JF1994: Wholesaling for Consistent Cash Flow with Dustin Seyersdahl

Dustin Seyersdahl is an active real estate investor in Cincinnati. He started in real estate through contracting and eventually started flipping homes and falling on his face a few times. You will learn the lessons he learned from the early mistakes he has made. He also shares some of the reasons he has been able to rapidly grow his wholesaling business.

Dustin Seyersdahl Real Estate Background:

  • Active real estate investor in Ohio specializing in retail flips and runs a rapidly growing wholesale operation
  • Flipped multiple properties in his first year of investing
  • Wholesales over 10 properties per month, with plans to double the volume in 2020
  • Based in Cincinnati, OH
  • Say hi to him at https://cash4ohiohouses.com/ 

Best Ever Tweet:

“A Couple of days ago somebody had been sold a property and it was on a Demo List, they would have never known unless they would have pulled a title search. I strongly suggest working with title companies and learning that side of the business.” – Dustin Seyersdahl

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

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JF1988: Lessons from Losing Everything with Mike Ealy

Mike Ealy graduated from Tuskegee University with Electrical Engineering and started into real estate without understanding over leveraging.  Started off great, buying 20+ units and through some unforeseen events lost it all and moved back home at 30 years old. Instead of rolling over and giving up, Mike came back strong and took the lessons he learned from his experience and turned them into profits. Listen to the lessons Mike has learned so you don’t have to. 

Mike Ealy Real Estate Background:

  • Lost everything in the early 2000s but picked himself up and has since acquired over 1,500 apartment units
  • Just this August alone, Mike bought and closed on over $28M worth of real estate transactions.
  • Based in Cincinnati, OH
  • Say hi to him at https://nassauinvests.com/
  • Best Ever Book: The Hard Thing about Hard Things 

Best Ever Tweet:

“This is kind of like a marriage, you’re able to communicate, you’re able to express your thoughts and move on, but if you’re married to someone and have to constantly argue everyday it’s not going to be a great marriage because in these deals you’re locked in for 3-7 years.” – Mike Ealy

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

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

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

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JF1967: Commercial Real Estate Investing & Commercial Loans | Best Ever Cincy Meetup with Michael Schablein

Michael is a local Cincinnatian, and commercial lending expert. As Vice President of the commercial real estate banking division of US Bank, Michael has underwritten around $300 Million in commercial real estate loans. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Every year or two we have to get a new valuation and new loan documents” – Michael Schablein

 

Michael Schablein Real Estate Background:

  • Vice President, Designated CRE Specialist Community Banking at US Bank
  • Almost 20 years of experience in commercial real estate
  • Has underwritten around $300 Million in loans
  • Based in Cincinnati, OH
  • Say hi to him at michael.schableinATusbank.com

 


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

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

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


TRANSCRIPTION

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

Mike Schablein: Doing great.

Joe Fairless: Well, I’m glad to hear that. Best Ever listeners, if you listen to  it on the podcast or watch it on YouTube, come visit us in Cincinnati. That’s BestEverCincy.com. We meet the last Tuesday of every month, except for December. I don’t think we’re gonna do December… But last Tuesday of every month, come hang out; you can go to BestEverCincy.com. We’ve got people from all over the Midwest.

Introducing Mike – Mike is the vice-president; he’s the designated  commercial real estate specialist, community banking at U.S. Bank. Did I say that right?

Mike Schablein: You did. It’s a mouthful.

Joe Fairless: It is a mouthful, that’s alright. He has almost 20 years of experience in commercial real estate. He’s underwritten around 300 million dollars worth of loans. Based in Cincinnati, Ohio. With that being said, Mike, do you wanna give the Best Ever listeners and everyone hanging out a little bit about your background and your current focus?

Mike Schablein: Sure. Well-rounded background – I  started in banking 30 years ago, as a teller, during college, and progressed up to a branch manager, and then got into some consumer lending, and some mortgage lending (residential). This is with the small savings loan that no longer exists; they were bought.

In 1999 I went to Fifth Third Bank and I was in their commercial credit area for two years. In 2001 I transitioned into commercial real estate. I started downtown in the Tower, and then ended up working in Butler County, off the Union Center highway exit. In 2007 I left Fifth Third and came to U.S. Bank, and I’ve been there since.

I am in Butler County still, in Hamilton, and we can talk about what makes that different than being in Cincinnati per se. I’m not actually part of the group or the team that is Cincinnati Metro Banking for U.S. Bank. I am part of community banking, which means my peer are not so much in Cincinnati, or St. Louis, or Seattle, they’re more in Topeka, Kansas, and South Dakota, more of the outside of the metropolitan areas. So what is a challenge, I guess – most of my clientele is within the 275 belt loop, as to not trip over my compatriots with U.S.  Bank in Cincinnati.

You mentioned designated real estate specialist… There are two of those in community banking in the state of Ohio – me, and then another gentleman who’s up in Toledo. There is one real estate lender in downtown Cincinnati who does only real estate, and she looks generally at only things 20-25 million dollars and more. So those are big projects. I look at projects generally from 250k up to 5 million, although I can do projects of any size. It just is that most of the deals that I come across are in that 250k to 5, maybe 7-8 million dollar range.

There are, as far as I know, somewhere between 40 and 50 U.S. Bank business bankers around Cincinnati. They can do real estate deals; they are not real estate specialists. So they can do financing for a company, through a line of credit, or they can do a loan to buy an apartment building… They’re general lenders. I am specifically real estate.

I think the other differentiation would be types of deals. I will do probably deals that could be a little more complex, or deals with developers, construction loans… That definitely is a specialty that we may not see the business banker do so much. But I’ve been doing real estate now for 18 years, and I really enjoy it, and that’s probably what I’m gonna do until I retire.

Joe Fairless: What’s the last deal you did?

Mike Schablein: Unfortunately, it’s been a while. It’s been a very competitive market.

Joe Fairless: What’s a while?

Mike Schablein: A couple months. I’m working on a couple right now, but it is very competitive out there, and that should be something we touch on. The last deal I did was for a project in Over-The-Rhine that is mixed-used retail on the first floor, and developing condos for sale on the upper floors.

Joe Fairless: And when you underwrite that, what are some important things that you look at?

Mike Schablein: That kind of a deal we place a little more weight on our guarantors, our sponsors, who’s behind the deal, what their personal liquidity and other sources of income are, more so than, say, buying a strip center where you’re placing your underwriting way more on the tenants and the leases, and underwriting that cashflow. This one, again, is construction. It did have one COI for the retail space, but all of the residential units are being built to sell with no identified buyers… So again, we’re looking real hard at our sponsors and what their ability is to carry this along if they don’t sell quickly.

Joe Fairless: COI stands for…?

Mike Schablein: Sorry, I meant LOI.

Joe Fairless: Okay, got it.

Mike Schablein: And that’s in [unintelligible [00:07:11].28] if we have a letter of interest with approximate terms. That kind of thing will generally start that for the underwriting process. Obviously, if someone brings us a lease that’s already executed, even better… But nine times out of ten on a new construction real it’s more prospects and letters of interest versus hard leases.

Joe Fairless: And you said that kind of deal we look more as a borrower. Is it because it’s more of a speculative deal, and not currently cash-flowing?

Mike Schablein: Correct. Anything that we can underwrite the cashflow… Again, say multifamily  – we have years of financials, and we have a rent roll; we feel like we can do a pretty good job underwriting and projecting how that may service the debt. Again, with the strip center with leases and cashflow, we can underwrite that. When you have something that’s more speculative in nature – construction – you’re looking at market rates out there, and you’re coming up with a proforma, but that proforma is only as good as the research you’re doing. And again, when you’re getting into speculative underwriting, then you’re gonna look more at your secondary source, which is your guarantor… So when we look at the guarantor, the first thing that we’re looking at is liquidity. We’ll collect  a personal financial statement and what they note as liquid accounts, so checking savings, investments that can be easily liquidated, things like that; we’ll get statements to correspond to those figures.

Joe Fairless: What’s the liquidity typically required?

Mike Schablein: Yeah, this is definitely more an art than a science. I’d say when you have a construction deal, a speculative deal, we’re gonna look for a little higher proportion – say 25%, or 30%. It depends on the deal, of what the debt is.

Joe Fairless: After deposit.

Mike Schablein: Yes, yes. And we’re also looking at their other personal and other commercial exposure. So at the end of the day, again, it’s art more than science, but the larger the deal and the stronger the cashflow – we tend to relax a little bit on what we’re looking for with liquidity. But we still wanna see it. And that would be part of maybe what we might wanna touch on with Best Ever advice… I would say Best Ever advice is look at your lender like your partner. When you’re buying a multifamily at 80% loan-to-value – we’re in this thing at 80%, with your 20%, and we wanna know every bit about that project as much as you would.

So we will ask a lot of questions, we will ask for a lot of information upfront… But look at it more as a partner, not “Oh, the bank is asking me for more stuff, and they never stop asking questions.” We ask a  lot of questions because we care, and because we wanna know. I wanna be able to answer questions that are put to me if we get financials in that show the property is not doing as well  as we thought it might do. I wanna know why. Well, if I’m not really paying attention and I’m not asking you questions as we go, it’s not gonna help me explain your case to the folks on my end on the credit side, that need to answer to people above them on the audit and on the examiner side.

So it’s a partnership, and we don’t ask for things we don’t need just to ask you for more stuff. We ask for it because we think that gives us the ability to understand you a little better, understand your business, and be able to present that more. Because at the end of the day, I’m your advocate, I’m the one that’s talking to the credit people, and the examiners, and everybody else… And if I do a lousy job of presenting your situation, it all flows downhill.

Joe Fairless: Will you take us behind the scenes? A lot of people in the room have probably gone through the process of getting a commercial loan, and some are particularly focused on residential… But I think regardless, it would be good to know when your company (U.S. Bank) has asked all the initial questions, and received the information – will you take us behind the scenes and let us know what are some typical follow-up questions that people you report to are asking you, that you’re having to field?

Mike Schablein: That is a good question. Well, let’s spread the curtain – there’s no Wizard of Oz here; the questions and the information on a commercial loan aren’t just upfront, at purchase, “Hey, I gave it to you. You approved it. We close the loan, we’re good.” Most of the time – and some of it is driven by the size of the loan and what our bank’s policy is as far as ongoing underwriting requirements… But on deals of size and larger, we have what are called annual reviews. And you have reporting requirements in your loan documents… So every year, I’m probably collecting a personal financial statement, I’m collecting liquidity verification, I’m collecting tax returns (personal), your business returns, K1’s… All kinds of things. It just generally will elicit ongoing questions; anything that changes substantially year-to-year.

A part of that requirement with the annual reviews is we’re pulling updated credit reports. So we’re looking at not only the property or the properties and how they’re performing relative to how we initially underwrote them, but we’re also looking at your personal situation; if there’s any significant changes, we’re asking those questions.

So it’s definitely not ask it all at once and maybe some follow-up and then we’re done. It can be an annual process. And in some cases, if it’s a large enough deal, we’re collecting quarterly financials; not so much on you, but your property. So quarterly P&L’s, and rent rolls. We’re obviously looking at occupancy on multifamilies if we see significant changes there… More units vacant, if we see costs that we’ve underwritten for a period of time spike… Maybe there was a [unintelligible [00:13:11].09] leak… Things that we’re gonna ask about.

Generally, properties don’t perform like your one-time proforma underwriting forever. There’s always gonna be changes.

I’d say the other thing is with loan documentation – again, some of it is dependent on deal size, but there may be a performance measurement in there. You have to hit a certain debt service coverage. That could be a quarterly measurement, it could just be a once-a-year. A lot of times, for various reasons, the property may not hit that during the term of the loan.

Joe Fairless: What happens?

Mike Schablein: Well, that’s a real thing, right? What happens is if it’s a true measurement and it didn’t work, but we can get our arms around why, and determine it’s not necessarily an ongoing issue that can’t be rectified, maybe a one-time issue, you’re gonna get a default letter issued, with a waiver. So we’ll waive the default, but you’re gonna get that letter. It looks kind of onerous; we’re quoting the language in the loan documents that say “Hey, this is what it was supposed to do, and it didn’t meet that measurement, so we’re putting you on notice, kind of thing…” But we’ll waive it. If we can’t get our arms around it and you can’t helps us get our arms around it… “Well, we’re having a hard time filling a unit, for whatever reason.” Well, you may get a default letter without waiver, and then we start having very regular internal discussions about your deal, and we’ll amp up the question asking and probably ask for more frequent financial reporting that you’ve provided in the past, and we’ll monitor it very closely until it either improves, or we get to a point where it just isn’t gonna get better and it’s not performing, and we’ve gotta have discussions about “Can we pay this down some, or do we have to send this to folks that are gonna –” I call it the workout group; those are real folks that all they do is monitor these accounts until the loans mature. At that point, they either help the client find a way to get that note renewed and meet the terms that it’s gotta meet, or they help the client find a new bank. That’s real.

Joe Fairless: And what are those internal conversations like, whenever you are talking about a deal that’s not performing and you can’t get your arms around it?

Mike Schablein: What makes it more real is that we actually have a higher-level credit approver on [unintelligible [00:15:35].26] in Hamilton. So they’re not necessarily located everywhere, we just happen to have one right in the building, and he’ll come down the hall and talk about it, which is good… But those conversations  – I think they want to see some timeframes given to things. They don’t wanna just hear “Well, we’ll have a conversation.” They wanna hear “Okay, within 30 days this is what I wanna see” or “I want you to report back and say that you’ve had this done.” It’s more defined, I guess, than when something’s maybe struggling but hasn’t quite hit that radar of “Well, it’s not performing.”

Joe Fairless: And then on the acquisitions side, after a potential borrower has submitted all their information and you’ve all received it, what are some typical follow-up questions that are asked, for whatever reason?

Mike Schablein: What I’ve found, and more so on the smaller – and when I say “smaller”, I just mean… We look at deals of various sizes. They can be a deal to buy a six-unit, it can be a deal to buy a 200-unit. But what I tend to find is more on the smaller deals, where maybe the current owner, the seller – maybe they have other properties and maybe they do their own tax returns. Maybe they load up expenses that aren’t necessarily related to that property on that [unintelligible [00:16:56].10], things like that. That’s gonna require more questions and understanding “Well, I see a lot of driving expenses, or meals and entertainment, and stuff like that for a local play. What is that?” Getting our arms around what’s a real expense for the property, versus what’s somebody’s personal expense. You don’t really see that too much on the larger deals. Those are generally underwritten, and you know what you’re looking at.

On the bigger deals, in this environment, the challenge is that it’s such a seller’s market, properties are so hot that a property that’s maybe not performed so good in the past gets  a strong three months, and all of a sudden the broker is underwriting the trailing three month, and trying to sell you “This is what it is.” “Okay, that’s what it is for the last three months. That’s not what it was for the last ten years.” So then we’re trying to get a sense of what’s a reasonable underwriting. It may not be the trailing three, but maybe it is definitely, and there are reasons why it has improved, and find a way to underwrite it that makes sense for us the bank, as well as the client, when they’re putting an offer in… Because again, it is a seller’s market, and a lot of properties are getting multiple bids.

Joe Fairless: What, if any, scenario would you all underwrite to the trailing  three months?

Mike Schablein: More so maybe it was a distressed property that has been renovated, and re-tenanted, and “Hey, we got this thing up and going”, and we can get our arms around what our renovation expense is, and we can see this submarket or that property is — say it’s generally a 90% to 95% occupancy, and their prior couple of years were in the 50s and 60s while they were emptying it out to redo units. So there’s usually a story behind that, and we’ll underwrite to that story if we can understand it and make sense of it.

Joe Fairless: Let’s take a step back, and for anyone who has not gotten a commercial loan, but plans on getting one in the future, what are the things they need to keep in mind in order to be approved for a commercial loan when they’re used to residential?

Mike Schablein: Okay.

Joe Fairless: We talked about liquidity a little bit…

Mike Schablein: Yeah. So definitely liquidity. 80% loan-to-value on a multifamily is fairly aggressive; it’s a standard. We don’t necessarily wanna see — yes, we want the bank to do 80%, but I’m gonna get 15% as a seller, held second, and I’m gonna put 5% into it. We wanna see that you’re putting the necessary equity in this, on the commercial side. Now, I know on the residential side there’s still programs out there for homebuyers for 3% down, 5% down, 10% down. We generally wanna see 20% down.

Now, you may have partners in this deal, you may have investors in the deal. So you may show me on your personal financial statement you could put the 20% down, but you’re not necessarily doing that. You may have investors that are putting in cash; they aren’t gonna sign guarantees, but that’s how you’re gonna get to your 20%. Those are all things we need to understand. We need full tax returns, we don’t just want page one and page two, we want all the schedules, we want the K1’s. I don’t care if it’s 200 pages long. You can email them and we electronically store them.

So full returns, full information, personal financial statements… Really take your time. Do a good personal financial statement. Don’t just blow through it and — “Hey, the bank needs to see a little liquidity. I’ll put some of that there.” Let us know what you’ve got. Not that at the end of the day we’re needing that because we’re trying to figure out how we’re gonna turn you upside down and shake out the quarters if we have to… I haven’t had to do a workout deal at U.S. Bank in 13 years. And it’s cyclical. It may have a period, for whatever reason, where it struggles. You’ll get a little more latitude from the credit folks when they know we have a good, complete personal financial statement and we understand your capabilities to pull that deal along while you’re fixing it… Versus the one that doesn’t show us everything, and we’re like “Well…” Our margin for error isn’t very much, and then they start getting a little more nervous.

Joe Fairless: On the personal financial statement,  you mentioned you need 25%  to 30% liquidity for  a new construction. What would be liquidity for —

Mike Schablein: What I would tell you is there’s no magic formula to that. It really all depends upon —

Joe Fairless: What’s minimum?

Mike Schablein: Again, no magic formula…

Joe Fairless: No minimum liquidity?

Mike Schablein: You obviously have to have enough to put the equity in that we need, and then we generally wanna see that you have at least another equal amount of that. So if you put 20% in on $100,000, we like to see you still have $20,000 after that, to account for one-time expenses or things you weren’t necessarily thinking would happen, that kind of thing. But a lot of it is driven by the size of the deal, and you have other partners in the deal… Do you have a bunch of other commercial loans, and how are those loans performing? If those other loans aren’t performing well, we’re probably going to see more than if you have a lot of commercial loans and they’re all cash-flowing at two times…

Joe Fairless: First one. This would be the first one.

Mike Schablein: This would be the first one… So we don’t wanna see that you’re putting every nickel you have into that down payment and you have nothing sitting there in reserve. You need to have reserves, you need to expect the unexpected, you need to expect that you’re gonna have that 20-year roof on there and all of a sudden it’s not what you thought it was, and it’s a major expense.

Again, I’m not gonna put a percentage to it, but I’m gonna say we’re always looking that you’re gonna have reserves. If you don’t have reserves, we’re gonna need to find another way to get you to that down payment, because as a bank we’re not gonna approve a deal where you’re putting every nickel in and have no reserves.

Joe Fairless: Same answer to net worth?

Mike Schablein: Net worth – we have a lot of clients with large net worths, but it’s–

Joe Fairless: What’s a large net worth?

Mike Schablein: It’s all relative. You can have a million dollar net worth that’s full liquidity… I consider that a big net worth. Your million dollar net worth is a little bit of property, but it’s $700,000 in cash. And we’ve got the 25 million dollar net worth person that has all kinds of real estate and has about $10,000 in cash. That one makes me nervous. Any of those properties go the wrong way, they don’t have the reserves. They’re having to either leverage their other properties, or get investors… Whereas that guy with the lesser net worth – very liquid. That makes us feel good.

Joe Fairless: What are your thoughts on a rule of thumb 10% liquidity, 100% net worth? Just a framework to throw it out there?

Mike Schablein: You’re gonna pin me down–

Joe Fairless: Just like your people like deadlines when you’re doing the workout, you’ve gotta have some sort of–

Mike Schablein: I can tell you, there are all kinds of things in our commercial loan policy, and I can quote you every ratio and percentage in what we wanna see on every type of property… That’s not something that’s actually covered in there. There’s nothing in our commercial loan policy that says they need to have this net worth or this amount of liquidity. It’s completely something that the credit approver — it’s arbitrary, and an art.

Joe Fairless: It is an art and a science–

Mike Schablein: Totally an art. There’s nothing that’s defined. Having said that, I’ll go back to the one with the high net worth and no liquidity – he’s gonna get scrutinized a little more than the one with the much lower net worth, but it’s a high percentage of liquidity. That one can withstand some bumps, and the other one is gonna have to leverage something to do that, and that requires – if it’s not our loan, it’s somebody else’s loan they have to leverage; that requires that other lender being okay with it. That’s as good as I can do for you on that.

Joe Fairless: Fair enough, I appreciate that. What are some no-go’s for you?

Mike Schablein: It’s flexible. That’s a good question, though. U.S. Bank has a lot of no-go’s. It makes my box a little smaller than I’d like it to be, but… We generally are only going to work with regional borrowers, buyers, investors. Regional – I can stretch those bounds, but realistically, say within 2-3 hours of the Greater Cincinnati Beltway. That’s where our borrower has to be located. We’re all about where our borrower is.

If you’re in Northern Kentucky or you’re in Northern Butler County, or you’re out in Eastern Indiana or out in [unintelligible [00:25:35].25] you’re in my market. If you’re up towards Columbus, you’re probably still in my market. But we’re gonna follow you, because we can get to you easily. I can meet with you on a day’s notice and drive out to see you.

Joe Fairless: The property has to be in that area, too?

Mike Schablein: No. We’ll follow you, Joe, if you’re buying a property in Florida. I’ll follow  you and do that property in Florida, if it underwrites and it cash-flows, and we can get our arms around that market. The no-go is I can be looking out of my office window at the building across the street and somebody from California buys it – I can’t finance that. Now, I could refer it to U.S. Bank of California, but they generally don’t get that excited about doing that themselves. So that’s the challenge.

Joe Fairless: Why is that? Dollar size/amount?

Mike Schablein: Yeah, sometimes it’s dollar size, sometimes I know by policy the guy in California knows he could do it, but California is a big state, they don’t really know that client, it’s not a large deal…

Joe Fairless: Yeah, not worth their effort.

Mike Schablein: …and in Hamilton, Ohio – not worth their effort. They don’t think they can understand that market. The cap rate in Hamilton, Ohio is not the cap rate in Los Angeles. There’s a lot of different things going on there. So as a lender, philosophically that’s always a challenge for me, because if I’m looking outside at that building across the street, I know the real estate market in Hamilton, Ohio, I know what’s driving things… I get that property, but if that borrower is not local to me, I can’t do it. And conversely, I don’t understand sometimes why — I may know you, and that’s great; I have full confidence in you, and you’re telling me this property in Florida is a great deal, but I don’t know that real estate market and that concerns me. But in theory, I can do that. So out-of-market borrower – no go. Second bank financing behind this – no go. We don’t do that, as far as no-go’s.

The other no-go for us is recourse. We do not do non-recourse. If the guarantor, the member, the borrower, that person is not willing to sign the personal guarantee, we’re not doing the non-recourse loan. And it’s very easy on larger properties that cashflow; non-recourse loans are all over the place… That’s just something philosophically we don’t do; it’s more of a relationship-based thing, and the bank frankly wanting to have a second source of coming back if the property doesn’t work… Versus the non-recourse loan, where you can hand over the keys and you’re done.

Joe Fairless: Cool. We’re gonna go to the Lightning Round, because you’ve already said your best ever advice – treat it as a partnership.

Mike Schablein: Right. Think of the bank as your partner.

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

Break: [00:28:29].05] to [00:29:07].11]

Joe Fairless: First question, what’s the best ever way you like to keep up to date with what’s going on in your industry?

Mike Schablein: I meet a lot with real estate brokers, and loan brokers. To me, it’s both. I need to know what’s available in the lending markets. Over 20+ years you know a lot of lenders at a lot of banks, so you can kind of keep up just by meeting with them, with what they’re doing. The loan brokers tend to know not only what the banks and the credit unions are doing, but what the life companies, and the Fannie/Freddie programs and all the other types of financing sources are. So I wanna know what’s going on there… Also, from a real estate perspective, what are the hot areas, what are the new projects that are maybe under consideration, but haven’t hit the business [unintelligible [00:29:50].22] Because once it’s hit that, it’s too late. That’s six months too late.

Joe Fairless: How is knowing where the hot area is helpful for you?

Mike Schablein: Finding out who owns the property, I can dig and find that myself, and making those calls, and trying to find out what’s going on.

Joe Fairless: Making the call for —

Mike Schablein: To the developer, to see what their plans may be. “Hey, I see you’ve purchased some property in Silverton [unintelligible [00:30:17].27] there’s probably some new multifamily just down the hill on Stuart– understanding neighborhoods that maybe are in the midst of change. Greater Cincinnati is a gigantic place. My office is in Butler County and I can’t possibly always know what’s going on in every neighborhood, and maybe what is planned, what local municipalities are planning to do with land, and if there’s developers, who they are and what they’re planning to do. That’s a challenge.

A lot of times the real estate brokers, the folks at the CBREs and the Colliers and those places tend to have an inkling of what’s going on before it hits the publications, and that’s when you wanna be checking into that… Because again, once you’ve read it in the [unintelligible [00:31:05].03] they’re already six months down the road on getting their financing in place.

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

Mike Schablein: I could do a better job at that… That ties into the book I  just finished, Halftime. I’m probably in the middle of the third quarter than halftime at this point, but… Kind of that point where you get to “How do you give back more?” and how do you get to a point where you’re doing what you want to do more than what you need to do to pay bills, and that kind of thing. Just really a mindset change… But I am on a local not-for-profit board; it’s a very small — but sometimes you just can’t do everything and still have four kids at home, and a couple in college… So I do that. Do I wish I could do  more? Sure… And I think my mind – I’m starting to wrap around “I need to”, it’s just the how that I haven’t mastered yet.

Joe Fairless: And the best way the listeners can get in touch with you to learn more about what you’re doing?

Mike Schablein: Yeah, that would be tough, trying to find it online, and probably even more difficult — U.S. Bank is a big bank; all the smaller banks, you might see [unintelligible [00:32:15].12] and actually be able to click on people. U.S. Bank’s got 70,000 employees, and a lot here in Cincinnati, so it’s not so much personalized and individualized. I have business cards I’m happy to pass out. I do a lot of emailing, because I can’t be everywhere at once.

Joe Fairless: Do you wanna mention your email?

Mike Schablein: Yes, sure. Michael.schablein@usbank.com.

Joe Fairless: Thanks so much for hanging out with us, and I’m opening it up to–

Mike Schablein: You spared me the Antonio Brown questions; I wasn’t gonna answer those anyway. [laughter]

Joe Fairless: I know what you’re talking about, but I have no idea of the context there. Let’s [unintelligible [00:32:58].00]

Audience Member: I wanna paint a lending scenario, and this is multifamily. Say I’m an existing borrower, current on all my payments, the various multifamily properties are performing, liquidity is okay, but when you review the debt service coverage ratio, I miss badly. I miss by 15% or 20%. So that’s a violation. What’s your thought process, or what would cause you to call the loan versus waive it?

Mike Schablein: Well, one, we generally don’t call loans. You may end up being monitored by somebody else other than me if they feel it’s a problem that’s system, that’s not going to go away. I guess what I would question is you say you’re performing well, but you’re missing your debt services. Why would that be?

Audience Member: Maybe I went a little too aggressive with the purchasing, and things are, for example, not fully renovated…

Mike Schablein: I’ll give you a situation we see all the time. What we see a lot is a property is performing, and then a year — it would be embarrassing if I didn’t know why for a full year, and then found out after the fact, but a lot of times you’ll get that next set of financials and all of a sudden your repair and maintenance expense is way up. “What the heck happened?” Well, yeah, I went ahead and renovated five units… Great. Okay, you didn’t ask me for the money, you did it on your own, but you drove your expenses up and your accountant decided they’d rather expense it than capitalize it, or maybe there were certain things that couldn’t be capitalized. We can get our arms around that, right? That’s a one-time thing. “Hey, this is what I did; I put my money back into the property, here’s how much I’ve spent…” I’ll normalize the underwriting and say “Well, had you not spent that $30,000, you would have hit your debt service coverage. It’s fine.” I can do that.

But I guess what I’ll struggle with is this scenario I’ve painted for you before, where “Well, I have a lot of properties and I travel to them a lot, and I’ve put all my personal expenses on the [unintelligible [00:35:02].00]  for that.” That’s something that I may know what you’re doing, but that’s not necessarily an acceptable answer for not hitting your debt service coverage. So you’re either gonna change the way you’re doing that, or we’re probably gonna have an issue, and it’s probably gonna end up where somebody else monitors that account until it matures, and then our recourse at that point is just to tell you we’re not gonna renew the loan… And that gives you a chance to shop that elsewhere.

But again, as long as we can understand why, and underwrite it and normalize it… A lot of times that’s what it is. “Hey, [unintelligible [00:35:35].28] and put the money back into the property.” “Okay, great.”

Audience Member: Hi, Michael. I–

Mike Schablein: You look familiar.

Audience Member: I’ve done a deal with you on [unintelligible [00:35:48].10], brother. You made it very easy.

Mike Schablein: Yes. Well, that’s the one time I made it easy. [laughter]

Audience Member: Yeah, I don’t know about that. I’ve been told that U.S. Bank has a stress test that you would [unintelligible [00:35:56].25] a 10% vacancy and credit loss. Is that accurate?

Mike Schablein: We have what they wanna call a minimum vacancy. Say you’re in a market that CBRE says Pleasant Ridge’s multifamily vacancy right now is 3%. Our policy may say the minimum of 5% or market vacancy, the minimum. So we’ll use 5%, even though the market is 3%. Now, conversely, say it’s 10%. Well, we’re not gonna use 5%, we’re gonna use the 10%, the actual. So it’s always gonna be a minimum of 5%. Sometimes the actual may be less than that, but if that’s really causing a deal to not work…

Audience Member: [unintelligible [00:36:48].27]

Mike Schablein: Management fee, we’re gonna use 4% as a minimum. Now, if you’re paying somebody 7%, then we’re gonna use 7%. But if you’re paying somebody 2%, we’re gonna use 4%. So there are a couple things like that, but honestly, the rest of it is really based on historicals.

Audience Member: As far as the debt coverage ratio goes, depending on how you structure the loan, I’m assuming their payments are gonna be different. So if it’s an interest-only loan, then maybe a little bit lower monthly payment. If the term length is longer, over a period of time you pay less. Also the amortization – if it’s 15-year versus 20-year versus 25-year, that payment is gonna be different… So do you work with investors to structure a loan in order to make the numbers work, or…?

Mike Schablein: That’s a good question. We have what’s called a sizing tool. We actually size the loan based on a constant, and that constant will involve interest-only. Your payment may be interest-only, but we’re gonna size that if it was a P&I payment based on a certain interest rate and a certain amortization… So if the loan sizes to that and you do an interest-only payment, you’re gonna be fine, because you’re interest-only and we’re basing our loan size on a P&I payment. Having said that, where that comes back to haunt us sometimes – that sizing constant may be a little more conservative than what the actual debt service of the property is. So our sizing may say “This only supports a 5 million dollar loan”, but the actual debt service would size at 5,5 million dollar loan. Well, somebody’s gonna underwrite it for the 5,5 million dollar loan, and we’re stuck at 5 million, and that becomes a competitive issue.

Audience Member: [unintelligible [00:38:21].04]

Mike Schablein: I can’t really speak to the residential. Commercial loans, I’d say your best source of information on commercial loans — because every bank is a little different. There is no heat map that shows “This bank loans this loan for a quarter of a million here, and U.S. Bank did this one here.” It’s really auditors’ sites, reporter sites… You can find who’s filing mortgages, and then obviously on auditors’ sites; if you know particular areas of properties, you can see who’s bought them, who’s transacted.

Audience Member: So if I have a smaller multifamily property, a 4-unit, and it’s in an LLC, and I’d like to do a HELOC on that, how would I go about doing that?

Mike Schablein: It is a good question. When you have the 1 to 4-family properties — I know residential lenders can do a multifamily 4-unit, unless they’re owned in your name. I think the LLC throws that out of the residential financing picture. On the commercial side, most larger banks don’t like HELOCs on investment properties. Number one, they generally limit the term. If they were gonna do  one, they generally would be a year or two years, so every year or two we’re having to get a new valuation on the property, and new loan documents, things like that.

I’d say we generally will prefer a term note. If it’s a one-time need, we’d rather see that than a floating checkbook on an investment property. Now, having said that, if it’s a very low loan-to-value property, if it’s a 30%, 40%, 50% loan-to-value we would consider a HELOC. But again, I think the trade-off is you’re probably gonna have a shorter term than a term loan, and every couple of years you’re gonna get that papercut of costs, with a updated valuation, and title update, and loan documents, and that kind of thing.

Joe Fairless: Assuming that the HELOC did happen, what would be a case where that one-time need could make sense to the bank? What would that one-time need be?

Mike Schablein: Well, big-ticket items… So depending on — if it’s a 4-unit, maybe I already have two empties, and the other two, I’m just gonna let them walk at the end of their term, and I’m gonna redo the kitchen and the bathrooms in these units, and I’m gonna pump the rents, and we’ll underwrite it to the proforma… Things like that. That would make sense on a one-time basis. If you own a bigger property and you’re like “Hey, I’ve got ten buildings on this property and I’ve gotta do roofs, or I’m gonna redo all the parking lots”, that’s more of a term note thing than a line of credit. A line of credit thing is “Hey, I’ve owned this property 20 years and I’ve paid my loan down, or paid it off, and I just wanna have something in the event I decide three years from now I’m gonna put new roofs on it, or do that…” Then we would look at more of a HELOC situation. But not where “Hey, I’m at 75% LTV and I wanna get every bit of equity I have to have this just in case something comes up.” That’s when we’re looking at your liquidity reserves.

Audience Member: That makes sense. And also, can you repeat your email?

Mike Schablein: Sure. Michael.schablein@usbank.com.

Audience Member: So if you were to analyze a deal that’s just a 4-family, 8-unit, whatever you wanna call it [unintelligible [00:42:09].16]

Mike Schablein: I have some properties that required flood insurance. The flood maps change, too. It may be in the flood zone two years from now, and it wasn’t when we did the loan. You don’t know. But yes, we have a very dedicated group of folks that only monitor flood mapping. So if something like that comes up during the term and it wasn’t in a flood zone, we’ll get a notification, you’ll get a letter, and it gives you X amount of time to get that in place.

