JF1471: From Credit Card Investment To A $90 Million Real Estate Portfolio with Tim Bratz

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Tim bought his first investment property with his credit card, rehabbed it, sold it for about $14,000 profit! He was only 23 years old at this time, he kept on going and is now buying a lot of different properties and has a large portfolio that earns a great monthly income. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Tim Bratz Real Estate Background:

  • He buys, develops, and holds apartment buildings, vacation rentals, and other commercial real estate
  • Bought an investment property with his credit card at age 23
  • 9 years later, portfolio has a value of over $90M
  • Based in Cleveland, OH
  • Say hi to him at https://cleturnkey.com/
  • Best Ever Book: 12 pillars

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Best Ever Listeners:

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


TRANSCRIPTION

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

With us today, Tim Bratz. How are you doing, Tim?

Tim Bratz: Doing great, Joe. I appreciate you having me, brother.

Joe Fairless: Yeah, my pleasure. Nice to have you on the show. A little bit about Tim – he buys, develops and holds apartment buildings, vacation rentals and other commercial real estate. He bought an investment property with his credit card at 23, and nine years later he has a portfolio value of over 90 million buckaroos. Based in Cleveland, Ohio. With that being said, Tim, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Tim Bratz: Well, thanks again for having me here, excited to be on the show. You’re doing an awesome job providing a lot of content and value for people, so I appreciate everything you’re doing.

Joe Fairless: I appreciate that.

Tim Bratz: My background – I’m from Cleveland, Ohio originally, and was going through college when the market was booming, ’03 to ’07, and people said “If you wanna make money, get involved in real estate”, and that’s what motivated a 21, 22-year-old kid back then, and I decided to get involved.

My brother was living in New York at the time, I ended up moving out there after college. I was a commercial leasing agent for a small boutique firm in Manhattan, and brokered a deal on a 400 square foot retail space in Greenwich Village area… And for 400 square feet the tenant was paying $10,000/month, 4% escalation, over 12 years.

I’m doing the math on this thing, and it was the first deal I ever brokered… And I’m like “This dude is gonna collect almost two million dollars over the next 12 years for something he did at one point in time, and that doesn’t include the other seven retail spaces and 15 stories of apartments above it, so… Man, I’m on the wrong side of the coin. I need to be owning real estate instead of brokering this stuff.”

So I ended up leaving New York, moved down to Charleston, South Carolina just on a whim. I didn’t have a lot of capital or access to capital, but I was resourceful. Have you ever heard the Tony Robbins saying “Resourcefulness is the ultimate resource.” It doesn’t matter if you don’t have the time, or the money, or the knowledge; if you’re resourceful, you’re gonna figure it out.” So I was able to figure it out.

I called up my credit card company, asked them for a big increase on my credit card, and they didn’t give it to me, but they did give me $15,000. I asked for $100,000 and they said no, but I got them to give me 15 G’s, and I bought the cheapest house on the entire MLS in 2009 – nine years ago, this month… And I fixed it all up. I didn’t know what I was doing. I’m youtubing stuff, trying to figure out how to change out carpet, and fixtures, and I’m doing all the painting myself, landscaping… And I ended up turning it around, selling it, because I created flyers and handed them out to all the neighbors, held an open house… I sold it to one of the neighbors and made about $14,000 net income in 75 days.

Joe Fairless: That’s huge.

Tim Bratz: I’m like, “I’m a punk 23-year-old kid in the worst housing market in 80 years and making money.” So you do it again, then you start meeting people with some money, who have capital but they don’t have the time… And then I partnered up with some people who I gave 50% to 75% of the deal to, probably my first 200-250 deals that I did. But I realized as a young kid I needed to build up that resume. I needed to get some deals under my belt.

So I kept doing it, and eventually those partnerships kind of withered away. We went our separate ways and I’ve been doing my own thing for the past 36 months now. I’ve been just in acquisition mode, and buying and building apartments and townhouse developments in Ohio, South Carolina, Georgia, Texas, and I own a couple vacation rentals in Florida, too… So a little over 1,300 units, with another probably 250 under contract right now… So I’m hoping to be at like 1,800-2,000 by the end of the year.

Joe Fairless: Wow. What a story… We will unpack that, that’s for sure.

Tim Bratz: I tried to be quick, man…

Joe Fairless: Yeah, I’m looking forward to it. It’s good to get high-level, and then we’ll go into the weeds a little bit… The 1,300 units that you have now, I believe, if I was following correctly, that you do not have partners in those deals. Is that accurate?

Tim Bratz: I have some joint venture partners on my stuff that’s out of town. I don’t traditionally syndicate the way most traditional syndicators put together, where they’re giving up 70%-80% of the equity. I keep over 90% of the equity for myself and the joint venture partners, and I pay kind of a debt-equity hybrid to my private lenders, that they really like. It leaves a little bit more equity in it for me and my joint venture partner, and we can kind of focus on our unique abilities that way.

So any stuff that I have out of state – yeah, I have a joint venture partner who’s got some equity in the deal, and that’s the only way that they’re compensated, is based on the performance of the property. Then as a kicker to my investors, I always give them a little bit of equity long-term in the deal, too.

Joe Fairless: With the joint venture partners and the deals that are out of state – it sounds like their role is solely to provide some capital… Or do they have other responsibilities?

Tim Bratz: No. My stuff down in Georgia – I have a joint venture operator. He’s somebody who knows construction, can find some smokin’ deals down there, and oversee the renovations, oversee the value-add process on these things, and deal with the contractors. Then if shit hits the fan, he can step in and handle the ongoing management long-term. And he’s putting his eyes on the property, he’s making sure that it’s run properly once it is stabilized, too.

So it’s a way that I’ve been able to grow my business without having to take on more overhead and more staff. I think a lot of us that start out as solo entrepreneurs, we get into it because we like the idea of doing the business, and then all of a sudden you start hiring people, you realize the value in human capital, but then you also realize all the headaches in having staff, and employees, and having to deal with human resources.

So I’ve gone through that, and built one of the largest property management companies, residential property management companies in Cleveland; I had a bunch of stuff there, and then some stuff in my investment company, and now I’d rather run a lean, mean type of business, where we can joint venture with people, help other people who maybe don’t have as much experience in investments and apartment buildings, but they’ve got a good work ethic.

I can raise the money, I can bring my balance sheet and get the loans, I can mentor and coach through the whole process, and it’s a way that I can do more deals, and instead of having 100% of a grape, I can have 25% of a watermelon. Does that make sense?

Joe Fairless: Yeah.

Tim Bratz: There’s a lot more squeeze in 25% of a watermelon than there is in 100% of a grape.

Joe Fairless: I imagine the challenge that you’ve come across with that approach is making sure that all the projects that you’re working on, the partners are doing their share of what was agreed upon, and just making sure there are checks and balances… So how do you navigate that?

Tim Bratz: I have obviously run across issues with that in the past, and it’s all about expectation setting. The way that we do it is — because I’m raising the capital, or bringing my own money, and I’m signing on the loans, typically the money controls the deal. I know both the operational aspect and the financial aspect of the business… So typically, I’m able to control the deals, my attorney is putting all the paperwork together… It’s my mortgage broker getting the financing, it’s my insurance agent ensuring that all that’s taken care of, and then my staff here in Cleveland – I have a COO, I have a director of acquisitions, I have a director of project management, and  I have a director of asset management. That’s my entire investment team now.

My acquisitions guy is underwriting the deals, making sure that they meet our buying criteria. Then when it’s time to go through the project management phase, my project manager is working with our local joint venture partner and ensuring that they know what the full scope of work is; they’re getting quotes, we’re sharing a lot of our national suppliers and vendors and contractors, so they’re handling all that stuff… And then he’s checking on them on a regular basis, making sure everything’s on budget, everything’s on time.

You can manage this stuff as long as you have the right key performance indicators (KPIs) in place. With a two-minute phone call every single morning you can say “Hey, where are we on budget? Where are we on timeframe? What does the occupancy look like?” All that stuff can all be done in a couple minute phone call, and numbers don’t lie. So we’re able to know what the expectations are, set very clear expectations, and our joint venture partners earn more equity as the project progresses. So the way the operating agreement is drafted – maybe they start out with 5% equity, and as they get further and further along, they earn more equity in the deal, and we do it that way.

That way, there’s no sour feelings, or anything like that, that come in from somebody not doing their job, or us having to step in and kick the table and be like “What the hell is going on here?” and then getting a lawsuit, or anything like that.

