JF1531: Why Commercial Real Estate Investing Is More Lucrative For Him with Ash Patel

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Ash is a returning guest and a friend of Joe’s. He has a ton of experience and real estate knowledge, especially on the commercial side of the business. Hear why he laid low for a while when the market was hot and how to have more fun with real estate investing. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Ash Patel Real Estate Background:

  • First property was a mixed use property and saw both residential and commercial real estate pros/cons
  • Previously had a 15 year career in IT but left to pursue startups and IT consulting
  • Total value of properties he owns is $6,000,000 and owns 7 properties
  • Listen to his previous episode: JF477: You Should Have Bought This Mixed-Use Property!
  • Based in Cincinnati, Ohio
  • Say hi to him at ashbpatel@gmail.com

Get more real estate investing tips every week by subscribing for our newsletter at BestEverNewsLetter.com

Best Ever Listeners:

Do you need debt, equity, or a loan guarantor for your deals?

Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at 212-897-9875 or emailing him mbelsky@easterneq.com


Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Ash Patel. If you recognize Ash’s name, that’s because you’re a loyal listener and you’ve been listening since episode 477 at least; that’s where I interviewed him. The episode is titled “You should have bought this mixed-use property.”

Ash is a good friend of mine. I got to know him actually by — I believe I reached out to you on Bigger Pockets to interview you, and that’s how we initially got connected. Ash is a successful commercial real estate investor. His first property was a mixed-use property, so he’s seen both residential and commercial. He is adamantly for commercial real estate versus residential.

He previously was in IT for 15 years, and now he’s a full-time commercial real estate investor. He owns property with a total value of over six million dollars, and he has seven commercial properties that that comprises of. Based in Cincinnati, Ohio. With that being said, Ash, do you wanna give the Best Ever listeners a little bit more about your background, just to catch everyone up? It’s been a little over a thousand days since we’ve talked on the show… And then also, that will lead into our topic today.

Ash Patel: So it’s been a thousand podcasts since we last spoke?

Joe Fairless: That’s right, yeah. A little over a thousand.

Ash Patel: I’m from New Jersey originally. I went to school in Indiana. I got an IT job in Cincinnati after college. I had a 15 or so year career in IT. I got into real estate because I thought there were some good tax benefits. I didn’t really know what I was doing, I got into it, I fell in love with it… The first building, like you said, was a mixed-use building, and I was able to see the residential side and the commercial side of real estate.

I fell even more in love with the commercial side, and since then, I focused on becoming a commercial real estate investor. So it’s been about six years now since I’ve been doing that.

Joe Fairless: And real quick, why did you gravitate towards commercial, versus residential?

Ash Patel: My first property was an apartment building over a grocery store, and I was able to see issues and benefits of residential and commercial. Residential tenants require a lot more effort; toilets clogging in the middle of the night… Just normal residential issues. The commercial tenant I would never hear from, and even when there were issues, they would resolve them on their own. They would call in their own plumber, they’d call in their own HVAC guys, and it was just a lot more effortless in managing commercial tenants. Subsequently, I acquired additional residential and commercial properties, but in the end I gravitated towards probably 90% commercial.

Joe Fairless: On that first deal, were the residential rents that you were receiving more than the commercial rent to make up for the extra time that it took you to manage?

Ash Patel: They were not. It was all market rents, but the commercial rents were a lot higher. The commercial side of it was just more profitable.

Joe Fairless: Got it. And with our conversation today – you’re one of my good friends, so we obviously talk a lot outside of the interview, and one of the things that you’ve mentioned to me a couple years ago is that you saw the market being really hot, so you kind of went on the sidelines a little bit. Can you talk a little bit more about that?

Ash Patel: Yes. My first deal was in 2012. It was when the economy was still rebounding. From 2012 through 2016 it was relatively easy compared to today to find deals. In 2016, things were getting a little bit more competitive, so I assumed we were near a market peak, and I started selling a number of properties and putting the profits into multifamily syndications through a company called Ashcroft. I’m sure you know them.

Joe Fairless: I know them, yes. I’m familiar with Ashcroft Capital. [laughs]

Ash Patel: So I assumed the economy was somewhere near a peak, and really I was just making excuses, because it became harder  to find deals, and I wasn’t putting in more effort compared to ’12 through ’16. I just figured I’d lay back, go passive, and wait for the next downturn in the economy before I got back in the game. Then things were kind of on autopilot, and I realized it’s not as much fun just maintaining properties as it is chasing deals, buying some properties, acquiring tenants, and just hustling and getting out there.

So I started marketing myself a little bit, letting people know what I do; I started networking a lot more than other real estate professionals, and not surprisingly, the deals started flowing again. And it was all just letting people know what I do, Facebook posts, lunches with other people… And today, just a year after I started marketing, I’ve got a handful of investors that wanna partner on deal, I’ve got other real estate professionals bringing deals to me, or wanting to joint venture on deals. I’ve got a couple great brokers that see me being active and start throwing me a lot more deals, and the result is I’m closing and buying more properties.

So I got back in the game, stopped making excuses when things got difficult; just got out there, hustled, and got back after it.

Joe Fairless: So 2012 to 2016 – it was more challenging to find deals… I guess when you look at new deals now, compared to 2012, 2013, 2014 and 2015 when you were finding deals more regularly or easier, are the deals similar to what you were finding then?

Ash Patel: They are not. ’12 through ’16 – I often acquired property that was either vacant or partially vacant, so there was a lot of value-add upside in stabilizing the properties. Today I’m finding mostly fully-rented spaces. Maybe the rents are below market. Or I’m still finding a few partially vacant buildings where you can still add value, but the returns are not as high; the upside is not as high, but the returns are still adequate to keep doing this.

Joe Fairless: And what type of returns do you look for?

Ash Patel: In the past I wouldn’t have done anything without at least being a 20% cash-on-cash annualized return, and today 16%-18% with no capital appreciation, so just pure cashflow; 16%-18% cash-on-cash returns.

Joe Fairless: And does that include when you sell the property, annualizing it, or after stabilization, or…?

Ash Patel: It does not. After stabilization yes.

Joe Fairless: Okay.

Ash Patel: Sometimes stabilization may be getting rents closer to market, or filling vacant spots, but it does not take into account the sale, or any property appreciation.

Joe Fairless: Since you had this new concerted effort in 2016, you’ve closed on one deal and you’ve got another closing tomorrow, right?

Ash Patel: As far as commercial properties, yes. I’ve done a few joint ventures with residential folks, but yes, commercial – I had a broker… This was an interesting story; one of the things that I put out there on Facebook was willing to mentor people that want to transition from residential to commercial, willing to mentor people that just wanna learn more about what I do, or willing to talk to somebody who wants to partner on a deal… Anything. Just get out there and network. If you have any interest in doing something or learning something, I’ll sit with you; we’ll figure out if there’s something we can do together.

I had a very successful residential flipper who had been doing residential flips for over ten years reach out to me because he wanted to learn more about commercial real estate. When I have these meetings, I’m often more interested in what they’re doing than sharing what I’m doing. So most of our lunch was spent learning about his business, and in the end we touched on some commercial. But it turns out he was looking for investors to continue flipping. I’ve gotten in on one of his deals, which — he should be listing it soon. When that sells, we’ll do another one and we’ll keep going.

That same person introduced me to a commercial broker, who was relatively new and hungry to find buyers, sellers, deals. Him and I got together… He presented a deal, and it ended up being a great property. We closed on it two months ago. The person I had lunch with got a nice finder’s fee for the introduction, and this broker subsequently has brought me several more deals, one of which we’re closing on tomorrow.

Joe Fairless: Wow. The deal that you closed on – what is it, what was the purchase price, business plan, that sort of thing?

Ash Patel: Sure. The first deal was a building that had been vacant for two years. It’s a bar on the first floor that’s empty. It was a salon that’s been rented for a number of years, and the second floor is vacant. It’s connected to the bar. The broker also had a friend of his who operated a coffee shop/bookstore, and they were looking to expand. So not only did he present the building to me, he presented a potential tenant, and before the closing we were able to sign the tenant to a lease. They’re going to convert the bar and the second floor to a coffee shop/bookstore/craft cocktails. So it should be a really neat concept… They’ve signed a 10-year lease, so a total win/win.

Interesting also about this deal was — just before the due diligence period was up, I was triple-checking my numbers and I realized the property taxes went from $7,000/year to $16,000/year, and I couldn’t figure why that happened, but that was gonna throw this deal out. There was no way to make these numbers work.

I did some more research, I found out that there was a tax abatement that was expiring. I called the broker and I said “Listen, there’s no way these numbers are gonna work.” He came back and said “Listen, we’ve gotta find a way to make this deal work” so we both got back in the trenches, brainstormed, arranged a meeting with the city council and told them where our dilemma was, and that this deal was not gonna happen… And they came back and offered a partial rebate on taxes.

We called the bank and told them the same thing – “Listen, the numbers don’t work on this.” The bank, who I’ve been exclusively banking with since my very first deal, they came back and modified the loan significantly to make this deal work, and finally all the pieces came together. We got a tax abatement, a tax rebate, and my loan is heavy-handed on the back-end, interest-only for the first year…

Joe Fairless: Okay. Is that what they did that they didn’t have before, interest-only?

Ash Patel: They did. Interest-only for the first year. I think they extended the amortization period. 20% down, instead of the typical 30%. Everything fell into place and we got it to work.

Joe Fairless: And what are the high-level numbers on the deal?

Ash Patel: Sorry, $550,000 was the purchase price, and this was attractive because this was the same price that the building sold for in 2013 to the previous owner. The lease numbers – I think the total revenue will be around $5,500; both commercial leases. So roughly a  16%-17% cash-on-cash return, but the tenant who’s gonna operate the coffee shop has an option to purchase the building in year three or in year five. So if he ends up executing either of those options, the annualized cash-on-cash return goes up to 25%.

Joe Fairless: Would you be able to 1031 if that happens?

Ash Patel: I would. It’d be a fair market sale, so to speak.

Joe Fairless: Okay. And would you plan on doing that?

Ash Patel: Depending on the market. I see a lot of people out there that get in 1031’s and they end up settling for properties just to avoid the taxes… And I think I’m still young enough in my career where I can afford to pay some taxes now, and maybe the next ten years the 1031 will be more important to can down the road… But as of now, rather than jumping into a mediocre deal, I’d rather pay the taxes.

Joe Fairless: You mentioned the tenant is doing a coffee shop/bookstore; you said earlier the second floor was vacant… Who pays for the bookstore and the coffee shop, to get it up and ready?

Ash Patel: Part of the deal was I would give them a $50,000 tenant improvement allowance, and the bank will essentially [unintelligible [00:16:40].04] So I’m putting in $50,000 to building improvements, and the tenant is putting in $80,000 of his own money into operating costs and further improvements. So it’s another win… There’s roughly $100,000 of improvements going into this building.

Joe Fairless: And then the deal that you are closing on tomorrow – how did you find that one?

Ash Patel: The same broker presented a deal; it didn’t look all that appealing on paper. We went to the location… It’s a small strip center, just three retail businesses operating out of there, and the place was just immaculate. It’s a block away from the other building that I bought. This is in a downtown suburb that’s got a lot of positive momentum. There’s some great businesses coming into this area.

The numbers on this one were a 6,8% cash-on-cash return as it is now. The leases are all expiring at the end of this year, so if we bring them up closer to market, the cash-on-cash return will be around 17%.

Joe Fairless: And is this deal a buy and hold long-term? Because the last one you gave the tenants an option to buy it.

Ash Patel: I gave the tenant the option to buy on that building just to make it more attractive for him. It’s one of those things where if he’s gonna put a bunch of money into this building and it’s somebody else’s building, you don’t get a great feeling about sinking a bunch of your own money into someone else’s property… So if he has that option to purchase, he would feel better about making improvements to the building, knowing he could potentially buy in the future.

Now, the purchase price is set with a nice return for me. He will definitely be purchasing it above market value. But he now has a building that he no longer pays rent on, and collects rent from the neighboring business that’s also in the building. So the exit would be a win/win on that.

To your question on this property – yeah, the tenants have been there for a number of years, they all plan on staying, so this is a simple, low-maintenance, low-overhead deal where I just resigned the tenants to slightly higher leases, and there’s very little landlord responsibility.

Joe Fairless: What’s the biggest challenge when managing a commercial building like a small strip center?

Ash Patel: Vacancies. If a tenant leaves and the space was specifically set up for them, you either have to find a tenant that can move into a space and take it as is, or you’re paying for tenant improvements, which will eat into your profits for a couple years.

I had a strip mall on the West side of Cincinnati where it was the corporate headquarters of a local eye care company, and it was very specific to them; there was retail in the front, and 80% of the space was office cubicles. Well, if they had left, it would be very difficult to find somebody to take over that footprint… So you wanna make sure that they’re stable, they’re happy, they’re willing to sign a long-term lease… So the turnover is the biggest challenge.

Joe Fairless: Do you have a property from your portfolio – or maybe it used to be in your portfolio – where the tenant left and it just wiped out all the profits if you were to do the tenant improvement, so you just decided to sell and you didn’t make nearly as much as what you thought you would because of that vacancy?

Ash Patel: No. And I think one of the ways that I avoid that is I’m a very hands-on landlord.

Joe Fairless: Yes, you are. I can attest to that.

Ash Patel: A tenant, whether it’s commercial or residential, has my cell phone number. I’m their first point of contact if there’s ever any issues. I’m on site quite often, just to see how everything’s going. I host happy hours, either at my house, or out somewhere, for all of my commercial tenants. It’s a meet-and-greet, networking, and kind of a business improvement type event, where I try to get our commercial tenants together and see if we can share ideas in improving businesses, share marketing ideas, gain economies of scale by sharing vendors… So they’re productive meetings, but they’re also very social, fun events.

I think every interaction that you have is an opportunity to make a positive impression. If your tenants know that you’re always there for them, willing to go the extra mile, take care of all their requests, they’re more likely to renew their lease.

Joe Fairless: What’s an example of when you did all of that, but then the relationship went sour? And maybe it hasn’t happened. You don’t have to get into specifics of who did this, but just as much detail as you can, if that happened, why did that happen? Because I know you are very hands-on.

Ash Patel: Yes. So on the East side of Cincinnati I had a 12,000 square foot single-tenant retail building. I had a tenant that signed a five-year lease. I believe in year three of his lease started slow-paying rent, and gave me the typical sob story – “I promise next month I’ll have it, next month I’ll have it”, and finally I show up one day to pick up rent that he told me he was gonna have, and the entire 12,000 square foot store was empty. My jaw just dropped.

He thought he was doing me a favor by clearing out all his inventory and giving me the building back in spotless condition. So when I asked him what happened, he said “Listen, you’ve been very good to me. I wanted to make sure that I gave you this place back better than you gave it to me.” In hindsight, that was a huge disservice, because now I had to market an empty 12,000 square foot building for lease or sale.

Had he stayed there and just told me his business wasn’t working, “I can’t make it work. I can’t pay you rent”, I would have let him stay there for free, as long as he lets me market it to another tenant or market it for sale. An empty building just is not very appealing.

Joe Fairless: It makes that big of  a difference if he’s got his stuff in this box, versus just being the box?

Ash Patel: It makes a huge difference, yeah.

Joe Fairless: Why?

Ash Patel: If you walk into an empty space, especially a 12,000 square foot box, it’s hard to envision what the space could be… But when he had isles and isles of merchandise, and clothes, and racks, and things mounted on the walls, signs everywhere, people in there, a good energy in the building, people can see what that building could be. They can envision their own business in that spot. But a vast empty space is just not very appealing.

Joe Fairless: Ash, how can the Best Ever listeners learn more about what you’ve got going on?

Ash Patel: Facebook, Ash Patel Cincinnati, Bigger Pockets, Ash Patel.

Joe Fairless: Ash, thanks so much for telling me these stories, and many others outside of this conversation, because I learn a whole lot from you… And then I also wanted to jump on this call and have this interview so that the Best Ever listeners can learn more about the commercial real estate strategies and just the overall approach that we talked about at the very beginning of the conversation, where there were deals that were easier to find… But then your mindset shifted and now you’re closing on deals, but marketing yourself more to get those deals and seeing results.

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

Ash Patel: Thanks, Joe. This was fun.

JF1515: Lessons Learned From Visiting a 292-Unit Apartment & The Power of Learning Something New Daily #FollowAlongFriday with Joe and Theo

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Joe and Theo are back for another Follow-Along Friday, where they provide updates from their businesses with the purpose of offering real world lessons to aspiring real estate and apartment investors. First, Theo discusses the lessons he learned from visiting a 292-unit apartment community, and its comps, in Tampa, FL. Next, Joe explains a new personal development strategy he is implementing – writing down something that he has learned at the end of each day.


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Best Ever Listeners:

Do you need debt, equity, or a loan guarantor for your deals?

Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at 212-897-9875 or emailing him mbelsky@easterneq.com


JF1508: Getting Better Everyday & Tips For Your Next Comp Visit #FollowAlongFriday with Joe and Theo

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Joe and Theo are back to give another update on their apartment syndication businesses. First, Theo provided three lessons he learned when visiting apartment rental comparables last weekend, and he talks about a report he discovered that offers the market rates for multifamily income and operating expenses. Next, Joe outlines his new vision for personal development and how he is striving to be better today than he was yesterday. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Best Ever Tweet:

Get more real estate investing tips every week by subscribing for our newsletter at BestEverNewsLetter.com

Best Ever Listeners:

Do you need debt, equity, or a loan guarantor for your deals?

Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at 212-897-9875 or emailing him mbelsky@easterneq.com


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

It’s Follow Along Friday, and with Follow Along Friday, as you probably already know, because you’re a loyal Best Ever listener, we talk about what we’ve got going on so that we can apply those lessons we’ve learned to help you out; that’s the whole name of the game, helping you out in whatever you’re doing as a real estate entrepreneur.

We’ve got with us Theo Hicks, like we always do on Fridays… How are you doing, my friend?

Theo Hicks: I’m doing good, Joe. How are you doing?

Joe Fairless: I’m doing well, and looking forward to our talk, our catch-up, and ultimately helping out the listeners… Do you wanna give some updates?

Theo Hicks: Yup. Last week I underwrote my first apartment syndication deal…

Joe Fairless: Really? Your first? I thought you’ve been underwriting deals…

Theo Hicks: For my particular business… I’ve underwritten other deals before–

Joe Fairless: What about that one you were talking about before, when you’ve visited it, and it was local, it was uglier than you thought it was…

Theo Hicks: Yeah, you’re right. This is the second one then.

Joe Fairless: So you officially just lied to everyone.

Theo Hicks: I officially misremembered everyone, yeah.

Joe Fairless: [laughs] Okay.

Theo Hicks: So this is the second deal I fully underwrote… And what I mean by fully underwrite, I mean I actually do the financial model and then I actually visit the properties in person, and I visit all of the comps, too. So it was a property — it wasn’t actually in Tampa, technically; it was in St. Petersburg, which is an island off of Tampa… And I just wanted to go over a couple takeaways that I had when I visited the comps, because again, I was really excited about this property, because the pictures looked great, and the property looked really nice, the numbers made sense based off of the comps that they’ve used, but I actually had to confirm that they were actually comps… In my opinion I don’t think they were, and I’ll go over why I think that, and you can let me know if you think otherwise, but… I’m pretty sure you’ll be in agreement.

The three categories that I broke it down to was the surrounding area – that was number one. Number two would be the actual demographic on site, walking within and around the community, because I went on a Saturday, so everyone’s home, everyone’s walking around, and the streets surrounding the property are busy… Then also the property type — I’ll go over all of those in a second.

The areas were different. We drove to all the comps first, just because that’s kind of how our trip took us…

Joe Fairless: Who’s “we”?

Theo Hicks: Me and my wife.

Joe Fairless: Okay, got it.

Theo Hicks: And we drove to the first comp; it’s got this really nice, brand new office building surrounding it, and multiple low-rise apartment communities that are a similar level to this comp. Then we drive into it and it really looked like a resort. I felt like I was at Disney. And that’s kind of the similar experience I’ve had for all of the — I think we went to four or five comps in total, and they all had that same feel to it. They were all 5-6 stories tall, built in the 2000’s, the surrounding area had a lot of new retail… So not even just the existence of retail, but newer buildings with retail in it, so an area that was developed… Actually, two of them had a dog racing track in front of it, so Marcella didn’t really like that that much.

Then we go to the subject property, and it’s right off the highway, which is good, but then we drove in the back and you can literally see the highway from the back of the property, and it was really, really loud… So that kind of needed to be addressed. But it was surrounded by hotels, and the only retail I could find within a mile radius was a Cracker Barrel. So that was a little different than I expected.

In my opinion, the areas were not similar enough for those comps that we looked at to be comps. The area was too dissimilar. There wasn’t enough retail and businesses in place for the residents to go surrounding the area.

Joe Fairless: How close were they to the subject property?

Theo Hicks: 4-5 miles.

Joe Fairless: Okay.

Theo Hicks: There were no apartments of this size. It was between [unintelligible [00:06:35].19] There was no apartment of that size within a four-mile radius of this property, which is why we went out that far.

So the area was like “Okay, these areas are a little bit different.” The demographics, similarly; the people that were walking around the comp properties looked more like young professionals that just graduated college… Not really any families. It looked like people our age. It was maybe white-collar, whereas at the other property the demographic was blue-collar… Which I’m sure if you actually update the units you could attract that, but I was just concerned about the actual demographic of the area, and are there enough of the white collar workers for that property to attract? So that’s something I needed to look into.

The third category is why I disqualified them, because all the comps were low-rise, five or six-story apartment buildings, and then they subject property was a garden style, so it was just a regular two-story apartment building. So the expenses are gonna be different, the type of tenant you attract is gonna be different… They’re just two completely different property types.

So I guess the lessons that I learned was number one, those were some things to look out for when you’re driving to the comps… Just to reiterate, don’t just trust the broker’s comps; actually go to the properties, or at least as Joe mentioned in last week’s episode, look at them on Google Maps just to at least give you an idea… But then also they need to be the same property type, which is something I could have noticed when I was actually looking at the comp pictures, but I didn’t really investigate it that much because I wanted to drive the market anyways… So I realized that if you’re looking at a garden style apartment, which is the one, two, or three-story buildings, you should probably be comping other garden-style apartments, and not the low-rise or high-rise buildings.

Joe Fairless: And when you’re looking at comps, you’re looking at it from a rent standpoint, how much rent you can command relative to other comps, is that correct?

Theo Hicks: Yeah.

Joe Fairless: So why does it matter if it’s garden-style versus low-rise or mid-rise buildings?

Theo Hicks: Well, the reason why I even discovered that distinction is because I was trying to figure out a way to have a better understanding of what the expenses would be for the Tampa area… And I was kind of doing some investigations, and they actually have this report – this is another update I was gonna give, but I’ll go over it now; it’s called IRET, and they basically survey apartment owners, property management companies and all the major MSAs (they do like 140 MSAs), and they ask them essentially what their income and expenses are, line item by line item – what’s your rental income? What’s the vacancy loss to lease concessions? All those line items. Then for operating expenses, what’s your maintenance and repairs taxes, insurance, contract services, things like that… And then at the end of that, they break it apart by the low rise, and the garden style, and then I think the other one was high rise.

All the numbers were different for those three, so that’s why I was thinking, maybe that’s because there’s a different demand for the low-rise versus garden style… I understand the expenses part, but I was confused or taken aback by the rental income, because I assumed the same thing as you, but when I was comparing the incomes on that report, they were different, which made me assume that the rents were different; [unintelligible [00:09:51].10] dollar per square foot basis, and then all the other things were a percentage of the gross potential income… But aside from my comp thing, that was the update I wanted to give – if you’re looking to figure out what the market rates are for the high and the low and the median range for your market, that’s a good report to download. It’s not free, it’s like $500, but I think it’s gonna be very helpful.

Joe Fairless: What do you google for that?

Theo Hicks: I googled “IRET income and expense reports”, but the website is IREM.org.

Joe Fairless: Cool.

Theo Hicks: So it’s actually IREM, not IRET. So IREM.org, and you’ll find those income and expense for all the different commercial types – office, retail, everything. That’s why I figured there’d be a difference, but I wanted to bring it up on Follow Along Friday to see if you had a different opinion, and if you thought what does it matter if it’s a low-rise, high-rise… It just matters what amenities are offered and what the [unintelligible [00:10:44].03] look like… In the area, of course.

Joe Fairless: Yeah, I haven’t bought anything other than garden style, so I don’t know, so I’m glad that you talked about this… As Ashcroft Capital continues to evolve, we might start buying some low-rise, mid-rise buildings.

I think it depends on the area, too. Dallas-Fort Worth there’s not a whole lot of those, relative to garden style… But I feel like in the coastal cities there are. So if we expand to more coastal cities, then we might come across more of those.

Theo Hicks: Yeah. So those are a few of the things I looked at. I’m gonna do the same thing this week. I’m actually underwriting three deals right now. I need to pick two to visit, one of Saturday, one on Sunday. Maybe we’ll hit two on Saturday, I’m not sure… One of the, again, is in St. Petersburg, and then another one is in Northern Tampa; another is by that property I talked about last week, that I misremembered… So that’ll be good, because I’ll get to double-hit that area again.

One of the main things I’m trying to do is get a better feel for the markets… Just driving around, and on the way there, while you’re kind of driving around the area, you get a really good understanding of the vibe and the feel of it that you can’t get otherwise… And it’s kind of just good to [unintelligible [00:11:56].02]

Joe Fairless: And you already have a head start with one of the properties, because it’s near the property that you already looked at, so you’ve got a sense of that area. Cool.

Theo Hicks: One other thing too that I just learned yesterday… As I mentioned maybe a couple episodes ago, me and my business partner kind of separated our duties a lot more. I’m focusing on finding the deals, underwriting the deals and I’ll be doing the asset management, whereas he’s focusing fully on raising capital, so building a brand, talking to investors… His goal is to talk to a handful of investors every day.

Yesterday he talked to an investor who had a net worth above 50 million dollars, and the ability to raise  five million dollars in capital for deals… I did a follow up and said “Did he say that he’s willing to do that, or is that what he’s able to do?” Because those are two different things… But regardless, that was some good news, because the types of properties we’re looking at are the 100 units or more, so it’s gonna be a five million dollars or more equity raise… So that was really good news.

Now it feels a lot different underwriting these deals, because now it’s real, whereas before I’m just like “Well, I’m practicing on these bigger ones until we either get the capital, so that in the future when we have the capital, I can be prepared.” But now it’s looking like we’re gonna be able to take down a deal over 100 units, so that’s really exciting.

Joe Fairless: You’re growing into your vision, that’s the key. You had the vision, and you were taking action on it, and lo and behold, now you all are speaking to people who can help you realize that vision. But if you didn’t have that vision to begin with, then you likely wouldn’t have put yourself in that position to have those relationships and conversations about what you’re doing.

It brings up an interesting point, because I know some people who have a very small portfolio, but they talk about partnering with hedge funds and family offices, and people with 500 million dollars net worth, on 50 million dollar deals… And I believe sometimes the vision, if it’s (quite frankly) unrealistic, or not likely, it can be a hindrance to your progression, because people can be so focused on getting the one big deal, and fast-forwarding from a very small portfolio to a 50-60 million-dollar project… There’s usually a couple steps in between at minimum, and sometimes having that big, big vision, with that big, big vision, if you just focus on that, you’re missing out on the steps in between, that can get you there, and then you don’t end up doing anything.

So I believe with your vision it is a very realistic vision. Hey, we’ve got a small portfolio – or large portfolio, depending on how you think about it… How many units you’ve got? 12, 13?

Theo Hicks: I’ve got 13, yeah.

Joe Fairless: 13, okay. So you have a 13-unit portfolio, I’ll just call it that, and now I want to get into larger stuff, and I will get into larger stuff, with a 250-unit property, one property. That’s doable, and that’s a good segue from a 13-unit portfolio, versus if you said “Hey, I wanna go find a 50-60 million dollar property”, which by the way, a 250-unit could be a 60 million dollar property, but that’s not what you’re looking for.

It’s a good way to think about things, and I do know people who have the grander vision… It’s good to have the grander vision, but at the same time, it can make you miss out on opportunities that can actually get you there faster if you did take those smaller opportunities.

Theo Hicks: Yeah, actually I was talking about this — I recorded the Syndication School episodes airing next week, so if you’re listening to this now, they’re not out yet; they’ll be coming out next week. But if was kind of about that – it was about having that grand vision, but you can’t just have that. At the same time, you just can’t have a one-year goal and that’s it. You need to bring those together, have your grand vision and be like, “Alright, what can I do this year to get me one step closer to that grand vision?” Not “What can I do this year to get that grand vision?” it’s “What can I do to get myself closer to that grand vision?”, to put it really succinctly.

Of course, I’ve got a vision of owning a ton of apartments, but I realize that I’m not gonna have 2,000 units within six months; it starts with one deal first, so I’m focusing on that one deal, but at the same time making sure that I’m also creating skills and learning things that will help me get to that grand vision, so making sure that I’m covering both at once… But I totally agree – if I was focusing on buying only a 50-60 million dollar 400-unit property, then I’d probably be underwriting deals for a while… Whereas now, if I find a 100-unit property that meets my criteria, I’ll take it down for sure.

Joe Fairless: Yeah. Also, one way that it manifests itself with having a much larger vision than that where it becomes actually a hindrance is thinking about that 12-month goal that you mentioned – how much you wanna make within those 12 months. A lot of times when I talk to people, they list out an amount that they wanna make within 12 months when they’re getting started in syndication as the same amount or greater than what they’re making currently in their full-time job… And it’s a little unfair to apartment syndication to have that goal. It’s possible, by the way, but it’s also a little unfair to apartment syndication to have the goal that in one year you’re gonna replace the income of your full-time job, because how many years in your life have you spent honing skills to earn the salary that you’re currently making in the full-time job? Probably longer than a year is my guess; probably five years, ten years, maybe even longer. And when we have goals that “Okay, I wanna replace the income in 12 months” – I love the ambition, but perhaps that ambition will be a negative, or perhaps the grand vision will be a negative, because if you don’t achieve the replacement of the income, then perhaps you won’t have the motivation and inspiration to continue… And I can tell you, if you do continue, you do consistent action, you do things, like you talk about in Syndication School and on this podcast, and in our book, and all that other stuff, you’re gonna replace your income in multiples.

About five, five and a half years ago I was leaving my full-time job in advertising… And I don’t know how many times, I haven’t even done the math, but a whole lot more in multiples than what I was making at my full-time job, but it didn’t happen in 12 months. And it usually doesn’t happen when you want it to happen, in the timeframe you want it to happen… So it’s just important — the take away is have  a vision, but know that it needs to be as realistic as possible so that you don’t get discouraged when you don’t achieve it and you don’t miss out on opportunities that can incrementally get you there actually faster if you take those opportunities than if you pass on those opportunities, waiting for the golden goose.

Theo Hicks: And I think using the example of quitting the job is perfect, because I bet the most common post on Bigger Pockets is someone who’s just starting out in real estate and they wanna replace their income at their  full-time job, and [unintelligible [00:19:28].09] it’s totally possible, and if you put your mind to it it’s gonna happen, but it’s not gonna happen as fast as you want it to happen. And if you’re already discontent in your full-time job, understand that you’re gonna be there for at least 12 months before you’re even able to entertain the idea of leaving… So just kind of understand that.

I don’t say that to sap people’s motivation, but to hopefully inspire them and have them think longer-term, and think in terms of decades, as we say, instead of a couple of a months. So yeah, those are all great points, Joe.

Joe Fairless: It is possible to do it within 12 months, but if that’s what you’re banking, then it can be a letdown… And that goes back to 50/50 goals that we’ve talked about before – 50% of the goal is achieving the goal, and then 50% is actually understanding the skills that you acquired during that period of time where you’ve been attempting to achieve the goal, and regardless if you did or didn’t, at least you have those new skills that you’ve honed and/or acquired, so you can apply that to future stuff.

Theo Hicks: Yeah, exactly. Alright, so those are my updates… What about you, Joe?

Joe Fairless: I’ve been focused on personal development, and some specific tings I’m doing, real quick… One, Colleen (my wife) and I went to a CPR class, so if you start choking, I can do the Heimlich, and if you have some sort of cardiac arrest, I can do CPR… So that’s important, especially since we’re gonna have a kid in about — I don’t know, between today and 2-3 weeks from now… So I know baby CPR, too; basically, the same thing, but you use two little fingers instead of your whole hand… Plus, you cover their nose and mouth with your mouth whenever you’re giving the two breaths. Certainly, if you’re interested in CPR, go Google it, don’t just do exactly what I’ve just said.

So one, we did CPR, learned that. And this was all this past week, by the way. Two, I finally solved the riddle that is waking up with inspirational speeches. I couldn’t figure out how to do it through Sons until I looked at Spotify, which is connected to my Sono speakers, and Spotify has Jim Rohn tracks… So now I simply set the alarm to wake up to Jim Rohn, and there’s probably others, too… But one cool thing about what I’ve found on Spotify when I searched Jim Rohn is that some people have mixed his speeches with music, so it’s waking up to like a jazzy Jim Rohn speech, which is pretty interesting… And Colleen approves, which is important, too. So we can wake up to that, and did this morning. That’s two.

Three – to date, I’ve completed 12 books for the year, which is kind of weak sauce, so I’m gonna put a more concerted effort into reading. I completed a book this past week; it was a fun book, “Leverage in Death” by J.D. Robb. It’s like a spy thriller, so not necessarily work-related… But Tim Ferriss would say it is actually more beneficial to read fiction books than non-fiction from a business standpoint, because it expands your mind, helps you think about different things, gets your creative juices flowing, that sort of stuff. So nonetheless, I finished that book.

Now I’m reading a book that I won’t tell you about yet, because I’m going to actually apply the principles in the book for at least a month – I’ve already started – and then we’ll talk in a month or two about the results of that book.

Theo Hicks: Before we move on, what part of the day do you read? I’m just curious.

Joe Fairless: It varies. If I wish I wanted something, I would just schedule it and I’d figure it out, so I guess I shouldn’t say “I wish I did it…”, but it would be more ideal if I did it in the morning every time… But sometimes in the morning, and usually at night I read something before going to bed. That’s a pretty good solution or thing for helping me fall immediately asleep if I open up a book, so… Reading at night.

And then lastly, I took that Playstation 3 Civilization and put it in the trash, and instead of actually doing that in some of my spare time, I am committed to being more connected with Colleen and just being more present. It wasn’t a problem, I wasn’t playing too much, but the time I was playing there was no interaction with anyone… So instead, last night we played a board game. I love board games, I love games, and she does, too. We played a board game called Qwixx, and it’s just a fun game. And lastly, I’m working out more.

I mentioned last week that I was doing the cash value insurance. I don’t have a specific update on that, because I’m still doing the paperwork and things, but I did take a physical for it earlier this week, and I don’t remember what my blood pressure was, but it was very good, and my pulse was 54, so it all checked out good… I bring that up just because I’ve been working out more, been mixing in weights and running… Yesterday I ran a mile, and then did sprints, and then did another mile after that.

One suggestion I have is if you have a lot of calls, then find a way where you can exercise during the calls. It’s kind of unusual to do at first, but what I do mostly now is when I have a call, I’ll do it on my treadmill, and I’ll have just a piece of wood that I put over my treadmill, and then I can prop my laptop on top of that, so I can walk while I’m doing my calls. I did that yesterday… I had six, seven hours’ worth of calls on different things yesterday, back to back to back, and I would be afterwards very upset and just cranky if I was sitting down doing all the calls, because I’m not getting exercise… But from that, I actually have more energy on the calls and afterwards. It was pretty good. So finding a way to incorporate exercise into the day-to-day stuff is helpful.

I mentioned all this, again, not to say “Hey, this is all the cool stuff I’m doing”, it’s just little changes that I’m making that will make incremental differences initially, and then over time will make larger differences. Some of these are forever skills, like CPR, so I acquired a forever skill, and some of these are more temporary, and you’d better keep it up, buddy, and that’s working out and other things.

Theo Hicks: A couple things to add… If you want a good board game recommendation, I recommend Settlers of Catan.

Joe Fairless: I don’t think she’d dig that, but I would.

Theo Hicks: [laughs] Me and Marcella play Settlers of Catan all the time. And then yeah, incorporating the working out into your daily work life… It’s simple – whenever I’m on the phone, I just put on my headphones and just kind of pace around the house, and that’s how I’d get my walking in. I actually got so bad at working out that I just put a gym in my garage. I’ve got no excuse. Because we were getting up so early in the morning  to go to the gym; I think we were going at 5 AM, and that was just too intense for me. Now I just go in my garage and pump some iron whenever I want. So it’s kind of figuring out your weak points and then finding a solution to them.

Joe Fairless: Awesome. Yeah, that’s a way to do it. We all have weak points or areas that we can hone, so it’s just identifying where they are and keeping on improving. That’s the key incremental improvement. Alright, let’s wrap it up.

Theo Hicks: Alright, so we’ve got the Best Ever Conference 2019 – it’s officially live.

Joe Fairless: Oh, that’s right.

Theo Hicks: You guys can buy your ticket at besteverconference.com.

Joe Fairless: It has been live for quite some time, but we are starting to put in the guests who are speaking at the conference, and at besteverconference.com the tickets today will be a lot cheaper than they are at the end of the year. I think they’re $799 now, but at the end of the year they’re gonna go to $1,000/ticket. So if you’re planning on going to Denver, and hanging out and attending the two-day conference late February, then I suggest you get your tickets between now and the end of the year.

Theo Hicks: Exactly. That’s besteverconference.com. And lastly, we’re going to do the book review of the week. If you’ve purchased the Best Ever Apartment Syndication Book, make sure you leave a review on Amazon, take a screenshot and send it to info@JoeFairless.com, and we will send you a whole bunch of free apartment syndication goodies.

This week’s review is from DallasInvestor. They said:

“Admittedly, I have not finished the book. I am through with chapter three. However, it is more than enough sample size to draw conclusions. First of all, I can’t wait to finish it. That is the most powerful endorsement that I can provide. It is very well written. Fairless and Hicks pack a tremendous amount of knowledge into each chapter and page, and present it in a very simple, intuitive and easy to digest format. If you are a beginning investor, it is not only highly recommended, but it should be considered a must-read.”

Joe Fairless: Thank you so much for that feedback and taking the time to do the review. I really appreciate it. Best Ever listeners, thanks for hanging out with us. I hope you got a lot of value from today’s conversation. I hope you have a best ever day, and we’ll talk to you tomorrow.

JF1501: 4 Syndication Lessons Learned From Visiting A Broker’s Recent Sales #FollowAlongFriday with Joe and Theo

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Theo recently went to a broker’s recent apartment sales, comparing the actual property to the OM. He found some very surprising and sneaky tactics the broker had done to make the property seem better than it actually was. Hear what lessons there are to earn from his experience. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Best Ever Listeners:

Do you need debt, equity, or a loan guarantor for your deals?

Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at 212-897-9875 or emailing him mbelsky@easterneq.com


JF1498: Build & Scale A Huge Cash-Flowing Portfolio While Working Full Time with John Lenhart

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As a lawyer, entrepreneur, and active investor, John knows a lot about scaling his portfolio while working as a lawyer, and his other businesses. He’s done a lot of unique and interesting upgrades to properties and is continuing his growth still. Tune in to hear how he’s gotten to where he is, and how he will continue to grow. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!  


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John Lenhart Real Estate Background:

Get more real estate investing tips every week by subscribing for our newsletter at BestEverNewsLetter.com

Best Ever Listeners:

Do you need debt, equity, or a loan guarantor for your deals?

Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at 212-897-9875 or emailing him mbelsky@easterneq.com


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

With us today, John Lenhart. How are you doing, John?

John Lenhart: Pretty good. Doing well, Joe.

Joe Fairless: I’m glad to hear that. A little bit about John – he is an attorney, an entrepreneur and an active real estate investor. He specializes in multifamily and self-storage in the Cincinnati market. I actually met John at a meetup a couple weeks ago, and we talked for about 20 minutes, or 30 minutes, or I don’t know how long it was… But I just really enjoyed learning from John about what he was doing.

He has a portfolio of over 15 million dollars and growing. He specializes in multifamily and self-storage, like I mentioned. Based in Cincinnati. With that being said, John, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

John Lenhart: Sure thing. As you mentioned, we’re actively involved in the apartment, as well as self-storage markets. We do have a few other small one-off properties as well in our portfolio, but primarily we tend to focus on the apartment and self-storage.

We are local market investors, so we are focusing on the Cincinnati region, mostly because we manage our own property and we know the area ourselves, so it allows us the opportunity to see the properties ourselves. We have not reached out to take private money yet, but that’s something that we’re exploring in the future. But that’s primarily why we’ve stuck to our own local market.

As mentioned, I am a lawyer by training. I no longer actively practice legal work. I have a few other small businesses, as well as my real estate business. As you’ve mentioned, we’ve been doing this for about ten years now and really enjoy what we’re doing on the real estate side… So that’s kind of where my interest just lies, and where the growth has been.

We got into apartments about ten years ago, and have grown that into an apartment and storage portfolio.

Joe Fairless: Okay, so you started out with apartments ten years, and then you went from apartments and also storage units?

John Lenhart: Correct. We started back in 2008, just kind of dipping our toes in the water with a couple of four-families in the local Cincinnati area. You know the Cincinnati market, Joe, so as you know, there’s a lot of older, 60-70 year old two and four-family properties around the area, and that’s how we got in. The market was down at that time, I should say, and there were a few decent deals out there that we were able to find… And what we did is we got going as we built our portfolio up slowly, just rolling over all the cashflow that we got from each property.

Every year we’ve rolled over, being able to acquire another property or two, depending on how much cash we had and the price we were able to find the property for. After about four years we had acquired eight four-families, so about 33 units total, and an opportunity in self-storage came to us in the market… And we’d been studying this for a little time at this point, so we knew a little bit about it. I’d even gone to the Scott Meyers training, if anyone knows who he is… He’s kind of the guru/expert on self-storage training… And the opportunity came up and we jumped on it. It was a very good opportunity for us.

Since then, we were able to find other opportunities, or hidden gems in the area. These were all value-add opportunities that we found, and have since worked on growing those. That’s been kind of our evolution.

Joe Fairless: You mentioned you haven’t taken private investors, but you say “we” when you’re talking about the business. Who’s “we”?

John Lenhart: Well, I have a partner in the business. This started ten years ago. I was in my late twenties at the time, and I work with my father on this. He more or less came to me and [unintelligible [00:06:42].16] interest in real estate at the time, and said “Hey, the economy is down, the market is down. I’m worried about my retirement. Let’s possibly get a few four-families together.” I would contribute to the money, he would contribute to the money… So we went into it as a fairly equal partnership, and that’s kind of how we started building it up.

As the years have gone by, we’ve just continued to let everything build up.

Joe Fairless: And how did you come across a self-storage opportunity?

John Lenhart: Well, the first one we came across was found on LoopNet, of all places… And I’ve actually found two deals on LoopNet – not just storage, but even apartment deals. I know everyone says LoopNet is where deals go to die, and that’s true for many cases, if you can run the numbers right and negotiate, you can find some of those diamonds in the rough and get something that’ll work for you.

So I found it on LoopNet; I’d already been to Scott Meyers and studied Scott Meyers’ training materials, so I knew a little bit about what to find on the self-storage. This was something that was owned by a mom and pop. It was about ten years old, they were looking to retire down in Florida… And when we got in there, we realized that the systems they were running were very archaic, to put it nicely here.

They were keeping the ledger for everyone that paid around the side of the lease, so that every time a person pays, they write on the lease they paid for June, or July, or August. So they had no computer systems in place, they had no property management system in place. The rents were bargain basement low, they’d never raised rents in their history, and they were leaving a ton of money on the table, and there was a ton of opportunity to build this up into a more modern system and really increase the revenue and the value of the property… And it was a great property to start with, for that reason.

We came in there, we originally brought a professional property management where — we brought a system in, and we computerized everything. We made a web page, so people could actually go out and rent units online, which was becoming a thing. Instead of having to spend $2,000 for a Yellow Page ad, which was common at the time, but dying at the time, we realized that we could save a lot of money there, and also increase the revenues. So we did things like that.

We brought in U-Haul trucks as another way to get referrals, as well as to increase revenue through U-Haul commissions. We started selling locks and boxes, which previously hadn’t been done at that location, and it was just another source of auxiliary revenue… And other sources such as storage insurance, things like that.

Then one of the other things that we started doing which was becoming common in the industry at that time was charging what I call is an administration fee or a renting fee, similar to going to the gym where they charge you a fee just to sign up for the privilege of signing up to join a gym – it’s the same concept with storage. A lot of times they charge $10-$20 just for the privilege to rent a unit. That’s very common in the industry, and we initially did that, and just a number of sources of different revenue for the property.

Joe Fairless: The admin fee, the insurance, the locks and boxes, the U-Haul trucks… Which one has the highest impact on the P&L?

John Lenhart: Well, if I were gonna say of anything, probably the U-Haul trucks, and the reason being it’s not so much the revenue that that brings in; the admin fees, the locks, the boxes, the U-Haul trucks – they’re all [unintelligible [00:10:17].11] in the big picture. You’re not going to have an independent business based on renting U-Haul trucks, or even selling storage insurance… But what it does and what it allowed us to do is it maybe accounts for 8%-10% of our monthly revenue… But what the U-Haul especially was doing was it gave us access to their system. We don’t just have our own web page, but we’re on their web page, and when someone rents a truck from us, they’re more likely to need storage, and we happen to be there as they bring the truck back and [unintelligible [00:10:50].27] So it rents us more units. It also puts us on their platform and gets us more views on their web page to rent more units as well.

So that’s why I’d say the U-Haul had probably the biggest impact, but not necessarily from the specific revenue it brings in, but from the additional storage customers that it generates.

Joe Fairless: How many more storage facilities have you purchased since then?

John Lenhart: We have three additional facilities in and around the area. After eight months of running this, we realized it’s actually a pretty good thing, and we really started looking for another one. We found another facility about three miles away. We purchased that about a year into it. That was something we bought out of a foreclosure from the bank.

The way that worked out was the price was great — I mean, you have to be a fool to turn that down…

Joe Fairless: How much was it?

John Lenhart: Well, it was about double the size of our first facility, for roughly the same price. I believe we paid about $650,000 for it at the time.

Joe Fairless: Wow.

John Lenhart: Yes, but it’s had its own set of challenges, that as we got into it we got to kind of see the differences between for example the storage market and the apartment market, and the fact that demographics and location –  how that plays into the storage market.

The market that we bought our first facility in – it was a good market, a fairly middle-class market in the area; it was growing. The market that we got our second facility, even though it was only a few miles away, was on the downturn a little bit, and it was also over-built, so there was a lot more storage in the area than possibly needed to be… So it kept rates down, we had a higher delinquency rate that naturally occurred there… Rates were down because there was a lot more competition in the area… So those were additional, different challenges than the first one.

What we learned from that is when we’re buying facilities, to spend a little bit more time looking at key demographics, almost like a retail establishment would, because that’s gonna be a core driver for your storage rent business.

Joe Fairless: Do you still have that second one?

John Lenhart: Yes, we do. It’s performing really well, and it does very well for us, but it just has to be managed slightly differently than, for example, one that’s in [unintelligible [00:13:13].19] Your unit size is gonna be different, your delinquency is gonna be different, how they rent is gonna be different. It’s just a matter of how you manage it; it’s not quite the same level or same thought process and management that you’d have from one to the other.

Joe Fairless: I would love to learn more about some specifics of how you manage it differently, because if someone who’s listening finds themselves in a situation where their area is overbuilt, but hey, they already bought the place and the demographics aren’t as good, here’s how you make it work – how do you do that?

John Lenhart: Our second one, as I mentioned, it’s in an area called Middletown, Ohio. For those who don’t know the area, Middletown isn’t the fastest-growing area in town; it’s more of an older factory town, and it’s seen better days, and it’s still struggling. Now, this particular property that we purchased – I guess it was a good deal for us, but it had a high delinquency rate and needed a lot more management on-site to manage things.

The manager has the ability to cut deals with people; we’re doing more storage auctions at this location than we would do at some of our other locations, which don’t have the same type of default rate… But we’re taking a lot more active approach in managing it. We’re working with the tenants, saying “Okay,  we might be willing to take a partial payment or two for someone who’s getting behind here”, or put them on a payment plan to get caught up, as opposed to just [unintelligible [00:14:38].29] That’s the nature of the market that we’re in.

The prices that you can charge per unit or per square foot are gonna be lower at this location versus other locations that we might have. It’s all in the nature of the market and how much competition is there, and the nature of the income levels of the market as well. That doesn’t mean that it’s a bad location or a bad property; it’s a great property and it performs very well for us, it’s just there’s different market conditions and how we’ve gotta adjust our management style.

Joe Fairless: As an owner, when you’re looking at the operations and the profit & loss statement for that property, and you’re doing the balancing act of having the on-site person cut deals for maybe partial payment, or maybe a payment plan, what metrics do you look at to make sure that they’re at the right spot, so that you’re not doing too much of the partial payments or payment plans, and you’re holding occupancy, or the delinquency is decreasing…? How do you look at that?

John Lenhart: Well, I guess the first thing we’re looking at is our delinquency rates. Ideally, all of our properties – we like to keep our self-storage delinquency rates at or below 5%… In that 5%-10% range — it runs more at about 8% in those times. So that’s the first thing we’re starting to look at, is “Okay, where is your delinquency rate at the end of the month? Where is that falling?”

There’s always gonna be a delinquency there. Those places are gonna have some type of delinquency. People fall behind, people have to pick and choose what type of deal is most important to them, and I get it, sometimes you’ve just gotta let your stuff go in a storage unit. But the great thing about storage is you don’t have to go to court to get people out. You can just cut their lock, and have an auction, and that cleans it out, and then you rent it to somebody else… But we’re monitoring that.

Typically, when we’re working with a customer, we’re cognizant to say “Okay, you’re 2,5 months behind… We’re not gonna take a $30/month payment or a $30/week payment until you get caught up. You’ve gotta make a significant chunk. We understand you’re not gonna pay off three months and late fees at the same time, but if you pay off, say, a month-and-a-half now, then we’ll work with you to allow you to make another chunk payment in 2-3 weeks.”

Our goal is to first and foremost collect the amount that they’ve owed for storage, and then late fees are secondary at that point.

Joe Fairless: When you have a customer who is delinquent and you might have to do an auction, is there some formula that you look at, where it’s like, “Okay, if they’re past $200 in delinquency fees, and I know on average I’m going to generate $250 in income, then I’ve got a $50 spread, so I’d better do the auction now versus next month, because then it’s at $300, and I’m gonna make $250, so I’m down $50.” Is there some type of formula you look at for that?

John Lenhart: Not necessarily. It’s just us, again… We’re probably more of a smaller group than some of the big REITs out there, who I’m sure may have a set formula in place, when they’re also managing tens of thousands of units as well. What we typically look at is our lien status is extra 60 days, and then the auction – anytime between 90-110 days is typically when we’re holding our auctions. We hold them quarterly at our facilities, or at least the ones that need it. So we have quarterly auctions for those.

Typically, what we see is when the notice of auction comes out, that’s when people get excited and anxious and they wanna make a payment. I often tell [unintelligible [00:18:20].18] that spurs people to action, and typically the week of the auction, that’s where we are getting our big collections coming in from those. We let people pay to get their stuff back up until auction… That’s how we typically do it. Because most of the time, the auctions are not gonna generate what you owe in rent anyway… So we typically let them have until that time.

As far as the specific metrics go, we might schedule the auctions typically in the winter time. If the weather — if we know it’s a colder month, we might hold off a couple weeks here or there. If it’s January, we might hold off till February or March, because people start filing their taxes in February or March, so they get their tax refunds and a lot of times they’re able to have a big chunk of money to pay off their storage bill at that time. So those are some things we take into consideration.

Joe Fairless: Your storage facility portfolio versus your apartment portfolio – which one do you make more money on? I’ll start with that question.

John Lenhart: Well, they’re both very profitable. The biggest difference, I’d say, between the two of them is with storage you’re going to get more cash. Storage is a very cash-cow business. You’re going to be able to generate more cash with a storage portfolio than apartments. But with apartments, if you’re looking to grow value of the property and then cash out in 3-5 years, you can get a bigger value probably when you go to sell the apartments, just because more buyers out there [unintelligible [00:19:55].10] slightly better cap rates than storage. That’s the big difference, I think – you’re gonna get better cashflow on the storage.

Joe Fairless: And what’s the largest apartments size building or community that you’ve got, in terms of units?

John Lenhart: Right now, our largest is a 50-unit complex.

Joe Fairless: And then self-storage – what’s the largest?

John Lenhart: As far as number of units?

Joe Fairless: Units, yeah.

John Lenhart: About 450 units [unintelligible [00:20:20].01] square feet, it’s about 65,000-70,000 square feet.

Joe Fairless: So comparing the 50-unit apartment complex to the 450 rental spaces/storage unit, which one takes up more of your time?

John Lenhart: Oh, the apartments, by a long shot. We are always having to go to apartments, and not always having to go — I mean, I had a staff that takes care of most of the stuff for me, but we’re always getting maintenance calls about clogged toilets, or leaky roof, or any number of issues. Or we’re turning in apartments, and we have to do renovations, or there’s always maintenance issues to handle at an apartment that are always coming up. Then you have the constant issues as well for people running late, and assessing late fees, and tenants can’t seem to get along… That’s pretty much common at any apartment building. But at storage you don’t have any of that. It’s still a collection business, where you’re sending notices to people as well, and you have to have somebody who most likely works at the office, depending on the size of your facility and what services you offer there. But outside of that, you could have a call center that answers the calls and takes payments after hours.

Our facilities are set up where people can go online and make their payment if they want. Or a lot of them are set up for automatic payments, so at [12:01] AM, 60% of all our revenues come in for the month, and we’re already cashflow-positive… So that’s some of the great things with storage. You don’t have to worry about getting that call in the middle of the night saying that a pipe has burst and is being flooded. That’s not something you have to worry about with storage. You don’t have to worry about someone having a meth lab in your storage facility, because there’s no water source. Those are all things that make the management of that a lot easier.

Joe Fairless: The last one you purchased, how long ago did you buy it and how did you find that one? The storage unit.

John Lenhart: We’re typically relying on a network of brokers that we’ve developed; we work closely with them, as well as vendors that we work with for other things, who go out and are bird dogs for us and try and find us property. I’m not someone who goes out — I don’t have the time to do letter writing and send out letters to various owners and try and solicit properties; I rely on the brokers for that.

This particular property – the last one we closed on – the closing date was in early February this past year, and we looked at it back in August of last year. So we got it under contract in September/October timeframe; it was about a three-month close.

Joe Fairless: From a broker?

John Lenhart: It was from a broker, yeah.

Joe Fairless: Okay. And when you have a bird dog, like a vendor or someone who finds a deal, how much are they compensated?

John Lenhart: Well, we’ve looked at properties from them; we haven’t found a property from them yet.

Joe Fairless: How much would you compensate them?

John Lenhart: I don’t know, I hadn’t thought about that. Obviously, something that’s fair and reasonable to everyone. I’d probably give them — it depends on what a reasonable broker commission would be. At least 1% or 2% of the deal is what I think, but I hadn’t really thought too much about that.

What [unintelligible [00:23:26].01] I’m using my U-Haul guys to say “Hey, find me a facility”, because for them – it looks good for their numbers too, because I’m gonna bring U-Haul to that facility if there’s not there; and if there is, they know that I’m gonna keep it there, so it helps them in their business, as well. That’s one good thing.

The other thing… My fence guys – same thing; the guys who repair my fences, my plumbers – people like that, that might know of something becoming available. It just means it’s gonna be more business for them down the line too, in their main business. So that’s kind of a strategy I use, too.

Like I said, we haven’t found anything that we’ve purchased from them, but we’ve certainly looked at quite a few properties they’ve sent our way and underwrote them.

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

John Lenhart: Well, as a local market investor, it’s relying on my network, whether it’s the brokers or out outside vendors, to help find properties for us that are kind of under the radar. Some of the best properties we have found, especially lately, are the ones that are owned by the out of town investors that don’t understand the area and are missing out on a lot of upside that the property has, that they don’t know because they are out-of-towners.

They don’t know the local trends, or some of the local developments coming through the pipeline, or they’re not in tune with the local business community to see where the growth is going as well as a local is. That’s part of the reason why we really focus a lot on our local market.

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

John Lenhart: Absolutely.

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

Break: [[00:25:06].12] to [[00:25:52].19]

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

John Lenhart: Recently read, or in general, the best book I have read that I recommend is The Millionaire Mind by Thomas Stanley. Early on in my career it kind of set my focus a lot, and I thought it was a very good growth on business.

As far as recent books, I’m in the middle of Matt Faircloth’s “Raising Private Capital” book right now. That’s a pretty good book, too. I enjoyed that book a lot, too.

Joe Fairless: Best ever deal you’ve done?

John Lenhart: Well, I’d say back in 2014 we did a storage facility, and the great thing about it – it was owned by a developer who was having some issues, struggling… He didn’t exactly know what he had, and we got the thing for a very good price. There was a little bit of uncertainty there, because there were a lot of units we couldn’t touch, and when we finally took over, we realized about half the units were deemed vacant, but it had people’s belongings in it. We quickly auctioned that off and got the place rented up fully. We’ve doubled the revenue on the facility by the three-year term, so… Great deal for us.

Joe Fairless: What’s a mistake you’ve made on a transaction that we have not talked about already?

John Lenhart: Probably I’d say my first real estate deal. It was a two-family house I’d purchased back in 2006, even before I really started actively investing. If you remember back that long, that was the height of the old real estate cycle, where everything was just crazy-priced. I bought in an up-and-coming market that was way too much. I still have the property today, and it’s performing well for me, but for the first couple years it was cashflow-negative, and just not a great investment at first, but we were able to turn it around.

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

John Lenhart: Well, having some younger kids right now, I spend a lot of time volunteering with their activities and their events… But my wife, she’s big with the Ronald McDonald House; she does a lot of stuff on their board, and I got to know them through the years… If you don’t know anything about the Ronald McDonald House, they are a phenomenal charity to work with, and they do a great job for families of children who are in the hospital, with long-term care needs.

Joe Fairless: What’s the best way the Best Ever listeners can learn more about what you’ve got going on?

John Lenhart: The best way they can learn more about what I have going on – I am active on Bigger Pockets, and I am a commentator there. Anyone is welcome to reach out to me on that, I’m always happy to talk real estate… Or see me at some various local networking events as well. I’m always happy to chat with them there.

I love the business, I love what we’re doing, and it’s definitely my passion, so I’m happy to strike up a conversation with anyone who’s interested. I appreciate you inviting me on the show, and I appreciate the Best Ever listeners for listening to me here today.

Joe Fairless: Oh, absolutely. I’m very grateful that you were on the show, learning about how you turned around the storage facilities, some specific ways that you did that… The U-Haul inclusion, where you’re not only getting the fee from referrals, but also you’re included in their network, so you get new leads, so it’s a partner that continues to pay dividends in the future… As well as the more challenging storage facility, the second on that you bought, and what you did in order to make that work, and all the other miscellaneous tips along the way.

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

John Lenhart: Sounds good. I look forward to seeing you around, Joe. Thank you.

JF1494: Secret to Qualifying Apartment Syndication Team Members & A Simple Mindset Shift to Make Millions #FollowAlongFriday with Joe and Theo

Listen to the Episode Below (34:55)
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Joe and Theo are back for another edition of Follow Along Friday, this time talking about team building and mindset. They’ll tell us what to look for in a good team member, as well as how to define roles within your team. Then Joe will tell us about a mindset shift he has realized lately and how it can help us make more money. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Check out Theo’s addition to the podcast with his newest segment, Syndication School.

Get more real estate investing tips every week by subscribing for our newsletter at BestEverNewsLetter.com

Best Ever Listeners:

Do you need debt, equity, or a loan guarantor for your deals?

Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at 212-897-9875 or emailing him mbelsky@easterneq.com


JF1487: How to Analyze an Out-of-State Deal & How to Effectively Communicate w/ Passive Investors #FollowAlongFriday

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Today’s Follow Along Friday is all about analyzing an out of state deal, and the best methods for keeping investors happy with great communication. We’ll hear exactly what Theo is doing as he evaluates a deal that is out of state for him. Then Joe tells us how he keeps all of his investors up to date and happy. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


Best Ever Tweet:

Get more real estate investing tips every week by subscribing for our newsletter at BestEverNewsLetter.com

Best Ever Listeners:

Do you need debt, equity, or a loan guarantor for your deals?

Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at 212-897-9875 or emailing him mbelsky@easterneq.com


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

Theo Hicks: Doing great, Joe. How are you doing?

Joe Fairless: I am doing well, and Follow Along Friday, as you all know, is all about lessons we’ve learned and how that can be applied to what you’re doing, Best Ever listeners, on your real estate endeavors and adventures. Today we’ve got a smorgasbord of topics to address, and it’s basically what we’ve been up to and what we’ve got going on right now, and things that we’ve noticed, and some helpful tips for you. Do you wanna kick it off, Theo?

Theo Hicks: Yeah, so – updates for me… It’s funny, because the Best Ever listeners know that I bought those three fourplexes about a year ago (last August) and it was kind of like, we just had all the money to buy properties, and we were going to start looking, and then all of  a sudden they just kind of appeared within a couple of days, through a mutual contact that I met through actually getting my real estate license, which I never really pursued further than just classes.

Joe Fairless: Are you still active with your license?

Theo Hicks: No, it’s [unintelligible [00:04:10].03] in the graveyard. I was just paying all those fees, and it just wasn’t worth it.

Joe Fairless: How much is it a year?

Theo Hicks: About $1,000.

Joe Fairless: Oh. I didn’t think it’d be that expensive. Okay.

Theo Hicks: I was constantly getting e-mails asking for more money, so I was like “I’m done paying for this.”

Joe Fairless: Yeah… If it was one payment of $999 a year, would you have approached it differently?

Theo Hicks: Probably. So we [unintelligible [00:04:30].16] about those properties, and then they came on the market, and we went and saw them and then bought them… And then we really haven’t had the cash to buy properties again until last week, when Marcella went to our bank accounts and was like “Oh, we can buy another property.” I’m like, “Oh, perfect. I’ll reach out to our agent and ask her to do another direct mailing campaign.”