But as far as underwriting goes, I’m not gonna say no to the property because it’s in a flood zone. If it works, and you have the proper flood insurance in place, and it still cash-flows, we will do the deal.

Audience Member: I guess what I’m saying if you just compared apples to apples, same place, on high ground and flood zone – will there be a difference in the way you look at it?

Mike Schablein: I don’t look at the deal differently.

Audience Member: Okay.

Joe Fairless: I set the bar high, so let’s see what you’ve got…

Audience Member: Well, a couple questions. I’m a buy and hold investor, I’m relatively new to commercial. Everything until recently has been four units or fewer. My understanding is that U.S. Bank has as a commercial lender on real estate has a reputation of being very picky about what they will and won’t write on… But if they decide they would want to write on a property, they’re gonna blow everyone out of the water with the terms that they’re willing to write on. What’s  your perspective on that reputation. Does that seem to hold true to you?

Mike Schablein: I don’t have that same perspective. I would say, in fairness, our box is smaller than a lot of financial institutions. And not because we’re picky about the types of properties so much, it’s that our underwriting terms – I could tell you, from the day I started 13 years ago to today, haven’t changed hardly at all… Whereas a lot of banks, leading up to 2007-2008, when things really went sideways, there was a lot of aggression out there. A lot of banks pulled back until about 2012-2013, and then it heated up again, and right now it’s the Wild West out there. It is definitely a borrower’s market for getting aggressive terms. Our terms haven’t changed.

On multifamily we’ll do up to a 10-year term, but on all our other commercial types, you can give me a Walgreens’ 15-year lease – it’s gonna be a 5-year term. So it can renew, but our terms are very conservative, so that makes our box small; not that we’re picky about what type of property it is.

Audience Member: Conservative, in a small box, but not picky. Okay. So if we experience a market shift and all of a sudden it gets a lot harder to get loans on our properties, would you expect that U.S. Bank would, in a market like that, end up feeling more aggressive than other lenders?

Mike Schablein: Yes. Again, when I came over it was just at the start of the crash, and from about 2009 through maybe 2013-2014 it was the most business I’ve ever done in commercial real estate… And that’s because everybody else pulled back. We weren’t doing anything differently, we weren’t offering any better terms, different terms. It was the same stuff. There just wasn’t any competition. Now everybody’s out there, so it’s challenging. But again, we’re not doing anything different, it’s just everybody else is really going after it.

Joe Fairless: Last one and then we’ll wrap up.

Audience Member: Do you invest in real estate personally, and if so, what do you do?

Mike Schablein: Well, the answer is no. My Fifth Third days, 1999 through 2007, there was actually a rule within the commercial real estate group – we couldn’t invest and lend at the same time. Number one, they didn’t want any clouding of thinking; number two, they didn’t want that to be your day job instead of the commercial lending aspect of it. U.S. Bank doesn’t necessarily have that same rule. What’s precluded me is four kids, two in college, a lot of other things going on right now. Would I invest in real estate? Absolutely. But it’s just not the right time yet.

Joe Fairless: Mike, thank you so much.

Mike Schablein: Thank you.

Joe Fairless: I appreciate it.

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JF1955: Learning From Investing Mistakes – Live Interview with Dan Gorman

This interview is from our monthly meetup, hosted in Cincinnati, OH. Joe interviewed Dan live on the mistakes he’s made in real estate investing, what he learned from those mistakes, and what we can learn from those mistakes too. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“As a whole, im way better off for having gone through that and making that mistake” – Dan Gorman

 

Dan Gorman Real Estate Background:

  • Founder of United Property Group
  • Been investing in real estate for 22 years, purchased approximately $50 Million worth of property
  • Currently owns 200 apartments, 6,000 Sq. Ft. in office space, and some retail locations
  • Say hi to him at https://www.unitedpropertygroup.com/
  • Best Ever Book: E-Myth by Michael Gerber

 

Listen to his previous episode here:

JF1888: Lifelong Entrepreneur Builds Real Estate Investing Business with Dan Gorman

 

Attend one of our meetups by RSVP’ing here: bestevercincy.com

 


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

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

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


TRANSCRIPTION

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

We are doing this live today from the Cincinnati meetup. If you have not attended, that’s probably because you don’t live in Cincinnati, but we have a lot of out-of-towners who also come and visit. You can go to BestEverCincy.com, come join us the last Tuesday of every month. It costs $2,50, maybe $3, but you also get free pizza.

With us today, we are going to talk to Dan Gorman. First off, how are you doing, Dan?

Dan Gorman: Good, thank you.

Joe Fairless: Good to have you. We’re gonna talk about the ways he has lost money on deals. He is an incredibly successful real estate investor, and Best Ever listeners, you can hear our interview where I talk to Dan about some very successful projects – maybe we’ll touch on that briefly, just to give some context… But we’re not gonna focus on those projects, we’re gonna be talking about lessons learned from deals that didn’t go the direction that he intended.

A little bit about Dan – he’s the founder of United Property Group, been investing in real estate for 22 years, purchased approximately 50 million dollars’ worth of property. Currently owns 200 apartments, 6,000 square feet in office space in a few different buildings, and a couple restaurants, a Starbucks, a Graeter’s, which is a wonderful ice cream place in Cincinnati, a convenience store… Which one?

Dan Gorman: It’s called Churchill Markets. It’s next to Starbucks.

Joe Fairless: Churchill  Markets… And recently flipped a 42,000 sqft. shopping center after buying the note, which was in foreclosure. Based in Cincinnati. So how about first if you wanna just touch on some successes you’ve had… Let’s set the stage for who we’re talking to, and then we’ll get into the bad stuff. So a couple projects that have worked out well.

Dan Gorman: Well, before I got involved in real estate, I had my own business. I was a jewelry broker. I really loved being an entrepreneur, I loved being  in business, but I really was searching for something that had a little bit more predictable and consistent cashflow… So I started listening — I don’t know if any of you guys have ever heard of Carleton Sheets’ No Money Down… I was listening to his tape sets constantly, and I ended up buying my first property, which is a 25-unit deal, no money down, in Quarryville. Then I picked up another 20 units at the same time…

So I had 45 units at that time, and I just realized that I was really struggling trying to run my business at the same time and do that, because it wasn’t producing enough income to be able to afford to hire staff. So I ended up, through a series of interesting events, acquiring a 168-unit apartment community with no money down, that made great cashflow, better than the jewelry business had ever made, and it was gonna be the best month ever… So I kind of let that business go and started to concentrate on real estate full-time.

It was kind of the heyday back then, before the real estate market crashed; you could do a lot of really crazy, creative, interesting deals… So before long, I was up to three mobile home parks, a few apartment communities, up to about 700 units altogether.

Then probably for the last 5-7 years we’ve been kind of shedding some of those assets. All the mobile home parks are gone, most of the apartments are gone, because the prices are just crazy ridiculous that people are offering nowadays. So I’ve shifted into distressed office mostly, because you can find a lot of office properties that are sitting half empty, with the same person that’s owned it for the last 30-40 years. So that’s where I’m finding an opportunity now.

So I have morphed into less apartments and more of that, and also starting a company in Rwanda to build low-cost houses. We have a few employees over there right now, and we’re working with the government to try to build a concrete house very quickly, that we can reproduce from tens to hundreds at a time.

Joe Fairless: And how much did you make on the 168-unit deal when you sold it?

Dan Gorman: That is a pretty unique deal. I bought that property, like I said, for no money down, for three million dollars. In fact, it came with $100,000 in the bank and a reserve fund. So in addition to no money down, it came with $100,000… [laughter] So I bought that in 2001, and I sold that in the last year for 10,5 million dollars.

Joe Fairless: You netted about seven?

Dan Gorman: Yes.

Joe Fairless: Okay. So you’ve had some success. [laughter] Okay… And more to that story, and we get into the details, in the other interview that I did; it’s on the podcast. We’ll put in the show notes what day it’s airing… Because I’m sure a lot of people are wondering how the hell did you just do that deal with $100,000 in your pocket at closing. So we get into that.

Let’s talk about the 120-unit property that you spent a decade and a half on. Tell us about that deal.

Dan Gorman: Once I acquired that property we were just talking about and had a lot of equity in it right away, since we were able to refinance that within a year, a year-and-a-half, and pull about a million dollars out, so I took that million dollars and I used it to buy a 120-unit apartment community… And if we’re gonna be talking about mistakes, this was a super-complicated deal that I just did not understand. There was a lot of people — we used taxes and bonds to finance it, we used low-income housing tax credits to finance it, both of which I knew nothing about. There were people that were saying “Well, this is the greatest thing since sliced bread. You are gonna make a ton of money if you do a deal like this…” And unfortunately, everybody that was counseling me and telling me what a great deal it was, they stood to make really large fees if the deal closed…

So I got to the point where I was about a week away from closing, I probably had about 250k hard at that time, which means that this was a deposit you could not get back if you don’t close the deal… And I went to my attorney and I said “This deal – I don’t understand it. This is a stupid deal. I don’t think it’s gonna make any money, and I just want out.” And they said “Okay, we’re gonna start the process.” And they all powered up and they said “Well, you’re gonna get sued”, blah-blah-blah, so I just ended up closing on it… And I lost my butt on that property for years.

With 120 units, it went from about 85% occupancy down to — because we were rehabbing it, and because it had to go from a market rate property to an affordable property with tax credits, we went down to about 25% occupancy. I was losing $20,000/month. It was extremely painful. So I’d say that it was so expensive to close that deal, and there were so many fees involved moving forward…

I’ve found out that most of the people that close that deal are non-profit agencies – or a lot of them that do deals like that – because they’re not as concerned about cashflow; they’re in it because their purpose is affordable housing… So it didn’t matter how high our occupancy was, I just didn’t make any money out of it.

So 15 years later I eventually sold it, just like six months ago. I sold it for the same price I paid for it. I was just so happy to [unintelligible [00:08:04].01] And on top of that though, the problem now is that I still didn’t understand the deal… And when I was selling it, I asked an auditor to give me a tax consequence letter, and I asked my CPA to give me a tax consequence letter, and even though I sold it for the same price I paid for it and I thought I was fully informed with what the consequences would be, I still have a million and a half dollar gain that I wasn’t aware of. I didn’t find out about it until three months after it closed.

So now I have to pay tax on this million and a half dollar gain. I’m trying to figure out a way around it; I’m meeting with somebody tomorrow, I’m driving up to Columbus and seeing if there’s a way that we can work on that. I have a few months left in the year…

So this is just a very valuable lesson for me. You learn a tremendous amount when you get crushed in a deal like that. Things that you’ll never do again, things that you can help people out with if they’re about ready to get crushed in a deal… But the thing is don’t get involved in a deal that you don’t understand. That’s the big thing right there. There’s a lot of complicated financing mechanisms out there, there’s a lot of complicated deals with land contracts, and lease options, and things like that…

When I would call up an attorney who was supposed to be an expert at that deal, and the attorney couldn’t give me an answer, they would have to say “I’ll have to get back with you on that…” Now, if it’s so complicated that the attorney can’t even answer the question, then it’s a sign that this is a sandbox that I shouldn’t be playing in. So that’s a big one, understanding exactly — like, you need to really, really understand it. Anything you get involved with.

Joe Fairless: Let’s go back to the day where you said “I’d like to be out of this deal. I’ll eat the $250,000.” What exactly — you mentioned that people said “Oh, if you back out, we’ll take you to Court…” But what were they threatening exactly? Because I would think you should be able to back out and just hand over the $250,000.

Dan Gorman: Well, along with a complicated deal came a complicated contract… And there was a clause in a lot of the contracts called specific performance, that basically says “If you’re trying to get out of a deal without a valid reason…”, so maybe your due diligence period has run out, and now you really can’t pull out of the deal unless something happens with your financing, or something like that… Once you hit a certain deadline, you are stuck.

A lot of times you just collapse the deal, and maybe you pay legal fees and things like that for the person who’s selling it to you… But  if this person was a jerk, they can basically say “I’ve lost all my buyers because I held the property up for you for the last six months, and we’re gonna force you to close on it. Or at least we’re gonna try to.” So it just can get really complicated and expensive, with all the legal fees.

Joe Fairless: What was it about that moment in time that you thought “You know what – I need to get out of this deal”? Did something in particular take place?

Dan Gorman: Well, the first thing was that I didn’t really understand it, my attorney didn’t understand it that well, but there was somebody in his firm that really understood. And this attorney was saying “This deal is not that good. This deal is risky, and I don’t think that you are experienced enough to be doing a deal like this.”

This happens when I say this to young people now, too… I said “Yeah, but it’s really, really *this* or it’s really, really *that*. I can make this work. There’s a gob of money to be made”, or whatever. “Maybe I won’t make as much as I thought I was going to, but I’ll still make some decent money.”

So when you’ve got an expert that’s saying “Don’t do this” and then you blow past that, that’s a red flag. Basically, I just got less and less comfortable with it the closer we got to closing…

Joe Fairless: And what specifically about — was it taking the apartment community from market rate to affordable, and you didn’t have that underwritten with maybe turnover costs? Or what financially didn’t work once you closed on the deal?

Dan Gorman: Well, as we were getting closer and closer to the deal, we needed the support of the city of Middletown. And the city leaders did not want the deal to happen. They did not want this apartment community going from a market rate apartment community to affordable housing, and along with that, the restrictions for the next 30 years had to stay affordable housing. So I was not getting any love at all from my neighbors.

In order to make the deal work, there’s all these projections of what you could raise the rent to. For example, the two-bedrooms were getting $650, and it was underwritten at $750 after the rehab was done. There was 2,5 million dollars in rehab. So I started getting less and less comfortable that we can actually raise the rents to these levels, which was what this attorney was saying. “These underwriting assumptions are too aggressive. You don’t know if you’re gonna be able to [unintelligible [00:12:12].02] and if you don’t, you’re gonna lose your butt.”

Joe Fairless: You did. [laughter]

Dan Gorman: I did, so… So what I learned from that specific thing about increased rents is that I will never ever do a deal again if I am not happy with the rents to where they are. So I may have tons of optimism about raising the rents from $500 to $900 or whatever, but I know that with that deal I’ll not lose money at $500… Because there’s a track record at $500. I know that I’ll be able to get that. I have no idea if I’m gonna be able to  get $900. I’m gonna assume that I can, but I’m not gonna promise anybody that.

I just bought a property that was a vacant 16-unit building, and I own the apartment community next door, and I know we’re gonna rehab the heck out of this thing; we’re gonna put granite and stainless steel and everything, but I know it’s gonna blow the other apartments that I have next door away, but I’m still underwriting it to the same rent that I’m getting next door, because I know I can get that.

Joe Fairless: 15 years… Why 15 years?

Dan Gorman: Well, again, with this type of acquisition where you have low-income tax credits, and you have taxes in financing, and other taxes in bond financing, I was a general partner and I only owned a hundredth of a percent — I had 100% of the risk, but only a hundredth percent of the ownership… So there are so many risks and things that could go wrong that nobody wanted to touch it. I can’t just say “Hey, who would you like to buy a property that is losing $20,000/year, and you’re on the hook for a five-million-dollar note that might be going to foreclosure…” And in fact it did go into foreclosure.

Joe Fairless: What happened?

Dan Gorman: Well, this had two components to the financing – a construction loan financing and permanent financing. In order to get out of the construction phase and into the permanent phase, I had to finish the rehab in a certain time, then I had to have 90% occupancy for 90 days in a row, with a certain debt coverage ratio, and I just couldn’t quite get there. I would get to like 89%, I’d get to 90%, and I would stay there for two months, but not three months, and I had to keep resetting the clock over and over again… And then right as I was getting close, the collapse happened in 2008.

Fannie Mae was the permanent lender, and they basically said “We’re not lending money anymore. If we’re not in a deal — if we have any way to get out of a deal, we’re getting out.” And they sent a letter to everybody across the country and they just said “We’re out.”

So this was a default. Under the term of the note, if you lose your permanent lender, you’re in default. I had never missed a payment, I was never late on a payment. I was making these $30,000/month payments and taking huge chunks out of my own pocket and I still got foreclosed on. So they brought in a receiver to run the property. I ended up getting out of that, which was very painful and stressful for a year, to get replacement financing and to get out of that.

Joe Fairless: Because you had a loan with a local lender and you were making your payments on the construction loan, just the permanent financing that you had lined up once you achieved certain metrics – that went away, so then the local lender that you were making regular payments to said “You don’t have that lined up anymore, so we’re calling it.”

Dan Gorman: Yeah. “We were never supposed to be the permanent lender, we don’t want this loan. We’re getting stuck with it now, so… Here’s your bill for 5,5 million dollars. You have 30 days to pay it.”

Joe Fairless: You got that bill, then what happened?

Dan Gorman: Then I called my lawyer and I said “What am I supposed to do with this thing?” [laughter]

Joe Fairless: You’ve got seven million in the bank, right? Pay in cash…

Dan Gorman: No, this happened ten years before that.

Joe Fairless: Oh, that’s right.

Dan Gorman: Yeah. So basically, we had to start circling the wagons and saying “Let’s talk about bankruptcy.” Bankruptcy is a really bad thing, even though this was owned in an entity, and everybody thinks that “Oh, you’re so protected, because it’s in an entity.” But there’s usually clauses in every other loan that if you declare bankruptcy in this entity, it starts to trigger defaults on every other loan that you have… So it was a scary, dark time.

I didn’t end up having to do that, because I found some replacement financing and that got me out of the deal, but it was very stressful.

Joe Fairless: How did you cope emotionally with that? What are some things that you did just to stay with it and into the process as you possibly could?

Dan Gorman: I don’t know, it was super-stressful. That’s all I’ll say. When you worked for a long time and you have all this stuff you’re pretty proud of, and you’ve got pretty good equity built up, and then this stupid deal you never should have been involved with to begin with, and you’re in it, you’re not making any money, you’re losing your butt, and it’s gonna take down everything else – it’s just very, very painful.

Joe Fairless: And the receivership – for anyone who’s not familiar with what that is and what the process is, will  you describe that?

Dan Gorman: When your property goes into foreclosure, the bank seizes control of it and they put in somebody to run it. It’s usually an accountant, or a lawyer, or somebody like that… And this receiver then becomes the boss of the staff. If there’s no staff, if it’s a smaller property, they basically start making the decisions.

The only good thing was that I didn’t have to make any more payments to the bank, so I got some relief there… But it was just such an unusual situation, because I was doing a good job running the property. We were at 89% occupancy – not 90%, but… It was just a really, really challenging location that I was in…

Normally, I would not be able to touch the property, but he just let me continue to run it. He kept all the same staff, I talked to them every day, he asked me questions, and it was just kind of this friendly thing. When I got out of it, we shook hands. But normally, the receiver – it’s his job to keep that thing frozen and not let it get any worse. He’s not necessarily going to put a bunch of money into improving it or whatever, he’s going to protect the value of the asset for the bank until that asset can be sold, or the bank can be made as whole as possible.

Joe Fairless: And what happens when you get out of it? What takes place then?

Dan Gorman: Well, normally you don’t get out. Once you’re down far enough to have a receiver put in, that means that project has failed, the foreclosure process is going to happen, and I would never be able to get that loan again, probably. Whenever  you get a big commercial loan, one of the first questions they ask — it may even be a non-recourse loan, which means I don’t have to guarantee it, but they always wanna know if you’ve ever defaulted on a loan in the past.

So even though I got out of that, because it got foreclosed on, I have to explain to every single one I get, forever. So I have a little piece of paper that’s ready to go, and I just submit it with my application to these commercial lenders… And it’s actually considered a positive to most lenders now, because of the fact that I didn’t throw the keys on the table when I was losing all that money, and I stuck with it, and it got foreclosed on even though I’d never missed a payment. They respect the fact that I got out of it. I stuck with it even when it got foreclosed on.

In fact, when I got out of it, which means I found replacement financing and a new limited partner and everything, and I shook the guy’s hand and he gave me my keys back (theoretically), and I said “Well, this has been a pain in the ass… How many people have ever gotten out of it?”, he says “You’re the first one in 25 years.” It’s been really stressful though…

I got foreclosed on and I didn’t really miss a payment, but at the same time these guys were shedding everything, these banks. They were foreclosing on everything so fast that the one good thing is that the replacement financing that I found for it was 1,5 million dollars less than what I got foreclosed on, and they did not pursue me for my personal guarantee… Which was a huge blessing.

Joe Fairless: And should someone come across a situation similar to that, where they’re getting foreclosed on, what are some things that you would suggest they do, emotionally, or just in the process, that were helpful for you?

Dan Gorman: Well, I think that you should pray. That’s a good thing. It helped me a lot. And I think it’s just very helpful to find an expert. You’re already probably in the situation because you’re losing a gob of money to begin with, but if you can get a recommendation for an attorney who’s very well-versed in this type of thing… The banks – they really don’t want that property. There are things that you can do to short-circuit that  process.

For example, I bought a shopping center note not too long ago… And this shopping center was getting foreclosed on. It had a Walgreens in it, and the Walgreens left. So they went from getting $25,000/month for this space, to about $2,000/month from a mattress store. So they stopped their payments, they got foreclosed on. The bank put the note up for sale. They didn’t feel like the property had much value to it, so I bought the note, I became the person foreclosing on them instead of the bank, and I said “If you sign the deal over to me, then you can walk away free.” And within one day I owned the shopping center and they were no longer getting foreclosed on.

Kind of going back to what I said, they will have to disclosed the fact that they were involved in that process, but the fact that they got out of it through me is a huge win for them.

Joe Fairless: Going back to the apartment community – you said you found alternative financing… How many lenders did you reach out to about getting financing? Because it sounds like — was that the linchpin that you needed in order to get it out of receivership, just get another group in there to give financing? I imagine you were hitting the street pretty hard…

Dan Gorman: Yeah, I was working on it every day for a year, pretty much, trying to avoid the bankruptcy thing and trying to get out of the foreclosure. A good attorney and a good person who was just another tax credit investor who really understood it a lot better than I did – they helped hook me up with the bank that was willing to make a loan.

Joe Fairless: How did you get introduced to the tax credit investor that helped you out?

Dan Gorman: I don’t remember the exact series of different people who introduced us, and stuff like that. This guy used to be a bond trader, so he really understood the taxes in bonds, and he understood the tax credits, so he introduced me to a bank that he was on the board of… So that helped.

Joe Fairless: Okay. Anything else as it relates to that deal that you think we should talk about, lessons learned from that experience?

Dan Gorman: I think that I hit on all the points. The big one was the property qualified because it was in a certain area, that wasn’t the best area, and then the combination of trying to go in there and spend a bunch of money on improving things and then at the same time thinking I could increase the rents by a couple hundred dollars a month in an area that was struggling to begin with… An area that 15 years later I never got to the rents I was supposed to get to. Underwrite to whatever you know for sure you’re gonna get, I’ll say it again.

Joe Fairless: And I know you’re in the middle of it right now, but do you know how you’re on the hook for a 1.5 million dollar gain if it’s the same price that you bought it for?

Dan Gorman: Yes… So what was happening was that every year I was having a lot of profits from some of my other properties, but I was having tremendous losses on this property. So because I was only a hundredth of a percent owner, my limited partner which was Huntington Bank (because they bought all the tax credits), they were getting all of the losses. I was the one who was taking the money out of my pocket and paying it. So a few years into it I said “I’m getting crushed on this property. Can you push some of those losses my way? Because you can trade your losses back and forth on your K1’s…”

They said, “Well, we understand. We want you to survive, so we’re gonna push a lot of losses your way. We have to have a certain amount for the [unintelligible [00:22:43].18] that equals the depreciation, but you can have everything else.” So what was happening – and probably somewhere along the way; it goes with the stuff I didn’t understand – somebody said “This is gonna affect your capital account, because you cannot take losses on something that you actually physically don’t own 100% of.” Does that make sense?

So I was accumulating all these losses that were offsetting all my other taxes that I would have paid, and it felt like it was a slight win for me, just because I hated this project so much and I was getting killed on it… But at least I was getting the losses pushed my way. But what was happening secretly – which I didn’t realize – was that this was all adding up, and something called your capital account… So after I sold it and I got the opinions of everybody, everybody said this was taken over the last 15 years, and now you have to pain a gain on those… Because you would have paid the tax if you wouldn’t have taken losses every single year… Does that make sense?

So if I would have owned 100% of the property it wouldn’t have been a big deal, but I didn’t really own much of it at all, and I was still taking a lot of the losses. So it’s complicated…

Joe Fairless: And I imagine it was an accountant who figured that out at the end… Was that accountant not on your team during the process?

Dan Gorman: Yeah, unfortunately it was the same accountant that I asked with the tax consequences…

Joe Fairless: Is that still your accountant? [laughter]

Dan Gorman: Yeah, she’s working hard to try to figure out a way out of it, so…

Joe Fairless: Okay. Thank you for sharing that. Very–

Dan Gorman: Yeah, I’m sweaty right now, only talking about it.

Joe Fairless: Very valuable. You do or don’t?

Dan Gorman: No.

Joe Fairless: No? But you offered to — so we had coffee three weeks ago, and you said “You know, it would be good to talk about ways I’ve lost money.” “Okay, great.” So thank you for this…

Dan Gorman: I mean, I am really seriously sweaty. It just brings you back to the situation, so… I would not be sweating if [unintelligible [00:24:32].25] But I do think that it has affected positively every single deal I’ve done after that. The way I underwrite a property right now, very conservatively… And I’ve been able to share a piece of that story with so many different people as we’ve been talking about another deal… Or that has affected my deals positively since then. So I would say that as a whole, I’m way better off for having gone through it, and I’m sure everybody has a horror story that is a mistake they’ll never repeat… And  hopefully it was a mistake that didn’t cause somebody to go bankrupt, and then they could learn from it and have a way better business because of it.

Joe Fairless: So here’s another bullet point I’ve got here in my notes and then we’ll wrap up… “Didn’t think he needed permits for commercial space. Costing him money now.” What’s that about?

Dan Gorman: So  I’m one of these guys that tries to fly under the radar. I love value-add, I love rehab… My dad was a builder, I love to rehab stuff; that’s my passion in real estate. So a lot of times it’s really obvious when you don’t need permits, sometimes it’s really obvious when you do, and sometimes there’s just kind of this grey area in between… So I would say that I have a tendency to ask for forgiveness rather than permission. I do a lot of things — if they’re on the borderline, I’ll just push through and do them without any permits… Or I used to.

I am involved in a deal right now where I have an office building and I rented the entire second floor (about 6,000 sqft.) to a tenant. I met the building inspector there, I met the fire department there, I said “This is what we’re gonna do with it. We’re gonna take all the walls out, it’s gonna be this big innovation hub with glass garage doors, and everything like that; it’s really cool. Is this cool if we do this?” And everybody gave their input and said “Yeah, go for it.” So I just charged ahead with the rehab, and I never really got a permit for it… Because you know, I knew what I was doing…

So after  these folks moved in and there was a bunch of news on it, the building inspector called me up and said “Hey, I know we went through it, but I don’t recall ever seeing a permit.” I was like, “Well, you never said I needed one. You were right there.” So now it’s just really painful to go backwards, because I do have to have a permit… And what has been the most painful thing with it is that what comes with a permit and proper plans is a determination of what your occupancy levels should be, so based on your HVAC, and your fire exits, and things like that… This tenant has a need to have 50 to 100 people in there on a regular basis, and I just found out this week that my occupancy is 42. And then the only way to get around that is to add a fire alarm system in the whole building, with strobes and buzzers.

We could have either made the decision not to rent to this tenant, or it would have been way cheaper to do it during the rehab when I had everybody there to begin with, than try to work around their schedule. They have to cancel stuff now… It’s embarrassing.

So every job now, I always call a building inspector if there’s any rehab to it at all, unless it’s super simple. I’m gonna be moving walls, or whatever; I know it is a pain and it slows things down, especially if they say you have to get drawings – man, does that slow things down… But it is way better to be on their good side than to get caught. And I’m not even gonna say “caught” like you’re trying to do things under-handed. It’s always better just to get their opinion. Building inspectors really like it if you’re proactive and you say “Can I get your opinion? Can you stop by? I wanna show you some things I’m gonna be working on here.” And then if they say “You’re gonna need a permit”, then just get a permit. Stuff can come back and bite you in a thousand different ways if you don’t.

Joe Fairless: What’s the fire alarm system cost, approximately?

Dan Gorman: Well, this is a three-story building, and the ballpark is about $25,000. So that is really, really not good news. I could have asked the tenant to pay for that upfront, before I leased it to him, we could have shared that cost before we signed a lease… And now this is my responsibility.

Joe Fairless: Well, we’re gonna open it up to questions. I’m sure we’ve got some… And if you can repeat the question – that way we can get it on the recording.

Audience Member: You mentioned that the large unit – you got into a project that you were unfamiliar with, so your advice would be to not do that. On the other side of the spectrum, you’re supposed to stay on — all your success is on the other side of your comfort zone… So how do you reconcile those two things? Does that make sense?

Dan Gorman: It does. Summarizing the question, if I say “Don’t get involved in a project that you don’t fully understand, then how do you expand your business and grow?” So I’m not saying “Don’t do things that are risky”, because that’s how you grow, but I’m just saying really understand it well. So if there are components that you’re signing your name on that have big financial consequences if they don’t go your way, you have to fully understand the deal that you’re involved with, underwrite it properly, fully understand all the risks and how it can go sideways on you.

I think that I’m a pretty decent example of going from apartments, to mobile home parks, to shopping center, to office, or whatever, and each one of those is a risk that I don’t know anything about before I go into it… But I’ve just been a lot more careful now.

Audience Member: With the variety of your experience in owning rental property, do you have a preference for residential apartments or for commercial now? And if you do, why?

Dan Gorman: Yeah, residential is the best, for a lot of different reasons. I think first of all, the more you get merged into commercial — it’s very expensive to get a tenant in the commercial space… I’m releasing a 2,000 sqft. space to a CPA. I met with him today, it’s gonna cost me $25,000 to prepare the space for him for a three-year lease.

Joe Fairless: And what’s the rent?

Dan Gorman: The rent’s gonna be just under 3k/month. Now, as soon as he signs the lease, I’ve started thinking a little bit more long-term, meaning that when he signs that lease, the value of that property goes up — I spent $25,000, but the value of the property goes up $100,000 because of the cashflow and the net income increases. But the risk is so much more spread out with apartments. So if I could find a good deal in an apartment community – which I cannot anymore – a 100-unit apartment community that maybe costs 5-6 million dollars, and the same type of property in anything else commercial, I would definitely take the apartment community. Your risk is so spread out, to 100 units, instead of three different tenants, or one tenant, or whatever… And it’s just a lot more predictable what can go wrong.

The problems that you have with residential are fairly minor compared to some of the things that could happen with commercial, where  you have a boiler — or an elevator (that’s the perfect example) go down. I had an elevator get stuck and people got trapped in it. That was not good. Then the fire department had to come and get them out. Then the elevator company came and they fixed it, and then three days later somebody else got trapped in it. They called 911 again, because they’re stuck and they don’t wanna be stuck. So then the fire department comes and lets them out and says “Alright, if this happens one more time, we’re gonna shut your building down.” And it happened again, four days later.

So there’s things that you just don’t know anything about, and you’re thinking you’re doing everything you can by hiring a reputable elevator company, and still this stuff happens and it just costs so much money. Every time the elevator company comes out and tries to fix something, it’s thousands of dollars.

Whereas if we go back to residential, it’s just much simpler.

Joe Fairless: Did they shut the building down?

Dan Gorman: They shut the elevator down, they did not shut the whole building down. But I did have some disabled people that could not get to their offices for 2-3 days until the elevator company came again and got it working.

Audience Member: I have a follow-up…

Dan Gorman: Sure.

Audience Member: I’m a residential guy, apartments, and I know people who rent commercial spaces who like to talk about how magical triple net leases are. It sounds like you would still advise “No, if you get your money into apartment buildings, that’s better”, even though with a triple net lease I’m not paying any of my own expenses, I don’t have to deal with so many things… And if you could give a brief description of a triple net lease, that’d be really helpful. But doesn’t the opportunity in the commercial space to get things like a triple net lease make that appealing?

Dan Gorman: Okay, so a triple net lease is basically as a landlord you have zero responsibilities. Your tenant pays the insurance, they pay for all the maintenance, they pay the taxes… So all you do is get a check every month, and then you pay your mortgage, and you don’t do anything else. That’s actually what I did with the big property that I’ve just sold – I invested in 12 Dollar Generals. Dollar General is opening stores up like crazy. So you’re not gonna get any type of a bargain on a triple net lease. You’re gonna pay THE highest price of any type of real estate there is, because no responsibility is very attractive to a lot of people who have been in real estate their whole career and now they want something easy. So there’s all kinds of money pouring into triple net, all the time, so the returns are much less.

The other disadvantage is that I have a ton of money tied up into these properties, so I did a tax defer exchange where I don’t have to pay the taxes…

Joe Fairless: They’ll get you later…

Dan Gorman: They’ll get me later, right? But because I get a certain return on that and I will never, ever be able to increase the value of that property, in my opinion… Because there might be an inflation clause built into the lease, so 15 years from now if Dollar General decides they wanna be in that place, they’re gonna say “Well, I know our lease says the rents are supposed to go up 4% or 8%, but if you want us to stick around, you’re gonna have to keep it the same.” It happens 100% of the time. So basically, you’re kind of locked in, there’s no upside at all. But what it does do for people – if that’s their strategies and they wanna have that – is it kind of sets the money aside and you don’t have to worry about it anymore for a while.

There is still risk. I have these Dollar Generals, I have 12 of them, they’re all in Michigan, in really rural areas. They’re so nice, we don’t do anything, but in the back of my mind I’m always worried than on year 15 how many of them are not gonna renew the lease on? And if Dollar General is not the tenant, how much rent am I gonna get if I have to rent it out to some local company? And how much does the value decrease if I do that? So there’s still risk involved in it. It’s really easy right now…

So my strategy with that would be “Dollar General is great, they’ve been around since the ’50s, but instead of having all the leases expire at the same time, I may sell 3-4 of them in the next year or two, replace those with brand new ones, so the leases are always kind of renewing on a different schedule, instead of all in the same year.”

Audience Member: [unintelligible [00:34:26].17]

Dan Gorman: The question was do I look at deals differently now with more clarity than having gone through that terrible time? I think it’s totally different. First of all, I don’t get sucked in by the sizzle some of these sales presentations/marketing brochures and things like that of how amazing this property is and how much upside there is, and everything’s value-add if you look at it… So I’m just much more conservative when I look at this right now, and I’m so much faster at just ignoring a deal instead of getting sucked in and wasting a bunch of time on it. If it even smells like over-promising some returns or something like that, I don’t even wanna get involved with it.

