JF1134: Below Market Rents Make More Money In The Long Run with Chris Heller
Chris is an agent and investor, and uses all his available resources and knowledge to succeed in the San Diego market. From REO’s to MLS listed houses, he’ll look at anything that makes money. He has a unique strategy for pricing his rental units, and it seems to work really well. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Chris Heller Real Estate Background:
-Owner of The Heller Real Estate Group Inc.
-Former CEO Keller Williams Realty International, Keller Williams Regional OP, Multiple Market Center OP.
-Sold over 3600 homes in his real estate career His team sells over 150 homes every year Based in San Diego, California
-Say hi to him at http://www.hellerthehomeseller.com/
-Best Ever Book: The Psychology of Winning
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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 fluff. With us today, Chris Heller. How are you doing, Chris?
Chris Heller: I’m doing great! I’m happy to be here.
Joe Fairless: Nice to have you on the show! A little bit about Chris – he is the owner of the Heller Real Estate Group. He sold over 3,600 homes in his real estate career; former CEO of Keller Williams Realty International, and a Keller Williams Regional OP, and Multiple Market Center OP. What does OP stand for?
Chris Heller: Operating Partner. It means that I own the majority of a market center, which is what we call an office or a region of the company.
Joe Fairless: Okay, got it. Based in sunny San Diego, California. With that being said, Chris, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Chris Heller: Sure. I got my license when I was 20 years old, in 1983; I was a sophomore in college. Real estate has been my one and only career. I still have a team in San Diego, the home seller team that’s been selling homes for all these years. We’ll sell 160-170 homes again this year.
The last several years I’ve spent my time working with Keller Williams at our headquarters, helping run the company. I’m no longer doing that; now I’m focused on building my businesses, but also looking at new opportunities and new ways of impacting the real estate industry.
Joe Fairless: So what’s the primary way you make money right now?
Chris Heller: The primary way I make money is off my real estate businesses, my brokerages, my team, and my real estate investments.
Joe Fairless: Let’s talk about those investments – what type of properties do you invest in.
Chris Heller: My philosophy has always been about the same, and that is they’re opportunity purchases. I’m just always looking for the opportunity to acquire properties at a good deal, that make sense, that are quality properties and make great rentals. They’re anything from single-family homes to condos to duplexes… It’s not so much the type of property as it is the opportunity and the type of deal.
Joe Fairless: That’s interesting. What would be the type of opportunity? If you could maybe give a specific example, that would help clear up the ambiguity of opportunity purchases.
Chris Heller: Sure. When we’re talking to as many consumers as we talk to every year, there’s always opportunities that come up. There’s people that say “Hey, look, I just want this for my home” or “As long as you can get me this, I’ll sell the home.” Or “Will you just buy my home? I need it quick, I don’t wanna put it on the market (for whatever reason). As long as I can get this, it accomplishes my goals and I’m happy.”
Many of those are good opportunities, and as long as the client understands that they’re foregoing additional potential profits by not marketing the property and exposing it to the whole market, and they’re good with that and willing to sign off on that, then it becomes a win/win situation.
Joe Fairless: Will you give us an example of a property you’ve bought in that scenario?
Chris Heller: Sure. I actually have a couple that I’m looking at right now – two different ones – in North County and San Diego. In both cases, the seller has said “Hey, can you just buy the property for this?” So we worked out the price — sometimes it’s what they want, because what they want is fair; sometimes what they want won’t work, because I have to factor in what I might need to do to the property to remarket it or to turn it into a rental… So I disclose that to him, and if they’re good with that, then I move forward and buy the property.
There was one I bought at the end of last year, which was a property near the beach, and [unintelligible [00:04:43].21] 1.1 million dollar property, and that was a really fair price. I knew I’d need to put in some money to fix it up, which I did… So she got what she wanted, I got the property, I fixed it up, I rented the property very quickly for $6,000/month, and it’s a great quality property for a long-term hold.