So that’s typically what we do, and then my asset management director – he’s constantly just reviewing statements, checking on the owner portals for all of our properties… And we run the property management remotely through our property management company up here in Cleveland. So we might have an on-site person to handle open houses and showings, and make sure the place is clean, and the grass is cut, and there’s no trash or litter anywhere, but we can handle everything else remotely. That’s the cool thing about being able to have internet and phone – we can market the properties remotely, we can take rental applications remotely, we can screen tenants remotely, we can sign leases remotely, we can collect all the rents remotely, all bills are paid remotely, and that entire process of maintenance is all done remotely. They can call into the 800 line…

So we have a good management software and a good team and process in place where a majority of the business aspects, things that maybe most operators maybe aren’t that good at – we can take all that off their plate, and then a local operator can just focus on (again) their unique ability, which is maybe managing the property or managing the contractors, and finding good deals.

Joe Fairless: With the joint venture partners that earn more equity as the project progresses, can you elaborate on the mechanics for how that works?

Tim Bratz: Yeah, there’s a lot of moving parts in commercial real estate. Somebody needs to find the deal; somebody needs to put up all the money for earnest money, due diligence, the loan application… That’s worth something. Somebody needs to go through the whole due diligence process and underwrite the entire deal; somebody needs to get the loan; somebody needs to raise all the private capital for it, all the equity. Then, once we close on the property, somebody needs to oversee the contractors and the value-add; that could be a couple months, that could be two years, depending on how heavy of a lift of a renovation it is.

Somebody then has to handle the ongoing management… If I’m stepping in and working with a newbie, there’s  a cost of me mentoring, and the time spent on that; that’s worth something to the deal, too. So I’m pretty a la carte with a lot of my joint venture partners, and whatever they need me for, I’ll come in for; if they don’t need me, then I don’t need to be a part of that and I can take a little bit less equity.

So we split it up in a way that if I’m taking a lot of the financial risk, then I control the LLC, the operating entity, and then as they prove themselves and as we get the property stabilized, and then we get it refinanced, and put maybe some non-recourse debt in place, and I get all my money back, and my investors get all their money back, then there’s a lot less risk in it than for me, and we have a stabilized asset with a non-recourse loan in place… So then I don’t need as much equity and we can keep on growing the joint venture operators’ equity.

It’s a cool way that we’ve been able to kind of (again) grow without growing internally, but still be able to grow our influence and our portfolio.

Joe Fairless: You mentioned earlier that in the past you’ve had some issues with partners… Can you give a specific example of one thing that happened?

Tim Bratz: Yeah, partnerships are tough. I run some masterminds, and just do some local stuff with business owners, and usually one of the biggest struggles is partnerships, or somebody not holding their weight, and just kind of leeching from the partnership… I mean, hey, partnerships are tough enough when things are going good, and then obviously they go bad… God forbid they go really good – then there’s even more problems, because money can make people ugly.

The first one that comes to mind is I had a joint venture partner who put up a lot of cash; they had a successful business, and they put up some cash…

Joe Fairless: How much cash?

Tim Bratz: About 1.3 million dollars over the course of about 18 months, in different projects… And over the course of about 36 months I turned that into about 3-3,5 million dollars worth of property. I just kept on rolling up, buy an 8-unit, get a 14-unit; flip that one over, get a 23-unit… Turn it into a 31-unit. Then we got to a point where we were gonna go buy a 100-unit apartment complex in a B+, A- kind of an area, we got it for a song, and it was at a point where now it’s time to go get financing… And everything checked out on me; I had good credit, not a lot of assets at the time, but most of it was in this partnership, that was what my net worth was…

And when they underwrote my business partner, he had some issues, he had gotten in some trouble when he was in his 20’s, and he was  40-something at the time, so about 15 years prior… He got caught taking drugs over the Canadian-American border, and because of it, and all these money laundering charges, and income tax liens and property tax liens – there’s no chance he would ever get financing… So that was never disclosed to me. I didn’t realize that that was the case, and now all of a sudden I’m responsible for bringing the money, getting the financing, getting the loans, and then doing all the work as well… And it changed the balance of who was responsible for what and who should be compensated for what.

It kind of got into a pissing match where he thought he was still entitled to the 67%-70% that he was getting, I was entitled to more than 33% if I was gonna take on that additional risk and 100% liability on that… And we just couldn’t come to an agreement, and we had to liquidate about 200-some units, right around there.

Joe Fairless: Wow… You liquidated the units and then you did not go through with the transaction with someone else?

Tim Bratz: Man, I lost it… And the thing would probably worth double today. This was early 2016, late 2015 that it happened. So it was just shy of 36 months ago.

Joe Fairless: Did you have any earnest money that was non-refundable that you lost, or anything like that?

Tim Bratz: No, we had $100,000 of earnest money, it was refundable, but here’s the thing… When you have $100,000 of earnest money up, and you’re going through the due diligence period, even though you’re able to take that money back off the table and say “Hey listen, we can’t move forward”, sometimes the seller puts in a headlock. Now they know that they’ve got your nuts in a vice, and they can kind of dictate things… So when I went back to the seller and said “Hey listen, we can’t move forward on this. We can’t get this loan”, the seller is like “Well, you know, I spent some time with my assistant on this, and they spent quite a bit of time getting all the due diligence together for you, and I had to pay my accountant to pull some of the records, and my attorney had to review this, and I had some costs… And of that $100,000, I think I’m entitled to $20,000 of it.” I’m like “What? Are you out of your friggin mind?” We went back and forth, I got so pissed that I just put my attorney in charge and I’m like “Dude, just get me as much of it back as you can”, because I was then going through the partnership dissolution…

Joe Fairless: Oh, yeah…

Tim Bratz: And he ended up getting me $98,000 back, but they still kept 2k… That’s the risk you take when you’re putting up the earnest money.

Joe Fairless: Wow… You were fighting battles on multiple fronts.

Tim Bratz: Yeah, and it’s stressful. Sometimes you can’t see outside of that situation. It was a pretty dark, difficult period of my life, where I don’t know what I’m gonna do, all my equity is in this deal, these guys might try to burn me, and this and that, and all my net worth is in these projects… I guess I was like 29-30 at the time. My wife was pregnant with our first kid, we were going through all this stuff, and I’m trying to figure out what’s the next step, where am I going in life… Really stressful.

Sometimes you can’t see outside the box that you’re in when you’re in some of those tough situations, but fortunately I had some good mentors that kind of walked me through it, who had been through that. That’s one of the big values of being in masterminds, and hanging out in groups of successful entrepreneurs, people who had been there and been through these kinds of situations. They’re able to take an objective look at what’s going on in your situation and say “Hey man, I know you already know what you need to do, but here’s me validating it by telling you what I did in that situation, what got me out of it.” It really helped out being part of a mastermind of some people who kind of guided me through that process.

Joe Fairless: What mastermind was it that you were a part of during this process that helped you out?

Tim Bratz: It was one called Deal Maker Family; Mark Evans runs it. I know you talked to Ray  Gonzalez, I know he was on your show, and I think a couple of the other guys. Good group. [unintelligible [00:18:36].17] is in there, and a couple big influencers on social media are in that group. Big supporters, good friends of mine, and we’re like brothers, a lot of those guys… That’s an awesome group.

I’m also in Collective Genius, with Jason Medley and a bunch of high-performing single-family investors. Then I know Rod Khleif, he’s got a multifamily boardroom, and then I have my own, called Advisors Council. It’s me, Lee Carney, and Francis [unintelligible [00:19:01].05] and a couple other people, that we do some high-level stuff as well.

I run masterminds, I spend a lot of money being a part of other people’s masterminds, and I think that is the secret sauce to really catapulting your success and fast-forwarding what you can accomplish in business, and life.

Joe Fairless: You mentioned you spend a lot of money in masterminds… Over the course of 12 months, how much will you invest in a mastermind, or across the board in all of them?

Tim Bratz: Not including the travel, I probably spend about $75,000. If you include the travel, and airlines, and all that other stuff, you’re probably looking at 85k, 90k, almost 100k.

Joe Fairless: And how do you determine the ROI for that investment of about $100,000?

