JF2032 : Creating a Win-Win-Win With Sterling Chapman
Sterling is the President at Crestworth Capital, a new venture into syndication. In 18 months he has built a $1.5 million portfolio consisting of 26 small multi-family units. Sterling shares an example on one of his deals with a duplex where he was able to get creative and develop a win-win-win strategy.
Sterling Chapman Real Estate Background:
- President at Crestworth Capital
- Finance degree from LSU
- Over the last 18 months, he has built $1.5 million portfolio
- 26 small multifamily units
- The host of REI podcast “The Rent Roll Radio Show”
- Based in Baton Rouge, LA
- Say hi to him at https://crestworthcapital.com/
Best Ever Tweet:
“I typically try to stay away from buying rentals in flood zones because it does hurt your cash flow.” – Sterling Chapman
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, Sterling Chapman. How are you doing, Sterling?
Sterling Chapman: Doing great, thanks for having me, Joe.
Joe Fairless: My pleasure, and glad to hear that. He’s the president at Crestworth Capital. He’s got 26 small multifamily units. Over the last 18 months has built a 1.5 million dollar portfolio. He’s got a finance degree from the national champions, LSU, in football, and he’s the host of the podcast the Rent Roll Radio Show. Based Baton Rouge, Louisiana. With that being said, Sterling, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Sterling Chapman: Sure. Like you said, I went to LSU for finance, and then I started off as a financial advisor, doing retirement accounts and stuff, and then transitioning into the telecom world, where I shot up the corporate ladder, and I’m actually still there today; I’m a regional sales director at one of the largest telecom companies in the world.
About 18 months ago, making more money than I ever thought I would, trying to figure out what to do with it. I got into personal finance. It got a little shaky in the corporate world, because they’re always shifting things around and surplusing people. I read Rich Dad, Poor Dad, got into financial independence in real estate investing. I started off with a couple single-family houses, then started getting some duplexes and fourplexes, and used some creative strategies, borrowing other people’s money, fixing them up, cash-out refinancing, creating some partnerships… I got a lot of seller financing… And then I guess I got up to the 26 units that I have and manage today, that are cash-flowing me just under 7k/month. I think that all the properties are probably worth close to two million at this point.
Then a few months ago I read Joe Fairless’ book on apartment syndication, and decided to start a podcast and create Crestworth Capital, and kind of switched gears going into 2020, looking to move into the large multifamily space.
Joe Fairless: Alright, well let’s talk about that. The 26 units – that is one heck of a portfolio to acquire in that period of time… And you mentioned you had some creative ways of doing it… What’s a deal that stands out to you among that portfolio?
Sterling Chapman: The first creative deal that I put together really made me, I feel like. The first thing I did was I went and bought a couple of single-family houses. I did those in a pretty traditional manner. I put 15% down, and I rented them out. They’re cash-flowing about $500/month each; little $80,000 houses that have rented out for about $1,100/month.
Then after buying two houses in two months, I was out of cash, but I was just hooked on the real estate bug… So I started reading and researching ways to expand my portfolio without putting a lot of money down, and I ran across the BRRRR method, so I started looking for beat-up properties.
I’ve found these two duplexes, side by side. One of them had been flooded and the bottom half was gutted out. The other one didn’t flood, it was just slightly more elevated, but it was trashed from a previous tenant… And I didn’t have any money, like I said, but I had a friend who flipped houses. He was always interested and approached me about — he could flip houses up to me for rentals, and I could get them under market value, because it would save him money having a guaranteed buyer right when he was done, and not have to worry about marketing and all that kind of stuff.
So I found the two duplexes, got them under contract for $190,000, brought them to my friend who used his investors’ capital to purchase them and fix them up. His investors were a little short, because they had some money tied up in other deals, so I also got my brother to invest 40k and to cover the difference.
He bought them, he added me to the title, he fixed them up, and put about 60k into them. Like I said, they were purchased for 190k, and then I did a cash-out refinance at 80% LTV. They appraised at 390k, so I was able to pull out 312k. I was able to pay back his investors, pay him 50k for all his work, and pay my brother back with a significant amount of interest. When I walked away, I had 78k in equity, and was cash-flowing $2,000/month.
