JF1036: Using Other People’s Money to Buy Properties
Vish wanted to purchase a 72 unit apartment complex but didn’t have enough of his own money for the down payment. Luckily he had a couple friends with more money than he had, who were willing to put up the rest of the money to purchase the property. They thought they had a great purchase, and he went on to build a $55,000,000 portfolio. Unfortunately, the entire portfolio had to be foreclosed on, Vish is nice enough to share with us his mistakes in hopes that we can learn from them.
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Vish Iyer Real Estate Background:
-Real estate investor, entrepreneur, and Hollywood Actor
-Owned over 200 properties and built and lost $55 million dollar portfolio in 3 years
-Started his real estate career with a 72 unit building, and is an active buyer in India
-Best selling author of the book Yoga and Love
-Based in Los Angeles, California
-Say hi to him at http://www.yogaandlove.com
-Best Ever Book: Autobiography of a Yogi
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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluff.
With us today – Vish Iyer. How are you doing, Vish?
Vish Iyer: Fantastic, Joe. How are you doing?
Joe Fairless: I am doing well, nice to have you on the show. Vish and I got connected via Bigger Pockets, and one of his first messages to me was that his first deal was a 72-unit and it was a disaster. Clearly, that piqued my curiosity, because he was willing to share that not only with me, but on an interview with the Best Ever listeners… So that’s what we’re gonna talk about, in addition to his other real estate ventures.
A little bit about Vish – he is a real estate investor, entrepreneur and Hollywood actor. He’s based in sunny Los Angeles, California. He started his real estate career with that 72-unit and is an active buyer in India. He’s the best-selling author of the book “Yoga and Love” and he’s owned over 200 properties. With that being said, Vish, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Vish Iyer: I come from a technology background; I have a masters in computer science and also another masters in business, but I started as a software engineer at Oracle (database software engineer). I did that for four years. I always knew I was gonna be in the movies, an actor in Hollywood, but I didn’t wanna be a struggling actor, so I started going to real estate clubs starting in 2003-2004. Once I quit my software engineering job, I got into real estate… That’s how my real estate career started.
Joe Fairless: Okay, so that’s when you started. What was your first property that you bought?
Vish Iyer: My first property – it was funny because I was looking at a house in Florida just for myself, because I’m a software engineer and I remember wanting to write my first earnest money check and it was $5,000 — my hands were shaking… [laughter] $5,000 for earnest money, I was like “Wow man, that’s a lot of money.” [laughs]
Then a couple of my friends with very deep pockets — one of them came over to me and said “Vish, I see that in the last few months you’ve been learning a lot about real estate” and he was diagnosed with terminal cancer; he had millions of dollars in his account, and then he said “Vish, your goal is to start to cash-flow, my goal is the same thing, and I want to heal… Why don’t we go together and get a large-scale commercial deal, so that you will get your cash flow and I will get mine?”
I said, “Wow… Okay, but I don’t have the same amount of money that you do”, but then he said he’s one of my closest friends, and I said “Okay.” So I put a little bit of my cash from my house; at the time I was living in San Diego. Then another gentleman with deep pockets, he came… So it was just three very close friends, and I’m sort of the brain.
Then we started looking for commercial properties starting in Texas. We [unintelligible [00:05:11].20] and then we said, “Okay, we can probably go for a two and a half, three million dollar deal, because that would give us a net cash flow of maybe 30k-40k if we do it right, and if we split it evenly, it would get us 10k each net. For me as a software engineer it was a good replacement income… So that was the strategy.
It took us 6-8 months to find a deal in Wichita, Kansas. It was a 72-unit which we closed for 2.4 million. That was the real big first deal.
Joe Fairless: That was your first real estate transaction.
Vish Iyer: That was my first real estate transaction.
Joe Fairless: Wow. We’re gonna get into the 72-unit mechanics and logistics, but what gave them the confidence to have you be the brains that’s leading the charge on this?
Vish Iyer: I think it was just friendship, and they’ve known me from many years; I come from a very scientific background, and they know that if I do something, I will research it really well. I’d been studying and going to clubs for so long… And plus, also a situation sort of demand. People put their trust in you, okay? Somebody is ill, so it’s not the right mindset, which is what I talk about in all the lessons…
It was a situation where, okay, he needed to get cash flow and I was in the same position. I was going to clubs and maybe I just came across really confident; I came across more confident than I really was, or maybe showed off more knowledge than I really had.