Tim Bratz: Well, I remember my first mastermind that I joined, which was the Deal Maker Family with Mark Evans… I was a solo entrepreneur, and they gave me two pieces of advice in that. One was to join the mastermind, and two was to hire an assistant and get all the small stuff off my plate. Although I knew I needed an assistant, when you’re a solo entrepreneur you have no idea what that looks like – how do I pay them, what do I pay them, how do I give them tasks, responsibilities, how do I make sure they’re doing those jobs, what happens if it doesn’t work out… All these fears that set in, and they kind of just walked me through it. Hey, instead of paying somebody — it’s not $30,000 that you’re risking here, you’re risking $2,500/month. So if it doesn’t work in 30 days, then you fire the person, and it was a $2,500 learning opportunity, versus a $30,000.

So just by tweaking my thoughts a little bit like that, I made that hire, and then I did a deal with Mark and a couple other guys, and I made $300,000 just in deals that I did with people in that mastermind that first ten months that I was involved in it.

So that was an easy ROI – I spent $30,000 on it and I got a ten times return on investment from it. A lot of times it’s deal flow, sometimes it’s raising private money, sometimes it’s not even quantifiable.

I went to one event, and the guy was talking about relationships, and dating your wife, and setting priorities, and having a marriage-centric household versus a child-centric household, and that changed a lot for me and my wife in our marriage, and it’s gotten a lot better… And you can’t quantify that. So there’s other things that maybe don’t have the metrics that you can measure, but have made significant impacts, not only in business, but in life.

Joe Fairless: I love that phrase, dating your wife. My wife’s pregnant right now, she’s due in a couple months, we’re gonna have a baby girl, so the having a marriage-centric versus a kids-centric – I don’t quite comprehend that yet, but I’m sure I will…

Tim Bratz: I’m in the same thing, I have a three year old and a one year old and I know you’ve got a couple little ones, so…

Joe Fairless: Well, I’ve got one, yeah…

Tim Bratz: It’s really tough in this space, but you’ve gotta do it, you’ve gotta date your wife; you’ve gotta take her out, and still court her, and get her flowers, and do fun stuff, and not forget that you guys were together before the kids came along… Just recycling my thought process on that has made a big impact on our marriage and our family and our household, and because I show up more in marriage, she shows up more too, and it allows me to then be more successful in business, because now I’m not stressed out about what’s happening up at home.

Joe Fairless: Yeah, it makes complete sense. I’m jumping around from something you said earlier, and then I’ll ask you the money question I ask everyone… But on the KPI call, you said you could have a two-minute call where you go over the budget, the timeframe, the occupancy… What are some other things that you or your team member goes over on that call?

Tim Bratz: It’s usually the occupancy rate, what the unit turn timeframe looks like, how long it is taking for us to turn units… Standard, people say “Hey listen, we wanna turn a unit in a week” or “We wanna turn a unit in 30 days” or whatever that looks like. Me, I set such a high bar that that’s unacceptable to me. My goal in owning my rental property is to have 100% percent of the rent paid, 365 days a year. They go “Tim, how the hell would you accomplish that? What about tenants moving out, tenants moving in?” Our leasing starts 90 days in advance.

We’ll go and contact the tenant 90 days prior to their lease renewal, and say “Hey, Mrs. Jones, do you plan on sticking around? We’d love to sign a new lease, for another 12 months with you.” “Oh, you know, I’m moving to California… My son’s having a daughter in a few months, and I need to go out there and spend some time, and I wanna be by the grandkids.” “Hey, sounds great… I know your lease is up at the end of October; I’ll tell you what – do you mind if we just come through and just take some notes on some improvements that we wanna make to the unit for once you do leave?” “Yeah, yeah, no problem.” “Great, we’re gonna send a property manager through next week.”

So we’re having this conversation, and then we go in, we take notes on everything that needs to be turned, we’re ordering the supplies 60 days out, and then we’ll even have  a conversation with Mrs. Jones, that says “Mrs. Jones, I know you’re moving out at the end of the October, but the supplies came  in early. Do you mind if we just come in and kind of make some improvements to your unit while you’re living there, and maybe give you a new kitchen or a new bathroom, even though you’re moving out? You’ll be able to utilize it for the last couple months of your lease.” “Yeah, yeah, that sounds good.” “Okay, great.”

So then we’ll go in and we’ll actually do the improvements and turn the unit while the tenant is living there. Then we’ll give them a discount or guarantee that they’ll get all their security deposit back if they use our cleaning company to have it professionally cleaned.

So instead of spending 7 or 20 days to turn a unit, they move out on October 21st, and we’re able to go in and turn the unit in literally a couple hours… Walk through, do the checklist, maybe there’s a list of items, and we’re marketing the unit the whole time, so we have a waiting list of tenants, and that way we can move somebody in on October 21st… And Mrs. Jones paid till October 31st. She doesn’t expect any of that money back, and we can double-dip on rent for ten days. So we actually collected rent 375 days of that year.

That’s the expectation that I set with my team, and if they fall from that a little bit, that’s okay, because we’re still at 100% occupancy. So doing things like that, and making sure that how many lease renewals we have coming up, how many people we contacted, asking about those kinds of KPI’s, what percentage has been paid out to the contractors versus what percentage of work has been done, and looking at that… We have timelines that are quantifiable on the front-end for line item on the scope of work for doing these renovations… So we’re looking at a lot of those things.

I try not to over-complicate it, but there’s usually 2-4 KPI’s per individual that we’re looking at, that will give us a good indication of “Are we growing or are we dying? Are we ripening or are we rotting?”

Joe Fairless: I’m glad I asked that question. What is your best real estate investing advice ever?

Tim Bratz: I would say join a mastermind. What took me nine years to do I think if you join a mastermind and you surround yourself with the right people… Now, you’re gonna have to pay; I pay $35,000 for one mastermind, another $30,000 for another mastermind, another $20,000 for another one, $1,500 for another one… So I guess I’m closer to like $90,000. I’m definitely over $100,000 a year.

I don’t think you need to join that many. I think you can join one, and soak it up, create a lot of relationships… It’s tough being an entrepreneur. Sometimes it can be lonely, and you can’t have high-level conversations.

When you’re talking in dollars and decimals, some people get offended by that that you grew up with. It’s different hanging out with people with a common past, versus hanging out with people with a common future. It’s kind of tough to think that way, because these are people that you love, that you grew up with, but the reality is life’s a train ride, and some people are only on for a couple of stops, and they’re not meant to be on for the entire train ride, as much as you love them and as much as you wanna support them. Sometimes they’re just going in a different direction, and have a different destination than  you.

Surround yourself with people with a common future, not just a common past, and I think doing a mastermind that has a significant investment kind of weeds out some of the lower mindsets and thinkers out there… So I think you can really fast-track success if you get involved in a mastermind.

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

Tim Bratz: Alright, brother… Let’s do it.

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

Break: [[00:26:43].23] to [[00:27:20].20]

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

Tim Bratz: Twelve Pillars.

Joe Fairless: Best ever deal you’ve done?

Tim Bratz: I just took down a 730-unit portfolio in Georgia, and I’m all into it for 24 million, and it’ll appraise for around almost 45 million, probably 43 million dollars when it’s all said and done.

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

Tim Bratz: Paying the contractor or letting the contractor get ahead of the money.

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

Tim Bratz: I bought a suite for the Cav’s conference finals this past season, because I’m in Cleveland… And I put some on Facebook, and I said “Hey, who’s a family that deserves to go to this Cav’s suite?” and I gave away four tickets to five different families who had faced a lot of adversity, and not only overcame it, but also paid it forward, started a non-profit to help out kids with congenital heart defects, or they’re going out and speaking on behalf of organ transplants, because the one girl’s sister passed away… And they saved four lives from an organ transplant. I like doing stuff where I’m connected with the people I’m giving to.

Joe Fairless: Best ever way the Best Ever listeners can learn more about what you’ve got going on and get in touch with you?

Tim Bratz: Hit me up on Facebook, Tim Bratz. I’m sure you’ll tag me, Joe, hit me up on there. And CLEturnkey.com is my website. Send some enquiries to me there, and I’m happy to connect with anybody.

Dude, I appreciate you having me, brother.

Joe Fairless: Yeah, I really enjoyed it. I learned a lot… A lot of valuable information, from partnerships, how to structure them, what to look out for, an example of a partnership that didn’t go according to plan, how you handled that, masterminds – the importance of them, and the ways to do asset management, questions you go through, and then also your approach on unit turns was really interesting… So thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Tim Bratz: Thanks, Joe.

