Best Real Estate Investing Advice Ever Show Podcast

JF1033: Buying Properties With $0 Out Of Pocket!

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From Africa to Canada, she can buy and teach her methods across continents! After starting with buy & hold properties, Thembi realized she needed money sooner than they could provide.  When she began with Rent to Own, she never looked back!

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Thembi Bheka Real Estate Background:
-Founder of Real Estate Real Riches, an education platform for individuals in Africa to invest in real estate
-CEO and Real estate investor at Infinity Housing Solutions
-She came to Canada from Zimbabwe with $5 in her pocket
-Mentor with Kelowna Community Resources, a government organization to help immigrants
-Based in British Columbia, Canada
-Say hi to her at http://realestaterealriches.com/
-Best Ever Book: The One Thing

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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluff.

With us today – Thembi Bheka. How are you doing, Thembi?

Thembi Bheka: I’m doing great! Thank you, Joe, for having me today.

Joe Fairless: My pleasure, nice to have you on the show. A little bit about Thembi – she is the founder of Real Estate Real Riches, which is an education platform for individuals in Africa to invest in real estate. She came to Canada, where she currently resides, from Zimbabwe, with five bucks in the pocket. She is the CEO and a real estate investor at Infinity Housing Solutions, as well. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Thembi Bheka: Yes. Hello, Best Ever listeners. I hope this will be the best ever show for you. I came to Canada, as you said, in 2001; I trained as a registered nurse. However, during that time I realized that I wanted some financial freedom and I also wanted some time to spend with my children. I started investing in real estate in 2008.

When I started, I started as buy and hold, basically buying properties for the long term, and I realized that wasn’t going to give me what I needed quite fast… So I transitioned into what they call rent to own and agreements for sale.

Joe Fairless: Are you doing rents to own now?

Thembi Bheka: Yes, I do mainly rent to own and agreements for sale, which I believe in the U.S. is known as seller financing.

Joe Fairless: Okay, and what is it called in Canada?

Thembi Bheka: Agreements for sale.

Joe Fairless: Agreements for sale, okay. Cool. You’re from Zimbabwe, right?

Thembi Bheka: Yes.

Joe Fairless: What is the program that you have? Do you have something with people who live in Zimbabwe to help invest in real estate?

Thembi Bheka: Yes. So what I have is a training platform where I help people in Africa to find out how to get properties with no money down, using seller financing, which is also agreements for sale, as I said… Because what I found [unintelligible [00:04:22].14] and people would just stay forever until they’re 70 years old before they even own their first home, trying to save money. And most of the banks, even if they are banks, do not qualify easily as you would anywhere else in the world.

That’s when I realized that there was a need, there was that gap where we could bridge the financing gap between individuals who are selling and individuals who need to buy a home.

Joe Fairless: Let’s talk about the last agreements for sale/seller financing deal that you did. Can you tell us the number son it?

Thembi Bheka: Yes, it’s actually what I’m working on right now; it’s three properties, all with one seller. This is in Canada. The seller needs 182k/property for a townhouse, and he wants really no money down. All he wants me to pay him is this one, which is listed with an agent, and he wants agent fees for that one, which is going to be about 20k.

It rents for about $1,400 in the area. Currently, the mortgage is $600/month and condo fees are about $300, so I will be cash-flowing probably about $400/month, and I’m not putting any of my money.

Joe Fairless: So you’ve got a seller who’s got three properties, each of them $182,000, and he’s agreed to sell them to you for no money down… What type of financing terms do you give him?

Thembi Bheka: I’m taking over the mortgage from the bank. He has a mortgage already at the bank, so basically I am getting in and taking over the mortgage. They agreed to extend the mortgage for another three years, so we have a five-year term with that mortgage.

So I’ve been taking over the mortgage, the property taxes, the interest and the insurance, and just getting into this property.

Joe Fairless: And why is this a good deal for him?

Thembi Bheka: Because he just wants to get out of the property. He’s tired of dealing with tenants.

Joe Fairless: But why wouldn’t he sell them traditionally? Because there is no equity in the deal?

Thembi Bheka: There is equity… There’s about 25k in each property, but once you pay the realtor fees and you pay all these legal fees and you pay the cancellation fees for your mortgage, he really was gonna walk out with nothing. So this is a good benefit for him… At least he doesn’t have to go through the pain of trying to sell it. And the market is not great right now in Edmonton – this is a property in Edmonton. The market is not that great for him to sell.

It could stay for six months without finding a buyer right now… So this is a fast way for him to let the property go.

