JF2151: Construction Owner and Investor Point Of View With Jorge Abreu

Jorge Abreu decided to leave real estate because he was not passionate about working in the corp world. He ended up developing a construction company called JNT Construction and now is the CEO of Elevate, a commercial investment group. He is now a full time active and passive real estate investor with 14 years of experience. 

 

Jorge Abreu Real Estate Background:

  • CEO of Elevate Commercial Investment Group and owner of JNT Construction
  • Is a full-time active and passive real estate investor with 14 years of real estate experience
  • He has wholesaled 200+ properties, flipped 100+ and developed several construction projects from the ground up
  • Current portfolio consists of 1,720 doors as a GP and 1,400+ as a LP
  • Based in Dallas, TX
  • Say hi to him at: www.ElevateCIG.com 

 

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Best Ever Tweet:

“If a contractor doesn’t have a presence online, it is a huge red flag.” – Jorge Abreu

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JF2043: The Benefits of Tertiary Markets During The Coronavirus With Solomon Floyd

Solomon is the CEO and founder of Reunion Investments. His business focuses on tertiary real estate markets and they currently are working with the department of defense to provide military housing, which basically guarantees rent for his investors. He explains how he is able to help his passive investors get high returns in uncommon markets.

Solomon Floyd Real Estate Background:

  • CEO & Founder of Reunion Investments
  • Managing Director of the CTX Global Real Estate Fund
  • Served in the US AirForce as an Airman
  • Located in Dallas, Texas
  • Say hi to him at : https://www.reunioninvestmentsllc.com/ 

 

Best Ever Tweet:

“Look at these markets and how they operate now in this crisis, and how they handle these issues to be prepared for the future.”  – Solomon Floyd


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I’m your host today, Theo Hicks, and today we are speaking with Solomon Floyd. Solomon, how are you doing today?

Solomon Floyd: I’m doing great, man. It’s been a beautiful day here in Dallas, Texas, and to be honest, working from home has become a lot more manageable.

Theo Hicks: That’s good to hear. Today we’re talking about the Coronavirus and how it’s impacting Solomon’s business. Before we get started, a little bit about his background. Solomon is the CEO and founder of Reunion Investments. He is the managing director of the CTX Global Real Estate Fund. He has served in the U.S. Air Force as an airman. He’s located in Dallas, Texas, and you can say hi to him at Reunion Investments LLC.

Solomon, before we start talking about the Coronavirus, do you mind telling us a little bit more about your background and what you’re focused on today?

Solomon Floyd: Yeah, absolutely. My background is, as you said – I’m an airman and entrepreneur from Dallas, Texas, who’s focusing primarily in tertiary markets, and utilizing military and municipal housing contracts to essentially get a form of guaranteed rent to my investors.

Theo Hicks: Alright, so tertiary markets… What types of programs are those, that guarantee rent to your investors?

Solomon Floyd: At the moment Reunion’s biggest focus has been our military rental program, where we use our DOD Housing Contract to house military members in exchange for what would be guaranteed rents. So in times like these, where a lot of landlords are scared, and like “Oh my god, what’s gonna happen to my rent?”, my investors aren’t really feeling that, because from the history of time, they’ve never not paid rent for military housing, and they’ve never not paid military members.

So now, my investments have the ability to wait this out and take their money out of the stock market, put it into more real estate that’s gonna house military members, and get them that guaranteed rental income every single month.

Theo Hicks: So the houses that these military members are investing in – people will come to you and say “Hey, I wanna buy a house that’s essentially guaranteed to collect rent”, and then do you help them through the entire process of buying the house, putting in a resident, managing it, and it’s just a complete passive investment for them?

Solomon Floyd: Exactly. We make it as easy as possible. Reunion understands that no one’s going to be able to make it out to these markets as easily as we are. We already have infrastructure there, our boots on the ground are there, our construction company is there, and our property management facilities are also there. So we make it as easy and as passive for most investors to say “Hey, I wanna help the community grow, and I wanna help these people who service every single day, but I also wanna make money.” That’s a very easy thing to do when you just factor in all the amazing possibilities that we can do.

Theo Hicks: So right now there’s been no issues with rent collection from any of these during the Coronavirus, correct?

Solomon Floyd: Exactly. It’s been a matter of we may have a  little issue on how many people are getting stationed and where now, just because some troop movements have halted… But the people who currently have rentals with us, their rental amounts aren’t being affected.

Theo Hicks: Perfect. I guess it’s really not much to talking about the Coronavirus, unless you think that might change in the future… But you expect it to not really have an impact at all, even in the future?

Solomon Floyd: [unintelligible [00:04:03].18] We’ve gone from doing originally maybe 35 deals a month, to now, we’re coming into April, and I’ve got 62 deals on my table. People have panicked, and Reunion offers them the ability to put their money someplace else. So as the Coronavirus goes – it’s not necessarily about Reunion, but when you really think about it, it’s a place about tertiary markets. Tertiary market investing is something that a lot of people overlook, because the distance is scary. There are so few distance investors out there, at least in these markets that are so small. And these tertiary markets provide you a great ability, especially from any investor’s standpoint; they don’t have Uber Eats, they don’t have Favor, like we have in Dallas. They don’t have a form of technology aspirations toward them… Which means now, they’re relying on the system that we are. Who’s gonna go deliver their food?

You see these people wait in line, and this offers people the amazing ability, especially now that we’re mimicking things similar to 2018, to innovate in these tertiary  markets. There’s still innovation that can be done, whether it’s the rentals technology, self-driving cars, whatever it is. That’s the best part about tertiary markets.

Theo Hicks: What types of returns do your investors make on these types of investments?

Solomon Floyd: For us right now, we are showing anywhere from 35% to 60%. That depends wholly on the investment, but we don’t do anything below 35% ROI when it comes to doing any of our real estate that we’re pursuing.

Theo Hicks: And this is for your company or for the investors who are investing?

Solomon Floyd: For the investors who are investing with us.

Theo Hicks: And that’s 35% cash-on-cash every year, or is that including profits from the sale?

Solomon Floyd: Profits from the sale go up a little bit more. Primarily, a lot of people use our housing for rentals. Sales are a little bit different; they’re a little bit higher, depending on who you’re selling to.

Theo Hicks: So you’re saying that if I invested 100k, I’d be making 35k to 60k every year, in cashflow?

Solomon Floyd: Absolutely.

Theo Hicks: So why isn’t everyone doing this?

Solomon Floyd: I think a lot of people, again, have that fear about these tertiary markets. I can take 100 people up to Wichita Falls, and maybe 25 of them are gonna be like “Oh, man. This is it for me.” I think it’s fear-based primarily, and the thing is, they don’t know much about that market. A lot of people are comfortable investing at home, especially in the economy that we had a couple of weeks ago… But not anymore. [laughs] Ideally, people are comfortable investing at home now.

A lot of people are part of Reunion, so I can’t say that no one’s not doing it, but I can say that more people are getting into it now more than ever.

Theo Hicks: And you said you do about 35 deals per month, and now it’s just exploded more? How are you supporting that deal flow? Have you had to change your marketing strategies, or have you always had more deals than you could buy?

Solomon Floyd: I think right now we’ve definitely had to change the marketing strategy. We were able to go to networking events, go to conferences, speak to people, and now we’re having to pivot to doing a lot more online digital marketing, which is odd for real estate companies, in my opinion… Because you can do most of that in-person. That’s where the connection is made. But getting people to do that next step over the internet I think will be kind of challenging. We’ll see what happens… But that’s just how it is.

Theo Hicks: So what types of online marketing are you doing now?

Solomon Floyd: We’re about to start hitting up YouTube and seeing if we can connect with our investor base ther. That’s where a lot of people are looking at  more real estate things as it grows. YouTube’s becoming a pretty popular channel for real estate investors to see what could happen, I suppose… So that’s what we’re gonna start marketing, as well.

We’re also about to do our first LinkedIn advertising, which apparently is very challenging… So we’ll see how my team does, but I’ve got complete confidence that they can make it happen, if they’ve got me this far.

Theo Hicks: And then what about finding investors? Do you have enough investors at the moment to support those number of deals that you’re needing to do, or are you also needing to pivot your investor lead strategies as well to online?

Solomon Floyd: I think we’re gonna have to definitely pivot the investor strategies online, as well. We are always looking for people to come in. Our newest product that we’ve created was in short-term JV deals that anybody could do in these tertiary markets… Because for us, there’s always gonna be a company that wants to buy these back here in the next couple of months, once everything flattens out, and convert them into a REIT. We’ve already had several companies approach us saying “Hey, if you can get us 100 cash-flowing properties, we’ll come by and buy them in July.” And they’ll put them under contract before everything else is really set in stone.

So it’s basically a guaranteed buyer, where all you have to do is go out and build homes, buy homes. Let’s say I need 100 – I’ll just contact a group of investors and say “Hey, I need help getting these 100 homes built/rehabbed/whatever”, knowing that there’s a buyer on the other end, as soon as they’re done. It’s kind of the perfect strategy for most people.

Theo Hicks: Do you focus on a specific market, or is this national?

Solomon Floyd: My DOD contract extends all over the United States, to every single military base, and tertiary markets exist throughout everywhere in the world, so yeah. Right now we’re targeting 18 markets. We’ve done about 12 overall.

Theo Hicks: If someone wants to do what you do, would they need to have previous military experience, or is this something that your average person could do?

Solomon Floyd: It’s something that your average person could do. For example, a buddy of mine – we were seeing what was happening in Flint, and we kind of thought to ourselves “The root problem would primarily be water filtration. How can you filter that water enough to put it in everybody’s home?” And the conclusion we came to was why don’t we just put three serious water filters in everybody’s front year, and run the water through there, so that way it’s clean on the other side?

We got about ten investors together, and we all put our money together, and I think we bought in total 30 homes. We replaced the plumbing all the way to the street, put in a three-series water filtration system, so that way the homes in Flint, Michigan had clean water. And we just rented it back out to the owners, or if the owners wanted the homes back, they’d buy them back from us. So anybody can do it. Tertiary markets exist for everybody.

Theo Hicks: And what about the DOD contract?

Solomon Floyd: The DOD contract – that’s a little bit harder to secure, but that’s a matter of just doing your own research to figure out what each base is in need of. In fact, if you go through the process of becoming a government contractor, it’s really not that difficult. I wish I knew all the logistics behind that, because I didn’t actually do my process. Somebody else did it for me, and that’s what made my life a little bit easier. But definitely research more into that, because the government is looking for housing, whether it’s military, veteran housing, or any sort of housing.

In fact, the best one to do, that doesn’t require you to be a military housing contractor, or any DOD contractor, is VASH. The VASH is essentially Section 8 for veterans, except with way better perks. It’s only a year that the veteran gets the voucher. The rents are substantially higher, and if any damage is caused by the veteran, the VASH program covers that. So that’s a great one for people to get involved in and help out as well.

Theo Hicks: Okay, Solomon, is there anything else we haven’t talked about that you wanna mention as it relates to your business and the Coronavirus?

Solomon Floyd: No, man. I think ideally most people just need to start looking out for these markets, as that’s where the opportunity is gonna be. When this is all over, I don’t imagine that the real estate markets – they’re gonna pick up again. They’re gonna be exactly where they left off, and that’s exactly the case that we felt every single recession. So explore outwards and help these other communities, and  you’ll be able to see now they will become the benchmarks for investing in the future.

Look at them how they operate now, in this crisis, as a tertiary market, and how they handle these issues, and see where the benefit and the value is, for yourselves and for the people that live there.

Theo Hicks: Alright, perfect. Thanks for sharing that, and thanks for sharing all of your advice today. Solomon does DOD housing contracts that houses military members, and he said that military members have never not been paid, and their housing contracts have never not been paid… So his business is going to be — not necessarily unaffected by the Coronavirus, but it’s gonna be affected in a positive way, because it sounds like he’s getting more deals this month than he had in previous months, due to the fact that there has been an explosion of demand for real estate in his tertiary markets due to Coronavirus.

He mentioned that you can get a 35% to 60%  return on your investment. So people who are interested in passive investing should definitely check out his website and the deals he has to offer. Again, that’s ReunionInvestmensLLC.

We talked about how he has to change up his marketing strategies, which most likely we are gonna have to do as well,  due to the Coronavirus… Because you can’t go to meetup groups or in-person events anymore. So he mentioned he’s gonna use YouTube to connect with the investor base, he’s gonna use LinkedIn advertising as well.

Then he also mentioned an interesting investment strategy, which is to pursue VASH, which is essentially Section 8 for housing.

Solomon, thanks for joining us today. Best Ever listeners, as always, thanks for listening. Stay safe, have a best ever day, and we will talk to you tomorrow.

Solomon Floyd: Thank you so much, Theo. I appreciate it.

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JF1963: Everything You Need To Know About Short Sales with Nicole Espinosa

Nicole and her company process over 150 short sales per month. They have taken the short sale process and streamlined it, closing short sales in 2-3 months vs 12+ months. Hear how she’s able to close them faster than most other sources. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Scaling is not necessarily a good thing if you’re not doing it the right way” – Nicole Espinosa

 

Nicole Espinosa Real Estate Background:

  • Author of “Short Sales Uncensored” and owner of The Short Sale Queen
  • Her company processes over 150 short sales per month
  • They are able to process short sales in any market
  • Based in Dallas, TX
  • Say hi to her at www.thessqueen.com
  • Best Ever Book: Scaling Up

 


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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. 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, Nicole Espinosa.  How are you doing, Nicole?

Nicole Espinosa:  I’m good. Thanks for having me. How are you?

Joe Fairless:  Oh, I am glad to hear that.  It’s my pleasure and I’m doing well.  And a little bit about Nicole – she is the author of Short Sales Uncensored and the owner of the Short Sale Queen. Her website is thessqueen.com. Her company processes short sales in any market, and in fact, her company processes over 150 short sales per month. She is headquartered in Dallas, Texas.  With that being said, Nicole, you want to give the Best Ever listeners a little bit more about your background and your current focus?

Nicole Espinosa:  Yeah, absolutely.  I started in the real estate industry with foreclosures with REOs (real estate owned transactions) and I really learned about how the banks worked and operated.  I hated working for the bank directly as my client, but learned so much about really how to get around things, how they worked, and had relationships. This is back in 2008-2009 when the market was heavily saturated with foreclosures.

At the time we were evicting people… I was in charge of pretty much all of the worst things we had at the time.  It was definitely a learning curve, but after a couple of years I got licensed, and the first deal that I did as an agent was a  short sale. And there was so many misconceptions of what to do, and those agents – and even my broker at that time – was telling me “Don’t waste your time.”

When it comes to short sale specifically, because it is such a different world than normal transactions, most people don’t understand how to facilitate the transaction or really understand how it works.  So I spent pretty much my entire career just educating so that people would feel equipped to at least know how to guide their client or guide a potential seller in that transaction. So I did my first listing, that was a short sale, and I’ve been doing it ever since. Just a lot better now that I spent some time.

Joe Fairless:  Well yeah, you do a lot of them so that would make sense – 150 per month. And in your bio you mentioned that your company processes over 150 short sales per month. What does that mean, you process 150 short sales a month?

Nicole Espinosa: It means we have a constant flow of properties closing and properties coming in, but in our inventory we are working actively with the bank on these listings to get approval.  So right now for example, we have 151 listings. And when we launched nationwide – we are in about nine to ten different markets right now, it will be ten this month…  So even though we have the ability to process in every market, and obviously we are not in every single market, definitely when we went nationwide, I don’t think we expected to grow this quickly. Just a year and a half ago, we were doing 30 to 40 a month. So to go from that many sellers, to scale that much has just been definitely an adventure.

Joe Fairless:  Oh, I bet.

Nicole Espinosa:  Because every state is different, and every bank has different requirements.  For me it’s just been on how to navigate the different states and different markets that we are in.  But that’s essentially what that means, that we are processing over 150 – it’s that we have that many listings in our pipeline, that we are working with investors and other realtors.

Joe Fairless:  How much do you make on average per deal?

Nicole Espinosa:  Our minimum is $5,000 on each deal. And I think when I was doing the numbers for 2019 in the  last couple of weeks, the average commission with fees and everything is about $7,500.

Joe Fairless:  Wow, okay.  So, $5,000 times 150, that’s $750,000 a month. And at $7,500, that’s $13,500,000 in a year. How much of that is profit?

Nicole Espinosa:  We don’t close 150 a month. We are processing that many [unintelligible [00:05:21].03] how we have in inventory, but we are two to three months out on the short sales.  The average short sale closes in about a year, for most agents.  For us, our time frame is two to three months, because we are highly focused on this.  We are not like traditional agents, where we are working with the buyer, and working with the seller – no, this is all we are doing. I have a staff of eight people. I have negotiators, I have an office manager, I have VAs who are calling the banks just to say “Hey, did you get our email?”

Joe Fairless:  [Laughs]

Nicole Espinosa: Seriously, that’s our operation. We try to do as much as we can to be proactive instead of reactive, so that way we can stay ahead of it, and we try to anticipate what the bank is gonna  need before they ask.  So that’s why our process is so much faster.  Average closings, we have about 30 a month.

Joe Fairless:  Wow.

Nicole Espinosa:  So that’s the average closing that we are doing. Last month was our biggest month, we had 32. And now that we are consistently getting more inventory, now our new goal is 45 a month.  So as much inventory as we have, we are trying to increase our closings.

Now, unlike other contracts – like if you are wholesaling or just in a traditional contract with a seller, you usually can anticipate the closing date, because you put a closing date of 30 days, or 45 days. With short sales, there is no way of knowing.

One short sale we could start at the same with another, and then one could close in two months, the other could closing is four… Because there are so many variables, and every lender is different, and every lender has a different process. So that’s why we do such huge volume at a time, because like I said, it could be one month we close 50, because we have more at the same time… So that’s what how we have to do with such a high volume, because we don’t know when they are going to close.

Joe Fairless:  It’s going to be really interesting talking to you about the different states, and the banks, and then how you scale… We are going to get into that. With the closings now – you said you do about 30, and that’s $7,500 per closing on average; 225k times 12, that’s a 2.7 million dollar business. How long have you been doing this, remind me?

Nicole Espinosa:  I’ve been doing this for nine years. It’s going to be ten next month.

Joe Fairless: At what point was it a million dollar business? How many years into it?

Nicole Espinosa:  I’m going to be very honest, because I am very straightforward – last year.

Joe Fairless:  Last year? Wow… What was the tipping point?

Nicole Espinosa:  Here’s the deal, I’ve learned so much these last couple of years of how to really focus on becoming profitable… Because I think everybody’s vision — as an entrepreneur, I think people are so focused on growing. We do really well and we are “Let’s scale”, but scaling is not necessarily a good thing. Sometimes growing just means that you are spending more money if you are not doing it the right way. So for me, I am a visionary. I see the bigger picture.  I want to take over the world. I’m like, “Let’s do this in every market” or whatever, because I know our value and I know that we are good at it. But I have failed so much when it comes to spending too much money, investing everything back in the business, spending money on the wrong hires…  So we are having rehire, and all that.

The tipping point was I started my business all over in October of 2018, and basically fired everyone and took everything back, because I realized that I had this cap to my business because of the employees that I had. They could only grow to a certain level, and they were great at the time, and I had a great culture, but they just didn’t have the capability to grow with me. So I had to take a step back.

Joe Fairless:  What made you realize that?

Nicole Espinosa:  I wanted to quit, and I was so frustrated because I was in every part of my business, and I couldn’t understand why I couldn’t grow. I couldn’t understand why I was so stressed out, working 80 hours a week, when I had so many employees.

Joe Fairless:  How many did you have?

Nicole Espinosa:  At that time I had four.

Joe Fairless:  Okay.

Nicole Espinosa:  And I was like, okay if we are doing 30 to 40 a month that we are processing – and processing, not closing; we are closing only like ten or eleven a month…  And I was like, why am I so stressed out if I have people? And know it because I wasn’t hiring intentionally and I was promoting people based off of loyalty and based off of just the culture that we had.  And I read Scaling Up, and I started really investing in personal growth. I am like okay, “What are my weaknesses, what are my strengths?” and started reading books that were totally opposite of my personality. And when I read Scaling Up, it said something like “One thing. It only takes that one thing.”

Joe Fairless:  Yeah, it does.

Nicole Espinosa:  It’s like this light bulb of like, “Okay, wow. That totally resonated with me.” And maybe people have told me this before, but it was just in a different way that it didn’t connect with me. So I read Scaling Up and it said this powerful statement, “If you look at your organization and you look at your employees, would you rehire them?” And I started picking apart and I was like “Oh my God, I wouldn’t.” I love these people, but oh my gosh, I am having to micromanage, and I am not even empowering them because I am so worried that they are going to screw up, or whatever… I had these bodies in these roles, but they weren’t taking ownership of them, and it was basically me doing everything.

Joe Fairless:  What a powerful question.

Nicole Espinosa:  Yeah. I tell people all the time, “Look it is so hard because we as individuals, we tend to gravitate towards people that are like us.”  And if we hire that way, we will never grow, because we need people that are the opposite of us. We need people that are going to be better in certain areas where our weaknesses are. And the only time we can do that is to very self-aware of what we are good at and what we suck at. And most people just focus on what they are really good at.  It was very, very humbling.  Being in the business for a while and…

Joe Fairless:  You fired all four?

Nicole Espinosa:  Oh I fired everyone, including my VAs, too.

Joe Fairless:  What was that like?

Nicole Espinosa:  Oh man, high blood pressure… I was so stressed out. [laughs]

Joe Fairless:  What’s a suggestion you’d give to someone who needs to go through similar process?

Nicole Espinosa:  To just do it, because it will be more painful to continue to go the path that you are going if you have the wrong people.  And you know what – what I noticed, when you say you fire someone, you assume that’s ugly, right?

Joe Fairless:  It’s always a good thing, because they are not maximizing their potential as a human being or as a professional, because they are not in the role that’s best suited for them. So it’s a good thing.

Nicole Espinosa:  Exactly.  And they were so relieved and happy too, because they were only staying because they felt loyal to me. So they were miserable too, they just didn’t want to admit it, and they weren’t going to quit. So when I did let them go, it was just like this relief of like, “Oh my gosh, okay… I can do what makes me happy”, and had I identified the right role for them, maybe they would have stayed in the organization and thrived based on their skillset, not based on what I needed at the time.

So my advice would be just to do it. To take an inventory of the people in your organization and figure out are they truly in the right role? They may have the desire to do it, but do they have the capacity? And I don’t think enough people talk about that. It is not until you are in it that you fully understand how important it is that someone is capable of being able to grow with you.

And I do believe that there are certain people that will just be with you for a season, but I also believe that there are people that can stay with your organization and buy into your vision as long as you continue to provide opportunities and growth. There is no reason why they can’t grow with you.

Joe Fairless:  So that’s half the battle, identifying that and then firing them, but the other thing you nailed, clearly, by taking that from 1 million to 2.7, is finding those right people, and making sure you qualify them properly… So how did you do that?

Nicole Espinosa:  Well, I started with the foundation.  Okay, I know my skill set, I know that I can build relationships… I think the important thing was that I knew every aspect of the job. In any given moment, if every single person in my organization quit, I could dive right in and do any part of the job.  And I was like, “Okay, if I am gonna be able to go out there and build relationships and grow the business and bring in the business, then I need someone that’s gonna to hold down the fort.” I needed somebody that was going to be like me, but  better, and be able to manage, because that was the other thing that I was terrible at, was managing. I am a great leader, but I am a horrible manager, because I have no patience. That’s why I can’t do it. Like, I don’t care just do it; just get it done.  I am a great boss and I am very flexible in things like that, but the job has to get done. It’s very black and white for me. We can have the best relationship if you do your job. Besides that, if you don’t, none of us eat. For the bigger purpose, it doesn’t work for anyone. So I realized I need somebody that is a good manager.

So it was actually Facebook – on your Facebook Page you can create a job. So I put it out there as far as like an Office Manager, and I knew that I was looking for a unicorn, because not many people understand short sales, have never done them… So, anyways, fast forward, Stephanie who’s my office manager now, she was doing them for an investment company. And she applied.

It was one of those things where I kind of didn’t believe her… I was asking her certain questions, because I am like “Okay, if you’re BS-ing me, I am going to know.” And she was just amazing. What got me was that in my book — she was like “Yeah, I read your book.” She’s like, “I probably would have added this, this and this”.

1: [laughs] That’s good!

2: I feel in love with her. I was like, “Oh, my God.” So that to me — I mean, it was just such a great fit, because where she was at she wasn’t happy, and there was no room for growth… They kind of just took advantage of her. So we had the same vision as far as where we wanted to grow, same work ethic… And she has helped me so much streamline, where again, I don’t think systems — I do now, because I have thrown myself into it… But I was the type of person that — I am a very visual person, so I had my notebook, I would get leads, and I would write everything down to retain information. And then it got to the point where I was like, “Okay, I can’t do this anymore. I am getting a [unintelligible [00:15:20].00].” Facebook, and Instagram, and this and that… We needed one central place to be able to do it so there’s no balls that are being dropped.  So we basically created the system that we have now. We use Infusionsoft, which is an awesome CRM database or whatever… But the biggest thing with that is that we were able to create a website.

If you go to helpmewithmyshortsale.com, you can literally enter all the lead details and then it goes right into Infusionsoft. So it creates a profile and it tags you as the ambassador [unintelligible [00:15:50] and it triggers a text to the seller saying, “Hey, Joe referred you over to us. When is the best time to connect?” And that way there’s instant contact, and we are not having to enter into it. It takes a lot of the steps out and streamlines it.

So that’s how we are able to scale – I basically looked at my organization as we started growing, and saying “Okay, what are the things that we are doing two to three times a day that we can put a system in place so that way it can go a lot smoother and we are able to scale it?”  We spent almost an entire year just working out the kinks, because working with 30 homeowners a month compared to 150 is a completely different ball game. They’re so many humans…

Joe Fairless: Yeah, it forces you to scale, and you have to.

Nicole Espinosa: Absolutely.

Joe Fairless: Or it forces you to develop a system in place, in order to scale.

Nicole Espinosa: Yeah, and I would rather take less business than not do what but we say we are going to do. So it was very important to me that because my business is 100% referral, we are not marketing for these sellers, we are not cold-calling, we are not doing any of that. So if we are doing such a high volume, my reputation needs to stay intact, and saying “Hey look, if you refer this over to us, you’re trusting that we are going to take care of it.” And we are going to take care of this person and that most importantly will give you an opportunity to be able to buy these properties and have this whole other pipeline, so your marketing dollars aren’t going to waste.

Joe Fairless:  Closing on around 30 a month now; your goal is in the short-term to be up to about 40 to 45, I believe you told me… The perception that I have – which is clearly not correct, so please educate me and perhaps other who are listening – is that short sales are not nearly as prevalent as they were when you started; that has to be a fact. But there’s still clearly a lot of them out there.  So what it’s like being in the business now, and how are you getting this type of volume?

Nicole Espinosa: So I do believe that I have a lot of the market share because I specialize in this and because we are consistent. We’ve been doing this for so long, and most people they just do one day, and they do another…  And they know – when they hear Nicole, they think either “The Short Sale Queen” or “The Short Sale Expert” or whatever.  And that’s why when we went national, that’s why the company name is The Short Sale Queen, because that was my nickname in Dallas-Fort Worth for a really long time.

So as far as the difference, at the time when I was doing short sales and I was teaching classes and things like that before I wrote my book, everybody wanted to do short sales. Because once the REO market kind of dried up, short sales becoming more known and more prevalent. And then of course as the market starts stabilizing and getting better, everybody that was trying to dabble into it and realized how much work it was, kind of fell off.

But here’s the deal – there’s always going to be short sales in any type of market, because even in 2014-2015 when we started seeing the prices going up again and we started seeing all that, we were still busy, because people are always going to have a financial hardship. People are always going to put themselves in situations that they can’t get out of. So it was just different, because short sales were so big before because prices dropped drastically, because the market crashed.  Now, as you shift to 2019-2020, it’s not so much about the prices going down, even locally, it’s turning into a buyer’s market which means sellers lose leverage – it’s not about that, it’s about clients who lost their jobs and get into a bad financial spot and then stop paying, because they are trying to do something with their  bank. So if they are doing loan modifications, they are losing all of their equity. So at any point, if they have to sell, they are forced to do a short sale because they lost all their equity to the bank, because they haven’t been paying. Or they did do a loan mod, and it was a band-aid fix, and now they agreed — because when the banks do loan modifications, they add all of those fees to the back of the loan, and a lot of times they are extending the life of the loan. So they are paying into something where they are not ever going to get out of. So that’s why people don’t understand – if you don’t understand that piece of it, you won’t understand why they’ll always be here.

Now, I believe in the next year that we are going to see so many more short sales coming back, because we are seeing a lot of these loans that were done the last couple of years because people were desperate to become homeowners, get into 100% loans again. We are seeing a lot of like new builds that people were just getting into and not really thinking about it, and they were at their max of the monthly payment, and now it’s been a couple of years and something happened to where they can’t afford it anymore. We are starting to see a lot of those come up now, and I think in the next years, we are going to see a lot more.

Joe Fairless:  When you take a look at the short sale process, what is the most challenging part of the process for you and your team?

Nicole Espinosa:  The price.  And that will always be across the board, not just with our company but just in general.  Number one reason why most short sales fail is because of price… Because the banks, even more now that it’s been years and years where they have been doing short sales and they have short sale departments, they try to pretend like they are in real estate. They try to act like they know based off third-party valuation, like “Okay, this is the price.” Well, we know that price is relative, or it’s an opinion, because it really depends on what someone is willing to pay.  So that’s why it is so difficult, because if the bank is trying to take as less of a loss that they can – they want to get as much as they can for the property.  That’s probably the number one thing – how do we consistently adjust the process so we can stay ahead of being proactive. For example with us – if an investor refers something  over to us, we let them know, “Do you have any repair bids, do you have anything that we can help us justify your offer?” Because if the property is in need of repairs and it’s something to where it won’t finance, it’s going to go to investor, because a traditional buyer cannot purchase it… So why not go to the investor that has relationship with the seller?

So we ask them, “Hey look, what do you have so that we can use as much as leverage as possible to negotiate with the banks?” and then get it to the appraiser so that we can show all that information and try to stay ahead of it. And then a lot of times that works, and then sometimes we get like the older appraisers that are stubborn and think they know everything, and don’t care, and we still have to dispute it with the bank… But we try to be as proactive as possible and get as much information upfront so that we can show that to the lender to have that as much leverage as possible.

Joe Fairless:  Taking a giant step back, what is your best real estate investing advice ever as it relates to your area of expertise?

Nicole Espinosa:  The best advice I can give is to capitalize on every single lead that you come across. I’ve been working with investors obviously for a very long time now, because 75% of my business is from real estate investors; the other 25% are from real estate agents who don’t know how to do short sales. So in working with a lot of the bigger companies and the bigger franchises or even smaller companies, a lot of times in training their acquisition teams and talking to them, they don’t understand that they need to be able to capitalize on everything. And I’m not saying to do everything, right? We can’t spread ourselves thin, we have to be able to be good at something, and highly focus on it… But if you don’t have a solution for everything that you come across, you are wasting money; you are leaving money on the table.

For example, a lot of times investors are just highly focused on properties with high equity. And they spend the money, they get a lead, they build rapport and then the deal doesn’t work, and then they walk away… Instead of trying to find a solution. Because at the end of the day, the sellers still has to sell.  It may not work for your numbers, but how can you provide a solution to where you can still monetize it?  And that’s the way you need to be; if I can’t do it myself, who can I outsource this to, to either still get paid, partner up with someone, but be able to recoup that? Because direct marketing is expensive.

You need to be able to provide solutions — and it’s not just about money, it’s about helping that person, because clearly, if they are coming to you, there’s a need to be able to sell. Something happened to them, they have to move on, especially if they are in foreclosure and they have some type of hardship. So how can you be that resource for them to be able to help them move on to the next phase of their life?

Joe Fairless:  We are going to do a lightning round. Are you ready for the Best Ever Lightning Round?

Nicole Espinosa:  Let’s do it.

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

Break: [00:24:39].00] to [00:25:18].28]

Joe Fairless:  Alright, Best Ever book you’ve recently read?

Nicole Espinosa:  Rocket Fuel.

Joe Fairless:  Rocket Fuel?

Nicole Espinosa:  That’s right. I just got finished reading that one.

Joe Fairless:  Okay. And I wrote down one that you’ve mentioned earlier, Scaling Up – would you recommend that one?

Nicole Espinosa:  Oh, a hundred percent. I didn’t just read it, but I’ve read that at least twice.  And if anybody is building a business, an actual business – you need to read that book.

Joe Fairless:  Hey, that’s me. I am going to read that one, too. I will be buying that. And I think 99.9% of Best Ever listeners are building a business too, so there’s gonna be a lot of purchases with that one. What is the deal you’ve lost the most amount of money on?

Nicole Espinosa:  I spent a year and a half helping an ex-husband – it was such a long story, but I lost 15k on it because we spent so much time and money working it and we never ended up closing.

Joe Fairless:  It wasn’t a short sale?

Nicole Espinosa:  It was a short sale, yeah. And we don’t get paid until it closes.  And that was one of those situations where we did everything that we could, and I have such a big heart, I was like, “Okay, we can try this way…” And this is one of the situations where three people had passed away, so the heirs ended up being kids, which — you learn something every transaction. So you need [unintelligible [00:26:23].06] for those heirs, and there just wasn’t any more money to be able to pay for an attorney to do it, and all that.  But we got this short sale approved three times.  So we did what we were supposed to do, we just couldn’t sell because of the title, because everybody kept passing away.

Joe Fairless:  What’s the deal you’ve made the most amount of money on?

