JF2100: Start Now With Heath Jones

Heath is a Neuroscientist for the US Army, helping the soldiers reduce hearing loss through studying and testing. Heath jumped in with both feet when he started into real estate, buying a 4-unit and a 16-unit back to back. Heath mentions that his confidence to jump in came from many free resources available online, including the Best Ever Show.

Heath Jones Real Estate Background:

  • Neuroscientist for the US Army
  • He started investing in February 2019 purchasing a four-plex
  • Now he has 5 properties: 4-unit, 16-unit, and 3 rentals SFRs
  • Located in Enterprise, Alabama
  • Say hi to him at:  www.hsquaredcapital.com 

 

 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Start now, it’s never too late to start, and there are no real good reasons not to start.” – Heath Jones


TRANSCRIPTION

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, Heath Jones. How are you doing, Heath?

Heath Jones: I am doing fabulous, thanks for asking me.

Joe Fairless: Well, my pleasure, and I’m so glad that you’re doing fabulous. A little bit about Heath – he’s a neuroscientist for the U.S. Army. He started investing in February 2019, when he bought a fourplex. Now he had five properties – a 4-unit, a 16-unit and three rental single-family homes. He’s located in Enterprise, Alabama. With that being said, Heath, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Heath Jones: Yeah, so my day job is helping to protect hearing of soldiers by doing research and experiments to test apart things that may be contributing to hearing loss, and finding ways to reduce that. I started investing in real estate because at one point I was a contractor for the DoD, and then I transitioned to a more permanent role with the federal government; that came with a decrease in annual salary, but loads of benefits…

But that crunch month-to-month was definitely gonna be a big chunk, so my wife and I had started talking about ways of increasing our monthly income, and started doing research and came across real estate as a potential option. That really spoke to me, because I don’t understand stocks and bonds; it’s all Matrix code to me, on a ticker tape… But I do understand going to a property, seeing a building, and then cashing a rent check each month. So that really spoke to me.

We started looking at getting rental property. This was Thanksgiving of 2018; we were talking to some friends who had done this, one single-family a year for ten years, and they had a 10-home portfolio. We were like “Oh, that seems like a good idea. Why don’t we do that?” So we started to look at properties. That was Thanksgiving 2018. I’m from Texas originally; we go home for Christmas, we’re driving back to Alabama, and we’re like “Alright, one property a year, five years – we’re gonna do it.” When we got back, we started looking at single-family homes, and trying to run the numbers and find a way to make the deals work, but all of our analysis – the best we could squeeze out of a place was maybe 200 dollars extra a month. I was like “Man, that’s a lot of upfront capital to put into  a place to just make 200 extra dollars a month. Why don’t we try to look at multifamily?”

So we started looking at four-units, how much they were going for; there weren’t any on the market at that time… And as soon as the first one came up – it was a triplex. We ran the numbers, it worked, we put in an offer, but we didn’t get that one… Luckily. It was actually overpriced, as we learned later.

Then we did the four-unit. It came on the market at 3 PM, we had an offer to selling agent by [5:30] that day, and had it under contract by the next morning. After that, I was looking for other properties that were multifamily. I found a 16-unit and I showed it to my wife; she’s like “Oh, that’s a good five-year goal…”

Joe Fairless: How soon after that?

Heath Jones: Oh, I actually had the 16-unit under contract before we closed the four-unit.

Joe Fairless: Wow! Okay, please continue.

Heath Jones: So I kept telling her we could do it, and at that time I was listening to your podcast, I was listening to Michael Blank, I was watching Matt Faircloth’s videos on YouTube, the DeRosa Group. So from what I was researching, from the things I was reading, the content I was consuming, it seemed very possible to me for us to acquire that 16-unit. I just had to get my wife on board. So the strategy I used was I started watching the videos while we were laying in bed together just loud enough for her to hear… [laughter] So I’d be listening to something and she’s like “Hey, they just said X, Y and Z. What do they mean by that?” So I’d pause the video and I’d start talking to her about it… And she was like “Well, if you actually make the 16-unit happen, I’ll be all-in with you.”

