JF2159: Creating Software For Landlords With Laurence Jankelow

Laurence is the Co-Founder of Avail, an all-in-one software solution designed for DIY landlords. He initially was handling his real estate investment process with excel spreadsheets and after a while, both he and his partner figured there must be an easier way to be a landlord. They searched for different software and found that the majority of the ones out there were made for bigger landlords, so they decided to create their own for the smaller landlords. 

Laurence Jankelow  Real Estate Background:

  • Co-founder of Avail, an all-in-one- software solution designed for DIY landlords
  • Long-term real estate investor with a passion for 3-unit multi-family properties
  • Portfolio consists of two 3-units and 1 Car wash
  • Based in Chicago, IL
  • Say hi to him at: https://www.avail.co/ 
  • Books: measure what matters

 

 

 

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Best Ever Tweet:

“You make all of your money essentially on buying the right properties” – Laurence Jankelow


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners and welcome to the best real estate investing advice ever show. My name is Theo Hicks and today I’m speaking with Laurence Jankelow. Laurence, how are you doing today?

Laurence Jankelow: I’m doing well. Thanks for having me on. How are things going with you?

Theo Hicks: I’m doing great. Thanks for joining us, looking forward to our conversation. A little bit about Laurence’s background – he is the co-founder of Avail, an all in one software solution designed for do-it-yourself landlords. He’s also a long-term real estate investor with a passion for three-unit multifamily properties; current portfolio consists of two three-units and a carwash. He is based in Chicago, Illinois, and you can say hi to him at his website, which is avail.co. So Laurence, do you mind telling us a little bit more about your background and what you’re focused on today?

Laurence Jankelow: Absolutely. So my background– thanks for mentioning the three-flats. I’ve been a real estate investor for a while; the portfolio, it shifts and changes. Before I got into that, I had started down the finance track after college, now probably 15 or so years ago, and started with business in risk consulting, did that for just under five years, going from company to company, just taking a look at their operations in using data analytics, would try to help them determine where they can improve their business. From there, I went on to Goldman Sachs and did somewhat much the same for their portfolio managers and supported their hedge funds, alternate investments and private equity groups. I did that for so long that at some point, I wanted to try to get out of corporate America. So I tried to do the Rich Dad Poor Dad strategy, which was start building up some passive income through real estate, and almost worked my way through those quadrants; I can visualize it in that book now… I added the real estate and then eventually I thought, “You know what, the recommendation is to become a business owner.” So I started to think about, “Do I want to take my real estate from the six units to 1,000 units, or do I want to do something different?” and at that time, I saw that the way I was managing my rentals was totally ineffective, and I saw an opportunity to leverage software to make it better, and found that the best path for me was to quit my job at Goldman and focus on building a business around providing landlords of my size software that they otherwise didn’t have access to.

So that’s what I focus on now at Avail, is providing the tools and process and education for smaller landlords; those with nine or fewer units, to help do the day to day tasks of being a landlord and including listing syndication, to finding tenants, screening renters by hooking into TransUnion for credit reports, background checks, letting the tenants pay their rent online, drafting and signing leases online, those kinds of things. I spend a lot of my time just evolving that software.

Theo Hicks: So you mentioned that this company grew out of your own inefficiencies in management. So do you mind walking us through what those inefficiencies were, and then for each of those, how you were able to use software to solve those problems?

Laurence Jankelow: Yeah, it’s actually almost embarrassing now when I think about what I used to do. The person I started Avail with, Ryan and I used to share Excel files back and forth, and we’d make an Excel file where I’d merge cells together and paint them, and that would be our rental application. We’d print that out, we’d hand that to tenants, and that was how we screened them; we didn’t even realize that we should be pulling a credit report or eviction checks and those kinds of things… And it all evolved from that. At some point, we realized, “Hey, this is not working. Excel doesn’t make sense.”

We went looking online for software that would do what we wanted and we saw stuff like Yardi, which was really powerful, but Yardi’s really designed for a landlord with 1,000 or 10,000 units, which I’ve got six, Ryan had two, and the starting price of Yardi’s something like $10,000 a month. So that’d be more than our combined gross rents; it didn’t make sense. So we felt like if we wanted to solve these problems for ourselves, that there’s probably a business to be had here for others of our size. So that’s what we set out to do, really targeting, helping landlords with nine or fewer units, I’d say.

Theo Hicks: Perfect. So you had all these issues with your property, you went online to see if you could find an existing software, and there were software out there but they were too much, too much money or it’s for these larger buildings, whereas you wanted to find something for smaller. So take me from there to the start of the business. Did you and your business partner just sit down together and say, “Hey, here’s all the pain points of smaller landlords,” and then, “Okay, so here’s the different software that could potentially resolve those. Okay, let’s focus on these [unintelligible [00:07:17].27] ” How does the process of creating this type of company work?

Laurence Jankelow: Well, creating a company is pretty hard, and I think we didn’t realize that going into it. Everyone tells you it’s really hard, and then it’s something you don’t really acknowledge till you do it. But we started this in 2012; that’s when we quit our jobs. We quit with nothing but an idea on a napkin. We felt that we didn’t want to work on it while full-time. It wouldn’t really go anywhere if we had a full-time job elsewhere, and it wouldn’t be fair to our employer or ourselves to let our dream sit on the side. So we quit and we started day one, and then what we tried to do is find an engineer to help us build it, and you can imagine, we couldn’t find an engineer who wanted to build our dream for free or for equity, which was worth nothing at that point.

So Ryan and I decided we were going to have to build it ourselves, and we had no experience in that. So we ended up having to roll up our sleeves, we taught ourselves to code. In 2012 to 2014, I essentially wrote the first 500,000 lines of code that allowed us to syndicate listings to Zillow, or Trulia or hit the TransUnion API to get a credit report or those kinds of things… And we spent that first two years fumbling around, I’d say, trying to figure it out, really took that just do what it takes mentality. End of 2014, we felt like we had a pretty good product and we started getting traction, started getting customers, started hiring our first employees, really started seeing it as a business and starting to grow, and then from 2015 to 2020, we really saw some growth,. We’ve now got 600,000 landlords and tenants who use our system for the everyday purposes of being a landlord.

Theo Hicks: Wow. So what did you do for money in those two years while you were doing all that fumbling around, as you said? Did you have money saved up ready?

Laurence Jankelow: Yeah. Ryan and I consider ourselves to be super privileged in a way. I was at Goldman Sachs and he’s at a different investment bank. So we had some savings, not as much as you would assume you get out of investment banking, particularly because we were just coming out of the financial crisis of 2008. So we didn’t really get bonuses those couple of years, but we had enough where we could each put $20,000 into starting the business, and that $20,000 was essentially, for us to live on for those years. So those two years were very much the ramen noodles years, but we at least had something to feed ourselves. But I don’t look back on it as regret. I feel like we’ve learned a lot. I think learning how to code was probably one of the greatest achievements for me. It completely changed how I think about almost everything I encounter now.

Theo Hicks: Did you self-teach yourself on Google or did you take courses?

Laurence Jankelow: Taught myself. This is probably a popular programming language for anyone who does this, but it might not resonate with some of your listeners. I taught myself Ruby on Rails, I downloaded a tutorial, and essentially that tutorial just walked me through creating my own Twitter from scratch, and replicating that. What was awesome about it is you really start to realize, “Look, I’m getting stuck at this point. There’s no one to help me, and I can either give up or I can spend four weeks trying to solve something that a real engineer could probably do in two minutes,” and you spend those four weeks trying to solve a two-minute problem, you tend to grow by leaps and bounds, I’d say. That’s what happened for me, and I feel like that just fueled my hunger for learning more and attacking harder and harder problems.

Theo Hicks: Wow, that’s awesome. Did your business partner write any code or was it all you?

Laurence Jankelow: I’d say I wrote 95% of it, and Ryan did do 5%, but Ryan also had a really challenging task for him as well. So while I was writing that code, he had to convince a bank to allow us to pull money out of any account in the United States, essentially, to do withdrawals. Tenants want to pay their rent. So yeah, we have to get approvals from those tenants. It has to be super documented. So he had to work on convincing a bank and figuring out that process of what that has to look like, how does it meet regulations, all those things. He had to convince TransUnion to allow us to pull credit reports and sensitive data on people, and we’re not famous, we don’t have a pedigree to go and earn these things just by nature. So he really had a lot of convincing yet to do. So I applaud his efforts on doing that. It sounds impressive for me to go write 500,000 lines of code, but honestly, for him to convince people to take a chance on us for those other pieces – much more impressive.

Theo Hicks: So you said around the end of 2014, some of the code or the software was written, you started getting customers and hiring employees, and then flash forward six years, you’ve got 600,000 landlords. So you got your code written, the banks allowed you to pull money out of anywhere in the US, TransUnion allowed you to pull credit reports. How do you find your customers?

Laurence Jankelow: That’s always been a challenge for us. Our customers are the smaller landlord, nine units or fewer. So they’re not listed in a phone book. It’s not like I can go find them somewhere and oftentimes, they don’t identify as landlords. I didn’t either when I was at Goldman. If I went somewhere and people would ask me what do I do, I’d usually tell him I work at Goldman Sachs or I would not even mention Goldman because at that time, and even now, there’s just a lot of animosity maybe towards some of those investment banks. So I tell them, I work in finance. I would never mention I’m a landlord. So it didn’t resonate with me as that’s who I was as a person. So that’s always been a challenge, and so what we’ve had to do is figure out where are landlords going, looking for help, and I think in some ways, we’re lucky because they go to the internet for that.They’ll go to Google and they’ll search for ‘what should I do if my tenants’ rent is late’ or ‘how do I get a credit report on a tenant?’ or– I’m in Chicago, so this resonates with me, ‘how do I get a Chicago standard lease agreement?’, and we put out so much educational content that they’ll often find us through those Google searches. We tend to think of our product having a sixth arm in a way or sixth major service, which is the educational component, and we spend as much time on our educational piece as we do on any other part of the product. So they’ll typically find us by– it’s commonly called inbound marketing; that way.

Theo Hicks: So you didn’t pay for any Google Ads. It was all just SEO. You said you figured out what these type of people will be searching for on Google, and then you just wrote those articles, and then eventually, over time, people started finding your blog posts, and in theory, from your blog post, they found your service.

Laurence Jankelow: Yeah, our go-to market strategy has evolved a lot. So it started off with content marketing, which is geared at some of those keywords that they search for organically, and we don’t have to pay for it, but it did evolve. We do pay for high converting keywords now. We can recognize which ones are likely to be profitable for us. So we do pay for those now, and then we continue to pay for those. But by far and large, most of our customers are coming from some of that educational content.

Theo Hicks: Who is writing your content? Is that you and your business partner or is it somebody you hired?

Laurence Jankelow: Well, that’s also evolved. 2012 to 2015, 2016, Ryan and I pretty much wrote most of it. Around 2015 we hired some writers to help us, and you could see a huge improvement in the quality of writing when we hire people. The hard part is oftentimes you’ll find a writer and they don’t know much about landlording and Ryan and I just knew so much about it. So then the challenge is how do you impart a lot of that learning to the writer so that they can write really high-quality, effective content? Because last thing you want to do is put out 2,000 words of dribble. It has to add value, it has to solve a problem for someone.

Theo Hicks: How does your company make money?

Laurence Jankelow: That’s actually interesting. So our software is free. You can have unlimited number of units and use our software for all the features. So tenant screening, listing syndication, the leasing, payments, all that’s free. We do have a premium tier. So if you need a little bit extra, then it’s $5 per unit per month and extra meaning something like you want to set up automatically fees. So if a tenant is more than five days late, it automatically charges 50 bucks. On the free tier, you’d have to log in and manually do it. So there’s a whole bunch of things like that, that push someone into the premium tier or the plus plan as their business evolves, and they need more automation.

Theo Hicks: So the only way you make money is on that premium tier, subscription-based model?

Laurence Jankelow: We have a bunch of ways; that’s our largest way.

Theo Hicks: Okay.

Laurence Jankelow: We also make some money on some of the transactional stuff. So when we pull a credit report, tenants will oftentimes pay $55 for the credit report. Now the benefit to them [unintelligible [00:15:05].09] so it doesn’t hurt their credit report, and then they can also share it with other landlords, so that a tenant isn’t having to pay $55 for this landlord and $55 for another. They can pay it once and share it with any landlord, even though it’s not on our system.

Theo Hicks: Was the premium model the plan from the get-go, and then also, obviously curious, how do you know what’s included in the free plan and what to include in the premium plan?

Laurence Jankelow: That’s evolved a little bit, too. So initially — our pricing has changed a little bit, but we tend to think of breaking the tiers down by landlords who have essentially one unit, and those who have two or more, and tailoring the plans to them. So although the plans are both for unlimited units, we tend to see that landlords with one unit on the free plan or landlords with two or more are on the premium plan, and the reason for that is just how you think about your rentals. For Atlanta with one unit, oftentimes, they’re an accidental landlord or it’s just something they have, and then maybe they’re dabbling, they’re not sure if they want to be real estate investors or not. But folks with two or more units tend to be more deliberate. They didn’t just happen to become a two-unit landlord or more. So they may view themselves as a business a little bit more, and realize that tools and software are part of business, part of how you reduce expenses and maybe push up income. So for that reason, those folks tend to want a little bit more out of the software, a few more features and are also willing to pay. So we bifurcate it that way.

Theo Hicks: Alright Laurence, what is your best real estate investing advice ever?

Laurence Jankelow: So many things to choose from here… I guess, I would start with– because we tend to focus on novice landlords or new landlords… Best real estate investing advice is when you buy the property. So one obviously, if one of your life goals is financial independence, then getting a rental property is great to do that, but you make all your money essentially, on buying the right properties. And if you’re looking into getting into it, you should really buy properties that are going to be cashflow-positive for you. There’s a tendency if you’re a first-time rental property purchaser to purchase in a manner where it’s akin to if you were buying a single-family home or something that you’re going to live in, and oftentimes those are emotion-driven. Here, you really want to focus on the numbers. So buy a rental property where the gross rent covers all of the operating expenses and the debt payments and has enough of a return where that’s your best usage of the cash, I would say. And if that property isn’t that, you put the cash somewhere else or in another property,

Theo Hicks: Okay, Laurence. Are you ready for the Best Ever lighting round?

Laurence Jankelow: Yeah, let’s do it.

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

Break [17:31:04] to [00:18:29]:06]

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

Laurence Jankelow: Well, I mentioned Rich Dad, Poor Dad, but that’s from a long time ago. So recently, the best one for us is Measure What Matters, and that’s essentially about a goal-setting framework that was developed maybe 30, 40, 50 years ago at Intel, and it’s essentially a structure that you can use to set up goals and how you measure the success towards that goals. And just for me at Avail, that was a pivotal moment for us adopting that framework and setting goals. And even if it’s not Avail, if it’s with your rental properties, you should set goals for the rental properties and how you want to measure them. So the key takeaway from that book is the measurement of those goals and making sure you have something that has a strict KPI in that measurement.

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

Laurence Jankelow: Great question. Well, I’ll probably start another one. Once you get bitten by the startup mosquito, you tend to want to get bitten more. So if Avail fail today, man, you’d have to take a hard look at why I failed, because I think we’re doing all the right things. But I would start the next one. I don’t know if it would be real estate, but I’ve got some ideas around investing in stocks that are similar to what we do for real estate, but for a stock investor. I think you’d have to keep going and keep building. Once you’re a builder, always a builder.

Theo Hicks: What’s the best ever way you’d like to give back?

Laurence Jankelow: I’ve got two kids, a six-year-old and a four-year-old, both little girls, and for me, I try to teach them some things. One of the things that we try to do now that’s really small is we take the little red wagon and we go around our neighborhood and we use one of those little claws to pick up trash. We walk around the neighborhood and we pick up trash and we try to fill up a trash bag every so often just to clean up the area.

As far as real estate, I try to participate in online communities. I feel like there’s a lot I’ve learned just from the six units, but then also, from seeing how our 200,000 landlords manage their properties there’s a lot that we’ve learned, and I try to take the knowledge we’ve gotten there and I try to push comments out. We have our own community on our website that I try to get it to some of those Facebook communities where you see a lot of landlords trying to interact and figure out what to do.

Theo Hicks: What’s the best ever place to reach you?

Laurence Jankelow: You can learn anything and everything you want about what we do at our main website avail.co, but I also like people reaching out to me directly. I’m always happy to have a conversation. So if anyone wants to do that, they can reach me at my email laurence [at] avail.co. I encourage anybody to do it. I’ve done a couple of podcasts now and not one person has reached out to me and that’s disappointing.

Theo Hicks: Best Ever listeners, make sure that you reach out. I might have to email him just to make sure someone reaches out, but I think one of our Best Ever listeners will reach out especially after listening to this episode; very powerful. I really enjoyed the conversation.

I stopped taking notes in the middle of it, and was just asking questions. It was so fascinating to me how you’ve been able to build this business and learn how to code and go from really having no idea how to write software, how to run your own company to having 600,000 customers; that’s great to hear. So definitely worth re-listening, just to hear his process from quitting with an idea on a napkin, to learning to code, to his business partner working with banks to figure out how to let them pull money from any bank, and working with TransUnion to pull credit reports, to finally 2014 when you started getting customers.

We talked about how you were able to get customers through content, so through your thought leadership. It was always great to hear because we talked about that on this show a lot. Then you mentioned eventually you ended up evolving to paying for stuff, but that’s like a theme, where you start off doing everything yourself and eventually it evolves into being able to outsource some things. And then your best ever advice was if you’re gonna buy real estate, realize that you make money on the front end and that needs to be cashflow positive.

So Laurence again, I really appreciate you coming on the show, I learned a ton, and I’m sure the Best Ever listeners will as well, and if they have more questions, take advantage of him giving you his email address. It’s not every day that our guests do that. So Best Ever listeners, as always, thank you for listening. Have a best ever day and we’ll talk to you soon.

Laurence Jankelow: Thank you so much.

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JF2119: Infinite Banking & Taxes With Mark Willis

Mark is a returning guest from episode JF1567. He is a Certified Financial Planner and is a #1 Best Selling Author, and in this episode, he will share with you the benefits of infinite banking and paying for your tax bills.

 

Mark Willis Real Estate Background:

 

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Best Ever Tweet:

We will provide you with what you need to know and what you need to do in order to increase your net worth.” – Mark Willis


TRANSCRIPTION

Joe Fairless: Best Ever listeners, how 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 that fluffy stuff. With us today, Mark Willis. How you doing, Mark?

Mark Willis: Hey, I’m doing great, Joe. How are you?

Joe Fairless: I’m doing great as well and looking forward to our conversation. So first off, Best Ever listeners, Mark’s name probably sounds familiar because you’re a loyal Best Ever listener, and he was interviewed on Episode 1567 titled, Increase Net Worth and Have Your Money Working For You, talking about infinite banking. We’re going to be talking about the same concept, but with a different application, and that is how to use that to help pay for your taxes. A little bit of a refresher on Mark – he’s a certified financial planner, he’s an author and the owner of Lake Growth Financial Services, based in Chicago, Illinois. So first off, Mark, do you want to give a refresher on what infinite banking is, and then we can go into how it can be used to pay for your taxes?

Mark Willis: Sure. So as a certified financial planner, using the infinite banking, or we sometimes referred to it as the “bank on yourself” concept, is not generally taught or even encouraged among the classically trained CFPs out there. It’s buy term, invest the rest in paper assets on Wall Street. So the infinite banking concept is using a high cash value dividend-paying whole life insurance contract that you own the asset, the equity, the money, the cash value and the policy, and use it for all of life’s needs. We’ve talked elsewhere about how to use this for real estate, but today we’re talking about our life’s biggest expense, which is our obligation to the IRS.

So using the policy affords you a couple of things – one, it grows on a guaranteed basis every single year outside of the market; two, you can access that money without taxes due if you design it correctly; three, when you borrow from the polic– see, not all policies do it, but if it’s designed correctly, the policy will continue to grow, even on the capital you borrowed against. To say that another way, you borrow money out of the policy and it continues to grow as if you hadn’t touched a dime of the money. And then four, it is life insurance. So you’re leaving your family more than you could ever save for them, because every dollar you put into the policy is a multiple when you decide to graduate. So that’s it in a nutshell.

Joe Fairless: Yep, and I am a proponent and also I have moved forward with infinite banking as well. So let’s talk about paying for your taxes with bank on yourself or infinite banking. What do you mean by that and how does it work?

Mark Willis: Well, it’s funny. I say, they picked the right acronym, because you put the word ‘the’ and IRS together and you get the word, ‘theIRS’.

Joe Fairless: Never thought about that, yeah.

Mark Willis: It’s all theIRS. The IRS is pretty young, though. It’s only been around since 1913, but it’s fun to– well, fun is a relative word, Joe. But it’s fun to look back over history and see that the country did just fine without an income tax for over 150 years. In fact, they had surpluses. It was started as a temporary tax on the most wealthy people to cover the expenses of the Civil War and then World War I, but it became permanent when the government needed to replace other revenue sources with more permanent taxes on their own citizens. So that’s where the IRS got their start.

Joe Fairless: Thank you for that. I didn’t know that.

Mark Willis: Yeah, it’s interesting, and I’d say, as we look at our current situation, we’re in a very interesting season right now. So the next five, six years, we are all in a lower tax bracket than we will be — unless Congress acts, we’ll be in a lower tax bracket right now than we will be five years from now, and that’s the law. That’s literally the tax code. We all get a tax raise on us at the end of 2025, just five years from now. And most people aren’t aware of that, but I asked folks, “Do you think taxes will be lower or higher in the future?” Almost everybody I talked to, Joe, says, “Yeah, they’re going to be higher.” So the question is – Well, why is it that most of us and our CPAs included are recommending that we put money into tax-deferred vehicles like 401Ks, IRAs, that sort of thing? If we know there’s a day, a month and a year when we know that taxes will be higher, why delay or defer a root canal? The same question.

Joe Fairless: Well, their stance might be time value of money, because if I’m delaying it today and I’m investing it and I’m making a return, today’s dollar’s worth more than tomorrow’s dollar.

Mark Willis: That’s a great point, and I hear it too, but the math works out where it’s literally the exact same money, whether I pay tax on the seed or I pay tax on the harvest. We can get into the math if you want to, but literally, it’s the exact same.

Joe Fairless: Please do, yeah. We’ll get into that math, will you?

Mark Willis: Sure. So let’s say that you put a certain dollar amount into a policy, or let’s say you put a certain dollar amount into a tax-deferred vehicle, one or the other. So a life insurance policy is after-tax, similar to a Roth IRA or something like that, and a tax-deferred vehicle might be like, say, an IRA or a 401k. Let’s say you put in 1000 bucks, and let’s say you’re in a 30% bracket. So a life insurance policy or a Roth IRA will have 700 bucks at the end of the year after tax – 30% off of a thousand is 700 bucks. Let that money grow at the same rate of return, and it’ll be a smaller number after 10 years, 30 years, whatever; and in the meantime, the tax-deferred vehicle, you got to keep all your $1,000 in there growing on a tax-deferred basis. So it’s going to be a bigger number at the end of 10 years, 30 years, whatever it is. With me on everything so far?

Joe Fairless: Yep.

Mark Willis: Now the key is, what happens? How do we get the money out of that tax-deferred vehicle? Well, it’s going to get taxed, and if taxes are the same 30%, you’re going to take your money out of that retirement account and 70%’s gonna be left in your pocket and 30%’s going to the government. Again, it’s all about how much is the tax rate when you put the money in, and you take the money out. Mathematically, if the taxes don’t change, tax-deferred and after-tax dollars are exactly the same on a mathematical basis.

Joe Fairless: And then an outlier for this, I believe, would be a 1031, where if you just 1031 till you die, you’re never gonna pay taxes.

Mark Willis: That’s right. Yeah, and then that lovely step up in basis. Yeah. So the 1031 is a great option for folks that are looking to defer, defer, defer. I would say buy, borrow, die, as others have said. So that’s the strategy if you want to just avoid the tax completely, for sure.

Joe Fairless: Okay, cool. Now going back, we went off a little bit, but I’m glad that we went in that direction for a little while. Now coming back to using this to pay for your taxes – will you continue that thought process?

Mark Willis: Sure. So again, think about how powerful it is to let your money continue to compound even when you’re using it to make big purchases. We could talk about how powerful that is when you buy a car. Let’s keep it simple first, then we’ll talk about real estate, and then we can talk about taxes too.

There’s only a few ways to buy things in life. You can borrow from somebody else, you can finance it, you can pay cash for that car or you can use a policy. So in the first instance, you’re sending interest payments and control over to the bank down the street to buy that car, where they charge you interest and they could repo the car if you don’t pay them on time. If you pay cash for that car, that feels good in the moment, but you’ve lost all the opportunity cost to continue earning compound on that money, had you not bought the car and left it invested instead.

The power of this strategy is, when I borrow from the life insurance cash value, the insurance company sends me the money and I’m paying them back. I’m using my life insurance cash value as collateral, and while I’m paying the loan off, the policy can continues to generate a full dividend, even on the capital I borrowed, meaning no interruption of compounding.

So the eighth wonder of the world is uninterrupted compound growth. So that’s cool when it’s coming in cars and whatever, but let’s talk about what it means when we’re actually paying our taxes. Some people say, “Well, Mark, I don’t really pay a lot in taxes. I did the math.” Let’s say you’re a 35-year old who’s putting away and has to pay $6,000 a year. That’s just your payroll taxes. You’re a W-2, your payroll taxes… Most of us are paying a lot more than that. But if you’re single, earning 50 grand a year and you’re 35 years old, you never got a raise and if taxes never went up, you’d be paying six grand a year, over 35 years. That’s $210,000 to the IRS. But what if you could save that money? If you could earn a return on $6,000 a year for 35 years at 5% interest, that’s over half a million dollars, and that’s only up to age 70. Of course, government still charges you taxes in retirement too, especially on our 401ks and IRAs. So that’s half a million bucks. But what would happen if you move some of that money into a life insurance policy? Literally, warehousing your tax payment in your life insurance all year long, and then borrowing out that cash to pay your taxes as you normally would, and then paying off the loans on those policies and premium payments as you have windfalls in your real estate business. So here’s where things get, I think, pretty interesting.

So let’s imagine for example, a case study. Let’s give him a name. Let’s call him Tommy Taxpayer. Let’s say, good old Tommy’s got a $90,000 a year tax problem, and he knows– he knows the story of that case study I just mentioned, where if you’re paying six grand a year to the IRS, half a million dollars over your lifetime, it’s a heck of a lot more if you owe 90 grand a year to the IRS. I know a lot of clients that take a zero or add a zero to that number. Folks pay big checks to the IRS, whether it’s on April 15 or all year long, just total it all up.

So Tommy Taxpayer has a $90,000 a year tax problem. So what we did in these numbers – I’d be happy to share the numbers with any of your Best Ever listeners that want to see it, but let’s say that he puts away into a life insurance contract that’s designed for cash accumulation. 90 grand a year is as premium. Now, in order to be able to really build the policy well, we have to factor in that there is an insurance cost on any life insurance policy, but he also knew he needed to save for his own retirement eventually as well. So this business owner wanted to save and he didn’t want to use a 401k or an IRA. So to do that, he combines his tax payment of $90,000 with a retirement savings amount of 50 grand a year. That was what he felt like he could save, but wasn’t convinced that a tax-deferred or tax postpone retirement plan like an IRA or 401k was the best place to keep it.

Joe Fairless: So all in $140,000 putting towards this problem.

Mark Willis: There you go.

Joe Fairless: Cool.

Mark Willis: So day one, month one, he has a cash value of $95,000 and a death benefit of $3.3 million. Day one, month one. So he’s got more than enough in that cash value in the first year to pay his tax bill, which is the key; and let’s say that he does that. He puts the money in, retirement money plus tax money, borrows out 90 grand, and let’s say for whatever reason, he never pays off that tax bill, that loan against the life insurance policy. Well, again, if it’s a non-direct recognition company, Joe – and most mutual life insurance companies aren’t non-direct recognition, but if they are, if this was a non-direct recognition company, the policy will continue to pay you interest in dividends on the $95,000 of cash value, even though you’ve only got five grand left in there after you take the loan to pay your tax bill. So let that  sink in for a minute; that is tremendous. That is the eighth wonder of the world, as Einstein says.

Joe Fairless: What does non-direct recognition mean?

Mark Willis: It’s a good question. Talk about deep cuts vocabulary… What it means is, they simply don’t recognize that you’ve taken a loan. Now, there are two kinds of insurance contracts out there – one is direct and one is non-direct. A direct recognition life insurance loan is recognizing that you took the money out, and thereby reduces or penalizes you, reduces your dividend if you borrow against the policy. That to me is a non-starter. I wouldn’t use the direct recognition —

Joe Fairless: Is it a one to one ratio for the reduction and debit?

Mark Willis: Correct. They will reduce your dividend based on whatever’s left or noncollateralized in the policy’s cash value.

Joe Fairless: Okay.

Mark Willis: Whereas a non-direct doesn’t recognize that loan was taken, and it continues the compounding.

Joe Fairless: Why would there be any non-direct companies? Because it doesn’t make sense from a business standpoint to me?

Mark Willis: Well, it’s all about business model. So some insurance companies encourage loans and others think that they could do better investing in bonds and other fixed-income assets. So the insurance company that has a non-direct contract simply is making a statement that they encourage your access to the cash value, and they would allocate their general fund accordingly. Most insurance companies are going to be well reserved with funds and policy loans and term insurance premiums. All those are the profit centers of insurance companies. If it’s a mutual company, Joe, no doubt, you know this – like a mutual life insurance company, you’re getting the profits, the dividends from that portfolio. So it’s just a business decision. Non-direct companies think ” You know what, we’re going to let our policyholders have a benefit when they access the cash value. We’ll use that policy loan as a part of our overall investment returns.”

Joe Fairless: Okay.

Mark Willis: Okay? So back to Mr. Tommy – after 20 years, let’s imagine a world where he never pays that tax bill off. In fact, Joe, let’s say he takes a new $90,000 loan every single year for the next twenty years paying his tax bill; every year for 20 years. So he starts at age 45. So now he is 65 years old, 20 years later, and he’s got a massive policy loan of $2.8 million, because he never paid off that policy loan, and yet, he still has $1.2 million in cash value because the earnings and growth of cash, and a $5.8 million death benefit, even though he never paid off the policy loan… Which I don’t recommend, but it’s technically possible. So if he was to pass away, the death benefit would still be left to his family at $5.8 million, and if he wanted to, he could just spend down the $1.2 million in cash as a retirement income stream; and if we designed it correctly, it would come out income tax-free.

Joe Fairless: But the money that he hadn’t paid back, that would be deducted when he dies, right?

Mark Willis: Yeah, that $5.8 million already accounts for the loan balance.

Joe Fairless: Okay, so eventually the insurance company is getting that money back. They’re taking it out of the death benefit.

Mark Willis: Well said. Exactly right. So they collateralize your death benefit. Some people have compared this to a HELOC in some ways. If your house is worth a million bucks, and let’s say, you’ve got a HELOC for 300 grand on that house, your house is still growing in the neighborhood at a million bucks. It doesn’t matter if there’s a HELOC on it or not, Zillow still thinks it’s worth a million bucks. The same is true with non-direct recognition life insurance. If you have a million dollar cash value and you borrow 300 grand, that policy is still going to earn a dividend and guaranteed cash accumulation of whatever the dividend was on the full $1 million, without the loan notwithstanding. But you’re right. The insurance company knows they’re going to be paid back upon death or beforehand, which is why they’re willing to let us have any repayment schedule we wish… And our good friend Tommy Taxpayer went 20 years without repaying a penny of that loan. Now what I’d recommend again, but it’s totally possible.

Joe Fairless: Why wouldn’t you recommend that? Because it sounds like a pretty good scenario for Tommy.

Mark Willis: Yeah, he still ends up with a decent retirement. If he was to repay that loan, it would lower the loan interest rate. He’d have a lot more at retirement, which I’ll mention in just a minute, than what he’d have if he could pay that loan off every couple of years. But there’s a risk too if you never pay off a loan on these policies and the loan exceeds the cash value, [unintelligible [00:19:21].24] and you might have a taxable event, if there’s gains in the policy.

Joe Fairless: How would the loan exceed the value?

Mark Willis: Yeah. As the loan is earning interest, there’s a loan interest on policy.

Joe Fairless: Okay, so you’re paying an interest rate on the money that you borrow, and that’s what, 5%?

Mark Willis: 5% on a simple interest schedule. So if you never pay the loan off, it would be a straight 5%. If you pay it off– over four years, Joe, I’ve seen policy loans APRs at about 2% if you pay the loan off over, say, a four year period. Yeah, it a good question. So you do [unintelligible [00:19:59].13] or you leave your family less if you never pay off that policy loan. So I do recommend we manage the thing well.

I tell folks, these loans should be paid off over a reasonable period of time, and folks will ask me, “Well, what’s reasonable?” and generally, I’ll say, “It’s really, whatever a regular schedule would be for any other bank down the street.” A car loan? Maybe four years is reasonable to repay a policy loan to pay off a car. For a mortgage, maybe 10, 15, 30 years. Who knows? It’s just whatever is reasonable for the cash flow in your life.

Joe Fairless: I’m glad you walked us through this scenario. What else should we talk about if anything that we haven’t talked about already, as it relates to this situation?

Mark Willis: If I may, let me share one more alternate universe for our good friend Tommy, and then I can talk through what may be better than letting that loan just grow, grow, grow. So imagine now Tommy’s still doing the same $140,000 in contract premium and he’s borrowing the same 90 grand every year, but every five years, his business is profitable enough to send a windfall into his policy. Most business owners I work with, if they have a $90,000 tax problem, they’re making a profit somewhere. So where’s that money gonna live?

I think one of the key things a good financial planner should ask their clients, and we try to do that ourselves is – where do you want your money to live? Your money needs to reside somewhere, and I can’t find many places better than a high cash value dividend-paying whole life policy. But the problem is, for Tommy, he can’t pack more than 140 grand in premium into this policy. That’s the limit that the government set on his particular policy. Now you can have a limit as low as 14 grand or 140 grand or three-quarters of a million. Each policy has their own engineered limit; but we found a way with the policy loan to pack in way larger windfalls. In his case, every five years, he writes a check to his policy and repays his policy loan to wipe out that loan balance, and every five years that happens to work out to 490,000 bucks. That was the loan balance every five years, and he gets a profit every five years in this hypothetical scenario, and he wipes out that policy loan every five years. So he’s limiting the interest that’s charged when he does that. He’s also freeing up a huge bucket of cash that he could use for other real estate investments or anything else, and just to cut to the chase, Joe, at age 65, his death benefit is $8.7 million, and he has a liquid retirement fund, let’s say, or a cash value of $4.1 million. At that point, he stops funding the policy and he just takes that $4.1 million out as another tax-free retirement income stream.

Joe Fairless: When you explain the situation to someone other than me, what are some typical questions that come up?

Mark Willis: What’s the catch? Why haven’t I been told to do this by my CPA? I think one of the things is the CPA is really good at helping you find deductions this year. That’s how they keep their job. Life Insurance is after tax. You’re paying your taxes today on the seed, not the harvest. So they’re not getting your smiles and grins for the big juicy tax deduction this year. When you put premium into life insurance, it’s usually using after-tax dollars.