Joe Fairless: [laughs] Bravo! How did you find those two? You said you found them…
Sterling Chapman: I was driving all over Baton Rouge, looking at properties, and one of the duplexes across the street was listed on the MLS, so I went and drove by it, just curious about kind of buying it in a traditional manner. And when I drove over there, I looked across the street and I saw these beat-up properties that had a little bandit sign stapled to the front door, with just a phone number on it. So I called the phone number and it ended up being a wholesaler who had it, but he was out of town. The properties had been handed down to somebody in an estate type of situation, and the kids I think were on drugs or something, and had taken out money about it, and it was in the process of being repo-ed by the bank… And they just needed enough to bail them out of trouble.
Joe Fairless: So you had a connection with someone who had a connection with investors. They then bought the deal; you were on title, with the intention of buying them out once the refi was complete. Did you say your wholesaler friend…?
Sterling Chapman: Yeah.
Joe Fairless: Okay, your wholesaler friend also oversaw the renovations – did I hear that correct?
Sterling Chapman: Yes. The wholesaler whose number was stapled to the door knew the previous owners. I didn’t know them at all. I just called him and locked up the contract to buy them. Then I had initially approached one friend about putting up the money and going in with me, and he saw the conditions of the property and kind of ran away… And then I called the other friend of mine, who was an experienced house flipper, who had investors who were funding his house-flipping projects.
So I positioned it to him and said “Hey, I have this deal under contract. I don’t have any construction experience. You do this all the time… I’ll give you the contract if you promise to let me cash-out refinance at the end and you can walk away with 50k for putting the money together and overseeing the construction and all that stuff.
Joe Fairless: That’s a win/win/win/win/win. Everyone wins.
Sterling Chapman: Yeah. Even my brother that put in the last 40k – he ended up getting 15% on it. It was a 6-month project, so it was a 30% annual return for them as well. So yeah, everybody came out [unintelligible [00:07:16].29]
Joe Fairless: And I imagine there’s a lot of those opportunities in your area. Is that an accurate assumption?
Sterling Chapman: Yes. There was a massive flood in 2016 for the Baton Rouge area, and it must have covered a third of the city. It left so much opportunity for this type of situation, where people were just walking away from their properties because they didn’t have flood insurance.
Joe Fairless: Do you?
Sterling Chapman: Yes… I have flood insurance on all my units.
Joe Fairless: How much does it cost for those two units?
Sterling Chapman: It’s four units. It’s two duplexes, and each duplex is $1,700 a year.
Joe Fairless: That’s not a lot at all.
Sterling Chapman: It varies though. It can get expensive. It varies based on your flood level, elevation, and where you are, and how much the properties are… But yeah, I typically try and stay away from buying rentals in flood zones, because it does hurt your cashflow… But there was so much meat on that bone. I just worked the flood insurance into the numbers and it still came out great.
Joe Fairless: How much of Baton Rouge is in the flood zone?
Sterling Chapman: Probably 30%-50%.
Joe Fairless: Okay. And you mentioned that there’s a lot of those types of deals, and I know you mentioned that you’ve read my syndication book, and now you’re going that direction… But why? If you’ve got a tried and true approach here and you’ve got a lot of opportunities locally, and you’ve done it before, why not just focus on that?
Sterling Chapman: I plan on simultaneously going in both directions. I wanna continue building up my portfolio locally, but I definitely want to go into raising larger deals, that are less labor-intensive.
At this point I have a rather demanding W-2 job, I have a five-month-old baby…
Joe Fairless: Congratulations.
Sterling Chapman: Thank you. And I have 26 residential units that I personally manage. So it’s just becoming a time crunch, and I just started evaluating other options. Having a much larger property and using other people’s money just seems like a less labor-intensive, easier, faster way to scale.
Joe Fairless: Let’s talk about some other units that you purchased in that portfolio. You said you started out traditional, 15% down on a couple single-family homes. You talked about those two duplexes… What deal have you lost the most amount of money on?
Sterling Chapman: I don’t know that I’ve lost money on any of them. I will say that the first single-family house I bought didn’t perform quite as well as I had anticipated, because I have $500/month cashflow on it, and on a spreadsheet that comes out to a 37% rate of return based on the 15k I spent to buy it… But I didn’t know what to look for, I wasn’t experienced. There were a lot of hidden plumbing issues, there was an HVAC issue, there was siding that had to be redone for the insurance company… So all the unforeseen repairs and issues that I just didn’t think to look for, because it was my first time, ended up probably taking the first year and a half or so cashflow out of it.
Joe Fairless: Have you had to replace the tenant?