So I worked hard; I had to raise about 120k, because all of our money was tied up in the four-unit… So I did research about setting up a PPM, and getting investors, and it seemed like it was gonna cost $15,000 to have lawyers draft up a private placement memorandum… So what I ended up doing was going to friends and family members and saying “Hey, I’m starting a real estate business…” And this was primed, so over the course of several weeks I would mention that I was doing real estate. “Oh, we’ve got this 4-unit under contract. We’re looking at multifamily.” So I had prepped my family to know that I was doing this, and then at one point I was like “Hey, I was wondering if I could set up a personal loan in which I would guarantee you–” For all my loans it was 5%. I was like “It’s not as good as you can find in other places, but we’ll keep the money in the family instead of going to some hard money lender…” Because I told them “I’m gonna make this happen, with your help or not. I just wanna get this first big property acquired.”

So I set up personal notes with all of them. So I have little loans for the down payment, which we’ve been paying off over this first year of owning it.

Joe Fairless: So how much in total were the loans?

Heath Jones: 120k.

Joe Fairless: Okay, so that was the equity.

Heath Jones: That’s correct.

Joe Fairless: So you’ve still got another loan on the actual 16-unit.

Heath Jones: Right. I have it on a seller-financed note. I negotiated with the seller to do seller-financing for 5.5%, with a five-year term, with a balloon payment at the end of five years. But we also wrote into the contract that I could get an extension if I needed to for a rate of no less than 6%. So by the time the fifth year comes up, I’ll have to either refinance, or exercise that extension… But the property needed some work; I’ve done a lot of work to it to begin with, and hopefully getting the rents up. I got a lot of bad apples out that weren’t paying rents.

That was one of the first lessons I learned – the difference between economic occupancy and actual occupancy. So they were full, but there were three people that hadn’t paid rent in 2-3 months, and I kind of inherited those headaches… But I got it all turned around, and rockin’ solid now.

Joe Fairless: Well, let’s talk about that… You said the seller financing note after five years is “no less than 6%.” Is there a cap?

Heath Jones: The language actually states that it will be whatever the market rates are. I wish it would have just stayed like that, because then I would just refinance with all the rates now… But I think at the same time they didn’t want it to be lower than the 5.5% or 6%.

The way it’s structured is that if the rates jump up to 6.2%, 6.3% or something like that – I think that’s what it would cap at, whatever the market average is… But if the market average is lower than 6%, then because I’m asking for a five-year extension, then that’s kind of what I’ll have to pay to keep the note [unintelligible [00:10:15].19]

Joe Fairless: Oh, it would be an additional five years?

Heath Jones: Yes.

Joe Fairless: So in total it could be ten years.

Heath Jones: That is correct.

Joe Fairless: Wow. Okay. And I was wondering about the 5% loan on the equity, what lender would allow you to borrow money like that for the equity… But mystery solved. It’s a seller-financed deal.

Heath Jones: Correct. Typically, most lenders won’t carry the first if you’re carrying a second note… So that was alleviated by the fact that I’m financing the property through the seller themselves.

Joe Fairless: Okay. And as far as having the conversation with the seller about seller financing – was that your idea, or his/her idea?

Heath Jones: That was my idea. So the way I went about it – I actually found this deal on LoopNet. This was — just getting started, you just use the resources that you have available. You don’t have any connections, there’s not really anybody at my local real estate meetup who are doing multifamily… All the agents here are mostly single-family homes, so they  might sell some four-units, or they might try to sell a 16-unit, but they don’t really know the ins and outs for the transactions of this size.

So I found it on LoopNet, and what I ended up doing is I didn’t wanna go through the broker that was listed there, because I knew that was gonna be a large amount of money for the seller… So I actually went to the county records, and I found out who owned the building. They had an LLC listed, I looked up the LLC, and of course, there was a number online. I called, and spoke with the secretary of the owner, told him I was interested. I got a call back maybe 20 minutes later from a broker friend of the seller, who – we were then talking and I was like “Hey, would you be okay with seller financing?” And they said “We would have to discuss it. We need to meet you. We like that you’re local in the area, and that you’re there.”

They said they had gotten 8 or 9 LOIs (letters of intent) on the property, but whenever I sent them mine, they knew that I was gonna be their guy… Because I had not only included in my letter of intent the terms that I was looking for, but I also included an amortization  schedule, what it would look like, how much they would make in interest payments over a 5-year, how that added to the balloon at year five, and got them close to what they were asking for.