Nicole Espinosa:   The most money I made on one transaction was $55,000, and we ended up buying it. I found the deal – this was early on, and I ended up purchasing it ourselves and then flipping it… But there wasn’t much work that need to be done, and the loan was in default for so long that the bank literally told us, “If you just gave us this, you can have it.” And it was just a slam dunk.  It was awesome.  It was a reverse mortgage, and we need more of those.

Joe Fairless:  Since you made a disproportionate amount of money on the reverse mortgage, and you said you need more of those, why not put 100% of your focus on getting of those deals, versus doing the short sales?

Nicole Espinosa:  Well, in that case – it was a very rare case.  Yes, absolutely we could hyper-focus on marketing to reverse mortgages, but… In this situation it was a bad note, and the bank could not foreclose on the homeowner. So the reason why we are able to get them so low – and it wasn’t even us fighting with them, it was us saying, “You’ve gotta do something” because the attorney could not foreclose it — I think it was almost ten years of being in default, where the homeowner had passed away and it was just sitting there.

So it was very rare, but we are focused on maximizing on every deal that we can.  And I told you, my minimum is 5k, but we do make a lot more on a lot of the deals. We just have a minimum that we have to still be able to be profitable and work hard on these deals for the client.

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

Nicole Espinosa: Honestly, educating. Being a resource for investors and agents.  I’ve said this my entire career, I will have people that will call me just to pick my brain, and to help them even if I am not involved. So I do the best that I can to make myself available to professionals, because the way I look at it, I feel like money will always come. And if I can help you to help someone else, then that’s the most important thing, if you want to take it on yourself.  If you don’t, then you are always going to have me to help you with it. So the best way I can give back is with my knowledge and to be able to help you, even if I am not directly getting paid from it, or whatever.

Joe Fairless:  How can the Best Even listeners learn about what you are doing?

Nicole Espinosa:  They can go on my website, thessqueen.com, and we are also on YouTube, The Short Sale Queen. We do videos every week.

Joe Fairless:  Nicole, thank you for being on the show talking about how you scaled tremendously over the last 24 months… And the key is just fire everyone. [Laughter] The key is to…

Nicole Espinosa: That’s gonna be the title, right? Or the caption… [laughs]

Joe Fairless: Yeah, just “Struggling in your business? Fire everyone and start from scratch.” But it’s assessing what your strengths are, it’s assessing “Would you rehire the people you currently have in place?” What a powerful, powerful question that is; that really can get an entrepreneur thinking… And then building the right team members to go along the journey with them.  And it’s knowing your business. If you didn’t know your business, then you wouldn’t know who to hire, how to hire them and what you need. It’s knowing yourself and your business.

Nicole Espinosa:  I think self-awareness as an entrepreneur, as the business owner is probably the most important thing if you want to be successful… Because if you can’t get out of your own way, you can’t grow. Because we always have these blind spots, and I feel like that is then the key for me to keep growing, is understanding “I really suck at this, so I am going to continue to outsource, I am going to continue to try to develop and grow, and put people in place that are better than me, so that instead of being prideful or instead of saying “Okay, I got this..” And I did, for a long time. I was like, “Oh, I got this. No worries.” And it was more of just trying to get it done, instead of taking a step back and saying “I don’t need to reinvent the wheel, I also don’t have to be great at everything.” I can focus on my strength and then outsource the rest.

Joe Fairless:  Thanks for being on the show. I hope you have a best every day, and we’ll talk to you soon.

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JF1944: 5 Step Clarity Strategy For Identifying Your Passion #SkillSetSunday with Tracy Timm

Tracy was dealing with the “Sunday Scaries” in her first Wall Street job. Knowing that she was going to have a difficult time being happy in that position, she started looking for another way to earn money and be happy at the same time. She was surprised to learn that there was not process to help people find something they are passionate about. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“I took all the best teachings from all the best mentors I’ve ever had and put it all together” – Tracy Timm

 

Tracy Timm Real Estate Background:

  • Tracy is the founder of The Nth DegreeTM Career Academy, a proven system that helps high-potential professionals define and discover work they love
  • believes that our unique purpose in life can be realized through our careers, and wants to help people come alive at work once again.
  • Based in Dallas, Texas
  • Say hi to her at www.tracytimm.com/bestever

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

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

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


TRANSCRIPTION

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

First off, Best Ever listeners, I hope you’re having a wonderful weekend. Because today is Sunday, we’ve got a special segment for you called Skillset Sunday. On this episode we’re gonna be talking about a five-step career clarity strategy, so that as you’re looking at what you’re going to do in real estate, or perhaps you’re in real estate – which most of you are – and you want to identify something that’s a bit more fulfilling, and you can have more purpose in what you’re doing, this process will help you get clarity on that.

With us to talk us through that is Tracy Timm. Tracy, how are you doing?

Tracy Timm: Doing great, Joe. Thank you so much for having me.

Joe Fairless: My pleasure, and looking forward to our conversation. A little bit about Tracy – she is the founder of The Nth Degree Career Academy, which is a proven system that helps high-potential professionals to find and discover work they love. She believes that our unique purpose in life can be realized through our careers, and wants to help people come alive at work once again. Based in Dallas, Texas. With that being said, first, Tracy, do you wanna just give a bit more background on yourself? And then I would love to dive right into your five-step career clarity strategy.

Tracy Timm: Yeah, Joe. That sounds  like a great plan. I think it’s truly kismet, or irony, or whatever you wanna call it, that this is going live on a Sunday… Because Sundays used to be my least favorite day of the week, and that’s actually why I do what I do now. I don’t know if you’re familiar with the term Sunday scares, but…

Joe Fairless: No, but I know the concept. I hadn’t heard it called that though. I like that.

Tracy Timm: Yeah, it’s a total millennial thing, but I love it. The reality was every Sunday you got this sort of deep pit of anxiety in your stomach knowing that the weekend was almost over and you had to go back to your job, done-done-done. And that was the reality for me right after college. My very first job out of college was working on Wall-Street, and I had a psychology background, and I loved people, and I had zero finance experience… But put all of that aside, I had really put myself in an environment where it was gonna be very difficult for me to be happy. It didn’t take advantage of any of my natural gifts, it didn’t allow me to go deeper into anything I was innately curious about or wanted to learn more about, and it put me in an environment with a lot of negativity and toxicity, and I happen to be a fairly positive person.

So the reason that I started my business is because I actually reached out to my university two years after graduating and said “Hey, I would run out the door  right now if I knew what I wanted to do. My only hurdle is that I don’t have clarity into what I would do instead of this job. Do you have any resources that would help me with the clarity process?” So not resume, not cover letters, not introductions, networking, not interview strategy, but actually just the deep confidence of knowing what I was made for and what I wanted to do.

There’s so many of us who don’t have that, and I was shocked to find that they really didn’t have anything that was strategic, any sort of framework that was proven, and that was really when the seed got planted to build one myself… And I figured “If I could figure it out for myself, then I could reverse-engineer a process that I could teach other people”, and that’s exactly what we have today. It’s a very logical, straightforward, five-step process that you can start on with knowing zero about what you really wanna do, and at the  end of the process you’ll know exactly what you want, why it’s perfect for you, and how to go find those opportunities.

Joe Fairless: I’d love to learn it.

Tracy Timm: Well, we’re gonna teach it. I try to tell people, too – nothing that I do is rocket science, and the fact that I didn’t make anything up from scratch, I didn’t invest something that’s never been done before… I took all the best teaching, from all the best mentors that I ever had, and then all of the self-discovery that I had done, and I just put it into a step-by-step framework that seemed to make logical sense.

So the goal was to take all of the — what I call puzzle pieces that are floating around in your head, and give them a literal frame for each piece to go into, such that it would reveal a masterpiece right at the end of the day.

So The Nth Degree is five major steps – we call those the steps that take you from stuck to unstoppable, and they’re called Now, Nature, Nurture, Network and Navigate. So you can probably see where I’m going with the Nth Degree. Because not only is it a fun play on words and it’s also your limitless potential, but it’s the degree that we’re all really lacking, the degree in ourselves. The degree in knowing what we really value and what moves the needle for us, and how we define success, as opposed to everybody else in the world.

And for your listeners too, especially when it comes to markets like real estate, things that are getting more and more saturated… How many TV shows are there about real estate advice, how many people say they have the proven methodology to flip a house, and so on. And then as you said, there’s so many ways to get involved in the industry as well, that it can be very easy to get in at some point, because it’s the only part you know, it’s what your mentor does, it’s what you read about in a book, it’s what Rich Dad, Poor Dad said to do… And without a really deep and solid understanding of yourself, it can be very easy to get lost, and very easy to lose your own sense of self and sense of direction, because you’re constantly comparing yourself to other people.

Joe Fairless: Right. So the first step is Now…

Tracy Timm: The first step is Now. I’m a huge fan in beginning with Now, because now is really all we have.

Joe Fairless: Yup.

Tracy Timm: It’s the reality of your current situation in life; so what are your life circumstances – we usually do that through a really extensive life audit. We look at the eight major components of somebody’s life and help them figure out what’s going well in each area, what could be even better… And actually, what that creates is a nice foundation from which to move forward. Because most people who come to wanna work with me are at a point where they’re pretty miserable doing what they’re doing. Or they’ve been working at something for so long and they’re just not seeing the success they hope for, and now they feel like they’re not reaching their fullest potential.

So we start with Now to set a foundation of “This is what you really do have going for you right now, that you can lean on.” But then we also use that as a springboard to talk about how what you’re doing now really differs from the values that you hold true right now.

Joe Fairless: Okay.

Tracy Timm: Because you and I know, anything that we physically do in a day – where we spend our money, or our time, or the people that we surround ourselves with, those are a manifestation of our values. But how many of us actually took the time to set those values in “stone” if you will, ahead of making all those choices?

Joe Fairless: Right.

Tracy Timm: Very few. And that’s what I realized I was doing  – my move to Wall Street spoke to some very specific values that I had at the time: security, fear, living up to other people’s expectations, being able to take care of myself thinking that I had a certain set of standards I had to live up to, being an only child… There were all these things that I identified with and values that I realized looking back were the value set that I was making my choices using, but they weren’t the value set that was ultimately gonna serve me in the long-term.

One of the very first things we do in the Now phase is once we’ve done your life audit we go back to the basics and figure out what your core values are at this stage in your life. Not five years from now, not what you wish they could be, and not what they used to be, but in a perfect world, if you were living completely true to who you are, what would those values be? And as any person knows and any company knows, you can set up a set of values, put them on the wall, and never talk about them again.

Joe Fairless: Right, yup.

Tracy Timm: So what we do is we crank those up a notch to Core Values 2.0, which I call commitments. And if you take each of your values and you ask yourself “How can I make a yes or no decision using this value?”, then it becomes a commitment. That value should speak to what you are willing to do and not willing to do in order to live up to the standard of that value.

Joe Fairless: Oh, wow. You really put your money where your mouth is.2

Tracy Timm: Absolutely, yeah. Because think about it – if you’re not willing to say yes or no to an opportunity, a person, a job, an investment because of a value that you have, then it’s not really a value.

Joe Fairless: True. That’s one example where someone might be — after they do those actions, they’re like “These are my values”, and they’re like “Okay, yes or no to this?”, and like “Um, no.” What’s an example of that?

Tracy Timm: I will give you a great example. For instance, when I first started my business — there are a lot things inherent to starting a business that are scary, like “How am I gonna make money? How am I gonna take care of myself? Who is gonna buy this?” or what have you… But I started to realize that once I set those values, it held me accountable to the commitments that I had already made. So a really good example of that would be one of my core values that year was freedom. I just had this big desire for a locational, situational, financial — just freedom in and of itself. I actually called that core value Braveheart… [laughs]

Joe Fairless: Okay.

Tracy Timm: [unintelligible [00:10:37].16]

Joe Fairless: Yeah, yeah.

Tracy Timm: The fun thing about core values too is you have to make them make sense to you, and that one made sense to me. Anyway, I tell this story all the time – let’s say Google, which I love and worship at the altar of, called me and said “Hey, we would love to buy your business, to have you do exactly what you’re doing for people, but for people who work at Google. You get to live in California (which I would love to do), we will take care of a ton of these expenses for you (which sounds really sexy), and you get to work with the smartest and brightest people…” and Google has an incredible people department. They are pushing the needle in people analytics, they’re doing some really cool stuff with culture… It’d be a cool place to work, right?

If my core value of freedom was really true, and they go through all that really shiny stuff in trying to get me to work there, and then the last thing they said was “Oh, by the way, we do require that you work at our office, five days a week, from 9 AM to 5 PM. And if you want to not be there, you have to request time off and you have to go through all these hoops, and what have you. There is no remote working option for this job.” Then literally because I had taken the time ahead of time to set out my values and to know what I really care about – and not only that, but to know what moved the needle for me and brought me joy, I could easily, without losing a wink of sleep and without questioning it, say no to that opportunity… Because I would know that that environment would not give me enough freedom to feel happy working there, despite all the other things.

Imagine the business that you’re running right now in real estate, whatever that looks like. If you were being really true to your values, there are probably some clients you would have said no to, there are probably some investments that you would have said no to, there’s probably some times where you’ve stretched and gone after that extra penny because of whatever shiny reason – maybe it was expanding into a new market, or you got to make extra money that month, or you got to take on a new kind of client that you’d never worked with before, and all of that seemed really sexy and awesome, but at the end of the day that client ended up being a pain in the butt, or that investment territory ended up not aligning with the whole rest of your portfolio, and now you have this thing that you can’t get off your books…

There’s all these things that in the moment we’ll justify to ourselves, but if we had set our values ahead of time, it’s a very easy decision-making process in the moment. And I don’t know about you, but I really like making things easier on myself. [laughs]

Joe Fairless: It makes sense. Being very intentional about how you set things up.

Tracy Timm: Yeah, yeah.

Joe Fairless: Okay, so that’s Now. What’s the second one?

Tracy Timm: So now, once you have your commitments and you know where you are in your life, and you have this vision for what you want it to look like, that really creates the outline of the vision, if you will. You know, painters — most people don’t know this; I didn’t even realize this… When somebody’s gonna make a painting, they actually draw on the canvas first an outline of what they’re eventually gonna fill in with paint. So your core values and commitments kind of create that outline or that template, if you will.

Joe Fairless: Got it.

Tracy Timm: That nature and nurture is what gives that image color and texture. And nature and nurture are just opposite sides of the same coin. It’s all the attributes that make you the unique individual that you are, except half of them come naturally to you, and those things are your gifts, your talents, your behavior and your personality, and then the other half are things that you’ve learned. I like to say that those are the things that you put in, that God left out.

So that’s your knowledge, your skills, your expertise, experiences that you’ve had over time, education that you’ve had over time… Anything that you’ve added to your toolkit since you were born. And if you can get really honest and appreciative of your natural gifts and talents, and then you can mine your history – whether it’s work or education or things that you did outside of those formal learning environments for skills and knowledge and expertise that you can leverage going forward, and if you put those two items together, your nature and your nurture, that is all of the amazing juiciness that makes you a unique value-added individual. Because nobody in the world is gonna have your same set of learned skills and abilities, and things that come naturally to you.

And the best part is that where those two things overlap with your values is not only something that you’re naturally good at, but you’ve also learned how to do, and likely love doing… Because it’s value-based, right?

Joe Fairless: Yup.

Tracy Timm: I like to say that where your nature overlaps with your now is kind of like what you were born for. “I love doing it, and oh, by the way, it comes naturally to me.” And then where your nurture and your now overlap – that’s what your were bred for, or built for… See where I’m going with this?

Joe Fairless: Yup.

Tracy Timm: Those are the things that “Wow, I really love them, and I’ve invested the time, the energy etc. in getting better at them.” And marrying those two ideas creates what we call in the N-the Nth Degree your niche. It’s your sweet spot in the career marketplace. So if you do this for yourself in real estate, you can immediately identify where not only you naturally add value, but where all of your learned abilities overlap and align with that marketplace, and because you’re personally invested in it from a values perspective, you’re gonna give more and get more by working within that sweet spot.

Joe Fairless: So is your niche, where you naturally add value and what you have nurtured – is that the fourth step? Because I’ve got Now, Nature, Nurture… Is Niche the fourth?

Tracy Timm: Niche is not the fourth step. It’s kind of this little bonus–

Joe Fairless: Okay, it just happens to start with an N. Got it.

Tracy Timm: Yeah, I had to keep the magic going with the Ns.

Joe Fairless: Right, of course.

Tracy Timm: That’s really the result of the first three steps. If I get my now, my nature and my nurture, if I put them together in a triple Venn diagram, which is how we do this in our program, then what pops out of the middle is your niche.

Joe Fairless: Okay.

Tracy Timm: What happens next is how you put your niche into action. And this is why we actually have two programs… Because there are a lot of people that come to me and say “I really wanna do what I love, and I’m so done with this” etc. What they really want is to just know what they wanna do, and then they wanna decide if they wanna do the hard work of actually getting it by making it a reality. So we have that niche program for the people who are testing the waters and trying to figure out what they wanna do.

The second half of our foundational program is Network and Navigate. That’s really putting that niche into action by sharing it with the right people, and by testing-driving all of the assumptions surrounding your niche.

Joe Fairless: Okay.

Tracy Timm: Those are the last two steps.

Joe Fairless: So Network – what are some tactical things that take place in that stage?

Tracy Timm: That’s a really good question. Networking is a four-letter word for a lot of people, right? It’s cheesy, it’s like handing over business cards, it’s that awkward community business group that meets at a happy hour and everybody is there for themselves. That is not how a good network functions. A good network functions by you telling the people who care about you exactly what you’re looking for and asking them for help, which means you have to leverage your current network, and then you have to try to grow a network that includes what I call career advocates – people that are going to go to [unintelligible [00:18:08].10] for you when you’re not around. And it’s really that simple. Actually, Business Insider says that 75%-80% of jobs are secured through networking… And I guarantee you that’s probably a low-ball number.

Think about any of the previous jobs you had if you’ve ever had a corporate job, or if you had a full-time gig, or maybe even the last deal you did in real estate, or the last piece of business that you closed – relationships are really what move the needle, even in today’s insanely digital environment. So you have to be out there, talking to the right people, saying the right things, at the right time, so that you become top of mind when that person is off having conversations that may have something to do with you. Does that make sense?

Joe Fairless: It does.

Tracy Timm: For some reason, the networking thing came really naturally to me. I even had — maybe not even a half-baked;  like a quarter-baked idea of what I wanted to do for a business… So I just started telling people, “Here’s what I think it is. Does that sound like something you’ve heard of before? Do you know somebody in that industry? Do you think you could help me get a little closer to a full-time gig, or should I be starting my own business?” And I would just ask questions… And people LOVE talking about themselves, and they love – this is the best part – being helpful. I don’t think we realize how much other people want to help us; they just don’t know how.

Joe Fairless: Right.

Tracy Timm: We’re just not giving them enough information to help us in a really positive way. So the scariest thing for the people that I work with has thus far been the transition from knowing your niche, to telling it to another human being.

Joe Fairless: And then what’s the Navigate part?

Tracy Timm: Yeah, so then as you’re working through your network and you’re building your network strategically, and you’re creating career advocates, you’re gonna start revealing some opportunities. And as soon as opportunities come onto your plate, that’s your opportunity to test-drive those opportunities, to see if they’re actually gonna be the fit that you were hoping for. A lot of the world operates in black and white, and this step is very grey. This is instead of taking a full-time job only to find out on day three that you have it… It’s actually going and shadowing at that office, or informational-interviewing somebody who already works there. Or saying that you’ll volunteer some of your time working nights or weekends to see if you even like the work environment, or the people who are there.

They’re so easy, and there’s so many opportunities to test-drive your assumptions about what you wanna do full-time that I still, to this day, am just — arrghh! I don’t even know how to voice the frustration that I feel when people tell me “But I’m just so afraid that I’m gonna get a new job and I’m gonna hate it.”

Joe Fairless: Right. It’s not all or nothing.

Tracy Timm: I’m like “You can avoid that!” [laughs] And it is not difficult. So we always say that the Navigate part of the strategy of the Nth Degree is taking action to get yourself to a place of leadership. It’s all about action. There’s a really great influencer online that I follow – her name is Marie Forleo…

Joe Fairless: Oh, I love her. Out of Jersey.

Tracy Timm: Yeah, I love it. She actually has a book to her going on here soon, because–

Joe Fairless: Oh, really? I modeled my JoeFairless.com website, my first version of it, after her website.

Tracy Timm: Yes, same. I know, I bought her B School program… I mean, this is gonna become a total commercial for her, but one of my favorite phrases that she says is “Insight comes from action, not thought.” And there’s so many who think that they can just sit and think through something like their career, and the answer is just gonna drop into their head or pop out of the computer screen, or what have you… And the reality is it’s through really targeted conversations, and then being willing to test-drive (which means fail) quickly, in order to get there faster.

You’re a business owner, you get it, right? How many times have you had to put something out there before you thought it was ready? How ready did you feel for your very first podcast? How much better is this podcast than the very first podcast, because you were willing to go back and try again, and again, and again, and get better, because you were taking consistent action?

Joe Fairless: Yeah, one thing that — I was also working on Wall Street, but I was working at an advertising agency…

Tracy Timm: No way!

Joe Fairless: …and I was doing what I call sampling life experiences – other areas of life where I was teaching classes and I was doing all sorts of things… Interviewing people for a book, and a bunch of other things. Just sampling different experiences that I was interested in. That way, whenever I left the advertising agency world I knew based on that sample size what I was most interested in doing, and then I doubled down on that.

Tracy Timm: That’s so great, Joe. It’s those little, easy things that people think “Oh, I have this full-time job. I can’t do anything else.” Or if I’m gonna do anything else, it has to be a full-blown starting a business.” Well, no. You can learn so much just from your extra-curricular activities. I call these your ninja skills; it’s like, all the things you learned from extra-curriculars, hobbies and travel.

I’ve had one client go through our foundational program. We did his Now, he was not super-impressed. We did his Nature – not super-impressed. We got all the way through his Nurture – his work experience, his education… Still, he was like “I just don’t see it.” And it wasn’t until we got to his ninja skills that he realized the only reason he couldn’t put any of the pieces together prior to that is he had never had a job he liked, and he didn’t really align with his education very much. I was really lucky that I love what I studied. I love psychology. Finding a job in it was challenging… [laughs]

Joe Fairless: Right. Well, you’ve found it.

Tracy Timm: Yeah, exactly. So I get to do that now, which I love…

Joe Fairless: You created it, I guess I should say…

Tracy Timm: Exactly. So the poor kid — I say kid; he was 25… He literally just had never had any job he liked, and he’d never studied anything that he found really interesting… But everything he did outside of work – his travel history, all of his hobbies, all of this extra-curriculars from high school and college, he loved. He had just never opened his concept of “work” to include those types of activities.

It’s the same thing — we all get indoctrinated into these ways of thinking, like “This is what work is, this is not what work is. This is what life should look like, this is not what life should look like.” And he had just never thought work could be fun, or “Work could be something I’m naturally good at. Work doesn’t have to be a slog all day, every day.”

For me, unlearning from my time on Wall-Street was just as challenging as starting a business, because there were days and weeks where I would beat myself up that I didn’t start work at 6 AM, or that I took a lunch with a potential client, and because that client didn’t close, I didn’t consider it work… You know what I mean? I thought I had been wasting time, and we all beat ourselves up doing stuff like that constantly, and I think the Nth Degree has been a really great way, even for me to go back — I do it once a year, the entire process, on myself and on my business, to make sure that I’m living on purpose, that I’m feeling my way through my business, and that I’m choosing my business model and strategy constantly, to make sure that I don’t build a cage of my own making and a monster that I can’t control, but my business serves me, and that I love working in it and on it.

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

Tracy Timm: Absolutely. TracyTimm.com is where we live online. We actually out together a great little landing page for your Best Ever listeners, so it’ll just be TracyTimm.com/bestever. We have a bunch of goodies there. You can download our five-step guide on how to feel less stuck immediately, you can sign up  for one of our coming webinars that are all about the five steps to take your career from stuck to unstoppable. We actually go even deeper in that webinar than we could today… And then if this is really resonating with you and you know you wanna build your life around it, your business around it, you like me, you like Joe, and you wanna have a conversation, then you’ll actually be able to book a slot on my calendar for a free clarity call, and we can figure out if we’d be a good fit to work together. But other than that, there’s gonna be all kinds of other fun goodies there for people to download and go deeper with if they wanna explore the Nth Degree and if they wanna talk with me.

Joe Fairless: Tracy, thank you so much for being on the show, walking us through your five-step process for getting career clarity and just having a conversation about it. It’s something that is necessary for all of us to focus on, but it’s something that the majority of us (I imagine) do not intentionally put focus on… And it can have a ripple effect of positive or negative consequences as a result of focusing or not focusing on it.

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

Tracy Timm: Awesome. Thank you so much, Joe. I appreciate you having me, and I wish you and your listeners all the best.

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JF1942: Building & Operating Mobile Home Parks with Skyler Liechty

Skyler is a third generation Mobile Home Park investor, we’ll hear about his story and what he has learned as he’s built and operated an investing business. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Listen to everything that people say” – Skyler Liechty

 

Skyler Liechty Real Estate Background:

  • Founding member of American Dream Communities, MH Park Advisors, and MHC Leads
  • Has been investing in and operating mobile home parks and manufactured housing communities for 20 years and is a 3rd generation MHC owner and operator
  • Based in Dallas, TX
  • Say hi to him at http://www.americandreamcommunities.com/
  • Best Ever Book: Extreme Ownership

 


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

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


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, Skyler Liechty. How are you doing, Skyler?

Skyler Liechty: Hey, I’m doing great, Joe. Thanks for having me on the show.

Joe Fairless: My pleasure, and I’m glad you’re doing great. A little bit about Skyler – he is a founding member of American Dream Communities, MH Park Advisors, and MHC Leads. He has been investing in and operating mobile home parks and manufactured housing communities for 20 years, and is a third-generation MHC owner and operator. Based in Dallas, Texas. With that being said, Skyler, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Skyler Liechty: Absolutely. That’s a great introduction for me. Remind me to pay you after the show for that… So like you said, I’m a third-generation mobile home park owner and operator. It’s interesting, we get to talk to a lot of new people coming into this space, and when I tell them I’m third generation, they’re like “Oh man, you’ve seen it all, haven’t you?” And what always surprises me is every day we find that we’re learning something new in this space.

Currently, we’re focused on properties in Texas, in Oklahoma, Missouri and Kansas. That’s our sweet spot right now.

A little bit about my background… When I got into this industry, I focused on the operations side of things, so that’s really what’s near and dear to my heart – how these communities operate, the best practices, how we take them from where they are to where we think they should be.

Currently, we launched a couple of new business segments, so to speak. One of them, which I’m really excited about, is called MHC Leads. The focus there really is — it came out of a need that we found for our own business, which was “Hey, we’re getting a  lot of people to the site to look at new homes, or pre-owned homes… How do we separate the guys and the gals that are wasting our on-site manager’s time?” And that’s really what we built that platform to do. It’s been a real big benefit for us and it’s helped us tremendously.

But yeah, it continuously amazes me to see that we’re constantly learning new things, challenges at you. You don’t think about it until  you get in the thick of it.

Joe Fairless: Well, let’s talk about the operations side of the business, since that’s what you gravitate towards… Let’s talk specifics about a recent transaction.

Skyler Liechty: Sure.

Joe Fairless: Tell us about the transaction and what operational enhancements did you do in that transaction.

Skyler Liechty: Sure. Earlier this year we bought a couple of communities up in the Tulsa, Oklahoma market… And most of the deals that we’re buying are off market, so it’s working with owners. What we’ve found with those deals was when we got into it, a lot of our best practices such as extensive background checks on residents, knowing the people who are there, putting in those policies to do things like if there’s a problem with the streets, maybe you need to go in and fix the streets, or… Some of those general things that for us in the industry – we just take as “Well, of course everyone’s gonna do that, because that’s what you do.” And a lot of times what we find is people who are in this asset class come from different real estate investments. Maybe it’s single-family homes… A lot of guys come out of the apartment industry, and operationally they just run differently.

On those two communities – we’ve purchased them; one of them was a pretty heavy lift, a big value-add component… So we went in, we did about $400,000 of street work, repaved the streets, repaved the [unintelligible [00:05:04].12] So we got the bones back to where they should look. Simple things like now the residents don’t have to go get their alignment checked on their car everytime they drive down the streets. Those things we take for granted, right?

Joe Fairless: Mm-hm.

Skyler Liechty: So we did that piece of it. One of the things we learned early on in doing this is it’s really good to rebrand a community when you buy it. So you go in, and maybe it’s called Tulsa Mobile Home Park. Right away we’re gonna go in and we’re gonna rebrand it, we’re gonna reestablish it in the community, so any of the negativity with prior ownership – we kind of shut that off. And not all the time is there [unintelligible [00:05:41].23] but it gives really a fresh look at the community. So we started our rebranding —

Joe Fairless: How do you pick  a name?

Skyler Liechty: That’s a great question. Me and one of my partners – we just sit with a yellow pad and go through some names that we think sound really good. This last one we rebranded from a name of Mobile Haven, we rebranded it to El Dorado Village. So to us it just really felt like it feet; that’s how we rebranded it.

And then one of the things in our asset class that’s very distinctive and different is we have huge barriers to entry, meaning you can’t just go build a new mobile home park. Most cities that we deal with do not like mobile home parks. They have this stigma with them. So we kind of had that barrier to entry with new parks being developed, which we find very good.

The other component that’s interesting about this asset class is we have the availability to essentially buy our occupancy. That’s a very interesting concept. What that means is — this particular community, we did the street work; there were 40 physically vacant home sites. So we paid zero dollars for those home sites, we go out and we’re buying brand new manufactured homes, straight from the manufacturer, we install them, and then we are either leasing them, or selling them… We’re occupying them.

So essentially, what we’ve been doing on this project is we’ve been increasing the value through purchasing new homes, moving them in, taking advantage of that vacant lot. And actually, what’s interesting about that is if you have a community with a bunch of vacant spaces, it’s actually costing you more money to have them vacant than occupied. And what I mean by that is someone’s gotta cut the grass, someone’s gotta pick up the trash, those types of things. So when we get a home there and a resident in, then some of our costs actually go down, so we have more efficient operations at the on-site level.

So on that particular property, the biggest takeaway we got after closing is residents are happy with what we’re doing, but we find that we’ve had to communicate a lot more with people, I believe, because the ownership that owned it for so long didn’t communicate with the residents. They just kind of let the asset go, so to speak. So when we came in, we had to really do a good job explaining, “It’s gonna inconvenience you, you’ve gotta move your cars, we’re gonna have street works, we’re gonna be moving in homes”, all those things. But at the end of the day, we’ve taken maybe a C+ asset, and when we’re done with it, we’re gonna end up with an A- type manufactured home community. So it’s gonna be a great place for all those people to live.

Joe Fairless: How much did you it for?

Skyler Liechty: I have an NDA with the seller, so I would put it this way – we bought it for substantially less than it would cost us to develop it ground-up.

Joe Fairless: Got it. And you said you put in $400,000 worth of street work. Will you talk a little bit more about where that cost goes, and what are the big chunks of that 400k? Because most people haven’t put in 400k worth of street work.

Skyler Liechty: The other difference about manufactured housing is when we buy a mobile home park, 9 times out of 10 the park actually owns all of the infrastructure. So we own the wastewater lines, the power meter boxes, we own the street. So in this case, all those streets are owned and maintained by the community. So that’s why when we say we put in 400k, it was overlaying all of the streets, we redid most of the off-street parking…

Again, just to get into that a little bit – typically, when we look at a community, we wanna make sure that it has paved streets. And if it does not have paved off-street parking, we’ll actually go in and add that… Because to us, that’s how a community normally looks. So that’s what was so costly about it – we overlaid all of the streets, we redid probably 35 concrete off-street parking pads; so that’s a two-car parking pad… So that’s really where most of the money went to.

Obviously, there was stuff like prepping the base, and doing those things, but visually, the biggest bang we got for that is when you drive into it, people are like “Oh, this is a community that’s being turned around.” This is a place people wanna live.

So for us, if you bring in a brand new home, and let’s say we’re gonna sell it, if someone’s gotta drive through streets that are all busted up, and they’ve got people on both sides that are just living in a way that’s not conducive to maybe what we would want the community to look like, it’s very hard to occupy that home.

So on the front-end we go in, we rebrand, we do the street works… Some communities we buy – perfect streets, and we do no street works. Sometimes there’s a lot of street work, like in this case. And then we start filling it in with the homes. And like I said, at the end of the day the curb appeal is completely changed, and most of our residents are really happy with the change. And some of them aren’t, and that’s okay, too. There’s other mobile home community parks and markets they can move to if they don’t like rules and regulations such as “You’ve gotta mow your yard, you’ve gotta pick up your trash…” Those type of simple things.

Joe Fairless: Switching gears a little bit, tell us about a mobile home park deal where you lost money.

Skyler Liechty: Okay, so everyone’s got those stories, right…? The first deal that we acquired through our equity raise arm was a deal in Missouri. We got into the deal; the deal of closing, we signed all the documents. The on-site manager said “Hey guys, I own a couple of the homes in the community.” We said “Okay, that’s fine. If you’re gonna rent them out and you’re gonna pay the site rent, no problem.” And she said “Well, actually I own about 50% of the homes in this community.” We essentially had a partner that we didn’t know about.

So in that deal we ended up buying all of those homes, so we ended up with a lot more community-owned homes than we originally thought… Which is okay, but really what hurt us in that situation – or complicated it, should I say – is whenever we are making a home ready to release (someone’s there, they moved out), what our objective is is to try and make it as close to a new-ish home as possible. Not everyone has that philosophy. So when we got into these homes, we ended up spending a lot more equity than we had planned on. So we were spending the equity, and it got to the point where as we were filling them up, we weren’t making enough progress.

