JF1651: How To Control $1.5 Million In Real Estate As A Part Time Investor with Ari
Ari decided to take more control of his financial destiny, so he began investing in real estate. We’ll hear his story of working full time at a job while working on a real estate portfolio part time. For most of us, this is how we get started, and hearing a successful example to follow can help anyone who wants to be in the same situation as Ari. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Ari’s Real Estate Background:
- Went from Journalist to marketing for 10+ years & part time real estate investor
- Controls over $1.5 Million of real estate while working full time
- Kapel Real Estate
- Based in Hershey, PA
- Say hi to him at kapelrealestateATgmail.com, https://youtu.be/7XnlQo0IMDo
- Best Ever Book: Crushing it in Commercial Real Estate by Brian Murray
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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, Ari from Kapel Real Estate. How are you doing, Ari?
Ari: I’m doing great, really honored to be on the show. I feel like I’m talking to a real estate celebrity, this is very exciting for me! Thank you for having me on.
Joe Fairless: Yeah, my pleasure, and looking forward to our conversation. A little bit about Ari – he went from being a journalist to marketing for 10+ years, and now a part-time real estate investor. He controls over 1.5 million dollars worth of real estate, while he’s working full-time. His company is Kapel Real Estate, and based in Chicago, Illinois. With that being said, Ari, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Ari: Yes, absolutely! I consider myself a journalist with an entrepreneurial mindset, who became an accidental landlord. After investing in single-family homes, I actually got $12,000 deposited into my bank account from just one home because of a clause that I put in a lease, and I was comparing that to my annual bonus I get at my job in sales and marketing. I said, “Hey, I’m doing the wrong thing. I really have to take more control of my financial destiny”, and I thought real estate was a really good opportunity to do that.
Joe Fairless: What was that clause?
Ari: The clause was “If you break the lease, you have to pay three months of rent, plus stay there for an additional three months.” So the tenants just went ahead and paid me six months of rent.
Joe Fairless: Huh. So if you break the lease, you have to pay three months of rent, plus you have to stay there an additional three months, but they broke the lease, so they weren’t staying there, so essentially if you break the lease you have to pay six months’ rent?
Ari: Essentially, yes.
Joe Fairless: And I’d love for you to continue what you’re about to say, but just a follow-up question – I believe there are laws in place that if the fees that you charge tenants are above and beyond what’s typical when you go to court, then the ruling will not go in your favor, because it’s like “Well, this is way above and beyond what you should be charging.” Was that ever a factor whenever you were drafting that up, or did you have an attorney look at that clause?
Ari: Yes, I did, and I just wanna caveat this by saying that I am not a real estate attorney. What I did is I had this drafted up with real estate attorney, within the state that this property is located and it was compliant with the regulations, because the penalty was just three months; it was actually a three-year lease, and then they had to stay an additional three months while I find another tenant.
The tenants actually decided, because they were going to be leaving, just to pay the six months all in one go.
Joe Fairless: Okay. Yeah, with it being a three-year lease, I imagine that helped your cause. And the state that the property was in – is that Illinois?
Ari: Pennsylvania. Most of my investments are in Pennsylvania.
Joe Fairless: Okay. Please continue. I just wanted to clarify that.
Ari: Great. So I was doing the math after I was investing in the single-family homes, and I saw, “Hey, if I’m getting cashflow between $200 and $400 a month, it’s probably gonna take me 10 to 15 years to reach financial freedom, so I should look at something else.”
So I really spent a lot of time figuring out what I should look at and kind of aligning a little bit with my strengths, and I identified that apartment buildings were a good opportunity. Specifically within the apartment buildings, I kind of looked at what I’m good at, what I’m not good at, and really spent a lot of time finding my niche.