Joe Fairless: And how do you give him the confidence that you will pay the mortgage in particular, so that he doesn’t get foreclosed on and hurt his credit?

Thembi Bheka: Our company is a reputable company; we’ve been doing this for a long time, so that also gives us the confidence and it gives anybody the confidence. But even then, we do have an agreement with the lawyer.

We don’t just sign this in the backyard, we sign it in front of the lawyer. We have an agreement which obliges me to do this; if I don’t do this, he could go after me and sue me.

Joe Fairless: Okay. And that is for all three properties?

Thembi Bheka: For all the three properties, yes.

Joe Fairless: How did you come across him?

Thembi Bheka: He called me from my website. I have a website which I haven’t advertised forever, and I just got a call a couple of weeks ago… He actually said, “I only have one property and I need to sell it because I’m tired of managing the tenants and it’s empty right now. Then as we got to speak, as I got to know him more, I found out that he actually has three, and then he was willing to let me take the three as a package.

Joe Fairless: What is his situation where he doesn’t want to just continue to sit on these properties? What’s the life circumstance?

Thembi Bheka: He’s tired. As an investor sometimes – especially if you buy without the right fundamentals, it is easy to get tired, especially if you don’t have the right training of what kind of tenants to put into your property… You get all these tenants who come and trash the place. Then you clean it up and then another tenant comes and trashes the place and you clean it up…

Without a good knowledge and without a basic foundation of where you’re going to go, it’s easy to [unintelligible [00:08:42].25] and it’s easy to get tired. That’s why you need a solid foundation in real estate and solid education, to be able to screen your tenants properly.

Probably what has happened with him is he’s just had all these tenants coming, trashing the place and leaving. This property is newly renovated; he just renovated them and he didn’t put anyone in them. He probably just decided “I do not want to deal with a tenant anymore. I am just exhausted with this and I want out.”

Joe Fairless: Wow, what a find. Congratulations on that one!

Thembi Bheka: Thank you!

Joe Fairless: Tell us about your least favorite deal that you’ve done.

Thembi Bheka: It’s the first property I ever bought, in 2008. I bought it because it was pretty. I didn’t look at the numbers, and I didn’t screen the tenants. I didn’t know anything about screening the tenants. I just got it and said, “Oh yeah, I’ve got a property and somebody’s looking for a place to rent. You’re in!”

What happened is those tenants stayed with me for five years, and I never did any checks. I didn’t know that you’re supposed to go check the property. After five years I went in, because they started not paying rent, and I kept giving them longer and longer periods to extend… I think it was after six months of not paying rent that I went in and the place was a mess.

Joe Fairless: How so?

Thembi Bheka: It’s funny, because when I went in, Joe, I went in with a potential renter. I advertised it to say, “Oh, I have another property if you wanna come and see…”, before even looking at this property. First of all, you come by the door, there’s garbage everywhere. Garbage!
I’m like, “Oh, this is embarrassing. I should clean up the garbage real quick before these other potential tenants come in.” As soon as I finish cleaning up the garbage, the potential tenants come in, and I open the door, and this smell… I can never get rid of it even up to now… It hits me! I can smell it just talking about it! It just hits me in the face.

I didn’t know what it was, but it turns out that when you have many cats and they just pee in the house for five years, it really gets it in a mess. The smell was so bad… We had to rip out everything. So I learned a lot…

Joe Fairless: Yeah, I’ve been in a similar situation when we were doing due diligence on an apartment community and there was a hoarder who had just stuff stacked to the ceiling in some cases, and not only did they have cat pee and poop everywhere, but they had dead cats, two of them, that had been decomposing in the closet. It was just a terrible, horrific scene. And the smell – holy moly…

The inspector would not go in there until he got a hazmat suit. He literally was in a marshmallow suit with a visor and the head gear and everything whenever he went in to inspect it.

Thembi Bheka: Wow… That’s probably your best deal.

Joe Fairless: [laughs] We did end up buying it, but they had to get it fixed before we ended up closing. So this 2008 pretty property – how much did you buy it for?

Thembi Bheka: 285k.

Joe Fairless: And where did you end up with it?

Thembi Bheka: I still own it up to now, and I’ll tell you what it’s worth – 240k.

Joe Fairless: Yeah, it happens sometimes, huh?

Thembi Bheka: Yeah… And I have put in at least 10k in that property. As I said, I just bought because I had [unintelligible [00:12:14].02] real estate you can be successful, and I just didn’t think of the fundamentals.

