JF1582: Scaling A Single Family Investing Biz To 7,000 Deals In 14 Years with Lee Kearney
Lee has been a real estate investor for well over a decade. He prefers to invest in single family homes, and has bought and sold over 7,000 properties since 2004. As he says, he’s done everything you can do in the single family space. If you want to learn how to scale to a huge investing business, listen to this episode and take notes. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Lee Kearney Real Estate Background:
- Single family home real estate investor
- Since 2004, he has bought/sold 7,000+ properties, and is known as the expert in leveraging real estate market cycles
- Based in Tampa, FL
- Say hi to him at http://www.spincompanies.com/
- Best Ever Book: Tools of Titans by Tim Ferris
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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. With us today, Lee Kearney. How are you doing, Lee?
Lee Kearney: Doing great. How about yourself?
Joe Fairless: I am doing well, and nice to have you on the show. A little bit about Lee – he has since 2004 bought and sold over 7,000 properties. He has focused on single-family homes. He’s based in Tampa, Florida, and his company is Spin Companies. You can go to the website, SpinCompanies.com. With that being said, Lee, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Lee Kearney: Absolutely. I’ve been doing this, as you’ve mentioned, almost 15 years. I have done absolutely everything in the single-family space – I’ve dabbled in commercial, I’ve dabbled in multifamily, but I really focused and honed my skills in single-family. At my high point I owned about 30 million dollars worth of rentals, over 300 doors, and I bought and sold about 7,500 units, over half a billion.
I started off in 2003, actually, by accident, and flipped my first condo. I bought it, it got broken into, I hated it, stole it, and ended up making 35k. That’s when the light bulb went off that “Okay, there’s something here. I made more money flipping this property by mistake than what I did in my job.” I moved to California, did a couple flips out there… Again, found a mentor right at the beginning, and really tried to understand what the business was, how to fix up the house, where to buy, what to buy, and really on those first two houses I would say I made every mistake known to man on those two properties… And I still made money, because I was in an upward market.
I moved to Florida in 2005, and began buying foreclosures. I didn’t have a clue what a foreclosure was; I had to ask a lot of questions, I found some people that really were knowledgeable in the space, in my circle… Just asking lots and lots of questions. And that’s what I tell everybody out there – ask lots of questions, even if they seem stupid. They’re not stupid if you don’t know.
So I bought and sold foreclosures for a couple years, and about midway through 2007 I realized I was starting to lose money. Then I started to lose money on every single property. What had happened – in a two-year period I had made and lost two million bucks. I was back to square one.
In 2008 I had to reinvent myself, learning a couple big lessons. One, there’s always money in real estate, and two, you’ve gotta figure out what side of the trade to be one, which is the right side. Once I learned that that was the rules in engagement, I started wholesaling, because that was the right side of the trade with a lot of market risk; I made almost a million bucks my first year, just wholesaling houses, and I’ve never looked back since then.
Again, we’re talking thousands of assets flipped since then, done several thousand fix and flips… Really, I’ve done everything. I’ve come across every scenario that you can see in real estate, bought and sold notes, too; I’ve been on both sides of the transaction as far as being the borrower, being the lender, and I’ve really got a good understanding of how to make money in real estate in any cycle, which is what you need to do; if you wanna stay in the business, you don’t need to sit on the sidelines… You need to constantly be analyzing where the opportunity is, and moving your business in that direction.
Joe Fairless: Tell us a story of one of the most challenging transactions that you’ve done.
Lee Kearney: I can tell you one that actually is just getting settled this week. It is a two-year court battle on a property that I bought two years ago. Specifically, the gentleman who’s going to a tax deed sale – we’d purchased the property the day before the tax deed sale, didn’t hear anything for about two weeks. Then that particular gentleman, who had come in with his friend by the way, who had witnessed the deed and was notarized in person with a driver’s license with one of my processors here who is a notary, and claimed that he didn’t know he was signing a deed to the property, and sued me for what’s called fraudulent inducement.
Joe Fairless: [laughs]
Lee Kearney: He basically said I tricked him into signing a deed. Now, I have never done that, I never will do that. I fought that gentleman in court for two years and we’ve just won.
Joe Fairless: Congratulations.
Lee Kearney: It was a two-year court battle just to prove that I was right. I did not want my name dragged through court records as fraudulently inducing anybody into selling their home.
Joe Fairless: Yeah, congrats on that… How much did it cost you in legal fees?
Lee Kearney: Oh, geez – an honest answer? About $20,000.
Joe Fairless: And how much did the property make you?
