JF1335: How To Wholesale Apartment Communities #SkillSetSunday with Luis Carrera
Luis has been on the show and has shared his Best Ever Advice in the past (link below). After the 2008 crash, he turned into a real estate investor. Now Luis is wholesaling apartments and has a very interesting strategy and tips to share with us today. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Luis Carrera Real Estate Background:
- Commercial wholesaler & real estate investor – Innovative Property Group
- Currently writing a book on a step by step guide to commercial wholesaling
- Currently raises capital for larger apartment complex purchases
- Started real estate in lease options to eventually doing wholesaling, and flipping
- Based in Raleigh, North Carolina
- Say hi to him at 973.902.7203
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, 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.
First off, I hope you’re having a Best Ever weekend. Because today is Sunday, we have a special segment for you, and the segment is Skillset Sunday. The skill we’re gonna be talking about is how to wholesale apartments. Interesting, right? We have a guest who wholesales seven apartments last year, and he’s gonna talk us through how to do it, and he’s also writing a book about it… How are you doing, Luis Carrera?
Luis Carrera: Hey, Joe. How’s everything? Thank you for having me again.
Joe Fairless: My pleasure, nice to have you back on the show. Luis said “again” because he was on episode #1024, titled “The 2008 crash turned him into a real estate investor.” You can learn more about him and his background and his best ever advice by listening to episode #1024… So we’re not gonna talk about that. We’re gonna talk about the nuts and bolts of how to wholesale apartments, but just a little bit more context about him, so you can be caught up to speed if you didn’t memorize what we talked about last time.
He is a commercial wholesaler and real estate investor. His company is Innovative Property Group. He’s based in Raleigh, North Carolina, and he is writing a book on how to wholesale apartments. He did seven last year. With that being said, well, how do we wholesale apartments?
Luis Carrera: Well, Joe, once you know the nuts and bolts about it, it’s not that hard, just because you have to target different properties, basically mainly under 80 units, but… Could I give you a quick back-story in regards to how I got to wholesaling apartments?
Joe Fairless: Please.
Luis Carrera: Perfect. Basically, I used to obviously do flips and wholesaling in my market in New Jersey, and now in North Carolina in the Raleigh market. I ran into different opportunities, and I always wanted to invest in apartment complexes, so much so that I did join a few groups and I actually did training with Dave Lindahl – I’m not sure if you know Dave Lindahl, Joe…?
Joe Fairless: Yup, yup.
Luis Carrera: So basically, I was in his program, studying, making offers, going back and forth with brokers and with private sellers… His program is basically — let’s just call it there’s a holy trinity; you have to hit certain markets in regards for it to be a home run deal. But the Dave Lindahl program, he makes you partner up with other investors. So… Great! I would love to partner up with other investors if it provides potential cashflow, but then working on his holy trinity, there was a lot of offers I made. I think I made about 60-65 offers, and I was laughed at all the time, just because they were so low, so they never had me in the run-in for each offer… So then I’m like, “Okay, let me change this up a bit…” Let me start getting more competitive on my offers.
Once I started doing that, I started getting more properties, at least with an accepted LOI (letter of intent). So with that letter of intent and essentially the contract down the road, I would take these offers to my investors. But then I would tell them, “Hey, I wanna jump in with you, and we could split the deal. You’re giving me 25, or 50, and you keep the rest.” Well, for most of these deals, all these investors said “Hey, Luis, this doesn’t work for us together.” I’m like, “What do you mean?” “Well, the margins are too tight. I could find this on my own, without you”, and I’m like “Oh, great.” So I’m scratching my head, I don’t know how to find a solution; I just keep on pounding the pavement and continue to figure out a way around it.
Joe Fairless: Just to pause there, so I’m making sure I’m tracking properly… You initially were making offers based on predetermined criteria that wasn’t competitive with the market, so you were getting laughed at. You then switched your approach, became a little bit more aggressive, then you started getting accepted LOI’s (letters of intent), and then you went to other investors to partner with them, so they brought the money and experience, I imagine, and they said “I don’t think so. Margins are too small. We could have found this on our own.”
Luis Carrera: Exactly. And it wasn’t only me. Every time I went to these multifamily events – it could be Dave Lindahl, it could be somebody else – everybody was having very similar issues, and I’m like “How could I bridge that gap between what we’re looking for and a home run? There has to be singles and doubles.” So it didn’t really quite occur to me until I found another deal which I brought to an investor… It was only a 26-unit deal. I’m like, “Alright, it’s first year returns of 7%, and then it goes up to 12% year five.” I provide it to the investor, and the investor again said “It doesn’t work for us, but it works for me”, and I’m like “What do you mean?” I’m like, “Look, you see this deal? I want it, because it’s a small complex, I could buy it cash, but I can’t split any profits with you [unintelligible [00:06:19].07] How about this – you see that assignment fee that’s written in there of 20k? I’ll give you that assignment fee, you just give me the deal.”
