JF2399: Using Kindness And Discipline To Manage Life And Business With Cornelius Camp #SkillsetSunday

JF2399: Using Kindness And Discipline To Manage Life And Business With Cornelius Camp #SkillsetSunday

Cornelius was a podcast guest five years ago when he just started his journey as a realtor. Since then, he has worked with several brokerages. He also works as a school counselor full-time. Over the years, Cornelius has gained plenty of experience in time management and customer service. In this episode of #SkillsetSunday, he’ll be sharing his knowledge as well as some tips to manage a busy life efficiently.  

Cornelius Camp Real Estate Background: 

  • School counselor for Chicago Public Schools and a real estate agent
  • 5 years of real estate experience
  • Previous guest: JF220
  • Based in Chicago, IL
  • Say hi to him at: www.CluelessRealtor.com 

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Best Ever Tweet:

“Kindness always wins no matter in business or in personal life” – Cornelius Camp.


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners, and welcome to the Best Real Estate Investing Advice Ever Show. I’m Theo Hicks and today, we’ll be speaking with Cornelius Camp. Cornelius, how are you doing today?

Cornelius Camp: I’m doing well, Theo. How are you doing?

Theo Hicks: I’m doing well as well. Thanks for asking and thank you for joining us again. So Cornelius was back on the podcast way, way back in the day, episode 220, all the way back in 2015.

Cornelius Camp: Correct. Yeah.

Theo Hicks: So he’s been up to a lot since then, so I look forward to catching up and also focusing on the skill for today, because today is Skill Set Sunday, so we’ll focus on a specific skill that Cornelius has that you can apply to your business. And the goal is to talk about actually two skills – customer service and time management. Before we get into that, a little bit about Cornelius. He is a school counselor for Chicago Public Schools and a real estate agent, hence, time management as a skill.

Cornelius Camp: Yeah.

Theo Hicks: He has 5 years of experience. As I mentioned, previous guest on Episode 220. He is based in Chicago and his website is http://cluelessrealtor.com/.

So Cornelius, before we jump into those two skills, do you mind catching us up on what you’ve been up to since you and Joe spoke about 5 years ago?

Cornelius Camp: Sure. So like you mentioned, that was 5 years ago and I was actually just getting started into real estate when I got an email from Joe and decided to be on his podcast, where he invited me to be on his podcast. So I’ve been practicing real estate along with being a school counselor for Chicago Public Schools. In real estate, I probably have been in three brokerages since then. I’m really happy with the brokerage that I’m at right now, Fulton Grace. I’ve partnered with the Louis Real Estate Group, one of the top producing groups here in the city of Chicago. So I’ve learned a lot. It’s been good. I’ve learned a lot.

Theo Hicks: Good. So the two skills that I mentioned we wanted to talk about is customer service and time management. And I’m just going to change it up on you, I’m going to do time management first. So you are a school counselor, which is a full-time job. I have an aunt who’s a school counselor… So you have a full-time job, but then you’re also a real estate agent on the side. Obviously, that’s going to take a lot of time management skills. I think you also mentioned that you said to us you’re married, you have a child, I’m sure there’s other things you enjoy to do as well… So time management is super important to make sure that you’re able to invest enough time in each of the different areas.

But first, before you go into your tactics for doing that, maybe just quickly explain how much time you’re spending in each of these; maybe give us like a typical school year week, Monday through Sunday, how much time is spent as a school counselor, and how much time is spent as an agent? And then when are you doing these things?

Cornelius Camp: Okay, so during the weekday, Monday through Friday, my school counseling hours, I usually arrive at school by around [7:45], or in this case, I log on at about [7:45], because we’re doing remote learning now. And usually the school day ends at about three.

I get a 45-minute lunch. So during that time, I’m usually eating at my desk, so that I can eat and also check emails, check post notifications on Facebook, Instagram, and just respond to the audience or just respond to any clients that I might have.

Once three o’clock ends, I usually will give myself about an hour and a half, maybe two hours… And that’s because depending on where the actual showing is – I usually have showings, I should have said that earlier; I usually will have showings with my clients. And depending on where the showing is, I’ll give myself about an hour and a half to get there. So I usually would do about 2-3 showings per night, and if I start at [4:35], that runs me till about [6:30] or [7:00], 2 or 3 showings. And then I can get back home, spend a little bit of time with my son, we have a family dinner, and then it’s time for him to go to bed.And then after that, once he’s in the bed, I’m usually up checking emails, responding to emails, trying to be creative with content and post content, and schedule out content. And then also trying to set up other showings for different clients.

Theo Hicks: What time are you usually in bed by?

Cornelius Camp: Usually about [10:30], because I usually have to wake up at about [4:30]. I’ve got to get prepared, because he doesn’t have an alarm clock; he wakes up some days at [6:00] o’clock, and some days he’ll wake up at [6:45], so it’s an adventure… And we have our little dog, so I have to go and walk her out as well. So I’ll take her outside and then I just stay up. That’s how I start my day; I have a little meditation period, a little time to read, a little time to focus, pray a little bit, and then I get ready for of him basically, yeah.

Theo Hicks: You’re kind of working all day from [4:30] until [10:30]. Besides the [unintelligible [00:08:00].01] that, how do you have the energy to do all of this?

Cornelius Camp: Well, I used to be a personal trainer, so I have knowledge as far as what type of foods you need to intake and what’s going to make you sluggish, and what might keep you up and peppy, I guess, so to speak. So I have quite a few sandwiches, protein bars here and there, I may have a shake in the morning. I’ll try not to have a very, very heavy lunch, nd then I just try to do things as far as what will keep me awake. I don’t really do much caffeine, but I do the decaffeinated green tea. So that keeps me going throughout the day. And water.

Theo Hicks: Let’s talk about the diet, because that’s actually really important, and we don’t talk about that a lot on here. As you mentioned, you’re a personal trainer, and the types of foods you eat, when you eat, how much you eat will determine the level of energy you have. And obviously, you have a lot of energy and you can get up at [4:30] in the morning and work until [10:30] at night, and more or less be on your game the whole time… So you kind of went over what you eat, but maybe be more specific. So you wake up at [4:30] AM, and you go to bed at [10:30]. What’s your diet look like in between there?

Cornelius Camp: I guess maybe around six o’clock is when I have breakfast. But that’s usually something kind of light, like maybe a cereal bar or—the past month or so, I’ve kind of gotten into a cup of green tea and toast with almond butter. So that’s usually how I kind of start the morning. It is real simple, it’s good, it’s healthy for you and I don’t have to put too much thought in it.

And I try to eat every 2-3 hours. So after that, I might have a bowl of oatmeal, after that maybe some yogurt and then usually it’s around lunchtime, so that includes maybe a sandwich or some type of chicken breast, or some type of carb or vegetable. I struggle with the vegetable part because I’ve never liked vegetables… So that’s where the ninja comes in. So the ninja comes in later on in the day.

And then usually I try to get something in, no matter what it is. Maybe a protein bar of some sort, once I get out of school and then going into the transition part of showing with my clients, because that’s when I really start lagging; it starts catching up to me around that time. So I may grab another cup of tea, a protein bar to give me a little boost of energy. Like I said, hopefully I can get home by [6:30] and [7:00]. My wife does usually cook a good meal for us, and I try not to eat past that time.

Every now and then I might get a little hungry so I may have some type of fruit, or like I mentioned earlier, the ninja part… I may get a cup of green smoothie or strawberries, bananas and mango. I usually like that combination. Get a little honey in it. Yeah, basically, everyday, at least Monday through Friday.

Theo Hicks: Is there any other tactics that you have besides the diet? And I guess all we’re talking about is a diet and your schedule, so maybe walk us through any other advice you have for people who are trying to balance a full-time job and working in real estate.

Cornelius Camp: Right now, because we’re working from home, my son’s daycare is very close to our house, so I drop him off at daycare. And then I actually have a little bit of time before I have to clock in at school to get a workout on. I’m kind of staying away from the whole gym area, because I have an underlying medical condition or compromised immune system. So I basically just run. I have a running background, I ran track in college, one state and the 100-meter dash in Georgia… So I have a running background, my dad runs marathons, I do half marathons. My goal is to do a marathon, but I haven’t gotten there yet. So yeah, I usually get a workout in between [7:00] and [7:45]. And then that gives me enough time to get home, get situated, don’t look so flustered, because I’m sweating and everything when I log on with the kids and in their classroom and stuff.

But any advice though – at least try to take 30 minutes. 30 minutes a day, even if you go for a walk, get some fresh air and get out of the house, get out of the office, just take 30 minutes, do some type of exercise. And if you can’t get outside, then I recommend doing sit-ups, push-ups and squats, and you can use your body weight and you can still get a good workout in.

Theo Hicks: Okay, let’s transition into the other skill, which would be customer service. So I will give you the floor. I know in your email you sent us that customer service is key to any business. So then walk us through why customer service is important and then maybe some of the things that you do to set yourself apart when it comes to customer service, compared to other agency or work with or seen out there.

Cornelius Camp: So I’ve been in the service industry ever since I’ve been working, since 15 years old. And that is a passion of mine. I like helping people, I like seeing people achieve their dreams, I like seeing people succeed. So that’s always been a passion of mine, is to help and serve.

But I got the whole excellent customer service, actually from my wife. She used to work at Verizon, and Verizon is the epitome of customer service. Any problem that they encounter, they’re always taught to keep a positive attitude. They’re always taught to not get frustrated, always taught to display empathy and so forth. So I kind of had a good sense of customer service. But when I met her and then she started working with Verizon, I started learning some tactics from her—not tactics necessarily, but just how to write emails, how to speak with people over the phone, how to speak with people one on one; that helps me out with when I have listing presentation, and so forth.

So that’s basically where it comes from. And then I am constantly now, because my wife introduced me to Gary Vee, I’m constantly watching him and listening to him and seeing his posts, and he’s always talking about kindness. And one thing that I often think about that he said was that “kindness always wins, no matter in business or in personal life. It always wins.” And in my part, as far as real estate is concerned, I’ve found that kindness wins, because it’s good that my clients might get frustrated at the whole buying process or the listing process, so kindness can kind of calm the situation down.

As far as working with other agents, I’ve known a couple of agents that will say to me, like, “Man, so glad that you put in an offer. I really didn’t want to work with this other agent,” or something like that. And then also when you go to refer your clients to a contract or to an inspector or to a lawyer or a lender, having those relationships can take you a long way and it can make you look a lot more professional, because you can say in your listing presentation, “Hey, I have a team. When you decide to place an offer or you decide to list your house, I have this lawyer,  I have this lender, I have this contractor if you need anything fixed on a house,” or whatever, and they’re very well recommended. And the customer service comes from people wanting to work with you, because they know you’re a good guy and they don’t mind referring you to another person as well.

Theo Hicks: I love the advice, especially the part on the kindness. Can you elaborate a little bit more on some of the other tactics that you learned from your wife, more specifically, those communication skills? So you said, how to write emails, how to speak with people over the phone, how to speak with people one on one in person; maybe for each of those quickly walk through how our customer service can shine through in those moments.