Also, one of the other things that we did which was unusual is when we closed on this, occasionally again — I’m getting into the weeds a little bit, so bear with me on it…

Joe Fairless: Please do. That’s good.

Skyler Liechty: …but usually mobile home parks – their water and the wastewater is city services. Just like your house you live at – you’re gonna have water from the city, and your sewer is gonna be through the city as well.

Joe Fairless: Yup.

Skyler Liechty: Occasionally, you’ll have communities that will have well water, they may have a lagoon system to treat the wastewater, or you’ll have a treatment plant. So in this particular deal, it had a commercial-grade treatment plant, and it had a commercial-grade well. The well was actually drilled down about 1,200, so it was a pretty big operation. So when we bought it – that’s fine, we’d dealt with similar types of things. But what we found out in the due diligence, which we didn’t realize how big of an issue it was gonna be, is a prior owner had converted that into a public utility system. What that means is we became subject to the same restrictions that the local municipality is subject to. So we had to do EPA, we had this and that… And it’s very unusual to have that.

So when you have that home thing that we didn’t plan on, and you have the treatment plant that we were subject to the same restrictions that the city was, that was a deal we ended up selling the utility company and selling the park, and we took a loss on the park. We did fine on the treatment plant, but that was a deal we took a loss on. And again, we learned a lot from that experience.

One of the big things we learned is in our contract and our due diligence now we don’t just ask “Hey, how many community-owned homes do you have?”, it’s “How many people in your community own more than one home?” So we’ve kind of climbed that, so we’re ahead of it on a move-forward basis.

Joe Fairless: Is that deal the one you’ve lost the most money on?

Skyler Liechty: That is the only deal we’ve lost money on.

Joe Fairless: Oh, wow. Well, that’s awesome. That’s great.

Skyler Liechty: Yeah. It’s good, and like I said, it was our first deal. We got a lot smarter about our structure. What I mean by that is we had investors who that was the asset they were investing in, and they said “Look, we know you guys own parks, but since this is the first equity raise park (so to speak), we’re gonna put in our money; no capital calls. If there’s a problem, you guys gotta take care of it.” That was the way we did it… Which created some of those problems with “Hey, if we need more equity to go out and buy new homes, how do we get that?” Well, our investors arent’ participating with it.

So again, our structure has changed quite a bit, and I would say our biggest structural change happened November of last year. We shifted to more of an equity fund model, so investors get a lot more diversification with our dollars. So rather than having one mobile home park, they’re gonna end up with 5-6 parks in that partnership. So you always end up with a big home run, maybe one that’s just chugging along, doing about what it should, and then in between.

Joe Fairless: In that scenario, do you pay back the limited partners, or is that just risk of doing business?

Skyler Liechty: Any equity deal, all of your equity is at risk all the time. But with that said, we ended up with (in our first deal) a lot of friends and family and things like that… So we took the lion’s share of the loss on it.

Joe Fairless: Let’s talk about the fund. With the fund – what’s the fee structure that you have on the fund?

Skyler Liechty: The way that we do is pretty standard to what most people see if they go out to a private equity group, or to a family office. We do a 70/30 split with our investors. So we take 30% of the upside, and investors get 70%. And then as far as fees, it’s just normal fees. What I mean by normal is if we buy a deal, there’s an acquisition fee tied to it. We’re doing all of the management…

Joe Fairless: A percentage of–

Skyler Liechty: It varies. It’s between 1% to 3%.

Joe Fairless: What’s it depend on?

Skyler Liechty: A lot of that depends on the deal itself. What I mean by that is our fund one – we pegged it 3%. Some of the deals we are looking at require a lower fee structure, just to get that IRR number to work.

Joe Fairless: Got it, okay.

Skyler Liechty: So that’s really what on the front-end drives some of the fees. Like I said, we get a pretty standard management fee. What I would call a standard management fee – there are companies that charge as high as 10% of gross revenue of a management fee. Our fees, of all the deals we’ve done, were 5%-6% of the gross revenue.

Joe Fairless: That’s asset management or property management?

Skyler Liechty: That’s both.

Joe Fairless: Both, combined.

Skyler Liechty: Yeah, we lump them together.

Joe Fairless: Right, because you’re self-managing.

Skyler Liechty: Yeah, that’s right.

Joe Fairless: Cool. So before, you were doing individual deals that you were syndicating, correct?

Skyler Liechty: Correct.

Joe Fairless: And now you have a fund. And the challenge that I’ve thought about – which is why we have not done a fund, but I’d love to get your thoughts, because you are – is the challenge of “Okay, yes, investors, this is the type of deal that we’re buying, but can’t tell you exactly which one. Please invest in this fund.” Compared to if it’s an individual one – here’s all the details of this specific deal. Was that a challenge as you all went from individual investments to “Here’s a fund to invest in”?

Skyler Liechty: We didn’t find that to be much of a challenge, and part of it was – when we made the decision to move to a fund, we had a few deals under  contract, so it made a lot of sense for a launch point, so we could kind of show “Here’s the first couple of deals that are gonna go into the fund”, so we could have that piece of the conversation. But as I’m sure you’ve experienced, we have investors that are happy with what’s happened, so they’ve moved to the next deal, and they’ve moved to the next deal. So part of it also is a level of confidence in what we can do.

To give you the other side of the deal… I can’t disclose everything about this, but generally speaking, our second deal — so I told you the first deal where we lost money; the only deal where we lost money. The second deal that we bought and sold – we took the asset from four million to a little over 14 million in about a five-year period.

Joe Fairless: Wow! How much did you put into it?

Skyler Liechty: We find in mobile home parks you’ve got the same debt opportunities that you have in the other commercial real estate… So typically, we’re looking at 70% to 80% loan-to-value on the acquisition. So our equity position is gonna be 20%-30%. As far as an IRR equity multiplier, it was about 30% each year. Again, we felt that was a home run deal.

Joe Fairless: But how much in terms of capital improvements? So you bought it for four, it appraised for 14…? You sold it for 14?

Skyler Liechty: Yeah, we sold it about six years later.

Joe Fairless: Okay. How much money did you put into it to improve it?

Skyler Liechty: Over the life of that we bought about a 1,2 million of new homes. So we brought in new homes; like I said, we bought our occupancy, so to speak. We did maybe $150,000 worth of tree work… Because again, you own all the land, you own all the trees that are on it… So we had major tree work that we had to do a couple times through the project. That was a big expense we put it.

We did a lot of street work to that deal as well, probably in the $250,000 range. We also had some additional land in the project. So we developed out about 12%, so we increased total number of home sites about 12%. So we spent money on that development cost as well. Again, that was a big value generator for us as well.

Joe Fairless: Did you get any pushback from local community members when you were developing the new home sites?

Skyler Liechty: Cities hate mobile home parks.

Joe Fairless: Yeah, that’s why I asked.

Skyler Liechty: They really, really hate it. So what we find is every city is a little bit different… And a little bit different means that the way they regulate mobile home parks isn’t standard from city to city. So some of the communities we own, the city says “Okay, you have 60 approved lots” or “You have 105 approved lots.” And even if you had 15 extra acres, the most you can have is 105. Then we have some cities that go strictly by setback requirements, meaning “How much space do you have between the homes? How much space do you have between homes if they’re back-to-back?” And in that situation they say “Hey, as long as you’re meeting setbacks, you can develop out the extra piece of it. As long as you meet the density requirement”, meaning some cities say you can have seven home sites per acre, some cities say “Well, this park’s been here since 1952, and you can have 12 home sites per acre.” Again, those are different variables in each deal.

And again, when we’re acquiring deals, something we’d like to keep an eye on, because if you have a seven-per-acre requirement, that’s typical of newer communities, and not a lot of communities get built in today’s market… So communities that were built in the ’90s plus or newer, usually are gonna have seven per acre, and you can get a full-sized home, and you can get a single section, you can get a multi-section… So if we’re doing that, we know any type of home we buy fits there.

If we’re going to a community that has 12 per acre, then you’re really restricted on the sizing of homes you can buy (new homes).

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

Skyler Liechty: It pays dividends to be patient and spend your time in the due diligence, to go through all the material you’re given.

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

Skyler Liechty: Ready!

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

Break: [00:22:41].21] to [00:23:17].17]

Joe Fairless: What’s one due diligence item that you pay particular attention to now?

Skyler Liechty: Environmental issues.

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

Skyler Liechty: Extreme Ownership.

Joe Fairless: Best ever deal  you’ve done?

Skyler Liechty: Probably the deal I was referencing, our home run deal.

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

Skyler Liechty: We spend a lot of money doing community events.

Joe Fairless: And how can the Best Ever listeners learn more about what you’ve got going on?

Skyler Liechty: They can go to our website, mhparkadvisors.com, or mchleads.com. All my contact information is there.

Joe Fairless: Skyler, thank you for being on the show and talking about your experience in mobile home parks, talking about buying occupancy – basically forcing appreciation –  through your own means, which is such a great tool to have, in any business, and you’re able to do it with what you all are focused on… And then how the different components of the operations that you look to enhance whenever you go into a community. So thank you for being on the show. I hope you have a best ever day, and we’ll talk to you again soon.

Skyler Liechty: Thanks, Joe. I appreciate it.

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JF1674: How To Build Your Own Residential Assisted Living Portfolio with Loe Hornbuckle

Loe was making good money running a car dealership, but was not fulfilled. He wanted to get into property management, but no one would hire someone who was taking a huge pay cut! He finally got a job as an assistant property manager and started learning the business. Eventually he learned about residential assisted living and started building that business, which is still his main focus. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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“I think it’s great to have a third party take care of stuff for you, but at the same time you have to know enough to know if someone is a good property manager or not” – Loe Hornbuckle

 

Loe Hornbuckle Real Estate Background:

  • CEO and founder of Sage Oak Assisted Living and Memory Care
  • Sage Oak is “the boutique assisted living company” with 5 locations in Dallas and a total of 40 beds.
  • Has two developments in TX and Louisiana, totaling 300 beds and estimated value of $45M
  • Based in Dallas, TX
  • Say hi to him at https://thesageoak.com/
  • Best Ever Book: The One Thing

 


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JF1659: From House Hacking To 30+ Unit Portfolio with Chad Hudson

One of the most popular ways to get started in real estate is through house hacking. This is how Chad got his start as well, only he did it a little different. Usually, someone will purchase a multifamily property and live in one of the units while renting out the other unit or units. Chad needed someone to help pay the mortgage so his friend moved in and his rent paid almost the whole mortgage. That got chad started and he quickly set out to get more property. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Chad J Hudson Real Estate Background:

  • Started investing in 2000 when he was burnt out on baseball
  • Founded Savoy Companies and grew to over 30 units
  • Based in Rockwall, TX
  • Say hi to him at https://www.savoycompanies.com/
  • Best Ever Book: The One Thing by Gary Keller

 


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JF1421: Using Passive Investing To Catapult Into Your Own Large Multifamily Deals with Jimmy Edwards

After being a very successful house flipper, Jimmy decided he wanted to pivot into buy and hold. In order to gain experience, knowledge, and credibility, he decided to be a limited partner on some deals first. With everything learned from that experience, Jimmy and his team were able to start acquiring their own multifamily deals. Hear how he did it, and what he learned along the way. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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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. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Jimmy Edwards. How are you doing, Jimmy?

Jimmy Edwards: I’m good, how are you?

Joe Fairless: I’m good as well, nice to have you on the show. A little bit about Jimmy – he is the owner of High Five Group, and has been in real estate for 12 years, flipped over 100 homes, is an investor in 400 multifamily doors, both passively and actively, and he’s based in Dallas, Texas. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Jimmy Edwards: Yeah, absolutely. Thanks, Joe. I’ve been in real estate for 12 years, like you said, and I’ve done a little bit of it all. I was a real estate agent, mortgage broker, and about five years ago I’ve started flipping houses, accumulating rentals, and within the past 12 months started to transition into multifamily in order to scale and go bigger, faster.

Joe Fairless: Over the last 12 months you’ve started transitioning to multifamily, but I mentioned in your bio that you’re an investor in 400 doors – has that been only within the last 12 months?

Jimmy Edwards: Yeah, and probably within the last six, actually. So yeah, in the last six months I got into 400 doors. I got into two passive deals, and then bought a 16-unit apartment complex with three other partners, and then about a month later I syndicated a 103-unit project.

Joe Fairless: Wow, that is quick! How did you get up and running so quickly?

Jimmy Edwards: I got a mentor and I got coaches, I joined some programs, and just started networking, and set some goals, and decided that’s the space I wanted to be in. It actually kind of all falls into place once you set your mind to something; I had a friend of a friend call me on a 26-unit deal, and while doing the due diligence on that we met up with some other folks that we’d had previous relationships with, and ended up buying a deal together, and then that just turned into bigger and better things.

Joe Fairless: The 26-unit – is that part of the passive investment?

Jimmy Edwards: It’s not. That was kind of the deal that was the spur of everything. That deal didn’t work out, but it was an off-market deal, the seller was one of my neighbors; he knew I had rental property, and he came to me with that deal. We started underwriting it, and I didn’t know what I was doing, got  help, got a coach, and it kind of kick-started everything else. It was a blessing in disguise. It didn’t work out for us, but it opened the door for a whole lot of other opportunity.

Once we had underwritten that deal, that’s when I got into the passive opportunities, knowing that those would look good on my resume, and that sort of thing.

Joe Fairless: Why didn’t the 26-unit work out?

Jimmy Edwards: It was overpriced, basically. It was a good deal. It came to me as an off-market deal; I knew the seller. He’d been getting calls from brokers, so we worked on it, we really tried to make it work… We sent him an LOI, and of course, the same weekend we sent the LOI he got an offer for 200k more… Which I understand. So it wasn’t the right deal, but the timing of it was perfect to get us moving in the right direction.

Joe Fairless: What about that deal allowed you to get moving in the right direction?

Jimmy Edwards: Understanding how to underwrite multifamily. I’ve been flipping houses for five years, and I can look at a wholesale deal or an off-market house in 20 seconds and know if it’s a deal or not. I’ve gotten good at walking into seller appointments and being able to make an offer on the spot… But multifamily was a completely different animal.

I was excited — I’ve got a finance background, and multifamily really excited me. I didn’t know much… I thought I owned a business, but when you get into multifamily and understanding decreasing expenses and increasing the NOI in order to trade the deal, it was just a new concept to me… So I learned about underwriting deals, and the 26-unit was definitely a catalyst to doing so.

Joe Fairless: What have you learned as a passive investor that you’ve applied to the deals that you’re doing as an active investor, if anything?

Jimmy Edwards: Yeah, a lot of stuff. I’ve learned a lot of things over the past six months. The passive deals – it allowed me to underwrite a deal separately, and a lot of the passive opportunities that I see and that I believe in are definitely people-driven. I think the sponsor is one of the most important parts [unintelligible [00:05:32].16] but just having the ability to underwrite a passive deal… I probably underwrote six or seven before I jumped on one, and just being able to kind of watch from the sidelines and being comfortable doing that, and then it adding to your resume, while you’re underwriting deals that you wanna take down (you’re kind of watching from the sidelines), and then having a little bit of stake in the deal and being able to bounce questions off people… It just opens up more conversation, if anything, talking with other passives and other sponsors.

Joe Fairless: Did the passive investments help you with the lender approval on your active deals?

Jimmy Edwards: Absolutely, 100%. That was probably why the 26-unit deal was a blessing in disguise, because we went to lenders and said “Hey, we have this deal” and they said “What does your resume look like?” So far it was “I’m a Texas real estate broker, I own rental properties, I’ve flipped 100 houses”, and none of that really matters. So immediately, the next step was “Let’s turn over some rental properties, do some flips and get into some passive deals.” Being a limited partner in 2-3 deals gives you some street credibility, really; it helps you build your resume and it allows you to get some experience without really having to do a whole bunch of legwork… So I’d say absolutely that was monumental in allowing us to take down our own deal.

Joe Fairless: Why are you transferring to multifamily when you’ve flipped over 100 homes, and I imagine you have that process down pretty good?

Jimmy Edwards: For me, scalability… I guess the natural progression of a real estate investor in my mind is going from single-family into multifamily. The ability to scale, having more of a  team in place… And I also think that it’s a little bit more — I hate to use the word “recession-proof”, but I don’t know… Five, seven years ago I had a lot of money in Apple, and Steve Jobs died and my shares cut in half. So I kind of went through the recession as a loan officer and as a lender. Rates were low, and I was refying people that were underwater.

Single-family, especially being here in Texas and Dallas-Fort Worth, the rental portfolio that I’ve built has a lot of trapped equity… And on top of the scalability with the multifamily, I think that for me, I’m just currently pulling my chips off the table, so to speak, in single-family, and redeploying them in multi-family. I think that you have the ability to 10x your money much faster in apartment complexes if you’re buying the right deals, and underwriting them correctly, and being conservative and increasing the NOI, whereas single-family homes – you’re riding the cashflow, but you’re waiting on appreciation most of the time… Even if you’re buying them at a discount, you’re still kind of riding the appreciation wave.

I think the market is still strong for the next couple of years, but one thing I learned, like I said, from that Apple experience, is I doubled my money and I didn’t pull it out when I probably should have, and something happened that was out of my control, and it sucked. So I’m kind of hedging a little bit by taking those chips out and putting them into a vehicle that I think is a little more sustainable in a down economy.

Joe Fairless: You are a lead partner on two deals, right? A 16 and a 103-unit.

Jimmy Edwards: Correct. There’s four partners on the 16-unit deal, and then the same four partners on the 103-unit deal. We did a one million-dollars equity raise, so we have 23 limited partners on that deal.

Joe Fairless: What’s something that’s gone wrong on one of those deals, and what did you do to address it?

Jimmy Edwards: They’re both heavy value-adds, which is coming from a flipper mindset… Heavy value-add seems like more opportunity, obviously… Which is not always the case, but most of the times it can be. Heavy value-add – the 16-unit was probably an F when we got it, and we’re getting it to a C status, so we knew there were gonna be a lot of challenges there. The challenges came, and they’ve passed.

The 103-unit deal was a little bit different. It was also 50% occupied. I was painted a picture that I believe everybody thought to be true.

Joe Fairless: What was that picture?

Jimmy Edwards: The chiller went out last summer. This is in Lubbock, Texas, and the chiller went out, and the owner didn’t get it repaired for 60 days, and caused a lot of people to move out… So we’ve looked at the financials and came up with an offer that we thought made sense. Once we got into due diligence, we kind of realized that that — although that may have been a true story, it was probably just the tip of the iceberg. We began to uncover more and more issues, indications of a distressed property.

Joe Fairless: Like what?

Jimmy Edwards: There were people coming in and turning in their keys while we were doing due diligence… It was really bad. You’re doing due diligence, and all of the tenants are standing there talking to you, and you wanna sit there and listen to them, because they’re giving great information… So they just start telling the story of their experience the past 3-4 years, and there’s been 5 or 6 property management companies, and we’re there on-site and the manager has been there for two weeks and the maintenance, it was his third week, and nobody knows anything… It’s a little bit more deeper than just a chiller being out. So it was just a surprise.

We ended up negotiating close to 500k off the price. There were surprises in due diligence, and the financials weren’t there, and we all got together and said “Hey, we’re still willing to do this deal, but we know that there’s gonna be more surprises after closing, based on our home flipping experience and dealing with distressed sellers.” So we negotiated the price down, got the deal, closed it, and here we are, six weeks into the deal, and the surprises keep coming.

Joe Fairless: Like what?

Jimmy Edwards: The pool hasn’t been opened… When we showed up for take-over two days after closing, there was a cardboard sign on the gate, written with [unintelligible [00:11:31].01] that said “Pool closed because residents can’t follow instructions. If you’re gonna swim…”

Joe Fairless: [laughs] Wait, what did it say? If you’re gonna swim…?

Jimmy Edwards: “If you’re gonna swim, swim at your own risk. Chemicals may not be adjusted, so swim at your own risk of your eyes burning up”, or something ridiculous. A responsible and a responsible property management company – they’re blaming it on the tenants.

So we took the sign down, went and grabbed one from Home Depot, put up a proper Pool Closed and started investing.

In Lubbock, you have to have a permit to have the pool open; the city has got to inspect it. The name on the last permit was three or four names ago, so the property has changed names in the past quite a few years… So we put in a form to get the named changed to the new name, and we did an inspection, and obviously it had been closed for more than just the last several years…

So we start digging into that, and it’s typical of what’s a distressed property and a distressed seller. We made sure that we had enough budget in the cap-ex, and we were able to keep moving forward, but… It’s stuff like that that we couldn’t see in due diligence, but we were lucky that our experience dealing with those types of transactions put up a red flag and said “Hey, you can do this deal, but it needs to trade at a value indicative of what you’re feeling.”

Joe Fairless: The 100+ flips that you’ve done, and you’ve indicated some things that you’ve applied from that experience to multifamily – but can you elaborate more on some things that you learned through those flips that you apply to multifamily?

Jimmy Edwards: Yeah, definitely. There’s a lot of things in the single-family business that I think can be translated. I think a lot of it relationships, understanding situations, listening to what people are saying… And I think a lot of it was trial and error, but just seeing the right indications… The single-family business was great, but you’d go in and you’d buy these houses and feel that you got them at a good discount, and then you start digging into the project and realize why they were so quick to sell sometimes, because there’s a lot of underlying issues that couldn’t be seen on the surface…

I think that helps. I think having a pretty good understanding of the construction management aspects, and walking the property, having been through so many issues, and rehab, going through the rehab process and just being able to walk a property and see the issues… Walking the apartment complex, we were able to just kind of put our eyes on it and [unintelligible [00:14:02].11]

That was the thing with this deal – we did the property tour, and to the eye, it seemed to be in pretty good shape on the exterior. Granted, it was in the winter, so they had the pull winterized, which may have been coincidental timing, but… We walked all 103 units, and they were just in much rougher shape than we had expected.

So I think there’s a lot of overlapping things. I think that people could get into multifamily without single-family experience, but for me, my comfort level is much higher, my confidence level is much higher… And then I think for our limited partners and our passives that invest in our deals, there’s some sort of comfort level there as well, knowing that we’ve been in high-distress situations, so it’s not that different.

Joe Fairless: Based on your experience as a real estate investor, so incorporating your single-family and your multifamily experience, what is your best real estate investing advice ever?

Jimmy Edwards: That’s a good question. I would say probably do your due diligence and make sure that you have a team. If you don’t have the experience, have a partner or a mentor or a coach that can guide you in the right direction.

I think you can save a lot of time and headaches by having good partners and good teammates. Multifamily is definitely a team sport. Single-family – I think you can do it on your own; you can learn from your mistakes, and most of them won’t be life-debilitating, but getting into multifamily I think you’ve gotta have the right team players in order to make solid investments.

Joe Fairless: The 103 units that you are partnering with three other people – four of you total, is that correct?

Jimmy Edwards: Correct.

Joe Fairless: Okay, so you’ve got three other partners on the 16-unit, and then also the same three other partners on the 103 units… How do you structure that on the GP side?

Jimmy Edwards: On the 103-unit it was just an equal split, because we all brought equal pieces to the puzzle…

Joe Fairless: Who brought what? You don’t have to name names, but just what were each person’s role?

Jimmy Edwards: Kind of 50/50, we brought — me and my partner from the single-family business brought kind of the sweat equity component, the day-to-day grind, the boots on the ground… We brought that component, and our other two partners – they have experience in multifamily and they have a really deep resume, and they were able to bring net worth and liquidity… So we kind of put the deal together. We split it up equally. They’re there to guide us and to help us answer any questions, but we’ve been really kind of boots on the ground, day-to-day grind, which was something we’re excited to do, and still are excited to do, and I think that’s what we can continue to bring to the table on other deals, and maybe a few years down the road we’ll be able to be on the other side of the table and help somebody else get into the business.

Joe Fairless: You’re based in Dallas, the property is in Lubbock – that’s about a 4,5-hour drive, so what does day-to-day grind, boots on the ground look like?

Jimmy Edwards: We go up there about every two weeks, but earlier I talked about having the right team, and one of the reasons we felt really comfortable on this deal was having a property management team in place, in the area, with 4-5 other properties, and lease up some value-add projects like this. We really felt good about their presence in the market, and the regional manager… So we communicate with the property management company pretty much on a daily basis.

If we’re able to fly out there — it’s a short flight, it’s an hour… So we fly out there and we go and put our eyes on everything, but the property management company has been monumental in communicating problems and resolving them, and just the day-to-day operations, more so than just getting leases written. They’ve helped a lot with facilitating a lot of the distress that we’re still working through.

Joe Fairless: What do you do there whenever you go every two weeks or so?

Jimmy Edwards: We’ll walk the property… We’re still at this point meeting with constructions teams and landscapers, and we’re implementing a water conservation program, we’re changing all of the lights from the property to LED lights, we’re rebranding it, so it’s getting new signage, and then of course, we have 40-some-odd units that need to be turned, and it wouldn’t be practical to have our maintenance guy and our porter doing that…

So really just going up and checking the status. I think we owe it to our team and owe it to our investors to keep our eyes on it and just make sure that everybody’s on the same page. I feel like it’s been good and it’s been beneficial, and so far it’s been running really smoothly. We feel good about the progress.

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

Jimmy Edwards: Let’s do it.

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

Break: [00:18:48].24] to [00:19:52].04]

Joe Fairless: Best ever book you’ve read?

Jimmy Edwards: Best ever book – Rich Dad, Poor Dad. It’s pretty cliché, but I read that book in my senior year of college and it changed my life. Any time I mention it and someone hasn’t heard it, I pull one of many copies out of my bookshelf and give it to them for free. I think it can be life-changing if you’ve never been exposed to that material.

Joe Fairless: This is actually a new question based on a request from the Best Ever listeners… If someone were to do a 103-unit syndication, on the general partnership side, what type of income should they expect to receive from that?

Jimmy Edwards: I think it depends on the deal. Depending on the deal side, you could have 40k/door to 120k/door. So based on the NOI, I think that could really vary. On our particular deal, the sponsorship deal had a 20% override, and then I think it was 1.5% asset management fee… The deal was about a 5 million dollar deal, so…

I think the more deals you can get into, and the more bigger deals that you can do is really where you can start seeing that paying more of your lifestyle, I guess.

Joe Fairless: Best ever deal you’ve done that we haven’t talked about already.

Jimmy Edwards: That’s a tricky one. I don’t know, there’s been a lot of memories… [laughter] That’s a tricky question. My mind first went to the biggest paycheck, but then I stepped back and said–

Joe Fairless: What’s been the biggest paycheck? Let’s do biggest paycheck.

Jimmy Edwards: About 70k on a wholesale deal… So I don’t do a lot of assignments; we’ll close on most of our deals… Because a lot of times we’ll get inheritances, or a family member will still be living in the property… I’ve done quite a few deals where the family member came to me and said “Hey, this is in my name. It was my father’s house, but my brother is still living there. We’re not on speaking terms… You can buy the house for X, but you’ve gotta deal with the brother.” So I said, “Okay…” So we’ll get it under contract and we’ll start talking to them and figure out some sort of situation, and then once we close, we decide if we wanna rehab it or wholesale it. A lot of times, those usually end up being really good candidates for wholesale.

But that particular deal we did like that, everyone was really grateful. We ended up giving the brother some money to move out, and he was satisfied. But I’d say my favorite deal I think I made 500 bucks on, but it was the sweetest little old lady, and she was in a reverse mortgage, it was going into foreclosure, and it was underwater, and couldn’t shortsale it…

It was one of those deals where we stopped the foreclosure two days before auction, and I ended up renting her a U-Haul truck so that she can move out of state to be with a family member. The buyer market was thin, because the margins were small, but we sold it to an institutional buyer. We made a couple bucks, but she was super grateful, and that’s probably my most memorable deal, just being able to help somebody out.

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

Jimmy Edwards: It’s funny you ask that, I was having this conversation last night… For me, in my career, relationships have been  important. I feel like I’m a good listener, and I like to talk a lot, that’s not unknown… But bringing other people up and helping other people get there, because I couldn’t have done it by myself, and along the way there was people that were willing to help me, so… That’s really one of the things that I really believe in – helping other people along the way and being a mentor, if you can. I get a lot of satisfaction out of that component.

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

Jimmy Edwards: They can go to my website – it’s highfivemultifamily.com. You can e-mail me, call me, I’m on Facebook, LinkedIn, Jimmy Edwards everywhere. I think those links are on the website, too.

Joe Fairless: Awesome. Highfivemultifamily.com, we’ll have that on the show notes page. Jimmy, thanks for being on the show and talking about your career in real estate, how you were in apartments now, what you’ve applied from the 100+ fix and flips that you’ve done to apartment investing, and the benefits of investing passively first to help get credibility with lenders, as well as just being able to underwrite deals and look at deals faster and more effectively, and have some people who have experience to ask questions to along the way, and then now how you structure it with your partners on the general partnership side, and how you make money on the general partnership side… As well as the due diligence, sneaky things that might come up, and the stories that you mentioned along the way.

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

Jimmy Edwards: Thanks, Joe. It was a pleasure, thanks for having me.

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JF1415: Finding Your Market & Going ALL IN with Chris Powers

Chris and his team are extremely bullish on the Dallas – Fort Worth market over the next couple of decades. Because of that, they have been expanding rapidly in the area. From multifamily and industrial to office and urban core, they buy and hold it all! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Chris Powers Real Estate Background:

  • Serial entrepreneur with more than 13 years of real estate development and investment experience
  • Has raised more than $70 million in equity financing through a multitude of high net-worth and family office partners
  • His Company, Fort Capital has invested and developed over $200M in multifamily, industrial and urban properties throughout Fort Worth and the greater DFW Metroplex
  • Say hi to him at https://fortcapitallp.com/
  • Based in DFW, Texas
  • Best Ever Book: Traction

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

With us today, Chris Powers. How are you doing, Chris?

Chris Powers: I’m doing great, thanks Joe. How are you?

Joe Fairless: You’re welcome. I am doing well, and nice to have you on the show. A little bit about Chris – he is a serial entrepreneur with more than 13 years of real estate development and investment experience… And here’s the proof in the pudding – he has raised more than 70 million dollars in equity financing through a multitude of high net worth and family office partners.

His company is called Fort Capital, and they’ve invested and developed over 200 million dollars in multifamily, industrial and urban properties throughout Fort Worth Texas and the greater Dallas-Fort Worth Metroplex. With that being said, Chris, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Chris Powers: Yeah. As you mentioned, I started a company when I was 18, in college at the time; it was called Powers Acquisitions, and it was set up to buy rental properties around TCU. That eventually kind of grew into a full-time student housing leasing company and property management company.

I did that all throughout college, and really grew the business over the last 9 years. Now we have a team of 19 amazing people.

We focus on buying and developing multifamily, buying industrial, and buying kind of urban core assets throughout Fort Worth, Dallas, Houston and El Paso. Primarily right now the majority of our work is in the acquisitions space, although we have development projects that we’ve been working on for a couple years… But the majority of what we’re doing is acquiring.

Joe Fairless: The majority of what you’re doing is acquiring… There is a mixed feeling right now about if investors should or shouldn’t be acquiring. What are your thoughts? Well, I know why your thoughts are, but why are you choosing to acquire at this stage?

Chris Powers: The market is high; the people that are wary of acquiring real estate – it certainly comes with merit. I think the way we look at it is, number one, our culture and philosophy is deep-rooted in more of a long-term hold than a get in and get out investment time horizon, more like 3-5 years… We’re more like 7-10 and beyond.

We really believe in the Texas story right now and the fundamentals of Texas. We love the job growth that DFW has, the business climate, the cost of living, the lack of new supply that’s meeting the demand… We’re having corporate relocations coming in from everywhere, so there’s a lot of fundamentals specific to Texas that we really like, which is where we’re doing all of our investing and buying. So it’s more of a Texas-first strategy.

Having said that, it’s not like every single deal we look at is a buy. It’s harder today to find a deal than it has been in a long time, but we’re just very bullish on Texas over the next 20-30 years.

Joe Fairless: You said your focus is buying and developing multifamily, buying industrial and buying urban core. Real quick, can you define urban core for any Best Ever listeners not familiar with that?

Chris Powers: Yes, we look at urban core as densely populated cities, and within those cities buying close to — I guess you would call the core is really downtown and trying to buy within three miles of downtown, in growth corridors where density is starting to occur, where old buildings are being torn down to build more dense buildings, where walkability is becoming more the trend… So properties that kind of fit that model.

For us, that could be buying buildings that can lease for now, that are on top of land that we think would make great development down the road, all the way to locations that we feel like are kind of once in a lifetime opportunities to pick up, and they’re just gonna kind of keep getting better. Those asset classes vary, but we’re really intentional about just location and how we think the city can build out around it.

Joe Fairless: What’s an example of an industrial project that you’ve purchased?

Chris Powers: The last one we closed on was two weeks ago…

Joe Fairless: Congrats, by the way.

Chris Powers: We started our industrial team a little over 18 months ago. We’ve just achieved a million and a half square feet of property that we now own. We call it light industrial, kind of shallow bay assets. The latest one we bought was in Garland, Texas, which is East of Dallas. It was a 650,000 square foot manufacturing facility built in the late ’70s. It sits on 52 acres. It was 94% leased, and it’s the low-cost provider in the area, so due to the age of the building, we’re able to charge significantly less than what new construction or newer buildings are charging.

It sits on a great piece of land, it’s rail-served, in an industrial market that’s probably the largest feeding into Dallas. It was an off-market deal, and our plan is to hold it for 5+ years, renew rents, update rents, and then we potentially think we have an amazing development site down the road… But for now, it’s an amazing industrial play.

Joe Fairless: You mentioned a couple things that someone – or myself, I’ll just speak for myself – who is not in industrial would not look for in multifamily, and that is rail-served is one of them… What are some other components of an industrial deal that are unique to industrial, or attributes that you’d look for?