A lot of folks will say, “Well, Mark, how can I possibly save 140 grand into a life insurance policy?” and I say, “It’s not about Tommy’s numbers, it’s about your numbers. You’re already paying your tax bill somehow, either you’re using cash to pay for it every month, every quarter, every year – a lot of our folks have quarterly payments – couldn’t you be saving that somewhere? Where’s that money saved better than a savings account?” A lot of folks who can’t save at all, I wouldn’t recommend this policy to. You do have to still pack money into the policy. It’s not a magic pill, and don’t look to this policy to become wealthy overnight. If you’re looking for hedge fund-like returns, you’re going to be bored to tears with the internal rate of return of the policy. I think in previous episodes we’ve talked about; it’s low to middle, single digits, 4%, 6%-something present. So it also means you have to think a little different than the average taxpayer, which is a roadblock for some folks as well.

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

Mark Willis: Yeah, thank you, Joe. If folks want to find out more about this, we’ve done a few podcast episodes on this that dive deeper at Not Your Average Financial Podcast. Or if you want to reach out and connect with me or one of my team members, go to growmorewealth.com.

Joe Fairless: I enjoyed this different thought process about how to apply infinite banking. Thank you for walking through that example, and Mark, thanks for sharing this area of expertise that you have with us. So I hope you have a best ever weekend and talk to you again soon.

Mark Willis: Thanks so much, Joe.

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JF2118: Broad Experience With Alix Kogan

Alix is the President of Ashland Capital Fund and has 20 years of real estate experience owning 1,700 apartment units, single-family rentals, commercial and developments. He started in high-end custom homes and more recently has been focusing on student housing deals. Alix shares one of his new strategies which is investing in second lien mortgage debts.

Alix Kogan Real Estate Background:

  • President of Ashland Capital Fund
  • 20 years of real estate experience
  • The portfolio consists of 1,700 apartment units, single-family rentals, commercial and developments
  • From Chicago, IL
  • Say hi to him at:https://ashlandcapitalfund.com/ 

 

 

 

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Best Ever Tweet:

“My broad experience in real estate has helped me tackle new projects” – Alix Kogan


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 that fluffy stuff. With us today, Alix Kogan. How you doing Alix?

Alix Kogan: I’m great, Joe. How are you?

Joe Fairless: Well, I’m doing well, and I’m glad to hear that. A little bit about Alix – he’s the president of Ashland Capital Fund, he’s got 20 years of real estate experience, the portfolio consists of 1,700 apartment units, single-family rentals, commercial and developments. He’s based in Chicago, Illinois, and he has now turned his focus towards student housing. So we’re going to talk about his background, what his focus has been, and then what his focus is now. So with that being said, Alix, do you want to first, give the Best Ever listeners a little bit more about your background and what you’re focused on now?

Alix Kogan: Sure. So I started in high-end design build, building custom homes for clients in south-west Colorado, ran that business for almost 20 years and I had a successful exit late last year in December. So pretty recent, but I have a parallel track for a good 18, 17 years or so. I started developing a single family portfolio, did some ground-up development, townhomes, condos, small subdivisions, and then as of three years ago or so, pivoted into multifamily, and that is, of course, how you and I met, and I’ve been doing that.

I’ve been partnering with groups as a key principal, lending out my balance sheet, and let’s see– distressed debt is another asset class I invest in, and then as of late, I’ve been pursuing some student housing deals; I’m excited about that opportunity as it’s not tied directly to the market’s economy as much as multifamily is. So it’s just another asset class to diversify for me.

Joe Fairless: When you said you were doing development for townhomes and condos, what are some differences from that versus the high-end custom homes?

Alix Kogan: It’s really completely different. The high-end custom homes, we always build on client’s land, there’s really no risk per se. It’s really — we’re working for a fee. So transitioning into development is a whole other world. Of course, it’s still a construction, but you’re assessing risk, you’re assessing the market. So really, it took a completely different mindset and skillset candidly to do that; the common thread, of course – we’re building. So it was interesting; it was good, and we rode the tailwinds of a great economy up until, of course, the recession of ’08, ’09. Then we ceased all development activity and concentrated on custom homes and rode through the recession. Well, a lot of our clientele actually came from Texas, and that market was doing very well. A lot of our clients were already the tail end of their careers that made their money, they put their money away, so they were still on a place to retire and build their retirement dream homes, and continue down that path and not be too affected by the recession.

Joe Fairless: You said you’re now focused on looking at student housing. What are some things you’re doing now in student housing?

Alix Kogan: We’re pursuing a couple of different deals currently. It’s a similar play, I suppose, to multifamily. What I like about it is in recessionary periods, like we’re likely heading into now with everything that’s going on, a lot of people go back to school, or they stay in school longer. So you’ve got that natural protection, as opposed to say A class multifamily where I think, where you could have some higher economic occupancy with that asset class — but student housing is an interesting plan. So we’re pursuing that. There’s some opportunities out there, there’s some groups that got over-leveraged, and looking to get out of their assets. So it’s an interesting time. So that’s what we’re– no, I wouldn’t say we’re completely focused on that. It’s just a second asset class in addition to multifamily that we’re looking at.

Joe Fairless: How are you coming across groups that are over-leveraged? Where are you getting those connections from?

Alix Kogan: We’ve made a great connection with a best-in-class property manager, and they of course, have connections with owners all over. They’re also an investor, as well as a property manager as well. So they are an interesting group where they understand the investments side as well as the management side, and they have a very specific buy box for a number of reasons with their business plan. But they’re running into portfolios or individual assets that don’t meet their buy box, and I’ve developed a good relationship with them where they’re bringing me those deals, so it’s a win-win. They get to property manage the asset if we are successful in taking it down. So there’s some good synergies in that relationship.

Joe Fairless: So I’ve never bought a student housing project. Educate me and perhaps some listeners on what would be a buy box. What components are in a buy box for student housing, and then what your buy box is compared to, say, the property management companies?

Alix Kogan: Sure. So the first one would be pretty easy to answer. So the relationship that I have there, they only buy core A Class assets, and they have to be pretty significant size to execute their business plan and to comply with their investors’ buy box, in essence. So in terms of what I look for, I can buy a smaller deal. I don’t have a specific buy box in terms of has to be a large deal, although I can take down a large deal; we’ll look at — for example, right now we’re looking at an opportunity about the $7 million acquisition range. That is considered somewhat small for some of the large players. They’re going to be in that 15+ million acquisition range.

In terms of what we look for, and that’s fairly consistent from whether you’re buying large or small, you’re looking for a successful school with growing enrollment, and that’s pretty key today to be successful. I think, that’s one of the biggest metrics. So not only does the asset have to be a good asset, you’ve got a school that’s got a great sports program; so tier one schools. So you look at that, you look at the asset itself, you look at similar dynamics; you’re of course looking at your rent comps, are you under market, amenities is also a big factor in terms of your rent growth and where you are in the market. So those are some of the big things that we look at.

Joe Fairless: Based on your experience with high-end custom homes and townhomes and condos and investing in multifamily, what do you think, from that experience, is most relevant to help you be successful in student housing?

Alix Kogan: I would say I’ve been fortunate that I’ve had a broad experience in different asset classes, and the common thread is real estate. So I don’t know that there’s one thing other than I may just have a broader view, I may look at different things. So I can’t think one major skill set other than just the broad experience.

Joe Fairless: Let’s narrow it down then. For the high-end custom homes that you did for 20 years and you said you exited successfully, what were some ways that your company differentiated itself from your competitors?

Alix Kogan: That one’s pretty easy – we were very early to the game in design build. So while a lot of my competitors were typical, what we call bid build, where they’re bidding on plans through architects or through clients directly, that have plans drawn… We adopted the design build model right out of the gates 20 years ago, where at first, we partnered with some outside resources. We’d outsource some of the design work, but really controlled the whole process from design to build, and then eventually became much more fully integrated with architects, interior designers. So that was certainly a key to our success.

In addition, of course, doing great design and won more awards than anybody in the area in south-west Colorado, and organically grew. Building a great team – no surprise, when you become the largest in the area, you need a great team behind you. So I was fortunate to have a great team to do that with. But those were some of the — great design, great team and the design build model that many people tried to follow, but fewer successful in doing it.

Joe Fairless: You mentioned distressed debt. What have you done with distressed debt?

Alix Kogan: That’s been an interesting space. I started down that road with non-performing notes. So buying defaulted mortgages in large pools and then working them out. So I’ve been doing more of a niche portion of the distressed debt, which is buying non-performing second liens. So rather than buying first liens, which– it’s a bit counterintuitive, but if you understand my business plan and the plan that we’ve been doing, which is buying non-performing seconds behind a performing first.

So I’ll give you an example. If you have a $500,000 house, you might have a $400,000 mortgage of $100,000 worth of equity, and then you also took out, say, a $100,000 home equity loan to finish your basement. You fell on hard times, you stopped paying in your home equity, but you continued to pay in your first mortgage. So those are what I’m buying as the second mortgages.

I like them because, obviously, it’s been demonstrated that the borrower still has some financial capacity because they’re paying on their first; and because I’m buying the second lien, the non-performing lien or note, at such a discount, I have the ability to go back to the borrower and help them stay in their house and say, for example, “You’ve been paying, $500 a month before you defaulted. Can you afford to pay $250 a month?” So because I’m buying at such a discount, I can work with them, help them stay in their home and get them current, and that’s been a really good investment class. It’s not the easiest business to learn, a pretty high barrier to entry, but once you get it dialed in, it’s a very interesting business model.

Joe Fairless: What discount are you buying those second liens on?

Alix Kogan: It’s a broad range. It also depends on what state. Every state’s got different foreclosure laws and timelines. So I would say anywhere from 5% of the unpaid balance up to 50% of the unpaid balance, and everything in between. So you literally have to underwrite each individual asset separately. How much equity does it have? How nice of a property is it? Because that, in essence, is your ultimate security; it’s that asset. Because you can, of course, foreclose from a second position subject to the first.

And then there’s more of a qualitative analysis of the borrower profile. You really have to understand who the borrower is, look at their credit, look at their specific situation, and somewhat assess what is the percentage that that borrower can do work out with you. So that goes into the pricing as well, of course.

Joe Fairless: So you said 5% to 50% that you’re paying. So just so I’m understanding correctly, depending on the state, depending on the situation, if it’s $100, you’re paying between $5 to $50 for that second lien position.

Alix Kogan: Yeah.

Joe Fairless: Wow. So your discount is between 50% and 95%?

Alix Kogan: Yeah. I’ve bought some assets where there’s a lot of risks, and  I’ve even bought them at 1%.

Joe Fairless: Alright. Give us that example, that specific example. Tell us a story about that property.

Alix Kogan: Something that you bid that low, there is no equity.

Joe Fairless: How much you pay for it?

Alix Kogan: So that borrower is completely upside down. So that’s one of those that you’re likely not going to pursue. You might take that asset, put it on the shelf and just wait until that borrower sells the house, and you may be in a position where you get a payoff. So that’s obviously very high risk; but if you have $100,000 unpaid balance and it’s still secure and you’re buying it for $1000 bucks, you can afford to just stick that in a drawer and just wait… Versus other loans that have equity, and the borrower is obviously more motivated to protect and keep that equity. They’re obviously motivated to do a workout with you. So those you’re going to pursue more aggressively, and spend time placing that with a servicer, or spending money investing in whatever legal you need to invest in, so that you could monetize that loan.

Joe Fairless: I know you said you’re buying large pools. So are the large pools of these defaulted mortgages, are they grouped into varying risk profiles, or…?

Alix Kogan: No, no. They generally are just sold in a pool. So you get a spreadsheet with a bunch of assets, and it’s really — you’re doing your own group and you’re assessing the risk and you’re saying, “Okay, 20% of these are in a judicial state, New York, for example, and the foreclosure time is very lengthy and expensive.” So I’m going to price that portion of the pool at whatever it is. 20 cents on the dollar versus, say, for example, California loans, which is a non-judicial state, and very quick foreclosure time. I may price those at 45 cents. So it’s all over the board.

Joe Fairless: Did you say California is quick to–

Alix Kogan: Yeah, believe it or not…

Joe Fairless: That– I would have missed that on a true-false test.

Alix Kogan: Right, exactly. With all the legislation and everything that happens in California, it actually is a non-judicial state. So you can foreclose and get at the asset in 90 to 120 days. So it’s a much faster process in California.

Joe Fairless: Tell us a story of a defaulted mortgage, either a pool of mortgages or an example or two where you’ve lost money.

Alix Kogan: Sure. I had a recent loan that– and fortunately, we were pretty careful. I don’t buy really high-risk loans, but in order to buy a pool of loans, apparently, you have to buy some loans that are higher risk; but I try to keep those at a minimum. So I only honestly have one that was recent; a Kentucky loan that basically foreclosed and we got wiped out by the first lien and completely lost. It was a $7,000 investment, [unintelligible [00:17:37].26] a million dollars that we took down. So that can happen, but if you’re careful, that’s pretty rare.

Joe Fairless: Yeah. So how can you be careful and make that rare if you’re buying a large pool of loans, and it sounds like that’s just gonna happen during the course of business?

Alix Kogan: Well, one, they’re gonna price them at a risk price. So it’s all modeled into it. Think of it as you’re buying a portfolio of single-family homes, you know you’re going to have some delinquencies in one home. Somebody stops paying rent, but you have the income from the other homes to offset that. It’s really the same principle. I’m going to make money, I’m going to hit home runs on some. I mean, I’ve had some that I’ve made 200% return on my investment, and then I have one that I lose $7,000 on. So you just price the risk into it, and then there’s some people that specialize in unsecured and no equity loans. It’s just their business model. So I would even resell some of those loans, and just get my money back and focus on the good loans that I prefer to work.

Joe Fairless: Okay. Tell us the story of, on the flip side, one that you’ve made 200% on or just done really well, just a specific example.

Alix Kogan: Sure. Just recently I invested $113,000 in an asset in California. The house is worth $270,000. We, unfortunately, had to foreclose, got that house back, and up until just a couple days ago, I had a contract for $270,000. So you can do the math on that. That would have been a great exit strategy. Unfortunately, with what’s going on in the world right now, that buyer fell out of contract.

So we’ve got the house, it’s worth $270,000. I can turn it into a rental. I’m hopefully going to sell it to somebody else, but you can see the return is huge if I can obviously monetize, which I’m sure I will… And that whole timeframe was about seven, eight months.  Okay. So let’s talk about the team. I don’t think you’re the one tracking down all these owners and having conversations based on what I know about you… So who’s your team? How do you structure it? How are they compensated, that sort of thing? Sure. I’m on the acquisition side, so I’m developing relationships and finding the assets. Once I find the assets, I have an asset manager in California that works remotely. He’s got 30 years experience in servicing the distressed debt space.

Joe Fairless: How’d you find that person?

Alix Kogan: Just the whole networking, talking to different people, and I met him, and that’s been a great relationship. So he’s literally working out of his house.

Joe Fairless: If you can think back to who introduced you to him, I’d love to know exactly how you found him. You don’t have to name names, but just throw us the breadcrumbs.

Alix Kogan: I think the trail started on LinkedIn or I connected with somebody on LinkedIn, and they had pointed me in his direction for just networking, and that he may know sellers, and one thing led to another, where you think you’re going to buy an asset or get some referrals for sellers, and before you know it, you’re talking to a guy who actually is an asset manager that may have excess time and be able to develop a relationship. So that’s what we did.

It started off as — for him, I was somewhat of a side hustle in addition to other asset management work that he was doing, and as my portfolio grew, he’s come on board nearly full time with a little bit of consulting that he still does with outside funds and outside investors.

Joe Fairless: Wow. So you were randomly reaching out to people on LinkedIn based on what they have in their profile, asking them about distressed debt?

Alix Kogan: Yeah, specifically targeting sellers of distressed assets at that time, and just happened to run it across the guy. So there’s multiple ways that you can do this, and you also, of course — to answer your question fully in terms of the team, there’s also third-party servicers that we use. So they’ll do some of the work, and then my asset manager will serve an oversight with them as well as borrower outreach and talking to the borrowers as well. So it’s really a small team, a small little boutique firm, if you will, in that asset class, and I’m soft capitalized, I don’t have investors in that world. So it’s really a third bucket of my business plan – student housing, multifamily and distressed debt.

Joe Fairless: Based on your experience as a real estate investor, what is your best real estate investing advice ever?

Alix Kogan: Learn the asset class well. It seems very obvious, but in terms of investing in different assets, learn that asset class well before you invest. Then if you have an opportunity to invest passively, learn as you go. I think that’s a great way, and you’re a prime example. I invested with you early on and got my feet wet in multifamily until I got comfortable enough to start looking at my own deals, and I think that’s a great way. And that’s also what I did with distressed debt. I invested passively in a more of a joint venture with a guy when I first started and learned the business, and then of course, the natural progression – I felt that I could do it on my own, and hire an employee that knows more than I do, and that’s just the way you scale and grow.

Joe Fairless: That’s a pretty good formula for people – invest passively to learn the ropes, plus build your ally group up so you can form allegiances, and then you learn the business simultaneously as well as actively learning, then go active and then hire someone who has more experience than you. But now you’ve got some experience and you know the ropes, you just don’t know the intricacies of someone who’s been in the business for decades. That’s a really good formula. I’m glad that you walked us through that. We’re gonna do a lightning round. You ready for the best ever lightning round?

Alix Kogan: I guess.

Joe Fairless: All right. Well, we’re gonna do it anyway. So hopefully you are. First though, a quick word from our Best Ever partners.

Break: [00:23:39]:05] to [00:24:34]:03]

Joe Fairless: Alright, what’s the best ever book you’ve recently read?

Alix Kogan: A book name Lifescale, which is interesting; a book that I’m halfway through.

Joe Fairless: Okay, Lifescale. Okay, got it. What’s a mistake you’ve made on a transaction?

Alix Kogan: Bad partner. Easy to say in the rearview mirror. He looked good on the front end, but I think more due diligence on the partner than the asset class is important. I got myself in trouble a few years ago with — and fortunately, we unwound that well, but… More due diligence on the partner than the asset.

Joe Fairless: What are some questions knowing what you know now that you would ask prior to engaging in a future partnership?

Alix Kogan: I think it’s more time getting to know someone, really as much as you can learning how they think, definitely more reference checks… But I think it’s time, and unfortunately, we’re in a business that moves pretty fast, whether it’s notes or multifamily or student housing – the deal comes up and it comes to you from a potential partner. So I’ve learned to slow down and only move forward when it feels right and I have enough of a comfort level with a partner. So as you know, I’m a KP on deals and people bring me deals all the time, and I really have to just slow that process down to get to know them better.

Joe Fairless: On that note, how can the Best Ever listeners learn more about what you’re doing and get in contact with you?

Alix Kogan: Ashlandcapitalfund.com is my website, and my direct email is alix [at] ashlandcapitalfund.com

Joe Fairless: Alix, thanks for being on the show talking about your areas of focus that you’ve had, and then now what you’re focused on, the three areas, with one of them being student housing and why you’re focused on that; you also talked about non-performing notes in your process there. Thanks for being on the show. I hope you have a best ever day. Talk to you again soon.

Alix Kogan: Thanks, Joe. Take care.

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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JF2091: CEO of Real Estate Tech Company Groundbreaker Jake Marmulstein

Jake is the co-founder and CEO of Groundbreaker Technologies, a real estate technology company that he created to help solve the problems he was having when he was investing in real estate. In this episode, you will learn some ways to use technology to improve your real estate investing experience.

Jake Marmulstein Real Estate Background:

    • Co-Founder and CEO of Grounderbreaker Technologies, Inc
    • Over 6 years of real estate technology experience
    • Based in Chicago, IL
    • Say hi to him at: https://groundbreaker.co/ 

 

 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“One practice that has really helped me grow is by getting outside of my business by helping other entrepreneurs.” – Jake Marmulstein


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 that fluffy stuff. With us today, Jake Marmulstein. How you doing, Jake?

Jake Marmulstein: I’m doing great, Joe. Thank you for having me.

Joe Fairless: Well, it’s my pleasure and I’m glad to hear that. A little bit about Jake – he’s the co-founder and CEO of Groundbreaker Technologies. They are the sponsor of today’s episode, as you are well aware, and he has over six years of real estate technology experience, he’s based in Chicago. We’re gonna be talking about using technology to your advantage, solving problems with technology, and then also pitfalls when creating a real estate business that he’s seen from a back-office operation standpoint, among other things. So with that being said, first though, Jake, you want to get the Best Ever listeners a little bit more about your background and your current focus?

Jake Marmulstein: Sure. Thank you for the introduction. So Groundbreaker and my background blend together because when I was working in real estate investment, I realized that managing investors in the current way that we’re doing it, at the REIT that I worked in, we were doing institutional scale investments in distressed hotels, and I was doing all the underwriting and packaging of the materials, and then having to get on investor calls and answer investor questions. So through that experience, I realized that the process was pretty manual and there was a large lack of technology, and I wanted to make it better and couldn’t find solutions in the market to address these problems. So that’s where Groundbreaker came into play with my background. And ever since, I’ve been working with real estate syndicators to help them get their business into a digital realm, where they can manage things in a more automated and streamlined way.

Joe Fairless: So you were working at a REIT that was buying distressed hotels, and you said you were responsible for– I think you said underwriting, as well as answering investor questions. What type of questions would be asked by an investor when looking at these types of opportunities?

Jake Marmulstein: The investors would want to know some of the basic things like – what’s the minimum investment amount? Why this asset? Talk to us about the demand generators in the market and the competitive set. Some of the things that you would assume that they would already read in the pitch deck, but maybe they never even looked at what you sent them.

Joe Fairless: So answering those questions would be one aspect of it, and you mentioned that– okay, you saw that there was an opportunity to build technology to address what you were seeing wasn’t automated, but could be. So how does a solution like Groundbreaker help with that process if they’re not reading it in the first place? Is it, “Hey, you’ve got a place to log into and now, here it is right in front of you, and it couldn’t be more obvious that you should check this out”, or are there are other ways that this provides a solution for the challenges that you came across?

Jake Marmulstein: Yeah, this is only one small aspect of it. I remember spending a lot of time also moving files into different folders and organizing the backlog that was our database of information, and not having it all in one place, and managing several different Excel spreadsheets to keep track of contributions and distributions and investor data and the conversations that we had with investors, and having that all really based on Excel in an internal server.

So there’s a wider, larger problem of data storage and just the access to the information that we use to operate the business that causes the problem. But with regard to this specific one, Groundbreaker has a offering memorandum builder inside of it, so you can create your offering and have it live on the internet, and that means that we can track people getting access to the system, logging in and looking at the offering. So when we go to them to call the investors and look at the list of individuals that are most likely to invest, we can pick the people who’ve already looked, and we know for those who haven’t looked, where they’re at, so we can moderate the conversation and maybe they might be a different priority in our list of investors to call, but we go into the conversation with the information that they didn’t actually check out the deal yet.

Joe Fairless: I know that when you look at the backend, back-office operations that need to be present when you create a real estate business – when you talk to others, a lot of times they’re missing some things or they don’t know what they need to have included whenever they create a real estate business. Can you talk about some of the backend office operations that are needed in order to have something up and running?

Jake Marmulstein: Absolutely. So a lot of people are great at finding good opportunities, good deals, because that’s what most people get excited about is the deal. Let’s find that deal and let’s find that great opportunity to invest in and be able to pull the trigger. But before you can scale a real estate investment business appropriately, you may start out with a simple Excel spreadsheet and PowerPoint with a group of friends and family who know you and trust you. But when you want to scale beyond that, you’re going to need to have systems in place to get across your track record and do everything in a compliant way, manage data and track everything. So having a website helps to create transparency about your brand and who you are, and a lot of people spend way too much money and time on the design of a website and that holds them back.

I also find that people will pay a lot of money for operating agreements and getting their entity set up, and it will come out of pocket tens of thousands of dollars before they even have the chance to make any money. So that’s where a lot of people stop, is on that basic stuff. So you need to have your operating agreement in place and your entity in your bank account, and having a website helps you to create a track record and show the history of what you’ve done, and it builds trust and familiarity with you, so that you can have access to new investors, and when people refer business to you, there’s a place for people to go to get information on who you are. So I think all of that helps. And then if you’re able to attach an investor portal into there, which is what Groundbreaker would be able to provide, you have the chance to catch those leads, let them sign up, and then give them access to your deals. So it will create an infrastructure for you as a business, to be able to build trust, do things the right way in a compliant manner and operate in a system that can scale.

Joe Fairless: With Groundbreaker over the years, what are some major things that have evolved since the beginning?

Jake Marmulstein: In terms of–

Joe Fairless: In terms of the product itself.

Jake Marmulstein: In terms of the Groundbreaker product?

Joe Fairless: Mm-hm.

Jake Marmulstein: Sure. So when we started, we were just a fundraising tool. We allowed people to create an offering and share it with investors. And people told us that they wanted to have a private investor base that they could manage in a CRM system, where they could take notes and keep information logged, and upload reports and share information and be able to distribute funds. So we built all of that functionality, and then we made distributions electronic so you can send funds through direct deposit to investors’ bank accounts through the software, and that’s been a huge improvement.

We also have been able to make it easier for people to find information by having the CRM and having all of the information from every investment, every report, K-1, in the same place; so you don’t have to manage different systems to keep track of this data. Groundbreaker can act more like a headquarters for the business, and I think that has really helped a lot of people who might be relying on email or Dropbox to house the data, and so it still creates that problem of inefficiency when information is in different places.

Joe Fairless: What’s been the biggest challenge for getting more customers? Obviously– well, not obviously, but I’d say most businesses, they want more customers. So there’s always gonna be a challenge to getting more and more. So what’s been your biggest challenge in getting more customers?

Jake Marmulstein: Well, I think initially, the challenge was just the realization from the market that this solution is the future and the need for it. I saw it pretty early on that every real estate investment company would, at some point, have an investor portal, and as more companies adopt, the companies that don’t adopt are in a position of weakness. So that’s the market moving and getting in there– identifying the need for an investor portal to be able to offer transparency to their investors in a way that’s never been available before. So as the market gets more educated, Groundbreaker’s here to provide that service, and I don’t see any challenges outside of just getting the word out about what we do and people being educated about why they need to get on board with the solution, because there’s definitely enough companies out there managing things the old fashioned way. They’re not happy with the way that they do things, but they don’t know that there’s something else better out there that they could do.

Joe Fairless: Let’s talk about you as an entrepreneur because as real estate investors, we’re all entrepreneurs in varying degrees. At least, that’s my belief. What’s been the hardest day for you as an entrepreneur?

Jake Marmulstein: That’s a great question. I don’t think there is a hardest day, Joe; I think there’s a lot of hard days. It’s like a rollercoaster ride; some days you feel great and happy in what you’re doing, and some days you really question why you’re doing it. But maybe, I could say when I moved to Chicago and took on the current investors that are helping to help me grow Groundbreaker, that was a really hard day, because I moved from living in Puerto Rico in 2017, and seeing the sun every day, to moving to Chicago in the middle of winter in January. I didn’t have a place to stay, and I was staying in an Airbnb, and I was questioning whether I’d made the right decision or not, because I could see myself taking a major sacrifice in terms of what I wanted and the lifestyle that I wanted to live, because I enjoyed Puerto Rico very much, and I could see myself living there… But making a sacrifice to be able to grow the business and realizing that as an entrepreneur this was a lifestyle change that I was willing to take so that I could achieve something greater and that one day, with hard work and determination, this decision would pay off.

Joe Fairless: Mentally or rather emotionally, in that time period, what do you do to help yourself emotionally? You mentioned your thought process, “Hey, this is why I’ve gotta do”, but did you do anything to help emotionally keep you in good spirits during the dead of winter in Chicago, which is probably the coldest place that I’ve ever been to? It’s miserable, quite frankly.

Jake Marmulstein: Yes, and you’re currently in Ohio, right?

Joe Fairless: I am, but Chicago with that wind and the winter just puts tears on my face involuntarily, and then they freeze on my face; it’s just miserable.

Jake Marmulstein: You should have been here for the polar vortex.

Joe Fairless: Oh, well, I’d rather just hear about it through you. But anything emotionally that you did to help keep your spirits up? And I ask this, because I’m interested in you, but more importantly, for all the Best Ever listeners, if they’re going through something where they take a leap, then maybe what you did to help you emotionally just get through it could be something they could use, too.

Jake Marmulstein: So here’s what’s helped me as an individual get through some of the challenging parts in my life, and it comes from understanding that I’m making a choice for something that’s greater that I believe will pan out in the future, that the sacrifice is necessary to get there, and that if I work hard and I power through, it’s going to be okay, it’s going to be worth it, and I’ll be looking back at the moment, happy that I made that decision.

So there’s a lot of optimism, but then also knowing that I’m putting myself outside of my comfort zone and leaning into that and saying, “I’m outside of my comfort zone and I know this is uncomfortable and I know it’s hard, and this is where growth happens,” because I want to grow personally from anything that I do. Whether it’s true or not, I’m thinking that I’m going to grow, and there’s a good example of that… When I was in college, I went and I lived in Spain, and I didn’t speak any Spanish, and I didn’t know anybody, and I knew that that was an uncomfortable situation, and I had to learn Spanish and find out how to live as a adult in the free world… And that took me a lot of suffering, also mentally and emotionally, to be able to get to a point where I was comfortable. And then this is the same situation. When I moved to Chicago, I didn’t know anybody. I just knew that I would grow from the adversity.

Joe Fairless: It’s embracing it and knowing that there’s something empowering about what you’re doing, and then having the faith to say, “Okay,” as you said, “This is where the growth happens.” That’s so powerful knowing, whether that’s true or not, but if you believe it to be true, then most likely, it will become true that you’re going to grow through the experience and regardless, you’re gonna be better off. It might not be exactly what you thought it would be, the end result, and that’s something I also got from Tim Ferriss… He talks about whenever you enter in the new venture, identify regardless of if it is successful in whatever quantifiable way that you think it should be successful, regardless of that, find ways that you will be better regardless of the actual success of the project. And that way, you’re still going to get something out of the experience, whether or not it’s the actual results you intended is another story.

Jake Marmulstein: A hundred percent. You described it really well. I also– when it was winter, and it was very rough emotionally because of not seeing the sun and not having people to spend time with, I ended up going to the gym a lot, and I think that balancing that positive self-talk and long-term thinking with healthy physical habits to regulate your body and your mental state are necessary.

Joe Fairless: Yeah, and that could easily go the opposite direction easily for someone. If it’s really nasty outside, you stay inside and you do not go work out, and then you gain a bunch of weight.

Jake Marmulstein: Yeah, and you tell yourself as you’re running to the gym, “This is challenging and I hate it, and I love hating it, because it helps me grow.”

Joe Fairless: What a mindset to have, and it can only help us when we think about things that way. Anything else that you think we should talk about as it relates to as an entrepreneur, just some things you’ve learned, or also we talked about pitfalls when creating real estate business, spending too much time and money on a website when you don’t have the other aspects taken care of, or using technology to your advantage based off of your experience working with the REIT, buying distressed hotels? Anything else before we wrap up that you think we should talk about?

Jake Marmulstein: Yeah, I’ll share with folks this last tidbit. I think that it is sometimes really hard to focus on what you’re building when it’s all about what you’re building and it’s all about you. So something that really helps me to remind myself of what I’ve learned and what I’ve been able to do and how I’ve grown as a person is really getting outside of my business, and that’s how I give back. I give back through helping other entrepreneurs and advising them and helping them to think about their ideas.

When I do that, it reminds me of what I know. And even though some days are tough and I don’t get what I want at Groundbreaker, when I can help somebody, it just proves to me how much I’ve learned and what an impact I can make, and I can see it through the impact I make for somebody else. So that’s just something to keep in mind for all of you out there who might be frustrated with your own business, and in a way that you can give back.

Joe Fairless: Service many leads to greatness. I’m really grateful that you mentioned that. You’re probably wondering if I was gonna ask you your best real estate investing advice ever, or best ever advice, but I’m making this a special segment on the weekend. So that’s why I didn’t ask it. I’m glad that you mentioned it proactively. How can the Best Ever listeners learn more about Groundbreaker?

Jake Marmulstein: The best way is to go to groundbreaker.co. We took a lot of time to work on our website and share as much content about us as possible. So you can learn about us at groundbreaker.co.

Joe Fairless: Jake, thank you so much for being on the show. I hope you have a best ever weekend. Talk to you again soon.

Jake Marmulstein: Thank you, Joe.

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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JF2090: Marketing With Groundbreaker Director Ed Cravo

Ed Cravo is the Co-Founder and Director of Marketing at Groundbreaker Technologies, Inc. He shares his journey into marketing and shares how Groundbreaker can help investors in their personal business. Ed explains how they can help you do more deals with less work while saving you money on operations and banking. The Groundbreaker software lets you streamline your fundraising, relations, distribution payments, and reporting in one easy-to-use tool.

Ed Cravo Real Estate Background: 

    • Co-Founder and Director of Marketing at Grounderbreaker Technologies, Inc
    • Over 4 years of real estate technology experience
    • Based in Chicago, IL
    • Say hi to him at: https://groundbreaker.co/ 
    • Best Ever Book: Drive by Dan Pink 

 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“The ease of use is such a big deal for us” – Ed Cravo


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 that fluffy stuff. With us today, Ed Cravo. How are you doing, Ed?

Ed Cravo: I’m doing great, Joe. Thanks for having me. Looking forward to not getting into any fluffy stuff.

Joe Fairless: That’s right. Well, you know the drill then. Best Ever listeners, you know Ed and his company Groundbreaker, because they’re a sponsor of today’s episode, as you are well aware. I’ve gotten to know his team through this process, and I know you’re gonna get a lot of value from this conversation.

So first off a little bit about Ed – he’s the co-founder and Director of Marketing at Groundbreaker Technologies, he’s got over four years of real estate technology experience, he’s based in Chicago. With that being said, Ed, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

Ed Cravo: Absolutely. So I started my career in marketing right out of college, joined a search engine optimization company, and I started doing sales there, but just learned the entire marketing business as well, moved on to founding my own marketing company after that. In that marketing company we serviced real estate clients, construction clients, e-commerce websites, etc., and then shortly after that, it was a growing agency, but learning a lot, picking up a lot of skills, shortly after that I joined Jake at Groundbreaker and just started focusing on marketing and sales, and that’s been the story since the last four years.

Joe Fairless: Okay. So what was Groundbreaker when you joined?

Ed Cravo: Groundbreaker, when I joined, was already a software as a service company for real estate investment companies. What it did, and it’s the same mission, the same thing it does today, it helps real estate syndicators automate their day to day activities around fundraising, investor relations, reporting, etc, and elevating their brand as well and giving their investors an investor portal where they can gain access to their data and their investments.

Joe Fairless: How has the product evolved over the four years since you’ve been on the team?

Ed Cravo: That’s a great question, because it has actually evolved a lot. The goals are still the same, but what we learned– we were probably the first company to come out with the solution, and it was a bit more than four years ago; I joined a little bit after the company had already gotten started. What we learned over the first couple of years was that ease of use was extremely important, and as syndicators would provide the software to their investors, it was really important that their investors just loved it at the first try, so that they kept coming back, and that wasn’t always the case in the early days.

