JF1847: How To Leave Your Job In 2 Years Through Real Estate Investing with Anna & Ken Hummel

Listen to the Episode Below (00:19:52)
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Anna and Ken are a husband and wife team, who are both military veterans and now full time real estate investors. When they finished with the military, they held W2 jobs while also getting into real estate investing. After just two years of investing, they were ready to leave their jobs and be full time investors. We will hear how they were able to do that in a short amount of time. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“It’s not glamorous and it’s not easy” – Anna & Ken Hummel

 

Anna & Ken Hummel Real Estate Backgrounds:

  • Veterans who are just now getting some skin in the real estate game.
  • They have 6 rental units, working on first flip, have left W2 jobs behind in just two years of real estate investing
  • Based in Colorado
  • Say hi to them at https://www.facebook.com/AKhomesLLC/
  • Best Ever Book: The 4 Hour Work Week

 


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

Theo Hicks: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I’m Theo Hicks, and today I’m speaking with two guests, Anna and Ken Hummel, who are joining us from Colorado. How are you guys doing today?

Anna Hummel: Good, how are you doing?

Ken Hummel: Awesome, it’s a  gorgeous day in Colorado.

Theo Hicks: Yeah, I’m down here in Tampa; it’s a gorgeous day as well. A little hot and humid, but I can’t complain. Before we get started, a little bit about Anna and Ken – they are veterans who are just now getting some skin in the real estate game. They currently have six rental units, and they’re working on their first flip. They have left their W-2 behind in just two years of real estate investing. As I mentioned, they are based in Colorado, and you can say hi to them at A&K Homes LLC on Facebook.

Can you tell us a little bit more about your background and what you’re focused on now?

Ken Hummel: Yeah, so a little bit background on us – like you said, we’re both veterans. When I was in the Army, I was an engineer, so I learned a lot of my construction knowledge and trade that way. Then when I got out of the army, I took a job as a construction superintendent and learned even more so about building houses, and how houses work, and everything. I also kind of built a network, got to know a lot of people, got to learn a lot of good skills and trades, so that’s helped us out moving forward… And primarily, it’s helped us out together, being how I’m more of the maintenance and upkeep and the physical work, as Anna does most of the business aspect of it, marketing and advertising, which she can tell you more about.

Anna Hummel: I guess for me, what I do the most is all the business aspect of it, and I really just make sure that I’m marketing my properties. I’m looking for good deals, and seeing how those work out for us.

Ken Hummel: In the Army you were…

Anna Hummel: Well, I did four years active duty, and that’s how me and Ken met. Then I did supply and marketing for the army, so that really helped me. I got out of the Army and got my bachelor’s in business.

Theo Hicks: A couple of questions, based on what you said… I definitely wanna dive into the fact that you guys were able to leave your W-2 jobs, because I know a lot of people become interested in real estate investing for that fact alone. But first, since you guys mentioned your military background, I was wondering if you could tell us about any skillsets that you learned through your time in the military that have helped you invest in real estate better?

Ken Hummel: I think that’s more or less a traditional skillset as far as problem-solving and critical thinking. Always working through issues and not accepting no as the final answer; always figuring out “Well, I want this. Even though you say no, how can I change my question, how can I change my presentation and my outlook on things and work towards what you want, no matter what the difficulty is and what you have to overcome?”

Theo Hicks: What about you, Anna?

Anna Hummel: I think the same thing – being able to learn how to overcome things. There’s a lot of times where we get put in really crappy situations, and we have to learn how to get through them. I think that helps a lot with real estate, because there’s a lot of things that just come up that we don’t know how to overcome… And we figure them out.

Ken Hummel: Yeah, and like Anna said, it’s got a lot to do with confidence. Even though we’re just getting into it and we haven’t exactly done every little thing, that’s fine. Give it a shot. See if it works out. If it does, great. Take notes. If it doesn’t, still take notes on what you could do better and how you can improve. It’s a constant improvement through reaching out and stretching yourself, expanding yourself to be something more than you currently are.

Theo Hicks: Let’s talk about one of these crappy situations that you faced in real estate. Can you maybe outline some challenges that you faced, either starting out, or more recently, and how you overcame that challenge?

Anna Hummel: In December we purchased three different homes, all at once, and then quit our jobs the day of the closing. Three days later, one of those houses flooded, and that was one of the scariest things that we had seen… Because we didn’t know if we made the right choice of giving up our jobs and buying three homes at once, and how much it was gonna cost us to fix this flood. The house was flooding for three days, so it was pretty big damages that were done to that.

Luckily, our insurance covered that one, and that was how we were forced into our first flip. It’s still a hassle, we still had to put a lot of our own money into it, so it wasn’t really the best outcome, but we’re getting through it. We didn’t give up on real estate because we had one bad experience.

Theo Hicks: Yeah, those types of challenges are the worst, when it’s not really your fault that the property flooded; it’s just something that happens… And it sounds like you guys figured it out. Best Ever listeners know about my flooding story from my first property, so I can definitely relate with you guys on that one.

Anna Hummel: [unintelligible [00:07:08].12]

Theo Hicks: So let’s transition into talking about — as you mentioned, you purchased those three homes at once, and then quit your jobs that day of closing. As I mentioned before, I know a lot of people wanna get into real estate for the potential ability to leave their W-2 jobs… So can you walk us through that process? …not only the financials, how much money did you need to bring in in order to quit your jobs, but more how you came at the decision from a mind’s eye perspective, if that makes sense.

Ken Hummel: Yeah, sure. We’re pretty fortunate that through being veterans we utilized the VA loan, which allows us to purchase properties with zero down. It’s not as glamorous as everybody would think it is, but I’ll start with the first property. We used my VA loan… So it was a four-bedroom. I rented out two of the rooms to friends of mine, and then we stood in the master, and then while everybody was living there, I also remodeled it. So people were constantly walking over construction work. It’s not glamorous, it’s not easy. You’re sharing the living space with a bunch of other people, and on top of that doing construction in the same spot you’re living…

That continued to a second property we purchased, which was using Anna’s VA loan, which was a fourplex. We were able to rent out that first house that I just mentioned to you, then move into the fourplex and live in one unit, and rent out the other three. While we lived in that one unit, we downsized to a small two-bed/one-bath, 800 sq. ft, and that’s another one where we constantly were doing construction.

At one point, I was working on the bathroom and tearing apart the bathroom, and that adventure took about  a week, so we went a week without the only bathroom in the place… As well as sacrifices like — I had a fancy truck I used to like to drive around, and decided that it was more important to take the equity out of that vehicle and I bought a 17-year-old vehicle instead, that just gets me from point A to point B and allows me to do what I need to do. Anna also did the same thing, and she traded down her car…

We took advantage of other things, like my Roth IRA. I also was able to cash out the initial investment of that without any penalty… And kind of went all in with what we had been saving up, what was supposed to be our retirement fund, and move it into our now-retirement fund, which is real estate.

Theo Hicks: So did you have a number in mind? “We need to bring in X amount of dollars in rental income before we quit”, or was it more of a “Let’s just go all-in and do this full-time, and figure it out as we go along”?

Ken Hummel: There is planning involved, at least for us. We did our cost analysis of what we do for a month in as far as what the mortgage is, cell phone bills, gas, insurance, food, what the minimum is for us to survive. Once we figured out that amount, figuring out how we can get to that, it helped that when I was in the Army, I knew how much I could live off of there, and how much I was able to put away for savings and move forward, so we were able to go off with that number and more or less move forward.

Theo Hicks: So when you bought those three properties at once, that’s when you knew you’d hit that minimum monthly expense, so you guys knew 30 days out you’ll be able to quit your jobs?

Anna Hummel: Yeah, pretty much. And we did account for our house that flooded; even before that, during the process, we kind of were like “I don’t know if this is gonna be a great deal, but it’s in a great location”, because it was right by the army base here. So we kind of went with that, and added the mortgage into our monthly expenses of what it would cost us.

It’s kind of nice that we did that and then we had the flood, because we kind of already were expecting to pay that mortgage out of pocket.

Theo Hicks: Alright, thanks for sharing that story. I think a lot of people will get really good advice and information out of that if they are looking to quit their jobs, from a high-level perspective. So before we get into the money question, I did wanna ask “What are some challenges and what are some benefits of working with a significant other in real estate?”

Anna Hummel: We actually work really well together only because Ken leaves me to do all the management stuff. I’m really good at the property management, and Ken does all the construction stuff that I don’t know how to do… So we kind of do our own thing, but still work together.

Ken Hummel: I think it’s important that you divide your responsibilities, and if the current task at hand is the responsibility of the other, then you respectfully allow that other to make all the decisions for that situation.

Obviously, still being there to help and assist, just dividing responsibilities and understanding the roles is what helped us get through everything so far.

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

Ken Hummel: Well, I think paralysis by analysis is a common phrase that I heard numerous times, and I will support the idea behind it. We’ve spent a lot of time just over-analyzing properties and thinking “Well, if I do this, then that might happen. If that happens, then this will happen.” You’re constantly over-analyzing, running numbers again and again. “Well, this property isn’t quite right. This one isn’t 100% what I want.” You spend all this time over-analyzing things and you never move forward. There are certain situations where getting 80% of what you’re looking for is still better than where you’re currently sitting. And to move forward on something is better than doing nothing.

Theo Hicks: What about you, Anna?

Anna Hummel: We talked about this question beforehand, and we kind of came up with that answer together.

Theo Hicks: Okay, perfect. That is good advice, and it’s something that you never really get over either, so I completely agree with your advice, especially when you talked about — not necessarily waiting for that perfect deal, because it’s probably never gonna happen… And finding something that’s good enough and moving forward with that. Kind of just getting your feet wet, at the very least.

Anna Hummel: Yeah, and we talked about that question just because Ken likes to think about things a little bit too much, and I’m more of a “Let’s just do it. It’s worth it.” We had that situation with the house we’re living in now, where it wasn’t our 100% home, but it had most of the things that we wanted… But it got us out of our jobs, and now we’re able to do more with investing, and that helped us up a lot.

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

Ken Hummel: Let’s do it!

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

Break: [00:14:00].28] to [00:14:40].22]

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

Ken Hummel: I’ve recently read the “4-Hour Workweek” by…

Theo Hicks: Tim Ferriss?

Ken Hummel: Tim Ferriss, yeah. I really appreciated that. It helps put in perspective how you can more or less leverage your time properly to give you more freedom.

Theo Hicks: Alright, besides your first deal and your last deal, what is your best ever deal that you’ve done?

Anna Hummel: Our best ever deal, I would say, is our fourplex that we purchased. One, because we were able to use our VA loan. We got a fourplex with zero down. And that one probably brings in the most income for us.

Theo Hicks: I’m kind of gonna go off-script here before I continue the Best Ever Lightning Round, but I just thought of this – how do you analyze  a deal when you’re not putting any money down? Because technically, any cashflow over a dollar is unlimited ROI.

Ken Hummel: That’s a good question. For us, what our standard is and what we’re looking for – because there’s lots of deals out there, and getting into (let’s say) a duplex that breaks even every month, with the consideration of all aspects and things, those are out there. There’s also other multifamily properties that break-even or even give you $200 per door a month. Our story, and the reason why we chose that fourplex, was we were able to live for free. The three units provided enough to pay the mortgage for us to live there. And while we lived there, we  renovated, and then as other people moved out, we renovated those ones and moved those ones up for higher amounts.

For what the mortgage is, I think we’re pulling in close to double that for rent. So we’re making 200% off of that. I mean, zero down though, so it is infinity, but for what the cost of the monthly mortgage is versus what your income is.

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

Anna Hummel: We recently got involved with the Military Investor Network, so we like to help out with those. We just had a meetup last Saturday, and got involved with helping other military, just because that’s where we could help, as we understand how the VA loan works and what we could get out of the VA loan. So we’ve been helping out with that, trying to get other military personnel involved in investing.

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

Anna Hummel: My email address or Facebook would probably be the best way.

Theo Hicks: Okay, and for Facebook, that’s A&K Homes LLC. Alright, well I appreciate you guys stopping by today and telling us about your background and what you guys are focused on now. Just to summarize what you guys discussed – we first talked about some of the skillsets you learned in the military, that have helped you invest in real estate. You mentioned the problem-solving, the critical thinking skills, not accepting no as an answer, working towards something that you want and keeping that top of mind, and of course, learning how to overcome things.

One of those examples was when you talked about that crappy situation you guys faced, where you bought three homes at once and you just quit your jobs, and one of those homes was flooding for three straight days. Fortunately, your insurance covered the damage, and it forced you, in a sense, into your first fix and flip. You did have to put some of your own capital into the deal, but the main lesson there is when you are met with some challenge, just figure it out and don’t give up on real estate just because of one roadblock.

We also discussed your approach to quitting your jobs, and you talked about how you were able to leverage that VA loan to purchase properties with 0% down. You gave the example of your first few deals. You also talked about how you had to sacrifice certain things that you probably didn’t want to sacrifice – the example you gave was having to trade down your vehicles, and as well as essentially liquidating you previous retirement fund, which was that Roth IRA…

And then from a strategic standpoint, you talked about how you did that cost analysis, and essentially calculated what’s the minimum amount of money you will need to bring in each month to survive, and then once you had that number calculated, you created a plan of action to get to that number. Then we also talked about how you guys were able to work together as significant others, and your advice was to split the duties, and whoever is responsible for task A, they kind of have the final say on what happens, obviously with the help of the other.

Then lastly, your best ever advice was about the paralysis by analysis, and something that Ken said that I really liked was getting 80% of what you were looking for is better than where you’re currently sitting. I couldn’t agree more.

Again, I really appreciate you guys coming on the show today to talk with us. Thank to everyone who is listening. Have a best ever day, and we’ll talk to you soon.

Ken Hummel: Great, thank you.

Anna Hummel: Thank you.

JF1826: Saving Tax Money On Short Term Rentals & Other Properties with Robert Stephens

Listen to the Episode Below (00:26:01)
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Taxes are a major expense for real estate investors, and Robert is here to explain some of the taxes that we may not know about, and how to save money on those taxes. In the short term rental area, there are lodging taxes. Much of the conversation focuses on that today. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“A lot of people think since they’re not running a hotel that the lodging tax doesn’t apply to them” – Robert Stephens

 

Robert Stephens Real Estate Background:

  • Co-founder of Avalara MyLodgeTax (formerly HotSpot Tax), formed in 2002 out of his own necessity to understand and manage compliance with his rental property.
  • Helps homeowners, hotel operators, and other businesses with short term lodging tax regulations
  • Based in Englewood, CO
  • Say hi to him at https://www.avalara.com
  • Best Ever Book: The Big Short

 


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.

With us today, Rob Stephens. How are you doing, Rob?

Rob Stephens: Great, thanks for having me, Joe.

Joe Fairless: Well, I’m glad to hear it, and looking forward to our conversation. A little bit about Rob – he’s the co-founder of Avalara MyLodgeTax, which was formed in 2002 out of his own necessity to understand and manage compliance with his rental property. He helps homeowners, hotel operators and other businesses with short-term lodging tax regulations. Based in Englewood, Colorado. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Rob Stephens: Sure. You touched on it, but… 20 years ago I purchased a second home in Vail, I wanted to generate rental income on it, because I needed to do that to be able to afford the property, which is pretty common. I put it up on some of these short-term rental sites, which were very new at the time. It worked great, but through that experience I realized there’s a bunch of other things I need to do to be successful at this, one of them being [unintelligible [00:03:15].23] remitting lodging taxes, which I didn’t know really anything about at the time. So it was really through that experience we built what we think is a very simple solution for people that are engaged in short-term rentals, and that’s really our focus – leverage technology to provide cloud-based or internet-based very simple solutions for people to be charging the right taxes, collecting them from their guests, paying into the jurisdictions at the right time. We handle all of those tax tasks for people, so that’s really our purpose – helping people with that kind of back-office function of tax, that are involved in short-term rentals.

Joe Fairless: Okay, let’s talk about this. I’d love to learn more. What are lodging taxes, and aren’t they already accounted for on the site that you have your house on?

Rob Stephens: Great question. Two-part question. The first is what are lodging taxes… So really the same taxes that hotels pay. By and large, the hotel is going to be paying the same sales and lodging taxes that a short-term rental apartment, single-family home, condo, whatever the property type is… With a few exceptions. Generally, it’s the same types of taxes. It’s called different things – sometimes it’s sales tax, sometimes it’s hotel tax, room tax, lodging tax, accommodations tax. It’s a tax on short-term renting, and I think some people miss that at the beginning; they think “I’m not a hotel, this doesn’t apply to me.” If you actually read the law, it’s pretty broad. Any type of property where you’re providing overnight accommodation is gonna trip these taxes.

Secondly, yeah, there’s a lot of change going on in the short-term rental industry. One of those things is the big platforms, one of them being Airbnb, starting a couple of years ago, have decided to collect and remit some of the taxes on their own. So in certain markets they are collecting and remitting some of the taxes. Usually, they’re doing state taxes… And I don’t know how in the weeds we wanna get, Joe, but a lot of these taxes, for most locations in the U.S, there’s a state tax you have to pay, at the Department of Revenue, but then there’s very often a city or county tax you have to pay, too.

What’s happening now is Airbnb is paying most of the state taxes, but they’re not paying the city and county taxes. That then leaves the host the responsibility to collect and remit some of these taxes. And they’re really the only platform right now broadly paying taxes. So if people are on VRBO, or Booking.com, or TripAdvisor, they’re gonna need to collect and remit the taxes, because that platform isn’t handling it.

Joe Fairless: How much are we talking? Just specific, maybe use an example for a certain market.

Rob Stephens: Sure. I think these taxes are a lot. The average I would tell you is 10%-12%, and that’s of gross rent. So if you’re charging a guest $200 a night, or $2,000 for the week, it’s an extra 10%-12% on top of that. When you get in urban markets, the taxes typically are 15% or higher. Chicago actually has over a 23% tax on short-term rentals now… So if you get into big, urban cities… Kind of like rental cars, hotels – it’s easy for those big municipalities; it’s a good revenue source for those cities to tax those types of activities, because it’s not residents, it’s travelers and guests tom the community.

So these taxes tend to be very high, and if you’re missing it, you’re not doing it, it can add up to be a pretty significant amount over time if you’re not collecting it from your guests.

Joe Fairless: I would imagine the majority of people are not accounting for this, or even paying it. What would your guess be?

Rob Stephens: That’s a great question. We have that debate here internally, and I generally think you’re correct. Look, it’s gotten a lot better; I’d say in the last couple of years there’s a lot more awareness and focus on this issue… And look, short-term rentals have really become a mainstream part of the travel segment. I suspect a lot of your listeners are engaged in this, or they have long-term properties… They may be actually looking at getting into that market. And I do think, by and large, there’s some people doing it, but I think there’s a pretty high non-compliance rate. Now, whether that’s 80% non-compliance, or 50% – I don’t think anybody knows for certain, but we’re hoping to help with that. There’s a lot more room to go in terms of being compliant, and I believe it’s just a matter of time. If we’re gonna be a real, legitimate industry, protecting our property rights in these cities and these communities, one of the things we’re all gonna have to do is make sure we’re paying these taxes.

Joe Fairless: What are the consequences of not being compliant as  a rental property owner?

Rob Stephens: Your obligation is to collect the tax… And typically, the way to think about this is the guest, the traveler – they pay the tax. If it’s a 10% tax, you charge that guest an extra 10%, they pay it. Your obligation as an operator is to collect it and then remit it to the different agencies.

I always tell our customers, “Look, this isn’t really an economic cost to you. This is kind of a passthrough; it’s your cost for doing business, you have to collect these taxes from your guests.” But if you’re not doing it, typically what they’ll do is audit, or inquire and go back typically at least 2-3 years – typically not more than 4-5 years, unless they believe there’s some sort of fraud or something like that involved – and they’ll look to pull your income tax returns or whatever records they can to validate how many rentals you had… And then if it’s a 12% tax and you’re doing $30,000/year in rent – which is pretty typical for a short-term rental – you’re looking at $3,000-$4,000/year in tax. So the liability can add up quickly, and then they’ll slap on penalties and interest on top of that, which can unfortunately be pretty significant. Those penalties can be easily 25%-50%.

We’ve seen it happen unfortunately to customers, or new customers coming in with the problem. It could be thousands of dollars of back-taxes, plus penalties and interest.

Joe Fairless: What’s the worst scenario that someone’s come to you with?

Rob Stephens: The worst scenario… These governmental agencies have a lot of power. In the tax world, in your market, or multifamily or long-term rental markets, every property has a property tax; and if you don’t pay your property tax bill, ultimately the tax agency can put a tax lien on your property. Same thing in the hotel tax, lodging tax world – if you’re not paying your taxes, they can make an assessment against your property for back-tax due, and if you don’t pay it, they’ll put a  tax lien on the property, and then anytime the property is sold, that’s when they can step in there and recover their funds. Obviously, the worst case is they’re seizing the property.

I don’t know that we’ve ever seen a property seized, but we’ve certainly seen people with tax liens, and had to sell their property just to get out from under that liability.

Joe Fairless: Tell us more about what you all have come up with as a solution.

Rob Stephens: Historically, all these taxes – it’s a manual process. If somebody’s short-term renting, they have to go to the state site, figure out the state requirements, go to their city site, figure out what the requirements are for the city, maybe even go to the county… So there’s multiple agencies involved, multiple forms, you have to register with these different agencies, you have to pay tax, usually monthly and quarterly to these different agencies… So there’s a fair amount of moving parts and complexity.

What we were talking about earlier, Joe – the rank and file person involved in this space just has never dealt with these types of taxes before, so they’re not aware of it. So what we’ve really tried to do is really just with technology solve all of that. Sometimes I’ll use an analogy – think of it like TurboTax, but for hotel taxes. We have a software platform, the customer can sign up, they put in the property address that they’re renting, we immediately tell them what the correct, accurate tax rate is to charge from the guest, then they [unintelligible [00:10:51].12] Airbnb account, or VRBO account, they collect the tax from the guest, we handle all the moving parts of registering them, filling out the paperwork, get all that in place, whatever licenses are needed… And at that point they’re really all set up; it becomes a monthly cadence of just they report whatever the rent was for the month, so there’s automated processes around this; they report their monthly rent, and then based on that we calculate the taxes, file and remit them on their behalf.

So from our customer perspective, really all they have to do is come to the website, sign up, put in their profile, their address, some of their profile information, and we take it from there – rates, we register them and file and pay the tax… And we just make sure everything’s done on time, correctly.

The way we describe it is it’s really a way for a host or a homeowner or an investor just to put al this on autopilot and make sure these taxes are done… And at a price point of $20/month/property. We think it’s good value, and leveraging technology to solve what’s kind of a headache for most people.

Joe Fairless: Oh, absolutely… Big-time headache for most people. And if it’s not a headache for them, then they’re probably not doing it, so then it will be a major migraine in the future.

Rob Stephens: It’s funny you say that, because some of our best customers – the most eager to sign up – are often people that have been doing this on their own and understand the monthly filings that have to be done, and some of the paperwork, or have tried to do it on their own are were confused, or frustrated… Or simply don’t have time. At a $20/month price point they’re happy to say “You know what – put this on autopilot, take care of this for me.”

Joe Fairless: Yes. With certain markets, one of them being close-ish to you – Denver, Colorado – moving away from short-term rentals and then being more medium-term (over a month), because regulations are against the short-term, what are the tax implications and reporting implications for medium-term rentals versus short-term ?

Rob Stephens: Sometimes it’s really good on the tax side, for Colorado… So we’ve talked about taxes on short-term rentals; in most states, in most locations, that’s 30 days. Once you flip over and you use the term “medium-term”, so once you’re doing monthly rentals or longer, you’re gonna be out from under, having to collect and file all these taxes. That’s the good news, that bad burden is gone. Now, in some states like New York, New Jersey, Massachusetts, it’s 90 days. Big travel states, like Florida and Hawaii, it’s 180 days. So some states do have longer definitions of short-term. But to use your example, Denver would be a city where if you’re doing monthly rentals, then you wouldn’t have to deal with the hotel tax portion of it. So that’s good.

Now, I always tell people – unfortunately, short-term rentals are in high demand, and I’m sure you have a lot of your listeners that have realized that in certain markets they can generate very high rents on kind of a nightly, weekly basis, relative to a long-term rental contract. So yeah, it’s great – 30 days you avoid the complications and expenses, administering these taxes, but I think most people in this market realize that short-term is certainly the most lucrative… But again, there’s increasing regulation and limitations in certain cities on people’s ability to do that.

Joe Fairless: What else should we talk about that we haven’t talked about already, as it relates to your business and real estate investors in short-term rental tax?

Rob Stephens: I would say — I’m a short-term rental property owner myself, which is how I got into this… I suspect your listening audience probably has mainly long-term investors, but I’m sure a lot of those people are getting in the short-term rental space… What I would say is a couple things. I think the big platforms – Airbnb, VRBO – they’ve invested a lot of money over the last decade; it’s getting easier and easier to do. So if people are thinking about this, I would encourage them to take the leap.

The other part of it is you hear lots of noise about tax and regulation… There is some of that. Again, there’s services like ours that can cover the tax fees; I think that regulation sometimes is overstated. I mean, there are cities where there’s real challenges, but in most places across the U.S. you can still short-term rent without too many problems.

And the other thing is sometimes people have — look, we’re in a community. We have tens of thousands of short-term rental property owners; I go to conferences, there’s often angst about wear and tear, or partiers, or what that short-term rental crowd is gonna be like… And I can tell you, by and large these are responsible travelers, higher than average incomes. A lot of times it’s families going to events, or vacationers if you’re in a ski market, or a beach market, or a lake market… The issue of high turnover in your property, or damage — I’ve been doing this for 20 years and I probably have one instance where there was some sort of issue that I had with a guest.

So again, if people are thinking about it, I think a lot of people are very successful at it. It’s a hot space. The nightly rents can be very attractive. Again, I’m a short-term rental advocate; I would encourage people that are looking at it to not hesitate. Give it a try.

Joe Fairless: You’ve been doing short-term rentals for 20 years?

Rob Stephens: Yeah. That means a) I’m old, but yeah…

Joe Fairless: You’re experienced.

Rob Stephens: Yeah, we’ve bought this in 1999 and put our property in Vail on VRBO. So I’ve seen a lot of change; it’s a completely different industry, obviously, than it was 20 years ago.

Joe Fairless: Oh, my goodness. Yeah. Airbnb wasn’t around, right?

Rob Stephens: Yeah, Airbnb came around I think 2009 or 2010.

Joe Fairless: Yeah.