Chris Powers: You look at things like the depth of the buildings, you look at the clear heights, which is how high are the buildings or how tall are the buildings and the ceilings… That has a big influence on manufacturers or warehousers or distributers that are storing goods – they need to know how high they can store those goods, what type of equipment/machinery they can have inside the warehouse to work on either manufacturing processes,  or how they store goods.

You have rail-served, which is larger buildings along train tracks, and that means that train cars can off-load and on-load product into buildings. You look for access to major highway systems, so you can find areas that have 18-wheelers that can come in and go out and easily get on the road for kind of their major transportation routes, you look for buildings that might have excess land – they call it yard, or yard storage, where people can park their extra trucks, pallets, machinery, equipment, different outdoor items.

A shallow bay is typically looked at as more of — you find that more in multi-tenant buildings, so that you can cut buildings up. The shallow bay would be the depth of the bay on the building. If you see Amazon in a million square foot building, it’s one enormous building; the dimensions of it are very large, and to cut that building up into multiple tenants would be tough. But when the building is narrower and longer, you can kind of cut that building up into more spaces, so that you can offer it to more tenants.

The light industrial vintage, kind of older industrial – it tends to be in industrial parks that are closer to the city center, just due to the age of when they were built, and they’re usually on a lot of land, and we love land here, especially in the bigger cities… So it’s interesting to us.

Joe Fairless: So the ideal industrial property is narrow, but very tall, has a yard next to it, close to a bunch of highways, and a railroad track.

Chris Powers: That would be pretty awesome. There would be a lot of demand, a lot of tenants that can use that type of space.

Joe Fairless: Cool. You’re buying and developing multifamily… Why develop? And there’s pros and cons to anything in life; I personally am not going to get into development because of the increased risk – in my opinion – that there is in development, and stress level. But you’re developing, so clearly you have a thought process for why that is the better model for you. Why is that?

Chris Powers: Well, it’s kind of interesting you ask that… So we are developing, and I said a little bit earlier in the show that we’re mainly acquiring now, and everything you just said is absolutely true. What we have learned as we’ve grown as a company is that acquiring property that already exists and working in that environment is less risk, it’s more controllable, both on cost and on time. It is a better lifestyle.

Development poses a lot of stress, especially in the urban core, where you’re redeveloping old properties. I think over time we are much more interested in acquiring than developing. Development comes with a lot of fatigue, there’s a lot of unknowns, and at this point in the market the returns don’t justify the additional risk and headache and lifestyle that you have to put up with to get these deals over the goal line. So I think during the next cycle, whenever that may be, there is a time and a place to develop, and the acquisition I think is a better lifestyle, no matter where you are in the cycle. Development is like, when it’s the right time, it’s worth the pain, because the gain can be really great.

Joe Fairless: What factors or metrics do you look at to know “Okay, time to suck it up. I’m gonna do development. It’s the right time. It’s gonna be stressful, but you know what, it’s gonna be worth it.”

Chris Powers: When land prices have done down. In down cycles, land prices typically take the hardest hit, because they have no cashflow to them. Banks do not like to hold raw land. So when land prices get low, when the cost of labor and construction has gone down because people for a year and a half into recession haven’t been building and so they’re dropping labor costs, material costs are going down – when those factors allow you to produce a building, and then demand is still in the market to where you can build a brand new building, sometimes for cheaper than you could buy an existing building, because a lot of the folks that had been buying while the cycle was up have a high basis in their properties, or they’ve developed properties that cost a lot more to build, the land costs a lot more, the constructions costs… So you’re able to enter the market with a newer product that the market will like, at a much cheaper basis, and you can achieve a better return on the cap rate that you can build to, to the cap rate that you can sell on, then it would make sense to go buy something.

It’s typically tougher also to develop in the down times, because people are a lot more nervous then. If you look over cycles, the people that kind of come out early in the cycle, developing, tend to do the best. They don’t necessarily probably think they’re gonna be doing the best, but history shows that they will, because a lot of the stars for good development align.

You have a city government that doesn’t have permits in line, a bunch of projects they’re working on, so they’re easily able to get through projects. Land’s low, construction cost is low… It’s kind of the perfect storm. And then as construction costs rise, as the city fills up with projects, as land prices rise, that margin for error continues to get squeezed and squeezed, and at some point there’s a breaking point… Some companies don’t ever see that; we certainly do, and we feel it, and we just feel like we can control our destiny a lot easier by just acquiring existing than developing new.

Joe Fairless: 70 million dollars in equity has been raised by you and your company for your projects, and in your bio it says it’s through high net worth individuals, as well as family office partners. Of the 70 million, what percentage is allocated towards family office partners, approximately?

Chris Powers: I would say probably half.

Joe Fairless: And how did you initially get introduced to those family office contexts?

Chris Powers: I want to get a lot out of today, but if there’s something that I think was a real critical turning point for us, it was — again, I started the company in college, and at the time (2004-2005) the economy hadn’t gone down yet… I had a friend that taught me how to buy rental houses. An 18-year-old with no credit, no money down… This was kind of the epitome with what was wrong with the economy at the time, which was just basically lending to anybody with a pulse… But we were getting loans through Countrywide with 3%, 6% cashback at closing. So we were putting very little money down, and then we were going and leasing these homes, and then going back to the lender and getting them refinanced and pulling out money.

So what I learned early on was you can grow money off of using other people’s money, and in that instance it was the bank’s money that I felt like I was using.

Fast-forward, it made me realize that’s not gonna last forever, and in 2008 when it didn’t, that’s when I really started having to look to other people for money. My mentor, who has been my mentor for 12-13 years always told me “You’ll build a great real estate company if you treat investors like royalty and like gold, and get them their tax documents on time, and communicate to them quarterly, send them financials, communicate what’s going on in your projects, prepare good legal documents when they’re signing in to be a partner of yours… All the things that make their life as your investor easier. And by the way, go do good projects that produce good returns, and you can scale that quickly.”

So I’ve put a lot of emphasis really early on on learning how to work with investors, how to put together pitch decks and investment decks to raise money, and it became kind of a strong suit of mine. So it started with a few people out of college, people that I’d gone to college with and their parents, and did  a deal, made money, and then we raised money for another project, and they introduced me to a few folks… “Hey, you might wanna talk to him”, and over 12-13 years it’s just kind of been this revolving door of meeting new people through our current network of investors.

The family office environment – they’re all very close with each other, they kind of live in their own world, so you get introduced to family offices from other family offices; they co-invest together a lot… And in the high net worth, kind of friends and family world, yes, it can work both ways, but if you go make somebody money, they wanna tell their ten friends about you. I guess if you lost somebody’s money, they might go tell 100 people about you, so it works both ways. We’ve been fortunate to continue to earn people’s trust, and we get introductions all the time, really without asking… And we’re taking them to heart, and cherish them, and we treat our investors like our customers.

Joe Fairless: What’s the difference between working with a high net worth individual compared to a family office?

Chris Powers: I think the main, general differences are a family office typically has hired investment professionals; they could be MBAs, or really smart accounting/finance people, and their job is to deploy capital into assets that will keep making the family money. The family at that point usually doesn’t need to be making huge returns, because they’ve already made their money; they’re more trying to grow steady, consistent wealth… So when dealing with a family office, I think there’s just a lot more kind of — I wouldn’t say red tape, but just more hoops you’ve gotta jump through to kind of check all their boxes.

They’re in the business of investing, so every investment they make, they treat it very much like a business, and they require good reporting and communication and all the things we already do… Whereas a high net worth individual, which basically just means they have a lot of money – they might be a one-man show, they have a couple million dollars of cash in their bank account, they go put 100k or 200k into one of your deals… They don’t really have any systems or processes set up to kind of constantly monitor you and be checking in.

I think high net worth people tend to be more passive, because they have other things going on in their life… And typically, they’re not investing enough into any one of our deals that they have to watch us like a hawk. They’re probably allocating 1% of their net worth into any one deal, and so they tend to just probably be a little more flexible to deal with, a little easier to work with… And not that family offices are tough, it’s just more work.

Joe Fairless: What type of terms, generally – or specifically, if you can be specific maybe about a deal – would a family office be provided on a deal if they are the only limited partner, versus high net worth individuals? …if those terms are different; perhaps they’re not.

Chris Powers: They are different. I think you can do better as a general partner or an operator if you syndicate capital from a multitude of capital sources to where not any one investor is more than 20% of the total partnership. If you just had one investor that was a family office, you might achieve terms that look similar to some type of preferred return with a split in the back-end, so it would be like an 8% preferred return, and then a 70/30 split on everything over an 8%.

What that means is if somebody gives us a million dollars and we give them an 8% preferred return, it’s basically like an interest rate on their money. We need to pay them 80k that first year, which is that 8%, and then if we sold it a year later and let’s say we made a million bucks in profit, we will pay the first 80k to pay their preferred return off, and then everything left, which would be 920k, would be split 70% to the partner, which is the family office, and 30% to us, which is the general partner.

On friends and family syndicated deals, or even with high net worth and family offices, a syndicated deal, and we might get something more like 60/40, or we’ve done deals where (it was a land development deal) we knew we’d only be in it for a year, and we just offered our equity partners a 20% interest rate on their money. It was equity, but as long as we paid them 20%, we kept everything above that. That worked, as long as we stayed on schedule and sold quick, and met our timelines. The longer we would have had to hold that project, it would have kept eating out of our potential profit, and so we were willing to take the risk that we would execute, and for that we were offering a guaranteed 20% return, assuming that the deal was profitable.

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

Chris Powers: My best real estate investing advice ever is location matters; it’s the common, common thing. Buy good locations. They’re the first to come back in a down market, and they do the best in an up market. And I think more than anything it’s just knowing your market. So wherever you’re placing your money, wherever you’re investing your money, it is super important to not just know about the one property that you’re looking at, but know everything else going on around it – who’s moving in across the street? Does the city council member like development? Do they not? Is there environmental issues? What are the rental rates in the area?

You can look at a lot of maps online, and everything on Google Earth kind of looks close to each other, but you know very well in your specific cities that you wanna be on this side of the street, not this side of the street, or on this corner and not that corner.

Knowing all those little details is what we call knowing our market, and the better you know it, the easier it is to find truly good investments. If you’re just looking at it like a piece of property and not the market around it, you can write a proforma, you can do all that work, and you think it looks good, but if people are leaving the city because there’s no jobs and everything else, the market could take that down quickly. So know your market and buy good locations.

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

Chris Powers: Let’s do it.

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

Break: [00:21:29].06] to [00:22:33].04]

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

Chris Powers: Traction, by Gino Wickman.

Joe Fairless: Best ever deal you’ve done that you haven’t talked about already?

Chris Powers: I assembled 36 homes in the hottest area of town – replotted them, re-entitled them and sold them to a multifamily group.

Joe Fairless: Dang! That’s impressive. That’s Sam Zell style, he opens up his book — have you read that? “Am I Being Too Subtle”

Chris Powers: No, what is it?

Joe Fairless: Well, he opens up his new book by saying that’s how he got started in Ann Arbor, Michigan, assembling a bunch of single-family homes, and i think he did some student housing development with it… How long did it take you, what were you all-in at, and what did you sell at?

Chris Powers: It took us six months to buy all the homes, it took us seven weeks to put it under contract with the group, it took us 18 months under contract to entitle it and get to closing. Our total all-in — so we bought it in 2011, which was kind of at the bottom of the market, or kind of coming out of the bottom… We bought the land for $11/foot, which basically put us all-in at about 3,5 million dollars, and we sold it for 10,8 million dollars in 2013 to a multifamily group.

The lesson there is, obviously, buy low, sell high, but more importantly, as the urban core continues to grow, there are opportunities to take land that was once just a single home and create the correct zoning and density you need to where we turn those 35 single-family homes into 420 class A apartments, on the same amount of land. So land prices can go up considerably when the density that you can get on them increases considerably.

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

Chris Powers: I think the biggest mistake we’ve made — I think this is with every business, but trying to be too many things to too many people. At one point we were trying to do property management, construction, fully-integrated, and we weren’t really great at property management, so it just was a mistake. We got out of property management and now we’re doing much better.

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

Chris Powers: The best ever way I like to give back – we support Rivertree Academy in Fort Worth. It’s a private school built in one of the most challenged neighborhoods of Fort Worth. They are starting with kids in kindergarten and growing them through sixth grade. These kids are doing phenomenal, they’re flourishing.

So overall, our theme across the company is helping children that have challenges in their life get the most out of the opportunities available to them.

Joe Fairless: How can the Best Ever listeners get in touch with you and learn more about your company?

Chris Powers: They can go to our website, FortCapitalLP.com, or follow us on Instagram, @fortcapital, or come to Fort Worth, Texas and let us know, and we’d be happy to host you at our office.

Joe Fairless: I got a lot of value from this interview, I personally did, and I’m really grateful that you were on the show. I learned a whole lot, from an ideal industrial property, really validating my thought on development, but then also there is opportunity with value-add development, which I guess is redundant – all development is probably value-add. But the example where you talked about the best ever deal, where you essentially profited about 7 million bucks, you and your investors…

And also talking about the difference between having family office investors versus high net worth individuals, and the structure of that – both communication style leading up to the closing of the deal, and then also the structure that you had with them.

Thanks again for being on the show. I’m really grateful. I’m sure that this added a lot of value to a lot of the Best Ever listeners. I hope you have a best ever day, and we’ll talk to you soon.

Chris Powers: Thank you very much, Joe. Have a good one.

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Best Ever Show Real Estate Advice

JF1402: From 6 SFR’s To 200+ MF Units In 7 Years with Greg Ford

Today’s guest did not mess around when he got started in real estate. He rolled up into multiple multifamily buildings and communities. Hear how he was able to do it. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Greg Ford Real Estate Background:

  • Real estate investor since 2010
  • Purchased 6 single family homes from 2010-2013 which he 1031’d into 50% ownership into an 85 unit apartment complex in 2016
  • Refinanced in July 2017, pulled out $1.5M, which rolled into 136 units
  • Say hi to him at gregfordinvestingATgmail.com  
  • Based In Dallas, Texas
  • Best Ever Book: Rich Dad Poor Dad

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TRANSCRIPTION

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 fluffy stuff. With us today, Greg Ford. How are you doing, Greg?

Greg Ford: I’m doing good, thanks for having me on.

Joe Fairless: My pleasure, nice to have you on the show. A little bit about Greg – he’s been a real estate investor since 2010. He purchased (listen to this…) six single-family homes from 2010 to… What year?

Greg Ford: The last one I bought was 2013.

Joe Fairless: 2013, which he 1031-ed into 50% ownership into an 85-unit apartment complex in 2016, and then in July of 2017 he pulled out 1.5 million and rolled that into 136 units. Did I get that right?

Greg Ford: Yeah, that’s pretty much right.

Joe Fairless: Alright. Well, we are gonna dig into that. He’s based in Dallas, Texas. With that being said, Greg, will you give the Best Ever listeners a little bit more about your background and your current focus?

Greg Ford: Sure. Well, first of all, I’m an industrial engineer by trade, so I’ve got the engineering background that loves to crunch numbers and sometimes I have analysis paralysis, but we try to get rid of it. I still have, to this day, a full-time job, and I do that mostly 9-to-5, but I do have some flexibility to do my real estate, and I have to admit, my job gets in the way of my real estate quite a bit. However, my focus was initially on single-family, and in 2010 I saw that the market was [unintelligible [00:02:36].16] down at that point, as we all know, and I thought it was a good opportunity to get in there, and I didn’t have any education at all… So I just bought a house that was near where I lived, and started renting it. Then I bought another and another, and I started seeing the cashflow and I really enjoyed it, and it’s kind of mushroomed now to where I’m primarily focused on multifamily, and I’m sure we’ll talk more about that.

Joe Fairless: The six homes that you purchased in 2010 to 2013 – how much total equity did you bring to closing for those six houses?

Greg Ford: My average purchase price was probably around $160,000, and I did the traditional 20% down on those… I did get creative on where to get that $20,000 from; in some cases, I took a loan out on my 401K, in some cases I [unintelligible [00:03:28].10] and sold, for that matter, IRA accounts and paid the taxes and then used that for the down payment. I saw that even if I was paying the penalty to get to those retirement assets, that my return here was gonna be far greater, and it was worth it to do it.

So the reasons that those houses were spread between 2010 and 2013 was I didn’t wanna create a huge tax impact in any one year by selling the retirement assets, so I spread it out a little bit.

I really didn’t have the education, I didn’t really know what I was doing, I just kind of knew that this was working, and if I had to do it again, I’d probably do it a little bit — in fact, I think most of us would probably do things differently… But that’s how I took 3-4 years [unintelligible [00:04:10].03] to acquire the six single-families.

Joe Fairless: If you had to do it again, I’m guessing you would compress that a little bit and do more in a shorter period of time?

Greg Ford: I think yeah, certainly. In hindsight, 2010 was a fantastic buying opportunity; we know the market has gone crazy since then, so I think we had to do it over again, we would certainly do that… And I would probably be a little less gun-shy about selling my retirement assets and diving in head first, even if it meant short-term tax paying… I’d be much farther along.

Joe Fairless: So the six homes, according to my math, you said approximately 130k per house, on average?

Greg Ford: 160k was the purchase, and then 20% down.

Joe Fairless: Let’s just round that for easy math – 200k. So 200k out of pocket… You did it in creative ways, but at the end of the day it was 200k out of pocket… So let’s begin where you then made a decision to package them together into a 1031 – can you talk to us about that?

Greg Ford: Sure. Well, 2013 was my last purchase. Sometime around 2014 I kind of took a look around, and honestly, time got away from me, and I look back and I say “You know, it’s been a year since I’ve done anything. I really need to kick this in gear. I need to do something and take more action, because I’m not gonna get where I need to be taking this with one or two houses  a year kind of thing.”

So in 2014 I made a decision — and I guess it was really towards the end of 2014. I said, first of all I’m gonna hook up with a local mentoring group, because I wanna start learning the right way to do this… Because up to that point, I had really just been kind of feeling my way through, reading a few books here and there, and… It was working, but I wouldn’t say I was crushing it.

At that time, those six homes were probably producing $2,500 – $3,000 a month in cashflow. Now, that’s before my capital reserves… So by the time I paid for repairs and things I might have been down to $1,500 or so of cashflow on those six, so they weren’t exactly crushing it. I knew I needed to do something a little more dramatic.

So I hooked up with some mentoring group, and then I said “Alright, well, let’s look at multifamily.” Bottom line is we decided that my homes – one of the calculations they had me do which I had not done was look at my return on equity.

Obviously, between 2010 and 2014 those homes had appreciated in value, and what we determined is my return on equity was very low; it was 3%, 4%, 5%. So the first thing that came to mind was let me do a refinance on these, do a blanket loan, pull out some cash from these homes – this was before I sold them and 1031-ed them… And I got about a quarter million dollars out on the cash-out, and I put that whole quarter million dollars as a passive investment into some syndications just so I could learn the multifamily side, and start to understand how that was all gonna work… Because prior to 2014 I didn’t even know what NOI meant. I didn’t know that whole calculation, I didn’t know the whole books side of it, and I was just like “Alright, it’s time to learn.” So that’s what I did initially in 2014.

Then in 2015, after I’d been doing the passive investing for about a year – those had been going great, I’d been working with the lead syndicators to really understand what they do… And I met a gentleman by the name of Mitt, and he and I were kind of in the same boat, and we were looking to do our first multifamily deal… And I figured I could afford about a 40-unit complex if I cashed out and sold all my six single-family homes, and he was in the same similar situation… And he said, “Well, why don’t we work together and we can find maybe an 80-unit. This way we could afford management, and we’ll both have full-time jobs…” This was just gonna work out better, so that’s what we decided to do at that point, and this is now late 2015 at this point, so a whole other year had rolled off the calendar.

Sure enough, Mitt was a passive investor in a syndication that as a group they had decided to sell their property. They’d already owned it for four years. Mitt and I were talking like “You know what, this would really be cool if we could just buy this”, because it was an 85-unit in Irving, Texas… So we approached the lead and said “Hey, let’s just keep this off-market, and what if we come in and buy the partnership out?”

At the time, to kind of bait that a little bit, we said “If any partners that are currently in here wanna stay in here, we’ll be happy to have them stay, but if they wanna sell and they wanna get out, then that’s fine, we understand that, too.” It turned out that the other six that were in there voted to just cash out; they wanted to take their money and go on their other ways.

So now we had the tricky situation of pulling that off, and we got hooked up with a local real estate attorney and a local tax person, and they crafted a situation to where we came in as tenants in common, two 50% ownerships. Now, like I told you, Mitt was already a passive in that deal, so in the sales agreement what we agreed to was that there would be a two-day close. On day one of the close the existing partnership would split into two 50% pieces. Mitt would only be part of one of those pieces.

Then on day two of the close, Mitt would buy out the remaining share to get him to 50%, and then I would bring my six homes in as the 1031 exchange and buy out the other 50%. That’s how we closed that deal. Obviously, there’s a lot of moving parts there.

Joe Fairless: A whole lot of moving parts there. That is fascinating… How did you qualify your partner? Because you’ve taken fees on your retirement funds to get the access to that money, you have spent 3-4 years acquiring this capital through your investments, and now it’s very precious to you, I imagine, the six homes, and now you’re gonna roll this into something else… But instead of doing it on your own, you decide to partner with someone, so I imagine the qualification process was something that you went back and forth with in your head to know if this is the right thing to do.

Greg Ford: It certainly was. Now, I had gotten to know Mitt — at the time we ended up doing the deal I’d known him for about a year and a half at that point, and spent a lot of time even outside of the mentoring group talking, and his son and my son were in gymnastics together, and we got to know each other a little more that way… So it was definitely that part of it.

But I was looking at it more from an enablement. As a 40-unit, which was my original goal, I may not have been able to afford on-site management – I certainly would have had a third-party property manager running it – and I wasn’t really scaled. Scale wasn’t there. And when Mitt told me he was looking for something very similar to that, that’s when we started saying “Well, now with an 80-unit we can afford to have on-site management”, and it just seemed like it would scale much better.

It just so happened within a month of that discussion is when that partnership that he was part of decided they wanted to sell theirs, and we jumped all over that.

Joe Fairless: So now you’ve got an 85-unit at this point in time in the story… Tell us about how that went.

Greg Ford: Well, let me tell you about the 1031 process just a little bit, because again, my not being educated as well as I am now, I decided that since these homes were in a very affluent, suburban area, part of Dallas, I said “I think the right angle here is they’re not good rental properties anymore, because of the price appreciation, so I’m gonna sell these individually…” And I had the foresight to set all the leases to expire at the same time – I think it was in June 2016. I had my realtor that I’d been working with all of these years – I had him market them and sell them, and I thought that would be the easiest part of the process. It actually was the hardest part of the process… Because what I thought would be easy — the reason it wasn’t easy was because we had rental homes, and they were competing against homes that people had lived in and were pretty well upgraded, and the countertops in some cases, and nice flooring, and mine were just average builder grade [unintelligible [00:12:44].12]

So here we are, getting ready to close – or I won’t say getting ready to close, but we certainly were under contract – and I wasn’t completely assured that these were gonna sell in time to provide the funds for the closing.

It got down to where several had gone in and out of contract, people had backed out, and I was getting a little nervous, so we were talking about plan B – where do we get these funds from?

For me in  total I needed about $400,000 of equity to do my 50% share, and these homes were gonna be about $400,000. Bottom line is we got down to the end and five of them did sell, but one did not, so when talking with the 1031 company we ended up doing a reverse 1031 on that one, because it was under contract, but it wasn’t closed… And the way reverse 1031’s work – you basically get a short-term loan and you’ve gotta cover the equity. So I basically did that, I had the money to do that, a part of it – it was about $50,000 or so – and we were able then to close the apartment. Just a crazy way of getting there, but we did, we pulled it off.

Joe Fairless: No kidding. You went from a single-family home investor to putting together one of the more complex 1031 exchanges and deals you could possibly do, with ticks, and reverse 1031’s, and normal 1031’s… It’s baptism by fire.

Greg Ford: Yeah, absolutely. Anyways, we got it all closed, we took over the property… When we took over the property – this was in August of 2016 – there were probably 5-6 vacant units out of 85. We had a plan to renovate them and kind of test the rents, and the funny thing was, since we got the property management team in place, and I don’t remember what day it was they took over, but we came to meet with them on-site a few days after closing and tell them like “Okay, here, we wanna renovate these, and this is what we’re gonna do” and they’re like “Oh, well we’ve already rented all five of these.” And not only did they rent them, but they rented them for quite a bit more money than they had previously been renting for, even without doing the upgrades, and we were like “Oh, okay… So we’ll have to wait now for some units to turn over.”

The third-party management team, and specifically the manager that they brought in was really a fantastic salesperson. She could sell ice to an Eskimo, so she had a really good ability to keep that property occupied… And it had never had an occupancy problem before, but now it was really — when we got one or two, it was a lot.

So one of the projects that was our cap-ex was to reseal the parking lot, asphalt the parking lot… And we said, “Hey, let’s go to the residents…”, because the previous owners, the previous syndication group had tried to sell reserve parking to the residents, and I think they were charging $30/month for a spot and they only had a couple people doing it. It really wasn’t an income-generating source. We said we’d reseal this parking lot anyway; let’s put a  special out there to the residents saying “Hey, $15/month (which was 50% off), and after we reseal it, we’ll put your name on it/your reserve spot on it.”

With this manager we had in place, she sold the heck out of that. Before we knew it, currently today we have $1,300/month in parking income, that if you do the math – let’s say you use a 6-cap, that’s almost $250,000 a year in value that we created out of nothing, and it was all because we just said “Let’s try it. Let’s give it a shot and see what happens.” That was an example of one thing that we did that was just crazy.

Joe Fairless: And you didn’t do carports, you simply painted “Reserved” on certain spaces and then rented those spaces out for $15/month?

Greg Ford: Yup, that’s all we did. We had virtually no expense other than the initial paint on that, and it’s been fantastic. Now, one of the reasons I do think it works, and it work here at this property versus maybe another one [unintelligible [00:16:50].07] I think we’re about a 1.3 ratio to units, so I think that helps, and we’ve certainly hit a critical mass at some point where everybody realized that “Hey, somebody just reserved this spot that I always park on. I’d better go get in line.” At some point it just took over and we have virtually now every spot rented at this point. And $1,300/month, that’s like a unit and a half of rent that we created out of nothing.

Our goal on this whole property has been looking at other income opportunities. We have looked high and low for where we can get other income, between — we own the laundry equipment… As I started to mention a minute ago, we took some units and we fenced them a little backyard between the units as a little experiment, to see if we could get a little bit more rent. About $25/month is what we’re currently pushing for, and that’s been mixed results; I won’t say it’s been a home run, but we’ve tried that…

Joe Fairless: Are you doing it on request, or are you doing it for everyone and then they pay…?

Greg Ford: Well, there’s only a certain number of specific units that we can do it on that have the land and the [unintelligible [00:18:01].05] There’s only about 8 units that we can do it on. We did four, and then of course, those four were already under a lease when we did it, so we went ahead and just installed the fence… So as the leases have been renewing though, we’ve had the discussion that this has a premium with a fenced backyard, and trying to get the $25. I said earlier that there were kind of mixed results; in some cases they pushed back and rather than lose them as a tenant we said “Alright, fine, we’ll just renew the regular rent renewal”, and in other cases they did.

So I wouldn’t say that’s been a home run, but it has certainly been a source of a little bit of revenue per month. I don’t know that it’s offset the cost of the fence installation, so we haven’t done the others yet… But just anywhere we can generate other income has really been a focus.

Joe Fairless: How much does it cost to install the fence?

Greg Ford: I wanna say we spent about $7,000 maybe. I don’t know how long it was… But we fenced four units and we spent $7,000.

Joe Fairless: Per unit or in total?

Greg Ford: No, total for all four.

Joe Fairless: Okay, got it. So around $2,000 or so.

Greg Ford: Yeah, and then if you could generate – what is that, $400 a year, and then again, go back to your 6-cap, it might take a year or two to account for it… So I guess it has been kind of a mix on that… But when we took over this property, the total revenue was about $58,000/month; that was everything, including vacancy and everything. Our total actual revenue was about $58,000 and we’ve improved it now to about $73,000/month. That’s been in the space of just under two years.

The focus on the unit renovations, the focus on the other income, the focus on just revenue as a top line item has been fantastic.

Joe Fairless: What management company do you have on that?

Greg Ford: We use a company here in Dallas called Devonshire. They’re primarily C class focused, I would say, maybe B- focused; they have about 8,000 units last I looked.

Joe Fairless: So you now have recently(ish) – well, now about a year ago – refinanced the 85-unit and you pulled out 1.5 million… Is that 1.5 million all yours, or is that yours and your partner’s that was rolled into 136 units?

Greg Ford: That was me and my partner.

Joe Fairless: So 1.5 million, and then obviously half of that is 750k… So you began with approximately $200,000 from the six homes in equity that you put out, and then in July of 2017 that 200k grew to 750k, plus you no longer had the six single-family homes, but you had a 85-unit property that also I imagine has cashflow on top of the $750,000. Is that all accurate?

Greg Ford: That is all accurate. Most of the cashflow we’ve been plowing back into the property for renovations and cap-ex; we’ve been taking a little bit, but most of it we’ve been reinvesting it right back into the property. But when we got this cash-out proceeds, that 1.5 million total, the two of us decided — we had an opportunity to buy 136 units in Balch Springs, TX, which is on the East side of Dallas. We knew that about 2.5 was the total raise for that, so we brought in two other people with us.

We still maintained the tick setup in that scenario, so there’s four of us now as tenants in common on this 136-unit. Mitt and I are probably about 75% owners of it. We were able to buy that, and we are operating that now. Devonshire is doing that for us as well, and it’s working out quite well as well.

Joe Fairless: I just love hearing these stories… And again, $200,000 initially has turned into ownership interests in a 136-unit where you own 36% in a 136-unit, as well as 50% ownership in an 85-unit. That’s awesome.

Greg Ford: Yeah, and the cashflow combined –  I told you earlier my six single-families officially on paper was about $2,500/month, but after I put my cap-ex reserves, it was more like $1,500/month. Now my cashflow has tripled and quadrupled from that, just from the larger assets that we’re owning.

So when I was saying earlier that I was selling my retirement accounts and paying the penalties, it absolutely was worth paying those penalties. It hurt at the time, but I had the long vision in mind of where I wanted to get to, and it’s played out quite well.

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

Greg Ford: In my case, as a full-time employee, property management is key. Be picky about who you select, not just pick anyone; find someone with a track record. I think that’s been essential to my success with doing this… And cashflow is also king. Cashflow gives you options, so pay attention to cashflow.

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

Greg Ford: I am ready.

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

Break: [00:23:32].18] to [00:23:51].20]

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

Greg Ford: Well, recently I listened to a lot of audiobooks. Recently the one I read was Tax-Free Wealth, but I wanna say the best one overall was Rich Dad, Poor Dad. I know that’s [unintelligible [00:24:03].03] but it really did open my eyes to the possibilities of what real estate could do.

Joe Fairless: Best ever deal you’ve done, out of all the deals you talked about?

Greg Ford: That 85-unit actually I think is the best deal. It was the catalyst to everything else at this point, by far.

Joe Fairless: What’s a mistake you’ve made on one of these transactions?

Greg Ford: A mistake I’ve made I think would be not getting enough opinions on whether it was a rehab, or a renovation, or just an idea of something that might work. My partner Mitt is just more social than I am, to be honest with you; as the engineer, I like to crunch the numbers, but I’m not as engaging as I probably should be with people. He’s my alter on that, so from a partnership standpoint it works really well.

I would say we’ve run into a few problems where we’ve spent more money for a rehab than we thought we were gonna spend. We might have gotten three bids, but if we’d just talked to even ten more people, we could have seen a better way to do it.

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

Greg Ford: At this point I’m learning every day, but I really like to take the person that was in my situation 6-8 years ago today, and show them the map. I’ve always really — I meet these people probably now weekly, especially in the mentoring groups that I’m part of now. I’m part of many of them. I’m happy to spend an hour at lunch or a coffee shop and just kind of help paint a picture of what is possible if they just think a little differently.

Joe Fairless: And how can the best ever listeners get in touch with you and learn more about you?

Greg Ford: The best way is probably through e-mail. I have an e-mail address, it’s gregfordinvesting@gmail.com. Send me an e-mail and I’ll be happy to talk further.

Joe Fairless: Great, so gregfordinvesting@gmail.com. Greg, thank you so much for being on the show, sharing your inspirational story of how you started with a single-family house and now have a portfolio where you have substantial ownership in a 136-unit plus an 85-unit property.

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

Greg Ford: Thank you.

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Guest Pete Kelly smiling on Best Ever Show banner

JF1394: Increase Your Bottom Line By Creating Relationships Among Your Tenants with Pete Kelly

Pete and his company, Apartment Life, help apartment owners create a strong community within their apartment complex. They have found that when tenants are getting along and have friends within the apartment community, they are happier, which leads to better reviews, and increased likelihood that they will renew their lease. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Pete Kelly Real Estate Background:

  • CEO of Apartment Life, a faith based nonprofit serving the multifamily industry
  • Helps improve a community’s financial performance through online reputation, resident satisfaction, and resident retention.
  • Say hi to him at https://apartmentlife.org/
  • Based in: Euless, TX
  • Best Ever Book: What Got You Here Won’t Get You There

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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. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Pete Kelly. How are you doing, Pete?

Pete Kelly: I’m doing great. Thanks for having me, Joe.

Joe Fairless: Yeah, my pleasure. Nice to have you on the show. A little bit about Pete – he is the CEO of Apartment Life, which is a faith-based non-profit serving the multifamily industry. He helps improve a community’s financial performance through online reputation, resident satisfaction and resident retention. Based in Dallas-Forth, or if you’re familiar with DFW, more specifically Euless, TX. You can learn more about his organization at apartmentlife.org.

