JF2173: Investing Long Distance With Mike Wilkinson

Mike is a full-time real estate agent and broker with 4 years of real estate investing experience. He currently owns 4 units in Cincinnati and 3 in Denver with a few flips under his belt. He shares why he started off by investing out of state and explains what factors he paid attention to before jumping to out of state investing and the steps he took to invest out of state comfortably. 

Mike Wilkinson Real Estate Background:

  • Full-time real estate agent and broker
  • 4 years of real estate investing experience
  • Portfolio consisting of 4 units in Cincinnati, 3 units in Denver, 3 flips
  • Based in Denver, CO
  • Say hi to him at: https://embarkdenver.com/ 
  • Best Ever Book: The Go Giver

 

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Best Ever Tweet:

“A good property manager is a huge part of your team in making out of state investing relaxing” – Mike Wilkinson


TRANSCRIPTION

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

Mike Wilkinson: Good. Yourself?

Theo Hicks: I’m doing good, thanks for asking and thanks for joining us. A little bit about Mike – he is a full-time real estate agent and broker, and also has four years of real estate investing experience; his portfolio consists of four units in Cincinnati, three units in Denver, and three flips. He is based in Denver, Colorado, and you can say hi to him at embarkdenver.com. So, Mike, can you tell us a little bit more about your background and what you’re focused on today?

Mike Wilkinson: Absolutely. So I think like many younger investors, I got going interested in personal development, financial independence, freeing myself from needing to always work a job and pay the bills and have some assets do that for me. So that all got started back in 2016, 2017, and I got my real estate license right out of college, I think the same way week that I had graduated, and jumped in and out of the industry for the first year or two there. I got started with the house hacking strategy as a first asset, and for the last couple of years here, I’ve been a full-time agent and focused mostly on the residential, single-family, small multifamily asset classes.

Theo Hicks: Perfect. So you have four units in Cincinnati and three in Denver. Did you do the ones in Denver first or the ones in Cincinnati first?

Mike Wilkinson: The house-hack in Denver came first, and then a couple of deals in Cincinnati, and then a few more deals here in Denver. So I hopped back and forth.

Theo Hicks: What made you do Cincinnati?

Mike Wilkinson: I actually had a roommate and very close friend of mine living with me in Denver at my house-hack there, and he had a girlfriend, now wife, who was living in Cincinnati, grew up there. She had just bought a house out there, and was charging her roommates very similar rents (over $600 a month) for living in her $100,000 house out there, nicely fixed up… And I was charging my roommates the same rent out here in a $380,000 house, and a light bulb went off in my head and I said, “Hey, man, it might make some sense to try and invest out of state,” especially when my then-roommate moved out there and I could go and fly and have a close connection and someone to enjoy some time with out there.

Theo Hicks: Those four units, are those four single-family homes, two duplexes, or what’s the breakdown for those Cincinnati properties?

Mike Wilkinson: It is one single-family home, which is the first place that I purchased, a straightforward 2% rule deal, a $50,000 house or $45,000 house with $1,000 rent, and then a triplex that actually has a commercial unit below that was being treated as a residential unit, and two apartments above; that was actually also purchased around that $50,000 mark. So a little different pricing out there than here in Denver.

Theo Hicks: Sure. So when you decided to start investing in Cincinnati, do you mind walking us through the different steps you took for anyone else who lives in a pretty expensive market and wants to venture out to a market where they can buy properties for significantly less? So setting up a team, finding the deals, managing the deals, just A to Z.

Mike Wilkinson: Absolutely. I think a common thread through a lot of my clients here who invest out of state is the property management aspect, and that being a huge determinant as to whether they are successful and enjoying out of state investing. I’ve experienced that myself recently, fired and hired a property manager and feeling a lot better about those investments now that I’m having a little bit more of a trusty relationship with the property manager. So that’s a huge aspect, and I’d say probably the most important aspect of your team out there.

Another huge aspect is just networking your butt off and actually going out there. I had the opportunity of having a friend out there who I could go and stay with and drive around with and use his truck and leverage some connections that way. So meeting up with other investors out there, and not just focusing on the real estate agents and the property managers and the lenders, but also networking with other investors out there who have years of experience investing in that market was a huge thing for me to bounce one investor’s idea off of another to get a clear picture of which parts of town, which neighborhoods I wanted to be in, what price ranges I wanted to be in there, and talking with people who have already decades of experience there, who aren’t looking to make money off of me, I think, is an important thing that not too many folks that I talked to out of state investing wise do. They seem to jump straight into talking to property managers and agents and the like.

Theo Hicks: Do you mind telling us why you had to fire that property management company and maybe walk us through the timeline? Because I know and I’ve talked about this on syndication school that I do in the past, that it’s typically a high timeframe in which you want to wait before firing just to make sure that they’re actually the reason why the property’s not doing very well… So I’m just curious what happened – was it an instantaneous firing thing? Was it three to six months of poor management until you made that decision? And then on top of that, what lessons did you learn that allowed you to not make the same mistake in hiring the next property management company?

Mike Wilkinson: So this particular property manager, so they had an in-house maintenance division, which can be a positive thing and can also be a negative thing. It’s a difference that you’ll see across a lot of property managers; depending on the area, maybe it’s a half and half. Some people do have that some people don’t. This property manager, when I originally started with her, had a separate maintenance team manager through the year or years that I’ve been with her, then her new husband had taken over the maintenance division there… And in checking in with my portal, all property– a lot of out of state property managers have some portal where you can see your expenses, and I do a fair amount of rehabs here in Denver and help clients manage rehabs, so I understand the costs quite well, and things started to not add up. I wasn’t getting the explanations when I was asking for them and therefore, I just quickly lost trust. It seemed all of a sudden that they were making their money in the maintenance division as opposed to helping me manage some profitable properties.

So that was the gist of it, and I think it’s an important question to ask a property manager right off the bat and ask if you have an option to go that route or not, and then making sure that you have some checks and balances there to make sure that those maintenance costs are competitive and appropriate, and that you’re not just being up charged and they’re making money off of you in that aspect.

Theo Hicks: An important question was to ask if you have to use their in-house maintenance?

Mike Wilkinson: Yeah. My new property manager out there, they do have an in house maintenance team. The real important question is, “What is your guys’s protocol? How do you do maintenance? Do you hire everything out to a third party?” A fair amount of property managers do do that and you ask, “What is the typical protocol here? Do you have one handyman that you always go to? Do you pay some people hourly? How does this work? Who owns it?” things like this to get an understanding of, “Okay, is this one of the most profitable parts of their company?” That’s not what you’d like to see, as opposed to this being just a necessary part of the job. And some people do run maintenance in house and therefore that’s helping save you money, especially when those are just simple jobs like changing locks or installing a new appliance or something like that… But it can also go the other way where you’d rather just pay a third-party $100 and they have the interest of keeping up their reputation and charging competitive rates and things like that. So I think the main question there is how do you run your maintenance division? Do you have one in house? Is this all third-party? And from there, asking the appropriate questions to see how things are handled.

Theo Hicks: You do own some properties in Denver and then in Cincinnati as well out of state, but which one do you like better? Do you like out of state investing or do you like in-state investing better?

Mike Wilkinson: More and more my perspective, especially leading up to my purchase around Christmas time this year, around New Year’s, that was a huge debate of mine going into that, the three or four months prior to that, and I had met with plenty of different investors chatting about it… And more and more, I have a leaned towards in-state investing. Here in Denver, I really believe in our market and have a lot of connections and efficiencies that I can utilize here. So being at a younger age, I’m not interested personally in using my cash flow right now, and getting a sprinter van and going across the country or anything like that. I see myself working, I enjoy my job a lot. I don’t need the income in the next, say, decade. So therefore, I think what needs to be considered is with the non-passiveness of real estate, we need to think about, if I have reason to believe these assets are going to appreciate. And here in Denver, I really do believe that they’re going to continue to appreciate, especially in these little pockets that I truly know, being a broker here.

So for those reasons and having connections here, having complete control, being able to go meet with a contractor face to face, line them out and then have the understanding of, “Oh, I’m going to make this right,” or, “I’m not going to see any more work from this person,” is huge.

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

Mike Wilkinson: So the best real estate advice ever – I would say that networking your butt off and providing value to your network without strings attached is a huge thing, and that is something that I leverage to stay top of mind in my database and network.

Theo Hicks: Perfect, and do you have any examples of ways that people can add value without any strings attached?

Mike Wilkinson: Yeah, asking the simple questions of “Who do I need to keep in mind to introduce you to, what are you looking for in your business, in your job, in your life?” For example, a couple of weeks ago, I found a colleague of mine a great job, and that goes a long way in a time like this, and is something that I’m not seeing anything out of, but I know we’ll go to pay dividends in the future, and I think that just providing value in ways that extend far beyond your interest in real estate is a huge thing to do.

Theo Hicks: Okay Mike, are you ready for the Best Ever lightning round?

Theo Hicks: Let’s go for it.

Break [00:15:09]:03] to [00:16:12]:05]

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

Mike Wilkinson: I would say along the lines with this providing value and my best ever advice, a book that I love is The Go-Giver, and I recently read the other edition of that it’s called Go-Givers Sell More. These are quick little books, but have a super meaningful message that is very simple and if you take that with you in your network and in your day-to-day, it’s a pretty foolproof way of having a big life.

Theo Hicks: If your business were to collapse today, what would you do next?

Mike Wilkinson: Wow, if my business were to collapse today – well, I would go ahead and start a new one.

Theo Hicks: Besides your first deal and your last deal, what’s the best ever deal you’ve done?

Mike Wilkinson: I would say, best ever deal was a flip project which I was taking a client through, realized that the numbers were awfully good, and they didn’t want to act on it. I got their permission to act on it myself, and in a matter of five months acting as GC, we turned an 83 grand profit on it.

Theo Hicks: What’s the best ever way you like to give back?

Mike Wilkinson: I’ve work as a volunteer with an organization called Families First, and do a weekly volunteering for them. They do a great job to help parents in need in ways of raising a family with the right support.

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

Mike Wilkinson: Sure, I would say by email is a great way. I’m always responding to email, and that is mike@embarkdenver.com.

Theo Hicks: Perfect, Michael. Thanks again for coming on the show and sharing your advice with us. Mostly, we focused on comparing in-state versus out of state investing, and why you prefer in-state investing. We talked about how you’re able to know the market a lot better, especially because your job is as a real estate agent and a broker. It allows you to have more control, you have more connections in your local area, it allows you to meet people face to face, and just overall, you like the in-state investing more than out of state investing, even though you do have some properties in Cincinnati.

We talked about some of the tips you do have for people who do decide to invest out of state and the two things you mentioned was one, that the property management company is the most important, and you told us how you had to recently fire a property management company because the maintenance costs didn’t seem to add up and you weren’t getting a good explanation as to why. So you said that an important thing to understand with a property management company is how maintenance is handled and what the typical protocol is, and making sure that there’s checks and balances so that the costs are competitive and appropriate. The second thing you mentioned about investing out of state was networking, but more specifically, making sure you’re actually going out to the market to meet with people and network with people face to face, and this includes property managers, brokers, lenders, but you also mentioned it’s important to meet with other investors too, people who aren’t there to make money off of you and are gonna have an objective opinion as well.

And then you also gave us your best ever advice, which is to network and provide value to the network with no strings attached, and you gave examples like introducing them to different contacts, maybe referring them to people, and then you gave a specific example of how you were able to help someone find a job. So just asking questions, probing questions to figure out if there’s any way you can help them in order to strengthen that relationship. So again, Mike, I really appreciate you coming on the show and giving your best ever advice. Best Ever listeners, as always, thank you for listening. Have a best ever day and we’ll talk to you soon.

Mike Wilkinson: You too. Thanks, Theo.

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JF2139: Lessons From Owning Dozens Of Companies With Bart Rupert

Bart has 14 years of real estate experience and currently runs a merger and acquisition firm called Stone Peak Alliance. Bart has founded and has been able to grow about 30 companies and he explains how it isn’t really that hard to do. Bart’s perspective will challenge how you are viewing your business.

Bart Rupert Real Estate Background:

    • He currently runs a merger and acquisition firm called Stone Peak Alliance 
    • 14 years of real estate experience
    • Portfolio consists of 7 rentals, 1 commercial, and has also flipped multiple properties
    • Based in Denver, CO
    • Say hi to him at: www.spartansalliance.com

Click here for more info on groundbreaker.co

 

 

 

Best Ever Tweet:

“The biggest lessons you will learn as an entrepreneur is failure” – Bart Rupert


TRANSCRIPTION

Joe Fairless: Best Ever listeners, how 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 where we only talk about the best advice ever; we don’t get into any of that fluffy stuff. With us today, Bart Rupert. How are you doing, Bart?

Bart Rupert: Good, Joe. Glad to be here.

Joe Fairless: Well, I’m glad that you’re glad to be here, and I’m glad you’re doing well. A little bit about Bart – he currently runs a merger and acquisitions firm called Stone Peak Alliance, he’s got 14 years of real estate experience, his portfolio consists of seven rentals, one commercial property and has flipped multiple properties, he’s based in Denver, Colorado. With that being said, Bart, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

Bart Rupert: Sure. I think that primarily what I’m doing today is mergers and acquisitions and helping other people learn how to buy and sell companies for a living. It turns out that 88% of all new wealth is created through the sale of a small business or through real estate, and within that focus, we often find that the real estate and the business transactions go together. So what I’m now working on having sold my own companies, grown several to very large successes, is working with individuals to be able to help them do the same thing through a defined set of processes and techniques to help demystify some of the acquisition process and the sale process just the same way we’ve done with real estate.

Joe Fairless: What companies did you sell?

Bart Rupert: There’s been quite a few across the portfolio, and a number that we’re still holding today, but primarily what I’ve done is groups within some degree of leveragability or flip. So you look at technology companies, you look at Software as a Service companies, things that we’ve done within different emerging industries like energy or renewables that have been able to explode pretty rapidly; those have been a lot of the sweet spot.

For my own companies, I’ve started a number of different technology companies, grown and sold those, and even involved a lot of different transactions for other people that have either sold to Fortune 500s or large groups on that front. So we grew a healthcare company from $8 million to $75 million upon the exit. We grew an organization from $22 million to over $115 million upon the exit. But primarily, what we do day in day out, is work with entrepreneurs that have a vision for their company or an exit strategy in mind, and utilize what we call the boost technique to get them the most value upon their exit.

Joe Fairless: Okay. Well, I would love to talk about the boost technique in a moment. Just so I’m clear on your companies that you sold, I’d love to learn more about that, and then we can talk about what you’re focused on now with how that’s evolved. You said you started a technology company?

Bart Rupert: Yeah, I’ve actually founded almost 30 companies.

Joe Fairless: Oh gosh, okay. Well, it’s a 30-minute interview, so we won’t have time to talk about all of them then. You founded 30 companies…

Bart Rupert: It’s actually not that hard once you get the system down, and particularly when you take on partners, what you find is that you want to be able to use different techniques that we really look at from an acceleration perspective, to either fail the companies really quickly or find out where their successes are and promote their successes. So the idea is that within a 60 to 90-day period, after really getting out there and trying some of the ideas and processes we’ve got deployed, you want to say that company’s not gonna work in the way that I had intended it so I need to pivot it or you need to find a way to say, “Look, it’s just not gonna work at all. The timing’s not right, the luck is bad; just fail and move on,” because you either want to get to the point where you fail a company or move it into a multimillion-dollar success on the path. The way I look at it now is to an exit, because the vast majority of–  the value as an entrepreneur that you can create isn’t from salaries and from running a company, it isn’t from stepping into the risk zone of 10% of all new companies that are created are successful. It’s getting to a point very quickly where you can see the success, recognize the success, and sell it to be able to recognize a multimillion-dollar exit.

Joe Fairless: Of the 30 or so companies that you founded, what’s been the most profitable for you?

Bart Rupert: It’s tough to say, because profitable I would now equate to the one resource you can’t ever get back, and that’s time.

Joe Fairless: Let’s talk about money though.

Bart Rupert: Looking at it from strictly a financial perspective, when we were able to grow the company from $8 million to $75 million and do the exit there, that was extremely profitable. So it took a good amount of time.

Joe Fairless: So it started at $8 million. So does that mean you bought it when it was at $8 million?

Bart Rupert: That’s correct, and it was a minority interest; it wasn’t majority on that.

Joe Fairless: Got it. That makes sense. So when you said you founded 30 or so companies, this founding also mean you bought a stake in a company?

Bart Rupert: So that number is much higher. The companies that I founded have not grown over $100 million dollars, but the companies that I have bought into or leveraged the purchase process to be able to go through and take a stake in, those were the ones that had the larger exit.

Joe Fairless: Okay. I mean, that makes sense.

Bart Rupert: So between the two, I’ve probably– if you look at founded plus bought into, it’s closer to 100 companies.

Joe Fairless: Wow. So of the 30 or so that you founded, what was the most profitable?

Bart Rupert: Let’s see. Well, there was a technology company that I started and I originally had some partners and then eventually bought them out, but I started that one many years ago, I’d say, almost 20 years ago. It was a technology company, and we did backups of files; this is back when you had dial-up and things like that. It was a pretty new concept, nobody knew how to do it. Everybody was dealing with tape libraries and such, and we actually moved that to what was before the cloud to the Internet, and started off with DSL and dial-up and things like that, eventually got it to the point where we had large customers on tier ones like Vanderbilt University, University of Colorado, brain imaging scans, we got HIPAA compliance, went International… So that was a good growth mechanism, and it allowed us to get a ton of money out of that organization.

Joe Fairless: Wow, what was the name of the company?

Bart Rupert: Circadian.

Joe Fairless: Circadian. And then on the opposite end of the spectrum, you were talking about, hey, fail within 60 to 90 days or prove the business model or pivot. What are a couple of failures that you’ve had, if any, of the companies you founded?

Bart Rupert: I think I’d start off by saying, if any entrepreneur tells you they haven’t failed, then they’re either lying to you or not really in the game. I think arguably, the biggest lessons that we’ll learn as entrepreneurs is failure, and there’s so many different gambits of what that looks like. I would say, primarily within failure, it’s focusing on too much of a micro-level, and not seeing the big picture. If you get too wrapped up in something like the operation of a company or the promotion of a certain brand or just the advertising and marketing, you’re not going to see the other elements of it. There’s an operational element, there’s a sales element, an advertising, all of that’s got to be looked at more holistically. So really, it’s where I started to see, instead of looking at operating the business day in day out, what I’d like to do is look at managing or orchestrating the operation of the business, to be able able to work with the individuals that have their own individual skill sets that they’re experts in, that they can turn around and tune-up in fine detail… But I’m looking at the big picture of where it’s going to go and strategically how to position it. Because when you get too laser-focused on a particular aspect of your business, you almost always miss other elements, and those other elements are what are going to allow you to expand it to double that growth next year, to increase the profitability, to get it to the next level, and you need to be able to do that as a business owner without emotional tie in one element of the business, without it becoming a favorite if you will. You’ve got many ways– just go out there and be very ruthless with how you assess your business and look at it. Its goal, its job is to produce profit for you, and you’ve got to know that profit is what pays your salary and everybody else’s and allows you to be successful, but what’s more than that is that’s going to be the main metric when you go to sell it later on.

Joe Fairless: Yeah, and I want to learn more about the boost approach that you mentioned, because I imagine that factors into what you just said. Just to close the loop on maybe a lesson learned on a company that you founded that didn’t go right, what specific example of a company you founded that lost money and it didn’t go according to plan?

Bart Rupert: That’s a great example. So we had an organization that did training services, and we had successfully sold an organization that did online training or CD-based training at the time – this is many years ago – and we’re looking at another organization that was doing online and promotion of that, and years prior too, we’ve had great success by creating the best product in the industry. So literally, everybody that went and checked out the product line saw that it was the very best, they bought the product, we made a ton of money and sold the organization.

Years later, we thought the same strategy would work. We didn’t adapt to the new market, we didn’t adapt to the changes. There had been online organizations that had come out offering training programs, things that you could do in your own home that were maybe not as good as what we created, but they were far more plentiful. So what we had done is replicated our success from before by looking at, okay, let’s just create the best quality product, the best quality training solution, and we didn’t pay attention to the fact that all of our competitors were really leapfrogging us in terms of the delivery of that solution, the affiliate marketing, the ability to get that in front of others and… Think of it like Udemy today – very cheap online training, very easily accessible, and we got crushed by that. We absolutely got crushed because, again, we were laser-focused on one thing, which is quality of the product.

If you’re listening to this, you’re thinking, “Well, is that bad to focus on the quality product?” No, you need to; that’s great, but you need to have somebody that owns that, so that you can look at the big picture and be like, “How are my sales doing? How’s the adoption doing? What’s the feedback I’m getting from the market?” and if it shows that I’m not growing as quickly as I should or I’m really not getting as much traction, or the people might love it, but nobody knows it exists, you’ve got a real problem.

So we got very, very laser-focused on that, and it ended up not working out, because the competition outpaced us. Think about the old Bill Gates and Steve Jobs conversation, to where, essentially, when Steve Jobs finally found out that Bill Gates had his own product, the Microsoft Windows operating system, and he’d already gotten around the IBM platform, they were at this debut where Bill Gates had shown the world this product called Windows on the IBM. And Steve Jobs was sitting there contemplating and he shook his head and he looked at him and he goes, “Well, you won’t win, because we’re better than you,” and Bill Gates looked at him and he goes, “You just don’t get it, do you, Steve?” and he pointed to the fact that it was on the IBM, and he goes, “That doesn’t matter.” So he could see that, like, “You might have a better product, but it’s completely irrelevant, because my product is on the most popular hardware on the globe.” And we’ve seen the result, and arguably Apple’s made a phenomenal comeback due to Jobs and Jobs had a big lesson learned, but I had to, unfortunately, experientially, learn that same lesson, is that you can get laser-focused on one thing like, “Hey, I’ve got the best product.” It’s irrelevant if it’s not out there in front of people.

Joe Fairless: Let’s talk about the approach that you all take to help an entrepreneur determine if they have a business that is going to continue to thrive or has potential to thrive or they need to pivot or they need to go back to the drawing board. What is that boost approach that you mentioned earlier?

Bart Rupert: Two different things here – one of which is around the success or failure of an organization as you’re growing it; the other is around the sale of an organization. So the boost technique is specific to how you sell a company. What I would say to anybody that’s out there, if you’ve got a business, if you’re looking to buy a business and flip it, whatever your status is in that whole ecosystem, eventually you’re going to want to sell your business if you own a business. If you don’t own a business, you could buy one, but if you’ve got one, as you go to sell it, arguably, we’d all want to make the most amount of money possible. So over 90% of the businesses that are out there for sale right now are what I would call listed in the wrong way. They’re being done in a way that will minimize their chance of success, and unfortunately, the brokers out there give this process a bad name, because they’re lazy, and I say that as one of them. I would say most of my peers out there are lazy, which is why we just mop the floor with them. When it comes down to — if you’re presenting a business and you’re only focused on things like fundamentals, you’re missing the big picture. You’re not telling the potential buyer what it is that they really need to hear to get emotionally invested in that business. It’s all about how you tell the story. When I say tell the story, I’m not saying make anything up or do anything that it’s not accurate or ethical. It just comes down to how you’re actually going to describe what the business does.

So for example, let’s take that online backup business I talked about – if I go out there and listed that business to say, “Well, this is an online backup company. It backs up files, it makes $3 million in profit per year and it’s got x number of customers.” Okay, well, that’s factual. Do people really care? Probably not. But if I go in and tell the story in a different way and say, “Hey, this is a business that has literally rescued Vanderbilt University from audits, from financial repercussions and from data loss within patient records. This is like an insurance policy. This thing is recurring revenue like an evergreen tree that’s out there in the forest. It’s never going to go away. People always need their data and we see ourselves essentially as perpetual insurance agents… And oh, by the way, here’s how much money we make doing that. Here’s how fast we can close a client. Here’s why our technology stack is so much more powerful.”

Joe Fairless: Sold…

Bart Rupert: You don’t talk about– people who have software companies, they talk about features. Don’t talk about features, guys. Whether you’re selling to a customer, whether you’re selling your company, that’s the last thing you want to do. Talk about benefits, talk about value, talk about it through the lens of something that has an emotional tie to it. And it’s the same thing with property. This isn’t the house that I’ve got for sale. This is a legacy for a number of families; for potentially famous families who have actually experienced x, y, z as part of their life journey here. It’s a far more engaging way to present it, and that is at the core of the boost technique, because we’re able to regularly get 20% to 40% more from a company than anyone else.

I’ll give you an example. There’s a very no-frills company we’re representing right now. It’s a construction company. They do HVAC, and arguably, that’s not very exciting. So there’s not a great tremendous story you can tell around that, but there’s always a story with every business that you can tap into. We’ve been able to leverage our boost technique to get what is a valued company that values right now on fundamentals that enter in $50,000 and we’ve got an NOI that we’ve got executed that we’re going to close in the next 90 days for a $2 million offer. So that’s well over 100% more value on that business, which exceeds the 20% to 40% standard. But if you do the technique, if you follow the process of what I’m describing, you can get at least 20% to 40% more value from a company.

A couple of other tidbits around how to do that – you don’t just represent it the way every other broker does in America. That’s how you get the success rate which Morgan Stanley publishes success rates, the IBBA does as well; it’s 8% to 12%. So Joe, if you think about that, 8% to 12% of businesses that actually want to sell their business that engage experts like Morgan Stanley actually succeed. That’s paltry, that is pathetic. If you think about it, what job could you ever do where if you’re successful 8% to 12% of the time, that’s a massive success. These companies run press releases when they get above 10% because they think they’re so fantastic. We regularly close 60% to 80% of the groups that we represent because we just do things differently. You don’t just take a bit of data on the company and the fundamentals and list it; nobody really cares. In fact, most buyers, they don’t really understand that unless they’re doing this every day. But if you can take a company and really broadcasts that story, do it in a way that’s very visual, very professional, has a lot of colors and interaction to it, and focuses on the things that a buyer would care about emotionally. Now you’re on the right track to be able to get at least 10% to 20% more value out of it, and then there’s other things that you can do that are more sophisticated or technical like tax advantages or structural benefits around how you set up your corporations that allow you to get far, far more out of it.

Joe Fairless: It’s interesting; what you’re talking about for positioning a company for sale is apples to apples comparison or apples to apples applicable to positioning a property for sale–

Bart Rupert: Exactly, right.

Joe Fairless: –because it’s one thing to talk about the features, it’s also a different thing to talk about the benefits, and especially applicable to single-family home for sale properties. I think that’s probably even more relevant than, say, a commercial property, but still, it could all be applied in focusing on the emotional benefits. Do you all do anything with companies from a structure standpoint, prior to sale, or from a process standpoint? So actually help them become more profitable or help them optimize something within the system?

Bart Rupert: Yes, we do, and we’re one of the few that focus on that because we believe it’s so material to the success of an organization. So for example, we’ve got something we offer called the instant savings program and we do this for the clients we take on where we’ll go through and find ways to renegotiate their existing contracts, because that’s part of what we do is what we call asymmetric negotiation, and we will get their contracts locked in at far lower costs. We can often save them 20% to 40% on their operational costs within 30 days just through some of the tactics and techniques and processes we’ve deployed for everybody else we work with; that can result in– it depends on the size of company, but in some cases, we’ve saved people 5% or more percent in profit in their organization. So if you think that most companies are sold on a profit multiplier, and then it’s just a negotiation around what that multiplier is, and then you think that we’d be able to come in and add, say, 5% or more percent to the profit margin… Think about a company that originally was looking at 10% margin, that’s what they’ve been operating on for years, if we can move them to 15% and the multipliers off the profit, we’ve literally increased the value of that company by 50%, and we’ve done that within 30 to 60 days.

So we view it as an absolute necessity to be able to go through it and do that structuring. Plus, that’s not even where you can get the most lift, and this all goes into the boost technique. You can get a lot of lift into the structural elements of how you set up corporations as well. So for example, you can set it up to where there is not just one entity that does everything from an LLC or an S-Corp or C-Corp perspective. You can have a scenario to where you’ve got an LLC that collects all the revenue, but doesn’t own the assets; an LLC that holds all the employees, but doesn’t collect any revenue other than leasing those employees back to the primary company that’s collecting the revenue; and you can have another company that holds all the assets. Not only does that structurally protect you from a corporate perspective, but there’s extreme tax advantages if you do it correctly that are all legal, that are out there. It’s just very, very few people are taking advantage of it. If you structure that before you actually get a letter of intent on the company, then you can boost the value of that whole thing, or at the very least, sell it for the same price and get the owner double-digit percentages more out of the business by saving them on tax liability. And further, if you take that to the next level, you can even get into more complicated processes that we look at.

Very, very few people in the United States have ever heard of what’s called a nested C-Corp, but there’s advantages to being able to say you’re going to own something, say, at an S-Corp level, but having an aspect of the business that produces revenue or profit embedded within that organization or fully owned subsidiary that’s actually a nested C-Corp. Now a C-Corp, if you turn around and sell that company, it faces double taxation, which is not good for the owner. But if you essentially have all the taxation done on the revenue that it generates at just the C-Corp level without the sale, you have a lot of tax advantages, particularly if you, as the owner, are in the upper tax brackets. So you save a lot of money while the company is generating money. You grow that for a couple of years if that’s your goal, and then when you turn around and flip it, there’s a specific technique you can do. It’s like a tax equity flip in a way, but there’s a certain thing you can do to be able to make sure the value of the business is not taxed twice, like it typically would at the C-Corp level, to get the best of both worlds.

Joe Fairless: Have you ever come across a potential new client of yours who has a business, it is not profitable, but they come to you and say, “Bart, I want out, I want to sell. My business has gotta be worth something”? If you have come across that scenario, how do you approach it?

Bart Rupert: There’s two ways we go about that. I would say for me, personally, I don’t deal with a lot of those anymore; I used to… Because I’m typically focused on much larger transactions these days. But I work with a lot of people, teaching them strategies to buy and sell companies on their own, and these are folks that I directly coach and mentor and I’ve got a program that does that. So those guys do those types of deals all day long, and they’re very successful at them, because a lot of them want to take that company that’s plateaued or distressed and grow it to be able to get a multi-million dollar exit, and it’s actually a very easy way to get into this business in a very low-risk way. I mean, you can do it without a lot of capital.

So the way we would typically do that is one of two ways. We’d either just go in and buy the business, because it’s not that much capital, it’s not hard to do. We’ve got access to financing here. Like right now, I need to place about $100 million dollars in different companies, so I’m looking for things to buy. So that’s not a big acquisition for us, we just pick it up, and then we add it to our portfolio, we’d work with the owner that would be within our team and grow that for a period of two to three years. We’d look to at least 10x the amount of value we get out of from what we paid, and then we’d flip it. And we’d have them use our techniques, we’d have them use our acceleration systems to be able to grow it very, very quickly, and learn all the lessons in a very short period of time that took me two decades to figure out through a lot of failure, so they don’t make the same mistakes.

The other way to do it is you can actually keep that business owner on as a partner. You could say, “Look, I’ll take on a certain percentage, maybe a minority percentage,” if we believe in that owner, “but you need some guidance, and so we’re going to rewrite your operating agreement where we’re going to come in as coaches and we’re going to have a vote, if not a majority vote on what it is you do and how you do it. We’re gonna bring in our systems and processes to help you get there,” and then everybody wins. It’s a great win-win scenario, because the existing owner gets far more out of it over time. They stay employed, they get to grow the company, they get new skill sets. The person or people coming in to help them, they’re able to be part of that journey as well in that venture, and everybody exits for a whole lot more money.

Joe Fairless: Anything that we haven’t talked about that you think we should as it relates to positioning a business for sale, and also any type of relevant information regarding that?

Bart Rupert: Yeah, I would say that buying businesses and selling them – because that’s what I do for a living – it’s very misunderstood. There’s a lot of people out there that feel it’s complicated, it’s difficult, and it is; there’s elements to it. But just like anything else, it’s a system, it’s a process. Everybody that’s listening to this is familiar with buying real estate and what real estate transactions look like, and we’ve all heard about flipping houses. I would say, just equate this to flipping houses, except it’s flipping businesses for a living. The difference is typically when you fix a house or flip a house, you’ve got to go in, buy it and then do maybe $30,000, $50,000, $100,000 worth of repairs, upgrades, renovations to be able to flip it. The great thing about businesses is that’s not always the case. We can flip businesses within 30 to 60 days. We can go in, take a business on, add 3% to 5% more profit to it, and turn around and flip it. So if that’s appealing to you, I would invite you to look into it. I’d invite you to reach out to us. We can give you some sample techniques on how to go about using that… Or see if you wanted to work with them on that type of stuff with us, because we’re looking for folks that are eager to work with as partners and take these opportunities on, because there’s literally more opportunities out there today than any one group can handle.

Joe Fairless: On that note, how can the Best Ever listeners learn more about what you’re doing?

Bart Rupert: They can check out our program at www.spartansalliance.com. If you have questions, you want to know more about it, reach out directly. We’ve got somebody in our team by the name of Austin, and you can reach him at Austin@spartansalliance.com.

Joe Fairless: I had a lot of fun talking about this stuff, and I’m grateful that you were on the show. So Best Ever listeners, we’re making this Situation Saturday episode. So you’re listening to this on a Saturday. Well, if you listen to it on the day it comes out, you’re listening on a Saturday.

Bart, thank you for being on the show, thank you for talking about how to prepare our business in order for it to be sold, and then how to position it during the sales process. Ultimately, we are all entrepreneurs who are in real estate, so this is applicable to us whether or not we do sell a business, because certainly, we can apply your techniques to selling properties. Thanks for being on the show. Hope you have a best ever weekend. Talk to you again soon.

Bart Rupert: Yeah, thank you, Joe, and I just want to say, I really appreciate what you’re doing. I’ve been honored to be part of this and keep it up. I think there’s a lot of people out there they get tremendous value from your podcasts.

Joe Fairless: Thanks a lot. Appreciate it.

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JF2080: Medical Real Estate Investing With Colin Carr

Colin is the Founder and CEO of CARR, one of the nation’s leading providers of commercial real estate services. He has personally completed over 1,000 transactions and has been in real estate since 2000. Colin goes into medical real estate investing and what it looks like in his business. 

 

Colin Carr Real Estate Background:

  • Founder and CEO of CARR, one of the nation’s leading provider of commercial real estate services
  • Has been involved in commercial real estate since 2000 and has personally completed over 1,000 transactions.
  • Licensed real estate broker in ten states
  • Based in Denver, CO
  • Say hi to him at https://carr.us/

Click here for more info on groundbreaker.co

 

Best Ever Tweet:

“I like to help healthcare providers maximize their profitability through real estate.” – Colin Carr


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, where we only talk about the best advice ever; we don’t get into any of that fluffy stuff. With us today, Colin Carr. How you doing, Colin?

Colin Carr: I’m doing great.

Joe Fairless: Well, I’m glad to hear that, and a little bit about Colin – he’s the founder and CEO of CARR, one of the nation’s leading providers of commercial real estate services. He’s been involved in commercial real estate since 2000, and has personally completed over 1000 transactions. He’s a licensed real estate broker in ten states, based in Denver, Colorado. So with that being said, Colin, you want to get the Best Ever listeners a little bit more about your background and your current focus?

Colin Carr: Yeah, absolutely. Well, first of all, thanks for having me on. Excited to be here. My background is exclusively real estate. I started managing apartment complexes when I was 19 – mid-rise, high-rise, rural; moved to Denver in my early 20s, kept managing apartments for a few years, got into brokerage, few years after that did Walmarts, Wendys, Blockbusters, a lot of national retailers, moved into other aspects of office, industrial, investment, healthcare, and then started a firm about 12 years ago, and we are now operating in about 40 states, and we touch a couple thousand transactions a year and have a pretty good pulse in the market.

Joe Fairless: What’s your personal area of focus right now?

Colin Carr: I’m the CEO of the company and I oversee over 100 agents. We have a healthcare division, we have a commercial division, an investment division and a senior housing division. So I oversee our agents’ best practices, and I do a lot on the investment and development side.

Joe Fairless: Alright, so I was typing as quick as I could… Healthcare, senior housing, and I know I missed a couple. What are some others?

Colin Carr: Yeah. Commercial, and then just an overall investment platform as well.

Joe Fairless: Okay. So when you say commercial, I think of senior housing facilities as commercial real estate. So what’s commercial? How is it defined here?

Colin Carr: So we would differentiate commercial being corporate uses, CPA’s attorneys, architects, oil and gas, financial services. So everything that we do is commercial real estate. We have a just traditional commercial division that also touches those focuses of commercial tenants and buyers, and then we actually have a senior housing division and then an investment division as well.

Joe Fairless: Okay, when I hear investment division, I think, ‘Well all of these are investments.” So how is the investment division different from senior housing investment or healthcare facility?

Colin Carr: Great question. Our investment division is going after investors that are looking for income-producing properties, and we’re helping them on the buy side, the sell side, the due diligence side. So our commercialization is corporations, helping them with their real estate. Our healthcare is helping healthcare providers with their real estate investments, income-producing properties with savvy investors looking to grow portfolios, acquire, dispose of, etc, and then same thing on the senior housing side – it’s investors, developers, operators. So a lot of these overlap though, there’s investment deals happening in all those sectors, and it’s a lot of overlap.

Joe Fairless: Which division is your least profitable?

Colin Carr: That’s a great question. All of our divisions are profitable, which is great. Senior housing is our newest one, so we’re touching a couple of dozen deals in that sector right now in a handful of states, but that’s our newest division that’s only a couple years old. So still got a great expertise there, but that’s one of our newer platforms.

Joe Fairless: What are some reasons why you created a new division for senior housing, and how do you hit the ground running in order to grow that quickly?

Colin Carr: So senior housing came to us because people knew how much healthcare work we do. We help a couple of thousand health care providers each year with their real estate. So we touch a lot of deals there, and so there’s a lot of investors and a lot of developers that are involved with medical office buildings, complexes, and they want to get into the senior housing game. So we get a lot of people that try to come to us for advice in that world, but that’s how senior housing came to be. It’s just very ancillary and complementary to our healthcare world.