Rob Stephens: There was no online booking, nobody took credit card payments… You had to call somebody or email somebody. It was a much more difficult experience. Kind of one of my points – it’s becoming easier and easier, and travelers love it, and it’s getting easier for travelers, because the travelers want that instant book. They wanna have that same hotel-booking experience with a vacation rental, which is pulling more travelers into this segment. So it’s a  lot of progress, a lot of exciting things happening.

Joe Fairless: Let’s talk about your short-term rental. How many do you have right now?

Rob Stephens: I have one short-term rental and one long-term rental.

Joe Fairless: One short-term and one long-term, okay. So with the short-term — have you have multiple short-terms at one point in time?

Rob Stephens: I have not. I’ve had multiple different short-term rentals, but not multiple at one time.

Joe Fairless: Okay, got it. So this one that you have now is not the one that you started with 20 years ago.

Rob Stephens: Correct.

Joe Fairless: Okay. Tell us about how your thought process for buying one, selling it, and then continuing to go until you’ve reached today the one that you have now.

Rob Stephens: Sure. I live in Denver. For a lot of us on the front range, that grew up in Colorado, lifelong skiers, owning mountain property or property in the ski resorts is a big goal. So for us, that first purchase was I would say as much or more a lifestyle decision than it was investment, and I think when you get in the short-term rental space, especially the vacation rental segment of that, that’s a lot of the mindset. People are like “I like to go to Myrtle Beach” or “I like to go to South Florida” or “I like to ski in Vail. I’m gonna purchase a property there, anchor there. I’m gonna go there… I’m gonna build equity over time there.”

There certainly was the investment thesis too that if you looked over time, real estate in a market like Vail was phenomenal, and it just gets more and more expensive. So my psychology – and this was 20 years ago – was at some point you’ve just gotta jump in, make that commitment. And when we did that at the time, we could afford just to own a second property on our own and pay that mortgage, so we needed the rental income to basically help cover the carrying costs. So that’s what we did, and it worked great.

We looked at using a property manager at the time. Property managers in Colorado at the time took about 50% of your gross rent for their management fee, so… We were looking for a better option, and that’s when we found the websites, VRBO, and for really nominal dollars put it on there, and it rented up very successfully.

So that was 1999. We ended up selling that one to our partner in 2007. Joe, you’ve been in real estate [unintelligible [00:18:48].05] 2007 was probably the peak of the real estate bubble, so we saw a huge appreciation. The property tripled in value in about 7-8 years. So when you reflect back on that, you say “Well, that was great… Probably a bubble.” So we turned it around and bought another one in Vail. This is the Best Ever Show – that second one was probably the worst ever investment. We bought it at the absolute peak of the market.

I remember doing the financing at the time, which — mortgages seemed to just give away; we had perfectly fine credit, and all that, but we were starting to struggle getting a mortgage, which was at the time a bizarre experience. Little did we know behind the scenes the mortgage markets were really melting down. Anyway, we closed that one, but bought it at the peak of the market…

Joe Fairless: What did you buy it for?

Rob Stephens: That was about $850,000.

Joe Fairless: Okay.

Rob Stephens: It dropped precipitously. I think the market just came back. It took about ten years to come back. It just came back recently. In fact, we’ve just sold it a year ago for a little bit less than $900,000.

Joe Fairless: Good for you.

Rob Stephens: But we’ve put about $100,000 of improvements into it, too.

Joe Fairless: Oh, there’s the catch!

Rob Stephens: And the first several years we had to support it operationally. Again, this is my worst deal ever, and anybody who does anything – not everything always works out great.

Joe Fairless: Yup.

Rob Stephens: But we sold that one and then bought a very tired, rundown property in the heart of Vail, which is a great location… And kind of immediately saw the opportunity. I had a contractor that had done some remodeling projects with us in Vail, and immediately — we gutted the place last summer, ripped out everything… So we’ve put in all new everything. It’s a small unit, 850 square feet, but a great location. It’s 75 yards from the Gondola… We’ve put it on the short-term rental market, and that type of central location – the rentals were just super-strong, and the property turned out great. The rentals are super-strong and we’re personally excited to be really close in where we can walk to restaurants, and the slopes, and bars, and that type of thing. But from a real estate perspective – we’ll see over time, but I’m excited about getting in… This property was very beaten up, and I think we got it at a great price, put in the work and dollars to improve it, and I think we’re well-situated now on that one.

Joe Fairless: Nice. Lessons learned, that’s for sure. When you think about your experience as a short-term landlord, and then also you have one long-term, what is your best real estate investing advice ever?

Rob Stephens: I was in this camp for years. I’ve always [unintelligible [00:21:12].02] myself. Joe, I’m sure you’re a real estate expert; I have a couple of properties and I’m in the short-term rental space, but we have this tax automation solution… But I still think of myself somewhat as a real estate novice, or did for years… And I’m always kind of looking at doing things, but not pulling the trigger. So my advice is to just take action, jump in, do something. That doesn’t mean you wanna do anything stupidly, obviously, but I was just talking to one of the young folks here; they’re looking at buying a house in Denver. Denver has become  a very expensive market for real estate over the last several years, and I was talking about — the first time [unintelligible [00:21:45].13] 25 years ago, and I got married, and we upgraded, and that whole story… I said “Look, this was the mid-90’s. We thought it was all super-expensive and super-hot then.” I remember friends telling me “I wouldn’t get on this market”, and the first time we bought in central Denver, we sold 3,5 years later for 60% appreciation.

So I guess my point is you can also look to time the market, or wait for the next correction or crash, but just take action. If you have an interest, you have some capital, you think you have a sound investment plan… It’s obviously important to have a plan, and run the numbers and the math and make sure it makes sense, but… At some point you’ve just gotta jump in and take action.

Joe Fairless: And I think with that taking action, it’s also having a fallback plan, or at least a reserve or something, because if you do accidentally time it for a 2007 purchase, then you’ve gotta be able to float that property for a period of time, right?

Rob Stephens: That’s a very good comment. You can’t necessarily go all-in; you need to be capitalized such that if the rental market doesn’t materialize as expected, or rates drop, that you do have the capital or the staying power to ride it out. You don’t wanna be over-leveraged, or that mortgage payment too high, or extend too much for a property; that’s gonna put you in a really bad position. So absolutely, there needs to be a level of prudent planning and thoughtful analysis that goes into these.

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

Rob Stephens: Let’s do it.

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

Break: [00:23:24].23] to [00:24:03].06]

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

Rob Stephens: The Big Short.

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

Rob Stephens: Not enough due diligence.

Joe Fairless: Best ever deal you’ve done?

Rob Stephens: That would probably be my first condo in Vail. It tripled in value over eight years.

Joe Fairless: And with not enough due diligence on the mistake – will you elaborate? An example of where you didn’t do enough due diligence?

Rob Stephens: Just not researching the market well enough, and maybe understanding the property well enough.

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

Rob Stephens: This is gonna be self-serving, Joe. I’m an entrepreneur, I started a company, so I think employing people is very powerful. For the people that work here – I really take care of them, I give them an opportunity.

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

Rob Stephens: Anyone interested – go to our website, MyLodgeTax.com, and learn all about our tax automation solutions.

Joe Fairless: Well, thank you so much, Rob, for being on the show. It sounds like you’ve got a great out-of-the-box solution for short-term rental landlords to help them make sure they’re compliant with the taxes that they will need to pay; whether they know it or not, they need to pay them. And I did not know the taxes were so high. You said the average tax is 10%-12% of the gross rent, and in some markets 15% or higher if it’s an urban market. And Chicago… Oh, Chicago. It doesn’t surprise me that they’ve got [unintelligible [00:25:30].29] tax on this.

Rob Stephens: Yeah.

Joe Fairless: They’ve got some things to work out…

Rob Stephens: Indeed.

Joe Fairless: But thank you, Bob, for being on the show. I hope you have a best ever day. I really appreciate your time, and we will talk to you again soon.

Rob Stephens: Happy to do it. Thanks, Joe.

JF1539: Navy Pilot ‘Flies’ Through The Real Estate Ranks with Stuart Grazier

As a full time service member, Stuart can only commit so much time to his real estate investing ventures. Even with that, he has been able to grow and scale his business through partnerships and raising money with private investors. To make this even more difficult,neither Stuart or his partner live in their main investing market. Hear how they grow their business with full time jobs and from another state. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

 

Stuart Grazier Real Estate Background:

  • Active duty Navy pilot who has served 16 years in the military
  • Stuart has built a $600k portfolio of performing mortgage notes, a portfolio of 5 rental properties, is a passive investor in two separate multi-family syndications, and recently started a turnkey rental property company
  • Based in Aurora, CO
  • Say hi to him at http://www.militaryinvestornetwork.com/
  • Best Ever Book: The Go Giver by Bob Burg

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Best Ever Listeners:

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

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

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


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, Stuart Grazier. How are you doing, Stuart?

Stuart Grazier: I’m doing great, Joe. Thanks for having me, it’s an honor to be here.

Joe Fairless: Yeah, my pleasure. Looking forward to our conversation. A little bit about Stuart – he’s an active duty Navy pilot who has served 16 years in the military. Thank you for doing what you do. He has also built a $600,000 portfolio of performing notes, and a portfolio of five rental properties, and is a passive investor in two separate multifamily syndications. He recently started a turnkey rental property company – holy cow, you’ve got a lot going on. He’s based in Aurora, Colorado. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Stuart Grazier: Absolutely. Like you said, I’m active duty Navy, currently stationed in Aurora, Colorado at Buckley Air Force Base. Although I’m in the Navy, I’m stationed at an air force base, so go figure… So I’ve been dabbling in real estate for about ten years now, and kind of done a little bit of everything; I primarily just tried to find different investments where I could be as passive as possible. Being in active duty military, I’ve got a full-time job and a family, so for the most part over the last ten years I’ve been trying to do private lending, and got into mortgage notes, and investing in some syndications… But over the last couple years, my taxes have gone up significantly, after kind of building on that portfolio… And getting some advice from other investors, they really just said “Hey, you need to start buying actual physical property”, so my focus has been over the last year or so to get and acquire some more physical property, so I can have some more tax write-offs.

I bought some turnkey properties from a turnkey company in Birmingham, Alabama, and although not a terrible investment, there were definitely some things that I didn’t like about it… And kind of doing some of my own research and learning from all the investing, I kind of decided to go out on my own and try to start my own turnkey company with my best friend from college. He kind of had a similar experience, having some issues, probably way worse than I did, with a turnkey company, so the two of us decided that we were gonna start on our own and make it better, and do right by our network of investors within the military, and try to start really providing value to our own network, and providing a really good, cash-flowing asset to some of our network.

So that’s what we’ve been focused on over the past 4-5 months. We’ve done 10 properties now, so we’re on average about 2-3/month, and we are focused in Milwaukee, Wisconsin. We find single-family homes, we’re buying them, rehabbing them, putting renters in place, turning it over to property management, and then selling them to other military guys that are wanting to buy cash-flowing real estate.

Joe Fairless: What were some of the areas that you are focused on improving on based on your experience and your business partner’s experience?

Stuart Grazier: One of them is communication. Both my partner and I really had some major communication issues with the companies that we had invested in, and just days/weeks go by if we had questions about our investment; it would take forever for them to get back to us… So we really wanted to improve on that. And then just honesty and transparency with our investors; not as much my experience, but my partner’s experience – he had some really poor stuff going on, some really major honesty issues. He had been told that for some of these houses every major component was rehabbed, and then going through videos, he’d find that they didn’t put a water heater in it, but he had paid for a new water heater… And just lots of issues like that. So we really just wanted to be open and transparent and honest as much as possible with our investors.

Joe Fairless: So what’s your approach with communication?

Stuart Grazier: We do weekly walkthrough videos of our properties, and we have an acquisition manager that’s boots on the ground in Milwaukee, Wisconsin… And by the way, neither of us are in Milwaukee; like I said, I’m in Aurora, Colorado, and my business partner lives in Annapolis, Maryland… But we have a really good team in place there in Milwaukee, so we acquire weekly videos and we send those videos to our investors once we’ve identified them to buy the property; take pictures, send them our scope of work to let them know what is being rehabbed on the property, and then at the end of it we get a full inspection done, and if there are issues that come up on the inspection, we tell them about them, and then once they’re fixed, take pictures of it… Just constant communication and constant transparency with everything. Then if something comes up that we didn’t plan for, and we feel that it was on us, then we would pay for it out of pocket.

Joe Fairless: You’ve got a turnkey rental property company… Are you also managing them once they buy them?

Stuart Grazier: No. We’ve found a really good property management company that we like in Milwaukee, that’s been in the business and doing it for a lot longer than we have, so we figured we would allow for the professionals to take on managing the property. As soon as the rehab is complete, we turn it over to the property management company and they take it over.

Joe Fairless: You don’t live there, your business partner doesn’t live there, but you picked Milwaukee. How did you pick Milwaukee?

Stuart Grazier: Again, my business partner – that’s where he initially invested with a turnkey company, and his wife is from that area, so he has family there… So we have some ties to the area anyways… But we tried to decide on different markets and we had done quite a bit of research, and we saw some economic indicators that we really liked about Milwaukee. One of the biggest ones we saw was that there is a company called Foxconn Technology, and they’re building a 13 billion dollar plant in Southern Milwaukee… And they just broke ground last summer, and it’s supposed to open in 2019. It’s supposed to bring about 15,000 new jobs to the area. We really liked the idea of getting into the front end of that, to where there’s gonna be a lot of business growth and a lot of people moving to the area to take some of those jobs. And there’s quite a few other mid-level Fortune 500 companies that are there as well, so we liked some of those drivers that we saw.

Joe Fairless: You have five rental properties yourself, and also you have a $600,000 portfolio of performing mortgage notes, and you’re also in two separate apartment syndications… How active are you in growing any of those areas of your investing?

Stuart Grazier: The mortgage notes – very little activity on my part. I really just sit back and watch the checks come in on a monthly basis.

Joe Fairless: How much do you make on a $600,000 worth of performing mortgage notes?

Stuart Grazier: I average about 10%, so about $60,000/year.

Joe Fairless: That’s pretty good.

Stuart Grazier: Yeah, it’s not bad. One of the lessons and why I kind of started getting into trying to buy more physical property was I bought all of those outside of a self-directed IRA; it was just in an LLC… So I talked with CPA, and doing some more research, there wasn’t really many tax advantages to having paper outside of an IRA, so it really was just increased income to my end of year taxes… So that’s kind of why I started trying to get into more physical property over the last couple of years.

Joe Fairless: So you’re not actively growing the performing mortgage notes…

Stuart Grazier: Not outside of my IRA. I did  open up a self-directed IRA a couple years ago, so I’ve started buying mortgage notes inside of my IRA when I have enough capital to do so. Right now I’ve pretty much used all the capital inside of my IRA, so I’ll have to allow it to kind of built up again until I buy another one.

Joe Fairless: What about your portfolio of five rental properties? Do you focus on buying more of those?

Stuart Grazier: I am. We’re doing the turnkey business, and I’ve kept one of the properties since, and added it to my portfolio, and I’ll continue to do so as we build capital through selling properties off. That’s kind of one of the goals, is just to grow our capital to where eventually we can buy more real estate ourselves. We’d really like to start getting into more multifamily deals as we have more capital.

Joe Fairless: And you are in two multifamily deals as a passive investor… What’s your experience been there?

Stuart Grazier: Good. One of them is in an apartment complex that a fellow Navy pilot, retired veteran syndicated, and it’s in Albuquerque, New Mexico. It’s gone pretty well. They’re actually on the tail end of it. They have a buyer and trying to exit by the end of the year, so hopefully we’ll get a nice return on that investment.

Then I invested a really small amount of capital into a mobile home park community in Florida, and that’s gone pretty well as well.

Joe Fairless: Do you see some tax benefits as a result of depreciation being taken on those two deals that helps you with those tax position?

Stuart Grazier: Absolutely. It definitely helps quite a bit.

Joe Fairless: What have you learned from investing passively in deals – if anything – that you’ve applied towards your approach when you’re working with investors on the turnkey rental property?

Stuart Grazier: Very similar as far as having really good communication. I think as an investor, providing opportunities to other investors, keeping that open honesty, transparency and open communication as much as possible really helps. As a passive investor in those deals, I love it when I get the monthly newsletters from them telling me how my investment is doing, so I’ve tried to transfer that to my turnkey business, doing that same thing for the investors that I’m providing that opportunity to. I think really having that communication is paramount.

Joe Fairless: What’s a story of something that hasn’t gone well for you from an investing standpoint?

Stuart Grazier: Very early on in my career of investing, when I was kind of first starting out, I was trying to find those passive ways to invest, and I started down the path of doing private lending deals. I was lending to an investor that I didn’t really know very well, and probably put — not probably, I did put too much trust in the individual, and over the span of about two years I collectively lost about $130,000 from investing in him. He ended up actually going to jail, because he was basically doing a Ponzi scheme.

Joe Fairless: Oh, wow…

Stuart Grazier: I didn’t know enough about what I was doing to really be investing with him, so… Huge personal growth experience there, really. Primarily I needed to educate myself first before I go invest in something that I don’t know much about, and then build a team around me that has my best interest at heart.

Joe Fairless: Let’s assume that you are interested in still doing private lending, and an individual approaches you… First, quick question – what type of deals was this person doing? Fix and flips?

Stuart Grazier: Yeah, they were all fix and flips, short-term deals.

Joe Fairless: Alright, so let’s pretend you still wanna do private lending. A fix and flipper approaches you and says “Hey, Stuart, I’ve got some deals; I need some private money to do these.” What due diligence would you do on this new person now, that you didn’t do on the previous person?

Stuart Grazier: I think now, after having quite a few years of experience under my belt, I’m not gonna really invest with someone that I don’t know fairly well, and have had quite a bit of time and opportunity to know the individual. Looking back on it, I should have never invested with someone that I barely knew.

And once that has been established for a while and I really know the individual and I can trust the individual… I wanna know some background about him, and other referrals I think is really good, and seeing what kind of deals they’ve done in the past, and knowing how successful they have been. And then, again, just being knowledgeable about what you’re investing in.

From a lending perspective, you need to know the paperwork involved in it, and the process for doing the paperwork correctly, making sure you have the right people on your team to back you up and to make sure it’s being done correctly.

Joe Fairless: You said 130k is what you lost?

Stuart Grazier: Yeah, $130,000.

Joe Fairless: 130k over the course of two years… How did you end up finding out that it was a Ponzi scheme?

Stuart Grazier: I got a  letter in the mail from an attorney, basically saying that the individual had been sued by another investor who had way more money investing with him than I did, and basically asked for all of my information and what I had invested in, and if I had any paperwork to show for what I’ve done with him.

Joe Fairless: And then from your standpoint, what did you do?

Stuart Grazier: First I kind of freaked out…

Joe Fairless: Yeah, I imagine. Did you call this person?

Stuart Grazier: Absolutely. I called him…

Joe Fairless: What did they say?

Stuart Grazier: …texted him, e-mailed him… They didn’t reply. They kind of went silent on the net.

Joe Fairless: Did they live close by, or flying distance at least?

Stuart Grazier: They did. I didn’t have his home address… But I reached out to a local real estate attorney in the area. I’m from Dallas, Texas, and the investor was in Dallas, so I reached out to an attorney in Dallas and just started asking questions. He was a real estate attorney, and fortunately for me, he was an investor as well, and that was actually helpful in the end, because he kind of took me under his wing and showed me how to do it right, showed me the proper paperwork, what to look for, and he really taught me a lot about being a lender in the mortgage note business. It actually helped me kind of boost my career, if you will, and doing more lending deals down the road.

Joe Fairless: Was there any hope of receiving your $130,000 through some sort of litigation that you attempted to do?

Stuart Grazier: I ended up really not taking any more action, because I knew that there were some other investors that have millions of dollars invested with him, that they had sued him, and I kind of just jumped on the bandwagon and put my name in the hat as far as all the other investors… It was a big court case, it went to trial, and he ended up going to jail. It went to a litigation, and I’ve received some money back over time, but nowhere close to a full payback.

Joe Fairless: What was the proper paperwork that the attorney said “Hey, you should have had this in place.”

Stuart Grazier: If you’re doing a deal like that, you wanna make sure you have either an actual recorded mortgage note, a first lien position or a second lien position that’s recorded by the County Courthouse; make sure it’s stamped, filed in the county files, and make sure you have a copy of it. Or, if you’re gonna do like a promissory note, make sure that it’s done through a lawyer and make sure that’s all done properly. The paperwork that he was doing was basically — I think he was just taking a Word document and writing some stuff down; he was making up fake addresses, and I didn’t really do much of a due diligence on making sure it was all done properly. None of it was recorded, so… Instead of trying to go at it yourself, I would definitely try to get an attorney to double-check all the work.

Joe Fairless: What have you made the most money on?

Stuart Grazier: The most money… I would say probably the best deal I ever did was I tried to start getting into some wholesaling and some flipping, and the plan was to flip a house in Fort Worth, Texas. I bought it at a really good discount, and through some networking I found another investor and basically sold it to him three days later for $15,000 profit.

Joe Fairless: Without touching it?

Stuart Grazier: Without touching it, yeah. I wouldn’t say it’s probably the most money I’ve ever made, but it was definitely the most money for the amount of work.

Joe Fairless: And since it was the most money for amount of work, but I didn’t hear you talk about wholesaling until I asked that question, why isn’t that a focus?

Stuart Grazier: It’s too much work, honestly.

Joe Fairless: [laughs] That kind of happens once every so often, those types of deals…?

Stuart Grazier: Yeah, and I decided very quickly that it wasn’t for me. I tried it, and again, as an active duty military guy, with a full-time job, the amount of work involved in doing wholesaling deals was way more than really I had time to do.

Joe Fairless: How is that less time than having a turnkey property management? Or not a property management company, excuse me… A turnkey company where you’re overseeing a general contractor and you’re sending weekly updates and videos… It seems similar.

Stuart Grazier: Well, you probably have a very good point, Joe. I think I’m at a different stage in my career, and probably a lot more knowledgeable now than what I was when I tried to do wholesaling a long time ago. I’ve learned how to put some systems and processes in place, and put teams in place that I can trust, and allow for them to do quite a bit of the work, that I wouldn’t probably have been able to do – put those processes and teams in place – five or ten years ago.

Joe Fairless: The big risk as far as what I perceive it to be with your business and how you have it set up – the turnkey rental business – is the renovation process, since you’re not there and your business partner is not there. So how do you have checks and balances for the work getting done – not for reporting to investors, but to actually make sure that you’re overseeing the general contractor the right way.

Stuart Grazier: We have that acquisition project manager that we’ve hired. She is a local real estate agent, she’s been doing it for 28 years, and she’s always kind of been on the investor side of the house, instead of just retail… And her husband is actually one of the contractors that we use, as well. So between the two of them, they have a very large knowledge base of both construction, contracting, and just the real estate in general.

So we’ve hired her to be our project manager, and she is the one that lives there and does the weekly walkthroughs and the videos, and checks on things and reports to us as the owners of the company. So we’ve put a lot of trust and faith in her and her knowledge base to report to us on a weekly basis… And really it’s probably even more than a weekly basis. She does walkthroughs every day or two.

Joe Fairless: And have you had her from the beginning?

Stuart Grazier: We have, yeah. We’ve been really fortunate to find her early on in the startup.

Joe Fairless: How did the business support her expense, or the investment in an employee, when you hadn’t done a deal yet?

Stuart Grazier: We just added that into our numbers when we were evaluating deals. Really we treated it almost like a realtor fee. We just added that into the expenses at the beginning of a purchase. So we just made sure that that was included into our acquisition costs, and it’s worked out so far.

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

Stuart Grazier: I had to think about this for a while… I recently read a book called Tribes, by Seth Godin, and it kind of resonated with me quite a bit. I think first and foremost you have to invest in your tribe, and then second, invest within your tribe. And what I mean by that is I think it’s really important to first spend the time and the effort to grow and add value to the people that are within your network. And then as that network grows, I think your investment opportunities will come, and you should invest then within that network that you’ve built and added value to.

Joe Fairless: Powerful concepts. Very powerful. I know of Seth Godin and I’m familiar with his work, but I have not read that book, and you have inspired me to read that book, so thank you for sharing that, certainly. It reminds me of the quote that Robert Kiyosaki said whenever I interviewed him – I think it was when I interviewed him… He said, “The richest people in the world build networks, and everyone else looks for work.”

Stuart Grazier: That’s huge. I think your network is very powerful.

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

Stuart Grazier: Ready.

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

Break: [00:23:28].15] to [00:24:18].01]

Joe Fairless: Best ever book you’ve recently read, besides that Seth Godin book?

Stuart Grazier: I’m gonna say The Go-Giver, by Bob Burg and John David Mann.

Joe Fairless: Best ever deal you’ve done that we have not talked about already?

Stuart Grazier: I was gonna say that wholesale deal, but another one just recently – we did a turnkey real estate deal and we made $35,000 on it.

Joe Fairless: Well, that’s pretty good, too.

Stuart Grazier: Yeah. It was a little bit more work than that wholesale deal, but yeah, it was pretty solid.

Joe Fairless: What’s a mistake you’ve made on a transaction that we haven’t talked about? …and I know clearly the 130k is what you’ll probably initially think, but something else, maybe more tactical?

Stuart Grazier: I went to a real estate conference just recently, and one of the advices that another investor said was “Fire fast and hire slow.” We kind of recently went through that, and I’m really kicking myself for not firing one of the contractors that we had hired a long time ago. They had done three properties for us, and every single one of them had some issues; we  either found some stuff that they weren’t honest about, they were late, they were asking for more money when our contract didn’t require it… And we gave them one more shot on a recent deal and it failed miserably. We actually ended up having to fire them mid-project, and they walked on the job… It was kind of a real hassle. So I would say hire slow, and fire fast.

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

Stuart Grazier: Part of our business model is we have a non-profit organization with a goal to buy a house, buy a property to use as a refuge for wounded veterans that are going through treatment at a VA hospital. So our business model is we take 10% of all of our profits from the sales of our homes to go towards that non-profit organization, to hopefully within a year or two buy a house through the non-profit organization to use as a veteran refuge.

Joe Fairless: What percent are you there in order to accomplish the first purchase?

Stuart Grazier: We still have quite a ways to go. Our goal is to raise $200,000, and we’re at about $20,000, so… Long ways.

Joe Fairless: You’re doing all cash, you’re not getting financing or anything?

Stuart Grazier: Yeah, that’s our goal.

Joe Fairless: Cool. Well, lastly, and important – how can the Best Ever listeners learn more about what you’ve got going on?

Stuart Grazier: I have a website, it’s called MilitaryInvestorNetwork.com. They can go to the website, and it’s free for any active duty or veteran, or their family member. They can e-mail me at stuart@militaryinvestornetwork.com. I’m also on LinkedIn as well, Stuart Grazier.

