JF1775: Live From Cincinnati | How To Scale A Real Estate Investing Business To 240 Units In A Competitive Market with Gaston Teran
Today’s episode was recorded at the meetup we host in Cincinnati every month (bestevercincy.com). Gaston has attended the meetup for years, and we have personally watched his growth as a real estate investor through the years. He’s scaled up to 240 units over the past few years, with no syndications or funds, all of the units are his own, acquired through traditional financing. One huge difference between Gaston’s business and most others that you’ve heard of, he buys bad properties (until he turns them around) in bad areas, which goes against the traditional advice you usually hear to “buy the worst property in the best neighborhood”. We’ll hear his story of getting to the level he’s at today, and how he plans on continuing the growth. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Best Ever Tweet:
“It had physical occupancy of 90%, but a lot of those people weren’t paying” – Gaston Teran
Gaston Teran Real Estate Background:
- President of GT Apartments
- Started building his multifamily portfolio while working full time as a corporate controller
- Left the accounting world to be a full time real estate investor, currently owns 240 units
- Based in Cincinnati, OH
- Say hi to him at gteranATyahoo.com
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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, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Gaston Teran. How are you doing, Gaston?
Gaston Teran: Good, thanks for having me.
Joe Fairless: My pleasure. We are in Cincinnati, Ohio at the Best Ever Meetup. The website is bestevercincy.com, if you wanna come check out/hang out with us. We’ve got visitors from — usually, we have them from all over the surrounding states. We do it the last Tuesday of every month, and we are going to be talking to Gaston today. He is a real estate investor based in Cincinnati, Ohio. He’s the president of GT Apartments. He’s got 240 units, and these 240 units are his 240 units. He has not syndicated, he has not raised any money; these are his 240 units, and he’s built this portfolio from zero.
He started building his multifamily portfolio while working full-time as a corporate controller, left the accounting world to be a full-time real estate investor, and we’re gonna get into it right now. With that being said, Gaston, do you wanna give the Best Ever listeners a little bit more about your background and your focus?
Gaston Teran: Sure. The bread and butter of how my business works has not changed. What we do is we buy distressed multifamily, preferably large, in bad neighborhoods. Usually the occupancy is low, there’s tons of deferred maintenance… We go in, we fix them up, both inside and outside, we get the occupancy up, we raise rents, increase the value, and then hold long-term. Then also there’s usually a cash-our refi component to it, which then funds future purchases.
Joe Fairless: You buy in bad neighborhoods – that’s the opposite of the advice I typically read in books, “Buy the worst property in the best neighborhood.” So why do you do that?
Gaston Teran: Well, I would buy a distressed property in a nice neighborhood, but usually, distressed properties are in bad neighborhoods.
Joe Fairless: Got it, okay. So you’ve got 240 units now. Let’s do a timeline and the progression from 0 to 240, as medium-level as we can. The first property was what?
Gaston Teran: It was a four-family in 2007.
Joe Fairless: You brought a spreadsheet.
Gaston Teran: I did.
Joe Fairless: I did not know that. Nice.
Gaston Teran: It’s because there’s a lot of numbers here, and you like to talk about numbers…
Joe Fairless: I do.
Gaston Teran: …so I wanted to be ready.
Joe Fairless: Good. Okay, so the first property was what?
Gaston Teran: A four-family in 2007. And I held that — I didn’t think much of it. I wasn’t gonna go into real estate; it was just an investment to park my money. And I really got more serious with it in 2013, when I bought an 18-unit.
Joe Fairless: Okay.
Gaston Teran: And on that one, I will note that as we were trying to raise the funds — I had a hell of a time trying to raise the funds, the banks wouldn’t talk to me… Finally, I did get my mom in as a minority investor for the first two deals, but since then it’s been me 100%.
Joe Fairless: Got it. Alright. So before we jump into the 18-unit, 2007 to 2013 you did not purchase anything.
Gaston Teran: Right.
Joe Fairless: 2010 through 2012, in hindsight, was a pretty good time to purchase, so what were you doing at that point? Was the 2007 purchase that was bought at the top of the market and you were underwater?
Gaston Teran: No… I’m pretty cheap, and in the accounting world — I always was saving money, so I wanted to invest. I didn’t know what I wanted to invest in. I did the four-family, I did stocks… I was kind of lingering around, figuring out how I wanna invest my money.
Joe Fairless: Okay, so you were figuring it out. What ultimately led you in the direction of “Okay, I wanna go larger”?
Gaston Teran: After some time I realized that four-family, if I scale it up, could make some good money, so I started looking a little bit more seriously, and I said “If the numbers are right, this could be really lucrative”, so that’s when I started seriously looking.
Joe Fairless: And what did you do? Did you act on that thought with the four-family?
Gaston Teran: Well, this is while I was owning the four-family. I was looking then – this would be 2012-2013 timeframe.
Joe Fairless: Okay, got it. So then you purchased the 18-unit… How did you purchase the 18-unit?
Gaston Teran: It was on the MLS.
Joe Fairless: Are you a real estate agent?
Gaston Teran: I am not.
Joe Fairless: So did you work with one to find it for you?
Gaston Teran: No, I’ve found it on one of the listings, I contacted the realtor, and then I went from there.
Joe Fairless: So do you have access to the MLS as a non-real estate agent?
Gaston Teran: Yeah, just the websites… The different realtor websites.
Joe Fairless: Got it, okay. So a broker had it, they were marketing it, and you reached out to the broker… And then what?