Best Real Estate Investing Advice Ever Show Podcast

JF1118: Helping Out-of-Country Investors Grow a Real Estate Portfolio in America #SkillSetSunday with John Carney

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John always wanted to be a real estate developer. He succeeded in that goal, and now he also helps Australians invest in the USA and grow real estate portfolios. He has a lot of great advice in many area of real estate to share with us today. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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John Carney Real Estate Background:
-Real estate entrepreneur, author and speaker
-Founded America Property Source in Melbourne, Australia to enable Aussie investors grow USA real estate portfolios
-Wrote the book Real Estate Is A Team Sport. The 9 Players You Need To Profit.
-Host of the Real Estate Locker Room
-Based in Cleveland, Ohio
-Say hi to him at johncarneyonline.com

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

John Carney: I’m doing great, Joe. Thanks for having me back on your show.

Joe Fairless: My pleasure. Best Ever listeners, John is a returning guest, so you can go search his name at BestEverShow.com and you’ll hear his episode where he gave his best ever advice. Because today is Sunday, we’ve got a special segment called Skillset Sunday where we’re gonna talk about a specific skill; that way, by the end of the conversation, Best Ever listeners, you will be able to implement the skill or perhaps hone a current skill that you have, and that is how to build the right team.
John has gone from a five million dollar project to a 23 million dollar project, and his team building along the way has gotten him to that point.

A little bit more about John – he is a real estate entrepreneur, author and speaker. He founded America Property Source in Melbourne, Australia, to enable Aussie investors to grow US real estate portfolios. He wrote the book “Real Estate Is A Team Sport. The 9 Players You Need To Profit”, so clearly there’s a theme here. Now he’s based in Cleveland, Ohio, and he’s the host of Real Estate Locker Room.

Before we dive into building the team, John – or maybe you can naturally segue, because I know you are a smooth operator – do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

John Carney: Sure, that was a great segue into it. I was living in “Melbourne” is how they would say it…

Joe Fairless: Did I mispronounce it? Is it Melbourne [Melbehn]?

John Carney: They say Melbourne [Melbin], like throwing it in the bin… But anyways, I might start speaking in Australian and I have to correct myself when I get into real estate vocabulary. But anyway, this is a love story. A lady brought me over to Australia in 2009 due to the economic differences between Australia and America at that time – strong currency, high property. I saw an opportunity to put what I’d learned in my real estate investing career to date to use, and I started enabling Australian property investors to invest in the United States and increase their cashflow, and it was all about safety and minimizing risk.

What I learned from that, really briefly, was that you have to have the right team; we put a lot of time and effort into making sure we have the best operators possible for every step along the way, and I also learned that just because we provide someone with a great team and a great property in a good location, it comes down to operation. So our real estate investors really do have to build the relationships with their team players and keep those active, and be an active participant in your investments, whether it’s one single-family home or a hundred, it doesn’t matter; each one is a business, and we really promote having investors understand that the team comes first and the property comes second.

Joe Fairless: Okay, I like it. So let’s talk about how you’ve built the team, so that the Best Ever listeners can implement some of the tactics that you’ve implemented in your business. I mentioned earlier the five million and 23 million dollar project – let’s talk about that, maybe talking about what those projects are and how you scaled your team, that way we’re using a real example.

John Carney: Sure. When I was in Australia I was out on my own. I met some people, I had my wife’s network and built a small business team, but my long-term goal was always to be in real estate development, and I tapped into those relationships three or four years down the line and asked for help. I wanted to be a property developer, and I started with something small and manageable, which was finding a lot that we could subdivide and build two new houses on.

The key players on that team were my business partner and my mentor in Australia, Brad, who was a large scale developer in Melbourne. He had a finance company, he had a real estate company… He was a great operator, and I learned a lot. The other component was having a builder; we brought a builder into the partnership, a custom home builder that could design, build and manage these projects.

Joe Fairless: And what was your role?

John Carney: My role was the developer. I was the person that put this together; I found the sites, I negotiated the purchase and sourced the team. With the help of the builder we vetted, for example, what company was gonna sell the property.

Joe Fairless: So you shared the role with your mentor, who was a large-scale developer.

John Carney: I like to look at it — he was a sounding board, that if I had a question and before I made a decision that would impact this partnership, if I had a question, he was on hand to answer that and give me guidance. So at the end of the day, it was running that, from the accountants, to contracts, to lawyers… I did pretty much everything.

Joe Fairless: Had you done any development previously?

John Carney: Not on my own, no.

Joe Fairless: Okay, not on your own. And what did you develop in this example?

John Carney: We found a vacant lot and we subdivided that and built two single-family homes. A gross sale price was about 1.1 million on this deal, and we got out with an acceptable margin. But right after we had made a deal on that lot, we had found another opportunity that we ended up getting in a bidding war. It was a quarter-acre block on a corner, and it was a $980,000 acquisition, and that was the project that we ended up selling for just under three million dollars to another developer because I was already in motion to move back to Australia. But had we continued the buildout, it would have been close to a six million dollar total project.

Joe Fairless: How much did you have to put into it, if anything, to sell it to the other developer for a little under three million?

John Carney: We had a lot of money into it, with all the planning and engineering.

Joe Fairless: How much?

John Carney: You know, if you take a 20% deposit, we probably each had over $100,000 of our own cash in there. So I was using my own cash; I was leveraging assets in the United States on a HELOC, and loaning myself money. Obviously, having your own skin in the game makes you pay attention to every penny spent.

Joe Fairless: But you sold it to a developer for a little over under three million – how much in total did the project have in it when you sold it for a little under three million/

John Carney: I don’t have that right at the tip of my tongue.

Joe Fairless: Roughly…

John Carney: We got out of this with pocket change.

Joe Fairless: Okay, so you basically broke even.

John Carney: We broke even. We got our money back and we broke even. The reason why we decided as a partnership that this needed to be solved — so we did all the development: we did all the subdivision, we did all the engineering, we got the plans approved of council… We had a shovel-ready site. The reason that we decided to sell that to someone who could just basically come in with our drawings and our plans, whole permits and build it — so we basically sold it to an engineering company/builder/developer because I was moving back to the US and I was the driving force behind this partnership, so there was no project manager taking care of the whole big picture with my absence.

Joe Fairless: What did your partner say about you moving back, knowing that they’ve spent all this time on the project, but they’re basically breaking even because you have to move back to the United States?

John Carney: Well, we’d exited our first deal together just ahead of the second deal… We were behind on some timeframes – that was true, and then that was, without getting into it, a long story… I won’t say we weren’t all getting along, but it would have been —

Joe Fairless: It was time to break up?

John Carney: It was in everybody’s best interest, without the team leader there, that this just wasn’t gonna fall [unintelligible [00:09:05].03]

Joe Fairless: Makes sense.

John Carney: Nobody lost money, that’s the number one key in my opinion. And when I say we made pocket change, that’s subjective, Joe. It wasn’t horrible, but it wasn’t what we projected. But when you’re in a real estate deal and there’s a lot of moving parts and you’re managing two deals like this, and it’s all new, it really was the team player. Take me out of the equation; I got a lot of help from our accountant, we got a lot of help from our lawyer… There was a lot of different sounding boards, and at the end of the day, when you’ve got a difference in personalities, skillsets and expectations in something that’s complex like this, when a lot of real money is on the line, and your capital is on the line – that was a collective decision.

We talked about that well in advance of the move; I was very upfront when the opportunity that was gonna bring me back to Cleveland came up. I notified my partners that this is what I was doing, and it wasn’t’ taken as something that was bad; there’s always an opportunity to work with people again in the future, and we left that open.

Joe Fairless: Cool, alright. Now the 5 million to 23 million dollar project – I think you’ve set the state perfectly to talk about that now.

John Carney: Sure. The project that my father and his business partners are working on in downtown Cleveland is in Public Square, and it’s setting the stage, because three years down the track we still don’t have a contract. So the project that I moved over here a year ago is still in limbo, but other opportunities have come and gone.

The deal that I’m talking about right now is a class A waterfront asset in Cleveland. It’s 160 units, with an opportunity of value-add to build another 29; that’s why we’re attracted to it. The landmark companies, which is the downtown development and property management company that my father, John Carney, and his partner, Bob Reines, started in the ’90s – that’s their niche in the market. They develop and manage historic buildings in Cleveland and Indianapolis, and then they manage that. These are complex — that’s what the Public Square building will eventually turn out to. We’re always positive that that’s a different story.

This building came to us in September. We looked at it, it was on the market, and we were working with investment bankers; they’re a big component of the team, which is new to us, on the capital stack. But we went through our due diligence, we made our bid and it wasn’t accepted… Just after the new year’s. So let’s go back to January – we’re mid-April right now – this building was back on the market and the broker called us because we were in the second position. So we made some decisions, we got the team back together – at least the big decision-makers – and we went back in with a new offer. It was slightly different based on conditions in the financial market at that time.