Joe Fairless: We’ve got time for one more question. Yes, in the back.

Audience Member: Hi. I wanted to ask about Airbnb. Do you do any real estate with Airbnb? Do you have any real estate properties that you rent out?

Dan Gorman: We only have one Airbnb, so I don’t know a lot about it… But I’ll tell you about my experience. I have a three-unit building in Bellevue, Kentucky that my daughter lives in, and we have this nice, awesome, consistent income from one of the units in there. And then the lady leaves, and my daughter wanted  to do an Airbnb, which I thought was not the best idea myself, just because we have $600/month coming in from this apartment, and she wants to do the Airbnb. But she’s killing it, she’s doing great.

It has been really challenging to deal with Bellevue, Kentucky. They keep changing their regulations. She went and asked them if she could do an Airbnb on the property, and they said yes. So we fixed up the unit and got it all ready. Then I said, “Okay, just go fill out the paperwork now, so we can make it official”, and they said “Well, you can’t do that. We just instituted some new regulations two weeks ago.”

Everybody’s doing their best to regulate these things, because Bellevue for example had a bunch of homes all over the place, and it’s pretty close to downtown Cincinnati, so people rent these homes for Bengals games and Reds games, and Riverfest… And if you have a three-bedroom home, you can fit like 12 people in this thing… So they party, and they take up all the parking, and they cause all kinds of problems.

So Bellevue – and from what I hear,  other towns – are trying to push through these regulations and figure this all out, so they don’t have situations like that. So they instituted a program where you have to be an owner of the property that you are renting out, and you have to live in it at least six months a year. So it was my daughter, but she wasn’t an owner. So then we’re so far into the darn thing that we had to form an LLC just for this, and she became a hundredth of a percent owner, so we were able to apply for it… And then they soon expect something else that said that — even though they said that if we did that, it would qualify, they sent us something back and they said “Multi-unit dwellings don’t qualify. You have to have single-family homes.” I’m like “This is not what the regulation said just two weeks ago.” So we’re still fighting it.

I’ve been very upfront with the city manager there. I’m like “Listen, we’re doing everything you’re telling us to do, so we’re just gonna be renting this thing out now, because I know there’s tons of people that are trying to do it on the down-low, and you just have to help us qualify. I think you’d rather have the owner living right next door, than somebody from out of state doing it.” So he’s fine with that, we’re okay.

So now she only gets $60 or $70/night for it, a $40 cleaning fee, and she is probably 28 out of 30 nights a month she’s booked. But it is a heck of a lot of work. She has to find people whenever she wants to go out of town; she’s gotta try to find people that can take care of any issues with her guests, she has to find somebody to clean it… And out of the 28 days that it’s rented, it’s probably turned at least 12 times to 15 times… So that’s a lot of work for somebody to go in there and turn it over. And if you like to do things like travel or something like that, you have to have some other — so her mom goes in and cleans it. I don’t know who’s gonna take the distress calls if there’s a problem.

People are finicky. They say “This is too hot”, “It’s too cold”, “You’re out of this”, “My towel looks dirty”, stuff like that. So to me it’s easier to have an apartment than that, but I have a buddy in Pittsburgh that has started to convert a lot of his multifamily units into Airbnbs because his township is fine with it. He doesn’t travel much, he stays around, and his kids are involved in this business, so they all kind of share… So for him, it’s been — he’s gone from $1,800/month for this one building to almost $5,000/month because of Airbnb… But it’s a lot more work.

Joe Fairless: Hey, thanks a lot. I appreciate it.

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JF1928: Getting High Production From Millennials & Using Institutional Money #FollowAlongFriday with Theo and Joe

The guys are back again with more lessons learned from interviews for the podcast. We’ll hear about how one investor (Chris Tuff – episode releases 3/1/2020) gets the most out of his millennial workers, and why it is important to work with them to get the most production. Then We’ll hear about the pros and cons of using institutional money (from Michael Merideth) for your deals. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“It wasn’t just working from home, but flexibility with hours”

 

Related Blog Post On Institutional Money (and why Joe doesn’t use it)

http://bit.ly/institutionalmoney

 


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

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


 

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JF1921: Business Lesson Learned From Playing Chess #FollowAlongFriday with Theo and Joe

Joe has been practicing chess and taking chess lessons over the past year, and of course he finds the relevant business lessons and wants to share with all of us. After that, Theo will ask his trivia question and share some free resources. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Don’t ask how can I get a deal, ask what conditions can I create, should I create, have I created, to allow a deal to show up”

 

Free Resource:

http://bit.ly/toploanprograms1

 


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

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

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


TRANSCRIPTION

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

We’ve got Follow Along Friday today… I’m back. Theo, it’s great to be back. It’s been about two months since I’ve recorded a podcast. It was needed to take a break from podcast recording, but fortunately we’ve all put in the hard work, so that we had a lot of episodes that could run while I was away, and then we had some friends of the show join you to be on the show also… But I’m glad to be back. Are you doing well?

Theo Hicks: I’m doing great. I’m glad to be back on Follow Along Friday as well. It’s been, as you said, two months. We did do lots of Syndication School, and then I did some Follow Along Fridays last months [unintelligible [00:02:10].20] I’m looking forward to talking with you again and I’m looking forward to jumping into our topic today. It’s gonna be interesting.

Well, while I’ve been away my obsession with chess has gone to another level… And I am reading books, I have a chess coach who comes over once a week. He’s a third-year medical student at the University of Cincinnati, medical school… And I’m bringing this up because this is a real estate investing podcast, and I have a couple relevant real estate investing things to talk about as it relates to chess.

Two things I’ve learned — and I’ve learned a whole bunch from playing chess. I’ve played about 250 games over the course of this year, not over the last two months… And I know that because I play chess with friends, and so it tracks that – which my chess coach scoffs at; he’s like, “Well, whenever you wanna play real chess, you go chess.com and you play with those people.” Alright, whatever… But I’ve played about 250 games, or a little bit more than that, over the course of this year. I play Colleen, my wife, frequently. Less frequently now that I’ve been taking lessons; she doesn’t find it as enjoyable… Because I’ve picked up some tips. But what I wanna mention is a recent game I was playing Colleen, my wife – and I haven’t’ looked up the record recently, but I’m like 50 wins and 10 losses against her. But all the losses were whenever I was really getting started, before I started really studying it… Well, this past week I played her. I was just dominating; I had my rooks in front of her king and queen, and I had some pieces pinned, and just doing really well. Then she moved out of it, I got a couple pieces, a bishop and a knight or something, so I was up six points… And then all of a sudden I get careless, and I move my queen, and it’s unprotected, and she snatches the queen. Then she proceeds to win the game as a result of that.

So what I realized is — well, first off she’s not someone you wanna lose to, because you’ll hear about it time and time again. You’ll hear about it at night, you’ll hear about it in the morning, you’ll hear about it throughout the day… And she’ll actually delay playing you again to soak up the win. So that’s one thing I realized…

The second thing I realized, and more relevant to everyone else, is I was thinking “What can I learn from this, from a real estate investing lesson?” And the first thing that came to mind was respect your competition. And I don’t think that’s the final lesson for this, but I think it’s relevant – respect your competition – because I was playing haphazardly, so to speak… Because I knew “Hey, I’ve beat her a lot of times before, so I can do it again.” And there’s merit to that in real estate investing. But I thought a little bit more about it. I was like “Well, what I really learned is it’s important to start sharp, but stay sharper.” Or another way to put it is “Start strong and get stronger as you go.” And I’ll just speak for myself, and probably a lot of Best Ever listeners, you’ve come across this, and it’ll be helpful for your business.

For my business, we have started strong. We have over 700 million dollars worth of apartment communities, and we’re rocking and rollin’… But if I were to be complacent or haphazard the same way I was in this chess match with real estate investing and our company, bad things will happen.

So it’s important that this serves as a reminder for me – and perhaps it can for anyone listening… But for me it was a reminder that “You know what – I can be beat at any time, if I don’t bring my A game.” But even a little bit deeper than that; if I don’t continue to put in the focus and the effort and the attention that got me to this point… I was destroying her on the game, and then I made a bad move, and then lost the match. Same thing with real estate investing. We’re doing very well, but should I lose focus and not put the same attention towards the business as I did leading up to this point, same thing can happen. So that served as a reminder for me.

Theo Hicks: Yeah, that’s a really good lesson, Joe… And it kind of reminds me of another analogy, the sports analogy, where you’ll  hear about someone who obviously played — I guess you can see this multiple times in sports, during their career, where they obviously start off really strong, and then once they get really good, all the attention gets on them…

Joe Fairless: Once they sign that fat contract.

Theo Hicks: Yeah, that fat contract, they win a championship, then they get maybe movie deals, and commercials, and the next thing you know, because their focus is on something on else… I mean, obviously they’re still focusing on sports, but they’re not fully focusing on it… So then they get worse, and they get cut, or whatever.

You can also apply this after they leave the league, too… They’re focusing on whatever their sport was, and then once they leave, they end up losing all of their money. Not all the time, obviously, but… I’m pretty sure we had a blog post, and it was a pretty high percentage that do.

I think that’s a really good lesson. Just because you are doing really well and have achieved your five-year goal doesn’t mean you can kind of just coast, or maybe pull back the reins, because as you mentioned, if you do that, it’s not just you maybe making a mistake, but there’s also other people that you’re in a sense competing against too, that could also have a big impact on your business. So yeah, I think this is a really good, relevant lesson, Joe.

Joe Fairless: Yeah. You can do a Google search on people who suck after signing a contract, and there’s all sorts of NFL players and NBA players… But they’re just in the public eye. There’s a saying “When people succeed, they party, but when they fail, they ponder.” If we celebrate – which is fine; we should, when we do well… But we should also ponder – what got us to this point, how much of it was luck, how much of it was being at the right place, at the right time, how much of it was execution, and what have I done to set the wheels in motion for future success? …which leads to the second and final thing I wanna mention; a different lesson that I got from chess that is relevant.

By the way, I’m learning a whole bunch of lessons that are applicable to real estate; I’m just mentioning two here. It’s a quote from a book that I’m reading. The book is called Logical Chess: Move by Move, Every Move Explained, by Irving Chernev. I might have unintentionally butchered his last name… But Logical Chess: Move by Move, Every Move Explained – this was recommended to me by the chess teacher. His name is Vincent, and I call him Master Vincent, because he’s got a 2000 in chess score, so I call him Master Vincent. So this was recommended to me by Master Vincent… And here’s the quote from the book. “The master does not search for combinations.” In this case they’re talking about chess masters. “The master does not search for combinations, he creates the conditions that make it possible for them to appear.”

Where this is coming from is when you go to Washington Square Park in New York City, or any other public park where people are playing chess, and you see some hustlers who have the chessboard out and they’re wanting to play games – those experts who are very good at chess can play multiple games (most of them) very quickly, and they can beat most of the people they play. How can they do that? They don’t have all the combinations memorized, because that’s quite a powerful computer that you have to have in order to have all the combinations memorized. Instead, they put the pieces in place so that the combinations appear, and traps appear, and they can then win.

How is this relevant for real estate investing? Well, I was just talking to a friend of mine… He was about to put his second large multifamily property under contract yesterday; he had no properties a year-and-a-half ago, and he is the lead general partner on the first deal that he closed on, and then he will be the lead general partner, partnering up with his business partner, so him and his friend are the lead general partners on both deals… And he said “I’m excited about what’s going on. It’s also kind of surreal.” And those weren’t his exact words, but I’m paraphrasing… And I said “Well, this quote actually is perfect for you”, and I read him the quote, “…because what you’ve done” – he’s got a podcast he does on a daily basis, and he attends all the real estate investing events that he can attend, he has a full-time job, and he’s still doing a daily podcast, just putting in the work and setting the foundation. And I said “What you’ve done is you’ve created conditions for yourself to be successful, and now success is appearing in front of you, deals are appearing in front of you, investors are appearing in front of you because you’ve created the conditions to be successful.” And that is a recipe for prolonged success, that is a recipe for prolonged growth.

So the question when we look at our businesses should be “What conditions have I created that will make the deal show up? What conditions have I created that will make investors show up?” Because it’s one thing if we say “How can I get a deal?” No, no, no. Dumb question. Not “How can I get a deal?” The question should be “How can I create the conditions that will make a deal show up?” And even deeper, “What conditions have others created that make deals show up for them?” That gets you the real answer to the question that you’re really trying to ask and solve for. Because ultimately, you want a deal, you want investors, you wanna grow the business. So it’s not “How can I get a deal?”, you’re going straight to the effect. But you wanna identify what the cause is. So “What conditions can I create for the deal to show up?” So in this case, you cultivate your investor database, you start building out your team, you look at what others have done, you align yourself with someone or multiple people who are doing what you wanna do… All those things.

It’s asking the right questions… Tony Robbins talks about “Ask a quality question, and you’ll get a quality answer.” Same thing here. Don’t ask “How can I get a deal? How can I get investors?” ask “What conditions can I create/should I create/have I created, that have allowed a deal to show up?” And then that will lead yourself to the deal, to the investors, to the increased business that you wanna have.

Theo Hicks: Yeah, and I think  — you’ve kind of mentioned this already, but one of the reasons why we talk about the thought leadership platform all the time… Because you hear about making a podcast, and it’s like “Well, how am I gonna get deals from making a podcast?” Well, as you mentioned, you’re creating conditions so that people know who you are, you’re being perceived as an expert, you’re meeting people, and from that — you meet someone, and through them you meet someone else, or you learn something, and the next thing you know, you’ve set up a system that allows you to eventually bring in team members, bring in investors… And then not be a one-off thing; I think that’s the difference – if you’re thinking about getting a deal, then you’re gonna focus on just getting a deal. Maybe you’re going online and looking for a deal, and underwriting all those deals… Once you find that deal, you need to do that same process again, whereas this sounds to me like – again, correct me if I’m wrong, Joe, but you wanna create a system, whereas you having to actually hunt for a deal every time you want one… You do things so that deals are continuously coming to you, and you can choose which ones you wanna do. That’s kind of what I’m getting at.

Joe Fairless: Yes, that’s true.

Theo Hicks: Something else it reminds me of, too – and again, I’m not saying that real estate is lucky, but I think the same concept is applying when people say “That’s just luck”, or whatever. Well, no. You create the conditions so that you can actually get lucky. [unintelligible [00:14:03].08] be in that exact spot, at that exact time in order to be lucky. So that’s something that you have a lot more control over.

For example, let’s say you create a thought leadership platform and you’re talking about how you’re starting a business, and you’re interviewing people, but you’re continuously mentioning that you wanna do a syndication deal… And someone listening to this just happens at that time to be listing a deal, or knows someone who’s listing a deal… So that’s lucky, that that guy happened to be selling a deal, or happened to know someone selling a deal at the exact same time you’re doing that leadership platform, but you would not have been able to get lucky if you weren’t actually continuously doing your weekly, your daily show. It’s kind of a vague example, but I think it applies here as well.

Joe Fairless: Someone hits a half-court shot to win the national championship in basketball.

Theo Hicks: That’s a good example.

Joe Fairless: Lucky shot, but holy cow… I guarantee  you he had practiced that at some point in time… Plus, they made it all the way to national championship, they put in the work to get to that point, to place them at that moment in time. And yeah, can he hit it nine times out of ten, or even four times out of ten? Probably not. But he put himself in a position to have that opportunity, and then it happened to fall through.

Theo Hicks: And one thing I wanted to mention going back to that first lesson, when you were talking about playing Colleen… In me and my wife’s relationship I think I’m the Colleen.

Joe Fairless: [laughs] She’s really good at chess?

Theo Hicks: No, we play a different game.

Joe Fairless: Oh, Bananagrams. You play Bananagrams.

Theo Hicks: But when she wins, even though I’m — I’m more like you [unintelligible [00:15:38].00] but I’m still joking around about it all day… [laughter] Like “Oh, you really wanna play again? Are you sure? Are you sure you can handle that? I don’t want you going to bed sad, or anything…”

Joe Fairless: Yeah, that wouldn’t go over well in our household… Cool.

Theo Hicks: Yeah. Are those the two lessons?

Joe Fairless: Yeah,

Theo Hicks: Perfect. Well, as Joe mentioned, it’s been a long time since we did the last Follow Along Friday – about two months; we are gonna continue doing the trivia questions for these Follow Along Fridays moving forward… The last Follow Along Friday we did, the trivia question was — and this is with me and someone else… And that is “What is the main difference between the cash-on-cash return metric and the internal rate of return metric?”

If you remember, these were all things that came out of either a blog we’ve done, a podcast we talked about, a  book we’ve written… And the one-word answer would be “time.” The cash-on-cash return is something that just is however money you make divided by the number of years, whereas the internal rate of return metric is something that — there’s a fancy formula for it, but the best way to calculate it is in Excel, and it takes the time value of money into account.

If I invest $1,000 and I receive my thousand dollars back in one year, then that IRR is gonna be higher than if I received $1,000 back in 20 years. So the main difference between those two metrics is time. I think when I mentioned the question I specified it being a one-word answer, so that one-word answer is time.

This week’s question is going to be kind of similar, but this time it’s gonna be the difference between the two main IRR factors. So what is the main difference between IRR and XIRR? This will be more than a one-word answer, but it may be condensed into one word. But it can also be a sentence of what the main difference between these two factors are. And again, you can submit this either if you’re listening to the podcast, info@JoeFairless.com, or if you’re watching this on YouTube, just put it in the comments below, and the first person to get this question correctly will receive a free copy of our first book. I can’t ask Joe about these ones, because obviously, Joe knows the answers to these questions, and then I’ll ruin this…

Joe Fairless: Or make me look like an idiot that I don’t know.

Theo Hicks: Exactly.

Joe Fairless: In this case I do know.

Theo Hicks: Yeah. You taught me this one. And then lastly, the apartment syndication resource of the week – we are still doing Syndication Schools. Those release two times a week on the podcast and on our YouTube channel… And for the majority of those we give away some sort of free document that accompanies those episodes. These are PowerPoint presentation templates, these are Excel calculators, PDF how-to guides, things that will help you in your apartment syndication journey… So we’re featuring some of the older documents on Follow Along Friday, just so you make sure you’re taking advantage of those.

This week is from series number 16, which was “How to secure financing for an apartment syndication deal?” We talked about the different types of loans, how to think about what type of loan to get… It’s a four-part series, so about two hours of content. For that series, the free document we gave away is the Top Loan Programs document.

This document goes over the characteristics, the pros and cons of the top apartment loan programs: agency debt, bridge loans, things like that. You can download that for free in the show notes below, or you can go to SyndicationSchool.com and download it in series number 16.

Joe Fairless: Everyone’s going to the conference – yes, in Keystone, February 20th through 22nd. If you haven’t signed up, you can go to BEC20.com and sign up. There’s a code for 5% off on the website; it’s  “5deal”, it gets you 5% off. Tickets go up every week, so you’ll wanna lock it in now.

I wanna meet you, shake your hand, give you a hug, whatever is appropriate, in-person. We haven’t announced yet what the panels and sessions will be, but I’ve got it in front of me, so I’ll give you a couple… We’ve got one panel, “Stories of the professional investor”, where we have passive investors talking about how they approach their finances and how they think about investing in deals, and what systems they use from a passive investor standpoint.

We have two tracks – one passive investor track, and one active investor track – throughout the conference, for the two days. On the active side, which is gonna be very interesting for passive as well, we have “Overcoming hardship.” Some individuals who have gone through bankruptcy, had some issues with SEC compliance, what happens after that… One of them has gone to jail, and has turned his life around. He’s gone to jail twice, actually, and has turned his life around… So if you think you’ve got it bad, then jail, bankruptcy, SEC on you – these individuals have overcome hardship and they talk about their story.

And then we have Frank, the co-founder of my company, and my good friend and business partner, with Ashcroft Capital. He’s got a presentation on underwriting in asset management he’s gonna be doing.

Lots of stuff… Go to BEC20.com and you can sign up. Looking forward to seeing you there.

Theo Hicks: Perfect. I am looking forward to it. I wasn’t able to make it last year, so I’ll definitely be there this year as well, meeting everyone.

Joe Fairless: Cool. Are we good to go?

Theo Hicks: Yeah.

Joe Fairless: Alright. Best Ever listeners, I enjoyed it; grateful to be back, and talk to you again tomorrow.

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JF1888: Lifelong Entrepreneur Builds Real Estate Investing Business with Dan Gorman

Dan had a few different business ventures before getting into real estate investing. He’s built a pretty good size business and portfolio. We’ll hear how he got into real estate, and a few different deal specifics. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Banks want to see buyers with some skin in the game” – Dan Gorman

 

Dan Gorman Real Estate Background:

 


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

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

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


TRANSCRIPTION

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

Dan Gorman: I’m great, Joe. How are you?

Joe Fairless: I am doing well, and looking forward to our conversation. A little bit about Dan – he formed United Property Group in 1999. He grew his portfolio of multifamily to over 700 units. Based in Cincinnati, Ohio. With that being said, Dan, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Dan Gorman: Yeah, sure. Just a  quick background on myself – I’ve graduated college with an electrical engineering degree in 1989, and I really did not connect with that at all, so I started managing a jewelry store that I had worked in during high school and college. Then I started my own jewelry brokering business. I was a diamond broker there for a few years, and just found — you know, the basic thing that Michael Gerber would say with The E Myth is that I found myself owning a job, and not a business. I was driving 50,000 miles a year, I was making good money, but if I wanted to go on vacation or I wanted to take a break, I didn’t make any money, so I started getting interested in real estate, to try to even out some of those highs and lows in my income [unintelligible [00:02:34].00] that had been sitting there for three years, one of those Carlton Sheets “No Money Down” series, and listened to it in the car over and over again… And just really got excited.

My dad was a homebuilder, and I’ve always liked construction-related things, so I ended up using his techniques to buy 25 units no money down, near the University of Cincinnati, and then pick up another 19 with no money down… So I had about 44 units there. Went from 0 to 44 in a year, so that was a lot of work. Those properties were pretty run down, filled with some college students, and just a heck of a lot of work.

I wasn’t really making a lot of money, because I had to give somebody a free apartment and pay them a little bit of a salary to help me out… So I found out that that spot, with that certain number of units was a lot of work, but didn’t really afford me the ability to hire a maintenance person and a manager to do all that for me. So I was getting  a ton of calls a day from that, and then trying to run my diamond business at the same time.

One of the guys that I was trading Rolexes with at the time – you know, he’d get me some, I’d get him some – he was an investment banker, so I sat down and I had lunch with him and I said “Man, I really wanna figure out how to buy something big enough that has [unintelligible [00:03:46].26] I don’t really have any money. What do I need to do to do something like that?” He was kind of like “Well, you know, that doesn’t happen very often, but if you bring me a deal that looks like this (he was talking about cap rates, and stuff), then I could help you out.”

Through a series of really weird and interesting events I found a 168-unit apartment community that had a Section 8 contract on it in Hamilton, Ohio. It was full (100% full), with a waiting list, and it was in foreclosure, because the owner was in prison for fraud. So I talked to the manager of the property and she said “Well, you really ought to take a look at this place, because we’ve got this long waiting list, we’re 100% full, we run great, and it’s been in receivership for two years.”

Joe Fairless: Hm…

Dan Gorman: So I got a lawyer, I said “I don’t know anything about this stuff, but would you look at this? Does this seem weird to you, that they’re not moving it towards getting any finality with this situation?”

Joe Fairless: Yeah.

Dan Gorman: We basically ended up filing something with the court and we said “Hey, this doesn’t seem right. This lender is not being made whole, and you’re just kind of [unintelligible [00:04:50].14] this thing for the last two years.” So the judge agreed, and he said “Okay, we’re gonna have a trial in 30 days and we’re gonna figure this out.” Or a hearing, I guess. I don’t know if trial is the right word.

So only three people showed up to bid on it, I was one of them, and ended up buying — that property had $500,000 NOI, and because I brought my investment banker with me and I had him looking at that, and the other two buyers that showed up had only heard about it a few days before that and they were very unwilling to commit, I ended up getting that property at 3.1 million dollars, with a $500,000 NOI…

Joe Fairless: Oh, my…

Dan Gorman: It was about a 17% or 18% cap.

Joe Fairless: [laughs]

Dan Gorman: The guy got the financing for, 100% financing, and it came with $100,000 in the bank…

Joe Fairless: Oh, my god…

Dan Gorman: So that was the opposite of no money down. That was no money down plus. That property changed the trajectory of my life, basically… Because I started thinking “I’m making a lot of money every month with this place, I’m driving 50,000 miles a year with my diamond business and I’m not making nearly as much as I’m making in this big real estate deal that I’ve got here”, so I’ve just kind of let that go and decided to focus on real estate full-time. I was able to pull about a million and a half dollars in equity out of that within 19 months, and used that to propel my investment portfolio over the next few years.

I just dipped my toe in a lot of different things over the next 5-6 years. About three mobile home parks, with about 300 pads total. I did a [unintelligible [00:06:21].28] with about a 120-unit apartment community, I bought a couple market rate communities, and then bought a neat apartment community with a Starbucks and a Graeter’s Ice Cream attached to it… So I was just exploring the different types of real estate to try to — because I just was really interested in doing a little bit different type of deal the next time than I had done before.

So about 3-4 years ago I was able to continue refinancing, and things like that, so I had money that I could redeploy, but it felt like it was getting more and more difficult to invest in apartment communities, just because the cap rates started getting ridiculously low, and nothing was a good deal. At the same time, I was getting these unsolicited offers for a lot of different things in my portfolio that I thought were very challenging to ignore.

The problem when you sell something at a market high like we’re in right now is that you have to replace it if you don’t wanna pay the tax on gains. You’ve gotta replace it at a market high as well… So it always makes me nervous when I’m selling something that I’m very familiar with and I’m buying something that I’m not familiar with, because there’s a lot of things that could go wrong with that scenario… So if you can’t get a good deal, you’re kind of stuck, I think.

So that one apartment community that I bought for 3 million dollars in 2001 I got an offer for 10,5 million dollars a couple years ago. So that was just an offer I couldn’t ignore. It was a really aggressive offer from this firm, so we went under contract and I spent about 18 months trying to find something to replace it with, so I wouldn’t have this huge tax hit, and I just was unable to find an apartment community that I felt was a decent deal.

When you redeploy that much capital, then you’re starting to compete against really large players in the market, that are willing to pay 5% and 6% for stuff that’s 1960’s and 1970’s vintage, which is — I can’t play in that same box…

So I ended up just — kind of at the last minute I found a broker, and I was talking to him about my challenges. This is a guy that worked at [unintelligible [00:08:21].10] so he found me a portfolio of 14 Dollar Generals.

Joe Fairless: Huh.

Dan Gorman: He said “These are all brand new, they’ve got brand new 15-year leases on them, 7% cap, so you’re gonna get better cashflow than you would get on all these apartment communities you’re looking at. There’s no unknowns, you know exactly what you’re gonna get for the next 15 years.” So I ended up shifting all the money from that one apartment community into those, and that’s been kind of nice, to just take a deep breath and not have to worry about those for the next 10-15 years.

So this is what I have been doing. Selling some of these things where I was getting these really high offers, and then… I haven’t really been able to find a lot of apartment communities to put this money into, but I feel like it’s been very easy for me to find office buildings.

I bought a strip center, and a few office buildings, and it just seems like there’s more opportunity there if you’re doing that in a decent part of town. You find somebody who has owned the thing for 20, 30, 40 years and is just kind of tired of it… There’s a lot of opportunity there, so that’s what I have shifted into. It’s kind of what I’m doing right now, as I look for things that need to be repositioned – office buildings, shopping centers… I’ll take an apartment community whenever I can find one, but I just haven’t been able to find one lately… And just go in there — if you get it cheap enough, you can really do some nice stuff with it, and it just really gets exciting for the potential tenants that are looking for things like that.

On a side note – I don’t know if you wanna stop there and revisit any of that, but I also opened up a company in Africa, in Rwanda. My dad was a builder, and I’ve just always been very interested in it, and I was taking mission trips to Nicaragua, South Africa, and just seeing how inefficient the building process is there, so we are working on a way to build an affordable concrete home very quickly over there.

We’ve got a model home that’s been improved by the banks and by the government. We’ve got another four that we just built here, and I’m gonna be flying over then within the next 30 days to talk to some government officials about [unintelligible [00:10:20].00] 200 they wanna build in this neighborhood, so hopefully that will work out well.

Joe Fairless: There’s a lot to talk about. [laughs]

Dan Gorman: There is, I know. Yeah…

Joe Fairless: A whole lot to talk about. What a fun story… So let’s dig in a little bit, and I’d love to just learn more about some of this that you’ve mentioned. First, how much did you 1031 from the sale of the place in Hamilton, 168, into the 14 Dollars Generals?

Dan Gorman: Well, the sale of the apartment community was 10,5 million dollars, so I had to find another property or group of properties that was at least 10,5 million dollars. So I think the deal ended up being somewhere around 14 million dollars. We dropped one or two of the stores because they had some environmental issues… So in the end we bought 12, and we just had to transition all that 10,5 million dollars to the next deal for the Dollars Generals, plus — I had a really large chunk of equity in that deal, so it was very easy for me to get the loan for the difference there between the 10,5 and the 13 or 14 million that  it ended up being. So that provides really nice cashflow for me right now, without much risk or effort.

Joe Fairless: The 1.5 that you pulled out of the property in the earlier days – had  you ever seen 1.5 million in your bank account up until that point?

Dan Gorman: No, that was a really cool day. That’s a great question. I’ve never had anybody ask me that before… I had never seen more than probably 10k in my bank account. You have to remember, when we acquired the 168 units, by that time I was over 200 units, and I had bought all these properties with no money down, so I’d really never had money to buy the properties to begin with, or had a lot of money after I purchased them, because if you really leverage up on some of these, you’re not gonna get a lot of cashflow. But when I got that, that was a game-changer, it was exciting.

Joe Fairless: What was more exciting – seeing that 1.5 in the bank account, or seeing the proceeds from the 10.5 million dollars transaction in the custodian’s account for your 1031 intermediary account?

Dan Gorman: I would definitely say the most exciting thing on the journey so far has been the day in court when the judge said that we got that property, that 168-unit. That was such a huge jump for me, going from 40-something units and really not having any idea what I was doing, to getting a property that large. That was really, really exciting.

Comparing the two things that you asked about – the 1.5 million dollars cash in my bank account, and that first refi for that large multi-million-dollar transaction into the bank account recently, I would say it was much more exciting back then. After a  while, when you’re doing these and money is moving from one account to the next, from one deal into the next, I never really think of it as like being really well off or wealthier, or anything like that; it just always feels like these are just transactions that move back and forth. I don’t know if you know what I mean.

Joe Fairless: You mentioned earlier that there were some weird and interesting events that led you to the 168-unit. How did you find out about the 168-unit?

Dan Gorman: Well, I had met with that investment banker, and he kind of gave me some criteria that I would need to look for… So I just started beating the bushes, and back then – this was right when the internet was just taking hold, so I was still looking in the newspaper in the classifieds, and I saw–

Joe Fairless: What year is this?

Dan Gorman: This is probably 2000.

Joe Fairless: Okay.

Dan Gorman: So I saw in the classifieds that there was an apartment community up in Dayton, Ohio that was for sale. It was 140 units, and something in that ad indicated that it was troubled. So I called the broker and the owner, and they sent me up, I looked at it, and it was almost completely abandoned. It was a  war zone. It was terrible. There might be three apartments occupied in it, but it was lots and lots of [unintelligible [00:14:05].11] scary.

So I called the guy back and I said “I’m not really comfortable with this property, even if you give it to me for free. I don’t even feel comfortable walking around it.” And he said, “No, no, you’ve gotta go interview the lady at this apartment community in Hamilton, because I’m gonna hire her and her maintenance guy, and we’re gonna send them up there and they’re gonna turn it around. You don’t have to worry about it. She’s used to doing stuff like this.” He said “Just go in there and talk to her.”

So I went and I sat in front of her and I said “Hey, I’ve been talking to this guy, and he says that you can turn an apartment community like that around.” And she said “Well, yeah, I can do it, but [unintelligible [00:14:37].29]” and I wasn’t really getting any response to my efforts to find out why it was still in receivership, and my attorney wasn’t getting a response either from the receiver…

So when I talked to somebody at HUD, I’m like “[unintelligible [00:14:54].08] that the apartment community is suffering, that the tenants are suffering because there’s been no movement here. Is there any hints that you can give me to help move this along, to see if there’s a chance to acquire this and make a difference here?” And the lady at HUD, she said “If I were you, I would start emailing your congressmen, your senators, the president – everybody… Because this property has a government contract on it, and this is not supposed to be happening.”

So I just kept sending these email blasts to everybody, and somehow that trickled bad to the received, and to HUD, and places like that, so I did get this little — it was interesting, when I was in the courtroom and we were talking, and the judge said “Hey, we’re gonna take an hour break for lunch”, the receiver came up to me and he goes “Hey, this is a good opportunity to email the president again.”

Joe Fairless: [laughs]

Dan Gorman: So he found out about all those emails I was sending, and he would have no way of knowing that I emailed the president… So I’m not sure; it was kind of interesting. So the key was that the judge, when he set that thing for a trial – or a hearing – he only gave 30 days, and that was really not enough time to advertise, or anything, so he kind of had to know about the deal when he showed up. It was a little bit of a risk. I mean, we were getting such a  great on it, but we really didn’t have any opportunity to do any third-party reports or environmentals, or anything like that… So there was risk.

Joe Fairless: One question on the Dollar Generals… So you’ve got a chunk of equity, you put it into these Dollar Generals, they’re on 15-year triple-net leases… Knowing what I know about Dollar Generals – which isn’t a whole lot, but I’ve shopped at some – they’re usually in little Podunk areas, remote parts of the map… And first off, are your Dollar Generals in very small towns/off the beaten path?

Dan Gorman: Yeah. Pretty much the way that it works is you have these developers, and they just continue to move on down the road, up through a state or whatever, and they’re building a Dollar General here, and then 30 minutes down the road they build another one, or two hours down the road, or however long it is… So the majority of the ones that I’ve got now are in pretty small areas.