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 Kelly: Yeah, sounds great. Thanks, Joe. As you mentioned, I’m CEO of Apartment Life. We are a faith-based non-profit in the multifamily industry, and over the last 18 years we’ve been honored to serve 1.3 million apartment units and over 3 million residents from coast to coast… And if I were to explain what we do in the very simplest terms – we help people make friends. Our central belief is that relationships are not just good for the soul, they’re also good for the bottom line.

Joe Fairless: I certainly agree. The more that the residents know each other and connect with each other, the more they are likely to enjoy the living experience, and then ultimately stay longer, which is  a big cost (turnover). So tell us maybe high-level how you do it, and then we can get into some specifics.

Pete Kelly: Yeah, that sounds good. Well, a lot of what I’m gonna share is directed toward apartment owners, but I think the principles apply to people who own single-family homes or duplexes as well. If I could give one piece of advice, it would be that the relationships your residents have with one another is more important than you realize.

What we’ve seen is that a lot of apartment owners are focused on the physical amenities – the granite countertops, how nice is your pool, or your clubhouse, or your exercise equipment – and they’re also focused on services, like making sure they have good maintenance, bundling cable and internet, package storage, package delivery… But I think one of the often overlooked amenities is that the residents themselves are an amenity. In fact, I would say that they’re the best ever amenity that you can have, because good neighbors make for great neighborhoods.

Joe Fairless: Absolutely.

Pete Kelly: So what we’ve found is that the more friendships that a resident has in an apartment community, the more likely they are to renew their lease and be satisfied and boast about it online… So that’s what our company specializes in. We place one or two people in the apartment community, they’re kind of like the welcome wagon – they welcome new residents as they move in, they host all the parties and events, they look for opportunities to care for people.

Let’s say a young couple just had a baby – they might swing by, and on behalf of the management company bring them a small gift, and say thanks. Then 90 days before that resident’s lease is set to renew, they’ll visit them and they’ll say “How do you like your stay here? Are you thinking about sticking around?” What we’ve found is if they do that, it creates a sticky community where people are happier and they wanna stay, even when the rents go up.

On average, we’re saving owners $138,000/year in resident and staff turnover, and it increases their online reputation. So to summarize, if you wanna differentiate your community from the competition, I’d say be intentional about creating community.

Joe Fairless: I completely agree, and thank you for talking through that. One question that comes to mind – you mentioned that the relationships residents have with each other are more important than we realize… But the welcome wagon, as you call it, the 1-2 people that you place in the community – those are not other community members, those are people hired by the owner to then basically stay in touch with the residents… So is that the program, or is the program getting the residents who also live at the apartment community to get to know each other and build a community that way?

Pete Kelly: Joe, that’s an excellent question. We have two models of service. We have an on-site program where this Apartment Life team – they actually live on the property as one of the apartment residents. That’s our most traditional model, the on-site model… We also have an off-site model, because some owners don’t wanna concess a 2-bedroom 2-bath unit. But either way, not only are they engaging with the residents themselves, but they’re serving as a catalyst to help people make friends.

When my wife and I first moved to Dallas, we lived for about nine months in an apartment community. They would have parties, they would have events, they would put food out, but my observation was that everyone hung in their own relational group, they didn’t interact with each other, and I wondered “How much better would this be if there was a catalyst that was working the crowd, introducing themselves and introducing people to one another? How much more of a sticky community would that have been?”

Joe Fairless: So how does that play itself out? Let’s go with the on-site model… So we bring in a couple people who live on-site, and they are primarily from a business standpoint responsible for lowering turnover costs and increasing the bottom line; they’re doing events and they’re visiting residents 90 days before, “Hey, how’s your stay?”, but in terms of connecting one resident with another, how does that work?

Pete Kelly: Well, it’d be as simple as when you’re at an event and you’re mixing it up with the different residents, you’re like, “Oh, you live in building number two… Hey, have you met Joe over here? He lives in building number two.” Or “You said you’re into water skiing… I noticed that Bob over here is also into water skiing”, or hunting, or whatever the common interest may be. So they’re always looking both for their connection to the residents, because that helps people feel safe if there’s one person kind of looking out for them, making them feel welcome… But they’re also always looking “How could I connect residents with one another?”

Joe Fairless: Let’s do the on-site model. Is it typically a couple that moves into a unit?

Pete Kelly: Yeah, it would be typically a couple. It could be two singles, but the most common would be like a husband or wife, typically either before they have kids, or maybe only one, or empty-nesters. We don’t see a lot in the middle, because at that point families get bigger and it becomes unwieldy to do the program.

Joe Fairless: Sure. So a couple moves in, and they host an event… How do they introduce themselves to the other residents?

Pete Kelly: I would say “Hey, my name is Pete Kelly. I’m your Apartment Life team here. On behalf of the management team I want to welcome you to this community.” So they serve as kind of a liaison between the management company and the residents, they’re kind of an in-between. This isn’t their full-time job, so all of our teams have outside employment; this is what they do in night and weekends. It’s kind of like a part-time commitment that they would have to that community.

So they really straddle two worlds – they serve as goodwill ambassadors to the management team, but they also are themselves a resident, so they wear two hats at once.

Joe Fairless: And what is the incentive for the individuals to move on-site?

Pete Kelly: For the on-site model, their compensation is in the form of reduced rent. The owner would concess a 2-bedroom 2-bath unit which we would turn around and give to the team so that they could use that. In addition to that, the owner pays a management fee, and obviously, for any events that they would host, they would cover the cost of those events. We recommend $1,50/door to throw a decent number of events each month.

Joe Fairless: Okay. You said reduced rent – was it reduced, or is it free rent?

Pete Kelly: The owner concesses the unit to us so that we can lower the cost of the management fee to the owner. The team does pay a little bit to be part of the program. They pay roughly 30% of the rental value to Apartment Life, and what that does is that enables us to keep the management fee to the management company as low as possible.

What we’ve found is that when teams are having to pay a little bit, there’s a little bit of skin in the game, and it also gives us an ability to recourse if, for some reason, the team isn’t performing up to the standards that we need them to perform up to.

Joe Fairless: Sure. So as an owner, the investment is give a unit to your organization, so free rent, and then I should allocate $1,50 per month towards hosting an event, and they’ll handle everything else… And then what is the management fee?

Pete Kelly: The management fee would be $650/month, and that covers the cost of our going out and finding these teams, training, equipping and making sure that they’re delivering the results that they need to please the ownership and the management.

Joe Fairless: And then you mentioned earlier $138/year savings, and it increases online reputation. First off, did I quote you correctly? And secondly, is that net of your fees?

Pete Kelly: $138,000 gross savings. You would take the fees off of that. Typically, I’d say we would bring net over $100,000 in value.

Joe Fairless: Got it. Okay, so net over $100,000 in value, so clearly we’d have to determine what size of property we’re talking about, because a 50-unit wouldn’t have, I imagine, over $100,000 in value… So what size property are you referring to with that stat?

Pete Kelly: In our traditional on-site program, our core would be 250 units and above. So it’d be your larger traditional apartment communities, versus your small, privately-owned ones.

Joe Fairless: And to determine that net of $100,000 in increased NOI, what metrics do you show the owner?

Pete Kelly: There’s a couple ways that we go about it. We have a well-respected economist named Ron [unintelligible [00:11:30].01] that for a small fee ($200) will do a study, and we’ll cover the costs of that for the owners themselves. It involves a survey of the management staff and the residents to gauge to what degree is the program influencing their likeliness to renew, and the same for the retention of staff, because that’s one of the things we count about our program – not only does it make the residents’ lives better, it makes the management team’s lives better… So that’s kind of a hidden savings for the owner themselves – you have less employee turnover.

Basically, [unintelligible [00:12:05].20] he’s got a model and he can show you “Here’s all the factors, here’s all the assumptions”, and on average it saves $138,000/year, so if you take your costs out, that’s a net of over $100,000 in savings.

Joe Fairless: And it’s based on basically a survey that asks if they’re likely to renew or not, and if so, how much influence did the program have in that decision?

Pete Kelly: Yeah, exactly. In addition to that, we do an annual property manager survey and we ask the management staff “In your estimation, how many leases a month would you attribute to either a new marketing side, or renewals, how many would you attribute to Apartment Life?” Annually, that comes out to 42 leases a year… So if you know your turn costs and your marketing costs, you can extrapolate 42 — let’s say your turn cost is $2,000. You multiply 42 leases times $2,000 and that would tell you what your annual savings are.

So there’s a couple different ways you can approach it. Obviously, there’s a whole lot of factors that go into retention and resident satisfaction, so we have to lean on the preponderance of the data to quantify the value of what we do.

Joe Fairless: When you speak to a multifamily owner who has a 250-unit property, when would it not make sense for them to participate in this program, based on your perspective?

Pete Kelly: Well, it may not make sense if they don’t wanna concess the 2-bedroom 2-bath. For some people — we’ve had a lot of owners say “Hey listen, I know I’m always gonna have an unused unit, so to me that’s not really a cost. In fact, I’m taking a unit that’s not doing anything for me and I’m in a sense monetizing it to get this program that saves me money.” So depending on how you view the concessed unit – some people don’t like to do that, because that feels expensive and it looks badly on their books, but others are like “No, I’m gonna have that, so it’s not a big deal.”

So for the ones that don’t wanna concess it, we’ve developed an off-site model where instead of giving the team a 2-bedroom 2-bath unit, we pay them an hourly wage to execute the program on-site.

Joe Fairless: And that would be, I imagine, primarily the monthly events?

Pete Kelly: That would be primarily the monthly events. There’s other things we can do. For example, I’d say our core is the class A and the class B assets, but more recently we’ve been surveying tax credit properties with managing their [unintelligible [00:14:38].02] requirements. So we have an additional service that helps that, as well… So for tax credit property owners, that’s an additional value-add for them.

Joe Fairless: How much of a focus would the on-site group – regardless if they’re living there or not, assuming that they’re hired… How much of a focus is it of them to promote and quite frankly generate online reviews by doing these events, and taking pictures, and having the residents post them, or however you do it?

Pete Kelly: It’s actually an increasing focus of ours. Over the last year we’ve introduced that as an increased value-add, because as we’ve looked at the multifamily industry, everyone knows that online reputation matters. They don’t know how to quantify how much is one star versus two, or three stars versus four, how much is that extra star worth, but everyone knows that it matters, because it drives traffic.

So what we’ve coached our teams to do is on every welcome visit, every renewal visit, every partying event, whenever they encounter a satisfied resident, say “Hey, as a personal favor to me, would you be willing to go online and put a positive review?” That really helps me, because in a lot of ways we’re able to do this program as we serve the management team. And if we’re doing that well and it’s showing up in positive reviews, that helps us.

So they can make that appeal as a friend to a friend with their other residents, and it’s so much more powerful than if the management staff just hands them a card, “Hey, would you do me a favor? Would you go online…?” It’s more of a friend-to-friend appeal, so it kind of lands differently… And what we’ve found is that’s really positive.

I’ve met teams that will say “I’ve got phone numbers of 200 residents on my phone right now.” All they need to do is reach out to them, text them and say “Hey, would you be willing to do me a favor and go online and post a review?” So a lot of our teams have been able to see dramatic results in a short period of time by capitalizing on their relationships.

Joe Fairless: Other than the on-site event, how many hours would you say they spend basically cultivating a community and helping generate online reviews a month?

Pete Kelly: We would say for a traditional on-site team, which is the 2-bedroom 2-bath unit concession, that we would expect that the team would give on average, between the two of them, 20 hours a week to the program. That could be preparing the events, promoting the events, hosting the events, doing the welcome visits… So it does take a good bit of their nights and their weekends, so as we select teams, we have to make sure they’re able to commit to that, because there’s nothing worse than getting in there and realizing “I don’t have the margin really to do this effectively.”

Joe Fairless: 20 hours a week – did you say per person?

Pete Kelly: Per team. It would be typically husband and wife. If they’re doing a visit, it’s best for them to do that together, versus an individual showing up at the door and knocking. So yeah, most of what they do, they would do together. Maybe shopping they would do separately, but when they’re throwing the events, when they’re doing welcome visits, renewal visits, they would do this together.

Joe Fairless: For the online reviews – is that a metric that you report back to the owners?

Pete Kelly: Yeah. Every month we send a report to the ownership group or the management group (or both, really). It shows, at the very top, “Here’s how many positive reviews that you’ve gotten this month”, and it’s got a list of all the welcome visits they’ve done… When we do welcome and renewal visits, we ask “On a scale from 1 to 5, how would you rate your satisfaction?” and if there’s anything lower than a 4, we ask them “What would make that better? Is there anything the management team could do?” Sometimes just by asking that face to face, because they wear a slightly different hat, people will tell them things that the management team would never know… Like “Yeah, our carpet was dirty when we moved in…” So immediately – they don’t wait till the end of the month for these things – when they get that, they alert the management team, “Hey, here’s something you can do to move that three back up to a five, if you would take care of that.” But then at the end of the month they get a summary of all the visits, all the events, all the comments, online reputation, and they can see for themselves, “Hey, here’s the activity for the month.”

Joe Fairless: Based on your experience, what is your best advice ever for real estate investors?

Pete Kelly: I would say if you wanna differentiate your apartment community from the competition, whether you use our program or not, I’d say be intentional about creating community, because your residents are that hidden amenity that are often overlooked.

Joe Fairless: Yes, you have sold me on that philosophy, that’s for sure… And I didn’t really need selling, but it’s nice to talk to someone who’s solely focused on it… Because I would imagine most people know it, either consciously or subconsciously, but you actually have an organization that’s executing on that idea, and that’s the key… From what I’m aware of, there’s not another organization like what you do.

How many apartments are you all in? You mentioned earlier, but I missed the number.

Pete Kelly: Well, over the last 18 years we’ve served 1.3 million units. Currently, I think we’re serving around 130k-140k units from coast to coast.

Joe Fairless: It’s a lot.

Pete Kelly: It is a lot, yeah.

Joe Fairless: How many owners is that roughly? Is it heavy on one owner, or are you spread out?

Pete Kelly: We’re pretty diversified. Greystar would be our largest client; of course, they’re the largest management company in the nation, if not the world. We serve a lot of Lincoln… But we’re pretty diversified. We’ve got a pretty wide range of owners and operators that we serve.

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

Pete Kelly: Sure, absolutely.

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

Break: [00:20:30].24] to [00:21:07].03]

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

Pete Kelly: I would say Marshall Goldsmith’s “What Got You Here Won’t Get You There.” I love that book. He talks about 21 common behaviors that sabotage your career and relationships. I think it’s one of the best books you could read to advance your career and your relationships.

Joe Fairless: What’s the best ever project that you’ve worked on as it relates to your business?

Pete Kelly: That’s a great question.

Joe Fairless: It’s like choosing between children, right?

Pete Kelly: [laughs] I think the funniest thing we do is when we break into a new market. Currently, we’re in about 20 different markets around the United States, and we’ve got our eyes on 13. Just yesterday I was up in Oklahoma City, meeting with a group of owners and people in the industry, talking about what we do, and that is so deeply satisfying.

Joe Fairless: Why?

Pete Kelly: Well, I just think they love what we do, and when they hear about it, they’re like “This is brilliant. Why haven’t we been doing this the whole time? It’s just incredible.”

Joe Fairless: What’s a mistake you’ve made along the way over these 18 years, as it relates to how your business is set up?

Pete Kelly: Well, at the end of the day, our business rises and falls on the quality of the people who are executing the program. People really are our business and our product, so sometimes when you’re in a haste to provide an owner with a team or with a program, you can believe the best in the team that you’re placing on site, only later to discover they’re not quite mature enough, they’re not quite the team that you need… So I’d say one of the greatest mistakes is not doing enough due diligence on the teams we place.

This year we’ve just had an increased focus on raising the quality of our teams and the quality of the programming that we deliver to our clients.

Joe Fairless: What is something that you do now to help with that discovery process where you find the right people?

Pete Kelly: Well, we always do phone interviews, but I think the face-to-face interview is key. When you get with people face-to-face and you can read their body language and you can see “This husband and wife – do they get along? Because if they go through a divorce in the middle of this thing, it’s gonna get really ugly for the client.”

So I think nothing beats meeting with a couple face-to-face and really looking them in the eye and seeing “Are they mature? Are they [unintelligible [00:23:33].08]? Are they relationally-equipped to do this? Do they have the margin to do this? Do they have the heart to do this?”

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

Pete Kelly: Well, two ways… One is you can reach out to me via e-mail. My e-mail address is PeteKelly@apartmentlife.org. If you’re not ready to e-mail because you wanna read more, you can go to apartmentlife.org, our website, and you can read more about it there.

Joe Fairless: Well, Pete, grateful that you were on the show, talking about your non-profit and how you structure it, the focus being on creating a community, having team members on-site – or off-site, depending on which model it is, but basically having a presence that is solely focused on creating community, having events and connecting residents with each other, with ultimately from a business standpoint helping the NOI increase because it will decrease the resident turnover.

Thank you so much for being on the show, talking about the metrics that you follow and share, as well. I hope you have a best ever day, and we’ll talk to you soon.

Pete Kelly: Joe, thank you so much for having me on the show.

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Joe Fairless Best Ever Show banner with Omar Khan

JF1392: He’s Raised Billions For Others – Now He’s Raising Money For His Own Deals with Omar Khan

Omar was working for a large company, helping raise $3.7 Billion as an analyst  during his time there. Today he takes what he learned there and applies it to his own company and real estate syndications. Omar branched out to do his own syndications, along with a partner, they are also building an underwriting software to give institutional underwriting to the average Joe’s. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Omar Khan Real Estate Background:

  • Manager at Boardwalk Wealth with 10 years of investing experience across real estate and commodities
  • Developing the next generation of multifamily, self storage and mobile home park underwriting software
  • Based in Dallas, Texas
  • Say hi to him at https://www.boardwalkwealth.com/
  • Best Ever Book: Thinking Fast and Slow

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

With us today, Omar Khan. How are you doing, Omar?

Omar Khan: Hey, Joe. Great honor to be here.

Joe Fairless: Well, I’m glad you are on the show. A little bit about Omar – he is a manager at Boardwalk Wealth. He’s got ten years of investing experience across real estate and commodities. He is based in Dallas, Texas, and you can learn more about his company at BoardwalkWealth.com. That’s also a link in the show notes page. That being said, Omar, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Omar Khan: Well, you’ve done a great job, so I’m just gonna add on some stuff. You’re a big inspiration for me, so we run syndications. I’ve done about 3.7 billion dollars of capital financing and M&A transactions. I’m Canadian, I moved down in the U.S. three years ago, so I advise a lot of high net worth individuals and entrepreneurs on real estate portfolio allocations.

Apart from that, my partner [unintelligible [00:02:00].24] a software that is just specifically catered for syndications in multifamily, mobile home parks and self-storage facilities. That’s basically going to be [unintelligible [00:02:09].04] you’re gonna get institutional quality underwriting.

Joe Fairless: Cool! So I can’t ignore anything with a B – billions. So 3.7 billion – will you elaborate on that, just so I can understand the context?

Omar Khan: Well, these are debt and equity transactions, as well as M&A transactions, both in real estate and commodities… Oil and gas primarily.

Joe Fairless: Oil and gas primarily. And what is your role in those transactions?

Omar Khan: I was the lead analyst and manager running those transactions. One was a debt refinance. We did that, and that took into account a couple of things, but the oil crisis three years ago – we had to basically selectively go out to the market, raise money to our investment bankers; there were a lot of strategic reasons, so I was leading that charge.

On the equity size, similar to that, we raised equity as well, and on the M&A transaction side, because I worked for a bigger company, selectively we would choose to acquire both refining assets, upstream assets and downstream assets in oil and gas. And then on the real estate side, I raised capital for about 80 million dollars [unintelligible [00:03:07].18]

Joe Fairless: Got it. So real estate side – you raised capital, 80 million dollars. Where did that 80 million dollars come from?

Omar Khan: Where did that come from? Well, that came from a lot of people. [laughs] Lots of people, high net worth individuals and entrepreneurs.

Joe Fairless: Was that for your company, or was that for the company where you were a W-2 employee?

Omar Khan: No, that was for other people’s projects; I was a capital raiser.

Joe Fairless: Got it. So for example, how would that be structured? Will you elaborate on that?

Omar Khan: Well, typically how we structure it is the same in the LLC and the LLP scenarios that you have in your own deals. A lot of my Canadian investors are primarily Canadians, and international people, because I’m from Canada, so we’ve got a lot of that… So when I was coming to the U.S. three years ago, that’s kind of how I got started. I didn’t have a good enough network in the U.S., but slowly that’s developing, and that’s how we do the work.

Joe Fairless: So you personally have raised 80 million dollars?

Omar Khan: I personally participated in 80 million dollars’ worth of transactions. I’ve raised about 4 million dollars.

Joe Fairless: Oh, got it, got it. Sorry, I misunderstood. I thought you said you’ve raised 80 million dollars. Okay, so you’ve participated in 80 million dollars; you have raised 4 million dollars. Got it. Okay, so you have raised 4 million dollars, and you said you were a lead analyst on a bunch of deals… That was as a W-2 employee – is that correct? Okay. What did you learn from that that you are applying to your real estate underwriting for your own stuff?

Omar Khan: Well, what I learned from that is that the level of granularity, the level of detail and the level of sophistication one needs when they’re running big transactions is a step above just the usual sort of “I’ll do analysis on the back of the envelope”, because there’s lots of moving parts, and a lot of these moving parts, a lot of balls are up in the air. You don’t really know how people are going to react, how the situation is going to develop, so what you basically need to do is have a plan, A, B and C, before you even do something… And you have to be confident enough in your own plans, but you have to be willing enough to know that if things don’t work out, you can basically switch gears pretty quickly.

Joe Fairless: Will you elaborate on that, just to crystallize in my mind a little bit what that means?

Omar Khan: So what that means is that when the oil prices went down 3,5-4 years ago, what was happening is that a company that I was working with (a 20-billion dollar company), in the Canadian space it was number three or four if you think about it in terms of their total production capacity; so apart from the financial aspect of “Hey, we can go out and raise money” and all of that kind of stuff, the bigger thing that we had to basically figure out was 1) what was our opinion? Was it just a temporary downside in prices, and prices are just gonna come back up, or was this a secular decline in commodity prices? And if it was a secular decline in commodity prices, because our operations are long-term in nature and we need long-term financing, what we had to do was secure more long-term financing, so we can avoid — as prices are going down, nobody’s gonna lend to us, so we should [unintelligible [00:05:58].06] but other than that, what we also had to start doing is thinking “We’re first out of the gate, we have a first mover advantage.” So if I go out as a company, we can go out and raise a billion dollars – that just means that when our competitors go out into the market, not enough people will buy their stuff, because there’s only a finite amount of capital to be allocated to a certain space at a given moment in time.

So there’s financial reasons, but there’s also a lot of strategic and qualitative reasons one has to look out for when engaging in these size of transactions.

Joe Fairless: Okay. It definitely makes sense. So when you now apply that to underwriting real estate for your own deals, how is that applicable to the latter?

Omar Khan: Well, how that’s applicable to the latter number one is that right now we’re seeing that — we’re not as big as you, obviously, so we’re not the first people that the brokers call… So for some of our brokers [unintelligible [00:06:51].05] Dallas, Houston, San Antonio, and we’re looking at Atlanta… What’s happening is that a lot of prices are being paid which frankly do not make sense to us for a given market… So what do we have to do? We have to look at two or three things. Number one, we have to be patient for the right deal. Number two, we have to maintain discipline, and number three, what we have to do is ensure that we’re continuously in touch with brokers, so the relationship is maintained, while we are doing all this stuff at our back-end.

A lot of this stuff — for instance, even just optimizing our processes, automating a lot of stuff within our company to make sure that when we do get the right deal, in the meantime we’re not wasting any time. We are still moving in the right direction, but we’re waiting for the right deal.

Joe Fairless: In terms of deals, what have you personally purchased?

Omar Khan: Personally – the Houston deal is done; that was about 243 units, and now we’re actually looking for another deal, either in Houston or in San Antonio.

Joe Fairless: Got it. So you were on the GP side of a 243 unit in Houston?

Omar Khan: Yeah, my partner was, actually. That’s how we’re partnering up.

Joe Fairless: So you and your partner were on the GP side of a 243-unit?

Omar Khan: Yeah.

Joe Fairless: Cool. Congratulations on that closing. So what was your role in that?

Omar Khan: Two roles. My partner was basically just putting up his net worth, and I was providing a lot of the financials, underwriting a lot of that kind of stuff behind it, just to make sure that when he was investing his money, he knew where it was going, it was a good enough deal for him, and it fit the parameters that we want.

Joe Fairless: And when you do that analysis, what are some tactical things you can tell us you did, that listeners can then apply to their underwriting?

Omar Khan: More than the underwriting, what we started off was a submarket analysis, by looking at the jobs growth, the employment growth, the demographics, all of that stuff. Then when we took it to the underwriting aspect of the game, what we wanted to basically figure out was not just a precise number, so let’s say x.xx IRR. What we wanted to figure out was what were the chances of us losing our money, or rather, how bad would things have to go for us to lose our capital, and how can we manage that situation?

Once we ran a lot of stress tests, we did a lot of sensitivity analyses, when we figured that out and we were okay with the risk, that’s when we decided to go ahead.

Joe Fairless: So specifically what metrics do you look for when you’re looking at how bad would it had to be?

Omar Khan: Cashflow metrics primarily. I’m basically looking at debt-service coverage ratios, I’m looking at liquidity to see for instance “Can we pay out the investors at the time that we’ve told them we’re gonna pay it out?” and “How much more margin of safety do I have?”

As an example, if I have to pay out $100,000 this quarter and I only have, say, $105,000, that’s not enough margin of safety for me, because things can go south. So looking at those sorts of things and realizing “Well, is it comfortable enough? Are we okay with it?” and then working with our property managers and our other partners to make sure we’re all on the same page and we’re not all looking and thinking about things differently.

Joe Fairless: What is the baseline cashflow metric that you look for?

Omar Khan: Baseline cashflow metric – I’m looking at it first primarily from the perspective of a lender, and I’m basically seeing debt-service coverage ratios. Because if I keep paying their debt  and everything else [unintelligible [00:09:53].21]

Joe Fairless: And what number do you look for there?

Omar Khan: At least a minimum of 1.35-1.4, in that range.

Joe Fairless: And in terms of liquidity, what do you look for?

Omar Khan: I need at least 10%-15%, ideally 20% margin of safety built in on a stabilized asset.

Joe Fairless: On a stabilized… 10%-15% of what?

Omar Khan: 10%-15% of whatever outflows of cash [unintelligible [00:10:19].06]

Joe Fairless: Okay. When you apply the lessons you learned from the 3.7 billion dollars worth of transactions where you were the lead analyst on those deals, and then you’re now applying it to real estate transactions, what doesn’t transfer over from your previous experience?

Omar Khan: Well, first of all, I think there are a lot of cross-transferable skills. Where it doesn’t maybe transfer over is the fact that at least in the space that we are in, the [unintelligible [00:10:53].11] there’s less institutional players there, whereas in my earlier job it was all institutional. But what does translate over is the fact that you need to be in-depth, you need to be granular, and you need to be very sophisticated in the way that you look at things.

Joe Fairless: As far as being very sophisticated in how you look at things, what are some tips you can give the Best Ever listeners for how to do that on their deals?

Omar Khan: As an example, for instance, a lot of deals that we look at [unintelligible [00:11:17].16] when they’re underwriting, they’ll only provide you, say, an annual level of detail… And I understand that you’ve gotta put it in your investment summary, but as soon as you start asking people about, say, “Can you provide me the monthly details?”, a lot of people don’t have it. I’m sure smart folks like you have it, but a lot of folks don’t have it, because their models are very simple; they’ve just simply copied over somebody’s model.

Or for instance when people say “We’re gonna implement RUBS” as an example, first they were gonna come in, and currently the property is at 40%, but they wanna take it up to 70%. So one of the things we look at is that people immediately start assuming that from month one I’m just gonna be 70%-75%, whereas what actually happens in real life is that there is a ramp up, right? You go slowly.

Then on top of that, what we also see is that a lot of times people are basically massaging the numbers, basically how aggressive they are in their rent roll, how much they curtail or manage their expenses… Basically, they’re trying to massage their numbers to hit some sort of cash-on-cash target, a preferred return target and an IRR target. So if you go back and you look at the monthly results, you see how aggressive or non-aggressive they are.

Joe Fairless: If we’re looking at financials and we’re looking to see if they are massaging the numbers to hit a certain metric, what’s something we can specifically look for to determine that?

Omar Khan: Two things right off the bat you can specifically look at is how aggressive they are with their rent rolls. Actually, three things – how aggressive they are with their rent rolls, how aggressive they are with their rehab projects if it’s applicable, and then on the exit, what kind of exit cap rate are they using. I prefer 50 to 200 basis points higher on a typical 2-5 year [unintelligible [00:12:55].13], but everybody has a different assumption.

Joe Fairless: 50-200 basis points higher… That’s a decent-sized range of what the exit is… How do you determine if it should be 50 versus 200?

Omar Khan: That depends on the strength of the market. As an example, if you bought in the last three years in Dallas… Or Richardson – if you bought in Richardson or Garland, you can get away with 50 to 100 basis points, because the market is very strong, with good demographics, diversity of economy and all of that stuff. But let’s assume you’re buying in more of a cyclical sort of market. Maybe Houston is a bigger example, but maybe in El Paso; that’s very oil and gas-driven. There you might wanna expand your exit cap out to 150-200 basis points to account for all the risk.

Joe Fairless: As far as — you mentioned about how aggressive with the rehab projects they are… Will you elaborate on that?

Omar Khan: What I’m seeing primarily is that a lot of folks on their first or second deal what they’re doing is let’s assume they put a 150-unit asset under contract, and they say “We’re gonna renovate 100 of those units, and we’re gonna renovate that in the first 6 months, or 12 months, or 13 months.” First of all, I feel that yeah, you could potentially do it, but there’s a lot of moving pieces, number one. Number two, if the rest of your underwriting is predicated on the fact that you’re very aggressive, so in 12 months you’re gonna upgrade 120 of these units and then you’re gonna start getting all these rent premiums, you’re going to build a margin of safety.

As an example, if you assume you’re gonna renovate all these apartments in a 12-month period, maybe you should underwrite for a 24-month period, give yourself some of that room. In reality, if you get more money coming in earlier, nobody’s gonna complain.

Joe Fairless: And then as far as the rent growth, how do we determine if they’re being aggressive or not there?

Omar Khan: In most [unintelligible [00:14:43].19] people assume anywhere between 3% to 6%. I would ideally like to look at anywhere between 2% to 4% just to be safe, but a lot of times what I’m looking at, just to fit the numbers, people are going above the 5%-6%, and what they’re primarily doing is looking at the last two or three years’ worth of high rent growth and big [unintelligible [00:15:02].06] and assuming that’s gonna continue forever, whereas that’s not really the case. The last 2, 3, 4, 5 years are the exception to the rule, not the rule.

Joe Fairless: And that’s on stabilization, right?

Omar Khan: That’s on stabilization, yeah.

Joe Fairless: And what about the renovation period where they’re assuming rent growth? What should we look at there?

Omar Khan: Well, there I would actually err on the side of caution, number one, because that’s also dependent on your rent roll and how [unintelligible [00:15:24].14] But I think the bigger thing to focus there would be how aggressive you are on your rehab plan. If you’re a newbie or you don’t have the experience like, for instance, you guys do… Again, like I said, err on the side of caution; if you or your property manager thinks you guys can do it in 12 months, I would underwrite a lower rent growth on a 24-month period, just to give yourself room to breathe.

Joe Fairless: Great tips. Very applicable, and the Best Ever listeners can certainly just take this and go help assess different opportunities, both from a passive investor’s standpoint, but then also from an active investor standpoint, putting these deals together.

What’s been a challenging project that you’ve been a part of?

Omar Khan: A challenging project that I’ve been a part of was this Houston deal. The challenge was more around understanding the market demographics, number one. We did our research, we were getting some [unintelligible [00:16:18].02] on the communication frequency that we wanted and the property manager didn’t want. Because we were partnering up with some other people – some of these were really experienced people – we wanted to be on more of a frequent communication in the first 12 months, so more like, say every two weeks, or every week, whereas the property management team wanted more at the three or four-week mark.

We basically had to sit down and come to an agreement, and we did agree on the two-week period, but that was more around the asset management, the property management, as opposed to the [unintelligible [00:16:43].24]

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

Omar Khan: Patience is a virtue.

Joe Fairless: How does that play itself out in your approach?

Omar Khan: How that plays out in our approach is that we have an investment criteria, and from time to time, as the market changes, we might have to modify it… But the bigger deal is holding on to your horses and not chasing after every deal that comes across our desk, because we know the market is hot. The bills are only as good as what the market is. So if we hold our horses, we stick to our criteria and we don’t try to over-engineer or [unintelligible [00:17:17].00] hopefully we’ll be coming out pretty in the long-term.

Joe Fairless: What is your investment criteria that you mentioned?

Omar Khan: 15% to 18% IRR. 8% ideally preferred returns, and around 8%-9% cash-on-cash.

Joe Fairless: And that 15%-18% IRR – is that project-level, or is that to limited partners?

Omar Khan: That’s to limited partners and net of fees.

Joe Fairless: Got it. So the project level would be low twenties at minimum?

Omar Khan: At a minimum. The spread has to be — that’s a good point you raised. For us, between the project and the LPs, the spread has to be at least 5% at the minimum.

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

Omar Khan: Yup.