Joe Fairless: Was it higher?

John Carney: Well, interest rates were slightly higher, so we came in a little bit lower. That’s the condition I’m talking about. So here we are – this was the learning curve for me, because this was my first time involved in a project of this size.

Joe Fairless: And is this the 5 million or the 23 million?

John Carney: 23 million.

Joe Fairless: Which one was the 5 million? The one you described earlier, in Australia?

John Carney: Correct.

Joe Fairless: Okay, I’m with you. Cool.

John Carney: Yeah, so now we’re over in the States; the project I moved over here for is still not happening, but we’re working towards that. And by the way, we’re about to take over in the year three of working towards a deal on this. We’ve got this class A asset on the lakefront just East of downtown Cleveland, and it’s ticking a lot of boxes.

Just to get from “Yeah, we’re gonna take it. You don’t have to go back on the market. Here’s our offer” to getting to a PSA (purchase and sales agreement) – that took the better part of five weeks. Then we got  into our due diligence period and we’ve had to ask for an extension, so there’s a lot of action happening this week, because the pointing end of the negotiation is happening today, tomorrow, and decisions have to be made by Friday.

In a perfect world, we’ll end up owning this property, but we’re prepared to walk away. The important part is the team… To circle back to that, if you take the numbers out of the equation, I’m working with people who are very familiar with these numbers, and to some degree they consider these small numbers. So we’re learning about different ways of financing with private debt and private equity to cover the gap, to stretch investors – you can call it what you want.

Basically, I’ve been astute of this project since September. I have my limited experience that I can bring to the table, but making sure that we have the right team members, from the accountants, to the lawyers, to the insurance agents, to the property management, to the builders, to the people that are doing the inspection that needs assessment – it’s all a critical part about making a good decision. So there’s not one decision being made lightly or that isn’t on an e-mail that’s copied in to every team member. And because we’re at the pointing end of this transaction right now, the sink or swim part, there’s daily phone calls with multiple team members, and everybody’s opinion is taken on board.

Joe Fairless: On those daily phone calls – who’s on those calls and what are the roles? You mentioned some team members, but I know not all those team members, like insurance agents etc. are on those calls, so who are the main players?

John Carney: We have the representatives from our property management company, which most of the time is my brother, who works hand-in-hand with our director of operations, because they know what it will cost us based on current leases to operate this building. They’ve been doing this for 20 years, they know what it costs to operate this type of asset in this market. So those numbers are fixed.

We have our builder, who will be doing the new unit buildout and who will be fixing up the immediate needs on this building… And there are some – there’s some deferred maintenance that wasn’t in the budget for the current owner. That’s not their business model, by the way.

So we have to make sure that this isn’t a class C asset, this isn’t something where you can fix things on the cheap. It has to be done right. We’ve got a 20-year-old roof; it’s a brick building, a 1920-built building. It’s a fortress, but it’s got brickwork and deferred [unintelligible [00:15:15].23]

Joe Fairless: If it’s a 1920 building what about it is class A?

John Carney: The interior fit out is class A, the tenants are class A, the amenities are class A, the views are class A, and the price point is class A. Back in the day, this was where the cargo ships would bring cars in from Detroit, along the Great Lakes; they would pull up here. It was a concrete-floored bunker house to receive cars… So it’s neat when you see those photos.

A little less than 20 years ago it went through a historic renovation, and we would potentially represent the third owner since then.

Joe Fairless: So on the daily phone calls you’ve got your brother, who represents the property management company, the builder who’s gonna do the building of the new unit, the 29 additional units, plus fix up the 160 units with whatever they need. Anyone else on those daily calls?

John Carney: We generally have my father, who’s running the partnership side of things, and his partner, who he’s worked hand-in-hand with his whole life. They started out as attorneys together, and then they went into real estate development… So a 40-year relationship working together. They work well together, it’s a good team, and a proven team. They represent the ownership and the majority shareholders in this building.

Then we have our investment banker group – the money people. We’re representing two different types of money here – the first three-year loan is a private loan. Then we don’t have enough of a down payment to cover their criteria, which I believe is 85%… When this went out to the market, the private money wanted to put more money in. Maybe you can explain that to your audience better than I can… So we had to come up with a group to fill the debt. So one of the investment bankers is generally working with the big money lender, and the second is the smaller equity partner. And the company that we’re working with, they also happen to have a real estate division that owns 9,000 doors.

Joe Fairless: The company that is providing the equity, or debt, or…?

John Carney: No, the investment bankers.

Joe Fairless: Right. The investment bankers have 9,000 doors?

John Carney: Yeah, they have a real estate division, and their director and his partners structure deals, and they generally buy class C assets where they can make improvements and raise rents. So this is a little bit new to them too, because they’re tweaking their models and their capital stacks slightly differently. So when you look at my role in this, I’ll say I’m a student and I understand who all the team players are, but like I said, this is at the tip of everyone’s radar right now… So anyone can be on a call within 30 minutes with a text message or an e-mail.

So that is right now the team we’re working with – our in-house property management, and right now we’re just trying to make where we are now and the negotiations work. Does that make sense?

Joe Fairless: It makes a lot of sense, and I’m glad that you talked us through that… Basically, you’ve just outlined the key team members for a 23 million dollar development, a mix — I don’t know what you call it, but it’s an established property plus development opportunity (additional development opportunity). That’s something that’s useful for everyone to know… Especially you didn’t just outline the people, but you outlined the responsibilities as well.

Where can the Best Ever listeners get in touch with you?

John Carney: The Best Ever listeners can find me at my website, which is JohnCarneyOnline.com, or shoot an e-mail directly to me at John@JohnCarneyOnline.com. I’m on Facebook and Twitter, and I have a new podcast out – The Real Estate Locker Room Show with John Carney, which is on iTunes and Stitcher. I’m still learning the podcasting game, but it’s a great way to learn more about the craft of being a real estate professional.

Joe Fairless: Some of the takeaways I got from our conversation on the Australia stuff – know when to exit, know when it’s time to break up the team that you’ve established and focus on other opportunities that are of interest… And the Cleveland deal – as you said, it’s been a three-year work in progress. We have a 30-minute or so podcast episode and people talk about their experiences, so frequently it can be assumed that it all happened very quickly, but when we actually dig in deep to timelines, you’ve been working on this one project [unintelligible [00:19:50].20] for three years, and… It takes time, in some cases, especially development deals.

But on this other one, the 23 million dollar project, you all put a bid in, it didn’t get accepted, and then they come back to you later and you lower the price – because of interest rates, that’s what your reason was, but I’m sure there is a little bit more meat on the bone for you all, as a result of them coming back to you… And then the team members that you have on these daily calls for the 23 million dollar project – that is 160 units plus the opportunity to build 29 additional ones – and that is a representative from the property management company, the builder, your dad and his business partner, and the people who are supplying the debt and the equity, which are the investment banker group, and yourself.

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

John Carney: Alright, thanks for having me, Joe, and I look forward to tuning in and learning more from your podcast, too.

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With over 30 properties under his belt and starting at a young age while being a firefighter, our guest started his real estate career buying duplexes. He took the advice that was free from his friends and family and ended up paying a fortune in expenses, mistakes, etc. He talks about what his buying criteria is and a unique county hack when purchasing property.

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Jack Petrick Real Estate Background:
– Licensed real estate agent and full time real estate investor for over 15 years
– Currently have 32 buy and hold properties
– In the process of transitioning into commercial multi family deals
– Started building new homes, rehabbing, flipping
– Additionally he is a FireMedic at Strongsville Fire Department
– Based in Cleveland, Ohio
– Say hi to him at petrickbuilders@yahoo.com or 440-552-8483

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Jack Petrick and Joe Fairless

 

 

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

Jack Petrick: I’m doing well.

Joe Fairless: Nice to have you on the show. A little bit about Jack – he is a licensed real estate agent and full-time real estate investor for over 15 years. He currently has 32 buy and hold properties. He’s in the process of transitioning into commercial multifamily deals. He started building new homes, rehabbing and flipping them. Additionally, he is a fire medic at Strongsville fire department. Do you wanna give the Best Ever listeners a little bit more about your background and what you’re focused on?

