JF2635: Syndicating After Bankruptcy with Tracy Hubbard

When Tracy Hubbard went bankrupt in 1998 after a business went south, he started learning how to get into hard assets instead. That’s when real estate came into the picture. Today, Tracy is sharing how bankruptcy made him a better businessman, why he looked into multifamily first, and his number-one piece of advice for closing off-market deals. 

 

Tracy Hubbard Real Estate Background:

 

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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. 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 the fluffy stuff.

With us today, Tracy Hubbard. How are you doing, Tracy?

Tracy Hubbard: Good. Great, Joe. Thanks.

Joe Fairless: Well, I’m glad to hear that. A little bit about Tracy—he’s a full-time multifamily syndicator and asset manager, along with agricultural syndications and ranching. His current portfolio consists of three properties of 400-plus units and he is based in Lubbock, Texas, and you can learn more about his company, hubbardcapitalgroup.com, and it’s also in the show notes.

So, with that being said, Tracy, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

Tracy Hubbard: Sure, I’ll be glad to. Thanks. Earlier in my business career, I was an entrepreneur. I’ve owned several different companies, different types of businesses. One of them had a lot to do with industrial real estate. I was in the logistics warehousing, so I became familiar with real estate and the benefits of it back in the late ’80s, early ’90s, and did some real estate deals back then. But then, one of my companies gave me the opportunity — when I say “my companies”, it was one of my corporations that I had. I went bankrupt. I got to start over in life in 1998; I was 42 years old, had four young children, trying to figure out what am I going to do in my life. I ended up basically going and learning how to trade the markets, the financial markets, because I was pretty much, at that point, done with messing with businesses and just the problems with them.

So I went into the financial market, started learning how to trade, and I know it sounds like an infomercial when you hear about that kind of stuff, but it’s such a long process. It’s taken me about seven years to really figure out what I was doing, and from that standpoint, I formed a couple of small hedge funds, and did very well back in 2000, all the way up to around 2015, trading the markets, the financial markets. But I could see the markets changing, especially after 2008 and 2009, what we went through there. And the markets just didn’t perform like they used to, and they still don’t. It’s a bunch of smoke and mirrors, in my opinion right now.

So I was trying to figure out how do I get into hard assets, and I’m talking about assets that can’t go to zero like a stock can. Real estate’s one of those hard assets, and so I started going over into that realm, and specifically settled in on multifamily; that was back in around 2015 and 2016 is when I started looking at multifamily. I need to pause, otherwise, I’ll go on forever. I hope I answered the question, Joe.

Joe Fairless: Thank you, because I do have a couple follow-up questions. 1998, you went bankrupt, you were 42 years old, and you had young kids. What caused the business to go bankrupt?

Tracy Hubbard: It was a manufacturing company, and I made a bad business decision. I grew that company real quick, and one of my customers was probably 80% of my business. We got into an issue on some products and stuff like that, and they had the willpower and the money to wait me out, and that’s pretty much what they did. And we lost everything.

Joe Fairless: For someone who might go through something similar to that, who’s listening, what are some things that you’d tell them, from a psychological standpoint?

Tracy Hubbard: Wow, there’s a lot to cover there. I will tell you that my wife helped me through a lot of that stuff, because you feel like a failure when something like that happens to you. I did everything I could to keep it from happening. I actually made some bad business decisions, trying to save the business by just putting a bunch of cash into it, trying to save it, and it was just throwing good money after bad at that point. I should have let the thing go down, but I didn’t want to have a failure on my record. Because up to that point, I’d been pretty much golden; everything I’d touched, all the businesses I’d owned and sold, we did real well. So, I didn’t really want to give up on that. So I held on too long. That would be one thing I did.

The next thing is you’ve got to have someone for emotional support, because it can be a real downer thing to go through. So you know, having emotional support was critical during that time, and my wife had faith in me to know that I would be able to get back on my feet. But it’s nonetheless, it can be a little tough. So the emotional part is probably more critical than the financial side of it to be actual [Inaudible [04:32].

Joe Fairless: From that experience, what are you better at as a result of having gone through that?

Tracy Hubbard: Well, my background before that – I’m a former Marine, which I just celebrated this birthday yesterday, on November 10th, Marine Corps… But it taught me a lot of not quitting, not giving up. Now, some of that “not quitting” is also probably what led me to put more money into the deal.

Joe Fairless: Right. I heard you say you held on too long.

Tracy Hubbard: Yeah, so that was a little bit part of it. What I would say now going into the future is to hold back a little bit more cash, keep some cash there, a little bit more cash. I just took it a little bit little too aggressive in my risk going forward, especially that one customer, because I was looking to really grow the business big. So I was not diversified enough. And that goes across all different investment assets, is being diversified in your portfolio. So, I learned that the hard way.

Joe Fairless: Now, let’s talk about 2015 when you focused on hard assets, specifically apartment communities. What was your first purchase?

Tracy Hubbard: Well, it’s sort of funny… I’ll take you through the process. I originally looked at single-family rentals, then realized pretty quick I couldn’t scale that. So then, I started looking at other multifamily stuff, but I was still looking too small. I was looking at the 10-20 unit complexes. I was thinking of doing it all by myself. So that was what I started doing. The first thing I did was a 7-unit brownstone in Chicago. That was my first attempt at something like that.

Joe Fairless: How did you end up in Chicago? Aren’t you in Texas?

Tracy Hubbard: I’m sorry?

Joe Fairless: How did you end up with a property in Chicago if you’re in Texas?

Tracy Hubbard: Just contacts with people I know up there, and that kind of stuff. So that’s how I ended up. Actually, I remembered Chicago, because I’d done business up there in several my other businesses but [Inaudible [06:14] with the city, but not from real estate perspective. So it presented what I thought was the opportunity to try to do it. It didn’t work out the way we wanted to, but what it did, it sort of got me figuring out, “Okay, I cannot do a bunch of these by myself. So I’ve got to figure out how to do it.”

I didn’t really know anything about the syndication world. So then I started educating myself on the syndication side, and saying, “Okay, I need to partner with other people if I’m going to get this thing big.” Now, keep in mind, all my other businesses in the past, it’s just been me, myself and I. I didn’t have a partner. So this was a new idea, new area going into having general partnership with a bunch of other partners and putting together something, but I also realized that a little bit of a big deal is it can be just as good as all of the small deals.

So that’s when I started looking to this, saying “If I’m going to do this, I got to learn how to do syndication.” So, then I started looking into syndication world as far as education, to get educated on it.

Break: [07:07] to [08:40]

Joe Fairless: The 7-unit, you said it didn’t work out. That doesn’t surprise me, because you’re in Texas, property’s in Chicago, and it’s your first foray into this. But will you elaborate on what didn’t work out and more details on that?

Tracy Hubbard: Well, the reason I don’t think it worked out is because my money partner on the deal didn’t follow through. So we didn’t have the money to do the rehabs on the deal. We were basically going to do some condo conversions on it, because it was in a nice little neighborhood, gated community. We bought it right, and basically wanted to go through and gut it because there was lots of comps in the area. We could have probably doubled our money on the thing. This was back, you know, I’d say, several years ago.

As far as selling the units and doing our own little Homeowner’s Association with that building. But that’s pretty much why it didn’t happen is because the money got into some trouble with some other stuff and couldn’t come up with the cash to do the deal.

Joe Fairless: You did buy the property, correct?

Tracy Hubbard: Yes.

Joe Fairless: So, you just sold it as is?

Tracy Hubbard: Yes.

Joe Fairless: Did you make any money, lose any money, breakeven?

Tracy Hubbard: I lost about 10 grand, so I figured that was a cheap experience.

Joe Fairless: Okay. So what was the first syndication then when you started bringing in people?

Tracy Hubbard: I was looking at some property in Amarillo, and a broker calls, said, “Hey, I’ve got a property in Lubbock that just came on the market. Would you be interested in that?” So I drove down there and took a look at it, said, “Sure.” We looked at it, ended up putting in a contract. It was actually two years ago, November of 2019. It was a portfolio property of two complexes, 115 doors and another one 68 doors. So I put in the offer, it was in and out of contract. It took quite a while to get the deal done, but we got it closed in November of 2019. So we’re in the midst of finishing up our rehab and trying to get those two refinanced right now.

Joe Fairless: Why in and out of contract? What happened?

Tracy Hubbard: Some things happened with the seller, trying to decide if they wanted to sell, getting financing lined up on a bridge loan, one of the lenders fell out, so we had to get another lender… So it was a couple of those things during the negotiation process to try and get it bought correctly—

Joe Fairless: And when it—

Tracy Hubbard: —but we were patient with it, you know, and was there waiting for it when the sellers got realistic, and so we get it done.

Joe Fairless: Did you have it under contract, and then the sellers somehow were able to break that contract?

Tracy Hubbard: No, I misspoke there; that was all during the letter of intent phase—

Joe Fairless: Got it.

Tracy Hubbard: —and that kind of stuff. Someone else came in and put a contract in on it… But theirs fell out and they totally lost the deal, and so it came back to us and saying, “Hey, are you still interested?” kind of thing.

Joe Fairless: Okay, I’m with you.

Tracy Hubbard: It was running around like that for a bit. Once we got to contract phase, it went through.

Joe Fairless: Got it. I’m with you. How much equity was needed for that transaction?

Tracy Hubbard: We raised $3 million on that one.

Joe Fairless: Okay. It was a bridge loan? It is a bridge loan.

Tracy Hubbard: Yes, it’s a bridge loan. We actually just had it reappraised again, and it’s gone up in value tremendously. We bought it for about 47k a door, and right now we’re sitting at one of them’s probably in the 80s as far as the appraisal goes, and the other one is in the 70s.

Joe Fairless: You bought it for about $8.6 million, and help me with that math for what it’s collectively worth now, about?

Tracy Hubbard: Right now, it’s a little over $13 million.

Joe Fairless: Nice, and what have you done business plan-wise to get it there?

Tracy Hubbard: It’s basically a value-add deal. Both properties received plus properties went in there and get a facelift on him and rehabbed an interior of the units, those kinds of things… And just cleaning up the property. They were mismanaged and owned by out-of-state owners, so they weren’t there very often. So we got very heavily involved in the rehab side of it and the asset management side of it. So just turning them around, rent bumps and stuff from the increase, from what we’re doing the rehabs, improving the property. The market’s going up.

Joe Fairless: The market’s helpful also.

Tracy Hubbard: This is what I said, that appreciation covers a lot of sin, as I say. So you can screw some things up, as long as the appreciation keeps rolling, you’re probably okay. But it’s also one of the things where when it stops, you better hope you underwrote it correctly.

Joe Fairless: What is your level of involvement with the business plan once you purchase the property?

Tracy Hubbard: On the ones I’ve done, I’ve always been the asset manager on them, and I say on-site… I live in Fort Worth right now. So it’s about a four-hour drive from me, but I go up there about every two weeks because we’re pretty heavily into the rehab phase, to meet with contractors and be a presence on there. So I’m the asset manager on the property.

Joe Fairless: So, those are two deals. What about the other ones that you’ve done?

Tracy Hubbard: I had another deal there in Lubbock. It’s 236 doors. We closed on that one in March of this year. That’s a property that was really truly off-market, that I’ve been looking at it just because I’d driven by with my broker. We were going to lunch one day, and he was going by there because he knew the seller and dropping something off, and he came back to the car and I said, “Is this property for sale?” he goes, “No.” I said, “Well, has he ever thought about selling?” He said, “Well, he might.”

So we messaged around the same for six months and we ended up going through a lot of detail. He was ready to sell by the end because I think he was trying to get out that market and move back to where he’s from. So the timing on it ended up being okay. It took me a year to get that thing to contract, just to get the contract, going back and forth.

Joe Fairless: Wow. So, six months until he said, “Yeah, I’m interested”, and then another six months to actually get it under contract?

Tracy Hubbard: Yeah, getting it done.

Joe Fairless: What are some things that happened and how you approached it to help get it to the finish line? Just a couple things during that 12-month period.

Tracy Hubbard: Over communicating. It was sort of interesting too. The broker, the last time they want to get the buyer and seller together, but we had conversations and what my goals are, what we’re trying to do and how to work together to make this thing happen. If he really truly wants to sell, we can make a deal. So just being our communicative on everything; it’s how we do everything in our business model. Investors, everybody. So we just try to communicate as best we can.

Joe Fairless: What’s an example of over communication in that scenario?

Tracy Hubbard: Well, when there’s a problem that crops up—and negotiating by email is pretty tough, in my opinion. I like the phone. In fact, I’m not real big on text messaging. I’m sitting and going, “We have all this technology, so we don’t have to write everything down, and now everybody texts each other instead of calls.” And I understand that because some people get long-winded and you can’t just get on the phone and get off the phone real quick. But if you have a situation come up that could blow the deal apart, whether it’s insurance, a problem with a unit, as far as down units, those kinds of things, just pick up the phone call and say, “Hey, here’s the deal – how can I work this out to make it viable for everybody? Is there a solution here?”

And that’s pretty much what I did on this property, as far as going through it, because of some of the issues that were coming up is… And especially when you get to the due diligence stuff, and you’ve got things come up that you may not have planned for, but you maybe got to go back and underwrite it a little bit differently. As far as buying, I changed the underwriting because of this issue, whether it’s a plumbing issue, electrical, whatever it is… And then you’ve got to go back and say, “Okay, well, I can’t really give you this,” but you just be upfront, say, “Here’s the math on it and this is the way it will work for me. I can’t make it work any other way.”

And also, I would say, you really need to know your buyer and why they’re selling. He really wanted to sell and I knew he wanted out of it, and I knew, “Okay, this is not like somebody’s just out there floating the numbers to see if you can get something for his property. He really wants out of that market, and to go back to Dallas.” So there was a motivation there. So I just had to keep that in mind just to see where you could and could not push it to get the deal done.

Break: [16:06] to [19:00]

Joe Fairless: Now, when I introduced you, I also said, because it’s in your bio, you do agricultural syndications and ranching. High level, what does that consist of?

Tracy Hubbard: Well, ranching is in my family heritage. We’ve been doing it for generations and so I’m sort of getting back into it a little bit, I do a little bit of ranching, but the agricultural syndication part of it is sort of interesting because when I was looking at buying one of my ranches, we were looking at putting a vineyard on there because one my son-in-law’s actually worked for a ranch that had a vineyard, and I saw the money that the rancher made off of it. He didn’t have a lot of acreage. He had like 10 acres of it, which is about all you can handle as a small operator. So I thought, “Well, there’s money there. I’m always looking for ways to offset expenses on a ranch and what else kind of revenue drivers can you have?” It was like I said, being diversified. Others were cattle, we were looking at the other stuff. So, we were looking at the vineyard also.

So I looked at it and it was a viable business model, but through another podcast I’d done, I’d mentioned that and then I found a guy that actually was doing a little bit of real estate syndication but not on a bigger scale as I was, but he knew a lot about vineyards, and they had a vineyard, and they were trying to learn how to scale the business model. So we got together and that’s pretty much what we’ve done is we’re syndicating a vineyard now up there in the high plains of Texas, which is the best grape-growing country in the state and produces 75% of the grapes in Texas wine.

Joe Fairless: For someone who has not invested in that type of business, what are the main risks associated to it?

Tracy Hubbard: Well, the risk are not—it’s really great. I don’t think, as far as what you have in multifamily, mainly because you have crop insurance and stuff like that. Here’s the biggest difference between vineyard, which is the agricultural part I’m in. Is it’s a long time process. You don’t get your first harvest until fifth year, and then it’s sort of more of a 10-year play instead of a five-year play, but the difference being is this is also like an annuity that keeps paying out because vineyards will produce revenue for 30-40 years.

So it’s not a fix-and-flip thing. It’s more of a development project, and it’s a legacy thing that you can build long-term wealth on and long-term income because it will cashflow double digits, [Inaudible [21:11], fifth year, and we’re doing the same thing you do on a multifamily. We’re also doing a refinance in year seven to get all the cash back out and you still keep it and it’s still cash flows great numbers.

The thing about this that’s different than multifamily is you can find a lot of property management companies and asset managers to manage your multifamily, but on the grape side of growing grapes, it’s a very small world out there. If you don’t know the operational side, you will lose your shirt. So I’m bringing more of the syndication money side of the deal. I’ve got a partner who’s the operator, they’ve been doing it and know how to do it. So it’s back to what I said, you’ve got to have good partners too when you’re doing this kind of thing.

Joe Fairless: Taking a step back, what’s your best real estate investing advice ever?

Tracy Hubbard: Good partner, and I’m saying the team, and I say, not just your financial partners, but I’m talking about attorneys, accountants, cost seg people, financial mortgage brokers, all those. I’m telling you, every deal I’ve been involved in, if you didn’t have a great team there, lots of times, they just won’t happen because of that. That’d be my advice, assemble a great team.

Joe Fairless: We’ll do the lightning round. Are you ready for the Best Ever lightning round?

Tracy Hubbard: Sure.

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

Tracy Hubbard: Recently read it’d probably be Texas Wine Pioneers, just the people that started growing wine in Texas.

Joe Fairless: Very topical for this conversation. What real estate deal have you lost the most amount of money on?

Tracy Hubbard: Well, believe it or not, I guess the loss would be that first one, and I spent some money, and I’ve spent a lot of money on education that probably didn’t pan out, but as far as just a real estate deal, that must have been the only one I really lost money on, that Chicago one.

Joe Fairless: What’s one piece of real estate education that you spent money on that that didn’t pan out?

Tracy Hubbard: It was a mentorship program.

Joe Fairless: Which one?

Tracy Hubbard: I don’t want to say that on here.

Joe Fairless: Why didn’t it pan out?

Tracy Hubbard: Probably because I didn’t get some mentorship that I was told I was going to get.

Joe Fairless: So, knowing what you know now, if you were going to join another program, what would you ask?

Tracy Hubbard: Who’s going to be doing the mentoring? Is it going to be one of the underlings or is going to be the guru?

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

Tracy Hubbard: I’m trying to give back to people who don’t have—right now, I’m for mentoring my GC, my contractor up in Lubbock. He’s a young guy and he wants to get into real estate investing and he’s trying to understand the syndication side of it. So I’m mentoring him, just to give back up, educating him on it.

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

Tracy Hubbard: I would say, go to the website, hubbardcapitalgroup.com. and there’s stuff in there, talks about our multifamily side and the vineyard side also.

Joe Fairless: Tracy, thank you for sharing your experiences going back to 1998 when bankruptcy happened and then psychologically, how to handle something like that should any of us, who are participating in this conversation, listening or otherwise, go through something like that. And also, I appreciate you sharing advice on your acquisitions and how you transitioned into multifamily as well as the wine syndication that you were mentioning before.

So thanks for being on the show, hope you have a best ever day, and talk to you again soon.

Tracy Hubbard: Thanks, Joe. I appreciate it.

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JF2634: Is U.S. Real Estate Expensive or Cheap? | Actively Passive Investing Show 68

In today’s episode of the Actively Passive Investing Show, Travis discusses the deciding factors of whether real estate is currently expensive or cheap. He talks about what metrics we are using to measure and compare real estate today, how the has dollar devalued over time and how this inflation affects the market, and what new evaluations we use today that we may not have had 10 years ago.

 

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TRANSCRIPTION

Travis Watts: Welcome, everybody, to another episode of The Actively Passive Investing Show. I’m your host, Travis Watts. I have a really exciting episode to share with you guys today, and it’s of the conversation, “Is U.S. Real Estate Expensive, or is it Cheap?”  And I think that’s a great question to ask, and of course, the media and the headlines are going to say that real estate’s out of control and prices have skyrocketed, and all these things. And while some of that’s true, I think it’s important to have the greater conversation surrounding the context of all this. Is real estate expensive, compared to what?

So the background here is that most of you guys know I’m a nerd, and I’m a full-time investor, and I do a lot of research, from a lot of different sources all day, all week, all month, all year. That’s just kind of the name of the game. And the benefit to you is, of course, I get to share a lot of that content with you.

I pulled a lot of this data from a really interesting research project by Jason Hartman. So if you guys aren’t familiar, he’s a real estate guy, he does a lot of great in-depth research, and I wanted to highlight a few things. It’s not just solely based off his presentation that Jason did, but other sources as well, which I’ll share with you. But it’s basically what we’re talking about is comparing real estate to other commodities and other things, not just the US dollar, to show you that, well, maybe it is very expensive, or maybe it’s actually cheap.

So without further ado, I’m excited to jump in. I’m excited to share with you this. Please always keep in mind the classic disclaimers – I’m not giving anybody financial advice. I’m not a financial advisor or a CPA, a lawyer, an attorney. So always seek licensed advice, but I am here to provide some educational topics for you to think about and hopefully, help you make better decisions as you go about your investment journey.

So the first thing I want to talk about is that real estate, as we all know, is very local. There is no such thing as ‘THE’ real estate market. There’s – gosh, 400+ markets throughout the US, there’s 3,100 counties, within these counties there are cities and submarkets and different neighborhoods… So when we talk about, is real estate expensive? Is it cheap? It really depends on what real estate we’re talking about.

For example, I was on one of these platforms, I forget what it was – Zillow, Redfin, or something, the other day, and I was looking… I like doing this, because again, I’m a nerd. I like going nationwide and just looking at real estate prices everywhere, and just see what’s happening. So I found a three-bed, two-bath, single-family home in Santa Monica, California, for $2 million. $2 million. Under 2,000 square foot, by the way. Then I was like, “Okay. Well, that’s interesting.” Is that expensive? Is that cheap? I really don’t know without further context.

And then I’ve got some family out in Oklahoma, and I drove out to Muskogee, Oklahoma, and I found a 3-bed, 2-bath, 2000 square foot for $200,000, a single-family home. So again, is it expensive? Is it cheap? It really depends.

And a big part of what it depends on is what we’re using to measure. For example, if you’re using the US dollar, and we look at history, then yeah, housing’s gone up; specifically over the last 12-18 months, it’s really skyrocketed, as the media likes to use that term… But that is only looking at part of the equation. That’s only considering in dollar-denominated terms, if you’re using US cash dollars to purchase the home.

As we all know, and as we talk about a ton on the show, and I think over the last 2-3 episodes we’ve hit heavy on inflation. So I’ll give you an example off the top of my head. My dad’s favorite car is a ’67 Chevy. So I researched “how much was a ’67 Chevy when it was brand new, on the lot, and sold to the general public, in 1967.” It was around $5,000. So my dad and I – well, mostly me – went on a collector car site where people resell their restored and collectible cars. I’ve found a restored 67 Chevy, looked pretty nice, pretty good job on the restoring, selling for $50,000. So same car, relatively speaking, but $5,000 to purchase back then, $50,000 to purchase today. What changed? The dollar has devalued over time.

Now, of course, you could argue that’s a special category or that’s just collector cars and how that works or whatever, but of course, you could take it in the real estate context as well. My wife and I, we used to own a 1932 home, and that home sold for about $5,000 in 1932. And today, it’s $700,000+. Same home, in fact in worse condition, because it’s dilapidating, right? It’s an old brick home. It’s got cracks in it. It’s super old. It’s creaky. But here we are, $5,000 compared to $700,000.

So, let’s dive into what real estate really is. When we say real estate, whether we’re talking a single-family dwelling, whether we’re talking a duplex, we’re talking a 400-unit apartment building, what you’re actually buying is really kind of a basket of commodities. It’s comprised of lumber, steel, glass, concrete, labor, energy, copper, etc. You get the point.  And as we all know, each of these individual commodities, they have their own swings and peaks and valleys. So we all know that lumber’s up right now in price, in as far as dollar terms. It has a lot to do with supply and demand, has a lot to do with inflation, it has a lot to do with a lot of things, but the point has coppers had its volatility where it spikes up super high, and then it drops super low. So it really depends when homes are being built, what the commodity prices are at that time. Generally speaking, today in 2021, commodity prices are quite high in dollar-denominated terms, therefore the price of housing has gone up or skyrocketed.

Break: [06:40] to [08:14]

Travis Watts: One question on everybody’s mind right now is, is this type of inflation that we’re seeing, this massive increase over the last 12-18 months, is that permanent inflation? In other words, are all these commodity prices and everything else going to stay elevated from here moving forward and pretty much forever, or are they what they call transitory, which is another term for temporary? Ao maybe we’re just kind of in this little peak right now and then we trickle back down into a valley, things normalize in a year or two. I really don’t know, and I wish I had a crystal ball, but it is something to consider as we move through this conversation.

I will say this in the context of real estate, one of the biggest things that’s being talked about, one of the biggest metrics to buying and selling real estate is what interest rates are. So we all know that Jerome Powell, the head of the Fed has kept rates very, very low. He’s dropped rates and kept them low, since COVID especially, but even before COVID. So that’s put a lot of interest into buying real estate, I would say, even more so in 2021. And the reason is, you guys, whether we’re talking again, single-family, duplex, 400-unit, if you’re going to go get debt, a mortgage, and you’re going to buy real estate, you’re probably going to have a very, very low-interest rate. Maybe around 3%, for example purposes. And here’s the crazy thing. They’ve already, since April, been releasing the inflation statistics, which we talked about more and more often on the show, but anywhere between 4%, 5%, 6%. Different metrics, different CPIs, different things to go after, but here’s the point… The inflation metrics are all higher than what interest rates are to borrow money.

So here’s my perspective. If you’re able to borrow money at 3% and lock it in long term, I’m talking 10, 15, 30 years, and inflation is higher than that, it’s almost like having free money. Well, instead of saying “free money,” it’s almost like you’re getting paid to borrow money. It’s almost like we have negative interest rates in a sense, right? Because the inflation is devaluing the currency, so it’s cheaper to pay off the debt in the future. It’s just a weird, weird time that we’re in, where we have this imbalance of higher inflation, lower interest rates. Back in the ’80s, when we had really high inflation, we also had really high-interest rates. So it was kind of a different story at that time.

Alright, so let’s dive into the main topic here. The main point of this – is real estate expensive or is it cheap? Let’s look at some actual comparisons that, again, Jason Hartman came up with. And I’m just going to pull a few. He did a beautiful job doing a full-blown presentation. I just want to highlight some of this stuff for you, just to get your mind thinking about it.

So what I’m going to use first are metrics from 2010. So you’ve got to back up a minute and think about 2010. So I was investing in real estate in 2010, as I was in 2009. Generally speaking, nationwide, real estate had corrected; we’re talking about post-2008, 2009, where everything’s falling and collapsing. 2010 was more or less kind of a bottom of the market, and before we started seeing an uptrend and a kickback. So we’re going to start there on those metrics, and I’ll share with you 2021 metrics, and we’re going to compare real estate to other commodities.

Okay, so the first thing to point out was that the median home price in 2010, nationwide, was $222,700 approximately, and the median home price today in 2021, is around $355,000, and some change. So the first thing I want to compare it to is gold.

So in 2010, it would have taken 162 ounces of gold to purchase a home that was within the median range, and today in 2021, it would take 208 ounces of gold. So that’s a total of about a 28% rise in price over an 11 year period. If you break that down, it’s about 2.5% per year. So definitely inflationary. In that regard, real estate’s definitely more expensive today than it was back then, but that’s just one commodity that we’re going to compare it to.

Now, to kind of go out on a limb and use an extreme example, we could say Bitcoin. So in 2010, it would have taken 773,000 Bitcoin to buy a median-priced home. In 2021, only 7.5 Bitcoin, and of course, those prices aren’t completely reflective of when you’re listening here today, as Bitcoin is very volatile, and is up and down… But approximately that. So it takes 99.9% less Bitcoin to buy a home today than it would have in 2010.

Now, let’s compare it to oil. So we’ll use just the standard barrel of oil. In 2010, it would have taken about 2,500 barrels of oil to buy a median-priced home. In 2021, about 5300 barrels of oil. So it’s a total of 112% increase, or about 10% a year appreciation or inflation.

Jason also talks about orange juice. Again, it’s a commodity. It’s things that consumers buy often at the grocery store. So in 2010, you would have had to buy 1,300 pounds of OJ, and in 2021, 3,200 pounds. So 146% increase, about 13.3% inflationary per year.

We’ll talk about rice real quick, one of the main food sources worldwide for human beings. In 2010, it would have taken about 17,400 pounds of rice to buy a median-priced home, and in 2021, about 27,100 pounds of rice. So about a 55% price increase. That’s about 5% inflation per year. Now, you guys, this metric just blows my mind. There’s so much content out there about stocks versus real estate, and “Is the stock market in a bubble? Is real estate in a bubble?” Just hear me out on this. Really let this one sink in…

Comparison to the S&P 500 Index, if you had own shares of the S&P 500 in 2010, keeping in mind, again, this was kind of the bottom of the market, but it was also the bottom of the market for real estate. So it’s kind of a fair comparison to say stocks were depressed, and so was real estate. That was really a real estate crisis. So, it would have taken 2179 shares of an S&P 500 Index to purchase a median-priced home in 2010. And today, only 898 shares. That means that housing, compared to the S&P 500, is 58% cheaper today than it was in 2010. Really interesting, in my opinion.

So now let’s talk about median income. And by the way, Jason did a great job at sourcing all of this. This is all .gov and Federal Reserve data; this is not his opinion. Unfortunately, I don’t have all that here to explain to you verbally. It would make for somewhat of a boring episode; but just know that you can check out his presentations and content if you want the actual links and the sources to all of this.

Median income is usually found through the Federal Reserve or through a .gov. In 2010, it would have taken 4.52 years of median income working to buy a median-priced home. And in 2021, it’s still relatively the same. It’s 4.9 years to be able to afford a median income home. Guys, I think this is a really important metric to think about. When we look at just price, and you say, “God, real estate’s just skyrocketed.” Well, wages have also increased. So that’s the whole name of the game, is how affordable is real estate today when you factor everything in, including people’s income. So the bottom line to that metric is that 8.4% more working that you would have to do to purchase a home. Again, this is assuming that you saved up and you purchased the home in full in cash and didn’t mortgage it. So that’s only 0.76% per year. So that’s hardly inflationary.

Now, let’s take a look at minimum wage. And this one’s kind of unfortunate, because truthfully, if you’re making minimum wage today in 2021, you probably aren’t a homeowner, unless there’s dual-income involved, or you were granted or gifted a home, or maybe in some very inexpensive markets throughout the US, you might be able to afford a home… But generally speaking, minimum wage isn’t going to cut it these days for being a homeowner.

So in 2010, making minimum wage, it would have taken about 30,700 hours to buy a home, and in 2021, 49,059 hours to buy a median-priced home. So a 59% increase of working at a minimum wage level, or about 5.3% a year inflationary.

Break: [17:17] to [20:10]

Travis Watts: So with all that, I’m going to cut it there. There’s so many more examples we can go into. I just don’t want to talk your ear off all day and lose you throughout the episode. So I want to bring some of these points home. So here’s an alternative perspective to think about. It’s not necessarily about the price, it’s about the payment.

Most people, whether we’re talking about buying cars, buying homes, most Americans are looking at the payment, whether a lease payment, a rent payment, a mortgage payment, a car payment… They’re really basing a decision on how much they can afford on a monthly basis. So this is the real key, in my opinion. It’s locking in low-interest rate, fixed debt, long-term, on real estate. This is kind of the name of the game. So assuming you’d played that card, you’d played that strategy, I want to go into these examples, going back to the year 2000 this time. So not even really going to the bottom of the market, but just kind of mid-range within a market cycle.

We’re looking at what your payment would have been in the year 2000. How much of these commodities it would now take to make the same payment on your real estate. So using the comparison back to gold, it would have taken 3.6 ounces of gold to make your mortgage payment in 2000. It would have taken 0.7 ounces to make the same payment today in 2021. Significantly cheaper than it was back then. Barrels of oil would have taken about 32.5 barrels of oil to make your mortgage payment in 2000. About 18 barrels in 2021.

Orange juice surprisingly, is actually about the same. That was 10.7, in the year 2000, pounds of orange juice, and 10.9 in 2021. So pretty much flat on that one.

S&P 500 Index shares – about 11.12 shares. Today, about 3 shares. Drastic difference there. Average amount of hours worked for median income – 69.20 hours to make your payment in 2000. 47.59, today. Minimum wage in the year 2000,  191 hours compared to 165.

So nearly every metric with the exception of orange juice, significantly cheaper, had you just put long-term fixed-rate debt on the real estate and simply held it, even through the Great Recession.

So final thoughts as I kind of extract the data there, and I analyzed that… Perhaps it’s not the price denominated in dollars is so high today and that that’s so scary, it’s that the dollar has lost a lot of value throughout its history, continues losing a lot of value as money continues to be printed, and we just have to accept that we’re in a inflationary period of time. With that data, there’s some commodities and metrics that you could look at where you say, “Real estate’s really not that expensive when compared to X, Y, and Z.” There’s other commodities and metrics that you could look at that say, “It is much more expensive today.”

So it all kind of depends on where you store your money, keeping in mind, you can always convert. There’s no law or rule that says, “You must keep cash in the bank.” You can always be working for a living, collecting cash, and putting that into different mutual funds or ETFs that track indexes, like gold or silver or soybeans or oil. So that is for a much more sophisticated conversation as to all of that.

I’m not going to go down that rabbit hole, because I’m not a financial advisor or a planner, and I don’t want to be giving any kind of advice like that, but basically, you do have a choice, I’ll just put it that way, on how you hold your money… And you listen to folks like Robert Kiyosaki, he’s always talking about how he stores a lot of his cash in gold and oil and stuff like that. So it is an option. I’m not saying it’s right or wrong, good or bad. I’m just saying that’s what he does. That’s an opinion. And as you saw with the price of gold, maybe he can hedge his portfolio a little bit as inflation kicks up, if he’s holding in something like gold, compared to holding in cash.