I have other opportunities — depending on the market… In a down market they come many times in the form of foreclosures or short sales in down markets; we took advantage of that and bought several shortsales in the last down market… There were some foreclosures, and those are properties that we were able to buy.
I’ll give you a couple of quick examples. One in Carlsbad, a townhome for $225,000 in 2011 that now is selling for $500,000. It had positive cashflow from day one. And I have some foreclosures I bought in the ’90s, some of them are paid off now… I bought them so long ago.
When I say opportunity purchases, those are the types of opportunities.
Joe Fairless: Back to that one example though, the 1.1 million dollar property which was, as you said, a fair price, and it rents for 6k… You said it was a good long-term hold – I think that’s the phrasing you used. Just from a cashflow standpoint, from a high level… I just look at the numbers, and for any property I just take the rent, divide it by the all-in price, and then you try and be somewhere between 1% and 2%. With this one it’s 0,5%, so are you able to cash-flow on that?
Chris Heller: That one’s about a breakeven. When I bought that in December, the loan I got on it was 3,25%, and that was with I think 25% down. So that one breaks even. But I can put that property on the market right now and probably sell it for 1.5. So I factor in the fact that I was also buying something at a really good price. I don’t plan to sell that, because it happens to be in a neighborhood and on a street that I really like and I have some other property in.
I have four kids that are becoming grown-ups, and someday some of these properties might be opportunities for them.
Joe Fairless: How do you manage your portfolio?
Chris Heller: I assume you mean literally manage, as in property management?
Joe Fairless: That’s correct, yes.
Chris Heller: So I have a girl on my team that handles the properties for me, and she’s been managing properties for 20 years for me and for some of my clients… So she does that. If I didn’t have her, I would hire someone to do it. It’s not worth the headache. If someone has one or two properties, that’s one thing, but when you get past that, it makes more sense to pay someone who’s really good at doing it, so you don’t have to deal with the hassle and the headache.
Joe Fairless: What’s been a challenging investment property that you’ve purchased? Can you tell us a story about that?
Chris Heller: Most of them have not been challenging for two reasons. Number one, I make sure they’re quality properties in quality areas. And with that, it’s easier to get quality tenants. The other reason that most of them have not been a challenge is that we really do a great job at not only screening the prospective tenant, but making sure that we price them in a way where we have a lot of demand for the property; it allows us to be really selective, and the people that rent them know that they’re getting a good deal.
Now, the reality of it is they may be paying $100 or $200 a month less than the market, but that’s a big deal for them, and if it allows me to get a much higher quality tenant, I’ll take that every day.
But to answer your question, if there was one — I had a fourplex in the ocean-side that was in a low-income area… These were four little studio bungalows, and three of them were great tenants, one of them turned out to be a guy on drugs that was a challenge constantly, and the eviction was a challenge, and all those things. But with all the properties I’ve owned over all these years, I’d have to think really hard about one that was a challenge. And in retrospect, it wasn’t that big of a challenge.
Joe Fairless: Yeah, that’s pretty good. I haven’t thought of it that way, how you described where you priced it so that you have a lot of demand – not necessarily with the primary objective of getting a quick tenant in there, but the primary objective of actually having a lot of people to select from, because ultimately we lose the most amount of our money (typically) on tenant turnover when we have an investment property. So I suspect, since they know they’re getting a good deal, they are likely to stay longer than what a tenant would if they were paying the market rate or above.
Chris Heller: Yeah, you hit the nail on the head. The losses are in the vacancy between tenant turnovers. I always do everything we can to minimize that. I’d rather have people immediately wanting to move in and take the properties…
As an example, I closed on a new construction in out of state, and put that property up for rent, and within three days had someone who wanted it. This was last week, actually… And they wanted it as of 1st August. Because I knew I had priced it so well, I was able to say “I don’t wanna wait until 1st August. I think I’ll have someone else take it before then”, and they said “Okay, we’ll take it 15th July.” So that’s a good way to minimize the downtime… Because if you have a property that rents for 2k or 3k/month and it sits for one month, you’re better off offering it out for $100 or $200/month less and gain it then quicker [unintelligible [00:10:29].13]
Joe Fairless: What’s been the best-performing deal that you’ve done, from an investment property standpoint?