So we’re actually on the second version of the software, which we are relaunching or have relaunched most of it already or continuously improving on, and our biggest focus was how can we make this as easy as possible to use, how we can make this easy on the sponsors, how we can make this easy on the LP ambassadors… So that’s why it has evolved a lot. We try to do all of the things we’re doing, but with less clicks and less complication.

Joe Fairless: What are some specific examples of what it used to be from a use case standpoint and what you’re doing now to improve that process?

Ed Cravo: Things are easier to reach now. So for example, in the software, there’s this big search bar at the top – this is on the manager side – and if you want to create a new contact, you used to have to go to your contacts section and then click the plus button and then start filling information in. Now you can just click in the search bar and type ‘create contact’ and the option to go directly to that final location where you add the contact comes up. Same thing for creating new entities, for creating new distributions. So you can still navigate to all the different sections, but now you can navigate to everything by just typing what you want to do at the top. So that’s one specific example, but overall it’s just the user experience as well. Instead of having to click three or four different places to get somewhere, now you can get there with less clicks, less of a learning curve.

Joe Fairless: What are some of the responsibilities that you have with Groundbreaker? You said you’re the director of marketing, you’re the co-founder. What does that mean in terms of a day to day for you?

Ed Cravo: That changes over time.

Joe Fairless: I bet.

Ed Cravo: Yeah… But when I first started four years ago, what I did was I would help new clients get onboarded, as in I would deploy their platform, I would make sure that their logos were in the right place, etc, but at the same time I was doing marketing. I was getting the website set up so that we could start to drive a lot of search engine optimization traffic, which was our big focus in the early days. And that was in the beginning.

Nowadays, I’m mostly trying to develop our inbound marketing in all sorts of ways, whether that’s growing our blog, whether that’s establishing a partnership with you guys, or even setting up for the Best Ever conference, that and the entire thing set up, so that we can come in and try to perform our best while there.

Joe Fairless: You joined an SEO company out of college and you were on the sales team. What did you learn from that experience that you’re applying in your current role?

Ed Cravo: One thing that I didn’t mention with your previous question is also sales. So I have, at times, done too much marketing, to the point that we had enough leads that somebody needed to step into sales. This was years ago. So I jumped into that as well. So I think the things that I learned there, the biggest one was, how do you get a website to the first page of Google for a specific keyword? And that was the most valuable thing I learned earlier on, and of course, that’s an evolving art and science, search engine optimization, but I would say that was one of the biggest, most valuable things I learned early on, that I have applied to Groundbreaker and to any work that I do with marketing.

Joe Fairless: Let’s take a step back and let’s just talk about — is it fair to refer to your service as an investor portal?

Ed Cravo: Yeah, that’s one part of it. Investment management or syndication automation would be fair as well. It’s just we’re building different tools to automate a lot of those day to day activities, but the investor portal is a big part of it. That’s one of the things that our clients are able to give to their LP investors.

Joe Fairless: So let’s just talk about it in that context for just a moment, because I think a lot of the Best Ever listeners think about what you do in terms of an investor portal, and then there’s things underneath that that correspond to the investor portal. So with the investor portal, I can tell you personally, I was not on board for having one for our company because I was concerned about the transition from getting investors in our current deals from nothing, just email updates and no portal, and we would do one-off email responses when they asked to look at distribution histories, and we would manually change their information, whether it’s they moved or whether they just got a different bank account, we’d have to work with them on that… And we would do all that manually.

And I was against it initially, for a long time, because I was concerned with the transition period, because I thought it’d ruffle a lot of feathers with our investors, because now they have to have access to a new website with login information, etc. So what do you say to a syndicator who has those concerns whenever they’re talking to you about jumping on board with Groundbreaker for that solution, for a portal, but they get the same concerns I did?

Ed Cravo: Yes. “What’s this busywork that they’re trying to push on me? Why do I need this?” etc. It’s a really great question. I think we’ve seen the market move. I think 2015 is when we first started to say, “Okay, here is this technology we have.” We were trying to do something else with it at first, but then we started to talk to some real estate syndicators and tell them, “We can give you this in white-label, what do you think?” Some of them were interested and some of them bought it. They cashed in the early days to be able to use this technology. It wasn’t as streamlined to offer as it is today. What we’ve seen over time is that — this is a classic market adoption curve is what we’re seeing. First, there’s that under 2% of the market adopting a new technology. They’re called the innovators or early adopters. And the innovators and early adopters, what they want is they want the latest and greatest. They want the coolest toy, because they think that that’s going to give them a leg up in their competition; and I’m speaking in broad terms here, not just about our technology, and it is true.

The innovators and early adopters are often able to get a leg up on their competition by being the first ones to come out with something that the market’s going to demand later. They’re the first ones and people start talking about them, and maybe in this specific context, the innovator or early adopter, one of your LPs is sitting at dinner with some high net worth friends. And what do high net worth individuals talk about at dinner? Well, many times they talk about what they invest in, or their latest and greatest investment, or their latest and greatest call in the stock market, etc. So they might, at that point, pull up their investor report and be like, “Look, I invest in real estate right through this portal. This is how it works,” and show them right then and there on a tablet or phone. And those are the early innovators.

Joe Fairless: Yeah.

Ed Cravo: The early majority is the next section of the market, and you can look this up on online market adoption curve. The early majority is a big chunk of the market, and that’s where we find ourselves in today, and that’s when the actual LP investors are beginning to ask the syndicators for a portal saying, “Hey, I have a portal with this other syndicator that I work with. Why don’t we have a portal? I’d like to have a portal so I can log in and download my documents, I can log in and see my distributions, what’s coming, what’s past, etc.” So I think, right now, we’re in the market phase where the LPs are beginning to ask for it, and the syndicators themselves are starting to look for it.

We’ve seen the conversation online on LinkedIn, at the Best Ever Conference, where this is a point of focus now in our mind, and I believe it’s pretty clear that as the late majority comes in and the laggards come in – those are the later stages of the adoption curve. Pretty much every real estate syndicator out there is going to have some online experience for their investors. So yes, it’s all about timing, like you said, and yes, it may be a hassle to do it in the beginning, but I think it’s going to become a question of, is this even a choice anymore? Can I even continue to grow my business without these tools that are helping my competitors advance, that are helping the other companies grow faster, it’s helping them do more deals, spend less time, just give their LP investors a better experience in general. Can I afford not to have that? We don’t think that the answer is going to be, “Yes, I can afford to not have that,” for very long.

Joe Fairless: Thank you for sharing that thought process and the market adoption curve. I did a quick Google search, and I was following along with you as you were going through it. I’m actually proud that we’re in the early majority, and that’s when we jumped on board; that we weren’t in the late majority or the laggards. But exactly what you said, LPs started coming to us and saying, “What’s the login to the portal? How can I get access to it?” I’m like, “Well, we don’t have one right now.”

From a general partnership standpoint, as you said, it’s helping the competition with their business. So why not allow it to help us with our business? So I get that, eventually, it’s not even going to be a choice. You just need it. Let’s go back to the root of the question though, that I asked, and that is the transition period that could be painful for limited partners and general partners. So can you talk to us about what that transition period looks like, tactically speaking, and how you make it as pain-free as possible?

Ed Cravo: Absolutely. So without a doubt, introducing a new platform to a new group of people may cause a little bit of pushback, or you may feel that there’s going to be a little bit of pushback. So it’s important to do it right. It’s important to get it right, to plan it appropriately. So the way that is done right now with Groundbreaker is that we call it white glove onboarding. And what that means is that you have a customer success person on our team that is providing you and your LPs with the documentation, the instructions and the training that they will need in order to be able to make this transition over to the new platform.

So where they’re coming from is they’re coming from receiving emails and needing to make phone calls to you to get updates, if that was the case or if you’re providing updates to them via email. So they are still going to be able to receive emails from the general partner, but those emails may be done in an automated fashion through the platform, or they may be done in a scalable fashion (not completely automated) through the platform as well. But in the early days, it’s about training the LPs on how to use the platform, and it’s about training the GP and the GP team on how to not only use the platform, but communicate with the LP investors.

So in our case, specifically, we’re providing our GP clients with the documentation, with the training material that they can pass on to their investors, and then we’re supporting them throughout that entire process. But that brings it all back to the point that I was saying earlier where ease of use, ease of adoption is extremely important for this specific purpose, for that transition period. Let’s face it, many LP investors may not be the most tech-savvy. We’ve got a lot of LP investors who are extremely tech-savvy, and we’ve got a new wave and a new generation of LP investors who are extremely tech-savvy coming into– beginning to manage the family money or the money that they’re making themselves.

So it’s all about being able to offer that high touch support early on if needed, but primarily being able to offer something that does not need that much support in order for somebody to figure out how to use as well.

Joe Fairless: What’s something a competitor of yours offers currently that you do not offer and why?

Ed Cravo: In terms of functionality?

Joe Fairless: Yeah.

Ed Cravo: Let’s see. So Juniper Square is a well-known competitor of ours, and they offer a very robust waterfall modeling functionality. And at this point, we do not have anything as robust, and the reason why is because we just have not caught up with them on that yet.

Joe Fairless: Has there been a big need?

Ed Cravo: Well, everyone does distribution to waterfall. So there is a need for it, and the question is, will people trade the ease of the functionality? There’s still a way to do it through Groundbreaker. It’s not as automated, it doesn’t calculate as automatically, but there’s still a way to do it by uploading the distributions. Now the question is, are people trading the high-end functionality for the price or the price for dealing with the current workaround, which we are saying, “Hey, we’ll get this, we’ll make this better and better. Join us now so that we can grow together”?

Joe Fairless: What’s been something that has surprised you about the users as they experience the platform, whether it’s they spend more time here, or they really focus a lot on certain components of it that we didn’t think were going to be as important, but now we moved our efforts into development into that area – anything like that?

Ed Cravo: I may not be the best person to answer that question, and I do have an answer, but I’m not sure that it’s exactly what we’re asking here, because I’ve already said it, and it’s that the ease of use is such a big deal. Early on, we were really the first ones out there and we were like, “This works. It’s great.” Through the phone, you could almost see their eyes light up. Through the phone, you could almost see that. That was three or four years ago as we gave a demo. But then we just realized ease of use is more important here than any other technology we’ve seen in the past, because of the work that’s been done with the LPs.

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

Ed Cravo: Oh, my best real estate investing advice ever would be to probably not listen to me on that advice because I’m not — I’m a technology and marketing person.

Joe Fairless: So let’s talk about that. So let me rephrase. Based on your background, as a technology and marketing person who works in real estate, what’s a tip or a piece of advice you have for someone who is focused on technology and marketing in real estate? Just whether it’s an SEO tip, or — you already talked about product adoption curve, which is really interesting, but what’s something based on your background?

Ed Cravo: Okay, now that’s much easier for me to answer. Thank you for rephrasing so that even I can understand it. So I would say two things. Biggest one– so this is specifically for the GPs out there that are trying to attract more LPs or trying to close more deals with LPs – it’s transparency. We’ve learned a lot about transparency recently with one of our mentors. Todd Caponi is the author of the book, The Transparency Sale, and it’s just such a powerful state of mind and mindset to have to be transparent… Because not only is that going to help you gain the trust of your LPs, but it’s also going to help you put forth the best offer that you possibly can. Because if you’re going to go out there and be 100% transparent about everything, you’re not going to go out there until you are comfortable with that being 100% transparent.

A couple of years ago we started learning this, and it’s just changed the way that people respond to us. It’s changed the relationships that we’ve built by just being brutally honest, brutally transparent with everything. It’s really made people build a better relationship with us. So I think that’s huge, even for PPs as well as they’re starting to build their businesses, they’re starting to expand and work with more LPs, is by figuring out “How can we be as transparent as possible with everything we’re doing?”

The other one I’d tack onto that from a marketing perspective is to figure out how you can be omnipresent. How can you be so present in the different channels, in the different watering holes that your audience is in that they can’t ignore you? If your audience is listening to podcasts, how can you be on the podcast? If your audience is reading BiggerPockets’ forums, how can you be on the BiggerPockets’ forums? Figuring out where your audience is, and then from there, making sure that you are present in those environments has served us really well at Groundbreaker.

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

Ed Cravo: Absolutely, excited for it.

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

Break: [00:22:12]:07] to [00:22:58]:09]

Joe Fairless: Best ever book you’ve recently read?

Ed Cravo: Best ever book I’ve recently read– not that many books, but I read very closely into them, maybe 10, 12 a year, and the recent one would be Drive by Dan Pink. It’s all about motivation. What motivates us? It’s so cool, because it really dispels a lot of thoughts you would assume about motivation, and they start out with an example about motivation in monkeys in the lab, and the author Dan Pink says, “This is the physics equivalent of letting the ball go and the ball flying up instead of falling down.” So they reveal this entire third driver of motivation. I don’t know if they call it specifically intrinsic motivation, but it’s all about intrinsic motivation.

It shows us that, sure, we are all motivated by rewards; that is undeniable. But there’s this entire third area of motivation, and the first one is just your basic human needs, and then there are rewards, and then there is this intrinsic motivation, which is people’s motivation to just be better. It’s people’s motivation to reach for mastery and become better at what they do, and it’s extremely powerful. Ever since reading the book, I see it everywhere. We actually included it in our hiring process from now on. We look for intrinsic motivation; it’s the number one characteristic that we look for every time we’re hiring. So I highly recommend it; very exciting, very eye-opening book.

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

Ed Cravo: About what I’m doing specifically, groundbreaker.co. We try to keep that very updated; that’s .co.

Joe Fairless: There’s also groundbreaker.co/joe, and you can get a free pitch deck template for all of you Best Ever listeners out there, and that will be very helpful for you as well.

Ed, thank you so much for being on the show and talking about your background, talking about portals. I know that’s just one component of your company, but the platform that you all have, and then addressing some reservations people might have about entering into this space if they’re just general partner, and as you said, eventually it’s not even going to be a choice; you just need to do it. So you might as well do it now, whenever you’re earlier on in the company, than later… Because the earlier you do it, the better off you’ll be, and I can tell you from experience, that’s definitely the case. So thanks so much for being on the show, Ed. I hope you have the best ever day. Talk to you again soon.

Ed Cravo: Thank you so much, Joe. Thank you for having me.

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JF2083: Understanding Loans With Christine DePaepe

Christine is a renovation loan division manager VP of mortgage lending at Guaranteed Rate INC. She has been actively involved in the mortgage industry since 1996 and her goal is to help those who may not have a large sum of money to invest in properties themselves without some additional funding. She shares her wealth of knowledge around the different types of loans available for many investors.

 

Christine DePaepe  Real Estate Background:

  • Renovation Loan Division Manager VP of Mortgage Lending at Guaranteed Rate INC.
  • From Chicago, Illinois 
  • Actively involved in the mortgage industry since 1996
  • Over the course of a 20+ year career has originated: Conventional, Fannie Mae Homestyle Renovation, FHA, FHA 203k, VA and VA renovation, commercial, Jumbo, new construction and Jumbo renovation. 
  • Noted by the Scotsman Guide in the top 20 FHA Volume Originators for 4 years consecutively
  • Guaranteed rate presidents club member for 7 years consecutively 
  • Say hi to her at: www.rate.com   

Click here for more info on groundbreaker.co

Best Ever Tweet:

“I love the 203k program for people buying in areas that are up and coming because it has the lowest down payment” – Christine DePaepe


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners, and welcome to the best real estate investing advice ever show. I’m Theo Hicks today, and today we’ll be speaking with Christine DePaepe. Christine, how are you doing today?

Christine DePaepe: Great. Thanks for having me.

Theo Hicks: Absolutely, thanks for joining us. I’m looking forward to talking about mortgages today. She is the renovation loan division manager, VP of mortgage lending at Guaranteed Rate, from Chicago, Illinois. She’s been actively involved in the mortgage industry since 1996, and over the course of her 20+ year career she has originated all types of loans – conventional Fannie May HomeStyle Renovation, FHA, FHA 203(k), VA, VA Renovation, commercial, jumbo, new construction and jumbo renovation.

She has been noted by the Scotsman Guide in the top 20 FHA volume originators for four years consecutively, as well as a member of Guaranteed Rates President Club for seven years in a row. You can learn more about her at rate.com/christinedepaepe. We’ll have a link to that in the show notes.

Christine, do you mind giving us a little bit more about your background and what you’re focused on today?

Christine DePaepe: Yeah, thanks for asking. Really, today we focus on a lot of renovation, new construction, helping buyers get into properties with a little bit lower down payment for investing… And by doing that, we’re trying to help people that don’t have as much capital as some of the major investors get into properties and start their portfolio.

Theo Hicks: I’m familiar with the 203(k) renovation loans on the residential properties… What types of opportunities are there for the 5+ properties when it comes to getting a renovation loan?

Christine DePaepe: On the 5+ properties – I refer those out to my partner and we can do up to 30 units. So if you’re buying commercial property, they will be able to help renovate the individual units… So we have to look at the total of purchase price plus what they’re looking for on the renovations to come together with “Will it work?”, future value… There’s a lot that goes into it, but we can do up to 30 units.

It’s private money, so it’s gonna be a lot different than the FHA loan or the HomeStyle Renovation loan, but we will definitely have an outlet for any of the listeners who have questions on that.

Theo Hicks: Okay, so you specialize in the residential renovation loans.

Christine DePaepe: Right, I specialize in the residential. What we’re trying to do is obviously help investors who want to buy properties. We have it available for long-term holds… Or we kind of use our FHA programs. Those are owner-occupied, but the caveat is that FHA only requires you to live in them one year. So what we’re seeing is by educating the buyers they can get into a four-unit property with 3,5% down, which is very low for four units, as long as they live there for a year. After they lived there for a year, they’re not required to stay in the property. They can then rent out the unit they lived in and have a cash-flowing property.

And again, with 3,5% down, it opens up a lot to people who otherwise would not be able to do this. Because on your conventional 4-unit, you’re looking at 20% to 25% down, and most buyers don’t have that, who are trying to start their portfolio.

Theo Hicks: So if I do a FHA 203(k) loan on a property, I live in it for a year, I move out and I wanna use it as a rental property… If I wanna do another 203(k) FHA owner-occupied loan, can I just do that, without doing anything to my existing loan, or is there something I need to do first before going to do a new one?

Christine DePaepe: FHA only allows you to have one FHA loan in your lifetime, unless there’s expanding family or a job transfer. So you can’t continue to use the program like that. I have had in the past — if there’s an equity pick-up over a couple years, they can refinance into a conventional program, and then let’s say a couple years later they wanna try to do an FHA again; that is allowed. But it’s not gonna  be consistently allowed, in terms of just keep churning.

More so, if you wanna do another property, you’d have to do a different program, probably conventional, but that requires a higher down payment.

Theo Hicks: Is there a rule of thumb of how many times you can rinse and repeat the FHA loan? Is it 2, is it 3?

Christine DePaepe: Well, FHA only allows one FHA loan as a client. So as a borrower, you can only have one encumbered FHA loan. So really for the investment, if you’re buying it and you’re living there for a year, you can only do that once with the FHA program… Because it’s such a low down payment, it’s 3,5% down, so they  don’t allow multiple churns, meaning you can’t keep doing it every year. You can do one to start, and then if you want to do another property, with a renovation program you’d have to do a conventional, and that requires a larger down payment. So we would talk with the clients to see if it would fit their needs, if they wanted to do another one, but it would be a larger down payment.

Theo Hicks: Okay, so just to confirm – I can do one; even if I refinance my existing FHA loan into a conventional loan, I still can’t do another one. I have to go conventional.

Christine DePaepe: No, if we are able to do that, then yes, you can. As long as you are out of the FHA loan, which I have done for clients – I got them into a conventional – and then they’ve used the FHA program again. If we get you out of the FHA loan, then you can go ahead and do another one. That is correct.

Theo Hicks: Okay, so you can have one FHA loan at a time, basically.

Christine DePaepe: Correct, yes.

Theo Hicks: Okay. So if you get an FHA loan and you refinance that property or you sell that property and you get rid of that FHA, then you can technically do that.

Christine DePaepe: Then  you can do another one, correct.

Theo Hicks: Okay.

Christine DePaepe: And on the FHA 203(k), they also allow for mixed-use, which is very unique, because most mixed-use is considered commercial. So when I say mixed-use, I’m not talking anything greater than four units, I’m talking four units or under. So if you have a store front that houses an insurance office, and then you have 2 or 3 residences above, as long as you’re buying the property and you live there for a year, then you can put 3,5% down on that mixed-use property, which is very low for a mixed-use property.

You need to live there a year — you can either do move-in ready. If the property doesn’t need work, that’s fine; we can still use it on my FHA program at 3,5% down. But if  the residences above need updating, you can use our renovation money only on the residential units, to fix them up and gain more rental cashflow… And you need to live there a year. And again, after a year you can move out, and then you have a cash-flowing property.

So the key is just trying to help people who are willing to move into a property for a year, with a super-low down payment, start to build their portfolio of property.

Theo Hicks: Yeah, this is exactly how I got into investing. I didn’t do the 203(k) loan because I didn’t know about it at the time, so I paid for renovations out of pocket… But I did do the FHA loan 3.5% down, and got into a duplex, lived there for a year and then ended up selling the property.

So what are the major differences, besides obviously the renovation aspect of it, between the standard FHA loan and the 203(k) loan? Is it just doing renovations, I get the 203(k) loan, and if I’m not I’m doing FHA? Are there any differences in the rates, amortization, anything like that?

Christine DePaepe: So the FHA regular is for single-family, up to four units, as well as the mixed-use. They don’t do investment properties, second homes, or anything like that. It’s only primary residence. And there is a difference in the rate on the construction, which is the 203(k), because of the risk, there is gonna be about a 1% difference. So if the current FHA rate is at 3% on a move-in ready property, we’re probably at 4% on construction. And again, it’s just due to the inherent risk of construction. They have a building. But when it’s done, we can always do the Streamlined FHA Refi, and we can get a lower rate and payment if the market indicates that, at the market rate at the time the construction is done.

Theo Hicks: Okay. And another question I had is something that I’ve always been confused about, so maybe you can clear this up… PMI. If I get an FHA loan, will I have PMI forever, or will it eventually go away?

Christine DePaepe: That’s a great question. FHA changed their guideline on that. I don’t know the exact year or month, but it was in the past couple years. FHA — now PMI will never go away, unless you put 10% down. Now, remember, the minimum requirement is only 3,5%, and that’s what most people are doing. But in the cases where someone’s like “Well, I wanna put 10% down”, PMI stays on the property for 11 years, and then it’s automatically canceled. But if you do not put 10% down, it’s on forever, and that’s not a good thing. So those are definitely loans that we’re always reviewing 2-3 years out, to see if they’ve picked up enough equity to get them out of an FHA loan, to get rid of the PMI… Because it is on for the life of the loan.

That’s only new in the past couple of years. Prior to that, the PMI always fell off around year 11, automatically. So that is definitely a change in the FHA program.

Theo Hicks: So even if I put 3.5% down and then in 11 years I have 10% equity, I still have to pay the PMI.

Christine DePaepe: That’s correct. And PMI falls off with 20% equity on conventional loans, and they used to on FHA. But FHA now has it for the life of the loan.

Theo Hicks: Okay. So for a typical client who does an FHA loan, lives in it for a year, keeps it, rents it out, what’s the next loan that you recommend giving them? And then let’s do two scenarios. One where it’s gonna be a more turnkey property, and then one where it’s gonna be a property that requires renovations. And we’ll keep it 1 to 4 and mixed-use.

Christine DePaepe: Normally, if you’re gonna use FHA and you wanna do a long-term hold, I recommend doing the 3 or 4-unit. You wanna get the most property you can. After that, if we can’t refinance them out, which normally we can’t that soon – it’s not gonna have enough equity to go into a conventional loan – I would say most of my clients then had a two-unit conventional program, because on the two-unit conventional you can put down 15%… And that’s either for move-in ready, or renovation. So that would be the next step. They don’t normally go back to a three or four, because it steps up to 20%-25% down, and that can be a little bit too much… But some people are willing to do the two-unit, and that’s a 15% down.

Theo Hicks: And then for that, since it’s conventional, you said the PMI will fall off after 20%.

Christine DePaepe: Yeah, on the conventional — so if you go into that at 15% and have MI, the PMI will go away. I think it’s a minimum of five years, and then you just put in for the PMI to be eliminated.

Theo Hicks: So we order an appraisal to determine the value of the property at that point?

Christine DePaepe: No, if they’re on a very low rate and they don’t  wanna refinance, they call the servicer direct and say “Hey, I’d like to have my property reevaluated”, and the company will do a reevaluation to see if they can get rid of the PMI for them.

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

Christine DePaepe: I evolved the 203(k) program for people buying in areas that are up and coming, because it has the lowest down payment, so it’s the least amount of cash out. I love that program for a buyer looking to move into something with a low down payment. When I meet with people, a lot of times they don’t have the capital, but they understand how important it is to invest in real estate… So we just educate them about the program and how buying in maybe an up and coming area you can gain a lot of equity.

They’re not for established high-end areas, because you’re trying to get into an area that is just up-and-coming with this low down payment… And FHA has lower loan limits, so we also have to watch that, depending on the area. Now, some areas have much higher loan limits, so we always have to go by the county. So that’s another thing I do wanna point out – the county dictates what we can do for each borrower; so when the borrowers call, because I’m licensed in 42 states, I first have to identify “Okay, what county are you looking in?” and then I help them understand the loan limits that they’re gonna be using, so they can buy their property. But if you were to say the best advice, I would say a four-unit or a three-unit and use the low down payment that’s available.

Theo Hicks: Alrighty. Are you ready for the Best Ever Lightning Round?

Christine DePaepe: Sure.

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

Break: [00:15:40].24] to [00:16:24].27]

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

Christine DePaepe: Best ever book I’ve recently read… You stuffed me on that one. Let me take a pass on that one. Let’s go to the next question.

Theo Hicks: How about best ever resource you use to stay up to date on your area of expertise?

Christine DePaepe: We just do a lot of internal training at my company. We have a lot of educational within our company, so I take a ton of training. Recently, I took a lot of VA training, because we have VA renovations, so I really needed to get in tune with that whole process. So just internal training. I’m always reading what’s going on and training myself, and I train other people… So it’s more about just I’m always reading what’s going on in the industry – what changes, what things are happening… Like we just talked about FHA – for years and years and years PMI went away, and then boom, FHA makes a change… So I have to keep up on that and the guidelines.

Theo Hicks: So I typically ask “If  your business were to collapse today, what would you do next?”, but I’m gonna change it up a little bit and say “If for some reason the FHA program just went away tomorrow, what would you do next?”

Christine DePaepe: I always try to stay with niche products. They have reverse mortgages out there, commercial, I love jumbo renovation… So I’m really in tune with everything different. I think there’s a lot of value when you understand just not the everyday mortgage. I do the everyday mortgage, but it’s really great to specialize in something; it just brings a lot of people to you, because of the specialty.

Theo Hicks: Okay. The next question – I’m gonna change it up a little bit, too. This may apply to you, but based on your experience, what’s the main mistake that investors make that result in their FHA or FHA 203(k) loan getting foreclosed on?

Christine DePaepe: That is a great question. What I see is when people call me they don’t even realize they shouldn’t do it. So one thing I look at is the total loan applications. Recently — I will give an example. A woman had never purchased a home, and she was (I would say) in her mid-50’s, and she was very honest; she was like “I don’t know what I’m doing, and I don’t have a lot of money.” So that right there concerned me, because she wanted to buy a four-unit major gut rehab; when I say that, we’re talking the property was maybe 150k and she was looking to do 250k worth of work… Without a lot of reserves, it’s a little nerve-wracking, because a reconstruction of that property is probably anywhere from 6 to 10 months… And we can only finance six payments. So my concern was she was gonna use every resource she had in her assets to put down on the property, and when the six months ran out, she would have to make this mortgage payment.

So after talking to her and explaining about that, she would have been a prime person that I think some loan officers maybe would not have really done the kind of diligence and education I did… And we both realized it wasn’t the right move. I’m like “This may not go well, and they will take your home. They definitely will foreclose if you can’t move forward with  your payments.”

So she bought a move-in ready where there’s no timeframe to not have your rent being paid. I think that’s the one thing on these four-units that people should understand. The first six months no one’s gonna live there on most of these rehabs. Now, some are just cosmetic, and we can get them done in 3-4 months, if they’re just gonna do kitchens and bathrooms… But some, they’re doing everything – new plumbing, new electric, kind of making it an effectively new home.

The cosmetic ones are easier, but gut rehabs – we’re definitely not in the home for six months. So it’s definitely important that they have a little bit of capital. The low down payment is great, but they should have a little bit of reserves. They require that on FHA, three months reserves. Then we try to roll in payments.

So where things can go wrong is when they don’t realize — they think, unfortunately, with HDTV and all these rehab shows, “I can do a whole rehab in 30 days”, and that’s a mistake. It’s not really reality.

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

Christine DePaepe: Oh, I love to give back to the community. We do a lot with Guaranteed Rate. We have a foundation and we give back to the community. We all contribute, we all help… I do a lot of work in my community as well. That’s just something I’ve always done. I definitely have a heart for kids, and we do a lot with women shelters and helping women with children that need to start over, so we give back in those ways.

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

Christine DePaepe: Well, my office phone goes to my cell phone, because I don’t  ever like to miss a call. I basically work and I’m available every day, especially on weekends and nights… Because you’re seeing a trend in the workplace where people are more in open [unintelligible [00:20:55].03] environments and everybody can hear each other, so people don’t really like to talk when they’re at work, so I make it a point to always be available at nights and weekends, where they’re more comfortable talking about their finances.

I’m at 773-848-4144.

Theo Hicks: Well, Best Ever listeners, definitely take advantage of that. You said you cover 42 different states, so it’s most likely that she’s in the state that you’re at… So if you’re looking to get into real estate with the FHA or the FHA 203(k) loan, definitely take advantage of that.

Alright, Christine, great content. I really enjoyed our conversation. It’s bringing me back to when I was looking at my first property, it’s very nostalgic… Just to quickly go over what we’ve talked about – there are renovation loans for 5+ units. You will refer people to someone who works with units up to 30, and it’s private money, so it’s obviously gonna be a little bit different, but your focus is on the FHA loans.

The FHA loan – it’s gonna be owner-occupied; you have to live in there for one year. The major advantages is a 3.5% down payment, and a good strategy would be to buy it, live in it for a year, move out and then rent it out. If you’re capable at some point of refinancing it or selling the deal, then you can use the FHA loan again, but you’re only allowed to have one at a time.

Christine DePaepe: Well, we also have the HomeStyle, we haven’t touched on that a little bit… I did wanna bring that up, because our HomeStyle Renovation program is for long-term hold rental properties, and it’s for single-family/townhome/condo. We don’t do multi-units. But what we’re using that for are investors who buy a house and just wanna do some cosmetic updating to increase the rents, and they don’t wanna use their own funds. So that program is 20% down.

But if you’re buying a house for example for 300k and you just wanna update it to get a higher rental rate, you can get our money, 50k to 70k, to update it. Then they’re holding them to not pay capital gains for a couple years, and either they’ll flip them or they will repay them. But those are for investors. They don’t have to live there. It’s 20% down, but we’ll give them the money to do the renovations.

So if they’re buying for 300k, doing 75k of repair, we use that as a 375k start point, they give me 20%, and I give them back 75k to do the cosmetic updates. That’s been a great program as well for some of my actual true investors who do long-term holds.

Theo Hicks: Okay, and that’s the HomeStyle Renovation Loan.

Christine DePaepe: That’s correct. It’s also available for owner-occupied multi-units, but those have larger down payments. So I just fit the needs to whatever the buyer is trying to do. Basically, it’s a phone conversation to see what they’re trying to do, how is their credit… That’s another thing I work on. A lot of people do not have any idea how to help their credit scores, or what they’re doing wrong, or what’s affecting it… And we have a software that will help the indicated scores, if there’s something wrong that I can identify; it’s very easy for us to help get everyone ready to purchase, get their credit corrected etc. So I think it’s a totality of everything. You can be very good at mortgages, but it’s the whole package – reviewing the file, finding out their goals and strategies, reviewing the credit, what can we do to make their credit score better…

You want a 760 credit score, that’s really what you want nowadays. That gets  you the best rate and programs available… So that’s what everyone’s goal should be. Hopefully, everybody’s using Credit Karma, because that’s a  great app to monitor your score.

Theo Hicks: Perfect. We’ll make sure they get that Credit Karma to check that out as well. So we also talked about the major difference between the FHA and the 203(k) loan, besides obviously the renovation portion of it, is the 1%(ish) difference in the interest rate.

You also talked about PMI and how that has recently changed… And now the PMI will never go away, unless you put down 10% upfront for your FHA loan. After 11 years it will be canceled. Then after FHA, some of your options would be to get a conventional loan. You mentioned the two-unit conventional program that allows you to put down 15%, and that’s a move-in ready or a renovation loan. And I believe you said the PMI expires on that after five years… Correct?

Christine DePaepe: Yeah, on the 15% down that’s correct.

Theo Hicks: Okay. Then we talked about the processes. You call whoever’s servicing your loan and then ask them to have that property reevaluated to see if you’ve reached the equity limit.

Your best ever advice was to use the 203(k) loan program in an up-and-coming area, because it is the least amount of cash out of pocket. Then you talked about how there are gonna be some loan limits based on whatever county you lived in.

Then during the Lightning Round you talked about one of the biggest mistakes you see people make with these types of programs, that result in them either getting their property taken away, or if you stopped them, they would have gotten their property taken away… And that is them just falling into the HDTV trap of thinking that everything can be done in half an hour of their time.

You’ve also talked about the reserves that are needed, and you only give out six payments, and things like that. So again, Christine, I really appreciate it. Lots of great information about these loan programs. It’s a very good episode for people who are wanting to get into real estate and don’t necessarily know how.

Thank you for joining us. Best Ever listeners, thank you as always for listening. Have a best ever day, and we’ll talk to you tomorrow.

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JF2070: Three Factors to Consider for Property Coverage With Sean Harper #SkillsetSunday

Sean is the CEO of Kin, an insurance company built from scratch on modern technology. Today you will learn three factors to consider when determining the right coverage for your property; covering the property for the right amount, why it’s important to get flood insurance and he shows how you can see if your insurance company is spending its revenue on claims or other expenses to make sure they take care of their customers.

Sean Harper Background:

  • Co-founder and CEO of Kin, an insurance company built from scratch on modern technology
  • Realized the homeowners insurance industry was still being managed in a way that NO other consumer financial products are managed today
  • Leads a team of 100+ employees to help educate and cover their clients 
  • Based in Chicago, IL
  • Say hi to him at https://www.kin.com/ 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“50% of flood losses happen outside of FEMA designated flood zones” – Sean Harper


TRANSCRIPTION

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

With us today, Sean Harper. How are you doing, Sean?

Sean Harper: I’m well. How are you?

Joe Fairless: I am doing well, and – a little bit about Sean. He’s the co-founder and CEO of Kin, which is an insurance company built from scratch on modern technology. He’s based in Chicago, Illinois. He leads a team of 100+ employees to help educate and cover their clients. Today we’re gonna be talking about three factors to consider when determining the right coverage for your property. This is a Skillset Sunday; I hope you’re having a best ever weekend.

First, Sean, how about you give us a little bit about your background, and then we’ll roll right into the three factors?