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

Break: [00:18:03].09] to [00:18:40].08]

Joe Fairless: Alright, best ever book you’ve read?

Omar Khan: This is basically Thinking, Fast and Slow by Daniel Kahneman [unintelligible [00:18:43].22] They’re basically behavioral economists, and they basically talk about how people actually react in situations, as opposed to how they should theoretically react.

Joe Fairless: Oh, I would just eat that up. I’m definitely gonna read that one. Thanks for sharing. What’s the best ever deal you’ve done that we haven’t discussed?

Omar Khan: I think the best ever deal — I wouldn’t call it a deal, but the best ever agreement I came up to was convincing my wife to marry me.

Joe Fairless: [laughs] Fair enough. I’m certainly not gonna have any follow-up questions there or ask you why… What about a mistake you’ve made on a transaction?

Omar Khan: The mistake I’ve made on a transaction is that, for instance, I wasn’t very patient, and in the hurry to do a deal and to just get that notch under my belt, I overlooked a few big things around due diligence. Basically, I didn’t do my whole operational due diligence; I did a lot of the financial due diligence and I thought that was okay, and that I learned the hard way not to do in the future.

Joe Fairless: What specifically from an operational standpoint got overlooked?

Omar Khan: What got overlooked was the fact that basically there were some foundation issues, and there were some septic tank issues that me and my partner should have looked at, but I [unintelligible [00:19:48].15]

Joe Fairless: Similar property, but a different one that you come across tomorrow, who do you bring on to help assess those things?

Omar Khan: That’s a good question. I’d have to reach out into my network to see who’s good at all this managing the foundation and septic tank issues, because that’s something we do or wanted to do… But we overlooked that little aspect and bought ourselves a deal where we shouldn’t actually be operating that side of the asset. So I’d have to look into my network and ask a couple of people… But I’d primarily wanna ask Reid; he’s done a couple of deals and he’s an engineer, so I could leverage him.

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

Omar Khan: We actually run and contribute to a few charities; one in specific is in San Antonio. I’m forgetting the name of it, but I read about it in the newspaper… A really big property developer had a daughter with special needs, but they couldn’t really find any amusement park that catered to special needs children. The guy, basically as his legacy, has built out a special needs amusement park for kids, and people from all over the world bring their kids in. It’s a great place.

Joe Fairless: That’s beautiful. Is that in San Antonio?

Omar Khan: Yeah. Sorry, I’m forgetting the name… It’s Happy-something. I should know this.

Joe Fairless: That’s alright. I think that’s enough for a Google search; it’ll be pretty easy to find. Best ever way the Best Ever listeners can get in touch with you?

Omar Khan: They can e-mail me at Omar@boardwalkwealth.com, or they can go to our website, www.boardwalkwealth.com.

Joe Fairless: Omar, thank you so much. You gave some helpful tips on underwriting, especially for passive investors, but also active investors, as I’ve mentioned earlier… The things to look at that are more sophisticated when we’re assessing an opportunity. One is making sure that the monthly details and the underwriting is there (not just annual). Two is making sure that the RUBS are done gradually; there’s a ramp-up time versus you bought it, and “Congratulations, now everyone’s on the RUBS program starting day one.”

Three is looking at the numbers in detail, and you gave three additional things there. One is how aggressive are they with rent growth; on a stabilized property you like to see 2%-4% rent growth, versus 3%-6%. The second thing is how aggressive are they with the rehab projects, and third – what does the cap rate look like? Making sure that it’s at least 50 up to 200 basis points higher than what the going in cap rate is, so that the market is projecting to be worse when you sell, and not the same or better.

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

Omar Khan: Thank you very much, Joe. It’s a great honor. Have a good one.

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Jason McDougall and family on #BestEverShow flyer

JF1350: Getting Busted By The Cops Couldn’t Keep Him Down with Jason McDougall

Jason was putting up bandit signs in 2009 when a police officer took them all down and tracked them down. Jason did give up briefly at that time, but came back better because of that happening. Now Jason is a full time wholesaler with a ton of buyers on his list, and he makes $15-$20k per deal. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Jason McDougall Real Estate Background:

  • Full-time real estate investor
  • Quit his job in January 2016 to go full time in real estate, with a focus on wholesaling
  • He has done about 30 – 40 deals a year since he went full time
  • Along with wholesaling he also flips houses, as wells acquires single family houses for rentals
  • Based in Dallas, Texas
  • Say hi to him at https://www.sellmydfwhouse.com
  • Best Ever Book: Rich Dad, Poor Dad

Join us and our online investor community: BestEverCommunity.com


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

With us today, Jason McDougall. How are you doing, Jason?

Jason McDougall: I’m doing great, sir. Thanks for having me on.

Joe Fairless: My pleasure, nice to have you on the show. Jason is a full-time real estate investor. He quit his job January 2016 to go full-time in real estate and focus on wholesaling. Since he’s been full-time, he’s done approximately 30-40 deals a year, and along with wholesaling he flips homes as well as acquires single-family homes for rentals.
Based in Dallas, Texas, specifically Colleyville. With that being said, Jason, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Jason McDougall: Yes sir, absolutely. My name is Jason McDougal and my company is Next Era Homebuyers. As you mentioned, I quit my job in 2016 to go full-time with this, but if I back up, I actually started doing this – or I tried to do this – in 2009. I was putting out bandit signs with my wife to try to get wholesale deals, and we got caught by the police putting them out… So we got fined, and I was like “I am not touching real estate ever again.” So that kind of put a damper on things.

Then some things at my job that I wasn’t happy with, I wasn’t fulfilled, and I realized that I would never create the life I wanted for my family unless I made a drastic change. My wife was three months pregnant in January 2016, and I told her “Honey, I’ll quit my job. I’ve only done two wholesale deals, but I think I can do this.” She supported me, and that’s kind of how we got started.

Joe Fairless: Wow. How much was the fine?

Jason McDougall: It was $600 for her, because she was the driver, and $600 for me, because I was the guy hammering them in the ground.

Joe Fairless: Is that in Colleyville?

Jason McDougall: It was in Hurst, Texas.

Joe Fairless: In Hurst… Okay. Got it. HEB. Okay. What type of emotional reaction did you have to that? And describe the scene, will you?

Jason McDougall: It was one in the morning on a Friday, so I guess it was a Saturday morning, and we were driving around putting these signs up… We had done it before, but we’d never gotten any deals off of them. The cop just pulled up behind us, and I tried to make an escape to the back seat, and that didn’t work. He pulled us over and cited us to put the signs out, opened up his backseat, and we saw 40 other bandit signs [unintelligible [00:03:12].02] I was like, “Man, I got caught by the wrong police officer.”

It just kind of crushed me and made me just wanna stop anything related to wholesaling or real estate, because I didn’t have the perseverance to just push through it.

Joe Fairless: Fast forward to January 2016 – you have a wife who is pregnant and you mention to her your idea about leaving your – I assume a stable full-time job, to do something that is perceived to be unstable, at least initially. Tell us about your thought process there.

Jason McDougall: Well, I climbed the corporate ladder and I thought that was where I wanted to be, and what was gonna make the most sense for my family… But after getting there, I really didn’t enjoy it and I wasn’t passionate about it, and I just dreaded going to work every day.

Joe Fairless: What were you doing?

Jason McDougall: I was doing forklift equipment rental management. I ran a rental department and we had forklifts going in and out all the time. I didn’t enjoy it, I didn’t love it, and I loved real estate and I was always passionate about it. So that drove me to give it another shot with wholesaling, to get out of that world… And it worked. She had a lot of confidence, I guess, in my ability… Maybe more confidence than I had in myself, and supported me to go forward with that and do it full-time. It was rough at first; getting the deals was not easy, I didn’t really know what I was doing, but we worked through it.

Joe Fairless: Did you go back to bandit signs?

Jason McDougall: Yeah…

Joe Fairless: You did! [laughter] Okay, in January 2016, “I’m gonna do this full-time”, and then you did what to get deals?

Jason McDougall: We started marketing in July of 2015; we would just do a lot of postcards, because I didn’t have time to put the bandit signs out.

Joe Fairless: So a year before you quit you started marketing.

Jason McDougall: Correct.

Joe Fairless: Okay.

Jason McDougall: And that worked… I wasn’t really doing that correctly either, but for some reason I got deals, and made it work, and then eventually we added the bandit signs back into it among other things, to kind of complement the marketing.

Joe Fairless: Okay, so you were starting to do work on real estate in January of 2015, and then you quit a year later… How many deals did you do between January 2015 and January 2016?

Jason McDougall: Two.

Joe Fairless: Okay, so it’s not like you had a system set up, you just got a couple deals.

Jason McDougall: Yeah, it was luck.

Joe Fairless: How much did you make on those two deals, minus all expenses, which includes marketing?

Jason McDougall: Between both deals, minus expenses, we probably made like $7,000.

Joe Fairless: Total?

Jason McDougall: Yeah.

Joe Fairless: Okay, got it. So how did you find your first deal?

Jason McDougall: It was direct mail. It was an absentee owner type list, and she said she needed to sell her house, and I was nervous the whole time. I had no idea what I was doing. I ended up contracting that and selling it to somebody on a buyers list that I had built back in 2009. I was like “Well, maybe somebody on here still buys real estate”, and they ended up buying it.

Joe Fairless: A buyers list back in 2009, when you were originally doing it… How did you build that buyers’ list?

Jason McDougall: I would just go to all these networking events, and I never stopped going to the real estate networking events through that time. I would always collect business cards; every time I got a business card, I would put it on that buyers list and try to build it up.

Joe Fairless: How many people did you have on the buyers list by 2016 whenever you were in full-time?

Jason McDougall: I had about 2,000 people on there by that time.

Joe Fairless: Holy moly!

Jason McDougall: Yeah… I went to a lot of networking events.

Joe Fairless: When you send that e-mail, what’s your open rate?

Jason McDougall: 13%. It’s pretty low.

Joe Fairless: Well, that makes sense, based on how you’re putting them in there… So you’ve got 260 people approximately who are opening it… And how many responses did you get from those 260 people who opened it, about that deal?

Jason McDougall: It’s still kind of this way… We’ll get 5-10 responses pretty quickly, and I’m like “Well, maybe I’ve priced it too low”, or sometimes we might get one or two if it’s just a weird property, or if I priced it too high.

Joe Fairless: And I assume your list has grown from that 2,000… Or is it 2,000 today?

Jason McDougall: No, it’s about 5,000 today.

Joe Fairless: About 5,000 today. I wanna make sure I’m understanding you correctly – you still get approximately the same amount of responses, 5-10 responses, now with the 5,000 list?

Jason McDougall: I do, yeah.

Joe Fairless: Why do you think that is?

Jason McDougall: I don’t know, that’s a good question. Well, a lot of people have Gmail, and Gmail sends a lot of our e-mails to the Promotions tab. So they don’t really go to their inbox, so people aren’t checking that and they’re not seeing any e-mails from us at all, which kind of sucks.

Joe Fairless: Yeah, that does kind of suck. It does that for me, too. I have investors who are like “I didn’t see that new deal…”, and I’m like “Well, you have the Gmail!” [laughs]

Alright, 30-40 deals a year… What’s the system that you’ve set up to be able to do that?

Jason McDougall: I wish I would have set up a system more thoroughly in the beginning to be able to do that, because the wholesaling thing is a job, and it’s really a grind for one person to do it by themselves.

So I don’t have all the systems in place; my wife’s of big help to me to kind of set up the marketing list and get those distributed, but by and large I don’t have any other systems other than Podio and Excel that I use to kind of manage the business.

Joe Fairless: Okay. Who all works on the business?

Jason McDougall: I would say 80% me, 20% my wife. We are looking to hire somebody in July and get an office to kind of help with administrative stuff.

Joe Fairless: Okay… The 20% that your wife does – you just mentioned it briefly, but will you outline what she does?

Jason McDougall: She does a lot with our website, she does a lot with our direct mail, she does all the designs for the postcards, and door hangers and different things like that that we do, different marketing. She designs the bandit signs… Kind of that marketing piece of it, she really helps a lot with.

Joe Fairless: Okay, and then I can probably deduce what your responsibilities are, but what are your responsibilities?

Jason McDougall: I go on all the appointments, I answer all the phone calls, I do all of the administrative tasks, corresponding with buyers, title companies, researching issues on title… Just different things like that.

Joe Fairless: What have you evolved in your — you said you don’t have a system, but what have you evolved in your process, from when you start to today?

Jason McDougall: When I started, I did zero follow-up, I just used paper to keep track of all the leads, and if I didn’t get a deal the first or second time after talking to them, they kind of went in the trash. And I look back now and I realize how much money I had thrown away by not having a system in place to track all those people, to touch them frequently, and to just follow-up with them. Having that in place now has been huge.

Joe Fairless: Is that where Podio comes into play?

Jason McDougall: Yes, sir.

Joe Fairless: With your 30-40 deals, minus marketing costs, how much do you make per deal on average?

Jason McDougall: When we started out, I was happy making $5,000 on a deal. Then I talked to somebody and he said “Why aren’t you making 10k?” and I said “I don’t know.” “Try to make 10k.” I said “Okay.” So I tried that, and I started making 10k. Then someone else said “Man, I really don’t try to make less than 20k. Why don’t you try to make 20k?” “Okay…”, so I started just going in, thinking I was gonna make 20k, and it started working. I’m like, “Wow…” So it’s evolved from making 2k-5k when I started, to usually 15k-20k is an average assignment fee now.

Joe Fairless: It sounds like a bunch of malarkey when you’re like “Hey, I just wanted to make this much more, so I started making much more”, but it reminds me when Tony Robbins talks about how he got from where he used to be to where he is now, and there’s a period of time where he got out of the $50,000 range, and got into where he was making a million bucks a year, and he made it for 3, 4, 5 years. Then I think someone said exactly what you just mentioned other people said to you, and he was like “Oh wait… Yeah, I guess I could make more, because I want to give back more, and feed more families as a nonprofit”, and then he just magically, by intention – but quite frankly, it’s not magic, it’s mechanics, too – was able to increase the revenue.

So within your five to ten and ten to twenty, it was a thought process, but what specifically changed within the mechanics of it?

Jason McDougall: I would go into a deal and I would always be afraid that if I tried to make $20,000 on an assignment fee, that my price wasn’t gonna work for the seller, and that was just my own limiting belief. So if I [unintelligible [00:11:29].11] I wanna make $20,000, so my offer needs to be where I have a $20,000 assignment fee built in. That’s the only change I’ve made, other than telling myself it was possible to do that, and it worked. So like you said, there’s no magic behind it, it was just really changing your thought process and changing your offer a little bit.

Joe Fairless: How are you now getting most of your deals?

Jason McDougall: They’re mostly through — I still do bandit signs, Joe… Bandit signs, we do door hangers, we do direct mail, we do some pay-per-click, and some SEO… So a combination of all of those produces our deals right now.

Joe Fairless: Okay – banner signs, pay-per-click and SEO?

Jason McDougall: Yes, sir.

Joe Fairless: And SEO.

Jason McDougall: Yes, sir.

Joe Fairless: Okay… How would you allocate percentages for those? The banner signs, direct mail, and pay-per-click, and then SEO – out of those four, in terms of deals?

Jason McDougall: It would probably be 30% bandit signs, 30% direct mail, 30% pay-per-click, and then the rest would be SEO.

Joe Fairless: Even though SEO is only 10%, I am curious – do you have a team member that does that?

Jason McDougall: I’ve got a VA that does that, yeah.

Joe Fairless: Okay, alright. As far as the bandit signs go, are you still risking personal fines by doing it, or do you have someone else?

Jason McDougall: I have someone else putting them out, but I guess if they ever…

Joe Fairless: Yeah, you’re busted.

Jason McDougall: Yeah, exactly.

Joe Fairless: Okay. How many do you put out?

Jason McDougall: 150/week.

Joe Fairless: What’s your approach for doing that?

Jason McDougall: I have two guys that put them out for me every week. I order them and they get sent to their house, and they put them out, and I pay them electronically. I would say every 600 bandit signs produces a deal.

Joe Fairless: You do 150 a week, so why not do 600 a week?

Jason McDougall: Because I don’t wanna flood these areas where they get so mad at me [unintelligible [00:13:12].24]

Joe Fairless: Oh, you’re walking a fine line… Okay, I’m with you. How much do you pay these individuals to put the banner signs out?

Jason McDougall: $2,15/sign.

Joe Fairless: $2,15/sign? That includes gas and whatever else?

Jason McDougall: Yup, that’s their fee to do it.

Joe Fairless: Is that per person?

Jason McDougall: No, that’s for both of them to do that; that does not include the price of the sign and the stake.

Joe Fairless: How much is the price of the sign and the stake?

Jason McDougall: I think it’s like another $1,50 for both.

Joe Fairless: For both. Okay, cool. For every $2,000 you spend, you make approximately $18,000. That’s pretty good.

Jason McDougall: Yeah. Sometimes it’s lower than that, but often times it is that.

Joe Fairless: With your direct mail, any tips there?

Jason McDougall: Testing things really is huge. We’ve done letters, we’ve done postcards… I actually bought all the equipment to do letters in-house. I bought an envelope printer, [unintelligible [00:14:04].00] all these machines to do it in-house and save money on it, because the response rate on letters is just so much better for us than postcards.

Joe Fairless: And what about your other method, the pay-per-click? What’s your approach there?

Jason McDougall: I’ve only been doing that for a few months, and there’s a lot of retail leads that we get with that, so it’s frustrating sometimes… We get people like “I wanna sell my house fast, but I want full price”, and like “Well, those two things don’t really work out together.” So that’s a challenge, but that’s just inherent with pay-per-click, I think, because some of the leads you get are gonna be like that.

Joe Fairless: You’re taking some of the profits, I believe – because I’ve read this in your bio, so I assume it’s true – and you’re buying single-family buy and holds; tell us about that.

Jason McDougall: I’ve been buying those with as little money out of pocket as I can. We had one this time last year, now we have six rentals and two notes that are producing passive income for us.

Joe Fairless: That’s great. So you’re not just creating a job, but you’re creating a long-term income stream for yourself, so that you can eventually phase out or put someone else in place of where you’re at.

Jason McDougall: Absolutely, I’m aggressively trying to acquire passive income this year.

Joe Fairless: Where are the homes?

Jason McDougall: They’re all in the Dallas-Fort Worth area; Arlington, Fort Worth…

Joe Fairless: What are the numbers on the last home?

Jason McDougall: I got two under rehab right now, that I just bought, and these will be my first ones that I’m trying to go Section 8 with. One I’ll be all-in into this house for $50,000, and we’re converting it from a two-bedroom to a three-bedroom. It should bring in $1,200/month, with a PITI of $600/month.

Then another one in Arlington, that we bought all in for 107k after rehab, it will be worth — ARV of 165k, and it will rent also Section 8 for $1,800/month. That’s kind of the path I’m going towards now, is the massive amounts of cashflow that I can generate through Section 8.

Joe Fairless: Are you managing that yourself?

Jason McDougall: I am.

Joe Fairless: Have you gone through the Section 8 process?

Jason McDougall: Not yet. I’ve been to their briefings, but I have not had a Section 8 tenant yet, so I might be changing my story on this in a year, but we’ll see…

Joe Fairless: Those weren’t leading questions, I was just curious… I have a Section 8; I have three homes, and one of them is a Section 8, so… But I don’t self-manage, that’s all. I was just curious.

The rehab properties, all-in 50k and all-in 107k – how did you find those two?

Jason McDougall: It was a pay-per-click lead, actually. Someone was appointed as a guardian over someone else’s estate, because he was legally incapacitated, and I purchased that property from him. The other one was a door hanger lead, actually; someone wanted to move out of state and sell his house, and I negotiated a pretty good price on that house.

Joe Fairless: Oh, I didn’t hear door hangers as part of your marketing arsenal… How many door hangers do you send out?

Jason McDougall: 10,000 a month.

Joe Fairless: Is there a reason why that was not included? Is that not that big of a lead generation?

Jason McDougall: We’ve just kind of started doing it, so to be determined on the effectiveness of it, versus how much we’re spending to do it.

Joe Fairless: Okay. When did you start doing it, how long ago?

Jason McDougall: In February.

Joe Fairless: Okay, 2-3 months ago, and it’s already resulted in… One deal, or more?

Jason McDougall: We’ve gotten two deals off of them so far.

Joe Fairless: And how much does it cost to do 10,000/month?

Jason McDougall: With materials and everything it’s probably $2,000.

Joe Fairless: Okay. The $50,000 house that you purchased, where you’re all-in for 50k, what did you purchase it for?

Jason McDougall: 43k, and it needed a rehab of 7k.

Joe Fairless: Is that an all-cash transaction?

Jason McDougall: No, I’ve got some banking relationships and some private lending relationships where I was able to purchase that with no money out of my pocket for the rehab and purchase.

Joe Fairless: Please continue…

Jason McDougall: [laughs] I’ve bought all of my properties that way, with no money out of my pocket, and this was through relationships I’ve built with banks, and through private lenders that I’ve been able to do that.

Joe Fairless: I heard you the first time, but can you be specific?

Jason McDougall: I’ve just focused on talking to several banks, and just kind of seeing what they’ll all do, and all these community banks will do something a little bit differently; it just depends on what their appetite for risk is. Some will say “Yeah, we’ll fund 100% of the purchase and rehab for your rental, and then after your rehab is done, we’ll roll it into a 20-year amortization with a three-year adjust.”

Joe Fairless: Huh!

Jason McDougall: Another bank would say something like “We’ll give you a 10% down to purchase the rental and we’ll cover 100% of the rehab.” Then I’ve had private lenders that were like “Hey, we’ll purchase the house for you, you rehab it, it’s your house, and just pay us 6% interest a year, no points.” So there’s been all kinds of different strategies that I’ve used to acquire these properties that have been really beneficial.

Joe Fairless: And you have six of them, cool. This is great. I’m glad we got to this point, because this is really interesting. You said you work with different banks and private lenders – are there any repeat banks or private lenders from those six homes?

Jason McDougall: Yeah, these last two houses – the one for 50k and the one for 107k were from one bank.

Joe Fairless: What bank?

Jason McDougall: It’s a small community bank in Fort Worth.

Joe Fairless: Which one? I’m from Fort Worth, I might use them.

Jason McDougall: Have you heard of First Bank?

Joe Fairless: I think so.

Jason McDougall: They were just comfortable with my credit and my experiences, therefore they offered me that deal, and I said “Well, how many rentals would you help me purchase?” [laughter] They were like, “We’ll do five.” I’m like, “Okay…” So I got two, and my plan is to get five maxed out with them, and then refinance those into a portfolio loan and do it again with them.

Joe Fairless: Beautiful. So just so I’m understanding it, they’re doing 100% of the purchase and rehab?

Jason McDougall: Yes, sir.

Joe Fairless: Wow! Nice searching! How many banks did you have to go to and have conversations with prior to finding them?

Jason McDougall: I’ve probably talked to 6-7 different banks, and then kind of found out what all they wanted to do after just sitting down with them, explaining what I wanted to do… And some of them — I’ve got two notes, and a couple of those banks let me wrap their loans to end buyers, so I can owner finance those, which has been great, too.

Joe Fairless: When you walk into the bank, what do you do? Do you just tell them “Hey, I don’t want any money out of my pocket, but I wanna buy this property. Do you wanna do a deal?”

Jason McDougall: Kind of… I mean, not really like that, but I tell them exactly what I’m doing and they’re like, “Well, you’re getting a pretty good discount on these properties when you’re buying. We’re comfortable doing that if we ever have to take it back. There’s lots of equity there.” And then my experience and my credit kind of help, I guess, as well.

Joe Fairless: So you’ve got good credit, you have experience, they know you’re a full-time investor, and then from a property standpoint what documentation do they require? From a high-level; I know a lot, but from a high-level what are the main things they require?

Jason McDougall: As far as financials, they wanted to see a P&L from my company for the past two years. I don’t have two years of self-employment taxes filed yet, so they were able to look past that just based on my P&L’s, and credit, and a financial statement.

Joe Fairless: And what about the house itself? Because you mentioned they said they have enough equity in it should something go wrong, so what did they need to see from the house?

Jason McDougall: They did an appraisal on the house, to make sure that — based on my scope of work from the rehab, if the house would appraise for their value, and they were comfortable with that.

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

Jason McDougall: I would say do not give up. I wish I really wouldn’t have given up in 2009 when I was putting up bandit signs, and just persevered through that. I could be much further along than I am today.

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

Jason McDougall: Absolutely.

Joe Fairless: Alright. First, a quick word from our best ever partners.

Break: [00:21:19].29] to [00:22:00].17]

Joe Fairless: Best ever book you’ve read?

Jason McDougall: Rich Dad, Poor Dad, the cliché answer.

Joe Fairless: [laughs] Hey, if that’s your answer, that’s your answer; that’s alright. What is the best ever deal you’ve done that we have not talked about, and it can’t be your first, can’t be your last.

Jason McDougall: It can’t be my last?

Joe Fairless: No, it can’t be your last.

Jason McDougall: I did a wholesale deal where somebody just called me up and said “I just don’t want this house anymore, you can have it.” I looked it up and I was like, “Man, I think I can make some money here”, and I ended up making $35,000 by wholesaling that.

Joe Fairless: And what did they say originally?

Jason McDougall: He just said “I don’t want this house anymore. I don’t wanna deal with this property.”

Joe Fairless: What was the problem that he had with the property?

Jason McDougall: The house was vacant and he had moved out to South Texas and he had some property taxes that were delinquent on it, and the house was in a really bad shape.

Joe Fairless: So then what did you do?

Jason McDougall: I contracted it and wholesaled — I’ll back up… He was getting someone to go to court in Fort Worth, and he was elderly, and six hours away, he was like “There’s no way I can go to court regarding this house”, so I ended up calling the court and pretending to be his grandson to try to postpone the court date until I could get it sold and transfer the ownership to the new buyer… And that worked out.

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

Jason McDougall: Trusting contractors too much and allowing them too much leeway, which has hurt me on a couple flips early on.

Joe Fairless: There’s just a tiny bit of irony – the previous answer was you pretended to be someone else’s grandkid, and then the next answer was trusting contractors too much… Right? You see the irony there? [laughs]

Jason McDougall: Yeah, I get it. I’m a very trusting guy, and I was too much so early on when I trusted these contractors to do a good job for me and paid them too much, and they just burned me.

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

Jason McDougall: I have a Facebook group called Passive Income Through Real Estate, where there’s some really good conversations going on about how to generate passive income, since that’s really my main strategy right now.

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

Jason McDougall: You can e-mail me, Jason@nexterahomebuyers.com, or get in my Facebook group and chat with us there.

Joe Fairless: Outstanding! Well, a wonderful conversation. Thank you so much for being on the show, Jason, and talking about your adventures, from getting fined $600 (actually, $1,200 as a family) with the bandit signs, to now doing 30-40 deals, how you’re getting financing for the buy and holds that you purchase after you have successful wholesale deals that you then reinvest into really interesting stuff… So thank you for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Jason McDougall: Thanks, Joe. I appreciate it.

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JF1315: Real Estate Economics From An Economy Expert with Danielle DiMartino Booth

Danielle is a global thought leader when it comes to money,finance, and economics. From best selling books, working for the FED, and founding an economic consulting firm, she has deep knowledge of our economy and how different investment and asset classes affect it. We get some amazing real estate advice from Danielle today, as well as higher level economy advice and thoughts. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Danielle DiMartino Booth Real Estate Background:

  • Founder of Money Strong, LLC, an economic consulting firm
  • Global thought leader on monetary policy and economics
  • Author of FED UP: An Insider’s Take on Why the Federal Reserve is Bad for America
  • FED UP rose to #22 on Amazon’s Best Seller List and garnered #1 in Economic Policy & 6 other categories  
  • Based in Dallas, Texas
  • Say hi to her at http://dimartinobooth.com/
  • Best Ever Book: Lords of Finance

Join us and our online investor community: BestEverCommunity.com


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If so, then go to CoachWithTrevor.com to apply for his coaching program.

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

With us today, Danielle DiMartino Booth. How are you doing, Danielle?

Danielle DiMartino Booth: I’m doing great today, how are you?

Joe Fairless: I’m doing well, and nice to have you on the show. A little bit about Danielle – she is the founder of Money Strong, which is an economic consulting firm. She’s also the author of Fed Up: An Insider’s Take On Why The Federal Reserve Is Bad For America. She is based in Dallas, Texas. She’s a global thought leader on monetary policy and economics. With that being said, Danielle, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Danielle DiMartino Booth: Sure. I made my bones being one of the few hated individuals in the country predicting the housing crisis; that came from my Wall Street background and understanding traders speak, and what a 125% loan to value toxic waste, piece of garbage was. That really did open the door for me kind of to being unhinged in my opinions, which caught the attention of the Federal Reserve.

The gallows humor, when I joined the Fed back in 2006, prior to the crisis hitting, was that they had hired me to shut me up. That was pretty effective, because I went silent for 9 years as an advisor to Richard Fischer, one of the better-known hawks on the Federal Open Market Committee through the crisis years. He retired, I followed him into retirement… The first thing and last thing I can tell you about myself is I am the worst bureaucrat ever known, and since then, I have written a weekly newsletter and it’s become quite the authority on pensions and commercial real estate, and the intersection thereof.

Joe Fairless: So with your newsletter – that’s the weekly newsletter that comes out regularly – as real estate investors, what should we be paying attention to if we were reading the newsletter?

Danielle DiMartino Booth: Really, inflection points is what I would focus most on. Commercial real estate in general has been underpinned in a very strong way by the tremendous foreign flows that have resulted from interest rates here increasing, so from foreigners looking for a better, stabler place to put their money in “hard assets”, and I think going forward, a lot of the focus is going to be on the pronounced downtrend we’ve seen in especially construction lending, as well as how retail shrinking its footprint has the ability to bleed into other sectors of the commercial real estate market.

Joe Fairless: Can you elaborate on that?

Danielle DiMartino Booth: Well, if you think about where class B and class C malls are, many of them are in pristine, great locations. So by the same token, there’s going to be a finite appetite for repurposing these malls. Here in Dallas where I live, for example, they’re in the process of raising a class B property very slowly, but they’re razing it to the ground in order to free up the land that’s underneath it.

Now, if you expand that strategy, if you will, to other markets, that means that you’re going to have prime real estate competing for commercial real estate in the years to come, and that supply of prime real estate is going to be increasing on the heels of what we know to be the most over-valued time for this particular sector. Like it or not, that’s just what the data say.

Joe Fairless: So as real estate investors who are listening to this, what are some things we can do to be ahead of this and take advantage of it?

Danielle DiMartino Booth: Well, it was years ago that Leon Black said – and this is of private equity in general – “I’m selling everything that’s not nailed to the ground”, and I think to be opportunistic sellers in this kind of environment is really wise. I think locking in rent while you can is also really wise, understanding that corporate America and how it operates, and the amount of square footage that it requires is changing as we speak. It is a dynamic dynamic, and we see that all over the place with shadow inventories [unintelligible [00:06:37].08] we’re starting to finally see some stress emanating from the office sector, and I would argue that this is a reflection of a lot of the supply that is coming online in addition to the over-building that we’re beginning to realize has occurred in the multifamily and in the restaurant and in the hotel spaces.

Joe Fairless: So with the quote “I’m selling everything that isn’t nailed to the ground” – you mentioned that because your suggestion is to sell at this point, if you were considering selling?

Danielle DiMartino Booth: I think so. For all of the years that I was now no longer with this firm called Donaldson, Lufkin & Jenrette, I kept on retaping a sticky to my computer screen that said “Pigs get fat, hogs get slaughtered”, and I think one of the most important disciplines that you can have as an investor is that of having a strong sell discipline. If you see that you’ve made a great return, then you should definitely take that money off the table while you can. Be opportunistic, sell into selling opportunities.

Joe Fairless: So know what your price point is to sell initially, and then when you reach that, then sell, because with that sticky note “Hogs get slaughtered, pigs get fat”, or something like that… I’ve heard it before —

Danielle DiMartino Booth: Pigs get fat, hogs get slaughtered, and to shift gears a little bit, I will never forget staring at that sticky, trying to talk a huge holder of Cisco systems into pairing back their position to their cost basis in 1999, and failing… And then being told, much after the fact, “Gee, I should have listened to you.” And again, in this environment, it is not about maximizing your return, it’s about assuring your return.

Joe Fairless: I’d love to run something by you. I did not invest in 2008, because I didn’t have money to invest. I was saving up my pennies. I’m from Fort Worth, I was living in New York City at the time, I bought my first house in Dallas, Duncanville, and then bought some more in DFW, and now I’ve got a portfolio of apartment communities in DFW and in Houston… And I’ve interviewed 1,300 or so people, every single day, for the last 1,300 days — well, one person a day for the last 1,300 days; 1,300 or so people.

Danielle DiMartino Booth: You’re very busy, I’m quite impressed. That’s prolific.

Joe Fairless: So I mentioned that only because here’s what I’ve learned, and this is what I wanna run by you… So what I’ve learned is that in 2008 when people lost their shirts – I’m only talking real estate investors, because that’s my world; I don’t know stocks, I don’t know bonds, I don’t know other stuff… So real estate investing – the people who lost their money, one of three things (or a combination of three things) happened to them. One is they bought for appreciation, not cashflow. So they weren’t making money every month, therefore when times get tough, now they’re underwater, and they’re losing money every month, so that’s a problem.

The second is they’ve had short-term financing, or they were just unlucky and their loan became due during 2008-2009 when no one was gonna want to put a loan on the property, or the loan terms were terrible and it was just a bad time trying to get financing. That’s the second.

