JF2763: 100% Tenant Turnover in 6 Months: Tips for Overcoming Value-Add Hurdles On Challenging Properties ft. Ben Suttles

Ben Suttles, managing partner at Disrupt Equity, faced a problem with his deal: there was 80% occupancy, but only 35% of the tenants were paying rent. Add in the crime rates and drug deals that occurred on the property, and he soon found himself having to do massive turnovers to the complex. Ben shares the lessons learned from this challenging deal and how he was able to turn it around for a profitable outcome.

Ben Suttles | Real Estate Background

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TRANSCRIPT

Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed and I’m here with Ben Suttles. Ben is joining us from Houston, Texas. He’s an apartment syndicator with Disrupt Equity. They have over 200 million in assets under management, with 2000 units across Texas and Georgia. He’s also an LP in 2500 units. Ben, can you start us off a little more about your background and what you’re currently focused on?

Ben Suttles: Well, thanks, Slocomb. Man, I really appreciate the invite. Hopefully, I can add some value to your listeners today. A little bit about my background – I come from IT sales. Everybody’s going to be like, “How did you get into multifamily syndication?” I’ll tell you a little story here. As a lot of people that are probably listening, I have read a little bit of a book called Rich Dad Poor Dad, I did the same thing in 2012. It was a light bulb moment. I said at that point, “Hey, I need to get into real estate.” Not knowing anything about multifamily; everybody knows about single-family, rentals, flipping, the stuff that you see on HGTV. So I got into that in 2012 and 2013, and did that for a couple of years here in Houston, where I’m from.

As some folks realize, after a couple of years of being a landlord on your own, flipping houses on your own, I lost the remainder of my hair, and I was looking for something different. I love real estate, I love building legacy wealth for my daughter, and ultimately looking to try to get out of the rat race as soon as possible, too. So I started looking at commercial real estate; and within commercial real estate, I found out about multifamily. So in 2015, I joined a group, learned how to do it, learned how to raise money, and I found out that my skill set as a sales guy was a good segue into raising capital and doing presentations and pitching deals. So I kind of took off from there. I did my first deal in 2015, did another deal the next year…

From there, I said, “Hey,  I really want to scale this out, but I’m lacking some of the things that I need in order to scale.” I started actively looking to identify a potential partner. In 2017, I met a gentleman named Feras Moussa; he came from IT as well. He wasn’t on the sales side, he was on the development side, but he had some of those skills that I was lacking. I’m a big proponent of one plus one equals three, so it was a good symbiotic relationship. In 2017, we created Disrupt Equity.

After that, we went on a tear for the next few years, bought a bunch of deals, then obviously COVID hits. But we’re back onto it now, we’ve got some pretty ambitious goals for 2020 and looking forward to getting back into the swing of things. We sold about five deals last year, and hopefully, we can continue to grow in the multifamily space.

Slocomb Reed: Awesome. So within your partnership with Feras at Disrupt, what do you focus on? What’s your specialty?

Ben Suttles: I’d say it’s raising money, acquisitions, and then ultimately, on the back end, I do the asset management side. Feras helps with the back office, IT, and also the property management side of our business. We have our own property management company, and that in itself is its own job. So we’ve divided and conquered, and again, it’s worked out fairly well, because his skill set does well over there, and this is kind of where I thrive. And it ultimately is what we enjoy to do too.

But I’d say day-to-day, the main part of my day is going to be the acquisitions, which is talking with brokers, identifying opportunities, and working with our underwriting team. The flip side of that, the other four hours, actually, probably six or seven hours of my day, is going to be the asset management side of our business… Just managing our current portfolio and making sure that we’re hitting the business plan that we’re trying to hit.

Slocomb Reed: Are you doing all of the asset management yourself for the whole portfolio?

Ben Suttles: No, we’ve since hired on a couple folks that actually do the day-to-day, and I’m just managing them. I think as you grow a company, you step back from doing the doing, to managing the people that are doing the doing. It’s been a little bit of a paradigm shift for both me and Feras, because in the beginning, you’re doing everything. Then you start delegating and carving out little pieces, and then you wake up one day, 80% of that is somebody else. Now you have to manage them and make sure that they’re doing it in the way that it needs to be done, keeping them accountable, keeping everybody trending towards the same goals, managing people and their time, and sometimes in some cases there are challenges. Bottom line – yeah, I manage the asset management team, I guess is probably a better way to describe it.

Slocomb Reed: Gotcha. Yeah, I was going to ask with 2000 doors and 200 million in assets, how you’re doing all the asset management yourself…

Ben Suttles: No. It would be very difficult.  I think that if I was to do that, I would never have any time to buy anything else, because you’re constantly blinders on trying to focus on making sure that your current portfolio is performing well. You don’t have time to go develop relationships with brokers, underwrite additional deals, or make offers, because you’re so bombed doing that. Actually, it’s a good point that you bring up asset management, because our first hire at Disrupt Equity was an asset manager. I identified that it’s just a really — I’m not saying time suck, because it has really negative connotation, but it was just not the highest and best use of the time that I felt like I needed to use. I wanted to focus more on acquisitions, so the first person I did was hire an asset manager. It was one of the best decisions that I’ve ever made.

Slocomb Reed: So a lot of time was spent in asset management. Do you guys have property management in house?

Ben Suttles: We do. We do first party and third party, so that’s been its own set of challenges. But yeah, we do have our own property management company called Disrupt Management. We started that in 2019; actually Q4 of 2018. Everybody knows what happened three or four months later… So it was a blessing and it was a little bit of a curse. Obviously, bad timing, but I’m actually glad that we took over our whole entire portfolio at the time that we did, because it allowed us to have that transparency and allowed us to pivot… Because all those things – I would have cringed to have a third-party company trying to manage our assets during COVID. Things were shifting week-to-week, nobody knew what was going to happen, what were the rules and regulations, and it was really nice to have our own in-house management where we could say, “Hey, no, we got to do it this way.” Boom, it gets done that way. Versus trying to go back to one of the big property management companies and say, “No, I want you to manage my assets this way.” It doesn’t work like that; they’ve got their own box… I understand why they do it. They’re big and they have to slam everybody in there in order to be able to manage it all. But it makes it difficult when you want them to pivot or be nimble when challenging times pop up. So it was a blessing in that respect when COVID popped up, because we could pivot when we needed to.

Slocomb Reed: Yeah. I do a lot of direct to seller lead generation here in Cincinnati, and in the conversations that I was having with owners in 2020, there was a direct correlation between how close the owner of the property was to the tenant, and how well their property performed in early 2020. The owner-operators, people like me, I didn’t have any collections issues, in March, April, May, June 2020. I’ve said this on the podcast before, but the moment the shelter-in-place order was announced, I had a plan. I reached out to all of my tenants and said, “Hey, if you experienced any financial hardship? I have plans to help you through. Please connect with me.” Several of them did.

On the other side of that spectrum though, the people in Cincinnati whose properties aren’t local, the owner is not local, and they hired a big box third party manager like you were saying, who has to fit everyone into the way that they do things – those are the people who really suffered. Those were the tenants who took advantage of the opportunity to not pay rent and not get evicted. The further the owner of the property was from the tenant, if they weren’t here locally and they were relying on a third-party manager, and they were relying on the wrong third-party manager, those are the people whose collections absolutely plummeted. So to your point – yeah, I bet it was. I don’t know how much time you spent comparing yourself to other operators in the space, but getting yourself that close to the tenant right before a serious macro-level event happened – I’m sure that did help with your operations.

Ben Suttles: I’ll also say we were able to control the messaging that went back to the tenants, too. I think in a lot of ways, that’s also challenging. Because for people that are trying to filter, “Hey, I want you to say this, or I want you to direct them to go here,” that can be tough when you’re trying to do that through a third-party company. Once we got our hands around what was happening with COVID, I think at the end of the day, it was always nice to say, “Okay, hey. We just found out about this new rule or this new whatever mandate, let’s send out a letter and say, ‘Hey, this is how we’re going to handle it. These are who you need to talk to.'” We provided almost like a Wikipedia page to all of our tenants with all the different links to all the different resources within their specific sub-market. People – man, they really ate that up, they really appreciated that because we took all the guesswork out of it. “Hey, if you’re having challenging times, you need to go here. Or if you need this, you need to go here. If you need this, you need to go here.”

We curated the page for actually all of 2020. We finally took it down I think in Q1 2021, but that was where we were pushing everybody, and we had essentially figured out all the resources and how to help them. People like that, and I think that that’s important. I think even in normal times, just communicating with people…

Slocomb Reed: Yeah, totally.

Ben Suttles: I think in a lot of ways if you try to wall yourself off and be all rigid, it’s hard to work a solution. But if you come to people and say, “Hey, this is what I’m trying to do. But ultimately, we want you to stay at the property. We know it’s been challenging, but here are some solutions.” We’re doing that even to this day, as eviction courts are starting to open up; we’ve found ourselves working out deals with folks, trying to get them back into paying rent, and how does that work, and “Hey, if we waive this, let’s get you back on track. You don’t want to have that eviction, that scarlet letter on your record, so how do we make this work?” It’s really been successful. If you start really working with people and talking to them, a lot of people have come in out of the cold and said, “Okay, here. Here’s what I can pay, what can you do to work with me?” It’s been very, very successful this year, and so we’re going to continue to do that, too.

There have been some submarkets, Atlanta being one of them, that are still trying to get their act together as far as eviction courts. And what they’re telling people is that “Hey, I’m starting from March 2020 and I’m working my way all the way to where it is now.” So they’re two years behind, man, and some of these are still not fully open. If they are there – again, they’re starting in March 2020 and they’re working their way through… You can imagine what kind of backlog they have, it’s crazy.

Slocomb Reed: Ben, you’re in a breadth of markets, at least in Texas and Georgia, but I know you said before we started recording that you’re also looking at Columbus.

Ben Suttles: Yup.

Slocomb Reed: Quick question… As involved as you guys are in day-to-day operations, the way that COVID was handled in a market with shelter-in-place, mass requirements, and eviction moratoriums, how much is that playing into your decision about whether or not you want to enter a market right now?

Ben Suttles: Huge, it’s huge. We love Atlanta as a market but, man, they muck the whole thing up, man. I would say, for the most part, and in normal times, Georgia was fairly pro-landlord. But it went almost completely to the other side of the spectrum when COVID hid and they just didn’t really work with us. They made it very challenging to get rental relief through. Maybe they don’t realize this, you have federal funding, went down to the state level, state-level then goes down to the local level, they push it down to the local administrations. Now there were some statewide programs in certain states, but in some locations, especially in Atlanta, it was administered by the counties. Each county had its own set of rules and regulations. If anybody knows anything about Atlanta, that’s made up of seven different counties.

We had to deal with four different ones and each one of them was extremely challenging. It has made us kind of pause acquisitions in Atlanta because not only do we know there are huge delinquency problems, they haven’t been able to evict anybody even to this day, we also just have a little bit of a sour taste in our mouths, I’d say, from how we were just treated as landlords by the local administration. I know that obviously stuff happened and I’m not trying to politicize anything. There were other states and other locations that handled it a lot more effectively. I’m not saying that one is better than the other, we’ll still ultimately go after deals in Atlanta if that makes sense. But I’m certainly going to be a little bit more cautious on my underwriting of deals in certain markets because of what happened during COVID.

Slocomb Reed: Ben, it sounds like you guys have taken a lot of deals full-cycle already. I think you said you sold five properties last year.

Ben Suttles: Yep.

Slocomb Reed: Tell us about the biggest challenge that you’ve had to overcome specific to a particular deal you took full-cycle.

Ben Suttles: Another Atlanta deal. This deal was challenging from the beginning, it was in what I’m going to call a transitioning market. You read into that statement however anybody wants to read into it. It is South Atlanta, anybody that knows anything about Atlanta, South Atlanta is different than North Atlanta. We’ve done very, very well down there but you just have to realize what you’re getting yourselves into. Well, this property had every challenge that you could possibly have. It had down units, it had crime, and it had deferred maintenance. We bought it from a slumlord that did nothing but put band-aids over just gaping wounds on the property. It had tenants that were criminals and everything else. I would say the most challenging deal that we ever had was that one. We bought it, on paper, it was at 80% occupied. Of that 80%, only 30% were actually paying rent.

Physical occupancy of 80%, economic occupancy 30%.

Slocomb Reed: Yes.

Ben Suttles: We weren’t making a lot of money so we were bleeding money from day one. We took physical occupancy down to 35%, you can now imagine that we are really hemorrhaging money. We had to do all the work, upgrade the property, and then release it back up, all of this takes a good 18 months. At the end of the day, it ended up being all right but we had challenges from the lender. The lender tried to blow the deal up because they’re one of these loan-to-own bridge lenders, I’m not going to mention anybody’s name. They were very, very challenging, they held up draws, they would give us approvals on stuff and then kind of come back and renege and say “Oh, no. Actually, you can’t do that.” There was every challenge in the book. We had a lot of criminal problems and that created some challenges when you went to go try to sell the property too. There were news articles and all kinds of stuff. That was probably our most challenging deal.

Now, it ended up being profitable. I’ve never lost money on any of the multifamily properties that I’ve had. Now, the one time that I have lost money is, COVID, March 2020, me and Feras get a deal under contract here in Texas. This was before the 15 days to stop the spread or whatever it was called. Early March, we’d already done our due diligence, we went to go do the capital raise, and they shut the economy down. We’re like, “Okay, that’s going to dry up, equity is gone dry up. How can we physically get this deal across the finish line?” We went back to the seller who had said, “I’m going to probably refinance, we’ll work something out. Yeah, I’ll give you your earnest money back.” Once we made it official, then everybody starts clamming up, and the guy didn’t want to give us our earnest money back.

Well, we ended up having to sue him to get it back and we took it all the way to arbitration. It took a good 18 months to finally get our earnest money back. We didn’t get it all back because you have to factor in the fact that I paid $50,000 for a lawyer to go chase after the earnest money that I had.

Slocomb Reed: How much was the earnest money?

Ben Suttles: It was quite a bit. I think it was $250,000.

Slocomb Reed: You got 80% of it back.

Ben Suttles: Yeah, we got some. But that was the only time where I feel like we’ve somewhat miscalculated it. The lesson that we learned from that deal, was to get everything in writing. Because this guy, verbatim over the phone, told us that he would give us our money back and then reneged on it. It was essentially, you go back to the lawyer and say, “Hey, well, this guy told us that.” Unfortunately, it’s unenforceable. A verbal agreement in most states, certainly not in Texas, is just not enforceable. That was a hard pill to swallow because, on top of that, COVID hits, and our acquisition pipeline essentially evaporated overnight. We didn’t have any deals selling, we didn’t have any deals buying. Ultimately, we had our current deals, but obviously, those were all slowing down because we’re still trying to get people to actually just pay rent. It was kind of a double whammy for us. But that’s probably the one time where I was just like, “Man, we probably could have done some things a little bit differently on that one.”

Break: [00:20:25][00:22:21]

Slocomb Reed: Ben, going back to the Atlanta deal that you ended up buying with only 30% economic occupancy. You made money, it was much more of a lift than you expected, where are the lessons learned in that deal? Going back, were there any red flags that you just didn’t recognize upfront or is there anything that you recognize now that you would have done differently at the onset?

Ben Suttles: Yeah, there’s a big, big lesson to be learned and yeah, I had red flags going off in my head but on paper, it looks very, very strong. A young guy with some hubris involved, where I’m like, “I can make this work. I can do this. I can make this profitable.” But I’d say the biggest red flag, not a red flag, but I guess the lesson learned is who you buy a deal from. I think people discount that. If you’re buying from an institutional person versus some slumlord, guess what? The institutional person is going to take care of the asset, the slumlord’s not. You need to realize whatever CapEx budget you have and if you’re buying from a slumlord, go ahead and double it. There’s going to be all kinds of skeletons in the closet when it comes to the deal because there’s just going to be a ton more deferred maintenance or there’s going to be things that are going to be uncovered once you take over the property and find out that this guy or this gal hadn’t done anything. We had gotten the sense that this was who that person was just based on the conversation that we had with the broker. That should have been a huge red flag. But again, we’re trying to get into a new market, the first asset in that new market, we’re willing to roll the dice a little bit. That was red flag number one. I’d say red flag number two is…

Slocomb Reed: Ben, before we go to red flag number two. Slumlord is a very triggering term in our industry, it’s even more triggering out of our industry. I want to give you the opportunity to put some definition behind that. What is it that you mean when you say slumlord and how can people who are underwriting deals, analyzing deals, identify a bad owner operator who’s leaving a property in very bad condition?

Ben Suttles: Apologies, I’m certainly not trying to…

Slocomb Reed: I’m not saying that you did anything wrong. It’s just a very broadly used term that I want to put some details behind what you mean when you say that.

Ben Suttles: What I consider a slumlord… Here’s a more positive way, a low-cost operator.

Slocomb Reed: You’ve gone too far in the wrong direction now.

Ben Suttles: These people don’t put any money into the project. That is the definition of they are there to just squeeze as much juice out of it without putting a dime into the property. That is not what we do at Disrupt Equity, we put money into our properties because we’re trying to create value and create a better community for our tenants. We look at it from an abundance mindset versus a scarcity mindset. We knew that doing the due diligence, and again, talking with the broke, just how these guys operated, and just pick up on these details that they’re trying to kind of drop on you. Because they don’t want to be perceived as not telling you about something. We also had another deal in Texas, it was the same thing. The person had owned it for 10 years, had not really put any money into it, and I would say that was the second most challenging deal. The lesson again that we’ve learned is you really have to know who you’re buying from.

The other thing too, is you have to have some kind of audited, not necessarily audited financials, but do some due diligence on the financials too. Because, in a lot of ways, these people that are kind of mom-and-pop low-cost operators, their books are either going to just be very, very sloppy or they’re downright fraudulent. In this case, it really was. Yeah, people say, “Why didn’t you sue them?” Because at the end of the day, that’s buyer beware. You have to do your own due diligence upfront, folks, or you can’t necessarily blame the guy. Now, if there was some clear-cut fraud that I could tie back easily and not have to spend 100 grand to go chase them with, that could be one thing. But we said “Hey, we’re just going to roll with it. We got enough money and enough capital to put into the project. We’re going to make it work.” That’s what I mean when I say that term. It’s just people that don’t put any money into it and all they’re trying to do is take money out.

Slocomb Reed: I will always stand behind the belief that treating people with dignity and respect is the most profitable way to operate any business. It sounds like you agree and it sounds like this is a property, it sounds like you’ve bought a couple of properties from people who did not operate that way. They just wanted money in with no money out, they let the place fall into disrepair because they knew there would still be someone who was desperate who needed to rent from them. Even if it was below market rent, hey, they have no expenses because they’re not fixing anything so why not just take below-market rent from someone who’s desperate?

Ben Suttles: A lot of these guys’ basis, we bought this deal in Atlanta. People are probably going to cringe because anybody that’s looking at Atlanta is going to say, “Whoa, what?” These guys bought in at 10,000, the door. The deal they bought in Texas was bought in 2008, everybody knows what was happening in 2008. Those guys bought it at the bottom of the market so their basis is low. They’re still probably cash flowing, to be honest with you, because their basis is so low. They have no real incentive to push it at all.

Slocomb Reed: Other than treating people with dignity and respect.

Ben Suttles: Well, that’s just the types of folks that they were. But my point is that there was no financial incentive for them to push it either, not to mention just the type of person that they are. But yeah, we live in an abundance mindset where, hey, if you put money in, you’re going to create money. If you create a community, you’re going to not only have less turnover, but you’re going to attract the right tenants that want to live in a community that’s safe, that has the quality and clean housing. That’s important. People need to realize that if you look at it through that lens, you will still make money but you will also be doing good for the community because all ships rise with the tide.

If you’re coming in and you’re the first person on the block, you’re the trailblazer that’s going to dump 10,000 a door into your community, and you’re just going to completely revolutionize it, and you’re going to start pushing rents, guess what? The guy next door is going to say, “Man, in order to compete, I either got to refi and pull some money out and put some money back in this thing, or I got to sell.” And the next guy that buys it from him is going to do the same thing because he’s going to say, “Well, hey, Ben and Feras are doing a great job. I got to put 10,000 a door into my deal too.” Guess what? All ships rise with the tide folks. I’ve seen whole communities transformed just by what we can do. It’s an exciting incredible thing to see it and the same thing can happen in single-family too. Don’t think of it in terms of gentrification or something negative. You’re just trying to lift the community up by improving the housing that’s in there. That’s what we try to do and try to look at it through that lens.

Slocomb Reed: Ben, I distracted you from lesson two on the Atlanta deal.

Ben Suttles: What was less than two? Oh, okay. Yeah, less than two. We get through, we bought it, we’re under contract, another big red flag… People are going to say, “This is glaring.” We’re on the property doing due diligence, within the first five minutes, I saw a drug deal go down. But I was like, “Okay, we’re just going to…”

Slocomb Reed: Is this after you bought it?

Ben Suttles: No, we’re under contract, we’re doing our on-site DD, due diligence, unit-to-unit walks. I see a drug deal go down, I’m like, “Cringe, not great. But we’re going to identify these people, we’re going to have security from day one, and we’re going to get them out.” But as we were walking through the community, there was not once but twice, where there were people that literally threw trash out of the balcony onto the ground right in front of us. The big red flag there is that they didn’t have any sense of community, they didn’t care because they felt like the landlord didn’t care. It really wasn’t their home, it was just a flophouse, so who cares? They don’t care about me, I’m just going to throw trash on the ground. I knew right there that we needed to just re-tenant the whole entire place because it was just going to be too challenging of a property.

But that was probably a big red flag that, “Hey, we’re going to have to do some thinning of the herd a little bit on the occupancy.” And we did. Again, we took it from 80% on paper down to I think 35%. But that was a big red flag. When you see crime, when you see people not taking care of the community, you know you’re going to have some challenging times, and you’re going to have to re-tenant that property. People don’t take into consideration that there could be a fair amount of turnover in year one, to the point where we turned over the whole entire property in less than 12 months. I think we turned it over and six months, was what we did. Either people just skipped in the middle of the night, they were evicted, or by natural attrition, they just moved out. You need to take that into consideration. That was a big red flag for us.

Slocomb Reed: Ben, are you ready for the Best Ever lightning round?

Ben Suttles: Let’s do it. Let’s do it.

Slocomb Reed: Awesome. What is your best ever way to give back?

Ben Suttles: We have a charity, it’s called Disrupt Gives. It provides financial literacy and education to our tenants. It’s an actual charity and we do this every year where we put money in as part of our asset management fee that we take on a property, as well as have events where we can raise money and dump it back in. But we do that and that’s the way that we give back. But I am also big on charitable organizations and I love giving back at the Houston Food Bank and some other organizations that we’re part of as well.

Slocomb Reed: What is the Best Ever book you’ve recently read?

Ben Suttles: I’d say we’re getting into EOS, entrepreneur operating system. I just recently read Traction about three months ago. I wish I had something a little bit more recent but I’ve been a little bit busy the last few months. I’d encourage anybody that’s really trying to scale out a business or build a business. Or maybe you’ve already built a business and you just feel like you’re in a rut, look into EOS. I think it’s revolutionized how we’ve been able to scale our business and how we’ve been able to operate. I encourage everybody to at least read the book. I think it’s Gino Wickman is the author of that one.

Slocomb Reed: Ben, what is your best ever advice?

Ben Suttles: I’d say be persistent but also just keep grinding it out. People that get into real estate have this understanding or this thought that, “Hey, I’m going to get rich and I’m going to get rich quick.” I see people that I aspire to be and I can quickly get there. Just be patient but be persistent. Because I think that that last day where you’re just about ready just to hang it up and just say, “You know what? I’m done with this. I haven’t found a deal or the deals that I have done haven’t been profitable.” It’s that last day that if you just continue to grind it out, you’re going to see a lot of progress and you’re actually going to hit one. I’ve seen people that three months in “Oh, the market’s too hot, it’s too expensive, it’s just too competitive.” On day 91, kept grinding it out, they might have found the deal. But instead, they just hang up their cleats and say “Alright, I’m done.” Be patient, be persistent. I’ll tell you, the profits and the money will come, you just have to continue to keep grinding it out.

