JF2527: Using TV Ads to Grow Your Motivated Seller Leads with Tony Javier

After burning out from 10 years of struggling to succeed in real estate, Tony Javier looked for ways to automate his business. Today, we’re talking with Tony about using TV commercials to grow your motivated seller leads on autopilot. He tells us the top 5 benefits of using TV ads for investors, what channels he focuses on and why, and how he does this for even smaller costs than direct mail. 

 

Tony Javier Real Estate Background:

  • Full-time real estate investor
  • 19 years of real estate experience 
  • Portfolio consists of 100 properties and 800 flips
  • Based in San Diego, CA
  • Say hi to him at: www.realestatemastersTV.com   
  • Best Ever Book: The 12 Week Year

 

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JF2526: 4x Your Revenue with Hotels with Nate Barger

After filing Chapter 7 bankruptcy at 35 years old, Nate Barger decided it was time to get more creative with his investments, so he shifted gears to hotels. Now, he’s working on an $80M Hilton build in Sarasota, FL. Nate talks about hotel scalability potential, possible risks of hotel investing, and why he would choose hotels over multifamily any day. 

 

Nate Barger Real Estate Background:

  • Full-time real estate investor 
  • 16 years experience
  • Actively involved as syndicator, syndication, apartment owner, hotel owner, warehouse, office
  • 1500+ current doors
  • Owns over $100 million dollars assets under management
  • 4 hotels including a Hyatt, Hilton, and Marriott
  • Based in Cincinnati, OH
  • Say hi to him at: www.NateBarger.com

 

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JF2525: Getting Higher Returns with Flood Zone Properties with DJ McClure #SkillsetSunday

Today, we’re talking with National Flood Experts’ Director, DJ McClure, about the benefits of investing in flood zone properties and how to use them as a value-add tactic. DJ discusses the flood zone creation process and how he works with FEMA to change flood zones, and how you can use this to your advantage to acquire properties other investors are probably passing on. 

 

DJ McClure Real Estate Background:

  • Director of National Flood Experts — a firm focusing on reviewing flood zones to uncover cost savings to properties
  • National Flood Experts has helped add over $100M in property value
  • Based in Tampa, FL
  • Say hi to him at: www.nationalfloodexperts.com

 

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JF2524: When 150 Units at 100% Occupancy Becomes 14 Units with Andrew Cushman #SituationSaturday

When a natural disaster hit Panama City Beach, Andrew Cushman went from 150 units at 100% occupancy to 14 units in a matter of three hours. In today’s #SituationSaturday, Andrew tells us how he handled investor conversations before and after the hurricane, insurance best practices, and how to plan for natural disasters and actually benefit financially. 

 

Andrew Cushman Real Estate Background:

  • Full-time apartment syndicator
  • 13 years of real estate experience 
  • Previous guest on episode JF868 in 2017
  • Portfolio consists of 2,100 apartment syndications
  • Based in Orange County, CA
  • Say hi to him at: www.vpacq.com 

 

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JF2523: Finding Deals in a Low-Inventory Market with Ruben Kanya

Today we’re talking about fostering long-term relationships to create deals for now and years to come. Ruben Kanya gives us his best tips for making genuine connections to create an inventory for himself. He talks about his approach to finding deals, his follow-up process for getting straightforward answers, and how to be more effective in your outreach.

 

Ruben Kanya Real Estate Background:

  • Full-time Business Analyst, Licensed Realtor, and Director of Invested Talent
  • 5 years of real estate investing experience
  • Helps investors find large apartments
  • Followed the Joe Fairless model in creating a thought leadership group 
  • Based in Atlanta, GA
  • Say hi to him at: www.experimentrealestate.com 
  • Best Ever Book: The Millionaire Fastlane

 

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JF2522: Limited Partners Exposed | Actively Passive Investing Show 52

In today’s episode of the Actively Passive Investing Show, Travis Watts explains what limited partners do for a living. He talks about the 5 different categories of limited partners, and 3 reasons why you may want to consider entering into a limited partnership to ultimately make retirement and time freedom tangible for you.

 

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JF2521: 7 Steps to Better Financing with Henry Washington

Henry Washington spent most of his young adult life with little to no savings and less than great credit, until one day when he realized he didn’t have the means to fund his future. When he decided to buy his first rental he found out he was $19K short, so he got creative. Henry talks about how he bought that property with no money down, and his step-by-step process for getting better financing today.

 

Henry Washington Real Estate Background:

  • Owner of Independence Realty Group
  • 3.5 years of investing experience
  • Portfolio consists of 67 rentals, 32 flips
  • Based in Northwest Arkansas
  • Say hi to him at: www.henrywashington.com
  • Best Ever Book: The Alchemist

 

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JF2520: Outsourcing to Maximize Profits with Cody Sperber

After 15 years in the industry, building a successful business wasn’t an obstacle for Cody Sperber. Once he perfected his marketing and became a “transactional engineer,” he realized it was best to focus on his strengths and outsource/delegate/delete the rest. In this episode, Cody talks about how his mindset shift led to making even more money, without just focusing on cash flow and profit. 

Cody Sperber Real Estate Background:

 

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JF2519: When to Walk Out on a Deal with Anthony Vicino

Anthony Vicino got involved in real estate as a college student with his roommate and his dad, although he quickly realized sometimes it’s best to keep work and play separate. Anthony emphasizes the importance of cultivating and preserving relationships in the industry by adding unique value. He discusses some hard lessons learned while working with investors, and how to ensure a committed investor every time. 

 

Anthony Vicino Real Estate Background:

  • Full-time investor/entrepreneur 
  • Co-Founding Partner at Invictus Capital, a multifamily acquisition firm
  • Portfolio consists of 150+ units/12 properties
  • 10+ years experience
  • Based in Minneapolis, MN
  • Say hi to him at: www.invictusmultifamily.com & www.anthonyvicino.com
  • Best Ever Book: Meditations

 

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JF2518: Reaching Financial and Time Freedom with Ali Boone #SkillsetSunday

While spending 5 years as an aerospace engineer, Ali Boone put any time and energy she could into leaving her corporate job. Now, she’s training others how to hack their minds before hacking their wallets in her new book, Not Your How-To-Guide to Real Estate Investing. Today, she’s sharing specific hacks for saving time, money, and your sanity. 

 

Ali Boone Real Estate Background:

  • Owner of Hipster Investments, focused on helping investors purchase turnkey and off-market rental properties
  • Current portfolio consists of out-of-state rental properties, primarily turnkey, and more recently added Southern California properties in Venice Beach
  • Hipster Investments managed to facilitate over $18M in real estate in its first 5 years in business
  • Based in Venice Beach, CA
  • Say hi to her at: www.hipsterinvestments.com/besteverfreebook

 

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JF2517: Working Less and Making More with Trevor Mauch #SituationSaturday

After a near-death experience due to being overworked, Trevor Mauch realized he needed to focus on more energy-enriching business practices. Like many business owners, he created his business to give him freedom, impact, and grow his finances, but instead it trapped him in an endless cycle of constant grind. Trevor talks about how he honed in on his motivation and overcame burnout by working less and ultimately making more. 

 

Trevor Mauch  Real Estate Background:

 

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JF2516: Perfecting Your Investor Relations Strategy with Ted Greene

Today, we’re deep-diving into speaking with investors, coming from the perspective of Investor Relation Manager, Ted Greene. Ted gives us his tips for communicating with new investors as well as continuing the conversation with his current investors. He even clues us in on his overall process from the first contact with a new investor to when they actually decide to invest. 

 

Ted Greene Real Estate Background: 

  • Investor Relations Manager at Spartan Investment Group
  • 20+ years of real estate experience
  • Portfolio consists of 14 properties, 10 of which have gone full circle 
  • Based in Golden, CO
  • Say hi to him at: https://spartan-investors.com/ 
  • Best Ever Book: Self Storage Domination

 

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TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners, and welcome to the Best Real Estate Investing Advice Ever Show. I’m Theo Hicks and today we’ll be speaking with Ted Greene.

Ted, how are you doing today?

Ted Greene: I’m good. Thanks for having me.

Theo Hicks: No problem. Thanks for joining us. Looking forward to our conversation. A little bit about Ted. He is the Investor Relations Manager at Spartan Investment Group and has over 20 years of real estate experience. Their portfolio consists of 14 properties and they’ve taken 10 properties full cycle. Their headquarters are based in Golden, Colorado, and the website is spartan-investors.com/.

So Ted, do you mind telling us some more about your background and what you’re focused on today?

Ted Greene: Sure. Boy, going way back into the early 1990s, I started at Merrill Lynch as an Investment Advisor right after college. And I turned that into almost 25 years of asset management at Merrill Lynch UBS Financial Services and was the Chief Compliance Officer for a number of years. A friend of mine and I, we launched a retirement account facilitation company, which we subsequently sold to a large group out of New York, and after that project wrapped up, I reconnected with Ryan, who’s one of the owners at Spartan Investment Group, and joined Spartan last summer as an Investor Relations Manager.

Teo Hicks: Great. And so, as a manager in Investor Relations, what does your day-to-day, week-to-week look like? What kinds of things are you focused on?

Ted Greene: I get to play in my sandbox. I enjoy people; I’ve got a little scarred tissue. People have different backgrounds and different paths to where they’re at now. Last week on (I think it was) Wednesday, I got to talk to 10 different potential investors for Spartan, and that’s abnormally heavy. But on a day-to-day basis, I get to interface with existing investors and new investors to Spartan, which are a little secret, but I can’t believe these guys pay me to do what I do. It’s really fun. It’s a way to keep a pulse on what’s happening in the marketplace, and I truly enjoy it.

Theo Hicks: Nice. So you speak with the current investors and then prospective investors. What types of things are you guys talking about? Maybe just like an example, what’s a common conversation that you have? So you schedule to talk to Theo Hicks at noon on Wednesday – how does the conversation kickoff? What are the things that you guys talk about? Is it mostly Q&A? Or is it more getting to know each other? And the reason why I’m asking is just kind of extract some best practices that people can use when they’re speaking with investors, coming from someone who has been doing this for so long.

Ted Greene: Yes, so — a broad overview of our corporation, our infrastructure, the asset types that we focus on, which predominantly is self-storage, Class B, Class C properties. But when we really start to dive into the plumbing of what makes this work, I’m trying to get the conversation teed up so that we’re looking at the net operating income increase that comes from an expansion of a storage facility, and I want to compare and contrast that slowly with the investor as compared to their bond portfolio. Many investors have a wad of doe in their corporate 401K. And what we’re seeing is the age-old rule of thumb – your age, a percent sign behind it, that’s what you should have in the bond market. Okay, but the bond market is at zero, so what do you do? Do you really harvest some gains from your stock mutual funds in your 401(k)? Truthfully, not a lot of investors actually do that. Tthey tell themselves, “I’m going to watch it really close.” But like we saw with COVID, nobody got out of the stock market before COVID.

So anyway, let me get back to answering your question. Investors are looking for a bond surrogate. And when we dissect how the increase in net operating income divided by the going cap rate of the marketplace, we’ll call it somewhere between five and six, if you can add 100 units at a storage facility, you’re really looking at probably a $1.2 million increase to the value of the property. So if you can add 300 or 400 units, because you’ve got some big, grungy-looking parking lot in a neighborhood that’s growing, you’re really onto something.

So in the bond market, when interest rates go up, bond values mathematically go down; there’s a huge difference between coupon and yield. And investors, if that doesn’t resonate, take some time tonight to digest that. So as interest rates may rise at some point in our lifetime – and maybe it’s coming sooner than later – there’s a decline in value. And just a teaser here, by the way, everybody, as some of us are aware, the Department of Labor just this past summer, in 2020, has made the announcement that private investments are now eligible to be held inside the target maturity mutual funds, so that the 2030 mutual fund or the 2050 retirement date mutual fund in your 401(k) is going to start to include private investments, multifamily, industrial, retail, you name it.

So anyway, back to the question, Theo. We’re driving at why valuation over the next 3-4 years, simply has to grind higher, even in the face of a rising interest rate environment. And that’s such an interesting conversation to have with investors, because it’s not uncommon to have a $1.5 million or $2 million in a 401(k), and we’re kind of nervous about the stock market… And now wait a minute, let’s look at the self-directed IRA opportunity for some of your retirement dollars and let’s look at how we push values higher due to our deep value-add bias. So I ran long in the [00:06:44].28] but I like it; it’s fun, it’s really important to investors. And once you get your arm around the mechanics of driving net operating income higher and why that pushes the market value higher, we can handle a 10-year bond that’s yielding 3%. We can handle that.  So that’s what I do.

Break: [07:04] to [09:05]

Theo Hicks: That totally makes sense. So basically, you give an overview of the company, what you guys do and then explain to them the value proposition of the company, which is that increase in NOI that comes from adding a storage unit. So after you had this conversation, this typical conversation, do you find typical objections that you get from people that you speak to? Or by the time they speak to you, they’re already on board investing, they just need some more understanding education on what it actually looks like?

Ted Greene: Yes, I think that investors, this notion of putting assets with a syndicator, probably 50% or 75% of the time, it’s the investor’s first time they’re talking with a syndicator; and that just kind of has to germinate and grow on the mind of the investor. Now people don’t just rush out and spend. Our minimum is $50,000 for either debt or equity. People don’t spend 50,000 with just a month or two, so you have to kind of grow it. But when you start to peel away the layers of investing in real estate, a lot of people have considered, “Well, maybe I’ll buy a condo that’s 800 square feet or 1,500 square feet.” And when we analyze, “Well, okay, where’s the value-add? Well, I’m assuming it’s just going to appreciate in value, Ted.” Well, now, wait a minute, we’ve got QE infinity, at some point that ends, and what happens if interest rates start to rise? And what happens if the market value starts to correct? And do you really have enough cash reserve should that asset sit empty? And Theo, I am in no way frowning on any portion of a real estate portfolio that is carefully selected, because you really should maintain exposure to the core four. But you also need to have a game plan; hope is not a strategy.