And that’s how I guess the light bulb went off, and I started saying to myself “Wow, so I don’t even have to jump on the deal, I have to just find good deals for investors to come in, and I’ll just assign them the deals to them, and they do most of the work when it comes to the due diligence. Bull’s eye.” So that was just groundbreaking for me. Then I started sharing this information, and there’s a lot of people that really wish they had, because then they would have gone after more deals, more singles and doubles. So that’s why I’m writing this book.
Joe Fairless: How do you decide what that assignment fee is?2
Luis Carrera: Well, typically it’s a percentage of the overall sale price. It’s kind of like a broker fee, so to speak, but you can’t really call it that, so we call it an assignment fee, and it’s anywhere from 1% to 5% of the overall sale price. So let’s just call it a five million dollar deal, 1% is what – 50k? So if we do 2%, that’s 100k. So if you find a good deal and you’re willing to work with other people, and willing to give it up just for some cash, then great. Move on to the next one that you could partner on with somebody else that has better margins.
That’s what I like about wholesaling apartment complexes, because yes, you might find less deals than typical wholesale deals, but there are more zeroes on the back of the assignment fee.
Joe Fairless: What’s the largest assignment fee you’ve gotten with an apartment deal.
Luis Carrera: 126k.
Joe Fairless: And what percent was that of the deal?
Luis Carrera: 3,5%.
Joe Fairless: Got it. And how did you approach the negotiation of getting 3,5%?
Luis Carrera: Well, I assumed it. [laughter] Yeah, exactly. So instead of offering my investors “Here’s the sale price, plus these fees for closing” and whatnot, I already figured it into my price and did the five-year analysis based on that. So they were happy with their returns… Yes, it was a large complex – over 180 units – and they moved forward. These were Chinese investors, obviously, but they had a 90-day due diligence period, which everything turned out pretty good, with not a lot of bumps in the road… Then the final [unintelligible [00:08:48].20] Actually, it wasn’t assigned; they bought the shares of the LLC off of me. That’s how we figured it into the deal.
So that was the biggest one, but on average it’s anywhere — because now I’ve decided to target under 100 units, because you could move them a lot quicker… So the assignments are anywhere from 20 to let’s just call it 50k each.
Joe Fairless: Under 100 units — you said 100, right?
Luis Carrera: Correct. Under 100 units are the best ones to move, because there’s just more investors with some cash that could actually purchase that alone. If you have to start doing syndications, then it becomes a little bit harder. If you wanna move a lot quicker, target from 20 to 100, and get them sold quickly. That’s what I try to do.
Joe Fairless: Have you assigned it to a group that syndicated it?
Luis Carrera: No, I haven’t assigned anything to a group that syndicated just because after that large deal I just focused on the smaller ones, because they’re a lot simpler to handle.
Joe Fairless: And that large deal – I did some math, and that’s 3.6 million dollars purchase price…?
Luis Carrera: Yes, it was around there. But they paid cash.
Joe Fairless: Okay, yeah. 3.5% of 3.6 million is 126k… So you did a 180-unit and it got you your biggest payday; I heard you, what you said – you move a lot quicker, and that sort of thing, but why not stick to the larger ones, because they got you your biggest payday?
Luis Carrera: I agree with you, but like I said, that’s a home run; there’s not many home runs. In the meantime, why don’t you start building your cash reserves, or making some deals with some smaller ones?
Joe Fairless: It makes sense.
Luis Carrera: So you make the smaller ones, you find the big one that you can jump in, and you put what you’ve made before into a larger one and you’re already a step ahead of the game.
Joe Fairless: How did you find that 180-unit?
Luis Carrera: It was on the market, through a broker… Marcus & Millichap.
Joe Fairless: It was on the market, you reached out to the broker, and then what do you tell the broker to get agreed upon LOI?
Luis Carrera: Well, basically for the most part, the brokers that you speak to, you just have to build some type of relationship with them. It doesn’t have to be much, but especially in certain areas, if you wanna do — like, in our area we have the triangle… From Raleigh, all the way down to Spartanburg, and Charleston; that’s the area I focus in. So I always reach out to these brokers to ask for — not deals, but “Hey, what do you have listed that I could go after?” and then they’ll start sending you things, and you just start submitting offers through an LOI. Eventually, one or the other gets approved. I would say before doing any of that, you should have at least a few investors that could purchase these properties, because if you go in without any help, then that’s where problems start, just because you can’t close.
So that’s another reason why I like targeting smaller units, because then I know I could move them a lot quicker than with the larger units.
Joe Fairless: Let’s say you reach out to me about another 180-unit deal. I am going to assume that I’m gonna sign an NDA (non-disclosure agreement), number one, before seeing the deal, and then number two, that you don’t have it under contract yet, but you just have an agreed-upon LOI with the terms. Is that accurate?