So what it comes down to is, it’s all about your perspective and speaking of perspective, I haven’t thrown a quote in one of these episodes, in several episodes… One of my favorite things to do. One of my personal favorite quotes is from Roman Emperor Marcus Aurelius, it’s nearly 2000 years old. Marcus said, “Everything we hear is an opinion, not a fact. Everything we see is a perspective, not the truth.” So my quote to kind of follow up on that as always is that, “Everybody has an opinion, but the only opinion that matters is [unintelligible [00:24:46].27]” so always strategize towards your own goals, set your own goals, kind of reverse engineer how you’re going to get there; if you need help, always leverage licensed individuals to help you out.

One final thought before we go close out this episode is that I was on a phone call a couple weeks ago with one of my mentors who’s been an investor for so long, and we were talking about inflation, as kind of the topic of conversation. He was sharing with me how in the ’80s, when he was an investor even then, that interest rates on real estate were around 16%, and at that time, or at least in his market… And he was saying the smart move at that time, in his opinion, was to pay off your home. Because interest rates were so high, it depressed the purchase price of real estate, so the smart thing would be, again, in his opinion, it’d be like having credit card debt today at 16%. The quote unquote “smart move” would be pay off the credit card debt.

Conversely, in today’s world, being that we’re in an inflationary time, but we have artificially low-interest rates, the smart move, in his opinion, is to lock in fixed-rate long-term debt if you’re going to buy real estate, and pay off your debt obligations with cheaper dollars as we move forward. In his opinion, this is how the rich get richer and it’s always been true throughout time; they understand these types of moves and strategies, where most of the general public is not tuning into this kind of message.

So for what it’s worth, I wanted to share that with you guys. These episodes are always tuned to you, the individual investor. I am wholeheartedly in this to help you along your journey, to give you some alternative ways of thinking, share with you advice from my mentors, share with you some data and statistics that may be helpful in making decisions.

So I will wrap it up and quit talking. I’ll see you guys next week on the Actively Passive Show. Have a best ever week. See you later.

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JF2633: Are All Bills Paid Properties Really Profitable? with Rebecca Moore

After getting her start in real estate with several single-family homes, Rebecca Moore decided she needed her investments under one roof. That’s when she made the switch to multifamily. Today, Rebecca is sharing how many deals she invested in before syndicating herself, her main focus when she bought her first deal, and her thoughts on the profitability of all bills paid properties.

 

Rebecca Moore Real Estate Background:

  • Full-time syndicator and clinical psychologist
  • Currently passively investing in 1,534 doors
  • Syndicated 5 buildings since 2017 for a total of 656 doors, with the first building in the process of going full cycle
  • Based in Dallas, TX
  • Say hi to her at: www.StarboardEquity.com

 

Click here to know more about our sponsors:

 

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

Follow Up Boss

 

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the Best Real Estate Investing Advice Ever Show. I’m Joe Fairless. 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 the fluffy stuff. With us today, Rebecca Moore.

How are you doing, Rebecca?

Rebecca Moore: I’m great, Joe. Glad to be here.

Joe Fairless: Well, I’m glad to hear it and looking forward to our conversation. Rebecca is a full-time syndicator and clinical psychologist. She currently has passive investments in over 1,500 doors, 1534 to be exact. She has syndicated five buildings since 2017, for a total of 656 doors and the first building that she syndicated is actually in the process of it going full cycle, and she’s based in Dallas, Texas. Her website, which is in the show notes, it’s starboardequity.com.

So with that being said, Rebecca, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

Rebecca Moore: Yeah, sure. That sounds great. I am married to a former naval officer and we got our start by buying single-family homes where he was stationed. So when we had this accumulation of single-family homes, we kind of looked at each other and said, “At one point in time, we’re going to have to put these all under one roof,” and that’s when we began looking to figure out how to, let’s say, buy a duplex or a sixplex or something like that, and that’s how we got involved in multifamily. So that was the very beginning of this journey that we are under.

So what had happened was that Warren, my husband, had to take over a squadron of ships. So he said, “Rebecca, you go figure this out.” So we found a mentor that was based in Dallas. So because, again, I was a psychologist, I had weekends off. The Navy and the other military do not have weekends off, for the most part. So I went out to Dallas and learned how to syndicate and learned the market. So that’s a little bit about the background. So I was able to fade out of my psychology work and lean into and do more of the syndication.

Joe Fairless: How many single-family homes did you two have?

Rebecca Moore: I think at that time we had three.

Joe Fairless: Three. Okay, do you have more or less now?

Rebecca Moore: We have less now. We’re down to just one, and we’ve had a renter in there for 19 years. So we will not get rid of that one.

Joe Fairless: Yep. For the two that you sold, what did you buy them for? What did you sell them for? And what city were they in?

Rebecca Moore: Okay, so let’s see… He had a couple before that, but regardless, we had one in Corpus Christi, Texas. I should actually say, it was on Mustang Island. It was great, right on the beach, and I think that we had bought that around the $200,000 range, sold it for about $320,000. And then when he was at the Pentagon, we bought a new construction home for about $600,000, and turned around and sold that for about $800,000.

Joe Fairless: Nice.

Rebecca Moore: Yeah. So that was good.

Joe Fairless: And over what period of time for both of those exits?

Rebecca Moore: Oh, gosh, I don’t re—

Joe Fairless: Just about. A couple years? Six months? 10 years?

Rebecca Moore: Okay, approximately five years for the Mustang Island, and approximately the same for the Virginia House—I’m sorry, the Pentagon, that was Alexandria, Virginia.

Joe Fairless: Right, yep. I was tracking it.

Rebecca Moore: About five years. Yeah.

Joe Fairless: Okay. So you had really good success with those deals. Why go into larger deals, if you are having $200,000 in appreciation, and getting those chunks of change from the single families?

Rebecca Moore: That’s a great question. Primarily, because we moved around a lot in the Navy; we had property managers taking care of those homes. So the rents – we were getting a decreased amount of rent because we had to have somebody else look after them. Also, when you have a renter that is leaving, and that property manager has to find a new one, of course that digs into your profit, because it’s a one and a one; you either have somebody in there or you don’t. So that’s the beauty of the multifamily, that you have, let’s say, if you have a 60-unit, then if one person moves out, that’s okay, because you have 59 other people still paying rent. That’s the scalability of multifamily that you don’t get in rentals.

Joe Fairless: Was your first larger deal a passive investor or an active investor?

Rebecca Moore: My first deals were passive, and it was really a great learning experience for me. I was an LP in a 190-unit in Colorado Springs, Colorado. So it was great in that I got to know what a deal sponsor does as far as the acquisition process, as far as getting those monthly emails, understanding what the CapEx is, understanding what occupancy levels were, the evictions that might have had to happen, getting the T12, so the profit and loss each month… I learned to look at that read that, understand what the other income was… It was a great learning experience for me.

Joe Fairless: How many deals did you passively invest in before you started syndicating?

Rebecca Moore: Three deals.

Joe Fairless: After the third deal, what was the impetus for, “Okay, now I’m going to go do it on my own”?

Rebecca Moore: I would tell you that after the second passive deal that we got into, I was ready to go. However, it took time for me to get a deal, so we still were passive in the third deal, put in more money, but it was looking for a deal. I had a very conservative partner, which is great, and some of the things that he had said to me as we were looking for my first deal was, “You want it to be a very very good deal, because your reputation depends on it. You can’t go buying something willy-nilly, just because you want your first deal.” And I still go by those words of a conservative, well-functioning property is what I want to get because not only do I want to make money, of course, I want my investors money to be very safe. So it took me a long time to get my first deal.

Joe Fairless: Was it just you and one other business partner?

Rebecca Moore: Yes.

Joe Fairless: Okay. And how did you meet that business partner?

Rebecca Moore: It was through a group that we were in together.

Joe Fairless: Which group?

Rebecca Moore: The Brad Sumrok group.

Joe Fairless: Okay, and you mentioned earlier you got involved with a mentor; I imagine that’s Sumrok’s Mentorship Program?

Rebecca Moore: Correct.

Break: [07:52] to [09:26]

Joe Fairless: So you met this individual through the program, and then how did you to decide, “Hey–” because I know there’s a lot of people, in the program.

Rebecca Moore: Yes.

Joe Fairless: How did you decide, “You’re my partner, let’s go rock and roll”?

Rebecca Moore: I had the luxury of getting in the group back in 2014. There was just — I don’t know, maybe 75 people at the time, and there were just a handful of people that were beginning to sponsor. So what’s great about the group is that we’ll get on buses in Dallas and travel around to look at, at the time, C Class properties, so we could learn and understand, what does the C Class property look like, and what can you do to add value to these properties? So on the bus, that’s where we would network with each other. So I met my great friend, Dustin Miles… He is an engineer; me as the psychologist, we were able to say, “Wow—”

Joe Fairless: Man, that’s a powerful duo.

Rebecca Moore: Yes, it is.

Joe Fairless: From an investor’s standpoint, having a psychologist, and from an underwriting/operations having an engineer…

Rebecca Moore: Yes, I’m glad that you can see that right off the bat, because it’s true. So he was able to help me with the numbers. I’m still pretty good at the numbers, but as far as that duo, our strengths together, we’re very powerful and he was very patient in teaching me really strongly how to underwrite. And together, I think — basically, he took me on and realized how reliable I was in the fact that I showed up. When he said, “I need you to do X”, he got that delivered right away. I do what I say I’m going to do, and our personalities really clicked as well. So I think that is how we sort of decided to become partners. I think he really took a chance on me, and I’m so pleased that he did.

Joe Fairless: I just assumed that you were more on the investor side, and Dustin was more on the asset management and underwriting. Is that assumption correct?

Rebecca Moore: Well, he absolutely knew how to underwrite, and yes, being an engineer, he knows those numbers, and he patiently had to go over them 100,000 times with me. But when it came to the asset management part, he said, “There you go, Rebecca, it’s all you.” So he would shepherd me through our first deal together, in that he would answer the questions that I had, but he gave it all to me and my husband, Warren, to do.

Joe Fairless: Where did you buy that first deal?

Rebecca Moore: Our first deal was in Hurst, Texas, and that is right smack-dab in between—

Joe Fairless: [unintelligible [00:12:15].26]

Rebecca Moore: Yes, sir. Very good. Yeah, right in between Fort Worth and Dallas. And it’s in a great school district, and it has a good median income, very safe area. It is a 1963 94-unit property, and it’s right next door to a school, again, in a great area. It’s an all-bills-paid building, and it’s the only all bills paid within about a 4-5 mile radius. It has one, two, and three-bedrooms, and the three bedrooms are townhouse-style, 1,500 square feet. So it really accommodates families very well. So it’s a really great building; it has been a pleasure to own. And again, going back to what Dustin said, you need to have a home run as your first deal, and it has been.

Joe Fairless: What’s the significance of it being an all-bills-paid property?

Rebecca Moore: Because it is the only all bills paid property within that five-mile radius, it gives folks who, let’s say, maybe they had a problem at one point in time, maybe they have a problem with their credit, so then they can’t sign up for, let’s say, electricity… This way, with the all bills paid, they don’t have to worry about that and they can rebuild their credit again. Or maybe they’re the type of tenant where they would really rather have everything all in one bill, rather than paying the electric, the gas, the water and sewer; they want it all in one bill. That kind of tenant wants to live in that kind of property. So it’s a nice niche property for those who would prefer to pay their bills in that way.

Joe Fairless: With an all-bills-paid property, some listeners might be thinking, “Well, what about the downside where it is all bills paid?” So the tenants might take advantage of that by pumping the A/C to extreme levels during weird times and just plugging in something using electricity more so than they would if they were paying for it. So how do you mitigate against that?

Rebecca Moore: Yes, that is something that does happen. So how we do mitigate that is by making it as green or as eco-friendly as possible. For example, with the water, the first thing that we went in and did was change out the toilets to low-flow toilets… So that rather than, let’s say, a gallon or so a flush, it’s only a liter or so a flush. And we keep up by having the LED lights rather than regular light bulbs, so we can cut down on the cost of electricity. So we put in everything that we can to make it more eco-friendly, and thus keep the bills down.

Joe Fairless: Got it. Is this the one that’s about to exit?

Rebecca Moore: Correct. Yes.

Joe Fairless: When is it scheduled to close?

Rebecca Moore: In December.

Joe Fairless: Nice. Well, congratulations on that. I’m not going to ask you specifics about purchase price or anything because it hasn’t sold yet, and I want to be respectful of that. How do you think you’re going to do on that deal? I’ll just ask it more generically than I typically would.

Rebecca Moore: Smoking! We’re going to do so good. I’m so happy, and so are my investors. It’s going to be a big party. How’s that?

Joe Fairless: Good. Glad to hear it. And just in case the listeners are wondering why wouldn’t I ask about it… First off, it could influence the purchase price or sales negotiation, so I wouldn’t want to do that; and it could also hurt property tax contesting, among other things, especially in Texas. So that’s why I steered away from it. But normally, I would want to know how much you’re going to make, how much investors are going to make and all that good stuff. How much money did you raise on it?

Rebecca Moore: Only $1.6 million. So this was purchased back in 2017, and that’s when prices were much more reasonable. I believe the reversion cap rate that we underwrote at was 7.75. So again, now we’re underwriting at about five cap… If that speaks to the difference.

Joe Fairless: That was the first deal. What about the next deal?

Rebecca Moore: Next deal was really fun as well, because it was a building that we were passive investors in. So I had already been in that building for three years as a passive, so I had understood what the rents were, what the value-add was being done on that property, who the management company was, I understood what the returns were… So when it went for sale, I thought, “I am going to buy that one. I know it, it’s a good one. It’s in a good place.” It’s in Haltom City, which you might know as well, right next to North Richland Hills, again in the Dallas area… So it’s a great area, a beautiful little property… And I went for it and got that one. And that’s 109 units built in 1969. So our strategy with that one was it had mansard roofs; so mansard roofs are those kind—

Joe Fairless: —are hideous.

Rebecca Moore: Yes, they are. [laughs] They are! So for those folks listening, they’re the type of roofs that look like they come halfway down the building. Some people might like to glamorize it and consider it a French look, but—

Joe Fairless: Never heard it described it that way.

Rebecca Moore: [laughs] Come on…!

Joe Fairless: What did you do with the,? Anything? Because you’ve got to keep them, right?

Rebecca Moore: Yes, because that would be a complete makeover. But what we did – the mansard roofs again, they come down half the building… They were strips of red asphalt, so ugly, ugly, ugly; and we had a loan that was the green program. So the green program — at the time, Fannie, Freddie, they would give you a lower interest rate if you made the property more eco-friendly.

So what they initially wanted us to do was to put in new windows, so that it would hold in the cool air or the heat during the winter… And we talked to them and said, “You know, if we put on new roofs, then it’ll keep even more heat; it will make it even more efficient. Can we instead use the money on new roofs, rather than windows?” And they said, “Okay, great.” So we were thrilled.

So we put the money into the roofs instead, took off that ugly asphalt, and put HardiePlank. HardiePlank looks like fake wood, rather than this asphalt. Also, you can paint it any color you want. So we made—it’s called [unintelligible [00:19:37].25] and we made it look so much prettier. So we put on this gorgeous HardiePlank, repainted the entire building, put some red on the doors to make them pop, and it’s much more beautiful, and of course raising rents, but also making it a place where the tenants can have much more pride of where they live.

Joe Fairless: From an asset management standpoint – then we’ll get into best ever advice… But from an asset management standpoint, knowing what you know now, what are you doing differently or better? Or what are you doing that you weren’t doing before, prior to, say your second large deal?

Rebecca Moore: From an asset management perspective?

Joe Fairless: Yes. Enhancements in your process… Just something like that.

Rebecca Moore: Okay, let me think about that for a moment. Oh, I would say, one thing that we do like to look at and assess, is can we put in a stone countertop? Would quartz or granite have that return on investment? Because the resurfacing of countertops is costly, ugly, doesn’t last very long… So that is something from an asset management perspective that we really like to look into as a better improvement, and it does tend to get the rents increased. And of course, that’s more in a B property often, but that’s something new that we’d like to look at, because the cost of granite and the quartz has come down enough and they’ve been able to make the slabs thin enough to make it economical.

Joe Fairless: What’s your best real estate investing advice ever?

Rebecca Moore: Don’t quit. Don’t ever quit. I know that I have been very slow in acquiring properties, because I want to do a very good job in returning my investors’ money. And sometimes it felt like I couldn’t go get a deal; but I just never quit. I kept looking for the deal that would really get great returns. So never, never, never quit.

Joe Fairless: We’re going to do a lightning round. Are you ready for the Best Ever lightning round?

Rebecca Moore: I think so. Yes.

Joe Fairless: Let’s do it.

Rebecca Moore: I’m ready.

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

Break: [22:08] to [24:57]

Joe Fairless: What deal have you lost the most amount of money on, to date?

Rebecca Moore: That would be a passive deal that I was in. Do you want me to tell you more?

Joe Fairless: Please do.

Rebecca Moore: Okay. So yes, it was no fault of the sponsors at all, but the city rerouted the way that the tenants had to get into the apartment building. They had to then go through a mall parking lot to get to their homes.

Joe Fairless: Oh my gosh!

Rebecca Moore: Yes, it was awful for them. So with that, we had a lower occupancy, and then we had some problems with the management team that was there. So I only lost about $6,000 of my initial investment… However, we held the place for three years, and trying to sell it, trying to get out of it, so therefore, I did not gain any money on that investment for three years.

Joe Fairless: What was the initial investment?

Rebecca Moore: I put in $50,000, and I got $44,000 back.

Joe Fairless: Got it. Okay.

Rebecca Moore: Yeah, so that was crummy.

Joe Fairless: You said it was no fault of the sponsor, which — the rerouting through a mall parking lot, that’s something I haven’t heard of before. But you said the management team also there was challenges, so is there some onus on the sponsor to have helped change the guard of the management team sooner?

Rebecca Moore: He did as much as he thought that he could do with them. He even got them to stop taking their management fee every month, because of the problems that they were having. Could he have changed them? I think maybe I am being light on him, because he is my friend, but he tried very hard to make that property work.

Joe Fairless: What did you learn from that experience as an investor?

Rebecca Moore: Sometimes there are things that happen that just come out of nowhere, again, with the city rerouting the street like that; you can’t foresee that happening. I don’t know how much more the management could do. Maybe the person could have sold, we could have sold sooner, and that you’re—well, I guess that you are at the mercy of the syndicator. It’s not necessarily a good lesson to learn though…

Joe Fairless: It’s just the truth, right? As a passive investor, you are banking on the sponsor to steer the ship, and then sometimes winds come that are unexpected and unpredictable, in this case, rerouting through the parking lot.

Rebecca Moore: Right. So again, that know, liking and trust the person that you’re investing with; trusting that they are going to go to bat for you, when bizarre things like that happen.

Joe Fairless: What’s the best way you like to give back to the community?

Rebecca Moore: In a small sense of the community, let’s say even the apartments themselves, it’s really fun to give back… Especially now, we’re going into the holidays… By Thanksgiving here, we are going to be giving out pies directly to all of our tenants. That’s really fun. When Christmas comes, we give out gifts and a lot of times we have Santa Claus come and see all the kids.

So that type of giving is super fun because it’s one-to-one, we can be there personally, at our Dallas and Houston properties. So that’s a ton of fun. And on a larger scale, Warren and I, we give to the Navy-Marine Relief Fund and other charities, like St. Jude.

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

Rebecca Moore: Oh, please go and visit our website at starboardequity.com and join the Starboard Equity Club. We would love to be able to tell you about what we’re doing. And check us out on LinkedIn, Rebecca Moore Buller; Buller is my husband’s last name. You can check out Warren Buller on LinkedIn. We’d love to see you there, link in with us.

Joe Fairless: Rebecca, thank you for being on the show. Thank you for sharing what’s worked, what hasn’t worked, your story, and some specific steps for how you got to where you’re at. I appreciate your time, hope you have a best ever day, and talk to you again soon.

Rebecca Moore: Great. Joe, thanks for having me on. It’s been a pleasure.

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.

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JF2632: The Key to Low-Stress, Passive Income with Randy Smith

When Randy Smith started his investing journey, he thought single-family, turnkey homes would help him reach his goals of passive income. That’s until a year ago when he realized multifamily and limited partnerships were the key to low-stress income. Today, Randy is talking about the main questions he asks during his due diligence process, what surprised him about passive investing, and the biggest reason he decided to make the switch.

 

Randy Smith Real Estate Background:

 

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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the Best Real Estate Investing Advice Ever Show. I’m Joe Fairless. 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 the fluffy stuff. With us today, Randy Smith.

How are you doing, Randy?

Randy Smith: I’m doing really well, Joe. Thank you so much for having me on the podcast today.

Joe Fairless: Well, I’m glad to hear that and it’s my pleasure. A little bit about Randy—he’s the Manager of Business Development for a Fortune 100 financial services company. He currently passively invests as an LP in six different syndications, including multifamily and a mobile home fund. He’s based in Phoenix, Arizona.

So with that being said, Randy, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

Randy Smith: Yeah, absolutely, Joe. Thank you so much. So I got into the real estate investing space just a few years ago, and I started in single-family, like a lot of your listeners do. I did a couple of turnkey properties through an operator in Kansas City, and then I actually moved over to the BRRRR strategy in Atlanta, Georgia, and then about a year ago, I decided to take the jump over to passive investing, which I actually thought the single families were going to be passive… But moved over into passive investing last year, the goal there being to really get a peek behind the curtain and see what this is all about and see what I can learn about it, in hopes of maybe someday JV-ing or getting into syndication game myself.

Joe Fairless: Got it. Well, let’s unpack that. You started with single-family homes, then turnkey properties in Kansas City, then the BRRRR method in Atlanta, and then an LP. Let’s go deal by deal. Single-family homes – where did you buy? How many did you buy?

Randy Smith: Yeah, I started out with turnkey in Kansas City, Missouri.

Joe Fairless: Okay.

Randy Smith: I kind of sat on the sidelines for probably two or three years while I was focusing on my career, but listening to podcasts and books, and finally just got inspired by an operator I heard on another podcast, and pulled the trigger on a couple of turnkeys in Kansas City.

Joe Fairless: Okay. What was your experience?

Randy Smith: The experience was not very positive. I probably did not do as good of a job with the due diligence piece on the operator, and I ended up getting a couple of properties that were not rehabbed to the level that I would want any tenants that I’m landlording for.

Joe Fairless: Right.

Randy Smith: So I ended up with really really heavy CapEx expense. I had a lot of tenant issues, property manager was built in place with the operator as well, and had a lot of struggles with that as well… And that’s what really led me into moving into BRRRR strategy in a different market after about 6-9 months of that.

Joe Fairless: Knowing what you know now, if you had to invest in turnkey properties and that’s the only thing you could invest in, what questions would you ask, that you weren’t asking initially with this operator?

Randy Smith: That’s a great question. So I think probably the biggest mistake that I made with that process is that my due diligence basically was doing a Google search, checking them out online, looking at their website, and then asking for some references from him. And anybody who’s got half their wits to them, they’re going to just give you references that are only going to speak good things about you.

So I think asking for references really not a good way to do any due diligence on that. I probably would have dug in more to try to get a good understanding of the operations, personnel, longevity of their personnel, turnover, how long they had been in the space, how long have they been doing construction… Those types of things. And that would have been to vet the operator, and actually, to vet the deal itself. I should have spent more time on the due diligence of the actual property. I didn’t even get an inspection on that first property, which would haunt me later, because there was just a ton of missing CapEx stuff. It was terrible.

Joe Fairless: You had purchased a house before in your life, I’m assuming.

Randy Smith: Mm-hm.

Joe Fairless:  And you had gotten inspections on that house or homes that you’ve purchased previously, I’m assuming.

Randy Smith: Uh-huh.

Joe Fairless: So what gave you the confidence to not have an inspection on this house?

Randy Smith: I think I was kind of a victim of a strong personality, that — I heard him on a podcast, so I assumed he had high integrity, and it’s certainly a lesson well learned and will never make again, that’s for sure.

Joe Fairless: Okay. And thank you for sharing this by the way, because it will help others; and that’s why you’re sharing – it’ll help others learn from your experiences.

Randy Smith: Sure.

Joe Fairless: So you got two of those homes… What do you buy them for? And if you still own them, then never mind about what you sold them for. But if you did sell them, what did you sell them for?

Randy Smith: Yes, so I still own both of those properties; we’ve shifted them over to another property manager. We’ve incurred heavy CapEx for the last 2.5 years with these. The good news is, is that real estate is very forgiving, and even though we’ve had a lot of out-of-pocket expenses, the net of these two properties, when you look at all the benefits done in real estate, it’s still positive. We’ve created 80 to 100 grand in equity in these, and we’re probably on the upside of 70% of that; that would be net positive, should we sell those. And we’re actually considering selling those to shift over into some other investments.

Joe Fairless: What did you buy them for, how much have you put into them, and what could you sell them for?

Randy Smith: So they both were sub $100,000. I think we were like $90,000 for one. Estimate is probably $160,000 and we’ve put about $20,000 into it. The other one, I think we paid $120,000 and that one is in the $170,000 range, and that was supposed to be a full turnkey. So if we were to sell today, we’d probably walk away with over $100,000, and probably $50,000 of that came out of the pocket.

Break: [06:23] to [07:56]

Joe Fairless: You live in Phoenix, so you first invested in Kansas City.

Randy Smith: Yeah.

Joe Fairless: And then I heard you earlier say, you invested in Atlanta to do the BRRRR strategy. Will you tell us how it came about?

Randy Smith: Yeah, so through this turnkey process, my wife and I made the decision that we wanted to be more involved with the renovation of these properties. We were pretty confident that we wanted to stay in the single-family space; I had the plan of ramping up to 100 units, and did the math on that, that would create the passive income that I was looking for. So we decided, after listening to podcasts, reading books, that BRRRR strategy would be a good strategy to pursue.

So we did some analysis, we landed on Atlanta. I was fortunate in that my wife was able to leave her W-2, so she focused a lot on the due diligence piece here, and due diligence with contractors, property managers, the market, realtors, those types of things… And she was able to devote the time to it. Whereas me and my W-2 was full-time, very high stress and didn’t have the bandwidth to support that. So she really took the weight of that. And we jumped in and we bought a $50,000 property that had been vacant. There were squatters in it when we got our realtor in there.

Joe Fairless: Wow.

Randy Smith: Yeah, we had all of the challenges that you hear about people that are doing full gut rehabs from long distance, and it was definitely a learning experience, but much more positive than the last one.

Joe Fairless: What are a couple things you learned, and where’s the property at in its current state?

Randy Smith: The property is in Atlanta, we’ve gone full cycle on it, we’ve been able to pull our funds out of it, and then some. So we were able to actually pull out some additional cash. And we’ve created probably about 80 grand in equity on that. And it ended up being a full gut rehab; it wasn’t initially going to be that, but to our surprise, when we flew out to meet our contractor for, I think it was the second time, one of his workers had actually taken it down to the studs, even though that was not the plan… [laughter]

So yeah, it was wild. We showed up, and first we went and checked out the property the day before we were supposed to meet the contractor, and it was gutted down to the two-by-fours, which to our surprise, we weren’t expecting that. And then we showed up the next day and the contractor said, “Hey, I’ve got some really great news for you. We’re going to take this thing down to the studs and completely rehab it with no additional cost’, and as it turned out, he had no control over his subs and they tore this thing down to the studs. So it was quite the ride, I will just say that.

Joe Fairless: Well, that’s great that he owned up to what happened.

Randy Smith: Yeah, it was interesting. It was a contractor that had worked in commercial, he was trying to break into the residential side. It just was not a strength of his to be there on site, watching the day-to-day and working with these types of 1099 guys, I’m guessing.

Joe Fairless: But my assumption is — maybe it’s wrong when I just made my last comment… My assumption was since he said, “We’re going to do this whole gut rehab down to the studs, and I’ll cover the difference”, my assumption is that’s a good thing, because you’re getting all new stuff, versus if they’d done it the original way.

Randy Smith: Yeah, one would think… And I think it’s still too early to say when we look at the overall project, yes, we’ve got a fully refinished house, new everything. And we’ve got a tenant in there, it’s cash flowing now. But yeah, we had a number of challenges. We had an HVAC unit that was still in way before we were about to put a renter in it. COVID hit through this process… Just tons and tons of challenges through it. It actually took about a year to do the rehab, and we thought it’d take 90 days or so.

But again, with real estate being forgiving, this is probably my best deal, oddly enough, up to this point, in the single-family space, because we’ve created some great equity, we’ve got a cash-flowing property, and we’ve created a great rental for our tenants to live. It’s a C Class, maybe at best, neighborhood. It’s a great, safe home for our tenants and their family. So all in all, it’s been very good.

Joe Fairless: What’s it worth? Around $130,000?

Randy Smith: No, we paid $50,000.

Joe Fairless: $50,000.

Randy Smith: We put $50,000 into it, and it’s worth $180,000.

Joe Fairless: You put $50,000 into it, that’s the part I missed. Okay. So it’s worth about $180,000.

Randy Smith: Yeah.

Joe Fairless: You bought it cash?

Randy Smith: $50,000 cash.

Joe Fairless: Okay.

Randy Smith: Yeah. $50,000 cash.

Joe Fairless: Alright. So do you have a loan on it? And are you planning on doing anything with that loan?

Randy Smith: We did the BRRRR strategy, so we waited till we had a tenant in place, and then did the cash-out refi and pulled all our money out, and now we’ve got a cash-flowing property. Yeah.

Joe Fairless: Got it. Okay. So now, in this timeline, you have that under your belt. Did you do another?

Randy Smith: Yeah, we ended up doing two more; it was not full gut rehab, but $30,000 to $40,000 rehabs. We continued to have challenges with contractors; we moved on to a new contractor with the next one, and had challenges with that contractor as well.

And then in the third property—the whole time, our property manager was sitting on the side saying, “Hey, we do construction as well. We’d love to help you with these properties.” But we thought we could go find a better contractor than our property manager. And the fact is we couldn’t, so our third one, we had our property manager do it, and it was as seamless as possible. They met the time deadline, they met the dollar deadline, they got a tenant in place, they did great work… But again, just lessons learned, that if you find a good property management partner and they have in-house construction, then if it’s a good partner, that can be a very good move and a good partnership to build the portfolio. But all that to be said, we’re about two years into this, and we’ve got five properties, and to figure, $100 a door, that’s $500 a month, there’s a lot of time and energy that’s gone into those to create very, very little passive income. And actually, there’s probably hours of other details that I can share with you about other challenges, but that’s what brought multifamily and passive investing onto my radar as a more logical solution to trying to create passive income.

Joe Fairless: How much in total cash do you have in those five properties currently?

Randy Smith: In those five, I probably only have 25 grand, when you consider the cash-out refi’s on the other properties.

Joe Fairless: Got it. I’m doing a quick math, which is 24% return on your $25,000. And that’s good.

Randy Smith: Absolutely. Absolutely.

Joe Fairless: That’s good.

Randy Smith: Yeah. And there’s been some equity growth there as well. So if I were to sell them all today, I’d probably walk away, after-sales expenses, 250k-300k. So there’s been some wealth generation, which is great.

Joe Fairless:  And obviously – hey, I’ve got a syndication business.

Randy Smith: Sure. Sure.

Joe Fairless: So I’m a proponent of passive investing as an LP. But I just want to play the other side a little bit. We just concluded that you’re making 24% return on the 25k that you have currently invested in those five properties, and you just said, cherry on top, there’s additional equity should I sell those properties. So why not continue to do that, versus being an LP in deals?

Randy Smith: Good question, and this has been the struggle. There was about a year where I was looking for properties to continue going down that path, because the argument obviously, like you said, it can be made, that the wealth generation out of those has been fantastic. But it’s very, very difficult to find those properties today. And if I was able to find those properties and have similar results, I might still go down that path, but the market has exploded in Atlanta. The market has exploded in Kansas City as well, and obviously here in Phoenix, it’s crazy. So that’s pushed me into other avenues to try to continue the path.

Joe Fairless: And what do you like about passive investing?

Randy Smith: So passive investing, what I can say in the last year – and again, that’s a fairly small-time period to look at this, but in the last year, my energy and effort involved in passive investing had simply been listening to podcasts, reading some books, going to some meetups and meeting some operators, figuring out how to do wire transfers into these funds, dealing with the whole IRA process and investing with self-directed IRAs. But very, very low stress, very low activity required, and the checks have already started to flow in. And even though we’re not hitting the full prefs on any of my six investments yet, they’re ramping up, and I can see some of these other deals that have gone full cycle with just absolutely amazing returns. And it’s — like, a book I read and I’ll suggest later, Lifestyle Investor, there’s very little activity, the returns are great, and if you do the right due diligence on a good operator, you’re making a bet in the operator or operators, and you can really — as a W-2 guy, I can just sit back and focus on my job where I know that if I put X amount of effort into it, it’s going to generate X amount of income, and I don’t have to worry about any of that other stuff. So really, it’s the passivity of passive investing that is really attractive.

Joe Fairless: What’s been something that’s been less than ideal as it relates to your experience passively investing?