Gaston Teran: Well, I’d saved up quite a bit. I probably had 60% of the money to buy it, and I thought “Surely a bank is gonna put up half. I put in half, you put in half, it’s safe for the bank.” I couldn’t get a bank to look at it. It probably was in rough shape… Not terrible, but it was in rough shape. It was probably 60% economic occupancy… So those numbers hurt, and I didn’t really have a track record at the time, so I was really getting nowhere with the banks.
Joe Fairless: And for anyone who’s not aware of economic versus physical occupancy, will you explain the difference?
Gaston Teran: Sure. Well, it had physical occupancy 90-something percent, meaning say 90% were occupied, but a lot of those people weren’t paying. So roughly 60% were paying.
Joe Fairless: The four-unit that you bought – was it fully occupied?
Gaston Teran: Yes.
Joe Fairless: Okay. So you went from a fully-occupied four-unit, and then an 18-unit that you were looking at, 60% economic occupancy, in a rough area?
Gaston Teran: Yes.
Joe Fairless: What area was it, for people familiar with Cincinnati?
Gaston Teran: Price Hill.
Joe Fairless: Price Hill. So an 18-unit that is 60% occupied (economic occupancy), 90%+ physical, which means you’re gonna have to boot a bunch of people most likely…
Gaston Teran: We booted a lot of people.
Joe Fairless: You booted a lot of people… So you were undertaking a major project. Did you know going into it, having not purchased a property of this size, what you were getting into?
Gaston Teran: Yeah, you can imagine, I haven’t gone through it… With the four-family I had done enough maintenance where I had kind of taught myself, so I was more comfortable with that. I was a little less comfortable with evictions, since I’d only done one or two at that point… But I was ready for it, and I went for it.
Joe Fairless: So how much was the total purchase price, first?
Gaston Teran: It was $190,000.
Joe Fairless: $190,000…?
Gaston Teran: It was a steal.
Joe Fairless: Okay. Hah! When you said “One nine…” , I was thinking 1,9. Okay, $190,000, which still would have been completely an opposite direction; I’m crazy. Okay, so $190,000… So they’re giving it away, essentially… You have 60% saved up, and your mom ended up loaning you the remaining 40% to buy it all cash.
Gaston Teran: Yes.
Joe Fairless: Got it. Then what? You closed on it… Now what?
Gaston Teran: I closed on it, and we went right to work with the evictions, the deferred maintenance, and slowly — I mean, because of my lack of experience, some of the incoming people weren’t the greatest either… But slowly but surely we improved, and that was great.
Joe Fairless: Because of your lack of experience what aspect of it, if presented something similar in the future, what would you do differently?
Gaston Teran: You can’t be a landlord with a heart. When people give excuses, even if they’re good… They could be crying, whatever… As an experienced landlord, you can’t do that. Everything’s gotta be black and white. If they’re late, they’re late. See you later. I was too soft there.
Joe Fairless: Okay… I imagine collecting rent was challenging. In a tough area, that’s a hard part of it usually. So what was your approach for collecting rent?
Gaston Teran: Just to be on top of it. And that makes a big difference. Sometimes property managers get into trouble because they try to do everything remotely, especially when they’re not familiar with the tenant base… And really, I was very hands-on. I was there all the time, working on it, I got to know all the tenants, and that really helped me.
Joe Fairless: Will you define that a little bit more, on being on top of it? If I’m a tenant, how am I most likely going to pay you my rent?
Gaston Teran: At that time I was accepting money order or cash in person. I don’t do that anymore, but that’s how I did it. But staying on top of it meaning by the seventh if you haven’t paid, I’m knocking on your door, or soon after giving you an eviction notice on top of that. I’m not letting it go till the 12th of the month, or something.
Joe Fairless: What’s a story of — and I don’t know if there is one, but I imagine there is one… What’s a story of a challenging time when you were knocking on the door on the seventh for rent, and you got a less than warm response?
Gaston Teran: I usually didn’t get that. Usually it’s a lot of excuses. “Come back tomorrow”, or “I’ll pay you on Friday”, that sort of thing. Usually they’re kind of weaseling out of it. You usually don’t get the sharp response for a rent collection.
Joe Fairless: Okay. How much in total did you put into that property?
Gaston Teran: 20k.
Joe Fairless: 20k? That’s it?
Gaston Teran: Yeah. The reason is because there wasn’t major — the roof was good, there was a lot of bathroom plumbing, that kind of thing, and I did it all myself. So I’m not counting labor, but that always plays a big part of it.
Joe Fairless: I mean, just the unit turns… I usually have a calculator in front of me, but I don’t right now. The unit turns alone have to be a couple thousand, and you evicted a lot of people, right? I mean, labor aside, just like the materials, and stuff…
Gaston Teran: When you do a unit turn, a lot of the cost is in flooring. Always, always I try to harden the apartments by having something hard on the floor. That one had the benefit of being hardwood floor, and fortunately there weren’t a lot of ruined floors. They didn’t have quite the luster, but they were still something where you could just clean, mop, move on to the next one.
Nowadays we do as much as possible real ceramic tile. It looks good, it’s durable, you mop it, you go. I hate paying for carpet. Carpets get expensive, especially when you have high turnover. And in bad neighborhoods you tend to have higher turnover.
Joe Fairless: And then do you do anything for the second and third floor units, due to the noise factor, with that type of flooring?
Gaston Teran: No.
Joe Fairless: No complaints?
Gaston Teran: No, not really.
Joe Fairless: Sleeping, common area or bedrooms all have that type of flooring?
Gaston Teran: Yes.
Joe Fairless: Anywhere you have carpet?