Then on Monday I got an e-mail from actually the same agent that was representing the three properties that I had bought before, and they’re listing a four-unit in Pleasant Ridge for sale, which is literally exactly the market and the type of property that I want. And what’s even funnier about it is if you remember when I was talking — maybe it was a couple months ago… One of the properties we got back through our direct mailing campaign was in Pleasant Ridge; it was a fourplex… The guy wanted 179k, and I went and looked at it and I didn’t buy it because it was just too distressed, and we were only looking for properties that we could buy now, hold on to them and then make updates as people move out… Whereas this one – I think there were two units that were vacant, and there was knob-and-tube, and a couple other issues that just didn’t make it worth it.

Joe Fairless: For people who don’t know what’s knob-and-tube…

Theo Hicks: Knob-and-tube is the electrical… I’m not exactly sure what years it would be, but it’s old. Electrical that is difficult to get insurance on. It’s possible, but you’ll talk to some insurance brokers and they won’t even ensure the property with knob-and-tube. A lot of properties in Cincinnati that are older will have that.

This property must have been built in the ’30s or the ’40s, so it still had the knob-and-tube… So I sent the deal to my friend, who ended up buying it for 20k below what they were asking, and ended up putting a lot of money into it because of all the issues… But this property that came up yesterday is literally right next door, which I thought was totally funny.

Joe Fairless: Oh. Are you using the word “literally”, like actually the next door neighbor?

Theo Hicks: Yeah.

Joe Fairless: Okay… [laughs]

Theo Hicks: Obviously, I’m in Tampa, so I just wanted to mention my approach to how I’m going to review this property…

Joe Fairless: So this property is in Cincinnati, and you’re in Tampa, Florida.

Theo Hicks: Exactly. Today I’ve got my real estate agent and a representative from my property management company is going to visit the property. I sent them a list of questions to essentially provide me with the answers to. What’s the state of the mechanicals, is there knob-and-tube…? They’re only allowing us to see one unit, so I’m asking them what’s the actual rent of that unit, because the rents for this property are all over the place… I think they range from like $525 to $650.

Joe Fairless: Okay. Is that market?

Theo Hicks: $650 is closer to market. The other ones are below. I’ve got six one-units in Pleasant Ridge already that are renting for between $625 and $685, and these units are actually better… Not in better condition – they’re the same condition – but it’s the layout… It’s a lot more open. The kitchens are bigger, and the living rooms are larger, and the kitchen area is bigger. So I think $650 to $700 is gonna be a good target.

As far as I know, they don’t need any updates, but that’s one of the things I wanna know, because when you view these properties, they only let you see one unit… But we’re gonna at least ask the broker “How does this unit compare to the other units?”, also “What is the rent on this units?”, so we know if it’s the highest rent, or the lowest, the middle, so we can kind of figure out “Oh, are they just under-rented because the landlord hasn’t been keeping up with the rents, or are they under-rented because the unit qualities are different?”

Joe Fairless: What’s the asking price.

Theo Hicks: They’re asking 204k.

Joe Fairless: 204k, okay. And at $650/unit, that’s $2,600. So let’s just say $200,000 – easy math. That’s 1,3%.

Theo Hicks: The actual rents are $2,350 right now.

Joe Fairless: Okay.

Theo Hicks: I bought my fourplexes for 220k, in the same area. I can basically use my properties as comps. Now, the properties that I have now do have two-bedroom units, so the rents are gonna be higher, but what I like about this property is, number one, there’s no boilers… And everyone listening to this podcast knows about how much money I spent on those boilers. They have individual furnaces and individual water heaters…

Joe Fairless: How much did you spend on boilers?

Theo Hicks: Over 20k.

Joe Fairless: Dang…

Theo Hicks: Yeah. I’d say about 20k.

Joe Fairless: Across the three fourplexes, or for one?

Theo Hicks: Across the three fourplexes.

Joe Fairless: Okay.

Theo Hicks: And the majority of the expense came from having to actually replace the inside of the radiators in the rooms. So it wasn’t actually the boiler in the basement, it was the corrosion on the radiators… So as a tip, if you have boilers, you have to inspect every single radiator, like literally take off the cover and look at the valve, and make sure the valve is not corroded. Because if the valve is corroded, it’s going to cost you $3,500 to replace the entire unit.

So yeah, we’re gonna take a look at the property today. I don’t know what the [unintelligible [00:09:19].11] conditions are. They claim there’s newer roofs and newer furnaces, and things like that… They call it a value-add, because you have to call everything value-add these days…

Joe Fairless: Of course.

Theo Hicks: …whereas in reality the value-add is just raising the rents to market rate.

Joe Fairless: Well, that’s the best value-add if you don’t have to do anything, right?

Theo Hicks: Exactly. One thing that is nice is that I do know that right now this neighborhood is not gonna demand any type of upgrades, so it’s not gonna make sense for me to go in there and place nice countertops, nicer kitchens, redo the bathrooms, because that’s what my friend did next door, and he didn’t demand a much higher rental rate than I’m getting for my one-beds that aren’t updated at all.

Joe Fairless: What did he get, versus you get on the one-bed?

Theo Hicks: I’m pretty sure our highest is $685, the average is probably $650… I think he’s getting maybe $700.

Joe Fairless: Okay.

Theo Hicks: The thing is he did it himself, so the costs were a lot less. I would be able to do it myself, so the costs would be a lot more. So for him, it actually kind of makes sense, since he did all the updates himself, so he’s not paying two or three times as much for the upgrades. But for now, based off of the rents that he demanded, it’s not gonna make sense for me to drop 5k-6k to update a unit. I’m not gonna make that back. This is not worth it now. It’ll probably make more sense to do it in a few years from now, because I know Pleasant Ridge is doing pretty well, they’re adding a lot of retail, and restaurants, and bars, and stuff…

Joe Fairless: Yeah, it’s up and coming, that’s for sure. Why are you looking at four-units, instead 5+?

Theo Hicks: Just because of the residential loans. We wanna stick with the fixed interest rate, 30-year loans, and get as many of those as we possibly can. And then once we can no longer get those types of loans, we’ll probably start looking at the commercial loans, and then looking at the larger properties. And then also, the down payment as far as the second one – it’d be more. And then third, fourplexes – there’s just so many of them, and it’s a lot easier to find. Five units and six units plus – they’re there, of course, but these four-units are easier to find. And also, the management company I’m using – that’s what they have expertise in, is these four-units. But if I came across a 5+ unit that I could afford, then I’d be interested. So that’s on the new deal front.

Then something else too, which was kind of an interesting way to fill your vacancies, and is unique – and obviously, you don’t wanna apply that to everyone; it depends on your relationships in the market… But I have a vacancy at one of my buildings – it’s a two-bedroom – and then we’ve got someone else, one of the original tenants that I inherited is moving out on the 1st of October, another two-bedroom… So obviously, we’re losing money on the one that’s not rented, and it’ll take maybe about a week to clean up, per unit. I remember I’ve had to do some repairs in that unit that the person is moving out of, and it won’t be that expensive to fix it up…

But anyway, so my friend who owns the property right next to the one I’m looking at owns another fourplex in Pleasant Ridge and had one vacancy, and they had an open house, and they had a ton of qualified applicants, but only one of them could actually live there… So we got the names of the people that couldn’t live there yesterday, and my property management company is going to reach out to them and schedule a showing of the vacant unit, and then obviously once that person moves out of the other unit, hopefully (fingers crossed) they just rent the unit… Because we know they’re looking.

The rent is gonna be lower on ours, because the ones that they were looking at were a little bit nicer… But with mine they’re gonna get a garage instead of street parking, and the area is a little bit better, because it’s a little bit closer to the downtown Pleasant Ridge area… So if you know people in your market who have a similar property as you and you have a vacancy, it doesn’t hurt to reach out to them and ask them if they have any vacancies that they’re showing, and if they have extra applicants that they weren’t able to have sign leases because they didn’t have enough rooms available. So I just thought that was a unique tip…

Joe Fairless: Yeah, that is a great tip. If you attend a meetup locally, then that’s a conversation topic that you can have. A similar concept took place with one of our apartment communities – we were approached by a broker this past summer, and it’s a broker we have a really good relationship with, we bought a lot of properties from him… And he said “Hey, I listed a property in your area, it sold, and we have a couple back-up buyers who wanna buy a property in the area where this particular property is that you own. They’re a cash buyer, and they’re willing to purchase your property at X price.” We said, “Okay. Let’s do it.”

The back-up offer, the group that missed out on the first property, the broker was smart enough to say “Hey, you missed out on this one, but I know another group, and if you offer this price, then they’ll be interested.” And we were interested, and we ended up selling that deal (the deal in Carlton) last May, and it worked out for everyone.

So when you’ve got a lot of supply from something, think about how you can leverage that for either helping others, or a future business for what you’re doing already.

Theo Hicks: Exactly. And luckily, in my situation, I guess they owed me a favor since I was able to send in that deal and I didn’t ask for anything; I was like, “Here, you can just have it, because I’m not gonna buy it.” So in return, I got hopefully a list of qualified residents to live on my property.

Joe Fairless: That’s cool, yeah.

Theo Hicks: So those are my two main updates. What about you, Joe?

Joe Fairless: Okay, let’s see… Miscellaneous things – it’s a busy week. Tomorrow we are likely selling a property, and tomorrow we are likely purchasing a property. Nothing’s final until our attorney e-mails us and says “We officially closed”, but we’ve got a big day tomorrow, a big Friday… Investors who are in the deal that we’re closing – you know which deal it is, and same with the investors who are in the deal we’re selling. So a day of celebration on both fronts.

Theo Hicks: But that property you’re selling – I know that your business plan is to hold on to them for five years… How long did you own this property before?

Joe Fairless: About two and a half, and it makes sense to sell when you hit your number. If you can get a purchase price that is similar to what you’re projecting in future years today, and then do a 1031 exchange for those investors who want to do that, into another deal, which we are doing, then we’ll do that all day long.

The property that we’re purchasing is in Duncanville, where we already own property, and I am very optimistic about that area. But we don’t underwrite based on optimism, we underwrite based on the here and now. However, if the values do continue to increase, then that’s the icing on the cake. I think there are some strong fundamentals for that area to continue to increase in value.

I’ve owned a house there since 2009, and I have my three homes – one of them is the one in Duncanville – for sale, through my sister, who is just putting out some feelers… And that house has doubled in value.

Theo Hicks: Wow.

Joe Fairless: But now again, it’s nine years, so that’s a long time… But the house is worth — actually, it’s more than doubled in value. It’s about one and a half times what it was. So anyway…

Theo Hicks: Before we move on, when you’re talking about Duncanville as a strong market, and even though there’s some projected rental growths and value growths, you’re always underwriting based off of the here and now… And based off of the last couple weeks when we’ve been talking about underwriting tips, one thing that I did wanna mention is that when you are underwriting these deals which you just mentioned, and let’s say you’re investing in a market that has had a 9% rental growth each year, and you’re projecting another 8% each year thereafter, if you underwrite that into your deal, you’re gonna have explosive, crazy returns, but what happens if you buy the deal and that doesn’t actually happen? Which is why when you are inputting your annual revenue growth, which is just not you forcing appreciation, but just natural rental growth, you always want to assume a 2%-3%, which is what the historical averages over a vast period of time, and not input the 10% that’s only projected through the research… Because that may be what happens, and if it does happen – great, fantastic. But if it doesn’t happen and you project that it’s going to happen, you’re going to be in trouble. I just wanted to mention that really quick, since we were on that topic.

Joe Fairless: That’s a very important note. Separately, as I mentioned, I’m selling my three single-family homes, and I have residents in each of those three homes, and their lease — they’re staggered, but pretty much through this next summer, and we’re not anywhere close to this next summer, so that limits our options for who our buyer is; it’s gonna have to be investors… Therefore, as I said, we’re kind of just sharing it with some people, but I personally wouldn’t buy them as an investor unless I really believed in the areas, and I didn’t care as much about cashflow at the price I’m gonna sell them for… So it’s likely — but every investor has their own approach… But I’m guessing that we’re not gonna sell the properties to an investor, and instead we’ll just wait until the leases expire, and then sell them to an owner-occupant.

Theo Hicks: Are you allowed to do any sort of buyout? Have you thought about that?

Joe Fairless: That’s a good question. I have not thought about that. I’m not in a rush, so I don’t care if they sell or they don’t sell over the next nine months. I’d rather just not rock the boat. For me, it’s more about the time I spend on it, and that would require more time, more conversations, and I don’t wanna spend any time or have any conversations about them. I just want them to either be sold, or just business as usual, and then whenever the leases are up for renewal, we just don’t renew them and we sell them on a one-off basis.

And let’s see – here’s an interesting thing that came up yesterday… I’ve never heard of this before. Frank, my business partner calls me, and he said he just got done having a nice lunch with a potential investor, who was discussing investing a significant amount of equity in our deals, and he said “Joe, guess how he heard about us?” I said, “I don’t know…” He’s like, “You’ll never guess!” I was like, “Alright, quit teasing… How did he hear about us?” He said, “He was following the SEC website for new registrations of securities”, because Ashcroft – we register every single deal through the SEC, like we’re supposed to… And he’s following that, and he saw that we had registered a new deal, so he reached out to us to see what other deals we have in the pipeline.

Theo Hicks: Wow.

Joe Fairless: Yeah. I didn’t even know you could track that to get alerts for when companies register deals, and Frank didn’t know either. I haven’t looked into it, and I don’t even know what I can do with that information, but I just thought it was interesting that an investor found us because we had properly registered an opportunity that we had just closed on, through the website, and they were tracking that somehow… So Frank had a lunch with this investor, and who knows, we’ll see what happens, but it was just interesting. I had never heard of that before.

Theo Hicks: That’s unique. It sounds like that’s an added benefit of — not the main benefit, but another benefit of creating a new LLC for every deal, rather than just not doing it for every deal.

Joe Fairless: Well, if it’s a security, it’s gotta be registered on the SEC. Creating anything aside, if you’re offering a security, you must properly register it with the SEC. So all of your entities are searchable on SEC.gov for each property, but that was really interesting.

Then the last thing I’ll mention is a reminder to communicate consistently with your investors, and have a consistent frequency of communication in addition to — go ahead and send out e-mails for important milestones, where you think people are curious about what’s going on.

For example, we do monthly e-mails for our investors by the 14th of the month, giving them the update on what’s going on with the property. In addition, if there’s a milestone like today, for example – we’re sending out distributions for the first time to our investor, and we wanted to communicate that to our investors on a particular property. So we’re sending out distributions for the first time on a particular property that we’ve just closed on about a month ago, and we wanted to notify them… So we crafted an e-mail… “We crafted.” That sounds– we wrote an e-mail… It sounds a little bit sexier than it actually is.

Theo Hicks: It was a very artistic e-mail.

Joe Fairless: [laughs] Yeah, a very artistic e-mail. We had some [unintelligible [00:22:56].16] and all sorts of stuff. We wrote an e-mail, and it simply said “Property name”, and it said “Distribution goes out today and tomorrow. We’re sending out first distributions for our *property name* today and tomorrow. ACH direct deposits will be sent out today, and checks will be sent out via mail tomorrow. For direct deposits, it should show up in your account within 2-3 business days, depending on your bank. Since we closed on *whatever date that is* your first distribution will cover the entire month of August (for example)”, and then we gave a $100,000 example, and we gave our approach for how we evaluate progress and how the future distributions will be handled. And we sent that out.

I got an e-mail back from an investor immediately after, and he said “Thanks, Joe. Your team rocks, as usual. My other partnerships could learn something from your communication style.” So other partnerships who are listening right now, I would suggest learn from this style, communicate consistently with your investors… It’s such a missed opportunity, because you could be nailing your projections, but if you’re not communicating to your investors and they’re in the dark on important things like when you get your first distribution, then you’re gonna get nearly the credit that you should for delivering on the business plan, which is the most important thing, in my opinion… But you’re not gonna get the return investors and the organic growth that you could by simply communicating consistently with them.

Theo Hicks: I’ve been going on Bigger Pockets a lot lately, just posting content and reading multifamily forums, and whenever I come across a forum where someone asked about a specific syndication group or crowdfunding group, or they are just asking “Hey, I’m interested in becoming a passive investor. What should I do as the next steps?”, and you read through it, every single time they mention a name, one of the things that they will say is about the communication style.

I have seen your name come up a lot, and [unintelligible [00:25:06].17] is how you communicate about the deal constantly. And I’ve read a couple, not about you, but other groups, where they said that the communication is not as great, or just nothing about communication was on there at all. But yeah, it doesn’t take that long to do; it just takes 10-15 minutes to write this e-mail for the update. It doesn’t take that long, but it’s so important to keep top of mind with your investors, let them know…

I know since I’ve met you you’ve had tons of e-mails and tons of responses about your communication style and how important that is to people and how much they appreciate it.

Joe Fairless: I love that you’re looking at it from the perspective of analyzing what investors are saying on Bigger Pockets and other forums and then applying that to this, because it’s true — just like I did research, and I believe you did research on Amazon Reviews for books prior to use writing the Best Ever Apartment Syndication Book, that way we know areas to address… And just if that didn’t convince an apartment syndicator to do it, then let me try one other angle and then we’ll move on.

The other angle is simply be selfish… Because by proactively communicating consistently with your investors, you’re gonna decrease the amount of one-off e-mails you have to reply to. So you’re gonna increase the amount of time that you have to spend on other things. If organic growth and having good things being said about you everywhere, about your communication, is not a driver for you, then just look internally and be selfish and do this, because then you’ll proactively address the questions, and then you’ll increase the amount of time you can spend doing other things that you wanna do.

Theo Hicks: Exactly. And another point before we move on – this is what I wanted to say about when I was going through Bigger Pockets, for syndicators or just investors in general… You will learn a lot by going on those forums – I’ve just kind of been doing it again recently, and I’m realizing how much value it adds, because you’ll see people that are either your potential customers… For example, if you’re a syndicator, you’ll see people who are interested in passively investing on there, and if you read what they say and the questions they’re asking, you can kind of figure out ways to add value, ways to attract them to your business that you might not have thought of otherwise.

For example, I was reading a thread where the person was asking questions about distributions, for example, and what factors are used to calculate those distributions. When I read that, I’m just like “Okay, I need to make sure that when I am going to present deals to investors, I need to make sure that I explain distributions in a simple form”, and actually explain them, because in my mind, since we do this every single day, we kind of forget that not every single person out there knows exactly what cash-on-cash return means, or how the internal rate of return is calculated… So figuring out a way to communicate that to your investors. And then also, selfishly, you’re not gonna have to have a bunch of one-off e-mails asking “What does COC mean?” or “What does IRR mean?”

This is one specific example, but  going on there and reading posts from either people that do what you do, that are trying to get into the business, or people that are kind of your customers, a.k.a. passive investors, and seeing the type of questions they’re asking so that you know to proactively address them and how to answer them when you’re having conversations with investors, or potential clients, or other people you wanna partner with.

Joe Fairless: Love it.

Theo Hicks: Good updates, Joe.

Joe Fairless: You too, Theo.

Theo Hicks: Thanks. So just to wrap up, make sure you guys and girls pick up a copy of the Best Ever Apartment Syndication book on Amazon. If you leave a review and take a screenshot and send that screenshot to us at info@joefairless.com, we will send you an e-mail with some apartment syndication goodies, some extra content and Excel spreadsheets that will help you start your business.

This week’s review comes from Christa. She said:

“I’m only halfway through this book and completely blown away by how much information there is… And it’s well-presented and enjoyable to read. I particularly like how Joe and Theo wrote this in a way to relate to all phases of investing. One helpful hint is this – grab a highlighter or some post-it tabs. As I’m reading, I know I probably should pause and actually do the exercises, and mark the items that I will want to remember, but I just wanna keep reading, ha-ha! Can’t wait to start the mentorship program next.”

Joe Fairless: Christa, thank you for that review, and I’m glad that you’re getting a lot of value from the book. Everyone, I hope you are as well. I think that’s all we’ve got. I enjoyed this conversation, Theo…

Theo Hicks: Me too.

Joe Fairless: …and everyone, thanks for hanging out with us. I hope you have a best ever day, and we’ll talk to you tomorrow.

JF1483: Tenant Management For Small To Medium Sized Landlords with Dave Spooner

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Dave and his company have a free software they offer for landlords to help manage their properties and tenants. They really have what sounds like  a great software and program for struggling landlords, or even just a landlord that could use a little extra help as they are growing. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Do you need debt, equity, or a loan guarantor for your deals?

Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at 212-897-9875 or emailing him mbelsky@easterneq.com


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

With us today, Dave Spooner. How are you doing, Dave?

Dave Spooner: I’m good. How are you doing, Joe?

Joe Fairless: I’m doing great, nice to have you on the show. A little bit about Dave – he is the co-founder of Innago, which provides simple, effective and intuitive tenant management software for small to medium size landlords. Based in Cincinnati, Ohio. The company’s website is in the show notes, so feel free to click that and go check it out. With that being said, Dave, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Dave Spooner: Absolutely. I founded another startup before Innago. It was focused on student housing, and primarily in connecting students to landlords, looking for a place to live. It was entirely successful, we’ve learned quite a lot from it, and one of the challenges that we ran into was that student occupancy — occupancy rates in student housing are sky high; they’re 98%-99% plus. Some campuses, some landlords have 100% most of the year, not all of the year.

There wasn’t a ton of need on the landlord side for any sort of service that would better connect them to students, but we’ve learned a lot from those landlords, and a lot of student housing landlords are independent, and that’s where we got connected to these small to mid-size independent folks, and that’s kind of what started the early germination of the idea for Innago. So that’s kind of the background that brought us here today.

Joe Fairless: What happened to the first startup?

Dave Spooner: We just dissolved it. We made a lot of good connections there, we learned a lot from it, but we ended up just shutting the doors on it, as we were not able to find quite a perfect market fit there.

Joe Fairless: And do you keep some of the team when you start a new one, or is it just “learned some stuff, starting fresh, and now we’re gonna launch Innago”?

Dave Spooner: It’s a little of both. My partner and I – we were working on the other one together. That’s where we actually met. He’s kind of the key piece that came out of that with me, and then he and I started fresh, and from the ground-up built Innago after that.

Joe Fairless: I believe it’s a relatively crowded space with what you do, but perhaps I’m just way too close to it, so I’m more exposed to it than most. One, would you agree with that, and then two, regardless of if you agree with that or not, how do you differentiate your company?

Dave Spooner: That’s a great question and a great point. I think it is crowded, however it’s not crowded throughout the whole spectrum. What I mean by that is there are a lot of property management software packages out there that are specifically tailored to what we call large-cap landlords; folks that have hundreds, thousands, tens of thousands of properties. You’re talking about AppFolio, Yardi, Entrata, different softwares like that.

There’s not nearly as many that are tailored specifically to this small to mid-size crowd, and those that have existed in the past are typically really outdated. There’s not a lot of modern software that makes it easier to manage and communicate back and forth with the tenant. There are a few others there, but not a ton.

The way we’ve kind of differentiated ourselves beyond just obviously targeting this market is in the way in which we’ve targeted it. What you find often times is there are some top list solutions, as I’ve mentioned, that are designed for smaller landlords… But most of those solutions are designed for landlords that have one, two, three, four, five units. Once you get beyond that, it becomes fairly clunky, fairly cumbersome… They’re just not built for expansion and for growth.

On the other side of the spectrum you have property management softwares built for hundreds of units, as I said. So there’s not a lot in-between, and there’s not a lot that really follows the journey of the landlord. You don’t get into real estate to buy a single-family home and say “Okay, I’m done. I got my property. I’m all set with my investment.” You get into real estate to buy multiple properties.

Innago – we call it software that grows with you. When you start off with just a single unit and you grow your portfolio all the way up to 100, Innago is gonna work great that entire time. It’s gonna be effective, it’s gonna be simple, it’s gonna be easy to use, and perhaps most importantly, it’s gonna be free.

Joe Fairless: And what are some specific ways that you deliver on the “grows with you” value proposition?

Dave Spooner: I think it’s all about an attention to detail and the way in which the software is structured. When you approach some of these challenges from a technical standpoint, depending on how you’re approaching it, it’s a lot easier to solve those problems. So if we say “Okay, we know our landlords are just gonna have 4-5 units”, it totally changes the way that we build out our user interface, the way that we build out the technical aspects of it, the way that the platform itself can grow.

But if we approach it with the idea in mind that this is gonna work with landlords at varying levels, varying sizes, it totally changes that equation. That attention to detail has been really critical, and beyond that we also have a number of features that I think work great for a landlord of any size. They include running background checks, tenant screening reports etc, running online leases, accepting payments online, automating rents, automating rents, automating late fees, communication, maintenance ticketing etc.

Joe Fairless: And you said it’s free, so you make money from the different services that the landlord offers to the resident, and the (prospective) resident pays a fee and you get a cut of that fee?

Dave Spooner: Sort of. Actually, the software itself is free to use. Everything that I’ve listed there is included at no charge to the landlord. The only piece that we do charge for is when the tenants pay rent online. Then we take a very small cut of that. It depends a little bit on the unit size, but we do take a transaction fee on each [unintelligible [00:08:31].17] card payment.

Joe Fairless: What’s the percent range?

Dave Spooner: Our standard flat rate is gonna be 1% capped at a maximum of $5 for an entire unit. So we’re never taking more than $5 on the entire unit, for both eChecks and credit card payments. And that’s for your first 25 units. Every unit after that is just a dollar, and the key point there is that it’s for the entire unit, so it’s not per tenant or per transaction, and it’s also only when they pay online. If they don’t take advantage of online payment services, then you don’t pay a dime for it.

Joe Fairless: PayPal is 3%, so… Much cheaper than PayPal, that’s for sure.

Dave Spooner: Exactly, yeah.

Joe Fairless: The challenge that you have building the business, my guess, is getting landlords on board, because if you get landlords, then you’ll get tenants, because landlords are your recruiters to bring more people in… So first off, is that your primary audience, landlords?

Dave Spooner: Yeah, absolutely.

Joe Fairless: How are you identifying ways to reach out to them and bring them onto the platform?

Dave Spooner: Really the best way to attract landlords these days is just to put out really great content online. Our blog is really active; we put out white papers, we put out information online, and we try to just provide resources to landlords… Landlords that need help with advice on managing their tenants in certain ways, communicating with their tenants, what should their late fee policy be… Are online leases safe? If so, how do you structure your lease? What clauses are important, etc.

So we’re constantly putting out what we believe to be really high-quality content, and in doing so we attract landlords that are curious and that are looking for answers to these types of questions. And as I mentioned, we’re mostly looking for growth landlords. As you’re growing as a landlord, you often times encounter new challenges, new questions, and having a really dynamic and engaging blog that answers to those questions is a great way to find those landlords.

Joe Fairless: Do you have a dedicated in-house person who does your blogging?

Dave Spooner: Yeah, we have a couple, and also the team itself kind of takes turns on occasion writing posts, depending on expertise. If we have somebody that has a lot of expertise in leasing, then they might put the post together. Of course, we have a single editor on the team that kind of makes sure everything is grammatically correct, is spelled correctly… But we all kind of take turns, and then  we have a couple of people that really spearhead most of the operation.

Joe Fairless: How many blogs do you put out a week?

Dave Spooner: We typically put out one per week…

Joe Fairless: That’s it?

Dave Spooner: …sometimes more than one.

Joe Fairless: That surprises me.

Dave Spooner: Yeah, one really good, high-quality blog post is really all you need. It’s not just like a 300-word post, like “Hey, here’s what you should be doing for blah-blah-blah.” It’s more like an in-depth analysis on whatever topic was taken on that day/week.

Joe Fairless: Okay. So the number one way to attract landlords, your audience, is to blog, and you’ve determined that doing one blog post of high quality per week is the best way to optimize that, versus doing multiple blog posts during the week.

Dave Spooner: Well, the thing about — I don’t wanna get too nitty-gritty into the…

Joe Fairless: Please do. No, that’s what I wanna do…

Dave Spooner: [laughs] Okay, cool. The thing about content is content continues to feed on itself. So we can put out a blog post today, that is gonna continue to attract readers 3-4 years into the future. As long as the content is good, high-quality and relevant. So it’s more about building on that quality content than it is throwing out a large quantity of lower quality content.

We build in this once-a-week sort of mentality, so that we ensure for ourselves that we are taking the right time and attention to detail to make sure that the information that we’re providing is really substantive and really useful. We’ve been posting on this blog for almost two years now, so there’s a lot of posts in there. There’s a lot to dig through, there’s a lot of really good information, and we wanna continue to add value to that, rather than just kind of throw out posts right and left.

Joe Fairless: The reason why I’m asking about this is because a lot of the Best Ever listeners have a target audience of landlords too, because we want to buy off-market deals… And that’s why I was asking you about this, because what you’ve learned certainly could be helpful for listeners who are attracting or attempting to attract landlords to acquire off-market deals.

Dave Spooner: Yeah, I think that makes a lot of sense. The key piece there you’ve gotta understand your audience and you’ve gotta understand the types of people you’re attempting to attract. So for landlords that are trying to attract off-market deals, depending on the area you live in, you might find that social media is the best avenue to go with.

What we always do is whenever we’re taking on a blog topic, we typically cluster them up… So we say “Alright, we’re gonna spend some time on leasing for the next month, month and a half.” When we do that, we identify online all the relevant forums, all the relevant Facebook groups, LinkedIn groups etc. that attract people that are having conversations about that topic. And that’s really what you wanna do from the start, and then you kind of word your content around that, to make sure you’re hitting all the right notes, and then you’re gonna put out information that’s gonna resonate with those communities that are already active online.

Joe Fairless: You work with landlords… Are you a landlord?

Dave Spooner: I am not.

Joe Fairless: How come?

Dave Spooner: That’s a great question. I’ve actually kind of been looking for taking my first dip into the pool here. We’ve spent a lot of time and a lot of money, of course, or getting Innago launched, so it’s been in part cashflow and timeflow issue… But that’s starting to settle down, so I would like to join in and possibly get my first rental property here in the not too distant future.

Joe Fairless: What are the reasons why landlords don’t sign up for your service after they’re made aware of it?

Dave Spooner: Good question. I like to think that they all sign up… [laughter] But of course, that’s not true. I would say that some of the things that we hear when landlords choose not to go with our service include — even though our service is free to use, inherently there are some costs associated with online transactions, and they’ll say “No, I’ll keep accepting my paper checks. I don’t wanna pay any money.” And what they don’t necessarily realize is that the time that they’re saving through a platform like Innago is well worth the very small fee that’s associated with that.

I think that’s probably the most common complaint. I think other complaints we hear – it’s really just about time. Landlords, as you know, are extremely busy. Often times they’re working a full-time job, and then they own properties on the side, or the properties just take up a lot of their time, and they may say “I don’t have enough time to learn this system and to get this all set up.” So what we’ve really tried to work hard to do is produce a product, produce a service that does not require a lot of learning, but communicating that to landlords can obviously be a challenge and a bit of a hurdle.

Joe Fairless: What are some things that you’ve done to optimize Innago based on the lessons you’ve learned about either the features that landlords do or don’t want, or just the overall user experience?

Dave Spooner: That’s a great question. So I would say a couple things. First of all, we always talk to our landlords directly. One of the big value-adds of Innago is that we have full support, both phone and e-mail. You actually get a dedicated account rep, so they kind of know the challenges that you run into, they get familiar with you, they know your voice, they know your phone number; anytime you have a question, they kind of handle it personally.

What that allows us to do is have a real ear to the ground as far as what landlords need and what they’re looking for. So whenever we’re wanna come out with a new feature, or whenever we’re kind of taking another look at a feature that we’ve had for a long time, we always get direct feedback and direct input from our active landlords, from our active partners.

That being said, we also really emphasize the attention to detail. I always say with the various teams at Innago, it’s death by a thousand cuts. It’s not about making big mistakes and big errors, it’s about making a ton of little ones that you don’t foresee at the beginning.

So whenever we wanna release a new feature, whenever we wanna release a new platform, we always really try to think the whole thing through, understand it from all perspectives, think about how different types of landlords would interact with it. A commercial landlord is gonna be different than a residential landlord, it’s gonna be different from a student housing landlord… And then there’s a ton of variance in between all those.

We just try to approach every single challenge from a broad perspective, and then have a really tight attention to detail and make sure that those features are not only useful, not only effective, but also simple and easy.

Joe Fairless: Based on your experience working with landlords, what’s your best advice ever that you’ve learned from landlords that perhaps could be helpful for landlords listening to this?

Dave Spooner: I think the number one thing I always stress with landlords whenever they ask my advice is it’s all about communication. As far as tenant management is concerned, it’s all about communication. If you don’t have a solid formal communication process in place, then you’re gonna end up with some gaps, especially when rougher tenants come through or when you have a problem tenant. If you haven’t communicated effectively, if you haven’t established ground rules and information sharing, then you’re gonna run into some challenges.

That goes from communicating late fees, communicating when somebody is actually late, when there’s a change in the rental rate, when maintenance ticketing comes through etc. Having that tight communication is really critical to having a good relationship with your tenant and having the tenant appreciate you as a landlord, and also pay on time and be a good resident for you.

Joe Fairless: And I imagine those features are all built into your platform.

Dave Spooner: Yeah, of course… [laughs] It’d be pretty strange if we [unintelligible [00:17:55].22] and we didn’t. I think there’s always room for improvement, and that’s the key – we’re always thinking about how can we improve that communication with tenants and between landlord and tenant. But yeah, a lot of those features are, of course, built in and automatically services through Innago.

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

Dave Spooner: Yeah, let’s do it.

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

Break: [[00:18:21].10] to [[00:19:08].07]

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

Dave Spooner: I would say on real estate it is “What Every Real Estate Investor Needs to Know About Cashflow”, which is by Frank Gallinelli, I believe. It’s a really solid book. Outside of real estate, I always love and will always go back to Hitchhiker’s Guide to the Galaxy. [unintelligible [00:19:23].09] for that book.

Joe Fairless: Best ever advice you have to a Best Ever listener who wants to start a tech real estate company?

Dave Spooner: A tech real estate company, okay… I would say first know and define your customer and talk to your customer as much as you possibly can. You’re gonna learn so much from your customer that you cannot possibly figure out on your own, and also try to get a lot of wide perspectives – try to find customers from all different ends of the spectrum, and also folks that maybe you wouldn’t think would be a great customer, but are kind of tangential or tertiary to the space that you’re trying to operate in; talk to them too, because they’re going to have great advice, they’re going to understand the market in different ways that you might not expect.

Joe Fairless: What’s something that you’ve done during this startup that if you made a different decision, then it’d be a completely different result? I know that’s a broad question, but feel free to take that in whichever direction.

Dave Spooner: Something that we’ve done that if we had done differently the results would have been totally different?

Joe Fairless: Yeah, like maybe you made a decision on having a certain feature, and as a result you got a lot more business, or maybe made a decision to remove something from your platform, and as a result it focused you in a direction that you didn’t even know you were gonna take?

Dave Spooner: Hm… Yeah, that’s a really good question.

Joe Fairless: It might be a really bad question, actually… I don’t know. I just made it up. [laughter] We can skip it if you don’t have anything top of mind.

Dave Spooner: Let me try to come back to it. I don’t know if that’s how lightning rounds work, but…

Joe Fairless: Yeah, that’s fine; I think it’s actually a really bad question, but I appreciate the flattery initially… Best ever way you like to give back?

Dave Spooner: I volunteered for a bunch of years as a swim coach locally, here in Cincinnati. I have not been able to do that the past year, because of just the tax on my time… But I try to do whatever I can, whenever I can. I find it really relaxing, and obviously it feels great to give back any way you can… So if it’s taking part in Give Back Cincinnati events, or Paint the Town or anything like that, I try to do it whenever I can.

Joe Fairless: What’s a mistake you’ve made when creating this company?

Dave Spooner: A mistake we’ve made… I would say – not to beat a dead horse here, but anytime we kind of lose sight within a feature or within a set of features of ultimately what the landlord is looking for. And what I mean by that is if we stray away our attention to hearing out our customers and hearing out our landlords, and getting all the different perspectives.

If we zero in on “Okay, this is what a student housing landlord — this is how they would functionally want to use this feature” and we’re not thinking about other landlords and other types, then we end up putting out a feature that really causes a lot more problems and challenges for landlords than it’s necessary. Anytime we do that, that’s always a big mistake and a big learning opportunity for us.

Joe Fairless: How can the Best Ever listeners learn more about your company and what you’ve got going on?

Dave Spooner: Well, they can always go to Innago.com. As I said, we have really personalized and open support and service, so they can also just shoot me an e-mail directly. My e-mail is really simple, it’s dave@innago.com. I’d be happy to have a conversation with them, show them how Innago can help them out, and learn a little bit more about what they’re looking for.

Joe Fairless: You’re looking to attract landlords, we’re looking to attract landlords, and that’s why it was really interesting hearing how you’re doing that – you’re focused on quality content online. Best Ever listeners, I recommend checking out their blog. Nicely formatted, that’s for sure, and very clean. I love the picture of the dog; I think it’s a dog with some sunglasses — no, a dog just squinting. [laughter] I imagine the dog with sunglasses, for some reason. But a dog squinting… A very cool blog, number one.

Number two is – one takeaway I got from the very beginning of the conversation is student housing, be a landlord in student housing, because you had a startup directed at landlords, to connect landlords and students for housing, but occupancy is sky high, so landlords didn’t need help, because there’s so much demand… So if you’ve got some units that you can split up, make them into beds and house some students – do it; make more money. I’ve talked to many landlords who do student housing…

And then also, congrats on your launch of Innago, and best of luck to you. I’m grateful that you were on the show, and looking forward to continuing to hear how it goes, and thanks for being on the show again, and talk to you again soon.

Dave Spooner: Thanks so much, Joe. It was great being on here, and a pleasure talking with you.

Best Ever Show Real Estate Advice

JF1480: Top 10 Tips for Underwriting a Value-Add Apartment Community (Part 2 of 2) #FollowAlongFriday with Joe and Theo

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Continuing a conversation they started about a month ago, Joe and Theo are giving away more of their top tips for underwriting value-add apartment communities. We also have a new segment of the podcast announced towards the end of this episode. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.

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

Today we’re doing Follow Along Friday. It’s part two of a two-part series on underwriting a value-add apartment community. Part one is episode… What episode is that, Theo?

Theo Hicks: 1445.

Joe Fairless: 1445 is part one. 1145… That’s a bunch of episodes. Part one was 1445, so you’ll probably wanna listen to that one if you haven’t yet. This will make a lot more sense, because this is part two of ten tips for underwriting a value-add apartment community.

Normally, we interview guests on this show, but Follow Along Friday – we break from that pattern and we talk about what we’ve got going on, and/or talk about some specific lessons that we think will be helpful for you in your real estate endeavors.

So where do we wanna pick up, my friend?

Theo Hicks: I just wanted to quickly mention the podcast episode, 1445; I wanted to quickly just mention what the first five tips were, and then if you wanna know the answer to these questions, go and listen to that episode, 1445.

The five tips that we went over were how to calculate an offer price, we talked about why you shouldn’t trust a broker’s offering memorandum, we talked about how to calculate the rental premiums for after you take over the property, we talked about what to watch out for when you’re performing a rental comp analysis, and we also talked about why it’s important to confirm your underwriting assumptions with your property management company.

So most of it had to do with how to calculate the rents after you take over the property, as well as your stabilized expense assumptions, and why must confirm it with your property management company. Those are the first five. These next five will also help you with your underwriting.

Before I go into it, I was going through Bigger Pockets, and trying to add value to people, and I could tell that there’s a lot of confusion on underwriting for larger apartment communities compared to the smaller properties, so I’m really glad that we’re doing this episode; that just confirms the need for this type of information out there.

Joe Fairless: What’s the most common thing that’s causing confusion?

Theo Hicks: Well, actually it’s the first one that I wanna go over…

Joe Fairless: Good segue. You smooth operator.

Theo Hicks: …which is technically number six, but it has to do with the actual rents. For example, when you’re doing a regular smaller deal, you typically look at what their actual rent is, and then you’ll do your rent comp analysis, or talk to the property management company and figure out what the rents could be after you take over… But for apartments it’s a little bit different, because if you’re at such a large scale, a 2% decrease in rents across one-units is gonna have a much larger impact on your revenue, because there’s 100 or 200 units. So when you’re underwriting a deal, you don’t wanna just input the actual rent that’s being collected, you wanna input the market rent.

I think a lot of trouble with this is distinguishing between the actual rents and the market rents. The actual rent is the rent that’s being collected on the actual lease. If someone’s on the lease for $600/month, that’s how much they’re paying. The market rent is how much the unit should be rented for if it was rented to market standards. Now, sometimes those might be the exact same, but if they’re not, the difference between those two is called loss to lease. I see a lot of people are confused by what this loss to lease means. The loss to lease is the amount of rent lost due to the actual rent being below the market rents.

The reason this is important, number one, is because if you rent out a unit to someone 12 months ago, at market rent, you’re not gonna be increasing the rent each month, so 12 months later, assuming the market went up, their unit is gonna be below market rent. That difference is called loss to lease; it’s money that you’re leaving on the table because that unit is not up to market rate.

Now, typically, a good percentage you wanna see is between 2% and 3%, because you are assuming that the rent is going to increase 2%-3%. For example, I was looking at an apartment deal yesterday where the loss to lease was $100… And if you just input the actual rents, then you won’t have an understanding of the historical loss to lease of that property, which is really important, because you wanna know what the loss to lease will be after you acquire the property, because you wanna know how much money you’re leaving on the table. So that’s one big thing – the difference between the market rents and the actual rents.

Something else you need to take into account is the vacancy, of course… But again, something else that’s different between how you typically underwrite a smaller deal and how you underwrite an apartment deal is you don’t wanna use the percent of vacant units; you wanna use the vacancies loss, so the rent that’s lost due to the vacant units.

For example, if you have ten vacant units and they’re all one-beds, the amount of money you’re losing is a lot different if they’re all two-bedroom units.

This comes down to the distinction between the economic and the physical occupancy rate, which we’ve talked about a lot on this podcast. The physical vacancy rate is not as important as the economic occupancy, because you wanna know how much money you’re actually collecting, and the physical occupancy does not take that into account. So you’re gonna have a 90% physical occupancy rate, but maybe 10% of those units aren’t paying the rent on time, or aren’t paying rent in general, or are paying only a portion of the rent. Your economic occupancy rate is gonna be 80%, and that’s actually what’s going to be used to calculate the calculate the cashflow, not the physical occupancy rate.

So a combination of all those things, which had to do with the actual revenue line items, knowing the difference between the actual rents and the market rents, and also the difference between the physical and the economic occupancy rate; I think understanding that will help you a lot when you’re underwriting this type of deals.

Joe Fairless: And this information is so valuable… I was not resourceful enough when I got started to find the source that educated me on this, and I’m so glad that we’re talking to the Best Ever listeners about this, because it’s necessary to know. If you’re wondering how to double-check economic versus physical occupancy, well you double-check that in three ways. One is the profit and loss statement that’s provided to you; they might fudge the numbers a little bit, or a lot. Two is the actual leases to verify that those leases add up to the rent that is allegedly being collected, and then three would be the bank statements – looking at the bank statements for that entity and determining how much income is coming in to the property.

A lot easier to do on larger deals than smaller deals, because it’s been my experience talking to people, because I haven’t bought a property — I went from single-family homes to 150+ units, so I haven’t done the middle range… But I’ve talked to people who have, and one common challenge that they come across checking the bank statements is the owner mixes the income with all their other income sources, so it’s really hard to parse that out.

A solution to that is hire a firm that will help you with that, assuming that you can get those bank statements from the owner.

Theo Hicks: Exactly. And something else I wanna focus on before going to the next step is — if  you listened to the last episode, we talked all about how to calculate the rental premiums, and what to look for in the offering memorandum… When you’re looking at a deal, they’re most likely gonna tell you what the market rent is, but always make sure you’re double-checking that it’s accurate, and always make sure that they’re basing that off of rental comps that are similar.

I was just looking at a deal yesterday, where they told me the property had $100 loss to lease, the units as is were $100 under-rented, and here’s the comps to prove it… And then I looked up all the comps, and what they had that the property didn’t have were pools, fitness centers, clubhouses, ponds with fountains, much nicer interiors… And that’s not a rental comp. Those aren’t the same property, so how am I supposed to determine the market rent of my unit if I’m looking at properties that are not even close or the same as mine. So always keep that in mind, and make sure that you’re not just taking their market rent at face value. Make sure you do some investigation on your end first. As I said, that’s the big one that I’ve seen.

These other ones are also very important. Number one is taxes. When you are underwriting an apartment deal, it was likely purchased by someone a couple years ago, at a purchase price that’s much lower than what you’re gonna buy it at, and the taxes on their profit and loss statement are gonna be based off of essentially how much money they paid for the property.

So once you buy the property for them, at the new purchase price, the taxes are not gonna be the exact same; so you can’t assume that you’re gonna pay the exact same amount of taxes as they are. This is something else that you might find in an offering memorandum – their proforma will have the exact same taxes that the current owners have, but they mentioned how they’ve done all these improvements to the property, and you look it up on that auditor site and discover that they’re selling it for two million dollars more than what they bought it for. What you need to do is you need to base your stabilized tax assumption on the actual purchase price. So exactly what you do is you’ll wanna go to the local auditor or appraisal site and find out what their tax rate is; it’s gonna be some percentage – 2,35% or whatever. So you’re gonna go on their site and find the exact one for the city or the county that that property is located in, and then you’re going to take that, multiply it by 80% of the purchase price, which is what you usually do. In California I know it’s 100% of the purchase price, but wherever you find this tax rate, it should show you exactly how they calculate the tax rate. It’s gonna be 80% or 100% the purchase price, times the tax rate. And that’s gonna be the tax rate that you use.

The reason it’s important is because you’re gonna look at deals sometimes where the taxes – which is one of the largest expenses – is gonna double, and that’s gonna have a huge impact on the amount of returns you can make at a specific purchase price…. So make sure that you’re using the correct tax number when you’re calculating your purchase price.

Joe Fairless: And it’s common practice to protest the taxes and negotiate with the county, and I highly recommend that you have someone on your team to do that for your asset. One way you could attempt to not have taxes increase is by purchasing the entity instead of the property; that way it doesn’t show a sale on record… But it’s not bulletproof. The mortgage that you’re getting is gonna be recorded, and for Cincinnati in particular, they have lawyers on staff, full-time — the Cincinnati public schools have lawyers on staff full-time who are just looking for transactions to increase the taxes, because you know, the school needs their money.

There’s no bulletproof way of avoiding the increase in taxes, so I would just anticipate it happening… But there are ways that you can attempt to not have it happen, or not have it happen as much.

Theo Hicks: Exactly. Number two of part two is taxes – make sure that you use the correct tax rate and the correct tax expense for the base of the purchase price.

Joe Fairless: By the way, if you purchase the entity, buyer beware, because you’re also purchasing all the issues that they might have incurred as a result of their ownership. For example, if there might be liens on the entity, there might be someone who comes seven years later or however long later and says “Hey, this bill was due” and you have no clue what they’re talking about, because it was the previous owner… A good attorney could find out most of that stuff prior to you purchasing the entity, but there’s no guarantees that you’ll find everything.

Theo Hicks: Exactly. The third tip is gonna be about renovations. Now, I know we focused on this in the past, but I’m just gonna reiterate it again. For the interior renovations – this is talking about a value-add community, so you’re buying a property that the current owner has already started a value-add program, he just hasn’t finished it yet, or  you’re going to do a value-add program to 100% of the units. So these are four questions you need to ask yourself, the broker, the owner, to help you determine what the interior renovation costs are gonna be.

Number one, you’ll wanna know how many units were actually renovated by the current owner. If you read through the offering memorandum or you ask the owner or you look at the rent roll, you should be able to determine how many units are renovated versus how many aren’t.

The next question you wanna ask, assuming that they’ve renovated units, is what were the actual unit upgrades, and once you know those, are you going to be replicating those, or are you going to be doing more than that, or less? You probably won’t be doing less, but are you gonna be doing the exact same, or are you gonna be doing more?

The third question you wanna ask is what period of time were those units renovated. If you remember back to two Follow Along Fridays ago, when we were talking about the underwriting part of the Best Ever apartment syndication book, we talked about what you need to look for when you’re looking at the rental comps on the offering memorandum, and you wanna know that if they’re being used as a comp, were those units renovated within a timeline that’s similar to how quickly you’re gonna be renovating the units.

The same thing here – you wanna know how long it took them to renovate those units, because the next question is gonna be what premium was achieved, and if they renovated over a long period of time, then that premium is not gonna be as accurate as if they renovated in the last couple of months.

The reason you wanna ask all these questions – you wanna know exactly how many units you’re gonna be renovating, and you wanna know to what level you’re gonna have to renovate those units. Say for example that the current owners have already renovated 50% of the units to, let’s just say, basic upgrades. Your goal is going to be to do premium upgrades, for all the units. You’re going to go in there and spend a certain amount of money for the original 50% that were already updated, but not as much as you would spend for the ones that had not been renovated at all… Whereas if you didn’t ask this question, you would assume that it’s gonna cost twice as much as it actually would.

Then you also need to know how much money you’re gonna make based off of those upgrades, determining if they make sense from a return standpoint. So those are the four questions you wanna ask in regards to specifically the interiors.

Next, of course, is the exterior upgrades, and really the only way you can figure this out is you or someone has to visit the property in person. If it is an on-market deal, they’re gonna have an offering memorandum that tells you that you need to replace the roofs, and the parking lot, and that’s it… But unless you actually go to the property and look at the roofs, look at the exteriors, look at the landscaping, there’s no other way to know exactly what you need to do, without, again, seeing it in person… Preferably with someone who has construction experience. If your business partner has construction experience, they should come with you, or if you have  a contractor…

Of course, if you’re not in the market, you need to plan a trip, or if you have a trusted team member or a property management company, or a real estate broker that’s willing to go there and do it for you, take pictures, take notes – that could help, too. But in order to determine the exterior budget, you have to go visit the property in person.

And then lastly, once you determine exactly how much money it’s gonna cost for the interiors and exteriors, you always wanna have the contingency for the unexpected. Because again, you’re just looking at it with your eyes before you’re submitting an offer, so it’s gonna be an assumption how much it’s actually going to cost… So you always wanna add in a little extra, just in case you uncover some things during due diligence that you didn’t expect, or if you uncover things after you’re buying the property that you didn’t expect.

A good rule of thumb here is 10%-15% of the entire budget. You wanna take the interior cost, plus the exterior cost, and add an additional 10%-15%, and that’ll be your total renovation cap-ex budget. That’s number three.

Joe Fairless: Or… Eight.

Theo Hicks: Eight. Great. Number nine is actually one of the three immutable laws of real estate investing, and that is always have operating reserves when you’re buying a property. When you’re underwriting a value-add apartment deal, and you have an idea what the purchase price is going to be, you wanna add in an additional 1% to 5% of the purchase price as an operating account fund. Obviously, the higher range is if there’s a lot more deferred maintenance on the property, and the lower end of the range is when deferred maintenance was already addressed.

Now, this is to cover unexpected dips in occupancy, this is to cover unexpected cap-ex projects… Essentially, to cover things that you can’t pay for with the amount of revenue you’ve made so far within the first couple of years. Of course, you’re keeping an ongoing lender  reserves and you’re gonna have cashflow coming in, but if something happens in the first couples of years and you haven’t created a fund for that yet, how are you gonna pay for it? You’re gonna have to do a capital call, pay for it out of pocket… I don’t know how you’re gonna do it, but you’re not gonna have to worry about it because you’re gonna have an operating account fund.

Now, a specific example of where this would have come in handy for me, if you’re a loyal Best Ever listener, when I talked about all the boiler issues I went through… If I would have had an operating account fund, I would have been able to — I guess I would have been technically out of pocket regardless, because it was my money either way… But I wouldn’t have been as surprised, and I would have just been able to take it out of a fund that I already have, as opposed to having it come out of my personal expenses.

Another example of when this would come into handy is let’s say you are underwriting a value-add deal, and it meets your return projections overall during the hold period, but let’s say year one, the cash-on-cash return is lower than the preferred return you’re offering to your investors. An operating account fund is a way that you can pay that difference upfront for the first year, and then of course, the cashflow from the property will cover the rest… Or you can just have that accumulate, but this is just another option for getting your investors their returns, starting from day one. That’s number nine.

And then lastly, number ten has to do with the sales disposition, or the sales assumptions. When you’re underwriting a value-add apartment deal — well, let’s just take a step back. Something else that I noticed is that when people are underwriting these smaller deals… And I mentioned this in part one – they just input one set of numbers, and then the returns based off of those numbers is kind of how they figure out, “Okay, if it’s 15% cash-on-cash returns I’ll buy it.” And of course, that’s not gonna be the case. You wanna have a proforma budget that is going to be a yearly breakdown for whatever you plan on holding the property.

The last step of that is to actually include the sales. Let’s say for example you plan on holding on to the property for five years; you’ll have your year one through five budget, and then the cashflow from that is gonna be taken into account for your cash-on-cash return. At the same time, if you’re gonna sell the property after five years, you’ll have to also include the profit from the sale in your returns… Whereas if you plan on holding on to the property forever and that’s how you’re underwriting the deal, you’re missing on maybe the largest profit that you’re going to make.

One thing that I wanted to talk about for disposition is how do you determine the cap rate at sale? So you need to know your NOI based off of your budget, and your rent increases, and the likes… But how do you figure out what the — the other part to the value is the cap rate. So what we do – and this is gonna be very conservative – is we actually assume the market is gonna be worse at sale than it was at purchase.  How you do this is you set a cap rate that is 0,2% to 0,5% higher than the in-place cap rate. So you buy the property at your purchase price, and based off of the in-place NOI you get a cap rate – let’s say 6%, and if we’re gonna sell the property five years later, we’re gonna assume an exit cap rate of something between 6,2% an 6,5%. That’s what will be used to calculate the sales price… So we would take the exit NOI, this new cap rate to figure out what the sales price is, we’ll subtract out closing costs, broker’s fees, things like that, as well as the remaining debt that you owe on the loan, to calculate how much money you’re going to actually make at sale.

That’s really important, because if you’re making multiples of millions of dollars at sale and you have to take that into account when you do your returns, you’re leaving a lot of money on the table and you’re leaving a lot of return percentages off the table, that your investors aren’t going to see when they are initially looking at the deal.

Always make sure you’re including these sales profits in your return projections. What we actually do is we have two separate returns – we’ve got the cash-on-cash return from just the cashflow from the property, and then we have a cash-on-cash return that includes the proceeds from the sale.

Joe Fairless: And these ten tips – Theo went over five in a previous episode (episode 1445), and then six through ten, these are the tips for underwriting a value-add community.

The important thing to think about after you’ve applied these tips is that you’re likely going to have a management partner, and if they’re not aligned with you on how you’re underwriting, then you might as well just throw it out the window and then hand your wallet over and tell them to take it… Because if the executors are not aligned with what you’re projecting in your spreadsheet, then you’re gonna fail, or at a minimum there’s a higher likelihood of failure on the project. And I’m defining failure as not meeting whatever you have in your projections.

This is a common mistake, so please don’t do this… The common mistake is doing the underwriting, closing on the deal, handing the budget over to the property management company and saying “Let’s go, team!” Instead, you should be aligned with your property management company; what I mean specifically is give them your budget prior to you getting awarded the deal and solidifying the terms with the seller. Make sure that your property management company has signed off on it… Because so many times I talk to investors and they say they did not share the budget with the property management company, the team that’s actually executing on the deal, and things went haywire right out of the gate.

Or you shared it with them, and the management company comes back afterwards with a revised budget, and nothing gets solidified, and then investor thinks “Oh, we’ll make it work.” It’s possible you can make it work, maybe with another management company, depending on whatever variables they’re changing, but that’s something that we’ve got to always keep in mind, because the main way we can lose money on deals is lack of execution. If you’re buying a large apartment community, 150+ units, or even 50+ units – think about a 50-unit, you’re dealing with 50 families, and dealing with 50 individualized dwellings; they’re connected, but they’re individualized, and there’s a lot that can go wrong on the execution, so make sure that you talk to your management company and they sign off on the budget. And even better, you see a template of what the budget reporting will be from them prior to closing… Because there have been times where I’ve talked to investors that say “Joe, I sent it to them. They said yes, that’s good, but then two months into it I finally get the finances back from the management company and they’ve got this whacky budget; I don’t know where that came from! They said we’re on track with the budget, but it’s not the budget I had…”

So a way to decrease the chances of that happening is by receiving a report – the template – with your numbers plugged in, that just shows “This is the budget we’re gonna be going off of.”

Theo Hicks: Those are all great points. Just one thing to add to that – make sure that when you’re interviewing property management companies (taking it even further back), you ask them “Will you review my proforma? Will you review my budget before we’ll probably be under contract?” The answer you wanna hear is yes, that they will review it, and of course, in combination with them having experience repositioning properties, so that you can trust that they actually know what they’re talking about. Those two things combined when you’re interviewing property management companies are key, because when the time comes, if you ever ask them, you say “Hey, can you review this?” and they say no, what are you gonna do? You’re gonna have to start the search for a new property management company all over again.

Joe Fairless: Yeah, very true.

Theo Hicks: So those are the top ten tips for underwriting… And again, there’s a lot of difference between value-add apartment community underwriting and the smaller deals, so I think all of these tips are going to push you in the correct direction when you are starting to look at these larger types of deals.

Joe Fairless: Just to clarify – when you say there’s a lot of difference between value-add apartment communities and the smaller deals… Will you define those?

Theo Hicks: Yeah, sorry. I would define that as four units or less. Most people who underwrite four units or less as if it’s a single-family house, and they’ll use the percentages for expenses…

Joe Fairless: Right. But for a ten-unit value-add, this applies.

Theo Hicks: Yes.

Joe Fairless: Or a five-unit value-add, this applies.

Theo Hicks: Exactly.

Joe Fairless: Cool.

Theo Hicks: And heck, you could even apply this stuff to the smaller deals too, to have more accurate underwriting. I guess what I was saying is that there’s a lot of differences between what I see people actually do and what I used to do compared to what’s the correct way to have the best assumptions possible and account for as many things as possible.

Joe Fairless: Cool. It makes sense.

Theo Hicks: Alright, so let’s move on to updates and observations. Joe, do you wanna give us an update on that property you were looking at in Cincinnati?

Joe Fairless: Yeah, the six-unit, flood zone, flood insurance too high… Not buying it. So… There’s that. No diversification for me in smaller stuff, which is fine. And again, for anyone who didn’t hear the episode where we talked about it, I was not gonna be active on that; I was gonna be the money man, and we were gonna do 50% ownership on the deal. My friend/real estate investor locally was gonna do the management, and [unintelligible [00:29:32].15] about $30,000. So the first $30,000 out of the entity that owns the property would go to me, because that’d be repayment, and then everything after that would be split 50/50. But nonetheless, it didn’t work out. The flood insurance is too high in the flood zone. Some things are too good to be true. It was killing that 2% rule, too.

Theo Hicks: It was.

Joe Fairless: I was seeing hundred dollar bills in my dreams… [laughs] And the other update I have is Colleen (my wife) and I went to a Jordan Peterson conference – or seminar, I guess, is more accurate – two nights ago in Cincinnati; he’s doing a tour, and it’s something I recommend. He’s doing a tour all over the country. I sent it to my siblings who live in Dallas, Fort Worth, because he’s gonna be there October 11th.

If you’re not familiar with Jordan Peterson – he’s a psychologist; he used to be a Harvard professor. He just talks about different philosophies and how to live life… And one thing I wanted to mention that really resonated with me – I am going to write a blog post about all the lessons I learned from this seminar; I have already written down my notes in a Word document, so I’ve got the outline, and I just need to bring it to life… But one of them I wanted to mention now is something that really stuck with me; he said “Compare yourself to who you were yesterday, not to what someone else is today.” It’s really powerful, for me at least, because what that makes me focus on is incremental improvement on a daily basis, and that’s what he talks about. Am I better today than I was yesterday? Or, better yet, how can I be improved today, so that I’m better off today than I was yesterday, I’m a better version of myself today than I was yesterday?

He talks about the Matthew principle. Essentially, it states that with every success that we have, that increases the probability of a future success. And the inverse is true – with every failure that we have, that increases the probability of the next failure taking place. So what do we do with that information? Well, what I do with that information, and what he talks about, is if there’s something that we are working on and we want to make the large goal happen — or a small goal; let’s do a small goal. For me, it’s not eat as many sweets. So if I instead just have one less sweet, one less bite of ice cream a day, or — I don’t eat ice cream every day, by the way… [laughs] But if I do something one less time, and not totally remove it, then that’s incremental progress, and there’s compounding returns on that.

And same with the podcast. The podcast is a great example. We have a daily podcast; it’s been daily for the last 1,500 days; holy cow, there have been compound returns on this podcast. It’s made me a multi-millionaire, that’s for sure… In an indirect way it’s made me a multi-millionaire. So when we do daily things — and another example is Bigger Pockets. I champion the thought of going on Bigger Pockets and being incredibly active, but some people I talk to say “Oh, I just can’t make enough time to do it!” Well, then do one post a day. “Oh, I can’t do that.” Okay, do one post a week. “Oh, I don’t know about that…” Really? You can’t do one post a week? Do one post a week. “I don’t know…” Do one post every two weeks. “Fine, I’ll do that.” So when you do one post every two weeks, you feel some sense of accomplishment – that’s pretty weak, by the way, but you feel some sense of accomplishment to do one post every two weeks… And then you’ll get some momentum. That increases the probability of you having future success, and increasing the amount of posting that you do on Bigger Pockets, there will be a direct cause and effect for increased activity on Bigger Pockets – it generates an increase in success in your business, I’m pretty confident about that.

That’s  one takeaway from the Jordan Peterson seminar. Check out his tour. If he’s coming to your city, it’s worth the investment. I don’t recommend getting VIP. I did get VIP with Colleen; all it is is a picture with him, which – cool. I don’t really care about that so much. So I wouldn’t recommend the VIP thing, but I recommend going to check out his seminar.