I think that I’ve got really nice risk – I’m not gonna say risk-free, but really nice management-related type of property where there’s gonna be no problems at all for the next 15 years, but that does not mean that they’re not without risk. Because I think what you may be alluding to is that when that 15-year lease comes — what’s great about Dollar Generals is they’ve been around since the 1950’s. I don’t see them going out of business [unintelligible [00:17:18].19] with a bankruptcy type of thing where you’re not gonna get your rent money, or whatever. But when it comes to the end of that 15 years… Now, a company like Dollar General is opening up thousands of stores a year or more; they’re gonna make some mistakes and they’re gonna say “Well, that little community there is just really not producing that much revenue, so we’re not gonna renew that lease.” So that is kind of stuck in the back of my head right now, where in 15 years I’m gonna have 12 stores that are all kind of renewing at the same time, and that does present some risk, because if Dollar General does leave, and I’ve paid 1.2 million dollars for that location, the chances of me finding another tenant in that area…

Joe Fairless: Not gonna happen.

Dan Gorman: …where when they signed a lease makes it worth that much money is pretty big.

Joe Fairless: Yeah.

Dan Gorman: So my strategy to deal with that is I’ve got a couple brokers out there working for me, and I said “I wanna continue to trim this portfolio where –” So I’ve got 12 of them. Within the next 12 months probably, even though we just closed a year and a half ago, while they’ve still got 11, 12, 13 years left on the lease, I’m gonna try and shed some of the ones that might be in some of the more remote locations, or maybe don’t perform as well, if I can figure out which ones those are… And then replace them again with more Dollar Generals or something similar.

Joe Fairless: Okay.

Dan Gorman: So we just continue to update the portfolio with leases that are more spread out and not all expiring at the same time.

Joe Fairless: Well, you read my mind with where I was going with this. [laughs] I figured you’d thought about that; I was curious about your thought process.

Dan Gorman: Yeah.

Joe Fairless: Cool. And you mentioned that you’ve done mobile home parks, low-income tax and bond deals, market rate apartment community with some mixed-used, with Starbucks and Graeter’s, the ice cream shop in Cincinnati… Your background is in electrical engineering; a lot of the engineers I know are very methodical about things, and it surprises me a little bit that when you hit a walk-off grand slam with the first deal, that you chose to do other things besides what you just hit a grand slam doing. So why choose all these different variety of asset classes? Clearly, you’re in multifamily for most of them, but it’s a different flavor of multifamily, and then you did a mobile home park… So why not just go with what you had been doing initially, that made you all the money?

3: I don’t know. The engineer in me — I really love the numbers. The most favorite thing that I do involved in real estate is just figuring out a good deal and figuring out how to close it. That’s where I get all my juice. I don’t know if you’re the same way or not, but…

Then, after it’s closed, I keep saying to myself “Okay, I’m gonna take a break and just focus on the portfolio etc.” but I can’t help myself. Within 24 hours I’m looking for the next deal, it feels like. I really enjoy the challenge of figuring something out.

So I wouldn’t necessarily say I’m gonna go specifically look to buy mobile home parks now, or I’m gonna specifically look to do a tax credit deal. It’s just kind of those opportunities end up in front of me as I’m doing my research for the next deal, and I’m like “Wow, that’s interesting…” And then I start just kind of going down that path to try to figure out whether or not  — well, I guess you can either continue to wait for the same exact type of thing you already have, or if something comes along that seems interesting too, you can go down that path.

I feel like it was — I wouldn’t say it was the smartest thing I’ve ever done, diverting into mobile home parks, but when you look back at it now, after 20 years, the breadth of experience has really helped me become a better investor now.

So luckily though, we were getting so much cashflow from that 168 units that it made it okay if I made a little bit of a mistake. The mobile home parks for me was a mistake. It didn’t lose money, but we didn’t make much money on those, and I just could never figure out how to get that right.

But if I’d had a capital call for myself, where I had to jack some money in, I was able to do that because the cashflow on the 168-unit was so great. I don’t know if that answers your question or not…

Joe Fairless: Yeah, it does.

Dan Gorman: It just kind of makes it more interesting for me. I always felt like — I guess from the very beginning I never really had any money, and I think sometimes people go a couple different ways when you get a big chunk of money and you’ve never had any… You can kind of like  hunker down and protect it… But for me, I was always like “You know what – you only get one life; let’s try some cool stuff and see what happens. If it some of it or all of it goes away, we can start over again.”

Joe Fairless: You mentioned that mobile home parks didn’t lose money, but they didn’t make it. Was that the least profitable out of the things you’ve done since?

Dan Gorman: Yeah, I would say definitely the least profitable. I did that with a buddy of mine, one of my best friends. He was looking to buy business at that time, and I’m just kind of like dipping my toe in the mobile home park business… So we kind of gapped this business plan together, where we were gonna buy 1,000 pads together, and hire a really high-powered, regional person to run that for us. So we acquired three parks fairly quickly, and what we ended up doing was we felt like if we bought a park out in the middle of the country, that there would be the possibility of competition because they could maybe open a different park a few miles down the road, or whatever… So for one reason or another we ended up focusing on more urban parks, or parks that had been around for a while, but are surrounded by a populated area, because we felt like the land would be desirable, and we would be an easy thing to sell because of the proximity to the population, and things like that.

But what we figured out was that when you have a mobile home park in a really populated area that’s kind of old and run down, that you’re not the most popular people in town. The municipality usually isn’t too excited to have you around, they cost a lot of money to maintain those homes… So the problem is that when you have a park that’s been there for 50 or 60 years and you’ve got a lot of old homes in it, a lot of the regulations continue to change and get more and more strict about those homes. So if you ever want to take a home out of there, it is super expensive to bring another home back in… So you end up having to continue to — we have these trailers that are kind of grandfathered in, and for us it was just this gradual slide down that was really tough to stop, and no matter what we tried, how much money we threw at the problem, we just could not solve it… So it was just really challenging for us.

So I would never, ever touch a mobile home park again myself. Now, I know that people love them… I was just on vacation with a guy who’s got a bunch of them and loves it, but I couldn’t figure out how to do it well.

Joe Fairless: Based on your experience as a real estate investor, taking a step back, assessing the last couple decades, what is your best advice ever for real estate investors?

Dan Gorman: I don’t know. I don’t know what to say to that. I feel like I try to deal with a lot of integrity with the way I treat my employees and my tenants, and my faith is really important to me, and I feel like if I let that guide my actions and kind of just trust that this is gonna work out, and things like that, [unintelligible [00:24:11].23] what I do with my money, and stuff, I feel that things end up working out okay in the end.

I’d say for the most people that meet with me and they wanna figure out how to get started, and they wanna buy a single-family home or whatever, what I say to most of the younger folks that I meet with is that it’s real estate investing. If you want to start growing, you’ve gotta have this plan to get big chunks of money, because the days of the no money down stuff – that might have worked 20 years ago. It’s a little bit more challenging now, with these banks… They want to see buyers with a decent amount of skin.

So I’m usually advising folks to work out some flips, and things like that, so they can get these chunks together, and then figure out how to — get a chunk of cash, so you can get something of a decent size… Because a lot of the people that I see that are investing in two-families and four-families – it’s a challenge, because if you have a unit that’s empty for a while, or you need a roof or a boiler or whatever, that kind of wipes out your profit for the year, and it can be a little bit defeating or deflating for some of those folks.

But if your end goal is to say “Okay, I wanna have an apartment community that is big enough to have a manager and a maintenance guy, so I’m gonna need to have $750,000 cash to do that, then let’s figure out how we start from nothing, or whatever I’ve got, to get to $750,000.” If you’re rolling that money over to it, you accomplish that goal.

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

Dan Gorman: No.

Joe Fairless: Well, we’re gonna do it anyway, regardless if you’re ready or not… [laughs] Alright, first though, a quick word from our Best Ever partners.

Break: [00:25:42].27] to [00:26:21].14]

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

Dan Gorman: Best ever book I’ve recently read… I’m just gonna go back to The E Myth, which is the Michael Gerber book.

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

Dan Gorman: Paying too much for a property.

Joe Fairless: How much did you pay?

Dan Gorman: Well, I paid four million dollars for an apartment community, then I put the tax credits on it, and stuff like that… And I could never recover, because I paid too much. So this is what I’ve learned from all my mistakes – it’s a very common mantra in business, which is that you make all your money when you buy, so… Don’t fall in love with it. Walk away if you can’t get a good deal.

Joe Fairless: Do you still have that property?

Dan Gorman: No, I just sold it within the last six months. I ended up doing okay on it, but it was very painful. I owned it since 2004, and it was just very, very challenging for many years.

Joe Fairless: What did you end up selling it for?

Dan Gorman: Well, it was complicated, because it was this tax credit thing, and all that kind of stuff… So we ended up probably making 1,5 million dollars on the thing when all was said and done… But halfway through it though, I was talking [unintelligible [00:27:27].15] about going bankrupt, because it was so stressful and challenging, because we paid too much… And luckily, we were able to survive that period, but very, very stressful.

Joe Fairless: Hm. Besides paying too much on the front-end, what’s something else about that deal, if you were presented it again, that you’d do a little bit differently?

Dan Gorman: Well, I was being counseled on that deal by a lot of people that we’re gonna make money if I closed on it, so… I did not fully understand it, and I can’t even say I understand it now. [unintelligible [00:27:58].13] low-income tax credits, things like that… So I got into a deal not only paying too much for the property, but also not fully understanding the mechanics of the financing, and how many fees and things like that there would be involved with it… So I would say that the consequences of making a mistake because either you pay too much or you don’t fully understand can really be magnified with real estate. Leverage is great in real estate to be able to really magnify your wealth, but also leverage can come back to bite you when you’ve only put a little money down, but you’re responsible for a huge project, and you carry the burden of that huge project if it goes sideways.

Joe Fairless: On the flipside, a more sunshine and roses – what’s the best ever way you like to give back? You mentioned it a little bit, about the concrete homes that you’re building in Rwanda… What’s the name of that company?

Dan Gorman: The name of my company is United Property Group, and the name of that company is United Property Group Africa. So if you looked at UPGAfrica.com, it’s got a video of the homes, and it kind of explains the process, and things like that. So that is a very, very exciting thing to be veering into. I tried to devote enough time to it, but I’ve actually hired an American guy to kind of go back and forth, and [unintelligible [00:29:08].03] But I think that the potential, if you can figure out how to solve some of the issues in the developing countries and make money at the same time, I feel like there’s a huge, huge potential.

So if you wanna make money, you can. If you wanna do it as a philanthropic effort, you could do that as well, but… There’s large potential.

Joe Fairless: And how can the Best Ever listeners learn more about your company? You just mentioned it, and I’m actually on your website as you were talking, because I wanted to check out the UPGAfrica.com… But any other way, or is that the best way?

Dan Gorman: That’s probably the best way. We’re redoing our website right now, so my website is not the greatest right now… UPGAfrica.com is the most exciting thing I’ve got going on right now.

Joe Fairless: Dan, thanks for sharing your story, talking about lessons learned, talking about what it was like getting 1.5 million in the bank account when you’d seen about two or three less zeroes at most in your bank account up until that point… And lessons learned for how you are mitigating the risk of when you have these 15-year leases on the Dollar Generals that you own, what you’re doing now to help mitigate risk for the future on that, and then obviously the other transactions that we talked about… So thanks so much for being on the show. I hope you have a best ever day, and we’ll talk to you again soon.

Dan Gorman: Okay, thanks Joe. It was nice talking to you, too.

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JF1872: Our First Ever Quarterly Team Meeting #FollowAlongFriday with Theo Hicks

We had our first quarterly team meeting earlier this week. Many of us real estate investors have teams that are spread out across the country, our team included. Joe finds it important to get everyone together to discuss the company and where we are going. Theo will cover the structure, benefits, and takeaways from our first team meeting and why you should be doing it too. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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“Even if you’re the leader, a team member might have a better idea than you”

 


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


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners, and welcome to the best real estate investing advice ever show. I’m Theo Hicks, and today is Friday, which means it is a Follow Along Friday. Usually, it’s me and Joe on Follow Along Friday, going over the lessons we learned from last week’s interviews, but this week we’re gonna do something a little bit different. It’s just gonna be me today, and we are going to talk about the Best Ever quarterly team  meeting that we’ve just completed earlier this week.

Now, I know Joe mentioned this before on Follow Along Friday… He interviewed someone who has a team that is spread out across the country, and in  order to keep the team on the same page, he schedules quarterly in-person team meetings, assuming where he lives. Joe thought that was a really good idea, so he decided to quickly implement that into our business… And we just had our first in-person quarterly team meeting this week. It was on Monday.

I wanted to go over the structure of our team meeting, and then go over some lessons and some benefits that I learned along the way. Then we’ll wrap up with the standard trivia question, and we will see you then again tomorrow, for Situation Saturday.

First of all, this was the first time that we as a team have met in person. Obviously, it’s Joe, it’s me, and then we’ve got a few other team members that he’s brought on recently, that I personally hadn’t met in  person, because I live here in Florida. One of the team members lives in Dallas, one of the team members lives in Denver… So the one main benefit, I would say, to having this in-person team meeting is just putting a face and a body with a voice or with an email. Obviously, we’ve talked before, but meeting in person is a lot different… So that was one of the main benefits, and that’s essentially how the meeting started out. We all walked into the room and all saw each other, and introduced each other, and it was just really good to actually see everyone in person.

Before we had the quarterly team meeting – and again, I’m gonna try my best to go over the structure, the benefits, and also talk about it in the context of why you should be doing it as well… So if you have a team that is not all located in the same city, or if you have a team and everyone works at home and you rarely see each other in person, it would be highly beneficial to have an in-person team meeting. We’ll go over why here on Follow Along Friday.

The first thing that we did that I really liked after we all introduced ourselves to each other is we went over celebrations. So the first part of the agenda was celebrations, wins, victories and progress. Everyone shares one personal victory and everyone shares one professional victory that they are proud of. In doing so, we got to learn a little bit about what’s important to everyone, what they’ve been working on, any big projects they completed recently, things like that.

And then after that we had six specific outcomes of the meeting, and that’s what we’re gonna focus on for the remainder of Follow Along Friday.

Again, Joe is very outcome-oriented, so we went into this knowing exactly what we were going to accomplish, and what our purpose was for the meeting. So the first outcome – we’ve already gone over this – is that everyone meets in one place for the first time, also to make sure we understand what each of us does… There’s a lot of things that we do individually, collectively, going to one thing. Meeting four times a year is important for our alignment, also to talk about target audience, adding more value to their life individually and collectively… So basically we all met for the first time, and then that was kind of going into what the other outcomes were, which we’ll get into in a second. And of course, a part of that was going over those personal and professional victories.

This next part, which I think was the second most valuable thing that I personally got out of this quarterly team meeting was that everyone on the team created a PowerPoint presentation before we attended the meeting, and this PowerPoint presentation went over exactly what each person does on a daily, on a weekly, on a monthly, and then on a one-off or annual basis. Basically, what they do.

When you’re part of a team at such a big business, it’s got marketing, and social media, then you’ve got an assistant, and you’ve got investor relations, and then you’ve got me, which is kind of all over the place, you’ve got Joe, who also does a lot of different things as well – once it gets that big, it’s hard to stay on top of what everyone else is working on. Yeah, we have morning meetings a few times a week, but still, I think it’s very important for alignment, but also for efficiency to know exactly what someone else is doing.

Here’s an example. Let’s say I have a task where I do investor emails. And then once I send those investor emails out, the next step in the process is someone’s taking in questions from investors. Or maybe it’s a new deal email, and then someone else on the team is taking in the commitments. Well, maybe there’s something that I’m doing on the front-end, creating those emails, that is making it difficult for the next person to take in all those investor commitments. So by learning “Okay, well, who is actually sending me work, and who am I sending work to, and what are they doing with that work once I’ve sent it to them?” Knowing that could help you understand if there’s things that I can do better to make their lives a little bit easier, or that they can do better to make their lives a little easier. Then, of course, it’s also great just to know what’s going on.

So the format of the PowerPoints — and again, this is just what we did; you guys can do whatever you want if you have your quarterly team meeting… But I do highly recommend doing this. I’m not sure if we’ll do this each quarter, or if we’ll just do this every year, depending on how projects change… But the format was you first talk about projects that you have completed, that you are proud of. Next was to go over what you do regularly, so what you do daily, weekly, monthly etc. Next was to go over challenges that they faced… And what was nice about that – it was interactive; it was only six of us in the room, so if someone’s facing a specific challenge, someone could butt in right away and say “Well, maybe you could do X, Y and Z to make that specific aspect of your job a little bit easier.”

Next, what we enjoyed doing the most, and then projects that we are currently working on. The one thing that I added in – and I went first – was my biography/my background; so where I went to school, jobs I had before this… Just to see where people are coming from, just to see what skills you’ve acquired from previous jobs, and maybe just to give someone a little bit more personal information about yourself, so you can relate that much easier.

So once I did that, every single person that went after me also did their bio, which was also interesting to see how diverse the backgrounds were of the people on Joe’s team.

So once we did the PowerPoint presentations – again, these were prepared beforehand – the next part was one of Joe’s mentors presented to us about personality. So we all took personality tests beforehand, and then based on those personality tests, you’re assigned a letter. I was a C. A lot of people on the team were Ds, or S’es… So one of Joe’s mentors came in to talk to us about the results of our personality test and how different personalities need to be communicated to differently.

One funny tip that they had is that at one of his previous jobs they all had their personality types on their doors, so that when someone came in through their door, they would see “Oh, this person is a C, so I need to talk to them this way. This person is an S, I need to talk to them this way.” So that was interesting.

But after that, we got into what I think is the most important, and what I think that we’ll most likely do some form of this every quarterly meeting… Even if you’re by yourself you should do this, but especially if it’s you and someone else, or you and multiple people, you should 100% do this at least once a quarter… And that was doing a deep-dive into our target audience. The main outcome of this was “How can we add more value to our target audience?”

I’m not gonna go into specifics on what we talked about. I’m gonna keep it more general, so that it can be applied to you just in case your target audience aren’t passive accredited investors… But basically, what you wanna do is you wanna have a whiteboard; you want one of those big paper boards, that are kind of like big, massive post-it notes… And the first thing you wanna do is you wanna define your target audience. What we did specifically — well, not specifically, but what we did was each of us has a different interaction with the target audience, so based on that interaction with our target audience, who are they? What’s the demographic? What do they like, what don’t they like? We thought about it, again, based on our personal interaction with them and what our observations were based on that. So that was the first step – we had a big list of “Okay, here are the characteristics, here’s our observation of our target audience.”

The next one that we did was we went over challenges that our target audience faced. So what are the main challenges that your target audience is facing? Not necessarily things that you’re doing wrong, but just in general. So for a passive accredited investor, maybe one of their challenges is time management; they’re being presented too many opportunities. So creating a massive list of all of the different challenges that your target audience is facing, that’s number two.

Number three is to create  a list of – in our case – ways we can add value to our investors, or ways we can add value to our target audience. For you, it would be the ways you can add value to whoever your target audience is, or ways you can increase — more deal leads, or whatever your main goal is. And then all of us, together — again, for all of these we came with prepared answers, and we all listed out all of our answers, and then based on that we kind of had a brainstorming session and some more answers that came up… Because obviously, if I have a list of ten, maybe everyone has the same five, and the other five are different. I hear someone else’s different ideas, it generates more ideas in my mind or in their minds…

So we created a massive list of all the different ways that we can add value to our target audience. And then the last step was to go back through all of those ways to add value to the target audience and assign those to some member on the team. We had color coding, so if it was Grant, he was gonna do this color; if it was me, it was this color; if it was Joe, it was another color. After we went through all the list and assigning to people, we set dates for when those needed to be accomplished by.

Again, just to summarize – step one, create a list to define your target audience and their characteristics and your observations of them. Two, challenges they face. Three, ways to add value. Four, who’s going to actually do those ways to add value, and then lastly, what is the timeline for that.

That is how the meeting ended, so now we all have a list of action items to do for the next quarter or so to add value to our investors.

Overall, again, I think this was a really great idea. I didn’t really know what to expect, but I know it was nice meeting everyone in person, of course… But it was really powerful to go through the exercise of capturing everyone’s ideas on how to add value to our target audience… And I think others would benefit the same. Since everyone has such a diverse background, and it’s likely the same on your team as well, everyone’s gonna have different ideas; everyone interacts with your target audience differently; everyone has different skills.

So if I create a list of ten ways to add value – again, maybe some of those are on other people’s lists too, but maybe since I don’t have the same background as other members on the team, or maybe I have different skills than other members on the team, or experiences, I don’t think of the same ways to add value, and maybe one of their ways is much better than all of my ways, and it ends us 2x-ing, 3x-ing, 10x-ing our business. And the same thing can apply for you, even if you’re in charge of the team; maybe your team members have a different background that you, and they come up with a brilliant idea that helps you grow your business, and you wouldn’t have gotten that idea if you didn’t have this in-person team meeting, or if you didn’t perform this exercise remotely.

After that, we all went to Topgolf and played some golf, and ate some food, and gotten to know each other even more. Some members on our team hustled us a little bit, claiming they weren’t very good at golf, and ended up being very good… And I was bragging about how good I was at golf and didn’t do very well, and I’m actually still kind of sore today, from swinging — I think we played like 4-5 games, so it’s 100 golf ball shots, and I swing really hard, so I’m a little sore. So maybe another piece of advice is if you have a quarterly team meeting, rather than just going to dinner afterwards, do some sort of activity… So go to Topgolf, go bowling. I recommended next time we go to a batting cages. Just a little bit more fun; it gets the competitive spirit out of people, and you still get to interact with everyone, that’s not in a very formal restaurant setting.

So again, I hope that what I just went over added value to you and your business, because it definitely has and will in the future continue to add value to our business.

Alright, now on to the Best Ever trivia question. Each week we do the trivia question, and the first person to answer it correctly will win a free copy of our first book. To submit your answer, you either do so by emailing info@joefairless.com if you’re listening on the podcast, or you can submit your answer in the comment section of the YouTube video below.

Last week’s question was “If you need to raise one million dollars for a deal, what is the maximum amount of money a single investor could invest without having to go through the extra due diligence by the lender?” So whenever you’re raising capital for deals, typically you want to set your maximum investment to 19%… Because if an investor invests 20% or more of the capital required to close, then the lender is gonna perform extra due diligence on them, which means extra work for your investor. So just to avoid that entirely, set your maximum investment to 19%. In this case, if you’re raising one million dollars, 19% of that is $190,000, which is the answer.

This week’s question is going to be “Of the two main occupancy metrics, which one is more important in apartments?” So there’s two main occupancy metrics that you need to consider when investing in apartments. Which one is more important? Again, the first person to get that correctly will receive a free copy of our first book.

Alright, again, I really hope this episode was valuable, I really hope to see a lot of Best Ever listeners hosting their own quarterly team meetings; I’m looking forward to hearing the results of that, any feedback that you have, or maybe things you did differently, that allowed you to have a very smooth quarterly meeting, that we could implement into ours.

As always, Best Ever listeners, thanks for tuning in. Have a best ever weekend, and we will talk to you soon.

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JF1851: Working With Big Investors & Who Are Accredited Investors? #FollowAlongFriday with Joe and Theo

A couple of lessons coming at you today from Joe’s interviews for the podcast. We’ll hear his favorite two lessons he learned, which were from Bob Lachance (https://revaglobal.com/) and Shoshana Winter (https://www.iintoo.com/). If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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“They’ll get more relevant information for them”

 

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TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


TRANSCRIPTION

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

We’ve got Theo Hicks with us. Theo, how are you doing, sir?

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

Joe Fairless: I’m doing well, just got done with the run, feeling good. Still sweating a little bit, but I showered, so I’m nice and clean for you. Looking forward to our conversation. We’ve got Follow Along Friday, and the purpose of Follow Along Friday is to talk about some things that I learned, or if you did the interviews the previous week, that you learned, and how it can help everyone hanging out with us today.

The focus of today’s conversation is gonna be about who are accredited investors, and really dissecting some information about how to think about accredited investors… Because it’s likely that, Best Ever listeners, you could benefit by bringing in more money partners into your deals, and accredited investors are the ones who have money to partner up with you. So we’re gonna talk a lot about who are accredited investors, and it is inspired by an interview that I did with Shoshana Winter, and we’ll talk about that.

First, a quick unrelated note to accredited investors, but more along the lines of just being helpful for anyone, regardless if you’re looking to partner with accredited investors – Bob Lachance; he is an active business owner and he has been a real estate investor since 2004. He’s actually an ex-professional hockey player. I really enjoyed my conversation with him. He seems like a great guy. Easy to smile, at least — I didn’t see him smile, because it’s only audio, but I could just tell he’s just an easygoing guy and he would be a cool guy to hang out with… But that’s not why I’m mentioning him. Why I’m mentioning him is when he was leaving professional hockey – he played overseas some, and he played professional for eight years; when he’s leaving professional hockey, he’s gotta create a new identity for himself, he’s gotta create a new profession, he’s gotta create a new way of making money and supporting himself and his loved ones… And he chose real estate.

The way he transitioned into real estate is he went to a real estate meetup group, and he asked everyone in the group who is the top shortsale investor in Connecticut (he lives in Connecticut). He asked a lot of people, because he wanted to get into shortsales; he’d done some research and wanted to do that… And they all mentioned one person. He then reached out to that person, and he said “Do you have any openings? Because I’d like to work for free.” Boom. And by doing that, he — of course, the gentleman (I think his name was Pat) said “Yes, I do have an opening. Here’s a list of people, and their addresses, here’s their script – go knock on some doors.” So he knocked on doors for almost one year, and that was his first job in real estate.

I mention that because there are a couple of things to take away from it, in my opinion. Maybe more, but a couple that stand out. One is when we’re transitioning into something new, it’s important to identify who is at the top of the game that you want to get into, and you identify that through word of mouth. Once you do that, then you go throw yourself into an opportunity where you can add value to their life. In this case, he offered to work for free. By offering to work for free, he was given an opportunity to actually make money by door-knocking; so he did not have to work for free, although I believe it was just commission-based… So you eat what you kill, so to speak.

But one, when we transition in something, identify who’s the top person through word of mouth, and then throw yourself in there and offer to work for free… That’s number two. And I’d say number three is, regardless of what that position is, just do it, and do it well and learn from it, and identify what you can take away from it that you can apply to future opportunities as you grow in the business… Because I’ve never — have I ever door-knocked? Not in a real estate capacity, I don’t think I have. Maybe as a young kid, but that’s completely different. So I’ll say I’ve never door-knocked before… And that’s gotta be terrifying. So props to him for taking a position that has got to be uncomfortable at minimum, and doing it for almost a year because he wanted to get into the business, and then off he went after that.

Theo Hicks: You never sold any candy bars or anything when you were a kid, and going door-to-door? And magazines?

Joe Fairless: I did, but I don’t count that, because kids are cute and people give them money just for sympathy, or they’re with their parents, or something… I’m sure I did, that’s why I kind of hesitated, but as an 18+ year old person, no, I haven’t door-knocked.

Theo Hicks: It’s definitely different. The cute factor is there for sure.

Joe Fairless: Yeah, yeah.

Theo Hicks: That’s interesting, and we’ve talked about it on this show before, how to work with someone who’s top in the industry… Obviously, offer to work for free; they happened to have an opening open for him to work for free, but… Just because someone says no if you ask them to work for free doesn’t mean you just stop. We’ve talked about this before – try to find a way to proactively add value, so do some research on them beforehand, figure out what they might possibly need help with, and then just do that for them…

And then when you reach out to them, introduce yourself, mention that you’re interested in working for them, and then use whatever this thing you did for them as evidence as to why you’d be someone worth bringing on. Sprinkle in there that you’ll work for free as well is also a good way, because I know, Joe, if someone came to you right now and offered to work for free, if you don’t have a job opening, you’d probably just say no. And if that person kept pushing, maybe they figure something out in their mind, that they thought would add value to you, and they did that, even it maybe didn’t, you would just see that they put forth that effort, and might be willing to give them a chance.

So I guess my point is that if you do follow this strategy and they say no, don’t just give up. You can go to the second-best person, but you should also continue to pursue the top person; you just have to think a little bit more outside the box, to figure out how to actually get in the door with them.

Joe Fairless: Excellent point. Thank you for bringing that up. It’s one thing to ask someone, “Hey, what can I do? I’d love to help you out.” And people do that. They send emails to me, or to the Contact Us page, and they ask “Hey, I’d love to work for free”, but it’s not free, because they’re looking for me to mentor them or help them along, and that’s my time, which is the most valuable thing, and it’s the most valuable thing for you and everyone else… So it’s the opposite of free, it’s actually the most costly thing out there. We only have so much time on Earth.

So by taking your advice, Theo, if they proactively create something, that helps me get an idea of the skillset they already have, and that they can bring to the table, and the value that they can add, and then I can start seeing them positioned within the structure of the company and how they could help, and then that gets my wheels turning. And I think you did that, right? Didn’t you do that?

Theo Hicks: It was a hybrid of that strategy. I was gonna add to that and say if they ask you to do something, don’t just do exactly what they said; do that, and then go above and beyond that is another strategy as well, besides proactively adding value. I think I did more of that than just doing something beforehand. Because you did have something you needed help with already. You said “Hey, Theo, I need help with this”, whereas this situation – this is someone proactively reaching out to you and saying “Hey Joe, do you need help with anything?”

And I was gonna mention it, but you already said it – you’ve gotta remember, if you’re reaching out to Joe, if you’re reaching out to, in this case, [unintelligible [00:09:40].05] you’ve gotta remember that they don’t know who you are, they don’t know what you’re good at. They have no idea if you are an MBA-level person, or a boots-on-the-ground level person… So as Joe mentioned, by proactively adding value and creating something for them, they can look at that and they can use that to determine what skillsets you have, and then begin thinking about how you could fit into their business. That’s also another benefit of doing that – they know what you can actually do.

Joe Fairless: Yes, thank you. I completely agree. The next thing that we wanna talk about – and this is related to what I’ve mentioned earlier – is who are accredited investors? This conversation is inspired by Shoshana Winter. She is a digital media veteran; she’s got 30 years of marketing management experience, and she’s at iintoo, based in New York City… And she said they have a database of 200,000 accredited investors. And it depends on what study you look at, but she mentions there are about 13 to 15 million accredited investors in the U.S. So there’s not a whole lot… I think there’s more than that, but regardless, there’s not a whole lot of people who are qualified as accredited investors.

So as a company that is partnering with accredited investors, it’s important to know who they are. And I think a lot of the times we go to the demographic information of accredited investors. They tend to be 45+ year-old, they live in business hubs like New York City, Dallas, Miami, those types of MSAs, versus Prosper, Texas, or some random area in Ohio. And the demographic information is important to know; what level of education do they have? Well, most of them have an undergraduate degree at a minimum. That’s important to know, but I think where it gets really interesting is when we look at the psychographic information.

She is coming at it from – as I’ve mentioned earlier, she’s got 30 years of marketing experience at companies in New York City, and working with companies that have achieved some pretty tremendous things… I think she said she worked at Audible before; I think Amazon owns Audible now, so before Amazon purchased Audible. I believe that, but I might be misquoting something right there… But you get the idea.

So with psychographic information, she said she took a look at their database and she said they tend to be more progressive thinkers, because syndications aren’t something that most accredited investors know about. And quite frankly, a lot of accredited investors don’t know the term “accredited investor”, so they don’t know what they have access to by being at a certain income level or a certain net worth level.

One of the things to think about is — when we talk about they tend to be a more progressive thinker, what does that mean? Well, it means that they tend to be more of an early adopter. They are using Uber. And again, I recognize that Uber isn’t something that only early adopters are using, because a lot of people are using it now, but in the early days they were one of the first ones using Uber, and they are more on the cutting edge of technology, or at least they try things out on the earlier stage, relative to the general public.

Now, anytime we’re talking about 13 to 15 million people, anything you say about 13 million people will not apply to all 13 to 15 million people. So if you are an accredited investor and you’re listening to this, and you’re like “I don’t use Uber” or “I’m not an early adopter”, I get that; I’m just talking more in generality, because that’s what Shoshana was talking about, just more general statements of them. Because I can tell you that from my experience, I haven’t looked at this, so I don’t have the exact statistic, but I’m gonna estimate that 90% of our accredited investors own real estate besides partnering with us. So they are people who already have experience doing these types of deals, so they’re more familiar with them and more comfortable with them. And the people who have not done any real estate outside of syndications – it’s a much different conversation than if they’ve done deals, even like a small investment property.

So thinking about from a psychographic standpoint how you position your company, know that they’ve likely done real estate deals in the past, they’re likely a  progressive thinker, most likely more of an early adopter, it helps you create more relevant information for the investors. And then what you can do with that – and I have not done that; our company has not done what I’m about to say, but in the future we will… What we can do with that is we can segment our email list so that if they have invested in the last six months, then there’s a certain message.

If they have never invested in real estate at all, then we know it’s more of a long-term play with them, because we’ve gotta educate them about syndication, so we put them in a certain segment in the email list where it’s more of an education email series… Whereas if they’ve done multiple syndication deals, then it’s a different track of segmentation, so we have different messaging for them.

It’s just interesting to think about the different psychographic information and characteristics of investors, because then we can start segmenting our email list a certain way to really speak to each of the segments based on who they are and their experience, or their thought process, and their interests… And it’s a more relevant message to them, which leads to more business, for them and for us.

Theo Hicks: That’s a really good point. I’ve never even thought about that before. Obviously, you segment your email based on who’s investing in what deal, but not necessarily what type of information would resonate with them the most.

I see here you have “Have they invested recently or not?” That could be obviously one segment. But “Do  they own real estate or do they not own real estate? How much do they know about real estate?” This is more personally, but one of the hardest things is figuring out how detailed to make the content; I’ll say a word that to me I know  what it means, but maybe other people don’t know what that word means, so do I define it? Am I wasting people’s time who already know what that word means?

Now, if you break it up and just “Okay, these people have never done a deal before, so we’re gonna keep things very high-level, whereas these people have done 20 deals, they’ve invested in every single deal, so they need something more specific. Let’s dive into data, because that will be more relevant to them”, and then segmenting that out so you can send them each a different piece of content.

That’s actually a really good idea, that I hadn’t thought of before. That will be more valuable for them, for the reason I mentioned. It will likely result in more engagement in the emails, and increase the likelihood of them sharing it with people in their circle of influence.

Joe Fairless: And the key there is to have that information in the first place. That can be the challenging part. When you’re having initial conversations with your prospective investors, making sure that you’re collecting the right information, either in the conversation, and/or during the initial outreach form that the investor fills out, or however you’re doing it, but being intentional about collecting certain information.