Sterling Chapman: No, I’ve had the same tenant there…
Joe Fairless: Wait till you have to replace the tenant… [laughs]
Sterling Chapman: Yeah. I’ve had to replace tenants in other units. But both of my single-family houses have had the same tenants since I got them a year and a half ago. They’re great tenants, and I think in the long run it’ll have worked out to be a great deal; it’s just the first year’s cashflow got wiped out by those unforeseen things, that I look for now.
Joe Fairless: Are you self-managing?
Sterling Chapman: Yes.
Joe Fairless: How’s that going for you? You’ve got a full-time job and a five-month-old baby…
Sterling Chapman: It’s escalating quickly… Between November and December of 2019 I’ve picked up 14 units. They’re lower income compared to the other properties that I have… So up into that point, all of my properties rented for about $1,100/month. And these last 14 properties I picked up, they’re renting for $600 and $700 range, and they’re older properties. So it’s kind of coming to a head where there’s a few different avenues…
I’m looking for professional property management, although you don’t get the same type of professional property management on the scattered out duplexes as you maybe would with a large multifamily, where you have more of a professional group… The kind of people that — what I’ve seen is the type of property managers that wanna chase down all those kind of low-income duplexes, I just haven’t seen where they’re performing as well with them as they would with me.
Another option that I’m evaluating is having my wife and possibly my mother run the property management, and kind of building out a property management company. My wife works retail, and she hates it, and we’ve entertained her quitting and us just buying a commercial office, and her running all the properties out of the office, as well as getting her real estate license, so we can just make it more of a family focus.
Joe Fairless: What’s your least favorite part of self-managing right now?
Sterling Chapman: I think showing the units. I’m good at closing the leases; I’ve always been a sales guy. I’m a regional sales director during the day… So when I first got the properties, I was so excited, because I was like “Man, I closed five leases today! I rented out 21 units in 36 days”, or something…
Joe Fairless: That’s impressive.
Sterling Chapman: And I got high off of it. But now, just getting stood up over and over and over again… 80% of the people don’t show. It’s just me driving back out to the same property over and over.
Joe Fairless: How far away are the properties, typically, from where you live?
Sterling Chapman: Not far. They’re all in Baton Rouge. But the last 14 I’ve bought – which I’d like to talk more about, because they’re all seller financed…
Joe Fairless: Oh, we will.
Sterling Chapman: But those are about 5 minutes away from my house. So that’s not a big deal. The duplexes – I ended up buying a third duplex where those first duplexes were. It was actually the first one I went to go look at; I ended up buying it later. Those are about 20 minutes away from me. And then the first house I bought is in Baker. That’s about 30 minutes away from me, though I haven’t been out there in probably a year. And then I have another house that’s about 30 minutes away, that I haven’t been at in a year either.
But when I say I self-manage, I don’t fix anything. I have handymen, I have sheetrockers, and painters, and plumbers and electricians. I just kind of coordinate it all, and show the units, and fill the units, and do the accounting, and all of that. But I don’t actually go repair anything myself.
Joe Fairless: There’s gotta be some way to improve the attendee percentage for showing up for your showings… Have you looked into that? I don’t have any ideas off the top of my head, but there’s gotta be something in the process. I know I’ve interviewed people in the past who have optimized the process.
Sterling Chapman: There’s a few things I do. There’s group showings…
Joe Fairless: Yeah, that’s what I was thinking of.
Sterling Chapman: I have zero vacancies, and I’ve had very little vacancies from the beginning. I have evicted two people and had the unit filled within a week both times. Those four units on Meadow Park that we had fixed up – I got those leased out, all four units, in four days.
A big thing that gives me comfort with me managing it is the sense of urgency that I handle it. The second somebody sends me a message, I’m like “Oh, where are you at? I’m gonna meet you over there right now.” And I don’t think a third-party property manager would necessarily have that sense of urgency.
And I hate to make this general statement, but the renter base that I’m dealing with there – they seem to get easily distracted. So if they call me on Thursday, I’m like “Well, I’ll meet you there tomorrow at 3 PM.” They’ll have disappeared off the face of the planet by tomorrow at 3 PM. But if I say “I’ll be there in 15 minutes”, they’re there.
