JF2691: The Devastating Impact of Climate Change on Your Real Estate Investments in the Next 10 Years with Neal Bawa

We’re sharing the top ten sessions from the Best Ever Conference 2021 as we gear up for the second Best Ever Conference at the Gaylord Rockies Convention Center in Colorado this February 24-26th.

In this episode, Neal Bawa presents how climate change could greatly affect the real estate space.

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JF2684: 6 Lessons in Becoming a Better Leader with Brandon Turner

We’re sharing the top ten sessions from the Best Ever Conference 2021 as we gear up for the next Best Ever Conference at the Gaylord Rockies Convention Center in Colorado this February 24-26th.

In this episode, Brandon Turner shares six lessons he’s learned about what it takes to be a better leader.

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JF2670: Will Interest Rates Be Higher In 24 Months? ft. Ryan Smith, John Chang, Hunter Thompson, and Neal Bawa

We’re sharing the top ten sessions from the Best Ever Conference 2021 as we gear up for the second Best Ever Conference at the Gaylord Rockies Convention Center in Colorado this February 24-26th.

In this episode, Ryan Smith, John Chang, Hunter Thompson, and Neal Bawa have a lively debate about whether interest rates will rise over the coming year.

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TRANSCRIPTION

Joe Fairless: Welcome to another special episode of The Best Real Estate Investing Advice Ever Show, where we are sharing the top sessions from the best ever conference 2021. This year, the Best Ever Conference is back in-person, February 24th through 26th. Come join us in Denver, Colorado; you’ll hear all the new keynote speakers, you’ll meet some new business partners, you’ll learn some insights from the presentations and from the people you meet, that you can apply to your business today. Here is an example of a session from last year that is still relevant today, and will be beneficial for you.

Ben Lapidus: We are on to the most exciting part for me where I get to participate in the intellectual debate. This year, we’re talking about interest rates, which is a scintillating subject matter, because John Burns hinted that interest rates are going up to 1.8% in the next year, and others have hinted they could go down. There are negative interest rates and other countries around the world. Will US interest rates be higher 24 months from now? We’re going to find out. I’d like to introduce our speakers, one at a time.

First, I’d like to welcome back Mr. Neal Bawa from Grocapitus; he’s got an amazing Udemy course, he is a makeshift economist in his own right. And interestingly enough, he raises a million dollars a year just from the tomatoes in his backyard. Welcome, Neal. I asked him how, and he wouldn’t tell me. He said, “You have to ask after the show.” If you didn’t have a question for Neal, now you have one. Neal will be debating for interest rates being higher, he’s for the motion.

On the other side of the queue is Mr. Hunter Thompson. Welcome back from Asym Capital, this is going to be your second debate with the Best Ever conference as well. What’s awesome about Hunter is that he seems like he is a powerhouse. He’s always running a marathon in his work, but he does it in a slow, smooth way. How does he do it? Apparently, this mastermind can run a three-hour and 10-minute marathon, which just shows his endurance. He will be debating against the motion for interest rates either being at or lower, where they currently are today.

Joining Neal will be Mr. John Chang from Marcus and Millichap. Again, the chief economist of Marcus and Millichap. Interestingly about John – I know his life shifted drastically with COVID. He did 62 presentations last year that he otherwise would have had to travel to, but hasn’t stepped on a plane since COVID started. So good for you, John, welcome to the club. I also enjoy not traveling, which isn’t very good for acquisitions. But I suppose it’s why we’re growing teams.

Then joining Hunter, against the motion, is Ryan Smith from Elevation Capital. He’s been in the business for multiple economic cycles. He’s looked at mobile home parks, self-storage, and plenty of other asset classes, and he is keeping his pulse on the market. Like Neil, he eats a million dollars of tomatoes a month, but his interesting fact is that he is a size 18 shoe. So watch out Neal and John, he might step on you.

With that said, I’d love to get this debate started. Will US interest rates be higher in 24 months? We’re going to have three phases here. The first is going to be opening arguments from each of these gentlemen over the next two minutes apiece, then followed by some scintillating debate, followed by closing arguments, and we will see who has influenced the most minds. How are we going to measure the winners? You, as the audience members are going to vote. You’re going to vote once right now, and you’re going to vote a second time. The winner won’t be who gets the rawest percentage points of participants to agree with them, but rather who has influenced the most minds. Who has created the most spread between the starting and ending percentage rate.

So I’m going to open a poll right now. 60 seconds on the clock. It is now open. Will US interest rates be higher in 24 months? You can answer yes, no, or undecided. You have 60 seconds. And just maybe in that time frame, we can get Neal to fill the 60-second void with how he raises a million dollars a year with the tomatoes in his backyard. Can I get you there, Neal?

Neal Bawa: You want me to tell you now? Very simple.

Ben Lapidus: Yes, please.

Neal Bawa: I install LED lights in my backyard, and they’re very bright. They’re two different colors. My neighbors, as they’re walking past… It’s a very rich neighborhood, everyone has million-dollar mansions… So they’re walking and looking at what I’m doing with my tomatoes. I leave the lights on 24 hours a day, so my house has this Halloween-like glow all year. When the tomatoes are grown in the summer, I go with a bag to all of my friends, and they want to know everything about the tomatoes because they’re so curious, they’ve been walking past the entire year. So, of course, that call lasts about an hour, and during that hour they asked me what I do. Of course, the story starts, and before you know it, they’re asking to be investors. So each year my yield has been higher than a million on the tomatoes.

Ben Lapidus: I expected nothing less from that answer Neal, that’s amazing. It’s a great story for debates that are virtual in a world like this. Thank you for helping me fill the time. So we’re going to do five, four, get your answers in now, three, two, I see a couple more, one… And we are going to hit the right button this time and pull — oh, you snuck that last one in there. So the folks who are debating against the motion, will the US interest rates be higher in 24 months? The answer being no, at, or below, have their work cut out for them, with only 15.4% of respondents thinking that that will be the case. 74.4% of respondents believe that US interest rates will be higher in 24 months, leaving a very small slice of the audience who is undecided to have their mind shifted. Hunter, Ryan, you guys have your work cut out for you. 10.3% undecided. Let’s go. We’re going to start with Mr. Neal, with your opening remarks. Two minutes on the clock, and I am timing you.

Neal Bawa: Anyone that thinks that interest rates will not rise over the next 24 months is quite simply delusional. We’re going to hear phony arguments, like the Fed has promised to keep interest rates low, or that the underlying economy is too weak to raise rates, or that the Fed is afraid of a double-digit recession, so they will not raise. Our team, John and I, will prove to you that all of these arguments come from just one source. They come from our inner desire as syndicators and apartment owners to see ever lower interest rates so our cap rates keep going down. We love drinking the Kool-Aid, we love smoking the opium, and we end up looking at only one side of this argument. And then we use social media to spread that one-sided argument to the point that we actually think that everyone is saying it so it must be true nonsense. Nonsense. Throughout today’s debate, we will present tangible, fact-driven arguments that will prove that not only are interest rates going to rise, but that there is already evidence that they will need to go up, already.

Our esteemed colleagues are going to spend a lot of time pointing to a year-old statement from the Federal Reserve as proof that rates will stay low. What they will fail to tell you is that the Fed also mentioned in the same statement that there are a data-driven organization and they will change their stance as necessary. At the time the Fed made that statement in Q2 last year, that pandemic was the greatest threat that the world economy had ever faced, ever. And that statement did its job already. The stock market bounced back, interest rates went down, real estate when ballistic, the US economy came out of the recession much faster than anyone had thought; it did its job. Now the Fed has to do what’s right for the US economy. Stocks are at an all-time high, real estate is going insane, one Bitcoin costs more than a luxury car; asset bubbles are everywhere. The Fed’s watching carefully, patiently. But folks, 24 months is a long time. The Fed does not have 24 months. They will have no choice but to start raising rates a year from now, and we will prove this to you beyond any shadow of a doubt. Thank you.

Ben Lapidus: Perfect two minutes, with inflammatory language to get Hunter and Ryan all riled up. Hunter, I’d love to hear that response. Two minutes on the clock, sir. You are good to go.

Hunter Thompson: I’ll keep it as brief as possible. Just for context, in terms of how we anticipate this is going to go… We’ve got John Chang, who on my podcast mentioned they spend about five million dollars a year in terms of proprietary economic data. We’ve got Neal Bawa, who is literally known for his ability to analyze economic data. Three years ago, I was asked to be a debater at this stage, but I was shortly told after that I was not the first pick. In fact, I wasn’t the second pick, or third pick, or fourth pick. I was the 13th pick to be on the debate stage just a few years ago. They had me paired with Ryan Smith, who for my understanding is a previous baseball player. So I’m looking forward to understanding how this is going to play out. Now, I was told to throw bombs; maybe I shouldn’t throw bombs at my teammate. But alright, just so we’re just we’re on the same page, let’s get into this.

I think that this is an important discussion, because a lot of people think that real estate is a great bet, regardless of what interest rates do. That’s pretty much the totality of their understanding. It doesn’t matter if they’re low or high, real estate is so good we should be participating. But the decisions we make based on interest rates are very consequential. There are some very savvy fund managers that made incorrect decisions, specifically to exit multifamily, with the intention of thinking that interest rates would rise and cap rates may similarly expand. And hundreds of millions of dollars of managers refuse to take floating rate debt, because they anticipated that interest rates would rise. Going back to 2010, that was the same question everyone was asking. When are they going to rise? How quickly is it going to happen? Look at the debt to GDP ratio; eventually, there are going to be some headwinds. And this whole time, they’re asking the wrong question. Really what the question needed to be was, how low can they go, and how quickly are they going to go negative? That’s the question that I’m seeing more and more as being much more important for us to ask as real estate investors, and what does it look like, and what real estate investment should be pursuing if that’s the case.

So my goal for this is to paint a very clear picture. When we look at the macroeconomic picture, we see where interest rates are headed. If you look up the 100-year or 200-year interest rates of the United States, it’s a very clear picture down and to the right, especially the last 40 years, down into the right. I’m not going to get up here and tell you that this time it’s different, and that this next decade, or next two months, or anything like that is going to be anything other than that. Now, the 24-month period is a short timeline. But from my perspective, this is like pocket aces versus pocket kings. Pocket kings can win sometimes, but that down and to the right trajectory is not going anywhere.

I’m also going to talk about the Bank of Japan, European Central Banks, all industrialized countries that have moved to zero or negative rates, and how the US political system, the incentive alignment associated with that, and the Fed working hand in hand have painted themselves into a corner that even in the most robust economy of the last 50 years cannot substantiate rate increases. That’s what we’re going to talk about today.

Ben Lapidus: Thank you, Hunter. Just so everybody knows, Hunter was my first pick this year, because of his amazing contrarian views on his podcast over the last few years. Thank you for joining despite the amazing competition you have on the other side of the aisle. John, two minutes on the clock, your opening arguments debating for the motion, interest rates will rise in the US, 24 months from now.

John Chang: Alright. Hunter actually ran off into left field for a little while and then he came back and argued that it’s down and to the right over the long term. But I want to pull some different context and some different data into the conversation. When the pandemic hit the US, our economy shut down like someone hit a light switch. We’ve only partially recovered from that. And when vaccinations reach a critical mass, likely in the second half of this year, economists are forecasting the economy is going to come roaring back. A new roaring ’20s, if you will. So the governments already injected 3.1 trillion dollars of stimulus into the economy, it looks like another 1.9 trillion is on tap; that’s five trillion dollars of stimulus, which is basically the equivalent of the entire economy of Japan being injected into our economy in cash. That is a lot of money. On top of that, the US money supply is over 19 trillion dollars; that’s up 25% in the last year to the highest level ever. As I mentioned this morning in my presentation, economists are forecasting growth in the 5% to 7% range in 2021, the strongest growth in more than 35 years. When the global economy reignites, it’s going to spur a surge in commodity prices, like oil. We’re also going to see growth in consumer good pricing, and that means inflation.

Part of the Fed’s mandate is to control inflation, so they cannot allow it to take off. They’ll need to do two things – raise the federal funds rate, and mop up liquidity. Now I’ve got to point out – back in 2013 after the financial crisis, when the Fed just mentioned the idea of reducing liquidity, Fed Chairman Bernanke’s remarks sparked the taper tantrum. That drove the 10-year Treasury up by about 100 basis points in about 100 days. So even a hint that the Fed plans to walk back into an accommodative stance could spark a flood of capital coming out of the bond market, which will push up interest rates. As my partner Neal pointed out, the Fed is a data-driven organization. Back in 2018, Chairman Jay Powell demonstrated that he has the backbone to go up against popular opinion and raise rates. So the Fed will not stand by, risk runaway inflation, and let the economy overheat at a record pace. So there you go, there’s my two cents.

Ben Lapidus: Thank you, John. Thank you for those nuggets of wisdom. To close out our opening arguments, debating against the motion that US interest rates will be higher in 24 months, Mr. Ryan Smith from Elevation Capital. Two minutes on the clock.

Ryan Smith: Awesome. Well, since nobody’s used a movie quote… When Neal was talking, I was disappointed. I was hoping he would end by saying “sexual chocolate” and just drop the mic, because that was just pretty thematic. Second, there’s going to be a lot of facts, figures, and numbers shared; I’ll just remind the audience that about 87.32% of all statistics are made up on the spot. With that in mind, I will also remind, to start, that the burden of proof really isn’t ours, meaning Hunter in mine. If all prevailing trends continue as is, unabated, we’win the argument. Their side will have to prove that if this, if that, and sequential ifs happen, then they’ll be correct. To that end, I’d have anybody go back and watch the debate last year in Neal’s position around cap rates, and should I buy or should I sell. I think there’ll be a similar outcome this year. But with all that being said, I remember back to 2014, talking to a number of limited partners that were interested in certain things, and the general thought was interest rates have to go up. In 2014, interest rates have to go up. Inflation is right around the corner. I heard talk of hyperinflation and the question I would ask is why. And there’s a sense that, well, it has to. But why? Well, it has to. And they were wrong, to Hunter’s Point.

Similarly, in about 2017, there was a lot of discussion around cap rates. Cap rates are at historic lows, they can’t go lower. Again, why? Because they can’t. Well, why? Because they can’t. Those folks, to Hunter’s Point, were wrong. So there’s a sense of nostalgia that I detect in the market, where there’s this sense that equilibrium… We’re going to go back, return to this point of equilibrium where everything’s just hunky-dory. But when you look at the data, things move in long-term trends; it’s either moving up or down. The trends that we’re going to be talking about, which is supportive of our motion, which is supportive of our position against the motion, is that since the year of my birth, 41 years, interest rates have been declining. For the last more than 10 years, the Fed funds rate has been declining. The Fed is actively and currently growing its balance sheet through Treasury purchases, which puts downward pressure on treasuries.