Sean Harper: Sure. I’ve been doing online financial services stuff for a long time; my co-founder Lucas and I both have. We really sort of stumbled into this insurance stuff when we started buying real estate ourselves. There were a lot of things about the real estate process that are pretty anachronistic, stuff that operates less efficiently than it could; insurance was one of them… And we were just scratching our heads at how manual and how much paperwork was involved, and how much back-and-forth… When there are other areas of financial services where it’s much more automated.

Think about getting a credit card, for example. You don’t need to talk to anyone; you just get the offer on the website and you click, and then you’ve got a credit card. So that’s what we’ve been building… It requires a lot of technology to do that, and most of the tech is around having — the core of every insurance company, bank, or whatever is actually a software platform. So all this software to do the underwriting rules, the accounting, the payments, the price and all that… So we had to build that, and then we had to build a really good system for understanding from public data sources and some private data sources, and even some machine learning, to understand the traits of the home. Because of course, we’re not there. We can’t see the building. So we needed a machine that’s really great at pulling data in, so that it does understand the building. It’s pretty fun, we’ve learned a lot about buildings… [laughter]

Joe Fairless: What have you learned?

Sean Harper: You know, it’s funny – the details are really important. One thing that really surprised me was even a simple trait of the building – think about square footage – is actually really hard to know. We’ll talk about a single-family house for a second. You could ask the MLS, you could ask the property tax site, and then you could actually take a picture of the home from above, from an airplane, and use the area times the number of stories you know it is to calculate it… And you’ll end up with three different answers.

Joe Fairless: Yeah.

Sean Harper: You could ask the person who lives there, and you could ask the person who lived there before them, and they’ll give you two different answers. And that’s just for square footage, which really should be a simple thing. Then you start trying to ask people what the quality of their cabinets and appliances are, or how old their HVAC system is, or what the pitch of the roof is… And the details get really complicated. There’s a lot of ambiguity.

Joe Fairless: How do you navigate that?

Sean Harper: We know that no data source is gonna be perfect for this stuff, so we try to  have redundancy and we try to have objectivity. One thing that insurance companies have always done is they’ve always relied on the user and/or broker to tell them about the building. And sometimes they know, and sometimes they’re honest. But there are also times when they know and there are times when they are dishonest. The first part, the objective sources that we use – they’re not always perfect, just like asking the user isn’t perfect… But at least they’re objective. They’re not skewed in any way. Versus if you start asking somebody who knows, that if they tell you they have a newer roof, for example, that they’re gonna end up with cheaper insurance – well, that creates a really big incentive for them to tell  you they’ve got a newer roof. And people do what benefits them; maybe they’re not being dishonest, maybe they’re omitting something.

So that’s a big part of it – we try to rely on sources that are objective… And then the other is we try to have redundant sources. In that example I gave you before, of square footage, if those three data sources are all pretty close, then you have a high confidence that it’s accurate. If there’s a huge spread between them, or maybe two of them more or less agree but the third one doesn’t, that tells you something about it as well. So having multiple data sources that are calculated in different ways, that can be used to cross-check against each other, is pretty important, too.

Joe Fairless: That’s a good lesson for anything where you have conflicting information… Even if it’s a he said/she said thing, well what are the objective sources saying that took place? And then are any of those objective sources redundant, or aligning with each other? And if so, then you go that direction with the answer.

Sean Harper: Yeah, absolutely. Having some tie-breaker is really nice.

Joe Fairless: Yup. Let’s talk about the three factors to consider when determining the right coverage for your property. What’s number one?

Sean Harper: Number one is you really wanna make sure that you’re covering the property for the right amount… And it’s really easy to get drawn into trying to find the cheapest insurance, because no one wants to pay more for insurance… But a lot of companies, especially a lot of insurance agents, will try to fudge essentially the insured value. So you might have a home or a building that’s legitimately worth 1.5 million dollars, and you’ll get an insurance quote that looks really good… And if you look under the hood, you’ll see that they’re only ensuring the building for 1.2 million dollars.

So that’s really important, is just to figure out how much the coverage costs you relative to the amount that’s being insured, and to make sure that the amount that’s being insured actually does cover the property… Because it’s not likely that something happens to your property, but if it does, you definitely don’t wanna be short on your insurance, because that could create a big problem; it could wipe out your equity.

The second one is  — a lot of people don’t realize this, but most property insurance, commercial or residential, doesn’t include some really important hazards… And the biggie is flood. A normal homeowner’s insurance policy, or a normal commercial – it can go either way; it could include it or it couldn’t. You really wanna make sure that you’re buying flood insurance… And that’s true even if you’re not in a flood zone.

Mortgage banks will usually enforce that you get flood insurance if you are in a FEMA-designated flood zone… But the problem is that FEMA drew those flood zones a long time ago, and things have changes. The types of weather that we get change, the sea levels have risen, and then also things get more built up, it can create flood dynamics… If everything’s paved over near you, there’s no ground for the water to soak into, so it makes floods more likely. And you can see some really bad situations. If you go to Houston, there are neighborhoods that still haven’t really rebuilt fully after Hurricane Harvey, which was two years ago, and that’s because people didn’t have flood insurance. So 50% of flood losses happen outside of FEMA-designated flood zones. And the really tragic thing is that if you’re in one of those areas, buying flood insurance actually doesn’t cost that much.

Joe Fairless: If you’re in a non-FEMA flood zone.

Sean Harper: If you’re in a non-FEMA flood zone. Because it’s not that likely that you’re gonna get flooded, but that’s why you buy insurance. You buy it for the stuff that’s not likely, but would be really crappy if it did happen.

Joe Fairless: What are some other things besides flood insurance that most property insurance doesn’t include?

Sean Harper: The other biggie is earthquake. If you are in an area where earthquakes happen, that’s usually not covered by a normal policy… And then there’s sort of a subset of this where the deductible will be different. Oftentimes now if you’re in a place where there is a lot of wind and hale, you’ll end up with an insurance policy that has a second deductible. So it might be a thousand-dollar deductible. But then there’s an asterisk next to it that says “Well, unless it’s wind, or hale loss… Which, that’s a pretty common type of loss.

Joe Fairless: Sure.

Sean Harper: It’s a very common insurance claim. And those deductibles could often be a lot higher. It’s very common. They have a $1,000 normal deductible, and a $10,000 hale deductible on even just a normal house.

Joe Fairless: Okay. And number three?

Sean Harper: Number three – this one gets a bit esoteric, but it really helps if you can look at the financial statements (which are all public) from your insurance company. They actually have to file their financials with their state regulator…

Joe Fairless: I can already tell this is gonna be less than half of a percent of any person who’s getting insurance, based on that, so far.

Sean Harper: Absolutely. But it’s so easy to do. What you’re looking for is you’re looking for how much of their revenue they spend paying claims, versus how much of the revenue they spend on their overhead. What you wanna see is you  wanna see an insurance company is spending most of the revenue that they get paying claims… Because that’s what you as a user care about. And because insurance can be really hard to compare, the last thing you want is your insurance company spending a little bit on paying claims… Maybe they argue with you a lot when there is a claim, or try to short-change you, and then they’re spending the rest of the money on corporate jets and fancy buildings and everything else for them.

Joe Fairless: Well, not having studied financials of insurance companies before, what percent would be considered high, versus average, versus low?

Sean Harper: That’s a really good question. For property insurance, the average is about 30% is spent on overhead and 70% is spent on claims. There’s actually a lot of variance. You’ll find companies that are 40/60, you’ll find companies that are 20/80. And usually, the ones that have the lower expenses are also the ones that have better customer satisfaction, because they’re not nickel and diming you when you have a claim.

Joe Fairless: What are some insurance companies that stand out in a good way in that regard?

Sean Harper: Some of the best insurance companies are regional. We’re very regional; we’re focused in just a handful of big states. One that is a national carrier, more on the personal insurance side, that does really well on that, is USAA. But it really is hit or miss. It’s not always the big brands that are the most efficient. In fact, some of those are the least efficient.

Joe Fairless: And what are on the opposite side? USAA is on the good side; what about the opposite side?

Sean Harper: I don’t wanna say that. That’s mean. I don’t wanna pick on anyone.

Joe Fairless: It’s just facts.

Sean Harper: [laughs] I’ll leave that as research for the user.

Joe Fairless: Where should they go to research that? Where is an easy place to look at that?

Sean Harper: The easiest is to just go to whatever state you’re in, search for their office of insurance regulation. Where I live, I just google “Illinois office of insurance regulation.”

Joe Fairless: Anything that we haven’t talked about as it relates to the three factors to consider when determining the right coverage, that you think we should?

Sean Harper: Those are my top three.

Joe Fairless: Well, how can the Best Ever listeners learn more about what you’re doing and get in touch with you?

Sean Harper: Kin.com is the easiest way.

Joe Fairless: Sean, thank you so much for being on the show and talking to us about the three factors – one, make sure we have the right amount; two, make sure that we have the right hazards covered, taking a look at flood and earthquakes in particular, and three, taking a look at the public financial statements of the insurance companies, and seeing what proportion of revenue is paying claims versus overhead.

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

Sean Harper: Thank you.

 

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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.

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JF2056: Scaling a Business Nation Wide With Eachan Fletcher #SkillsetSunday

Eachan founder and CEO of Nestegg, a platform for property management and maintenance that makes being a landlord refreshingly easy. Eachan is a returning guest from episode JF1980, where he shares the ways technology can make your property management easier. In this episode, he is going to share how you should best go about scaling your business to be nationwide.

 

Eachan Fletcher Real Estate Background:

  • Founder and CEO of Nestegg, a platform for property management and maintenance that makes being a landlord refreshingly easy
  • Worked as the CTO and VP of product at Expedia where he built and led multiple teams, developed award-winning products
  • Has been interviewed previously on the show, that episode will release on February 3rd, 2020
  • Based in Chicago, IL
  • Say hi to him at https://nestegg.rent/ 
  • Best Ever Book: anything written by Steven Pinker

 

Best Ever Tweet:

“There’s a difference between getting bigger and being scalable.” – Eachan Fletcher

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JF1980: Property management tech to make being a landlord refreshingly easy with Eachan Fletcher

In this episode, Theo Hicks interviews Eachan Fletcher, founder and CEO of the property management and maintenance platform Nestegg. Eachan discusses all of the insights they discovered while developing Nestegg. Learn about Nestegg’s core features for property management and how they designed their solutions to fit the needs of their targeted consumer. 

Eachan Fletcher Real Estate Background:

  • Founder and CEO of Nestegg
  • Worked as the CTO and VP of product at Expedia where he built and led multiple teams, developed award-winning products
  • Based in Chicago, IL
  • Say hi to him at https://nestegg.rent/ 
  • Best Ever Book: anything written by Steven Pinker

 

Best Ever Tweet:

“When you build technology products, particularly as a startup, you have to be hyper-focused. It’s so easy and so tempting to make your product for everyone.” – Eachan Fletcher

 

The Best Ever Conference is approaching quickly and you could earn your ticket for free.

Simply visit https://www.bec20.com/affiliates/ and sign up to be an affiliate to start earning 15% of every ticket you sell. 

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners, and welcome to the best real estate investing advice ever show. I’m Theo Hicks, I’ll be hosting today’s episode. Today we are speaking with Eachan Fletcher. Eachan, how are you doing today?

Eachan Fletcher: I’m super-good. Thank you so much for having me.

Theo Hicks: Absolutely, and thank you for joining us. I’m looking forward to our conversation. Before we get started a little bit about Eachan – he is the founder and CEO of Nestegg, which is a platform for property management and maintenance that makes being a landlord refreshingly easy; we’ll definitely dig into that. He also has worked as the CTO and VP of product at Expedia, where he built and led multiple teams, developed award-winning products. I actually used Expedia to book my recent trip to Cincinnati for work.

Eachan Fletcher: Oh, great.

Theo Hicks: He is based in Chicago, Illinois. You can say hi to him at Nestegg.rent. Eachan, before we get started, can you tell us a little bit more about your background and what you’re focused on now?

Eachan Fletcher: Sure. I’ve always been a tech guy, worked in technology all of my professional career, and I’ve always been fascinated by how technology and how data can help people with ordinary everyday frustrations that they’re often not even aware of… And I think my time at Expedia was one of the most transformative times of my career, where we spent a lot of time looking at travel, something that happens out in the real world, and we could better support that through technology and data.

I think we’ve fundamentally changed how people travel, and I think if you look at what we used to do – I think this probably dates me, I guess, to all of your audience… But I think everyone remembers the days of the travel agent, where you would have someone in a store, with a big, glossy catalog, and you would go there and say “I wanna go on vacation”, and they’d flip through some pages and they’d try to figure out where you should go, and they’d talk to you about prices, and packages, and [unintelligible [00:03:28].08] arrangements… And then you’d get some paper tickets. That was the big deal. And in that scenario, you had a lot of power and a lot of access [unintelligible [00:03:36].22] locked up into the hands of a small number of experts. If you look at what we’ve achieved in travel, we’ve democratized that by taking that access and that power and that information and disseminating it directly to the people who need it and who are benefitting from it.

Now, we don’t even think twice. There are people who’ve never used a travel agent, and people are going on more trips and more vacations than ever, than in any other time in history now, because it’s so easy, and it’s so accessible, and the information is available. We take it for granted, but that’s a major transformation, and it was amazing being part of that journey, and just seeing how technology just totally disrupted, but then lifted up an entire industry.

Then as a small real estate investor myself, I got more and more interested in buy and hold real estate investing and building up a small portfolio of my own, and then I started to hit some of those exact same frustrations – where is the expertise, where is the information, what are the great automated technology tools that help me build and maintain a profitable portfolio, and take care of my future income? I saw the same pattern emerge in real estate, that we addressed in travel… So that’s what drew me into this, and that’s why I founded Nestegg.

Theo Hicks: When did you found Nestegg?

Eachan Fletcher: We started in 2017, with a beta, in the Bay Area. In 2018 we got our proper round of VC funding, and any startup people listening will appreciate what’s involved in that. In January this year we launched in Chicago.

Theo Hicks: So it sounds like you applied the same concept — you’ve kind of already said this, but you’ve applied the same concept that you did at Expedia, finding what frustrates people and then creating some sort of automated tool that alleviates that frustration. Do you want to maybe walk us through how you specifically identified this particular frustration with property management and maintenance, and then how that went from just an idea to you actually start a business and creating a product that (as I mentioned) alleviates that frustration?

Eachan Fletcher: Yeah, for sure. Let me do my bit to summarize a good year plus of work, in a quick and punchy answer for you. I think everything starts with understanding the space and the customer. We used very practiced, standard market research, user research methodologies that we’d been using for years in the Bay Area and Silicon Valley to draw out insights about what’s missing and what’s difficult about property management today.

So step one was gaining those insights. Through various techniques, we found out that really the hard part and what was really missing was for people who were reasonably new to property management and who had reasonably small portfolios. I’m talking people 2-3 years into being a landlord, with less than 10 properties. That’s the ideal customer that we’ve specifically tailored our product around.

As a general rule, I think when you build technology products, particularly as a startup, you have to be hyper-focused. It’s so easy and so tempting to make your products for everyone – any kind of landlord, any kind of property, any size portfolio… But I think if you do that, you end up making a lot of very generalized features, that become very ordinary and common, and don’t necessarily exactly match someone’s specific frustrations.

So to talk through what we did to make that real, as an example – when we identified this sub-segment of landlords, these reasonably new people with small and medium portfolios, we’ve found a handful of main pain points that they had.

The first one is one of cashflow – these are people who are just starting out in their real estate investing journey, so often they’ve really leveraged themselves a lot to get their first few properties… So cashflow is tight month-to-month; exactly when expenses hit, exactly when [unintelligible [00:07:43].22] things like that matter. So that was insight number one.

Insight number two was they don’t have an existing network of trusted contractors that they know to deal with all the maintenance, that they know will do a good job, will charge them a good price [unintelligible [00:08:01].09]

And the third one just comes down to confidence. Without access to the expertise of someone like a property manager, there’s so many things they don’t know they don’t know, if that makes sense. We’ve designed that product exactly around those three features. And when we did some initial research – because obviously, step two is always go out there and find today’s solutions and try to figure out why people aren’t happy with today’s solutions; why these pain points are still pain points, and if other prop tech companies exist, if other real estate companies exist… And what we’ve found was all the guys out there already doing things for small, independent landlords – they were really focused on the online things that are the beginning or the end of every lease.

So finding a tenant, listing the property, background checking potential tenants, signing a lease… Those kinds of things are – I hesitate to use the word “easy”, but they are now becoming what I would consider a commodity. You have so many options doing things like that. But once you have someone in your property, and then they’ve got a [unintelligible [00:09:07].04] you are on your own. That is your problem, and you have to find a contractor you can trust; you have to figure out when the tenant’s available, when the contractor’s available, take care of the scheduling, make sure it gets done, make sure the contractor gets paid, make sure the work is reasonable… There’s a lot to it, and we didn’t find anyone really taking that pain away, so that’s what we did.

So the features that we’ve rolled out so far maybe to touch on that as the core of the platform is about that maintenance. Once you have a tenant in, they’re there for 18 months, two years, 2,5 years, and during that time you’re gonna have 4-6 small to medium maintenance jobs go wrong. That’s what’s gonna happen, and you need to be able to resolve those quickly.

So our product – we like to think of it as kind of like the help desk for landlords. A tenant will report a maintenance issue to us, anytime 24/7, we diagnose that issue, figure out exactly what’s wrong, we figure out a price for it, and then we notify the owners. So as a landlord on that platform, you’ll get a notification in our app to let you know there’s a maintenance issue, we’ll let  you know what [unintelligible [00:10:15].19] you’ll see a before image, you’ll see our diagnosis of the issue, our recommendation, and a price to get it fixed. If you want us to go ahead with that, all you need to do is tap the button and then we take care of everything.

We find the right contractor – we have a big network of contractors that we’ve onboarded, that we’ve verified, background-checked; we track the quality of their work, we stand behind every job they do, and we take care of the scheduling, the timing of the contractor with the tenant, with making sure the job gets done. We take care of paying the contractor, and then maybe charge your credit card once you’re happy. That way everything is taken care of with a tap; all those dozens of phone calls – down to a tap. We stand behind all the work we do for 14 days, we actively monitor repairs to make sure they stay fixed.

That’s the core of the platform, and that takes away that major pain point of “What do I do if something goes wrong?” Because today if something goes wrong and you’re a small rental owner, your whole life is thrown into disruption while you desperately search around for someone who [unintelligible [00:11:16].11] deal with it. So we take care of that.

Then the other major features are around this cashflow issue, which again, is unique to newer landlords or smaller portfolios. We have several features for that. One is we’re doing some very differentiated things with rent collection. We are the only platform who will pay you your rent in advance. So if you use rent collection through us, we will guarantee you available funds in your account, right upfront on the first, even if we don’t collect from your tenant until the 10th, or the 15th, or the 5th, or whatever. And that just takes a lot of monthly crunch that happens every month [unintelligible [00:11:58].00]

The other thing that we’re rolling out right now is a feature we call “Fix now, pay later.” As I’m sure you’re aware, a lot of traditional property managers will execute on small  repair jobs and then take their money for the invoice out of a  future rent check. So we’ve taken that one step further, where we’ve allowed you to spread that over a number of rent checks.

So instead of having all $300 or $400 come out of the very next rent check, and then have  a potentially tight month, you can choose to spread that over 2, 4 or 6 different rent checks, and then just have a small, manageable amount come out each time… Almost financing your maintenance over time for rent collection. We think that little things like that – it’s easy to do with smart technology, and it just takes a major burden off of rental owners, and that’s what we’re all about.

Theo Hicks: It’s funny, because those three particular pain points you’ve just addressed are addressed by those three features you mentioned: the maintenance, paying the rent in advance, and spreading the maintenance costs out over time – those are the three main issues I had with the property management company I worked with. Every time I was like “Oh, cashflow issue.” “Oh, fix now, pay later? That’s great.” I definitely wish I would have found a service list this when I was first starting out, because those are definitely three major pain points that I had.

So right now you said you launched it in the Bay Area, and now it’s in Chicago. So if I’m an investor in Tampa, Florida, for example, I can’t use Nestegg.

Eachan Fletcher: You can use us; we have a whole bunch of property management features that give you regular reminders about key dates and tasks, information about your units, a chat feature to allow you to keep in touch with tenants, and give them notices and things without needing to exchange personal details… So you can use all our property management features, you can use all our rent collection features, but our maintenance is — right now we have pretty much all of Illinois, pretty much all of Indiana, Wisconsin area, L.A. and San Francisco. And that’s because we wanna take our time to make sure in every city that we switch the maintenance feature on, we wanna take our time to make sure that we’ve got only the best contractors in that area locked down, and we’ve taken the time to make sure to verify them, make sure that they’re trustworthy and they do great work, because eventually we put ourselves on the line, and our reputation on the line through their work.

And of course, we negotiate volume discounts with these guys, and that could take some time, too. So we try to pass on some savings to our owners as well.

Theo Hicks: Alright, Eachan, what is your best real estate investing advice ever?

Eachan Fletcher: How about this one – if I could go back and tell myself something to do differently ten years ago, I would have said be more aggressive, and I would have taken on more properties sooner, and I would have grown my portfolio more quickly. But I think starting out can be expensive and it can be scary; particularly when you’re starting out from a reasonably comfortable financial position, you’re gonna buy a couple of properties that you’re never gonna live in, you’re gonna carry a lot of financial risks and a lot of overheads for a while, and you may even have to make compromises on your  current lifestyle, but boy, it’s worth it in the future… And I think especially if your long-term plans are based on 401Ks and things like that, I’d say you should grow a portfolio at any opportunity you can. Don’t wait for the perfect deal and the perfect time. You’ve just gotta make your start. The sooner you make your start, the more comfortable you’re gonna be later in life. That would be what I’d say. You don’t have to go to 27 real estate events and read ten books, you’ve just gotta get a unit and try it.

Theo Hicks: Exactly. Alright, Eachan, are you ready for the Best Ever Lightning Round?

Eachan Fletcher: Yeah, for sure. Let’s do it.

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

Break: [00:16:04].16] to [00:17:01].29]

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

Eachan Fletcher: Best ever book I’ve recently read… I love anything by Steven Pinker. I think he’s an extraordinary genius, and sees the world a very different way. I think it really helps you understand the Universe you live in through the eyes of people like that.

Theo Hicks: Blank Slate?

Eachan Fletcher: Oh, Blank Slate. Yes, there you go. You’re familiar.

Theo Hicks: Yeah, I’m very familiar with Steven Pinker. If your business were to collapse today, what would you do next?

Eachan Fletcher: You know what – I would do the same thing again.

Theo Hicks: There you go. Simple.

Eachan Fletcher: I think this is a huge opportunity that touches everyone, where you live, and how you enjoy a home.

Theo Hicks: What deal did you lose the most money on, and how much did you lose?

Eachan Fletcher: That’s a great point. My answer is probably not the one you’re looking for… I’ve always done pretty well on the real estate side, but I’ve lost a lot of money investing in a handful of startups, and I think that is one of the things that goes along with startups – in the first six months or so there’s a very high chance of failure, and there’s a very small chance you’ll change the world. And I think it’s worth taking those chances, because eventually you change the world.

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

Eachan Fletcher: Oh, I’d love to hear from anyone who likes what we’re doing and wants to know how we can help them. Just go to Nestegg.rent.

Theo Hicks: Alright, Eachan, I really appreciate you coming on the show and sharing your journey with us, and as well as your new business, Nestegg. Just to summarize a few takeaways from me – I really liked how you broke down the steps to starting a business, and again, this is in the perspective of founding a property management automated technology business, but this could be applied to real estate as well. Number one is gaining insights and understanding the space and the customer.

Then you also mentioned that when you are building a new technology product, you wanna make sure you’re being very hyper-focused, as opposed to making general solutions that don’t necessarily address a specific problem, or can’t address a specific problem that a specific person has. And then the insights that you gained were a cashflow issue, the network of existing contractors, and then the confidence that’s lacking in not necessarily knowing what you don’t actually know.

Then step two was finding the competitors and figuring out why people aren’t happy with the solutions. Based off of that, you came up with Nestegg. The three main features were the maintenance, so it’s basically a help desk for landlords, and you went through the process of how you’re able to basically handle the entire maintenance process for the landlord.

Two is the cashflow issue. Rather than getting rent a month later or two months later, you’re able to pay rent in advance. So they’re paid on the 1st, even if you guys haven’t collected that rent yet.

And then there was your “Fix now, pay later” new feature, which allows landlords to spread the costs of the maintenance over a number of checks, as opposed to it coming out of next month’s rent.

And then lastly, your Best Ever advice, which is advice you would give to yourself ten years ago, which is to be more aggressive, take on more properties sooner to make sure you’re growing your portfolio much quicker.

Again, I really appreciate it, Eachan. I really enjoyed this conversation. Best Ever listeners, thanks for listening. Have a best ever day, and we’ll talk to you tomorrow.

Eachan Fletcher: Thank you.

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JF1917: How To Leverage House Hacking To Get Your Start In Real Estate with Josh Mitchell

Josh and his wife used the house hacking method to purchase their first investment property. They were able to leverage that strategy to grow to over 5 units. We’ll hear some challenges they faced along the way, and more importantly, how they overcame the challenges. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“You start to realize that with small sacrifices, you can build generational wealth” – Josh Mitchell

 

Josh Mitchell Real Estate Background:

  • Real estate investor with his wife
  • They own 5 units with another unit under contract, used house hacking and cash out refinance to get started
  • Based in Chicago, IL
  • Say hi to him at josh.mitchell525ATgmail.com
  • Best Ever Book: Rich Dad, Poor Dad

 


The Best Ever Conference is approaching quickly and you could earn your ticket for free.

Simply visit https://www.bec20.com/affiliates/ and sign up to be an affiliate to start earning 15% of every ticket you sell.

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.


TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Josh Mitchell. How are you doing, Josh?

Josh Mitchell: I’m good, Joe. How are you today?

Joe Fairless: I am doing well, and I’m glad to hear that. A little bit about Josh – he is a real estate investor and invests alongside his wife. They own five units, with another unit under contract. They used house-hacking and cash-out refinances to get started. Based in Chicago, Illinois. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Josh Mitchell: Yeah, absolutely. As you mentioned, my wife Sarah and I have used many different techniques and styles to get us started. We bought a condo out of school, and moved into that, and with the focus of eventually renting that condo out, as we kind of got into that condo, we got married and used our wedding funds to actually purchase our first investment condo in the same building that we had our first condo in. The association then kind of switched the rules on us and allowed for rentals all throughout that complex, so that’s when we moved into the next phase and started our investing journey there.

Joe Fairless: Was that a decision that you both wanted to do, where you invest the wedding funds into your first investment property?

Josh Mitchell: It took a little convincing on my end from just a numbers’ perspective and getting my wife on board. She’s always the more analytical one of the both of us, so she definitely needed to see the numbers… And it was a  blessing in disguise, because it really made me jump in and dive deep into every little thing and explain to her what I envisioned and what these funds could do for us moving forward.

Joe Fairless: So for someone who has a significant other and is in a similar position where they have funds that they’ve either received or just saved, what would you say would be some specific things that you did that would be helpful for them?

Josh Mitchell: My wife and I both are along the same mindset of joining finances; it really helped us stay on track and really focus and dive deep into our finances and see where we were spending money, where we could maybe cut back… And then falling into the money that we got from the wedding, which really obviously was a blessing from our family and friends, that they were generous enough to do that… Really just kind of focusing on where that lump sum of money could be best used. We didn’t want to use it on cars or things that would depreciate. We both were in the same mindset of putting this money to use and really using it to the best of our ability to create generational wealth and get us started on that journey towards financial freedom. Our goal has always been to retire by the age of 40, so that’s kind of what pushed us to jump in and get started.

Joe Fairless: What are the numbers on that first investment property?

Josh Mitchell: The numbers on that one – we bought that one for 85k and rented it for $1,400, again, in a suburb of Chicago here. That is pretty much the going rate on a 2-bed/2-bath condo in this area… But we got in on that one in 2013-2014 range, and since it’s probably doubled in appreciation, so it was a good time to get into that complex.

Joe Fairless: Yeah, that sounds amazing. Now that it’s doubled in value, have you done anything to capture some of that?

Josh Mitchell: Yeah, we actually financed both of those condos that we had. We’ve moved out of the one we were living in and sacrificed for a year; we moved into a 500 sqft. one-bedroom/one-bath apartment, with the dog… So newlyweds in that small of a space, you can imagine how that year went… But we did a cash-out refinance on both of those and we were able to purchase our first single-family home in the same city, and go to the next step with some of those funds that were available in those condos.

Joe Fairless: When you take a look at the purchasing condos versus single-family homes, what are some of the pros and cons that you see?

Josh Mitchell: The biggest con was any townhouse condo is gonna be the association deuce. They can really eat into that monthly profit that you might see on a single-family home… But I always kind of hesitated that as well, because you do have that management company in place, you have people that are at a drop of the fat gonna be there to fix certain things and be able to repair things that the HOA covers. You’re not gonna have the roof expenditures, for instance, that you would have at a single-family house.

So the accounting on the single-family side might a little bit more involved from your individual perspective, but the condos – some people shy away from them just because of those HOA dues, and kind of having someone else maybe control or change those rules at any given time.

Joe Fairless: So what gives you comfort, given those potential disadvantages for condos?

Josh Mitchell: We’ve really kind of gotten to know a lot of the board members on the condo association, being that they’ve just changed the rules to allow rentals. It was in 2014… They’re very new to doing that, so I think that that kind of gave us a little bit more comfort that they were gonna at least give this a go for the foreseeable future. They capped the complex at 15% rentals, so we actually got in at a great time, with allowing those rentals up to two units that we had. But most of those are owner-occupied, and we’ve actually built good rapport with some of the neighbors as well, to allow them to have a little bit of say; or not say, but a little feedback on “The renters are good” and maybe keeping an extra eye on them, and just kind of helping us, be our eyes when we’re not there all the time.

Joe Fairless: On the first two properties – and I know you’ve got more than that, so we’ll get into that… But on the first two, what was a challenge that you came across, and how did you overcome it?

Josh Mitchell: Well, the first investment condo we bought there, the tenant was moving their stuff in and we had a sewer back up on day one after closing.

Joe Fairless: Oh, goodness gracious…

Josh Mitchell: So that was… [laughs] Yeah, that was lovely; I had to go through insurance, getting a claim filed, they tore out all the carpets, cut the drywall two feet up from the floor, replaced all of that… So we were in a little bit of a difficult position from day one on that one. But we got it all resolved, and got the tenant comfortably living in there now. She’s been in there since we’ve had it, so we’ve had no turnover in that unit, which helps a lot with [unintelligible [00:07:47].25] some of those costs and not having any vacancies as well to go along with that.

Joe Fairless: When you say “sewer back up”, it’s one thing to say that, but can you describe exactly what happened?

Josh Mitchell: Yeah. A sewer back up — and again, I don’t exactly know what drain it came back-filled into, but… It was either the shower, or the toilet… The sewer line was backed up, and a lot of nasty stuff was in that unit that had to be mediated and taken out by SERVPRO, who came in and did all that work for us. It was just kind of a nasty week or two to get all that resolved. And it doesn’t smell very good, it’s not very fun to be in and to be  a part of, that’s for sure.

Joe Fairless: So this is your very first investment property that you and your wife put your wedding funds into… And you finally get a tenant, and day one of them moving in, there’s sewage running through the unit. What did your wife say about that?

Josh Mitchell: “Are we idiots for doing this?” [laughter] That’s pretty much what she said. I had to do a lot of more convincing and tell her “Insurance is gonna cover it. We’ll be fine.” Just kind of give her that comfort. But it was definitely something that we had a little apprehension and hesitation on going forward… But we’ve seen the benefits of it, getting it fixed and making sure that we stay with the course there.

Joe Fairless: And what was it like for you navigating the conversation with the resident as they were moving in day one and this is happening?

Josh Mitchell: Yeah, we really just tried to go above and beyond to them, to give them everything they needed. Luckily, their lease on the apartment that they were at and currently living at wasn’t up yet, so they had a place to go, just for those couple days while we were getting things fixed… But we tried to go above and beyond and help them. We offered to help move anything that they needed for the time being back into the apartment for them. We tried to make sure that they were comfortable, and if they needed anything, it was pretty much all hands on deck; anything we could do to keep them happy and just assure them everything was gonna get fixed correctly, and make it a happy place for them to live.

Joe Fairless: Those were the first two units… Now let’s talk about the next one.

Josh Mitchell: So then we jumped into our first single-family, and – wouldn’t you know it – week one we had a little water back up in that one as well. So we had no sump pump at that single-family, which – that’s one of those learning things that we look for now at our places that we purchase… But this one did not have a sump pump, and of course we got torrential downpour and had a little water back up into that specific residence… But again, had to get it removed, and dried out… We actually did install a sump pump at that residence to never have that problem (hopefully, knock on wood) ever happen again to us… But again, had to go through pretty much the same thing on that one as well, which is coincidental, I’d have to guess, if you wanna call it…

Joe Fairless: Let’s hope so. [laughs]

Josh Mitchell: Yeah, yeah.

Joe Fairless: We won’t say you’re cursed quite yet. We’ll wait to hear what happens with future properties…

Josh Mitchell: Yeah, yeah… Those are our two horror stories. But we pushed through, and like I said, stayed on the course and kept going here.

Joe Fairless: And what are the numbers on that third property?

Josh Mitchell: We bought that one for 230k, and it rents for $2,100-$2,500 right now a month… So cash-flowing roughly just over $500/month after expenses and everything are paid. So that one has been a very good one for us, and has appreciated as well to roughly about 315k-320k in value.

Joe Fairless: What about the next deal?

Josh Mitchell: The next one we jumped into we went back to the same condo building, if you believe it or not… [laughs] We bought another condo in that same building, this time on the second floor. We were trying to forward-think and think about any water down-flowing to the first floor; the first unit had some sewer back-up problem… But we went back to that condo and got one on the second floor this time, and it’s been just as good, if not better than the other ones, with no problems, to this day at least.

Joe Fairless: And you have five, right? So we’ve got one more?

Josh Mitchell: Yeah, we’ve got one more. It’s a townhouse a little bit further away; it’s still in the same town, on the South side of the town, I have that one as well. Just bought that one for — 150k I think is what we paid on that one, and got that rented at that 1% rule, with $1,550.

Joe Fairless: How are you finding these properties? I’ll be specific – how did you find the fifth one?

Josh Mitchell: Actually, all of these properties have come off the MLS. We actually have a  great realtor that we work with. She’s done all of our purchases here for us, but she’s awesome at sending us usually leads that are about to come on the MLS, to kind of give us that first glance, which has actually helped us build rapport with other realtors in the area as well. They send our realtor some leads and ask if we wanna go look at the properties before they even put it on the listings… And it’s been awesome to have that, and maybe have a first crack at making that offer to a seller. The seller always feels  good when they can get their properties sold before it even is listed for anybody to come look at… So it gives us a little bit of negotiating power and helps us get that started and get the ball rolling on making an offer.

Joe Fairless: With any of the deals – pick any of the five – was there any major negotiating between purchase price or terms?

