Best Real Estate Investing Advice Ever Show Podcast

JF1068: $5,000,000 to $50,000,000 Value Add Deals!!! With Matt Lasky

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Matt and his company buy BIG deals in healthcare and retail assets! He is in charge of finding, structuring, and analyzing the deals. Get an insight how the big boys underwrite their deals. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Matt Lasky Real Estate Background:
-Managing Partner at Equity Velocity Funds, a boutique real estate private equity fund
-Responsible for deal sourcing, structuring, and analysis
-Company focus is an emphasis on value-add and opportunistic healthcare & retail assets
-Post-acquisition, Matt helps implement the strategic business plan on each asset to enhance its value
-Based in Columbus, Ohio
-Say hi to him at www.evfunds.net
-Best Ever Book: The Most Important Thing

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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 of that fluff.

With us today, Matt Lasky. How are you doing, Matt?

Matt Lasky: I’m doing great, Joe. How are you?

Joe Fairless: I’m doing great as well, and nice to have you on the show. A little bit about Matt – he is a managing partner at Equity Velocity Funds, which is a boutique real estate private equity fund. He’s responsible for sourcing, structuring and deal analysis. His company is based in Columbus, Ohio. You can say hi to him at his company’s website, which is in the show notes link. Let’s get into this, my friend. Matt, do you wanna give the best ever listeners a little bit more about your background and your current focus?

Matt Lasky: Sure. We’re a private equity fund that’s spun out of a deal sponsor who was celebrating their 30th year in existence this year; the whole time we’ve pretty much stuck to healthcare and retail investing; those have been our core competencies, in kind of a smaller and middle market. Most of our projects are between 5 and 50 million. We’re not duking it out with a lot of the bigger institutions in the core markets most of the time. 30 years ago, when our founder kind of laid the vision, health care and retail were highly disparate activities, and as you see – or as you’ll probably hear when we speak – healthcare and retail are merging; we’re seeing a lot of health care uses in retail spaces, and that’s part of our philosophy, so I don’t know if it was fortuitous [unintelligible [00:03:52].02] Now those two sections have a lot of overlap, and that just happens to be what we do now.

Joe Fairless: So let’s talk macro level, and this is just to give some big picture perspective on the type of dollars you’re dealing with and the type of stuff that you all invested in your overall business model. Will you give us an example of maybe the last fund that you did, what type of specific things did you buy within it and what is your role in that process?

Matt Lasky: Sure. We bought about seven or eight assets; we were the whole owner of six of them, and then in the other two — one we went and bought about a 30 million dollar deal with another equity partner, and then also partnered with some physicians on a medical office development. So our fund’s value add and opportunistic. Our goal was mid teens net returns to our investors, and we wanna write a minimum million dollar check, so our first fund’s asset value was just shy of 100 million dollars, and we deployed it in just over a year. We wanted to raise the funds and invest them in the same environment that we were kind of raising them in, maybe a little different than the bigger institutional funds who have a 1-2 year capital raise period and then 1-3 year investment period. We just maybe took a different philosophy there, and we were able to do so just given the project size we typically pursue.

From a macro level, that was pretty much split 50/50 between retail and healthcare assets, with one repositioning and one ground-up development; the rest were value-add acquisitions.

Joe Fairless: Repositioning, ground-up and value add – so most value-add, one repositioning and one ground-up. What’s the difference between value-add and repositioning?

Matt Lasky: In this, repositioning was kind of a unique situation. We had a tenant through kind of our sponsor that I mentioned we spun out of, and the corresponding brokerage firm. The tenant needed space, and we ended up finding a bank-owned, completely vacant building, but had already structured the lease deal with them [unintelligible [00:06:07].19] and so it became a construction project and kind of a retrofit, from a [unintelligible [00:06:13].10] medical office to put the practice in.

Joe Fairless: What is your role in this process?

Matt Lasky: I’m responsible for deal identification, helping lead our underwriting team, and then post-close implementing the business plan and doing some of the high-level asset management. We believe strongly that the people making the assumptions on deals should live with them, so our acquisitions team is the same as the asset management team [unintelligible [00:06:43].15] from inception to disposition, which involves the acquisition assumptions and underwriting helping with the debt structuring, and then closing on the asset, and then post-close monitoring performance and helping — usually we have some sort of problem to fix, being a value-add player… Whether that’s deferred maintenance, vacancy, or all of the above. We’re helping oversee the corrections of those issues and then ultimately the disposition.

Joe Fairless: Have you exited out of all these deals?

Matt Lasky: No, our first investment was made October 2014, so we’re just starting the exit on some of our deals.

Joe Fairless: Okay. Have you exited out of any?

Matt Lasky: Yeah. Our first one, we kind of bought a portfolio and we’re exiting in stages. That was a retail deal where we sold it in parts, and that final part – actually, we should be getting the purchase contract to the final part today. So we’ve exited out of two, and assuming we exit the third where we think, and we’ve had multiple offers in the same area, we’re looking at a 2,5x or 3x equity multiple at the project level over, call it just shy of three years.

Joe Fairless: And for someone who’s not in your world of equity multiple formulas or metrics, what is an equity multiple?

Matt Lasky: That’s basically saying that for every dollar you gave us, with that 2,5-3 equity multiple you’d be getting $2,5-$3 back over the course of the investment.

Joe Fairless: And does that include your original investment dollars back?

Matt Lasky: Yes, it does.

Joe Fairless: So let’s talk about that one that you’re starting to exit in pieces. Can you tell us how much you bought the portfolio for, what exactly is it, and then just give us the numbers on these exits that you’re taking chunks from to exit out of?

Matt Lasky: Sure. We bought the portfolio, which was a couple single-tenant buildings and a strip center that was about 60% occupied for 3,5 million dollars. It was our opinion that the strip center just needed some more hands-on ownership; it was in a market where the average occupancy was well into the ’90s, with rents a lot higher than this center. It’s in Pickerington, Ohio, which is a South-Eastern suburb of Columbus.

Joe Fairless: Okay.

Matt Lasky: This is a little off the beaten path of [unintelligible [00:09:20].21] and it’s gonna be more of your local tenant mix, and the owner, who had some TI dollars and being well capitalized to capture some of the tenants that were in the market could do so. So over the course of 2,5 years we’re now at a true 100% occupancy; we have no vacancy.

Joe Fairless: Wow, congrats.

Matt Lasky: …and we had a good timing. We bought in late 2014, and as a lot of your listeners probably know and other people talked about, cap rates have continued to compress, or I guess otherwise that building values have gone up. So we both bought it right… On one  of the single-tenant deals the tenant was expiring in a couple years and we kicked them out in an extension to over 10 years, which creates a lot of value in the single-tenant net lease marketplace, but not enough to kind of get a premium.

The original going in price, like I said, was around 3,5 million. We had a renovation budget of a hundred thousand, and now we’re selling it piecemeal. I guess, for reference, the strip center exceeds our overall project budget, plus the two single-tenant deals that we exited.

Joe Fairless: That’s outstanding. So you’re basically selling the strip center for the price that you paid plus renovations costs for the entire portfolio.