For example, when I speak to prospective investors, in my notes – because I’m taking notes during our conversation – if they’re an entrepreneur, if they have any business at all outside of a W-2 job, then I’ll write in my notes “entrepreneur”, and then we have a snail mail newsletter called “The Best Ever Report”, that gets mailed to our accredited investors for Ashcroft Capital… And we profile one of our investors in that newsletter, and usually they’re entrepreneurs. So my team will search the notes and they’ll just search the word “entrepreneur”, and they’ll confirm that that person has invested with us – because we only profile people who have invested with us – and assuming they have, then they’ll be contacted to be highlighted in the newsletter.

So there are things that you wanna be intentional about doing when you’re getting to know your prospective investor, that way you can then use that information to then build a relationship with them even more by segmenting them in a certain email segment, and having more relevant information to them, or putting them in a report like we do.

Theo Hicks: Yeah, so one of the big takeaways here is that 1) when you’re actually talking to your investors upfront, make sure you’re asking the right questions, so you know about them. And then once you know about them, you can put them in their categories, so that when you are creating content, you can figure out which segment they should be in, so you’re sending them the correct, relevant information.

Alright, good stuff. Really quickly, trivia question – the first person to answer the trivia question correctly will receive a free copy of our first book. Last week’s question was “What large city has the most diverse economy?” This is based off of industry diversity, occupational diversity and worker class diversity, and surprisingly, the answer was Sacramento, California. And even more surprisingly, I think 4 of the top 10 were California too, which I personally did not expect. So if someone got that correctly, Sacramento, they will be getting a copy of the book.

This week’s question is “What U.S. city has had the most multifamily completions so far in 2019?” This was in a very recent study.

Joe Fairless: New York City.

Theo Hicks: Okay. So if you wanna answer this question, it’s either in the YouTube comments, if you’re watching this on video, or info@joefairless.com if you’re listening to this on the podcast.

Joe Fairless: I’m pretty confident about that one.

Theo Hicks: Okay. And then the last thing is the free apartment syndication resource of the week. As you know, Best Ever listeners, we do Syndication School every Wednesday and Thursday; the focus is on the how-to’s of apartment syndications. For the majority of these series we offer free resources: PDFs, templates, PowerPoint presentations, something to help you scale your apartment syndication business… And we’re highlighting some of those documents on the Follow Along Friday.

This week’s document is from series 15, which is how to submit an offer on an apartment syndication deal. If you wanna listen to that series, it begins at 1716, and the free document for that series are four letter of intent templates. They’re actually examples that you’d have to copy and paste and add in your own personal information… But that [unintelligible [00:20:48].03] episode explain to you everything you need to know about creating a letter of intent, which is the non-binding agreement you send to a seller, with the intent to purchase their property with your purchase terms. If you want to download that, 1716, or in the show notes of Follow Along Friday.

Joe Fairless: And still have an attorney look over any type of legal document. Any template we ever share with you that would be considered a contract with a buyer or a seller, have an attorney look over it, just to be on the safe side.

I hope you enjoyed our conversation, got some value from it. We will tlak to you tomorrow.

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JF1844: Negotiating Labor Prices, Getting To The Truth, & Finding Deals #FollowAlongFriday with Joe and Theo

More Best Ever Lessons coming at you today from Joe’s interviews. Today’s lessons are coming from William Robison (https://www.kansascityinvestmentrealestate.com/), DJ Scruggs (https://realbluespruce.com/), and Jens Nielsen (https://opendoorscapital.com/). If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“You can still find deals if you are resourceful enough”

 

Free Document:

Rental Comparable Analysis: a template for completing Step 6 to 8 of the underwriting process: http://bit.ly/besteverrentalcomps

 

Referenced in this show:

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TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


TRANSCRIPION

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

We’ve got Follow Along Friday today, talking about some insights that I learned from the interviews that I did last week. This is just a handful of insights; these interviews have not gone live, they’ll go live in 3-4 months, so I wanna give you a sneak preview – and more than a preview, I wanna give you some things that will help you out, since it’ll be a little while before they air… And then you can listen to them in detail whenever they come out.

First off, Theo Hicks, hi.

Theo Hicks: Hey, Joe. How’s it going?

Joe Fairless: It’s going well. We’ve got Theo Hicks with us, and we’re gonna talk about these insights… So let’s go ahead and dive right into it. First one is if you are looking to come up with a deal with contractors where you get economies of scale, basically, you get a discount for having a high volume of work with them, you might think that you just go to them and say “Hey, I’m gonna bring you X amount of work. It’s gonna be more than what someone who doesn’t have a business will bring you, so  let’s negotiate some sort of discount.” You might think that by bringing them a high volume of work, it’s a no-brainer that they would accept that… And the reality is that the trades are in high demand – plumbers, electricians etc. They’re in high demand, and a lot of times they can pick and choose who they work with, and can be more selective… Because those industries, generally speaking, people aren’t growing up and saying “I want to be a plumber, I want to be an electrician”, although those are very good professions to be in, and there’s a lot of business and a lot of money you can make as a result of having those types of companies.

So the interview I did with William Robison, who’s been in real estate for 15 years… I actually interview him in episode nine, the ninth interview I’ve ever done; episode nine, “One critical component of building a real estate business.” He works with a lot of contractors, and he gets volume pricing from contractors and suppliers, and he said “Well, I’ve got the volume pricing now because I’ve formed these relationships.” And I said “Well, how many phone calls did it take to different plumbers in order to get this type of agreement?” and he said “Dozens.” That’s important to take note of, because it’s not like you work with a plumber and you say “Hey, I want a volume discount because I’m gonna bring you X amount of business.” He or she might not be as interested, because they’ve already got business, and retail pricing is better than volume pricing. However, here are three selling points, talking points, three things you can mention to the potential partner about how to convince them that you should get volume pricing.

One is having more consistent work. So yes, you might have a lot of work, but is it consistent? Is it very reliable? I can provide you with more consistent work, too. How much are you spending on advertising right now? Because whatever you’re spending now, you don’t need to spend nearly as much, if at all, because now you’ll save that money by having more consistent work with me. And number three, my work tends to be within the hours that you want to work – 8 AM to 5 PM, Monday through Friday. You won’t get the type of calls from me — for the most part; there will be exceptions, but for the most part you won’t get the type of calls from me that are emergency jobs in the evening. My work can be done during the time you wanna work.

So those are the three selling points should you want to approach tradespeople for volume pricing. One, more consistent work, two, less advertising budget, and three, we’re working within the timeframe that you actually want to work.

Theo Hicks: And based on my interactions – with plumbers in particular, and probably electricians, too – I think that third point is probably gonna be the biggest selling point… Because I just had a leak in my personal house, and the plumber had to come out on an emergency call. He didn’t get here until late; he just kept complaining about how “Yeah, I can fix the problem, but it’s getting late, and it’s Friday, and I kind of wanna get back to my family.” I’m like “No problem, but you’re probably gonna have to come tomorrow, and it’s Saturday.” He’s like “Well, I don’t wanna come on Saturday, because it’s the weekend…”

So while you were explaining this, I was kind of thinking — these are obviously the three best ways to convince them, but it’s really just kind of listening to them… Because from my experience, working with plumbers, electricians, contractors – they’re very honest, and they’ll tell you exactly what they’re thinking. So if they say that they want more consistent work, they’re saying they’re spending too much money on advertising, they’re saying they wanna work between certain hours, just listen and they typically will tell you what they want, and you can use that to, in a sense, convince them to give you those bulk discounts.

Joe Fairless: Yeah, identify what their pain points are initially – consistent work, the hours, profitability, whatever it is. They might not get into profitability of their business, but identify that, just like you would if you were approaching a seller and you’re looking to buy their property. You wanna learn what the pain points are, if any, so you can structure the deal accordingly.

Another thing that William mentioned is he doesn’t usually provide multiple bids on jobs to his clients, and a lot of his clients know that… But on occasion, some new clients might say “Well, I wanna get multiple bids on this job”, and that’s fine to do… But he said one thing to keep in mind is if someone has a business where they do a high volume of work, then they likely have already gone through the vetting process with their vendors, and they’ve negotiated the rates down to a certain points, and they also are combining that information with the service that they received from those vendors… Because it’s not always about, as we all know, the lowest price; it’s also about “Will they get the job done, and will they do what they say they’re gonna do? Will it be done right?”

So he said he’s not against multiple bids, but something to keep in mind if you are working with someone who has volume discounts from other vendors is just maybe initially give them the benefit of the doubt of saying “Hey, maybe they did already do their due diligence to make sure that this is the best price, combined with the best service.” And if you don’t want to go with that assumption, then just perhaps ask the person, “Hey, did you already negotiate the rates down to a competitive level, and are you confident in the service that this vendor is gonna provide if you do have questions?”

Theo Hicks: Yeah, I think one of the better contractors I worked with already had everything pre-negotiated, and whenever you asked him to do something, he would send you a very detailed document that had the quantity of what you’re doing and then his predetermined price already, very clean… Whereas the other contractors are like “It’s $500.” It’s like, “Well, how are you getting $500? Where is that coming from? Is that coming from materials, services…? I don’t understand.” A little bit different than what you’re talking about here, but it is nice when you’re working with contractors to have already negotiated prices, and you can see exactly how much you’re spending on labor, how much you’re spending on the actual materials that they’re using.

Joe Fairless: Another interview I did, DJ Scruggs. I love DJ’s first and last name. I think that flows really well. He is the CEO of Blue Spruce Holdings. Based in Denver, Colorado. Entrepreneur, started in the customer service software for email industry, sold his company in 1999. He talked about some lessons learned there… And what I wanna mention here is when he works with other businesspeople and he feels like someone is trying to pull one over on him, then he says one thing he’s learned is that you don’t have to be a jerk, but you can always ask the question “Why?”

So if someone is trying to tell you something that you know is not right, or you don’t think is right, you don’t have to be a jerk about it; you can instead just keep asking the question  “Why?”, and obviously you need to craft it a little bit better than just saying “Well, why is that? Why is that? Why is that?” You can continue to just be curious and ask questions about it, and then that will help get you to the answer of what you’re looking for, to identify if it is legitimate what they’re saying or not.

I thought that was just an interesting approach if something like that is taking place, to build on the relationship should you end up having a relationship with this person, versus kind of attacking them and tearing it down and not having any opportunity  to have a relationship.

Theo Hicks: Yeah. It just says here, “How to figure out when someone is BS-ing you” – it reminds me of something related to what you’re talking about here… It reminds me of a show where there’s a character and they’re asking him why something isn’t happening [unintelligible [00:10:45].11] and he says a line, and they go “Well, it doesn’t make any sense. Why isn’t this happening?” and he literally says the exact same thing again, but slower. So the way they reply to the why – you can tell if they’re pulling one over on you, or if there’s something going on underneath what they’re actually saying. In this case, this person had no control and was just saying whatever he was told to say…

But yeah, if you can’t naturally read someone and tell if they’re lying to you or if they’re pulling one over on you, BS-ing you, asking why and asking them to explain why I should invest in this deal, why I should buy this deal, and see what they say, and if they don’t really have a specific answer, or they kind of say very high-level, generic things, then you can kind of dig deeper into that. If they don’t have any answers, again, you don’t have to be a jerk about it; you can just say “Okay, I don’t think I’m interested in investing in that deal…” Just because they might be new, they might not know what they’re doing, they might not have the information because the seller didn’t give it to them… But maybe in the future they do actually come up with a deal that you can buy, or invest in, or whatever. And if you’re a jerk, then they’re not gonna bring that deal to you ever again. It’s basically keeping as many doors open as possible.

Joe Fairless: Exactly, that’s a great way to put it. It’s just having an opportunity to build a relationship with that person, should your initial perception be off about them trying to pull one over on you.

Then DJ also mentions since he hasn’t been in the real estate industry as long as he’s been in other industries, he still needs to demonstrate competency in real estate… And he said ideally he would have a 20-year track record of performance in real estate, but since he does not, he demonstrates it in other ways, like being respectful and respectable, he talks about.

So by being respectful to others, but then being respectable – that’s where it comes into play where he is establishing a thought leadership and being an authority figure, which is one of the reasons why he was wanting to be interviewed on the podcast; and his company has multifamily holdings, so we talked about that… But it goes back to what you and I have talked about extensively, so we won’t get into it in detail here; the thought leadership platform – if you don’t’ have that type of track record, then interview people who do have that, and then as a result of interviewing them, you learn more, you build your relationships, and then you’re associated with those people who do have that track record, and then you can build from that, in addition to bringing on the right team members on your team, who have that skillset… Even though it might not be in partnership with you, but at least they have that skillset and that track record so that you can then build off of that.

Theo Hicks: And really a big thing too is just more people are aware of who you are. They know who you are. I can’t tell you how many people that I knew before I started working for you, that will call me or text and be like “Oh my god, I realized you know Joe Fairless, you’re on Joe’s podcast.” Obviously, that’s a really massive one, but it’s just interesting to see how many of them are getting into real estate and know who I am, and they always say how this can be very powerful for my brand, and very powerful for when I start doing deals again… So yeah, 100% – a thought leadership platform is super-important; not just for the expertise and what you talked about, but also just people knowing who you are. The more people that know you, hopefully saying good things about you, whatever investment strategy you’re implementing, you’re gonna be more successful, because people are gonna wanna work with people because they know who you are.

Joe Fairless: Yeah, absolutely. It all is connected together, and that is the right way to approach. And lastly, [unintelligible [00:14:23].27] Nielsen… I just wanna give a quick reminder that you can still find deals if you’re resourceful enough and you put in the work. [unintelligible [00:14:32].04] Nielsen closed on a 16-unit; it was him and his wife. They found it through direct mail. How did he direct the direct mail? He did not buy a list, he created his own list; went to Apartments.com, got the information from Apartments.com. He said they could see the unit size on the rental site. Then he went to the assessor’s office to see who the owner was, then he went to the State Business Registration to see who the owner of that was; if it was an entity, then he mailed out the direct mail pieces.

It was just basically saying “Mr. & Mrs. So-and-so, I like your property and I’d like to buy it. Here’s a picture of me and my wife”, and he mailed out 200-300 letters. He did that every 2-3 months for about one year, and then he got a 16-unit as a result of that.

Theo Hicks: One thing I did wanna mentioned based on this strategy – obviously, he hustled and found the deal, but if for example he pulled his list, and then on that list half of those properties are owned by LLCs, and he just mailed it to whatever address the LLC said, which is most likely a PO box at a UPS somewhere, or a post office somewhere, he might not have gotten this deal.

I thought there was a blog post, but there’s not, so I’m gonna post this as a blog post – how to find the owner of the LLC. You mentioned about going to the State Business Registration,  but specifically what you do is whatever state that you’re in, you go to the Secretary of State, and then somewhere on that website you have the ability to search the entities, search the corporations. They’re gonna call it corporations or entities; you type in whatever the LLC name is, and then the LLC will come up. Then, depending on the Secretary of State site, it will have the information you need right there – owner’s name, owner’s address. If not, there should be some area on there to download the articles of the organization and then on the articles of the organization you’ll find the actual owner of the LLC’s name and their address.

So you wanna make sure you’re mailing to that address, not the PO box that’s listed on the assessor’s site, if it’s owned by an LLC.

Joe Fairless: Great information. Detailed, as always, and helpful nuances, because it’s one thing to know the concept, and it’s another to know the actual process. You said we’re gonna do a blog post on that…

Theo Hicks: Yeah, I’ll post this today, and then we’ll put it in the show notes and release it on Friday.

Joe Fairless: Wonderful. Alright, cool. So those are the insights I wanted to talk about, and that I thought would be helpful.

Theo Hicks: Alright, trivia question time. Last week’s question was “According to the most recent census data, what city grew its millennial population more than any other city?” The answer was Seattle. I think you said the answer right, and then you changed it to something else, like Dallas maybe. You said “Seattle”, and then “No, wait… Dallas.”

Joe Fairless: I don’t know if I said Seattle, we’ll have to listen to that again. I know I ended up with Dallas, so… Oh, well.

Theo Hicks: Yeah. This week’s question — and again, as a reminder, the first person to get this question correctly will receive a copy of our book. Submit your answer either to info@JoeFairless.com, or in the comments of the YouTube video below. “What large city has the most diverse economy?” This is based on industry diversity, occupational diversity and worker class diversity?

Joe Fairless: Well, I know it’s not Vegas…

Theo Hicks: It’s not Vegas, correct.

Joe Fairless: I hate to use Dallas-Fort Worth as all my answers… So if I had to put money on it, I’d say DFW, or I guess if they’d make me be more specific, I’d say Dallas. But since I don’t wanna use that as my answer for everyone, I’ll go with Atlanta.

Theo Hicks: Atlanta. Alright, so we’ll have that next week, as well as another trivia question for you to have the opportunity to win a free copy of our book.

Lastly, the apartment syndication resource of the week… We do Syndication School every Wednesday and Thursday on the podcast, as well as on YouTube. For most of these series we offer a free resource or document for you to download, that helps you learn how to do apartment syndications.

Last week we talked about series number 14, how to underwrite a value-add apartment deal, starting at episode 1653. One of those free documents was the simplified cashflow calculator, which you can download in the show notes of last week’s episode.

The other free document that we gave away for that episode was the rental comp analysis calculator. On one hand, you need to underwrite the deal, and you also want to do a rental comp analysis in order to determine what your rental premiums are going to be. This template helps you input the properties that you’re using as comps, the square footage and the rents of those comps, and then it will automatically calculate an average dollar per square foot, which you can then use to determine what the rent will be at your subject property based on the square footage. So that is gonna be available for download, again, in that series 14, which is episode 1653, or in the show notes of this Follow Along Friday.

Joe Fairless: I enjoyed our conversation, Theo. Best Ever listeners, I hope you got some value from this, and we’ll talk to you tomorrow.

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JF1837: Investment Spreadsheet Mistakes, Monetizing Hotels, & BRRRR Key Models #FollowAlongFriday

Joe has another round of Best Ever Lessons to share with us today from doing the podcast interviews last week. Theo has another trivia question, be the first to answer correctly and receive a free copy of their first book. The lessons this week are coming from Peter Knobloch (http://www.pknobloch.com/), Nicole Stohler (https://www.therichergeek.com/), and Ali Boone (https://www.hipsterinvestments.com/bestever/). If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Some of these concepts don’t just apply to hotels”

 

Free Apartment Resource:

http://bit.ly/bestevercalculator

 


Evicting a tenant can be painful, costing as much as $10,000 in court costs and legal fees, and take as long as four weeks to complete.

TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


TRANSCRIPTION

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

We’ve got Follow Along Friday today, with Theo Hicks. Theo Hicks, hello sir.

Theo Hicks: How’s it going, Joe?

Joe Fairless: It’s going well. Follow Along Friday, as a refresher, Best Ever listeners, we’re gonna go over stuff that I learned through the marathon of interviews that I did last week, on last Thursday; that’s when I do all my interviews, one day of the week, and that is on Thursdays usually. I’m gonna pull some things from those conversations and talk about them, because I think they’ll be helpful for you, and because those episodes won’t be airing for a handful of months from now.

The first one was with Peter Knobloch. He’s a third-generation real estate investor, and he’s got experience in multifamily office space, hotels, restaurants and sporting clubs… And one thing he talked about – because he’s really honed his expertise on underwriting – is he built his own underwriting analyzer from scratch, and he said one mistake make when they’re creating those spreadsheets, and even one thing you should look out for when you’re purchasing the spreadsheet… I don’t think his is for sale either, so it’s not like he was trying to sell his or anything, I don’t believe… He said make sure that you have the ability to put in when leases expire for each of the units that you have.

This is assuming we’re talking about an apartment community, but the same principle applies for office and retail. And he said the reason why is a lot of calculators have an assumption that when you increase rent by X amount for renovations, you’re gonna renovate units, it assumes that you’re gonna do all of them at the same time, but in reality everybody listening to this conversation knows – and Theo, you know – that it doesn’t happen magically overnight, it happens incrementally, as leases expire. And it’s important to be able to plug in when leases are expiring into your calculator, that way you can have a true staggered approach for what reality looks like, versus what you would ideally like, which is all at once at the beginning of the year.

Theo Hicks: Yeah, one hundred percent. Another way to go about doing that without having to plug in all the lease expiration days in the cashflow calculator is to have in mind how long you think it’s gonna take to renovate all these units – 12 months, 18 months… Obviously, it’s not gonna be zero months; it’s not gonna be you buy the property and instantaneously every single unit is renovated [unintelligible [00:04:44].20] when you’re underwriting in the beginning – obviously, you wanna do this eventually, but it’s to assume however long it’s gonna take, let’s say 12 months or 18 months, and then make sure that the rent is gradually increasing from day 0 to month 12. If it’s 12 months, by one-twelfth, so if the overall rent increase is gonna be $12,000, then each month it goes up by $1,000, rather than $0, $0, $0 and then all of a sudden up $12,000… Because that will mess your model up.

I did wanna mention too that that’s kind of an advanced underwriting tip. Me and you did do an episode where we talked about some other advanced underwriting tips. That’s episode 1445, and then we continued at 1480. So we did ten tips — I think we did two episodes; the first episode was the first five tips, the second one was the next five tips. I don’t think this was one of them, so I guess now we have 11 advanced underwriting tips.

Joe Fairless: Theo, I love how prepared you are. Busting out with the episode numbers…?

Theo Hicks: I just pulled that while you were talking about it.

Joe Fairless: Man… You’re the man, nice job. We’ve got a professional show going on right now, I love it.

Theo Hicks: We do, we do.

Joe Fairless: Let’s keep going and see what else Theo has in store for us. The next insight I got from last week’s interviews – Nichole Stohler. She’s the founder and host of The Richer Geek Podcast. She’s got over 90 units and has a 64-room hotel under contract. Her focus is not multifamily, it’s hotels. I don’t know a whole lot of people who are focused on hotels, and I wanted to talk to her about why she likes hotels. She gave some examples or some reasons why, and she said you have higher profitability per room versus multifamily, with hotels.

She elaborated more on that and she said “Because you can monetize hotels, because they have a different clientele than, say, C-class apartment communities.” She said you can offer free Wi-Fi, but then you can have an opportunity to upgrade that Wi-Fi. And as most of us have noticed on planes, when you go buy Wi-Fi, a lot of the times it says “Here’s free Wi-Fi, or here’s a set price for Wi-Fi if you just wanna browse the internet, and here’s a higher price should you want to watch movies or download larger files.” Same concept here.

She said other ways to monetize hotels – when someone logs into the Wi-Fi, you can have a splash page, and then sell advertising to local restaurants on that splash page.

Then she got to other examples, like there’s a breakfast space that you can rent out for events when it’s not being used… She gave a list of things. But one thing it made me think of is some of these concepts don’t just apply to hotels, they also could apply to multifamily. For example, the splash page example made me think of  – well, okay, most hotel guests are logging into Wi-Fi, and they’re being exposed to this advertising… What about apartment communities? What do most apartment residents do? Most of them pay their bills, so how is the rent presented to them, and is there a way to incorporate some sort of advertising component to that and sell that space? So if it’s an online bill, does it have to just be an invoice, or something that is sent to the tenant on some accounting type of template, or can it be something that also has a local restaurant?

This isn’t gonna be big bucks, unless you have a large apartment community, but you could drive some incremental revenue, and you could also be giving your residents some exclusive discounts to these restaurants, so it could help with your retention, which I would argue would be more valuable from a bottom-line standpoint than any type of advertising dollars you’ll receive for selling that space.

Theo Hicks: Yeah, it’s always interesting to hear how other seemingly completely disconnected real estate niches are able to – in this case – monetize to make money… And then try to pull the underlying concept of how they’re doing it and see how you apply it to real estate. You did exactly that. The free splash page – the underlying concept is just advertising. So what ways can you incorporate advertising into your apartment to make more money? Your example was to somehow have an advertisement on maybe the portal that is used to collect rent.

Another example I remember from the podcast way back in the day was someone put up a billboard on the decor of one of their buildings and leased that up for advertising dollars.

So for these three right here – the Wi-Fi upgrade is offering some sort of upgrade, so what can you offer at your apartment that’s typically free or not expensive, and then something else on top of that. Maybe it’s a regular unit and a furnished unit. Maybe you can somehow offer a free Wi-Fi upgrade or a cable upgrade, or something like that.

Then the other one was the events. If you have a big apartment community, you might have a really nice clubhouse, or a really nice business center, or a conference room that you could rent out to people who live there – for not a lot of money, but for whatever event they want to put on… So kind of looking at these types of things at a deeper level I think is good, and it’s exactly what Joe just did.

Joe Fairless: Yeah. Even if it’s $1,000/month extra, which might not seem like a lot… But $1,000 at an 8-cap, that’s $150,000 worth of increased value that you created  for your apartment communities. $1,000 times 12, $12,000, divided by 8 (8%), is a $150,000. So you can see how by doing a handful of these extra things you get well into six figures, and even into seven figures, just by being more intentional about it.

Lastly, Ali Boone, founder and owner of Hipster Investments – she was interviewed on our podcast five years ago. Episode 40. Four zero. Craziness. Just craziness. I remember interviewing her… I was in New York City in my East Village apartment, in my bedroom, which was the size of a shoebox; my bedroom only had space for a bed and a dresser where I put my clothes, and I had a closet… So I either did my interviews literally with my head sticking into the closet, with pillows all around me, that way the noise from the city – the windows were right there – wouldn’t distract listeners, or I would just do it sitting on my bed, because I didn’t have a desk, and there was no living room in that apartment that I lived in for nine years… So it just brought back memories…

But the thing that I learned from this episode with Ali – five years now since the last time I spoke to her on the show – is she has an idea for doing a combo of a BRRRR and turnkey deal… So BRRRR Key could be a term; I’m not sure about that, but just combining those two, that’s what I came up with… Or maybe she came up with it.

The way to do it is talk to turnkey providers and say “Hey, can I fund the renovations? And I’ll be at risk if the renovations go over”, but at least this way you’re getting some of the upside on these renovations. And my question to her was “Well, I thought that’s where the turnkey companies made their spread.” If I’m a turnkey company, I make the money by finding deals that are undervalued or distressed, renovate them, make the spread on the construction, and then whenever I sell it retail to the investor… And she said I’d be surprised by how low those margins are for turnkey companies. So they don’t really make their money as much on the spread, but more on the management.

So there’s that… If that’s helpful for anyone who’s working on those types of deals, then perhaps look at doing a turnkey/BRRRR Frankenstein approach.

Theo Hicks: Is this something she has done, or it’s just an idea that she had in her mind?

Joe Fairless: I should know the answer to that question; I don’t remember, during our conversation… I’m 90% sure that she has multiple people who have done this. I’m 90% sure, because I think we talked about it… But for some reason I can’t 100% recall.

Theo Hicks: But definitely an interesting strategy, and just kind of another unique, creative investment strategy. It’s always interesting… Something else I wanted to say, too – just kind of off-topic a little bit, but I love the titles you had on your earlier episodes. They’re great. [laughs]

Joe Fairless: Oh, yeah… Yeah, you’re referencing what I titled episode 40, which was “Love is in the air…” [laughs]

Theo Hicks: I love the show notes, because I remember for the first book we went through the first hundred episodes, and the titles are great. [laughter]

Joe Fairless: You really have to think long and hard about what I’m actually talking about when I wrote those titles. They’re not intuitive for what it is… But yeah, that was me doing titles.

Theo Hicks: Heck yeah, I like it. Alrighty. Great lessons, as always. So this week’s trivia question – if you’re the first person to get these trivia questions correctly, we’ll give a free copy of our first book. Submit your answer either on the YouTube comments below if you’re watching on video, or if you’re listening to this on the podcast, you can just email us at info@joefairless.com.

Last week’s question was “What is the best city to work in tech in 2019?” This was based on not just how much money you get paid in tech, but it was based on the cost of living in that location, the tech employment concentration, so the proportion of the population who’s employed in tech, unemployment rate, ratio of average pay to tech pay… And the answer was, surprisingly, Columbus, Ohio.

Joe Fairless: Huh. Alright… What did I say, do you remember? It wasn’t Columbus. Oh, I said Pittsburgh.

Theo Hicks: Yeah, you said San Francisco first, and then you said Pittsburgh, because I mentioned all the caveats.

Joe Fairless: Yeah.

Theo Hicks: This week’s question is “According to the most recent census data, what city grew its millennial population more than any other city?”

Joe Fairless: Okay, so it’s percent increase, not total number, right?

Theo Hicks: It’s actually total number.

Joe Fairless: Okay. Grew millennial population, total number… I’m not gonna say anywhere in Florida. There’s a lot of people moving to Florida, but I think they’re a bit older. Although millennials – hell, I’m a millennial and I’m 37 years old, so I’d say I’m old, too…

Theo Hicks: [laughs]

Joe Fairless: Let’s go with Dallas-Fort Worth.

Theo Hicks: Dallas-Fort Worth. Alright, so the first person to get this correctly will get a free copy of our first book. YouTube comments, info@joefairless.com.

The last thing – very apt, because we talked about underwriting earlier in this episode – is the free apartment syndication resource of the week… And this week’s resource is related to underwriting. Series number 14, 8-part series – so eight different episodes where we talked about how to underwrite a value-add apartment deal from start to finish… I really enjoyed recording that, because I like underwriting… That starts at episode 1653, and then the eight Syndication School episodes after that as well, and the free document is the Simplified Cashflow Calculator. This is — we’ll call it a basic, standard template to underwrite a value-add deal. So you can underwrite a value-add deal to completion, but some of the assumptions are locked in, and we’ve got those assumptions on the cashflow calculator.

The purpose for it is to, firstly, give you something to start with, so that you can underwrite a deal starting today,  but secondly, it’s recommended for you to create your own model, and customize it based on your specific business plan, how your mind works, your experience level with Excel, things like that… And it’s also something you can use as a starting point, without having to input every single thing yourself.

So that’s the simplified cashflow calculator, available for download in any of those episodes. But I would just go to episode 1653, or you can just download it in the show notes of this episode.

Joe Fairless: Best Ever listeners, I hope you got a lot of value from our conversation, and we will talk to you tomorrow.

 

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JF1833: Cincinnati Meetup Podcast: Predicting The Second Half Of 2019 Cincy Real Estate Market

Today’s episode is the audio from our July meetup in which we had three experts on a panel to discuss how the market in Cincinnati has been in the first half of 2019. More importantly, we’ll hear what they think the real estate market will do in the second half of 2019. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“You hire an agent for exposure, negotiating skills, and positioning” – Peter Chabris

 

Peter Chabris Real Estate Background:

  • Owner and executive of The Chabris Group
  • The Chabris Group has sold over $60 Million in real estate each of the past two years, primarily consisting of single family homes valued under $500k.
  • Based in Cincinnati, OH
  • Say hi to him at peterATasktcg.com

 

Kurt Weil Real Estate Background:

  • Mortgage broker with Zipfel Capital
  • In July of 2019 alone, Kurt is set to close on over $16 Million in real estate loans
  • Based in Cincinnati
  • Say hi to him at http://www.zipfel.com/

 

Slocomb Reed Real Estate Background:

  • Realtor, and became a house hacker in 2014, currently living in second house hack
  • Has bought and sold 34 flips and 24 buy-and-hold properties, totaling 75 units, for himself and his clients
  • Owns & manages 18 rental units, with 24 more under contract to close in August
  • Based in Cincinnati
  • Say hi to him at slocombmarketingATgmail.com

 


Evicting a tenant can be painful, costing as much as $10,000 in court costs and legal fees, and take as long as four weeks to complete.

TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


TRANSCRIPTION

Best Ever listeners, I’ve got a special segment for you. 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. 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.

 

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

We are here in Cincinnati, filming this live, and the purpose of today’s conversation and this panel is to talk about Cincinnati specifically. So if you’re not interested in Cincinnati, go ahead and listen to something else, watch another video. If you are interested in Cincinnati, then come hang  out with us for a little while.

We have a panel today. We’re going to be talking to each of these  three gentlemen about last year compared to this year briefly, and then most importantly where they see the market headed in Cincinnati relative to their respective focuses.

First, we’ve got Slocomb Reed. Slocomb is a realtor and became a house-hacker in 2014. Currently living in a second house-hack. Bought and sold 34 flips and 24 buy and hold properties, totaling 75 units for himself and his clients. Owns and manages 18 rental units with 24 under contract to close in August. Big August, congratulations on that. All three of these gentlemen are based in Cincinnati, so I won’t repeat that.

Then we’ve got Peter Chabris. He’s a realtor for the Chabris Group…

Peter Chabris: Yes, sir.

Joe Fairless: The Chabris Group has sold over 60 million dollars in real estate each of the past two years, primarily consisting of single-family homes valued under 500k.

Then we’ve got Kurt Weil. How are you doing, Kurt?

Kurt Weil: Good.

Joe Fairless: I just found out Kurt’s uncle is the former president of Junior Achievement, that I’m a board member on; I just learned that. Cincinnati is such a small town, isn’t it?

Kurt Weil: It ends up that way.

Joe Fairless: It ends up that way. So Kurt is a mortgage broker with…

Kurt Weil: Zipfel Mortgage Group.

Joe Fairless: Zipfel Mortgage Group. That’s a tough one to pronounce. In July of 2019 along Kurt is set to close on over 16 million dollars in real estate loans.

With that being said, how about let’s kick it off… We don’t need to go into areas of focus or anything for background, since I’ve just said it… So what were you doing last year compared to this year that’s different? Slocomb.

Slocomb Reed: Sure. Sales-wise, as an agent, I’d say the biggest difference — well, first of all, I do most of my work at this point with investors who are looking to buy and sell their investment properties. Mostly buy and hold stuff, some flips. When I was looking back through my transactions, 2018 and 2019, what I realized was in the first half of 2018 I actually was able to find cashflow on market for clients… And now I can’t.

My sales is gonna feel fairly anecdotal compared to the massive businesses these guys have… But what I’m seeing on the market now, early 2019, is that there are three types of investment properties. All of the investment properties that hit the MLS fall into three categories. There’s the stable, ready-for-market stuff, that’s listing too high and selling too high really fast. There is the stuff that really needs a gut rehab, that is appropriately price, and lasts minutes on market… And then there’s some stuff in the middle, where there are people who think that they can get good market value for a property that needs some work, mostly because it’s been neglected… And that stuff is really coming from sellers who have seen this hot, bullish market for so long that they think it’s basically time that they sell their junk, because they’re never gonna be able to get what they think they can get right now for it. And that stuff sits on the market for a while. I’ve had a lot of clients looking a lot at those recently.

Joe Fairless: So you have double the size of your portfolio currently under contract, right? You have 18 units, and then you have 24 under contract.

Slocomb Reed: Yeah.