And then the third is they had some unexpected expense occur, and they didn’t have the cash reserves. So those are, from what I’ve found, the only three reasons (or a combination of those three) that people lost money. So with that as my thought process, going to your comment about selling when you have a strong return – I’m with you on that, but my thought is as long as I don’t break any one of those three cardinal rules, I don’t have to sell, I don’t have to try and time the markets. I can simply be a long-term player; that way I’m not worried about what’s going up and down in the markets and I’m not trying to time anything and be perfect about that. What are your thoughts?

Danielle DiMartino Booth: Well, timing never works, and I have officially spoken out of boths sides of my mouth. But again, it all hinges on what your position is. If you’re cashflow-positive and you can see over the horizon and know that you’re going to remain cashflow-positive and not be beholden to refinancing, then you can certainly do the math yourself and hold on, and continue to clip that coupon, so to speak. It really does depend on your starting point and how strong you are in your position, and regardless of which investment we’re talking about, which asset class we’re talking about, if you’re cashflow-positive and you can remain cashflow-positive with some good assurance, then you are absolutely correct, there’s no being forced into selling anything.

I suppose I’m speaking more to the people who are looking for that appreciation in the property, who maybe bought at really high prices and don’t have that same kind of security that you describe.

Joe Fairless: Okay, it makes sense, 100%. I just wanted to run that by you and get your opinion.

Danielle DiMartino Booth: Sure. It’s absolutely intuitive, you’re right.

Joe Fairless: What is the biggest challenge you have on a daily basis with your business?

Danielle DiMartino Booth: On a daily basis with my business, what’s the biggest challenge that I have?

Joe Fairless: Yeah, maybe an interesting problem that you’re solving for, or something that you kind of got a soapbox for, and it’s kind of a thorn in your side… Anything that comes to mind.

Danielle DiMartino Booth: Well, look, you have my mind right now on real estate, and one of the biggest thorns in my side is that I’ve become a close study of pension funds, and for that matter sovereign wealth funds and how they interact with private equity… And my greatest concern is that as we potentially begin to hit a more volatile time in the broad financial markets, that a lot of these pension funds under-appreciate the lack of liquidity in some of the alternative investments that they’ve made – and I will tell you, commercial real estate private equity funds have been the darling of pension funds for the past 18 months or so…

My greatest concern is let’s take a pension from state ABC that has reduced their fee structure by investing passively in the stock market, and tried to up their long-term returns by gaining exposure to commercial real estate – my biggest concern is that as baby boomers retire and [unintelligible [00:13:19].02] and cashflow becomes a concern because they’re actually writing pensioner’s checks, not relying on actuarial accounting gimmickry, that they’re going to run into the perfect storm of not being able to access liquidity because their stocks have declined, while at the same time realizing the very long-term nature that they’ve committed to in plowing their money into illiquid commercial real estate, especially on the private equity side, where you’ve got that 7 to 10-year commitment for your funding.

So that’s a real thorn in my side, and it’s especially prevalent among the weakest states and cities that have been adversely affected by the recent tax reform bill that is going to cause an acceleration of the shrinking tax base that states like Florida, Texas, Nevada will benefit from going forward. That’s going to be a huge [unintelligible [00:14:13].23] for certain states’ real estate market and provide a great floor, but by the same token, it’s going to accelerate the pain for states whose residents are going to continue to flee.

Joe Fairless: What’s the ideal solution?

Danielle DiMartino Booth: Oh, gosh… [laughs] Now you’re asking the big question. The ideal solution… Well, I will tell you that ideal – since we’re speaking ideally – the pension fund system in Great Britain, for example, requires that public pensions cap their rate of return assumption at 3,5%, such that they never can go too far out on a risk limb, endangering their pensioners, endangering retirees. I would like to see some sobriety come out of what I expect will be a lot of pension crises in the years to come, in the form of legislation that requires that in the future, if you’re gonna make public promises to firemen and policemen and teachers, that you have to be realistic in your return assumptions so that you never get into this soup again.

Joe Fairless: There’s not something in place with the realistic projection guideline?

Danielle DiMartino Booth: No, absolutely not. Most return assumptions right now are in the neighborhood of 6,75% to 7,25% per annum. Most pensions have been unable to hit those [unintelligible [00:15:35].29], which means that as a factor of time, they continue to get deeper and deeper and deeper under-funded.

Joe Fairless: If you were in a room full of real estate investors and the following question were posed to you, what would you tell them – what is your best advice ever for real estate investors, based on your unique experience and background and education?

Danielle DiMartino Booth: Well, I think to follow the flows would be my best advice. When you see a herding effect, be afraid, and be conscientious, and try your very best to zig when others are zagging. It’s really difficult to do, because sometimes you want to ride that wave.

Joe Fairless: So you’re a big Bitcoin investor then…

Danielle DiMartino Booth: Ha-ha-ha-ha… [laughter] That would be no. That would be the negativo there. No, absolutely not. No, I chuckle, and it’s not that I don’t — look, I’m a former central banker, I’m a reformed central banker. I completely commiserate, and I have deep empathy for people who are losing faith in our dollar’s ability to retain its value, but by the same token, I don’t have much faith in something that has 1,000% return and people say it’s gonna be a 3,000% return. It doesn’t pass muster. But I would say that to be contrarian-thinking, even in a long-term asset class such as real estate, really does afford the people who are going to be most successful over the long haul.

I listen to investors like Sam Zell, and they’ve never had trouble being early to the party, therefore live to invest another day.

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

Danielle DiMartino Booth: Oh, gosh, you’re scaring me! Your youth is coming through. Let’s do this!

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

Break: [00:17:36].22] to [00:18:05].15]

Joe Fairless: Okay, best ever book you’ve read?

Danielle DiMartino Booth: Lords of Finance.

Joe Fairless: What’s a mistake you’ve made in business?

Danielle DiMartino Booth: Believing people who sell me something that sounds too good to be true twice.

Joe Fairless: [laughs] The same person twice?

Danielle DiMartino Booth: No, different entities, different selling strategies, same bad results.

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

Danielle DiMartino Booth: I like to give back mainly through financial literacy. That’s the best thing that I feel I can give to other individuals. I’m a supreme translator of jargon and gobbledygook, especially as it pertains to interest rates and monetary policy, and I think that the more I can pull the curtain back on what a lot of central bankers try and confuse us with, the more everyday working people can have a better comprehension of their financial standing and what they should do to be on the safest ground possible.

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

Danielle DiMartino Booth: Well, you can follow me on Twitter, which is never boring. I don’t [unintelligible [00:19:13].25] You may have inspired me. But @DiMartinoBooth is my Twitter handle, and you can go to my website, do a trial subscription of my newsletter, which is DiMartinoBooth.com. And the easiest way to access who I am, my philosophy, where my thinking is grounded, what my background is, is to grab a copy of Fed Up, the book that I wrote, that went to 22 on Amazon and continues to sell magnificently, I’m proud to say.

Joe Fairless: And number one in Economic Policy category on Amazon as well. Well, Danielle, thank you so much for being on the show and sharing your expertise. We usually have real estate investors, so this was a different angle than we’re used to, and I love it… I love hearing from you, and based on your background and talking about the – as you said – follow the flows, and be aware of macroeconomics and what’s going on, or listen to people who are aware of that, so there’s a bit of a filter, and then see how that can be applied towards what we’re doing on the ground.

I loved the class B and C model example, where they are raising —

Danielle DiMartino Booth: You are — beautiful articulation. You said it all very, very well.

Joe Fairless: Well, thank you, I’m patting myself on the back right now. Danielle, thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Danielle DiMartino Booth: Thank you, take care.

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JF1313: Making The Move From Single Family To Multifamily Investing with Anna Simpson

As an immigrant in 2004, Anna began her real estate career. She was investing in single family, then invested passively in other peoples’ deals. Fast forward to today and she is sponsoring her own syndications in the DFW market. Anna gives very actionable tips for scaling your business and moving from smaller deals to much, much larger deals. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Anna Simpson Real Estate Background:

  • Multifamily Investor & Deal Sponsor
  • Started investing with rental homes, then moved to multifamily
  • Invested in 1,300 multifamily units passively/as KP, then became a deal sponsor
  • For first deal raised 1.4M via syndication
  • Came from Russia in 2004 and is a licensed realtor in DFW
  • Based in Dallas, Texas
  • Say hi to her at www.simpsonmultifamily.com
  • Best Ever Book: Rich Dad, Poor Dad

Join us and our online investor community: BestEverCommunity.com


Made Possible Because of Our Best Ever Sponsor:

Are you committed to transforming your life through real estate this year?

If so, then go to CoachWithTrevor.com to apply for his coaching program.

Trevor is my real estate, business, and life coach. I’ve been working with him for years. Spots are limited, so be sure to apply today!


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, Anna Simpson. How are you doing, Anna?

Anna Simpson: Hey, Joe. I’m glad to be here.

Joe Fairless: Nice to have you on the show. A little bit about Anna – she is a multifamily investor and a deal sponsor. She has passively invested in over 1,300 multifamily units, and she has also put together her own syndication. She has also been involved in a tenants in common deal, otherwise known as a TIC deal, and she’s based in Dallas, Texas. She came from Russia in 2004, and is a licensed real estate agent in Dallas-Fort Worth. For her first syndication she raised 1.4 million dollars.

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

Anna Simpson: Sure. At this point I’m a multifamily investor and a deal sponsor or syndicator, as you mentioned. I started my investing career in rental houses; I was buying homes, I was rehabbing them, renting them out… And I also worked as a realtor at Keller Williams in South Lake, Texas.

In 2015 I decided to make the move to multifamily. I first invested in 1,300 multifamily doors passively, or as a key principal. Then I switched and became a deal sponsor. As you mentioned, for my first deal I raised 1.4 million, and I had 23 equity investors for this deal. For the second deal I also had the same equity raise, 1.4 million, but this was done in a tenants in common (TIC) structure, and I only had two other people with whom I did it. In this deal I’m a TIC manager and I’m also an asset manager.

At this point I’m in acquisition mode. My focus is in DFW, because that’s one of the best markets in the country, so I’m lucky to live here.

Joe Fairless: Lots of things to talk about, let’s see… First, let’s talk about 1,300 doors passively that you did previously, and I assume you’re still involved with some of those or most of those deals as a passive investor. And you said “or as a KP.” Can you elaborate on what KP is, and also what the difference between investing passively versus being a KP is, with those 1,300 units?

Anna Simpson: Sure. When I first started, I basically just started to kind of learn about this business, so I figured the easy way would be just become an equity investor, and I did have the money, so that’s where I started. I basically learned how other deal sponsors communicate with their investors, what they do, and I figured out what are good things to do, what are bad things to do, and then I decided to take the next step, which is to become a KP. The reason for doing that – you sign on the loan; that’s the difference. If you become a key principal, you are signing on the loan, you’re becoming  a guarantor, to help someone else to secure an agency loan. This is basically good for your own resume, whenever you’re ready to start becoming a deal sponsor, because the bank is going to be looking at you as an experienced borrower… So that’s an important step.

Joe Fairless: What do you risk and what do you receive for signing on the loan?

Anna Simpson: These being non-recourse loans, you really don’t risk too much, except if your deal sponsor decides to not perform well – potentially might turn into recourse. So that’s your risk. Basically, you have to choose your deal sponsor very carefully, and what you gain is basically this little plus on your resume, so the next time when you’re ready to syndicate your own deal and you apply for agency loan, basically they’ll see that you already did it in the past, so it’s not your first deal.

Joe Fairless: And do  you get additional equity, or some sort of fee for signing on the loan?

Anna Simpson: That depends. If this really benefits you — in my case it was benefitting me, and it was not really bringing that much of a difference to the deal sponsor with whom I signed on the loan, so I did not get anything… But let’s say if I was a deal sponsor in five deals and I was bringing my experience, that would have been a different case. Right now, I potentially can do it for other people for their equity piece, because now I’m bringing not only network and liquidity, but also experience… So that would be more valuable. Back at my first time, I just brought the net worth liquidity, and that was it.

Joe Fairless: Makes sense. What type of equity ownership would someone negotiate in order to have a key principal bring their balance sheet and experience to sign on the loan?

Anna Simpson: Let’s say if the deal sponsor gets the sponsor overwrite – let’s say it is 10%, 15%, 20%, potentially the key principal might get 1% or something like this, because essentially they are not doing anything, they’re just signing on the loan… So maybe like 1% or 2% out of it they can get.

Joe Fairless: Of the general partnership.

Anna Simpson: Correct.

Joe Fairless: Got it, okay. And you mentioned as a limited partner, a passive investor, you learned some good things and the bad things of how people operated. Can you tell us about some of the good and bad things you discovered?

Anna Simpson: Just basically communication that some of the deal sponsor provides. It’s essential to communicate with your passive investors, because they want to know, once they send the money to you, what is exactly happening with the deal. They kind of want to know if you’re doing well. So it’s not just sending the reports on a monthly basis, but maybe sending pictures, maybe sending updates…

Some of these things, some investors do it very nicely. They just really update everybody, they explain what’s happening, and some people just don’t kind of do it very well… So I’ve just kind of learned about this, and of course, making meetings with your investors – that’s a good thing to do.

Joe Fairless: You said you have 23 equity investors on the deal that you’ve put together, a 1.4 million dollar raise… Did I write that down correctly?

Anna Simpson: Yes.

Joe Fairless: How did you find that deal, and what can you tell us about it?

Anna Simpson: This deal was originally off-market, so I made an offer, and they didn’t like it originally, but then they took my second offer. So I found it kind of through relationships. My lender introduced me to this broker; they knew each other, and we kept relationship… And once he got this deal listed, he kind of had me in his mind as his potential buyer. That’s kind of how I found it.

Joe Fairless: Who introduced you to the broker?

Anna Simpson: My lender.

Joe Fairless: Your lender introduced you to the owner, did I hear that correctly? Or to your broker?

Anna Simpson: To the listing broker.

Joe Fairless: To the listing broker… But I thought you said it was off-market.

Anna Simpson: Yes, even off-market deals, they’re still listed, but they may not be just kind of widely marketed… But it went on market later on, so I didn’t get it the first time, but I got it the second time.

Joe Fairless: So initially he didn’t like your offer, but then it went to the market, and you were awarded the deal through that process. How much did you offer, and were they similar terms, off-market, before they shopped it around, versus when it got shopped around and you got awarded the deal?

Anna Simpson: It wasn’t too much of a difference, but just in between these two offers the new financing came through; it was a new program that Freddie Mac had for certain submarkets… So basically, my financing became better, so I was able to get better leverage, so that way I was able to offer a little bit more. And it wasn’t much of a difference, but basically it all came to financing, really… Because once you get better financing as a buyer, of course you can offer a better price.

Joe Fairless: What specifically was better between the financing from the first go around to the second?

Anna Simpson: Basically, this was  a new program by Freddie Mac, and this was something about a certain zip code that they considered as affordable, and [unintelligible [00:10:40].08] I don’t even remember exactly. So this is not like a cheap zip code, or anything. This is in Arlington, in a very nice location, but it just fit this bracket for Freddie Mac at the time. So basically, I just got a better leverage. It was lower before, and it was better on the second time around.

Joe Fairless: Okay. The price for the first go-around versus when you actually bought it – what was the price for each of those?

Anna Simpson: Oh, it wasn’t much of a difference. They were asking 4,15 million originally, so eventually I got it for 4 million. So it’s not too much of a difference.

Joe Fairless: Okay.

Anna Simpson: And I was offering before four.

Joe Fairless: You were offering what?

Anna Simpson: Before I was offering lower than four million, and then I was able to come up and offer four million. So that’s what they ultimately wanted.

Joe Fairless: Got it, cool. And that’s in Arlington, you found it through your lender… How did you find your lender?

Anna Simpson: He is very known in the industry, and actually it would be my advice for everybody, to create good relationships. He is well-connected here, so pretty much everybody knows him.

Joe Fairless: What’s the best way to get connected to the people who are connected to everyone else?

Anna Simpson: Basically, when you start in this business it’s just very important to kind of go and find out who is who, and make it a priority to make significant relationships with the right people. When I first went into multifamily, I literally went and asked people “Who is good here?” and I started to kind of meet all the movers and shakers in my market, and I started to create kind of a team around myself… Because this is very much of a team sport, much more than single-family. So here you really have to surround yourself with the right people and create your team – a lender, a mentor, a property manager, due diligence professional, insurance… You just have to find all these people and identify who is going to be on your team. That was an important thing for me.

Joe Fairless: The TIC structure (tenants in common) – can you elaborate on what that is and then why you chose to structure it that way, versus the traditional way?

Anna Simpson: Sure. In this particular case I knew a couple of people that basically had more money than normally people willing to invest, because in a syndicated deal usually people invest 50k or 75k, 100k… These people, between just the two of them, they brought way more. One of them was a 1031 exchanger, so basically he sold his property in another state and he was ready to deploy this money here in Texas. So we knew each other and he kind of came to me and said “Look, we have this money and we would like to find something here in DFW. We know you, we trust you…” I was working on two off-market deals, so it kind of worked this way that we had enough equity to go ahead and purchase this deal.

The reason we chose the tenants in common structure for this partnership or syndication is because this person was doing a 1031 exchange, so he could not be in a partnership. This has to be a tenants in common for him to not be disqualified for his tax-deferred exchange.

Joe Fairless: Because the information from his previous property needed to be on the title for the current property, and that’s how you were able to do it, with the tenants in common.

Anna Simpson: Correct. To be able to not be disqualified, you basically cannot kill the taxpayer… So to say if your relinquished property — when you sell the property, it becomes a relinquished property; you sell it under your social security or under a certain EIN number, and you buy the next under the same EIN, or same social security number. You cannot change it, otherwise it’s not gonna be qualified for exchange. So he had to be in a tenants in common structure, because in our case, the three of us, we owned the property and we each have a deed for the property… But it’s not a single LLC, it’s three LLC’s that own this property. So that’s kind of how it works.

Joe Fairless: Let’s talk a little bit more about that four-million dollar deal. How many units is it, first off?

Anna Simpson: The second deal, the tenants in common deal is 76 units in Fort Worth.

Joe Fairless: Okay, sorry, I switched gears on you. I went back to the four-million dollar deal… Because that was four million, right? The purchase.

Anna Simpson: Yes, yes. So the first deal it was 70 units, in Arlington.

Joe Fairless: Okay, 70 units in Arlington… And then we’ll come back to the TIC, but 70 units in Arlington – what’s the business plan for that?

Anna Simpson: Basically, this deal is in a very good submarket of Arlington. It rents for very much below market for pretty much no reason, so what we’re doing right now – we’re aggressively raising rents to be at the market level, and we’re also doing certain upgrades on the exterior and on the interior. So my goal is basically just raise the rents, raise the NOI, and once I’m able to, let’s say, double the money of my investors, I will be able to sell the deal.

Joe Fairless: What type of structure do you have with your investors?

Anna Simpson: This is just a normal syndication. This is the LLC where I’m a general partner and I have 23 limited partners. I’m an asset manager over there, and I’m taking care of the day-to-day business, but we do have the third-party property management… So I’m basically managing the management company.

Joe Fairless: And with 70 units, some people might think that you need to be at 100 units in order to really have the property pay for that management team… Can you elaborate more on that thought?

Anna Simpson: I wanna say 60 units and up you can definitely use the property management company. We are still paying a very reasonable fee, so it totally makes sense. I would never want to be on the management size, like be there day to day; that’s just not what I do. I believe you have to do what you really like. I like to acquire deals, analyze the deals and meet the brokers and the equity investors… Management is not my stuff, so I’ve never even thought about this.

We have a very good management fee, and I don’t see it as a problem. You don’t have to be 100 units, or anything. 60 and up should be fine.

Joe Fairless: With the interior and exterior upgrades, anything in particular you want to mention that you’re doing that might be a little bit different, or if not different, then just very high ROI?

Anna Simpson: Whenever you’re on the buying side, you really wanna be looking for the deals that maybe have interiors that have not been upgraded, because let’s say if you put a new boiler or a new roof, that is not going to increase your rents. Basically, you need to find a deal that has good bones, so you don’t have to be putting too much of cap-ex, but maybe something that has not been upgraded inside. Because once you do this type of upgrades, you can definitely raise rents.

We are raising rents $200/unit in this particular property. That’s because the units were not really upgraded to the level that we are doing right now, so tenants are willing to pay this price for their better-looking units. And we do things like backsplash, [unintelligible [00:18:01].24] that kind of things.

Joe Fairless: And approximately how much are you spending per unit to get those $200/unit upgrades?

Anna Simpson: So let’s say if the flooring is already there, because we have some units with a very nice flooring, then it’s $3,000, maybe even $2,000. It really depends. The units are kind of 800 square foot average size.

Joe Fairless: Wow, $3,000… That’s quite a return. That’s 80% return.

Anna Simpson: Yes, we are doing well on this one, that’s for sure.

Joe Fairless: Cool. How many of the 70 have you upgraded?

Anna Simpson: At this point it was maybe around ten… We are kind of in the middle of doing three of them right now. I don’t want to upgrade too many, because once you’re ready to sell the property, you always want to have a good story for your next buyer… So the good story would be that I’m leaving some meat on the bone. You don’t want to essentially over-improve your property, because it just doesn’t make any sense.

Joe Fairless: And of those ten that have been upgraded, how many have rented for that $200 premium?

Anna Simpson: All of them.

Joe Fairless: Outstanding.

Anna Simpson: It’s Arlington, we have no problem with that.

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

Anna Simpson: I want to kind of say that multifamily real estate is a very competitive industry, so it’s very essential to position yourself correctly. Single-family – there are a lot of houses that you can find pretty much anywhere; multifamily assets – they are mostly controlled by brokers. Even if they’re off-market, they still kind of come from the brokers, most of the time. So it’s important to position yourself in the market and keep a very good reputation among listing brokers and among owners’ communities.

So kind of three things that I thought I would give away as advice. Those three things really helped me to succeed. The first one, as I mentioned, is relationships. You really have to leverage good relationships in this business to be successful. For me, early on I made it a priority to build very good relationships with the right people. When you start, I recommend that you concentrate on that… Because as a multifamily buyer, you’re basically doing two things – you find deals, and you find money; to be able to find deals, you have to have relationships with brokers. And to find money, you have to have relationships with the equity investors. So that’s basically one thing.

The second one, for me it was very important to create the momentum. Basically, what it means is once you’re in the game, it’s important to keep it active. What I mean by that is you always want to be staying on top of the mind of the brokers. You always have to call them, remind about yourself, so once they have a deal, whether it’s off-market or on-market, they think about you as a potential buyer.

And the same goes for equity investors – you don’t want to disappear on them; even if let’s say if you don’t have a deal right now to offer to them, you always want to keep the connection with them, so they know that you are actively involved in the business. So that’s another thing.

And the third one – it’s important to treat multifamily investing as a business, not as a hobby. I see a lot of people that come here and they think it’s easy, and they’re kind of like dabblers. It’s important to just really keep on track, set your goals and have a plan how to reach these goals, and follow through. And once you reach the goal, basically set a bigger goal, and go for the bigger goal. Push your limits; always, always push your limits.

It’s important to be very intentional. Say if you have a goal – say you wanna buy your first apartment complex… So just kind of assess the actions as you take actions. Figure out, whatever you’re doing, is it taking you closer to your goal, or is it taking you further away from the goal? I’m kind of identifying the priority of what I have to be doing, and kind of acting on that.

Joe Fairless: A couple follow-up questions… Let’s talk about relationships. You are from Russia and you came to Dallas in 2004 – is that correct?

Anna Simpson: I first came to Plano, I was there for like a year and a half, and then I’m based in [unintelligible [00:22:24].29]

Joe Fairless: Got it, alright. DFW. But you came from Russia in 2004, yes?

Anna Simpson: Correct.

Joe Fairless: Alright. How many people did you know when you came to Dallas-Fort Worth?

Anna Simpson: Not so many.

Joe Fairless: Okay, that’s the root of why I’m asking this. So you came in 2004, didn’t know very many people, from a different country… For someone who is in a situation similar to yours and they’re listening to this show, how do they build the right relationships? Tactically, how do they do that?

Anna Simpson: Okay, so basically I usually say “Fish in a pond where there’s fish.” Essentially, if you know that you want to be successful in a certain industry – let’s make it multifamily – figure out if you have any multifamily groups in your market, and go join them. Because there will be some groups; unless you’re in some kind of rural setting, it’s gonna be something. In DFW we have a lot of real estate-related groups, multifamily-related… Basically, you go there and you start meeting the right people, and you start building your relationships.

You don’t want to go on the street and start teaching this business to people who don’t know anything about it. Same goes for equity investors. It’s easier to find equity investors in real estate groups, because they’re already kind of sold on real estate investing; you don’t have to explain why. So what I did, I basically started joining these groups. That’s how I started.

Joe Fairless: Okay. As far as number two, you said momentum, and really staying top of mind with brokers and equity investors… How do you stay top of mind with brokers and equity investors?

Anna Simpson: Sure. So as far as brokers go, I have a list of let’s say ten brokers that I would really like to keep on top of them all the time, because they have deals [unintelligible [00:24:21].16], sometimes they have off-market deals… So what I personally do, I either e-mail them or call them pretty much every week.

It’s kind of like when I started first buying houses, my agent told me “Be [unintelligible [00:24:36].19] So basically, you just always kind of remind about yourself, to the point that they just wanna give you something… Just “Okay, let’s give her a deal, so she gets busy with it.” So yes, every week, I have a list of brokers that I contact, and basically I ask “Do you have something? You know what I want”, and very often, especially now that I have a couple of deals under my belt, they just call me themselves and say “Look, I have a deal. I think this is what you want.”

Joe Fairless: Let’s say you have now e-mailed this broker for four weeks straight… What does the fourth week e-mail — what is in that e-mail?

Anna Simpson: Basically, I try to have a very personal relationship with all of them, with the brokers that I personally know. So this is not just kind of like go on DotLoop, find ten names and start e-mailing them. No, you have to really know them. I know them personally, I know their family, I know what they do, I meet them at different events… So all of these guys I have a very good chance to have something from them. This is not a cold call, essentially; this is a very warm call. All of these people I already created relationships.

The fourth e-mail, or tenth e-mail, that basically can be different, like “How are you doing? How was your Christmas? How was your multifamily conference? And by the way, do you have something for me?” That’s kind of how it is.

Joe Fairless: Got it. So it’s getting to know them personally, and also knowing what else they’re working on or experiencing, or maybe it’s just seasonal, based on if there’s a holiday or something, talking to them about that, genuinely caring about the answer, and then also reminding them about what you’re looking for.

Anna Simpson: Absolutely, so you don’t sound like a machine, like every week it’s the same “Hey, how are you? Do you have something?” It’s really very personal, because I genuinely care about what they have to say about this conference that they’ve just had in January. I care about what their experience was, what did they come there from…? I care, and it’s interesting for me to hear this, so we have a relationship. That’s kind of how it goes.

Joe Fairless: If you were investing in Chicago – since you don’t live in Chicago, what would your approach be for following up with them and getting to know brokers, since you’re not in the market?

Anna Simpson: I’d say I would travel there first, and personally meet them. Because nothing can beat the personal relationships. When I first started, as far as meeting the brokers, I actually went and scheduled meetings for them. Several brokers, literally – I went to their offices, or maybe took them out for coffee or something like this, because you’ve gotta do it. Until they meet you and look you in the eye, just really understand that you are a real person… And also very important to show them that you actually already invested in multifamily, so you’re not a single-family guy with a couple of houses and now you want to try multifamily.

So it was important for me that I was already invested in 1,300 doors, and they knew the sponsors with whom I invested, so that was a big deal.

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

Anna Simpson: Absolutely.

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

Break: [00:27:51].15] to [00:28:24].29]

Joe Fairless: Best ever book you’ve read?

Anna Simpson: Rich Dad, Poor Dad. Hands down.

Joe Fairless: Best ever deal you’ve done that’s not the first one and not the last one?

Anna Simpson: I was gonna say my first one… Well, I think that it’s so difficult to go from zero to one, so my first deal was really my best one, really. The reason is this is how you get in the game, and once you get in the game, this is like a new life start… So I should say my first one, sorry.

Joe Fairless: What’s your second best-ever deal?

Anna Simpson: Maybe one of my houses… I put $15,000 in it, and I pulled out like 70k, and I was cash-flowing during three years. That just was one of the best ones also.

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

Anna Simpson: My biggest mistake was when I was still doing the rental houses. For one of these houses I paid more than I should have, and I basically ended up doing a lot of projects myself, literally. I hated it, and I vowed to myself to never do it again, and never work IN my business, but actually work ON my business. It’s kind of important to remember, when you buy something, you make money on the purchase. If you overpay, it’s gonna take you a long time to recover, and probably you’re not gonna make as much money as you wanted to make… That was in my case.

I didn’t lose money, because it was several years ago and as you know, the market is very good… So the market was very forgiving and I didn’t lose any; actually, I made money, but I didn’t make as much as I could. So do not overpay, for sure.

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

Anna Simpson: I like to volunteer at real estate events, and specifically with the people originally helped me succeed in this business. I always volunteer my time, to just go there and do whatever they want me to do. Just volunteering.

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

Anna Simpson: The best way would be to go to my website, SimpsonMultifamily.co.

Joe Fairless: However did you come up with that name?

Anna Simpson: Hey, that was easy… [laughter] My last name and “multifamily.”

Joe Fairless: Well, Anna, thank you so much for being on the show. I love the lessons learned – very helpful for everyone, not only people putting the deals together, not only people passively investing in deals, to get a glimpse of the evolution of things, but also just real estate investors in general, because there are some tried and true principles that you discussed. One is for how to position yourself in a market, especially with multifamily, but really anything… One, focus on relationships; focus on relationships with the right people, and as you say, fish in the pond where there are fish – very simple, and it really helps us hone in on where should we focus our efforts, at least initially.

You came from a different country about ten or so years ago, and you’ve built this up, and it’s interesting to hear how you approach it, because anyone starting out certainly can approach it a similar way and have some success.

Two is maintain momentum with your brokers, as well as equity investors. Actually, I meant to ask this question, so I wanna ask it… I asked you about how you stay top of mind with the brokers; how do you stay top of mind with your equity investors?

Anna Simpson: I have a meetup that I have, and I also go to other people’s meetups. We have like maybe 50 people always coming, so you constantly network with these people… And just go to all the other local REIA, just basically meet all these people over and over again, so they know where you are and what you’re doing.

Joe Fairless: And then the third thing is treat the business as a business, not as a hobby, and assess results as you continue to go. So 1) focus on relationships and build the relationships with the right people, 2) stay top of mind with brokers and equity investors, and 3) treat it as a business, not as a hobby.

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

Anna Simpson: Thank you, Joe. I appreciate it.

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Lance Wakefield and Joe Fairless

JF1290: Closing 30+ Deals Per Month After Being In Business For Only 2 Years! With Lance Wakefield

Lance started wholesaling in March of 2016. Fast forward to March 2018 and his team and himself are closing 30+ deals per month! Lance shares his best tips for how he has been able to scale so quickly. From setting up partnerships, learning from others, and investing in yourself, these are just some of the tips we hear from Lance today. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Lance Wakefield Real Estate Background:

  • Started wholesaling in March 2016 and now his team does about 30+ deals a month.
  • Have about 30 people on our team, in both Houston and Dallas
  • Focus is wholesaling but also do flips and have experience in buy and hold investing and new construction
  • Based in Dallas, Texas
  • Say hi to him at lance@winwinmethod.com OR http://winwinmethod.com
  • Best Ever Book: Never Split the Difference by Chris Voss

 


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business partnership advice

JF1257: How To Approach Partnerships & What To Look For #SituationSaturday with Mark Kenney

Mark started investing in real estate at the age of 22. Now with over 2300 units and plenty of partnerships had, he can tell us a thing or two about good and bad partnerships. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Mark Kenney Real Estate Background:

Seasoned real estate investor, published author and founder of Think Multifamily

-Over 20 years experience and has extensive experience in property valuation, acquisition, and operations

-Has a passion to help others succeed in the multifamily arena and is invested in 2100 units

-Mark also is a CPA

-Say hi to him at http://thinkmultifamily.com/

-Based in Dallas, Texas

 


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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. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. First off, I hope you’re having a best ever weekend. Because today is Saturday we’ve got a special segment for you called Situation Saturday, where we’re gonna talk about a tough situation and how the Best Ever guest overcame it; that way, if you come across a similar situation, you have a playbook and you know exactly how to overcome it, or you have some tools and techniques for what’s worked with previous people in that situation.

With us today to walk us through how to approach partnerships, what to look for and some hard lessons learned along the way, Mark Kenney. How are  you doing, Mark?

Mark Kenney: I’m good, Joe. How are you doing?

Joe Fairless: I am doing really well, and thanks for being on the show again, Mark. Best Ever listeners, you might recognize Mark’s name, and that’s because he was a guest on episode 975. It’s titled Hotels And Multifamily Investing On a Passive Level, and you can hear his best ever advice… He has money in over 1,000 units as of that time… And you began when you were 22 years old, did I get that right?

Mark Kenney: Yeah, I started when I was 22; I guess 21 probably really, and now we’re at about over 2,300 units.

Joe Fairless: There you go, wow. And you’re also a CPA based in Dallas, Texas. The company is Think Multifamily, and you can just go to ThinkMultifamily.com, that will be in the shownotes link. Mark, let’s start out with partnerships, obviously, and maybe a story about a partnership that didn’t go the way you wanted it to go, and then we’ll kind of extract the lessons learned from that.

Mark Kenney: Sure. So I’ll give you an example of a very recent tough lesson learned as we had a partner in a deal. It’s a little confusing, because he actually was already in another deal with another partner, and we bought his partner out. So we came in, bought his other partner out, assumed everything – same company, same LLC, same loan, everything. And when we did that, we found out fairly quickly that he was doing something he shouldn’t be doing, so within two months we kind of discovered some things…

Joe Fairless: Like what?

