JF1346: Mayonnaise Fights, Man Crushes, & Property Management with Michelle Ketchum

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Michelle is the owner and broker of Acorn + Oak Property Management. Her and her team have over 1000 units under management, and still growing. They take a customer service approach to their company, and that really sets them apart from other companies. They even have tenants that wait for a unit to open up, just so they can rent from Acorn + Oak. Hear different tips and advice that you can use to set yourself apart from your competition. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Michelle Ketchum Real Estate Background:

  • Owner/Broker in Charge of Acorn + Oak Property Management and managing partner of Acorn + Oak Triad.
  • Have been an active property manager and Realtor since 2009
  • Active in property managements throughout North Carolina and is leading Broker in the area
  • Based in Durham, North Carolina
  • Say hi to her at www.acorn-oak.com
  • Best Ever Book: The Four Hour Work Week by Tim Ferriss

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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I'm Joe Fairless, and this is the world's longest-running daily real estate investing podcast. We only talk about the best advice ever, we don't get into any of that fluffy stuff. With us today, Michelle Ketchum. How are you doing, Michelle?
Michelle Ketchum: Hey, Joe. Doing well. How are you?
Joe Fairless: Good! I'm glad you're doing well; I'm doing well as well. A little bit about Michelle - she is the owner and broker in charge of Acorn + Oak Property Management, and she's been a managing partner of Acorn + Oak Triad. She has been an active property manager and Realtor since 2009, and her company does property management throughout North Carolina, and is also a leading brokerage in the area. Based in Durham, North Carolina, and you can say hi to Michelle at her website, which is in the show notes link.
With that being said, Michelle, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Michelle Ketchum: Absolutely. Michelle Ketchum, owner of Acorn + Oak Property Management, down here in Durham, North Carolina. We've been in business since 2013, so we just celebrated our five-year anniversary here in the triangle...
Joe Fairless: Congrats!
Michelle Ketchum: Thank you! Really amazing growth since the beginning. We're currently managing just over 1,000 properties in the triangle area, and just having a really good time doing it. We focus on mid to high-end rental properties; that's anything from a single-family home, to townhomes, to -- our largest client owns about 90 units in Durham... So everything in between, as well.
Joe Fairless: 90 units - is that an apartment community, or does that person have 90 single-family homes spread out?
Michelle Ketchum: It's some small multifamily complexes, with like 14 units here, 20 units there... They're kind of all in the same neighborhood, but just split up a little bit.
Joe Fairless: Got it. So in the case of the 20-unit, that would be a 20-unit apartment building, or 20 single-family homes around each other?
Michelle Ketchum: Well, this particular client - that would be a 20-unit apartment building, but we do have some folks that own 20-30 single-family homes. There's a pretty good market down in this area for student housing, so we work with a lot of those landlords too, that are renting out big homes to UNC Chapel Hill students, and some Duke students, and things like that.
Joe Fairless: Okay. I'd love to dig into some of the intricacies of managing 20 units, versus student housing, versus single-families... But first, before we started recording you said you were doing some research on the show and you took issue to my no-fluff approach... Can you elaborate on that?
Michelle Ketchum: I did... I've been listening to quite a few of your podcasts and I know that it's your signature line to say "no fluff", and I'm a pretty fluffy person; I mean, I'm not girly, but I do bring a hands-on, heart-led approach to property management, which I think has really been the key to this company's success - the fact that we are compassionate, we try to do the right thing, not only for our clients that own the property, but for the tenants that are in place. We really want it to be a win/win/win, the third win being for us, the property managers.
But anyways, so I was a little nervous about not being maybe as hardcore as what you're used to... But fluff isn't always bad.
Joe Fairless: Fair enough, I agree to that - fluff isn't always bad. From a compassionate standpoint, how does that come to fruition as a manager, that would be different from perhaps another company that's managing properties?