Chris Heller: There’s different ways to measure performance. There’s just the black and white of it – the return… But another way to measure performance is on the amount of hassles or non-hassles, or turnover… I have one property that I bought in 1993 that has the same tenant in it from 1993. They’ve lived there all of those years, and they’ve done as many or more improvements to the property as I have, and treated it like their own house. In my mind, that’s a really well-performing investment.
I typically take a long-term approach. There’s the occasional ones that we’ll buy specifically for the purpose of turning or flipping, but most of them are with the idea of a long-term hold. In Southern California, if you buy them right, [unintelligible [00:11:26].17] like I mentioned that townhome that I bought in 2011 or 2012 that’s more than doubled in value, or some single-family [unintelligible [00:11:34].29] that I purchased in that same time period and that have doubled in value – by any measure, those would all be considered well-performing.
Joe Fairless: I hadn’t thought of it that way, when you defined performance in different ways, like one of them is the non-hassles. The 1993 property – is that a single-family house?
Chris Heller: Yes.
Joe Fairless: Okay. Did you inherit that tenant, or was that someone that you brought in?
Chris Heller: No, it was a property I bought as a foreclosure and I had to remodel it. It had been owned by a lady that had a lot of cats, maybe hundreds… [laughs] And we had to completely gut it and sterilize it and everything else. Then we put it on the market, we got the tenant and they’ve stayed over since.
Joe Fairless: What is your best real estate investing advice ever?
Chris Heller: The advice that I’ve gotten – that’s how wealth was created in real estate. As real estate professionals, we make a living off our commissions, but we created wealth through our investments. The advice that I’d give myself or if I’m asked for it by others is to make sure you get a great buy. There’s no shortage of great properties, but there are not always great buys. And not being emotional about it – be objective, and make sure that… We’ve all heard the old adage, “You make your money going into the deal, not coming out of the deal. You make your money on the acquisition, not on the sale.” I believe that to be accurate. So the advice is, again, to make sure it’s a good buy and that it makes sense.
The only time that I ever bought properties that weren’t at least a breakeven were when we were in a rapidly appreciating market and I knew that the market was appreciating so fast that that would more than overcome any negative cashflow I had. But as soon as I’d see that the market is starting to change, those would be the properties I would always sell. By 2005 I could see and sense that the market was gonna shift, and I looked at all the properties I owned at that stage and asked myself which ones am I not willing to carry for the next ten years? And there were four or five that I had negative cashflow or would be problematic for ten years, or didn’t have good mortgages, or whatever the case might have been… So in 2005 those properties were sold.
Joe Fairless: What would you look for now to identify a shift in the market, and do you see one?
Chris Heller: I’ve always looked at the same thing, and that is simply supply and demand. In any given market, I’m looking at how many homes are for sale, how many went pending in the previous 30 days… And when you’re looking at that over time, month after month after month, you start to see trends. You start to see demand starting to wane, or supply starting to grow, and those are the indicators of eventually prices changing and the market shifting. So that’s what I look at.
I think your second question was when do I see the market shifting…?
Joe Fairless: Yeah, do you see it shifting now?
Chris Heller: The market always shifts in a finite period of time, say a three, or four, or five year period of time. There might be a general trajectory – there might be an upward trajectory or a downward trajectory, but even during those upward trends or those downward trends, there’s times where it flattens out, or speeds up, or slows down, and that’s [unintelligible [00:14:52].04]. What most people talk about when they talk about a shifting market is the general trend of the market, the complete market trending in a different direction. So we haven’t seen that start to happen yet, but we’re closer to that happening than not. The only time you know you’re at the top of the market is when prices start going down; that’s the only true indicator.
