JF1854: Stuck With Bad First Deal, But Scales To Over 20 Units with Jamie Gruber
Jamie bought his first real estate investing deal in 2005. He still has that same property because he was unable to sell it. He didn’t let that ruin his investing career, Jamie now owns more than 20 units with more under contract to close (may have closed since recording this episode). If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Best Ever Tweet:
“Build your network, but also try to be the face of a market or the face of a niche within a market” – Jamie Gruber
Jamie Gruber Real Estate Background:
- Real estate investor with 21 units and 22 more under contract
- Recently created a fund to take on capital and scale his business with his partner
- Based in Ann Arbor, MI
- Say hi to him at https://www.cfassetgroup.com/
- Best Ever Book: Outwitting the Devil
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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, Jamie Gruber. How are you doing, Jamie?
Jamie Gruber: I’m doing well, Joe. Thanks for having me.
Joe Fairless: I’m glad to hear it, and it’s my pleasure. A little bit about Jamie – he’s a real estate investor and he has 21 units with 22 under contract. He recently created a fund to take on capital and scale his business with his business partner. Based in Ann Arbor, Michigan. With that being said, Jamie, do you wanna give the best ever listeners a little bit more about your background and your current focus?
Jamie Gruber: Sure, yes. I’m a native New Yorker. I grew up there, I bought my first property there. In 2005(ish) I made a mistake that I think a lot of people made back then in going zero down. 20% down with one loan, the rest was under another loan, and when I moved a few years later (right around 2008, actually) to Boston with my job, I couldn’t sell that house, and I still own it to this day. So for a lot of years, that house was a burden to me; I always looked at it like “Man, if I could just get rid of it, I’d feel so much better.” Even though I was renting it, making a little bit of money on it, it just felt more like an albatross than an investment.
A few years later I re-read Rich Dad, which I know is essential to a lot of investors’ career… At the same time my wife and I bought a house in the Boston area that we ended up house-hacking and kind of flipping (long-term flip) and made some decent money on that… But really decided that I was gonna take that single-family and change my mindset around it from sort of detriment to asset. We restructured the debt on it, we did some things to make it a little bit more professional as far as how we managed it, and we went from there.
Shortly after, we decided to buy a couple of duplexes in that same area in New York. So we were living in Boston, we bought these two duplexes remotely, both distressed. We fixed them up, we’re in the process of refinancing them… But then as time went on, I’m a W-2 employee, I have been one for a long time; I like what I do, but I realized that the long game of a 401-K isn’t as sexy to me. So buying properties two doors at a time is great, but takes a long time, so I made the decision that multifamily was for me. I got myself educated, and when I moved to Michigan with my job a couple years later – which is where I am now – I got with a partner, I started looking at deals… We picked up a 16-unit late last year, and we’re now under contract with a 22-unit. That is our focus.
That first property we purchased we with our own money, and with partners. The second property we’re purchasing with partners as well, but we’re funding it with other people’s money, and moving forward our focus is to find some larger deals and syndicate.
Joe Fairless: Tell us about the 16-unit deal. Purchase price, business plan, that sort of stuff.
Jamie Gruber: Sure. We picked it up — it’s in a small town outside of Ann Arbor, kind of a bedroom community. We picked it up for $755,000, about 47k/door, with a 7-cap. The NOI was like $51,000 at that point when we purchased it, and the owner was your standard mom and pop. They owned it for a lot of years. Older couple, unfortunately their health was failing; we found the deal off market through who now are our partners on the deal, and we realized that rents are severely suppressed. Leases from 1999, where rent was never increased or increased very little, more than one. And others were 2008 and 2007, 2012, that kind of thing. So lots of upside on rent.
We came at $578/door in rent, and we projected to get to a little over $700/door in rent, and actually we’re learning — it’s a very small town, and we’re pretty much the market. There’s really not a lot of multifamily in that town, and we’re learning that even our anticipated rent is lower than what the market would allow for… So we’re starting now with a couple of unit turns to really pump rents up to even more than we thought.
Joe Fairless: Like what?