Joe Fairless: How do you run the numbers now when you look at a deal?

Thembi Bheka: I calculate basically what the mortgage is going to be, and everything… When I calculate my mortgage, I put in a buffer because we know that interest rates go up and down, right? Right now our interest rate is kind of very low, about 2.5%.

Joe Fairless: 2.5%?! Oh, man… Lucky you!

Thembi Bheka: Yes. So when I calculate a property, I don’t calculate with 2.5%, I calculate with 5%. I put in a buffer for that, because I know they’ll go up. Then I add in the property management, which is something I never used to do before. So I add in the property management, the vacancy rate, which I calculate for one month’s rent (which is 8% vacancy rate), and maintenance fees, because the property needs to be maintained, and I usually put 10% for maintenance fees.

So I add in all those as a buffer… Not that it’s gonna happen, but just in case it happens, I have some money in the bank.

Joe Fairless: With the interest rates being as low as they are, and then you’re projecting 5% — why are you projecting 5%, unless you’re doing a variable versus a fixed interest rate on your properties?

Thembi Bheka: I try to go variable as much as I can.

Joe Fairless: Oh, really? Why?

Thembi Bheka: Because long-term research has shown that when you go variable, at the end of the day – usually not just in a year, but over 25 years – you actually make more money than when you go fixed. And I also like the fact that I don’t have to be tied down too if I have to get rid of the mortgage or cancel a property.

Joe Fairless: I remember interviewing someone – I forget who it was, but he talked about how it does make sense to do variable interest rates in certain scenarios, and it’s interesting that you’re doing it in every scenario when you can.

Thembi Bheka: Especially right now, with the way the economy is. The rate is so low, it makes sense to do variable. But having said that, I do have a [unintelligible [00:14:21].14] creeping up, sometimes I could lock in, but usually, I try to go variable.

Joe Fairless: Do you find that you’re at a competitive disadvantage sometimes when you’re making offers on properties and you’re running the numbers in this way where you’re doubling the interest rate, and others probably are not running the numbers that way, therefore they might be able to pay more?

Thembi Bheka: Yes, I do, but it makes me sleep at night. For me the most important thing is having sleep at night and spending time with my children. What I found, especially with the first property where I just assumed things were going to stay constant [unintelligible [00:14:59].21] fees will never go up, I found myself being stressed, not even being able to pay a property manager because I don’t even have the money to pay a property manager upfront. So I’d rather have a big buffer, than have less.

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

Thembi Bheka: Start with your why. In any transaction, when you have to do with a seller or you have to do with a buyer, just find out what is their big WHY. Why do they want to sell this property? Instead of focusing on the financial aspect, you’d be surprised how much you can [unintelligible [00:15:30].24] when you focus on the why.

Joe Fairless: Can you tell us a story of when you have focused on the why and it has helped the transaction?

Thembi Bheka: This property of land – 10-acre land – which I made an offer on and it was 450k… The realtor had listed this land and he kept saying “Oh, the seller wants the money, the seller wants the money.” Then I asked if I could meet with the seller, and I spoke to the seller and I asked him “So what do you need the money for?” He says, “I just wanna put it in the bank account.” Then I explained to him that “You do realize that when you take this money upfront and you put it in the bank account, you’re going to [unintelligible [00:16:07].01] capital gains, and also you’re going to be getting very little interest.”

What happened is I gave him options to say, “Well, maybe what I could do is I could give you just a little bit upfront, and then pay you over a certain number of years, that way you don’t have to pay that much in capital gains.” That seller was so happy and I ended up getting the deal.

Joe Fairless: Beautiful! Thank you for sharing that. That should be in everyone’s tool kit that’s for sure. Regardless of what type of deal we’re working on, we should always have that conversation.

Thembi Bheka: Exactly.

Joe Fairless: Now, are you ready for the Best Ever Lightning Round?

Thembi Bheka: Yes!

Joe Fairless: Okay, let’s do it. First, a quick word from our Best Ever partners.

Break: [[00:16:49].26] to [[00:17:41].17]

Joe Fairless: Best ever book you’ve read?

Thembi Bheka: The One Thing.

Joe Fairless: Best ever deal you’ve done?

Thembi Bheka: I guess the three deals I just spoke about – the agreement for sale deal.

Joe Fairless: What’s a mistake that you haven’t mentioned so far that you’ve made on a deal that comes to mind?

Thembi Bheka: Using emotions when dealing with tenants.

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

Thembi Bheka: Teaching other people to invest in real estate.

Joe Fairless: And where can the Best Ever listeners get in touch with you?