Gaston Teran: Some, just we haven’t gotten around to switching them. Sometimes if I get in a bind, I’ll just begrudgingly go carpet, just because it’s fast. [unintelligible [00:12:41].15]
Joe Fairless: Got it. So all-in $210,000.
Gaston Teran: Yup.
Joe Fairless: Did you refinance that one?
Gaston Teran: Yup.
Joe Fairless: And what was the refinance valuation?
Gaston Teran: 360k was the appraisal. This was several years ago.
Joe Fairless: Do you still have it?
Gaston Teran: I do have it. The cash-out – it wasn’t ideal; usually, I try to get 75% of the appraisal value cash-out, minus what’s owed on it. This one in the end was only a 50%, but I still got 180k out. So I almost got all my money back.
Joe Fairless: And what’s the economic occupancy today?
Gaston Teran: 100%.
Joe Fairless: You’re collecting 100% of the rents every month?
Gaston Teran: Yes. And they’re good people. Good family people. There’s none of those drug dealers that used to go on. Even though the surrounding neighborhood’s bad, the people in there are great.
Joe Fairless: And tips for someone who’s buying in that type of area, to get 100% economic occupancy?
Gaston Teran: Well, the most important thing is you have to find who the troublemakers are. If you’re working there, you’ll kind of see it. Find out who your best tenants are, just by observation, by talking to them; get friendly with them. If they get comfortable with you and they know that you won’t say “Hey, so-and-so told me that so-and-so…”, they’re gonna rat out who the troublemakers are, and you make sure to get those troublemakers out of there. That’s the first thing you need to do.
Joe Fairless: What’s the second?
Gaston Teran: The second most important would be, of course, rents.
Joe Fairless: Yup. Collecting money. Important in real estate.
Gaston Teran: Yeah, kick out people who are not. They’re habitual liars, or people that wanna keep delaying.
Joe Fairless: What’s the third?
Gaston Teran: I guess it would be related to maintenance. You really need a decent-looking building. [unintelligible [00:14:16].17] that kind of thing.
Joe Fairless: What’s your timeframe for getting the work orders?
Gaston Teran: It depends what it is, but generally if it’s an emergency, it would be — we don’t come out in the middle of the night unless it’s flood or fire; otherwise it’s next day. But just something typical might be a week. That’s kind of the way it is.
Joe Fairless: And what’s a typical maintenance request?
Gaston Teran: A drain is slow, maybe cockroaches… And those depend, because sometimes if we’re there [unintelligible [00:14:45].29] We don’t want it to go…
Joe Fairless: Got it. So you self-manage, right?
Gaston Teran: I used to.
Joe Fairless: You used to. During the 18-unit days you were self-managing.
Gaston Teran: Yes.
Joe Fairless: Is there a way – to the best of your ability answer this question – to implement step one of that process when you hire a property management company?
Gaston Teran: Well, you hope that the property management company knows and will do it. I would suggest if you do that — it’s depending on where you live, but check up on the place often.
Joe Fairless: And when you say “often”, how often were you there?
Gaston Teran: I was there probably four days a week.
Joe Fairless: And you had a full-time job at the time?
Gaston Teran: I mean, not four full days, but after work I’d go over there. Yes, I had a full-time account.
Joe Fairless: Got it. Alright. So 18-unit, bought it for all-in 210k, reappraisal for 360k… Then what did you do after that?
Gaston Teran: My next property was in 2015k, so two years later. It was a 24-unit, same neighborhood.
Joe Fairless: Okay. Numbers?
Gaston Teran: The cost was 325k, and that required no rehab. That one had about 85% economic occupancy. It did not need much at all.
Joe Fairless: Why were they selling?
Gaston Teran: I don’t know. It was out of state… I don’t know why he was selling.
Joe Fairless: Okay. And did you get a refinance on that?
Gaston Teran: No, I did not.
Joe Fairless: Okay. And is it because there wasn’t a value-add component, so it wouldn’t be as friendly of a refi?
Gaston Teran: I probably will get a cash-out refi on that one, but I have not.
Joe Fairless: Okay. Anything interesting to note on that deal?
Gaston Teran: It’s become kind of a high demand area. I always get calls, people wanna buy.
Joe Fairless: What’s the area?
Gaston Teran: It’s also Price Hill, but that specific area within Price Hill.
Joe Fairless: Okay, got it. And what about the next one?
Gaston Teran: The next one was a 56-unit, five months later. This was probably my biggest home run. This was a 56-unit for $400,000.
Joe Fairless: How did you finance the one right before, and then we’ll talk about this property.
Gaston Teran: Yes, yes. The 24-unit was a traditional bank financing. Since that was in good shape, the banks would listen to me.
Joe Fairless: Then they’ll do it, of course. And what bank did you use?
Gaston Teran: US Bank.
Joe Fairless: Okay. And do you remember the terms?
Gaston Teran: US Bank – they have incredible terms, but they’re scared of their own shadow. So if you have a good property, I would suggest then. But if you have any problems, any defects, they’re gonna run away. The interest rate was about 3,5%. It was a great interest rate.
Joe Fairless: And were you under contract in any of your properties in your portfolio with US Bank, and then they backed out?
Gaston Teran: Yes, one time.
Joe Fairless: Tell us that story, and then we’ll get to the oh-face property.
Gaston Teran: Okay. I was under contract, I talked to them, they said they were interested. They ordered the appraisal. Three or four weeks later – they really let it wait – they said “The P&L is negative. We’re gonna back out.” But fortunately another bank stepped in and we financed it.