Cornelius Camp: So I guess when it comes to writing emails, when I first started working for CPS, that’s when I really had to do way more emails than I’ve ever had to do before in my life. Even though I was the kind person when you talked to me one on one, individual, when it came to emails, I was just blunt and straight to the point. It was just one or two sentences, three sentences or something like that. And talking with her and speaking with her, I’ve noticed that in my emails, when I either email my principal or I email students, I try to start off, “Hey, how are you doing? I’m doing well, I hope that everything is going good.” And then whatever it is, I’m emailing you about, “Stay safe, be safe.” And I try to break it down, instead of having them try to figure it out, I guess, lack of better term dummy-it down… So it can be made as easy as possible for them, whoever it is that I’m writing to.

For instance, just a few minutes ago, I was emailing one of the students about a particular assignment that they needed to do, and I was like, “Okay, you have not done this; this is where you need to go,” gave them the website. “This is what you need to do.” I had a screenshot of where they need to go on the screen, “…and here is the information that you need”, and I had the information laid out. So it was basically, you just need to look at the email and then you figure out the problem. That’s what the whole email thing came into place.

As far as talking one on one with people, she taught me how to be empathetic. And that really helps, because the way that you start off a conversation is to be empathetic. And then that helps build the rapport that you need, whether you’re dealing with a client or you’re dealing with a professional service person, a contractor, a lender or a lawyer, anything like that.

So if you set that ground that you have empathy for them and you know exactly what they’re going through, it kind of eases the tension maybe, that might be in the conversation. And then also, it allows you to build that rapport. And whenever in life that you’re dealing with someone, especially in business is concerned, you really have to have a rapport, and I think a rapport is so critical.

Theo Hicks: What does that empathy look like? Maybe give us an example.

Cornelius Camp: Okay, so here’s the example that my wife gave me, and she often uses this. When she was working at Verizon, we were dating, but we were not married. And she will get a phone call from someone and it will be kind of irate and saying that, “Oh, my husband is doing this, and I’m getting a divorce, and all this other stuff. And I’ve got these four kids and they’re driving me up the wall and everything.” Back then, again, we weren’t married, my wife didn’t have any kids, but she would empathize with the person. “Oh, my God, I tell you, I’m going through a divorce right now. It can be so hard, but you’ll get through it.” As far as the kids is concerned, again, she had no kids, but “I totally understand you. Kids, they drive me crazy. They’re pulling me from each and every angle. And I have to do this, and I’ve got to tuck this one into bed. And I’ve got to go over the homework lesson with this one.” Just being able to empathize with that person, and even though it was a made-up situation, she genuinely built a rapport and understood and made the customer on the other end – they’re able now to walk their way through whatever problem they were having.

Theo Hicks: I love that example. Thank you for sharing that. So Cornelius, is there anything else that you want to mention about either customer service, time management, before we sign off? And also where we learn more about what you’ve got going on and anything else you’re working on.

Cornelius Camp: So I wanted to mention about the time management piece, and I think one of the things that’s really critical, no matter what business that you’re in, especially in real estate, is set a schedule. A lot of people will ask me, “How do you work full-time and then also have a thriving real estate business?”

Really, it’s all about setting a schedule. If you set a schedule and you say that, “Between one and two, that I have lunch, I’m going to eat my lunch at my desk. And then I’m going to respond to emails,” well, then do it between that time period.

The same as if I’m not going to respond to emails or be on social media after [7:00] to [8:30] so I can spend time with my son or spend time with my family, set that specific time and then at seven o’clock, shut the social media down, shut the phones down. Don’t check emails, don’t be trying to spend time with your son or whatever and your family time and then you’re constantly checking emails. Set that timeframe and stick with it. The same with working out. 30 minutes, 12 to [12:30]. If it is nice outside, go for a walk during your lunch period. So that’s what I wanted, to express a little bit more about the time management. I think having a schedule, especially if you’re really, really busy, I think that’s critical to keep your sanity.

Theo Hicks: And then your phone, you’ve got an alert set up, or is it just written down, or it’s just in your mind?

Cornelius Camp: I have a couple of alerts on my phone, but my wife created a daily checklist, so it always has Monday through Sunday, and you can write on there and it has these little goals or whatever that you’d have to get done. Some of them are daily, and then some of them you can do every other day, or some of them might be weekly. And then whatever day it is, if you’ve completed that task, you check it off. You may have meetings, or if you have showings, you can put those as notifications in your phone. And then also, I recommend that you get a calendar, write it out.

As a counselor, I have to have a calendar. Because if I see Jonathan on Monday, I’m probably not going to see Jonathan on Tuesday. So I need to know who am I going to see on Tuesday and who am I going to see on Wednesday, so that way everybody can get the amount of appropriate services that they need.

Theo Hicks:  Sure. Thanks for sharing that final point, and thanks for sharing all the points. So Cornelius, thanks for joining us. Again, the focus today was on time management. So you went into a very detailed breakdown of how you spend your day, and then also what you eat, which again, may not seem super relevant, but again, you’re a personal trainer. I think most people understand that the types of foods that you ingest, the amounts, the timing is pretty important and has a pretty big impact on how you feel. That’s pretty big if you’re trying to balance all these different things and maximize your time, doing the details on that.

And then you talked about the importance of working out as well. And then overall, just having a schedule. We talked about customer service and how it is a passion of yours. So I guess I’m not saying it’s easy, but it’s easier, since you’re already passionate about it and don’t need to work on caring for other people; you’ve already got that going for you.

You mentioned some tactics for communicating, and then you also talked about kindness and how that can calm situations when you’re speaking with clients.

And another thing you talked about was for specifically as an agent, when you’re working with clients, providing a good customer service would be providing them with all different contexts they would need – so a lawyer, a lender or contractor. Providing them with a full service, so that not only is it more helpful to them personally, but then the clients and then the contractors or lawyers and lenders are more likely to refer you to more business. So that’s specific to being a real estate agent, but you can think of that in whatever you’re doing, whether you’re an active investor, or some other role or professional. The same concept applies when it comes to customer service. And then maybe call up Verizon and see how they handle you and get some tips from them.

Cornelius Camp: Right.

Theo Hicks:  So Cornelius, thank you so much again for joining us. Again, his website is http://cluelessrealtor.com/. Best Ever listeners, as always, thank you for listening, have a best ever day and we’ll talk to you tomorrow.

Cornelius Camp: Thanks so much.

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JF2349: Single Family Or Multifamily With Lee Kiser #SituationSaturday

Lee Kiser was on a previous episode JF1694 so make sure to go listen to get his best ever advice on that episode. A little bit about Lee, he is a principal and managing broker of Kiser Group, and today he will be sharing with you which option you should focus on, single vs multifamily investing. 

Lee Kiser Real Estate Background:

  • Principle and Managing Broker of Kiser Group
  • Before starting Kiser Group, Lee was the top producing apartment broker in Chicago at his brokerage
  • Previous guest on JF1694
  • Based in Chicago, IL
  • Say hi to him at: www.kisergroup.com 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Going for single-family or multifamily will depend on your goals & what you are trying to accomplish” – Lee Kiser


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. And well first off, I hope you’re having a Best Ever weekend. Because today is Saturday, we’ve got a special segment, Situation Saturday. And here is the situation. You’re trying to decide between single-family or multifamily. What are you going to do? How do you decide if you’re going to start or continue with single-family or do multi-family? And with us today to talk us through a thought process for how to decide between the two, Lee Kiser. How are you doing Lee?

Lee Kiser: I’m doing well. How are you, Joe?

Joe Fairless: I’m glad to hear that, and I’m doing well as well. A little refresher about Lee. He’s been on the show, Episode 1694. You can go listen to his Best Ever advice on that episode. So we’re going to stay focused on the topic at hand today. A little bit about Lee. He’s a principal and managing broker of the Kiser Group. Before starting Kiser Group he was a top producing apartment broker in Chicago at his brokerage. He’s still based in Chicago. So let’s talk about it… Single-family versus multi-family. What are your thoughts?

Lee Kiser: Well, my thoughts are it really depends on what your goals are with investing and how much you want this to be sideline versus primary business. And pros and cons… Pretty much, the pros for doing single-family are the cons for doing multi-family, and vice versa, in my opinion.

Joe Fairless: Like what? What would be some pros for single-family?

Lee Kiser: Well, how much cash do you need to make an investment in a rental property? And not always, but most typically, single-family homes are less expensive and usually have higher leverage available, meaning you get a higher loan relative to your acquisition price than our apartment buildings in the same area markets. And I’m not talking about a two flat versus a single-family, I’m talking about a multi-unit, a six flat or larger versus a single-family home. And if you’re buying it for investment reasons and renting it out, a single-family home, you can most likely get 80% leverage on that from a lender. Depending on the local rules with lenders, you may be able to leverage it higher than that… Which means, if you can get that loan for it, then how much cash do you need? How much equity do you need to use to buy it?

Versus an apartment building – right now, typically, the highest you can get is 80% leverage. Right now with COVID and recent changes, it’s really 75%. And if you’re a newer investor, you’re probably going to suffer on your loan-to-value there some more. So you probably look at 70% loan-to-value, which means you’ll need 30% of your acquisition price for the cash to buy the deal. And typically, that’s just simply a lot more cash when you look at the price of the building, and then the leverage available. A lot more cash that you would need to buy an apartment building. So a pro in my mind for single-family is the con for multifamily, is how much cash you need to buy an investment property.

Joe Fairless: Okay. And I don’t think it’s any secret that you and I are both focused on commercial real estate. So we do have a dog in the fight. And it is tough to be unbiased… But I’m going to do my best to be unbiased, because I have invested in single-family homes, and I assume you have as well. So let’s just keep on the pros section of single-family homes. You mentioned less cash. You mentioned higher leverage. What about better discounts? Because you’ve got less sophistication from the seller standpoint, than larger properties.

Lee Kiser: Yeah. To me Joe, the discounts all have to do with supply and demand. And for the last decade, multi-family has been in pretty high investor demand; there’s more demand than supply. The big econ 101, duh… That means it’s going to be a higher price, and therefore a lower return. So I would say relative to the single-family market, yeah, that’s another pro for investing in single-family homes, is that there’s more of an equilibrium between supply and demand, which helps keep valuations more in check, theoretically, meaning you could get a better return sometimes from a single-family home investment. But I think that’s isolating that particular issue in a vacuum… Because I think when you look at some of the pros of multifamily, which we haven’t gotten to yet, then it begins to mitigate that return as a potential pro for single-family… But the pro for single-family is – yeah, there’s generally not as much demand for it as multi-family. So relative to valuation, it’s probably cheaper.

Joe Fairless: What about liquidity? I no longer own single-family homes, besides for personal reasons; but as from an investment property standpoint, I don’t own any single-family home investment properties. I sold them all in October 2019. And when I decided to sell them, they were sold in about three months. There was only three of them, but it was quick, it was easy. I worked with a real estate agent who happened to be my sister, and sold them; liquid, nice, done, moving on. Apartment buildings, if I want to quickly sell three apartment buildings I’m a general partner on, it’s more complicated. So what about liquidity? Would that be a pro on single-family homes?