Slocomb Reed: Absolutely. Ben, where can people get in touch with you?

Ben Suttles: You can check us out at www.disruptequity.com or you can email me directly. I like to talk shop as people can probably tell, ben@disruptequity.com as well.

Slocomb Reed: Awesome. Best Ever listeners, thank you for tuning in. If you’ve gotten value from this episode, please do subscribe to the show, leave us a five-star review, and share this episode with a friend who could gain some value out of the conversation we just had with Ben Suttles. Thank you and have a Best Ever day.

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

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JF2762: An Airbnb Speakeasy? How To Make Short-Term Rentals Standout ft. Rich Somers

How do you create a unique short-term rental that will attract renters? Rich Somers, founder of FortuneCribs, reveals his strategy for creating “Instagrammable” STRs, selecting the right market, and pitching to investors.

Rich Somers | Real Estate Background

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Ash Patel: Hello Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, Rich Somers. Rich is joining us from San Diego, California. He is the founder of FortuneCribs which helps clients buy short-term rentals that they design and manage. Rich is also the managing partner at Pac 3 Capital, a multifamily and short-term rental syndication company. Rich, thank you for joining us and how are you today?

Rich Somers: Ash, doing well. Thank you so much for having me on the show. I’m excited about this conversation and I’m doing very well. How are you doing today, my man?

Ash Patel: I’m doing great and I’m glad you’re here, Rich. Let’s get into it. But before we do, can you give the Best Ever listeners a little bit more about your background and what you’re focused on now?

Rich Somers: Yeah. I grew up middle class. My mom was an immigrant from Taiwan. My parents both know the value of working hard and saving your money. I was always taught from a young age to go to school, get good grades, go to college, and get a job. For the most part, that’s what I did. I have a background in sales. While I was going to college, I started selling cell phones and then cars, and that was the first time I realized that I could impact how much I made. I really wanted to sell commercial real estate when I got out of school.

In 2008 I graduated, I interviewed with a couple of commercial brokerages, CB Richard Ellis and Grubb & Ellis. They were both like, “Hey, we love your hustle but this is not a good time to get into the industry.” Everything was starting to come down, they pulled these internship positions that I had interviewed for… And I had found myself on a car lot selling cars, in 2008, not a lot of job opportunities out there, figuring out what the heck I’m going to do with my life, and I act into a career as an air traffic controller, working airplanes for a living. I ended up doing that for 11 years, but along the way, I remember real estate, I read the book Rich Dad Poor Dad, and just figured out a way to restructure my life and jump into the real estate investing realm.

I did, at the time, what a lot of people told me not to do; they said it was too risky. I cashed out my 401K, I pulled out a home equity line of credit against my primary residence here in San Diego, and I started buying some cash-producing real estate. The first deal was an 11-unit building in Cincinnati. Shortly after that, I partnered with a couple of my partners who I syndicate with today, and we joint-ventured on a 32-unit building in Indianapolis. We launched a podcast, we learned how to raise money, and last year, we took down a couple of larger syndicated deals. The Arbors 150-units in Greensboro, North Carolina with our investors, and Timber Creek Apartments, 145 units, also out in Greensboro with our investors.

Along the way, we started buying some short-term rentals. This year realized, man, it’s been hard to find multifamily to pencil when we underwrite. There’s a lot of competition out there, yields have come down, cap rates have compressed, and it’s very competitive out there. Along the way, realize, man, these short-term rentals are cash flowing so great, the tax benefits are awesome. So I thought, “Hey, man. This year 2022, let’s focus on building the short-term rental side of the portfolio.” My partners and I, we’re going to launch a fund to go buy short-term rentals with our investors.

Also, we recently launched a company which you alluded to, FortuneCribs, where we help investors buy short-term rentals in select markets around the country, that we help them close on; they own 100% of the property, but our team will do all the work. We’ll design, furnish, and manage all the day to day operations, making the experience truly hands-off to the investor. That’s really my story in a nutshell.

Ash Patel: Rich, that first property in Cincinnati – were you in San Diego at the time?

Rich Somers: I was in San Diego.

Ash Patel: How did you buy a property in Cincinnati as your first property?

Rich Somers: I was looking for cash flow, and I was looking for a property that was going to be a good first property to get into, something that didn’t have a ton of risk, good cash flow, buy at a high cap rate, and I could add a little bit of value. So I was looking in select markets, my research took me to Cincinnati, and that’s how I was able to get it done, man. There were a lot of mistakes made with that one, hired the wrong property manager, the rents were low, had a lot of deferred maintenance… As soon as we closed on it, a bunch of people moved out… But we got in there, we started turning the units. Fast-forward to today, I actually closed on a refi not too long ago and was able to pull all my initial capital out, plus a little bit on top, and we’ve been able to almost double the gross income on that property over the last two and a half years.

Ash Patel: Did you have partners in that first property?

Rich Somers: No, it was just me.

Ash Patel: What were some of the challenges in terms of remotely managing this property?

Rich Somers: I think the biggest challenge was finding the right property manager; like I alluded to, I hired the wrong one initially. She said all the right things. That’s another tip for your listeners, is that a lot of these property managers, the third-party ones, especially with these smaller buildings, are a little bit more mom-and-pop, but a lot of them tend to say the right things in these interviews. But I quickly realized after closing within six weeks that she was not the right fit. I pivoted to property manager number two, who I should have gone with from the jump. That one I met through the listing broker who had sold the deal to me. Since then, I’ve been using them and it’s been a night and day, a much better transition. They’ve done a great job and, yeah, it’s been fun.

Ash Patel: How are you exposed to the world of short-term rentals?

Rich Somers: Man, it’s funny you asked that. Actually, I backed into a short-term rental. A couple of years ago I had a pre-approval from a local credit union here in San Diego for a highly leveraged loan, and I thought, wow, why not take advantage of it and see how it does. I’ve always heard San Diego was a good short-term rental market, let’s try it. I bought a two-bedroom condo, brand new construction here in San Diego, furnished it, threw it up on Airbnb, and this thing has just been full ever since, it’s just been cash flowing like crazy.

Ash Patel: Have you taken any of your multifamily properties and converted a portion or all of them to short-term rentals?

Rich Somers: No, I have yet to do that. I’ve definitely made a couple of runs at some smaller multifamily properties in hopes to transition them to short-term rentals, but haven’t been able to find anything that really fit that mold. I have yet to do that.

Ash Patel: Is it all single families that you’re converting to STRs?

Rich Somers: Yeah, mostly single families. Some of the client properties that we’re bringing on are smaller multifamilies, duplexes, and up to four units. My partner, Mike, actually has a fourplex in Cleveland. That was all long-term when he bought them; operated it that way for a couple of years, and recently converted them all to short-term. The cash flow is just so much better, from what he’s mentioned, at least.

Ash Patel: Rich, what do you tell somebody who wants to dip their toes into short-term rentals? What advice would you give them?

Rich Somers: Well, I’d say this… If you’re an investor out there and you can only afford to do one deal in the next couple of years, and maybe it’s your first deal, whatever it is, I always suggest to investors all the time, you probably want to consider going the short-term rental route. People all the time are like “Man, I just closed on my long-term. I’m making 150 bucks a door.” I’m like “Dude, that doesn’t even get me out of bed.” If you’re looking for cash flow and passive income, and you only have the ability to do one deal every couple of years, I would highly suggest going the short-term rental route. Do your research, reach out to someone that’s already done it before, make sure you go into the right market, and you understand the fundamentals but you also understand the projected revenue, the seasonality, and the occupancy in any given market that you go into.

Ash Patel: Rich, the fund that you’re starting, what are the anticipated returns?

Rich Somers: The fund that we are starting, we are looking at cash on cash returns in the 20% range for the investors. Overall returns are a little bit more challenging to measure because this is not a value-add multifamily where we’re forcing our appreciation. We never want to bank on long-term appreciation, but cash-on-cash returns in the low 20% range.

Ash Patel: Is that available immediately or is there a hold period or waiting period?

Rich Somers: It is not available at this very moment. We are putting together the fund now. We’re probably looking at sometime around May of 2022 before we launched this fund.

Ash Patel: Let me rephrase the question. Once somebody invests their capital into this fund, do they immediately start getting returns or is there a lockout period, a hold period?

Rich Somers: Yeah. It won’t be immediately but it’d be pretty quickly. Because it’s not like multifamily where we’re going to start a fund and then we got to go find these deals where it could take potentially a long time to find the right deal. With the short-term rentals, it’s a lot easier to find deals that actually pencil. The hold period or the wait period might only be six weeks before you actually start making some money versus multifamily where it might be a little bit longer.

Ash Patel: Got it. You mentioned that you help clients design and set up their short-term rentals. What is that?

Rich Somers: We have an awesome design team with our company FortuneCribs. They will actually fly out to whatever market that we purchased the short-term rental for the client. They’ll fly out, design, furnish, come up with a house manual, set up the cleaning, the maintenance, and all that sort of thing. The furnishing and the design for any short-term rental is one of the most crucial pieces to this investment vehicle because you want to bring something that’s unique to the marketplace.

A lot of guests that travel and stay in short-term rentals are millennial demographic or younger and everyone is looking for that property with that Instagrammable feature. We try to include an Instagrammable feature on the property whether it’s inside or out. We like to use unique styling and concepts that do well in that particular market. We’ll do market research and see what the top-performing properties in that market, what they look like from a furnishing standpoint, and we’ll try to match that so we’re not guessing.

Break: [00:12:43][00:14:40]

Ash Patel: What are examples of Instagrammable experiences?

Rich Somers: I’ll give you an example. I just closed, about a month ago, it’s a luxury home in Scottsdale. It’s a $2.5 million project, going to put about $500,000 into a full renovation. Right now, it’s like six-bedroom, seven-bath, we’re going to convert it into eight-bedroom, eight-bath. It’s a 7600 square foot property. Our Instagrammable feature is that we’re going to include a speakeasy on the property. We’re going to have this library-looking wall with like a secret door that pivots into the speakeasy. We’re going to have a cool bar, a tiki-style looking bar in there, like a lounge area. That’s going to be our Instagrammable feature for this particular property.

To give you an idea of what these things make, this particular property in Scottsdale, the comps out there in the neighborhood are bringing in anywhere from $500,000 to $800,000 a year in gross revenue. In this short-term rental asset class, about 50% of your gross revenue will drop to your bottom line and be your net cash flow after all expenses and after debt service.

Ash Patel: That is insane and I want to stay there. I want a speakeasy in my short-term rental. That is awesome.

Rich Somers: You’re welcome to come out anytime, man. You’re more than welcome.

Ash Patel: Do you still look for multifamily deals? Is it on your radar?

Rich Somers: Yeah, we’re still operating the ones that we have but we focused our attention, at least for this year, away from searching for multifamily. We’re just pivoting over to short-term rentals. We might get back in multifamily maybe next year, maybe the year after, I don’t know. But for this year, where it’s solely focusing on short-term rentals.

Ash Patel: Let’s play devil’s advocate for a minute. A lot of cities are cracking down on short-term rentals, hotels have incredible lobbying power, where do you see the future of short-term rentals going? What are some of the headwinds you’re going to encounter?

Rich Somers: That is the biggest risk to this asset class, in investment vehicle is the regulatory environment changing. As you know, there are a lot of markets around the country that have already cracked down on short-term rentals. There are ways to mitigate that. One of the things we do is we like to go into markets that are a little bit more short-term rental friendly. These tend to be markets that are a little bit more landlord-friendly conservative states. There are some states out there that took the opposite approach, Arizona is one of them, where the governor actually signed something into a contract that says it is highly discouraged and illegal for cities and municipalities within the state of Arizona to highly regulate short-term rentals.

Their stance is like “Hey, we want to encourage tourism. It helps stimulate our local economy, our local businesses, etc.” You want to start to focus on markets like that or go into vacation towns that have had vacation rentals for decades and decades before Airbnb and Vrbo was ever a thing. Those are other areas that are safe bets. But the ways to mitigate the risk if the regulations were to change, one, you can always fall back to midterm stays. Short-term rentals are defined in most cities around the country as anything less than 30 days. If the regulations do change, you can always fall back to 30-day or greater stays in furnish, which is a growing demand as this whole work from home notion becomes more and more prevalent.

I’ve heard a lot of different numbers out there but we had Neal Bawa on our show not too long ago. He threw out the number 22 million Americans roughly. 22 million Americans are adopting this new way of life to where they are no longer going back to the office, they prefer to work remotely and do the whole digital nomad thing. They’re bouncing around and living in different cities around the world, and they’re not moving their furniture with them. I think there’s a growing demand for that, should the regulations change? Brian Chesky, the CEO of Airbnb, recently in an interview said, “People are no longer staying in short-term rentals, they’re living in short-term rentals.” I feel very bullish on this asset class, I feel like it’s still the first setting of short-term rentals.

Ash Patel: I would also imagine in downtown Phoenix, city centers where you can find cheaper housing, there’s a lot of short-term rentals and they would be the first to regulate. $3 million homes in Scottsdale are probably not going to get regulated.

Rich Somers: Yeah, because you’re not really taking a lot of housing off of the market for a potential renter in that price point. Is that why you’re alluding to that?

Ash Patel: Yeah. How many people are going to crowd million-dollar-plus homes and how many millionaires are going to complain, “Hey, we can’t find a deal because all these short-term rental guys are driving up prices.”

Rich Somers: Right. That’s a good point and that’s another reason why this housing market has been on fire over the last couple of years, that a lot of people don’t even mention, it’s the short-term rental industry.

Ash Patel: Rich is that a negated community, the $3 million property?

Rich Somers: It is not. It’s a community without an HOA so we typically want to stay away from properties that have HOAs.

Ash Patel: Yeah, that’s a challenge. You are going to draw a lot of attention there. Awesome. What’s the biggest lesson you’ve learned or the hardest lesson you’ve learned with short-term rentals?

Rich Somers: I think it was early on when I got into my first few short-term rentals. I didn’t have the same tools my disposable that we use today such as AirDNA. Today we use AirDNA, we have a national subscription so we can pull up any zip code in the world that has short-term rentals and we can see exactly what those properties are making. We can see the seasonality, we can see the occupancy, and we can see a lot of different stuff. But when I first got into it, I was really just guessing and I was taking a risk, I was speculating a little bit. But sometimes without risk, there’s no growth. I think that was the biggest challenge for me early on is not having all the available information to my disposal. Now we do.

Ash Patel: Rich, getting investors on multifamily versus short-term rentals. Can you dive into that a little bit?

Rich Somers: Yeah. I think there are a lot of similarities and then there are some differences. Some of the similarities are networking to meet investors, that’s all really going to be the same. An investor that has the capacity to invest as a limited partner in a syndication typically has the capacity and wherewithal to be able to buy a short-term rental under FortuneCribs, and get a loan and that sort of thing. Some of the differences are, as a limited partner in a syndication, you’re investing in an LLC, typically, that owns a property or maybe owns a few different properties. Now, with this model under FortuneCribs, the investors actually own 100% of the deal, they get 100% of the tax benefits, they get 100% of the loan pay down, they get 100% of the long-term appreciation, and they get 100% of the cash flow after all the expense. That’s really the main difference.

Ash Patel: They get 100% of the cash flow after expenses. How do you guys make money?

Rich Somers: We take a split on the gross monthly revenue. Typically, it’s about 25% of all gross monthly revenue that comes in. The design furnish and all that sort of stuff, we don’t make any money on that. It’s really just on the gross revenue and on the operational side is where we make our money. Essentially, we’re kind of partners with the investor, although they own 100% of the deal so we don’t get the benefit in the long-term upside, just on the monthly cash flow upside.

Ash Patel: I get it, man. I could see how that can be very attractive to investors. What is your best real estate investing advice ever?

Rich Somers: Don’t run out of money with any project that you get into, especially these value-add deals where you’re going to have a dip in occupancy, you never want to run out of money. In our first 32-unit deal, we made a lot of mistakes, we ran very, very low on money. The pandemic drops shortly after that, we had a lot of vacant units, and we had some serious heart-to-heart talks. But just know, if you do run out of money, there are always outs and always solutions that you can arrive at. In that deal, we actually just went full cycle on, we sold it about a month ago and we 3X the value of the property in just 25 months.

Ash Patel: What was your solution when you guys ran out of money?

Rich Somers: That’s a great question. We were able to secure a non-secured private second mortgage on the property which gave us the funds to complete our business plan really.

Ash Patel: This was during the pandemic?

Rich Somers: Right when the pandemic dropped.

Ash Patel: Good for you guys for being resourceful. That’s incredible.

Rich Somers: Absolutely. There’s always a solution for everything. I think success is never a straight line.

Ash Patel: Yeah. Rich, are you ready for the Best Ever lightning round?

Rich Somers: Let’s do it.

Ash Patel: Let’s do it. Rich, what’s the Best Ever book you recently read?

Rich Somers: The E-Myth Revisited by Michael Gerber. I just read it recently. Wow, that book has changed a lot of stuff in my life. For the listeners out there, it talks about working on your business and not being a worker bee in your business, knowing the value of your time.

Ash Patel: Rich, what’s the Best Ever way you’d like to give back?

Rich Somers: One of the things I’d like to do here in San Diego is volunteer with a program called Big Brothers Big Sisters, they have them in big cities across the country. I was matched, a few years ago, with a nine-year-old boy named Isaac. He comes from a little bit rougher background, his father’s not in the picture, and we get to hang out one or two times a month and go do fun stuff. He’s almost 12 now, a good kid.

Ash Patel: Rich, how can the Best Ever listeners reach out to you?

Rich Somers: You can find me on social, Instagram handle is @rich_somers, I’m pretty active on social media. Fun check out our podcast, it’s The Multifamily Takeoff. If you want to learn more about FortuneCribs and buy a short-term rental, it’s fortunecribs.com. If you want to check out our syndication company and our fund that we’ll be launching in a couple of months, you can check us out on pac3capital.com.

Ash Patel: Rich, I got to thank you for sharing your story with us today. Mark Cuban recently said, “You can try a lot of different things, you can move on if you don’t enjoy something because you only have to be right one time.” I’m glad you found your one right time, coming from the immigrant upbringing, selling cars, air traffic controller, and now you’re killing it in real estate, man. Thank you for sharing your story with us.

Rich Somers: Ash thank you so much for the kind words, man. I enjoyed this conversation. It’s been a pleasure.

Ash Patel: Yeah. Best Ever listeners, thank you so much for joining us as well. If you enjoyed this episode, please leave us a five-star review and share the podcast with someone you think can benefit from it. Please also follow, subscribe, and have a Best Ever day.

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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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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.

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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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JF2738: The Innovative Strategy to Scale Military Short-Term Rentals ft. Joe Riley

Veteran Joe Riley saw an opportunity in the market when he rented his home while on deployment: creating temporary housing for families near military bases. Now with over 300 properties, Joe has continued to grow his portfolio to fit this overwhelming need for military housing. Joe talks about how he created Patriot Homes and how to scale your short-term rental portfolio.

Joe Riley | Real Estate Background

  • Founder of Patriot Family Homes, a veteran-owned company that meets the need for short-term housing near military bases.
  • Portfolio: Owner of 300+ properties.
  • Prior to starting this company, Joe was a Captain in the Army, having multiple overseas deployments, and previously served on the National Security Council at the White House.
  • Based in: Chattanooga, TN
  • Say hi to him at: www.patriotfamilyhomes.com
  • Best Ever Book: The Politics of Diplomacy by James A. Baker III

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Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed and I’m here with Joe Riley. Joe is joining us from Chattanooga, Tennessee. He is the founder of Patriot Family Homes, which specializes in short-term housing near military bases. He has over 300 properties and he was a captain in the Army and served on the National Security Council at the White House. Joe, can you start us off a little more about your background and what you’re currently focused on?

Joe Riley: Yeah, so I was in the army, and on a deployment to Afghanistan, my wife and I decided to throw our house up on Airbnb and HomeAway, because she traveled for work Monday through Friday and there was no reason for her to stick around Columbus, Georgia. We’re not from there, and with me being gone, instead of trying to take all our stuff out and put it in a shipping container or something, we just left it in the house, rented it on Airbnb and HomeAway, realized (no surprise) that there was a big need for furnished temporary housing around military bases with families coming and going all the time. We then came back, started getting some more houses. The short version of the story is that it just kind of morphed from there, we started working with other veterans and folks in the service, a ton of military spouses… In fact, it was on another deployment to Ukraine that we started relying on other military spouses to kind of take care of the houses while we were gone. That’s really been the secret to what we’ve been able to do.

Slocomb Reed: Nice. So 300 properties around military bases. Are those still all single families?

Joe Riley: The vast majority of everything is single-family and we do have some small multifamily. We’ve branched out now, we’re no longer just around military bases, we’re also in some kind of vacation areas and other markets. We are in Pennsylvania, Virginia, North Carolina, South Carolina, Tennessee, Alabama, Georgia, Florida, Texas, Kentucky, Mississippi, is kind of our current footprint.

Slocomb Reed: Gotcha. So every time there’s an SEC football game, you guys are fully booked out, it sounds like.

Joe Riley: The University of South Carolina or the University of Georgia, or Alabama or whoever else is playing, we have houses in most of those markets. We find that many of the same characteristics that make army bases attractive for short-term rentals also make university towns attractive for those.

Slocomb Reed: Joe, tell us about your partnerships. You said that you were working with other veterans; tell us how your partnerships work.

Joe Riley: We started out, my wife and I, just kind of having our own houses. When we ran out of money, we did a rental arbitrage model where we would go and sign a three or five-year lease on a property, and then turn around and sublease it as a short-term rental. We had landlords who came to us and said, “Hey, how are you paying our rent and still making money on top of that? Would you just like to manage for us?” Then we started a management company, to kind of manage for those types of folks. We had other service members who wanted to do this, but didn’t want to have the hassle of managing the properties themselves. From that, we’ve now morphed into working with larger investors who are looking to buy 50-100 homes. We go put that to work and spread them out across our markets.

Partners range from just a single-family who has a home, maybe they’re what we call PCS in the army, moving from one base to the next; it could be just somebody who has a second lake house or beach house, it could also be somebody who’s looking to go and do this for 10, 20, 40, 50, 100 homes. We’re fully vertically integrated, so we have our own acquisitions team, we have a renovation oversight team that oversees that, we have our own warehouses where we warehouse all the furniture to set up the houses, and then obviously, we manage it on an ongoing basis. So we can come when someone just says, “Here’s an amount of money I want to put to work”, and we can go do soup to nuts everything from there.

Slocomb Reed: Awesome. Out of those 300 properties, how many do you all own?

Joe Riley: We have full ownership in about 100 of them, partial ownership in another 150, and then just pure management on another 75 or so.

Slocomb Reed: Gotcha. Joe, what I’d like to ask about is raising capital for doing short-term rentals. The people that I know who do short-term rentals are doing it with all their own capital or they’re arbitrating. As you said, you sign a lease with the landlord to rent the space with permission to sublet as a short-term rental, which means that your startup cost is significantly lower. But it also means you don’t own the asset, you’re not building equity or gaining appreciation, you’ve just got the cash flow. It’s much more of an active business than what most people are looking for from real estate investing.

Similarly, people who are looking to invest more passively tend to shy away from short-term rentals, because they’re looking for something that doesn’t have the fluctuations that the short-term rental market is perceived to have. So let me ask, the people who are coming to you looking to buy houses or looking to partner with you in this, or just for lack of a better term, hand over their money and let you invest it in 50 to 100 houses at a time – what is it that they’re looking for and what is it that is attractive to them about investing in short-term rentals?