Josh Mitchell: I’m trying to think if there was any real negotiation… We did have on the first single-family we bought – it was listed a little bit higher than what we were able to purchase it for. The only thing that gave us that leverage was, again, getting in before it went on the market… But this property in itself had a converted garage, they had an in-law suite that they weren’t going to convert back for us… So we kind of gave them a little bit lower offer, and just kind of justified it in the sense that it was the only house on the block, and within a five-mile radius — actually, our appraiser had a little bit difficult time finding comps, just because it didn’t have the garage, like the rest of the houses did. So again, we kind of took that into account and gave them a little bit lower offer than maybe what they had it listed for.

Joe Fairless: And do you remember the numbers?

Josh Mitchell: I think they had it listed for 249,9k. And again, I know that it’s a big difference there, but it did need a little bit of updating; nothing huge, all cosmetic stuff… But we got it, like I said, for 230k. I feel like that was a good negotiation and we got it at a good price for what they had it listed at.

Joe Fairless: Did you have anything under contract that didn’t happen?

Josh Mitchell: We have not, actually. We’ve been lucky that everything we’ve offered on has happened. I have actually just started sending letters to multifamily owners, and just kind of researching them through the tax portals and through a title rep… I’ve just started sending letters, and actually just got my first rejection letter; I’m kind of proud of that, actually…

Joe Fairless: Oh, congratulations. [laughter]

Josh Mitchell: Yeah, I know that that’s kind of the next step, right?

Joe Fairless: What did they say?

Josh Mitchell: “Hey, we got your letter. We’re not interested in selling. Please don’t contact us ever again.” So a little slap in the face, but nothing we can’t bounce back from. I plan on maybe trying again in a year or two and seeing where they’re at, and trying to overcome any objections… Maybe their circumstances change.

Joe Fairless: What’s been something that you thought would be easier than what it actually is?

Josh Mitchell: I think that I thought it would probably be easier to find good, reliable tenants. Luckily, we’re in an area that tenants are usually very good. It’s very competitive in our area though; there are  a couple complexes that allow people to get in for maybe a little bit cheaper prices than what we have… But we feel like our unit — we shoot for the B+ to A property, so we’re willing to pay a little bit more premium for those properties, and it kind of comes with the territory of trying to find better tenants as well, though. So it kind of works hand-in-hand, and we wanna make sure that we get the best people in our properties. We’re always willing to maybe wait another month or two to find that right person. I guess that’s been one of the bigger challenges that we’ve faced.

Joe Fairless: What’s been something that’s easier, that you thought it would be a little bit harder?

Josh Mitchell: I think that the managing of it — I do all the managing myself of the properties, so I’ve found that that’s been very smooth. Obviously, there’s things that come up, there’s things that happen – for instance, all the things we’ve discussed previously… But other than that, the renters pay on time. As long as you keep your properties and things organized, well-documented with everything, that process has been very smooth, and we’re more than happy that we’ve kind of chosen this road to go down.

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

Josh Mitchell: My advice would be just to make that first sacrifice to get the first property. We sacrificed living in a nice condo down to a 500 sqft. apartment, we sacrificed our wedding funds to get started… I think once you start and get that first property, as you probably know, Joe, you get the bug; you get the real estate bug and you start looking for the next property, and the next property, and you start to see the benefits from a cashflow standpoint versus tax advantages, and you really start to realize that with the small sacrifice that you can make, you can really envision your future and see the generational wealth that real estate can bring, and help provide for you and your family.

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

Josh Mitchell: Let’s do it!

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

Break: [00:17:16].23] to [00:18:14].11]

Joe Fairless: Best ever book you’ve recently read?

Josh Mitchell: I’ve gotta go with the cop-out answer. Rich Dad, Poor Dad has been the life-changer for me. That’s what got me started and going here.

Joe Fairless: Best ever deal you’ve done so far?

Josh Mitchell: I’d have to say that it’s gonna be our single-family. Regardless of the water back-up and stuff…

Joe Fairless: Was it really a water back-up?

Josh Mitchell: It was really a water back-up, yeah…

Joe Fairless: Oh, that was water — yeah, I’m getting them mixed up with the condo.

Josh Mitchell: Yeah, so that single-family one – $500/month in our pocket, and we’ve had no issues, and it’s been a great property for us to this point.

Joe Fairless: What’s a mistake you’ve made on a transaction we haven’t talked about already?

Josh Mitchell: Well, the only mistake I feel we’ve made on the transaction side of things is my  wife travels for work a lot throughout the year, and we’ve had to do a couple of power of attorneys, and didn’t get that signed one day before closing… So we had to scramble, because the title company needed the original, and they needed a  bunch of different things, so we actually had to push back closing a day or two on one of the properties… But that was pretty much the only hang-up that we’ve had to this point.

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

Josh Mitchell: I’m a huge athletics freak. I played in college, in the suburbs here in Chicago, but I’ve coached at the college level, and I’m actually coaching at the high school football level this coming season… So I’m all about working with that age group. Any friends and family that wanna talk real estate – I’m always pushing them to try to get involved and try to get their feet wet, and I love just discussing the advantages of doing that.

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

Josh Mitchell: I’m on any social media that you wanna reach out to me. Josh Mitchell is pretty much my Facebook, Instagram, Twitter etc. I’m on Bigger Pockets; everywhere that you can be found in real estate, I’m probably a member in that group. So if you can find me, I’m sure I’m there somewhere.

Joe Fairless: Josh, thanks for being on the show, talking about each of your five properties, talking about some challenges on day one of your first investment property, thought process, how you handled it, how you overcame it, and now you’re much farther along and have bought many more properties after that. The thought process you have when you’re buying a property and the numbers that you look at. So thanks for being on the show, Josh; I hope you have a best ever day. We’ll talk to you again soon.

Josh Mitchell: Absolutely. I appreciate it, Joe. Thanks so much.

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JF1903: How This Investor Scaled To 15 Units In 2.5 Years with Melchor V. Domantay

For many newer investors, the goal is to create enough real estate income to have the option to leave their job if they choose. Melchor is well on his way as he has grown his portfolio from zero to 15 units in 2.5 years. Great episode for newer investors, but we also dive into some deal specifics for a little higher level insight. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“If you know your why, then educating yourself become easy” – Melchor V. Domantay

 

Melchor V. Domantay Jr. Real Estate Background:

 


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Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.


TRANSCRIPTION

Joe Fairless:  Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Melchor Domantay. How are you doing, Melchor?

Melchor Domantay:  Hey, how are you doing, Joe? Thanks for having me.

Joe Fairless:  Well, it’s my pleasure, and looking forward to our conversation. A little bit about Melchor… He is a controller of a non-profit company in Chicago, a CPA who a couple days ago got his CPA license – congrats on that – and a real estate investor. In just 2,5 years he has built up a portfolio of 15 units. Based in Chicago, Illinois. With that being said, Melchor, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Melchor Domantay:  Yeah, thanks Joe. I was born  in the Philippines and came here when I was 17. I’m 29 now, so – regular American dream, just trying to go to college, have a full-time job… But I had a great mentor, who was actually my boss… And he told me to buy real estate. I didn’t listen to him for five years, and after that I bought my first house. It was a two-flat house-hack, and I had a great tenant. I got that first check, and then just the light bulb — you know, that investor/landlording light bulb came off. Then from there I started researching everything, educating myself, looking for the right people in my team, and then with their help I acquired 15 units in the last 2,5 years.

Joe Fairless:  Well, I don’t wanna fast-forward too much… So you went from a two-flat house-hack, and in 2,5 years you have 15 units. The two-flat house-hack – how much did you buy it for, what did you have into it as a down payment, and improvement costs?

Melchor Domantay:  The first house was really kind of like a training wheel. I bought it fully rehabbed, $280,000. I put 3,5% down… I had a good realtor at the time, and she taught me about doing a credit. I had a 3% credit, so really, to be honest, I probably brought all-in $7,500.

Joe Fairless:  What’s the 3% credit you’re referring to?

Melchor Domantay:  It’s a seller’s credit that they gave me. It was a probate, and [unintelligible [00:03:32].22] just wanted to get rid of it, so they gave the 3% credit to me… So it was a cool structure.

Joe Fairless:  Okay. And is that 3% credit something that’s typical on a transaction, or how did you go about asking for it?

Melchor Domantay:  To be honest, most of my deals I always ask for a credit. The reason I do is because it’s an advantage for a person to not bring a lot of money to the closing table. For example, easy math, $100,000, if you’re putting down 5%, that’s $5,000, plus any closing costs. And if you ask for 3% credit, which most lenders I think will allow – that’s the cap – then that’s $3,000 off that you don’t have to bring to the closing table… So I try to do that structure as much as possible.

Joe Fairless:  Okay, so that was the two-flat. That was about 2,5 years ago. And then what did you do?

Melchor Domantay:  Then after that I found a realtor from Bigger Pockets that’s also an investor, so that helps a lot.

Joe Fairless:  Who?

Melchor Domantay:  John Warren. I’m not sure if you’re familiar with him. He helped me a lot, he added a lot of value… And seven months after I bought a foreclosure property, a two-flat in the West suburbs of Chicago. But the cool thing about it is there’s people living in there, so it was livable. But it was a foreclosure. I bought that for $80,000. Great deal. Then I put about $15,000 of work, and that kind of like propelled me and gave me a lot of confidence to do more real estate… Because I think my mortgage at the time was $750, and I was bringing in about $2,100, so it was great.

Joe Fairless:  It is. That is a great ratio there… The property was a foreclosure, but it had people living in it. Were those the people that were being foreclosed on?

Melchor Domantay:  Yeah, I think they were the owner, and they just couldn’t pay the mortgage. I asked them to stay, actually… So they can just stay there, and not worrying about moving, but I think a week before I closed they left already.

Joe Fairless:  Okay. So you made it a point to say it was a good thing that people were living in it… But if they moved out before you closed, what was the benefit of them living in it?

Melchor Domantay:  For me, the benefit of living in it — usually, a foreclosure property, an REO, usually they have been left behind for a long time… So when people are living in it, the advantage of it is there are still some people who live in it, and that means it’s livable. Most foreclosure properties have a leaky roof, or leaky pipes, and grass is five feet tall… So that’s the advantage of me saying that it’s great that there’s people living in it.

Joe Fairless:  Did they trash the place on their way out?

Melchor Domantay:  No, it was a Hispanic family and they were really nice. I got to talk to them when I was under contract. I had a conversation with them and they were really nice. I asked them, “Okay, why is that you’re getting foreclosed?” and they shared with me that something happened in the family and they just couldn’t pay the mortgage.

Joe Fairless:  And you put $15,000 into it… Did you do the work yourself and pay for supplies, or did you hire contractors?

Melchor Domantay:  I tried, but I’m just not a handyman. That’s not my strength.

Joe Fairless:  Me neither, by the way.

Melchor Domantay:  I hired a lot of people. It was – keep in mind – seven months after I bought my first property, and I think I was making $35,000, so I wasn’t making a lot of money. I was still a staff accountant at the time, and… I just hustled, man. I came up with the $25,000 to close, and another $15,000 to repair it… I hustled. I was driving Lyft before work, driving Lyft after work. It’s a good thing I worked in downtown Chicago. The parking here is hard, but I was fortunate that I can park right at my office. So it was a lot of hustle, a lot of driving Lyft… Because that’s not my skill. My skill is I can drive Lyft. So if I was making $20/hour driving Lyft, and in turn I can just pay a contractor to do the same job $30/hour, I feel like that’s okay, because I don’t have to do all the learning process, being skilled about it; that’s a lot of time. So I feel the right decision for me at the time was to just drive as much Lyft as possible, and pay the contractor to do the work.

My model was always get the property as fast ready as possible, because every time the property is vacant, you’re losing money.

Joe Fairless:  Did you have a general contractor who then hired subcontractors?

Melchor Domantay:  No, there was a lot of handymen at the time. I couldn’t hire a GC because there’s a margin the GC charges. So it was a lot of building relationships with all my handymen, and a lot of it came from my realtor. So having a great realtor, who’s an investor as well – they would know a lot of other people.

Joe Fairless:  Yes. Very important, especially with construction workers, to go through references, and good thing that you had that person. Okay, so that was the next two-flat, so at this point you have four.

Melchor Domantay:  Yeah.

Joe Fairless:  What did you do after that?

Melchor Domantay:  After that – I think November of 2017 – I bought a three-flat, another foreclosure, again, around the same area.

Joe Fairless:  And you’re making $35,000/year, you said, at the time.

Melchor Domantay:  Yes, at the time. I was still focused on my full-time job too, while doing this.

Joe Fairless:  Oh, of course.

Melchor Domantay:  So I was getting promoted… At the time when I started I was staff accountant, and now I’m a controller. So as I go, the last 2,5 years, I was still focused on my full-time job, and not forgetting that I have that responsibility. And I have great mentors. My boss at my full-time job knows everything that I’m doing, so with the support from them and from all the team members I have…

Joe Fairless:  I bring that up because, relatively speaking, it could be considered a low amount of money, but you’re buying all these properties; that’s my point. So you were getting this extra income from (I imagine) keeping your living expenses pretty low, and then also doing the side hustle of driving for Lyft?

Melchor Domantay:  Yeah, the key for me to buy the next property, the three-flat, my third property, is I refinanced the foreclosure, because at the time — it was considerably low when I bought it, so I bought it right… It was [unintelligible [00:09:44].12] I think about $130,000 after, so I basically got most of my money back.

Joe Fairless:  The one you bought for $88,000?

Melchor Domantay:  Yes, correct. And then I used that, and then some of my 401K to buy the three-flat that I bought. It was $240,000. And I learned how to paint. I think painting is the only one I can do. [laughs]

Joe Fairless:  The 401K money – did you pay a penalty? I guess you can probably do self-directed, because it’s your own deal…

Melchor Domantay:  It’s a loan. You can do a loan in your 401K. Basically, you pay a minimal interest. At the time I think it was 4.5%… And [unintelligible [00:10:22].02] That’s basically what happens.

Joe Fairless:  Alright. So you bought one for 240k, that’s the three-flat, so at this point you’ve got seven. What did you do next?

Melchor Domantay:  So that one was a foreclosure as well. I knew coming in it’s gonna be worth $300,000 when I bought it. So right away when I bought it I just created $60,000.

Joe Fairless:  Which one, the three-flat?

Melchor Domantay:  The three-flat, correct.

Joe Fairless:  Okay, alright.

Melchor Domantay:  So I think the key for me growing really was buying it right in the beginning. Most of these properties — the two-flat was a little distressed, but not too distressed. But the three-flat was really distressed. We’re talking about carpets that animals feed on… So I had to do a lot of work for it, but right now I think it’s worth $360,000.

Joe Fairless:  Good for you.

Melchor Domantay:  Again, that was about 3,300 sqft. I spent mornings and evenings after driving Lyft painting, just to get it ready. It was in the middle of winter, too… But it’s a lot of hard work. I think that’s what most beginning investors lack. Because I did excited listening to your 1,700 podcasts. I’ve listened to Bigger Pockets 300 podcasts while driving Lyft… So I like to think of myself like a taxi driver; all of them have a Ph.D. in something, because I’m sure they’re listening to everything.

So it’s a lot of hard work, man… Waking up at [4:30] in the morning, not coming home till 8 PM… I think at the time I was still single. I don’t know if I can get away with that now.

Joe Fairless:  [laughs] You were waking up at [4:30] in the morning, then what would you do? Just high-level, from [4:30] to 8 PM.

Melchor Domantay:  At the time I would wake up at [4:30] in the morning, go paint for like an hour, and hour and a half, and then drive Lyft. Go to the gym, then go to work, and then again drive Lyft. Around probably [7:30] I’d stop and then come home and paint till 11. That was really my day.

Joe Fairless:  [4:30] AM to 11 PM… For what period of time did you do that?

Melchor Domantay:  I was doing that for about two, two and  a half months. I got sick a couple times doing that. [laughter]

Joe Fairless:  Your immune system was not enjoying the lack of sleep, plus the paint fumes, plus everything else that you were doing.

Melchor Domantay:  Yeah…

Joe Fairless:  Well, thank you for sharing that schedule. That is important and necessary to note, so thank you for that. Real quick, let’s go faster on the next properties. You had a three-flat, then what was the next one?

Melchor Domantay:  The next one was a five-unit, so that was nice…

Joe Fairless:  Alright…

Melchor Domantay:  It was totally distressed… At this point I’ve been talking to a lot of people and building a lot of relationships, and then after that, that actual seller of the five-unit got me the last property, the three-unit, which is a seller finance.

Joe Fairless:  Okay. Let’s talk about that five-unit – how did you hear about it?

Melchor Domantay:  I found it on the MLS, put an offer that day… Just the regular MLS; all of my properties are MLS, besides the last one.

Joe Fairless:  When you say “distressed”, will you describe the circumstance of the distress?

Melchor Domantay:  Sure. Floors are broken, tuck-pointing needed, it smells like pee… The problem with that too is there were people in there. So there were people in there paying rent. The seller was just your typical old, mom-and-pop, and doesn’t wanna basically deal with it.

Joe Fairless:  How much did you purchase it for?

Melchor Domantay:  I purchased this for 280k.

Joe Fairless:  280k. So for someone who’s not in Chicago or doesn’t know the market, that sounds like a  lot of money for  a property that is distressed, and smells like pee, and people not paying rent.

Melchor Domantay:  Yeah. I think I’d pay for it probably higher right now. That was probably around 56k per unit, if I’m not mistaken. So right now in the same area it’s probably exchanging at around 75k/unit. So there was a lot of meat on the bone, however I think all this stuff that I have to do – it’s probably just gonna even out.

But a thing that I wanna point out – because especially right now that’s how I’m looking at deals – is when you acquire it… Because I look at it long-term. Let’s say that property, for example, will net income, after I pay it off, let’s say it’ll give me $30,000/year. So if I acquire four of those, regardless of if they become a dollar — let’s say just the rent stays, and everything else stays… Which if the expense goes up, more likely than not the rent will go up. But if it stays just $30,000 after I paid it off, that’s $30,000 that I can earn without me basically doing anything. Just passing it to the management company. So that’s really how I look at deals now, and especially if the seller of the property has more properties.

It doesn’t hurt to buy it and build rapport that you can actually perform — because that’s the reason why I received the award for the seller finance, because the seller, after three months I kind of change the look of the property. They’ve been in the block, they saw how windows changed… They saw that I’m actually doing something with the property, instead of just staying like an eyesore. The seller saw that too, so — as a young guy especially, most people will say “Look, you don’t have a lot of experience”, but even if you don’t have a lot of experience, a lot of hustle, a lot of people that you know that you can leverage, it will kind of even the gap.

Joe Fairless:  Thank you for sharing that. The five-unit led to an opportunity with the three-unit and seller financing. Based on your experience, what’s your best real estate investing advice ever?

Melchor Domantay:  I was thinking about this, and it’s very generic, but I think the foundation of any business you can go to is knowing the purpose, what’s your Why. Because I think if you know your Why, then educating yourself becomes easier. There’s always a Why… And hustling becomes easier. Waking up at [4:30] in the morning becomes easier. Driving Lyft…

Joe Fairless:  What time do you wake up now?

Melchor Domantay:  Right now I still wake up at [4:30], but I do the Miracle Morning by Hal Elrod. I do that in the morning. I still drive Lyft, even though I’m a controller… But I’m more into just building relationships. The reason I wanna be a realtor is I wanna just exchange dollar-per-hour from Lyft, becoming a realtor… And I just love seeing houses, and helping people.

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

Melchor Domantay:  Yes, sir!

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

Break: [00:17:08].11] to [00:17:42].20]

Joe Fairless:  Best ever book you’ve recently read?

Melchor Domantay:  Recently… Millionaire Success Habits, Dean Graziosi.

Joe Fairless:  Best ever deal you’ve done?

Melchor Domantay:  I think the second two-flat I bought, the foreclosure. The 80k one. That gave me a lot of confidence to do more real estate, definitely.

Joe Fairless:  What’s a mistake you’ve made on a deal?

Melchor Domantay:  Trusting contractors. I think a lot of us have done that before. I think if I have one skill, it’s to delegate… But the problem I had on that transaction is I didn’t put systems and processes in place to have a checks and balance. I asked the contractor to do something, thought it was done, but I didn’t check on the tenant, I didn’t ask for pictures, and I paid the contractor… And I’ve basically just not used that contractor again.

Joe Fairless:  Yeah. How much did you pay him?

Melchor Domantay:  Man, I paid him $700.

Joe Fairless:  And did they do any of the work?

Melchor Domantay:  Nope.

Joe Fairless:  [laughs] They did none of the work…

Melchor Domantay:  Nope, none of it. I learned from that. That was when I was dreaming still.

Joe Fairless:  Hey, it happens to everyone.

Melchor Domantay:  Yes. At least it was only $700.

Joe Fairless:  Right. Enough to remember, but not enough to side-track things majorly.

Melchor Domantay:  Yeah.

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

Melchor Domantay:  I do go to meetups, and I talk to other investors. I just started doing a video content every week, that I wanna share with everybody, because I think  a lot of the stuff that’s popular – they don’t really go through steps on how they got there. They just say “Okay, I have 100 units…”, and all that. I think sharing my experiences will help a lot of investors, especially new investors, with how to think about it. I was making $35,000… There’s a lot of people making more than that now, that I think can buy properties. I think there’s a little trigger that if they can see themselves, it would give them the trigger to pull it.

Joe Fairless:  That’s why we do this show, to share your story, so it will inspire others and help others. How can the Best Ever listeners learn more about what you’re doing?

Melchor Domantay:  Can I give my number?

Joe Fairless:  Give your number.

Melchor Domantay:  They can call me at 708-979-0852. If they’re around [unintelligible [00:19:49].24] or even Chicago area. They can also email me at mvdarental@gmail.com.

Joe Fairless:  Call, text, anytime, day or night.

Melchor Domantay:  Yes, yes, yes…! I don’t sleep.

Joe Fairless:  [laughs] Well, Melchor, thank you for being on the show. Thank you for talking about your habits and how you got to where you’re at. The [4:30] AM to 11 PM typical day that you had for 2,5 months whenever you were repositioning one of your properties, the business plan that you take with each of your properties, which is basically you find a distressed property and you fix it up, and then you take the proceeds from that and you parlay it to something else… And in some cases, you parlay the relationship into other deals, for example that 5-unit, into the 3-unit, which you got seller financing with that 3-unit.

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

Melchor Domantay:  Thanks, Joe.

 

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JF1740: How To Complete Over 500 Rehabs & Transition To Multifamily Investing with Jim Huntzicker

Jim has done a ton of rehabs, and started getting into rental investing just a few years ago. He already has about 500 units under his belt, with a goal of 5000 in the future. Jim will break down a couple of deals for us, we’ll hear what went right, what went wrong, and what we should learn to implement in our own businesses. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“I didn’t get here by reinventing the wheel, I took one thing that worked and I did it” – Jim Huntzicker

 

Jim Huntzicker Real Estate Background:

  • Started his real estate business in 2005, has done over 500 deals
  • Focused on flipping for first 7 years – 95% of the 500 deals were rehabs
  • Based in Chicago, IL
  • Say hi to him at jimATjimhuntzicker.com
  • Best Ever Book: Tools of Titans by Tim Ferriss

 


If you’re a passive investor wanting to learn more about questions to ask sponsors in order to qualify the opportunities, sponsors, and the markets opportunities are in, visit BestEverPassiveInvestor.com.

We created this site just for passive investors to have a free resource providing the questions to ask and things to think through. BestEverPassiveInvestor.com


 

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JF1694: How This Broker Started & Grew A Brokerage To Be The Multifamily Market Leader In His Area with Lee Kiser

Lee has built his own brokerage in Chicago, focusing solely on multifamily apartment buildings. He’s here today to talk about that journey, as well as talk to us about some unique aspects of investing in real estate in Chicago. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Understand your risk tolerances” – Lee Kiser

 

Lee Kiser Real Estate Background:

  • Principal and Managing Broker of Kiser Group
  • Before starting the Kiser group, Lee was the top producing apartment broker in Chicago at his brokerage
  • Has a personal career transaction volume greater than $3 Billion.
  • Based in Chicago, IL
  • Say hi to him at http://kisergroup.com
  • Best Ever Book: The Sharpe Series

 


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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, 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 of that fluffy stuff. With us today, Lee Kiser. How are you doing, Lee?

Lee Kiser: Good, Joe. Thanks for having me.

Joe Fairless: Well, it’s my pleasure; nice to have you on the show. A little bit about Lee – he is the principal and managing broker of Kiser Group. Before starting Kiser Group, Lee was the top-producing apartment broker in Chicago at his brokerage. He has a personal career transaction volume greater than three billion dollars (with a B). Based on Chicago, Illinois.

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

Lee Kiser: Sure. Background was always entrepreneurial ventures. I found my way into commercial real estate brokerage in the late ’90s, decided to focus on multifamily, on apartment buildings. We’ve had that company for eight years, the last five of which my partner joined me; she left a law career,  I recruited her – yes, it’s my wife – and in ’05 we started our own niche firm, here in Chicago, a commercial real estate brokerage exclusively focused on multifamily in Greater Chicago Land. We are fortunate that we are the market leader in that niche in Chicago. So – commercial real estate brokerage, exclusive focus on apartment buildings.

Joe Fairless: What type of apartment buildings do you typically work with your clients on?

Lee Kiser: Our current average – and we track it religiously – is 34 units and 3.2 million dollars. That certainly goes up and down each quarter, but that’s typically our strike zone. Our profile, therefore, Joe, is the private investor/landlord/owner; that’s approximately 80% of the stock in Greater Chicago Land – it’s privately owned. That said, that’s our average deal size and our average profile client.

We do six flats, and we do 572-unit complexes. So anything that’s privately, not institutionally owned, as a profile client, we would target.

Joe Fairless: What are some unique aspects of doing deals in Chicago, to the best of your knowledge, compared to other markets?

Lee Kiser: I would say that there are three uniques; I’m not originally from Chicago, I’m from Carolina…

Joe Fairless: Okay.

Lee Kiser: …and I moved here in ’93… But there are three local idiosyncrasies that people looking to invest in Chicago need to know about. Quickly, those are Cook County Property Taxes – there’s an entire legal industry in Chicago for protesting property taxes, entire firms solely dedicated to that practice… And the reason is that there’s no math, there’s no logic to the process. The assessor’s office will arbitrarily assign every three years a new assessed valuation of the property; it’s incumbent upon the property owner to go and contest that. And if you don’t, your tax is going through the roof. So it’s just a normal part of doing business here – you hire a protest attorney, they work on a percentage of the savings that they’re able to negotiate on your behalf.

The second idiosyncrasy is a local concept called Attorney Review. If you’re looking to buy an apartment property in Chicago, 95% of the time local attorneys will default to a form of contract which everyone is familiar in Chicago Land – it’s the Chicago Association of Realtors contract – which has an unusual provision for attorney review and modification of the contract itself, as a contingency built into the deal. It runs simultaneously with other more standard, orthodox contingencies like inspection contingencies and mortgage contingencies, but it was a concept I had difficulty wrapping my brain around in the beginning, because if the attorneys are able to suggest modifications and then they have to agree on it, the local contract is really nothing more than a letter of intent…

Joe Fairless: Right…

Lee Kiser: And for people who are anywhere except Chicago, this is a foreign concept… So to get into the local culture, you kind of need to be prepared for that.

Joe Fairless: Well, just so I’m understanding what you’re saying – if I enter into a contract with you, I’m buying a property from you and we use a typical contract that is used in Chicago, then that will say that if after we sign the contract, if there’s something that your attorney wants to add or remove, then my attorney must agree to that, otherwise the contract is void?

Lee Kiser: Voidable, yes. Now, there are specific things they cannot change, and those are spelled out in the attorney review provision, such as price, dates etc. But all other terms and conditions are open to modification. Now, those who are fully indoctrinated into this process and are credible here within our local culture don’t abuse this, and it’s a normal part of doing business, and the attorneys just have to agree on — our clients are like “Oh, the attorneys don’t handle the legal matters…”, but yeah, for people not accustomed to this, it’s a very confusing and frustrating process.

Again, one of the three things you need to be aware of that are local Chicago idiosyncrasies – the third one is the Chicago Residential Landlord Tenant Ordinance. It is a very tenant-friendly ordinance, and there are a few gotchas in it that can get landlords in a lot of trouble… So I would say if you’re new to Chicago and new to investing, make sure you have a good landlord representation attorney coaching you, or hire a local reputable third-party management firm through whom you can learn the ropes as you’re learning to navigate the CRLTO.

Joe Fairless: What are some things that might surprise listeners who aren’t familiar with the Landlord Tenant Ordinance?

Lee Kiser: Well, we were able to get the major one changed… I’ll give you an example – up until about the last two years before Kiser Group was able to effectuate that change; it was security deposit interest requirements, meaning – of course, security deposits had to be kept in a segregated account, but then there are very specific calculations of interest, payments of which must be made to the tenant quarterly, and the rates change, and the calculations are difficult, and they must be paid on a quarterly basis as per the anniversary of the commitment of their lease…

Joe Fairless: Oh, God…

Lee Kiser: If you’ve got somebody that’s got 3,000 units and staggered starts, you can see the complexities of just tracking this… But the problem with the ordinance was any violation of it was strict liability of three times the rent that the tenant is paying. There’s no argument, there’s no defense, there’s no nothing; it was strict liability. So the attorney saw an opportunity to effectuate class action suits because somebody owns 3,000 units, they know that they’ve made one violation unintentionally, on one tenant… And they’ll send out mailers to all 3,000 tenants and start a class action; the landlord was faced with no alternative other than to figure out how to settle the suit.

We were able to effectuate a change in the CRLTO that gives landlords a limited right to cure the mistake, which is inclusive of a payment directly to that tenant, and then the ability to correct the mistake in the security deposit interest… But prior to making this change, Joe, there were seven-figure settlement awards for less than $5 of a mistake in security interest.

Joe Fairless: How was it less than a $5 mistake if it was just three times? Wouldn’t that be $15?

Lee Kiser: No, the actual infraction – the strict liability was three times the tenant’s rent. So you might be holding a $500 deposit on a $1,500 apartment, and you make a $3 mistake on security deposit interest; you owe the tenant $4,500. Now, multiply that with a class action suit times 3,000 units…

Joe Fairless: It’s disgusting.

Lee Kiser: …and you begin to see the exposure for the landlords.

Joe Fairless: But that’s changed, thankfully…

Lee Kiser: Yes, but there are other issues with the CRLTO. But as long as you’re aware of them, and you have someone coaching you, you’ll adhere to the ordinance and you’ll keep your nose clean of problems. A lot of people though weren’t aware of this ordinance and they bought buildings in Chicago, and they took security deposits, and they learned the hard way.

Joe Fairless: Just real quick, what’s a current issue that is still in play?

Lee Kiser: Most of the issues now have become much more reasonable. I would say there’s nothing in there that could be a major economic impact for a landlord. That said, the security deposit interest is another example of one that’s still there; you just have a limited right to cure. So instead of costing you millions of dollars, it might end up costing you $5,000 for a violation of the security deposit interest regulations… But you need to know that if you’re gonna own buildings in Chicago, that’s why you do not take security deposits. You just don’t even wanna open yourself up to the potential.

Joe Fairless: Let’s talk about your average size, 34 units, 3.2 million dollars. Describe that typical property, will you? How old is it, and what’s the business plan that most of the owners have… That sort of thing.

Lee Kiser: Sure. It’s a 1924 construction courtyard building, which is a 3-story walk-up type property. That property, within Chicago Land, can range anywhere from $25,000/unit to $350,000/unit, depending on the neighborhood, the location and the rent… But that is the stereotypical property that we will be dealing with.

Joe Fairless: 25k/unit to 350k/unit, depending on the area… What are of Chicago would be 25k and what area of Chicago would be 350k?

Joe Fairless: Englewood, Roseland, Auburn Gresham… These are the areas where that’ll be $25,000/unit. These are lower-income areas; all the stories you hear about Chicago with violence, most emanate from these areas. And there’s a high concentration of multifamily properties; we work in all those neighborhoods… But typically, that’s where you’ll see the lower end of that spectrum of price per unit I described.

The other end of the spectrum is primo locations like Lincoln Park, Gold Coast, Old Town… These are places where the same physical property will trade at the higher end of that spectrum per unit. Most typically in Chicago you’ll see that [unintelligible [00:13:07].01] at about the price per unit as I described as our average; something approximately $100,000/unit. Again, that’s an average across all Chicago neighborhoods. Typical working class, solid neighborhoods where you’ve got working class tenants and good transportation, you’ll see that building trading $125,000 to $140,000/door.

Joe Fairless: And then what’s the typical business plan?

Lee Kiser: Typical business plan – it depends. Many times these are bought for value-add plays, and those are a 3 to 5-year hold. What we see more commonly though is the very long term investor. Sometimes generational.

A lot of these properties will stay in the same family for years; they’re working buildings, they’re cashflow buildings. There’s a declining profile that matches that, relative to a lot of the new capital coming into Chicago. Because of Chicago’s more attractive cap rates relative to other major U.S. cities, we’re  seeing money come in not only from those areas, but also internationally. We are currently doing [unintelligible [00:14:24].20] we track this, and the number is not in my head, Joe, but I think we’re currently active in 18 different countries with investors buying apartment buildings in Chicago.

Joe Fairless: When you get a call from someone who’s out of the country, what are some questions you ask him or her to qualify them to ensure that it’s a good use of your time if you continue to work  with them?

Lee Kiser: What their experience in multifamily is in the U.S., how well capitalized they are, what relationships they have with local – not just U.S., but perhaps Chicago local – lenders and attorneys, and then why they’re interested in Chicago. We want to figure out how much they know about our local market, how much they know about the different areas of Chicago, and all of these are usually answered relatively early in the interaction. Maybe not on the first call, but certainly by the first meeting.

Joe Fairless: And are those similar questions for someone located in the U.S., just tweaking them a little bit?

Lee Kiser: Yeah, very similar… Because Chicago is such a local type atmosphere, and I named the three main idiosyncrasies, but there are certainly others… It’s helpful to spend the time with an investor looking to get into this market, to educate them on some of the local practices, on some of the local cap rates, what that means, and try to match it with their expectations, so that they’re not wasting their time or yours.

Joe Fairless: What are the types of terms that area winning deals, but not completely aggressive right now?

Lee Kiser: Ask me that again, I wanna make sure I understand the question.

Joe Fairless: Yeah, so if you show me a deal, and it’s a 34-unit deal, and you say “Hey, it’ll probably trade around 3.2 million”, and I’ll say “Okay, great”, and I’ll take a look at it… And I know about what the price is, but I don’t know what type of terms I should offer that are typical for your market – refundable or non-refundable, earnest money, closing dates, that sort of thing… What types of terms are you seeing?

Lee Kiser: Got it. To be attractive to the seller of a property if you wanna make an offer, exclusive of price, terms that will be most important are 1) a very quick attorney review. [laughs] If you’re using a standard contract and you’re subject to that contingency, then make it quick; three days.

Joe Fairless: Okay. Calendar days, or business days?

Lee Kiser: Business days. And make sure you have a good local counsel who’s credible, who will be known by the seller’s attorney. That will be very helpful. If you want to be competitive, your offer should not be subject to financing. That’s why having a lending relationship and knowing with a degree of confidence what you’ll be able to procure for a certain acquisition – it’s important to have that, to have the confidence to be able to submit the offer without a financing contingency.