Jamie Gruber: We also have a plan for pets, plan for storage, those fees coming in… There was no reported laundry income, so all of that on the income side. And we have some expense management strategy we have in place to increase the NOI to about 85k, 86k, which would put us at about a 1.2-1.3 million dollar valuation.
Joe Fairless: Wow, that’s phenomenal. A very thought out plan. You said you projected there’d be $700, and it looks like you can push a little bit more… What do you think you can push to?
Jamie Gruber: I think on average we can get rents up to probably $750-$775, if not more. When it’s fully turned over, if current residents leave, it’ll be over $800… But I’m anticipating our current residents, who we’ve moved their rents up not to full market, but pushed it as much as we felt we could without turning the entire building over – as we kind of incrementally increase those folks, it’ll get into the high sevens… But if we turn units in time, then we can be easily into the $800.
Joe Fairless: And it doesn’t sound like you’re doing major renovations in the units to upgrade them. Is that accurate?
Jamie Gruber: It depends. Some of the units are in really good shape. The biggest issue, honestly, is that this was a big-time smoker building; or the two buildings, big smoker. So a unit we just turned – you take the magnets off the refrigerators and you can see the original color, kind of thing… So we’ve had to do some — I wouldn’t call it major renovations, but probably $5,000/door or so. We’ve put in new kitchens, or painted sometimes kitchens, painted cabinets… Same thing with the bathrooms. We haven’t had to gut a bathroom yet, but paint the vanity or maybe replace the vanity, replace the toilet, clean up the tile, that kind of thing. So 5k-ish a door is what we’ve put into it… And we’ve learned a lot, because there’s some sweat equity in there as well that we didn’t anticipate certain costs…
Joe Fairless: Like what?
Jamie Gruber: Cost of labor. We were probably under on cost of labor, what we anticipated going in.
Joe Fairless: And what about it being under on cost of labor? What aspect of the estimate was a little bit off?
Jamie Gruber: A couple of things. One, the cost of just handymen services – guys to come in and just help us lay down flooring, help us do some paintwork, or whatever, was probably more in the $50-$65/hour range, where we were anticipating and maybe just didn’t do enough deep diving into it to learn that it’s really… We thought $25 was gonna be a good price, but we’re learning that it’s significantly more to get a good handyman. So that’s one.
The cost of a painter was a lot more than we expected, based on feedback we got from other investors, and I’m sure we’ll find more apartment-friendly investors in the future… And then some of the condition of some of the cabinetry we thought was better than it was, but when we got into it and you started really moving things around underneath, where you’re thinking you’re gonna move a shelf and paint this cabinet, the shelf would crumble, or the structure of the cabinetry would crumble… Those sorts of things were things that we maybe didn’t anticipate as well.
Joe Fairless: Regarding the painter, what did you think it would cost and what is it actually costing?
Jamie Gruber: It’s costing now about $1,500 to paint a unit. We were expecting half or less of that.
Joe Fairless: And how large are the units?
Jamie Gruber: They’re about 700 sq. ft.
Joe Fairless: With the expense management strategies you mentioned that you were employing, what are some examples of that?
Jamie Gruber: A good example is when we bought the property, there’s a dumpster, so we have an account with a local waste management company… And one of my partners called that company right away, saying “Hey, our price is high.” I honestly can’t remember exactly how much it was, but the price feels a little bit high… “Is there anything we can do to negotiate this?” and they said “Yeah, well the prior owner just never called us, so we kept raising it. They never called us”, and they literally slashed the cost of our dumpster in half, if you will. So that was one big one.
Other expense management stuff was there’s hard water in the building, and there’s some faucets, toilets, things like that, that are literally running all day. Some of the toilets were running all day… So we went through and changed some of those fixtures to mitigate our water bill, and we’re starting to see that build in a little bit now.
Joe Fairless: What type of financing do you have on this property?
Jamie Gruber: We have a credit union that financed it for us. We got 80/20 loan-to-value. It was about a $600,000 loan. It’s a 20-year amortization, a 5-year term, 6% interest, and no prepayment penalty.