Senior housing is an interesting niche because it’s not just the real estate component, it’s the operations, and really the operations drive the value, as you know. So that’s a world that just takes a little bit longer to get into. Whereas a lot of profitability, a lot of opportunities, the amount of product that’s needed in the senior housing market is one that literally cannot be met over the next 10, 15, 20 years. So there’s a huge opportunity there, but there’s more complexities too, with compliance and operations and licensing. So it’s a little bit different world.

Joe Fairless: From a broker standpoint, why is it harder to get into because of operations? This is my ignorance showing, but I wouldn’t think that you all would be involved in the operations part. So it’s like, alright, you’re selling a property, so why does it matter that the operations are really important with senior housing?

Colin Carr: That’s a great question. So to understand how to value a senior house facility, you’ve got to understand the operations, and you’ve got to actually get in there and get under the hood and figure out how the property is being run, because the operations are what drives the income. Whereas if you’re looking at an apartment complex or a multi-tone office building, you can look at a rent roll, and it’s pretty clear to figure out what’s happening. There’s so many different variations of senior housing facilities, and there’s a lot of concepts of, “Is it government subsidized?” There’s so many different facets of senior housing, and there’s different revenue streams in addition to just “What do they pay per month for that room? What are the other services that are provided?” So to understand or read a senior housing facility, you’ve got to understand how it’s operated.

Joe Fairless: And is that as simple as hiring one person or bringing on one person who knows the industry, and then he or she can train your team, and now you’re off and running, or is it more involved than that?

Colin Carr: It’s really more involved than that. It’s a skill set that takes, in my opinion, years to really understand and learn, and I’m not trying to make it larger than it is or more complex than it is, but there’s so many nuances. Is it independent living? Assisted living? Is it memory care? Is it a skilled nursing facility? Is it Medicaid? There’s so many aspects to that world. And then on top of that, from a buying and selling side, the facilities don’t get put onto a commercial MLS or listing service predominantly, unless it’s a really challenging property that is less than desirable.

Whoever controls the listings controls the opportunity. So it’s not one that you can get on to an online database and preview 15 facilities and see their income statements and rent rolls and balance sheets. You can’t do that. So you got to understand how to evaluate them, number one, and then you’ve got to figure out who controls the opportunity,  number two.

Joe Fairless: It makes a lot of sense how you got into it, given your connections with healthcare. So can you talk about your healthcare business or division and what’s a typical transaction look like?

Colin Carr: Absolutely. So our primary healthcare division represents healthcare providers. So dentists, physicians, veterinarians, and we help them with every aspect of their real estate interests. So finding land, developing properties, new locations, relocations, a lot of lease renewals… And in doing so, we work with a substantial number of landlords, large REITs, developers, and we work with a lot of owners trying to figure out how to make their properties more valuable, how to increase occupancy, etc.

Joe Fairless: What’s a recent transaction that comes to mind, or a recent deal, whether you’re finding the location or the actual property itself, or selling it? …just something that we can talk about.

Colin Carr: So an owner purchases a building, wants to attract healthcare uses, gets us involved in the process, figures out where’s the deal got to be priced at, what we have to do to make it attractive to healthcare providers, is it a viable healthcare option… And then if we can assist them in that process of bringing them numerous buyers, we can create a lot of opportunity out of changing a property from an office use to a medical use, etc.

Joe Fairless: What are some questions that you ask the owner during your due diligence process to determine if that office can be used for medical?

Colin Carr: Some of the initial stuff– we go through all the zoning, we go through those concepts, but really it’s does the owner have a desire to invest heavily in the process? Medical office is a very attractive asset class of property. Markets go up and down, the economy changes, it will correct; everyone knows that. So if you’re an owner, you’ve got to look at it and say, “Who do I want on my property?” You want a franchise that maybe has thin or no margins, and they’re just trying to buy a market share to see if they can later sell, and it’s not really a long term viable option.

Are you concerned if you have a retail center and you’ve got a bunch of apparel and soft goods, and you can pull up their income statements and realize these guys are losing money quarter after quarter, and what’s going to happen when you lose the 20,000 square-foot Forever 21 store that doesn’t renew and how do you backfill that with four or five other people and who’s going to backfill it? Or do you look at a medical opportunity and say, “You know what, even when the market goes down, that dentist is not going to decide to start a landscape business. Or the plastic surgeons, they might tighten the belt, they might trim some staff, they might work four days versus three days a week, but they’re probably not going anywhere, they’re probably not gonna change industry.”

So we do a lot of education with landlords on why it makes sense to invest more money into a healthcare deal. Why if you can lock down a ten-year deal, the tenants are gonna go in there and pump a couple hundred thousand dollars into the space; they’re more invested, they’ve got more skin in the game – why that makes sense to stretch further to make that deal, and why that deal, even though you might have to put a little bit more money into it or invest more, why that deal actually ends up being a safer investment for you.

You put more money in, so some people would say, “Well, no, that’s more risky,” but you’re securing a more valuable blue-chip tenant in a lot of scenarios. So we do a lot of education with landlords and developers on why they want these deals, and then you get the right tenant, they sign a ten-year lease, they’ll probably be there for 20, 30 years. So you can literally do a deal and not always – there’s definitely changes, – but a lot of times, you put that thing to sleep for a couple of decades.

Joe Fairless: You mentioned asking the owner, do they have a desire to invest money into it, but then you talked about how the tenant will put in a couple hundred thousand to get it to fit their exact needs… So what is the owner putting money into the property to do, versus a tenant?

Colin Carr: Good question. So the tenants put a lot of their own money into the spaces because landlords are typically not going to front the entire cost of the buildout or the finish. We do ask the landlords to contribute as well. We’re looking for both sides to be invested in it. So a traditional office deal or industrial deal or retail deal, the landlords are going to put money into the space to attract good tenants.

A lot of times on the healthcare deals, we ask them to put in a little bit more than they would for a traditional office use or retail use, but we, in turn, put in more money than the traditional user as well, and a lot of times we’re doing longer-term leases, and we’ve got a much lower default rate. Most of our healthcare uses have less than a 1% default rate, so it’s a more secure investment. So we ask the landlords to put more money in because our clients are putting more money in, and they’re willing to do longer-term leases, and they carry a higher success rate, lower default rate with them.

Joe Fairless: Is the landlord putting in money prior to getting a tenant?

Colin Carr: Typically, we tell them, “Don’t touch the space on a healthcare deal until the actual healthcare provider or tenant shows up”, because you think they want that type of lighting or ceiling or walls or bathroom, and then they want to change the location of the finishes… So we don’t like landlords to put money into spaces. A lot of times, landlords will try to put into a vanilla shell format or vanilla box, and we don’t want that, because they’re going to upgrade it almost every time. So that’s another way for landlords not to waste money on vacant spaces. Wait till the tenant shows up, don’t spend money in advance.

Joe Fairless: Is it usually 50-50 on improvements or what?

Colin Carr: No, it’s usually a per square foot basis that comes into line with the lease rates to where some landlords say, “Hey, I’m not going to put in more than one year of total rent into the deal” if it’s new construction and they’re financing the money, and they’re going to turn around and sell it in a couple of years. They might put in two, three, four years of rent into that initial space. So it depends. Is it first generation? Is it second generation? Are they a long term owner? Are they gonna try and sell it? Is it the cash they’re putting into it, or are they going to finance it? So it just depends on who the owner is and the structure, but typically, on most healthcare spaces, it’s between one to two and a half years of total rent usually gets put into the concession package of TI allowance, free rent, stuff like that.

Joe Fairless: So for someone listening to that, and if they’re thinking, okay, so, in a medical transaction, where you bring a health care provider, if I’m a landlord, I’m gonna have to put in, on average, one to two and a half years of total rent that I receive. So I’m not making any money for one to two and a half years. Why would I ever do that? You mentioned it already, long-term, but is there anything else that we should be thinking about where it’s like, “Oh man, the first two years are gone. I’m not making any money.”

Colin Carr: A lot of landlords are going to finance that tenant improvement allowance and a lot of lenders are going to be more prone to give money for that tenant improvement allowance, especially if it is a healthcare use and a long term lease. So there’s definitely owners that want to put cash in upfront and not go to the bank, but if you’ve got a loan on the property already, which most landlords do, most lenders are going to give money for that tenant improvement allowance to secure that tenant. So at that point, it’s [unintelligible [00:16:25].25] game.

The other thing that comes into play too is for the landlords that are willing to put money into the space, they’re going to typically capture a higher lease rate, which means the property is worth more. So whether you look at it as having a long-term owner, that’s fine, but most people are always looking at “What’s my exit strategy?” and so the higher the lease rate, the better the cap rate, the higher the property. A lot of landlords are looking at properties, “Hey, if I could buy this property, and let’s just say it’s getting $20 a square foot for rent, and if I were to put a little more money into it and get a healthcare use in there, I could maybe get $23 a square foot in rent. Well, $3 a square foot on a six cap or seven cap, all of a sudden my property’s worth 200 grand more, 800 grand more, whatever it is, depending on the size of the property.”

So it’s a numbers game of “Can I put more money into this space to attract better tenants, longer-term lease, and then a better cap rate, because it’s stronger credit tenant, lower default rate, and then can I raise the value of my property?” So that’s the game – if you’ve got a property and you’re normally getting local mom and pops retailers or short term office leases, and you can attract the long term healthcare use, you can raise the value of your property substantially by getting healthcare in there.

Joe Fairless: What’s been one of the more challenging transactions you’ve personally worked on?

Colin Carr: How many hours do we have for me to run through that list? Almost every commercial deal we do has some–

Joe Fairless: A specific one. I’m looking for a specific example that you can tell us a story about.

Colin Carr: Man, that’s a great question.

Joe Fairless: It could be a recent one. I’m just looking for a story from you about a transaction where there was a challenge, you overcame it, and here’s some things we can learn from it.

Colin Carr: I would say, a specific deal I’m thinking of right now is, you find a landlord – and this is a specific deal – they bought a building a number of years ago, the tenant had an above-market lease rate when it was purchased, annual increases push the lease rate up 3% every year, and then you come to the lease expiration date, and you get ready to do a lease renewal, and the landlord is 100% set on not reducing the lease rate because they don’t want to discount their cashflow and discount the value of the property… But the deal is way over market, the tenant’s not going to stay. So you end up in an arm wrestling match with the landlord, and they’re assuming that the tenant’s not going to move, but the tenant has to move, because they can’t pay that type of rent.

So the landlord has come to grips with the fact that they didn’t do good due diligence upfront and it was an above-market lease rate, and they can’t capture and maintain that rate moving forward. And once that lease is over and that tenant moves out, they’re going to have to come to market with the real deal for the next person. So that’s a traditional deal, that’s what I’m thinking of right now, is “Hey, you’re 20% above market. I know it looks good on paper, I know you bought it thinking it was a great cash flow, but it’s not real.”

So it’s kind of a pro tip – you’ve got to make sure that you’re not dealing with inflated rents that are not renewable in the future, and if you lose that tenant and you have to go to market, you’re gonna have to come up with a real deal.

Joe Fairless: What a great piece of advice mentioning that… Because if I go to look at deals, and I see an office building and the seller says, “Hey, the market is X amount of dollars, but I got you even better at Y.” I think, “Ah, that’s awesome. This is gonna be a better deal than I’ll get it anywhere else, because I’m getting better market rents,” but as you said, there’s some pitfalls to that when the lease expires.

So then what I would need to do in order to make sure that the deal still makes sense is determine what type of market demand there is for that type of tenant, and if there’s a whole lot of demand for that tenant, then — I guess, I still shouldn’t assume that I’ll be able to get above-market rents upon the lease renewing, but at least there’ll still be more tenants to fill in if this one leaves.

Colin Carr: Absolutely. You’ve got two sides of the coin. You got, “Why the lease rate’s below market?” and “Is that really the lease rate?” They say, “Well, this is a below-market lease and you’re gonna be able to bump it up on a renewal.” “Well, alright, show me that you’ve achieved that the last couple leases you’ve done and show me where the market’s at, so that I have the track record that you’ve been able to do that.”

The other side of the coin is, “Hey, look at these lease rates. They’re capturing premiums, and these are a lot higher than our competing properties in the market or other comps.” And the question is “Is that sustainable in the future? Do I need to discount that value and underwrite it differently?”

The same concept applies with – you get a property as a 100% leased, you’ve got to put a vacancy factor in there and assume that you’re gonna run a vacancy over time and on average. You’ve got to put a 5% or 10% vacancy factor in there. So yeah, there are definitely pro tips as far as if it’s below market – why? If it’s above market, why? I think really the question comes down to what’s sustainable, and that’s where you’ve got to tap market experts to give you that advice and just make sure that you’re doing your due diligence.

Joe Fairless: Based on your experience as a real estate professional, what is your best advice ever for real estate investors looking to purchase, or in the industry of buying healthcare, or having commercial properties that cater to healthcare professionals?

Colin Carr: My advice would be just find the people that are the most likely to bring you those tenants. So when you’re talking about buying a medical building, and you’re talking to the seller, look at what they’ve done as a track record, because that’s a great indication of hopefully what you’ll be able to accomplish as well, too… But it’s really easy just to talk to the selling party and let them give you all the information, all the play by play. But at the end the day, they’re not going to be the ones to try bringing you the new people for your space, or helping you to renew those people. So I would say, find an industry expert like a company that represents healthcare tents and buyers, and then ask them, “What would be your objections to bring in your clients to the center? What would we have to do to attract your clients for the property? Do you think the market can sustain these lease rates? What type of TI allowance do I need to do to put into these deals?”

Get a perspective from the other side of the table with someone who’s not involved in that transaction. Not the listing agent, not the seller, but talk to somebody who is viably going to bring you an option or bring you a tenant for the future and get their perspective on it, because it’s going to be very different than what the seller’s selling you, trying to sell you the property.

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

Colin Carr: I am.

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

 

Break: [00:22:55]:04] to [00:23:38]:03]

 

Joe Fairless: What’s a bad piece of advice that you’ve received over the years?

Colin Carr: Thinking the market’s not going to change. Thinking that, “Hey, we’ve got this the last five years, it’s gonna continue to be that way”, and just not realizing the market is gonna shift.

Joe Fairless: What’s a best ever resource that you use in your business that is really helpful for you, whether it’s an online resource, an app, some website, something like that?

Colin Carr: The same answers two times ago – talking to the market expert who’s not involved in the transaction to give you an independent third party perspective on how viable is this location, this space, this deal, this price, and how would you critique it for your clients if you bring us a tenant or buyer for this?

Joe Fairless: What’s been one of your favorite transactions that you’ve done?

Colin Carr: Favorite transactions… I would lump them together as beginning deals in the business, grinding out the dirtiest, lowest-priced, worst location industrial deals you can possibly imagine, and just learning how to put together a deal, learning how to treat people, learning how to figure out how to solve problems, and just thinking back to the worst property you’d ever want to go to, and then getting that deal done and making no money on it whatsoever, but realizing you found a way to make a win… And at the end the day, even though it was a down and dirty property, the tenant was happy to be there, and learning how to do deals.

Joe Fairless: How do you not make money when you transact a deal, even if it’s a bad deal and a bad area?

Colin Carr: As a broker, you’re paid usually upon– it could be a per-square-foot commission, but a lot of times it’s a percentage. So I’m thinking of the 1,100 square foot machine shop industrial deal with a $4 lease rate, where you spend months on a deal and you make a couple hundred bucks or something like that, where you look at your time and you’re like, “Wait a second, I think I ‘ve made $1.50 an hour on this deal.”

We’ve got monster success stories of making a ton of deals, and that’s great, but honestly, it’s the deals that you learn to cut your teeth on, and even the ones where maybe, you lost some money, but you learned a lot. Those are my favorite because that’s the foundation you build upon.

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

Colin Carr: I love sharing information and helping people take what I’ve learned, and then help them become more successful… Because that’s really what I’ve done over my career – I’ve had the benefit of picking people’s brains, asking the exact questions you’re asking now, getting their insight, and then taking a lesson that a guy took 20 years to learn, and then he shares it with me and saved me all the heartache and pain. So doing the same thing of taking my information, the skillset, the contacts, introducing people to those same people, those lessons, and then helping them to build upon the foundation that I’ve laid, which is really the foundation of hundreds of other people before me.

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

Colin Carr: Website is carr.us, and in the upper right hand corner, you can find an agent. So if you want to talk about the viability of a deal or get a perspective from us before you buy a property or invest in and pick someone’s brain, our team, our agents are happy to do that. We do it every day. They won’t charge you for it. They’ll just give you free advice and give you their thoughts, and you can get in touch with someone locally that could give you a lot of information that could help you to process.

Joe Fairless: You’re a wealth of knowledge. It’s so nice talking to people who are so knowledgeable about what they do, and it is very clear that you know your industries that you’re in, and it’s just fun. I love talking to people like you. So thank you for being on the show, talking to us about the four divisions of your company, talking about how you got into senior housing as a result of being in healthcare, and then going deep into healthcare in particular, from an investor standpoint, and what to look for. So thanks for being on the show, really enjoyed it. I hope you have a best ever day, and we’ll talk to you again soon.

Colin Carr: I appreciate that. Thanks so much.

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JF2064: A Passive Investors Perspective During The Coronavirus With Travis Watts

 Travis is a full-time investor and the director of Investor Relations at Ashcroft Capital. Travis has written some articles on our blog to help investors during the Coronavirus pandemic we are all going through today. As a full-time passive investor, Travis gives his perspective on what he is seeing in the current market and what he is keeping an eye out for. 

Inflation article

 

Travis Watts Real Estate Background:

  • Full-time passive investor
  • Director of Investor Relations at Ashcroft Capital
  • In 2009 he started investing in multi-family, single-family, and vacation rentals
  • Based in Denver, Colorado
  • Say hi to him and grab a free passive investor guide at Ashcroft Capital

 

 

 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“There is always a silver lining, there will always be opportunities that pop up. Look at this as an opportunity to educate yourself” – Travis Watts


TRANSCRIPTION

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

Travis Watts: Hey, Theo. I think I know you from somewhere, don’t I?

Theo Hicks: Yeah, I think I know from somewhere as well. If you guys don’t know, Travis is the director of investor relations at Ashcroft Capital. That’s how I know him. I met him at our first quarterly meeting. I’m looking forward to our conversation, because I haven’t been able to have a long conversation with him yet, so I’m looking forward to getting some advice… Just like you guys are looking forward to it as well.

A little bit more about Travis – he’s a full-time passive investor, as well as the director of investor relations at Ashcroft Capital. In 2009 he started investing in multifamily, single-family and vacation rentals. He’s based in Denver, Colorado, and you can say hi to him at AshcroftCapital.com. You guys should all be able to spell that by now.

Travis, before we begin, we’re gonna be talking about the Coronavirus today. Travis has some really good articles on our blog right now, so we’re gonna talk about one of those in particular, and maybe talk about the other one as well.

Before we get into that, Travis, do you mind telling us a little bit more about your background and what you’re focused on today?

Travis Watts: Sure, I appreciate that intro. So I got started in real estate, as probably a lot of people do, probably the majority of real estate investors – single-family. It kind of led to trying to scale that portfolio up… The problem that I had personally, which isn’t applicable to everyone, but I was working a full-time W-2 job, more importantly a 98-hour workweek job, where I was away from home, completely dedicated to that… And as I started trying to scale the single-family on the side, doing some flips and vacation rentals, things like that, it just got to be too hands-on for me, which — I had to go back to the drawing board, learn how to become a completely passive investor, what strategies and assets and things like that existed… And that’s where I ran into syndication investing in real estate.

I made a complete transition around 2015 through 2016, where I was selling all my single-family, I was going all-in into multifamily and syndications… So that’s brought us to the last 5-6 years. I came onboard with Ashcroft to just help spread education around passive investing and what benefits those can have for certain people’s lives.

Theo Hicks: Perfect. Thanks for sharing that. One article that I really liked was your article about inflation, and how people can benefit from the inflation from printing off two trillion dollars in cash… Do you wanna summarize that article? And then if there’s anything else you wanna talk about as it relates to inflation.

Travis Watts: Yeah, and again, I think that article is out there both on the Best Ever Community – I put it out there I think under my Bigger Pockets as well, things like that… So check it out. But the concept is pretty basic, really. This is a topic we could have talked about a year ago, two years ago, five years ago… And that’s just this idea that the Federal Reserve is printing money, every time we’re going into these crisis situations – 2008-2009, now this pandemic here being probably the worst in terms of what we’re gonna see in money printing… But that’s devaluing the purchasing power of the dollar.

There’s a lot of scary headlines out there that you read, about the mortgage crisis, and just what’s unfolding, and all this scary bad news, but here’s a way to look at it in the light of real estate, whether we’re talking single-family, multifamily, whatever. When you’re acquiring debt, so you’re going out to get a mortgage, you’re hopefully getting some long-term fixed-rate debt, depending on what you’re doing, meaning that you’re locking in a payment every month, that’s gonna be due. Let’s just call it $1,000/month for a owner-occupied home, that’s your mortgage payment. So that payment, on the debt side, is never gonna change for 15 years, 30 years, whatever kind of mortgage you get.

The idea is as we move forward and the Fed continues printing and printing, and the purchasing power of the dollar is going down and down and down, you’re basically using cheaper dollars to pay off that debt. So what is $1,000 in today’s money could be worth $200 down the road in the future. So it’s gonna make it much easier to pay off that debt long-term, and more specifically in terms of investment real estate, where tenants are paying that off anyhow. So that’s what the article is kind of about, from a high-level, for those that may not be tuned in. Yes, the Fed has already printed a couple trillion dollars, and that can quickly escalate to 4, 6, 10. I hear all kinds of numbers out there.

The scary thing to think about is — this is how inflation is created. Basically, inflation is the cost of goods going up year after year after year, so it takes more and more dollars to purchase the exact same thing, years down the road. So the crisis here, in my opinion, if you wanna look at the negative side of things, is we’ve got 2019, four trillion dollars in circulation. That’s like our money supply. So if the Fed’s gonna go and print four trillion dollars as an example, then theoretically we’re gonna have some massive inflation kicking in at some point, theoretically a doubling in price… Maybe not today or tomorrow or next year, but down the road.

So if anything, look at this in a positive light – we’ve got all-time low interest rates; it’s a great time to be refinancing projects, and potentially getting involved with real estate, if that’s something that you haven’t done yet or that you’re currently doing. So a little long-winded… There’s still hopefully some value in reading that article, but that’s the high level.

Theo Hicks: Obviously, it makes sense to get debt, but since I’ve got a $1,000 payment and I’ve got 100k (let’s say) sitting in my bank right now, and five years from now that 100k is gonna be worth 10k… Practically speaking, should I pay down my debt on my properties?

Travis Watts: Yeah, that’s a good question. The way I look at it is “What’s my alternative?” In general right now we have a lot of low interest rate debt for things like real estate, whereas a lot of folks might have at this time high interest rate debt. They might have personal loans from a bank, or credit card, or retail debt… Things they’re paying 10%, 15%, 20%, 25% annually on. That’s what I’d be focused on right now paying down.

And what I mean by alternatives – if you’ve got a 3,5% mortgage today, could that money be better utilized if you were to invest it in something that could produce a higher return? Like a 8%-10% annualized cashflow return. So I’m not giving any kind of financial advice to anybody, but it just depends on your situation, what kinds of debt you have, but certainly for the folks that are saying “I have $100,000 in the bank account. I’m just gonna let that sit and ride for the next 10-20 years as my little reserve account”, you’re most certainly gonna be losing a lot of that purchasing power over that time, so I’d be looking for ways — while safely and conservatively keeping your emergency fund in place, certain months of living expenses (3-6 months is what you commonly hear), I’d be looking at places to park that capital, things like real estate, that are kind of a hedge against inflation, somewhat.

Theo Hicks: Okay, thanks for sharing that. Changing gears a little bit – so you are a full-time passive investor… Most of the people I’ve talked to about the Coronavirus are actively investing, so we talked about rent collections, and making sure they can pay their mortgage payments, and asking how much cash reserves they have… But something that I’d be interested to ask you about as a full-time passive investor is are you still seeing opportunities to invest in right now, or has that slowed down? And if so, what’s your strategy over the next 6-12 months as a passive investor? Are you kind of in a holding pattern, are you still looking for deals? Things like that, if you could talk about that for a little bit.

Travis Watts: Yeah, absolutely. I guess the unique perspective or the benefit of not only being an investor with one group like Ashcroft, but being an investor with 14 different groups is I get invited to a lot of webinars, a lot of conference calls, I get a lot of email updates, I get a lot of “Here’s what we’re doing in terms of Covid” and all this kind of stuff… So I have a bit of a broad perspective on what a lot of folks are doing out there.

In general, this interview is taking place mid-April. This is our first real impacted month. This whole Corona thing got real serious towards the end of March, and then rent was due April 1st. So my opinion here is that a lot of people were already kind of set up and primed to pay their rent anyway. They already had it in the bank, or in their savings account… They were ready to go for April. I’m a little more concerned maybe with May and June, and however long we’re in this lockdown, and the economy is shut down, and things like that.

What I have seen more specifically, to answer your question, with these different syndication groups in general is a little bit of wait-and-see right now. It’s a little too early to start calling the shots, it’s a little too early to start saying “Oh, there’s all these new deals popping up, things like that.” It’s hard to look at a T12 statement and have that make a lot of sense, looking at 2019 numbers, when now we’re in this state where we don’t know what our collections are gonna end up being. So I’m a bit of the same mindset.

I did invest in some recent deal that have closed through the March timeframe, and I think one in April… But at this point I’m focused more on making sure I have adequate cash reserves personally on hand, in case things pop up; capital calls, whatever. Or best-case scenario, I just hoard a little bit of cash and then maybe by late summer there’s some deals popping up that make a lot of sense to get involved with, and we’ll have the cash to do it.

So that’s kind of where I sit. It’s a little bit of sit-and-wait probably through April and May, and hopefully we’ll know a whole lot more in June, and hopefully the numbers start making sense again, and the economy starts reopening. But we’ll see. Who knows.

Theo Hicks: Exactly. So definitely wait and see right now. So you mentioned that you’re getting a lot of communications from either deals you’re investing in with all types of sponsors… Do you mind walking us through, as a passive investor, what types of communication you’re getting from syndicators? More specifically, maybe tell us what a good communication looks like at a time like this, and maybe some things that you see and it’s kind of making you worry when you consider a bad communication.

Travis Watts: Something I’d talk about on the podcast is why I like syndicate groups that not only distribute monthly distributions, but hand-in-hand they report monthly. I think in a time like this it means a lot. No one wants to sit here 3-4 months to wait on an update to see how their property is doing.

Some groups to this point that are quarterly that I’ve invested with have literally sent out one communication since this whole thing started to unfold… And I don’t appreciate that. I’m all about transparency and proactiveness, communication… So what does that prompt investors to do? Call. Email. Just bug you to death. So why don’t you just get the information out?

What am I seeing is a lot to do with helping the tenants, helping educate how they can file for unemployment if they’ve lost their jobs, how they can maybe get on some kind of payment plan and maybe make a half payment on the first and a half payment on the 15th, resources for companies hiring in the local area… There’s obviously some businesses somewhat thriving right now. It’s kind of a weird word to use… Amazon’s hiring, grocery stores are hiring… There’s a lot of opportunities. I invest mostly in workforce housing, B and C class properties, so a lot of these folks are in an income range of 30k to maybe 60k/year household income… So a lot of opportunities are available for folks like that, depending on the area where your property is located.

So in general, that’s the communication I’ve been getting – let’s wait and see how collections pan out, and here’s where we are as of today, and how does that compare to the previous quarter. Look,  I don’t need a communication every day, because it doesn’t make a lot of sense, but I think at least a monthly communication is ideal. A lot of groups have been doing webinars, Q&A calls, things like that… And I think that goes a long way as well in a crisis situation like this.

Theo Hicks: Another article that you wrote on the website – and I’m sure it’s on LinkedIn and your Bigger Pockets profile as well – is about the mortgage crisis. Do you mind talking about that for a little bit?

Travis Watts: Sure. That one’s a little more technical. I think there’s a lot of key elements that are just probably better read through the article itself… But basically, what you’ve been hearing a lot in the headlines is things like this mortgage forbearance, or people aren’t paying their mortgages, they’re not paying the rent… Well, the thing is there’s a chain effect here. It starts with, let’s say, the homeowners saying “I’m not gonna make my mortgage payment”. But then what a lot of people don’t understand is that mortgages are often sold. And they’re sold, they’re wrapped up into collateralized mortgage obligations, investments basically that people can invest in, where you’re investing in different tranches, and things like that…

So you’ve got the bank or the lender, you’ve got the tenant, and then you’ve got the investment, then you’ve got the investors behind the scenes there… And it’s like “Who’s left holding the bag here?” That’s kind of what the crisis is – trying to figure out what kind of stimulus is coming for who exactly; it’s gonna start with probably the person that’s supposed to be paying their rent or their mortgage, and then it’s gonna go as a trickle-down effect. But it could completely implode parts of the lending industry… So it really is a crisis in a sense, but… Anyway, there’s much more detail that’s probably better found in the article… But yeah, that was another recent one that I’ve just put out.

Theo Hicks: You don’t have to answer this question if you don’t have to, because I’m putting you on the spot, but I did read recently that Chase changed their mortgage criteria… So they’re only lending to people that have a credit score of 700 or higher, and then 20% down payments… Which seems to be one of the first residential lending institutions to make changes such as that.

I guess my question would be “Do you think that that is gonna be an opening for other lending institutions to also change their lending criteria?” And if yes, what kind of effect do you think it’ll have on the overall real estate market?

Travis Watts: Yeah, I’m happy to give a high-level overview… And that’s kind of how that article ends, that I wrote – what are the practical takeaways here? Well, if you’re selling a home, it may be a little bit harder, for obvious reasons, to get a buyer, just because people aren’t getting out as much, or they  may not be in the investment market space as much right now… But more importantly, to your point, someone who’s qualified. So which lenders are still lending? And if they are, like you said, I think that banks are gonna be tightening up quite a bit right now… Obviously, to lower their risk. They don’t want any defaults, and there’s probably a lot of defaults coming their way.

In fact today – maybe yesterday – was the earnings report for a lot of banks, and they’re in a bad place right now. They see a bit of a grim immediate future here, at least talking through the next quarter. With all of this mortgage forbearance, and people not paying, and unemployment spiking… It’s a tough time to be a bank.

If you’re buying – to your point – you may have to have a little bit better credit, you may need to put a little bit  more down… If you’re selling, it’s a little harder to find a qualified buyer… Obviously, that’s gonna have an effect in the residential space, of course, 100%. But in no way, shape or form, in my opinion, are we talking about something similar to ’08, ’09 housing real estate crisis. That’s not exactly what’s happening this time.

Theo Hicks: Thanks for sharing that. Is there anything else you wanna mention as it relates to the Coronavirus and real estate that we haven’t talked about already before we hop into the lightning round?

Travis Watts: There’s always a silver lining to this stuff. Even ’08, ’09 — yes, it’s bad news, and there’s negativity everywhere, and nobody knows, and where is the bottom, but there’s always going to be opportunities that pop up… Not only in the syndication space, in the publicly-traded stuff… Look at this as an opportunity to 1) above all, educate yourself. This is a really great time to educate yourself. Figure out what your goals are… And it’s a great time to get started. As you alluded to in the beginning of this podcast, I got started in 2009. Well, that was not quite the absolute bottom of the market, but it was pretty near and close to it. And riding the way up over the next decade is helpful, for a lack of better words. It wasn’t the perfect time to get in, but it was a pretty decent time… So just hopefully you can keep your job, and your income, and your business running through this. Hopefully the stimulus money can help soften the blow on that front, and then wait and see what opportunities can come over the next 6-18 months or so.

Theo Hicks: Alright, Travis, are you ready for the Best Ever Lightning Round?

Travis Watts: Let’s do it!

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

Break: [00:19:48].09] to [00:20:50].16]

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

Travis Watts: I think you just said the title of it – it’s the Best Ever Apartment Investing Book that you and Joe wrote. That’s actually a really great book that you guys wrote. I actually just bought that the other day and gave it to someone who was looking to be a GP themselves.

One that’s kind of a classic, that I’ve recently re-read is Awaken the Giant Within, a Tony Robbins book. I don’t even know when he wrote that. Probably in the ’80s. But man, is it just timeless; great insight and info for self development.

Theo Hicks: If your passive investing business were to collapse today, what would you do next?

Travis Watts: What would I do next… I’m trying to make this as short as possible, but I’ve always been a huge advocate of the FIRE Movement (Financial Independence, Retire Early), which has a lot to do with reducing your expenses and overhead, making as much money as you can make, and investing that into things that produce passive income. I would stay on the passive income route, I would just look for an opportunity to make as much income as I could, and put my focus back there again.

Theo Hicks: Do you mind telling us about a deal that you’ve lost the most money on? How much you lost, and the lesson that you learned.

Travis Watts: Yeah, I invested in something I clearly didn’t know that much about. It was a distressed debt syndication fund. Sometimes I experiment outside of real estate; that was one of the first big experiments I did. I put maybe — I don’t even know; there were two funds, and I put maybe 175k in, and lost (to date) maybe 40%-50%. It could be a lot worse… It’s in a receivership now, so who knows what that will end up being… But it was a rough ride.

Theo Hicks: What about the best ever deal that you’ve done?

Travis Watts: The best ever deal was actually in the single-family space during — I think it was like 2014 to 2015. I bought a house from a bank, I paid 97k for it. I didn’t do anything to it. I just rented it out as is, and I sold it two years later for 215k.

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

Travis Watts: My time. Week to week I take calls with all types of people, not only investors, but people looking to house-hack, or do a fix and flip, or become a GP, sometimes an LP… I just love sharing experience, talking through things, handing off resources… I just mentioned the book you wrote with Joe – I gave that as a resource to someone just last week… So just sharing my time.

I just wish that there had been more people in my life when I got started, that I could have reached out to, to say that classic “Hey, let me pick your brain for 30 minutes.” I give people that opportunity.

Theo Hicks: Then lastly, what’s the best ever place to reach you?

Travis Watts: Probably email. Travis [at] ashcroftcapital.com. Or ashcroftcapital.com/passiveinvestor. I’ve got a free passive investing guide there and it connects you with me if you’d like to jump on a phone call as well.

Theo Hicks: Perfect. Best Ever listeners, make sure you take advantage of that, and make sure you check out the two articles that we talked about today. The first one is “How inflation can benefit you over the next decade”, and the second one is “The Mortgage Crisis: Will You Be Affected?” As Travis mentioned, the Mortgage Crisis one goes into more technical detail on that.

Besides those two articles, the one other main takeaway that I got was you talking about the types of communications you’ve been getting from different sponsors… You’ve got some people who haven’t reached out at all, some people that are reaching out a little bit too much. The sweet spot is monthly communication, letting you know what’s going on at the property and being transparent and honest.

I think that is it… Travis, it’s been nice talking to you. Best Ever listeners, as always, thanks for listening. Have a best ever day, and we will talk to you tomorrow.

Travis Watts: Thanks, Theo.

 

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JF1936: Lost After College, Entrepreneur Turns To Real Estate Investing with DJ Scruggs

Today we have the privilege of hearing about DJ’s real estate investing story. He had no clue what to do after graduating college, started and ran multiple businesses, before discovering his love of real estate. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“You don’t have to be a jerk, but you can always ask why” – DJ Scruggs

 

DJ Scruggs Real Estate Background:

  • Has owned and operated multiple businesses for over twenty years
  • CEO of Blue Spruce Holdings
  • He has filled many roles in business and as a real estate investor including raising capital, marketing, sales, and software development
  • Based in Denver, CO
  • Say hi to him at http://realbluespruce.com/
  • Best Ever Book: The Book of Why

 


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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, DJ Scruggs. How are you doing, DJ?

DJ Scruggs: I am great. How about you, Joe?

Joe Fairless: I am great as well, and looking forward to our conversation. DJ is the CEO of Blue Spruce Holdings. He’s owned and operated multiple businesses over 20 years, filled many roles as a real estate investor… That includes raising capital, marketing, sales and software development. Based in Denver, Colorado. With that being said, DJ, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

DJ Scruggs: Happy to. And thanks again, it’s an honor and a privilege to be on this show. My background was — if we wanna go all the way back to college, I was a classic literal arts major, I had no idea what I was doing when I got out. I was a music major. I realized by my senior year that that was not gonna be a good career for me, just because financially it’s not always the best, and the people who really are good at it – to them it’s like crack; they can’t not do it. And I wasn’t one of those people.

So I got out of college and really did not know the first thing about business. I’ll fast-forward to say I started reading a lot. I read The Wall Street Journal, Inc. Magazine, lots of books… This was in the early ’90s, before blogs and even websites really. And around ’95, I remember very specifically it was Thanksgiving of ’95, I got on the internet — I had been on the internet before, but it had been through America Online, and stuff like that, so it was a very degraded experience… But this was the first time I was on the internet, in the wild, and I thought “Oh my god, this is the biggest thing ever. This is gonna be enormous. I’ve just gotta figure out a way to start a business.” And I would say the takeaway from that — a lot of people say “Well, how do you start a business?” or “Am I smart enough to start a business?” It doesn’t matter. Just start.

What really motivated me is I read this — it was actually in Inc. Magazine, they did an article about the early beginnings of great companies. And back then, great companies meant Apple – it was still a great company – Hewlett Packard, Motorola, Microsoft… And almost to a T, every single one of them when they started it was just one or two people with an idea. They had no idea what they were gonna do, they had no idea they were gonna build billion-dollar companies, but they just sort of said “We’re gonna do something different.” And it hit me like  a ton of bricks – everything you see around you, literally everything, except maybe for hiking in the mountains, is because someone had an idea. Someone said “I’m gonna build a desk for you to sit at. I’m gonna design a computer that you’ll like to use. I’m gonna create software that allows people to do interviews over the internet.” It’s all about having an idea and then just getting started.

Joe Fairless: Yup.

DJ Scruggs: And that’s what I did.

Joe Fairless: So what was it?