Joe Fairless: Stuart, thank you so much for being on the show, sharing lessons learned along the way; certainly, the Ponzi scheme would check that box… And as important, the wonderful things that have taken place, and that is the company that you’ve got right now, turnkey company, as well as the different types of investing that you’ve done, and what you learned and then applied towards what you’re doing now.

One last question that I have, and this might sound like a stupid question or a weird question, but I’m just gonna ask it…

Stuart Grazier: There’s no stupid question…

Joe Fairless: Are you glad that you got involved in the Ponzi scheme and you lost $130,000?

Stuart Grazier: That’s really funny you ask that… I’ve thought a lot about that in the past, and it has really made me grow as a person and as an investor. I learned so much from that… A lot of people say that you learned from your mistakes and grow from them – it’s so true. Going through it, when it was happening, it was absolutely terrible, and I thought that it was pretty much gonna ruin me… But I just picked up from it, learned from it, tried to grow from it, and it’s really helped me grow myself as an investor.

Joe Fairless: Best experience you never wanna happen again, right?

Stuart Grazier: That’s right. [laughter]

Joe Fairless: I have not been involved in one of those, fortunately that hasn’t happened to me, but I have my fourth house – it was not what I thought it was, and in lessons learned along the way and experiences that when people on the show who have deals that go sideways or really south, I like to ask that question just to get their thought process about after the fact, and if they’re glad… And nine times out of ten — and perhaps “glad” isn’t the way to describe it, but nine times out of ten they learned a lot more from that experience than what they lost, and I think that’s really the key there, so… Best experience you never wanna happen again.

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

Stuart Grazier: Thanks, Joe. You too.

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JF1539: Navy Pilot ‘Flies’ Through The Real Estate Ranks with Stuart Grazier

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As a full time service member, Stuart can only commit so much time to his real estate investing ventures. Even with that, he has been able to grow and scale his business through partnerships and raising money with private investors. To make this even more difficult,neither Stuart or his partner live in their main investing market. Hear how they grow their business with full time jobs and from another state. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Stuart Grazier Real Estate Background:

  • Active duty Navy pilot who has served 16 years in the military
  • Stuart has built a $600k portfolio of performing mortgage notes, a portfolio of 5 rental properties, is a passive investor in two separate multi-family syndications, and recently started a turnkey rental property company
  • Based in Aurora, CO
  • Say hi to him at http://www.militaryinvestornetwork.com/
  • Best Ever Book: The Go Giver by Bob Burg

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JF1005: Why He Prefers to Buy Shopping Centers Now with Danny Newberry

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He’s not interested in residential, and believes that the evolution of an investor starts with a single family house and turns into commercial shopping centers. He also turned a shopping center around in as little as eight months, that’s fast! Hear how he did it!

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Danny Newberry Real Estate Background:

– Founder and president of Value Investment Group, a commercial real estate investment firm
– His firm has acquired more than 20 properties since its inception in 2008 acquiring assets in 7 states
– Owns over 250 rental units and now invest in high end commercial deals and retail shopping centers
– Based in Colorado Springs, Colorado
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buying shopping centers

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

With us today, Danny Newberry. How are you doing, Danny?

Danny Newberry: Good, how are you doing, Joe?

Joe Fairless: I’m doing well, and nice to have you on the show. A little bit about Danny – he is the founder and president of Value Investment Group, which is a commercial real estate investment firm. His firm has acquired more than 20 properties since its inception in 2008, and that’s across seven states. He owns over 250 rental units and now invests in high end commercial deals and retail shopping centers. Based in Cedar City, Utah – with that being said, Danny, do you wanna give the Best Ever listeners a little bit more about your background and your focus?

Danny Newberry: Yeah, thank you, Joe. Just to clarify and give everybody enough data, I have officially moved to the beautiful state of Colorado. I am officially a Colorado Springs resident, and originally from Southern California. I was born in Mexico, my mom is Columbian, my dad is American, and I couldn’t tell you how I ended up being born in Mexico… But I’m here now.

I’ve definitely had the privilege of investing as a young guy. I’m 28 years old now, and I’ve been able to accomplish some pretty good things based on the mentorship that I’ve had and the people that I’ve had in my life to help me and propel me down my path. It’s been a lot of fun, I’ve been enjoying the ride, I’ve been having a good time, and again, thanks for having me on.

Joe Fairless: What are you buying now?

Danny Newberry: I’d say my core focus is shopping centers. I’m looking across the spectrum of [unintelligible [00:03:48].07] commercial, so retail shopping centers, medical office buildings and industrial complexes… I’ve got a mix of all three right now. I’m really not buying any more apartments right now; I’m a little bit burnt out. They are a little bit more management intensive, but I heard this the other day and it kind of made sense to me – someone told me it’s the evolution of a real estate investor, going from residential to apartments and then ultimately into commercial, and I wanted to wrap my head around the different sectors and learn them, so that way I could identify opportunities in different marketplaces across different asset classes, so that’s what we’ve been doing for the past couple years. I’d say over the past 24 months I’ve really focused on the commercial side.

Joe Fairless: Tell us about a shopping center you’ve bought.

Danny Newberry: I actually just bought one last week here in Colorado Springs, a little over 20…

Joe Fairless: Congrats!

Danny Newberry: Thank you… Yeah, I’m very excited about it. It was a small shopping center in a neighborhood with an outparcel. It’s a little over 20,000 square feet. One of the names [unintelligible [00:04:48].14] other than that we have some mom and pops in there. Just signed a lease with a cryotherapy group, and we’re also working on a distillery right now, so that would be a pretty interesting tenant to get in the shopping center if we ultimately commence with them.

We bought that for about 700k, so it was only $30/foot when neighborhood shopping centers are going for about $125-$150/square foot. Our goal on this deal is a flip, it’s not one that we are necessarily interested in holding in our portfolio long-term. Our goal is to get in there — we’re gonna put a new roof, a new parking lot, a new facade, new signage and stabilize the rent roll, and then put it back on the market probably… I’m hoping to get it back on before the end of the year, we’ll see.

Joe Fairless: Wow, what a quick turnaround… That’s less than 12 months. That’s an eight-month turnaround.

Danny Newberry: Yeah, we identified this opportunity and we already had a team in place in Colorado; I bought a medical building about a year-and-a-half ago out there, so we already had boots on the ground, had a good team, a good leasing agent, my construction guy is ready to go… So this one – we looked at it, we looked at the numbers… Rents were below market, everyone was either on month-to-month or very short-term leases. We were able to renegotiate a few of those already, and we’re bringing them up to market.

The previous owner – I hope he’s not listening, but he did a terrible job of managing this place and left so much meat on the bone, and that’s what we focus on… It’s a value-add opportunity, so our goal is to have it on the market for about three and a quarter at the end of the day.

I’ve got a bet with one of my friends that we have to buy it, fill it up, stabilize and flip it this year, and sell it for at least 2,5 million. If we can do that, then I get a free ski trip to any ski resort in Colorado, so I’ve gotta make it happen now.

Joe Fairless: [laughs] You said you’ll probably put it on the market for 3,25 million, right? But you wanna sell it for 2,5. Okay. And you bought it for 700k. How much will you put into it?

Danny Newberry: I’m looking to put about a quarter million into it. My roof’s about under a hundred, parking lots about 55k, monument sign is about 30k and the facade is gonna be about 50k.

Joe Fairless: Will you say those again but slower? Because I’m taking notes, I wanna write that down.

Danny Newberry: So we’re under a hundred on the roof – it actually came out to 88k (I’ll give you specific numbers), brand new roof. Then we’re going to do the parking lot, which is 52k. We’re gonna do a new monument sign, it’s gonna be about 30k, and then the facade work is 44k.

Joe Fairless: So all in about 250k, as you mentioned.

Danny Newberry: [unintelligible [00:07:32].07] tenant improvement… Like I said, I just signed a cryotherapy groups – they freeze your body below the head, for inflammation. We’re doing about 26k in tenant improvement for them, and they’re signing a ten-year lease. A quarter million is our capex, and then we’ll be anywhere from another hundred to up to 200k in tenant improvement, to basically stabilize the center.

Joe Fairless: How many spots do you have to get filled between now and when you put it on the market?

Danny Newberry: We had two tenants before we closed the shopping center, and as soon as we closed, we signed a barber for about 1,000 square feet at $12 triple-net; that means the tenant pays for the taxes, insurance, and common area maintenance, and that’s another reason I really loved commercial property, our triple-net.

Anyways, we signed them, and then we ended up signing, like I said, the cryo-group at about $13 triple-net. We’ve only got one space available now that’s about 4,000 square feet, and that is the one that we’re talking to a distillery about.

Joe Fairless: I’ve interviewed successful investors who focused on shopping centers, and they say it’s desirable to have destination tenants, so companies that you actually have to drive to, versus you could buy online. Clothing store – not a destination tenant; you can buy on Amazon or Macys.com or whatever, whereas a barber shop would be a destination tenant, so would be the cryotherapy, because you actually have to go there to get your whole body frozen, and other things. Do you take that into consideration when you’re flipping a product?

Danny Newberry: Absolutely. It’s all about having a good tenant mix, and that’s what we look at. We look at what are the demographics to this area, what’s missing, who needs to be there, who’s gonna do well? So when we look at the tenants, especially when we buy and we have an area that we know that’s really strong, that there’s good demand, good absorption for space, we can pick and choose the tenants that we want in our center, so we absolutely look at that. We’ll look at their financials, we’ll look at their previous history, current locations, and then we look at the business and look at everybody else’s in our center and say, “Hey, is this a good fit for who’s in there now?”

Joe Fairless: After eight months, let’s say things — congratulations, everything has gone perfectly according to plan; you’re on track to getting your ski trip. Why wouldn’t you do a cash-out refinance on this, instead of selling it?

Danny Newberry: That’s a great question, and the biggest reason is we do have properties that we hold on long-term. I’ve got three shopping centers that [unintelligible [00:10:20].00] This is the reason I’m holding the other shopping centers versus this one – I’ve got three shopping centers that are extremely well located. One is a Walmart [unintelligible [00:10:29].11] shopping center, all national tenants in there, and then I’ve got another [unintelligible [00:10:34].27] to a Home Depot and a WinCo Foods and Pepco, and then all the tenants around that are all national. My neighbor to the right of me is Carl’s Jr., to the left of me is [unintelligible [00:10:43].24] behind me is Big O Tires… These are locations that I don’t think that there’s gonna be much, if any, high vacancy, or an area where let’s say the demographics are trending downwards. Those are areas where the demographics are trending upwards, the population is growing, the income is growing for the residents in the area…

But on this center, this is more off the main road. Academy Boulevard, the one we’re talking about now – it doesn’t have the traffic counts that I would necessarily like to hold on to a property long-term. It’s under 15,000 traffic count, but it’s definitely a destination neighborhood shopping center.

If you live in the area, you know about it, but it’s not necessarily like you’re picking up traffic from people going from one end of the town to the other. In the long-term view this property is older, this property is off the beaten path, and it doesn’t necessarily fit with our business model of the type of tenants that we want in there. We’re not gonna have Verizon and Subway; some of the other ones could be Einstein Bagles and those type of tenants that are a little bit more high-quality.

Joe Fairless: That makes sense, location and age… But in that order, it sounds like location first and foremost, and then age – it doesn’t quite fit your long-term hold. You’ve done one of these turnarounds before, obviously… What do you know is going to come up as you start doing the roof and the parking lot, the monument sign, that you’re gonna have to address? You just know, you’re expecting this issue to come up, based on your experience?

Danny Newberry: Well, first of all, tenants. No one’s happy if they have to have all their customers park out on the streets or on the other half of the parking lot and have to go around, and a lot of times you’re gonna have a lot of noise when you’re doing the parking lot or doing the roofs or doing the facade, and those types of things. So it’s going to be an interruption to our tenants, and we always wanna make it as painless as possible, so we always shoot to do a lot of these things, if we can, on slower days. If Sunday is a slow day and most of the tenants are not open for business, that’s a great day to do it. Otherwise, Mondays, Tuesdays and Wednesdays seem to be a little bit slower, especially at this shopping center, so we would try and get everything done for the big stuff or the loud stuff, or where we need to actually cone up certain areas where they can’t go into – we’ll do it on those slower days.

Joe Fairless: That brings up a good point – is there some sort of clause that they have, or have you heard of any tenant going after a landlord for lowering their sales because of ongoing improvements that hurt them and maybe didn’t allow them to pay rent, or something like that?

Danny Newberry: You know, I haven’t… I’ll tell you what I have done though in the past – when we know we’re doing something like this and it is disrupting their business, we want to create a really good atmosphere with our tenants and we wanna make sure they’re taken care of and they don’t feel like we’re not addressing their needs. So a lot of times we’ll talk to them, we’ll figure out “Hey, what day works best?”, we’ll have our contractor involved in this conversation, and a lot of times at that point everyone’s happy.

If they’re not, what we’ve done in the past is maybe we’ve done like “We’ll give you a couple days free off your rent. We’ll give you a pro rata for five days off if we’re really having to cut your customers in half of those five days.” A lot of times they’re gonna be like, “Oh, that’s great. That’s fantastic.” I’ve really only had to do that once, but you can stop that by just getting everybody involved and letting everyone voice their concerns, and then addressing those issues.

Joe Fairless: When you’re evaluating a shopping center and you talk through the rent per square foot and what you buy per square foot – I’d love for you to just recap how do you evaluate if you are going to purchase a shopping center or not?

Danny Newberry: We look at it from three different views. One is who are the tenants, what do their leases look like, how long are they going out, what kind of strength do they have, how long have they been in business? We look at it from that standpoint.

Then we look at it from the cost approach – if I had to build this brand new, what’s it gonna cost? I’ve gotta buy the dirt, I’ve gotta build it, I’ve gotta fill it up. Then the other thing is looking at it from a cap rate and price per square foot comparable. On the comparables you look at what are prices going for shopping centers that are similar to this property in this area, and then also what are the cap rates that people are paying in this area for this type of product. So we’ll look at it from all those different aspects, and then we can say “Okay, this is about a 7-8 cap marketplace (I’m just giving you an example of this shopping center)”, and the shopping centers, depending on your tenants, will adjust that cap rate.

Then looking at the price per square foot, everything that’s selling in the immediate areas, between 125-150 is the most average price per square foot that things are selling for, and then looking at it from the standpoint of who your tenants are… We’re gonna have more mom and pop type tenants. We do [unintelligible [00:15:50].06] and then we’re got a children’s feeder where parents bring their kids and drop them off and they are doing dance and theater stuff and all that. Then we’ve got the barber, we’ve got the cryo, we’re looking at doing some other tenants over there that would make sense…

At the end of the day, these are mostly gonna be your mom and pop tenants, so when we look at it from a disposition standpoint, we’re gonna be on the higher end cap rate, so we’re shooting at an 8 cap, and we’re probably gonna be between 2,5-3 million on a disposition when we look at what the price per square foot is and what the cap rate is gonna be. So looking at it at the low end on a price per square foot of $125/foot on a sales price is 2.6 million. Looking at it at $150, you’re above 3 million. So it all just comes down to who we end up lending, what those leases look like, and obviously, what we do to the center, as well: doing the new roof, the parking lot, the facade and signage… That increases the value for the tenants, but also for buyers.

Joe Fairless: What type of financing do you get on these properties? On this one in particular – we’ll keep staying specific with this deal.

Danny Newberry: This one we just bought cash because it was an easy takedown, 700k; it really didn’t make sense to get financing when we knew we were going to flip it in a year. And even if we had to hold it, that’s fine, it’s gonna cash-flow like crazy, but at the end of the day we do a little bit of both. I’ve got partners that like to go into long-term deals for the cashflow and the depreciation, and on the other side I’ve got deals where it’s like “Hey, this is a perfect one for us to pick up, fix it up, stabilize it and turn it around and make a nice profit.”

Joe Fairless: The 700k – is that investor cash, or just you and your company’s cash?

Danny Newberry: On that one I’ve got two partners. What we did is we basically split it up to where we were able to take down the 700k, and then we had another couple hundred thousand that we needed for our tenant improvement dollars and our capital improvement budget.

Joe Fairless: And how did you structure that with the two partners?

Danny Newberry: I used syndications, and just like you, Joe, I started out in this business and really I had to build up an investor pool. I started off with friends and family, and then that started to morph into more relationships as we grew, and right now I’ve got about two dozen investors that I work with that come into our deals. Usually, it’s our a little bit bigger capital raise deals that I’ll have several partners on, but on this one specifically it was just the three of us total. We did a [unintelligible [00:18:27].06] we just did the operating agreement, subscription agreement, questionnaire, and ended up opening up a banking account in the name of the LLC that we purchased it in, which was a brand new entity formed in Colorado, and everyone comes in with their own entity; it’s for the equity and their ownership.

Joe Fairless: Okay. And do you do a proffered return, or what is your investor partner structure?

Danny Newberry: No, we don’t really do preferred returns. What we do is we just do “Hey, look, here’s the deal, X amount. We’ll get you X amount of ownership in it.” Most of our deals we’ll do [unintelligible [00:18:59].23] and a lot of people like that bonus depreciation or that depreciation that you can give out to people that are either considered full-time real estate investors or can use it in other faculties of their W2’s. A lot of times when we set these up, each deal can be a little bit different, but for the most part they’re pretty cut and dry at the same time.

Joe Fairless: Based on your experience, for a Best Ever listener who’s interested in shopping centers in particular, what is your best real estate investing advice ever for them?

Danny Newberry: I think the best advice for the Best Ever listeners would be make sure that you have really good mentors in place. I feel like I wouldn’t have been able to do all these different asset classes, from residential, multifamily, retail, office, medical, industrial – all these asset classes, without having professionals and people there that can help me on my deal when I’m going through it, and being able to ask the right questions, and being able to have people when things come up and you’re not sure exactly what the next move is.

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

Danny Newberry: Yeah.

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

Break: [00:20:14].00] to [00:21:07].29]

Joe Fairless: Best ever book you’ve read, Danny?

Danny Newberry: Best ever book I’ve read – I’d have to say Think And Grow Rich. I know that’s not very original, but when I think about it… I read it every year, that’s how good it is. And I can’t say that about a lot of books, that I read that often.

Joe Fairless: Best ever deal you’ve done?

Danny Newberry: We’ve bought a medical office building and we were able to turn it and stabilize it in under a year, and then we sold it on month 13th and profited over a million bucks on it.

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

Danny Newberry: Right now I donate to three charities. I really enjoy giving back, but one thing I’d like to do more of is mentoring, and giving people skills that I’ve learned over the past few years.

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

Danny Newberry: A mistake that I’ve made on a deal… Trying to be my own attorney. Don’t ever try and be your own attorney, always hire professionals. Always make sure that you have qualified people on your team to review all your documentation and to help you from A to Z on any of your deals.

Joe Fairless: What’s the best way the Best Ever listeners can get in touch with you?

Danny Newberry: They can go to my website, which is www.valueinvestmentgroup.com, or they can reach out by phone at 435-590-9095.

Joe Fairless: Shopping centers – that’s the focus of our conversation, and you walked us through a case study for the shopping center that you’re doing, as well as some previous examples of deals that you’ve done, what you’re expecting to work through, like any time there’s interruptions with capital improvements on the exterior – there’s gonna be some interruptions with tenants, so doing it on slower days, as well as just walking through how you run the numbers and the things you look for on evaluating the shopping center, the tenants, the cost approach if you were to build brand new again (or rather the replacement) and the cap rate and price per square foot comps. Talking through the type of tenants that you’d like to have in there, and the strategy that you use, why do a refinance versus a long-term hold, and in this instance on the deal we talked about it had to do with the location first and foremost, then also the age – that’s why you’re looking for an exit versus a long-term hold.

Thanks so much for being on the show, lots of great information. I have you have a best ever day, and we’ll talk to you soon.

Danny Newberry: Thank you, Joe. I appreciate it.

 

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JF984: She Beat Airbnb to It, and Here’s How

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Furnished residential real estate with high-yields is not a new thing. Our guest was doing it for decades… and she even knows the right connections with high paying customers for top-of-the-line quality and furnished spaces. She covers traveling nurses and other niche tenants that fit well into her operations, this is an episode you won’t want to miss!

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Kimberly Smith Real Estate Background:

– Owner and CEO of AvenueWest Global Franchise, a multi-million dollar success story
– Accomplished entrepreneur and real estate author
– Over 20 years experience as an entrepreneur in real estate, property management, corporate housing, website development and franchising.
– Based in Littleton, Colorado
– Say hi to her at https://avenuewestfranchise.com

Click here for a summary of Kimberly’s Best Ever advice: http://bit.ly/2rd0ecT

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investing in furnished real estate

 

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

With us today, Kimberley Smith. How are you doing, Kimberley?

Kimberley Smith: I’m doing great, thanks for having me!

Joe Fairless: My pleasure, and looking forward to digging in. Kimberley has over 20 years of experience as an entrepreneur and real estate property management corporate housing. She is an accomplished entrepreneur and a real estate author. She’s the CEO and owner of Avenue West Global Franchise, which is a multi-million dollar company. She is based in Littleton, Colorado. With that being said, Kimberley, do you wanna give the Best Ever listeners a little bit more about your background and your focus?

Kimberley Smith: Sure. My focus is corporate housing, which is furnished monthly rentals. In 2016, furnished rentals on a monthly basis in the United States was 3.2 billion dollars in rental dollars. So for dozens of years, long before there was an Airbnb, there has been an industry that provides furnished residential properties for businesses relocating and needing temporary housing. It’s amazing how it’s now the new key thing and everybody wants to be part of Airbnb and figure out how to do this; we’ve actually been doing it for decades.

Joe Fairless: [laughs] It’s old news to you, right? Alright, well let’s talk about this; this is gonna be an interesting conversation. I’ve got apartment communities; they’re B-class apartment communities, built between 1980 to 2000, in working class neighborhoods. Is this relevant to me?

Kimberley Smith: Absolutely. It’s relevant to anybody who owns residential real estate. When you’re providing a rental property, all you have to do to be successful is find the right tenants, set the expectations and then meet or exceed the expectations of the tenants.

In the United States there’s about 100k-200k traveling nurses in any given year, and they go and they have an entirely fun lifestyle where they pop from city to city, and they work for 6-12 months on a contract basis, so a B property would be a perfect situation for them. But what I want to say – what’s most important for me is what I call portfolio of diversification. We talk about all these fun and exciting things, and everyone has a bad habit of just jumping in; so let’s say you have an apartment complex with 10, 20 or 100 units in it. How can you maximize the revenue by making sure your long-term ROI is stable?

If you could take 5-10 of those properties and make them furnished monthly rentals, it’s a lot less work than doing painful dollar with your vacation rentals. You’re talking about getting 2-4 renters a year, but if you could make an extra $5,000-$10,000/year/rental property, that might be interesting. But as we know, in real estate everything goes in cycles, so you wanna keep a large portion of your portfolio; still in those monthly rentals where you can pay it on the first of every month, and that’s consistent… But these furnished monthly rentals allow you to capture some of that increased revenue you would be getting otherwise.

Joe Fairless: That’s smart. I love it. After we’re done with our conversation, I’m gonna pretend that I’m going to make it happen at one of my properties, so I’m gonna ask you all the questions that I can think of that I would need to implement this at my property, because who cares about me? It’s all about the best ever listeners, and I suspect that the questions I’m about to ask will be relevant to them if they’re gonna implement it on their stuff. So 1) how do I find people who are going to rent a furnished property?

Kimberley Smith: That’s one of the key secret sauces. In the old days, this 3.2 billion dollar industry that most people have never heard of – unless you’ve been relocated by your company – was a B2B business. So I would set up a corporate housing business, I would set up hundreds furnished rental properties and I would go out and I would do old-fashioned request for proposals with major corporations, and they would say “Okay, I need 103 one-bedrooms for six months. Can you get them all ready for me?”

What’s happening today with the transformation of the internet is there are these new distribution portals. Now, if you’re watching any of the news right now, the Airbnb’s are just now starting to think about “How do I talk to a corporation?” So there’s a learning curve.

Part of the challenge right now is finding those right tenants, and it’s done through a number of different ways. Some of it is through distribution portals, some of it is through old-fashioned relationship-building… Is there a university in your area? Is there a hospital where there’s a housing coordinator? Are there human resource directors who do this on a regular basis?

One of the first things that you’re gonna do before go anywhere into starting anything with your property is for the last eight years, Corporate Housing By Owner has created an annual report; you can get it on Amazon.com or you can register for free at CorporateHousingByOwner.com and you can download it for free. And it will tell you — we asked hundreds of people across the country “How do you market your furnished rentals and where do you get your best results from?” We have eight years of data in that report and it’s gonna start by just reading the details.

Joe Fairless: Distribution portals – you’ve said that a couple times… What are the distribution portals? Can you name them?

Kimberley Smith: Sure. So Corporate Housing By Owner is an old-fashioned distribution portal that’s created relationships over the last 11 years with major corporations, and it’s a subscription-based marketing platform. What that means is you put your property there, it calls you and you do the deal on the side. The great news is it’s a fabulous return on your investment. You’re investing a couple hundred dollars to get someone who’s gonna make you 5k-10k/year.

The Airbnb’s are there, and in certain markets like in San Francisco, where businesses like to be high-tech. You do your rental transaction through the Airbnb’s of the world, and you pay a much higher return on that for their platform to transact your rentals’ processes. So you’ve got HomeSuite, you’ve got Airbnb, you’ve got Booking.com, you’ve got HomeAway… All of these guys are just starting to think “How do we best service the needs of the business traveler?” So in the short run, you wanna be in all of those places.

The good news is if you understand your technology, you can sync your availability calendars from one platform to another to keep everything organized. So you can sign up with a reservations program like Access.com, list all your rental properties in there, and then you can see all your properties through APIs to these distribution portals. That’s a lot of detail, sorry.

Joe Fairless: No, we love details, especially for those of us like me, who take notes on these calls. So that’s great. What about if we have a third-party management company and they’ve never done this before?

Kimberley Smith: That’s actually what I do every day, and part of it is understanding the difference between the tortoise and the hare. In unfurnished property management, you are the tortoise; you’re renting a property for a year, and if your kitchen sink has a leak, you report it and they come out in the next week and they’re gonna fix it for you. In corporate housing, if I’m there for 30, 60, 90 days and there’s something wrong, I need you to deal with that. As a corporation, I need you to deal with me on a business-to-business type transaction. I need to understand that, I need to be invoiced in a certain way. I’m not gonna pay you a security deposit, because I don’t wanna tie up my cash. I need you to understand my reputation as a business client and [unintelligible [00:10:04].10] responsibility.