Matt Lasky: Correct. We’re flipping that [unintelligible [00:10:48].05] we could sell the single-tenant pieces and get all of our equity out on the strip center, with no money into it… So kind of the inverse of what you’ve just said. But either way you look at it, we just thought the single-tenant stuff would be easier to sell going into it; adding value in retail is always a little bit of a question mark. We think we can do it, but we’re never positive that months 6 do we get leases done, month 12, 18, 24, or whatever… But we knew what we had in the single-tenant stuff, so we kind of took the mirror image of the approach you mentioned. It’s similar ways of looking at it. We just thought each part was greater than the sum of the whole, and if we could add value, we’d be in a good spot.

Joe Fairless: Here’s a stupid question – when you sell, say, the two single-tenant buildings and you’re able to now own the strip center with no money into it, is that owned by you and your company, or is that owned by the fund, so you, your company, plus your investors will own that?

Matt Lasky: It’s a complicated question. Technically, it’s owned by the investors and the sponsor, and the same partnership agreement as the whole portfolio, if that makes sense. This project was a little tricky because of the way we collateralized the debt. On the front-end we knew we might do this, so we had to pre-negotiate the lease amounts to free up equity as we sold off a part of the portfolio.

Joe Fairless: I wanna talk more about that 60% occupancy that now is 100%, because I’d like to get into specifics. I love the philosophy that your team has – the team that acquires the property is the same team that is managing the asset, so you have to see through the vision that you had painted at the beginning. A lot of the Best Ever listeners who have a smaller company are like, “Well, d’oh, you have to acquire and then you oversee it”, but larger companies might have an acquisitions department, and then separately an asset management department.

So let’s talk about the 60% occupancy and now it’s 100% – how many storefronts did you have to get occupancy for and how did you go about it?

Matt Lasky: That’s a great question. The total size of the center is about just over 25,000 square feet. The bays or the storefronts were 1,400, so I’m not sure what that math works out to be, but we needed a handful. We were fortunate enough to have some great leasing guys, and so we kind of took a top-down approach of who were the biggest users… So we had some blocks of space where we could combine continuous space to reach 4,200, which was three of the bays, in a couple situations. So we tried to identify, as a team, users who are in these types of centers – this was a Kroger anchored center… For the Best Ever listeners out there, Kroger is a market-leading grocer in the Midwest, headquartered in Cincinnati; we’re up in the Columbus area, so there are kind of an 800-pound gorilla of grocers here, which is what attracted us to this project, so we were like “In what other places are there centers like this that are Kroger anchored, kind of off Main & Main, and what does their tenant mix look like?” So we databased and did research on a number of those, and then we went after categories who we thought would take multiple bays. The results were pretty interesting.

The two big tenants we got were 1) the public library of Pickerington; they did a branch office in our building, which was great, and we’re right across from a public high school; we think that plays really well, being across from the high school and being a library. And believe it or not, that is a little bit of an atypical use in retail, but it’s not the first time that’s been done in Columbus. There was a center that I described in that process earlier of how we were looking at other tenants in a town called Worthington – the Worthington Public Library is in a Kroger center that’s not on Main & Main.

So that wasn’t that original of an idea; maybe a little out of the box, but we were like, “Hey, we should really talk to these guys.” It ended up working out. Then we got a karate studio, as well.

As a landlord who’s experienced in health care and retail, I guess one of our big philosophies is – kind of coin the internal term “Amazon test”, which is we would put in tenants who can’t outsource them to online. You can’t do karate online (yet) or go to the library actually online; you can buy books and what not, but it’s not exactly the same experience, especially with the school across the street.

So we’re trying to be cognizant of that as we look at the tenant mix and who might be the best long-term prospects for centers.

Joe Fairless: That’s fascinating. I was gonna call you out when you said “the Amazon test”, because you said the public library — I was like “Come on, that’s how Amazon was founded, by selling books!”, but I get it, because this school is across the street, so kiddos go over to the library. Any special deal negotiation parameters that you had to be aware of negotiating with a public library point person, versus someone in the private sector?

Matt Lasky: They were inexperienced just because this was the first real estate deal they had done since their main campus. They’re not in the business of real estate, they’re in the business of being in the public service. We were really collaborative. We had to get a little creative on how they win and what their structure looked like, which involved a couple levels of board of trustees and approvals for people who weren’t gonna be involved in the day-to-day, but just oversee decisions. They were great, because they were very collaborative and they really did make the process smooth and easy. We try to be open book when we can, and we want a true win/win for everyone, so it was kind of through that collaboration and them saying “Hey, these are our sticking points.” As a landlord, you always want the highest rent possible with the least amount of concessions, but ultimately there was something that worked for both groups. We gave a little flexibility; we ended up giving them half rent for one of the suites, because [[00:17:26].09] looked like a big win for them based on their internal politics, and it allowed the people who wanted to operate there and the directors of the library to get board approval.

Joe Fairless: And as far as the single-tenant buildings, you said you extended it from one to ten years, which helps with the value of your property, because it shows a long-term commitment, just like if there are apartment buildings, month-to-month versus a one-year lease – same thing. Why weren’t they already on ten years and how did you come up with the solution for them to want to do ten years, versus what they were already doing?

Matt Lasky: They had built their building on a ground lease, and their base term was running out. They had built the building in ’04 or ’05, and the term was running out when we acquired the building. As part of our due diligence on all our acquisitions we interview all the tenants; if it’s a local tenant, we try to talk ownership; if it’s a more regionalized or national tenant, at least the manager, and a lot of times the real estate person, and it’s a collaborative situation where we just wanna understand how the space works for them and what their needs are, and if we can budget in capital expenditures to make the property better, to meet their needs and ultimately help their business; that’s the type of landlord that we wanna be.

It was through that process that we met with the owner of the single-tenant concept. We were on this edge of town where — it is the gross edge of Pickerington, and this center came out of the ground about a year or two before ’08 happened, and then all the housing starts that were supposed to happen stopped, but they’ve since picked back up and there’s a ton of new houses out that way, relative to what else is going on in Columbus. So he knew that the houses were coming back; he was a really well-experienced restaurant operator, and he just said it’s a little slower than usual, so we ended up negotiating on his rent increases from when his lease would expire. If his was to renew, his option – for five years his rent would have increased higher, and we kind of met him in the middle and said “Hey, let’s not increase your rent as much, but let’s extend you for 10 years. We’re more in it for the long-term and the surety of income than your term rent increase.” Ultimately, he had a lower occupancy cost and wanted to be there long-term, so we were able to come to an agreement.

Joe Fairless: I could ask you questions about this for probably 60 more minutes; I find this so fascinating, because you’re playing at a higher level, and I love learning about how funds operate from a professional standpoint and how you methodically approach things… But we’ve gotta keep rolling, so what is your best real estate investing advice ever?

Matt Lasky: I think my best advice is really understand and be collaborative with whomever you’re dealing with. A lot of our investment philosophy comes from our backgrounds – everyone on our fund’s team was a broker or in an advisory role at one standpoint, so we’ve been on each side of a transaction. I think that really helps us pick apart and understand everyone’s motifs. So just being a human, going out there and actually meeting people, or getting face-to-face I think really goes a long way in today’s digital age.

We’ve had a number of confrontational phone calls, and then kind of the guard comes down and we’re all humans at the end of the day, and things get advanced.