DJ Scruggs: This was back when Java was a new thing. Java, the programming language. It was actually still in beta then. Java now is considered a dinosaur; it’s ancient. But the basic business plan was “Do something with Java.” That was enough to get me excited, pretty much. And what it turned into was to create customer service software for email.

I used to go pitch investors — this was in Chicago, and this is like ’96(ish). I would pitch investors, some of them very sophisticated, who just did not think email was gonna be that important. They thought it was just a toy, they all had AOL accounts and that was fine for them, they didn’t need anything more… So it took a lot of convincing to say “Online customer service is gonna be more important than call centers.” But that was the basic idea.

Joe Fairless: Okay. Congrats on that. Do you still have the business?

DJ Scruggs: No. I ended up selling it, and this was probably another lesson for people… It never hurts to ask. We were pretty hard-pressed for money, partly because we were in Chicago. Chicago is not a great — I don’t know about now; I think now it’s probably a lot different. But back then, starting a software company in Chicago was not optimal. Lots of consultants, because of the banking/financial sector, but starting just a pure-play software company – that was not very common, so it was hard to find talent, it was hard to get investors interested… But I’d gone out to Silicon Valley, and of course, they’re biased towards Silicon Valley, right? They want a company that’s within 20 minutes Sand Hill Road, where all the venture capital firms were.

So we were running out of money, and I was like “I’ve gotta find some money.” I ended up making a bunch of cold calls to venture capitalists, and the one who returned my calls, a guy named Brad Feld, who’s now considered one of the top 50 venture capitalists in the world – he’s based in Boulder, Colorado… And one thing led to another, and I ended up selling my company to a roll-up that Brad was running. This was closed in 1999.

Joe Fairless: Nice! What did you sell it for?

DJ Scruggs: Well, it was an all-stock deal, which – there was a hard lesson learned around that, too… But it ended up being about 20 million dollars. My investors did really well, they made about eight times their money in a year and a half.

Joe Fairless: That’s a good deal for them. [laughs]

DJ Scruggs: Oh yeah, it was great for them. For me, it ended up not being quite as exciting.

Joe Fairless: And why was it an all-stock deal? Can you elaborate?

DJ Scruggs: Yeah. Basically, I got shares instead of cash, and I didn’t get them all at once. I had to earn them out over a two-year period… And I couldn’t touch any of them for the first year. So during that first year, the stock price ran up really high, so I was loving life. In that second year, it went really low, so I wasn’t loving life… And they were dragging their heels about – I don’t think it was malice; I think it was just incompetence – actually getting the [unintelligible [00:06:49].23] They were locked up in some kind of escrow, or trust, or something I don’t quite understand… And it’s one of those things where I didn’t realize my own power.

At that point, I was the largest single shareholder who was an employee of the company. I should have just raised absolute hell, and I didn’t. I was a little too nice about it. But hard lesson learned.

Joe Fairless: Well, on the raising hell versus being too nice, have you come across that situation in real estate, where you’ve since raised hell because you’ve learned that hard lesson early on?

DJ Scruggs: Yeah, I would say so… It’s not so much raising hell, it’s just figuring out when someone’s bullshitting you. I don’t know if I’m allowed to say that on your show…

Joe Fairless: That’s fine, yeah.

DJ Scruggs: Because here’s the thing… So I sold the company — like I said, I was a music major. There weren’t blogs or anything to learn from. I’d read a few books and kind of knew a little bit about business, but not a lot. There weren’t online courses I could take, or mastermind groups I could join, or anything like that. So when I sold the company, I remember thinking “Thank goodness. Now the experts are gonna run things.” Because it was all — a senior vice-president with an MBA from Stanford and ten years running traditional tech companies, and stuff like that. So I deferred a lot to them.

But after a while I just started noticing… Like, I remember when he hired this one person – I don’t wanna name names; she was a good person, I like her, and she had a pretty senior role. Everyone liked her. But I noticed pretty quickly that her solution to everything was to throw money at it. And my company — we had raised a little bit of money; we raised about 1,5 million, but it was all in drips and drops. So it’s not like I ever had 1,5 million in the bank to start with. It was always just trying to make payroll… So I would always stay at the crappy airport hotel, I would rent the economy car, I would take the overnight flight to save money. So I get there and these guys have a lot more money; they’re not making money, but they’ve got a lot more money…

Joe Fairless: They have access to more money.

DJ Scruggs: They have a lot of capital, yeah. So suddenly, we’re staying at the nicer hotels, and we’re renting the nice cars, and I remember thinking “Well, I’m not sure that’s how I would do it, but maybe that’s the way you do it when you’re big.” And this woman I mentioned – everyone loved her, and I noticed that her problem was she threw money at everything. “Let’s hire more people, let’s buy more software, let’s buy more equipment…”, and I thought “Someday the money train is gonna stop, and what’s that gonna look like?”

Well, it was about a year later that the money train stopped, and what it looked like was she stopped returning people’s calls. She stopped coming to the office, because her go-to solution was no longer available. And it went from everyone loved her to everyone hated her.

To circle back to the question of when to raise hell – I just have a better sense of when someone really knows what they’re talking about, or if they’re just trying to snow me. I remember early on in this business we talked with a potential partner about working on a deal together, and the questions he was asking just from the very first phone call – I realized he didn’t know what he was talking about. He wanted to see our operating agreement. Like, that’s not material. You don’t need to see that. The deal was a separate entity.

And there was another guy who was supposed to be on the call who didn’t make it. He’d blown us off two times in a row. So Brad, our underwriter, asked “What do we do? Do we send the operating agreement?” I said “Absolutely not. This guy is trying to big-time us, show us how important he is, and he’s not.” Anyone who knows what they’re doing is not gonna ask stupid questions like that.

Joe Fairless: Yeah. And then if you don’t pick up on that, then you might get into a deal with that individual, and then you lose money.

DJ Scruggs: Yeah. It’s not fun to lose money, but also, if you don’t pick up on it, the temptation especially if you’re new to this is to defer to their judgment… And like I said, just because they have an MBA, or a track record with some other business, doesn’t mean they actually now what they’re doing. It just means they’re good at talking about knowing what they’re doing. You don’t have to be a jerk, but you can always ask why. “Why are we doing this? What’s the point of this? How are you making this decision?” And oftentimes they don’t really have a good answer. And if you do it in a non-threatening way, maybe you can reach a better solution.

Joe Fairless: I like that. You don’t have to be a jerk, but you can always ask why. I like that a lot. What’s your role as CEO of Blue Spruce Holdings?

DJ Scruggs: A few different ones. I would say what I spend most of my time on is raising capital. I talk with investors, and I do a lot of (I guess you could call it) content marketing, email, newsletters to keep people informed of the business, introduce the company… We’re relatively new to this; we’ve only been doing it a couple of years. And what I tell people is – in any business –  the best answer to the question why you should do business with us is “Well, I’ve been doing it for 20 years, and  we returned X% every year.” That’s the idea.

Joe Fairless: [unintelligible [00:11:32].04]

DJ Scruggs: Yeah. If you don’t have that, then you need to demonstrate competency some other way. So act professional, be respectful, and be respectable. Show up a lot. That was basically [unintelligible [00:11:46].21] strategy. He started doing meetups, and he was just everywhere; he was all over Facebook, he’s always at different events, and just by showing that he cared and that he was serious about this… And by the way, he’s a fun guy to hang out with, and get advice from. Those are the ways that you can demonstrate competence.

So a lot of what I do is around talking to investors, writing our newsletter, writing for the blog, and then just some technology support around the way we automate a lot of our systems. And then I guess the other thing is just more broadly — the best description I’ve heard of a CEO… I can’t remember who it was; this was probably 20 years ago [unintelligible [00:12:22].15] You’ve got three roles. One is to make sure that you have a viable strategy. The other is to make sure that you’re operating as efficiently as possible, and the third is to make sure you have the capital in place to manage your growth or any challenges you might have. I sort of dip and out of those roles pretty much on a weekly basis, in different ways.

Joe Fairless: You talked about tech support for automating the systems… Can you elaborate?

DJ Scruggs: Yeah. Ironically, that first company I mentioned — I didn’t write any code for that company. Well, I wrote a little bit, but it was for reporting, it wasn’t the core software. It wasn’t until later that I started writing software seriously, and then I wrote a lot of software over about 15 years.

So I got really good at that, but also, when I joined with Blue Spruce it was really tempting to get sucked into it, because it’s fun; it was like solving a puzzle, but it was not the best use of my time. So I look for tools that are more or less plug and play, if you have a little bit of tech  skills. Active Campaign we use for email system, I think it’s a great CRM; it’s got a great price/performance ratio. And if you know a little bit about integration, you know how APIs work, you can use it along with a product called Zapier, which allows you to connect different APIs together.

For example, we use Zoom, as you do, for our webinars, and when you register for a webinar on Zoom, that data gets pushed through Zapier into Active Campaign. That way we have you in our CRM, we don’t have to download from one system and upload into another. Once you really dive into Zapier, you realize “Man, there’s a lot of things you can do.”

One of the companies I used to be with – I was one of the early partners at a company called SurveyGizmo. As you can imagine, they did surveys; they were like a Survey Monkey, basically. They were a little geared toward more professional uses of surveys. So I got really good at using that software. We have a whole system of — when you first go to our website and sign up, you receive an email that says “Hey, thanks for signing up. We need to know more about you to be SEC-compliant, so please fill out this profile form.” And if you take that form, it looks kind of like the investor questionnaire section of a PPM. They ask you “Are you accredited or not?” And then we ask a few extra question. We ask them what their birthday is, so we can send people birthday cards…

Joe Fairless: What other questions do you ask besides birthday?

DJ Scruggs: We ask about their investing priorities. We have four options: safety of principal, total return, cashflow, or tax benefits, and then we ask you to rank those in order. We make sure to get their mailing address at that point, because — we haven’t really done much besides the birthdays, but we intend to do that… And we do an annual letter that we send out every December, so that gets mailed.

Joe Fairless: What do you have in the annual letter?

DJ Scruggs: Well, it was our first one. The first part was just saying “Here’s what this thing is you’re gonna be getting from me every year”, and I just kind of talk about some highs and lows of the business. The real model was Warren Buffett.

Joe Fairless: Right.

DJ Scruggs: So I say “Here’s what we were good at this year, here’s what we were not so good at, here’s something we tried that didn’t work, here’s something we tried that did work, and we’re gonna double down on…”

Joe Fairless: What was the thing you mentioned that you weren’t good at?

DJ Scruggs: I would say our acquisitions was really haphazard last year. They always say – and it’s true – pick a market and really get to know that market, and we were still just kind of trying to figure out what our business even was, in terms of who was gonna do what… So we were just very — we like to say “opportunistic”, but a better word is “scattered.” We would just look anywhere that it looked like a good deal.

So after that, at the end of last year we decided we were gonna focus this year on Oklahoma City. So that was  a good opportunity — we did a series of webinars in December… Some of them were just pure value-add, things you should know as an investor, and then there was one that was just about the different markets we looked at and why we like them, and in particular why we were focusing on Oklahoma City. We’re about to announce three more markets we’re focused on, but we’re not quite ready to do that.

Joe Fairless: What’s one thing that you all have done that didn’t work out, separate from not having a particular market to focus on? Just tactically speaking.

DJ Scruggs: Our very first deal was a very small deal, it was 16 doors, and we made the mistake of using the existing property manager…

Joe Fairless: Because they knew the property, right? [laughs]

DJ Scruggs: Right, exactly. And it turned out that person was fine at just sort of the basics of leasing and dealing with tenants, but was just awful at communications. Awful. I would literally ask 3-4 times for the same thing. It’s not like I was a jerk who would blow up her phone three times a day. First I would email, I’d wait a couple days, then I’d send another email saying “Hey, have you had a chance to look at this?” I’d wait a couple more days, then I would text… It was outrageous.

So I had no visibility into what was going on with the property, and it turned out that there were a lot of things not going well. So we had to replace that person at the end of last year. We have a new one, and it was a little bit of a tough cookie to swallow, because it was more expensive… But it’s night and day, the new firm. They do what they say they’re gonna do, when they’re gonna do it, they proactively communicate… We still do weekly phone calls, but it’s pretty much just sort of checking a few items that we talked about last week to see if they got done.

Joe Fairless: Based on your experience as an entrepreneur and real estate investor, what’s your best real estate investing advice ever?

DJ Scruggs: Get started. You’re never gonna know everything you need to know. I’ve been doing this for a while and I still don’t know 20% of what I wish I knew. But I remember hearing an interview – I think it was the Farrelly brothers, the guys who made Dumb and Dumber… And they were shopping that idea for a while. And they had one agent who wasn’t doing a very good job, so they met with another agent; they would go into meetings and say “We’re trying to make this movie”, and the agent said “Stop saying that. From now on you’re saying ‘We’re making this movie.’ Here’s the plan, here’s what we’re gonna do, and here’s the people involved.” And it just changed the perspective in the meeting. It wasn’t a couple of guys who maybe had a pretty good idea, but maybe not… It was a couple of guys who were gonna do something.

So I would say just however you can get started, if it means just going to a meetup and committing to going to that meetup every week or every month, or spending an hour every day listening to your show… Make it a habit of moving forward, as opposed to thinking about moving forward.

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

DJ Scruggs: Sure!

Joe Fairless: Let’s do it then. First though, a quick word from our Best Ever partners.

Break: [00:19:15].04] to [00:19:50].17]

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

DJ Scruggs: Right now I’m reading a book called “The Book of Why: The New Science of Cause and Effect.” It’s not about real estate at all, but it’s about how we think about — you know the saying “Correlation is not causation.” It’s sort of the history of that idea. Because for a long time, correlation was causation in the minds of — “If we sacrifice this virgin, the gods are gonna be nice to us, and bring rain.” That was what cause and effect used to be. So that’s one that I really like, that I’m reading right now.

Joe Fairless: How could you see that helping you as a real estate entrepreneur?

DJ Scruggs: Well, I guess I’ll bring up another book that I really like, that I’ve read recently, which is Ray Dalio’s Principles.

Joe Fairless: Well yeah, that’s an obvious one how that can help  you.

DJ Scruggs: Yeah…

Joe Fairless: But the other book though – because I see parallels; I’m just curious how you’re thinking about it.

DJ Scruggs: Well, one leads to the other, because his whole thing was he made a horrible call on national TV back in 1980 about the economy, and was really wrong, and lost millions of dollars. And it wouldn’t surprise me if he’s also read this book I’m reading, “The Book of Why.” Because his whole thing is instead of asking “How am I right?”, you ask “How am I wrong?” So you look for “Am I assuming causation with something that’s not really there? Is it just a correlation?” So that’s where I think that book helps.

For example, I think – I’m sure you know, everyone’s talking about a  recession may be coming, or maybe not… What I have noticed is a lot of people, especially if you go online to Bigger Pockets and stuff, people say “I’m wondering if I should wait till a recession to buy.” And I think in their mind a lot of them think recession is what happened in 2008. That was not a recession, that was a borderline major depression. We really dodged a bullet there, and still a lot of people got crushed. In places like Las Vegas they were losing 30%, 40% of home value there. And I think some people think it’s like that. “Oh, I’m just gonna wait till prices drop 30% or 40%, and then I’ll get in.” You’re probably gonna wait 70 or 80 years for that to happen.

Now, I could be wrong. Maybe we will have a big crash like that. It’s like with the military. Generals tend to fight the last war. I think a lot of new investors think “Well, the next recession is gonna be like the last recession”, and I just think that’s a spurious correlation there.

Joe Fairless: I hadn’t thought of it the way that you described, and 1) it’s refreshing, as a real estate investor and entrepreneur; it’s refreshing to think of it that way. And 2) it’s logical, as I’m considering what you’ve just said… Because I’ll put myself in that category of — when I think of a correction or a recession that we think about as real estate investors, or I think about, I think about 2008. [laughs] That’s the one I’m thinking about. I don’t think about a bump, I think about a crash.

DJ Scruggs: Right. Well, it could be a crash. The thing is, the nature of a crash — or let’s call it even something broader, an economic shock… The reason it’s a shock is because no one was expecting it. So the odds are if there’s a big economic shock, it’s not gonna be in something that everyone’s looking at and wondering if there’s gonna be a shock. It’s gonna be something totally unrelated, like a war in the Middle East that drives up oil prices, or a currency crisis in Asia. Something like that, that no one is thinking about. That’s what makes it a shock. If it’s something that everyone’s looking at, then there’s lots of hedging that goes on, banks are a lot more risk-averse than they were then, both in fact, and also they’re constrained by law. So it just seems less likely to me.

Joe Fairless: Best ever deal you’ve done?

DJ Scruggs: Buying my house in Boulder. [laughs]

Joe Fairless: What year was that?

DJ Scruggs: That was 2003. That’s an example of good market, but it’s also — at that time, Boulder [unintelligible [00:23:39].25] or sometimes the People’s Republic of Boulder. They limit growth there. They’ve been limiting growth there since the ’70s. So no matter when you are there, whether you bought in 1985 or you bought in 2005, you were like “Holy cow, this is expensive!” And that’s how I felt. I bought a townhouse for about 250k in 2003, and I remember thinking “This is crazy. Why am I spending so much money on a townhouse?” And this goes to the point of a good market.

During the financial crisis, Boulder did not crash. It went sideways for about three years… But prices held value, and then I sold it a few years later for about 500k. So I doubled my money. I did some modest upgrades to the place… You know, hardwood floors, and stuff.

But the best ever deal I’ve done as a professional investor is probably a flip I did here. When I first got into this, I started out with flipping, but I knew I wanted to get into multifamily. I just wanted to kind of get my hands dirty and learn about real estate… And it was my first full rehab project, and I made tons of mistakes, but I was in the right market, so I ended up making good money on it… And that sort of taught me the power of being in a  good market, but it also taught me — I don’t like building my business based on that. I’m a lot more conservative in underwriting now.

Joe Fairless: Real quick, what’s a tactical mistake you’ve made on a deal?

DJ Scruggs: Well, the one I mentioned, the 16 doors. We really botched the due diligence on that… Again, because we weren’t sure who was doing what. And it wasn’t until after the due diligence period was over that we got the insurance quote, and it ended up being way more than the T-12, because it turned out the seller was under-insured. And the insurance we had to get – it wasn’t an option because the lender was demanding it. So that cost us several thousand dollars a year.

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

DJ Scruggs: You know what I like to do? Honestly, I just like to help the homeless. I did this last Christmas, and I still do this, but in a different way. You can go to Walmart or Costco and buy these boxes of cashews; kind of like airline size, but bigger, full of cashews… And I just give them out to homeless people when I see them.

And what I did over the holidays is I stapled five-dollar bills to them and put little Christmas stickers on them. I used to be sort of against that, because the thinking is “Oh, well, they’re just gonna go out and do drugs, or buy alcohol.” I’m kind of like “So what?” They’re having a really hard time; the least I can do is help them out somehow.

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

DJ Scruggs: Probably the best place is just RealBlueSpruce.com. There you can see our portfolio, learn about how we invest, learn about me and the rest of the team.

Joe Fairless: Lots  of valuable lessons for entrepreneurs, real estate investors and apartment investors in particular. I’ve mentioned this already during our conversation, but I love the thought process of when something’s not jiving with you, then you don’t have to be a jerk about it, but you can always ask the question why. And then separately, when anyone is starting in a business, because they are starting out, they don’t have that long track record; so as you said, if you don’t have that, then you have to demonstrate competency in other ways… So be respectful and respectable, and demonstrate the competency in all the ways that you know how, other than having that track record. And everyone who ever starts something will come across that challenge. I think that’s a very valuable reminder. And then many other lessons along the way, too many to recap now.

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

DJ Scruggs: Thanks, Joe.

 

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JF1902: House Hack Your Way To Financial Independence #SkillSetSunday with Craig Curelop

Craig is coming back on the show to tell us more about house hacking, which he has done three times now. He’s been able to go from a negative net worth to financial independence through this powerful wealth building strategy. Craig puts things into perspective with actionable tips and strategies for anyone to use in their own lives. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Buy a single family house, live in one room and rent out the other rooms” – Craig Curelop

 

Craig Curelop Real Estate Background:

 


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TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I’m Theo Hicks, and today I’ll be speaking with Craig Curelop. Craig, how are you doing today?

Craig Curelop: I’m doing awesome, man. Better now that I’m on your show.

Theo Hicks: Absolutely. We’re glad you’re here and we’re looking forward to speaking with you again. Best Ever listeners, Craig is a repeat guest. Make sure you check out his previous episode; it is 1260, and it’s entitled “Bigger Pockets analyst tells us his life-hacking story, with Craig Curelop.”

Since this is Sunday, we’re going to be doing a Skillset Sunday. Craig is a house-hacking expert, so we’re gonna talk about how you can house-hack your way to financial freedom/independence.

Before we begin, I wanted to quickly go over Craig’s background as a refresher. He is the author of the house-hacking strategy, as well as an aggressive pursuer of financial independence. From sleeping on his couch to renting out his car, Craig has been able to go from a negative $30,000 net worth to becoming financially independent in three years, all while paying off $85,000 in student loan debt.

He’s currently on his third house-hack. Based in Denver, Colorado. You can say hi to him on Instagram @thefiguy. Craig, before we get into the skill, do you mind telling us a little bit more about your background and what you’ve been up to since we last spoke?

Craig Curelop: Yeah, the last time we spoke I believe I was living in my first house-hack, which was that duplex where I was really hacking it, living behind the curtain, and all that… I won’t go into all the details here, you can go back and listen to the previous episode… But since then, I’ve purchased two more house-hacks. About six months after that last episode, I purchased my second one, or a year after I got my first one; that one was a five-bed/two-bath in Thornton, Colorado, which is just North of Denver.

Then I did a different strategy, where I rented by the room. So it was a five-bed/two-bath, I lived in one room, rented out the others. I had my own bedroom, I was living a semi-normal life at this point… And then I rented out the duplex full-time. So the duplex was making me some money, the single-family I was living in was making me some money, and I was living for free; that allowed me to then save up and purchase the third house-hack, which I’ve just closed on about a month and a half ago, and getting that sold as we speak.

Theo Hicks: Perfect. So you’ve got your book “The House Hacking Strategy”, you’ve done three house-hacks… So let’s just talk a general overview, for those who don’t know – which I’m sure everyone knows what house-hacking is, but just in case… Do you mind just describing what this strategy actually is?

Craig Curelop: Yeah, house-hacking – the whole idea is that you buy a one to four-unit property, with 3% to 5% down; because you’re getting that 3% to 5% down loan, you’re required to live there for one year. So while you’re living there, you rent out the other parts of the property, such that the rent from your tenants is fully covering your mortgage, so you’re allowed to live for free, or maybe even get paid to live, and you’re just able to save tons and tons of money and build lots and lots of wealth that way.

Theo Hicks: Okay, so I actually house-hacked my first property too, so I’m familiar with this strategy… The first question I have is how do you analyze the deals when you’re actually house-hacking them? Because most deals make sense when you house-hack them, just because of the very little down payment, and the fact that you’re really just trying to cover some or all of your living expenses… But then, as you mentioned, the plan is most likely to move out and rent it out full-time. So are you underwriting it based on that time, when you’re gonna move out, and making sure that it’s cash-flowing then, or are you underwriting it so that all of your expenses are covered, you’re making money, some of your expenses are covered… Walk us through the analysis of house-hacking and how it compares to just a regular rental.

Craig Curelop: Yeah, for sure. So when you’re house-hacking, you definitely have to take into account the rent savings… Though I always try to live for free, but that’s just how I am… And I don’t care all that much that I have a super-fancy place. I don’t care all that much that I have my own space. So I really love this buy a single-family home, because it’s definitely cheaper than the multifamilies… And live in one room and rent out the other rooms.

The numbers on that – basically, I know that a $350,000 to $400,000 property is gonna be about a $2,000 mortgage payment each month. So it’ll be a little higher, a little lower, but within $100, that’s kind of what it is.

So I can go into a property – and I’ve been doing this for long enough where I can go in and look at the rents that I could get for each room, and I just make sure that the rents are well in excess of that mortgage payment. I like to see something between $750 to $1,000 over the mortgage. That will give me plenty of buffer for all of those expenses that you hear about – cap ex, vacancy, all of that stuff.

So rather than trying to have a percentage for each one of those and have all these moving numbers and moving pieces to play with, I just try to keep it really simple, with “Hey, what’s the rent? What’s the mortgage payment? How much do you want for reserves?”, which includes all of those expenses… And I just try to make it work that way, and it’s been pretty successful so far.

Theo Hicks: So you’ve done the renting out one of the units and living in the other unit, and then you’ve done the renting out the rooms… On this third one, is it a duplex or is it a single-family home where you’re renting out rooms again?

Craig Curelop: It’s kind of a hybrid. Technically, it’s a single-family. I’ve purchased it as a single family. But it’s a six-bed/three-bath. The top level is three beds, two baths, and the bottom level is three-bed, one-bath, with its own kitchen, it’s own bathroom, its own laundry room etc. So it’s essentially two units. So what I did was I actually just walled off basically where the upstairs meets the top of the stairs to go downstairs, and made a separate entrance, so that they can walk in and go directly downstairs and have their entire unit. Right now I plan to airbnb that unit out fully, and I expect to make a little bit more than I would with a traditional rental.

Theo Hicks: So would you say that the better strategy is to do the by-room, as opposed to the per-unit?

Craig Curelop: It all depends on who it is. I would say it’s the more lucrative strategy, for sure… But if you don’t feel comfortable living with the people, then maybe you do the duplex or triplex, or you do the “luxurious house-hack”, where you live in the big house and you rent out maybe the mother-in-law suite, or the downstairs, or whatever it is.

Theo Hicks: I’d probably say the most common thing I see — not the most common, but something I see a lot when people are talking about house-hacking is the amount of time you need to live in the house. So is it definitely a year that you have to live there, and if you don’t then something bad happens? Or do you need to live there longer than a year? Does it depend on the type of loan that you get? If you wanna talk about that a little bit, what’s the requirements for doing the house-hack…

Craig Curelop: To get that low down payment, that 3% to 5%, which is what makes house-hacking so powerful, you do have to live there for one year. Now, I don’t think the banks are knocking on your door every month to make sure that you live there, but if you do get caught, it is considered mortgage fraud, which I believe is five years in jail… So probably not worth it. I know people that have taken the risk and they’re not in jail, but again, I would not recommend it.

There are ways you can get out of it… For example if your job moves away, or something happens in your family… They are semi-reasonable with life-changing instances, but that’s really the only way to get out of it.

Theo Hicks: What’s some other important information that we need to know about house-hacking?

Craig Curelop: I would just say it’s a really great way to get started in real estate investing, if not the best way… Because you have to live somewhere anyway, so you might as well live where you’re investing. That way you’re really in the weeds and you can manage the property because you’re always right there. Also, it’s just a tremendous way if you’re doing this to really build yourself a great financial position and hopefully obtain financial independence within the next few years. I’ve never found a more powerful way to do so, with as little risk as house-hacking is.

Now, I’m not saying house-hacking is not risky, but it’s a lot less risky than investing in Bitcoin, or some startup company, or penny stocks, or something like that.

Theo Hicks: How many more house-hacks do you plan on doing?

Craig Curelop: I don’t really know. I guess this aggressively maybe one more… But then I probably intend to take some time off and do my own thing for a little bit… But when I come back and settle down, I still may house-hack, but it’ll probably be a little bit more of a luxurious house-hack, where I just rent out the bottom or rent out an  additional [unintelligible [00:09:44].14] in the back, or something like that. But yeah, I don’t see why not do this for as long as I can.

Theo Hicks: Do you plan on doing other investing strategies as well with the house-hack, or will you just keep house-hacking because it’s been so successful?

Craig Curelop: Yeah, now that I’ve got some capital built up, I’m looking to do some more BRRRR type deals, or even just some more buy and holds in the Denver area here. Definitely looking into exploring different types of investing. It’s pretty addicting, it’s hard to just do only one a year.

Theo Hicks: Is there anything else that we haven’t talked about as it relates to house-hacking that you want to mention?

Craig Curelop: One thing I would just mention is that if you do decide to go down this route of house-hacking, is that you’ll always feel different. The first house-hack you will look like a poor man/woman, because if you do what I did, you’ll be living on a couch behind a curtain, or you’ll be sharing a house with 4-5 different people, and you’ll be unlike everyone else, because they’ll probably have their own place and whatnot. But then you’ll be saving and saving more and more money, and after year one  you’ll be able to buy a second property; then you become unrelatable, because now you’ve just bought two properties in basically less than two years…

So then you’re able to save more and more and more, and then by the time you get your third one, you now have tens of thousands or hundreds of thousands of dollars to either investing — you can start investing in larger properties, or you can start going out and doing your own thing, and before you know it you’ll be financially independent, which even if you’re in your 30’s and you’ve got 5 years, you’ll be 35 to 40 years old, and most people are not financially independent at 40 years old.

So you have to be used to kind of being a little bit different. At first it’s kind of not so good, and then in most of your life it’ll be very good, it’ll pay off for you.

Theo Hicks: When you’re actually looking for these deals, do you just look for them how you would look for any single-family home? Are you just finding these on the MLS, or are you finding these things off market?

Craig Curelop: I find them on the MLS, yeah. I guess the main reason why that is is because the house does need to be livable. A lot of the ones off market are kind of rundown and beat up… So in order to live there for a year, the bank needs to deem it as livable, and basically it needs to have running water and electricity, and four walls and a roof… So yeah, there has to be that… And then also I’m looking for one deal a year when you house-hack, and in my market there’s lots of house-hacking deals… So you just have to figure out how to make a mark.

Theo Hicks: Alright, Craig. Well, thanks for coming on the show and essentially giving us a breakdown of exactly how to house-hack. Just to quickly go over what we talked about – so you’ve done three house-hacks so far. The first one we’ve talked about on the first show; again, that’s 1260, if you wanna check that out. The second one was the five-bed/two-bed just North of Denver, where you decided to rent it out by the room, while renting out the previous one full-time. You mentioned that by the room is more lucrative than by the unit.

And then you just closed on your third one a month and a half ago. That’s a hybrid one, where technically it’s a single-family home, but you were able to wall it off and turn it into a hybrid duplex, and you actually plan on airbnb-ing one of those units for even more money.

We talked about how you actually analyze these deals, and it really depends on what your goals are, but for you it’s you wanna live for free. You don’t really care if it’s a really nice place, or if you’ve actually got a room; as you mentioned, you lived behind a curtain on a couch for a while… So to do so you wanna calculate what the mortgage payment is going to be. You can do that pretty quickly, [unintelligible [00:12:45].27] experience. And then take a look at the rents for each of the rooms or each of the units, how you plan on doing it, and you want the rents to be at least (in your area) $750 to $1,000 above the mortgage, so that you can cover all the ongoing expenses and live for free.

You also have to live there for a year. If you don’t, it’s considered mortgage fraud and you can go to jail. There are some exceptions, but… If you’re gonna house-hack, live there for a year.

A few other things we talked about – it’s a great way to get started in real estate investing, because you need a place to live anyways, and you might as well have that be your own investment property. The strategy is a low-risk strategy, compared to other investment strategies out there.

And then lastly, you mentioned that when you’re buying real estate in general, but especially if you’re doing the house-hack, you’re always gonna feel a little different compared to others around you who maybe have their own apartment/home, and you’re living, as you said, on a couch behind a curtain, but obviously the benefits long-term outweigh that, because in a few years you’ll have a bunch of money, multiple properties under your belt… And the more money you get, the more deals you can do,  and you can be financially independent by just following the strategy and buying one property per year.

And then lastly, you mentioned that you’re just finding these deals on the MLS, because they need to be livable in order to qualify for the loan. And you only do one deal a year, so you’re able to find that in your market, because there are a lot of single-family homes available.

For more about house-hacking, make sure you pick up Craig’s book, “The House Hacking Strategy.” There’ll be a link to that in the show notes. And again, check out his first episode, 1260, “Bigger Pockets analyst tells us his life-hacking story.” And say hi to him at @thefiguy on Instagram.

Craig, thanks again for joining us. Best Ever listeners, have a best ever day, and we’ll talk to you tomorrow.

Craig Curelop: Thanks for having me, man.

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JF1887: From 10 Single Family Homes To 1600+ Apartment Units with Anthony Chara

Anthony got his start like many real estate investors, by doing a few smaller deals first. Once he had a taste of investing in apartments, he never looked back. We’ll hear how he scaled his business and also hear some specifics on a couple of his deals. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“The only time that you fail is when you just give up, don’t give up, keep moving forward” – Anthony Chara

 

Anthony Chara Real Estate Background:

 


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TRANSCRIPTION

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

Anthony Chara: I’m doing great, Joe. How are you?

Joe Fairless: I am doing well, and looking forward to our conversation. A little bit about Anthony – he started real estate investing in 2001, owns and/or has syndicated approximately 1,600 apartment units across the country. Based in Denver, Colorado. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Anthony Chara: Sure. I can certainly do that. Hello, everybody.  I actually started in creative investing back in ’93; I’ve been doing pretty much apartments almost full-time since about 2001-2002… But in ’93 my wife and I turned our first house into a rental and then moved into a larger, nicer house… And for ten years, that’s all we knew. Our world consisted of buy and hold, because we didn’t know you could do wholesaling, fixing and flipping apartments, short sales, or anything else. So we did that for about ten years; had nine or ten single-family homes and condos, and then met a gentleman named Robert Allen, which a lot of people know – he wrote  a book called “No Money Down” years and years ago, and started taking some classes from him and then realized that you could do wholesaling, fixing and flipping and other things, and I did a couple of those. One of the biggest things that I learned after I did learn something was to take it and put it into action.

So I did that, I did a couple wholesale deals, I did a couple fix and flips, and realized that “Wow, that was a lot of work, and some reward”, but once the deal was done, I had to go out and do it again. It was like getting a job, and the job was over, and now I had to go find another job. So I also learned how to do apartments, and in early 2003-2004 I did my first apartment deal. One of the things that I learned from that was that the money kept coming in, and they were a lot bigger checks than some of the single-family homes that I was doing… So I decided that I really liked that.

Our next deal was 98 units, then we went up to 120, and 140, and 150, and our largest deal so far to date was a 410-unit portfolio that we did in Indianapolis. As you mentioned earlier, right now I’ve either owned or syndicated a little over 1,600 units. I love doing apartments, so my main focus now is apartment investing, and I’ve got a lot of students around the country, because I do actually teach people how to get into this… And then just keep on buying more stuff. I love traveling around the country and doing the teaching, I love meeting up with my students and educating people on how to be successful with the different deals that they get into.

Joe Fairless: That 410-unit – is that the most recent purchase that you’ve been a general partner on?

Anthony Chara: No, that one was a few years ago. We actually sold that one back in — it was either 2015 or 2016… So the most recent one we just closed was a — wow, I’m trying to figure it out, because we’ve got a bunch of them that just closed within the last year.  About a year ago we did a 60-unit in Iowa, we did a 100-unit property in Macon, Georgia…

The most recent one was actually a 32-unit property that we closed — perfect timing, we closed in Panama City, Florida, and shortly after we bought it, the hurricane came through, and took the roof off of it… So that was kind of nice. But fortunately, we had the right insurance in place.

Joe Fairless: What is that process like, when a hurricane comes in — you’re in Colorado, the property is in Panama City, and you see your weather alerts, that there is some nasty weather coming to an area where your property is… What do you do to keep track of that, and then when you assess the damage, what’s the process?

Anthony Chara: Sure. Well, in that particular case the property was being run by one of my students, so he went down as quickly as he could after the hurricane came through. Of course, before then you absolutely wanna make sure you have the right coverage, which we did… So not only are we getting the property taken care of, but the insurance company is also paying us as if the property is still being rented, as if renters were still in it. That helps tremendously, especially when you have investors that need or  are expecting some type of cashflow.

But it’s definitely been a pain in the butt, it’s been trying. The student has been interfacing with the insurance company, and if you’ve ever worked with an insurance company, most of them try and take in as many premiums as they can and pay out the least amount possible… So we’ve also been working with a public adjustor, who’s gone out to the property, and is on our side, because they’re working with us to battle our insurance company… Because you can’t imagine that you’re actually on the same team when you actually have to put in a claim. It’s like a big battle to the finish, and whoever survives is the winner and the victor.

Joe Fairless: Which is very unfortunate, but it’s ridiculous that they take it that direction… But yeah, [unintelligible [00:06:00].15]

Anthony Chara: It is, yeah. Yeah, so the public adjustor is helping, because they’re coming out and showing other detailed information to the insurance company, that says “Your estimates are way undervalued, because we need to bring this property back up to the condition it was in before the hurricane came through.” We can show them pictures and videos of the interior of the property and how we want this property to be put back like it was before.

They generally like to push back, they think that we’re charging way too much or asking way too much, and we think that they’re paying too little. Eventually, we’ll come to an agreement and get everything done, and ultimately we are gonna win; we’re gonna be successful, but it’s a very long, painful process, because as I mentioned, insurance companies, even though they love to take your premiums, they don’t like to actually pay for those repairs.

Joe Fairless: So you have business interruption insurance; you are also insured for the property whenever something like this takes place… Let’s fast-forward 12 months from now. In your opinion, is the property better off having had this event take place, is it a neutral event, or is it a negative?

Anthony Chara: In this particular case it’s going to be a hugely positive event. It has already been a hugely positive event, simply because there’s been so many homes and housing that’s been wiped out in the Panhandle area there in Panama City. We’ve actually been taking our rent up, and I know that there are some people out there that would say “Oh, you’re taking advantage of people in the area.” It’s like, “No, we’re actually not.” Most of the people that were living in the property are actually working for insurance companies and contractors, and there’s no place for them to live, and we need to pay for our increased premiums and everything else that goes on… Because everything in that area has gone up.

Not only are we raising the rent, but the things that you would normally pay for, that might cost you X amount – well, it’s now X plus an extra 50%, because it’s harder for even things like lumber and drywall and roofing material to get into that area… And as soon as it gets in, it’s gone, because there’s just so much work that has to happen in those areas; the people that live there just to get food, and things like that. They’re still working on the power in that area, and making sure that the power is flowing the way it’s supposed to, they’re still clearing debris out of the area… And it’s a year later. As a matter of fact, I’m down in New Orleans right now, and it was 14-15 years ago when hurricane Katrina came through; last time I was here doing a presentation was on their 10-year anniversary and they were still recovering from the effects of Katrina.