Lee Kiser: I think liquidity, if you’re looking at a single asset, I would agree. Or if you have a portfolio of assets, but you’re marketing them individually when you’re exiting, then yeah. I think – back to that old supply and demand topic we just talked about previously, you’ll be competing with a lot of other single-family homes on the market, but there’s also a large demand. And it’s simply making the right matches. I think if you own a large enough portfolio of single-family homes, and you’re only interested in exiting as a portfolio, I think you’ll find it may be more difficult than exiting an apartment building.

Joe Fairless: That makes a lot of sense. What would you say that number is, of homes in a portfolio where then it’s like you’re starting to actually to be harder to sell than an apartment building because of all these homes that you’ve got?

Lee Kiser: Sounds like you’re asking me what a con is Joe, and I just want to make sure I’m following the lead, correct?

Joe Fairless: Oh, fair enough. You got me.

Lee Kiser: So I wish it were that easy to say, “Okay, here’s the threshold. And if you have more than five, it’s going to be more difficult.” Now, one of the con is management. And to understand the con, you have to look at the pro. So in multi-family, you have several units under one roof, it’s all one location, and you have multiple tenants. And that is what is attractive to an investor, and that’s also what makes that property easier to manage. You have one mechanical system, you have one person who’s going to do your maintenance and repair, one location to send them. It’s simply a more efficient management. Contrary, if you look at a portfolio of single-family homes, then the geographic concentration of those would be very important if they were a grouping, and you’re looking at a portfolio and an investor to take out everything.

When it’s scattered-site, meaning over a large geographic distribution, then I think it is a different equation. If you had five single-family homes you’re trying to sell and they’re in the same county, but they’re in five different towns or five different areas, it’s a very different equation than if you had 10 single-family homes in a three-block radius. And I think that’s more important with your question. So it’s not really a number, but there are other factors involved.

Joe Fairless: That is such a good point. I hadn’t thought of it in the way that you described, because basically what we’re saying –or what you’re saying, and I completely agree– is if you do single-family homes, here are some benefits for doing so, but don’t have too much success if you want to exit out of this portfolio in a way that attracts a lot of buyers… Unless you want to sell them individually off. Or unless you’re concentrating in a specific area. It’s almost like you can acquire and do well, but don’t do too well unless you follow this specific model of buying.

Lee Kiser:  Yeah, and management. That’s something touched on briefly here. In some ways, the management of single-family is easier. So I guess we’ll consider that part a pro… Which is usually you can structure leases that the majority of the upkeep can be put on the tenant. So mowing yards, making minor repairs around the house. So in some ways that management can be shifted to the tenant. But in many ways, it cannot be. Major systems — a gas forced air furnace, or a boiler if it’s an older home, that’s not something that the tenant is going to accept responsibility for, because it’s a capital expenditure that’s going to be a landlord’s expense. And when you think about it, you have one heating plant for a 30 unit building, for 30 houses you have 30 heating plants. And usually, it’s not a system replacement. Usually, it’s a repair item, but that’s still beyond the scope of the tenant or the responsibility of the tenant, so you’re having to send someone in. And it’s simply probabilities. What is the probability that you’re going to have an issue with a heating plant during the winter? What is it? A 10% probability? So you’ll have a 10% probability that your boiler at your apartment building is going to have an issue. But if you have 30 houses, it’s statistically proven, “Okay, you’re gonna have three houses that have a problem.” So it’s budgeting for that and then it’s managing how that gets repaired, who is set. So again, those are things to consider,

Joe Fairless: Before we move into the pro category for apartments, any other pros that you can think of as it relates to homes?

Lee Kiser: No, and I guess that’s why I do what I do for a living.

Joe Fairless: [laughter] Well, you started off the conversation by saying, “Do you want this to be a sideline thing or a primary business?” Which goes to or alludes to the point of a pro for homes is that it can easily be a sideline thing.

Lee Kiser: Yes. So that is a pro. It’s much easier to do on the side, and for some of the reasons we mentioned – some of the management can be transferred, some of the responsibilities can be transferred to the tenant, it’s cheaper usually to get into… So yes, it’s much more of a side business, and I guess that is indeed a pro.

I think another pro may be typically people who are able to buy an investment property kind of already established themselves to some degree, and statistically, higher probability that they actually live in a home. themselves. So I think perhaps it is an understanding of the tenants’ experience and how to run that home or market it, lease it, run the management because you’re more familiar with what that occupant might actually need, because you personally identify. So I guess maybe you call that [unintelligible [00:15:19].12] I guess that’s a pro as well,

Joe Fairless: I like that. You’re better set up for success because you’ve got first-hand experience, or you know others who have it. But most likely, you’ve got first-hand experience if you have lived in a home. Let’s talk about the pros for apartments, because – could you use that same logic to apply for apartment buildings if you have lived in apartments? Or does that not translate?

Lee Kiser: It doesn’t translate as well, because there’s so much going into renting an apartment building, that as a tenant, you’re never aware.

Joe Fairless: True that.

Lee Kiser: Yeah, apartment management can be very complex. And it really is a big thing. That sounds like a con. It’s not to me, because every market we participate in has an industry of third-party management companies for apartment buildings, and some very reputable companies, and if you can hire that service, where you’re probably not going to be able to hire it for a single-family home. So I would say that if that’s the question you’re asking versus me just going off on the pros that I have…

Joe Fairless: Yeah. That makes sense. What are some other pros?

Lee Kiser: We talked about cash needs… But the interesting thing – yes, you’ll need more cash to buy an apartment building. But it’s a whole lot easier to raise that capital from fellow investors for an apartment acquisition than it is for a single-family home. So going out and syndicating or raising that capital, if you have the right plan for the building is typically fairly easy, because there are a whole lot of people who don’t have the option of buying a building themselves, but they have enough cash that they want to invest in something, and their options are going to be very similar to yours – “I’m going to go buy an investment house, or I want to buy a building. If I can’t buy a building, who do I know who is?” It’s in my opinion a lot easier to raise that cash for multifamily acquisition.

Another thing that is really important is occupancy. And let’s flip the coin around and instead call it vacancy. So you own a single-family home and you rent it at a level that you know covers all of your expenses, and for one reason or another you lose your tenant. What is your vacancy rate? It’s 100% vacant. And until you can find a replacement tenant, as the investor, you shoulder the cost of the entire operation.

In a multi-unit building, certainly, occupancy is always a critical component of how you run the building and manage it. But when you inevitably have vacancies, it’s typically much easier to handle, because the costs are spread over multiple units versus just one. And you can actually have a percentage vacancy, and make your decisions on where rents need to be, and how you need to lower them, or how aggressive you can be based on how close to your income need your current revenue is. If you’re 10% vacant, but yet still completely covering all of your expenses, you may want to be aggressive on the rents on those vacant units when you’re marketing them to see where the market is and what the tolerance is for rent for that unit type.

Conversely, if you’re 10% vacant and you know that your second installment tax bill is coming up, you don’t have the right cash in the account right now, whatever, you may also decide, “Let me be less aggressive on those rents, let me lower them, let me get that filled.” But you’ve got that flexibility and it’s spread across a number of units. My main point is that losing a tenant does not affect you nearly the same way in a multi-unit building as it does in a single-family home.

Joe Fairless: And then I would also say a pro would be you make more money on apartment buildings relative to the amount of time that you put in, compared to being focused on single-family. So if I’m focused on single-family for five years, and I’m focused on multifamily for five years, I would be confident in saying that it is highly likely –assuming that both focuses are conservative and a value-add approach– that the multi-family investor is going to make a disproportionately greater amount of money than single-family home investors, because you’re dealing with higher dollar amounts, and cap rates, and being able to increase value through forced appreciation… Versus just some single-family approaches that some of you can add value through force appreciation, but you can’t do it at scale.

Lee Kiser: I think scale is the keyword, I was going to say. It’s an economy of scale question. And multifamily provides an immediate economy of scale. That’s the entire concept. Back to the boiler – am I going to heat one unit with this boiler? One home? Or am I going to heat 30? It’s almost the same size system. So there’s an automatic economy of scale. But you made an interesting comment, Joe, and that was that multi-family makes more money. And I think that’s a question of how you measure that. And by the way, I agree with you. Multi-family makes more money. It’s harder to get into for some of the reasons that we’ve described. But the reason people do it is because it’s more lucrative. But it also depends on how you measure that. And my favorite measure is cash on cash.

So yeah, people will talk about cap rates and they’ll talk about all kinds of ways to measure it. For me, it’s how much cash am I going to put into this investment, be it a home, or an apartment building, or a senior housing center? Any investment. How much cash am I going to have to tie up in this? And at the end of the day, after I’ve paid all of my expenses, and my mortgage, how much cash am I going to have left as profit? And what is the percentage of that cash against what I actually tied up to buy it? And I think when you run that analysis that you will see significantly higher cash on cash returns in multifamily than you do in single-family investments.

Joe Fairless: Anything else that we should talk about as it relates to pros for single-family homes or pros for apartments that we haven’t talked about before we wrap up?

Lee Kiser: Well, I guess this is a pro for single-family and it’s a warning for multifamily investing. The way you determine whether or not something is a good location. So a pro for single-family is you probably know the neighborhood, you probably know the schools, because you probably have some degree of experience with this yourself. And your criteria for deciding whether or not a house is a good investment, you probably have more intuitive knowledge about it. I think that’s a pro.

The con is you may not have that specific knowledge about a multi-family investment from a location standpoint, but you can’t approach it the same way. You need to learn how to determine whether a location is good for multi-family. And the criteria is not whether or not you would live there personally. It’s not an emotional thing. It’s access to public transportation, it’s access to employment, it’s the amenities that the building has relative to its price points, and it’s understanding the demographic of the location and the needs of apartment renters to determine whether or not that’s a good location. So I’d say it’s a con most people don’t start with that knowledge and they only see the investment through the lenses of whether or not they would personally live there, and the pro for single-family is, yeah, you probably have something in your experience silo that gives you an intuition about that location. That’s the only other thing that just came to mind.

Joe Fairless: This was a great conversation. It was great hearing your thoughts. How can the Best Ever listeners learn more about what you’re doing and how to get in touch with you and your company?

Lee Kiser:  Go to our website; everything that you would need to know is there and it’s easy to contact us through it. The name of the company is also my last name. People commonly misspell it. So it’s Kiser, not Kaiser, and the URL is kisergroup.com.

Joe Fairless: Lee, thanks for being on the show, talking to us about the pros of single-family home investing and the pros of apartment investing. I think we did a good job of being as objective as we could be… So I’m patting myself on the back and I’m giving you a virtual high five, because for two apartment investing people I think we did a good job of laying out the case for single-family homes too. I hope you have a Best Ever weekend and talk to you again soon.

Lee Kiser: Thanks for having me on again Joe.

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JF2296: Bad Start but Strong Finish With John Dessauer

John has a rich history as an entrepreneur and has owned many companies in various industries. John has transacted hundreds of deals in real estate in different sectors such as apartments, office buildings, retail, single-family homes, and condominiums all within his personal portfolio.

John Dessauer Real Estate Background:

  • Full-time entrepreneur 
  • Has over 22 years of real estate investing experience 
  • Portfolio consists of over 2 million sq ft. rentals/retail 
  • Based in Chicago, IL
  • Say hi to him at: www.johndessauer.com 
  • Best Ever Book: Spin selling

 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“The best benefit for having multiple companies is having multiple sources of income for when unfortunate events happen” – John Dessauer


TRANSCRIPTION

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

John Dessauer: I’m good, Theo. How are you?