Similarly, the money supply has increased 250% since 2010, and 20% in the last year. There’s a flood of liquidity, which John alluded to, and his “if they mop it up” – that’s a pretty big if; there’s a lot of liquidity in the marketplace.

And lastly, when you look at transaction volumes, they are flat and declining over the last several years. So you have downward pressure that will likely remain. On the Treasuries you have thinning spreads that lenders are charging over the Treasuries, as there’s more supply of capital than there is demand for it, due to declining transaction volume.

So the last point, just to speak quickly to Neal, I’m actually in favor of inflation. I like inflation. We have members of our team that were operating in the real estate sector in the ’70s, when interest rates were 16% and things generally performed pretty well at that time. So I’m not in the camp of lower interest rates are better. That being said, I think it is a reality that will happen.

Ben Lapidus: Amazing. Thank you, Ryan. I wonder how many people got the movie reference. Thank you for that. Nobody got to see me laugh behind stage.

Break: [00:17:17][00:18:56]

Ben Lapidus: John, I want to start with you. And folks, because of our time, I know that we’re virtual so it’s a little bit weirder to kind of corral everybody… Do please keep your preambles to a minimum in answering these questions. Do feel free to answer each other, but I will intervene if I think we’re going off course.

John, I want to start with you, and I want to refer back to Ryan’s point. Ryan is saying that the burden of proof is not on Hunter and Ryan’s side. Interest rates have been declining for decades. And you’re mentioning a 7% growth rate, but Hamad Khan on our chat is suggesting he’s concerned with GDP and unemployment. Isn’t a 5% to 7% growth rate just recovering from a massive drop? Is hyperinflation something to be concerned about? Or is Ryan’s point valid?

John Chang: Okay, so you covered a lot of territory… There is that long-term movement. It’s been coming down, interest rates have been coming down for a long time. But we can’t count on that trend. If you look at the last 10 years, it’s been hovering right around 2%, and that seems to have been the balance. But you can only push things so far. The money supply is almost 30%, the Fed balance sheet is off the rails; it’s up 80% since the beginning of the year. So you see all these numbers and you say, “Okay, we can continue to do this. We can continue to stack it up. We can continue to pile into our debt and our overload.” But eventually, you start to hit a point where it breaks down. And if you look at the liquidity and the bubbles that have been forming… The stock market’s up 21% in the last year, and we went through a pandemic; it doesn’t make sense.

The problem is there’s too much money pursuing everything, there’s too much cash in the marketplace, there’s too much debt, and the interest rates are so low, it’s fueling that. That’s why there’s so much fear of an uprising of the interest rates, is that it’s going to create a contraction in the liquidity and cause some companies a lot of brain damage.

So I just really don’t think that the idea of long-term growth is going to hold out with regard to hyperinflation. It’s possible, but that’s exactly what the Fed wants to avoid. They’re going to let it run hot. If it gets into the two-and-a-half percent inflation rate, they’re okay with that. If it gets up to 4% and 5%, they’re going to hit the brakes; they’re going to hit them hard. And then they’re playing catch up, and that’s when you really start to run into some problems.

Ben Lapidus: Awesome. The against team, do you have a counterpoint to that?

Ryan Smith:

A couple of things. Again, it’s the if, if, if, if, if scenario. Again, it’s things can’t go lower. Why? Because they can’t. Why? Because that reaches a breaking point. Well, that breaking point wasn’t just described, it wasn’t articulated as “Here is the set of factors.” It’s this comment, which I agree with John, there’s likely going to be, some call it a number of names, call it inflation this year, for a number of reasons. I would at least submit that maybe a proper term would be reflation, not inflation, as the economy kind of comes back to its natural life, I think, to the gentleman who made a remark in the online interface.

But again, when you go back to the historic measures, when you look at inflation, John just said 4% and 5%. Well, there are two things that are problematic with that. One, there’s been only one time in the last 12 years that inflation hit 3%. That’s the peak over the last 12 years. It hit 3% one time, for less than half a year, and that’s the peak. That’s the highest inflation that has hit roughly in the last 12 years. Then the second, seen in advance of what I believe we’re talking about, which is this inflation/reflation argument, the Fed has modified their policy stance, which I find personally intriguing, for reasons we can discuss at another time. But the point is, late summer, I think early fall, the Fed announced a policy shift where their target is 2% inflation. However, they’re now considering it in the aggregate. And that simple little shift is a pretty big departure. And what that says is, simply put, that they will let inflation or reflation run without moving the Fed funds rate at all.

And to put one last data point on that, when you look at the trailing two years, which if you add that two years to now, you’ll find that we’re right. But if you go back for the last 24 months, the moving average for inflation has been 1.14%. If inflation, to John’s point, or reflation, does come and tick up to 3% for a year or more, the average would be barely more than 2%. Again, it’s a nonsensical argument, because I don’t think the possibility of that would even occur by the time the two years happens, which would, again, give us the victory in this debate.

Ben Lapidus: I appreciate that, Ryan. So Neal, Ryan is saying that the Fed has shifted their monetary policy, Hunter is suggesting that there is precedent globally in more developed countries… Not more developed, but more socialized countries, for interest rates to go to zero or negative. President Trump, during his time in office, exuded jealousy over that fact. So you suggested in your opening arguments that there is, “evidence that the Fed needs to increase those rates.” Given those arguments, what is that evidence?

Neal Bawa: Well, I want to start out by saying that Ryan is completely wrong when he mentioned that the burden of proof is on our team. All Ryan has to go out and look at is past recessions. The Fed raised interest rates after the 2008 recession. In fact, the Fed has raised interest rates after all recessions end. There is actually no proof of the Fed not raising interest rates after a recession ends. Show me that proof, Ryan; show me that proof.

And by the way, Ryan’s been reading stuff from a year old. He needs to actually go hit the newspapers, because on January 27 this year, the Associated Press reported that the Federal Reserve removed certain statements from their December statement that had said that the pandemic was pressuring the economy in the near term and posed risks over the near term. Why did they remove that phrase? Well, according to Jerome Powell, the most powerful man in America… It’s not the president that’s the most powerful man in America, it is Jerome Powell. According to Jerome Powell, the Fed now, today, sees the pandemic increasingly as a short-term risk, that will likely fade as vaccines are distributed more widely.

There are short-term risks that happen in the US economy all the time. We don’t even need to go into recessions; with the Fed changing its stance to the pandemic being a short-term risk – Jerome Powell’s words, not mine – there is now clear evidence that the Fed has changed its stance. Now, the Fed, when it changes its stance, takes time to move people from A to B, because they don’t want markets to crash. But if you simply read what the Fed is saying, look at what the Atlanta Fed is saying, look at what the St. Louis Fed is saying, it’s clear over the last two months that they’re changing their tune. And keep in mind, to win this argument — this argument is not whether interest rates will change in the next six months. In fact, John and I are not arguing that at all. We are saying that it’s impossible for the Fed to keep the rates this low for 24 months. If they raise rates 23 months from today, we would win the argument. What is the chance of that happening when the Fed is already talking about it, already backing away from its arguments? There is abundant evidence, Ben, that this is already happening. We just need to read the articles that are out there.

Ben Lapidus: So Neal, you invoked Ryan’s name. Ryan, I want to give you a chance to respond to that. Then I’ve got a question for you, Hunter, from the audience.

Ryan Smith: Neal, I’m a big fan of yours, by the way. I love the banter. But I would say similar to the fact that Neal grows tomatoes and ends up convincing people to invest in securities at the same time, it’s similar trickery. He just conflated two facts that are not to be interposed. So I’m familiar with what he’s saying, and I read generally publications with words that are longer than four characters… But in short, the conflation that he just made is the difference between the Fed’s shift in recognizing that the pandemic is a short-term impact, which I 100% agree with him, and recognize that with my point, which is still actually enforced… And the point I’m making is the Fed has made a policy shift and still maintains that policy shift. And what that shift is – it’s fundamental and it’s pretty seismic, in that they’re saying that, yes, inflation may kick up in the short run; they’re acknowledging that. Again, we can call it reflation, inflation, we have a debate on that.  But the point is, they are fundamentally — and historically, if inflation was to kick up at all, they would run in advance of it, raise rates, to Neal and John’s point, they would get ahead of it, try to pool in inflating situation by raising rates and kind of cooling things down as quickly as they can. Realizing some of the policy missteps in the past and some of the fundamentals in the economy currently, they have modified their policy stance saying “We’re actually going to let it run and consider inflation in the aggregate.” This is a really big shift, because now they’re not considering it at present value as it’s ticking up, they’re considering it to a degree a moving average of what it might be. So the point is, they’re going to likely let it run above 2%, and they have clearly stated and have not modified their stance that they will keep the Fed funds rate at zero until 2024, and also let inflation run, if it were to pass or come to fruition. So I would say, I’m not disagreeing with Neal’s point, but Neal had made a different point than I was making.

Ben Lapidus: Understood. I appreciate it, Ryan. We have a question from the audience for Hunter. You talked about the precedent of 0% or negative interest rates in other countries, particularly in Europe, I imagine. Can you reference those and try to draw a line for us as to why that might be a bellwether for the future of the US?

Hunter Thompson: Oh, it’s not just Europe, it’s all over the world. We’ve got Norway, Denmark, Sweden… Look it up. Industrial countries all over the world have zero or negative interest rates. So what I think people make the mistake of thinking is that how low can they go? That window is drastically different than what most people believe. It’s the same thing with how high can the debt to GDP ratio go before people are unwilling to purchase our bonds? Well, we have a tremendous amount of historical context and economic data to kind of discuss this. The the topic that I’ve talked about frequently, and I definitely want to talk about during this debate, is Japan. They have none of the advantages that we have in terms of the dollar being the reserve currency; they have about a 266 debt to GDP ratio. For those that aren’t familiar, they experienced basically an 80% collapse of real estate and stock market, it initiated a multi-decade-long, endless money printing. That’s the model that the United States is going after, that’s the model that Europe is going after; it will never end. The quantitative easing will never end. And because the debt burden becomes higher and higher and higher, the implications of actually raising rates become so burdensome that it’s absolutely crippling.

So when you look at the way the political system is set up to basically incentivize people to work on a four-year type of basis, and the Fed is certainly not set up to blow up the global economic picture… You just see this prolonged low interest rate environment. Now, the conversation about inflation is interesting, but I’m just not seeing it. So the question is, how much money printing can we have before this starts to happen? Again, look at Japan. Over the last three years, they’ve had half a percent inflation, -0.1% inflation, most recently and heading into 2021, 0.3% inflation.

So with all this money printing – and I’m interested to get both Neal and John’s perspectives on this – this does not result in CPI shooting through the roof. This results in the financial sector basically getting it and people purchasing bonds. So the negative interest rate bond market is about 16 trillion or 17 trillion dollars. That number is just going to go more and more and more.

The question about — and I’m assuming you’re talking about Europe… It’s much more widespread, and the reason it’s taking place doesn’t really make sense to me. These countries are buying their own debt, which suppresses their own interest rates. But I think people look at this and say, “Hey, Japan lost 80% of its stock market, 80% of its real estate market, and they’ve figured it out. They unlocked the ultimate key, which is that if you print enough money and keep interest rates lower, you never touch 10% unemployment.” Imagine that. Imagine the United States if you had an 80% collapse in the stock market and unemployment peaked out at 5.5%, which is what happened in Japan. People who are proponents of this theory view Japan as “We’ve unlocked it.” It’s like taking the power source and plugging it back into the power source. We got unlimited money now, and it’s never going to end.

Ben Lapidus: Hunter, I want to interrupt that, because I’ve got a fantastic question from the audience… And time flies when we’re having fun. So we are going to move to closing arguments after this. The question from Matt is if the US interest rates go negative –Mr. Matt Mopin, excuse me if I’m saying your name incorrectly– the dollar would be dethroned from the world currency… This is important to the point that you just made, Hunter, because the only reason we were able to execute quantitative easing is that we were the global currency of the world. So this is an open question for anybody. If the US interest rates go negative, the dollar would be dethroned from the world currency. True or false, and how does that impact your argument?

Neal Bawa: I’d like to take that on because, I’ve talked about this in the past. When Hunter tells this scary story to compare our interest rates with Europe, he makes what is known as a false equivalence. Then he compares us with Japan, which is an even more false equivalence. He fails to point out that the eurozone and Japan’s negative rate policies are in fact creating a massive, unprecedented flow of money into the United States. The Germans are sending us money, the Swiss are sending us money… When this money flows into our economy, it creates inflation, because it’s money that comes in here, and we have a fixed number of assets. When that fixed number of assets is presented with this money, it causes asset inflation. Because Ryan is confusing the Fed policy with saying rates stay lower for longer, with the Fed saying they will not raise at all. In fact, the Fed raises rates regardless of whether inflation is rising or not. Go back and look at when the Fed raised rates the last five times. They have raised rates when inflation is low. The biggest reason that the Fed raises rates is that interest rates are their weapon against a bad [unintelligible [00:32:55].22] They will raise rates whenever they can. They want to raise interest rates, because they lose this weapon if they simply never raise interest rates. Go back and look at the history of the last three or four recessions and you’re immediately going to notice that the US does not follow the world, and that is what gives us the privilege as a reserve currency of the world.

Ben Lapidus: Amazing. Hunter, he invoked your name, so I’m going to give you the last word here before we move on to phase three of this debate. Do you have a response?

Hunter Thompson: Sure. I’ll quote two of my favorite economists. This is from Larry Summers. “We are one recession away from joining Europe and Japan in the monetary black hole of zero interest rates and no prospect of escape.” Here’s another one. “It’s a good thing that we’re at positive yields. But our politicians want to go Germany’s route. Why? Because they can lend and basically borrow more money. The Treasury is financing our ridiculous trillion-dollar deficits with these kinds of Treasury bonds. So if you have a 10-year treasury bond that goes from 2% to 0%, now we can borrow so much more money. That’s the way the politicians are always thinking.” That’s from my favorite economist, Neal Bawa

Ben Lapidus: [laughs] Amazing final words. Ben Andrews, [unintelligible [00:34:10].13] I am going to get your question. I think it’s an important question, but it’s not substantial for the direction of this debate.

Break: [00:34:17][00:37:13]

Ben Lapidus: We’re going to move into closing arguments. Neal, I’m going to give you the last word. Ryan, I’m going to give you the first word in closing arguments here. Two minutes on the clock. Let’s try to get to that time folks.