So if you were like us, and you were in that area right as the situation happened, it is going to be a very positive event for us, because we are helping to continue to provide housing for people in that area. We are benefitting from it, because we can increase our rents, because there is a lack of housing… But we’re also providing a service that do need to be down in this area helping people recover by fixing up their units and getting back on track with their lives.

Joe Fairless: One challenge I came across with one of our deals that we owned in Houston – we’ve since sold it – when hurricane Harvey came, it did not directly hit our property, but what it did is it increased the cost of contract labor, because now all of a sudden what we had budgeted for contract labor dramatically increased, because they were more in demand, and there were other properties that were paying much more for their services, because they had to, in order to get their services. So then our budget had to increase. Have you come across that with your property?

Anthony Chara: Yeah, we certainly have, same exact situation… Because there’s only a certain number of people. There’s a lot of workers that were in that area that are now displaced. They moved to other areas of the country with family, or to find a job someplace else, because their home, their apartment might have been wiped out. So the people that are coming down, that are there, their cost of living and being there is higher… And we’ve also found out that insurance companies are paying these people more to entice them to come back to the market or into the market, so that they can actually do the work that needs to be done for the insurance company. So yes, all the costs have gone up because of the scarcity. The infrastructure is still suffering, so a lot of the stuff that we take for granted, like warehouses to store food, and building materials and things like that – they’re all gone; there’s no place to do it. So it’s a constant, endless truckload of things, and food, and parts, and pieces that need to come in, and all the people that need to take care of those things.

So yeah, expenses have gone up. Until you get to the point where it’s very easy to go down to the street corner and get a gallon of gasoline, things are gonna continue to be expensive until it normalizes… And if it’s anything like what New Orleans went through, it’s gonna be about ten years before Panama City comes back to fruition.

So it’s good for us, since we already have property there, and it’s gonna continue to stay strong for a while, but yeah, it’s also costing us more, as well.

Joe Fairless: The 60-unit in Iowa – switching gears a little bit – will you tell us about that?

Anthony Chara: Sure. That particular one is on the Eastern Coast, right on the Mississippi River, in a little town called Burlington. One of my students found that through a real estate connection that he had; he’s created relationships with brokers in that area. He likes buying in Iowa and Kansas and Nebraska… And the broker came to him. And the interesting part was we know that that same broker likes this type of property, so when he brought it to us, we said “Wait a second… Why aren’t  you buying it, if it’s such a great deal?” And he said because it was too far away from his target area. It was about a 2.5 hour drive from where he lives, and he only likes buying properties that are over 100 units, which we do, too… But in this particular case, that same student already owned about a 118 or 119 property about three miles away, so it was an easy transition.

So we went out, took a look at the property… It was actually a great little property. The owner of the property – about four years ago now the fire department came through, and why they didn’t do this years ago I have no idea, but the fire department came through for one of their typical inspections, and noticed that in all the second-floor units… These were townhouse-style, where you’ve got the living area on the lower end, and then you go up the stairs to the bedrooms in the upper area… All of the upper windows had the through-the-window air conditioning units, and the fire department finally figured out that “Oh, wait a second… You’re blocking an emergency egress.” So they made them take out all the upper air conditioning units. Well, if you’ve ever been in Kansas in July or August, it gets very hot and very humid, and people aren’t going to only stay down on the lower level with the air conditioning unit that is going through the wall on the lower level… So the owner made the decision when they pulled them all out to put in all brand new air conditioners and furnaces in all 60 units.

Joe Fairless: Nice.

Anthony Chara: At the same time, they redid all the roofs, they redid all the siding… So we ended up coming in and buying what should have been a C class property, that was probably more like a B-, just because it had all this new equipment in it… And we also inherited an 18-unit HAP (Housing Assistance) contract from HUD with that same property. So 18 of the units were paid for, whether they were occupied or not, and then the other 42 we take care of on the open market.

It’s been going pretty good for us. We’ve had a little over a year now, and we’re looking to refinance out of a short-term bridge loan that we got on that one in order to get into it.

Joe Fairless: What was the business plan for it?

Anthony Chara: Well, the business plan was because we knew that it was gonna be a good candidate for a HUD loan, was to buy it on a bridge loan, which we did; unfortunately, it’s taken us a little bit longer. We had some issues with HUD themselves, getting this particular property going. The original manager that was in the property for us ended up getting blacklisted by HUD because another property that they managed, that the owner was taking care of the maintenance. Well, HUD didn’t care that the owner was supposedly taking care of the maintenance, because this management company had their name on the property, and HUD was not happy with the repairs that they were doing… So HUD blacklisted them and made us get another manager. Well, that whole process set us back, because it took us about 3-5 months for three different parts of this.

Joe Fairless: Yeah…

Anthony Chara: The first part – we had to find a new manager that we liked. That took us about a month, a month and a half of interviewing quite a few managers in the area. Then once we liked them, then HUD had to interview them to confirm that they were okay with them, and then do a background check on them and look at some of their other properties to make sure they were maintaining them… And then the third part of it was because of this HAP contract, as soon as they blacklisted the first manager, they stopped paying us for the HAP contract. So it’s like “Well, wait a second… You’re the ones that blacklisted them, and now you won’t pay us.”

So once we finally got the new manager in place, the new management company then had to redo all the paperwork and submit all the paperwork for the 18 units, and that took another 2-3 months in order for us to get fully paid and up to date with all the paperwork. Well, at the same time, with the transition, the previous manager was short-timing it, so they weren’t really doing a very good job of putting new people in, plus they couldn’t talk to anybody that was on HAP, because they knew HAP wouldn’t pay them. So they could only talk to people who were coming in off the open market.

So anyway, we ended up getting a bridge loan, and the plan was to be out of that within a year, but then with this whole situation with HAP our vacancy started to creep up. We ended up at worst-case scenario; we ended up at 30% vacancy, 70% occupancy, going through this whole process… And now we’ve got it back on track. Over the last few months the manager has been putting in better quality people, and we’re back up around the 85% range, but we can’t actually do the HUD contract or the HUD loan until we’ve got 90% occupancy for at least 90 days. We’re still working on that.

So the plan – long answer to a short question – with the business plan was to have the short contract in order to buy the property with the bridge loan, take out financing within the first year, and now we’re just slightly over one year, so it’s probably gonna be about a year and a half, so we’re about six months behind on the plan.

Once we get that new loan in place, the interest rate is gonna drop drastically, the cashflow is gonna go up… The last thing that we need to do with the property – because there really wasn’t a whole lot, since the owner had been doing a good job of taking care of it – was replacing most of the windows. A lot of the windows were original from the early ’70s when the property was built. They still had some single panes, and some of the windows don’t open and close very well… So we’re gonna replace all of those, which is also gonna help with the energy efficiency of the property, and then we plan on selling it in five years, when the loan  balloons, to other investors. Of course, the goal is to at least double our money within that five-year period, if not better.

Joe Fairless: About how much does it cost to replace the windows in a 60-unit?

Anthony Chara: It depends on the quality. We’ve had quotes anywhere from some of the smaller windows for maybe $150 to $200 including labor, up to $350 to $400 for some of the larger windows… I think we budgeted about $120,000 to replace all the windows, including labor.

Joe Fairless: And how do you think of that in terms of ROI for the deal whenever you sell it in five years?

Anthony Chara: That’s a great question. We actually took that into consideration before we bought it, because that was part of our plan when we purchased it. We knew that these windows were a sore spot, not only with the residents, but with the energy efficiency of the property. Some of them don’t look very good, some of them that are the dual-pane also have the seals broken, so you can’t really seen through them… And they also are kind of an eyesore at this point, simply because if you look at some of the units that have been changed, they have the larger, thicker, white vinyl border, whereas some of the older ones are still the old aluminum windows… They look older, and they’re kind of an eyesore.

So we actually budgeted for that in our numbers, and that’s one of the reasons we were really excited about this property, just because even with the 120k or 160k total between the windows and some other things we wanted to do, our investors were still getting a cash-on-cash return around 10%, and then the total return we were projecting – I think the IRR is gonna be in there around the 18% range over a five-year period.

Joe Fairless: With the 18 units under the government assistance program, would you rather have just 18, or all 60, or zero? Which of those three options would you rather have?

Anthony Chara: You know, if you would ask me before we bought it, I might have —

Joe Fairless: Before they stopped paying you…

Anthony Chara: …before they stopped paying me, I might have been interested in the whole project being a Section 8, just because whether it’s occupied or not, they’re gonna pay the contract. The downside is after what happened here – and I’ve heard this from other owners as well – is that if HAP has an issue with something, whether it’s the condition of the property, how you’re taking care of it, they don’t like the manager, something goes on, they can literally cut off all of your payments. So I think I’m actually kind of happy the way it is now that we only have a part of the property, about 30% under the HAP contract… And we still are allowed to take HAP vouchers; we still have other people on the property that are on Section 8, but because they’re under a voucher program, as opposed to the HAP contract, they did not get cut off, those payments did not stop coming in.

So I kind of like the way it is now. We  have 18 of them where we have guaranteed rent, and then the other 42 are open market and Section 8 people… So we have a variety of people on the property.

Joe Fairless: Will you elaborate on the difference between a  voucher program versus a contract?

Anthony Chara: Sure. The contract is just like it sounds – you have  a contract with housing assistance that says “We want these 18 units. We’re gonna decide who’s gonna go in the units. We’re gonna pay for these units so that they’re available for us to utilize.” And they pay that–

Joe Fairless: So they screen the tenants and they put them in there, and all that process?

Anthony Chara: Well, they’re supposed to… We still have the ability to screen them, and if we don’t like the people that are coming – and we have the ability to go out and look at their work history and their eviction history, and things like that (even their criminal history) to see whether or not we wanna allow them into the property. But a lot of times because it’s under the HAP program they just say “Well, Mr. Jones is here, and we’d like Mr. Jones to move in.” With the HAP program, people just go wherever HAP says “We’ve got a contract. You can go here. Here’s the available unit. If you like it, let us know and we’ll put you in.”

With the voucher program, people can actually take the voucher. It’s what’s called “portable.” So they can move that voucher from one complex to another. They’re not limited on where HAP only has a contract. They can go to a house, for all that matter. They can go to a homeowner that is willing to accept a voucher, and they can walk in and say “I’ve got this voucher”, and based on how much money that person makes, then HAP has a metric, a formula that they put them through, that says based on how much money they make and what the average rent is in this certain area and how many people are in the house, whether it’s husband and wife, or girlfriend and girlfriend, or boyfriend and boyfriend, and whether or not they have any kids, the size of space that they need, the number of rooms, how much they qualified for what their share is going to be, if any… We’ve had some people that even on a voucher HAP has paid for their entire rental rate, and some they paid a minimum amount – $4, $9, $11/month…

So the big difference is with a contract it’s set. Most of the time you pretty much accept the people that come, but with the vouchers you can still screen them, they can take that voucher and they can use it on your property this year, and then next year if they decide to move out, they can take that voucher and their income and go someplace else to somebody else’s unit, where the HAP contract is set for — I think it’s a five-year contract that we have with them. I don’t remember off the top of my head, but I think it’s somewhere between a five and ten-year contract.

Joe Fairless: On a separate, but related note, regarding the property… You said you came in town and looked at the property. What are some things that you pay particular attention to? And we’ll be specific – let’s just talk about the 60-unit. When you came and looked at the 60-unit, what are some specific things that you read about the property, you saw the financials, so you had the paperwork, and you probably saw pictures, but now you’re actually there… What do you look at? What do you look for?

Anthony Chara: Well, the biggest things that I wanna look for are the major issues with the property that can cause you a lot of monetary loss if they’re not taken care of properly. Some of the biggest things I wanna look at when I come in are things like the roof, I wanna look at the parking lot, I wanna look at the drainage around the units… We’ve had issues where years ago we missed things, because — well, I shouldn’t  say we missed it; we just didn’t realize that it was an issue until we actually had an issue with it.

We had  one property where there was actually a creek flowing through the middle of the property. And we knew it was there, we did our best to check and make sure that it wasn’t gonna be a problem, we made sure that there was a drainage area underneath a little bridge on the property that we had to make sure was cleared out… And then lo and behold, we get a huge rainfall, and the creek was not the problem; the problem was the way the property was situated – it was up on a frontage road next to a freeway; there was so much rain coming off the frontage road down into the property where there was no creek, and no clear path for the water to drain, because it had never really rained that hard in the area to even cause an issue… It actually washed out the foundation underneath one of our buildings. So that was  a pain.

Now that we’ve learned that, we walk around the property, we look to see if there’s any (in essence) chokepoints like that… Because you do get a lot of rain in Eastern Kansas, especially since we are very close to the Mississippi River. We look at the elevation to see how close we are within the flood plain, because – I don’t know about you, but the Mississippi River and a few other rivers in Central America (as in Central United States of America) have been over-flowing and flooding… Roofs are always a very big ticket item. We look at the either boiler systems and/or chiller systems. In this case we have individual furnaces in all of the units. We knew those were only three years old, so we didn’t have an issue with any of those… But we wanna take a look at the big dollar ticket items.

We also wanna look and see if there’s any types of issues with mold, bugs, things like bed bugs, cockroaches, and see what we can do to mitigate some of those issues to the best of our ability… Because those things are what’s going to cost you in the long run. It’s going to be very expensive to do the roofs. Ours were only three years old, but even though they were three years old, we still got up on the roofs and checked them out, because occasionally you can have decking under the roofs that is weakened, and sometimes people don’t actually replace the decking when they put on new roofs; they just put new shingles over old shingles if they’re allowed to, based on code…

So we did our checking on that, and the roofs looked like they were in great shape. All the furnaces and air conditioners were all in great shape. The drainage issue… We had one little area where I let the team know and the managers know that they needed to keep a particular area, clear it out, because it seemed like a lot of stuff – whether it was people dumping trash, or the trash just blowing or draining down into that area as the rains came; that all needed to be cleared out… Plus, it didn’t look nice with some of the trash that was in the area. So those were some of the big things we look at.

Then, of course, the parking lot, whether it’s asphalt or concrete, what’s the condition, does the parking lot need to be sealed… A lot of people don’t realize that the asphalt parking lots need to be sealed on a regular basis and restriped, so that they don’t dry out… Because if they do dry out, they can literally turn to nothing but mush and gravel, and then it’s gonna be a much more expensive fix to clear all that out and then put down a new overlayment, instead of just taking care of it and doing preventative maintenance in the meantime.

Joe Fairless: Taking a giant step back, what’s  your best real estate investing advice ever?

Anthony Chara: My best real estate investing advice is 1) take action. Learn, and then take action. And then the other part of it I would tell people too is to not give up. There are going to be obstacles that you run into, and it’s all too often that in our society people just hit a roadblock and they quit. In my opinion, the only time that you fail in any type of investing or any type of endeavor is when you just give up. So don’t give up, keep moving forward. Even if you have setbacks, learn from the setbacks. Use that as a tool, so that you are a better investor the next time you go out and you do a deal. Don’t let setbacks hold you back. Keep moving forward, keep doing more and more deals, and you will be more and more successful.

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

Anthony Chara: Let me sit up straight here, and… Yup, I’m ready to go.

Joe Fairless: Alright, I know you’re ready… First, a quick word from our Best Ever partners.

Break: [00:27:06].02] to [00:27:44].27]

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

Anthony Chara: Cashflow Quadrant. I’ve just reread that a couple months ago.

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

Anthony Chara: I donate money and time to a bunch of worthy charities, I donate a lot of money to Habitat, since I’m in real estate… I donate a lot of money to Habitat for Humanity, American Red Cross, Wounded Warriors…

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

Anthony Chara: You can go to my website, SuccessClasses.com. I do classes all across the country, and we’d love to see you out there.

Joe Fairless: I know some people in Cincinnati who have taken your class and had really good things to say. Anthony, thank you for being on the show, talking about some specific deals – the 32-unit challenges, with that and Mother Nature; the 60-unit in Iowa, and just talking through some things in the business plan, and what you and your team is doing, and things to look at from a big picture, whenever you’re taking a look at a property on a walkthrough.

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

Anthony Chara: Thanks, Joe.

 

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JF1827: Is Your Short Term Rental Legal Or Illegal? With Erin Spradlin

Erin is here today to help us understand the different laws and restrictions that some areas are placing on STR’s. Along with her team, they help investors find, buy, and run legal short term rental properties. You may be surprised by how many different regulations and laws exist that investors may not know about until it is too late. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“If you want to be serious about this, don’t treat it as a hobby” – Erin Spradlin

 

Erin Spradlin Real Estate Background:

  • Co-owner and broker of James Carlson Real Estate
  • They focus on setting people up with legal Airbnbs to cover their mortgage or reduce it significantly
  • Erin also focuses on female investors, they’ve done a BiggerPockets video series, and she is a blogger for on BP
  • Based in Denver, CO
  • Say hi to her at https://www.jamescarlsonrealestate.com/
  • Best Ever Book: Long Distance Investing

 


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Go to tenantscreening.com and enter code FAIRLESS for 25% off your next screening.


TRANSCRIPTION

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

Erin Spradlin: Good, how are you doing today?

Joe Fairless: I am doing well as well, and looking forward to our conversation. A little  bit about Erin – she is the co-owner and broker of James Carlson Real Estate, where they focus on setting people up with legal Airbnbs to cover their mortgage or reduce it significantly. Erin also has a focus on female investors, where she’s done a Bigger Pockets video series, and she’s also a blogger for Bigger Pockets. Based in Denver, Colorado.

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

Erin Spradlin: Sure. In the past I’ve had an 8-to-5 job, as I’m sure many real estate agents and investors did. Starting about 2014 my husband and I got into Airbnb here in Denver, and it just started to change our lives pretty rapidly, because there was a significant extra income. After that, we started to look at ways to acquire different properties in Denver. This was before Denver had established laws around Airbnb… So like a lot of other cities throughout the country, they had a law where it made it illegal, because it was under a 30-day rental, but the city wasn’t really following up with that, they didn’t really have the zest to look into that… So at that point we were looking at other rentals, and we started seeing other people that were doing that as well, so then we ended up getting our real estate license, dropping out of our 8-to-5 jobs and going into real estate and helping other people identify Airbnbs and properties that were good for that.

Then the laws changed, so now our focus really is getting people into legal Airbnbs, because as an ambassador you wanna know that what you’re doing is okay and it’s not gonna change significantly in the next few years, depending on what the city council decides.

Joe Fairless: Yes. And as a human being it’s good to do legal things…

Erin Spradlin: [laughs] That too, that too.

Joe Fairless: That’s normally good advice. [laughs]

Erin Spradlin: Laws exist for a reason…

Joe Fairless: Yes. What were you and your husband doing professionally, prior to getting your real estate license and going all-in with real estate?

Erin Spradlin: I was a digital marketing director and he worked for the State Supreme Court in communications. I actually think both of those past careers have been really beneficial for us… Because I think we came to real estate with a professional background, so we had an idea as far good communication, or what that looked like, and also being able to support or justify whatever recommendations you’re making to clients, and then also just understanding — I know we both felt like we didn’t understand really the value of a real estate agent before we got into it, so we felt like being professionals, we could kind of explain what our value-add was, and then also get back, have good communication, explain things in a way that we didn’t necessarily feel like we’d had that experience in the past when we’d worked with real estate agents.

Joe Fairless: Let’s talk about what you offer exactly. Who is your ideal client and what do you do for them?

Erin Spradlin: Our ideal client is usually a homebuyer, and a homebuyer that’s looking to knock down their mortgage, or cover their mortgage primarily with short-term rentals. The way we go about that is that we research the laws for whatever city they’re looking in; whether or not that city has passed the law, if they haven’t passed the law, what that law looks like, also the temperament of the city council, if the city council is discussing it and researching it and just hasn’t made a decision yet… And then installing them in some kind of property that works for them.

A lot of times what that looks like is a basement apartment. Sometimes that’s a full duplex, so it’ll be an up/down duplex, it’ll be zoned that way, and have a kitchen downstairs… And then sometimes it just looks like a basement with a back entrance, where you can really knock out the rest of the house, but then you’re not seeing the Airbnb guests all the time, it’s still legal… But that property might not have a kitchen and it might still be zoned for a single-family house, but it’s still good for an Airbnb, and legal.

So a lot of our clients that come in have that profile, like “Okay, I wanna do this, but I wanna do it legally and I don’t know how the property works for that.” I think our value-add is coming in and saying “Okay, this is the law for that city, and these are the kinds of properties that work for that.”

Joe Fairless: So how do you make money when you do that?

Erin Spradlin: From my end or from my client’s end?

Joe Fairless: Your end?

Erin Spradlin: From my end, I’m a real estate agent, so I make the commission off of that. And then we have ongoing relationships; [unintelligible [00:06:43].23] if people will come in, they’ll buy their primary, and they’ll end up using that money to cut down their mortgage, and then they’ll turn around and buy an investment property… Whether it makes sense to do it short-term, because some cities allow short-terms for investors, or if it just becomes a long-term investment. Usually we just have ongoing relationships with clients based off of that model. And then we do that model as well, on some of our own properties.

Joe Fairless: Okay. You’re in Denver, Colorado, so you’re able to make commissions on places outside of Colorado?

Erin Spradlin: No. We do it primarily for Denver and Colorado Springs. Denver has different laws than Colorado Springs. Colorado Springs is a total free-for-all; you can go own, buy anything. The city actually is positioned as far as they are fine with people coming in and doing short-term rentals, whereas Denver is not. Denver has a primarily residence-based law. So we do both, two different communities, based on what our clients are looking for.

Joe Fairless: Okay, that’s the part I was missing. When I asked how you make money on it, I was thinking you’re working with people in New Jersey, so I was wondering how–

Erin Spradlin: No.

Joe Fairless: Okay, alright. So you’re making commission as a real estate agent, for the properties that you find for them. Let’s talk a little bit more about that, and your business model. So you’re helping them find the property, and then do you consult with them after that, or do you not have that part of the business, and it’s just “Here’s a property. It’s gonna be good for Airbnb. Now go execute the business plan.”

Erin Spradlin: I think that’s a great question, because people definitely have that curiosity about us all the time. I will say upfront, we don’t do property management. I have a lot of respect for people that do do that, but that just seems like an awful — or a job that is very hard. How we set people up is we do the front-end as far as figuring out if the law makes sense, the property makes sense, and what they can expect to make money-wise. Then we help them as far as talking about how they wanna furnish it, getting checklists  in front of them, how they would wanna set up their Airbnb advertisement, and what that looks like. Some of the things that you wanna highlight, how you would be different… And then also introduce them to people. Obviously, we have relationships with property managers, general contractors, so we put [unintelligible [00:08:55].13] with them post-close, just to make sure that it’s going well.

It’s really important to us that our clients do well, because we care about them, but also as a business model it’s not good to have people where you set them free and they’re failing, or whatever… So we have a pretty intense check-in after the fact.

Joe Fairless: When you have intense check-in – will you elaborate on that?

Erin Spradlin: It just means we have that relationship with the property manager, so we’re always checking in with them to see what the numbers are, and then we’re checking with our clients every once, two months, in the beginning, not after that; maybe six months to a year after the first one or two months… To see how their setup has gone, if they’re having any issues, if there’s anything that we can help out with, and just to make sure too that the numbers are running, and that they are meeting the expectations of what we told them.

Joe Fairless: Okay, great. Is that all part of the initial commission that you receive, or do you have a consulting thing that covers how to furnish it, how to set it up, advertising, introducing them to the team members?

Erin Spradlin: Yeah, for our clients there’s no extra charge for that, so it would just be the straight commission. In Denver typically it’s 2.8%, and then in Colorado Springs it’s 3%. But from our clients, that’s all they pay. For people that aren’t our clients, we do charge an hourly consulting fee.

Joe Fairless: Let’s talk about your Airbnbs. What do you have?

Erin Spradlin: We had two in Denver that we’ve actually converted to medium-term rentals, because Denver’s laws changed, so we didn’t wanna be outside the law. We have converted them to furnished medium-term rentals, which means 30 days or more; but they’re still furnished. Typically, the types of people we’re going after are corporate professionals, traveling nurses, people that have gotten divorced and that are kind of figuring out their situation, or are in the middle of the divorce, people that have moved here… That’s what our situation looks like in Denver.

And in Colorado Springs we just have a straight duplex that is about a mile from downtown, and people do Airbnb there, because again, it’s legal in Colorado Springs, whereas here it’s not. So I say Airbnb broadly, but it’s actually all the short-term rental markets, whether that’s VRBO, or Booking.com, or HomeAway – that falls under that – [unintelligible [00:11:07].19] Colorado Springs, and then obviously in Denver the law is a little bit different.

Joe Fairless: Okay, so you don’t help clients get short-term rentals in Denver, you help them get medium-term rentals in Denver.

Erin Spradlin: Well, you can do short-term rentals, and we definitely do help people do short-term rentals in Denver, but they have to live in that house.

Joe Fairless: Oh, okay.

Erin Spradlin: So it can be a room in the house, it can be a basement in the house, it can be a mother in law suite. The rule here though is that it has to be where you take your mail. So we help people with that kind of configuration, and again, how to do it legally. I would say probably 50% of our investor clients in Denver do Airbnb, and they do it in the house where they take mail. Whereas Colorado Springs, which is also a big part of our investor pool, they don’t have to live there. It can just be a straight investment, and then you bring in a property manager obviously, because you can’t do short-term rentals very effectively long-distance, unless you have a property manager on it.

Joe Fairless: Let’s talk about the last deal in Denver that you found for a client. What’s the purchase price and what’s the income-producing potential for it?

Erin Spradlin: Sure. Right now we had someone buy a four-bedroom house in Arvada, Colorado. That’s a city outside of Denver. They are doing it in their basement. The purchase price of that house was 425k, and for their first month it paid $1,600. They are doing a bedroom downstairs; there’s another bedroom downstairs, but that bedroom they’re using as an office and a kitchen space, so… It’s not a true kitchen, but it has a microwave, a mini-fridge, whatnot. So they pulled in $1,600.

I don’t think that they were overly aggressive; I think they could make more, but they kept their prices lower because it was their first month, and then also because they were just kind of trying to figure out what they were doing.

Joe Fairless: Okay. $1,600 a month?

Erin Spradlin: Yup.

Joe Fairless: Okay. Which would probably not cover the mortgage, depending on how much they’d put down, I guess, but… It’d knock out a  chunk of it, right?

Erin Spradlin: Yes, definitely. And we try to be clear with people about that; depending on where you’re at, what you’re doing, sometimes it can cover the mortgage. A lot of times it won’t. But it will make the payment a lot more comfortable.

Joe Fairless: Oh yeah, absolutely. The background of people who do this, your recent clients, maybe your last three clients who have closed on a house… Obviously, without disclosing who they are, but just tell us a little bit more about their background, and their age, and maybe their life-stage, that sort of thing.

Erin Spradlin: That’s also a good question. I think in general they tend to be first-time homebuyers, or a little bit younger. By younger I mean like 45, or 40, or younger. But I think that is because – honestly, a lot of that profile is more interested in Airbnb, and has had more exposure to it. Sometimes with an older clientele it’s hard to get them to have buy-in on that, or they’re new to it… And it’s interesting, because I think that seniors actually are the fastest-growing demographic for Airbnb, but they tend to do a room in their house, or  a house that they already own. They’re not looking to purchase a house and do that.

So typically, our clients tend to be in big life stages – they’ve just gotten married, or they’re just having a baby, or they’re just purchasing that first house, and then they’re open to doing something to cut down their mortgage… And usually, they’ve heard of us, because they’ve done some research online, or they’re hearing about it through Bigger Pockets, and/or they’ve had that experience where they’ve gone and stayed at an Airbnb [unintelligible [00:14:33].11] and then thought to themselves, “Oh, maybe I should try and do this.”

Joe Fairless: What are some misconceptions your clients have when they initially start working with you and they’re asking questions about the process?

Erin Spradlin: Two things. I think the first – sometimes people think it’s easy money, or free money… And it’s like, it’s good money, but it’s neither easy, nor free.

Joe Fairless: [laughs]

Erin Spradlin: I think they should have that expectation. If you’re doing it in your house, you are going to be doing cleaning, sometimes you’re gonna be fighting with your spouse about the furnishing, and things like that… So I always try to knock that down immediately, like “Expect this to be sort of a second job, and also expect to think about it as a business.” If you really wanna [unintelligible [00:15:15].24] don’t think about it as a hobby… And honestly, that’s true for any second business, or a business that you own – not to think of it as a hobby, but to think of it seriously, and run your numbers, and have your sheets, and everything. That’s part of it.

And I would say the other thing is getting them over the hump of what you can make. Sometimes they’re locked in on the long-term rental numbers, and they have a hard time getting over “This is what you can do short-term” and “These are the nightly rates, and this is what’s happening in your neighborhood.” So I feel like there’s an education piece as far as getting that into their head that this is actually what the numbers are… Because they’re looking at long-term numbers, or likely, if they’ve decided to go into investing, they have a family member that did it before them, and that family member is saying “No, you don’t want a two-bedroom. I’m cash-flowing $100”, or whatever. So just getting them to come along on that.

Joe Fairless: Wouldn’t the short-term numbers nine times out of ten be more favorable than the long-term renter numbers?

Erin Spradlin: Yeah, 100%. Usually what we see is about 150% to 200%, if you’re doing it full-time. So definitely not that example that I told you about with the $1,600. If you’re a full-time investor, usually we say 1,5x to 2x. We try to back that up obviously with neighborhoods; unless you’ve made a pretty bad decision, usually I think the short-term rental numbers are better. But there are additional costs you have to take into account though. Now you’re paying the utilities, the [unintelligible [00:16:41].20] in the beginning to furnish the place… Usually, your insurance is at 1,5x higher, because even though Airbnb promises insurance, we usually like our clients to have an additional insurance product on it.

So there are other expenses, and I would say in the beginning that can be a little bit more expensive, but long-term your monthly should definitely be better.

Joe Fairless: When you do those follow-ups with your clients, what’s one thing that someone’s complained about, or they didn’t take into account initially as much as they should have?

Erin Spradlin: Setup, honestly. I think that’s always an issue. That’s where we ran into problems, and it’s definitely where we see clients run into problems. There’s just a lot of decisions that have to be made on the furnishing, and how long that takes. I think there’s different philosophies on that, as far as whether or not you wanna go through a Craigslist, or Facebook Market, to acquire cheaper furniture, versus just going to IKEA. I think you see people maybe stretch out a timeline longer than they should based off of that, or you see business partners and/or couples getting in fights over how they think they should do it.

I think that part of it, and I also think property management. Sometimes you have people that have different ideas as far as how much the property manager should be involved, how much they should be involved… Those are some of the sticking points that come up a lot.

Joe Fairless: What are the fees that are typical for a property management company, should they be involved to the greatest extent that they could be involved?

Erin Spradlin: Usually, we see 17% to 25%. I would say 20% seems to be the average where we’re at, though those people are pretty intense. For our properties, the property manager that we use charges 18%, and we are really no part of it. We’re pretty hands-off. They provide us with a monthly report, and that’s it.

Joe Fairless: And that’s of the collected income?

Erin Spradlin: Yup.

Joe Fairless: Okay. So what are the responsibilities that they undertake, in your example, where they collect 18%?

Erin Spradlin: They are handling all the communication, which I think the communication on a short-term rental is a lot more intense. People have a lot of questions…

Joe Fairless: Yeah…

Erin Spradlin: You’re saying “Yeah…”

Joe Fairless: Because I’ve rented from one – my wife and I have – and I know she asks a lot of questions, so… I wouldn’t wanna be on the receiving end.

Erin Spradlin: [laughs] Well, there’s this idea — I mean it’s good; it’s why people like it and why it got started, but they wanna know the coolest places to go in town, where do you like to go get your beers, or what’s something that’s off the beaten path, that’s not just a touristy thing to do. I think there’s ways to limit those questions by building out your Airbnb profile correctly, but I think there’s just a lot of communication that goes on… So I think your property managers really dealing with all of that – cleaning, obviously is a  huge issue… If you have a long-term rental, you’re not worried about these things. But if you have a short-term rental, you’re changing out and doing a clean every single time someone stays… It’s honestly  a huge complaint that we hear about from the guest side – people always want it to be really clean, and they don’t wanna see a rogue hair somewhere, something gross… So I think your property manager has to put in place a really good team, and make sure that that’s done.

Those seem to be the stressors, and then again, dealing with just any kind of issue that happens, that would happen with a long-term property as well – your short-term rental management has to take care of it… If there’s a flood, or a backed-up toilet, or whatever. They’re dealing with that piece, so the normal long-term rental piece, but then on top of it the communication and the cleaning.

Joe Fairless: And what do you do?

Erin Spradlin: What do you mean what do I do? [laughs] I sit back…

Joe Fairless: Right, yeah. I have three single-family homes, and I sit back, too. I just get a monthly report… Is that the extent of it for you, since you have a property management company doing all this?

Erin Spradlin: Yes, it is. And that’s how we want it. I really feel like a good property manager — I really don’t wanna hear from them that often; I wanna have a relationship where we trust each other, and if I let them make any decisions up to $500, I feel like “I trust you, that’s why I have that relationship, and I really want you to handle this.” And then if something bigger comes up, or we need to change something, or I see a drop in numbers, then maybe we’re talking. But in general, I don’t wanna be involved.

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

Erin Spradlin: Short-term rentals… [laughs] It’s definitely been our market, and I think going after cities — we’re pretty bullish on Colorado Springs, and I think the reason for that is that you see a lot of millennials come in. It’s a city that had pretty depressed housing costs, because people didn’t wanna be there. It’s sort of interesting; it was on the front range, but now it’s benefitting from the fact that Denver is so expensive, so people are flooding into that…

So I guess I would say look at cities that surround cities that are very popular, because it turns out that the cities are probably gonna get expensive, and you’re gonna benefit from that overflow. And again, if you can find a place that will allow for short-term rentals, that is sort of a destination, I think you’re gonna do pretty well that way.

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

Erin Spradlin: I am.

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

Break: [00:22:05].22] to [00:22:45].15]

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

Erin Spradlin: Long Distance Investing, by David Green.

Joe Fairless: If Airbnb and short-term rentals became illegal, they had the same policies in place in Colorado Springs as they do Denver, what would you do with your business?

Erin Spradlin: I would try to keep our business model similar, but I would tell people to move into medium-term rentals, like they’ve done in Denver. I think it’s been a really positive experience for us. As people tend to pay more, they’re really responsible, and a lot of times they convert into long-term renters anyways, because they get into this situation – they think they’re gonna be there for three months, and just because of life circumstances they end up being a 6-month or a year-long tenant, and it just ends up being a good relationship for everyone. And I honestly think you could just build a business model around those people, without the short or the long-term on it.

Joe Fairless: Best ever deal you’ve done?

Erin Spradlin: Definitely my place in Colorado Springs. The duplex that we have down there is cash-flowing quite well. It’s a duplex, and then again, I just think Colorado Springs is a hot place, where the prices are increasing, and they have a lot going on down there.

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

Erin Spradlin: Buying in an HOA. No doubt. I know since then I’ve read about people not buying in condos, and that stuff has been true for us. We had a really good investment that was cash-flowing quite well, and then we were gonna get hit with a huge special assessment, and the HOA was just causing a lot of issues… So I don’t think we would repeat that.

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

Erin Spradlin: We have something called [unintelligible [00:24:17].09] so every single commission we do, we give 2.8% back into a charity of our client’s choosing. That’s one way I think we like to keep it local… And then also we do a lot of free education, because like I said before, Airbnb really affected and changed our lives, let us quit our jobs, so it’s exciting to talk to other people and help other people get in that position as well.

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

Erin Spradlin: They can find us on jamescarlsonrealestate.com, that is our website. They can also find us on Bigger Pockets; I have a dedicated blog there, under Erin Spradlin, and then my husband (who is my business partner) also has a profile, and that’s James Carlson.

Joe Fairless: Erin, thank you for being on the show, talking about your approach to short and medium-term rentals, and talking about some misconceptions that are in place with people who are just getting started… And then also some challenges for furnishings, property management, and solutions to those challenges.

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

Erin Spradlin: Yeah, thank you so much. Have a great day.

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JF1735: Going From Active Investor To A More Passive, Triple Net Lease Strategy with Alan Fruitman

Alan helps his clients own properties and lease them as triple net leases to commercial tenants. His clients are able to purchase properties nationwide through Alan, which his team personally vets before bringing them to his clients. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“You might get a little higher cap rate because its a strong B tenant and not an A, but you made up for it with the security that the incredible location will bring to you” – Alan Fruitman

 

Alan Fruitman Real Estate Background:

  • Owner of 1031tax.com and author of “The NNN Triple Net Property Book”
  • Has helped investors purchase more than $1 Billion of single tenant, triple net leased investments
  • Based in Denver, CO
  • Say hi to him at https://1031tax.com
  • Best Ever Book: Two Page Marketing Plan

 


If you’re a passive investor wanting to learn more about questions to ask sponsors in order to qualify the opportunities, sponsors, and the markets opportunities are in, visit BestEverPassiveInvestor.com.

We created this site just for passive investors to have a free resource providing the questions to ask and things to think through. BestEverPassiveInvestor.com


TRANSCRIPTION

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

Alan Fruitman: Excellent, thank you. Nice to be with you this morning.

Joe Fairless: Yeah, nice to have you on the show. A little bit about Alan – he is the owner of 1031tax.com, and author of The Triple Net Property book. He’s helped investors purchase more than one billion dollars of single-tenant triple net lease investments. Headquartered in Denver, Colorado. With that being said, Alan, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Alan Fruitman: Thank you. My focus is very small. I help a target audience of investors looking for passive income, and the type of properties we sell are single-tenant, triple net lease properties. These properties range from pharmacies, Walgreens or CVS, restaurants, McDonald’s, Taco Bell, Chipotle, dollar stores, auto parts… Lots of the same retailers you see when you drive down the street – those are the properties my clients purchase.