The rest is how comfortable you are with learning and understanding the physical structure and reviewing the books and records. All that’s lumped into what we locally call inspection contingency. The more quickly you’re able to move through that on a 34-unit… An acceptable timeframe would be somewhere between 7 and 10 calendar days.

Joe Fairless: Okay, got it. And then what about earnest money? Hard, day one, or do you not see that in your area?

Lee Kiser: We don’t typically see that here. The only time we usually see any amount of earnest money, non-refundable on day one, is when it’s a very unique property and highly active in terms of number of offers. Most typically, you’ll see initial earnest money posted with the contract, all of which is refundable, and an increase to that earnest money once all contingencies are waved. So in the situation I described earlier, where you don’t have a financing contingency, where there’s a short attorney review and an inspection is done in 7-10 calendar days; at the conclusion of that inspection, the earnest money increase is triggered, and that becomes non-refundable to the buyer, except in the event of a seller default. So on a 3.4 million dollar deal, we’ll probably want  to see a minimum of 1% hard; more typically we’d see approximately $100,000 non-refundable on a 3.4 million dollar deal, so approximately 3%.

Joe Fairless: Okay. And once that 7-10 calendar days expires, what amount is typically there for the additional money that’s put up?

Lee Kiser: What I described was the additional money. So on a 3.4 million dollar deal, $100,000 non-refundable at the end of the contingency periods would be very market.

Joe Fairless: Got it, okay. Based on your experience in the real estate industry and as a managing broker and an apartment broker of over 3 billion dollars’ worth of transaction, what is your best advice ever for real estate investors?

Lee Kiser: I guess know your risk tolerances. What I mean by that, especially in Chicago, your cash-on-cash returns are really going to be relative to the amount of risk associated with the property. That really speaks true as a general statement for apartment investing, but in Chicago it’s really important… Very low risk, which means great location, no deferred maintenance in the building – you’re going to be low single-digit cash-on-cash returns; 3%, 4%, 5% cash-on-cash returns. If you’re looking for a high risk, high return area – and these are heavily management-intense, challenged neighborhoods… Some of the ones we discussed in the beginning, when I was talking about the 25k-30k unit range – you can see cash-on-cash returns 20% plus, sometimes up to 50%. But it’s heavy risk. Typically, $100,000 to $140,000 units courtyard that we were talking about, in a good, solid working class neighborhood – that’s gonna be a mid-level risk. You’re gonna be looking at approximately 10% cash-on-cash returns.

I would say that the main advice I would give to someone coming in is understand your risk tolerances. That’ll help define where you should be looking and for what you should be analyzing. Take the time to learn Chicago, learn these neighborhoods, learn this architecture, learn the idiosyncrasies before you actually go out and start looking at buildings. It will narrow your search, it will help you understand the investment better.

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

Lee Kiser: A lightning round? Sure!

Joe Fairless: Alright, cool. It’ll be fun! First though, a quick word from our Best Ever partners.

Break: [00:21:30].17] to [00:22:29].28]

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

Lee Kiser: Oh, not a single book… The Sharpe Series, by Bernard Cornwell.

Joe Fairless: What’s a best ever deal or transaction you’ve been a part of?

Lee Kiser: The best deal is to me the most challenging and complex, that needed someone with our expertise to pull off. That would have been Sheraton Plaza in Chicago. We did that deal about ten years ago. It was an affordable deal. We had HUD, [unintelligible [00:22:53].09] the buyer and the seller, and each of these had attorneys. I’ll never forget the conference call, where I am not exaggerating, I had 12 attorneys on the conference call, each representing their different client, and we got that deal closed. That was a fun deal.

Joe Fairless: [laughs] It’s interesting that you call that a “fun” deal. 12 attorneys representing 12 clients…

Lee Kiser: There were about five or six different entities represented by those 12 attorneys.

Joe Fairless: Oh, man… No, thank you. What’s a mistake you’ve made on a transaction?

Lee Kiser: As a principle, I don’t invest where I am a broker… But I have invested in other things outside what Kiser Group represents. There was a development deal in North Carolina; I got involved at the very wrong time. It was right before the crash, and there was nothing that we could have done to salvage that… So that was probably the biggest mistake I made in real estate.

As a broker, the biggest mistakes that I have made, frankly, is projecting too much upside in a property, which led me to incorrectly value it… So we put it on the market and we simply weren’t able to get people interested in making offers. That happens rarely, but occasionally, where you — look, underwriting and valuing a property is an art, it’s not a science, and we’re 97%-98% effective in it… But there’s always that one that is just a mistake, and you just have to tell the client, “Hey, here’s why I thought what I thought, and here’s why we made the mistake. We can adjust, or we can just agree to part ways now.”

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

Lee Kiser: To the real estate community I give back through mentoring. I mentor both through DePaul University’s real estate program, as well as the Eisenberg Foundation, and I’m mentoring college students constantly. Personally, my favorite charity is NAMI (National Alliance on Mental Illness). They have a big event, an awareness walk once a year. My hobby is music, my band plays for that event gratis, and it’s a wonderful organization, a wonderful cause.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing and get in touch with you or your company?

Lee Kiser: More about what we’re doing through our website, KiserGroup.com. Through there you’ll also see all of our blogs, all of our Forbes articles, all of the stuff in the news… You can learn all about Chicago apartments. And we’re of course easily found and accessible through that website.

Joe Fairless: I loved learning about the idiosyncrasies of investing and making offers in Chicago. Three things you mentioned – Cook County Property Taxes, no rhyme or reason for how they come up with their tax increases, so having a legal counsel to help you through that process… The attorney review contingency, as well as the Chicago Landlord Tenant Ordinance – you gave the extreme example, that thankfully has since been updated, but still things to keep in mind prior to investing in that market… As well as the type of terms that are typical for a deal, what’s competitive when you make an offer in Chicago, and then what would set you apart from the rest.

Thank you, Lee, for being on the show. I hope you have a best ever day. I really enjoyed our conversation, and we’ll talk to you again soon.

Lee Kiser: It’s truly been my pleasure. Thank you for having me on.

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JF1669: The Best Ever Takeaways From Last Week #FollowAlongFriday with John Casmon & Joe

A little bit of a change up for today’s Follow Along Friday, we’re having a guest on the show with Joe. John has been on the show in the past (episode 487) and is sharing some of the best things he learned in his business last week. Of course Joe will be sharing his best lessons learned last week too. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“I struggled in the beginning with saying “I’m not good at that” and would try to everything on my own”

 

Listen to John’s Best Ever Advice:

JF478: From Live-In Duplex to 13 Rentals ($1.5 MM)—In Three Years!

 

John Casmon Real Estate Background:

 


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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, 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 of that fluffy stuff; we hate that fluffy stuff.

Today we’ve got Follow Along Friday, and – well, this is a special Follow Along Friday, because we’ve got a guest who’s going to be co-hosting this with me, John Casmon. How are you doing, John?

John Casmon: I’m doing great, Joe. Thank you for having me on.

Joe Fairless: Yeah, nice to chat it up with you on this Follow Along Friday, standing in for Mr. Theo Hicks. Theo will be back, Best Ever listeners. I’ve known John for – was it like four years or so we’ve been buddies?

John Casmon: Something like that, yeah.

Joe Fairless: Yeah, probably about four years… Great guy. He’s the host of Target Market Insights Podcast. He is a general partner on 700 units. I’ve interviewed him on the show, you can just search his name. One episode was episode 478.

I’ve been told that iTunes doesn’t like numbering the episodes anymore, so I don’t know how I’ll keep track of that moving forward, but… For past episodes, episode 478, I think you can still go check that out.

So today – Follow Along Friday, similar to other Follow Along Fridays. We are gonna talk about things that we have learned recently, or observations in our business… Not to talk about it, but more to be focused on how it will help you, Best Ever listeners. So we’re always gonna be focused on “Okay, this is what happened, but here’s the takeaway and here’s how it can be beneficial for you.”

With that being said, John, when I asked you “Do you have some lessons learned from this week?”, you snickered and you were like “Oh yeah, I’ve got some lessons learned…” So how about you kick it off? What do you have going on?

John Casmon: Yeah, we’ve got a few things going on. Right now we’re in the final stages of getting under contract on a property in the Cincinnati area, and we’ve been working with a broker on this for a little while now… And what I’ve realized is that we’ve had some conversations, and I believe he started to lose confidence in our ability to close. Part of that is because we were looking to go hard money upfront, and because of that I was asking a lot more questions about “How solid is the building? Is there any deferred maintenance? What’s gonna happen?”, all those kinds of things… And as we were asking more questions, and kind of taking our time, making sure the contract was written the right way, making sure that we understood what the out clauses were, things like that, he grew more and more concerned…

So I realized that we wanna make sure we address our concerns, and making sure that we’re not entering into a deal we’re gonna lose money upfront or don’t have any out clauses, but on the same note we’ve gotta manage that broker relationship… Because at the end of the day the brokers are the ones giving us the leads, giving us the opportunities on these deals, and we need to make sure that we’re building and strengthening those relationships. So part of me was making sure that they understood where my concerns were coming from, that we had full intentions of closing, and as long as the seller was willing to work with us on remedying any of the issues that came up, we’d be willing to move forward, but we weren’t necessarily dragging out signing the contract or things like that. We just wanted to make sure we were all operating under the same premise of “Hey, we all wanna sell and buy this property. Let’s make sure we’re putting ourselves in the position to do that.”

Joe Fairless: And why do non-refundable money day one, versus say seven business days? That way you don’t have the risk of some things coming up.

John Casmon: That’s exactly where we netted out. They started wanting us to do hard money day one; as we went back and forth on what would make us comfortable, we landed on five business days. That gives us enough time to at least get in there, see if there’s anything major that’s gonna scare us, or that we know we don’t have in the budget to fix… And if not, if they’re small stuff, we can obviously work around those kinds of issues. So that’s where we netted out, but in that process, that was like maybe the second thing that slowed down our process; and then I was just in town, looking at the property, right before we signed the agreement, and lo and behold there is a pretty substantial leak happening in the basement.

I sent the video to the broker, and then we talked back and forth about “Well, how is this gonna get fixed?” And keep in mind, we’re not under contract; we’ve agreed to the LOI, we have our attorneys hammering out the purchase and sale agreement, but we’re not technically under contract. And again, with my money going hard after five business days, I wanted to make sure this was gonna be remedied correctly… So this was something else that kind of dragged on the signing of the purchase and sale agreement, and I think the brokers are just kind of getting irritated that there’s different things that keep dragging us on… But again, I’m trying to make sure we protect ourselves and they don’t do a crappy patch job to get that fixed and “Okay, it’s no longer leaking”, but now I’ve gotta deal with this issue… And who knows what else this is; it may be an underlying issue that there are other problems at the property. So for us, it was giving us some pause, and I’ve talked to my partners about it.

So it was just one of those things where we have some concern; we still wanna move forward, we just need to make sure we protect ourselves in that process of moving forward.

Joe Fairless: And why initially come in with non-refundable day one money? Is that where the market is at with properties like this in Cincinnati, or was that something that you all wanted to do to be above and beyond what the other offers were?

John Casmon: It was to be above and beyond the other offers at that time when we were looking at it. The property actually works very nicely for us, because it’s seven minutes away from our other property, and it would give us 72 units within a seven-minute drive. So for us it provides —

Joe Fairless: It’s got a nice ring to it, too.

John Casmon: Yeah, exactly. So it gives us some economies of scale right there, and we think that that would really help us improve not just the asset we’re looking to acquire, but the asset we already have under contract, or that we are already operating. So we liked it a lot, and we think that this would be a really great addition to our portfolio for those reasons… So we felt like we could make a strong, competitive offer, that could put us into position to move forward… Plus, our investors saw it, they really liked this deal, and we felt like it was a pretty strong one. Again, we’ve been looking at a ton of different deals in the area, and not a whole lot is making sense… So this was one that did make sense, it kind of checked the boxes on a lot of that criteria that we have, so we felt willing to make a pretty strong, compelling offer to get this.

Joe Fairless: Your background’s in marketing, right?

John Casmon: Correct.

Joe Fairless: Not in construction management, correct?

John Casmon: Correct.

Joe Fairless: So therefore who are you going with to the property, who has that expert eye on construction and deferred maintenance and mechanical systems, who’s gonna say “Hey, John, hold on, there’s an issue here, and this is a major issue.” I mean, clearly, a bunch of water somewhere — I have a marketing background too, so you and I could spot that; pretty obvious. But some other things might not be as obvious.

John Casmon: Yeah, I took a contractor with me on that one, just to take a look and see “Hey, here’s roughly what I have estimated for repairs, for our renovation schedule… I want you to come in, take a look; let’s see if this looks right, what are projecting, let’s see if there’s any concerns you have…” So I took a contractor with me. Once we are under contract, we’re gonna get an actual inspection and have him go through everything, understand the mechanicals, understand everything else that’s going on… Because to your point, I have no clue; I’m not the guy to– all the roofs look the same to me. I’ve had people show me, “You see this, where this has come off?” I’m like, “No, it looks the same to me.”

Joe Fairless: [laughs]

John Casmon: I cannot tell a new roof from an old roof, so that is not my expertise at all. I definitely am leaning on contractors, inspectors, specialists; anything water – I’m gonna bring a licensed plumber to come take a look at that, who can take a look and give me an accurate quote of not just what it costs, but is this a sign that there are bigger issues at the property? Is this something that is an isolated incident, or is this something that is taking place in multiple places around the property? That’s something that we wanna bring in those specialists to help us identify things that I certainly wouldn’t be able to find by myself.

Joe Fairless: And I think starting out, I was too proud to admit what you’re saying and what I currently say, and that is I’m not an expert in all these different areas, so I need to make sure I bring in the right team members. That can be a very expensive mistake if we don’t admit that “Hey, we have a certain specialty, and we need to bring others who have the specialties that are required for us to be successful.” It’s so important to identify what we’re really good at, and then bring on those other people to compensate for what we’re not good at, or what we’re average at, because we’ve gotta be exceptional in this business. We need to be competent in all areas, but it’s impossible to gain a deep level of expertise in everything; I think it’s impossible to get deep level expertise in everything, because other people are dedicating their whole lives to it… So it’s pretty hard. Thank you for sharing that, and some valuable lessons there.

John Casmon: Yeah, thank you, Joe.

Joe Fairless: So on my side I’ve got three things, and they are — one is an observation that will be helpful for anyone scaling a business; second and third are more personal development, but they certainly have implications toward the bottom line with the business. [dog barking] That was my puppy dog Jack, barking at the UPS man; he’s thirteen pounds of fury right now.

So the first thing is West Coast team members. I live in Cincinnati. Strangely enough, it’s in the Eastern Time Zone. I don’t know how Cincinnati got an Eastern Time Zone; that’s another story. Cincinnati is in the Eastern Time Zone, which I love. The challenge is if all the team members are in the Eastern Time Zone, then when West Coast investors – I’m thinking about investors in particular – e-mail us, specifically me, and ask a question, 95% of the questions are more administrative related, so I always have a team member handle that, and then eventually they start e-mailing that team member… Like, “I wanna change my checks to receiving ACH”, or “I have a new address”, or “Were the K1’s sent out for this property yet?” Something like that.

What I’ve found is we have a West Coast team member… Her name is Chat, and she is an executive assistant for our company, Ashcroft Capital. And the dynamic of the time zones is just a wonderful thing, because if it’s six o’clock or even seven o’clock Eastern Time, well, it’s four o’clock her time, because she’s in California, and she’s able to handle those requests for an East Coast investor who’s emailing us at 7 PM, and probably not expecting a reply until the next day… And she’s able to handle the West Coast investors, who probably do expect a reply that day, because it’s 4 PM their time.

It’s something I hadn’t consciously thought of, but it’s an excellent customer service bonus… Or even, at this point you wanna exceed expectations, so I’d say it’s even mandatory, as you scale,  to have a customer service person or an executive assistant be on the West Coast, so that when you do get late night inquiries, it’s still within the business hours of the West Coast person, and they’re able to respond, and investors are really impressed, they’re like “Thanks a lot for getting it addressed so quickly.” I’m always being responsive regardless of the time, for the most part, but there are certain things that our team members do, the administrative things… So I will just copy her and then she’ll address it with them, and it’s wonderful.

John Casmon: And for your East Coast time zone, do you have a different assistant who helps with the East Coast, or are you more involved in some of that?

Joe Fairless: Yeah, I do have a different assistant who helps with East Coast. We’ve got the 8 AM Eastern Time covered, and then we’ve got the 8 PM Easter Time covered.

John Casmon: Right. So you pretty much have a 12-hour coverage there, between East Coast and West Coast time. That’s pretty solid.

Joe Fairless: Yeah, yeah.

John Casmon: Have you heard back from those West Coast investors, or even East Coast investors about that directly?

Joe Fairless: Not directly, but they say “Thanks a lot for addressing this so quickly.” So they don’t say “Thanks a lot for having a team set up so that you can address it so quickly on the West Coast”, but the takeaway is they’re appreciative of it. Any investor in our deals, when you talk to him/her, they’re gonna tell you “We have top notch customer service.” I’d be shocked if anyone doesn’t give us five out of five stars for that, and this is one component.

John Casmon: Awesome, awesome.

Joe Fairless: The second thing… Here’s the problem – the problem is connected to number one, what I was just talking about, about always being responsive on e-mails, and stuff. Well, the downside to that is I’m always on my phone, looking at the screen… And it’s not healthy. I was recently interviewing someone – he’ll be on the show later, too; it’ll go live in about 30 days or so – and he told me three tips. I’ll give you two. Two tips to not being on the phone as much, but maintaining productivity. I was like “I’m all ears. Tell me. Please, please, please. I need help.” And one tip – this is pretty obvious – is to remove all notifications from your phone. Every single notification. No apps can give you a push notification, nothing. Well, I almost did that. I still have my calendar app and I still have text message. So text message and my calendar app – they still do push notifications, but I took away all the other notifications, so that I don’t get notified on a push notification whenever the app wants to talk to me… Because then I’m sucked into the world of thumb.

John Casmon: Manually, one by one?

Joe Fairless: Yeah.

John Casmon: How long did that take you?

Joe Fairless: Oh, I don’t have a lot of apps, so 3-4 minutes.

John Casmon: Okay.

Joe Fairless: And the second tip – it has made a bigger on my impact on my time on my phone, decreasing time on my phone, without losing productivity… The second thing is making my phone — he said greyscaling it, so that when you look at your phone it doesn’t look like a carnival or  a wonderful playland for you to go into and spend a lot of time… All these different colors, and buttons, and stuff to play and push. Instead, just greyscale it.

I have an iPhone. I didn’t see an option to greyscale, but I did see an option — it’s called Night Shift, and it basically makes your phone like pee yellow; it’s like a filter. It’s very easy on the eyes, and a little hard to see during the day, but I don’t think I’m hurting my eyesight as a result of doing this… But you can make it a Night Shift. I actually do the Night Shift literally 23 hours and 59 minutes, because I didn’t see how you can do permanent Night Shift… So I just have it so it just recycles one minute every day. So one minute of a day it’s not this way, but otherwise it is.

That’s very helpful. It bugs Colleen, my wife; you wouldn’t believe. Whenever she looks at my phone, she’s like “I can’t [unintelligible [00:17:32].08]” and that’s the point! That’s the point, so I don’t like how things look, so I’m  not on the phone, zooming around and doing stuff that is not leading to productivity.

John Casmon: So from a psychological standpoint it’s to make the phone less attractive, so it doesn’t look fun, it doesn’t look engaging, and you just do what you have to do on it to get back off of it.

Joe Fairless: That’s right, yeah. And e-mail is the number one thing I use it for, and will continue to use it for. So those are two things – West Coast team member, and two tips for not being on the phone as much, while still being productive. The third tip is I have a problem with chocolate, I’m gonna admit it; I have a problem with chocolate, and it’s something that — my family has diabetes, it runs in the family… Heart attacks, strokes, all sorts of nastiness. Although my grandmother is 103 years old, and my great aunt is 98 years old, and I’m going to visit them soon in Michigan. So the women do a great job living in my family; the men – not so much.

I’m a healthy guy. I just got a physical recently – top notch across the board. But if I don’t fix this chocolate thing, then I know where I’m gonna end up, quicker than I should. So I’ve been trying to identify, what is the best freakin’ way to stop eating as much chocolate. Because there’s sugar in everything… I believe it will be nearly impossible; nothing is impossible, in my opinion… But nearly impossible to eliminate sugar altogether. There’s sugar in a ton of stuff – fruit, everything. So I don’t wanna eliminate sugar, but I do want to decrease the chocolate. I’ve been struggling with that…

The reason I’m bringing this up is our health leads to our productivity, which leads to the bottom line of our business. So it certainly is all connected. I tried many things… Only eat desert one night a week. Well, that one night you’d better watch out, buddy. [unintelligible [00:19:28].01] That didn’t work.

Another thing I’ve done is just have it in moderation. Another thing I’ve done is just eat it within a certain window of time. Well, none of that worked… And what has worked is – you know I work with Trevor McGregor; I hire him as my life/business coach (coachwithtrevor.com). I’ve worked with him for 5-6 years; I’m not sure exactly how long. I’ve worked with him for many years. And what he taught me recently, and which I’ve implemented, which has been successful for me, is something called a 50-stack. What a 50-stack is is writing down 25 reasons for why eating chocolate will be a negative in my life. I will get diabetes; I will, as a result, lose my toes; then I won’t be able to walk Quinn, my daughter, down the aisle, when she’s married; then I’m gonna lose my leg; then I’m gonna lose my other leg. Doing some extreme examples of that, but 25 of them for what are the negative consequences of it I continue to go down the path that I’m going down.

Then on the opposite end of the spectrum, 25 positive that will result from me not eating, and eating more healthy stuff. I will be able to run around and play soccer with Quinn; I’ll be able to grow my business and optimize my performance and add more value to the world, because I won’t be focused on my health as much, or lack thereof, I’ll be focused on contributing.

This is very powerful, because it hardwired my mind to think about it differently. I eat fruit still, that’s cool, but the chocolate thing isn’t nearly as desirable to me as it previously was. In fact, I have not had a piece of chocolate since then; I’m sure I will in the future. But this 50-stack idea is a great solution for if any Best Ever listener is trying to kick some sort of habit… Because it’s a lot more powerful than other things that don’t reshape how you think about that bad habit. So I thought I’d share, because it worked with me, and I figured it could work with some other listeners who are looking to reshape something in their life.

John Casmon: That’s a great tip to share. I can imagine how visceral it is to sit and write down all of those things, especially when you talk about your daughter, and the life that you’re trying to build for her, and walking her down the aisle, and the fact that you might not be able to do that, how that can change.

I think Tony Robbins has a similar approach, where he talks about if there’s a habit you’re trying to change or you’re trying to break, you need to sit down and write all the things about why you wanna break it and what your life would be like if you don’t break, and what your life could be like if you replace that habit with a new habit. I think it’s powerful stuff, and it’s something that — we’ve got some small things that I’m trying to do as well, that I think I can take that 50-stack and implement it… So that’s a great piece of advice.

Joe Fairless: Yeah. And I’d known about the stuff that Tony talked about, but I hadn’t intentionally done it, and packaging it in a way called “the 50-stack.” And full-transparency – the 50-stack is supposed to be “50 reasons why it’s good and 50 reasons why it’s bad.”

John Casmon: Oh…

Joe Fairless: But I was like, “Dude, this is a lot”, so I shortcutted it and I made 25+25. I totally am not calling that a 50-stack, but regardless, it’s worked. Well, John, how can the Best Ever listeners learn more about what you’ve got going on?

John Casmon: Yeah, if you’re interested in attending the Midwest Real Estate Networking Summit, you can go to midwestresummit.com. You can also check out our website, casmoncapital.com to check out anything else that we’re doing.

Joe Fairless: Sweet. Well, good catching up with you. Best Ever listeners, good hanging out with you, too. We don’t have a trivia question, we’re not gonna have a review today, but we did have some helpful things that will help you along your journey. Grateful of you being our listener, and we’ll talk to you tomorrow.

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Guest DeAnn O'Donovan on flyer for the Best Show Ever

JF1666: Loan Purchasing & Loan Servicing | Real Estate Note Investing with DeAnn O’Donovan

There are alot of note investors, both performing and non-performing. DeAnn is here to tell us more information on the strategy. We’ll hear what to look for both good and bad, and also how to know what the worst case scenario is. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet: “Don’t fall in love with your deal, every time I see someone do this, they make a mistake” – DeAnn O’Donovan

 

DeAnn O’Donovan Real Estate Background:

  • President & CEO of AHP Servicing
  • Has over 25 years of experience in real estate, financial services, asset management, mortgage lending, and residential loan servicing
  • Based in Chicago, IL
  • Say hi to her at https://ahpservicing.com/ or ceoATahpservicing.com
  • Best Ever Book: The Alchemist

 


Sponsored by Stessa – Maximize tax deductions on your rental properties. Get your free tax guide from Stessa, the essential tool for rental property owners.


TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Deann O’Donovan. How are you doing, Deann?

Deann O’Donovan: I’m great, Joe. Glad to be here with you and your Best Ever listeners.

Joe Fairless: Yeah, nice to have you on the show. A little bit about Deann – she is the president and CEO of AHP Servicing; she’s got over 25 years of experience in real estate, financial services, asset management, mortgage lending and residential loan servicing. Based in the Windy City, Illinois. With that being said, Deann, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Deann O’Donovan: Absolutely. In terms of my background, I started out in acquisitions, working for a public real estate investment trust, so I got great experience early on in how to underwrite, and analyze, and close a deal. Then I also went to work in 2008 for a regional bank, and got some great workout experience there. A lot of experience running acquisition teams, as well as workout teams. I joined AHP Servicing about a year ago.

We are a socially-responsible investment company, so we’re crowd-funded. Somebody can invest in our fund, and the money that we raise we then use to buy non-performing notes. So it’s an alternative real estate play in this particular role. Then we work with the homeowners to try to reposition that debt and either settle the debt with them, or modify it.

Joe Fairless: And Jorge Newbery was the founder of AHP?

Deann O’Donovan: Jorge Newbery was the founder of American Homeowner Preservation (AHP), and that company was founded in 2008, at the height of the great recession. Last year he recruited me and moved into a chairman role, and then we started AHP Servicing to bring the servicing of our loans in-house. So we now have kind of two books of business, if you will. We’ve got the loan purchase and sale business, and then we’ve also just opened our doors to servicing for third-parties, as well as servicing our own loans.

Joe Fairless: Oh, okay. Got it. Well, Best Ever listeners, you can search “Jorge Newbery Joe Fairless” and you’ll hear Jorge on a couple episodes.

Deann, when you started in acquisitions, working for a REIT, and you said you learned how to underwrite, analyze and close a deal – what are some takeaways you got from that experience in terms of underwriting and analyzing deals?

Deann O’Donovan: That’s such a great question. What I would say is don’t fall in love with your deal. Every time I see somebody do this, they end up making mistakes, because they ignore warning signs, whether that’s the state of the market that we’re in, or the counterparties, or the financial numbers… So I think that’s really critical.

I would also say make sure you’re doing a sensitivity analysis on your proforma or financial underwriting, so that you give yourself some cushion in the deal. Everything doesn’t go right; it’s very easy to have the perfect deal on paper, it’s much harder to have the perfect deal in reality, so make sure that you give yourself that vacancy reserve, cap-ex reserve, and stress-test your own assumptions.

Joe Fairless: I’ve seen all sorts of sensitivity analysis… What are some main components – and you might have mentioned a couple already just now… But what are some main components that a sensitivity analysis should include?

Deann O’Donovan: I definitely think you need to build in a vacancy reserve, a cap-ex reserve… If I’m underwriting a commercial deal, I’m also gonna typically take it out three years and make assumptions on staffing costs, and operating expenses, and increases on the revenue side, and rents, ancillary income, so that I’m really seeing if things go well, what does it look like, and if things go bad, what does it look like… And making sure that I know what the operating margin is gonna be in all of the situations, and what my cushion is on my debt service coverage.

Joe Fairless: On the “if things go bad, what will it look like” how do you know how bad to make the scenario? Because clearly, if it’s an apartment building, for example, and it’s 100 units, if you make it 90%, then that’s bad, and the deal is not gonna work… So I imagine there’s a balance or a line that you walk where it’s like “Okay, this is how it would go bad, but that’s probably not gonna happen, so we still should proceed”, but… I know I have this bad scenario in the back of my mind, so how do you reconcile that?

Deann O’Donovan: You’re right, that is very specific on the asset class. If I was doing a multifamily deal, I would probably be looking at “Okay, what happened in the last recession? How long were things vacant for in my market, and what did I have to do to adjust the rents in order to fill those units?” Because I think that if you look back to that last recession, chances are we’re not gonna have one in our lifetime that’s worse than that, so that to me would be your absolute worst-case scenario.

Then from there I’d back off it a little bit and say “Okay, what do I actually think it’s gonna happen in the next 3-5 years?” The predictions are we’re gonna have a recession in 2020, but what do we think that’s gonna look like? What do I think interest rates are gonna be? How long is my debt? So then you can kind of back-fill what factors for my particular deal have variability that I need to understand that risk for, and make sure I’m comfortable taking that level of risk.

Joe Fairless: In 2008 you went to work for a regional bank, and you got, as you call it, “workout experience.” As someone who isn’t in the lending industry full-time – but I work with lenders, obviously – you’re talking about working out loans when people are behind, so you’re figuring out how do you work out the scenario so they don’t default and you don’t have to foreclose on them… Is that correct?

Deann O’Donovan: Yes and no. The company I worked for was Wintrust, they’re a regional bank – and they acquired a lot of other failed banks from the FDIC… So they hired me after they acquired the largest bank failure in Illinois history; it was a company called [unintelligible [00:08:10].10] It was a billion-dollar portfolio.

Joe Fairless: Wow.

Deann O’Donovan: And I’ll tell you, in the first 90 days on the job I wrote off probably 15 million dollars, or more.

Joe Fairless: What do you mean wrote off 15 million?

Deann O’Donovan: I’ll give you an example – there was one deal I was looking at where it had already defaulted, and when I took a look at the underlying security, that collateral for the loan, it was not a real estate deal; in this case the collateral was virtually worthless. It was worth maybe ten cents on the dollar… So then you really have to get creative.

Joe Fairless: Keeping whatever privacy you need to keep, but what could that be, that they initially used as collateral, that was perceived to be worth so much on a large loan, but then was worth ten cents on the dollar?

Deann O’Donovan: So in this particular deal that I’m thinking about it was a bundle of life insurance policies, and they had done an actuarial analysis basically, like the life insurance policies, the beneficiary benefit had been assigned to this company, and they had done an actuarial analysis on basically when are people supposed to die, and that actuarial analysis was incorrect, and there were a whole host of other things; they hadn’t collateralized it right… And the reason I think that’s such a great example is it was a very clear example of people closing on a deal where they did not understand the deal.

They didn’t have sufficient knowledge of the industry, they didn’t have sufficient understanding of what happens when that deal goes bad, how do you fix it, and what do I really have to collateralize that loan? I think that’s relevant to any industry, but it’s especially relevant to real estate; when people are moving into a new class, you’re dealing with different counterparties, or maybe a different lender for the first time – you really need to understand how that deal is put together and how that deal could unwind, and what you’re gonna do if something goes bad.

Joe Fairless: What an experience… First 90 days on te job. You started out quick. Did  you know that was what you were getting into? It’s 2008, so I imagine you knew the sky was falling, so that’s probably what you were gonna be focused on when you got hired there…

Deann O’Donovan: I did. I did know that the sky was falling, and previously when I’d worked for a REIT, I had done large public company bankruptcy work and restructuring, so if we had a large tenant that went bankrupt, I would be the one working with our attorneys to figure out how do we restructure it, how do we rewrite the leases, what collateral do we need, what kind of margin do we want [unintelligible [00:10:42].13] or whatever it may be… So that was a very helpful experience. But taking on a massive portfolio of primarily defaulted or near-default, primarily commercial real estate, but also consumer debt and C&I deals… It was a lot of fun, I loved it, but it was a lot of balls in the air.

Joe Fairless: Oh yeah, I bet that was an intense job.

Deann O’Donovan: Yeah. And I would say you learn so much more by working at somebody else’s bad deal than you’re ever gonna learn doing a deal yourself on the front-end… Because you see everybody’s mistakes. I used to tell the guys on the team that were younger “You’re gonna be an amazing underwriting, and you’re gonna be amazing at putting new deals together when the market turns, because you’ve learned from all of these mistakes that these other lenders made over the last ten years.” That’s amazing experience.

Joe Fairless: What are some mistakes you’ve seen that you’ve taken lesson from, that you can share with us?

Deann O’Donovan: Well, I was thinking about that in advance of this podcast, because I think you ask really probing questions, which I very much appreciated… And one of the things that I think I’ve learned is the more you can figure out for yourself what your drivers are, the more you’re gonna figure out why you like the real estate business, and why do you like it part-time or why do you like it full-time.

For me, the reason I love it is I’m a builder; I love putting deals together, I love building teams, I love doing new business, I’ve launched a lot of new product lines, moved companies into new lending areas… And one of the appeals for me about AHP Servicing was, frankly, taking a company that had a small book of business on the loan trading side, and then this new business that they were starting up on the servicing side… For me, that’s a blast. But for a lot of people, the knowledge that they’re gonna be working 60 or 80 hours a week and there are all these systems to put in place is overwhelming and disheartening, but for me that’s what gets me up in the morning. So the more you can figure out what gets you up in the morning and how does that relate to what you do professionally, and how do you want it to relate to what you do professionally, then it becomes play that you get paid for. Not that you’re not working hard, because I work very hard, but you’re passionate about it, and that makes all the difference. So I think that’s one thing.

Then I think the other thing is being intentional about who you’re doing business with, and making sure that you’re doing business with people that you can trust and people that you respect.

Joe Fairless: Any tips on qualifying those individuals in advance of doing business with them?

Deann O’Donovan: I’m a big believer in references and test drives. So if I’m looking at a new vendor, for example, we have a really robust due diligence process, especially for critical vendors. That includes talking with references and other clients, because you learn so much more in a five-minute conversation than you’re gonna learn by going through their annual report and their [unintelligible [00:13:41].02] Not that you don’t need to do that, but you do need to also talk to people who have done business with them, so that you make sure that you’ve got that DNA alignment between the organizations. And I’ll tell you, that served me incredibly well in my career.

As I’ve moved jobs, I’ve had co-workers and employees that have worked for me who have said “I wanna go where you’re going”, and I’ve also had attorneys and other vendors that when I know I need somebody, that’s the person I’m gonna call, because I’ve got that 5-year, 10-year, 15-year trusting relationship with, and I know they’re gonna give me a straight answer.

Joe Fairless: What’s been the main challenge as CEO of AHP Servicing?

Deann O’Donovan: I would say the main challenge was doing everything all at once. In my first 90 days at the job I had four different systems implementations or conversions I was working on, I was hiring a management team, I was closing out a fund, I was putting systems in place, and understanding the processes, and taking the reins over from Jorge, and picking up the relationships that he had developed over a decade… So when I would put my company project list together, I kid you not, it was five pages long.

So prioritizing those things and making sure that they’re all not just getting done, but getting done well, and being done in a way that’s going to create the infrastructure to take the company from 5 to 10 million, to 15 million, to 100 million, makes a really big difference… Because once you’ve got that infrastructure and that scale, and people understand how the company runs and you’ve defined that company culture, it will be much easier to take this company from 15 million to 500 million.