So when we start to drill down on, “Okay, mathematically, how can we both get comfortable with the argument for why gain exposure to the asset class.” Don’t put a gob in. Maybe 2% to 10% of your liquid net worth should be in a private investment. And measure the maturity dates; don’t have everything coming due in four or five years. Don’t have five projects coming due in five years. Be measured in when you place that capital, and have a laddered approach to your guess as to when they mature. But anyway, our approach is intriguing, it’s mathematical, and we’re just driving net operating income higher, which pushes market values higher in the face of a rising interest rate environment. It’s just fun.

Theo Hicks: You kind of highlighted my next question by saying that when you talk to them, these ideas kind of germinate in their mind for a little bit, and think about it, because this is the first time they’ve talked to a syndicator. Typically, how long until someone invests? And then from that first point of contact to them deciding to invest, what’s your process? Do you just talk to them one time and then let them loose to think about it, and then they come back, great, and if not, then that’s fine? Or is there a very specific follow-up process you have where you email them once a month or you call them once a month or something?

Ted Greene: After my initial call, I really encourage people to just go do a deep dive on our YouTube channel, where we dissect pretty much every topic that relates to self-storage, bonus depreciation, how to read a K-1, what’s our underwriting process, what does it look like. The list goes on and on, of the 10 or 15 minute YouTube videos that we have. And I just tell people, line up your favorite two or three topics and push play when you’re in the car. And instead of listening to NPR, listen to one of us goofballs at Spartan Investment Group, and just come along with us and get to know us. Our investment process – it’s a soft commit, so the investor completes a subscription agreement; it’s not binding, they don’t need to send the funds. And because our deals do get subscribed fairly quickly, it’s a good way to get your place in line, and then you can back out and you don’t have to follow through and fund the investment.

So back to the question, it’s an ongoing dialogue. The last thing Spartan wants to do is have somebody feel pressured; we would like them to comfortably grow their understanding of our marketplace, certainly know the risks, don’t get out over the end of your skis by way of your personal liquidity. We’re looking for investors that are with us 10 years from now, 15 years from now, that are on the Holiday Card list, we’ve done a couple of transactions with, but they also have syndicators in other asset classes that they’ve gotten to know, like and trust. And so that’s the game. And don’t hurry something like that, I guess that’s my point.

Theo Hicks: Sure. That makes sense. So you talk to them, you tell them about the YouTube videos, but then are they coming back to you, and you put the ball in their court? Or is there some sort of follow-up that you’ll do after a certain amount of time just to touch base and see if they’re ready to invest, or they want to learn more, or talk again? Or is it just all kind of in their court and then if they come to invest, great, and if not, then you’re giving them time?

Ted Greene: It’s really in their court. The appetite currently, I think because for a short period of time multifamily has taken a little breather – maybe that’s the way to put it – and not in all markets, but in some markets maybe investors have a couple of allocations, so they’re looking for a different type of allocation… We don’t have as much deal flow as we have interest for deals, and that’s because our CEO, Scott, was an army captain in Iraq and he doesn’t like getting in bad situations, I can promise you that. The co-owner of Spartan is a former commercial airline pilot, Ryan, Mr. Checklist, we call him, and he doesn’t want to get in a bad spot either. So there’s an appetite for more deal flow.

So investors hear from us by email when we have a transaction we’re bringing, but it’s really on the investor to circle back to us, to monitor our electronic communications and outreach when we have a deal that’s available.

Theo Hicks: Got it. Are those the only emails you guys send out, just when you have a deal, or are you sending out newsletters to your investors as well?

Ted Greene: Existing investors, we communicate monthly. And we do video calls quarterly with a broad overview of the portfolio on a quarterly basis, but then monthly electronic communication as to updates. So we try to stay in front of the committed investors that are partnered with us on a monthly basis.

Theo Hicks: And then the prospective investors, they only get contacted with a deal?

Ted Greene: Correct.

Theo Hicks: Okay, Ted, what is your best real estate investing advice ever?

Ted Greene: I think investors really need to have an attitude that the investment dollars that they have should be protected. I recently had a couple of people in the office here —our headquarters are at Golden, Colorado, and then Ryan and Jackie and I are in Seattle, and a couple of people were in the office… And as a side conversation, one of the gentlemen mentioned that he was looking at a duplex to buy; he just needed the down payment, I think it was a $650,000 purchase price. He just needed the down payment, and he was going to have to find it from a different investor. And what occurs to me is there’s not a lot of room for things to go wrong. And behavioral economics is a thing in Academia because it’s a thing in the real world. And we’ve had the wind to our back the last decade, quantitative easing, low-interest rates, and I think some investors may be persuaded or encouraged to look at the marketplace and just think “Things just go up. They always go up and you don’t need to plan for things to go wrong.” And as sure as I’m sitting here, that’s not real world; the business place, it’s a fistfight at times, and other people want your assets, but they don’t want to pay you what you want to be paid, and it’s dangerous. What if you have an A/C unit go out for your storage unit or your multifamily apartment building, and then you get a property tax increase? You could blow through $250,000 by Friday of this week, if both of those things happen.

So I think a lot of people just think, “Look how much money I can make”, as opposed to the first question really should be “How bad could this be for me?” And things can change. Nobody saw COVID coming. We might be at a 10-year bond yielding 3% by June of this year, who knows? So proceed with caution; be jealous about your assets, protect your assets, make sure you’ve got plenty of liquidity yourself, and if you’re going to put your money in somebody else’s hands, you want to know that they know what they’re doing.

Theo Hicks: That’s great advice. Ted, are you ready for the Best Ever Lightning Round?

Ted Greene:  Yes, let’s do it.

Theo Hicks: Okay. First, a quick word from our sponsor.

Break: [18:11] to [20:14]

Theo Hicks: Okay, Ted, what is the best ever book you’ve recently read?

Ted Greene: There’s a book out that was written specifically for storage, which is— that’s our sandbox. The book is called Self Storage Domination. Jim Ross and Matt Van Horn wrote that. That’s a good one. It gives you clarity as to how an asset should go up in price if you build a bunch of storage units in some dirt or gravel parking lot, and just increase the footprint by 50%. It’s not rocket science, but there’s a lot of meat in that book.

Theo Hicks: If your business were to collapse today, what would you do next?

Ted Greene: I think I would do the same darn thing with Ryan and Scott. But I would suggest to them, “Let’s start with the receivers.” And receivers are court-appointed trustees of a corporation’s assets that has gone insolvent, and usually it’s some kind of bankruptcy filing… And a small bank – this is not a Bank Of America or Wells Fargo request, but the small banks that are facing a charge-off on their balance sheet, they just want that liability paid. So if somebody shows up and says,” Hey, we’ve got 8 million bucks. Why don’t you let us take that asset off your hand for the 8 million that was owed to you? You don’t have to take a write-down, you will get traction.” So I would be willing to be the tip of the spear on that approach, because that’s got legs, and I think we’ve got a number of people in the current operating market that are a little bit extended, and unfortunately, that does come back to roost eventually.

Theo Hicks: [unintelligible [00:21:54].11] this question for the best ever deal, so you can take it one of two ways – you can talk about the best ever deal that you’ve been involved in, or maybe a time that you spoke to an investor and it ended up being the most amount of money that anyone’s invested with Spartan because of this conversation you had with them.

Ted Greene: We like tertiary markets or markets that are out of the downtown; we’re not going to ever buy a property in downtown Seattle. We do have a property in Black Diamond, which is a smaller town, 30 minutes away from Seattle. And this is three years ago, before I was a part of Spartan; three and a half years ago actually. Ryan got a hold of some property just outside of Black Diamond, and that was just a couple of million dollars; $2.5 million to $3 million for purchase and entitlements. That property July or August of this year will have the certificate of occupancy, and that is somewhere between $25 million and a $30 million asset. So of course, we’ll wait till we’ve got [unintelligible [00:22:56].24] to do anything with it, but it’s nice to go from a place you’ve got a bunch of big old cows – we all love a good cow – it’s nice to see that move through that whole lifecycle, and now we’ve got a big class A property sitting there that… It’s cool. It’s just cool.

Theo Hicks: What is the best ever way you like to give back?

Ted Greene: With Scott’s background in the army, we’ve got a number of non-profits that we support; the Special Forces Foundation, Rescue Freedom, the University of Michigan’s Neurology Department, the Second Wind Foundation come to mind… I think there’s a couple more out there, but they’ve slipped my mind.

Theo Hicks: And then lastly, what is the best ever place to reach you?

Ted Greene: The best place to find me is on LinkedIn. So Ted Greene on LinkedIn was—pardon, I’ve got an “E” at the end of my name… And that’s probably the best way to track me down.

Theo Hicks: Perfect, Ted. Well, thank you so much for joining us today and providing us with your best ever advice. We really went into a lot of detail on what the process looks like, from speaking with someone for the first time, maybe it was their first time ever speaking with a syndication group, to them eventually investing in their first deal, and then have everything in between. So I really appreciate you going into a lot of detail on specifically what you guys do to bring an investor, first time talking, to investing in the deal.

And then your best ever advice, which was all about making sure you’re protecting your money, whether you’re investing it yourself or investing it with someone else, and making sure that you don’t have that attitude of, “Well, things are just going to just always go up and up and up, and I can do whatever, and it’s going to be perfectly fine.” Don’t think that way. Make sure that your assets are protected.

So Ted, again, I really appreciate you coming on and speaking with us today. Best Ever listeners, as always, thank you for listening. Have a best ever day and we’ll talk to you tomorrow.

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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.

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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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JF2515: Top 5 Best Practices for Effective Investor Relations | Actively Passive Investing Show 51

In this episode of the Actively Passive Investing Show, Travis Watts lays out the top 5 best tips for good investor relations. He discusses one of the main pieces of information syndicators don’t talk about (and why you should), how to be more attractive to investors online, and what you need to be doing before going out and raising capital.

 

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TRANSCRIPTION

Travis Watts: Hello, Best Ever listeners. This is Travis Watts, your host of The Actively Passive Show. Theo is out today on a break, so you’ve got me, and I figured I’d do a really short solo episode on something that kind of baffles me that we’ve never covered on the show. It just felt right to do it as a solo episode, and I’ll tell you why here in a minute.

The topic is The Five Best Tips for Investor Relations. So at the end of the day, yes, I’m a full-time passive investor; that has to do with my investing preference of where I place capital. But on the active side, I am Director of Investor Relations, and prior to doing that, I created an investor relations platform for a syndication group, and prior to that, I worked investor relations with Fidelity Investments. So investor relations is really kind of my world, at least on the active side. So I felt like this could be a really powerful beneficial episode for both passive and active investors, and I’ll tell you why.

If you are an active investor – we’ll start with that – it’s pretty obvious, you either have to be Investor Relations yourself if you’re going to be a one-man or one-woman show, or you’re going to have to hire someone for Investor Relations. So this, without a doubt, will be helpful for those folks. And on the passive side, you need to know what type of group you’re working with. As a passive investor, who is the communication source? Are you talking directly to the general partners? Are you talking to an investor relations rep? How many do they have? What questions might you want to ask them? And are they in the know? Are they following some of these best practices, so to speak?

So that’s just my take on it by the way. Speaking with thousands of investors, this is just kind of a quick five best practice recap, in my opinion. So certainly not to say this is all you need to do, and there’s certainly a lot more we could talk about… But I’m going to keep the episode short, and that is the topic of today.  So I’m just going to knock into it here, right off the bat with the takeaways…

The first thing I would say, to active and passive investors in relation to Investor Relations – make sure the investor relations rep is discussing the good and the bad in the conversation… Because it’s all too easy for us – and of course, I’ve been guilty of this, everybody has – to speak about the positives and the best-case scenarios and “Wow, what a strong past performance track record we have blah, blah, blah.”

Everything you read and see, obviously, is going to show you the highlights of the best, and it’s going to try to paint the picture for what things could be. But make sure if the investor relations rep is not bringing it up on their own, that you bring it up. “Have you had a deal gone bad? What if interest rates double? What if – blah, blah, blah” Make sure that you have those conversations and that there is an answer to them. I’m not saying there’s a right or wrong response to those, just that they’ve thought it through and that they’re willing to talk about it and not shy away from it.

You can create a lot of skepticism among investors if all you ever do is talk about the positives. And some of the first podcast I ever did where I was a guest speaker, talking about passive investing, was just that. It was, “Oh my gosh, it’s great, and it’s this, and it’s a benefit, and it’s a pro.” And then eventually, I did that a couple episodes, and one of the hosts stopped me and says, “Wait a minute, wait a minute, wait a minute. It can’t all be good. It can’t just all be rainbows and butterflies here. Tell us the real story.” And it really got me thinking, “That’s true. I really need to give the other side of the coin in fairness, to promote transparency.”

So that’s number one, discuss the good and the bad. Listen for that. Look for that. Do that if you’re in that kind of role.

Break: [04:14] to [06:15]

Travis Watts: Number two, be visible. I would say it’s not a great idea if you’re active and you’re new to this space to just go out and start trying to raise capital and promote a deal if you have no presence on social media, you have no website, you have no blog, you have no podcast, you have no thought leadership platform. If somebody goes to Google, types in your name and nothing comes up, I would say there’s probably a mistake, because limited partners like myself, we do due diligence. We look up firms, we look up people, we’re are trying to read between the lines, figure out who is this person. I like to watch people do speaking presentations and talk to an audience, so I can try to read their character. So you’ve got to get out there, you’ve got to be visible.

And also on that note, I know there’s a lot of people and/or firms in the syndication space that maybe they prefer one social media outlet. Maybe they’re very heavy on Facebook; they’re posting every single day on Facebook, everything’s on Facebook, their blog’s on Facebook, their video’s on Facebook. But what about all the investors who are on LinkedIn and they don’t do Facebook? What about all the people watching YouTube that don’t go to Facebook?