Ryan Smith: First, let me say thank you, Neal, John, Hunter, and Ben. This has been lot of fun. I have a lot of respect for you. I’ve made my points in that, the trend is your friend. There’s a statement, “The trend is your friend, and don’t fight the Fed.” Both of those statements have us winning this debate, in that interest rates and both of those things happen, interest rates will be equal or lower two years from now.

Again, to my opening comment, I actually am rooting for inflation, against Neal’s assertion, because inflation can be incredibly positive in the asset classes that I play in. So for me, I’m actually a fan of inflation, but do not expect it. I actually think our position will be true in spite of my hopes.

And lastly, this whole debate that’s taking place – and if I may, I parked on the if’s. Let me interject my first if, which should tell you something about my stance. My first if – this is all presuming no global conflicts, which would cause central banks to seek flight to safety, which again wouldn’t create bond-buying of US Treasuries, depressed yields, and everything else.

We are in one of the greatest periods of peace in US history. And if you referred to a great book called The Fourth Turning, which is a regressive study of the market cycles for every industrialized population – it’s about 450 pages, and if you struggle with sleep, you should read it, it’ll cure what ails you… But in short, there’s a significant chance of global conflicts in the period of time that we’re in. So my position is interest rates will be lower, the same if not lower two years from now; I’ve made my case. All of that presumes no conflicts with China, Iran, Russia, or any of their surrogates, which I think is seemingly likely in the coming year. Anyway, I think we’ve got a good position, I feel good about it, and I’ve got a great teammate in Hunter.

Ben Lapidus: Awesome. Thank you, Ryan. The Fourth Turning, now on the reading list. John, final words.

John Chang: Alright. I want to tie up a couple of loose ends here. First of all, Japan has had negative treasury rates, but they’ve also had no economic growth. Their average economic growth over the last five years or so has been under 1%. So we’re not in that kind of a situation.

When you look at a willingness to raise interest rates – first of all, the 10-year treasury has gone up 30 basis points so far this year, and it’s already trending upwards, so there’s a basis going on right there. We also know that Jay Powell will raise rates. In fact, there wasn’t even that much pressure for him to raise rates. But when he took over as the chairman, he came in and just kept swinging. So in 2018, Jay Powell was raising rates, and he actually had to reverse course as the pandemic hit. So he’s one of the few chairmen of the Federal Reserve that I think would actually just go in there and just start hitting it.

The next piece is that we already have inflation. Just one thing for the real estate industry – construction costs for materials have gone through the roof. Lumber is already at a peak level, it’s up about 15% for materials on a year over year basis right now, and overall construction costs are up about 11%. So I wanna toss that out there to start… And the only circumstance that I can think of where interest rates don’t rise is if something bad happens to the economy.

If the vaccine doesn’t work, or if the vaccine actually starts the zombie apocalypse, or if we have a major economic setback – something like that could cause the Fed to ease off. My fingers are crossed that that doesn’t happen. The good news is that rising interest rates mean the economy is accelerating and doing very well, and that’s good for real estate. As Ryan was pointing out, a little bit of inflation is a good thing, and growth is a good thing. So we want those things, and we want the Fed to actually raise rates as we go forward, because that means things are going well.

The last piece I wanted to say is – pull it back to real estate. Look, take action. If you’re looking at refinancing, get it done. Yeah, rates can possibly come down in a short blip, but if you’re refinancing, refinance now. If you are buying an asset, lock in your rates. And if rates go down and you miss it a little bit, you’re probably okay. I don’t know anyone ever who complained that they locked in an interest rate at three and a half percent. So ultimately, we’re in a good place right now, it’s a great time to invest, and the opportunities are out there. But I still think interest rates are going to rise.

Ben Lapidus: Amazing. Thank you, John. Hunter, I will give you two minutes on the clock for your final words.

Hunter Thompson: Sure. I’ll try to keep it brief. I can’t see the clock, so give me the yank.

Ben Lapidus: You’re good.

Hunter Thompson: Agreed, interest rates rise when things are going well, and… Things are not going well. I think the metaphor is that we’re on morphine, so it feels like it. That’s not the right thing. I was injured, I had to get surgery on my shoulder; morphine doesn’t make you feel like this. This is adrenaline. This is adrenaline, but we’re just sitting at the desk, working like it’s normal. It’s not like being super productive, it’s just that we’re at the desk, we’re working, we’ll be able to keep our head off the desk because of the amount of stimulus.

There was a $1 trillion deficit in 2018, which was about 4.8% of GDP. That was the highest percentage deficit in GDP not in war times, in 2018, while we have the lowest unemployment rate of 50 years. That’s the type of situation that we’re in, where we have peak, peak, peak, peak debt, peak, peak, peak, peak deficits, all-time low-interest rates; if you sneeze, you create a massive economic collapse, and no one’s going to be on the front of that. Don’t bet against politicians acting within their best interest. Don’t bet against Janet Yellen being Paul Volcker all of a sudden; don’t make that mistake. I anticipate a similar to Japan low-interest rate, low growth, low inflation, kind of stagflation type of environment that continues on and on. That’s the way that I’m going to be investing.

Ben Lapidus: Thoughtful words.

Hunter Thompson: By the way, it can be quite lucrative for the real estate investor.

Ben Lapidus: Thoughtful words from Hunter. See, Hunter, that’s why you’re debating here for the second time with Best Ever. Thoughtful words that we can wrap our heads around. I appreciate the metaphor. And the king of metaphors and strong language, Neal – two minutes on the clock to make the most influence on our audience and this debate. Take us home, sir.

Neal Bawa: Ryan Smith said to Neal Bawa, “Show me the money.” And I said “Ryan, take a look. This is the greatest, the most super-heated stock market ever.” Ryan said, “I don’t see it.” So I said, “Take a look at the real estate market. This is by far the greatest, most mega-heated real estate market of all time.” Ryan said, “I don’t see it.” I said “Look at Bitcoin. One and a half-trillion dollars produced just in the last few months.” Ryan Smith says, “I don’t see it.” I showed him John Chang’s number of five trillion dollars injected into the US economy in the last 12 months, and Ryan Smith says “I don’t see it.”

The truth is, if you choose to ignore everything massive in the economy and base it on some old argument that has worked in the past, you’re not data-driven, you’re simply saying “It didn’t happen in the past so it’s not going to happen in the future.” Hunter says, “We see where interest rates are headed over 100 years.” We are not debating that, Hunter, we’re talking about the next 24 months. In the last 100 years, rates have gone up, rates have gone down half a dozen times. It takes our listeners less than five seconds in a Google search to prove you wrong.

I asked Hunter and Ryan, “When has anyone injected five trillion dollars into the US economy? When has anyone injected one third of that amount?” We are creating an asset boom the likes of which have not been seen since the roaring ’20s. The truth is our friends are confused. They think that because millions are hungry in America, we cannot have a booming economy. They think because half a million are dead, that we cannot overheat. This is an emotional approach, it’s an empathetic approach, it’s a good person approach, and I sympathize with them. But the truth is, folks, when the Fed makes decisions, it does not count the dead; it does not feel the hunger. It’s going to look at cold, hard facts. And our friends are choosing to ignore a mountain of evidence, and that is why they can see that interest rates must rise in the next 24 months. They absolutely must.

Ben Lapidus: There you have it, folks. Neal, your punditry is always a pleasure. So is the feature of interest rates based off of the adrenaline of the stimulus, as Hunter has suggested? Or have we over-compensated with the stimulus and interest rates need to go up to bring it back down to Earth?

So poll is going to be opened, we have two minutes to answer. Will the US interest rates be higher in 24 months? You get to decide what the answer is. Are you going to be voting for a future that hundreds to thousands of people will be seeing, predicting the future interest rates going up? Or will they be staying the same or going down in the next 24 months? You get to decide. The poll is now open. Yes, no, or undecided.

While we are doing that poll, John, I do have a question for you. This whole conversation is fantastic. I appreciate all of you guys. But what’s the “so what” here? We have a question from Ben Andrews. What are the implications for real estate investors just starting out if rates go up? Same question for if they’re going down. I’m going to couple that with a comment from Ryan [unintelligible [00:46:27].21] “John Chang showed the spread between a cap and US Treasury rates. at which point spread will investing in real estate not be worth it? Are interest rates and cap rates uniformly tied together? How much does this conversation matter for real estate investors?” If we have time for a second answer, I’ll let you guys jump in, but I want to direct this to John first.

John Chang: Okay, so I’m going to take the last part first. If you look at the trends on the cap rates and the Treasury rates, both have been going down to the right for a long time. But when you look at the short-term movements, it widens and it comes together, it widens and it comes together. Right now, it’s very wide, and that is good. We anticipate and I expect personally that interest rates will be rising. But I will also quote Mark Zandi, the head economist of Moody’s who said, “Forecasting interest rates is a fool’s errand and nobody ever gets it right.” So we have this window, and this is the “so what?” The window that we have right now is that the cap rates have been stable for the last two years or so. The interest rates have come way down, and the spreads from the bankers have tightened up over the last six months or so. So you can get financing on assets today. There’s a lot of liquidity, you can borrow money on just about anything, except for maybe a hotel or a big shopping mall. Outside of that, you probably get financing and it’s going to cost you less than it ever has. So the window is here; looking forward, those things can tighten. But I’ll tell you, even when they’re super-tight, investors make lots of money. People who bought real estate in 2007, when that spread was the narrowest ever, and held it, if they held it all the way until today, made a fortune on that real estate. So there is opportunity, and it’s just a question of how long it takes to get their perspective.

Ben Lapidus: Perspective appreciated. We’re going to close the poll in 20 seconds. Does anybody want to fill the space answering that question, with 20 seconds? Ryan.

Ryan Smith: Quickly, on the first part of the question, with is it good or is it bad? The answer is yes, unfortunately. There are two sides to the coin. You have cash flow, you have the value of cash flow, or the capitalized value of the cash flow. Generally speaking, there are trends like the one we’ve been in, where cash flow has been reduced on assets, but the value of that cash flow has been inflated on those assets. The opposite trend is increasing in cap rate, a decline in multiple, with increasing cash flow. There’s a lot of opportunity around market pivots, to my point earlier about inflation, if we’re able to lock-in. We did this rate lock two weeks ago on a mobile home park we’re buying in the Washington DC Metro next month, at 2.77%, 30-year in, 10-year fix, one-year IOO, non-recourse, fully assumable yada, yada, yada. The point being is if inflation does run and I can pass inflation on to the customer, then that means I have tremendous cash flow growth in the near term. So there are two sides to the coin, and you’re always deficient in one. You have too much here, not enough here, but over the long run, it’s kind of a ratchet system, if you’re on for the long run. It’s really, to John’s point, [unintelligible [00:49:20].13] get in the game.

Ben Lapidus: Thank you, Ryan, for the perspective and ownership. Sorry, Neal, I’m going to have to cut you off. We are going to go to close the poll, three, two, one… Poll ended. And what is amazing – let’s go over what the results were from the beginning. Will US interest rates be higher in 24 months? 74.4% of you answered Yes, not leaving a lot of room for Neal and John. This is what their answers were at the beginning, Hunter. They’re not leaving a lot of room for Neal and John to move a lot of minds, with 74% in agreement with them. 15.4% said no, they will be the same or lower in 24 months, and 10.3% were undecided. Not a lot of folks to bring home into your basecamp. What’s interesting is that the undecideds went up to 11.1%, almost a full point of people being more confused…

John Chang: We did such a terrible job. [laughter]

Ben Lapidus: Congratulation’s gentlemen, that’s a singular takeaway.

John Chang: Hey, that’s what you pay for.

Ben Lapidus: And those that believe that US interest rates will be higher in 24 months moved from 74.4% down to 66.7%. Seven points were gained by the team that suggested rates will be at or below where they are currently in 24 months. So Hunter, Ryan, congratulations. You have 12 months of bragging rights until the next Best Ever Conference. All four of you, congratulations on participating. This was a heated debate. I appreciate the spunk that all he brought to it, and I can’t wait to see y’all next year. Thank you. I’ll bid you adieu so we can keep this moving. I appreciate you guys. Thank you, gentlemen.

Joe Fairless: I hope you’ve gained some useful insights and actionable advice from this previous Best Ever Conference session. Remember, if you’re looking to scale your investing in 2022, we look forward to seeing you in Denver. Get 15% off right now with code BEC15 at besteverconference.com That is code BEC15 for 15% off at besteverconference.com.

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JF2668: 3 Ways to Grow Your Business at a Networking Event with Ben Lapidus

Ben Lapidus is the host and founder of the Best Ever Conference and has extensive experience in creating and overseeing networking events. In this episode, Ben shares how to maximize your experience at these events to help build new relationships, educate yourself, and ultimately grow your business.

Join us for this year’s Best Ever Conference in Aurora, Colorado from February 24th-26th: www.besteverconference.com

Ben Lapidus Real Estate Background

  • Chief Financial Officer for Spartan Investment Group LLC,
  • Portfolio: 51 operation, $100M AUM 
  • Founder and host of the national Best Ever Real Estate Investing Conference and managing partner of Indigo Ownerships LLC
  • Say hi to him at www.spartan-investors.com

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PassiveInvesting.com

 

 

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TRANSCRIPTION

Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed. This is the world’s longest-running daily real estate investing podcast. Today we have Ben Lapidus with us again. Ben, how are you doing?

Ben Lapidus: Doing well, Slocomb. Thanks for having me.

Slocomb Reed: You all just recently heard about the success that he is having with Spartan Investment Group LLC, and the self-storage that they’re developing, and the other deals they have going on. He is also the founder and host of the national Best Ever Real Estate Investing Conference. That’s what we’re going to talk about today. Ben, I’m going to translate my own experience and hope it goes with a lot of our Best Ever listeners. I’m attending the Best Ever Conference in person myself for the first time this year. I attended virtually last year and got a lot of great info. But you know, sitting at home with my headphones and my laptop, and my toddler running around, is a very different experience. Help me understand, Ben, this is my first Best Ever Conference attending in person. The first question, I’m registered, I’m checked in, I have my hotel room, I want to dive in… What’s the first thing that I should do?

Ben Lapidus: The first thing that you should do is you should identify your primary goal of attending. If your primary goal of attending is to identify a new passive investment to place, because that’s what your aim is – you’re not an active operator; you’re a pilot, an attorney, a lawyer, you’re looking for places to place your capital that you’re earning in your career into syndications, you’re looking for more groups like that, or to engage with the groups that you’ve already invested with, meet them once a year, the Best Ever Conference is a great place for that. There are dozens of high-quality operators that sponsor and attend the event that are friends of the Best Ever Conference. If you’re…

Slocomb Reed: What’s the best way for me to get myself in front of those operators?