Randy Smith: One thing that was a surprise to me that I did not figure out on the frontend was that the initial returns don’t necessarily hit the pref that is on the PPM on the frontend. And it’s just something because I never asked the question and never even thought to ask the question, that maybe you’re one, you’re going to get 1% or 2% or 3% returns on your money; you start to see better returns in year two and three, and depending on how long it takes to go full cycle, that’s when you see the big jump on the backend. So I’ve got a lot of dollars that are tied up with getting less than pref level results in year one, which on the opposite side of that, as these things go full cycle, I think the returns are going to be phenomenal.

Joe Fairless: What is your best real estate investing advice ever?

Randy Smith: Best real estate investing advice, I would say – to your high-income W-2 guys, skip the active investing and jump right into passive investing with multifamily syndication.

Joe Fairless: We’re going to do a lightning round. Are you ready for the Best Ever lightning round?

Randy Smith: Absolutely.

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

Break: [18:12] to [21:00]

Joe Fairless: What’s the best ever book you’ve read? You said it earlier, but I would love for you to repeat it again, and if you know the author, even better.

Randy Smith: Yeah, absolutely. So – a really great book by Justin Donald called The Lifestyle Investor. He goes through the 10 commandments of cash flow investing and passive investing. Just a fantastic book that shows you how to get time freedom, while also generating great returns.

Joe Fairless: What deal have you lost the most amount of money on?

Randy Smith: The deal I lost the most money on was a single-family home that I purchased in Atlanta, that ended up being a teardown, that I again did not take the advice of the inspection. So the inspector said to get a mechanical engineer out there or a foundation guy out there. We did not do that and as it turned out, it was a tear-down property. So we ended up selling that one for a loss.

Joe Fairless: How much did you lose?

Randy Smith: Cash, probably 10 or 15 grand, and probably more so the time that was invested in that, which was 4-5 months of high stress, multiple inspectors, getting all kinds of contractors out there. Just we could not make the number work, had to tear it down. So we were probably out of pocket 10 grand, but more so opportunity loss there.

Joe Fairless: Best ever way you like to give back to the community.

Randy Smith: Yeah, I love this question. So I give back—in my W-2, I mentor quite a bit with new employees. But personally, my wife and I give financially to our family and to a number of nonprofits, and actually, my wife has just been asked to join the board of an amazing organization called Playworks, which is an organization that helps underprivileged children stay active while learning life skills, all through the use of structured play. It’s just a fantastic foundation that really, really helps kids.

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

Randy Smith: The easiest way to find me is on LinkedIn, Randall M. Smith, or my Instagram handle is @salesguyinvestor.

Joe Fairless: Well, thank you so much for being on the show and sharing your detailed experiences, starting out with single-family homes, the turnkey properties, what you would do differently if you had to do them again, the BRRRR approach multiple times, contractors, and then pros and cons, and ultimately, why you choose to passively invest in syndications.

So thanks for being on the show, I hope you have a best ever day, and talk to you again soon.

Randy Smith: Thanks so much, Joe. Have a great day!

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.

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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.

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JF2631: How to Vet Property Managers for Optimal Returns with Chris & Ashton Levarek

When Chris and Ashton Levarek got started in real estate in 2018, they quickly realized the benefits of scaling. But, they also quickly got burned by a property management company. Today, Chris and Ashton are giving their insight on vetting property managers and what questions to ask, what their biggest mistake was when hiring their first property manager, and how to become educated on a new asset and do your research before outsourcing.

 

Ashton & Chris Levarek Real Estate Background:

  • Chris, Owner & Operations Manager and Ashton, Sales, Marketing and Acquisitions Manager of Valkere Investment Group
  • Syndicators with experience in operations syndications, apartment ownership, assisted living, and 716 units in their portfolio
  • Based in Phoenix, Arizona
  • Say hi to them at: https://www.valkeregroup.com/

 

Click here to know more about our sponsors:

 

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

Follow Up Boss

 

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the Best Real Estate Investing Advice Ever Show. I’m Joe Fairless. 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 the fluffy stuff. With us today, Ashton and Chris Levarek. How are you two doing?

Ashton Levarek: Doing great. Thank you for having us, Joe.

Chris Levarek: Good to be here. Thank you.

Joe Fairless: Yeah, well, it’s my pleasure. And a fun fact – Chris, congrats on the new arrival, and I’m sure you have lots of sleep and are well-rested, so I appreciate you being on the show with us.

Chris Levarek: Hey, thank you. Yeah, second son born yesterday. I appreciate it.

Joe Fairless: Chris is the owner and Operations Manager, and Ashton as a Sales Marketing Acquisitions Manager of Valkere Investment Group. They are syndicators with experience in operations, apartment ownership, assisted living, and they have 716 units in their portfolio. Based in Phoenix, Arizona.

With that being said, do you two want to give the Best Ever listeners a little bit more about your background and your current focus?

Ashton Levarek: Yeah, that was a great intro. Thank you, Joe. We’re both veterans; Chris spent four years in the military, I did 21. And we decided we wanted to create some more passive income, so we started investing in real estate back in 2018. I quickly realized the benefits of scaling up, the economies of scale. And we got into—well, with every deal we did, we were partnering with people already, so it just kind of made sense to get into syndication. So from there, we kind of skyrocketed as far as growth, but always learning, always growing, always working with professionals, trying to increase and perfect this business.

Joe Fairless: Well, first off, I’ve got a tremendous amount of respect for you both for serving in the military… So a sincere thank you for what you and your colleagues did during your time.

And let’s talk specifics about your 716 units. Now, when I introduced you two, I mentioned — because it was in your bio, assisted living and apartment ownership… How does that break down, the 716 units in terms of assisted living, apartments and whatever else you’re doing?

Chris Levarek: We are closing the assisted living this year, so it’s going to be in our portfolio. We threw it in there, but it’s—

Joe Fairless: How many units?

Chris Levarek: 89 units for assisted living.

Joe Fairless: Okay.

Chris Levarek: So the rest is multifamily Our early properties were duplexes. We have a five-unit, we have a 13-unit, and then our first syndication was a 16-unit. We have an 84-unit apartment, a 374—

Ashton Levarek: 384.

Chris Levarek: 384, sorry. And a 120-unit as well. So altogether, that’s about 716, yeah.

Joe Fairless: Wow. And what was your first indication? How big was it?

Chris Levarek: 16 units. Some people would say that’s not a good first way to do it.

Joe Fairless: What would you say to that?

Chris Levarek: I talk a lot in BiggerPockets about this, too. If the deal makes sense, and you’re going to make a profit, and the margins are there, then so what if it costs $15,000 for an attorney or to raise the money? For us, it was a great learning experience, and that’s what I’d look at it. If it’s helping your business grow, then it really doesn’t matter if it’s a million-dollar deal, in my opinion.

Joe Fairless: Did I hear you correctly? You started out with a 5-unit?

Chris Levarek: We started out with duplexes.

Joe Fairless: Duplexes. Okay.

Chris Levarek: So our first purchase was two duplexes. So it was a quad kind of but it was two duplexes at the same time.

Joe Fairless: Got it. Two duplexes, and that was with your own money, and then you go to—

Chris Levarek: One correction, we partnered with one partner on that. Yeah.

Joe Fairless: Ah, okay. How did you structure it?

Chris Levarek: Actually, it was a great one; we did just the private lending. They lent 70%, we funded cash 30% plus renovations, purchased it all cash and renovated and did a BRRRR on both those duplexes.

Joe Fairless: Why not continue to do that?

Chris Levarek: We’re still doing that, actually. We do that on the side. So we do, I guess you would call that short-term loans, 12-month promissory note loans; some people like that, and we found great interest. Also, I didn’t mention, we did short-term rental that we just are taking live here on the 13th. So really shortly here. And that one was completely funded with short-term debt. So 12-month loans; we raised about $250,000 that way.

Joe Fairless: What are the terms that you give the lenders?

Chris Levarek: 12 months, 10% interest, simple interest, and then at 12 months, they can roll it into on a continued basis, keep it in there, or we just find another short-term private lender to backfill that position. And the way short-term rentals are done today – there’s a lot of cash flow that makes that work, where it wouldn’t work in other deals like that.

Joe Fairless: So you’ve got the smaller properties that you’re doing on the side, and then you’re doing larger deals. I mean, the 384 is massive. Were you the lead sponsor on that 384 deal?

Ashton Levarek: No, we were co-GPs on that one.

Joe Fairless: Okay. And then what about the 120-unit or the 84-unit?

Ashton Levarek: Those are all partnered with the other operators, people we continue to work with, actually. So we found a lot of momentum, a lot of progress just working with other professionals. And really, that comes back to stick to what you’re good at.

Joe Fairless: What are you two especially good at?

Chris Levarek: We’re really good at building the network, and interfacing with other investors with building the team. I’ve got 21 years in special operations. And that’s what it’s all about. It’s about managing and putting a team together to execute on a specific task or mission. So that’s what we focus on now. We focus on educating our network, we focus on helping our network understand how to get into this business, and then how to Excel, and then we bring together the operators that can execute the boots on the ground, and make the business plan work.

Joe Fairless: So the assisted living – I assume that’s a co-GP deal. Correct?

Ashton Levarek: It is. Correct.

Joe Fairless: Okay. How did you two become educated on assisting living nuances, compared to traditional apartments?

Ashton Levarek: That’s a good question. So that is a little bit out of our area, if you want to call it that, just because it’s something we haven’t done before. But the reality is, it’s not that different. If you take somebody that’s going to buy an apartment complex, he’s not going to manage it all by himself; he’s going to get a property manager that’s been doing it for 10, 20, 30 years, or something that can execute on it, that can turn it around, add value, force the appreciation, and make it work in that market, right?

So really, what we did was we partnered with the right people to be able to do it. So we’re working with a group that’s considered one of the top in the nation, that brings in the right personnel to manage it, that hires and fires, that can help us raise the value and make it a profitable investment.

But then, really, from there, it was just educating ourselves on why; why would we invest in assisted living, right? It is a different strategy for us, but it makes sense. When you start looking at how many people are retiring, the baby boomers… It’s like 23 million Americans over the age of 75. In 2031, the oldest boomer will turn 85, which is going to open the floodgates for senior housing investments. There’s a lack of senior housing out there right now. So we’re filling a demand, because there’s a lack in supply.

Break: [07:31] to [09:05]

Joe Fairless: Is this operator that you’re partnering with someone you’ve partnered with before?

Ashton Levarek: It is. Yes. Vetting partners is a tough one, right? It’s not just people that you know, and like, and trust; they have to have some type of track record behind, fill a need that you have, basically. So that’s a big part of our business, is making sure we’re partnering with the right people, because we have been burned before, and that was fun, being burned.

Joe Fairless: It’s all learning experience… I mean, you know from your military background, that challenges come up and you just have to improvise and make it happen. What took place when you got burned?

Ashton Levarek: So you partner with a property management company or property management that came highly recommended, and then they put the wrong tenants in there, the rehab schedule gets behind, maybe you end up becoming six months behind, cash flow starts to slow down, you’re behind on your projections, and then of course, you have to answer to all your partners and investors.

So without going too much into detail, that’s kind of how it happened. And then they get bad tenants in there, and that’s a 12-month pain, right? That’s a 12-month loss. So that’s kind of how it went. And then of course, in the height of COVID – that didn’t help at all. Chris, you want to weigh in on that?

Chris Levarek: Yeah, it’s a difficult conversation, I think, when you offer an 8% pref or something like that, and then all of a sudden, you’re delivering 4%, or something like that. And then why is that going on, and you have to talk with other partners that you’d like to keep a long relationship with, and it’s suffering because you failed at your development of the operational partnership side.

And I think you see syndicators do this a lot – they rush in, they form a group, and they call it done and the property closes, and everybody’s happy, and they promised 20% IRR, everybody’s excited. But what they fail to realize is to deliver on that, you need the experience.

When we did our 16-unit ourselves, we were the lead sponsor, we realized really early, we could keep doing this, or we can find people, like our current partner, 40 years experience, over 1 billion in assets, who are experts on that side, and we can learn from them, we can grow, we can move our company in that direction if you want to, but we don’t have to. Those are all choices you now have when you partner with experience, versus just trying to slap a deal together.

Joe Fairless: I hear you. Yeah, I had a similar challenge right out of the gate. I assume the deal with the property management company that didn’t go according to plan is the 16-unit?

Ashton Levarek: It was actually a 13-unit, and then I think it was an 84-unit after that. Yeah. So we had two incidents, and they kind of coincided at the same time or overlapped.

Joe Fairless: Fun. Even better.

Ashton Levarek: Yeah.

Joe Fairless: Well, you know, it’s probably better than they’re happening at same time, versus one, and then it’s completed, and then you’ve got another train wreck after that.

Joe Fairless: Well, then it would show we didn’t learn anything, right?

Ashton Levarek: Right, exactly. So help me with the timeline here. You did the smaller deals, and then you did a 16-unit syndication on your own, and then you did a 13-unit and a 84-unit?

Ashton Levarek: Actually, it kind of went like this… So we did two duplexes, another duplex, another duplex, a five unit, then the 13-unit. And when we did that 13-unit — because we were doing these probably 1-2 months apart at the beginning there, pretty quick. And then we started doing one a quarter as they got bigger. And then we did the 16-unit. So we had put the property management in place for the 13-unit, but sometimes you don’t realize what’s going on, how it’s performing right away, or how bad they’re executing on what you want them to do. You don’t realize that right away. So then we did the 16-unit. I think six months passed, and we’re like, “How come they’re not raising rents? How come the rehab plan’s behind? What’s going on with this?”

Joe Fairless: On the 13-unit?

Ashton Levarek: On the 13. Yeah. And then we closed on an 84-unit later that year. And we were in partnership with another property management company at that time. And that’s kind of when it started snowballing. We’re like, “Wait a minute, we need to reevaluate how we’re doing this.”

Chris Levarek: We need to manage the asset.

Ashton Levarek: Manage the asset.

Joe Fairless: And was it the same property management company on the 13, 16 and 84?

Chris Levarek: Interesting enough, the 16-unit we had great success, mainly because we leveraged other partners that we knew were operating the area with a good property manager, and we used that relationship. The 16-unit did very well. And actually, we switched the 13-unit property management company to the company we were using for the 16-unit because of that. But then the 84 was in another state; it was a first-time partner group that we are partnering up with, and the sponsor group was good. It’s just the property management team wasn’t fully invested into it, and we saw that. And it was kind of a rundown area that we had to take an entry deal into to get into.

Ashton Levarek: It was a bigger town.

Joe Fairless: What cities, 16, 13, and 84?

Chris Levarek: The 16 and 13 unit were in Fayetteville, North Carolina, next to Fort Bragg. And then the 84 unit was in Columbus, Ohio.

Joe Fairless: Got it. So you have some thoughts on how to vet property management companies, I imagine, and what to look for… So clearly, the referral – that went along way on the 16-unit, and then you switched over. So I heard you when you said that. But besides referrals, what questions — even with a referral, you’d ask certain questions now that perhaps you didn’t know to ask prior to these two experiences on the 13, 84. So what questions would you ask now that perhaps you didn’t ask before or didn’t know to ask before?

Chris Levarek: That is a good question. So I think the first thing people look at when they look at a property management company is probably the price, if they’re not directly partnering with the person. And that was our first mistake. I think we took a cheaper property management company for the 13-unit and that was the first mistake we did. It was just 2% cheaper at the time, and it came recommended by somebody else; but we didn’t look into their experience, their background, why they’re doing, what they’re doing, how they handle leasing up, how they handle rehab, all that stuff. So that kind of bit us in the butt there.

But the questions to ask I think would be, how did they handle lease-ups during COVID? That was a big one for us. We were working with a property management company now that they were able to continue leasing up the 384-unit we closed on. They’re able to continue leasing up during COVID, because they were marketing to central personnel. So police officers, nurses, people like that. And then they were also doing the paperwork for their tenants to make sure that they can secure—I forget what it was called, but—

Ashton Levarek: [Inaudible [15:31]

Joe Fairless: We do the same thing. We fill it out for them, and then they just look at it, review, sign.

Ashton Levarek: Exactly.

Chris Levarek: Yeah, much easier.

Ashton Levarek: Yeah. So I think that would be a great place to start, especially where we are as a nation right now, with COVID, and everything.

Joe Fairless: Okay. Hypothetically, congratulations, you just got another 120-unit in a new market. And you asked this potential property management company, “How did you do during COVID? How was your lease-ups?” I mean, come on, they’re going to give you whatever answers you want to hear. So how do you go beyond that, and really get to make sure that they’re not trying to pull one over on you?

Chris Levarek: Yeah, I think a big problem with the 13-unit is we looked at unit count and not unit type that was in the unit count. Someone can boost up their unit count in a lot different ways, they can become partners in certain deals, and all of a sudden their unit count goes through the roof.

But if you’re going to be talking to that property management company, and that’s part of your strategy, is to depend on that partner for that type of work, then you want to see other types of properties that they’ve managed through certain parts of the year, a couple years or multiple years, that demonstrate that kind of experience. And then you want to check how those properties are valuing now, what were they valued a couple years ago, what is the occupancy… If they can provide you with that kind of information, that’d be super helpful. You can judge for yourself based on numbers they give you from other properties in the area. And how strong are they in that local market? Are they holding 20 properties in the local market, or are they not at all there, and they’re just starting out? Maybe they’re based out of another state. You can kind of ask, “Okay, well, what is your strength in this market with this asset? And how long have you been doing it?” Versus just saying, “What’s your unit count? And what’s your price?” Which I think a lot of people do.

Break: [17:09] to [20:03]

Joe Fairless: Ashton, I know you mentioned you would look at their leasing process and rehabs. Will you elaborate on what in particular you’d look at with leasing up and rehabs?

Ashton Levarek: Yeah, so I’m sure all your listeners — or maybe not all of them, but most understand how apartments are valued. They’re valued by the net operating income, right? So a huge part in that is making sure it’s, you know, over a certain percent occupancy rate to hit that cash flow. And then, of course, increasing the rents, rental bumps, by increasing or improving the property, or decreasing expenses. All that stuff is trackable.

So when you talk to a property management company, you can see that. And if they’re in the business for longer than five years, which is the typical cycle of an apartment complex, they can easily show you those kinds of numbers. “Yeah, we managed this property from 2010 to 2015, and then we raised the value, sold it.” If they can show all that, and the lease-ups itself, I think you’d be able to find all that stuff; they’d be able to show you all that stuff. I’m sorry, I kind of got long-winded. Did I miss your question on that one?

Joe Fairless: No, no, no, I just want to know more about the lease-ups and the rehabs and what you would look for when speaking to a property management company.

Ashton Levarek: Another good one is, how do they plan on doing that? They should have a systematized way of doing that. They should have experience doing that, obviously, and you want to see that, but they should have a plan. You should have your own plan, but I want to see what they come up with. What is their plan? How are we going to be able to turn all these units? If we have 120 units, you’re not going to turn them all at once… Otherwise, your cash flow stops right away, right? So how are we going to waterfall those turns to keep the cash flow going and increasing as we do it, as well as keeping the tenants happy? And how do they manage all that? And they should have a process for that.

Chris Levarek: That’s why we failed with the 13-unit in that regard, is the property management team wasn’t used to having a schedule like that, and we weren’t either. Up to that point, we bought things for cash, flipped them in a couple months, and then rented them out. So we ate the cost for three months or two months or whatever they were. But when you go bigger past a certain size, you can’t just empty a property; it costs way too much. So you have to have a schedule. And you can talk to an asset management team, property management team, if you need to outsource that type of work and see how they’ve done those kinds of turns in the past. What kind of rent bumps have they done? Do they match what your underwriting did for the property? Is that realistic?

A lot of times, people do these massive underwriting. “Well, we’ll flip it, and in six months everyone will be at these $150 rent bumps.” Is that realistically attainable by emptying out a 120-unit? Can you even do that? Typically, it’s going to take you 2-3 years. And so you can see those schedules from previous ownership that this property management team might have, and let them walk you through how it went, how they did what they ran into what issues they had, that kind of thing.

Joe Fairless: Have you sold the 13 or 84?

Chris Levarek: Actually, we’re selling it right now, the 13-unit.

Joe Fairless: Oh.

Chris Levarek: Yeah.

Joe Fairless: What did you buy it for? And is it under contract?

Chris Levarek: It’s being listed, but according to our broker, it’s going to go fast.

Joe Fairless: Got it. Are you going to make money?

Chris Levarek: Yes, actually.

Joe Fairless: So all is well, that ends well.

Chris Levarek: All is well that ends well. Yeah. Probably double the price we bought it bought at, which is really cool. Two years later.

Joe Fairless: Good. And I know you said earlier that you switched property management companies on that 13-unit to the one that successfully managed a 16 unit. So I’m glad that ended up working out and they’re able to deliver.

Last question on this… What, from an asset management standpoint, do you do better or differently? Or do you actually do that you weren’t doing before, now that you know what you know? One thing for each of you, if that’s all right.

Ashton Levarek: I think it’d be investor relations. And there’s so many people doing stuff like this, but once you close on the deal, that doesn’t mean you stop talking to all your partners, all your investors. We have set in place a good process for keeping all our investors and all our partners updated through emails and webinars each year, and I think that’s very important. You’re building a relationship, and it’s a five-year relationship essentially, right? It could go longer, it could go shorter, but that’s very important.

Joe Fairless: Okay.

Chris Levarek: Yeah. For me, I’m more on the operations side. So the 84-unit struggled specifically because we didn’t have timely reports. So we are keyed now on having shared storage where we get those monthly reports, that way we can regurgitate that back out to investors in a nice, more simplified, friendly format, but also we’re aware of what is going on as it’s happening… And that’s really important, having that monthly communication; weekly even.

Joe Fairless: What’s your best real estate investing advice ever?

Ashton Levarek: Partner.

Chris Levarek: Yeah, I think partner.

Joe Fairless: Yep.

Ashton Levarek: We’re big on that.

Joe Fairless: I hear that. I can count on one hand how many real estate investors have not partnered with people.

Ashton Levarek: Yeah.

Joe Fairless: It seems like everyone does it, myself included, and… Why not? Yeah, you accomplish goals faster with more people, and help more people along the way. We’re going to do a lightning round. Are you two ready for the Best Ever lightning round?

Ashton Levarek: Let’s do it.

Chris Levarek: Let’s do it.

Joe Fairless: We talked a lot about lessons learned on stuff, so I’m going to give you the opposite question. What deal have you made the most amount of money on?

Ashton Levarek: That’s a very good question. 16-unit, I think, so far.

Chris Levarek: Yeah.

Joe Fairless: How much did you make on it?

Chris Levarek: That one we’re selling, too. So I think that will be — it’s almost 2.5 times what we bought it. So about a million, right?

Ashton Levarek: We’re not going to, but—

Chris Levarek: Well, yeah. In profit. Yeah. Yeah.

Joe Fairless: How much will you two make from that?

Chris Levarek: About $200,000.

Joe Fairless: Nice.

Chris Levarek: Yeah.

Joe Fairless: And you held that over what period of time?

Chris Levarek: Just under two years.

Ashton Levarek: Under two years.

Joe Fairless: That was a good market.

Chris Levarek:  A good market right now.

Joe Fairless: Yes. Absolutely. And it’s amazing that that’s one of the smallest deals. So there’s more to come in. And I heard earlier that you’re in partnerships with 384, but still, it’s probably just not even scratching the surface. Have you lost money on any deal to date?

Chris Levarek: Yeah.

Joe Fairless: What’s the deal you lost the most amount of money on?

Chris Levarek: We’ve been fortunate, we buy really conservative, we’re very conservative, but we lost about 10 grand on a recent short-term rental we went under contract for.

Joe Fairless: And knowing what you know now, what would you do differently, if presented the same opportunity?

Chris Levarek: If the market’s hot, don’t waive your appraisal contingency. [laughter] Just wait, yeah.

Ashton Levarek: Yeah.

Joe Fairless: It didn’t appraise?

Chris Levarek: It appraised $160,000 under.

Joe Fairless: Oh, wow. So you said, “No, thank you”, and you just kept the money that you had into it.

Chris Levarek: Actually, we went into a settlement, and at least got some of it back. But yeah.

Joe Fairless: What’s the best ever way you like to give back to the community?

Ashton Levarek: We donate 10% of our profits to Big Sky Bravery and Unbound. Big Sky Bravery is a nonprofit for Special Operations veterans, and an Unbound fights human trafficking.

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

Chris Levarek: Visit our website, valkeregroup.com, best way.

Joe Fairless: Truly a pleasure speaking with both of you, grateful that you shared your lessons learned regarding property management, and also how you got to this point with partnerships, well-vetted partnerships, and how you went through that vetting process, things that you would do differently knowing what you know now, on certain deals from a management side and asset management side.

So truly, thank you so much for being on show, both of you. Again, I respect your military backgrounds, and it’s been a pleasure. So I hope you have a best ever day and talk to you again soon.

Ashton Levarek: Thanks so much, Joe. Appreciate it.

Chris Levarek: Thanks, Joe. Appreciate it.

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.

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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.

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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.

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JF2630: 3 Disruptive Trends in Real Estate with Neal Bawa #SkillsetSunday

Data-obsessed Neal Bawa successfully created the super value-add strategy to combine data and analytics with current trends to make the most informed future investing decisions. Today, Neal is talking about why real estate is the most inefficient asset, what he believes the future of real estate investing should be, and how COVID is altering current rent prices. 

 

Neal Bawa Real Estate Background:

  • Previous episode #1298
  • Real estate developer with a $500M portfolio of 22 projects in 10 states
  • Approximately 3,300 units of multifamily, student housing, industrial & self-storage in 10 states
  • Founder of a real estate community with over 30,000+ members
  • Based in San Francisco Bay Area, CA
  • Say hi to him at: https://grocapitus.com/

 

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TRANSCRIPTION

Ash Patel: Hello, Best Ever listeners. Welcome to the Best Real Estate Investing Advice Ever Show. I’m Ash Patel, and I’m with today’s guest, Neal Bawa. Neal is joining us from the San Francisco Bay Area. He was a previous guest on Episode 1298. So if you Google Joe Fairless and Neal Bawa, his episode will show up.

Neal, we’re glad to have you back. Thank you for joining us, and how are you today?

Neal Bawa: Fantastic. Great to be back on the podcast. I loved the conference and I love everything that you guys do. So it’s marvelous to be back.

Ash Patel:  Awesome. Neal is a real estate developer with a $500 million portfolio across 10 states. His portfolio consists of 3,300 units of multifamily, student housing, industrial, and self-storage. Neal is also the founder of a real estate community with over 30,000 members.

Neal, before we get into your particular skill set, can you tell us a little bit more about your background and what you’re focused on now?

Neal Bawa: I’m obsessed with data. So think of me as a dork, a geek, a nerd; everything that Silicon Valley brings to everything that they do, which is measurement, which is careful look at data and analytics and figuring out what trends are going to make the most amount of money for investors. My audience, my 600 investors are just like me, they’re geeks and dorks. There’s doctors, there’s engineers, lawyers, tons and tons of technologists from Silicon Valley and from Austin, and they believe in the same thing that we believe, that is that you must obsessively track every single trend that’s happening in the marketplace, figure out how trends layer on top of each other, and that is the best way to create wealth in the long run. Not necessarily simply buying value-adds; value-add is a wonderful strategy, it’s my bread and butter. I couldn’t say enough good things about it. But to me, layering trends on top of everything that you do, whether it’s value-added, we do it by creating a strategy called super-value-add, and I’m happy to discuss that. We’re the only syndicator in the US that has ever attempted this successfully. It’s about the use of data and analytics, and that’s what all of our investors care about.

Ash Patel: And Neal, today’s topic – and Best Ever listeners, today is Sunday, so we’re going to do a skill set Sunday where we talk about a particular skill that our guest has. And Neal is going to discuss 10 disruptive trends in real estate. So Neal, before we get started, I want to ask you – the amount of data that you’re consuming, how is it not overwhelming? And what are the most important criteria that you use?

Neal Bawa: I think the honest answer is sometimes it is overwhelming. Right now data is somewhat overwhelming, because in the last nine months, US commercial real estate has changed extremely drastically. When you talk about cap rates, when you talk about rents, when you talk about single-family home prices, the changes are so radical and so drastic that I think all of us are struggling to accept those changes. The honest answer is that when we consume, we don’t like to consume for the purpose of consuming; we like to consume data and immediately create insights from it, and we do that through our YouTube channel. There’s 2-3 videos there a week; we do that through podcasts, we do that through mechanisms, we send out emails and research advisories to our geeky investors… And that actually allows us to take such a large amount of data and focus on a small number of insights that come from it, and that way we can read and then discard the rest of the stuff that’s in there. So I might read a Walker & Dunlop article that’s 12 pages long, and then my focus is, where’s the meat? Where’s the top three things that I’m going to take out of this article? Because there’s no way that tomorrow I’ll even remember the remaining 11.5 pages. So the focus has to be, can I get the top three out of this?

And today actually, I’m not going to talk about 10 disruptive trends, because your audience can’t remember 10 of them. I’m going to pick the top three that our audience voted as the most disruptive, and talk about those three. And I think if your people can take one of those trends and layer it on top of whatever they’re doing, they will have hyper-accelerated their returns.

Ash Patel: Let’s do it. What’s the first one?

Neal Bawa: Well, the one that I’m most excited about, and also worried about, is tokenization. So one of the problems with real estate is it’s the most inefficient industry in the United States, and possibly in the world. And you think about inefficiency – I’m going to give you an example and it’ll immediately make you go wow, alright?

So, I’m going to say it roughly takes me six minutes to buy a stock using this phone, right? So I’m talking to Ash Patel and Ash says, “Hey, there’s this company and blah, blah, blah. It’s awesome. You should invest in it.” And I’m like, “That’s a solid tip, I really like it.” It takes roughly six minutes to do this. But it takes roughly 6000 minutes for me to take Ash Patel’s tip about a market such as Idaho Falls, Idaho. He’s talking, he says, “Man, you invest in Idaho Falls, you’re going to make a crazy amount of money.” He convinces me, right? He convinces me, and I’m like, “Okay, I need to do something about investing in real estate in Idaho Falls, whether that’s single-family, multifamily”, something, right? It takes a minimum of 6000 minutes. 6000 minutes is 100 hours, think about it. You do the research, you call the brokers then you’ve travel to Idaho Falls the first time, then the second time, then you find a property, then you walk through the property, you lose a bid, then you fly back again, you lose another bid, then you lose the third bid, and the fourth bid, you get a property. Now you start the rehab process; it takes you a while, maybe it’s a single-family, it’s a gut rehab, you do it, you put a tenant in, blah, blah, blah. There’s no human way in which it would take less than 6000 minutes or a hundred hours. You know what that means? Real estate is one one-thousandth as efficient as stocks. And that is both the greatest strength of real estate, because it allows people like Joe Fairless and Neal Bawa to exist; it’s not commoditized, like e-commerce is, right? With E-commerce, 40% to 50% of all e-commerce is done by one company in the US, Amazon, and that kind of commoditization hasn’t occurred yet with real estate, because of the fact that it’s so inefficient. So it’s its greatest strength, but it’s also its greatest weakness, because it can never be considered a truly liquid asset. Let me say, there’s some exceptions to that rule, but it’s not very liquid.

So for decades, people have been trying to say, how do I make real estate liquid? How do I take a tip from a show and within six minutes buy some kind of real estate asset in some city that I’ve just received a tip on? That technology is called tokenization, and it’s finally here. It’s finally here. Today, right now, I’m going to give you the name of a company, I’m not associated in any way. You can go to a website, it’s called lofty.ai; and you can go to lofty.ai, and you notice that there lots are single-family homes that they’re selling, in lots of different markets.

But what you’ll notice is that you can actually go to their website and you can either pay with Bitcoin or cash, in $50 tokens, and you can buy pieces of those properties. And you might say, “I can just go out and buy the property.” Yes, but it takes the 6000 minutes or more, remember? And you don’t really have that kind of time. Most people don’t actually have time; you’re a working doctor, you’re a working lawyer, you’re a tech entrepreneur, you don’t have the time. But you always have time to listen to Ash Patel’s podcast and Neal Bawa comes on there and says, “Idaho Falls is simply the greatest investment in America.” By the way, that’s what our number say.

So now you’re like, “I should be able to pick up my phone, and instead of going to Robinhood where I’m buying my stocks, or E*TRADE, they should be this other app and I should be able to tap on it and search for Idaho Falls and see a bunch of assets there, everything from multifamily to a hotel to a single-family to a parking lot, and I should be able to say, “50 bucks? Okay, I’m buying 20 tokens. I’m buying 50 tokens.” Can you imagine how amazing that makes it? Because I sometimes will do a webinar and people by the end are like “There were like 10 different cities here that I’ve never heard about that sound all incredible, but there’s just no way for me to invest in it.” Tokenization makes it absolutely 100% possible to invest, because sometimes you go to a party and people are talking about stocks and you buy five stocks by the end of it. That is what is happening with tokenization. It’s here, check out lofty.ai; it will change the face of real estate.

Ash Patel: Neal, let’s expand on that for a second. With our attention spans today in this new Robinhood crowd, a lot of day traders are out there, people are in and out of stocks, high-frequency trading. So when you add that, coupled with liquidity, coupled with overseas investors wanting US real estate, what can that do to US real estate prices?