Michelle Ketchum: When I started Acorn + Oak, one of the very first things I did was just research on other property management companies in the area; that's a good place to start when you're starting a new business - what's the competition doing? What are they lacking? And what I felt time and time again were complaints actually both from the clients as the property managers, but also a lot of tenant complaints just that they weren't being treated very fair. They were going weeks on end without any communication for different maintenance requests, they ordained a lot from security deposits just because... And I really took that to heart, and I would say almost everyone out there has been a renter, and a lot of us still are, and I just really wanted to bring this philosophy that everybody matters to my business.
So some things that we do are -- for instance, a lot of times property managers will charge a non-refundable pet fee, and... We're all dog owners at Acorn + Oak, so it's really important to me to just kind of not do that anymore. You can collect an extra deposit, which will basically do the same thing as a fee would do - rectify any damage if there is any damage done by the pet... But just things like that, where we're not nickel and diming tenants just because we can, and really just giving them nice places to live, treating them fairly, and just really making it an experience about them as the customer, and really thinking about them as the customer, and then the property as the product, and the property manager and the client as kind of the business owner. You always wanna make sure your customers are happy.
We just really led with that approach, and it has absolutely helped and made us one of the best companies in the area to rent from. We have tenants that specific land on our website and have heard great things about us, and they're like "We're renting from you. It just depends on when the right house comes up, but we are renting from your company."
Joe Fairless: Wow.
Michelle Ketchum: So it really does matter.
Joe Fairless: Oh yeah, creating a property management brand is not something a lot of property management companies do to the extent where people are requesting to live at their properties. That's not very typical. What are some other tactical things...? Because I'm gonna admit that when I heard you say "compassionate", my first thought was "So her company will let it slide if a resident is late on the rent, and then that's gonna hurt my bottom line." Selfishly, that's just what I immediately thought.
So one, can you address that? And then two, just some other tactical things that you all do that other management companies might not do.
Michelle Ketchum: Sure. Specifically for late rents - it's our policy that if somebody is late for the very first time, we'll waive their fee and reduce it from whatever it was down to a dollar. So it's still on our records that they paid late, but we reduce it and they get one freebie. And then it really just depends. There's tenants of ours that have rented for years and years and years, and maybe they had a late payment their first year, and now it's year four... So they've been great tenants, but guess what - they're people, and life happens, and their car broke down, or the kid had to go to the hospital, and they've had some emergencies come up... So we don't necessarily just automatically waive that fee, but we think about it, and we talk to our clients, and of course if they're troublemakers we're not just gonna keep waiving fee after fee; we're going to charge those fees, and potentially not renew if it becomes a real problem.
But for those people that have been great and they've just had a situation come up in life, we're gonna be compassionate about those things.
But at the same time, we can play hardball when needed, for sure, and we're not gonna let people just take advantage of us.
Joe Fairless: From a fair housing law standpoint, how do you walk that line of doing it on a case-by-case versus just uniform, regardless of what the situation is? Educate me on that part, will you?
Michelle Ketchum: Yeah, it's really important, and that's why we do allow it one time. We do make note of it. It's not based on anything else except that's just our policy, for the first time... And then after that, it gets into -- again, we just have those conversations with the client; it's not like we're just making the decision for them on if we should waive it, but we're giving them the option, and at the end of the day it's their money, so they really have the ultimate say on if they want to waive it or not.
Joe Fairless: Some other tactical things... You mentioned instead of a non-refundable pet fee you have a refundable pet fee, correct? So what are some perhaps other tactical things that you all do?
Michelle Ketchum: Some other ways that we make it tenant-friendly - and still again, with any of these ideas, they always have the owner's bottom line in mind.
Joe Fairless: Sure.
Michelle Ketchum: Going back to the pet fee vs. deposit - we still are protecting the owner's investment, and usually what we do when we do the deposits is we'll do something higher... You'll see a lot of times where it said maybe a non-refundable $250 pet fee - what we'll do is we'll charge a $400-$500 refundable pet fee. So we're charging more, but the tenant has the chance to get all of that back if their cat just lays around like a pillow and doesn't do anything to mess up the house.