Ben Lapidus: Just attend. If you’re at the conference, you will identify them by sitting down at the lunch table, there’s going to be somebody there that is an owner-operator. By going to the sponsor booths, you’ll walk up and down the aisles, and you’ll see dozens of those options.

We have a pitch event for passive investors to see a dozen or so of our owner-operator groups that have opportunities to invest into their deals. Groups like Spartan or Ashcroft. There are dozens of them that are in attendance, I want to say three or four dozen. Some of them highlight themselves on stage, some of them highlight themselves in the sponsorship area, some of them highlight themselves in the pitch event. There are dozens of operators. It is a conference for real estate syndicators to attend. So if you’re a passive investor, which about a third of our audience is, then you’re also going to be in a room with a large amount of nationwide syndication real estate firms.

Slocomb Reed: What if I am an aspiring syndicator, I own some rentals already, and I’m thinking about explosive growth in my own business?

Ben Lapidus: Again, back to what is your primary goal? Are you there to identify what is the asset class that you would like to invest your focus and time into? Are you there to find a business partner who can complement your skill sets? You’ve already got your team and you’ve already got your assets, so you’re there to figure out your winning acquisition strategy or your winning capitalization strategy that’s been limiting your ability to take down your first deal, or to scale a preexisting portfolio. So identifying what your primary goal is will help you figure out an agenda for yourself. What sessions do I want to attend, while allowing myself the freedom to network and enjoy the overall experience? There’s not a single-track way to attend the event, so identifying your goal in attendance is essential and primary.

Break: [00:04:42][00:06:21]

Slocomb Reed: Tell me, Ben, again, you’re talking directly to me and hopefully also a lot of our Best Ever listeners who have either been there several times or are planning to attend for the first time this year. These mini masterminds, I’ve read the blurb, but how is this going to work? What’s the deal with mini masterminds?

Ben Lapidus: We have a team of staff members who offer a white glove concierge experience, give you a call, get to know you one on one, and then identify a group of people that could be a good fit for you. We bring people together in a virtual space, one of our staff members attends and launches the first interaction of the mini mastermind. From there, it’s kind of for the individuals inside of that group to take it and run with it leading up to the conference. The intent is to have more interaction than just this one weekend so that you can maximize the impact of your time while you’re in attendance. If you have a group of six to eight people who have gotten to know you over the last couple of months, every couple of weeks interacting with them, you’re not only there in attendance for yourself, but you’ve got six to eight cheerleaders who are also looking out for you to identify that one nugget of wisdom, that one relationship, that one contact that can impact your life forever, that can impact your business. The idea is to create a group of people that can be a home base when you’re at the event because 1000 really successful people can be intimidating, but 1000 really successful people where you’ve got six to eight peers who you know, trust, and have already been vulnerable with, who you can kind of come back to as a sounding board for the experience, and who can also be your cheerleader and identifying opportunities for you as their networking. That’s a home base that we’re trying to create for all of our attendees.

Slocomb Reed: That is awesome. Ben, I don’t want to ask who your favorite speakers are going to be. But can you give me a couple of three speakers that you think may surprise people with their insight or with their subject matter?

Ben Lapidus: Some of the speakers that I’m personally interested in… Remember, I say this all the time, I basically built this event for me. I was an intermediate real estate investor, not advanced, not a beginner, and I didn’t want to be told one way to skin a cat at one of these “I’ll show you how to get rich conferences” which have value. I wanted diversity of thought on stage and I wanted to identify people who I thought were interesting that could teach him something. I assumed that, as an avatar of an audience member, if it was interesting to me, it would be interesting to others. The people that I’m most excited about are probably going to be the most interesting. But we have Spencer Levy who is a chief executive of CBRE, he’s been hailed as one of the best orators in the real estate space, he’s incredibly entertaining, and he’s got macroeconomic information that is going to be brand new for 2022. I’m very excited about that. We have cryptocurrency being represented on the stage for the first time and the impact of blockchain technology on commercial real estate. I’m excited to marry those two knowledge bases, those two investing worlds.

We have Vicki Schiff, who has been in commercial real estate since the 90s. She just recently sold a mortgage REIT that has originated over $3 billion. Just having somebody on stage that has played at that scale and can share some of her economic wisdom as well. I’m very excited about that. John Chang is coming back. He’s a great economist for Marcus and Millichap. We have an intellectual debate that is always awesome. We get two people to debate for a motion and two people to debate against a motion. It’s just a great way to explore a question that doesn’t have the right answer to it in trying to predict what the future looks like on a particular subject matter. There’s a number of sessions and speakers that I’m really excited about. That’s just a few.

Slocomb Reed: I hear an amazing speaker, one of the people you just mentioned likely. I have questions for them or want to connect with them afterward, will I have an opportunity for that?

Ben Lapidus: Absolutely. What we learned from the virtual event last year is that it was really efficient from a user experience to kind of keep the show moving, not do Q&A during the mainstage event, and to have a Q&A room after the fact. We’re going to take that model and we’re going to convert it into the physical space where during our breaks we’re going to have Q&A rooms with our speakers who have gone… Kind of like a radio station set where the hits keep coming, and then during the commercial break, you can go to the bathroom, you can hang out with the sponsors, or you can go into the Q&A room and interact with the speakers.

Slocomb Reed: Got you. I hear something that appeals directly to me and I want to follow up with that speaker on their subject matter. The main stage will get a new speaker soon, but I can go do Q&A with the speaker who engaged with me in another space.

Ben Lapidus: Yes, exactly right.

Slocomb Reed: Nice. Is there anything I haven’t asked about yet that you think everyone needs to know?

Ben Lapidus: Why come to the Best Ever Conference? What’s the point? What are we doing it for? I find that there’s a lot of content out there. There are dozens of conferences that you could attend, there are hundreds of books that you could read, lots of podcasts. Why this one? Why this experience? Why this content set? My answer is, it’s the only true national forum that marries the mid-market investor space, which is what the listeners of this podcast are, to institutional quality speakers and content. There’s a lot of conferences out there where you get your kind of top podcasters to be your speakers. These are folks who are, let’s say, early still in their real estate cycle. Even Joe, myself, and Brandon Turner from the Bigger Pockets Podcast, we’re all in our first economic cycles. We weren’t investing back in 2005 in commercial real estate. To learn from people who are talking about tens of billions of dollars who have seen multiple economic cycles, but to do it in a space where you have 96% of your people have done at least one commercial transaction in the last six months, which makes every audience member just as impressive as every speaker.

We have incredibly high audience quality interactions, incredibly high speaker quality interactions. It’s the only national forum that’s kind of taken that tact to allow our syndicator operators in our audience inside the Best Ever community to interact with institutional-level execution. We have found over 60 podcasts have been started from the Best Ever conference, over two dozen companies have been formed by interactions, by partnerships made at the Best Ever conference. Brandon Turner from Bigger Pockets kind of hails the Best Ever conferences, the inflection point when he started open door capital. That’s an example. Life Bridge Capital was formed out of the Best Ever Conference. Spartan Investment Group was formed out of the Best Ever Conference. Ashcraft was formed out of the Best Ever Conference. These partnerships were formed by connections that were made at the conference. That’s the reason to attend. It is the highest audience quality event in this big market syndicator commercial real estate space.

Break: [00:13:05][00:16:01]

Slocomb Reed: Ben, speaking of audience quality and quality networking, I was looking at the prospective itinerary for the conference and I saw Best Ever Party. That’s definitely not something I got to do virtually last year. Tell me about that. What is that?

Ben Lapidus: That is where we have one of our top sponsors just buys around drinks for the entire conference. We got a bus series coming in to bring people from the Gaylord to the largest bar in Denver. We’re just going to take it over and we’re going to be there for as long as people want to be there. Denver shuts down at 2 am and usually, there’s at least 100 people left by that hour in our physical space. The Best Ever Conference is not just a place to go and sit with your notebook and take notes, definitely do that but it is the best networking ground. People think they want to come to the speakers but the real value that they get out of it, the reason they come back, the reason 60 to 70% of people come back every year, is because of the audience quality. It is the best place to meet all the people that you’ve listened to on podcasts, that you’ve spoken to over the last year, and to make great new connections, partnerships, relationships. The party helps foster that.

Slocomb Reed: That’s awesome. I know, I spent a lot of time with my notebook in my seat last year watching the conference on my computer. I’m very much looking forward to the networking, the opportunity to meet you in person, Ben, and some of the other people that I’m interviewing with this podcast as well.

Ben Lapidus: Right on.

Slocomb Reed: Great. The conference is from February 24th through 26th. Where is the best place for people to get more information about it and to register, Ben?

Ben Lapidus: The best place is besteverconference.com We’re really excited. We have more than double the amount of people attending already than any other previous year by this time. We’re excited about another great event in February.

Slocomb Reed: Awesome. Best Ever listeners, we hope you have a Best Ever day. Ben and I hope we get to meet you at the Best Ever Conference in February.

Ben Lapidus: Thanks, Slocomb.

Website disclaimer

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

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JF2667: 4 Best Self-Storage Growth Tips for 2022 with Ben Lapidus

In the past year, Ben Lapidus’ company grew from 13 self-storage operations to 51, with a portfolio of $100M AUM. Working through COVID-19, and looking to the future, Ben Lapidus provides his insight on the self-storage industry and what his strategy is for tackling the new year.

Ben Lapidus Real Estate Background

  • Chief Financial Officer for Spartan Investment Group LLC
  • Portfolio: 51 operation, $100M AUM 
  • Founder and host of the national Best Ever Real Estate Investing Conference and managing partner of Indigo Ownerships LLC
  • Say hi to him at www.spartan-investors.com

Best Ever Book: Covariant Loop Quantum Gravity: An Elementary Introduction to Quantum Gravity and Spinfoam Theory by Carlo Rovelli

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TRANSCRIPTION

Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed. This is the world’s longest-running daily real estate investing podcast. Today we have Ben Lapidus with us. Ben, how are you doing?

Ben Lapidus: Doing well. Thanks for having me.

Slocomb Reed: Great to have you here. Ben is a partner and the chief financial officer for Spartan Investment Group LLC, where he has applied his finance and business development skills to acquire the company’s current portfolio, build the corporate finance backbone for the firm, and organize hundreds of millions of debt capital. Ben is also the founder and host of the National Best Ever Real Estate Investing Conference, and managing partner of Indigo Ownerships, LLC, where he sponsored 40 plus single-family and multifamily real estate transactions. Ben, you were just telling me, you’ve put together a pretty big deal here just last month. Why don’t we start there? What do you have going on right now?

Ben Lapidus: Sure. Spartan is a self-storage development and syndication company. We focus all our energy on self-storage assets. We’ve had a pretty big breakout year, we went from 13 operations to 51 operations this year, we’ve 5X’d our acquisition take-down, we’ve 8X’d our revenue, we’ve 6X’d our employee headcount, and that was kind of capstoned with a $100 million portfolio, 18 properties in Texas. The day before Thanksgiving, we finally closed. A 100-million-dollar total project costs, almost a 60-million-dollar loan.

Slocomb Reed: That’s exciting. That’s a lot of big numbers. You’ve got a lot going on. It sounds like explosive growth for Spartan. Talk me through that. That’s just in the past year, those numbers?

Ben Lapidus: Yeah, that was one deal, the 100-million-dollar deal. But we did 260 million dollars of takedowns this year.

Slocomb Reed: Gotcha. That 260 million – how many deals is that?

Ben Lapidus: 12 transactions.

Slocomb Reed: Gotcha. That’s exciting stuff. Tell me, with this 100-million-dollar portfolio – you said it’s in Texas?

Ben Lapidus: Yup. The 100-million-dollar portfolio is in Texas. It’s all around the Dallas-Fort Worth area, in Tyler, Texas.

Slocomb Reed: Awesome. I assume these deals came from brokers. Have you found that particular broker relationships have been more fruitful for you than others?

Ben Lapidus: For sure. Not all of our deals have come from brokers; some have been direct sellers. But yes. In the storage industry, it’s a little bit different than multifamily. There are more multifamily brokers in Dallas-Fort Worth than there are storage brokers in the US. So you want to build strong relationships with all of them. I mean that very literally, all of them. But yes, there are some that we tend to find that our transaction methods and our values for doing business match their values for doing business more so than others.

Slocomb Reed: That’s awesome. So this 100-million-dollar portfolio – tell me more about what makes it so exciting aside from just the size.

Ben Lapidus: Well, we’re excited about the opportunity to execute Spartan’s business plan, our standard kind of bread-and-butter business plan, which is to identify self-storage assets that have existing cash flow, but extra land, and market conditions that allow us to expand with low risk, so that we can take advantage of the cash flow from our existing structures, build new cash flow on top of the vacant land, and allow the cash flow from the existing supply, the existing structures, to cover the debt service on the expansion, so that we can essentially have the margins of a ground up development, with the risk profile of a cash-flowing asset.

We have, in this 18-property portfolio, five assets that we’re planning on expanding right away, but 11 of them can be expanded. Six of them, we did not believe were quite prime for expansion quite yet, but there’s at least five assets that we can expand on.

Typically also in self-storage we have 30-day lease cycles as opposed to 12- month lease cycles in multifamily, or a three to 10-year lease cycles in office, industrial, and retail. So we’re able to push rents very quickly, and on average, we’ve been pushing 15 to 20% in collections in nine months. So we could take 100,000 of rents and push it to 115 to $120,000 of rents in about nine months. We’re excited about the opportunity to do that.

We’ve also [unintelligible [00:05:13].11] these 18 assets down on top of a preexisting portfolio of about 12 assets that we already had in the area. We’re really excited about the economies of scale and economies of scope that can be achieved by adding these new assets and new team members in the region.

Slocomb Reed: So you’ll have 30 sites in the Dallas-Fort Worth area. Is there a sense that there’s a certain critical mass, a percentage of the market share or something like that, that gives you more control over what self-storage looks like in Dallas-Fort Worth?

Ben Lapidus: Absolutely. There’s more self-storage facilities in the United States than McDonald’s, Burger Kings, Starbucks, all combined, all three of those combined. So there are over 50,000 self-storages knocking on the door, 60,000 self-storage facilities in the US. It’s really difficult to take over markets like DFW. However, in Tyler, Texas with a population of 150,000 people, we’ve just added our fifth facility and we’re looking to have more. So we’re going to be the largest owner operator in Tyler, Texas, and the most sophisticated operator, which is great for search engine results and for competitive landscapes. We anticipate being the highest profitability operator in the region of Tyler, Texas. It’s easier to take over a market like Tyler, Texas, or Chattanooga, Tennessee, or Bentonville, Arkansas, than say a DFW, or Denver, or Seattle. But yes, there is a way to hit critical mass in some of these markets.