So I would say this – put a little bit of content on as many outlets as you can, versus putting 1,000 posts on only one outlet, that would be my take on that. So be visible; you’d be surprised to get people reaching out all the time, “Oh, I saw this Instagram post you put up, and that was like a year ago or whatever it was.” Or “I heard you on so and so’s podcast” and that was not even a recent thing. So be visible, be a guest on people’s podcasts, maybe launch your own podcast… It really depends on you, your strengths, your time commitment etc., but be visible nonetheless.

Alright, number three – professionalism. So a lot of newer groups reach out to me because now I’m kind of known as the passive investor guy in the space… So syndication groups that are newer will reach out and say, “Hey, can you take a look at our website?” or “Can you take a look at our slide deck or our company prospectus or our deal overview? Tell me what are your thoughts from a limited partner investor.” They want to make sure obviously that they’re putting out something that’s going to be marketable, that’s going to be competitive, and they’re looking for me to tell them red flags. And I’m happy to do this stuff by the way. I think it’s great, and I appreciate everyone who has reached out to do that.

It always gets back to professionalism though… I’m telling you, almost everything I look at, especially from newer operators – I find typos, glitches, generic Google pictures that are blurry in there… It looks like oftentimes it was made on PowerPoint. And that can be fine if it’s made on PowerPoint, but use professional templates, professional-looking fonts and just don’t get too weird with it. And the average overview for a deal is probably 30-60 pages long. I can’t tell you how many have been sent to me that are five pages. “Here’s our company. Here’s our deal. Here’s the data. Here’s the Contact page.” Don’t do that, be professional. Look at some groups that are doing it successfully in the industry and mimic, to an extent, what they’re doing. Look at their templates and their professionalism.

Also, when you have calls with investors, if you’re going to be an investor relations rep or anything even related, what you say and how you say it matters a lot, and first impressions, the old gold standard, they go a long way. So when I do calls with investors – if you guys are tuning in right now on YouTube, you can see me, but I’m usually wearing a buttoned-up shirt or maybe a sport’s coat, and I’ve got my hair done and stuff, I don’t have chaos happening in the background. Use a green screen or something if you have to; buy a professional microphone.

But I’m telling you, I’ve shown up on these calls and I’ve had people apologize for showing up in their T-shirt and shorts, because — I wouldn’t say I’m dressed up, but I’m professionally set, I’ve got a lighting kit going, all this kind of stuff.

So you don’t have to take it too far, you don’t have to be in your tuxedo or whatever taking calls, but be industry professional, I would say.

Any communication you have, anything you write or post online, your videos etc., remember your demographic, which is what we’re going to talk about next. Who are you really presenting to? High net worth, high-income individuals. Don’t you think those individuals most often, they buy into that. They’re doctors, so they have to wear professional-looking wardrobe, they have to speak professionally, they don’t have typos and errors all around their office and on their paperwork… So they look for these things. So you don’t want to be a red flag to them.

So let’s talk about that. Let’s talk about target audience. Funny story. Years ago, I was just getting into public speaking, and I wanted to start with some smaller events. I had a buddy in Orlando and he was doing a local real estate meetup group, and I said, “Great. Real estate investors, Orlando, that’s where I live.” So I said, “Okay, let me help you with it. Let me kind of co-sponsor, I’ll co-speak, I’ll co-promote… Let’s do this.” So I can’t tell you how much time I put into this. It was quite a bit. But I marketed this event, we got a whole bunch of people to fill seats, we found a venue, we rented things out, we brought in food and water etc. I made a PowerPoint presentation, polished it off, dressed up nicely, showed up, had rehearsed this thing 100 times, came in and literally just killed it. It was great. It was a great presentation beginning to end, audienc is clapping, and it was a great deal. I thought, “Man, this is awesome. I crushed it.”

Well, only one problem. Not one person in that audience was an accredited investor, as it turns out. As we mingled afterwards and we had our list of attendees, not one person was accredited. And what I was ultimately trying to do is network with accredited investors.

So lesson being, know who your audience is, know what they do, where they hang out, what they like, and get in front of that audience the right way; it saves you so much time and energy. I see so many ads for syndication stuff, and I just think, “Man, they’re kind of missing the target with the message.” So maybe hire someone, a consultant or a marketing director or whatever’s in your budget. If nothing else, when you have an idea that you’re going to post or something you’re about to put a lot of time into, run it by three, four or five people in your network and just see if they think that’s a good idea. Maybe you could do that for free.

Break: [12:34] to [14:42]

Travis Watts: Number five, wrapping up here, is respond quickly. It’s something I pride myself on, it’s something I pride other people on. I very much respect when I’m an investor and I’m looking to invest in someone’s deal, I send an email, because let’s say they just had a webinar last night, and the next morning I say, “Okay, I watched the webinar. Here’s my three questions” and I get a response back or I get a phone call. That’s another thing. If I make the phone call, do they answer their phone? Okay, if they don’t – fine. Do they call me back? Same day? No. Next day? No. A week later? You’re looking for these things as red flags as a passive investor. And if you’re active, I can’t tell you how important it is. There’s a fundamental concept here, it’s that it doesn’t matter whether you are ready to pitch your deal to somebody or you’re ready to do your presentation. What matters is when the customer is ready, when the investor decides, “Yep, I’m going to put 100k into this deal,” and then they send you an email or call, you better be on it; that’s money burning a hole in their pocket. And if you’re not going to be responsive or give them what they need, they’re just going to find another deal and park the capital there and say, “Sorry, missed out this time, maybe next time.” And that’s a huge deal. So even if you prefer working Monday through Friday or whatever, I would say be open on the weekends to texts and emails, especially those urgent like, “Hey, I’m looking to invest. I just have a couple questions,” or “Where do I send my funds?” If you get that on a Friday, don’t put it off till Monday; respond to that as fast as you can. It’s a form of professionalism, first of all. It’s unprofessional to blow people off and not respond. It is professional to get back with people in a timely manner.

So that’s pretty much the five recaps, if I were to pick five, that I feel are very important, that have proven themselves over and over to me.

And the last thing I’d say kind of in closing and in recap is just be adaptable. This goes for anything in life, but adapt. Rapid changes in today’s world with technology and new social media platforms coming out, COVID happened, you’ve got to be adaptable. Before COVID, I was going to in-person face-to-face conferences and real estate meetups nationwide. That was like my whole gig; week-to-week, that’s what I did. And all sudden, no conferences, no face-to-face. I had to be adaptable. I had to pivot; when one door closes, you have to pivot and look for another door. So something to keep in mind.

One of my mentors years ago told me, “Double down on what works.” So as you’re experimenting with all these things, you’re posting on Instagram and Facebook and LinkedIn and BiggerPockets, if something starts working, if you start getting a response out of it, double down; post more there. Don’t exclusively go to it, like we talked about; still post a little everywhere, but double down on what’s working.

So I appreciate you guys tuning in. Hopefully, found that helpful. Again, this is Travis, Actively Passive Show. Theo, will be back next week. This was just kind of a biweek, so I thought I’d do this solo episode. Thank you guys so much for tuning in. If you have any questions, send them to theo@joefairless.com. We’ll see you next time.

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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JF2514: 30 Banks and 30% Down to $3.6M Homes with Stephanie Walter

When Stephanie transitioned into multifamily, she may not have expected her first syndication to be a fraternity house in Colorado; however, she’s an expert in trying new investments that are out of her comfort zone. Since then, she’s added retail, apartments, and soon, development for multimillion-dollar homes all in different markets. She talks about her biggest challenges and where she’s found the greatest return on investment, as well as her exit strategy. 

 

Stephanie Walter Real Estate Background:

 

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JF2513: The Urban Development Framework with Franklin Spees

Franklin Spees wasn’t new to the property management game when he and his wife decided to start a company of their own soon out of college. Fast forward to today, and he’s working on developing 74 2,000 square-foot commercial units. Tune in to learn about the 4-step process to effective condo conversions, how to successfully pre-lease before construction is even completed, and why land ownership may be your next business venture.

 

Franklin Spees Real Estate Background:

  • CA licensed broker, attorney, consultant, syndicator, and property manager
  • Currently VP and Partner of a law firm
  • Owns a small portfolio of single families, small multifamily with a few passive LP positions in multifamily syndications
  • 20+ years experience
  • Based in Fresno, CA
  • Say hi to him at: www.NeighborhoodREI.com
  • Best Ever Book: Multifamily Millions & The 4-Hour Workweek

 

 

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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 with our guest today, Franklin Spees. Franklin is joining us from Fresno, California. He has over 20 years of experience and is a licensed broker, attorney, consultant, syndicator, and a property manager. Franklin is the Vice President and partner of a law firm and owns a portfolio of single-family, small multifamilies and is a passive investor in multifamily syndications.

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

Franklin Spees: Thank you, Ash. I’m doing well. Thanks for having me.

Ash Patel: Great. Before we get started, can you tell us a little bit more about your background and what you’re focused on now?

Franklin Spees: Yeah. So I started in real estate back in — I think what really got me going was even going back to being an RA in college, when I worked for a property management company as an RA; that was sort of my initial exposure. Then I moved down to San Diego in grad school, I went to law school, my wife went and got her master’s in San Diego. And they decided to buy an apartment complex and asked us if we wanted to manage it after we just got married. So that was a 16-unit complex in San Diego. And that really got us thinking about real estate specifically. We started a management company, began managing some other properties for others. That actually took me into doing some condo conversions, co-founded a company called Condo Conversionsat the time, and we probably did 75 entitlements of apartment buildings back when that was hot. And that market sort of dried up and I moved over to actually working at a law firm, a land use and entitlement law firm in Escondido for about a year. I quickly realized I didn’t want to sit behind a desk for the rest of my life. I got my broker’s license, went and started doing some land use entitlements for a cell phone carrier. It was Cingular back in the day. And that then led me to doing some entitlement work and some development for a large retailer. So it was an architectural and entitlement firm in LA, working with Home Depot’s and Walmart’s in the Western states, doing some site development and pre-development applications at cities and whatnot.

And full circle, came back to Fresno with now a wife and a few kids and worked as an urban planner in the city of Fresno; processing on the other side of the counter – it gave me a lot of good experience to see the full circle of development and real estate in general. I worked on some land use, updated the general plan and zoning ordinance at that time.

Then stepped out, went back into the private practice of law about a fraction of my time. Again, that’s probably the highest tax dollar that I earned; very active, being an attorney. As I mentioned, I own a property management company. We’ve grown that to about 600 doors. I also do my own transactions, I do about a dozen transactions for other investors, and now I’m into real estate syndications and doing a little bit of everything.

Ash Patel: I’m speechless, and I don’t know where to start, other than – I’m going to make a comment. For any of you Class C minus landlords that you think you have it hard, try being the ultimate property manager, an RA for college students.

Franklin Spees: Yeah, you are not kidding.

Ah Patel: Let’s start right at the top—condo conversions. Now, that seems like a really appealing area, where you take an apartment building and essentially condo-ize it.

Franklin Spees: Yeah, it was great at the time. And actually, as we all know, I’m in California, and the affordable housing – they call it a crisis, and in some respect, it is very real. In urban areas, big hot markets, I think at that time were Florida and San Diego, areas of Florida and San Diego. And so there was a need for affordable housing, and you go through the process with a tentative tract map using a land surveyor to create an association through the state, and then you can essentially sell those off individually. And it was a great opportunity for folks to buy something in the market, where you’re buying a two-bedroom apartment that is now a condo; they, otherwise, wouldn’t have been able to get into the market. So there’s a lot of pros and cons with it. The city really tightened up and they were worried about all the apartment housing stock going away and being converted to ownership. But yes, it was a great opportunity at that time.

Ash Patel: Why do you say, at that time? Why can’t you replicate that today in another city who doesn’t have stipulations against it? Because it seems like a really great way to add value.

Franklin Spees: Yeah, it definitely is. Again, I think that some cities were very favorable towards it, some cities would cap it. You also had some apartments that are better situated to be made condos for ownership, and some that aren’t. And so sometimes maybe it was forced in some situations when — usually, when you have a Condo Association, there are some amenities, whether that be storage or common pool area, barbecue and things like that. So cities really were reluctant to just convert everything that they had, because an apartment owner could go in and buy anything from a sixplex to 50 units and flip it into condos, and then sell individually, and then the developer’s gone, and now you’ve got these tenants that need to work together with this association that was hopefully funded well, with a reserve study.

So when done right, it can be very great. But I think there’s also a balance, we need apartments, we need affordable housing, we need condos and we need single families and all the way up. So we need the whole spectrum of housing.

Ash Patel: Franklin, what about doing that with an office building, small to mid-rise office, selling those off as condo units?

Franklin Spees: Yep. And I was involved in less of those, but even industrial spaces as well. So the concept of fractional ownership essentially is very attractive, can create opportunities for those who instead of renting something small for the rest of their life, whether it be your house, your primary residence, an office condo, an industrial condo, lots of different things – it does provide ownership opportunity for folks. So yeah, I was a part of that, primarily residential, but saw it in commercial and industrial as well.

Ash Patel: And another really alluring area is the cellphone towers that you were involved in.

Franklin Spees: Yeah, so this was really my first introduction into really entitling land. So I would essentially go out with a radio frequency engineer and we’d be looking for areas that would make sense to add coverage for these various carriers. And I’m sure probably the tech has changed now, and eventually, Elon’s taken to satellite cellular service, whatever that looks like… But at the time, it was really interacting — you’d go out to a farm or you go to a church and you say, “Hey, I’d like to lease this area, and we’re going to put this fake tree or fake rock or ugly antenna on your property and try to make it work” and they could generate some income from it. So that had an appeal for folks, and that’s what I did at that time.

Ash Patel: Franklin, I’ve read on a lot of forums where people are buying property, and there’s a cell phone tower on there with a long-term lease. Any advice to those people? Is that a positive? A negative?

Franklin Spees: I think it can be a positive. I think where it’s located is important. I think aesthetically, it can be unattractive. People were concerned that it could cause cancer or some other health problems. But I don’t believe the science has panned out on that. It’s more of an aesthetic issue and it takes a significant little footprint. So you often you’ll see it in commercial buildings or you’ll see it on churches or industrial buildings… It’s not very appropriate in a residential interface.