Theo Hicks: That Matthew principle, the concept of momentum in the positive direction and in the negative direction – it really applies to everything; it’s just a truism for everything. If you have a goal that’s not gonna happen tomorrow, it’s baby steps, and then nothing will happen for a long time, and then all of a sudden everything will start happening. Not all at once, but it will have that compounding effect, and it’s kind of the same thing in the negative direction too, but we’ll focus more on the positive direction for this episode.

I didn’t realize you were a Jordan Peterson fan. My friend Joey was actually there, too. I’m surprised you didn’t run into him.

Joe Fairless: Oh, cool. Cool. Well, I hadn’t read his book, and one of my good friends who I respect greatly, and who has a brilliant mind – someone I worked with in advertising, he’s a strategist; GCP, shout-out to you, buddy! – he told me about Jordan Peterson… So when he tells me about someone, I listen, and that’s why I went there.

Theo Hicks: I’m glad you went, and got a lot out of it. I’m looking forward to reading that blog post. Alrighty. Well, just to wrap up…

Joe Fairless: Oh, wait… We’ve got one more thing, something exciting – Syndication School. Sorry, I should have mentioned this. Syndication School, my friends, we’ve got that coming up… What is Syndication School? It is a series focused on teaching you an aspect of apartment syndication. Theo is gonna lead the charge on that. You are going to learn the how-to of apartment syndication; and it’s just gonna be on this podcast, so you’re not paying for it or anything… We’re just giving it to you, and it’s gonna be valuable.

The reason why we’re doing this is because we’ve gotten so much feedback on the Best Ever Apartment Syndication Book that we wrote, and the how-to nature of the book… Not just theory-based stuff, but exactly “Here’s how to do things”, getting into the details. So starting next month, in October, we’re going to have a weekly series on apartment syndication. It’s gonna be a two-part series, so two days out of the week will be Theo doing a lesson on some specific aspect of apartment syndication… So how to find off-market deals — and again, it’s not theory-based, it’s actual examples of how to do it, getting into the details. How to get capital on your first apartment syndication, how to get the experience, how to attract the right team members, but again, being very specific.

So it’s gonna be a two-part series, there are gonna be some corresponding documents that you’ll get on most of the episodes, so we’ll give you a link to get the free documents… All of it is free, and it’s gonna be a great way to add value to you if you are an apartment investor, or you’re someone who wants to bring more capital to your deals via partners – passive or active partners – or someone who’s looking to scale your business. If you’re in none of those categories, then just skip these two episodes whenever they come up each week, but if you are in either one of those three or all or some of those three categories, then this is going to be very valuable for you.

Theo Hicks: Yeah… And I would say listen to them anyways. I’ll listen to podcasts with a wholesaler, and he’ll say some success habit, or he’ll say something that has to do with his business that I’m like, “Oh, I didn’t even think about that. How can I apply that to my business?” So even if you’re a wholesaler or a fix and flipper, I think listening to the syndication school will still add value to your business, and maybe give you some future ideas of how to (as Joe mentioned) scale your business, as well. I’m excited for that.

And speaking of the book, make sure you guys pick up a copy on Amazon and leave a review…

Joe Fairless: Guys and girls, Theo…

Theo Hicks: Guys and girls, guys and girls… If you leave a review and take a screenshot and send it to us at info@JoeFairless.com, we will send you some free apartment syndication content. This week’s review is from John…

Joe Fairless: Who’s not my wife.

Theo Hicks: Yeah, who’s not Colleen… [laughs] John said “I received the book yesterday and plowed through it during a long flight and airport layover.” That’s impressive. “The book is crammed full of practical advice based on Joe’s experience actually building a large portfolio of apartment communities over the past five years. Notable aspects of the book are:

  1. a) it’s highly detailed and contains best practices to achieve success in critical areas, like finding deals, underwriting, raising debt and equity capital;
  2. b) a number of options are presented in the book, which leaves readers with choices of how to best apply methods to grow their apartment syndication business.”

Joe Fairless: Thank you so much for that comment, and taking the time out of your layover to write it, assuming that you wrote it during your layover… That is quite a long layover. I went through the book myself, right before we published it, just to do one final pass-through, and I read the whole thing and it took me approximately 24 hours, but I did sleep in between the two, and I wasn’t reading the whole time… So that’s very impressive, that you read 450 pages during a layover / I’m sorry that you had a layover that long… But nonetheless, thank you, John.

Again, if you leave a review on the book on Amazon and e-mail us a screenshot at info@JoeFairless.com, we’ll get you some good stuff that will help you on your apartment investing journey.

Thanks again for hanging out with us. I hope you have  a best ever day, and we’ll talk to you tomorrow.


JF1473: Best Ever Apartment Syndication Book Part 4 | Execution #FollowAlongFriday with Joe and Theo

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Best Real Estate Investing Crash Course Ever!

Joe and Theo are back for the final installment of our four part series about the recently released, Best Ever Apartment Syndication Book. This part is all about securing the funds and executing on your business plan. Hear how they execute their business plans for their investments. I’m positive they will mention at least one strategy you have not heard before. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


Mentioned In This Episode:

The First Three Parts of This Conversation:

JF1452: Best Ever Apartment Syndication Book: Part 1 – The Experience #FollowAlongFriday with Joe and Theo

JF1459: Raising Private Money | Best Ever Apartment Syndication Book (Part 2 of 4) #FollowAlongFriday with Joe and Theo

JF1466: Finding and Underwriting Apartment Deals | Best Ever Apartment Syndication Book (Part 3 of 4) #FollowAlongFriday with Joe and Theo


Get more real estate investing tips every week by subscribing for our newsletter at BestEverNewsLetter.com

Best Ever Listeners:

Do you need debt, equity, or a loan guarantor for your deals?

Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at 212-897-9875 or emailing him mbelsky@easterneq.com


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

Today is Follow Along Friday. We’re gonna be talking about the fourth part of doing an apartment syndication, and if you are just joining us, well, we’ve got three other conversations that I recommend you listen to. The first one was about the experience, how you get the experience you need in order to do a syndication; the second part is money, how you attract private money; the third is deal – how do you attract deals constantly to you, and then how do you run the numbers on those deals… And now the fourth – you’ve successfully done the first three, so you’ve got the experience, you’ve got the money, you’ve got the deals, now how do you actually execute?

Before you can actually execute, you’ve got to actually secure the money, and there are two main components of that. One is debt, and the other is equity. Theo and I are gonna be talking about some ways to secure the debt and the equity, and some things you should think about.

Yesterday I got our book in the mail, and Theo, I’m so proud of this thing. Is this showing up on camera, Theo?

Theo Hicks: Yeah, I can see it.

Joe Fairless: There we go. For everyone listening on the podcast… We’ve got a YouTube channel and you can see it, but it’s something that will be very helpful for a lot of people who — well, I don’t know about a lot of people, because apartment syndication is a very narrowly-focused business model, but for everyone who is doing apartment syndication, I’m confident that it will be very helpful for you.

We’ll kick it off today, and start talking about getting the money.

Theo Hicks: Exactly. As Joe mentioned, at this point in the process you have the deal under contract, and before you close on the deal you need to do two things. Number one, you’re gonna perform due diligence, which we’re not gonna talk about on this episode, because we’ve actually dedicated two podcasts to going over the due diligence… It’s episode 1116 and 1130. In the first one we go over what due diligence documents you need to get, and in the second one we talk about how much it costs… Which is important, of course.

Joe Fairless: Nice work having those episodes handy, Theo. I appreciate that.

Theo Hicks: Thank you. I’ve learned from the best, Joe. And then secondly, why you’re doing that [unintelligible [00:05:24].02] financing for this actual deal. Typically, when you think of real estate, you’ll get that loan from the bank, and then you yourself will fund the down payment. Well, since you’re syndicating this deal, part of the money will still come from the bank, and the other part will come from your passive investors.

In regards to [unintelligible [00:05:42].29] from the bank, there’s a couple of things you need to do in order to accomplish that. This is when you are reaching out to the lender and asking them what type of loan program you can qualify for, and whether or not you or the deal will qualify for financing.

There are four things you need to do. The first thing is you put together a biography; this is a biography for yourself and for everyone else that’s involved in the deal – your management company, if you have a mentor… Anyone who’s involved in the deal, a sponsor – they wanna know who these people are, what their relationship is to you, what their background is, and how all those three together relates to the deal in question.

One of the things that the lender will look at is the actual person they’re loaning to, and they wanna know that this person is gonna be able to execute the business plan, so they can make their money back. They wanna know who’s involved in the deal, so that they can make that decision. So that’s number one, you need bios.

Number two – they’re going to ask you for the financial statements for the actual property. It varies from lender to lender, but generally you’re gonna have to send them the historical profit & loss for the last 12 months to three years (usually 12 months). Then they’re also gonna want a current rent roll for the property.

Sometimes the lender might look at the trailing three months for some things, or the trailing one month for other things, but in general, they’re gonna ask you for those two documents, and then they’re going to essentially underwrite the deal themselves to make sure that going in, the debt service coverage ratio is above a certain threshold, so that they know that you can cover the mortgage payments with the current income.

Joe Fairless: And what are the thresholds that are typical?

Theo Hicks: For agency debt is usually 1,25. Essentially, what that means is that the NOI is 125% of the debt service, so they know that they’re confident in your ability to pay back the debt service, because we’ve got that 25% buffer between the NOI and the debt service. Then for bridge loans, sometimes it’s the same, sometimes it’s 1,1… It kind of just depends on the lender. So these are all things that you wanna ask your mortgage broker or your lender, because it varies… But for agency debt it’s usually 1,25.

Joe Fairless: And what’s agency debt?

Theo Hicks: We’re actually gonna go into it in the second part. So that’s number two. You’re gonna need a profit & loss statement and a rent roll. Number three is they’re also going to want your budget and your business plan. They know how the property is currently operating, but they wanna know how it’s going to be operating after you take over the property, and also what you plan on doing to the property. As a value-add investor, what you’re gonna wanna do is you’re gonna wanna send them your stabilized expenses, you’re gonna send them your stabilized rents and revenue line items, and you’re also gonna wanna send them your capital expenditure budget, so they can review all of that and make sure that, again, once all those are done, [unintelligible [00:08:35].24] accurate, number one, and number two, will you still be able to pay the debt service once the property is stabilized. So that’s number three.

And then finally, they’re also gonna want the personal financial statements from essentially everyone who’s signing on the loan. I actually went through this process a couple of weeks ago, talking to mortgage brokers, and sometimes they’ll want you to send it to them before you have a deal, just to expedite the process, and it’s one less thing you have to do when you actually find a deal.

One of the benefits of doing it beforehand is you can see how much debt you qualified for, based off of your net worth and your liquidity. If you can qualify for a one million dollar loan, but your plan is to buy a ten million dollar property, then you’re gonna have to bring a loan guarantor. A loan guarantor is someone who meets those liquidity and net worth requirements. Usually, their net worth is equal to 100% of the loan balance, and your liquidity is 10% of the loan balance at close. You’ll find that person and they’ll sign the loan, hopefully qualify for the loan, and in return you’ll compensate them either a one-time fee at closing, or a percentage of the general partnership, depending on the type of debt that’s being secured.

Joe Fairless: And/or. It could be both.

Theo Hicks: Yeah.

Joe Fairless: And one thing to mention on the financial statements that are being submitted – not only for a loan guarantor, but anyone who has 20% or more ownership in the deal. So that’s why as general partners, when we send the opportunity out to our private investors, we cap the amount that any one investor can invest at 19% of whatever the equity is.

For example, we’ve got a deal, the equity raise is 21,5 million – we capped it at a little over four million dollars, so that they stayed under the 20% trigger. What it does is it triggers the Know Your Customer Clause with the lender, and then they’re underwritten, and passive investors (at least our passive investors) don’t wanna go through that process, because it defeats the purpose of being passive.

Theo Hicks: Exactly. So for those four things that I mentioned – the biographies, the financial statements for the actual deal, you and/or your loan guarantor financial statements, and then the budget and the business plan… These are all things that you want to at least discuss with your mortgage broker before you actually find the deal. You don’t wanna just do this after you find the deal, send them all the bios, send them all the financial statements…

Also, for your business plan and actual deal financial statements – you can send those to the mortgage broker beforehand as well, so they can tell you ballpark the type of debt you can qualify for. Most of the mortgage brokers I’ve spoken with have had no issue with me sending them all of these things, as long as I don’t do it for every single deal and never close on a deal… You’ve gotta keep that in mind, too.

Joe Fairless: And in addition to financial statements, you’ll want to have your real estate owned schedule complete; that basically shows how much real estate you currently own, and it shows the debt that you have on it, when you bought it, if it’s an apartment building what’s the NOI, who is the loan with, when is the loan due, what percent ownership do you have in the deal, and ultimately what your equity is worth in that deal. You’re gonna be asked that, so you might wanna have that prepared now, than just add t it and update it whenever you do get a deal.

Also, from a liquidity standpoint, they’re gonna wanna see a bank statement within the last 60 days that shows whatever your liquidity is. So if you know you’re gonna be buying a property in the next 4-5 months, just keep that in mind, that you’re gonna need to provide a bank statement for the last 30-6- days of whatever you have, and that’s what you’re gonna be showing them whenever you close… So if you need to be more cash-heavy during that period of time, then approach accordingly.

Theo Hicks: Exactly. So that’s the first part of the financing – the debt from a lender. The second portion is gonna be the money you raise from your passive investors. The rule of thumb for how much money you’re likely going to need to raise – it’ll be approximately 30%-35% of the total project costs. You’re gonna have your LTV and you might have to put 20% down for the actual loan, but you might have to raise additional money for the acquisition fee, for the operating account fund, for closing costs, financing fees, if you pay for renovations out of pocket you need to raise money for that… So a good rule of thumb is 30%-35% of the total project costs.

Now, there are actually two main types of equity that you can raise. I guess these are two different ways you can structure with your investors. Number one is the equity, which is the most common… And that is when you raise capital from passive investors, you offer them a preferred return, and they will participate in the upside of the deal. So there will be some sort of profit split where they will make a percentage of the sales proceeds. That’s number one.

Number two – there’s also a different kind, that is similar to actual debt. In this situation, you’ll raise money from passive investors, but they won’t participate in the upside of the deal, just like a lender isn’t paid in the upside of the deal. Instead, they will receive a higher ongoing return. I’ve actually learned that it’s called a coupon rate. Essentially, they’ll get an interest rate on their money for a specific period of time, whatever you agree to. Then once that period of time is over, you will return the capital to them, whether it’s through a refinance or a supplemental loan. Then you as a syndicator own the deal free and clear.

Now, from my understanding talking to a few mortgage brokers, you can either do one or the other. So you need to have all equity or all debt. Usually, the debt works better if you only have a handful of investors that are investing a lot of money, as opposed to someone who’s investing 50k. But you can also do a combination of the two. You could have the majority of the capital come from a debt investor, let’s say 80%-90%, and then the remaining 10%-20% can be equity investors where you raise 50k here, 100k here from people to fill up the remaining equity.

Basically, what I’m saying is there’s unlimited ways that you can structure these types of deals, so make sure that you are having a conversation with your investor, so you know what types of returns they want and what type of structure they want, and then also have a conversation with your attorney who’s gonna be creating this operating agreement between you and your investors… Because if they are an apartment syndicator specialist, which they should be, they will have experience creating all types of operating agreements, and they can give you an understanding of how to approach it.

I actually had a conversation with a couple of real estate attorneys this past week, and they recommended that we start simple and just start doing the equity, where you offer a preferred return, and then upside in the sale… But as we grow, we could create more and more complicated deal structures based off if we have one big investor, or we find a certain type of deal, things like that. I just wanted to mention that before we get into actually how to secure capital and the process for doing so.

The process for securing capital – we have a four-step process for doing so. The first step after you have the deal under contract is to create an investment summary.

Joe Fairless: Oh, you paused because that was my cue to start talking, wasn’t it? [laughs]

Theo Hicks: Yeah, I did…

Joe Fairless: Alright, I’ll talk about this… But you said you were gonna mention agency debt and bridge debt, and you didn’t talk about those; can you quickly define those two and talk about it?

Theo Hicks: Yeah. Agency debt is essentially permanent long-term financing. This is debt from Fannie Mae or Freddie Mac, and the terms can be 5, 7, 10 or 12 years. This is a set it and forget it debt. So you’ll get your debt, you’ll have preferably a fixed interest rate – sometimes it might be floating – you’ll have a specified LTV and debt service coverage ratio, you’ll get your loan; you won’t pay the same payment for the length of the term, unless of course you get interest-only, which means you’ll be paying a bit less upfront.

The point is that this is  a loan that’s longer-term in nature, so based off of how long you’re planning to hold on the property, you’re going to make sure that your loan term is longer than that… So if you plan on holding for five years, you want a loan that’s five or more years; seven years – seven or more years.

A bridge loan, on the other hand, is shorter-term in nature. They can be as low as six months and up to three years, and then you’ll usually have an option to buy extensions of six months to one-year extensions… So it’s possible to extend it out up to five years, but essentially you’re gonna get a bridge loan when the deal doesn’t qualify for permanent financing.

If you remember what I mentioned earlier, it means to have a debt service coverage ratio of 1,25, and it needs to have a — I can’t remember exactly what it is, but it needs to have a certain occupancy rate. I can’t remember exactly what it is. It might have been 80%-85%… But it needs to be above a certain economic occupancy rate, or it won’t qualify for permanent financing. If that’s the case, your other option is a bridge loan, which is shorter-term in nature; it’ll allow you to cover the renovation costs, so instead of it being an LTV (loan-to-value) loan, it will actually be a loan-to-cost loan… So you’ll figure out what the purchase price is, plus all the capital expenditures, and then they’ll fund a percentage of that, and then they’ll provide you with draws for renovations along the way.

But essentially, the main difference is the length, so the agency debt is longer-term in nature… And then number two is the types of deals that qualify for this financing.

If the deal is essentially stabilized, you can qualify for agency debt. If not, a bridge loan is your other option.

Joe Fairless: Yeah, and interest rates will be higher for bridge loans. Your leverage can be lower for bridge loans, so if you were reckless and you wanted to juice your returns, so increase your returns as much as possible for every single deal, you’d just do interest-only bridge loans, and you’d look to exit out in two years, and then you just keep doing that… But the problem is they’re riskier, and you really should do them just for value-add deals.

The one way they’re riskier is let’s say you are doing renovations and your renovations are not going as planned – well, there are certain loan covenants with any loan, things you have to adhere to during the course of ownership in order to continue to be in good standing with the lender… And with a bridge loan, as Theo mentioned, you are not receiving the cap-ex funds at the beginning, but rather you’re receiving them in draw periods, just like a fix and flipper would receive it from a private money lender. They show that they did the works, and pictures, and they show reports, and proof of the work being done, and then you get reimbursed.

Well, on an apartment community, if things aren’t going as planned or you have a downturn in the economy or whatever takes place – any number of circumstances can take place – and your occupancy dips below a certain level, or your debt service coverage ratio dips below whatever level, or collections dips below a certain level (whatever the covenants are in place with the lender), well guess what? They’re not gonna send you the money to reimburse you for the work that you’ve done, and that’s a huge problem for you. You’re gonna have to either front the money, or you’re gonna have to do a capital call, or you’re gonna let the project sink. So there’s more risk involved with a bridge loan, significantly more risk. So while you can get higher returns, there’s significantly more risk involved, so you’ll wanna be very judicious with how you pick your loan options.

Theo Hicks: Exactly. And you are able to get some capital expenditures covered in agency debt. Essentially, what they do is they’ll (again) provide you a loan as low as 1,25 debt service coverage ratio… So if at the current purchase price without including renovations it’s above that, then you can increase the size of your loan until it hits that 1,25, and then whatever extra you have on top above the purchase price can go towards renovations. That’s how you can get around funding at least a portion of your renovations with agency debt… Whereas for the bridge loan they’ll just do it based off of the loan to cost. There is a debt service coverage ratio requirement – I think it’s 1,1, so it’s much lower, because they understand the deal is distressed and the NOI is going to increase over time. That’s why it’s important that you have a solid business plan to show them. But it is possible to have renovations covered with agency debt, too.

Joe Fairless: Cool. And now on the equity side, real quick – equity side, the process for securing the capital… Because Theo just talked about debt, and now there’s equity to secure with your private investors, the four-step process for securing the capital. This assumes by the way, that you’ve already done the legwork to cultivate your network, your position as a thought leader, you have the team in place to have the credibility and the experience to execute the business plan… So this assumes all those other things that are in place.

Now you’ve got the deal, and what do you do? Well, you create an investment summary. There are many things you can include in the investment summary. There are the legal documents, which are the private placement memorandum, the operating agreement, the subscription agreement and a couple other things. They will have all the details and then some. It’s gonna be probably over 100 pages whenever the attorneys are done. Sources and uses, the distribution priority spelled out in detail etc. So you don’t have to replicate those legal documents, but instead just put in the relevant things, which is basically the deal, the market and the team – the good things, and any ways you are mitigating risk for each of those three. So just think about it that way – the deal, the market, the team; what are the relevant things I need to know? At the very beginning of an investment summary have a snapshot of the opportunity with the projected returns, and what the offer is to them, so what are they investing in, and then go into deal, market, team.

So number on is create that investment summary. Number two is notify investors of the new deal in a conference call. Number three is host a conference call and send the recording to the investors afterwards. I use FreeConferenceCall.com. The reason why I do a conference call instead of a webinar is multiple reasons – one, I want it to be more of a conversation, not a presentation. I want investors to be able to have the information they need in advance. That’s why I send the investment summary prior to the call, and then it should be more of a “Okay, you’ve got the information, now let us just talk about the deal and the opportunity.” I don’t wanna present something to anyone, I just wanna have a conversation about it, number one. Number two is with a conference call I can be in my office in a T-shirt, versus I’ve gotta dress up. I don’t like dressing up, so that’s another reason why I do a conference call versus something like a webinar.

So one, investment summary. Two, notify investors of a new deal and of the conference call. Three is host the call – I do FreeConferenceCall.com. You can record it, and make sure you record it and send out a link to the recording afterwards. Do a Q&A sessions at the end of the call too with the investors; that way, you answer all their questions and others can hear the questions that are being asked and the responses.

Number four is secure commitments. Obviously, you’ve gotta secure the commitments, and how you do that is you just tell them “First come, first serve.” At the beginning of Ashcroft, I had to follow up with the investors, because we didn’t have as many investors… So what I did is I asked them at the very beginning, I said “Hey, here’s the deal we’re doing. Reply to this e-mail if you’d like the investment package.” That way once they e-mailed me asking for the investment package, I knew who I had to follow up with if I didn’t hear back from them about investing.

Now I don’t need to do that because we have so much demand. I can just send out the investment package in the initial e-mail, and then whoever invests, invests, and whoever doesn’t, doesn’t, and I don’t have to follow-up with anyone.

So at the beginning you might have to be a little bit more in tune with who you’re following up with, but as your business grows and as you perform, most importantly, then you won’t have to do that. So that’s the four-step process.

Theo Hicks: Perfect. So once we’ve got the capital secured, the financing secured, and the due diligence performed, we close on the property. At that point is when you implement your business plan. So for those remaining steps, to learn more about those, purchase the book – Best Ever Apartment Syndication Book, or go to apartmentsyndication.com and we’ve got blog posts on everything we’ve talked about today, as well as blog posts on the closing and the asset management duties, and how to sell the property at the end of your business plan.

Joe Fairless: And this week still – it’s the first week of launch, so when you buy it, e-mail your receipt at info@joefairless.com and we’ll get you a bunch of free goodies, which include a couple eBooks; one is from Gene Trowbridge, who wrote a book on syndication from a securities attorney’s standpoint… And a bunch of templates and things like that that we send over to you.

Theo Hicks: Absolutely. Besides the book being launched – it’s definitely a huge accomplishment and I’m very excited about this… It’s been a very fun week.

Joe Fairless: One year. It’s been one year, too.

Theo Hicks: Yeah, it has been.

Joe Fairless: We’ve been working on this puppy for one year.

Theo Hicks: Yeah. Do you have any other updates?

Joe Fairless: Yeah. We’ve got a couple deals that we’re working on. Closing on one at the end of this month, closing on another in mid-November. Then separate from that, I play softball; I’ve been on the same team for three years… And the captain of the team, his girlfriend is a real estate agent, and she asked me if I had any insurance broker contracts for a challenging deal that she’s working on, and I gave her the person I work with. She contacted him, and because apparently she’s working on a deal – just a six-unit deal – that had some insurance challenges, and the seller ended up backing out… Well, it’s a deal that is $130,000, and I said “Send me the deal and I’ll forward it to someone I know, and I’d be happy to help you out”, that’s it.

Well, she sent it over to me… $130,000 is the purchase price, good condition, and the rents in total are $2,665. I was like, “What?! The 2% rule…” That’s incredible. I was like, “Wait a second… This is a really, really good deal.” So I sent it over to my friend who represented Colleen and I on a transaction locally… He comes at my meetup every month, and we play poker with our investor group every month, so I’ve gotten to know him really well… And I said, “Hey, here’s the deal. If you want it, great. If you wanna partner up on it, I’d be open to partnering up.” And I know I’ve said in the past that I’m not looking to do smaller stuff, so we ended up moving forward. The way I structured it with him is I am only funding the deal; that is my responsibility. So it took me about $30,000 out of pocket, I’m gonna put in the deal, and he’s gonna work on getting the loan; obviously, I’m gonna have to spend some financials for the loan and that’s gonna be a little bit of a hassle, but other than that I’m passive, and he is gonna manage it.

How we structured it is it’s gonna be 50/50, and the first $30,000 or whatever my final total ends up being that comes out of the property, goes to me. Then after I get all my money back, then the profits are split 50/50. I thought that’s a good way of structuring it, so I’m still passive and I’m not focused on it, because that’s my most important thing – I don’t want to have focus shift from what I’m doing with apartments to something else… But if I can invest some money into a smokin’ deal and I can still remain passive…

And by the way, he says it’s worth $200,000 right now… So we’ve got 70k in equity at closing. Now, I don’t know — plus or minus 10k or so, I’m sure, but… That’s a way that I’m still keeping my focus on apartment syndication and Ashcroft Capital, but then also on the side doing a deal… And how I structured it I wanted to share, because perhaps other listeners who are in a similar position where they wanna remain passive but wanna still build a portfolio, and you come across something, or someone you know comes across something smaller, structure it that way… Essentially, it’s a 0% interest loan that I’m giving to the LLC that we’re buying the property with, and then the first money out of it goes to me.

Theo Hicks: Where in Cincinnati is it located?

Joe Fairless: New Richmond, which is in flood territory, which is the challenge with the insurance… So we’re still determining if the insurance is gonna be a deal breaker or not; so we’re not sure if we’re moving forward yet, but it is under contract, and then we’ll see if things work out. He’s working on all of that stuff, I’m not focused on any of that.

Theo Hicks: That’s a solid deal. I’m sure the insurance is a little bit higher, but the gross rents are as much as the gross rents were at my fourplex which I bought for 220k, so…

Joe Fairless: Yeah… My eyes went like saucers whenever I saw that. I was like, “Alright, maybe it’s worth a couple conversations.”

Theo Hicks: Well, congrats on that, Joe.

Joe Fairless: We’ll see what happens, but I thought it was interesting to share how we structured it, so that it’s a win/win for both.

Theo Hicks: Perfect. Alright. Well, to wrap up, we usually do the Best Ever Podcast review of the week, but since it’s launch week for the book, I figured we’d be apt to do a book review of the week. So make sure you guys and girls pick up a copy of the book on Amazon – it is Best Ever Apartment Syndication Book. If you like the book and it’s valuable, please leave a review for your opportunity to be the review of the week that we read aloud on the podcast.

The first ever book review of the week is from CemSmiley1, who said “A must-read for anyone interested in syndication.” Their review was:

“This book truly goes step by step through the entire process of apartment syndication. There’s a lot of information, but the material is put into layman’s terms as best as can be done, and the material included within each chapter is clearly outlined, which I think will be extremely helpful for referencing.

It’s not necessarily an easy read due to so much info, but a must-have book on your shelf if you’re truly interested in getting into multifamily syndication.”

Joe Fairless: Well, that’s my wife, so we can’t use that review… [laughs]

Theo Hicks: Oh, is it really?

Joe Fairless: Yeah, that’s Colleen… So Colleen, thank you for the props on that. It is an authentic review, so I’m okay telling you that’s my wife, but we’ll use another one… Because she did read every single word in that book and she helped us during the editing process.

Let’s read another one… Let’s read Ellie – “Great book, valuable content!” Verified purchase. This is an Amazon review. She says:

“I cannot recommend this book enough. I read Joe’s previous books and enjoyed them a lot. This is one is, by far, THE BEST. Filled with valuable advice from people who made it in real estate, including the author, Joe. The step-by-step method to start an apartment syndication is well laid out. The book will teach you how to build your brand, team and network. Very well-written and fun to read. Already looking forward to the next one.”

The next one?! Well, I don’t know about a next one on this… [laughs] This was a year-long process, and then some. Ellie, thank you so much for that thoughtful review. I really appreciate it. And Colleen, thank you so much for your thoughtful review; I really appreciate that. And everyone, thanks for hanging out with us. Talk to you tomorrow.

JF1466: Finding and Underwriting Apartment Deals | Best Ever Apartment Syndication Book (Part 3 of 4) #FollowAlongFriday with Joe and Theo

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After hearing about parts one and two of the Best Ever Apartment Syndication Book, today we’ll learn some more about part three: finding and underwriting deals. To hear what to do in competitive offer situations and more great tips from Joe and Theo, tune in today! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Do you need debt, equity, or a loan guarantor for your deals?

Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help.

See how Marc can help you by calling him at 212-897-9875 or emailing him mbelsky@easterneq.com


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

Today we’re doing Follow Along Friday, and more relevant to you, we are going to give you the five factors that you should be aware of when you’re in a competitive bid situation, when you’re bidding on a deal; you have essentially five categories that you should keep in mind, and we’ll give you some tips for those categories, for how to win the deal without breaking your budget. That’s one conversation that we’ll have.

Then another conversation that we’ll have is three things to look out for whenever you’re reviewing the broker’s comps on a deal. You should always do your own comp analysis when you’re looking at a deal, but then there are three things in particular that you might not be looking at, that you definitely want to be looking at… So we’re gonna talk about that, too.

All of this is coming from the book that is going to be published on Tuesday of next week – Best Ever Apartment Syndication Book. It is 450 — did it make 50? I’m trying to think… 436, right? How many pages was that?

Theo Hicks: I think overall, including the introduction material, it’s 456 pages.

Joe Fairless:  456… It’s a monstrosity. It is the how-to book for raising money and buying apartment communities. If you haven’t pre-ordered it yet, then go pre-order it by going to apartmentsyndicationbook.com. That way, you get some free goodies that we’re giving away along with the book whenever you purchase it. Those are available when you pre-order, or during the first week of purchase. ApartmentSyndicationBook.com.

The previous two Fridays we have discussed 1) experience – how to get experience, knowledge, how to align yourself with experienced people and how to acquire the knowledge, and what knowledge you need to have, and also the importance of brand building and thought leadership.

That was experience, two Fridays ago, and then last Friday we talked about money – you need money to do these deals, so you can go listen to last Friday’s episode if you wanna learn about how to build a roster full of private investors who you attract into your deals. And then today we’re gonna be talking about what I mentioned earlier, which is related to the actual deal itself.

Oh, and Theo Hicks, how are you doing?

Theo Hicks: I’m doing great, Joe. How are you doing?

Joe Fairless: I’m so excited about that I just jumped right in. I didn’t even say hi to you… Although I said hi to you when we talked before we started recording. But officially, hello. How do you wanna approach this?

Theo Hicks: As you mentioned, we’re gonna have part three today of the book, which is all about finding, underwriting and sending offers on your deals. After you’ve got the experience and the private/passive money lined up, next up is start looking for deals. So in this particular episode we’re gonna focus on finding the deals and the underwriting.

For finding the deals, one of the things that you’re gonna do after you find them is underwrite them and submit an offer. Sometimes, especially in today’s market, you’re likely gonna be in a competitive offer situation, so you want to approach your offer accordingly. Most people who haven’t done a deal before probably think that the only fact that matters is the price, but in reality that’s just one of the five factors that a seller is gonna take into account when reviewing the offers and selecting the best one.

Of course, one of them is going to be price. So if you have the lowest price, all things equal, it’s not gonna look as the highest price. So when you’re submitting an offer, especially in these competitive offer situations, you wanna make sure that you’re submitting the highest price that you can for the deal to make sense from a return perspective.

Now, that doesn’t mean that just because you’re offering the highest price you’re going to win, because these other four factors are gonna be taken into account, but the price is obviously gonna be one thing the seller is gonna look at.

Joe Fairless: I know first-hand for a fact that a deal we have under contract right now, we offered $400,000 less than the other group, and we got awarded the deal. So we were not highest on the price; we were almost half a million dollars below what the highest offer was on the price, but we got awarded the deal. And we got awarded the deal because of our track record and some of these other factors that we’ll go into. And this gives hope for single-family investors who are wondering about the learning curve and the type of experiences they’ve had in single-family and how that translates into multifamily.

Well, in single-family you do get awarded deals if you show strength from a closing standpoint. If you go in with a lower offer, but the seller really needs to get out of their property, then it’s possible that you’ll get awarded the offer, versus someone who has not as proven of a track record as you. And for all the single-family home investors who have 10+ deals under their belt – I know you know what I’m talking about – you get awarded deals based on other things than price. Price is certainly a determining factor, and it depends on the seller how much of a determining factor that is… But it’s not the only factor.

Theo Hicks: Exactly. And that naturally transitions to number two, which are the terms. At the end of the day, you have to know what the seller wants – do they want to exit as quickly as possible? Do they want a non-refundable deposit? Is that something that would sway them to a direction? All-cash offers, so if they wanna close faster, then you submit an all-cash offer; they don’t have to wait for you to go through all the financing process, and they don’t have to worry about the deal not being qualified by the lender. They’ll know that “Okay, I don’t have to worry about the financing aspect, because this person is paying all cash.”

Also, something else that you can do for the terms – if they wanna close quickly, if you can waive certain due diligence items. I’m not saying you should do this, but they’re just all options that you can do. You always wanna inspect the property, but… Let’s say your team member or your partner is a commercial real estate contractor, he’s been doing this for 20+ years; instead of having a professional inspector going in there, if you’re doing an all-cash offer, you can just have your contractor look at it instead.

Of course, if  you’re doing financing, you’re going to need to get an inspection and do certain due diligence items in order to qualify for the loan, but essentially, you wanna just take a look at your purchase and sale agreement, go through all the terms and see what you can do to make it more competitive, whether it be a non-refundable deposit, deposit a higher earnest deposit, shortening the closing period, all-cash offer… Things like that. Because again, if the seller wants to close faster, or have more confidence in your ability to close, you can tweak the terms to fulfill that need for them.

Joe Fairless: One thing you could also do – to build on what you said; it’s not in addition to, but it’s just a bullet point underneath – with a non-refundable earnest money deposit is instead of having that be held with the title company, if you were to be so bold, you could have that released directly (or immediately) to the seller. That way, they know that they have that money in their bank account. Because what typically happens, even if it’s non-refundable, it’s gonna be with the title company, and before the title company releases it, they’re gonna need to have the okay from both sides.

And if your non-refundable money is with the title company and then something were to come up – maybe the seller was dishonest about something, or the environmental didn’t come back clean, or the title didn’t come back clean – something that would trigger an issue that they weren’t being honest about whatever that deal point was, then what typically happens is you go to court if you can’t agree that “Hey, you weren’t being honest with me… So yeah, it was non-refundable, but you misrepresented XYZ.” And then the seller will get whatever gets agreed upon through litigation. And the seller doesn’t wanna do that, clearly, so a display of strength would be to have that money released from the title company to the seller maybe after a week, or something… Just adding in that extra talking point or that contract point, and that will definitely give your non-refundable deposit some extra credibility, compared to someone else who’s doing non-refundable for the same amount of money. So you do have your offer stand out.

Now, I’m not suggesting anyone do this, by the way. I’m simply saying what is possible, and you decide if that is the right approach for the particular deal that you’re doing. We have had buyers release their non-refundable earnest money to us on transactions, to show “Hey, we’re gonna be closing on the deal that we’re buying from you guys, and here’s our non-refundable earnest money. Now it’s in your bank account, versus it’s with a third-party.”

Theo Hicks: Yeah, absolutely. I can imagine them having cash in hand being much stronger than them having to wait to get that money until the close.

For those first two, the price and the terms – these are things you need to think about when you’re submitting your actual letter of intent. So your first offer to the seller is usually gonna be a letter of intent (LOI), which is like a non-binding agreement, just setting up expectations for the price and terms. So you’re gonna be able to put your price and your terms on there. All those things we’ve just talked about, you wanna make sure you’re thinking about those when you’re underwriting the deal, or I guess after you’ve decided that you’re gonna submit an offer after underwriting; make sure you’re doing this upfront, and not doing it best and final, or kind of waiting until the end and holding all of your cards to your chest… Especially in a competitive situation, of course.

Number three is going to be relationships. Everyone knows how important relationships are in real estate. We might have talked about this last week, but when you’re looking for real estate brokers, you shouldn’t expect them to send you their best off-market deals after knowing them for a week. Once you know them for a while and you’ve proven that you’re able to close on deals, you’ll just start getting better and better deals from them.

The same thing works for when you’re actually submitting offers. If you know the listing broker, if you know the owner, you’re gonna have an advantage over someone that they don’t know, because as Joe mentioned in the intro, a track record is gonna be very important, and if they know you and they know your track record, you’re gonna have an advantage over someone that they don’t know at all, they’ve just met, if your offer is the exact same.

Joe Fairless: So the question you might be asking is “Okay, what if I just am going in cold? It’s a deal I’ve found on LoopNet, or it’s a deal that I am making an offer on because it’s just an on-market deal…” One tip for you in that case is to ask the listing broker if he/she has any preferred mortgage brokers for this transaction… Because at least then, you’re aligning yourself with someone who the listing broker knows well, and maybe has some sort of agreement, side agreement, or who knows what they’re doing behind the scenes. But at least you’re going into it with a familiar ally of the listing broker.

Theo Hicks: Exactly.

Joe Fairless: And anyone can do that. All you have to do is ask. Now, you don’t necessarily have to go with that mortgage broker, but if you’re open to seeing different terms, and if the mortgage broker who the listing broker is recommending is similar or better than the other options you’ve got, then it’s a no-brainer; you go with that and it will likely help you get awarded the deal, if all the other things are equal.

Theo Hicks: Exactly. On that same note, back to building relationships – it’s not as good as what you’ve just said, it’s kind of a tier below, but if you’re wanting to build a relationship with a specific real estate broker and you find an off-market deal or whatever, and obviously, they’re not gonna be involved in the process, you can use their mortgage broker or their property management company if they have all that included in their company,  just to kind of push that relationship in a positive direction.

Number four – this is one that you might not even have thought about, but your team structure. Some owners, for example, won’t sell to a general partner that doesn’t have their own in-house property management company, for example. So if you have a third-party property management company, they might not sell to you or they might not be as competitive as if you’ve had your own in-house company. It might be true, but it also might be false, but the perception is that your company is not as integrated.

Remember, at the end of the day they wanna know that you are credible and that you are able to close on a deal. So if you have an integrated company, it kind of proves that you have that track record.

I remember a long time ago we talked about when you should bring on an in-house management company, and it’s once you have a large enough portfolio for it to make financial sense. So it’s perceived that you’re big enough that you have your in-house property management company.

Another example – and I believe we talked about this last week, with the alignment of interests – is also what other roles are your team members playing in the deal. Do you just have a property management company managing the property and that’s it? Or are they investors in the deal? Do they have equity in the deal? Have they brought on their own investors? Are they a loan guarantor? Who is your loan guarantor? Is it some other local owner who has experience, or are you just doing all this yourself? All those things are gonna come up during the best and final seller call if you get to that point; they’re gonna ask you about your team structure – who’s your property management company, are they third-party or in-house, who’s your lender? If you have a consultant, or some sort of mentor, or you’re partnered with a local owner, you wanna mention that.

So your entire team structure is something that could be a huge selling point for the deal, especially when you’re just starting off fresh and don’t have any experience.

Joe Fairless: We’ve lost out on a deal because we have a third-party management company. The seller went with another group that had similar terms (it sounded like; I don’t know for certain). They said that since we did not have an in-house management company, that they felt more comfortable with the company that did. That is not typical, but it did happen, and that’s why we included this in these factors.

Also, thinking about team structure, where you’re getting your equity – they’re team members, too. So the seller is certainly gonna be qualifying you and your equity partner or partners, asking you “Okay, have your equity partners reviewed the deal? Have they visited the property? Do they need to visit the property? If they don’t work out, where are you gonna get the equity? Have you ever partnered with those equity partners on previous deals? If so, how many?” Those are all the questions that you should be prepared to answer, and then some.

In the book we have all the questions — well, not all; I guess we’d never technically be able to have all, because people come up with random stuff… But most of the questions you should be prepared to answer during the conversation with the broker, and then also on the best and final call with the seller.

Theo Hicks: Number five, the last factor  is your underwriting. Essentially, are you able to identify extra value-add opportunities, which are things that will either increase the revenue or decrease the expenses – so are you able to identify extra value-add opportunities that other people that are submitting offers are not finding? Because at the end of the day, if you can have a higher NOI, which means you have a lower expense or a higher income, then you can submit a higher offer.

This kind of ties back into the price, but the better you’ll get at underwriting, the better you’ll get at identifying value-add opportunities on properties, and the better team members you have that can do that as well, then the higher offers you’re gonna be able to submit.

And again, since price is one of the factors, if you become an underwriting wizard, and a wizard at identifying these opportunities, then you’re gonna be able to essentially win it. If you’re good enough at this, you could win almost every deal, because you’re gonna be able to submit a price that’s so much higher than everyone else’s, because you know you’re gonna recapture all that after you’ve implemented your business plan.

Joe Fairless: So what’s an example, Theo?

Theo Hicks: Instead of doing coin-operating laundry in the laundry facility, you put laundry into the actual units and raise the rents on each individual unit. We actually have a list of (I think it’s) 27 ways to add value to apartment communities. If you just google “Joe Fairless 27 ways to add value”, you’ll find that blog post, and those two things that I’ve mentioned, the washer and dryer, and the carports are on there, but it’s also a list of 25 other ways to add value. Essentially, you just wanna be creative with it.

Another example – I can’t remember who you interviewed, but they would increase their advertising budget a little bit, because they would host these resident appreciation parties constantly, with raffles, and just very engaging… So because of that, they were at like 99% occupancy. So instead of underwriting a 5%-8% vacancy rate, they could underwrite a 1% vacancy rate. I’m not saying you should do this, because you have to prove that you can do this first, but they’ve proven that they can maintain essentially a 100% economic occupancy by bumping up their advertising budget. So when that happens, when you underwrite and you’re 4%-6% extra revenue each month, you can submit a much higher offer.

These are all things to keep in mind, and as you’re listening to the podcasts — you could even listen to a podcast by someone who’s not an apartment investor and find an idea of a value-add opportunity… Just being creative, and of course, it takes time as well.

Joe Fairless: When I was getting started, I read a book by Dolf de Roos called Commercial Real Estate Investing – he talks about all sorts of different ways to add value, not just to apartment buildings, but to commercial real estate in general.

Theo Hicks: So before we move on, just to summarize – the five factors that will win, or result in you winning or losing a deal in a competitive offer situation is the price, the terms, your relationships with the seller and/or listing broker, how you structured your team and you communicate that, as well as your underwriting skills. So those are the five factors to keep in mind when you’re submitting an offer in competitive offer situations.

The second thing you wanted to talk about has to do with the actual underwriting process. When you’re underwriting your deals – let’s say it’s an on-market apartment deal – there will be an offering memorandum, which is the listing broker’s sales package; I’m sure everyone who has looked at apartment deals before has seen one of these… It essentially summarizes the offering and talks about the property description, and the market… But then it also has a proforma section where they talk about their expected projections for the property from a financial perspective. And also they’ll have their rental comps, which is what they use to calculate the new rents once the renovations are completed [unintelligible [00:23:10].02] raise the market rents. So here are three things to look for when you’re reviewing the rental comps from the listing broker.

As Joe mentioned before, you wanna do your own comps, but you can technically use theirs as long as you address these three questions first, and make sure that the answer is correct and they’re not trying to pull a fast one out of you. Question number one you wanna ask yourself is how far are these comps from the subject property? The mileage is important, because if they’re 40 miles away and it’s in a massive market, then it’s probably not gonna be a good comp. But more importantly, you wanna make sure that the subject property and the comp property are located in like areas.

If you like anywhere near downtown area, you know that one street could be an A and two blocks over could be a D area. So technically, when you look at the comp map and you might be like “Oh, these properties are one mile apart, so I don’t need to investigate further”, but if you end up investigating further, you’ll realize that one property is right next to a college, and the other property has a really high crime rate. So yeah, they’re close, but they’re not actually comps, because those neighborhoods are completely different, which means that the demographic is gonna be completely different.

So that’s one question, looking at the distance between the two properties and making sure the actual neighborhoods line up.

Number two – and I know Joe has mentioned this before, but this is a big one – is when was the property renovated? If you’re doing a value-add deal and you are going to base your rent premiums on the proven rents they’ve received by doing similar updates to the interiors, you wanna make sure that those were 1) done recently (within the past year), and 2) make sure that they’ve actually done enough, and done it at a rate similar to how quickly you’re gonna renovate them.

For example, a comp that has renovated five units in the past two years is a lot different than a comp that’s renovated five units in the past two months. So if they’ve renovated five units in the past two months, then you can expect to receive similar rental premiums, but if it’s been two years ago, who knows what the actual rent premiums are going to be, and you can’t necessarily rely on that data, because it didn’t happen fast enough… Unless of course you plan on renovating five in two years.

Joe Fairless: And these two points came from a deal that we were looking at. The deal was in Anderson, which is a suburb of Cincinnati, and they showed rent comps that were in areas called Norwood, which is not Anderson, and it’s completely different, and far away relatively speaking… And then the renovations looked good, but they’d been doing them over a  two-year timeframe, and that’s not the timeframe that we do renovations; we want all the renovations done within 12 to 16-18 months. We want all of them done. They’d only done 10% within two years… But we want all of them done, definitely, within two years.

As a result, that doesn’t really give proof of what the market can command, because it’s just over too much of a timeframe. There’s all sorts of different variables that could have happened; they could have offered concessions, and now the concessions are burned off… They could have just been turned down by 75 people, and then the 78th person said “Yeah, I’ll buy it” because they had some weird circumstance, or they had to move in quickly and they had the ability to pay a little bit more. So you wanna see more of a pattern. That’s where the two came from, from an actual deal.

Theo Hicks: And then the third one is you want to ask yourself “Do the property operations match?” What I mean by property operations, one example would be the utilities – who pays for water, who pays for electric, who pays for gas? If the owner of the subject property, the owner pays for just water, and you plan on just paying for water as well, and the residents pay for their own electric and/or gas, and then you go look at the rental comps and you have a rental comp where the owner pays for everything, then those rents are gonna be completely different… Because if you’re including the utilities in the rent, it’s gonna be higher.

So if you’re listing a unit for rent and saying “All utilities included”, not only is someone going to rent that  unit faster, but you’re gonna be able to demand a higher rate, because of the cost savings associated with saving $50-$100/month on utilities.

Another example from a property operations perspective is move-in specials. When you’re doing a rental comp analysis and you’re calling up or visiting these properties in person, you want to ask what type of concessions they’re offering; because if their rents are $50 higher than all the other rental comps in the area, and you call them up and they say “Yeah, we’re offering first month rent-free”, then in reality it’s not actually $50 higher, it’s actually lower, because they’re giving away free rent… So you’re gonna be able to demand a higher rent if you’re giving away first month’s rent free, reduced security deposit, referral fees, things like that.

So make sure that the types of concessions that are offered are similar at both properties. They don’t have to be exact, but just use common sense, and if one property has some crazy rent special and yours doesn’t, then you probably should pass on that rental comp and find another one.

Joe Fairless: But use that information as something you want to dig into more, because if someone’s doing major concessions in your submarket, then that could be a red flag.

Theo Hicks: Exactly.

Joe Fairless: One other thing – I have noticed on the 30 to 100 units that brokers will be more inclined to put all-bills-paid properties into the rent comps when comparing if their property is not all bills paid… Whereas 100+ units – you might have a more sophisticated buyer. I haven’t seen any brokers put all-bills-paid properties in the rent comps if their subject property was not all bills paid. But I have seen it multiple times with 30 to 100 units.

So if you’re buying in the 30 to 100 or 20 to 100 units, then be on the lookout for that, and just make sure you’re comparing apples to apples, because as Theo said, all-bills-paid properties, rent per square foot and overall rent will be through the roof compared to a non-all-bills-paid property.

Theo Hicks: In the book, when we go over the rental comps, we go over a lot more than this. We tell you exactly how to do rental comp investigation online, how to do it over the phone, and how to do it in person, to kind of cover all bases.

So just to summarize quickly, the three things to look out for when you’re reviewing the broker’s rental comps is 1) look at the distance between the subject property and the rental comp, and make sure that they’re in alike areas/neighborhoods. 2) Looking at the renovation timeline and making sure that the renovation timeline that they’ve used is comparable to how quickly you’re gonna do your renovations. And then finally, making sure the property operations are similar, as well.

That wraps up part three of the deal. Next week we’re gonna talk about the execution. Once you’ve submitted the offer on a deal, now it’s time to actually start executing your business plan, which starts with due diligence, and then closing, and then your asset management responsibilities. So we’ll be talking about a couple of topics as it relates to those.

I’m really excited for this book to be coming out next Tuesday.

Joe Fairless: Yeah, I am, too. I’m excited for how helpful it will  be, and quite frankly, for us just to be done with it. [laughs] This has been a year in the making, and it’s been a labor of love for both of us, but now it’s time to give birth and kind of let the baby do its thing. Nothing else in the marketplace is out there that addresses the how-to guide for apartment syndication… So go to apartmentsyndicationbook.com and make sure you get the free goodies too, because we’ve got a bunch of good stuff that will be helpful for you when you pre-order, or order during the first week. The first week – that deadline is September 18th. By September 18th you’ll be eligible for all the free goodies if you go to apartmentsyndicationbook.com. And you’ve gotta e-mail the receipt to info@joefairless.com.

Theo Hicks: Alright. Well, to wrap up, make sure you go to the Best Ever Community on Facebook – that’s BestEverCommunity.com. Each week we post a question of the week, and we use your responses to create a blog post.

This week’s question is “What is your greatest strength and how has it helped you as a real estate investor?” So what are you really good at and how has it been beneficial to your real estate investing career?

Joe Fairless: What’s yours?

Theo Hicks: Well, I was thinking about that, and I would say now — I’m not sure what the word would be, but I’ll just say my biggest strength is I don’t panic anymore. So if anything goes wrong, instead of having that moment of like “Oh my god, the world’s ending!”, I’ll just be like “Alright, it is what it is” and then with a clear mind I’ll come up with a solution quickly, rather than thinking about it constantly and letting it affect other aspects of my life. So kind of just — I guess a better term would be compartmentalize, so I can not think about it, and then once something comes up and I need to do it, I can turn everything else off, focus on that and do it. Once it’s done, I can turn that back off and go back to doing whatever else I’m doing, without letting it stress me out.

I wanna say that this is a newer ability. I did not have this when I first started off at all. I was the exact opposite. I’d be having a minor stroke for a year straight.

Joe Fairless: It is quite the skillset to be able to compartmentalize so that you are focusing on one thing and then knocking that out, because there is incredible power and focus, that’s for sure… And it’s something more and more people lack because of social media and just the way we operate with our smartphones, and being pulled in a lot of different directions; it’s the lack of focus. But when we do have focus towards something, it’s very powerful.

I would say mine is resourcefulness. I believe that whatever comes across my way, I’ll find a solution. Sometimes it’s not the solution that is most desirable, but I’m incredibly resourceful, and that has served me well as an entrepreneur; I make things happen, and it’s just something I’ve always had, and applying it to what we do has been very beneficial.

Theo Hicks: I would agree, you are very resourceful. And then lastly, make sure you subscribe to the podcast on iTunes and leave a review for the opportunity to be the review of the week. This week’s review is from LegacyDriven. The title of the review is “Be a sponge.” The content of the review is “I say ‘Be a sponge’, because I’ve listened to this podcast for about six months, and the knowledge I have gained is hard to believe. Since listening, I’ve rented my home that I was going to sell, and getting positive cashflow, too. I’m excited about acquiring more units and acquiring more knowledge with Joe along the way.”

Joe Fairless: That’s great. Congrats on renting that house out and getting some cashflow. What a huge difference that will be… That will have a ripple effect. Throw a stone in a pond and see the ripples; those ripples are all the positive actions that will take place as a result of you renting your place out and cash-flowing, versus buying a place and “upgrading” into a bigger and better place… Instead you did the right thing, in my opinion, based on me not knowing you — but generally speaking, you did the right thing to cash-flow, and then congrats on your future goals and looking forward to hearing more about how you do.

Thank you, everyone, for hanging out with us. I am confident that this was valuable if you’re raising money, buying apartments, or just an investor in general who’s looking to enter into any of these areas. And if not, then why are you still listening right now? [laughs] You should have turned it off a long time ago.

I sincerely appreciate the review by LegacyDriven. Powerful name, I like it! LegacyDriven, thank you for that review, and everyone else, please leave a review in iTunes to help us continue to have a high quality for you and everyone else. We’ll talk to you tomorrow.

JF1459: Raising Private Money | Best Ever Apartment Syndication Book (Part 2 of 4) #FollowAlongFriday with Joe and Theo

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Follow Along Friday is back and we’re talkin’ the latest book release again. Joe and Theo are going to tell us about part 2 of the Best Ever Apartment Syndication Book, which is all about raising money. Get an insight to the value this book will bring you by listening in on this episode. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Do you need debt, equity, or a loan guarantor for your deals?

Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help.

See how Marc can help you by calling him at 212-897-9875 or emailing him mbelsky@easterneq.com


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

We’ve got an episode today that will help you attract private capital by aligning yourself with the right team members, especially if you have little experience and little credibility in the industry. Last week we talked about the experience component and how important that is, so this week we’re talking about the ways to attract private capital, as well as to attract the right team members who then help you attract private capital.

It’s a four-part series, and this episode is inspired by the book; it’s not out yet, but it’s available to pre-order. So you can go to ApartmentSyndicationBook.com, pre-order it… You’ve got a bunch of goodies when you pre-order it. Just e-mail the receipt to info@JoeFairless.com and you’ll get all those goodies.

Last week we talked about experience, this week we’re talking about credibility and attracting private money. Let’s get rockin’.

Theo Hicks: As Joe mentioned, last week, the first part, we talked about making sure you have the experience requirements before becoming a syndicator… So it’s having preferably both – past business experience and past real estate experience, but if you’re attempting to do your first apartment syndication, you’ve never done one before, you’re still gonna face a credibility problem in the face of potential passive investors, because if you’ve never done apartment syndication before, they’re gonna want to be confident that you’re gonna be able to return their capital.

So before you even find private money investors, you’re gonna need to address that credibility problem, and that’s where finding experienced team members comes in. That’s why one of the parts of the money part of the book is building your actual team. There’s a lot of different team members you need – you need a property management company, a real estate broker, you need attorneys, a mortgage broker, accountants…

In this episode we’re gonna focus particularly on the real estate broker, and we’re gonna go over some ways to win them over.

Joe Fairless: That is the challenge at the beginning; I know I had it at the beginning whenever I had broker conversations… I thought I was riding on my high horse with four single-family homes that I had at the time, and I thought for sure they would all just fall over and fight to talk to me, since I had these four single-family homes. Not at all… At all, at all, at all. [laughs] They were not very interested in talking to me, because I had four single-family homes, since I did not have experience with apartment communities.

So I personally came across this challenge. I wish I had this episode to listen to whenever I was going through this challenge, because it would have made it a much more seamless transition, and I would have been able to attract brokers quicker, I would have been able to grow faster, in a more effective way… But I didn’t. However, you do, so here are four tactics you can use to attract the best brokers in the market that you selected.

Theo Hicks: Yes. And the idea behind these four tactics is to put yourself in the mind of the broker and ask yourself “What do they want?” and based off what they want, how can you show them that you can get them what they want? At the end of the day, they wanna make their commission; in order to make their commission, they have to be confident that once they find a deal, the person they send it to has the ability to close. So since you’ve never closed on a deal before, you can’t leverage your past experience; instead, you can do these four things to prove to the broker that you are going to be able to close on a deal.

The first one, kind of obvious, but just pay them a consulting fee. So instead of waiting to pay them after closing on a deal, offer to pay them a couple hundred dollars an hour for their time. So if you are visiting properties with them, if you’re having conversations on the phone with them, log that time and offer to pay them a consulting fee.

Joe Fairless: I actually don’t think that’s obvious at all. I didn’t know of anyone who had offered that, and I forget the guest – maybe you remember the guest who mentioned this. He’s in the Carolinas, I believe.

Theo Hicks: Yeah, his name was T.

Joe Fairless: T, yes. He’s a broker. When he mentioned that, I’d never heard of it, and I’ve mentioned in a couple presentations when I’ve spoken at some conferences, and I hadn’t heard of anyone who had heard of it whenever I spoke about it… So I think that’s great, and it’s such a quality investment of a thousand dollars. A thousand dollars is a lot of money, but so is the rapport that you build with a top broker in the market, because you’re likely going to be making more than the thousand dollars; you’re likely gonna be making a hundred times more than that, or ten times more than that, or whatever size your deal is. So it’s a really good investment, in my opinion.

Theo Hicks: Number two is when you’re having a conversation with a broker, one thing you wanna do is ask them “How many properties have you sold in the past year?” and when they tell you that number, ask them for the actual addresses of these properties, go visit them in person, and take a look at the condition of the property, the location, the size… Anything that can let the broker know whether that specific property aligns with your business plan.

So you’ll visit the property and then you’ll follow up with your broker – either a phone call or an e-mail – and say “Hey, I went and visited your property at ABC Street. Really good deal. Here’s what I liked about it, here’s what I didn’t like about it.” Number one, it’s showing them that you’re proactively going out there and looking at deals, but two, it also gives them a better idea of the type of deal you’re looking for… Because some brokers might specialize in a specific type of deal, where other brokers might just look at any deal that comes in, no matter what the size or the asset class. So it’ll give a better understanding of the type of deals you’re looking for.

On a similar note, kind of a hybrid of this, is to do the same thing, but when they send you deals. So when they send you deals and you underwrite it, instead of just disqualifying the deal because it doesn’t meet your return goals, instead of just saying nothing, e-mail the broker and tell them what you liked about the deal and what you didn’t like about the deal, and why it was disqualified.

Essentially, look at the deals they’re sending you or the deals they previously sold, and tell them what you did and didn’t like about those deals as it relates to your business plan.

Number three is to provide them with information on how you’re going to fund the deal. Once you find your mortgage broker and you’ve had a conversation with them, reach out to your broker and say “Hey, I talked to ABC mortgage broker.” Once you fill out the personal financial statement or once they’ve told you you qualify for a deal, tell your broker that “We qualified for financing.”

Also let them know how you’re gonna actually pay for the down payment, so explain to them how you’re having conversations with passive investors, tell them how much money in verbal commitment you’ve had… Then also, since you’re probably not gonna be able to qualify for the loan yourself, let them know that you’re having a conversation with people who are verbally interested in signing on the loan and being a loan guarantor.

Essentially, anything that has to do with how you’re going to fund the deal or how you’re gonna qualify for financing, follow up with the broker and let them know and keep them updated.

Joe Fairless: And I would push this into number 1, or 1.b, because if they don’t have the confidence that you’re gonna close, none of this stuff matters unless you’re paying them the consulting fee, or by the hour.

My suggestion is to proactively address how you have access to capital or how you have capital yourself. That way it addresses the 10,000 pound gorilla in the room… Or elephant! I almost said monkey, and I was like “That’s a really heavy monkey…” Because they’re gonna be thinking about it the whole time you’re talking, “Can this person close? This is a great conversation, they’re nice, but can they close? Can they close? Can they close?” So just proactively address that one.

Theo Hicks: Exactly. I’m actually in the process of having real estate broker conversations. We actually talked to a guy yesterday, and that’s exactly what we do. When we give them our background, we mention exactly what we’ve done – not only our real estate background and our business background, but what exactly we’ve done in regards to syndications… So do we have a financing lined up? Do we have private capital lined up? Who do we have on our team so far? And just mention all that stuff up front, and then follow up with updates as you go.

As Joe mentioned, if you don’t address that from the beginning, they’re not gonna take you seriously at all, because they’re not gonna know if you have any of those things lined up.

So that’s kind of leading into number four, which is constantly follow up with your broker. You’ve got two ways – number one, drive to their properties and let them know what you liked about the properties, and number two, provide them with information on how you’re funding the deal… And any other update that you can provide to them that will show you you’re getting closer and closer to being able to close on a deal, you want to send that to them.

Every week or every two weeks make sure you’re constantly in contact with these brokers, letting them know that you’re taking action.

Joe Fairless: And there’s certainly a fine line there, with being a nuisance to being someone who’s proactively following up… And my suggestion is it’s what Theo mentioned at the beginning of our conversation – put yourself in their shoes; would you want someone e-mailing you weekly, saying “Hey, got a deal? Got a deal? Got a deal? Got a deal? Got a deal?” No, you don’t want that.

But would you want someone who you’ve told that you’ll follow up with them when you have a deal, and you also introduced them to some team members – would you want someone to follow up with you and say “By the way, thanks a lot for the recommendation, for introducing me to so-and-so. I spoke to her, and I’m likely gonna be bringing her on my team as well. Do you happen to have any recommendations for XYZ?” Maybe it’s a title company, maybe it’s something else. And the answer is yes, the broker would be usually totally good with that, because the broker knows that this is a relationship business, so when he/she is referring other team members of theirs out to potential clients, then they look good too to the title companies, to the attorneys etc. And it’s good to know their contacts are being actually contacted by the person…

So add value when you follow up. It’s important. Otherwise, it’s gonna have the opposite effect of what you’re intending.