Joe Fairless: When you have that five pages long list of things and you’re going about prioritizing them, what type of thought process or system do you use to do that prioritization?

Deann O’Donovan: What’s the most critical, what order do things need to happen in? Then once they’ve happened, what do we need to go back and back-test? What kind of people do I need to hire that I can delegate some of these things to, and trust that they’re gonna keep them running? How much autonomy do I give them, and then how do I check back in a way that feels good for them, rather than them feeling like I’m checking their work, where it’s truly collaborative? I think that’s incredibly important as well. I’m a big believer in collaborative companies. So I’d say those are some of the key things.

Joe Fairless: Just as a refresher for Best Ever listeners on AHP – will you just give everyone a refresher on what you all do? I know you’ve briefly mentioned it earlier, but it’s a very cool concept, that I think is a win/win for everyone. I’d just love to talk about that a little bit.

Deann O’Donovan: We actually internally have crafted a business model that I refer to as a win/win/win/win…

Joe Fairless: Oh, okay. There’s an Office episode on that, where Michael Scott resolves conflict between two co-workers and he tries to get win/win/win/win scenarios…

Deann O’Donovan: Oh my gosh, I just saw that a few weeks ago! That was pretty funny.

Joe Fairless: Yeah, yeah… [laughs]

Deann O’Donovan: So to answer your first question, what we do is we do a series of funds – we have a current fund open right now, and it’s open to both accredited and non-accredited investors. They can invest in our offering for as little as $100. We then use the money that we get from that offering to go out and purchase defaulted loans. Then we work with the borrower to try to come up with a cooperative solution to their past due payment status. If they’d like to keep the loan, we’ll modify it, reduce the principal, reduce their monthly payments, and make it affordable for them, so that they can stay in their home.

If they’ve already vacated the property or they would like to get out from under the debt, if the title is relatively clean, we’ll take a deed in lieu of foreclosure, we’ll bring that underlying collateral into our portfolio as real estate owned, and then we’ll sell it. We underwrite those loans on the frontend, so that we have a pretty good idea of if we have to take that asset back, what it’s worth and what we’ll be able to sell it for.

Then the win/win/win that I was talking about, our philosophy is we are socially responsible, so we’re trying to create funds that are good for our investors, so our investors get a return of up to 10%. We’re trying to create solutions that are good for our borrowers, where they get to modify or settle their debt, and hopefully go on to rebuild their credit and have a good life. We’re trying to do something that’s good for our communities, because nobody wants a vacant, moldering, decaying property sitting next door while it’s going through a two-year foreclosure process, right? That’s terrible for the community. It invites drugs, it invites vandalism… It’s just awful.

And then finally, we’re trying to create a company culture that’s good for our employees, who really come to work knowing that what they do matters in somebody else’s life.

Joe Fairless: Yeah, I was waiting for the employees to be part of it, and if they weren’t, I was gonna add another win to your win/win/win/win… But you got it covered, so… Four wins.

What is your best real estate investing advice ever?

Deann O’Donovan: I think my best real estate investing advice gets back to what we were talking about earlier, which is be deliberate and don’t fall in love with your deal. Sometimes the best deal is the one that you never do.

What I say to folks here is you have got to be willing to walk away from the deal if it no longer makes sense. We just had a situation at the end of the year where we did that. Somebody tried to cram us down literally on December 31st, and I was like “Not gonna happen. Sorry, guys. If you change your minds, let me know.”

Joe Fairless: What were some specifics on that that you can share?

Deann O’Donovan: They wanted to capture the upside after we completed our due diligence, without crediting us for the downside, where some of the loans were significantly less than they had indicated that they were worth… So they sort of wanted to have their cake and eat it too, and we said “That’s not how we underwrite, that’s not how anybody underwrites in this business. If you can get your deals done that way – God bless, go do it, but we’re not gonna close and we’re not gonna be pressured to make that deal at year end.” They ended up coming back a week later; we just closed it, and I think we got to a place that was good for them and good for us… But you have to be willing to say no.

We had spent probably 40k or 50k in due diligence, so…

Joe Fairless: Wow!

Deann O’Donovan: But I’d rather not do a deal and eat that cost than do a bad deal that I spend 18 months regretting after I close.

Joe Fairless: Right. Where does that cost go, that 40k-50k in due diligence prior to making the transaction happen?

Deann O’Donovan: When we’re buying a loan, we’re ordering basically three pieces of due diligence from third parties. One is a broker’s price opinion (BPO). That lets us value the underlying collateral, and we need to do that to make sure that we’re buying the debt at the right level, so that we’ve got a cushion there.

Then we order a title report and we take a very forensic look at the title to make sure that if there are any gaps in title, we can complete that curative work… Because the last thing you wanna do is buy a loan and then find out that you can’t foreclose or you can’t take a deed, or you can’t modify it because somewhere there was a break in the title, so you can’t prove clean ownership.

Then we also order a tax report, so that we can see if there are any due taxes, because those are typically credited against your purchase price when you close.

Joe Fairless: Okay.

Deann O’Donovan: So if you’ve got a big deal – let’s say that’s $300 a loan, all-in (I’m rounding up there), if you’re doing that for every loan and it’s a big enough deal, those dollars add up.

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

Deann O’Donovan: I am ready!

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

Break: [00:21:19].06] to [00:22:25].16]

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

Deann O’Donovan: I would say The Alchemist, by Paulo Coelho. I go back and read that every couple of years.

Joe Fairless: Why every couple of years?

Deann O’Donovan: Because I think you get different things out of it. It’s a very simple story, it’s a quick read, but it’s kind of a classic hero’s quest story about finding your destiny… So it’s something that not only have I come back to, but I’ve given that book to more people as gifts over the years than probably any other book.

Joe Fairless: Best ever transaction you’ve been a part of?

Deann O’Donovan: Well, I would say maybe the deal that we just closed that I was referencing… Not because it’s the best deal that I’ve ever done, but I think it was — I’m training a couple of new traders right now, and I think it was the best deal that they’re going to see in terms of the discipline and the other things that we’ve been talking about.

Joe Fairless: Yeah, a case study in real life, and they’re working through it.

Deann O’Donovan: Exactly.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Deann O’Donovan: A mistake on a transaction… Well, I think getting pretty far down the line on a deal with a new counterparty, and then discovering that they’re just not reputable in terms of how they do their deals. One of the things that I feel very strongly about is I do not retrade my deals. If I tell you I’m going to buy something from you, I am going to buy something under the terms that I agreed to… So for me that’s a really big pet peeve when somebody–

Joe Fairless: [laughs] Do you invest personally in real estate?

Deann O’Donovan: I do, but in a small way. I’ve got some single-family rentals, but they’re all passive. I’m so busy with my day job… I would love to have time to do some multifamily or other asset classes, but right now…

Joe Fairless: You’ve got your hands full. The reason why I ask that is in your personal investments when you agree to buy it for X, I’m sure during due diligence something comes up. Something must come up, where it’s like “Wait a second…” They weren’t being dishonest, it’s just due diligence, inspector reports, something comes up… So in that scenario, did you just say “Hey, I’m gonna agree on the initial price, all good” or did you go back and say “Let’s knock it down a little bit” or did you just say “I’m not buying it.”

Deann O’Donovan: If there’s something material that comes up on due diligence – absolutely; I think it’s appropriate to go back to the table. When I say “retrade”, I’m really talking about somebody who when it gets to the finish line there’s no communication along the way, and then suddenly they’re like “Well, I’m not gonna close unless I get X and Y in addition to what we agreed on”, or they try to knock the price down without having a justifiable reason for doing that.

Joe Fairless: Okay.

Deann O’Donovan: I view that as distinct. The whole reason you do  your due diligence is to see “Did I price it right?”

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

Deann O’Donovan: Really through AHP Servicing. I love the business model, it’s one of the reasons I joined the company, and it feels amazing to go to work knowing that you’re doing a good thing.

Joe Fairless: How can the Best Ever listeners learn more about what you all are up to?

Deann O’Donovan: They can connect to me directly at ceo@ahpservicing.com. They can check us out online on our website at www.ahpservicing.com, or they can give us a call at 866-ahp-team.

Joe Fairless: Well, thank you so much for being on the show, Deann. I really enjoyed our conversation, from the lessons you learned starting out, working for a REIT on underwriting and analyzing deals, to the regional bank that you worked at, and the example of when you talked about the first 90 days, and you wrote off 15 million dollars or more, and discussing that… As well as, obviously, what you and your team are doing now at AHP. Certainly a win/win/win/win scenario with your business model.

I really enjoyed our conversation, great catching up. I hope you have a best ever day, and we’ll talk to you soon.

Deann O’Donovan: Thanks so much, Joe. I enjoyed it as well.

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Flyer for Mark Willis as guest on the Best Show Ever

JF1567: Increase Net Worth & Have Your Money Working For You with Mark Willis

We all want to increase our net worth (usually). Mark is a financial planner and here to talk to us about how he has been able to increase clients net worth by over $500,000,000. One great way he does this is through real estate, and pairs it with whole life insurance. Confused? Me too, until I listened to his explanation in this episode. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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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, 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 of that fluffy stuff. With us today, Mark Willis. How are you doing, Mark?

Mark Willis: Good, how are you doing?

Joe Fairless: I am doing well, nice to have you on the show. A little bit about Mark – he is a certified financial planner, and he has written two books, and one of them he just published; you’ve gotta go check it out, it’s called “How to be an Amazon legend and fire your banker.” That is the name of the book, I’m not gonna continue — that would be a really long title. Mark is the owner of Lake Growth Capital Financial Services, which is a financial firm in Chicago. He has increased the net worth of his clients and their families by over 500 million dollars, and you can learn more about his company at LakeGrowth.com.

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

Mark Willis: Yeah, sure. I’ll keep it brief. I listened to Dave Ramsey all too well as a young adult growing up, getting out of college. I came away from that experience with six figures of student loan debt and no plan to pay it off in the middle of the Great Recession, looking for work.

Joe Fairless: Oh, wow.

Mark Willis: So does that sound like a great start, or what?! [laughs]

Joe Fairless: Yeah…

Mark Willis: Soon after we moved to Chicago – not the least expensive city in the world – and just was cranking at trying to do as many different income streams as possible. All of my training taught me that mutual funds, mainstream financial investments were the pathway to financial freedom, including of course Dave Ramsey. If he says it, it must be true. So we were plowing all of our money towards student loan debt, until we found out there were better ways to do it.

I guess that’s a short enough background… I ended up getting some state licenses, I got my certified financial planner designation, opened up our practice here, Lake Growth Financial Services, and I’ve been having just a ton of fun ever since.

Joe Fairless: What were the better ways that you found out that you should do it?

Mark Willis: Oh, man… Well, first of all, the traditional retirement planning system or industry in this country seems to have a very clear picture of where we all should be putting our money, which is in their pocket, right? So every dollar I put into investments, and mutual funds… Well, you have to keep in mind, I’m a post-recession planner, so every dollar I was putting into my investments were going down, down, down. Meanwhile, the student loans were requiring that giant mortgage payment, essentially. So we had to find something that wasn’t tied to Wall-Street, something that put money back in our pocket rather than taking it out of our pocket every month… Something that would grow predictably for us.

That really is what spurred us on to find other financial products and vehicles that more closely aligned with what we were trying to do and what we were trying to accomplish. And honestly, Joe, it gave me a chance to think critically about what Dave was saying on the radio every day, which is something I just had never really paused to think about. Obviously, your listeners know very well, the benefits of real estate — and of course, there’s drawbacks to real estate as well, but the point is thinking carefully and critically about what you want your money to do for you is probably more important than any product or place you might put your money.

Someone once said “If I had to choose between Tiger Woods golf clubs and Tiger Woods’ golf swing, I’d take the swing, over the clubs”, right? Same with financial vehicles – it doesn’t matter how great that golf club is, you can mess it up if you’ve got a bad swing… Just like any financial product, whether it’s mutual funds, or real estate, or anything else. It comes down to “What is the strategy behind the product?”

Joe Fairless: So what are the top three places where you put money, in order of most money to least?

Mark Willis: Yeah, okay… Well, you look back over the last 2000 years – where do people honestly keep their cash? Well, one, you can go back even further, the pyramids – that’s kind of the first and best case of real estate, right? So the three places people keep their cash are real estate, businesses, and then paper wealth.

We have been taught mostly that paper wealth – 401K’s, mutual funds, IRAs – is the only place to put it, wherein that is the least efficient way to generate financial independence. So the question is, again, what do we really want out of our money? What do we want it to do for us?

The top three places we put our money and our clients’ money – one of my favorite places is in real estate, because it provides so many great tax benefits. Typically, it’s non-correlated to the stock market, it gives you money in your pocket at the end of each month, rather than taking money out of your pocket every month… But even that can’t stand on its own. You really need some various different assets that complement the real estate product. That’s sort of like nitro and glycerin; if you can add the right combination of financial vehicles together, and you can really get some awesome, explosive growth, if you can just put the right products together to create a strategy. Again, it’s not about golf clubs, it’s about the swing. It’s not so much about one real estate, or another business, or another investment, it’s about how do you combine those things together to create a plan to help get you from where you are to where you wanna go.

Joe Fairless: That makes a lot of sense. Just so I make sure I heard you correctly – top three places that you put your money is 1) real estate, 2) businesses, and 3) paper wealth, in that order?

Mark Willis: That’s right.

Joe Fairless: Okay. And now you mentioned it’s more about how to swing the club, not actually having the club, so using that analogy, what are the strategies within each of these three that you employ to do the best you can within each of them?

Mark Willis: Well, there’s probably more there than I can probably answer in a short episode, but…

Joe Fairless: We’ll go with real estate first and we’ll see where we get from there.

Mark Willis: Sure. One of my favorite discoveries in all of this, in my tumbling down the rabbit hole of things that don’t necessarily have to deal with Wall-Street and its kissing cousins, is a combination of real estate and solving the problems that most real estate brings with it. What are the problems that come with real estate? Well, let’s think about it for a minute.

There’s no guarantee that that asset will continue to grow. And when it does grow, historically speaking, over the last 100 years, it’s only been 1% above inflation, according to Robert Shiller. Of course, it’s not free to maintain or buy or sell real estate, and you’ve got this pesky problem of tenants not paying rent, or vacancies in your portfolio.

It’s important to realize that even real estate is only worth what someone’s willing to pay for it when you sell it. Until then, all you have is a Zillow [unintelligible [00:08:49].18] which isn’t worth a whole lot. And there’s really no control over the equity in real estate. So do you have control over the equity in there, or do you have to ask a banker every time you need a HELOC or need some money out of that property. And is that money in the house, or in the condo, or in the apartment complex that you own – is it guaranteed?

If you think about it, when are we most likely gonna need cash? Just kind of stop and think about that for a minute.

Joe Fairless: When they don’t wanna lend us cash.

Mark Willis: Right, yeah. During a crisis, when banks are least likely willing to give it to us, right?

Joe Fairless: Mm-hm.

Mark Willis: When is the price of your real estate likely to be at its lowest? Probably right at the same time, during a crisis.

Joe Fairless: Yup.

Mark Willis: So there’s pros and cons to everything, but one of the most interesting combinations of assets that I’ve ever seen is a mixture  – again, nitro and glycerin, peanut butter and jelly, Thelma & Louise… If you put the right two things together, they do great things. A mixture of all things – of real estate and dividend-paying life insurance. That’s been one of my strategies to work on with clients, that’s provided some blend between the best parts of real estate and the best parts of the business model, which is an insurance contract. If you want, I can go down that path and explain how that works.

Joe Fairless: Sure. Please.

Mark Willis: Okay. So if it’s designed correctly, an insurance contract is literally a unilateral contract between you, the real estate investor, and the insurance company, which is a business. So instead of using Wall-Street’s model, you’re using a business model. And that business model is typically an insurance business – it just so happens they sell life insurance, but it’s a business that’s been profitable every single year for over 100 years.

Imagine if you were an attorney and you were offered partnership with an attorney law firm that’s been around for over 100 years and always posting profits. That’d be an awesome deal to be offered equity share or partner share in that kind of business. That’s sort of what a mutually-owned life insurance company offers. When you purchase one of these contracts, in essence, you become an owner in that 100-year-old mutual life insurance company; you co-own the company, along with all the rest of us policyholders.

This is different than term insurance, which is just about the death benefit; just renting that death benefit. Instead of renting the death benefit, this type of cash value life insurance, Joe, is permanent, and it builds equity, just like when you purchase a home you’re building equity. And that equity is called cash value. The cash value is the money you can use for everything; not just your personal needs, but buying real estate, too.

So when you have one of these contracts, the contract guarantees you an annual cash value increase, meaning your equity will guaranteed be more this year than you had last year. On top of that guarantee, they’re throwing you dividends, profits from their profitable business, because you’re an owner… You get a dividend payment on that cash value every single year on top of what they guaranteed you. Before I move on, any questions on anything there so far? Anything that makes sense?

Joe Fairless: I have one of these contracts, so no, I don’t have questions, but please continue. It’s an interesting aspect of what we do.

Mark Willis: Yeah. Most people see it, and they’re like “Life insurance? I don’t need that. And Dave Ramsey says it’s all bad.” Again, this is a contract, it’s a business model. You are buying into a life insurance contract, yes, but the business itself is less important as to what the money is doing inside that contract. So again, once it’s there, you’ve got this big pool of contingency capital. What could you do as a real estate investor with a six-figure, seven-figure pool of opportunity cash? Well, I could come up with a couple ideas; I don’t know about you, Joe… But once it’s in there, you can use it for everything.

You could use it for purchasing a property, or several properties. You could use it to pay the property tax on your building. You could use it to float you when tenants don’t pay rent or there’s vacancies in your property. You could use that cash anytime; there’s no government restrictions, there’s no required minimum distributions, there’s no prohibited transaction, unlike a self-directed IRA or a self-directed 401K. There’s no prohibited transactions, there’s no self-dealing rules. The government can’t put limits on how much you put into one of these contracts, or tell you when you have to take the money out.

In four simple steps, here’s how you can fire your banker and become your own mortgage company to yourself. Step one, open up one of these life insurance contracts and use the equity, the cash value in your policy to purchase some real estate. Because of the kind of contract – and this is maybe the most important part of the whole thing, Joe – if it’s designed correctly… And that’s super-important to keep in mind; if the policy you bought was designed correctly, the cash will continue to grow, even when you borrow that money out.

I’ll say that again – if you took a loan against your cash value, the policy will keep paying you growth and dividends as if you had not touched a dime of it.

Joe Fairless: Yeah, because you have the policy; that doesn’t change. You’re simply borrowing against it, so the original principal that you put in the policy is what you’re making the dividend on.

Mark Willis: Absolutely. If anyone here is familiar with how HELOCs work, your home is gonna appreciate in the neighborhood whether you have a HELOC or not, right? You’re just using your home as a collateral for that cash in the HELOC.

Joe Fairless: Yeah, good analogy.

Mark Willis: Same way to use it with the life insurance contract, if it’s non-direct recognition. So many people think they have one of these policies and it turns out they don’t, because they have what’s known as direct recognition loans. Lots of great mutual life insurance companies out there, but they’re offering direct recognition loans, which lowers the dividend when you borrow against it. If it’s non-direct recognition, you get that sweet, beautiful sensation.

I took a loan a few years ago, my wife and I spent a month in Hawaii. While we were there, we got the dividends, even on the money we had pulled out of our accounts to go to Hawaii. It’s such a cool feeling. It’s like a no-guilt vacation.

So first step – use the cash in the policy to buy your real estate. Two, the policy is gonna keep growing over here, even on the capital you borrowed. Three, you get to decide your own repayment schedule when you wanna repay that loan. A lot of our clients decide to use rent money to help repay that policy loan, so they can free that dollar up in the policy to spend on the next real estate.

And then four, whenever you’re ready, you sell that property and recycle the money back into your policy. Those are the four simple steps to firing your banker.

Joe Fairless: And I know I’m just adding fuel to the fire with you, you’re gonna like this comment – when you die, it just gets the money that your spouse or whoever would receive… If when you die you still have that loan outstanding, it just gets deducted from that total amount, and you still get paid out, which is a nice feeling, because you can always have a loan out there, and  know that when you die, it’ll just take care of itself by being deducted from the sum that your beneficiary would receive.

Mark Willis: Super, super-awesome, Joe. I love it. Yeah. Thinking about that for just a quick minute, just to use some simple numbers, let’s say that your cash value is 200k, and let’s say your death benefit was two million. Let’s say that you took a loan for as much as you could. Let’s just say you could access about $200,000 of that cash value. Typically, they’ll let you have 90% or so.

Just for simple math, let’s say you had a loan of 200k, and you use that 200k to buy a piece of real estate. And then let’s say you got your wings that night, you graduated, you passed away. Now, a lot of folks are like “Well, why the heck would the insurance company do this crazy deal where you’re getting growth on the money even when you borrow against it?” and you just answered it, Joe  – when you pass away, if there’s a loan on the policy, the life insurance company has been off the hook for that loan amount. So  instead of giving your family two million bucks, they’ll take two million and minus out any loan on the policy. So they’d get 1.8 million, and of course, the real estate that you just bought the day before.

Joe Fairless: They get the real estate, too?

Mark Willis: The family gets the real estate, yeah.

Joe Fairless: Oh, right, right. I was like, “Wait a second… Who’s “they”, because I don’t remember?” [laughs]

Mark Willis: Yeah, yeah. That’s the thing, it’s a non-recourse loan on life insurance, and so yeah,  they are the family in this case.

Joe Fairless: Okay, got it. I was following you, I just wanted to make sure I was —

Mark Willis: Yeah, cool.

Joe Fairless: It’s something I’ve done a lot of research on over the last couple years. It seems like black magic, quite frankly, when you hear someone talk about it, but… I had to read multiple books, and I’m in a policy right now and I’m going to see how that goes, and go from there.

Mark Willis: For yourself, Joe, and for many of your listeners, if they’ve also heard it, I’d be happy to share two or three different strategies for how that combination works in these minutes we have here.

Joe Fairless: Yeah, please.

Mark Willis: Alright. I’ll just run through a few of these… These have been just so fun to really think up with my clients over the years. The first would be simple, straightforward, small stuff like homeowners’ insurance, property taxes, HOA specials, repairs and maintenance, the down payment on the property – all of those are just drags on your yield for your  real estate, and if you could use an asset that would grow, even on the capital that you were spending for those regular assessments and expenses, you’re increasing the yield without any additional market risk. You’re overcoming opportunity cost.

In my opinion, using these policies is better even than paying cash directly for real estate, or big purchases. So that’s the simplest, easiest, smallest step to take. The next step would be to pay cash from a policy loan, just straight up be a cash buyer. Using a policy loan, you can get access to this money in about 3-5 days. So when you see a deal you like, request your loan. I had a guy who took a loan for $350,000 and went to cash close on the property, and bought the property as a cash buyer, and got the property, and now the policy itself is still continuing to grow. That increased his ROI as the policy was growing, and the real estate was growing at the same time.

Another option – and I’m just kind of flipping through these…

Joe Fairless: These are loans that you do have to pay an interest rate on, so what’s the typical interest rate that you pay?

Mark Willis: Yeah, the interest rate depends on the insurance company you work with. I’ve seen them upwards of usury rates, or as low as 5% simple interest.

Joe Fairless: What’s a usury rate?

Mark Willis: Oh, usury – it’s kind of a derogatory term for super-high, like with credit cards. I’ve seen 10%, 12% policy loans, compounded… Not fair, I don’t think. Most of the companies I recommend have 5% simple interest, and only compounded annually in arrears. That’s like a mouthful there, Joe; basically, what that means is – rule of thumb, if it took you four years to pay the loan off on your policy, you pay about 1.9% APR.

Joe Fairless: Got it. Okay.

Mark Willis: Quick example, this guy who had the $350,000 loan, with some other deals he was doing, and the rent money he received on that real estate he bought, he was able to get the loan paid back in about five years… He paid a 2.1% APR, which worked out to $38,000 of loan interest. That’s real, actual money that’s a finance charge on the life insurance loan, so why the heck would he do that? Why wouldn’t he just pay cash, and not have to pay interest on his own money? That’s what Dave Ramsey would say, right?

It’s important to remember that the policy was growing more than the loan interest that he was charged. So he paid – I’m just looking at the numbers here on this particular example… He paid $38,000 of loan interest over five years, which is a 2.1% APR on his loan, but his policy grew – without him adding any money to it – over $119,000 at the same time. [laughs] Plus the house was growing in the neighborhood, too.

That gives you a higher yield — even when you think through the loan interest, even when you factor it in… That’s what we call positive arbitrage.

Joe Fairless: When you go to secure one of these — and you call it a whole life insurance? Cash value? What’s the exact term you use for this?

Mark Willis: You know, there’s lots of terms. Unfortunately, too many terms.

Joe Fairless: I know, I know…

Mark Willis: So part of the reason why I went through the extra hoops to being a Bank on Yourself, authorized advisor, Joe, is because there’s so much misinformation out there in the market. I kind of view the Bank on Yourself Authorized Advisor program as kind of the one and only quality standard, so that consumers know “Hey, if I get a policy from a Bank on Yourself Authorized Advisor, I’m gonna get one that’s truly designed correctly, with a non-direct recognition loan, and it’s a dividend-paying whole life policy from a mutual life insurance company, with paid up additions…” I mean, that’s a mouthful; that’s not even the full list there. And if it’s gonna be taxed in retirement or not, and if it’s gonna be limited by the insurance company in terms of how much you can pay in – all that stuff I’ve seen unfortunately with people who thought they had one of these (other people call it a certain thing), it’s been called cashflow banking, it’s been called infinite banking…

Joe Fairless: Got it. Alright, fair enough. So you’ve got the Bank on Yourself term. Okay, I’m with you. So my question is not everyone can get a $100,000 policy, because the insurance company needs to make sure that it’s not overwhelming financially for the person, because it’s not a “one-and-done, you put 100k into it.” You have to feed that on an annual basis… Or am I missing something?

Mark Willis: Great question, Joe. Most of the time, folks are wanting to keep their money somewhere. Your money has to live somewhere. And most of the time, people think they’re gonna need to pack more money away later; so yes, most of our clients are packing more money in every single year. But you know, a good chunk of our clients do single premium contracts. This is where you just take one lump sum, you’ve got some money in a CD that’s just kind of souring, the CD not earning a lot of interest, and you just put the money into a policy, and it gives you all the advantages we’ve described, without having to come up with more cash next year.

Joe Fairless: So if it’s not a single premium policy, then is it called multiple premiums policy?

Mark Willis: Probably, I don’t know. It sounds right.

Joe Fairless: That would be logical…

Mark Willis: Yeah, that makes sense.

Joe Fairless: Got it. Alright, fair enough. Based on your experience as a certified financial planner, what is your best advice ever for real estate investors?

Mark Willis: Wow. Well, we’ve been talking about a cool concept, but of course, we have to do the disclaimer that “Hey, I have no clue what your goals are, what your transitions are, what you’re trying to accomplish…” I’m describing a concept that may or may not even fit your particular situation, so my best advice ever is think more carefully about your function of money than about the label that you put on it. Think more carefully about “What do I want this one dollar here to do for me for the rest of my life?” and think less about whether I can get 5% or 6% rate of return, or “Is this the latest hot stock, or best cryptocurrency?”

Take the labels off the money, and think about “What do I want that money to do for me?” Because where you put your money makes it do different things.

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

Mark Willis: Ka-boom! Let’s do it.

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

Break: [00:24:27].11] to [00:25:52].17]

Joe Fairless: Best ever book you’ve recently read?

Mark Willis: The best book I’ve read recently – Never Split the Difference, Chris Voss. I love it, great book.

Joe Fairless: Best ever transaction you’ve done?

Mark Willis: I think investing in my CFP, probably the best transaction ever. It gave me the biggest, broadest view of how money really works.

Joe Fairless: How much does it cost to be a certified financial planner?

Mark Willis: They take your soul, and then they take about 4k. [laughter]

Joe Fairless: How long does it take to study to become one?

Mark Willis: About three years, I guess. It was a little bit longer than three years for me.

Joe Fairless: And is that because you took three years, or the process takes three years?

Mark Willis: You could technically, if you were doing it full-time as a student, probably get it done in two years. I was working a job, growing my business here, so it took another little bit of time.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Mark Willis: Paying off debt, rather than saving in one of these policies first.

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

Mark Willis: I love the idea of helping people become better versions of themselves. So rather than pouring into someone, I’d love to draw out from them the best parts of themselves.

Joe Fairless: And how can the Best Ever listeners get in touch with you and learn more about what you’ve got going on?

Mark Willis: Check out our podcast, NotYourAverageFinancialPodcast.com, and if you’d like to chat further about some of these strategies – obviously, Joe is very aware of this strategy – I’d love to share some more with you if you’d be open to it. Click on “Book a meeting” on our NotYourAverageFinancialPodcast.com website, and if you mentioned the Best Ever Real Estate Investing Podcast, I’ll be sure to include a free copy of my latest book, compliments of Joe.

Joe Fairless: Awesome. Well, thank you so much, Mark, for being on the show. I am a proponent – clearly, because I’m doing it – of the strategy that you mentioned, and I’m glad that we got to talk about that and went deep into it… As well as your overall approach to investing, both not just in real estate, but also in other vehicles, too. And it’s not just the vehicle, it’s the actual strategies within each, and making sure that that’s the right fit for individual goals.

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

Mark Willis: Thanks, Joe. Thanks for willing to have me on your show. It’s been a pleasure.

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The Best Show Ever flyer with guest Weston Harding

JF1406: How Can A Brokerage Go From $20M Sales To $40M Sales In 1 Year? With Weston Harding

Weston set a goal to specialize and be the number one seller of 2-4 unit properties in Chicago. Goal accomplished! With his brokerage and team around him, together they are the move the highest number on 2-4 unit properties in all of Chicago! Weston saw this need years ago and went all in. Hear how he has been able to have such great success. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

 

Weston Harding Real Estate Background:

  • Owns and operates X Plus Real Estate
  • His team is currently the #1 brokerage for 2-4 unit sales in all of Chicago
  • Team closed over $20M in sales in 2017, on track for $40M in 2018
  • Say hi to him at https://www.xplusrealestate.com/ or at 312.669.4343
  • Based in Chicago, IL
  • Best Ever Book: Never Eat Alone

Best Ever Listeners:

We have launched bestevercauses.com  

We profile 1 nonprofit or cause every month that is near and dear to our heart. To help get the word out, submit a cause, or donate, visit bestevercauses.com.


                                                                                                                                 TRANSCRIPTION:

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 of that fluffy stuff. With us today, Westen Harding. How are you doing, Westen?

Westen Harding: I’m doing great, Joe. Thanks so much for having me on the show.

Joe Fairless: My pleasure, nice to have you on the show. A little bit about Westen – he owns and operates X Plus Real Estate. His team is currently the number one brokerage for 2-4 unit sales in all of Chicago. His team closed on over 20 million dollars in sales in 2017, and is on track for 40 million dollars in sales in 2018. Their website is xplusrealestate.com, and there’s a link to that in the show notes page. Based in Chicago, Illinois. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Westen Harding: Sure. Thank you so much for the Best Ever listeners for tuning in today. A little bit about my background – I actually got started selling real estate in college, in Texas Tech University, Go Red Raiders!

Joe Fairless: Yeah, Guns Up, baby!

Westen Harding: Guns Up! So I sold real estate there, which was just your standard single-family homes for like $75,000, and then I moved to Chicago after graduation and decided to get into commercial real estate. So I was actually selling larger 20-unit plus apartment buildings, and while doing this, I started doing a lot smaller 2-4 unit deals to kind of get my feet wet, and I noticed that there was nobody else in this market; this was back in like the early 2000s and I said “You know what, I’m gonna go ahead and make a goal for myself to be the number one seller for 2-4 units in all of Chicago.”

In 2010-2011 I started my own brokerage, X Plus Real Estate, where from there I’ve just been cranking away, building a team, up to a team of about 6-7 people now, and as Joe mentioned, we’re the number one seller of 2-4 units in all of Chicago.

A little bit more on last year’s numbers – our sales were on average 13.8 days on market, and had 98.9% list price, so just crushing that right now. On top of that, I own a number of properties, and I’m actually gonna currently gonna be liquidating my portfolio to buy some bigger stuff out of Chicago.

Joe Fairless: You own properties in Chicago?

Westen Harding: Yeah, I actually had a portfolio of about 6-7 three to six-unit properties that my wife and I owned, and then we decided last year, as the company was growing, that it just became more of  a conflict of interest to keep buying stuff. Cherry-picking deals for myself isn’t the best thing for my clients and for my company, so we decided to start liquidating that portfolio and start looking at stuff out of state, some ground-up stuff as well.

Joe Fairless: Ground-up development – that’s a gutsy move. What gives you the comfort level for doing ground-up?

Westen Harding: Recently, last year I bought  a project that was a complete gut in the Avondale neighborhood in Chicago, and we took that all the way down to the studs. That was  a 4-unit property, and we actually just sold that for $937,000, which is the highest sale for a 4-flat ever in this Avondale neighborhood. We looked at what we did there and we talked to our contractor, and it’s like the only two things we didn’t do was put in a foundation and build the exterior walls… So why not take the next step and see if we can find the land for a relatively good deal and just build from the ground-up… So that’s what we’re doing.

Joe Fairless: You sold it for $937,000… What did you buy it for?

Westen Harding: We bought it for $307,000.

Joe Fairless: And how much did you put into it?

Westen Harding: 275k.

Joe Fairless: 275k… Over what period of time?

Westen Harding: Best contractor ever, it only took him four months.

Joe Fairless: Wow. Amazing. I’m not as familiar with Chicago… It’s within the Chicago city limits, Avondale is?

Westen Harding: Yeah, it’s within the Chicago city limits, it’s on the blue line which goes from O’Hare to downtown. It’s a [unintelligible [00:04:46].27] neighborhood.

Joe Fairless: So I believe I heard you say you’re looking to invest out of town, so the one difference in the ground-up development – and I imagine it would be a big difference – is that it would be away from your backyard, whereas this was in your backyard, so how do you mitigate the risk there?

Westen Harding: We’re actually gonna do the ground-up stuff in Chicago, but we’ll be doing all the other purchases outside of the state.

Joe Fairless: Alright, I hear you. With the brokerage, you are on pace to double from last year to this year in the transaction volume… What do you attribute that to?

Westen Harding: We’ve spent a ton of money last year redoing our website, so now when you type in “4-unit Avondale” or “4-unit Humboldt Park”, we’re the number one thing that shows up. So we’ve done that, as well as I’m an investor myself, and all my clients are investors, and I just asked them what they wanted most, and everybody said the same thing – “I want a website that I can go to, specifically created for smaller investment properties and click on a property and then have it auto-populate a proforma.” We actually created that.

So if you go to our website, xplusrealestate.com and click on a property and click Proforma or Investor in the top right corner, it’ll create a proforma for you for what’s currently on the MLS. So we did that, which has boosted us a lot, as well as we’ve just done a significant amount of marketing. We have a database with every 2-12 unit owner in North West Side that we reach directly out to, as well as marketing through online e-mails, as well as old-school mail marketing as well.