So again, we're keeping the owner's bottom line in mind, always... But another thing that we do too is we don't make it easy for the tenant to break the lease, but we also don't make it completely financially horrible for them to have to do so. We live in a really transitional area, where there's a lot of professional people, they're getting promoted, or sometimes they're getting fired or being laid off, and we don't want them to have to stay in a lease they can't afford... Or again, if they got promoted, then they've got a great opportunity to move away. We don't want to make them pay 2, 3, 4 months rent to break a lease, or a huge termination fee... What we do is we give them the option of advertising the property on their own, finding a tenant to take over their lease, and they have to pay rent, obviously, through that term, until the day before the new lease starts. They're also required to have the property professionally cleaned... But that's it. So they can get away with it for almost the cost of a house cleaning, and a little bit of their time.
For the busy professional we do offer a service where they can pay us and we'll re-advertise for them, and really just do our best to find someone to take over that lease. And a lot of times, the owner of the property - they don't skip a beat, right? They've got rent coming through, they have the tenant pay for the professional cleaning and anything that needed to be done during the turnover... The tenant wasn't paying an arm and a leg to break their lease. It just makes it a little (I think) fair, and a little bit more flexible to rent with us.
We also really do a lot of nice things for our tenants throughout the lease. When they move in, they get this awesome welcome box that's beautifully hand-crafted with a card from us; it's got everything from [unintelligible 00:11:47.04] coupons to local business, a roll of toilet paper... Just a little welcome box saying "Hey, we're happy to have you here. We're gonna treat you well while you're here. Welcome to your new house."
We do monthly gift card drawings every month for tenants that pay rent on time... So we just don't always approach it as "Ding-ding-ding! We're gonna ding you with a late fee, we're gonna ding you with an early termination fee..." It's like, "Let's support you if you're doing what you're supposed to do." So we do monthly drawings every month for tenants that pay rent on time, we do renewal gifts, and we actually have a tenant appreciation happy hour thing coming up next month where we're having all these raffles, and just having them stop by our office for some ice cream and beer.
Joe Fairless: Yum! Sign me up.
Michelle Ketchum: If they're of age.
Joe Fairless: Of course, obviously. With the monthly gift card drawings, how much is that gift card worth and how many gift cards are given out every month?
Michelle Ketchum: We do two right now, but as we continue to grow, we're probably gonna need to up that... But we do two $20 gift cards to a local business. We don't generally give out gift cards to chain restaurants or anything like that; we're trying to support our local restaurants and shops and everything. They also get a really awesome Acorn + Oak T-shirt... So it's about a $30 value.
Joe Fairless: Cool!
Michelle Ketchum: But hey, they're paying their rent on time. For doing what they're supposed to do, there's a chance they can win something cool.
Joe Fairless: Absolutely. Have you noticed any benefit as a result of including local businesses in your marketing approach?
Michelle Ketchum: It's probably just something I haven't noticed, but this area is such an awesome place to have a small business and to have a local business... So it's just being part of the community. That was another really important piece of starting a company - I want it to be an active, supportive part of this amazing community and culture that we have down here.
I think we kind of just rub each other's backs. Some of our clients are business owners in the area. Some of our tenants are business owners in the area... So it's just nice to keep it local when you can.
Joe Fairless: The renewal gifts - how do you determine how much that gift is and what do you give them?
Michelle Ketchum: It's pretty standard. It's another $20 gift card to a local ice-cream shop here in downtown Durham, and it just says, basically, "Thanks again for renewing. We're so excited to have you! Enjoy an ice-cream out on us." Usually, $20 should get you two fancy ice-creams, so... It should get you two ice-cream cones.
A lot of our renewals are happening in the summer, so again, it was just kind of a fun thing to do in the summer months.
Joe Fairless: And you have over 1,000 properties that you're managing. If let's say you get 75% of those residents renewing, then you're investing $15,000 in that local ice-cream shop for these renewals... So do you have some sort of deal negotiated with them, where you save some money on these gift cards?
Michelle Ketchum: You know, I don't... But I should.
Joe Fairless: That local ice-cream store owner is gonna hate me. [laughs]
Michelle Ketchum: [unintelligible 00:14:56.16] Yeah, exactly. Again, so this is five years old. When I started, it was me, working at my house, with nothing. No brand recognition, nothing. I literally started from the ground up with this thing... So the renewal gifts - those have kind of come along over time; that was actually something that we developed last year, so it wasn't something we've always done. So it's only a year old, but you're right, I should be talking to this ice-cream shop about getting some sort of discount.