Theo Hicks: I am well, thanks for asking. And thank you for joining us, looking forward to our conversation. John’s background – he’s a full-time entrepreneur and has over 22 years of real estate investing experience. His current portfolio is over two million square feet in rentals and retail. He is based in Chicago and you can say hi to him at his website, which is johndessauer.com. So John, do you mind telling us some more about your background and what you’re focused on today?

John Dessauer: Yeah. So thanks for the interview and the introduction. I guess my background started growing up here in Chicago, just outside now, but up until the point I left for college I had always grew up in apartment buildings, so I had a unique perspective of that business from the inside looking out, rather than — a lot of people that get involved in real estate investing, they learn it from the outside looking in.

So after I graduated from college and I got out into the workforce and realized that the corporate world wasn’t for me, I kind of went back to my roots and said “I liked it when the rent guy would come once a month and pick up that rent check.” That was something that I’ll never forget, around 10 years old I’d have that happen all the time. I was like “Ma, why is this guy here again?” “He’s here to collect the rent.” But yet I’d see my mom go to her nine to five, or nine to nine really, to make that rent check happen. So I never forgot that. 27 years ago, when I started this, I said “I want to be the rent guy. I love my mom, but I want to be the rent guy” at that point. So I started out about 20-some years ago, at 22, and I haven’t looked back since.

Theo Hicks: Perfect. So maybe walk us through how you started. You mentioned that you wanted to be a real estate investor since you were a kid. You said you went to school, and then came back to this area. Maybe walk us through how did you get into your first deal.

John Dessauer: So what was interesting about the whole thing was when I first thought about being a real estate investor, you don’t think about all the dynamics that are involved in actually doing it, from financing, to property management, and all the things that you’ve got to do. What you think about is the luxuries and the ton of money that you’re going to make, right? That may not happen, by the way, but that’s what you think about.

So my first deal was a duplex; it was a street that I was interested in buying real estate on, and lo and behold I was driving by one day and I see the realtor pounding the “for sale” sign in the front yard, and I thought “Hey, that’s something I would be interested in buying.” So I pulled over, talked to the real estate agent… And what was interesting about that first deal, which I made a terrible mistake on, by the way, is I was way over-leveraged on the deal, because I bought the thing with 80% bank financing, and at that time I was able to use 20% seller financing. So it presented a situation where I came to closing with zero money out of my pocket. So I thought “Man, I’m the next real estate mogul. I’m unstoppable now, if this is how every deal goes.” But what I realized pretty quickly within 30 to 45 days is I was over-leveraged. I not only had a mortgage, but I had the operational expenses of the duplex, and I had an empty unit on one of the units, and the other unit – the gentleman was paying about $300 in a $700 market. So I had all this money going out, but not a lot of money coming in.

So that was my first deal. I learned pretty quickly that really kind to understand the financial dynamics of the deal and how important that is, and even more importantly, just because you can buy a deal with no money down, or even buying it creatively – because there’s a lot of that around today – doesn’t mean you should. So those are my lessons there.

Theo Hicks: That was a great lesson. So let’s flash forward to now… So what’s your business model today?

John Dessauer: Yeah, good question. What’s interesting, I studied a lot of guys from the industrial revolution. I don’t know what it was, but Chicago was a town that had a lot of these guys in it; Pullman, and Marshall Field, and some of these other guys… But the guy that I drew a lot of interest in was not from Chicago, he’s from Pittsburgh, Andrew Carnegie. And what I realized about him was his original business was not steel, his original business was a telegraph business. And he started on the telegraph business and got to steel because they would put telegraph lines along railroads. So he got interested and started buying railroads so he could place his telegraph lines a little bit better and save money by doing that. And the biggest expense of a railroad is steel… And the rest was history.

So by no means am I saying I’m in Andrew Carnegie but it’s kind of the same thing in that all of my business today has been related to that initial business that I got into, which was real estate investing. So today we have a real estate investing company, we’ve got a full real estate brokerage, so we have real estate agents, both residential and commercial, we do asset management with that, we are managing assets for ourselves and other people as well, apartment buildings, retail, office buildings, things like that… And then we have a marketing company, too. And one of the things that I have learned in my career is marketing in sales are so important in the real estate investing world. That’s one of the things that I think people don’t really think about… But that’s kind of where our business model is; it falls into our investment company, our brokerage, our asset management company, or our marketing company, and all of those are kind of related, they have a symbiotic relationship with each other… And that’s kind of our model, we stay with that core real estate theme.

Theo Hicks: Could you walk us through the progression of when those were brought on and then kind of how it happened? Obviously, it started with investing in real estate. So you said you’ve got an investing company, the brokerage, the asset management company… The asset management — is that the property management company?

John Dessauer: Yeah. Yup. Property management.

Theo Hicks: Okay. So brokerage, asset management, marketing company. In what order did you bring those on, and when, and why?

John Dessauer: Obviously, the investment company started first, and that was basically at first buying and selling all types of real estate, everything from single-family houses up to 350-unit apartment complex kind of thing. So the very next thing that came was the brokerage. And the reason that that came is I would sit at closings as the owner-operator, I was buying a hundred-unit apartment complex, and I’d sit at the closing and I would see the work that the agent that represented me and the agent that represented the seller in the deal, and no offense what they were doing, but I saw the checks they were getting and I thought “Wow, that’s pretty amazing for them to be partaking in this deal where I’m bringing the capital, the equity, and the debt to the deal, and they’re taking a chunk.” Now, granted, they found me as the seller – or sometimes the buyer in that case – but I did like that process, so I thought it would be interesting to get a licensed and create a  firm.

Now we’re in four states – Illinois,  Indiana, North Carolina, and Florida – and we buy and sell a lot of real estate through that. As an investor myself it helps, because I do get an inside look on real estate as it comes through, but also I am able to participate my real estate commission in my deals. So I start saving 3% to 6% off the top before I even get rolling with that.

The next was the asset management firm. We were probably at one time one of the fastest-growing firms in the south part of Chicago, and the reason for that was we were acquiring a lot of assets… And as you know, Theo, that management is probably one of the most important aspects of that; for you to have a successful real estate investment it’s got to be successfully managed. So we started doing that for ourselves and other people as well, so that became an income string to us.

And then finally the marketing side, and I think I was mentioning this before… One of the biggest things that I think people underestimate when they want to become a real estate investor is they underestimate the skillset of sales and they underestimate the skillset of marketing. So we created the marketing to get leads for our deals, and we also do marketing in other areas, but that was the real premise initially for that.

Theo Hicks: Okay, so you kind of mentioned where you got this idea (from Andrew Carnegie) of starting your original business, and then from there seeing what your expenses are and rather than paying those, basically starting that company or buying a company that does that. Is it possible to do too much? Because there are 20 different ways you’re paying money; how do you know when you should stop? Should you bring everything in-house? Like contractors, mortgages, financing… How did you know when to stop, or how did you know which one is to bring in? Not necessarily in what order, but… I know you kind of  explained why you picked these particular ones, but just a larger level… If I’m this investor right now, should I base it off of what I like, what I’m good at, maybe when I’m spending the most money on, based off my market? What type of things should I be thinking about?

John Dessauer: I think initially — and by the way, I don’t want to sound cliché, that is a really good question for an entrepreneur, because one of the dangers is of bringing on too much, and taking in too much. But the idea of where I was going with that was I would look at where we were spending money, and I would look at where I didn’t have a lot of control.

So let’s take property management, for instance – we were spending money on a property management firm or third party firm, but yet I didn’t have necessarily direct control in that firm. And that was a real sensitive thing for a real state that we were buying, because a lot of times we were buying assets that were assets that needed a value-add to it. So we would come in, do a little renovation, increase the rents, lower the expenses, and that really takes an experienced manager. Initially, I didn’t have the time to educate some of those property managers, so I thought we would shorten that curve and create that ourselves. Now, that is a little more difficult, and we do need to bring on some people for that, but you’re either going to outsource the property management or asset management to a third-party firm, or you’re going to outsource it to a firm that you own, that you have employees too. And for us, that was a decision that we made, and 22 years later it was probably the best one.

Theo Hicks: So you’re getting to my next question, which is – so I’ve got my real estate investment company I’m in charge of, and I guess technically the COO, too. So you said the first company that you started was the brokerage. So here walk me through specifically for that, or just kind of in general… Am I then the CEO of that company, too? Or am I hiring someone to run that company, and then trusting the company to this individual? And if so, how does that work? How do I pick someone? Does that make sense?

John Dessauer: Yeah. So for us, it was interesting in that my wife – I know she’s better looking than me, but she’s probably smarter than me as well. So as a married couple, I’ve got a little bit of an advantage over somebody that’s starting off on their own. So we have two people, type-A personalities, instead of just one person. So when you have a couple of different entities, number one, there’s a synergy that goes on between all of them. And there are some tax advantages in different things that you can do as well through having multiple companies like that.

The best benefit of having multiple companies is you have the ability to have multiple streams of income. And a good example of why that’s important is March of 2020. When COVID hit, a lot of things shut down, and a lot of income stream shut down for a lot of different people. And while it was unfortunate, I think one of the things that I’ve realized over my twenty-some years of doing this is that always happens. It’s COVID today, or it’s 9/11 yesterday, or it’s the great recession, or whatever it is, it always happens, and it comes in cycles. So one of the things that we’ve realized with the way that we are set up is when an income stream shuts down, another one is there, or turns on. So for us, that’s been a real blessing.

Let me get back to your question on structure; the structure can happen really any way that you need to see fit with that. What I would suggest is don’t overburden yourself and take on too much where you’re ineffective at all things. Only taken on is much you as you can really kind of handle, and you’re going to know that for yourself, your listeners are going to know that for themselves. I knew for me that I was able to take on a role on the brokerage and on the asset management side, because we were already doing it. I was already taking that responsibility. So I had a little experience there. If I didn’t have any experience with that, I would probably looked or lean on some other people to bring in to kind of run that show, if you’re that big. A lot of times you are starting on small and you can’t do that.

And that’s probably the third thing I would mention, is instead of bringing on all these people and creating all these entities and all this workload, make sure there’s a reason for it, make sure there’s a journey for it. Ask yourself, number, one, why you’re doing it, how is this going to make you money or save you money, save you time rather than spending time… That’s number one.

And then number two, make sure that you are growing financially in a way that you can kind of bring on that. There’s no sense in creating all of these things if financially it’s not in the cards yet. So that might be out of your 18-month plan. That might be your three to five-year plan, but not your 18-month plan. Your 18-month plan is to get to a certain revenue or income scenario, and then make the decision once you’re there what we do next, whether it’s a brokerage, and asset management firm, marketing whatever that is.

Theo Hicks: Perfect, John. Alright, what is your best real estate investing advice ever?

John Dessauer: My best real estate investing advice is there’s a lot of places that you can go and spend a lot of money to get educated. For me, the best education was some of the mistakes that I made early on. And I’m not saying not to get an education because I do think there’s a definite spot for that, and bringing on a mentor or a coach and things like that is a definite help. I wouldn’t be where I am today without that. But what I would say too is don’t be afraid to take a little action. If you’ve got a duplex, call that agent. If you’ve got a six-unit building or a retail center or office building, call that agent, start talking to them, start getting information.