Joe Fairless: Recourse?
Jamie Gruber: It is recourse, yeah. And our goal is to get it to the price point where we can refi into non-recourse.
Joe Fairless: Okay. And if it is at the — you say 1.1 million? That’s what it’ll be with the new NOI?
Jamie Gruber: 1.2 to 1.3.
Joe Fairless: 1.2 to 1.3. Is that the range that you could then get non-recourse, once it breaks the million-dollar mark?
Jamie Gruber: Yeah, correct. About 1.24 or higher we should be locked down, but even at 1.2 we should be good to get non-recourse.
Joe Fairless: You mentioned that you found this property from people who are now partners in the deal. It was off market. Can you tell the story?
Jamie Gruber: Absolutely. My partner and I, when we got together about a year ago now, and started really looking at multifamily property and going about putting together a business plan, socializing that plan to brokers, to property managers, to all of these different groups, and just trying to kind of build our team and build our credibility in the market, we had great interactions with brokers, but then we weren’t a priority for brokers, which I completely understand. So I would say “Hey, here’s our criteria.” The broker would say “Wow, this is great. You guys have a really clear plan. It’s excellent”, and then they would send us something that was nowhere near the criteria that we had outlined.
So we were getting a little bit like “Alright, well if we’re not gonna get it through brokers, how else can we?” And we decided to start a meetup group. We found a conference room in an insurance office, put it out on Meetup, created a Facebook group, and just sort of “Hey, who wants to come talk about multifamily?” We got about ten people or so that first month, we had a loose agenda. We did it again the second month, had about 15 people, and we built it since then. In fact, now we have seven markets with the brand that we have. It’s called Multifamily and More. So we have a meetup locally here in Michigan; it’s got over 500 members in a Facebook group, and then we’ve got about another 500 members combined in other groups across the country… So it’s been great.
But in that meetup – I think it was the second or third one – a couple (husband and wife) came to us and said “Hey, we’ve got this deal. It’s actually an 8-unit building, but the owner has 16 total units. We’re looking just to kind of partner up to close on this thing.” We got to know them a little bit, talked through what our strategies were, what our goals were, so on and so forth… And from that interaction they brought us this deal and we were able to close on it.
Joe Fairless: How many people attend your meetup?
Jamie Gruber: To this day?
Joe Fairless: Yeah.
Jamie Gruber: Somewhere between 40 and 50.
Joe Fairless: Okay.
Jamie Gruber: We do a virtual meetup once a month as well, where we get about 100 registrants and probably about 70-80 people attending that. I have a guest come on, somebody of national prominence typically, and do a webinar, if you will, the second Wednesday of the month, and that goes into all of the communities for them to view and participate and ask questions.
Joe Fairless: And how did you structure the general partnership with that couple on this deal?
Jamie Gruber: We are 25% apiece; there’s four of us in it – me and my partner, and then the two of them. We’re 25% apiece, all-in, that’s the gist of it. Any other specific…?
Joe Fairless: No, that makes sense. Joint venture partnership, everyone owns a quarter.
Jamie Gruber: Correct. All brought the same amount of money in and we just split it four ways.
Joe Fairless: That is crystal clear. Very straightforward. What about this 22-unit that you have under contract? How do you structure the general partnership for that?
Jamie Gruber: We’ve got four partners again in this deal. Me and my partner, the gentleman who brought the deal to us, sort of a boots on the ground guy. We split this up a little bit differently because we’re raising capital and there’s different roles here. The guy that’s on the ground, who will oversee management, who’s really doing the due diligence – he’s getting 32% of that property, and the rest of us are splitting the balance. I think me and my partner get 16% each, and the balance goes to the guy who found the property and is also bringing money to the deal.
Joe Fairless: And how was that property found?
Jamie Gruber: Through my meetup here; we have a Cleveland-based version of the meetup as well, and through that, this gentleman brought the deal to us.
Joe Fairless: Is it in Cleveland?
Jamie Gruber: It is.