Thembi Bheka: RealEstateRealRiches.com.

Joe Fairless: That will be in the show notes page, so Best Ever listeners, you can click on the link and check out her website.

Thembi, thank you so much for being on the show and sharing your experience starting from scratch, coming from Zimbabwe to Canada… You started out as a registered nurse, and then decided that you wanted to focus more on long-term wealth and spending your time how you wanna spend it.

Then the properties – the three properties that you’re working on right now, with the seller who is just tired and wants to get away from the deals, and the value exchange that each of you are providing… More so he’s providing to you than you’re providing to him, but I think if we were to ask him, he would say you’re providing a lot of value too, because it’s a peace of mind.

Also, talking about the agreement with lawyers that you have in place so that he could come after you if you don’t adhere to what you said you would do; that’s an important part, I’m glad that you mentioned that… Because when people hear that story, initially at least, I think “Well, what’s the catch?” So it is drafted up and there are some repercussions if you don’t live up to what you will be doing.
Also, the 2008 pretty property that stunk really bad after five years of tenants living there, lessons learned and then how you run the numbers now with the interest rate padding, the vacancy, the maintenance fees… And start with the WHY questions that you want to know for every transaction – Why are they selling? And you gave the wonderful story of how you were able to work yourself into a deal with a little upfront and money over a period of time, versus more money upfront.

Thanks so much for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

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Best Real Estate Investing Advice Ever Show Podcast

JF993: How to Build a Fund and Buy BIG Deals in Many Markets

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He started with the capital and then grabbed the deals…in multiple markets! Follow our guest to hear his offering to his investors including a preferred return.

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Joel Sherlock Real Estate Background:

– Founder of the “Match Method” and HouseHarmony.com, realtor and investor
– Team is in the top 1% of our market, built and sold a brokerage and a few other endeavors
– Put together $30 million dollar fund to buy real estate in America
– Based in Vancouver, BC
– Say hi to him at www.househarmony.com
– Best Ever Book: The Saint, The Surfer and the CEO

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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluff.

With us today, Joel Sherlock. How are you doing, Joel?

Joel Sherlock: Fantastic, my friend. Thanks for having me.

Joe Fairless: My pleasure, and nice to have you on the show. A little bit about Joel – he put together a 30 million dollar fund to buy real estate in the United States. He is also the founder of Match Method and HouseHarmony.com. He is both a realtor, as well as an investor. His team is in the top 1% in his market, which is Vancouver, and he has built and sold a brokerage and he’s done a couple other endeavors. With that being said, Joel, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Joel Sherlock: Absolutely. Our real estate team is based in [unintelligible [00:03:09].00] and our fund is based out of the Vancouver area. Basically, the [unintelligible [00:03:13].10] is right between Vancouver and Calgary, it’s kind of like Canada’s Napa region. Lots of wineries, fresh water lake… It’s a beautiful place to be.

I started very simply, I bought a terrible little condo, fixed it up while I was in college, sold it at a profit because the guy I had bought it with fell in love and wanted to move in with her, so I sort of stumbled into flipping real estate, and it’s been a beautiful love affair ever since.

Joe Fairless: Well, I’m curious… I wanna jump right into the 30 million dollar fund where you put that together to buy real estate in the U.S. Tell us about that.

Joel Sherlock: You bet. My background’s in finance, so I was always a numbers guy. That first accidental flip, I ran the numbers, I was going to school to Canadian Securities, which is like a stock broker. My father was in the financial services… I’ve always been a numbers guy. And for me, always in my career I was looking for patterns, deals, systems automation… I was always a big fan of that.

There was a time in our market where the Canadian market had slowed down and a lot of the Canadian investors were looking down South. I’m from Winnipeg originally on the East Coast, and all the East Coast guys are talking about Florida, all the West Coast guys were talking about Arizona. So there were a couple of doctors that I had done a lot of deals with in our market here, and some of them had gotten down, they’d gotten deals in Arizona, some of them had gotten down and not gotten deals… And I was asked by a couple of them to come down, and I thought, “Hey, it’d be good to get away and play a little golf, hang out in the sun, and I can throw my 2 cents in wherever it’s needed.” But that first trip we went down, we went into 75 homes… It was at one of the lower points of the Arizona market, and it was mind-boggling to me… As we were going through these homes, people were talking about “The last sale was 750k, loan balance was 695k, and it’s listed at 350k and we’re talking about an offer of 210k.” In the Canadian system, that was absolutely just mind-boggling, so I think for the first 20 homes I was just purely in shock.