Joe Fairless: Got it. What was your thought process as a real estate investor/entrepreneur?
Gaston Teran: I was surprised. This is later on, but that was a hell of a deal; I had experience, money, credit… Everything. I thought for sure this would go, and it didn’t.
Joe Fairless: 56-unit, purchased it for 400k. Right, 56-unit?
Gaston Teran: 56-unit.
Joe Fairless: Purchased for 400k. What can you tell us about the business plan?
Gaston Teran: That required a more intense rehab. It was five buildings. Four of the five roofs were leaking. It was half-empty. Basically, half of the units were down maintenance-wise.
Joe Fairless: Wow. Please continue.
Gaston Teran: By this time I had some employees. These were kind of low-cost employees, but we got the job done. That was about 100k rehab.
Joe Fairless: 100k rehab to rehab approximately 25-27 units from not habitable to habitable?
Gaston Teran: Yes.
Joe Fairless: Is that $2,500/unit? Did I do that math right?
Gaston Teran: About $2,000.
Joe Fairless: About $2,000/unit. Tell us more about what you had to do per unit, how much each of the things were, just to elaborate more.
Gaston Teran: Okay. The electrical was in good shape, we didn’t have to touch the electrical. Plumbing – it’s not major, main drain type of plumbing, but just the fixtures, the P-traps, those little [unintelligible [00:19:17].28] things here and there.
Joe Fairless: What’s a P-trap?
Gaston Teran: Under your sink, it catches water, goes down… Those things. They’re pretty simple, they’re just $4 at the store. It’s low cost, but just labor.
Joe Fairless: Got it. Okay. So you put in $100,000, you bought it for $400,000, so all-in half a million.
Gaston Teran: Yup.
Joe Fairless: And you have refinanced this one?
Gaston Teran: I did do a cash-out refi.
Joe Fairless: Over what period of time from when you bought it to when you did the refinance?
Gaston Teran: About 15 months.
Joe Fairless: 15 months, okay.
Gaston Teran: That was just a little over a year.
Joe Fairless: And how did you know the work that needed to be done in order to increase the value? Were you thinking about it that way?
Gaston Teran: No. I was thinking about it along the lines of [unintelligible [00:19:57].29] and then we need to get it nice enough where we can raise the rent.” I mean, this is a tougher neighborhood so we’re not gonna go real fancy with it, but we want it to be nice. Usually, if you’re just thinking that way and get the rents up, the value comes with it.
Joe Fairless: And how far away – for anyone not from Cincinnati – is Westwood from Price Hill?
Gaston Teran: 4-5 miles.
Joe Fairless: And how far away do you live from these two properties?
Gaston Teran: 4-5 miles.
Joe Fairless: Okay, so it was rather convenient for you to get to both of them.
Gaston Teran: Pretty close, yeah.
Joe Fairless: And were you still in a renovation process with any of your other properties when you purchased this Westwood one?
Gaston Teran: No.
Joe Fairless: Okay, so you were fully dedicated to this.
Gaston Teran: Yes.
Joe Fairless: But did you have your full-time job?
Gaston Teran: Yes.
Joe Fairless: How many hours a week were you working?
Gaston Teran: 40 hours at least.
Joe Fairless: 40 hours a week at least. What were the hours? 8 to 5?
Gaston Teran: Yeah, 8 to 5.
Joe Fairless: Okay. Did you go into an office?
Gaston Teran: Yup.
Joe Fairless: So you’re going into an office… How long was your commute?
Gaston Teran: Short, maybe 20 minutes each way.
Joe Fairless: Okay, so 20 minutes each way, plus you’re working 8-to-5, and you have a property that is half occupied, or half vacant I should say, think about it that way… And it’s you and who else helping you?
Gaston Teran: We had about three guys that used to help me mostly on the weekends.
Joe Fairless: Okay, and how did you find those guys?
Gaston Teran: One was a tenant, and the others were two of his buddies, basically.
Joe Fairless: And how were you dividing and conquering the responsibilities?
Gaston Teran: We were working together. These are not guys that you can pretty much leave alone and say “Take care of the whole building.” So I had to work with them side by side. I had some frustrating things, but we got the job done at a little cost.
Joe Fairless: And what was an example of a frustrating thing?
Gaston Teran: I had to show them how to do everything, pretty much.
Joe Fairless: Okay…
Gaston Teran: I mean, they learned along the way, but coming in they had low experience.
Joe Fairless: Got it. Alright. So 15 months later, all-in 500k. What did it appraise for?
Gaston Teran: 1.12 million.
Joe Fairless: Wow. 1.12 million, and you’re all-in at 500k.
Gaston Teran: Yes.
Joe Fairless: And how much were you able to get out of that?
Gaston Teran: To acquire the property – this was another one where I went to the banks and they were not hearing it; they did not want to do it. I had a good percentage of the down payment, but the banks wanted nothing to do with it. I went the hard money route. So I did that, 12% interest… So when I did the refi, we had to pay back the hard money lender, which was fine, that worked out. So if you do the appraisal value times 75%, minus what I owed the hard money lender, I got a check for 795k.
Joe Fairless: Wow. So that 100k that you put into it – was it the hard money person’s money?
Gaston Teran: No, that was some rents, some savings, some money on the side.
Joe Fairless: Okay, got it. So all-in you probably had around 50k-60k at most of your own money in it, not factoring in the money from the rent?
Gaston Teran: I would say that’s probably right, yeah.
Joe Fairless: And you got a check for how much?
Gaston Teran: 795k.