Joe Riley: In terms of what’s attractive, we tell people we offer hotel-style cap rates with a single-family backstop. When we approach most of our lenders, we do manage million-dollar beach homes and lake homes, but the preponderance of our portfolio is actually just kind of run-of-the-mill single-family homes that you could also run in cash flow as a long-term rental. One way you get banks comfortable with financing is that you show them that this property could also cash flow as a long-term rental. We think we can use the returns as a short-term rental, so the bank feels confident, “Okay, if they do well, good on them. If they do poorly, then it still cash flows.” So hotel-style cap rates, single-family backstops.

Slocomb Reed: When you say hotel-style cap rates, what do you mean?

Joe Riley: Double-digit cap rates, unlevered cap rates. What we would say is that we find across our portfolio we have about a 13% unlevered cap rate.

Slocomb Reed: Gotcha. When you say unlevered, what do you mean?

Joe Riley: If you just went out and bought a $100,000 house, then we would say that your net income at the end of the year would be $13,000, assuming you had no debt on it. Then if you add in leverage, that 13,000 goes down, but then you don’t have 100,000 in cash sitting in it.

Slocomb Reed: A 13% cap is going to sound very exciting, especially with the kind of debt that is available for single-family homes; and as you said about the backstops, if there is a dramatic market shift, then single families tend to be easier to sell, and you do have the long-term rental potential in some cases. A 13% cap is pretty impressive, of course. What analysis do you do to determine the market that you’re going to go into?

Joe Riley:  At the broadest level, we want cheap markets with a lot of turns. Sometimes that is secondary and tertiary markets which is the kind of the main place where we play. We also look at blue-collar vacation destination sites. We’re not out in the Hamptons, we’re in the Poconos; we’re not on Destin, we’re in Pensacola; we’re not in downtown Savannah, we’re out in the kind of rural areas outside of Savannah. Gatlinburg, Pigeon Forge… That’s what we’re looking for, cheap markets with a lot of turns. Then when we look at an individual house, we target a minimum of 25% of the asset value in annual revenue. A $200,000 house, we want to generate $50,000 a year in top-line revenue. You back out your net operating income is typically about 40% of that, inclusive of our management fee.

Slocomb Reed: The expenses are only 40%?

Joe Riley: 60%. So your net operating income would be about 40% of the top line.

Slocomb Reed: Gotcha. It sounds like you’re all over the Southeast, possibly because you’ve talked about Georgia and you’re in Chattanooga, Tennessee. Why is it that you’re focused in the Southeast? Is it just geographic proximity and that makes things more efficient?

Joe Riley: Yeah. Obviously, a big piece of it is proximity. We started our first market in Georgia, then we were in Alabama and Tennessee, and we’ve just kind of spread from there. This is an incredibly operationally-intensive business. Do you think managing long-term single-family rentals is operationally intensive? We turn our houses on average six times a month. So if you’re doing 70 turns a year compared to one turn a year, and then in addition to basic maintenance, you’re having to worry about linen, soap, shampoo, toilet paper, and cleaning at every turn… It’s a very operationally intensive business. We tell people short term rentals are easy on the [unintelligible [00:12:11].24] hard on your emotions.

The biggest reason we see people not succeed in short-term rentals – one, they become too emotionally attached and that leads them to just have a lot of stress and take it personally when people say bad things about their home. Also, then they turn around and they spend way more than they should on furnishings and finishings and everything else, which is relevant in some kind of prime markets for prime properties, but for what we do, we call ourselves the Walmart or short-term rentals. We’re just offering consistent, good quality, but not premium, not luxury accommodations for traveling groups of workers, electricians, plumbers, families on the move, military families. Again, we’re not the Saks Fifth Avenue, we’re the Walmarts.

Slocomb Reed: Gotcha. A little bit of background on me, Joe. I’m in Cincinnati, Ohio and I’m a buy and hold guy, landlord, long-term rental. I tried Airbnb for a while; I say tried – I had at most three units at once. Superhosts, over 200 reviews. I had some success, my issues were operational; I didn’t have the scale to leverage or delegate the majority of the responsibilities within Airbnb with only three doors. I would at least like to say that it wasn’t for emotional reasons that I decided to get out of Airbnb, it was because I saw my portfolio, my goals heading in another direction. But I am certain, Joe, that there are people who are listening to this episode who have flirted with Airbnb, gotten in, gotten stressed, whether it’s because they’re too emotional or because of the operational difficulties of the short-term rental space. They’ve gotten in, they’ve gotten stressed, they’ve gotten out, as I did.

I think my biggest issue was scale. Three doors is a terrible number to have. I want to ask two questions at the same time, Joe. Someone like me, who wants to get into this and wants to be able to delegate the majority of responsibilities… I don’t want to be the one who has to go through it during every turn. I want to know that I have a cleaner who’s reliable, I want to know that I have someone else sending the vast majority of messages, responding to the vast majority of the inquiries, and doing the legwork that’s required to set nightly, weekly, monthly rates, along with the software platforms that are available. How much revenue do I need to have in order to get to that point where I can hire out the majority of the day-to-day operations for short-term rentals? How many units do I need? Another way to ask basically the same question, Joe, how many units do you need to bring on to enter a new market and have the same infrastructure and efficiency that you have where you’re operating already?

Joe Riley: For us to enter a new market, we would want five with a pathway to ten is what we would be looking for if we were going to do full service. Now, we also offer a digital-only package. Let’s say you had your three doors in Cincinnati, and you were like, “I’ve got a cleaner, but I don’t want to make sure the cleaner gets all the automation to go there, and I don’t want to answer the guest’s questions before they arrive, and I don’t want to do the pricing. I don’t want to have to put together software that pushes me to Airbnb, Vrbo, Booking.com, and integrates all the backend stuff. I don’t want to do all that, but I’ve got good maintenance people on the ground and I’ve got a cleaner.” Then we could do a digital-only package for you and we can do a digital-only package anywhere and you don’t have to have scale or volume. For us to come in and pull up a full-service operation, then it’s five with a pathway to 10 is typically what we tell people. Does that answer your question?

Slocomb Reed: It does, and that number surprises me, Joe. Five with a pathway to 10 seems low.

Break: [00:16:06][00:18:02]

Slocomb Reed: Now, you have much more experience in this space than I do, of course, although I was Superhost and got a couple hundred reviews, so I have some experience. My units were studio apartments in a walkable downtown. The vast majority of stories that you hear about Airbnb are people who are getting larger spaces, multiple bedrooms; you said single-family homes. So with that five with a pathway to ten, how much revenue is that, that you’re looking to have when you start in a new market?

Joe Riley: To be clear, at five or less, what we would do is we would find a local cleaner who does a good job, and we would sub out the cleaning. Then we would have a maintenance person that we have on retainer that we can call out. That’s why we say we’re the Walmart, not the Saks Fifth Avenue. If you want white-glove service and fresh cookies in the house when the guests show up, we’re not going to do that even with 30 houses; that’s how we operate [unintelligible [00:19:03].07] you said Superhost status.

So we do have some profiles, we segment out profiles into premium, intermediate, and budget properties, and we find that actually often our budget properties are the best return on investment for the asset owner. The analogy I give is I can have a $100,000 house in a transitioning neighborhood that will generate $36,000 a year pretty consistently, or I can have a $300,000 house that’ll make $70,000 a year or $75,000 a year, or I can have a million-dollar house that’ll make $100,000 a year.

In many instances for the asset owner — selfishly for the management company, we like to manage the million-dollar home. Because if you can take 30% — and oftentimes in vacation markets, the owners are price-insensitive; they didn’t buy the house for an investment, they bought the house because they wanted to go there on vacation. So anything that makes them money is better than their alternative. So they’re the ones carrying the million-and-a-half-dollar cost, but then that house turns around and makes $150,000 a year, and the management company takes 35%-40% of that, because again, the owner is relatively price-insensitive. ..So selflessly, from a management company, those are the houses you love to manage. What’s harder is to manage the standard 3/2 in a transitioning neighborhood that makes $36,000 or $40,000 a year. We do that, but the difference is there’s not someone meeting the guests to check them in, and there’s not a bottle of wine and cookies.

That’s what we have to talk with owners about, is – if you want to have only five-star reviews, then we can do that but that’s at a different price point, both in terms of the asset and in terms of the management fee to be able to manage that. But our view – and this is what we’ve done with our own properties – is that, again, from an asset-owning standpoint, we find that the best return on investment is more of those kinds of Walmart-style properties. And more specifically, we find that the two best types of assets are either small multifamily or large houses in urban cores. Small multifamily, we would break into like duplexes, quadplexes, something like that… Because let’s say I have a duplex, I don’t have two listings, I have three listings. That’s really important. I have unit A, unit B, or the two together, and that allows me to touch multiple points in the demand curve, which allows me to then push the average nightly rate for each unit up without having a major hit on occupancy.

Let’s say they’re three/twos and they sleep 10 people each, or collectively they sleep 20; then I’m hitting two different points, again, on the demand curve. The other types of assets that we find that do really well, maybe they used to be student accommodation, college rentals so they’re big houses and urban cores. Ultimately what Airbnb is, from a value play at the macro level, is a volume counterweight to a hotel room. If you go stay in a Marriott hotel room, you’re going to get a Marriott experience, but you’re going to pay 250 or whatever it is a night for one room, versus getting six; where you start to get those really big cost savings from a renter is if you’re renting a four or five-bedroom house in an urban core, that’s where that arbitrage opportunity is there.

The other thing that does really well is anything that’s got a mother-in-law suite or [unintelligible [00:22:26].07] in the back or something like that, because then you can rent out the mother-in-law suite or the casita to a traveling nurse or somebody who needs it. Then you’ve got the main house that’s generating the bulk of the revenue, or people can run out the two together.

For example, if you came to us and said, “Hey, I’ve got five houses in Cincinnati that I’d like for you to manage”, I’d say, “Absolutely. We can do it digitally or we can do it full service.” Our full service would not be us putting a W2 person on the ground, it would be us going and finding a 1099 cleaner and a 1099 maintenance person and paying them a retainer in addition to the cleaning fee are the service call to kind of come out and manage that stuff on the ground for us. This means the guests would probably, frankly, not receive the same level of service as when you manage that yourself because you were much more personally involved and there’s a much more personal relationship that the guests receive, versus us, which has a larger, more of a kind of management company, corporate style, experience. But again, our view is with the pricing — we also work with a lot with insurance companies, we have a lot of direct partnerships, so around 30% of our revenue comes off-platform, which is a huge benefit.

Slocomb Reed: Tell me a little bit more about that, Joe, 30% of your revenue comes off-platform. Let’s dive into that a little further.

Joe Riley: So we’re a preferred vendor for a lot of insurance booking companies. Let’s say your house burns down, tornado, water damage, whatever have you; the insurance company has to put you up. So those are really nice, juicy, two-month, three months, six-month-long bookings that we’re able to get; then we work with a lot of different corporate housing groups more generally conceived. Then we have a really good program – let’s say someone stays with us, anytime one stays with us for five days or more, we do an outreach and ask them why they’re coming. A lot of the time, that’s like a group of traveling contractors, and they’re coming back next week and the next week, so then we allow them to go directly with us; they save money, it’s better for us as well. Our strength is really in that kind of digital package that you get of pricing pushing out across all the different platforms, the off-channel stuff, and then the efficiency at which we manage turns with our 1099 vendors. Frankly, we run markets of 25 houses with not a single W2 person on the ground.

Slocomb Reed: That’s awesome. Joe, a couple of questions before we transition into the final phase of this episode. Have you entered a market and then decided to leave?

Joe Riley: Yes.

Slocomb Reed: Okay, tell us about that. You go into a market, you try it out, it didn’t pan out or didn’t meet expectations, and you decided to step away from the market. Can you tell us what market that was and how that went down?

Joe Riley: Yeah. The most recent one would be Athens, Georgia, which we’re actually now going back…

Slocomb Reed: College town.

Joe Riley: We left and now we’re coming back. So we went into Athens at the worst time, which was February of 2020, is when we closed on our first homes.

Slocomb Reed: You purchased them, that wasn’t arbitrage?

Joe Riley: We bought them. We basically then pivoted to some more kind of long-term rental stuff, and then we’ve brought them back to short-term rentals, and they’ve done really well. It’s not a full left the market, but we had to pivot focus, because that whole market was wrapped up in university traffic, which all shut down for 2020 in COVID. Then we had to kind of push through those longer-term leases, and now we’re transitioning back.

So that’s the main one that we’ve kind of gone into and had to leave. This is not me trying to blow smoke. I tell people, nine times out of ten, if you have a standard home in an area that has a metro population above 100,000, I’ve rarely seen an instance in which you don’t make more money as a short-term rental than you do as a long-term rental.

We’ve had a turn loose some of our leases… The arbitrage business is the biggest one where it’s great if it does really well, but you can have thin margins. We don’t arbitrage anymore on small units, because there’s just not the margin. Again, if we go back to what is the arbitrage of short-term rental – it is a volume play vis-a-vis hotels. If you have a small unit, you’re not taking as much advantage of the difference.

Let’s take Birmingham, Alabama. I can get $1,000 a month rental and then make $3,500 as a short-term rental. I can go get an $1,800 a month or $2,000 a month rental and make $7,000 a month. Now I’ve taken that $2,500 spread up to almost $5,000. Or I can go get a $3,200 a month rental and I can get $11,500 on average, where now I’ve got an $8,000 spread.

So as you go up to those bigger properties — because no one’s going to pay $8,000 a month in rent, you cap out on the long-term risks for some of these bigger nicer houses, because people who can afford that are either going to move out into the suburbs and have better school districts, or they’re going to buy the house. So where we found the arbitrage to not work – it’s on smaller properties that are not as premium in location.

Slocomb Reed: Because they have slimmer margins. What is the biggest challenge you’ve had to overcome thus far in getting your portfolio to where it is?

Joe Riley: Accounting.

Slocomb Reed: Accounting.

Joe Riley: Accounting is the name of the game in this business. If you just have one unit, you don’t really fully internalize that. But at 300 plus, closer now to 350 units spread across a mix of arbitraged, owned, fractionally owned, and managed, the different lodging occupancy taxes in every spot… There’s just like — every time you turn around, how does the pet fee get split? All of those things seem relatively simple when you have one or two or three properties… And it’s even somewhat simple if you manage in one market…

Slocomb Reed: Joe, let me ask, what is it that you have to do to be able to handle the accounting for your short-term rental portfolio?

Joe Riley:  We’ve had to leave QuickBooks and go to Sage Intacct to allow multi-entity accounting. We have a pretty robust in-house team, and then we have an outsourced…

Slocomb Reed: How big is your in-house team, just specific to accounting, for 300 plus?

Joe Riley: Five people.

Slocomb Reed: Five people to do the accounting for 300 plus units.

Joe Riley: Plus an outsourced team.

Slocomb Reed: Plus an outsourced team. Wow, that’s a lot for sure. At the end of the day, though, you’re still talking about a 13 cap on average across the portfolio. High-intensity operations, high-intensity business plan, but also high-intensity returns. Joe, are you ready for our Best Ever lightning round?

Joe Riley: Let’s do it.

Slocomb Reed: What is the Best Ever book you recently read?

Joe Riley: The Politics of Diplomacy by Jim Baker. Not relevant to real estate at all, but I’m a big fan of Jim Baker.

Slocomb Reed: Joe, what’s your Best Ever way to give back?

Joe Riley: We’ve been working with a lot with Afghan refugees to house them in these units as they’re waiting for more permanent housing.

Slocomb Reed: What is your Best Ever advice?

Joe Riley: Love your tenants and never sell.

Slocomb Reed: Where can people get in touch with you?

Joe Riley: They can go to info at info@patriotfamilyhomes.com as an email, or you can send me an email to joseph@patriotfamilyhomes.com.

Slocomb Reed: Best Ever listeners, thank you for tuning in. If you’ve gotten value from this episode, please subscribe to our podcast, leave us a five-star review, and please share this episode with a friend so that they can get value from our podcast too. Thank you and have a Best Ever day.

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JF2728: The Key to Multifamily Asset Management ft. Kyle Mitchell

Kyle Mitchell, Founder of Limitless Estates and Managing Partner of Vertical Street Ventures, returns to the Best Ever Show to share his insight on multifamily asset management. In this episode, he details the importance of having a good asset manager and how to create an efficient, scalable business using this role.

Kyle Mitchell | Real Estate Background

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Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed and I’m with Kyle Mitchell. Kyle is joining us from Scottsdale, Arizona. He’s the managing partner of Vertical Street Ventures. He’s a GP on 107 million in assets under management. Kyle, can you start us off with a little bit more about your background and what you’re currently focused on?

Kyle Mitchell: Yeah. Thanks, Slocomb, happy to be on. My background is now in multifamily real estate, we focus on value-add apartment investing in the Arizona and the Texas markets. We’ve got about 14 different properties that we’ve done syndications on; I’ve been in real estate since 2010. In my previous life, I was on the golf management side of things, so property management, but for golf courses. I did that for about 20 years, got burned out on it, and I ended up finding an online course for real estate, and then 11 months later I left my full-time job to pursue it full-time. So I’ve been full-time in multifamily for the last three and a half years, and I live in Scottsdale where we acquire most of our properties in the Arizona market.

Slocomb Reed: So you’ve been full-time in real estate investing in the last three and a half years. You’ve acquired 14 properties in that time?

Kyle Mitchell: That is correct.

Slocomb Reed: Gotcha. You’ve been busy.

Kyle Mitchell: Busy for the last 12 to 18 months, I would say. Yup.

Slocomb Reed: Okay, how many of those deals are in the last 12 to 18 months?

Kyle Mitchell: Seven of those deals were in the last 14 months, actually.

Slocomb Reed: Seven deals since basically the beginning of 2021, end of 2020?

Kyle Mitchell: Yup.

Slocomb Reed: And what markets are those in?

Kyle Mitchell: We have one that we closed last November in Arlington, Texas. That was a 352-unit property. And then the rest were between Phoenix and Tucson, which is where our core markets are.

Slocomb Reed: Phoenix, Tucson, and Arlington, Texas. It’s not like you’re the only guy who’s looking for deals there. I imagine the vast majority of people who are looking for deals in those areas, even those with your experience, aren’t locking in seven deals in about the last five quarters. What do you perceive to be the differentiator between you and the other people writing these offers?

Kyle Mitchell: Yeah, I made a big move in my life last year, actually, in April; I moved from Southern California to Arizona. Prior to moving to Arizona, I was still flying into Arizona every other week, but I just wasn’t able to build the right relationships, or better relationships, like I do now, and also being able to react much quicker. So now that I live in Arizona… If a broker sent me a deal, in the past, I would say, “Yeah, I’ll be there next week. I’ll take a look at it.” Well, by that time, 20 other people have taken a look at it. We’ve literally been sent a deal on a Saturday, I go look at it, we underwrite it, and we’re making an offer by Saturday afternoon or Sunday, before anyone else looks at it. So that’s been a huge factor. I’ve been able to be the boots on the ground and really build the relationships with the brokers here, and then been able to react very quickly.

Slocomb Reed: Gotcha. So moving into your target market from SoCal. And that’s not the time that you were going full-time; you were full-time for a couple of years before that, weren’t you?

Kyle Mitchell: That’s correct.

Slocomb Reed: Gotcha. So you perceived yourself losing out on deals because you couldn’t get to them quickly enough. So you’re already full-time doing this… Why not go be where you’re looking to buy deals, so that you can be Johnny-on-the-spot? You hear about on a Saturday, Sunday you’re there, and Monday you’re writing your LOI. Is that about right?

Kyle Mitchell: Yeah, exactly. There’s even the same day that we’ll write an offer or provide feedback to the brokers. When you can provide feedback to brokers the same day, they tend to like that. And whether I do that one deal or not, they’re going to continue to throw deals our way, because we get back to him pretty quickly and we move quickly. So that’s been a huge factor. And just the fact that I live in this market, I can see it real-time, things that are gentrifying, areas that are good, that are not good, that we’re not interested in, and then just understand the market and building the relationships – it’s just gone a long way for us since we moved here. We’ve grown exponentially since we moved to the market.

Slocomb Reed: Gotcha. I understand, Kyle, obviously, you’re involved in acquisitions and deal-finding. I understand you’re also involved in asset management. Is that correct?

Kyle Mitchell: Yup.

Slocomb Reed: A bit of my background, Kyle – I am an owner-operator, so I’ve worn all of the hats, or almost all the hats for all of my properties thus far. And I’ve read the Best Ever Real Estate Syndication Book multiple times. Because of my experiences as an owner-operator – I’m the property manager, I’m the asset manager, I am the person to whom I have to answer on most of my properties. You guys hire third-party property management then?

Kyle Mitchell: We do right now. We’ve had the discussion about bringing it in-house now that we’re over 1,000 units. I came from the property management side of things, but from the golf course perspective. But it’s the same thing. It’s a lot of people, low margins, it really is a thankless business. So for me, if we can have a strong third-party property management company that allows us to customize things and works with us on a lot of our key performance indicators, our targets, and how we do things, then for right now I’m okay with having a third party.

I can see why people bring it in-house, but that’s not something I would pull the trigger on yet. Like I said, it’s a tough business, there are a lot more moving parts because you have a lot of employees involved, and that changes things, so we’ve decided not to bring that in-house. However, we are bringing construction management in-house, which is somewhat similar, but the goal of that is to help alleviate some of the supply and labor constraints that are out there right now.

Slocomb Reed: Over 1,000 units, you have some property management background… Tell us, Kyle, what’s factoring into your decision? You guys are considering bringing property management in-house, but you haven’t done it yet, and it sounds like you’re not going to, based on your current portfolio. What are the factors in that? Why is that?

Kyle Mitchell: It’s just tough to manage people. The more people you have in your business, the tougher it is to manage. We’re happy with our third-party property management company to this point, and we are probably one of the larger groups with them, so we get some flexibility. We sit down with the owners, and they allow us to customize certain things the way we want to see it. So as long as we have a partner in that, we want them to be focused on what they do best, and we can focus on what we do best, which is finding the assets, and then managing from an asset management level, execution of the business plan. But if you have a strong third-party property management company, I do like the fact that they’re focused on that and what they’re really good at. Again, I understand why people bring in property management in-house. A little bit more control, there are some ways to save and increase your NOI.  But right now, I think we’re sticking with a third party.

Slocomb Reed: Thank you, that’s very helpful. When it comes to asset management, tell us a little more of what the, not necessarily day-to-day, but month-to-month and quarter-to-quarter of that looks like in your relationship. Do you have one property management for the whole portfolio?

Kyle Mitchell: We have two. We have one that is based in Tucson and one that is based in Phoenix.

Slocomb Reed: Gotcha. And then you’re using another property manager in Arlington, Texas as well?

Kyle Mitchell: Actually, the same one that’s in Texas, because they also manage properties out in Texas. They have a portfolio out there and that they manage so that’s worked well.

Slocomb Reed: Okay, nice. Yeah, that is convenient. Tell us about what asset management looks like for you guys. What is it that you’re focused on in your relationship with your property manager, but also, what are your key performance metrics, the ones that you’re tracking? And how frequently are you pinging the property manager to see how things are going?

Kyle Mitchell: When it comes to asset management, I think a lot of people think that you can just hand the keys to the property management company, they’re going to execute the business plan, and you call it a day, you move on to the next property. But really, you do value-add investing, and the more you can force the NOI up, the more forced appreciation, the more value you’re going to get on the property. Asset management is critical to make sure that the property management company, number one, understands what your business plan is, they know going in, and they execute it properly.

As I mentioned, property management is a people business, and people are not perfect, so there need to be systems in place to manage people and manage the execution of the business plan to get the best results. That’s where asset management comes into play.