Slocomb Reed: Got you. You have a value-added business model. I don’t know if value added is the term that you’re going to use. You said you’re looking for ground up development type deals, but with cash-flowing asset financial structures… Do you see more opportunity in larger metro areas where you have vast competition? Or is it the Tyler, Texases that give you a better opportunity to do that?

Ben Lapidus: Right now, our investment thesis is focused on secondary markets and suburbs of primary markets. We’re not interested as much in competing with REITs. If I’m in Atlanta proper, I’m competing with — 92% of my competition is going to be REITs. Companies like Extra Space, Cubesmart, U-Haul, Public, Prime Storage, StorageMart, the last two being privately owned companies. But these are the top 10 largest operators in the world of self-storage. The majority of them are publicly traded, and they have access to much cheaper capital than us, and we would lose in a price war. And that happens.

During COVID times we owned a mall conversion in Fort Worth Texas proper, like downtown Fort Worth. It was a mall that is still in the process of being revitalized into different utility, the existing purpose. Across the street was an Extra Space, a mile north was an Extra Space, a mile south was an Extra Space, and something like 87% of the square footage in a 15-minute drive radius was REIT managed.

When COVID happened, Extra Space said “We’re cutting all rates nationwide by 50%.” Not the most intelligent play for all of their assets. They had assets that were 99% full, that went to 98.5% occupancy, that they still slashed rates 50% on. It didn’t make any sense, but that was still a policy they did. So across the street, where they had 99.6% occupancy, they slashed their rates 50% for six months. We invested a ton of money into search engine optimization, which is a typical playbook strategy that usually works. In Fort Worth, it wasn’t working, because Extra Space is spending a whole lot more.

So we tend to avoid heavy REIT competition areas and focus more on secondary markets. That’s a fear-based strategy. But the winning strategy that accompanies that is these REITs don’t really have the attention and capacity to take down five-million-dollar assets in a Tyler, Texas. They do, however, have the capacity to take down a billion-dollar portfolio. So we’re seeing a cap rate arbitrage between a 10-million-dollar transaction and a one-billion-dollar transaction, with exactly the same operational structure, the same avatar of ownership.

So you could buy a 10-million-dollar deal at a 5.5 cap and see the exact same billion-dollar portfolio that’s just comprised of a hundred 10-million-dollar assets, trade at a 3.75, or 4.0, or 4.25 cap rate, without changing anything to the operation, doing zero value add, zero rent pushes. So we’re seeing an arbitrage play by portfolio composition of concentrating our assets in secondary markets where we’re the largest operator, because it allows the top 10 ownership groups to get in at scale. So our portfolio thesis is to build a one to two-billion-dollar portfolio concentrated in the secondary markets that are attractive, to allow one of our big brother competitors to enter that market by buying a portfolio, if we choose to let that happen.

Break: [00:10:02][00:11:41]

Slocomb Reed: It sounds like you’ve found maybe not a niche, but you’ve found a property size or an asset size that really works well for you guys. There’s probably a limit where something is too small to make sense for you, but you have an upper limit where you don’t want to be competing with REIT money that can handle those three-caps. And correct me if I’m wrong, Ben – what you guys are doing is amassing portfolios from smaller properties to get them to the size that REIT money becomes interested in them and you’re able to sell them at a severely compressed cap rate?

Ben Lapidus: That’s right. And we’re often repositioning these assets, too. We’ll take over something that looks like a dog from an owner operator that wasn’t interested in investing in deferred maintenance. We’ll refresh it, we’ll push rents 20% in the first year, even if there is no expansion potential on the asset… And just the aesthetic appearance makes the coastal money more attracted to the asset, just by swapping out the first impression on the frontage. Which also improves our ability to increase rents, because tenants show up and they say, “Oh, this looks nice, it looks safe, it looks secure, it looks well managed and taken care of.”

Slocomb Reed: A little easier to do that with self-storage than it is with apartments, isn’t it?

Ben Lapidus: That’s right. Yes, it is.

Slocomb Reed: Gotcha. Do you see this business plan, this skill set that you all have put together in self-storage, do you see it translating to other asset classes?

Ben Lapidus: For sure. We don’t consider ourselves to be self-storage operators, we barely consider ourselves to be real estate investors. We consider ourselves to be students of business operations, and to combine our unique competencies as a team, and deploy them under a strategic thinking planning process that allows us to attack any business challenge. So we just happen to have decided, have landed on self-storage today, because that looks like the best opportunity in front of us… But we can take our business operation and mold it into any other asset class, really any other business model inside of the investing landscape.

Slocomb Reed: Gotcha. Ben, you’re a friend of the show, you’ve been on the podcast a few times now, I believe, and people know you from the Best Ever conference… But I don’t know that you’ve been on the podcast since COVID became a pandemic. How has COVID impacted the demand and possibly the supply of self-storage in America?

Ben Lapidus: Yeah. In the reverse way from what you think, it’s made everything a lot more attractive and a lot more lucrative in self-storage. COVID became the highest performing asset class in commercial real estate outside of data centers. After about a year, it even surpasses data center. So self-storage…

Slocomb Reed: This is self-storage during COVID?

Ben Lapidus: This is self-storage during COVID. I made mention of the first six months, how in primary markets it got really competitive as everybody kind of waited and buckled down for “shit to hit the fan”, but it didn’t. There was more new self-storage built between, I want to say, 2015 and 2020 than the previous 30 years of the industry combined. In that five-year period, a massive amount of new self-storage came to the market, peaking in Q3 of 2018 is when construction completions peaked. Everybody anticipated it was going to take three, four or five years for all this new supply to get incorporated into society. There was even an asset in Denver that was selling for 40 cents on the dollar that nobody purchased. A year later, it went back on the market for two and a half X and they got taken down within a month.

In Denver, it was probably the second most concerning city in terms of oversaturation of new storage supply. But all of the new supply got eaten up; the demand was there to match it in about a year or year and a half, more than twice as fast as the best predictions. Consequently, rents nationwide increased from June of 2020 to June of 2021 by 12%, while occupancy went up by 4.6%. So just massive rent growth over the year.

And new construction has gotten more difficult. Wood skyrocketed, metal tripled in cost, labor went up 20%, all in about a year. So our construction for a flat-graded site in Texas went from about 40 bucks a foot, for climate control, single story buildings, to about 60 bucks a foot, climate control, single story buildings. So a 50% increase in overall costs, which is just nuts. It’s making new construction more difficult; it’s making markets like Tyler, Texas, where the rents are lower than DFW, almost impossible to build new in, unless the rents are increased. That’s what started to happen, because there’s no additional supply and there’s this great migration pattern happening and people moving to Tyler, Texas. Rents are increasing as occupancy increases. It’s making the identification of assets much simpler. Three or four years ago, we used to say Denver is oversaturated, but you can find a good deal. It’s an intersection specific play, it’s a convenience play. So if you find the right intersection in an oversaturated market, you could do very well.

Today, it’s not as necessary. Almost every intersection is either neutral or slightly under supply. As opposed to a couple years ago, we assessed it to be oversupplied. So there’s more opportunity out there; the ride, the wave of self-storage is not over. More than $40 billion of dry powder has entered the space in the last year and a half. Blackstone, KKR, Brookfield have all gotten into the business. Bill Gates and Singapore sovereign wealth funds just funded StorageMart, Prime Storage just launched another three-billion-dollar fund that they just finished raising… There’s just so much dry powder. Public storage sat and waited for about three or four years without buying anything, and it took down two billion and a half dollar portfolios this year. It’s just a massive shift in the last year for storage, and cap rates have compressed despite interest rates going up.

Slocomb Reed: That’s a lot of great information, Ben. A couple of things – you said during COVID, your cost to build went from $40 a foot to $60 a foot. That’s a 50% increase. What is the rent growth during that same period? Is it proportional?

Ben Lapidus: No. 12%.

Slocomb Reed: Okay. And that’s 12% in Tyler, Texas as well as Dallas Fort Worth?

Ben Lapidus: No, it varies entirely. Yardi is the number one data provider of nationwide shifts, macroeconomic shifts in self-storage. I don’t remember the number one city, but I remember the number two city on their top 25 lists, with Atlanta, and it had 24% rent growth. So it’s all over the place, but on average, it’s 12%. In Tyler, Texas — like I said, we’re finding ourselves pushing collections by 15 to 20% in the first nine months of almost every asset that we’re buying, whether it’s Georgia, or Texas, or Colorado, or Wisconsin, or anywhere else that we’re buying. But a lot of those assets that we’re buying have rents that were under market even a year ago. So it’s difficult to tell exactly based off of our own acquisitions. Tyler, Texas is not a metro that Yardi measures, but at least 12% in Tyler, Texas.

Slocomb Reed: So for someone who wants to get into self-storage now, end of 2021, early 2022, you’re describing compressing cap rates, increased construction costs, outpacing rent growth, although the rent growth is solid… Where do you see opportunity for someone who wants to get into the self-storage game now?

Ben Lapidus: It’s fairly difficult.

Slocomb Reed: Let me ask, Ben, is there a property that is too small for you and your team? You guys play underneath the “big money?” Are there people who can get into a space underneath you and still get really good returns?

Ben Lapidus: For sure. We typically look for assets that can generate at least a quarter million dollars a year in revenue. We do own a few – they’re smaller, maybe they do 100k or 150k in revenue, but there’s expansion potential and we know that they can improve there. If you have a 20,000 square foot asset in Harlingen, Texas or in Tea, South Dakota, it’s not really a place that groups like myself or the big REITs are going to identify as an acquisition target. There are some groups our size that do go after assets like that. KO Storage is very good at operating in rural areas with smaller purchase prices. But for the most part, groups like ours don’t attack those.

So yeah, a 20,000 square foot asset that’s generating $100,000 in revenue – there’s just not enough revenue there to support the overhead, the cost to operate it the way that we’d like to operate it from a centralized location in Denver. If you’re right around the corner, you could end up doing very well and have a very lucrative business operation. Just know that it’s not just buying passive real estate, it is a business operation that does require a time investment, and does have a burden of ownership, just like any other real estate. It is more hands on than retail or office, but not as hands on as multifamily or mobile home parks.

Slocomb Reed: To that point, Ben, that it’s not as management intensive as multifamily or mobile home parks – how big does a self-storage facility need to be to justify a full-time employee on site?

Ben Lapidus: It brings up another can of worms conversationally about where the industry is going to a contactless experience, which is more efficient from a cost standpoint. But right now, we typically target 200k to 250k in revenue is our minimum that we’re looking for to support our operational model, which does include somebody on site. That typically is around 35,000 square feet in a market like Florida, or maybe as much as 45,000 feet in Gary, Indiana.

Break: [00:21:09][00:24:05]

Slocomb Reed: Do you think there’s opportunity for people who want to get into self-storage, it sounds like, if they’re willing to owner-operate in a smaller than that space?

Ben Lapidus: Yeah, for sure.

Slocomb Reed: And it sounds like the opportunity you guys are taking advantage of is buying the assets smaller than what the REITs are interested in, in order to do some construction, do some new development and some building a portfolio of assets in an area large enough that the buyers at the lower cap rates will be interested in buying it from you at a multiple of what you’ve got in it.

Ben Lapidus: Yeah. And one clarification there is that we do have some assets that the REITs would love – they’re beautiful assets, 15 to $20 million – but they’re in markets that the REITs aren’t already in, so it’s more of the scale inside that market that’s too small.

Slocomb Reed: Got you. They need scale, so you are bundling scale for them to sell it to them at a multiple of what…

Ben Lapidus: Exactly.

Slocomb Reed: What is your Best Ever advice?

Ben Lapidus: Best Ever advice is to focus on people’s why’s, and then to identify who have why’s that complement your why, but have different competencies to support you. I think everybody focuses too much on the how. There’s a great book, Who, Not How by Dan Sullivan, and there’s a great book Start With Why by Simon Sinek. When you combine those two together, they are magical. Identify people’s why’s, incentivize them, and empower them to achieve their why by making them your who to achieve your mission in your life.

Slocomb Reed: Awesome. Ben, are you ready for a lightning round?

Ben Lapidus: Let’s do it.

Slocomb Reed: Awesome. What is your Best Ever way to give back?

Ben Lapidus: Right now, I’m 100% concentrated on scaling our business. We’re trying to create a great place to work. Our big, hairy, audacious goal in progress – so it might change, but our big, hairy, audacious goal in progress is to create wealth for every Spartan, and 100,000 active investors at Spartan investment group. The creating wealth for every Spartan component is where I’m most concentrated, creating a great place to work. We’ve grown to 70 employees and we’re targeting 300 in the next year or so. So identifying where we can improve the lives of our people – that’s where I’m currently focused. I’d like to broaden that scope as I age in life. Right now, I want to stay very, very focused on my team.

Slocomb Reed: That’s awesome. What is the Best Ever book you’ve recently read?

Ben Lapidus: Ah, man, I’m going to be a little bit off the beaten path, but Carlo Rovelli is an Italian physicist that specializes in gravitational loop theory. He has made gravitational physics accessible for the layman like me who has never taken a physics course. It’s changed my entire concept about time and space and purpose of life. Physics has become my new religion. I think that everybody should be a student of quantum particle gravitational physics, because it is the most interesting subject matter in the human experience.

Slocomb Reed: Ben, do you see direct correlation between what you’re learning, reading about gravitational loop theory from Carlo Rovelli with what you’re doing with real estate?

Ben Lapidus: Yes. People ask me that all the time. They’re like, “Why are you concentrated on that?” I think that too much of us in the business world focus on business books, self-help books, psychology books… And I’ve done a ton of reading on leadership in the last couple of years as we’ve grown our team. But when you’re a leader, you have to start thinking about different psychology and philosophy of conversations and interactions, so now you start studying things like stoicism, nihilism, and different ways of holding yourself, and interacting with others. Then you kind of think about like, “Why be a stoic? What’s the purpose of life behind that?” Gravitational physics helps give me a grounded sense of reality as I explore different philosophical postures in my interactions and expand my emotional intelligence to be a leader with my people. That’s all helping coagulate our team to drive in a particular mission, in a particular direction. It doesn’t help me be a better investor. I read the Economist, I read the Wall Street Journal, I’m a student of economics, but that’s a different subject matter. But in building a team and leading them, I’m way too introspective and way too cerebral to just say “Do this thing, I expect you to do it.” I have to understand the why behind all of my individuals, what motivates them, I have to understand the why behind myself. How do I optimize my own energy flow throughout the day? How do I not get decision fatigue? So I read Marcus Aurelius, and – I don’t know, I’m blanking on other philosophers, but I read those books…

Slocomb Reed: Lucius Seneca maybe.