So this is the advice part, surround yourself with people that are doing it now in any way that you can. Either go to their meetings, take them to lunch, do a deal with them, whatever it takes, but surround yourself with the people doing the things that you want to do, and all of that would rub off on you.

Theo Hicks: Perfect. Alright, John, are you ready for the Best Ever lightning round?

John Dessauer: I’m ready.

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

Break: [00:18:34][00:19:24]

Theo Hicks: Okay John, what is the Best Ever book you’ve recently read?

John Dessauer: I read a lot. The Best Ever book that I have read recently is called Spin Selling by Neil Rackham. And it’s interesting, and I was mentioning this earlier – as a real estate investor I think we don’t focus on how important sales is to the real estate investor, where you’re selling that agent, you’re selling that tenant on paying you rent on time, or you’re selling a contractor to get the job done in the right amount of time, at the right cost. You’re always selling. So for me, that was a really impactful book on how to organize your sales process. So Spin Selling by Neil Rackham.

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

John Dessauer: That’s an interesting question. I would probably work — I would go right back and work on an advantage we have today that I didn’t have when I started, and that’s technology. And what I mean by that is, for instance, the way that we find our leads today is purely tech-based, and we do that by… Instead of searching for a property, instead of searching for a person, like a real estate agent, we search for problems. So problems in real estate – when there’s a piece of real estate for sale, there’s always a problem to solve. If I can get there before that owner says “I need to reach out to a professional”, I’ve got a leg up, whether it’s pricing, or deal structure, things like that. So that’s what I would do, I’d go right to my tech source for that, and we would start down the marketing way like that. I know without a doubt if it failed today I would be back up in no time.

Theo Hicks: What is the Best Ever deal that you’ve done?

John Dessauer: I would say — I’ve done a lot of good deals, I’ve done some deals that weren’t so good; I’m sure you may be asking that, too. But one of the best deals that I did was I bought a property in Lafayette, Indiana, and I bought it for 3.15 million bucks. So within 18 months, I turned that into 5.4 million. The way that I did that was by a technique that I worked a lot on, I call it “divide and conquer”. I buy at wholesale and then I piecemeal it off and sell it retail, and I can drastically change the value of the real estate in a very quick way by doing that. So I would say that was one of the better ones.

Theo Hicks: Well, you were leading me, you know exactly where I’m going next – what’s the deal that you’ve lost  money on? Give me the most money, or just the biggest headache type deal… And then what lesson did you learn?

John Dessauer: So everybody likes to talk about their wins right? They don’t want to talk about their losses. But I think in your losses is where you learn more.

I bought a 48 unit apartment building, it was made up of two twenty-four unit buildings. And the way I bought it was I had a contact that was a real estate broker at a national firm, a big firm, and he said “Hey, I’ve kind of got this pocket listing that if you want to buy, it’s yours. I think there’s some upside here. It’s been managed improperly.” So I looked at it, I had the equity to buy the two buildings at least, so I went for it. And the lesson that I learned was bad management sometimes leaves a scar. And what I mean by that is when you’ve got a single-family house that has bad management, you can change that pretty quickly. When you’ve got a 48-unit building – even though there are two buildings… When you’ve got a 48-unit that you’re buying, of bad management, it really does take a longer time to get that straightened out. And my fault was my ego got in the way and I said “Hey, I’m John Dessauer. I’m going to get back in there and I’m going to change this around in 6 months. I’m going to have a performing asset.” Well, that didn’t happen. I ended up selling the building after a year and a half and losing money on that. But that was a lesson learned, and I haven’t done that since.

Theo Hicks: What is the Best Ever way you like to give back?

John Dessauer: We do a lot of things. We’ve been involved a lot with the country of Haiti. Haiti is a couple of hours off of the US coastline of Florida, and it’s really a forgotten about country; they’re in a really really challenged economic scenario for most of the country. The government is a little bit in chaos. They don’t govern the best there, let’s just say that, for the people.

So that’s always been a focus of mine… I was on a board of directors for a foundation that we’ve built 23, actually 24 sustainable villages down there. So that’s always been something that’s been on our radar and something that we’ve participated in over the last, say, 10 to 15 years.

Theo Hicks: And then lastly, what is the Best Ever place to reach you?

John Dessauer: You can reach me at johndessauer.com, that’s probably the best way. I’ve written some books on real estate investing; one in particular I think your listeners and watchers would be interested in is the one called Apartment Confidential, where I start to talk about some of the strategies that I’ve used, like the one property with my biggest upside [unintelligible [00:24:22].22] so I used that strategy in that book. But that would be the best place to find me, johndessauer.com.

Theo Hicks: Awesome, John. Thanks for joining us and giving us your Best Ever advice. Some of my big takeaways – your first deal, you talked about that over leveraging and these creative financing strategies… Even if you can do that legally or the seller is willing to do it, it doesn’t necessarily mean that you should always do it. You gave the example of your first deal being zero money down, but that also increases your monthly outgoing payments, and the property couldn’t support those payments… But obviously, lesson learned.

You talked about your business model, which I really liked. I had an interview with someone a few weeks ago who does something kind of similar… So you have your initial business, and then you look at things that you’re spending money on and then things that you don’t have a lot of control in, and then rather than continuing to use that third-party, you bring it in-house, and you either create your own company, which is what you did, or [unintelligible [25:22] just bought an existing company that did that, so bought asset management companies, things like that, and just took them over. And so the benefits are synergy between all those businesses, there’s tax advantages, and then obviously, you are able to reduce your risks if something bad were to happen, because you have these multiple income streams that are hitting the deal from all different angles. And you kind of walk through during your journey when you brought each of those on.

So it started off with obviously an investment company, next was the brokerage because you saw the money that they are making for not really doing that much, or at least that much as you were doing… And then next was the property management company, because that’s was more of a control issue. And you did the marketing, because marketing is something that people underestimate, the skillset of sales and marketing; that’s how you were able to get your leads.

And you talked about the mindset of when to bring them on, making sure not bringing on too much, not overburdening yourself, making sure you can handle it from a time perspective; if that’s something you’re good at and experienced at you can bring it on, if not consider, finding someone else and bringing them on… And then making sure you know exactly why you’re bringing this type of thing in-house, and making sure you’re at the point financially that you can bring it in.

And then lastly, your Best Ever advice was that obviously education is important, book education, but you’re going to learn a lot more by the mistakes that you make. So just kind of surround yourself with people that are at where you want to be, so that if you do make those mistakes, you’ve got someone to help you quickly resolve those… But even also leverage that experience to maybe increase your confidence to get out there and take some action. John, I really appreciate it, thanks again for joining us.

John Dessauer: You got it.

Theo Hicks: Best Ever listeners as always, thank you for listening. Have a Best Ever day and we’ll talk to you tomorrow.

Website disclaimer

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

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JF2294: How to Buy PreREOs With Jorge Newbery #SkillsetSunday

Jorge is a returned guest who was previously on episode JF1342. Jorge owned about 4000 apartments across the country and a natural disaster happened and caused him to lose everything he had and put him millions of dollars in debt. Then in 2008 when he saw that many Americans were losing their homes he decided to create a company that could help them by buying mortgages from banks in pools. Today he will share what a PreREO is and why he focuses on this.

Jorge Newbery Real Estate Background:

  • CEO of preREO LLC, AHP servicing LLC, and a partner in Activist Legal LLP
  • 30 years of real estate experience
  • A previous guest on episode JF1342
  • Portfolio consist of 10,000 purchased defaulted mortgages, owned 4,000+ multifamily units, and brokered thousands of properties
  • Based in Chicago, IL
  • Say hi to him at: www.preREO.com 

 

 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Local investors have advantages because they can see the work that is needed and typically have a local team they know and trust” – Jorge Newbery


TRANSCRIPTION

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

Theo Hicks: Good, thank you. Thanks, Theo, for having me on the show.

Theo Hicks: Absolutely, thanks for joining us again. So Jorge a repeat guest; make sure you check out his other episode, which is Episode 1342. So today is Sunday; we’ll be doing a skillset Sunday where we’ll talk about a specific skill set that our guest has, and as you can tell by the title, we’re talking about how to buy pre-REO’s, not REOs but pre-REO’s on the internet. So Jorge, can you tell us, first of all, what pre-REO’s are and then how you can buy those from your house on the internet?

Before we get into that, Jorge’s background… So he is a CEO of pre-REO, as well as AHP Servicing, and is a partner in Activist Legal. He has 30 years of real estate experience, a portfolio of 10,000 purchased defaulted mortgages, he has also owned over 4,000 multi-family units, and brokered thousands of deals. He is based in Chicago, Illinois and the website is prereo.com. So Jorge, do you mind telling us just a little bit more about your background and what you’re focused on today?

Theo Hicks: Sure, I’ll give you a brief history. About 16 years ago I owned about 4,000 apartments across the country, a natural disaster devastated my largest holding which was 11,000 units in Columbus, Ohio, and it gutted me financially; I ended up losing everything, and over 26 million dollars in debt. That story created a huge amount of challenges for me at that time of my life; actually, enough that I wrote a book about it called Burn Zones.

But I rebuilt myself through a company called American Homeowner Preservation, and this was 2008 when the financial crisis was devastating America and millions of families were at risk of losing their homes… And I saw that many of these families were going through the same things that I was going through. So I started a company called American Homeowner Preservation. And what we started doing was purchasing the defaulted mortgages at big discounts from banks and other lenders, and when we could, we would share those discounts with the families in the form of affordable modifications so they could stay in their homes. So that’s what American Home and Preservation has done. We bought over 10,000 mortgages in the last decade.

But when we bought from banks, we’d often buy pools, and those pools will include some that are occupied and some of them were vacant. Sometimes we got lucky on the vacant ones; we could find the homeowner and we’d pay them cash for a deed in lieu and we’d sell the property. So that’s great. But other times we could not find the family; maybe the homeowner was deceased, or was divorced, and no one could agree on what to do, and we would end up having the fore-close on a vacant home. So we’re the mortgage holder, there’s a property owner, but they’re not living in the home, and it’s sitting there vacant.

Now, in many cases there are great challenges; the returns often on that component of the population and often times was not that good, and I’ll tell you why… As a mortgage holder, if the property owner is not taking care of the property, the mortgage holder needs to, and that  includes anything from cutting the grass to shoveling the snow, to boarding up the property… And sometimes code enforcement, the local city will go out there and say “Hey you need to bring everything up to code. The roof is leaking.” So we have to do it; we don’t own the property, but we’d have to pay for that work.

And then in extreme cases like where I am in Chicago, if the property became a nuisance because people kept breaking in there and whatnot, then the city would actually require that we posted a night watchman. So every night we’d have to pay for a security guard to guard the property. And obviously, that becomes extremely expensive. And we’re still just sitting on a vacant property that’s losing value, in many cases, because it is deteriorating.