Joe Fairless: 795k in 15 months.
Gaston Teran: Yes. That was my biggest home run.
Joe Fairless: It’s great, yes. Netting 730k in 15 months. And it’s a refinance, so it’s not taxed, because it’s your money…
Gaston Teran: Right.
Joe Fairless: So then what did you do with that 795k, but netting 730k?
Gaston Teran: That funded future acquisitions.
Joe Fairless: Okay. And when was that refinance?
Gaston Teran: That would have been at the end of 2016.
Joe Fairless: Okay, 2016 at the end. Now what did you do with that money?
Gaston Teran: The next purchase was a 44-unit just outside Price Hill. I call it Price Hill, but technically it’s not. That was a 44-unit for 595k.
Joe Fairless: How did you finance it?
Gaston Teran: Traditional bank.
Joe Fairless: Okay, and how did you find it?
Gaston Teran: MLS. Well, I take that back. It was a broker, who had not put it on the MLS. It was a broker I was familiar with, who was the broker on the previous deal, on the 24-unit, so he was familiar with me.
Joe Fairless: Right, okay. So he was not actively marketing the deal…
Gaston Teran: He was marketing it to his email list.
Joe Fairless: To his email list, okay. So he was promoting it, and then he reached out to you… And what do you think you saw with that deal that others didn’t, or others weren’t willing to pay the price that you paid?
Gaston Teran: It had some deferred maintenance. It wasn’t terrible, but it had some deferred maintenance. It’s kind of a rougher neighborhood, kind of… It’s kind of a rough area, but it’s in a dead end, so you don’t have a lot of the neighborhood problems in the dead end, so it’s good in that way.
Joe Fairless: When you’re driving in an area that is rough, is there anything that you see that would deter you from investing in the area? Or you’re just like “It doesn’t matter the area. If it’s a good deal, I’ll invest there”?
Gaston Teran: If the maintenance is just terrible. Like, you could see in the window, and see the sky, because part of the roof is missing… That kind of deters me a little bit. [laughter]
Joe Fairless: Why? That surprises me…
Gaston Teran: I would still consider it.
Joe Fairless: Because it’s a major value-add deal.
Gaston Teran: Yeah, but you have several factors. One is the city. The city is [unintelligible [00:25:10].12] They sometimes are determined to knock it down. They want permits, and they want to redo all the electrical, and plumbing, and all that. It can be done, but the cost is gonna go higher.
Joe Fairless: So that’s about the property, but I was asking about the area. What about the areas? Is there anything that the research, or through word of mouth, that is just like “You know what, I’ve done some rough stuff, but I’m not gonna go there”?
Gaston Teran: It all factors in… I probably would go anywhere, but if it’s a hotbed for shootings, or that sort of thing, or if it’s a high congregation area… For example there’s an apartment building and a Quickie Shop right next door, you don’t want that.
Joe Fairless: Nope.
Gaston Teran: Because in the Quickie Shop everybody is gonna loiter, and you have no control over that. And they’re gonna keep loitering. If they’re all loitering in your target apartment building, that’s a good thing; you can kick them all out. You control that part.
Joe Fairless: Do you have security at your apartment?
Gaston Teran: No.
Joe Fairless: So how do you kick them out?
Gaston Teran: I do it.
Joe Fairless: You do it.
Gaston Teran: You have to be careful, but yes, we do.
Joe Fairless: Got it, okay. So that property parlayed into what? What was the next one?
Gaston Teran: So the 44-unit was one acquisition. 2017, by the way, was awesome. Then on the same day I purchased a 13-unit in Dayton. This was a good deal, too. Smaller, but a good deal. $90,000. There’s a 12-unit and a house. Not vacant.
Joe Fairless: Okay. What’s the business plan?
Gaston Teran: That was far away. The others were 5-6 miles, whatever. This was an hour’s drive away. What brought the value of that down was there was a vacant house next door; a big, vacant house with boarded-up windows. And that’s always gonna drive the price down.
My little trick there was I said “I have to knock that house down.” And I wanted to be able to be sure I can knock that house down before I bid on this… Because no one really wants to live next to — coming out their door and they see a big, vacant house, boarded-up windows, and all the trouble that those kind of buildings bring.
So it’s a long story, but basically I got in touch with some old guys that owned it, and because of how it was set up I couldn’t buy it, but I said “Okay, how about I just knock it down? And it’ll lower your taxes…” They were behind on taxes anyway, and they were like “Go ahead, I don’t care.” So we knocked it down.
Joe Fairless: Did you get a written agreement before you did?
Gaston Teran: Yes.
Joe Fairless: So now you knock it down… Is there anything at all there? Did you plant a garden or anything?
Gaston Teran: A beautiful yard. It’s just a beautiful, straight lawn. Now they have a backyard.
Joe Fairless: Yeah. So you were under contract with another property?
Gaston Teran: This was all quick, but basically I got into agreement with them before I put the final offer. Or I think it was during the inspection period.
Joe Fairless: So how long did it take you — you said it’s a long story and we don’t have to go into it all, but how long did it take you from initially seeing the boarded-up house to actually it being bulldozed?
Gaston Teran: Well, the agreement was within two weeks, and probably a month later it was bulldozed. You have to do certain things with the permit process to —
Joe Fairless: Right. But you were able to track the people down who owned the house, and have that conversation.
Gaston Teran: Yes.
Joe Fairless: And I’m the person who owns the house. How did that conversation go?