Typical unfurnished property managers do not understand corporate housing, so what I do is I work with real estate brokers and property managers to develop Avenue West corporate housing, which is a management brand that focuses only on furnished rentals.

So right now there are eight Avenue West property management companies across the country, and our goal is to get 50-75. I would be a little wary in just handing a furnished rental that you’re expecting to get a business client into an unfurnished property management, because they don’t really understand how to find that right tenant.

Joe Fairless: There’s a couple scenarios, and I’m gonna give you both of them — well, I’m sure there’s more, but I have two on my mind. I’m gonna give you one, and then I’ll give you another. One is I have a single-family home in Dallas, and I have a management company that I’m happy with, but certainly your idea piques my curiosity and intrigues me. Do you replace the current management company, or do you educate them? How does this work?

Kimberley Smith: Dallas is an easy answer for me, because there is an Avenue West Dallas office. So you would replace your management company with Avenue West Dallas, if you really wanted to make it a full-time corporate housing company. You could sit down and work an educational basis with your property management company and say “Hey, I really just need to be able to call you when there’s something wrong, and I need you to deliver the keys when I need the keys delivered, but I’m personally gonna go out and I’m gonna start meeting the needs of the corporate housing travelers.”

Part of the challenge is in unfurnished we’re used to being able to plan ahead and do things slowly. Most corporate housing tenants call you today and they actually wanna move in within seven days. So if I’m an auditor and I’m going to a new city to do a project, I’m not gonna need my corporate housing until I’ve actually signed that deal, but once I sign that deal, I need to be there tomorrow. So there’s a speed to that. Now, with you as the investor, maybe in the short run you want to answer those calls and figure out the best client for you, and then just have your property management company back you up, but there is a bit of a learning curve there.

Joe Fairless: And then the other scenario I can think of is I have an apartment building – I’ll give you a real example… I’ve got a 296-unit apartment building in Dallas. As you said earlier, have a small percentage, not the whole thing, that way we have a diversified portfolio. How do you work with that management company? Because I imagine since you’re only taking a very small piece of the pie in terms of number of units, that you wouldn’t want to take over the whole management of the apartment community.

Kimberley Smith: Maybe we should go back one step before we get there. When I talk to investors, there’s three things that I really wanna focus in on. One is I want you, the investor, to know thyself. What is it that makes you tick and what’s your threshold of pain when it comes to real estate and cash flow? That next step is understanding your pain per dollar, and there’s lots of opportunities out there, but you need to understand, if you have absolutely not a single ounce of time left in your day at any given time, the idea of making an extra $5,000-$10,000 a year may not be of interest for you, so you  need to understand…

In certain markets you can do vacation rentals, but you’re flipping something all the time, but that’s a lot of work. So you need to understand what your pain per dollar is, and then you need to understand the lifecycle of real estate. Every market and every type of property will have ebbs and flows, so if you can understand that a little bit more, you have some flexibility.

So a 296-unit… You would probably wanna sit down and say “Hey, let’s put together a business plan. Who in my area — is there a hospital? Are there traveling nurses there?” So I’d create two different levels of corporate housing. Could I create what I call a CHBO complete property, which is really designed… Have 5-10 units that are perfect: they have Wi-Fi, cable, exactly the right number of forks, and king-size beds and TVs in every room. That really works for that business traveler.

Now, are there 10-20 units that I could use more for the traveling nurse? They just need basic accommodation. Then if you have an on-site property manager, every couple of years you may wanna say “Hey, this year they’re working on a power plant that’s down the street, and they’re gonna get a whole bunch of extra contract workers, so for the next 12 months I’m gonna do 30 units that are gonna be basic, furnished units.” “Oh, but you know, that power plant contract is done, so I’m gonna take 20 of those this year and just do the typically furnished/unfurnished.”

So if you’re really talking about a 296-unit building, sitting down, putting together a business plan, saying “What clients am I gonna get now?” and then reviewing that on an annual basis is gonna help you through that process.

Joe Fairless: Fascinating. The business plan and the opportunity just molds to however the market shifts, as you said. So you’ve got traveling nurses, business travelers, if there’s something happening – okay, that makes sense.

Let’s talk about money. How much more money can we make?

Kimberley Smith: Return on investment – that’s what everybody wants. I talk to investors and I say “Hey, you have a furnished rental… Let’s just look at the numbers and say you have an annual occupancy of 80%.” Okay, so you wanna look at the extent of stays in your neighborhood, you wanna look at the hotel rates in your neighborhood, you may even be able to find exact corporate housing rates in your neighborhood.

Last year, in the United States, the average daily rate on a corporate housing rental was $150. The average U.S. corporate housing rental is also a one-bedroom. So if you take a one-bedroom unit and you say “Okay, I’m getting $150/night” and run that at an 80% occupancy… Now, most individuals are not gonna get that $150/night. You have to understand your individual market and figure out where you fit, and you can purchase something called Corporate Housing Industry Report, which this year is a 206-page document that goes through all major metropolitan state areas and looks at “What’s the average rent that was collected last year on a studio on a one-bedroom, on a two-bedroom…?”

Again, when you’re looking at houses, you could look at the Corporate Housing By Owner report; it’s gonna give you average rental rates… So then you’d back into that.

I just come up with round numbers of $5,000-$10,000 extra returns, because I’m talking very generally. But if you look at something like Phoenix, you could have a one-bedroom apartment that you’re buying for 100k-150k, that would rent unfurnished for like $750, but you might actually be able to rent it as a furnished rental for $2,500. Some markets have really big spreads, and then there are other markets that have unusual spreads that are reversed, like San Francisco.

San Francisco is a little soft this year, but if you look at San Francisco in 2016, you could actually in some cases get more as an unfurnished rental than you could as a corporate housing rental… But in San Francisco people don’t like to tie up their rentals for 12 months, because rents are changing so much. So by putting in the corporate housing rental model, they can turn that and get an increased rent every 90 days, depending on the market.
So you do wanna understand your individual market – the Corporate Housing Industry report can do that for you, which is put out by the Corporate Housing Providers associations and also the CHBO report.

Joe Fairless: What type of management fee should the management company charge for corporate? Because we know what they charge for residential or regular residents, but what about corporate residents?

Kimberley Smith: If you were a vacation rental property, the property manager typically charges 50% of the rent in order to do full property management.

Joe Fairless: Is that right, 50%? Is that what you said?

Kimberley Smith: That’s correct.

Joe Fairless: Okay.

Kimberley Smith: So for corporate housing, an Avenue West managed corporate housing brokerage would charge you between 25%-35%, depending on the market. If it’s a corporation, it’s paying the rents via credit card. Avenue West is incurring that expense, and not passing that on to you, the owner. They’re doing all the key arrivals, they’re doing whatever background checks are necessary; they’re doing all of that service for that corporate tenant. They have extensive software to do the invoicing and such that’s necessary as part of that whole thing… And they’re building relationships. They’re working with a management company that doesn’t say “Oh, I HOPE to find you a corporate housing rental.” You’re dealing with an Avenue West company who’s been around for 18 years, developing these relationships, that says “Hey, these are the corporations that work with me every day.”

Joe Fairless: Just running some quick math… I love specific examples. I’ve got a house that rents for $1,200 in Dallas, and let’s say I got $100/day for this house with a corporate rental. That’s $3,100, and then 35% off the top, so that’s $2,000. So basically, I go from $1,200 to $2,000 – so an $800 difference.

I’m sure there are other things, like paying for all the forks and Wi-Fi or whatever else that’s involved, so the expenses would be higher, but both the CapEx expenses and then the ongoing expenses would be higher, right?

Kimberley Smith: Yeah, that’s correct. But how many bedrooms do you have?

Joe Fairless: This one house example? Four bedrooms.

Kimberley Smith: Okay. So at four bedrooms, you’re really undervaluing the property at $3,100. It probably rents more for like $4,100/month.

Joe Fairless: Interesting. I had my conference actually a stone’s throw away from you, in Denver, Colorado, and we had someone speak about corporate rentals, and it makes a lot of sense, especially to diversify your portfolio. The key is – and this is where the genius of what you created – the management, and having the management team be experts in it. I think it’s a really smart business.

What is your best real estate investing advice ever?

Kimberley Smith: Best advice is a couple different things. One is understand yourself. It’s so simple to go to real estate conferences and get so excited… There’s lots of ways to make money in real estate, but know yourself first. Not all real estate is created equal, so you’ve gotta do your homework, you’ve gotta understand who your developer is, you’ve gotta kick the tyres, you’ve gotta know three different ways you can make money off of that rental property.

And then return on investment is an interesting thing. Understand that sometimes you do not want to cash-flow real estate. What happens if you went and bought that four-bedroom house today and you decided “I’m gonna put a 15-year mortgage on it and I’m not gonna cash-flow it at all for the next 15 years. But I just had a cute little baby boy today, and 15 years from now I’m gonna have to pay for him to go to college, and it’s gonna cash-flow like there’s no tomorrow in 15 years.”
So there are lots of interesting ways through financing in what you need. If you are a young investor and you wanted to cash-flow today so you can buy the next one, that’s cool, too. But the way to get the long-term return on your investment is not necessarily about making a dollar today, so have fun learning about some of those different ideas.

My figure book is The Idiot’s Guide: Making Money With Rental Properties. You can check it out at most libraries, you can buy it on Amazon.com. It talks about all of those ins and outs. There will always be a “What if…” in real estate investing, you just need to know a scenario and a solution to all of those what ifs as life changes.

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

Kimberley Smith: Sounds scary.

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

Break: [00:22:25].13] to [00:23:13].05]

Joe Fairless: Best ever book you’ve read?

Kimberley Smith: That’s a great one. I was thinking about it, and I’m on whatever great book I’m reading now… So read something now, right?! Right now I’m reading Stealing Fire, and it’s how if you create great, amazing teams, you can exponentially outperform the individual. The navy SEALs do it, the googles of the world do it… So my advice is just to always have a book in your hand. I read non-stop.

Joe Fairless: Best ever deal you’ve done?

Kimberley Smith: I was a couple months out of college; I found a 400 square foot studio that I bought for $89,000. I got a first-time homebuyer’s loan on it, I put  $2,300 down. That 400 square foot studio happened to be in San Francisco before the dotcom era, and it grew and grew and grew. I was able to rent it for $3,900/month, I was able to eventually sell it for $400,000 and buy my primary home during — the dotcom bust happened, September 11th happened, no one could sell real estate, and I could sell that 400 square foot studio to finance an entire primary house. So always buy that smallest property in the best neighborhood.

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

Kimberley Smith: I love to connect people and ideas. It’s amazing what is possible. I work a lot with mentoring and business development; that’s why I love doing the franchising side of my business, because I get to help other people build their businesses.

I support [unintelligible [00:24:38].06] healthcare innovation. We are currently functioning in Nicaragua. We are now working with the Nicaraguan government to renovate and manage a rural health clinic, and it’s amazing, when you take one step at a time, the incredible things that you can accomplish.

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

Kimberley Smith: Trusting a developer. I have a hard time buying things pre-construction. Don’t just assume that the permits and all of the things are gonna do all of the checks and balances for you. Learn what other things that developer has built in the past, what are the reviews on that building… In my particular case, when [unintelligible [00:25:17].12] prior to close, I was so disgusted that I actually walked away from my security deposit. So don’t just buy something and think that all properties are created equal.

Joe Fairless: Where can the Best Ever listeners get in touch with you, Kimberley?

Kimberley Smith: Kimberley@AvenueWest.com. You can look up AvenueWest.com, which is the property management side of the business. I’m always happy to answer questions.

Joe Fairless: I enjoyed our conversation, learning about corporate housing, how we can benefit by diversifying our portfolio by using corporate housing, and how we can maximize the income by just maybe swapping out maybe on a single-family house for corporate housing tenants. How to find them through distribution portals (like you listed earlier), relationship building, are there any hospitals close by for traveling nurses, talking to the housing coordinator if there is one, or at least a human resources contact; a university would be another source for this type of housing… And then the management side of things, too. You’ve got your own business; you’ve got Avenue West Dallas, Avenue West Fill-in-the-blank-for-the-city… And then also the type of money we can make with corporate housing – you went through that.

Basically, if we want a rough estimate from what I took from our conversation, we project 80% occupancy and look at the extended stay businesses in our area, and see what they’re charging, look at the hotel rates, look at Airbnb, and we’ll have a general idea of what we can charge, then we can back into some numbers, and assuming 35% off for the rent, and then factoring in some other CapEx expenses that we need to put into the property in order to get it ready, as well as some other ongoing things as well that we would normally have.

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

Kimberley Smith: Thanks so much, Joe. Have a good day, too.

 

 

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JF973: How to Make a Pot of Gold with Tax Advantages

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Just go to the end of the rainbow… Okay Okay, well in fact this is all about IRAs. Yes, with tax advantages, why wouldn’t you open a self-directed IRA to invest out of? It’s definitely not for everybody, but if you are one to hold large sums of cash and not sure what to do with it, this episode is for you!

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Clay Malcolm Real Estate Background:

– Chief Business Development Officer at New Direction IRA, Inc.
– 20 years of teaching and 25 years of management experience
– Teaches continuing education classes for CPAs, CFPs, and real estate professionals
– Degree in communications from Northwestern University
– Based in Boulder, Colorado
– Say hi to him at https://newdirectionira.com
– Best Ever Book: Spectrum of Consciousness

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benefiting from tax advantages

 

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

With us today, Clay Malcolm. How are you doing, Clay?

Clay Malcolm: Great! Good to be here, Joe.

Joe Fairless: Nice to have you on the show, and glad you are here. A little bit about Joe – he is the chief business development officer at New Direction IRA. He’s got 20 years of teaching and 25 years of management experience. He teaches continuing education classes for CPAs, CFPs and real estate professionals. He’s based near Boulder, Colorado – between Boulder and Denver. With that being said, Clay, do you wanna give the Best Ever listeners a little bit more about your background and your focus?

Clay Malcolm: Sure. Well, I’ve been here at New Direction IRA for a little over five years, coming up on six, and for my real estate investing experience it’s been a great learning place, because IRAs can be a real estate investor, and it’s something a lot of people don’t know. From my perspective, I came into it personally needing to change my retirement investments, because they were pretty static in 2008… A lot of people got clobbered. So this has met my personal needs, as well as my professional needs. It’s a great learning experience, like I said, and the nice thing is that I’m usually telling somebody something that they can use and that they haven’t heard before, so it’s a really satisfying position to be in. It turns out not to be for everybody, but certainly it’s a nice thing to be able to give somebody more options.

Joe Fairless: Who isn’t it for?

Clay Malcolm: Well, I would say that it can be for everybody, but I would say that if you’re in a long-term government position or a company that has a very robust pension, you might not need to do this, simply because IRAs in and of themselves, your retirement accounts, including HSAs are really built to help yourself later in life, give you income and hopefully retire the way that you want to, pay for your medical expenses, so on and so forth.

If you have that stuff covered, you might not need to move those retirement funds into alternative assets like real estate, but then again, you might. But a lot of those plans for government and some pension plans don’t actually allow you to move the money or to do real estate… So if your mind’s locked up, then it’s probably not the exact right tool for you, but pretty much anybody else, especially somebody who has contributed to a 401k or 401a, 403b, 457 – any of those plans, and you separated from employment, and those plans aren’t making money… A lot of those are static; a lot of people actually have put them on the sidelines, and they have real estate investing expertise, but they’re unaware of the fact that they can actually combine the tax advantages of the account with their real estate investing experience and preferences. That’s the combination that a lot of people don’t have in their heads.

Joe Fairless: Can you elaborate on that combo that you just mentioned?

Clay Malcolm: Certainly. The IRS does not limit your IRAs asset purchases other than to say “No collectibles and no life insurance.” The IRS does not however tell IRA providers which assets they have to handle, so IRA providers like us, or Schwab, or Fidelity, or your bank – we’ve all chosen a business model built around the rules [unintelligible [00:05:32].19] and so on and so forth. Banks and brokerage houses typically have built their business where you have to invest in publicly traded securities, which often you get a commission from, and so on and so forth; that’s the business model.

We’ve actually taken the opposite approach, and we’re not the only company that does this, of course, which is that we handle almost all the assets that are allowed by the IRS – including real estate – and the fact of the matter is the IRS does not limit real estate investors. So if I get one message across today, it’s really that your IRA can keep its tax advantages and be a real estate investor. The thing that conceptually you’re kind of adjusting to is just that the money, once it’s been contributed to the account, instead of it buying stocks and bonds and funds and looking at the appreciation or dividends and things like that, that same (tax advantage) money is buying real estate, or making a real estate loan, or something like that, and that’s how the IRA or the account makes the revenue. It’s still tax-deferred while the money is in there, so if your IRA buys a house at $80,000 and several years later gets to sell it for 95k, first of all, good job! Second of all, that entire 15k, the profit, would come back into your IRA and be ready to be reinvested without any capital gains and things like that.

By using the tax advantages, the tax-deferred status, hopefully you can get that money to compound faster, so that’s really the get. So really just taking those tax advantages and graphing it on to your real estate investment preferences.

Joe Fairless: This is two separate questions — actually, I’m not gonna ask you two separate questions, I’m just gonna ask you one question: what are some mistakes that you see people make when it comes to setting up or thinking about a self-directed IRA?

Clay Malcolm: I’ll give you the two most common ones. One is people are very unaware of the differences between a 401k and an IRA, and there are some specific rules that they have to follow, one of which is that the IRA provider is the signer for the account, and things like that. So I would say conceptualizing that difference is one thing.

The other paradigm shift that I think is a little bit tough for some people to get into their heads is that in this particular scenario, which is typically called “Self-directed IRA Investing”, the account holder is calling all the shots. The provider, us – we’re a very neutral part of the equation. Our job is to make sure that the account is documented properly, so that the IRS knows that it’s a part of that account type and it gets to keep the tax advantages. But the account holder himself is the one who chooses the assets, and you can use your regular real estate team or a financial team, but you choose the assets, you negotiate the deal, you’re the motive force.

In the scenario where somebody’s IRA is with a managed company, whether that’s a bank or brokerage house, it’s a very passive kind of participation. In the self-directed world, especially in real estate, it’s very active; you get to make calls, and we’re really just responding to your scenario, the thing that you’ve developed. And again, we don’t supplant anybody, so bring your own real estate team, bring your financial team, whoever helps you work, your preferred method for real estate investing – bring them all, and they can just, again, take that same scenario and move it into your IRA. But a lot of people don’t realize that you’re gonna have to be the motive force, and get to be the motive force.

Joe Fairless: When your company starts working with someone, what are some surprising elements that they come across? And perhaps you just covered it, where that’s basically the same question. If so, say “Joe, dude, that’s the same question”… But I’m wondering what surprises people when they’re working with you.

Clay Malcolm: I’ll give you a different slant. I think that one of the surprising things is that they think it’s gonna be very expensive usually, and they think that it’s gonna be difficult. Neither of those things is necessarily true. One of the things I mentioned is that each IRA provider has their own revenue models and their own technology… But in this day and age of electronic banking things, tools that you can use, so on and so forth, a real estate investor who has an IRA that owns a property – you can pay your bills online for free with some providers, the paperwork is becoming almost always electronic – things like that.

Again, it will vary from provider to provider, but I think people are surprised that it can be relatively easy. The information is out there, we do a lot of education, so we want people to do it well. The other thing is that our fees are different and often less than what they’ve been paying at a 401k company or an IRA company, so that surprises some folks, too. But I would just say that your ability to get into this type of investing – it probably doesn’t have the barriers that a lot of people expect that it will.

Joe Fairless: What is your company’s revenue model?

Clay Malcolm: We basically charge for our bookkeeping labor… Things like when you open an account, it’s $50, because we have to push some paper. When you make a purchase or sale, we have a transaction fee that corresponds to how much paper it is, basically. If you’re buying precious metals, it’s $40. If you’re buying a piece of real estate, it’s $250. All of it is really based on our bookkeeping labor. It’s like hiring a bookkeeping and custodial entity to document your IRA transactions.

We’re not gonna take percentages, we’re not gonna be reliant on — we don’t sell any assets, things like that… So that’s the way historically banks and brokerage houses have built their revenue model. So again, we’ve kind of taken the other approach – you’re hiring us as a service so you get to do the type of investing you want, and we’ll just tell you what we charge and you run the show.

Joe Fairless: There has to be a larger way that your company makes money other than just charging $250 here and there…

Clay Malcolm: Well, there is an ongoing annual fee, because an IRA obviously keeps its tax advantages over a number of years, so a lot of the real estate investors that we work with choose our flat, which is $295/asset/year; it doesn’t matter what the value of the asset is… It could be 100k or one million, or whatever it is, because every year we report to the IRS the value of the account, and certainly we have to set you up with the online portal so you can pay bills, and that kind of thing. So that’s what the ongoing fee is about. So yes, there is an ongoing piece.

Joe Fairless: There’s gotta be another way that your company makes money. Do you invest? Because $295 – you have to have 203 people just to make $60,000, which would be to pay one person’s salary -ish… So do you invest the money that is in the self-directed IRA or do you borrow against it and then invest in something else from a larger revenue standpoint for your company?

Clay Malcolm: It’s a good question. We, as part of [unintelligible [00:12:15].07] FDIC-insured, but it’s also static… But typically speaking, in our agreement with account holders we’re allowed to invest any of the cash position that’s left with us. Now, as you might imagine, most people come to us with an asset in mind, so the cash is only here for a short amount of time. So they open an account, they do a transfer or a rollover, and then they take that money to buy a condo or a commercial property, or whatever it is that they do to invest. So the cash doesn’t typically stay with us very long, but we are allowed to invest it in the interim while we have it. It’s still liquid for everybody, but we can invest it, so there is some revenue there.

Joe Fairless: Okay, I imagine that’s gotta be the foundation of the business from just a business model standpoint for you all.

Clay Malcolm: Well, in our particular case because we try to get people to understand that their cash position is gonna be static and that they really need to be looking for investments, it’s not our major source of funds, and it’s not something that we really promote. We can do it and we do do it and it does help us to keep our costs down, but generally speaking, most of the way that we’re approaching this is we’ve been very bullish on investing in technology. We have IRA holders who have real estate, and the renters can pay the rent electronically. As you might imagine, in the bookkeeping and in the financial world, anytime you can automate a process and take a person’s attention away, so you don’t have to sit there and go “Okay, this check is for this thing, and I’ll enter it into here and there…” – any of those efficiencies that we can create, we do. So we’re trying to keep our cost down because, frankly, it’s all part of the bottom line, and we encourage people — if you’re the motive force in any investing venture (and that’s basically what you’re doing with your IRA here), we encourage you to do due diligence on every participant, whether it’s the asset or the IRA provider, or anybody that you’re working with… So we encourage people to look into our business model as well.

Those are the two things that we’re trying to work on: making sure that people understand what we’re doing, and also make it easy for them.

Joe Fairless: Based on your experience as a self-directed IRA expert, what is your best advice ever for real estate investors?

Clay Malcolm: Well, the best advice ever for the Best Ever listeners is really just to keep the idea that your IRA money is in play when you’re out looking at deals. That doesn’t mean just your IRA money either; if you’re gonna invest in a deal and you are gonna control it, but you need other investors, introducing that idea to them, that their IRA money is available to possibly invest in a project can be a huge boon.

Lots of times people are out looking for money, looking for investors, and all they really need to do, in some cases, is to just introduce the concept that their IRA money can invest in real estate, because most people don’t know, and that’s a fact… Most people will go, “Huh? Never heard of that.” I asked my bank, “Could I invest in real estate with my IRA?” and he said no. And the reason he said no is because they don’t handle real estate, not because the IRS prohibits it.

So I think my best ever advice for listeners is really to just keep in mind that that pot of money that is tax advantaged is available… So don’t forget about it, make sure that you incorporate it, and it can be for other people, as well, so it’s a real estate investor in and of itself.

Joe Fairless: What does someone have to submit, once they identify that they wanna do a self-directed IRA, in order to be fully up and running, and how long does that take?

Clay Malcolm: Good question. The typical process that we see is that somebody will open an account with us – in our particular case it’s online, so it takes 15-20 minutes to fill it out. The account is usually officially open within a business day. Transfers, rollovers and contributions are the way that money gets into that account in order to be positioned to disburse. Contributions are very fast, you can do those online with us. Transfers and rollovers are a little bit longer process, simply because we don’t control them; you’re actually asking your bank or brokerage house to liquidate those funds and then send them over.

We tend to tell people it’s 1-3 weeks to get that money from the old IRA or the old 401k over to us. Often, it is somebody who has a 401k at a company that they no longer work for or that they forgot about and left it there, so that comes over via transfer or rollover; no tax, no penalty… You’re really just moving it from one custodial entity to another. So I would say opening the account and getting it in position – we’re probably looking at 1-3 weeks; that can vary some.

During that time, most of our investors are already looking for the project or even negotiating the deal. So you can make an offer on a property even if all of your money hasn’t hit us yet. You can make an offer, be negotiating the deal, because the money will be needed at closing time. Often, people are in this sequence – they’ll be multitasking along the way, trying to get the investment ready to go as the money moves. So I would say that you’re looking at a few weeks.

Joe Fairless: Very helpful. Clay, are you ready for the Best Ever Lightning Round?

Clay Malcolm: Ready, Joe!

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

Break: [00:17:34].22] to [00:18:26].19]

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

Clay Malcolm: I will say Spectrum of Consciousness, although anything that Wallace Stegner wrote, I really like.

Joe Fairless: Alright… New author for me, new book for me – thank you for sharing that.

Clay Malcolm: Certainly.

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

Clay Malcolm: Well, my favorite way is I have been involved with a company that reads textbooks onto tape, so that blind students can use those textbooks in their studies. I always thought that was cool.

Joe Fairless: What would you say is a mistake you’ve made on a particular business deal or just as a business professional?

Clay Malcolm: I would say not empowering myself to make a move… And I’ll go back to 2008 – I hadn’t practiced moving funds into different investments, and it stalled me. It was an interesting thing, it’s part of my psychology that if I haven’t done it before, it seems bigger than it would be, and if I had been more agile and thinking and been empowered already to make financial moves, I think I could have mitigated some of my losses. It didn’t work, but that was the lesson, for sure.

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

Clay Malcolm: Well, the easiest way to get in touch with me is an e-mail address, which is info@ndira.com. I do get to travel a lot and have a lot of things that I need to be doing around here, but that way I can get that information, that question or anything and get back to you pretty much anywhere I am.