Jack Petrick: Yeah, absolutely. About 15 years ago I started off going a couple different directions. I had an interest in being a firefighter paramedic, so I went to school and got through with that at about 22 years old. I also had an interest in real estate, so I kind of kicked off both at the same time. I started off as a general contractor, building custom homes. Nobody in my family had this background or necessarily interest. I just basically went on Amazon and purchased every book imaginable. I went on OwnerBuilder Forum and I just kind of [unintelligible [00:03:28].02] myself into it, and pretty much spent the next year going to every single model home, [unintelligible [00:03:32].29] homes, and going to every construction site possible. By doing that, I would just pick up phone numbers from various subcontractors.

I did that for a number of years until the housing market kind of wiped out. In about 2006, that’s when I first picked at my first buy and hold property. Didn’t really have any interest in rentals… I just heard all the free advice from friends and family and I’ve come to learn that free advice is sometimes the most expensive advice, and just talking about the [unintelligible [00:04:00].20] the tenants, the six month evictions… Everybody trying to play down at this area, when in fact they’d never experienced it before.

So I started off, did my first deal – it was a duplex, and from there I just did about seven houses, took a break… I did a lot of remodeling during that time. Then the housing market near me – I’m in Cleveland, Ohio, and the housing market in a couple of suburbs completely wiped out. I’ve been picking up houses for like $5,000. The cap rates are insane.

Having that back on it, I go into these houses, we completely rebuild them and run them out, and I’m making like 25%, sometimes 30% cap rates on the returns on these properties. That’s kind of how I got into where I’m at right now.

Joe Fairless: You have piqued my curiosity about these homes that I’m buying. $5,000 – some of them, perhaps not all… Well, first off, before we get into a specific example, what are the acquisition prices, low to high, that you’ve done?

Jack Petrick: In my market – I’ve got a really unique market, but I like to have an all-in number between 35k-40k – that’s purchase and renovations. There was a period where I was able to pick houses off of the HUD Homes store for like $25,000, maybe $30,000. These houses were completely rehabbed, and prior to the mortgage meltdown, these houses were selling for 120k, 130k. So we’re talking completely new on the exterior, interior, new garages, new driveways… But the we lasted for a short amount of time.

The HUD Homes store is definitely still an option for picking properties off, but the deals aren’t quite as aggressive. There’s still some stuff on [unintelligible [00:05:45].16] which is our real estate listing service. There’s a lot of deals off market, but I’ve been picking up a lot of deals off of the county LandBank, and there’s actually a website – I’d have to look it up, I don’t remember it right now, but there is a general LandBank website that will locate every LandBank throughout the entire country. These are properties that I’ve been able to pick up very inexpensively. They were completely wiped out, but as long as you hold to the specifications, you rebuild them, it provides years of passive cashflow without the capital expenditures that you would normally have to do on a typical property you would buy.

Joe Fairless: Now, educate me on the LandBank, with what you’ve just said as far as years of passive income from what you typically buy. When I hear LandBank, I’m thinking it’s just vacant land, is that not right?

Jack Petrick: No, that’s not correct. Basically, LandBank is a government nonprofit entity that receives Federal funding. As there are properties that are bank-owned, they’re distressed, they can’t sell them, they can’t turn them over for whatever reason, these are properties that are then donated to the LandBank. Say bank XYZ has a property and they can’t sell it. They will donate that property to the LandBank, but they’re on the hook in the event that that property does not sell, they would have to participate towards the demolition cost of that property.  So during that time, the LandBank will go in the house, they’ll clear it out, they’ll gut it out, and they’ll build a specification sheet of everything that that house needs, all the renovations.

So generally, I’ll go through the house and I’ll take a look at the renovations spec sheet, and 90% of the time they’re straight on point for all the renovations they want. They sometimes want the whole house to be rewired, but that’s not necessary. So knowing this now, I’ll scratch off a few things off the list to kind of get my rehab price down, and I’ll go in there and do a full rehab, top to bottom.

Most people, when they’re looking to pick up an investment property, they don’t actually take a look at simple numbers like return on investment, or what’s the cap rate that that property is gonna produce. Just a couple simple calculations – most people won’t run those numbers, and they will buy based on how they feel about the property, they feel about the area, and we can’t purchase based off our feelings; we have to make purchases based off of numbers.

Joe Fairless: So going back to the LandBank, you find the properties through your county LandBank – the county meaning the county that you’re in or that’s close by. You find the property through your county LandBank, and… What does the process look like? Let’s say you’re online, you find the property, it looks good – now what do you do if you wanna buy it?

Jack Petrick: Most LandBanks have an application period for you to submit your information, and it takes 1-2 weeks to get approved. Once approved, you can just go off the website and you can e-mail the main coordinating party for the houses you wanna see, and generally they will have an inspector meet you at the property. There will be a renovation pack that you will have and you’ll go through and you’ll agree or disagree with the specs of work that you’re gonna perform; I’m able to negotiate to some extent some of those larger ticket items to bring my acquisition price into a target range that I’m trying to achieve.

Once I have that done, I’ll submit the debt on the property. Recently, there was one house they were asking $45,000 for and the numbers didn’t justify and I offered $6,000 on the house, and we picked that for $6,000.

Once I actually have the property in my possession, it’s a deed in escrow program, so the title company holds my purchased funds check, and they will also hold the deed of that property. Once the house went through a four-month renovation and the house is completely rehabbed and all inspections are passed, at that point it will allow the money to transfer and the deed to then transfer to me.

Joe Fairless: Simple as that, huh?

Jack Petrick: Yeah, that’s it.

Joe Fairless: Once the deed transfers to you, you’ve now got a property. Do you then go post on Craigslist and try and get a tenant, or do you have a different approach?

Jack Petrick: Great question. A variety of options. For a while I had my property manager putting ads out on Zillow, Trilio, Craigslist. For a period a while ago we were also running to some CMHA section 8 tenants, but our market in this area improved to a point where I’m able to receive significantly higher cash offers and I can with a [unintelligible [00:10:20].11] voucher. I’ve just recently hired a gentleman to come in and least out the properties, like a leasing agent. He’s been able to push some extremely high rent values. For example, CMHA for a period of time was getting us anywhere from $770-$850 for a three-bedroom one-bath property, and this leasing agent has been able to get us to the point of almost $1,100 for this fully rehabbed property.

Joe Fairless: What’s CMHA?

Jack Petrick: CMHA is our local section 8 in the Cleveland, Ohio market. That’s just called CMHA, which is just short for basically the HUD section 8 program in Cleveland, Ohio.

Joe Fairless: Okay. So you hired a leasing agent to lease out your rentals.

Jack Petrick: That’s correct. For a while I was resisting against that, because a lot of them will charge one month’s rent to lease a property out, and I thought that I could save money by having it done in-house, but there was a term that was taught to me a while ago that a lot of times people bend over a pick of nickels while dollars go over their head. That was so true. That full month’s rent for a leasing fee is worth every penny if you can find a reliable and efficient and aggressive leasing agent. They’re worth every dollar.

Joe Fairless: So I’m guessing that you don’t have a third-party management company managing your rentals, but instead you have an individual property manager managing your rentals?

Jack Petrick: Yes, that is correct. I have that service in-house, but the leasing side of it, we were able to get much higher rent offers and faster turnovers utilizing a third-party service.

Joe Fairless: Okay, how did you find the third-party service?

Jack Petrick: Just with networking. Just finding other investors in my area that do deals and just asking to take them out to lunch and just talking to them… It’s amazing the wealth of knowledge that other investors have, and I’ve just really been blessed by how open other investors have been to actually sit down and meet with somebody like myself… Meaning, the gentleman that I met with, Paul, he has a thousand units, I have 32, so I’m pretty small in comparison to his achievements, but I think a lot of times guys that have a lot of success will take the time to meet the people that are up and coming, because they never know when somebody like myself will bring a bigger deal to them to partner up on.

Joe Fairless: Yeah, it’s interesting… That’s a different approach, where you have your own property manager for your properties, and then you contract out a third-party company to do the leasing… And you pay the first month’s rent to the leasing agent?

Jack Petrick: Yes, that’s correct. They take care of the lease and they’ll lock us in anywhere from a 12 to a 20-month lease. It’s just a little bit of a different strategy. Starting off, I never had a mentor so I did everything wrong when I started, and I initially took on all those headaches on myself, and a lot of other individuals do… But it burns a lot of people out. Money really isn’t made managing the property, the tenants, the phone calls, it’s made finding capital, doing deals and focusing your time and effort on that.

Joe Fairless: You said 12 or 20 months – why 20 months?

Jack Petrick: I misspoke, I meant 12 or 24 months. My mistake.

