JF1075: How to Reach Financial Freedom in 7 Years with Austin Fruechting
Like many other real estate investors, Austin was bit by the bug after reading Rich Dad Poor Dad. He got started and never looked back. Now Austin owns enough property to live off of the income the produce! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Austin Fruechting Real Estate Background:
-Full-time real estate investor First real estate investment was in 2010 (age 25) and is financially free at age 32
-Have everything from single family to two 12-unit buildings, 107 rental units across 49 properties
-Have some cash investors for bigger portfolios, my ownership equals 70 units 32 more units under contract right now
-Based in Kansas City, Missouri
-Say hi to him at www.goodlifeinten.com
-Best Ever Book: Thinking Fast and Slow
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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 of that fluffy stuff.
With us today, Austin Fruechting. How are you doing, Austin?
Austin Fruechting: I’m doing good, how are you doing, Joe?
Joe Fairless: I am doing well, and nice to have on the show. A little bit about Austin – he is a full-time real estate investor. He started in 2010 when he was 25 years old, and is now financially free, at 32 years old. He has a whole lot of stuff, here we go.
He’s had everything from single-family homes to two-units or to two 12-unit buildings; 107 rental units across 49 properties. He’s got some cash investors in his larger portfolios, and he has right now a 32-unit under contract. He’s based in Kansas City, Missouri. With that being said, Austin, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Austin Fruechting: Sure, absolutely. In early fall of 2009 I had a friend who told me “Hey, you really need to check out Rich Dad, Poor Dad by Robert Kiyosaki. I got into that, and as a lot of real estate investors, that was something that kind of changed my perspective on everything and kind of kicked everything off.
I ran a big spreadsheet to financial projections for different financial strategies, and real estate investing always came out the winner. After that I just purchased every book I could find and just spent the next many months just educating myself. Then I was able to close on my first property in June 2010.
Fast-forward, I would pick up some properties here and there; my favorite type of investment was purchasing something that was run down, fixing it up, getting it rented out at a much higher rental rate and then refinancing it so I could move on to the next one and keep doing stuff like that.
Over time, now I’m at 107 rental units across the 49 properties, as you said. In total, I only have $150,000 of my own personal cash left in any of these investments.
Joe Fairless: Wow. And what’s the portfolio worth?
Austin Fruechting: I would say the market-appraised value right now is approximately seven million.
Joe Fairless: Cool. Congratulations on that! How many of the 107 units do you have partners in?
Austin Fruechting: Most recently we picked up 80 rental units in the past little while, that I’ve brought in some larger cash investors in on. On one of them I put a lot of my own cash to get us to our goal of financial freedom, so I would have a larger ownership in that. In that one I have 70% on some of the others, and 50% when using all investor money.
Joe Fairless: When using all investor money, does that mean you didn’t have any of your own money in those deals?
Austin Fruechting: Correct. I will give them a 7% preferred return, and then on that particular portfolio 7% preferred return on their cash, and then everything above that, it’s 50/50.
Joe Fairless: How do you answer the question from an investor – and I know you got this question before, in that particular deal – “Well, you don’t have any of your money in the deal… If it’s not good enough for you, why is it good for me?”
Austin Fruechting: Well, actually I haven’t really had to answer that question, because I’ve been very selective on bringing investors along. I’ve had opportunities for investors over many years, but I would always just try to do it myself if I could. These were just large enough that I wasn’t able to do it myself, so I took it to them and some of the people that approached me over the time.
They were familiar enough with what I’ve done over the years that they didn’t have any question that if I was looking to do a deal that it was gonna be a solid deal.
Joe Fairless: If you hypothetically had been asked that question, how would you respond?
Austin Fruechting: I would say I’m still signing personal guarantees on all of these loans. With the bank that I’m working with, even though the loan’s on an LLC, I’m still signing personal guarantees on it, so that means I’m risking the entire rest of everything that I own and putting my name on it.
Joe Fairless: Plus the preferred return the investors get paid first, that’s be another good one. So you’re signing — are they recourse loans?
Austin Fruechting: Yes. I’ve been working with the same portfolio bank since the beginning, and they do some special things for me that are not standard and which allows me to bring less cash down; as part of their thing, they’re servicing all the investment loans in-house, so they still want the personal guarantees.
Joe Fairless: What bank are you using that’s local and what are some of the unique things that they’ve done to help you grow your portfolio?