Neal Bawa: Massively increase them. So there’s good news and bad news here, but the good news comes first. So any asset that becomes commoditized in this fashion, in the sense that you can break it into individual pieces, $50, $100, $200 pieces, its value goes up. We’ve seen that all across the board, it has nothing to do with real estate; but any kind of asset that can be traded on markets and be completely liquid, where I can just simply say, “Okay, I’m going to sell my 50 tokens of this property in Idaho Falls, because Neal Bawa was wrong and Idaho Falls sucks. I’m going to go invest in Destin, Florida.” You should be able to do that instantly. And as long as you can, that liquidity leads to substantial increases in prices of real estate.

So I am forecasting that in the next five years, we will see a substantial increase in price of real estate, not just because of all the other things that we’re seeing, the shortage of homes etc, but because real estate is now on a journey that’ll take 10 years for it to become a completely liquid asset; as liquid as stocks. You’ll be able to basically buy and sell instantly. Now, it might take a few minutes longer for your real estate stock to “sell” than for stocks. With the stocks, you sell it, it takes maybe a second and somebody buys it.

So the market will take time to get to that level of liquidity, but you should be able to sell it in a few minutes, if not a few hours. And in 10 years, we’ll get to that both horrible and amazing world where 80% of trading will be high-frequency algorithms. And then whenever you sell a stock, it’s gone in a 10th of a second because some computer somewhere grabbed it from you. Do you see what I mean? We’ll get there in 10 years; so we will see significant price increases and that’s the good side of this equation.

Break: [10:54] to [12:27]

Ash Patel: So in theory, on Monday morning, you could buy $100 of the Empire State Building, sell that and buy $100 worth of the Flatiron Building in New York.

Neal Bawa: Not just that, you could buy $100 of parking lots that’s under the Empire State Building, where someone’s charging parking fees, and never have to worry about a parking ticket or chasing somebody. It’s not your job. When you buy a stock, how much work do you do for Apple?

Ash Patel: Yeah.

Neal Bawa: Do you go into Apple’s campus and punch a clock? You don’t, right? With real estate, why isn’t it that way? Why shouldn’t you be able to buy a parking lot in New York and benefit from all the rents that are coming in? Now, obviously, there is a massive amount of technology on the backend to make all of this stuff happen, to make sure that rents make their way to you, all of that stuff. There’s massive amounts of tech that is going to happen. It’s all being built on something known as the blockchain; if you don’t know what that is, do your research. No, I’m not talking about Bitcoin. Bitcoin is just a cryptocurrency. I’m talking about blockchain, which is the backend infrastructure of Bitcoin, of Ether. That backend infrastructure is now going to hold the tokenization of real estate, which I’m really happy about, because the blockchain is not something that governments can interfere with. So it’s growing much faster, you can see that in the price of Bitcoin having doubled or tripled in just the last 45 days; as people realize, governments – it’s very difficult for them to mess with anything related to the blockchain. So the fact that real estate assets will be up there makes me feel safer than governments, who in the future, are likely to attach our assets.

Ash Patel: Neal, I’m going to push back on you for a second, if I may.

Neal Bawa: Go.

Ash Patel: So real estate still has a lot of archaic and inefficient models. We’ve had several companies like Zillow, Redfin, trying to usurp the realtor model, and they have not been very successful. What makes you think that blockchain will be successful in infiltrating this archaic industry?

Neal Bawa: I think because the infrastructure is still being built. The answer is that the obsessive nature of Robinhood will overcome what you just said. The fact that the young today can’t live without that Robinhood app means that there are 100 million consumers that are going to overcome these issues. They’re going to overcome them. Someone will build an infrastructure on the blockchain and some arcane government organization will say, “No, this doesn’t match the real estate broker laws”, and that company will be fined a huge amount of money or will be shut down. A second company will build it, they will be fined. A third company, guess what happens? By the time the third company is built, someone will write laws and say, “This is the right way to do this.” All progress in the United States happens in this fashion, where some company breaks the law or goes too far, and then gets punished; a second one, a third one, and then finally, laws are written to say, “You know what? Everybody is going to do this anyway; they’re all going to be in this gray zone. Let’s write laws.” Those are going to happen now, because you know what? Lofty.ai is selling commoditized $50 Real Estate right now. I’m not saying that this company will succeed. I hope they do, because I really think that’s the way to go for real estate. And if they do, or if they go by the wayside and another company comes in and does it, the final impact of this is this – when real estate becomes liquid, it’s worth a lot more.

Ash Patel: Yeah, that’s a great point, and a lot of the Robinhood crowd wants access and exposure to real estate, and often they can’t get it; they need the fractional shares.

Neal Bawa: Yep.

Ash Patel: They can’t buy a share of Tesla.

Neal Bawa: Right.

Ash Patel: They buy a fractional share, just like they would with real estate. So yeah, great point.

Neal Bawa: And then you might say, there’s REITs out there, already on the real estate stock exchange and then no one is buying them, because REITs are not sexy. You know what’s sexy? It’s Tesla. Because you look at a company called Tesla and say, “I believe in their vision, I want to buy their stock.” “I love Apple MacBooks, I’m going to buy their stock.” In the same way, what people really want to say is, “I love Idaho Falls, I want to buy multifamily in Idaho Falls.” They want to have a choice, and REITs never give you any choice. It’s some vacuous thing where they’re buying real estate, and there’s no sexiness. Do you want 100 million people tapping on stuff? It has to be sexy, it has to be specific, the choice has to be real. That’s why tokenization is so different from REITs.

Ash Patel: Another great point. And it gives you bragging rights.

Neal Bawa: Yeah.

Ash Patel: I own multifamily in Idaho Falls.

Neal Bawa: I own multifamily in Idaho Falls, right? I’m just like, “Where the heck is Idaho Falls?” “Well, let me show you.” Whip out my phone and show you the home that I own pieces of, right? That’s so beautiful.

Ash Patel: Yeah.

Neal Bawa: Everyone loves real estate. No one ever has to explain why real estate is awesome. It’s just so, so archaic, and the system has to change; and it changes through punishment. Punish, punish, change; punish, punish, change. That’s how laws work in the US.

Ash Patel: Awesome. What’s the next trend?

Neal Bawa: The second trend that we are seeing is hybrid work; and I know that people on your podcast have talked about the impact of hybrid work, but I just don’t think that people get how big a deal this is. So let me break it down for you… There are 333 million people that live in the United States. Roughly out of those, 180 million are our workforce, the people that work, right? Working something. Out of those 180 million people, there’s roughly 80 million white-collar workers; people that work in front of computers, or people that basically interface with technology in some way. White-collar folks, right? The rest of them, they can’t really do hybrid work. If you’re a bus conductor or a driver, it’s kind of hard for you to do hybrid work. So I’m only talking about those 80 million people.

Now, something important to keep in mind – those 80 million people make 70% of all the dollars. So even though they’re 40% of all the working population, or it’s slightly less than 40%, they make 70% of the money in the United States. Now you take this 80 million person audience – before COVID, only a few million of those people were free to work from anywhere; a few million out of 80 million, right? And mostly, those were individual entrepreneurs.

Today, there are estimates – and these estimates vary, but our best estimate based on our research shows that out of those 80 million, 22 million high-paying white collar workers are free from a desk. They can work from anywhere. And some of them, anywhere doesn’t necessarily mean that they can work from Puerto Rico. Anywhere means that they can choose to not live in an expensive suburban home; they can go out another 50 miles and come into work once a week. I think that’s freedom too, because now they’re driving an additional 50 miles once a week. That’s freedom; most people will take that and now that radius expands.

So as a result, there are three or four massive impacts of the way work is changing in America, and those impacts all have massive consequences for your real estate investing over the next five or 10 years, and that’s the concept of hybrid work.

Ash Patel: Is the impact on that real estate assets in city centers declining, suburban assets increasing?

Neal Bawa: We’ve seen that, and let me give you an example that will surprise you. Most people that listen to Joe’s podcast are really thinking about multifamily in some way, right? But do you know what is the most successful asset class in the last 12 months? It wasn’t multifamily, and it wasn’t industrial, it was suburban office. And guess who were the people buying suburban office? Not multifamily people; they were people who already had in-city offices. The people that were running in-city offices saw their occupancy decline massively, and they’re buying a suburban office. So we are already seeing an impact.

The first impact of hybrid work was not to multifamily, it was the suburban office. Now, of course, we’ve also seen massive increases in multifamily prices on the suburban side versus in-city. So yes, there is definite data to suggest that even with people coming back to cities in the short term – they will come back because their jobs are there. Not every company is flexible. Some companies are still figuring out what flexible means for them. This is an evolution. But here’s what I think is happening – people left the cities, went out, experienced a new kind of life; a significant portion – in fact, a majority – came back or are in the process of coming back, and over the next three years, a significant portion of those will leave again. This time it’s organized. This time they’ve thought about their families, their kids’ education, where they want to go, and this time, they will be a diaspora of these people going out. And when they go, they’re not coming back.

So long-term cities will hurt. Inner areas, we call them CBDs, Central Business Districts – they will hurt. And suburban office, suburban multifamily is a big gainer; but it’s not the suburbia that you are thinking of just. So think about this – I’m going to give you an example. Phoenix. I don’t invest in Phoenix, but I invest in Phoenix’s suburbs; and the suburbs that I invest in are the Southeastern suburbs, and then the Northwestern suburbs. So 30 miles from Phoenix is a city called Mesa; it’s much faster growing than Phoenix itself. I have a large property there. And then 30 miles in the other direction, diagonally opposite, is a city called Avondale. It’s even faster growing than Mesa. Phoenix has four out of 10 of the fastest-growing metros in the US.

So when I’m investing there, I’m massively benefiting from this trend I’m seeing just absolutely insane, mind-boggling rent increases. We’re hitting five-year rent increases in one year. But here, as we’re noticing that, we’re noticing something else – our data is showing that there are now an outer ring of cities outside of Phoenix that are even growing faster than our cities. Before COVID, our cities were the fastest-growing. Now, they’re still very fast-growing, but now there’s an outer ring. And you know, that ring now is pretty wide. Buckeye is clearly growing faster than either one of my cities. Buckeye is 50 miles from Phoenix, the City of Maricopa is 55 miles from Phoenix, and it’s even growing faster.

So what we are seeing is, the city ring which traditionally was a 30-mile radius is now a 60-mile radius, and the cities on the outer fringes of that radius are growing at explosive speeds. The same thing is happening in Dallas, where McKinney used to be as far as people would go on the northeast side of Dallas. Now, people are going 20 miles further, and those cities are exploding. They’re growing at massive rates; like, rates that you could not believe. This is the kind of place where you buy something and it doubles in six months. That’s what’s happening to the outer fringes. So the radius of every city in the United States has increased.

Ash Patel: I have a theory on that, if I could share that with you. So I think we suffer from recency, and over time, we’ll get back to normalcy. What I mean by that is you see a lot of Wall Street banks that are saying, “Hey, you guys can collaborate as efficiently or effectively at home or in Zoom meetings, as you would in office, face-to-face meetings.”

Neal Bawa: True, true.

Ash Patel: So right now there’s also a job shortage. Employers are desperate for employees; the next recession will turn that around, and employers will now have the upper hand, and they can call people back in the office. “Hey, if you want a job, it’s in the office.” Do you think we’ll head in that direction at some point?

Neal Bawa: The answer is no, and I’ll explain why. Everything you said is true. When employers have more power, they tend to kind of centralize, they tend to pull people together in one place. But when I’m looking at data from what employers are doing right now, they’re changing their minds, Ash. So many of the big companies are going from that concept of having monolithic places with 80,000 people working – they’re going away from it. They’re ending their leases on those big offices, and doing these suburban satellite things.

So you’re assuming that employers will want it to go back to that level. I think what employers really are going to do is they’re going to take that one 80,000 person office and build five satellites with 50,000 or 60,000 people in them. That’s the trend that we’re seeing. We’re seeing it repeated over and over again.

One of the key things is this – when a catastrophic change happens in the world… And COVID, by the way, is the first event in modern history to have affected 7 billion people. World War II affected 3 billion people; it didn’t affect the entire population of the planet. Also, World War II affected poor people a lot more than rich people. COVID affected rich and poor people evenly.

What you forget is that what has just happened, the biggest consequence of that is not the health tragedy; the biggest consequence is we trained 300 million CEOs in the world on how to run their companies more efficiently. And so many of those people realize that this part is actually fairly efficient from a cost perspective, if you kind of imagine the cost perspective. So many realize that now they can hire talent everywhere in the United States and make it work. Imagine this has been a master class of CEO training. And here’s the thing – the younger ones amongst those CEOs are the future Steve Jobs. They’re the future Elon Musk. So this accelerates from here, because those younger CEOs, their net worth in their company sizes rise from here and each year, those people now believe they can run hybrid companies more effectively. So the effect accelerates every year.

Ash Patel: That’s a great point. Thank you for that.

Break: [25:41] to [28:34]

Ash Patel:  What’s trend number three?

Neal Bawa: So trend number three is healthy living, and one of the key focuses – and we’ve seen this, and it’s represented in this bill to rent massive explosion that we’re seeing in the last 12 months… COVID changed us. There’s this concept that people have which is completely untrue, which is COVID happens and then COVID ends, we get these new pills that Pfizer’s coming out with, and that’s the end of the pandemic. Shortly, that is the end of the pandemic. I believe 60 days from now that pandemic in the US will end when those pills are available. But it doesn’t change the fact that our brains have changed; because think about everything that’s inside my head – I am a sum of my experiences, and COVID has been the largest, most impactful experience of all. So I can’t just go into my head and remove every neuron that was COVID-specific. It changed 7 billion people in the way we think, and one of those changes is healthy living. So people today talk more about healthy living, they think more about healthy living, they’re more into nature; because for nine months, we were basically locked up. We couldn’t go to movie theaters and malls, so we went out to parks, because parks were safe. Park usage in the United States tripled during COVID; and here’s the cool thing – it didn’t go back to where it was. People just got used to go into parks. So that’s an example. Backyard usage in the United States more than quadrupled during COVID, and it’s not back down to where it was.

So people want more space, so that’s the first concept of healthy living. So people want larger spaces to live in, they want more green environments. So botanical walls – this concept of basically covering up your stucco with green walls – has exploded. We’re now selling about 12 times the botanical walls that we were selling before COVID; so people want that greenness around them. Areas around parks – real estate there is now increasing at two times the price increase that we’re seeing anywhere else.

So anything that was near a park is now massively more expensive, and it will stay more expensive for the next decade, because it’ll take at least a decade for those neurons to subside. Because we spent a year writing those neurons into our hard drive, you see what I mean?

Ash Patel: Yeah.

Neal Bawa: So healthy living has become an incredible concept, and I will give you some tips on that. So there’s a company called Delos; they are the absolute leader in healthy living in the United States. They have these iPad dashboards; you walk into a home, it tells you how the air is filtered, how the water is filtered, the negative ions that are charging the air – all of that stuff is in there. I think this company is worth $100 billion. They’re not public yet but when they go public, I would buy their stock; I absolutely plan on buying their stock because what’s going to happen is there’s going to be a Tesla of healthy living. And I think Delos is positioned for it.

Ash Patel: And how do you use that to make acquisitions? Do you specifically look at real estate near parks?

Neal Bawa: So the short answer is, in my mind, real estate near parks is more valuable for the next decade. Beyond that point, the effect might go away. So by default, not everyone is thinking about that. Not everyone’s thinking that people actually want to spend more time near parks. When you’re buying an asset — my Park Canyon asset, it’s called Park Canyon, it’s in Dalton, Georgia. It had a builtin man-made lake. So guess what I did? My investors were happy, the prices went berserk. We were making 45% annualized. So I sold it in the public market, hired a broker, paid $150,000. The top bid comes in at $23.3 million, I match it and buy the asset back again.

Ash Patel: Wow.

Neal Bawa: I matched it and buy the asset back again, because I’m like, “This is the best asset I have. It has incredible stickiness because of its nature concept. It’s built on a hill, it’s gorgeous”, and that matters a lot more to me today than it did pre-COVID. So my decision-making has changed, and I’m like, “Why would I give this asset up”, when I’m probably going to go out and buy a very similar asset for a very similar price. Let me just buy it again.

Ash Patel: What a great exit; this way your investors are made whole at fair market value, and you now own this asset. That’s incredible.

Neal Bawa: Yeah, yeah. So it worked out really well. And just so you know, 90% of the investors stayed with us for the 1031.

Ash Patel: Awesome. Neal, how can others use data in their investing?

Neal Bawa: Obviously, we’re used to things like Excel spreadsheets. But the problem is, there’s just too much stuff, there’s too much data. So what we like to build is, we like to build data toolkits for nerds, and one of those toolkits is called location magic. That’s a great place to start, because it is a toolkit, it’s on our website, multifamilyu.com. So you go there, and you find your way to location magic on the homepage, and you listen to a 45-minute presentation; the presentation actually leads you through the use of demographic, freely available data. This is not a subscription. It’s not a product. It’s a concept. It’s an idea. It’s a way of making things easy.

But what it does is – after you finish that hour of instruction, you will be able to take any city, any town in the United States and compare it against any other city in the US using five metrics, all publicly available. You never have to come back to us. You never have to buy a subscription. You never have to talk to Neal Bawa again.

But that location magic kit is a fantastic way to get started with data, because I guarantee it, 10 minutes or less, you’ll be able to say things like, “This city is way better than that city. Way better.” And you’ll be able to say “No, you’re wrong. This city could not possibly be as good as this one, and let me tell you five reasons why.” That gets me really excited, you can tell I’m excited about that, because the way Wikipedia has democratized information without all the bullshit that goes on on Facebook is something that I’m very passionate about. So location magic was always meant to be a way to give stuff away, to create more nerds and geeks, because my core belief is this. The Bible got it wrong by one letter; it is not the meek shall inherit the earth, it’s the geek. It’s the geek, right?

Ash Patel: I love that.

Neal Bawa: Richest man in the world – geek. Second richest, geek. Third richest, geek. Are you seeing the pattern?

Ash Patel: I see it. I see it. So a lot of us back in 2015, 2016, 2017, 2018 thought the market was at a peak. I started selling assets in 2015, I was obviously very wrong, and sort of buying them back in 2016. So what do you say to people that are like, “Man, this trend has been going on way too long. We’re due for a recession. We’re due for a crash”?

Neal Bawa: We just had it. Please understand that COVID reset the market. We were in the 9th inning. In fact, I would say that in January 2020 we were in the 10th inning, we were in overtime. So yes, that particular rally was ending, because all of the help had been basically provided to the economy in 2010, 2012, 2013, 2014, and then the help ended. So the market since then had been moving based on the momentum,  the push that the Fed gave it, the push that Congress gave it, and then the momentum was slowing and slowing and slowing, and eventually, it slowed to the point where the economy just drops into a recession. And it did. Obviously, there was an external stimuli, COVID, that caused it. But in the end, the reset did happen.

I’m going to give you an example, and I think that example will clarify this in people’s minds that think that today assets are overvalued; they do not understand the economy. Real estate assets are all overvalued, 100%, but real estate today is financialized. It is a financial asset that is controlled by Wall Street. Ash Patel doesn’t control real estate, neither does Neal Bawa or Joe Fairless. It’s all controlled by Wall Street, because they have hundreds of billions or trillions of dollars. So we dumped roughly $2 trillion into the market in 2010. We dumped $2 trillion; we created liquidity, we created new money, we bought mortgage backed securities, okay?

And that $2 trillion gave us our train enough of a push for it to run until 2020, and there were still people saying, “We’ve still got a year left or two years left.” And maybe they were right, but at least we got nine or 10 years out of it.

Now imagine the same exact train — same exact train; it hasn’t gotten any bigger. Because the growth in the US, 1% population growth in the last 10 years, at the most, your train is 10% bigger. Now, instead of a $2 trillion push, we’ve given it a $12 trillion push. And what’s exciting about this push is, the last time the push that we gave was mostly putting money into banks; it was called liquidity, right? Quantitative easing.

This time, in addition to doing that – and we definitely did that; we’ve been buying mortgage backed securities, $120 billion a month. We also gave it a special kind of push; we actually put $2 trillion into the pockets of Americans. Please research today, what are the bank holdings of Americans. They’re the highest in history. Savings in the United States are highest in history. How do you have an overvalued economy if Americans have more savings than they’ve ever had before? The power that American workers have to ask for salary increase – highest in history. These things can only happen earlier in the cycle. They’ve never happened late in the cycle; they can’t possibly be. 2019, savings were down because people are paying so much for assets. COVID reset us, and gave us a $12 trillion push, and that has momentum, and right now the momentum is so high that inflation is at an all-time high. If there’s nothing else you believe, believe in inflation.

Why the heck, could we be slow enough to tip into a recession but inflation is at a full-time high? Do you see how that is diametrically opposite? Do you see how you have two arguments that cannot possibly both be true? So if you believe that inflation is at 6.3% – and that’s the official inflation, by the way. Unofficial shadow stats inflation is running at 12.5%. Today, earlier in the day, we came up with numbers for October, 6.2%; highest since 1990. So if inflation is this high, the economy must be supporting it, because it’s running very fast, right? That’s how inflation rises. If it’s running very fast, how could it suddenly stop and then fall? That is not how economies work.

Ash Patel: Another great point. Neal, thank you so much for joining us today and giving us your trends on what’s impacting real estate. I want to have you back and talk about the other seven at some point. But how can the Best Ever listeners get a hold of you?

Neal Bawa: Well, I think the best way to do it is just type in my name into the internet. I’m the only Neal Bawa, hit Enter, or if you want to go and look at the other seven trends they’re recorded on multifamilyu.com, go there, watch the 10 trends. Some of the other ones are just mind-blowing too, just didn’t have time for them on the podcast. So check out Neal Bawa.

Ash Patel: Awesome. Neal, thank you again. Best Ever listeners, thank you for joining us and have a best ever day.

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JF2629: How to Vertically Integrate for Optimal Scalability with Chris Pomerleau

Chris Pomerleau got his start in real estate with a single-family flip that took over a year to complete. Now, he specializes in multifamily in seven different states with over 2,500 units. Today, Chris is talking about keeping his long-term investors happy with clear communication, how to identify consistent markets, and advice for getting into commercial real estate without a proven track record. 

 

Chris Pomerleau Real Estate Background:

 

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TRANSCRIPTION

Ash Patel: Hello, Best Ever listeners. Welcome to the Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, Chris Pomerleau. Chris is joining us from Omaha, Nebraska. He is a full-time real estate investor and has eight years of experience with syndications and joint ventures in multifamily. Chris’s portfolio consists of 2,500 units, with $190 million in assets under management.

Chris, thank you for joining us, and how are you today?

Chris Pomerleau: Thanks. I appreciate it. I’m doing fantastic.

Ash Patel: Good. Chris, before we get started, can you give the Best Ever listeners a little bit more about your background and what you’re focused on now?

Chris Pomerleau: Yeah, so we’re based in Omaha, Nebraska, here. It is basically where I grew up, and we specialize in multifamily. So we do a lot of joint ventures and syndications in seven different states right now. We own our own property management company, we own a third-party property management company, we have a hard money lending business. We’re vertically integrated, that’s for sure. We have a title company, and we’re looking to open an insurance company as well. You could call that FOMO or shiny object syndrome, but they’re all pieces of the real estate puzzle, if you will.

Ash Patel: Alright. You know, a lot of people say “be hyper-focused on one thing.”

Chris Pomerleau: Yeah. Well—

Ash Patel: I don’t agree with that, by the way, but you’re obviously not…

Chris Pomerleau: Yeah. I mean, you don’t want to be a jack of all trades. So if you only have 24 hours in the day, you don’t want to be trying to squeeze 30 hours of work into those 24 hours. But that’s what scalability is for, right? It’s not like I’m driving to Dallas to change the toilet. We have trusted experts from a property management there that can handle those things. So owning parts of these businesses and being vertically integrated doesn’t necessarily mean that I’m only performing at a B-minus at every level. My job is really to help the capital group, the equity group, which is our main focus, raise money and lock down these real estate opportunities for people.

Ash Patel: Chris, how did you get started?

Chris Pomerleau: Rich Dad, Poor Dad. I always liked to succeed if I could, however, but I read that in law school. So I’m an attorney. I like to call myself a recovering attorney. I practice about five hours a month. I’m still part of the firm I was heavily a part of throughout my legal career, but about five hours a month. I read Rich Dad during law school, and not only—so in the mornings, I was in the military; during the day, I was in law school, and at night, I was getting my master’s in negotiation. So reading Rich Dad, Poor Dad during that time, it clicked, I understood, but I just could not find that 25th hour of the day to squeeze in also real estate investing. So it wasn’t until I graduated law school and got out of the military thereafter where I said, “Okay, look, now I’m only doing the legal job. I’m only practicing as an attorney. Now, I can start dabbling into real estate.” So 2013 is when we started doing that.

Ash Patel: And what was your first venture in real estate?

Chris Pomerleau: A single-family home with my dad. We found a property really close to where he actually lives, and we did everything ourselves. We changed the cabinets and the flooring, and the toilets. It took us over a year on the single-family home, just to flip it, if you will. But from day one, our goal was always to implement the BRRR method, which I’m sure your listeners understand what that is. Refinance, pull our money out and own forever. And that was in 2013, and that was my first venture ever. In fact, my first four real estate transactions and ventures were all with my father, all single-family homes, all nearby where we lived.

Ash Patel: And what made you go beyond single-family homes?

Chris Pomerleau: The scalability. We were doing everything ourselves. I had four single-family homes in four years. And while that’s oftentimes four more than many other people, that still was not going to get me to that passive income that I had always read about and dreamed about. So it wasn’t until the 2017 when we said, “We’ve got to start looking more into multifamily”, and that’s what we just hit all out on as many units as we could.

Ash Patel: What was your first multifamily purchase?

Chris Pomerleau: 2017. It was a 20-unit with a couple of partners in town here; a 20-unit in Omaha, Nebraska.

Ash Patel: What were the numbers on that?

Chris Pomerleau: Round about figures, we purchased for about $850,000. And just saying that out loud is weird, right? 20 units for $850,000. You can’t really find that in 2021; but we bought it for about $850,000. We put about $150,00 into it. So I think we’re about a million in. And then it appraised at $1.3 million. So we did a refinance, we got all of our money back out… So we now, to this day, still own the 20-unit in Omaha for free, and it’s cash-flowing very well.

Ash Patel: What was your next progression?

Chris Pomerleau: I dabbled into a nine-unit after that, a couple of duplexes and then I jumped up to a 48-unit.

Ash Patel: And did you raise money or was it just friends and family on that deal?

Chris Pomerleau: You know, the way I got in was borrowing money from families. So that 20 unit was just me and our partner. It was a $200,000 downpayment; I brought $100,000, they brought $100,000. And it wasn’t $100,000 that I had at the time. So I had to borrow that from family and I paid interest to that family member, so that they weren’t just lending it for free. As you know, cash – it’s kind of trash, so they were to give it to me, it wouldn’t be making any money. So I paid them interest on that, and then at refinance, I paid them back. And I did that a couple times, I actually recycled that $100,000 a couple times. A big thank you to that family member.

But then after I had borrowed a couple of thousand dollars from different family members, I realized, I need to start getting into this syndication opportunity here. I partnered with somebody in town, his name’s Collins Schwartz. I think he’s actually been on the show, it was like three years ago. But we realized that we have a sphere of influence of people that are really interested in multifamily, and we’re done borrowing from family members, it’s time to start pooling money to buy these larger assets, and then I also take people on the ride with us. No one believed me that I owned a 20-unit for free. And now they see we’re doing that with 80s, 100s, 250 units. Now we’re doing that for free, after the work’s put in, and that’s super-rewarding.

Ash Patel: When you first raised money from outside people, how did you find those investors?

Chris Pomerleau: Well, my family… So that helped. And then I tried to attend meetups in town here; there’s a real estate meetup that’s in town here. I don’t have time for coffees anymore or lunches or anything really; that’s the combination of my full-time businesses, as well as having a family and a three year old and a one year old.

But I met with every banker and every agent, and every person I could – coffee, lunch, anytime that I possibly could to fit that into my law schedule, because I was still a full-time attorney. And I met as many people as I could, and as time went by and the more experienced we got, the more proven we became to not only agents and bankers, but now investors as well. They said, “Holy cow, these guys have accumulated 100 units in the last six months, and they’ve refi’d half of them. Let’s see what they’re a part of, what they’re about”, and that’s really helped us.

Break: [06:57] to [08:29]

Ash Patel: What was your latest deal?

Chris Pomerleau: We have 850 units under contract right now that will close by January 1st. The most recent closing was a 235-unit in Fort Worth.

Ash Patel: And right now, Chris, what are average returns for your investors?

Chris Pomerleau: Now, we’re not counting after the refi, right? Because every dollar return after refinance is kind of infinite. But as far as cash-on-cash return before the refinance, we’re anywhere between 7% and 10%.

Ash Patel: And are you finding additional investors that are okay with that kind of return? Because it’s a competitive landscape right now for syndications.

Chris Pomerleau: Yeah, that’s a great question. We have built such a large investor list, and I’ll tell you why, and I think it’s a little different. I know it’s certainly different than what a lot of the listeners have heard before… But we don’t flip apartments. I want to hold my apartments forever. I want that apartment to pay me, to not practice law anymore. I want it to pay my father who just retired, so he doesn’t have to work anymore. I wanted to help my children out. And because of that, we don’t flip apartments.

So the syndication model is still a syndication because legally, we’re pulling passive investors money, but we are refinancing, we are giving the capital back, and those same owners stay in as owners. Same percentage, nothing’s diluted. So that investor who’s receiving 7% to 10% cash flow throughout the life of the business plan, if it’s $100,000 investor, they get $7000, $8000, $9000 a year. But then once we refinance and they get all $100,000 back, if they continue to get $6000, $7000, $8000, $9,000 a year, they’re extremely happy. They don’t have any money in the deal anymore.

So a lot of people like to press the IRR play or talk about cash flows that average 12 or 13, and those are oftentimes higher figures, which are attractive, but that factors in a sale at the end. We don’t sell. So to your question, that’s how we keep people excited, because a lot of these investors are finding out, they don’t want to be part-time banks; they want to own real estate, and they want to own it as long as they can, and they want to get passive income, and that’s how we’ve gained such a traction.

Ash Patel: That’s an interesting business model, because I’ve seen a lot of investors turn down seven-year holds. The max, they’ll go is five. Ideally, less than that, and they get their money back. Do you ever find investors that at some point, they’re like, “Hey, let’s just sell this thing. I want to cash out?”

Chris Pomerleau: That has not happened to us yet. And I think that’s because the most important thing to us, obviously, from day one, is to make sure they’re signing up for the same business plan that we are.

So for example, we’re in the middle of a raise right now, and it’s a portfolio. So it’s not a fund. But it is four different properties, three different states, it’s going to total about 262 units. And as you would imagine, every property is going to refinance at different times, as far as timelines are concerned. But I make sure they’re all comfortable with the money being frozen for 3-7 years. Maybe they get some of their money back from one property in the fourth year, and another property the fifth year. But these investors, they know from day one, what the plan here is. So if we ever didn’t get push back, and they said, “Well, we don’t want to invest, we want our money back in four years”, it just isn’t the right fit. And we’ve never had a current investor who’s already invested demand their money back, because we all knew from day one what the plan was. I think that’s kind of the most important thing is to make sure we’re on the same page.

Ash Patel: Good. And Chris, where do you find your deals from right now?

Chris Pomerleau: It’s a combination of agents, property management companies, and what I would call bird dogs or wholesalers. So a lot of agents who aren’t licensed to practice in that state, who know how to call owners directly… They’ll funnel it off to us. And look, when I first started, I had to claw tooth and nail to get that 20-unit. No one would pay attention to me; it didn’t matter that I was an attorney. I had only owned a couple single-family homes. But now we’re getting calls from people all over the country because we’ve done a good enough job, and this is a huge thanks to a number of people on our team… That they know if they bring us the deal, and we get it under contract, we’re going to close the deal.

So it’s a combination of agents on off-market, bird dogs or wholesalers. And then property management companies; we have a pretty good relationship with our property management companies, so they oftentimes have access to owners that may be flirting with getting rid of their property.

Ash Patel: What advice would you give somebody that’s starting out and doesn’t have the credibility or the track record? How do they try to establish themselves and get a broker to take them seriously?

Chris Pomerleau: Partner with somebody that has that experience. That’s exactly what I did. When I started with my partner on that 20-unit we didn’t necessarily have multifamily experience, although they do have 2, 3 or 4 unit apartments; but they owned their own property management company, and they had flipped houses. So we started with something smaller, but they took them seriously. They’re obviously liked my W-2 pay as an attorney… But that combination of a partner and money that was helpful to the banks. We’re taking in — every once in a while, we have partners on these syndications that they may bring a million dollars in investors, and then now they’re a part of the general partnership team, and that’s how they get their experience. And then it’s a lot easier for them to move on to the second deal, because they don’t need the first partner, because now they have that experience. It’s all about partnering people that know what they’re doing.

Ash Patel: Alright, let’s dive into this vertical integration. A property management company, I get that. Do you manage just your own properties or others as well?

Chris Pomerleau: So we had two management companies. My partner, Collin Schwartz, he started a property management company in 2017, which we both own. We manage our own properties, all 700 units here in Omaha, Nebraska. So that’s not third party. It’s only what we own in Omaha, and Council Bluffs, which is nearby.