Ash Patel: Interesting, good to know. And then you moved on to entitling land for retailers. What was that like?

Franklin Spees: I was working in urban areas in LA, Inland Empire, and had a project in Hawaii. But it was during a time when the Walmarts and Home Depots were expanding, and just as they were starting to constrict a little bit their expansion domestically, but it was essentially going out and working with the brokers who would identify properties for these large retailers, and then they would need to lay out a site. So you’d work with the developer, the broker and then lay out a site plan, [unintelligible [00:09:08].07] with all the truck movements and traffic access, and then the pads, and then your major anchor tenant.

So my direct client was Home Depot or Walmart, and you would go in and you’d lay it out. And then once it’s been internally approved, you take it to the city and you negotiate the whole process of entitlement, the general plan, land use and the zoning, and then all the restrictions. And then as you can imagine, all the adjacency issues, too. Some people are rolling out the red carpet for Walmart, and other people are bringing out the protesters. So that was quite an experience, working in that regard. But it was a great experience introducing me to commercial real estate and seeing the timeline and the value. And I think at the time Home Depots were generating on average in those types of areas about a million dollars a week. So every week that you delayed in your entitlement process, you felt the pressure of, “That’s $1 million essentially, that is gross profit that’s lost by the store.” So it’s a highly intense environment.

Break: [10:05] to [12:06]

Ash Patel: Franklin, when you say “entitlement”, what does that mean?

Franklin Spees: The simplistic way to look at it is just a piece of property that is within a municipality, it needs a certain level of approval. So you’ve got zoning and you’ve got different areas within your city where you can allow certain types of uses. And it used to be that you throw all your residential in one area, industrial in another area, commercial over there, and you divide it all the uses. Well, now the cities are trying to blend some of those back together, because it’s less friendly to transit in our environment, and so you see a lot of mixing of uses. But essentially, when you entitle land, you are basically getting an approval, going through a process through the planning department and working with all the city departments to approve a property for a specific type of use. And some of those are a by-right use with a site plan review, some of those are conditionally approved for the conditional use permit, you hear that term CUP… So it really is receiving local approval for an intended use that you intend to do on the property, whether that be adaptively reusing an existing building, or building new construction.

Ash Patel: Thank you for that. So now you’ve seen a lot of landowners get very wealthy through cell phone towers, retail, condo conversions… Are you enticed to try to find land that you can do the same thing on?

Franklin Spees: I mentioned that I’m on my fifth real estate syndication, and the first four of those were value-add multifamily; we did an additional portfolio three properties that were 450 units in Visalia, Tulare and Kingsburg. Then did another 300 units in Reno last October… But those were very much the vanilla model of adding value through inserting capital and raising rents over a period of time, and a capital event – either refi, cash out or sale of the property.

Right now, my fifth syndication is actually in the city of Madeira. We’ve located a 16-acre piece of property, it’s vacant land, and it is currently being entitled to build multi-tenant light industrial spaces. So we have 74 2,000 square foot bays, each with its own yard and roll-up door, and essentially taking that land and building those out over about a 12 month construction period, to then fill that and then sell that within a 30-month period. That’s really what I’m involved in right now, and that’s sort of a pivot from multifamily in California, specifically in the Western states, where all of your listeners will know that it’s extremely competitive to find those value-add deals that were somewhat readily available for 4-5 years ago. It’s very competitive now, all over the country. Everybody that I know is looking in every state; you used to really specialize in one particular Geography. Now, you’re having to look out all over the country for these hot areas where you can find these large value-add deals.

So all that to say is I’m still very much interested in residential value-add deals, but the group that I’ve partnered with at the moment, which is Warehouse Partners, which you can google and find that online, we’re syndicating this multi-tenant light industrial, and the demand for that right now is extremely high. I think the industrial vacancy rate in California is below 3% right now, and specifically in Madeira I think it’s less than 1%.

And then you niche down into these multi-tenant spaces, which will be for lease… But the next phase of it actually might be, as we talked about before, we might put a final map on that and provide those condos where folks could come in and buy those units as well. So there is an extreme demand for light industrial space up and down California right now.

Ash Patel: Can we dive into that project?

Franklin Spees: Absolutely.

Ash Patel: So you said 74 2000 square feet units.

Franklin Spees: That’s it.

Ash Patel: So are these bay doors where you could drive in?

Franklin Spees: That’s exactly right. So oftentimes, you think metal building and you drive on the freeway, and you see a kind of a beat-up metal building that looks rundown with a roll-up door – it is that in some respect, but it will be new construction. And working with the city, it’s actually in a really decent part of town, just West of the freeway, near a regional park and a fire station… But essentially, it will have full security cameras, lights, it’ll have an automated gate, 24-hour access, and when you come into it, you really see these four buildings that are very linear. And exactly as you described, they are 2000 square feet, where you’ll see a roll-up door, it’s evaporative cooled on the interior, and then it’s got a little shoebox office about eight by 10 that has its own split system, AC. And then you’ve got a backyard, a gated yard.

So it really is catered towards the Small Business contractors, the cabinet guy, the pest control guy, the pool guy, the window tinting guy… And we really have a tight program that doesn’t allow for certain incompatible uses, such as automotive uses, where you’re changing oil or doing mechanic work, or cannabis uses. We also don’t allow churches and athletic gyms, just because of the parking toll that that can take.

So really, the group that I’m working with has got a good feel for exactly the profile of tenant that works well in this and the demand is there. So we’re really looking forward to taking a million-dollar piece of dirt, adding $16 million in construction, and about a five and a half cap in 30 months, we’re projecting the project’s going to be valued at $21 million to $22 million.

Ash Patel: So building 74 of these units seems really ambitious… Are you doing anything to line up tenants pre-build?

Franklin Spees: It’s a great question, and that actually hits on one of the challenges as it relates to lending. If you don’t find a lender that knows this particular area, it becomes very difficult, because a lender really wants to see, do you have leases lined up? Typically they’re looking for your 5-10 year leases, long-term, tenants, triple net. This is very different in that the profile of the tenant we’re looking for—if we were to put a sign out there today, they are not thinking, “Hey, in 30 months, I’m going to come in and sign a 12 or 24-month lease.” These are small businesses that are moving up literally out of their garage sometimes, or sometimes they’re scaling down from 5,000 to 10,000 to 15,000 square foot building that is oversized for them that they’ve kind of had to make work. You can also take these units and combine them together. So you could take one 2,000 bay and put it next to a two. And sometimes you’ll go up to three of them. And you just punch a hole in between them in the demising wall and use a forklift, which is big enough for access between the three. So you can move up, you can move down… It’s a very flexible space for that specific type of tenant profile.

Ash Patel: Yeah, I know a lot of HVAC tenants, cabinet makers that literally are outgrowing their space. And you’re right, it’s, “I need something now.”

Franklin Spees: That’s exactly right. You also have a lot of last-mile delivery; with e-commerce, as we know, there were lots of winners and losers as COVID hit, but even before COVID you’ve got e-commerce that’s just taking off. And there’s a lot of demand for this micro-warehousing, logistical space spread out in order to have that merchandise and that ability to get that merchandise out very competitively within one or two days.

Ash Patel: So, Franklin, how does that sit with your lenders when you tell them that these are all people that we’re going to get last minute, but don’t worry, we’ll fill it up?

Franklin Spees: Essentially, what we’re going to do is we project that at the moment that we are done with construction – because really the construction period is not that complicated, right? We’ve got a simplistic way of looking at it; you’ve got a concrete slab and you’ve got a prefabricated metal building that needs to go up. And so construction will take about 12 months, and there are four different buildings. So as soon as construction begins, there’ll be a sign up and we figure that we will attract and pre-lease about 25% of the units.

And then once we actually open, so that will be 25% within our financial model, within our projections for our investors, because we’re structured as a 506(c) fund, that we are projecting that is only going to take us about a lease a week or week and a half through the remaining 30 month period to fill it up. So that’s really the plan, is to have it 25% pre-leased and then knowing that we can lease it on average through the remainder of the period, to still hit those projections and be able to seller refi at month 30.

So getting a lender that’s on board that understands industrial space… We’re not shopping the large lenders, it’s really — we’ve looked at private money, we’ve looked at smaller community banks, but these smaller community commercial banks, we’ve been very encouraged for their terms and how welcoming they are once they really understand the business model. And again, looking for those that already have some familiarity in the space.

Break: [20:58] to [23:05]

Ash Patel: Franklin, what’s the process to transition these two condos?

Franklin Spees: First phase that we’re doing will not be condos; the second phase, or even successive projects – because the goal is to place multiple of these up and down the state and maybe even Western states. But essentially, if you have a building that you’re building new construction, the goal would be at the same time to place a map on that property, so you really provide the ability to have individual parcels, even though you may at lease them as if they were rental spaces on the front end with the ability, you’re preserving the right. Once you put that map in place, whether you’re mapping an existing building or you’re putting the map on at the same time — so right now we need a site plan review through the city in order to build this first phase.

If we wanted to, we could also concurrently file a tentative tract map and finalize that map which would be in perpetuity that could sit on that property. So it’d be entitled as site plan review for leasing it, but you’d also have in the background, on that property, you’d have the map that would allow you if you decided in the future, you could then go through the process through the state to do a reserve study and create an association and begin selling those off individually.

Ash Patel: And once you build it, what’s the process of reverting it to condos, if you build it as normal rentals?

Franklin Spees: Well, if you had the map in place, then again, it would be just as I said, is that you’d go through the state and there’s essentially an approval process and there’s a reserve study that needs to be put together… Essentially, if you’re putting people in a position to be able to buy those units, and let’s say, the developer is then exiting, well, there needs to be a plan in place. When I say reserve study, just like a typical Association in the residential world, you need to be able to anticipate that useful life of all the different common area amenities and things that will be cared for by the association, from paving to roofs and exteriors to the gate. So there needs to be some sort of initial reserve amount and then everybody needs to pay continually. And then there’s some sort of organized body, an association that would have a board and the group would make decisions. But that would really provide the ability for individuals to begin buying their unit. And again, they would have a piece of real estate and they’d be essentially putting some money back in their pocket, as opposed to paying it out in a lease to somebody else, and then they could sell that for value as well.

Ash Patel: And I would hope that an HOA of business owners would be much better run than a residential HOA, hopefully.

Franklin Spees: Boy, I would have to think that yes. I mean, I think we’ve all had our experiences with residential HOAs and that can be challenging.

Ash Patel: Yeah. So now you are an urban planner as well.

Franklin Spees: Well, I did work for the city for about six years as a planner, and that was essentially receiving projects that come into the city, people are building; people are expanding, whether it’s a subdivision, a commercial shopping center, or they’re just adding a garage. The whole variety of things that you need to go to the city for in order to build, construct or change use. So I did that. And one of the things that allowed me to do that really was having the law degree and the previous real estate experience.

They were looking for somebody that was coming from the private sector to come and add that different perspective. And really, one of the components of my role was, I hosted a meeting for any developer that would come in – we call it the Development Partnership Center, where I would have a roundtable of folks where you’d have a representative from planning, Public Works, public utilities, PD, fire, Valley Air, and have everybody come around the table, and a developer walks in and says, “Hey, I’d like to do this subdivision. I’ve got these preliminary plans.” And you get comments from everybody around the room, before they spend the money on the application. Before they get really down into the details, they need to know; is there a major sewer extension that needs to occur that’s going to blow the budget? Where are the hydrant? Where are the public infrastructure needs? And what are the development impact fees? All those types of things that developers are just really hungry for at the beginning in order to project out their budget. So it was very helpful for developers to be able to have sort of a one-stop shop, a peek behind the curtain before they really go all-in on a project, acquiring the properties, spending all the dollars to begin developing it. And then finding a surprise later down the road. That’s the last thing that developers want to hear.

Ash Patel: That is a great strategy. I want to circle back on your light industrial development. From your investor standpoint, what are the expected returns?

Franklin Spees: Great question. And I would say what we are projecting as our minimum investments right now, we’re looking at about a 1.57 equity multiplier for the LPs. And the reason I say right now is that for some of your listeners, many of which are probably much more familiar with the structure than I am, but this being my fifth, I’ve seen several different types of structures. So the way this one is structured is it’s a limited partnership, and it’s a reg D 506 (c), which means we can publicly solicit the property, all of the investors are accredited, it’s $100,000 minimum investment… And when folks come in, they can anticipate receiving a return.

But what’s interesting – this is unique for me, at least, in that usually in a value add deal, you come in and you say the property’s 97% occupied, and you’re going to go in and put $12,000 to $15,000 of each door and eventually turn it over, but you’re never going to wipe everybody out. So you’re always going to have income, the property will always cash flow during that period of time.

Let’s say you had a 40% attrition where the tenants are naturally moving out, and then you’re moving some around, and eventually, in 12-24 months, you can turn over a 300 unit building without dipping much below 95%, maybe 90% occupancy.

With here, we start with dirt. As we’ve gotten investors, for us, that’s about a $6 million or $7 million raise. So the day we make that capital call, people are anticipating a return, but there is no income on the property obviously. So what we do is we begin a pref. So we’ve got a 10% pref that begins day one at the capital call, that will just accrue going forward. And then once we begin filling the property, we’ll eventually begin to cash flow. And as the waterfall works, that money that comes in that’s positive cash flow will flow back to fill up that 10% pref for all the investors. And then on that capital event, when the property is sold, once that 10% profit is full, then there’s a split essentially with the investors, and then on the backend disposition, and there’s a split with the investors as well as the proceeds.

So all the investors get all their money back, they get all their pref prior to the GP actually taking any participation in the split, in the upside as they say.

Ash Patel: That’s an incredibly fair way to do things for your investors. Thanks for sharing that.

Franklin Spees: Yeah, absolutely.