Joe Fairless: Clearly, last year or this year you’ve been able to grow.

Slocomb Reed: The biggest difference would be in off market lead generation for those properties. I do more off market now, so I have the capacity to buy a 24-unit now with partners, that I didn’t have this time last year. I could dive into this; I would like to talk about it more later…

Joe Fairless: Okay.

Slocomb Reed: …but the summary is going to be that  you really need to be finding deals off market, probably from a variety of sources, if you’re gonna find good deals in Cincinnati right now.

Joe Fairless: Alright, we’ll jump back to off market stuff. We’ll bury the lead. Peter, what were you doing this year compared to last year?

Peter Chabris: We’re mostly status quo. We’re primarily resale. We do work with investors that have found the opportunity and they’re looking to take it to market… But that really just constitutes as a typical resale play. So the only thing that we’re doing differently this year than last year is that we wind up spending more time negotiating multiple offers. Cincinnati’s inventory continues to drop. It’s dropped for four years straight, it dropped 20% per year, and over the past 12 months it’s dropped another 12%.

We’ve seen the average sales price in Cincinnati increase 5%-6%/year for the past years. The historic appreciation in Cincinnati is 3%, so we’ve been doing double the appreciation, driven by the decrease in inventory. That is waning. Over the past 12 months the average appreciation in Cincinnati is down to about 4.5%, and inventory year-over-year is down 12%, versus that 20% difference that we’ve seen. So while price have been doing this, they are still appreciating, but it’s starting to level off a little bit.

Joe Fairless: So any time there’s statistics, there’s all different ways to slice and dice the statistics.

Peter Chabris: Yup.

Joe Fairless: I read in your bio that you focus on 500k and below homes, is that correct?

Peter Chabris: Yup.

Joe Fairless: So what about above? Are those stats still true?

Peter Chabris: Yeah, luxury softened up about two years ago. Luxury is different in every Cincinnati we consider it 500k or more. I think part of the reason why is that people that have that kind of money – their values system for that kind of dollar has changed. So what we traditionally consider a luxury inventory, these massive properties on big land, a lot of maintenance – isn’t necessarily catering to the demands or the needs of the next generation of luxury buyer. I think luxury is trying to figure out what does value look like in that segment.

From a business model perspective, luxury homes take more time, take more maintenance, they’re harder to sell, they require trickier marketing… We like to set things up, we have a system and we know it works, so we try and keep within that system.

Joe Fairless: Knowing that the luxury market is soft relatively speaking, have you worked with any clients to convert those big homes – lots of rooms, lots of land – to assisted living, or anything like that?

Peter Chabris: That’s a great question, and the answer is no, it has never crossed my mind. Normally, our experience in the luxury — because we do still service luxury inventory; not as frequently as the non-luxury… Generally speaking, a luxury seller doesn’t want to horse around with converting a property into a multifamily or an assisted living, or something like that. They have demands in their lives, and they just want to have a clean separation and get it done, and have it be a business deal, and… Obviously make the most, but not horse around with details.

Joe Fairless: I was thinking more of an investor coming in and reaching out to purchase properties. That may be a discount relative to where they should be because it’s softer.

Peter Chabris: Sure. Yeah, I assume as long as the zoning makes sense, it’s a great idea.

Joe Fairless: And Kurt – you’ve got a lot of loans going on. What’s the difference between last year and this year?

Kurt Weil: I think the biggest difference in the lending sector would probably be investors; especially Cincinnati being in the Midwest, we have a very attractive real estate portfolio overall, so we’re bringing a lot of outside investment in; compared to our cap rates, to what lending rates are, it’s a nice spread… So I think that compared to last year, this time more of that outside investment is coming in. It’s getting more attractive. Rates are fluctuating, and the Fed went up a couple times; they’re looking to come back down tomorrow per se.

The bond market has already reacted… And with that, people need to find a  place to put their money. The economy is good, people have discretionary income, and with that, outside investments are coming here harder, because we have very low vacancy rates, very good growth rates, we have a great job market…

So I would say overall probably just investors – there’s more of them.

Joe Fairless: Help me reconcile the in some ways contradictory information. Because I hear the market is softening, I hear it’s tough to find deals…

Kurt Weil: Sorry… Let me clarify that I say that about investment property specifically. He may say in the luxury market —

Joe Fairless: Well, he was saying 500k and below it’s 20% inventory–

Kurt Weil: On the residential side… Whereas I look at it more as multifamily investing, single-family blankets, industrial flats, office space, things like that. That is more where I’m finding more outside investors coming in. Not just from East Coast to West Coast, but other countries. The Midwest market is very attractive, and that’s more so what I would say when I say investors coming out.

I do completely agree that inventory is very well, but in the basic economics of supply and demand, the demand is overabundant and the supply is not there.

Joe Fairless: Got it. I should have broadened my mind a little bit… You’re loaning on more than just single-family homes.

Kurt Weil: Correct.

Joe Fairless: So I guess I should have asked that – what are you loaning on?

Kurt Weil: Anything from single-tenant investment properties to 250-unit multifamily properties, office, industrial, flex spaces, self-storage warehouses, you name it.

Joe Fairless: You said international investors are working with you?

Kurt Weil: Not necessarily me as much. They’re more coming into the Midwest, and a lot of times those deals are harder to do, because you have to find international banks that not only can service that to do an actual loan, but get them qualified… So a lot of it is more coming in the form of cash.

Joe Fairless: Got it. Slocomb, off market stuff – how are you finding deals now? Let’s start with that.

Slocomb Reed: There are some great people in the room right now who do a lot of off market lead generation, and we’ll probably all say that you start with building a list of people that you wanna be able to contact, for whatever reason; they own property in Cincinnati, don’t live in the area, they are delinquent on paying property taxes, they live in the specific neighborhood you’re specialized in… You get a list built, and then you figure out how you can contact all of those people.

What I’ve been doing specifically is I have a team of people who work for me who use public record data, mostly from county auditors’ websites, to create a list of people that I wanna contact, and then we work on finding contact information, mostly phone numbers. Then all of my lead generation starts with cold calls.  I have people who work for me who make calls full-time, and I make some calls as well, depending on the property.

Joe Fairless: How did you find the people who work for you?

Slocomb Reed: I use virtual assistants. I found a company that is now called UpWork, that is great for finding people who can do remote work. All of the people who work for me in lead generation are in the Philippines.

Joe Fairless: And do you have one point of contact with UpWork, and then — I’m familiar with UpWork; do you have one virtual assistant who then has a team that they manage, or do you manage multiple virtual assistants?

Slocomb Reed: I’ve found an agency based out of the Philippines, and one of the two founders of that agency now works for me full-time. She helps me find other people who can fill other roles. She’s found three different callers for me. She does the initial interview, she preps them to be interviewed by me, and then I interview them. We go through a couple of practice calls, and then they’re off to the races.

Joe Fairless: What are they compensated?

Slocomb Reed: They are compensated between $5 and $7/hour plus bonuses after I close a deal… Whether I buy it myself, or sell it and get a commission, or some sort of fee. When we get to the end and I’m getting paid, I make sure that they get some of that. But it’s a pretty low hourly rate until then.

Joe Fairless: So they get an hourly rate, plus bonus whenever you close.

Slocomb Reed: Yeah.

Joe Fairless: So it’s $5-$7 hourly rate prior to closing, and then once closing – what do you give them for a bonus?

Slocomb Reed: I give the manager, the person who made the call, and the person who works on the back-end, making sure my callers have their lists – she really just does data entry, but there’s a lot of data entry involved; these people are making thousands of calls a week – I give each of them $100.

Joe Fairless: Got it. And how do you get the phone numbers?

Slocomb Reed: How do I get the phone numbers… There are a few different sources, and I’m doing some more general scrubbing of the internet to find owners of LLCs that own properties, and things like that. I have used Cole Realty Resource, which Cole Information is a big data company; Cole really resources what they use for real estate agents specifically who are looking for contact information for property owners in the area where they sell.

I’ve been using Cole Information to cross-reference with the property owner lists that I’m creating from public records to see who I can find contact info for.

Joe Fairless: Anything else about that process that is relevant to talk about?

Slocomb Reed: Well, I would say that the kind of lead generation, regardless of whether you are cold-calling, you’re hiring people to cold-call, you’re sending direct mail, you’re doing stuff on the internet – when you get to the point of being successful enough to create a full-time income for yourself, that’s a pretty serious commitment of investment dollars… But you can build up to that. I didn’t have 4-5 VAs in the Philippines working for me at the beginning; I was doing it myself, and sending a few postcards, and then using the revenue from that to scale up into bigger things.

Joe Fairless: If you did not close on a property in one month, but you had the team in place, how much would you pay expense-wise for that team?

Slocomb Reed: About $2,000.

Joe Fairless: Peter, we’ve got a bunch of investors watching and listening – what are some relevant things you think they should know in this market, based on your expertise?

Peter Chabris: I think Coleman nailed it. It’s really hard to buy cashflow right now.

Joe Fairless: Slocomb.

Peter Chabris: What did I say?

Joe Fairless: Coleman. [laughter]

Peter Chabris: Slocomb.

Slocomb Reed: Slocomb. He nailed it.

Joe Fairless: That was good stuff, so we wanna give him credit.

Peter Chabris: Yeah, totally good stuff… So yeah, it’s hard to buy cashflow right now [unintelligible [00:17:16].06] MLS. It has to be off market; it’s going to these kinds of ends where you’re gonna find your opportunities. If you can buy something right, it’s super-easy to sell something. Flipping is easier to do, I think, than buying and holding right now in terms of making cash. I think it’s easier to do, because — I wanna make sure I clarify, the market is not softening. The rate at which we’re appreciating is decreasing, but we’re still appreciating.

Joe Fairless: Right, so I misconstrued that. My bad.

Peter Chabris: So you still have market [unintelligible [00:17:47].11] and inventory is more valuable than it was 2-3 months ago because we’re in a hot market, and that’s not gonna change the second half of this year. So the wind’s in your sales; if you can find the opportunity, it’s really kind of hard to mess it up right now from a resale perspective.

Joe Fairless: I think you mentioned that to buy a cash-flowing property you should get them off market… You’re a real estate agent, so you put properties on market; so the properties that you put on market – are they typically not cash-flowing properties?

Peter Chabris: Typically, the amount of work that we do with investors is small relative to the total amount of volume that we do. I’ll be totally transparent about that. We are finding ourselves working with more and more investors in the last six months or a year, and with investors – they will typically find the opportunity and bring us in to make sure that they’ve got their projected sales price correct, and then we’ll help them move the property once they’re done with it. Sometimes we’ll consult on what to do on the property.

Now that we’ve kind of gotten into the scene a little bit more, we are finding off market opportunities present themselves, so we obviously share those with our investors first, and then if not, we’ll take them to the MLS… But in this market, they never get there, unless they’ve been picked over and they stink, in most part.

Joe Fairless: So I’m an investor, I have a single-family home, and I go to you to list it… What are some things that you’re gonna do, either from a marketing standpoint, or positioning the property itself, that will maximize the value when we list it?

Peter Chabris: I love that question. Well, there’s a couple things that you hire an agent for. One obviously is the exposure. We generate more exposure. The second one is the negotiating skills, and I think the third one is positioning from a pricing perspective… And then also positioning within the realtor community.

On the marketing front – the marketing used to be a classified ad in the newspaper; we all know it’s gone to the internet, so the question is “How do you more than just stick it on Zillow? What are the additional activities that you take online to generate additional interest? What is your reputation within the agent community? How do you move the property within the agent community, and how do you market directly to consumers?” Those are all what you look to an agent to do on the marketing front… And then you’ve gotta play something right; even in a market where everything sells quickly, if you over-price, you still leave money on the table, because a properly-priced home will go into multiples and you’ll yield more return on your investment than you will if you start the price too high and let the market figure it out.

Joe Fairless: I love that. Let’s get into some specifics on both of those points.

Peter Chabris: Sure.

Joe Fairless: When you’re looking at pricing, is there a formula that you use for what’s too high, what’s too low, what’s just right?

Peter Chabris: Yeah, I’m a data nerd, so we definitely do a data-driven pricing analysis with our client. We’ll figure out “How do you segment the market correctly?” Is it driven by school districts? If so, by the elementary level? Is it driven by beds and baths and square footage, the floor plan, parking…? And different things matter differently to value in different neighborhoods. Downtown a parking spot is gold. If you’re out in the burbs, a  parking spot is assumed. Half bath in older homes, like a Hyde Park and Pleasant Ridge adds huge resale value and the speed with which you can sell, and yet it’s an assumption [unintelligible [00:20:48].13] So different things drive value in different neighborhoods, so that’s a critical component – identifying what is the true market segment you’re operating in. You look at supply, you look at demand, you look at obviously what has sold recently, as well as what you’re competing with, and you also look at what didn’t sell, because that’s data as well, in addition to homes that you know that you know that may be coming on the market that you’re gonna be in direct competition with.

Joe Fairless: When you look at supply and demand, what exactly are you looking at?

Peter Chabris: Well, an appraiser is gonna look at any sales that sold in the past six months. So by default, as real estate agents we only wanna use data that is no less than six months old. We’re gonna look at past sales as a way of identifying how many sales sold in this market segment over a certain period of time, and we’re gonna compare that with how many homes are on the market.

A balanced market in residential real estate is 5-6 months’ worth of inventory. That is to say if we look at the past 12 months and 12 homes sold, your absorption rate would be two homes sold per month. Then we would look and we would say “Okay, how many homes are on the market?” Well, if there’s six on the market and two homes sold per month, that would mean there would be three months’ worth of inventory. So a balanced market is 5-6 months’ worth of inventory. Over six months of inventory is over-supplied, buyers market; less than five months is under-supplied, sellers market.

Cincinnati has continued to go down, down and down, generally speaking, in aggregate, and in some neighborhoods it’s a matter of weeks worth of supply now, which is fun… If you’re selling. [laughter] If you’re an investor, it stinks.

Joe Fairless: Yeah. Great info. From a marketing standpoint, you said you want someone who’s not just gonna post it on Zillow and wash their hands of it, so what specifically does your group do?

Peter Chabris: Yeah, I love that question. We’re a big believer in teasing the market to create urgency. Luckily, the MLS has enabled us to systemize this a little bit. It’s called like a “Coming Soon.” So we’ll try and drive up some urgency within the agent community – because all their clients will starve for inventory – as well as directly consumers; that’s done through various portals… You can pay a premium to promote that availability coming.

With the portals, we use social media – we pay on social media to put that in front of prospective buyers. And we will market that to our own database of buyers; there’s about 14,000 buyers right now… And in addition to that, we’ll work the agent community, both on the MLS and then through some various communities that we’re a part of. And if you do that right, it creates a frenzy. Anybody can sell a home right now, the question is how much money do you leave on the table? Because we actually love — a quick sideline… We love when our clients are interested in a for-sale-by-owner, because we’re not competing with the 4,500 other agents in Cincinnati and their clients, so we know we’re not gonna get stuck in a multiple offer situation; we can get that deal for them for less.

So we look to agitate in public and within the agent community through paid digital efforts, and then part of it is just old-fashioned networking with the agent community. And then in our reality, in our physical space, we’ll do door-knocking, we’ll do fliers, we’ll do call campaigns around a property to drive up interest and activity. Because everybody knows somebody that wants to move into a neighborhood, so we’ll hammer in that community and create some urgency within the local neighborhood as well.

Joe Fairless: Does your client pay for the door-knocking and the fliers?

Peter Chabris: Sure, it’s part of the commission.

Joe Fairless: It’s part of the commission.

Peter Chabris: They pay us when we’re closing.

Joe Fairless: Right. So at what price point is it worth it for your company to do that level of effort?

Peter Chabris: That’s an awesome question. What we’ve found was that it didn’t make sense when we got into the lower price points, so now we just charge a different commission rate or a flat fee, and then they’ll get the exact same service as someone who has a half a million dollar home.

Joe Fairless: Okay. So anything less than 500k, you’ll either try to–

Peter Chabris: So the way we do it is typically (we’re not price-fixing here) agents charge around 6%. Under 150k, we’ll generally charge 7%, under 100k we generally charge $7,000 flat fee. Now, these are for individual clients. [unintelligible [00:24:44].06] if it is a multiple iteration client, then obviously that’s something that we’re gonna talk about.

Joe Fairless: And what have you done that was a waste of money and time that you no longer do from a marketing standpoint?

Peter Chabris: God, where do we start…? Buses, bench boards, signs over urinals… [laughter] [unintelligible [00:25:08].25] I just wanna be different and cut through all the chatter, right? So… I’ve learned a lot. Anybody who’s in real estate, ask me first before you spend the money, because I can tell you if it works or not. [laughter]

Joe Fairless: Kurt, based on your experience, what should this group know that would be relevant and helpful to them, based on your expertise?

Kurt Weil: As investors, coming from my banking background, inside, out into the broker world, I would tell you to be smart; it’s a sellers market. If you’re selling, good for you. If you’re buying, be smart. With the way cap rates are now, if you take something on market, it’s slimmer and slimmer and slimmer. And as we’re in the looming hours of tomorrow, where they may or may not cut the Fed fund rate, is that really gonna do much to the Treasuries? Has the bond market already gone out and lowered rates already? They’ve already reacted; or should I save “have been proactive.” So is your margin thin between your cap rate and your interest rate? Is there a lot of meat on the bone for you? No. So you have to be smart about your underwriting.

What I can tell you is that, going back to your initial question of this time last year, [unintelligible [00:26:18].16] and you see vacancy rates that used to be 6% just hit 4.9%. That’s good. It’s good for investors. Like I said, we’re in a good economy, things are going well, rates are low, it’s advantageous for investors, but it’s really advantageous for sellers. So be careful. Be careful when you’re underwriting, make sure you’re putting in reserves, make sure you’re looking at the cap-ex, and make sure that you’re doing your own due diligence.

Joe Fairless: And you mentioned cap ex and reserves… Thinking about an example of a previous client, who came to you to get a loan, and you said “I can’t do it based on the numbers that you’re showing”, what were the categories and numbers where it just didn’t work? …if that situation has happened to you.

Kurt Weil: In regards to making improvements for increased rents, or…?

Joe Fairless: They wanted a loan, and they couldn’t get a loan because of how they were underwriting. Where did they mess up?

Kurt Weil: Sure. The biggest thing — when you’re four units and under, you can take it in the residential world, where you can pass on your DTI. If your DTI is there and you can do it with a W-2 wage, you can overpay; you can overpay all day long. And that’s gonna be a shame on me; I learned my lesson the first time around.

When you start getting into the five units and more, that’s where you’re gonna be based on a cashflow coverage. When you’re based on a cashflow coverage, you need to learn with the bank that you apply with, how do they apply that [unintelligible [00:27:40].27] because we’re at a 4.9% vacancy rate, even though the property is 100% occupied, are they always gonna put in a 5% vacancy rate? Yes. “Well, I’m gonna self-manage the property.” “Fantastic, we’re still gonna put in a 5% property management fee.” It’s gonna happen no matter what, so the margins can get thin.

Will they do [unintelligible [00:27:58].04] agency-type debt, a requirement of $250/door? Are they gonna base you on $150/door in insurance, even though you have a better quote? Those are the type of questions that you need to find out – where are you gonna take this loan, where are you gonna go with it, who’s going to  be looking at it? Is your broker, is your banker going to be addressing those issues upfront? Are you doing a value-add deal, are you gonna add cap-ex? “Hey, I can still increase this right now by $200/door, but I need stainless steel appliances, and I need to repaint the cabinets, I need to put down new flooring.” Is that [unintelligible [00:28:30].11] is your proforma still gonna show, at a 95% occupancy, or while you’re going through stabilization, while you’re still in an interest-only period, with a lower stabilization – is it still going to be able to cashflow?

So those are the type of questions — sorry, I didn’t mean to get too much into it…

Joe Fairless: That’s good, thank you.

Kurt Weil: The biggest thing about investors is there’s a big cut-off – four units and under, and then five units and above… And it’s a game-changer. It’s a game-changer no matter if you’re starting out with one unit, or going straight into 12. It’s things that you really have to consider, and read up on, and learn about to be able to get your finances to build your business.

Joe Fairless: As we wrap up, anything that we haven’t talked about, that we should, as it relates to helping everyone in this room, and watching and listening, be successful in finding and buying profitable deals now, and then the foreseeable next 6-12 months in Cincinnati?

Slocomb Reed: Sure. Moving forward, there are several things that are impacting the market: cashflow, cap rates, things like that… One thing that I don’t think is going to change now is that in the last few years the rest of the real estate investing world has found us, and they’re not going anywhere. What I mean is that the people who are used to getting 4-caps, 5-caps, 6-caps on the East Coast and the West Coast – they’ve found Bigger Pockets and they’ve found Cincinnati, and when they figure out that they could get an 8-cap to a 10-cap on the market here, it sucked all the wind out of the room. And that’s what a lot of us have been experiencing.

On that — so I was listening to a  Bigger Pockets podcast at least a couple years ago, and Tim Ferriss was on. He wrote the 4-Hour Workweek and basically every else about business, and this is worth listening to… I was in a rental car, on my way back to the airport in Maryland, and when I heard what Tim Ferriss had to say to Brandon Turner and Josh Dorkin, I had to pull off on the side of the highway, put my blinkers on and write notes.

We were having trouble finding deals, and he was explaining the three advantages to making any business decision. The first is an informational advantage, the second is an analytical advantage, and the third is a behavioral advantage.

Working backwards, a behavioral advantage in figuring out whether or not you should buy or sell real estate probably has a lot to do with your discipline. Does it meet your criteria for what you should do? Are you stretching yourself because you’re desperate? Are you maintaining good investing behavior?

The other two are something that I think everyone needs to have in order to get a good deal in Cincinnati right now. An analytical advantage is when you have a way of seeing something that other people don’t have. For example, if you have a building – let’s say a duplex – where both of the units have three bedrooms, right now market rent for that, depending on the neighborhood… I’m thinking about a property in a C-class neighborhood right now – your market rent might be $850, but Section 8 is gonna pay $1,250 for that same apartment. So knowing those kinds of things gives you an analytical advantage and it allows you to see cashflow and see benefits to a deal that other people aren’t seeing.

The last one – informational advantage is when you know things that other people don’t know. That’s what you have when you’re going off market. And when I say “going off market”, I don’t necessarily mean that you need to spend thousands of dollars a month in postcards and SEO and cold-calling and door-knocking every evening… But you need to know the people who are doing that and who are putting together the deals off market, that are showing serious cashflow, that are showing the 10-caps, 12-caps, that are showing the real value-add potential that creates what we call BRRRR deals. You need to have that hassle somewhere, either you or with the people in your network, so that you have that informational edge.

Joe Fairless: Any additional thoughts?

Slocomb Reed: I can only speak to five families and less; that’s the commercial world, it’s these guys. If you’re looking at five units or less, just to your point, protect yourself. Everybody’s paying premiums right now, so make sure you’ve got an agent looking at that property and making sure that your plan B [unintelligible [00:32:50].19] Make sure you’re buying it such that you’ll be able to get out and sell it at least breakeven. I think that’s a huge, huge piece of creating insurance for yourself when it’s so competitive acquiring inventory right now.

Joe Fairless: Any parting thoughts?

Peter Chabris: All I can say is be diligent and be patient, because a lot of people are trying — like Slocomb said before, be patient, because people are trying to make deals happen, just because they’re itchy that they’re not meeting that 24-month, 36-month, 5-year goal, that they don’t have so many units. Don’t get wrapped up in the unit count. Get more wrapped up in “Is it cash-flowing?” Remember, your first one, with the bank, is always your proof of concept. If you didn’t do it right the first one, you’re not cash-flowing, who’s gonna give you a second one? So be diligent and be patient.

Joe Fairless: Thank you, you three. I really appreciate it. [applause] We have time for a couple questions. Yes, sir…

Audience Member: You guys mentioned things like inventory, appreciation rates, and those things when they affect the market. If you saw a downturn coming, what would be the red flags that are blinking? Is it an inventory rate of X, is it an appreciation of X, is it the bond market, is it unemployment? And what would be those numbers where it’s flashing and you’re like “Okay, here it comes.”

Peter Chabris: So if you watch sold data, it’s too late. You have to be watching the ratio of active inventory to the ratio of inventory that’s under contract, waiting to close. When you’re in an up market, that’s where you’re going to see the trend before it bites everybody else in the butt. Shameless plug – we do a monthly video email to our people, with the hidden economic indicators that drive our market, and [unintelligible [00:34:45].05] on what we think that means. If you guys are interested, just email peter@asktcg.com and I’ll add you to that list. But you’ve gotta watch the ratio between pending inventory and active.

Joe Fairless: What’s the ratio that would be trouble?

Peter Chabris: You look at the number of units that are traditionally sold over a six-month period – that’s the absorption rate; how does the pending inventory over a 30-day time correlate to that monthly absorption rate in the sold area? If it starts creeping up, that’s your first indicator… It’s another way of saying watching the increase in inventory.

Inventory is gonna go up or demand is gonna drop. Normally, it’s a little bit of both, and then all of a sudden it’s really extreme, so you’ve gotta be watching the lead indicators, not the lagging indicators. Does that answer your question.

Audience Member: Yeah, that’s one. Are there other factors? You mentioned the bond market… And then there’s obviously appreciation, and/or — I mean, that inventory, that’s awesome. Are there other indicators like that?

Kurt Weil: The bond market can be tricky. It depends. If you historically look at how agency treated multifamily compared to the interest rates that the bond market did on Treasuries, it potentially could be an indicator. But then it’s hard to say… And I say that because look at the interactions with the Fed itself; look what they did last year – they bumped it up a couple times. A lot of people that had revolving debt lines of credit, not that monthly installment [unintelligible [00:36:12].07] that revolving credit card debt, everybody’s tied to to prime on their home equity line of credit; if you’re flipping, you’re tied to some type of base. Most likely prime, but it could LIBOR and whatnot… But when that happens, your rates are going up, and the one that’s working that is the investor. But that leads into so many more indicators.

That leads into that discretionary spending not being there when times are good, that leads into not as much consumption GDP… That leads into so many things that get reactionary; I believe the official definition of a recession is the previous two quarters of downward trends. You don’t know you’re in a recession until it’s already happened.

Slocomb Reed: I hope you guys are taking notes. I’m on the panel right now, and I’m taking notes. I hope guys are getting as much out of it as I am.

Kurt Weil: Can I plus that up just a little bit?

Joe Fairless: Sure.

Peter Chabris: Two other indicators to watch – interest rates, GDP and unemployment drive home values, or residential home values. Commercial – it’s all about return on investment, but for residential, those are the three drives. He can speak to rates… Our unemployment dropped from 3.6% to 2.9%, and GDP has expanded as well, so there’s no indicators that would demonstrate we’re going anywhere except for our continued appreciation in values.

Joe Fairless: [unintelligible [00:37:25].14] Australia.

Peter Chabris: What’s that?

Joe Fairless: Australia has had good economic times for 27 years in a row.

Peter Chabris: That’s why they’re so happy. [laughter]

Audience Member: So if a recession were on the horizon, how would that change your investment perspective and/or how do you see the Cincinnati market going forward, next 12-18 months?

Slocomb Reed: I can start… Yeah, the first thing I’d do, to answer your question, is go on Bigger Pockets and google-search “recession-proof”, and you’ll find oodles and oodles of things. I would say if we were in a downturn or if we were preparing for a downturn, number one, have cash; and number two, cashflow can keep you from needing to sell.

One of the fundamental things – and when you’re buying your first rental property especially – that you want to avoid is the need to sell. So if you’re bringing in the revenue that can sustain your property… There are a lot of people around the room nodding heads, who have larger portfolios than me, FYI… And if you have the cashflow coming in, that will keep you afloat and keep you, ideally, generating income as the market dips, and you’re gonna be fine, so long as nothing else is compelling you to sell at a time that is disadvantageous, if that makes sense. And really, if you wanna make sure that your cashflow is going to be okay in a market that is turning down, you wanna make sure that what you own is not a niche product that is only desirable in an up market.

Joe Fairless: So that is a way to play defense, and I completely agree with you. You can search “three immutable laws of real estate investing.” I’ve got an article that talks about that – buy for cashflow, have long-term debt, and have adequate cash reserves.

Slocomb Reed: That’s awesome.

Joe Fairless: But how would you play offense?

Slocomb Reed: Have cash is a great way to play offense. One of the ways to look at market cycles is that there are times when everyone wants to buy and there’s nothing for sale, and there are times when everything’s for sale and no one wants to buy… And really, the answer would be for playing offense — your question to be asking yourself now is “How do you put yourself in a position to be one of the few people able to buy when everything is for sale?”

Joe Fairless: And I also thing that studying creative ways to structure deals, if you’re in residential – creative ways to structure deals, so that when the recession does come, you already have that knowledge to know how to do workouts with distressed sellers, so that you’re not trying to learn and go; you’ve got the knowledge and you can get going immediately.

Slocomb Reed: Yeah, awesome.

Joe Fairless: Any other questions?

Audience Member: What do you think specifically for the Cincinnati real estate market maybe is the fewest days on market, for residential? Or if you’re an investor, where do you think you can put your money today with how it is [unintelligible [00:40:22].02]

Peter Chabris: All I would say is that economically — first-time buyers have never felt a bigger pinch on inventory, that first-time buyer market segment. So wherever first-time buyers are buying, and whenever that price point is, is where you can pop things as quickly and for the biggest return.

Joe Fairless: What’s the average price point?

Peter Chabris: Yeah, I was gonna say – generally, in Cincinnati it’s anywhere from up to 175k to maybe 250k-275k in the young professional white collar entry-level inventory.

Slocomb Reed: When I get asked that question by out-of-state investors, typically people who are trying to look for their first real estate investment deal, someone who lives in L.A. or New York, for example, and wants to come here for cashflow, the generic, but accurate and helpful answer that I give during that little phone call, if you’re talking about path of progress, is look at Over-the-Rhine and downtown, and look at Oakley; then expand out in the rings. Very, very generally speaking, what we’re seeing elevator pitch-wise is that those two areas are crazy hot, with new development, with renovations, with lots of money getting invested, and that’s rippling into the surrounding neighborhoods.

So when you talk about path of progress, what I tell people who are on their laptop, on the phone, on Google Maps, is put a pin on Over-the-Rhine and put a pin on Oakley, and then just go out from there and start looking at that.

Kurt Weil: That’s a great one. I think maybe the easiest way to sum that up is follow the money. The first-time homebuyers – where are they putting their money, where are they getting that debt? Where are the projects going on? What area is being regentrified? Is there city money, is there tax abatements? Where are they being improved at? Where is the redevelopment of the strip centers? Follow that. On those ripples of those areas of Oakley [unintelligible [00:42:22].07] So just look at the ripples and then follow the money.

Joe Fairless: Last question. Anyone got a last question? It’s gotta be a good one. Pressure is on…

Slocomb Reed: One thing – shameless plug for each of these guys. They’re both phenomenal. Kurt is working on his second “Commercial Mortgage for Me” right now, and his knowledge of the market and what you can get away with when lending is phenomenal. He’s a wizard. [laughter] And that was appropriately put, by the way. The commercial game is a lot about what you can get away with.

And Peter Chabris is genius. He’s been helping me a lot in my own business, in figuring out how to do lead generation better, how to have better systems and better infrastructure. So if you get the opportunity before you leave, you should definitely shake hands with both of these guys.

Joe Fairless: Alright, thanks a lot. Oh, he’s good, too. [applause]

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JF1830: Getting Money Back From Contractors, Seller Financing, & MHP Investing #FollowAlongFriday with Joe and Theo

We’re going to hear Joe’s top three favorite lessons learned last week when doing the interviews for this podcast. Lessons learned are coming from Amanda Cassiday (https://www.amandacassiday.com/), Peter Conti (https://realestate101.com/), Andrew Keel (https://www.andrewkeel.com/). If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“If they are looking to grow their business, and you follow these five steps to get your money back after being burned, you increase your odds of getting it back”

 

Free Apartment Syndication Resources:

Example T12: http://bit.ly/bestevert12

Example Rent Roll: http://bit.ly/besteverrentroll

 


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Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


TRANSCRIPTION

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

This is Follow Along Friday. Theo Hicks, I learned a whole lot last week during these interviews… And as a reminder, Best Ever listeners, the purpose of Follow Along Friday is to pull out some insights that we learned – in this case I did the interviews last week, so I learned last week – and share them with you as a sneak peek, and also so that you can (should you choose to) start applying them sooner, since they interviews that I did this past week will go live probably in 4-5 months from now; we’re that booked out.

So Theo, do you want me to just go ahead and get into it?

Theo Hicks: Yeah, let’s jump right into those lessons, Joe.

Joe Fairless: Alright, cool. Holy cow – his name is [unintelligible [00:03:01].05] What an impressive human being, from a real estate standpoint. I met him through this interview, so I don’t have any preexisting relationship with him; he’s a 24-year-old real estate investor based in New York City… And as a sophomore at NYU, he identified a need for a student-run brokerage. He went out, got his brokerage license, and he and some friends were leasing apartments to fellow NYU college students, and I’m sure other college students.

He was making six figures a summer, for three months of work. Six figures. I have a hard time putting myself in that place when I was at Texas Tech as a sophomore, having an idea for a business and then earning over $100,000 for three months’ worth of work. Just an incredible entrepreneur. I asked him how much did he have by the end of his senior year, how much was in his bank account, and he said it was between 250k to 350k.

Theo Hicks: Wow…

Joe Fairless: As an undergrad who just got their degree, this person had over 250k in his bank account, and he had a college degree. Just so impressive. So one is if you are in college, and you’re looking to create a business, this is a potential opportunity. He capitalized on the New York City market, and  the way it’s structured, where you’ve gotta go through a broker to get an apartment… I know having lived in New York City, New York City is its own animal, so perhaps this exact strategy won’t be applicable to Best Ever listeners who are in college looking to create something, but… It’s just inspirational, at minimum. Perhaps some tactical components need to be reconfigured, but just incredibly inspirational.

Here’s a tactical thing that he talked about for how he has since then (surprise, surprise) grown his portfolio (he’s 24 years old) to 60 single-family units, 12 multifamily — so I should say 60 single-family houses, 12 multifamily units, and a self-storage facility. And the self-storage facility – I was like “Tell me about it.” He’s like “Well, it sounds more impressive than it is. It’s 20 garages, 4,000 square feet.” I’m like “That’s impressive. That’s very impressive.”