We look at it more as a partnership with our property management company, where we’re partnering with them to execute our business plan together. Asset management, one day, could just be hopping on a call with them, understanding and letting them know what the budget is for a certain project, and making sure they stay on time. Another day, it could be going to the property, double-checking their work, and really pushing them to hold them accountable for things that are not getting done properly. But what our cadence looks like is during the value-add phase, we have weekly calls with our property management company, and we have a checklist that we go over, and a task list that we go over every week, to make sure everything’s staying on track. Once the property is stabilized, we’ll go every other week, or even once a month, depending on how the property is performing and all that. That’s a lot of what asset management has to do with; we have a full-time asset manager on our staff who does all this. But right now, especially with where we are in the market, in my opinion, I think speed, execution, and efficiency is critical. Making sure that you’re working in tandem with your property management company to finish out that business plan as quickly as possible is crucial.

Slocomb Reed: Speed, execution, and efficiency are words that everyone’s using about the acquisition process, and we were just talking about you moving your life to Arizona to make that possible with acquisitions. Meeting with your property manager once a week during the value-add phase – how often is a member of your team visiting each of the properties, during the value-add phase and then afterward?

Kyle Mitchell: It depends on how heavy of a lift. If it’s a light value-add, it’s going to be much different than a heavy value-add I would say. If it’s a heavy value-add, it’s once a week, to be honest with you. But right now, if it’s just a light standard value-add, that’s our on the fairway type of deal, at least twice a month, and maybe three times a month.

Slocomb Reed: Kyle, what counts as a heavy value-add for you?

Kyle Mitchell: Well, we have a deal we’re closing on in a couple of weeks where we’re putting 70 grand a unit, $7 million into it, and it’s a 100-unit property.

Slocomb Reed: You’re putting in 70 grand a unit?

Kyle Mitchell: Yes. That would be a heavy value-add. I would say a light value-add for us in the Phoenix area is probably 10 to 15 grand a unit.

Break: [00:13:51][00:15:47]

Slocomb Reed: What are you getting for 70 grand a unit?

Kyle Mitchell: What are we getting for 70 grand?

Slocomb Reed: In Cincinnati, Ohio, 70 grand a unit is more than I want to pay purchase and rehab for most of the stuff that I’m looking at, Kyle… So you’re blowing my mind with 70 grand per unit for rehab. Well, first of all, tell me the gross rents on these things and what you’re doing to the gross rents by spending that much money. And then please explain what 70 grand a unit is going to get you in Arizona right now.

Kyle Mitchell: 70 grand a unit it’s going to get us a rooftop deck, it’s going to blow out the entire bottom floor, brand new amenities, brand new office space, offices, common area amenities, and exterior work as well, rebranding. What else are we doing to it? Interior renovations are going to be between 20 and 25 a unit, so that’s not [unintelligible [00:16:34] the interiors. This is a tower, it’s a nine-story tower, so we have a lot of interior work, and then deferred maintenance. I would say probably a third of the 70 grand is going to be to defer maintenance to things like the roof, plumbing, etc. But this is in a great downtown location, huge units, and so 70 grand a unit for this one. In-place rents are $400 below market on day one, and another $600 to $700 after renovations.

Slocomb Reed: You’re adding $600 to $700 per month per unit with your renovations?

Kyle Mitchell: Yup. But on day one, they’re $400 below market. So when it’s all said and done, from today until the end of the renovation, it’s over $1,000 in increase.

Slocomb Reed: Oh, gotcha. So you’re getting 1000 a month increase for 70 grand a unit?

Kyle Mitchell: Yup.

Slocomb Reed: Gotcha. Give us the bigger picture numbers as well. You gave enough math to figure out how many units there are. But how many doors is this? What’s the purchase? What’s the rehab? What are you expecting this to be worth? And what do you expect to be producing on the back end?

Kyle Mitchell: It’s a 96-unit building, ’60s build, downtown Tucson. Let’s see, 70 grand a unit is what we’re going to be spending on it; purchased it for about 27 million, and when we’re all said and done, looking at it to be worth about 43 to 45 million.

Slocomb Reed: Gotcha. So you’re going to be all in for around 34.

Kyle Mitchell: Yup.

Slocomb Reed: And it’ll be worth about 10 million more than that when you’re done.

Kyle Mitchell: Exactly.

Slocomb Reed: Underwritten to the five-year hold?

Kyle Mitchell: Underwritten to the five-year hold. Correct.

Slocomb Reed: Okay, and what kind of return are you projecting?

Kyle Mitchell: About 2.1 multiple, 17% IRR.

Slocomb Reed: Gotcha. Yeah, I’m willing to call this heavy value-add too, Kyle. How are you expecting your asset management relationship to go with this? And you mentioned you’re bringing construction management in-house; is that for this deal, because there are so many things going on?

Kyle Mitchell: It’s not specifically for this deal. The reason why we’re doing that is like I said, we’ve got about 14 deals, and about six or seven of them are still in the value-add phase. And we’ve just seen, between COVID and labor shortages, and supply constraints, what used to be eight to 10 units a month that we could do has really shrunk down to three or four. And we feel we’ll have a lot more control bringing it in-house; obviously, our team will only be working on our properties, so they don’t have to go to other properties. So we’ll have a little bit more control on being able to be more efficient when it comes to our renovations. The scope for that heavy value-add, we’re bringing in an outside general contractor, architect, design team, because it really is a huge lift, and our in-house team is not going to be able to blow out the entire bottom floor of a building and do all that. So that’s kind of separate. But again, it’s really been the market environment for the reason that we’re bringing construction in-house.

Slocomb Reed: Gotcha. So asset management for your property manager, but also for all of these vendors that you’re bringing in to complete the rehab. I have a feeling that at first you’re going to be on-site more than once a week. What is that going to look like from an intensity perspective, frequency of how often you’re there, how many people are you keeping track of, that kind of thing?

Kyle Mitchell: The good news is that we have a full-time asset manager as well. A lot of his time is going to be focused on this property when we close on it in a couple of weeks. I will also be involved, since I’m boots on the ground. But when we’re first getting started, I’m probably going to be there two to three times a week to start for the first month or two, until we feel really comfortable with what’s going on.

There are some city permits and requirements, so we’ve got to go through some of those items, so we’re not going to start for four to six months. So we do have it staggered in a way that it’s not going to be too extreme. But yes, when we’re doing 70 grand a unit heavy value-add on a deal, we’re going to be very hands-on and be out there as much as possible.

Slocomb Reed: Blowing out the first floor – are you going to have tenants living there in the meantime?

Kyle Mitchell: The first floor right now, which is actually good, mainly consists of open storage and commercial space. We’ll do it in sections. So yes, there’s no living spaces in the bottom section, so we’re going to be able to do it while the residents are still living there.

Slocomb Reed: Gotcha. Kyle, let’s talk about asset management from a hypothetical perspective. I’m taking the perspective of a property manager, for myself, and thinking that I’m being brought on to manage a value-add asset, probably closer to the lighter value-add, that we may have some major mechanicals that need to be replaced. We’re doing some cosmetic updates in the apartments. We have a reasonable time frame, so it’s not like we’re emptying out the buildings to get everything done quickly. Thinking from the perspective of your property manager, how often should I expect to hear from you, and what level of decision making can I make on my own? And what do I need to get approval from you for?

Kyle Mitchell: Great question. We hired our asset manager about three months ago, and we were just talking about this yesterday… Because there are a lot of things that go on in a business plan, and a business plan doesn’t end the way it started; it just never happens that way. It would be great if everything stayed on timeline and stayed on budget. But essentially, what we do is we’ll have a meeting with our property management company and our asset manager is involved. They’re there for due diligence; we talk through the business plan together, they know what our budget is. So they have our budget, they have our business plan, and so does the property management company. So that person has full rights to make sure that everything stays on the timeline, within the budget. And if anything goes outside of the budget or changes, is when we get an email or a request for our input on the deal.

So we want to make sure there’s some flexibility and freedom for the asset manager; otherwise, they’re essentially just an assistant. It’s important to make sure you have the right person though. For the first couple months, we’re going to make sure that that person has good decision-making ability, asks the right questions, asks good questions. When we feel that he or she’s ready to take on the project a little bit more, then we’ll give them a little bit more rope. But as long as it’s staying within the budget and the timeline, we’re not going to get as involved as something that’s going over budget or an unforeseen item.

Slocomb Reed: Last question before we move on to the next segment of this interview, Kyle… What are the key metrics that you’re looking at for the performance of your properties?

Kyle Mitchell: We look at a ton of different metrics. One that I’m really interested in right now is lease trade-outs. The reason for that is lease trade-outs on renovated units, but also least trade-outs on existing, just classic units. Our market, in and of itself, has gone up 15% to 20% on rents over the last 12 months, so what we’re actually seeing is that we can get a lot of that rent increase without renovating a unit. So we want to make sure it still makes sense to renovate the units at the full level to make sure we’re getting our ROI on it. So looking at the lease trade-outs between what classic rents are and what renovated rents are one thing that we really focus on right now.

Slocomb Reed: Focusing on making sure that you’re getting the right return on your rehab dollars, as opposed to the return that you’d be making if you didn’t spend as much of course. Gotcha. Kyle, are you ready for our Best Ever lightning round?

Kyle Mitchell: Let’s do it.

Slocomb Reed: It’s been a few years. You’ve been through this before. You came on the show right after getting your first syndication deal, right?

Kyle Mitchell: Exactly.

Slocomb Reed: For anyone who wants to find him, that is Episode 1784. Kyle, what’s the Best Ever book you’ve recently read?

Kyle Mitchell: Who, Not How, by Dan Sullivan. It changed my perspective and view on things over the last 12 months.

Slocomb Reed: What is your Best Ever way to give back?

Kyle Mitchell: Our Vertical Street Ventures company is starting a nonprofit arm that my wife and other partners are working on. We’re really excited to give back in that way. We also have an academy where we teach other people how to get started in the Arizona markets. It’s a tough market to break into right now, so we are helping people get their first deals out here in Arizona.

Slocomb Reed: What is a Best Ever skill you develop since your first deal?

Kyle Mitchell: Best Ever skill. Great question. I would say just honing in my skills on asset management. I come from the management side of things, but just changing industries is — it’s not a perfect transition… So just honing my skills on the asset management side. I’ve learned quite a bit on how to do that, and managing people.

Slocomb Reed: Awesome. What is your Best Ever advice?

Kyle Mitchell: I think last time I said it was consistency, and I still stick to that. If you’re consistent in this business, you’re going to be able to beat out 95% of your competition. It’s one of the toughest things to do, is be consistent for a long period of time. If you do that, you’re going to be successful in this business. Things don’t happen overnight, but over two, three, four years, it’s amazing how much you can accomplish if you’re consistent.

Slocomb Reed: Absolutely. Kyle, where can people get in touch with you?

Kyle Mitchell: Yeah, verticalstreetventures.com is a great place to go; it talks about our team, our portfolio, and even the academy that we offer.

Slocomb Reed: Or the phone number and email address in your background for those who are watching on YouTube. Best Ever listeners, thanks for tuning in. If you’ve gotten value from this episode, please subscribe to our show, leave us a five-star review, and please share this episode with your friends, so that we can add value to them too. Thank you and have a Best Ever day.

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JF2717: 4 Advantages to Self-Managing Your Rental Property ft. Jacob Garza

Jacob Garza believes that no one will manage your properties better than yourself. As GP of over 2,000 units, and also co-founder of a property management company, Jacob has been able to follow this advice and scale his portfolio over the last 10 years. In this episode, Jacob shares his strategies for self-managing his rental properties and how he was able to grow his businesses. 

Jacob Garza | Real Estate Background

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Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed. This is the world’s longest-running daily real estate investing podcast. Today, we have Jacob Garza with us. How are you doing, Jacob?

Jacob Garza: I’m fantastic, Slocomb. How are you?

Slocomb Reed: Doing great. I’m excited about this interview. Jacob is a co-founder of REEP, real estate equity partners, which focuses on acquiring underperforming income-producing multifamily investment properties in Texas. Current portfolio, they are the GPs of 2374 units worth over 274 million. REEP is currently celebrating its 10-year anniversary. Congratulations, Jacob.

Jacob Garza: Thank you on that one.

Slocomb Reed: They are based in San Antonio, Texas. Jacob, tell me how the last 10 years have gone with REEP.

Jacob Garza: Well, like a lot of things, they started out very slow, until we get our legs, and from that it’s taken off. We started with a 24-unit apartment complex. My wife and I were both co-founders of REEP Equity, and we’ve also self-managed. I’m kind of a different tool, if you would. When we bought our first property 10 years ago, we actually did all the maintenance on it and Arlene did the leasing on it. Prior to that, we had a very large exit with a software company so we were able to take our time, if you would. Fast-forward to today – yeah, we’ve just got about 2,500 units under management, we do our own management company, we’ll talk more about that later, we raised –I forget the number now– $100 million, we’ve done full-cycle on 13 properties, and those also include refinances, and we deployed about $100 million and CapEx. So like a lot of your listeners, that’s our story and that’s where we are today.

Slocomb Reed: That’s great. Starting slow for you means starting with a 24-unit?

Jacob Garza: Yes. It seemed like a big behemoth goal at that point; we bought one and we were so overwhelmed. But yeah, that was it.

Slocomb Reed: I’ve been there literally with a 24-unit. It wasn’t my first, it was fifth or sixth. And self-managing… Man, I’m even bad with a hammer and a paintbrush. So there are some things that I couldn’t do myself, which I’m fortunate to say, because it forced me to find good people for that. But I know how daunting a 24-unit can feel. [unintelliigible [00:06:13].22] the first commercial property. You said you guys self-managed back then and you own a management company now; so you guys are still fairly self-managed, even with 2500 doors?

Jacob Garza: Yeah, we’re totally self-managed. We have a president who runs REEP Residential; our building – we’re on the fourth floor and they’re on the second floor. It’s a traditional accounting and property management company; full accounting, HR, whatever else they do down there. But yeah, that’s what it is. For your listener’s knowledge, Arlene and I actually went third party, Slocomb, when we hit about 350 units. The story behind that is we weren’t large enough to hire anybody to run it, so we were running; and then we couldn’t buy anything, because we were literally running a management company. So we went third party for about two years.

Slocomb Reed: 350 doors, couldn’t manage it yourselves and grow… What year was this?

Jacob Garza: 2015.

Slocomb Reed: 2015. Okay, please continue.

Jacob Garza: Yes, thank you. We went third-party, and that was the best piece of advice, because it actually allowed us to focus more on raising money, buying, relationships with brokers… And we got about 1200 units, and then brought it back in-house in 2017. The rest is history, and it’s where we are today,

Slocomb Reed: How many doors did you have when you brought it back in-house in 17?

Jacob Garza: 1,200.

Slocomb Reed: 1,200. Gotcha. What made that the right time to bring management back in-house?

Jacob Garza: There is enough management fee income coming through the door; we can hire some good staff. So we opened up an office, we hired an accountant, we hired an HR person, an accounting clerk, and then someone to run it at a director level. Not like with the president we have today, but certainly not a regional either. Still, when that happens, the director was able to run the management company pretty much by themselves; a little guidance from me… I have experience with startup companies. But this made all the difference in the world, and allowed us to continue to raise capital, and have relationships with the brokers, and buy properties, so it worked out.

Slocomb Reed: I’m going to be selfish for a moment here and just hope that the Best Ever listeners get value out of me asking questions on my own behalf, Jacob… I self-manage, I’m at 65 doors, and I’m looking to double my portfolio this year. It’s January 2022 when we’re recording. I self-manage, it’s just me, no other partners that are active enough to be involved in property management or asset management. The only way that I can stay efficient with my time right now is by hiring virtual assistants. Even with only 65 doors, hiring a virtual assistant, depending on how you count, 20% to 40% of the cost of a local full-time employee with the same skills, that allows me even just at 65 doors to have one person full-time on the phones, handling all prospective tenant inquiries, tenant concerns, everything in the leasing process that doesn’t have to be done in person.

I do have one full-time maintenance technician on staff, I have some decent rehabbing subcontractors, and then I have another VA who’s helping me with back-end things, bookkeeping, tracking financials, things like that. What I’m asking for here is when I get to 350 doors, I expect that I will still want to self-manage. So why is it that you decided when you were that size, that it was time to let go? Do you think you should have done it sooner? And is there anything that you have learned since then that would have helped you remain self-managed, as opposed to needing a third party?

Jacob Garza: I think one of the first questions was, should we have done this sooner? And like a lot of things in life, the answer is yes. However, I can tell you, you can’t change history; it is what it is. We’ve learned so much in running the management company. Again, still, it would have been better earlier rather than later, but we learned so, so, so much. Even today, it just continues to pay really big dividends for us, because I do believe this is the decade of the management company. We can talk more about operational execution and how that juices the returns [unintelligible [00:10:40].21] your proforma. What was your other question? You had three really good ones.

Slocomb Reed: The other question here is, you say you should have given it up sooner. One of the issues that we face in Ohio, particularly in Cincinnati where I am, is that our market rents are so much lower than so much of the country that finding quality third-party property management that’s paid on a percentage of gross revenue… Our gross revenues are so much lower in so many places, including a lot of the places where you’re invested in, in Texas. It’s really hard to find quality third party property management for 10%, much less for less than that, of our market rents.

You just said this is the decade of the property manager, which makes me feel, Jacob, like I need to stay in control, even though it is very enticing to find a third-party manager… And hiring a third-party manager would help me free up my time to grow. Again, Best Ever listeners, I’m really asking on behalf of myself, but I really also hope that you’re getting value out of this, too. I feel like Jacob has an abundance of knowledge that he’s sharing with us right now.

The real question is, how can I stay in control? How can I continue to self-manage –because I know that self-management will mean that my portfolio performs better than if I hire someone else– and still be able to continue growing the portfolio?

Jacob Garza: In a perfect world, you definitely want to stay in control. Grow the company to where — you say you want to double in size this year, correct?

Slocomb Reed: Yes, it’s just 65 to 130.

Jacob Garza: No, that’s significant. Getting there’s probably burning the midnight oil and maybe hiring an extra VA, I don’t know… But at some point, bringing somebody on board that’s there, that’s tangible, that can help run these… Are these single families, duplexes, a couple of them?

Slocomb Reed: Predominantly C Class apartments, and predominantly one bedroom. Specific to one-bedroom C class apartments – the turnover rate is high. We’re good at being aggressive about leasing, but also that means that they’re very hands on.

Jacob Garza: So while you’re getting and doubling in size — it’s just all you; let’s just say it’s you for now, because you want to stay in control. I agree with that by the way, I think that’s the strategy to go with. You mentioned something about leasing online. So some of the efficiencies that we have done to help maximize the less time it takes is all of our lease applications, all of our forms, our TA lease, every one of those are online. As a matter of fact, you cannot sign anything; because that’s what’s happening with user software…

Slocomb Reed: 100%. between my virtual assistants and my software, my electronic signature software, my property management software, it’s all online. When someone tells me they need a paper application, we tell them it’s only online. Frankly, in a C class area, someone who can’t handle an online application – I look at them as less employable, and therefore less qualified an applicant. Because if there’s someone who can’t handle opening a link in an email, then that’s not somebody I must have in one of my apartments anyways.

Jacob Garza: I like that. That’s a nice nugget there. So the point in that is just try to automate as much as you can. Because when you do that, it’s less for you or your VA is to do, while you’re buying more and just making that transition into “Yes, now I’m going to bring somebody on part-time or full-time”, to help you. That’s going to be your game changer. If you could get there, then you’re focused fully on… I’m assuming you syndicate some of these, or all of them?

Slocomb Reed: Not yet, no. I do have partners on some of my deals, but they’re active partners.

Jacob Garza: Okay, the more you’ll be able to find other opportunities and work with your partners to close more deals. Then it just begins to scale; then you get to 300 and you’re a whole different shop at that point. You’ve got some lieutenants, I call them, that’s taking care of the day-to-day. The good news is you’ve been there and you know what it’s like. You can’t BS the BS-ers, as they say. I don’t know, I’d put money with you, because I know you’re going to take care of it. I wish you all the luck. I think you have a lot going for you and you’re right there.

Slocomb Reed: Jacob, thank you. I want to ask a little more specific question here, and then I want to move on to a comment you made previously. Outside of maintenance, the guy who turns the wrench or rolls the paint roller, I am the only person in-house locally. I totally feel the compulsion that you have that you’re giving me to hire someone part-time or full-time to be here locally. For my first local hire outside of maintenance and renovation, what responsibilities should I be looking at giving that person? What is it they’d be taking off of my plate, from your perspective?

Jacob Garza: Okay, if you could color code the work that you currently do, you’ve got what I consider gold time, which is like family time, time that you maybe spend with something you want to do, maybe you want to write a book or something that’s just really, really your time. Below that, you’ve got green time, and those are some of the things that you just have to get done. And then below that, you’ve got brown time, which is really wasting your time watching YouTube videos and spending hours on TikTok. So you want to try to give up as much of that green time as you possibly can; and I don’t know what that specifically is. I’m assuming you want to continue to buy more properties, spend more time cultivating your investors, and managing them. Showing an apartment, making a move in, doing a punch list on something – all those, in my opinion, you can teach somebody to do and manage it. Then you can, from that point, continue to grow your business.

Break: [00:16:29][00:18:38]

Slocomb Reed: Jacob, I want to go back to what you said about this being the decade of property management. Except for two years between 2015 and 2017 when operationally it made more sense to go third-party so that you could continue growing, you guys have kept property management in-house, you have it in-house now, and it sounds like you will, for the foreseeable future. The decade of property management – how is it that keeping that in-house has played to your advantage for the last few years? What is it that you’re projecting about self-management moving forward that is going to help your portfolio outperform other similar portfolios?

Jacob Garza: Sure. I think this is a fact – no one’s going to manage your properties better than you will.

Slocomb Reed: I feel that every day. Yes.

Jacob Garza: And if everyone could do it, they would. It’s a special breed; my wife wouldn’t do it. She likes buying and then she likes raising the capital, but there’s something inherent in both of us that we just like that. Today, that’s a huge advantage for us. That to me, the fact that we like to do it and we can do it, no one else is going to manage our properties better than we will. And you’re right, we have no intention of handing this off to anyone else.

For the foreseeable future, what makes us competitive is we have an opportunity, like you, to create your own culture, your own caring individuals that actually come to work every day. And hearing this from you, and me, they know why they’re there; there’s a real sense of purpose. You and I have a chance to treat these employees the way we want to be treated. Because the link is the property, us, and ownership. There’s that conduit that sits between and there’s a real energy, if you would, that goes through there, that – we’ve got some owners that really care, not only about the property, they care about us. When you start building that — and there are so many other intangibles that I could talk about with how this works. It has nothing to do with property management, nothing to do with treating people right, giving them guidance, and giving them a roadmap. They come to work with a purpose, they’re on a team, and they’re fulfilled.

I know all of this sounds, perhaps for some people, like whatever, but it’s really the absolute truth – so you have an opportunity to really build something pretty special, and with a purpose. And I’ve always said, any business I’ve ever operated and owned, if you take care of the ultimate end user, everything will take care of themselves. In this particular case, it’s the renter. If you take care of them, they’re going to pay the mortgage, they’re going to pay the landscape, they’re going to pay the water, and they’re going to pay us the money that’s left over to hit our proformas. That’s what we’ve been able to establish here at REEP, and it’s worked very well for us.

Slocomb Reed: Absolutely. You know, with all of the tumult of Coronavirus the last couple of years –again, this recording is January of 2022– I saw within my own sphere and within the off-market lead generation I’ve been doing for the last couple of years, that it is particularly the non-local real estate investors who went and hired a big property management company that they had never heard of before, that they didn’t do much vetting on; those are the people who had a hard, hard time with rent collections when COVID first hit and people were getting laid off. We got the feeling that a lot of C and D class renters especially, were using COVID as an excuse to not pay rent, whether they had the money or not. It was the people who didn’t have a local presence, who didn’t have the ability to adapt to the changes in the market, in the economy, in the world, whose portfolios suffered the most. Those are the people that I’ve been buying from, frankly, for the last couple of years.