Joe Fairless: And you started going to real estate clubs in 2003… What year did you close on the deal in Wichita?
Vish Iyer: Well, we closed in 2005.
Joe Fairless: Okay, got it. Cool. Well, congratulations, you have closed on a 72-unit… Now what?!
Vish Iyer: [laughs] Yeah, we closed on it, and I was the brain behind it. I was managing with professional management. [unintelligible [00:07:06].27] Also, one other thing was we had another friend of ours who had just bought a three and a half million dollar 165-unit in Dallas, probably a few months prior.
My friends and I set up a meeting with him – he’s a close friend – and we started interviewing him. He painted this great picture: “Hey, it’s great cash flow, it’s a 165-unit in Dallas, and I paid three and a half million.” That gentleman was also a multi-millionaire, so we were like “Wow, this is great. This is easy. All we have to do is just buy and wait and get the cash flow coming in in the mail.” That was so naive. [laughs]
Joe Fairless: Yup.
Vish Iyer: I take most of the blame and the responsibility of making it sound easier than it really is. Then we started and the professional management took over. We were waiting for the first month, we did the analysis, we had a good commercial broker… And most of the times [unintelligible [00:08:10].24] but most of the time it ends up where the broker tells you “Hey, this is a good deal… You can make money on it. It’s an 8-cap; maybe it will go to a 10-cap at some point. Raise rents, do some work…” and those things start influencing you. You see a potential and you think you’ll maybe hold on to it for five years.
The first month it was breakeven, and I’m looking at the thing and the property management made more money than we did. I called them and I said, “Hey, guys, where is the positive cash flow?” [laughs] That’s when we realized “Oh my god…” Initially the expenses were at 30%, and now it’s 60% expenses. “Oh, that needs to be done. Oh, these [unintelligible [00:09:02].13] and we need to paint… And a bunch of people are not paying.” “Oh, okay. We understand.” “Okay, you need to understand there’s something called physical occupancy versus economic occupancy.” [laughs] That was a big wake-up call for the first deal. [unintelligible [00:09:22].20] and it’s like, “Wow, okay… Alright.”
Three months, four months and my friend is deteriorating in health as well. So there’s no money coming in, and I’m just flying, and by then we had bought another office complex in Austin for another one and a half million.
Joe Fairless: Oh, wow…
Vish Iyer: The next 18 months from 2005 to 2006 I built a 55 million dollar portfolio, myself, single-handedly. So I’m flying almost every week to one, and it was nine different states, by the way.
Joe Fairless: You had properties in nine different states?
Vish Iyer: Yes, sir.
Joe Fairless: Wow.
Vish Iyer: And 38 condos in Louisiana [unintelligible [00:09:59].22] just on and on. Then I’m doing a 55-acre development project in Boise and building a million dollar home in Boise, and then around 45 houses in Dallas, then a [unintelligible [00:10:12].12] and Texas, on and on… But things are not panning out, and my friend was calling [unintelligible [00:10:18].03] “Be patient, things will turn around.”
We’re thinking, “Oh, we were presented with the opportunity of a positive cash flow, but we’re not getting it.” Then after six months, eight months, things are getting really bad…
Joe Fairless: What’s “really bad” with the property? What do you mean by that?
Vish Iyer: What’s “really bad” with the property is the expenses – there was so much default maintenance, which we did not look at properly. We didn’t do enough due diligence. We just looked at the numbers, and there was so much default maintenance… We said, “Okay…” Now all these things are popping up – pipes are breaking in Wichita, Kansas; it’s cold. And a number of expenses which we did not account for, which we had no clue how to manage, neither did we have set up separate funds for maintenance. We had no strategy.
We just said, “Okay, we’re gonna get this, and this is gonna be a cash cow and start producing money.” Then I said, “Alright…” My friend passes away; it was a very tough situation. Then I go and fire the management, because it’s been eight months and we have not made any money.
I go fire the management — it’s the worst thing you can do…
Joe Fairless: Why?