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

Matt Lasky: I am.

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

Break: [[00:21:15].22] to [[00:22:17].10]

Joe Fairless: Best ever book you’ve read?

Matt Lasky: Probably “The Most Important Thing” by Howard Marks. It’s chock-full of high-level investment philosophy that really makes you reflect.

Joe Fairless: Best ever deal you’ve done?

Matt Lasky: Probably the one we just talked about, that went phenomenally well. If we could always do that type of returns, in a couple of years we’d be in a great place.

Joe Fairless: What’s a deal that hasn’t gone well?

Matt Lasky: Probably our nicest retail asset that actually passed the Amazon test; we’re working through and have a lot leasing momentum, but we bought it and a year in had two bankruptcies for tenants who had 50 and 250 locations respectively and had been around for over 60 years each. It was fortunate enough to be in a good market and we’ve got a lot of leasing momentum, but it caught us off-guard because all the managers, through our due diligence process told us that the locations were performing well, but then they had kind of whole company failures, independent of the locations.

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

Matt Lasky: I am a mentor at my college’s business school, which is [unintelligible [00:23:30].10]. There’s a young professional committee that I’m on, and I have a few student mentees… I’m really trying to help today’s youth, and I end up slanting all conversations back to real estate. I’m trying to recruit some bright young minds and help them as they transition from student to professional.

Joe Fairless: And how can the Best Ever listeners learn more about your company or get in touch with you?

Matt Lasky: My e-mail is mattlasky@equity.net and our website is EVFunds.net. I will disclose that this morning we found out we actually had had our website hacked, so we’ve got some random links on there right now, which is really fortuitous timing for this call.

Joe Fairless: [laughs] Well, this call will air probably after you get those resolved, so I suspect it will be okay to go check out your website. But just in case, you can just e-mail Matt at the e-mail address that he mentioned.

Matt, thank you for being on the show. Thanks for talking about the fund that you all are in the middle of, the acquisition approach — really the asset management approach is what we focused in on, with the strip center and the single-tenant buildings, how you approached identifying the best tenants to fill in the strip center based on what’s worked in the past with others; you brought in the public library, you brought in the karate studio, you do the Amazon test… And then the extension of the lease from one to ten years to add value, how you were able to exit out of it, and man, isn’t that just beautiful when you can exit out of something and still own pieces of the deal with no money into it? That’s a real estate investor’s dream.

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

Matt Lasky: Thanks, Joe, you and the Best Ever listeners as well.

 

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Best Real Estate Investing Advice Ever Show Podcast

JF1045: Know Your Market or Lose Your Money with Pete DiSalvo

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Many investors think that if they have property in a strong housing market, they have a great property.  Pete is here to tell us why this isn’t true.  Listen in to get a better idea of what makes a property valuable.  If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Pete DiSalvo Real Estate Background:
-Founder and President of DiSalvo Development Advisors, a real estate consultancy firm
-Over 20 years experience providing market research and consulting on 1,000+ projects throughout 46 states
-Housing work has been used by bond rating agencies, investment groups, banks, and private developers
-Based in Columbus, Ohio
-Say hi to him at http://ddadvise.com/
-Best Ever Book: Liar’s Poker

Click here for a summary of Peter’s Best Ever advice: How These Two Market Factors Will Make or Break Your Real Estate Business

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advice on real estate market knowledge

 

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, Pete DiSalvo. How are you doing, Pete?

Pete DiSalvo: I’m doing well, Joe. How are you?

Joe Fairless: I am doing well, nice to have you on the show. I’ve known Pete for 4-5 years, and I initially came across Pete through a mutual friend. He helped me (Pete did) on market research on a project that I did not end up purchasing, but I learned a whole lot about business and his insightful mind… Because Pete has over 20 years fo experience doing market research and consulting on 1,000+ projects across all the 46 states. He is the founder of DiSalvo Development Advisors, which is a real estate consulting firm. He is based in Columbus, Ohio.
With that being said, Pete, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Pete DiSalvo: Sure, thank you. I am a former senior market analyst with the [unintelligible [00:03:29].07] which is a national real estate group. I worked there for 14 years and I worked with nearly every tax credit syndicator in the country. In 2010 I left and started my own practice. Among our services, we help clients like yourself and other investors and developers assess the market value of properties, especially acquisitions during an option period.

Most of the work that we do involves mixed-use redevelopment, but it’s typically led by multi-family developments. So multi-family is still a core of the services that we offer. Today I wanted to discuss a little bit about how do you assess if your property that you’re looking to acquire, your value-added property has the marketable characteristics to have long-term viability.

Today in most of the markets across the country that we go to, every apartment market is strong, so how do you know if your particular property is going to be able to do well when the market is not humming on all cylinders? Just because you have a property in a strong housing market doesn’t mean that the property can sustain the high occupancy and rent for a long term.

Strong housing markets can’t mask weaknesses or vulnerabilities in inferior properties, so when a market isn’t at its highest level, those inferior properties are the ones that have the hiccups. You start having occupancy problems, rent problems… To those Best Ever listeners that fell in love with the “value-added property” in a strong local rental housing market – you have to ask yourself some key questions, and more importantly, answer those for your investors.

So you have a marketable property that has long-term viability based on three market-related items: one is location, two is product, and three is market position. I’m gonna go into a little bit about each of those three items and what things to look out for.

When you’re looking at a property, aside from “Financially, does it pencil out today?” what are some of the things you wanna look for as red flags or positives for your property? On the location side, a lot of apartments — ideally, you have an apartment that has visibility to a lot of traffic. There’s a lot of drive-by traffic that sees your apartment. If you’re not one of those that are getting 10,000-15,000 cars a day in front of you, that may mean you’re gonna have to spend more dollars marketing for people to find your property.

Joe Fairless: Where do you get that data?

Pete DiSalvo: Esri – the demographer – has a lot of that traffic count data, and if it’s a state route or a highway, you get that from the Department Of Transportation for each state.

Joe Fairless: Really? I didn’t know that.

Pete DiSalvo: You can also touch base with your city. Often times, municipalities will have traffic counts throughout  their city. My experience – and I’ve heard from other groups… Like, management will say “Yeah, we’re having problems in a market that doesn’t have them, and we have to run out every day and place temporary signs on a major road and then take it down before the end of the day”, but that’s not the ideal situation. So that’s one possibly red flag – am I hidden? Is this the situation I wanna be in?

To the same extent, good ingress, egress, how easy it is to get in and out of your property – that can play into it, too. If it’s a right out only, but you know that all the traffic goes left to go to work in the morning, that may be an issue.
The one that I enjoy seeing examples every day is what is located next to your apartment? Not only is it aesthetically pleasing, is it complementary, but I recently saw an apartment development that was built near a strip club. Now, it was a non-descript strip club, but once the apartment opened and there was entrance road next to the two, the strip club would park their billboard sign next to the entrance. [laughter] It was a family project where you had this enormous billboard of the next ladies that would be dancing there that night.

And not as extreme an example, but in one of the markets I saw a developer build the exact same product – one of them was next to a mini-storage facility, which was in decent shape, but not really contributing to the apartments, and they were getting less rents than another apartment that had better uses.