Joe Fairless: Oh, the plot thickens. Okay…
Jamie Gruber: [laughs]
Joe Fairless: So you’ve got the 16-unit in a bedroom community outside of Ann Arbor, if I heard you correctly…
Jamie Gruber: You got it.
Joe Fairless: And now you’ve got a 22-unit under contract in Cleveland… How far is Ann Arbor from Cleveland? At least a three-hour drive…?
Jamie Gruber: About that. Two and a half, three hours apart, yeah.
Joe Fairless: About a three-hour drive. How do you plan on doing the management for that?
Jamie Gruber: We’ll have a professional manager for Cleveland. And again, the big part for us was one of our partners who actually runs the Cleveland meetup group that we created – and I’m in a mastermind with, so I know the guy fairly well – he’s the boots on the ground, so that’s why he’s getting a larger chunk of the equity in this property. He’ll be the one to really be there, see it visibly, manage the manager and all of that. So we needed somebody local to participate in this.
Joe Fairless: Okay. You got the 16-unit last year… When do you close on the 22-unit?
Jamie Gruber: Good question. We’re under contract, but this is very mom-and-pop. We’re struggling to even know if the price is good, because he wanted an LOI, we gave him one with what we had at the time, which wasn’t much, and we’re sort of clawing things out of him here and there. He’s got three properties, all of them are mixed together…
From a bank statement perspective, he just gets cash from all three groups of tenants and just puts a lot of money into the bank… So it’s hard to know what the economic occupancy is versus actual, and the leases are all over the place… I think the guy in Cleveland, our partner in this, even said – he was brought copies of the leases, and then asked by the owner if he could have those copies back, because he can’t find the originals… [laughter] So it’s been fun, it’s been fun.
Joe Fairless: That sounds about right for a 22-unit… It was one of those scenarios where you make an offer and then we’ll show you what the property is actually worth.
Jamie Gruber: You got it. [unintelligible [00:15:07].10]
Joe Fairless: Right, right. And obviously, in that deal you were not going non-refundable day one.
Jamie Gruber: Correct.
Joe Fairless: How much money do you invest in due diligence of a project like that, knowing that it can take a left turn very quickly based on the lack of information that you have?
Jamie Gruber: At this point, the way we structure the LOI – I don’t know if this is right, or the best way to do it, but what we did (and I think it’s fairly standard) and what we’re making sure of is we’ve got our EMD, so $10,000 is our EMD on that. And we’ve got an exhaustive list of financial due diligence–
Joe Fairless: Earnest money deposit, just so…
Jamie Gruber: Correct, I’m sorry. Yeah. We’ve got an exhaustive list of financial due diligence that we’re requesting from the seller, and he hasn’t even given us all of that yet. So until we have all of that — and we even told him upfront, we don’t know if we can go in with this price, we really don’t. We’ll give you this price, but we don’t know if we’re gonna have to retrade you. We don’t wanna do that if we don’t have to, but we don’t know if we will have to.
So once we get through the financial due diligence, really only then will we start, based on the LOI, the physical due diligence, which will start to cost us some money.
Joe Fairless: Okay. You are under contract though.
Jamie Gruber: We’re under contract. The LOI has been accepted, the contract is signed; we have a purchase and sale agreement signed.
Joe Fairless: Okay. And with the due diligence of it – it sounds like you haven’t walked any units, it’s just gathering all the paperwork right now? Is that correct?
Jamie Gruber: My partner walked a few units upfront; they did allow us to get in once we submitted an LOI and they accepted that. So prior to the actual contract we did walk it, after the LOI. And from what he reported, the units that they did show us, they were in decent shape. Could use some upgrades, but overall in decent shape.
Joe Fairless: Do you know how they found this property?
Jamie Gruber: I actually don’t.
Joe Fairless: I was just curious.
Jamie Gruber: Yeah.
Joe Fairless: So you’ve got clearly a focus on these 15 to probably 50-unit properties… Is that where you want to continue and build the portfolio, through these types of properties, or are you looking to change it up after you purchase a couple of them?