Ben Lapidus: Exactly. Thank you.

Slocomb Reed: I have a philosophy nerve too. Back into the lightning round. Ben, what is the most money you’ve ever lost on a deal?

Ben Lapidus: The most money I’ve ever lost on a deal was two flips in the Chicagoland area for about $180,000.

Slocomb Reed: Those are single-family flips?

Ben Lapidus: Single-family flips. Yeah, not a great solo flipper.

Slocomb Reed: Gotcha. What about the most money you’ve made on a deal?

Ben Lapidus: The deals not over yet, but 24 million.

Slocomb Reed: Talk about that. That’s the money you’ll make on a deal you’re doing now?

Ben Lapidus: Yeah. So on a $100 million portfolio, we might generate four million dollars of revenue in our first year, which we did, and anticipate $20 million of upside to our ownership group after hitting all of our return targets and beyond for our investors. The second deal…

Slocomb Reed: What’s the hold period on that?

Ben Lapidus: Five years. A better option – we built a mobile home park in Sequim, Washington. It started in February of last year, we purchased the land, we just got our CFO last year, we’re under contract to sell it in two weeks, we’re more than double our cost basis. We’re generating about $13 million of upside in about a year and a half.

Slocomb Reed: Awesome. What does that return look like for your investors?

Ben Lapidus: Spartan is going to earn a couple of million dollars on that, but our investors are getting 175% return in about 18 months approximately.

Slocomb Reed: That’s awesome. Where can people get in touch with you, Ben?

Ben Lapidus: ben@spartan-investors.com or ben@besteverconference.com.

Slocomb Reed: Yeah, the Best Ever Conference is coming up soon. We are soon going to release an episode exclusively about the experience of the Best Ever Conference. We’ll get into that more here soon. But for today, Best Ever listeners, we hope you have a Best Ever day. Ben Lapidus, thank you again for all the insight you’ve given to us. We will see you again tomorrow.

Website disclaimer

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

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JF2658: 3 Ways Land Investors Can Find Better Deals with Brent Bowers #SkillsetSunday

CEO and Land Coach Brent Bowers believes that anyone can get into land investing with little to no money or risk. It only took him nine months to become financially free, and he’s continued to use his strategy throughout his career. In this episode, Brent shares how he made some of his greatest deals, and three ways you can source better land investment deals.

Brent Bowers | Real Estate Background

  • Career: CEO of Zech Buys Houses LLC, and Land Coach at The Land Sharks
  • 12 years of real estate investing experience
  • Based in Colorado Springs, CO
  • Say hi to him at www.thelandsharks.com

Check out Brent’s other episode with us here: bit.ly/JF1490BrentBowers

 

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TRANSCRIPTION

Ash Patel: Hello, Best Ever listeners. Welcome to the Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, Brent Bowers. Brent is joining us from Colorado Springs, Colorado. He was a previous guest on a couple of episodes. If you Google Joe Fairless and Brent Bowers, the episodes will show up. Brent, we’re glad to have you back. Thank you for joining us and how are you today?

Brent Bowers: Thank you so much for having me, Ash.

Ash Patel: Awesome, man. Hey, today’s Sunday, so Best Ever listeners, we are doing a skill set Sunday where we talk about a particular skill that our guest has. Brent is the CEO of two companies, and today he’ll be showing us how anyone can invest in land with little to no money or risk. He’s also a land coach for Wholesaling, Inc. Brent, before we get into your particular skill set, can you tell the Best Ever listeners a little bit more about your background and what you’re focused on now?

Brent Bowers: Yeah. My background – I started in real estate in 2007, got my real estate license in 2007, because I thought that to be a great investor, I need to have a real estate license. Well, we all know what happened in 2008-2009. I kind of took a little break from real estate for a few years while I joined the military and went back to school. The military actually sent me to school in 2013, and I started house-hacking before I even knew that was a term. I was renting out the rooms and that kind of gave me my start. Then I started wholesaling houses, and then ultimately stumbled upon wholesaling land. In my second land deal, I created a passive income note of $400 a month. I was like, “This is too good to be true.” Because I just covered my car payment, is what I did. Then I did it again and again and again. Before I knew it, I now have 114 notes pay me every single month on vacant, raw, unimproved land. Most people drive by land every day and they don’t even look twice at it. I’ve virtually had no competition. So I’ve been shouting it from the rooftops, I’ve been teaching people how to do this, and having a lot of fun.

Ash Patel: You’re blowing my mind. So vacant land is somehow paying you.

Brent Bowers: Yeah, absolutely.

Ash Patel: Let’s dive into that. I’ve got to hear more.

Brent Bowers: Yeah, let’s keep it super simple. It’s as simple as it sounds, really. What I’m doing is I’m buying stuff at a massive discount. It’s just like houses, apartments, or mobile homes, 99 out of 100 sellers are not going to need your discounted price for your speed and your convenience, and all the things you offer. But there’s that one out of 100 that’s going to need to get that monkey off their back or speed, or convenience, or they’re about to lose it, or they inherited it, no emotion tied to it. So we just need to talk to the right amount of people, and before we know it, you have someone that’s like, “Yeah, I’ll sell it for…” “Shoot me an offer,” or “I’ll take $200.” I’ve gotten land for free, that I’ve made $27,000 profits on. So it’s just one of those things. It’s so real. We just got to talk to the right people.

Ash Patel: Brent, everybody says don’t buy assets that are not cash-flowing. Not only is your land not cash-flowing, but it’s also not improved and has no way of cash-flowing. How is the money coming in?

Brent Bowers: That’s why I never bought land myself, honestly. I looked at these parcels of land and I’m like, “There’s no way I can buy it.” Because I started as a landlord. I just started accumulating rentals, and before I realized it, they really were cash-flowing, they were paying for themselves. Then every time I got a little bit of a profit, something broke. Something always breaks on a house when you have tenants. You’re guaranteed two things in life when your landlord – to die and to fix things for tenants.

So how does my land cash flow? Let me just give you a quick example. That second land deal that I did, I purchased for $500 from a lady that was pushing 91 years old. She was the sweetest, kindest lady. She was like, “Look, my husband bought this thing 20 years ago.” We were sitting on her front porch in Denver, Colorado; her porch was bigger than my entire house, so I’m not buying it from a poor person either. She was educated, she was very well-spoken, and she said, “Look, it’s yours for $500. I don’t want it. I’ve been paying the taxes on it for 10 years now. My husband bought it 20 years ago, yada yada.”

What I did was I wrote her a $500 check for this piece of land. It was not buildable, because it was not accessible. Actually, it was encased by state land so, technically, we had to figure out how to get an ingress-egress or an easement through the state. So there was going to be some attorney and some legal work done there. But I wasn’t going to mess with that. What I did was I went on Craigslist that night when I got home. I had actually stopped by the land, took photos, put it on Craigslist, disclosed everything I knew about it… Not accessible, not buildable, 4.7 acres, $500 down, $400 a month. And I sold that property the next day on a Sunday. The guy literally brought me the cash and brought me $400 every single month. That’s where I was hooked. I was like, “There’s no way I can keep doing this.”

Ash Patel: Was that essentially a land contract?

Brent Bowers: 100%. I sold it on a land contract or a contract for deed. I had my attorney draw one up; and I even offer people mine that I use for free. But I just ask “Have your attorney check it out that way you can use it across state lines.” But yeah, that land was cash-flowing. And by the way, Ash, I got my investment out of it the next day. My rental that I bought in 2007 – I didn’t get my investment out of it until I sold the darn thing 12 years later at the same price I purchased it for.

Ash Patel: A couple of things. I love the analogy with single-family houses, because it’s fun to do those proformas, but you don’t take into account the plumbing problems, the HVAC going out, the roof leak even though the inspection went well. There’s a lot of what-ifs. Right now, you sold this land for $500 and $400 a month; your car payment is taken care of, you’re feeling good, and you want to repeat this, I’m assuming?

Brent Bowers: Yeah. I remember sitting down with my wife and I was like, “Wait a minute, this is financial freedom. We’ve got to figure out how much we owe each month.” It was almost like $6,000 a month at that time, this was 2016, and we spent about $6,000 a month. We just had our first baby, we moved across the country. So what we did was “Okay, what is our water bill? What is our electric bill? What is our house payment?” And then each land deal, I would check something else off the box. Before we knew it — it took us almost nine months actually to become financially free. I was like, “Hey, I can get out of the military now.” I’m not bashing rental properties. I love buying buildings with the cash that I get from my land cash flow, because buildings give me three things – appreciation, depreciation of the building, so it gives me a tax write-off, and then mortgage paid out. So all those things combined create wealth in the long run, but not cash flow for me; they pay for themselves.

Ash Patel: So at this point, did you pursue additional real estate or strictly land?

Brent Bowers: I did both, actually. I really, really heavily pushed the land, because my goal was, I was trying to hit $100,000 a month in payments coming in for the land. I have not reached that goal yet, but I did hire a coach that he actually was way past that. So I paid him the one-on-one coach me and I’m getting there. We’re getting closer every single day. I’m not there yet, but yeah, I still bought houses. Because here’s the thing, at the end of the year, they tell me what my tax bill was, and I pay a CPA about six grand a year to tell me, “Hey, here’s how many houses you need to buy to pay very little in taxes.” Because I would rather buy a house with that tax money, than send it to the IRS.

Ash Patel: Your coach, was he or she a land flipper, or just a general business or real estate coach?

Brent Bowers: I would say land dealer is what I would put a tag on him as. He’d been doing this for 20 years. I think I did 10 or 12 land deals before I hired a coach. I was almost at $200,000 and I was like “There’s got to be a way I can systematize this and structure it and turn it into a business.” Now I have a team running the whole thing for me. So it’s just purely a real business.

Ash Patel: I’m still trying to grasp my head around this. You used the typical wholesaling approaches – the mailers, the mass marketing – and you tried to buy land instead of single-family houses or multifamily.

Brent Bowers: You hit it on the head. Absolutely.

Ash Patel: And what’s your typical seller? I get the person who bought the land, it’s been in the family forever, they want to dispose of it. What other types of sellers do you run into?

Brent Bowers: I run into that seller… And these don’t have to all be behind on taxes or out of state. I’ve had people that live in the same county, the same city, that – they just want to offload the property. Lately – it’s actually really sad to say – we’ve been mailing across the country and some people have lost loved ones, that that was their land, and they inherited it. Sometimes it was like a husband or wife purchased it, sometimes the seller is “Hey, I bought this land in Colorado. Me and my wife went out on vacation here 20 years ago. We never did anything with it. We wanted to build a cabin; we actually had plans.” I’ve had sellers who show me the plans that they had drawn up for like a cabin or a dream second home. Who else…? Neighbors that bought the lot next door to them, they never did anything with it. They vary, they really do.

Ash Patel: I get that. A lot of my friends, and me included, are looking at land to buy just to run four-wheelers. Some of the guys want it for hunting, but I don’t think they realize all the things that come along with it. You’ve got to keep it groomed to some extent, the taxes, any trespass signs, survey… I mean, there’s a lot that goes with it. But on the surface, it’s just appealing. “Hey, you know I’ve got 20 acres to go [unintelligible [00:09:57].06]”

Brent Bowers: Oh yeah. It’s the American dream. I sell to a lot of people that just want those 20 acres to go out and ride those four-wheelers. Now, they weren’t all $295 or $500. They’ve gotten bigger. But yeah, it’s totally the American dream. That’s my buyers and my sellers.

Break: [00:10:14][00:11:47]

Ash Patel: Brent, do you focus strictly on land or do you still try to wholesale apartments and single families?

Brent Bowers: I would say probably 7 out of 10 is land. We pick up deals like mobile homes and houses, we will wholesale them, we will assign the contract to the house. I try and do like a renovation or a flip on a house once a quarter… Because those come. This business works hand in hand with houses and land and multifamily. It’s just given me the ability to scale on a level I didn’t realize. But it’s funny how I ran into land – it actually started with houses, and then it kind of flopped more towards land and less towards houses, but the houses still come along. So a little bit of everything. I’m an investor in a 19-unit apartment complex, and we bought our office building, so more moving into commercial as well…  Because you got to do something with the land profits, because you cannot depreciate land. So it’s really taxed at a higher tax rate, ordinary income.

Ash Patel: Are there a lot of people doing what you’re doing?

Brent Bowers: I don’t feel like there is. I still say there’s virtually no competition in this business, and I told you why. The same thing with you, Ash; you said land doesn’t cash-flow. That’s what most people think, and that’s what I used to think as well.

Ash Patel: I love that contrarian approach, man. Go where no one else is going. I’m going to push you for a second. I’ve tried to convince a lot of wholesalers over the years who’ve strictly focused on single-family homes to go into commercial. And again, my definition of commercial is non-residential buildings. So strip malls, mixed-use buildings, medical… And there’s just nobody doing that. So for the last 10 plus years, I’ve been a commercial real estate investor and I’ve only gotten one postcard where somebody said, “Hey, quick cash offer for your building.” I knew it wasn’t a mistake, because they wrote the word “building” instead of “house.” So one wholesaler I’ve ever come across in 10 years that wants a commercial property. So it sounds like people should be looking at land as well. But at the same time, why don’t you look at commercial properties? What would it take to get you to dive into that?

Brent Bowers: I actually hired Dolf De Roos, the king of commercial, to help me. Dolf has helped me one on one. [unintelligible [00:14:00].23] Dolf De Roos, king of cash flow, is mentoring me on commercial. Also, another guy Ken Van Liew, who builds skyscrapers in New York. It’s funny you say that, because I’m looking more into diversifying into commercial. I love commercial, because it’s more contract-based and not people-based. That’s why I love land, because my land buyers don’t call me when there’s a problem. I call them usually and say “Hey, you’re late. You now have a $75 late fee that was automatically tacked on.” Because at the end of the day, I love people, but I don’t want to deal with people. And with my house rentals, that’s what the property manager does. But the best part about commercial, for me, is it’s more contract-centric, not people-centric.

Ash Patel: And Brent, how can new investors get into what you’re doing?

Brent Bowers: For the land or the commercial?

Ash Patel: For the land.

Brent Bowers: Alright. So for the land, I just started a YouTube channel about five months ago and I have a video going out five days a week, Monday through Friday. I highly recommend going to my YouTube channel. Go to YouTube and just search Brent Bowers. But there’s a payment; you’ve got to pay, you’ve got to subscribe. That’s the only way you’re going to get to see these videos and they’re actually going to work for you. You can watch them, but if you don’t subscribe, they won’t work for you. [laughs]

So that’s probably the way I would recommend. Start this with a very small barrier of entry. The first land deal – I bought for $285, sold it to a realtor the next day for five grand. It’s a realtor, that realtor knew that area. So it’s a very small barrier of entry, and that’s why I love it so much. My father’s done about 35 of these land deals now. I’ve got my dad doing it… So I can’t say enough great things about it.