Those are the kinds of things to keep in mind [unintelligible [00:08:02].26]

Joe Fairless: I missed that point – what was wrong with building next to a mini-storage facility?

Pete DiSalvo: Well, you have to ask yourself when you’re looking at these properties – do you wanna live next to a mini-storage facility? Is it truly a complementary use to an apartment? It’s not entirely adverse, but when you’re stacked up in a competitive environment, less people are gonna wanna choose to live next to a mini-storage than other residential, or retail, or something like that.

It’s just understanding where you fit against your competition – are you next to the most complementary uses, or is it kind of a mismatch of uses?

Joe Fairless: Okay.

Pete DiSalvo: They all know schools are important, but I would say more so (renters are having less kids) but I would say if you’re looking at a property that has a really heavy mix of three bedrooms, that’s when you really need to look into the schools, and if the schools aren’t particularly good, what are the private schools like? Sometimes that’s enough to negate that issue.

And everyone hears the talk of the millennial – “Hey, we need to get the millennial… It is an enormous generation coming through. How do we attract them?” Well, three of the things as they relate to location – are they close to jobs? Millennials don’t commute as much as dummies like me did when I was a kid, and some of that is can you get to a highway quickly? Do you have quick access?

Then the third is how close are retail opportunities? The closer you are to those – as long as it’s not a strip club – the better type of site you have. So those are some of those locational issues.

Joe Fairless: For the schools, what resource do you use to determine if it’s a good school district or not?

Pete DiSalvo: That’s a good question. Every state pretty much has report cards on how their schools are doing. You could look at that, but I’ve found that the best way to find out is simply to go talk to people and say “Hey, I’m relocating in the area, looking for an apartment… Where would you suggest?” and if they suggest another area, you say “What about this area?” and see if schools pop up.

Just asking of somebody coming into the area – you can get a good flavor; if there’s really a problem with the schools, there’s gonna be a knee-jerk reaction. “You probably don’t wanna be there because of the schools…” So just talking as a newcomer to the area, to several people – that often times will be enough to identify if there’s an issue or not.

Joe Fairless: Okay.

Pete DiSalvo: The next item that’s often overlooked is product. When I’m talking about product, there are opportunities with this, but looking out for that functional obsolescence… If it’s something that can be remedied, there’s a big potential for rent increases, and I’ll give you some examples. If not, it’s a big red flag… That if the markets have those hiccups, as I call them, you may be the first to experience problems.

I’ll give you a list of some of those… Galley kitchens, for example. Galley kitchens are tiny kitchens for those – I’ll try to do my best to explain them – that are contained in a very tight, small area and really aren’t open to other rooms. They’re probably what you see a lot in New York City… Joe, would that be fair to say?

Joe Fairless: Yeah… I’m sure my apartment in East Village, when I lived there — it was just like a sync and a stove and that was basically it. I don’t know if that’s a galley kitchen… I wish I had a galley kitchen, I think. [laughs]

Pete DiSalvo: Yeah… It may sound nice, but a galley kitchen is essentially a closet with your appliances in it.

Joe Fairless: Oh, okay.

Pete DiSalvo: It’s the one you see in a lot of the older products. I’ve seen some really good examples where those can be opened up, and everybody wants an open floor plan now, and having a kitchen open [unintelligible [00:11:50].24] open to the kitchen… But I’ve also seen plans where the construction of the unit, especially in high rises, is almost like a bunker, and opening it up isn’t financially feasible… So it’s one of those things you need to keep an eye out for. Galley kitchens aren’t the most marketable kitchen types, so keeping an eye out for that, and if they can be convertible.

On that same theme, that compartmentalized floor plan, the one where there’s a hallway everywhere, and your unit feels like a lot of doors and hallways… Renters don’t lease spaces based on rent/square foot, as much as we talk about rent/square foot. It’s all about perception. A smaller, efficient floor plan in many ways is gonna outdo larger floor plans in a market that has tons of hallways  and doors.

To the extent that your floor plan has the ability to be open or is open, that’s a good thing. If it’s not an efficient floor plan, that’s a red flag.

Joe Fairless: Just for my own clarification – the more open it is, the better it is, and the more compartmentalized (doors, walls), the less desirable? Is that correct?

Pete DiSalvo: That’s correct. And it doesn’t function as well, because if you think about hallways and doors, all of that space has no use, aside from passing through it. So aside from maybe putting a little table for a key stand or something, there’s very little than you could do with that space. If it’s open, not only does it allow you to do more things, the perception is it’s a bigger unit than it actually is… As opposed to an apartment where you come in and it’s tunnel vision. You may leave thinking “This is small”, even though it may be larger.
I’m always a big person on dimensions and bedrooms sizes and closet space; the master bedroom, if you’re getting less than 10 feet, unless it’s very common in your market, that’s something you need to keep an eye out for. If it’s less than 10 feet, it really limits what a renter could put in there in terms of bed size, and a lot of things.

And then lack of closet space… Some of the older, older properties have a place to hang up a little bit of clothes, and those types of things can create some higher turnover once they get and say “Well, I don’t have enough place to put my clothes…” Without the storage stuff, you’re gonna have higher turnover in your property, maybe even difficult to rent.

A couple other ones… The sub-grade units – those apartments that are partially underground, in a basement, those are…

Joe Fairless: Terrible.

Pete DiSalvo: Yeah, those are the ones that you need to keep an eye out for. That’s a big red flag. Those are tough, no matter how you look at it. Even in good times those can be difficult to rent.

Joe Fairless: I know why I said terrible… Why did YOU say terrible?

Pete DiSalvo: [laughs] Well, again, thinking from a renter’s standpoint, if you’re looking for an apartment, do you wanna live in a basement? There’s also a perception of security issue as well, as people walk by and they can look into your unit from that ground level. What is your take on that?

Joe Fairless: Floods, water coming in because it’s below ground…

Pete DiSalvo: Okay. That’s important from a developer’s standpoint as well. In terms of obsolete unit types, three-bedroom one-bath units certainly aren’t the ideal type of unit that you wanna be getting, unless you can possibly add a bath. As long as there aren’t a lot of them, you’re okay.

The two-bedroom townhouse with one bath on the top floor is also a very obsolete design, and I’ve seen that converted an awful lot where you’re putting a half-bath under the stairway. It changes the marketability entirely and increases rent. So that’s a situation of “one that really doesn’t work” to now we’ve got something that’s marketable and we make more rents.

The last item I wanted to discuss was that market position. Understanding where your property is and its potential to increase rents is really a key to that whole value-added property acquisition model. Everybody employs the comps strategy, and I’m not gonna go into that because I know that it’s been talked about on other podcasts and people understand that… Finding a comparable property and saying “Here’s what we can do compared to that.”

Joe Fairless: Yup.

Pete DiSalvo: I like to take it a step further and employ a strategy where I establish a ceiling by looking at properties that are of high quality, that “Hey, I know we can’t attain this rent”, so I have an understanding of “Where can I expand into?” What’s good about that is let’s say you have a class B property and you wanna improve it, whether that’s amenities, improving the exterior… If the rent is already close to class A rents, you may not be able to push the rent that much higher for the improvement that you wanna make.