Joe Fairless: I mentioned in the first line of your bio that you’re the owner of 1031tax.com… I’m gonna guess – and then please elaborate more – that you work with a lot of investors who used to be active, made some money, looking to 1031 that money into something that is passive, and therefore you connect them with a triple net lease property. Is that basically the business model?

Alan Fruitman: That is the model. Many of my clients come out of apartment buildings or shopping centers, office buildings, even land… They do a 1031 exchange into something much easier to manage; long-term leases with no obligations for the landlord.

Joe Fairless: Do you ever work with any of your investors who say “Alan, I’ve got some money, I’m an active investor. I do want to be passive, but I’d like to still get some of the financial benefits of a value-add deal.” So is it possible to get the best of both worlds? A passive investment via a triple net, while also incorporating value-add?

Alan Fruitman: It’s not, no. The triple net properties – there’s really no value-add. It’s considered mailbox money. You buy the property, you have a long-term lease, long-term meaning 10-20 years on the primary term. The tenant will have multiple renewal options, going 20+ years for options of renewal. There’s really no value-add. The concept and the focus is passive. Value-add is a great component of real estate, it’s just different from what this type of property entails.

Joe Fairless: Are you a broker?

Alan Fruitman: I am  a broker, and my clients purchase these triple net properties nation-wide.

Joe Fairless: So how do you find the triple net lease properties to match up with your clients?

Alan Fruitman: One thing that’s unique about my model – and there’s really nobody in the country that does it the same way that I do… What’s unique is we only represent buyers on this national level, and the properties come to me from owners, developers and brokers all over the country. My team and I receive usually more than 200 properties every day, and we sift through these properties and pick out the best of the best of the best, and we send an e-mail to our investors of these properties every day; Monday through Friday, my clients receive an e-mail of new properties that come to market.

Joe Fairless: And the new properties that you share – are those the ones that have already been filtered out, or have those passed the filtration process? Or do you share all 200 that you receive every day.

Alan Fruitman: No, they are filtered of 1) location, 2) strength of tenants, and 3) length of lease. The properties start around a million dollars on the low side, and go much higher than there, but our sweet spot is the 1 to 10 million market points.

Joe Fairless: Okay. And what did you say – location, strength of tenants, and what was the third?

Alan Fruitman: Number three is length of lease.

Joe Fairless: Length of lease.

Alan Fruitman: We try to focus on longer-term lease properties. It’s a different marketplace for the shorter-term lease properties. When you want a passive investment, the longer horizon is usually more appealing to our clients.

Joe Fairless: Do you prioritize it in that order, 1-2-3?

Alan Fruitman: Yes. It all comes back to real estate fundamentals. Location is number one. We want a location where the current tenant will thrive, but we also want a marketplace where when the tenant eventually vacates, it’s highly likely and easily re-tenanted. And specifically, we look for retail corridors where the tenants and the property is surrounded by many other prominent retailers. We want that stretch where you’re surrounded by Walmart, and Kohl’s and Home Depot, and Lowe’s, and McDonalds, and Chase Bank, and all the other national retailers. That prominent corridor is what we look for.

Other attributes would be near university, a big hospital, a highway exit… Permanent fixtures that aren’t trendy, that will pass the test of time.

Joe Fairless: Okay. And then what about the second thing, strength of tenants? How do you qualify that?

Alan Fruitman: Well, after location, the second most important feature would be strength of tenant. If it’s a corporation, we wanna make sure it’s a strong, profitable type of company, and an industry that will function in the long-term.

If it’s an industry we think that the internet will replace, we don’t show those properties. If it’s a company we don’t like their standing, we don’t show those properties. If it’s a franchisee, we wanna make sure it’s a quality franchisee – many locations, and stable within their financials.

Joe Fairless: What are some ways you quantify that qualification process with strength of tenants?

Alan Fruitman: Many of the companies are publicly-traded, so we look at their earnings ratios, their stock performance, their 52-week trends. That’s number one. If it’s a franchise, over 26 years I’ve sold so many properties that I recognize the franchisees from other properties my clients have purchased. I stay in close contact with my clients through the years. If there’s a problem, they usually call me right away, so I know which tenants have had a track record of stability and which ones have not.

I’m not perfect, so when there’s a new tenant, there’s a learning curve that has to happen… But because I’ve sold so many properties over such a long duration of time, I can usually weed out the problem properties well in advance of my clients ever seeing them.

Joe Fairless: You said most are publicly traded companies… What are a couple examples — or maybe tell us a story of a deal that was not a publicly-traded company, but still passed your test.

Alan Fruitman: Many years ago I sold a Burger King in Ohio, and when the lease came due, the tenant did not renew… So my client called me and said “Alan, what do we do? Burger King is not renewing.” I connected the client with a leasing broker in the local market, and because the location was so strong, within less than one month we had a bidding war between Chipotle and Starbucks to take over that soon-to-be-vacant Burger King. And the end result was Starbucks winning the bidding war, and we went from a franchised Burger King to a corporate Starbucks, which has certainly a higher credit rating, and the rents went up significantly, too.

That’s why our first criteria is location. And if our current tenant were to vacate, we wanna make sure the future is greater than the present.

Joe Fairless: And then length of lease… Do you have any investors who say “Alan, I do want something that is passive, but I see this area is growing, and I think the shortest lease possible would be best, because then we can get them real good on the increase once the area comes to where I think it will be.”

Alan Fruitman: That’s a great question… There is a segment of the market, and a very valid and valuable segment of the market that looks for that type of investment. It’s outside of my scope. We focus on the longer-term lease properties, but that’s a great angle within the triple net property world that investors purchase. It’s just outside of my scope. I have a very tight vision for what I sell. There’s an incredible demand. There’s lots of opportunities for these long-term lease properties. This is typically what the buyers seek, which is why it’s my focus. But the angle you described is a great angle, and it’s just outside of the box of what I focus on.

To take that thought one step further, my clients sometimes call me when their lease becomes short, and they ask me what to do, and 19 times out of 20 I’ll tell them “Don’t sell. Because if you sell, somebody else will pick up on that opportunity, that great location, the long-term vision that you have, and they’ll take your upside.” So when the lease gets short, if the location is excellent, I advise my clients not to sell, and not give somebody else that opportunity that you just asked about.

Joe Fairless: How do you define a longer-term lease?

Alan Fruitman: In the triple net lease world, leases usually are between 10 and 25 years, and that’ll be the primary lease term before the option periods.

Joe Fairless: Tell us a story of a deal that was a triple net, but did not work out.

Alan Fruitman: There’s probably many. You probably don’t believe me when I tell you I don’t have an example of any of my clients that it happened to… I’ll tell you another story. The first property I ever sold was a Denny’s in Colorado. It was near the outlet stores of Interstate 70. Very prominent location, but I guess it didn’t work out. The tenant  was a small franchisee; there was a personal guarantee associated with the lease.

The tenant closed their shop, because the franchisee had (we’ll say) other problems, without getting into a long story. The personal guarantee held up. The client received all of their rent. The client worked a buyout with the tenant, and was given a significant amount of money as that lease ended… And the property is now turned into a Chipotle and a Which Wich sandwich shop. It’s probably tripled in value over this long duration of time.

I don’t have an example of difficult endings… One thing I would share is if you don’t have a great location, when your tenant vacates, that’s where you could get in trouble. If you know that McDonald’s, or Burger King, or Dollar General, or any tenant in a rural area, the current tenant might thrive because they might dominate a small market which fits their model, but that’s the current use. The problem arises when they vacate – what do you do with that vacant building in a very small marketplace? That’s where clients could get in trouble.

Joe Fairless: Based on your experience, what type of returns should an investor expect on a triple net?

Alan Fruitman: The conservative McDonald’s, Chick-fil-A type investment with a new 20-year triple net lease will be around a 4% cap. The franchise restaurants would be somewhere in the mid-fives, or approaching 6% cap rate, and everything in between. So 4% to 6% is the range for most newer, longer-leased, triple net properties.

Joe Fairless: Okay. And what’s an example of something that is outside of that 4% to 6% range?

Alan Fruitman: As the location gets more inferior — again, we have these three criteria… We have location, strength of tenant, length of lease. When one or some combination of those three are not optimal, the cap rate rises. When all three are optimal, the cap rate is low, and when there’s a fine balance between those three, you’re in the mid range.

If your location is not very strong, the cap rate rises. If it’s a weaker tenant, the cap rate rises. A shorter lease, the cap rate rises, too. So when you get all three of those criteria that are not optimal, that’s when you’d have the highest of cap rates.

Joe Fairless: What’s the highest cap rate you can think of on a deal you’ve done? Triple net deal.

Alan Fruitman: Again, I only focus on the quality properties, so not much higher than a 7% cap. Maybe an 8% cap, but that was a long time ago. As the market has gotten better and better each year, as we’ve gotten further away from the recessionary times of a decade ago, cap rates on everything, on all types of real estate were higher. But in this marketplace, not much more than  a 6% cap, in the last several years.

Joe Fairless: Okay, so over the last several years what was the property – can you just tell us the property that was the highest cap rate, and just describe it a little bit?

Alan Fruitman: Without researching, the first one that comes to mind was a Zaxby’s franchise guaranteed, kind of a B- location, and that was about a year ago. The cap rate was around 6.5%.

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

Alan Fruitman: My clients always ask me — on my e-mail list there’s around 200 properties, and my clients frequently say “Alan, what’s the best property on your list?” And my answer is always the same – it’s the one in the best location. I’d rather have a franchised Burger King in an excellent location than a corporate McDonald’s in an average location. So the answer to your question is the best property is the one in the best location.

Joe Fairless: And you mentioned earlier how you’re defining the best location – that it will thrive and be easily re-tenanted, and it’s in a retail corridor… What are some other quantifiable things we could look at to say “Yup, this property out of the other 199 is head and shoulders in the best location”?

Alan Fruitman: Well, other quantifiable measures would be traffic counts, demographic, population counts, income levels… Those are other quantifiable. You can also look at market cap rate for tenants. Many of these tenants — McDonald’s is a… I don’t know the number, but it’s a well over 50 billion dollar company. And Chase Bank… You can look at Standard & Poor’s credit ratings; that’s another quantifiable measurement of worthiness, credit-wise.

Joe Fairless: And when you take a look at the location from a  traffic count, retail corridor, population, income levels, market cap rate, how do you determine which of those are more important than others?

Alan Fruitman: That’s a great question. There’s not one way to answer your question. There’s many measurements. Let’s look at demographics. You can have several hundred thousand people on a five-mile radius, but if you’re half a block apart, it’s a completely different area. If you’re on the signalized traffic corner or if you’re on a side street a half block away, the value of the property might be one-tenth as valuable.

So there’s an exception to every rule, and you have to take location, demographics, retail corridors, strength of tenant – you take all these attributes and figure out what makes each property unique. And there’s no two equal properties. Sometimes you have to make value judgments of which criteria to make more valuable than the other. Do you look at being on the corner more important than being sandwiched between on an outparcel to a Home Depot or Safeway or Walmart anchored center?

There’s so many great choices. Sometimes you have to make a value judgment of which ones you think will be the greatest long-term. Sometimes you say “I’ll take a  good tenant, not a great tenant, but a home run A+ location.” That might be a value judgment. And maybe you get a little higher cap rate because it’s a strong B tenant, but not an A, but you made up for it with the security that incredible location will bring to you.

Joe Fairless: Very helpful, thank you for that additional perspective on how to determine how to think about assessing opportunities, and in particular locations. We’re gonna do a lightning round now. Are you ready for the best ever lightning round?

Alan Fruitman: I’m ready.

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

Break: [00:19:31].17] to [00:20:23].16]

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

Alan Fruitman: I’ve read a book — I think it was called The Two Page Marketing Plan. I read it over the holidays… And it really helped me dig into what I’m doing, how I’m doing and how I can improve it.

Joe Fairless: Best ever deal you’ve been a part of?

Alan Fruitman: I don’t know the answer to that question. I close 30-50 properties every year. The one that my client loved the most… I’m blessed with so many clients that buy so many great properties. When my client is thrilled at the end of the deal, that’s the best deal.

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

Alan Fruitman: Good question. I’m not sure off the top of my head the best answer to your question… I think if I had to make sure I do consistently one thing in every deal it’s ask questions and just let my clients talk, and answer their questions, and let them ramble and tell me what’s important to them, and just listen, listen, listen, before I advise.

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

Alan Fruitman: My mom has run a Thanksgiving charity project since I was probably 8 years old. I was born and raised in Florida, I live in Colorado now, and for 40+ years I’ve been blessed to be part of this Thanksgiving charity project that has zero financial overhead, and we’ve fed many thousands of families, and continue to do so.

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

Alan Fruitman: Two ways. Number one, my website, 1031tax.com. And on my website you can sign up for my property list. That’s only for investors, not for brokers. And number two, I wrote The Triple Net Property book, and if you’re an investor looking to buy triple net property, you can call me at 800-454-0015, or contact me through my website and I’ll mail you a hard copy of my book.

Joe Fairless: Alan, thank you so much for being on the show, talking about triple net, and the reason why you are laser-focused on helping your clients get triple net properties, and how to evaluate triple net properties, the type of returns to expect, 4%-6% generally, and in terms of how to assess the opportunity – 1) location, 2) strength of tenant, and 3) length of lease. Then you went into detail for how to think about each of those three categories, and in particular location.

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

Alan Fruitman: Thank you, Joe.

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JF1719: Working With Commercial Real Estate Cleaning Companies #SituationSaturday with Edgar Aguilar

Edgar took over a struggling janitorial company at the age of 23 in 2008. He took that struggling business and grew it into a successful commercial and construction cleaning company, helping investors clean up their properties after construction. It wasn’t always easy, Edgar worked two jobs for some time. He’s had success, but some of the business slowed for a while, Edgar did not given up, he’s working harder than ever to get his business to levels it has never reached. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“I didn’t know how I would pay the bills, but I knew that if I kept learning, and putting myself out there, I would make it” – Edgar Aguilar

 

Edgar Aguilar Real Estate Background:

  • Owner of Legacy Construction Cleaning
  • Has been working with investors and construction crews, cleaning facilities for over 20 years
  • Based in Denver, CO
  • Say hi to him at https://www.legacyconstructioncleaning.com/

 


If you’re a passive investor wanting to learn more about questions to ask sponsors in order to qualify the opportunities, sponsors, and the markets opportunities are in, visit BestEverPassiveInvestor.com.

We created this site just for passive investors to have a free resource providing the questions to ask and things to think through. BestEverPassiveInvestor.com


TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where 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. Here’s the situation – you want to learn about the different aspects of investing in real estate, and what are those aspects that you probably don’t know or probably haven’t studied a whole lot is the commercial cleaning aspect of the business. Working with companies that come in and actually do the cleaning.

We’re gonna be talking to a Best Ever guest who is the owner of Legacy Construction Cleaning, and has been working with investors and construction crews, cleaning facilities for over 20 years. First off, how are you doing, Edgar Aguilar?

Edgar Aguilar: I am great, Joe! Thank you for having me on.

Joe Fairless: Yeah, my pleasure. Looking forward to our conversation. I guess what would be helpful is if you wouldn’t mind just telling us a little bit more about your background and your company’s current focus.

Edgar Aguilar: Yeah, I would love to, Joe. Thank you. Well, initially we took over the company about ten years ago. In 2008, in the best market ever, we took over a struggling janitorial company. I say that lightly, because 2008 was crazy… Well, little did I know at that point that we were going through one of the hardest recessions ever.

Joe Fairless: Sure.

Edgar Aguilar: So here I am, 23 years old, and my [unintelligible [00:02:32].16] had just passed away from lung cancer; I had just graduated from business management school, with the passion of one day owning my own business of something. Well, after he passed away, nobody really wanted to take over the company… So I put my hand up and I said “I’ll take it over”, thinking that I knew everything about business because I had just graduated business school. Well, that’s a joke, because as we all know, that’s not the way it goes.

At that point I was also working for corporate America, and I was running the job part-time; I continued doing that for the next four years. Going to corporate America, having an 8-to-5 job, and then going to go clean afterwards (or before), and doing that year after year… Well, at 25 I made the most money I had ever made, doing both gigs… And at that point I thought I was on top of the world.

Joe Fairless: How much were you making?

Edgar Aguilar: I made six figures. Woo-hoo! With my corporate job and the business. And at 25 I believed that I was pretty unstoppable, making more money than I had ever made, more money than my parents had ever made.

Joe Fairless: That’s a ton of money for anyone, but a 25-year-old, six figures – yes, please.

Edgar Aguilar: [laughs] That’s the way I felt, and nobody could tell me anything. Well, we fast-forward three years; now I’m 28 and the income kind of dropped, and we’re not really gaining no momentum on the business, and corporate America was — it was a very stressful situation, just going in to a job that you don’t like, doing something that you don’t wanna do, just for a pay check week to week. And I’m sure a lot of listeners can relate to this, when you’re stuck at a job just for a pay check, and you’re not happy about what you’re doing.

Luckily for me, I happened to put “personal development” one day on YouTube, and a course of Napoleon Hill came up. He was talking about personal development, about your goals, about a mastermind group… And that completely revolutionized the way I started thinking from that point going forward. I was like, “Man, who is this guy?! What is this whole thing about personal development? The more you learn, the more you earn… What is this about personal development?” It really intrigued me, so I started taking notes. I filled up a whole notebook of what Napoleon Hill was talking about.

Then at 29 I said “This is it with corporate America. I can no longer do this.” Fast-forward to when I was 30, actually that same year at 30 I put in my [unintelligible [00:05:40].12] and I jumped full-time into business ownership. Scariest thing I’ve ever done. It was the scariest thing, and the happiest feeling I had ever felt.

At this point I have three kids, I don’t know how I’m gonna be paying for health insurance, I don’t know how I’m gonna be paying the bills, but I knew that if I kept learning and just putting myself out there, I would make it. Well, six months after I made that transition, I landed a huge janitorial account, where I was bringing in $2,500/month. At that point it was enough money to pay all my bills and to just continue with the business. I knew that was the guiding light, because at that point it was the same amount of income that my corporate job was paying.

So I just had to work my butt off every day, for the next few years. I worked, I cleaned… Our focus was construction cleaning, so we would go in the morning, clean a custom-built home, and then at night I would go do my janitorial gig. That happened now for the next two years. I did that every day, worked from 7 AM to midnight, go home sleep for a few hours, get up and do it again.

I started getting a little bit of momentum, so I got one employee, two employees, three employees, I started putting them in teams, putting them in different offices… Now we have a team of 12, we have 30 different office buildings that we clean, and we have about 20 different builders that we work with… Anywhere from custom-built homes, remodels, pop-ups, apartment buildings, restaurants… We’ve pretty much done every type of construction cleaning that you could imagine. But I really put a lot of the emphasis on my personal development, because those two years that I was out there cleaning from 7 AM to 12 midnight, I had audiobooks just playing. While I was cleaning toilets, I was learning. While I was sweeping and mopping and vacuuming, I was learning. I put over 50 different books, from John Maxwell, Darren Hardy, Napoleon Hill, into my inner circle. Once I started doing that, I really saw my income jump. In the last three years we have been able to double the business each year, year-over-year.

Joe Fairless: Wow. That’s impressive, especially that you took a company and have grown it to this extent, and have scaled it… And clearly, the focus on personal development is at the forefront and is the foundation of everything, plus you actually acting on the personal development tips that these individuals give you. You need to actually do things that people suggest you do (first is just listening to them) and you clearly have done them…

Let’s get into some details about the business, because the audience is real estate investors, and it’d be good to hear from the perspective of someone who we would hire, how you price your jobs, things to consider as a real estate investor, knowing what you know, when we’re hiring a company like yours… So what can you tell us about some of your business specifics?

Edgar Aguilar: Great question. Our pricing is normally on a per square basis, and I’m sure that a lot of real estate investors, flippers like to know solid prices on it; what will happen, in my experience, is when I go in to give a bid for a new builder, I am normally competing with the smaller mom and pop shops. That means if we do it right, there’s gonna be three separate bids, or four different bids from different companies.

Normally, you have your lowest two, and then your higher two. Normally, your lower two cleaning estimates are gonna come from people who not only own the business, but are actually gonna be on-site, cleaning the job site… Which is a double-edged sword. It’s good on one hand, because you’re gonna get the lowest price, but on the other hand, you have the actual owner in there cleaning, and they’re paying themselves a very minimal hourly fee. And that’s normally how you could get to the lower price.

Joe Fairless: Why is that a bad thing, if you hire someone who is the owner of the company and they’re paying  themselves a lower fee?

Edgar Aguilar: It’s bad because you will never see any growth with that company. It was like what I was doing five years ago, and I had a very small mindset.

Joe Fairless: I’m thinking about it from a real estate investor standpoint, not your perspective. So if I’m looking at bids and one of the lower bids is with a group where the owner is gonna be cleaning, I don’t care what they pay themselves, as long as I’m getting the lower bid and a good service.

Edgar Aguilar: Very good, and a lot of people like that. A lot of people like to see the owner actually out there cleaning. The only problem with that is how long can they do that for? If we’re looking at the long-term game and you’re doing multiple flips, they will be good for one season. But if you’re doing multiple projects throughout the years, they might not be able to sustain that type of job for a long period of growth.

Joe Fairless: Okay.

Edgar Aguilar: For example, for me – I have all employees, I’ve got them under insurance, workmen’s comp, paying my taxes… So we are a total legitimate company, and sometimes when we deal with the smaller companies, especially the owners and the lower estimates, they’re not insured, they’re not bonded, they don’t have workmen’s comp, they don’t have standards, and they don’t have any long-term growth. So if you are in the game long-term, it’s better to just hook up with a cleaning company that has been around for a while and that is doing everything right by the books. Unfortunately, you’re gonna pay a little bit more with that.

So it’s a double-edged sword. You could go on one side with that lower fee person; the owner is doing it… But how long can they sustain that? Let’s say you have three flips, or four flips, or multiple projects, or you have a 27-unit apartment building – they could only do so much. And if you have an apartment building, 27 units or 30 units, and then you have two other houses, and then you have a commercial space that all need to be cleaned within the same week, a one-man crew normally can’t handle something like that. You need to have multiple teams. Because of that, you pay a little bit of a premium price.

Joe Fairless: Okay, it makes sense.

Edgar Aguilar: Yeah. So that would be the biggest thing.

Joe Fairless: And you said you charge on a per square foot basis – is that typical for the industry?

Edgar Aguilar: Yes. Or some people do T&M.

Joe Fairless: T&M… What’s that?

Edgar Aguilar: Time and material.

Joe Fairless: Oh, got it. Okay. So per square foot basis – what’s the range that price will be from a per square foot basis?

Edgar Aguilar: Now, I am in the Denver market area, so that means that there’s a lot of construction going on around here. People are flocking into our state and into the Denver Metro Area, so the competition is pretty high. We are about 40 cents/square foot, up to 60 cents/square foot for residential. That’s kind of average. You can find that throughout our industry when it comes to construction cleaning.

Joe Fairless: Okay.

Edgar Aguilar: So if you’re gonna do a flip, 1,000 square feet, at 40 cents/square foot you’re looking at $400. Pretty typical.

Joe Fairless: Cool.

Edgar Aguilar: Now, if you’re building a restaurant, because it’s a lot more detailed work, they’re gonna be putting in a lot more elbow grease; they’re gonna have to clean the walls, the stainless steel – now our pricing changes closer to $1/square foot. If it’s a 5,000 square foot Chick-fil-A, or just any type of restaurant, it’s normally closer to $1/square foot. Now, that normally does also include all the window paints with that $1/square foot, and it also normally includes two cleanings. One, the pre-construction cleaning, just to kind of get it up to the CO standards, right before they have the health inspection, and then the final clean right before they open.

Joe Fairless: Got it. And the 40 to 60 cents/square foot for residential construction cleaning – you’re talking a fix and flip house, anyone who does ground-up development… Those are the two primary residential construction cleanings, right?

Edgar Aguilar: Right.

Joe Fairless: Okay. 40 to 60 cents. What would influence it being 40 cents, versus 60 cents?

Edgar Aguilar: Normally, anything over 5,000 square feet would be on the 60 cent mark, because you’re gonna be there a lot longer; there’s a lot more detail-oriented work, and it’s just a bigger space, more to cover. Normally, the bigger the project is (over 5,000 square feet) that’s when you’ll see a 50 or 60 cents charge for that project. It’s just a lot more detail work.

Joe Fairless: So I would think that the bigger the project, the cheaper it would be, because then you’re in one place longer, and you don’t have to travel from job to job, therefore there would be economies of scale. So if someone has mentioned that to you, what’s your response to that?

Edgar Aguilar: Because the bigger it is, the longer it’s gonna take, and we’re gonna have to do multiple trips. Normally, for something over 5,000 square feet I always like to tell our customers, our builders, our homeowners, our flippers – it’s gonna take 2-3 days to be on the safe side. On anything smaller than 5,000 square feet, if we take a big team, we are normally able to be in and out in a day. The problem with that is that no matter what we do, there’s always gonna be dust particles that are gonna settle on flat surfaces. So to cover yourself, especially on a 5k, 6k, 7k square feet project, you wanna be in there two days. You could probably do it in a day, but it’s gonna kill your people, so you wanna be there two to three days in order to cover all those flat surfaces… Because once you start dusting the walls and the ceilings and the ceiling fans, that dust doesn’t settle right away. It normally takes 24 hours for it to settle down.

Then one thing that I came across – sometimes homeowners, flippers, builders will go the next day and rub their hands on flat surfaces and dust will come up on their hands… And it’s not that it didn’t get cleaned, it’s just that those dust particles now are settling down, and it needs to be recleaned. So the bigger the project, the longer it’s gonna take us to clean it. And to keep it on the safe side, we wanna ensure our customer’s satisfaction, so we wanna say it’s gonna take 2-3 days, so that way we’re always coming back to clean those flat surfaces after the dust particles have settled down.

Joe Fairless: I didn’t realize it would be a 2-3 day job, so it makes more sense… Thanks for clarifying that. Put yourself in our shoes for a moment, if you would, please – a real estate investor who is considering different cleaning options, or just being educated on the cleaning process… What else should we know that we probably don’t know?

Edgar Aguilar: First you wanna meet with them. Normally, just meeting someone face-to-face will tell you a lot. As we all know, the first five seconds that you meet anybody, the first five seconds tell a lot; your first impression. If someone’s getting there and they have pads down to their needs, and they have a shirt that’s tore up, do you really want someone like that in your house or in your project, cleaning it? Even though they might be the cheapest and they are the owner of the company, do you really want that to represent your project? I would say no. You want somebody that is clean-cut, looking clean, just because that is a representation of who you’re hiring.

So I would say the first impression is meeting them. The second would be getting on their website and looking at their reviews. Google their website, Facebook, LinkedIn, just making sure that they have solid reviews on there. That’s one thing that we pride ourselves in a lot – just having great reviews. Customer service is  a must for us, but other companies don’t have that as their philosophy.

So I’d say meeting them and looking at their proposal, seeing how their proposal is structured… Is it just something on a Word document, that anybody could do? Or is it a really nice, professionally-done estimate that was done on a nice software, that they have to pay? Just because all those little things have a lot to do with the way you feel about somebody. Then at that point you can make an educated decision. They have great reviews, they have a great website, they have a great online presence. When I met them, they were clean-cut, they knew what they were talking about… I guess those few items would be able to tell you a lot from a person.

Joe Fairless: Sure. Yeah, it’s the little things that add up to a big thing, and it’s how they approach those items that is a likely indicator for how they’ll approach working with whenever you have selected them.

Edgar Aguilar: Exactly.

Joe Fairless: Edgar, thank you so much for being on the show. How can the Best Ever listeners learn more about your company?

Edgar Aguilar: Yeah, thank you. They could just go to our website, it’s legacyconstructioncleaning.com. Or I’m on LinkedIn under Edgar Aguilar, or we have a Facebook page, Legacy Construction Cleaning. Any of those ways.

Joe Fairless: Excellent. In this conversation I learned a lot of things. One is the two common ways to price out; one is on a per square foot basis, which is typical, or the other is time and material (T&M). Where you are, in Denver, 40 to 60 cents/square foot for a residential construction cleaning – that’s the fix and flippers and anyone doing ground-up development for residential – and then it increases for restaurants, because of the higher level of cleaning and more detailed level of cleaning.

Then also when we’re selecting a cleaning company, looking at online reviews, looking at the website, meeting them in person, and looking at the proposal, how it’s structured and how professional it is, because it’s likely an indicator of how professional they’ll be and how good of a quality of job they’ll do whenever you select them, or if you don’t select them.

Edgar, thanks for being on the show. I hope you have a Best Ever weekend, and we’ll talk to you again soon.

Edgar Aguilar: Likewise. Thank you so much for having me on. Have a great day.

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JF1680: Natural Entrepreneur Combines Corporate World & Love For Real Estate Investing with Dino Pierce

Dino was raised by entrepreneurs, but took a little different path at first, going to and graduating from college before entering the corporate world. Once he was there, he wanted more, and to scratch that entrepreneurial itch! He started a few small ventures, before falling in love with real estate, specifically multifamily syndications. Hear how he jumped into the multifamily syndication business, and is teaming with others to grow the business. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“You can bring a deal to a team that is already experienced, chances are they’ll do it and add you to the GP side of the deal” – Dino Pierce

 

Dino Pierce Real Estate Background:

 


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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, Dino Pierce. How are you doing, Dino?

Dino Pierce: I am doing good, thanks for having me. I’m excited, and I appreciate the opportunity.

Joe Fairless: Yeah, my pleasure, and looking forward to our conversation. A little bit about Dino – he is the CEO of Edified Equity and an active multifamily investor. In 2018 Edified Equity and partners syndicated four apartment communities consisting of 254 doors, across four markets, valued at 9.3 million dollars. Based in Denver, Colorado. With that being said, Dino, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Dino Pierce: Yes, certainly. Thanks again so much. My background – I have a little bit of a different background than most people, because I was raised by entrepreneurs. So literally it wasn’t just my mom and my dad, it was their parents, it was their brothers and sister… I almost didn’t know anyone who woke up and went to work for a company; they all woke up and ran their own business, and managed their own employees… So I didn’t realize just being in that environment that it was something unique until I graduated college, or kind of got out in a  different environment, let’s put it that way.

So I always have had an entrepreneurial spirit, and it’s almost all that I’ve ever known, from day one… I took a little bit of a different path, where I did go to college. When I talk about entrepreneurs, I’m talking about people who didn’t even go to college. They were finishing high school and going right into business. I know that’s kind of catchy and trendy today, and you hear a lot of people saying “Why are you gonna go waste this time in college? Just start now. If you’re not gonna be a surgeon, you don’t need to go to school.” And I’m taking that to the extreme… But anyway, I did go to college, and got out into the corporate world, but there was that entrepreneurial spirit that couldn’t be crushed.

So about four-and-a-half years ago, just jumping forward to real estate, by-passing all the little landscaping businesses and things that I did entrepreneurial along my path, about four-and-a-half years ago I got involved in real estate investing, when I relocated to the Denver Metro Area.

I started off – typical path, I was going direct to seller with marketing, getting distressed properties under contract, and I was taking it to a residential redeveloper, and I was either wholesaling it for a very small, quick, but heavily taxed profit, or I was saying “I’m not gonna wholesale this to you. I have the goods right here, we’re gonna partner. You’re gonna do the work, because I don’t know how to do that, but I’m gonna lend you $20,000 to $25,000, no points – this isn’t hard money; just straight interest – and we’ll settle up everything on the back-end.”

I did that for a good two years. I had a friend – still is my friend – COO for an apartment acquisition company, and he kept telling me “First of all, you have to be getting killed with taxes”, which was true, and he said “Second of all, our market is so tight…” and this was like four years ago; it’s even crazier now. But he’s like “I know it’s hard to find deals. Once you guys do a flip, you have to find another one. That’s another job for you. You have the business mindset and the wherewithall; you should really learn how to syndicate apartment communities and be on the GP side.” And I tell people all the time – I don’t think it was one of those things where I woke up and I was having a really tough day, but it was just him constantly dripping on me for those two years – “You’re getting killed with taxes. You really should learn this business. Here’s why – cashflow, tax shelter, tax deferment, profit refinance, tax-free, then big profit on the back-end…”

So I woke up one day and I was like “I should learn how to syndicate apartments.” And that’s how I got to where I have been for the past two years, with working in the multifamily only. I don’t do anything single-family, I don’t lend my private money unless it’s in my own deals, and that’s kind of fast-forward to where we are today, where I’m focusing only on multifamily.

Joe Fairless: Well, I wanna spend the majority of our time talking about what you’re currently focused on, but I am curious about the other ventures you did prior to getting into real estate. You mentioned landscaping… What else did you partake in?

Dino Pierce: It was a landscaping business; a friend and I had a trailer, we had some lawn mowers, some wheat eaters, and we had some elbow grease… We would drive around – we had a routing – and we would cut yards; this is during the summertime. I’m originally from Louisiana; we’re doing this call right now — I’m in New Orleans, Louisiana. I was on a business trip and I’m about to visit with some family… So that was number one.

I also got into personal training, which was another entrepreneurial — but everything was time for money, time for money, time for money. Even with the flipping, time for money… And I realized, especially with personal training, “Wow, it’s only me. The only way to scale this is to get many other trainers and me be the architect of the business.” And then again, you’ve got that heavily taxes, because you’re running your own business, you have your own job – you’re not in the right tax bracket.

Let me think if there’s anything else I can think of… I had some experience in the family business, which helped me learn how to run businesses, but one of the things that–

Joe Fairless: What’s the family business?

Dino Pierce: My grandfather — I’ll be quick, but it’s a great story; again, I’m from Louisiana. My grandfather went to school, to kindergarten, not even speaking English; he only spoke Cajun French. That man – his name is Nolte – literally was forced to quit school in the fifth grade to help his father put food on the table. He went on to become a self-made millionaire.

Joe Fairless: Wow.

Dino Pierce: So the family business – he started a tugboat company, he developed self-storage from the ground-up, he had single family as well as some mobile homes… He had a small motel – I think it was about 20 rooms – he owned an icehouse, a marina, a Laundromat, storage for sports fishermen that would come from New Orleans, leave their boats on the Gulf Coast, because that’s where I’m from… He did a little bit of everything. But the best thing about working for Nolte as his grandson was that I got to work the hardest and the longest, and I got to get paid the least… Because that’s what he passed on. He passed on “Nobody gave me anything. I quit school in the fifth grade and found my way. If one can do it, so can another, and I’m not gonna treat you any differently. As a matter of fact, I’m gonna be harder on you.”

So that’s the family business. And also – I didn’t mention – they owned gas stations, and things like that as well, in South Louisiana.

Joe Fairless: So the main takeaway I got from the ventures that you did – well, there are two takeaways. One, your grandfather was one heck of a person; but then two, the time for money thing – trading time for money, time for money, time for money. Landscaping business, personal training. That makes a lot of sense now, as you’re focused on syndication apartments, and the different benefits there… So let’s talk about the deals that you did last year.

When I read your bio, it said you did four apartment communities consisting of 254 doors, across four markets. First question is how did you come across the opportunities in four different markets?

Dino Pierce: Okay, so 100% transparency, still to this day – I guess it still has to do with the business mindset – I operate  a medical device business in Colorado. I have three small kids – and congratulations; I understand you are a father now…

Joe Fairless: Yup, thank you.

Dino Pierce: Yes, you’re welcome. I have three small kids, so that’s a full-time job. My oldest is nine, my youngest is three, and in addition to that, I’m on a syndication team; the keyword I’m gonna use there is “team”. So I don’t do this alone. I actually have a partner who is really good at networking with brokers, getting off-market deal flow or word of mouth from property management companies. We might be looking at something that maybe zero eyeballs are on except us, or three to five groups, but it’s definitely not something that’s going out to an entire broker’s A-list, or LoopNet.

So the deals came – they were pocket listings or off-market, from relationships that my partner had. Of those four deals, I actually don’t take credit for identifying and finding them initially.

Joe Fairless: Okay. Who’s your partner?

Dino Pierce: Three of the deals have been with the same partner, his name is Kyle. He lives right outside of Houston. And then I have done one deal with Kevin Dowling, and Pili and Jason Yarusi.

Joe Fairless: Okay.

Dino Pierce: So other than that, the other three have been with Kyle.

Joe Fairless: Very cool. Okay. And your role in these syndications it sounds like is not on the front-end, find the opportunities. I’m guessing it’s gonna be bringing some equity to the deals and bringing value to the deal that way. Is that correct?

Dino Pierce: That is 100% correct. And there’s other roles too, where we’ll underwrite behind each other, market evaluation, market research, making sure that we can all together collectively find enough data to say that “This is an emerging market.” And it might not be national news, which is good, because we wanna be there so that — and again, we don’t underwrite any of the appreciation, or maybe like a 2%, just go with the market, [unintelligible [00:11:13].07] kind of thing… But we’re not banking on the poised boom, if you wanna put it that way. The deal works even if that doesn’t happen. But if we can identify an area and be there when it does, everybody’s gonna be really happy. Because if you like the returns that we’re showing you, you’re gonna love us if we’re able to cash in on some of that appreciation as well.

But you’re right, what I did — and I’ll be upfront with you, you motivated me. I read an article, and I’ve even posted that blog on Bigger Pockets, I reposted the link to that article… You have a good article out there, and I think you recently updated it, about thought leadership. That’s exactly how I started. Because when I got involved, I learned the business of syndication, how to underwrite deals, and network, and talk to investors… But when people ask me, they say “What’s the easiest way to get my foot in the door?”, you can do one of two things – you can bring a real deal to a team that’s already experienced, and add value to them that way. Chances are they’ll do it and they’ll write you in on the general partnership side, and you’ll get started there. Or you can bring your network’s money to the table and add value that way. I think those are two of the easiest and quickest ways to get started.