Joe Fairless: Don't tell him/her that I mentioned this, because I don't wanna be on their bad list.
Michelle Ketchum: I won't...
Joe Fairless: Let's talk about the differences in managing a 20-unit versus a single-family house... Because you started out doing single-family homes and you have a 20-unit in your portfolio that you manage. That's accurate, yes?
Michelle Ketchum: Yes.
Joe Fairless: Okay. What is the difference between managing the single-family and the 20-unit, and how did you evolve your team and the process to be able to do that?
Michelle Ketchum: Obviously - or maybe not obviously - managing a 20-unit apartment complex is gonna be... It's a small building, chances are the layouts and the floor plans are exactly the same, so there's gonna be less work as far as producing marketing and remembering paint colors and all of that. It's gonna be a little bit easier if it's in bulk, and generally those clients pay a little bit less in management fees... But it's really not that much different in anything else.
The way that we structure it - some of our agents work for maybe two or three clients; we've got a couple people at our company that really love multifamily. They've come from the apartment complex world, so they're just bringing that expertise and they're working with those kinds of clients.
Then we have other people that really love working with the investor that's just getting started and they're buying a single-family home this year, and a townhome next year, and all that. But the way that we approach it really is we try to do everything in batches. So even if it is 20 single-family homes versus one building with 20 units, we're still really trying to do batches and kind of keeping them as a portfolio. If we're doing inspections, we're gonna inspect either that one building with the 20 units, and we're going to inspect those 20 homes at the same time.
I don't know if that really answers your question, but we try to kind of make the single-family homes into sort of like a multifamily, just with a little bit more drive time in between... But the way that our agents are set up too is - when you start as a property manager with Acorn + Oak you're kind of given a territory, and usually that territory is pretty close to where you live. So the idea is that you're not having to drive from Raleigh to Durham and to Chapel Hill; really, the idea would be let's condense your territory into maybe a five to ten minute drive from your house, so that you can easily serve these tenants and these properties and these clients.
Joe Fairless: So for a Best Ever listener who's got a 20-25 unit, maybe a 30-unit that they are looking to purchase, would you say it does not matter if the property management company currently does apartment buildings and they're only doing single-family homes?
Michelle Ketchum: I think it can be done, but I think it helps to have a company like ours, that has the experience from both sides. So with the multifamily that we're doing right now, we're doing things differently, and there's also a whole side for like cap ex, repairs, there's a whole side for budgeting and specific reports, because it's just a little bit different.
So I would say that it's not necessarily a deal breaker; I would always hire a property manager based on their personality and how you all mesh together. That's me personally. I would choose just getting along with them and having the same ideas and philosophies on how you wanna run that property; it's gonna be more important than their experience, because I think the experience kind of goes both ways. If you did multifamily, you can learn how to do a single-family residential home, and vice-versa. But at Acorn + Oak you don't have to choose, because you get both - you get the great personality and the great service, and all of the expertise... But maybe in other markets, I would say that I'd probably go for, again, just kind of "How do I feel about this person?" I'm kind of a gut person.
Joe Fairless: Yeah, it makes sense. In terms of the student housing, the last question I was kind of leading you - but I shouldn't have, because then you said basically you didn't do many different things for the single to 20... So I won't have a leading question this time, I'll just ask you - is it different with student housing, versus singles, versus apartments, and if it is, how so? And if not, then we'll move on.
Michelle Ketchum: Student housing is definitely its own animal, and I think "animal" can sometimes be the right word. [laughter] You just have to have different expectations, and that's really any kind of real estate investing. You just have to have really good expectations on what this is gonna look like.
For student housing, specifically for what we do over at UNC Chapel Hill [unintelligible 00:20:13.18] Some of these students are moving at August 1st. By September 24th - literally, less than two months into their lease - they have to tell us if they're going to be staying for the next school year. So they're making decisions about renewals really quickly. It's important to start advertising those student rentals.