He bought that for $120,000, and he found it on the MLS. He talks about that during the interview, so I won’t go into that. But the tactical thing I wanted to mention is how he found 60 single-family houses and 12 multifamily units is by working with REO companies and getting deal flow through them.

And I said, “Okay, I’m not gonna ask you which companies you’re getting deal flow from, because that gets into your competitive advantage, and I don’t wanna steal your thunder on that, but the question I have is if you were starting over and you didn’t have the current relationships that you have with REO companies, how would you go about replicating this process?” and he said that an attorney helped him get connected to the REO companies. So he said what he would do is he would focus on networking with attorneys, telling them what he’s looking for and seeing if they have any connections they can give him.

He said another tactical thing you can do is by looking at the deeds and the mortgages and see who’s selling a lot of stuff on the county website, and if they’re selling a lot of stuff, they might be an REO entity. So those are two tactical things that anyone can do to identify these REO companies that might be a good lead source for him to buy directly from.

Theo Hicks: [unintelligible [00:06:49].24] I remember all the way back, when I was close to his age, I did that for Cincinnati… So I know there’s a way to do it for all the county, but for Cincinnati in particular you can get access to the back-end of the auditor’s site. [unintelligible [00:07:05].08] every single property in Cincinnati. In this case you would just filter by — they actually have recent sales too, so you just download the recent sales and filter it by the name of the person selling property, and just see “Okay, this person sold 50 properties in the past month. Maybe they’re an REO company.” Maybe they’re just a big owner who’s selling properties too, so it’s not just necessarily REO companies.

And then going back to the school one – that’s interesting, because most people will graduate with as much money that he had in his bank account in debt. So he did the exact opposite of what people typically do. For me — I was in mechanical engineering, so I’m sure I probably spent a lot of time on school, compared to maybe other majors, but I still had so much free time that I spent on doing stupid things, that I could have spent on obviously doing something like this.

I’m not sure if people think this or not, but they might think “Well, I am a full-time student. How am I gonna have time to do this?” But if people really think about it, you’ve got way more time when you’re in college than you do when you actually graduate and get a real job. So it’s definitely possible, and as you mentioned, this is pretty specific to New York. I didn’t realize that you had to have a broker represent you to lease an apartment. But yeah, this is kind of more inspiration, to get the wheels churning in your mind to think of ways you can add value as a real estate investor to college students… Because every college student is renting, looking for a place to live; you can even be some sort of consultant the same way, even though it’s not a requirement.

This guy sounds like he’s very smart, and very entrepreneurial, and obviously it’s working out for him.

Joe Fairless: I believe it was the book “Things I wish I knew when I was 20.” It’s written by an Ivy League professor, and she talks about different things that she wish she knew when she was 20. I believe it’s this book – she mentions that she gives her students a challenge at the beginning of the year to make as much money as possible with $100. So she gives them $100 and like “Okay, go.” It’s an entrepreneurial class. “Go make as much money. Create a business. Whoever makes the most money wins”, and there’s other prizes, too.

Some people created a business around selling gadgets around campus, others did laundry services… But the winning team that earned the most money — I think it was a shorter period of time than a year. I think it was about a month. The winning team that earned the most money actually did something ingenious… They sold the time that they had to present to their fellow students their business plan and their business. So instead of creating a business, they simply identified a company within that area that would love to have a captive college student audience for 30 minutes, and then they sold their time to that business, and that business presented to the students, and as a result they got access to the students; and the students that had that idea earned the most money.

So along the lines of, hey, Angad’s business, if you’re not in New York City, that exact business might not work, but it’s the mindset of how do we maximize the resources that we currently have available – that’s what this is all about, and that example really came to mind whenever I was thinking about Angad.

The second thing – Philippe [unintelligible [00:10:41].19] He’s an entrepreneur; he scaled from a $3,000 mobile home park to owning ten units now. Based in Nashville, Tennessee. I wanna mention two things about my conversation with Philippe. One is that he had a six-unit that he has now sold, and it was in a college town. One thing that he did to increase the value – he bought it for $120,000, and two years later he more than doubled it in value. He sold it for $260,000. So actually I’ll give you two things that he did, and then I have another lesson learned from him. One is he changed it from [unintelligible [00:11:20].23] the amount of beds that you can have within the residence. So he didn’t focus on “How many tenants should I have”, he  focused on how many — well, I guess I’m saying it incorrectly. He added more beds in the house. So he added two more beds in the house, and as a result he started charging per person, instead of per-bedroom. I guess that’s the proper way to say it.

So he literally made the living room a place where two more people could live. So one, he changed it from a per-bedroom to a per-bed. Two – and this is what I thought was really interesting – is he had relationships with local vendors, and those vendors would send leads his way, because they’re popular spots for college students, and in exchange he would send his residents to those vendors. Some specific vendors – there’s a Mexican restaurant; a place called Grandma’s Pancakes, and a local coffee shop.

And he would put in the welcome packet for his residents when they moved in, he’d put these cards that the vendors/restaurants gave him, and the residents would show the cards to the restaurants whenever they arrived, and then they’d get exclusive discounts as a result of living at his place. So it was  a win/win. I did something like this for one of my properties, where I reached out to local businesses. I had a card that I printed out.

And surprisingly, it was challenging for me to get local businesses on board. I offered discounts in general, but also I’d like to offer discounts that weren’t publicly available. But I went to tanning booths, or tanning salons, I went to a pet groomer, I went to a payday loan company… They were very interested; they were actually the most engaged. Surprise, surprise. I went to restaurants… And for some reason – maybe my approach wasn’t the right approach, or maybe the market wasn’t right, or something, but I didn’t have that  much success.

However, from a percentage standpoint, from the couple of companies that I did connect with – Dickey’s Barbecue was one of them; they were really on board because there’s an entrepreneurial guy who owned that franchise location… The couple of them that were on board – they really helped me have selling points for residents who wanted to move into that apartment community, and it was a win/win.

So I’ve done this approach… It might take more effort than you initially think, but it was a good use of the team’s time to create something like this… Especially if you have a smaller-sized apartment building and you’re not looking to do this in multiple locations. Or maybe it’s actually — if you have one geographic location where you own a lot of properties, that’s good. If you are spread out across multiple markets, then it might not be an effective use of your time, because it just takes a whole lot of time to do it. But in my experience, it was worth it.

I’ll stop there. Theo, do you have any comments there?

Theo Hicks: I was gonna say – do you know if he had preexisting relationships with any of these companies, or did he just reach out to them randomly?

Joe Fairless: He went to the Mexican restaurant a whole lot, he said, so they might have known him. But I don’t think he had a preexisting relationship with them in a formal capacity.

Theo Hicks: I was curious… Because I’m sure that would probably be helpful. If you’re thinking about applying this strategy, think of the places you just go to frequently, and then bring that up in the natural course of conversation if you’re talking to that owner, or whatever.

Joe Fairless: True that, yeah.

Theo Hicks: I was gonna mention something else – we were talking about this on Follow Along Friday; it might have been when we were discussing someone who had a question about buying a smaller apartment, or that didn’t have any amenities on-site, around like a bunch of massive apartment communities that had top-notch fitness centers, and things like that… We talked about you can leverage the local businesses, like fitness centers, movie theaters etc. and try to get discounts from them, and then you can present your property as like a luxury experience, without the luxury price. “So a fitness center isn’t here, but because of that your rents are gonna be lower. But we’ve also got discounts at this coffee shop, this movie theater, this tanning salon, this whatever.” That’s another way that you said you can present this type of concept to your residents as well.

Joe Fairless: Yeah, we’re actually buying a property right now that fits into that category, where there is a fitness center on-site, however literally right next door there’s a state of the art fitness facility, and the management has negotiated only an $8/month membership fee for those residents. And that is an exclusive arrangement that our property has with the fitness center. I think that more stuff like that – exclusive perks… Because then you start moving away from being a commodity and you start differentiating your apartment community in a way that others can’t compete, because you’re not going back and forth on price; you’re actually talking about these additional amenities and relationships that they don’t have.

One other thing I’ll say about the interview with Philippe – this reminds me of the example you brought up a couple times, Theo, of the gentleman who looked for properties that had a busted foundation. He would actually seek them out and he had a solution for it, where others would run away. In this example Philippe talks about how he noticed that the homes in a certain area had a double garage; they’re two-story, and the downstairs was a double garage. He would convert that double garage into three additional bedrooms. He had three bedrooms, a kitchen and a bathroom that he’d convert the double garage into, and he rents it out to construction workers.

So the house – upstairs it has three bedrooms, downstairs it has a double garage; well, now it’d have three bedrooms upstairs, and then downstairs it’d have three additional bedrooms, and he rents it out on a per-bedroom basis.

So just looking for situations in our market where there’s opportunity to reconfigure the layout of the property, and if you identify a bunch of homes that have a similar configuration and you have a certain business model like that, then you have the opportunity to make twice as much cashflow as someone else.

Theo Hicks: And the same thing can technically apply to apartments, too. Obviously, there’s demand for those larger units, but if you’re in a market where you find an apartment that’s got massive units, and the dollar per square foot doesn’t necessarily make sense, and you can just convert that to two bedrooms instead of one bedroom, and get way more money… Obviously, it depends. Same thing with an extra living space that might not necessarily be in demand in that market, converting that to a bedroom, or keeping it the same… Again, depending on the market.

Joe Fairless: [unintelligible [00:18:23].10] He is an investor based in Phoenix, Arizona. He specializes in wholesaling. They do over 70 wholesale deals a month. Their business model is to be the wholesalers’ wholesaler. When a wholesaler has an opportunity, cannot find a buyer, they go to Jameill’s group, and Jameill’s group has a list of 80,000 buyers with a 30% open rate, who he and his team send it out to.

The business model is not to be as focused – or nearly as focused – as finding the opportunities, but more focused on having a buyers list that is robust, and being the solution to wholesalers’ challenges if they don’t have buyers for their properties.

Clearly, I had to hone in on how did he create a list of 80,000 buyers with a 30% open rate when he sends out an opportunity. And he says he thinks of themselves as a tech and data company (surprise, surprise), and they have a two-step process. One is his business partner has a software background, so he has a software that they created that scrapes social platforms and the internet for a list of potential people who might be qualified buyers. Think of accredited investors – they look for that type of person.

And then Jameill’s team will actually personally reach out to these people and send them a note through that platform. He talks about what that note says. I didn’t write that down in my notes, but he sends them an intro message, and just by sheer volume of the amount of messages through that software platform that they initially find all these leads, they get a lot of people to say “Yes, I’d be interested in being on your list.” And he’ll search for #azdoctor, for example, he’ll search for lawyers, he’ll search for accountants, Facebook groups… They’ll see what you have liked and map that back to if you’d be a likely real estate investor.

So just 1) having a business that is a solution for other people in your industry, who could be perceived as competitors; that’s interesting to me. That could be applied to any business. So one, quick, think of all your competitors. Two, how could you actually be of service to them, so that they pay you for your service. That could lead to some interesting stuff. That’s what he did. And then two is the one-two approach that he and his team take to building that big list. One is you write a software, two is you have individuals reach out to these people.

Theo Hicks: Is his business partner doing it, or do they have VAs doing —

Joe Fairless: VAs. Yeah, it sounded like they have an army of VAs.

Theo Hicks: I was gonna say, I can’t imagine him sending out 8,000 messages to people.

Joe Fairless: No, it’s 80,000 people on the buyers list. That’s an email that gets sent out.

Theo Hicks: It’s probably more than that.

Joe Fairless: But you’re right, if there’s 80,000 people on the buyers list, good point – they probably sent out half a million personal messages.

Theo Hicks: I think on MailChimp the average open rate for the real estate category – and again, this is just MailChimp – is like 10% maybe. So they’re three times what it usually is. So obviously that person will touch them, and rather than just stopping at step one and saying “Okay, here’s who we want to target”, and then kind of just like creating content and sending it out and hoping they see it, they proactively just go after that one specific person and send them a message… And obviously, that seems to be working out.

I bet it’s a very interesting interview, if you go into specifics on how he’s finding these people on Facebook, using the hashtags, or whatever software that he’s writing. Obviously, not every single person is gonna write the software, but everyone can navigate the Facebook, the Twitter, the LinkedIn search function. It might take a little bit extra time, but again, it sounds like they’re using VAs, and 30% open rate is pretty amazing.

Joe Fairless: It is. And I asked him “Do you send that list anything other than deals?” He says “No. I absolutely don’t.” That’s how we approach our private investor list. I don’t send them anything other than opportunities. There has been one exception where I asked them for thoughts on the book that we’re writing – what would they want in that book – because we were writing that book for them, to help them on how to think about passively investing in apartment communities. But besides that, I don’t believe I’ve ever send an email to my private investor list about anything other than opportunities that we have available.

Cool. And then lastly, Jason Parker – he is an investor in Seattle, Washington, but he’s also a financial advisor with a focus on retirement planning. I enjoy talking to people who aren’t exclusively focused on real estate, so that we get a broader perspective. One thing he says when he sits down with potential clients – he asks them “What is the purpose of your money and why do you have it?” And when he was asking that question, I was like “Man, that’s a  good question.” What is the purpose of my money and why do I have it? I thought about it a little bit (not a whole lot) since then, and I view money as simply a  tool to exchange and to help build lifestyle and do things with.

It’s not powerful to me, it’s simply a tool. And by thinking of it as a tool, it allows me to feel good about value exchanges, it allows me to invest in myself by going to a Tony Robbins program… And it’s just a tool to help me become a better person, in that example, or give to all the non-profits we give to at BestEverCauses.com…

So I think it’s just an important question to ask ourselves, “What is the purpose of our money and why do we have it?” I don’t know what the right answer is, but it hit me as something that is a question or two questions that we should ask ourselves, so I just wanted to make note of it.

Theo Hicks: I see it on here, “Not too concerned [unintelligible [00:24:38].18]”

Joe Fairless: Yeah, so you’re looking at some notes that I had during the conversation… And he said that potential clients, when he asked them that, they tend to not be too concerned about leaving money to their kids. They wanna have the same standard of living that they’re accustomed to. But they’re like “You know what – we’ve done what we needed to do for our kids, and at this point, kids, you’ve gotta make it happen or not.” Generally, that’s the sentiment from his potential clients.

Theo Hicks: That’s interesting, because you hear a lot of times people’s goal is the legacy, family wealth, leaving it to their kids… I have a five-month-old, so it might change, but I’m definitely on board with this guy. We could probably talk about that for hours, so… You can move on.

Joe Fairless: Cool. Alright. I think that’s all. That’s all I wanted to mention on that.

Theo Hicks: Okay. Those were really good lessons. I really liked the college guy. It reminded me back to when I was in school, and I did a few things — nothing like this, but I was slightly entrepreneurial while I was in college, to make some  money, just because I didn’t have anything and I didn’t wanna work a regular job at that time.

Joe Fairless: Colleen and I were on our walk the day after I did these interviews, and I was like “And he had $300,000 in the bank account after he graduated college…!” I was just so blown away. I still am. Very impressive.

Theo Hicks: Alrighty. Well, let’s move on to the trivia question. This is the Jeopardy month. Last week the question was “The U.S. state that is home to the two cities that have the lowest cost of living.” The answer was “What is Texas?”

Joe Fairless: Oh, Texas…! My backyard.

Theo Hicks: The two cities – I don’t know if you recognize these… Harlingen and McAllen.

Joe Fairless: Yeah, Harlingen is by the  border. I think they’re both by the border.

Theo Hicks: Okay. The cost of living was 20% below the national average, and way below the highest, which was obviously New York.

Alright, this week’s question is — Yardi Matrix (they’re a real estate research company) just released their biannual rental growth information… So this week’s answer is “The U.S. city with the highest year-over-year rent growth as of June 2019, 8.4%.” So what’s the question? What is that city?

Joe Fairless: Say that again?

Theo Hicks: The U.S. city with the highest year-over-year rent growth as of June 2019. The number is actually 8.4% rent growth in 12 months.

Joe Fairless: Okay, so in the last 12 months trailing June, so from June to June?

Theo Hicks: Yeah.

Joe Fairless: The U.S. city with the highest rent growth, 8.4%… I’ll go with Orlando.

Theo Hicks: Orlando. So the first person to get that answer correctly – you can either submit your answer in the YouTube comments, or you can send an email to info@joefairless.com – will get a copy of our first book.

And then lastly, the free apartment syndication resource of the week – I actually just finished recording the last series of the first part of Syndication School, which goes over the entire process… So we just talked about how to sell your deal. That will be coming out next week. Then we’re gonna go back over Syndication School and go into more detail on some of those episodes, some of those steps.

But anyways, we give away free documents for Syndication School, so we’re highlighting those on Follow Friday at the end. This week’s free document we’re gonna highlight is from series number ten, which is how to structure the GP and the LP compensation. That starts at episode 1597; I believe it’s a two-part series, so 1597 and 1598. First we go over how to structure the compensation for the general partners, so how the GP makes money, and then next one is how you as a  syndicator can structure the compensation with your limited partner.

To help you with that, the free document is the LP structure decision tree. It’s basically a series of yes or no questions that you answer, and based on the answer to the previous question we’ll ask another question, and ultimately you’ll land on what’s the idea partnership structure with your investors, whether that’s debt equity, preferred return, profit split, what the limit should be… Things like that. You can download that in the show notes of 1597 and 1598, or in the show notes of this Follow Along Friday.

Joe Fairless: Well, very valuable resources, and they’re free, so definitely if you’re in the industry or wanna be in the industry, take advantage of that. Best Ever listeners, I hope you enjoyed this, and most importantly, got a lot of value from it. We will talk to you tomorrow.

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JF1823: Online RE Auctions, Value Tactics, Finding More Money & More Deals #FollowAlongFriday

Joe and Theo are back in the studio today to tell us about the best things they learned last week. Specifically, Joe will share his lessons from three interview guests, and Theo will offer a little bit of follow up to Joe’s thoughts. The lessons we’ll be hearing about are from Joe’s interviews with Don Wenner, Jeffrey Gitomer, and Collin Schwartz. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“If Henry Ford asked people what they wanted, they would have said a faster horse”

 

Free Document:

http://bit.ly/dealfindingtracker

 

Due Diligence Resource Joe referenced:

https://joefairless.com/ultimate-guide-performing-due-diligence-apartment-building/

 


Evicting a tenant can be painful, costing as much as $10,000 in court costs and legal fees, and take as long as four weeks to complete.

TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


 

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JF1816: Making $100k In 3 Months As A College Student, Building A Buyers List, & Financial Future Questions #FollowAlongFriday

We’ll be hearing Joe’s favorite lessons learned last week during his interviews. He’s sharing lessons from Angad Guglani (http://cooperacq.com/), Felipe Mejia (https://www.sideguymovers.com/), and Jamil Damji (https://keyglee.com/). If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Working with REO companies and getting deal flow through them”

 

Free Document:

http://bit.ly/thelpstructure

 


Evicting a tenant can be painful, costing as much as $10,000 in court costs and legal fees, and take as long as four weeks to complete.

TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


TRANSCRIPTION

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

This is Follow Along Friday. Theo Hicks, I learned a whole lot last week during these interviews… And as a reminder, Best Ever listeners, the purpose of Follow Along Friday is to pull out some insights that we learned – in this case I did the interviews last week, so I learned last week – and share them with you as a sneak peek, and also so that you can (should you choose to) start applying them sooner, since they interviews that I did this past week will go live probably in 4-5 months from now; we’re that booked out.

So Theo, do you want me to just go ahead and get into it?

Theo Hicks: Yeah, let’s jump right into those lessons, Joe.

Joe Fairless: Alright, cool. Holy cow – his name is Angad [unintelligible [00:03:01].05] What an impressive human being, from a real estate standpoint. I met him through this interview, so I don’t have any preexisting relationship with him; he’s a 24-year-old real estate investor based in New York City… And as a sophomore at NYU, he identified a need for a student-run brokerage. He went out, got his brokerage license, and he and some friends were leasing apartments to fellow NYU college students, and I’m sure other college students.

He was making six figures a summer, for three months of work. Six figures. I have a hard time putting myself in that place when I was at Texas Tech as a sophomore, having an idea for a business and then earning over $100,000 for three months’ worth of work. Just an incredible entrepreneur. I asked him how much did he have by the end of his senior year, how much was in his bank account, and he said it was between 250k to 350k.

Theo Hicks: Wow…

Joe Fairless: As an undergrad who just got their degree, this person had over 250k in his bank account, and he had a college degree. Just so impressive. So one is if you are in college, and you’re looking to create a business, this is a potential opportunity. He capitalized on the New York City market, and  the way it’s structured, where you’ve gotta go through a broker to get an apartment… I know having lived in New York City, New York City is its own animal, so perhaps this exact strategy won’t be applicable to Best Ever listeners who are in college looking to create something, but… It’s just inspirational, at minimum. Perhaps some tactical components need to be reconfigured, but just incredibly inspirational.

Here’s a tactical thing that he talked about for how he has since then (surprise, surprise) grown his portfolio (he’s 24 years old) to 60 single-family units, 12 multifamily — so I should say 60 single-family houses, 12 multifamily units, and a self-storage facility. And the self-storage facility – I was like “Tell me about it.” He’s like “Well, it sounds more impressive than it is. It’s 20 garages, 4,000 square feet.” I’m like “That’s impressive. That’s very impressive.”

He bought that for $120,000, and he found it on the MLS. He talks about that during the interview, so I won’t go into that. But the tactical thing I wanted to mention is how he found 60 single-family houses and 12 multifamily units is by working with REO companies and getting deal flow through them. And I said, “Okay, I’m not gonna ask you which companies you’re getting deal flow from, because that gets into your competitive advantage, and I don’t wanna steal your thunder on that, but the question I have is if you were starting over and you didn’t have the current relationships that you have with REO companies, how would you go about replicating this process?” and he said that an attorney helped him get connected to the REO companies. So he said what he would do is he would focus on networking with attorneys, telling them what he’s looking for and seeing if they have any connections they can give him.

He said another tactical thing you can do is by looking at the deeds and the mortgages and see who’s selling a lot of stuff on the county website, and if they’re selling a lot of stuff, they might be an REO entity. So those are two tactical things that anyone can do to identify these REO companies that might be a good lead source for him to buy directly from.

Theo Hicks: [unintelligible [00:06:48].24] I remember all the way back, when I was close to his age, I did that for Cincinnati… So I know there’s a way to do it for all the county, but for Cincinnati in particular you can get access to the back-end of the auditor’s site. [unintelligible [00:07:06].08] every single property in Cincinnati. In this case you would just filter by — they actually have recent sales too, so you just download the recent sales and filter it by the name of the person selling property, and just see “Okay, this person sold 50 properties in the past month. Maybe they’re an REO company.” Maybe they’re just a big owner who’s selling properties too, so it’s not just necessarily REO companies.

And then going back to the school one – that’s interesting, because most people will graduate with as much money that he had in his bank account in debt. So he did the exact opposite of what people typically do. For me — I was in mechanical engineering, so I’m sure I probably spent a lot of time on school, compared to maybe other majors, but I still had so much free time that I spent on doing stupid things, that I could have spent on obviously doing something like this.

I’m not sure if people think this or not, but they might think “Well, I am a full-time student. How am I gonna have time to do this?” But if people really think about it, you’ve got way more time when you’re in college than you do when you actually graduate and get a real job. So it’s definitely possible, and as you mentioned, this is pretty specific to New York. I didn’t realize that you had to have a broker represent you to lease an apartment. But yeah, this is kind of more inspiration, to get the wheels churning in your mind to think of ways you can add value as a real estate investor to college students… Because every college student is renting, looking for a place to live; you can even be some sort of consultant the same way, even though it’s not a requirement.

This guy sounds like he’s very smart, and very entrepreneurial, and obviously it’s working out for him.

Joe Fairless: I believe it was the book “Things I wish I knew when I was 20.” It’s written by an Ivy League professor, and she talks about different things that she wish she knew when she was 20. I believe it’s this book – she mentions that she gives her students a challenge at the beginning of the year to make as much money as possible with $100. So she gives them $100 and like “Okay, go.” It’s an entrepreneurial class. “Go make as much money. Create a business. Whoever makes the most money wins”, and there’s other prizes, too.

Some people created a business around selling gadgets around campus, others did laundry services… But the winning team that earned the most money — I think it was a shorter period of time than a year. I think it was about a month. The winning team that earned the most money actually did something ingenious… They sold the time that they had to present to their fellow students their business plan and their business. So instead of creating a business, they simply identified a company within that area that would love to have a captive college student audience for 30 minutes, and then they sold their time to that business, and that business presented to the students, and as a result they got access to the students; and the students that had that idea earned the most money.

So along the lines of, hey, Angad’s business, if you’re not in New York City, that exact business might not work, but it’s the mindset of how do we maximize the resources that we currently have available – that’s what this is all about, and that example really came to mind whenever I was thinking about Angad.

The second thing – Philippe [unintelligible [00:10:43].19] He’s an entrepreneur; he scaled from a $3,000 mobile home park to owning ten units now. Based in Nashville, Tennessee. I wanna mention two things about my conversation with Philippe. One is that he had a six-unit that he has now sold, and it was in a college town. One thing that he did to increase the value – he bought it for $120,000, and two years later he more than doubled it in value. He sold it for $260,000. So actually I’ll give you two things that he did, and then I have another lesson learned from him. One is he changed it from tenants to the amount of beds that you can have within the residence. So he didn’t focus on “How many tenants should I have”, he  focused on how many — well, I guess I’m saying it incorrectly. He added more beds in the house. So he added two more beds in the house, and as a result he started charging per person, instead of per-bedroom. I guess that’s the proper way to say it.

So he literally made the living room a place where two more people could live. So one, he changed it from a per-bedroom to a per-bed. Two – and this is what I thought was really interesting – is he had relationships with local vendors, and those vendors would send leads his way, because they’re popular spots for college students, and in exchange he would send his residents to those vendors. Some specific vendors – there’s a Mexican restaurant; a place called Grandma’s Pancakes, and a local coffee shop.

And he would put in the welcome packet for his residents when they moved in, he’d put these cards that the vendors/restaurants gave him, and the residents would show the cards to the restaurants whenever they arrived, and then they’d get exclusive discounts as a result of living at his place. So it was  a win/win. I did something like this for one of my properties, where I reached out to local businesses. I had a card that I printed out. And surprisingly, it was challenging for me to get local businesses on board. I offered discounts in general, but also I’d like to offer discounts that weren’t publicly available. But I went to tanning booths, or tanning salons, I went to a pet groomer, I went to a Payday Loan company… They were very interested; they were actually the most engaged. Surprise, surprise. I went to restaurants… And for some reason – maybe my approach wasn’t the right approach, or maybe the market wasn’t right, or something, but I didn’t have that  much success.

However, from a percentage standpoint, from the couple of companies that I did connect with – Dickey’s Barbecue was one of them; they were really onboard because there’s an entrepreneurial guy who owned that franchise location… The couple of them that were on board – they really helped me have selling points for residents who wanted to move into that apartment community, and it was a win/win.

So I’ve done this approach… It might take more effort than you initially think, but it was a good use of the team’s time to create something like this… Especially if you have a smaller-sized apartment building and you’re not looking to do this in multiple locations. Or maybe it’s actually — if you have one geographic location where you own a lot of properties, that’s good. If you are spread out across multiple markets, then it might not be an effective use of your time, because it just takes a whole lot of time to do it. But in my experience, it was worth it.

I’ll stop there. Theo, do you have any comments there?

Theo Hicks: I was gonna say – do you know if he had preexisting relationships with any of these companies, or did he just reach out to them randomly?

Joe Fairless: He went to the Mexican restaurant a whole lot, he said, so they might have known him. But I don’t think he had a preexisting relationship with them in a formal capacity.

Theo Hicks: I was curious… Because I’m sure that would probably be helpful. If you’re thinking about applying this strategy, think of the places you just go to frequently, and then bring that up in the natural course of conversation if you’re talking to that owner, or whatever.

Joe Fairless: True that, yeah.

Theo Hicks: I was gonna mention something else – we were talking about this on Follow Along Friday; it might have been when we were discussing someone who had a question about buying a smaller apartment, or that didn’t have any amenities on-site, around like a bunch of massive apartment communities that had top-notch fitness centers, and things like that… We talked about you can leverage the local businesses, like fitness centers, movie theaters etc. and try to get discounts from them, and then you can present your property as like a luxury experience, without the luxury price. “So a fitness center isn’t here, but because of that your rents are gonna be lower. But we’ve also got discounts at this coffee shop, this movie theater, this tanning salon, this whatever.” That’s another way that you said you can present this type of concept to your residents as well.

Joe Fairless: Yeah, we’re actually buying a property right now that fits into that category, where there is a fitness center on-site, however literally right next door there’s a state of the art fitness facility, and the management has negotiated only an $8/month membership fee for those residents. And that is an exclusive arrangement that our property has with the fitness center. I think that more stuff like that – exclusive perks… Because then you start moving away from being a commodity and you start differentiating your apartment community in a way that others can’t compete, because you’re not going back and forth on price; you’re actually talking about these additional amenities and relationships that they don’t have.

One other thing I’ll say about the interview with Phillippe – this reminds me of the example you brought up a couple times, Theo, of the gentleman who looked for properties that had a busted foundation. He would actually seek them out and he had a solution for it, where others would run away. In this example Philippe talks about how he noticed that the homes in a certain area had a double garage; they’re two-story, and the downstairs was a double garage. He would convert that double garage into three additional bedrooms. He had three bedrooms, a kitchen and a bathroom that he’d convert the double garage into, and he rents it out to construction workers.

So the house – upstairs it has three bedrooms, downstairs it has a double garage; well, now it’d have three bedrooms upstairs, and then downstairs it’d have three additional bedrooms, and he rents it out on a per-bedroom basis.

So just looking for situations in our market where there’s opportunity to reconfigure the layout of the property, and if you identify a bunch of homes that have a similar configuration and you have a certain business model like that, then you have the opportunity to make twice as much cashflow as someone else.

Theo Hicks: And the same thing can technically apply to apartments, too. Obviously, there’s demand for those larger units, but if you’re in a market where you find an apartment that’s got massive units, and the dollar per square foot doesn’t necessarily make sense, and you can just convert that to two bedrooms instead of one bedroom, and get way more money… Obviously, it depends. Same thing with an extra living space that might not necessarily be in demand in that market, converting that to a bedroom, or keeping it the same… Again, depending on the market.

Joe Fairless: Jameill [unintelligible [00:18:26].10] He is an investor based in Phoenix, Arizona. He specializes in wholesaling. They do over 70 wholesale deals a month. Their business model is to be the wholesalers’ wholesaler. When a wholesaler has an opportunity, cannot find a buyer, they go to Jameill’s group, and Jameill’s group has a list of 80,000 buyers with a 30% open rate, who he and his team send it out to.

The business model is not to be as focused – or nearly as focused – as finding the opportunities, but more focused on having a buyers list that is robust, and being the solution to wholesalers’ challenges if they don’t have buyers for their properties.

Clearly, I had to hone in on how did he create a list of 80,000 buyers with a 30% open rate when he sends out an opportunity. And he says he thinks of themselves as a tech and data company (surprise, surprise), and they have a two-step process. One is his business partner has a software background, so he has a software that they created that scrapes social platforms and the internet for a list of potential people who might be qualified buyers. Think of accredited investors – they look for that type of person.

And then Jameill’s team will actually personally reach out to these people and send them a note through that platform. He talks about what that note says. I didn’t write that down in my notes, but he sends them an intro message, and just by sheer volume of the amount of messages through that software platform that they initially find all these leads, they get a lot of people to say “Yes, I’d be interested in being on your list.” And he’ll search for [unintelligible [00:20:24].25] he’ll search for lawyers, he’ll search for accountants, Facebook groups… They’ll see what you have liked and map that back to if you’d be a likely real estate investor.

So just 1) having a business that is a solution for other people in your industry, who could be perceived as competitors; that’s interesting to me. That could be applied to any business. So one, quick, think of all your competitors. Two, how could you actually be of service to them, so that they pay you for your service. That could lead to some interesting stuff. That’s what he did. And then two is the one-two approach that he and his team take to building that big list. One is you write a software, two is you have individuals reach out to these people.

Theo Hicks: Is his business partner doing it, or do they have VAs doing —

Joe Fairless: VAs. Yeah, it sounded like they have an army of VAs.

Theo Hicks: I was gonna say, I can’t imagine him sending out 8,000 messages to people.

Joe Fairless: No, it’s 80,000 people on the buyers list. That’s an email that gets sent out.

Theo Hicks: It’s probably more than that.

Joe Fairless: But you’re right, if there’s 80,000 people on the buyers list, good point – they probably sent out half a million personal messages.

Theo Hicks: I think on MailChimp the average open rate for the real estate category – and again, this is just MailChimp – is like 10% maybe. So they’re three times what it usually is. So obviously that person will touch them, and rather than just stopping at step one and saying “Okay, here’s who we want to target”, and then kind of just like creating content and sending it out and hoping they see it, they proactively just go after that one specific person and send them a message… And obviously, that seems to be working out.

I bet it’s a very interesting interview, if you go into specifics on how he’s finding these people on Facebook, using the hashtags, or whatever software that he’s writing. Obviously, not every single person is gonna write the software, but everyone can navigate the Facebook, the Twitter, the LinkedIn search function. It might take a little bit extra time, but again, it sounds like they’re using VAs, and 30% open rate is pretty amazing.

Joe Fairless: It is. And I asked him “Do you send that list anything other than deals?” He says “No. I absolutely don’t.” That’s how we approach our private investor list. I don’t send them anything other than opportunities. There has been one exception where I asked them for thoughts on the book that we’re writing – what would they want in that book – because we were writing that book for them, to help them on how to think about passively investing in apartment communities. But besides that, I don’t believe I’ve ever sent an email to my private investor list about anything other than opportunities that we have available.

Cool. And then lastly, Jason Parker – he is an investor in Seattle, Washington, but he’s also a financial advisor with a focus on retirement planning. I enjoy talking to people who aren’t exclusively focused on real estate, so that we get a broader perspective. One thing he says when he sits down with potential clients – he asks them “What is the purpose of your money and why do you have it?” And when he was asking that question, I was like “Man, that’s a  good question.” What is the purpose of my money and why do I have it? I thought about it a little bit (not a whole lot) since then, and I view money as simply a  tool to exchange and to help build lifestyle and do things with. It’s not powerful to me, it’s simply a tool. And by thinking of it as a tool, it allows me to feel good about value exchanges, it allows me to invest in myself by going to a Tony Robbins program… And it’s just a tool to help me become a better person, in that example, or give to all the non-profits we give to at BestEverCauses.com…

So I think it’s just an important question to ask ourselves, “What is the purpose of our money and why do we have it?” I don’t know what the right answer is, but it hit me as something that is a question or two questions that we should ask ourselves, so I just wanted to make note of it.