They were asking 635k for it, and I had evaluated it based on what I thought the cap rate was for this area to be — what did I say…? It was 45, and I told them I would give them 500k for it… And we met at the middle at 560k. But then after the due diligence process there were some things like the insulation needed to be brought up to code, little things like that that kind of added up… So I was able to negotiate another 20k off the price.

So all in all, I got it for 540k, with the 120k down payment seller-financed for a 30-year amortization at 5.5%, with a 5-year balloon, and the extension.

Joe Fairless: Bravo on navigating that. That is not a cookie-cutter deal, especially as your largest one.

Heath Jones: Well, I have to say I wouldn’t have been able to do it if it wasn’t for your podcast, your YouTube videos, Michael Blank and Matt Faircloth… The information that I got from reading your guys’ articles and watching the information you’re providing – I don’t know if I could have navigated it as easily. So I’m just so grateful that you guys have been doing what you’re doing… And to be a part of it today, it feels pretty amazing. So I thank you again for having me on.

Joe Fairless: Well, it’s one thing to listen and to read, it’s another to put into practice. And you put it into practice. Let’s talk about challenges that have come up on the 16-unit since you’ve taken over. How long ago did you close on the 16-unit?

Heath Jones: We closed on the April 4th, 2019.

Joe Fairless: Okay. So what are some challenges that you’ve come across.

Heath Jones: A couple of the challenges is finding contractors to do work that you need done, and having them be reliable and not overcharge you… When you do find contractors, it’ll show up consistently them pricing it up a little bit more, because they know they’re consistently showing up… They get the job done… I’m a little OCD, I have to say, so there’s a lot of times where I watch them do the job, or I come and look, and I’m not really as happy with the work, but they did meet the statement of work, what I asked for.

Another challenge was — since I was self-managing, I did everything by myself. I do have to say, my wife was one of the big reasons we got the extra 20k reduced. She is a negotiation master, and helped guide me on that side of things. I couldn’t have done it without her. But I was the one who was going to the property and knowing on doors and asking people to pay rent. And that’s not really what I was used to, but I wanted to take the first year to understand how to property-manage, I wanted to learn what I could ask a property manager to do if I was to invest in a property that’s far away or out of state… I wanted to see what it would take to actually try to increase rents… More specifically, I also wanted to know if they were going to be taking me to the cleaner’s for flooring, and paint jobs… I now have a better sense of how much things cost.

But the challenge was getting the bad apples out, trying to do things without evictions… I didn’t have to do cash for keys, luckily, but eventually the persistence of asking them for the rent, remaining in constant contact with the bad apples kind of made them know that the management was different, and that the Notice to Quits – we were about to take action; so they ended up moving out anyway.

Now I’m screening a lot more stringent than the previous property management company, so my tenants are good, paying rent in time… So just interacting with the tenants was something that I hadn’t thought about while I was filling out my Excel sheets and making phone calls, and things like that. So that was a challenge for me that I had to get past.

I have one year experience as a property manager, and I do have to say, for the good property managers out there – they deserve a lot of credit. They do a thankless job sometimes, and… They are making their share for doing that job, but I’ve got a lot of props out to the good property managers that are out there.

Joe Fairless: Here’s a hypothetical scenario – tomorrow you come across a 16-unit in a similar area. What are a couple things that you might do differently on this next approach? Whether it’s on the negotiation side, the terms side, the execution side, budgeting side… What are a couple of things you would do differently?

Heath Jones: The one thing that I would do differently is I would also build up a capital expenditures reserve account. My number one goal was first get the down payment; at any cost, I need to get the down payment to close this deal. So that was the watermark on the wall that I was trying to hit. With that being said, since I knew that trying to raise additional money for any of the fixes – what I ended up doing was I also asked the seller and I negotiated it to have deferred payments for the first three months. So what I was anticipating was that for the issues that I knew about, I would need X amount, and the gross income at that time would cover most of those. So I was gonna pay for the repairs out of those first three months of the rental income.

And of course, you always have more repairs than you anticipate, and you always have more issues that come up, that cost more than you thought… So the one thing that I would do differently is to build in a bigger budget, or raise more money for the capital expenditure budget and reserves.