Jamie Gruber: Yeah, we’d like to start small and expand. We were looking at a 32-unit recently… That sort of thing. But at some point we wanna get into the larger, 100+ deals. We have this mantra – my primary partner and I – of “500 and 5.” That’s 500 units in 5 years. We even have a hashtag that we text each other every so often… [laughs]
Joe Fairless: I like it.
Jamie Gruber: So yeah, we wanna scale up, take the experiences from one, apply it to the next. We’re making plenty of good mistakes on the property we own now, the 16-unit; I’ve made plenty of mistakes on my small, single-family portfolio, and we plan to just leverage those and continue to scale up.
Joe Fairless: I’m gonna go all over the map and all the way back to what you said earlier – the 2005 property you bought in New York, zero dollars down, that you still own today… Where in New York is it?
Jamie Gruber: It’s a town called Elmira. It’s a little town, right on the Pennsylvania border; I would say directly South of Rochester. A little South-East of Rochester, New York.
Joe Fairless: And is that the only home you own in Elmira?
Jamie Gruber: In Elmira, yes.
Joe Fairless: Do you own homes in the nearby area of Elmira?
Jamie Gruber: About an hour and a half East of that, where my family lives, where I grew up, for the most part, is where I own two duplexes.
Joe Fairless: And how much did you purchase that Elmira house for?
Jamie Gruber: Back in 2005 it was $140,000.
Joe Fairless: And what would it go for today if you sold it?
Jamie Gruber: Maybe 120k.
Joe Fairless: 120k. And what does it rent for?
Jamie Gruber: About $1,200/month.
Joe Fairless: Okay, so it’s breaking even/you might be making–
Jamie Gruber: You’ve got it. Spot on. It’s not killing me, it’s not doing anything for me either… It’s just sort of there. My wife is a real estate professional by designation, so we take the passive of losses and move on.
Joe Fairless: Okay. Who manages that?
Jamie Gruber: My wife does, pretty much.
Joe Fairless: Remotely.
Jamie Gruber: Remotely, yeah. She has some contractors and people on the ground there that she’ll leverage, but she manages it remotely.
Joe Fairless: Okay, got it. Based on your experience as a real estate investor, what’s your best real estate investing advice ever?
Jamie Gruber: Networking is, I think, an underrated, understated imperative when it comes to investing. Everyone knows what it is, everyone knows – including me – it’s the general gist of “Get out, meet people” and everything else, but the extent to which you can not only get out, join a local REIA, meet with people there, build your network, but also potentially get out in front and be the face of a market, or be the face of a niche within your market.
I’ve had multiple deals sent my way, I’ve had capital offered to me to invest, simply because I’ve put myself out there in front of 50 people a month at a meetup locally, and 100 people/month on a webinar, with the idea of giving value. So you go out, you network, you give as much value as you possibly can, without expecting it to this extent. I see the return on that, even though it’s not primarily why I do it – I really enjoy it – but networking is key. I would say that’s my best advice.
Joe Fairless: Yeah, I completely agree… And anyone can put together those meetups, and most people don’t. I can tell you, I’ve seen both sides of it, because I have a monthly meetup in Cincinnati. I’ve had it for probably about four years; maybe three years. And then one of my good friends – he’s also a passive investor with me – he started an investor meetup, non-real estate-specific, just an investor meetup where local entrepreneurs who wanna start their business, they come present, and we as investors decide if we wanna invest in their idea or not… And I can tell you that as an attendee of a meetup, it’s amazing, because someone else coordinates it all. I just show up five minutes before, I’m relaxed, I hang out, I talk, I listen to the presenter, and I leave when I want… It’s just wonderful. And putting one together – it’s a lot more work; if you have a team, then it’s much better, but there is a lot of value that’s created through creating that meetup… But that person, my friend who puts together that one meetup that I attend – he gets value too from it. So everybody’s benefitting.
In your case – holy cow, the two largest deals… Those are the two largest deals, right?
Jamie Gruber: Yeah, yeah.
Joe Fairless: They came from your connections. So I’m glad that you mentioned that, and I’m glad that that was your best ever advice.
Jamie Gruber: Absolutely.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the best ever lightning round?