We also have a third-party property management company we started recently and that manages over 500 units, from the Des Moines to Manhattan, Kansas, Wichita… And that is for anybody really, but we formed those partnerships with another property management company we had utilized in Kansas City. So there’s two different companies there.

Ash Patel: And you’re in seven different states. How do you identify what markets you want to purchase assets in?

Chris Pomerleau: I’ve been on many of these podcasts, and I’m always hesitant, even on our website, to advertise us as a Midwestern investment company, because it just so happens all the seven states we’re in are Midwest. I’m sure sooner or later, we’ll find an asset that makes sense for us that’s not Midwest; but the reason we like the Midwest, is it’s just consistent. So if you have another 2008 or 2009, we’re not going to lose 40% of the value of our apartment, the rents aren’t going to go down. Maybe instead of 7% a year, maybe it levels off to 2%, but the value stays the same. All of our investors knew from day one this was a long-term play, so that one or two years of the next recession doesn’t really affect anybody, and then we’re right back up the gradual increase.

And what I like the most is that I’m not relying on the market, the group that we’re a part of. We’re forced-appreciating our assets. I don’t have to just buy something in San Diego and just know or count on tomorrow it being worth 40% more because it’s such a hot market. Nothing wrong with that… We feel comfortable with just knowing that It doesn’t really matter what we do, it’s going to stay relatively consistent in the Midwest, and then if we really want it to appreciate, that’s on us to forced-appreciate it. That’s why we like the Midwest so much.

Ash Patel: Yeah, I agree with you. Buying it 2-3 caps, banking on the what-if not happening, right? What if the economy collapses… — there’s not a lot of margin for error in some of these deals.

Chris Pomerleau: Agreed.

Ash Patel: A title company – why would you integrate with a title company? And what does that integration look like?

Chris Pomerleau: Yeah, so me and a handful of relatively high traffic, high business individuals in Omaha that are all real estate-related, we partnered with another title company in town that had the operational aspect down, and we formed a new property management company. Why do that? Because my partners that are a part of the traffic building part, we do so many transactions; hundreds upon hundreds upon hundreds transactions a year in real estate. So you’ll learn throughout the process of investing, why would we pay another title company all these fees? Why don’t we just own that title company? And it’s not like I’m driving down there and drafting the paperwork. The title company we teamed up with has the operational experts; they’re the ones who already know what they’re doing. It’s kind of on us to bring the traffic, which we do. So it’s great to know that over 95% of the time, we know exactly the people related to the title company, we know exactly how they’ll handle it, we trust what they do, they’re used to us, and then we’re not paying other people to do things that we can pay all of ourselves with.

Break: [16:25] to [19:18]

Ash Patel: You don’t want to leave any money on the table.

Chris Pomerleau: I’d rather not.

Ash Patel: Yeah. Hard money lending, you’ve got a lot going on. Why are you messing with that?

Chris Pomerleau: You know, I love this topic, because when you’re talking to people that aren’t that familiar with it, it kind of has a dirty name. I don’t know if it’s necessarily — if even a lot of syndicators work with it… But again, we have this meetup in Omaha here, we have a lot of traffic, and we have a lot of people here that are investing in real estate. And of course, as you imagine, there aren’t as many multifamily — there’s a lot of single-family or flippers or wholesalers, and they need access to capital. If you utilize hard money the right way, it’s the best financing. In fact, when I tell people about this… We charge 18%, that’s what our hard money lend is. The minimum is 30 days. Now, that sounds weird in a market where you can get a loan for 30, in the threes. But if you use it correctly, or intelligently, it’s the best situation ever.

Let me give you an example. I, myself, have borrowed over a million dollars from my own hard money lending company. And why did I do that? I bought a $450,000 strip mall that while I had it under contract, I went out and found somebody else to buy it for $550,000. So I closed on it in about four days… No bank will close on anything in four days, but I gave them the money in four days. 40 days later, I sold it for $550,000. We made $100,000.

So within 44 days, I utilized hard money, and I went out and made $100,000. A bank couldn’t even close in 44 days. So that’s an example of how I’ve used it. It just so happens that’s how we want our customers to use it. Most of our clients are house flippers, people who want to buy something really quickly, and then go to a bank and refinance it so they can do their own BRRR method… And it’s just another tool in the toolbox, really, so that everyone has access to capital and we can use it to invest in real estate.

Ash Patel: Chris, do you look at any commercial assets besides multifamily. The strip mall, for example.

Chris Pomerleau: What example?

Ash Patel: The strip mall, for example.

Chris Pomerleau: Well, we certainly didn’t want to keep to own that. There were some units up top there, but we really just knew that we were getting it for much less than it was worth, so we wanted to get rid of it. Now, do we entertain the opportunity for other sectors in the commercial space? Yes. We’ve been looking at some industrials, some storage and some mobile home. But we haven’t taken that jump yet, and I think it’s a combination of two reasons. One, I don’t know how good our deal flow is on those; we haven’t really gained that respect from a number of people who would pass that our way. And to be honest, we’re not comfortable with it yet. So before I spend $7 million of our investors’ money, and my money, because we put our own money in our own deals, in the industrial space, I want to make sure we’re really confident about it. So look, if we talk again, in three years, we may have something outside of multifamily, but we haven’t taken that jump yet.

Ash Patel: Chris, what’s the hardest lesson you’ve learned on this journey?

Chris Pomerleau: The “I’mma” mentality, the mentality that I’m going to do everything myself – it only gets in your way. Thinking that everything needs to be perfect and a pinch to save every penny you possibly can before you make that first jump – I think that’s the wrong way to go.

There’s a phrase — I forgot how it goes, but basically, you’re going to be frozen if you don’t actually move forward and do something. And I think that that’s what I learned over the first four years; I owned four single-family homes in four years. That’s not going to really get you very far. Don’t get me wrong, I learned so much. I made some banking connections, we made some money off of those, and I got to spend a lot of quality time with my father. But it wasn’t going to help me build that. And that can be said whether it’s a single-family home to a 20-unit jump, or whether it’s a 20-unit to a 350-unit. You have to not be afraid, find the people who know how to do it, team yourself with them and just move forward. I wish I would have done that earlier.

Ash Patel: Chris, what is your best real estate investing advice ever?

Chris Pomerleau: Partner the right way. Look, this is kind of what I just said… Team up with people who know what they’re doing. And that does not mean necessarily go find a syndicator and be their co-GP. It could be you know a lot about how to underwrite and you have the balance sheet to be the syndicator. But you don’t have a property management company and you can’t find one; there’s only one in town that’s worth anything. See if they’ll be your partner. We throw some of our property management companies a little bit to the GP piece, because now their interests are aligned. And instead of me trying to learn everything myself, I trust the experts to do what they do. Well, I have a property management companies down in Dallas, [unintelligible [00:23:29].21] I’ll give them a shout-out. They’ll help us just to underwrite properties… I’m not going to go buy something unless they’re comfortable with it. I don’t need to teach myself for hours upon days the perfect way to underwrite a deal in Dallas; I need to know what I’m doing, and then I can also rely on experts who have done it already hundreds of times.

Ash Patel: Chris, are you ready for the Best Ever lightning round?

Chris Pomerleau: I am.

Ash Patel: Let’s do it. Chris, what’s the best ever book you’ve recently read?

Chris Pomerleau: Who, Not How.

Ash Patel: What was your biggest action item from that book?

Chris Pomerleau: A lot of my stress is my own fault. I don’t have to do everything myself, and a lot of times the reason we’re not growing is because I’m doing it myself, or our company is not hiring. So Who Not How is just basically, find the right people to get the stuff done. It may not be you, and you need to be willing to deal with that.

Ash Patel: What’s the best ever way you like to give back?

Chris Pomerleau: Gosh, [unintelligible [00:24:14].04] We’re volunteering our time over the holidays here to serve some food. We do that every single year. We also are starting to take a significant amount, a portion of our profits from our property management company here in town to give back and buy gifts and stuff for the holidays. We like to do that as much as we can.

Ash Patel: Chris, how can the Best Ever listeners reach out to you?

Chris Pomerleau: I’m on LinkedIn. I’m on Instagram, Twitter; you can find us at parkaveinvesting.com. I’m always wanting to talk. I can talk about this stuff forever. I feel like all I do is just talk this entire time; maybe that’s my nature, but I love real estate. I’m always willing to help anybody I can.

Ash Patel: Chris, thank you for sharing your story with us, from being an attorney, the four single-family flips, to hundreds of millions of dollars in assets under management. We appreciate your time today.

Chris Pomerleau: Thanks for having me. I appreciate it.

Ash Patel: Awesome. Best Ever listeners, thank you for joining us, and have a best ever day.

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.

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JF2628: Laying the Groundwork for your First Syndication with Tim Vest

With a background in technology, Tim Vest’s first step into real estate was land development. Now, he’s involved as a GP, LP, and KP in several multifamily syndications. Today, Tim is talking about the importance of having an exit strategy, why he became an LP before becoming a GP, and why he spent a whole year laying the groundwork before his first syndication.

 

Tim Vest Real Estate Background:

 

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Ash Patel: Hello Best Ever listeners. Welcome to the Best Real Estate Investing Advice Ever Show. I’m Ash Patel, and I’m with today’s guest, Tim Vest. Tim is joining us from Huntersville, North Carolina. He is a full-time technology manager for a large bank and investor. Tim is a KP, GP and LP in multifamily syndications.

Tim, thank you for joining us. And how are you today?

Tim Vest: Hey, Ash. How are you doing? I’m doing well. Thanks for having me on.

Ash Patel: I’m very well. Tim, before we get started, can you give the Best Ever listeners a little bit more about your background, and what you’re focused on now?

Tim Vest: Yeah, sure. So again, Tim Vest, I’ve got an IT background, and have been doing it for 23 years, ever since I graduated from NC State here in North Carolina. And I have a strong background in IT, founded a couple of small little IT startups, a couple of app companies. And then around 2006 I got into real estate. Met a couple of guys I was working with at an IT company, and they were doing some real estate investing, and it kind of piqued my interest; I had always had some interest in the real estate space. So I got involved with doing land development; buying raw land, getting it ready for developers, then selling it off to them. I did that for a couple of years, until 2008/2009 happened; I hit a little bit of a snag with that. But then around 2010, I started to get back into it with some fix and flips and single-family rentals, and around 2018/2019 I made a pivot into the multifamily space, and that’s where my focus is now.

Ash Patel: IT guys doing land development. What’s going on?

Tim Vest: Yeah, IT guys doing land development… So the way that happens is in the IT world we make pretty good salaries, we tend to have a little extra income… So we were able to leverage our income, our W-2s and our credit to work with developers that needed help getting land prepped to bring it to the general public. A lot of times these large homebuilders or even small homebuilders, they leverage their own credit, their own capital to secure the land, where they work with a landowner to secure the land, but then they look for people to come in and help them with the capital needed to then put utilities and infrastructure in place to then actually build on the land.

Ash Patel: You guys were essentially money partners on the deal.

Tim Vest: Yeah, pretty much.

Ash Patel: What kind of returns did you see from that?

Tim Vest: It was significant. So on those types of deals—I’ll just give you one example. On those types of deals on 100-acre plot, we’d buy 10 acres for, say, $500,000. And then within 18 months, we would typically sell that back to the developer for $625,000. So on those $500,000 plots, $450,000 of that was financed, $50,000 down from us, and then a total cash return of $125,000 in addition to our $50,000 back within 18 months.

Ash Patel: Beautiful story.

Tim Vest: Yeah.

Ash Patel: Tim, in 2018 multifamily – did you get tired of the single families?

Tim Vest: Not so much that I got tired of it. Well, the land thing, that stopped happening in 2008. Our development partners with the 2008 market crash for real estate, they ceased to exist anymore.

Ash Patel: Did you guys get burned on that?

Tim Vest: Oh, yeah, big time.

Ash Patel: To the tune of?

Tim Vest: To the tune of about three times what we actually made.

Ash Patel: Oh, no. So everything you put in was washed away, plus some.

Tim Vest: Yeah, and we spent about two years cleaning that up, just personally cleaning that up. Because a lot of people — not just land, but even homes at the time, something that you had a loan on for $500,000 may only be worth $250,000. And in some cases, banks were calling loan dues to get risky creditors credit they deemed risky off their books. So we went through that.

Ash Patel: So you guys were in the weeds for a while. Luckily, you still had your IT career.

Tim Vest: Yeah, we were in the weeds. Fortunately, looking back on it, one of the best things coming out of that was we did not know at the time about other people’s money. So we did not have investors. We were doing it with our own. So the only money we lost was ours. So while that was painful, I was at least able to put my head on the pillow at night knowing that I didn’t lose somebody else’s money. Because that’s a whole different ballgame.

Ash Patel: That’s a whole different ballgame. And Tim, were you jaded in just sitting on the sidelines for 10 years?

Tim Vest: No—

Ash Patel: [Inaudible [04:41] real estate?

Tim Vest: Yes, I was on the sidelines for a couple of years. I got back in a couple years later with the fix-and-flip and single-family stuff. So I wasn’t so much jaded. One thing – for a couple of years sitting there cleaning things up, what I kept looking back at was I knew things went south, but look at what I was able to do in a short period of time. I was able to take $50,000 and it turned it into $125,000 in a very short time.

So instead of being jaded, what I actually started to look at was, what did I do wrong? What did I do wrong? Where did I put myself in a risky position? And I’ve said this a couple of times to a few different people, what I kept coming back to was, I didn’t have cash flow on these properties, so I couldn’t wait things out. And I had no exit strategy that was not dependent on the developers themselves. So when my developer partners went away, I had 10 acres of land sitting in the middle of the North Carolina mountains with no infrastructure, and you couldn’t get to it without a four by four or on foot. So that was difficult for someone like me, that wasn’t in the development space themselves. So no exit strategy, and there was nothing else I could do with this land at the time.

Ash Patel: Did that developer just disappear, just ghosted you guys?

Tim Vest: No… To their credit, they didn’t really ghost us or disappear. They couldn’t do business. They were overleveraged; banks were calling on them, too. They just had to close the doors as well. I would be remiss if I said that it wasn’t painful for them. Those development partners had been in business for a very long time, 20 years plus.

Ash Patel: Yeah.

Tim Vest: And they no longer existed after that. So I’m sure that was tough for those guys.

Ash Patel: Yeah. So single-families, and then to syndications. How did you come to find that?

Tim Vest: Probably the same way a lot of other people do. But again, single-family, I was running them, saw the cash flow, loved it; it didn’t scale very well, although I think there’s some ways now to do it a little bit better. But it wasn’t scaling very well. I’d created basically another full-time job for myself, and I was reaching limits to what I could do with my own money.

So I started to look for other places to go, and as I was looking where to pivot, sold off my portfolio and pivot into, one of the things I kept saying to myself was “I have experience with tenants and renters. Let me just do this in properties that are bigger than a single-family home. So let me do it in a quad or a tri or a fiveplex.” And then I met a mentor who was like, “Well, why are you stopping at fiveplex? Let’s talk 20, 30, 40, 50 units.” He’s like, “The more tenants you can get under a single roof, the better it scales.” So that’s kind of how I landed in the multifamily space, was by taking some of the experience and naturally transitioned from single-family into multifamily. And then one of the biggest things I did for myself was finding a mentor that would help me move into that space.

Break: [07:30] to [09:03]

Ash Patel: What was your first syndication?

Tim Vest: So my first syndication was actually as an LP. I did not go in as an active partner at the time. I wanted to get some experience, so I invested as an LP in a 42-unit property in Mobile, Alabama. That was the first multifamily syndication that I participated in.

Ash Patel: How are the numbers on that?

Tim Vest: They’re good, we’re still in that deal. So for the numbers are good. I think we’re coming up on a refi of it here in the next 60 days, where it’s looking like all investor capital is going to come back to the investors. So I’ll get my initial capital back. And so far, we’ve been hitting the pref, which is right at a seven pref every quarter, so I can’t complain right now.

Ash Patel: Yeah. Tim, I love that you invested as an LP first, before becoming a GP… Because I think it’s so important that people see things from the investors’ perspective – the communication, the returns, the treatment of the investors is so important.

Tim Vest: Yeah, and I also want to understand – before I went to ask people for money and do a syndication, I wanted to understand being an investor in a syndication as well. I wanted to see it through the lens of an investor before I took on the role of asking people for their money.

Ash Patel: How did you choose this particular deal to invest in?

Tim Vest: I was working with a couple of different syndicators at the time; I actually was trying to vet them out, getting to know them. And it just so happened that I had built a pretty good relationship with a sponsor team on this one. So when it came time, when I started to feel comfortable with investing as an LP, I kind of gravitated towards this group of guys, because I had built a really good relationship with them. And that’s how I landed—

Ash Patel: Are they local to you?

Tim Vest: They are not local to me. So I’m in Huntersville, and they’re actually on the ground there in Mobile.

Ash Patel: So a great question is, how did they, and you, build a great relationship remotely? Because I think there’s some valuable lessons to be learned here.

Tim Vest: Lots of Zoom conversations, lots of phone calls, and quite frankly, texts, texts till 11 o’clock at night, where we’re just chatting with each other. It really wasn’t that difficult for me. Again, being in the IT space, I fully admit that I’m used to doing a lot of things remotely. I’ve managed teams overseas for years, and built relationships that way. So I was comfortable with that, and I felt like I have a pretty good read of most people through those types of means of communication. But it wasn’t quick. I didn’t talk to him one time and decide to do it. I was having multiple conversations with them over the course of months.

Ash Patel: And what was it that they did that the other syndicators didn’t? Was it just continuing to have conversations with you over time? Did the other syndicators not spend as much time with you?

Tim Vest: So here’s one of the funny things… This particular syndicator, in all the conversations we had, never once asked me to invest in their deal or asked me about money. It was just conversations; his kids, my kids, what he and his wife are doing, what me and my wife are doing, what my goals were as an investor, those types of things. Never really, “Hey, do you have $50,000 or $100,000 to put into a deal?” nothing like that. So that was one of the things I liked, was this particular guy was just being very genuine, and it didn’t come across as a hard sell. It just seemed to be building a relationship, building a rapport, and I really liked that, because quite frankly, that’s how I approach things as well. I like to know people that are investing with me, before we go down that route.

Ash Patel: Tim, did you initiate every conversation, whether it was on the phone, Zoom or text? Or did they proactively reach out to you throughout this process?

Tim Vest: It was a mix of both. So I didn’t initiate every conversation. They didn’t initiate every conversation. There were times when they would reach out to me, there were times when I would reach out to them. So it was definitely a mix.

Ash Patel: That’s great. So they took an empathetic approach to really learn about you. And not just, “Hey, are you going to invest or not?”

Tim Vest: Yeah, correct.

Ash Patel: Yeah, that’s great. So when it comes time for you to do your own syndication, take me down that route.

Tim Vest: So when it came time for me to do that, my first indication was not in a deal—on the GP side, the first one I did on the GP side was not in a deal that I found myself. I had a partner or a connection here in the Huntersville-Charlotte, North Carolina area, who was doing a deal in Winston-Salem. And he reached out to me saying, “Hey, would you be interested in participating in this?” And we knew each other through mutual connections and had had some conversations before? Oddly enough, we worked W-2 jobs at the same company. So I met him for coffee, we chatted, we talked for a little bit. I didn’t commit at that time, I went home, I thought about it for a couple of days, I had a few more conversations with him, and then said, “Yeah, I’d be interested in participating on this, going to be some boots on the ground, since I’m not too far from Winston-Salem, and also raising some capital on it.” So I committed to raising $500,000 in two weeks, and hit that number.

Ash Patel: So you’re IT buddies?

Tim Vest: No, it wasn’t my IT buddies. It was people that I’d been having conversations with over the previous year. Because when I say I pivoted into multifamily – I spent a good year to a year and a half pivoting, and laying some groundwork, laying the foundation, building my network before I did my first LP deal, and definitely before I participated in my first syndication as a GP.

Ash Patel: Can we dive into that as well? I think that’s so important.

Tim Vest: Sure.

Ash Patel: So the time that you spent building your network, marketing yourself – what types of activities did you do to accomplish that?

Ash Patel: A number of things. One, like I’ve mentioned earlier, finding a mentor. That was one of the biggest things for me, as I knew from my land development days that I wanted somebody that had been there, done that, here in the multifamily space, and I wanted to be able to have access to that individual.

So I spent some time finding that person, build a network around that. I vetted my mentor. I think I nailed it down to three guys. And I was like, “Alright, now I’m going to kind of stalk them a little bit, quietly,” monitoring what they were doing, looking up their deals, looking up their track record, and landed on a guy out of Ohio and started working with him. And that went really, really well. I knew that one of the places that I would need a push was in the capital raising space, building my network of investors. So I went after a mentor that would be able to help push me in that space, and he definitely did completely change my mindset around those types of things.

And then went about spending the next year kind of building my network of investors through friends and family, through coffee conversations, through Zoom meetings, and through social media, quite honestly. I leveraged LinkedIn and Facebook quite a bit consistently, every day, multiple times a day, and then would have conversations with people I’d meet through that.

And then I also set aside a chunk of money for myself, that I always call kind of personal development, personal education, that I would use for joining mastermind groups and building my network through mastermind programs with people who were looking to do the same thing in real estate. So all of that combined.

Ash Patel: You put a tremendous amount of time into this. And when people think, “I need to grow my network,” I mean, that’s a lot of effort that you’ve put into it.

Tim Vest: Oh, yeah. It’s not quick, for sure.

Ash Patel: And then how did you market yourself? How did people know that, hey, you’re also a real estate investor, and not just an IT guy?

Tim Vest: I just talked about things I had done. I was very open about things that I had done. I was very open about the mistakes I’d made back in 2007/2008. I was very open about where I had gone wrong there, as well as how I pivoted and went into other areas of real estate, and I would just have conversations about that. So I think the feedback I get from people a lot is that they feel like it’s genuine. And they’re appreciative of the fact that I’m willing to not just talk about everything that went right, but I’m also willing to talk about things that didn’t go so right.

Ash Patel: That is incredible. And are you doing a lot of this on social media, or in person, or both?

Tim Vest: Both – social media, in-person and then through Zoom calls and phone calls.

Ash Patel: You are a KP, LP and GP. Can you explain the difference between a KP and a GP for our listeners?

Tim Vest: A GP has a much more active role, at least in my mind, the way I separate it. A GP has a much more active role. A KP can be active, but typically not as much. But a GP is involved in all aspects or can be from capital raise investor relations, asset management, those types of things of when you get the property under management. KP is a little bit more of just doing the sponsorship piece of it. In fact, I’m actually talking to somebody right now about being the KP on one of their deals that they’re doing where they need somebody to come in and help them qualify for a Freddie loan. So we’re talking about what my background is, what my business partner’s background is, and if we are able to help them qualify for that. So I think that kind of sums it up.

Ash Patel: Yeah. So a KP or a Key Partner has a specific role that they have to fulfill, and in return, they’re often awarded equity in the deal.

Tim Vest: Right.

Break: [18:05] to [20:59]

Ash Patel: So what are you working on now? What’s the deal that’s in front of you?

Tim Vest: The deal we’re working on right now is a deal in Georgia. We don’t actually have it completely nailed down, so I’m not going to talk too much about exactly where it is.

Ash Patel: Just give us coordinates, latitude and longitude.

Tim Vest: [laughs] Yeah, we’ll just say north of Florida. But we’re working on a deal in Georgia right now that is a 56-unit property, and we’re looking to get into that one for a little under $60,000 a door. And the cap rate would be around a seven cap on purchase, which right now, sitting here today is pretty good with the way the market’s going right now. So that one will be a true value-add; there’s quite a bit of work that needs to be done on it, quite a bit of exterior work, but nothing that’s real scary. We’ve walked into properties where our general contractor or our engineer’s like, “You need to do significant work to make sure this building doesn’t fall down.” This one is more cosmetic; there’s just some neglect on the outside overgrown bushes, needs some paint here and there, take some graffiti off some storage units in the back, stuff like that. So we’re really excited about that one, and that will actually be our first foray into Georgia. We’ve done Virginia, North Carolina, South Carolina, and Alabama, but we skipped over Georgia up until now.

Ash Patel: How did you find that deal?

Tim Vest: Broker connection. Completely off-market. We have a strong broker connection with a really good independent broker who seems to like how we take deals down, how smooth we try to make the process. And once we proved that we had the ability to close and that we could close smoothly, those types of things start to show up in our inbox or we start to get phone calls on those pretty quickly.

Ash Patel: So with all of your networking, do you also include brokers in that networking?

Tim Vest: Oh, yeah, absolutely. 100%.

Ash Patel: Yeah, that’s important. So it’s not just chasing people with money—

Tim Vest: No.

Ash Patel: —and [Inaudible [22:51] all the deals, brokers, everybody.

Tim Vest: Yeah, you’ve got to have the full thing. Obviously, if you do this long enough, you run into guys who, all I want to do is raise capital, and I want to participate that way. We really appreciate that, and we have partners like that as well, that are huge to being successful here. But at the same time, it takes the money and the asset, the property, to do a deal. So you’ve got to fund both, and that requires direct to seller, that requires broker conversations, you name it. So yes, those broker connections are key.

Ash Patel: How much money are you raising for this deal?

Tim Vest: So if we move forward with this one, the total raise will be just over $2 million.

Ash Patel: And how much of that is CapEx?

Tim Vest: The total CapEx on that one will be just under $1.2 million.

Ash Patel: So $800,000 to acquire it, and then $1.2 million for CapEx?

Tim Vest: Yup.

Ash Patel: What’s the purchase price?

Tim Vest: The purchase price on this one will be $3.4 million.

Ash Patel: And is your capital stack fully loaded, ready to go?

Tim Vest: Yeah, it is. Absolutely.

Ash Patel: What will the return to investors be?

Tim Vest: So right now — we always do conservative projections, almost worst case… But on a conservative underwriting model, we’re looking at around an 18% IRR, just over 10% cash-on-cash and then it just under 2.1 equity multiple on a five-year hold.

Ash Patel: Got it. Tim, what is your best real estate investing advice ever?

Tim Vest: Best real estate investing advice ever… For me, just based on my personal experience, I would just have to say, don’t let the bumps, don’t let getting knocked down once or twice keep you from getting up and moving forward. I could have easily let 2008 keep me from getting back into the real estate game at all. I didn’t and I’m very, very glad I did not. Over the last five years, especially over the last 18 months, it’s been phenomenal.

Ash Patel: Yeah, you are a great example of that. Tim, are you ready for the Best Ever lightning round?

Tim Vest: I hope so.

Ash Patel: All right. We’ll find out. Tim, what’s the best ever book you recently read?

Tim Vest: Best ever book I recently read is Who, Not How; just all about scaling and enabling that.

Ash Patel: What’s the best ever way you like to give back?

Tim Vest: The best ever way I like to give back is just having conversations with other people who, like me, were just getting started off at one point in time. So when people call and they have just questions about starting, I like to actually spend some time and talk to them about that.

Ash Patel: How can the Best Ever listeners reach out to you?

Tim Vest: Yeah – we mentioned social media, I’m on LinkedIn, under my name, Tim Vest or you can at me at tvest@harvestpg.com.

Ash Patel: Tim, thank you so much for joining us today and sharing your story from being an IT guy, getting rocked in 2008, but learning from that and picking yourself up, and now you’re doing syndications, you’re partners on multiple deals… So thank you again for all that advice today.

Tim Vest: Yeah, Ash. Thanks for having me on, and I appreciate it.

Ash Patel: Awesome. Best Ever listeners, thank you for joining us and have a best ever day.

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.

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JF2627: 5 Ways to Align Your Investments to Achieve Your Goals | Actively Passive Investing Show 67

In today’s episode of the Actively Passive Investing Show, Travis discusses how to identify your goals and actually reach them through your investments in five steps. He talks about identifying lifestyle vs. financial goals, honing in on a strategy specific to those goals, and how to know which form of investing fits best with your ideal lifestyle. 

 

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TRANSCRIPTION

Travis Watts: Hey, everybody, and welcome back. This is Travis Watts with the Actively Passive Show. First and foremost, you might hear a little bit of an echo on this particular episode, I apologize. I’ve switched a couple of different things around with the studio, I’m still trying to tweak those out, and I don’t have any furniture right now in front of me where you can’t see. So it sounds a little bit more echoey. So, apologies for that, I will get that wrapped up here shortly.

So what we’re talking about in today’s episode is basically this—there’s five things that I want to share with you that will help you ultimately align your investments up to your goals. Said another way, we’re going to identify what goal or what goals you have, and I’m going to show you, in five steps, how to align your investing to actually be able to achieve those goals. So this is not any kind of BS hype, there’s no upsells and programs. I actually just want to give you value for value right here, in probably as short as 15 minutes, we’ll say.

So that’s what we’re talking about. As always, the disclaimer is that I’m not a financial advisor, I’m not a legal professional, I’m not a tax professional. So please always seek licensed advice. I’m just sharing with you what’s worked for me, what’s worked for a lot of other people that I’ve seen first-hand. And my goal, as always, you guys is just to make things easy. It’s a complex world out, there’s a lot of noise, there’s a lot going on. Let’s just get right to the point, though; let’s eliminate the 99% of the distractions, let’s focus on the 1% of things that actually work. That’s what we’re talking about today. Thanks for tuning in. Without further ado, I’m going to dive right in.

So first and foremost, step number one of all five steps is simply to write down and identify what your goal or what your goals are. Now, there’s two general types of categories here; you have lifestyle goals, that would be like, “In 10-20 years, I want to have a beach house and a secondary home, and be able to travel, and have two cars, and have 3.5 kids,” this kind of stuff. So it’s identifying, it’s visualizing rather, what you want your optimal lifestyle to look like and be like; that’s one type of category to look at goals.

The other is just financial goals, which are super straightforward and obvious. It’s just, “I want to have a million bucks in the bank”, “I want to have $5 million in the bank”, “I want to have $10 million in the bank”, whatever it is, or, “I want to have $5 million allocated to real estate investments”, or something like that.

So I would say the latter goal of financial goal is not as strong. And the reason I say that is when you hit setbacks or hurdles or the economy shifts, you’re more inclined to give up on that goal and just say, “Well, I thought I wanted $10 million, and it turns out, I only got $5 million.” And then settling for less. It’s a lot harder, emotionally speaking, to settle for less of a lifestyle, to go from that example of, “I want a beach home and a second house and a couple cars”, to saying, “Whatever, I’ll just live in a 600 square foot apartment and not have any cars and not have kids and not have a marriage.” That’s a little bit tougher emotionally.

So I would say set the lifestyle goals if you can, and just identify as clearly as possible what you anticipate trying to achieve. The more clear you get, the more you can think and visualize on that, the stronger those goals become, the more likely you are to achieve them. That’s kind of how that goes in a nutshell. So that’s step number one. If you want to take a note of that, a physical note; if you’re not driving or whatever, do that. And I highly recommend that you write it down. You can go through this episode right now audibly, and then maybe re-listen later and write down your goals, but I always recommend writing them down.

Okay, now, number two, diving into the investment portion here, is to identify whether a cash flow or a passive income strategy is the right kind of strategy to get you to that goal, or if it’s more equity-based. So let’s start with the financial goal example, if that’s the kind of goal that you set for yourself. So obviously, if you said, “I want $20,000 a month passive income.” That’s obviously a cash flow or a passive income goal. If you said, “Hey, I want $5 million in the bank.” That’s an equity-focused goal. That’s the easiest, simplified version.

Now to talk about lifestyle goals, it’s a little more complex, because it depends, right? You might say, “I want my home paid off,” or, “My homes paid off. I want my cars paid off. I want zero debt.” Well, that portion is going to be an equity goal. So your house on the beach is – just making up numbers – $500,000. Your second home is $400,000, your cars are $200,000. Just throw in round numbers. So maybe you need $1.1 million as far as equity is concerned to purchase those items.

Now, the rest is probably going to be a cash flow goal, because you’re still going to have, on those homes, insurance and property tax and maintenance and upkeep, and rehabbing them, your cars are going to get old over time, you’re going to have to replenish those… So you’re probably going to need a little cash flow to live on, additionally. So it might be a hybrid between the two, and I think for most people, that would be the case; you need kind of an equity and a passive income goal.

On the flip side, my wife and I, for years, did the rental thing where we basically rented everything. So that was kind of interesting, because we found out how to create a completely passive income-focused lifestyle by just leasing and/or renting where we lived, and maybe even vehicles in your case; in our case, we paid our vehicles off, but you could definitely lease them. So in regard to that, you just want to figure out. So maybe that beach house rents for $4,000 a month, and the second home for $2,000 a month, and then your cars for another $2,000 per month. So maybe a goal of $10,000 per month in passive income could be your financial goal. But the point is, for step number two, identify passive income or cash flow, income or equity, or a combination of the two. All you’ve got to do on that is simply circle one, or decide.

Break: [06:42] to [08:15]

Travis Watts: Alright, moving on to step number three… So this one is identifying whether or not you want to be an active or a passive investor. So simply put, if you’re a passive investor like I am, you are not materially participating in the business of what you’re investing in. So a passive investor could be as simple as using an example that you invest in a publicly-traded stock; Tesla, Facebook, Amazon, blue-chip stocks, whatever it is, index funds. That’s an example of being a passive investor. You don’t work for those companies, you don’t have any active involvement, you don’t really have much in terms of decision-making ability, you’re just passive. I’m passive in real estate syndications, where I let general partners run the show, find the deals, manage the business as I passively invest with them.