With single-family homes and things of that nature it’s very difficult for me — I don’t have time to drive for dollars, so I can’t get the deals good enough. I’m not good at fixing toilets, appliances, anything electrical, carpentry, things of that nature, so I can’t kind of DIY it. I can’t DIY, be a property manager, because I have a demanding full-time job, so I felt I wasn’t able to get the returns that a lot of my competition was able to get with the smaller units, but I found a white space in the market where I thought I could get better results, and I wanna tell you a little bit about the white space.
Joe Fairless: Cool.
Ari: There are apartment buildings that are around a million dollars or somewhere around that range, that are too big for the local real estate investing crowd to want to sink their teeth in, but they’re too small for the big institutional money to go in after. So when we make offers on these sort of properties, we see that we don’t have a lot of competition, and we’re able to get it at a good deal.
Joe Fairless: How many have you purchased?
Ari: We recently purchased a 20-unit deal, and we’re also in the process with some other deals.
Joe Fairless: Okay. So let’s talk about that 20-unit deal. What was the purchase price?
Ari: The purchase price – we ended up getting it for only $780,000. It was listed on the market for over $900,000, but we really went in there understanding a lot about the sellers, the sellers’ motivation, building credibility, and we put together a very strong offer to be able to get it under contract.
One of the things that we utilized in our offer strategy that I think is very helpful is very big Escrow money. We put $100,000 in Escrow, contingent on financial and inspections in order to close this. In that alone, we were very transparent about our financial background, our financial profile and our net worth, and we gave them a lot of information that really put them at ease to know that we really could close.
That coupled with relationship building, we were local to the area, we saw them, we built rapport, really solidified our offer and getting it under agreement. And we moved very quickly, too.
Joe Fairless: Where are you based, Chicago, or Pennsylvania?
Ari: Well, I’m from Chicago, but now I’m based in central Pennsylvania.
Joe Fairless: Okay, got it. So this property is also in Pennsylvania.
Ari: That’s correct.
Joe Fairless: Cool. And you mentioned you knew the seller, or you got to know the seller and their motivation. What was their motivation for selling?
Ari: Well, they were part of a partnership, and one of the partners owns a restaurant chain, and they were looking to expand into New Jersey, so they wanted liquidity. Actually, the ownership team had actually put some really strong improvement in place. They weren’t looking to sell this, they were fixing it like they wanted to hold on to it. What they did for the heat pumps, the air handlers, they fixed the roof, they black-topped the parking lot… They made a lot of good, sound improvements on the building, like they were gonna hold it for the long haul, but one of the partners needed to get out.
Joe Fairless: How did you find the deal?
Ari: I found the deal going to a local meetup. We have a lot of meetups in Central Pennsylvania, that a lot of times at the front of the meetings anybody that has deals puts it out there. I had gone through the process of trying to build a relationship with commercial realtors, I had gone through the relationship of marketing online, marketing directly to sellers, but this was kind of a word of mouth at a meetup… And it wasn’t actually just presented to me, it was presented to the entire meetup group, but I was the kind of guy that went full steam ahead on it, and moved quick on it.
Joe Fairless: You said “we”, who’s “we”?
Ari: “We” is me and a group of people that I have that invest, but they’re a little more passive.
Joe Fairless: How do you structure that with them?
Ari: We structure it through the operating agreement with the LLC. It’s a smaller amount of people. Again, I’m not a real estate attorney; I would say please check with your real estate attorney on how you wanna do it… But we have it a little bit more the promissory note, LLC operating agreement structure.
Joe Fairless: And how much of your own money did you put into the deal?
Ari: I put probably about 50k of my own money, and I raised over $200,000.
Joe Fairless: And what type of financing did you put on it?
Ari: Ten-year fixed, because I know we’re kind of towards the top of the cycle, so I wanted to have more long-term debt on this asset.
Joe Fairless: What lender and what type of program did you use for that ten-year fixed?
Ari: I got a portfolio lender with a local bank in the region. It’s a 20-year amortization, and I got it for 4.89%, which was really a good rate at that time. I also was able to negotiate with the bank, built a good relationship, so we were able to lock it up for that amount of time at a good rate. I know money is hard to come by nowadays.