Austin Fruechting: This is a bank in Leavenworth, Kansas, just a small community bank. They’ve been able to do a lot of packaging together on some properties that I was fixing up. I could get a certain percentage of the purchase, the fix-ups and the closing as long as their loan never exceeded 70% loan-to-value and as long as I was putting the minimum 10% down. So as opposed to having to put 20%-25% down, and then fix up in cash and then have a long seasoning period, we could roll it all into one thing, with as little as 10% down sometimes.
Joe Fairless: How did you come across them?
Austin Fruechting: That’s where I got started investing in rental property. I just started the connection with them; I knew them before I even bought my first one. When I went to buy my first one, they were one of the banks I talked to, and they’ve been great to work with, so I’ve just continued to grow with them.
Joe Fairless: You’ve got 32 units under contract right now… Can you tell us about that deal, the numbers and the projected returns, and if you have investors in it?
Austin Fruechting: This is another portfolio deal; it’s across eight properties. So there’s two duplexes, two 4-units, 12 town homes, and then one 8-unit building. We’re getting at just over a million dollars; currently, it’s pulling in $16,700 in rents, but it’s being rented under market. Within a short period of time, even without having to fix up much, we should be able to raise the rents to approximately 19k-20k, with very minimal upgrades.
If we do a higher level of finish on turning some of these units over, we can easily be looking at probably 22k/month in gross rents.
Joe Fairless: It’s interesting that you went straight to the upside potential that you’re realizing in this, and that goes back to what you said earlier about the types of properties that you like to buy – the run down ones; you fix them up, you rent out at a higher rate, then you refinance.
Is your plan to refinance after a certain period of time with this one, too?
Austin Fruechting: There’s a good chance we will, I’ll discuss that. I do have investors along with this, so I’ll discuss what they would prefer to do on that. This one is not as crucial to refinance, just because the cashflow is going to fund anything we need to do. If we go for the higher level finishes to capture that 22k in gross rents, as opposed to 19k-20k, then I think we would definitely look at refinancing in two or three years when that’s done, pulling all the cash, plus — I would say we’ll be able to pull out all our cash plus an extra 200k or so with the new value.
Joe Fairless: And how much (if any) of your own money in this one?
Austin Fruechting: This one will be another where I have not put in any of my own cash.
Joe Fairless: What type of structure do you have with investors?
Austin Fruechting: This one will probably be at a 50/50, and this one we will probably forego the preferred return, just because it’s gonna take a little more time on my part than just putting the deal together. It will take some more time on the back-end, as far as getting all the units turned over and helping manage that process.
Joe Fairless: What type of management do you have in place? Is it your own company?
Austin Fruechting: It’s actually a company that I started years ago. When I was first getting into real estate investing, I knew my goal was always to have a passive income, but I didn’t necessarily trust the property managers that were in the area at the time, so I decided to start my own company. Then I sold that back in 2013, and they’ve continued to manage my property since then.
Joe Fairless: You don’t have any ownership interest in it anymore?
Austin Fruechting: No, I just found people that I would trust with my properties and we worked out a good deal for both of us.
Joe Fairless: Okay, so you’ve had it for about three years, then you sold it.
Austin Fruechting: Yes.
Joe Fairless: Did you make money on it? What type of return did you get on that one?
Austin Fruechting: On that one I probably only broke even; I might have even lost a little bit of money, but I would have been close to a breakeven on everything it took to build that company, versus what I sold it on. But the more important thing is it was only three years; even if I lost a little bit of money on the property management company, I now have property managers I can trust going forward indefinitely.
Joe Fairless: With your project, the 32-unit, how long do you plan on having it and what are the overall project’s projected returns?
Austin Fruechting: Pretty much everything I do is a long-term buy and hold, like no real plans to sell. My investors always know [unintelligible [00:11:37].26] Again, I’ve been super selective on who I work with, and I’ve never actually even sought investors. They’ve come to me, and whenever I see that our interests do align, then we’ll talk more about moving forward.
I would say in two years the cashflow might support everything that needs to be done, so we might just take zero cashflow for the first two years, and then we’ll be at 22k in gross rents.
Joe Fairless: What happens if an investor wants out?