The cons to being a passive investor are lower return on investment potential, as compared to being active, which I’ll talk about here in a minute, lack of control, and I would say lack of ever making it huge as far as financially speaking. Most people who are $100 million-plus, billionaires, all this kind of stuff, were active in businesses that they started or investments that they made. So it’s kind of higher risk, higher reward, but also your time commitment, something to consider.

So to that point, let’s talk about active a little bit more. So active could be flipping homes, trading stocks, starting a business and running it yourself, being the CEO of a company, that kind of thing. As I mentioned, you certainly have more control, you certainly have more decision-making ability. And what you’re really doing at the end of the day is you’re paying yourself for your time, effort and energy.

So just to recognize that, I’ll share with you, which I’ve shared a few times on the show, my story of when I got started in real estate investing, I chose to be active. And I did that because the higher return on investment. I was making pretty great annualized returns, but I was also doing a tremendous amount of work. And as I started scaling that out bigger and bigger, I ran into some scalability issues with that business plan. I’m not saying that you will, just saying that’s what happened in my story. I later decided, once I had built up some equity, I could actually be a passive investor, a hands-off investor, and have enough cash flow to support my goals and the kind of lifestyle I wanted to live.

So I guess put in a general sense, if you’re starting from nothing, you’re starting from scratch, you have very little capital to work with, perhaps active is something to consider and look into. Once you start building a nest egg, once you have a little bit of net worth, now it’s time to maybe think passive or a combination between the two, perhaps. Again, not giving anybody advice, just recommending a thought or an idea that you might consider.

Okay, now that we know active, passive, or a combination, or a hybrid between the two, step number four is identify what kind of assets can potentially get you to your goals. There’s so many different assets to choose from. There’s real estate, which we talk about all the time on the show. And even within real estate, there’s single-family and multifamily and office and hospitality and mobile home parks and self-storage; the list goes on and on. And then there’s stocks, bonds, mutual funds, there’s notes, there’s ATM machines, there’s private businesses, there’s insurance products, like annuities, or whole life insurance. There’s a world of investments out there. So start to identify which ones make the most sense.

For example, with real estate, let’s say in the sense of buy-and-hold real estate, you have a couple different ways that you make money; you could have cash flow, as your tenants pay you every month, you might have equity appreciation as the property goes up in value over time and keeps up with inflation… Whereas let’s say you did note lending where you’re lending money out for an interest rate in return – you may not have any equity upside in a deal like that, but you might perhaps have stronger cash flow out of the gate. So again, we’re tying this back to the initial things that we talked about in steps one and two – are your goals cash flow or equity-focused?

Using the same example in the real estate space, maybe you’re interested in investing in development real estate; that’s more of an equity play, where you invest 100k and hopefully, in a few years, they actually build the apartment or whatever it is, the apartment building, and then they sell it for a higher cost than what it obviously took to produce that building.

So the world is your oyster, but the point is, get some books, get some education, get some mentors. Start identifying which of these asset types can help get you to your ultimate goal.

I speak a lot about the F.I.R.E Movement, Financial Independence Retire Early, and a lot of people who are in that movement, they invest passively in index funds, which are publicly-traded in the stock market; it’s kind of like a pool or an index that owns a bunch of different stocks. And then what they do is, when they’re ready to retire, quote unquote, they withdraw about 4% of their portfolio balance to live on. So that’s a whole different topic, different conversation, but just saying that might be right for someone in the F.I.R.E. Movement, looking to do that specific strategy. Other people may find that these other asset types are a better fit.

Alright, look at that. We’re already on number five. Step number five is do the math. This is the funniest thing. First of all, I’ve said this before, I’ve said this so many times. I hate doing math, math was the worst subject I ever had in school. I specifically chose a college degree to pursue that didn’t require a math class, and a huge part of my decision was solely based on that. As crazy as that may sound, I hated math that much where it was either I’m not going to college or I’m going to pursue a degree that doesn’t require it. So I chose to go into this lighting design and live show production, and I was going to go tour with bands and all this kind of stuff. So kind of funny side note on that.

But seriously, you guys, it’s not that complex. I do this kind of math all the time. And I guess, to be frank with you, I’ve always enjoyed practical math, like what’s a 20% discount on buying a TV? I just never liked the advanced algebra, the X plus Y divided by the Z, with the question mark here, and then see what’s missing from that equation.

So let’s do the math. It’s as simple as this – when we go back to steps one, two, and three, and we think, “Okay, I’ve got this lifestyle in my head and whether I’m going to rent, lease or whether I’m going to own and pay everything off, I either have this equity or this cash flow go” — let’s go with the cash flow example.

So running the math could be as simple as this. I need made $100,000 per year in passive income. Okay. Well, if I start looking at real estate as an asset class, and I say, “Yeah, that’s probably a type of asset that might get me to my goals,” and I find a piece of real estate that cash flows at 8% a year, then I just plug in the numbers, you guys, it’s that simple. $1.25 million invested at 8% annually equals $100,000.

Now, you may not do it in one deal like that, where you’re dumping a million bucks into one piece of real estate that does 8%; you might be diversified, but I at least would know, I want to pursue real estate, I need a number like 8% a year in cash flow. And then I would go seeking these deals, whether that means actively or passively, so that I could piece that into the puzzle and pursue towards my goal of having $100,000 a year in passive income.

Or here’s the equity side of that. It’s the rule of 72. I think I briefly talked about that with Theo months and months ago. But the rule of 72, if you’re not familiar, is this simple, you guys. Go on a calculator, 72 divided by the anticipated annualized return that you think you’re going to get out of the investment, or that you did get out of the investment. So 72 divided by 10% a year on an investment means you will effectively double your money in 7.2 years. Now, of course, a lot of assumptions are built into that, that all your investments are going to do exactly 10%, and nothing’s ever going to go wrong, but things could also exceed 10% depending on what you’re investing in. So the simple math is that.

Break: [16:47] to [19:40]

Travis Watts: You could plug in a lower number. So 72 divided by eight is nine years. So every nine years you would double your money. If your financial goal, going back to the previous steps, was “I want to have a million dollars in the bank, and today I’m starting with $100,000 to invest” and you think the investments that you’re going to go chase after might do 8% passive income per year, or total return, however you want to look at that… I think 8% is kind of the historic stock market return going back about 100 years or so, something like that. But for example, purposes, we’ll just roll with the 8%.

So your $100,000 that you’re starting with could potentially turn into $200,000 over the course of nine years if you’re getting an 8% averaged out annualized return, and then the $200,000 could potentially turn into $400,000. And then the 400k could turn into 800k in another nine years, which is a total of 27 years, give or take. And then your 800k could turn into $1.6 million over the next nine years, because again, we’re still doubling money every nine years with an 8% return. So that’s a total 36-year timeframe, you went from 100k to $1.6 million. But what was our goal? Our goal was just $1 million in that example. So to get to $1 million, it’d be 30 years, give or take, 31 years, something like that.

So again, all I’m trying to say here is run the numbers, run the math, guys. This can take five minutes, and you will get a perspective on what your goals are, how long that might take

I think there’s just a lot of delusion. There’s a lot of delusion, unfortunately, through marketing, through sales courses, the bad reputations of get-rich-quick, all these things that exist for financial products are obscure. That’s what I mean, there’s so much noise out there. If you just look at reality, if you just take literally, a time out of your year, take one week, take seven days, it doesn’t have to be consecutive, take a day here, take a day there, take one day a week for the next couple months, you can figure all this stuff out on your own. You don’t need any special anything; you don’t need to go spend a bunch of money. If you feel you need a financial advisor or something like that, of course, always seek licensed advice. But in general, I believe you right now listening to this podcast can do this. And I recommend that you at least go through it… Just humor me, try it out; just take 10-15 minutes, write this stuff on a piece of paper and just start brainstorming, and I promise that will have a huge return on investment for you in the sense of just pushing you forward towards your goals, helping you clarify and identify what you’re moving towards.

A lot of people, unfortunately, I think get stuck in a career where maybe they work years that they didn’t have to even work had they just sat down initially and gone over some of this stuff that, like I said, could take seven days to identify, on average. Think how much you could do in 20 years if you had no work obligations of any type. If you could just travel, spend time with friends, family, do whatever you do. That’s huge, guys. We can always get money back in life, we cannot get back our time, that’s been one of my underlying messages to the world, is passive income can help you free up what I call time freedom. That just means freedom over your time. Maybe that means retiring early. Maybe it means working part-time; whatever it means to you, I think you’d agree with me it’s one of the most important things in life, is not to squander our time and what limited time we have. And who knows, we might all—hopefully, not all—some of us may pass away tomorrow, unfortunately. So it’s never a guarantee that we have any time left. So I really try to look at maximizing time. That’s why I’m making this simple episode for you. That’s why I said, I’m going to cut the noise out I’m going to take 15 minutes, I’m going to get right to the point, I’m going to give you five practical steps to identify your goals and figure out how to get there through investing.

So in the spirit of valuing your time, as well as my own, I’m going to cut this episode short right here. Thank you guys so much as always for tuning in. This is Travis Watts. This is the Actively Passive Show, once-a-week episodes. Thank you guys so much. I’ve got a bunch of you that reached out last week thanking me for that episode. Quite frankly, I don’t even remember what that episode was. I have to go back and look, but apparently a good one. So if you didn’t see the episode before this, go check it out.

Thank you, guys, for tuning in. Have a best ever week. We’ll see you next time.

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JF2626: 5 Parameters to Qualify Syndicators with Ruth Hiller

Ruth Hiller is no novice when it comes to multifamily investing, as the third generation of investors in her family. Now she’s syndicating her own deals all across the U.S. Ruth is discussing how she became an accidental businesswoman, investor tax benefits you may not know about, and how her mentorship program skyrocketed her success. 

 

Ruth Hiller Real Estate Background:

  • Full-time multifamily investor and syndicator
  • Syndicator in one multifamily deal in Texas (143 doors), passively involved in 8 syndications totaling over 1900 doors, 50% co-owner of 118-unit multifamily in Los Angeles, CA, and 20% owner in NYC retail space
  • Based in Boulder, CO
  • Say hi to her at: www.yesmfnow.com
  • Best Ever Book: Think and Grow Rich

 

Click here to know more about our sponsors:

 

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

Follow Up Boss

 

TRANSCRIPTION

Ash Patel: Hello, Best Ever listeners. Welcome to the Best Real Estate Investing Advice Ever Show. I’m Ash Patel, and I’m with today’s guest, Ruth Hiller. Ruth is joining us from Boulder, Colorado. She’s a full-time investor and syndicator. Ruth has invested in eight syndications and is a JV partner in properties in LA and New York.

Ruth, thank you for joining us, and how are you today?

Ruth Hiller: Oh my God, thank you so much. I’m honored to be here. I really appreciate it. I’m fabulous. I had a nice hike with my dog this morning.

Ash Patel: Awesome. Well, it’s our pleasure to have you. Ruth, before we get started, can you give the Best Ever listeners a little bit more about your background and what you’re focused on now?

Ruth Hiller: Well, it’s an interesting background. I have to preface it that my grandmother invested in multifamily in 1940, and was able to support her family her whole life through those investments; and she’s not alive today, so I can’t ask her how she knew to do that. And then my parents continued the tradition and bought a multifamily property in 1968 in Los Angeles, California. And then about five years ago, I wanted to start to improve the properties that I had owned. So I searched for a mentor that could help me grow in multifamily quicker, and improve the business that I already had.

Ash Patel: That is incredible. Three generations of multifamily investors. When you got started, what was your holdings? Did you inherit any properties?

Ruth Hiller: I did. I inherited a family property 20 years ago, the property that my parents bought in California. My mom purchased it with her brother, and I inherited that 20 years ago. And up until about five years ago, I wasn’t really that interested in running the property. I just kind of let it run itself, basically.

Ash Patel: And did you grow up in the business? Did you actively work in multifamily management?

Ruth Hiller: No, I’ve always had a full-time property manager. I’m a trained artist. That’s been by profession for like the last 30 years, and I call myself the accidental businesswoman because I’ve bought and sold real estate since I’m in my 20s, and I just never thought of it as a business until recently.

Ash Patel: That was just your family obligation/hobby, so to speak.

Ruth Hiller: Yeah, exactly.

Ash Patel: Awesome. Alright. So, you are now actively investing in your own properties and a syndicator, and you’re also an investor.

Ruth Hiller: Yes.

Ash Patel: Tell me, what are your holdings right now?

Ruth Hiller: I own large multifamily properties in Texas, Alabama, Florida, Georgia, Tennessee, and California as a limited partner. That’s where I started with a mentorship group about two years ago, and I met people in the group, and it was a way for me to go further faster. So that’s where I’m currently invested.

Ash Patel: And Ruth, is this the same GP on these deals, or is it different?

Ruth Hiller: That’s an LP deals, the eight deals, I’m an LP. The GP deal is 143-unit C-Class multifamily in Carrollton, Texas, that we’re about to close on.

Ash Patel: Okay, what I meant was, are they different operators, or are you just with one syndicator as an LP in multiple deals?

Ruth Hiller: One syndicator, I’m invested in three deals with them; and the rest of different people that are different syndicators, and I met them within the group that I’m in.

Ash Patel: And how do you qualify the GPs or the syndicators before you put your investment in their deal?

Ruth Hiller: Well, I’m a relationship person, and I’m very intuitive. So when I joined my mentorship program a couple years ago, one of my outcomes I wanted was to build relationships, and find out who are the best people in the group to invest with. So I took about a year to do that, and then this year, I’ve invested in about seven of them.

Ash Patel: What kind of due diligence do you do?

Ruth Hiller: I have five parameters when I’m investing in a multifamily. One is, do I know, like and trust the sponsor team, that’s number one to me; and the location is super important, and the track record of the sponsor team. Then I do another thing… What is the median household income? It needs to be above at least $44,000. I’d like it up in the 50s. It has to be a proven market.

The sponsor team has to already have a track record, at least one other the person in the group; it has to have a good track record, and someone has to be boots on the ground. And the most important thing to me is that someone has a very strong asset management background, because to me, that’s the most important thing in a GL. Because I see a lot of deals and no one’s ever run an asset like this, and having owned multifamily forever, I know how much work that is.

Ash Patel: I love that. So one of the GPs has to have their boots on the ground?

Ruth Hiller: Yes.

Ash Patel: And location, what do you specifically look for?

Ruth Hiller: That’s funny, because originally it was just going to be Texas and Florida, but like I said, for me, the sponsor teams important, and now with multifamily as crazy as it’s been, the rent growth has been ridiculous. If I really like the sponsor team, I’ll look in other markets. I’m in Colorado, and I’ve been looking for some of my own deals here also, but the price per unit in here’s like double what it is in Dallas.

Ash Patel: Ruth, if somebody had a deal in Nashville or Bentonville, Arkansas, would you consider it? Or is that just off the table?

Ruth Hiller: Actually, I just invested in a deal in Nashville last week.

Ash Patel: Alright, Nashville is on fire. Bad example. Sioux Falls, South Dakota, or Bentonville, Arkansas. If the numbers look good, operator looks good, would you invest in it? Or it has to meet all five of that criteria?

Ruth Hiller: It has to meet the five criteria; they have to have experience… But honestly, if I really liked the sponsor team, I will invest in it. I did invest in one in a really small town in Alabama.

Ash Patel: How did that deal do?

Ruth Hiller: It’s just not closed yet. So we’ll see.

Break:  [06:12] to [07:45]

Ash Patel: What types of returns do you typically expect?

Ruth Hiller: I expect at least 8% to 10% cash, and then I expect either 90% total return or double my money in 3-5 years.

Ash Patel: Well, that’s a big difference, 3-5 years. So—

Ruth Hiller: Yes.

Ash Patel: Do you want to double your money in three years?

Ruth Hiller: So some of the sponsor teams — it just depends especially on the deal that we’re sponsoring if they can meet their business plan. Let’s say they’re giving you 90% return; after three years, sometimes they will sell the property. It always depends on the sponsor team. I prefer to hold it for five years, and create more equity, since multifamily has been on fire. One sponsor who I invest with I wasn’t in this deal, sold the deal, and she tripled the investor’s money in three years. So if you invested 100k, you walked away with 300k at the end of the deal.

Ash Patel: What was the asset on that?

Ruth Hiller: It was a C-Class multifamily in Texas.

Ash Patel: Do you know where in Texas?

Ruth Hiller: Cleburne.

Ash Patel: And what was the value-add there, where you were able to triple investor’s money?

Ruth Hiller: They redid a lot of units. They rebranded stuff, and then the market’s just gone crazy. Stuff that you could buy for $80,000 a door now is going for $130,000 or $150,000. So, just the inflation and the craziness in the market.

Ash Patel: That builds some high expectations for investors.

Ruth Hiller: It’s does. It does.

Ash Patel: So you currently have a deal that you are the operator and GP on.

Ruth Hiller: Yes.

Ash Patel: Can we dive into that?

Ruth Hiller: We can dive into that a little bit, yes.

Ash Patel: Okay, let’s go. Where’s the deal?

Ruth Hiller: The deal where I’m the 50% owner—

Ash Patel: The one that you’re syndicating.

Ruth Hiller:  Oh, the one I’m syndicating, yes. I’m a co-sponsor, and it’s basically a women-driven team, which I’m super excited about. It’s in Carrollton, Texas, which is about 30 minutes northwest of Dallas. It’s a type C asset, 143 units, and when we were doing our due diligence, when I was walking the property, I found three extra rooms that we’re going to convert [unintelligible [00:09:47].15] So we’re really excited about that. That one’s going to be closing next week.

Ash Patel: How did you find that deal?

Ruth Hiller: So I’m in this mentorship group, and I identified people in the group that I wanted to work with… And one of my top skills is people, so I was invited into the deal to help raise capital and do investor relations based on our previous relationship.

Ash Patel: And how did you raise the capital?

Ruth Hiller: Through my network. I was at Tony Robbins Platinum Partner for a year. I’m an influencer, people really trust me, which is awesome, and so I just have been building my database, nurturing my database with the emails that I send out, “What is this syndication?” So people have seen my success, and they want to get involved. So this was my first capital raise, and I was excited that I did so well.

Ash Patel: Is this a value-add, where units have not been renovated?

Ruth Hiller: Yes, some of the units have not been renovated.

Ash Patel: And do you have a property management company identified for this?

Ruth Hiller: We have a property management company identified for it, and they’ve overseen our budget and agreed that all the pro forma rents can be implemented. So I’m excited about that.

Ash Patel: What are the household income numbers in that area?

Ruth Hiller: $57,000 is the median household income in that neighborhood.

Ash Patel: Which one of the GPs is going to be the boots on the ground?

Ruth Hiller: There’s three of them.

Ash Patel: I want to make sure this meets your five criteria.

Ruth Hiller: There’s three boots on the ground; two of them are great asset managers, and the third one is a great CapEx manager.

Ash Patel: Awesome. I know Carrollton well. My very first investment with Ashcroft and Joe Fairless was in Carrollton. It’s a great property that they turned around and sold years ago. Great area.

Ruth Hiller: It’s a great area and the values keep going up, and the last two ownership teams didn’t give a lot of TLC to it. So we’re excited to take it over and rebrand it.

Ash Patel: Ruth, in all of the deals that you’ve been an LP in, what do you see that GPs could do better?

Ruth Hiller: More education.

Ash Patel: Educating the investors?

Ruth Hiller: Educating the investor. I think that for me, that’s one of my missions, is to have people not just give me their money, but be educated on what they’re investing in and why. Why it’s so good, and what are the benefits. I think a lot of GPs do that on the webinar, but again, I’m not sure beforehand that maybe they do that as much.

Ash Patel: And what are you specifically doing to educate your investors?

Ruth Hiller: I provide a newsletter that explains everything. I’m in the process of writing an ebook with my partner. We’ll do a lot of educational zooms to go over deals, so people understand how the deal works; even if it’s a past deal, just like if a new investor comes to me, “Let me take you through this deal, and it shows you how this type of investment works.”

Ash Patel: Do you educate them on this specific deal, or in multifamily investing in general?

Ruth Hiller: Multifamily investing in general.

Ash Patel: Okay.

Ruth Hiller: So that they can decide that it’s right for them. And my favorite thing about it is the cash; I love the cash, but for me, the tax benefits are one of my favorite things about it.

Ash Patel: I love that, because I don’t think GPs do enough of that. Can we dive into that a little bit, all the tax benefits to investors?

Ruth Hiller: Yes, I would love to dive into that.

Ash Patel: Let’s talk about that, because really, when I talk about—and I don’t syndicate multifamily, but when I ask other people about it, they don’t know the tax benefits.

Ruth Hiller: Well, one of the things is – and I’ve been learning a lot about this… If you’re an active real estate investor and you’ve spent at least 750 hours a year in real estate investing, managing properties, you get a lot of tax benefits. So on this deal, they do something called a cost segregation study, and what that means is a company goes in, and there’s a law that expires next year – they can depreciate 100% of the property on year one instead of over 27.5 years. So as a real estate investor, if I invest $100,000 on our deal in Texas, I’ll get $100,000 off my [unintelligible [00:13:36].19] off my income tax.

Ash Patel: Well, is it $100,000 on the property, or do you have to specifically identify accelerated depreciation items?

Ruth Hiller: Yeah, we hired a Cost Segregation specialists, and they already did the study and they identified the accelerated depreciation.

Ash Patel: Right. Okay. So, yeah, there’s a process to get to that point.

Ruth Hiller: Yes.

Ash Patel: But it’s not 100% on the entire asset.

Ruth Hiller: No, it’s 100% on the capital raise, so  whatever that was… And so that for every investor, they will get 100% bonus depreciation for their investment. If you’re a W-2, it’s not as easy to use the tax benefits. You’ll need to speak with your accountant. I’m not 100% certain, but you can write any of that losses off against your passive income. You cannot write it off against your W-2 income.

Ash Patel: Right. That’s a challenge. So people that are high earners, that don’t have any other options, they can only write it off against passive losses, not their active income.

Ruth Hiller: Correct. That’s the toughest part. So there also are some accountants out there that will help you work on that and make it work to your benefit. I have a real estate specialist accountant that focuses just on that, and how to make it worked for people.

Ash Patel: Ruth, what kind of returns will your investors see?

Ruth Hiller: Well, we’re looking at a 5.5 exit cap. If you invest $100,000, after five years, you’ll have $190,000 return on your investment. That’s $100,000 of your investment, and $90,000 profit, which is delivered in quarterly distributions and equity at the end of the deal.

Ash Patel: Is there a preferred return?

Ruth Hiller: No, we just do 80/20 split. That’s why I like these deals, 20% to the sponsors team, and then 80% of the passive investors.

Ash Patel: Interesting. And then are there the traditional fees on top of that?

Ruth Hiller: We have a 1% acquisition fee, a 2% asset management fee, and there’s no refinancing fees. There’s none of that. That’s it. Just those fees.

Ash Patel: No disposition fee?

Ruth Hiller: No.

Ash Patel: Interesting.

Ruth Hiller: Yeah. We like to keep it as simple as possible, and I just think it’s better for the investors.

Ash Patel: I like that. Very simple, 80/20. Perfect. You own property in LA and New York as a JV partner. What are those?

Ruth Hiller: Yes. I own an apartment in New York City, and I also own a retail store. So I’m a 20% partner in a retail store in New York City that I’ve had for 29 years, and the Los Angeles property, I’m a 50% owner, with family members. So we’re working right now to put that one on the market, which I’m excited about.

Ash Patel: What type of retail in New York?

Ruth Hiller: It’s a ground floor retail in Soho. So it’s in a cast iron district. It’s a really great neighborhood, and we’ve had a lot of fashion stores in our building.

Ash Patel: And amazing rents?

Ruth Hiller: Oh my god, it’s crazy. Am I allowed to say the amount?

Ash Patel: Yeah. I mean, go ahead.

Ruth Hiller: We were getting $35,000 a month. Now, because of COVID, retail’s really tanked. So we’ve had that just to get some tenants in there… Because if you walk through Soho right now, it’s just empty. It’s kind of sad.

Break:  [16:40] to [19:32]

Ash Patel: What’s the value of that property, retail value?

Ruth Hiller: The value of that property? I’ll have to tell you interesting stories… Probably about $5 million, but about eight years ago in Soho on the corner of, I think it was, Greene and Spring, which is like the center of Soho… This 10,000 square foot retail space, not even a building, sold for $120 million to a REIT. So we are trying to get it together. So we kind of missed the boat on that one, but we were just like, “Wow. That’s crazy.” There was a lot of that going on, I think that was like eight years ago. Not so much anymore.

Ash Patel: Do you know the price per square foot on that building?

Ruth Hiller: I don’t.

Ash Patel: I’ve talked to people who rent retail spaces in New York, and this was years ago. I asked, “What are you paying, $40, $50 a foot?” They’re like, “No, $400 a foot.”

Ruth Hiller: It depends — depending on the size and location… Yeah, I think it was $300 a foot at one point, but now, no.

Ash Patel: Which was exponentially higher than here in the Midwest…

Ruth Hiller: Yes.

Ash Patel: Awesome. Ruth, what advice would you give to somebody starting out that’s wanting to syndicate deals?

Ruth Hiller: Find a mentorship program. That would be my advice; find a mentorship program, or study. I couldn’t be doing what I was doing unless I had joined that mentorship program.

Ash Patel: And what was the program that you joined?

Ruth Hiller: I joined Brad Sumrok’s Apartment Investment Mastery. I met him randomly on a bus during a Tony Robbins event, and we’ve been friends ever since, and so I joined his group, and it’s like, cut time. I’m GP-ing already in two years. I didn’t want to be a GP; I just wanted to invest passively. Then when I made the decision to be a GP, at the beginning of this year — I’m also in his Mastermind. That happened within four months.

Ash Patel: Then what are some of the hard lessons you’ve learned along your path?

Ruth Hiller: I lost a ton of money in a multifamily business I bought 20 years ago, and I didn’t do the due diligence, because I didn’t know how. I wasn’t educated. So for me now, I just get specialized education in anything I want to do, and talk to people that are experts in the business. Success leaves clues, so if I do what my friends are doing, if they’re successful, then I want to know how to do that. I don’t need to reinvent the wheel. So trying to do it on my own is—

Ash Patel: Do you mentor people?

Ruth Hiller: Yeah, I do, and that’s something I want to do more going forward, because I feel like the last years have been on hyperspeed. So I’d love to impart information. And one of my goals is to either contribute or set up some sort of fund that teaches financial literacy and mindset to young people.

Ash Patel: How would somebody get your attention enough to where you would want to mentor them?

Ruth Hiller: That’s a good question.

Ash Patel: Because I’m sure a lot of people have approached you, “Hey, I’d love to learn from you.”

Ruth Hiller: And I’ve just been teaching. I really just have. But if it was like a full-time gig, “Can you help me understand this?” I just kind of love doing that; but if it was a long-term thing, I don’t know. I’ve heard other people say, “Well, they need to add value,” but I just really love to help.

Ash Patel: Yeah, I think at some point though – I ran into this, where you give away a lot of your time, and then you find people that don’t do anything with it. So one, you’ve got to qualify the individual that you’re mentoring, because you want to make sure you’re not wasting your time.

Ruth Hiller: Right.

Ash Patel: And you want to find those outliers – at least from my perspective, find those outliers that go above and beyond. They don’t necessarily have to add value to me. I just have to see that they’re hungry, and they’re already putting in time and effort into that.

Ruth Hiller: It’s funny, because I met an Uber driver last time I was in Texas, and he’s like, “So, what do you do?” And I’m like, “I’m doing multifamily.” And he’s like, “Oh my God, I want to do it.” He signed up for all the events and he’s always sending me questions, and I would totally mentor him. He’s amazing.

Ash Patel: Awesome. Ruth, what is your best real estate investing advice ever?

Ruth Hiller: I’d say, learn as much as you can before you invest. Get laser-focused. There’s so many different types of deals out there – there’s syndications, there’s duplexes, there’s single-family. Pick something and get super focused on it. Learn about it, and then be ready to make the investment, and then take action.

Ash Patel: Ruth, are you ready for the Best Ever lightning round?

Ruth Hiller: I am.

Ash Patel: Let’s do it. Ruth, what’s the best ever book you recently read?

Ruth Hiller: I love the book Think and Grow Rich by Napoleon Hill. I’ve read that a couple of times.

Ash Patel: What’s your biggest takeaway from that book?

Ruth Hiller: The mastermind. And I’ve been in a few, and it’s really shot me way up.

Ash Patel: Are those typically paid masterminds, or are they not?

Ruth Hiller: Yes, they are pay-to-play. I’m going to tell you, it’s been worth every penny.

Ash Patel: And are they masterminds that are perpetual, or is it just for a period of time?

Ruth Hiller: They’re perpetual multifamily masterminds, and it’s been ongoing for the last few years, and I just recently joined in that, and it just 10x’d my growth just in the last year.

Ash Patel: Ruth, what’s the best ever way you like to give back?

Ruth Hiller: Again, I like to mentor people, and I like to donate money to causes that I believe in.

Ash Patel: Ruth, how can the Best Ever listeners reach out to you?

Ruth Hiller: They can reach out to me on my website at yesmfnow.com, and my tagline is, I don’t know what you’re thinking, but MF stands for MultiFamily.

Ash Patel: That’s what I was assuming. Awesome. Ruth, thank you so much for joining us today, and sharing your story from being a third-generation multifamily real estate investor, and this fast-track to syndication. We’ve learned a lot from you, and thank you for joining us.

Ruth Hiller: That was fabulous. Thank you so much for having me. I hope to see you soon.

Ash Patel: Awesome. Best Ever listeners, thank you for joining us, and have a best ever day.

Ruth Hiller: Thank you.

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JF2625: Why Your Mindset Is Your Most Valuable Asset Pt. 2 with Nate Barger

Nate Barger continues the conversation today on mindset, comfort zone, and goal setting. He’s talking about how selling drugs helped him learn how to scale his investments, the moment he realized he was over-leveraged, and how he made his way out of being nearly bankrupt. 

 

Nate Barger Real Estate Background: 

  • Full-time real estate investor 
  • 16 years experience
  • Actively involved as syndicator, apartment owner, hotel owner, warehouse, office
  • 1500+ current doors
  • Owns over $100 million assets under management
  • Four hotels including a Hyatt, Hilton, and Marriott
  • Based in Cincinnati, OH
  • Say hi to him at: www.NateBarger.com

 

Click here to know more about our sponsors:

 

Deal Maker Mentoring

 

PassiveInvesting.com

 

 

Follow Up Boss

 

TRANSCRIPTION

Ash Patel: Hello, Best Ever listeners. Welcome to the Best Real Estate Investing Advice Ever Show. I’m Ash Patel, and I’m with today’s guest, Nate Barger. Nate is joining us from Cincinnati, Ohio. And Best Ever listeners, this is part two of an episode that we started yesterday. Nate was also a previous guest interviewed by Joe Fairless. So if you google Joe Fairless and Nate Barger, all of these episodes will show up.

Nate, thank you for joining us, and how are you today?

Nate Barger: Man, thank you guys for having me so much, man. I’m excited to be here.

Ash Patel: Awesome. So, we had a great conversation yesterday, and we pushed on some topics – mindset, comfort zone, goal setting, helping other people… Today, I want to deep dive into your story. So you started out with dealing drugs, going to prison… Give me your real estate journey. What was the first deal? What did you do?

Nate Barger: So I had knew a little bit about construction. My first deal actually, I was trying to find something legit. I was trying to find a way to make money. I was selling drugs. I just was lost. I must have failed 30-40 times. I’m talking about lose all my money on trying to start a business and lose all my time. So I had this roofing company and one of my buddies called and said, “Hey, this lady called. She needs a roof. Go over there, her house had caught on fire” and it was on Ward Street, I still remember. I think it was 4046 Ward Street in Cincinnati. This had to be ’99. I went over there and I was so green, I didn’t even see the opportunity. I gave her a bid for the roof and then told my buddy, “Hey, yeah. It caught on fire.” He said, “Sell it.” I was like, “Okay.” So I asked her. That was the first house that I got.

Well, the guy I ended up partnering with, I ended up putting money into the house, $20,000, $30,000, and he ended up selling it for $90,000 and not giving me any money. So that was my first real estate learning deal. So needless to say, I knew that there was money to be made in real estate, but I was too busy selling drugs and trying to find something to do selling.

So by 2004, I was so tired of selling drugs, the Feds were watching me… I cried out, man. Life was so unfulfilling to me. I had everything that you think you could want financially. I had money, cars, women, a nightclub, traveled all the time… But I was depressed, because I couldn’t be myself.

So I cried out to God to stop selling drugs, and he showed me real estate. So three days later, I started buying real estate. So I bought my first single-family house — it was really in a bad neighborhood. It was Lincoln Heights. I don’t know if you know Lincoln Heights, but that’s the worst neighborhood. So I bought a single-family home and I was just on fire. My first year, Ash, I bought 13 properties, I did cash out refi’s over $350,000. I was doing a BRRR and I didn’t even know it.

Ash Patel: How were you getting financed? Just traditional financing?

Nate Barger: Well, back then it was a no doc NINJA loan.

Ash Patel: Oh, that’s right. That’s right.

Nate Barger: No income, no job, no asset. So I remember one time, an underwriter, they said. “Well, how do we know that you own this?” I had a sole proprietor, like Nate’s Custom Contracting, or something. “Well, how do we know you own that?” I said, “Well, I don’t know. Here’s my bank statement” and they said, “Get us a business card saying you’re the owner.” So I said, while we were on a conference call, I said, “So you want it to say, Nate Barger, owner?” [laughs] That’s how crazy it was back then. So I went and had a business card printed up and sent it to him.