Theo Hicks: Exactly. So these are four ways to win over the real estate broker that we’re gonna talk about today. In the book we follow a similar process and provide a similar explanation for the other team members, so how you win over the property management company, how do you find the correct accountant, and how do you talk to mortgage brokers – all that is also covered in the book. On this episode we’re touching on the real estate broker aspect.

Joe Fairless: Cool. And in ten seconds or less, what are the four things again?

Theo Hicks: Consulting fee, number one; so pay then. Number two is drive to their recent sales and tell them what you do and don’t like about that property. Number three is provide some information on how you’re going to fund the deal, and number four is constantly follow-up with new information and added value.

Joe Fairless: Cool.

Theo Hicks: So once you have the team lined up, and you have the credibility that comes from the team, now it’s time to find private capital.

Joe Fairless: Yup. And the challenge with private capital initially is your track record (or lack thereof). I’ve mentioned this multiple times, but the disclaimer one more time is I’m not suggesting that everyone should raise private capital. I am assuming at this point that you have the experience and the knowledge in order to safely navigate a deal to as what would be expected for the industry.

So if you’re just starting out, I don’t recommend raising private capital. But assuming that you’ve got some sort of knowledge, then this will help you gain that alignment of interest with team members so that you can attract the private capital.

Whenever I was starting out, that was a big challenge that I had, too; four single-family homes doesn’t amount to much from an experience standpoint, so instead, on the first deal, what I did is I had the brokers put in their commission into the deal, and they were part owners with us in the deal. What that allowed me to do is to speak to my private investors and say “Yeah, I don’t have the experience, but the brokers have four decades, five decades (or whatever it was) of experience, and they’re partnering with us on the deal because they like it so much. That went a really long way.

Essentially, what you’ll need to do is you’ll need to find some people who can address that experience challenge that you’re ultimately gonna come across when you’re starting out, and you will give up a portion of the deal – that’s just how it is – or a whole chunk of the deal, but who cares, because you’re getting that track record. So it’s important to have that mindset of “Yeah, I’m gonna give up a decent amount of the deal, but it’s gonna get me in the door.” This is a temporary challenge, and once this is addressed, after a couple deals or maybe even one deal, then I won’t have to do that, or I won’t have to do it as much as I used to.

Theo Hicks: These are all things that you can leverage when having the conversation with your passive investors, and saying “Hey, you’re investing money in the deal, I’m investing my own money in the deal, and I’ve got alignment of interest with my team members” based off of the five things that I’m going to explain right now, of how you can have alignment of interest with your team members.

These start from the lowest to the highest level of alignment of interests, and you can do this with different team members. The first level or the lowest level of alignment of interest is just bringing on the qualified team members. As you’ve mentioned before, bringing on a qualified real estate broker, bringing on a sponsor or a mentor, or bringing on a qualified property management company on your team.

Joe Fairless: Or all of them.

Theo Hicks: Of course, you need all those people… So that’s number one – bringing on a qualified team member. But that’s the lowest, because they don’t really have any skin in the game whatsoever; they’re just helping you manage the deal.

Number two is you bring on this qualified team member and then you give them a percentage of the general partnership. So you bring them on and you offer them a percentage of the general partnership; this is number two. The reason why it’s not higher is because they still actually don’t have skin in the game. Yeah, the amount of money they’ll make is based off of the success of the deal, but they’re not gonna lose any money… Which is why the next tier up, number three, is bringing on a qualified team member, giving them a percentage of the general partnership because of their investment of money in the deal. So just giving it away to them, and now they’re gonna invest their money in the deal for that chunk of the general partnership, so now they actually have skin in the game.

Joe Fairless: But the money is treated as limited partnership money… But as part of the negotiation, you say “Yeah, if you also invest in the deal, then you can be in the GP because of your track record.”

Theo Hicks: Exactly. So now they have skin in the game. The fourth level is the previous three levels, but they’re also having other people that they know bring money into the deal. So they’re having their own investors invest in the deal.

Actually, when you’re having initial conversations with your real estate broker or your property management company, that’s a question that you can ask. You can ask them “Do you have investors who would be interested in investing in apartment deals?” I’ve asked every property management company and real estate broker I’ve talked to that question, and much to my surprise, they all said they do have people who are willing to invest in these types of deals. I was actually surprised when they said that, because I didn’t know. I figured that maybe it’d be 50/50, but all of them have said it so far.

Joe Fairless: Wow, it’s interesting…

Theo Hicks: So again, number four is bring on the team member, having them invest and having someone on their team or someone that they know invest as well. And the fifth is having them actually sign on the loan, so having them be a loan guarantor. That way, they’ve got a lot of skin in the game – they’ve got their money in the game, they’ve got their personal finances in the game…

So if you tell your investors that “I’m investing in the deal. I’ve got qualified team members who are investing in the deal, they’re bringing on people to invest in the deal, and they’re signing on the loan”, that’s pretty impressive.

Joe Fairless: You just locked it up, yeah. You just locked it up, the credibility, absolutely, when you do that.

Theo Hicks: So for these five levels, as I’ve mentioned, they’re going from lowest to highest alignment of interest, but there are three team members that can do any of these five. You’ve got your real estate broker, a sponsor or a mentor, a consultant, and your property management company.

For those three, the property management company would result in the highest level of alignment of interests, because there’s not only alignment of interest through bringing on money, bringing on other people’s money, signing the loan, but they’re also involved in the day-to-day operations of the deal.

The next would be a sponsor, because they’re not gonna be involved in the day-to-day operations of the deal, but they do have experience, so you can leverage that and tell your passive investors “Hey, I’ve got this sponsor who’s got 1,500 units in this area. They’re investing in the deal and they’re gonna allow me to ask them questions if anything were to come up.”

And then the one that is the lowest is the real estate broker, just because they’re obviously signing off on the deal up front, but once they get their commission, they’re not necessarily involved in the deal any longer, besides making the money based off of which tier of alignment of interest they’ve decided to pursue.

Joe Fairless: And a bonus one, number six, would be to give the property management company a little bit less than what they were wanting on a monthly basis, but then back-load that once you achieve your metrics that are in the proforma, and give them a bonus that is twice as much as what they would have made with that whatever you lowered it by.

Let’s say you lower it by $100,000, because they were gonna make a certain percentage, but now they’re gonna make 100k less over five years as a result of the fees; however, when they help you achieve the metrics by effectively managing the property, they receive a bonus of 200k in five years, or in two years when you do a refinance, or a supplemental loan.

That will show alignment of interests with the deal, because the property management company gets a bonus, and it also does not give them any equity in it; you just have to have some sort of contract drafted up that shows those terms.

Theo Hicks: Exactly. And then also, it’s essentially a value-add opportunity, because when you underwrite the deal, if you’re lowering that property management expense, your expenses are going down, so the ongoing cash-on-cash return is going to be higher, and then instead of paying that off each year, you’re just paying off that big chunk of equity you make at the end.

Joe Fairless: Yeah. It can actually help you on the acquisition front too, because you can underwrite it a little bit differently than what other people are underwriting, because your expenses are lower than what other people’s expenses are. You just don’t have as much upside on the back-end, because you’re giving them a bonus… So as long as the numbers work on the back-end, that could be a way to get a deal that perhaps you wouldn’t have gotten otherwise, because you were underwriting it differently.

Theo Hicks: Exactly. So that’s the approach you wanna go with how to have that conversation with the property management company up front during the interview process. To quickly summarize, the six different ways to create alignment of interest with your team members, going from lowest to highest, is number one, bring on a qualified team member with a property management company resulting in the highest, followed by a sponsor or a mentor, followed by the real estate broker.

Number two is to give them a percentage of the GP. Number three is to have them invest as limited partner in the deal. Number four is to have them bring on other people to invest as limited partners in the deal. Number four, have them sign the loan, and number six, reduce their ongoing payment and double or triple it at sale.

Joe Fairless: Or some sort of capital event, if you do a refinance or supplemental loan. Great stuff. Got any updates this week?

Theo Hicks: I don’t. What about you?

Joe Fairless: I decided to sell the three homes, but there’s a wrinkle in the plan, and that is I looked at the leases. They expire this coming summer, so we’re basically 12 months away… Therefore what we’re doing is we are sharing the deals with our property management company, who said they might have investors who are interested… So there you go.

If you look at the 1% or 2% rule, they’re 0.7% across the board… So it wouldn’t be as much cashflow. I’m not sure if an investor would want it… Who knows, we’ll see. I really don’t care. If not, then I’ll just sit on them for 8, 9 months and then sell them retail next summer.

Theo Hicks: Yeah, that’s an advantage of having the single-family rentals, unless of course the lease isn’t expiring for a while.. But you can sell it to live there as a regular homeowner, or you can sell it to an investor, so you kind of have a larger market.

Joe Fairless: Yeah. The only reason I’m doing it I’ve got 349k trapped in those homes in equity, and I make like $250/month maybe, in total from those three homes, because if there’s repairs, or a tree falls on a car or something like that… And plus the liability of having those homes… It’s time to take those and put that money into our deals.

Theo Hicks: Are you allowed to 1031 into a passive investment?

Joe Fairless: Technically, yes, you are… For our group, we don’t accept 1031’s unless it’s 3 million or more, because we’ve gotta restructure the whole kit and caboodle, and it’s just not worth all that brain power from attorneys and us, and coordination, logistics… So if one of our investors asks us if they can 1031 into our deals, the answer is if it’s 3 million or more.

However, we do 1031’s from one deal to another, and we have, but we just don’t accept outside 1031’s that are not our deals. So I could not 1031 my proceeds from these homes into one of our deals, because it’s missing one zero at the end.

Theo Hicks: It makes sense. Okay, I hope you sell those puppies and get to invest that money into the next deal. If not, then I guess [unintelligible [00:26:27].03] opportunity to sell them in the next year.

Joe Fairless: Yup.

Theo Hicks: Alright, so before I conclude, make sure everyone listening, guys and girls, goes to the Best Ever Show community on Facebook. That’s BestEverCommunity.com. We’ve got over 1,000 active real estate investors asking questions, posting content and responding to our Best Ever Community questions of the week, where we will take your answers and create blog posts.

This week’s question is what year do you think the next downturn/recession/market correction will happen, and why? I’m looking forward to reading your responses and your predictions on when the next correction/recession/whatever terminology you prefer to use, is going to happen. We will take all the responses and create a blog post next week.

Joe Fairless: My favorite so far has been — I can’t remember who it was, but he said something like “I don’t know, it’s just speculation. No one knows.”

Theo Hicks: Yeah… It’s all speculation.

Joe Fairless: Yeah, and then someone said “Amen!” and I liked that, because… Who knows? More importantly, make sure that our investments, your investments are set up to handle a market correction. That’s more important. Why try to time it? It’s fun to talk about it, I guess, but why not just set it up so you’re gonna mitigate risk as much as possible along the way?

Theo Hicks: It was Julia, and she said “No one knows, and it’s a futile exercise.”

Joe Fairless: There you go, Julia… [laughs] I love Julia, she’s a character. Yup.

Theo Hicks: Everyone knows every single year, every single month, every single day there’s someone writing an article saying the crash is coming tomorrow, it’s gonna be the biggest crash of all time. People have been saying that ever since there was a market to crash, so… As she said, probably a futile exercise; make sure you’re set up for success no matter what the market is.

Joe Fairless: It’s a good conversation, and perhaps that’s why we posted it, but I agree with Julia, who knows…? But just set yourself up the right way so you mitigate risk, and we’ve talked about that – you just google “three immutable laws of real estate investing joe fairless” and that’s how you do it.

Theo Hicks: Exactly. Alright, and then lastly, everyone, guys and girls, please subscribe to the podcast on iTunes and leave a review for the opportunity to be the review of the week. This week’s review comes from Shae Carr, with the title “I’m a fan.” Their comment was:

“Informative, short and to the point. This podcast is enjoyable and truthful. Thanks for sharing your tips with the world.”

Joe Fairless: Well, thank you, Shae. I appreciate you spending some time and investing that into writing the review, and thank you for listening, and I’m glad you’re getting a lot of value from it. Please everyone leave a review; that will help us get high-quality content, and help you out ultimately.

Thanks for listening, thanks for hanging out, and we’ll talk to you tomorrow.

Best Ever Show Real Estate Advice

JF1452: Best Ever Apartment Syndication Book: Part 1 – The Experience #FollowAlongFriday with Joe and Theo

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Today’s Follow Along Friday is based on the new book Joe and Theo wrote, Best Ever Apartment Syndication Book.  The book is broken down into four parts, today they discuss part one, the experience. Hear what you can do to gain experience or find someone who has the experience to partner with for your first apartment syndication. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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

We’ve got some information that I think is gonna be pretty helpful for you if you are looking to raise money and buy apartment communities, or even separate those two – if you’re looking to raise money and do something else real estate-related… Or you’re just looking to buy apartment communities with your own money, this is gonna be relevant. We’re gonna be talking about what you need prior to raising the money. This is inspired by the book that Theo and I wrote, and is being published September 10th, but it is available right now for pre-order. You can go to ApartmentSyndicationBook.com, and when you pre-order the book, you will receive a free eBook from Gene Trowbridge. His book is called “It’s a Whole New Business: The How-To Book of Syndicated Investment Real Estate.” That’s the eBook that you’ll get when you pre-order our book, and you’ll also get some other goodies, too. Seth Williams is providing an eBook, and you’ll get some different calculators and things that we use in our business. So go to ApartmentSyndicationBook.com.

The book is in four parts, that’s how we’ve structured it. Part one is the experience, so what do you need to know and put in place prior to raising money. Part two is finding the money or attracting the money. Three is the deal, and four is the execution. So today we’re gonna be talking about the experience.

Certainly, in the short period of time that we have, we won’t be able to go through everything that’s in the book, but we’ll touch on some important aspects, and it’s not to promote the book — well, it kind of is to promote the book, but the objective of our conversation right now is to provide you with actionable information, so regardless of if you buy the book, this conversation will still be helpful for you… So what’s the best way to approach this, Theo?

Theo Hicks: As Joe has mentioned, the book is broken into four different parts, and the idea is to show you not only what to do, but how to actually do it, as well. So there’s exercises that you’ll actually do throughout the book that will add value and will bring you one step closer to actually doing a deal… But each of the four parts are kind of broken into subparts, and they’re in order of  essentially how you go from where you are right now, to by the end doing your first deal.

In regards to the experience, that’s actually broken into four parts. It’s broken into knowledge, goals, brand building, and then market evaluation. I think the best way to approach the conversation is to kind of go through those four, the first one being knowledge. A good place to start and one of the things that we do talk about are what are the requirements you need before you even start this process? Because unfortunately, not just anyone could just automatically start up the process of learning, and then once they know what they’re doing, raise money. There’s a couple of other requirements that you’ll need beforehand… So I think that will be a good starting point.

Joe Fairless: Yeah, I agree, because we’ll see books that say “You can do deals and partner with other people without any experience and without any money, and it is possible to do that”, but there’s a caveat, and that is you’ll need knowledge. If you don’t have experience and you don’t have money, you need knowledge in order to make sure 1) that you’re structuring the deal for yourself properly, but most importantly, you’re structuring the deal with others properly.

So the two requirements to become an apartment syndicator — it’s actually an and/or… That is either real estate experience and/or business experience. I should say that it’s more than just experience with business. It should be a track record of accomplishments, because if you’re just starting out, then maybe you don’t have that real estate experience… But if you are a successful salesperson in an organization, who has been promoted 3-4 times within 3, 4, 5, 6 years, then that says something about how you’re savvy in business and how you know how to hone a craft… And that’s a requirement for what we do, and that’s a requirement for being successful in any business.

So look at your experience and give yourself an honest assessment of “Have you excelled within your current professional career?” and if so, what does that look like? What milestones have you achieved that perhaps are not typical for others in your industry who have been in that industry for that same period of time? And if you haven’t, and you also don’t have any real estate experience, it’s my opinion that apartment syndication is not for you at this moment. However, if you can start learning the process, learning the fundamentals, learning the lingo, and then get experience by interning for someone, and then build your track record that way while offering to do things for free for others, then you’ll be able to build a track record and ultimately you’ll check the box for what you need prior to becoming an apartment syndicator, and that is some sort of real estate background and/or a professional business background where you have accomplished things that are not typical for others in your professional industry.

Theo Hicks: And something else that’s important… At the end of the book, this assessment that Joe’s talking about — we actually walk you through an assessment where you analyze your real estate and business background and give yourself a rating, and then based off of where you fall on that scale, we kind of give you some advice on how to move forward. Obviously, if you have a very strong rating, then you can move forward; if not, as Joe mentioned, you’ll need to actually work on gaining experience in real estate or business. It doesn’t have to be something in apartments, or you don’t have to be a CEO of a company; the idea is you need to have some sort of background that when you’re going to people and asking them for money, they are gonna ask you “Why would I give you money? What’s your background?” and you have to be able to tell them something.

And part two, the money – another part of that, because your private investors are gonna be kind of on your team. Once you analyze and figure out what your background is and what your strengths are, you’ll wanna kind of complement those with other team members. That’s gonna be what we talk about in part two, building your core real estate team… But just as an example, if you have a really strong business background, you’ve got a lot of business contacts of high net worth individuals, that’s really good because you’ll have that money aspect covered, but… They don’t really know how to asset manage or how to operate a deal or how to underwrite a deal, so if that’s the case, then you can complement that by finding a really strong property management company, which you wanna do regardless… Maybe bring on a partner or a sponsor. And of course, vice-versa, if you have a really strong real estate background, you might not necessarily have a lot of relationships with people that have high net worths, or people in the business world that would invest with you passively… So from that standpoint, you might need to bring on a partner who raises money, and you just do all the operations.

Joe Fairless: Yeah, and everyone’s got some assets that they’re working with, and I talk about that at the beginning of the book, and I talk about it in a way that perhaps you might not have thought of before in terms of the assets that we all have… And as an exercise or preparing to launch a book and put any finishing touches on this book, I was up last night — one, I could really sleep, but then two, I was just reading reviews of other people’s books in the real estate category, and I was reading the negative reviews. A lot of the negative reviews on other people’s books – they could be grouped in certain ways, and one of the groupings was “Yeah, this works for so-and-so person, but my market’s different”, or “This person invested at the right time in 2008, but now deals are hard to come by.”

There’s always gonna be an advantage for when you jump in and do this, and there’s always gonna be disadvantages. There’s always gonna be advantages for what you can bring to the table initially, and there’s also gonna be areas that you’ve gotta shore up. And the sad thing about reviews like that, where people say “Hey, they started at the right time in 2008, or 2009, or their market is better than mine” is that the reviewer doesn’t realize that they do have assets, they’re just different assets from perhaps the author, or other investors.

For example, we all live in either a deal market, or a money market. We all live in a market that either has deals, or we live in a market that has a bunch of rich people… And it’s important to recognize if you’re in a deal market or a money market, and then approach accordingly, because you can leverage that. If you’re in a deal market, then great – you build a platform, which we talk about in the Experience section, where you attract investors… And if you live in a money market, then great, you leverage those connections that you have and you go partner up, or you go do some research and you find a market that makes sense that cash-flows.

So there’s always gonna be some challenges, but there’s also always a solution. That’s a core belief I’ve always had – there’s always a solution. We might not like the solution, but there’s always a way to work things out. I whole-heartedly believe that, and I really am proud of my resourcefulness because of that belief, and my resourcefulness comes because I believe that.

And then one thing that you mentioned, Theo, I just wanna touch on… You said find investors and ask them for money, and I just want to tweak that a little bit, and I wanna say we wanna attract investors, and we wanna offer them opportunities. I never ever, even at the beginning, have asked people for money, ever; instead — actually, I take that back. On my first deal I didn’t have the $50,000 for the earnest money, so I did ask one of the investors to put it up first, and then I wrote him a personal guarantee. But besides that, in terms of the opportunities and the deals, we have an opportunity where we offer it to other people; we don’t ask them for money. I’m not harping on you, I’m just making note of this thought process, because this is an important thought process… And it’s really for section two, but we were talking about it now, so I figured I’d bring it up.

We attract investors, we attract other team members… And in the book, we talk about how do you become attractive in order to attract those attractive partners? Because ultimately, in order to attract attractive partners, we have to be attractive, too. And when we think about raising money and our different opportunities, if an investor who reaches out through my website and he/she asks me on an introductory call “Okay, tell me why I should invest with you”, I take a step back and I say “Have you seen information on Ashcroft Capital that I sent you prior to our conversation?” Then they’d say “Yes”, and I’d say “Well, do you have any specific questions about that?” because ultimately, that would be the best approach for our conversation, versus me trying to talk about things that I’m not sure that you have or haven’t already looked at…

Theo Hicks: Exactly.

Joe Fairless: And I never will force-feed investors or anyone information about our company, but rather I will attract them into the business, and then as a result of that, the conversation is so much smoother, and that is the importance of having a thought leadership platform. This happens rarely, but yesterday I had three investor calls, and one of the three — this is the part that happens rarely, three new investor calls; they all sent submissions to the website… I have a couple at least a day.

One of them, he said “Are you affiliated with Ashferd?” I’m like “Ashferd…?” I said, “Ashcroft?” He’s like “Yeah. I came across your info I think on the internet, or something…” So he wasn’t familiar with me, didn’t know my background… And that conversation was much longer than what’s typical — which is fine; I’m just commenting on the differences between an investor who doesn’t have knowledge about your thought leadership platform and who you are, versus an investor who does, who maybe listens to this podcast or attends our conference in Denver, or any number of things; reads books, or listened to other people’s podcast and just heard me interviewed. That conversation is so much smoother, because I’ve already established some sort of track record and credibility with them prior to the conversation… And building the brand is part of part one in our book, and there are ways you can do that outside of just having a podcast, but having that conversation with someone and they already know a little bit about you is so much smoother, especially in our business… Because we’re in the business of capital preservation, and then hopefully we grow it, which we’re in real state, and if you do the  fundamentals of real estate, then you probably will.

Theo Hicks: Yes, that’s a lot of good information. From the small number of conversations I’ve had with potential investors, I could agree with exactly what you’re saying. I know we’re gonna talk about this a lot more in part two, but most of the time, it’s something that they kind of bring up, and they’re really passionate and excited about… Like, “Wait, I can do that…?” They don’t even realize that it’s something that’s possible for them to do; they just think that they can invest in stocks, or their 401k, and that’s it.

So you mentioned the brand building, and that’s another part of part one… In reality, you can start building your brand right away. If you don’t have that experience we’ve talked about earlier, this could be one of the ways that you could work towards gaining that experience and credibility. The brand allows you to meet potential team members, or as Joe said, attract potential team members, and the amount of opportunities that would come from that are really countless, and some of them you wouldn’t even think about.

We have a large section in the book talking about exactly how you go about building your brand, and as Joe mentioned, it’s not just creating a podcast… It could be a YouTube channel, a meetup group, a newsletter, conferences… You can kind of go through all of it.

Something else that’s important for this foundation before you go into raising money is, number one, you have to understand how you actually make money, so that you can set a goal. One of the things that we talk about is the importance of focusing on the cash-on-cash return and the internal rate of return for apartment syndications.

If you haven’t invested in apartments before, you might not know what the internal rate of return is. Basically, it’s a return that’s based off of time. Of course, a dollar today is gonna be worth more than a dollar five years from now, and the internal rate of return takes time into account when it’s calculating the returns… So that’s what your investors are gonna be looking at, or what your investors will likely look at when they’re analyzing your deals, so you’re gonna let them know how that number is calculated and what it means.

You also wanna know about the cash-on-cash return, because that’s another thing your investors are gonna look at… But also for yourself, because at the end of the day you’re doing this to likely reach some sort of goal, and a part of that goal is gonna be a financial goal. So once you understand how you make money, which we go over in the book, something that you wanna do is set a 12-month or 24-month or a 5-year goal, that’s gonna be a specific number. And instead of just saying “I wanna make a million dollars this year”, and stopping there, we go through a process of figuring out exactly what you need to do to hit that goal, and the fact that we use is the amount of money that you need to raise.

So once you understand how the returns work and how you make money, you can kind of back-track and calculate exactly how much money you need to raise in order to hit your goal. That will help you lead into part two, when you start reaching out for commitments, and you’ll know how many commitments you need to have before you start actually looking for deals.

Joe Fairless: The mistake a lot of people make who are starting in the apartment syndication business is they say “I wanna make X amount passively a month.” You’re not making anything passively a month, because you’re the general partner; however, the ways you can make ongoing cashflow as an active investor in a business would be investing as a limited partner in your deals, number one. Your money is treated the same as all your other investor’s money. Two is asset management fees. However, as you grow your company, those fees will likely need to be allocated towards you building out your staff and your team to support the amount of properties that you have.

I guess the cashflow from the general partnership, too. The reason why I didn’t mention that is because we tend to keep our returns, the GP returns, from a cashflow standpoint, in a bank account, just to be conservative, and then when we do some sort of capital event – a supplemental, or a refinance, or when we exit – then we would catch up… But we like to just provide the limited partners their returns, and usually we’ll keep our cashflow from the GP split in the deal, just to be a little bit more conservative.

So because of that, the way to look at it is looking at the acquisition fee, and then reverse-engineering from there. That’s how we arrive at the number. And I suggest doing a 12-month goal over the 24-month, and holding yourself accountable to the 12-month… And then also having a vision for five to ten years later. But that’s gonna change. Assuming that you have a solid, quantifiable 12-month goal, once you get that first deal or a couple deals done to achieve that 12-month goal, things are gonna snowball, and it’s likely that that 5-year goal or the 10-year goal will need to be updated, because you’re getting a lot farther, faster than you thought you would.

Theo Hicks: Exactly. Something else – and if you’re a loyal Best Ever listeners of course you know this, but you wanna have your specific, quantifiable 12-month goal, as Joe mentioned; that’s like kind of your number, but you also wanna at least have an idea of kind of why you want to achieve that goal.

We have in the book an exercise that will walk you through how to create a long-term vision. We ask you questions about what gets you excited about real estate, how will you benefit by achieving this goal…? So kind of the positives. At the same time, we’re also driven by things that we’re afraid of, that disgust us; we also go into questions about “What happens if you don’t achieve this goal? What’s your life gonna be like?” or “How would you feel if you didn’t achieve this goal?” or “How do you currently feel about not achieving this goal and what are some consequences you faced?”

Essentially, we’re creating a vision that we can go towards, but at the same time something that we’re also running away from, and something that we don’t wanna [unintelligible [00:20:50].06] So you’ve got those two things working for you, in a combination with your actual monetary goal, and combined, that will give you the inspiration to push through when things get tough.

Joe Fairless: When I became an entrepreneur, a full-time real estate investor, I put a document together with my goals, and I was working with Tony Robbins’ coach Trevor McGregor, who I still work with today, and I wrote down what will happen when I achieve my goals – I think it was to buy an apartment community; I think that was my goal – and I said “I’ll be able to have some more financial flexibility, and I’ll be able to finally launch a business that is mine, and I won’t be relying on an employer to send me a paycheck every two weeks”, but then I also put what will happen if I don’t achieve my goal… And I wrote “I will be thoroughly embarrassed, because I’ll have to go back to my job, tail between my legs, work back in an industry (advertising) that I didn’t like anymore. I’ll be humiliated, because I told everyone, including family and friends, that I’m gone, I’m not doing this anymore and I’m now focused on real estate.” And both the pain and the pleasure of associating that to your goals is incredibly important, and I still do that today… So here’s what I want to achieve and here’s what I’ll receive and others will receive as a result of me achieving it. Here’s how their life will be better, here’s the ripple effect…

But then here are the negative consequences to not achieving it. And it’s great, because when you do goal-setting, you’re usually incredibly inspired, and rah-rah, and high fives to everyone, “I’m gonna conquer this world”, but then four, five, six months later, twelve months later or whenever, you go through a lull, and it’s important to be able to pick that up and be inspired, but perhaps you also need to be disgusted by what would happen if you don’t achieve it. We need to have both those forces working in tandem to inspire us and keep us going.

Theo Hicks: Yes, and something that’s interesting in what you said there is when you were talking about when you left your job, that one of the things that would have disgusted you is the feeling of embarrassment of having to go back… Now, what I’m going to say is not advising people to just quit their jobs right now, with no plan whatsoever, but I think there is something to the concept of burning bridges… Because if you have your full-time job while you’re trying to be a real estate investor, you might be more timid, and be like “Well, I could pursue this really hard, but I still have this paycheck coming in”, so you might not pursue it as hard… But if you don’t have a job, and the only way you’re gonna make money and put food on the table is by doing a deal, or by getting your act together and working 40-60 hours/week – I think there’s something behind that.

For me personally, when I left my full-time job, I had a plan, and of course, I had done things in the years leading up to kind of prepare myself for it, but there’s never gonna be the perfect time to leave; you kind of just have to have faith and just do it, and then trust that you have the ability to be resourceful enough to get the job done… But again, it’s important to do the assessment we talked about earlier, and make sure that you actually can, and be realistic with yourself… Kind of look in your past and be like, “Alright, so when I left something before, without a full picture, was I able to be resourceful enough to figure it out?” Because at the end of the day, you’re gonna have your plan to quit your job and to do real estate full-time, and think you know exactly what’s gonna happen 100%, but this is not how it’s gonna work out…

So again, as long as you have some sort of idea, and you’ve done an assessment and truly believe and truly know that you are resourceful enough to figure it out, and you’ve got multiple backup plans in place, then my personal philosophy is just go for it, if I’m being honest… With all those caveats, of course.

Joe Fairless: Yeah, and that’s a whole other conversation… But yeah, there’s different approaches there. You put your back against the wall, fight or flight; some people fight and they work through it, and some people fly away and bad things happen to their family and their business, and all that… So pros and cons, and that’s a whole other conversation.

Theo Hicks: Yeah. So the last part before you start to go out and raise money is to figure out where you’re actually going to invest. As Joe mentioned earlier, you’re either in a deal market or a money market. If you’re in a deal market, then that market that you live in could be your target investment market. But if it’s not, you need to know that before you start going out and raising money and looking for deals. So the last part before you actually go out and start raising money and looking for deals is to figure out what market you’re gonna target.

Another section we have in the book focuses on what to look for in a market and exactly how we evaluate potential investment markets. Then something else that Joe mentioned in the beginning was how one of the objections that he came across when looking at reviews was people saying “Oh, well this person started after 2008. The market that he was in was great. Right now the market is not as great, so I can’t find good deals”, or things like that… So we also go over the three immutable laws of real estate investing, which if you’re a Best Ever listener, you’ve heard us talk about that before. Essentially, those are the laws that apply to any market. If you follow those laws, you’ll be able to not only survive, but potentially even thrive, and in any type of real estate market, whether it’s at is peak or at its low.

Joe Fairless: And just for clarification, because you mentioned market to identify the city, but then you said market to identify the real estate cycle… So those are two separate things that we go over. One is identify the city that you’re investing in, and then separately (but related) is the real estate cycle that you’re in. If you’ve listened to this podcast, you’ve heard me interview economists before, and one of them – I asked her after she talked about what we should do (buy, sell etc.), I said “Well, what if we just buy for cashflow, have long-term debt, and have adequate cash reserves?” She’s like, “Well, yeah, then you can hold on to it. Don’t sell. You’re set up well.” So doing those three things is what we talk about, regardless of the real estate cycle.

Certainly, you’re gonna buy more during the down, and you will sell more during the high, but you can continue to buy during all parts of the real estate cycle, as long as you buy for cashflow, have long-term debt, and have adequate cash reserves.

Theo Hicks: Exactly. So just to review, we talked about part one of the four-part process/system for completing your first apartment syndication deal. Within part one there’s four subsections, and the first one is the knowledge – so we talked about the experience you need before you even start this process. Then once you have that experience, you’re gonna wanna learn more about apartment syndications; that’s understanding the lingo so you can communicate, as well as what you’re supposed to focus on.

Once you have the knowledge aspect covered, the next two parts are to set your goals, so that’s setting your 12-month financial goal, but also a long-term vision, which is something that is going to inspire you, but also something to run away from, something disgusts you at the same time, so you have both those forces working for you… As well as building your brand, and we’ve talked about how the purpose of the brand is to attract these team members, attract passive capital, and also to build up your credibility, because that’s gonna be very helpful when you’re having these conversations, if people know who you are versus not knowing who you are.

And then finally, before you start going out to raise actual capital, you wanna figure out what real estate market or what city you’re going to invest it, or what one or two cities you’re going to invest in, and also make sure that you are aware of the three immutable laws of real estate investing that Joe mentioned, which is buy for cashflow, long-term debt, and have adequate cash reserves, so that you’re able to survive and likely thrive in any part of the real estate cycle.

Joe Fairless: Awesome. Cool. And go to ApartmentSyndicationBook.com to pre-order, and you can get a bunch of free goodies, too.

Theo Hicks: So on that topic – I know something you wanted to talk about was a couple e-mails that you’ve received…

Joe Fairless: You know what, I’m gonna have a separate episode on that.

Theo Hicks: Perfect. Something else that you wanted to talk about was your single-family portfolio that you have…

Joe Fairless: Yes, I had an epiphany last night while I was up late, looking at online reviews for other people’s books to make sure we had everything covered for ours, and I realized that my three homes are worth about 170k each, and $222,000 is what I bought them for, and they’re worth, I believe, about $510,000 now. Those are the three homes.

I have $161,000 in debt on those loans – total mortgage balance for those three. So $510,000 value, $161,000 in mortgages, so that’s in equity about $349,000. Guess how much I’m making a month on these three homes?

Theo Hicks: $400.

Joe Fairless: Like, nothing. Zero. A tree just fell down and hit the tenant’s car… So I don’t even know what we’re gonna do with the insurance; I have to talk to the insurance company about that, and also to the property management company… But in terms of the tree, it was $870 to get removed. There goes all the profits for all three homes, because it’s about $250/month that I make, but that’s on a best-case month.

So I’m looking at this and I’m like “I have about 350k worth of equity in these homes and I’m making nothing every month…” I know they have sentimental value, but holy cow… I started looking at if I were to sell, and let’s just say after the dust settles I get like 250k, factoring in taxes and other stuff; this is a really, really rough math. Fees, commissions, all that. 250k, at 8%, which when I invested in our deals, which is what I would do, I would just put more into our deals, at 8%, because we do an 8% preferred return, that’s $20,000/year, divided by 12, that’s $1,666. I’d change that number just so it doesn’t have three sixes in it, so I’d figure something out… But that’s $1,600/month, and 20k a year that I could be making if I were to invest in one of my own deals this money.

Now, I already invest in our deals, but I’ve got these three homes, so I’m considering it… I haven’t decided yet. My sister is a real estate agent in Dallas, Fort Worth, so I’ve got a call with her tomorrow and we’re gonna talk about it. I might sell individually, I might sell as a portfolio… They’d cash-flow for another investor if everything goes perfectly, but I’m not a fan of single-family homes. I haven’t bought any since 2012 or 2011.

I also see this as my largest vulnerability for being sued… Because I have these residents who live there, and if I get sued — I’m covered with insurance and I’m fine with that, but I just wanna remove that variable of vulnerability from a legal standpoint, too. I get that I could put the properties in an LLC and there might be a due on sale clause that’s triggered, so… I’ve just gotta kind of work through that, but I think I might be doing something with these three homes.

Theo Hicks: Yeah, because if you have $250,000 in equity you could buy —

Joe Fairless: 349k, but then with just rough math, I’m knocking out a hundred for taxes and such…

Theo Hicks: So technically, you could also buy a 1.2 million dollar apartment…

Joe Fairless: I’m not gonna do that… I’m not gonna do that at all; no, no, no… Yeah, I could 1031 into something else and just grow from there, but I have no desire, zero, negative desire to do that. I would be investing in our deals, otherwise I would go insane with having to buy that type of property, that small of a property, on the side, while we’re doing the Ashcroft stuff.

Theo Hicks: Well, I’m looking forward to hearing what you end up doing with those properties. I know you’ve had them for a while, and as you’ve mentioned, they probably have sentimental value, but… If you’re not getting any return on them, it’s understandable that you’re gonna pull that equity out and get that 8% pref… It’s 8%. I mean, that’s a solid return.

Joe Fairless: Pretty healthy, yeah. It’s better than what I’m getting now with my homes… Cool.

Theo Hicks: Alright, so I don’t have any updates, so let’s transition into closing. Everyone make sure you go to the Best Ever Community on Facebook; that’s BestEverCommunity.com. Join the conversation with — we’re up to over 1,500 active real estate members now. Each week we post a question of the week and write a blog post based off of your responses.

This week’s question is gonna be “What was your worst deal ever?” We wanna know what year that deal was in, and then tell us a story about why it was your worst deal.

Personally, I don’t think I’ve had a worst deal yet. They’ve all been — not the best deals ever, but…

Joe Fairless: Well, we’ve gotta get you one then. Hurry up and buy something.

Theo Hicks: Yeah, I’ve gotta buy a really crappy deal, so I can answer that question on Facebook… But yeah, just go on there and tell us a story about your worst deal, why it was your worst deal, and then also what you’ve done to mitigate the risk of that happening again in the future.

Joe Fairless: Cool.

Theo Hicks: And then lastly, please go to the podcast on iTunes and subscribe and leave a review for the opportunity to be the review of the week. Another great review this week from — most people don’t put their names… I’ll just say from B. I think it’s just a random amalgamation of letters… But they said that the podcast is the perfect commute soundtrack. Their review was “The Best Ever podcast has replaced the music and talk radio I used to listen to on my way to and from work. This has become my daily soundtrack. In addition to teaching me a trove of invaluable, profitable lessons, it’s also taught me what to look for in a real estate investment opportunity, especially what a bad deal might look like. There are lots of opportunities out there to invest in, but Joe and his guest will teach you what questions to ask, the common pitfalls and oversights that some syndicators fail to recognize, and how to minimize your risk. You’d be lucky to be able to get this kind of coaching by paying for it, but here it is for free.”

Joe Fairless: Well, and you talked about the bad deals, and that’s perfect for what the question of the week is at BestEverCommunity.com. Feel free to participate there and you’ll not only get to share your worst deal, but then also hear from others, and we’ll do a blog post on that to summarize all of that. That will be available at TheBestEverBlog.com.

Well, thank you so much for writing that review, and I’m glad you got a lot of value from our podcast. Everyone, thanks so much for hanging out with us. I hope this added a lot of value to your business, and ultimately your life. We will talk to you tomorrow!

JF1451: Save Money On Your Income Property Utilities with John Tanner

Listen to the Episode Below (23:47)
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If you own income property, especially larger buildings with a lot of units, you likely have some room for improvement with your utilities. John is here today to discuss this with us, as he specializes in helping his clients save the most amount of money possible. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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John Tanner Real Estate Background:

  • Director of Sales Marketing for My Utility Cabinet
  • Specializes in utilities and invoice management for commercial property owner/operators
  • Based in Cincinnati, OH
  • Say hi to him at https://myutilitycabinet.com/
  • Best Ever Book: Steve Jobs

Best Ever Listeners:

Do you need debt, equity, or a loan guarantor for your deals?

Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help.

See how Marc can help you by calling him at 212-897-9875 or emailing him mbelsky@easterneq.com


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

John Tanner: Good, Joe. How are you? Thanks for having me on.

Joe Fairless: I am doing well, and it’s my pleasure. A little bit about John – he is the director of Sales Marketing for My Utility Cabinet. They specialize in utilities and invoice management for commercial property owners and operators. Based in Cincinnati, Ohio, and the website is myutilitycabinet.com, which is also in the show notes page.

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

John Tanner: Yeah, absolutely. MUC and its cloud-based platform were originally created for construction and heavy industrial companies, because many of these companies had thousands of different locations and were constantly acquiring new ones, but didn’t have a uniform way of organizing or tracking the data within those bills.

Since 2011 we have evolved and now cater to basically any industry that uses energy and is looking for a better way to track it and manage it.

Over the last few years, we’ve been able to acquire clients ranging from floral shops, to breweries, and now even commercial and residential real estate companies.

One of our particular commercial real estate clients used our brilliant services to determine fair ways to build tenant allocations that didn’t have each unit individually metered. So not only did we create a fair and transparent billing system, but we also were able to analyze the rates for all of those clients’ location and reduce the utility spend by more than 15%.

Joe Fairless: Okay, so you all look at the energy that’s being used at a commercial property, and then what do you do with it?

John Tanner: We analyze the data to see if there’s any discrepancies, billing errors; we compare it to other locations that are the same size and should use the same amount of energy to see if you’re on the right rate, or if there’s something going on where you’re using too much energy and you shouldn’t be.

We dug into the numbers that are past the bills, so not just the dollar signs there, but the actual usage numbers.

Joe Fairless: Got it. So you look at a subject property and you compare subject property to other similar properties in that area, and you look at usage and determine if they’re on par for energy usage.

John Tanner: Yeah, and we also manage and process their billing as well. All of their bills are sent to our office and we process them, so it’s one easy lump sum payment, as opposed to you have a landlord sitting down and cutting open 20, 30, 40 different bills. We just make it simple for them, and it’s one easy payment.

Joe Fairless: Got it. And as far as bills go, you’re referring to the electric and water, or are you referring to cable…?

John Tanner: It can be all those. It can be just electric, gas, water, or we can add in television service, your phone service – anything that’s technically considered a utility or a bill, we can take care of it for you.

Joe Fairless: And then you consolidate the monthly bills and the owner writes one check to you, and then you all pay those bills.

John Tanner: Yeah, so we bill them one time. On our online database we give users logins and all of that, and they’re able to see all of their information on this site, and our financials are pushed to them, whether they use QuickBooks, or any other accounting software.

Joe Fairless: What about if bills are the first of the month versus the 28th of the month?

John Tanner: That’s something that a lot of property owners have voiced concerns, with the cashflow optimization, and we’re able to work with the utility companies… Say you have a mortgage that’s due on the first. We work with the utility company on our client’s behalf to try to stagger that out. If their mortgage is due the first and they wanted to pay something in the middle of the month, to have more cashflow optimization, we’d be able to do that for them.

Joe Fairless: As far as the energy usage, can you maybe give a case study or two as it relates to commercial properties?

John Tanner: Yeah, I have an example right here… Our most recent project with one of the clients directly relates to one of the articles you wrote back in April, the 27 ways to add value to apartment communities.

Joe Fairless: Yup.

John Tanner: Number seven on that is the ratio utility billing system (RUBS), but in our experience, sub-metering is basically RUBS on steroids. We ran an analysis of master metering with sub-meters versus having every unit be metered [unintelligible [00:07:47].20] building in Cincinnati, and after the initial year we projected 37% savings in utilities in the building, successfully lowering the NOI.

Joe Fairless: So what were the two variables you were comparing?

John Tanner: The two variables would have been — having a master meter for those 29 units, sub-metering that out, so they’re still being tracked, versus having a meter for each of those units.

Joe Fairless: Got it. So you’re making the distinction between sub-metering and master metering, which obviously makes sense, but then… Was there a third that you mentioned that you’re comparing?

John Tanner: No, there was really only two.

Joe Fairless: Okay, sub-meter versus master meter. Got it. And will you define both of those, just in case someone’s not aware of what those two things mean?

John Tanner: Yeah, so sub-metering would be — for instance, in this building we have 29 different units, so you’d have one master meter where all of the energy goes through, and running off of that master meter would be sub-meters, each of which would be going to a unit and you’d be able to tell exactly what that unit is using.

A regular meter is you would see driving by the apartment building – they might just have 10, 15, 20 of these master meters that are on each building, that are on a building, that go towards a unit… But for those units you have to pay a meter fee, for each and every one of those meters; it’s around $36. If you sub-meter, you pay that one meter fee, and then you still get the information for the rest of the units in the building.

Joe Fairless: So it’s cost-effective to sub-meter.

John Tanner: Yes, it’s cost-effective to sub-meter. You’re also putting some accountability on your tenants, so they have more understanding of the energy they use; it’s being split fairly.

Joe Fairless: Have you come across — and this gets more into operations, so it might be a little outside of your scope… But I’m just curious – have you come across an owner who attempts to sub-meter, but lo and behold, the residents at the property consider it a rent increase, because it’s more money out of their pocket if they’re now paying for those utilities, and then they have to back-track and discontinue the sub-metering?

John Tanner: No, we haven’t come across that, but [unintelligible [00:10:03].18] that we’re doing now is for a building that’s being gutted and newly-developed… With sub-metering, it would just basically reduce usage, and it wouldn’t particularly go straight back to the tenants and they would have to be paying more.

Joe Fairless: If it’s master-metered, then the residents still could pay, but it wouldn’t be as accurate, right?

John Tanner: Yeah, there’s a couple different instances you would have… There could just be one meter on the building, and you’re having to go in and use RUBS [unintelligible [00:10:32].15] square footage and all of that, and it would be fair to an extent, but you wouldn’t know exactly what unit was using; you would just know the exact building usage, and you’d be dividing that up.

Regularly, if you didn’t have a meter on each unit, you would also be able to tell what they were using, but you would have to pay those meter fees as well, as a tenant would. If you put up the upfront costs to install sub-meters, you’re not incurring that cost anymore, and the tenant’s not incurring that cost anymore. So that $36/month that they’re paying on their utility bill – they wouldn’t be paying that anymore.

Joe Fairless: What are some objections that you come across with owners, and after telling them “Hey, this is how it works”, then they say “Okay, cool. I’m in.”

John Tanner: There aren’t much objections, just because with sub-metering you get instant feedback on those units, so you’re able to tell… Say there’s a leak in an apartment, say there’s an anomaly in the billing system – you can set it up to where you’re able to figure this out. In 15-minute increments the data can be sent to you… So there haven’t been many objections there.

Joe Fairless: So everyone you talk to signs up… Every single client or potential customer…?

John Tanner: Well, for sub-metering this is a fairly new thing we’re rolling out, but everyone that we’ve had has at least been open to it, yes.

Joe Fairless: Okay, the ones who are open to it but then have not signed up yet, what is a reservation?

John Tanner: Just the upfront costs. There’s a lot of people that know about it but don’t know the exact cost of it, so we perform the ROI for them to be able to figure out how well the payback would be and the benefits of doing it, and the benefits usually outweigh the cons in this situation.

Joe Fairless: Let’s go through a hypothetical scenario – or if you have a specific example, that works, too. What are some typical upfront costs?

John Tanner: I don’t have exact numbers in front of me right now, and honestly, it just depends on the size of the building.

Joe Fairless: What’s the range for installation on installing sub-meters?

John Tanner: I don’t have those numbers in front of me right now. We don’t install it ourselves; we kind of work as a broker with [unintelligible [00:12:41].04] company, so we try to find the best deal out there for our clients.

Joe Fairless: So you set up the owner with a company that then installs the sub-meters, and you all act as the go-between.

John Tanner: Yes, absolutely. We’re talking with people all over the country, trying to find the best ways to do it, the best pricing, what the going rate is in certain states, and to make sure everything is compliant.

Joe Fairless: So what are the ways that you all make money?

John Tanner: Ways that we make money are processing invoices for our clients. We don’t take any of our clients’ savings, like I’d mentioned earlier, talking about one of our clients. We projected 37% savings to them in this building, and we don’t take any of that cost. Kind of an added value for them.

There’s a lot of companies out there that will come along and say “Hey, we’ll save you this much, but we take 50% for the first however many years.” All of your savings are your own. For us, we just require a payment for a user fee for our website, and then depending on the amount of bills that you have, it can range between $2,50 to $5 on how many bills that we process for you.

Joe Fairless: Got it. Okay, it makes sense. And you mentioned that’s the way you all make money on the processing side… What about the tracking data and identifying utility usage relative to comps and where there can be efficiencies?

John Tanner: Those are included in our flat rate. The same thing for having a monthly user fee – that’s all included in our flat rate. All of the information is readily available on myutilitycabinet.com. We kind of just are able to analyze that and paint pictures there that make sense to people. We have different graphs, pie charts, whatever… There’s many different ways that we’re able to come across that data and interpret it differently for different people, different visualizations.

Joe Fairless: Where are the sensors for the utility usage, so you can determine if there’s a leak or not?

John Tanner: That would be in the sub-meter itself. The meter would be the sensor. So if it’s delivering us data every 15 minutes and we have a trend, and that trend skyrockets, we’d be able to tell “Hey, what’s going on right here right now? Why is it so much higher than it has been in previous months?” That would be how we would be able to track that.

Joe Fairless: So it can be a warning detector if you’re doing sub-metering, versus if you’re doing the RUBS, where you’re billing back based on square footage, or number of residents, or something like that. There’s not that proactive nature that you’d get with RUBS that you do get with sub-metering.

John Tanner: Yeah, absolutely. If you’re doing RUBS, you might not be able to figure this out for, say, a couple months; you don’t realize that your bills are getting a little bit higher, a little bit higher… That’s why we track usage as well, because sometimes prices change, rates change… Being able to track usage gives you direct data and trends of what has been the operational mean or average and what it should be, and things stand out when they’re not.

Joe Fairless: You mentioned on sub-metering you all perform a return on investment assessment to basically show when you get your money back, after a certain period of time, when you invest in sub-metering. What’s a typical timeframe that you see, and what’s the low end and high end, just to understand the range of time?

John Tanner: Honestly, it just depends on the size of the building. If you perform this on a larger building, with hundreds of different units [unintelligible [00:16:30].26] quicker, just because you’re not paying that extra $36/month.

So usually within the first two years – I would assume that’s around the average, but it can span depending on the project, depending on the amount of units, or if you’re dealing with an office space… There’s a lot of different variables that go into it.

Joe Fairless: Is units the primary variable, and then there’s other secondary variables? Or is there something in addition to units that would be a major variable to consider?

John Tanner: Units would be the main variable there. Say you have a building and you only have five units in it; it wouldn’t make sense at that point to sub-meter, just because there’s a cut-off. There’s a start where it make sense to do it, where you’re saving money right off the get-go.

Joe Fairless: Approximately what’s that cut-off on average? You said five unit not so much… What would be?

John Tanner: If you had (I think it’s) seven or more units, it would make sense.

Joe Fairless: Okay… Assuming other variables are friendly in that scenario.

John Tanner: Yeah, exactly. You might come across a building that already has some meters set up, or something where it wouldn’t make sense to retrofit, go in there and dig all that out and start from scratch. That’s why this project that we’re working on is unique, because we already got in the building and we’re starting it from scratch… We’re being able to hit the ground running.

Joe Fairless: Yeah… Super-interesting. I’m really grateful that you’re getting into details with us. Based on your experience within this industry – so it doesn’t have to be real estate investing advice, but just within this industry based on your experience, what is your best advice ever for real estate investors?

John Tanner: My best advice ever for real estate investors would be to gather all the information and data you can before making a decision. And just because someone else did something that way or you’ve heard that’s the way it’s usually done doesn’t mean it’s the best way for your specific property or your specific operation. So make decisions based on tangible information.

What we like to say here at MUC is you can’t manage what you don’t measure.

Joe Fairless: Amen to that, that’s for darn sure. I certainly take that philosophy in my business. We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round? Alright, let’s do it. First, a quick word from our Best Ever partners.

Break: [[00:18:58].03] to [[00:19:48].15]

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

John Tanner: The Steve Jobs biography by Walter Isaacson, because it describes how an incredible personal work ethic, as well as regular self-reflection and re-evaluation of one’s choices can create success. This is applicable in real estate, because investors should constantly review their situation in order to make the right decision at the right times.

Joe Fairless: And I said “best ever book you’ve most recently read”, which is a little redundant, so I apologize for that… I should’ve said “best ever book you’ve recently read” — something like that, I don’t know… It’s a new question and I’m trying to add in the “recently” part, so I’ve gotta figure out how to word that.

What’s a favorite case study that you haven’t talked about that you’d like to talk about?

John Tanner: We have a case study from one of our different clients – due to some confidentiality agreements we aren’t able to tell you exactly who this client is… But this is something we offer in our ancillary services; in this case it’s tax code analysis. We were recently able recover over $250,000 in erroneously paid taxes, which neither the client nor the utility were aware, that they shouldn’t have been paying.

In addition to that, we also offer utility tracking management, and we’ve saved our clients millions of dollars between late fees, erroneous meter fees, peak demand and billing error tracking.

Joe Fairless: That’s great stuff. How is tax code tied into utility fees?

John Tanner: It depends on someone’s operation. It could be whether it’s on the production side, or… If you look at the tax code on a utility bill, the numbers kind of seem endless, so we have an in-house tax code analyst [unintelligible [00:21:33].03] operating across the country. Different states have different tax codes. The utility company is never gonna tell you if you’re paying money that you shouldn’t be, but if we can go in and find in the tax code, whether it’s for production purposes, if you have a business that’s making raw materials, you can figure out ways that they shouldn’t be paying those taxes.

Joe Fairless: Great stuff, thank you for sharing that. Best ever way you like to give back?

John Tanner: As a company, we volunteer often at the Freestore Foodbank in St. Bernard. Also, in our parking lot here we offer free parking to the elderly.

Joe Fairless: Are they coming to hang out with you, or is your parking lot connected to something perhaps more engaging for them?

John Tanner: Well, it depends who you’re talking to… [laughter] There’s a couple things around the area here in [unintelligible [00:22:20].17] but sometimes they’re engaging with us; I don’t know if they mean to, but… It’s all for the best, right?

Joe Fairless: It’s all for the best, yeah, exactly. What is the best way the Best Ever listeners can get in touch with you and learn more about what you guys have got going on?

John Tanner: There’s a couple ways you can reach us. We have a LinkedIn page, My Utility Cabinet. You can e-mail us at info@myutilitycabinet.com. We also have a Facebook page, and if you wanna reach out to me, I’m John Tanner on LinkedIn.

Joe Fairless: Awesome. John, thank you for being on the show, thanks for talking about RUBS versus sub-metering. To use your words, “sub-metering is RUBS on steroids”, and you talked about why – it’s more accurate, you get a  more proactive look at things, not to mention it’s something that can add value to the property in the long-run whenever you exit, because you’ve taken a lot from the expense column and put it more towards the income column. Then in addition, the processing invoices for clients that you talked about, and some of the next-level things like tax code analysis… So thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

John Tanner: Thank you. You too.

Best Ever Show Real Estate Advice

JF1444: Bring Your Real Estate Investments Alive! With Joe Fairless

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Joe has another special segment for us today. He’s talking to us about how he keeps death reminders around to help him focus on what’s really important in life, and how that has helped his real estate investing. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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We profile 1 nonprofit or cause every month that is near and dear to our heart. To help get the word out, submit a cause, or donate, visit bestevercauses.com.


Joe Fairless: Best Ever listeners, I’ve got a special segment for you, and every now and then I’ll be doing these special segments when I come across something that I learn in my entrepreneurial journey and I think it will be helpful for you as well… So I hope you enjoy this episode, and more importantly, I hope you get some value from it that you can then apply to your life.

The outcome of today’s episode is to show how focusing and incorporating death and death reminders into my regular life helps me be more effective as a real estate investor, as well as being more focused on the moments that are truly going to matter to me throughout my life, and ultimately what else is there that’s more important than focusing on those moments, as long as those are empowering moments for myself and others… So that’s the outcome for our conversation.

Where this is coming from is very recently I got an e-mail from the Dean of the College of Media and Communication at Texas Tech University. He said, “You’ve been nominated and voted in as outstanding alumnus for Texas Tech University College of Media and Communication.” I said, “That’s amazing!” I’ve been looking forward to this; for about 10 years I’ve been on the board and I’ve attended the ceremony at every one of those years. During the board meeting, that same weekend, there’s a ceremony for people who are being inducted into the group… And I said, “I’m very much looking forward to this!” and I said “What weekend is it again?” and he mentioned in the e-mail “November 3rd.” And I thought, “Oh, doggies…! November 12th is when Colleen, my wife, is due to give birth to our baby girl that we’re having, our first kid… And that’s kind of close, cutting it close…

We live in Cincinnati, therefore Colleen is giving birth in Cincinnati, and this award ceremony is November 3rd, nine days prior to when she’s due, in Lubbock, Texas. There’s a conflict there. But I thought I could do both. I thought “Hey, there’s a nine-day difference, and it’s okay if I need to hop back as quick as possible to get back to Cincinnati if something were to come early…” So I said, “You know what, dean, I’m likely in, but on the off-chance that Colleen is giving birth, then obviously I’m not gonna attend” and he said “Fine.”

Well, last night at [1:45] AM I’m reading a book called “Not Fade Away” by Peter Barton. I highly recommend the book, and I’ll give some other recommendations on death in a little bit… I highly recommend this book. Basically, the book’s about Peter, who is a successful entrepreneur; he was diagnosed with cancer at around the age of like 45, ended up passing away at the age of 51, and he brought in someone to write about his experiences as he was leading up to his death, since he had terminal cancer…

This book is not a book on his career, but rather how he internalizes what is going on, what’s important to him, and ultimately the purpose of the book is to simply document his experiences for others who are facing that type of experience with death, or just need to have a reminder to live fully, which is what it did for me…

And in the book, the passage I was reading last night, he talks about one of his most  cherished memories – being there with his wife as she was giving birth, each of the three times that they had a kid. He would cut the umbilical cord, he had a shirt as a tradition that he wore, and he loved it. And it showed through the words that he used, and that was one of the most – if not THE most – precious moment each of those three times.

Immediately after reading that, I e-mail my assistant and I tell her “Please tell the dean, as well as all my family members, that I will not be attending the awards ceremony. It’s too close to when Colleen is supposed to give birth. I will be with her the entire time.”

That is something that absolutely would not have happened, at least that night, last night; maybe I would have eventually figured it out later, but I wouldn’t have made that decision last night if I didn’t read a book about a person dying… And ultimately, that is what I want to mention that I learned through one of the books that I read about death, and I surround myself constantly, as I mentioned earlier, with different things that remind me that my time is limited.

Steve Jobs talks about this in a commencement address to Stanford’s graduating students, and he says “Remembering you’re going to die is the best way I know to avoid the trap of thinking you have something to lose.”

There are constant reminders I have in my life that remind me to think about the importance of the moment with those around me. And how does this tie back to me as a real estate investor? Oh, it’s super simple. I don’t procrastinate. I’m guilty of it in instances, but by and large, I don’t procrastinate… Because I know that the moment is all I’ve got right now, and hopefully I can string together many more moments in time, but I don’t know. So I take advantage of the moments that I have.

One reminder that I use for this is books, videos and podcasts. A book I recommend is Not Fade Away by Peter Barton. A video I recommend is that commencement address by Steve Jobs to Stanford students; you can find it on YouTube real easy. A podcast I recommend is a podcast that Tim Ferriss did with B.J. Miller, who is a doctor who works with hospice patients. I highly recommend those three things.

Another way I constantly incorporate the living — it’s not necessarily living like today is my last day, because I think that’s kind of ridiculous… Because if I did live every day like it was the last day,  I might be running naked on the street right now. Who knows what I’d be doing…? I don’t know, I haven’t really thought about it, but I probably wouldn’t be doing this at this moment in time; I’d probably be doing something a little wackier than this. So I don’t live like every day is my last – I think that’s a  little silly – but I do live in the moment, and I do focus on being present with those who I care about and I love.

The second way is a death clock that I have. I have a clock that looks like something you’d see at a basketball arena, but instead of a countdown clock for the shot clock, it’s got days, hours, minutes and seconds on it. It’s about four feet long, one foot tall, and about six inches deep, and it’s hanging on my wall. It’s constantly counting down from my 90th birthday to now, so it’s constantly ticking seconds away, minutes away, hours away, days away. When I look at it – it’s to the left of my desk – I can see, and it’s  a constant reminder that this moment counts. Be present, do what you need to do that is important.

So having a death clock is important. You can order through Amazon just a countdown clock. I had to get mine custom because I went up to my 90th birthday, and most of them (or anyone I’ve found) didn’t have that. So if you want the company that I ordered from, you can just e-mail infor@JoeFairless.com. I make no money off this, by the way, but it is like $300, so it is an investment… And think about the amount of time that — it could save you time as a result of you paying attention to time, so certainly I think it was worth the $300 investment, but that’s up to you.

The third is I volunteer for hospice, and I meet with patients who are – as doctors say – going to die soon. Those patients, when I speak to them, they focus on the memories they have of their family and of experiences, and there’s no way that I’d intentionally put myself in jeopardy of missing the experience of the birth of  my kid; there’s no way. So even though it was nine days away – November 3rd is the awards ceremony in Lubbock, Texas, November 12th is when she’s supposed to give birth. Even though it’s a nine-day difference, absolutely no way I’m gonna put myself in the situation where I could miss that… Because it is possible that I get to Lubbock and then I immediately have to go back because she’s in labor, and then I miss it because the flight’s delayed, or something else. Who knows…? It’s possible.

I’m not gonna put myself in that situation because I know by surrounding myself with death that the important things that we’re gonna remember when we’re taking our last breaths are the time we have with those we love and the moments that we cherish with them, and the experiences that we have.

That’s why I’m so grateful that I’ve got this podcast, that we can share experiences other real estate investors have about what’s worked and what hasn’t worked, because that helps you maximize your time, it helps you get some shortcuts for achieving success, so that you can then spend your time in the way that you want to spend it. That’s why I’m so passionate about this stuff, because ultimately it’s about what you do with your time, and focusing it in the areas that you deem important… And my guess, if it’s like other people who I’ve read about, watched, studied and experienced myself, what you think is most valuable is ultimately going to have to do with some sort of companionship with others: those you love, those who you wanna serve, those in your community etc.

That is how being surrounded by death has allowed me to continually fully live my life. I slip. Of course I slip. I procrastinate. I do things where I’m not always productive or I’m not always putting family first, I’m doing other business things or I’m checking e-mail when I should be focused on a conversation, but I have some safeguards in place to pull me back in and to constantly remind me that it’s the moments with each other and it’s the relationships that I’m likely going to care about at the end, so therefore I’m gonna put more priority on right now.

Thanks for listening. I hope you got a lot of value from it. Talk to you tomorrow.

JF1438: 8 Step Process For Selling Your Apartment Community #FollowAlongFriday with Joe and Theo

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Joe and Theo are back for another edition of Follow Along Friday! Today we’ll hear about what things we should be looking at when deciding to sell an apartment community. We’ve covered this before, but today in greater detail than ever before. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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8 Step Process For Selling Your Apartment Community

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

We’ve got Follow Along Friday today. Today we’re gonna discuss the 8-step process for selling your apartment community. Let’s dive right in.