On the other hand, if your rents were well below that and you get out of those, there’s an opportunity to potentially bump up your rents without encroaching on those class A rental properties. I like that example a lot for value-added, because class A properties – which typically are new properties – don’t have a lot of flexibility in terms of what they can do with their rents; they really need to get those high rates… Compared to your value-added, that has a lot more cushion, where if the market was going south a little bit, you could come down a little bit and it would still pencil out.

The other thing I wanted to mention was regarding markets that don’t have class A apartments, and have a lot of older inventory… Markets like Cleveland, Ohio…

Joe Fairless: They don’t have class A?

Pete DiSalvo: They do now.

Joe Fairless: Okay.

Pete DiSalvo: For a long time, a lot of national/regional developers wouldn’t even think of – even investors wouldn’t touch or think of Cleveland, because they were concerned about the growth really wasn’t there, and the rents weren’t very high… There’s wasn’t this “higher comps”, and then somebody finally realized in that market “We’ve got a lot of high incomes, and there’s tons of [unintelligible [00:17:49].13] for good product.” So as soon as somebody built that, it was like the floodgates were open, and now we’re seeing property after property open… But understanding that in some of those older markets – don’t be too scared to get involved if you’re not seeing rents that aren’t as high as you may want; it may just be a product of what’s out there, and if you give them something good, you can really push the rents in that marketplace.

Joe Fairless: Does that complete number three?

Pete DiSalvo: It sure does.

Joe Fairless: Awesome. Well, location, product and market position… I’ve asked questions along the way, so I’m gonna ask you a high-level question based on your experience… What is your best advice ever for multi-family real estate investors?

Pete DiSalvo: It relates to the whole topic – understanding that just because you have a site in a strong housing market doesn’t mean you have a great site. Making sure you have those fundamental market characteristics is important to having a long-term viable project. Depending on the exit strategy, five years out is a long time in terms of market. A lot of investors wanna hold on to it for much longer than that, and you need to look past today… So making sure you’re not vulnerable to future fluctuations is important.

Joe Fairless: I noticed that you were talking about the particular property and the location next to it, the product, and the market positioning in terms of what is your ceiling… What I didn’t hear you talk about – I know it’s a factor, so that’s why I wanna bring it up, and I know you take this into account… It would be jobs and the diversification of employment. Can you talk a little bit about what you look for?

Pete DiSalvo: Sure. In fact, I’ll say jobs are key for apartment development, and a lot of the clients I’m looking for when we’re looking for sites – that’s one of the key issues, because again, millennials wanna be close to jobs. If you have the jobs, there are opportunities for that housing. If you don’t have jobs nearby your area and you’re asking people to drive a longer way, it’s gonna be a little more vulnerable.

Joe Fairless: What’s longer?

Pete DiSalvo: It depends on the market. Obviously, if you’re in Los Angeles, compared to Columbus, Ohio, it’s a lot different. But if you understand your market area or your trade area and you see that it will take you a lot longer… If everybody else can get to employment quicker than you can, that’s the issue. It’s all relative to each market, so I can’t give you a time. The more accessible and the quicker you can get to it, the better.

Joe Fairless: Okay.

Pete DiSalvo: And if you start to have more unemployment in an area, that’s where you wanna have that flexibility with rents. If you’re starting to lose jobs, it’s going to impact your market. It just depends on how many jobs you’re losing; if it’s a major employer, everybody’s gonna feel it.

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

Pete DiSalvo: Yes.

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

Break: [[00:21:01].10] to [[00:22:04].14]

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

Pete DiSalvo: Well, I don’t have one best. I’m a big fan of Michael Lewis, so I would say that any Best Ever listeners that have not read his books, maybe try Liar’s Poker.

Joe Fairless: Best ever project you’ve worked on?

Pete DiSalvo: I had a chance to work on a lake-front development for the Cleveland Browns, the former ownership. That was fun.

Joe Fairless: What did they hire you for?

Pete DiSalvo: I worked with an international sports group and they were looking at all of the housing and retail opportunities around the stadium.

Joe Fairless: What’s a mistake you’ve made on a transaction or just in business in general that you can think of?

Pete DiSalvo: Probably the mistake that I had the most is letting others talk you out of a position, when you know in your gut it’s one way and you’ve done your homework, whether it’s a former boss or a partner that doesn’t agree with you. You’ve gotta argue enough to get your point across.

Keeping an open mind, but sticking to that opinion lest somebody has a compelling reason for you to move. That’s a mistake, I made those mistakes, and that’s something that I’ve learned – just to keep an open mind.

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

Pete DiSalvo: I like to do some pro bono work with some of the nonprofits, consulting work, and also helping out some startup companies.

Joe Fairless: Pete, who’s your ideal client, and how can the Best Ever listeners get in touch with you?

Pete DiSalvo: Our ideal clients are municipalities, developers, CDCs and investors. You can either get in touch with us through our website, DDAdvise.com. My phone number is there as well. DDAdvise.com is the best way to get a hold of us.

Joe Fairless: Excellent. Best Ever listeners, there’s a link in the show notes page with that URL. Pete, I am clapping silently right now, because I so much enjoyed learning from you during this conversation, and this is one of the reasons why I do the podcast. We were able to get a college class in 28 minutes or however long we’ve been talking, and it’s free for the Best Ever listeners and myself, and I suspect you’re gonna get some business out of it as well, but if not, you’ve given a lot of value to the world, that’s for sure.

The question is how do we know if our multifamily property is positioned well in the long-term, and the answer is we’ve gotta look at location, product and market position. Looking within each of those, you mentioned some surprising things that I hadn’t thought of… One of them is going to and from the apartment – do most of the people turn left, and is that left a tough left turn to make? Because that could have an influence on your turnover being high.

On the product, again, the master bedroom being ten feet or more – that’s something I’m gonna pay particular attention to from here on out, as well as the open floor plan, which I kind of already knew, but it wasn’t a conscious thing for me. And then the marketing position, and lots of other insights in between.

Best Ever listeners, if you need some notes from this, then go to BestEverShow.com and we’ve got a transcription of this episode and the previous episodes, so you can go read this conversation as well, if you weren’t able to take notes like I’m taking notes right now.

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

Pete DiSalvo: Thank you, Joe. I appreciate it.

 

 

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JF947: You’ll Lose MILLIONS If You Don’t Understand These Tax Principals

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The IRS is merciless, and if you don’t understand how real estate investments and the tax laws work together, you could be at a loss. Focus on understanding self-directed IRA’s and the entities you use in the purchase and sale, and don’t just rely on a cheap custodian to help you. This is a great episode!

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John Hyre Real Estate Background:

– Tax attorney, accountant and real estate investor
– 19 years of experience as a tax attorney/accountant and 14 years of experience as a real estate investor
– Investor in low income rentals and small mobile home parks
– 95% of his clients are real estate investors
– Prior to owning his company, he worked for two of the Big Five accounting firms and for several Fortune 500 companies
– Based in Columbus, Ohio
– Say hi to him at http://www.realestatetaxlaw.com
– Best Ever Book: Grit by Angela Duckwork

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tax principals with John Hyre

 

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. We only talk about the best advice ever, we don’t get into any of that fluff.

With us today, a tax attorney, an accountant and a real estate investor, John Hyre. How are you doing, John?