I'm giving an example - if someone wants to move in August 1st, 2018, so their lease runs through July 31st, 2019... So by September 24th, 2018 they're telling us if they're gonna be staying from August 2019 through July 2020.
Joe Fairless: Wow.
Michelle Ketchum: Yeah, they're having to make those decisions. But that's cool, chances are they know if they like the house, moving kind of sucks, so they usually tell us, and we start advertising October 1st for 2019-2020 leases... And it's just crazy, it's a frenzy, and all the students at UNC know that it's the time to advertise, so the advertising is a little bit different, there's obviously a lot more moving parts, because sometimes you've got four people living together, and they've all got a co-signer, and maybe four groups of four people with four co-signers, so that's a lot of people...
So it's different in that way, and then the expectations are they're gonna leave couches at the curb, they're going to leave trash in the house... The houses are definitely gonna need a deep clean when they move out... I've had great tenants, and I'll say, I was like a pretty mature undergrad, so I'm not saying all undergrads are this way, but we've also had tenants that have had mayonnaise fights on their way out, and now there's grease stains all over the walls... So you have to expect that a mayonnaise fight might happen, and just be prepared that we're gonna have to [unintelligible 00:21:57.03] we have a nice deposit as well for these student rentals, so...
A lot of the times too you have to understand that - specifically in UNC Chapel Hill - you can live off-campus I believe as soon as you're a freshman, so a lot of these people are going from living with their families to being out on their own, and they have no idea what an air filter is, or a water filter, or a [unintelligible 00:22:24.09] filter... And I was asking myself, I'm like "When did I learn about air filters?" I don't know, but there was a time in my life when I learned about air filters.
So it's really kind of like taking these kids under your wing too, and showing them how to live alone, in a house, without their parents. That's why a good property manager takes that off your plate, so we can be the den mother.
Joe Fairless: Many unique challenges there, that's for sure. When you were talking about the mayonnaise fights - I never had a mayonnaise fight, but in college we rented a house, and it was in Lubbock, Texas; it was like $200 each of us, and there were two of us, so like $400. We had a wrap around couch we found on the side of the road, and since it was a wrap around, it wrapped around in a corner, so in that corner there was a little open spot behind the couch, in between the couch and the wall, and we would just throw our empty beer cans in that corner, instead of taking them to the trash can.
Michelle Ketchum: And this is not unheard of, yeah.
Joe Fairless: Good, good, I appreciate you backing me up on that one.
Michelle Ketchum: And I hope that in my title on your podcast website it says something about mayonnaise fights, because we really want people to click and listen, like "What is she talking about..."
Joe Fairless: [laughs] That's right, that's right. "Student rentals and mayonnaise fights. Wanna learn more? Listen to this show." Well, what is your best real estate investing advice ever?
Michelle Ketchum: My best advice would be to just do it. I think a lot of people are scared, and if you have the right property manager helping you along the way, it's really not that bad. And a lot times too we're getting clients -- so we actually don't do any general brokerage; we don't help people buy or sell property, we only do property management. We wanna do one thing, and we wanna be the best at it that we can. But we get a lot of people that contact us first, they're thinking about investing here and they wanna make sure that they've got a good property manager in place before they even start looking... Because again, the property management will make or break your deal.
So I would say don't be scared, do it, educate yourself, get some advice... It's not for everybody; more people could do it, but I think they're a little nervous. So get educated, learn, and if you feel like it, start out with one, see how it goes, and then you'll get the bug and you'll be having 90 properties.
Joe Fairless: Between single-families, student rentals and small to medium size apartment buildings, what has the highest profit margin for you as a management company?
Michelle Ketchum: What do we make the most money on?
Joe Fairless: Yeah.
Michelle Ketchum: It's probably just your middle of the road single-family home. Our student rentals rent for a lot of money. You said you were paying $200 in Lubbock, Texas. UNC Chapel Hill houses are going for $800/bedroom, and they're not marble, quartz, gold-plated houses; they're basic homes, but it's all about location.
So the rents are high there, but a lot of times we end up discounting our management fee for those... So for us it's probably just the people that own the single-family homes, taking them up one at a time.