Theo Hicks: So this is based off of  a question received from a listener. His name is David, and he said: “I wanted to ask you if you have any suggestions or tips on the selling process. I wanna be as knowledgeable as possible going into this process. Any books, specific podcast episodes or just general tips?”

We are gonna do a specific podcast episode on this, so we’re gonna fulfill that. This is also based off of a blog post that we have with a similar title; of course, as we’re doing it live, we’re gonna go in a little bit more detail on the selling process.

As you mentioned, it’s 8 steps, and the first step is to actually identify when to sell the property, because that’s going to differ from deal to deal. High-level, Joe, how does your company determine when you’re going to sell the apartments you guys bought?

Joe Fairless: Well, there’s a short and a long answer. The short answer is we determine when we’re gonna sell based on what type of returns we can get when we sell. That’s the short answer… And if those returns are going to hit the projections, then we’re going to consider it and likely will sell; if it’s gonna exceed the projections – then again, we’ll consider it and likely will sell.

If it will not hit the projections, but there are some things on the horizon from a market standpoint – maybe we’re in a market that just lost 50% of the employer base for whatever reason, I don’t know why, but maybe that’s what happened, and we don’t see a way that that’s going to get turned around in the near future, then our job as general partners is to focus on capital preservation and mitigate risk as much as possible for our investors.

So while returns are great, losing money is worse than as good as getting a return feels or is. So we want to first and foremost protect the capital that we have on the investment, so we would look to sell if we wouldn’t hit the projected returns, but there’s a variable out there that we see is going to be present in the near and long term, then we’ll get the money back to the investors and get whatever type of return we can, and then move on with something else, and know that we have a variable we need to look out for on future deals that we didn’t see previously.

So that could be, like I mentioned, some employers, and it could be an area that we thought would continue to be as it currently was when we bought it, but instead maybe a school district got rezoned and now the property is no longer in the good school district, it’s in a bad school district, and that hurts the value of the property, so we see that as a long-term issue, not something that’s short-term. If that’s negatively impacting the property, then we’re gonna need to figure something out.

So that’s ultimately what we look for – can we hit the projected returns, can we exceed them? Okay, then we’re gonna seriously consider it. And if we can’t, but there is another variable in play that is on the horizon that we don’t see going away, then we’ll still look to sell, assuming that we can’t push through that and come out the other side.

Theo Hicks: So you buy a property and the initial business plan is to hold for five years; that’s kind of just the projected, but as you’ve mentioned, if something happened in the market that makes sense to sell it earlier, or if for example your projected sale price after five years was 20 million and after three years you can sell for 20 million, you’ll exceed your return projections by doing that if you’re selling it earlier, and the IRRs based off of the time of when you sell the property, or how long the capital is tied up for.

Joe Fairless: In your example, if we can get 18 million for the property instead of 20, even though we projected 20 in year five – many variables in play, but the IRR is likely gonna exceed what we would have achieved if we held it two more years and got an additional two million dollars on the sale… So then we’d consider selling.

As soon as we buy the property, we’re constantly assessing what we should do with it relative to the business plan, relative to the market, and we get brokers’ opinion of value at minimum on our properties, and we see “Okay, based on where we’re at with the business plan and where we projected, we can get x% of the total exit purchase price that we were projecting now – how does that look from an investor return, and what do we wanna do?”

Then you’re also considering along the way the type of debt financing you have on the property, when does that become due… Because you’re gonna need to make a decision in, say, three years, so if you have to make a decision in three years, then you need to start looking at it in year one, in year one and a half, because you don’t wanna be pushed in a corner.

Theo Hicks: Okay. You also kind of mentioned something else I was gonna talk about for this step of wanting to sell – the way that you determine the value of the property to figure out what returns am I gonna get is through that broker’s opinion of value that you’re getting every 12 months. That’s essentially a broker doing their sales comp approach to determine what the value of the property actually is, using the net operating income.

I think you mentioned they’ll give you like  a high, medium, low sales price, and from there you can determine, “Okay, based off of me selling it now, what are the returns going to be, based off of this broker’s opinion of value?” and then move forward from there.

Before we move on to step two, when you get the broker’s opinion of value, do you get them from the broker that you used to purchase the property, or do you get them from multiple brokers you’re working with? What broker do you decide to go with?

Joe Fairless: Yeah, you don’t get it from a lot of brokers. You should pick your partner or maybe have one other partner… So maybe at most get two brokers’ opinion of value… In my opinion. This is my opinion.

The reason why you don’t get multiple brokers’ opinion of value is you’ll hurt your reputation with all of them if you’re asking all of them to do it, number one. Number two, if you at this point are unsure of which broker you should go with, and you have to get five brokers’ opinion of value to see who can get the best price, or who thinks they can get the best price, then you are not doing your homework and you are not building relationships that you should be building along the way… Because by the time you’re looking to sell a property, you’d better have strong relationships with at least two brokers in your market, and those are the two brokers who you can use to get the broker’s opinion of value.

And how you select which one you go with – well, it’s either the strength of the relationship… That’s assuming that the brokers’ opinion of value are similar, by the way. If they’re drastically different, then you need to dig in and understand why are they different, and then you might uncover some things that will help you position your property or you didn’t know about your property etc.

Ultimately, it’s a combination of strength of relationship and confidence that they’ll be able to deliver on what they say they can deliver on… So you look at their track record and history; this is assuming that the brokers that you’ve selected have a track record, have a history, and you can confidently assume that they’re going to get their conservative estimate… Because as you mentioned, they’re gonna give you a conservative estimate and they’re gonna give you a more aggressive estimate for what they can sell the property for… And assuming that they have delivered on conservative estimates in the past and you can assume they’ll deliver on yours too, especially if that’s within the range of the other one, so then it’s just a matter of relationship.

Theo Hicks: Exactly. So essentially, you’re not necessarily going with the broker’s opinion of value that has the highest price; there’s other factors to take into account, so you want the best broker’s opinion of value, which comes with the best price and the best actual broker.

Joe Fairless: Doesn’t that sound so similar to how you select a buyer when you are selling? You don’t just go with the buyer who’s offering the highest price, you go with the buyer who has a high price, but also that you know will close the deal, will do what he/she says they’re gonna do.

Theo Hicks: Exactly.

Joe Fairless: We have won deals, and one recently, where I know for a fact that we were $400,000 less than the highest offer, and we got awarded the deal; it’s because of our track record. That goes the same with when you select brokers – you also go for the track record. If their aggressive estimate is a lot higher, then you’ve still gotta take into consideration who they are and will they be able to deliver?

Theo Hicks: Yeah, exactly. We’ll kind of go over what Joe has mentioned in more detail in step five, the best and final seller call.

So step one is to find when to sell, which we’ve talked about. Step two is once you’ve made a decision to sell, you need to be — of course, you’re going to be mindful of the sale, but you wanna make sure that you are setting yourself up to get the best offer on the property. If you’re buying property and you’re underwriting deals and you’re screening deals and you’re doing due diligence on deals, so you know what you’re looking for when buying a deal – you wanna make sure that certain things that you would use to disqualify a deal [unintelligible [00:10:55].26] at your property, but secondly, you want to obviously maximize your income and minimize the expenses before selling the property, because the property value is gonna be based on net operating income.

A few examples of things you can do are, for example, if you plan on selling it a month, you have to determine if it makes sense to renovate those units. Is the money you’re gonna put into those units gonna be less than the increase in value from the increase in rents from renovating those units? If not, don’t renovate them. If they do, then do renovate them.

So it’s not automatically hold off on renovations, it’s just kind of going in the details and determining what the rental premiums will be based off of those renovations and determining if it’s worth doing that.

Another example would be to increase your marketing budget. But again, if increasing your marketing budget is not gonna get rewarded more than the cost to market, then don’t do it; but if you are, you’re gonna get that extra couple of percentage points in occupancy, then increase your marketing budget.

Something else that you can do, no matter what, is to pursue your collections more aggressively. One thing that — when we are looking at deals, you don’t wanna see a high bad debt or high delinquency, so when you’re going to sell your property, you wanna make sure that you’re pursuing this bad debt and minimizing it as much as possible, because it makes the property look better, but it also increases your net operating income.

Those are just a few examples of things that you can do. Basically, just look at your T-12, look at your revenue line items, look at your expense line items and figure out what you can do to increase the former and decrease the latter. That’s step two.

Step three – Joe kind of already mentioned this… It has to do with notifying your lender that you’re gonna sell the property. For example, let’s say you’ve got a loan that has some sort of pre-payment penalty after [unintelligible [00:12:36].05] for three years. Maybe it makes sense from just a sales price perspective to sell it, but you have to take into account any type of penalties or yield maintenance, or the fees that you have to pay on the loan by selling the property earlier.

Practically,  what you do is you send your lender a notification of disposition, letting them know that you intend on selling the property, and then also you need to have an understanding of any type of penalties you’re going to pay for doing so… And then taking that into account when you’re looking at if it makes sense to sell or if you should wait until all those fees go away.

Step four – this is after you’ve got your broker, based off of your best (not the highest, but the best) broker opinion of value, and then next is for them to start a bidding war. This involves them creating their offering memorandum, marketing the property, them bringing people onto the property, showing the deal… Essentially, everything that you went through in order to buy the property, they’re gonna have people doing it at your actual property.

Joe Fairless: It might make sense to not have the property go on market. One of our properties that we sold, we did not put it on the market, and the reason why is because a local group who owner property around where our property was came in with a very, very strong offer… And we know the market, the broker knows the market, so we know that it was unlikely that the market would pay what we were getting in offer from this local group… And the local group owned property around that area, so they could operate it differently and more effectively than other groups who were coming in and just buying the property without the scale that this group had in this neighborhood.

So have a conversation with your broker and ask him/her about if they think it would make sense to do off-market as well. Listen to them, and then you make the decision. That should be after you get the broker’s opinion of value for the conservative and the aggressive range. Most likely, it will make sense for you to take it to market, most likely… But there are circumstances…

Another circumstance where we’ve sold a property off-market is a broker recently represented a seller in the same sub-market, and he had multiple buyers who didn’t get the deal; only one got the deal, and he came to us and he said “Hey, I’ve got a group, they’re willing to pay all cash, they are wanting to buy in your area, and here’s the price that they’re looking to give you for your property”, and we’re like “Okay.” Why go through the whole process…? Because they just went through the whole process in the same submarket for a similar property, so we know what the market will demand (or command) for deals… So we skipped ahead and then didn’t have to go through the whole song and dance with tours and everything else.

Theo Hicks: We have a blog post that’s entitled something along the lines of  “3 ways an owner benefits from selling off-market.” It’s written from the perspective of you being a buyer, but you can also learn about why you might potentially wanna sell your deal off-market because of those three benefits.

Step five – this is assuming you’re the deal on-market and not off-market – is to have a best and final seller call. As we were discussing when we were talking about which broker to go with, you have to have the same approach when you’re determining which offer to go with.

The highest offer is not necessarily the best offer. There are other things that need to be taken into account about the buyer before you go through the process of awarding them the deal… Because then your property is gonna be tied up for that time, and they’re backing out, that’s 1) additional money that you’re gonna be losing because you are selling the property 60-90 days later at a minimum…

So on the best and final seller call, essentially you want everyone to submit their best offer, and then you will have a conversation with the buyers to get more information on their background. You wanna know what their track record is. It’s kind of like what Joe just mentioned – they sold a property to someone off-market who had just bought a deal, so they had the confidence that they’d be able to close.

If the buyer doesn’t have a solid track record or doesn’t have a team with a solid track record, then you don’t really have any proof that they can actually close on the deal besides their word and just this offer price.

Something else you wanna know is how they’re actually gonna fund the deal. Again, if they don’t have their debt lined up, they don’t know if they’re buying it all cash, where is that money coming from, if they’re buying it with debt, where is the down payment coming from and where is the debt coming from, can they qualify for the debt…? Because obviously, if they can’t fund the deal, they can’t close on the deal.

You also wanna know what their proposed business plan is. Say, for example, you’re selling a property that is completely renovated and their plan is to do a value-add business plan and raise the rents by $100 – are they gonna be able to do that? Will they even be able to qualify for a loan based off that underwriting? Will their team be able to execute on that, and will they agree to execute on that? If not, they’re probably not gonna be able to close on the deal.

Then another thing you wanna ask is who their team members are, who is their property management company… I’m assuming most importantly will be the property management company, because they’re the one that’s going to be actually operating the property…

Joe Fairless: Debt.

Theo Hicks: And the debt, as well. These are all things that they need to have lined up in order to close on the deal. So essentially, the purpose of this best and final seller call is to confirm that they can actually close on the deal, and that involves asking about their track record, who’s on their team, what their business plan is and how they actually plan on funding the deal.

Then from there you can have a conversation with your team on what’s the best offer to accept, and it may not necessarily be the highest offer.

Step six is after you select the best offer is to negotiate a purchase sales agreement. That’s the actual sales contract, so it’s different than the letter of intent that they probably submitted prior to the best and final seller call. This is an official contract.

Joe Fairless: On the purchase and sale agreement, as a seller, make sure you use your template, and then provide that to the buyer. You’re starting with a home-court advantage if you do that.

Theo Hicks: Yeah. Don’t let the buyer send you a purchase sales agreement. Make sure that you yourself are drafting that.

Joe Fairless: Your attorneys.

Theo Hicks: Step seven – once the deal is under contract, you want to make sure you’re fulfilling your due diligence obligations for the purchase sales agreement… It’s depending on what’s in the purchase sales agreement, but 24 hours notice the can come visit the property, and you’re providing them with all the financials on a timely basis, and things like that.

Again, at this point you have gone through that process yourself, so put yourself in the shoes of the buyer and understand that they need to perform due diligence on their property in order to confirm their assumptions, so you need to be open and provide them with that information and allow them to tour the property and things like that.

Lastly is step eight, which is the close and distributing the sales proceeds to your investors. So you close on the deal and you make sure that you are taking the sales proceeds and distributing to your investor based off of how much money they invested in the deal.

Joe Fairless: That’s likely gonna happen in 2-3 different distributions, because there’s all sorts of outstanding checks and different payments you’ll have – maybe for taxes, or maybe a vendor hasn’t cashed a check yet… So you’re gonna have to keep something in the operating account, but you also want to distribute the chunk of what you’re confident you can distribute to investors.

One mistake we made on a recent sale is we sent the large chunk distribution out after the sale, and it happens like two, two and a half weeks after you close, just to get everything tidied up as much as you can… And we sent out the distribution, but we didn’t let them know that this was the first distribution of what we knew we could distribute… And when we did the distribution, because it was a large chunk of what we could do, we just made it an even number… So their profits from the sale was, say, a hundred thousand dollars and zero cents; it was exactly even. So we had one investor ask us “Hey, wait a second… This is a little weird. Why is my distribution exactly this amount with no pennies? It seems like it should be like 27 cents, or something like that…” And they asked to see the closing statements, and we sent them the closing statement, and then I finally asked “Wait, what are you asking about?” and he said, “Well, I just thought it was a little weird…” and I was like, “Got it. Well, here’s what we did…”

I should have communicated that to them in the e-mail, that we’re going to distribute a certain percent now, and then we’ll determine once all of the vendor checks are cashed and once we’re still getting some income from the city, from certain rent checks that were subsidized housing… And once all of that’s done, then we’ll give you, to the penny, the remaining distribution down the line, which can take up to 3, 4, 5 months.

Theo Hicks: So those are the 8 steps. One thing I did wanna mention is that starting in step 6, after you’ve negotiated your purchase sales agreement, that’s the point where you want to start notifying your investors and keep them updated on the process; once you’ve accepted the offer you wanna let investors know that you’re selling the property, and then you also wanna let them know when the closing date is. So if that changes, then you’ve gotta let them know when the closing date is.

Then once you actually close, you wanna send them an e-mail, letting them know about the successful close, and then kind of as Joe explained, about the distributions, explaining how that process is going to work… Because again, it’s important to keep your investors updated and communicating with them, because that’s how you build trust and relationships with them, and have them come back for future deals.

Joe Fairless: So to recap, here’s the 8-step process for selling your apartment community:

  1. You need to know when to sell. That broker’s opinion of value is helpful there; also, where is your business plan, also any other variables in play in your market.
  2. Be mindful of the sale, so position your property for a successful sale, meaning look at the renovations that you’re doing – maybe hold off on them, maybe continue… It depends. Look at the marketing budget, collections etc.
  3. Send your lender a notification of the pending sale or the upcoming sale. Know what your terms are in the loan covenant, because you might need to notify them more days than what you have under contract or they have under contract. That should not be a surprise to you, so know that in advance, prior to putting your property under contract, know how much lead time the lender needs, and then take into account pre-payment penalty and yield maintenance.
  4. Start a bidding war.
  5. The best and final call, qualify the buyer.
  6. Negotiate a purchase and sale agreement. Provide them yours.
  7. Fulfill due diligence obligations. You need a timeline; print out a timeline, put it in your wall, and also provide that to your attorney and ask them to notify you prior to any major milestones or major deadlines in the contract.
  8. Close and distribute the sales proceeds while communicating with your investors the expectations for when they should receive their distributions.

Theo Hicks: Alright, so just to wrap up, make sure you guys and girls go to the Best Ever Community page on Facebook. Each week we post a new question, you guys provide your answers, and you get included in the blog post.

This week’s question is “What is the biggest red flag for you when evaluating a potential deal?” This can be some sort of factor in your underwriting model… For me, when I saw this question, my first thought – and this is more specific to Florida… When I’m looking at deals down here, if they don’t have a concrete foundation, I don’t look at it. Apparently, termites are a huge deal in Florida, so if you have a wooden foundation, termites are attracted to wood, so it can open up a whole slew of problems in the future by having a wood foundation.

So if it doesn’t have a concrete foundation I don’t even look at it. That might be a unique approach on here… I was looking at some of the answers on the page right now, and someone said “A really low expense ratio. 30% in the proforma.” Probably not realistic… Another answer was “Accidentally miscalculating the IRR”, on the calculator, making sure that the formula is correct… So again, that’s a pretty big deal, because that’s one of the things you’re using to determine whether or not to invest in the deal.

So make sure you guys and girls go to the BestEverCommunity.com, answer that question and you will be included in a blog post next week.

Lastly, make sure you subscribe to the podcast on iTunes and leave a review for the opportunity to be the review of the week. This week’s review is by James Patrick JP. He had a short and sweet review, which was: “Great podcast, with high-quality guests, and a good mix of education and inspiration, covering a wide range of topics.”

Joe Fairless: JP, thank you so much for that review and taking time out of your day to help the community get stronger. I really appreciate it. Everyone, please do a review if you haven’t already, and we will showcase you in the review of the week.

Thanks so much for hanging out with us –  8-step process for approaching selling your apartment building – and looking forward to talking to you again tomorrow.

JF1431: 7 Factors To Consider When Raising Rents #FollowAlongFriday with Joe and Theo

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If you’re a value-add investor, raising rents is something that is near and dear to your heart. Today Joe and Theo will discuss in-depth details of what to look for when considering raising the rent prices. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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

We’re doing Follow Along Friday today. We’re talking about how to determine when you should raise rents. I’m with Theo Hicks, who joins me on Fridays… And this topic, on the surface, is pretty simple – you raise rents when the market will commend a certain premium, or when you property can commend a certain premium based on the market comps.

So on the surface, you might be thinking “Okay, well I just need to know what the market is doing, and that will determine how I raise rents.” High-level – sure, that’s accurate, but there’s much more to it. There’s a 2.0 analysis that you can do and should do, especially when you’re dealing with apartment buildings, because you’ve got some large financial implications when you keep rents the same or you’re not maximizing the rents that you can be getting. And then there’s also financial implications depending on when you’re selling, where you’re at in the business plan etc.

So we’re gonna talk about that… Theo is gonna lead the charge, I’m gonna chime in along the way, and we’re ready to go.

Theo Hicks: As Joe said, the short answer to when you raise rents is you have your property management company, or you yourself will do some sort of market comp analysis on a monthly basis, weekly basis or however often you want, and then based off of that, your property management company or you will find out that “Okay, we’re under-rented by $15, so on all new leases we’re gonna raise the rent $15.” That’s the short answer, that’s one way to do it… But there are a couple of exceptions where you don’t necessarily want to just continue to raise your rent… Not necessarily exceptions, but things you wanna look at first, to make sure that those are all good before you start raising the rents, because as Joe said, of course, when you raise your rents, the rents will go up, but there’s also other implications of other expenses that might increase or things that might decrease, and that could potentially end up decreasing your overall cashflow on the property.

I’ve got a list of things here that I’m gonna go over… One of them is pretty high-level too, but it’s what’s your business plan? What was your initial plan to raise rents when you were underwriting the deal? Well, first of all, did you have a plan? …which you should; if you’re a Best Ever listener, we talk about that all the time. What was your initial plan to raise the rents? Was your plan to renovate the units and then raise the rents once they were done? Was the plan to decrease the loss to lease… So you went in there and the units were fine, but they were under-rented, so it was a plan to go in and raise the rents that way?

Also, do you have investors that you offer a certain return to, that you need to hit, and in order to achieve that return, you need to raise the rents? That’s maybe more upfront…

In the long-term, you wanna see where you actually are in your business plan compared to what you projected. Again, when you’re underwriting the deal, you’ve got your month-to-month projections, so two years down the road where are you at? Are your rents where they’re supposed to be? If not, and the market comps tell you that you can raise the rents, then that’s something that you’re gonna need to do in order to hit your target.

Joe Fairless: Something else with the business plan… It’s incredibly important that we’re aware of when the projected capital event will take place… And by capital event I mean a refinance, a supplemental loan or a sale. Because in order to get your desired amount (or even greater) for whatever you’re looking to get from that capital event, you’ll want to have the rent roll to show as high of income as possible, which then consequently will have your income be as high as possible. Theo is gonna get into this in a little bit… You can do some things to maneuver the property so that it’s put in the best light with your leasing, to get those rents as high as possible and then also to maintain the occupancy.

It’s not necessarily mutually exclusive, where you get rent premiums and high occupancy; there’s a way to get both, but you might have to do some concessions, or something like that, in order to get those leases signed at a high rate and keep that occupancy high for that capital event… Whereas if you’re not about to do a capital event or you’re not planning on doing one, then you can let occupancy dip a little bit, stay strong on concessions, meaning you don’t have any concessions, and then do it a little bit slower, in not as much of a blitz pace.

Theo Hicks: Exactly… Because the value of the property is based off of that operating income, and obviously, the majority of the actual revenue is rents, but you have to keep in mind that there is other income and there’s other things that you’re doing to get renters that costs you money. This is a concessions example.

Something else you wanna look at, since I think it’s a pretty smooth transition into talking about concessions – before you go to raise your rents, take a look at what type of concessions it is that you’re offering. If you’re offering a ton or rent concessions before raising the rents, it’s probably not a good idea to raise the rents until you are able to reduce those.

Again, concessions are things that are used, like first month is rent-free, a referral program, discounted rents… Anything that you’re conceding to the resident to get them to live in your building.

If you are already doing that at the current rents that you have, you’ll probably have to offer more concessions if you’re gonna be raising the rents. So concessions could actually be an indicator of whether or not you’re ready to raise the rents, kind of like occupancy. If the occupancy is really high, that might indicate that you’re under-rented. Having low concessions could also be an indicator that you could push your rents a little bit higher and increase that revenue.

At the same time, if you are increasing your rents by $300/month, but you have to offer $1,000 in concessions, it doesn’t really make any sense. So concessions is something else that you wanna look at and minimize before you go to raise your rents.

Something similar to concessions that’s also a revenue loss is bad debt and delinquency. This kind of also goes hand-in-hand with evictions and skips. So take a look at your eviction rate, the number of people that are skipping out in the middle of the night, and then once people skip out and they’re not up to date with their rents, then that’s bad debt. That’s money that you cannot collect.

If you’re having all these resident problems, minimize that first… Because again, if you minimize your bad debt, you minimize skips, you minimize evictions, your revenue is gonna go up without you having to even raise the rents, just with operational change. Once you’ve got all that figured out, you get the added bonus of eventually raising the rents.

Joe Fairless: And just to clarify a little bit on the bad debt… If someone skips out, you can technically collect, but you’ll likely have to go through a collections agency, and it’s gonna be a long time and you’ll just get a percentage of it, because the collections agency will take a percentage, too.

Theo Hicks: And Joe, you were talking earlier about things that you can do leading up to the sale – becoming more aggressive on your collections is one of those, as well. Of course, minimizing eviction and skips, but also if you’ve got bad debt that’s more than 3% of your gross potential rents, of course, the person that’s looking at your deal is gonna have questions about why is the bad debt so high. That’s something else too that you wanna address.

I was looking at a deal the other day where the bad debt was literally over 10% of the gross potential rent… It was just because of the resident space, but… Again, 10% of your gross potential rent… Think about how much money you’re paying for property management; it’s like 3%. So it’s three times as much as paying the property manager, money you’re just losing because you’re not aggressive enough on the collections. So that’s a way to raise the rents without actually having to raise the rents.

Another one – and this kind of goes back to what we were talking about earlier with the market comps, the competition… So what are your 2-bed and 1-bed rents compared to the similar apartment across the street? What are they offering currently? What type of concessions are they offering?

If you are wanting to raise your rents from $850 to $875 and someone across the street is at $825 and offering some concessions, it’s probably not the best idea to raise the rent, assuming that those are the exact same properties.

So the market comp analysis will take care of that… When you get your analysis back, you’ll look at your competition and see what they’re renting. But I’m not 100% sure if they have things like concessions or who pays the utilities on there… Does it, Joe?

Joe Fairless: Yeah, absolutely; a good analysis certainly does, because the good analysis will be that of a perspective resident at that property, and that perspective resident, when going through the process at the property, will come across if there’s a concession or not, or who pays what.

Theo Hicks: Okay.

Joe Fairless: And that should be done at minimum on a monthly basis for your property.

Theo Hicks: Exactly. And one of the main purposes of that is to minimize that loss to lease, which is something else that’s a loss… And if you can minimize that gap… Because loss to lease is the difference between the market rent and the actual rent, so for example — one of the deals you guys bought maybe over a year ago, I was reading through the investment summary and the owner was not aggressive on his rents, so it was 5%-10% below market rents… But they sacrificed that so they’d have a really high occupancy rate.

So it is kind of a give and take on all of these factors, and you kind of wanna just navigate them so you can have certain ones that are high, but then not have other ones go up because of that, and things like that… And that just takes experience and time.

Joe Fairless: All roads lead back to the business plan, which is why we started off talking about the business plan… Because if your business plan is to have returns that are desirable, so 17%-18% internal rate of return on a five-year project to limited partners, then it’s likely you’re doing a value-add play, so you’ll need to continue to be aggressive with income, or be focused on income… Compared to perhaps a family that purchases a property to beat inflation – they’re likely more focused on occupancy, sitting on it, paying off the debt and holding it long-term, maybe doing a cash-out refinance in the future, depending on how the economy does. It’s just different – different business plans, different perspectives on what to do based on certain circumstances.

Theo Hicks: Exactly. And with this business plan, everything that we’re talking about, you’ll want to make sure that you’re aware of this when you’re creating a business plan. This is not something that you want to do two years in, and be like, “Alright, how do I raise rents on this property?” You should know as much as possible exactly what you’re going to do after taking over the property, so that you’re not scrambling last-minute to raise the rents, or you don’t know what to do when bad debt increases, and things like that.

Joe Fairless: Yeah, you should absolutely know who is your competition prior to purchasing the property, what you need to do to compete with that property… So if you’re doing a value-add deal, it should not be other properties that are where you’re at now, it should be the properties that you can compete against once you implement your value-add plan.

Then once you close, you implement the value-add plan, you then do an assessment to determine where you’re at relative to that competition, and how you can optimize that plan… Whether you can scale down on the upgrades, because maybe it’s overkill, whether you need to scale up, or whether you’re just about right, and then you can figure out how to maneuver afterwards… But you’ve gotta have that plan going into it, you’ve gotta know who your competition is and how you plan on competing against them and how much it’s gonna cost in order to do that per unit.

Theo Hicks: Yeah. Another factor to look at is the number of canceled applicants. These are the people who apply and then disappear. You wanna see how many people are canceling or have applied to move in and then the move-in date comes and they don’t actually show up. If you’re having a high number of these, that’s another area you should probably focus on first, because that’s kind of a sign of either something’s going on with the resident, or there’s something about your property that they don’t want to move in… So that’s something that you wanna find an answer to and figure it out, because that’s wasted advertising dollars, that’s wasted time for your leasing agents… That’s a unit that could have had a resident, but now it’s vacant for another couple of weeks because that person didn’t move in.

So all those things are losses against your revenue. If you’ve got a bunch of applicants cancelling and not showing up for move-in day, figure out what’s going on and address that before you go in and raise rents.

Joe Fairless: Two comments on that. One – in addition to it being applicants who were approved, you also might have applicants who applied, but then they went AWOL and they wouldn’t have been qualified anyway. It’s important to take note of how many you have of those individuals, because that could be an indicator of the market and the submarket. So you’ll want to see the trend there of all these canceled applicants and you’re not really getting the quality that you used to, or you’re getting better quality residents based on however you qualify the potential residents. So that’s one comment.

Theo Hicks: The other comment is these are all things that you should be asking your property manager on-site to give you information on… Whereas I imagine if you didn’t hear our conversation between Theo and I, you might not have asked about all these questions prior to saying “Yeah, let’s increase the rents.” And this is just a next-level way of looking at if you should increase rents and other considerations, because each of them have a way of hurting your property and your profits if you’re not paying attention to it. Canceled applicants, the number of evictions, the competition, concessions, clearly the business plan – these are all things that you should be asking your on-site team about, so that you’re educated, and then you can start seeing trends over the course of ownership at that particular property.

Theo Hicks: Exactly. And a couple more comments, or one… A lot of the things that we’re talking about – canceled applicants, the bad debt… Well, always the bad debt, but canceled applicants, evictions, skips… If you are underwriting a deal, or you actually have your property management company already managing the property, all of these things should be listed on the rent roll, assuming you’re using a really detailed software… If not, as Joe mentioned, you need to get this information from your property management company. This should be information you’re getting on your weekly performance reviews with the management company. You should have spreadsheets, you should have a lot more than just the number of canceled applicants, evictions, skips, bad debt and concessions…

You should make sure that you’re in constant communication with your property management company and you’re knowing what’s going on on a weekly basis in regards to these different factors.

Joe Fairless: And someone who has a large apartment building might be thinking, “Well, yeah, but Joe, I have an LRO (lease rent options) system to just tell me when I should raise rents”, and that’s great, but it doesn’t necessarily factor in all of these things that we’ve discussed. So even if you have a software program that tells you what the market rent is at your competition, what their occupancy rate is and what you should do on that particular day with your unit, you still want to take all these other factors that we’ve discussed into consideration.

Theo Hicks: Exactly. The last factor is the rental season. So figure out what month you’re in right now – we’re in August – and then determine how close you are to when the rental season begins and when the rental season ends. Of course, the rental season is gonna vary from market to market.

I know back in Cincinnati it was May, June, July, August, around that time. I did some research beforehand and a lot of people say summer… I’ve read a couple e-mails from your property management company, Joe, and they talk about April and May… So it sounds like between April and September – somewhere in there is when rental season starts and ends.

Then obviously in the winter is when it’s not rental season… So if you’re in the winter, you’re probably not gonna be able to get as high of rents as you would if you wait six months to raise the rents in the spring and in the summer… So that’s something else that you wanna take into account – where are you at in time, and is this the optimal time to raise the rents, or should I wait six months before raising those rents?

Joe Fairless: Winter is the time to hold tight on occupancy. November, December not only do residents not move, and if they do move out, then good luck getting someone to replace them at that particular time, but properties don’t sell.

Now, I’m making a general statement – certainly there’s exceptions, but usually you’re not gonna have a property of yours go on the market in November, because there’s just not as much traction as in the spring and in the summer, and every single-family home investor who’s listening to this is like “Yeah, no kidding…”, because you experience the same thing with single-family homes. You would think larger dollar amount transactions might buck that trend, but they do not.

When we sell our properties, we’re looking to sell in the same timeframe that you’ve just described.

Theo Hicks: Exactly, yeah. Maybe during that time of the year, in the winter, it’s the best time to buy a deal from someone, because they’re not gonna be able to demand as high of a price, but…

Joe Fairless: Yeah, absolutely. There’s a flipside to that for sure.

Theo Hicks: [unintelligible [00:19:02].10] So just to summarize, when to raise rents at your apartment community – the short answer is run a rental comp analysis and if it tells you to raise the rents, raise them. But there are some other additional factors to look at, too.

What’s your business plan? What kind of concessions are you currently offering? Take a look at the people you’re competing with, take a look at the number of evictions and skips, take a look at your bad debt and delinquency costs, make sure you’re up to date on the number of cancelled applicants, and then finally, make sure you’re aware of what time of the year it is, and whether or not you’re in the rental season.

Joe Fairless: I think that was seven things. That’s nice and clean for the title of this episode once it goes live.

Theo Hicks: Yeah, exactly. Moving on, Joe, to the updates – I know you guys closed on a deal yesterday, so congrats on that.

Joe Fairless: Yeah, that’s a pretty big update. We closed on a 436-unit property in Dallas, and I actually just sent out an opportunity yesterday to my private investor group about another property that is in that area, South Dallas area; we think there’s gonna be some good cashflow opportunity with perhaps some appreciation in the market, although we’re not counting on it… More of a cashflow opportunity and do our value-add business plan. I’m excited about that.

Then one real estate productivity-related thing that I learned last night was I watched the documentary Truth About Alcohol (on Netflix), and I learned some things that I’d heard before, but I didn’t know it was actually science… So for any Best Ever listener who does have a drink every now and then, or multiple drinks every now and then, this is information that you might find interesting (I did). One is the more water we have in our body, the longer it takes for us to get drunk, so that’s why larger people don’t get drunk as quickly as smaller people, because the larger people have more water in their body. That’s number one.

The more muscle you have compared to fat, it will take longer for you to get drunk. So if you’re more muscular, then you don’t get drunk as quickly as if you are fat… That’s another thing I learned on the documentary.

Third thing is we probably don’t know this, but I saw an experiment, so it proved it – if we eat prior to drinking, then we get drunk slower. The blood alcohol content that is in our bloodstream is lower if we eat prior to drinking, versus if we drink on an empty stomach.

And then four is we eat more when we’re drinking. Again, most of these things I had heard of, but I didn’t know if they were actual facts or not… At least they were from this documentary. The documentary is The Truth About Alcohol. I thought that was interesting, so I wanted to share.

Theo Hicks: So now if you don’t want to get drunk, you know what to do. If you also want to maximize it, you also know what to do… [laughter] When you’re working on your real estate stuff.

Joe Fairless: There you go.

Theo Hicks: Yeah, I mean… Whenever you watch an older movie, whenever they’re doing business transactions, they’re always drinking–

Joe Fairless: Sipping on whiskey…

Theo Hicks: Sipping on whiskey, and stuff like that.

Joe Fairless: Smoking a ciggy…

Theo Hicks: Yeah. They could probably make some more open and honest [unintelligible [00:22:22].13] business negotiations.

Joe Fairless: Yes, yes. What about you? Any updates?

Theo Hicks: No updates on my end. I’ve got my three fourplexes, they’re fully occupied, so there’s cashflow… I mentioned last week I’m gonna host a barbecue event in the next couple of months. I’m not gonna tell them when it’s coming, I’m not gonna tell them when the next one’s coming, and I’m excited about that.

Joe Fairless: Well, you kind of wanna tell them a little in advance when it’s coming…

Theo Hicks: I’ll give them a week advance, yeah.

Joe Fairless: Right, right.

Theo Hicks: Then I’m also starting to work on doing my own syndication deal, so we’ll talk about that coming soon.

Joe Fairless: Fair enough.

Theo Hicks: I’m putting together a team right now and we’re gonna start looking for deals. I’m running some things, but not enough to share on this podcast just yet… But once I learn my first big lesson, I’ll definitely share it for everyone.

Joe Fairless: Well, Theo, we have some resources for you that will help you learn the process.

Theo Hicks: I’m leveraging all those resources, don’t worry, Joe…

Joe Fairless: Yes, fair enough. And for everyone else, you can go to apartmentsyndication.com, or multifamilysyndication.com (we’ve got both URL’s) and there’s all sorts of syndication tips and blog posts on raising money, and finding deals, and working with brokers, building out your team… All that good stuff.

Theo Hicks: Alright, so just to wrap up here – make sure you guys go to the BestEverCommunity.com…

Joe Fairless: You did it again…

Theo Hicks: What did I do again? Oh, guys and girls…

Joe Fairless: There you go. [laughter]

Theo Hicks: Guys and girls… [laughs] Make sure you guys go to the bestevercommunity.com, our Facebook group…

Joe Fairless: You just did it again… [laughs]

Theo Hicks: And each week we post a question of the week. If you guys and girls respond to it, you’ll be included in a blog post. This week’s question is “What is the biggest red flag for you when evaluating a market?”

I wanna add to this — I’m gonna go back and add to this and say “What’s the biggest red flag for you when you’re evaluating a market?”, but I also wanna know what the biggest red flag is when you’re evaluating a deal? Maybe that’ll be the question next week.

The biggest red flag for me when evaluating a market — of course, we talk about this all the time, which is job diversity… But something else is I wanna look at the median income, and — this is more for a deal, I guess… What the average rent is gonna be, and make sure that the median income can support that rent.

Most people spend around 30%-35% (I think that’s the high end) of their income on rent… So if the rents are below that, that’s a good sign; if the rents are 50% of the median income, then I’m probably not gonna invest in that area.

Joe Fairless: That’s a good one. Thank you for sharing that.

Theo Hicks: I got that from one of your clients, Dan.

Joe Fairless: Oh, cool.

Theo Hicks: I’d heard it before, but he articulated it in a good way, and it stuck.

Joe Fairless: Yeah, that’s good. I like that.

Theo Hicks: And lastly, make sure you guys and girls subscribe to the podcast on iTunes and leave a review, it really helps us out… And you might have the opportunity to have your review read aloud on the podcast.

This week’s review was from Hanna Bumper, and she said:

“These podcasts are extremely informative for first-time investors, through to those with [unintelligible [00:25:20].10] portfolios. I highly recommend it. Even the ones I didn’t think pertained to me had nuggets of information that were useful.”

And yeah, I agree, I’m sure most people when they go through your podcast, they look at the title and they read the bio of the person, and they see “Oh, they’re a wholesaler… I’m not  a wholesaler, so I’m not gonna listen to it…”, but real estate is so interconnected that you might learn some deal generation techniques that you could apply to your business, or some success habits that they use that is something that you’re struggling with, and once applied, could increase your productivity.

So I agree, every podcast has at least one thing that is new that you can learn and apply to whatever business, or even to your personal life. And at the very least, you’ll get a very good book recommendation at the end.

Joe Fairless: Yeah, I love your thoughts, Hanna, and also your comments, Theo. I’m the same way… One core belief I have is nothing in life has a meaning until I decide to give it meaning… So I determine what words mean to me, and it’s a fact that that’s how the world is, because everyone is interpreting our conversation slightly differently based on their own life experiences, where they’re at, their attention span etc.

So when I’m speaking to a fix and flipper or a wholesaler – I’m not doing that stuff, but I am learning about certain aspects of what they’re doing so that I can see how I can apply that to my business… And there’s always something I can learn from a conversation, so I’m grateful that we’ve got Best Ever listeners who acknowledge and embrace that. I too embrace that.

Thanks everyone for hanging out, listening, and we’ll talk to you tomorrow.

JF1427: Debate 03: Fix & Flip Vs. Buy & Hold with Eric Kottner and Mark Dolfini

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If you’ve been wondering which of these strategies are best for you, then tune in and hear what the respective experts in their field have to say about why they chose their strategy. Even if you know your strategy, these debates are extremely informative for everyone, no matter the experience level. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Mark Dolfini Real Estate Background:

  • Husband, Father, and U.S. Marine Veteran
  • Currently oversees the ownership, operation, and management of $40 Million worth of Real Estate
  • Volunteers with various veteran’s causes as well as Junior Achievement
  • Based in Lafayette, Indiana
  • Best Ever Listeners can get a free pre-release version of his new book at www.LandlordCoach.com/BestEver
  • Say hi to him at https://landlordcoach.com/
  • Best Ever Book: Think and Grow Rich


Eric Kottner Real Estate Background:

  • Full time investor since 2006
  • Started flipping in 2011
  • Joined a high volume flipping company in 2015, where they did 5-7 flips per month
  • Has done 15 flips since going back on his own
  • Based in Cincinnati, OH
  • Say hi to him at:

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Joe Fairless: Best Ever listeners, welcome to another round of the Best Ever Debate. Today we’re pitting Mark Dolfini versus Eric Kottner. Mark’s gonna be representing the buy and hold approach, Eric is gonna be representing fix and flip. The purpose is not to prove which strategy is superior, but rather which strategy is best for you.

We’ve got four categories:

1) barrier to entry

2) risks

3) potential returns

4) if it’s maintainable in a downturn.

They’re gonna be talking about their approach based on those four categories, and you can go to BestEverShowCommunity.com (I think BestEverCommunity.com works too, you can just do that). That will take you to our Facebook page, where you can jump in the conversation, talk to Mark, talk to Eric and tell us which strategy is best for you based on this episode, or just ask them some questions that you have about the content and the conversation that took place… So enjoy the episode, and we’ll talk to you tomorrow.


Grant Rothenburger: Alright, it looks like we’re live. Hi, everyone. Thanks for tuning in to the third Best Ever Debate. Today I’m joined by Mark Dolfini and Eric Kottner. How are you doing today, Mark?

Mark Dolfini: I’m doing great.

Grant Rothenburger: And Mark is here to argue the buy and hold side of this debate. A little bit about Mark – he has been a previous guest on this show, and he is a  husband, father, U.S. Marine Veteran, so thank you for your service. Currently, Mark oversees the ownership, operation and management of $40 million dollars worth of real estate. He volunteers with various veteran’s causes, as well as Junior Achievement. He is based in Lafayette, Indiana, and he has a new book that has recently come out… Or is coming out, Mark?

Mark Dolfini: I’ve got two books. The Time-Wealthy Investor published last year in July, and I’ve just released The Judge a week ago, Friday.

Grant Rothenburger: Okay, cool. So LandlordCoach.com/BestEver, and you have something set up for the Best Ever listeners there.

Mark Dolfini: They can get a free copy of the download of The Judge, and also there’s some videos on there as well, explaining the VIP process outlined in the Time-Wealthy Investor.

Grant Rothenburger: Perfect. And Eric Kottner is a personal friend of mine here in Cincinnati. He’s joining us — you’re in one of your flips at the moment, aren’t you?

Eric Kottner: I am. We’re actually gonna get the professional photos done today, and hopefully get it on the market this weekend.

Grant Rothenburger: Very cool. Obviously, Eric Kottner is here to tell us about the fix and flip side of this argument. He has been a full-time real estate investor since 2006. He started flipping in 2011, and in 2015 he joined a high volume flipping company for two years. They were doing 5-7 flips per month. Since, he has gone on his own again and has done 15 flips personally.

Today, obviously you guys are debating buy and hold versus fix and flip, and we’ve got four points we’re gonna hit: barrier of entry, risk, returns and how maintainable is your strategy in a downturn.

With that, we’ll go ahead and start with you, Mark. Do you wanna tell us a little bit more about yourself? Then we’ll dive into the barrier of entry after that.

Mark Dolfini: Sure. I started in real estate back in the late ’90s. I proceeded to make every mistake you could possibly make in real estate… So if there’s one out there, I’m not sure that I haven’t made it… A couple times, because the first time wasn’t expensive enough. You learn pretty quickly that way. [laughs] But I’ve done a lot of different things. I’ve done some flips, I’ve done a lot of different things in terms of contract sales, and holding paper, and trading paper, and stuff like that… But it’s all been centered around real estate.

But my strategy which works best for me is buy and hold. I’ve always bought things with the eye towards holding onto them, and really it’s been a strategy that’s worked out well for me, and maybe it will work out for some of your listeners as well.

Grant Rothenburger: I think it already has, and hopefully we can encourage some more, unless Eric has something to say about it…

Eric Kottner: I mean, just like Mark, I’ve been in this since 2006; I actually started as a landlord, owning rental properties, along those lines… And throughout the few years I’ve been doing that, I made every mistake in the book, just as I’m sure Mark has as well, and I learned over these few years that just me being that landlord just really wasn’t what I wanted to do, it wasn’t what matched my skill sets… So down the road, I’ve hired a property manager back in 2008-2009, I got my real estate license, tried my hand at being a realtor in 2009, which was — once again, we talk about mistakes we made in real estate… That would be one of those. [laughter]

In 2011 I saw that there’s an opportunity to buy properties low, fix them up and start selling them. And actually, in 2011, when I did do my first flip, I had it under contract within three days, and it was one of those things that I learned that (as we’ll talk about later) there are things you can do in a down market that will still get you to sell your houses fast and make a good profit on them.

But yeah, I learned that I do a lot better dealing with problems that are in front of me, with construction work, or houses, along those lines, than so much dealing with emotions of other people, along those lines, and having to talk with tenants and everything along those lines… And just fitting that skillset, fix and flip is good for me, and also for making sure that when I go into a project, I do it 100% because I know I’m gonna be selling off to somebody else. So it benefits me to make sure I put an extra little bit of money into it, knowing that I’m gonna sell it to a homeowner down the road, and just only keep it for a short period of time.

Grant Rothenburger: Okay. I love how you did a little bit of foreshadowing there for the maintainable in a downturn… Okay, so let’s talk about barrier of entry, and we’re gonna grade each one of these on a scale from 1 to 5. So barrier of entry, difficulty to entry, 1 being low, 5 being high… When we get to maintainable in a downturn, 1 will be easily maintainable in a downturn, 5 is very difficult to maintain in a downturn. So with all that being said, Mark, will you kick us off with your argument for barrier of entry for buy and hold?

Mark Dolfini: Yeah, I rated that as a 4, and I’ll admit that it is hard to get into — that’s the one thing, that’s the one constant that I hear when people are saying “I wanna get into rentals, but I’m gonna start with wholesaling, and maybe do some flips, and then get some cash, and then buy some rentals.” So from that side of things, I will tell you it is difficult.

Back when I was starting out in the early 2000’s I just needed to understand how the banks were thinking, what they were looking for in the underwriting process, and that’s what I showed them. It wasn’t anything other than just learning that. Now, the banks have gotten very sophisticated in terms of what they’re looking at; they question everything, and it is a lot more difficult to even buy a property that you live in for a few years and turn that into a rental. It’s much more scrutinized than it was even just a few years ago.

So it’s not as easy as it was, but I didn’t rate it as a 5, because I didn’t wanna make it sound impossible. I rated it as a 4, just because there is significant capital that you’ll have to have to get into a decent property, and not buy a property that — if you look at the money and it’s $30,000 to get into a rental, for that $30,000 rental property you’re like “Oh, my gosh…” That’s not the type of property you really wanna be getting into in every market. In some markets it’s okay, but not every market is conducive for that. So I rated it as a 4 just because of the capital outlay, that you’ll have to almost always have cash or cash equity in a deal.

Grant Rothenburger: Alright, cool. Eric, do you have a response or a question to what Mark just said?

Eric Kottner: He made some very good points. With all of real estate, especially rentals or fix and flips, there’s gonna be a lot of capital involved, and raising capital, depending on what market you’re in, can be the easiest or the hardest to do, depending on your skillset levels, along those lines. But I completely agree with him – getting the capital, talking with the banks is probably one of the more difficult things to do right now.

But for my difficulty level on fix and flips, I actually had it a little bit lower… And the only reason I say that is because I had it at a 3. The main reason for that was mainly for the fact that in a fix and flip there’s a couple ways that — you can either come into it like I did, with a lot of capital, with your own money, to start fix and flipping… I actually refinanced my rental properties to start fixing and flipping back in 2011, and that’s how I got my start.

In this market right now though, I’ve been seeing a lot of people that [unintelligible [00:09:09].10] either joint-venturing, people that actually had done construction work, or had been a general contractor for years are not partnering with actual experienced real estate investors to get their foot in the door, to start fix and flipping properties themselves.

So if you don’t have the capital and you have the skill to be able to turn a house around – that’s one way I’ve seen a lot of people pretty much start on fix and flipping before they can build up that capital like I was talking about to actually start doing fix and flips on their own.

So I’m essentially stating that if you have the skill or the mini-skills, you can pretty much learn [unintelligible [00:09:42].22] somebody, similar to what I did with the high-volume company a couple years ago… Or you can use your own money to do fix and flips, which obviously at this point it’s a lot higher to get that money to start off with. But then after you have a couple flips under your belt, you can start easily qualifying for hard money loans, going to a bank like Springs Valley where you can put about 15% down and get a lower interest rate than hard money loans, along those lines.

But if you have the handymen skills or the money, you can relatively jump pretty quickly into fix and flips.

Grant Rothenburger: Alright, cool. Mark, do you want to rebut or have anything to say to Eric?

Mark Dolfini: Yeah, I have a question on that, because I think that you were spot on, and everything that you just said is 100% correct. The question I would ask though, because your barrier to entry that you have so far, that you’ve identified, is capital, and I think that is THE barrier that most people can’t get through… What about skillset though? Because I think that is a significant barrier, where it’s not just being able to do the thing… It’s being able to do the thing that’s appropriate to that property.

You’re in the Cincinnati market, and it’s a great market, but there’s still gonna be areas where you know what – marble is not the best use to put on this countertop… But you know that, because you’ve done that. You’re laughing because you’re thinking “Yeah, I know people who put marble in a not-marble neighborhood.” So what would you say to a skillset in terms of it being a barrier to entry in terms of what’s appropriate, so you don’t over-fix a property and remove the emotion from it to say “Okay, you know what, I need to look at this clinically” and say “You know what, this is a Formica type flip”, and you’re not fixing it to what you would like, but to what the buyer would like… So how would you address the barrier to entry there?

Eric Kottner: The barrier to entry along those lines would be essentially going to the REIA meetings and talking with actual experienced investors. When I talk to people that don’t have the skillsets to be able to go in there and do the properties, I say that their most easiest way of entry is actually partnering up with an experienced investor… And hopefully, the experienced investor is gonna tell them “This is Formica, this is granite, this is quartz.”

It’s funny that you bring that up, because this is actually the first property I’m in now that I actually used quartz in, because I’ve found it for $55 a square foot. So I went a little bit higher for my materials on this one, but you’re exactly right – am I over-improved here? Did I hit spot on? Now that we’re in a deep sellers’ market, with these upgrades on there… I’m not saying you have to go [unintelligible [00:12:06].24] level, where they spend like $40,000 more and raising the price $70,000. There’s no way that’s gonna work. But an experienced investor is gonna tell you, “Okay, if we can upgrade from granite to quartz here, if we go a little bit nicer, spend that $5,000 more, we can push this price point of 230k”, which is what I’m gonna be asking for this one, and just kind of see how the market takes it.

We’re not going too deeply up on there, so for someone starting that has the skillset of being a handyman, I would recommend that they job-shadow a reputable flipper… That way they understand the price points of what to put in for the cabinets.

For the ones that have the capital, that have the money and wanna start right away, I would say make sure they go to a REIA group, make sure they just talk around… Because then once you talk to people, it’s like “Oh, $150,000 – yeah, you know…” If it’s in a questionable neighborhood where it’s like half rentals, half flips, I might put granite just for a sparkle factor, because no one’s really doing it, but I won’t go completely all out about that. That would be my one special feature to it… Whereas if it’s a $230,000 property, I’ll put a backsplash, I’ll put quartz to try it out. If it’s doesn’t work, I’m just gonna readjust on my nest flip that’s close to it.

Mark Dolfini: Right. So what would you say to the person in terms of barrier to entry that has no skillset in terms of being able to rehab? I mean, they might be able to hold a paintbrush by the right end, but that’s about it. Because I think that’s a significant barrier, where most people are trading their time for money, and that’s the definition of a job, right? So if they’re trading their labor to do all the work themselves, what would you say to the person that does not have that skillset?

Eric Kottner: It’s essentially along those lines of just getting into corporate America; you can either do an internship, or a job-shadowing of an experienced investor. Right now investors, the ones that are pretty much picking up more properties, they need somebody to either help — if you’re good with numbers, which I learned I was really good with my accounting background of doing numbers… I could do the comps and repair estimates relatively quickly.

Now, my repair estimates – I always give a fudge factor of about 10% in homes that are 1970’s and more. If I’m dealing with a 1920 home or more, or in that range, then my fudge factor is close to 15%-20%. It also depends on the level of rehab.

So I’ve always been really good with numbers, and that was the one reason I did join up with the high volume company that I did, was because of the fact that within two or three minutes I can give you a valuation of property, I can give you an idea of what it needs for repairs… And yeah, we were pretty much within 5%-7% of the numbers I said.

So I’m not handy at all… I make the joke of it as well where every time my contractor is seeing me on the job site, they make sure no tools ever get in my hand… [laughter] So my strength was my numbers, and you could have somebody that is just wanting to evaluate the deal – “Hey, what does this look like?” and be able to job-shadow them, and then get hired on as an asset manager or acquisition manager for the title of the company, while you’re learning and fix and flipping on your own while learning under an experienced investor.

Grant Rothenburger: That makes sense, but on the same note, Mark, can someone also partner with a more experienced landlord and kind of get the same on-the-job training?

Mark Dolfini: Yeah, it’s a  little bit differently, from my perspective… I think the barrier on that side is perceived to be less, let’s just put it that way… Because a lot of times when I’m seeing people that are making mistakes in the landlording business, or even the property management business, is they don’t know what they don’t know. That’s the problem.

In this particular case, you could get someone that would go in and say “Okay, what’s it gonna take to renovate this bathroom?” and you can get three estimates and you know the number; you can interpellate the number… Based on what they see, of course; you get in and there’s termites or [unintelligible [00:15:43].06] but those are the sorts of things — that’s why you bake in 10%-15% on overage…

But in this particular case, what I’m finding most often, especially when I’m coaching or consulting other landlords, is the fact that they don’t know what they don’t know. They don’t even see the risks that they’re taking because it hasn’t been a problem yet, and they don’t see the problem where them just driving around and picking up rent – they don’t really ever value their time, so they don’t even see the few things that they’re making mistakes on. They go, “Well, if I don’t drive around, I won’t get it”, and I’m thinking “That’s a game not worth winning”, and you’re not setting up the proper infrastructure to replace themselves as quickly as possible.

So more often than not, I’m seeing mistakes of just ignorance, or just things that they just didn’t think about because there hasn’t been an issue. You could shadow another landlord, but I almost think it’s — from the tribal method, you’re learning more bad mistakes, to be honest with you.

Eric Kottner: I do have a question for Mark, if that’s okay.

Grant Rothenburger: Yeah, sure.

Eric Kottner: One of the things you might hear on this barrier of entry, people wanna talk about “What if I get a property on land contract, or I can buy it with seller financing?” – that obviously if you can find a seller that wants to sell on a land contract or their own financing… That would lower your barrier of entry. What advice would you give to somebody who would try to rebuttal you and saying “It’s easier than what you’ve previously stated, because I have these options in place”?

Mark Dolfini: Well, that’s certainly one of the things that you can do – you can buy a property on contract, but the contract is gonna have to allow you to do that, because a lot of contracts, a lot of owners may not want you to purchase the property for the purpose of renting it out. The contract may stipulate that you’re not allowed to do that. So that would be one thing that I’d be careful about.

But as long as you’re allowed to do that, you can get into the property, but you’ve gotta understand from that side you can lower your risk, but then again, I think from that side of things where if you can mitigate the risk by getting very favorable contract terms – like if you’re gonna have a balloon that’s gonna be pushed out into the future and you’re not gonna be looking at a two-year balloon or three-year balloon… Because this is the whole point – they wanna get cashed out, right? So if you can mitigate those risks by having a very favorable contract that allows you to do what you need to do, then I don’t see a problem with that whatsoever. In fact, I’ve done that a couple different times; in fact, that’s how I was able to build up a part of my portfolio back in 2006 and 2007.

There was a guy who had 20-something units that he just — he didn’t wanna be a landlord anymore, and he sold them to me on one contract. So from that side of things I think it’s great, but you have to make sure that that contract is written in a way that it allows you to do what you need to do as a landlord.

Grant Rothenburger: Easy enough… Well, easy said, anyway.

Mark Dolfini: [laughs] There’s a lot of people out there that are in pain, though. And Eric, you bring up a great point – there’s a lot of people out there that don’t wanna be landlords anymore because they’re just so emotionally spent, because they’ve never set it up as a business, they’ve never set  it up to be scalable to where they are removed as the bottleneck for all the information to pass through… And it’s their fault; they won’t admit it, but it’s their fault.

That was the problem that I had back in 2008-2009 – I was running 92 rental units all by myself, and my life was a complete, total disaster. I’ll own it, because I was the one that created that problem.

Grant Rothenburger: That sounds like a disaster, like you said

Mark Dolfini: If you can imagine a photo of the Hindenburg… That’s kind of what I looked like.

Eric Kottner: We’re getting into a great segue for risks here, so…

Grant Rothenburger: Yeah, we are… And you’re gonna start us, so go ahead, Eric.

Eric Kottner: One of the things when it comes to fix and flip is there’s a lot of great risks involved… As Mark was just talking about, dealing with headache landlords and people that just wanna sell out… The risks usually are not any less when it comes to fix and flips. You have to know what area you’re buying in, you have to know what’s on the property.

For someone starting off, on there you can mitigate those risks by hiring a professional inspector to come in, or even a general contractor to come in and point everything wrong with the house. You’re gonna spend a few hundred dollars to make sure the first few times you do it… You’re gonna spend about $400-$600 to make sure that you have everything pinpointed that’s wrong with the house… Even more if it’s a foundation inspection.

With those inspections, you can mitigate your risk on any property that you’re going into. And for people that say “I don’t wanna spend $400-$600 on the inspection”, from somebody who has made mistakes, you’re going to spend thousands and thousands more if you decide to go at it alone.

One of my current flips I have right now – there’s sump pump irrigation that pumps water to the outside, but the inspector found a sump pump on the inside and was trying to find out what’s going on with it. Now, because it had the sump pump inside, they pretty much wanted a first-time homebuyer say “We want this company specifically to fix this issue”, and instead of $4,000 it was $7,000, just to remediate that fix, to put a sump pump [unintelligible [00:20:22].22] Yeah, there’s no way I can really go against that unless I just want to back the buyer out, and then try to find another one. But for me, it’d be easier to deal with this one, because it was a strong buyer, so I went ahead and went with it and got it taken care of. But I didn’t have an inspection done on that one; that one I’ve been hurting a little bit on… But I also have two other flips where I’m gonna make good money on. The one I’m currently in right now, I should be set to make about $25,000… Which is okay in the Cincinnati market, at least in the $230,000 price point.

But yeah, with fix and flips you have to find every problem, because it’s not like a tenant is gonna move in there and they can live with the older bathtub for a little bit. An inspector is gonna come in that’s a professional, that’s hired by the buyer to find everything that’s wrong with your house, and then it’s gonna be up to you to make sure that that gets fixed.

Grant Rothenburger: Right. Mark, anything to question or add to that?

Mark Dolfini: You’re 100% right, because I ran into the same problem with people that — if you’re talking about inspection, that’s kind of your insurance policy before the transaction, right?

Eric Kottner: Yes.

Mark Dolfini: On the front-end. Well, I run into the same problem — I cannot believe the amount of people that look at credit reporting, or when you’re running an application on an applicant as a tenant… And they look at that as a commodity. You know that there’s good inspectors and there’s bad inspectors, and just like there’s good credit reporting and bad credit reporting. It’s just a commodity. They get it 30-60 days [unintelligible [00:21:46].10] and meanwhile, this person is currently being evicted today. And there’s certain of them out there that it’s just a data dump. They just, you know “Okay, pull their credit, check the box”, and that’s in. Meanwhile, that individual is getting evicted that day.

So you really have to value not just the information, but what the information represents and how you’re getting it. So I think that that’s very good in terms of risks.

I don’t know if you actually value that as a number, but one of the things in terms of the risks that I have a question for you about is what happens when you’re in — you obviously have a preferred set of subs that you use, which kind of removes you as the bottleneck from doing all the work, so that’s great, and this is something that I deal with as a property manager all the time – what happens when one of those subs gets flaky?

Everybody right now is having the same problem in terms of labor. There’s a huge labor shortage out there for just people to show up for an interview, for god’s sakes… Right? [laughs] I feel like I wanna give away a free Vespa for anybody that wants to show up for an interview. But my biggest concern–

Grant Rothenburger: Come on…

Eric Kottner: [unintelligible [00:22:48].12]

Mark Dolfini: So that’s to my point though – how do you mitigate the risk for when one of your subs gets flaky? …whether it’s them, themselves, or their guys don’t show up, or anything like that. How do you mitigate that risk?

Eric Kottner: I’m glad you brought this up, because the way how everything is going along those lines – contractors are probably very similar to tenants, where on paper they’re gonna look very good, [unintelligible [00:23:16].18] Google reviews look good, but they completely flake on you when they get a better-paying job with a retail client… They just completely go off.

So one of the things we actually do is we always have our general contractor have a — I’m trying to think of the proper terminology for it right now… But it’s a contractor contract, along those lines; it states “This is what you’re put in the job for, this is who’s providing the materials for this job. Here’s a W-9 that we also need you to fill out, so that way we can report for tax.”

Then one of the biggest things that we have in all of the contracts is a deadline date. So if I have a contractor that says “This is gonna take about 4 weeks to complete”, we’ll say “Okay, we’ll just put it on this contract. We’ll put the contract 6 weeks out, and then if it’s still going on after 6 weeks, we’re deducting $100/day from what your proposed quote is.” That’s one way to mitigate that… But once again, once you get into that and you get into a dispute, you have to take it to small-claims court, just as you evict a tenant, go into [unintelligible [00:24:15].07] But I have that contract going out there, and actually, the last contractors I got were referrals from other investors.