At that time I hadn’t really come across interest-only payments, so deferred was kind of the strategy I employed… I might defer payments for a little bit longer, or I might ask for interest-only payments during the first year, while I fix everything and get the bad apples turned.

Joe Fairless: How much would you build into the cap ex reserve account for that hypothetical 16-unit?

Heath Jones: Oh, man… I would feel comfortable — and this is assuming that you don’t have to replace roofs, or HVACs, or anything like that. Well, I would feel more comfortable if I had maybe 20k to 30k in a reserve, that I could deploy if an HVAC went down for some reason, or the roof started leaking and insurance wouldn’t cover it. Turning the carpets — so what I’m trying to do as well is I’m trying to move away from having carpets in the units, so I’m trying to put in LVP that is sectioned, so if there is some damage, I can just remove a particular panel and then not have to redo the whole floors… That is running anywhere – depending on if I also have to do the carpets upstairs, which I wanna do LVP upstairs as well – between 2k and 3k for the apartments right now.

And painting as well. Painting costs a lot more than I thought it did, and it’s either gonna cost you in sweat and agony if you’re doing it yourself, or it’s gonna cost you to have someone go do it for you. So I guess a little long-winded response to why I would wanna keep at least 20k or 30k for the 16-unit in reserves, and then keep replacing that whenever I don’t have any issues. That way it’s still there in case I need it.

Joe Fairless: Based on your experience, what’s your best real estate investing advice ever?

Heath Jones: Oh, man… Start now. It’s never too late to start, and there’s no real good reasons not to start. Just excuses. Everybody I’ve read, or watched, or talked to, they all say the same thing. They all say “I wish I would have started sooner.” You would be amazed and surprised at what you can accomplish if you make the decision to start and you set your mind to completing that particular goal.

Joe Fairless: We’re gonna do a Lightning Round. Are you ready for the Best Ever Lightning Round?

Heath Jones: Yes, sir.

Joe Fairless: Alright. First, a quick word from our Best Ever partner.

Break: [00:21:30].20] to [00:22:05].23]

Joe Fairless: What’s the best ever book you’ve recently read?

Heath Jones: I’ve read a lot of real estate books, but just getting close to the finishing is Crucial Conversations.

Joe Fairless: I love that book. What’s the best ever deal you’ve done?

Heath Jones: The best ever deal I’ve done is the 16-unit. I got it for a really good price and a lot of favorable terms in the way I financed it.

Joe Fairless: And the best ever way you like to give back to the community?

Heath Jones: Oh, man… I have a five-year-old and a three-year-old. My daughter is in Girl Scouts, so we give back to the community through Girl Scouts. They just finished doing all their cookie sales, and we’re still dropping off cookies at places… So I’m helping the community through her Girl Scouts. I’m a former Eagle Scout, so that kind of fits the way I have done things in the past, and that’s how I like to deal with that.

Joe Fairless: And how can the Best Ever listeners learn more about what you’re doing?

Heath Jones: You can find our Facebook group, the Multifamily Real Estate Experiment Facebook group. My partner Hutch (the Marine Investor) and I, we started that Facebook group. We have a podcast with the same name, you can find us there. You can also email me at heath [at] hsquaredcapital.com. You can also go to our website hsquaredcapital.com. I’m on Bigger Pockets… I actually took your advice from the Best Ever conference this year and I’ve started going in and posting and trying to answer questions that I might have some information about, or try to start discussions… So I’m on Bigger Pockets. I’m also on LinkedIn… So any type of way, feel free to connect; I’m more than happy to talk real estate, talk strategies… I’m just here to help other people improve their lives as well, through real estate or any other means.

Joe Fairless: That 16-unit is just a spectacular case study for how to manufacture a deal. You found it on LoopNet, you have seller financing, you got creative with how to get the down payment (with the promissory notes), and then you were not the only LOI in the game, according to the seller’s broker (there were about 8 LOIs), but you put the amortization schedule in there and you were very detailed… And should you come across a similar opportunity, a couple things that you would do differently is in additional to deferred payments have interest-only payments for X period of time, as well as build up a cap ex reserve account and bring that to the deal (about 20k-30k).

Thank you for being on the show, I enjoyed it. I hope you have a Best Ever day, and we’ll talk to you again soon.

Heath Jones: Sounds good. Thanks for having me again.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

You may also like

Joe Fairless