Luis Carrera: That is correct. I don’t market anything or shoot it out to any of my buyers without it having some firm footing, like an approved LOI. Once I have an approved LOI, I’ll start making phone calls or sending out a few emails just to get the ball rolling.
Joe Fairless: How do you know what terms to agree upon with the seller on the LOI? Because that could be a deal-breaker for a lot of investors, if you agree to certain things that they wouldn’t agree to in due diligence, or earnest money, or whatever else.
Luis Carrera: Well, I try to keep it as typical as possible. So let’s just say for example the LOI period would be 5-10 business days for the contract to be written up and approved, a 1% earnest money deposit, and then typically if I have the funds and I’m very confident in the deal, I’ll put it in escrow, and then I’ll find a buyer. But then typically what the buyer has to do is they’ll have to replace those funds, so to speak.
Joe Fairless: Then what do the broker and seller do once you assign it? Because they used to be working with one buyer, and now they’re working with another one.
Luis Carrera: Well, their interest is also like my interest, to get it moved… So as long as it closes, I haven’t had any issues, except for the 180 – the guy complained a bit. However, he got it sold, he got his commission…
Joe Fairless: [laughs] What guy, the broker?
Luis Carrera: Yes. They’re gonna scoff at it, but it is what it is. At the end of the day, if they move it, they’re happy. If you move it, you’re happy. And the terms are typical. Let’s just say the LOI will say “Look, 30 to 90 days due diligence period in order to review all the financials and inspect the property…” It just depends on the size. Typically, 60 to 90-day turnaround for a close. Two months for financing contingencies, typically. So I try to write everything in with some outs, so that the investor that’s coming in is satisfied with that.
Joe Fairless: Take us back to when the Marcus & Millichap broker called you up the first time, after you had made him aware of another group buying it. How did that conversation go?
Luis Carrera: Ar first he was upset, but then I told him “Look, I was gonna be on the deal with them… However, they noticed that their margins are gonna be too tight, and they just want me to walk. I’d be glad to take on another property from you.” So at the end of the day, he still sends me favorable deals before anybody else.
Joe Fairless: How did you meet that group of investors who ended up buying at 3.6 million in cash?
Luis Carrera: Well, they actually used to do flips with me. They provided funds for flipping properties, I did a pretty good job for them, and then eventually I convinced them to think bigger, and they had the finances to do a larger deal. Actually, they asked me “Hey, do you have any multifamilies available? Because we wanna jump in on the multifamily.” At first I said “No”, but then once I found what they were needing, then I actually targeted a few properties, made a few offers, got a couple accepted – one of them they didn’t like, the other one they did, and we moved forward.” But for the most part, it’s people I’ve worked with in the past, or that they know me from previous flips or other investments… Just because they need that peace of mind to know who they’re working with.
The beautiful thing about this is let’s just say you have a buyers list and you’ve sold a few properties, maybe you could do like a stepping stone of 20-40 units to one of these investors… And if you’ve worked with them in the past, they’re more agreeable to working with you in the future.
Joe Fairless: As far as the compensation goes, when you get to a certain level of property, say a 15 million dollar property, 1% would be 150k – would you cap out at, say, 50k or 75k or 100k if you were to find a larger property, or would you push for still 1% of the property purchase price?
Luis Carrera: I would actually push for that 1%, as long as the numbers make sense. If you see that the numbers don’t make sense, then yeah, maybe you could cut down your fee a bit… But if the numbers make sense, I would totally go for it. At 15 million dollars, you’re already talking to a price range of investors that could only purchase between 10 and 25 million, and then above that it’s typically institutional, so your pool of investors is a lot smaller.
Right now I’m not targeting those deals yet, because I know based on experience that anybody that goes in on that is typically a syndicated deal, or it’s just an institutional investor parking their money somewhere.
Joe Fairless: I would think the challenging part for you – well, one of the main challenging parts; I’m sure there’s many – is the timing… Because you’ve got to time it just right, where you have an agreed upon LOI, and then you assign it to another group before your contract period ends… So how do you approach that?
Luis Carrera: Well, for the most part I always put it under contract under my name — well, the company name, that I’ll use. Typically, when you do buy a property of this size, you’re gonna create an LLC for that property. Typically, most multifamily deals are under a separate LLC, so during the contract, yes, it’ll say my name, and then this contract is assignable based on an agreement, and once we create the LLC, before closing, we’ll just assign everything towards that LLC. I’ll have a fee written in the assignment sheet, or I’ll assign it to the corporation and through the operating agreement they already have saved and used, it’ll say that I have to sell my shares at the time of closing, as another separate transaction. So that’s typically what I do when it comes to assigning or purchasing the shares to a new LLC.