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

Franklin Spees: I was thinking about this listening to some of your other podcasts… And I would say, become an expert in one particular area. Well, I didn’t take that approach. I went out and I became a real estate attorney first, then I became a real estate broker and then I started doing land use entitlements. And I started condo conversions and property management and real estate transactions and getting into syndications… And I really sort of wanted to get experience in all areas of real estate, and having enough expertise in those areas that it really synergizes and made me better in each of those areas for having my foot in all those areas.

So I would say, what’s beneficial for me now is that when I approach somebody and say, “Hey, I see your deal, I see what you’re doing. I’d like to come in and partner with you.” Well, they look at me and they say, “Okay, I see the value that you can bring to our partnership, whether it be raising capital, whether it be coming in and helping with the entitlements through the city, whether it be helping with the transaction or just providing general legal advice.” I have the ability to wear all these different hats and just provide some expertise.

So I would say to your listeners that the best thing you can do is first focus on the value that you can bring, and then the opportunities as you’re going out and looking for those relationships, the doors just open. I think that would probably be my best advice.

Ash Patel: I love that advice and I wholeheartedly agree with you. Franklin, are you ready for the lightning round?

Franklin Spees: I am.

Ash Patel: Let’s go. What’s the best ever book you’ve recently read?

Franklin Spees: Okay, I read a book not too long ago… It’s called Multi-Family Millions by David Lindahl. And everything in the book that I thought was the best advice or actually stuck with me — but it was this concept that this guy was using that’s just this creative approach to investing and how to control assets with as little personal capital as possible in it, so that you could do multiple. But just the way he approached every deal with the amount of creativity, it really got me thinking about looking at every deal creatively, from financing to adaptively reusing, to the group that you’re involved with. So that got me going.

And then the other one I’ll say that it’s really a non-real estate book was The 4-Hour Workweek by Tim Ferriss. Again, getting my mind, stepping out of the traditional structures of you go to school to be a lawyer and then you’re a lawyer for 40 years. You get your real estate license, and you go in and you do transactions. It just kind of blew the doors off for me and said, “Hey, start a business, use these tools, high tech, and how to scale it, and the 80/20 rule and all that stuff.” So those couple of books had a real impact on my career.

Ash Patel: Yeah, it seems like they’ve served you very well. Franklin, what’s the best ever way you like to give back?

Franklin Spees: Well, I sit on a couple of boards. One at the local Habitat for Humanity. I’m on the advisory council. I really like that organization a lot. And of course, it’s got lots of real estate embedded in it, it’s a real estate company. I also sit on a board called Hope Now for Youth in Fresno, which is really targeting 16-24-year-old young males who are involved in gangs, and grabbing those guys literally off the street to say, “Hey, do you want a job?” partnering them with a caring relationship, sharing with them Christ principles and watching their lives transform. And that has been a very rewarding opportunity for me to serve on that board for about five years now.

Ash Patel: That is amazing. Franklin, how can the Best Ever listeners reach out to you?

Franklin Spees: I’d say the best way is probably LinkedIn. I mentioned the Warehouse Partners website, which you can google, but if you search my name, Franklin Spees on LinkedIn, you can find me. It’s also under Neighborhood REI. And I’m also on BiggerPockets and all the major places. I’d love to connect with anybody out there who has questions about syndications, starting a property management company or just talking real estate in general.

I’m actually going to be the Best Ever Conference in February, I’m looking forward to that. I just jumped on a mastermind with about seven other people. That’s been great.

Ash Patel: That’s great. Franklin, thank you very much for sharing a lot of your experience with us, from beginning out as an RA and going into doing your own deals and syndicating, and then pivoting into light industrial. We barely touched on the things that you’ve done, and we’d love to have you back on the show to deep dive into a couple of these areas if you’re okay with that. But thank you for sharing this incredible advice with us. Best Ever listeners, thank you for joining us, have a best ever day.

Franklin Spees: Thank you, Ash.

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JF2512: What Lenders Want from Investors with Andrew Schnissel & Ruben Izgelov

When Ruben Izgelov went to a private lending conference, he had full intentions of finding better sources of capital for his own deals. He walked in as a fix & flipper and walked out as a hard money lender. Tune in to find out what lenders are looking for in investors, how to make the lending process easier, and what you need to make sure your lender is NOT doing. 

 

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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 here with today’s guests; Andrew Schnissel and Ruben Izgelov. They are joining us from New York City and are partners and co-founders of a private lending company, We Lend, LLC. Between the two of them, they have 25 years of real estate experience.

Gentlemen, thank you, and how are you today?

Ruben Izgelov: Well, as well, thank you so much for having us.

Andrew Achnissel: Likewise, we’re really glad to be here.

Ash Patel: Thanks for joining. Before we get started, tell us a little bit about your backgrounds and what you’re focused on now.

Ruben Izgelov: Sure, so I myself was a fix-and-flipper/developer/wholesaler in the beginning of all of this, and then ultimately, transitioned into private lending. Kind of coincidentally, I went to a private lending conference to find a cheaper source of capital for my own deals, and I was introduced to an attorney out there who introduced the whole idea of private lending and being able to start a fund and doing exactly what my private lenders were doing for me, but doing it for other investors. And lo and behold, walking into this conference as a fix-and-flipper and leaving out as a hard money lender.

Ash Patel: And what was it that attracted you to hard money lending versus being on the investment side?

Ruben Izgelov: There’s a lot. I think, for us, we saw that there is a lot of opportunity to be able to improve in the market. A lot of the private lenders that we were working with many years back, they were old school; many of them that didn’t have an email address. Believe it or not, they were still using fax machines and still had flip phones or what have you. And we felt like being young and entrepreneurial, that there was a lot that we can bring value-wise into the business through technology, social media and just a new way of thinking.

Ash Patel: And what year was this?

Ruben Izgelov: That was in 2018.

Ash Patel: Okay.

Ruben Izgelov: So we co-founded in 2018.

Ash Patel: And what are the returns typically for somebody in the hard money lending business? Annual, let’s say cash-on-cash returns

Ruben Izgelov: It depends. There’s a number of ways of looking at it and from a strategical point of view, but in cash on cash, I would say anywhere between 12% to 15%.

Ash Patel: And that’s annualized?

Ruben Izgelov: Correct.

Ash Patel: So why would somebody want to get into hard money lending?

Ruben Izgelov: I don’t know many people who are in the fix and flip space who would want to enter hard money lending, unless they have enough liquidity to be able to do so and they don’t have enough deal flow to be able to put that liquidity into use. I think that’s really when you get into a position where you might start considering doing loans for your competitors or friends or family, which can of course snowball into being a full-blown private lender. That’s kind of how it started for us. When we just started April of 2018, we were working with friends and family, lending money out to them, and then it kind of snowballed into a nationwide private lender.

Ash Patel: And where is your source of funding coming from?

Ruben Izgelov: Our source of capital is primarily from private family office. Additionally, we have investors and other individuals who are currently in talks in order to start investing into our funds.

Ash Patel: And what kind of return would a typical investor get if they’re loaning the hard money company funds?

Ruben Izgelov: I would say anywhere between 12% to 15%.

Ash Patel: Okay, so you guys are very popular right now with this real estate boom. On all these forums, there’s tons of talk about hard money lenders. What should people look for when they’re searching a hard money lender?

Andrew Achnissel: They need to make sure the company is reputable. It needs to go online, look at their Google reviews, go the Better Business Bureau, really ensure that the lender they’re working with is legitimate, and just ask around get referrals.

Ruben Izgelov: I think to Andrew’s point, as a fix-and-flipper and an investor myself prior to starting We Lend, execution was everything, right? A lot of times, I would have hard money lenders calling me with amazing rates, but execution for me was key. [unintelligible [00:04:49].17] wall. I was still using my seven-year-old hard money lender at the time, which till this day is a mentor and a friend of mine, and I was paying him double digits. Sometimes paying him 14% on the money that he was lending us, and two and a half, three points. Obviously the market has changed. But for me, I was ready to do that, because I knew he was able to execute. And many of the borrowers that we work with today, we pride ourselves in the fact that they feel confident in the fact that we’re able to execute on the deals that come their way.

Ash Patel: So hard money scares me if I’m doing a fix-and-flip, and it runs over in a lot of time. What are the repercussions? Or are there any?

Ruben Izgelov: I think that the answer to that question is twofold. We really like to describe the company as a nationwide private lender. And the reason we do so is because we don’t only do fix-and-flip loans. Our most popular product recently is the 30-year fixed-rate refinance program, which is starting at 3.875% currently; so that’s competitive with a bank, and a lot faster and easier to work with. So I’d challenge the term hard money.

Break: [06:04] to [08:06]

Ash Patel: You’re venturing into being a traditional mortgage company, so to speak.

Ruben Izgelov: Not necessarily. I think there’s this stigma that is followed by the term hard money and I get it. Every time someone thinks of a hard money lender, they think that someone is coming in to break your kneecaps if you don’t make the payment, or if your loan is not paid off with the term of the loan.

Obviously, that’s not the case. And I think the way in which we can improve on that stigma and really eliminate it is by changing the way in which private lending or hard money is looked at. It’s no longer hard money lending, it’s private lending where there’s institutional-backed capital that is coming in, billions of capital coming in to be able to facilitate and service the fix and flippers and the buy-and-holders and the syndicators out there.

So it’s no longer those private, hard money guys that everyone thinks of. That was the case many years back. Today, it’s really institutional-backed funds that are coming in and really trying to build a business around what we’re doing today.

Andrew Achnissel: And I think to answer your initial question, if a borrower has a fix and flip loan, and it’s month 12, and they come to us, well, we’re happy to give them an extension.

Ruben Izgelov: And let’s be frank, this was a very common issue due to COVID. Many of our borrowers, their projects were delayed by six months, sometimes even greater, because of all the moratoriums and what came out from COVID. What happened? And it’s a good question. Actually, I think it’s a valid one. You have to work with borrowers, because reputation, for us, is key. If a loan exceeds the term of the loan, you have to work with them; you give them the extra time, you ask them how much time they need and you facilitate that.

Ash Patel: So you guys become more of a partner than the traditional hard money guy.

Ruben Izgelov: We like to see our borrowers succeed. That way, they come back to us with future business.

Ash Patel: Yeah.

Ruben Izgelov: We usually describe ourselves as a partner, as much as a lender who has interests aligned with our borrowers.

Ash Patel: Good. It seems like a lot of people needing hard money loans are in an incredible time crunch, because their traditional financing didn’t come through, an investor fell out… How do you deal with that? And how do you guys underwrite a deal in 10 days or less?

Andrew Achnissel: Thankfully, a lot of our business today is coming from repeated borrowers, which is amazing, right? One, it comes to show you that we’re doing the right thing, but two, it helps expedite the process, because whatever we needed on the first one that we funded, we probably need the same documents with the exception of contract, of course, and corporate documents on the next loan; so that helps us expedite the process. There’s been loans where we funded within 36 hours for returning borrowers. It also definitely helps when a borrower is organized and has all their ducks in a row. But depending on the borrower to be able to expedite the process, it’s also what we’ve built internally.

A lot of what we emphasize on today is technology. So we were able to build systems and put processes into place where things become systematic; we want to take the thinking out from our existing processors and underwriters and loan officers, and all they really have to do is just check off the boxes and move the file right over, and there’s automations that come into play that help not only the processor and underwriter, but also the borrower in completing the conditions that are open.

Ash Patel: If somebody knows that they’re going to need a private money, sometime in the near future, what documents and what things can they put in place to make that approval process easier?

Ruben Izgelov: Sure. So I think that we’ve seen across the board institutionalization of the space. So the documents that we require are the same documents required by publicly-traded REITs and foreign banks and hedge funds so on and so forth. We look for the borrower’s PFS, his SREO, we look for the income and expense report, rent roll, title… If you come to us with a complete file, we could get that closed in, I would say, 2-3 days.

And we try and be helpful with it. To a lot of borrowers, depending on what state they’re in, whether it’s an attorney state or not, they may not have the corporate documents, for example, an operating agreement or the bylaws to be able to send to us. And one of the automations that we’ve put into place is to be able to facilitate the borrower by sending them templates of documents that we would need ahead of time. So as soon as a loan is submitted, there are emails that are sent out to the borrower with what’s to come what’s expected, and what they should be foreseeing to start preparing for in the near future.

Ash Patel: And that puts the onus on the borrower to come up with all the documents, that’s great. What are limits on private money? Is there a dollar amount that you won’t go above?

Ruben Izgelov: There’s certain metrics that we have to abide by just as part of this institutional paradigm, if you will. So every time we give a loan, there’s two main parameters. Let’s say it’s an acquisition loan, for example. So we can only give a certain amount on the purchase. Generally, it’s about 80% of the purchase. And we’ll give 100% of rehab. So that’s the first metric.

And the second metric is that the total loan amount cannot exceed 65% of the after-repair value of the property. And the purpose behind that is just to make sure the borrower is secured and there’s profitability in the deal for them. You don’t want the borrower overleveraging, and as a result, the interest expenses are going to eat the profits; or you don’t want the borrower to be put in a position where they thought that the after repair value is going to be X amount, but it turned out to be Y amount, and is no longer profitable. By having that maximum of 65% of ARV, it almost ensures that the borrower is profitable in the deal, especially when it comes down to first-time investors. You want to be able to guide the process for them, show them the ropes, teach them the lessons that you’ve learned in the school of hard knocks, and that’s something that we pride ourselves in.

Ash Patel: That’s great. Is there a minimum that We Lend requires?

Ruben Izgelov: So as far as experience or—

Ash Patel: No, no. Sorry, minimum dollar amount.

Ruben Izgelov: The minimum is $150,000 on a fix and flip. Have we made exceptions in the past? Absolutely. We’re always looking to establish new relationships with borrowers. And then the maximum is $25 million.

Ash Patel: Okay. So again, private lending is just on fire right now. A lot of these newer investors that are taking money from them – what are some of the pitfalls you’ve seen from bad actors in the industry? What are things to look out for?