Lee Kearney: I think when we flip this asset — it’s got a tax-assessed value double what our basis is right now… So we’ll double our money on the property, even with all the extra legal. What’s really interesting is there was an extra payout that I was going to be paying this owner as part of our agreement, and what we ended up settling on in court after we won was that I end up taking out my attorney’s fees… So my global amount two years later was the exact same as I would have paid two years ago, except my attorney got half the money instead of him.
From their vantage point it was a pointless exercise, and I think that really for everybody out there – don’t just get in lawsuits. Ultimately, the attorneys win if you’re just getting in a lawsuit to get in a lawsuit. But if you’re right and it makes business sense, go for it. This is where each case is different, the facts are different, and the amount of potential profit is different in each deal… So you really wanna make a business decision before you just start getting in court. It’s my least favorite thing to do, besides filing tax returns. I hate fighting people in court.
Joe Fairless: Yeah, you and I are similar in that regard. Two things that are not enjoyable, and at the bottom of my fun list. You said you started wholesaling and you haven’t looked back since… Does that mean that you currently focus primarily on wholesaling?
Lee Kearney: No, what I meant specifically by that is that I began building a base in real estate and didn’t go back to square one again.
Joe Fairless: Oh, okay.
Lee Kearney: So we moved forward as the market started rapidly appreciating after 2011. We jumped right into the fix and flip space. Now that we can see that we’re coming to the end of that cycle, we’re dialing down fix and flip and dialing back up wholesale again, to take risk off the table.
Joe Fairless: Okay, got it. So over the last 12 months, what percent would you estimate you’ve done wholesale versus fix and flip versus whatever other category there is? We’ll call it miscellaneous category.
Lee Kearney: It’s been about somewhere between 60% and 70% to 30% – 40% wholesale. So we have done more fix and flip than wholesale. However, we’re ratcheting down rehabs and dialing up wholesales, so I suspect that number to be completely flipped next year, and be more two thirds wholesale, one third retail.
Joe Fairless: And in order to dial-up wholesaling, what do you do from a staffing standpoint to make that happen?
Lee Kearney: Well, in our particular case what we did was we subbed out the marketing to a joint venture partner, so I didn’t have to dial-up staff. When it comes to processing a wholesale asset, you actually need less staff, because the asset move through your production line so quickly compared to a rehab… You could literally hold the asset anywhere from hours, to days, to possibly a couple weeks, versus typically several months with a rehab, and there’s a lot of touch with the rehab. You’ve got processors touching that asset almost every day if you’re fix and flipping it.
Joe Fairless: How does that work when you partner up via a joint venture to do wholesaling?
Lee Kearney: Sure. That was actually fairly straightforward. We paid a small marketing fee on the front-end, which helped pay their sales for, and on the back-end we split the profits 50/50, so once they do the marketing, we’ve got a property in the door. We process the asset, whether it’s a rehab, a wholesale trash-out, we sell the property, and then when the proceeds are concluded, what we’ll do at that point is escrow 10% back into our joint venture for new marketing, and then we split the other 90% 50/50.
Joe Fairless: Beautiful. Thank you for very succinctly walking through that; that’s very straightforward. How did you find your joint venture partner who — basically, they find the deal and then you take it from there, right?
Lee Kearney: Absolutely. That’s [unintelligible [00:10:31].18] and that’s the joint venture who’s actually my partner in the educational space through Advisors Education, my Flip Your Income platform. So there was a natural fit already there in the info side of the business, and they said they were dialing up the seller-direct campaign; I said, “You guys already have [unintelligible [00:10:53].09] you already have that infrastructure, I already have an entire floor of processors, and a construction team and vendors, and we have an entire team of lenders, so let’s just partner up. I’ll do what I’m good at, I’ll do more of it, you do what you’re good at and you do more of it, and then it’s a win/win for everybody.”
And I will say this to everybody out there – if you’re getting in a joint venture, make sure both parties bring something to the table. Otherwise you’re gonna have a disgruntled partnership from the standpoint that one partner is gonna be doing a lot more than the other partner, you’re splitting the proceeds, and then you end up with a very short-term partnership because it just doesn’t make sense in the long-term to do something where both parties are not bringing value to the table.
Joe Fairless: You said at one time you had 30 million dollars in property and 300 doors, that was your portfolio high point… What are some things, knowing what you know now — if you were presented a similar position, what would you do differently to maintain that?
Lee Kearney: I would say initially we didn’t do our tenant screening correctly. That’s probably — when it comes to maintaining high occupancy and high payment rate, the biggest place we screwed up early on is that we were just trying to get warm bodies in our properties. Then we realized later if we’d spent a few more moments on screening a tenant correctly, our net income would go way up. That’s when I really went from hating rental properties to loving rental properties, when they stopped being a liability and became an asset from a cashflow standpoint.