Then the next 20 I’m going, “Hold on… What’s it cost to rebuild this? Okay, well, what’s happening to the rental market?” We had a checklist. I always love to invest in markets that have great demand, reasonable job growth or reasonable second home markets, and vacancy rates that are very low. They were talking about phenomenal prices, and we’re buying less than replacement cost in a market that has an exceptionally strong rental market. So I thought, “Well hold on, this is a great opportunity!”

So we came back to Canada, and the thesis was simple – we were gonna buy property… At the peak, that market was taken at 35,000 starts, so there’s great demand… We’re gonna buy property cheaper than replacement value, and we’re gonna rent it, hold on to it until the market comes back, and the only variable was when that would be; we had no idea.

The demand was much larger than I expected, so we put that fund together, a traditional GP/LP structure. I had some help on that one from a mortgage company and a couple of investment guys, so there was a group of us, and then off we went. It was a brilliant experience. I definitely wish I had sold everything I had in Canada and bought more real estate down there, but my hindsight portfolio is almost perfect.

Joe Fairless: Yeah, exactly. You brought in 30 million dollars… Can you tell us some numbers about how it performed and any details on it?

Joel Sherlock: You bet. So the interesting part for us – when we brought that money across, we secured 214 doors; we’ve got 10-11 now, and then a couple under contract. So we are liquidating everything we have down there. Looking back at the numbers, we brought the majority of that money across at par, and that’s important as a little bonus.

Joe Fairless: And for anyone who’s not familiar with that terminology, can you elaborate?

Joel Sherlock: The money came across dollar-for-dollar, which was very unique at that time – Canadian dollar to American dollar. We started with a 10% cash-on-cash yield [unintelligible [00:07:43].16] rentals, and then as that market really picked up, we had crazy units in downtown Scottsfield that were $85,000-$90,000, and then our rehab costs — and they were just simple two-bedroom one-bath, townhome units… Our rehab costs were 8k-12k. We started out getting $1,100/month, then we got $1,200… By the end of it we were getting $1,400-$1,450/door. So the returns were fantastic on those.

Some of the things we had a little bit further outside of town in [unintelligible [00:08:18].01] stayed in that sort of 10-11 range.

Then we saw incredible appreciation in the latter three years, and then about 18 months ago we started having a conversation… With the way the dollar was — the Canadian dollar at that time was like 1,27 for every U.S. dollar, and we thought “We could hold this another year and we could see another 10% appreciation, but if the currency corrects 10%, then we’ve held it a year for nothing.” So the decision was made to sell it, and then the dollar got a little weaker, so we got 1,30-1,32 were some of the peaks that we saw. So that was another 32% bonus on top. All in all, it was a phenomenal investment for us.

Joe Fairless: What was your role? You said you had some team members that went in on the GP side with you… What was your specific responsibility?

Joel Sherlock: A lot of the team management, definitely capital raising in the beginning, and then a lot of watching the market fundamentals and deciding when should we really exit some of these things. I learned a lot about the structure of those funds and sort of that GP/LP relationships from my two partners, and now I’ve been very active reinvesting some of that capital into markets that we’re working in now.

Joe Fairless: What are those markets?

Joel Sherlock: Again, it’s a little bit dependent on the investor. Funny enough, we had a couple buildings that financed the legal cannabis industry, so just a real estate play into that market… We’ve got a group of investors who are really focused on investing into commercial assets, looking at mixed use buildings – three levels of retail, one level of residential on top. Two of the guys are getting into some small development… So really it’s kind of investor-specific, and then I’ve just been helping and investing on the side in some of those deals.

Joe Fairless: And as far as the actual cities that those are in, do you have any cities that you’re focused on right now?

Joel Sherlock: Definitely Vancouver, Kelowna, Calgary… Still active in Scottsdale, we did do a couple deals in Nevada, we’ve been looking at Oregon, Washington; [unintelligible [00:10:38].15] surprisingly enough is a beautiful commercial market if you can get your hands on any commercial property, because they put a boundary around [unintelligible [00:10:48].11] and there’s been a really large demand for commercial growth there.

Joe Fairless: I’d like to learn a little bit more about the GP/LP structure on the 30 million dollar fund. How was that structured?

Joel Sherlock: So traditional GP/LP (General Partner/Limited Partner), like the investors are limited partners and then the general partner is kind of the guy who manages the operations. The 2 and 20 refers to 2% management fee for capital under management, and then we take a 20% yield, so we participate in the lift, if you will. After we’ve made an 8% yield for the investors, we participate in 20% of the rest. So they get 80% of the upside, we take 20%.