Generally, the GC that I have right now pretty much works primarily with me and the other investors that referred him to me. He’s very selective on the investors he chooses, which is good for me, and I’ve used him in four projects right now, and other than the hiccup we had with [unintelligible [00:24:40].12] everything else has gone absolutely smooth. I’m very lucky to have a good general contractor now, but yeah… He signed the contract, did the W-9, I did a [unintelligible [00:24:48].20] report on him, along those lines, just to make sure that he is what he says he is. He’s been in this business for over 6-7 years, he’s been in  construction for over 20 years, and he doesn’t have a criminal record, which to me — that was actually the question I was gonna ask you here shortly… What’s the biggest criteria you have for your tenants? Because I know for my properties on there, I care more about the formal reporting, eviction report, than so much for the credit report.

Mark Dolfini: So in  terms of risks, where I see it — I’m gonna go so far as to rate it as a 1. I think that real estate is one of those things that is absolutely completely and totally forgiving if you buy and hold. Even in your own industry, what’s the fallback? Well, I can’t sell it, so I’ll rent it. And if you hold on to that long enough, eventually the equity will catch up, and where does cashflow come from? Cashflow comes from equity. So it’s very forgiving, and that’s the one thing where even if you’re not getting — people say “Well, I’m gonna lose money every month because my mortgage payment is $800 and I’m only able to get $600/month out of this rental.” Well, okay, I get that, but you’re still getting someone paying two-thirds of your mortgage for you. And then obviously you’re gonna have other expenses, but my point is it’s very forgiving.

So if you have to contribute to this annuity on the front-end for five or maybe ten years, you’re gonna get the annuity payment at the back-end eventually… Unless you just bought something completely underwater, on the banks of Chernobyl, it’s not gonna work out that way. But realistically, real estate is very forgiving when it comes to that. That’s why I rated it 1.

But in terms of mitigating the risk for the residents, my background is in accounting as well, so this is like a nerd-fest, I love it… But you’ve gotta understand the metrics that you’re getting into. They’re climbing in the bed and they get so wrapped around other things that don’t matter, but it’s those intricacies — I don’t care if you’re looking at it cash-on-cash, or cap rate, or IRR, or however you wanna slice and dice it, you have to consider how those metrics are gonna be delivered, how is that going to happen? What’s the management, what’s the boots on the ground that’s gonna get you to those metrics? And a lot of times, especially with landlords, they say “Oh, well I can get this property and I’ll rent it for that much” and they don’t ever value their time, the time that they’re gonna put into it. So that’s the problem.

But from what I’m looking at, to answer your question, Eric, when I’m underwriting someone, I underwrite them just as if I was gonna extend them — if it’s $1,000/month, as if I’m gonna extend them $12,000 worth of credit. That’s how I underwrite it. And I look at it, and it’s not just, like you said, criminal background reporting, which is extremely important, because most drug crimes are actually happening within rental properties, and that’s a fact… You don’t want that nonsense going on in your rental property. But you wanna make sure that you’re making a calculated risk and you’re not setting anybody else up to fail.

So underwrite them just as if you would underwrite anybody else; look at their expenses, look at their credit. Maybe they’ve got a bad score, but what is the score about? What’s making up their credit report in general? Look at their payments. What payments are they making? Are they making these payments? Those are the things that are really much more important than someone coming to me with a 720. I wanna look and see what their expenses are, based on the job that they have. So I’m underwriting it just like I would any other bank loan, to be honest with you.

Eric Kottner: I completely forgot to add, I’m glad you brought up the ranks of what we’re doing – for fix and flips I would actually put it at a 4. There is a lot of risk involved with it. As you said, we have to buy it at a certain price to be able to make sure we make a profit.

Also, the fact is that once you’re out to sell it, you have people that are literally working against you to make sure that they can either get the best deal possible, or make sure the house is in the best shape possible. So if you don’t do those properly to begin with, it’s gonna hurt you when you’re trying to sell it.

Mark Dolfini: And the thing that really annoys me about people — not in your industry… But I think it’s unfair – they’re gonna look at you and they’re gonna say “Well, what did Eric pay for that property? Well, I’m not paying that… He paid $150,000 two months ago, I’m not paying $225,000. That’s ridiculous. He’s ripping me off.” They don’t look at value, they look to see what you paid for, as if that’s some metric that should matter. It doesn’t matter that you put 30k in improvements and now the house may be worth 250k, but they don’t wanna pay that 225k. It’s very unfair, but unfortunately that’s also one of the things you’re up against.

Eric Kottner: I’ve been fortunate enough where I’ve never had that issue. I’ve had people ask [unintelligible [00:29:16].00] I’ve been upfront with them too, and then I tell them exactly what I put into it. So I’ve never had that pushback, and it could be because of the market. [unintelligible [00:29:25].05] seller’s market, saying “Well, if I’m gonna back away, I have two more people that are gonna take my place.” [laughter]

But yeah, I’ve heard stories where people think exactly like that… But yeah, when you go to sell it, they are people that are gonna fight against you about the house, and that’s why to me it’s a heavier risk than a buy and hold is.

Grant Rothenburger: Great. And before we moved on, I just wanted to mention to all the Best Ever listeners and viewers watching and listening to this – you can head over to BestEverShowCommunity.com and vote on which strategy you prefer or who you thought debated better… And I’m pretty sure — didn’t we say the loser is gonna do some burpees? [laughter]

Mark Dolfini: I’m doing mine offline.

Grant Rothenburger: We’ll just take your word for it.

Eric Kottner: [unintelligible [00:30:08].29] but I don’t wanna do burpees. [laughter]

Grant Rothenburger: Okay. You guys covered everything with risks, and we’re on to returns now. Mark, we’ll head back to you. What do you have to say about returns on the buy and hold side?

Mark Dolfini: Buy and hold side – you have to buy them right. It’s the same thing with what Eric was saying, but I’m gonna do some voodoo math here, because I’m gonna rate it as a 4. And the reason why I rate that so high is because there’s one nuclear button that I can’t understand even why the IRS allows this… But the 1031 tax-free exchange that happens when you sell a property, and you can roll that into another property… If that didn’t exist, this number would be far less. But when you can get those properties — and I have to give my disclosure, because I am a  licensed broker and I can’t give tax advice and all that stuff, so definitely talk to a good tax preparer that get you into that, and get you the right information…

But when you have a property that you’ve held for a while, and again, you’ve got substantial equity in the property and the equity returns — you can get more cash that can make more returns for you, absolutely… It makes sense to roll that. But if that 1031 exchange did not occur, I’m telling you, the returns would be far, far less. And that’s a big plus, because you can take that equity that you got on that property, roll that into another property tax-free, and man, that is a huge, huge plus.

And then it resets the depreciation clock, and everything else, so there’s a lot of pluses there. I think the returns — I rated it as a 4 only because I know you can get some [unintelligible [00:31:43].23] flips out there, and you buy a great property and it makes a lot of sense to not hold it for very long, and you can turn it…

I did one this year actually, but it’s all part of a larger strategy in terms of – I take that money and put it into more buy and hold stuff. So that’s why I rated it as high as I did.

Grant Rothenburger: It makes sense. Eric, do you have a question or anything for Mark?

Eric Kottner: No, he explained it greatly. One of the biggest benefits for rentals is the fact that you can pretty much sell a few of them that are like-minded properties and be able to roll into higher properties, higher apartments at a tax advantage. Once again, I’m also a licensed agent, so I’m not disclosing CPA or legal advice.

Grant Rothenburger: We have all the disclaimers here. [laughter]

Eric Kottner: But yeah, that is one of the huge benefits, and as we talked about with fix and flips, just to give the example of the one that I’m in right now – all-in, including my closing costs for this property, I’m probably at about 195k. Because we like easier numbers here, we’ll just round it up to 200k. I had it listed for 230k.

My purchase and repairs – I bought this for 122k; I think I’m about 50k into it, so I’m at 172k. I’m a licensed realtor, so I can save about 3% on the list side as well when I list the property, so I’m saving money there as a caveat. My closing costs would only be about $15,000, and that’s at the highest end.

So at that, I’m about let’s just say 200k for easy math. So if I sell it at 230k, that nets me 30k on (let’s just say) a six-month project, because I bought this late March, it’s late June right now, and let’s just say it takes another three months for me to close it, which it definitely shouldn’t be in this market. So $30,000, six months, my own cash into this is about $40,000, so over that time I’m making over 100% return on my money, just because if you use the APR on an annualized basis, along those lines, technically I’m making off my $40,000, $60,000 off the annualized, for only holding it six months… So yeah, I’m over 100% return, just as he was talking about.

So the returns can be very high, but they can also be very low, where I’m [unintelligible [00:33:48].05] and that one I had for about four months. You can do the percentages if you really want to on there, but that return was not worth it, in my opinion. The only benefit to that one was the fact that I put out my own bandit signs that looked like realtor signs out in front, and the house I actually bought in that area was actually a lead from my bandit sign.

So I’m using a house that even though I made a horrible return on, I got another house project in the process.

So on the good ones you can usually make very high double-digit returns; I would say triple digits may be a little bit of a rarity, unless you wanna use the breakdown number I did… But it’s very common to see over 30% returns on good fix and flips that have properly been done and properly calculated.

Grant Rothenburger: So that’s kind of interesting… Mark, I’ll let you rebuttal as well. I also had a question – “I know you’re an experienced flipper and we’ve talked many times, you definitely know what you’re doing… How come McCauley turned out the way it did? The reason I ask is because, you know, you think with experience you avoid things like that happening, but apparently with experience things like that still happen.”

Eric Kottner: It’s very simple. One of the cardinal rules when it came to real estate – [unintelligible [00:35:04].03] It was an off-market property with a realtor, which as of right, realtors can provide you good off-market deals if you wanna find a way to get connection with them to do so.

So with this property I thought it would be my way in to go in there, so originally when I looked at the numbers, we did $95,000 for $30,000 into it, along those lines, and then we were gonna sell it at $150,000. So that $30,000 became $50,000, including the inspection contingencies. Then also I actually sold it for a higher price, but with my closing costs attached to that, it just became more of a wash, along those lines.

So yeah,  I was at 140k, my closing costs I think were about $12,000, so 152k, and then there’s a few other things in there that kind of negated the $8,000 return. I haven’t done the full numbers on it, so it may be more than a $1,000 what I was expecting… But I was buying it on lower margins that what I usually do, because it was an off-market realtor property, and it was on a decent road in a very hot area that I really wanted to flip more properties in, so I was willing to take the lower margin because I knew I could put one of my signs out there and get more leads on the properties. Because one of my biggest leads – and I’m thinking of a proper term… Where she will know you’re a closer; so your confidence factor… Credibility – that’s what I was looking for.

When people see that you’re already flipping a house in their area, you have that credibility factor when they call you and they wanna sell a house, knowing that down the street you’re already flipping another house. So I took a lower margin onto it, I didn’t have the inspection done, which was one of my biggest mistakes on this one, because it was a [unintelligible [00:36:36].18] and that was one of the biggest things that hurt me.

Mark Dolfini: That’s something that I wanna talk to you as well, because every time we make a mistake – in my own property management business or as a landlord, it’s almost always when we go outside of our system. That’s where I have a question for you, Eric – one of the things that I teach specifically is how to make this systematic; how can I put a system in place that you do the same thing every single time… The inspection is a perfect example. So one of the things that I do, and that’s one of the things that I teach, is “How do I build it as a business?” Because my biggest thing that I wanna do is I wanna create time-wealth for people; I wanna create the ability for them to control their calendar, and I wanna give them more life output, so they’re not beholden to doing this thing.

From the landlording side, I see that it’s actually not that difficult to do. On your side, I see it very labor-intensive. There are obviously companies that can do that and that have been very intentional about building a system around it, but I think for the individual person – and again, this is just because of my belief window… I see this being so much easier to put a system in place; yes, you’re right, you’re dealing with the human factor a lot more than in your side, but you’re still dealing with the human factor, right? You’re still dealing with subs, and you’re still dealing with inspectors, and you’re still dealing with other realtors, which is — talk about egos, right? We both know what that’s like. But that’s the side that I see to be the most challenging to make that systematic, where you just didn’t create another job for yourself.

Granted, you may have great returns sometimes, but when you look at opportunity cost on that $70,000 deal that you had, you actually lost money from an opportunity cost perspective… And I’ve done the same exact thing – whenever we make a mistake with a resident  or an owner that we bring on board, it’s almost always because we go outside of what we’re good at.

So my question to you is “How do you make that systematic?” Or do  you just have to do it to where you just get so big, then you just are able to do that? How can a small individual investor make this systematic where they’re not just creating a job for themselves?

Eric Kottner: That’s an amazing question as a rehabber, because yeah, ultimately when people talk about real estate, they say “The way you’re gonna get to true passive wealth is do landlording, buy and hold, syndications and everything along those lines”, but essentially, what they say is wholesaling and fix and flips are gonna be the steroids that boost up to what exactly you wanna do.

The way that people have built businesses throughout fix and flips was 1) it all depends on your skillsets. If you would much rather be on the field, checking out your properties each day, then you can hire out the subs, get a lower cost, get a lot better return. If you don’t wanna do that – I’m one of those people that I proudly announce of how lazy I am. So me – I interview probably 7 or 8 general contractors to make sure that they knew exactly what I was talking about… And I interviewed them just as I would a middle manager, a project manager, an asset manager, or anybody else along those lines, that I’m eventually gonna want on my team.

So I checked out their projects, I saw what they did, and the GC I have right now has their own operations manager. So the only managing I do is either through text messages… Now, because I still wanna be diligent, I always check out my properties at least twice a week, but I only stay about 10-15 minutes per house, along those lines. And if there is an issue when we go on there, we put it down in writing. I’m out within 30 minutes usually for most of the time; they have it in writing of what exactly we need to do to solve the problem, and they go and just set it in motion.

So for those who wanna kind of back off, you are gonna spend more for a general contractor than you are gonna be subbing it yourself… But like you said, your value is ultimately your time. For me, I only spend about an hour a week in each one of my properties when I’m fixing and flipping, and then the operations manager, GC take care of their own subs and everything along those lines.

Now, I do wanna add in there is a risk to that, making sure that for each job you do, make sure that you get the release of waiver from the subs as well once the project is finished; that way, if there is an issue with the general contractor not paying a sub, they can’t come after you through the property. So I will add that to the risk of something to keep a lookout for.

But yeah, ultimately when it comes to your business, you set “Here’s what I’m willing to do, here’s what I’m not willing to do.” For me, handyman skill side – it’s not my forte, so I wanted to pay more for somebody that I knew was knowledgeable and trustworthy. And just like with any other business, you’re gonna hire slow and fire fast. So I went through seven general contractors – or I interviewed seven general contractors. This is probably my third rotation on an actual team, and they’ve already lasted about four projects for me, where usually the average has been about two or three for me before I’m passed. So this one’s already at four, we’re still going strong, we still have a great communication record.

The thing that made it easier for us as well for communication was we went into a program called Buildium, which is a high-end program which pretty much outlines everything in an app format, that way there is no questions back and forth along those lines. That way I can focus either on raising money or buying new deals – the things I really wanna do.

I also recently hired an acquisition manager that meets up with the sellers, along those lines, where if I can’t, [unintelligible [00:41:48].17] they know how to lock up the contract and send it to a title company, and then I can just focus in on getting the money for it.

So yeah, as you’re building up, first and foremost it’s gonna be your crew. You want a good general contractor, you want a good insurance agent, and then just, as you say, very slowly building up; you buy from one rental property, to the next one, to the next one, then you do a 1031 to a multi-unit… You would just build up that way.

Grant Rothenburger: Did you have a number – assuming you buy right, follow the cardinal rules, what would you say the returns…?

Eric Kottner: The returns I usually [unintelligible [00:42:20].22] $150,000 house, that needs about $30,000 in work, I essentially want a $40,000 gross. So that means my all-in – I have to be at $110,000 for that 40k gross. And then with it being a 30k rehab, that means I need to buy it around $80,000. Starting at 75k for a little bit better, and then start at 80k, knowing that my top number is 80k.

But I don’t do it like percentages, really; I do that when I’m about to sell it and see what my returns are… But when I go to buy it, I do it with the minimum gross amount that I do just for the easier math as I walk through the house.

Grant Rothenburger: In terms of 1 to 5 for our debate, what would you give it?

Eric Kottner: I think if done properly, that would definitely be a 5.

Grant Rothenburger: Okay. “If done properly” is definitely a big part of it.

Eric Kottner: Yes. I think that’s a caveat for all real estate. If done properly, you can make a fortune.

Grant Rothenburger: Yes. So we’re on to our last point, which will be maintainable in a downturn, and I just wanted to point out — I know we allocated an hour, so I wanna be respectful of everyone’s time… We’re coming up on about eight minutes, so if you guys wanna move a little bit faster, or if you have a little extra time, I will leave that up to you guys. Maintainable in a downturn – I think, Mark, you started with…

Mark Dolfini: Yeah, I started with barrier…

Grant Rothenburger: Okay, so you’re up on maintainable in a downturn.

Mark Dolfini: Okay, so… Me or Eric?

Grant Rothenburger: Eric is, you’re right. Sorry. [laughter]

Eric Kottner: Thanks, Grant. So… Maintainable in a downturn – I would probably put it at about 2. Now, is this for difficulty, or is it just for maintaining? Because I have it at relatively difficult, so…

Grant Rothenburger: Yeah, 1 would be easy.

Eric Kottner: Okay, I’ll put this at a 4 then… Because essentially what this is gonna be is in the downturn you have to have a higher level of clientele that can qualify for mortgages and everything along those lines. So in a downturn, you’re gonna realize that it’s now a buyer’s market, and you’re gonna have to adjust for it. So it’s one of those things where if you see that you’re getting into a correction or a downturn, houses are currently selling for 155k – even with you putting all this work into it, you might adjust your numbers to say “This is probably gonna sell at 145k or 150k. I might be able to get 155k, but I’m gonna be paying every closing cost under the book as well”, so I would adjust downward at least 5%-10%, depending on how the market is moving, and definitely keeping a sharp eye on how the credit market is going and how the number of refinances on mortgages is being applied for… On the stock market, watching CNBC for  those numbers, because that’s gonna give you an idea of how to differentiate your percentages and how to calculate it. But yeah, for a 155k house, I would probably do 145k just to be safe…

And then one of the things we always talked about is in a seller’s market you can go for almost any level you want as long as you know the ARV. I’m doing a lot of higher end type things just to try to test the market and test really what the top is. In a down market, you’re gonna have to kind of put in these flashy features, knowing that you’re gonna have to sell it for less than what’s being sold for right now as well.

So where right now I’m testing out [unintelligible [00:45:29].17] testing out backsplash, testing out Bluetooth speakers on there, I may have to put those in any way and still readjust my price in a downturn market, knowing that it’s like “Hey, these are cool features, but now I have the upper hand.” So I’m still gonna negotiate this and find a middle ground for you. It’s gonna help your property sell faster, but in a downturn it’s not gonna really increase the value-add as to what you’re gonna see for right now.

So you would definitely have to be very careful with mixing in those [unintelligible [00:45:57].20] in the house and what it can truly sell for. So yeah, in a downturn it’s gonna be difficult to maintain, and along those lines is too where if you can’t get the number you want into it, you may have to look into selling it on a land contract or a lease option, to sell your home a few years down the road and not be completely bit. Or you might have to sell them, just take the loss and move on to the next one.

Grant Rothenburger: You could be a landlord.

Eric Kottner: Yeah, [unintelligible [00:46:19].02]

Mark Dolfini: [unintelligible [00:46:24].14] back-up plan as being a landlord. Okay… [laughter] No, but that’s absolutely right, and I think that you’re being fair to yourself in terms of risk rating. I do agree with you, I think it is a lot more risk, because we all know there’s gonna be a correction, we just don’t know when and what it’s gonna look like, and that sort of thing. Of course, the last correction was more of a labor market correction than it really was a real estate correction, even though — I mean, it was a labor market problem, right? I was having problems for eight months when the guys on CNBC started coming on and saying, “Wow, things are really starting to get bad out there.” And meanwhile, on the bellwether for the tenants that are not paying rent I had $65,000/month coming in in revenues, and that went from 65k/month to 30k/month, and that was month-over-month-over-month, and that sucked… And mostly because I was over-leveraged; not so much financially – I mean, I was overleveraged financially, but I was overleveraged in time, as well. That was a whole other issue.

So I think I’m rating this as a two in terms of being able to weather a down market, if you are appropriately leveraged. If you’re overleveraged, there’s nothing that’s gonna be able to save you. Even in an up market you’re gonna have problems. But if you’re appropriately leveraged… And I can’t tell you what that is; that doesn’t necessarily mean that — I mean, you can buy a property with 100% in, that’s fine. If you’ve got 30k in the bank that can help you weather that storm, or 50k, or whatever that is, whatever that number is for you to help you weather the storm for 12 months, then you’re okay… But I’m talking from a global portfolio of being deleveraged. So you can buy property fully leveraged, but you’ve got cash in the bank – that’s fine. If you wanna put $50,000 down on a $100,000 house, that’s fine, whatever it is… But I’m just looking at global leverage there.

From my aspect, I put it as 2, because — again, if you don’t get someone that fully pays the mortgage, even if they’re only paying 80% or 90% of it, they’re still paying a good chunk of it, and that’s gonna get you to the other side of that bridge to help build that annuity.

Eric Kottner: I do have to do a couple of remarks here, because I feel like the tables have definitely turned on me for a little bit… One of the big things you mentioned there is if the tenant is paying you, along those lines, where if we had the labor market really go in – the one main downside I know I had on there, where I had a lot of mechanics that were in some of my buildings… And when I say “a lot of buildings”, I own like 30 units, so I’m not trying to sound like a big shot here, but we had like five or six mechanics on there that got laid off, and they pretty much were living off their savings for about two years, and when they couldn’t afford to pay, those five people pretty much dropped all at the same time. Now, for a non-payment or rent issue, at the beginning of the month “pay or get out”, give a three-day notice, and two weeks later you can get them out. If you deal with any tenants that are just being unruly and you wanna get rid of them, we have to do a 30-day notice, so you’re stuck with them for 30 days knowing that they are about to be kicked out 30 days later; that might cause a little more issues to the property while it’s not being paid…

Mark Dolfini: Eric, I think you make up a good point though, because it is gonna be based on location. I know if you’re living in the People’s Republic of New York, you’re just wrong; you’re wrong for being a landlord, get used to it, that’s the way it is. I grew up in that state, so I’m sorry to all my brothers and sisters and friends out there that are living there, but you know… You chose to stay there.

In a state that’s so legislatively against you every step of the way, it’s hard for me to defend against that, so you’re right there. Indiana is a very landlord-friendly state. I think it’s reasonable; I’m not gonna say it’s all about the landlord (it’s not), but it does tend to favor the landlord compared to other states. So it is gonna matter the location in terms of the legislation and the ordinances that you’re up against as well. That’s a very valid point, and that could certainly skew the difficulty in a downturn, and the risk factor as well.

Eric Kottner: I did make those remarks as well, but as you said, there are a few states out there that could be very beneficial for a landlord, whereas for fix and flips, the inspectors in the permit departments that you’re gonna have – I like Butler County up here in the area because I can normally get permits done relatively quickly. But one of the things that could slow down in a flip is having an inspector in the city of Cincinnati, or just scheduling one to be about two weeks out, and if they find one small issue, you’re now scheduled another two weeks out to get that taken care of.

Now, granted, if you have a good crew that knows what they’re doing, they can go off to other projects around the house, but you’re still stuck those two weeks until you can get that taken care of. So yeah, just as it is for landlording laws on there, your permit inspections – and that can even vary by county as well, for good counties and bad counties, for your fix and flips to get permits and making sure you’re doing your job properly.

Grant Rothenburger: Alright. Well, thank you both very much for that. We’ll wrap it up now with some closing statements, and I do believe I have my order right this time… We’ll start with Mark…

Mark Dolfini: I think that fundamentally if it comes down to someone who really wants to be able to control their calendar and create time-wealth in their life, where you’re not looking at the number of transactions you have to do in a certain period of time, honestly, I think this strategy would be for you.

Grant Rothenburger: Eric?

Eric Kottner: The ultimate road to wealth is through passive income, like Mike said, but to get the steroid boost and everything along those lines you’ve gotta know real estate, you’ve gotta know values. The best way you’re gonna be able to do that is in the front lines, either wholesaling or fix and flipping. Once you get in a few good fix and flips, the good, bad and the ugly, you’re gonna know so much more about real estate than if you just passively invest your money, throwing into it.

So starting out with fix and flips, going from there… Keep doing them to earn another 20k, 30k, 40k per flip. If you’re gonna get over 100k/year just off of four properties, it can really help your portfolio down the road. And even at a part-time basis, four houses a year is very manageable for the experienced investors, too. So it’s definitely good to have something in your repertoire and continue doing it, because once you master it, it’s gonna be that nice income… And if you know how to adjust for the downturn, even though it is gonna be a lot more of a risk, you know exactly how to negotiate with your contractors, you know exactly what you need to do in a downturn market to continue getting those $20,000-$30,000 net checks that will help you get towards that passive wealth.

Grant Rothenburger: Alright. Well, Best Ever listeners, thank you for tuning in to the third Best Ever Debate. Again, this will be in the BestEverShowCommunity.com, which is our Facebook group. You can go on there and comment, let us know how we did today, let us know who you think won the argument.

Me, myself – I kind of like a combination of the two, with the famous BRRRR Strategy. Maybe we need to have someone come on and be the third debater here. [laughter] Anyway, I hope everyone has a best ever weekend…

Mark Dolfini: Very good. Eric, so you do seven burpees and I’ll do eight then. Does that sound like a fair compromise?

Grant Rothenburger: That sounds fine.

Eric Kottner: That’s fair, you know… [laughter] I can make that deal, so…

Mark Dolfini: Okay… [laughs]

Grant Rothenburger: Thanks, guys.

Mark Dolfini: Thank you!

Best Ever Show Real Estate Advice

JF1424: 5 Tips For Parting Ways With Your Property Management Company #FollowAlongFriday with Joe and Theo

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If you’ve been wondering why you would fire a property management company, we’ll answer that here. More importantly, you’ll know how to make it as smooth as a process as possible. Joe is telling us these tips from experience, which are definitely tips we can apply to our own investing businesses. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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

Today we’ve got Follow Along Friday with Theo Hicks, and we’re talking about how to approach firing your property management company, and specifically we’re talking about apartment communities management company… So we are not talking about a single-family home management company, although I’m sure some of these principles could be applied to a single-family home… But this is specific to apartment community.

We will talk about five things you should keep in mind whenever you’re transitioning, and then some soft skills that I recommend that you practice while you’re transitioning from one to another.

With that being said, we’ll go ahead and get right into it.

Theo Hicks: Before we get into the five things, let’s start off by discussing when we should be parting ways with our property management company… So what are the types of things that a property manager would do that would warrant you firing them. Maybe we can talk about how long they’d have to be doing those things; maybe one time and they’re gone, for each of the ways.

Joe Fairless: There are two things that a property management company could or should be fired for; well, three really, now that I say that… The third that I just thought of is any criminal or fraudulent activity, but we’ll leave that aside. Let’s assume they’re not criminals, although I’ve interviewed guests who have had criminals or people doing criminal activity as a property management company… But let’s put that aside.

One is execution and two is communication. If they are not executing properly or they are not communicating with you along the way, then those are both fireable offences… Because even if they’re executing very well, if they’re not communicating with you or are responsive when you have your questions, then you’re not gonna know what’s going on with your investment, and you’re flying blind… And even if they are executing effectively, perhaps they won’t in the future and you won’t know about it because they’re not communicating with you. So those are the two categories for why I would fire a property management company.

My company has let go a property management company, so this isn’t conceptual; this is real stuff that we’ve gone through as a company, and these are some tips that we’ll get into for when you come across a time when you need to fire a company that’s managing your apartment building… These are some things that will help you make that transition as smooth as possible.

There will be rough patches… You’re removing one management company that is overseeing an apartment building or community, and is deeply integrated into the process of that, and you’re putting in a new one, so there’s gonna be some rough patches, but after listening to our conversation today, you’ll be able to make it a much smoother process than if you hadn’t.

Theo Hicks: Okay. So for the communication and the execution aspect, how long — because I could imagine you’d have your property management company and they would maybe not be doing exactly what you want them to do, but you’re in your mind thinking “Well, do I fire them or do I just wait a little bit longer to see if they get their act together?” So from your perspective, would you recommend giving them one warning and then after that it’s over, or would you recommend just the first time they make a mistake, finding someone else? How would you approach that?

Joe Fairless: I don’t have a direct answer. The reason why I don’t have a direct answer is because it depends on your length of relationship and your knowledge about them to begin with… Because perhaps they’ve performed on previous properties, and you have a seven-year relationship with them, and now for whatever reason they’re just not performing or not communicating with you properly on this property. In that scenario, I would give them a longer leash. What that longer leash is, I don’t exactly know.

Let’s talk about execution. If they’re not executing, so the expenses are higher, the property is not at the right occupancy, but the comps – and that’s the key, you wanna make sure it’s not the market… You wanna make sure it actually is the management company, because you need to be aware of what the market comps are doing… So is the occupancy similar to your property, or is your property performing below the market?

If it’s performing below the market, then there’s your red flag. You can find out by talking to brokers in the area, you can find out by talking to other property management companies; if you have a pre-existing relationship with them, you wanna be careful there, because if you’re talking to other property management companies and you have a current property management company, and those two talk to each other, which they probably know each other already, then you might be putting yourself in hot water unnecessarily if you’re simply trying to find information. So I recommend talking to a broker first, versus other property managers.

But find out if it truly is an execution problem or if it is a market problem. You don’t wanna put blame unnecessarily to a property management company if it’s not their problem… But then if it is an execution problem and you’re seeing your numbers go down, then also make sure it’s not a seasonality problem, or something that is wrong with your property… Because perhaps your property doesn’t have an amenity or isn’t in a particular location – even though you’ve got market comps, but maybe the market comps are on a main [unintelligible [00:06:41].15] with a lot of traffic, whereas yours is tucked away a little bit on a side-street… So you really want to identify that it is their problem, not a market– or even the place where the property is located, or certain components of it.

But once you’ve narrowed all that down, you limited those variables, then I would give it a quarter – one quarter, three months is my assessment… And again, I don’t have a direct answer, because it depends on many variables, but three months’ time where they’re just not cutting it and you’ve had conversations along the way, and the market and other competing properties are passing you by on rent premiums and occupancy and/or your expenses are higher than normal, then you need to make the switch.

From a communication standpoint, same thing… You’ll know pretty quickly if the communication just isn’t there, unless there is a new person who is your point person, because a lot of times there can be turnover in the management business, and when you have turnover, different people have different communication styles… So make sure it’s not that individual, but rather the process, because if it’s the individual, then perhaps you can have that individual replaced with a different individual that will be your point person.

Theo Hicks: Solid advice. Basically, make sure that it actually is the property management company and not another factor, and then give it about a quarter before moving on.

So that’s the reasons why you would fire a property management company. Once you’ve made that decision, obviously you need to find another property management company first, which we’re not gonna talk about right now, because we have an ultimate guide — it’s called “The Ultimate Guide to Finding a Property Management Company”, on TheBestEverBlog.com. So if you just google “Joe Fairless how to find a property management company”, that article should come up. We go in-depth on how to find them, how to interview them and how to win them over to your side.

So once you’ve made the decision, you find a new property management company, these are the five things that you need to do in order to ensure a smooth transition. The first one is to address the staffing. Do you wanna talk about the staffing, Joe.

Joe Fairless: Yeah. That’s important, because as I mentioned earlier, you’re replacing a management company and you’re putting in a new company – that’s a  big deal, and if you can smooth out that transition by looking at the staffing at that property, and perhaps you want to keep some of those staff members… That’s also a tricky proposition, because they would be switching companies, but that happens fairly frequently within the management world, where one property manager, one actual community manager changes companies as the ownership changes, and their property management company that employs them changes, whereas they might stay with that property. That happens fairly regularly in the industry. Or maybe there’s a leasing agent, or maybe there’s a maintenance person or people who you want to keep… So look to see if the new management company can vet the current staff and decide who stays and who goes; that way, if you have anyone worth keeping, you can attempt to keep them, which would smooth out that transition exponentially.

Think about a maintenance person who’s already got experience with the property, how much valuable intel he/she can provide to the new maintenance team or other maintenance members, versus if you’re going in from scratch, because there’s all sorts of nuances with every apartment community and different things that go wrong from a maintenance standpoint that it’s very helpful to be aware of. So that’s the first thing – you wanna see if you can keep any of the staff members, or if any of them are worth keeping, and have you new management company do that vetting process.

Theo Hicks: Okay. Second after staffing is the financials of the property.

Joe Fairless: That’s important, obviously. Numbers are kind of important with what we do. Your new management company should request everything that they need, and some specific documents… There’s the historical profit and loss statement, and then also the chart of accounts. That’s the list of income and expense items, plus bad debt and delinquency. So make sure that they are first asking for it, and if they’re not asking for those documents, that’s a big red flag for your new management company; you might be in the same place three months from now… So make sure that they are asking for the proper documents, which they should be, and then make sure that they’re actually getting access to those financial documents, because they’ve got to pick up where the other one left off.

The challenge with financial statements in our business is that different companies label the same thing differently. You’ve come across this many times when you were underwriting – some line items that a company calls something, they’ll call it something different. What are some examples that you’ve seen?

Theo Hicks: Most of the time I see it with the contract services and turnkey expenses. Some property managers will have a category for turnkey, a category for repairs, a category for contract services, but then other companies will just have maintenance or repairs, and everything [unintelligible [00:12:15].22] is there.

One person might call something supplies, the other person might have it split up between pool supplies, painting supplies, carpet supplies… So most of them I see it through there, and then also sometimes they’ll have administrative expenses kind of scattered throughout the T-12. Sometimes there’ll just be a line item just floating by itself that’s supposed to be added in expense, like eviction costs, or something like that… So those are the main ones that I’ve seen, but most of the time you’ll have trouble pulling out the turnkey and contract services costs if they have them all lumped into maintenance or repairs.

Joe Fairless: We’ve gotta get those defined the same way and labeled the same way, so that when the new management company transitions, there’s not a “What the heck are these financial statements that I’m looking at?” reaction. You’ll know exactly what goes into what category.

Theo Hicks: And then for the rent rolls – do they need to get their hands on the rent rolls, or will that be something that’s available as a hard copy in the office?

Joe Fairless: Yes to both. There should be hard copies of the leases in the office, and then they need to also have the version of the rent roll.

Theo Hicks: Okay. Number three – this probably would apply to value-add properties that you’re doing renovations to. You need to address the renovations at the property with the new property management company.

Joe Fairless: Exactly. You’ll need a list of what was and wasn’t renovated, and it gets pretty darn confusing, usually. It’s not a simple list of two columns, “Was Renovated/Wasn’t Renovated.” There’s usually “Was it partially renovated? If so, what did this partial renovation entail? Was it countertops and appliances? Was it just light fixtures? Was it just carpet in the living room and hardwood flooring?”

There’s all sorts of different permutations of what a renovation might entail, and sometimes, if you’re lucky – you really notice this when you’re buying properties from people who are renovating, because then there’s always sort of different types of renovations that they do… But you also notice it when you transition, because maybe your team has partially renovated a unit, because you have a current resident and they just wanted to do the partial renovation because of whatever reason, but you got the same rent premiums or similar rent premiums relative to what you would have spent… So you need to make note of that, that way you know on the next turn what you need to do to that unit.

So getting the list of what was and wasn’t renovated and also making sure that if they just give you that list of “Hey, we renovated this”, make sure that you know exactly what they did to renovate that unit, and if that was the same as all the renovations, or if not, what did they do to that or those particular units that they didn’t do to the other renovated units, in order to determine where you’re at and where you’re standing across the whole property.

Theo Hicks: Okay. Number four is kind of related to renovations, and that’s getting the list of vendors in the hands of your new property management company.

Joe Fairless: Yeah, you need the list of vendors because if you take over the property and you don’t know who to call for certain things, then you’re gonna be in trouble, and even if you have relationships – which a property management company will have – with other vendors, it’s gonna be a lot easier at least in the near-term to work with some of those same vendors that the previous management company is working with, just to get things done the first month of operation… Otherwise you’re introducing a lot of new variables into the equation at once, and it’s better to have a smoother transition, and how you do that is you introduce fewer new variables into the equation immediately, and then over time you introduce the new variables, and one of the new variables could be new vendors.

Theo Hicks: Yeah, that’s very important, because you’ve gotta remember, this is after you’ve owned the property for a while – you’re not taking it over and then going through that transition one time; you’re doing it a second time… The less variables there, the less that could go wrong.

Joe Fairless: Yeah.

Theo Hicks: So the fifth thing that you need to do to ensure a smooth transition is to get the list of service contracts into the hands of the new property management company.

Joe Fairless: The list of them, and then also the actual contracts. That includes pest control, the pool repair person, landscape, the security company and the point person… And not only, as you said, have a list of contracts, but then the actual contracts, so that you can then make sure that you know what you’re adhering to… And you should know this already as the asset manager, it shouldn’t be a surprise, in terms of you’re in a 10-year agreement with Time Warner — wait, Spectrum now… Spectrum. They changed their name, but they’ve still got the same service, or lack thereof.

So maybe you’re in a 10-year contract with Spectrum – you should know that already, because you should have already signed off on it, or a laundry company, washing machine, dryers company… But you need the actual contract, too.

Theo Hicks: Okay, so those are the five things that you need to do to ensure a smooth transition. You said there were a couple other things you wanted to talk about on how to approach the situation?

Joe Fairless: Yeah, here’s the soft skills I was gonna mention… One is relationship management. So we just gave you five tips for when you are firing  a management company, what you need to take into account and to make sure you’ve got addressed… But the soft skill is relationship management, and it is making sure that when you’re telling the property management company that you’re firing that they are fired, that you don’t say it the way I just say it. You don’t say “You’re fired.” Instead, you say something like “Hey, this probably isn’t a surprise to you, but we’re just not performing based on the way that we all agreed that we could perform on the property. I’ve been talking to my investors and my other business partners and they’re pressuring me to make a move, and I don’t really want to, but at this point the numbers speak for themselves and I’ve gotta make the move because of all the pressure from these other people… So we need to transition from you to another group. Again, it’s them… I wish I could have more of a say here, but I’m sure you understand.”

Then what I did there – now I’m taking a step back outside of that role-play thing – is I blamed it on other people. I didn’t put me at the forefront of saying “You’re fired and I want you out”, and the reason why is because it doesn’t hurt the person’s ego as much, and it also doesn’t make me the point person they can come back to and make an argument for why they should stay.

The other thing that we’ll do is when you’re getting all those documents and the different things – the vendor list, the service contracts, the renovation list etc., your management point person should be doing that, not you. They should be getting that information – “they” meaning your new management company point person should be getting it from someone else on the old person’s team who’s not the president… Because what happens is feelings get hurt when the president of the company or your original contact is being told they’re fired, and then told to give all this information to the new kid in town.

So instead, have a regional manager contact another regional manager… And those regional managers – they’re just doing their job. It’s just business as usual; there are not the emotions involved as there would be if you’re working with the president of the company who just lost the account because their company is terrible on this property. So you’re not dealing with the emotions.

Those two tips help your transition be as smooth as possible. It will not be smooth, but I said “As smooth as possible.” One is blame other people for the change; don’t be the person saying “It was my decision, and you’re out, buddy.” Then the second is have one regional manager talk to another regional manager to get all the information we listed in steps one through five, because emotions will likely be out of the equation, feelings won’t be hurt, and it’ll just be “Hey, this is the business stuff we need to take care of”, and then they can do that in the background.

Theo Hicks: How long do you think those five things take to do after you’ve told them they’re fired, buddy, in the soft way?

Joe Fairless: It depends, but two weeks to four weeks

Theo Hicks: Yeah, that’s what I was thinking. Okay, so to summarize what we’ve talked about – the two main reasons why you’d ever fire a property management company is the lack of communication and the lack of execution…

Joe Fairless: Or fraud, or something like that.

Theo Hicks: Or if they’re criminals…

Joe Fairless: Criminal activity, yeah.

Theo Hicks: …and once you’ve come to that decision, Joe said waiting a quarter is probably a  good idea before making the decision, and making sure that the property management company is at fault, and not some other factor, like the markets, but more the property itself. Once you’ve made the decision, you need to find a new property management company first, and you can do that by reading that blog I mentioned, “The Ultimate Guide to Finding a Property Management Company.”

The five things that you need to make sure that you address to ensure a smooth transition is the staffing, getting the financials, getting the list of renovations, getting the list of vendors, and getting the list of contractors and the actual service contracts that they have.

And then the two additional things are to make sure that when you are actually talking to that property management company, don’t just tell them that they’re fired; do it in a soft way. And also, when you try to address these five things, make sure that you have a representative of the new property management company doing it and not you do it, and make sure that they’re talking to a regional manager and not the president of the company.

Joe Fairless: I’m gonna put one more thing in at the front-end, and that is make sure, before you have any conversation with any property management company, you read your contract with that property management company. There might be a clause in there that you overlooked that it’s 90 days notice, or something; there might be a clause that’s 30 days, or there might be a clause that says that regardless of if they’re fired, they represent you when you sell the deal, and there’s really nothing you can do about that. That should be marked out prior to the contract.

But you wanna be aware of what the contract says you can and can’t do, and have your attorney look at it before you start making the waves about firing them and telling them that they’re fired… Otherwise it would be very awkward at minimum, and at most, you could torpedo your investment… Because you could tell them “You’re fired”, they could say, “Um, actually I’m not. The contract gives us 90 days notice, and okay, if you’re giving me notice now, fine… But now  we’ve got three months.” How is that property gonna perform for the next three months…? [laughs] Yeah, so you wanna look at that first.

Theo Hicks: That’s good advice. So moving to the next topics – some updates and observations… I’ve got one update. I think it was maybe two podcasts ago where we talked about all the different resident appreciation even ideas, and I was thinking of it more abstractly of “Oh, you know, some apartment investor could do it”, but you said “Theo, you should do it.” So I’m gonna [[00:24:15].10] It’s not gonna be anything special, it’s just gonna be like a barbecue… So we’re gonna cater Eli’s Barbecue – I’m sure you know what that is, Joe; I love Eli’s. And I’m gonna host it once… Because I think there’s still a couple of residents that we’re kind of finalizing a new lease for. So once that’s done, everything’s set in stone – we either got the new residents in, or we’ve got the new leases signed – we’re going to throw like an end of summer barbecue bash, and we’ll have free Eli’s Barbecue for everyone to enjoy.

My property management is gonna do that, so I won’t be coming back to Cincinnati to do that… But I’m looking forward to it; I think they’re really gonna enjoy it. It’s very helpful that all the properties are right next to each other, so we can just do it in one of the nicer parking lots in the back… And I’m thinking just maybe an hour, and — because after I reached out to him, I was doing some more research on it, and a very popular thing to add to your event is to have some sort of competition or a raffle, where something that’s more than food is given away… So I’m still brainstorming ways to incorporate — it might just be something as simple as a raffle, and someone gets a $50 gift card to Eli’s Barbecue, or something…

But that’s something I wanna incorporate at my property, and maybe every quarter or every six months host some sort of event there, just to — again, the whole idea is I want them to stay, because I’ve realized that when they stay, it’s better for me than when they leave… So the hosting of these events are great ways to foster a sense of community, so that people know each other and are less likely to leave… And they also like you, because they know that “Oh, in a couple of months we’re gonna have another barbecue. If I go somewhere else, I’m not gonna have a barbecue, or have a chance to get a gift card.”

Joe Fairless: I’m gonna suggest one change to your approach, and you can decide if you wanna do it or not, but it’s based on just psychology and how we think as human beings… And that is instead of making it an end-of-summer bash, make it a barbecue to show your appreciation and gratitude for them being residents of your property. Do not set expectations for doing it every couple months; instead, just have it happen when it happens. Because when we as human beings expect something to happen, then there’s a higher degree of expectation, and then we feel like it’s something that we should receive; and if you don’t do it, then it’s taken away from us… Whereas if you do it randomly, even though (wink-wink) randomly is every six months for you, but you just don’t say it’s every six months or every two months, then it will be a wonderful surprise that their landlord does for them, and it will be something that they’re not entitled to from their perspective, but rather something that is an added benefit and is something pretty cool that their landlord does.

Theo Hicks: I think I remember us talking about this before too, the expectation versus just random giving…

Joe Fairless: Yeah, I read a book and it was in there, plus it’s clearly human nature, just through life experiences… If you just randomly give someone something, it can be much less, and equal the same amount of pleasure for that person, than if you tell them “I’m gonna give you something” and then you give them it; they won’t be as pleased, even though that might be much more in value as the one that was surprising.

Theo Hicks: Yeah, I’m definitely gonna use that approach. I thought you were gonna say that I shouldn’t call it the end of summer bash, because that’s kind of like depressing, because now it’s the end of the summer and they’re going back to school… We are changing the name for sure, but that’s not the reason why.

Joe Fairless: Yeah.

Theo Hicks: Alright, I appreciate that advice. It’s good advice. So just a couple things to wrap up… Question of the week for the Best Ever Community – this is where we post a question and everyone in the BestEverCommunity.com on Facebook gets to respond. Last week we had a question about how long it took people from initially becoming aware of real estate to actually finding their first deal, and we got a lot of great stories… On a similar note, we’re asking a question this week, which is “What is the longest time you’ve taken to go from initially finding a deal to placing it under contract? Why did it take that long?” and then of course, if you just instantaneously put that deal under contract and it’s never happened to you before, what are some of the things that can be done to avoid that?

I’m looking forward to hearing people’s stories on that. I’m definitely looking forward to hearing some developers talking about how long it takes from finding a deal to putting it under contract, because I remember when I talked to Evan Holladay on the podcast – I think he said that the longest time it’s taken him to go from finding a deal to contract might have been three years for a development deal. So I’m looking forward to hearing your guys’ and girls’ story on that.

Joe Fairless: Developers earn every penny that they make. That is such a stressful business… I don’t want any part of that, ever… EVER.

Theo Hicks: There’s never gonna be a Fairless Tower in Cincinnati?

Joe Fairless: Unless it already exists and we buy it… We absolutely will never do ground-up development.

Theo Hicks: And then lastly, please subscribe to the podcast on iTunes and leave a review. It’s very helpful to get feedback on how the podcast is doing. If you leave a review, we’re gonna read it on the podcast as the review of the week. This week the review of the week was from Rob W. (and a bunch of numbers afterwards).

Joe Fairless: What are the numbers?

Theo Hicks: 00332288.

Joe Fairless: If anyone can crack that code for why those numbers exist other than Rob, then we’ll get you a gift. Just e-mail info@joefairless.com. You can’t know him though.

Theo Hicks: Do you know what they mean?

Joe Fairless: No, I have no clue.

Theo Hicks: Okay. [laughs] Rob said:

“The number of great guests that Joe gets on a daily basis is amazing. Combine that with his direct and great questions, and this is by far the best podcast on real estate. Joe asks the questions that I want to know when listening, which usually gets into the numbers around the deals his guests do. Absolutely amazing.”

And I will say, that is one thing that I do really like about your podcast – you always ask about a deal, and then they explain their deal, and then you always go into the actual numbers on it – how much did it cost, how much did they put into it, how much did they sell it for, how much does it rent for? That’s very helpful, because you can’t really get that if you’ve never done a deal before, and the only way to get that is to hear someone else talk about it. I’m not sure how many podcasts actually do that, so… I agree with Rob.

Joe Fairless: Well, thank you Theo, and thank you Rob… And the reason why I do that is because whenever I’m talking to someone and they tell me “I got a good deal”, that’s not helpful for me or anyone listening. What is helpful is if they dissect the deal or dissect certain aspects of whatever we’re talking about, and then we can start learning how they got to the point where they got that good deal, or they made a lot of money or lost money. That way, we can learn from those experiences. So ultimately it’s just about dissecting stuff to learn from it, so that everyone listening can learn from it, I can learn from it, and we all grow together.

Please write a review if you haven’t already, and that will be helpful to — well, it’ll just make us smile, and it’ll help with the podcast, too.

Thanks everyone for hanging out with us. I hope you got a lot of value from this episode, and we will talk to you tomorrow.

JF1423: Debate 02: Value Add Syndication Vs. Affordable Housing Tax Credit Development with Evan Holladay and Theo Hicks

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Joe Fairless: All you experienced Best Ever listeners who are looking at value-add multifamily syndication – well, we’re going to open up your eyes to a different type of approach, and that is affordable housing tax credit development. Evan Holladay is gonna be debating Theo Hicks on which strategy is best for you, and they’re ranking it based on four factors: barrier of entry, risk/returns and maintainable in a downturn.

Enjoy this debate with Theo Hicks representing value-add multifamily syndication, Evan Holladay representing affordable housing tax credit development, and when you identify which one is right for you, go to BestEverCommunity.com and let us know which one you’re gonna be doing, or which one you’re gonna be learning more about.


Grant Rothenburger: Hello, everyone. Thank you for tuning in to our second Best Ever Debate. We are filming live on Facebook right now, but you may also be listening on our podcast, the best real estate investing advice ever show… And I am joined by Theo Hicks and Evan Holladay. Theo, how are you doing today?

Theo Hicks: I’m doing great, Grant. How are you doing?

Grant Rothenburger: I’m doing great. Like I mentioned, I’m a little nervous to have my voice on a podcast for the first time ever.

Theo Hicks: [laughs] You’re gonna do great, Grant.

Grant Rothenburger: Thanks. Evan, how’s it going today?

Evan Holladay: I’m doing well, thank you for having me on.

Grant Rothenburger: Absolutely. Thanks for joining us. Today Theo and Evan will be debating value-add apartment syndication – that’s Theo’s side – versus affordable housing tax credit development, which is Evan’s side. A little bit about Evan – first of all, he was a Best Ever guest already on the podcast, so if you haven’t heard it, it is episode #1367, titled “Hustle leads to dream job as an affordable housing developer, with Evan Holladay.” He’s a real estate developer and investor, he is the host of Monumental Podcast, developed over 100 million in new construction multifamily at LDG Development, and they use tax credits to create affordable and mixed income communities. Based in Louisville. Say hi to him at EvanHolladay.com.

A little bit about Theo – he’s a creative project manager and investor, part of a team that has syndicated over 300 million in value-add apartments, co-author of two books – The Best Real Estate Investing Advice Ever, vol. 1 and vol. 2. Based in Tampa, Florida, and say hi to him on Facebook.

With that, guys… We’ll start with Evan – do you wanna tell us a little bit more about yourself?

Evan Holladay: Yeah. I think that you covered a lot of it, Grant, but just to add on to that a little bit… I’ve been with LDG about five years, been in real estate I guess coming on ten years. I really got started in college, got obsessed with development, started a development company in college, and took that out and got into affordable housing, new construction, multifamily development; we mainly do 200+ unit developments, and work a lot in Nashville, New Orleans, Tennessee and Louisiana. Those are my main markets… But I absolutely love it, I love real estate, and I’m glad to be here today.

Grant Rothenburger: Awesome. Theo, I think the Best Ever listeners probably know about your background, but do you wanna give us a little bit more about yourself?

Theo Hicks: Yeah, sure. So I started in real estate in February of 2015, I believe, by house-hacking a duplex. Then I kind of took a little break after that property for about a year, and then in the process of getting back into real estate I hooked up with Joe, and I’ve been working with him for the past – over two years now, approaching three years… So I’ve learned a ton about apartment syndications by just working with him and helping him out with his business.

I’ve just made this move to Tampa; I was in Cincinnati before. I planned on starting my own syndication business there, but instead, I’m starting it down here in Tampa. I’m in the process of learning the market, and I’ve met some property managers, some brokers, and now we’re just looking for a deal.

Grant Rothenburger: Awesome. I know we’ll be hearing more about that on future Follow Along Friday episodes, so I’m looking forward to that.

Alright, into the debate… So we have five categories that you guys are gonna rank 1 to 5, 1 being easy, 5 being hard, or in the case of returns and others, 1 being low and 5 being high.

The five categories are barrier of entry, risk, returns, maintainable in a downturn. That’s only four.

Theo Hicks: So four.

Grant Rothenburger: Four categories. So let’s go ahead – we’ll take turns and we’ll let Evan go first on barrier of entry. What have you got for us?

Evan Holladay: Okay, so you want us to rate each one individually, not as a whole, right?

Grant Rothenburger: Correct.

Evan Holladay: So for barrier to entry, I think the biggest things to take into account with new construction and tax credit development – they both have a high barrier to entry, and that is a good thing and a bad thing. The barriers to entry come from a lot of different things. I’m gonna go through some of the things that may not be good to get into multifamily, but it also helps you (if you’re getting into multifamily) protect against others that are trying to get into that industry of new construction or tax credit developments.

So if you’re doing new construction, you have to really work with communities and try to figure out exactly what they want. You have to make sure they’re on board, you have to make sure the city council members are on board, you have to make sure the mayor is on board, and really anybody along that process as far as the political side, or even the planning side, has a lot to say with how your development turns out, or can say yay or nay on the support of your project, and that can potentially kill your development. So that’s a big barrier to entry for new construction, but if you’re able to work with communities – our company, LDG, has done very well in working those relationships and being able to get through that zoning process, the permitting process, the design/development process… That is going to enable you to create those long-term relationships with cities that enable you to do not just one deal, but many deals with a community if you do it right.

So I think that’s a high barrier to entry, but I think that also adds a lot of value if you’re getting into it; it means that first deal is gonna be a whole heck of a lot tougher, but once you get that first deal done and you’ve done a good job and you put your all into that first deal, then that makes the next two through ten deals that much easier, because you have those relationships and you have that track record.

The other side of it is with new construction there’s also that unprovenness of the market; you’re building something that’s brand new, it has no track record… But that is a barrier to entry because it makes it harder, but it also is a good thing, because you’re building something that is brand new and is gonna add a lot more value to your investors, and it’s harder to build, but that also is good because then you don’t have as many competitors coming right behind you and just copy-pasting and doing exactly what you’re doing. It makes it harder for others to get into that neighborhood or that city and do exactly what you’re doing. So that helps protect your investment. I think that covers it on the barrier to entry.

Grant Rothenburger: Yeah, definitely. That was great. Thank you for that great explanation. What would you rate it 1 to 5 (5 being hard)?

Evan Holladay: Probably like a 4,5. It’s pretty high up there.

Grant Rothenburger: Fair enough. Alright… Theo, barrier to entry for value-add apartment syndications?

Theo Hicks: I would say I think it’s definitely lower than development, but it’s not a 1 or a 2. I’d probably give it around a 3. There’s a couple of factors for value-add that just take a couple of years… For example, experience; you need to have some sort of real estate experience prior to becoming an apartment syndicator. It can be something as simple as doing your own deals yourself, but ideally you’ve been involved in apartments in some form or fashion, whether it be as a broker or working for a property management company or working for a syndicator… So having some involvement and experience and experience in apartment syndication that you can leverage when having conversations with your team members.

This isn’t necessarily a requirement in the sense that you won’t be able to literally do an apartment syndication if you don’t have this, but you’re not gonna be able to do it successfully if you don’t have this, which is education. You need to know what you’re talking about, you need to know the terms and the terminology… I’m sure this is the same for development, but you need to know what you’re talking about, so when you’re having conversations with your team members – this includes your investors – you come across as a credible person. And of course, you need to have the education and experience to actually prove that you’re able to execute on the deal.

You also need to find private money… So depending on where you’re at in your life, depending on what job you do, the relations you have, it can be as easy as picking up the phone and calling up your friends, or it could sometimes require a more proactive effort, in the sense that you have to start to form relationships with other people and go to places where there are high net worth individuals.

Now, of course, for all of these things – you can offset them by partnering with someone, but you’ll have to have one of these things. You’ll have to have either access to private money, or the experience. If you have the experience, you can partner with someone who has access to private money but maybe doesn’t have as much experience, which is what I’m doing… Or if you have access to a bunch of private money but don’t know what you’re doing, you can find an operator that does know what they’re doing. So you can kind of offset the barrier of entry there, which is why I rank it a little bit lower, by partnering up.

I think experience and education are what you need to be a value-add apartment syndicator, and depending on where you’re at in your real estate career, you may or may not have that. So the barrier to entry – I would give it an average of 3. If you have those things, it’s gonna be a lot easier, but if you don’t, it’s gonna be more difficult, or at least take more time to get those things.

Grant Rothenburger: Right. Both strategies are pretty similar on the barrier of entry. It’s not something for a newbie investor. You at least need a good amount of education or a great team in place that has experience… So clearly, they’re pretty similar there. And Theo, we’ll go back to you now with risks. How much risk is involved with value-add apartment syndication?

Theo Hicks: I think the rest of these are pretty variable, because it depends on how you buy it, what your business plan is… Based off of our strategy, I’d give the risk a 2, because I think 1 is unrealistic… And here’s why. And I know we’ve recently recorded a video on this on YouTube, talking about these three immutable laws of real estate investing… Those are “Don’t buy for appreciation, buy for cashflow”, “Put long-term debt in place” and “Have adequate cash reserves.” As long as we have those three things, you are mitigating your risk as much as you possibly can.

When I think of risk, I think of capital preservation… So when I’m ranking this, I’m ranking it how at risk is the investors’ capital; not what they’re gonna make, but just the actual capital they gave me – how at risk is that if they were to invest in a value-add apartment deal?

I can go into more details on those three, but as long as you have those three in place, you’re mitigating the risk. For example, if you buy for cashflow and not appreciation – and by appreciation I mean natural appreciation of the market just going up… Not forced appreciation, which is kind of the key to value-add, which is making some sort of improvement to the physical or the operations of the property in order to increase revenue or decrease expenses, which in turn increases the value of the property… That is different than the appreciation I’m talking about; I’m talking about buying a property thinking that “Oh, for the past 10 years rents have gone up 10% every single year” or “For the last 10 years values have gone up 10%. That’s gonna happen for the next 10 years. After 10 years, my property will be worth this much more.” You don’t wanna do that, because again, if the market does not continue to go up, you’re gonna be in trouble.

For long-term debt – very similar. If you have a business plan that’s five years, you wanna make sure that the debt is set up for seven years. That might involve doing a refinance after a few years, but always making sure that you aren’t forced to refinance, aren’t forced to sell your property… Because if you’re forced to do anything, it’s most likely not for a beneficial reason.

And then adequate cash reserves is pretty self-explanatory. If something comes up and you don’t have the money, then you’re gonna lose the property.

Grant Rothenburger: Alright. And Evan, before you tell us the risk level with your strategy, would you give us — and Best Ever listeners, again, he was on the podcast already, talking about his strategy on episode #1367… But Evan, would you give us a quick breakdown of what your strategy is? Because it’s not just apartment community development, it’s a little bit more evolved.

Evan Holladay: Right, good point. So at LDG what we do is we do new construction and we use tax credits from the Federal Government that help cover some of the costs for building affordable housing, and then in return we’re kind of capping our rents based on whatever the average person is making in that metro area, and we’re taking that below the average to help provide a reasonable rent for people, so they’re paying no more than like 30% of their check or their monthly income on rent… So that gives them a safe, stable, quality place to call home and raise a family, and it helps provide housing for all the people that are working in the economy, that provide all of the services that we use on a day-to-day basis, but they are not reasonably being taken care of on the housing side…

Especially nowadays, you’re seeing more and more developers, or even rehab of existing, and the rents just keep skyrocketing… So these people keep getting pushed further and further out of town, and further and further away from their jobs, and that’s becoming a real issue. It always has been an issue, but now even more so… It’s also because more people are renting, so it’s just inevitably just driving up rents.

So that’s the value we add – we provide affordable housing, but yet the same quality as the market rate housing that’s just down the street, but we can provide it at a reasonable rent and help provide a good foundation for families.

Grant Rothenburger: Perfect.

Theo Hicks: Before you go any further, I’ve just got two quick follow-up questions pretty fast… Do these tax credits cover the entire cost to build? And then do you guys sell these afterwards, or do you hold on to them?

Evan Holladay: There’s two different types of tax credits. There’s one that covers 70% of the construction cost; that’s very competitive, you have to fit into a tiny little hole to score well to get those credits. We do not go after those credits, we go after the less competitive credits, the credits that are more readily available, but they don’t cover nearly as much; they cover only about 30%-40%… So you have to fill that last 60% with debt, so we leverage up to 50%-60% of the cost, and then we also fill in the last 10% with either putting in our own fee toward the deal, our own equity, or we get a tax abatement from a city that we can in turn borrow more money against, or we ask for a soft loan, payable out of cashflow type thing from the city or the state.

Theo Hicks: Okay, cool.

Evan Holladay: And then as far as owning, we develop and own all of our properties; tax credit compliance is 15 years, but our company has made it our strategy to build and hold, so we haven’t disposed of any of our properties.

Grant Rothenburger: That aligns with the wanting to provide housing for the —

Evan Holladay: Right, right, and that way we can keep it affordable long-term.

Grant Rothenburger: That makes sense. Cool. I thought that was necessary, so that we could have some context with direct categories.

Evan Holladay: Yeah, definitely.

Grant Rothenburger: So knowing that now, what would you say the risk level is for your strategy?

Evan Holladay: So for risk, with both tax credit and new construction – and I guess this applies to all real estate – you are at the whim of the financial market, you are at the whim of the total economy. So whatever you’re deciding today, by the time you’re ready to close, it may not be the case as far as interest rates or demand, or investor demand, but I think that is really amplified with new construction and tax credit development.

New construction – you’re just dealing with a longer lead time. The quickest deal I’ve ever closed – it took me a year from finding the land to getting the permits to getting the financing to starting construction; it took me  a year. That was the quickest I’ve ever closed a deal. Rehab – you can close much quicker than that, but new construction, you’re dealing with longer timeframes. I’ve closed a deal that took me three years to get across the finish line. So that is a big risk. I put that at 4, because there is a lot of inherent front-end risk with new construction development. You’re dealing with timing… In three years a lot can change, so that’s a big variable that you have to be aware of and be able to mitigate, and one of the ways to mitigate that is by having deal flow, having that pipeline of working on ten deals at once to close 2-4 deals a year type thing.