That thought leadership article that you write – I just jumped in… And I started blogging, I started podcasting, I started my own closed, purely educational Facebook group; I’m not pitching deals or anything there. Writing articles on LinkedIn, now I just got on Instagram, I also have a YouTube channel… Taking one piece of content and modifying it slightly to fit those – I don’t know, I’ve probably just named about five different channels. You motivated me to do that, and start to just position myself as a thought leader, and start drawing attention as a credible source in the industry… And even – rewind back to before I had even done my first deal, “How are you credible?” Well, I’m credible because I’m leveraging the experience of my partners. It’s just like if you and I did a deal together, you have 500 million in assets under management, and even if I’ve never done a deal, but I’m bringing $500,000 from my network to your deal, now I can automatically leverage you; so when they say “Well, how many deals have you done?” “Zero, but let me tell you about my partner here, Joe, and what he’s done.” And right there, it’s instant.

Joe Fairless: It completely makes sense, and that is the approach that I certainly recommend, and I’m glad you got a lot of value from that article. And when I say “the approach I recommend”, when you don’t have the qualifications or the experience, the best way to learn is by networking while you learn; that’s what you’re doing on Bigger Pockets and at the events.

So how did you structure the deals on the GP side?

Dino Pierce: The way we structured all except one was a straight split. Anywhere from 70/30 to 80/20 split… That meaning, Best Ever listeners, 70% to 80% of the cashflow, tax benefits, profits are going to the limited partners and the general partnership team for identifying, underwriting, qualifying for the loan – the whole nine yards; bringing all the other money to the table from the equity partners you didn’t have to meet and build trust with… There’s a lot involved, as you know.

Joe Fairless: Right.

Dino Pierce: We’re keeping 20% to 30%, and we do a straight split for everything – cashflow, equity across the board. That’s how they were structured. Is that what you were asking?

Joe Fairless: No, I was asking about the GP side. Okay, so you do 70/30 or 80/20 split – cool. But on the GP side, for you bringing what you brought – what did you get in compensation for that?

Dino Pierce: We have a certain percentage carved out for everyone’s role, and usually — of course, it’s more than equity, like we talked about before, but… We usually have roughly 20% to 30% of the GP. So if  you take a 70/30 or an 80/20, that 20 now become the GP’s 100%; we’ll take about 30% of that and carve it out for the capital raise or the investor relations team, however you wanna call it.

Joe Fairless: Cool. And how much equity did you bring in total, across those four deals?

Dino Pierce: I haven’t put the pencil to the tee, but north of a million, last year, collectively.

Joe Fairless: Cool, so around a million.

Dino Pierce: Yeah, a little over a million.

Joe Fairless: A little over a million dollars… And of that amount, which investor – I’m obviously not asking you to name names, but just thinking about that investor, how did you meet him/her? The investor who invested the most; I didn’t add the important part of the question – the investor who invested the most, how did you meet him/her?

Dino Pierce: Yeah, I’m so glad you said that, because I crunched the numbers, and I don’t have them memorized, but it was enough math for me to know just the direction you need to go in. So it was something like 65% of the people who invested with me I had met online, over the phone, that kind of thing. However, when I put the pencil to it, it was almost 90% or more of the people that actually invest money with me – even though we met that way, we ultimately met up one-one-one, face-to-face, at a coffee, a lunch, or at a meetup.

So the person I’m thinking of – we actually met at a meetup, that ended up about two weeks later to a coffee, and then to the investment… Because there’s the levels of trust that you have to climb; they have to like the asset class, then they have to have trust in the team, and then the team has to show them the right deal. But what I’m trying to say is, even though I have all these methods of thought leadership, the reason I created a meetup group this year – I failed to mention that when we talked about my avenues of thought leadership… But the reason I created a meetup group this year is, again, because when I put the pencil to it, the people who actually put money into the deal, over 90% had actually met me face to face later on.

Joe Fairless: What meetup did you meet this person at?

Dino Pierce: The first time I met this person it was at the Denver Apartment Network meetup group.

Joe Fairless: Okay. And then that person you met at a meetup, an apartment networking group – you met up with him a couple weeks later, had coffee, and then they ended up investing… Have they invested in multiple deals?

Dino Pierce: Not yet, but they invested a nice chunk in this one, and we are meeting — actually, we’re gonna have dinner before your Best Ever event coming up; and my partner is also attending, so we’re gonna go to kind of like a one-off one-on-one dinner and talk about future opportunities, because we have a few other deals in the pipeline… And we realized that there’s more money, and this person also has a network, and if we can bring him to the GP side, he would be willing to open that up as well.

I’m in for the long game, and I will go off of good quality volume, and I have no problem giving up a percentage so that we can get a good deal done and offer a great investment opportunity to more limited partners.

Joe Fairless: When you were bringing equity and other things – you have other responsibilities in those deals; one responsibility was to bring some equity… When you were bringing equity to those deals, what was something that was surprisingly challenging to you?

Dino Pierce: I think surprisingly challenging was – initially, when I started out and I was letting people know what I was doing, I had a sample deal package, it was upfront… This is not a real deal, but this is where I’m transitioning from single-family to multifamily; “When a real opportunity like this comes around, are you interested in it?”, it was almost overwhelmingly yes. But then when we had a real deal, it was very difficult to get people to wire money, subscribe into the deal. And the only thing that changed was that it was real now. And it was like “Oh, wait, I’m really gonna wire $50,000 or $100,000 into this opportunity…”

That was a little bit surprising, because initially I thought “Wow! I know it’s gonna be work, but this is very doable.” And then it turned into “No, you need to have some wherewithal, and you need to have a last man standing, long-game mindset”, because when the rubber meets the road… I’ve even had investors subscribe and not wire. They go dark after subscribing. And again, probably one of the trust levels hadn’t been met yet, and that’s fine. It might take me putting five, ten, fifteen deals in front of someone before they say yes.

So we don’t burn bridges or anything, but I think that was a little bit of a surprise, how difficult it actually was to get people to do what they said they were gonna do.

Joe Fairless: There’s a video and a  speech that Jim Rohn gives, and the name of it is “The sower and the seed.” He talks about how when you plan seeds, not all of them blossom, and sometimes the birds get some; that’s just what happens in life. There are certain things we can do to optimize the performance of the seeds that we sow, but ultimately they’re not all gonna blossom, so I get that… And it’s a really good speech too, for any Best Ever listener. Jim Rohn, “The sower and the seed.”

What is your best real estate investing advice ever?

Dino Pierce: Related to this business, my best real ever real estate advice would be to take action, and don’t get caught in analysis paralysis. Now, admittedly, I am the 1% who will tap into really good podcasts, and go to great events, go to meetups, and I’ll put the pieces of the puzzle together and run with it… To where there’s other people who need not one mentor, they have to have three different people hold their hands through the first deal; that’s fine too, if that’s what you need and that’s how you learn. But for me, I’m like “Fail forward.”

The only thing I wasn’t willing to fail forward with is someone’s investment… Because I am the type of person – if you and I invested into a deal, we both put $100,000, same deal, and it went south, and let’s say I was a GP and you were an LP, I’m the type of person who says “Tough lesson. I will make it back. There’s no use crying and dwelling over this. Let me take the lessons learned from it and don’t let that happen again, if at all possible.” But it would be your $100,000 that would literally create ulcers in my stomach and keep me up at night. So I wasn’t willing to let people invest into a deal I was involved with without having–

Joe Fairless: Would you pay it back?

Dino Pierce: Would I pay it back to you?

Joe Fairless: Yeah.

Dino Pierce: Yeah, by all means possible, because — that was a scary story, it almost happened; I owed someone $25,000, and that was what I was thinking, “Okay, how do I get him his $25,000 back?” Well, come to find out he never wired… Because we were like “We’re missing person X’s wire. We can’t find person X’s money.” We verified over the phone the routing number; he has a disclaimer in his e-mail saying “Never wire to a routing number that was sent via e-mail”, so I’m like “Oh my goodness, it’s this guy, and we can’t find his money.” So I’m like “Okay, I owe him $25,000.”

So the answer is yes. Now, if I’m not liquid, we would have to sit down and talk and work something out, but I would do my best to make things right.

That’s the only thing  I wasn’t willing to do. But you know what – if you’re a broker and I’m learning to speak the lingo, and I’ve been studying, and I know the terminology, yeah, I might have some nerves… But the phone’s not a cactus; I’ll pick it up and call you, introduce myself, tell you about my team, “Here’s what we’re looking for. I saw this deal on LoopNet. Do you have anything bigger?” And I will start meeting with investors too, because there’s gonna be a first time. You just have to do it, and get good at it… Because I actually learned more, because I went through a course to learn about syndication, but I learned more doing my deals —

Joe Fairless: Which course?

Dino Pierce: I learned — I don’t wanna say everything, but initially everything multifamily through Michael Blank.

Joe Fairless: Cool.

Dino Pierce: And from there, I learned more actually doing the deals, being active.

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

Dino Pierce: I’m ready.

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

Break: [00:23:22].24] to [00:24:44].13]

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

Dino Pierce: I know it’s kind of cliché, but it’s “How to win friends and influence people.” It’s a classic, and I reference it regularly.

Joe Fairless: Best ever deal you’ve done?

Dino Pierce: Best ever deal was actually not for tax reasons; this is back when we were doing the flipping. I actually found the lead, it was free, from Craigslist, for sale by owner; father passed, the daughter didn’t want anything to do with his investment portfolio. I made an offer, they said “No. We’d rather have an open house and take the highest bidder.” But me being me, I followed up after the open house; I just sent a text message and said “How did it go?” and she wrote back and she said “It sold.” I was like, “Okay, good for her.” Then about five seconds later she says “…to you.” I was like, “Okay… Now I see where we’re going here.”

Long story short, I was tied up, really busy at that time… She was happy with the purchase price, the residential redeveloper was happy with the purchase price, and me being in the middle experienced a $45,000 heavily-taxed profit from scouring  Craigslist for a deal.

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

Dino Pierce: Real quick, a mistake I made on a transaction… The only transactional mistake I made was not knowing what was gonna happen with the market, and I ended up paying two mortgages… Because I was transitioning state to state. And I paid two mortgages for a year. That was my personal worst transaction.

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

Dino Pierce: Give back – of course, through the thought leadership. I do complementary mentor calls with people who are just getting started; I don’t charge anything… Just giving them advice, letting them know they can do it. Constantly donating to good — Joe, my kids have more than they’ll ever need for toys. I told my son, I’m like “Do you want a birthday present? Then you have to take five toys, and you’re going with me to Goodwill and we are giving this.” So we donate to Goodwill, Salvation Army… That’s how I like to give back.

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

Dino Pierce: It’s easy to get a hold of me. I’m very active on social media, so you can look me up on Facebook, Dino Pierce. Go to EdifiedEquity.com and you can contact me there as well… But I’m easy to get a hold of.

Joe Fairless: Dino, thank you so much for being on the show, talking about your entrepreneurial family and background. The ventures that you started with – the landscaping business, personal training, and it was time for money, time for money; spend time, get money. But ultimately we run out of time, and we’ve gotta scale that. You went to real estate, doing wholesaling, heavily taxed profit; you then focused on apartment investing and syndication. You took a course, learned, and then started doing it. You are now in four deals, worth almost ten million dollars.

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

Dino Pierce: Yes, sir. Thanks for the opportunity. I really appreciate it.

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Joe Fairless and Steven Pesavento on a flyer for Best Ever Show

JF1638: How To Purchase 150 Properties In Just Two Years with Steven Pesavento

Steven considers himself a “beginning” investor… Who has 150 properties purchased in his first two years of investing. Maybe not quite a beginner in a lot of eyes, but for himself and his goals, he’s just getting started. We’ll take a dive into how he has been able to scale to the level he is currently at in just two years. 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, Steven Pesavento. How are you doing, Steven?

Steven Pesavento: Hey, Joe. I’m doing well. How are you doing?

Joe Fairless: I am doing well, and nice to have you on the show. A little bit about Steven – he has been investing in real estate for two years and he’s bought and sold 150 properties. He’s based in Denver, Colorado. You can learn more about what he’s got going on at theinvestormindset.com, which will also be in the show notes. With that being said, Steven, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Steven Pesavento: Yeah, absolutely. I consider myself fairly new to investing. I’ve been investing for two years, but definitely have quite a bit of experience after that two years. I hadn’t ever done any real estate investing when I got started. I just kind of had that same feeling a lot of people have, where you’re like “I really wanna do this”, but I kept making up excuses on why I wasn’t taking the leap. Finally I did, and in the last two years we bought and sold 150 houses in two different markets.

I live in Denver, but we invest in Raleigh, North Carolina, and Minneapolis, Minnesota.

Joe Fairless: 150 properties in two years. How?

Steven Pesavento: We’re really focused on scale, so we built a team. We have people on the ground who are going out and signing up these contracts, getting these properties under contract directly with the sellers. And of course we’re doing direct response marketing, direct mail, PPC… All the things you might read about on Bigger Pockets, we’re just doing it at a little bit bigger scale than a lot of people, because my philosophy was “You have to do enough deals rapidly, to get enough information to learn quickly.” I’m just a big person on modeling others, and I found a few investors who I was able to pretty much learn the ins and outs of how their business is working and kind of take 7 to 10 years of real estate experience and condense it down into a few months.

So we just really started modeling, which is just another word for copying… So kind of ripping off everything that they were doing. We started applying that in our business, and we really took off. We’ve done quite a bit, and we’ve been able to help a lot of people, which has been really rewarding.

Joe Fairless: Who did you model after?

Steven Pesavento: There’s some investors – Andy McFarland, Bill Allen, Mike Simmons, Justin Williams, a couple people from around the country… They’re part of a mastermind group called Eight Figure Flipping, or Seven Figure Flipping…

Joe Fairless: Which one is it, eight or seven? That’s a big difference.

Steven Pesavento: Well, there’s two separate groups. There’s one higher-level group that we’re a part of…

Joe Fairless: Oh, okay. [laughs]

Steven Pesavento: We got connection to them through an event that was going on, and I wasn’t really a big fan of spending money on coaching or mentorship at first; I thought I could learn everything on my own. And to be honest, I was; I was trading some of my experience in other fields, building websites and doing things like that, for the ability to learn from some other investors… But when I came across these guys, I could just tell they were really authentic. A partner of mine ended up paying for it, and I ended up trading some of my time to get access to it, and then we just really took off after that and things just really grew. It’s been a great two years.

Joe Fairless: If you were to write the high-level overview of how you structure your company to allow this volume so quickly, what would be the bullet points?

Steven Pesavento: Good question. The biggest thing is you want to hire people who are better than you at certain areas of the business, so you can focus in on your core competency. For me, what I’m the best at is building systems, sales, and really putting a team together, so that’s what I focused on.

I’ve essentially hired out an acquisition manager to go on sales appointments, a  lead manager to answer the phones, a disposition manager to sell wholesales, a project manager to manage the flips that we have going… And the biggest bullet point is you just have to take action. You have to go out there and do it. You have to choose one marketing channel to go after… Because in my world, in order to get scale you’re probably gonna have to spend some money and you’re gonna have to do something that’s repeatable, and for us that was marketing. Direct mail was the first channel we went after, and we started out with about 10k or 15k mail pieces for that first month, but now we’re up to a point where on any given month we’re between 50k and 100k mail pieces per month. What that does for us is it gives us enough pieces of marketing going out every day, that we know that we’re gonna get a certain number of phone calls. And from those certain number of phone calls we’re gonna get a certain number of appointments, and we can pretty much expect how many contracts we’re gonna get.

So the biggest thing about being able to do volume is just hiring the right people and training them and really managing them, which is a totally different business than being kind of the one-man army that a lot of investors are, kind of being able to go out there like a Swiss Army knife and go out and do every single task.

For me, I don’t go on appointments. I don’t live in the market, and I’m not locking stuff up over the phone, so… I really have to rely on other people. I think that’s the biggest piece about building anything to scale – you really have to rely on your team and your partners to do what they need to do.

Joe Fairless: If you didn’t build out the team with the acquisitions, the lead and the disposition managers and the project manager, and instead you attended the mastermind that you referred to earlier, and you learned everything, but then you decided “Hey, you know what, I’m gonna just have one right-hand person and that person and I (and if you have another business partner, fine; the three of you or the two of you) am gonna do this thing.” Would you be able to make more money that way, since you don’t have all of the overhead from the team members that you have brought on?

Steven Pesavento: Yeah, whenever you take on the decision to cut overhead, it’s a trade-off. If you have two or three people who are just super-motivated, “I just wanna go out and bust your butt”, and put in a lot of hours, then absolutely. Two, three people could definitely go out and do that. For us, with the kind of volume that we’re doing, I don’t think the best use of our time is to be spent on a phone call. That’s something that’s perfect for a $10-$20/hour type of person to be setting those appointments. Then what you would do if you were trying to be a smaller-scale team, you’d have those people focused on setting appointments and then you go out and lock them up, and you go out and sell them, and you go and do all this stuff. Absolutely, 100%.

For me, the reason why we went this direction – I have people who are running the business, and that frees me up to do other things, outside of just being stuck in the business 60-80 hours a week.

Joe Fairless: Quality of life, plus you’re building something that you might be able to step away from and still have residual income from, right?

Steven Pesavento: Absolutely. Absolutely.

Joe Fairless: What’s been a big challenge as you’ve gone really quickly into this business, over the last couple of years?

Steven Pesavento: I think the biggest challenge is whenever you decide to move quick, you’re gonna make mistakes and you’re gonna have to learn from those mistakes really quickly. So when you’re doing marketing at scale and you make a mistake, that mistake costs you a lot of money.

Joe Fairless: For example…

Steven Pesavento: If for example you’re making a change within your system and you have 200 phone calls coming in a week, and you have something go wrong with your CRM, or you have something go wrong with your call system, it’s gonna really impact you and you’re gonna have to figure out really quickly how you’re gonna be able to come back from that. In other words, what I learned was you really need to have redundancy in this system. If our CRM goes down, we need to have a back-up available, so that our team is able to get in there and do the things they need to do to make sure that the machine continues to run.

So that was one big thing, it hurt us. A lot of people who were using Podio know that went down for a couple days last year and everyone was freaking out… But we learned from that quickly, and now we have some systems in place to make sure that we’re not stuck with that.

Joe Fairless: A deal that you have lost money on, if there is one — well, you’re wholesaling, so you’re probably not losing money on deals, right?

Steven Pesavento: We flipped about 40%…

Joe Fairless: Oh, really?

Steven Pesavento: We’ve done full rehabs on about 40%-45% of properties…

Joe Fairless: Well, that just opens up a whole new set of questions. You flipped 40%, so — I don’t know what that is… Like 60 properties or so?

Steven Pesavento: Yeah.

Joe Fairless: How do you do that remotely?

Steven Pesavento: My model for the first two years was partnerships. I had a partner on the ground, a 50/50 equity partner, and that person was responsible for managing the actual renovations and flips that were going on out there in North Carolina and Minnesota. So in that case, that person was the person who was actually making sure that we’re buying right, they’re going and seeing what’s going on, they make sure that we’re not losing, that we’re not making bad investment decisions… But it happens; when you’re doing stuff at scale, you are gonna lose some money. And because we were taking big swings, we did have a couple times where we lost some cash. It’s never a good feeling, but it is a great feeling when that’s off your books and you’re like, “Okay, well, I learned a lot from that.”

Joe Fairless: Yeah, I hear you. So one key is having a 50/50 equity partner, that way you’re both in it for the upside, or otherwise. What’s a specific deal that you lost money on? Tell us how much you bought it for, and what went wrong please.

Steven Pesavento: Yeah, absolute. For sure, I don’t mind sharing that at all. I think you learn the most from your mistakes. There was a property on Hunting Ridge Road in Raleigh that we bought. We bought it for 280k, we had the opportunity to sell it probably 290k, 295k, so we could have walked with some money right upfront… But this was early on, when we were entering the Raleigh market, and my partner had a lot of experience flipping, but didn’t have experience locally. He had just moved to that market.

So we ended up putting in about $80,000 in repairs. That was about double what we expected. There were a few things that came up with our contractors; even though it was a really good friend of his, the contractor ended up extending the timeline by about eight weeks longer than we expected… So that added up to some costs. And we had to redo some of the roofline, we ended up not being able to account the basement as square footage, like we expected, and we just had every little tiny thing that you think could go wrong, went wrong. By the time we put it on the market we had the ARV pegged at 450k… We ended up selling that for 412k.

So we went from expecting a profit of about $80,000 to a negative profit of about $14,000. Of course, our investors made 30k-40k on that, but we walked away with negative equity on that property. But we did learn a lot about the market and about how picky the buyers are in that area, and how it’s a little bit different than some of the hotter markets like Denver or Southern California, which is where we had some experience.

Joe Fairless: Why couldn’t you count the basement as square footage, as you expected?

Steven Pesavento: Well, in that area in particular basements are not very common, in North Carolina… And in that area we could count it as square footage, but it didn’t have the same value. So it still was counted, but it was worth way less than we thought it was because of that.

Joe Fairless: And you mentioned you had investors in the deal… How do you structure your deals with investors?

Steven Pesavento: We typically are borrowing money – private money lender, hard money lender type situation; typically, we’re paying points and interests, and typically they’re paying 100% of the whole purchase plus renovation, because we typically buy these deals with enough equity for that to work. So in the end, after points and interest and everything was said and done, they ended up making more money than we did, and we were happy. We were happy to pay them, they stick with us on every single deal that we do, and that’s been important for us in our growth, to have kind of a partner like that. Even though they’re a lender, we still consider them our partner.

Joe Fairless: What’s a competitive rate, for the Best Ever listeners, if they’re working with a group that is lending them money?

Steven Pesavento: I think it depends on the area. What I noticed is in Southern California you might be able to find money for 1 and 10, 1 and 12, 2 and 12. In North Carolina locally it’s a little bit more expensive – 2 points and 12%, 3 points and 12%… I’ve seen as high as 4 or 5 points and 12% in that area, which just blew me away… When we’re typically paying one point and 12% interest, but that’s 100% funded, and we’re usually paying our points and interest on the back, rather than monthly. Not everyone gets that, but when you have a good relationship, sometimes people — if they’re not living off the points and interest, they’re happy to take them at the end of the project.

Joe Fairless: So you’re buying deals, fixing and flipping them or wholesaling them, and North Carolina, Minnesota and also Colorado?

Steven Pesavento: Yeah, but I don’t do any business in Colorado currently.

Joe Fairless: Okay… So just North Carolina and Minnesota.

Steven Pesavento: Yup, just North Carolina and Minnesota.

Joe Fairless: So those are the two areas that you and your team are doing deals… Any unique challenges to — and I guess we’ll be specific with it, since they’re both states, so they’re rather large… I think you said Raleigh was the one deal you just talked about, right?

Steven Pesavento: Yup.

Joe Fairless: Okay, and what cities are you in in North Carolina, besides Raleigh, and then what cities are you in in Minnesota?

Steven Pesavento: We’re in what they call the Triangle Area, which is about an hour, hour-and-a-half around Raleigh, and we’re in Minneapolis Twin Cities area, so the metropolitan–

Joe Fairless: The Research Triangle, all the smart university students and young professionals over there, in North Carolina, and in Saint Paul, you said, in Minneapolis, for Minnesota?

Steven Pesavento: Yup. And some of the unique challenged to those areas is just the buyers are different; in other words, the people who are gonna move into those houses have different expectations on what they’re looking for. In an area like Raleigh…

Joe Fairless: You already said they’re very high-maintenance, but in Minnesota they’re very nice people and they’re low maintenance, right?

Steven Pesavento: [laughs] Minnesota people are very nice to your face…

Joe Fairless: I’m kidding, by the way, North Carolina listeners…

Steven Pesavento: [laughs] One of the challenges in North Carolina that you don’t really know about is there’s these things called underground oil storage tanks, that are maybe not as popular in some parts of the country, but they’re a huge cost to have those removed… So if you don’t know about them before you buy, it can be a pretty big unexpected cost if they leak, and it can be pretty difficult to sell a property because it’s hard to get a mortgage on them, depending on the kind of contamination… So that’s one challenge we’ve found.

Joe Fairless: Is that just typically disclosed when you purchase a property, or is that part of the house inspection process? Where is that getting covered?

Steven Pesavento: It’s really one of those things where you have to know what to look for. The sellers, when you’re selling a house and you’re buying it off-market, they’re not always disclosing everything about the property. You’re usually buying it as is, and they’re not sharing all the information about “Oh, well, I think there’s an oil storage tank…” But if you know what to look for, you’re able to find it. Usually, there’s a little pipe sticking out of the ground. Sometimes people cut those off, and you have to really search around with a metal detector… But for the most part, we haven’t run into too many issues; we’ve just had a couple where it cost us about 15k-20k to remediate the soil on a property that we were purchasing to tear it out and split the land so we could build two houses on it. We ended up not being able to do that because of that issue.

Joe Fairless: That’s pricey.

Steven Pesavento: Yeah, it cost us 20k to fix it, and it was supposed to be a $150,000 profit, so it was a big problem when we found out.

Joe Fairless: Well, but when you’ve got $150,000 profit… I mean, come on now. [laughs] It’s a problem, but you’re still doing alright on that deal.

Steven Pesavento: Yeah, but the issue was because of the remediation issue we couldn’t actually build the new houses, because there was a well that was too close.

Joe Fairless: So what did you end up doing?

Steven Pesavento: We ended up remediating it and selling it. We ended up making about 25k on that instead, which was good, but we weren’t able to do the development piece that we were hoping to.

Joe Fairless: Any unique challenges with Minnesota people, or the market?

Steven Pesavento: I think Minnesota is a great market; one of the challenges is just finding deals that pencil. There’s a pretty big homeowner base there, and we really haven’t had too many problems in Minnesota, I’ll be honest.

Joe Fairless: Well, I don’t want you to make one up, so we’ll move on… Based on your experience as a real estate investor, what is your best real estate investing advice ever?

Steven Pesavento: My best real estate investing advice is just to get after it. Decide exactly what you wanna do, get up, take action and just go for it… Because you only learn by doing, and you really just need to get out there and take some action.

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

Steven Pesavento: Alright, let’s do it, Joe.

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

Break: [00:19:17].28] to [00:20:18].23]

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

Steven Pesavento: Best ever book… One of my favorite books by far is definitely Never Split the Difference. I’m sure it’s been brought up a ton of times. I love that book.

Joe Fairless: What’s a mistake you’ve made on a transaction that we have not discussed already?

Steven Pesavento: A mistake I’ve made on a transaction that we haven’t discussed is not running title early enough in the process after getting it under contract, and finding out about issues with title at the last minute. It cost us some money.

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

Steven Pesavento: I like to do direct contribution. I like working with people directly, face-to-face, helping people learn about how to get out of the situations that they’re in, and see that “Hey, there’s a better way.”

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

Steven Pesavento: You can find me on social media, on the internet, Steven Pesavento, or you can check out theinvestormindset.com to learn a little bit more about what we’re doing.

Joe Fairless: Steven, very impressive what you’ve built in a relatively short period of time… But regardless of the period of time, impressive. I really enjoyed learning more about your business, how you work in different markets while being remote, and some transactions that did not go according to plan, why that was the case, as well as some transactions that did… So thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Steven Pesavento: Thanks, Joe.

 

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Christian LeFer on a Best Ever Show flyer for episode 1636

JF1636: Creating, Managing, & Raising Money For A Nonprofit | How To Establish A 501(c)3 #SkillSetSunday with Christian LeFer

Christian and his company help people establish their own nonprofit organizations. You’ve probably heard how complicated and time consuming the process is, clouded with red tape that takes months to years to clear up. Changemakers is here to help minimize those hassles and get your giving back efforts established more efficiently than what is typical. Hear some great tips on how to establish your own efficiently, or hear how Christian and his team can help. We’re only on this earth for a short period of time, it’s important to try to make it better while we’re here. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Christian Lefer Real Estate Background:

  • Founder and CEO of Changemakers
  • Starts and manages 501(c)3’s for successful business owners, investors, execs and celebrities
  • Has raised millions and run many campaigns during his decade-plus of fundraising
  • Based in Denver, CO
  • Say hi to him at https://changemakers.world/
  • Free PDF for starting a 501(c)3 www.changemakers.world/realestate

 


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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 Sunday, we’ve got a special segment for you called Skillset Sunday, and here’s the skill you’re gonna acquire… This is a fun one, and a rather altruistic skill – creating, managing and raising money for a non-profit. We’ve got an expert who will help us with that, Christian LeFer. How are you doing, Christian?

Christian LeFer: I’m doing fantastic. How are you, Joe?

Joe Fairless: I am doing fantastic as well, nice to have you on the show. A little bit about Christian – he is the founder and CEO of Changemakers, which starts and manages 506(c)(3)’s for successful business owners, investors, execs and celebs. He’s raised millions of dollars and run many campaigns during his decade-plus of fundraising. He’s based in Denver, Colorado. The URL is in the show notes page, so you can go check that out.

With that being said, Christian, do you wanna first just give a little bit of background about yourself? And then I’d love to dive right into creating, managing and raising money for a non-profit.

Christian LeFer: Absolutely. I appreciate you having me on the show, and I’m looking forward to where we can go here.

Joe Fairless: Cool. So will you give the Best Ever listeners a little bit more about your background?

Christian LeFer: Absolutely. I have been in the non-profit space on both the [unintelligible [00:03:27].06] and the public charity side for probably closer to 15 years now. I have traveled the country, meeting with people on the fundraising circuit… Basically, meeting with people that I’d never met with before, learning a little bit on the way about their goals, their personal history etc. and then sort of connecting their personal mission with their desire to contribute to a particular non-profit, and coming home with a four, five or six-figure gift.

[unintelligible [00:03:55].00] that opportunity, both because I got to see so much of this incredible country, and meet the  people that really make it work, and make it go around. Some were [unintelligible [00:04:04].23] executives, or just middle management or whomever, independent people; some were entrepreneurs, some were real estate investors… So I just got to meet a cross-section of a heartland that I’ll take with me through the rest of my life.

I’ve also done a lot of communications, I’ve been a copywriter for many years for a sort of direct response [unintelligible [00:04:24].10] political, and going and consulting with businesses of my own, or businesses that I did work for. So a lot of communications, a lot of ultimately what is sales; in the non-profit space you’re not providing a tangible to someone for their gift, you’re providing them with a connection to creating a better world and a better future in general.

Joe Fairless: So you’re the founder and CEO of Changemakers. Is Changemakers a for-profit company, or a non-profit?

Christian LeFer: Changemakers is for-profit. Structurally, it’s an LLC, and I co-founded that with Jacquelyn Long, and we help successful entrepreneurs, investors etc. connect their next-level efforts to make more of an impact and a legacy for the future, while taking maximum advantage of things like tax strategy and the non-profit vehicle as a way to give back to the community, in a way that doesn’t take away from what they’re doing now.

Joe Fairless: That makes sense, and I know one of my team members actually reached out to you, because he’s looking at starting something, and that’s how we came to know you… So when you are working with an entrepreneur or an executive, whoever’s wanting to start a non-profit, what are some of the questions that they typically ask?

Christian LeFer: Typically, when somebody is out to start a 501(c)3, first of all, there’s tons of misinformation out there. Now, that might be because people operate on conjecture assumptions etc, it might be because there have been a lot of changes over the years, with guidelines and how the IRS views certain things, what their process is, how long it takes, all that kind of thing… So there’s a lot of questions around the process and timeline, what’s permissible and what’s not permissible, and then I would say a lot of those questions are just sort of “in the weeds” operational – how do I switch out a board member, and that sort of nitty-gritty kind of stuff. But what we try to do is help people with those things, and do a lot of those things for the non-profit founder, so that they can focus on their mission. That is the number one thing, and that’s where things like tech strategy will come into play…

Or we provide plug-and-play sponsorship strategies, for example, so that people don’t have to sit there and have hours of meetings about how to stratify different giving levels; there’s some templates and some ideas that are tried and true that can work well, and help people get past those logistical issues and getting something up and running, so they can really focus on their strategic and their lifetime goals, and even post-lifetime, their generational goals.

Joe Fairless: Why create a 506 — first of all, am I saying it correct, 506(c)3? Is that accurate?

Christian LeFer: It’s a 501(c)3.

Joe Fairless: Sorry. I was venturing into securities territory, where I’m at. Okay.

Christian LeFer: I’ve actually written a memorandum for 506(b), which I know is your investment vehicle, and I’m familiar…

Joe Fairless: Okay, so 501(c)3… Why create one of those, compared to going on GoFundMe…? Say I’m passionate about ponies, and I want to help pony rescue… I don’t know why ponies are on the mind, but they are; so I wanna help pony rescue.

Christian LeFer: I have an 11-year-old daughter, so…

Joe Fairless: Okay, cool. Well, I have a one-month-old daughter, so maybe that’s why ponies are on my mind, but… When I want to support ponies in my local area, why can’t I just do a GoFundMe account and say “Hey, everyone”, share it on social, “Pony rescue, let’s make this happen”, versus going through the whole process, which we’ll get into in a little bit, of creating a 501(c)3?

Christian LeFer: Absolutely. Well, there often are reasons, typically… If you look at the cross-section of the world, 95% or 99% of people are going to give to a GoFundMe, or to a particular non-profit with a donation, or taking part in a social campaign sharing initiative, or whatever… But there are really three reasons, versus methods of engagement – and I have three of those as well – that someone would want to actually start a non-profit instead of give to another non-profit, or a GoFundMe, or what have you. Those are primarily simply to give back.

Somebody I believe in – I’m sort of a serious capitalist, and I also believe that people have goals and dreams that can’t be quantified in a bank account. So simply giving back is often a primary reason that someone would want to start a non-profit, because they see a way that they can contribute, where their experience growing up in the inner city, growing up without a dad – whatever have you; growing up without a pony – they see the need, and they look around and they haven’t seen anything that fills that need in the way that they see it.

People sometimes say to me, “Well, aren’t there too many non-profits already?” My answer to that is “Are there too many businesses already?” Because the millions of businesses and micro-companies that exist in the U.S. are because someone does not see a need filled, that is from their angle, in a  particular community, or reaching a particular community. And with 300 million Americans, and seven billion or so on the planet, there are a myriad ways someone can interpret a way to fill a need, and then a community to approach with that solution, that is unique… And non-profits range from a few thousand dollars – if that – a year, like your local Little League, all the way to the Bill and Melinda Gates Foundation. So number one is simply to give back.

Joe Fairless: Before we go on to number two, I’m still not clear, because if I were to start a GoFundMe account for a pony rescue, then I’m giving back; and if I were to start a GoFundMe account for $100,000 and I were to donate all $100,000 towards a pony rescue, then I’m giving back just like I would if I had a 501(c)3, right?

Christian LeFer: Absolutely. But just in the same way that you might be an advocate for a certain company – “I love this hardware store. They have the best hammer selection. Go there”, and you can encourage all your people to go there. But there’s a particular type of roofing hammer that nobody carries, you can’t find it, you have to order it, and it takes weeks; you start a company providing that particular item. It’s the same thing with a non-profit.

The reason you might wanna start a non-profit is because no one is doing what you want to do, in the way you want to do it. Does that help?

Joe Fairless: Yes, it does.

Christian LeFer: So we can get on board with other people, we can see “Hey, I’m already aligned with this effort over here. Why don’t I just do that?” But people start non-profits for — I’ll give you a great example. I’m actually on the board of a non-profit where this sort of crazy entrepreneur – he’s an industrial painter by trade – created a guitar for a very famous rock band, tracked that rock band down, got them to sign it, and now wants to autograph it, and he thinks that he can do this again and again. It’s a really neat idea, and again, it’s a crazy idea, nobody’s gonna do this, and he approached me to not only help him get the non-profit going, but to sit on the board. I just got approved a few days ago in a pretty quick fashion. So nobody is going to do that, and what he wants to do is preserve the legacy of this type of rock, this band and bands like it, for future generations… Because people who hear of things now — millennials don’t know what it’s like to live without a microwave, and future generations might lose that piece of history; so instead of relying on the non-profit that probably is the rock ‘n roll hall of fame, he wants to install statues in places of celebration for these bands, in various countries around the world, that maybe don’t have the [unintelligible [00:12:09].04] memorabilia and experience like we have in America.

Joe Fairless: Got it.

Christian LeFer: That’s pretty unique, no one else is gonna do that, and I just think it would be fun to work with these kinds of bands… And these guys are getting old, they wanna contribute too, so it gives them an opportunity to not just go to another signing, or go to another Gala event in L.A, but to really bring these people in Cambodian places where generationally they haven’t had the opportunity to experience this kind of thing.

Joe Fairless: Noted. Okay. Number two?

Christian LeFer: Number two would be to create an organization in a way that aligns a corporate social responsibility effort through the non-profit and a for-profit venture. For example, talking with Grant in your office, and what you wanna do, you want to bring – and I don’t wanna read the other mission if that’s not something you’re ready to roll out…

Joe Fairless: That’s fine, that’s fine.

Christian LeFer: Okay, so you wanna help veterans obtain housing, right? And what a great thing to do. What a great way to inspire other people to maybe copycat you in their own jurisdiction, their own geography, in a place that you’re not doing this. So you can give away a home in a massive — and I know someone that’s already done this, and created an incredible model that I’m gonna share with you… They raffled these tickets to these sponsorships on  a massive national scale; that has a halo effect. You’re doing something that brings light to the world, and that light is positively reflecting on Joe Fairless, your investing company, your team, yourself… There’s nothing wrong at all with reflecting positively on your for-profit venture by doing something that is literally going to put a veteran in a home. That is awesome.

So aligning those two things by having a non-profit alongside a for-profit is something that is a main, primary focus of us at Changemakers. Hopefully that example served to illustrate that point.

And then last but certainly not least it’s to take advantage of tax strategies. Yes, you can take advantage of tax strategies by doing certain things, like donating property into Fidelity Charitable, for example, and maximizing the upside on a long-term held property; you can’t do it with short-term holdings, but you can do it with long-term. If you do it with short-term, you can only get the cost basis. Longer term you can get a massive write-off by donating it; it’s kind of like donating appreciated stocks. But our philosophy at Changemakers is to do all three of these, because we have to get past the stereotyping that by making money you’re not for the social good, profit is evil, all that stuff. Total BS. It deserves to be  relegated to the trash bin of history. You cannot save the world if you can’t pay the rent, and they are.