So in my mind I was saying “How do we rectify this? We have homes that could be rented out and generating income, but we don’t own the property, so what can we do?” And I guess the opportunity and the challenge is that the situation I described for AHP is the same for all the other hedge funds and mortgage investors across the country that do this nationally; they all have similar situations with a portion of their vacant properties.

So the solution that we came up with is pre-REO. And people say “What is a pre-REO?”. A pre-REO is a first mortgage that’s in default, that is secured by a vacant property; and actually, it could also be secured by a tenant-occupied property, but by and large, is by a vacant property. So what we offer is for hedge funds and other holders of these mortgages to put them on pre-REO, the local investors can bid to buy an interest in that mortgage, and that interest will allow them to follow a strategy that we’ve come up with, which is to work with our law firm Activist Legal to continue the foreclosure, number 1, so they can eventually get title to the property, but also to appoint a receiver, which is typically a local real estate agent who can repair and rent the property while it’s in foreclosure.

So it’s not yet owned, but the court will allow it, because it has been abandoned in many cases, to appoint a receiver to repair and rent the property and start generating income while the foreclosure is continuing. So that is the strategy that we’ve come up with, and so far we are getting a good reception.

Right now we have hundreds of properties on the platform, I anticipate by the end of the year we’ll have thousands. So it’s just a huge demand from lenders, and now we’re trying to reach out. One of the reasons I’m on the show is to let buyers know about the opportunity. It’s in many cases a fantastic opportunity for local investors to buy these at significant discounts to what they would buy REO’s.

Theo Hicks: So from your perspective, the deals that are on there are notes that your company owns, as well as other companies that do the same thing, that have the same issue with a portion of the vacant deal. So someone already owns these notes already, right?

Theo Hicks: Correct.

Theo Hicks: Okay. So from my perspective as a client, as a person who wants to buy these, I go to your website — I went to your website and saw that info on there. What types of things do I need to do in order to figure out how much I should pay for these things, if it’s worth paying for this…? What’s the due diligence that I need to do on my end?

Theo Hicks: Sure. Because it’s vacant, it is truly destined to be an REO in almost all cases. It would be rare that a homeowner would pop back up and say “Hey, you know, I want to pay off my mortgage, or re-instate”, or something like that. So in time, there’s a high likelihood that these will become REO. So I think investors should look at it as “What do I really think this property is worth as an REO?” And as is, where is.

And our guidance to sellers is to price it at 75% of the REO value. So they think the property is worth 200k, offer it at 150k. So there’s a $50,000 equity that’s there to be captured by going through this process. And the sellers – the sale to them is “Hey, you get your money a year or more early, you’re going to save all the legal fees, all the taxes, insurance, boarding up cost, night watchman, all that stuff is gone.” And for the local investor, they’re going to put a tenant in there who could be paying them, call it a thousand a month or something like that during that year, so they pick up $12,000, plus they do the repairs while it’s still being foreclosed upon. And when it’s foreclosed upon, they can choose to either sell it as an REO or to keep renting it.

Theo Hicks: So that offer is to you and these hedge funds, right?

Theo Hicks: Correct. Right now the offers all go to us, and then we share them with the hedge funds. But ultimately, they’re making the decision on “Hey do we accept it? Do we counter it? And how do we respond to this?” So to be clear, all the asking prices on there are simply just that – they’re asking prices; you can offer more, you can offer less, and we do see both of those. We see people who are offering full price, people where there are maybe five or six bids, but they’re all 10% or 20% low, which means that maybe the hedge fund opinion of values may be higher than it should be, and vice versa. There are some times that somebody is selling for a little bit more than what the asking prices are. So pay what you think is fair, offer that. Right now, we’re highly attentive to trying to get these things sold to prove out the models. So we’re trying to broker… In some cases, in the end we’re almost on the phone between the buyer and seller to try and bridge the gap to a price that makes sense.

Theo Hicks: Okay. So if I submit my offer, you mentioned that your company, for the pre-REO, has a system that I can use. So that system is up to the actual foreclosure; then it’s in my hands, right? So you’re saying that you help the second I take over that note to the foreclosure, and then the main thing in between there is appointing the receiver.

Theo Hicks: Appointing the receiver. You, for instance, could choose “Hey I know a friend who is a real estate agent. They are really reliable, I want them to be the receiver.” That’s fine. But the court will have the attorney propose to the court that that agent is appointed as a receiver.

Theo Hicks: Why aren’t the hedge funds appointed the receiver?

Theo Hicks: Because this is very local; we’re in Chicago, so when we’re having to pay for these repairs on properties I know we’re not getting in best prices. The local person will maybe have their own crew or have their own relationships and contacts where they can get stuff done at a better price, done faster; they can also be there watching “Hey this is what the work is, and you’re getting the bid for this.” That makes sense. And besides, we’re a thousand miles away from the bid and we don’t really know; we get photos and sometimes people — they always think it’s a bank or a hedge fund,
“They’re not going know the difference whether it’s 2000 or 3000, so bill them 3000.” We got this clean-up bids sometimes for like $3,000 and $4,000. I’m thinking, if I had a small crew, I’d be out there with the dumpster and get it all done for 500 bucks. And then they say “We’re bonded, we’re insured, and that’s why we’re $4,000.” Sure, that’s important, but the local investor can always do these things better. Also, selecting tenants, making sure they pay…

So I think what pre-REO is trying to bridge is the local investors absolutely, in this case, have the advantage. They know the market, they can watch the work get done, so they are doing that portion of the work and they’re adding value because they have transactions as a result. The hedge funds can never compete with a local investor in that regard.

Theo Hicks: Yeah. Plus, they’re not real estate investors either.

Theo Hicks: They’re not. We got offers on our REO’s, there are always people sending us the photos of like the worst thing in the house, making it look as bad as possible… And again, we are thousands of miles away sometimes so we don’t really know the difference. So local guys can say “Hey this thing is worth $300,000.” Or it’s worth whatever the number is, and if somebody is crying about a little repair that needs need to be done, hey I’ll get that done and they should be paying full price.

Theo Hicks: I’m not very familiar with this. So appointing a receiver – is that something that always happens? There’s no risk of the court say “Well no, you can’t do this, from my perspective.” Who are the receivers?

Theo Hicks: Sure. So that typical receiver is appointed on an office building, a hotel, a property that’s generating revenue, and if they’re not paying the mortgage or the other debt then, the lender can request that court to appoint a receiver to collect the rent, pay the expenses on that type of property; even they put him at sometimes retail stores or whatnot. But those receivers are often times attorneys or other high-priced professionals, and it would not work to use that type of receiver for a single-family residence.

So we were like struggling with who do we use, and who’s going to make sense here… And the receivership is very much akin to property management, with a couple of extra reporting steps with the court; so a local real estate agent makes a ton of sense. And they are doing it — maybe collecting rent, maybe 10% of the rent collected, and that’s okay, but I think what the agents are really looking for is hopefully some of these ends up being listed once they are foreclosed, they’re going to want to sell it, and then I’ll get the listing; so they’re building a pipeline of future listings. In turn, the receivership is usually high cost; we’ve made it affordable for this segment of the market, single-family residences and other small properties.

And then the other part is if real estate investors just call the local attorneys and say “Hey, appoint a receiver on a single-family”, it’s going to be “I’ve never heard of that.” So we have one firm [unintelligible [00:14:35].17] which I’m a partner in, which facilitates default services nationwide; so all of these we recommend that you go through Activist Legal, and Activist Legal will co-counsel with the local attorney in their network to complete the foreclosure and to get the receivership appointed.

And you’ll think “Well, how much is the receivership?” To appoint a receiver, estimated hours maybe a thousand dollars in legal fees. When the receivership is completed, maybe a couple of hours and maybe $500. And your question, which is a good one, “Is this definitely going to work? Is the court definitely going to appoint a receiver?” And the answer is we expect that they will, but we don’t know. There may be some judge who just says “I don’t get this. It doesn’t make sense to me. I’ve never seen it before.” We haven’t run into that yet; we’ve been able to so far convince judges that this makes sense. And the reality is if a judge is going to look at it from a public policy point of view and say “Is it better to leave a home vacant for a year, or better to appoint a receiver and have a tenant in there? Which is better?” It’s clearly to have it occupied; if it’s vacant it either is or could be of blight on the community, so it’s just so much better to have it occupied. The neighbors would appreciate it. So it does make sense, but we do anticipate at one point or another we may have [unintelligible [00:15:41].18] We’ve had this concern enough as we keep going to different jurisdictions to prove out the concept; if a receiver  could not be appointed, our fund would buy the asset from the pre-REO buyer. We expect that to happen one in a hundred times; it hasn’t happen yet. And if it does, then we simply know that in a jurisdiction we can’t do it, and we’ll keep trying. It makes sense, so we expect at some point the judges will all be on board with this.

Theo Hicks: Another question I have from a very limited knowledge of the foreclosure process – I know it’s usually not always the exact same length from when it is initiated to when it’s actually completed, so how do I know when looking at a deal what spot in the process we are at?

Theo Hicks: That’s a good question, because if there’s a sale date next month and you already have a judgment, then you’re just going to say “Skip the receiver, I’m going to get the deed to this thing in a month or two.” So we are trying to provide information on our site; it’s not where we want. Sellers – it always seems like they have to go to the servicer, go to the attorney and get the current updates. So we are trying to improve that. If a property is of interest, and you think of bidding on it and that’s important to you, which it should be, then before you bid, say “Hey, what’s the status of the foreclosure?” And someone will get you that information.

Bear in mind though, the way we’ve structured pre-REO is accepting the ones that are towards the end of foreclosure. If it’s kind of mid or earlier, then it’s going to be months if not years in some cases, so it does make sense to appoint a receiver. And the passage of time, which usually negatively impacts the returns of a mortgage holder using pre-REO, where you’re generating rent during the term for the foreclosure, then the passage of time is no longer a negative drag on your returns.

Theo Hicks: So if I have a receiver, and I get fixed up, I can put someone in for rent before? That makes sense. I was kind of confused. I saw on there in your website, that you could do loans on this as well.

Theo Hicks: Yup.

Theo Hicks: So I put the down payment, obviously I’m paying that loan, because I’ve got an outgoing payment, but with a receiver, I fix it up, I put a tenant in it, the tenant could pay me before I actually own the property.

Theo Hicks: Correct. Now, a big asterisk to all that. The receiver needs to coordinate the work, so the court’s going to allow the receiver to do the work, and they can hire contractors. So you couldn’t actually do the work yourself; you could coordinate it through the receiver. You could tell the receiver “Hey, I recommend that you use this contractor.” Ultimately, you’re the one funding the work. And the rents that are collected would need to go to the receiver, they need to go to the servicer, and then they come back to you. That way it’s fully documented for the court and there’s always a record if they ever ask. In the end, we accomplish what you’re just describing.

Theo Hicks: So you said that rents go to receiver, and then who is this servicer? Is that you?

Theo Hicks: Yeah. But that’s the AHP servicing.

Theo Hicks: Okay.

Theo Hicks: So almost all the states in this country require that a licensed servicer is the one that usually collects the mortgages, interfaces with the bar, facilitates foreclosures… So AHP servicing is a national servicer; we can fill that role. In fact, in pre-REO you can say “Hey, it’s a great way to generate business for AHP servicing, [unintelligible [00:18:29].07] and you’re right. But also, without those two components, it would be very difficult to replicate. Because otherwise, you’d have to go to a servicer, go to a law firm and try to put these pieces together, and that I think would create a challenge. So here I’ve created the roadmap, and the companies and resources that you can utilize along the way, so you just follow the steps for the particular pre-REO that you’re working on.