So that front-end risk – you’re putting money on the line; you’re putting money on the line for design/development, for permitting, for reports… So that’s all big risk that you’re putting up front. But on the back-end, what I would say is, especially with affordable housing development and new construction affordable housing, the risk just drops off precipitously.

Once you get to construction, construction is also a big risk, because you have to make sure you’re managing it well, you have to make sure you have a good GC… But once you’ve successfully built it, you’ve leased it up, that is when the risk just — for the most part, as long as you have a good economy in that area, you are almost… I don’t wanna say risk-free, but you’ve very much lowered your risk, because we’re dealing with affordable housing – our rents are capped, like I said a little earlier, and because of that, always our investors look for at least a 10% rent cushion basically below market rate rents…

And sometimes in cities where rents are skyrocketing, market rate rents are just out of control, Nashville being one of them, we have like a 50% to 100% rent cushion. So you can imagine when somebody needs affordable place to live and they see our place, that looks just as good as a market rate place down the street, but costs half as much, it makes their choice a lot easier, and financially it makes their choice a  lot easier. So that’s the cushion that provides much less risk on the back-side, because we’re always — at least right now, the last five years, we’ve been close to 100% on all our properties, with waitlists… So it’s that demand for affordable housing that’s kept it just being able to cash-flow the property and create good long-term real estate assets.

Grant Rothenburger: So you’re double-sided there… You’re really high on risk until it’s built, and then the risk kind of drops down considerably.

Evan Holladay: Right.

Theo Hicks: I don’t imagine that anyone could move into these buildings, right? For example, if you’re saying that in Nashville your rents are 50% to 100% lower than the regular rents, everyone that’s renting in those places that look the exact same and are paying way more – they can’t just come to your place, right? Only a certain type of person can move–

Evan Holladay: Right, right. They’re income-limited, basically. You have to make an income that is low enough that you need that type of housing. So it’s not just open to anybody, it’s open to people that are policemen, firemen, entry-level jobs, some sort of support role, paralegal, whatnot… People that are working, but are coming in at that entry-level job that need housing, but don’t have the ability to pay $1,800-$2,000/month.

Grant Rothenburger: And don’t need all the car wash, and…

Evan Holladay: Yeah, exactly, don’t need the amenities.

Grant Rothenburger: Alright. Theo, what have you got for us? You already did risk… Let’s go back to Evan now. Evan, how are the returns with the mixed-income, affordable housing tax credit developments?

Evan Holladay: The returns just in general — I would say it’s vastly different the way we look at returns for a development. We don’t have a sharing of cashflow with our investors. It’s very different. I’ll give my number first – I’d say returns, I’d probably put it at about probably a 4. It seems to be my number today.

So the returns for affordable housing development, at least the way that we’re doing it now at LDG – we’ve been able to build out our own units, so we act as our own GC… So for the returns side, we’re able to make that general contractor profit. We take that risk, but we make that profit and over the years we’ve been able to repeat, repeat, repeat, so we know what we’re doing by now.

So the returns are great, because we can not only make that profit on the construction side, but we can also go in and we get a developer fee as an incentive to do affordable housing. Each state allows a certain percentage… So we get paid that developer fee, or we can put part of that into the deal as our equity… But we can get paid part of that as early as closing, or through stabilization, and then after that we can get paid that out of cashflow. And we get paid that first, because there’s an incentive [[00:22:39].16] tax credit development put an incentive in there to make sure that’s paid off by year 15. So our investors – they’re positively motivated to push us to make sure we get that paid in time, or else we have to pay that back ourselves. That’s a big tax event, it’s not a good thing.

So we get paid first cashflow, and then really the investors just want 1) the tax credits which we get from the Federal Government who gives it to the states… So they just want the tax credits. We get the cashflow, and on the back-end, at year 15, we’ll buy the investor out for a much smaller fee than you would a typical market rate development. So we’ll buy them out and then we can have that asset just producing regular cashflow… And we get the cashflow of the 15 years because of the developer fee.

So we look at it differently where we’re getting the majority of the cashflow. The cashflow typically won’t be as high as a market rate development, but we’re able to get that front-end construction, and then we also are able to get the developer fee and the cashflow and not really have to share that as much as you would on a typical market rate development.

Grant Rothenburger: Right. And when you get most of the cashflow, it’s okay if the cashflow is a little lower; you’re getting a bigger chunk of it.

Evan Holladay: Exactly.

Grant Rothenburger: Theo, let’s go to you. First, do you have any questions for Evan on the returns?

Theo Hicks: I don’t think so. He did a really good job explaining the returns. It’s hard to say like an actual number, as a percentage, because you’re not really putting your money in there, so it’s technically infinite. But now, I figured that in apartment syndication there’s an acquisition fee you get paid at closing, so it sounds like it’s kind of what that developer’s fee is…

Evan Holladay: Right.

Theo Hicks: And then I think the biggest advantage for you is that after 15 years the whole thing is yours. You have all of it.

Evan Holladay: Right. We pay some smaller fee, but it’s much easier to take full ownership of the development in affordable.

Theo Hicks: So for my end for returns – 5 is high returns, 1 is low… I put it at 3, right below the developer; I wouldn’t say that the returns are higher, assuming that you’re actually completing the deal.

I think it’s interesting that it takes a lot longer to do a development deal, and as you said, there’s more risk during that time period… Usually, for an apartment syndication if you close within 60 to 90 days after you’ve put a deal under contract — yeah, sure, things could potentially go wrong during that time period, but not as likely…

Something that’s different between the business model that you implement and the value-add business model is that yours is literally like a long-term hold; you’re holding on to these suckers for at least 15 years.

Evan Holladay: Right.

Theo Hicks: Whereas our business plans are five-year holds, as we usually project… So the drawback, you could say, would be that you’re not necessarily having that consistent cashflow; you have to continually do deals, but it’s a positive because you could scale it way faster. Joe has exploded in the past three years because of how quickly you can do these deals once you start having access to private capital.

So from a return perspective, why I say a 3 and not a 4 is because, as Evan said, he gets access to all that cashflow, whereas on our end we have to give the majority of that cashflow to the passive investors.

From an actual return perspective for passive investors it’s great, because they’re just giving us the money and then each month they get a preferred return, and then at the end of a year, any cashflow above that return will get distributed. Then of course there’s the forced appreciation that we do… So what’s good is that if you buy the deal right, you can cashflow from day one; you don’t have to wait to pay your investors until all your renovations are completed.

So I think that’s a huge plus, that from day one, once you identify a deal, 90 days later the deal closes, and then within the first two months, generally, they’ll get their first check. There’s also the potential for a refinance, so they can get a portion of their equity back within the first couple of years, because again, since we’re forcing appreciation, we’re gaining all that equity that we have, and that’s something that you can pull out and refinance into a new loan, especially kind of in combination with that law number two with the long-term debt – if you’ve got a five-year business plan and you’re going with a five-year loan, you’re probably gonna wanna do some sort of refinance year two or three, so that that new five-year loan pushes you out to eight years; that way, if the market is not where it needs to be at five years, you’re not forced to sell it; you’ll refinance at that point.

And of course, since we are actually selling the property, that’s when the passive investors and the apartment syndicator makes the most money, because again, you bought it at 10 million dollars, you have forced appreciation of 7 million dollars, and so take away some fees and taxes, you’re making 7 million dollars that get split between you and your investors…

And of course, returns also vary depending on how you structure your syndication. The most common is an 8% preferred return, and some sort of split afterwards, like a 70/30 split. But then sometimes they might cap that – they might cap the investor returns at a certain IRR, like a 16% IRR or something. Then once that gets hit, which is not gonna happen until sale, then that split will be reduced and the syndicator themselves will make even more money.

So again, I’ll give it a 3. I don’t 100% understand the development, but just from my understanding, the returns are definitely higher, because you’ve got a much higher risk, of course, so that’s what offsets the risk, is the benefits at the end.

I wanna say that it is really interesting, for your specific business model, and the risk – there’s all that risk up front, but once you get past there, it’s like “Phew! Alright, we’re here.”

Evan Holladay: Yeah. “We made it!”

Theo Hicks: Then it just like drops below everything else, because as you said, you’re gonna have access to — the supply of renters that you have are always going to be really high.

Evan Holladay: I just wanted to say that I’m very envious of anybody that can close in 60-90 days.

Theo Hicks: Yeah, one year being your shortest… [laughter]

Grant Rothenburger: Yeah, and it’s nice that you guys actually own the whole thing after the 15 years. With the value-add syndication, at least if you’re doing an equity raise, a syndicator never really owns the whole property if the investors stay in it. Of course, you can do a debt raise, but I think the equity raise is the more popular, for obvious reasons.

Evan Holladay: Right. I wanted to ask Theo if — you said you’re mainly targeting like a five-year hold, add-value, and then after year five you either refinance or flip… Are you guys looking at holding onto or buying out any of your investors on any of your deals?

Theo Hicks: No. The investors stay in the entire time. That’s one of the selling points for them, is that they’re in the whole time. That’s kind of what Grant was saying – there’s the equity versus debt. With equity, you’re raising money and then you’re paying them a  preferred return, like a bank. In that case, if you refinance, you can give them all their money back and maybe like a 12% profit on top of that… And then yeah, you own the entire deal.

Some syndicators do that, but we do the equity, which means that the investors stay in the whole time.

The only time a buyout would maybe happen is if the investor needs to get out, for some reason… But it wouldn’t be something that we would come to them and offer it or force him to do it, or something.

Evan Holladay: Right. Yeah, I think the five-year model seems to be the point of very good returns, but it can definitely add more — you’re constantly having to go out and find the next deal…

Theo Hicks: Exactly.

Evan Holladay: …which is the same in any real estate, it’s the same in new construction. We’re constantly having to fill our pipeline, so we can start with ten to close two… But yeah, it was just interesting to hear the other side of it.

Theo Hicks: My personal strategy is to syndicate until I have enough money where I can passive invest in syndications, that way I’m kind of reducing my time commitment. I still have to analyze deals and I still have to actually do some work, but it’s obviously gonna be drastically reduced.

Evan Holladay: Right.

Grant Rothenburger: Cool. So let’s move on to how maintainable it is in a downturn, and we are back to Theo again. So 1 being very maintainable in a downturn, 5 being not very maintainable in a  downturn – what have you got?

Theo Hicks: So I got ahead of myself and I addressed this when I was talking about those three laws… And again, this is one of those things that’s highly dependent on your business plan. It’s highly dependent on how you buy the property and how you set up your business plan.

I said the three laws are buy for cashflow, long-term debt, have adequate reserves. If you ignore those when you buy the property, then it’s not gonna be maintainable at all during a downturn. If you buy for appreciation – of course, the downturn is the reverse of that, so you’re not gonna get your depreciation… So if you’re not cash-flowing when you buy it, then how are you gonna make money on the deal?

If you don’t have long-term debt, if you’ve put some sort of short-term two-year bridge loan that doesn’t have the option to buy another year or two, and then the market takes a dip at year 1.5, then you’re in trouble, because you either have to sell teh property at a loss… I don’t think you’ll even be able to refinance at that point, so you’re gonna be in trouble.

So the reason why I give it a 2 is because for our strategy, we take all those things into account and we wanna make sure that we’re able to preserve our investors’ capital in the event of a downturn. And how we actually do that is when we’re actually underwriting a deal, we run a lot of sensitivity analysis. So we say “Okay, so what would happen…?” For example, let’s say we put a loan on a property that is a floating rate. So what we’ll do is we’ll buy a cap to that, so it can’t go any higher than that cap, and then we’ll run a sensitivity analysis like “Alright, so what happens if it stays at the same rate for all five years? Okay, what happens if it goes up 0.5%, or 1%, or 1.5%?” That way we can see, alright, worst-case scenario, if it hits the cap, will we still be able to cash-flow?

We also do sensitivity analysis for the rent premiums. So if the market rates have been increasing by 10%, we do the rental comps, we find out that we can raise the rents by $100, but what happens if we can only raise it by $50? What happens if we can only raise it by $25? What if we can’t raise the rents at all for a couple of years? Will it still actually cash-flow?

So those are the types of things that we actually do to — because you can just say “These are the three laws”, but what we actually do to make sure that it’s gonna be maintainable in the downturn is on that front-end making sure that we’re underwriting the deal properly, and that we have the proper debt in place… And then the cash reserves is kind of self-explanatory. It’s making sure that you’re raising additional money or getting additional money from a loan to cover any unexpected maintenance issues, like ten boilers going out at once. If you don’t have an operating fund, what are you gonna do at that point? What happens if that happens and then the market goes down? So you’ve got the cashflow to cover it, but then the market goes down and you lose that cashflow – what are you gonna do?

So it’s making sure that you kind of think of all these worst-case scenarios and underwrite — don’t base your entire underwriting model on that, but make sure you’re at least looking at that, so you know that “Hey, if something happens, I’m not gonna be -20% cashflow”, or something.

So to summarize, as long as you’re following those three laws, then — again, you can’t completely eliminate risk, because you never know how big the downturn would actually be, but as long as you do that, then you’re at least mitigating those risk areas of not cash-flowing, having to give the property back to the bank, and all of those horror stories from ’08.

Grant Rothenburger: Yeah, and I’m obviously working on the same team as you – I obviously agree with all three of those points. I know how maintainable in a downturn Evan’s is gonna be… Let’s hear from you. Do you have any questions for Theo, first?

Evan Holladay: I don’t think so. The only think I would add is the adequate reserves – I 100% agree. I think that’s very important. And then we’ve seen our investors since 2008 have made us put very significant reserves in. The interesting thing is with new construction we typically don’t need them as much, at least from a capital improvements or capital maintaining the property, because we build long-term… But sometimes there is that occasional — like you say, you aren’t getting the rents that you need, and having that reserve has helped us cover certain gaps… But we’ve seen a requirement of those reserves from a lot of our investors.

But as far as maintainable in a downturn, I would say like a 1… It’s not easy for new construction, in general. Financing dries up, investors dry up… Our investors buy the tax credits and they’re usually motivated for — they get a community reinvestment act; it’s kind of like a grade that is given to them (I think) each year by the Federal Government. So the Federal Government says “Okay, are you investing in all parts of the neighborhood that you’re wanting to go into and do banking in?”, basically to combat redlining.

So we have this pool of required bank investors that need our tax credits to get a good score, but even with that need for that score, they still sometimes are like “No, we’re good. We don’t want any tax credits right now. We can barely keep our doors open…”, or whatever it is, they’re trying to just maintain their own liquidity and they’re not so much worried about buying tax credits when there’s a downturn in the economy.

So that’s a huge negative, and the other side is just new construction in general – nobody wants to finance it and take that risk. So that’s the downside.

The other downside is affordable housing, as much as we have that inherent, skyrocketing demand, you also have to look at people’s income levels. When there’s a downturn in the economy, usually the people that get hit the hardest – and it’s unfortunate, but they’re typically families that aren’t making as much money to begin with.

So our rent base – yeah, it’s there, but you have to look at how much money they’re making to be able to afford the rent. So if they’ve gone from being able to pay our rent previously to losing a job or going down to part-time and now they’re below what we can qualify as a qualified resident, because they’re making too little income and they can’t pay the full rent. So it’s a double-edged sword where you would think there’s always demand for affordable housing, which is completely true, but it’s just what rent levels, what income levels are you targeting?

So there’s always that inherent demand for affordable housing, and that’s where you can get — in those downturns, if you can get the cities or the states to financially step up and say “This issue is a big enough problem for our city, and even with the downturn in the economy, we’re gonna help fill the gap that was taken away from your investors not putting in as much money, or your construction lending not putting in as much money. We’ll help fill that gap.”

So I’d say it’s infinitely harder, but it can be done though… But it’s just that much harder.

Grant Rothenburger: And just to clarify – you said a 1…

Theo Hicks: I think it’s a 5.

Grant Rothenburger: I think we just might have been backwards on the scales…

Evan Holladay: A 5, definitely.

Theo Hicks: There’s something, I guess, that could mitigate risk slightly, and that’s by what you’re doing, which is investing in those markets that have that huge 50%-100% cushion… Because I imagine what would happen is that you’ve got your cap in affordable housing here, and if your competition is only 10% higher and the rents drop by 10%, then you’re in big trouble. But if their rents are 100% higher and it drops 50%, then the demand is gonna be still a little bit stronger… But I do understand what you mean by the fact that when there is a downturn, your property would see the reduction, or be affected most by the downturn.

Evan Holladay: Right.

Theo Hicks: Something else I wanted to quickly mention about mine that I don’t think I said – because I didn’t say specifically what you do…

Grant Rothenburger: That’s how Theo wins debates…

Theo Hicks: [laughs] No, it’s just something I forgot… If a downturn happens and you’re doing a value-add deal, as long as you follow those three rules you just keep the property; you don’t do anything. You just keep the property, you’re gonna cash-flow… You don’t have to refinance, you don’t have to sell.

The reason I brought this up is I’d imagine for you, for the deals that you actually have that are already finished, the risk is a lot lower for the deals that you’re actually working on at the moment, where you’re in the middle of construction, or in the middle of that up front, front-end due diligence aspect.

Evan Holladay: Yeah, I would agree to an extent, but I think you kind of hit it on the head – if there’s not enough cushion between us and market rate, and the market rate drops low enough… In 2008 we’ve had to lower our rents because we were having to compete directly with market rate product, and we typically can’t win against directly with market rates… So we have to inevitably lower our rents.

Grant Rothenburger: Alright, cool. I actually have a surprise question… We’ll start with Evan. If you could take one aspect of Theo’s strategy and put it in your development strategy, what would it be?

Evan Holladay: Closing in 60-90 days. [laughter] No, honestly, that’s a big part of it – I think doing affordable housing new construction has taught me a valuable lesson, and that is patience. But the flipside of it is I want to do more deals, I wanna be involved in more development, but it gets harder to get that in new construction… So that’s one thing I would want – an ability to close more quickly and create a bigger, more actionable development pipeline.

Grant Rothenburger: Okay. Theo, what about you? What would you steal from the development aspect?

Theo Hicks: I’d probably say Evan’s ability to own the property outright. Again, there’s ways to do it in apartment syndication, but it’s inherent in your strategy that you own it outright, and then you have all the cashflow, too.

Evan Holladay: The grass is always greener on the other side… [laughter]

Grant Rothenburger: Some aspects anyway…

Theo Hicks: I’d totally be interested in doing a development in the future, at some point. It’d be cool just to do it, to see what it’s like… But not now.

Evan Holladay: You know, another thing I didn’t touch on is just the — I guess you could call it the ego side of it. It’s really cool to [[00:39:46].00] something out of the ground where nothing existed before. That’s really cool. That’s what got me into it. There was a development going on on my campus in college, and I was like, “I need to be a part of that. I need to go learn from that guy, I need to figure out how he’s doing that. That’s so cool, just building something out of nothing, and having that permanent value to that community, wherever it is, for the next 50 to 100 years.”

Grant Rothenburger: That would be really cool to be a part of, for sure.

Theo Hicks: That would be the fifth category, Cool Factor. [laughter]

Grant Rothenburger: Development definitely has [[00:40:16].24] So I added up everyone’s numbers and I made up a little scale just now… My made-up scale. Let’s see… Evan was a total of 17.5 out of a possible 20.

Evan Holladay: Seventeen… And a half!

Grant Rothenburger: Yeah… [laughs] Because you threw in that half [[00:40:33].09] But the returns factor into that nets high as well, so let’s take that out… Now we’re down to 12.5, which on my made-up scale, you need some experience or education or a team mate that has a lot of that. You probably shouldn’t be a newbie trying to get into development deals, but you don’t have to be super-experienced and flipped 100 houses or own 100 multifamily units already. If you’re resourceful enough, you could definitely find that and get things done.

And same thing with Theo’s – if you take out returns, three, then he’s a 7, which on my made-up scale… I don’t like my made-up scale anymore, because that means that a novice could do it, and I think you should be more like — same with the development, you should be definitely more than a novice to be doing syndications.

So with that, I’m gonna go ahead and wrap this up, unless you guys have anything to add. Or we’re gonna do rebuttals – Theo, what do you have for Evan on the rebuttal aspect?

Theo Hicks: I think for both of us we got that in when we were going over each of the categories.

Grant Rothenburger: I thought so, too. Alright, so for me personally – and I’m a little biased, but after hearing you guys’ arguments, I’d go with the syndication side, mostly because of the risk of the front-end… But that risk drops off after it’s built, so it’s kind of double-sided there. And I do really like that you guys will own it outright, without having to share in the profits of your investors forever; that’s really nice.

But obviously, I’m biased, so listeners and viewers, go to the BestEverShowCommunity.com and give us your opinion, and tell us which one you would prefer, or which one you do prefer.

With that, guys, Evan – thank you for joining us today. Theo, I’ll probably talk to you later today… [laughter] Everyone, have a best ever day!

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JF1422: The Overachievers Guide To BLAH Days with Joe Fairless

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In an effort to bring The Best Ever Listeners even MORE value, Joe has started a special segment of the podcast. In these segments, Joe shares something he has either recently learned, or even something he’s known for a while that he thinks can be valuable to everyone else. In this episode, he’s addressing feeling “blah” and how to power through it and still be productive. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Best Ever listeners, I’ve got a special segment for you, and every now and then I’ll be doing these special segments when I come across something that I learn in my entrepreneurial journey, and I think it will be helpful for you as well… So I hope you enjoy this episode, and more importantly, I hope you get some value from it that you can then apply to your life.

This episode is gonna be focused on what I call the Overachiever’s Guide to BLAH Days. I think we all have those days where you’re just feeling like… BLAH. You’re just feeling like you don’t wanna do stuff, you’re tired, or you’re hungover. In my case, last night I had two glasses of wine, I had five hours of sleep, and on top of that, yesterday we closed on a large apartment deal, so there’s certainly a little bit of sense of accomplishment, although my main focus on the apartment deals and when I celebrate is when we do the first investor distribution, and I’ve wired my mind that way… So there’s not a whole lot of celebration when we close a deal, but still there’s a little bit when we close the deal. So that was yesterday.

Today there’s a little residual hangover from the two glasses of wine, there’s sleep that I wish I got more of, and I also haven’t really exercised today, so that’s another variable… Plus, I have a slight sense of accomplishment from closing on a deal yesterday. So there’s a perfect storm of stuff that today I have just felt BLAH. I felt like a lazy bum. Now, I’ve done some stuff – I’ve had a Follow Along Friday with Theo earlier, I have had an investor conversation, I have gone for a walk with Colleen, my wife, and Jack, our 12-pound Yorkie with tons of attitude… Actually, he’s got a great temperament, unless you’re another dog while we’re walking, and he’s on his leash – then he’s got a lot of attitude. Besides that, he’s a great dog.

So I’ve done some things today, and… What time is it? It is [1:37] PM when I’m recording this… But I haven’t gotten just a lot of momentum yet, so I’ve started thinking, I wonder if any Best Ever listeners out there have come across this, where you are typically an over-achiever; I like to believe my identity is that of an overachiever. Normally, every day I’m “BAM, BAM, BAM!”, but today I just feel blah… So I thought, “What can I do to shake out of this and turn this around?” and then also what can I do to help others who might come across this situation turn it around for theirself as well.

I’ve figured out a three-step process, and I’m implementing right now, so it’s not just theory-based; I’m actually doing it. The intention of mentioning this is to help you out if you are an over-achiever, which I imagine you are, because you’re a Best Ever listener, so you’re crazy like I am, and you’re into this real estate thing and you’re consuming a lot of content about real estate on a consistent basis… So I imagine you’re an overachiever, and I also imagine that some days you have kind of a blah day, so here’s a three-step process for your guide to getting through, overcoming and transforming your blah days into productive days.

Step one, get excited. Why do I say get excited? I say get excited because you’re an overachiever and you’re having a blah day; well, that means that other days of the week are not blah, otherwise you wouldn’t recognize it being different. Also get excited because when we do achieve great things, it’s so easy to get caught up in the moment when you’re totally motivated. When you attend a Tony Robbins conference everyone’s pumped up. When you attend a real estate conference, everyone’s connected and BFFs. When you’re attending a local meetup, everyone’s talking “Oh yeah, I’ll do this, I’ll follow up with you, I’ll give you a call, I’ll e-mail you.” Everyone’s all about it.

But then something interesting happens – people don’t follow up, and people don’t do things that they say they’re gonna do when they’re not in the moment, and that’s what separates you and I from other investors, because when we’re not in the moment, we’re still making progress. So that’s why I say get excited, because when we do come across a blah day, that’s when we get the muscle built even bigger.

Tony Robbins talks about which rep builds the most muscle when you’re on a set of ten? The first one, the second, third, all the way to the tenth…? Which one? What would you say? It’s actually the 11th. The 11th rep gets you the most muscle, because then you’re really pushing your muscle. Same thing with what I’m describing right now – when we have a blah day, that means that we’ve had a bunch of good days up until this point, and then we want to push through which builds the muscle even stronger when we have the greatest resistance… Because on that 11th rep, what is there? There is the greatest resistance, and when we push through that, the muscle gets bigger.

So that’s why I say get excited – we’re pushing through the resistance, and we’re getting stronger as a result of it. Number one.

Number two, after you get excited, then get moving and create something. My suggestion is on the blah days to focus on creating something that is of interest to you, and that way you’ll get momentum. There is fulfillment in creation, there is not fulfillment in maintenance. When we create something, then we’re going to get really excited. That’s what I’m doing right now – I mentioned I’m following this process, I’m creating a podcast episode, so I’m following this process because I believe in this process.

So when you are having a blah day, first get excited, because you’re gonna push through the resistance and you’re gonna get stronger, and second, get moving by creating something.

And third, reflect back and give yourself some props. “Nice work on this!” It’s tough, and it’s something that most investors, most entrepreneurs, most businesspeople, most people in general don’t do. Generally, when they’re having these challenges after they’ve had some good, over-achieving days, they just don’t do anything, and that’s what separates you and I from other investors… Not in a bad way – I’m not saying “us versus them”, I’m simply making an observation, that when we push against resistance and we create something by moving and creating something, then we are separating ourself from what other people do.

And then third, like I mentioned, reflect back on what you just did, pat yourself on the back and get excited, and perhaps write it down. That’s where my daily journal comes into play. I’ve mentioned on the show multiple times before, but I’ll mention it again – I do a daily journal, every single day. Out of the calendar year (365 days) I probably only miss six or seven days total. Pretty much every single day I’m writing in that journal.

I’m writing “Hey, today was a blah day, but I’m an over-achiever and I follow the three-step process of getting excited, because I’m gonna have resistance, and I’m gonna grow my mental muscle, my entrepreneurial muscle, whatever muscle because of that, because there’s gonna be a lot of resistance. Two, I got moving and I created X, or XY, or XYZ, and three, now I’m reflecting back, because darn it, it feels good that I was able to push through this…”

And it was pretty cool, because I worked on a project that I wanted to work on. And you know what, I cut myself some slack, because I realized that there are some days where I’m not gonna have as much sleep, and I’m gonna be cranky, or I’m gonna have a couple glasses of wine, or beer, or whatever you drink – or maybe you don’t drink; maybe too much sugar, or whatever it is – and I’m not gonna feel the best the next day… Or I’m gonna accomplish something pretty darn big the previous day, and then the next day I’m gonna feel like I have a little bit of complacency, even though I know inherently that’s a terrible thing to have in business…

So I’m gonna cut myself some slack and I’m simply going to follow this three-step process of getting excited, getting moving and creating something, and then I’m gonna reflect back.

Those are the three steps to your guide to making a blah day a productive day for all of you over-achievers. I hope this is helpful, and thank you for being a listener to the Best Ever Podcast. This is a special segment that I haven’t done before, but you know what, I might start doing these more often, because there are some messages that as I’m going along through my entrepreneurial journey, as I’m building a company, there are lessons that I’m coming across, and who cares about what I learn – it’s more about what I learned that can be helpful for you, and if I have something that can be helpful for you, I feel like we should have a special segment to mention that, so that you can benefit from the stuff I’m learning along the way, too.

I hope you’re having a best ever day, and we’ll talk to you tomorrow.

JF1416: Real Estate Attorney & Active Investor Tells How To Structure Your Contracts with Paul Sian

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It doesn’t take much to realize the value that a conversation with a real estate attorney who is also an active investor, can have on your business. Paul and Joe cover real estate contracts extensively in this episode, a lot of great content in this episode! You’ll want to save this episode and listen again. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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

With us today, Paul Sian. How are you doing, Paul?

Paul Sian: Good. How are you doing, Joe?

Joe Fairless: I am doing well, nice to have you on the show. A little bit about Paul – he is a licensed attorney in Ohio and Michigan, and a licensed real estate agent in Ohio and Kentucky. He’s worked in real estate for 12 years while owning rental property; he helps buyers and sellers in Cincinnati and Northern Kentucky areas buy investment and personal real estate. He is based in Cincinnati, Ohio. With that being said, Paul, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Paul Sian: Yeah, definitely. Like you mentioned, I’ve been in real estate for 12 years. Actually, I originally started off licensed in Michigan for about 8-9 years, and then when I moved down to Ohio for a career change, I was doing real estate part-time there in Michigan, and then let my license go and then got my licenses back.

I was in the Army reserve for a while, and once I got out of that I needed to keep myself busy, so I got my real estate licenses again. I’ve got Ohio and Kentucky; I got both in the 2014 timeframe, and in around 2016 – that’s when I started getting back into real estate investment. We actually owned a single-family ourselves. That became a rental when I was called to active duty with the military… So rather than selling it — it was a brand new development with new construction… I would have sold it at a loss if I tried to sell it. We just rented it out and kind of became remote investors in that sense.

When we came back about a year later, I ended up selling it; development was finished, and the tenants [unintelligible [00:02:28].21] causing some issues, and it was too far away from where we currently lived, so I sold that.

In 2016 I got a fourplex, which I got at a good time. As you probably know if you’re looking in Cincinnati, we’ve kind of seen the prices starting to run up since then.

Joe Fairless: Absolutely. Are you still a licensed attorney and are you still practicing?

Paul Sian: Yes. I do real estate [unintelligible [00:02:49].19] and then I also do my real estate work as well too, helping buyers and sellers, both investors and for people buying their personal home.

Joe Fairless: So what’s a typical transaction as an attorney look like for you, in terms of your involvement?

Paul Sian: If I’m doing a real estate transaction [unintelligible [00:03:06].25] I don’t necessarily have to step in as a real estate agent; if they have a deal they’re buying, either like in a wholesale process or buying directly from for sale by owner, they can just come to me, we can work out a contract review fee, a document review fee, and then if they need, we can go through my work law firm – I work with a local law firm here in Cincinnati. They own a title company, and we can just process everything through there.

So I can help save them some money… It doesn’t have to be through the real estate license sign, but I can work with people as an attorney as well, and I do work with a lot of wholesalers, helping them with their contracts in terms of purchasing, as well as turning around and selling to others who are interested in holding the property, rather than wholesaling.

Joe Fairless: What are some areas of the contract that you believe add a lot of value to the contract? It’s kind of a dumb way of phrasing the question, but basically what I’m trying to find out is what are some areas that you focus in on on real estate contracts that perhaps if an investor wasn’t working with you, that wouldn’t be as buttoned up?

Paul Sian: Yeah, definitely… Especially if they’re not using even some of the state standard contract forms, or some of the ones you can get online, they might be missing appraisal terms, and they’re required to meet a certain appraisal… Which if you’re buying with borrowing money, like through a mortgage, then usually those contracts are required and your lender is not gonna bless that anyways… But if it’s a cash deal and you’re purchasing it for 100k and they wanna make sure it’s worth 100k, they can always get an appraisal if they want. But if that language is not in their contract, then they get the appraisal and the appraisal is low, without that language there they have no escape clause from that contract. They’re stuck buying it for $100,000, regardless of how much the house is worth.

Inspection calls is another important thing, too. Most people think “Yeah, home inspector… We wanna get our home inspected”, but when it comes to the investor buyers, a lot of times – especially now with a seller’s market – there can be an eagerness to go in and waive the inspection clause, which in my opinion is a big mistake.

You have waived that and you suddenly find that your foundation is sinking and it’s gonna cost 50k-60k just for that, to shore it up. Your whole investment strategy could be thrown out the door there, in one little misstep.

Joe Fairless: Within the inspection clause, what are some things that you always include in there?

Paul Sian: Generally, we look at the timeframe, the initial inspection, and then we also will address the post-inspection negotiation, and basically what the terms would be; if you can’t come to agreement on repairs, what are the options for the buyer and the seller…

And then mainly for the timeframes that everybody needs to pay attention to. You can’t just leave it in there and say “Hey, we will inspect within ten days” and then leave it at that. Okay, you inspect, but then what? You found that there’s a big issue with the electrical system – what’s your timeframe for resolving that? The seller and the buyer don’t agree, it becomes the “he said/she said” type of thing, and ultimately to resolve it you have to go to court… But if it’s something that’s already spelled out in there, if it does go to court, it makes your case easier.

Joe Fairless: We’ve got appraisal terms, so making sure that they’re in there… This is when we’re buying a property. We’ve got inspection clauses, the timeframes, and both of the initial inspection, of also the post-inspection… Anything else that you can think of as you think of the contract that would be good to know?

Paul Sian: Yeah, definitely a lot of contracts should have language in there regarding deed terms, the type of deed you’re getting… If it’s a bank deed, you’re generally gonna get a special warranty deed, because the banks don’t wanna guarantee, they’re not able to guarantee the deeds, so they’ll guarantee you to the point that they can.

If you can get general warranty deed – that’s the best kind. That basically steps in there and says “Hey, this deed is good.” If there’s an issue later, you can go back against the seller, or if you have title insurance on the property, then the title insurance will cover you under the general warranty deed. A special warranty deed limits it to what kind of ownership interest they’re transferring.

Joe Fairless: Will you elaborate on the general warranty deed and special warranty deed, and the distinction between the two, and if we have a choice on which one we receive?

Paul Sian: Definitely. The special warranty deed – those are generally gonna be on foreclosed properties. Banks generally are only gonna give you a special warranty deed. It’s rare that they have a general warranty deed. They don’t have all the information, and they’re kind of trying to do a quick sale and get rid of it as easy and as quick as possible.

Generally, if it’s closed through a proper title company who does all the title search, they should be able to come up with the full research on the property and kind of protect you on it.

When it’s a normal deed, when you’re [unintelligible [00:07:45].00] individual, if they’re giving you anything less than a general warranty deed, like if you’re getting a quitclaim deed, which is almost like “You can have whatever ownership interest I have in this property, if I have it.”

So it may be the case, you know, I’m selling you the corporate headquarters downtown Cincinnati; I’ll give you a quitclaim deed. It’s worth the paper that it’s written on. Obviously, I don’t own it… I can give you a quitclaim deed, but it doesn’t give you any right to it either.

The general warranty deed is the best, and your special warranty deed – the bank is only gonna give you that. Then a quitclaim deed – it’s rare to find those in a transaction, but if you do, if somebody wants to offer you a quitclaim deed, I’d be pretty skeptical and I would definitely talk with an attorney and a title company to make sure what’s going on with that.

Joe Fairless: What does the bank and the special warranty deed on the foreclosed property – what is the bank not agreeing to, that they would be agreeing to on a general warranty deed?

Paul Sian: With that, they’re basically — they’re in a sense excluding their ability to guarantee the deed, to give you a general warranty deed that says “Hey, our property is good. We bought it at a good title.” Basically, they got it usually through like a sheriff’s auction or foreclosure process, so they are just getting the deed as is, and that’s their way of selling the deed, as is.

So they’ll guarantee it to you to that point, and you can borrow against that, too. If a lender comes and you’re purchasing the property and you need to borrow off of that, you can generally borrow on it, assuming the property itself meets the appraisal criteria… But it still gives you pretty much a good guarantee, but the bank is just not willing to step out there and say “Yeah, we’ll guarantee you against any and every claim possible.”

Joe Fairless: What’s an example of a challenging contract that you’ve worked on?

Paul Sian: A challenging contract… I guess a lot of it just involves the back and forth negotiation before you even get to the contract… Just getting to the terms, especially when you’re in the investment realm.

I’ve just seen a contract that fell apart because the buyer wanted the seller to leave all the raw materials left in the apartment so he could refinish it, and the seller said no, so the buyer in that case walked for that.

Or they probably use something else, they probably use something in the inspection clause… For something as simple as “I’m not leaving you the drywall, I’m not leaving you the screws [unintelligible [00:09:58].19]” So a lot of it is just the negotiation and getting past egos. Once the language is there, once everybody understands the language and they kind of see the purpose behind it, they’re ready to go for it… It’s more how do you get those emotions at times that get in the way.

Joe Fairless: How long have you been working on real estate contracts with clients?

Paul Sian: I’ve been working on that for at least about ten years.

Joe Fairless: From year one to now year ten, I’m sure you’ve evolved your language to enhance the contracts and the value that you offer to your clients… If that assumption is correct, what are some of the things you do now that you weren’t doing before?

Paul Sian: In the past I would use often times the standard draft contracts you would get from a lot of these companies, primarily service attorneys, and sell you blank legal contracts, and they might be state-specific… [unintelligible [00:11:00].15] Now, especially at my law firm, we kind of start from a base our law firm designed, and we design it more based on the locality, like in my case, Cincinnati and Northern Kentucky… Whereas those form contracts by certain companies are generally state-wide. Sometimes they’re city-provisioned, sometimes there’s something in the city, either the tax or the Building Department requirements that are unique, that those contracts don’t cover, so we have contracts — it’s a multiple-page document, then we kind of go through it and based on the particular situation knock out language that we don’t need and make sure the language that we need is in there and it makes sense when it’s put in there.

Joe Fairless: What are some examples or an example of tax and building requirements that are unique to a city, that wouldn’t be in a state templated contract?

Paul Sian: In Hamilton County – this actually more follows upon the owners of the property, but the requirement to register your property with the auditor. And there’s no fees or costs with that, there’s no requirement at the state level… But then you go to a city like Cleveland, or a few other Northern Ohio states, and they actually have rent taxes as well, or unit taxes basically, and they’re charging that, so then you get prorations with some of that, if the prior seller — it’s almost like your regular taxes, when you’re buying and selling a property you prorate based on how much they’ve already paid when their ownership ends, and then how much does the buyer owe based on that.

So they’ve got similar concepts like that that state-wide doesn’t necessarily apply. Cincinnati doesn’t have any rental unit taxes, but we do have registration requirements… And on the opposite end you have those taxes, so you have to account for those.

Joe Fairless: What’s the most challenging part of your job?

Paul Sian: The challenging part – a lot of it too is just making sure people are on the right page, explaining… Not only am I working with the buyers, as I’m working with a buyer or a seller – if I’m working with the other side too, they don’t have their representative… It’s kind of like, I am representing my client, I’m in a contract with them, so they’re the ones I’m representing, and then kind of explaining to the other side, “Hey, if you don’t have your own counsel, then here’s the extent I can advise you. I can’t go further than that, unless I — if I start revealing my client’s privilege information and whatnot, then I run the risk of facing liability lawsuits or giving away information that I shouldn’t be giving.”

Joe Fairless: Based on your experience as a real estate contract law attorney — what is the best way to phrase that…? Real estate attorney in contract law, is that basically it?

Paul Sian: Yeah, real estate attorney/contract attorney, or acquisitions attorney…

Joe Fairless: Cool. Alright, based on your experience within that capacity, what is your best advice ever for real estate investors?

Paul Sian: If you’re going alone, make sure you have your teams in place. That will include an attorney, or if you’re working with a real estate agent, but have your contractor in place, have your property manager in place… A lot of times, especially in this market, when the deals and the offers are flying left and right, you might find yourself in contract with a building that’s ready to go, if you don’t have a contractor there who needs to service something, or you don’t have a property manager in place, especially if you’re a remote buyer and you’re not within the state, you’re gonna be in a tough situation between managing your tenants remotely… If your tenants figure that out, that you’re not local, then that kind of gives them a run of the place, and who knows what could happen then…?

So definitely have your team fully in place before you even start considering making your offer that within the next 20-30 minutes you could  find accepted, because the deals are going like crazy.

Joe Fairless: What are some of the best ways to find those qualified team members?

Paul Sian: Networking is one of the best, and with my out-of-state clients too – what happens is they’ll connect with me based on reading my blog, or seeing some of my posts on certain websites, and they’ll come back and say… We’ll chat, we’ll do an initial phone conversation, and then usually I recommend to any of my buyers that if you have the ability, by all means, come and visit Cincinnati. I’m happy to drive you around, show you around. You need to get an understanding of where you’re investing and the neighborhoods you’re gonna invest in, because everything varies based on which neighborhood you’re in, and the same type of thing if you’re buying in New York – it’s always good to have your boots on the ground and understand what the lay of the land, where everything is.

Joe Fairless: What’s the most popular blog post that you’ve done?

Paul Sian: Active blog posts that I’ve recently done  — I’ve got one that gets pretty good traction, it’s “Financing your investment properties.” I mention different ways that you can finance investment properties, and I get a lot of feedback.

Another blog post I’ve got for investors is my 1031 exchange blog post. I do get a lot — both on the law side as well too, asking for what they call the QFI, the qualified intermediary, who basically arranges the deals, who holds the money while you’re selling one property; you transfer the cash to them and then you purchase the other property. So the money has to be held in a trust, it can’t be just put into your bank account… So I get a lot of questions on those as well.

Joe Fairless: We’re gonna do a lightning round… Let’s do it. First, a quick word from our Best Ever partners.

Break: [[00:16:03].16] to [[00:17:07].09]

Joe Fairless: Best ever book you’ve read?

Paul Sian: Best ever book, Think and Grow Rich. It gives you a great mindset. It’s not specific to anything, but it kind of gives you the mindset to pursue anything.

Joe Fairless: Any books come to mind as it relates to real estate law or contracts that you would recommend to the Best Ever listeners?

Paul Sian: Not in terms of law… The ones I read are strictly for attorneys and they’ll put you to sleep. If you’re looking for some good bedtime material, those kind of books are good. But most of mine are strictly from a legal, theoretical perspective, and law books that discuss local laws, local statutes and codes.

Joe Fairless: What’s the best ever deal that you’ve done?

Paul Sian: That was a recent purchase of a four-family. It was a good deal at the time, right before we had the run-ups here in the Cincinnati area. I’ve got a reliable lender, but he had some issues with his own company and I kind of had to work with the seller, because it ended up being rather than a 30-day close, it ended up being almost like a 90-100-day close.

I just kept in touch with the seller, and kept in touch with my lender, and we ultimately got it closed. [unintelligible [00:18:07].13]

Joe Fairless: What’s a mistake you’ve made in business?

Paul Sian: [unintelligible [00:18:12].29] Sometimes it’s not fully screening the tenants, not fully vetting the tenants… I kind of use my own process, do my own research, and I’ve slowly come to learn that hey, there’s a lot more to look at, a lot more to look through before you accept just to get a rent check falling into the door.

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

Paul Sian: Just sharing knowledge. I blog, I’m usually publishing once a week on my blog, on my website. I share my knowledge there, and I’m more than happy to answer questions. Anybody is welcome to call me or e-mail me and I’ll try and do my best to give you an answer.

Joe Fairless: Speaking of that blog, what’s the best ever way the Best Ever listeners can read more about what you’ve got going on?

Paul Sian: Definitely the blog. It’s at cincinkyrealestate.com. My contact information is on the page there, so feel free to e-mail me, call, or text me. I’m happy to chat.

Joe Fairless: Thank you so much for being on the show, educating us on the different types of deeds – quitclaims, special warranty and general warranty. Quitclaim – you’ve really gotta stay away from those. Special warranty deeds, and then the best, the general warranty deed… Why each of those three exist, and also talking about other things from a contract standpoint we should be looking out for.

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

Paul Sian: Thank you as well, Joe.

JF1411: Make More Money Per Deal By Being Fanatically Honest #SituationSaturday with Garth Kukla

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Garth is making his second appearance on the show today. This time he is here to update us since his last interview (see below for link), he is closing more deals and making more money by being brutally honest with sellers. If you buy anything that is negotiable, you should listen up! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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

With us today, Garth Kukla. How are you doing, Garth?

Garth Kukla: I’m doing fantastic, Joe. How are you?

Joe Fairless: I’m doing fantastic, nice to have you back on the show. Best Ever listeners, episode 1210, that’s where we first interviewed Garth on wholesaling. He’s a full-time wholesaler in Northern Kentucky, greater Cincinnati area. He’s been doing it since July 2016, completed almost 50 transactions, and has four other team members.

Today, because it is Saturday, first off, I hope you’re having a best ever weekend… Because it’s Saturday, we’ve got a special segment, Situation Saturday. This is for the wholesalers out there, but it can certainly be applied, as with all of our episodes, to other types of real estate investing. We can take something away from every episode, regardless if they’re focused exactly on what we do, but especially wholesalers today… If you find yourself needing to do more deals or trying to close out more deals as a wholesaler, then this episode’s for you.

By the end of our conversation, you will have an approach that is working for Garth, who as I mentioned, has closed almost 50 transactions since he’s been doing it full-time, which is less than two years. It’s been working for him, so maybe it can work for you.

First, Garth, do you wanna give the Best Ever listeners a little bit of a refresher on your background, and then we’ll dig into it?

Garth Kukla: Yeah. My background is, I think, one of the things that led to my success or my growth – I was a sales rep for about 19 years. I sold copiers and then office supplies. I got into medical sales, and my last position was managing a team in healthcare sales… So I think from a background, that really helped me… But I also had some real estate experience, I wouldn’t say a lot. I remodeled my first home, I remodeled my mother in law’s house, so I felt like I had a little bit more than normal real estate experience… So I combined that with my selling ability, or my skills that I’ve developed over 19 years, and I basically combined that into what I do every day now. Does that make sense?

Joe Fairless: That makes sense. So what you do every day now is… What?

Garth Kukla: Well, I just had an acquisition manager join my team. He is full-time looking for deals. Prior to him, I was the main person to find properties, get them under contract and sell the properties to our cash buyers. Now I’m finding that I’m working more on my business than in my business, and I’m able to make my systems for disposition more efficient. I’m working on coaching and training my acquisitions person; he’s an absolute superstar, and I’m blessed that he’s a part of my team. I’m learning how to be a better leader in an organization, and that’s leading to even more growth, if that makes sense.

Joe Fairless: What’s your tagline, by the way, for your business?

Garth Kukla: Well, I think you put it in the last podcast, “Wholesaling with integrity”, because I feel like that’s what we do. When we talk to motivated sellers, we’re very almost in-your-face, up-front. My acquisition manager calls me fanatically honest. First off, we’ll tell them that most of the time we’re not gonna be the one buying their house, that we work with investment partners. We don’t necessarily go down the road of telling them that we’re wholesalers per se, because most people wouldn’t even know what that is… But if one of our cash buyers shows up at closing, that’s never a surprise to the seller.

I think the other approach that you’re wanting me to get at is an approach that we’ve kind of refined these last six months… Let me say it this way – we try to talk people out of doing deals with us, because we tell them there’s other options that are better than selling to an investor. We’ll say things like “If you list your house with a realtor, you’ll get probably a lot more money”, and then what we do is then we shut up, and we let them talk.

Sometimes they say, “Okay, I’ll do that.” A lot of times they say, “Well, I don’t wanna use a realtor”, and then we start the discussions further… But we always are presenting them with what’s the best option for them, and most of the time we are not always gonna be the highest offer. In fact, we’re never the highest offer, but the deals we do and the growth that we’ve experienced is because we’re transparent with the sellers and we literally tell them “If you fix the house up yourself or if you rent it, or if you list it with a realtor, you’ll get more money.” While we do that, we build rapport with the sellers and that allows us to get more deals, because when somebody trusts somebody, they wanna do business with them. So we build trust with the sellers literally just over the phone, and that then leads to more deals.

Joe Fairless: So you tell them that you’re not the right approach initially, if they’re looking to get the best price; you say that right up-front.

Garth Kukla: Yeah. I mean, literally, we just closed this deal yesterday, and the seller said they were listing it with a realtor for $50,000, and we said “Well, our offer will probably be half that, so it will be better if you just listed it with another realtor. Do you need a referral?”, and then we shut up.

They’re like, “I don’t wanna list it with another realtor, I just need this house gone”, and then we continue the conversation… But  the whole time we’re listening to the sellers, we’re identifying what their needs are, what they’re trying to do, and then we make our best  decision based on our experience and our integrity, what’s best for them, and we present them with that offer.

What I mean by that is, hypothetically, if you’re a seller and I’m talking to you, and your house is in good shape, and you’ve got six months to sell, your hair is not of fire per se, you don’t need to sell it tomorrow, I’m gonna say “You really should list it. You’ll get a lot more money.” Sometimes they take me up on that offer. Other times they trust us because we’re being honest and upfront and straight with everybody we deal with; we find that we do more deals because we gain that rapport faster by just being straight with everybody we deal with.

Joe Fairless: What is a way you can determine if that approach gets you more or less business?

Garth Kukla: Well, we’ve been doing it probably the last eight months or so. I’ve always carried myself with integrity, per the last podcast we did; I wholesale with integrity. I’m always straight with everybody I deal with. Now I’m a little more — I wanna use the word in-your-face, and I don’t know if that’s the right word, but let me give you an example.

I was going through a house with a seller. I like to inspect the house to make sure that the house is something that I can move to one of my investors. I’m looking at the condition, trying to figure out how much it’s gonna take to rehab it, because that’s part of the evaluation process of my cash buyers… And then the seller says to me, “Well, are your crews going to come in here, and how much do you think it’s gonna cost to fix this kitchen/living room/floor?” I literally turned to them and said, “We’ll probably just buy and resell it, and not touch it at all.” And then I’m quiet.

When you’re that in-your-face with them, you’re listening for a sigh… And the sigh is “Finally, I’m talking to somebody that is just being brutally straight with me”, and you just build really fast rapport, you get people to trust you, and you do more deals. Where I’m going with this – you asked the question “How can I quantify that approach?”, well, I’m a numbers guy, I’m a goals guy, and we ended the first quarter six times ahead of our revenue from that first quarter of last year. I think six times growth is pretty good, and I would attribute a lot of that growth to this in-your-face-approach, if you wanna say it that way.

Joe Fairless: I like the “fanatically honest” approach that was coined by your team member, I’m gonna go with that. So you’ve mentioned two specific ways that you bring the fanatically honest approach to your business. One is you tell them if it does make sense, based on your experience as an investor, for them to list with an agent, you tell them. If you list with an agent, you’ll probably get more money. Two is you tell them “We’ll probably just buy the deal and resell it.” Any other ways that you bring that fanatically honest approach to your deals?

Garth Kukla: Good question. I know this last deal that we just signed up is gonna be a great deal for the investment partner that we’re working with; they wanted to know how much their house would be worth if it was all fixed up, and we told them that at the kitchen table. It was almost uncomfortable, because we were telling them that their house is probably worth 165k as is, and we were offering them 120k. At the table, again, we just kind of referenced that number and said “Are you sure you don’t wanna list?” and they literally said, “No, we wanna sell. We need this gone”, and they literally hugged us as we were walking out the door.

So I think the approach of — if somebody ever asks us a number, we’re not gonna shy away from that. So if they ask us how much their house is worth, “How much do you think you’re gonna sell it for?”, for the most part, we’ll tell them, because I feel like that’s just the right way to do.

And that deal, even though it was a little uncomfortable – like I said, we left with the house being under contract for 120k, and then as we were leaving… I wish I had a video camera, because the lady gave us a hug and said “Thank you so much for buying our house.” It makes you feel good that you’re doing the right thing, and like I said, part of the reason why I do what I do, in the way that I do it, is because I also wanna be able to sleep at night. Because if you google “We buy houses companies”, you can read articles about people taking advantage of people. That is not my goal. I wanna make a fair profit, I wanna grow my business, but by being 100% straight and honest with everybody I deal with, and they accept my numbers and I tell them I’m not their best option and I’m not just a good salesperson and I’m talking them into signing a contract, but then I’m positioning it in a way where this isn’t the best option for them because they don’t wanna sell it.

The deal we closed yesterday, they just wanted it gone as quickly as possible. But on that field, to answer your question even further, some deals are very straightforward. I know that our purchase price is a price where we can move it. The house is either in a good shape or in a good neighborhood, it’s very straightforward… Sometimes houses are a little peculiar. This house had a good foundation, but it had a lean to it, so you could tell that there was a slight unlevelness of the house… So we were very straight with them and said “Look, we’re not 100% sure if we can do this deal because of the lean.” I believed in my gut we could. We negotiated the price and we said, “Look, if your inspections and our investors come through and they are happy with the deal and we’re able to do better than we can…”, on this example we actually gave the seller another $2,500 even though we didn’t have to. That gets back to one of our company’s principles, and that’s just treating everybody fairly.

So on a deal where I wasn’t 100% sure we were able to do a deal, we were able to do a deal; we made a good profit ourselves, and then we actually raised the sales price by about 20% for the seller, and that was just giving them more money, because that’s the right thing to do.

So to answer your question about other ways of how we’re fanatically honest, I think that might fit, if that makes sense.

Joe Fairless: You mentioned earlier on the “$165,000 list, but we’re only going to offer you 120k”, you said “For the most part, we’ll tell them that…” – so are there circumstances where you won’t?

Garth Kukla: Well, if they don’t ask, we don’t always volunteer everything. For example, I don’t tell people that I’m a wholesaler, because they wouldn’t understand it. If somebody asks me a question, I’m always gonna answer it honestly. For example, I did a deal in ’16 where they’ve reviewed my contract and I guess they googled some terms and they figured out I was a wholesaler, so the guy said “Are you a wholesaler?” and I will always answer that question honestly. I said “Yes, I am.” Then I say, “Well, we agreed on a price. You wanna sell your house, you need to sell your house. Let’s just move on to do this deal”, and I closed the deal, we sold it, and everybody was happy.

If somebody asks me specific numbers, like “What do you think my house would sell for?”, I’m gonna answer it. I don’t always volunteer all those numbers, because sometimes throwing everything at somebody might confuse them, and if they get confused, then they might not do anything, if that makes sense.

It’s just kind of like, if you don’t give somebody options, there’s an expression that I learned long ago and I hope you’ll understand it when I say this… Sometimes people like to be told what to do. So when I go into a seller meeting, I’ve already identified what I feel like is the best option, and I present that one option. I don’t say “Well, you could sell it to us or you could list it with a realtor”, because if you give them options, then sometimes people just freeze, and they don’t make any decision at all, and that’s not good for anybody.

It’s not that I’m withholding information, but if somebody doesn’t ask me “What are you gonna sell the house for? What do you think my house is worth?”, I’m not always gonna necessarily volunteer that information, if that makes sense.

Joe Fairless: Yeah, it does. That’s an interesting part you’ve just mentioned – when you go into a seller meeting, you only provide one option, and that’s based on the information that you know about their situation prior to that meeting? Is that accurate?

Garth Kukla: Yeah, I use my selling ability, which a lot of it has to do with just listening… Part of what makes you a tremendous interviewer is you really listen to people like myself, and you ask really good questions… I take a lot of notes; I often will restate phrases that are exactly used by the seller, which will help show them that I’m listening, and then I take that information to them and I present an offer.

Let me say another example – there was a house that the lady owed too much money on it, so I could do a deal, so we were listing it with one of my realtor partners; she didn’t know all the good realtors, so I recommended one. We’re sitting in her living room, it’s a Friday, the realtor is there, I’m there, the seller is there, and they’re talking about listing it and she’s like “Well, give me the weekend and let me think about it, and maybe we’ll sign the papers on Monday.” I said “Carrie, you need to sell your house quickly, correct?” She said, “Yes.” “And you don’t wanna live here, correct?” and she said “Yes.” “And it’s stressing you out because the bills are expensive and it’s affecting your health, correct?” She said, “Yeah.” So I told the realtor, “Just get the paperwork, let’s get you listed today. The sooner your house is listed, the sooner your house will get sold”, and then we left with a listing contract.

That’s an example of me kind of listening to what they need, and then helping them make the decision that’s best for them based on what they tell me.

Joe Fairless: Got it. Lots of good tips. Anything else as it relates to the fanatically honest approach that we haven’t discussed that you wanna mention?

Garth Kukla: Well, there’s a term that I’ve kind of adopted in the last probably six months or so, it’s called being a truth-teller and a truth-seeker.

The truth-teller is all of what I’m talking about being 100% transparent. I’m not gonna buy your house, or if I am gonna buy your house, I’m just gonna resell it, I’m not gonna fix it up. But then there’s the side of being a truth-seeker. When you’re a truth-seeker – let’s say I’m talking to a seller and they’re saying, “Well, I need to downsize.” Well, downsizing isn’t a big enough reason to do a deal with an investor, so I have to seek out the truth. And often, for somebody to become comfortable enough to share the true reason, you have to build rapport. After you build rapport and you ask further questions, you can kind of drill down and find out “Well, they’re not really downsizing, they’re wanting to move because of medical reasons, or  a divorce, or their unemployment, or they’re $25,000 back on taxes and they’re about to get foreclosed on.”

Once you find those true reasons, then often you can also put deals together that maybe you would have passed on in the past, because you felt like the person wasn’t truly motivated. That’s a way where you can expand or grow your business or find more deals, because if solely you get off the phone with somebody because somebody says “I’m just downsizing” and you say to yourself “Oh, well they’re not motivated”, well, as a service provider you haven’t done them your service, because you haven’t found out exactly why they are downsizing.

Now, sometimes it is solely just downsizing, but more times than not it’s another reason, so being a truth-seeker allows you to find more deals, and also find better deals, and that’s important.

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

Garth Kukla: My website, www.tristatediscountrealestate.com. My e-mail is garth@tristatediscountrealestate.com, and my phone communication is on the website.

Joe Fairless: I really enjoyed learning about your approach, and if a  Best Ever listener is in a situation where they’re trying to close more deals as a wholesaler, or perhaps just in general as a real estate investor, just the approach of being truthful certainly is number one and we should all do that, but in addition, more tactically speaking, some things to do, like you mentioned – one, going into the meeting knowing information about them and providing one option based on what makes the most sense.

Two is just saying, “Yeah, we’ll probably just buy your house and then resell it”, and you mentioned it builds rapport really fast, because it breaks down the walls.

And then three is if you list with a realtor, you’ll probably get more money, and that cuts through all the BS. It’s like, “Okay, what do they really wanna do?” because then there’s no back and forth game on “Well, my house is worth this, it’s worth that” — yeah, it’s worth that, but you’ll have to do XYZ, or you work with us. And then the truth-teller and the truth-seeker…

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

Garth Kukla: Thanks, Joe.

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JF1398: How to Make A Real Estate Meetup Worth Attendees Time #SkillSetSunday with Troy Miller

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Troy is here today to tell us all about meetups. We’ll hear what a good meetup does, vs what a bad meetup does. He ran a REIA for years, now he is able to travel while working and is talking to us today from Thailand. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Troy Miller Real Estate Background:

  • Indirectly grew up in real estate with directly over the past 14 years
  • Works with REIAs, REIA Leaders, and Local/National organization to set a new standard in our industry
  • Developing the ways Real Estate Entrepreneurs connect/learn through a “Learn, Do, Teach” Education Model
  • Started Miller Construction in 1994 in remodeling homes and then moved into New Construction
  • Based in Cincinnati, Ohio

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

Troy Miller: Doing excellent, Joe. How are you today?

Joe Fairless: I’m doing excellent, and nice to have you on the show. A little bit about Troy – well, he indirectly grew up in real estate and has been in real estate for the past 14 years. He has a consulting company that works with real estate investment associations and real estate investment association leaders, and national and local organizations to set a new standard in how to engage their customers in a meaningful way… So our conversation is gonna be about engaging our customers – engaging whether it’s investor or whether it’s attendees at our meetup, or whether it’s people who are selling their house if we’re a real estate agent… Engaging our customers in a meaningful way, and also as attendees of meetups, being able to look at how we should evaluate if we should attend a meetup, because we’re gonna look at it from the other side of the spectrum. We’re gonna be looking at it from the people who are putting on the meetup. So a couple things we’re gonna be talking about today…

Troy is based in Fort Collins, Colorado, but he is not there right now. Troy, where are you?

Troy Miller: I am in Chiang Mai, Thailand, currently.

Joe Fairless: And what are you doing over there?

Troy Miller: Everybody talks about that lifestyle design stuff… If you are a Tim Ferriss fan — I stepped away from running a local real estate investor association in Colorado because I wanted to acquire that desired lifestyle, and have been able to take my consulting business on the road with me… So that’s what I’m doing.

Joe Fairless: Outstanding. So you’re basically doing it because why not, why wouldn’t you be doing it, right?

Troy Miller: Absolutely.

Joe Fairless: The question is why aren’t you doing it, Joe? Not why am I doing what am I doing… [laughs] Well, Troy, how about you give us a little more background on how you got to this point and what you’re focused on right now?

Troy Miller: Well, as you said, I’ve sort of indirectly been involved in this industry all of my life. My mother was a property manager and my father was a GC, both in Kentucky and Cincinnati area, similar to yourself currently… And from that, my background was in Arts Administration, and I worked with theatre companies around the country for several years; then I became a meeting and event planner for a [unintelligible [00:03:29].26] in Southern California, and that’s what sort of got me into the meetings and events industry… And I took a position with a national real estate organization doing planning and development for that, and I came across this wonderful place called [unintelligible [00:03:46].09] and I was sort of caught off-guard by it, because I had worked in some organizations that worked for the Cincinnati Apartment Association, I worked for the Kentucky chapter of CCIM [unintelligible [00:04:00].23] and then when I got involved with the real estate investor association, it was a completely different animal.  I just sort of sat back and absorbed most of that for a long period of time, and I was like “You know what, I really think that there’s some opportunity here”, and I sort of developed my professional development – I became a member of the American Society of Association Executives, and then also the Professional Convention Management Association. Those are organizations for other trade associations in other industries where you come and share best practices and talk about how to assist the end user…

And most organizations out there I feel are either for advocacy or to create a gold standard for their industry… And I sort of began to take that information back to real estate investor associations, and everybody, for the most part – and this may be just my own perception, but it just felt like everything was sort of status quo… And when I worked with organizations, they said “This is the way that we’ve always done it”, and I’ve always been somebody that sort of sits out there on the fringe, saying “Well, how can we make this better?”