Vish Iyer: Because I said “Okay, the management is making 8% on the total collection, plus they’re making for all these expenses, they’re making all sorts of money.” Then I said, “Alright, let me hire an in-house manager and give her an apartment.” The strategy would be I’ll get a husband and wife [unintelligible [00:11:50].29] so he can do the work; I’ll give her a salary [unintelligible [00:11:56].22] with an apartment, so that I can save all that money and make a positive cash flow. That was my strategy.
Joe Fairless: Yeah, okay. Logical.
Vish Iyer: Right, logical. I went to the [unintelligible [00:12:07].15] I found somebody; I hired her, got her in. She used to manage a hotel, but then the building department came and put code violations on — there was a bunch of fourplexes and sixplexes, and the property was just not one big 72-unit.
Joe Fairless: Okay.
Vish Iyer: And they started [unintelligible [00:12:27].19] code violation. Then I heard that people are doing drugs, and there was a meth lab in one of the apartments. This is despite a lot of control, even though I had a property manager living there… And I didn’t know what to do. We had no clue how to manage this, we didn’t have enough money to put in because my friend passed away and there was no cash coming in. It just spiraled out of control, and we had to let it go.
Joe Fairless: What was the area like?
Vish Iyer: The area was good, it was right opposite to the air base. They call it air base in Wichita. So we were expecting all the officers, the air force personnel to rent the property. I would call it a C area, C+, and the property itself was probably a C, C- when we bought it. But poor management, bad strategy, not enough money for maintenance… It just killed it. We couldn’t handle the expenses; no strategy, nothing.
Coming to think of it right now, I would have had a plan if I had known. Now when I look at a property, same deal, I’m so thorough with my inspection that I know exactly what it needs for rehab, and I put funds aside… “Hey, it’s gonna cost 50k, and I’m gonna put 10% or 15% in this thing [unintelligible [00:13:47].00] to cover the expenses. I make sure all the mechanics are right. Once you control it that way, then you know. It can’t surprise you.
Joe Fairless: Your two friends in the deal – one of them passed away; the other was still in the deal, correct?
Vish Iyer: Yes.
Joe Fairless: And how much of your money did you put into the deal?
Vish Iyer: I put probably 100k.
Joe Fairless: And how much did your other two partners put in the deal?
Vish Iyer: They put 200k each. It was a 500k down payment.
Joe Fairless: Okay. And the 200k for your friend who was still alive – is he still alive?
Vish Iyer: You mean the other friend?
Joe Fairless: Yeah, your other friend.
Vish Iyer: Yeah.
Joe Fairless: Okay, so he’s still alive… What was the conversation like with him? Because I imagine he lost 200k and you lost 100k – is that correct?
Vish Iyer: Yes.
Joe Fairless: What was that conversation like?
Vish Iyer: Really bad. That’s another lesson. I don’t know about you, but I have a tendency at the time if something was bad not to present it as a bad situation. I’m trying to sugarcoat it because I’m dealing with a widow, and she doesn’t know anything; she just lost her husband, and one of her big investments — nothing is going well, plus the 45 houses in Dallas are not getting rented on time… That’s another 3-4 million dollars in carrying mortgages.
We were having probably around $100,000-$200,000 in mortgage payments per month. So it’s not just one property, you’re dealing with a whole portfolio of properties here… Probably 25-30 million with just this group. Then I had another 25 million dollars with other partners.
So to answer your question – it was a really bad conversation, and I am just giving them positive hope that next month things will get better, the next month things will get better, when things are not. I just got nasty e-mails, nasty phone calls because I did not set right expectations. I did not say “Hey, things are sinking.” I just didn’t have the guts to tell somebody – my own friend – look them in the eye and say “I’m sorry, I’m losing your money, and your money is gone.” I just didn’t have the guts to say that.
It’s a very, very painful lesson, which is what lead me to write my book, which eventually became a best-seller. I took three and a half, four years to write “Yoga and Love.” Learning that fundamentally, whether it’s relationships or any business — it’s all about relationships. It’s all about how you take care of your relationships. Yeah, there are business lessons to learn, but fundamentally it’s all about how you show up as a person [unintelligible [00:16:29].05] your commitment.
I just didn’t have the commitment. I don’t know why; I was just trying to be the nice guy and be positive. Instead, I could have just said, “Hey guys, you’re putting all this money… I’m a novice myself, and we could make mistakes and you could lose all your money. Are you okay with that?”