The only true indicator of being at the bottom of the market is when you see prices going up, and you know that was the bottom. So it’s impossible to time it, but you can see when it’s starting to happen and watch the trajectory or the trend start to shift and change. I don’t think for the remainder of 2017 the market is gonna change much from where it is right now. 2018 and 2019 I think it’s going to slow down, or inventory is gonna grow and the rate of sales will start to drop off – that’s when it would happen, but there’s no guarantee that that will happen. It’s a different world we live in now, and there’s different factors that impact the market… And the demographics are changing, and we have to take into account those demographics. If they weren’t changing, we’d probably start to see the market already shifting, but there’s a big group of buyers that over the next 3-5 years will be entering the market that could prolong a strong market.
Joe Fairless: Are you ready for the Best Ever Lightning Round?
Chris Heller: Sure.
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: Chris, what’s the best ever book you’ve read?
Chris Heller: It’s funny, I just re-read it again and gave it to my daughter to read – possibly The Psychology Of Winning would be one of the best.
Joe Fairless: Best ever deal you’ve done that you haven’t mentioned?
Chris Heller: Personal deal?
Joe Fairless: Yup.
Chris Heller: I was cold-calling out of area owners, I talked to a guy in Chicago that owned a house in my marketplace; he said, “Yeah, I actually was just thinking I wanted to sell it, I just had an appraisal done. It appraised for this”, and I said “Great, I’ll buy it for that.” It turned out to be a great investment.
Joe Fairless: Simple enough. How many calls did you have to do to get to that point?
Chris Heller: I called for 29 years, so… [laughter]
Joe Fairless: Hundreds…
Chris Heller: Thousands of calls.
Joe Fairless: Thousands, yes. [laughs] What’s a mistake you’ve made on a transaction?
Chris Heller: Hundreds and thousands of them. Everything, from representing that there was a refrigerator included when there wasn’t, to — there’s so many, I probably try to block them out. I know there’s been some bigger ones, and I would definitely focus on minimizing them, but things still happen. I don’t know, fortunately there haven’t been a lot of big ones; it was a lot of little ones.
Joe Fairless: On just the refrigerator example, what’s the solution, when you say there’s a refrigerator included but there’s not?
Chris Heller: I always take responsibilities for our mistakes and own them. If I have to buy a refrigerator because that’s what the expectation was, that’s how the deal was represented, then I’m buying a refrigerator.
Joe Fairless: Best ever way you like to give back?
Chris Heller: In every transaction there’s an opportunity to give back, and that is the quality of the service and the experience that it provided the client. So that’s one way that I always give back… And the other agents that are involved, too – making sure that they have the best experience possible. But I’ve also done lots of things like making donations for every home I’ve sold, at certain times, in certain years, to different causes, whether it’s a Boys & Girls club, or different charities.
Joe Fairless: How can the Best Ever listeners either get in touch with you or learn more about your company?
Chris Heller: Our website is HellerTheHomeSeller.com, or call us toll-free at 800-800-2978. And lastly, they can e-mail me at Chris@HellerTheHomeSeller.com.
Joe Fairless: Chris, thank you for being on the show and talking about your opportunity-focused investing mindset, where the purchases you’ve made have been opportunity purchases – number one. The second thing that stood out is what we talked about earlier, where you price your rentals so that there’s a lot of demand, therefore you can be more selective and the tenant or resident knows that they’re getting a good deal, therefore it’s likely they will stay longer and save you more money in the long run. And the third thing that stood out – among many others – is when I asked you about performance… You mentioned returns, but then you also talked about different ways to analyze deals, and one of them is how much of a non-hassle they are, and you referenced the 1993 tenant who has been there since… Well, since 1993.
Thanks for being on the show, thanks for talking through these things among others. I hope you have a best ever day, and we’ll talk to you soon.
Chris Heller: Joe, thank you. The pleasure is all mine.