Mark Kenney: Not recording any payables, and not like 10k-20k, but like $300,000 from 12 months old…

Joe Fairless: Well, 10k-20k is a big deal, too… [laughs]

Mark Kenney: Yeah… Well, try 300k. And frankly, a lot of it is bogus, scam between him and a vendor…

Joe Fairless: And we’re talking a multifamily property, right?

Mark Kenney: Right.

Joe Fairless: Okay. Was is self-managed? Is that why he was able to do that, or…?

Mark Kenney: Yeah, self-managed. He had a partner in the deal, a general partner as well… And since we took over, we inherited all those sins, if you wanna say… We did a lot of due diligence ahead of time, but at the end of the day if someone wants to be deceitful, they’re gonna get away with it. We called him quickly, took legal action…

Joe Fairless: How did you catch him?

Mark Kenney: Well, first I went down there, surprise visit… That’s one key thing I think if you have properties. Even if your partner is running the deal, do a surprise visit. They’ll always be like, “Why didn’t you tell me you were coming?”, I’m like “Because I don’t want you to know I’m coming.” Things kind of looked a little bit — not super bad, but kind of like not quite as good as they should be… And it had only been two months.

Then we actually had a board set up over that property; I won’t go into all the details on that, but we had an SEC attorney from Harvard and some pretty high caliber people… But essentially, I was requesting information on the rehab – it was a very large rehab project – and I wasn’t getting the answers. It was more like, “How much is this stuff gonna cost?” “Well, probably more than we thought?” “Well, how much?” “Well, you know…” – kind of those answers.

So we had a formal board meeting, we requested information formally through the board, five members total including himself, and gave him a deadline, he didn’t produce the information. We didn’t even know what he spent on rehab and things like that, and what still needs to be done and all those basic questions that he should get. That’s where it started. And then when we kind of uncovered more and more… We didn’t find out until after we removed him – it took us almost two months to get him out, somewhere around there, after we requested information and then we had the attorneys involved and everything like that… Then invoices showed up – two weeks after we booted him out invoices showed up from one vendor for $160,000; that went back from December 2016, so at that time nine months old…

So if your gut is kind of telling you something just doesn’t seem quite right, and fortunately for this, we took action quickly… Our basis is low on the property, but nobody wants to go through that; we lost essentially about five months of our business model right off the bat…

Joe Fairless: When you went to the site visit you said things didn’t look exactly how they were supposed to; it was a surprise visit… What specifically did you see that was a little off?

Mark Kenney: Vandalism, which isn’t uncommon with a class C property, but broken windows and doors that were sliding doors that were broken… It’s a huge rehab project and there were a total of three guys that were working. I was like “This doesn’t seem quite right.” And there was always an excuse given. They are tough, but the city is giving them problems, which they weren’t; the lender is not giving him money from the reserves, and things like that… But we met with the lender directly ourselves and kind of got the story on that, and it was like “Well, we don’t believe everything is being done the way it should be done…” But for that big of a project, and have three guys working there, and then before that requesting information like “What percent are we complete?” and “How much did we spend versus how much we have?” – the typical information wasn’t provided, and it still has not been provided to this day.

Joe Fairless: It was really quick that you were able to identify that… Would you say that ties into your CPA background?

Mark Kenney: No, not in this case, really. I think it was somewhat probably timing; I just happened to go there at the right time when things kind of looked a little suspicious. It is very quick; you can argue “Well hey, you wish you would have called him day one”, but at the end of the day it’s the guy I’m gonna partner on another deal with… I think at that time I trusted him. But you know, it really wasn’t — I have something to compare it against. I have a lot of other properties with other management companies, and I can be like “Well, I get this information from them, why am I not getting this from you?” We had some luck, and then it was taking action immediately. We didn’t give him any wiggle room.

Joe Fairless: You said it took almost two months to get him out – that seems lightning fast, to get someone out of a — did you kick him out of the general partnership?

Mark Kenney: Yeah, we have an overall company with five members in it that kind of oversaw this property, and thankfully we have attorneys that were involved, and one is on the board, an SEC attorney, Harvard graduate, and things like that… So we were able to finagle things. If it had been left up to me, he’d still be there, but we engaged the appropriate legal people immediately, and that helped. Without them, frankly, probably all our money would be gone.

Joe Fairless: Yeah, yeah. And you said that you bought his partner out, and you assumed the previous partner’s position, and congratulations, you’re now partner with what turns out to be a crook… [laughter] So did the person that sold you their ownership interest know what was going on?

Mark Kenney: No, not that we were aware of.

Joe Fairless: Why did they sell? What was the reason they sold?

Mark Kenney: The story was that he was a New York guy, had properties up there, and I think with he was frustrated with the lack of communication, but to my knowledge had no indication whatsoever was going on, because a lot of things didn’t really come to fruition until after we removed him. All these invoices showed up, and liens on the property… It was bizarre, and kind of a little bit fascinating, as I would never go in that situation again buying out a partner, because you inherit everything from before.

There were some advantages to doing it; we got to keep the same loan, we didn’t have to  pay additional fees and things like that, but personally, from my own perspective, I would never do that again.

Joe Fairless: Okay. So now that you know what you know, what would you say about — if you were presented a similar opportunity, how would you qualify that partner?

Mark Kenney: One thing you could do is just background checks, which lots of times you’re not gonna find some of these things like this anyways. I would talk to their old partners, which at this time I had already partnered with this guy and he gave me his story, so I’m kind of like “Okay, well I don’t need to go check with his partner”, but I would say “Can I talk to your other partner? What would your partner say if I talked to him? What would he say?”, kind of go from there.

Then the other piece is regardless of what’s said, is everything in writing. In this case, there were some existing agreements that we were never even provided, that made it more difficult to get him out. It’s almost like you have to do a do-over. If I come in and buy a partner out, we need to restructure everything, all the agreements that were done between the construction companies and the existing company – they all need to be redone. If you don’t do that, there could be things in there that makes you liable for things you never even dreamed of.

Joe Fairless: So you do background checks, talking to old partners, asking them “What would your partner say about you if I talked to him/her?” and then gathering all of the paperwork that is in place, even though they might not share everything with you, but at least you can ask for it, right?

Mark Kenney: That’s right, you ask for it.

Joe Fairless: You ask for it in writing, probably.

Mark Kenney: In writing. In some cases — like, he had a construction company that was doing work there too, I would have asked to redo those agreements that we were never even provided… They still haven’t been provided. So that’s the thing – you don’t know what’s out there, unfortunately, in a situation like this.

Joe Fairless: Okay, so those are the three… Have you done a background check? I’ve had people do background checks on me and I have to give them my social, and my name and stuff. Have you asked that of a partner before?

Mark Kenney: Yes. I did not with him, because he was a prior partner, but I have… And if the partner has an issue with you running it, then I would just say don’t do business with them. And I mean, it’s like, “Really…?”

I think there are a lot of things when you enter into a partnership, and this is not an exaggeration – I just had dinner last night with two of my best friends; one is an attorney and the other one is a financial guy at a large organization, and he had some rental properties as well. He had mentioned he’s been trying to sell his rental properties for the last 18 months and his partner doesn’t want to… So lesson learned, guys, if you’re gonna have a partnership, you need to have tag along clauses and things like that [unintelligible [00:13:21].23] legally you can force your partner to sell, and they can force you to sell, provided some sort of stipulations are met.

So he’s stuck there not being able to sell his properties for 18 months because the partner doesn’t wanna sell them. The other partner – he’s known the guy for 23 years, went to law school with him, had been in partnership with him for 9 years, and his partner came in Wednesday before Thanksgiving, came in and said “I’m done. I don’t wanna partner with you anymore.”

So if you’ve been partners long enough, with enough people, I can guarantee one of them will not go as planned, and you had better make sure you have things in writing, even simple things like “What do you do in a tie-breaker? If you’re in a 50/50 ownership in one of these partnerships, how do you break ties? (legally break them) How do you resign if you wanna get out?” There’s a whole slew of things…

I don’t know what you do, Joe, but the partners — I know a lot of banks don’t support dual verification; your partner could go and withdraw $100,000 and say “Thank you very much”, and you could after the fact address it, but you can’t address it typically before it happens.

I think partnerships are great, I really do. I think you look for people that have some sort of skillset that you don’t have, you plan for the worst-case-scenario in writing, because eventually something will probably happen – hopefully, it doesn’t – and have it in writing that way… But yeah, at the end of the day your reputation can be tarnished. Think of all the people that you don’t think of as individuals, and their names are presented together… If your partner is doing something that they shouldn’t be doing, there’s a good chance — and it’s not even doing something; I mean, that’s the extreme example. But if they treat people differently than the way you want people to be treated, because fundamentally they don’t have the same — the way they interact with people, maybe they’re very harsh or brash and you’re not like that, you can sometimes inherit their reputation, unfortunately.

Joe Fairless: Going back to the story you were talking about, if you had asked for a background check, if you had talked to his old partner – which you talked to the old partner, but you didn’t do a background check – and if you had asked for everything in writing prior to going into the partnership, then you likely wouldn’t have gotten everything in writing, so then the question becomes would you have known that you weren’t getting everything in writing, so here’s a hypothetical question to you – if you would have asked and had everything in writing, do you think he would have shared with you enough stuff to lead you to believe that you had everything, or would he not have shared with you enough where you’re like “Wait a second, something’s off…”

Mark Kenney: He would share enough, without a doubt. He is an extremely intelligent, crafty individual; I’m kind of back to where I would personally never buy into another partnership like that, where I’m inheriting potential liabilities and risks that happened before I was even involved. And he washed his hands, he’s gone now, and “Thank you very much, Mark! You can take all of this stuff, and look at these vendors and old invoices from nine months ago that were never paid, and didn’t pay sanitary for 12 months… I recorded it all in the books, though; they’re all in the P&L.” [laughs]

Joe Fairless: Sanitary is a pretty important service.

Mark Kenney: Bizarre to me how you can get away with that.

Joe Fairless: Yeah. So let’s talk about never buying into another partnership like that, because there are opportunities for you – or as an investor for us – to buy an LLC from the seller, and then… Is that what you’re referring to?

Mark Kenney: No, not so much. If you do that, I think you can put language in there where anything prior to that you’re not liable for, and things like that. This was literally just buy a partner out of existing everything. My partner still stayed in, so it was kind of a different structure. The loan stayed the same, everything was the same.

The example where we buy an LLC out I think is different. One reason you might do that is for your tax basis. People kind of do it that way. But I think if you ever consider doing that, you need to put in verbiage about anything prior to the day you took over, you’re not liable for.

Joe Fairless: With the approach that you took with this gentleman in the partnership, anything that if you had to do it over again… Obviously, there are some things that you’d do and we’ve talked about that, but if you did those things – the background check, talked to the old partner and looked at everything in writing – you still wouldn’t enter into another partnership like this?

Mark Kenney: I would not.

Joe Fairless: Burn the bridge, baby.

Mark Kenney: Burn the bridge; there’s other deals I can do that are a little less risky, I guess.

Joe Fairless: Yeah, fair enough.

Mark Kenney: It could work out, right? You could do 100 deals and 99 of them work out perfectly, and it’s just that one that taints you.

Joe Fairless: Well, this is good information. If we’re presented a situation like this, we will all reference this episode and have a cautionary tale for what to look out for and proceed with caution if we do proceed. Anything else as it relates to partnerships that you wanna mention?

Mark Kenney: No, just back to having everything in writing. I see people that have these loose agreements that exist; you need to contemplate everything going South and how you account for it. Always having someone that can break the tie, because you’re gonna have disagreements. I think having really just the core fundamental beliefs that are the same, let alone the skillset for your to help each other, but having the same way you treat people is critical.

Everything in writing. If your partner doesn’t wanna put things in writing, then there’s an issue. I just wouldn’t do business with them. You need the ability to maybe also — people have a different perspective, but if you’re in a partnership, more than likely one partner thinks either what they do is more important than the other one… “Hey, I find deals.” “Well, I raise money so you can get deals” or “I raise money”, “You can’t do that without deals.” It’s like, “Hey, don’t do that.” But inevitably, someone’s gonna think that what they do is more important.

I recommend maybe doing things deal by deal, because life events happen, and yes, you wanna help each other, but if you’re doing 90% of the work on three deals and I’m doing 10% on three deals, then I think you should be compensated deal by deal, splitting up by category – who found the deal, who raised the money, whose earnest money is in there, whose balance sheet is being used… And do it deal by deal. That’s what I would suggest doing it. That way there aren’t those hard feelings potentially where you get two years into the partnership and one person thinks they’re doing a lot more because the other one’s wife is sick… You know what I mean? Something like that.

Joe Fairless: Sure. Great stuff, and this has been helpful from a very practical standpoint when we go through the scenario, and also just from a — it was kind of entertaining, too… Sorry to tell you that. [laughter]

Mark Kenney: Thanks, Joe… Thank you! [laughs]

Joe Fairless: I was actually entertained by your story.

Mark Kenney: Yeah, it’s bizarre — I mean, I never would have dreamed (literally) anything like this would happen. It’s almost like a story you have on TV, it really is… But I’ll share anything with anybody, because at the end of the day I do not want anyone else to go through some of the lessons we’ve learned over the years.

Joe Fairless: Why did you have a board? That’s not typical.

Mark Kenney: It’s not typical at all. So we had a larger organization with these grand plans which included this other individual, and as a result of that we had a board structure. We had a CFO from a publicly-traded company, the SEC attorney, a large broker guy involved… It was really more to make sure everything’s structured upfront, legally, and how we potentially — my other partner’s plan was “Let’s bring this together and eventually create a REIT.”

Joe Fairless: That’s not gonna happen with him, is it?

Mark Kenney: Oh, hopefully he ends up in jail; I hope he ends up there, I truly do, because he needs to stop doing this. And it goes back to the reputation; my reputation gets hurt because of what he did. But I think if you can be very open with investors – and that’s the key, to be very open with them and share everything you can… Of course, things don’t always go as fast as everyone wants, but if you have an open communication with them, most investors – not all, but most – will be okay and supportive. It’s that one or two that it doesn’t matter what you do, they might not be quite supportive like they should (nothing’s ever good enough), but communicating out is key.

Joe Fairless: How much are board members in a scenario like that – if you can’t say exactly how much they’re compensated, but in a scenario like that, how much are they compensated?

Mark Kenney: The board members – because I was in the board, and then this other individual was in the board… We had 50% total between the two of us, and then the other board members – that’s somewhat getting diluted down, but that’s very high… I never like that structure; it was actually set up before I got involved with him. But this goes back to the compensation piece again, who’s doing the work.

One individual has done virtually nothing, because his time hasn’t come yet. He’s the CFO, and we’re not at that point where we need him, so why give away some sort of percentage upfront that might never happen? it doesn’t make sense to me. I think it should be reevaluated deal by deal.

Joe Fairless: I’m a little confused… You said 50%, so you had 50% and the board had 50%?

Mark Kenney: He and I can get around 50%. We were on the board, though; he and I were both on the board.

Joe Fairless: But you said there were many board members.

Mark Kenney: Five.

Joe Fairless: There are five. So five board members, each of them roughly had what percentage?

Mark Kenney: 75%, the four board members. That’s how we had the right to rule them out.

Joe Fairless: So everyone had about 18%?

Mark Kenney: Yeah. It varied, depending on the role.

Joe Fairless: Okay, cool. That’s a ginormous amount.

Mark Kenney: It’s insane, and it shouldn’t be, and it’s actually not gonna be, frankly… It’s getting adjusted. I got into that with him and he had some grand scheme plans and things like that, but yeah, there’s actually not reason to be giving that type of percentage away. it makes no sense.

Joe Fairless: Cool. Well, Mark, thank you for being on the show again. How can the Best Ever listeners get in touch with you?

Mark Kenney: Our website, ThinkMultifamily.com, and the e-mail is mark@thinkmultifamily.com.

Joe Fairless: When we look at partnerships, we’ve gotta obtain background checks or run background checks, we need to obtain everything in writing, and ask for everything in writing… Because we might not get everything in writing that has been memorialized, but if we ask for it, at least there’s a paper trail of us asking for everything in writing. And then talk to other people who have partnered with the person we’re planning on partnering with, and ask the potential partner “What would your partner say if I talked to him/her? What would your old partner say if I talked to him/her?” Those are three ways that we can attempt to mitigate the risk…

But ultimately, as you said, Mark, if they’re trying to pull a fast one, they’re probably gonna pull a fast one, and it’s just a matter of having a plan in place for if a fast one gets pulled, then what are the steps that we need to take in order to get that individual out of here.

Thanks for being on the show, Mark, I really appreciate it. I hope you have a best ever weekend, and we’ll talk to you soon.

Mark Kenney: Thanks, Joe. Take care.

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JF1250: Do You Have Proper Insurance? With Beth Boisseau-Coots

Beth has an incredible amount of knowledge in insurance and specifically insurance for real estate investors. As the Vice President of Sales at a full service insurance agency, knowing specialty insurance programs for real estate investors is part of her job. This episode will help you understand your insurance needs. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Beth Boisseau-Coots Background:

-Vice President of Sales for J.B. Lloyd & Associates, a full service insurance agency

-Specializes in specialty insurance programs for real estate investors, lenders, mortgage servicers, community banks

-Endorsed by Texas & Western Independent Bankers for Forced Place, Foreclosed Property Liability, Mortgage Impairment, and Outsourced Insurance Tracking.

-Say hi to her at http://www.lloyd-ins.com/ – beth.cootsATusrisk.com

-Based in Dallas, Texas

-Best Ever Book: Think and Grow Rich

 


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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, Beth Boisseau Coots. How are you doing, Beth?

Beth Boisseau Coots: I’m great, how are you doing?

Joe Fairless: I am great as well, and nice to have you on the show. Beth is the vice-president of sales for JB Lloyd & Associates, which is a full-service insurance agency. She specializes in specialty insurance programs for real estate investors and banks, lenders, mortgage servicers etc. Today we’re gonna be talking about insurance. She’s based in Dallas, Texas. With that being said, Beth, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Beth Boisseau Coots: Sure, and thank you for having me today, I really appreciate it. My background is really just insurance. I started in sales, in another space, but my father started this business back in 1988, so I was sort of raised into it, and when he saw that I have some ability in the sales area, he said “Okay, well come on, you need to be part of the family business.”

So I’ve been doing this for 12 years and have loved every minute of it, believe it or not. I know people are like “Insurance… It doesn’t sound so exciting”, but this has been a lot of fun.

Joe Fairless: And what about it do you love, real quick? Just curious.

Beth Boisseau Coots: You know, one thing I just absolutely love is the fact that it’s never boring, and there’s always something to learn. My area, my specialty in insurance is always changing; we always have regulations that are always being updated and changed and tweaked by the government that we have to stay on top of… So it’s never boring, there’s always something to learn, something to conquer, and you could spend your whole life doing this and never know it all. That’s the main thing.

Joe Fairless: And then on that note, with your focus – you’re focused on real estate investor policies and working with banks… Is that right?

Beth Boisseau Coots: Yes, that is correct. We started in the banks space, we’ve specialized in community banks since we started in 1988, and then during the financial crisis we started getting more calls from people who were purchasing large pools of distressed assets from lenders, and our [unintelligible [00:04:21].13] that we were working with the banks on was a very good set for these investors as well. So that’s kind of how we stepped into the real estate investor space.

Then as time went on, we’ve adapted our program and our product, we added more carriers, we refined the system on that side of the house to really reflect the needs of the real estate investor… Because they don’t always need all the bells and whistles that the force-placed program offers to the banks. At the same time, there are things they need that the banks don’t need, so we were able to really create a niche for investors.

Joe Fairless: I love that you’re talking about force-placed insurance, because I literally just found out about this term and this policy on the last interview I did, about ten minutes ago, after — I don’t know how many interviews I’ve done; over a thousand, obviously… And the woman on the show talked about force-placed, because she buys distressed notes, so she does that. Now, real quick, what’s a refresher on force-placed? And then let’s talk about some other aspects of insurance.

Beth Boisseau Coots: Okay. So force-placed insurance is an insurance policy that allows a bank, a lender, a mortgage servicer to force coverage on any properties they have in their loan portfolio where the borrower is not compliant with the insurance requirements that are outlined in that mortgage or in the loan.

For example, if you have someone who’s bought a house and they own maybe $100,000 on it, and they’re not keeping up with their insurance, the bank can add insurance to it for what the borrower owes, and have their interest in that property covered.

So the banks need the ability to add properties as necessary, but they also need the ability to delete the properties as necessary. So they don’t want to have an annual term; they may have a property that’s only covered for two weeks, they may have one that’s covered for a year. They need that flexibility, and to accommodate this, we have an online system where they can manage the insurance on the loan portfolio. There’s no more underwriting after the policy is bound, because it’s an after-policy, so they just go online, add properties as necessary, take properties off as necessary, and then they’re billed monthly.

At the same time, if they have a property that they have to foreclose on, then they could go on that online system and just change the status of the property from a force-placed to a foreclosed, and then liability is added. So it’s a convenient way to manage the insurance, all in one place, as needed, with no underwriting delays, no more applications, and then pay as you go… Where the real estate investor’s policy is very similar – it’s the same online reporting, except liability is added (unless we’re told not to) on all properties, because what we find is that the real estate investors usually have a mixed bag, but in almost every case they need the liability, because they have that exposure. So that’s really the key difference between the two.

Joe Fairless: Got it. And certainly for the first example it’s someone who has a high transaction volume, I imagine, whenever they’re trying to oversee their portfolio and things are going in different stages in the process.

Beth Boisseau Coots: Yes. Again, the two policies are very similar, but there are some key differences, one being the liability needs, and another one being the fact that a real estate investor, while they can cover a property or the amount that is owed, and that might be necessary if they are doing an owner-finance situation… A lot of times they’re doing contracts for deeds, or buy and holds, or fix and flips, so a lot of times they’re going to want replacement cost, rather than just to cover what their interest is in the property. So they have that ability – they can do up to replacement cost, or they can just cover it for their interest in the property that they paid for, or what their borrower owes on it.

Joe Fairless: Let’s talk about terms that we should be aware of whenever we’re shopping insurance carriers and we’re evaluating different policy options. Can you educate us on that?

Beth Boisseau Coots: Absolutely, and I’m a big believer that this is something that all insured should know. The first one, that I think is probably the most important one, is know whether your policy is an actual cash value policy or a special policy. Another name for actual cash value policy would be basic, and another name for special would be all risk.

There’s some very important differences between these two types of policies. A basic or actual cash value policy is going to only cover a list of things. It’s only gonna cover what’s listed in the policy. Usually, there are five basic perils, like smoke and explosion, things of that nature, and sometimes they’re endorsed to add a few more, like theft, vandalism, malicious mischief… But you can see that if the only things that are covered are listed on a policy, there’s going to be a lot that’s not covered, and that’s really important to know… Versus a special policy – everything is covered, unless it’s specifically excluded. So you can see that you’re going to have a much, much better coverage with a special form of policy than you would with the actual cash value, and that of course is going to be reflected in the rate. But you need to know it going into the contract and signing the contract, because I hear every day “Oh my gosh, I had no idea that my form of policy was an ACV policy until I had a claim.” So that’s really important.

The second thing is co-insurance – what is co-insurance? Well, co-insurance is the insured paying a portion of a claim; usually it’s an 80/20 split. So if it were an 80/20 split, that means after the deductible, the insured would pay 20% of the claim. So it’s important to know if you have a co-insurance clause in your insurance contract, because obviously that could be a big surprise if you have a claim for a roof, and it’s $20,000 to replace or repair the roof, and you think “Oh, well I just have to pay my $1,000 deductible and I get my roof; then it’s gonna cost me $19,000.” Well, if you have a co-insurance clause, that could really change things in terms of your claim payment.

Joe Fairless: And the comparison between the cash value versus the special policy – on average, how much more percentage-wise is the special policy?

Beth Boisseau Coots: It depends on underwritings. It can be significant, and then there are times when it’s not as significant, just depending on the risks involved. But yes, it is definitely going to be more expensive to get a special policy.

And back to ACV, one thing I needed to mention and I didn’t is that that stands for actual cash value. Basic and actual cash value usually go together. And actual cash value means that when you get your payout, they take the replacement cost, they deduct depreciation and that is your claim. So that’s another very important term to know, is what does that mean, versus replacement cost. You definitely want to know that… If you have that same roof claim and the replacement cost is 20k, but it’s a 30-year-old roof, so they’re gonna take off 30 years of depreciation and you might get a $3,000 plain check. So those are very important terms, the actual cash value, replacement costs, co-insurance.

Joe Fairless: Yeah, it is. Is that the depreciation that you had on your taxes, or depreciation that the insurance company writes up?

Beth Boisseau Coots: They have a formula for depreciation, so it is an insurance company formula that they have. It’s not the taxes. And it’s based on age and quality.

Joe Fairless: What’s another term or something we should pay attention to when we’re evaluating?

Beth Boisseau Coots: Well, obviously deductibles, and homeowner’s insurance – you probably noticed you have a percentage of the value of the house, the value to replace the house, which a deductible is. In my world, a deductible is more like car insurance. My investors get to pick anywhere from $1,000 to $10,000 for their deductible, and that is the amount that you pay when there’s a claim.

If you have a $2,500 deductible, that first $2,500 you pay, and then everything after that is your claim if you don’t have a co-insurance clause. If you have that, then you pay another 20%, or 10%, depending on what your insurance clause is. So the deductible is also very important, and it’s about knowing how much risk that you have the ability or the desire to assume. If you don’t wanna assume much, then you need to choose a lower deductible, you pay a little bit higher rate. If you don’t mind, you have the cash on hand, then you can go higher, and that’s reflected in the rates as well. A deductible is basically how much are you going to self-insure, before the insurance kicks in.

Joe Fairless: What’s a mistake that you see investors make, as it relates to insurance?

Beth Boisseau Coots: Oh, my goodness… The biggest one is not reading the policy and not researching the company – those two, in that order. I’ve had so many that have come to me because they were referred by a friend to so and so, and they find out when there’s a claim that, going back to those terms, they had a basic policy with an actual cash value, this co-insurance, and a high deductible. They think they’re covered, because they are paying every month, but when the pedal hits the metal and there’s a windstorm or a tornado or something, a tree goes through their roof on their house in Kansas, they find out that roof is barely covered, and the amount that they get won’t even fix the whole that has been knocked into it.

So reading the policy – huge. Knowing the carrier – are they A-rated or above by A.M. Best? That’s also really important. We only work with carriers that are A-rated and above, because that shows that they pay their claims, they’re financially solvent, and all that good stuff.

Joe Fairless: What’s the rating system?

Beth Boisseau Coots: It’s called A.M. Best.

Joe Fairless: A.M. Best?

Beth Boisseau Coots: Yes.

Joe Fairless: Okay.

Beth Boisseau Coots: And a quick Google search will get you a lot of results on that.

Joe Fairless: Yeah, I’m already there, I see it. [laughter]

Beth Boisseau Coots: [unintelligible [00:15:21].06] Another term to know is limit; what are the limits? How much liability do you have? Is it a million dollar limit? Is it $500,000? You wanna know what your limits are, and you wanna know that they’re enough to cover you. If you own an apartment complex and you have a  pool and a little kid gets in there and God forbid something happens to them, and of course you get sued, what are the limits? You need to know that, so that’s another one of those terms.

Going back to this, another thing that real estate investors should be aware of is that there’s a lot of variance in types of policies. You can go to your local agent and have them do a policy everytime you have a property, and then you’ve got maybe a hundred different renewal dates, a hundred different policies, a hundred different policy fees, and so you kind of manage all this. Or you can do it in an online system like what we have, where it’s all in one place, and you’re paying monthly.

Then there’s other ones that are similar to ours, but you fax in a copy every time you add a property to your agent. So there’s a lot of variance. I think the real estate investor insurance world is so evolving and so growing… So you find just a whole plethora of things in there, and a lot of times agents who may be doing home, auto, a few businesses, throw their hat in this, too. So it’s good to know what you’re getting, and that your agent is able to navigate this, because it is definitely a niche, with its own requirements, its own compliance standards from CFPB, and laws – there are laws and legalities that go along with it as well.

Joe Fairless: Fact or fiction – if I get an umbrella policy that is five million dollars, then that’s better than one million because if something were to happen, then the insurance company would put their better lawyers on it and spend more time because they don’t wanna lose that four million dollar difference?

Beth Boisseau Coots: Well, I would not say you’re gonna have a better coverage or a better time because of lawyers and whatnot; you will be paying more for that, and you will have that extra coverage. So if you need that much coverage, it’s there. So you would be better covered because you would have the coverage. But I would ask you this – why would you need five million?

Joe Fairless: Because of what I just said. If that is true, which you’re saying it may or may not be… So I have people who I look up to in the real estate space, and one of the guys who I look up to, he’s a commercial real estate investor and super successful and he says he’s got five million dollars worth of coverage because if it’s one million, then the insurance company won’t put as much effort towards it, versus if they have a five million dollar liability. And I’m not saying that the insurance company wouldn’t put effort towards a one million, I’m just saying just the difference there – you have more of their attention, so therefore they’re more likely to get behind you in more of a stronger way.

Beth Boisseau Coots: And they may. I have not had that experience personally with the company that I work with. What I have found is that — I guess going back to what my original question is (and I would ask him the same thing if I were his agent), “Why, sir, do you feel that you need that much coverage? Do you own apartments that have swimming pools? I would want to know why, because that is a lot of coverage.” We can go up to that amount, but we don’t very often. Not because we don’t want to or not because we can’t, but because there’s just really not a need; that’s an excessive amount of coverage in many cases, but not to say that it’s not needed. If it’s needed, then that’s what’s needed.

I have one client who is a physician, and he’s a very wealthy physician, and he actually does have five million. We didn’t have to get it through an umbrella, we were able to get it on his regular policy, but he feels like he needs it simply because he has deep pockets and he is afraid that he might be sued because of those deep pockets, which is understandable. But in most cases, I would say that five million is excessive; it’s excessive even for banks. My banks don’t even typically carry that much liability.

Joe Fairless: Wow, that’s interesting.

Beth Boisseau Coots: In fact, I only have one bank that carries that limit, and it’s not even on the liability, it’s on the property side, and it’s because they do a lot of commercial lending. So I have not had the experience that he describes, but I would say if someone asked me for that – and when they have –  I have stated what I have just stated to you, and that is “Why would you need that much coverage?” Because I’ll do it, and I don’t mind doing it, but let’s talk through this to see if it’s really necessary, since you’re gonna be paying for it.

Joe Fairless: It might have to do something with the meth labs that he has on his properties. [laughter] I’m kidding. So Beth, what is your best advice ever for real estate investors as it relates to your area of expertise?

Beth Boisseau Coots: My best advice ever – quality over price; shop the coverage first, carrier second, and lead the policy. Those are my three main things. Know what your coverage is. I know it’s boring, but do it. And ask questions. I love it when my clients ask me questions.

Joe Fairless: I’d say read the policy, but then have your attorney read the policy. I just got done getting a bunch of insurance for myself and my wife, and just making sure we’re covered in case something crazy comes after us, and I read it – great, but I had my attorney read it and then he went back and forth with my agent through me to get all the questions answered, because it’s one thing for me to read it and to get it interpreted by the agent, but then also have the attorney from a legal standpoint make sure that everything’s in there that needs to be in there.

Beth Boisseau Coots: That is excellent advice because it is a legal contract, but not everybody has access to an attorney or the funds for the attorney, and if they don’t, at least be familiar with what you’re getting. But yes, if you have access to legal, by all means, I think that’s even better.

We have all the time our banks and some of our larger investors – they have to do their due diligence on us, so we have that same thing going back and forth, sending a form, showing who we are, so that they know who they’re dealing with.

Joe Fairless: We’re gonna do a lightning round and then we’ll wrap up. Are you ready for the Best Ever Lightning Round?

Beth Boisseau Coots: Sure.

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

Break: [00:22:03].09] to [00:22:52].09]

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

Beth Boisseau Coots: Think and Grow Rich, by Napoleon Hill.

Joe Fairless: Best ever policy that you have sold?

Beth Boisseau Coots: Oh, my goodness. I can’t name names, but I have one amazing client; his initials are A. A., and his policy was the best, and he is the best client.

Joe Fairless: Is that Mr. American Airlines?

Beth Boisseau Coots: [laughs] No. I believe they’re self-insured.

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

Beth Boisseau Coots: I teach Sunday School, I volunteer with the church choir, I am a board member of my children’s PTA, I am a board member at my daughter’s American Revolution chapter… I love to serve, because it’s an honor and a privilege, so I give back however I can.

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

Beth Boisseau Coots: Well, my direct number is 972 342 4280, and my e-mail is beth.coots@usrisk.com, and we have a website, www.lloyd-ins.com, and then I’m on Facebook and LinkedIn as well. You can call, text, e-mail, yell really loud, I’ll probably hear you, especially if you’re somewhere in Dallas… And I’d love to hear from you. Anytime anybody has any questions, I’m always happy to do policy reviews and things of that nature.

Joe Fairless: Beth, thank you for being on the show, thanks for talking about the different types of insurance and then the different terms of insurance that we need to pay attention to, from actual cash value (ACV), otherwise known as basic, compared to the special policy (all risk), and the pros and cons for each – basic is gonna be cheaper, special will cover everything unless it’s specifically excluded, whereas basic only covers a list of things, and maybe some additional ones if they’re added.

Also, the co-insurance, where the insured is paying a portion of the claim, so always look to see if you have co-insurance in contract. Make sure we know what the deductible is – there’s a balance there, risk versus ability to pay or to assume certain risk, and the limits for how much liability we actually have. Make sure we read through the policy. Shop around first, as you said, and then second, make sure we do research on the carrier, and third, read through the policy, and my recommendation, as we discussed, is also to get that attorney to read through it, too.

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

Beth Boisseau Coots: Take care.

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