Joe Fairless: So you had a lot of turnovers, I guess…
Lee Kearney: Yeah, yeah. At our low point, early on, when I was building that rental portfolio, I had about 20 evictions going on, and I said to my team “This is not going the right direction.” Rental properties, which are supposed to really pay you in three ways – through appreciation, through being able to depreciate that asset on your tax return, and also create cashflow… It wasn’t hitting the cashflow button, it was just costing us money every month, so I wanted to turn that around because we’d built a sizeable rental portfolio, so the outgoing cashflow was at a point that really was making a dent in the company’s finances, and I knew I needed to turn that situation around if I wanted to hang on to these rental properties long-term.
That situation forced us to really look at what kind of tenants were defaulting, what was broken in our screening process, and we needed to make some changes as far as the qualifications for our tenants coming into our properties.
Joe Fairless: And what were the results of those changes?
Lee Kearney: For several years, until I started winding down — I would say realistically four to five years we’d been maintaining at the worst time 95%, but averaging more around 97%-98% rent collection, 97%-98% occupancy on C, C- assets, which I think is pretty incredible when I talk to people out there.
Joe Fairless: It is, yeah. Do you have your own property management company?
Lee Kearney: That’s one thing I got right, right out of the gate. I manage property management in-house, and just to give you a quick explanation why — when you’re dealing with an external property management company, their interests are completely misaligned with you as the owner. Let’s talk about that…
As an owner, you want people to stay in your property and you want people to pay. A property management company makes money when stuff breaks and when people move out, and when new people move in. So at a very base level, the industry is broken, because property managers actually make a lot more money when the owner makes a lot less money. I didn’t like that setup, I knew I couldn’t fix it, so rather than try to fix an industry, I brought those best practices in-house from day one, and really rewarded my staff through bonuses and incentives to make sure that they brought in people that paid and people that stayed, and kept them in there so that our occupancy and our payment was at that 97%-98% range.
Joe Fairless: What’s been some of the challenge of building out a property management company?
Lee Kearney: Just building out your SOPs… Realizing that on the payment side – you just have to be consistent with that, as far as rent collection goes. What I mean specifically about that – because you mentioned at the beginning of the show we’re cutting out the fluff here… Everybody gets a three-day notice, everybody gets sent to the attorney after the three-day notice has expired. Everybody must pay half their balance, including the attorney’s fees, and also they stay in eviction until they’ve completed a written stipulation payment. So we actually don’t even stop the eviction until they’re brought current again; we make them sign it, it’s a stipulated payment agreement, and they must be caught up by the end of the following month… Because what you don’t want is when you finally go to evict someone that they’re three months in arrears, because you’ve put them on a payment plan that will never actually get them caught up.
For instance, if you’ve got $1,000 rent and someone’s $1,000 in the hole, if they’re just paying their $250, they’re never paying down that $1,000 balance. Realistically, they’ve gotta be paying $300-$400 a week to get that payment down, where they’re paying their current rent and they’re paying down what they’re delinquent on.
So that’s some of the lessons we learned early on that really affected how well we did property management… Even something as simple as raising our deposit from a half month, which we used to do for Section 8, a month for non-Section 8 tenants… We raised it across the bar, we did nicer properties, cleaner, and we did a month and a half for everybody; it did not matter if you were Section 8, private pay… Everybody had to pay a month and a half. And all of the bottom feeders, who had tried to negotiate with you over a security deposit because they didn’t have any money no longer applied for our properties.
Joe Fairless: Switching gears back to wholesaling, you said that’s gonna be dialed up in the foreseeable future based on where you see the market heading… How do you maximize the conversion rate whenever you receive the leads, from receiving it to actually making money on the deal?
Lee Kearney: That’s a really, really good question. First, not every lead is the same. What I mean by that – if you spent the same amount of time on all leads, you would never process your really good leads effectively… So one of the first things we try to do is weed out the “definite no’s” we call them. What I mean by that – if in your initial screening of that lead you realize these people are over-leveraged and they cannot sell, they’re gone. So we don’t spend any more time on that. It doesn’t matter if they want to sell, or they have to sell; they can’t sell.
So the first thing we’re always trying to do is to not waste time on deals that we can never convert to a deal… And I think a lot of people out there, when I talk to them, they’re on the front-end, they’re the opener, and they’re screening every deal, and then they’re trying to analyze the really good deals and wonder why they’re missing the really good deals… It’s because they’re working on analyzing all the deals that will never become a deal.