Austin Fruechting: We have a very solid LLC agreement that’s written up. I could buy them up, or one of my two investors or the other investor could buy them out. Or they could get a qualified offer for their share, and we would have [unintelligible [00:12:21].28] If they sell their share to another investor, the new investor doesn’t have any voting rights, because that’s not who we agreed to get into business with. So if they could sell it to somebody else that is okay with that, they’re allowed to do that.
Joe Fairless: Based on your experience as a real estate investor, what is your best real estate investing advice ever?
Austin Fruechting: I would say my best advice ever is that quick is costly. Looking for the quick answer is how you end up with the wrong math, or even the completely wrong investment strategy for you. You should always let the numbers make the decision, but more importantly, know the Why behind everything you do, from the smallest scale of why you should use X instead of Y for each expense factor on a particular property, all the way to the biggest scale of knowing why one investment path is better for your personal goals than another path.
Joe Fairless: Using that example, why you should use X instead of Y on an investment property – maybe it’s an improvement or something that you’ve done, can you give us a specific example of something that you used and why you used it?
Austin Fruechting: Well, a lot of times I see people wanting to just say “What percent should I add in for capital expenditures on a long-term buy and hold?” and that just doesn’t work. You can’t just throw in a percent for it, because if you’re looking at a 4-unit that’s maybe in this area, with rents of $750/unit, your capital expenditures are going to be probably a lot higher percentage on that than they would be a 40-unit over here, where you’re getting $1,200/month per unit. So just knowing why you’re putting every number into your calculations and analysis is crucial, or knowing that the vacancy is this percentage in this type of property in the area, or this percentage at this type of property in an area that’s maybe an A area, versus the C area that’s just a couple miles away.
Joe Fairless: Going back in time to when you got started, how did you come up with the money to buy your first property?
Austin Fruechting: I’ve gotten creative from the beginning… I didn’t have much liquid at the time, and I had read through a lot of Kiyosaki’s books, so I had set up lines of credit before I ever needed them, and I used a lot of that for the purchasing and fix-ups, and I’ve continued to use a lot from lines of credit along the way to do the work, and then I would refinance and pull the equity back out.
Joe Fairless: Was that with your bank that you did the line of credit initially?
Austin Fruechting: I’ve had a couple other banking relationships, and actually one of my lines of credit was at another bank, or other times our cars were paid off, so we just got a personal line of credit against the cars, and some other personal assets and things like that as well.
Joe Fairless: Can you tell us on that first deal with the line of credit how much did you borrow, what was the interest rate and what were the acquisition costs, and just give us the numbers on that first one? As best as you can remember…
Austin Fruechting: I don’t have them top of mind, but I can give another example on a 6-unit building that I bought. This was probably one of the best deals that I’ve done… I was able to purchase it for less than 60k. Initially I was able to get a loan for 120k total, but the working purchase total came to about 180k, so I pulled 40k from a line of credit; that was at 5%, and I could pay interest only. Then I had a lot of material and stuff like that, probably another 15k that I just put on a credit card, and I was able to refinance it at 195k within about four months after we fixed it up and put some tenants in.
So the 195k covered the 60k purchase, the 120k renovation, and put an extra $15,000 in my pocket.
Joe Fairless: Are you doing the work yourself?
Austin Fruechting: I act more as a project manager. I’ve hired pretty much everything out, most of the time. At the very beginning I did a little bit of the work myself, because I did work construction during college. Since then I realized the size of the projects I was doing, it was very much worth it to pay somebody else. I could get in and do this $120,000 project and we were done in six weeks. It would have taken me years.
Joe Fairless: Wow, that’s unique that you are not getting in there and swinging the hammer. You did initially, but you learned quickly that you wanted to scale, and you’re not the one doing it.
Austin Fruechting: Time is money. Every day additional, if I’m trying to do the work, that’s extra utilities, taxes, insurance, interests, payments – everything accumulates over time. If there’s a significant time saving in paying somebody else, you’ve gotta weigh that against what your time is worth, and your daily or weekly carrying cost on a property. Often times you’ll find out that it’s worth paying somebody else that can get it done in a quarter of the time, and you’ll probably come close to a breakeven on your carrying costs versus what you had to pay them.
Joe Fairless: A Best Ever listener is listening to this and he/she wants to essentially replicate what you’ve done, because you’ve got a seven million dollar portfolio, you’ve got only – $150,000 is a lot of money, but when you look at the portfolio size, it’s not a lot of money relative to what you control/own. So what would be something that you think they might spend time doing, but would be a complete waste of time when trying to replicate what you’re doing?