Theo Hicks: So you say this is pretty passive compared to other strategies. Is that like entirely passive? But it sounds like it’s passive, because a lot of the steps – kind of communicating with the receiver, it sounds like once you’ve bought the deal and then sending the money out for the loan… So those are passive?

Theo Hicks: Yeah. I don’t know if I’d say very passive. You still have to be the quarterback, maximize your success. You want to be very involved [unintelligible [00:19:13].24] you’re right, you’re having to work through others to help execute the strategy.

Theo Hicks: Alright, Jorge. This is very fascinating stuff. It’s from the perspective of buying this, but also just from your perspective in identifying this need and starting a business. Of course, we couldn’t focus on it that much, but I think we did get a lot out. Is there anything else that you want to mention about buying pre-REO’s on the internet, or anything else before we wrap up?

Theo Hicks: No. I think we’ve covered most bases. You mentioned the financing – we provide 75% of the money, so the local investor just needs to come up with 25%. We’ve tried to make it as similar to doing a normal real estate transaction, except here you’re just buying earlier in the process, at a greater discount. So I think we covered all the bases. I appreciate the question, and thanks for having me on today.

Theo Hicks: Absolutely. Thanks for joining us and talking about how to buy pre-REO’s on the internet. So if you want to look at actual live deals, prereo.com. And there you can kind of click and see some details about those deals.

Overall, just to summarize what the process is, you are buying the first mortgage that’s in default, as secured by a vacant property, from a hedge fund or some other company that’s already bought that. And then you being the local investor will be able to add more value to that deal than the company that’s thousands of miles away.

Once you buy the note, which you said that the starting offer price would be 75% of whatever that value is, then you request that the court appoints a receiver, and then this receiver, which your company helps find, will be the person who can coordinate the renovations on that vacant property, putting a tenant in that vacant property, so you are able to make money before you actually foreclose on the property. That sounds like the overall strategy. Obviously, there’s a lot more that goes into it than that, but that’s the overall strategy.

Jorge, thanks again for joining me. It was great talking to you. Best Ever listeners, as always, thank you for listening. Have a Best Ever day and we’ll talk to you tomorrow.

Website disclaimer

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

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

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

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

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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JF2274: Real Estate Branding With Jaren Barnes

Jaren is a full-time real estate investor who previously worked with BiggerPockets in 2014 and he helped grow a wholesale company from 8-12 deals per month to 30. He has now grown a small land flipping business over the last 3 years that he runs fully remote. 

Jaren Barnes  Real Estate Background:

  • Full-time real estate investor and is the Senior Creative Director for RETipster.com 
  • 6 years of investing experience
  • In the past, he has worked with Biggerpockets.com, & helped grow a wholesale company from 8 deals per month to 30.
  • He has created a land flipping business that he runs 100% remote
  • Based in Chicago
  • Say hi to him at: www.retipster.com 
  • Best Ever Book: Best Ever Apartment Syndication Book

Click here for more info on groundbreaker.co

 

Best Ever Tweet:

“I think grit is the 80/20 of success” – Jaren Barnes


TRANSCRIPTION

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

Jaren Barnes: Man, I’m honored. This is a big deal. I really like you and Joe Fairless’s book Best Ever Apartment Syndication Book. I actually say a lot that it was the best course I’ve ever taken on a subject. So I’m a fan.

Theo Hicks: That’s great. We really appreciate that. And thank you for joining us and I’m looking forward to our conversation. So a little bit about Jaren. He’s a full-time real estate investor, as well as the senior creative director for REtipster.com. He has 6 years of investing experience. In the past, he has worked with BiggerPockets and helped a growing wholesale company from 8 deals to 30 deals per month. He also has a land flipping business that he runs 100% remote. He is based in Chicago and the website is REtipster.com. So Jaren do you mind telling us some more about your background and what you’re focused on today?

Jaren Barnes: Yeah. So I got my start in real estate specifically pre-doorknocking, pre-foreclosures in the San Francisco Bay area. I spent half my life in the San Francisco Bay Area and half of my life in a suburb of Atlanta Georgia, so very different places, very eclectic [unintelligible [00:04:23].25] quite a bit. And when I was in the Bay Area, door knocking, I learned a lot. I got a lot of deals, but was connected with some unethical guys that really didn’t have my best interest at heart, and I actually didn’t get paid at all through that whole process.

But I started a blog called realestatecatalyst.org and I did a review on BiggerPockets; this is back in 2014. And at that time, Josh and Brandon over at BiggerPockets were kind of the only two people working at BiggerPockets. And they had a couple of VA’s and programmers and things, but they were looking to grow their team, so I ended up joining forces with them temporarily. It was a temp situation from the beginning, just to help them transition so they can start building the local team there in Denver. So I did a lot of things over there; I learned a lot about real estate. I was the blog editor, the podcast show notes writer, and all kinds of crazy things for them on there.

And then from there, I obviously was exposed to real estate and knew I wanted to pursue that, and ended up moving to Indianapolis of all places, and connected with a guy named Brett Snodgrass, who runs a company called Simple Wholesaling, and I helped him grow. We had a small team around; at first it was 4 guys, and then it grew to about — I think by the time I left we were around 10. But I helped him grow from doing about 8 to 12 deals a month, to doing 25 to 30 deals a month on average.

And they’re a different wholesale operation than most; we didn’t do any assignments, we took everything [unintelligible [00:05:50].21] the title. Then while there, I wanted to use the skills that I had developed as a disposition manager, and knowing wholesaling, in some capacity that wouldn’t create direct competition to my boss, Brett. Because at that time I thought that I was going to be his right-hand man and I was going to be running with him until the hills come home. So I started looking at similar business models that weren’t directly in houses. So that’s where land came up.

We interviewed a couple of land guys on the Simple Wholesaling podcast, because I was a co-host there, and I ended up connecting with Seth Williams. I was in a mastermind group with him for a number of years… And he let me moonlight his course, the Land Masterclass, for free. So I took it and I gave it a really thorough review as a big thank you, and it radically changed my life.

I ended up within my first three deals making $30,000 in one transaction; it was kind of freak deal that doesn’t happen all the time, that’s definitely an outlier [unintelligible [00:06:46].05] But it changed my life radically. So I was kind of doing land after I had left Simple Wholesaling, and it just kind of made sense for me and Seth to merge, because of my background with BiggerPockets, and doing content stuff and podcasting stuff at Simple Wholesaling. There was a lot of overlap between the needs of somebody kind of replicating themselves in a different person [unintelligible [00:07:07].27] REtipster. So I joined the team, about two years ago actually, in July, which is crazy to think. But I have been working my land business and working at REtipster ever since. So that’s where I’m at today.

Theo Hicks: Thanks for sharing that. So out of those two things, what’s kind of your main focus?

Jaren Barnes: Definitely, senior creative director at REtipster. I do content stuff 8+ hours a day, for sure.

Theo Hicks: Perfect. I want to focus on that, but could you just kind of quickly tell me about this land deal. I know you said that it’s kind of not the normal land deal, but it sounded like it was a pretty important part of your journey. So kind of break down what was so unique about it.

Jaren Barnes: I did direct mail, and I got a call for a property in Southern Indiana that was something like 150 acres. And Brett, surprisingly, even though land was not his niche, had a deal in the pipeline that another wholesaler brought him for another a hundred and some acres. If I remember it correctly, it was like 225 acres total… And I did a showing as we were closing to a timber company, and they said. “Hey, we want to do a package deal for that property with Brett, and then your property, all in one”, so we actually did a double closing. And the stars aligned… And Brett still to this day says he has made more money in that one transaction than he ever has in one single transaction. And it was like this weird fluke; there was a really old realtor that wasn’t online at all, and he was probably pushing his 80’s or 90’s, and he was like, “Yeah, I got this client I’ve been trying to sell it for two years. I represent him, and he just wants to move it, so let’s make it happen.” And the spread per acre wasn’t that much. But when you multiply it by 225, it was huge. So it was just really incredible

And I will tell you, land is pretty amazing and a lot of people don’t understand the land business; they’re like “How can you really make crazy money in land?”, but it’s not unheard of to do deals like that. Seth actually showcased a property where he bought a property for $500 and sold it for $25,000. And that’s on our Youtube channel actually, at REtipster.

Theo Hicks: Perfect. So I kind of want to focus on the creative director, just because a lot of people — especially right now, I’m sure a lot of people are focusing on growing their brand online, but they’re not doing as many deals. So before we decide now what you’re specializing in, what’s the main objective as the creative director? Is it just pumping out content, is it driving people to certain actions, is it increasing the website traffic, or is it all those things? What’s the main objective that you’re supposed to accomplish?

Jaren Barnes: My main objective is to be a second origin source of content. So I review courses… I’m literally in a triplex right now that we recently just bought, and I’m house hacking. So I did a huge article about a year and a half ago where I interviewed different ways to house hack, that not a lot of people to talk about… And now that I actually lived it out and I decided what I was going to do, I’m going to update that blog post with my life, and it’ll be like a drone aerial shot of my house, and do a whole thing. I do a lot of video stuff. I do a lot of work on product development. I also am the main contact. Seth doesn’t do any of the coaching at all at REtipsters, so if you apply for our land coaching program, I’m the head coach there. So I work with all of our coaching clients.

Theo Hicks: So you just write content and then someone else is focused on converting people from that content? Or do you do that, too?

Jaren Barnes: I do some of that, but to be honest, something that’s really impressive about REtipster is it’s grown to what it is — I think last time I checked we had somewhere around 150,000 people coming to the website per month… And it grew organically. And we get the majority of our traffic from organic search. Now, I don’t think that in today’s environment you can really start without paid advertising and get there, but Seth started at the right time, and that’s where we’re at today. So, I’m actually being trained by a Facebook guy right now to learn a bunch of stuff about how to start supporting our growth efforts through paid strategies, but we are still very green on that. Most of our traffic just comes from people knowing who we are, and ranking, and re-listing URLs back to our site.

Theo Hicks: So how frequently are you posting content? Is it every week, every two weeks, every month?

Jaren Barnes: It’s a little bit different. So we have probably a content piece that comes out every day, but  we have a blog post that comes out — I believe it’s every other week, and then every Tuesday we have a podcast, and we are probably going to switch back potentially to… We’re testing out doing it weekly. For a long time, we’ve done a podcast that came out every other week, and we’re testing the waters… We’re still on the fence as to whether we’re going to stay weekly or not. But that’s coming out on Tuesdays… And then we have a lot of videos that come out randomly… So we could have 3 to 5 videos come out a week, or we might have one video come out on Youtube a week. It just kind of depends. Youtube is more of a support to giving tutorials on our written content, so our main driver is blogging; that’s the cornerstone of who we are.

Theo Hicks: So you’ve said that it starts with a blog, and then from the blog you’ll do daily social media post, as well as creating video content based off of that. But the blog is kind of like the starting point.

Jaren Barnes: Yep. 100%.