Ruben Izgelov: There’s a number of them. First and foremost, upfront fees. There’s a lot of hard money lenders out there who charge an application fee in the beginning of the process. It could be a number of reasons why a loan gets denied and some of these reasons may not be the fault of the borrower. But guess what – they’re never going to see that deposit returned to them.

Another thing is just look at the loan documents. Make sure that there is no hidden fees. A lot of times what we’re seeing is lenders out there promising a very low initial rate. But when you get to the payoff, you start seeing all these exit fees. Guess what? That initial rate is not as low as you expected it to be. So now you’re in the double digits. Those, I would say, are the two most common risks and things that I would look for in a hard money lender, is upfront fees, and what are your exit fees, if any.

Ash Patel: Yeah, good advice. Out here in the Midwest, I believe rates are two and 12. Two points upfront, 12% on the loan. Different areas of the country, I would imagine there’s different rates.

Ruben Izgelov: Correct.

Ash Patel: What market are you guys focused on?

Ruben Izgelov: So today, pre-COVID, the majority of our business was in a New York City area, the five [unintelligible [00:15:47].24] And that’s natural because of where we’re located along with our network.

Post-COVID, we were in a position where we had to pivot to focus on other states. So today, we’re seeing a lot of deals in New Jersey, Connecticut, Maryland, Florida, the Carolinas, Georgia, just down the Eastern corridor. But we’ve also done a ton of deals in Arkansas, Texas, Alabama, and that’s coming naturally to us from the social media marketing that we’ve been doing and focusing on.

Andrew Achnissel: And I think, to your point about the REITs being 12 and two in the Midwest – that’s something we’re trying to disrupt.

Ruben Izgelov: Yeah.

Andrew Achnissel: I think that for an experienced borrower in the Midwest, who’s done 10+ deals, we’d be happy to be at 9.5%—

Ash Patel: Wow.

Andrew Achnissel:  —with that borrower.

Ash Patel: You guys would definitely disrupt the market with that.

Break: [16:45] to [18:47]

Ash Patel: I was at a poker game one time and I said, “Hey, I would do it for two and 10,” and everybody’s head turned. And I’m thinking, one, I don’t even really want to do this, but I just kind of threw it out there to see if that would win the market.

Ruben Izgelov: Right.

Ash Patel: Then I thought “Man, how easy would that be?” These guys are willing to pay 10%, two points on a four-month, five-month rehab at best.

Ruben Izgelov: Yeah.

Ash Patel: So good for you guys for wanting to disrupt some of the sharks out there that are taking advantage of people?

Ruben Izgelov: Absolutely. Look, I think it’s inevitable; when you’re backed by the correct and right capital providers, you have the ability to be able to do that.

Ash Patel: That’s incredible. Good for you guys. Give me an example of a horror story of a loan that went wrong and the lessons learned from that.

Ruben Izgelov: Yeah, there’s a number of them. On my part, I can tell you right now and experience that we’ve had recently was a borrower came to us with a scope of work of just a renovation of the property. He was just going to do a gut reno. Calls us and says, “Okay, guys, I’m ready for my first draw.” “Okay, great.”

We come in, we send our inspector. Our Inspector calls to the scene and says, “You know guys, the property is demolished. There’s nothing on the property with the exception of land; there’s just nothing there, with the except trucks and dumpsters.”

Ash Patel: Wow.

Ruben Izgelov: And we took a step back, we did not want to default the borrower, we definitely had a conversation with him in the sense of, “This was not what you told us you’re going to do. This is your scope of work, and this is what you ended up doing. It’s two absolutely different things.”

Thankfully, the borrower understood what they’ve done, they were able to bring back the structure with their own liquidity, and then we were able to come right back into issue the draws just like we would promise, considering what his initial scope of work was.

So that was just a recent experience that we’ve had; seeing a property that was once there, no longer there, I think was a total shock to us.

Ash Patel: So is there a way that you can have boots on the ground when you’re 2000 miles away from the borrower?

Ruben Izgelov: Absolutely. There’s companies out there that we use and that we work with, that are construction management companies that go out there for us to inspect the properties, along with appraisal management companies that would, of course, value the property for us.

Ash Patel: Got it. Gentlemen, I’m going to ask you a question. What is your best real estate investing advice ever?

Ruben Izgelov: I can tell you one thing. I referenced this in the beginning – I had the right mentors. I’m very, very, very fortunate for that. And surprisingly, my mentor was actually my hard money lender. He was an older gentleman, and to this day, we’re friends. I mean, he’s literally seen me grow from just a wannabe investor, fix-and-flipper, into a hard money lender, myself, a private money lender.

And to me, although he was charging me double digits and three points, it was worth every penny, because he was able to guide me through the process, teach me the ins and outs, make the right introductions… And that kind of helped We Lend, because I took that ethos and now bring it into my borrowers by giving them the advice that we’ve experienced ourselves, making the right introductions and steering them into the right direction.

Ash Patel: Which is a great attribute to you, and that’s probably why you’ve grown so well.

Ruben Izgelov: Yeah.

Ash Patel: Great. Gentlemen, are you ready for the lightning round?

Ruben Izgelov: Let’s do it.

Ash Patel: Alright, what is the best ever book you recently read?

Ruben Izgelov: I’ve read this multiple times, How to influence friends—

Ash Patel: How to Win Friends and Influence People.

Ruben Izgelov: Exactly, with Dale Carnegie. And another book that I’ve just recently read is Scaling Up with Verne Harnish, which is also really amazing, and I highly, highly recommend it. It teaches you what you need to do to scale a business, but do it in the right ways to be able to help the customers that you’re attracting.

Ash Patel: Fantastic. Andrew, do you want to throw in one?

Andrew Achnissel: I would say one book that is one of my all-time favorites is The World is Flat by Thomas Friedman. It kind of changed my perspective and made me look at things that like, “Hey, everyone from around the world [unintelligible [00:22:53].18] everything.” So essentially, the playing field is flat. And it’s kind of just a motivating factor for me to know that I can compete with anyone and have no barriers.

Ash Patel: That’s a great mindset. What is the best ever way you like to give back?

Ruben Izgelov: So when COVID first hit in New York City, the city was scrambling to find housing for doctors and nurses and COVID patients, and to see what was going on. I was like, “Hey, I know a bunch of landlords and people in real estate…”

So I sent out an email blast to everyone at my company at the time. And I just started getting bombarded with people who had hotels or office buildings or nursing homes, and that want to lease them out to the city. So I think at that time, that was the best thing that I could do. And I connected those landlords with the city.

Ash Patel: That’s an amazing way to pivot. Good for you.

Ruben Izgelov: I would say for me, charity is everything. We came to America with very little and we were able to grow into what we’ve grown into with the help of others. So charity for me is everything.

Aside from that, it’s really being able to mirror what my hard money lender did for me when I started, is to be able to give the foundation to new investors or even up and coming investors, the tools and the resources that they need to be able to bring their business to the next level. So that for us, is very important, is to be able to help our borrowers other than just providing a capital, which is huge, but also be able to help them in growing in places that they’ve never imagined.

Ash Patel: Thank you for sharing that. And gentlemen, how can the Best Ever listeners reach out to you?

Ruben Izgelov: We’re on all major social media platforms; TikTok—and yes, I said TikTok… So TikTok, Facebook, Instagram, LinkedIn. Our handle on all four is welendLLC, and you could also visit us on our web at www.welendllc.com.

Ash Patel: Gentlemen, thank you for your time today. And Ruben, what an amazing journey you’ve had, from attending a conference with no interest in being a hard money lender, and getting great mentors that changed the course of your life. I have no doubt that you guys and We Lend will disrupt this private lending industry. So thank you for sharing your journey and what you do. Best Ever listeners, thanks for joining us and have a best ever day.

Ruben Izgelov: Thank you so much for having us.

Andrew Achnissel: Thank you.

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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JF2511: 3 Essential Tips for Selecting Investment Markets | Best of Best Ever

In this episode of “Best of Best Ever,” we talk about how to select the best markets to invest in. Marco Santarelli talks about the key items to look at when choosing a good market, as well as how to avoid overpriced, bubble markets. Brent Maxwell teaches us the tell-tale sign to identify up-and-coming markets by studying single-family trends. Lastly, Adiel Gorel shares his secrets for selecting the best markets for landlords using his research on demographics. 

Marco Santarelli

 

Brent Maxwell

 

Adiel Gorel

  • CEO of ICG, a real estate investment firm
  • Based in San Francisco, CA
  • Say hi to him at: https://icgre.com/
  • Episode #2152

 

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Real Estate CFO Services

thinkmultifamily.com/coaching 

 

Rent Redi

TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners, and welcome to the best real estate investing advice ever show. I’m Theo Hicks, and today we will be featuring three more previous best ever guests. You will hear their expert opinions on how to select the best market to invest in.

The first clip comes from episode 1804, with Marco Santarelli. Here’s what Marco had to say about selecting the best market.

Marco Santarelli: The first thing I’m gonna say about that are markets that are experiencing depression, lost population, meaning their net migration is negative and has been negative for years, meaning that is the trend… Because you need people in the market, and more people coming in, or more people growing there organically, to sustain the demand on real estate. So the people who rent your properties have to be people who live there and work there. So if you see negative migration, that’s a bad sign; you probably wanna do really good due diligence, or stay away from that market.

Same thing with jobs – you wanna see positive job growth, job stability, and a diverse economy. If you don’t see that, that may be a market you should avoid. Because let’s face it – there’s so many other markets you can choose from, and the United States is such a large market geographically speaking that it’s really made up of over 400 metropolitan statistical areas and probably over 600 if you include micro-markets. So there’s a lot to choose from, and this is why you shouldn’t necessarily be investing in your so-called backyard… It’s because odds are there are better opportunities in other markets if you just look around and start to look at things such as job diversity, the economy, growth, population, housing demand, and all that good stuff.

So stay away from markets that have negative factors like that, and then if you wanna break it down a little bit more granularly, I would stay away from submarkets and neighborhoods within markets that are not that great, that are not providing you with solid returns in solid locations.

Joe Fairless: You come across a million dollars; who knows how you came across it, but it’s an extra million bucks, and you have to invest it in turnkey rentals in the United States. But there’s a catch. You can invest it in any market in the U.S, but the catch is that there are five markets that you’ve got to cross off your list; you would never ever, ever invest in those five markets… But they’ve gotta be major cities. What are the five markets that you must cross off your list before you actually pick the market that you wanna invest in?

Marco Santarelli: That’s a good question, it’s very interesting. Joe, do these markets have to be ones that I would consider otherwise?

Joe Fairless: No. They can just be five major cities that you wouldn’t consider, so the first five off your list.

Marco Santarelli: Well, if I wouldn’t consider them right from the get-go, then that’s easy, because there’s many of those markets… And I will just rattle off some names: San Francisco, Los Angeles, New York, Washington DC, parts of New Jersey. I don’t know if I’m answering your question, but I can tell you what all these markets have in common…

Joe Fairless: Yeah, please.

Marco Santarelli: If you look at these markets, you’ll see — Seattle, Washington is another one. They’re very, very expensive, and I wanna say overpriced to the point of they’re bubble markets. And the problem there is this — it’s what I’ve talked about before; if you have properties that are so expensive, you have two problems. One is the ratio of what those rental units, whether it’s an apartment complex, or more specifically single-family homes – what they rent for relative to the purchase price or market price of that property is so out of whack, is so out of line, that there’s no way you can get a decent rate of return, if at all, on those properties, without putting a large down payment. But then you’re not really using your capital properly, you’re not leveraging your capital, you’re not getting the greatest rate of return. These are very expensive markets.

So number one, you don’t get the right cap rate, the cash-on-cash returns and everything else. Number two, because they’ve had such a huge run-up, there’s greater potential for there to be a pullback or a turn where that real estate market turns and you see the equity and the property values come down. That means that the downside risk is higher in those markets than in a more stable market, where you see the cycle in that market, appreciation-depreciation, be more like a soft wave, as opposed to a rollercoaster.

That’s the problem with these expensive markets – they’re out of whack, they’re overpriced, often they’re not landlord-friendly, and it’s hard to actually get a rate of return. Besides, you can’t leverage your investable capital as far in those markets as you can in some of these more stable, diversified markets.

Theo Hicks: So Marco provided advice on not only how to choose the correct market, but what are some of the metrics you need to look at to know which markets to actually avoid… And he gave some examples of the markets he chooses to avoid.

Break: [00:05:49].07] to [00:07:50].20]

Theo Hicks: The next clip comes from episode 1628, with Brent Maxwell. Here’s what Brent had to say about selecting the best market.

Joe Fairless: The focus of our conversation today is how to identify an up-and-coming market before everyone else… So how do we do that?

Brent Maxwell: That’s a great question. For the people that have a bit of risk tolerance, I think it’s the question to be asking. When you look at, for example, Detroit as a market, as a whole, there was a trough from 2009 when we bottomed out, all the way for the next few years, and then things started to peak up. In many areas of the city and most of the suburbs property values are at, near, or even above their pre-crash peak values, but there are still many places where the values are still flat. So if you’re buying as a value investor and you’re looking for an increase and appreciation, obviously you wanna buy in an area where that curve is at least at the emerging part of the growth market, and ideally you’re getting in low, obviously… So how do we do that? I think the answer in Detroit is to look for areas where you’re starting to see signs of the percolation of transition.

Joe Fairless: And what signifies transition?

Brent Maxwell: Transition is a change of the demographics of an area. You’re looking at areas that have been stable or declining for a long period of time, and are experiencing a different character of person moving into them, whether it be middle income, middle-class people, or young, hip people, whatever that is – those are areas of transition. Of course, there’s downward transitions as well, but we’re looking for the upper transitions. Basically, we’re looking for areas that, for a lack of a better word, are approaching what many people would consider gentrifying, although really at the beginning stages of any neighborhood in transition you don’t have any gentrification, and quite frankly in the neighborhoods of Detroit there isn’t any gentrification. I realize it’s a bad word for a lot of people, but I don’t have any problem saying it because it doesn’t really exist, even in the central business districts downtown, where you’re seeing $25/ft for rental space… It’s priced appropriately, compared to similar markets nationwide, so you can’t really look at that as being something that’s displacing people.