John Hyre: Very good, thank you much!

Joe Fairless: Nice to have you on the show, my friend. John has 19 years of experience as a tax attorney/accountant and 14 years of experience as a real estate investor. He’s an investor in low-income rentals and small mobile home parks, based in Columbus, Ohio. With that being said, John, do you wanna give the best ever listeners a little bit more about your background and your focus?

John Hyre: Sure. My focus is making sure you keep it, because you earned it. Most of my practice is tax-oriented, it’s mostly real estate investors, small businesses and self-directed IRA investors. I do the attorney part now, I refer the CPA work, meaning the tax returns and the bookkeeping out.

I also invest on the side, just sort of building a little bit of wealth on the side, mostly high cash flow, low income, which is a whole separate podcast and story onto itself. Those are the basics.

The client base is nationwide, and I’ve been at it for a little while now.

Joe Fairless: What’s the typical client hire you for?

John Hyre: That’s a hard one to break down…

Joe Fairless: Top three categories for why they hire you.

John Hyre: The top three categories… I’ll tell you, the self-directive IRAs, the self-directed 401k practice is absolutely exploded over the last three years. I won two tax court cases and word kind of got out there on that. So I do a lot of that work, and a lot of people call in and say “Look at my whole structure, top to bottom.” Entities, books, taxes, everything. And usually we figure out a fixed fee and then I save them a ton of money.

Finally, a very specific question – someone might call in with a very specific, very pointed question, which I will of course keep the discussion to the parameters that they define. I would say those top three define it.

Joe Fairless: What do people hire you for with self-directed IRAs and 401k’s? Because I’m under the impression – but obviously, it sounds like I’m wrong – that you can just go to a custodian, like iPlan or Pensco or something, and then they’ll handle everything for you.

John Hyre: They don’t handle everything. They won’t do planning advice or structuring, or at least they’re not supposed to. If you read their paperwork, it says they don’t do it, and if they do it’s not their fault if it’s messed up. A lot of the people you talk to on the phone there, while they mean well, are also salespeople and also just don’t have the expertise.

I get a lot of referrals from those custodians that send me people. For example, people will ask “We wanna setup a checkbook LLC. Can we lend money to our uncle? Can we invest in such and such project? How do we avoid prohibited transactions?” Those are a lot of the questions that I get, and I’d say about 70% of my referrals come straight from straight from the custodians, questions they really don’t wanna answer.

Joe Fairless: You won two tax court cases… What was the case about, if you can talk about it?

John Hyre: I’ve actually won more than one, and by winning, we didn’t go to trial. The IRS decided instead of going to trial, they would just tell my client they no longer owed them any money, and could we just call it even and walk away… Which I consider a bigger victory than going to trial, because you avoid the expense. The two cases are specifically self-directed IRA cases.
The first time we had a guy that was a rehabber mostly, with his IRA, and he had done some things in there that were questionable; they were grey, but we convinced the IRS that “No, that’s okay.”

I’ll give you an example… His IRA ran out of money on a rehab, so he put some of his own personal money in there, which is usually a no-no, but we managed to show the IRS some rulings and some case law that indicated, “You know, we have a fighting chance. Do you really wanna go to court with this?” so they decided to back off.

The second guy had a very large Roth IRA and did a lot of investing. We’re talking rentals, buy and sell, lending, a private equity investment… He did all sorts of things, so there was a lot for them to look at. We spent a lot more time on that one because of the number of transactions. We went through a lot of different things, but ended up in the same position. It was kind of like the Obi Wan Kenobi moment, “These are not the droids you’re looking for.” “These are not the droids we’re looking for” – they agreed with that, and so ultimately we got a very happy ending. There was a half a million in taxes at stake, and we got him out for — I think my fee on that one was in the very low five-figure. He was extremely pleased.

Joe Fairless: Just so I’m clear on that second one… It was the same issue that was being discussed, mixing personal money with IRA money?

John Hyre: That one had a multiplicity of issues. For example, he had a trust that the IRA invested into, that he controlled the trust through a friend who was the trustee, so the IRA was arguing the trust was illegitimate, they argued that you can’t have a friend act as a trustee, which – yes you can, as long as it’s done correctly… They also tried to argue that certain transactions were illegitimate based on the details. Those I won’t go into. Bottom line is we persuaded them that they were wrong.

It took a while. The auditor didn’t wanna listen, the appeals people, who are usually pretty good, didn’t really understand IRAs, which is normal, so we didn’t really get any traction until we talked to the lawyers. I do audit and tax court representation all over the country, but what we do is we bring the cases here to Ohio, we have the trial in Columbus, and the attorneys are actually out of your hometown, Cincinnati. So I know who they are; they come up here, and I’m used to dealing with them. Actually, I have to say, they’re pretty reasonable, the IRS lawyers. They can be aggressive, but they’re pretty reasonable.

The client was in Florida, and ultimately we went through the transactions one at a time until they decided “This really isn’t a good case for us, never mind.”

Joe Fairless: Does that mean that we can mix our own personal money with a self-directed IRA and be okay?

John Hyre: You can, I don’t recommend it. If it’s done, it has to be done in a very specific way. It creates complexity and it creates subtle traps, which is why I recommend people, if they can, just not go there. Keep your IRA and personal investments separate. That’s ideal. With that said, can they be mixed if it’s done in a certain way? Yes. Typically, either an undivided interest, especially if we’re dealing with a note, so maybe the IRA lends 70k, I lend 30k, and it’s 100k total.

I’m oversimplifying… There are some tricks and traps in there that we have to watch for. The biggest one is we have to prove that we did not need the IRA money to enter into a personal deal. You can never use an IRA as assets or income to benefit yourself personally, no matter how small or indirect that benefit. So if you needed the IRA to get into the deal, for example, that would be an example of using the IRA to benefit you, so the first thing we do is try and create a record that “Hey, I could’ve done this deal myself. The reason I brought my IRA in was not because I needed it – I have other sources of money – but because it was a good deal for the IRA.” That’s one example.

Sometimes we’ll do joint investment of personal and IRA money through an LLC. Really, it just depends on the nature of the investment and how much time we’re gonna be in the investment and how much liability there is. For example, I’m more inclined to use an LLC where low-income rentals are concerned, because those are high-liability items. But if there’s a loan, lending money is not really high liability. People don’t tend to trip and fall on notes, so usually just a cheaper joint investment, the same way you might invest in a house as tenants in common is a cheaper, more efficient way to do things. Because we don’t wanna overcomplicate or over-bill the client if it can be avoided.

Joe Fairless: What are some issues that you see your clients or prospective clients have from a tax attorney standpoint that can be avoided?

John Hyre: Tons. That’s two or three podcasts right there.

Joe Fairless: You’re booking me up for the month right now.

John Hyre: Yeah, we’ll fill you up. Let’s see here… In terms of IRAs, it’s not getting help ahead of time, listening to the custodians and being cheap and thinking that you know it. The IRA rules are complicated, and the penalty for the IRA for screwing up is death. The IRA dies if you commit a prohibited transaction; that can be horribly expensive. So usually, even if you do some research, get a little bit of help; get an attorney, talk to them about what you can and cannot do. Put some time in up front.