Theo Hicks: You said the blog is every week, right? Or every two weeks?

Jaren Barnes: I believe it’s every two weeks, unless something comes up.

Theo Hicks: So you’re doing longer blog posts, I’m assuming then, right? Even the short 600 words, usually how long are they?

Jaren Barnes: Probably on average is about 2,000 words per article, but it can range. Really, the objective is not to hit a certain word count, it’s to thoroughly explain the concept. So a lot of the stuff that we’re working on right now is defining a lot of terms, we have a whole terms directory that we’re flushing out… But if it’s not terms oriented, we really take a subject or a course or something that is extremely helpful, and we break it down to where anybody can understand it. So a lot of our blog posts could be paid content. It’s to that degree that we giveaway value.

Theo Hicks: So maybe walk us through — maybe not the blog post you’re doing on the house hacking, just because I’m sure a lot of people aren’t going to replicate doing something like that and then writing a blog post on it… But maybe give us a recent blog post that you wrote that was long, that was very in-depth, and then explain to us the process for writing that. How does it start? Do I have a topic, and then there is an outline, and then research, and then writing? Tell me about your process.

Jaren Barnes: Yeah. So really it always starts with the overarching question of “What’s the pain point?” Where is something that people need really clear directions on, or a really confusing concept like assignments, for example? I made an assignment video – it was a voice-over video animation, and it has I think last time I checked it was over 10,000 views on Youtube. And we take a concept like that, that for somebody just getting started in real estate can be really confusing to understand, and then they hear things like “It might be illegal… Is it not illegal?”, and what’s going on with it. So we take a  complicated subject like that… And I take the elephant essentially and then I break it down into the puzzle pieces. And then I have each puzzle piece explained thoroughly, so that it leads to the overarching goal of understanding assignments, or whatever the objective is.

But at a high level, the way you come up with really high-value content, I feel like, is taking the complicated and then making it simplistic. And the best way to do that is to break it down into baby steps. And even when it comes to goals and other things, too – that’s really a crucial key to being able to write things or to create things of value, and business plans, or action steps within your businesses – it’s to take something, “Okay, I want to make X amount of dollars,” big, hairy, audacious goal, and then break it down into literally like, I pick up a pen, and then I write, and then I do this. Really bringing it down to a very simple level… Which, again, your guys’ book, the Best Ever Syndication Book did a fantastic job. I review a lot of courses, and I mean that full sincerity, it lives up to its name. You guys did a phenomenal job with that.

Theo Hicks: I really appreciate that, and thanks for saying that, because that was a lot of work to put it together, as I’m sure you know from doing this for a job. So I understand the first part obviously, but do you go one by one, where you’ll pick one concept, and then you’ll knock that out of the park, post it, and then you’ll think of the other one? Or are you kind of planning ahead and saying, “Here’s one massive, complicated subject. I want to write ten blog post on this. So for twenty weeks, I know exactly what I’m going to write about.” Or is it every two weeks you’re coming up with something new?

Jaren Barnes: Because I actually do real estate — there’s kind of two ways to approach it, and I’ll get into it in a  second… But normally, it’s what am I learning in my real estate game? I’m pursuing apartment syndications and I’m trying to figure out the apartment game. So there’s going to be tons of content, because I have fresh eyes as a complete beginner in that space to run into the things that are extremely complicated, that are not explained well. And I can take notes as I learn, and overcome those obstacles, and then turn around and share that with the audience at REtipster. So that’s a lot of it, is just practical cases; I’m actually doing the stuff, and I learned, “Okay, this voicemail system that used to be great doesn’t work anymore. They increase their prices and they’re a terrible option now.”

Another great example is I wrote an article on Traveling Mailbox, which is a virtual mailbox system where people can send you letters to a physical address, but then they scan it and email it to you. So you can be anywhere in the world, as long as you have an internet connection you can have access to your mail. And that’s huge for somebody like me and other people who do land remote. Most of the guys do land remote; they don’t do it in their backyard, they do it in hotbed markets like Colorado, Florida, Arizona, etc. So to have those kinds of system set up is extremely helpful.

So I go and I figure out how to optimize my business and solve my own problems and then turn around and share that.

However, think if you were starting fresh today and really trying to grow content today, I think keyword research is extremely important, because you can use something like ahrefs.com and you can look at different keywords, or even hire a VA on Upwork who specializes in SEO research and say, “What are people searching for that doesn’t have a lot of actual content?” And you can find that sweet spot. It’s hard to find now, because things are going more and more noisy every single day… But there are subject matters that have a high search volume, but don’t have content that’s actually meeting that in a really high form. So you could start targeting those things if you really wanted to grow in scale.

It depends on how you want to grow a brand. At the end of the day, do you need to be the biggest guy out there? Or do you just need to be a big fish in a small pond in your market and in your niche? If that’s the case, if you just find things that are extremely helpful, even if 500 people watch it… Another perfect example is within Facebook marketing – this is a great example of creating good content. So Facebook has a backend called Business Manager; that’s where you run Facebook ads and things. They had an update recently and it’s been a couple of months since I’ve been in there, and I could not for the life of me figure out where to find my Facebook pixel, for an existing Facebook pixel. I couldn’t find the pixel code. I spent hours and hours and hours trying to find it. I called friends… And you know, it was really frustrating.

So once I found the solution, I created a three-minute video and I said, “Hey, just so that this is somewhere out there on the internet for somebody, I’ve found this. This is the solution.” And I only have probably 10 views on it or something, but I have four comments of people like, “Oh my goodness, thank you so much for finding the solution, this was amazing to find.” And that’s the perfect example.

If I was in Facebook marketing, like that was my thing, I would be answering those kinds of questions all day long, because that’s what people need. People use the internet outside of entertainment; for our space people use it to find solutions to problems, so that’s why you have to provide.

Theo Hicks: Okay Jaren, what is your best real estate investing advice ever? Or since we’ve been talking about marketing and branding, what’s your best branding advice ever? You can take it either way you want.

Jaren Barnes:  I think the answer is actually probably the same for both. It’s more of a mindset thing than anything. I think grit is the 80/20 of success. I think that at the end of the day a lot of what success looks like behind closed doors is banging your head against the wall until something works.

And a lot of people don’t like that, because it doesn’t sell well from a stage… But that’s the reality; if you want to get to the other side of success or the other side of greatness, it’s going to take a lot of blunt force, it’s going to take a lot of, “I don’t want to do this, but I’m going to do it anyway”, showing up and getting busy.

For a long time growing up as a kid, I always shied away from the hard stuff. I still to this day don’t understand working out. Why would anybody voluntarily go and get all sweaty and hot and bothered? It doesn’t make any sense. But it’s on the other side of that consistently that you reach what you want; you want to be in shape, you want to carry yourself in a way that’s influential, etc. So if there is one thing I could give to the world, it would be work ethic and grit.

Theo Hicks: That’s a really, really solid advice. Alright Jaren, are you ready for the Best Ever lightning round?

Jaren Barnes: Yeah. Let’s do it.

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

Break: [20:29][21:09]

Theo Hicks: Okay Jaren, what is the Best Ever book you’ve recently read?

Jaren Barnes: I’m going to say the Best Ever Apartment Syndication Book. Honestly, I can’t say enough about that book; I went through some courses and I really read through a lot of stuff, and that hands-down is the most like taking a super complicated subject and be like, “Okay, for market research do this; go to this website, and go here.” You guys did a phenomenal job.

Theo Hicks: Thank you.

Jaren Barnes: Definitely.

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

Jaren Barnes: Which business? Real estate? Or if I was let go from REtipster?

Theo Hicks: I’ll say both. What happens if both collapsed at the exact same time?

Jaren Barnes: At the exact same time? I’m probably going to go become a contractor.

Theo Hicks: A contractor?

Jaren Barnes: Yeah. I’ve been in about how to swing a hammer. I was super intimidated by the whole concept for a long time, but with this particular triplex I actually learned quite a bit. And it’s interesting when you have skillsets that are related to your hands – you’ll never go hungry, because if you don’t have any money, you can literally go door knocking like, “Hey, is there something I can fix for you? Is there something I can do?” That, or become a truck driver. In America truck driving, you can make some crazy money.

Theo Hicks: Yeah. That’s a good point.

Jaren Barnes: I would do that until I could start real estate again.

Theo Hicks: Tell us about the best deal you’ve done.

Jaren Barnes: Oh, man…

Theo Hicks: Besides that land deal you already told us about. A different one.

Jaren Barnes: So, let me think here… I have one right now that I think is going to be my best deal ever, but I haven’t done it yet so you don’t want to talk about that one.

Theo Hicks: Or we can talk about that one if you want to, it’s up to you.

Jaren Barnes: Probably the closest one was I bought a property, a land deal for $2,000 and I sold it for $18,000; that one was pretty nice. But that was just another outlier. I did blind offer direct mail campaign and he just didn’t want it; he inherited it. It was in Florida, he lived somewhere in New England, and he was like, “Yeah, let’s do it. I just want to get rid of it.” So I gave him $2,000, and with the closing costs it was like $2,500. And then I sold it I think like 2 months later. I think we lease it for 25k and we sold it for 18.

Theo Hicks: And then lastly what is the Best Ever place to reach you?

Jaren Barnes: Probably jaren@ibuyland.org. That’s my personal email. I got a lot of things in the fire. I’m actually working with a passion project, teaching people how to implement profit first in their real estate business, and stuff… And REtipster, and I’ve got real estate stuff… So if you want to reach out to me and learn more about what I got personally going on, I would say jaren@ibuyland.org, or jaren@retipster.com, you can use that as well.

Theo Hicks: Perfect, Jaren. Thanks for joining us today and sharing your tips for how to grow a brand, how to grow a blog. Really what your process is you basically do things, you investigate apartment syndications, or something that you don’t really know anything about, something that’s very new, and being a newbie at it, you’re going to come across things that you yourself have a hard time doing, or you’re unclear on, and it doesn’t make sense… And you assume that other people who are also new at it and are getting into this are going to have the same issues, so you do it. You figure out what works, what doesn’t work, and then you simplify that, and then you repeat the process over and over and over again. And it was kind of what you’re focused on now.

Obviously, the other way would be to do the keyword based research, where as you mentioned, you hire someone to do it for you… But really, it comes down to identifying pain points, and the best way to do that is to do things, to investigate things and see what is actually hard for you, and then talk about your journey.

You gave us plenty of examples of that, with the house hacking, through land, and then you talk also about how once you’ve written that blog post, you were able to use that information to post different various things on social media, as well as create different Youtube videos. And again, you gave a lot of examples on that.

So you can have one piece of content and multiplying it into multiple pieces of content to kind of cover the same topic on different channels. You went over a lot of examples and even into more details on that, but that’s really what it comes down to. So thank you for sharing your process with us. Everyone, make sure that if you want to grow a brand or grow a blog, this is the way to do it. So thanks again for joining us. Thank you again for your kind words about our book, I really appreciate that. Best  Ever listeners, as always, thank you for listening, have a Best Ever day and we’ll talk to you tomorrow.

Website disclaimer

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

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

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

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

Oral Disclaimer

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

Follow Me:  
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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

 

 

 

Click here for more info on PropStream

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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