Gaston Teran: Well, I said “I noticed that it’s abandoned, and I was wondering if you’d sell it.” They said “Sure…” They weren’t even really about the money. The city was kind of after them, because they weren’t really cutting the grass, they weren’t paying the taxes… They really wanted to get rid of it. And I was willing to pay them some money for it…
Joe Fairless: What did you offer them?
Gaston Teran: Well, we didn’t even really get to that, because it was a partnership, and a lot of those partners were deceased, so it was gonna go through a probate thing… I don’t even understand all the details, but it was gonna be hell… So it was a lot easier to just get the written permission to knock it down.
Joe Fairless: Okay, got it. What’s the next deal?
Gaston Teran: Another smaller one – this is a 6-unit for $90,000.
Joe Fairless: We can skip past that.
Gaston Teran: Okay. And then the next one is a bigger deal – this is a 63-unit for $700,000.
Joe Fairless: 63-unit for $700,000. Okay. So now you’re relative to what you’ve usually purchased at. You’re purchasing at a higher per-unit basis. Slightly… I believe. I mean, I don’t have a calculator.
Gaston Teran: 11k per door.
Joe Fairless: Right. Relative to what you used to purchase at. So what’s the business plan there? Is that in a similar area?
Gaston Teran: It’s in the city of Hamilton, maybe a 45-minute drive away, something like that. It’s a beautiful building. It’s actually my favorite building.
Joe Fairless: Why?
Gaston Teran: It’s large, it’s a historic building, it’s a beautiful architecture… That’s where we have our rental office. The units are great… It was in good shape. It did not have a lot of deferred maintenance. I got lucky in there.
Joe Fairless: And did you refinance it?
Gaston Teran: Yes.
Joe Fairless: And what did it refinance at?
Gaston Teran: It appraised a lot lower than I expected. It appraised for 1.1 million, minus the mortgage that we had on there; it gave us a cash-out refi check of 349k.
Joe Fairless: Over what period of time?
Gaston Teran: Maybe a year and a half.
Joe Fairless: Got it. Any other large ones?
Gaston Teran: No.
Joe Fairless: Okay. So your model is pretty straightforward – you go in and you buy in challenging areas, you are really hands-on, renovating the units, increasing the value, focused primarily on just getting them renovated and leased up to high-quality residents, and then you refinance the cash-out. Pretty straightforward.
Gaston Teran: Yup.
Joe Fairless: The last question I’m gonna ask you – the question I ask everyone – you said you used to not have a management company, but now you do…
Gaston Teran: It’s an employee.
Joe Fairless: It’s an employee. Okay, so you have your own management company.
Gaston Teran: It’s internal, but I personally don’t do it anymore.
Joe Fairless: Okay. What are some things that you made sure to train that person on, that perhaps would not be typical based on your experience, or maybe might just be something that would be interesting for the listeners?
Gaston Teran: Man, I can’t think of any. Normally, he just follows the rules of property management. I don’t know that there’s too many things. I mean, there’s a lot of integration with us. Sometimes they can wear different hats, where maybe a separate property management company may not get into… But more or less it’s a vanilla position.
Joe Fairless: I don’t think they would agree with that. [laughter] Just my gut. I don’t know this person, but they wouldn’t call it a vanilla position.
Alright, what’s your best real estate investing advice ever?
Gaston Teran: I would say have integrity. I don’t know what is with real estate, but real estate is a magnet for people who are pretenders, and scammers… You see it with gurus who prey on these newbies, for example; they’ll have a section for $50, and people attend, and all it is is a sales pitch for the next level, which is $1,000, which is the next level for $20,000… That’s kind of disgusting.
Then wholesalers — some wholesalers have integrity, they announce themselves as wholesalers, but other guys are always deceiving people. I hate that. And then the other one is I’ve had people want to buy these apartment buildings, pretend they have the money, make a good offer, we get into contract, and now they’re trying to raise all this money. They don’t have any access to the money, and they’re walking away, and sometimes they wanna fight to get their earnest money back, even though they had it tied up for a couple months.
I really suggest anyone getting into the business – perform with integrity.
Joe Fairless: On the last point, did they pass their deadline, so then their earnest money was non-refundable?
Gaston Teran: Yeah, they definitely did pass the deadline.
Joe Fairless: So when the dust settled, did you end up keeping it?
Gaston Teran: It depends on which one, but yes, on the most recent I kept it. On the other one, they fought… Sometimes it just doesn’t make sense because of the legal stuff. It’s just “Keep your earnest money.”
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Gaston Teran: Yes.
Joe Fairless: Alright. First, a quick word from our Best Ever partners.
Joe Fairless: Best ever book you’ve recently read?
Gaston Teran: I read Moby Dick in eleventh grade, and I didn’t finish it, so…
Joe Fairless: That’s the most recent book you’ve read?
Gaston Teran: That’s the most recent. [laughter]
Joe Fairless: Student of experience.
Gaston Teran: No, I do read… I listen to podcasts, I’m on the internet learning constantly, Bigger Pockets, that sort of thing. Just books aren’t for me.
Joe Fairless: Best way to learn how to renovate a unit?
Gaston Teran: To learn how to renovate?
Joe Fairless: Yeah, learn about the process.
Gaston Teran: If you’re gonna learn it yourself, there is so much online. YouTube – there are guys that put these videos up, and many of them are great. I’ve learned a lot of things by using YouTube.
Joe Fairless: Best ever clauses you have in a purchase contract whenever you’re buying a distressed property? If you have that in your sheet, I’ll be shocked… Because I’m just giving you questions off the top of my head.
Gaston Teran: I have four keys to find good deals.