Theo Hicks: I see it on here, “Not too concerned [unintelligible [00:24:38].18]”

Joe Fairless: Yeah, so you’re looking at some notes that I had during the conversation… And he said that potential clients, when he asked them that, they tend to not be too concerned about leaving money to their kids. They wanna have the same standard of living that they’re accustomed to. But they’re like “You know what – we’ve done what we needed to do for our kids, and at this point, kids, you’ve gotta make it happen or not.” Generally, that’s the sentiment from his potential clients.

Theo Hicks: That’s interesting, because you hear a lot of times people’s goal is the legacy, family wealth, leaving it to their kids… I have a five-month-old, so it might change, but I’m definitely on board with this guy. We could probably talk about that for ours, so… You can move on.

Joe Fairless: Cool. Alright. I think that’s all. That’s all I wanted to mention on that.

Theo Hicks: Okay. Those were really good lessons. I really liked the college guy. It reminded me back to when I was in school, and I did a few things — nothing like this, but I was slightly entrepreneurial while I was in college, to make some  money, just because I didn’t have anything and I didn’t wanna work a regular job at that time.

Joe Fairless: Colleen and I were on our walk the day after I did these interviews, and I was like “And he had $300,000 in the bank account after he graduated college…!” I was just so blown away. I still am. Very impressive.

Theo Hicks: Alrighty. Well, let’s move on to the trivia question. This is the Jeopardy month. Last week the question was “The U.S. state that is home to the two cities that have the lowest cost of living.” The answer was “What is Texas?”

Joe Fairless: Oh, Texas…! My backyard.

Theo Hicks: The two cities – I don’t know if you recognize these… Harlingen and McAllen.

Joe Fairless: Yeah, Harlingen is by the  border. I think they’re both by the border.

Theo Hicks: Okay. The cost of living was 20% below the national average, and way below the highest, which was obviously New York.

Alright, this week’s question is — Yardi Matrix (they’re a real estate research company) just released their biannual rental growth information… So this week’s answer is “The U.S. city with the highest year-over-year rent growth as of June 2019, 8.4%.” So what’s the question? What is that city?

Joe Fairless: Say that again?

Theo Hicks: The U.S. city with the highest year-over-year rent growth as of June 2019. The number is actually 8.4% rent growth in 12 months.

Joe Fairless: Okay, so in the last 12 months trailing June, so from June to June?

Theo Hicks: Yeah.

Joe Fairless: The U.S. city with the highest rent growth, 8.4%… I’ll go with Orlando.

Theo Hicks: Orlando. So the first person to get that answer correctly – you can either submit your answer in the YouTube comments, or you can send an email to info@joefairless.com – will get a copy of our first book.

And then lastly, the free apartment syndication resource of the week – I actually just finished recording the last series of the first part of Syndication School, which goes over the entire process… So we just talked about how to sell your deal. That will be coming out next week. Then we’re gonna go back over Syndication School and go into more detail on some of those episodes, some of those steps.

But anyways, we give away free documents for Syndication School, so we’re highlighting those on Follow Friday at the end. This week’s free document we’re gonna highlight is from series number ten, which is how to structure the GP and the LP compensation. That starts at episode 1597; I believe it’s a two-part series, so 1597 and 1598. First we go over how to structure the compensation for the general partners, so how the GP makes money, and then next one is how you as a  syndicator can structure the compensation with your limited partner. To help you with that, the free document is the LP structure decision tree. It’s basically a series of yes or no questions that you answer, and based on the answer to the previous question we’ll ask another question, and ultimately you’ll land on what’s the idea partnership structure with your investors, whether that’s debt equity, preferred return, profit split, what the limit should be… Things like that. You can download that in the show notes of 1597 and 1598, or in the show notes of this Follow Along Friday.

Joe Fairless: Well, very valuable resources, and they’re free, so definitely if you’re in the industry or wanna be in the industry, take advantage of that. Best Ever listeners, I hope you enjoyed this, and most importantly, got a lot of value from it. We will talk to you tomorrow.

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JF1809: Power Connections, Cannabis Properties, & Hiring VA’s #FollowAlongFriday with Joe and Theo

Theo did the podcast interviews again last week so we’re hearing the lessons that he learned from those interviews last week. The lessons that Theo will be discussing come from Alex Talcott, Brad Stevens, and Dana Wallace. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“The idea of the money raising tracker is to see how you are finding investors and know where to focus your time”

 

Free Document:

http://bit.ly/moneyraisingtracker

 


Evicting a tenant can be painful, costing as much as $10,000 in court costs and legal fees, and take as long as four weeks to complete.

TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


 

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JF1808: How to Asset Manage A Newly Acquired Apartment Syndication Deal Part 8 of 10 | Syndication School with Theo Hicks

Theo explained how to attract high quality residents to your apartment communities yesterday. After you have great residents, you’ll have to focus on keeping them. That is the focus of today’s conversation, starting with resident appreciation party ideas. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“When you are hosting these resident appreciation parties, it will result in higher occupancy, less turnover, less bad debt, better and higher quality leads and residents, which equates to a higher net operating income”

 

Free Document:

http://bit.ly/weeklyperformancereview

 


Evicting a tenant can be painful, costing as much as $10,000 in court costs and legal fees, and take as long as four weeks to complete.

TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


 

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JF1802: Staying In Touch With Clients, Pulling Permits, & The 5 10 3 Rule #FollowAlongFriday with Joe and Theo

Follow Along Friday today will be the top lessons Joe learned from his interviews for the podcast last week. Joe also adds his own actionable tips and tactics to the lessons he shares today. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Those tasks might not seem super important to do everyday, but they add up over time”

 

Free Document:

http://bit.ly/buildingyourteam

 


Evicting a tenant can be painful, costing as much as $10,000 in court costs and legal fees, and take as long as four weeks to complete.

TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


TRANSCRIPTION

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

Today is Friday, and that means it’s Follow Along Friday. With us, Theo Hicks. Hello, Theo.

Theo Hicks: Hey Joe, how are you doing today?

Joe Fairless: I’m doing well, and looking forward to talking about some lessons that I learned from the marathon of interviews that I did last week, on Thursday. As a refresher, Best Ever listeners, these are lessons that when I interview — I usually interview about nine people on Thursdays. We batch the interviews obviously on one day, and that allows us to be ahead of schedule in the interview, and then it also allows me to focus on other things throughout the week, specifically buying apartment communities and making sure they’re successfully executed on the business plan.

The way we wanna structure today’s conversation is talking about some lessons that I learned during those interviews that I did. These interviews have not aired yet on the podcast; they will air in 3-4 months or so, so you’re getting a preview of some things that are coming up, and some takeaways, too. Some very practical tips.

I’m very excited to talk about what we’ve got today, because we’re going from talking about nine ways to stay in touch with your clients, whether you’re a real estate agent, whether you’re a multifamily syndicator, or whether you’re just a fix and flipper or a wholesaler – nine ways to stay in touch with your clients, your customers after the closing.

We’re also gonna talk about some construction tips – or a construction tip – as well as something that someone lost $75,000 dollars on, and why they lost $75,000 on the deal, and some personal development stuff.

First, let’s just kick it off with an interview I did with Tony Ray Baker. Tony Ray is based in Tucson, Arizona, has been a real estate agent for 25 years, and he gave (among other things) nine tips that he uses to stay in touch with his clients after he closes on a transaction with them. And again, these nine tips (or really tactics) are applicable to not only real estate agents, but apartment investors, wholesalers, fix and flippers… Really anyone. So let’s go and do the nine quickly…

One is he has a black book of vendors, so anytime one of his clients has an issue with their house, then he gives them a list of vendors that he recommends and that he has relationships with. That way, they can resolve whatever issue that they have.

Two is he and his team are foodies, and as a result they have restaurant recommendations. So it’s more than just real estate-related, it’s something that him and his team really love – food; and good food, apparently… And they have good recommendations.

Thinking about this from your standpoint, when you’re thinking through how to implement this in the business, and my standpoint too, what are some things that I’m passionate about, that In really like, what are some things that, Best Ever listeners, you really like, and how can you make that something valuable that you can share with your clients?

I really like concerts, I also am really into chess recently… I just reached out to someone to give me some lessons, on some tips, which is another story… But I think there are ways to incorporate what we really enjoy, and also make that added value to our clients and our customers or our investors. So restaurant recs is the second thing that he gives, but again, that can be personalized based on what you’re into.

Three, he does a snail mail newsletter, and he doesn’t talk about real estate, he talks about fund things that he does with his team, and places that he travels to. I do a newsletter to my investors – and Ashcroft’s investors – on a monthly basis. It is a snail mail newsletter where we interview an investor and we also profile certain businesses that our investors have who are entrepreneurs, that we want to highlight to high net worth individuals that we mail this out to, because they’re all accredited investors of ours…

So this is something that I am currently doing, and I don’t know what the ROI is on it, but I can tell you that it seems like it makes a lot of sense, and that’s why we do it, because it’s a way to build a relationship with certainly the investor who we’re profiling, because we’re interviewing them, but then also it’s a way to build a relationship – or stay top of mind in a relevant way, I should say – with the investors who receive it via snail mail.

The fourth thing is the email campaign — and by the way, if you are an investor with us and you are not receiving that snail mail newsletter, then you can email info@joefairless.com and we’ll make sure that you get put on that list, or we get your address correct.

The fourth thing is an email campaign that he sends out every month to his clients. This is something that is unique, in that it’s a dynamic email where you can plug in your mortgage information on the current home that you own, and you can determine how quickly you can pay off that mortgage… Or rather how to pay off the mortgage early, and what’s it look like, is it a good time to refinance or not to refinance… So within the email itself you can do different scenarios, and that allows you to see “Oh, should I sell, should I not sell? Should I refinance? Should I pay off the mortgage early?”

I asked him what program he uses, and he said he uses a program called HomeBots. It’s a lender program, so usually agents team up with lenders and they incorporate this service. It is a pay-to-play service. You can check that out if you are a real estate agent, but just the concept is applicable to anyone, and that is having something that’s more dynamic in the email itself, that can pique curiosity about what that person’s situation is currently, and then that curiosity can lead to action to drive more business for you. So that’s the fourth thing.

The fifth thing – and I’m gonna go through the rest of them pretty quickly. Talk on the phone at least once a year with his past clients. Six, involve them in a wine club or a  pet group. Tony Ray loves wine, and volunteers for some pet organization… So involving them – he didn’t really get into details about how they’re involved, but I think it’s pretty straightforward with wine; they’ll drink wine together probably. And pet group – I don’t know, they volunteer or something together.

Six is do appreciation parties. He talks about how he has people over to his house once a year, I believe, and he has local bands that come and they all just hang out. Clearly, it depends on how much land you have, what your housing setup is if you’re gonna host people, but certainly you could rent a place out, or do something else like that.

Black book of vendors, one. Restaurant recs, two. Snail mail, three. Email campaign with dynamic info, four. Talk on the phone, five. Involve them with a wine group or pet group, six. Do appreciation parties, seven. Randomly text them, if he’s thinking about them, eight. And then social media, nine.

So those are nine ways to stay in touch with the clients, your customers, after closing. I thought it was really relevant, and certainly it’s a lot of interesting tactics.

Theo Hicks: Yeah, that first one, black book of vendors, reminds me of a blog post we wrote about how to find off market apartment deals, and it was talking through different apartment vendors. But there’s a guy in my neighborhood, our landscaper, who’s like THE guy with all the different vendors. If you’ve got an issue, you go to him and he tells you “Hey, here’s a pest control person. Here’s a contractor that can help you fix a leak in the bathroom…” (we had a leak in one of our bathrooms).

Anyway, so I was  thinking, another interesting strategy – I guess this would be better for real estate agents, but I’m pretty sure it would work for investors as well – is to find that guy in your market or in your neighborhood, and then essentially find a way to do some sort of partnership with them. Because if everyone’s going to them for recommendations, and you’re an agent and someone goes  to them and  says “Hey, by the way, do you know someone who can list my house? Do you know someone who can help me find a house?”

The reason why you’re gonna want to use someone that has that black book of vendors is if you keep using them over and over again, and they keep giving you good recommendations – if you can be that person for recommendation, it’s basically free business you’re getting from people. And depending on how big they are and how well-known they are in the community for their recommendations… I’m not sure if it’s just like a Florida thing, but there’s certain people out here that are like the hubs of all of the different recommendations for your home. If it’s like that elsewhere, it’d be good to find that person and get in their  black book.

So it’s kind of slightly the reverse of this, how to stay in touch to stay to be the person in the black book, rather than having the black book.

Joe Fairless: Oh yeah, absolutely. So I think it’s being intentional about who you have relationships with, and creating something that has recommendations, and then you reaching out to people who have a wide group of customers or clients, and then saying “Hey, by the way, if you ever need people for XYZ, I’m your person, because I have a lot of different relationships and I can help you find the right person.”

Theo Hicks: Exactly.

Joe Fairless: The second thing is from James [unintelligible [00:11:46].19] is the co-founder which is a brokerage service specializing in building long-term wealth and financial stability for clients. Basically, his company does residential properties, fix and flips, and things like that. Two things that he mentioned that I wanted to point out – one, he said when you’re pulling a construction permit on a house that you’re renovating, he suggests that you pull a permit just for a particular phase of the project, versus the whole building… Because what he did initially is he’d pull a permit for the whole building, and that didn’t allow him to earn income by renting out one of the sides of the building.

Say you’re doing construction on the floor units – he would initially do the full building, and then he was out income during the construction phase of units 1, 2 and 3, even though he’s only working on the fourth unit… Whereas now he pulls the permit for the particular unit that he’s working on, or a particular aspect of the building he’s working on, and he’s able to still get income from the other side, or other sides. That’s one thing that he’s learned… Because I asked him “What are you doing differently now, versus when you started?” He said “Well, I’m not pulling the full permit on the building, that way I can make money along the way, during the construction phase.”

Another thing on a separate note is I asked him “What’s a deal you lost money on?” and he said he lost $75,000 on the house, and there were two reasons why. One is he ran into contractor issues, so he went through two GC’s and a subcontractor. That happens, right? But the second thing he mention is on that same property the driveway was steep and he thought he could grade it, but he had put $35,000 in structural concrete walls, and he also had to get a permit… And he said if it’s a structural item, slow down during the purchasing process or during the evaluation process, just to make sure that you’ve got all your costs estimated properly. He said it was so steep that one of his project managers a week on the job actually totaled his car trying to pull into the driveway, because it caught the tires and then the tow truck came, and the tow truck pulled the axel off, or something like that…

Theo Hicks: Wow…

Joe Fairless: Yeah, crazy. So just cautionary tale for that… Any comments on that one?

Theo Hicks: I do not know.

Joe Fairless: Okay. And then lastly, Gary Boomershine. I really enjoyed our conversation. We talked about probably a direction he didn’t think we were gonna go, and I’m glad that we went this direction… We talked more about how he has built his company and some things that he has in place. He mentioned at the beginning of our conversation — Gary founded RealEstateInvestor.com in 2005, and REIvault.com, he also has that… So he’s got like 90 or so employees, I believe; don’t quote me on that part. But he’s got a decent-sized team, and he talked about how he is in I wanna say nine masterminds, and they range from $15,000 to $50,000. I asked him some things that he’s learned from those masterminds, and he mentioned a couple of things… That’s what I wanna share with everyone.

One, he mentioned the 5/10/3 rule. So wake up at 5 AM, don’t start the business day until 10 – so from 5 AM to 10 AM he journals, he reads, he cleans, he comes up with one thing, or now three things that he’s gonna do today that will move the marker in the business. That’s kind of business, but still, it’s more planning, not executing. He’s in the gym for two hours… That’s a lot of time, by the way; 5 AM to 10 AM – what the heck are you doing? He’s like “Well, I’m in the gym for two hours.” He said he journals for about an hour and a half…

And then the three is he finds three things that he’s gonna do today, that will move the needle. I’m not gonna do the 5/10/3 thing because that 5 AM and 10 AM gap is too much for me, but I’ve found it interesting, and maybe that’s something that some Best Ever listeners wanna practice. Certainly Hal Elrod’s approach for the Miracle Morning is noteworthy to mention during this conversation too, so checking that out… That’s one thing.

Two is that once a quarter he flies his team to meet in person, and Theo, I think I’m gonna start doing this, once a quarter having you fly in to meet, along with Cody and some other team members… Because I think it’s important for us to meet in person. Four times a year, it’s not that big of a deal to get together four times a year… But it will be important just to recap what that quarter looked like and where we’re headed.

He also mentioned that he noticed that he has initiative in business, he’s initiator in business; he’s very proactive… But not as much in his personal life, so he’s working to correct that. And I noticed I’m the same way. I’m an initiator in business, but I don’t take as much initiative planning things, or doing certain things in my personal life. So I took a page from his book and I’m gonna be more intentional about that.

And then lastly, he has a family calendar, and I thought that was a useful thing to have. I’ve got a business calendar clearly, but what about a family calendar for things that we wanna do or experiences we want to have, or people we want to see. I thought that was something that was worthwhile to do.

Theo Hicks: I’ll work backwards… With the calendar part – I remember growing up we had a family calendar, and we had different-colored markets for all the different personal things the kids got to do for that month… So that’s something you can do too, have a calendar and just color-code it for business and for personal. I guess you can do it on your phone, but I think it’s better to actually have it, maybe put it on your backwall, or whatever.

Joe Fairless: Yeah.

Theo Hicks: And then for that 5/10/3 rule – I think that’s interesting. Obviously five hours is a long time. I think the whole idea behind it is figuring out and dedicating a block of time to those tasks that might not seem super-important by doing them each day, but they definitely add up over time. So you can tell yourself, “Well, I can work out tomorrow”, but if you don’t ever do that and you go months and months without working out, that’s gonna be an issue. Same with obviously cleaning your house, same with journaling, reading, things like that.

And then also, for me just figuring out what time of the day you’re most productive. Most people can work 2, 3, 4 hours straight, depending on your attention span. And just figuring out “Okay, if I start working at 10 and I work from 10 to noon, or 10 to 2 non-stop, working that 2-4 hours will be more productive during that time than if I started working at 6 AM till 10 AM, or 6 AM till 11 AM, 12 AM, or whatever. Just figuring out when you’re the most productive, I guess, is my point. And then – I agree with you, 5 AM is a  little bit too early for me, but I can maybe do like a 7/9/3, or something like that.

Joe Fairless: What about the quarterly meetings?

Theo Hicks: I’m down with this. Try to do it on poker was the first thing that came to my mind. I keep seeing those on Facebook, and I can’t play… I haven’t played poker in a while.

Joe Fairless: For some context, Best Ever listeners, I run a monthly Cincinnati meetup, and from that meetup has spawned a monthly poker game, where we just rotate at different houses and we all play poker once a month. Low, low, low stakes.

Yeah, well, I would love to schedule it during a poker night. Cool.

Theo Hicks: Alright, let’s move on to the trivia questions. Last week’s trivia question ended the month of international questions… The question was “What country is home to the most expensive house in the world?” and the answer was the United Kingdom. Buckingham Palace, which is valued at 1.55 billion dollars. So if you’re interested in moving in there, I guess you need to raise a ton of capital.

This week’s question —

Joe Fairless: Is it for sale? I don’t think it’s for sale.

Theo Hicks: I don’t think it’s for sale, but I think if you offered 1.7 billion they’d probably sell it to you.

Joe Fairless: Okay…

Theo Hicks: All cash… So this month we’re gonna do Jeopardy-style questions, so the answers are gonna be “What is…” and then the answer.

Joe Fairless: I hated Jeopardy… Go ahead though.

Theo Hicks: The city where 63% of the people who are searching for a place to rent are from outside that particular city? So this is a city that’s attracting the highest percentage of people in the country. What is that city?

Joe Fairless: The city where 63% of the people who are searching for a place to rent are from outside the city… Well, New York City is the number one thing that comes to mind. If I was having to put a dollar on this, I would say New York City. But since I don’t have to put a dollar on this, I’m gonna say San Francisco.

Theo Hicks: Okay. So the first person to answer this question correctly – you can either submit your answer to the YouTube comments below, or at info@JoeFairless.com and you’ll get a free copy of our first book.

Then lastly, we’re going to discuss the free apartment syndication resource of the week. Each week, every Wednesday and Thursday we release two Syndication School Podcast episodes – they’re also on YouTube as well – where we talk about the how-to’s of apartment syndications. For all of those series we release some sort of free document for you to download.

This week’s document is from series number eight, which is about how to build your all-star apartment syndication team. That starts at episode 1548. We’re basically walking through all the different team members that you need to bring on, in what order, and then how to interview them, and then what to expect them to ask you. The document we gave away for the episode that we’re highlighting is the team-building spreadsheet. Essentially, it’s a spreadsheet that lists out all the team members that you need, and it’s a place for you to track your progress for building your team, so you know who you’ve talked to, who you’ve actually decided to hire, and then all of their contact information. You can download that at the show notes of this episode, or at the show notes of 1548, or at SyndicationSchool.com.

Joe Fairless: Theo Hicks, I enjoyed our conversation. Best Ever listeners, thanks for hanging out. I hope you got value from it. We’ll talk to you tomorrow.

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JF1795: Sales Skills, How To Grow A Podcast, & Overcoming An Identity Crisis #FollowAlongFriday with Theo and Joe

Follow Along Friday will feature some of the best things that the guys learned last week. They’ll be covering a lot about sales skills and emotional intelligence. These tips are coming from both the interviews, as well as a lot of personal insights from Joe. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“You’re not going to create a successful podcast in a month”

 

Free Document:

http://bit.ly/companypresentationtemplate

 


Evicting a tenant can be painful, costing as much as $10,000 in court costs and legal fees, and take as long as four weeks to complete.

TransUnion SmartMove’s online tenant screening solution can help you quickly understand if you’re getting a reliable tenant, which can help you avoid potential problems such as non-payment and evictions.  For a limited time, listeners of this podcast are invited to try SmartMove tenant screening for 25% off.

Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


TRANSCRIPTION

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

We’ve got Follow Along Friday today, Theo Hicks with us… And we’re gonna be talking about lessons learned — he did some interviews last week for the show; he’s gonna be talking about lessons learned. Let’s go ahead and get right into it, my friend.

Theo Hicks: Alright, let’s do it. I’ve got lessons learned from two interviews. It should be two lessons, might turn into four; we’ll see. I usually talk a lot on these, whenever it’s my turn to talk about interviews, I’ve realized that the past couple of weeks.

So one person I interviewed – Travis Chappell. He’s a sales consultant, real estate investor, and he considers himself a professional connector because of his podcast, which is called “Build your network”, and is a top 25 business podcast.

We broke the conversation down into two sections. One was talking about his direct sales experience, and the other one about the podcast.

For direct sales, it was interesting… I can relate, because I was in direct sales; a little bit different than his. He was doing door-to-door sales, so he was going door-knocking, door-to-door, selling — I can’t remember exactly what he was selling but something interesting that he mentioned about the skillset that he learned from doing these door-to-door sales was emotional intelligence. He called it a crash course in EQ.

He said one major thing that he learned through his door-to-door selling experience is that when you talk to people, they’re not going to actually say out loud what they are thinking… At least not right away. And when they don’t do that, you need to learn how to understand what people are saying through non-verbal communication. Their body language, how they’re looking at you, where they’re looking, things like that.

I was asking questions, “How do you learn how to read people’s nonverbal communication?” and really the only way to do it is to do it. To actually put in the reps. We talked about it metaphoric to working out. Let’s say I want to become a world-class bench presser. Well, I could read all the books in the world, all the blogs in the world, listen to all the podcasts in the world about how to become a world-class bench presser, and it’s going to help, but I’m not gonna become a world-class bench presser unless I put in the actual reps in the gym.

Same thing for learning how to read people non-verbally, as well as really anything in life. It’s important to read about nonverbal communication, as Travis was talking about, but it’s even more important to actually go out there and put in the reps. He would talk to 25+ people every single day, and doing that for years, he learned how to just instantaneously read someone non-verbally, even if they’re saying something completely different.

Joe Fairless: This is something that I think I can add my two cents in, that will be helpful for the Best Ever listeners… Because I consider myself very good at emotional intelligence. It’s something that comes naturally to me, where I can pick up on things that are subtle nuances whenever I’m speaking to people, if I’m in-person or over the phone… Probably because of the sheer number of conversations I’ve had. I’ve interviewed more real estate investors than anyone else in the entire world… But then also it’s just a gift that I’ve had throughout my life.

I went to a conference this past weekend – Michael Blanc’s conference; I was speaking at that conference. And at conferences, at meetups, typically you’re going to have a chance to observe this dynamic, where people are talking, one person’s more interested in the conversation than the other, or the conversation has run its course, but one person doesn’t know the conversation has run its course, and the other person is trying to get out of the conversation, but won’t announce “Hey, I’ve gotta bounce.”

On that related note, Tim Ferriss talks about a way to get out of a conversation and talk to other people by simply saying “Hey, I’ve gotta run, but are you gonna be around for the rest of the conference? I’d love to continue to meet up with you or talk to you.” That way it doesn’t feel like it’s an ending, it’s just “to be continued.” So there’s one tip for you if you’re trying to get out of the conversation, or if you’ve gotta go to the bathroom. “Are you gonna be around for the rest of the conference? If so, great. Let’s continue to connect.”

But the tip I have for how to really identify if you’re picking up on the cues or not from someone else, is to put less emphasis on ourself when we’re talking to people and put more emphasis on the other person. It sounds kind of obvious, but I don’t think a lot of people do that.

For example, this past weekend I was at the conference, and I get a decent amount of people coming up to me and talking, and I really enjoy it. But then at the end of the conference, whenever Colleen, my wife – and we actually had our daughter, a nine-month-old, with us – we were looking to leave, there were a bunch of people who kept coming up. And if the people towards the end of that were picking up on my nonverbal cues – I’m starting to wipe my face, and itch, and twitch, and stuff – they would have identified “Hey, I think he’s needing to bounce.” And I could have used that example, the tip I said earlier, “Hey, are you gonna be around?”, but we were actually leaving for the conference, so I needed to try and end the conversation; eventually, I just kind of had to interrupt them during their conversation with me, like “Hey, I really enjoy getting to know you, but we’ve gotta go.”

So in order to hone this skill set, my opinion – it’s simply being more self-aware. And how do we become more self-aware? Well, whenever we approach conversations with people, we intentionally (we have to have intention with this) put more emphasis on them than we are ourselves or the stories that we’re telling. Even if we’re really excited to get some message out, or our background about where we came from, or a deal that we’ve got, still check in with them through eye contact; not necessarily asking “Hey, how are you doing? Are you enjoying my story?”, but check in with them with eye contact, and just notice, just mentally notice what’s their interest level. Because if they’re checked out or if they’re starting to twitch, or sway, or maybe look around the room, then you might not have as receptive of an audience, so you’ll need to pivot or you’ll need to change your approach… Or you’ll need to wrap it up.

That can tie to your bottom line as a business professional, because ultimately people remember how things end with you. And there’s studies on this, there’s a book – I forget the book, but it talks about a doctor who does colonoscopies, and they did studies on this; people who get colonoscopies, if you give them an intense amount of pain, like major, intense, big-time pain during the middle of the colonoscopy, but then taper it off towards the end, they’re gonna have a better perception of the experience than if you give someone a little bit of pain towards the middle, but then just slightly more towards the end… Because they’re gonna remember how it ended more painful than it began. And same with conversations, same with deals with your investors, same with anything that you do in business. It’s a psychological mechanism — not mechanism, but it’s a psychological trait that most of us have, where we’ll remember most of our experience about the end, but it’s kind of tough to remember during the middle and beginning stages of stuff. It’s just how it works.

So when you’re having a conversation with someone, check in with them, because regardless of how much rapport you’ve built up with them from the beginning and the middle, if you’re losing them towards the end then it’s gonna not be as good of an experience with them.

Theo Hicks: Yeah, that’s a lot of great advice. There’s one thing to add – I guess another specific thing you can pull from that is if you go to a conference and you wanna talk to a speaker, do it at the beginning or the middle of the conference, don’t wait until it’s over.

Joe Fairless: Yeah. And Tim Ferriss — apparently, I’m on a Tim Ferriss kick here on today’s episode… But Tim Ferriss talks about when you are at a conference, instead of going up to have a conversation with the speaker, go up and give them a handwritten note or something, that they can slip in their pocket. Say “Hey, I know you’re busy, you’ve got a long line. I appreciate what you do. Here’s a note for you. Feel free to read it whenever. I hope you enjoy the rest of the conference.” That’s a way to stand out, and your likelihood of having that person follow up with you afterwards is much higher than if you had just approached them and had the conversation with them… Because it’s tough to remember who’s background ties to who, and who you should follow  up with, who you shouldn’t… So give them that handwritten note.

Theo Hicks: Alright, so the next lesson I learned also from Travis Chappelle – as I mentioned, he has a top 25 business podcast, and so a natural question would be “Well, how the heck do I get a top 25 business podcast?” or “How do I create a top podcast?” This is something that we already know; we’re talking about the podcast a lot, but it’s just great to hear it reinforced by someone who actually has a successful podcast… And I know something that me and Joe talked about maybe six months ago, which is instead of thinking about things in terms of months, thing of things in terms of decades, or at least in years. That’s the advice that Travis gave about creating a podcast. You’re not going to create a successful podcast, YouTube channel, thought leadership platform in a month, in two months; maybe not even in six months. It’s going to take years to grow an audience.

He was saying that his number one tip for people who want to start a podcast, start a YouTube channel, is to upfront realize that it’s a five to ten-year play, and not something that’s going to be something that you’re going to get a million dollars or a million viewers in six months. So it’s just kind of reinforcing that… And something that he said that’s very interesting was “Take time now to save time later.” Invest that 2, 3, 5 years into creating your podcast; once the ball is rolling on that, then it’s kind of like — I’m making a graphical with my finger… It’s gonna shoot up. It’s gonna be very slow at first, but then once you’re getting to that point where the ball is rolling, you’ve built up momentum, the results you get – either viewers, or sponsorships, investors, whatever your goal of the podcast is  – are going to increase exponentially, once you’ve put in the time. But it’s not something that’s a gradual increase. It’s going to be slow at first, and then shoot up. So it’s really good to hear that be reinforced by someone who has actually got a pretty popular podcast.

Joe Fairless: Yeah, I wholeheartedly agree. Sound business advice.

Theo Hicks: One other quick thing about the podcast too that was interesting – because a lot of people are probably thinking when they’re starting a podcast, “Well, Joe Fairless is out there making a podcast, so why am I gonna make a podcast if he’s already there with all these viewers?” Tim Ferriss, Tony Robbins – you name it; whoever has a successful podcast right now… “Why would I do that?” So it’s kind of coming down to having the impostor syndrome is what Travis mentioned… And one way to get over that is to 1) understand that Tim Ferriss, Joe Fairless, everyone was at the same point you were at at five, six, ten, whatever years ago. Something else is that if you don’t think you have enough knowledge in your mind to do a podcast – which probably isn’t true, but if that’s a roadblock that you have – then just do an interview-based podcast. So interview the experts instead. Rather than it being your expert advice, it’s someone else’s expert advice.

Something else that Travis talks about – and we’ve talked about that on the podcast before – by doing that, you become an expert. You become perceived as an expert, but you also become an expert, because you’re able to curate your own customized education by interviewing the top people in whatever industry you are in.

Joe Fairless: Absolutely.

Theo Hicks: The other interview I did that I wanted to talk about was with Logan Freeman. He was on the podcast before – this was a Skillset Sunday, so the second time… He’s an ex-NFL player with the Oakland Raiders. He transitioned from the NFL to becoming a real estate investor, developer and agent.

Joe Fairless: He’s in Kansas City, right?

Theo Hicks: Yup, Kansas City, Missouri.

Joe Fairless: Yeah, I remember our conversation.

Theo Hicks: A very powerful interview. He mentioned a lot of things that are very inspiring, just because he went through a pretty big identity crisis, and not only with the NFL, but he lost his father as well… And one question I asked him was — because everyone at some point in their life goes through a major or a minor identity crisis; maybe you’re going through one right now… And I asked him “If someone’s going through that right now, what’s the first thing that they need to do in order to take that first step to transitioning into something new?”, and he said something really interesting… He said “Take time to take inventory on what your beliefs, your values (he said limiting beliefs) are, and then pick one of them that you think is the thing that’s holding you back the most and focus on figuring out how to remove that.” So whatever it is – you’ve probably got a million limiting beliefs, or 100 limiting beliefs; find the one that’s the biggest roadblock and then remove that one first… And that’s it.

Joe Fairless: Did he give an example?

Theo Hicks: He didn’t give a particular example.

Joe Fairless: What would be one?

Theo Hicks: Well, we can just go back to the podcast example about growing a podcast, and you’re thinking that “Okay, I wanna start a podcast, but my reason why I’m not starting a podcast is because Joe Fairless is already out there, and they have all the viewers, so why would I waste my time doing a podcast if 1) I don’t have the expertise, plus why wouldn’t someone just go to Joe?” Well, that’s probably a huge limiting belief that you have, that you can’t be a Joe Fairless, or you can’t be a Tim Ferriss. So if you remove that limiting belief – and the best way to obviously do that is what we mentioned, is to interview other people on your podcast. If you’re not the expert, then just interview someone else who is the expert. That’s what you did, that’s what a lot of successful podcasters do.

It’s not about just identifying it and saying “Alright, I’ve figured it out. Alright, Theo, remove the limiting belief.” It’s not that easy; you have to actually do something to overcome that. In this case, if you’ve got impostor syndrome as your limiting belief, then the way to overcome that is to actually go out there and interview people instead. It’s not gonna be easy, but that’s essentially what you need to do if you truly want to grow a podcast and get over that issue that you have.

Another example that he gave as well, that I’m thinking of right now – this is another thing I wanted to talk about [unintelligible [00:16:51].24] is about goal-setting. So when he took inventory on his goals, he realized that a goal that he had set was actually holding him back from scaling his business. The example is his goal for the year was stability for his family, financial stability. So by focusing on financial stability, he was missing opportunities that would allow him to move his business forward, and it kind of blinded him to other opportunities that were maybe not as stable, maybe a little bit more risky… He didn’t give any specific examples of this, because we were at the end of the podcast, but… I thought that was interesting, because a lot of people talk about their goal being financial independence, financial stability, but what happens after that – or is that something thatR