So I do group showings… If I’m at the office, if I’m doing my day job, I won’t. I try my best not to leave. I try and set it to where it’s convenient for me in group sections. But if I have 5 or 6 people that say they’re gonna meet me there tomorrow at 3 o’clock, I’ll be lucky if one shows up. But I do have a lot higher attendance rate if I say “I’ll be there in 15 minutes.”
Joe Fairless: Let’s talk about those 14 units. Tell us the story about it.
Sterling Chapman: Throughout the process of just kind of networking around the area and just calling and asking everybody that was listing stuff, I ran across this older gentleman who had been collecting properties for 30 years, 40 years… And he had been 1031-exchanging for all these years, so he had a pretty sizeable portfolio. He was looking to sell, he was trying to retire, but he didn’t necessarily want to take the big tax hit of this tax that he’s been deferring his whole life… So he was open to the idea of seller financing it. Also, what was he gonna do with the cash? Obviously, he trusts his money in real estate.
So we negotiated to do 10% down seller financing. The first one was a 130k duplex that rented for $1,500/month, and I put $13,000 down. We did 10% down, 30-year amortization, with a 10-year balloon, at a 6,5% interest rate. So I’m cash-flowing $600/month on that one.
Then he had a fourplex… My brother actually had some cash and he wanted to get involved, but he doesn’t wanna actually be involved; he just wanted to invest the money. So we had him put down the 10%, so him and I split the cashflow on that fourplex. Then we picked up four more duplexes. Two are with my brother, and then two are just in my name.
Joe Fairless: All with the same percent down?
Sterling Chapman: I think two of the duplexes I got 0% down, because I was buying so much from him.
Joe Fairless: Wow. Okay, so you said you met this person through the networking you’d been doing… Can you trace back more specifically how you came across this person and their properties?
Sterling Chapman: This particular individual – he was a realtor at some point; he listed the properties himself. I called him to ask him about one of the duplexes he had listed. I asked him to go out to lunch with me, and we just sat and talked. He said “Well, actually I have all these other properties, too.” We stayed in touch over a six-month period until finally he said “Look, I’m 75. I’m trying to get out of this thing”, and I said “Alright, I’ll start taking them off your hands.” Like I said, over a couple month period I ended up getting 14 of them.
Joe Fairless: And what’s the structure? You said the percent down, but what are the terms of the seller financing?
Sterling Chapman: Yeah, all of them are 30-year amortization, on a 6,5%, with a 10-year balloon.
Joe Fairless: Okay. Very reasonable for both parties. 10-year balloon – you’re not in any rush…
Sterling Chapman: Right. And that area I feel is in the path of progress a lot. Some of the property he had — it’s right by LSU, and they’re building up $300,000 condos all around that area. He had somebody come and give him $50,000 for a half-acre lot he had next door to the properties that I’m buying.
Joe Fairless: Tear down your properties, make it a vacant lot. [laughs]
Sterling Chapman: Right… Well, they’re 60-year-old units; there’s no doubt that somebody’s gonna come along and pay me for the land. In the meantime, I’ll just enjoy the cashflow.
Joe Fairless: Speaking of the cashflow, what do they cashflow? Because someone might listen to this and they think “Well, okay, 30-year am – that’s fine.” But 6.5% – is he making monthly income from it?
Sterling Chapman: Sure. Like I said, the first duplex I got from him is cash-flowing $600/month; the fourplex I got I think is cash-flowing $1,000/month, and then the last four duplexes we got cash-flow about $600/month each.
Joe Fairless: And you said at the beginning of our conversation $7,000 in cashflow a month is what your portfolio is generating, right?
Sterling Chapman: Yeah. And just to be clear on that, because I don’t wanna be misleading… When I calculate my projected cashflow, I just do minus the interest, insurance and taxes. Mortgage interest, insurance and taxes. So of that – I think it’s up to $6,800 – there is repairs and vacancies coming out of that. Like I said, in the last year and a half I haven’t taken any vacancy hit. I’ve had a couple units vacant for a couple weeks, but the convert of their security deposit into revenue covered that. So I’m truly at 0% vacancy there. The repairs have eaten into it a little bit.
Joe Fairless: Repairs, vacancies and your time with management, too. Those are the three big variables.
Sterling Chapman: Right.
Joe Fairless: $84,000/year coming in, not factoring in those three. Bravo!