Austin Fruechting: That’s a good question.
Joe Fairless: Do you know where I got that from?
Austin Fruechting: I do not.
Joe Fairless: Tools of Titans, Tim Ferriss. [laughs]
Austin Fruechting: I haven’t read a lot of that book…
Joe Fairless: I’m gonna start asking this question more.
Austin Fruechting: I have it on my desk, sitting over here. I’ve started digging into it a little bit, but…
Joe Fairless: Yeah, yeah. When he talks about how to get better at a sport, he lists a bunch of questions, and this is one of the questions; I figured I’d pop it up, and you’re actually the first person I’ve asked this question to… [laughs] Welcome!
Austin Fruechting: Yeah, [unintelligible [00:18:50].11] Boy, I would say spend your time truly knowing the numbers, and if you’re gonna try to spend your time learning how to redo electrical or redo the plumbing, or things like that, if you’re gonna scale, you have to be the big picture guy and you have to be able to manage the little stuff. But if you’re spending your time just doing the little stuff, you’re spending your time trying to save a few pennies, when there’s thousands to be made if you spend your time on the big picture.
Joe Fairless: You have taken your own advice, that’s for sure. Are you ready for the Best Ever Lightning Round?
Austin Fruechting: Sure, let’s do it.
Joe Fairless: Alright. First, a quick word from our Best Ever partners.
Joe Fairless: Best ever book you’ve read?
Austin Fruechting: I would say Thinking, Fast And Slow. It’s an excellent study into how the mind works and how decisions are made, and it can help you make much better decisions and also know where the other people are coming from in their decision-making, which is a big advantage in real estate.
Joe Fairless: Best ever deal you’ve done that you haven’t talked about already?
Austin Fruechting: I’m loving this 32-unit deal I have under contract right here. We’re getting it in at about 1.6% monthly rents-to-purchase, but with minimal work we can be right at 2%. The returns on this are gonna be a killer.
Joe Fairless: What’s a mistake you’ve made on a transaction?
Austin Fruechting: On a transaction I can’t really say that I’ve made a big mistake; I’m such a numbers nerd that I put them through the ringer, run the numbers every which way I can. But as far as biggest mistake in real estate that I’ve made – at the beginning I was introducing myself as the owner of the property, instead of the property manager. It’s so much easier to treat it as a business if the relationship is the tenant to property manager instead of the tenant to owner… Since they know like “Oh, you’re the owner, you have full decision-making ability to grant me leniency, or do every little repair that I ask for, or whatever.”
I wasn’t really treating that part of it as a business, so I learned that lesson really quickly.
Joe Fairless: Best ever way you like to give back?
Austin Fruechting: I started up a little blog, Good Life In Ten. It’s just sharing what I’ve learned over the years and trying to help other people get started and go down the same path that I did.
Joe Fairless: And that’s GoodLifeInTen.com?
Austin Fruechting: Yes.
Joe Fairless: Cool.
Austin Fruechting: I got to this point within seven years, so I think anybody can in ten.
Joe Fairless: Cool. I’ll have that in the show notes page. What’s the best ever way the listeners can get in touch with you?
Austin Fruechting: I would say through the blog. You can contact me via e-mail there, and that’s GoodLifeInTen@gmail.com, or just checking out the stuff at the blog.
Joe Fairless: Austin, thank you for being on this show, for talking through how you’ve gone so quickly in a relatively short amount of time. Your main business model is buying the rundown, or properties that need to be fixed up; then you fix them up, you rent them out at a higher rental rate, then you refinance it. Tried and true approach that many investor before you and many in the future will do and have a lot of success doing.
How you have a relationship with a portfolio lender – a local one – in Leavenworth, Kansas, and how you approach your deals, the “quick is costly” approach, and knowing why you’re doing something instead of just doing it. Then when someone wants to replicate what you’re doing, don’t spend time on the micro-level stuff that you can hire someone for, but rather make sure that you’re a big picture person. Know how to be competent in the areas – I think you would agree with that, but you don’t have to be a skilled expert in every single facet; you’ll go freaking crazy if you try to do that.
Thanks for being on the show, Austin. I hope you have a best ever day. I really enjoyed it, and we’ll talk to you soon.
Austin Fruechting: Alright, sounds good. Thank you, Joe!
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