Joe Fairless: Well, from giving specifics on the process for opening up a self-directed IRA, and the timeframe that that requires (usually about 2-3 weeks from start to finish), to talking about the price points that it does cost with your company in particular, to the mistakes, like not knowing the difference between a 401k and an IRA, and the ramifications for the difference (like you said, the IRA provider is a signer on the contract), as well as the little know fact for some investors – perhaps not all of the Best Ever listeners, because we’ve talked to self-directed IRA experts, but as you mentioned, the self-directed IRA account holder is the one calling the shots… And then your overall lesson learned, that can be applied really towards anything we do as a real estate entrepreneur, and that is – I love your quote – “if you hadn’t done it before, it seemed a lot bigger than it should have been”… Isn’t that the truth with anything in life? If we haven’t done it before, it just seems like it’s a whole lot more complicated and harder than it actually is once we end up doing it.

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

Clay Malcolm: Sure, I enjoyed it!

 

 

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JF967: Why You Should Use Your REALTOR to Manage Your Rehabs

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If you’re flipping in multiple markets and you decide to pull the trigger to hire contractors far from you, it may be wise to have a second pair of eyes ensure that the job gets done… And who better than someone who is constantly reminded to protect their fiduciary duty to you, that’s right… Realtors! She fixes and flips properties in two markets, Denver and SoCal, hear how she leverages other professionals to get the job done!

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Susan Eliya Real Estate Background:

– Full-time real estate investor
– Over the last 5+ years, we have completed more than 70 deals utilizing various strategies in many markets
– Her strategy is to flip in hypermarkets and create passive income utilizing the profits from these flips
– Based in Denver, Colorado
– Say hi to her at 201.424.0247
– Best Ever Book: Chase the Lion by Mark Batterson

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rehab real estate advice

 

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

Susan Eilya: I’m great, thank you, Joe. Thank you for having me.

Joe Fairless: Nice to have you on the show, and looking forward to digging in. Susan is a full-time real estate investor. Over the last five years she’s completed more than 70 deals, utilizing various strategies in a bunch of markets. Her primary strategy is to flip in hyper markets and create passive income utilizing the profits from those flips. She’s currently based in Denver, Colorado.

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

Susan Eilya: For sure. As you said, I’ve done about 70 deals going on — this is my sixth year in it. My husband and I started this business, jumped all in about six years ago. We do everything from basic cosmetic rehabs of 15,000, all the way to brand new builds and to scrapes. My examples also include condo and single-family rentals, as well as I’ve done some short-term and vacation rentals. Always looking for another strategy… The focus is to master one strategy, keep that going, keep those systems in place and then jump to the next and jump to the next, and create various streams of income.

Joe Fairless: Yeah, the good stuff. So what are you doing right now as far as the main types of projects that you’re working on?

Susan Eilya: I’m mostly doing fix and flips. I live in Denver, it’s a really hot market. I also do fix and flips in California and San Antonio… Just focusing on those three main markets. I’ve done stuff in other areas, so trying to hone in there. That is the focus, but I think the ultimate goal, like a  lot of us real estate investors is – the flips are fun, but ultimately owning rentals and multi-units for that passive income, and really building that wealth.

Joe Fairless: Yeah, so that is the fix and flippers and wholesalers – to take those profits and then invest them long-term into something. You’re doing flips in Denver, which is a hot market… You mentioned California, I suspect… Where in California are you doing flips?

Susan Eilya: Mostly Southern California, outside of L.A. A few years ago you could pick up a property for a couple hundred thousand, paint the cabinets white and still make 20% on your money… It’s changed over the last few years, but the market’s still there, despite the prices increasing [unintelligible [00:04:30].14] and the profits are still there. So mostly Inland Empire, Southern California area. I’ve done everything from Pasadena, all the way to La Quinta in Palm Desert. Big area.

Joe Fairless: You’re based in Denver, but you’re doing it out of state in California… How are you finding those deals?

Susan Eilya: Actually, when we started I was living in the DC Metro Area, and that was when the California market was hot, so we started doing deals out of state, which is rare for most people. Like anything, it’s just having a solid P. My realtors there are invested just as much as I am, because they know if they find me a good deal, they’re gonna sell it a few months later, so they’re double dipping on the commissions; also overseeing my GCs… It’s all about teams, and I’m  mostly getting those deals on the MLS, whereas in Denver almost all of my deals are pocket deals or directly from the sellers, just because the way the market is here.

Joe Fairless: What did you say about the general contractors?

Susan Eilya: I was just saying that your team is everything, and my realtors in California, for example, are overseeing my GCs as well; they’re just as hands-on as I am or my partner is, or my GCs, because they’re just as invested as far as they know that they’re gonna be able to make money on the front end and the back end.

I’ve got a few sets of eyes – not just my GCs, but then I have my realtor sort of GC-ing the GC to make sure that things are moving smoothly, because again, we all have something to win in that project.

Joe Fairless: Wow, that’s fascinating. You have your real estate agent oversee the general contractor… How official is that and what are their specific responsibilities?

Susan Eilya: Well, they just make sure that the project is still moving. We have the GC who’s got the teams, but we’re out there fairly often. I don’t do much traveling; my husband does most of the business traveling. I’ve actually done a lot more in the last several months or so… But they just make sure that the project is moving on, and what I tend to do too is I actually, because of my relationship with my realtor, I actually will send him funds to distribute to the workers, because we’ve had a six-year relationship and I trust the guy, and we’re also discussing even making him part of my California entity, so he’s actually making profits out of the profits as well. So again, another level of commitment on his end, because of what he’d be gaining as well.

Joe Fairless: And why send the funds to the real estate agent to give to the GC? Why not just do it directly to the GC?

Susan Eilya: Well, in California my GC in particular is managing that, and he’ll say “Hey, here’s the bid”, let’s say for the kitchen, and I don’t pay anything until the work is done anyway, but a lot of times I’ll send some money to him just so that it’s available immediately to pay to the guys once it’s done. But just like any state, I’m not generally paying anything obviously until it’s done. You’ll get in trouble when a GC asks you for 50% down. I see people do that all the time… Give them 50% and then wonder why the project’s not done a week later, or hasn’t started. When you hold the money, you hold the control.

Joe Fairless: How do you structure your contracts with general contractors, knowing that your beginning, which is incredible – you were in Washington DC, but had flipped projects in California… How do you structure that with GCs?

Susan Eilya: You know, in the beginning of any business or any location that you’re cranking out your business or whatever, you really need to be present… So you’re building the teams there, and in the beginning we were out there for two weeks every four to six weeks, so we were out there very often, building those teams. And just like any other business, you have to consistently build those teams.

We’ve been present a lot, but once you get those teams in place, it’s a little easier to manage and run the projects. I’m sorry, I went off topic there and I don’t think I answered your full question.

Joe Fairless: No, you were on point, but how do you structure it? Maybe the payouts and what documentation do they need to provide you before you pay them?

Susan Eilya: First of all, we always have a contract between us and the GC. Additionally, yes, they can send pictures, but I always like a second set of eyes and get my realtor to send pictures of completed work as well. I get bids all the time. I also get invoices… I have my GC actually in San Antonio – he’s probably one of the most organized GCs ever… He’ll send an invoice with what was done, what is pending and what we need payment for for the next week. It’s like clockwork, every Monday I’ll get this invoice and then I will wire what was completed, and then either get the invoices for what was already paid for and reimburse that, or I’ll just pay for items directly.

A lot of times I even pay for items directly to the suppliers, whether it’s the window guy, whether it’s Home Depot or Lowes, or the kitchen designer… Generally, a lot of times I’ll pay for that directly so that I know the vendors are paid, and then the labor is paid to the contractors.

Joe Fairless: You’ve done 70 or so flips utilizing different strategies in many markets… Whenever I’m reading your bio and it says “different strategies in many markets” – what does that mean?

Susan Eilya: So I’ve done 70 deals… You said flips, and I just wanna clarify – those 70 include fix and flips, they include rentals that I picked up, they include properties that I renovated and refinanced and held, they include wholesale deals… I guess that’s mostly the strategies.

So anything from flips to new builds to buy and hold, or buy renovate, hold and refi, and even small wholesale deals. I don’t wholesale much, but I usually just wholesale for guys that I know that can close if I have a few extra deals. So those are most of the strategies that I do.

Joe Fairless: Are there any types of strategies that you’ve done before, that you wouldn’t do again because you got burned or you just don’t think it’s a good one after doing it?

Susan Eilya: You know, what I love about real estate is that you can either make it a business or a hobby, and whether the market is good or not, you can always find a strategy that’s good for your market. So despite what CNN or the news is saying about real estate, there’s always a strategy. So really, no, there’s not a strategy that I’ve ever done that I felt like wouldn’t work…

And frankly, if I got burned on something, I’m not gonna let that one bad experience deter me from creating a portfolio of wealth and great projects. So no, I really don’t have anything where I can think off the top of my head where I didn’t like that strategy.

Joe Fairless: You just roll with whatever the market’s giving you and you implement it based on what makes sense?

Susan Eilya: It’s that for any business, whether it’s you running your podcast or your rentals or other businesses that are unrelated to real estate. You have to constantly adjust to your market, whatever that is. I’m doing different strategies in different markets because of what it’s providing me. I’ve done some stuff in Chicago and I know people in Chicago are picking up these cheap properties and just renovating them 30k-40k, all in less than 100k (even 90k) and then they’re putting in section 8 tenants, and that’s a great strategy for that market. You’re buying low and you’re renovating it as a rental, and then you’re putting a renter in… So there’s just strategies in every area.

Areas like [unintelligible [00:11:29].10] which have a tremendous amount of foreclosures, or areas like Colorado where inventory is so tight and the population keeps growing… People can’t even find anywhere to live, whether it’s rentals or flips or whatever it is.

Joe Fairless: With the money that you’re getting from the flips, where are you investing those dollars for your long-term holds?

Susan Eilya: I’m mostly putting them back into some of the things that I have in Denver. I do love Texas, I’d love to own some multi-units down there. I’d love to own multi-units period, as long as the numbers are good. So I care about the numbers, I don’t care about really anything else. But I’ve been reinvesting a lot of that cash in my current deals, but I’m starting now to kind of just push on the side and not reinvest them and put them into longer term holds, because I do sometimes put them in flips.

Joe Fairless: Let’s talk about the last deal that you took from start to finish. Can you tell us the numbers, the story about the deal and give us the details on it?

Susan Eilya: Sure, actually I’ve got two selling at the end of this month. I picked up a property from an owner directly, and I’m actually buying two more from him. It was a 142k purchase, put about 18k-20k in… Let’s just say 20ish, so we’re all in at 160k, and I put it on the market and sold it for — I’m getting two mixed up, but they’re exactly the same… It’s under contract for 215k.

I have two of the exact same deals. For the first one I had two offers that went over list, and in Denver you’re giving a lot of multiple offers, people are losing out on deals… They’re both actually VA loans, so they’re both veterans, which was really cool for me. They both went over list; the second person felt like he missed out, but the cool thing was I was able to say “Look, you didn’t win out on this one, but I have the same exact property a block away, the building next door, and I’m gonna list it for this and that” and we ended up putting it under contract actually for five less than I was gonna list it. So whereas he felt like he was gonna miss out, he actually won, because he got the exact same product… Though I actually like that one a little better, just because I like the flooring and it had a parking space.

So basically we’re looking at — as far as an ROI, I sold it for… When all is said and done — I’d have to kind of pull up my numbers, but we’re still looking at a double-digit ROI, and we were in and out in a matter of months, about six months.

On average, my investors are making double-digit annual returns, whether it’s on one deal or we do a couple in a year, whatever, but when you annualize it, they’re making double-digits easy, every time.

Joe Fairless: And that was the next question, and you segued perfectly into it – how are you financing these deals?

Susan Eilya: Most of my deals have been with private cash partners. When I started, I really didn’t have much… I put everything in to start this business, so where my credit was amazing, it kind of got a little hit… But most of them are cash partners. I started to use a little bit of unconventional lending, because my goal is to stay a little more liquid and leverage the funds that I have. So instead of raising $300,000 on a deal, I could bring in a lender at a reasonable rate for hard money, and then only have to raise 50k or bring in the 50k myself, so I’m making a little more cash.

With my equity partners, I tend to give up more of the profits than I would if I had brought in a lender, when we kind of look at the numbers. But for me, giving up more equity to build a relationship with a creditor, cash partner for the long-term is totally worth it. I’m not here to do one deal, obviously… This is my livelihood, it’s a career that I’m building and wanna keep for a long time, so for me to have those partners that I have year after year that wanna keep their funds moving deal after deal, it’s worth giving up a little extra equity if I have to.

Joe Fairless: What type of terms are you offering or have you offered in the past to partners?

Susan Eilya: A lot of times I just go 50/50 on the deal. They bring in all the capital and we have the teams, the opportunity, the deal, we do the work, we do everything; they just kind of send the wire, sign some documents, and then I’ll go 50/50 on the profits. They get their capital back, and  then we just go 50/50 on the profit. That’s usually if I have one partner who wants an equity partnership on the deal.

I have some people that have said to me “Susan, I just wanna make 6% annually.” I’m like “Great, I can absolutely do that.” Depending on how much money they have, I can put it to work.

So yeah, I have partners who are like “Just send me a check quarterly”, so I borrow their funds as working capital, and I put it into play wherever I need it, and then I pay them out quarterly with their interest payments. The benefit to that for me is that the funds are always turning and I don’t have to write a check each month, an interest check. Then I have some partners that are like, “Hey, Susan, I wanna jump on this deal” and I’ll just give them a flat return on the deal. Generally my deals are 6-8 months. The ones I’m doing now are six months. Then they make their flat return at six months, we [unintelligible [00:16:22].00] most of these people, to the property, and then after sale they get their principle and interest, and if they’re happy, they do it all over again, which most of my partners do. And again, we’re averaging significant returns annually.

Joe Fairless: For someone who’s looking to bring in private money into their fix and flip business but they haven’t yet, what advice would you give them?

Susan Eilya: I think one of the biggest fears of new fix and flippers is they feel like they’re asking for money, and they have to remember that they have an incredible opportunity where their partner can make a really nice rate of return that is secured, and a rate of return better than what they’re gonna find anywhere else.

A lot of times I talk to these new flippers and they’re like “Well, I don’t wanna ask for money” and I’m like “You’re not asking for money. You have an incredible deal in your hand, you’ve got a great opportunity, and you’re securing these people’s funds to an appreciating asset. And frankly, if something happens and you strategy is to fix and flip it and for whatever reason you can’t sell it, you’ve created equity in it and you can actually refinance their cash out of it and pay them out, or you can put a renter in and still make money one way or another.”

There’s various strategies, but I think that – to really go back to your question – a lot of times they feel like they’re asking for money when they’re not; they’re really presenting an opportunity which is secure, and that’s the key there… They’re presenting an opportunity that most people don’t have and can’t find, and probably can’t manage themselves.

Joe Fairless: Once we internalize what you just said and then apply that within our approach, it’s gonna have a tremendous difference. If we think we’re asking for money, then we’re not gonna be successful. It is about giving investors an opportunity that is, as you said, secured by an appreciating asset in most cases… So yeah, thanks for that.

I found the same thing when I speak to people and they ask “Well, what if I’m not good at sales?” You don’t have to be good at sales, you just have to have a good opportunity that you believe in and you wanna help others by sharing it with them.

Susan Eilya: For sure… I get that all the time, “I’m not good at sales…” If you feel like you’re asking for money, you’re gonna look desperate, instead of focusing on what a great deal it is. Like you said, if you have a great opportunity, you’re gonna find funders.

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

Susan Eilya: I’d have to say to jump in. Do your due diligence, but jump in. You have to move fast in this business. In an instant, an opportunity can be taken away; if you don’t jump in, someone else will and you’ll lose out on the opportunities. Like I said before, I don’t care if the market is good or is bad, real estate is always good. You just have to find your niche and hammer that strategy.

Joe Fairless: There was a quote… I forget who said it, but it was a guest on the show and he said, “Every deal is a good deal in 50 years”, and it’s so true. I mean, of course, there’s exceptions to every generalization, but just going with that, most deals are good deals in 50 years. I think he actually said 20 years, which I’d still agree with.

Susan Eilya: Are you’re saying that you’d have to wait 20 years to benefit from it, or you’re gonna look abck 20 years later and say “Damn, I should have kept that!” or “I should have done that deal!”

Joe Fairless: Yeah, the latter.

Susan Eilya: Okay… That’s what I figured. [laughter]

Joe Fairless: Yeah, you don’t wanna lose money for 20 years and be like “Okay, finally I’m making profit on this…” No, it’s just holding on to it for as long as you can, because in 20 years it likely will be a good deal.

Susan Eilya: Amazing… And there are definitely deals that I’ve looked at even a couple years ago and just go “Oh, I should’ve kept that…!” but at the time what I needed to do was sell it, and it’s okay, I’m always gonna have another great opportunity. It’s not like there’s just one a year.

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

Susan Eilya: Yes, let’s do it!

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

Break: [00:20:03].18] to [00:20:45].21]

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

Susan Eilya: I’m actually currently reading a book called Chase The Lion by my pastor in DC when I lived there years ago, Mark Batterson. It focuses on the fact that if your dream doesn’t scare you, it’s too small. It’s something that my husband and I are both reading and kind of go in each chapter together… It just kind of pushes you to the limits, it’s great.

Joe Fairless: Best ever deal you’ve done?

Susan Eilya: It would have to be the two that I spoke with, that I’m gonna close both on this month. On one I received two offers that went over the list price, and the second-place guy felt like he lost out, but instead I was able to come to him and tell him I have an identical property that I was gonna list that next week.

To me, that’s one off the top of my head. I was generally more excited for the second buy than he probably was, but I loved knowing that I could help him out, help veterans out and also put a deal under contract in zero days.

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

Susan Eilya: I feel like a lot of times we wait until something happens before we can give back; I don’t need to wait until my career has hit a certain number or mark to give back. We can give back daily, which is what I do, whether it’s helping someone learn this business and make a little extra on the side, or whether it’s me [unintelligible [00:21:55].19] who’s taking care of the much less fortunate… I’m grateful I can do something to help. I give back every day by doing what I do, which is why I love this business – I create jobs, I make homes beautiful, again… They were once beautiful and I’m making them beautiful again and I help new owners create beautiful communities.

Joe Fairless: What’s a mistake you’ve made on a deal, that comes to mind?

Susan Eilya: Well, the biggest mistake I was thinking would just be not to start sooner, but I can’t really focus on that because I’m here now, and I’m making the best of it. But if there’s a mistake… There’s always hurdles in this business, you just have to adjust to them. I guess for me maybe just this one deal – I took the owner’s report for the sewer, instead of doing my own sewer scope, and then I had to kind of change it.

After the whole project was done, the new buyers did a sewer scope and there was a crack, and I had to spend another $10,000 to fix it and change it. Maybe that one… I mean, there were still profits in the deal, and that’s 10k out of my pocket; my investors made every dime that they were promised… But maybe just not getting that sewer scope done sooner…

Joe Fairless: What’s the best place the Best Ever listeners can get in touch with you?

Susan Eilya: You could call me directly… I kind of prefer the phone, although I’ll e-mail and text sometimes. I like meeting people in person, and I think that this really is a people business. So the best way they could contact me is either my phone number. Do you want me to share it? It’s a Jersey line, don’t judge me… I am in Denver, but haven’t been in Jersey in 10 years… Hopefully I’ll get a business line…

Joe Fairless: What’s wrong with the Jersey line?

Susan Eilya: Nothing, it’s just every time I call someone they’re like, “I wasn’t gonna answer because it said New Jersey…” So that was my cell, and I do have a business line, but it comes to my cell anyway, and I just kind of work out from this one. My number is 201 — and I can’t ever get rid of that 201… 201 424 02 47. Or they can shoot me an e-mail at Susan@greenstarrising.com. I did not realize how long that would be when we first created that entity two years ago… [laughter]

Joe Fairless: Well, Susan, thanks for being on the show. I enjoyed our conversation, hearing how you’re structuring deals with investors, the advice you have for fix and flippers who are wanting to take on private money, but are concerned about asking for money… Well, it’s not about asking for money, it’s about presenting an opportunity that is secured by an asset, and having that mind shift. So thanks so much for being on this show… I hope you have a best ever day, and we’ll talk to you soon!

Susan Eilya: Excellent, thank you so much!

 

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JF965: Why He SOLD All He Had, Went to War, then Returned to Develop Land and Syndicate BIG Deals

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He found the best and highest use of real property, and brings it to life! This exciting episode showcases the complicated yet rewarding nature of syndicating and developing deals. Scott, our guest, literally sold all he had and went to war to be a soldier, he learned leadership and initiative, and came home to build an empire. This is a must listen!

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Scott Lewis Real Estate Background:

– Co-founder of Spartan Investment Group, LLC
– In 24 months, SIG has completed 4 projects totaling $2.5M with an average ROI of 36%
– Currently has three more projects underway, and raised over $3M in private equity
– Led several successful real estate developments ranging from single-family flips to raw land development
– Based in Denver, Colorado
– Say hi to him at http://www.spartan-investors.com
– Best Ever Book: It’s Your Ship by Michael A

 

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real estate deal syndication advice

 

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

With us today, Scott Lewis. How are you doing, Scott?

Scott Lewis: I’m doing great, Joe, and Best Ever listeners.

Joe Fairless: Well, nice to have you on the show and I’m glad you’re doing great. A little bit about Scott – he is the co-founder of Spartan Investment Group. In 24 months his company has completed four projects, totaling 2.5 million dollars, with an average ROI of 36%. Currently, he has three more projects under way, and has raised over three million dollars in private equity for those projects. He has lead several successful real estate developments, ranging from single-family flips to raw land development. Based in Denver, Colorado… With that being said, Scott, do you wanna give the Best Ever listeners a little bit more about your background and what you’re focused on now?

Scott Lewis: Sure, thanks Joe. Best Ever listeners, my background really started Chemistry and Marketing major coming out of Michigan State University. I went into the corporate world for a little while, I had a regional sales job with a biotech firm, and kind of got sick of that, so I did the crazy thing and sold everything I owned and joined the army and went off to war, which actually was a really good experience. It got me some really good leadership training and what not, and when my active duty time ended I came out, I went into government service, which gave me some additional really solid training – less on leadership, but more on strategic planning, which I’ll talk about… Which ultimately lead me to build the strategy for my company. Currently – Spartan Investment Group. We’re real estate syndicators and developers. We go out, we find deals and then we put together the money for them. We also develop deals as well.

Joe Fairless: Real estate syndicator AND developers… When you say “develop”, are you talking about ground-up development?

Scott Lewis: Absolutely. We specialize in taking raw land and then developing it. As I’ll get into a little bit later, we look in two different areas. There are larger single-family developments with multiple units, or self-storage, but we like to focus on raw land.

Joe Fairless: Larger single-family development or self-storage… The four projects totaling 2.5 million that I mentioned earlier – what were they?

Scott Lewis: They were all single-family flips. We started, like a lot of folks do, in renovating single-family homes. I will say that I was a little bit non-traditional in that the smallest renovation budget we’ve ever worked with is $165,000 on an 850-square-foot house in Washington DC. One of the houses of those four projects was a raw land development, and that’s kind of what wet our appetite for that. This is a little bit more difficult, so there’s a little less competition in that asset class.

Joe Fairless: It is a little bit more difficult, that’s for sure, the raw land development. It’s interesting… We talked in Denver, and Scott was a speaker at the Best Ever conference, and I really enjoyed getting to know Scott, and I took a lot of notes whenever he was talking. We had some drinks afterwards, and one of the things that I’ve noticed with all of the interviews I’ve done is when I ask a developer “Okay, you’ve been developing for a certain amount of time – is it really worth the risk vs. reward?” and sometimes they’ll say “You know what? I just like doing it. I don’t know if it’s worth the risk versus reward, because there’s so many uncertainties and so many grey hairs that I got through the development process.” What are your thoughts on that?

Scott Lewis: Joe and Best Ever listeners, it’s definitely true. There’s a lot more risk in the development side of the house, but with risk comes reward… And maybe I’m just a glutton for punishment like some of the other developers, but I really enjoy doing it because that’s where the real money is made. Once somebody has figured out the best and highest use for a property, and then entitled it so that it’s ready for the construction phase, they can suck a lot of the juice out of the deal because they’ve done the real work, they’ve done the real risky work.

Being able to go in and do that work and then take it all the way through to fruition to whatever the project is, whether it’s a single-family home, ten townhouses, a four-phase condo development  – whatever it is, that’s where the real excitement is, and then also the real payoffs.

Joe Fairless: So let’s talk about a specific project, any one of those four that total 2.5 million on the four over the last 24 months. Can you give us some numbers and just tell us about the project?

Scott Lewis: One of them was the development deal, and it was not quite raw land… A hole had been dug in the ground, so not quite raw, but our contractor that we’ve partnered with over the last six years had a stuck project that he had kind of started and stopped, and we got in there and we helped him look through a [unintelligible [00:07:02].08] which anybody that got the fluorescent tag on their door once in a while knows that that’s a bad place to be.

So we helped him work through that, we did kind of a partner deal. He owned the land already, so he brought the land, we brought the money, split 40/60, 40% going to him 60% going to us. [unintelligible [00:07:21].19], I wanna say we were in at about $450,000 for development and construction and sales and everything, and the out was about $750,000. So we made about $300,000 with $450,000 in, and split – 40% going to the contractor because he did all the work at cost, and then 60% going to us for bringing all the money and helping him work through the city and the utilities and all of the other tangential things that go with development that aren’t there during construction.

Joe Fairless: What would be a couple things – knowing what you know now – if you were presented with those same scenarios on a future deal, that you would do differently?

Scott Lewis: Joe, that’s a great question, and Best Ever listeners… That scenario was presented to us in July of this year and then again in December. Joe, at the Best Ever conference I referenced a deal that I had two different raises on, at two different time points, and which we kind of combined them because we took two pieces of land that were just raw, and one had a house on it that we were going to demolish and get rid of. But the two pieces of land, independently, could get a total of seven townhomes, but combining them and leveraging a special zoning exemption where we were building, we were able to actually get 11 homes.

So one of the things that we’ve done right upfront is we’ve started engaging the utility companies, because that was one of the things that we waited on for our first development project, and it caused us a 60-day delay because those guys were just so backed up, and anyone that’s worked with utility companies in the past knows they are not the most motivated and efficient folks. They’re incredibly burdened, they’re under-staffed, coupled with just how it is out there, that can really stop a project. So in any of the development projects now, after we make sure we’re good with zoning and the tax guide and everybody else from the government, the next thing we do is get everything we need to do with the utility companies going right away, so that we can adhere to their traditional timelines and not be worried about delaying the project.

Joe Fairless: What type of timeframe do you have to allocate for the utility companies?