Ash Patel: Just one?

Nate Barger: I think I sent him the proof. I didn’t even get a mail. They just said, “Give me the proof” and I sent it out to him.

Ash Patel: The good old days.

Nate Barger: I scaled quick, because I was on fire, because I went from selling drugs full time, wanted to do something so legit. So my first $1,000 I made legit was, to me, felt better than my first million I made selling weed. So, by 2008, 2009, I didn’t know anything. I was just buying, buying, buying, buying, buying, buying, buying. I didn’t understand real estate cycles. I didn’t really understand finance. I didn’t go to school, I went to prison. So by 2010, I was bankrupt. I lost everything. Chapter 7, I called my buddy Mike [unintelligible [00:04:28].18] up, and got Mike on the phone, and we started negotiating with banks, and started getting short sellers…

Ash Patel: Okay, hold on. So things are going well, you’re cash-flowing on all these properties, and then the economy collapsed. And then renter’s just stop paying?

Nate Barger: No, I overextended myself. I was all over the place. I didn’t have a clear direction. I had two big industrial buildings. The leases on them were cross-collateralized with some real estate. I had a 56-acre junkyard. I had construction equipment that I financed. I just was overleveraged. My residential real estate did good. Through the recession, it actually did better, because rent started going up, and even though the occupancy in Cincinnati dropped from 93%, 94% to 89%, really effective occupancy was 95+… Because you’ve got to think there were all these buildings that went to zero that skewed it, and made it look like it was lower, but really, if you had units, man, I remember, back then I was buying buildings… Because what happened is, when I went bankrupt, I went and told one of my investors. He had a couple million with me, and I thought he was going to be, “Thanks for coming over, and I’m going to go down and talk to the attorney with you.” So it really was a great time back then, and I really did not give up through that. And that is what I want to talk to you guys about today. Never giving up.

Ash Patel: There’s so much I want to talk about. Okay, so you’re way, way overleveraged, and people are starting to foreclose on you. Things are getting bad. Most people at that point are like, “Damn. I screwed up. What am I going to do next?” And what did you do? You went to the bank, and started negotiating?

Nate Barger: I didn’t have any other option. I got four felonies. I’m 29 years old. I don’t look very good. So what was I going to do? Go get a job somewhere? This was all I knew. It was, go back to selling drugs or figure this real estate thing out. And I came home and one day, and my wife, she looked at me and she was like, “You’re just stressed out,” and I said, “Look, honey. We’re going bankrupt.” I was like, “What?” And she was like, “Okay, I’m going to go get a job back.” I was like, “You aren’t getting no job back.” That gave me the fuel that I needed, because that was our agreement.

Ash Patel: And that’s your why.

Nate Barger: That was my why, and that gave me that rocket fuel you were talking about in yesterday’s episode. Then I went to one of my big investors who had $2 million with me, and we went down here to Robert Guerin, who was my attorney (a great bankruptcy attorney) and he said, “You can’t be here. You’re one of [unintelligible [00:06:51].24]” I said, “Man, this is my friend. This ain’t my creditor.” I was, “Duuhh!!” And I said, “Hey, don’t worry. Look, I’m not going to miss a single payment. Your money is good.” What I was doing was I was going in BRRRR back then. So my investor’s money was safe. I never missed a single payment and they never lost a single dollar.

I didn’t include them in my bankruptcy. And since times were so bad, the banks didn’t even show up back then. When he saw I did that, he was like, “Nate, you could have really just included me in the bankruptcy.” I was like, “No, I wouldn’t do that, man. You worked hard for your money.” He ended up giving me another $3 million.

Ash Patel: Wow.

Nate Barger: Never give up. Guess what I did with that $3 million?

Ash Patel: Apartment complex or [unintelligible [00:07:33].17]

Nate Barger: I started buying more apartment complexes, and started negotiating with the banks. Mike was borrowing the money from them and buying the mortgage notes on my property. So now, I own Mike, who owned my investor… It’s just [unintelligible [00:07:46].18]

Break: [07:46] to [09:20]

Ash Patel: Nate, what period of time was the pressure on about, “Okay, what am I going to do? What am I going to do?” And what period of time went by before you’re like, “Okay, here it is. I’m good?” Because again, it’s really simple, man… Like, was it a day, two days, a month, months?

Nate Barger: You’ve got to think, it was all relative to me going back to prison, and I promised myself one thing. I was in solitary confinement for 30 days in prison, and I promised myself, I said, “If I ever get out of here again, I’ll never be sad a single day in my life.” And that’s how I’ve lived every day ever since.

Now, again, that doesn’t mean that I haven’t lost loved ones, but that means that if I’m going to spend this day – and it was forever going after today – does it benefit me to at all spend it being angry or sad or upset? I want that day to be a memory, that was part of my life. And I want you guys to view your money the same way. Don’t just go spend your money and get rid of it. Spend your time; your time is more precious than money. Be cautious with what you do with your time.

Ash Patel: Yeah, incredible advice. And I wish I could do a lot of what you’re saying. I’ll make an effort to get better at that.

Nate Barger: You do. Every Monday night, man. I love seeing you, brother.

Ash Patel: Okay, so you go to the banks, you renegotiate this debt, and just like you talked about with the hotels, you look for opportunities, and you wanted to buy more. So the investor gave you money… You guys just went on a buying spree of really cheap assets.

Nate Barger: Yes, I’m like a 400-and-something credit score, and I hear these people saying, “What do you do if you don’t have good credit?” I’m like, “Man, not only did I not have good credit, I was bankrupt.” You go find somebody who’s just got good credit. You go find somebody that’s got money. But what do I have? I had the will and desire to succeed, and I studied and studied and studied, and that’s why I know so much about real estate today, because I never wanted to not know something again, whether it was regarding real estate cycles, the economy, how the Feds work, how the banking system works, how interest rates move, how rents move, how much it cost to build. I wanted to know absolutely everything, because I never wanted to fail again. I didn’t want to take my family through that, my friends through that.

Ash Patel: You were overleveraged before the 2008 crash. You bought construction equipment, all kinds of stuff. Did that weigh, in the back of your mind, on your decisions thereafter? Because you’ve got $3 million now, and you’re buying like crazy. Are you still going back to buying industrial buildings construction equipment? Or are you a little smarter this time?

Nate Barger: Laser-like focused. Not only that, but you’ve got to think I was a drug dealer. I made millions of dollars, man. I was bringing in [unintelligible [00:11:58].02] every week, and I was making a lot of money. I was getting a suite for 575 and selling it for 1,600. So, I was making a lot of money, and I look back and I said, “Man, all that money I had, I had nothing”. I had nothing that I could even go sell.

Ash Patel: You learned how to scale. The very first time you and I met, I was blown away how you went from a little to a lot in such a relatively short time. I’m like, “Man, how did you learn how to scale?” And you’re like, “Dealing drugs” And I’m like, “I don’t get it”. You’re like, “Man, I was moving major weight back then.” It wasn’t like a small-town drug dealer. So you had a giant multi-city operation.

Nate Barger: No, no,  [unintelligible [00:12:41].26] 300 pounds isn’t really a lot. It seems like it; and I only had five people that sold weed for me. You just give one of them 100, and you give the other four 50, and then you  have your money back in two or three days.

Ash Patel: And that taught you how to scale, leverage?

Nate Barger: Well, I had them one time, they wanted to give me 4,000 pounds. But then I had to think about, “Man, how am I going to get that? How am I going to move that? I’m going to be hot.” I’m in my comfort zone, right? But everything you think about is the solution. The harder the solution is to come up with, the more money you’re going to make. So for me, scaling was just looking at it and figuring out what we needed to grow. I already had this investor that was willing to give me money. Then I had other investors that were willing to give us money. We had an abundance of deals. I already had a property management company. We just needed to do more of it, and I needed to focus on the one thing that I’d learned that did well through the recession, and that was residential multifamily.

Ash Patel: Nate, one of the things people struggle with, and especially people with a background like yours, they kind of want to do it all, right? And you grew up without a lot of money, and it’s hard to give your profits away to a property management company here, an accountant, a receptionist or an executive assistant. Was that difficult for you?

Nate Barger: That was very difficult for me, and I’m going to tell you guys, I’m going to tell your viewers what helped me get over that. One day, I was sitting there and I told you, my wife had a house up in 40 minutes outside of Cincinnati she had built right when I met her, and I had a house down in Cincinnati, right around campus, and I would stay there. And I would work until midnight, and I’d wake back up at four or five. And we were married, we were newlyweds. I said, “Well, if I come up there, I’m only going to get three hours of sleep. I’m going to get 4.5 hours sleep if I don’t have the—.” Some nights I didn’t go home.” I was like, “I can’t keep doing this and I need to grow. I have a system, and I’m starting to make margins.” I’m understanding what margins are. So I was like, “I don’t have the money to bring somebody else in.”  So what I’m going to do is I flipped piece of property, and I took the profits off of that, the 40 grand that I made; I put it in an account. I said, “I’m not going to touch that money. That’s going to pay for the person that I’m going to hire to help become a property manager.” And they came in and they made me $80,000 to $90,000. That year I was like, “Whoa.” I was like, “You can hire humans and they just make you money.” So I was like, “I want a human farm.” You know, it’s like farming corn, but you’re farming humans.

So I realized how to start doing that, but then the one thing that really helped me let go of things — because nobody’s going to do it as good as you. But if you don’t let go, you’ll never have any peace of mind. I sat there and I drew out a diagram, and I said, “How much is my time worth right now? How much do I want my time to be?” And the way you do that is you figure out what your yearly is, and you divide that by 2,200 hours to 2,300 hours, and you’re going to come out with it. That’s what got me into hotels, too. When we made a decision, we were making over $1,000 an hour each doing apartments [unintelligible [00:15:39].06] tell us, “Man, I want to do that, man. That’s crazy, man. We’re making all this money. Blah, blah, blah.” And I said, “Okay, Mike, I’ll be fair with you. Give me 20 minutes, I’m going to run some math.” And I called him back, and I was like, “Holy crap!” Because I knew the numbers. And it was over 30,000 hours what we were going to make doing hotels. So I said, “Mike, we’re doing hotels.”

Ash Patel: And this is hotels, post-COVID.

Nate Barger: Post-COVID, yeah. Now, it’s even better, because there’s better opportunities. But it’s knowing what your time’s worth. And if you’re sitting there and you’re doing a job that you can hire somebody to do for $20 an hour, and you’re telling yourself, “Well, yeah, I’m going to make $400 an hour doing this”, you’re lying to yourself, man. You’re never going to get that $400 an hour. Like, right now, the thing that keeps me focused — I can go find some wholesale deals, make $100,000, $200,000, $400,000, $500,000. The thing that keeps me focused though, is knowing that if I keep track of all my hotels, where I’m going to be at?

Ash Patel: Say that again. If you keep track of your hotels—

Nate Barger: If I keep all my track, focused towards my goal,—

Ash Patel: Right, right, right.

Nate Barger: —my five-year goal, right? You’re talking about making hundreds of millions of dollars, but you’re never going to get there if every day you piddle around, and you stop, and you call over here… You can’t. You’ve got to have a laser-light focus.

Ash Patel: And that laser focus is hitting your goal of acquiring a certain dollar amount of hotels.

Nate Barger: It’s focusing on getting the hotels. And the problem with that is when you’re buying hotels, you’re not making money. You’re building equity, but you don’t realize the equity or apartments are anything. So you’ve got to be disciplined, and first, you have to have that passive income. Because once you get the passive income, you’re not worried about money anymore; then you can really focus on the things that are going to bring you in a great deal of money.

Ash Patel: Once you hit your hotel goal, what’s next?

Nate Barger: Well, it’s really giving back to people. That’s more important to me than hit my goal on hotels. Because my money is good. I’ve got enough money, I don’t have to work again if I don’t want. I’m not saying that to brag, I’m just telling you. My passive income is good. I live off of a percentage of my passive income; the rest I just stack or reinvest. It’s really helping change people’s lives, man. I’m hoping to reach people.

I’m hoping to make 2,500 people—well, I’m not saying hoping. I’m going to help make 2,500 people millionaires by 2025. We’ve already started. So that is my goal. I hope to crush that goal. I hope to have a bigger impact than just that, but just to reach tens of millions of Americans and show them, “Look, maybe college isn’t for you. Maybe it is, okay, but maybe not.” If that is not, I don’t know why we don’t take cognitive ability test and figure out what people’s natural aptitude, what they’re naturally good at; instead of going to waste four years in college.

Now, if you want to be a doctor, you’ve got to go to college, man. I can’t help you with that. But if you want to learn how to become a millionaire in real estate, I can show you in five years how to do that starting from zero.

Break: [18:32] to [21:24]

Ash Patel: Nate, you went through 2008. What if another 9/11, 2008 happens again? How do you prepare for that? How do you not be overleveraged? And what are you personally doing, knowing that at some point, the economy is going to trend lower?

Nate Barger: It’s really having a reserve. The biggest thing that kills you when you’re buying a multifamily is not having the right amount of reserves. Like, “Oh, the roof went bad.” Like, I already knew that was going to go bad when I bought it. “Oh, the boiler broke.” Like, “Good. Replace it then.” I don’t care. That money is already budgeted. Anything that we see that could happen in that property in the next five years is already budgeted. So if that hot water tank, we feel like it’s going to bust—look, if I’m going through 100-unit complex and the hot water tanks are all 6-7 years old, eight years old, ten years old, I know I’m going to replace 50% of them over the next five years. So what does that cost? What does that value? Set that money aside. Then we reevaluate that every quarter. How much of that money did we burn through? Are we on track? Do we need more money? If we need more money, then what do we do? We up the reserves per unit, and you make sure that your year five is always met. So you’re really looking out next year. You’re looking out five years from that. You’re always forecasting out “How much cash do I need?” And I’ve got plenty of money already in the bank, waiting for that stuff to happen. So we’re different. When we buy property, we’re trying to spin this money in the bank as fast as possible, because the quicker we can spend it, the faster we’re improving that property, the quicker we’re able to move them rents up to where they need to be.

Ash Patel: That is awesome. Nate, if you can go back and talk to the Nate Barger that was year one in real estate, what advice would you give him?

Nate Barger: Man, I don’t think you could have talked to that idiot. I don’t think there’s anything you could have told him.

Ash Patel: Well, not so much in life, but I want real estate advice.

Nate Barger: Oh, man… Understanding basic jobs. How basic jobs drive the housing market, and what areas to buy in> Because back then, I was just buying anything that was cheap, because that’s all I had. But if you understand the basic jobs and you understand where the movement is going to be at, you will make so much more money.

Understanding what new build costs are, what current inventory levels are, what vacancy rates are, at what point are they going to have to start building to meet demand… Once they have to start building, how much does it cost to build, and if you’re buying a property way down here… Like you’ve seen that post I did the other day, we bought that for $450,000, put $1.4 million in it, $1.85 million all in – it’s worth $5 million. Guess what? I get an email at [7:55] this morning, one of our bankers said they need to talk to us, and I’m thinking, “Man, this can’t be good.”

So we talked to him. They said, “Hey, man. We want to refinance and give you guys some cash out.” So here I am, thinking something’s going to be bad, but it’s really understanding what areas to buy in. Once you understand what areas to buy in, the properties are going to go up in value overnight. While you sleep, you’re going to make your money.

Ash Patel: Nate, you talked a lot about basic jobs, and I got burned, for a couple reasons. One, I didn’t know to look for basic jobs; and two, I had a giant ego, where years ago, everything I bought just turned to gold, and then other people started saying that, so I actually started believing it. And I bought a bunch of auction properties in Ripley, Ohio.

Now, going into this, I knew that they’re closing the power plant there. There’s a couple of factories that left. Schools were going to [unintelligible [00:24:51].01] abandon buildings. I mean, it was bad. But again, I thought, “Dude, I can buy these buildings cheap. I’m good. I’ll turn them around, like I always do. I’ll just find tenants.” And man, that didn’t work out that way. I got burned. And you and I had a conversation later about basic jobs. Can you give the Best Ever listeners a little bit more about what you mean when you say basic jobs?

Nate Barger: Yeah, so basic jobs are jobs that are not service jobs in a community. The way I like to explain them is a couple of different ways. I’m going to give you an example, if that’s okay.

Ash Patel: Yeah, please.

Nate Barger: So let’s say we go out, me and you, find some real cheap land out in the country, this farmer gives it to us for a buck an acre, we get the people, the Amish people, that build really cheap. We get them to build a house, really cheap, beautiful houses, right off the highway. Everybody stops in, they look at the houses, and they leave. Nobody buys them. Me and you look at it, we say, “We know what the problem is. We need a gas station.” Put a gas station in. “Nobody’s going to buy this without a gas station; they’re going to run out of gas.” Put a gas station in, they come by, they get gas, they look at the house, they leave. Put a restaurant in. Put a bank in. Same thing. Grocery store. They continue to come and they leave. Those are all non-basic jobs. Those are only essential. So nobody bought that house because now we put in a power plant — or let’s say we put in a Honda plant behind us. Boom! Manufacturing plant. Durable goods has about 8.6 to one. So for every one durable good job, you’re creating 8.6 more jobs, okay? Those are direct and indirect jobs.

So now, these people come start buying all these houses, now you need more houses, and now, you need the bank. Now you need a restaurant. Now you need a grocery store. So those are basic jobs. Think about jobs that bring money from all over the world and bring it right down here, into where you live at. The ones like the gas station – all it does is really rotate money around. The gas station – the guy gets money before going to a gas station. He goes down the street, he eats at the diner. The lady at the diner comes to buy gas, then they both go to the bank. So those are non-basic jobs. If you can identify the basic, you can make massive amounts of money in real estate.

Ash Patel: Yeah, and I did the exact opposite. So I wish I heard that story before I made that mistake, but it was a good lesson learned.

Nate Barger: No, wait, wait. One other thing I need you to think about – if that one job creates eight jobs, think about it… If that one job leaves, it’s taking eight jobs with it.

Ash Patel: Yeah, it’s a good point.

Nate Barger: It may take some time, and it comes quicker than it goes, but it’s going to happen. Thus, look at Detroit. You look at Flint, Michigan. Look at Austin, Texas. Look at the ones where you have new jobs coming. Look at the ones that lost a lot of jobs. You have an over-supply of housing. You don’t need it. You have way too much, prices crash. You don’t have enough – prices shoot up.

Ash Patel: Nate, we’ve learned a lot today. I want to thank you for being on our show for the third time. We’ve taken up a lot of your time, so thank you very much for joining us.

Nate Barger: Man, thank you for having me, man. I appreciate you, brother.

Ash Patel: Yeah, and Nate, tell the Best Ever listeners how they can get a hold of you.

Nate Barger: Man, you guys can go the BRRR Invest on Facebook. Nate Barger on Tiktok, on YouTube. Go check my videos out, man. I’m going to show you everything you need to become a millionaire in the next five years.

Ash Patel: And I’ll vouch for the Tiktok users. Nate’s very entertaining, very knowledgeable; follow him on all the social media platforms. Nate, thanks, brother. Great seeing you again.

Nate Barger: Thank you so much, man. I appreciate you, brother. Tell Joe, I said hi, man. Thank you guys for putting this on, and thanks for having me as a guest, brother.

Ash Patel: Will do. Best Ever listeners, thanks for listening and have a best ever day.

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JF2624: Why Your Mindset Is Your Most Valuable Asset Pt. 1 with Nate Barger

After spending time in prison for selling drugs, Nate Barger knew he had to switch gears. That’s when he found real estate and realized the mindset shift that had to take place in order to succeed. In this first episode of a two-part series, Nate talks to us about how he created his own reality, transitioning from growing his assets to giving back, and the importance of goal setting for success.

 

Nate Barger Real Estate Background: 

  • Full-time real estate investor 
  • 16 years experience
  • Actively involved as syndicator, apartment owner, hotel owner, warehouse, office
  • 1500+ current doors
  • Owns over $100 million assets under management
  • Four hotels including a Hyatt, Hilton, and Marriott
  • Based in Cincinnati, OH
  • Say hi to him at: www.NateBarger.com

 

Click here to know more about our sponsors:

 

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PassiveInvesting.com

 

 

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TRANSCRIPTION

Ash Patel: Hello, Best Ever listeners. Welcome to the Best Real Estate Investing Advice Ever Show. I’m Ash Patel, and I’m with today’s guest, Nate Barger. Nate is joining us from Cincinnati, Ohio. He’s been a previous guest with Joe Fairless. If you Google Joe Fairless and Nate Barger, the episode will pop up. Nate’s a good friend of mine, and he’s a fixture in the local Cincinnati-Florida real estate scene.

Nate’s involved in hotels. He’s got over 1,500 current doors, over $100 million in assets. Four hotels, including a Hyatt, Hilton, and a Marriott, and he just gives back more than anybody I’ve ever come across in real estate. So today, I just want to spend time finding out more about Nate, and getting that evolution. Finding out how he went from being locked up in prison twice, a drug dealer, having no good role models, no direction, and somehow, in a short amount of time, just became a savage in real estate.

So Nate, thank you so much for joining us. How are you today?

Nate Barger: Man, thank you so much, brother. I appreciate your kind words, and looking back, it didn’t seem so short all the time, but you’re right. It was a short amount of time relative to what other people give in life to get what they get out of life.

Ash Patel: And that’s the part that I don’t think a lot of people see. They see successful Nate Barger. They see the house, the cars, the trips, everything you’ve got going on; and you make it look easy, and it’s not until people pry and push you, do they find out little bits, and that’s my goal today. So we talked about when you were first starting out, you would sleep on your project sites, right?

So for the Best Ever listeners, you’ve got to hear the interview that he did with Joe. That gives you the backstory on Nate; but today, we’re going to do a deep dive into him.

So Nate, when you were starting out doing these rehabs, fix and flips, give me your mindset, and give me some of the struggles that you had.

Nate Barger: Well, I told you, man, I didn’t feel like I had any struggles.

Ash Patel: Expand on that; this blew me away. And I’m sorry I keep talking, but this was one of the things that I really wanted Nate to get across today. And again, Nate makes everything seem so easy. So I asked him a while back, I’m like, “Nate, give me a time you were under financial pressure,” and the answer that he shared, I shared with my wife, and man, we both loved that perspective. So please, go ahead.

Nate Barger: So again, it’s all perspective. So man, when I was selling drugs and growing up, went to military school, we had roaches crawling on us, there wasn’t much you could do about it. You’re going to keep killing them, they’re going to keep coming. You’re just going to let the roaches crawl on you. That’s your reality, right? So coming out of that, then selling drugs on the street, going to prison, and then getting out, 57-58 days and going back to prison, and then selling drugs and being paranoid and knowing that if I got caught, I was going away for 15 or 20 years. That would have been in 2004 when I stopped selling drugs.

So I probably still would have been in there had I got caught, because I was moving a lot of weed. I was bringing in weed from Mexico. I was bringing it from Arizona. And plus when you go to the Fed-Joint — we aren’t going to talk about that, but it all gives you a mindset. Your mindset is different, that – what is really rough, what is really hard? So when I cried out to God, and I asked him to deliver me and show me something, then boom! He showed me real estate.

I didn’t realize this until a good friend of mine, Sean, asked me. He said, “Nate, how are you able to deal with all this stress that you’re dealing with? You’re dealing with all the contractors.” I said, “What stress?” And I didn’t realize it, but I thought about it that next night, and the next day I came in and I said, “Man, you know, when I said I didn’t have to stress that you thought I was dealing with…” because he was like, “Let me know if you need a construction manager to help you” or, “Let me know…” I was like, “No, I don’t need anything, man” I was comparing that to prison. I was comparing that to where I had been.

So I didn’t have that comfortable, cozy — you know, it’s like if you sleep on concrete, and somebody gives you a blanket and the next night you’re sleeping on concrete still, but you got a blanket in between you and you’re covered up with a blanket, you’re going to be like, “Man, this is great!” People are going to say, “I can’t believe you’ve been sleeping on that concrete!” And you’re like, “Man, it feels—like, what are you talking about? I’m not sleeping on concrete. I’ve got a blanket.”

Ash Patel: Yeah.

Nate Barger: So it’s all mindset. It’s all what your mindset is. And furthermore, what are you focused on? Because somebody said to me, “Man, I can’t believe that you have to do all that.” And I said, “Well, I can’t believe that you’re going to work until you’re 70 years old to have a retirement.” And I didn’t mean to say it to the guy like that, but that was the reality, and that’s what I said to him, and that made me think, “Why would you do that? Why would you wait until the golden years?” That’s what America teaches us. That’s what I feel like our school systems teach us a lot of times, and I was just was different, because I never had that reality. My reality was different.

Ash Patel: Yeah. And to elaborate more, what you shared with me is, pressure is when you know, if you slip up today, you’re going away for a couple years. I mean, that’s real pressure.

Nate Barger: No. No. 20 years. You’re going away for 15 or 20 years.

Ash Patel: Yeah.

Nate Barger: When you call me and you’re a property manager and you say, “Oh, my God. We’ve got… The building, no, you’re not going to believe, it’s flooding!” “Anybody died?” “No.” “Okay, well, what’s the problem? We’ve got water in the unit? What do we have to do to get the water out?” It’s just water. There’s water all around us. Why are we so scared when it gets in the unit, right? Why does it freak you out?

Ash Patel: Yeah. 99% of the people get pretty freaked out over a situation like that, because they don’t have the right perspective.

Nate Barger: It already happened, right? It already happened.

Ash Patel: Yeah.

Nate Barger: You can’t prevent it. What can you do to fix it? Let’s go do it. That’s it.

Ash Patel: Yeah, I wish I had that perspective.

Nate Barger: I think you do, in a lot of different ways.

Ash Patel: Yeah, but I also freak out.

Nate Barger: What are you going to do if something’s already happened? Why worry about it? That comes down to me sitting there, growing up in an alcoholic family and sitting there, and I remember some lady came over and gave my mom this plaque, it was a Serenity Prayer. Do you notice Serenity Prayer?

Ash Patel: I know of it.

Nate Barger: So say it. Look, not about religious belief, but it’s basically saying, “Let me focus on what I can control. Let me have the wisdom to know what that is, and let me let go of the things that I can’t control.” And if you take that mindset to business, then you can grow a lot quicker.

Break:  [06:45] to [08:17]

Ash Patel: So Nate, you’ve achieved a ton of success, and now you’re so focused on giving back. You’ve got an academy. By the way, Best Ever listeners, Nate Barger has the BRRRR Facebook group, and you’re probably  at130,000 by now, members on there?

Nate Barger: Yeah, we’re growing like 5,000 people a week. It’s insane.

Ash Patel: And there’s a tremendous amount of knowledge that gets shared constantly on that Facebook page. So check that out.

Nate Barger: Thank you for that.

Ash Patel: But where did you transition into growing your own assets to really focusing on giving back?

Nate Barger: One of the things that really allowed me to give back was that I focused on “What do I need to survive?” Because when you’re in survival mode, you see people out there selling drugs or shooting people… Most of the time they’re in survival mode. So you’re telling them that, “You shouldn’t sell drugs, you’re ruining people’s lives”, right? But the problem is that this guy is like, “Hey, my kids are starving tonight. What am I going to do?”

So when you transition out of survival mode, and then you get to a place where then you’re working, and then you get to a place where you’ve achieved all your financial goals, you don’t need money anymore… And what I mean by you don’t need money – you get a lot of passive income coming in, you’re living off a fraction of that. So you’re just essentially reinvesting all of your excess. And then you say, “What is life really about? What is my purpose? What is my passion?” Well, my passion was real estate, but then I found my other passion was really, I don’t want to see people struggle financially. I watched my father struggle. I’ve watched everybody in my family struggle with finances. And then you learn it, and you’re like, “Why are they struggling with finances?” It’s because it’s mindset. It’s all mindset shift.

So my goal became to help change people’s mindset, share my story, show them where I came from, and let them know that if I can do it, a four-time felon, been to prison twice, no education, grew up in a poor blue-collar alcoholic family, and just a neighborhood full of debauchery, all of my friends were criminals and drug dealers and robbed people… And if I can do it, certainly, you can do it.

But then I dug in deeper, why do these people not do it? It’s comfort zone. If you’ve got a half a million dollars, or you’ve got a million dollars, or you’ve got $5 million, and you’re comfortable, maybe $5 million you can start to become comfortable, but man, you’ve got to push. And everybody’s different. So I’m not sitting here trying to be a dictator and say, “This is what you’ve got to do”, but what is your comfort zone? Where is your comfort zone?

So for me, money doesn’t get me to want to work anymore. It has to be a lot of money. But what does, for free, is giving back to people and watching those people become millionaires, watching those people change not just their life, but their kids’ kids’ kids’ lives, and being able to pay for that wedding and being able to go on those trips. That was what’s important to me, and that’s why I have come in and helped grow the BRRRR group and just want to give back to people, man… Because you don’t have to struggle. It truly is a choice in the United States.

I’ve spoken to a lot of people that are foreigners, a lot of them are my neighbors, Pakistan, Indian, and they’re all like, “Oh, no, no, no, no, no…” Because I was like, “Man, what do you guys think about politics?” And they’re like, “Oh, it’s still great here.” You know, but we don’t understand that, because we’re from here. You have the opportunity to do whatever you want to do here, and no matter your race, your religion, your color, your gender… Only you can stop yourself. Now, will there be barriers? Absolutely, but who cares? Now, when you start focusing on the barriers, you’re focused on the circumstances, and not the goal. Focus on the goal. Don’t worry about the circumstances.

Ash Patel: Nate, have you had family members or people that you grew up with join you in real estate?

Nate Barger: A lot of my friends, but not so much family, because it just comes to that mindset. It’s hard to change that mindset. And you’ve got to accept people for who they are. Like, my brother, I said, “Hey, man, you come in and you work for me, I’ll give you equity in every project you work on, your retire in 10 years a millionaire.” “No. I don’t want to.” “Why?” “Because I drive five minutes to work and five minutes home, and I don’t want to have to drive an hour and a half” and I was like, “Hey, that’s great.” He’s happy with his life, though, right? He’s happy with where he’s at. So what can I do about that? I can just help him enhance his life, like I’m giving them a car, helping buy his house, whatever. You can help your family out with that stuff, but don’t necessarily think that they’re all going to want to change.

Ash Patel: And then you’ve had friends take you up on learning real estate and come along with you?

Nate Barger: Yeah, so that’s kind of what made me really want to give back, was — my friend, Jarius. You guys might know Jarius, he’s a multimillionaire. I started teaching them about five years ago. A lot of these guys, I just knew real estate really well and knew how to explain it really well; and then once I start showing these people all this stuff, they start executing and becoming millionaires, and then that’s when Matt, my social media guy, was like, “Man, all these people, they want you to mentor them.” I literally had people, I’ll give you $25,000 [Inaudible [13:11]. I was like, “Man, I don’t have time. I’ve got too many commitments.”

So, I was like, I want to reach a lot of people, but how am I going to do that? And that’s when we got the BRRRR group, and that’s when we came out with the academy; it’s a 12-week academy that’ll show you. You’ll learn more in that Academy than most 20-year real estate guys that I know; and I’m talking about not guys that just been doing real—I’m talking about guys that are wealthy, like me, to do real estate, because they never think about it like that.

Ash Patel: How’s that Academy set up? Is it a private Facebook group? Is it an actual course? Is it videos? Reading?

Nate Barger: Good question. So it is an online academy, and you go through it. It’s a 12-week course. There’s a lot of spreadsheets in there, it teaches you about just a ton of stuff, from how the Federal Reserve works, why is that important? Well, that’s relevant if you’re going to go into a bank. You always want to know what is their objective, right? Then I’m going to present the bank with exactly what they need. It makes it easier.

So it’s got everything in there, from charts, to graphs, to leases to operating agreements, spreadsheets, and it shows you how to do construction, shows you how to bid out a job in 20-30 minutes. Then we have a private Facebook group that you also get access to, that we are starting to teach people in there, in week 11, and one of them have one house so far. Five-year goal, he said a $16 million net worth. That’s the type of mindset shift that people are having. He put a video on there, he was literally crying, and great guy, man… But that’s what’s rewarding. It’s not the money. What am I going to do? I was about to order me a brand new Bentley and I just got out of my other Bentley. I was looking at my other Bentley, and I was like, “This Bentley is fine. Why do I need another one?” So what is money really going to do for you once you get there?

Ash Patel: It has diminished returns.

Nate Barger: Has diminished returns. You start thinking about, “Oh, man. Should I get another Bentley with a different interior?”, and I was like, “This stuff doesn’t even matter.” What matters though is your friends, your family and that’s why I love having all my friends over. I love you coming over. We missed you this week. We had a nice turnout.

Ash Patel: Best Ever listeners, you’ve got to understand, Nate literally opens his house to the real estate community here in Cincinnati. Just very gracious… But really giving back. And Nate, I want to talk more about mindset – the people that go through your academy, and I don’t know how you could find this out, but the ones that don’t ever take action, what can you do to push them?

Nate Barger: So physically going there; we look at who’s not watching the academy, because we got access to that. Who’s not completing the homework; and we reach out and say, “Hey, man. What’s going on with your mind? Where are you struggling at, man? Why aren’t you doing this? I’m showing you how to become a millionaire. You don’t want it. What is your why?” It’s not about you; because if it was about you, then it was about me.