They’re starting out now, on day one of forming a company, they’ve got a social idea in mind. Back in the ’50s and ’60s a lot of these folks that I would fundraise from as I traveled the country, great people [unintelligible [00:15:01].11] to the manufacturer, for example. They’d make things that you drive behind a tractor. They’re doing 30 million a year, they have everything they want, their family has everything they want, and then they say “Oh, what about my legacy? I’m getting older. I’m 50, 60, 70 years old, I wanna give back.” It is a different paradigm now. There’s been a massive shift, where young people – and heck, I’m 50, I’m young – from the outset of the company they have a social purpose in mind. I’m a foster parent and I’ve adopted through the foster care system, so I have a particular passion around that.

My sister is developmentally disabled. I’ve been in the Special Olympics since I was a kid. I’ve got certain affinities, and when you start a company and there’s a great purpose behind it, it’s much more powerful on those bad days than when you’re losing money or you make a bad deal, it’s the mission that drives you forward… And if you can align your personal mission with your business mission, I think that’s gonna bring people to the kind of satisfaction that leads to fewer Prozac prescriptions, personally.

Joe Fairless: I would agree with that. And what are the costs associated to starting one?

Christian LeFer: The costs can vary. There are a couple of different tracks to getting a 501(c)3. The IRS has a tiered filing fee structure, for example… But it’s not just about starting the 501 entity itself. Yes, we’ve done that thousands of times successfully. I’ve been involved in many thousands of those. What I realize after thousands of these is that the likelihood of success long-term for the founder is also having the system set up to get the funding in, and to set up the sustainability systems like with any business, for things like compliance, staying on mission and getting the board or getting any staff and people that are involved in the non-profit to be aligned on the same page, and then that will drive the organization forward.

What happens with non-profits a lot – if they’re under-funded, especially the founder gets burnt out and the thing becomes sort of a side project that never really runs under its own power… Or if they don’t plan ahead, there can be sort of a founder’s syndrome, where everything’s falling on the founder over time, they don’t get enough buy-in, and it’s like a company where somebody’s not grooming middle management to be C-level and to take over, and growing people.

What happens is there becomes a stagnation and maybe the company that could be doing 50 million a year plateaus at 5, and is dysfunctional, and no one’s really excited to go to work in the morning. So what we do is we provide a holistic approach to all of those things, so that you know exactly what the policies are, and  aligning your for-profit and your non-profit.

Where you can get in trouble and where you don’t have to get in trouble – how do you make money? You founded the non-profit – can you be a director and a paid staff? The answer is yes, but it’s how that’s done that’s important. So those are the kinds of things that I find the best predictors for success, and that’s why we’re templating these things and consulting, so that we can align the mission and the function.

Joe Fairless: So what are the typical itemized costs for starting one?

Christian LeFer: If you were to itemize the costs, you can be looking at about $10,000 for starting the non-profit, putting all the policies in place, and aligning the by-laws, the charges that you have to your directors and officers and all those kinds of things, with the mission of the non-profit and with the day-to-day functioning, how the things work, and setting up the systems so that the non-profit can operate properly.

It can range from about $5,000 to $10,000 to get started, and then there are ongoing maintenance costs that you need to pay attention to, and it’s subjective. It can vary. To get particular, there are a series of questions that will qualify what the costs really are and how long it takes. The maintenance costs can be fairly minimal – a couple thousand dollars a year, or maybe even a thousand, depending on the budget… To if you are fundraising in a very public way, where you are a Donate button, you’re doing a lot of social, you’re not just getting from a very close-knit group of people, larger donors… 41 states regulate charitable fundraising and you have to register in those states. That cost can be $5,000 to $10,0000 a year, but when you’re doing 2-3 million a year or more, that becomes just a cost of doing business.

On one hand, I don’t wanna scare anyone with big numbers, because most non-profits don’t incur those kinds of costs, because they’re not doing big, massive, public fundraising campaigns. But that is the range that it can go to. If you go to our website, you can see there’s a $5,000, there’s a $15,000 package which has a lot of ongoing maintenance where it’s sort of done for you; you can stay focused on your mission, we take care of everything else.

Joe Fairless: What is something that is not permissible, that some people mess up on because they don’t know any better?

Christian LeFer: Impermissible things – certainly a co-mingling of funds. Say you’re running a for-profit and a non-profit together, or alongside of each other (I shouldn’t say together, but your audience might). The listener would want to have a decision-making process that is very distinct for the non-profit, and separate from the for-profit.

The for-profit – you might have a board, you might not. You might just be a solopreneur. But say you have a group of people that are involved in the decision-making process for your for-profit real estate investment company – you can share directors; I recommend not having a majority, or at least not having a 100% overlap of directors, because that’s gonna create some separation and bring some sunlight into each process… But you wanna have a distinct bank account, decision-making processes.

You might have lots of your company people that volunteer for your non-profit, but you sort of want to look at this as two different hats that you would wear. You take off one hat to put on the other hat; you don’t stack them on top of each other. So the same person can wear a number of different hats in an organization, but wanna take those off when they go do work for their for-profit.

It really comes down in the IRS’s eyes to sources of funds and use of funds. The use of funds for a non-profit needs to fall under one of the exempt purposes, which is why the non-profit entity exists.

Joe Fairless: Anything else as it relates to creating, managing and raising money for a non-profit that you wanna mention before we close out, that we haven’t talked about?

Christian LeFer: Absolutely. I had mentioned earlier there are three types of non-profits that real estate investors might want to start or get involved in. Number one is the general education and/or community non-profit. This is where you’re putting information out to the public, you’re teaching them about real estate, or you’re teaching them about a certain aspect of what you do, and it’s available to everyone. It could be paid membership, or it could be just for free, but education is a primary one.

And then creating community. We’ve done a number of angel investing groups. The 501(c)3 can have the pitch fest, it can get everybody together into the rooms, where they educate people on how to become an angel investor etc. When the deal is made, those doors close and another door opens, and that’s where the for-profit or the other type of entity would be involved in actually putting deals together.

Number two would be a purpose-specific vehicle, like the one that you were talking about starting, where you give away a property, or you rescue ponies, or whatever, and you just wanna start one for a particular purpose.

And the third is to donate property to take advantage of some of the tax strategies that are available. There isn’t really a goodwill of real estate donations, and most non-profits have a lot of trouble. If you called your average non-profit up the street from you, they would find it very difficult to accept the real estate parcel. So there are organizations and companies that do specifically that, and sort of turn those into cash for the non-profit… But you could also give properties directly to a charity if they’re capable of accepting those.

Those were just a few of the final points I wanted to make on creating, managing and giving through a 501(c)3. I’m happy to provide more information. People wanna go to our website, changemakers.world/realestate.

Joe Fairless: Cool. Good stuff. Well, Christian, thank you so much for being on the show, talking about the costs associated to doing this, why to do it or why people do it, as well as what’s permissible or what’s not permissible, and some commonly asked questions that perhaps someone who is listening who wants to do something more formalized with their philanthropic efforts – they’ve been wondering, and you addressed them.

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

Christian LeFer: Absolutely. Thanks a lot, Joe. I really enjoyed being on the show. Have an awesome weekend.

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Scott Lewis and Joe Fairless on a flyer for the Best Ever Show episode 1565

JF1565: How To Execute On A RV Park In The Middle Of Nowhere #SituationSaturday with Scott Lewis

Scott is back on the show for a special segment today. We’re going to be talking about a deal he has going on. He found an RV park in the middle of nowhere, bought it, and is now telling us his business plan for the park. If you ever buy an odd property, you know you have to get creative sometimes, let’s learn from Scott’s experience and apply it to our own businesses. 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.

First off, I hope you’re having a best ever weekend. Because today is Saturday, we’ve got a special segment called Situation Saturday. This is a fun one… You come across an RV park in the middle of nowhere, and there’s a lot of challenges involved with that… What do you do? How do you take it down? How do you execute the business plan?

Well, fortunately, we have a guest on the show today who has acquired an RV park in the middle of nowhere, and has implemented a business plan at that property, and we’re gonna talk about the challenges and the individual disciplines within the team members that are required in order to do this type of deal.

With us today, again, how are you doing, Scott Lewis?

Scott Lewis: Hey, Joe, and Best Ever listeners, and happy Saturday out there! Great to be back on the podcast. I’m doing outstanding, I just got back from a couple of days in Las Vegas, at a mastermind out there that was fantastic, and I’m happy to be on this show.

Joe Fairless: What mastermind did you go to?

Scott Lewis: It was a self-storage mastermind.

Joe Fairless: Okay. Who put it on?

Scott Lewis: Scott Meyers.

Joe Fairless: Cool. Good stuff. What was the takeaway that you got from it?

Scott Lewis: I don’t know that there was any one thing that I was taking away from it, other than as a company we’re doing all the right things to be able to acquire self-storages.

Joe Fairless: Well, it makes sense, and we will transition into the RV park… But first, I want to give a brief overview of Scott’s background — and you might recognize Scott from our previous interview, which was episode 965. It is titled “Why he sold all he had, went to war, then returned to develop land and syndicate big deals.”

A little bit about Scott – he’s the co-founder and chief executive officer of Spartan Investment Group. Spartan Investment Group has completed six million dollars in development projects and has 30 million more underway; has raised over 10 million in private equity. Those numbers might even be higher… I’m not sure what the latest is on those numbers. Also based in Denver, Colorado. With that being said, Scott, do you wanna give the Best Ever listeners just a brief refresher of your background, and then roll right into this RV park?

Scott Lewis: Thanks, Joe, and Best Ever listeners. I came to real estate by way of the military and the Federal Government. I’m still an active reservist, out here in Colorado, which is fantastic; I do a lot of good training that helps me be successful in my role as the CEO for Spartan Investment Group.

I started in real estate when I was in high school, building houses, and that’s kind of how I put myself through college as well, as a framer. I became a — I’ll say a “reluctant investor” in 2007 when I joined the military, because I bought a condo in 2005, and everybody’s aware of the history… I still own that condo. I won’t say it’s the bane of my existence, but it’s definitely a third leg that’s not all that helpful.

And then really just kind of got started in DC, bought a really crappy rowhouse, and flipped it, and that’s really what started our company, and we’ve just been growing ever since.

Joe Fairless: And one part of the growth was an RV park that you all came across. Tell us the story about that.

Scott Lewis: Yeah, it’s really an interesting story. It’s a story of — maybe we can call it an epic adventure, so we need some really cool instrumental music in the background right now…

Joe Fairless: You’re setting the expectations really high…

Scott Lewis: [laughs] It came kind of on a tangent to a two-property portfolio in self-storage that we were looking at taking down. Our primary mission right now is to purchase self-storages… However, that particular deal fell apart, and the agent was really impressed with our acquisitions process and how we handled that, and he was like “Hey, you guys gotta take a look at this… I’ve got a deal for you. It’s an RV park.” We were like, “Um, what?” He’s like, “It’s an RV park.” We’re like, “Okay, where?” “In Gardendale, Texas.” “Say again?” “You know, Gardendale…” “No,  we don’t know it.”

Joe Fairless: Everyone knows Gardendale…

Scott Lewis: Yeah, so we’re like “Alright, can you orient us to where we need to look?” He’s like “Oh, it’s just North of Odessa, Texas.” So for Best Ever listeners that aren’t geographically sound with Texas, Odessa and Midland are approximately about five hours South-West of Dallas, maybe about 4,5-5 hours… Pretty much do West of Austin, kind of in West Texas.

For the listeners that aren’t familiar with what West Texas is, it’s oil… And it’s actually called the Permian Basin, and it’s the second-largest oil shale outside of Saudi Arabia; it’s one of the main reason why–

Joe Fairless: Friday Night Lights?

Scott Lewis: Absolutely. Midland and Odessa were featured in a movie Friday Night Lights. That’s where it was. And it’s everything that you would think it would be – there’s tumbleweeds, lots of cowboy boots… A Prius could fit in the cab of every single pick-up truck that’s driving around down there…

Joe Fairless: Yeah, I was gonna say, there are no Priuses in Gardendale, Midland or Odessa, Texas.

Scott Lewis: Yeah. For any listeners that are down there, if you rent a Prius, a Dodge Ram or a big Ford  F-150 will eat your car.

Joe Fairless: Yeah, yeah… [laughs] If you’re driving a Prius in Odessa or Midland, your safety is in danger, I believe.

Scott Lewis: You are incredibly in danger if you’re driving a Prius down there, so do not do that. But just a quintessential, solid Texas town. Good community, good, solid, hardworking Americans that are working in the oil fields down there. So when the agent first proposed this, our director of acquisitions brought it to us, and we said no. No way in hell. And he started running the numbers on it, and they were offering it at a 16-cap, which for an RV park is a little high, but it’s not outrageous.

Our acquisitions director started running the numbers and that cap rate started creeping up. So by the time he was done running his analysis, it was right around a 20 or 21-cap. So that started to pique our attention. That’s when we really started to dig into “Well, what is this about?”, so that we understood the underlying reasons for the sale. It was a group of cousins and friends and brothers that had formed to buy and build the park, but they just weren’t really getting along, and it was just time for them to part ways and get rid of the park.

They didn’t have great management systems just because it was kind of a fractured relationship, and that’s not really what [unintelligible [00:09:07].16] We’ve actually become good friends with them, and they’re just good, solid, hardworking Americans. They do dirt work and paving. That’s what they specialize in, not operating real estate assets. So the park had kind of been run down a little bit, it wasn’t being operated very well, and it had just kind of become a thorn in the side for some of the partners, and they decided that they wanted to sell. So it was a really good situation.

So right out at the beginning, once our director of acquisitions convinced us to do this deal, we’re up against a cash offer, and the cash offer was offering to close really quick. This was in November of 2017. Well, we went back with an innovative strategy to say “Listen, you actually don’t wanna do that. You wanna take our offer, which will be private equity and debt, and we’ll close on January 5th, so that you can delay your taxes an extra 18 months, versus having to pay the taxes in 10 months if you close in 2017, since we’re so close to the end of 2017.” And they were all over that. So that’s a potential strategy, Best Ever listeners; if you are trying to close a deal in the end of the year, you may be able to add value by just waiting a couple of weeks, because it’ll allow the seller to basically have a tax-free loan for up to 20 months, or 18 months, whatever it is, if they extend their taxes. So it’s a tactic that you can use to potentially win deals with not being the highest price offer.

But anyway, so we went under contract with that, and it was heavily contingent on financing. It was going to be a very, very tough deal to finance, because it’s an RV park in Odessa, Texas. However, when we did the feasibility work, it had fantastic fundamentals from a feasibility standpoint, and the Permian Basin when compared to other oil producing areas, had the most resiliency through boom and bust cycles. They’ve been doing it for 80 years.

The people of the Permian are resilient, they’re tough, understand how to ride those waves out. So even in the worst times, when oil was in the $25/barrel area, unemployment was still 5% to 7%, versus up in North Dakota or Wyoming, where unemployment reached double digits.

So we decided to go forward, and we decided to go out and raise private equity and take down the park. The price of the park was 1.71. We had negotiated a $40,000 credit to fix some [unintelligible [00:11:37].21] stuff, so we were gonna raise about a million dollars to do some repairs and maintenance, and then we were gonna take down a loan for a million bucks. We called EVERYBODY. Everybody and their mother, and we couldn’t get it financed at all. The financials were a mess, the record-keeping wasn’t good… It was very, very hard for us in our due diligence to even understand what we were gonna be getting into, and it was even harder for banks to understand.

So at the last minute we found a hard money lender that agreed to lend us money, and we were able to raise the private equity. It’s a pretty good return; our investors are earning 26% cash-on-cash on that particular deal, and it’s supposed to be a four-year deal, so it’s about 100% return over four years… Pretty darn good return, and really good cashflows along the way, but it was the debt financing that was really tough,

Here’s where we really kind of shined as a team – our director of business intelligence had put together a phenomenal feasibility study. Just really good, really easy to follow, and our investors loved it. The debt lender loved it, as well. It was all juiced up, ready to rock, and then about a week or so before we were ready to close, they just up and decided not to fund us, at all.

Joe Fairless: Why?

Scott Lewis: That was really interesting. They told us that the financial part didn’t make sense; we weren’t strong enough as a buyer, and they didn’t like the fact that we didn’t live there. What was really annoying about this is they had everything, all of that information, for a month before they decided just to pull out at the last minute. So what we think is that those buyers failed on their side and they couldn’t get it done, and instead of acting with integrity, they blamed it on us.

I’m not gonna say their name, because I just don’t wanna deal with the legal ramifications of it, but when we have an opportunity to give a recommendation for these folks, it will not be positive. We do not believe they were good people, and they did not act with integrity at all.

Joe Fairless: Imagine coming across that in commercial real estate. Shocking.

Scott Lewis: I know… It was really irritating, because they could have told us no a month before. There was absolutely nothing new that they discovered.

Joe Fairless: So that was two weeks before the scheduled close?

Scott Lewis: About a week or so… A week and some change.

Joe Fairless: About a week before scheduled close. How much money and time did you have into this deal at that point?

Scott Lewis: We had gone hard on our earnest money, and we had pulled some studies, and this and that… So it was about 50k.

Joe Fairless: Okay. What was the earnest money?

Scott Lewis: 30k-35k, somewhere in there.

Joe Fairless: Okay. And then how much time would you estimate that you all had put towards it in total number of team hours?

Scott Lewis: Oh, in total number of team hours? Between trips, acquisitions, capital, finance… Maybe 100.

Joe Fairless: Wow. Alright, so you’ve put a lot of time and money into this deal, a week before closing financing falls through from the debt side. Equity side is still strong, right?

Scott Lewis: It is. Fully raised.

Joe Fairless: Okay… So now what do you do?

Scott Lewis: Well, as we mentioned at the beginning of the podcast, I’m a military guy, so I am fanatical about planning, and I’m fanatical about planning worst-case contingencies. In the military, in a planning process you have the most dangerous course of action and the most probable course of action. Now, from a military perspective, that’s based on what the enemy is gonna do. So when we look at our deals, we have a couple of different enemies, and one of them is always the lender. The lender in our deals is always one of our enemies… Another one being government bureaucrats, or something along those lines. Not a quintessential enemy, but someone that could act in such a way that it would damage our ability to execute our mission.

So for this particular one, our acquisitions director had gone through and analyzed the most dangerous course of action and the most probably course of action for the lender. The most dangerous course of action that we had built out two months earlier was that they would pull out a week before closing.

Joe Fairless: [laughs] Wow…

Scott Lewis: It was already in our system… And then with each one of these most dangerous and most probable courses of action, we have mitigation strategies to take care of it if those come to pass. So the plan was already written.

We basically just did nothing for 24 hours, reviewed our plan, and the plan that we had written was that banks were going to fail, so we would have no choice but to raise our own private debt instrument from our investors. That’s the only thing that we could do. We had never done it before, we didn’t know how to do it, but that was our plan.

96 hours later we  had a promissory note written, a deed of trust written, and a million dollars raised at the same terms that the hard money lender was gonna give us, and we closed the deal.

Joe Fairless: Wow… What are those terms?

Scott Lewis: They were miserable. 12,5% interest-only loan.

Joe Fairless: What was it, 12,5%?

Scott Lewis: It was.

Joe Fairless: 12,5% interest-only loan… For how long?

Scott Lewis: It had a three-year payback, but if we went to years two and three, we got hit with an additional point each year, plus we had to give up equity positions to the debt guys if we went there. So it was basically 12 months to get our act together and get different financing on  it.

Joe Fairless: Okay. How long ago did you purchase this property?

Scott Lewis: We closed March 1st.

Joe Fairless: Okay, so we’re still in the 12-month period; I’m very excited to hear how it’s going… But I don’t wanna fast-forward too much. Alright, you all found the person for the hard money… And how did you know this person?

Scott Lewis: It was actually 12 of our investors. They were our normal equity investors that just took a debt position on the property. We actually had maybe two or three investors that actually took a straddle position to where they had equity and debt. They did both.

Joe Fairless: And the original lender backs out… A little shock, but you have that in the worst-case scenario for your contingency plan… What did you do to communicate, or rather how did you communicate to your investors the fall-out and what you needed in order to close?

Scott Lewis: It’s a good question. For the equity side we really didn’t even have time to communicate. We sent out an e-mail basically saying “Hey, this is what’s happened. Here’s our course of action going forward. Anybody that’s in on the equity side, are they interested on the debt side?” So we had a couple of people raise their hand right away. We had very, very little time and we executed the strategy in four days or so. 96 hours I think it was when we had closed the million bucks on the debt side.

Then we just opened it up to our regular list. We put it out to our list of our personal investors that know us; we had personal relationships with all of them… And we just put it out to our list, and we had an overwhelming coming back to  say “Yeah, we’re gonna do this with you guys.” Everybody loves 12,5% interest for the first lien position on an asset.

Joe Fairless: And why did you go with those terms, instead of a little bit less than that?

Scott Lewis: Good question. We had very, very little time, and we really didn’t have time to struggle with the raise. We wanted to make sure we could take this down, because it was a good deal, as I’ll get into here in a minute, for the operation side of the house here. It was a really good deal, and we wanted absolutely zero probability that we wouldn’t be able to execute.

So we kind of took it on the chin a little bit upfront, knowing that we were gonna be successful in our business plan and that we would be able to take it out later.

Joe Fairless: So you’re about 7-8 months into it… What’s been the result?

Scott Lewis: The operations have been fantastic. Our business plan was to do a number of different upgrades to the park, stemming from cap-ex, like improving electrical, to just vanity upgrades, by putting in a fence around it and just really making it a much better environment, to operational upgrades such as digital management software, better marketing, a call center, you can pay by credit card… All the barely standard improvements that you would do to a particular asset to take it from a class C to a class A asset, as much as an RV park can be a class A asset.

We plan to add additional spaces. The park started out with 102 spaces, and we are in the process of finishing up 14 more, so we’ll have 116. We actually installed a propane dispensing station on-site and got our managers trained, so people can stop by and buy propane at our facility now. We’ve just done a number of different upgrades, which has allowed us to raise rents… I’m not sure what the percentage is, but it’s over $100/month per spot, and that’s really driven the NOI up a lot, by a factor of probably double or triple.

Joe Fairless: You’ve still got the loan on it?

Scott Lewis: We’ve just executed the refinance on the loan…

Joe Fairless: Oh, bravo! What a relief…!

Scott Lewis: It was. And we were able to do it in a fantastic way, as well. We went out and we engaged some lenders, and we actually got a really good bank down in the Midland area. They were really awesome to work with, and they gave us a term sheet, and it was our plan all along to go down and see what we could get from financing. When we have an opportunity to pay people, we wanna pay our own people.

The bank gave us good terms. They were a great fit for us. The terms we cut was 5.5% interest, amortized over 15 years with personal guarantees. So the interest rate – fantastic; the personal guarantees we were really kind of ambivalent to. We didn’t really care. But the amortization over 15 years – it really didn’t do the greatest for the cashflow for the park.

Joe Fairless: Right.

Scott Lewis: So what we did is we went back to the investors that had done the loan with us in March, and we had told them all along that our primary objective here is to refinance this loan out as fast as we can, because we have a fiduciary responsibility to our equity investors to make the park produce as best as possible, and one of it is to get rid of a very high-interest loan.

So we went together and we put together a new terms sheet for them, and we offered 8% interest-only, because that’s what we felt was good for our investors, we liked the interest-only, we wanted to take care of our people, it reduced the burden of debt on the park by $3,800/month in debt service, and it allowed us to take care of our internal people.

100% of the investors said “Fine, modify the loan and we’re good to go.” So now we are at 8% interest-only, versus 12,5%, and we did that in about six months.

Joe Fairless: That’s beautiful. And it’s amortized over 30 years?

Scott Lewis: It’s just an interest-only loan–

Joe Fairless: Yeah, it’s interest-only so it doesn’t matter.

Scott Lewis: Yeah. It’s really been good that — you know, people are still getting a solid 8% return, and the equity investors are getting a lot more as well.

Joe Fairless: What’s the term of the loan?

Scott Lewis: It has a balloon at five years, with extension periods to six and seven years with one point. At seven years, if something has happened and we can’t refinance it, then in addition to continuing to receive that higher interest, the debt investors get equity positions that comes out of Spartan’s stake on the deal. So not only will they have a debt position, but they will also get equity positions as well, if we can’t refinance them out.

Joe Fairless: Wow. I love this story, this epic adventure, and I love this case study. How can the Best Ever listeners learn more about what you all are doing?

Scott Lewis: They can find us on Facebook, Spartan Investment Group on Facebook. You can go to our website at www.spartan-investors.com, or you can reach out to me at scott@spartan-investors.com.

Joe Fairless: Or they can meet you…

Scott Lewis: Oh, absolutely. We’re gonna be speaking at the Best Ever Conference. I believe it’s February 23rd and 24th, 2019. We’ll have a booth there. Best Ever listeners, and those of you that are new to the Best Ever podcast, I wanna say from a participant in every single Best Ever Conference that it is by far the best ever conference that I’ve ever been to, and I do not like conference at all. Joe puts on a fantastic conference.

So don’t worry about the cold in Denver… A little secret here – sometimes it’s 50 degrees, 60 degrees in February. Anybody that comes to that conference will have an absolutely amazing time, and I don’t care how long you’ve been in the business, you will learn a ton.

Joe Fairless: So meet Scott at the Best Ever Conference, February 22nd-23rd. You can go to besteverconference.com.

I enjoyed our conversation today and loved learning about this case study on the RV park. Then also I enjoyed your presentation last year at the conference… In your presentation last year you talked about the planning for how you look at worst-case scenarios, and lo and behold, here you go, now you put it in action.

Thanks for talking about this case study, thanks for being on the show. I hope you have a best ever weekend, and we’ll talk to you soon.

Scott Lewis: Thank you, Joe. I appreciate it, as always, being on the show.

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Joe Fairless and Chad Wittfeldt on the Best Ever Show flyer for episode 1511

JF1511: Lose It All But Bounce Back & Scale A Real Estate Business In Just 9 Months with Chad Wittfeldt

What a crazy story! Chad lost all of his money just 9 months ago!! Now he’s here on the show to share his story of going from that to partnering in over 100 units. If you’re feeling discouraged or just want to hear a great story, definitely hit play on this one! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

 

Chad Wittfeldt Real Estate Background:

  • Started investing in the equities market at 17 years old, before moving to currency markets
  • Joined BlueSpruce to apply his online media skills while learning real estate
  • Lost everything, was a valet in downtown Denver, is now partnering to acquire 100 units, all in 8 months
  • Based in Denver, CO
  • Say hi to him at https://realbluespruce.com
  • Best Ever Book: How to Win Friends and Influence People

Get more real estate investing tips every week by subscribing for our newsletter at BestEverNewsLetter.com


Best Ever Listeners:

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

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

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


TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best ever 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, Chad Wittfeldt. How are you doing, Chad?

Chad Wittfeldt: Doing great, Joe. Thanks for having me.

Joe Fairless: My pleasure, nice to have you on the show. A little bit about Chad – he started investing in the equities market at 17 years old before moving to currency markets. He joined Blue Spruce to apply his online media skills while learning real estate. Blue Spruce is a real estate company. He lost everything though, and was a valet in downtown Denver, and now he has partnered up to be a partner on 100 units, all within about eight months. Based in Denver, Colorado. With that being said, Chad, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Chad Wittfeldt: Absolutely. For my background, I grew up in Michigan and I was in the process of moving out to Denver when I realized that I was flat broke… And the back-story behind that is I was pretty heavily focused in the foreign exchange market. I graduated college, I was moving out to Denver, and I arranged this partnership with a guy who I had trusted with my trading account. At the time, shame on me for putting everything in one account and giving someone access to it, but I was a hungry kid out of college and I wanted to “make it” as a professional trader, and it turned out the individual just didn’t have the financial responsibility; he was placing massive positions on my account, blew it up…

Then I got linked in here in Denver with my current partners now, but at the time I was in the process of moving here and didn’t really know how to pay for my rent and all those things, so I was a parking valet when I was closing my first apartment deal in Bridgeport, Connecticut… We closed that, and then we closed an 83-unit property in Branson, Missouri as well, so a lot has happened very quickly.

Joe Fairless: Wow, no kidding… That was all within the last eight months?

Chad Wittfeldt: Within eight months. I think I was in Iowa, driving from Michigan to Denver when I realized I had no money…

Joe Fairless: Dang…

Chad Wittfeldt: Yeah, so it happened really quickly.

Joe Fairless: How much did that person lose of your money that was in the account?

Chad Wittfeldt: At the time – like I said, I was fresh out of college, so I had about $26,000 saved, and that was from working from 15 till 22, 23…

Joe Fairless: Oh, that makes me sick…

Chad Wittfeldt: It was a lot of money for me. It was everything I had. I grew up in a pretty middle-class family, so I never went without, and I always worked in the summers, and this and that and the other thing, so for the first time in my life I had felt that true, real financial pain of “How am I gonna pay my bills?”

Joe Fairless: Wow… What did you say to the person who lost  the 26k?

Chad Wittfeldt: Man, it was tough… I didn’t even know what to think. When something like that happens, the first initial thing is you don’t believe it. You think “Okay, this was just a glitch on my broker. This can’t be real.” Then you kind of come to terms, and I don’t remember exactly what I said to him, but I have to imagine that I used some profanities, for sure. And the trouble is this is an individual that I met in the online community. I never met him in person, so it’s not like I could go and have a face-to-face conversation with them. It wound up with him just blocking me on every communication platform, and since we didn’t have any operating agreements or any contractual agreements in place, there was no recourse on my end. It was just a hard lesson, for sure.

Joe Fairless: Which leads us to the lessons that you learned… What are they from this?

Chad Wittfeldt: Honestly, due diligence on people. Don’t ever follow somebody just blindly. It doesn’t matter their status or whatever the case is, who’s in their network or what name is behind them. Just don’t follow someone blindly. Then number two – just diversification. Always, always. Never put so much risk on one entity like that.

Joe Fairless: Due diligence on people, but even after the due diligence, having written agreements in place, right?

Chad Wittfeldt: Oh yeah, absolutely.

Joe Fairless: Okay, so when did this happen? How many months ago from our conversation right now?

Chad Wittfeldt: Right now — this happened, I would say, nine months ago. Exactly.

Joe Fairless: Okay, nine months ago you lost everything that you had saved since a teenager, through what we just talked about. And then what happened after that, once you came down to earth and you had some sanity and clarity? What did you do next?

Chad Wittfeldt: Sure. Well, I was fresh in Denver at the time, and I knew nobody here. I just was going through a lot of self-reflecting and thinking. So I did graduate college, I didn’t mention that… I did go to school, I did get a degree… So going and getting a corporate job was always an option. It was certainly always an option that would have settled that pain. But I knew myself well enough that I wanted to make it as kind of in an entrepreneurial phase, and then I didn’t wanna live a life of asking permission 24/7. I don’t wanna ask permission to go ride my bike in the mountains. I don’t wanna ask permission to go fly wherever. I like to create my own path. So I was focused on making that happen, so the first thing I did was just figure out how I can make some money to live, so I started just parking valet, because that gave me some flexibility. I was at least able to go park cars at night, instead of working during the day.

Joe Fairless: How much can you make on that?

Chad Wittfeldt: I was probably making about $25-$30/hour, something like that. Downtown Denver, just trying to find the high-end locations, and shake hands and smile. [laughs]

Joe Fairless: Okay.

Chad Wittfeldt: So that was the first focus, paying my bills. The second focus was starting to build my network in Denver, so I started attending meetup groups and networking events like it was my full-time job. I was going to them every single day. I actually got linked into my business partners now. My first point of contact was my business partner Brad, who I met at the bike park. We’re both pretty active mountain bikers, and… I lived here in Denver for two days, and I just didn’t know anybody. I wanted to meet some friends, so I just said “Hey man, it’s a sweet bike.” We just kind of started going back and forth, and he says “Hey, I’m in real estate.” I’m like “Great, I’ve been interested in getting into real estate.” I go to our business partner Adam Adams – his meetup group; I meet Adam, grab his attention a little bit, and long story short, we just set an appointment and now I’m business partners with him.

But after my head kind of calmed down, I was just focused on action. I was focused on making steps forward to kind of remediating that loss and remediating that pain. I think in situations like that it’s really easy to get focused on the bad instead of focusing on the solutions. I think that mindset shift for me is what really helped a lot.

Joe Fairless: How many units are you in?

Chad Wittfeldt: Just 100 units right now.

Joe Fairless: You say “just”… That’s a lot of units. I think I heard you say an 83-unit…?

Chad Wittfeldt: Yeah, 83. That’s in Branson, Missouri.

Joe Fairless: Branson, Missouri… And then, I guess I can do math – 17 units in Bridgeport?

Chad Wittfeldt: Yeah, Connecticut.

Joe Fairless: Okay, got it. $25/hour, times (let’s say) 40 hours, times four weeks – that’s about $4,000/month, $48,000/year, plus or minus. So I imagine your role in these apartment communities isn’t just investing your own money, since you started from zero nine months ago, and you’ve got a $25/hour job… So what is your role in these communities?

Chad Wittfeldt: I actually invested no money into these deals. I invested my time, and my expertise and my knowledge. And as far as the math on the valet – I wasn’t working 40 hours a week, that’s the thing. My focus was getting away from that  as much as possible. So my full-time job at that point was building my real estate journey.

To answer your question, my role in these apartment communities is — I guess I’d like to say I wear quite a few hats. I help on the lead gen side of deal flow and investors; primarily though, the back-story behind that is when I first joined the team, I wasn’t partnered with them. I was just their acquisitions guy. So all I was doing was cold-calling brokers and wholesalers and saying “This is who I am, this is who I’m working with, these are the assets we’re buying. What’s your e-mail? I’m gonna send you over my buying criteria.”

I was getting pretty frustrated, because I was making 40-50 phone calls a day, following up with more e-mails than I can even count, and my inputs were not matching my outputs in the sense of these brokers were sending me single-family deals and new developments and empty pieces of land. Just very awful stuff that’s not even close to my buying criteria… So I went back to my business partners and I said “Hey guys, this might be what you’ve been taught by whoever, but I don’t really think this is working very well. What if I can position you, this company and ourselves so that deals and all the moving pieces of closing a deal comes to us, instead of going out and actively seeking it?” They said, “Okay, show me what you’ve got.”

So I just started showing them a lot of intent-based marketing strategies that were actually going to convert and actually bring us leads in different facets of real estate. Just to kind of give you a quick example, we had a 160-unit property under contract last month, and that deal came to us because I had my partner record me a video explaining what IRR is, and debt service coverage ratio, and what it means in the apartment syndication community… And I make sure that the algorithms of social media are right, and I post it, and I make sure that the engagement gets right and it gets out to the right people… And that brought us a deal that we actually put under contract.

So just a lot of digital development, online development, and making sure that our message is positioned properly and it gets in front of the right people. So that’s my primary focus in the company.

I also pre-underwrite deals and help raise money with my personal network of investors… So definitely a couple different hats, but it’s been awesome. It’s been a lot of fun.

Joe Fairless: It’s a lot of fun to hear your story and how you’ve created the value and made room for yourself and put yourself at the table with the team. As far as the 160-unit deal, you said you had it under contract last month. Did it close?

Chad Wittfeldt: No, we let the contract dissolve on that.

Joe Fairless: What happened?

Chad Wittfeldt: It was a pretty medium rehab, so it needed roofs and all kinds of different things… In our initial due diligence phase, just based off of our communications with the seller and the broker, we anticipated about 1,6 million of cap-ex, and at the time we hadn’t visited the property in person. We sent one of our partners down to the asset and he walked the property, and we just found a lot of things that hadn’t gotten disclosed by the sellers and the broker…

Joe Fairless: Like what?

Chad Wittfeldt: The exterior stairwells all needed to be replaced. Actually, the day after my partner left, someone actually stepped through and it broke on them.

Joe Fairless: Oh, man…

Chad Wittfeldt: Yeah, so it just didn’t pass through our due diligence. We’re very strict with what we’re gonna close on. We still pursued the deal, but we had a contractor come out and bid out the entire rehab, line by line, and it came out to be a little bit more than we originally anticipated… So we went back to the seller for a renegotiation and they just were not interested, so we said “Okay, we’ll work on our other deals, and thanks for your time.” That’s just how that worked out.

Joe Fairless: What are some other examples of intent-based marketing strategies that you do now that have generated leads?

Chad Wittfeldt: A lot of it comes through content production and social media. Specifically, our last property that we actually closed – it came to us in a Facebook group. Somebody had asked a question, and I believe my partner went in and gave them a very educated, very well thought out, very genuine answer. When other people see you doing this, it shows that you’re credible, it shows that you know what you’re talking about, it shows that you come from a place of value… And the same thing – that person reached out to us, said “It looks like you’re doing awesome things in multifamily. I’d love to bring you deals.” So they wound up bringing us the 83-unit property and we closed on it.

But yeah, if anybody sees — I’m not talking about specifically my business partner… If any of the big names – Grant Cardone, and Gary V., and Tai Lopez and Tony Robbins… You see their content and you see the videos that they’re producing – you have to understand that these things are very well engineered to appeal to a certain person and make them feel a certain type of way, and then respond accordingly. We do the same thing, it’s very strategic.

A lot of our content that we produce – we have a podcast as well, that brings us deals, that brings us investors, people who wanna work with us… And we just kind of replicate that process through different mediums: Facebook, Instagram, YouTube… Honestly, it’s really just about positioning the message, showing who we are, what we’re doing, that we’re credible, that we can close, and providing value along the way. A lot of it comes through an educational standpoint, teaching people how to position themselves properly online, teaching people how to pre-underwrite a property without spending three hours just going through a basic T-12 before going through full-on. Just teaching people these little ins and outs and trying to provide as much value to our marketplace as possible. It typically comes back in the form of deals and investors.

Joe Fairless: The 83-unit in Branson – what more can you tell us about that in terms of purchase price and business plan?