Joe Fairless: Okay, cool. I was wondering if there’s a method to your madness there. [laughs] On the note of finding capital for your deals, you’re all-in price on average is 30k-40k, you’ve got 32 of them… That’s $960,000 valuation – how did you buy these places?

Jack Petrick: I started off in the beginning like most people do, where they’ll have equity in their private home and they’ll just pull an equity line out. That’s the starting point for most new investors. Once again, a few properties that are then paid off free and clear, you can pull equity lines against those. You can do that for a period of time, and the benefit to going that route is your rates are low, your costs are low… Generally just paying a couple hundred-dollar application fee with your local bank. Then as you get larger, you have to start expanding into private investors, the reason being most local banks will only allow you to do so many buy and hold single family properties, until you reach that cap. Then you have to start looking at private lending, hard money lending and also portfolio lenders, too.

Joe Fairless: And portfolio lenders are those private banks and credit unions locally, right?

Jack Petrick: That’s one option, and there’s also Lima One Capital. I just closed a deal with them. I believe they’re actually funded by a hedge fund. They will take a group of properties, appraise them and then put them into a blanket mortgage. A lot of times, you have to do some creative financing to get a package of houses worth $350,000 – $500,000, and then at that point turn that into a larger refi or a blanket mortgage.

Joe Fairless: Lima has been a sponsor on the podcast, and for anyone who wants to talk to someone at Lima, you can e-mail cortney@limaonecapital.com, and he’ll talk to you about some of these programs. Because I had a guest on the show a while ago, and they talked about how they worked with Lima and did some wonderful things, so I was like “Well, I’m gonna reach out to them”, and they ended up being a sponsor.

Let’s talk about your hard money or your private lenders. How do you structure that with those individuals, since you’re doing buy and hold properties?

Jack Petrick: Great question. On hard money lenders, the terms are pretty similar if I’m flipping a property or if I’m holding it for a buy and hold until I can eventually work myself into a position to refi. But the hard money lenders in my area are around 15%. I have one hard money lender that does not charge points, I’ve got another hard money lender that does – that’s pretty aggressive funding, and it works for a short-term solution. On the private lending side, I’ve been able to contact a number of family and friends that have money in a 401k and it’s not really doing anything, it’s barely keeping up with inflation. Most people, once they get into their 50s and especially 60s, they just have to be very conservative to protect that principal, but yet they want to be able to grow interest and protect their yield. So what I will do is I will structure a note with that private lender, and I will provide a 10% annual interest rate and I will pay principal and interest over a five-year period. We’ll sign the note that we’ll turn into a mortgage to secure the note against the property; we will file that with the local county so we secure that investment with that investor. It’s a very safe way for the investor.

The other thing that I do personally, once I have my properties completely renovated, they have an after-repair value of anywhere from $60,000 to $70,000, but I’m only pulling $35,000 of equity out of it in that loan, to protect them and to leave equity into the deal.

Joe Fairless: Did I hear you right, you’re doing a five-year period with those private lenders?

Jack Petrick: Yes, that is correct.

Joe Fairless: What happens after year five?

Jack Petrick: After year five the loan and the total interest – everything has been paid back during that time, so we’ll just basically use a mortgage calculator and we’ll determine what the payment will be to pay during a 60-month period, with principal and interest.

Joe Fairless: So they get 10% interest rate over five years, and after five years you have it all paid off. How do those numbers look on a property? I guess the more direct question is does that property stand on its own two feet to pay all of that, or do you have some of your 32 properties pay off that one property?

Jack Petrick: Only about half of my properties are leveraged right now, so I leave plenty of cashflow just for evictions and for just when life doesn’t go as planned. But it’s almost like a 1-2 ratio. For example, I’ve got a house right now that’s completely paid off free and clear, and it’s cash-flowing. My gross rent right now is like $1,050 a month. So I will secure a private loan against that property, and then by the time you factor in my income versus expenses, I’m pretty much at awash at that property, but I now have secured $35,000 of capital, which allow me to purchase and renovate my second house.

In this example, I’m now making $1,000/month again. I’ll make $1,000/month as gross income on two properties, but at the end of five years, that number will double then to $2,000/month plus rent increases. So it’s like a 2-1 ratio, that’s how it works out.

Joe Fairless: How did you come up with the idea of doing the five-year period, 10% interest and then paying it off over that period of time with the help of some other properties?

Jack Petrick: This is kind of creative financing, because I have a lot of options to finance flip and funds. When you structure a flip, generally you’re paying interest-only payments up until the 12th month, and then you’re returning all the capital back. And because these are buy and hold properties, I just had to get creative on a scenario because there’s not many options in this field for expanding on single family rental properties; there’s not a lot of funding options, so it’s just being creative, I guess.

Joe Fairless: Yeah, that’s really interesting. Based on your experience, what is your best real estate investing advice ever?

Jack Petrick: Wow, best advice ever… I think I mentioned this earlier, but free advice is expensive advice, and there’s a lot of people that have opinions on what we do. I would just really vet out the experience of those people that are providing that advice, because there’s just a lot of naysayers that don’t have necessarily the experience to be able to provide an input or opinion [unintelligible [00:20:15].27] “This is what you wanna do.” This isn’t easy; if it were, everybody would do it. But once you figure out the systems, the processes, the procedures, this is the best career that you could possibly do, in my experience.

We’ve done quite a few things, other businesses, and it’s really provided the unlimited amount of cashflow, depending on how large you wanna grow your business, but also the quality and the time freedom that you generally cannot get as a physician, attorney, sales rep or any other high six, seven-figure producing positions.

Joe Fairless: I like the line “Free advice is often the most expensive advice”, and it’s certainly not one that I will repeat too often, because my podcast is called The Best Real Estate Investing Advice Ever… But I do agree with that, because the advice from someone can be very good advice for you, or it can be very bad advice for you, depending on what stage of the process you’re in. So you can get the same advice, but it can be either good or bad depending on where you’re at in your business cycle. Additionally, some of the worst advice I’ve gotten is from family members, people who should know me the best (but maybe not).

It’s important, as you said, to get advice from people who have been there and done what you’re currently doing, and are currently doing that. When we get advice from people who are close to us and who love us dearly, on stuff that they’re not doing or haven’t done, then it certainly falls into the category of “free advice is expensive advice”, because it might be the worst advice you’ve gotten. I’ve experienced that, and fortunately I didn’t take some of the advice that I got from those who were closest to me, and that’s how I got to where I’m at. But I took advice from them on other things, and it helped out. It is important. So we’ve gotta pay attention to who’s giving that advice and if they’re doing what we’re doing.

I wanna touch really quickly on these properties that are $30,000-$40,000 all in. You don’t manage them, you have a property manager manage them, but the main stigma about properties at this low of a price point is the quality of tenants, and you get a lot of turnover, you get a lot of maintenance issues that come up… What have you experienced?

Jack Petrick: Good question. In the market that I’m in we have a couple different types of properties. We have properties that are built in 1910/20/30, and we have properties that are built in the ’40s and ’50s. I own both of them, but today I will only buy properties that are built in the ’40s and ’50s, because there’s just 30-40 years of less neglect in those properties.

The properties that are built newer, we’re dealing with drywall instead of plaster and lath. The [unintelligible [00:23:20].20] are in better shape, the foundation walls have less stress to them… The properties are just overall smaller to rehab and renovate. That house that I’m referring to might be 1,200 square feet, versus the properties built in 1920 that might be 2,000 square feet. They’re both three-bedroom houses, but one’s considerably  more work to renovate and repair versus the other. So that’s the first thing – I look for properties that are newer.

Joe Fairless: …relatively speaking. [laughter]

Jack Petrick: Relatively speaking [unintelligible [00:23:51].09] Secondly, I have a background as a general contractor and I only purchase distressed properties, because that allows us to go in, gut the mechanicals, gut the roof, windows, bathrooms, kitchen, and put everything in new. That way I’m not having to be nickled and dimed with deferred maintenance as time goes on. We also will only put really the highest quality product in the houses, and that throws people off; like, it’s just a rental property.

For example, you could put a Moen faucet in, which has a lifetime guarantee, or you could get something from Lowes and Home Depot out of China, it’s made out of plastic. One’s gonna last for decades, one’s gonna last six months. When you put the extra money into the property, you’re not gonna get nickeled and dimed over the years.