Scott Lewis: We just got a notice back from the gas company that their timeframe is 8-12 weeks. [laughter] So we’re doing another project that’s a condo conversion, and we’re basically taking a single-family home and we’ve dug out underneath the house and it’s a row home… So there’s a row of probably five or six homes; our property is the second in from the end, so we’re actually digging underneath the two other houses, on the walls and underpinning and going out the back, but we’ll also have to dig out the front a little bit to have an egress to the seller’s condo, and with that there’s a gas line there, so we have to do what’s called gas line abandonment.

The gas company has to come out and [unintelligible [00:10:17].29] and then take it out so that we can dig out, and that’s 8-12 weeks… Which is fine; this isn’t a surprise to us, we knew it was coming, so it’s built into our timeline.

Joe Fairless: How much does that cost?

Scott Lewis: The gas line – they just have to come and turn it off, and then our contractor does all the digging. So it’s just part of our construction cost, it’s not a ton to us. But sometimes the utilities can be upwards of $30,000 if you have to bring new service in… We don’t have the final bill yet, but we have to increase the size of the water line from the street because of the new sprinkler system requirements, and we don’t have the final cost there. We usually budget around $30,000-$35,000 for our projects per unit for utility cost, so it can be pretty significant.

Joe Fairless: Yes, they can be. Let’s talk about the three projects you have under way and have raised three million dollars in private equity for those projects. Have those projects closed as far as you’ve bought them, you’ve got the equity and now you’re implementing the business plan?

Scott Lewis: Yeah, so one of them is actually closed, constructed and sold. Last Friday we just closed on the property. That one went pretty well, it took a little bit longer; we missed our timeline by about two months, so we gave our investors a 2% equity bump just for us missing our timelines. So that one went pretty well other than the timeline. Our budget came in as we wanted it, so that was good.

Joe Fairless: What type of project was it?

Scott Lewis: That was a single-family flip. That one was actually a favor to our contractor. He owned the house since 2006 and he came to us and asked us to help him put it all together and get it ready, just because he didn’t want to. We put some of our money in it, we went to some of our really close investors, and just asked them if they wanted to be in it. Three of them jumped in. We raised $200,000, so not very much for that one, but it was projected to be a six-month timeline for a 10% return. We actually gave the investors 12% because of the eight months… So pretty close to a 24% annualized.

Joe Fairless: What was the all-in price, what was the exit price?

Scott Lewis: The all-in price was about $630,000, and the out price was $785,000. That normally doesn’t meet our 30% ROI criteria, but because of a favor to our contractor and the short timeline, we decided to do it.

Joe Fairless: Cool, $185,000 profit in eight months. Let’s talk about project number two.

Scott Lewis: Project number two was the condo conversion. We’ve been working on that — our plans went in in June 2016, and we actually split those plans into foundation plans and building plans, so that we could go ahead and get started with all the underpinning and foundation work that we needed to do, while the [unintelligible [00:13:04].00] was running its course through the normal application process.

That one is kind of our gold standard, we got a pretty sweet deal on that. We worked on it for about 18 months, trying to track down the owner, and just a random, fortuitous meeting at a corner bakery with an attorney to talk about another project, he referenced having a client with a property on L Street, and we immediately knew who it was. We had talked to the owner a couple of times and she had told us that she had an attorney and we didn’t think that it was even remotely possible, but it turned out it did. The financials are pretty good, we’re gonna be all-in at a million and out at 2.6 million.

Joe Fairless: Condo conversion – is it just one condo?

Scott Lewis: No, so we’re actually taking a single-family and we’re digging out underneath it and we’re adding a floor and a half, so when we’re done we’ll have four two-bedroom, two-bath condos. Three of them will be about 1,000 square feet, and the third one will be about 1,300 to 1,400 square feet.

Joe Fairless: Wow… Okay, I wanna make sure I understand that. You have a single-family house and you’re converting that into four condos?

Scott Lewis: Yes. The real sweet deal about that is we acquired the property as a single-family home, but because we’re converting it to condos, that allows the financials to change a little bit, and that’s where the deal is. It’s a big thing that’s going on in the district of Columbia right now – the condo conversions, because the housing is so limited… And DC – there’s a number of reasons the housing is limited in DC, but one of the things folks are doing is they’re row houses, so you can’t really go out to the sides, and you don’t really wanna go out to the back too much, because you kill the property, and sometimes the lots are really small, so the other way is to go up and down.

Some folks have taken it to an extreme – those are called pop-ups, and they look pretty bad. We probably could have gotten a six-condo out of it, but it would have looked really bad. We’ve actually made the top choice to go with what’s better for the neighborhood and just do the four condos. And even on the fourth condo, we’re only going half a floor, so that it still holds the charm from the street.

Joe Fairless: And you said your all-in price was a million – did I hear that correct?

Scott Lewis: Yeah, the all-in, after everything is done, is about 1.5 million, to include acquisition, construction…

Joe Fairless: And what are you projecting it will sell for once all four condos are sold?

Scott Lewis: Right around 2.6.

Joe Fairless: Nice! What do you do if anything while you’re building it to secure the condos’ sales?

Scott Lewis: That’s kind of a balancing act. As soon as we get the drywall up, we’ll go through and we’ll start soft-marketing them… But with condo conversions there’s a lot of documentation that needs to get approved before you can get your certificate of occupancy, so there’s only so much that you can do prior to the certificate of occupancy.

With this particular one, our agents work consistently in this particular area of Washington DC, so probably maybe 45 days out or so we’ll start letting them pocket-list it, and then once we get the certificate of occupancy then we’ll really go full bore, because we can’t close before that comes in anyways, so we don’t wanna market them too early.

Joe Fairless: You mentioned it was a fortuitous meeting, that you knew exactly who your attorney was talking about when he mentioned the other client… You said before that you had tried for 18 months to track down the owner – what were you doing and why didn’t it work?

Scott Lewis: We were just using the traditional methods that a lot of wholesalers and direct marketers use. We weren’t doing anything crazy. We do have an aggregation process that we use to bring a lot of different data sets together to identify sellers. Whenever we do direct marketing campaigns – which we’ve actually stopped doing – we only do maybe 50 letters at a time, but those 50 letters have been vetted through multiple levels within our organization, so it probably takes us as much time to hit 50 people as some of the wholesales could hit 2,000 people, because we take a very focused approach, versus a wide blast of mailers. Every one of our letters is personally written to the person that we’re trying to get at, and we’ve actually got really good response rates that way.

This one was no different. We got the person’s phone number, we actually talked with her and she confirmed who she was… We met her later because one of the things that we do for any of our sellers is we help them try to reduce any client’s fees/taxes; it doesn’t help us at all, because our contract price is our contract price, but the mission of Spartan Investment Group is to improves lives through real estate, and we’ve had some pretty good luck working with the District. We’ve saved one of our sellers $50,000 in bad taxes and fees; it didn’t go to us, it just gave her $50,000 more. She was a DC firefighter, so that really helped change her life.

This particular seller, she was in her late seventies, her husband had died quite a while ago, and it was probably pretty intimidating to have us call her on the phone. But once we actually got in contact with her lawyer and he vouched for us and verified who we were… I actually went over to her house a couple times and took her down to the District of Columbia, so she would be there in person, and we were able to save her about $10,000 in fees and fines. That was 10k that went right back into her pocket that she wouldn’t have gotten.

Joe Fairless: So your process which does work for other deals didn’t work initially when you were reaching out, because they might have been intimidated, or for whatever reason, but when you talked to her attorney, that proved to be the door that opened up and you were able to get the deal done. As a result of that, do you now make a more focused effort on speaking to attorneys about clients they have and just reverse-engineer that process?

Scott Lewis: We’ve actually moved away from going after the probate guys or the estate attorneys. We’ve got a couple attorneys that will occasionally pitch us deals, that we have relationships with, but we made a strategic pivot in October 2016 to kind of get out of the single-family and direct marketing. Just too much competition down there in that red ocean market, so we recently haven’t even been engaging.

We’ve got relationships with two attorneys that occasionally send us projects that they have as estate attorneys, but other than that we really haven’t even been engaging sellers.

Joe Fairless: So let’s talk about what you are doing and the shift that you’re making. What are you shifting towards? I would suspect it’s self-storage, right?

Scott Lewis: Yeah, Joe, that’s it. We’re 100% going after self-storage, and we are using some of the same methodologies. Lindsay, who is our director of business intelligence, comes from the Intelligence Community in DC, so she takes some of the methodologies that she used there to do the same thing for our business, to identify sellers and to identify pieces of property that we wanna go after.

We found that when we’re going after commercial deals, it’s not a big deal if we contact the sellers, because commercial deals are based on numbers, there’s no emotion involved. I mean, occasionally there is, but the vast majority is based on numbers, so that as long you present a reputable front from your company and that you are reputable yourself, we found that it’s much easier to deal with sellers for commercial deals.

Joe Fairless: Have you gotten a self-storage deal under contract?

Scott Lewis: Yes, using our research methodology we identified a piece of land in Washington state, went through the whole process and engaged — the seller was using a broker, so he pointed us to the broker; we engaged the broker, and now we’re under contract and we’re in the due diligence period now. It’s a piece of raw land, so it’ll be ground-up development.

Joe Fairless: How many storage units would be able to be built?

Scott Lewis: That’s a good question, Joe, and it’s one of the things that we’re trying to look at right now. There’s wetland on the property, so we had our biologist out there last week, and he is delineating the wetland on our survey, and then he’s also classifying them; there’s various classes of wetlands, and depending on the class, they can either be easily moved, or you have to go through board of zoning approvals to get an exemption to move them

Once we figure out what we can do with the wetlands, we can then go ahead and develop our site plan so that we know our unit mix and how many units we’re gonna put there.

What we did initially was we looked at if we couldn’t use any of the wetlands, and we could only use what turned out to be about 40% of the acreage that we’re buying, is this deal still feasible? Could we still pull this off? And the answer to that question was yes, which is why we wrote the contract, and the contract is contingent upon the biologist’s report on the wetlands.

Joe Fairless: Okay. When I was trying to interrupt you, you read my mind, so I’m glad I didn’t interrupt you… [laughs] That’s what I was gonna ask, how you identify what you make an offer if you don’t know how many units can be built? Let’s just say you cannot use any of the wetland area… Do you know how many units can be built just for that 40%?

Scott Lewis: We could do approximately 50,000 square feet of self-storage. Again, we haven’t done our unit mix yet, we’ve just used averages at this point, which a lot of folks might say we’re treading in dangerous waters, but we have the contract written as such that we can kill the contract if necessary if we can’t get what we need, so that’s why we’ve decided to go this route, versus having the complete feasibility studies, which usually include the unit mix, which we’ve done kind of in heuristics to see whether the numbers would work out… And there’s also some self-storage land acquisition heuristics that are out there that kind of point the needle at what your per-square-foot land cost needs to be based on your monthly cost for a 10-by-10 and a 10-by-15 unit.

We’ve done that projection, and if that’s correct, then there’s actually a lot of value in this land already, so we’re okay.

Joe Fairless: How much does it cost your company to qualify a deal like this before you can actually say yes or no definitively?

Scott Lewis: That’s a good question. We’ve done our internal feasibility studies. Lindsay, our director of business intelligence, does our internal feasibility studies, so currently it hasn’t cost us anything, other than her time. And feasibility studies cost anywhere from $3,000 for a desk audit where folks don’t actually travel to your site, up to $7,000-$8,000 if folks travel to your site to do the feasibility study.

Joe Fairless: Didn’t you say you had a biologist or someone going out to look? Aren’t they charging you something?

Scott Lewis: They are. We think we’re gonna put about $10,000 on the line before we actually know whether we can do this or not.

Joe Fairless: And the bulk of the $10,000 comes from where?

Scott Lewis: All of our money, we don’t use investor money.

Joe Fairless: No, I mean what are the expenses that make up the 10k?

Scott Lewis: There’s three major ones; four in this case, but normally it’s three. In this case we need a civil engineer to give us an initial site plan to take to the city. Then we need our biologist to go out there to delineate the wetlands and any protected or invasive species of plants or animals. We need a geotech report, so they can go out there and test the soil and tell us what type of soil it is, so that we can then have the civil engineers calculate the concrete mix, and for this particular area, we actually need a mine hazard report, because there’s some old mines that are there, so we have to make sure that there is no mines underneath. With all pooled, it’s probably gonna be about $25,000, but $10,000 of it is probably money that we’ll have to spend before we make a decision. The mine and the geotech we really don’t need to do before we make a decision, but the biologist and the civil engineer we do, to see what the site plan is, and then ultimately the unit mix. Then we can tighten up our proforma.

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

Scott Lewis: Best Ever listeners, the best advice is broken down into two categories. One is just starting out, and if you’re just starting out, take some time to learn yourself before you start. There’s some personality assessments out there… DISC and Myers-Briggs are two that are out there. I really recommend you go out and you figure out what type of personality you are. Then once you figure out what type of personality, build your tribe around your weaknesses.

Myself, I’m a DISC D, that means I’m a driver – I just wanna get stuff done, I don’t really pay attention to details. So I went out and I found a partner who is very into details and he’s very detail-oriented. The two of us, plus a couple other members of our team kind of really round that out.
Once you figure out your team, then start with an education period. Just figure out what asset class you wanna focus on, and then go. For those of us that have been out there and have been in the trenches, constantly challenge your assumptions and operating models.

We recommend a devil’s advocate. The Israeli Mossad, which is their version of the CIA, they call that the 10th man. This person is just the person on the team that disagrees with everything that’s going on. What that does is it ensures that groupthink doesn’t cause you to make a bad decision.

Joe Fairless: Does that person rotate on the dissension, so that they don’t get punched in the face eventually?

Scott Lewis: Absolutely, Joe. So Best Ever listeners, there’s two key components actually. One is (absolutely, Joe) they have to rotate. Somebody else has to come in and be that person. And then second, there is no personal attacks on that person whatsoever.

Joe Fairless: Makes sense, yes. Alright, are you ready for the Best Ever Lightning Round?

Scott Lewis: I am.

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

Break: [00:26:44].16] to [00:27:26].08]

Joe Fairless: Best ever book you’ve read?

Scott Lewis: “It’s Your Ship” by Michael Abrashoff.

Joe Fairless: Best ever deal you’ve done?

Scott Lewis: Our condo conversion in DC. There’s a million dollars of profit in that one.

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

Scott Lewis: Mentoring and education.

Joe Fairless: What’s the biggest mistake – or any mistake you can think of – you’ve made on a deal that? One that you haven’t mentioned earlier.

Scott Lewis: We had the opportunity to buy a church that was right behind where my partner and I lived when we were in DC, and at the time they needed two million bucks to make the deal work, and we were pretty novice and had no idea about raising money, and we’ve been able to raise two million dollars in like two hours over the last couple months… So that deal, the guy that bought it is building 36 units there that will probably have a sales price of probably 22 million dollars for that deal. We could have had it, but we didn’t know how to raise money.

Joe Fairless: What’s the best place the Best Ever listeners can get in touch with you?

Scott Lewis: Best Ever listeners, if you have any questions about what I said, you can reach me at my e-mail address, which is Scott@spartan-investors.com, or our number is 202 827 5483.

Joe Fairless: I enjoyed our conversation in Denver, and I enjoyed this one just as much, because we’re talking just about you; it was less back and forth, and I was learning more about you and I really enjoyed that, and I know the Best Ever listeners got a lot out of it as well, specifically some of the takeaways…

Utility companies – they are slow; we’ve got to allocate in the timeline for the amount of time that they need (in your case 8-12 weeks). And condo conversion – holy cow! – 18 months to track down the owner, and eventually it ends with you getting in touch with their lawyer coincidentally, and then using that as a conduit into the deal that has over a million dollars in profit, that is yet to be realized but looks really good.

Then the self-storage evolution that you’ve taken in your company. As you said, the red ocean versus the blue ocean strategy – I think it’s a book, I’ve just heard a podcast on it – where there’s not a bloodbath and a feeding frenzy, and that is in self-storage and ground-up development. And the amount of money that you have on the line prior to making a go/no-go decision on that deal.

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

Scott Lewis: Joe, Best Ever listeners, thank you very much!

 

 

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JF956: Why He Traded Billboards for MOBILE HOMES!

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Undoubtedly, he is a mobile home park authority. The fifth largest mobile home buyer in the US is dropping knowledge on occupancy, acquisition, and how mobile home parks create true wealth. This is a niche unlike other niches… but there are definitely riches. Tune in!

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Frank Rolfe Real Estate Background:

– Co-founder of Mobilehomeuniversity.com
– Ranked, with his partner Dave Reynolds, as 5th largest mobile home park owner in the U.S.
– Over 250 communities spread out over 28 states worth over $8,000,000
– Commercial real estate investor for over 30 years
– Based in Denver, Colorado
– Say hi to him at http://www.mobilehomeuniversity.com/
– Best Ever Book: The Man Who Bought the Waldorf

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mobile home real estate investing

 

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

With us today, Frank Rolfe. How are you doing, Frank?

Frank Rolfe: Hey, Joe. I’m doing great, how are you doing?

Joe Fairless: I’m doing well, nice to have you on the show. We’re gonna be talking about mobile homes, because Frank is the co-founder of MobileHomeUniversity.com. He is ranked with his partner Dave Reynolds as the fifth largest mobile home park owner in the U.S. They’ve got over 250 communities spread out over 28 states.

His company is based in Denver, Colorado. He’s been a commercial real estate investor for over 30 years. Frank, do you wanna give the Best Ever listeners a little bit more about your background and your focus?

Frank Rolfe: Absolutely, Joe. Basically, I went to Stanford University and got a degree in Economics; I got out a year early. Back in that day, if you were going to go to a good business school, you wanted to start a business and write about that as your essay on your application. So I had to start a business that I could start, build and shut down within one year. The business I came upon was a billboard business.

I started a billboard company. In the first year I had [unintelligible [00:03:27].12] signs, but I had seven more pending, so I decided to go one extra year to get those closed out. You can guess what happened – I never went to graduate school, I kept building the billboard business. Then 14 years later I was the largest private owner of billboards in Dallas-Fort Worth, and I sold to a public company in 1996. A few months later I started buying mobile home parks, and I’ve been buying those for the last 20 years.

I teamed up with my partner, Dave Reynolds about a decade ago, and we’re now together the fifth largest owners in the U.S., which we built just one property at a time. We were the only people to ever build something as large as we’ve got just one property at a time.

That’s basically the background, Joe. I’m just basically very heavily invested, both monetarily and personally and time-wise in the whole affordable housing industry.

Joe Fairless: I know looking back on it, you can identify why mobile homes make sense… But if you can, if it’s possible, I’d love for you to think about when you sold your billboard company to when you bought your first mobile home or mobile home park – why did you go to mobile homes at that point in time, instead of other types of real estate?

Frank Rolfe: Well, I’ve always liked stuff that the rest of the world’s not doing… That’s why I liked billboards, because when I was doing billboards, there was only a handful of people that had any interest in it. I guess being an Economics major, I’ve been a big believer in supply and demand. I like to go where nobody else goes. That’s kind of been my life theme.

When I had had the billboard company, I built two billboards on a mobile home park, and I check on the signs, and the guy that owned the park would often call me up and ask me to do weird things like could I knock on the manager’s door and ask him why he won’t ever call him back, things like that…

I thought, “Man, what a weird business.” I’d never heard of it, I’d never knew anyone growing up who lived in a mobile home park or in a mobile home, so it was kind of like “Well, this is kind of different.” Then I also noticed when I was doing the billboards that billboards – people don’t realize, it’s a federally regulated industry. You can only build billboards in certain zonings and certain spacings from other signs, so you get very familiar with zoning maps; you’re looking at zoning maps all the time.

The MH zoning class in Dallas was the smallest zoning category I ever saw. I saw more zoning for lead smelters than I did for mobile home parks. So again, thinking supply and demand, I thought we’ll always be in the rarest zoning that exists, and this has gotta have some value in it. That’s really what got me into it. I was just kind of fascinated a) with how weird it was, and the fact that nobody else was in it, and then b) how scarce it was.

Joe Fairless: Now let’s fast-forward to today… You’ve got 250 communities across 28 states; what do you focus your time on now?

Frank Rolfe: That’s a good question, Joe. I basically probably go wherever the weak spot is and try to fix it. Basically, I kind of float around. Right now I’m very much focused on trying to fix occupancy issues and our most lagging 20% of the properties. I work on collections issues… I work on just about anything. Property condition… Just about any role. The size that we are — it’s kind of like being the [unintelligible [00:06:49].14] on an assembly line, you’re just trying to find which parts of the assembly line are not working efficiently and fix those.

Joe Fairless: That’s great. That’s very helpful, and it gives us a lot of stuff to talk about. Let’s go with the occupancy issues and the most lagging 20% of the properties. What does an occupancy issue look like, and then how do you solve it?

Frank Rolfe: We have a lot of demand because affordable housing right now is the hot topic. Basically, it’s very simple math when you have a mobile home park. Every three calls typically leads to a showing; every three showings lead to a sale or a rental. So you’ve gotta have the phone ring about nine times to make something happen. Our goal is to find all the properties that have the phone ring at least nine times every week.

The first problem you have is if a property is not hitting nine; if it’s hitting three or four, you’re trying to figure out, “Okay, how can we fine-tune the marketing?” In some cases what happens is managers get dependent on Craigslist, because it’s free and it’s easy, but the problem is Craigslist is only really effective in the larger urban markets; it’s not that great a tool in some of your medium and smaller-sized markets. Although it does work well in some of them, it doesn’t work in all of them, so you then have to expand your horizons on the marketing channels of how you’re trying to reach people. So that’s problem number one.

Joe Fairless: For example…? How do you expand?

Frank Rolfe: Lots of ways. Ads [unintelligible [00:08:09].21] are by far the best. You can do such items as apartment direct mail, it’s very effective; you can do such items as more signage on the front edge to your property, more referral letters to tenants, what we call tear sheets, which are eight-and-a-half by eleven sheets of paper with your phone number vertically  in the bottom that you cut with scissors, and put those in Laundromats and grocery stores.

There’s all kinds of different avenues you can do; you just try to figure out what works in that market. So that’s problem one.

Problem two is… Another reason you can have problems selling or renting is that people just don’t like your product. That can be because you’re not rehabbing it to a high enough level, or it can be that you are missing such basics as just having it smell good and be clean. So it’s the same issues that come up with single-family, so that’s another thing that can block you.

Third is if the manager is any good at sales. Are they even showing up for showings, and when they show up, do they care and seem enthusiastic, or do they just give you a look like “Why are you even here?” and hate everyone? So that could also do it.

Another issue can be pricing. You may be priced out of the market. You may say, “Well, our deposit on this home is $1,000”, and let’s say the home market can only afford $500; you’ll never sell much.

So those are typically the occupancy issues we have; they are falling into one of those categories, so I try to go out to the property and meet with the manager and figure out which the problem is, and then fix it. It’s no more exciting and complicated than that.

Joe Fairless: And just so I’m clear on the nine times a week… It takes nine phone calls to get one sale or rental, so if you have multiple mobile homes, then you’d multiply nine by the amount of mobile homes that you have vacant or needing to be purchased, right?

Frank Rolfe: Yeah, exactly. Most of these properties fall into a rhythm just based on the size of the market. In other words, if you are in Des Moines, Iowa, you could score 50-100 calls a week there; the homes fly out the door and you really don’t have any vacancy.

If you’re in a market that, let’s say, gets nine a week, that means you can do a home a week. So there’s some properties we have that can do a home a day, we have some that do a home a week, some that would do basically a home a month… This kind of gives you an idea of what the velocity should be. We don’t have any that would need more than one a month. We try to only buy stuff that can do one a week.

Joe Fairless: So you said another weak spot that you identify and then you dig into are collection issues…

Frank Rolfe: Collection issues are huge in the affordable housing business, because the very nature of customers that need affordable housing – they don’t have a lot of money. You probably have read, Joe, that 70% of all Americans don’t even have $1,000 total. What that means is when you’re living in a world without any savings at all, you’re flying an airplane at about a thousand miles an hour about two feet off the growth, and the slightest little thing will crash the plane. All that has to happen is the brakes go out on your car, and to get the brakes fixed it’s $700, and now you can’t pay your rent. Or you have a medical emergency, you go to the hospital, you could break your arm… There’s a million options.

So what happens is when you’re in an environment like that, it’s always hard to get everyone to pay. Now, our prices are very low, so they typically can always afford to pay; it’s sometimes a priority issue, and sometimes a timing issue. But you won’t get paid unless you have a pretty firm program, which most community owners call “No pay, no stay.” That’s true pretty much throughout the affordable housing industry. What it means is if you don’t pay, you can’t live there, so people have to make that choice – do they want to have a roof over their heads, or do they want to buy the big screen TV?

A lot of times you’re having to retrain people into doing what they need to do and not what they want to do. Sometimes what happens is the community managers loses sight of that, because often they live in the community, it’s often some of these people are their friends, and they’ll basically start relaxing the program to make friends, and what ends up happening is it screws the whole property up, and you have to go in and fix it.

It’s something you have to stay vigilant on every month, because even if you get everyone perfectly trained to pay the rent like clockwork, if you for one month stop pushing it, they all go backward again. It’s kind of like pushing a ball up a mountain, or something; if you don’t keep pushing, at some point it’s gonna roll all the way down the mountain again.

Joe Fairless: I know that you all train the on-site person initially – “Hey, it’s no pay, no stay. Here’s the process”, and it sounds like that needs to be continually reiterated, just because of the nature of the business. Do you have a process that you implement on an ongoing basis for those on-the-ground people to reinforce that “No pay, no stay”?

Frank Rolfe: Yeah, we even built an online — like a defensive driving course that we give all the managers on the frontend, and then we back that up, we’re talking to them constantly. Despite all of that, you still have to — typically, when you have as many properties as we have, you have to stay on top of everything, because there are certain people in there who will forget their training or just start doing things they shouldn’t do, which they know they shouldn’t do, but they do out of convenience or to make friends, or whatever.

It’s the greatest training program in the world; our program is about as good as you can get on the training side, but it still won’t solve all your problems.

Joe Fairless: Speaking about the on-site people – how many people do you need to oversee mobile home park? It’s a fairly broad question because I didn’t tell you how many spots there are or whatever, so take it however you want.

Frank Rolfe: Most of our properties have just one manager, and then some of the properties have what’s called a maintenance man, and that’s about all you need.

Joe Fairless: Regardless of the size?

Frank Rolfe: Well, no… In other words, until about 100 to 150 lots, typically your entire staff is potentially two people or one person. When you get beyond that, say you have a 250-space community, then you might have a manager and an assistant manager and a maintenance man. But our industry is relatively low maintenance, because the nature of the business on the park side – you’re just renting land, so it’s very low maintenance. The home side – not that much breaks in the stuff, because most people have in their agreements… The customers do all the small stuff, and we do the large stuff; large stuff doesn’t break that often. So I guess we’re like the Maytag repairman – we still don’t have a lot to do, and that’s why we can staff things without as many people as you might have to have for example in multi-family. It’s just not that much that goes on.