Joe Fairless: How would you characterize your relationship with your friend and your friend’s widow?
Vish Iyer: [unintelligible [00:16:56].20] We don’t have a relationship now.
Joe Fairless: And what about your other friend?
Vish Iyer: No, both of them. Neither of them. And I take full responsibility for the unpleasantness, for losing their money. I lost their money. It was a total loss of over 10 million dollars.
Joe Fairless: Yeah, because we were just talking about the 72-unit portfolio, but as you said, it goes larger than that.
Vish Iyer: Yeah, that was just one piece. [laughs]
Joe Fairless: Yeah, yeah. Well, I know you’ve reflected and you’ve mentioned a lot of the lessons, and I have some bolded — my notes… But just to hear your take on the summary of the overall lessons learned — first off, for the whole portfolio, the 55 million… Did it all get foreclosed on?
Vish Iyer: Yeah. At least what I know. Then some of the properties I just gave it to them. I don’t know what happened.
Joe Fairless: So what are the lessons learned, the main takeaways for you personally?
Vish Iyer: Personally, the first thing I would say is set right expectations. Be honest about bad news, that’s number one. Number two, don’t be greedy. In real estate there’s so many instances where money comes easy… Always have it checked. That can be offset by having a clear plan, like [unintelligible [00:18:17].23] Have a clear financial plan. Have a weekly plan, a monthly plan, a six-month plan, a yearly plan, a five-year plan. And find a mentor. Never do anything without a mentor.
Now I’m friends with several really successful investors in Southern California who are my friends now, and plus I’m in the motivational industry; Jack Canfield, Marianne Williamson, Michael Beckwith… In the business world, in real estate, it’s all about thinking long-term. Anything of value takes time to build. In the motivation industry [unintelligible [00:18:56].14] is look for contentment. Understand what contentment is. I’ve already spoken to you about my [unintelligible [00:19:04].21] some very successful entrepreneurs now, and just because they didn’t understand what contentment is — they have a lot of money, but they don’t know how to enjoy it. [laughs]
Joe Fairless: Yeah.
Vish Iyer: They’re super successful. Those are the lessons, sir.
Joe Fairless: We’re so fortunate to have you on the show and to share these lessons learned, and thank you so much for that. I’m gonna ask you the question I ask every guest, and it might be repetitive, but if so, that’s okay – it reinforces the message you’ve already mentioned… What is your best real estate investing advice ever?
Vish Iyer: Actually, it’s take care of your relationships. Real estate is not about, it’s about personal connections.
Joe Fairless: I agree with you whole-heartedly. Are you ready for the Best Ever Lightning Round?
Vish Iyer: Yes, sir.
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: What’s the best ever book you’ve read?
Vish Iyer: Autobiography of a Yogi.
Joe Fairless: Best ever deal you’ve done?
Vish Iyer: I’ve just bought a six-unit in Chicago. I bought it for $135,000, I put around 35k into it; it’s appraising for close to 350k, and it makes close to 6k/month.
Joe Fairless: Congrats on that. There is the cash flow… Now we’re talking! [laughter] What’s the best ever way you like to give back?
Vish Iyer: It is your time. Time and being present. I teach a lot of meditation to school kids [unintelligible [00:21:29].22] Time and being present.
Joe Fairless: And where can the Best Ever listeners get in touch with you?
Vish Iyer: You can go to my site, www.yogaandlove.com. You can e-mail me at Vish@YogaandLove.com. My office will respond. If you want coaching, I’m available for that as well.
Joe Fairless: Excellent. Well, Vish, thank you for being on the show. The lessons learned along the way, as you so succinctly summarized – one, set expectations and be honest about bad news; two, don’t be greedy; three, have a clear financial plan for your company and each property; four, find a mentor; five, think long-term – it especially holds true with real estate; six, all along the way we’ve got to look for contentment, because regardless of how much money we have, if we’re not content with our status in the journey – because we certainly spend a lot more time on the journey than on the destination – then we’re gonna be fighting an uphill battle the whole time.
Thanks for being on the show. I hope you have a best ever day. I appreciate you sharing your candid story for the Best Ever listeners and myself to learn from, and we’ll talk to you soon.
Vish Iyer: Thank you, Joe. It was a pleasure.
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