We can only do so much. So you’ve got to find something greater. Your greater is your wife, it’s your kids, right? Same here. You have to find your why. This isn’t about you, because it’s a sacrifice. So it’s hard for you to sacrifice for yourself; but when you start to think about other people, like me and losing weight… I don’t care about losing weight for myself; but when I start to think, I want to be around for my kids, I want to be around for my grandkids, I want to be around for my wife. That has to become your why, and it has to be greater than you.

Ash Patel: Alright, and I appreciate that. When you have a family member — I’ve got a really good friend that, man, I have tried. I’m sure you’ve tried with your brother. You try, you try to push them into this. “Man, listen, I can teach you. I can get you out of this 9-5. I can show you a better way to make money.” “Yeah, man. That sounds awesome. I’ve got to get there. I’ve got to get there”, and they never take action. What can you do?

Nate Barger: Is he in Cincinnati?

Ash Patel: Yeah. I see him every weekend.

Nate Barger: Then you need to start bringing him to the Monday events. When I get back from Florida, and we start having — you start bringing them around people… Because you see, really what it is — look, man, don’t take this the wrong way. Not you, but your listeners. People will lie to themselves, and they’ll say that they don’t really like money. They don’t really want money. They’ll do that because really, subconsciously, they don’t want to go do what it takes to get money. And here’s what I’ll challenge you to do. If they say, “Well, I don’t really like money. I don’t really care about money.” Then say, “Why are you getting up working eight hours a day to get something that you don’t like?” That’s ridiculous, right? That’s ridiculous thinking.

So the fact is that you do like money, because it can help you do things in life. And even if you say, “Why? If I just had money, I’d give it away.” “Let’s go get some money, so you can give it away.” Bring him around people, so he could start seeing normal people starting to succeed, and then he will start seeing himself in those people. So sometimes that’s what it takes.

Ash Patel: I love that, and I will do that. That’s a great idea. Nate, you mentioned setting goals. It’s easy to set goals when you’re doing well and you have money. Back when you started, did you know about goal setting?

Nate Barger: I think I did, because when I was selling weed, I had goals, man. But I think that the one thing that you just said – it’s easy to think about that when you have money; that comes to mindset. According to Fidelity, 88% of millionaires are self-made. So when they say — listeners, listen, man, if this is you, “Well, only the rich people can make money.” Well, 88% of the millionaires are self-made, so I disagree with that, right?

So you’ve got to set goals, because last year 2019, Mike said, “Nate, we’re going to buy $300 million worth of hotels in 2020”, and it kind of scared me, because that was a goal, and I knew Mike was going to be going after that; and that Mike is my partner, and I knew I was going to be on that roller coaster with them. And I thought, “Man, how can we do that?” Right? Because my mind wasn’t where his mind was. And January of 2020, pre-COVID, 30 days into thinking this and setting that goal, we got one call from Colony. Colony is a big REIT, and they said, “We’re going to be selling off our whole REIT. We’re going more into digital stuff, and we’ve got an opportunity for you guys to take over $350 million worth of Courtyard Marriott Hotels.” One month, you set a goal, you start thinking about it, you start making moves. Now, thankfully, we didn’t close on that, because COVID came… But it just goes to tell you about the mindset. When you start dreaming about stuff and thinking about stuff, and setting actual goals with dates and deadlines, they just start happening. And I’ll give you a great example. What’s that tall mountain? Mount Everest?

Ash Patel: Yep.

Nate Barger: Is that like the tallest mountain in the world?

Ash Patel: Mm-hm.

Nate Barger: What is that? 30,000 feet?

Ash Patel: Something… Yeah.

Nate Barger: So if I go, and me and you stand next to that, and our goal is to climb that mountain. I mean, you’re probably going to be like, “Hey, man. I can’t do that.” But if I say, “Hey, Ash, listen. I just need you to do 100 feet. Can you give me 100 feet today?” You’ll be like, “Yeah, I can give you 100 feet. I’ve got all day?” “Yeah, yeah, all day.” Okay, tomorrow you can give me 100 feet. And what begins to happen? You begin to move towards that goal, right? And 300 days or however many days, you reach the pinnacle. You’re at the top. You’re at the peak now. You’ve made it, and you didn’t even realize it. You just were making them steps forward every day.

Ash Patel: Yeah, that’s a great story, and I’ve got an analogy for that. I think it’s Marcus Luttrell, Lone Survivor, the movie, played by Mark Wahlberg… When he was all shot multiple times, broken back, broken legs, he would throw, I think it was a hat or something, and he would say, “Okay, I’m going to crawl to that, whatever I threw. A rock. And then I’ll reach that and throw it again. Okay, I’ll just get to that.” So, I love that Everest comparison.

Nate, you said you were scared when Mike said, “I want to buy $150 million in hotels.” Why were you scared?

Nate Barger: Because you’ve got to think – I just came out of bankruptcy, okay? So in 2013, I came out of bankruptcy. 2015, I retired. I made enough passive income to retire. I’m living. Life is good. I’m comfortable. I really don’t want to step outside my comfort zone. But then I got my partner over here pushing me, and it’s like, “Me and you were going up the mountain” and you’re like, “Come on, Nate. 20 more feet. And there’s this ledge right there.” I’m like, “Man, I don’t know about that ledge.” You’re like, “You told me you will do 100 more feet.” So now I’m looking at this ledge, focused on the circumstances, instead of the goal.

So I guess what really scared me about it was that I kind of didn’t know enough about hotels. It was the education part where I didn’t know enough about hotels at that point, and I still had this worry, and COVID took all that worry away from me, man… Because through COVID, I saw the worst hotels could ever operate, and I was like, “This is it?” I was like, “We’re prepared, man.” You know, our banks called, “Oh, do you guys need a deferment on your hotels?” “No.” “Do you need deferments? Maybe we can buy them from you.” It became that thing where, “Okay. Now, I know what worst-case looks like.”

Break:  [21:43] to [24:37]

Ash Patel: Is that important, identify the worst-case scenario?

Nate Barger: Yes, and how do you live with that. We were making decisions before, I think, Marriot did. We were making decisions that were so crazy to me, “Well, did somebody drown?” “No.” Okay, so look, I just looked at our forecasted budget. We went from 42% on this hotel for the month, to 5%. 5% for the whole month, right? I said, “Hey, guys. We’ve got to shut the hotel down.” These are 30-year hotel guys. They said, “You can’t shut the hotel down.” I said, “Why can’t we? We’re going to lose $80,000 if we keep it open in a month. We’re going to lose $30,000 if we shut it down.” We shut it down. It was a simple decision, right? And then I said, “Wow, man. We’ve got enough money to keep this thing shut down for two years. Like, we’re good. We have plenty of capital.”

So we shut it down, and they were like, “Well, we’re going to have to have our 24-hour security.” I said, “No, we’re not. I’m going to go buy some cameras, and put them up there, and put an alarm. We’ll be good.” I was just like, “They’re overthinking it.” I said, “We operate abandoned buildings all the time.” And it was like, “Well, we talked to the police up there, and we think somebody is going to break in.” This one was in Columbus, Ohio. I was like, “Nobody’s breaking in there. I’ve got an alarm on it. Don’t worry about it.” I was like, “Call the insurance and let them know it’s going to be vacant.”

Ash Patel: That’s it.

Nate Barger: That’s it. “Yeah, let’s go shut the water down.” “You can’t shut the water down because of listeria, etc”, so like I said, “Okay, let me call my engineer.” Called my engineer. It’s all dealing with problems. They had all these reasons why you couldn’t do all this stuff. I said, “Okay, let’s do this, write it down. Let’s find out if that’s true or not.” That’s it.

Ash Patel: Kind of how I deal with my kids a lot.

Nate Barger: Yes, exactly.

Ash Patel: It’s breaking it down into simple “what if’s.”

Nate Barger: Yep.

Ash Patel: Yeah.

Nate Barger: Exactly, brother.

Ash Patel: Nate, you mentioned Mike Ealy, your partner, and you mentioned you may have been comfortable and just getting by if he didn’t push you. How important is it to have a partner in this business, or really any business?

Nate Barger: I think it depends on your personality type. Some people don’t need people, they don’t want people. For me, I naturally like to work better with other people. I like to compensate people’s weaknesses. I like to find people to compensate for my weaknesses, and the main thing is, I like to do what I like to do every day. So there’s certain things that I hate doing, like pounding salt. Like, did you ever pounded salt, and just got bloody knuckles? I hate paperwork. Now, I’m very good at it, but I hate it. I hate being in an office. So for me, I always partner with people who have that type of strength.

Ash Patel: Have you read the book Rocket Fuel? It talks about a visionary and an integrator. And I always had a lot of self-doubt, because I would not be very good at paperwork. I would not be very good at following through on anything. I’d be great at finding deals, but then I’d screw the process up and have to fix it before closing… And I found out that it’s not a detriment. It is just being a visionary. It sounds like it’s similar to you. You’re not the integrator. You’re not the backend guy that does it all. So, is Mike also a visionary, or is he an integrator?

Nate Barger: Mike is a more backend guy, but he has some vision, too. So I can be a backend guy, but I can’t do it day in and day out, because I’ve got to deal with my construction. I’ve got millions of dollars in budgets that I’ve got to keep, and I’ve got to give out contracts, and I’ve got to submit the AIA’s to the bank, and I’ve got a lot of paperwork, but I delegate all that, and then I just review it and send it over.

Ash Patel: Do you have an integrator in your company, somebody that you just rely on heavily for all the backend stuff?

Nate Barger: Oh, yeah, lots of them. Yeah. We’ve got controllers. We’ve got accountants. We’ve got layers of accountants. So yeah, absolutely.

Ash Patel: Okay. So you guys get to just literally go out there and be visionaries and focus on what you enjoy.

Nate Barger: Yes. And I’ll share something with you later on, that we’re building out, that’ll be a multi-billion dollar company too, that is focusing on what you’d like to do.

Ash Patel: Alright, you know what? I think we’re going to save that for part two, but I want to ask one more question about partnerships. I see you and Mike interact, and you guys get along like brothers. What are some examples of hard times that you’ve had with partners?

Nate Barger: With Mike? None, really. A lot of times what it is, is [unintelligible [00:28:41].15] So you don’t really get into bad relationships, because you’re like, “I don’t mess with that guy.” If we had a problem, let things go, because nothing is that important to me. I had a couple partners and they were really, really, really smart on the finance side, but not good operators, not good people, couldn’t build a good culture… But I learned a lot from them on the finance side.

We were in a meeting, and I owned this company with them, and they were saying, “Hey, we’ll give you any type of help that you need”, to one of our high-level managers, or regional… And then when the regional left, they were like, “They better figure that out. We pay him too much money.” And I was shocked. I was like, “Wait a minute. You just told him we can give him anything we needed.” “Yeah, but they….” I was like, “Man, this isn’t for me.”

So I ended up selling my part of the company and just dissolving it. But you learn in life, who do you really want to be with? Who do you really want to be around? Me and you would get along great. You know why? Because we’re easygoing. I’m not going to argue with you about something. Look, if it’s that important, you can have it. I don’t really care. Even if it’s $100,000, even if it’s a million dollars. Look, if it’s that important to you and you need it, take it. Go do what you’ve got to do. Because when you learn how to make money with people – like I said, man, we’re all friends. We’re here to share this world, for a very short amount of time, guys. So I challenge you, man. We’re sharing this world together. Don’t get upset about little things in life. A bad day is not a day that you wake up with oxygen in your lungs. A bad day is when you try to wake up, and you don’t have any oxygen. That’s a bad day. Let that define a bad day for you. And everything else is not a bad day. I mean, we’ll lose loved ones, and that’s tough and that’s rough, right? But other than that, just be easygoing in life. Enjoy life.

Ash Patel: Yeah. Nate, we’re going to pause here, and we’re going to pick this up with a part two tomorrow. But how can the Best Ever listeners reach out to you?

Nate Barger: The BRRRR Invest Group on there. We have over 125,000-130,000 people, and there’s a ton of knowledge on there. That’s on Facebook. I’m on YouTube. I’m on Tiktok. Tiktok kicks me off all the time, but I still love you guys. They kicked me off if I’m driving in the car something. But yeah, I’m on there, and I’ve got an academy if you guys are interested. Every Monday at eight o’clock PM Eastern Time we go live, and we share one of our deals with you. In the past 30 days, we pulled out about $3 million in cash-out refi’s. So I’m going to be sharing one of those deals next week. I’m going to do a write-up on it this week as well.

Ash Patel: Awesome. Nate, thank you so much for joining us. Best Ever listeners, thank you for joining us, and have a best ever day.

Nate Barger: Thank you, brother. You guys have an awesome day.

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JF2623: Managing the Manager and the Use of KPIs with Gary Lipsky #SkillsetSunday

Serial entrepreneur Gary Lipsky started his entrepreneurial journey in college with a meal delivery service. Now, he has $41M of multifamily assets under management. Today, Gary is talking with us about the KPIs he uses for assets and employees, how to effectively manage your staff, and his favorite accountability tools to keep his team on track.

Gary Lipsky Real Estate Background: 

  • Full-time active syndicator in multifamily for 19 years
  • GP on four properties, and an LP on another seven properties
  • $41MM AUM in multifamily, as well as some single-family flips ($7MM)
  • Based in Manhattan Beach, CA
  • Say hi to him at:  www.breakofdaycapital.com

 

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TRANSCRIPTION

Ash Patel: Hello, Best Ever listeners. Welcome to the Best Real Estate Investing Advice Ever Show. I’m Ash Patel, and I’m with today’s guest, Gary Lipsky. Gary is joining us from Manhattan Beach, California. He was a previous guest on our podcast. So if you google Joe Fairless and Gary Lipsky, the episodes will show up.

Gary, we’re glad to have you back. Thank you for joining us, and how are you today?

Gary Lipsky: Yeah, thanks for having me back. I love the podcast.

Ash Patel: Awesome. So today is Sunday. Best Ever listeners, we’re going to do a Skill Set Sunday, where we talk about a particular skill that our guest has. Gary is a full-time syndicator and has 19 years of investing experience. He has over $41 million of assets under management.

Gary, before we get into your particular skill set, can you tell us a little bit more about your background and what you’re focused on now?

Gary Lipsky: Yeah, I’ve been an entrepreneur even growing up as a kid. I started a restaurant delivery service while I was in college, kind of like a DoorDash and Postmates. Certainly didn’t have that vision then. I co-produced three independent films in my 20’s. I also had an OutdoorEd Leadership Development, an outdoor education company. I sold that at the end of 2016, and I had been investing in real estate. This allowed me to get into real estate full-time and learn as much as I could before I started doing my own deals.

Ash Patel: So you don’t sit still.

Gary Lipsky: No, I get accused of that a lot from family, and whatnot. Yeah, I like to keep busy.

Ash Patel: So Gary, you said you’ve been investing in real estate a long time. Was it the typical route, starting out with single families, progressing to multifamily?

Gary Lipsky: My very first investment was a house I was going to live in, and I looked at that as an investment, not like I was going to live in it for 40 years like my parents. So we bought the house, no money down. We were in debt. We opened up the kitchen, we converted the garage to my office space… And that was quite honestly, how I was able to afford the house. I was charging my business on rent money too, and then having people — we were working out of the garage. We had like four or five people working on the garage at one point, going in the house for the bathroom. Eventually, I bought another house and converted another one into a single-family rental, and was looking for four units and six units, but eventually, I learned from others about really going bigger, and that it’s much easier to do, let’s say a 40-unit or an 80-unit, versus buy myself a four- or eight-unit. And I’m glad I went that route; it really opened the doors to really rocket fueling my business.

Ash Patel: What was your first large multifamily investment?

Gary Lipsky: It was a 42-unit deal in Tucson. We paid $1.6 5 million for that, and then our second deal, we went to a $15.3 million deal in Phoenix. We’ve since sold both of them.

Ash Patel: And you said “we.” Did you raise money for both deals?

Gary Lipsky: Yeah, I was a GP on both deals, and I had a couple other partners as well. If I didn’t partner up, I wouldn’t have been able to take down those deals myself. Obviously, everyone knows real estate is a team sport, and it was great to be able to partner with others and have their input and their expertise and share our resources, and that really helped get my real estate career going.

Ash Patel: Gary, did your partners have syndication experience?

Gary Lipsky: On the first deal, one of them did and one of them didn’t. So it was good to be able to share — gaining that confidence, because when we’re looking at deals, particularly your first one, you’re nervous, you’re typically way over-conservative in your underwriting, and it’s great to have someone that’s done it before and kind of give some insight and participate in all the meetings, and whatnot.  They give you confidence. So you can go after those bigger deals.

Ash Patel: Gary, your particular skill set is effectively managing larger properties. Why is it easier to manage larger properties?

Gary Lipsky: Economies of scale. Having full-time people that are working on your property and you can hold them more accountable. You have a lot more turnover on these smaller properties when they’re not full-time. So you get a much more quality person to manage, and it certainly makes that easier.

Ash Patel: You hear a lot, “go bigger, faster”, but a lot of people take that with a grain of salt. They’re naturally conservative, or fearful rather. What advice would you give to people when they don’t necessarily buy into the “go bigger, faster” philosophy?

Gary Lipsky: I get it, everyone is different. But when you can partner up with someone, then maybe you’re more willing to go bigger and partner with people that — they can help raise some more money. Maybe their skill set is managing the manager and your skill set is finding the deal. So pooling resources is so important, and you could take down these bigger properties, you could get better at loans, you can get better staff… You’ll get lower property management fees. Your property management company will also pay more attention to you too, the bigger the deal as well. So there are a lot of advantages for going bigger.

Ash Patel: A lot of advantages. What are some of the pain points in growing?

Gary Lipsky: Certainly, stepping out of your league on these bigger properties – it takes a while to implement a business plan. On our first property, it was a 42-unit, we implemented our business plan really quickly, quite honestly. When we got to 128-unit, it’s moving a ship. It’s a big ship. It’s not a little robot that you’re turning. It takes more time. There’s more problems. But thankfully, you’re paying someone to do that job on a daily basis. Now, again, you’ve got to hold them accountable. You’ve got to set really good expectations. You’ve got to stay consistently on your checklist, because at times it’s like herding cats… But if you have a good attention to detail, then you’re way ahead of the game.

Ash Patel: Key Performance Indicators. Can we dive into the KPIs that you use both for assets and people?

Gary Lipsky: Yeah, very important. So your property management software, which you will have access to, will provide some KPIs. But we use RealPage, and it connects to the RD-software, and we get over 100 KPIs. But certainly, there’s ones that we want to focus on, and NOI is a big one. There are all these different things that feed into it. So we’re going to look at that as a whole, and then break down all the different things.

So one of the things we like to look at for leasing is where are our leads coming from, and where are we getting conversions from? Because just because let’s say, ApartmentGuide is bringing me 200 leads in a month, I might only get one conversion from that. So I want to carefully track where I’m getting the most conversions, and how I’m spending my money… Because if I’m cognizant of cost per conversion, that’s going to save me a lot of money for this property and for other properties. It’s going to be different from city to city, and maybe some submarket to submarket, so you’ve really got to pay attention and break it down, and that’s what KPIs allow you to do, really break everything down. So you analyze it, figure out where there’s bottlenecks or whether there’s issues. But if you’re looking at anything as a whole, you really can’t figure out where any problem lies.

Ash Patel: I would imagine the hardest part of all of this is still managing your staff. How do you effectively do that?

Gary Lipsky: On our weekly property calls, we have a Google sheet that we have, and each week, we have a different tab for our property report. And we also have a tab for tasks, and on those tasks, someone’s name is assigned there, what needs to happen, by and when, and when it’s completed. And Google Drive is free to use, there’s no cost factor, so there should be no excuse not to use it, and it really holds people accountable. You don’t want to show up the next week, if you had something to do and it wasn’t done. It’s there for everyone to see. So we’re not trying to gotcha anyone, because that’s not what we’re trying to do, but people write notes down little pieces of paper, like me, or forget, that happens. Everyone’s got a bunch of different things that they’re working on. So it’s just having that up there for everyone to see. We have our meeting Monday, and Wednesday you’re like, “Did I have something to do this week?” And you can go and see it, and if your name is there, then you can get it done. And having that accountability tool is really key.

Break: [08:45] to [10:18]

Ash Patel: I’m a fan of Google Sheets, and we’ve tried a lot of different task managers and collaboration software. Is that what you solely use to manage people’s tasks?

Gary Lipsky: Not solely. We’ll use a Trello board as well, and again, you can get that for free. So we’ll use that on unit renovations. So our renovation team will see when we have a unit that’s going to become available, and they’ll be notified as well. We know what lead time they need to make sure they have all the appliances, everything they need in advance. They could move it along the Trello board. “Okay, we’ve now demo-ed it, we’ve now done this.” So we can see where we stand on all the unit renovations, our leasing team can see it, so they’d make sure that, “Hey, we’re going to get this thing leased up” and someone moved in as soon as it’s ready. We don’t want to have any dead time, in a perfect world. But that’s another collaborative tool we use. We’ve also been using monday.com, which I like as well, and again, that’s another free tool that we have a lot of data on there.

Ash Patel: And was the first one Trello, T-R-E-L-L-O?

Gary Lipsky: Yep.

Ash Patel: Okay. Well, Gary, you’ve got a well-oiled machine right now, but I want you to go back to when you had the growing pains. What are some hard lessons that you learned?

Gary Lipsky: Building systems from day one. We didn’t know what we didn’t know. Excel is a really good tool, but putting together systems or holding people accountable, tracking everything… Because if you’re not tracking it, it most likely isn’t going to get done, or you’re going to forget. I can’t recall any times where we really screwed up, quite honestly, because I’ve had that business experience, but building those systems is really important as we continue to grow, and that’s helped a lot. In the beginning, you’re chasing deal after deal after deal, and not necessarily building those systems. And [unintelligible [00:12:03].01] you stop and build those systems, you’re really setting yourself up for success for the long haul.

Ash Patel: And in terms of attracting and communicating with investors, what do you use?

Gary Lipsky: We use Mailchimp. We went to ActiveCampaign for a while. We’ve kind of switched back to MailChimp. ActiveCampaign was kind of doing weird things when you’re emailing things out. Some people swear by it. Whatever you use, you just need to be consistent. Tell people what you’re working on.

I think my mistake in the beginning was, if I didn’t have a deal, I wasn’t reaching out and building my investor database, and you’ve got to forget all that, even if you haven’t done any kind of deal. Talk about what you’re learning. You need to prime your investors, and I was very slow on doing that in the beginning. So that was one of my mistakes.

Ash Patel: So how should people starting out do that? Is it just a monthly email, a newsletter? What would you recommend?

Gary Lipsky: A monthly newsletter talking about different markets that they’re looking in, sharing some data, priming potential investors for a potential deal. And that won’t be your only form of communication, but when you see that person, you may talk about things that you’re doing, and refer back to that newsletter, but you’re preparing people to invest in real estate. And quite honestly, there’s a lot of people who don’t know this amazing opportunity to invest in real estate. All they know is they’ve got this financial advisor, and it’s stocks or a mutual fund. So it takes some time for people to get comfortable.

I’ve got some good friends that jumped on board with me right away, and some other friends that are just very, quote unquote “risk averse” to this, even though this is the best risk-adjusted returns out there. They’re very slow to come on board, because it’s just something different and new to them.

Ash Patel: And what do you do to educate those people that are hesitant to come on board?

Gary Lipsky: I never force it down their throat. They’re going to come around when they come around. And when they hear that we sell a deal in under two years for 2x, their ears perk up. We talk about all the different things that we’re doing, and deals filling up right away, and they want to be a part of that. So one of my one, they get involved or they’ve heard of their friends getting involved, and they come around. But it’s really got to be on their timeline. You can’t force anyone into it. You want to make sure they really understand what they’re getting into. And it’s cool, when they finally do come around and they get excited about the deals, and oftentimes, they start bringing their friends too. So once you get a few deals under your belt and you’ve got some exits, it really makes it a lot easier to raise money.

Ash Patel: Is there a way you can encourage existing investors to get their friends involved?

Gary Lipsky: Referrals are important. A buddy of mine set up a dinner the other day, it was like five couples and friends that people were asking him about it. So he did that on his own [unintelligibl [00:14:51].10] but we wrote a book, Best in Class. And so what we are doing is asking all of our investors if they want us to send it to any of their friends that are interested in investing in real estate, and send it as a gift from them for the holidays. So that’s one of the things we’re doing. We’re always asking for referrals. Some people are really good about it, some people aren’t, but you have to make that ask, and you have to give them something for that as well. So the book is a useful tool; taking people out to dinner is another one, just to get to know someone, a friend of a friend. So those are things that you could be doing, and just constantly cultivating those relationships.

Ash Patel: How do you reward somebody for getting referrals to you?

Gary Lipsky: I take them out to dinner, buying them a nice gift, and saying thank you… And even if that person doesn’t invest, sending them a thank you, buying them a nice gift. A small gift is just a fraction of a cost of finding a new investor that may be coming back deal after deal or bringing someone else [unintelligible [00:15:50].17] So the cost is so minimal, and that’s I think in life anyway. Any kind of referral to an insurance agent, a broker, whatever it is, I’ve always been one to cultivate my network, and I do a lot of favors for other people, and conversely, people know that I do that and do favors for me and introduce me to other people, because I’ve been good to them. So it’s really important to cultivate that network, not just from a real estate investing perspective, but life in general; it’ll come back in spades.

Ash Patel: And what do you think about outsourcing that investor relations? Is that something that you have team members do, or do you and the other principals handle that yourself?

Gary Lipsky: I do have an operations manager that helps set up emails and sets up calls and stuff, but I still like that one-on-one communication with the investor, and maybe down the road I just can’t do it as I continue to grow, but I do like to get to know my investors. I want to make sure they understand what they’re getting into. It’s all about relationships. I’d rather do less deals and have smaller amount of investors that I’m friendly with, that I have good communication with, than be this kind of business where I don’t have those personal relationships… Because at the end of the day, that’s the most important thing.

Ash Patel: Yeah, you’re not looking to just turn and burn.

Gary Lipsky: Yeah.

Ash Patel: Gary, if you look at a typical day for you, what is the one thing you wish you could change, add or subtract from your day?

Gary Lipsky: I guess, the social media piece. It’s a necessary evil, and I’m getting my team to do more of that for me. But I don’t want to be all over social media. But what I do like is, like I said, that relationship building with brokers, with investors, with peers. So you do need a little bit of that, and social media. And I love going to conferences, like the Best Ever Conference, or meetups, and get out there, talk real estate. You’re always learning something new from someone else, and that’s the beauty of this industry. You could be doing this for many, many years, but someone else might have a new idea. So that’s what’s great about going to these events to see what other people are doing.

Ash Patel: Alright, you’re an outgoing guy. Why do you dislike putting yourself out there on social media?

Gary Lipsky: [laughs] You know, it’s funny. I’m a bit of an introvert, but it’s just time-consuming, quite honestly. Posting, and whatnot, and responding to others… It does suck up a lot of time, when here I am, trying to do more deals and manage my business. But I also don’t want to have someone responding as me too, because I’ve built relationships with these people, and I just don’t want a quote unquote robot responding. So it’s tricky.

Break: [18:25] to [21:18]

Ash Patel: I’m going to give you unsolicited advice. I think you should be the one posting and responding, and do it less frequently. If you want it to be authentic, I would rather interact with you than a member of your staff pretending to be you, right? I want to know what you have going on, I want to hear about your day, when you have a tough morning, a tough deal… I think that’s what builds relationships. So I’m going to challenge you to do more of that, and I’m going to follow you.

Gary Lipsky: Alright, Ash. You’re on.

Ash Patel: Awesome. So going forward, what are your current pain points and/or bottlenecks?

Gary Lipsky: Yeah, we need to grow our team. We’ve been talking about adding an asset manager/ acquisitions person. We’re just getting all the benefits together, but that’s coming out, and I’ll probably hire someone by the time this podcast comes out, but that’s a pain point, growing my team. And finding good deals. With the cap rate compression, it’s hard to find good deals that work. We just got an off-market recently, but just finding good deals…. But things have been going very well.

Ash Patel: Alright. Gary, I’ve known you now for about 20 minutes, and I feel like you’re going to systemize the hiring process. What is it that you would do? Would you create the job description, would you create the KPIs, how the person is going to be bonused, all before looking for the hire? And then, what attributes and where are you going to look to hire that person?

Gary Lipsky: Absolutely. So my assistant [unintelligible [00:22:39].19] some other job posts before, so she kind of built it out, and we’ve talked about the expectations and what we want out of this person, and then we’re posting out to our networks, and on Indeed. We’re looking for a real go-getter, a real problem solver, someone that’s going to fit within our culture, and be with us for the long haul.

Ash Patel: And how do you weed people out in an interview?

Gary Lipsky: Yeah, that’s a really good question. I’ve done hundreds of interviews in my lifetime, and sometimes I nail it, and sometimes I don’t. You know, it’s frustrating. But sometimes, you need to hire someone, you might fail, and hire the wrong person, fire quickly, but then after you’ve had that person, you might have learned things that you should have asked or looked for that you didn’t necessarily at that first time. So you check their references, you try to get a good feel… It’s funny, my last hire – I just had a feeling like she interviewed pretty good, she really wanted a job, but her resume wasn’t a perfect fit for this, but we took a hunch and a gut feeling and she’s been fantastic. So sometimes you’ve got to go with a gut.

Ash Patel: Yeah, I thought the story was going to end bad. I’m glad that that worked out for you. That’s great. So what’s next for you guys?

Gary Lipsky: Continue to build the company, do four or five deals a year… I’m focused on Phoenix and Tucson, but we’re looking at some other markets as well. I’m partnering with some other people, building our team out, and we’re big proponents of asset management. We’re not going to take on more deals if we can’t asset-manage our properties correctly. So that’s first and foremost, taking care of the properties that we currently own and keep doing good work.

Ash Patel: What markets are you looking in?

Gary Lipsky: So Phoenix and Tucson is us, but I do have some partners looking in Texas markets. I’ve invested as an LP in a number of different deals, and Joe as well. There’s a lot of markets I love, but I can’t be an expert in all of them. Some of the partners that I’m working with are experts in those markets, and we’ll potentially partner up and do some more deals.

Ash Patel: I love that philosophy. Just like you partnered up on your first syndications. Even though you’ve achieved all the success, you’re still looking to partner up and grow your business. So thanks for sharing that. I love that. So a typical investor in one of your deals – what’s the hold period, and what’s their return look like?

Gary Lipsky: Typically, it’s a 2x return, we say in five years; we’ve been doing that in 2-3 years. Deals have been moving pretty quick as you know, so it could be a three-year hold time… But we’d rather underpromise and overdeliver, because then investors will keep coming back for more. So we’ll typically say, 3-5 year hold time, 2x their money, 15% to 18% IRR, but cash-on-cash is getting tighter and tighter these days too, so investors need to understand that. Potentially, there could be zero cash flow in the first 6-12 months these days, because there’s so much loss to lease.

Ash Patel: And is that your metric on when you sell, if you can 2x your investor capital?

Gary Lipsky: Yeah, for the most part; we want to hit our projected return… And someone brings us an amazing offer, and we also want to understand — if it’s a newer asset, maybe we refi and hold longer; if it’s an older asset, then we want to get out a little quicker, because you’re going to have more deferred maintenance. So each asset, each market is a little bit different, and we’ll have those constant conversations with the broker on a yearly basis, to see where the market is going, what kind of deal we can get, where we stand on our business plan, is there a ton more room to go… Or we also like to take advantage of time value of money. If we’ve maxed out our business plan and it doesn’t make sense to refi, then maybe we look to sell. If we can refi, and we still see more gains down the road, then we’ll hold longer. So you’ve got to evaluate each property on its own.

Ash Patel: Is there a sweet spot that you’ve found in terms of how long to hold a deal from an investor’s perspective?

Gary Lipsky: It’s interesting… So some of the older-time veteran investors – they’re not in any hurry to sell. If you want to hold it 10 years, they’re fine with that. Some of the newer investors – they want to see more turnover. They want to get their cash out and invest in another deal. So I would say that sweet spot is, let’s say, four or five years, depending upon your investor base.

Ash Patel: Yeah, I think that was well said. I’m an LP on a number of investments, and when they go five years, it’s almost like they’re getting stale. They’re still returning capital, but it’s like they’re getting stale. It’s like, “Hey, let’s do something else.” Like, “Give me my money back, and let’s find another deal.” So that’s great. I think for our Best Ever listeners, if you have older investors, they’re really looking to park money. They just want to grow it. They may not want as much turnover. But anybody under 50, I would say – I mean, they kind of want to turn and burn. They want the excitement of new deals, right? Interesting.

Gary Lipsky: Yeah, absolutely.

Ash Patel: Awesome. Well, Gary, thank you so much for being on the show, sharing a lot of your knowledge, building systems, and partnering with other people. You’ve given us a ton of advice.

How can the Best Ever listeners reach out to you?

Gary Lipsky: You can go to my website, breakofdaycapital.com, and I’m on Instagram, Facebook, LinkedIn. So connect, let’s talk real estate.

Ash Patel: Awesome. And I’m going to follow you as soon as we hang up here, and I want to start seeing some posts. [laughs]

Gary Lipsky: Alright, sounds good.

Ash Patel: Awesome. Thank you again. Best Ever listeners, thank you so much for joining us. Have a best ever day.

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