Joe Fairless: After they receive their 8% preferred return…

Joel Sherlock: You bet.

Joe Fairless: And that 2% management fee – it’s basically 2% of capital under management, so that’d be 30 million… 2% of 30 million – is that paid annually?

Joel Sherlock: That’s paid annually, correct.

Joe Fairless: And then as far as distributions to your team, did you receive that monthly, or is that paid every 12 months?

Joel Sherlock: It was actually a European waterfall, which is a little bit unique. It meant that we didn’t participate as the GP until everyone had gotten their full investment back, and their 8%.

Joe Fairless: Okay, so you didn’t get the management fee until they got their money back and their 8%?

Joel Sherlock: Management fee, we did. The 20%, if you will… In traditional private equity there’s the two models: there’s the European waterfall where you get paid once everyone’s got their money back, and there’s the American waterfall where every time there’s a disbursement or every time there’s a profit made, the GP takes a piece.

Joe Fairless: You’ve gotta create a Canadian model.

Joel Sherlock: [laughs] Exactly!

Joe Fairless: So the 2% management fee for capital under management – you said that’s 2% annually, but as far as distributions go for that 2%, did you all receive it monthly, or was that quarterly, or was it every 12 months?

Joel Sherlock: Quarterly.

Joe Fairless: And when your team submits distributions on this fund, was it quarterly as well to your investors?

Joel Sherlock:  No, so it was upon exits.

Joe Fairless: Oh, upon exits. Okay.

Joel Sherlock: Yeah, and then the rental revenues were distributed quarterly.

Joe Fairless: Okay, I’m with you. And the rental revenues would go towards their 8% preferred return?

Joel Sherlock: Correct, it goes towards the total return.

Joe Fairless: That makes sense.

Joel Sherlock: So yeah, all in all it was certainly a home run and we’re actively hunting for the next market, the next opportunity. I’ve been down into Mexico, we’ve looked at a project in Belize… Those ones all have significant downside risk, which is one thing we always like to manage. It’s good to make a return, but we wanna protect that initial capital the most.

Joe Fairless: So the last question (I think) on the GP/LP – how much of the 30 million did the general partnership invest alongside the LP?

Joel Sherlock: The GP would have made up I believe seven and a quarter, seven and a half million. That’s always one thing that’s always been very important, and if someone’s looking at investing into a fund, make sure those general partners do have some skin in the game.

Joe Fairless: So that’s 25% of the 30 million the general partnership put in… And then on top of that 25% there was basically a 20% fee that the general partnership received after the 8% preferred return was paid and the money was paid back?

Joel Sherlock: Not a 20% fee, a 20% share of upside.

Joe Fairless: Share, yeah, sorry.

Joel Sherlock: So they get 80% of the return, and of course [unintelligible [00:14:42].13] we participated in our percentage of that.

Joe Fairless: The overall raise from outside investors then would be roughly 22.5 million, because the general partnership put in 7.5 of the 30, right?

Joel Sherlock: So the GP – we owned LP shares for that.

Joe Fairless: Yup.

Joel Sherlock: So we were investors in the fund and we got our 8% preferred return and our 80% of the return above that for our LP shares.

Joe Fairless: I get that, I’m just saying, besides the general partnership people, when you co-invest, the 7.5 turns in the limited partnership, but besides that, it’s 22.5 million that you’ve basically brought in outside of what the general partnership invested as LP.

Joel Sherlock: You bet.

Joe Fairless: Got it, okay. So since your role initially was capital raising, what can you tell us about how to raise capital, 22.5 million dollars? How do we do that?

Joel Sherlock: I have a very strong thesis, and something that is completely defensible because everyone looks at risk differently. Number one, make sure you’ve got all of your numbers together, make sure you’ve got all of your research done, and make sure your thesis is completely defensible from every angle.

Joe Fairless: And then when someone asks you “What type of risk is involved? What’s the downside?”, knowing that you have looked at it from different angles, how do you answer that question?

Joel Sherlock: I don’t try and hide from risk… I don’t believe that when you’re selling an investment trying to hide that risk or minimize that risk — I actually wanna balloon it up. We would tell people that the Arizona market’s taking an absolute beating, and it may be years for it to come back, and there’s no guarantee it ever will. So for us, not that you wanna talk people out of investing, but the last thing you want and the most stressful part of working with investors is when an investor is worried about their capital and checking in with you on a very frequent basis.