Joe Fairless: The $50,000 that you put in, and in total there was $250,000 worth of equity into the deal, correct?
Ari: Some of that $50,000 was due diligence costs, so I would say the amount that I put into the equity of the deal, my personal money, was closer to 25k-30k.
Joe Fairless: Okay. But you got reimbursed at closing, right? For the due diligence costs.
Ari: Because this was my first deal, I actually did not charge any sort of acquisition fee. I’m not charging any management fee, I’m not gonna have a disposition fee. So this was really — because I’d had results with smaller properties, I wanted to demonstrate that I could have those results on a larger property. So for my investors I didn’t charge any fees at all.
Joe Fairless: For the loan, did you and your investors have to submit financials to get approved for it?
Ari: Yes, we both had to guarantee.
Joe Fairless: Okay. When you say “both”, did you just have one other investor?
Ari: One other investor put up the most money that they had, to guarantee. The other investors put up a smaller amount, so the bank didn’t require their personal guarantee.
Joe Fairless: Got it. How many months ago did you purchase this 20-unit?
Ari: We closed on it on March of 2018.
Joe Fairless: Okay, so about a year ago. And one last question about going into it, and then we’ll talk about how it’s gone over the last year – what was your business plan going into it?
Ari: My business plan going into it was purchase it, make a few improvements, a few adjustments, hold on to it… We weren’t planning to do either a reposition or add much value to it. We thought it was a solid investment. We had ten-year fixed money. We wanted to try it out, see how it was performing. We didn’t have a big refi out. We have ten-year fixed money, so this is kind of like what I look at as the backbone of our real estate investing business, this would be that solid asset that keeps performing for us over ten years. We didn’t plan to juice this or pull money out at all. We plan to refi in ten years.
Joe Fairless: So what’s transpired over the last year or so since you’ve had it?
Ari: Over the last year or so we’ve found out that a good amount of tenants were not paying as much rent, or they weren’t paying on time, so we’ve actually had 11 turnovers, we had to buy a lot of new heating systems, we had three evictions, new HVAC systems… But long story short, we increased gross rents at the end of the day by 15%, and we reduced our fixed maintenance costs by 8%. So all in all, we’ve added about $250,000 worth of value to this property in the first six months. That was not something that we were setting out to do, but when we saw the rent wasn’t coming in, we tested the market with a little bit higher rents, and the market responded well. We had good results with it.
Joe Fairless: Did you attempt to put in a similar clause that you had when you received the $12,000 deposit for your one house with these units?
Ari: That’s a good question. We’re using a professional property management, and they standardly don’t use that sort of clause in language… But now that you mention it like that, I’m gonna talk to them about it to see what makes sense to do with this asset.
Joe Fairless: So you’ve got the 20 units, and do you still have single-family homes?
Ari: Yes, I’ve got a single-family home. We’re about to close on another five units as well. We’ve got a fourplex and another single-family home, but really the sweet spot that we wanna focus on is the million-dollar range up to two-million-dollar range apartment buildings.
Joe Fairless: You said you’re about to close on the five units… The single-family home – how long ago did you purchase that and what did you buy it for?
Ari: We purchased that single-family home back in 2013, and we purchased it for about $230,000. That was our original kind of — first house I ever bought with my family; it’s a house-hack, essentially. We could sell it, but we were approached, someone wanted to rent it, people that were viewing it. So we crunched the numbers and we rented it out.
Since the market has gotten so hot in that part of Pennsylvania, that town we bought it in, we just recently sold it for $280,000, so we got about $50,000 higher than what we bought it for.
Joe Fairless: And then is the five-unit under contract right now?
Ari: Yeah, we’re about to close in the middle of February.
Joe Fairless: Cool. And what are the numbers on that one?
Ari: It’s a single-family and a fourplex. We were able to get it for about $215,000, or something like that… And there’s upside in rent from a cap rate perspective. It’s close to a 8%-9% cap. These are good investments, and we are very much value investors, which is why we haven’t been as active in 2018. It’s not that we haven’t evaluated, we just haven’t gotten under agreement on a lot of stuff because of the cycle of the market right now.