Joe Fairless: Okay, let’s hear them.
Gaston Teran: Okay. Number one – have cash or financing ready. I have lost a couple deals, and they killed me inside (even though they’re old) that I did not have the cash or the financing ready, and I lost it… So that’s the first thing.
Number two is just as far as finding the deals – follow up on leads and listings consistently. You can’t just look at it and then forget it for two weeks. You have to consistently do it. I don’t do it every day, but I do it pretty often.
Joe Fairless: Do you have an example of when you did not get the deal, but then you followed up and then you got it?
Gaston Teran: Yeah… The 18-unit was one where I was going through the banks, I thought I was gonna lose it, and then I came through with the partner that had the money.
Number three – this is a little different than most people do it… I do 90% of my due diligence before I make an offer. And by that, I mean I have enough experience hands-on that I can go into a building and pretty much know what needs to be done in the building. And that’s mainly my main due diligence that I do. Of course, we wanna look at title, we wanna look at all those other things, but the majority of my due diligence I do before the offer… And if I can’t get in, I can still offer, but it’s gonna discount the offer.
That’s number four – make a calculated offer; include all the different factors. The neighborhood… If it’s something that you can’t get into, I’ll still make an offer, but it’s gonna be discounted.
Joe Fairless: I’ve got a property, and I tell my broker “Have any prospective buyer submit their offer, and then I’ll release the financials.” It’s dumb, but people do that. How would you approach discounting your offer for my property?
Gaston Teran: I care about rent rolls, and I don’t really care about P&L’s. When you have experience, you can kind of figure out P&L’s. You know when it’ll ensure for more or less, you know what the water and the electricity is… Once you have the rent roll, you know what everything else is… So really, what I need is the rent roll. And even if you don’t give it to me, if I’m doing a tour, I can ask the tenants. That’s really the information I need.
Joe Fairless: And the rent roll shows the potential income, but the P&L will show the actual income, right?
Gaston Teran: Yeah. What I wanna know is where are the rents, and — well, I would like to know who’s paying, but really, how full is it?
Joe Fairless: Got it. Okay, interesting. Best ever way you like to give back to the community?
Gaston Teran: I like to help folks who are newer. I attend many meetups every month; some in Dayton. That’s one of my favorite things to do.
Joe Fairless: And how can the Best Ever listeners learn more about what you’ve got going on?
Gaston Teran: If you have any questions or wanna follow some of what we’re doing, email me. That would be the best way.
Joe Fairless: Okay. Do you wanna give out the email?
Gaston Teran: Sure. Gteran@yahoo.com.
Joe Fairless: I enjoyed our conversation, Gaston. Impressive stuff, congrats. Now I open it up to questions from the Best Ever listeners, or people here.
Audience Member: I’ve two quick ones and then a longer one. Is most of your debt recourse or non-recourse?
Joe Fairless: And will you repeat the questions?
Gaston Teran: Yes. The gentleman asked if the debt is recourse or non-recourse. All of it is recourse.
Audience Member: What’s your average per-square-foot rents across your portfolio, if you remember it off the top of your head?
Gaston Teran: In general, rents for a one-bedroom – let’s say $440, with maybe 460 sq. ft. Something like that. And then we have efficiencies in two-bedrooms.
Audience Member: Cool. And then the last bigger question was – obviously, you are pretty key to your operation and your business plan. You put a lot of your own time and heart and soul into it. Do you see your business model changing as you have to start hiring employees to grow?
Gaston Teran: Yes. The question was basically as far as scaling and employee count, what the plans are. Right now I have three rehab — I count myself as a rehab, so really there’s four rehab guys. There are two full-time maintenance guys, and one full-time property manager.
Basically, I wanna grow that, in all instances. The rehab crew I wanna grow, and I want the property manager to be fully independent. I hate when I have to get into the property management side. I really like doing more the rehab and the acquisition side.
Audience Member: Thanks.
Audience Member: You mentioned you tried to make your apartments nice, but not too nice. What can I expect — if I wanna do an apartment, what would it look like, and what are the things maybe you don’t do or maybe you do do because of the area?
Gaston Teran: My favorite floor is, like I said, the ceramic tile floor, usually all over. And then for vanities – vanities get beat up. A bathroom vanity will often leak, and people will tell you about it, or get kicked, or whatever. So I will usually go at Lowe’s and just get one that’s $120; it looks new. It’s not fancy at all, but it’s solid, the door works right… So I’ll spend some money there. And the faucets… That kind of thing.
Audience Member: A couple of questions… You have one person you’re calling a property manager for 240 units. What are that one person’s responsibilities for 240 units?
Joe Fairless: I should have asked that. Good question.
Gaston Teran: What are the responsibilities for the property manager, given the number of units that we have… Lease-up. Leasing agent is a big part of his job. The other is receiving maintenance calls. I would like in the future to split that up. Right now he is receiving the maintenance calls. He doesn’t do any maintenance, he just puts it online. We use Rent Manager, and he’ll put it on there, and then the maintenance guys will see it, go, and then clear it once we’re done.
He’ll have some other duties, like if there’s some bills that need to be managed, or that kind of thing. If there’s a dumpster issue, or that kind of thing.
Audience Member: And then move-outs and evictions?
Gaston Teran: Evictions… My wife is an attorney, so she does our evictions. The property manager will do the eviction notices. Right now we’re kind of alternating. Sometimes I’ll go to court, sometimes he’ll go to court.
Audience Member: Okay. And then you said you use a management software called Rent Manager… What does that do for you?