Then as far as your question as far as the location, every area has areas which are just war zones, and I will not go into a war zone. There’s no future, there’s no hope, the turnover is horrendous… It’s just not a good situation. I like to get into suburbs that are beat up. The outer ring suburbs of Cleveland is where I’m at right now, and I’m able to be in a community that’s like a C- community possibly, but by the time we go on with your full renovation on these properties, they go from the worst houses on the street to the most desirable houses on the street.

So one option for us for years was to rent out, to subsidize tenants, and it provides extremely stable cashflow. Your sacrifice is your cashflow is gonna be a little bit lower than necessarily cash-paying tenants. But as the market improves, which it does in areas as the market income and households improve, then it will allow you to start to be able to tap into the higher-paying cash tenants as the area improves, which is the transition I’m in right now.

I think you have to know your market cycle where you’re at, and you really have to know the market, the economies in the area that you’re in, to determine “Are you in a completely beaten down war zone, or an area that’s just going through some hard times?”

Joe Fairless: Are you ready for the Best Ever Lightning Round?

Jack Petrick: Please do.

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

Break: [[00:26:06].01] to [[00:26:49].22]

Joe Fairless: Best ever book you’ve read?

Jack Petrick: There’s so many of them… I’m gonna start off where my first personal development book was Rich Dad, Poor Dad, which really opened my eyes to the difference of a liability versus an asset, and that really was what kind of stirred things off for me. I’ve read better since then, but that was the starting point for me.

Joe Fairless: The best ever deal you’ve done?

Jack Petrick: A lot of them. Really, honestly, the last ten houses I’ve picked up for like 4k and 5k each, I would say they were pretty much the best deals I’ve ever got.

Joe Fairless: What is the best ever way you like to give back?

Jack Petrick: Teaching knowledge. I have so many people that I’ve mentored and I’ve provided my playbook, my handbook on how to do this, where it took me 15 years of mistakes to get to those points. My brother right now has done a second house, a total rehab in two months, and right on budget… I just love being able to mentor and provide those services to others, and be able to help people have  a better lifestyle.

Joe Fairless: What’s a notable mistake you can think of on a deal that you did?

Jack Petrick: Bending over to pick up nickels when dollars go over your head… Meaning trying to save money, but in the end you’re really hemorrhaging out more money than you’re saving by trying to do work yourself, by trying to bring in your own crew to do all the work at $10/hour labor versus getting professional tradesmen in. That’s a mistake. Hire the right people to do the job and get it done right, because in the long run it’s gonna cost you less money and you’ll have a better quality of like and experience. Pay for it when you need to.

Joe Fairless: Where can the Best Ever listeners go to get in touch with you?

Jack Petrick: I will give my cell phone, and that’s actually how I came across you, because in the podcast you had with Michael Blank…

Joe Fairless: I’ll never do that again, by the way… [laughs] I gave out my cell phone three years ago, and he still plays that podcast episode… I’m all about people reaching out, but I can’t do that anymore. [laughs]

Jack Petrick: Well, at the time of that podcast you were I think at like 167 units…

Joe Fairless: Yeah… Different.

Jack Petrick: Yeah, when I came across you again you were at like 1,500 units… I’m like “I don’t think he’s gonna take my phone call.” [laughter] My e-mail address is PetrickBuilders@yahoo.com.

Joe Fairless: What’s your cell phone? I didn’t wanna scare you off…

Jack Petrick: I’ll go for it… 440 552 84 83. And hopefully I can have your success, Joe, in three or four years and have the same problems.

Joe Fairless: There you go! This is how you get 100 million dollars right here in real estate – you give out your cell phone on podcasts.

Jack Petrick: Absolutely!

Joe Fairless: It’s a proven technique. Well, Jack, I’m so grateful that we had a conversation. Holy cow… It really interest me about how you are structuring it with your private lenders on buy and holds, where you do the five-year period, 10% interest rate, where you pay the principal and interest and then use other properties and that property to just pay it down; it’s just a snowball effect… As well as your $30,000-$40,000 all-in price and your very thoughtful approach on why you’re going about it this way, versus other ways.

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

Jack Petrick: Thank you for your time.

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https://www.youtube.com/channel/UCwTzctSEMu4L0tKN2b_esfg

JF525: The 5 Questions You MUST Ask for the Best Tenants

He does it all! He invests, he’s a licensed real estate agent, and an insurance agent on top! He jumped into real estate by first investing in the lower class areas of Cleveland where someone stole stuff from his car! He now is more seasoned and is about to purchase a 4 Plex while waning his own commission through the transaction and insurance, this is an entertaining show you cannot miss!

Best Ever Tweet:

Kevin Hoag real estate background:

  • Real estate agent with Holton Wise Property Group based in Cleveland, Ohio
  • Has leased over 75 rental units since becoming and agent in 2015 and is also a licensed insurance agent
  • Real estate investor who has purchased and sold several turnkey rentals
  • Say hi to him at: holtonwisepropertygroup.com
  • His Best Ever book: The Property and Casualty Insurance Book

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Listen to all episodes and get a FREE crash course on real estate investing at:http://www.joefairless.com

Are you committed to transforming your life through Real Estate this year? If so, then go to http://www.CoachWithTrevor.Com and claim your FREE Coaching Session.  Trevor is my personal real estate coach and I’ve been working with him for years. Spots are limited, so be sure to do it now before all the spots are gone.

Have you tried REFM’s Valuate software yet? It makes investment analyses a breeze, and makes you look like you spent all week on them. Go to app.getrefm.com to sign up today.

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JF318: The Key Things Ya GOTTA Do to Keep a Rental In Good Shape

Today’s Best Ever guest knows Cleveland like the back of his hand…basketball and real estate! He shares with us his Best Ever practices in order to make sure a rental is kept in good shape, how to determine a good market to invest in and why it is SO important to do your due diligence.

Best Ever Tweet:

 James Wise’s real estate background:

–          Co-founder of The Holton Wise Property Group based in Cleveland, Ohio

–          Real estate broker and his company manages a portfolio of about 250 rental units where they own about 100 of those units

–          Say hi to him at http://www.Holtonwisepropertygroup.com

–          Huge Cleveland Cavaliers fan

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Patch of Land – Want to learn more about crowdfunding? Let the leading expert in the crowdfunding space, Patch of Land, give you all the info you need to get started. Grab your FREE copy of Top Ten Answers to the Top Ten Crowdfunding Questions athttp://www.PatchOfLand.com/bestever

Valuate – Tired of spending HOURS running the numbers on deals that don’t work? Former Best Ever guest, Bruce Kirsch has the solution! Go to http://www.app.getrefm.com to get your FREE version of his software to evaluate deals.

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JF241: I’m All In…on Flipping Houses

Fear may be the ONE thing holding you back from investing success. Our Best Ever guest today, took a leap off the corporate ladder into the world of investing, and hasn’t looked back since. We discuss the importance of private lending, how to find your next flip and how beneficial having a good contractor is. Don’t be afraid, because we step by step guide, so that YOU can leave the corporate world and dive into real estate.

Best Ever Tweet:

Jared Lichtin’s real estate background:

–          He has flipped over 4 properties in 2 years while having a full-time job as a lawyer

–          Host of the popular podcast, Flip

–          Based in Cleveland, Ohio but is moving to Houston, Texas

–          Playing in first World Series of Poker Tournament in about a month

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Patch of LandWant to learn more about crowdfunding? Let the leading expert in the crowdfunding space, Patch of Land, give you all the info you need to get started. Grab your FREE copy of Top Ten Answers to the Top Ten Crowdfunding Questions athttp://www.PatchOfLand.com/bestever

Mascia Development – Do you need an equity partner or know about a great deal and want to get paid for finding it? Mascia Development can help you make that retail or medical office deal happen. Email them at jv@masciadev.com

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JF156: Discover the Hidden Rules of Raising Private Money

Learn how the mantra “funding = freedom” has catapulted today’s Best Ever guest’s career in real estate. He shares with you a ton of tips on how to raise private money and busts up some myths about private money.

Let’s go!

Best Ever Tweet:

Josh Cantwell’s real estate background:

–        Chief Executive Officer at Strategic Real Estate Coach based in Cleveland, Ohio

–        Bought and sold almost 700 properties in 25 states

–        Strategies include rehab, rental, foreclosure, pre-foreclosure and short sale

–        Primarily focused on raising capital and doing larger real estate deals

–        Say hi to Josh at http://joshcantwellcoaching.com/

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Sponsored by Patch of Land – Could you do more deals if you had more money? Let the crowdfunding platform, Patch of Land, find investors for you and fund your next deal…and your next deal…and your next deal…and…well, just go find out more at http://www.PatchOfLand.com

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