We didn’t wanna talk anyone into investing, especially Canadians investing in a market they’re not in and don’t totally understand, because that whole scenario down there was so foreign to what has ever happened in Canada. You know, the number of defaults…

Joe Fairless: That’s a great quote…

Joel Sherlock: Yeah…

Joe Fairless: “Don’t talk anyone into investing” – I really like that quote; that’s a great philosophy.

Joel Sherlock: Absolutely. Especially when it’s real estate, the investor pool is massive, and there’s some incredible resources out there, and different websites, and you can put your deck out there, your thesis, and it’ll draw great people in. But just sift through those people and take only the best ones, because you are essentially going to be partners and married to that person, especially with a long yield like that, for quite some time. It’s different than taking an investor for a flip deal and you’re together for three months… It’s a little bit different.

Joe Fairless: The fund was about like eight years or so?

Joel Sherlock: You bet. Just under.

Joe Fairless: You’re the founder of Match Method and HouseHarmony.com. What are those businesses?

Joel Sherlock: As I’ve said before, I’ve always been looking for patterns, and so many people were talking about going to Arizona, so “Okay, we’ve gotta figure that one out.” In a real estate practice, and also in my own investing practice, I noticed that the majority of people were selling homes to buy something else. Unless you’re a first-time home buyer or selling your home to buy Apple stock (and now Google stock), most people would be selling their condo to get a townhouse, selling their three-bedroom home to get a five-bedroom home; selling their 10-bedroom home to downsize into a 5, or selling in Kelowna to go to Vancouver, or selling in Arizona to go to San Diego… Whatever that would be, they’re selling a piece of real estate to make a move, either up, down, lateral, different town, something.

So we trained all of our guys and we developed great dialogues to get information, and then “What do you have and what do you want?” In a hot market, people would say “Oh, I’d love to buy a penthouse in that really exclusive building. If anything ever comes up, let me know.” Both agents would just scribble that info down and “I’ll set up a search for you, and I’ll call you if anything comes up.” But you’re missing 50% of that equation. So we would let people know that “Hey, [unintelligible [00:19:04].20] let me know what you have to sell if I find you this penthouse, and what I might have is somehow who has the penthouse and wants to get on the waterfront.” That person has the waterfront, and going to the penthouse.

Those were great dialogues, because people would always say, “Oh, that’s interesting… I have a home on the waterfront. It’s half an acre, 4,000 square feet, and I want this much money for it”, and our agent would furiously scribble notes down… And then once a month we would sit down – we started once a quarter and we brought it forward to once a month – and play a big game of go fish, essentially. We would share that list with other agents in the office, and it was so successful that we brought in agents from other brokerages.

I had always thought, “Wow, scale gives this thing so much power, because the more listings we can bring in, the more matches we can essentially find.”

Joe Fairless: It’s really smart, and it’s an obvious need, and you solved it. That’s great, thanks for telling that story about it.

Joel Sherlock: And then it gets really interesting, so when I would finish a flip, I would attend our open houses, I would list it with one of our brokers, and people would come around from the area, and people always come in to get “ideas”, and I would always ask “Oh, where are you?” and a lot of times they’re like “Oh, I’m just down the street and I need to rent on my house.” And there were times when it was like, “Oh, well why don’t you buy this one and I’ll buy your house?” So I would sell my rental and get my next project with that strategy – you buy mine, I buy yours.

HouseHarmony is essentially the evolution of that. What we did was we built a dating site for house deals. Now agents can come in and put that list in, what your client has, what your client wants, and it’s private unless your client has what I want. Unless there’s a match between you and me, I’d never be able to search that inventory. But once there’s a match, it [unintelligible [00:21:06].06] both the brokers and say “Hey, you guys should talk, because Joel has the penthouse and wants to go to waterfront, and you have the waterfront and want to go to the penthouse.”

Joe Fairless: Joel, what is your best real estate investing advice ever?

Joel Sherlock: That’s on fundamentals. We look at job growth in the city, vacancy rates historical, I always look at pricing, and then there’s supply and demand cycles, so look at what drives demand and how much supply is coming on the market.

Joe Fairless: I wanna make sure I have written down the things you look for: job growth, historical vacancies, pricing, and where the market is in the cycle.

Joel Sherlock: And new starts.

Joe Fairless: New starts, supply and demand.

Joel Sherlock: You bet. And actually, we want unemployment as well.

Joe Fairless: Any specific metrics that come to mind in terms of — okay, job growth, what percent are you looking at? Or you’re just looking at an uptick, or looking at a three-year, five-year projection?