Jamie Gruber: Let’s do it!
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: Alright, best ever book you’ve recently read?
Jamie Gruber: Outwitting the Devil, Napoleon Hill.
Joe Fairless: Oh yeah, Sharon wrote that, too.
Jamie Gruber: Correct. Great book. I think it’s the foundation for Think and Grow Rich, and it just got my mind racing. Great book.
Joe Fairless: That is a very polarizing book, because I did not like it at all, but it was highly recommended to me by people who swear by it. So I believe you’ll either love it, or you’ll be like “Meh, not for me at all.” So Outwitting the Devil, that’s yours.
Jamie Gruber: I’ll be honest, the first third of it was slow. I didn’t know how much I wanna stick with it, but enough people recommended it that by the time I finished it, I really loved it. But yeah, I could see how you wouldn’t like it, to be honest with you.
Joe Fairless: Yeah, alright. To each his own. I do like other books that Sharon has written, by the way. I think we have like one degree of separation with Sharon, so – Sharon, I do like your other books.
Best ever deal that you’ve done?
Jamie Gruber: Probably the 16-unit I mentioned. That’s going really well. To have not understood the true rents are even higher than we anticipated – that’s a good mistake, or a good learning, I guess… But the home I purchased in Massachusetts was an estate sale we bought, and when we left, we walked away with a hundred and something dollars in profit. We’ve enjoyed the house, and when it was time to get rid of it, it ended up being a great deal.
Joe Fairless: You rode the wave of appreciation, just because that’s what happened in the market, or…?
Jamie Gruber: That, and we redid the whole house, too. We put about 50k into it, because it was vacant for two years prior to that…
Joe Fairless: Oh, so you earned it.
Jamie Gruber: …not redone since like 1972 when it was built.
Joe Fairless: Okay, well you earned your profit.
Jamie Gruber: Yeah.
Joe Fairless: What’s a mistake you’ve made on a transaction that we haven’t talked about already?
Jamie Gruber: I think it goes back to the duplexes that I purchased. It was probably under-estimating the cost of repairs, the cost of some of the stuff that needed to be done, like windows, siding, things like that, that you have people in that market, and they say “Yeah, I had my siding done for X, I had my siding done for Y”, and you’re like “Okay, that gives me a good idea of what I’ll pay”, and then when you actually get a quote for yourself with that specific property, it’s a lot more. So making sure you get specific quotes on the property that you’re looking to rehab I think is the biggest mistake I’ve made.
Joe Fairless: Best ever way you like to give back to the community?
Jamie Gruber: My wife and I are big on donating to — we call it “the innocent”, so children, animals, that sort of thing. I think that’s from a charitable standpoint, where we give back. From a community standpoint, within this multifamily group I really do enjoy bringing high-level guests to my meetups, high-level guests to my webinars, so that folks can interact with, learn from, and everything else from them… As well as giving my own time to a lot of folks that have questions about mistakes I’ve made, things I think, that sort of thing.
Joe Fairless: How can the Best Ever listeners learn more about what you’re doing?
Jamie Gruber: I think the best place to go would be to our website, which is CFAssetGroup.com. On there you can learn more about our company. There’s also a link in the middle of the page to Multifamily and More – if you click on that, you can then select any other groups nationally that you might wanna join, so you can network locally. We’ll also have a newsletter, you can fill in your email address and we’ll send you information on what we’re doing in the community, when webinars are coming, that sort of thing. And all of my contact information is in there as well.
Joe Fairless: Jamie, I enjoyed our conversation. I talked a lot already, relative to how much I usually talk during the interview, about my thoughts on our conversation, with your approach on networking and building relationships and having these meetups… But I’m also grateful that you got into the specifics of the 16-unit and the business plan, your expense management strategies, as well as the income, or the cost of labor, and some of the assumptions that you’ll update on the next go-around with this 22-unit and future properties, in particular handymen, services and painter costs… So thanks for being on the show, getting into the specifics and also talking about how you found these properties.
I hope you have a best ever day, and we’ll talk to you soon.
Jamie Gruber: Thank you so much, same to you.