Having that control, having the ability to adapt to the changes that come in a time like the last few years – very beneficial. Are you seeing anything coming in the next few years, Jacob? Any shifts in the housing market, in the economy, otherwise in the nation or in Texas, that you think are going to be challenges for property management to adapt to?

Jacob Garza: Yes. For us in Texas, it’s the growth. I grew up in Dallas and I moved to San Antonio in 2008, after I sold my third software company. Dallas has been growing ever since I was a kid; I’m kind of an old guy. Everybody thought in ’16 that Dallas was going to implode and Dallas is going to stop slowing down. But the challenge we have here is how do we keep up with the massive influx of corporations and people coming in. And I don’t see any slowdown, in general, we can include some of the other southern states with that, because people are leaving other states and they’re coming in. I’m going to speak for Texas because that’s where I am. It’s been a challenge, to some degree, for talents, not as hard for some other management companies. It’s been challenging to buy properties that are not a two cap, for example, because equity is finding its way to these particular states, Texas including. So for us, it’s about maintaining that constant focus on buying the principles right and not getting over our skis, if you would.

Slocomb Reed: Yeah. It’s acquisitions in markets with lots of growth. I think it’s clear to everyone that that’s difficult, unless you’re willing to buy a two cap in Waco, Texas. You’re going to have trouble with acquisitions in a place that’s growing. Outside of acquisitions, this sounds to me Jacob like you’re describing a dream scenario. Everyone is moving in, the employers are bringing jobs… Are there specific challenges that that presents in the management of your current portfolio? You did say it makes finding talent more difficult, I believe. Please continue.

Jacob Garza: Yes, that’s it. My pretty good educated guess is most people who work on site would much rather work for an owner-operator than a fee-base, for the reasons I was talking about earlier in the broadcast. For that particular reason, I don’t think we’ve had a more difficult time bringing in people; the days of $1,200 per unit payroll – that’s what it is in Texas – those are gone. You have to pay these people right, our investors know it, and they know; in reality, we’re not spending any extra money, we’re investing it. They stay on our properties and they take care of our properties. We just opened up a 401K this year too, so… We’re just trying to stay nimble, trying to listen to the marketplace that’s out there and treat our employees right. Because I go back to it – this is a decade of the management company, and we’re in a good spot, Slocomb, we really are.

Slocomb Reed: Yeah. Jacob, to your point, I was interviewing maintenance technicians — I made a great hire recently. I’ve gone through a couple of interview processes, a couple of hiring processes in the last six months. The majority of people who made it to the phone interview in my process told me that one of their biggest frustrations was when they came across a problem and they reported it to their supervisor, and their supervisor had to go get approval from one or two other people or companies before they could fund the repair, replace the vent hood, or the door, or whatever… Everyone I spoke with, you could hear their excitement when they heard me say, “You’re calling me when there’s an issue and I am making a decision with you over the phone as to what to do next, and then you get to go solve the problem right there.” So you’re right, not only because owner-operators care more than third-party managers, and I don’t want to over-generalize there, but also, we are nimbler, because it’s much easier for us to make quick decisions, and big, bold decisions when necessary. Jacob, we could go for another hour, but that is not the best real estate investing advice ever podcast is. Are you ready for a lightning round?

Jacob Garza: Yes. Thank you.

Slocomb Reed: Awesome. Jacob, what is your Best Ever way to give back?

Jacob Garza: It’s treating our employees right. We’re very charitable, my wife and I, and I’ll leave it at that.

Slocomb Reed: What is the Best Ever book you’ve recently read?

Jacob Garza: It’s not recent, but it’s Good to Great, by Jim Collins. That’s my go-to book, and I love that book.

Slocomb Reed: The last time I read it I didn’t have any employees. So I need to go back and reread it now that is more applicable. Jacob, what’s the most money you’ve lost on a deal?

Jacob Garza: Fortunately, none. We have not hit our proformas before; it was early on, and bought some properties we really shouldn’t have, or property we shouldn’t have. So we’ve been very fortunate in that sense.

Slocomb Reed: What’s the most money you’ve made on a deal?

Jacob Garza: 340% return.

Slocomb Reed: In how long of a timeframe?

Jacob Garza: Two years.

Slocomb Reed: Oh, wow.

Jacob Garza: But that was back in the day, Slocomb, when cap rates were falling. I could have gone to sleep for two years, woken up, and still would have made money.

Slocomb Reed: Yeah. Not a relatable circumstance in 2022, so we’ll move on. Jacob, what is your Best Ever advice?

Jacob Garza: For people that are out there that want to invest in real estate either passively, as a sponsor, or on your own, you just have to not skip any steps. You have to find someone who can help you, a mentor, or get educated. If you’re an LP, you just got to know your sponsor, get to know them, pick up the phone, call them and ask them questions. That’s the best advice I would give in real estate. If you don’t feel comfortable with them or in a hurry to get off the phone with you, then they’re not right for you.

Slocomb Reed: Great. Jacob, where can people get in touch with you?

Jacob Garza: My email address is the easiest, it’s jacob@jacobgarza.com. It’s just basically my name. Send me an email, I’d be happy to help out in any way I can for anyone out there.

Slocomb Reed: Great. Well, Jacob, I’m hoping we can have you back on the podcast or one of your partners so that we can continue this conversation. But for now, Best Ever listeners thank you for tuning in. If you’ve enjoyed this conversation with Jacob Garza and me, we ask that you follow and subscribe to the podcast, leave us a five-star review, and share this with someone who you think can benefit from what Jacob has shared with us about self-managing your portfolio as you grow. Thank you and have a Best Ever day.

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JF2706: 5 Ways to Find Off-Market Multifamily Deals ft. Chad King

Chad King believes there is always a way to find deals, even in competitive markets. With the right tools and mindset, Chad has sourced the majority of his deals off-market. In this episode, Chad shares his direct-to-seller deals he’s closed, how he’s scaled his portfolio, and the best ways to source multifamily properties.

Chad King | Real Estate Background

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TRANSCRIPTION

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

Chad King: I’m doing great, Joe. Really looking forward to the conversation.

Joe Fairless: Well, I’m glad to hear it, and as am I. Chad is the principal and owner of Titan Capital Group, which purchases and repositions commercial real estate. He’s got 303 units as a GP and 328 as an LP, based in Nashville, Tennessee. Titancapitalgroupllc.com is the website. With that being said, Chad, do you want to get the Best Ever listeners a little bit more about your background and your current focus?

Chad King: Sure, absolutely. I started humble beginnings in the wholesale fix and flip space, I kind of scaled my way up, so I did that path. I’m sure some of your listeners are familiar with that trajectory. Then ultimately, I got into apartment complexes. I was buying my own for the first couple and then realize that through syndications I can ultimately do larger deals. Then I got into doing some 506(b) and 506(c) syndications. That’s where I focus all of my time now, is apartment acquisitions; that’s what I’m just mainly focused on now.

Joe Fairless: What have you purchased so far?

Chad King: I started with a little 14-unit. Me and two buddies put a down payment together and bought a little 14-unit, we’ve refinanced that thing twice. Then a 21-unit was the next deal, built some confidence, got to a 49-unit, then a 65-unit, then a 93-unit, and kind of just been scaling my way up. It seemed like every deal that I did, I just got a little bit more confidence that “Oh, man. If I can do a 50-unit, I can do 100-unit. It’s just an extra zero.”

So I’ve been acquiring a lot of stuff between 20 and 100 units. We’ve exited multiple properties, we refinanced properties; that’s what the portfolio looks like. The 303 on the GP is a mixture of a lot of 50 to 100 unit properties.

Joe Fairless: Let’s talk about those. I’d love to go through as many as we can, just to hear the progression and what transpired. We’ll fast forward to when you started doing larger deals. I heard you on the wholesale and fix and flip, and I might ask a follow-up question about that in a little bit. But let’s go to when you started doing the larger deals. What was the first one?

Chad King: The first, let’s call it syndication, of the 50-unit in Chattanooga, Tennessee…

Joe Fairless: So you went from wholesale and fix and flips to a 50-unit syndication?

Chad King: Yeah. There was a 14-unit and a 21-unit in between them, but that was just bought with active income that was from wholesaling and flipping.

Joe Fairless: Wow. Okay, good to know.

Chad King: Ultimately, I also had to get a guarantor. I didn’t have much of a balance sheet other than making money, because I was just an entrepreneur, and banks don’t really love entrepreneurs when they get underwritten… Because our job is to show losses, right? It’s funny how that works. So I had to get a guarantor for the first couple to get them done. Now, obviously, when the balance sheet increases, you can do your own deals. Anyway, I’m digressing a little bit.

Joe Fairless: Who was your guarantor? You don’t have to name the person, but how did you know that person?

Chad King: Just networking. We’ve done a tremendous amount of wholesale fix and flip deals and he was my partner in the wholesale business. So it’s all about networking, getting people to know, like, and trust you. It’s the same thing with raising capital, Joe, and you know that. People want to put their capital with somebody they know, like, and trust. A lot of times, it’s not even about the deal, it’s about the operator. When you network and you tell people what you’re doing, those relationships just sort of open themselves up, especially the ones that you need at the time.

Joe Fairless: Okay. So you did a 14-unit, a 20-unit, and you got a guarantor for those, because you needed to. But besides your guarantor, it was just you, correct?

Chad King: That’s correct. I was the one running the whole deal. Even on the 21-unit that we’re talking about right now, I learned a lot of lessons on that. We fired three property managers in the first two quarters of ownership,  [unintelligible [04:34] off the job. It was a heavy value-add deal; six units were occupied when we bought it. We could go down a rabbit hole like the lessons learned on some of these apartment complexes.

Joe Fairless: What were the top two lessons learned from that… You said 21-unit or 20-unit?

Chad King: 21-unit. Yeah.

Joe Fairless: What were the top two lessons learned from that 21-unit?

Chad King: That’s a great question. I’d say the top two lessons – number one, when selecting a property manager, you need to ask a lot of questions. I think I was a little bit still green in the apartment space and I wasn’t fully vetting the property managers the right way. But we use third-party property managers for all of our apartment complexes; I don’t want to take the phone calls, I want to scale. So getting those team members on the ground is mission-critical.

The first one that we hired, I didn’t vet them properly from an accounting, software, and systems perspective, and it was just a complete nightmare on the financials. They had a contractor that was able to get out there and everything, but the work orders and all the financials were all messed up, and I was spending all my time trying to dig through the accounting, the bills, and the credit card receipts, and it was a nightmare on the accounting side. They didn’t have a software in place, the woman’s son was running the books… I didn’t ask these questions, and it was a nightmare.

The second lesson I learned was making sure that if you’re going to go with a third-party property manager, that they have the relationships in place that can knock out work orders quickly and get things done in-house. What’s their relationship with contractors? Locally? Because the second property manager that we ended up letting go, it was taking them two weeks to get to just a minor work order, like fixing a toilet. It’s because they didn’t have any contractors in-house to knock out little things. I get you to need to serve out the big stuff, the electrical, maybe the HVAC stuff, but you need to vet your property managers… Can they knock out work orders quickly and do they have contractors in place to get things done? Those were the two lessons that I learned moving forward. Now we have just the best of the best property managers, because I think I learned those lessons the hard way on that building.

Break: [00:06:40][00:08:19]

Joe Fairless: From those two lessons, both property management-related, and you said to ask a lot of questions, and then make sure they have the right team in place from an in-house standpoint. What are a couple of questions that you would ask? I heard what you said, but if you asked, “Hey, do you have people in place that can do work orders quickly?” They’re going to say yes, it doesn’t matter who they are. Knowing what you know now, how would you ask those questions, both about the reporting and bookkeeping, and also the in-house question? How would you ask those to make sure you’re getting the answer that you need in order to make a good decision?

Chad King: Great question. I always take just a couple of notes, so I don’t forget and get off track, because I can go down some tangents… This is basic sales 101. You don’t ask a yes or no question, because you’re going to pigeonhole yourself into getting a yes or no answer. So if I could go back to that conversation and the way that I have them now, is you ask it very open-ended and see where they take the conversation. It sounds something like this. “Hey, just curious, how do you guys currently handle work orders?” Leave it open-ended and see where they take the conversation. But what you’re going to do is sort of guide that conversation to “Okay, what about in-house work orders? What do you guys serve out currently?” Letting them elaborate on their process and their product is I think the biggest thing, rather than asking them yes or no questions.

The same thing with the financials. I should have asked her, “Can you walk me through a little bit about how your accounting system works right now and how you guys handle the bookkeeping?” If I had asked that question and she told me “Well, my son handles the bookkeeping and we do it on an Excel sheet,” I would have freaking run for the hills.

Joe Fairless: I love your approach, the open-ended questions and let them talk, and you just ask a follow-up question. That’s awesome.

Chad King: That’s it, 101, you should listen twice as much as you’re talking.

Joe Fairless: Yeah. But it’s also the open-ended questions, versus people who would be inclined to have a checklist of, “Hey, do you have this? Do you have this?” And then they’re checking off their checklist of questions I ask. Whereas yours is more, “Here’s the outcome that we want.” Then it’s going to take probably multiple follow-up questions on the fly in order to get to that outcome; I’m just going to let them talk.

Chad King: 100%. I think the other lesson too, Joe, is that you have to know what your desired outcome is or what those questions are geared toward the responses that you’re trying to get and uncover. That’s kind of the lessons that I was just telling you about earlier. That’s what’s really important, is where are those questions actually leading to?

Joe Fairless: Well, okay. Thank you for that. Now, let’s go to the 50-unit. How much was it? And by the way, where are these properties? You’re in Nashville.

Chad King: Nashville, Tennessee. I started wholesaling in South Florida, and it wasn’t really conducive to where I wanted to build an apartment portfolio, so my wife and I packed up and left. We didn’t know anybody when we moved here, just came to Nashville, and I loved it where it was located. Obviously, the South-East is a landlord-friendly state. Then I was able to put a pin in Nashville, draw a two-hour radius around Nashville, and I was able to grab Chattanooga, Huntsville, Louisville… We have some stuff in Florida, but most of our assets are in Kentucky, Tennessee, Georgia, and Alabama. Most of our stuff is in Louisville, Chattanooga, and here in Nashville. We’ve entered and exited in Huntsville and have some stuff in Florida, too. But I’m right here in Southeast Tennessee, Kentucky, Alabama, to answer your question.

Joe Fairless: This 50-unit, where is it? Is that Louisville?

Chad King: Chattanooga, Tennessee.

Joe Fairless: Chattanooga. Okay. How did you find it?

Chad King: Off-market, direct-to-seller. It came from a text message, believe it or not.

Joe Fairless: How’d you get their number to text them?

Chad King: Skip tracing the. Pulled the list from Reonomy which is the…

Joe Fairless: You got the list from Reonomy, and then what did do you do?

Chad King: Got the list from Reonomy, we skip-traced it, and we put it into our marketing sequence. I love buying direct-to-seller. Most of the stuff that I have in my portfolio we bought directly from the sellers. So we put it in our marketing cadence and they responded to a text message. I sat down with the owner at a McDonald’s, and he pulled out his rent roll, it was on the back of a napkin. He was collecting the rent, mowing the grass, kind of a mom-and-pop, just your traditional perfect avatar cellar for apartments for forced appreciation value-add stuff. I ultimately ended up getting a Fannie Mae loan on it, because I put together all the financials manually based on his napkin roll.

Joe Fairless: So you bought the list from Reonomy, and you skip traced it. What service do you use to skip trace?

Chad King: There’s a lot of VAs and stuff, like on Fiverr, that’ll do skip tracing for you. We use a private guy; I don’t mind plugging him, his name is Ryan Smith.

Joe Fairless: Fair enough.

Chad King: He’s got a company called Lead Smith.

Joe Fairless: Just google him.

Chad King: Yeah. Google.

Joe Fairless: Sorry, he’s got a company called what?

Chad King: Lead Smith.

Joe Fairless: Lead Smith. Okay, fair enough. Once you said the company name, then it’s an easy Google. I was just laughing at the Ryan Smith part.

Chad King: I haven’t negotiated any kickback yet. So just wait until…

Joe Fairless: [laughs] Fair enough. You got maybe a week or so before this episode airs.

Chad King: Cool.

Joe Fairless: Alright. So then the marketing sequence – how many text messages did this owner receive before they agreed to meet?

Chad King: It was on the first text message, but he had received some other marketing from us, so it wasn’t a foreign text message, because he had gotten a couple of letters from us, and he had gotten… I don’t know if he had received the email, but he was on an email sequence as well prior to the text message. So he had gotten two letters, two emails, and then this was the first text that he responded to, to set up a meeting.

Joe Fairless: Got it. So he received two letters, he did not respond. He received two emails, he did not respond. He received a text message, he responded.

Chad King: Got to hit him on all communication mediums.

Joe Fairless: That’s right. What did the text message say?

Chad King: I’d have to go back to the language, that was a while ago… But just something generic, “Hey, I’ve sent you a couple letters. I’m not sure if you’re interested in selling the property. We’d love to have a quick conversation with you whether now’s the right time or not.” With apartment owners, Joe, all the messaging is geared towards building a relationship. It’s not like single-family, where you’re kind of looking for distress and motivation. You really won’t find too much of that in multifamily. I mean, these people do want to sell, but not a lot of these are going to be distressed sales. I mean, very rarely are you going to find that. It’s all geared towards relationship building, and I think I said like, “I’d love to sit down with you and talk about your portfolio, see if it might be the right time to sell.” This guy wasn’t in a lot of pain, but he was just tired of mowing the grass, collecting the rent, and doing all that stuff.

Joe Fairless: And educate me on Reonomy. I’m not too familiar with it. Are you sending the marketing sequence, the two letters, two emails, text messages, via Reonomy?

Chad King: Yeah. You can, it does have that service. However, we pulled the list out, skip-traced it externally, and then we sent that list to a mail house,

Joe Fairless:  A mail house and they send the letters out.

Chad King: Correct.

Joe Fairless: But what about the emails and the text message?

Chad King: We use MailChimp for the emails, and we were using Sendy for the text messages, which is where he actually got his text messages from. Ultimately, Sendy I think shut down, so now we use a service called Launch Control.

Joe Fairless: So how do you coordinate — if at the time (or sounds like still) you have at least three different companies that are sending out stuff on your behalf to the same person, how do you track that internally to make all those systems speak to each other so it’s easy for you to see the response or lack thereof?

Chad King: Yeah. So I have a CEO for that, that tracks all that; he’s the integrator, he tracks all the data. But with the apartments, you’re not going to get a ton of leads. It’s not like single-family, where you can shoot postcards out to 50,000 people. In any sort of metro, secondary or tertiary, there are only probably three or 400 apartment owners that might be in your target; so it’s not a ton. You don’t need some robust CRM, I think; that’s a limiting belief that people have like, “I don’t have a CRM setup like Podio.” You can get it done with an Excel sheet. I’ll be honest, I’ve acquired all my assets with an Excel sheet to keep track of who calls in. I have it ring directly to me, because I want to be the one that has the conversation. If a seller is calling in, have someone on the phone who can actually talk the talk. I think if you end up putting somebody in that position to answer calls, you may end up doing yourself a disservice. But I track them in an Excel sheet, to be honest with you, Joe. I mean, I’m not going to overcomplicate it.

Break: [00:16:39][00:19:36]

Joe Fairless: Yes, simplicity is very helpful in order for us to execute regularly, so I’m glad to hear that. Alright, I think I’ve uncovered the way we can add a whole lot of value to a lot of people on this show, and that is that you’ve purchased a majority, or I think you might have said all, of your large apartments off-market, direct-to-seller. Let’s talk about that, because clearly, right now it’s a challenge to find deals and a lot of people have excuses. Most of them are just BS excuses, because they’re not putting in the effort to do things like you’re doing, and/or hiring people, or bringing on people who have those skill sets to do this stuff. So that’s the 50-unit… What about the next deal? How did you find it?

Chad King: I have bought a couple of deals from brokers, so not all my stuff is…

Joe Fairless: Yeah. Fair enough.

Chad King: But the next deal was a 93-unit that was right here in Nashville. That one was negotiated directly with the seller as well. $8.3 million dollar purchase price. He actually owner financed it, held a $6.1 million note for us, so we didn’t have to go to the bank to get a loan, didn’t have to get approved for anything, no appraisal, nothing. I sat down with him and figured out what he wanted. He had owned it for over 20 years; just a lot of operational efficiencies that we were able to come in day one, increase the NOI by 110,000 by cutting salaries on day one, which increased our value over a couple of million bucks overnight. We can dig into that but that was the next deal. We did a syndication raise of 2.8 million on a 506C(c) which is open to the public. That was our first 506(c) syndication.

Joe Fairless: That was the 93-unit?

Chad King: Correct? Yeah. Right here in Nashville.

Joe Fairless: Yeah. I heard that you said direct-to-owner letter. Got it. Okay. Before, it was sent two letters, two emails, and a text message. The two letters – do they go out first before the emails?

Chad King: We do letter, email, letter, email text, letter, email text, and then they get off that cadence and give them a break, and then they go back on it later on.

Joe Fairless: How soon after they receive a letter do they get the email?

Chad King: Two weeks.

Joe Fairless: Every action is two weeks?

Chad King: Give or take.

Joe Fairless: Give or take. You said it was the first letter?

Chad King: The second letter he got from us.

Joe Fairless: So he had already received a letter and an email.

Chad King: Again, you can’t tell if they get the emails, you just have to assume that they’re seeing your name and your logo. I just know that we mailed them twice. I don’t know if he called me from the first letter that he held on to, or it was the second one that got him. That’s what you never know, Joe. People will pull a list and do a campaign and get no phone calls, and they’re like, “This doesn’t work.” Well, you’ve got to kind of put some activity in. These people need to see you a few times before they reach out to even set a meeting to see if you’re serious.

The other thing that I had going for me on this one in full transparency is we had a broker that had a relationship that was also able to speak to our credibility, that knew the seller very well, too. So it was off-market, it had never even touched the market, and nobody else even got a phone call to even bid on it. But I also build a lot of relationships with brokers in addition to direct-to-seller marketing. So on this one, I actually got a letter and we kind of tag-teamed it with a broker relationship that was able to help out, [unintelligible [00:22:49].19] in there for credibility.

Joe Fairless: What was that broker compensated?

Chad King: The seller compensated him on the sale. [unintelligible [00:22:56].19]

Joe Fairless: When you send the letters, are they the same exact letter? Same question for the emails.

Chad King: No.

Joe Fairless: Different, so you switch it up some. Got it. Alright. That’s awesome. What would you say to someone who says, “I’m having a hard time finding multifamily deals.”

Chad King: So is everybody else. [laughter] It’s a lot of activity. I think people say that and they probably haven’t even begun to look at enough deals to even come out and say something like that. Because I don’t think enough people getting into this understand how much activity you have to load into the top of the funnel, as far as deal flow goes and underwriting goes. I’m looking at 60 to 70 deals before we buy one, and underwriting 20 to 25 deals before we’re actually closing on one. There are 10 to 12 LOIs going out right now to get a deal closed. There’s a lot that goes into the top of the funnel, and people are looking at four or five deals and saying “Oh, there’s nothing out there.” They’re going on LoopNet, looking at the three four deals on LoopNet, and “There are no deals out there.”

You’ve just got to increase your deal flow, look at enough properties, and start underwriting enough deals to actually get one closed. Because it’s a numbers game; it’s a race to 60 or 70 deals is what it is. If you change the way you think about it – not that there are no deals out there, but “Hey, 70 deals need to come across my desk,” you’re going to raise your standards for your activity level and the rest is going to take care of itself. Kind of a long-winded answer, but I hope that was helpful.