Chad Wittfeldt: That was acquired for 3,1 million, and that property had about 1,2 million of cap-ex in renovations before we acquired it, so it doesn’t need really any value-add. What we really like about that property is our property manager is one lady, and she’s been managing that asset for several years; she knows all her tenants by name, she hosts weekend barbecues in the courtyard… Right now it has a lot of older residents, so we have discussed positioning it, and — I don’t wanna say converting, but kind of just moving it over to kind of like a light assisted living center. That’s something that we wouldn’t really execute on for a couple years, but right now it’s a pretty straightforward asset. It doesn’t need really any updating, it doesn’t really need much repositioning, so… Just making sure that it cash-flows properly, keeping occupancy up, rinse and repeat, really.

Joe Fairless: Was does a “light” assisted living facility look like?

Chad Wittfeldt: This isn’t something that I’ve really heard of as a strategy before, but assisted living centers – you have a caregiver there the whole time, right? So a light model of that would just be somebody to help the older residents get their groceries, help them cook once in a while… They’re not there primarily the whole time, but really just kind of creating the community and creating the environment around the older demographic, to attract more into that property.

Joe Fairless: How do you model that in your underwriting when you’re acquiring the property?

Chad Wittfeldt: We underwrite very conservatively. We underwrite from the standpoint of where the property is standing today, but basically we had anticipated that if we do decide to execute the strategy, we’d be able to charge higher rents due to the extra amenities, and obviously just offset the expenses from there as well.

Joe Fairless: From the 83-unit, before we move on to the 17… From the 83-unit, for the Best Ever who are listening and are like “Wow, I wanna get in on an 83-unit, too…”, how much money have you made from this to date, if anything so far?

Chad Wittfeldt: Our company takes an acquisition fee straight from the close, and then monthly distributions off the cashflows. The way ours is structured is our partners are on the general partnership side, and then we have a sponsor on our general partnership side as well. Then on the limited partnership side, we just have our equity investors.

What’s nice about this property – it’s been cash-flowing since day one, so we’ve already received some quarterly distributions off of it.

Joe Fairless: Oh, that’s great. So what was the acquisition fee?

Chad Wittfeldt: I believe in our original underwriting it was 3%, and then we brought it down to 2%. I’m not very good at math. I wanna say it was like 60k-70k.

Joe Fairless: Cool. And how much were you able to take away from that?

Chad Wittfeldt: Well, since we had to split some of it with our sponsors, and then we split it up between our partners on the general partnership side, I wanna say it came out to like 9k-10k/person off of it.

Joe Fairless: That is 400 hours work of valet, so that’s darn good, right? [laughter]

Chad Wittfeldt: The way I look at it, too – you put in the work for something that’s gonna pay you off for the next 7, 8, 9 years. So it’s just a long-term play, really.

Joe Fairless: You all are in Missouri, and now let’s go way up to the East Coast to Bridgeport, Connecticut, a 17-unit… How did you come across that deal?

Chad Wittfeldt: That property came off to us on Facebook. It’s crazy. People look at social media as just a place to post pictures of your dogs and your kids, but business actually goes down on Facebook and Instagram… So it’s pretty cool to see acquisitions and see a forward ROI from those efforts.

Joe Fairless: Specifically from Facebook, was it an ad, or was it just a post that you did on your group page, or what was it exactly?

Chad Wittfeldt: Basically, this property was already under a contract and moving through due diligence before I came onto the team, but I believe this property came to Adam Adams just through networking in a Facebook group. Not his own group, but somebody else’s.

Joe Fairless: So a 17-unit — was it represented by a broker?

Chad Wittfeldt: Yes.

Joe Fairless: And what are the numbers on this one?

Chad Wittfeldt: I believe–

Joe Fairless: You weren’t as close to this one as the other one…

Chad Wittfeldt: No, I really wasn’t.

Joe Fairless: Fair enough. We won’t get into any details on this one. I’m really grateful that you talked to us about that 83-unit. That was really helpful for just understanding the mechanics behind it and how you all found it.

What was your major in college?

Chad Wittfeldt: Entrepreneurship.

Joe Fairless: Oh, cool. Where did you go?

Chad Wittfeldt: I went to Northern Michigan University up in Marquette.

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

Chad Wittfeldt: I would just say honestly for me it all starts with the mindset. It’s so easy to talk about it, it’s so easy to go post a status on Facebook about surrounding yourself with the right people, or staying positive, or this and that… But to actually execute upon it when things are not looking good – that’s what’s hard. When you’re in the trenches and you don’t know how you’re gonna pay your bills, it’s hard to stay positive then… So I’d really just say focus on building that foundation of your mindset and build out from there, because you can really build an empire on a weak foundation.

Joe Fairless: What’s one thing you do regularly that works on your mindset?

Chad Wittfeldt: Gratitude. Constant, constant gratitude. I’m in a position right now in my life where I’m young and I’m in this game of real estate, and I’m surrounded by people who have already found their success, who have already done it… So instead of looking at them out of jealousy or greed or any of this, I look at them out of gratitude that I even know them, I look at them out of appreciation.

This past weekend – I’m a huge dirt biker and I went up in the mountains with 12 guys that I was riding with, and pretty much all of them are very successful real estate entrepreneurs. They’ve got their Toy Haulers and their brand new Diesel trucks and brand new dirt bikes, and I’m righting with them on my 1998 KTM dirt bike… But you know what, the entire time I had so much gratitude and so much appreciation that I was even able to get out there in the first place. So it’s coming from that place of constant gratitude.

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

Chad Wittfeldt: Let’s do it.

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

Break: [00:23:00].19] to [00:23:46].28]

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

Chad Wittfeldt: How to win friends and influence people, Dale Carnegie.

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

Chad Wittfeldt: Real estate specifically?

Joe Fairless: Well, yeah… We already talked about that other one. [laughs]

Chad Wittfeldt: [laughs] I guess you could say this 160-unit deal had a mistake in it in the sense of we didn’t dig as deep as we needed to in the very beginning, but at the same token, I believe there’s a process to things. We kind of have this rule in our company that we’re not gonna go visit a property until it’s under contract… And that was brought to us through previous experiences that didn’t transact either… So just keep your ducks in a line, and it’s not closed until it’s closed.

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

Chad Wittfeldt: Helping others. I’m not where I intend to be yet, but I’ve been through a lot over the last eight months, between losing it all and then making some  real momentum in my life… So I started to help other young entrepreneurs in my space, and I do more calls than I can count just to help them get their businesses going.

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

Chad Wittfeldt: Find me on Instagram. It’s @cw_invests. You can find me on Facebook – just my name, Chad Wittfeldt. I post a lot of content, a lot of stories, and the best place to reach me is probably in those DMs right there.

Joe Fairless: Inspiring conversation. I love hearing how you overcame a pretty challenging financial situation, and… Here’s a question – are you happy that it happened?

Chad Wittfeldt: Very. I’m very, very happy.

Joe Fairless: Ain’t it crazy how that works?

Chad Wittfeldt: It really is. Those pain points, they’re the greatest motivators and the greatest educators.

Joe Fairless: Yeah. Thank you for getting specific with us about what you did next, how you added value, how you focused on networking and going to meetups as a full-time job, making some money on the side just to pay rent and food and gas for your dirt bike, and then now what you’ve done, and what — we haven’t even scratched the surface. Really inspiring to hear this.

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

Chad Wittfeldt: Thanks, Joe.

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Joe Fairless episode 1509 banner with Adam Adams

JF1509: How To Raise $1 Million In Just 4 Days In A Crisis #SituationSaturday with Adam Adams

Adam is a repeat guest and is here today to share a fascinating story. He was in a situation where he was supposed to close in 4 days, but needed $1 million more to do it. It was time to get grinding and raise that money! Hear how he was able to do it and what he would do differently in the future. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Adam Adams Real Estate Background:


Get more real estate investing tips every week by subscribing for our newsletter at BestEverNewsLetter.com


Best Ever Listeners:

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

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

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


TRANSCRIPTION

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

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. The whole purpose of this is if you’re in a similar situation, you’ll know how others have handled it, and in some cases overcome the challenge, in other cases just learned a whole lot… And in today’s episode, it’s how they overcame a challenge – we’re gonna be talking about if you need to raise a lot of money in a short period of time, how someone did it. Who that someone is is Adam Adams. How are you doing, my friend?

Adam Adams: I’m fantastic, how are you?

Joe Fairless: I am doing fantastic as well, and nice to have you back on the show. If you recognize Adam Adam’s name, well, one reason could be because you’re a loyal listener. He gave his best ever advice in episode 1238. You can learn more about Adam and his advice there.

Today we’re gonna be talking about a specific situation that he was in. I don’t know the circumstances, but I do know that he had to raise a million dollars in four days… So please, fill us in. What happened?

Adam Adams: Alright, so we are fairly new syndicators still. We’ve syndicated a few deals and helped other people raise money for their deals. And when you’re new at syndication, it isn’t always easy; that’s just gotta be the truth of the matter. Some people say if you find a deal, the money will come; that might be a little true, I’m not gonna argue against it… I’m just gonna say there’s a lot of work involved, as well. There’s a lot of mindset, and there’s a lot of work.

At the time, this was our second syndication. We did one syndication on a small property, 16 units in Connecticut, and it took us about three weeks to raise 300k. Then we got better at raising money, so on the second syndication that came up — I’m supposed to be the money raiser in my company, similar to you. I’ve got a podcast, and that’s supposed to be my role. I raised a couple hundred thousand in the first few days, and at the time I didn’t really know that this was my role, so I went on vacation, literally. I went out of town, and then I came back, and I was like “Hey guys, how are we doing?” and they were like “Oh, you know, we’re at 300k”, and I’m like “But we were at 300k before.” They said, “Oh, yeah… Yeah, yeah.” So I said, “Hey, I’m gonna go out of town for another ten days next week, so let me teach you all what I would do to raise the other million.” So I taught everybody what to do, and then I went on vacation with my girlfriend, had a great time at the Jazz Fest in New Orleans…

Joe Fairless: Did you say “girlfriends”, multiple?

Adam Adams: Oh, I did maybe subconsciously say that… And now I’m gonna get in big trouble. No, my one single girlfriend.

Joe Fairless: Okay, just wanted to make sure… [laughs]

Adam Adams: My one, and she knows who she is… Anyway.

Joe Fairless: Both of them do.

Adam Adams: Both of them do. [laughter] Now, I don’t think that there was a Freudian slip; we’ll have to rewind and see if I did say that, but I should only have one girlfriend. I only know of one.

Joe Fairless: [laughs] Fair enough.

Adam Adams: So anyway, I went out of town to the jazz festival, I came back after ten days, and I was like, “Great, where are we?”

Joe Fairless: 300k.

Adam Adams: 300k. You know it. You know the story, Joe.

Joe Fairless: I saw that coming. I don’t know the story, but I saw that coming.

Adam Adams: So everybody was talking about “Okay, what are we gonna do? How are we gonna do this?” We had some motivation, they believed in me and I didn’t know what to do exactly, but I always felt that we need to have a strong mindset. I’ve always felt that way. What’s his name — he just came on your podcast; he’s a friend of mine, and for some reason I can’t think of his name because I’m on the spot…

Joe Fairless: Because you’re friends with everyone.

Adam Adams: I try to be, yes. So Tim Bratz was just recently on your podcast…

Joe Fairless: Yup.

Adam Adams: He had a similar situation where he had to raise a lot of money in a very short amount of time… It was all mindset. The power that he had was the power of saying “I can’t fail. I just have to do this.” You ask yourself how can I, how can I – so  I just said, “I’ve canceled all of my other appointments for the next few days…”, because we had four days to close, so I canceled everything.

I remember calling everybody and saying “I can’t go to lunch with you anymore, I can’t talk to you on the phone anymore, I can’t do this with you. We have a great podcast interview coming up, but I’m gonna have to postpone that for another couple of weeks, because I have something that needs to happen.”

So I locked myself in the room from about 10 AM to 6 PM for four days in a row, and that’s where it starts out… People would walk into the room while I was in between calls, and they were like “We’re getting down to the wire.”

I remember it was the day before we were supposed to close, and we still needed 500k. So three days, maybe about 500k. And this is all estimates, because I don’t have the specifics, but I remember thinking that I had about 500k more that needed to go in the bank tomorrow, so that we could close on time… And I had several investors that I was talking to on the phone say “What happens when you don’t close this?” and I was like, “We’re closing it.” And they’re like, “Yeah, but what happens if you don’t close it?” and I just had to politely say “We’re gonna close it. I don’t have time to talk about there being a possibility of anything else… So I’ve just gotta respectfully let you go, so I can keep making these phone calls.”

Then I actually truthfully had two different of my partners walk into the office. They were like, “Hey, Adam, what happens if we don’t close?” and to them I wasn’t as nice as I was on the phone. I was like, “You can’t effin’ tell me that! You’ve gotta get out of my office, and everybody in this office has to know that we’re gonna close. We have to know that.” Honestly, it was kind of crazy, because — this is a totally true story, it’s just mind-boggling how down to the wire it was.

So the day of, we still needed 250k, and one of the 1031’s that I think was 200k backed out. So that put us at needing a ton more money… I just kept calling — and when we get into the questions, I wanna talk about the sales pitch that I used when I called people, because I do think it is beneficial for anybody out there. It’s not just the mindset and it’s not just the grind, but the psychology behind asking for money also needs to kind of come out in the interview today, so that we can really learn, not just that we need to have some tenacity and never quit.

The end result is literally and truthfully the day that we were supposed to close we got that last wire in about two hours before close. My partner DJ ran to the bank, made our wire, and just in time we barely, barely closed. Then the next day — and this is all just… I don’t know if it’s really ten million; I don’t think I’m exaggerating, I don’t think I’m lying, or either way… I never even wrote it down. But the very next day after we closed, that’s when I got all of these people call me and said “Hey, we want in on that deal, and I assume you didn’t close, so now we’re ready to get into it”, and I’m like, “It’s gone.”

Again, this is not literal, but I feel like the very next day I had ten million dollars that wanted to go into it; I only needed one, which I guess helps a ton for the very next deal that we do. Ever since those days, raising money is a lot easier now, but… I’ll give it back to you.

Joe Fairless: Let’s talk about what you said to the investors, and then we’ll go from there.

Adam Adams: Okay, so this was 506(b), which is important to note that I had to know them already. I couldn’t advertise this; I had to have a prior relationship, which kind of painted me into a corner. I was stressed, but I wasn’t willing to say anything else. I thought “I’ve gotta only talk to people that I know, and I’m running out of people that I know. This is hard”, so I started going back, and I started to try to figure out what could I say to change it… And I kind of took a page out of your book; something that you do naturally, I figured that I would have to also do.

Having to figure out a way to tell somebody who’s also a syndicator why it makes sense for them to give ME their money… Because that’s all I had left, is other syndicators. So here’s the pitch, and it worked like a miracle. I would dial the phone, and when they said “Hello”, I would just say — let’s see, I’d get one of their cards, and I would say “John, it’s been a while. I haven’t seen you since we were at the Ultimate Partnering Events, or since we were at that sponsor event. I just wanted to touch base with you… How’s your syndication business going?” So that’s the first thing – “It’s been a while. How is your syndication business going?” Very, very important question, because now you have to start to listen, and when listening, you have to start asking more questions.

They were like, “Oh yeah, I haven’t been doing it lately because it just got too hard, and I had to go back to work”, or whatever they said. Whatever they say, you really have to be intentionally open-minded to understanding more about that situation, whatever it is.

So “How’s your syndication going?” “Oh, it’s not okay.” “Well, what happened?”, and then you’ll get into a part of the conversation where it’s kind of like this “Well, I know you have the money, I know that you have the drive for it, so what you’re telling me is that the reason you haven’t been successful is because it’s just been really tough to find a good deal. And the reason that it’s tough to find a deal is because you didn’t have the track record” and then they usually answer “Yes.”

So when it comes down to that point, then you say “Well, I’ve got a deal right now. Why don’t you just go the minimum in that deal…”

Joe Fairless: Which was…?

Adam Adams: 50k.

Joe Fairless: Okay.

Adam Adams: “Why don’t you just go with the minimum in that deal. That gives you the track record to have some more doors to your name, and then hopefully the brokers will start taking you more seriously, just because you’re invested in a deal. It always got this “A-ha!” moment for them, where they were like “Huh… I never thought that it could be that easy to just get experience.”

So really diving deep into this question, people who are listening might have the thought process that it’s way easier than what I just told you. They might just assume that it’s super, super-easy. “All I have to do is say ‘How’s your syndication business going’ and then I’ll be like ‘Invest in my deal”, but you have to find a way to sit back and first ask enough questions.

Here’s the analogy I have for you – if you walked into a doctor’s office and you said “Hey, I’m not feeling well”, and they just said “Alright, we need to give you a cast for  your ankle”, that’s not a solution to your problem. They haven’t diagnosed you well enough yet. So when somebody says “Oh, you’ve got measles/mumps” and you walk in and you’re like “Nah, it’s just my nose hurts, and I just didn’t know what’s going on.” They’re not solving your problem, and that’s because they’re not asking enough questions first. That has to be you. When you start by asking somebody “How’s your syndication business going?” and they start to answer, you really have to respond back and forth with a lot of dialogue.

You know how the doctors say “Does it hurt here? Does it hurt here?”, and they keep touching different places, or they say “What happens if I turn your neck like this?” and when they ask enough questions, they’re like “I think I know where this pain point is.” That’s you as the salesperson, allowing people into your deal. You have to see “What is it? Are they having trouble with brokers? Is it a different reason?” There’s so much that’s to it, but if you don’t understand how to ask all of these questions repetitively to draw out the real diagnosis, that’s when you’re going to fail.

I don’t know exactly how to teach that 100%, but if you have questions for me, Joe, that might help bring that out, I would be happy to help… But the point is, you have to ask enough to really understand what it is, because when you solve the problem, it needs to sound completely genuine; it needs to be completely genuine. “Well, I could help you by you being involved in my deal.” You say you have a bunch of doctors/attorneys/whatever that have a huge liquidity and they’re waiting to get into your deal; why don’t I put you in on my deal, and you let all of your doctors and attorneys come in on this deal that we own together, because you’re on the general partnership now. You know them personally, so that makes it legal by the definition of 506(b), and now I’ve solved your problem. You own the real estate, you’re on the deal, and your investors are going  into your deal, so it solves their problem, too. That’s kind of what I’m trying to get out or help other people to understand.

Joe Fairless: Yeah, it’s very helpful, and one other thing to point out here is that you have a Rolodex of a targeted list of syndicators, because your concept certainly works, regardless of if you’re talking to a syndicator or a W-2 professional or an entrepreneur who’s not in real estate, and that concept of asking them to talk about themselves, so that you can learn more about them, and then as you talk about your opportunity, you can match that up with challenges that they have. “Oh, I’m looking to decrease my tax burden, I’m looking to get more consistent cashflow, I’m looking to diversify from stocks, I’m looking to get a track record so that I can eventually do this on my own, but I don’t have any experience so far. I’m trying to find deals etc.”

So the key from a macro  level is, from what I’m taking from this and from how I approach conversations too, is listen and learn when you’re talking to someone. That makes the conversation so much smoother and more real, because you’re simply customizing the benefits of the opportunity to whatever is most relevant to them, versus having these bullet points that they don’t care about at all, because they’re interested in other bullet points that you don’t know about because you didn’t ask questions and listen. But in your case, in this example, you were reaching out to syndicators, so the challenge with doing deals is what you’ve just described, for the most part – finding the right deal, and getting the right credibility in order to do that when you’re starting out. So it’s a beautiful approach for that particular group, and I’m glad that you shared that.

Adam Adams: Thank you, I appreciate that.

Joe Fairless: The couple follow-up questions, taking a step back just about the opportunity – it sounds like you raised one million in four days, but even drilling down more, you raised 450k in half a day, it sounds like. So my question is, the amount – let’s just call it that million bucks that you had four days from now; let’s put yourself in that situation – you’ve gotta raise a million dollars in four days… Is that million dollars all the equity that was required for the deal, or was that million dollars the equity required simply to close the deal?

Adam Adams: Super-good question, and there is  a good distinction. Let me respond by saying this is our second syndication, and because of that, we hadn’t yet learned a lot of the different costs that are associated with a syndication… So how much we raised wasn’t really how much we will raise on the next one that’s the same price. We probably would’ve raised at least another 100k, knowing about prepaid insurance, knowing about utility deposit… These expenses jumped at us. Even though we were taking an education through somebody who has had thousands of doors, they never really told us to prepare for that. So there’s a multiple answer to your question.

First off, we were allowed to raise up to 1,3 million, and we raised 1,28 million.

Joe Fairless: What do you mean you were allowed to?

Adam Adams: I mean that on the private placement memorandum there’s a maximum, so we can raise up to 1,3. And there was a minimum, but we raised more than that. If we needed to, we could have closed with $200,000 less than that (1,1), and then we just used our money for the rest of the syndication. So we would have been able to do that; I didn’t want to do that and I specifically, when I was making the calls, I didn’t allow myself the freedom of thinking that I could stop at 1,1. I just had to get the entire amount and then some, or else I felt like I was failing at it… So I just knew that I had to go with the whole amount. But like you asked, we could have legally gotten to 1,1, still closed; we would have had our money into the deal, just fine, and then we could have raised the last later. But we raised 1,28, which is basically 1,3 (I always round it). So we raised about the full thing, and then again, on the next deal, we will know better on some of the closing costs that kind of bit us in the butt, and we will absolutely raise at least those things that we found on that last deal.

Joe Fairless: And you mentioned a couple of closing costs – prepaid insurance and utility deposit… Anything else that stands out that was something that it was like “Oh, shoot, I’ve gotta account for this”?

Adam Adams: I don’t have it in my head right now, but those were the two big ones that we didn’t get. On the last deal before that we learned a few other things… But I’ve had a podcast simply on just all of the closing costs, I just don’t remember all of those… But there’s a lot that I think surprise new syndicators, so I’d always be very cautious to see if you can have a good mentor with you, somebody who’s learned the ropes or listened to Joe’s podcast… Or read your dang book; that book is crazy. I’m buying it today, Joe.

Joe Fairless: You haven’t bought it yet?

Adam Adams: I was planning on purchasing it before —

Joe Fairless: Interview over. Interview over.

Adam Adams: [laughs] I was planning on purchasing it before this interview, but I had a longer interview go on… And I’m dyslexic, did you not know that?

Joe Fairless: I didn’t know that.

Adam Adams: I’ve read one book, Joe. I’ve read one book. It was Rich Dad, Poor Dad, and it changed my life. Now I’m gonna get through your 400+ page book, and pay $50 for it, because I know the value is there.

Joe Fairless: Read it before your next deal, too. It will be helpful for you, before you put your next deal together. Well, thank you so much for being on the show, talking about a million bucks, four days… How many people make up that million dollars, by the way? You might now know the exact number, but roughly.

Adam Adams: There’s 20 people exactly that makes up 1,3.

Joe Fairless: Got it.

Adam Adams: So 16-ish, 17-ish is what changed in four days.

Joe Fairless: Well, congrats on that. You’ve got an event coming up?

Adam Adams: I absolutely do. We’re starting to promote it on your podcast. We’ve probably already heard a couple of them, and a couple more after this interview, but I would love if anyone wanted to join us… It’s a Raising Money Summit. It’s a two-day summit… I asked you, Joe; I said, “Hey, you’ve gotta come here.” It sounded like you wanted to; I’ll take you at your sincerity that you did want to…

Joe Fairless: I did.

Adam Adams: But you have a baby coming out – not from you, but from your wife – around the exact same time as the event… This is the first annual Raising Money Summit, 2018, and then I hope that you’ll accept my invitation to come to the next one.

Joe Fairless: Cool.  And what are the dates of it?

Adam Adams: November 17th and 18th.

Joe Fairless: November 17th-18th. I imagine it’s in Denver?

Adam Adams: It is in Denver. Everything I do is in Denver. If I can not travel, I will.

Joe Fairless: Alright. Well, it sounds like a great summit, and I’m grateful for the invitation. I’m sure there will be a lot of value for those who are able to attend and do not have the arrival of their first child during that timeframe.

Well, thank you, Adam, for being on the show, talking about the psychology and how you approach the conversations… And then we took a step back and talked about the psychology and how to approach conversations regardless of if we’re talking to syndicators or not… And the importance of caring about the questions you ask and the responses, and listening to those responses, because it’s so much easier to have a conversation when we listen, because then we can bring up relevant things to them based on what they were talking about; it’s a breeze, and it’s fun, because when you get someone talking about something they care about and they get passionate… And who doesn’t wanna talk to a passionate person? That’s fun. Those are good, lively conversations.

Thanks for being on the show. I hope you have a Best Ever weekend, and we’ll talk to you soon.

Adam Adams: Thank you.

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A best Ever Show episode 1503 flyer with Evan Hoffman and Joe Fairless

JF1503: Locate Your Major Revenue Stream And Take It Wherever You Want with Evan Hoffmann

Evan has a very interesting take on how investors and entrepreneurs can take control of their revenue streams. He is an investor himself and also consults others with their businesses. Hear what he has to say about what he calls a value proposition pricing scheme and how it relates to multifamily investors. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

 

Evan Hoffmann Real Estate Background:

  • Principal & Chief Strategist of Incisive Solutions, providing revenue growth strategies to the multifamily industry
  • Has been employing optimization techniques and helping companies grow revenues for 20+ years
  • Based in Denver, CO
  • Say hi to him at https://www.incisivesolutions.org/

Get more real estate investing tips every week by subscribing for our newsletter at BestEverNewsLetter.com


Best Ever Listeners:

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

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

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


TRANSCRIPTION

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

With us today, Evan Hoffmann. How are you doing, Evan?

Evan Hoffmann: Doing great, Joe. Thanks for having me on.

Joe Fairless: Well, I’m glad you’re doing great, and it’s my pleasure. A little bit about Evan – he is the principal and chief strategist of Incisive Solutions, which provides revenue growth strategies to the multifamily industry. He’s been employing optimization techniques and helping companies grow revenues for over 20 years. Based in Denver, Colorado. With that being said, Evan, do you  wanna give the Best Ever listeners a little bit more about your background and your current focus?

Evan Hoffmann: Sure, absolutely. When I said that I’ve been employing optimization strategies for 20 years, I’d almost simplify to say that I’ve been pricing somebody’s widgets for over two decades. I first started out in the car rental industry, pricing cars for the Hertz Corporation and a few others, and then moved on to other facets of hospitality, both hotel and in cruise lines, and I’ve been involved in multifamily both at the REIT level, and then also on my own as a consultant for the past 11 years.

Basically, what I do is I help multifamily owners, operators, investors, developers and redevelopers to find and locate where the revenue streams are and where they wanna take them. That can mean all kinds of things, based upon the individual needs and what it is that keeps these folks up at night.

Joe Fairless: Will you give us a case study of just one group or a person you worked with, just so we can have a sense of what you did?

Evan Hoffmann: Sure, absolutely. In one example I had this one client that owned a 156-unit apartment community that they had just done a value-add kitchen and bath upgrade on on most of the units… And the issue with them is they had a sense that they were leaving money on the table, that perhaps they weren’t positioning themselves in the right way from a pricing perspective, and also from a marketing perspective. The one leading indicator of that was that they were still [unintelligible [00:05:00].29] pre-lease a month and two months out at nearly 100%. That for me is a red flag, saying that there is an awful lot of upside opportunity from the pricing side of things.

They were also concerned about that they had invested so much money in the product, they were also looking to upgrade their demographic. So what I was able to do was to go in and create a value proposition pricing schema across the unit types and the different amenity variables within those unit types.

As an example, something on the second floor with a courtyard view may be priced a bit higher than something that was ground floor, closer to the street… That kind of thing, so that as folks came in and looked at it, they could see the value proposition and were willing to pay a higher amount for  a premium located unit, even though the interiors of them were identical. That’s just one example.

Joe Fairless: Let’s talk about that a little bit more in detail, and then we’ll go to another example, because I think this is a good way to guide our conversation, just to go through these examples.

Well, let’s see – value proposition pricing schemes… That sounds like something — other than their investment in you, it sounds like something that they didn’t have any out of pocket costs for. Is that accurate?

Evan Hoffmann: That’s absolutely correct. They’ve already done the upgrade on the place, they’re then bringing me in to bring a fresh set of eyes in. Sometimes there is an RO without the I. You don’t necessarily have to have the investment without getting a return and getting a [unintelligible [00:06:29].16] revenue stream. This isn’t always going hat in hand and going to cap-ex.

Joe Fairless: Should every multifamily owner do that, the value proposition pricing scheme based on where the unit is, and views, and that sort of thing?

Evan Hoffmann: Yeah, 100% of the time. It’s interesting, I get into conversations with folks and they think that that’s relegated only to an A product… But there are ways to create variables and variations for A products, B products, C products, high rise, mid rise, [unintelligible [00:07:00].10] There are lots of different ways to skin the cat and ways to look at it, so that then you can offer surely the right product, to the right customer, at the right time, for the right price.

Joe Fairless: What product was this 156-unit?

Evan Hoffmann: This was a product that went from a C+ to a B, or so…

Joe Fairless: Okay. And what were the different pricing variables or tiers?

Evan Hoffmann: Sure. This was garden-style, but there were floor differentials. Based upon the demographic – and that’s a whole other conversation we can talk about on a tangent… But based upon the demographic, this was a younger demographic, so the higher floor commended a larger premium, and we’ve discerned that by looking at how many days vacant the ground floor units were, versus the second floor, versus the third floor. The third floor units were the quickest to turn, the ground floor units were the slowest to turn… And there were younger folks that were kind of workaday folks, rather than folks that were in the older end of the demographic scheme.

Joe Fairless: Did I hear you say the ground floor was the slowest to turn?

Evan Hoffmann: That’s right.

Joe Fairless: But you charged a higher premium on the higher floor?

Evan Hoffmann: That’s right. Sorry, the quickest to turn – to move in. I apologize if that wasn’t clear.

Joe Fairless: Oh, okay. Got it.

Evan Hoffmann: Yeah, not turn time; move out to move in.

Joe Fairless: Okay, got it. I’m with you now.

Evan Hoffmann: So we were able to do this for all units in the building. The next piece was to look at proximity to parking, because there is a premium, as long as we’re not talking about street parking… But talking about parking whether there’s reserve space, or it’s simply first come first served… Based upon the ability to carry groceries, then get in and out, convenience, especially in winter climates; Denver, although it’s a lot nicer than certain other parts of the country, it really has severe winters… That also has a piece.

There were some units that had [unintelligible [00:08:46].04] so they got a premium. And then quite frankly, on the other side of the spectrum we had a few units that unfortunately overlooked the dumpster area. The owner did the best to mask with fencing and so forth, but it was still not exactly up to snuff, so we actually put a negative amenity value on that, bringing it slightly below the base we were playing with.

Joe Fairless: Okay.

Evan Hoffmann: So that created a total stratum of price points, even within the same  — whether it was a one-by-one box, or a two-by-two box. Each of those had enough variables to create a real value proposition.

Joe Fairless: What percent qualified for an upgrade in rent from the standard rent, would you say?

Evan Hoffmann: In that particular case, because there wasn’t a huge differentiation here, because all the units had been upgraded except for a handful — based upon the kitchen and bath rental, those upgrades were about $180-$250, and then the variables between floors and proximity, that added maybe another $100. So using three times the rent, almost everybody qualified for any of those. There were very few that couldn’t qualify for a top floor [unintelligible [00:09:57].19] that did qualify for a ground floor bare bones type.

Joe Fairless: Okay, got it. What’s the reason why the owned would do a decrease in the rent if it overlooks the dumpster, because it seems like they could get away with not having decreased rent on one unit. What we found is that there were 2-3 units that qualified for this, and the vacancy loss on those was excessive relative to the others. If you had a 600 square foot one-bed one-bath, pick the floor of your choice, and one looked at the dumpster and one didn’t, then the dumpster [unintelligible [00:10:32].27] each and every time.

We’re not talking about a lot of money. On $1,500 rent you bring it down $50. The other benefit of that is having loss leader pricing. That is available all of a sudden; from a price point perspective, you may be competing or have an advantageous position to compete with someone else, and then you do the offer [unintelligible [00:10:52].17] showing them the upgraded pieces.

Joe Fairless: And will you elaborate on what loss leader pricing is?

Evan Hoffmann: Loss leader pricing is that you advertise the lowest price available unit. If you have one unit that’s $1,300 and another unit that $1,600, you either advertise whether you have a website or don’t have a website, whether you’re using [unintelligible [00:11:11].01] simply posting on Craigslist or on Zillow, you post the individual units and that lost leader puts you into a different straddle when people are searching with price ranges.

Often times on many of these places you’ll be able to put in a price range that you wanna pay as a renter. So by having that loss leader pricing, you will show up in more searches if it’s below a certain level. If you have 20 people that are shopping $1,300 to $1,500, and you have another 10 that are shopping $1,250 to $1,500, and now that loss leader is at $1,250, all those other folks now find you. That’s the benefit of loss leader pricing – it increases your vision, your scope, and hopefully your gust cards.

Joe Fairless: Let’s pretend that a Best Ever listener is listening to this and he/she is like “I love it. I’m going to hire Evan, if he’s available.” I know you’re the principle in two [unintelligible [00:12:06].29] at your company, but let’s just roll with this… “I’m gonna hire him.” What is the process — well, I’ll give you a leading question, because I think I know the process starting out, but I’d love for you to fill in the gaps. When you get hired to do another 156 units, is the process first you review the historical vacancies for each unit, and also review the competitive set to see what the [unintelligible [00:12:32].09] to increase rent, and then you take a look at the property itself, tour it, and then you come up with the different categories for how you could increase rent for each of the different types?

Evan Hoffmann: You pretty much hit the nail on the head, Joe. The way I like to do it is I actually prefer to go out and look at the concept first. I’ll identify some folks online, I’ll also check the neighborhood, but then I will go and actually do a ghost shop, where I will create a persona of myself, saying I’m looking to rent… And I will shop three or four of what I determine are the main competitors, because I wanna understand what they’re offering… Not only from a bricks and mortar perspective, but also what they’re offering from a customer service perspective; what does the chain look like? How do they engage me? What are the questions that they’re asking me?

Then and only then will I actually go on site, to my client property, because then I can go “A-ha! Here are the advantages, here are the disadvantages.” How do we play up one? How do we minimize the other and then work with both the nuts and bolts of going through the rent roll, but also talking to the team.

An important aspect of this, because we are so reliant on the team on the ground in this industry, perhaps more so than any others, from a pricing perspective, is understanding what their mindset is, and how they feel about the product, and quite frankly, how they’re delivering services and how they’re talking to folks.

Joe Fairless: What are some questions that you would like to be asked when you’re ghost shopping, if it’s an exceptional experience?

Evan Hoffmann: If it’s an exceptional experience, I want some of that to really get down to asking me what it is that I’m looking for, and really define what that means. When I tell somebody “Yeah, I’m looking for a lot of room”, if they simply go to the biggest unit on the property, then they haven’t really done the full discovery. “Evan, when you tell me that you want space, what does that mean for you? Does that mean that you need a big kitchen because you’re a cook? Does that mean you need lots of closet space because you need storage? Are you worried about your furniture?” I want them to walk me down the garden path. In an optimal situation, they’re not giving me a quote for more than two units in the building. If they’re giving me a quote or a price point or fliers on more than two units, then I walked away without them finding out what it is I really need.

Joe Fairless: I would have shown you the biggest unit. [laughs] I’m glad I’m interviewing you, because I’m improving my skillset during our conversation. Okay, that’s really good stuff. After you go shop the competitors, do you have an opportunity to go shop the property that hired you?

Evan Hoffmann: That depends upon the client, whether they feel that there’s a need for that or not… Because at the end of the day, I wanna do this in kind of a collegial [unintelligible [00:15:15].21] working in collaboration with the client. Half of them will say “Absolutely, please go shop and then we’ll introduce you afterwards”, and others want it to be just an organic conversation that we go on there. And I understand both sides of it.

Joe Fairless: What’s more effective?

Evan Hoffmann: It’s better if I get to go shopping first.

Joe Fairless: Okay.

Evan Hoffmann: Because then they’re no longer on stage. Now they are in their natural state.

Joe Fairless: Got it. So you look at the competitive set, you go shop, you review the historical vacancies, and then you come up with the different categories that you can increase rent based on proximity to pool, or whatever?

Evan Hoffmann: That’s correct. The first thing we have to do is determine what base floor plan rent is, and what I mean by that is “What’s the price for the box before it has any of these other structures?”, so that every single 600 square foot one-bedroom one-bath starts off at a single price point, call that $1,000. Then you add on your other layers; the other layers are “What is the amenity value at the property level of being close to a pool, close to parking, having a better view etc.?” and then going in and literally walking as many units as possible, at least within proximity, to then get sight lines, so that you can then assign that amenity value to the unit that has the base floor plan rent, so you have those building blocks that then create a market rent for the individual units.

Joe Fairless: What’s another case study?

Evan Hoffmann: Another case study was a smaller property where the first thing that they had to address in my estimation as I looked at it was the lease management curve. It was a smaller building, somewhere under 50 units (42 or so), and literally, 50% of the units were expiring in February and March. What that did was that put an inordinate amount of pressure on renewal and retention in those two months. That mean they likely could not ask for a renewal increase with that much potential exposure, or at least couldn’t ask for what the market would bear, let’s put it that way.

And then the next bit of business is if those people left at 50%, now all of a sudden you’ve got 10 units you have to rent in a 40-unit building. Holy catnap, that is an awful lot of inventory. You’ve just created your own supply problem.

Joe Fairless: Did I hear you say “Holy catnap?”

Evan Hoffmann: You did hear me say “Holy catnap.”

Joe Fairless: [laughs] I will use that for the rest of my life.

Evan Hoffmann: Feel free.

Joe Fairless: Okay, so what did you with this problem?

Evan Hoffmann: What I was actually able to do with them was I first started working on resident retention. And what I suggested is that we begin to offer either short-term leases or very long-term leases to those people that were the farthest below market. So if the market after doing the market study was, let’s call it $1,500, and those people that were still paying $1,200-$1,300, we would go to them first and offer th