With general taxes, I would say the biggest issue by far that clients have is horrible record-keeping. They’re entitled to deductions, but they never back it up. They never do what they have to do to make it legit in the eyes of the IRS to be able to prove it. I happen to be married, and I can tell you there’s a big difference between being right and being able to prove to your spouse that you’re right. That second step is where investors mess up. They don’t do what it takes to prove to the IRS that they’re right. Scanning receipts, keeping a good set of books, especially for QuickBooks… And it’s normal; entrepreneurs are normally gunfighter/cowboy/can-smell-a-deal-a-mile-away, and they’ll do the bookkeeping work maniana. And maniana becomes maniana-maniana-maniana, and there’s the issue.

Joe Fairless: I’d love to learn a little bit more about the proving — well, I wrote my notes “Prove to your spouse that you’re right…” [laughs] The intention behind that, which is make sure that we can prove to the IRS that we are right and that we have accurate books… You mentioned scanning receipts and having a good set of books. Let’s say we hire a bookkeeper; he or she is taking a look at our credit card transactions, our bank accounts, and putting them in a spreadsheet. So we have that allocated. What do we need to do with the receipts? And do we need receipts at all if we have them in the credit card statement?

John Hyre: You do need the receipts. In fact, because the IRS has had its budget cut and audit rates are down, they’re getting sneakier and trickier. They’re sending out letters that say “Show me February and May receipts for this business.” And then let’s say you’re missing 60% of them, they just allow 60% of all your expenses on the return. You need to have receipts. The best way to keep them – scan them.

What we do is we pay our children to do it. There’s a tax angle in paying your kids. You get a tax deduction; your kids almost certainly will not pay any tax on the income, because their standard deduction is bigger than what you’re paying them, and if you pay them through not a corporation, so any entity, but something that’s taxed as a corporation… If you pay them through not a corporation and they’re under 18, they also don’t pay social security tax. So you’ve shifted money within the family. You still have indirect control of the money through the kids, you’ve gotten a tax deduction… Once they scan your receipts, save them in three or four different places, and name them by the date. I name my receipts – today would be 030117A, 030117B. I don’t even put what it was for, because I will never look at them again unless I get audited, but I can find them by date. If I get audited, I’m gonna show my QuickBooks to the IRS, and they’re gonna say “Show me February receipts for car expenses”, and I can just pull all the receipts for that month and have a VA or somebody go through the receipts and figure out which ones were for cars, and hand them over to the IRS.

Joe Fairless: Do you use a particular app for that?

John Hyre: I don’t. I probably should, and I suspect that kids are out of the picture… The cheap, easy labor of those kids are my app. I don’t even know what app they use to scan things, frankly. They deal with it. So once I don’t have the kids around, I will probably have to discover one of the better apps. I know there are a ton of them out there. Same thing for tracking mileage. There are a ton of apps that will doing if people would just take the time and implement it.

So once you’ve got the receipts, ideally you keep things in QuickBooks; I’d prefer that to a spreadsheet – it’s a lot better record keeping system. As long as the receipts tie to the QuickBooks that tie to the banks statements – man, that’s gonna be a short audit.

Just last year I had my shortest, cheapest audit ever. I charged a guy $1,300 to do the audit and it made me sick to charge that little. But he had a flipping business — more really an assignment business on the side… So he had a day job, he had a side business on schedule C; he was an engineer, he listened well to directions, he took directions well and he was detail-oriented. That audit lasted about 15 minutes of me showing the IRS agent the receipts, and about an hour and forty-five minutes of me flirting with her and passing the time.

Joe Fairless: [laughs] Let’s say you get the letter that states “We need to see your receipts for February and May” and you don’t have the physical receipts. Have you heard of a case where the IRS is “Well, really? Then how about you show me for the rest of the year, too?”

John Hyre: Absolutely. The whole point of those audits is to see if they’ve got an easy target. The faster and the clearer you respond to that letter, the more likely they are to be done and gone. So first rule with the IRS is “Never lie.” The second rule is “Don’t answer questions that were not asked.” The third rule is “Don’t let the audit metastasize”, and that is precisely what you described, how an IRS will metastasize. They smell blood, they spot weakness, they expand the audit.
Joe Fairless: What was the second rule?

John Hyre: Don’t ever answer a question that wasn’t asked. People do that all the time, that’s why we don’t like clients talk to the IRS. They wanna talk and show the good faith and how innocent and wonderful they are, and the IRS agent shuts his mouth and listens, and gets a lot more information than you want. When they ask a question, no matter how stupid or irrelevant you think the question is, you answer the literal question, with the truth, nothing more, nothing less. You don’t expand.

Joe Fairless: Alright, let’s switch gears to your investing in low-income rentals. What’s the last low-income rental you purchased?

John Hyre: It’s not really a rental… I got one I’m about to flip. The last low-income rental – I bought one if my 401k back in May. I am so busy with the practice I’m not out actively looking, but some of my clients are wholesalers and they bring me things. A wholesaler brought me a low-income rental here in Columbus… It’s not a war zone, but it’s not a beautiful area either… But this was a great deal.

It was 15k. I think he made 5k on it. The lady had been in there for 12 years, the rent is 620/month; it needs about 10k to rehab, but not today. I’ve had this thing now for almost a year, and we’re now getting ready to replace the roof with about how half of my net cash flow.

It’s been a great property. The only real quirk with the property is the tenant has been there so long, she’s hard to train. I have a property manager, because when you have something in an IRA or 401k you don’t wanna run it yourself; there are tax problems with that. You really need to have an outside manager.
For her, the manager needs to show up on the third Thursday of the month, and text her on the third Wednesday of the month. She gets her government check the third Wednesday. You have 24 hours, and she will pay you in cash. If you wait 48 hours, that money will be gone. So you have to show up and pick it up from her. She’s incapable of writing a check. That’s the only real quirk. But if you do the numbers, it’s a sweet deal, and it’s perfect in my 401k. I don’t pay tax on it, I’ll continue to reinvest the money.

Joe Fairless: And you’re using the money from the rental to improve the property? Is your goal to sell it in a certain amount of time, or is this a long time hold?

John Hyre: This is a cash flow property. I could sell it right now in this market for probably 30-35. Maybe if I had a California or a foreign investor maybe 40. It’s funny, I tell my California investors “Be careful, don’t tell people you’re from California, because if they hear that, they charge you more, and you pay.” But no, I’m gonna hold that for the cash flow. I am cash flowing about 5k/year on that property, which if you figure I had 15 in it, that’s great.

For the first four years I’m gonna reinvest about 2,500/year into updating the property. For example, the roof really needs replace. It’s still functional, it’s not leaking, but I can tell it’s gonna go, and I’d rather just deal with it now. Plus, keep her in there. If she’s been in there 12 years, le’s make the place a little nicer. It’s a swell return.

Joe Fairless: Based on your background as a tax attorney, is there a particular reason why you choose to do fix and flips, or low-income rentals versus other opportunities?

John Hyre: You know, some of it is based on the tax law, but some of it — it’s a long story how I got into it. Bottom line is I bought a book called Deals On Wheels by Lonnie Scruggs, almost 20 years ago. And to experiment, I started buying mobile homes really cheap and turning around and selling them on payments, and I got to know the low-income way of doing things. It was a hard lesson… I used to be a really nice person, and dealing with low-income tenants will fix that problem quick.