If you wanna get your conversion rate up, your openers should be weeding out the people who are not good leads, and then your closers should be hand-fed any lead that’s in range. What I mean by that – they can sell, they have to sell, and they recognize that they need to sell. That’s really the unicorn seller… When you’re dealing direct with seller, you’re looking for three things: those who can sell, those who have to sell, and those who realize they have to sell. They’re the ones we’re focused on.
We have not limited geography. As we move forward now and we’ve really matured in this space, we’ve realized we’re chasing distressed sellers and not chasing geographical locations… So we open up a much wider geography, to cast a much wider net, to get the most distressed sellers.
Joe Fairless: You mentioned that you’ve done some commercial, and then also some multifamily, but your bread and butter is single-family. For a lot of people, they do single-family and then they decide to do something else, like multifamily or commercial or something like that… So what about single-family has attracted you to it to maintain that for the long-term?
Lee Kearney: When we made the decision to begin to move into multifamily, we realized the multifamily space was overheated… So although I would take down 100 units, 500 units tomorrow, the market’s not bearing a price that I can live with. That means that we are very dialed in in the single-family space, so we’re gonna keep doing that until the right opportunities come along.
Unlike a lot of people out there, just because I want to move into multifamily, I’m not gonna chase it down to the lowest cap rates. I’m not willing to do that. I believe that economically we could be coming into a time of recession, I believe the real estate cycle has almost gone full circle, and with all those things being said, to chase multifamily deals at peak pricing is not in line with our core business model.
Joe Fairless: What’s your best real estate investing advice ever?
Lee Kearney: I’ve got a couple, actually. I’ll give you one, if you want one – it’s not important to call the bottom of the market, but it’s important to call the top of the market.
Joe Fairless: What indicators do you look at in order to call the top of the market?
Lee Kearney: Extreme euphoria. Everybody’s buying real estate, everybody’s an investor, rates are going up, there’s no supply, there’s a desperation to buy a deal just to keep your pipeline full. All of those things I see going on in a lot of primary markets, which means that desperation means that people are overpaying, and ultimately the chickens come home to roost. You make your money in real estate typically on your acquisition, and if you get that wrong, that’s also where you’re gonna lose money. It’s just when that happens.
I see a lot of desperation in the market, and I see the foreclosure rates – just to quote a specific statistic here in Florida – year-over-year [unintelligible [00:20:50].22] rate appears to be climbing… So I’m seeing a lot of indicators that we are coming full circle, and even something simple as the rates – they’re about 2% higher than they were just two years ago.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Lee Kearney: Sure.
Joe Fairless: Alright, let’s do it. First though, a quick word from our Best Ever partners.
Joe Fairless: What’s the best ever book you’ve recently read?
Lee Kearney: Tools of the Titans.
Joe Fairless: I love Tim. And all of his books. I haven’t read the cooking one, but all other Tim Ferriss books – I love those. What’s the best ever deal you’ve done that we haven’t talked about?
Lee Kearney: It was a deal that had a second mortgage. We were able to wipe out the second mortgage. We are selling the property next month, and will net about $250,000 on a single-family asset.
Joe Fairless: What’s a mistake you’ve made on a transaction we haven’t talked about?
Lee Kearney: I bought a gigantic rehab; it was a million dollar home, that we ended up losing $300,000 on.
Joe Fairless: And what’s the lesson learned there?
Lee Kearney: The renovation budget was about $150,000 off, and our resell price was a similar figure off. And our hold time was about double what we thought it was going to be.
Joe Fairless: Best ever way you like to give back to the community?
Lee Kearney: We like to support an organization that protects trafficked women and brings them back into society. Redefining Refuge, it’s a charity that we support, and supported for many years. I’m very passionate about that. Those who prey on the weak in our society – I have a tough time with that, whether it’s women or children or anybody that’s considered weak or vulnerable in society; I feel very passionate about supporting organizations that try to help out with those causes.
Joe Fairless: And how can the Best Ever listeners learn more about what you’ve got going on and get in touch with you?
Lee Kearney: Sure. FlipYourIncome.com is the best way to learn about what we do in teaching real estate.
Joe Fairless: Awesome. Lee, thank you so much for being on the show. We talked about a whole lot of stuff, from how to increase your conversion rate if you’re a wholesaler, to the reason why you’re focused on single-family homes and not multifamily, and when to stick to your guns on a court case; when you’re in the right, you ride it out… And lawyers are usually the only ones that win, but in this case you also came out even, or positive, because I’d say from the learning experience that you had working with the lawyers who were essentially paid for by the person who was suing you, I’m sure you learned some stuff too along the way.
I really enjoyed our conversation. Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Lee Kearney: Great, thanks for having me on the show.