Sterling Chapman: Yeah. The whole goal at the time when I first got into real estate – I had my boss who had been at the company for like 17 years, got surplused. Big companies do that – they just move things around, and they say “Hey look, at the end of the year you’re not gonna have a job.” And I was engaged at the time, I was about to buy my first house, and I just envisioned me being 40 years old, with three kids in private school, and car notes, and a house mortgage, and the corporate faucet just randomly turning off… And it just terrified me. So I was like “I’ve gotta figure out a back-up plan.”
So that was my first goal, was to just create that cashflow in case something happened to my W-2 job. Since then it’s blossomed into so much more, and I have much larger real estate ambitions today… But that was my first goal, and I achieved it in a year and a half.
Joe Fairless: How much of the total of your money do you have in these properties?
Sterling Chapman: Not a lot. I was adding it up the other day, and I wanna say it’s probably around 70k.
Joe Fairless: Well, you know what – that’s a really good ratio, money into annual cashflow…
Sterling Chapman: Right.
Joe Fairless: If I can invest 100k to make 100k in annual cashflow, then that’s a scalable venture that I’ll continue to do. Taking a step back, based on your experience, what is your best real estate investing advice ever?
Sterling Chapman: I would say it is to kind of work on your mindset. People don’t realize how important that is. I’m a huge Tony Robbins fan, and I know you are, too…
Joe Fairless: Yes, absolutely.
Sterling Chapman: And there’s so much noise out there, especially around real estate investing; there’s so much negativity… And it comes more from people you love than from people you don’t. Your family is concerned, and everybody — you just get so much pushback. “Well, the risk…” So you really have to focus on having the right mindset and putting the right stuff in your mind to combat that and to persevere through it. Today nobody tells me it’s a bad idea. A year and a half ago every single person I knew told me it was a horrible idea.
Joe Fairless: Are you ready for the Best Ever Lightning Round?
Sterling Chapman: Sure.
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: Alright, you know what’s coming… What’s the best tool you use to stay sharp from a personal development standpoint?
Sterling Chapman: Reading and podcast.
Joe Fairless: What’s a book that you’ve gotten some value from recently?
Sterling Chapman: A book I’ve gotten a tremendous amount of value from recently was Joe Fairless’ apartment syndication book.
Joe Fairless: Oh, I know that guy.
Sterling Chapman: That’s why I started my podcast and that’s why I created Crestworth Capital.
Joe Fairless: What’s a mistake you’ve made on a transaction, that we haven’t talked about already?
Sterling Chapman: A missed opportunity… Trying to low-ball, when I could have just offered the full amount and gotten a great deal. But I was greedy, and just tried to save an extra few thousand dollars, and I lost a deal to somebody who wasn’t.
Joe Fairless: Best ever way you like to give back to the community?
Sterling Chapman: My brother actually has a program called “Strong Men Academy.” He’s an assistant principal at a local middle school, where he’s dedicated to teaching — there’s a lot of at-risk youth that don’t have a lot of strong male father figures around, so he brings in strong male role models from the community to help coach these kids into growing up to be good, solid, well-rounded men. I spend a lot of time helping him with that program.
Joe Fairless: And how can the Best Ever listeners learn more about what you’re doing?
Sterling Chapman: They can listen to my podcast, The Rent Roll Radio Show. They can email me at email@example.com, or they can check me out on Facebook. My personal one is Sterling Chapman and my business one is Crestworth Capital. The Rent Roll Radio Show has a page as well.
Joe Fairless: You’re a very resourceful person, that’s for sure. That deal that you talked about, with the $190,000 to buy, and you didn’t have capital at the time, so you structured it in a way that everyone won… That’s just a microcosm of some of the other things you did that we talked about with the seller financing. Because there’s a lot of opportunity for Best Ever listeners who are low on capital, to go find deals, and then network with the right people, connect the dots, and then have a property of their own afterwards, and everyone wins.
One of the main things is to find the right deal, because there’s a lot of equity built into that, and you’re able to compensate everyone handsomely as a result of that… So finding the right deal is a major component of that. But then also, someone could come across that deal and not know what to do with it, and I’m glad that we’ve talked about what you did, because it’s a great case study for others.
I really enjoyed our conversation. Thank you for joining us. I hope you have a best ever day, Sterling, and we’ll talk to you again soon.
Sterling Chapman: Awesome. Thanks, Joe. I look forward to meeting you in person at the Best Ever Conference in Keystone in February.
Joe Fairless: Oh, nice. Alright, see you there, my friend.
Sterling Chapman: Thanks.