Joe Fairless: The lessons that you learned on the 20-unit, if you were presented the exact same scenario where you come across a 20-unit, it’s literally the exact same thing – anything you would do differently going into the deal, that you learned from the initial acquisition of the first 20-unit?
Ari: I may do the apostille certificates on the rents, to make sure that we’re getting the rents…
Joe Fairless: The what certificates?
Ari: From what I understand during the due diligence, there’s the option to do some sort of apostille certificate, where you can verify that the rent is actually coming into the property manager’s bank account, or wherever. That’s one piece I would probably do differently.
When we did the inspection, the inspector noticed that there was a connection to an underground storage tank that may or may not have oil in it, environmental issues in it. So we didn’t even follow up with that until the last minute, and we were very worried that there were some issues with it… So we did a full environmental test, where they did the soils and everything, and everything’s okay, and everything turned out fine, because it was handled properly, closed out properly… But if it wasn’t, that would have been very challenging. So I would have looked at that clue that we got from the initial inspection a lot earlier. And spending a little more time with due diligence on the market rents, because this place didn’t appear to be under-rented if you look right next to it…
But the quality of what these units had — because every tenant can control their heat and A/C and everything like that, and it has dishwashers in it, which in the area around it the rentals did not… And we’ve actually been able to raise the rent more. If we would have done probably a broader analysis of the greater submarket, we would have seen that value was there earlier.
Joe Fairless: Based on your experience as a real estate investor, what’s your best real estate investing advice ever?
Ari: I would say identify your niche and competitive advantage and leverage it very aggressively to differentiate from the crowd, because you’re always gonna have competition, there’s always gonna be people that can do things better than you… So what’s your unfair competitive advantage? For me, I had a corporate job, so me connecting with banks, commercial realtors, things like that that was more business-related came easier and more natural to me, and I made better relationships that way, than if I was trying to talk to a motivated seller in a residential environment.
That, and I think study a lot about offer; for me I think it’s so important, and I try to read as much as I can about offer strategy and how to structure offers in negotiation.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: Best ever book you’ve recently read?
Ari: Best ever book — besides the Best Ever Real Estate Investing Advice by you, Joe, is “Crushing it in Commercial Real Estate” by Brian Murray.
Joe Fairless: Best ever deal you’ve done?
Ari: This 20-unit deal in central Pennsylvania.
Joe Fairless: What’s a mistake you’ve made on a transaction that we haven’t talked about already?
Ari: Well, one thing is in the accounting I was using my same CPA, and basically what they did was they depreciated all my renovation costs across 30 years, and I had to catch it later and then pay to do the refilling, to do that properly. So I’d say get a professional real estate CPA earlier.
Joe Fairless: Best ever way you like to give back?
Ari: I really like to do things like trash cleanup and plant trees in the places that I invest, just to spruce up the community.
Joe Fairless: And how can the Best Ever listeners learn more about what you’ve got going on?
Ari: You can go to my YouTube channel, Kapel Real Estate, or you can email me at firstname.lastname@example.org.
Joe Fairless: Well, thank you so much for being on the show, talking about your 20-unit, how you structured it with your partners… You know, one follow-up question on that structure – is there any preferred return on the structure, or is it just whatever percent ownership in the deal, that’s the percent of cashflow that you get?
Ari: There is a preferred return.
Joe Fairless: What is it?
Ari: It is currently at 5%.
Joe Fairless: Cool. And you said currently, so does it change throughout the deal?
Ari: No, I would say that’s where it is right now. It does not change throughout the deal.
Joe Fairless: Cool. Well, I really enjoyed learning about that deal, and thanks for bringing it up, talking about the lessons learned, and what you all have done over the course of the past 12 or so months to improve the property.
Thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Ari: Thanks so much, Joe. I really appreciate it.