Joe Fairless: That’s helpful. All on point. I’m not going to go through your other deals, because I think we’ve found the main focus for this conversation. I’m glad that we talked about it. So I’m going to ask you the question we ask everyone, what’s your best real estate investing advice ever?

Chad King: Best real estate investing advice ever… Trust the numbers. Fall in love with the numbers, don’t fall in love with the deal. Too many people fall in love with the actual property or the piece of real estate. They try and fit a square peg in a round hole and actually try and force the numbers to work. When I get a deal, Joe, I try and kill it on the underwriting; I kill the deal on the numbers, and then if it fights to stay alive and still stays in the green, then I trust it and I do the deal. So fall in love with the numbers and get good at trusting the numbers, because they don’t lie. They tell a story; when you’re looking at these properties, the numbers will tell you a story. You have to trust the story and be able to change the narrative, and trust the numbers moving forward, and they’ll take care of you.

Joe Fairless: You’ve got 328 units as an LP; so how many deals are you in as an LP?

Chad King: That’s five.

Joe Fairless: How many different sponsors?

Chad King: Two.

Joe Fairless: How did you pick those two sponsors?

Chad King: Track record. I vetted them hard. You’ve got to vet your GPs. A bad GP can screw up a great deal if they don’t know how to run it.

Joe Fairless: And when you say vetted them hard, will you qualify that a little bit?

Chad King: Yeah. Look at how many properties have they purchased, what are their current assets under management, how many have they successfully exited, is this their first deal? That’s not to say I wouldn’t invest in somebody if it was their first deal, but I just got to feel very comfortable with them in their game plan, their reposition plan for the property. I’m looking a lot at their numbers and how they’re projecting out. Are they a little overzealous on the rent increases? A lot of people think you can both increase rents and decrease expenses all at the same time, and it’s going to be hunky-dory. So what’s their narrative change going to be? How are they going to force appreciation?

So not only what the narrative is for the deal, but also, what is the narrative for those sponsors? Do they have other jobs that they’re doing? Am I just talking to a money raiser or am I actually talking to someone who’s going to be actually hands-on with the property? Those are the kinds of things that I’m asking when vetting a sponsor. How are they getting a debt? Like who’s sponsoring the debt? All that kind of stuff is important when you’re looking at investing in an LP.

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

Chad King: Let’s do it.

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

Chad King: Believe it or not, I have never lost money in a real estate deal. I did a lot of wholesale deals, but we’ve flipped a lot of properties…

Joe Fairless: Even the fix and flips?

Chad King: Yeah, we kept a very tight box on what we would actually take down and flip and we would wholesale everything else that was outside of our box. So we really got super specific on — and this is probably a good tip, but we didn’t do any renovation over 40,000. We kept it cookie-cutter on the renovations, things that just needed basic cosmetics. We stayed within that box and then wholesaled everything that was outside of that box. It ended up treating us pretty well, so we never lost money on a real estate deal.

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

Chad King: For-purpose apartment community. We put a line item below the line. We’re working this into our new acquisitions as well, but we’d like to give back with for-purpose apartment communities. Each apartment complex that we buy has an initiative. Some of them are child sex trafficking, some might be disaster recovery, and they all have an initiative below the line expense item that can fund an initiative. So both the residents and the investors now feel like they’re a part of a greater purpose, and we feel like we’re giving back to a greater purpose as well, to the things that matter to us.

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

Chad King: I had our marketing team put a link together just for your listeners. I did this first-offer challenge where I went into a brand-new market… I know this is the lightning round, but this is pretty cool for your listeners. So I went into a brand-new market from scratch, with no relationships and I just cold-called… I went from going to a brand-new market to making and submitting an LOI in five days, with one hour a day of work. I recorded the whole thing and kind of put it into this little package, to kind of eliminate everybody’s limiting beliefs that you just can’t get started and get an LOI out.

We cold-called brokers, I cold-called sellers, and I was doing it live. They can get a hold of that if they want to opt into our world at 7figuremultifamily.com/chad, and they can get access to that challenge. But if they want to come to see me, I’m Chad King on Facebook. We have 7 Figure Multifamily as our mastermind group. We’re doing an event in Nashville in June, or this year in June, we’re doing an event. If you guys want to come over and check us out at 7figuremultifamily.com, that’s our mastermind where we teach people how to do what we’re doing.

Joe Fairless: Got it. And you don’t spell out seven…

Chad King: No, the number 7.

Joe Fairless: Yeah. The number 7. Yeah, I just tried typing in seven, but that didn’t work. So you have 7figuremultifamily.com/chad. I see that.

Chad King: I don’t know if that link is live. I actually told them to set it up this morning.

Joe Fairless: It is live. They are on point. Yeah, it’s there. Well, Chad, thank you for being on the show. Thank you for sharing with us in detail how to get off-market deals. And hey, if you’re having a hard time finding deals and you’re not doing this, then here is a solution for how to find deals. I love that comment you gave regarding, well, you just got to keep doing it and have a system. The results are here in your story. Thank you for that, Chad, inspirational and very, very helpful and timely for a lot of investors. I hope you have a Best Ever day and I will see you at the Best Ever Conference here in about a month or so. I’m looking forward to shaking your hand.

Chad King: I can’t wait Joe. Thanks for having me on. I think we’re [unintelligible [30:11]. I can’t wait to see you. Thank you very much. I appreciate it. Always a great value on this.

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JF2702: 4 Ways to Balance a Full-Time Job with Multifamily Investing with Iven Vian

Iven Vian managed his multifamily investments while working full-time in the Air Force for 15 years. Finding the right strategy to maximize his time spent on his investments while also ensuring he could do his job and spend time with his family has been crucial to his success. In today’s episode, Iven shares how he found his first multifamily deal, how to find a good business partner, and the key to juggling both your job and your CRE assets. 

Iven Vian | Real Estate Background

  • Founder of Anthem Capital which syndicate funds to purchase multifamily properties.
  • Portfolio: ~1,200 units over 8 properties as GP. 900 units over 5 properties as LP.
  • Retired from the Air Force 10/1/2021. He was a Lt. Colonel who flew the B-1B. Has been investing in RE for the past 15 years and multifamily RE for the past 6 years.
  • Based in: Oklahoma City, OK
  • Say hi to him at: anthemcp.com | iven@anthemcp.com | LinkedIn
  • Best Ever Book: You Were Born Rich by Bob Proctor

 

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PassiveInvesting.com

 

 

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TRANSCRIPTION

Ash Patel: Hello, Best Ever listeners. Welcome to The Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, Iven Vian. Iven is joining us from Oklahoma City, Oklahoma. He is the founder of Iven Capital, which syndicates multifamily assets. Iven’s portfolio consists of 1,200 units over eight properties as a GP. He is also an LP investor in five properties. Iven is also a retired Air Force Lieutenant Colonel who flew the B-1 bomber and has been investing in real estate for 15 years. Iven, it’s a pleasure to have you on the show today.

Iven Vian: It’s a pleasure being here. Thanks, Ash. Very excited to have this opportunity to share with you.

Ash Patel: Iven, before we get started, can you give the Best Ever listeners a little bit more about your background and what you’re focused on now?

Iven Vian: Yeah, absolutely. As you mentioned, Ash, I’m a retired Air Force Lieutenant Colonel, I spent 20 years in the air force. I had the fortune of flying the B-1 bomber my entire career, something I always wanted to do since I was a little kid; I was able to do that, and pulled that off. But while in the Air Force, being transferred to various cities and whatnot, is where I kind of found out about real estate, started investing in single-family properties, and worked my way up to multifamily.

I recently retired in October of 2021, just a few months ago at the recording of this show. Now I’m solely focused on my multifamily investment companies; it’s actually called Anthem Capital. I focus on Anthem Capital as one of the primary co-sponsors. I have a business partner, his name’s Tariq, who’s not here with us today; he and I operate Anthem Capital.

Ash Patel: My apologies for getting that wrong in the intro. Iven, when you were in the Air Force and going from city to city, what was your real estate investment?

Iven Vian: I kind of fell into it on accident. I was stationed at Ellsworth Air Force Base in Rapid City, South Dakota and I got orders to relocate to Abilene, Texas. When I moved down there, my mother-in-law said, “Hey, this lady down the street is going through a divorce. She really needs to sell her house. Why don’t you go down there and knock on her door and see if you can get something going?” Because I have talked about wanting to have some real estate, and I was starting to get interested in it. So I went down there, knocked on the door, and long story short, she’s like, “Yeah, I’ll sell you my house for 35,000 bucks.” Not knowing what I was doing, just going in with very little knowledge in the whole thing, just kind of trusted my gut in the process… But I got lucky on that one because it rented for like 850 to 900 bucks a month, and you tack on the debt service, I was doing all right, self-managing; around 200 some bucks to 300 bucks a month on that one. So that’s kind of how I got that investment bug, and it kind of took off from there.

Ash Patel: And now you got to find a lot more than $35,000 houses…

Iven Vian: [laughs] Yeah, definitely. And good luck too, trying to find those. Well, they’re probably out there somewhere… But I kind of let that one go once I learned about multifamily.

Ash Patel: Was there something about being near a military base that made real estate more attractive?

Iven Vian: Yeah, absolutely. From a Job Corps standpoint, military renters typically are good renters overall, because they have consistent income. If they don’t pay rent, you can go talk to their boss and handle things maybe the military way; I say that with air quotes… So yeah, it made for a good, attractive place to acquire investment properties. I had a small portfolio there in Abilene, about 15 years ago now, but that’s kind of how I got started.

Ash Patel: How did you progress to multifamily?

Iven Vian: Interesting enough, I was driving back from Dallas listening to AM radio. And there is this podcast or this radio show playing, it was a mentorship program. And they said “Come to my two-day event.” I said, “Well, I’m interested in real estate, I need to go check them out.” So I went to the two-day event. Day two of that two-day event, they introduced us to the multifamily investment model. My eyes were opened, I’m like, “Oh my God, that’s what I want to be doing. That makes much more sense.” Economies of scale and things like that – I’ve got to find a way to get into multifamily. That’s kind of how it was introduced to me.

Ash Patel: What was your first multifamily investment and how did you find the deal?

Iven Vian: Well, there’s a lot that happened between that radio show and when I got my first deal. I didn’t quite have the belief, the knowledge, the know-how, or the capital, and I kind of nose-dived for a while before I had to come back up. We could get into that if you want, that was around 2008. Fast-forward around 2016, eight years later, I signed up with another mentor down in Dallas. During that time, I was an investor realtor. One of my best clients named Tariq, he and I decided to go into business together in multifamily. So we went to that two-day event in Dallas, focused solely on multifamily investing, and that’s where we got started. So nine months after we got started in multifamily investing, I ended up selling off my single-family properties and redeploying that capital into multifamily.

I live in Oklahoma City, he and I said that we want to focus on Oklahoma City as our first investment. We immediately established relationships with the local brokers, and one of the brokers brought us across this multifamily portfolio. 214 units total; it was a 65, 99, and a 50-unit, two of them were in Norman, Oklahoma, and the third one was in Chickasha, a little town of 35,000 people.

We went through the whole underwriting process and said, “Hey, I think we’ve got a deal here. Let’s go to work and make it happen.” Being part of this investment network, that’s kind of where we got access to all the vendors that you need to be able to close a deal, as well as the equity. So we tied all of those relationships together to allow us to find the appropriate people we need to acquire a property, as well as raise equity. Our first jump into multifamily was a three-property portfolio, a 99, 50-unit, and a 65. We held for about three years before we exited out of those three assets.

Ash Patel: Very nonchalantly you said “Because I was part of this group, it allowed me to get the equity that I needed.” It wasn’t that easy, was it?

Iven Vian: Well, no. The first go at it, you don’t have a track record. Yeah, it definitely wasn’t that easy. But one of the keys to success is to partner with people who do have track records, and have prior experience, not only maybe in the market that you want to invest in, to convince the local brokers that you can close a deal, but have experience in multifamily overall. So we teamed up with some co-GPs who already had an investor database network that allowed us to raise capital. But it still came with some challenges along the way.

Ash Patel: What were those challenges?

Iven Vian: Convincing people that you can perform.

Ash Patel: And you had, what – 30 days, 45 days to get the deal done?

Iven Vian: During that time was about a 45 day to close kind of scenario. We were doing three loans at the same time; it was an umbrella type syndication 0 one raise, disperse, pro-rata basis amongst the three properties. But there were a lot of moving parts, a lot of stuff going on that first go at it.

Ash Patel: Let’s dive into that. So you have this portfolio presented to you… Were you determined to close on it? Was it a really good deal?

Iven Vian: Perceivably, yes. We go through the underwriting process, you shop the comps, look at the CoStar data, you make your assumptions on what you expect to happen… And on paper, it seemed to make sense. So at the time, yeah, absolutely. But sometimes the first deals do come with some hard knocks or certain challenges along the way, or perhaps you may find that your assumptions were a little off. That’s okay. You have to find a way to overcome that, self-correct, and get yourself back on course, which we were able to do.

Ash Patel: Iven, how did you convince the other GPS to come on with you?

Iven Vian: Like anything else, I think real estate is a relationship business, so you have to establish a relationship, which we did. It took us nine months to get our first deal, so it took those nine months to establish relationships. So you go to coffee shops, get to know each other, hang out in each other’s homes, whatever it is; phone calls… Zoom wasn’t really happening too much then, but phone calls, or video chats, and things like that, to make sure you understand what your roles and responsibilities are going to be going into the relationship and how you’re going to work together. We got a lot of those questions out of the way and a lot of those expectations and roles were established prior to going to the equity raise, which did help out along the way. The sponsors that we worked with – we ended up staying on with them for a total of four deals. That first one and like three others after that.

Ash Patel: Did you and your partner raise any money for that deal, or was that all of the other GPs?

Iven Vian: Oh yeah, we had our own personal network as well that we tapped into and brought capital to the deal to close.

Ash Patel: Have you since sold that property?

Iven Vian: Yeah. Sold that one, but also focused on other deals that we ended up selling as well. Today, we’ve gone full circle in around five or six deals.

Ash Patel: What were the returns like on that first deal to your investors?

Iven Vian: The return on that one were not the best. Honestly, were not the best. We had challenges along the way, and ultimately that market was saturated. So we learned a lot in that first particular deal; but the second deal we did amazing on.

What I must say – that first deal was three properties, two in Norman and one in Chickasha. The one in Chickasha did outstanding. We sold that one in two years for a 94% total return. We bought it for about 22k a door and ended up selling around 50k something a door, in two years’ time. A lot of that was just operational improvement. It needed a professional property management company, and it needed interior and exterior improvements. Doing that, you raise the rents, you burn off the loss of lease, and you improve the value. So we were able to exit that one for a 94% total return.

Ash Patel: That’s a big win.

Iven Vian: That was a good win, that felt good. In the beginning, I said “Chickasha, 35,000 people.” That was a tertiary market, which we ended up doing really well on a tertiary market. That was my first taste of like, “Oh my gosh, this thing is real. You can make really good money doing multifamily. Not only as a passive, as an LP, but as a GP, as a sponsor.”

Break: [00:10:39][00:12:18]

Ash Patel: What were some of the hard lessons you learned on that property? The first one.

Iven Vian: Hard lessons – very important things. Spend a lot of time getting to know the property management company, and then spend more time after that. Find someone who’s local to the market, has an established network, and has a history in the market, versus trying to bring someone out of the Dallas market and trying to operate an Oklahoma City asset the same way as a Dallas asset. We’ve found over time that it’s best to use property management companies who are homegrown to that local market; it creates a lot better efficiency overall. Again, this is like six years ago, so I’m trying to put myself in my shoes six years ago compared to where I am today.

Ash Patel: Yeah. And that makes a lot of sense, especially in some of the smaller towns. You want those boots on the ground that know everybody.

Iven Vian: Right. Especially in the smaller towns. That third property, that Chickasha one, the manager we had there was one of the key reasons why we did well, is because she was – on that asset, it was an owner-operator scenario, in such a small town, she was well connected to that demographic and understood how to operate that property, parallel to what the demographic was down there. So a lot of oil-based jobs, and she was able to connect with those types of people well.

But going deep in this conversation, really making sure that the onsite manager understands the demographic, understands the business plan, is able to execute that business plan well, and make sure the property management company identifies a really good property manager well before you close on an asset, so that they are able to hit the ground running the day you close. In some cases, sometimes property management companies don’t find someone until two days prior to closing. They can barely even log into the property management software, let alone know what’s going on, and you’re already starting off behind the curve. Again, this is like six years ago. Now, this is not the situation, but this is the kind of stuff I learned in the beginning. So I took those lessons, and moving forward, it made for a lot better transactions and business plans thereafter.

Ash Patel: Iven, today, how do you make sure that you have a really good on-site property manager?

Iven Vian: Drill down the questions, set the expectation, ask them “Did you do your full due diligence? What’s the background? What’s the history?” Also, make sure the regional doesn’t have a huge portfolio that they have to oversee. Like, I’ve found maybe around seven or eight properties max; when you get to the 10, 11, 12, 13 properties, there’s only so much time in a day. So how much attention can they really give your asset, that it needs?

These apartments require a lot of attention, especially the value-add, the kind of classy stuff that we operate, they require a lot of attention. So you’ve really got to set the expectation correctly up front that we only want the best here. Also, especially with the labor pool that we have today, maybe pay a little bit more. We try to maybe save expenses to improve value, but it’ll hurt you in the long run; that’s been my experience. So pay a little bit more per hour to get the better person and to make sure that they stay there. Nothing worse than turnover as well. You don’t want a manager after manager after manager; it’s hard to build momentum.

So find someone correctly upfront, take longer than you need to find that person, pay them well, and then make sure they stay healthy along the way. Appropriate management of tasks, jobs, and responsibilities, so they do not get over-tasked. The last thing you want is for them to leave.

Another thing we found is if they live on-site, they take better ownership of that property, because they live there, especially their families. They want their families to feel safe, and have a clean functional asset to live in, so they’re going to be a little more emotionally attached to that asset, that property, which we found to be a better benefit or benefit overall when hiring a property manager.

Ash Patel: So many good lessons there. Iven, you went to that first multifamily conference and there was an eight-year gap before you went to the second one. What was the mindset?

Iven Vian: Oh, man… A lot. I didn’t have much capital… First of all, I didn’t have a mentor when I first went into single-family investing. So I bought one, I did well, then I got the bug. Then I bought one, and I didn’t do well. That thing almost took me out. I was like $80,000 in the hole; and that’s a scary time. I had my first son, barely making any money, in the Air Force, I was like a captain in Air Force, and now I’m in debt. That was right when the crash happened. So I’m out of capital, the crash happened, and everything was selling at a discount, 30 cents on the dollar, 50 cents on the dollar, and I didn’t have any capital to invest; it was so frustrating.

Interestingly enough, I didn’t really sign on to the mentorship program until after I went in the hole. Once I went in the hole, I started getting the education training. I had enough capital to buy a couple more, so I had about four single families. But my mindset wasn’t right and I didn’t have the belief that I can go into these big assets that cost millions and millions of dollars, so I hung out in the single-family world for a while.

I went out, got mentorship, got training, and started over. I ran out of capital, so I had to build it back up doing single-family. I had the opportunity to move to Oklahoma City around 2013. I said “When I moved to Oklahoma City, I’m going to start over, continue to perform my job and do well in the Air Force, but also invest the single-family on the side.” So I moved to Oklahoma City, I hit the ground running, and I saved up some capital at that point in time. I was able to buy six houses. Then my broker said, “Hey, once you get your license, you can sell houses on your lunch break and after work.” So sure, I got my license, he gave me a few clients, kicked me out the door, and said “Go sell houses.” It was just like that, like literally no training or anything. I was like, “Well, I got training through my mentorship program. I know how to teach, because I’ve been an instructor in the Air Force. I’m just going to teach my clients to do what I did.” And he gave me good clients, and they caught on quickly. When they caught on, things just took off. Through that experience as an investor-realtor – and all I did was work with investors; it was a very easy job – I ended up selling 99 houses in two years as an investor-realtor. That’s what allowed me to go to the next level. I took all that capital, ended up getting around 30 houses, and I built up a portfolio.

But the market started drying up in Oklahoma City based upon the type of returns I wanted to get around 2016, and that’s when I started having conversations with my now great business partner, Tariq. “Hey, I want to get into multifamily. I’ve been wanting to do multifamily forever. Now is the time. I think we need to go check out this conference in Dallas and see about what’s going on in multifamily.” That’s when we went down to Dallas. And I always wanted to be on my own when I retired from Air Force; I never wanted to work for anybody ever again, so I saw multifamily as my way of being able to do that. I just latched onto the idea of it, and went through the growth process that you need to go through to get yourself emotionally, physically, mentally right to be able to operate assets at this level. Long story short, it turned out to be a great success. Here I am today, a full-time multifamily investor; I have operated now actually around almost 2000 units.

Ash Patel: That’s incredible. Thank you for sharing that experience. Iven, you’ve had an illustrious career in the Air Force; it had to have been a very humbling experience losing that $80,000. How important is your partner Tariq in changing your mindset, the fact that he came along with you on the ride? If it wasn’t for him, do you think you would have prolonged your entrance into multifamily?

Iven Vian: I don’t know how to answer that, because I do have to say Tariq was very instrumental in my life and why I am where I am today. But could it have been another Tariq or another person? I don’t know. All I know is that the timing was right, and the universe, however you want to have it and see it, presented me Tariq. And whatever opportunity I got in my life, I always went all in and wholeheartedly. I saw Tariq as someone who wanted the best real estate, and all I did with all my clients – I just served them well; I always made them a priority. I was buying houses, but I always had this thing, “I’m going to sell 10 before I buy one.” I would always make sure that they’re full before I can go get mine. And I just treated everything in my life like that with that mindset, that I’m going to serve them well, I’m going to help them achieve what they want; and opportunities started coming my way.

And then also, just being around high net worth individuals – they think differently, they see things differently, they make decisions differently, and I naturally picked up on that. So 100% that influenced my life in a positive way. I’m forever grateful for that opportunity to be able to work with someone like Tariq, and forever will be grateful to be able to work with someone like Tariq. I’ve been working with Tariq now for eight years.

Ash Patel: That is incredible. So for somebody else that’s in a similar situation, would you recommend finding a partner?

Iven Vian: Yes.

Ash Patel: Where I was going with this was if you didn’t have a partner, would you have scaled the way you have?

Iven Vian: No. No, no, no. Because my duty is to my Air Force first. And then have a family, and then have other interests in life. For me, I was a pilot for the B-1 bombers. I can’t be talking to a broker or a lawyer while I’m in the air at 30,000 feet. Well, it’s possible, but I don’t advise doing that. I wouldn’t have my wings anymore if they knew I was doing deals while on the air.

Ash Patel: With your laptop sitting there.

Iven Vian: Yeah. So of course, you need a partner to be able to do what I was able to do while in the Air Force. And also, with our natural skillsets – Tariq is a financial wizard. He handled the transaction side of the business and acquired dispositions. I handled operations, which is my background. Being in the operational world, a pilot in the Air Force, and very operationally-minded, I was able to leverage a lot of my military experiences, working in systems, and just working with people, into my multifamily business. That made for a great partnership. But a lot of people are probably in similar situations, where they have a full-time job. “How am I going to do this? I have this dream. I want to be a multifamily investor. I want to be on my own full-time partnerships.” Yes, you’re taking less of a total return, but the net result, at the end of the day, you’re able to actually acquire more and do more. Plus, you don’t want to be working 15 hours a day anyway. If you just had two or three, it’s going to consume all your time, and you’re not going to have any time for anything else. It’s about quality of life, too. If you want to have a good life, if you want to be able to enjoy things outside of just sitting at a desk all day or working at a property; a partnership is the answer to that and it’s a great way to be able to scale and build a business.