I learned you have to be really firm, you have to be careful with those guys… But I love the cash flow. I love the cash flow – that’s the real reason I do it. One of these days I may look at other types of rentals, but as long as I can find decent management — because I have learned I don’t wanna manage that. I will probably get arrested if I manage for too long, and they’ll find bodies everywhere. “Who’s the tax attorney that took [unintelligible [00:19:41].13] the water tower in this low income neighborhood?” “Oh, that was Hyre.” So we can’t have that. We make sure that other people manage them for me.

Joe Fairless: [laughs] The number one challenge, at least from what I’ve heard, with low-income rentals is the maintenance and the high tenant turnover. Have you experienced challenged in either of those areas?

John Hyre: Definitely. We’ve gotten better at picking tenants. Now, I’m if Hispanic background. I grew up speaking Spanish, my wife’s from South America, so we do like dealing a lot with immigrant tenants, especially of Latin background. Politically incorrect as it is to say it, the first generation comes here to work, the second generation – not so much. So we really like first-generation… They’re gonna bust their butts, and if you take care of them, by and large they’re gonna take care of you. I do find you get a better result when a woman is present. If it’s all guys, that’s really hard on the property.

You’ve gotta get a feel for their job history and background, are the kids in the local schools…? How itinerant are they? Because they can be very itinerant, but if you take care of them, it’s a good property, they tend to stay, they tend to be very good about referrals… You have to be careful with in particular Latino immigrants. They fix the property up for you — and put that all in quotes, “they fix it up for you”… They think it’s nicer and they think they fixed it up, and you look at it and think, “Oh dear lord, I’m gonna have to tear that down and just start from scratch on whatever it is they did.”

They have a different way of looking at saving money, and they really believe they’re saving you money. And based on my experience overseas, living in Chile, for example, that may work there. That approach just doesn’t work here. You really have to control what they do with the property, drive by it periodically, make sure that half their extended family isn’t living there.

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

John Hyre: Tax-free investing. Don’t pay taxes. Do it through an IRA, an HSA, a [unintelligible [00:21:35].09]  savings account, a 401k… There are not deductions that are bigger, and we’ve gotten a reprieve. There was a bill in Congress – in the Senate, specifically – that showed the Democrats game plan for taking apart IRAs. They don’t like Roth’s in particular. And seeing those, how they figured they’re gonna win and they laid out their game plan – everybody was of course surprised by the result – we’ve gotten a reprieve, and we have some time to use this technique and this device before Congress decides it’s losing too much money. It would be lunacy to pass it up.
And I walk the walk. I invest in my properties whenever I can through one of those devices. I don’t wanna pay the tax.

Joe Fairless: With the 1031 exchange you can continue to defer the gains until you die. Help me clarify something… Whoever picks up your property after you die – it can continue to be up until what… Is it 13 million dollars in there…?

John Hyre: We’re mixing taxes, and it’s easy to do. On the income tax side, if you 1031 till you die, which I think is a great strategy, your kids inherit property – or whoever it is that you have inheriting – and you get what’s called “the basis step up”. So let’s say you bought it for 100k, depreciated it like crazy for 28 years or more down to zero. They inherit it, and let’s say when they inherit it it’s work 300. The day they inherit, they have a basis of 300. They can sell it that day and not pay income tax. So that’s the income tax side.

Then what you’re talking about is the estate tax. You can have up to 11 million in your estate with no planning. This is assuming you’re married – otherwise it’s about five and a half million. You can have 11 million with a little bit of planning in your marital estate and not pay estate tax – which is very high. Estate tax is up there around 50%, so you don’t wanna pay any.
Once you get past that 11 million, you need to do some planning in order to not pay estate tax on the remainder.

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

John Hyre: Hit me!

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

Break: [[00:23:44].12] to [[00:24:26].07]

Joe Fairless: Best ever book you’ve read?

John Hyre: Let me think a minute. Best ever book I’ve read? I read so much that I’m starting to smoke through the ears. The best most recent book I’ve read, the one that comes to mind – there’s a book called Grit, and it is about persistence and toughness and just pushing through. That was a brilliant book.

Joe Fairless: Best ever deal you’ve done?

John Hyre: Probably that little rental I’ve just described. I really like that deal. I’ve done stuff that’s close to that, but not quite that cheap.

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

John Hyre: Two things: volunteering as a debate coach. I coach kids debate; I teach verbal violence, and it’s just fun to see the light come on and the confidence in their eyes. Second, there’s a school here in Columbus, St. Charles School For Boys that we like to give to. I plan ultimately on funding a scholarship; they’re a wonderful school, they change lives.

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

John Hyre: Partners. I’ve almost never bought a bad deal, but I’ve gotten involved with bad partners, I didn’t do my due diligence. In one case I didn’t do the due diligence on the spouse, and it turns out that she was two scoop-fulls of crazy, and it caused a lot of problems, big time. It cost me way more money than they property ever could have.

Joe Fairless: I enjoyed the two scoop-fulls of crazy. I haven’t heard of that, I have a good visualization, so thank you for the metaphor. How do you qualify partners and partner’s spouses now for future stuff?

John Hyre: I don’t partner anymore. I don’t have the need to do so, and for now I don’t. If I were to qualify them, I suppose I would do more due diligence, asking around, looking at history, ask for credit record… This one would have been pretty hard to spot. In hindsight, the only way I could have spotted her condition was talk to enough people who dealt with her, because what’s funny is after the feces hit the rotating blade device, a number of people came up and said, “Oh yeah, she’s nuts!” I just wish I would have talked to those people, but it’s the only way I think I could have discovered it, because she was kind of like high-functional crazy. It’s not like I came home and there’s a rabbit’s head boiling on a pot of water on the stove… You really had to dig to figure her out.

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

John Hyre: Two places that go to the same website: iralawyer.com or realestatetaxlaw.com. It’s a primitive little website – I’m so busy I haven’t had time to make it nice. One of these days I will.

Joe Fairless: Well, we will have that link in the show notes page. John, thank you for being on this show, thanks for talking through the tax issues and challenges that investors will come across… Keep our receipts, and also the three rules for dealing with an IRS audit – number one, “Don’t lie”, number two, “Don’t ever answer a question that wasn’t asked” and number three, “Don’t let the audit metastasize”, so don’t let it snowball into something; immediately address it.

And the 15k flip, flip/hold that you’re doing, where you’re getting $620/month in rent; it’s worth about 30k, so it’s really not about the money you’re making on the sale, it’s more about the cash flow, and why you invest in low-income producing properties. Thanks so much for being on the show, I hope you have a best ever day, and we’ll talk to you soon.

John Hyre: Take care!

 

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JF762: How to Assess, Address, and Fix While Keeping Your Tenants

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Never had a big issue that needs to be fixed while keeping a multiunit building? This episode will show you how, or at least what our guest did. It all worked out well, here’s his solution to a very common problem in buying homes.

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Roan Yarn Real Estate Background:

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– Over 15 years experience in real estate, which began as project manager of 46-unit building in Miami
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– Best Ever Book: The Art of the Deal by Donald Trump

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