Ash Patel: Let’s take the wholesaler. They search for maybe people that are behind on taxes, or they look for properties that are not well kept. What can they do to start getting land?

Brent Bowers: Let’s get granular with this. Let’s talk about how we can start right away. So in the beginning, I started with the tax delinquent list. Now I’m starting to notice counties are charging for those, and they’re really a pain in the butt. They scan this PDF, and it’s like schedule numbers or APN, the assessor’s parcel number, and you’ve got to put that into the assessor site to get the name, and the address of the mailing… Then if it’s got a property address, then how big is it… That was a really big pain in the butt for me. I’ve found that there are easier ways. You can go to PropStream and download a list of landowners in a county in five minutes. I could even give a link with a free seven-day free trial and you can go get a list for free right now if you’d like for me to do that.

The second thing is you want to communicate with this list. I recommend sending a postcard or an LOL, a land offer letter. Send them an exact offer letter of what you would offer on this land, or a postcard just saying — just like you said, “Hey, I’d like to buy your building,” but it’s “I’d like to buy your land. If you’re interested in a quick cash offer, a fair offer, call me.” That’ll get your phone ringing; and you can start individually looking at these parcels of land, seeing what the least amount of money the seller would take.

Then go and figure out what it’s worth by calling a realtor, looking on Zillow, seeing what stuff’s sold for in the area; Redfin, another favorite, or landwatch.com. How do you figure out what lands are worth? Well, I just gave you three: Redfin, Zillow, landwatch.com. And you want to compare apples to apples, one-acre parcel, two-acre parcels, or quarter-acre 8,500 square feet. Compare apples to apples within the same area; if Zillow or Redfin says the lands are worth 10 grand, and you can get the thing under contract for $4,500, you now have an asset under contract at 50 cents on the dollar. I literally have a student that just got a piece of land under contract for $95,000, 36 acres in Park County, Colorado. Guess what they figured out was on it? A cabin, an off-grid cabin, with solar that sleeps almost nine people. He already had the land under contract for 50 cents on the dollar, because it’s worth almost 200k, and it had a cabin too. So you really get lucky when you go out and work every day at this.

Ash Patel: Can we go over some land parcels that are super attractive? And I would ask you if there’s anything you wouldn’t touch, but you already touched a property that had no access to it. So I’ll still ask it… Is there anything that is off-limits when it comes to land?

Brent Bowers: No. If it makes a profit, if I can get it at a crazy discount, and/or I can change the zoning, or kind of like with commercial, you change the zoning, you could probably pay a little bit more… If I can figure out a way to make the profit on the land and it doesn’t take a ton of work, I’ll do it. I don’t generally like subdividing or changing the zoning, and I don’t like cleaning up junk cars. I will answer one thing I won’t touch – I’m not going to touch on environmental issues. I don’t want to mess with environmental stuff, and I haven’t really run across too much of that.

Ash Patel: What if you buy at the side of a hill? A steep hill? Would you buy it?

Brent Bowers: Heck yeah. I have a friend that bought a piece of land, it was a cliff. He bought it for like nothing. Guess who’s renting it from him? Someone out in Hollywood; they film with it. So he didn’t have to sell it.

Ash Patel: What’s really in demand?

Brent Bowers: You know what’s really in demand lately? Buildable infill lots, things that spec home builders or developers can build on. Also what’s in demand – recreational land where people can go just outside the city, park their camper or their RV, go camp with their kids, create memories, get out of the city; not go to Disney World, but we’re going to go on a camping trip. COVID really changed the land business for me. I remember we didn’t even know what COVID was. It was February; I purchased the lake house, we come home in March, and what is this COVID-19 thing? I was like “Oh my goodness, we just spent almost all of our money on this lake house. My land buyers are going to stop paying.” One stopped paying, and actually, we just modified his loan. Then I actually had a lot of land inventory for sale. Then about April and May, we sold it all, because there was just more of a demand.

Ash Patel: What’s an example of where you did not make money?

Brent Bowers: On a piece of land? I got a little cocky on my first five or six land deals. And as Tony Robbins would say, “When you’re winning, when you’re making a lot of money, you’re partying. When you lose money, you ponder.” So I was actually an army officer, I was working 12 or 13 hour days, had my new baby at home, wanted to spend time with my wife, and I was doing these land deals left and right. When I could get a chance away from the army stuff, I would take my lunch break, and I would buy these lots. I kind of bought a few of them right off the bat. I wasn’t running title searches, I wasn’t doing owner incumbrances, and I didn’t realize what a treasurer’s deed was. Basically, what that is – I’m sure you know Ash, but when someone’s not paying their taxes, there’s something called a tax lien investor and they come in and pay them for you. Well, if you pay for enough years, it becomes deed eligible, and you can foreclose on that property and take it from that seller. Well, I bought a few of those as well that came on treasures deeds. And when I turn around to flip them, my buyer was going through a real estate agent, and I list it with my realtor, we figured out “Oh, there’s a cloud on the title.”

On one particular property — I was able to pull it off on most of them and still make money by offering seller financing. Seller financing and buying at a massive discount gives you the biggest margin of safety you’ll ever realize. It gives you such a buffer. But this one particular property that I purchased with a treasures deed – I didn’t do a title search, and it sounds so stupid for me to say it… But in the beginning, I was “I can’t mess up. The county says is worth 35,000, it’s assessed at $3,300, I’m paying half the assessed value… I can’t mess up, right?” Well, this one particular parcel, I didn’t even go and look at it. I just knew it was in a great area. Well, I come to find out there’s like a huge crater in the ground, plus the treasurer’s deed… And I finally did sell it for exactly what I paid for it, but with owner financing,

Break: [00:21:57][00:24:50]

Ash Patel: I think a lot of us have that humbling experience and I think we need it. Because when things are going well, it almost feels like everything you touch turns to gold. And I had people say that to me, and I actually believed it. And I had the same humbling experience… So that’s very valuable. So somebody starting out and they’re contemplating single-family homes, multifamily, maybe they have a full-time job… How do they start with this? Can they just get on Craigslist, get on the MLS, try to find land, call the sellers, and try to negotiate a deal?

Brent Bowers: No. When you’re first starting out and you have that full-time job… I teach people how to do this, like, “Hey, I just quit my job and dived into this full time.” I don’t recommend that, because you can’t go out in your backyard today and plant an orange tree and live off of it tomorrow. You’ve got to cultivate it, you’ve got to get that thing off the ground, you’v got to start building the business. So what I recommend is pick your playground; that’s your area. I started in my own backyard. It was a two-hour radius; so I could get there on a weekend if I needed to. I picked that area, then I went to PropStream, and I started pulling the entire county land list. Then I went to Zillow, Redfin, and LandWatch, and I wanted to see where the volume was. Where’s the land selling the most? What size? Then I noticed it was a certain size, and then I went after that first. This was after I exhausted the tax delinquent list. Because that list is so small. The tax-delinquent list, you run out of it very quickly. So you can start there, or you pull the entire county list, and the tax link will be in that county list as well.

Then start mailing them that postcard that I talked about. Get your phone ringing; return those phone calls on your lunch break, or in the evenings. Then have a great call with those sellers, listen to them, understand what’s going on, and solve their problems. At the end of the day, it’s not about us buying land at crazy discounts, it’s about solving that problem for the seller – usually it’s the land – and then getting it under contract. Then either assigning your contract to a builder or developer, or buying that thing, and selling it on Craigslist, or Facebook, or with a sign. I sold so many of my parcels of land with signs. I moved a lot in the army, side a lot of boxes at home. I couldn’t afford the signs, so I would write on these boxes and staple them to a tree, or put them on a stake. As soon as it rained, my box was trashed. But I sold so many parcels with free boxes that I got from moving all over the country in the army, or all over the world, honestly.

Ash Patel: Very underrated. Craigslist, Facebook, and signs. Amazing what they can accomplish. On Facebook, not only on Marketplace, but hit the local towns; get onto the pages of what town your property is in, and engage with the residents of that town. That helps a lot.

Right now industrial is on fire. Two of the biggest landlords in the world are operators of industrial or logistics land. Are you doing anything with that?

Brent Bowers: No, I’m not.

Ash Patel: Let’s push you again. Anything near airports or intersecting interstates where there’s a workforce – super-hot. We’ve done a few deals near airports and interstates for large multi-million square foot industrial buildings. These large companies often don’t have the resources to go out and scout their own land; they rely on others to bring them deals. So it might be something for you to look at.

Brent Bowers: That’s incredible. I actually just watched Amazon build a 20-acre building right outside the airport in Colorado Springs. Imagine that land seller, how happy they were.

Ash Patel: Yeah, and how hot it is. Amazon now has realized that they’re making a lot of landlords very wealthy. So they’re now getting into buying the land, building their own infrastructure, and keeping it on their books, versus just leasing it. Yeah, man, I love your story. I can’t imagine where you’re going to be in six months. Let’s keep in touch and see what you’re working on later on. What else do you have for the Best Ever listeners? What advice on getting started?

Brent Bowers: First off, thank you so much for that tip as well. That’s amazing. That’s worth millions of dollars. That’s going to lead me to answering your question right now, Ash. Between you and I – we just talked about so many things that can create a millionaire in the next two, three, four, or five years. It’s just taking action; you’ve got to take action and do it. At the end of the day, you can listen to a thousand podcasts; if you don’t take action… And how do you take action? When do you take action? How to take action? Well, time-block it; put it on your schedule. When I’ve got to get something done, I block out my schedule, turn my phone off, turn my email off… Delete Facebook off your phone, don’t scroll. Create. Don’t consume, create. You’ve got enough knowledge to go ahead and pull the trigger. You’ve got all the answers for today, and tomorrow’s answers will come to you tomorrow, when you need them. So just take action.

Ash Patel: I love that. And your time blocking and leaving your phone away – I just started separating myself from my phone. You do it in baby steps. Walk out of your office and leave your phone behind, or leave it in the kitchen while you go into your office. It’s amazing how free you feel. So start out with five minutes. You think, “Oh my god, what if I miss a call? Okay, not that big of a deal.” Then go 20 minutes, 30 minutes, and you’ll be amazed how you can unleash yourself from your phone. Great advice, man.

Brent Bowers: Digital noose. I used to call it a digital leash, but I think it’s a digital noose. Monday, I filmed 20 videos for my YouTube channel. I did them all in one day, and I didn’t look at my phone from nine to five. Most people think “Oh my God, it’s going to take me forever to get caught up.” Well, I was able to return all those calls and all those text messages from nine to five… It maybe took me 20 minutes.

Ash Patel: Yeah, and the world didn’t collapse while you didn’t have your phone.

Brent Bowers: No. Exactly. In 20 minutes? But think about it, what if I answered it, checked it, and replied all day long? That would have kept that text message communication going, that 20 minutes would have turned into an eight-hour day.

Ash Patel: I love it. Brent, how can the Best Ever listeners reach out to you?

Brent Bowers: Find me on YouTube. You definitely have to subscribe though… As well as, if you’re interested — thanks for mentioning it. I’m a Wholesaling, Inc. coach. Head on over to wholesalinginc.com/land. If you’re interested in booking a call with me and my team, we’ll see what your goals are. If you want to jump in the land, I’d be honored to coach you.

Ash Patel: Brent, thank you for a great conversation today. Starting out in 2007, going into the military, house hacking, and then just accidentally getting into land, and going full speed ahead on it. What a great story, man. Thanks for sharing.

Brent Bowers: Thank you, Ash.

Ash Patel: Best Ever listeners, thank you for joining us, and have a Best Ever day.

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

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

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JF1923: From 0 to 82 Units In Just 3 Years with Jens Nielsen

Jens is focusing on building his rental portfolio via value add deals. While he’s building his portfolio, he’s also still working full time. There are a lot of people in the same situation – wanting to or currently building a portfolio while working full time, with hopes of being a real estate investor full time in the long run. Hear how he’s going about scaling his business, the deals he’s finding, how he’s finding them, how his business is structured with his partners, and a couple of deal specific case studies. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“We don’t have any investors, we’re just a group of people that are long term buy and hold investors” – Jens Nielsen

 

Jens Nielsen Real Estate Background:

  • Denmark native, been in the US since 1996, investing in multi family real estate since 2016
  • Owns 82 units in New Mexico and Colorado, all value add deals
  • Based in Durango, Colorado
  • Say hi to him at https://opendoorscapital.com/
  • Best Ever Book: Begin With Why

 


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


TRANSCRIPTION

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

Jens Nielsen: I’m doing quite well. How are you, Joe?

Joe Fairless: I am doing well, and looking forward to our conversation. A little bit about Jens – he is a Denmark native, been in the U.S. since 1996, investing in multifamily since 2016, owns 82 units in New Mexico and Colorado. They’re all value-add deals. Based in Durango, Colorado. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Jens Nielsen: Absolutely. I should just mention – I grew up in Denmark, been here since 1996, and I actually moved to London in the early ’90s, and then to the East Coast of the United States in Maryland, and then on to the West Coast through Albuquerque, New Mexico, and now Colorado.

I followed the traditional path – go to school, get a good education, get a job, saving in a 401K… That’s what I was supposed to do, until I got the wake-up call a few years ago and realized that probably was not the path for sustainable wealth and income… So I kind of had a mindset shift a few years ago.

Joe Fairless: What takes your focus now? What are you doing?

Jens Nielsen: I still have a W-2 job, but my focus really is a couple of things… When I had that realization a few years ago, I started out buying some smaller properties just because “Hey, let me put my own money at risk and see how this goes.” So I did that, and that’s worked out pretty well. I connected with some local investors, and then they told me to reach out to this broker, and he helped me a lot; an older gentleman who wants to help newer investors. He helped me a lot with sourcing deals, and rehabbing, and everything.

So I did that, I started with those smaller properties, and then since that it has kind of moved into some joint ventures, bought some larger properties with some friends and family, and then actually doing some syndications in the last year. It’s kind of progressing… Once you get that real estate bug, you can’t really stop, right?

Joe Fairless: Yeah, that is very true. Let’s talk about the 82 units you have in New Mexico and Colorado. What’s the largest deal of those 82?

Jens Nielsen: 38 units. That’s the one we bought about a year and a half ago.

Joe Fairless: Let’s talk about that one. Where was it, purchase price, business plan, all that stuff.