Break: [00:23:19][00:26:16]

Ash Patel: I think that’s so important. I learned that super-late in my investing career. But when you look at a lot of the high performers, they all have partners.

Iven Vian: Yeah, absolutely.

Ash Patel: That’s incredible. From your Air Force career, what’s helped you the most in your real estate career? What skills have translated to really help you in real estate?

Iven Vian: Man, that is a great question. A lot, a lot of things come to mind. One thing first comes to mind is I was an instructor pilot for five years in the Air Force. I taught students coming out of pilot training how to fly the B-1 – taking off, landing, air refueling, dropping bombs, flying low level… Which is cool. We get to fly 500 feet above the ground at 600 miles an hour; there’s nothing cooler than that. But not everyone is the same coming out of pilot training. They’ll have different backgrounds, belief systems, personalities. So you had to learn how to adapt to these individuals coming out, to teach them how to fly and operate this plane, eventually taking them to combat and execute the mission to combat. So Air Force experience taught me a lot about people, human psychology, and how to connect with people.

They say leadership is influencing people and having them still maybe like you after influencing them. Not that that really matters, but there’s a certain thing about respect… So I approached that experience that I took in the military to my multifamily asset management career, and working with property managers; they all have different backgrounds, personalities, perspectives. Some are more difficult, more challenging to work with, some are not. I took a lot of my leadership experience and I applied that to how I do things in the business world.

So learning about people, and flying a B-1 – there are four of us in that plane, and you’re always working with different people. You learn how to adapt to multiple personalities and learn to be flexible in that type of environment. That has helped me a lot in what I do today.

Ash Patel: I would imagine you do exceptionally well with investor relations. Hopefully, that’s your role. Is that your role?

Iven Vian: Yes, it’s my primary role. I do a lot of network meetings, I do a lot of the calls; I field all the calls that come through, and all the monthly financial reports that we send out.

Ash Patel: Awesome. You also mentioned a mentor a few times. How important is that? And at what stage in your career should you get a mentor?

Iven Vian: Oh, man. I mean, I want my kids to have mentors. You need to have an objectified perspective of you, someone seeing things in your life that you can’t see, and seeing the potential in you to help you grow into the person that you truly were meant to become. That’s one key thing in my life that has contributed to my success, is that I’ve always had a mentor. High school, college, after college, I always found somebody to help influence my life in a way that I wanted to be influenced. So as soon as you can talk, you should get a mentor. That could be a teacher, for a student; for college students, it could be a teacher, or it could be a mentor, someone who’s gone there, done that before, someone that you can emulate, and you don’t have to reinvent the wheel. Multifamily – I never reinvented this stuff; this is stuff that everyone else has done. I listen to them, I see what they’re doing, and I copy them. They have proven results, I copy them, and I get the same results. Sometimes even better.

Ash Patel: Yeah, Iven, there are people out there that have no problem asking if somebody can mentor them. I’m sure you get hit up a lot, “Can you mentor me?” What would you say to those people who are afraid to ask for a mentor? How do they go about finding somebody to guide them?

Iven Vian: How do you go about finding someone to guide them… Well, there’s professional mentors, there are coaches, there are all kinds of coaches; any type of mentor you want. Of course, you can hire somebody to do that. But anything in relationships should become natural. You’ve got to have enough desire to get out of your comfort zone, you’ve got to be hungry enough is the first thing. You’ve got to really check your own desires and your own inner beliefs of what you really want in life. If you’re hungry, you’re going to go eat, you’re going to find something to eat, I guarantee it. If you’re in the woods, you’ve got to find a way to consume that deer if you’re hungry. You’ve got to have hunger, man.

Ash Patel: So you’ve got to want it bad enough.

Iven Vian: You’ve got to want it, you got to be passionate, you’ve got to really desire this thing. That’s the thing – I’ve always wanted to do what I’ve always done in my life. I’ve always found a way to get there, regardless of the challenges that I have overcome; my background, all of that. I’ve always been hungry. I think that hunger is what caused you to go out and seek a way to feed yourself. In this case, we’re talking about mentorship. So my hunger for multifamily – I had to go find a multifamily investor. People have their own personal spirituality… Go find that person. If you want to get better in shape, go find a coach to help you get in shape. But it’s that hunger, it’s that desire; you’ve got to have those goals. That’s one thing – vision and goals are key. You’ve got to have a goal in life. If you don’t have a goal, you’re not going to go anywhere, you’re not going to have any direction; you’re going to be aiming aimlessly. Sit down and have goals, write those goals out, and have a clear understanding of what that looks like. Watch what happens when you write goals, watch what happens when you have clarity in your life. It creates natural hunger; it’ll create these functions in you, if you will. Like, “Oh my God, I need to do this. I need to read this book. I need to do this.” These goals are what drive the path to help you get to where you’re supposed to be in life; that’s kind of some of the ways I look at and how I go about it in my life.

Ash Patel: Yeah. Iven, today, what’s the bottleneck in your business? Is it deal flow, is it capital?

Iven Vian: Capital. Everyone has their bottleneck… But all kinds of deals out there; being very intentional this year, a lot of competition in our investment database. So I’m going out there and I’m building out my equity database, and my investor database, and I’m going to go out and continue to build it. I’d love to find more partners who are tied to more equity as well; I’m open to co-GP with other sponsors out there to be able to take down a deal, operate it, manage it, overall, collectively as a team. But obviously, more equity than anything.

Ash Patel: Got it. Iven, what is your best real estate investing advice ever?

Iven Vian: Best advice ever. Man, like what I was saying, you’ve got to know what you want. You can play a game at any level; you’ve got to work with the end in mind. So have a clear understanding of finding what that picture looks like. I know a lot of people in a lot of situations, maybe they hate their job, or they hate where they are in their life, or they may feel like they should be farther along, all of those things. But what I can say is that there’s something about having a clear understanding of what you want in life that allows you to get there. And go for it, man, go for it. Take that chance, take that leap, step out into the deep dark place that maybe you don’t know what’s around the corner, and trust that. You’ll get there, one step at a time.

I wanted to be a full-time multifamily investor when I retired from the Air Force, and that was it; I knew what I wanted. When I was six years old, I knew I wanted to fly airplanes; I knew that was what I wanted, and I went after it. For me, it’s proven well for me. The key thing for me is that I’m learning that I’m capable of more. I wish I would have thought higher and bigger and farther; I would probably be farther along.

Ash Patel: Still got time, man.

Iven Vian: Still got time. Have those high and achievable goals for yourself, have a clear understanding, and watch what happens in your life. Then take that step, take that chance; you’ll get what you want.

Ash Patel: Iven, are you ready for the Best Ever lightning round?

Iven Vian: Let’s do it!

Ash Patel: Let’s do it. Iven, what’s the Best Ever book you recently read?

Iven Vian: Best Ever book. I’m currently reading You Were Born Rich, by Bob Proctor. It’s been an amazing book.

Ash Patel: What’s your big takeaway so far?

Iven Vian: Bob Proctor’s book?

Ash Patel: Yes.

Iven Vian: Everything that you want is not outside of you, it’s actually inside of you. You’ve just got to allow it to happen.

Ash Patel: Iven, what’s the Best Ever way you like to give back?

Iven Vian: Honestly, I thought about this… I would love to teach young people about what it is to be an entrepreneur, about financial education, about all those things you wish you were able to learn at school, but never did. I want to be the person to help them have an understanding of what that is when they’re young, so they don’t have to go through a 20-year career they end up hating. They can actually live a full life, more than just about making money; a full life where they truly feel in control of their destiny.

Ash Patel: And Iven, how can the Best Ever listeners reach out to you?

Iven Vian: My email, iven@anthemcp.com, or you can go to my website, anthemcp.com. You can find my contact info there, and also learn more about our company.

Ash Patel: Iven, thank you so much for sharing your story with us.

Iven Vian: Thank you.

Ash Patel: And your incredible career in the Air Force. Thank you for your service and your sacrifice for your entire career in the Air Force.

Iven Vian: Thank you. I appreciate it.

Ash Patel: Thank you for sharing your story with us today. It was inspiring. Some of the good times, the bad times, and how you got out of it. What an incredible time I had with you today, so thank you.

Iven Vian: It’s been a pleasure. I’m truly humbled and grateful. Thank you so much for this opportunity.

Ash Patel: Best Ever listeners, thank you so much for joining. If you enjoyed this podcast as much as I did, please leave a five-star review, share this podcast with anybody who you think can benefit from it. Don’t forget to follow, subscribe, and have a Best Ever day.

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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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TRANSCRIPTION

Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed. This is the world’s longest-running daily real estate investing podcast. Today we have AJ Shepard with us. How are you doing AJ?

AJ Shepard: I’m doing well. How about yourself?

Slocomb Reed: Doing great. AJ is the owner and managing partner of Uptown Syndication and Uptown Properties. Uptown Syndication focuses on purchasing large multifamily assets through partnerships with passive investors. They have a portfolio of 150+ units that they also manage as Uptown Properties. Uptown Properties manages a portfolio of over 700 units. They are based in Portland, Oregon. AJ, general partner in apartment deals and also property management… Were you in property management before you started investing your own money and other people’s money?

AJ Shepard: We actually started out by buying single-family homes and then kind of worked our way up to duplexes and fourplexes. The property management company was kind of a way for us to generate more income to qualify for more financing.

Slocomb Reed: Generate more income to qualify for more financing. I feel you. I started as a house hacker, so with single families. But I formalized a property management company as my portfolio grew to the point that I needed to hire people. Is that how it worked for you or was it something else?

AJ Shepard: Yeah, we started buying houses in 2007, and I think we started the property management company in 2010.

Slocomb Reed: I know a bunch of people here in Cincinnati, Ohio with portfolios between 50 and 500 units. Every single one of us asks ourselves all the time whether or not we should get into professional third-party property management to make money. And all of us say no. You said yes, you’re in Portland, so coming from my perspective, why do it? Why would you manage for other people?

AJ Shepard: It’s a steady income. We were looking at the crash in 2007, and a lot of brokers and other people in real estate services went away. My brother and I had W-2 jobs, and when we got away from that, finding another source of income was super nice, and this was a stable way. Also, it was a way for us to manage our own properties, and hire employees, and do it with a professional aspect. Coming to lenders and saying “No, we don’t just own our properties. We professionally manage them.” It gives us kind of like a step up, allows us to qualify for more financing, and it’s just a better picture overall for that kind of lending aspect as we got into more multifamily deals.

Slocomb Reed: Absolutely. Thinking about Best Ever listeners who may be in a similar situation to you or me, AJ, I’m thinking about the decision of being an owner-operator or being a GP who’s also involved in management, thinking about the decision to take on property management third party. I think why most of my buddies in Cincinnati don’t do it is because we can’t see ourselves working as hard on other people’s properties as we do on ours. Shoveling cat litter out of the parking lot before the showing because it’s not normal to have cat litter in the parking lot, but also because you know you want the place to show well… I think a large part of it, and one of the reasons that a lot of investors, non-local investors are struggling up in Cincinnati is that it is so hard to find quality property management here. That’s certainly one of the reasons that I self-manage. Tell me if you agree or disagree here. Portland, Oregon is a much higher cost of living area than Cincinnati, Ohio.

AJ Shepard: No, it definitely is. Rents are going to be much higher. Portland is still one of the most affordable cities on the West Coast though. If you compare it to Seattle, LA, or San Francisco, we’re significantly cheaper, but we’re not going to be as cheap as Cincinnati, Ohio.

Slocomb Reed: If you had to ballpark it AJ, across your portfolio, what is the average monthly rent?

AJ Shepard: Probably 1,500, maybe 1,600.

Slocomb Reed: Yeah. So for simple math, 10% of that as 150 to 160 bucks. So if you’re charging 10% for management – I’m not saying that you are; just for simple math – that’s 150 to 160 bucks a door. A C-class one-bedroom in Cincinnati right now has seen some very sharp rent growth recently, thanks to COVID and all the things that have happened in the economy since then…

AJ Shepard: Yeah, a lot of people move out of California.

Slocomb Reed: Yeah. But it’s not so much into C neighborhoods in Cincinnati. The average is probably around 650 to 700 a door. If you start adding B neighborhoods, your one-bedroom average rent will be around 750 to 800 a door, but 10% of that is 80 bucks a month. So a property managers making half as much for different work…

AJ Shepard: The same amount of work as I’m doing, for sure. Maybe that’s why it works in my market or works in larger appreciating markets. One of the ways that we really worked on our investments was by doing value-adds. In the higher rent districts, like where we’re at, we’re able to find those places that have $1,000 a month rent, $1,100, and be able to take them up to $1,400 or $1,500 with some good value-add.

Slocomb Reed: Everything you manage is in the Portland area?

AJ Shepard: Portland is comprised of metropolitan areas, so we have multiple different cities around, like Gresham, Beaverton, Tigard, Lake Oswego, even Vancouver, Washington too… So nstead of Seattle, where Seattle has neighborhoods, we’re just a little bit different. But we try to stay in the Southwest of Portland, create our niche. That’s where we move predominantly buy, and it allows for us to not get into some of the lower rent districts. You hit it right on the nose – if we’re going to do property management, we want to do it for high-rent districts. So when you get out towards the east of Portland, you get into like Gresham, there are lower rents, like what you’re talking about in Ohio. You see more of like the 700 to 1100 type rents. And for us, to drive farther and manage less money, it’s just not worth it. So we’ve kind of picked our area and we’re like, “You know what? We’re going to really focus in on this.” We know that we can get good management prices for that, and it make sense.

Slocomb Reed: Yeah. That makes a lot of sense.

AJ Shepard: The other thing that we do too is we use a lot of off-site professionals. We have probably 12 or 13 girls in the Philippines that work for us, and they do a lot of the heavy lifting. I would have to have to someone in person to go remove that cat litter, but taking that tenant call, the complaints about it – we’ve got someone that does that, and then kind of all the backend office work. That’s a way to definitely reduce your costs in property management.

Slocomb Reed: I have two people full-time in the Philippines right now, and two I’m starting part-time. One of them is for lead generation, for acquisitions. But specific to property management, for our listeners who are more active, there are some mental hurdles that need to be jumped, that some people need to jump before they hire someone completely virtually, who’s halfway around the world. How did you get into using VAs and how do you think it compares to having local employees?

AJ Shepard: VAs are great. In the Philippines, they have the BPO industry, which is specific to like the financial industry and providing customer service. So they’ve got this like background and customer service that they can kind of graduate, in and that lends to be very good in property management. Listening to those tenant complaints, amd addressing them, and being very cordial about it.

Slocomb Reed: They are intensely polite.

AJ Shepard: Yes, it’s super nice. I belong to NARPM, it’s the National Association of Residential Property Managers, and they have a great conference that we have found a ton of vendors and a ton of value from. I volunteer with that organization still. So that’s kind of how we got into them. But as far as implementing them, it’s really dialing in your processes. If there’s anything that you can do is write down what you’re doing and how you do it, then every time you do it, review it, and make sure you do it the same way. Once that process is 95% or 90% to like where you’re going to redo it the same way every time, or you’ve sorted out all the unique positions, or whatever — the unique situations that happen, and trying to get the process written so it handles 90% to 95%… Then you take that, take it to another employee, and then have them start doing it.

One of the ways that we’ve worked really well with virtual employees is using Zoom here, and recording what it is that we do on the computer. If I do a process, I’m able to record it and then they can review it multiple times without having to ask me. It saves a ton of my time.

Break: [00:10:08][00:11:47]

Slocomb Reed: I’ve learned that I have to be way more detail-oriented with remote employees. There are a lot of cultural, not really barriers, but there are a lot of things that we would assume, that someone would assume the same way we do, that the people in the Philippines will not. So there are a lot of small course corrections. My portfolio is one-tenth the size of what you manage, AJ, so I’m probably much more involved in the day-to-day, because I have to be. I’m getting questions from my VAs constantly about the things that we don’t have scripted yet. But our scripts are precise, and we write everything down. And every one of our meetings, as you said, we record. In part because I don’t feel like repeating myself, and I don’t feel like slowing down so they can write everything down. I just hit the Record button and then they can go back and listen to me as many times as they want. If they have a question, they can reach me whenever they need to.

You know, I said earlier… This is a point I want to drive home for the Best Ever listeners. I said earlier that I show my own apartments. In my experience — AJ, this is a kind of coming from the gut number; there’s not a lot of analytics behind this. But I think wages in the Philippines, what I’m paying my people in the Philippines is about one-fourth of what I would need to pay someone in the United States to get the same quality. Is that about right for you?

AJ Shepard: Yeah. 25% to 40%, I would say.

Slocomb Reed: Awesome.

AJ Shepard: Granted, they’re limited on the capabilities of the type of things that you can do; it has to be behind a computer. Like if you need a handyman or people that are going to have to be physically out of the property, then you’ve just got to bite the bullet. That’s where we have an office that is a bunch of hot desks, and most of my people are not in the office; they are out at properties, visiting stuff, making sure that things are going alright, putting lockboxes on, managing contractors, that sort of stuff.

I was going to say, we actually implemented self-showing lockboxes. Even my leasing agents – they just put a box on, then wait until some tenant decides that they’ve seen it and liked it, then we move forward, then the agent then goes back and picks up the lockbox afterwards.

Slocomb Reed: I have, by door count, about 20% to 25% of my portfolio is in A locations. I would totally do that there, but I’m not doing that and C areas. But I totally get where you’re coming from. Back to what I was saying about doing my own showings… What the leasing process looks like for me right now, having a virtual assistant, considering that I’m the property manager for the portfolio – when we get an inquiry online, from Zillow, Apartment List, or any other website, it goes to my VA, Izzy’s, inbox. She’s the one who texts them to see if they respond, she’s the one who asked them preliminary questions, gets them on the phone, and pre-qualifies them. Assuming they meet our pre-qualification standards, she has my calendar, she’s the one booking the showing. All I do is show up.

I show up, if it seems like they want to apply or if they tell me they want to apply, I message Izzy the apartment they want, we have scripts for all of this. She’s the one who sends them the application, she’s the one who reviews the application, calls the references, sends me a summary of the application that includes specifically the qualification criteria that allows me to read an email and make a decision.

If they’re declined, we have scripts for every single reason you would tell someone that they’re declined, in writing, making sure that we are following all federal housing guidelines. And assuming they’re approved, Izzy is the one who tells them they’re approved; she’s the one who fills out the lease in our electronic document and signature platform, I review it, approve it, sign it, she sends it, tenant signs it, and she’s the one putting them in our software, setting them up to pay the rent, and the security deposit. So I say that I’m showing the apartments and I’m the property manager, but 90% of the work involved in getting a great tenant is being done by somebody in the Philippines.

AJ Shepard: Yeah. I mean, as long as 90% of the work can be done behind a computer, there’s no reason that you can’t teach them how to do it. Most of mine are college-educated; they speak great English, it’s awesome. If someone is on the phone, a tenant’s talking to them, they have no idea whether they’re in the US, or in the Philippines, or in Brazil, or wherever. I think the pandemic has definitely shown remote work is really going to be prolific kind of going forward. Why not take advantage of the economic differences?

Slocomb Reed: Yeah. Absolutely. So your 150+ units as GP – how many different properties is that?

AJ Shepard: So we started out in single-family and small multifamily, so it’s going to be probably a lot higher.

Slocomb Reed: Are those single-family or small multifamily deals that you syndicated?

AJ Shepard: No. My brother and I started out just buying ourselves, doing the BRRRR method, and then kind of graduated to two units, and then four units, and then eight units.

Slocomb Reed: When did you start?

AJ Shepard: We started buying in 2007. I didn’t start syndicating until 2020. So we did our first syndication in 2020, and it was a 12-unit deal. We bought it for 1.25 million, and then it was kind of a cash deal. Then we had it appraised at 1.8 six months later. Then we did another 12-unit, and we’ve since done a couple of 20-unit deals. When you ask about my 150 plus prop units, it’s probably across like 60 properties, maybe 50 or so.

Slocomb Reed: Got you. I have in my notes here that your limited partners – you guys are operating under exemption 506(b), so these are limited partners with whom you have prior relationships.

AJ Shepard: Yup.

Slocomb Reed: So when you bring in limited partners, are you underwriting to the five-year hold? Are you planning to continue with the BRRRR method, cash-out, refi, and hold long term? Are you selling quickly? What do you do?

AJ Shepard: The first one that we did, we had planned on doing a little bit of a cash-out refi. It was actually during COVID and we had a bunch of reserves. Whenever you buy property, that’s typically where you make the money. I think even when we were buying it at 1.25, it appraised for 1.4. So when you’re buying a property, that’s where you get all the equity.

We are kind of on that five-year hold timeframe. With our first set of investors, we promised to hold it for at least five years, and we’re going to hold to that word. Obviously, the returns would have been super juiced if we would have just turned it real quick. Typically, a lot of times, the way syndications work is the quicker you can add value and the quicker you can liquidate, the better it is for everyone; investors get their money back. But a lot of times, that just creates more work for the investor and then they have to go find another place to invest it. Maybe there’s some time in between where they’re not making the returns that they wanted. So there are pros and cons to it. We’ve been around the block and are a buy-and-hold company. Ideally, we’d be able to hold our investments longer. But we are new to syndication, and when we say that we’re going to do something, we do it. We are planning on turning those properties over after five years.

Slocomb Reed: Got you. I have not gotten into syndication myself yet. I’m a buy-and-hold, cash flow investor. You started in ’07, I started in 2013 or 2014, depending on how you count. I would like to think at least that I’m on a similar trajectory, given the success that you’ve had, AJ.

Let’s talk for a minute, let’s brainstorm. We’re both buy and hold guys, we both want the long-term benefits of real estate investing, and we care about cash flow, we care about the tax advantages of the long-term hold. How can people like us structure syndication deals such that limited partners would be incentivized to stay in a deal with us for the long haul? Not expect a five-year sale or seven-year sale, but buy-in planning to be in the deal for the foreseeable future?

AJ Shepard: That’s a great question. I wish I had that figured out. But if I was to brainstorm and off the top of my head, it’s putting together a deal that kind of outlined refinances on the timeline and the expected returns of those. Kind of like in our portfolio, what we’re seeing is a refinance every seven to nine years, and being able to pull out a good chunk of change. I mean, maybe you commit along that schedule.

As a syndicator though, it’s tough. The way that those deals are written, there’s an IRR hurdle or a preferential return, just signing on to make just the amount over the pref for the long-term, and providing all the services that go along with it. Syndicators typically want to be paid for their additional efforts in adding value, and hitting a good deal, and making that home run. On the deals that I own 100% of, I’m stoked about a home run, but I’m also stoked about it providing kicking off a bunch of cash flow for the foreseeable future. And I know that when I sell it, I’m going to reap those rewards that I really put it in the beginning. With syndication, the rewards that I get are so small in comparison, because I’m owning maybe 2% or 5% of the deal. Where I get paid is off the services. We hit a home run, and anything over a certain amount of percentage is where I really get that benefit.

So I think structuring it in some way that having refinances happen on a schedule, and a fee goes to the syndicator on that schedule might be something. I definitely think that for the long-term hold, having less expectation of a return. It’s just not feasible to hit those 20 to 30 tight numbers on a long-term hold that goes for 15 to 20 years.

Slocomb Reed: Unless you can produce a really juicy cash-out refinance.

Break: [00:21:51][00:24:48]

Slocomb Reed: If you’re starting with an asset that’s more distressed that you’re buying at a steeper discount, you buy it for a million, you put in 500,000, it appraises for two – you could feasibly give your LPs all of their money back and leave them in an equity position in the deal, and still reap some sort of benefit. Of course, you would need limited partners who are interested in taking that kind of risk…

AJ Shepard: And limited partners that want to be in it for the long haul. I think that’s the key, is finding those partners that are like, “Yeah, I want to hold it 20 years. I want to hold it for 30 years.” If you start out looking for those partners, they’re going to understand that it’s nice to have your money in a place and kick off some returns after refinances. We both love that, we’re buy and hold guys, we know the benefits of it. There’s got to be more people out there like us that don’t want to be the active person in that type of deal.

