, and keep a structure or an organization to your business. I’d say having a mentor is key. Sometimes that sounds cliche to have a mentor, but I just have found it so important.

Joe Fairless: Oh, there’s a lot of truisms that sound cliche, but they’re true. And you better do it, otherwise, it’s not going to work out. We’re going to do a lightning round. Are you ready for the Best Ever lightning round?

Paul Montelongo: Let’s do it.

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

Break: [00:23:57][00:24:47]

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

Paul Montelongo: Mentorship. I have a group of young to middle-aged men and a couple of women that I mentor. I’m just with them, and my deal with them is they have access to me at any time. And I handpicked these folks, and I don’t charge them. I just mentor them.

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

Paul Montelongo: Anything Paul Montelongo. Paulmontelongo.com, any social media outlet, @paulmontelongo – Facebook, Twitter, Linked In, Instagram.

Joe Fairless: Paul, I thoroughly enjoyed our conversation, and learning about joint venture structure on fix and flips. And clearly, the star of the show, the RV park marina, turned tiny home village, and the economics that drive that business decision. And it’s also a good competitive advantage that you’ve created by turning something into something else that most people wouldn’t do… Whereas if you’re a value-add apartment building investor – I won’t name any names – then that’s a model that a lot of people have, so you’re going to face similar competition… Whereas they talk about the blue ocean strategy – you go where there’s not a lot of blood in the water, and that’s what you’re doing. So thanks for being on the show talking about that. I hope you have the Best Ever day and talk to you again soon.

Paul Montelongo: Thank you, Joe. Best to you.

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