Joe Fairless: The last thing you mentioned earlier when you said you’re looking to find the weak spot and fixing it was the property condition. If you haven’t implemented the whatever renovations you’ve already budgeted for, then how do you approach that if you don’t have the money allocated already, because it sounds like that would be a surprise in this scenario, that the property condition is deteriorating?

Frank Rolfe: Well, in property condition, most of that is free. In other words, what it is is enforcing the rules; the whole community has rules, guidelines that people have to live under, and those items include you can’t have junk in your yard, not running vehicles, home has to be kept up to a certain standard, the grass has to be mowed. Those items are free to the park owner; those are things that the residents are supposed to be doing.

The park owner is in charge of the common areas. We’re in charge of the entry signage, mowing the common areas, things like playgrounds if we have them, and then roads, which typically we do a pothole repair once a year. So the biggest part of property condition is just making sure that the manager is staying on top of the rules violations, and that we’re mowing the property effectively. Those are kind of the keys.

The way we do it these days, Joe, which is different than the old days (20 years ago) to stay on top of property condition, you have to drive the property yourself. Today we do everything based on HD videos. Each manager has a Polaroid Cube camera and a suction cup mount. Monthly you put that on the roof of your car, and you push the button and you start about a thousand feet away from the property, so you can see even the front entry, and they drive the entire property; then they take the card out of the camera and they send the card in, and then we download the video, and we watch the video.

Now, the only problem is as large as we are, to watch the videos it’s 16 hours, so it’s a lot of video watching…

Joe Fairless: …for all the properties.

Frank Rolfe: Exactly, correct. But it’s an extremely effective tool, because while it’s not identical to what you see if you go drive, and it is only that one day in time, it looks pretty darn similar, and you can spot problems quickly and easily. You can view all your properties every time you do that. If you wanna take it to the next level, you can actually put that in a GoTo Meeting webinar and you can drive the property with the manager, like you’re in the car with them, and discuss it as you go, and stop and rewind… It’s a super effective tool. That has improved our lives by a trillion percent, because now we can just go out and physically go to the ones that are really of concern, which rarely on property condition there’s enough concern that you’re really freaking out.
The number one issue you have with them traditionally is gonna be in, say, a hundred-space community you might have a couple non-running cars, which means the manager failed to recognize running from non-running, or was trying to maybe help a friend, or something. Then THE most common is that the grass is not getting mowed. So basically, through the entire winter season, life is bliss because there are relatively no problems. But right now we’re entering into our hardest time of the year, which requires mowing.

Joe Fairless: Other than those two things – and maybe there aren’t any, but I bet there are – other than non-running cars — how do you know if a car is non-running by looking at it on a video?

Frank Rolfe: Well, a non-running car – when we talk a true non-running car – will be sitting there on flats, for starters. One item we’ve seen more and more in the industry is that people to either save money or to make it more convenient, wanna create their own self-storage sometimes in the mobile home park, so what they do is they buy a van or a pickup truck and they park it there, and they use that as their own self-storage. The car doesn’t even run. But you can always spot them, because they’re always on all flats, with trees growing up between axels, or something.

We try not to be too picky on stuff that’s just minus the tags. A non-running vehicle, by definition, based on towing regulations, is something that does not have all its tags up to date. So if your inspection sticker is off by a month, you could theoretically have it towed for being non-running. But that’s crazy, because there’s people in McMansion subdivisions that forgot to get their tags renewed, right? So that’s a crazily high bar to set.

Basically, as long as the car is being driven, even if the tags are out of date, we do not call that a non-running vehicle. In fact, if you were to tow that, what’s gonna happen is then the resident — you’ve just created the three-foot-off-the-ground plane crash; now they can’t get to work and they can’t pay the rent. So we try to be very user-friendly, particularly in automobiles, because they’re very expensive to upgrade. We don’t wanna give people more problems than it’s worth, but we can’t afford to have people pulling in a van and letting it sit there rusted on all flats because they like to use that as a mini-storage vehicle.

Joe Fairless: My last follow-up question on this particular topic – when you watch the video with the property manager and they’re not as experienced, besides non-running cars and grass isn’t getting mowed, what’s something else that you might point out to them?

Frank Rolfe: We actually have a whole thing for them – it’s an 11-step process, and it ranges from all signage (we own all the signage on every property)… You want all the signage to look good. That means that — obviously, your entry sign is the key one that kind of sets your first impression, but we do not allow any signs that are bent or rusted or weathered or have graffiti on them. For example, if you’ve got a Stop sign and somebody spray-painted something on the stop sign, you’ve gotta replace the stop sign, or you’ve gotta get it off. But you can’t get i off, so you’re gonna replace the Stop sign. So signage is one of their items.

Mowing is one of their items, non-running vehicles is one of their items, the general condition of the residence, homes and yards is one of the items. You’ve got trash dumpster areas – you don’t want any mattresses and junks sitting in those, that’s one of the items. You’ve got the common area appearance of like club houses or any structure – make sure that it’s painted and looking attractive. If you have playgrounds or basketball courts – those are all painted and in good condition. The basketball court has nets on it… It’s those kinds of items.

It’s not rocket science, but the problem is if you let it slide, it hurts the overall community feel, and it irritates people and there’s no purpose. And the worst part you have with property condition is what you sometimes have is you’ll have all these people that keep everything immaculate, and then you’ll just have this one person that just ruins it for everyone. You can see them in most any mobile home park. If you go to any mobile home park, you’ll see that of every 20-30 houses, there’s that one person. That’s not fair to the other people; they have their property looking fantastic, and then here’s this one person who’s home is beat to death, the cars are atrocious and there’s junk everywhere… When we first buy the properties, often they’ve got three pit bulls on ropes in the yard… That’s what we’re really striving to eliminate.

That person either has to move on to another property that says living like that is okay, or they have to clean up their act. That’s one of the key items.

Joe Fairless: Frank, what’s your best real estate investing advice ever?

Frank Rolfe: Are we talking on a macro level or just in my industry?

Joe Fairless: Let’s talk about your industry, let’s keep it focused.

Frank Rolfe: On the industry there are five key things that you have to know about a mobile home park purchase, or you’re gonna get in trouble. We call it the IDEAL system. The I is for infrastructure – you have to make sure the thing has solid infrastructure; typically city water, city sewer, good working water and sewer lines, power system is in good shape, roads are good… That’s the first step

Second one is called density – that’s the D. Density means you have to have lots that are large enough that you can bring new homes into, because the industry has changed dramatically over time. In 1954 the biggest mobile home was 8 by 40, and today it is 18 by 100, so that’s changed hugely. So you have to make sure that your lots — as soon as they can’t hold the largest homes now made… They have to hold at least about 14 by 46, which is a two-bedroom, one bath.

The E is for economics. Clearly, obviously, you have to have a handle on what kind of net income the property produces, what it can produce going forward, and make sure you’re buying it at a price that makes sense based on its net income.

A is for the age of home. We’re probably the only industry in America that tends to favor the older stuff more than the newer stuff, and that’s because an older home is paid for. It really just depends not so much on the age of the home, but whether it’s paid for or has a mortgage on it. When you have customers where the home is paid for, you typically have a customer for life, because there’s no place that they can possibly live cheaper than the mobile home park. So if they own the home and we own the land, they’re like stakeholders in the business. We like our residents to own their own homes free and clear.

The L is for location. There’s two locations that work in the mobile home park world. One is a nice suburban area in a good school district; that comes as no shocker. But the other style which many people find a shocker is that kind of gritty urban living that millennials now choose in their own apartments. People wanna live downtown, and there’s a certain number of people in the mobile home park world that like to live where the action is, in downtown. Those are those mobile home parks you sometimes drive by just outside of downtown or in downtown, and you think, “Oh my god, who would live there?” But shockingly, if you look at a market like Denver, the highest rents in Denver are those gritty urban parks; those get like $700/month lot  rent. The rural areas, even the nice school districts get like $300-$400.

I’d say that those five items are key. If you flunk any of the five items… For example, if density is too high to fit new homes on… The only way you can buy a park if one of those five is bad is if one of the other five is good enough to offset that. So it’s kind of like the scales of justice. You can only really buy a property where they’re all balancing, and if they don’t balance, you shouldn’t buy it. If they’re beyond balance on the good side, you should definitely buy it.

Joe Fairless: Wonderful practical information, and thank you for sharing that. Are you ready for the Best Ever Lightning round?

Frank Rolfe: Sure, absolutely. Go ahead.

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

Break: [00:26:11].11] to [00:26:53].15]

Joe Fairless: Okay, Frank, what’s the best ever book you’ve read?

Frank Rolfe: The Man Who Bought The Waldorf, the story of Conrad Hilton.

Joe Fairless: What’s the best ever deal you’ve done?

Frank Rolfe: A park in Iowa, we paid nine million for it, sold it for 19.

Joe Fairless: Over what period of time and how much did you put into it?

Frank Rolfe: Three years; additional capital put in – probably about 1-2 million.

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

Frank Rolfe: Basically, I am all the time talking to people getting in the industry on how to do it properly. I’ve got a design to it that works and it’s a win/win. What I do is I drive a lot between properties, and when I’m on the road I just turn my phone on speakerphone and I return the gazillion calls I get from people and try and tell them my constructive ideas on parks they’re buying, or valuations on parks they’re doing. It keeps me awake and lively while I’m driving, and it’s a good way to give back to them to help them get their mobile home park thing going.

Joe Fairless: What’s the best ever way for someone who wants to get started in mobile home investing to find a deal?

Frank Rolfe: The best way… There’s probably four ways to find them, and it varies. They’re all fairly effective. First one is online. Go to mobilehomeparkstore.com. There’s about 800 parks for sale on there. When you do that, you have to understand that only probably 25% of those are deals you would wanna buy. That’s the first place most people go.

Broker pocket listings are big… That’s where half of all of the properties we buy these days come from – pocket listings. These are listings that brokers have that they don’t publicly discuss, because the seller typically won’t let them, because he’s afraid of scaring the residents or the manager, or it’s because the broker could talk about them publicly, but he doesn’t want to because he doesn’t want to talk to other brokers, only to buyers who are not represented, so that he gets the entire commission.

Third level is direct mail. We do that all the time. You basically send postcards or letters to people who own mobile home parks, saying “Hey, I wanna buy a mobile home park. Are you interested?” Like any direct mail, we get typically a 1% response rate.

The fourth is cold calling. You basically just call people up and say, “Hi, I’m interested in buying a mobile home park. Is yours for sale? If so, at what price?” Those are the four most standard ways. There’s a fifth way which is called “drive and talk”, where you pull into a mobile home park and just try and strike up a conversation with the owner, but it’s very time-consuming and half the time it’s of no value, because all that’s there is the manager.

Joe Fairless: What would be a mistake you’ve made on a particular deal, thinking back through the deals you’ve done?

Frank Rolfe: The biggest mistake I ever made was not understanding what makes the business work. In my early, early career I bought some properties in Shreveport, Louisiana that I should not have bought. Fortunately I came out of all of them whole, so I didn’t lose any money on it; I learned a lot. The problem you have is to create affordable housing you have to have expensive housing. Today I call that contrast.

If you’re looking at a market where the median home price is $40,000, nobody needs a mobile home, or a mobile home park. And I didn’t know that. Early on I just thought, “Oh, there’s a mobile home park… Why would it be any different that another one?” I’ve learned over time that there’s huge issues in the market that make some markets desirable and some not. The desirable markets to us are basically 100,000+ population, median home price of about 100,000 and up, a three-bedroom apartment rent of about $1,000 and up… We also like to see market vacancy – the U.S. average of 12.5% or lower… All these stats you can get off BestPlaces.net (that’s where we get them all).

Beyond that, we like to buy what we call recession-resistant economies. That means that they have the bulk of the jobs based on either healthcare, or education, or in government. Markets that are heavy in that – an example would be Kansas City. Kansas City has more federal jobs than any city outside of Washington DC. It also has a huge amount of healthcare, and it also has a huge number of colleges. St. Louis has the same…

If you look at the U.S. economy based simply on how safe is the employment, you’ll find entire regions that are very risky… For example, when you go way out, far East Texas it’s all about oil and gas, right? West Texas is also all about oil and gas… A lot of your Midwestern, Great Plains markets are pretty much well diversified in healthcare and colleges and government, and that’s what we like.

We like the cities where you can have the 2007 Great Recession and nothing changes.

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

Frank Rolfe: You can always reach me at my e-mail, which is frank.rolfe@gmail.com. That’s typically the best starting spot. I am very accessible, because again, I’ve got it now where I’m basically talking to people, and typically everywhere I go in life today I take my laptop with me… Whether it’s to any event, or watching TV, or whatever. So anyone who’d like to contact me, always feel welcome to do so.

Joe Fairless: Outstanding. Frank, I have literally a page and a half of notes from our conversation. This has been just a great crash course on mobile home investing, from ways to solve the occupancy issue – you broke it down very tactically, which was helpful… Then how to find deals, and then overall how to look for it using the IDEAL acronym (Infrastructure, Density, Economics, Age of homes and Location).

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

Frank Rolfe: Sounds great!

 

 

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JF945: How to Make Real Estate Your Business Instead of a Hobby

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Turn it up a notch! OK we’re not cooking anything in the kitchen, but we are about to cook up some recipes for success in real estate. From flipping, to meet up, to networking, it’s all necessary to be well-rounded and self-reliant. Hear what our two guests have to say about getting started in taking the business to another level.

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Bill Bronchick & Bobby Dahlstrom Real Estate Background:

– Co-founder of the Colorado Association of Real Estate Investors
– Nationally known attorney, author and public speaker
– Say hi at bill@bronchick.com
Founding board member of the Colorado Association of Real Estate Investors, leader of Northwest group
 Well-known investor, entrepreneur and real estate broker
 Based in Denver, Colorado
 Say hi to them at www.legalwiz.com and www.alpenlux.com
 Best Ever Book: Think and Grow Rich

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make real estate your business

 

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

With us today, Bill Bronchick and Bobby Dahlstrom. How are you two doing?

Bobby Dahlstrom: Great, thank you.

Bill Bronchick: Doing great, thank you.

Joe Fairless: You’re welcome, both of you, and nice to have you both on this show. I’m really looking forward to digging in. They are based in Denver, Colorado. They are co-business partners in real estate deals, they co-authored a book called “The Business of Flipping Flips” – did I write that down correctly?

Bobby Dahlstrom: The Business of Flipping Homes, Joe.

Joe Fairless: [laughs] I don’t know how I wrote that… You know, I do like “The Business of Flipping Flips”, though… That’s pretty catchy. “The Business of Flipping Homes” – they co-authored that book. With that being said, do you two wanna give the Best Ever listeners a little bit more about your background and what you’re focused on?

Bobby Dahlstrom: Wow, that’s a long silence. I hope we didn’t lose Bill. I will start in… This is Bobby, and I started investing full-time — I’d been a marketing consultant and started investing in real estate full-time back in the mid-nineties. Bill and I met each other and did several projects together, and were involved with the group that he founded, called The Colorado Association Of Real Estate Investors.
Over the years I’ve done hundreds of flips and had many joint ventures with Bill, and we also wrote another book around 2001 that was a best-seller, called Flipping Properties.

Bill Bronchick: Great. This is Bill Bronchick. I’ve been investing since 1992, I’ve been practicing law as a real estate attorney since 1990. I quickly figure out after about two years of practicing law that it doesn’t matter how much you make an hour, it’s how much you make an hour when you’re not working, so I got quickly into real estate and my client’s deals, and I soon discovered that the law of practice pays the bills, but you get rich in real estate.

I did a lot of deals pretty much full-time since 1992, weaving in and out of my law practice and the association in Colorado. I’ve done just about every type of deal you can imagine – residential, commercial, flips, wholesales, lease options… Just about every type of deal, but Bobby and I fell into a nice little niche together flipping homes, and we wrote the best-seller in 2001 called Flipping Homes. Our brand new book is “The Business of Flipping Homes”, which is a business approach to the real estate strategies.

Joe Fairless: Well, let’s talk about a business approach to the real estate strategies of flipping homes. Walk us through the premise of the book.

Bill Bronchick: The premise of the book basically is using certain real estate techniques to run a business. A lot of people do it as a hobby or a part-time thing, or really haphazardly… Real estate investing, in my mind, is not like stock market investing – you don’t throw money at it and wait for something to happen; you have to be active as a participant. And it’s like any small business, you have to worry about things like cash flow, marketing, keeping your books and records, and so forth. So what we do is we give a blueprint on how to run your investing like a business.

Joe Fairless: Let’s talk about that. What are some ways to run your real estate business like an actual business, and not a hobby?

Bobby Dahlstrom: One of the first things that people need to do is realize it’s gonna be a time commitment. There’s a lot to learn, and you need to surround yourself with other successful people and build a team that you trust, that you can work with on a repeat basis. That’s kind of the basic place to start. Then you have to go out and start looking for your first deal.

Many people get lost in trying to find the perfect deal, which probably doesn’t exist. You need to find one that makes sense, go with that, learn from your mistakes, which hopefully we will help you to avoid, and then move on to the next one, as you grow.

Bill Bronchick: Also, one of the most important things in a business I mentioned earlier is cash flow. You have to make sure that you have enough money to not only run your business on a daily basis, but to fund the deals you’re working on and don’t get all your money tied up to the point where everything is hanging on a couple of deals, and if they don’t go through you’re broke. It’s like any business, you have to anticipate your expenses and your cash flow needs.

Joe Fairless: And with flipping, how do you look at cash flow?

Bill Bronchick: We talk about two types of flipping in the book – wholesaling and retailing, retailing being the traditional stuff you see on TV, buy, fix and flip… Wholesaling being more of a short-term deal and selling it to another investor as is.

Wholesaling will bring you short-term income, and the fix and flipping will be every three or four months, but you have to be able to anticipate your projects. For example, if you’re in the middle of two fix and flips and they went over budget and you’re feeding it and feeding it, and all of a sudden you have to pay other expenses of your business, like your phone in your office and all the things like that, you have to make sure that you have enough cash on hand so you don’t run out of cash for your deals.

Joe Fairless: Earlier I heard that you want to avoid the mistakes… What mistakes have you two come across, either personally or through the investors you know that you wanna share, so that the Best Ever listeners listening can avoid those mistakes?

Bobby Dahlstrom: To continue on our train of thought sort of along the lines of cash flow, let’s talk about cash flow mistakes. There’s various ways to control a property and then purchase a property. If you’re going out and getting a new loan for it and it’s gonna be a flip, most likely what you’re doing is because flipping’s become so popular, [unintelligible [00:07:38].23] money that would be considered hard money loans. And those can make sense, you can get in and out quickly. But a lot of times these hard money loans have a little upfront cost, as you’d expect; they also have, however, a high interest rate, and usually a balloon payment in six months or so. So you wanna be realistic… Most flips that we do, we get it from purchase to ready to sell in, say, three to six weeks, so even with the hard money loan, that would work out.

If for some reason you’re planning to do an addition, or something, or you don’t have a crew and a seasoned, experienced contractor that can get the work done quickly, and you think it possibly might take longer than that – and it’s really not just when you finish, but when you get is sold – then especially be careful, be aware that that balloon payment is coming, and the carrying cost is much higher than what you might expect for just your traditional home payment.

Now, ideally, you’d be able to fund the deal with your own either savings, or you might have some money tied up in a retirement account to utilize – which is a whole different strategy; that’s a little more advanced – but also just your own lines of credit. Even though they have less upfront expense, they are probably gonna make sense… It just depends on your state of mind, if you’re comfortable using your own credit line in this business.

I think sometimes people don’t realize how long it’s gonna take and they get their money tied up… And like Bill mentioned, if you’re trying to juggle more than one deal, it gets complicated because you’re having to get your resources, including yourself, to two different places. It’s usually better, like in most things, to start slowly, one deal at a time.

Bill Bronchick: Right. And just to add to that, a lot of people do get hard money loans for their fix and flips, and they don’t realize that, let’s say they have a six months loan – after six months, the interest rate goes into default, which means it might step from 12% to 20%. Then all of a sudden it’s racking up at 20% while you’re trying to get your closing done on the backend, and all of a sudden your profit is eaten up to be nothing or even negative.

But even though it only takes a couple of months to get a rehab done and ready for resale, you could have delays, you could have contractor problems, you could have weather, you could have more often than not a buyer that says, “Yeah, I’ll buy” and then a month-and-a-half later, right before closing, they can’t buy, so then you have to put it up and get another buyer.

The six months may seem like a long time, but what I recommend people do is make sure if you’re got a loan that’s due in six months, you have the right to buy an extra two or three months, otherwise you’re either getting hit at the default rate of interest, or potentially foreclosure by the lender and you’re gonna lose the house.

Joe Fairless: Earlier you’d mentioned building a team you trust… What team members need to be on this team for fix and flippers?

Bill Bronchick: Us two. [laughter] An attorney, a contractor, a real estate broker, a title or Escrow company rep, a good insurance person, an accountant, an inspector… Just all the players — and it’s not like you have to have every one of them lined up before you make your first offer, but that’s one of the things you wanna do right up front, start getting your things lined up so that you don’t end up having some bad experience because you’re just rushing to get something done with someone.

Joe Fairless: What are the best ways to meet the attorney, the contractor, the real estate broker, the title company person, the insurance person, the accountant and the inspector?

Bill Bronchick: Local real estate investment groups is one good way, ask for referrals.

Bobby Dahlstrom: That’s where I was gonna start, too. Almost every city has some type of a real estate organization that’s sort of a creative thinking, like-minded people type get-together scenario, they’ll meet monthly. You can find those online, and sometimes going to some of the seminars, whether they’re free seminars or a paid weekend event like I believe we have coming up – those kinds of things are a great place to meet other people and just get a sense of what this flipping is all about. Then also, as you read and learn more about the different people that you’re gonna need in your group, when you speak to, say, a real estate broker – and I’m a broker, I’m also a contractor…We don’t all think alike and we don’t all have the same experience. It’s not that difficult to become a real estate agent. So you wanna start looking for the ones that have worked with investors and ideally own investment properties themselves, so they understand what you’re trying to accomplish.

Bill Bronchick: Meetups are also a good place to find groups. If you go to meetup.com, there’s dozens in your town.

Joe Fairless: What are some lessons learned as far as creating a real estate group or meetup? Because Bill, I know you are the co-founder of The Colorado Association Of Real Estate Investors and you did that in the late ’90s, I think you said… Or early 2000s? Mid-nineties, and you’re still active. What are some tips that you have for someone who wants to do something like that?

Bill Bronchick: Well, you’ve got to be able to have an organized organization that’s gonna help… Maybe get some volunteers in the beginning, so you don’t have to spend money on employees. Some of these groups are run like a board, like government, and they have a board. Mine was run as a benevolent dictatorship, and therefore was much more efficient, just having one person or two people be the point people to run everything and make the decisions.

You’re gonna have to build an e-mail list, you’re gonna have to find some place that’s fairly reasonable, but reputable, to have your meetings, and most importantly, you just gotta make it interesting with the topics. A lot of these groups have speakers who come in and sell things – sell seminars, books and CDs… Which is okay, but if they have that every month, you’re not getting a lot of information.

Joe Fairless: One other follow-up question — I know I’m kind of going back in a kind of scattered approach, but I was taking notes as you two were talking, and I wanna make sure we address all these items. You mentioned earlier, Bobby, that there will be a time commitment; that’s the first thing that you said. For someone looking to get started and going full-time, what type of time commitment should they expect?

Bobby Dahlstrom: Well, I think as a minimum you’re probably looking around ten hours a week. In our previous book we spent more effort of gave more emphasis on the idea of wholesaling, which basically you don’t necessarily need any money to do. If you go out and identify a property that’s a good deal, then with a little effort you’re gonna find someone who will definitely take that off of your hands. So the idea as a wholesaler is you spend your time looking for bargains, and you’re probably not gonna find it by just having your real estate broker go out and look for you. That is one way to identify deals, but usually it’s really pounding the pavement and being creative… But it’s hard work, so that’s gonna take some time to go out and find that deal, and then you need to secure it.

If you’re starting kind of skipping that step and you’re willing to work with people that have already found wholesale deals, or with real estate brokers, or buy foreclosures at the trustee sales, those kinds of things, then in some ways it takes less time to find a deal, that’s true, but then you still have to manage the actual process of getting it from under contract to closed, to then fixing it up and then selling it.

To really be successful, you need to spend time on your education along the way, too. So again, even if you’re not wholesaling, and you just skip that step and you’ve got the money to do your own deals, it’s still gonna probably be, let’s say – and this isn’t a rule of thumb I’ve set in the past, but Bill, you can chime in – ten hours or so a week would be a good place to start. If you have more time… We see a lot of people get into flipping that have the money tied up in the stock market, and maybe they’re empty nesters… They still have another career – we don’t advise people to go and just leave their existing career, but maybe in addition to that, or if they’re sort of semi-retired, they can work their way into the investing at their own pace, if you will.

Bill Bronchick: Just to add to that, I would agree, ten hours a week is a good place to start. I think the approach that people need to have is that after they come home from five o’clock from their regular job, it’s time to go do the second job. Like I said, treat it like a business. You’re setting aside two or three hours a day, and that’s just your second job for a while, and you’re gonna have to get your family and friends to understand that and accept that. At some point, maybe when you get up to 15 or 20 hours a week, you’re gonna have to decide which job is more important. If you’re doing it right, the job that’s more important is gonna be the real estate, because it’s gonna make a lot more money.

Joe Fairless: Alright you two, what is your best real estate investing advice ever?

Bill Bronchick: My best real estate investing advice ever… My knee-jerk reaction would be “make a lot of offers.”

Joe Fairless: Why is that?

Bill Bronchick: Well, I think too many people dance around it, they look at it, they research it, and then they haven’t even made an offer yet. You can’t buy a property from a seller in a good deal until you find out what the seller’s problem is. You gotta sit down with them and get personal and get them to open up, and go “What’s the real reason you’re selling?” Not because you wanna sell the house, but there’s some problem attached to that that you need to find and get to the bottom of, and then solve that problem and buy the house; if you solve their problem, you make money.

It’s not always price they’re looking for. It might be speed – closing quickly, it might be closing later, it might be terms… You just don’t know. So make lots of offers, but don’t make an offer blind, without knowing what the seller’s needs are – their personal needs, not the property needs.

Joe Fairless: I love that.