Joe Fairless: Okay. As far as most organizations focus on advocacy or adhering to or helping reach the gold standard, how is that not like the real estate organizations? Because you’re saying other organizations, not real estate related did that, and then you were involved with some real estate organizations and they weren’t… Did I hear that correctly?

Troy Miller: Yeah, and when I started working with real estate investor associations, most of the organizations I worked with were not for profit organizations – 501(c)(3)s, 501(c)(6), and most of the REIAs that I came across were more for-profit organizations. So the people that were creating these organizations were generally product and service providers in the industry that were creating a lead generation for themselves… So then I began to understand that there was some intent or there was an intention behind just exactly why they were providing this service for their tribe or their group of people surrounding them.

Joe Fairless: Okay… So other organizations not trying to make money on the people, real estate organizations trying to make money on the people who attend, and that’s a main complaint that a lot of people have who attend real estate meetups – it’s just a pitch fest and/or they don’t focus on what is relevant to me as an attendee… So you identified that issue…

Troy Miller: And I would say that another complaint that I hear with real estate investor associations is that there are products and sales at most turns, and there are two sides to that… I think that, for one, a friend of mine in Knoxville, Tennessee told me, he said “Nothing in this industry is free” and he said that “Education without action is nothing more than entertainment” and he said “It takes $25 to go as a guest to your local meetup, on average, and if you’re not gonna do anything with that, 1) you should take that $25 and go to a movie and get yourself a ticket and some popcorn and be entertained…” But there are a great deal of people in the industry that aren’t going to take the action necessary to do that.

So what I’m saying here is that good information is worth the price that you’re going to pay for it… However, I think that there’s  another side to that, that with the education, especially now, I think that you really have to understand what the end user is looking for, and for the most part, I think a lot of the information out there is very general, and mass appeal to people. I call it sort of like “the box store approach”, like your Walmart or Target – you’re simply just gonna put all of your wares out there and let people pick and choose.

But I think that we have evolved as, for example, the adult learning model. When you go to an education platform or go to a meeting, you’ve got different generations of people in the room, and you’ve also got different learning styles… And then on top of that, in our industry you’ve got people investing at all different types, so what they’re really looking for is not necessarily just the education, but they’re also looking for some sort of consultancy. So I think that there is an opportunity to begin to change the way we deliver and present information so that it’s not just blanket presentations, it’s not just the sage from the stage, but it’s a conversation.

For example, look what’s happening in social media – the way that we engage and interact with each other has changed dramatically with social media… So when you got an event, you’re often called an attendee, and I would rather call you a participant, and I would like the person from the front of the room to be guiding the conversation and then we as a room or we as a community having a conversation around that to bring up 1) the quality, bring up the delivery of information and create these best practices, and then begin to hone in on what are the needs of the room versus simply delivering information because you think that is what is needed.

Joe Fairless: I certainly agree, and the challenge – and this is probably why companies or individuals who are putting something on hire you – is to be able to structure that in a way that generates engagement while it also doesn’t create madness… Because what I heard you say is — and by the way, as we’re flowing through our conversation, it really sounds like people who are putting on events, we’re talking about ways to maximize engagement and get the best experience for the attendees… So really, that’s the primary person that we’re talking about. Anyone who has a meetup or puts on a large conference or wants to put on a large conference, or maybe can have suggestions for the meetup they attend, then this is really who we’re talking to.

Now, as far as what I heard you say is that it shouldn’t be a presentation, it should be a conversation. Instead of having mass appeal, it should be specific to those in the audience… How do you plan for that as a meetup organizer?

Troy Miller: Well, I think that there is a substantial amount of vetting that should take place before the event even starts. An event that I’m working on right now, we’re about two months out from the event and we’re already doing a substantial amount of vetting and creating criteria, not only just for the speakers on the stage, but also attendees, as well.

We have criteria that we have created around what we need our speakers, our experts to be knowledgeable on, what we want their background to be, and we’re also having them go through a criminal background check because we feel that it sets a precedent that has not existed up until this point. And the same thing from the attendee. And with this vetting, we feel everyone will be on the same page in terms of the playing field.

Joe Fairless: Criminal background check for attendees?

Troy Miller: Correct.

Joe Fairless: Wow, I like it. Okay. What if you have a misdemeanor?

Troy Miller: They’re all criminal.

Joe Fairless: Wow, alright…

Troy Miller: And we feel that that’s going to really step up and change the way that we do business. As a participant coming into this and knowing this, it should make you comfortable that there has been a substantial amount of due diligence done, knowing that the people that you’re gonna receive information from and also the people that you’re going to be participating and networking with have all been through the same screening that you have.

Joe Fairless: Okay. So you’re doing planning. One is just a background check, but that’s probably a bullet point of the overall thing… In terms of the planning, what are you exactly doing to make it not madness?

Troy Miller: Well, from there we have identified a pain point… What is a pain point that the participant is currently dealing with in their local market, and one that happens to be is that the event will be in L.A., and a lot of investors are having a hard time investment opportunities that make sense for them. So we have identified five key markets within the United States that make sense, that are becoming emerging markets, and we’re going into those emerging markets and identifying with our criteria in mind market experts, who not only know the market by the numbers, but also either have clients or are investing themselves actively in those marketplaces, doing our own due diligence on them, and then bringing them to the stage.

Then before they even make it to the stage, we’re doing  a slow drip of content and information to prime the participant so that they’re not coming into the event itself cold. They’re being warmed up with information and engaging with the speaker ahead of time, so that the conversation begins even before the event. About 5-6 weeks out they’ll begin to have that conversation. Then when they come to the meeting, there’s an expectation that this event is a business place, it’s a marketplace… So while they have time to sit and listen to presentations and participate in discussions, there will be time for face-to-face meetings between the participants and the speakers as well. So you’ll get one on one time with every single speaker that happens to be across the stage.

There you get to talk about what your strategy is in terms of investing and how the informations they provided connects to you and creates that relationship so that they can come back to after the event… And then following the event, the attendee will have a chance to, in this instance, since it is an out of state investing summit, the attendee will get to either participate in a webinar or be invited to the local market where the attendee will get a live property tour of some of the information… So they’ll see the information in action should they choose to.

Another thing about this is that it’s sort of a salad bar approach, so that the attendee can pick and choose what they choose to engage in. They can either listen to the presentations, they can just directly to the meetings, they can also take advantage of the call to action at the end and participate in the local marketplace… So not only will there be multimedia, but you’ll learn a little bit, you’ll do a little bit, and you’ll actually be able to walk away and do this on your own, which for the most part I feel doesn’t truly exist in the marketplace because there’s always the up sell to the next level, either to the home study, the course, the mentorship. Here it’s about giving you the information and vetting that information, doing the due diligence up until the point to get to you, then letting you decide what’s important to you and letting you take action on the things that make sense to your business.

Joe Fairless: And you mentioned not a presentation, it should be a conversation, earlier… It sounds like that’s really in reference to the macro-level approach to the event, because as you mentioned, there’s a lot of different ways you can have that dialogue with the speakers, but then also there is a presentation by the speaker… So just so I’m clear – they are actually presenting something at a certain point in time, but then you can also have a conversation with them before or after… Is that right?

Troy Miller: Well, the conversation before, but at the actual event there has to be some sort of priming to set the stage, to begin the conversation, and after that is done, then you can sort of format it so that the attendee is taking that information and digesting it by either going through case studies and having them go through case studies, so it’s real-time, so that they’re either working in groups, so that not only are they just processing information themselves, but they’re having a conversation with like-minded individuals who are also participating in this around the information, and then they’re taking that information back to the front of the stage… So it’s a nice ebb and flow of participant to presenter, back to the participant.

Joe Fairless: Got it. And that comes in the form of the information that is sent out prior to the event. But just so we’re speaking apples to apples, there are speakers at the event and they present – true or false?

Troy Miller: True.

Joe Fairless: Okay, got it. So there are presentations, but then it’s packaged around conversations and kind of an evolving dialogue – is that accurate?

Troy Miller: Absolutely.

Joe Fairless: Okay, I’m with you now.  I was like, “Well, there has to be presentations…” – okay, there are. It sounds like the selling from stage – there is not selling from stage; instead, it is participate in a webinar or do a live property tour in that particular market afterwards.

Troy Miller: Yes, absolutely. I think the level at which I’m developing content, – I would say not for the beginner investor; this is focused at more of an intermediate to experienced investor that actually has or is in the trenches and has a few deals under their belt and they’re wanting to elevate their business to the next level, or they’re simply wanting a trusted and safe platform where some due diligence has been done, in this particular instance – and I keep going back to this, because this is the project that I’m currently working on… But at this out of state investing summit, the participant – if they were to do this legwork on their own, they would literally have to go out to the marketplace, travel there, and then try to attempt to find all these resources… And what we’re doing is by doing the legwork for them and bringing all of these resources in one centralized location to save them both time and money, and more importantly, the time… Because I think most seasoned investors, the most important resource that we have, far beyond money, is time.

Joe Fairless: I agree. Absolutely, 100%. For an investor who is putting together a meetup and they are looking to replicate this approach, what are some tactical suggestions you have for him or her?

Troy Miller: Well, I recall there was a pretty well-known national podcast that did an event on how to start a REIA for a lead generation. I saw it on social media, and I commented and I said “Let me tell you 100 reasons why I think this is the most affordable idea possible.”

Joe Fairless: Huh!

Troy Miller: [laughs] …because it is the most over-saturated thing that’s currently happening out there across the country. I see this both in Colorado, and I see this across the country – it’s all just lead generation, and if you are going to start a real estate investor’s association, I think there has to be a little bit of altruism, a little bit of holistic sense that what you’re trying to do is make things better for the community, not just for yourself… And there has to be, obviously, a leader that is gonna take the time to do the vetting.

And this is a really good point as well –  I often hear people wanting to make recommendations or put people in front of the stage, because somebody did something for them and they’re simply returning the favor… And I think that it is paramount that if we’re going to make a recommendation, that we literally have to sit down and understand what the end user’s wants and needs are.

For example, I was looking for a speaker for an event, and I asked a colleague of mine and he gave me  a list, and when I started to do my due diligence, it was clear that he had absolutely no clue what I was looking for, and simply because these people that he recommended to me had done a favor or had done some business with him, he wanted to help them out… But the thing was I was asking for the recommendation, and he wasn’t nearly as interested in what I needed versus how he could help them out… And I think if you’re going to start this type of organization, I think yu have to sit down and put your interest and your intentions to the side and say “Do I really wanna help people, or do I simply wanna build a business and create a lead generation tool for that business?”

Joe Fairless: Absolutely. Thank you for sharing that; it’s a powerful point, and it’s a point that will have major impact for everyone who has a meetup or is going to create one, because “Service to many leads to greatness” – I think it’s a Zig Ziglar quote, or someone like him, and I whole-heartedly believe that. How can the Best Ever listeners get  in touch with you?

Troy Miller: My e-mail is tmiller@reiaconsulting.com.

Joe Fairless: Good stuff. Well, as real estate investors, as you mentioned, prior to starting a community, a meetup, we need to make sure that, well, it’s recommended, that we have some altruism there quite frankly at the forefront to make things better for the community, put the community’s interest at the forefront, and then we will benefit in the long run. Tim Ferriss talks about playing the long game.

Some tactical things that you’re doing with the event that you’re working on to deliver on that is a criminal background check – no one can have any crime whatsoever; by the way, for the record, I’ve never been arrested, I don’t have a crime, I was just curious about that.

Secondly is solve a pain point – you have structured that event to solve a pain point that people in Los Angeles have, and then approaching it accordingly with the speakers and the flow of the content. Give them content leading up to the event, that way they don’t come into the event cold, and during the event have time for face to face meetings… And ultimately, have it be a conversation, a dialogue, not just a static talking to them; you’re talking WITH them, and however you can structure that that best suits your format, then go ahead and do it.

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

Troy Miller: Alright, thanks, Joe. Have a great day.

Best Ever Show Real Estate Advice

JF1340: Can Your First Investment Be An Apartment Community? #FollowAlongFriday

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Joe and Theo are back with weekly updates, what they learned, and how the lessons learned can apply to us. We also have a listener question asking about jumping straight into large multifamily. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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

We’re doing Facebook Live, but that’s not the word I was looking for… We’re doing Follow Along Friday, for everyone who is watching us now via Facebook Live, hello. Feel free to comment below. And if you’re listening to us on the podcast, then hello as well. Today we’re gonna be talking about things that we’ve learned since the last time we did Follow Along Friday – approximately a week ago – and how those lessons can be applied to what you’re doing, Best Ever listeners.

So how do we wanna approach this, Theo?

Theo Hicks: Before we dive into our business updates, we had a really good question come to us from a Best Ever listener named Mike. He actually started off by praising your podcast, multiple paragraphs doing that, so I thought that was cool; we appreciate that, Mike. And his question was what your thoughts are on starting out as a single-family investor, or if you’re able to jump straight into larger apartments?

I’ll read his exact question first, and then I figure we could have a conversation around it and get your thoughts on this question. So Mike says “I was wondering your opinion on real estate investing – if you could go back, would you have gone into multifamily investing sooner, or do you think it was a good idea that you had a few single-family residences under your belt first? It just seems like all the successful investors end up in large multifamily eventually.”

Joe Fairless: Cool. Well, I’d say I think how you paraphrased it initially is slightly different, but the slightly part is important, from what he asked. I think how you’ve paraphrased it was “Should people start in multifamily or single-family?” but what he asked was “If I had to go back, what would I do?” and most times when you ask someone “If you could go back and do XYZ differently, would you?”, unless they murdered someone, they’re probably not going to say “I’d like to do it differently”, because they’re probably gonna follow up with “Because if I did do it differently, then I wouldn’t be where I’m at today…”, unless just Armageddon happened in their business and/or personal life, and then that’s another thing. But for the most part, if you ask someone “Would you do it differently?” you’re gonna get an answer “Well, but then this XYZ wouldn’t happen. I wouldn’t have met my wife”, or “I wouldn’t have my child” or in my case, “I wouldn’t have the portfolio that I have with our partners, because I didn’t follow the same process.”

So for the gentleman who asked the question, I’ll answer your intention behind the question, but just a comment about the way that was phrased. So now to really how you paraphrased it, I think that’s more relevant… Because I wouldn’t change what I did, for the reasons I’ve just said.

So is it better to start with single-families versus multifamilies, or is it better to start with multifamilies over single-families? The answer is yes, and I answered yes to both… [laughs] I don’t think it matters. I really don’t, because I’ve gotten to where I’m at starting with single-families. I think it’s  a tactical question, and really it is side-stepping the core of what sets us up for success as investors, and that is improving ourselves on an ongoing basis, learning from what we’re doing, and continuing to grow and expand. I know that sounds not vague, but esoteric, but it’s just how it is. And if that’s not the answer that you’re looking for, then sorry. That’s just what it is.

I can tell you I’ve gotten to this place — yeah, I started out with single-family homes, but I was also teaching others after I bought a couple in New York City, who were asking me “How the heck are you doing this while having a full-time job?” So I started teaching others and I started learning through teaching. Everyone learns more, it reinforces the content whenever we tell others about it.

Then I grew from there, and I got this podcast – a daily podcast – learned a whole lot… Yesterday was my interview day – holy cow! Full transparency, sometimes I get annoyed and worn down on interview day. I mean, I interview 8 or 9 people a day on my interview day, but yesterday in particular I just got phenomenal lessons interview after interview.

I interviewed someone who got a 10-unit off-market through a direct mail campaign; he went through how he did that. I interviewed someone who is in Louisville and his company builds multifamily developments using tax credits. I interviewed someone who went bankrupt and now is doing over 15 million dollars worth of development, he’s doing a 200+ bedroom community for student housing in Upstate New York… Tons of interviews.

The point is that if we don’t have a podcast, then it’s still learning. So coming full circle, to answer the question directly – either one. I don’t think it matters, as long as you’re learning the whole time and you’re improving each step of the way. Because here’s the thing – I think the reason why this question is asked – and I understand the question, why we would ask it… It’s “Hey, I want to get farther faster”, but the reason why it’s asked is because “Is it gonna take me too long if I start at single-families to make a whole lot of money with larger stuff?” That’s basically another way to rephrase the question. “Am I losing out? Is there an opportunity cost with me buying single-family homes when I could have started larger and made more money in a shorter period of time?” That’s the question. And I don’t think there is a disadvantage because of what I’ve done starting with the single-families (four single-families and no large multifamily). So those are my thoughts.

Theo Hicks: I agree. I think when I was looking at this question, I think at least from my perspective the key point is kind of where you’re at right now in your life is gonna tell you — not what you should do or you can do, but what would be the most effective. If you just learned about real estate yesterday, then you’re probably not gonna be buying an apartment as your first deal, if you wanna do a deal very soon.

But if you’ve been listening to podcasts for months or for years, if you’ve been involved in real estate in some other capacity, whether you’re a broker or if you’re raising money for someone else… Like, the guy that hopefully you buy an apartment with, his first deal is gonna be an apartment, but that’s because he’s educating himself on apartments, he has a podcast about apartments, he’s raised money for apartments before… So yeah, I guess technically you can say he’s done a deal before because he raised money for apartments, but my point is it kind of depends on where you’re at.

For me, I didn’t know anything about real estate at all when I bought my first building, and everything at the time went very poorly, and I’m really glad that it happened on a small building, not a 400-unit apartment building.

And of course, I’m not necessarily sure if he’s asking about doing an actual syndication deal or using his own money to buy an apartment, but that’s also another issue. If you’ve never heard about apartments before but you’re a multimillionaire through other reasons, then an apartment could be something that’s on your plate, but if you’ve never heard of it before and you’re in college and you have no money, obviously you could potentially raise money from someone else, but that takes time to build up your pipeline of investors and your credibility in general.

I think it’s important, as you said, where you’re at education-wise, experience-wise and money-wise, to determine what would be the best bet… Because at the end of the day – at least this is how it was for me, but my first deal went so poorly I was afraid of doing another deal for a year or two, because of how bad it went… Because I jumped right in, and it’s not necessarily that I went above my capabilities… It was just kind of a shock, because I was not expecting it, because I had unrealistic expectations going on. So that’s kind of my thoughts.

Of course, your first deal could be a large apartment, but it’s probably not gonna be a large apartment if you’ve just heard about real estate yesterday and you have no experience and you don’t really know anyone.

Joe Fairless: Yeah, I’m gonna assume this individual didn’t hear about it yesterday. Most people who listen to the podcast didn’t just hear about real estate yesterday… But I’m gonna assume they have some baseline knowledge, but they haven’t pulled the trigger on anything, but they’re fairly intelligent about the lay of the land…

I’d say I agree with you on the experience, money and — I forget what was the third thing you said.

Theo Hicks: Credibility I think is what I said.

Joe Fairless: Credibility, yeah. I think most important – and this gets into the esoteric thing that I talked about earlier – is your psychology; where are you at from a psychological standpoint? How tough are you? How tough is your mind? How do you handle adversity and how have you handled it in the past? Are you really ready for it? Because I guarantee you that if you are starting larger, that’s fine, but the problems that you’re gonna come across from a mindset standpoint will be proportionately larger than if you started with a single-family, because you’ve got more money at stake, and there’s different components that are needing to be addressed. Management is more of an issue, maintenance, you’ve got more people under your roof… So be self-aware with yourself on how you are psychologically, because Tony Robbins talks about it’s 80% psychology, 20% skill. I agree with that. It might even be 90% psychology, 10% skill. Somewhere in between, or somewhere around that range.

And first off, if you’re asking a question via this podcast, then you’re well on your way, because you’re already elevating yourself above the crowd because you’re listening to this podcast. It’s not because you and I say anything novel, it’s just you’re conditioning your mind to learn more, and that’s great. So it’s likely you do that in other things in your life as well, that’s my hypothesis.

So do a check on your psychology, perhaps do the Perry Marshall exercise in the book 80/20 that Perry Marshall wrote. That exercise is where you ask those who are around you your unique skillset, and then they’ll tell you what your uniquely good at. And if they don’t mention “Hey, you do what it takes, you’re resourceful, I can count on you to get things done”, if it’s something else like “A really nice guy/gal, really good with numbers’ – that’s good stuff, but if they don’t mention something that is at the core of “Hey, you’re just gonna get things done”, then maybe start out with the smaller stuff, or maybe work on yourself first before you buy anything.

Theo Hicks: I think that’s a very good point. As you say, it’s kind of hard to measure how well you handle adversity, but I like how you said “How have you handled it in the past?” Because I can say right now that “Oh yeah, I’m great at handling adversity”, but you’d say “Well, how do you know that, Theo?” and if I don’t have any evidence in my past of me going through it, then you really don’t know what’s gonna happen when you face challenges.

If you would have asked me before I bought my first property how I’d face adversity, I’d be like “Oh, dude, I played sports back in school, and worked out and didn’t stop”, things like that; I would have been like “Oh, I faced adversity really well”, and I would have been tricking myself, because once I faced real adversity at my real estate when money was on the line… I guess that’s key, too – how do you face adversity when there’s actually your own money on the line? How do you react to that? For me, I reacted very poorly.

Now, I went through that, I’ve kind of reflected on it, and now I’m self-aware of what I can handle, which is why I’m going to make sure that I’m just outside my reach for not extending so far that I have some sort of psychological meltdown… But what you said I think is very important, and I think it’s hard to measure, and a good way is, yes, ask other people. Don’t say “How do you think I’d handle adversity?” because they’re probably gonna say “Oh, you know, you’ll handle adversity great”, because they’re your friend… You’ve gotta ask them, as you’ve said, “What are my strengths?”, so they’ll be more honest.

And then also evaluating your past and see how you handled adversity in general, but also how you handled adversity when you’ve had money on the line in some form or fashion.

Joe Fairless: You texted me a couple days ago – we won’t go into details, but you texted me and you said “Hey, I need some help with some stuff.” We got on a call, and my main message was “Anything that comes up that is seemingly negative, the question we always ask ourselves is how can I use this?” How can I use this so that I am better off because it happened?

One of two approaches there – one is you use it so that you truly are able to leverage that experience and it was actually a really good thing that it happened, because it took you on a different direction or you’re building on it, or another thing – it kind of sucks that it happened, but you learn from it, and now you know how to mitigate it from happening again as much as possible, and that sets you up for success in the long run, because then you attempt to not repeat the same things that transpired. If we have that mindset when stuff goes down, then that’s setting us up for success and that’s the approach that I always take when adversity hits.

Theo Hicks: Yeah, and in that particular situation you were talking about when I asked you for advice — my point is when something happens, like you have some type of negative event happen in your life, the root of it is most likely not the thing that actually triggered it; it probably goes back a couple of months, a couple of years, even maybe for this particular situation there were decisions I made months or years ago, kind of like led up to the point I’m at now… So once you kind of resolve that problem, you fix all those problems from the past year, now you know like “Okay, identify where this all began… Now I’m moving forward, and if that occurs again, instead of doing it the way I did it before, I can do it differently and if nip that problem in the butt now, so that in a year from now I’m not facing the exact same problem.”

I know that’s very vague, because I’m not necessarily giving a specific example, but that’s kind of what I did, I’m reflecting on the situation that I had [unintelligible [00:15:47].27] It was just about some relationship issues with a real estate agent and another real estate investor. But now it worked out perfectly, the issue is resolved now, and if we can transition into our updates now and I can talk about the direct mailer and things like that, if you want…

Joe Fairless: Yeah, last point and then let’s move on… The decisions that were made a couple of years ago or whatever, that you decided to change – you did it in an instant, right? Tony Robbins always talks about that; you can make all these decisions years ago, and then that’s led you to all this stuff that you’re doing now, but you make a change  in an instant; he always snaps his finger to make that point. And when you make that change in an instant, then it changed your whole trajectory.

That’s something to keep in mind for all of us, myself included. We are programmed  just to go through life in certain capacities, in certain areas of our life, but if we really stop and think about “Hey, when did I decide to act this way? When did I decide to think this thing?”, then when we are conscious about it, we can change it in an instant. Alright, sweet. Let’s roll.

Theo Hicks: Alright, so [unintelligible [00:16:53].16] The advice I had for you was on the direct mailing, and I’m going to continue to use the agent where I’m gonna give her the go-ahead today to start preparations for the second mailer. Something that I learned from evaluating these deals, and I’m actually not sure why I wasn’t doing this before, but there was one deal that I was looking at that if I had done my underwriting in a way that was doing like a five-year projection or a ten-year projection, I probably would have bought the deal… But for some reason, when I was underwriting the deals, I was just looking at it as if “Will it meet my return expectations from day one?”, which obviously is not what you wanna do.

Joe Fairless: Ow…!

Theo Hicks: I’m looking at deals and I’m just like “Well, this is a 2% cash-on-cash return at this purchase price and at these rents.” Now, it is true that this particular property I don’t think that the rents could be raised that much, but if they were raised, it would have made a little bit more sense. I think my point is I should have done further investigations. The deal is gone now, so it is what it is, but moving forward when I get these deals, I’m gonna use a new cashflow calculator, and input information so that I have obviously the day one, year one cashflow, which is what it is when I’m buying it, and then have a plan of — whatever my business plan is, and then inputting that in there as well.

For some reason, there’s a disconnect, because when I’m underwriting apartment deals – obviously, this is what I do, but there just was a disconnect between that and these smaller buildings, for some reason, in my mind… And I just realized when I was taking my dog for a walk this morning, I was like “Wait, what? What are you doing, Theo? You shouldn’t be doing this.” So I’m glad I learned that lesson and I’m going to apply that moving forward.

Joe Fairless: People ask about the cap rates that we’re buying properties at, which is a relevant question, but the more relevant question is “What’s your business plan with the properties that you’re buying? Can you tell me about the business plan?” Because cap rates just show what cashflow you would get if you were to buy it all cash, based on existing financials, but it does not show the business plan results whenever it’s implemented, and that’s really the question.

I mentioned this at the Philadelphia conference, Dave Van Horn’s conference – phenomenal conference, by the way – where I did the keynote, and I used this example where I’ve got an investor who invests in Manhattan, and the group he invests with there buys buildings at two caps. At first, he’s like “What the heck? Two cap? I don’t think so, buddy. I’m not investing with you!” But then this group has a way to generate really good returns because of the business plan, and basically the business plan is renovating units, like we do, but they purchase rent stabilized properties and [unintelligible [00:19:42].16] at the property where the rent-stabilized tenant is giving his/her lease to someone else. I think there’s some type of electronic key card and some other stuff… I’m not familiar with this business model as much, but the point is that a group in New York – and I’m sure there are many groups – buying at two caps, but generating pretty healthy returns, and it’s because of the business plan.

The same with your example – and you know this, but just kind of summarizing – if you’re looking at what it will generate right out of the gate, well, it’s necessary to know, but if we’re long-term investors, and even if we’re not, if we’re buying for like five years, I still think we should 1031 from that… It’s more important what’s the annualized projected return over those five years.

Theo Hicks: Exactly. So I’m gonna take my existing cashflow calculator that’s just one year, very basic, simple model, and I might just put a 30-year and have a snapshot around the 5-year, because what I was doing before made zero sense. And as you said, as investors, we’re adding value to these buildings and that’s kind of how we’re rewarded with these rents, and if you’re not taking that into account, you’re gonna have a hard time finding a deal that’s meeting your return expectations from day one, if your return expectations are based off of adding value. So yeah, I’m glad I figured that out when I was taking my dog for a walk this morning.

Joe Fairless: Because there’s an art to underwriting, and a lot of investors don’t recognize that. There is an art to how you see value and what you can create in an apartment community. I think that’s one area that my company excels at – identifying where value is, and having the right team to execute on it.

If we were to just do those year one numbers – and I’m not beating a dead horse; or maybe I am, but I’m just kind of illustrating a slightly different point, but on the same subject… If we were running the numbers just on year one, then we’re competing against all the other investors who are running the numbers on year one, and we’re basically all arriving – or most of us arriving – at the same point… Whereas if we see a different vision for the property, then we can arrive at a slightly different location with terms and price, and make probably more money than those who were running the numbers the other way, because we’ve actually got a business plan that we’re gonna execute.

Theo Hicks: Exactly.

Joe Fairless: Sweet.

Theo Hicks: And then another update – I’ve got my next meetup group tonight, and I’m really excited about that.

Joe Fairless: Alright. Is that a local town hall thing, or what?

Theo Hicks: No, it’s actually funny… I made another mistake, because my last meetup I changed it to a brewery, and I mentioned how I didn’t confirm with them the night before that they would be there, and so I show up and I have all these pizzas, and the doors are locked… And I basically mentioned the person, like “Hey, I’m here. What’s going on?” and I don’t get a response for like ten minutes and I’m just sitting there, freaking out… But of course, she ends up messaging me saying “Hey, he’s inside. He’s preparing, and will be there…”

Joe Fairless: Who’s he? Are you talking about the person at the…

Theo Hicks: Yeah, the person that owns the brewery, yeah.

Joe Fairless: Okay, got it.

Theo Hicks: So at the end of the meetup I confirm for the next month, “Okay, we’re gonna do it again on this day, and it’d be cool for you to come.” They’re like “Yeah, sure. It’s so nice that you’re doing this.” So I go to confirm last night, which I should have confirmed last week or multiple weeks ago… But they’re not in town for the meetup, so the venue basically canceled. And I’m sitting there, I’m like “Well, this is kind of annoying”, but fortunately I did my first meetup at a restaurant, so I had a backup plan automatically and kind of changed the venue, but… Again, that was just kind of an example of — probably a couple years ago I would run around the house in circles, but I just sat there…

Joe Fairless: A brewery is not open on a Wednesday night?

Theo Hicks: Yeah, so they’re actually only open on Thursdays through Saturdays, just [unintelligible [00:23:41].25] So they weren’t even open on Wednesdays; they planned on coming just for us… But they just happened to be out of town. I think it was just miscommunication.

Joe Fairless: Alright, got it.

Theo Hicks: But yeah, I messaged them and just like “Oh, no…! Of course!” So I’ve got 14 people signed up, we’re gonna meet at a restaurant, and it’s gonna go great and I’m looking forward to seeing everyone again tonight. It’s just a real estate meetup, it’s very similar to the one that you host in Cincinnati.

Joe Fairless: And for anyone who has not attended, which is the majority of the people who are listening, high-level what’s the structure?

Theo Hicks: You show up, if it’s your first time, you give an introduction, explain what you do… For both of my meetups, everyone’s brand new, so it happened both times. Then you explain what your outcome is for attending this meetup; I got that question from you and I really liked it, because I want the meetup to be very outcome-oriented.

Then we’ll go over any needs or wants, so if someone has a question on a deal they have, if they have a general question of “How should I get started?”, we can do that, we talk about that as a group. Then if you came the previous week and you set a goal, I have a Facebook group that you’re gonna post it to, and you’ll give an update on your goal, and then if you have any questions or need advice on that, you can do that.

The goal is to have that be the first 15-20 minutes of the meetup, that way everyone knows exactly what everyone else does, so when we break apart into just kind of freestyle networking, people know who to go to, that they have similar interests, they’re doing similar things… And that seems to work our and result in – basically, from my past two experiences – the best and most fruitful conversations… And afterwards, everyone’s like “Oh, Theo, thanks for putting this together. I really appreciate it. I’m learning so much.”

I’m not sure about your experience, but the majority of people that come to these things – at least starting out – there’s a couple of people that have a lot of experience, but most people haven’t done a deal yet, so I think it’s really cool to see that, because I see myself in a lot of those people when I was first starting… And I just explained to them, hey, you’re giving they advice that they just obviously don’t know, and it’s fun to do and I really enjoy it.

Joe Fairless: That’s cool. Well, congrats on that, and looking forward to hearing how it goes.

Theo Hicks: Awesome. And then this last quick update on the rentals, my three four-units. We have two units that are vacant right now; one of them we’ve almost secured  a tenant for… We’re just kind of going back and forth with the background checks, and stuff.

We’re having some issues renting the other one-bedroom unit, because we have it listed at $685, but there’s another unit that’s for rent – not on the same street, but close enough, for $575… And so we think that that might be one of the reasons why we’re having issues getting it rented, so we’re gonna lower the rent, lower the listing down to $625 to get it filled.

And there’s a couple other things why I don’t think it’s getting rented that I will have to address with my property manager, but we’re gonna be talking about that…

Joe Fairless: Real quick, can you…? Just real quick, what are they?

Theo Hicks: It’s another silly mistake on my end… The unit was occupied by a heavy smoker, and we refinished the hardwood, we repainted the walls, and I was told that the cabinetry and the toilet and the other objects in the unit were fine, they weren’t that dirty, and then when I looked at the listing and saw the pictures, they were all obviously–

Joe Fairless: Got the yellow?

Theo Hicks: They’ve got the yellow, so we need to repaint it or replace it, because no one’s gonna wanna live there with them like that. So I think that’s why it’s not being rented out. I just noticed that a couple days ago, so I’ve reached out to my property manager and we’re gonna get that addressed. It’s not gonna be anything too expensive. We’re not gonna have to replace the cabinets, we’re just gonna have to paint them… Because they’ve been painted before.

I don’t think it’s a smell issue, it’s just an aesthetic look issue, especially with the super pearly white walls that we just painted, and then you’ve got the contrast of the stained yellow cabinets, so…

Joe Fairless: [laughs] It’s gross.

Theo Hicks: It’s gross, yeah.

Joe Fairless: Yeah, you’ve gotta get that replaced or painted.

Theo Hicks: Alright, that’s what I’ve got. What about you, Joe?

Joe Fairless: And you have 12 units, right?

Theo Hicks: Technically 13 now, because of that single-family that we have.

Joe Fairless: Okay. That single-family aside, you’ve got 12 in a little cluster, and two of them are vacant, right?

Theo Hicks: Two units are vacant, yeah.

Joe Fairless: So you’re at 83% occupancy.

Theo Hicks: Yeah.

Joe Fairless: Are you concerned about that?

Theo Hicks: Not really…

Joe Fairless: How come?

Theo Hicks: Because I know they’re gonna get rented, and I’ve already raised the rents on other units, and they’re not necessarily making up for the loss in rent that I’m getting, but overall I’m still cashflow-positive, I’m not losing money. Of course, I’d prefer they were all rented, but it hasn’t even been a month yet, and I’m very confident that they’re gonna be rented by June 1st or probably by the next couple of weeks.

Joe Fairless: Cool. And you’re in the middle of the business plan too, because you acquired them less than a year ago, right?

Theo Hicks: Yeah.

Joe Fairless: Cool. Alright, what we’ve got going on – we’ve got (I had to do the math) 890 units under contract right now.

Theo Hicks: Wow…

Joe Fairless: One 564-unit and one 326-unit… All of them were off-market deals through either broker relationships, or relationships that we actually had with someone who found the deal and then wasn’t able to close on it, because they didn’t have the ability to. So we had that relationship with them, and now we have 890 units under contract, so I’m excited about that.

We’re closing — we’re in May now, so we’re closing next month. As you can imagine, that’s taking up my primary focus. For all those deals, all the equity is spoken for. It’s actually been a little — shocking and surprising aren’t the right words, but those are the first two that came to mind, how quickly it was spoken for, the equity… I don’t know if my business has reached a tipping point with investors based on our track record and this podcast growing and other things, but for both of them — and combined it’s 24 million in equity, and it took in total for that 24 million… Seven days total for 24 million dollars in equity. So I’m not sure if that’s a sign of things to come, or if it was just pent-up demand, or… We did some refinances on one of our deals in particular recently, and that was a pretty good one, so we got a lot of investors rolling that into these deals, but it’s a far cry from when I first got started, or even not when I first, but early days after the first deal, when I was messaging people on LinkedIn who lived in Houston, who I hadn’t spoken to in ten years, that I have an apartment building, I’d love to connect with them again and talk to them about what they’re up to, and “Oh, by the way, I’ve got a deal…” [laughs] And that didn’t work at all, by the way, so don’t do that. That was not effective. I literally did not get one investor from that, although they should have… They definitely should have; that project has turned out really well.

So it’s gratifying to be in that position now. Again, I don’t know if that’s a sign of things to come for future deals, or if these deals were unique, or what, but I certainly have a lot of gratitude towards where we’re at right now.

Theo Hicks: Do you have a general number, or if you can be specific – that 24 million dollars in equity was raised across how many investors?

Joe Fairless: On average I’d say investors invest $200,000 or so, whatever that is. I’d have to use a calculator, it’s not my Microsoft calculator on my — so what is it, 24 million divided by 200k?

Theo Hicks: 120.

Joe Fairless: Yeah, so approximately 120 investors.

Theo Hicks: And in your first deal, how many investors did you have?

Joe Fairless: 12.

Theo Hicks: That’s awesome.

Joe Fairless: And they are part of that 120. All of them didn’t invest on these last two deals, but certainly a large percent have on these last two, so it’s been great.

Theo Hicks: Then you mentioned that one of the deals you got through a broker relationship obviously, but the other one you said you got it through someone who couldn’t close themselves… Was that another investor, and how did they find you? How did you find them?

Joe Fairless: It was through Frank’s friend. She knows someone. So follow the breadcrumbs a little bit… But Frank’s friend, who he knows through (I believe) his time at Bucknell; he was a civil engineer major, and I think he knows her through that… Or maybe it’s their alumni network, I can’t quite remember. But anyway, she knew someone who got this property under contract, and tied it up at a ridiculous price per unit, and wasn’t able to follow through on it… So we said, “Yes, please. We can do that”, and ended up putting ourselves in the position that now we’ve got it, and moving forward.

Theo Hicks: And actually really how important it is to let people know what you do… I can’t remember exactly the context that this came up. We were talking maybe on last week’s Follow Along Friday about letting people know that you raise money for apartments or that you invest in apartments or that you’re in apartments or in real estate – that way a year from now or a month from now or tomorrow or that exact same day someone has some sort of person or deal for you, he’ll bring it up, and if they don’t know, then you don’t know how many opportunities you’re missing out on.

Joe Fairless: Yup, absolutely.

Theo Hicks: What else have you got going on, Joe?

Joe Fairless: That’s it.

Theo Hicks: Awesome.

Joe Fairless: That’s my primary focus.

Theo Hicks: Well, congratulations – that’s 800+ units under contract; that’s impressive. Alright, so just to wrap up, make sure you guys join the Best Ever community on Facebook (BestEverCommunity.com). We have some really great questions on there, and we got a lot of great responses, and we use those responses to create a blog post, obviously to add value to other people’s lives, but also to include some of you guys on the Best Ever Blog and kind of get your name out there.

The question we have this week is “Is it better as real estate investors to focus on one strategy, or more than one?” So if you go to BestEverCommunity.com, it won’t be pinned to the top, but it’ll be relatively close to the top of the page. You can go on there and read the comments, and then post there if you want to be featured in a blog post next week.

Joe Fairless: Yeah, really some thought-provoking stuff. I love that question, because I know some investors who focused on one market, but multiple strategies within the market, whereas my company primarily focuses on Dallas-Fort Worth, and we’ve got some in Houston too, but Dallas-Fort Worth has been our focus… And we only do apartments, and we only do apartment investing.

And then the others who are just value-add investors – I’ve interviewed value-add investors who just buy commercial, office, retail, apartments, single-family homes, larger ones, they do Airbnb…

I believe in the power of focus for sure, but after being educated and exposed to all these investors and their approaches, I believe the power of focus can be concentrated in different ways, or defined differently. I personally focused on apartment investing, that’s my power of focus… And I know someone else who focuses on Charleston, South Carolina. That’s his power of focus, and he does all different stuff within Charleston. Or some investors – this gets a little bit outside of the power of focus in my opinion, but others are just value-add commercial real estate investors, and they are just incredibly smart with underwriting different types of deals, and they just find value-added deals, which I believe gets a little away from focusing, but still, they’ve got one area that they always focus on, and that’s adding value to some type of property.

Theo Hicks: I’m looking forward to reading all the responses and seeing what people are having success with, especially if they’re doing multiple things. I would imagine that if they’re doing — not necessarily completely different strategies, but if they are expanding their focus, it’s probably because they got really good at one thing, and then that’s kind of like on autopilot, and then they’re adding in something else just to expand.

So tomorrow we will be doing the first ever Best Ever debate that’s not between me and Joe. It’s gonna be me versus somebody else about short-term rentals versus long-term rentals. I’m really excited about that conversation…

Joe Fairless: Which side do you have?

Theo Hicks: Long-term rentals.

Joe Fairless: Oh, that’s gonna be tough on the cashflow. I think you’ve got some good points…

Theo Hicks: Oh, yeah. I don’t wanna give anything away right now.

Joe Fairless: Yeah, that’s fine, that’s fine.

Theo Hicks: I don’t want my competition to hear what I have to say [unintelligible [00:36:09].11]

Joe Fairless: You might get destroyed with the short-term cashflow; if they go in talking about short-term cashflow, I hope you’ve got some good rebuttals.

Theo Hicks: I do.

Joe Fairless: [laughs]

Theo Hicks: That’s tomorrow at 4 PM, and if you’re watching live on Facebook now, it’ll be in this exact same spot, on the Joe Fairless Facebook page. If you’re listening on the podcast, then you can go to the Joe Fairless Facebook page to listen to the replay… But if you wanna listen to it live tomorrow, it will be at facebook.com/joefairless. So regardless of how you’re gonna listen to it, that is where it will be, and again, that’s tomorrow, which is Thursday the 3rd, at 4 PM.

And then to finish off, make sure you guys go to the podcast on iTunes and leave a review. It really helps us out to learn how we’re doing. And if you do, you’ll have the opportunity to be the Review of the Week and have the review read live on the podcast.

This week we’ve got HenryLL. He says:

“I listen to a ton of podcasts across many genres, and this is one of my favorites. Joe provides consistently high-quality content by covering a broad range of real estate strategies, whether you want to fix and flip, buy and hold single-family homes, buy notes, or syndicate apartment buildings

I also love how the Skillset Sunday discusses skills applicable to other parts of your life, like persuasion and developing great relationships.” End of review.

Joe Fairless: Thank you. [laughs] End quote. Hey, Henry, thank you so much, and thanks for mentioning the Skillset Sunday episodes, too. They’re actually the least listened to episodes. So we’ve got regular episodes, and we’ve got Situation Saturday and Skillet Sunday episodes – those basically have the lowest amount of listens, and I’ve always wondered, is it because they’re on the weekend? Because not a lot of people listen as often on the weekend versus during the week, so it’s good to hear your feedback on the Skillset Sundays, because I like them; I like that they’re very specific about a particular skill that’s relevant to us as real estate investors and entrepreneurs. So I appreciate the review, and also quite frankly the vote of confidence in that type of segment.
Everyone else, if you can leave a review — well, you can, you’re physically able to, so if you may… Is that even right, “If you may leave a review…”? Please leave a review; that will help us build the community, get better guests, or continue to get high-quality guests and have the best content possible for you.

So thanks everyone for spending some time with us, I’m grateful for that. I’m looking forward to talking to you again tomorrow.

JF1330: BRRRR 101: Real Life Example Of Scaling Using This Famous Method Of Investing with Joe Cornwell

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Joe is a police officer in the Cincinnati, Ohio area. He’s also a very savvy investor and agent who has tackled three deals in his short time being an investor, with plans and goals to do more and more. Today Joe gives us details of his first BRRRR deal, a duplex that he renovated, rented, and refinanced. He was able to use that equity created and use it to buy a 6 unit, which is the beauty of doing BRRRR deals. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Joe Cornwell Real Estate Background:

  • Police officer for 6 years, currently at the City of Deer Park
  • Realtor for 2 years, did a live in flip in 2012-2015, own two rentals 8 total units using the BRRRR method
  • Plan to start own brokerage and property management company in next 8 years
  • Wants to do 20 units in 8 years
  • Based in Cincinnati, Ohio
  • Say hi to him at jcornwell@realtyonestop.com
  • Best Ever Book: Best Real Estate Investing Advice Ever

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

With us today, Joe Cornwell. How are you doing, Joe?

Joe Cornwell: Good, how are you?

Joe Fairless: I’m doing well, and nice to have you on the show. A little bit about Joe – he’s been a police officer for six years; he currently lives in a suburb of Cincinnati, Ohio. He’s a realtor for two years, he’s done a live and flip, and he did that from 2012 to 2015. He also owns two rentals, a total of eight units, using the BRRRR method.

He plans to start his own brokerage and continue to grow and grow and grow. With that being said, Joe, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Joe Cornwell: Absolutely. As you said, I’m a buy and hold investor, so my goal is to grow to at least 20 units that I hold personally. I got into real estate with the live and flip; that’s kind of what opened my eyes to the potential of real estate. Prior to that I wasn’t exactly sure what I was gonna do investing-wise for retirement, and when I started building real estate units for retirement savings, I kind of realized that this could be more of a wealth-building tool than just a retirement type saving, so that’s what initially piqued my interest into it.

Joe Fairless: With that live and flip, were you married at the time?

Joe Cornwell: I was not.

Joe Fairless: You were not. So a single guy… A peek behind the curtain, Best Ever listeners – I’ve known Joe for about three years or so. The first thing I did when I moved to Cincinnati was I started a meetup, and Joe has been one of the loyal attendees who comes every month for the last three years, so we’ve gotten to know each other fairly well. So I will attempt to ask questions that I would ask if I didn’t know you.

So you were single at the time, with the live and flip. What were the numbers on the flip? Because I know that was the foundation that kind of served for you to build and build from where you were at then to now.

Joe Cornwell: Right, that was definitely the catalyst that opened my eyes to real estate being a wealth building tool. So I purchased a home in Milford, as you said, a suburb of Cincinnati, and my initial purchase I think was 87k, which was a pretty good deal even back in 2012 when the market was still pretty down… And I’ve put about $7,500 in materials into the house, and I did most of the work myself, which was kind of a learning experience in and of itself, doing the rehab. I was fortunate to have a stepfather with a ton of rehab experience, but he’s of an age where he can’t really do the work, but he was still there to kind of coach me through the process. And through that, I was able to sell it in 2015 for 125k, and I think when I walked away it was around a $40,000 profit. Obviously, I got my down payment back, and then it was pretty close to 40k in profit as well.

Joe Fairless: So you got the profit from that deal, and then what did you do?

Joe Cornwell: I actually used that to purchase my current personal home, which was about three and a half times more expensive, and I was able to put a much more substantial down payment, which would not have been possible without that first live and flip, and I probably wouldn’t have been able to afford my home at the time without those funds being made from the flip.

Joe Fairless: How much did you put in initially? You said $7,500 into materials at that first purchase. How much was your down payment?

Joe Cornwell: I think on that one — I might have done 15%. I think the total was like 13k, so I guess all-in I was 20k into it.

Joe Fairless: About 20k all-in, okay. So 20k all-in into the first deal, you made 40k on it, and then you rolled that into your personal home. Robert Kiyosaki would slap you on the wrist for that… And then what?

Joe Cornwell: At that time this was not intentional. It wasn’t some planned out thing; I did not buy that first home with any sort of metrics in mind. I really didn’t know anything about real estate investing; I kind of just happened upon it, and I realized — upon the selling is what really piqued my interest. So this is 2015, probably — actually, pretty close to when I met you, and I really piqued my interest into learning more about real estate. At that time I had no idea what I wanted to do. Obviously, I was a police officer, as you’d mentioned; I’d been doing that for about three years at that time. The income was good, I enjoyed my career in law enforcement, but I realized “Hey, there’s a lot of potential here in real estate if I can figure out what I’m doing, and make this not only a retirement tool, but a wealth-building tool as well.”

Joe Fairless: So the money was put into the personal home, and we don’t see it anymore, correct? Or do you leverage it in some way?

Joe Cornwell: Yeah, it’s in the home.

Joe Fairless: It’s in the home, okay. So that’s gone. So then what?

Joe Cornwell: So as I started attending your meetups – as you mentioned, this was I guess maybe fall of 2015 or so – I really began learning everything I could about real estate. I started absorbing every book I could get my hands-on, online resources, podcasts such as yours, and doing everything I could to really learn about real estate, which kind of led me to going down the process of buy and hold.

I kind of knew that flipping and wholesaling was more of a job, and even though those were extremely interesting to me and still could be in the future business plan, it was more of a job and not an investment to me. So the buy and hold strategy was really what piqued my interest in what I wanted to pursue.

Joe Fairless: What was the next purchase?

Joe Cornwell: So the first actual rental purchase was a duplex in the City of Deer Park, which is where I’m a police officer… So it was kind of part of the plan there, to be somewhere I’m physically at most of the time for my first purchase; I wanted to be very hands on, I wanted to keep a good eye on my tenants. Obviously, one of my biggest fears prior to investing was “How hard is landlording really gonna be? Are my tenants gonna trash the place?”, that kind of thing. So being there physically, and obviously, being a police officer gave me a little bit of a competitive advantage to managing tenants.

Joe Fairless: What are the numbers?

Joe Cornwell: The initial purchase on the duplex was at $89,000, which was a pretty good deal even in that market at the time. The comps were like 140k+ on any duplex sold in the school district for Deer Park… So I put 25% down, so that was $22,250 down; I ended up putting a total of 38k into the rehab, so it was a very substantial rehab. This house was about 90 years old when I bought it…

Joe Fairless: 38k you say?

Joe Cornwell: 14k in materials and 24k in labor. It was a total of 38k in renovations, which was basically a rebuild on the interior for both units.

Joe Fairless: Okay. You said it was a good deal based on comps. What about the post-renovation rents?

Joe Cornwell: After it was renovated, I was able to get a total of $1,500/month, which was $850 for the downstairs, which is a 2-bedroom, and then $650 for the upstairs, which is a one-bedroom apartment.

Joe Fairless: Okay. What were they renting for before the renovations?

Joe Cornwell: I believe he was getting $500 on the upstairs; I’m honestly astonished that the previous owner was able to get $500/month because it was in complete disrepair. Half the plumbing didn’t work, the bathroom wasn’t really usable… It was honestly in horrible condition, so the fact that he was able to get any rent was pretty surprising, but I think it was just an extremely long-term tenant that didn’t really complain much and was happy to just have a place to live.

Downstairs I believe was a family member, so I don’t think he was even collecting rent on the downstairs.

Joe Fairless: Okay. And $1,500, you’re all-in at 127k, so that is a 1.1%. You nailed the 1% rule, but not 1,5% or 2%, so it doesn’t sound like it was a killer deal. It sounds like it was a really solid deal. Is that accurate?

Joe Cornwell: Yeah. It worked for the rehab; obviously, the cash-on-cash was very low… I think it was at like 13%, which is under my metric of what I would want, but for the all-in, the rent ratio was also low. However, when I was able to go for the refi, I was able to pull all of the capital from the renovations back, plus a little bit more of the down payment as well. The strategy was to do the BRRRR method, and I knew going in that it was going to be a big renovation job.

Joe Fairless: Oh, there’s the key. So I heard you correctly, you were able to pull back out the $23,000 down payment AND the $38,000 out of pocket costs?

Joe Cornwell: Not all of it. I was able to get back 41k, and that included the closing costs for the refinance… So 41k total cash back, and I was all in on the renovation for 38k, so let’s say 19k is what I still have into it.

Joe Fairless: Yeah, you got back 67%. From all-in money, you got back 67% of what you put in initially. And the property cash-flows?

Joe Cornwell: Yes, I’m still cash-flowing with the new loan at about $400/month. That’s on a 20-year amortization [unintelligible [00:09:46].07] short-term loan, and my cash-on-cash went up to 22%, which I was very happy with… So that’s above my goal, which was 20%.

Joe Fairless: The 38k and the 23k – did that just come from the piggybank from your W-2 job?

Joe Cornwell: Right, so a little bit of savings from my W-2, and one of the reasons why I ended up getting my real estate license that you mentioned before was not only to learn more the business from the inside, but predominantly so I could take my commissions… I don’t need that money to live on, to pay my bills, because obviously, I do have another full-time job. However, I wanted to accelerate my savings by having the commissions coming from another income source, so that’s why I pursued the real estate license.

So not only am I able to help other clients who are doing the same things that I’m doing, but I’m able to make extra income to accelerate my buy and hold strategy.

Joe Fairless: Then you’ve got the money back out – what did you say it was?

Joe Cornwell: 41k was what I cleared after–

Joe Fairless: 40k is what you cleared. You put in 61k in total and you got 41k back, so you’re into the property for 20k. You’ve got a cash-flowing property, and… Now what do you do?

Joe Cornwell: I took that refinance, and I knew roughly what I was gonna have back as far as the cash-out, and I started looking for another property. I was able to find a six-family property which is also just outside of Cincinnati, and in a good neighborhood. I was able to take that 41k that I got from the cash-out, with another 10k in savings from the real estate commissions, and put that down on a six-family, which has obviously increased my cashflow substantially, in addition to the $400 that I’m getting on the duplex.

Joe Fairless: And what are the numbers on the six-family?

Joe Cornwell: As it were purchased, currently – and I actually just closed on this last week…

Joe Fairless: Congrats, by the way.

Joe Cornwell: At purchase, the rents are $3,050. That’s five units at $500 and one unit at $550. My plan for the property – and what I’m already implementing – is to get all of the total rents to $600 each, which would be $3,600/month, plus coin laundry, which is roughly $75 to $100/month. That is the plan, and it should take about 12 months.

This actually has the potential to be another BRRRR strategy, because at purchase, which was at 246k, I’m actually going to be able to increase the valuation, because it’s a commercial property [unintelligible [00:12:25].27] and the cap rate, which is roughly 8% for the area, to actually bring the market value of that property up to 315k.

Joe Fairless: How long’s that plan projected to take?

Joe Cornwell: I think within 12 months I will have the rents the way they should be, at market, and that includes renovating three of the six apartments, so within 12 months I would have that at its highest current value.

Joe Fairless: And how did you select the management partner to help you with this business plan?

Joe Cornwell: Well, I’m actually managing it myself.

Joe Fairless: You’re self-managing?

Joe Cornwell: Yes.

Joe Fairless: Okay. Why are you self-managing versus a third-party?

Joe Cornwell: Well, there’s a few reasons. One, I only have eight units, so it’s manageable to manage, it’s not overwhelming at this point, even though I do have a couple careers. So that’s one.

Two, I wanted to learn to business from the inside, and I think part of learning the business is being hands-on, especially at the beginning, and leasing the tenants, doing the screening, dealing with issues as they come up, dealing with contractors – all those things that property managers do, and I think it’s important to learn that from the inside.

Now, the third reason, and specifically in my situation – I want to eventually build a property management company as part of the brokerage, and offer those services as well as brokering sales and purchases of real estate… So obviously having that experience, having units and having to manage them under my belt is gonna go a long way in building the property management company in the future.

Joe Fairless: How did you find the six-unit?

Joe Cornwell: It was actually just an MLS deal that had been on market for a little while. I had somewhat of an existing relationship with the agent and was able to talk to him at the price they listed, which was at 275k; they didn’t have a lot of interest, they hadn’t done any price drops, so I think it kind of went under the radar for a little while. Luckily, I was able to go in and negotiate and get it down to 246k, so I was very happy with that purchase price.

Joe Fairless: How did you arrive from 275k to 246k? How did that back and forth go?

Joe Cornwell: Well, the initial thing – again, because this is a commercial property, I was able to kind of demonstrate to the agent and to the seller that the rents hadn’t really been raised since he’d owned it, which was eight years. He had raised them a little bit at a time, but it wasn’t nearly where it should have been for market rents, so I was able to show them that this property is really only around a 230k-240k range, that’s the market value on it. I explained to them, “If you guys wanna renovate it and bring the rents up to market, then it may be worth close to what you’re asking for or even more, but if you’re not willing to do that, then you’re probably gonna have to lower the asking price to sell it at its current value.”

Luckily, they were able to understand that, I was able to demonstrate that, and honestly it was the truth, so… Luckily, we were able to come to an agreement after that conversation.

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

Joe Cornwell: I would say that the number one lesson I’ve learned, and looking back at the past two years that I’ve been educating myself in real estate is that you really cannot learn this business – whether that’s flipping, buy and hold, or wholesaling – unless you actually get into it and do it. I think that’s the most important thing.

I work with a lot of first-time investor clients and I have this conversation with most of them – you can learn everything you wanna learn, you can listen to every podcast, you can read every book, but until you get in and do your first deal, the opportunity cost you waste by having fear and not taking action and making decisions is gonna cost you more in the long run than even a bad or mediocre deal for your first executed deal.

Joe Fairless: 100% agree. If you were given the opportunity to approach anything that you’ve done differently, what would you do differently?

Joe Cornwell: It would definitely be my first contractor experience and relationship that would have been completely different.

Joe Fairless: What happened?

Joe Cornwell: Long story short, I basically paid a contractor about $3,000 for work that was not completed, or was completed incorrectly and had to be redone. I did have a contract with him, and they did not hold up to their end of the contract and I kind of learned the painful lesson that it was gonna cost me more in legal fees and time than I would be able to recuperate, even if I won, a civil litigation. So I learned the hard way to never pay a contractor for work that’s not completed or not completed correctly.

Joe Fairless: What checks and balances would you have in place in the future?

Joe Cornwell: I do things a little bit differently now. One, I found better contractors; I think that’s the easiest and probably most important aspect of this. I found contractors that I trust and that are reliable.

Joe Fairless: How do you screen for that trust and reliability?

Joe Cornwell: Well, the second group of contractors I was fortunate to find were actually referrals from one of my tenants who he previously worked for their company, so it’s a mix of right place, right time, but also to tell everybody you interact with what you need, because if people don’t know what you’re looking for in any aspect of your business, you’re not going to have people that are able to find those things. So just by talking to my tenants and explaining to them what I needed, they were actually luckily able to connect me with almost the perfect fit to the puzzle piece, so to speak.

But as far as me personally, what I do differently is I inspect all the work myself prior to releasing funds, and I make sure it’s done correctly. If I don’t know enough about what it is that they did, which luckily now with the experience I’ve gained, I pretty much do… But if I didn’t understand what should be done correctly, I would bring in somebody else that I do trust (or a third-party) to inspect work, again, prior to releasing those funds for things that aren’t done or not done correctly.

Joe Fairless: That’s where you bring in your stepdad, the heavy-hitter, it sounds like…

Joe Cornwell: Yeah [unintelligible [00:18:13].10] even inspection companies to come out and inspect work, so… There’s a lot of resources, even if you don’t have that advantage.

Joe Fairless: On a related note, on my very first house that I purchased for $76,000, which is actually the same amount that you put into your first one, we got the inspection report – I didn’t know what the heck I was looking at, so I immediately emailed it to my dad and my brother in law, and then they gave me their thoughts, so… We might not have the right skillset, but we just have to be resourceful to find others who care about us and our financial well-being to help us out.

Joe Cornwell: Exactly, and especially when you’re brand new. Obviously, let’s say five years total of being involved with real estate, the amount of information I’ve learned – and I tell people this a lot – I feel like I could have gotten my PhD in real estate, because I’ve spent more time studying real estate than I ever did in college, because it’s something I’m passionate about and it means more to me honestly than college classwork did, so… I feel like you don’t have to do this for 30 years to learn a lot about this business. If you put the time and the effort in, you can learn a lot in a quick amount of time.

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

Joe Cornwell: Let’s do it!

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

Break: [[00:19:24].10] to [[00:20:06].15]

Joe Fairless: Best ever book you’ve read?

Joe Cornwell: I would definitely say — can I give more than one?

Joe Fairless: Yeah, sure.

Joe Cornwell: Well, I enjoyed both volumes of your book, those were great.

Joe Fairless: Oh, you don’t have to say that, come on… [laughs]

Joe Cornwell: They were really good, they gave me great perspective from a lot of different aspects of real estate. I enjoyed the Bigger Pockets books, I’ve read all of those, and then obviously the Kiyosaki books are really good as well. That involves a few lines of books, but those are all great things for new investors.

Joe Fairless: Best ever deal you’ve done?

Joe Cornwell: I would say this second purchase here, this six-family is gonna be the best deal. It’s already on track to do really well, and the cashflow is gonna be a huge step in my long-term goals.

Joe Fairless: What’s the business plan with that in terms of getting your money back out? If there is one.

Joe Cornwell: I’m considering, depending on where I’m at in 12 months, doing another BRRRR with this building, because obviously there’s gonna be around 40k+ there in equity that I could potentially tap into, while leaving 20%-25% into the building. But it also depends on my personal finances, obviously, if I’m able to save enough for the next good deal that I come across; I may not need access to those funds right away, so it’s really gonna be deal-dependent at that point.

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

Joe Cornwell: Aside from the contractor issue on the duplex that I already mentioned, I would say the biggest mistake I made was underestimating the renovations. What I mean by that is on the duplex I had estimated about 25k in a worst-case scenario, and I quickly learned that when you start tearing walls off and basically gutting a building, especially a 90-year-old building, there is substantial risk for other issues. I found knob-and-tube wiring, I found additional structural damage from termites, and obviously electrical and structural costs added up very quickly, which ended up being almost $15,000 over my initial budget.

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

Joe Cornwell: I really enjoy giving back to the police and fire community. One of the aspects of my business is offering as discounted real estate services as I’m allowed to, and I think that police and fire and those tight-knit communities have a hard time trusting other people; obviously, there’s a lot of reasons for that, but having a real estate professional that they can trust and is also going to give them the best financial break they can is one of the aspects of my business that I enjoy doing.

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

Joe Cornwell: I would say the best way is to email me. My current e-mail is jcornwell@sibcycline.com, and if you need any real estate services in the Cincinnati market, I’d be happy to help.

Joe Fairless: Sweet. Well, Joe, thank you for being on the show and catching up with us and talking to us about how you got started and grown from the live and flip to now eight units, and recently including that six-unit property… And then the numbers. I love getting into the details of the numbers and how you approach each transaction, and as we’re going through it, it’s clear that it’s just building and building and building, and there’s not a lot of additional out-of-pocket cash that’s coming into these deals; there’s some, but there’s not a lot, and the rewards are certainly disproportionately larger relative to the amount of additional cash that’s being put into each of these deals.

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

Joe Cornwell: I appreciate it, thank you.

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JF1221: Your Guide To Evaluating An Apartment Community Before Making An Offer #FollowAlongFriday

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Follow Along Friday is back for the New Year! Today Joe and Theo tell us mistakes they have made when evaluating deals and what they do differently now. If you’re in the market for any property, especially apartment buildings or communities, this is definitely an episode you want to listen to. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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