Slocomb Reed: We either need LPs who want to be long haulers in the investment, or we need to structure the investment opportunity in such a way that LPs could leave early if they chose, and that there was some sort of streamlined way to sell their interest at like a contemporary valuation, four, eight, 12 years later, for personal reasons, or because their investing appetite has changed, they want to get out…

AJ Shepard: I mean, life happens.

Slocomb Reed: Yeah. If people like us had some way that we could easily facilitate an exit and a sale of that equity in the deal to someone else, I think that would be helpful as well.

AJ Shepard: Yeah. I’m super interested to see what happens with Blockchain technology and a lot of these fintech —

Slocomb Reed: I was thinking the exact same thing.

AJ Shepard: There seems like some applications like that where an investor could then just parse it out, sell it off, and liquidate whenever they wanted. I just don’t know…

Slocomb Reed: Yeah, they make it resaleable.

AJ Shepard: Yeah. I just don’t know of anything that’s available like that yet. I’m definitely looking forward to the future. I feel like it’s kind of on the precipice. There are a lot of people talking about it, and once you get the conversation going, then something hopefully will happen.

Slocomb Reed: Yeah. I know I won’t be the innovator in that space, but I may be eager to be the early adopter.

AJ Shepard: Exactly.

Slocomb Reed: Somebody else creates a platform, I may pounce on it, and start putting my deals up, because I love this idea. I love the idea of using the power of syndication to take down larger deals, and combine it with all of the benefits of the long-term hold, for myself personally, but also for all the investors. Real quick, we’re running a little over on time, AJ… But you were telling me before the episode that you and your partners run a bottle shop and brewery because you got a good deal on the building? I need to hear more about that.

AJ Shepard: Yeah. My brother and I are the ones that run our company. We had a fraternity brother of mine approach us and be like, “Hey, this building’s been empty for a couple of years. I know the owner, I know he’ll give us a lease option to buy on it.” We’re like, “Okay, You’ve piqued our interest. What are we going to put in there?” We didn’t want to lease to a third party, so we decided to start a business. That business is now Uptown Beer Co. and Binary Brewing. But we started out with a bottle shop, a homebrew supply shop, and a couple of taps. Now it’s morphed into a brewery, 36 taps at it, and we now own the building. We actually just had our 10 year anniversary in December, so that’s been awesome.

Slocomb Reed: That’s awesome. So in December — so that’s late 2011 that you bought the building. How good was the deal on the building that you were willing to put this business together for it?

AJ Shepard: We just love getting more real estate and getting into it. So by the time the two-year lease option had kind of run its course, real estate had kept appreciating, it’s more than doubled in value since the time that we bought it.

Slocomb Reed: The building. What about the business itself?

AJ Shepard: The business itself is running well. We’re actually expanding operations and putting together a new brewery location and restaurants. That should be opened up here in like April or May in Beaverton. Unfortunately, we are leasing that space but that’s from a good friend of mine that’s an owner as well.

Slocomb Reed: So 10 years ago, a frat brother brings you an opportunity to get a lease option on a space, you start a bottle shop and then a brewery with him, then you buy the building, and now you’re opening a second location that’s a brewery and a restaurant because you got a good deal on some commercial space 10 years ago. That’s awesome. That’s good to hear that it’s all working well. AJ, are you’re ready for a Best Ever lightning round?

AJ Shepard: I think so.

Slocomb Reed: Awesome. What is your Best Ever book you’ve recently read?

AJ Shepard: I really enjoyed Joey Coleman’s Never Lose a Customer Again. Just that idea of the customer experience and how it goes through the business. I worked with my business development person on that for our property management and third-party clients. Developing that touch system was really, really helpful. That one, I think, doesn’t get mentioned a lot but has been very influential in a lot of our businesses.

Slocomb Reed: Never Lose a Customer Again. I’m writing that one down too. What’s your Best Ever way to give back?

AJ Shepard: I think I mentioned it before. I volunteer for NARPM, I’m currently the regional vice president over California and Hawaii, and help provide education to over 700 property management companies and property management company owners.

Slocomb Reed: Great. What is your Best Ever advice?

AJ Shepard: My Best Ever advice is keep the grit, don’t give up. If you’re going to do something, do it, jump all in, and get it finished as quickly as possible. Hyperfocus.

Slocomb Reed: AJ, where can people get in touch with you?

AJ Shepard: People can get in touch with me on uptownsyndication.com, that’s an easy place. My brother and I also do a podcast, it’s called West Side Investors Network, so you can find is on West Side Investors Network.

Slocomb Reed: West Side Investors Network. Awesome. Well, Best Ever listeners, thank you for tuning in. If you enjoyed this episode, please subscribe to our podcast, leave us a five-star review, and share this with someone with whom you want to share the best real estate investing advice ever. Thank you and have a Best Ever day.

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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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TRANSCRIPTION

Ash Patel: Hello Best Ever listeners. Welcome to The Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, Charlotte Dunford. Charlotte is joining us from Atlanta, Georgia. She’s in the private equity mobile home parks space, and her portfolio consists of over four million dollars’ worth of mobile home parks. Charlotte, thank you so much for joining us today, and how are you?

Charlotte Dunford: Good, how are you?

Ash Patel: I’m wonderful. Charlotte, before we get started, can you give the Best Ever listeners a little bit more about your background and what you’re focused on now?

Charlotte Dunford: Yes, so my name is Charlotte Dunford. I am in mobile home park private equity investment. Like Ash mentioned, under our portfolio we have currently 24 small to medium-level mobile home parks, with a total investor subscription of $4.7 million in our portfolio. We are in this — we call it a niche within a niche. Mobile home parks have been a long-ignored asset class, and we are in the small to medium level mobile home parks, which has given a smaller niche within a niche. We have a strong belief in this niche.

As I got started, I was looking into other assets to get into, such as multifamily and other commercial properties. However, at the time, when I started a couple of years ago, I’d just graduated college and I started the job for a firm and then worked in the corporate world for a year and a half. I did not have the experience needed to compete with the big boys in multifamily and other commercial properties, so mobile home parks became a really good starting point, with less competition, but more profit margin for investors like me to get into the space. Over the past year and a half, it grew to what it is today, the 24 lots, so it really just took off from 2020 and 2019.

Ash Patel: So 24 lots in a year and a half is incredible. I’ve got a lot of questions. What is the private equity piece of this?

Charlotte Dunford: The private equity piece of this is our customers are investors. We offer a preferred rate of return for each deal that we are in. Right now, it’s an 8% preferred return, and then there will be a waterfall structure. 70/30 and then there’s the next hurdle. Each hurdle is a four-point increase, so the next hurdle is 12% and then it changes to 60/40, 60 being the investors and then 40 being the sponsors, which is [unintelligible [00:03:12].23] Capital, us. Then it jumps by another 4% at 16% return, and then 50/50. It stops there.

Ash Patel: How did you get started in real estate?

Charlotte Dunford: It’s interesting, because I came to the United States when I was 16, for high school. I did not come with anybody else, I came by myself. My parents didn’t come with me, so I pretty much just had to start everything from scratch. So I figured out pretty much the whole system and went to college. Then after working, I’ve always wanted to do real estate, because where I came from in China, you actually cannot own real estate legally, you have to lease it from the government for 70 years and you have to give back. So real estate has always been a dream come true now.

At my corporate job, I used my salary pretty much to finance my first deal in single-family, and then moved on to a duplex shortly after. Then after which I felt the desire to be an entrepreneur, and somewhat, although limited, but some experience in education I got in real estate through just listening to podcasts, buying books, and actually buying real estate. It helped me launch the new venture of a full-time real estate investor in mobile home parks. I met my business partner around the same time, late in 2019, and then we started buying mobile home parks. Then it got into one mobile home park, two, three, four, and then grew into what we have today, 24.

Ash Patel: I have even more questions now. You had a corporate job for one year out of college. Why did you not like that?

Charlotte Dunford: I like the job, it’s just that I had something I wanted to do more, which is being an entrepreneur and to create, and to really create a service for people to achieve financial freedom. For me, our service primarily serves accredited investors to expand their assets and to grow their wealth. I think that idea really appeals to me. That’s something I’ve always wanted to do.

So my corporate job was great, I learned a lot from it being a business analyst. Learning about data analytics… It really helps me today in my today’s job in underwriting and sourcing deals. So I did not want to stay in a corporate job forever, because it just was not providing fulfillment, either financially or mentally, or anything.

Ash Patel: Charlotte, your first mobile home park – was that purchased with your partner?

Charlotte Dunford: No, not with my current business partner. My first mobile home park was with other private investors that I worked with.

Ash Patel: And you found the deal.

Charlotte Dunford: Yeah, I always find the deals.

Ash Patel: Okay. You find the deals and you manage them as well?

Charlotte Dunford: Yes, we manage all of them in-house.

Ash Patel: And why mobile home parks that are under 50 units?

Charlotte Dunford: Because I’m a firm believer in escaping competition. One of my favorite books of all time is From Zero to One, by Peter Thiel, a Silicon Valley investor. He is actually one of the most successful investors out of Silicon Valley. He has a really good philosophy in escaping competition, and that’s to create more profit margin. For me, I chose this niche because it avoids a lot of big boys from institutional funds to buy up really extremely competitive and heated markets and heated, big lots. A lot of them are like a small city, big communities consisting of 300 lots, 100 lots, and even over 100 lots. Everybody’s going after that, everybody’s going after this heated market, which makes small guys like us, or small guys who want to get bigger, who want to monopolize a small niche and then expand… Our job is extremely difficult and almost impossible to make a good profit margin if everybody’s chasing after the same thing.

Ash Patel: Yes, I love that philosophy, and the same applies for multifamily. But it seems like there’s just no niche in multifamily that’s not highly sought after, even under 40, 50 units.

Charlotte Dunford: Exactly. That’s because multifamily maybe is not a niche. It’s become a major market. For mobile home parks, it’s different.

Ash Patel: So now when you dispose of these mobile home parks, does it make it more challenging because there are not that many players in that arena?

Charlotte Dunford: No, actually. There are a lot of… You’re talking about exiting, right? So I’ve already sold one and am in the process of selling another one, another two actually, and one of them will be closing soon. So no, I think the players — you probably wouldn’t want to sell it to institutional buyers, because those people will probably want bigger ones. If they do buy it, they probably want a big portfolio. So that’s another thing – you can group it and sell it together in a bigger package. Actually, it’s not that challenging to sell it, it’s just you have to find the right buyer. Even in the loan approval process – a lot of people think that there might be difficulties finding a loan to finance the buyer, but we have sold a couple and both times the loan has been approved with no issues. So it just depends on the buyer that you’re going after.

Break: [00:08:37][00:10:16]

Ash Patel: Do you have to use local lenders for this type of asset?

Charlotte Dunford: Actually, for all of our deals, I would never use a lender on all of our 24 deals. It’s very interesting. We either buy cash, because they’re small, they’re inexpensive, and we have a lot of private equity; that’s our capital. We have people subscribing to this deal, so most of them are cash or seller finance. Because in the world of small mobile home parks, it’s a lot easier to get seller financing, than let’s say multifamily… Because a lot of banks don’t really want to lend on a small to medium level mobile home park; they would rather lend on a same price single-family home. That’s like a $400,000 single-family home versus a $400,000 small to medium level mobile home park. That single-family home is a lot less risky from the lender’s perspective, but they don’t want to lend on it. So that gives the buyers a lot of chances to get seller financing, because sellers know it will be difficult to get kind of traditional financing. But the landscaping is changing now, because lenders are getting more comfortable with this asset class, and you’re more likely to get more loans; but you can still buy cash and seller finance. A lot of our deals are either cash or seller finance.

Ash Patel: What percentage of the deal does a seller typically hold back in terms of seller financing?

Charlotte Dunford: I think the best deals we’ve gotten vary from 30% to 50% down. We’ve had — one of our first deals actually, we got 35% down, 3% interest rate, 30-year amortization, and a 10-year balloon. So it’s extremely attractive terms, really not bad terms, even for lending commercially.

Ash Patel: Charlotte, what do you look for when you find a small mobile home park?

Charlotte Dunford: There are a set of requirements. We have a proprietary algorithm in-house to determine the score of each deal, to make sure that it passes the system. Some of the major things that we look for is, first of all, the ratio of a… Sorry, I’m a little sick; you can tell from my voice. Tenant-owned homes versus park-owned homes. A tenant-owned home means the tenant owns the mobile home, and they’re just paying a parking lot fee to the park; that is the ideal situation.

A mobile home park is essentially a parking lot; you’re running on dirt. You don’t want to be owning the cars that park in your parking lot and be responsible for the maintenance and repairs. So we definitely want a majority of tenant-owned homes versus park-owned homes. But there are exceptions to every rule, of course, and if they’re park-owned homes, they have to be an extremely newer model; probably newer than the 2000s, or if not newer than that. That will be the number one priority, because it really adds up to the expense ratio to the already high small to mobile home park expense ratio. That’s the number one thing.

The number two is the utility structure. We definitely want something public utility, there could be a private sewer, including septic tanks, that’s probably the only thing that we can accept. Anything else will be a little bit too risky. Because for a parking lot, we’re still responsible for infrastructure, maintenance, water pipes, the utilities, we want to make sure that they have lawn care. In the common areas, you still have to maintain a lot of common area maintenance. So you want to make sure those major infrastructure expenses do not cause big expenses, because that would really bankrupt you…

Ash Patel: What are some things that most people overlook, that you don’t, when you’re doing due diligence or when you’re looking to acquire a mobile home park?

Charlotte Dunford: That’s a good question.

Ash Patel: What have you learned over the years that a lot of people don’t know and now it’s part of your scoring system?

Charlotte Dunford: Right, that’s a good question. I think a lot of people don’t pay attention to, and this is very specific to the mobile home parks industry – it’s titles, mobile home titles. It’s interesting, because mistakes have been made and lessons have been learned in this… Most people don’t know that, in a closing, the title company checks titles for mobile homes. If you’re buying park-owned homes, you really need to make sure, especially if the park-owned homes are a major component of the deal, you’ve got to make sure that you’re getting the titles of the mobile home, to make sure that the seller actually has the title to the mobile homes. And there are situations, a lot of times, when the seller does not own the homes, and they’re trying to sell you the asset they don’t own. A lot of times, this falls through the cracks, because the title company doesn’t check for the titles of the mobile home, they only check the title for the real estate, which is the land underneath.

When they say the title is clear, if you’re a first-time buyer, you probably don’t know to check the titles of the mobile homes themselves, because they’re counted as personal property. Make sure they’re transferred through a bill of sale, and in a PSA, and they have titles, and the seller has titles, and to properly transfer them to you. If not, you’re going to encounter situations where there will be people claiming titles to the home and fight you on it, and the seller doesn’t know what to do, the title company didn’t know what to do, and you’re in a [unintelligible [00:15:34].06]

Ash Patel: That is an incredible piece of advice. And you’re right, if you’re buying a neighborhood of 30 single-family homes, you’re absolutely going to make sure that you have titles to all the homes. But I can see how that’s overlooked with mobile home parks. Thank you for sharing that.

Charlotte Dunford: For sure, yeah.

Ash Patel: How do you find these deals, Charlotte?

Charlotte Dunford: Over time, we’ve accumulated tons of channels to channel those deals to us. We go on mobile home park stores, we have broker relationships that send us those deals through emails, and several different channels off/on-market broker relationships. The sellers we have relationships with, and who often… My voice is wholly ragged today.

Ash Patel: You sound great, don’t worry.

Charlotte Dunford: …who often own several parks, so we maintain relationships with them towards other deals. So we make offers regularly, to make sure that we were sourcing every deal that we have available. Everything’s for sale for the right price, so we want to make sure that we see a good deal with good infrastructure, that we definitely put that in our database and we definitely keep track of that.

Ash Patel: Charlotte, earlier in this call, you mentioned a partner. How did that partner come into your business, and what is their role?

Charlotte Dunford: It’s interesting, because I was posting on a real estate forum, and it was asking a question on ”Are there any female investors here?” So I was 25 at the time, I was a young female investor. They were asking, and I say, “Well, here I am. I’m one.” I told my story of how I came to the United States when I was 16, and pretty much only with clothes on my back, and I became a US citizen this year. In that post, I kind of elaborated on my experience, and I didn’t really do much mobile home park at the time, only one or two… And that really attracted a lot of interest, including my business partner. It sparked his interest, and he reached out to me, messaged me, and said, “Hey, I saw your post. That’s interesting. Would love to talk more.” That’s when it started, we met, then we pretty much hit it off. I’m kind of a visionary on the team, he is the executor and operational person. We’re a good team, and we doubled our size in 2021. We have more team members on our team now.

Ash Patel: Charlotte, in terms of partnerships, for anybody looking to grow or scale their business, what’s your advice? Should they take on partners or just take on more employees and staff?

Charlotte Dunford: Well, I think you have to be careful who you do business with, and you have to pick your partner carefully. Taking on a partner is not a light job and is not a decision to be taken lightly… Because you’re essentially driving a ship, you’re picking another captain, co-pilot to fly a plane or drive the ship with you.

We’ve had experiences where business partners have not worked out, and it really can sour the partnership. I would suggest that partnerships are great, just be extremely careful who you do business with. If you’re not sure, I will start with employees first and staff before joining the partnership or picking a partnership, because that is a big decision. If you can’t see yourself working with this person for 10 years, and this person is not ethically reliable, you don’t like his personality or something – it’s very much like a marriage, don’t do it. But if you see the right fit, go for it. Just be very, very careful in selecting.

Ash Patel: Great advice. Charlotte, you self-manage all of these properties. How do you do that?

Charlotte Dunford: We manage them in-house, me and my partner, like a lot of people in mobile home parks, especially for small ones. You definitely want a team locally to watch over the property. We collect the rents and we bill invoices just like any other property management that would manage a single-family home or a multifamily property. We do that just like any other property manager; the only thing different we do is that we have a local watch people, either residents in the park to watch out for what’s going on, or local contractors that swing by and see what’s going on, for a small fee. One thing we don’t do is that we don’t give free rents for people to manage our property. We don’t think that’s a good practice, and we don’t do that. We are getting a service, we’re paying you for the service, but no one’s getting free rent. That’s something that we don’t do.

Break: [00:19:58][00:22:54]

Ash Patel: Help me understand that. I’ve got an office building where I have one tenant that does the common area cleaning, does the trash, snow removal, salts the sidewalks, and she gets free rent. Why is that not a good idea?

Charlotte Dunford: Well, it’s not a good idea for us, just because rents in mobile home parks are pretty low to start with. Waiving that rent – we don’t like starting this precedence of waiving someone’s rent for service. We would rather hire the right help to get on board than someone claiming that they’re not renting, because that is one lot gone. Especially for small to medium level mobile home parks, it’s not like those lots with 100 lots, or something. If you have 20 lots and one person is not paying, that’s a big chunk. That also means that this person is not going to pay future rent increases, which is a big part of the mobile home park, because there’s a lot of meat on the bones still left.

So one person not paying out of 20 lots, that’s a big chunk of your profit margin gone. And just because it’s small and it doesn’t really make sense economically to have this person to do a little bit job, a small job for a big chunk of rent… It just doesn’t make sense.

Ash Patel: That’s a great point, because I raised rents on the other office tenants, but the tenant that is not paying rent, I can’t really go back and say “Hey, I’m raising your rent. So from zero, we’re going to 100.”

Charlotte Dunford: Exactly. If it goes from zero to 250, it’s not just going to work well with them, and it just is not a good tradition to start.

Ash Patel: Yeah. Charlotte, with multifamily, 50 units is a huge pain point, because you can’t have a full-time leasing person, you can’t have a full-time maintenance person. What are your pain points with managing remote mobile home parks? And geographically, are these parks in different states, I would imagine?

Charlotte Dunford: Yes, they are. They’re in 10 different states.

Ash Patel: So what are your pain points in remotely managing these?

Charlotte Dunford: Being remote is actually not that big of a pain point, as long as you have a local maintenance team. I think the biggest pain point actually is not related to management, but to keep up with… We’ve onboarded a compliance officer to make sure that we’re complying with each state’s regulations, permitting, registration, and foreign registration, all that good stuff. The biggest thing is that you want to make sure that you keep up with each state’s requirements in reassuring your business. Because every state has a different requirement, and that needs some digging in. Some states are easier to work with and the others; you need your business license, you need your mobile home park permit, you need to register with the tax department, you need to register with their Department of Revenue, you need to go on their portal, you need to file annual reports depending on your business size, and everything. Every single state has different requirements, so that’s something you need really to keep up with. But I think as long as you have the right staffing or right infrastructure in place, that should help you with that.

Ash Patel: If somebody moves out of a mobile home, how do you remotely show that to a new tenant?

Charlotte Dunford: Because mobile homes are owned by tenants for the most part, and we usually put in their leases to have first-round of refusal for us, so we buy their home first. So once we buy it, we can arrange a sale, hire a local mobile home dealer, or a realtor to sell it to a new tenant. In that case, we don’t really want to own the home, we can have a new owner of the home occupy the lot, and they can pay the lot rent.

So as far as arranging the sale, it will be someone trusted in the park, or a local trusted team member who is either a contractor, or a tenant, or a realtor, or a mobile home dealer that we have dealt with before to show the home. We also have the lockbox and key, we also publish that either in the newspaper or online. So mobile home parks are really a different demographic, you have to really approach it differently.

Ash Patel: Yeah. I love that you have systems for everything. Charlotte, on the deals that you’ve sold, what was the cash-on-cash return for your investors?

Charlotte Dunford: We’re actually in the process of selling two. One is about to close, the other one hasn’t. Without the final closing, I can’t say. But the one that I did sell – that was just my own personal asset, so no investor involvement. The one that’s in the process, I can’t disclose that until everything has been said and done.

Ash Patel: Charlotte, what is your best real estate investing advice ever?

Charlotte Dunford: Great question. The best real estate investing advice is, I think my advice would be taking action, ironically. Because a lot of people have a lot of advice, to say that, “Be careful with this,” and that actual advice in managing a property. With me, if you don’t start taking action, if you have never invested before, if you don’t take action, and learn, and get the momentum going, and let the momentum carry forward, you won’t go far in real estate investing. So I would really just say learn a lot and take action.

Ash Patel: Charlotte, are you ready for the Best Ever lightning round?

Charlotte Dunford: Yes, I think so.

Ash Patel: Alright. Well, let’s do it. Charlotte, what’s the Best Ever book you’ve recently read?

Charlotte Dunford: It’s called The Ultimate Sales Machine.

Ash Patel: What was your big takeaway from that?

Charlotte Dunford: Have systems for everything, policies, and procedures. Train your staff with policies and procedures.

Ash Patel: Charlotte, what’s the Best Ever way you like to give back?

Charlotte Dunford: That’s the lightning round, huh? I’m supposed to be fast.

Ash Patel: No, take your time.

Charlotte Dunford: Give back through education, through mentoring.

Ash Patel: Okay. And Charlotte, how can the Best Ever listeners reach out to you?

Charlotte Dunford: You can reach me at our website at johnscreekcapital.com. There is a contact form and then I usually respond pretty quickly.

Ash Patel: Charlotte, thank you for taking time out of your day today to share your story. Coming here from China at 16 years old, going to college, getting your corporate job knowing there is more in store for you, getting a single-family house, a duplex, then entering into the mobile home space and absolutely crushing it. I applaud you and thank you again for sharing your story.

Charlotte Dunford: Thank you so much for having me. Again, I apologize for my sick voice but I normally sound like this. Thank you for listening.

Ash Patel: You sounded wonderful. Best Ever listeners, thank you so much for joining. Have a Best Ever day.

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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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.

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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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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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, 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.