Gaston Teran: Rent Manager… The company is LCS. They’re based in Cincinnati. They are a database. We put all our tenant information in the system. We run our rent payments through there, so it can tell us quickly who’s delinquent and who’s not; it can run our financials. All the P&L’s, fees or taxes, are done there. We’ve recently implemented electronic pay, so now tenants have another option besides mailing a money order. Now they can pay with credit card, ACH, or they can go — I think [unintelligible [00:41:32].03] which surprisingly a lot of people like to do.
Joe Fairless: What type of compensation does a property manager in that position get?
Gaston Teran: $40,000.
Audience Member: [unintelligible [00:41:42].28]
Gaston Teran: What’s the key to finding tenants in rougher neighborhoods… Yes. When I talk to a tenant, I’m always listening; I’ll shut up and let them talk, and after they’re done talking, I’ll be quiet and they take the uncomfortable silence and they’ll keep talking… And here’s what I’m listening for. If they say things like “Oh, I’m working a temp job”, you don’t want them. If they say “I’m in between jobs”, you don’t want them. If they’re talking about anything like family drama, anything like that – you don’t want any of that. If they’re lying — sometimes they’ll say something… “Oh, I haven’t had an eviction in ten years”, and then you double-check on the Clerk of Courts website and you see the eviction, boom, they’re lying. And then the other is if they’re rushing to move in. “Oh, I need it by tomorrow.” That’s a red flag. You really want people to put their deposit down and move in in three weeks. That’s how it’s supposed to be done. And even in rough neighborhoods people will do that. But if it’s a hurry, you’ve gotta ask questions. Something’s a little off there, usually.
Audience Member: Do you have any other screening processes that you employ?
Gaston Teran: As far as screening, we do not do credit check. I can’t base this on facts, but I assume that a lot of the credit scores we would see would be pretty low. What we do check is criminal and eviction. And of course, we wanna verify that there is income, whether it’s something like social security, or a job; if they provide pay stubs, we wanna see that.
Joe Fairless: Any income to rent ratio that you look for?
Gaston Teran: The property manager has that… Usually it’s not as strict as some have it, but I forget what ratio he uses.
Audience Member: [unintelligible [00:43:23].01]
Gaston Teran: I hired my property manager way too late. I was near mental breakdown at that point when I hired him. It was that day where I bought the 44-unit and the 13-unit, and we already had 100 or so units… And I was still working full-time — well, no, at that point I was decreasing from five days a week to one day a week [unintelligible [00:43:54].20] But yeah, I probably should have done that a little earlier. So to answer your question, I’m a little crazy, but I personally can do 100 units with the stuff. But once you cross 100 units, you really need a property manager.
Joe Fairless: And how did you find them?
Gaston Teran: I think the first guy was Craigslist, I think… But now I use normally Indeed.
Audience Member: I haven’t heard you mentioning Section 8. Are you using Section 8/affordable housing?
Gaston Teran: The question was if we use Section 8. Rarely. We used to have across our portfolio maybe 7 Section 8. They’ve gotten tougher as far as maintenance requirements. For example, one that kept bugging me was some of our parking lots — especially in Cincinnati, where it’s very hilly… Some of the parking lots have some areas where they’re a little rough, and they started being very picky about that… And I didn’t think it was worth to repave in order to get some Section 8 tenants in. So we’ve kind of dialed that down. I think we’re down to one Section 8 tenant. And people say it’s guaranteed rent… Well, not really, because even if Section 8 pays three fourths, you’re still gonna have to chase down the one fourth that the tenant owes… So it’s not really guaranteed.
Audience Member: What’s your current occupancy?
Gaston Teran: We have about 12 vacancies… Just a little over 90%, I would say.
Audience Member: So you’ve turned down a lot of potential tenants… Has anyone ever said you’re discriminative against them for some reason?
Gaston Teran: Not really, but you have to be really careful about that.
Audience Member: How do you deal with that?
Gaston Teran: Usually if you give him a direct answer and you say “Look, you had a misdemeanor/felony X number of years ago. We don’t accept that, I’m sorry”, then they move on. If you’re vague or if you’re mean to them, you’re not helping yourself.
Joe Fairless: Any other questions? The last two. Yes, sir.
Audience Member: Why do you choose to keep property management internal, instead of hiring a property management company?
Gaston Teran: That’s a good question. It’s something that I’ve kind of wrestled with. I think the main would be repairs. I do like keeping repairs in-house. I do like having some control over that. I always have feared — I’ve never used a property management company, but I’ve always feared that if they start managing the repairs, they might take advantage of getting their money not through the rent collection, but through the repair process. I always wanted to avoid some of that.
Joe Fairless: Okay. The last one.
Audience Member: [unintelligible [00:46:25].01]
Gaston Teran: Say it again? I’m sorry…
Joe Fairless: Apps to estimate your costs. Anything you use in particular, other than your experience in your head?
Gaston Teran: Now, no. It’s all in my head.
Joe Fairless: Before?
Gaston Teran: Other than maybe the roof. Once you know the square footage, you can multiply, figure out what a new rubber roof would cost. Before I had to do some research, maybe talk to someone that might be more experienced in a certain thing. Now it’s — I mean, you have to write it down; you can’t remember it all. But you write everything down, you multiply, you get a feel for everything… You look at the wiring, you look at the plumbing, you look at the foundation, you wanna look at all the corners, make sure you don’t have corner settling. The roofs – if there’s wet mud on the ceiling, you have to wonder where that’s from.
Joe Fairless: Cool. Hey, thanks a lot. I appreciate it. [applause]