Joe Fairless: That’s incredible So you just click that Investor calculator – I’m on your website – and then it pre-populates a proforma… How did you determine what benchmarks to put in the proforma for each property?

Westen Harding: Benchmarks in what sense?

Joe Fairless: Taxes, insurance, maintenance…

Westen Harding: Yeah, so the taxes is just drawn off the tax records, so it’s the tax from last year. Maintenance is just the numbers — we do so many of these deals that we put in what our average deals see. We went through a bunch of our previous sales and just kind of compiled where those insurances were coming out at, what the average gas bill was, what the average electric bill was, and then just used an average number to put in there.

Then the other really cool thing on benchmarks is that if you look, there’s one column that is the actual how it’s running, and then the next column over is actually gonna be a column that is an algorithm built into our website that’s always changing, that pulls up what the current rent would be for a two-bedroom one-bath, that has washer and dryer in the unit, as well as an updated kitchen… And that’s always changing. That’s kind of a cool feature, you can see immediately from that proforma what it would be like if you updated your kitchens and baths.

Joe Fairless: It really is very impressive. I have not seen this on a website. You can even delete everything that your team has in here and put in your own stuff and calculate it, right?

Westen Harding: Exactly. The great thing about investing in real estate is everybody has their own ideas and own way that they run their numbers, so to be able to give you at least a framework to work from – we thought that would be great.

Joe Fairless: Yeah, it’s really cool. Then you can download it… Great stuff. How much does it cost to build a website like this?

Westen Harding: Great question. It’s a lot. I think we spent somewhere about like $20,000-$30,000. I think that was the cost for everything. And there’s other numbers that run on the back-end of that website… We can constantly pull what the average 3-unit or 4-unit is selling for in an area or in a zip code… So it does a lot more than just what you’re seeing on the front-end.

Joe Fairless: Yeah, that’s great stuff. With what you’re seeing right now in your business – not necessarily in the market, but just how your business is evolving, where do you see your business evolving to in the next 5-7 years?

Westen Harding: Great question. This year has been an immense change; even in the last 2-3 years I’ve normally been running with one assistant, and then last year I decided to grow the team. So we went from myself plus one, and then I hired two more people. Then just in the beginning stages of this year we were getting so overwhelmed with clients that I hired two more people. So we’re up to now two buying agents, a selling agent, a closing coordinator and we have somebody who just does all our rentals… Because we have so many people that we sell to the four-units that they wanna rent those properties out that we’ve decided to take that in-house as well. So I think the next couple steps is hiring a couple more people, and then just growing to certain other parts of Chicago.

Currently, we’re really based on like North and North-West side – moving that out to maybe farther West and farther North is probably our next move.

Joe Fairless: Your investor clients who are buying 2-4 units, what’s a typical question that they ask and what’s your response?

Westen Harding: Oh, man… “Is this a good idea?” That’s probably the question I get the most.

Joe Fairless: So they’re starting out.

Westen Harding: Yeah, I would say — we do buying seminars bi-monthly, and free… Anybody who wants to come, they can come to those. We discuss house-hacking, that’s probably our biggest topic, as well as how to finance a house-hack, what goes into living in one unit, what you’re expecting from being a landlord…

The biggest thing I get asked all the time is “Once I live in this property and I have other people living with me, what can I expect?” What I normally tell people is that it’s really scary the first time that you do this or you decide to buy a property, it’s a big purchase… But at least what I’ve found out and what most of my other clients find out is after three months of owning a property and living there, not a whole lot goes wrong, knock on wood… But once you do it, you’re kind of like “Alright, I’m making money” or “I’m living for free. Let’s go do another one”, and you can kind of get easier with the next purchase.

Joe Fairless: What’s a question that you’re not asked but you should be asked?

Westen Harding: I think the question I don’t get asked enough is “What do I do next for financing?” Normally, people get so focused on their first purchase, but “How do I go about buying the second one?” I think is probably the thing that people need to think about on their first purchase more. There’s so many different types of financing available, and I think it’s really important to look at all aspects of that. We have people we’ve worked with for years – big banks, as well as small local banks that can do deals that other people can’t.

Joe Fairless: What’s a doable goal for a client of yours to achieve through the purchase of a 2-4 unit right now in Chicago?

Westen Harding: Great question. I was actually running the numbers on this earlier today, because we’re gonna be doing a big video campaign coming up… But normally, your purchase is gonna be about $700,000 for a 4-unit, give or take, so you’re gonna be putting down around $25,000 with an FHA loan, so getting into that… Then your mortgage amount I think comes out to around $4,500. You’re living in one of those units, you have the other three rented out between $1,350 and $1,500. You’re either gonna be living for free or come really close to it.

We normally like to see our clients living in one unit, that’s normally a 2-bedroom 1-bath, not paying more than about $500/month.

Joe Fairless: And then what has been an example of a potential client coming to you with a goal where you’re like “Sorry pal, I can’t deliver on that.”

Westen Harding: The biggest misconception people get is that there’s so many two-flats in Chicago, so we’ve got a lot of people that say “I wanna buy a two-flat.” And through education and just helping people look at the numbers, a two-flat is a very hard property in Chicago to make yourself live for free.

We normally start with them saying “I wanna buy a two-flat” and then after a month there are a couple conversations of explaining, they say “You know what, yeah, probably a three-flat or a four-flat is a better way to go.”

Joe Fairless: Based on your experience, what is your best advice ever for real estate investors?

Westen Harding: Oh, best advice ever by far – get out there and look at properties. I meet so many people that are like, “I’ve been looking at properties online and running proformas for the last two years, and I’ve already got enough money to buy a property, but I can’t make that step.” My team and I are here to help you get out there and look at stuff. Even if you don’t buy a property, we’d love to teach you and educate you on that process, because eventually you’re going to be confident enough in the investment to make the purchase.

So my biggest advice ever is get out there and find yourself a broker – if it’s us, if not, somebody else… Make sure you get out there and start looking at properties.

Joe Fairless: When you host  a bi-monthly event, what is the flow of the event? If I were to look at like an agenda or table to contents…

Westen Harding: So the flow is always gonna be two types – it’s either gonna be like a fireside chat with myself and normally moderating with some other expert, whether that’s a mortgage person, or a property manager… So it’s either gonna be that or it’s gonna be a panel discussion. We’ll have two or three people that are experts. The most recent one we did was like an Airbnb; all of our Airbnb investing in Chicago and how that’s changing smaller multifamily properties, and we had three top people from that field.

Then we do a couple questions, and then we do an open question and answer where the audience gets to ask questions, and then after that everybody sticks around normally for a couple beers, so you can talk to them one-on-one as well.

Joe Fairless: What’s been the most challenging time you’ve had as a real estate professional?

Westen Harding: I guess this will also go with the biggest thing I’ve learned, I guess. When I was originally starting out and the business was growing, I started getting overwhelmed. I got so many clients and so many listings, and there’s only so many hours in the day… And I actually had a  good friend of mine who was looking to purchase a property, and I started to show him places, but at the same time I had so much more on my plate… And after about a month or two he actually decided to go with somebody else [unintelligible [00:15:02].20]

Joe Fairless: Big wake-up call.

Westen Harding: Exactly, huge wake-up call, and I was like “I knew I needed to get an assistant…”, so I hired my first assistant. From there, I just was able to delegate a lot more and give tasks away… So I think the biggest change that I’ve made is after I hired that first person I hired, the second, third, fourth person all was a matter of a year or two, and that was amazing.

Joe Fairless: I remember reading Gary Keller’s Millionaire Real Estate Agent – even though I’m not one, I read it – and he said the first hire should be your assistant… So after reading that book, within a week I had a job posting up and then within three weeks I had hired my assistant.

Westen Harding: I read the same book and I got to the same conclusion. [laughter]

Joe Fairless: Fair enough. With your team, what compartment do you work with the most?

Westen Harding: I probably work with the sales side the most, mostly because people selling properties – it’s a lot to ask of somebody to come into your home, and you really want somebody to evaluate what that’s gonna be worth… So mostly I’ll meet with every seller of the property that we’re gonna sell. I’ll come in and give a free evaluation of what it’s worth, as well as where I think we can push the value.

A couple other things that are really interesting about our company is that we will pay for professional photographs upfront. We pay for that, there’s no upfront cost for selling a property through us. If we don’t sell your property, we don’t get paid. So mostly the sale side.

Then on the buy side, I’ll meet with the client normally the first time out. I’ve got two amazing full-time buy side agents, and all they do is look at investment properties. That’s all they do all day. They drive people around, and once it goes under contract, it goes to a closing coordinator… So once you go under contract, you have a dedicated person to help you get through the closing. That also leaves our buying agents to really look for the best properties and focus on their clients, which is great.

Joe Fairless: Switching gears to where you’re headed from an investment standpoint – you said you’re looking for land to build on… How do you run those numbers?

Westen Harding: It’s actually really simple. Once you know what your build cost is gonna be, you just backtrack to say “Okay, I know what I can sell it for, I know what I can build it for, and now I know what I have to buy it for. If I want X amount of profit, it’s gonna be X number.” So it’s just working it backwards to figure out where that’s gonna make the most sense.

Joe Fairless: And what level of profit makes the property and the project pencil out?

Westen Harding: Normally, I like to see at least 100k, if not more.

Joe Fairless: And your contractor that you work with, how did you get to know him or her?

Westen Harding: I actually met him through one of the people who was — one of my assistants actually was roommates with the son of the contractor. So we met through him, and then him and I just kind of hit it off, and he did an amazing project for me on our first deal, and then I’ve given him all my other smaller projects of smaller things that I wanted to rehab, as well I as I gave his name and number out to all my clients.

When you work with us, we have an open Rolodex. Anybody you need, we have… And we’ve had relationships with or dealt with and worked with in the past. So working with him was just a great experience, and I give his name and number out to all my clients now.

Joe Fairless: My follow-up question would be if we’re in another market that you’re not in, what’s your suggestion for finding a good contractor? Or maybe it’s just finding a real estate brokerage that has a contact working that angle, or is there something else?

Westen Harding: We actually had a contractor before this contractor – actually, three contractors before this contractor, that we got like heavily burned on… Like, really badly burned, like $100,000 burn on… And we wound up – my wife and I, and my wife is very A-type personality, and that’s a great thing, and she’s very detail-oriented, and she said “Next time we hire a contractor, you have to vet them.”

Joe Fairless: That’s a good rule.

Westen Harding: Yeah, it’s a very good rule, something that I didn’t really do a lot in the beginning of my investing. It just kind of worked out [unintelligible [00:19:15].19] So what we do now is if we’re gonna work with a contractor, we have a long list of questions, we go over the project in detail to make sure that it seems that he knows what he’s doing, as well as we’ll ask to see current projects that he’s working on, talk to current people he’s working with, as well as a number of past people that he’s worked with as well. So it’s very much a vetting process of a lot of phone calls to make sure that he’s gonna do what he says.

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

Westen Harding: Let’s do it.

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

Break: [00:19:54].03] to [00:20:56].24]

Joe Fairless: Best ever book you’ve read?

Westen Harding: Best book I’ve ever read is Never Eat Alone by Keith Ferrazzi.

Joe Fairless: How have you applied the insight from that book into what you’re doing?

Westen Harding: It’s all about networking, and I think that’s the biggest thing in real estate or most businesses – the more people you know, the more people are gonna refer your business, the more people that you’re gonna be able to help with their business. That’s a big key to the book and in general about networking – don’t always look to help yourself; if you can look to help two other people out, they’re gonna think of you when they need real estate, or a contractor, or whatever that may be.

Joe Fairless: Best ever deal you’ve done that we haven’t discussed?

Westen Harding: The best ever deal I’ve ever done was my first house-hack. I bought a four-unit property in Avondale, in 2010, for $235,000. It was not the same area it is today, it was a little rougher, but I was able to live in one of the units, moved out all the tenants and moved in newer tenants, updated the units, and I was actually not only living for free, but I was making about $1,200/month, so it was amazing.

Then actually as of two weeks ago I sold that property for $787,000.

Joe Fairless: That’s a good return, 205k to 780k…

Westen Harding: It was a very good deal.

Joe Fairless: What brokerage did you use to sell it — no, I’m kidding. [laughs] What’s a mistake you’ve made on a transaction?

Westen Harding: The biggest mistake I’ve made was hiring the wrong contractor. That’s the biggest mistake I’ve ever made. It lost us a ton of money. We bought the deal luckily at such a low price and the market went up, and I was able to bring in a different contractor and we teamed up to finish it, and then we’re planning to flip out of the deal together and split the profits, but he wound up falling in love with the building and wound up just buying it from me, and I was still able to make a little bit of money.

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

Westen Harding: I am actually on the board of directors of the Harold Eisenberg Foundation, which is an amazing foundation. They help young people coming out of college or in college learn about commercial real estate. They do free mentorships, they do a free career day, they do site visits, they do a number of things including a case competition… But it’s an amazing organization. If you’re ever coming to Chicago or ending college and thinking about getting involved in anything, I would definitely check out the Herald E. Eisenberg Foundation.

Joe Fairless: And how can the Best Ever listeners learn more about what you’ve got going on and get in touch with you?

Westen Harding: I’m gonna go ahead and throw out a cell phone number. This is our office line. If I don’t pick up, somebody from my team will pick up. You can call or text this, it’s 312-669-4343. Or you can find us on the web at xplusrealestate.com, and we’re here to help with any small multifamily transaction. If you’re just getting into the business and wanna know anything about it, give me a call; I’ll grab a coffee with you. If you’re looking to sell your property, we would love to do that as well.

Joe Fairless: And I also recommend checking out X Plus Real Estate, the website, just to look at how it’s put together. It’s certainly a unique format, with the investor proforma and the numbers populating, and then you can change the numbers based on how you wanna run it, and you can download your proforma. Really, really cool. Nice work on that. It makes sense that that is paying dividends, and the beauty of it is you invested 20k-30k in the website, and the lifetime value  of it greatly exceeds that investment, I’m sure.

Thanks again for being on the show, talking about your evolution as a real estate investor and entrepreneur, what type of deals that you do as an investor, what you’re looking to do in the future with raw land, how you pencil those numbers, as well as how your brokerage is on pace to double in sales from last year to this year.

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

Westen Harding: Sounds great, thanks so much for having me.

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Joe Fairless's Best Show Ever flyer with guest Sam Sharp

JF1401: When Denied For Funding, He Can Help Get You Approved with Sam Sharp

Sam is here today to explain how he can get people approved when they’re getting denied. Specifically, he tries to get people as many properties financed with residential financing. Since residential financing is the cheapest money around, this is advantageous for investors. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Sam Sharp Real Estate Background:

  • Executive Vice President of National Sales at Guaranteed Rate
  • Has funded over a billion dollars in loans
  • Specializes in highlighting various strategies to ensure clients secure the best financing options
  • Say hi to him at guaranteedrate.com/SamSharp
  • Based in Chicago, IL
  • Best Ever Book: Millionaire Agent by Gary Keller

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TRANSCRIPTION:

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 of that fluffy stuff. With us today, Sam Sharp. How are you doing, Sam?

Sam Sharp: I’m doing well, thank you. How are you?

Joe Fairless: I’m doing well as well, and nice to have you on the show. A little bit about Sam – he is the executive vice-president of national sales at Guaranteed Rate. He’s funded over one billion dollars – with a B, one billion – in loans. He specializes in highlighting various strategies to ensure clients secure the best financing options. He’s based in Chicago, Illinois. With that being said, Sam, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Sam Sharp: Sure, I appreciate that. Yeah, actually we’re getting close [unintelligible [00:01:48].00] over 1.5 billion, so I look forward to crossing the threshold on the two billion market here. It’s a goal of mine to reach in the next – [unintelligible [00:01:56].11] probably by the end of next year.

I’ve been in the industry now for just over 16 years, I’ve been working heavily with purchase production, as you know, in the mortgage finance world. Now I work with residential financing, so I help people purchase residential homes up to a 4-unit property…

And as probably most of our listeners would know, financing has two main facets. One is the refinancing. A lot of people in the business will look to just refinance a loan to improve their status; other people look towards purchasing homes, so it obviously helps them to buy their home, or you can help them adjust their financing on their home.

I’ve started out in the industry and I immediately was drawn towards purchases, because I realized that if I helped someone buy their home, chances were that I’d have a good chance to help them refinance their home later on if there was ever [unintelligible [00:02:44].08] So I focused on this, working with a lot of first-time homebuyers [unintelligible [00:02:47].16] and then of course, as you start to progress in your career, this led me to come in contact with a lot of investors. Not only am I myself an investor and do I buy investment properties and invest in real estate, but I obviously now come in contact with a lot of individuals.

So I was kind of sharpening the tools in the shed, if you will, trying to help individuals go through and learn how to maximize their investment: how to leverage our cash, how to go through and obtain financing in a lot of cases from a more out-of-the-box perspective; what can they do that might help them overcome some of the restrictions.

At the end of the day there are going to be lending guidelines and restrictions that will keep some people from qualifying for a loan, so my goal is to figure out “How do we look for any options that are available? How do we navigate through those channels that are still open to help people obtain money?”, which of course is beneficial, because residential money tends to be the cheapest money available… So that’s why a lot of people will turn to me for my services.

Joe Fairless: And Best Ever listeners, just a little bit of background… I met Sam at Brie Schmidt and John Casmon’s conference, MidWest Real Estate Networking Summit in Chicago. I sat next to him, and we have some mutual friends and they spoke highly about Sam, so I was like “Hey, I’d love to have you on the show.” That’s how we got connected. So I have a little bit of context with what you do, but not a lot, because we didn’t talk a lot about your business.

So I guess what would be helpful, since we’re primarily real estate investors on this show, is to give maybe a case study — let’s start out with a case study of an example of someone you’ve helped and what their situation was as an investor, the challenge, and what the solution you all came up with was.

Sam Sharp: Sure, and I have a few different examples I could give you. I would like to use something that’s more immediately relevant, basically more recent. One of the things we love to do is we try to figure out how can someone obtain as many financed properties as possible using residential financing?

A client will come to me and figure out “How do I get into purchasing this property with a lower down payment, and how do I continue to repeat that?” So I focus my efforts on looking at options that will help a client go through and purchase a property and put as little down, obviously, and then what will be their option for the next 2, 3, 4, 5 properties as they look to move forward.

I have a client right now who’s looking to come into our market and wanted to purchase a unit; they’re gonna live in the property… So they’re gonna buy a 4-unit property, they wanna live in one of the units, and then they wanna rent the other three out. Now, they own another property, so they were gonna look to go through and set this up so that they can look to obviously move in and continue their investing.

Well, we have a conventional loan program that will allow someone to purchase with as little as 5% down on a 4-unit property [unintelligible [00:05:38].14] because it will allow for a competitive interest rate, lower mortgage insurance, and of course, you can have that mortgage insurance removed… So when someone puts less than 20% down on a property, they encounter PMI, so we always wanna look at that PMI, which is probably the mortgage insurance. We always wanna look to figure out when can we eliminate that, because that’s an added expense. We can improve their return on their investment by going through and eliminating that.

So the client wanted to see how could they take advantage of this. Well, unfortunately, one of the caveats with that loan program is that you cannot own another property. So when you’re going through, if you own another property, you [unintelligible [00:06:17].16] can no longer use the 5% down conventional loan, and that’s why my focus is usually to try and guide my clients to start with this type of loan. When I work with investors here in Chicago and they’re looking towards moving towards that multi-unit platform, and again up to four units, I’ll talk to them about them about looking to use this type of financing first, because it’s the only time they can do it; once they own a property, they’re in a position where they no longer qualify.

Well, in this case I have two borrowers who are looking to purchase. We started looking at it, and let’s just say one buyer could qualify without the other one, but that was the buyer who already had a property in their name… So what we ended up doing… We were able to set up and facilitate a transaction where the other borrower — we set it up to where they purchased that property from the first more qualified borrower; we’ll call him the co-borrower here, so as to keep things clear. I don’t want it to be confusing.

The co-borrower ended up buying the property from the borrower, and we used equity from the property as their down payment. We were able to use the gift of equity. So they didn’t even have to go through and use any down payment. We just basically rearranged their financing, so now our co-borrower had a property in their name, but the primary borrower did not.

Now they’re able to go through and they can look to purchase that property, and they’re buying that property with 5% down. So I was able to restructure it. Even though sometimes someone might have looked at it and been like “I’m sorry, but you own a property and you can’t qualify.” I looked into it and said “Okay, how can we try to rearrange your debt so that you could qualify.” After we’ve done that successfully, now what happens is they purchase that property with 5% down, and after they’ve been there for a year, now they can look to buy another multi-unit and this time go through and use FHA financing.

FHA financing is a government-insured financing that also allows for a lower down payment… So in this case it’s actually even than the conventional, 3,5% down. So when I work with the client, they’ll look to utilize that first conventional loan with 5% down, because again, if they own another property — if they would use FHA first, then they couldn’t use this options. We have to go through and we have to stay in order as far as how we use the loan program. So I structure this with my client; the guys are now going through and purchasing with a 5% down, then they’ll buy their next property with FHA, which allows 3,5% down… FHA doesn’t have any restrictions on either of them owning any other property, so now we’re able to put them both back on the next property together, so that they can continue to qualify without any type restrictions… Or if we start to need the income from the co-borrower or things of that nature, it’s not a problem.

So we’re able to now go through and I’ve helped them effectively leverage 8,5% to get into two properties which range up to about a million and a half dollars between those two properties, or actually closer to 1.7. So they’ve been able to leverage 8,5% to get up to about 1.7 million, and they’ll look to move forward after that and they’ll be able to actually move on and they could purchase a single-unit now and go back through — and if they were going to occupy that property (because sometimes investors decide they may not wanna live with their tenants anymore) now they’re going through and they’re able to use that, and they’re able to go through and purchase using conventional financing again with as little as 3% down.

Now if you’re following the math on that, that’s 11.5%… So basically, if you use the loan limits for conventional and FHA financing, that’s about 2.1 million dollars that they’ve put in their portfolio with only 11.5% into it.

That’s a really good example of how I’ve helped someone recently, who at face value did not qualify for this type of strategy; we restructured what they were doing, we got them into line to qualify, and now they’re well on their way to moving on towards their next property. Hopefully that gives you a good example.

Joe Fairless: Did you diagram that out for the investors, to say “Hey, trust me on this, here’s the approach…”

Sam Sharp: I have not — I’ll be honest, I didn’t have any type of written diagram. It was just a verbal conversation and more of a plan of attack. I do spend a lot of time with my clients, speaking with them and trying to conceptualize and verbalize those concepts to make sure that they have a good understanding… But I did a pre-recorded video on how to do this, and now I’m actually going through and we’re having that translated into not exactly a PowerPoint type of thing, but more of a written illustration. So it’s not something that I’ve done, but it’s something that I’m doing right now.

Joe Fairless: You mentioned earlier you have sharpened your tools now, as it relates to working with investors… What are some other types of challenges that you’ve come across with investors in a solution(s) to those challenges?

Sam Sharp: Sure. To give you a few examples… So right now — again, keep in mind, most of my focus is how we can use cheap money, and that being generally a few conventional methods of financing. Conventional financing has restrictions on how many properties you can have financed. You can only have up to ten properties using conventional financing, and after that you have to start looking for other avenues there.

Joe Fairless: How are you defining conventional financing?

Sam Sharp: Conventional financing is anything that’s gonna be following through the warranted guidelines through Fannie Mae and Freddie Mac, and in one case being FHA for one of those loans… But it’s anything outside of a hard money loan, commercial lender, portfolio product… Just basically defining it as conforming loan limits, conforming guidelines, adhering to the regulations that are dictated by Fannie Mae and Freddie Mac.

Joe Fairless: Got it. So it’s limited to ten properties for that conventional financing. Okay.

Sam Sharp: Yeah, and then the reason why that’s a benefit is because it’s cheaper. You’re gonna get a better interest rate, you’re gonna get 30-year fixed money. A lot of people don’t realize when they get into investing that most of your financing outlets are not going to be these long-term fixed products. There are some great products that are coming about in the marketplace, but they’re generally gonna be at a higher interest rate, so the best way to get a more stable return on your investment and to have that set ROI is going to be coming from working with this type of money. So when someone gets to ten properties, now they have to start looking for less conventional methods, which can be more expensive.

Well, what I’ve done to kind of sharpen the tools is that we’ve gone through now and we’re able to identify that these are — what defines those ten properties are gonna be conventional… Anything that’s financed on a residential property. Commercial property doesn’t count, so if you have a commercial loan, it’s not gonna go towards that limit of ten properties, but as you get through, once you have ten residential properties, we can actually move forward now and I can connect them with commercial loans that will allow them to blanket one loan over all ten properties, effectively financing that into one commercial loan. Now they get to start all over with that ten count.

So it was a way that I was able to work around and show like “Hey, you know what? You’re not locked in. We can improve your situation”, and that’s been really beneficial, because people are able to buy more properties now for cheaper money. That was one way, something that we’ve gone through and made that adjustment…

Another thing that would be relevant staying in that line – as I’ve mentioned before, a lot of these plans of action will be based off of the buyer living in the property. We’re still not even addressing the straightforward 25% down, because with a  multi-unit with conventional financing, you generally have to have 25% down once you’re no longer gonna live in the property.

Well, what we look to do now is we’ve looked to form these partnerships and synergies with other investors that have clients who will go through and buy a multi-unit and they’ll look to put 5% down… Well, they have family members and other people who now wanna do the same thing, but they don’t have the capital. So they form partnerships with them, which is absolutely 100% legal, in which case they’re able to contribute the capital to where now their family or friends can go through and they can purchase this property, and they can live in that property. So now they can take advantage of a 5% down program again.

Now, in this case, in this instrument you’ve got someone who’s able to go through and leverage that investment. They’ve now figured an investment strategy where they’re helping other people benefit and follow that path, but they’re also able to hold on to ownership in those other properties. Their investing capital, they can have whatever investment agreements that they want with those partners, and they’re able to branch out and basically leverage their cash even further. So that’s another example of something I’ve done to kind of sharpen those tools in the shed, if you fill. A real play on my last name… [laughter]

Joe Fairless: For the ten properties that we then roll into a commercial loan, we then can start over at zero for conventional financing, because we don’t have any conventional financing – real quick, that’s true, correct?

Sam Sharp: Yes, that’s true.

Joe Fairless: Okay, cool. So I think it’s important for us to talk about the terms that are typical on that commercial loan, so that when we as investors are underwriting our deals and we plan to eventually do a commercial loan, we’re underwriting to those terms to make sure the deal works, not necessarily the original conventional financing terms, because we’re gonna end with that commercial loan… So what are the typical terms of that commercial loan?

Sam Sharp: These are expanding right now. I have partnerships with other banks that handle the commercial financing. I don’t actually lend commercial financing at all, I only handle residential financing because it’s what I’ve experienced to be my focus and it’s the best way that I can excel at that… But the partnerships I’ve formed with some of the commercial lenders – these will follow a variable type of programs. Some of them actually [unintelligible [00:15:32].23] fixed money that will go through, but as a  lot of people may or may not be aware, commercial loans are more about (just as you said) the deal. This is something that’s pretty common that you’ll hear in the investor space – it’s the deal and what the deal looks like… Whereas conventional financing, to that matter, is based off of the personal guarantee and qualifications of an individual; well, commercial loans are based off of the performance of the deal itself.

Of course, looking through this, the idea is that if people are holding these properties long-term, they’re gonna wanna see a certain return on their investment from what they’re looking at, and hopefully they’re getting to a point where they have positive cashflow and they’re looking at something where that deal makes sense. So we look to make sure that our clients are getting involved — basically as they’re building the building blocks towards amassing those ten properties, we’re making sure that they’re in a position where those deals make sense, not only from a residential perspective, but from a commercial perspective, showing that outside of the personal guarantee for the person, that the deal makes sense from an equity position.

Keep in mind, for some people to amass ten properties can take quite some time, so they do see  a greater appreciation through that property, but it also can be a matter of what type of deal they got on it when they invested from the beginning.

A lot of people – you’ve probably heard, I’m sure, and you maybe even said – you make money when you buy, not when you sell… So if someone got in a position where they got a good price on a property, there’s appreciation and whatnot, that’s gonna help lead to better improvements. But then further from that will be the cashflow on the property. So we’ll look to make sure that they’re structuring their investments to stay in line from a cashflow or as a return on their investment, as well as appreciation on the property and paying down the equity on that property, so that way when they blanket this together with the commercial investor, the commercial investor can look at all ten properties — and keep in mind, you can even have one of those properties that maybe doesn’t have a lot of equity; maybe it’s not even positive cashflow. But when you look at this as a portfolio and you look at all ten loans, they’re gonna say “Okay, well based on the group value, there’s this amount of equity, there’s this amount of net positive cashflow that’s coming out of it.” So we’ll structure it with them to make sure that that makes sense.

Joe Fairless: And noted that you focus on 1-4 units, residential property, so you don’t do the commercial loans but you partner with groups who do, but just based on your knowledge of the commercial loans, the typical framework for terms – what are they?

Sam Sharp: In the past it’s been more common that they’re gonna be five-year balloons; a lot of them are 20-year amortization 5-year balloons. Just recently I’ve formed some partnerships with some lending institutions that are offering fixed money, and they’re actually even looking to go into 20 and 30-year fixed terms. Interest rates are generally gonna be a  little bit higher than what you see — if you go for the long-term fixed, the last structure I looked at was getting into them at sixes, which is still very cheap… But outside of that, a lot of times you’re gonna find money (from what I’ve seen) in the mid 5% range on the 5-year balloon, 20-year amortization… But that landscape is changing, as well… So I dare say too much, because it may be different by the time we even end this podcast.

Joe Fairless: Right, I hear you. What you’ve just mentioned is really helpful just to help set the framework for how we think about the loan package that we will get once we achieve ten properties… Or if we have ten properties now, the type of options that are available to us.

Sam Sharp: I think a better showcase is the attractiveness of the conventional loan package.

Joe Fairless: Sure. [laughs]

Sam Sharp: When you start to look at the normal structure… Basically, when you see that the money is cheaper, it’s like “Okay, well how do we  get the cheaper money first?”

Joe Fairless: Oh yeah, absolutely. I love your approach of focusing on how to use the cheap money, which is conventional financing as much as possible. That certainly is key for 1-4 unit investors.

What’s a challenge with a borrower that you could not overcome and you could not work with him/her because of it?

Sam Sharp: Qualifying ratios… Unfortunately, with conventional residential financing we are still using a borrower as a personal guarantor, and we’re going to look at what we call the abilities to repay. We may be in a position where someone just doesn’t make enough money, or the property — combined ratios with how much cash is generated from the cost of the property, as well as that borrower’s income is not enough to qualify. That’s a problem.

Another unfortunate problem that we do run into – the credit requirements, and this is important to note… When you’re dealing with conventional financing, once you get above and you start getting into anywhere between 4 and 6 properties or more, you’re gonna need to have at least a 720 credit score. That’s a huge restriction.

Now, getting those up to first four properties, you still wanna have conventional terms and you still need to have fairly decent credit, so I ran into a lot of clients who, based off their entrepreneurial spirit, they’ve gotten themselves in situations where their credit is just not as good as they’d liked, and that can always a bit of a deal.

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

Sam Sharp: Get started right away. [laughs] I think the best real estate advice — if I had to look at that, I would say surround yourself with like-minded people who have found success in these industries. Never turn away from the opinions that are given freely. I think that even though a lot of us are drawn towards the more successful people and the more successful mindsets, when it comes to any industry, I think that there’s something that you can learn from anyone… Because you’ll never know when someone who has a tremendous success in any of these industries is just getting started… And when you’re having that access and free access to their opinions – that may be very valuable. So keep your ears open, surround yourself with people who are like-minded, and I hate to say it, but don’t judge a book by its cover. Give everyone an opportunity to see what they have to say, and make sure you’re listening.

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

Sam Sharp: Oh no, I don’t know what it is. I’m not sure…

Joe Fairless: [laughs] You’re totally ready. First though, a quick word from our Best Ever partners.

Break: [00:21:43].05] to [00:22:25].12]

Joe Fairless: Okay, best ever book you’ve read?

Sam Sharp: Best ever book I read? Millionaire Agent, Gary Keller.

Joe Fairless: Best ever deal you’ve done?

Sam Sharp: Best ever deal I did was for a client, she was a veteran; it was one of the smallest loans I’ve ever closed, and she broke into tears at the closing table because she was truly that happy that she bought her home. It was a hallmark moment, but I’ve gotta tell you, it almost gets me choked up right now even thinking about it. You could tell she was that happy and that felt amazing.

Joe Fairless: That’s great. What’s a mistake you’ve made on a transaction, either as an investor or in your role as a lender?

Sam Sharp: I can tell you firstly one of the mistakes I made as an investor was purchasing a property and moving on a shortsale assuming that the deal was strong enough and taking the advice without doing the research. It didn’t come out to be sour, but it wasn’t as sweet as I thought, and I think that was the biggest mistake that I ever made, and it was also the best mistake I ever made, because it allowed me to never repeat that.

Joe Fairless: What specific aspect of the deal wasn’t up to par?

Sam Sharp: I could have got a better price. The agent I was working with at the time – I took their word for the value and where it was at, because it was a shortsale and people assume that you’re getting a great deal as a shortsale unless you’re getting it for less than it’s worth.

I got my hands in so many different cookie jars right now that I didn’t take the time until we were going through the process, the shortsale was approved and I got the appraisal, and I got the appraisal, and it appraised at the purchase price. I looked at it, I call the appraiser and said “I know this is for lending purposes, but what’s it really worth?” and he said “Well, that’s about what it’s worth.” I wanted to be that guy who got the shortsale and had $100,000 in equity out of the gate, but that wasn’t the way it works.

Joe Fairless: And shortsales usually aren’t quick, either… You probably waited on that for a little while.

Sam Sharp: Yeah, I was like seven months into it. Maybe that’s not the worst thing I’ve ever done, but it comes to mind.

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

Sam Sharp: I find the best way to give back is trying to share — as I mentioned earlier, I listen to what people have to say, and share my opinion. I like to talk, I love people and I love interacting with people, and the best way that I can give back is just trying to be very open and transparent and to be straightforward and talk to people as much as they wanna listen and treat everyone equally. Don’t treat someone based on what benefit you think you can get from that conversation; treat someone because you’re actually interested in talking to them, and if they’re actually interested in what you have to say, then give them that respect and share with them.

Joe Fairless: On that note, how can the Best Ever listeners get in touch with you and learn more about what you’re doing?

Sam Sharp: You can feel free to call or e-mail me at any time. You can reach me directly at 312-217-4030, or you can feel free to e-mail me at ssharp@rate.com.

Joe Fairless: Sam, thanks again for being on the show. One of the main takeaways I got is you’re focused on how to use cheap money, and cheap money is defined as conventional financing, so really your focus is how do you get your clients in conventional financing as much as possible.

One challenge is once we reach ten properties, then we are no longer able to do that, so the solution that you discussed is rolling into a commercial loan, and now you’re back to zero conventional finance properties, and then you can continue to build from there.

The key is for us to have some foresight and know what type of terms we will get with that commercial loan, that way we can underwrite our residential acquisitions according to the terms of the commercial loan and make sure the numbers work there… Because if they work there, they certainly work with the conventional financing.

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

Sam Sharp: Thank you for having me.

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