Bobby Dahlstrom: Yeah, I agree. I would say — we’re not inventing this one, so I’m not gonna count this as my best advice, but what really does matter is you have to buy it right; you just can’t overpay for a property… So where my advice might come in from there is don’t take things personally. People get really attached to one potential deal, and they try and make it work; they go backwards and forwards and try and make it work, and get all these other people involved, when maybe it’s just not a deal. Or maybe it will be a deal in a year, so you can always leave a verbal offer with the potential seller in a respectful way, maybe they’ll come back to you. That comes back to really making more offers.

People get really caught up also in the renovations, so they start doing things the way they would want to do it for their own house. If I happen to like light blue interiors for my house – which I don’t  – that would be fine, but I don’t wanna use that in a flip. We wanna be a little creative, get most bang for the buck – that’s part of the fun of the business – but don’t try and project your personal case and your personal opinions too strongly into each deal.

Joe Fairless: I love that. Are you two ready for the Best Ever Lightning Round?

Bill Bronchick: Go for it!

Bobby Dahlstrom: Sure!

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

Break: [00:18:21].02] to [00:19:03].01]

Joe Fairless: Best ever book you’ve read?

Bill Bronchick: Think and Grow Rich.

Joe Fairless: Best Ever deal you’ve done?

Bill Bronchick: Oh, there’s so many…

Bobby Dahlstrom: Bill and I were partners on a duplex in Washington Park which went against the grain of some of our typical deals. It worked our really well, we bought half a duplex.

Joe Fairless: You bought half a duplex…

Bill Bronchick: Right, we bought half a duplex for a 100k, put 80k into it, sold it for 263k in eight days, cash.

Joe Fairless: How did you find the buyer?

Bill Bronchick: The buyer was easy, because it’s Washington Park, the most desirable neighborhood in Denver… So that wasn’t hard. We put it on the MLS and we had it sold in a minute.

We found the seller’s property was vacant for eight years, and it was a disaster. 1,200 square-foot, half a duplex, we put 80k in it – that’s a lot of work for a little half a duplex.

Bobby Dahlstrom: That’s right. We purchased it from another investor who… Really, they were new, and it would have been a little too much for them to take on. As I recall, Bill felt bad a little bit that we made so much and he paid for a vacation for her, in addition to the money we had already agreed upon for the purchase.

Joe Fairless: Nice.

Bill Bronchick: Yeah, that was good. And just one other thing I just wanted to mention with that deal… This deal in particular – it was a wholesale from another investor to us, and then we sold it retail, so it was kind of back-to-back. It was half a duplex, so there was another side to it, and the other side looked terrible… So we had to actually fix up both sides in front, so it matched, otherwise it would have looked like the monsters with [unintelligible [00:20:30].02], one half good and one half bad. [laughter]

Joe Fairless: And did you have to get their approval to do that? Because I imagine they didn’t pay for those renovations… You just paid for it to help your investment.

Bobby Dahlstrom: We’ve done that in the past, as well… We kind of encouraged the neighbor, with their houses dilapidated, and said “Look, we’ll do a little renovation while we’re here, just to help you out, too. It’s win/win.” An awkward conversation, and then after that, it usually goes just fine.

Joe Fairless: What is the biggest mistake you have made on a deal?

Bobby Dahlstrom: Well, if I stick with deals with Bill, it might be the time that he verbally told me we had one ready to go, and I got a crew in there over the weekend and then found out that we actually didn’t have the deal signed. We had already done all kinds of demolition and emptied the place out, took out some [unintelligible [00:21:19].16] walls, that kind of thing. But it worked out… We luckily didn’t lose anything too valuable of the owner’s, and we worked it out.

Bill Bronchick: If we’re talking about the one in Baker district, my biggest mistake was selling it to Bobby for a quick 10k cash, and then he fixed it up and made the lion’s share of profit. I was greedy. I was looking for a new car and he flashed cash in my face, so I sold it in two days after I had it, to Bob.

Bobby Dahlstrom: Oh, that’s right.

Joe Fairless: What is the best place the Best Ever listeners can get in touch with you two?

Bill Bronchick: The best way to get me is my website, legalwhiz.com. Bob…?

Bobby Dahlstrom: You can send me an e-mail, Bobby@alpenlux.com, or go to my website, alpenlux.com.

Joe Fairless: Alright, Bobby and Bill, this has been an educational conversation. Thank you for being on the show, thank you for talking about the best ever advice that you have, which is to make a lot of offers – don’t dance around the property, just make offers. I loved the “solve the problem” – I think that really resonates with me even more… Identify what the seller’s problem is and solve that problem, because we are dealing with people, we’re not dealing with properties. We’re in the people business.

And Bobby… I think I have your voices down, by the way, at this point, but correct me if I’m wrong – I believe you said, Bobby, “Don’t project our personal taste into the deal”. I love that. That is a mistake that I have heard a lot of beginning flippers make. Then lastly, when you two mentioned paying to renovate the outside of your neighbor’s property – in this case it was a duplex; in other cases it might be just your neighbor, if it looks really bad… It’s a win/win – that certainly is a win/win/win: you win, they win, and the neighbors all win. Everyone wins, all the way around. Really interesting stuff.

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

Bill Bronchick: Great, thank you.

Bobby Dahlstrom: Alright Joe, you have a great day! Thanks.

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JF944: How to Get to 75 Rehabs a Year and 10 Employees

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Big business, it all started thinking big. Our guest has a 50-50 partner with responsibilities of his own, that is how they know who does what… That is how they scale. Hear how he was able to do 75 rehab the year.

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Brian Elwood Real Estate Background:

– Business Coach, Real Estate Investor, Entrepreneur
– Does 75+ rehabs per year and owns 25 rental properties in Middle Tennessee but resides in Denver
– Passionate about business development and helping entrepreneurs
– Based in Denver, Colorado
– Say hi to him at BrianEllwood.net
– Best Ever Book: 4 Hour Work Week by Tim Ferriss

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fix and flip investment advice

 

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, Brian Ellwood. How are you doing, Brian?

Brian Ellwood: I’m great, Joe. How are you?

Joe Fairless: I’m great. Nice to have you on the show, and looking forward to digging in. Brian does 75+ rehabs a year and owns 25 rental properties in Middle Tennesse, but lives in Denver, Colorado. He is a business coach, real estate investor and an entrepreneur. You can say hi to him at his website, which is in the show notes link.
Brian, do you wanna give the Best Ever listeners a little bit more about your background and your focus?

Brian Ellwood: I lived in a bunch of different states growing up, but Tennessee from sixth grade on, went to the University of Tennessee, graduated and moved back to Nashville, and that’s where I started my real estate business. That was 4+ years ago or so from now, and two years into it we started to build the business to where we can run it from our houses, without having to leave our house, but investing in the same city.

Then we decided to test that theory and moving across the country. Now I live in Denver, and we have a team of about 10 people that live in Nashville. Not everybody does… The marketing guy would not need to be local, but your sales guy would; certain people are boots on the ground, other people are not.

I really have a passion for creating passive income and for teaching other people, helping other people get into this business and create the lifestyle that they want to live.

Joe Fairless: I wanted to talk about your responsibilities now, as someone who does 75 rehabs a year and owns 25 properties and employs 10 people. How do you spend your day?

Brian Ellwood: I have a 50/50 business partner, so the work is divided up between the two of us. I am over marketing and finances and operations, and he is over sales and renovations, so we kind of divided it down in the middle. It’s kind of like we have two CEOs on our org chart.

My day is basically spent working with our marketing director, working with our CFO and our COO. I know these sound like big, fancy titles; the marketing guy and the COO are the same person, okay? [laughter]

Our COO, he spends one day of the week working on operations and four days on marketing, because marketing is more important to a business of our size. So I’m on the phone with them for several hours a week, and I’m focusing on our vision for the year and holding them accountable to getting certain results done by certain times.

I should also throw in there that 75 rehabs sounds really intense, but we don’t do expensive rehabs. We have, and we have a couple more going on right now, but over time we’ve decided that $10,000 or less is the sweet spot for us. We focus on being a marketing and sales organization at our core, so the backend monetization has to be kind of simple, because you can’t really be great at every part of it, at least not in the beginning… So that decreases the simplicity a lot.

A lot of times we’ll just do five, seven thousand dollars… Just trying to get properties in rent-ready condition, put it back on the market; either a landlord would buy it, or someone who wants to move in and finish the renovation will buy it.

Joe Fairless: So you’re staying away from the big time distressed properties and you’re looking for something that just needs some lipstick?

Brian Ellwood: It’s not that we wouldn’t buy a big kind of distressed property, as long as there’s equity in it when we buy it, as long as we can get it for a discount. It’s just that we’re only gonna put the first ten grand or so that it needs into it, and then put it back on the market.

If it was really distressed and needed to be torn down, we wouldn’t do anything to it. We would just buy it and list it as is. Sometimes it doesn’t make sense to put any money into a property, but in our experience, running a business virtually is tough when you’re putting $110,000 into a rehab and they’re opening walls and finding all kinds of different stuff.

We have a great team there, the project manager and another guy who oversees all the projects, but we’re just trying to create a more focused business model. I always hear the mantra that “Focus makes you rich”, so we’re not trying to be great at everything.

Joe Fairless: What usually comprises of the five to ten-thousand-dollar rehab budget?

Brian Ellwood: It’s probably like paint, carpet, [unintelligible [00:07:13].28] just cleaning it, taking out all the trash, doing some landscaping… It could be like windows, if the windows are broken out. If the property is gonna be listed and it’s gonna be sold to a homeowner, someone who’s gonna live there, then you’re gonna just do the first $10,000 worth of work that’s gonna make it livable, for someone to buy. But if an investor’s gonna buy it and do like a rehab on it, then we may just clean it up and not do much to it.

Joe Fairless: That’s an interesting model. I haven’t come across this model where you’re doing the initial part of it, or you’re just doing the five to ten thousand dollars worth, and then flipping it to either the end buyer or another investor. Did you start out that way?

Brian Ellwood: We started out wholesaling, and we kind of over time have just come to think that closing on everything is the best strategy – just closing on it, listing it on the MLS, selling it with a realtor. We still focus our efforts on marketing and sales, but instead of signing a contract to an investor, we decided to put the resources in place to allow ourselves to close on every property and sell it the traditional way, because then not only can you sell houses to investors, but you can also sell them retail, which means you can expand your business to a lot of other zip codes, or maybe investors aren’t looking, because you’re selling everything to retail buyers.

Joe Fairless: You mentioned that a lot of your conversations — or maybe not a lot, but you mentioned a priority of yours is holding the team members accountable to get the results done. What results do you outline for them to accomplish?

Brian Ellwood: Just as an example, our marketing director’s key indicator, of whether or not he’s doing a good job, is how many leads he generates each week. Of course, there’s a lot of other variables that go into that, like cost per lead, but that’s the main thing that we look at. And he has goals for each quarter, to get to a certain point.

Our CFO is actually responsible for maintaining a certain profit margin – net profit margin – in our business and forecasting the revenue that we’re going to make against the expenses and saying “Hey, the next quarter does/does not look good, so we need to make this or that budget cut of this amount to maintain our healthy margin where we wanna be.” Sales guys – there would be appointments attended and contracts signed. Another position we call our CRO, which would be chief revenue officer. He is responsible for pipeline revenue added, and we have one other that we call our brand commitment score, and that is something that our COO — he calls every customer after the property has closed and surveys them on how good of a job we did creating a certain experience for the customers, and it’s on a scale of 1 to 10. That gets reported. There’s a lot of other KPIs, but those are the main ones that we focus on.

Joe Fairless: Do you have a software program where you log in every week and just check the software program, or do you have a spreadsheet that you created and each of them fill out what they accomplished? How does it work?

Brian Ellwood: Each team member has their own dashboard where they have all their KPIs clearly displayed, that we look at on our call each week. We also have kind of like an assistant position, and one of the things she does is takes the KPIs that I mentioned, the core ones that we feel drive our business, and puts those in a little report that she posts to our KPI Slack channel each week, just so it’s front and center for everyone on the team to see how everyone else is doing in terms of hitting their numbers. Every person is responsible for tracking their own KPIs on a simple Google spreadsheet.

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

Brian Ellwood: Well, I struggle a little bit to come up with a great answer for this, but what I wanna say is to start with lifestyle as your number one goal when you’re going into business. What that would look like would be write out your perfect day in detail, like where you are, who you’re with, what you’re doing, how much time you’re working, how many hours do you work etc. and figure out what that lifestyle that you’re imagining costs, and figure out what type of business model would allow you to live that lifestyle, and then work backwards from there to building your business.

I’m sure you’ve read the Four-Hour Workweek, right?

Joe Fairless: Yup.

Brian Ellwood: It’s probably the most mentioned book on your show, if I had to guess.

Joe Fairless: Rich Dad, Poor Dad.

Brian Ellwood: Okay… Yeah, I thought about that one, too. [laughter] Well, in the Four-Hour Workweek he talks about the difference between being a CEO that makes 500k/year working 80 hours a week and he’s gone all the time, or a dude who makes 50k/year working ten hours a week from a coffee shop, doing something that he loves. Two extreme ends of the spectrum, and there’s no wrong answer as to where you should be on that spectrum, but it’s just a really important question to ask, because there’s way too many stressed out, unhappy billionaires out there in the world.

What intrigued a lot of people about our business is “How do you do this virtually and you seem like you sit at home and you must be laying on the couch, watching soap operas?” Well, I’m not, but I don’t do a lot of stuff that I don’t enjoy, and I had to be intentional about creating this day-to-day experience, instead of just saying “I wanna make a million dollars and not thinking about what it’s gonna take to make the million dollars.”

A lot of people will sacrifice lifestyle for money, but they want the money because they think that will give them a certain lifestyle… It doesn’t work that way, unless you’re intentional about it.

Joe Fairless: That’s so true. What a great point. Are you ready for the Best Ever Lightning Round?

Brian Ellwood: Let’s do it.

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

Break: [00:13:36].25] to [00:14:19].17]

Joe Fairless: The best ever book you’ve read?

Brian Ellwood: Four-Hour Workweek.

Joe Fairless: What’s the best ever personal growth experience, and what did you learn from it?

Brian Ellwood: One of my biggest personality flaws is that I have shiny objects [unintelligible [00:14:27].16] really bad, the visionary type, and if I see new ideas coming across my plate, all over the place… Every time you scroll Facebook there’s a new piece of software that’s supposed to connect to your business, or something. For the first four years we were in business we changed our direction a lot. “Well, let’s focus on this. Oh, you know what? Let’s change. Let’s invest in this other market. That didn’t work out… Let’s try to do new construction. Oh, that didn’t work out.”

I learned over time that you never get anywhere if you keep changing direction, so now what we do is we develop a vision for the next year and we stick to it. One year is about all I can commit to, because I still have issues… But once that yearly vision is in place, we don’t sway from it. We can make tweaks to it, but that’s what we do the whole year, even if great ideas come up and try to make us change course, and we get a lot more results from being focused.

That was the hardest and best growth experience I think I’ve had to go through.

Joe Fairless: Yeah, that’s probably some advice I should take myself… Thanks for sharing that. What is the best ever deal you’ve done?

Brian Ellwood: The best deal… We bought a house for $35,000 and it was in an area where new construction and things were maybe 10 to 15 streets away at that point; the area was still pretty rough, but the growth was spreading towards it, and we held it as a rental for about three years, and then sold it not too long ago for $225,000. So we bought it for $35,000, sold it for $225,000. The house was on two lots, and each lot was good for two houses, so four houses total, and it sold for land value.

Buying on the fringes of areas that are gentrifying I think is the easiest money you can make.

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

Brian Ellwood: I’d say two things… One is that inside of our company culture we have — I mentioned the idea of living your perfect day in the beginning of this interview, and we have what we call our Perfect Day Crew where we meet quarterly and everyone goes over what their perfect day is and what’s holding them back, and we all give them feedback and advice. In between those quarterly meetings we are assigned an accountability partner. They hold their partner accountable to doing these things that they set out to do, to move them more towards living their ideal life. So I help not only our team members to do that, but friends and family as well.

Another thing I’ll say is that I really like to donate to Kiva – have you ever heard of Kiva before?

Joe Fairless: No.

Brian Ellwood: It’s a nonprofit… Some guy in San Francisco started it, and it’s micro-loans for people in third world countries that need money for things like water filters and building toilets, and stuff… And they actually pay you back. They have like a 90-something percent repayment rate. An $800 loan can buy a clean water filter for an entire village of people, and they collectively can pay you back in a year or so, and they even pay I think a little bit of an interest.

I like to throw a few hundred bucks a week to my Kiva account, and there’s always money coming back when I’m getting repaid, and I just keep pushing it back and it kind of creates a snowball.
I really like the idea of the money getting paid back. There’s something about that, because then I can just keep redeploying it. I think Kiva is a great organization, and I tell people about that a lot.

Joe Fairless: What is the biggest mistake you’ve made on a deal?

Brian Ellwood: Probably not doing enough due diligence, not getting a professional home inspection on the deal, and then thus overlooking major foundation issues that cost us $20,000… Basically, taking the deal from being profitable to just barely breaking even. So not doing thorough due diligence I’d say would be the biggest mistake.

Joe Fairless: Since you live in Colorado, your properties are in Tennessee, what safeguards have you put in place to prevent that from happening again?

Brian Ellwood: Well, we do a home inspection every time now. We have a contractor go out there and give us an estimate. We have a member from our team that we call the renovation manager go meet the contractor. Then we get a professional home inspection and a termite inspection on every single deal. We also have photos and videos uploaded to Google Drive that we can check out. That’s about all the due diligence I need to be comfortable. That’s our current system now.

Joe Fairless: What’s the best place the Best Ever listeners can get in touch with you?

Brian Ellwood: The Best Ever listeners can visit my website, it’s BrianEllwood.net. They can also feel free to send me an e-mail, Brian@BrianEllwood.net. I’d love to hear any of their questions and I’d be happy to help them out if they feel like there’s anything holding them back.

Joe Fairless: A couple major takeaways for me… One is your philosophy, and that is be intentional about your day-to-day experience, and you certainly have lived that and are walking the walk because of how you built your business. The other is how you are holding team members accountable because you have a different type of lifestyle where you are working remotely. I love how you went through the majority of the people on your team and what they are being held accountable for, and then lastly, the best ever deal, where you’re buying on the fringes of areas that are gentrifying is the easiest money you can make, according to you.

Thanks so much for being on the show. I really appreciate you sharing your advice with the Best Ever listeners, and we’ll talk to you soon.

Brian Ellwood: Thanks for having me, Joe. I enjoyed it!

 

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Joe Fairless's real estate podcast

JF925: TOP Reasons to Start an REI Club and How a Mountain Man Turns to Investing

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The Breakfast Club! OK this one is all about real estate and it happens to be in Denver, but our guest is still officiating this group and shares the top reasons and benefits for having this collective. Hear about how he got into real estate investing from only making $30,000 a year in the mountains and what he’s up to now!

Best Ever Tweet:

Tim Emery Real Estate Background:

– Owner of Invest Success, a coaching and mentoring company
– Invest Success teaches people how to fix and flip in Denver
– Host of The John Fisher Breakfast Club
– In 2004 started working as a Broker Associate with Stix and Stones Fine Colorado Properties
– 2011 he built Stix and Stone Property management company
– Based in Denver, Colorado
– Say hi to him at http://www.invest-success.com
– Best Ever Book: Centennial by James

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real estate pro advice

JF898: How He Made $30,000 on a Flip with NO MONEY Down

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BiggerPockets.com was his resource to find private capital and Hardmoney. He does flips in Chicago yet lives in Denver, and you’re probably curious how it’s possible. You don’t want to miss this one!

Best Ever Tweet:

Benjamin Lapidus Real Estate Background:

– Founder and Managing Partner of Indigo Ownerships, Indigo Home Buyers, and Indigo Investments
– With over $2M AUM in the Richmond, VA the 2017 focus is expanding the business in the CO front range
– Built multi-million dollar study abroad company, which, after selling, was seed to launch his investment businesses
– Based in Denver, Colorado
– Best Ever Book: Richest Man in Babylon

Made Possible Because of Our Best Ever Sponsors:

You find the deals. We’ll fund them. Yes, it’s that simple. Fund That Flip is an online lender that provides fast and affordable capital to real estate investors. We make funding your projects easy so you can focus on what you do best…rehabilitating homes.

Download your free copy at http://www.fundthatflip.com/bestever

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Best Ever Show Real Estate Advice from experts

JF823: How to Delegate Everything and Become a Nomad While Running Your Business #SituationSaturday

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Have you ever wanted to live outside the country while still running your business? Seems impossible doesn’t it? It’s not, it’s a matter of selecting the right team to hire, setting an expectation, and preparing yourself in the business accordingly. Hear how our guest had closed her biggest deal while living in Thailand.

Best Ever Tweet:

Micki McNie Real Estate Background:

– Owner, Broker, Investor at 33 Zen Lane, a Denver real estate team that focuses on “investment-minded” clients
– A commercial leasing broker and a residential broker
– Owns rental properties, hold notes, and flip houses
– Based in Denver, Colorado
– Say hi to her at www.33zenlane.com

Made Possible Because of Our Best Ever Sponsors:

You find the deals. We’ll fund them. Yes, it’s that simple.

Fund That Flip is an online lender that provides fast and affordable capital to real estate investors. We make funding your projects easy so you can focus on what you do best…rehabilitating homes.

Download your free copy at http://www.fundthatflip.com/bestever

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JF781: He Funded a HOSPITAL Deal and HAD to FORECLOSE on the Property #SituationSaturday

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This may be the most complicated situation we have had on the show! Our guest funded a hospital deal, was forced to foreclose on the investors, realized that he still owned a piece of it, and lawsuits fly around on both sides of the city and our guest… This is a very entertaining interview!

Best Ever Tweet:

Rob Swanson Real Estate Background:

– Owner of Freedom$oft; A successful real estate investing software
– Has flipped houses in over 20 states for over 15 years
– Currently writing a book called CASH IN, What To Do Before, During & After The Next Housing Market Crash
– Based in Denver, Colorado
– Say hi to him at http://www.freedomsoft.com

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Get a FREE strategy session with Dan Barrett who is the only certified Google partner that exclusively works with real estate investors like us.

Go to http://www.adwordsnerds.com strategy to schedule the appointment.

Subscribe to Joe’s YouTube Channel here to learn multifamily and raising money tips:
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Best Ever Show Real Estate Advice from experts

JF:772 How He Scored $10 MM at the BOTTOM of the Real Estate Market

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Rob Swanson is an icon in the real estate investing world and owner of the CRM Freedom Soft. He was able to convince a group of individuals to lend him $10 million in 2008, or at least he was able to create a fund. In this show he shares what he did with the cash and how he structured his overall operations in a weak market. Turn up the volume!

Best Ever Tweet:

Rob Swanson Real Estate Background:

Owner of Freedom$oft; A successful real estate investing software
Has flipped houses in over 20 states for over 15 years
Currently writing a book called CASH IN, What To Do Before, During & After The Next Housing Market Crash
Based in Denver, Colorado
Say hi to him at www.freedomsoft.com

Want an inbox full of online leads?

Get a FREE strategy session with Dan Barrett who is the only certified Google partner that exclusively works with real estate investors like us.

Go to http://www.adwordsnerds.com strategy to schedule the appointment.

Subscribe to Joe’s YouTube Channel here to learn multifamily and raising money tips:
https://www.youtube.com/channel/UCwTzctSEMu4L0tKN2b_esfg

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Best Ever Show Real Estate Advice from experts

JF764: How He Rolled His Capex Into a Multifamily Loan and Earned HUGE Cash on Cash Return

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Are you nervous about dumping your capital into fixing up your brand-new purchase? Today’s Guest enters deals very safely as he includes the cost of all capital expenditures into the loan. Hear how he ran into some road bumps but was covered due to the terms of his loan and check out his cash on cash return!

Best Ever Tweet:

Mark Walker Real Estate Background:

– Founder & President of Luxmana Investments LLC, which focuses on residential and multifamily investments
– Active real estate investor since 2004; began part-time while holding full-time job in high tech
– Built a multi-million dollar portfolio in less than four years
– Acquired 22 properties with an average cash-on-cash return greater than 20% in the first year
– Own property in four different states
– Based in Denver, Colorado
– Say hi to him at www.luxmana.com
– Best Ever Book: Rich Dad Poor Dad by Robert Kiyosaki

Want an inbox full of online leads?

Get a FREE strategy session with Dan Barrett who is the only certified Google partner that exclusively works with real estate investors like us.

Go to http://www.adwordsnerds.com strategy to schedule the appointment.

Subscribe to Joe’s YouTube Channel here to learn multifamily and raising money tips:
https://www.youtube.com/channel/UCwTzctSEMu4L0tKN2b_esfg

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no fluff real estate advice

JF690: How to Successfully Enter a New Market #situationsaturday

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When you are thinking to move into a new market, you may be surprised that your tactics don’t work. You may need to switch it up! Today’s guest shares his story of moving into a new market and adjusting his marketing. Hear how he did it!

Best Ever Tweet:

David Corbaley Real Estate Background:

– CEO of Marketing Commando
– Was a Green Beret
– Hear Best Ever Advice on Episode 144
– Based in Denver, Colorado
– Say hi at http://www.therealestatecommando.com

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

Made Possible Because of Our Best Ever Sponsors:

You find the deals. We’ll fund them. Yes, it’s that simple. Fund That Flip is an online lender that provides fast and affordable capital to real estate investors.

We make funding your projects easy so you can focus on what you do best…rehabilitating homes. Learn more at http://www.fundthatflip.com/bestever.

Subscribe to Joe’s YouTube Channel here to learn multifamily and raising money tips:
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real estate advice podcast

JF657: How He Creatively Controls Properties with No Obligation

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Today’s guest is a highly creative real estate investor in the Colorado market. Although his first deal only earned him a $100 spread, he mastered the creative financing deals, and now owns over 20 properties. Hear how he also raised millions.

Best Ever Tweet:

Kevin Amolsch Real Estate Background:

– President of Pine Financial Group
– Owns more than 20 units
– Based in Denver, Colorado
– Say hi at kevin@pinefinancialgroup.com
– Read his book at: https://www.amazon.com/gp/aw/d/0692501193?keywords=45day%20investor&pc_redir=T1&qid=1456187644&sr=8-1

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

Made Possible Because of Our Best Ever Sponsors:

You find the deals. We’ll fund them. Yes, it’s that simple. Fund That Flip is an online lender that provides fast and affordable capital to real estate investors.

We make funding your projects easy so you can focus on what you do best…rehabilitating homes. Learn more at http://www.fundthatflip.com/bestever.

Subscribe to Joe’s YouTube Channel here to learn multifamily and raising money tips:
https://www.youtube.com/channel/UCwTzctSEMu4L0tKN2b_esfg

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