Joe Fairless: How do you find that data? Where do you look? …and if you’re on the ground, same question.

Brent Maxwell: Well, there’s two questions there, really – how do you find the data and what does it look like from the ground? The data is readily available to anyone with basic access to comps in an area. You can see days on market, prices of properties that have been sold, photos of those properties and such by looking at the MLS or any associated feed that comes from that. So that’s one step. The other step though is actually being in the neighborhoods and in the areas that we’re talking about, and kind of getting a feel for it by being present all the time.

When you see a young couple moving in, with young kids, and a couple dogs, and they look completely out of place compared to the other people in the neighborhood, and there’s a bar that was formally run down and now it’s got some hipsters coming to hang out there, you know that there’s something going on in that particular area. These are kind of harbingers of progress, and leading indicators of an area that is on the edge of hip, or will maybe someday be hip.

Joe Fairless: From the data question and response you said you wanna look at comps in the area, and some specific data points like days on market and prices of properties that have been sold. What specifically are you looking for with days on market?

Brent Maxwell: A decrease in days on market. I like to divide the market into quarters, and I look at the top quarter for my investing purposes. A decrease in days on market on the top quarter of properties means that the people who are buying the more expensive properties in an area are acting faster… And in conjunction with the decrease in the days on market you wanna see a drive-up in prices.

Joe Fairless: Anything from a on-the-ground standpoint? You mentioned young couples with a dog, and hipsters going into a bar that’s been opened… Anything else, a type of business maybe that you’ve seen, that indicates that the property value is increasing?

Brent Maxwell: Yeah, absolutely. Big rooftop data companies like Trader Joe’s and Whole Foods. Obviously, when those come in the neighborhood, you know that the neighborhood is going to experience some continued resurgence… But they’re looking at rooftop data and they come later in the process.

On the front-end though, a lot of people think that they have people move to an area, and then the prices start to go up, but in my experience, before the hipper people come, you have the artists, the pioneers who come, who are looking at just cheap, cheap, cheap prices, and the ability to live and focus on their art or their lifestyle, and still  have a neighborhood that works for them. So that’s something that people think is the driving force, but in my opinion, what really makes the difference is, like you said about the businesses, when you’ve got a hip restaurant that lands in a neighborhood, or a hip coffee shop, that kind of thing, that brings in people to drive to as a destination to the neighborhood, that is the big number one sign.

Break: [00:13:04].15] to [00:15:07].18]

Theo Hicks: So Brent’s major focus is identifying up-and-coming markets, and he actually does this by analyzing single-family trends. So he looks at the data and determines if the particular neighborhood is going through a transition. Then he also talked about how you can’t just look at the data, but you actually need to go to the location, look around the area, and he gave us some things that if you see them also indicate that an area is transitioning.

The third clip comes from an interview we did with Adiel Gorel, episode 2152. Here’s what he had to say about selecting the best market:

Adiel Gorel: My criteria of where to buy are pretty simple – I’ve been a student of the demographics in the U.S. for decades, and if you look at the U.S. census, you can easily see the part of the country that the demographic growth is the best is what I like to call the Sun Belt states. The Sun Belt states are states like Nevada, Arizona, Texas, Oklahoma, Louisiana, Florida, Georgia… Where the sun shines, in the South.

Not only are these states the ones with the biggest growth and demographic growth for the future – and we can talk about why, but we may not have the scope here – they also happen to be states where they are pro-business, which also means they are fair to the landlord… Unlike the state of  California, for example, the state of New York, which are very harsh on the landlord. But these states are very good for the landlord, they’re affordable… So my first criteria is Sun Belt states.

The second criteria is pretty self-explanatory – it’s large metropolitan areas. That’s because you have job diversity and industry diversity. If one factory, god forbid, goes out of business, there are many others. So large metropolitan areas in the Sun Belt states.

The third criteria is where the numbers work, meaning the ratio between rent and price makes sense. And as of the month of April 2020, it does not make sense, as I said, in some of our classic markets like Vegas, like Phoenix, like Dallas, like Austin; markets where we bought many thousands of homes do not work. So what does work now?

One market that does work right now is the Oklahoma City market. If you look at the map, it’s not that far from Dallas, and yet the prices are a lot lower than Dallas. The rents are somewhat lower, but not that much. The property tax is 250% lower than in Dallas, and they have the lowest unemployment in the whole United States, out of all the big cities in the U.S. Of course, now we have the crisis, but I still believe their unemployment is quite low relative to many of the other big cities.

In addition, they’ve found enormous reserves of oil and gas no far from Oklahoma City. Of course, oil is super-cheap now… I don’t look for things like this, but it’s just an extra that you get. A strong economy… And we are buying brand new homes. I like to buy brand new homes. It took me a while to realize it. I started off, as all new investors, as a cashflow cowboy, buying old stuff in not-so-great locations, but I learned – you buy in good areas only, and you buy brand new homes, that come under warranty… So we are buying brand new homes in Oklahoma City, from about 150k up to about 190k. And they rent well. Typically, the 170k home would rent for about $1,400/month, with very low property tax. So that’s one market that works.

Another market that still works is what I would call Central Florida. Well, the Orlando market is too high now, for the same reason that the Phoenix market is too high. And the Tampa market is too high. Between Orland and Tampa, we have bought a few thousand properties over the years, but they’re too high. However, between Orland and Tampa there is growth, and it does make sense there. North of Orlando there’s very interesting stuff as well; East of Orlando, including on the shore, and South of Orlando. So the prices there are different. The prices are between 200k and maybe 225k, except there’s one pocket North of Orlando where there are properties to be had for as low as 140k; and we can talk about that.

And then another market that still makes sense – there are parts of Atlanta (it’s a giant market) that do not work anymore, but there are parts that do. So that’s another market.

And our most expensive market right now is the Raleigh-Durham market, the Research Triangle in North Carolina. The prices there would be between 200k and 260k, but they still work, and of course, it’s a very popular market. We also buy in Baton Rouge, Louisiana, where the rents ratio is good… And pretty much, these are the few markets that right now in 2020 make sense.

Joe Fairless: What part of Atlanta works?

Adiel Gorel: Well, again, it’s not a formula. It’s not like you say “Oh, you only buy in the South”, but it is true that parts of the South of Atlanta work. But one thing — this is an important question, Joe, that you just raised… I live in the San Francisco, Bay Area, and I learned a lesson over the 36 years that we’ve been doing it. I like to build trust with my teams in the field, with the people with whom we work, with our brokers and managers, and listen to them. So I listen to what they say; just like you, Joe, would be a super-expert on the area where you live – your street, your city. I listen to them. So when I work in Atlanta, I listen to what they say as to what would be a good area.

Theo Hicks: So what I really liked about Adiel’s episode is that he talked about based off of his 30+ years of investing experience that the Sun Belt states are the best markets for multifamily for rentals right now… And we’ve done a lot of episodes focusing on the markets that performed the best during the Covid pandemic… And sure enough, all the top markets are in the Sun Belt.

Then he also provided us with a little secret to finding the best markets, which is to trust your boots on the ground and rely on them to help you identify the best market and the best neighborhoods.

So those are three experts on how to select the best target market. First we have Marco Santarelly for episode 1804, who focused more on the data and the metrics side. Next we had Brent Maxwell, who also focused on the data, but also talked about some of the intangible feelings that you get by walking a market to understand if it’s a good place to invest. And then lastly we have Adiel, who talked about why the Sun Belt states are the best to invest in; also going into data, and then a little tip on relying on team members to point out the best neighborhoods in the market you are investing in.

So that will conclude this episode. Thank you for listening. As always, have a best ever day, and we’ll talk to you tomorrow.

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.

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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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JF2510: 4 Key Benefits of New Construction Development with Josh Gorokhovsky

After working in corporate America for 1 year, LA native Josh Gorokhovsky found his investing niche of built-to-rent real estate. Learning from a local developer as his mentor, he narrowed down his ideal buyer and got to work. Josh talks about scoring good deals on land, how to keep construction costs low, and cultivating a good team to keep construction running smoothly. 

 

Josh Gorokhovsky Real Estate Background:

  • Runs Telos Properties, a vertically integrated development firm
  • 5 years of real estate investing experience
  • Portfolio consists of 20 projects completed, 6 stabilized units under management, and 24 under construction
  • Based in Los Angeles, CA
  • Say hi to him at: www.telosproperties.com  
  • Best Ever Book: Real Estate Titans

 

 

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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, Josh Gorokhovsky.

How are you doing, Josh?

Josh Gorokhovsky:  I’m doing well. How are you doing?

Joe Fairless: Well, I’m glad to hear that and I’m doing well also. A little bit about Josh. He runs Telos Properties, which is a vertically integrated development firm. He’s got five years of real estate investing experience. His portfolio consists of 20 completed projects and six stabilized units under management and 24 currently under construction. Based in Los Angeles, California.

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

Josh Gorokhovsky: Yes, I would love to. And thank you for having me on, first and foremost. My background – I come from very humble beginnings. In college, I dabbled around in a few different things. I was studying business, was trying to figure out if I was going to go into sports or entertainment… And just like many people, I stumbled upon the book Rich Dad Poor Dad, and reached out to a mentor of mine at the time, family friend, and asked him if he knew anybody that was successfully working in real estate.

So he introduced me to my now mentor, who is a local real estate investor and developer here in Los Angeles. I work at his office now. I started learning under his wing, took a corporate job while still learning under him, and did that for about a year before I quit that corporate job and dived into real estate full-time. So fast forward five years, like you mentioned, to today, I now have quite a few projects going on, and have been slowly growing the business ever since.

Joe Fairless: Well, we have a lot to talk about and to unpack there. And thank you for the introduction. What was your corporate job that you left after a year?

Josh Gorokhovsky: I worked for Oracle here in Los Angeles, which is a large tech company.

Joe Fairless: What were you doing specifically?

Josh Gorokhovsky: I was doing tech sales, which is my background. I’ve been doing sales since I was 15 and a half years old; it’s what I knew.

Joe Fairless: What was your first sales’ job?

Josh Gorokhovsky:  I worked as a telemarketer for my uncle’s Home Improvement company when I was 15 and a half.

Joe Fairless: Wow. What was that experience like?

Josh Gorokhovsky:  It was bittersweet. Looking back on it, it was an awesome foundation for me; in this industry and in life, to be honest, you deal with a lot of rejection, but you build a backbone and you realize how to communicate with different types of personalities, different types of people… So overall is a great experience. I recommend it to a lot of people.

Joe Fairless: By build a backbone, can you give us an example?

Josh Gorokhovsky:  Yes. Like I said, first and foremost dealing with rejection. 99% of that job is getting cursed out and getting rejected on the phone. So you’ve got to deal with that on a daily basis. And then once you start getting a little momentum and start building a little bit of rapport with these people online, it kind of teaches you how to transition a conversation, transition through a sales funnel, how to stay organized, how to be on top of your daily routines to be more successful… So it’s a really good foundation for any type of sales job, or even running your own business one day.

Joe Fairless: Absolutely, I can only imagine. How do you mentally and emotionally stay sharp and on a high level whenever you’re getting rejected 99% of the time?

Josh Gorokhovsky: A lot of coffee. And besides that, it’s a lot of self-coaching. It’s not taking it personal. It’s just a part of the business; every no is one step closer to a yes. And that’s true in real estate as well. Every deal you analyze is not going to be a deal. Every property you put a bid in on is not going to end up being yours. So it’s just telling yourself that it’s part of the game, and it’s one step closer to getting to where you need to be.

Joe Fairless:  Mm-hmm. Okay, so you quit that job after—well, we’re talking about telemarketing, but I’m fast-forwarding now to Oracle. You quit the tech sales job after a year, you decided to focus on development full time. What specifically are you developing and where?

Josh Gorokhovsky: So it’s all in Los Angeles, and I’m focusing specifically on ground-up duplex and double-duplex developments. So two to four units, and most of these that are being built are built to rent, so I’m trying to keep as many of them as I can. And also do some smaller single-family rehab and flip them whenever I can get my hands on them.

Joe Fairless: As an outsider who does not live in Los Angeles, but there’s a stereotype that I had in my mind that there’s no way someone could build and rent out and make money on that, because of the cost to acquire and the cost of construction… But clearly, I was wrong. So can you talk about some specific numbers on a project?

Josh Gorokhovsky: Yes. So the way that I’m able to make these work is my building costs are very inexpensive. And I’m also getting good deals, relatively, on the land. So I can give you an example on one that I recently finished up in the North Hollywood area of Los Angeles. We purchased the land for just under $700,000.

Joe Fairless: How much land is it? Maybe like a quarter acre, or what?

Josh Gorokhovsky: It’s almost 7,000 square feet. It was a 6750 to be exact.

Joe Fairless: Right.

Josh Gorokhovsky: Yeah, so just big enough to fit some nice-sized units on there. So we built two duplexes, two standalone buildings, three storeys each, townhouse style, with their own garages. And the hard construction costs, not including any soft costs, like plans, permits, demolition, so on and so forth, it was about $850,000, which came out to roughly around 100 bucks a square foot for the buildable square footage; throw in some more soft costs in there, as well as my holding costs for my construction loan, and we brought it in at just about $1.8 million, all in.

Joe Fairless: Okay.

Josh Gorokhovsky: The property appraised for just over $2.2 million. And that one, I did end up selling for $2.235 million. But I’m doing two similar projects right next door; those are same scope, and I will be keeping those. So we’ll be refinancing those once I’m done, and then cash-flowing them.

Joe Fairless: What do they rent for?

Josh Gorokhovsky: There were two four-bedroom units and two three-bedroom units. The three-bedroom units went for about $3,100, and then the four-bedroom units went for $3,700.

Joe Fairless: Does that cash flow on a property that’s purchased for 2.235?

Josh Gorokhovsky: Well, for the end-user, no—

Joe Fairless: For them maybe not?