Joe Fairless: And what about the timing standpoint, where you have to find someone to then assign your shares to? When do you start talking to potential buyers of the property for you to assign?
Luis Carrera: Well, basically I’m always having a conversation with them beforehand, and I’ll keep them posted at several deals that I’m in the running for… But not until I get that LOI will I call them all, saying “Hey, I have this under LOI. Are you ready to move forward? Because you’ve been asking me for a couple months now that you’re looking for a 30-unit, or a 40-unit.” I keep everybody up to date on what I’m doing, and my progress. The more I do it, the more investors I have, which obviously I’ve been blessed because of that… But when you continue to speak to people, more and more people show up, that they have the need for a 20-unit, they have a need for a 50, or 60… Then you just ask them to write a proof of funds or any other projects you worked on, and they will certainly be glad to provide that, just because half of them or most of them don’t have the time to look for a deal.
I already have a group of investors – maybe up to 40 – that I have them targeted… “Okay, these five are between 20 and 30 units. These seven are between 30 and 40”, and I continuously speak to them in regards to these deals that I’m making offers on, just to get them excited so that when something does come out, they already know about it.
Joe Fairless: Of the seven that you assigned last year, how many were not broker-represented?
Luis Carrera: One. For the most part, the best deals are usually broker-represented.
Joe Fairless: How did you find that one deal that didn’t have a broker?
Luis Carrera: Oh, while doing the — because I still do a lot of wholesaling and flips on the side… It came through my yellow letters. I sent it to an owner of a tax default list. The property that I targeted was their primary residence, and they said “Look, I’m trying to sell my assets.” I think he lost his job… And one of the units was a 42-unit property, and he just needed to move it, and I was glad to offer him a solution. That was the only one, and that just happened through yellow letters.
Joe Fairless: Do you still do yellow letters, even though you’re focused on apartments now?
Luis Carrera: Yes.
Joe Fairless: Is that the primary way that you market your services to owners?
Luis Carrera: Yes, yellow letters, and from time to time postcards… But I prefer yellow letters.
Joe Fairless: Anything else that we should be aware of as it relates to wholesaling apartments?
Luis Carrera: Right now I think it’s the best time for wholesaling apartment complexes. Just because we’re at a good market, it’s tougher to find deals where anybody could jump in, just because the margins are tighter, and there’s a lot more people out in the market now… So as long as you find the buyers, you could find the deals. But continue to keep a list of buyers, just because everybody’s getting anxious out there. Margins are tighter… What you could get for 8% last year, this year is 6% or less. More people are jumping into deals, and the quickest way to sell a deal is through wholesaling. The tighter the property, your best bet is just to move it, and continue gaining those singles, so that once you find a good deal that you could jump on, and do it either yourself or with a couple other investors, then just take advantage of that.
Joe Fairless: On one of the large deals – say the $126,000 that you got for the 180-unit deal, did you consider taking, say, maybe 100k of that and then put 26k of that towards equity?
Luis Carrera: Well, no, because the investors didn’t want me in on it. Some of them are gonna be particular, some of them want you in or they want your experience… I would say if you wanna jump in on board, you could say “Look, just pay me a monthly fee, or give me 5%-10% and I’ll manage it for you.” You can jump in that way, with minimum risk. I like preaching that – the less risk, the better, because you never know what’s gonna happen around the corner.
Joe Fairless: Really interesting, I’m grateful that we caught up again and you talked about wholesaling apartments and gave us all these details… How can the Best Ever listeners get in touch with you?
Luis Carrera: They can get in touch with me at my page book on Facebook at www.facebook.com/ipgroupnc, or they could contact me personally – my phone number is 973-902-7203. It’s either through those two avenues, or through email. I could send you my email so you could put it on the notes.
Joe Fairless: You can either say it right now, or forever hold your peace.
Luis Carrera: Okay, well my email is email@example.com.
Joe Fairless: Sweet. Well, thank you for being on the show again. Some interesting things – one of the things was that you target 80 units or lower, because you can get an assignment fee and you get more volume that way, versus working with people who are syndicating… The one that you did have an exception, with the largest one, where they bought all cash, the 3.6 million dollars… Also, the terms that you do and just the overall approach and the inner workings of it. I’m glad that you talked to us about it, and for anyone who wants to wholesale apartments, you’ve got a book coming out too, right?
Luis Carrera: Yes, that’s correct.
Joe Fairless: Sweet.
Luis Carrera: We’re currently editing it.
Joe Fairless: Do you know the title of it?
Luis Carrera: It’s Apartments – How To Make Millions Off Wholesaling Apartments.
Joe Fairless: Cool, easy enough. Well, thank you again for being on the show. I hope you have a best ever weekend, and we’ll talk to you soon.
Luis Carrera: Thank you for having me, Joe.