Jens Nielsen: So that’s in Albuquerque, NM. It’s a ’70s vintage, classy property, probably in a B- area. We bought that for 1.2 million dollars. “We” – that’s my broker/property manager, and a couple of friends, a group of five of us that brought capital to the deal.

Joe Fairless: So you, the broker plus three friends?

Jens Nielsen: Yeah.

Joe Fairless: Okay, got it.

Jens Nielsen: That thing was listed at 1.55, and we ended up getting it for 1.2 million. It was one of these situations where the owner was out of state, they hadn’t really put any money back into the deal, so it was just deteriorating. Plumbing issues, and delinquencies, and just kind of falling apart. We were able to get it at a reasonable price, but also with the realization it needed a lot of work. I think we only got a 50% loan-to-cost at that time, and then we brought another 600k to the deal. Then we got a construction loan from the bank, so we’ve been using that  600k to really fix up the property… Which is new roofs, because for some reason every roof in New Mexico is flat, which is a pain. They always tend to leak.

Joe Fairless: They have some mansard roof, too?

Jens Nielsen: What kind?

Joe Fairless: Mansard, where the shingles are on the front of the building, not just on the top… It looks hideous.

Jens Nielsen: No, it’s typically parapets, where you have built-up stucco, and then you have the roof a foot below that, with canales (as they call them) where the water runs off… But back in the day they all tended to be flat, and it’s hard to have any slope on this; a lot of issues with standing water, and so forth. We ended up putting a whole new membrane roof on there, and replaced all the windows, did new stucco, new — it’s a two-story, so new exterior decking, new parking lot… And then we’ve just been tearing up the units and pretty much gutting them to the studs. So a lot of work, a slow process… Not your typical slight value-add, where you’re trying to invest in a couple years. This is a longer-term hold, for sure.

Joe Fairless: Yeah, let’s talk about that. How do you make the decision to gut the units to the studs, versus just spruce it up some?

Jens Nielsen: Just because the cabinets were in poor shape, we had some plumbing issues, so we had to go into the walls to fix the plumbing… Flowing was — sub-floor in the upper stories were not very solid, so we had to put some backer down, and then put those vinyl plank flooring in… We didn’t tear the drywall out on every wall; if it was in good shape, we left that… But there were a lot of places we were in the studs, especially for the plumbing issues.

The decision was really —  we don’t have any investors, we were just a group of people that are long-term buying and hold… So if it takes us a few years to start seeing a return, that’s totally fine, because we know the long-term value is there, and we just wanna keep it as a long-term cashflow type thing.

Joe Fairless: How do you define long-term?

Jens Nielsen: 10+ years.

Joe Fairless: Is that how the rest of the four are defining it as well?

Jens Nielsen: Yeah, that was how we entered into it. It was basically “Hey, this is gonna be ten years at least in order for it to be worthwhile putting all that money into it.”

Joe Fairless: Okay. And how much money do you have in the deal?

Jens Nielsen: Personally, or…?

Joe Fairless: Yeah, personally.

Jens Nielsen: About 100k.

Joe Fairless: Okay. And does everyone have about 100k?

Jens Nielsen: It varies a little bit. Some have slightly less, some have slightly more… But I own about 20% of that deal personally.

Joe Fairless: And how did you all determine who brings what amount of money?

Jens Nielsen: We just sat down and negotiated. “Here’s what we need to raise”, and what people were interested in bringing to the deal. It was kind of an organic discussion; we just said “Hey, this is what I can bring, this is what I can bring”, and we just came up with the money. We needed the 600k, and that’s how we got to it.

Joe Fairless: Any challenges in putting together a partnership with five people that you’ve come across?

Jens Nielsen: I think some people want to be more active and have a more hands-on — but really, the rehab is being run by a property manager; he has a construction company… And he calls the shots. At times we’re questioning some of the decisions, like “Hey, why did you do this? What was the rationale behind it?” [unintelligible [00:07:35].01] and then try to understand that. I think that’s the major thing.

Joe Fairless: And what are the roles of everyone on the project? Because you talked about the broker/ property manager; that’s clear. What about you and the other three?

Jens Nielsen: I’m actually heading there this afternoon. I do the site visits, and see how the rehab is going. We have some of the other guys who look over the monthly expenses and summarize those, and tax returns, and other things. Some are more active than others for sure, but everybody takes an active role in what’s going on.

Joe Fairless: So that is the largest unit size, 38 units. What’s the next-largest?

Jens Nielsen: That’s a 16-unit that we’ve just closed on in May, and “we” are now in this case my wife and myself. We just bought that outright. I mean, not outright; we had the down payment and got a loan on it. It was interesting, because that was one that I found through direct mail, I sent out some letters?

Joe Fairless: Really?!

Jens Nielsen: Yeah.

Joe Fairless: Good for you.

Jens Nielsen: Everybody talks about it, but this actually worked out. It was a gentleman that had owned it for about ten years, and he was just — typical mom and pop type of managing it and dealing with his tenants… We negotiated for like eight months before we finally had enough relationship that he was willing to sell it to me, I guess… So that was interesting.

Joe Fairless: Oh, man… Let’s talk about this. Direct mail – where did you buy the list?

Jens Nielsen: Well, people are gonna think that this is crazy… I actually created my own list, me and my wife, a  few years ago. We just sat down and started looking at Apartments.com and just started looking “Where are the apartment buildings? The area we liked? What are the sizes?” and we started creating our own list from scratch, essentially. We figured out who the owners were… This was time-consuming, but also, New Mexico is a non-disclosure state, so it’s not super-easy to find that information… So we  just did it the hard way, created the list and started writing Mail Merge letters, and handwrote the envelopes, and that was the process.

Joe Fairless: So how did you find the information if it’s a non-disclosure state?

Jens Nielsen: Well, we could see somebody’s rental site, we could see what the unit size was, and then we could go to the assessor’s office and figure out who the owner was, and if it was an LLC we could go to the state’s business registration to figure that out and try to google a bunch of stuff. We didn’t have any information about when it was last sold, or what it was sold for… So I’m sure we sent letters to people who had just sold it, or had owned it for a short period of time. It wasn’t a lot of letters; probably 200-300 at a few different intervals.

Joe Fairless: What was your interval?

Jens Nielsen: Every 2-3 months we would target them.

Joe Fairless: Okay, every 2-3 months. How many intervals did you do before you got your first deal?

Jens Nielsen: This gentleman said “I’ve had your letter for a while, and I wasn’t ready to sell, but now I’m ready.” So I don’t know if we only sent one or two to him, but he didn’t get a whole bunch. [unintelligible [00:10:21].23]

Joe Fairless: That’s great.

Jens Nielsen: Yeah, absolutely.

Joe Fairless: So how many intervals have you done to date?

Jens Nielsen: I stopped again when I got more involved in syndications, because I realized — a 16-unit is great if you’re one or two people buying it, but you can’t syndicate it, and I kind of didn’t have a whole lot of capital left, so I stopped doing it… But I may start it up again if I wanna buy some smaller properties again, which is not really on my radar at this point.

Joe Fairless: Okay. So about how many intervals have you done then?

Jens Nielsen: Probably 3-4. It was about a year where we were sending them out every 2-3 months. It wasn’t a ton. I have a few other people that reached out to me, that I still have kind of in my backpocket, that maybe at some point I can reach back out to them and see if they’re willing to sell.

Joe Fairless: What did the letter say?

Jens Nielsen: It said something like “Dear Mr. John, we saw your property at 123 Main Street. We’re real estate investors in your state and we’re looking to buy your property if you’re interested in selling” and then a picture of me and my wife, and an email, and a phone number… So just very simple, clearly something that was hand-made, if you will… So it didn’t look like the postcards you may get dozens and dozens of.

Joe Fairless: Right. Do you have any children?

Jens Nielsen: No children.

Joe Fairless: Okay, and what type of attire were you and your wife wearing in the picture?

Jens Nielsen: I think it was a picture of us on vacation somewhere, very casual.

Joe Fairless: Okay. And did you address the person by name?

Jens Nielsen: Yeah, “Dear John”, and then the address of the property.

Joe Fairless: Okay. Eight months of negotiation… How did the first call go?

Jens Nielsen: He called me and said “Hey, I’ve had your letter for a while. I wasn’t ready to sell, but now I’m looking to sell…” And I think I made some mistakes there. I’m an analytical guy, so I wanted to go straight to “Hey, what do you want for your property? Let’s see if we can make a deal.”

Joe Fairless: Right. [laughs]

Jens Nielsen: So it was a mistake, and I’ve learned that since… Because I said “Well, that sounds interesting. Send me some info.” He shared his P&L and stuff like that. It was handwritten by him, but it was still pretty accurate, and I could see “Well, that actually kind of makes sense.” I went down there and he showed me the property… And then I think I probably offended him by trying to lowball him a little bit.

Joe Fairless: You couldn’t even get that out. You felt embarrassed almost. You’re like “I was trying to, um… Well, I lowballed him.” [laughs]

Jens Nielsen: Because I realized it needed some work. It really was a little bit tired, and stuff…

Joe Fairless: Did he have a number initially?

Jens Nielsen: He wanted somewhere close to $800,000 for it.

Joe Fairless: That’s what he told you initially?

Jens Nielsen: He said he had gotten a broker’s opinion on it, which was $780,000 or $800,000 or something.

Joe Fairless: Okay, and what was your offer?

Jens Nielsen: I think it was in the low 700k, because–

Joe Fairless: Your first one?

Jens Nielsen: Yeah.

Joe Fairless: That’s not an embarrassing low offer…

Jens Nielsen: People get very emotionally attached to something, because I know he paid — when I saw his loan pay-off, he had paid over 800k for it in 2008, or something like that. I said “Okay, well you’ve also had your 10+ years of rent income, and payoff of your mortgage, and everything else…” He said to me “Well, I guess we have nothing else to talk about…” [laughter]

Joe Fairless: How do you respond to that?

Jens Nielsen: I said, “Well, I’m sorry”, and then I just left him alone for  a bit, and then I was like “Okay, let me maybe be more realistic about my numbers.” I came back and I said “Okay, I’m thinking around 740k, I can probably do…” Because I had talked to the bank and they were willing to roll some rehab costs into the loan, and so forth. That’s what we ended up buying it for, it was 740k.

Joe Fairless: How long did it take for you to follow up with him on your revised offer?

Jens Nielsen: It was probably a month, or something. I thought the deal was dead, and– I just couldn’t get it out of my head, because I liked the property. So it was a while, I can’t remember exactly… But he cooled off, I cooled off, and we were back on speaking terms, you know… [laughs]

Joe Fairless: Was that a phone call, or was that an email, where you had the revised offer?

Jens Nielsen: I think it was an email and then following up with a phone call. Then he started kind of like “Yeah, I think that works out…” And I went back and I took my property manager and we toured the units… Because we wanted to make sure we weren’t overpaying for it in terms of the amount of work it needed. It was kind of a conversation that — I continued to develop that relationship I should have developed earlier, I guess.

Joe Fairless: So eight months timeframe… How long once you had it under contract did it take to close?

Jens Nielsen: Well, that actually took a while too, because he’s an attorney and he was off traveling, doing some work out of state… So from the LOI to actually closing was probably about four months, or five months, or something… So just because he was dragging his feet, and then the bank was kind of taking it slowly. But it actually worked out, because interest rates were kind of high late last year, so the interest rate actually ended up dropping by the time we closed on it in May, so that helped a lot.

Joe Fairless: Oh, wonderful.

Jens Nielsen: Yeah, right?!

Joe Fairless: Yeah. And with that 16-unit — was that when you made the decision,  “Okay, I don’t have much capital left to invest, so now I want to turn my focus to syndication”?

Jens Nielsen: Yeah, I think I have a kind of two-pronged approach. I like to have some properties that are just mine/ours; we don’t have to answer to our investors, and we can just keep them to give us some cashflow that will just continue to come in. I like that. And then syndications, investing – I’ve been investing in that passively for years, and some people reached out to me and said “Hey, we’ve seen the work you’ve done. Are you interested in being on the GP on one of our deals?” That was super-interesting, going from 38 to 205 units; it was pretty exciting, and it’s a whole different ball game.

Joe Fairless: Based on your experience, what’s your best real estate investing advice ever?

Jens Nielsen: I think it’s basically creating — if you’re trying to work with individual investors, to create a relationship with them before you try to get to the bottom line.

Joe Fairless: Yeah, that was something that came true on that 16-unit, right?

Jens Nielsen: Exactly. I think if you’re buying a very large property, it may not make that much of a difference, because it’s strictly a business transaction, but if you’re trying to buy a smaller property, creating a relationship with the seller is hugely important, if it’s a direct to seller type thing.

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

Jens Nielsen: Absolutely.

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

Break: [00:16:38].12] to [00:17:36].17]

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

Jens Nielsen: Start With Why, Simon Sinek.

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

Jens Nielsen: I think the 16-unit is turning out to be a really good deal.

Joe Fairless: In what way?

Jens Nielsen: We’re actually 10% above our projected rents in the units we’ve rehabbed already, and we’ve gotten it painted and everything else, and it just looks really awesome. And it’s in a great area, so I think it’s gonna be a long-term, great cashflowing asset.

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

Jens Nielsen: I think initially I was buying properties in areas that weren’t that great, because “Oh, they’re cheap, so what could possibly go wrong?” Well, in reality, just because  it’s inexpensive and it looks good on paper doesn’t necessarily mean it’s gonna make money in the long-term.

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

Jens Nielsen: I do some coaching. I have some students that I help coach, new investors, and stuff like that. That’s a great way to share some of my knowledge and help them grow.

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

Jens Nielsen: My email is jens@opendoorscapital.com. I like to offer people — if they wanna schedule a call, go to my website, OpenDoorsCapital.com/call and schedule a call with me if you wanna chat about real estate.

Joe Fairless: Jens, thank you so much for being on the show and talking about your advice. The 16-unit – holy cow, I love hearing about the direct mail approach, and how that worked out for you, and the specifics for how you did direct mail… So thanks for being on the show. I hope you have a best ever day, and we’ll talk to you again soon.

Jens Nielsen: Okay. Thanks, Joe. I appreciate your time.

 

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

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

 


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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.

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

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

 


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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.

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Guest Stuart Grazier on Best Ever Show banner

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!

 

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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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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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Best Real Estate Investing Advice Ever Show Podcast

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

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
– Say hi to him at http://valueinvestmentgroup.com/

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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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Best Real Estate Investing Advice Ever Show Podcast

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

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

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://ndtco.com/home
– 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

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!

Best Ever Tweet:

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

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!

Best Ever Tweet:

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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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 Mobile