Joel Sherlock: In job growth we also look at job diversity, and the reason for that is you look at a market like Fort McMurray, Alberta – a huge percentage of their employment is in oil and gas. So when oil and gas is strong, their market is red hot, and incredibly strong. Double wide trailers are renting for $4,000/month. But oil is cyclical. It’s guaranteed to be cyclical, it has been for decades. So when oil low, not many people wanna be paying $4,000/month to be in Fort McMurray. So for me, I just don’t like that kind of risk, because sure, when it’s hot you can make a solid cap rate, but when it’s slow, you make a very round number as a cap rate, like perfectly round in a circle, and those frighten me.

Joe Fairless: Let’s talk about new starts real quick. Is there a percentage or a number that you look at, or how do you quantify if it’s a good or bad thing with new starts?

Joel Sherlock: Again, that’s just more new starts adds to the supply number, and so big supply is not a problem if you have massive demand. Big supply is a problem if there’s huge amounts of supply coming on. We look at months of inventory, so like “How much is the market eating every month? If everyone stopped listing today, how many months of inventory are on the market right now?” If it’s less than six months, that’s a seller’s market. But if there’s 14 months of inventory coming down the pipe, that’s something that would certainly slow me down on that market.

Joe Fairless: Are  you ready for the Best Ever lightning round?

Joel Sherlock: Hit me!

Joe Fairless: Alright, let’s do it! First, a quick word from our best ever partners.

Break: [[00:24:06].07] to [[00:24:51].26]

Joe Fairless: Best ever book you’ve read?

Joel Sherlock: The Saint, the Surfer and the CEO. I thought I would pick one that’s not like “The Millionaire Real Estate Agent”. Gary Keller’s stuff is amazing, but so many people talk about it.

Joe Fairless: [laughs] Yeah, I like it. Okay, I got that written down, I’ll check it out. Best ever deal you’ve done?

Joel Sherlock: I would say that the first time I ever sold my rental and bought my next flip with that match method… I thought I was a genius.

Joe Fairless: What’s the best ever way to find people who have 22.5 million dollars?

Joel Sherlock: Best way to find people who have 22.5 million dollars? Just be open for every conversation and be passionate about what you’re talking about. I could talk about real estate every day all day, because I love it. It’s not work to me. If somebody said, “Hey, let’s go and raise some money for a lumber mill”, it’s like, “Oh, gosh… Okay…” I would be terrible at it. I cannot sell anything I’m not passionate about, and I’m passionate about real estate.

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

Joel Sherlock: Great question. I sat on the board of a children’s charity in Vancouver, and we have a medical needs, disabilities children’s camps, it’s called the Zajac Ranch – amazing work, incredible. I love to be involved in that, I love giving back.

Joe Fairless: Thinking back on the deals you’ve done, what’s a tactical mistake you’ve made on a deal?

Joel Sherlock: Not enough due diligence. Blinded by excitement.

Joe Fairless: What aspect of the due diligence was not enough?

Joel Sherlock: Taking pressure from — there was another agent on the other side, and on the surface it’s like “Hey, that’s a great deal. You’ve gotta make your mind up quick, because we’ve got a bunch of people looking at it.” So we just ripped through the due diligence really fast, and it was a big house, there was a lot of value to it – it was a flip that we did – and luckily we got our money back, but it was just a far larger project than we initially thought and our traditional due diligence scenario would have found out.

Joe Fairless: Where can the best ever listeners get in touch with you?

Joel Sherlock: SherlockAndAssociates.ca is our real estate site. I’m far more active on HouseHarmony.com. Facebook, Twitter is @Joel.Sherlock, Instagram – same… So really any of those sources, we’re active on all of them.

Joe Fairless: I thoroughly enjoyed our conversation, Joel… Holy cow, this was like taking an MBA class in real estate investing, raising money, as well as just as you said, investing on the fundamentals and talking about what you look for in markets: job growth, job diversity, historical vacancies, market cycle, pricing, the new starts and unemployment. The majority of the time we talked about the 30 million dollar fund, where you and your team raised 22.5 million dollars from outside investors, and the types of fees that you charge within that structure, as well as the type of returns and how you approach the overall business plan, why you saw what you saw, and then how it turned out. It sounds like you’re pretty much wound out of that, so congrats on that fund. I’m really grateful that we had our conversation, and I know the Best Ever listeners are, as well. I hope you have a best ever day, and we’ll talk to you soon.

Joel Sherlock: Thanks so much!

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