Josh Gorokhovsky: Yes, whoever ended up buying… It does cash flow; it’s not going to be your greatest cash-flowing asset, but it is brand new, and you get a lot of depreciation on it, obviously. And then there’s not going to be much maintenance on it. And then you don’t have upside on it, unfortunately, but I think whoever bought it is more just trying to place their money in something that’s newer, rather than—

Joe Fairless: Okay.

Josh Gorokhovsky: —being so hands on and trying to turn the units, fix it up and so on and so forth.

Break: [07:50] to [09:51]

Joe Fairless: Who is the buyer type? Can you describe who buys that from you?

Josh Gorokhovsky: It’s on the market, so it wasn’t anybody that I knew specifically, but I think it was a gentleman who was a lawyer, who lived in the area, and just like I said, he wanted to park his money somewhere. But I think it’d be a lot of these lawyers, doctors that are not trying to spend a lot of time with these assets, just kind of somewhere to park their money and let it grow. Or somebody perhaps that’s 1031-ing into something, so their back’s a little bit against the wall. So I think those are the typical buyers.

There have been some funds that have been looking to buy, and I don’t know how much you know about opportunity zones, but these properties were in an opportunity zone, so I was approached by some opportunity zone funds that were looking to place their capital into these projects, just for those tax benefits.

Joe Fairless: Did they buy any from you?

Josh Gorokhovsky: I was selling this building right before the Coronavirus lockdown, so I was getting a decent amount of traction on it, and then right when that hit, it was still on the market, so then all hell broke loose…

Joe Fairless: Right.

Josh Gorokhovsky: …and everybody rescinded their offers and I was getting a bunch of lowball offers… So it was not a great time to be selling, but I did get some offers before that.

Joe Fairless: What was the highest offer you got before the pandemic?

Josh Gorokhovsky: It was 2.3.

Joe Fairless: Okay. Well, you did pretty well, then. They didn’t shave too much off the price?

Josh Gorokhovsky: No, I kind of bit down and waited a little bit, and it panned out.

Joe Fairless: When did you end up closing on this deal?

Josh Gorokhovsky: This closed in, I want to say it was May or June—

Joe Fairless: Oh, quick. Okay.

Josh Gorokhovsky: -—of last year. Yes.

Joe Fairless: Got it. So when you mentioned soft costs, you gave some examples of hard costs. What are some examples of soft costs?

Josh Gorokhovsky: The architectural engineering for getting your plans done, demolition of the existing property that was there before, paying for the permits, obviously, to the city, and all the city fees.

Joe Fairless: Okay, got it.

Josh Gorokhovsky: [unintelligible [00:11:37].24] up very quickly.

Joe Fairless: You gave those examples earlier; sorry, my bad. So what are examples of hard costs, the $850,000?

Josh Gorokhovsky: That’s the actual construction. So we have foundational, framing, windows, so on and so forth.

Joe Fairless: So how are you able to get it done cheaper than what is typical?

Josh Gorokhovsky: Well, that’s just the luxury that I have of working under my mentor who’s had almost 30 years of experience in the Los Angeles market. He’s been developing for several years, so I kind of just assumed a lot of his resources. And over time being an industry, I’ve made my own connections, I have my own subcontractors just from being in the field, and being on several job sites. So I do run about half of these projects myself, and then half with his contractors. So it’s just their cost.

Joe Fairless: Okay, so it’s mainly the relationships that have been built with the subcontractors and getting it at preferred pricing, that’s where you saved the most money?

Josh Gorokhovsky: Yes, and material. I do have some resources for materials. Same thing, whether it’s through one of my contractors or through my mentor, just long-standing relationships with these vendors that give us preferred pricing on material.

Joe Fairless: Let’s talk about the numbers for a deal that you have held. Can you give us those numbers?

Josh Gorokhovsky:  Yes, we can talk about — I’ve built duplex in South LA, which is a more inexpensive market in Los Angeles, more up and coming market. So we purchased the land there for $330,000. That lot was, I believe, around 5,400 square feet. So just big enough for a nice duplex. The hard construction on that project, which is the building cost, was $340,000; I was all the way into the project for $700,000. And that one appraised for 815k. We refinanced it, got a low leverage loan, I believe a 65% loan. So we ended up leaving about $180,000 in the project, when it was all said and done, equity left in the deal. And those are larger units. One of them is a five-bedroom, one of them is a four-bedroom. And those are renting out for $3,300 on the five-bedroom, and $3,000 on the four-bedroom. So that one is cash-flowing.

We have very minimal expenses on these projects, which is also why I like them; there’s not much going on there. So after we pay the mortgage, a lot of it is going into our pocket. So I believe that one’s cash-flowing about 12% to 14% cash on cash right now.

Joe Fairless: Nice work. The one thing I’ve noticed with the both of these deals in North Hollywood and the duplex in South LA – and I’d like to know if it’s a coincidence or not – the land, the hard costs and the soft costs for each project are about the same. So the land for North Hollywood is 700k, hard costs 850k, and the soft costs were somewhere around that. And then for South LA 330k-340k, and somewhere around 340k for soft. Is that a coincidence?

Josh Gorokhovsky: Yes, I think it’s just the scope of the projects that we do. We try to keep them very cookie cutter and that’s why we can build them inexpensively. Architecturally, they’re boxes; there’s nothing fancy about them. The finishes are super inexpensive finishes, so that they’re easily replaceable. And that’s why I like the new construction aspect more than flipping personally, because I can calculate it a lot easier. Whereas when you’re flipping a property, as I’m sure you’ve experienced, you know, you have your budget, and then you open up a few walls, and there are a lot of unexpected things that come up. So your budget gets altered a lot quicker.

Joe Fairless: I never thought about it that way. So my perception coming into this conversation was that new construction tends to be more risky, because you’re taking dirt and making it profitable, or trying to. And fixing and flipping is not, because you already have something cash flowing, you just are enhancing it. But that’s a great point that there’s a lot of uncertainty behind those walls when you are flipping.

Josh Gorokhovsky: I think it also depends on who you are and how experienced you are. I have a very close friend of mine, all he does is flip properties, single-family houses, and he has an incredible construction eye just from being in the business for so long. So his budgets are fairly accurate when he can walk into a property and in 10 minutes, say, “Okay, here’s my budget” and he’s pretty spot on. I don’t have that construction eye, because I haven’t flipped too many houses, and I haven’t been in the business in general for all that long, so I can’t really walk into a property and pinpoint it so accurately. So I think it just depends on who you are and what you like.

Joe Fairless: What project that you’ve worked on has lost the most amount of money?

Josh Gorokhovsky: Thankfully, I haven’t lost any money just yet. But there was a project where I was converting a large single-family house into a duplex, all internal work. And it kind of went haywire on me, everything that could go wrong, did go wrong. I started out with a bad team that I had in terms of architectural work, and I’m not going to bash anybody, but it was just a poor job.

Joe Fairless: Of course.

Josh Gorokhovsky: So that went a lot longer than I anticipated. I had hard money on that property. So something that should have been ready for me to break ground in two months took seven months. So unexpected hard money costs there. Once we actually got the plans, it was significantly over-engineered, the work that was there. So that increased my budget by almost double. So by the time I actually broke ground and I was putting in all this work, I’m going to get lucky if I break even.

So I ended up calling [unintelligible [00:17:34].10] and finding a private investor to buy out the hard money guys. We ended up finishing it up, and it turned out to be a solid deal at the end of the day because of that reason, because I wasn’t continuously paying hard money for the remainder of the construction period. But that was a huge learning experience for me.

Joe Fairless: And for us all, because of your experience. So thank you for that. A couple follow up questions on that. You said the architect – and clearly not looking for any names, but I want to be educated on what the poor job equals from an architecture standpoint. Will you elaborate on that?

Josh Gorokhovsky: Yes, so unless it’s a blank piece of dirt, which they probably should go see it in person anyways, but if you’re hiring somebody to reconfigure a property, you’d hope that they would at least walk the property and understand the full scope, rather than just making assumptions. So that’s what ended up happening, and that’s why the overengineering came into play.

Also, I think that they were just a little inexperienced with this type of project. So a lot of mistakes being made, and the city asking for [unintelligible [00:18:41].03] before approving the plans, asking for a lot of revisions. So those two things is what caused the time delay and the overages on the budget.

Joe Fairless: What’s overengineer mean? What’s an example?

Josh Gorokhovsky: So for example, if you’re putting a lot more framing, or like heavier beams on the first floor of property to hold up the second floor, without understanding that you really don’t need these load-bearing walls or these beams because there’s not much going on upstairs, there’s not much living space – things like that. There was plans in there to redo the foundation, but the foundation was in a perfect condition; it didn’t need anything to be redone. So once those things are on the plans and you get your inspector out there, he’s going to make you follow the plans. It’s his butt on the line if you don’t.

Just little things like that, that just cause the budget to double. And when you go back to your hard money lender and say, “Hey, I know you gave me this budget, now it’s double. Would you give me more money?” 99% of the time, they’re going to tell you to kick rocks.

Joe Fairless: Yes. So you called that [unintelligible [00:19:48].05] and you got a private investor. How did you find that private investor?

Josh Gorokhovsky: Just over time — he was a family friend of mine who already expressed interest in investing with me. But over the years, I’ve been networking a lot and meeting people. So I had a small Rolodex at the time of investors which – I sent the deal to a few of them. And he expressed interest, I gave up a large portion of the profit share, just to make it work, to make it appealing for him. So I had him come in, like I said, he bought out the private money lender.

Joe Fairless: Yep.

Josh Gorokhovsky: I had a partner in the deal, so he bought him out, gave him all of his money back, so that he was back in the green, and then just finished this thing up. And I already told him if it didn’t end up landing where I thought it was going to land, that I was going to take everything that was over out of my end, not on his end.

Joe Fairless: Good for you. And that’s how you build long-term relationships, right?

Josh Gorokhovsky: You hope so, yes.

Joe Fairless: Yes. How much was the hard money lender and that other partner being bought out in total for?

Josh Gorokhovsky: I believe it was around $600,000, somewhere around there.

Joe Fairless: Okay. And then I ask this just for someone who is in a position like this to know, “Hey, you’ve got to do whatever it takes to make things right, and then to exit out of it and move on, because fortunately, there’s lots of other real estate opportunities out there. You’ve just got to lick your wounds and move on.” So what profit percentage did you have originally, and then what did you end up with?

Josh Gorokhovsky: So this property, I was actually going to flip it; I was going to convert it and then flip it. And there was going to be, if I remember correctly, like around $100,000 of profit in it for me and my partner. Obviously, that didn’t happen, and then once it was done, we decided that it didn’t make any money if we flipped it. So when I pitched the investor, I said, “Hey, this is going to be a hold, and we’re going to hold this duplex, rent it out, cash-flow it.” So when he came in and we did that, obviously finished it up, refinanced it, and he got most of his capital back; I ended up leaving whatever I had into that project, he left a few bucks in there. And now it’s been cash-flowing for almost a year, it’s been doing actually pretty well. I think it’s been cash-flowing also around like 12-14 percent cash on cash.

So it ended up working out, because I was—before bringing him in, I was debating on just selling it as it was to maybe break-even or lose a few bucks and just move on with my life. So I’m glad that I ended up taking that route instead.

Joe Fairless: You self manage?

Josh Gorokhovsky: I do self-manage.

Joe Fairless: What’s something you’ve learned through that process?

Josh Gorokhovsky: When you say self manage,  I’m assuming you’re talking about the rental aspect of it.

Joe Fairless: Yes, sorry. I segued with no transition. Yes.

Josh Gorokhovsky:  No, it’s okay. It’s okay. I just wanted to make sure. It’s been great. It’s a great learning experience. And I do plan on keeping everything in-house as I continue to grow; I’ll just make hires and have a management arm of my business for my units. So I feel like it would have been very difficult to run that side of my business had I not been hands-on like I am right now. So it’s been a great learning experience through and through from A to Z, from leasing the tenants, showing the units, qualifying the tenants, interacting with them, going through the leasing process, dealing with maintenance issues, by handling all the backend stuff, the bookkeeping and the property taxes and paying your insurance, getting quotes. So just every little thing adds up, and over time, you kind of just get this whole peripheral view of the management side, which has been great for me.

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

Josh Gorokhovsky: Be patient. I’m going to steal something from Gary Vaynerchuk, but I love that guy. He says, “Micro Speed, Macro Patience.” And I couldn’t be a bigger advocate of that. In my day to day, I’m going as fast as I can and I’m trying to reach my goals, and I get down on myself and I’m very hard on myself when I don’t hit those goals, and those are a lot of times, but in the grand scheme of things, it’s important to be very patient and allow yourself to grow, allow yourself to get educated and go through the growing pains.

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

Josh Gorokhovsky: I think so.

Joe Fairless: Alright, I bet you are. First, a quick word from our Best Ever partners.

Break: [23:58] to [26:00]

Joe Fairless: Alright, your best ever book you’ve recently read?

Josh Gorokhovsky:  In terms of real estate, I would say Real Estate Titans by Erez Cohen. For somebody who might just be getting started or wanting to learn more about the basics, I always push for Millionaire Real Estate Investor.

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

Josh Gorokhovsky: I’m part of a few organizations right now that have different philanthropic missions. But besides the money aspect, I’m always around to lend a ear, and for whatever it’s worth, my advice or my two cents. So I’m always around to help anybody out.

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

Josh Gorokhovsky: On all the social media platforms, my website, telosproperties.com,  @TelosProperties on those social media websites – Facebook, Instagram, LinkedIn. And then I’ve got my personal social profiles as well, if you’re interested in keeping up with me personally.

Joe Fairless: And we’ll put a link to your website in the show notes. Josh, thank you for being on the show. Thanks for talking about how you are developing in Los Angeles, and lessons learned on how to do that successfully, and what not to do. And when you get into a deal that is challenging, some tips for how to navigate it. So thank you for sharing that story as well. I hope you have a best ever day and talk to you again soon.

Josh Gorokhovsky: Thank you very much, I appreciate you having me on.

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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