Joe Fairless: And why do you discount your management fee? Because from what you describe, it sounds like they're much more time-intensive, those student rentals.
Michelle Ketchum: Our management are an initial fee ($395), and then 10% of the rent... Which I don't know that I've seen anyone charge more than 10% yet. And if people have more than one single student house, again, this can get kind of pricey. So a lot of times they're kind of coming in knowing that they can get it for cheaper. We're usually settling -- we don't stray too far from 10%, and some of our clients do pay 10%, but because we know that could be a pretty large management fee... I mean, it is a lot of work, but it's just different work.
Joe Fairless: Yeah, it's more entertaining work.
Michelle Ketchum: It's definitely more of a surprise.
Joe Fairless: It sounds like it's really more entertaining.
Michelle Ketchum: Yeah, exactly.
Joe Fairless: We're gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Michelle Ketchum: Yes!
Joe Fairless: Cool. First, a quick word from our Best Ever partners.
Break: [00:26:18.25] to [00:26:59.00]
Joe Fairless: Best Ever book you've read?
Michelle Ketchum: I love The 4-Hour Workweek by Tim Ferriss, and I think I've just been sort of in love with Tim Ferriss, but I also like Tools of Titans by him; I'm reading that right now.
Joe Fairless: Great book... Both of them. I completely agree. I have a quasi-man crush. I have a Tony Robbins full-fledged man crush, but Tim - quasi-man crush; I love most of the stuff Tim does and talks about. What's the best ever business deal that you've done? Either a property, or a client transaction, or something else.
Michelle Ketchum: You know, I think when it really boils down to it, when I first started the company, again, I had very little. I had some experience working for another company, but Acorn + Oak was brand new, and I got my first client that had 30 properties, and he totally whittled me down... But that was such a monumental point for my business.
You always kind of wonder, like "Am I gonna make it? Am I gonna make it? How long is it gonna take?" and as soon as I got that client, I was like "I'm in. I'm all of a sudden legitimate", and it really started to roll in after that. So he's a current client, and we butt heads sometimes, but at the end of the day we actually have legit love for one another... So I always say that he's been my best deal.
Joe Fairless: What's a mistake you've made on a deal or a transaction, or in business?
Michelle Ketchum: I would say that there was a deal -- and it wasn't even that big of a deal, but it was a multi-unit building, and again, because I'm this fluffy person, we had a verbal contract... I felt like I did a lot of work, I did a lot of reports, I did a lot of inspections, and I thought everything was good to go. I'm used to people doing what they say they're gonna do, and right before the deal closed, they said "We're gonna go with another company, and I felt really used... But it was a great lesson in business - get your contract signed.
Joe Fairless: What's the best ever way you like to give back?
Michelle Ketchum: I really enjoy... Again, I haven't been a business owner for super long, but I've had quite a bit of success - and success to me isn't money, but I've had this rollercoaster ride, and so I'm now in this point in my career where people are actually wanting to sit down with me and hear my story and hear the do's and don'ts, and I really love getting into this mentorship field... Especially, like I said, Durham, North Carolina is just a wonderful place to have a local business, and I'm always up for like supporting people that wanna venture out on their own. I love being in a position where people actually want my advice, and being a mentor.
Joe Fairless: And how can the Best Ever listeners get in touch with you and learn more about Acorn + Oak?
Michelle Ketchum: Our website is a great place. There's actually a video on there as well. That's acorn-oak.com. Or my e-mail, which is Michelle@Acorn-Oak.com.
Joe Fairless: Lots of lessons learned in our conversation. I'm so grateful that we were connected and that you're on the show. One is the differences between managing single-families versus small to medium-sized apartment buildings, versus student housing... The unique challenges in particular with student housing -- well, this is actually a pro, having a longer lead time to fill vacancies... But then some cons - having a lot of co-signers, having a lot of people within each of the properties, and it can get messy with mayonnaise fights... As well as some ways that you have positioned Acorn + Oak from the ground up, to be differentiated by taking that compassionate approach, hands-on, heart-led approach, as you say, and some specific things that you're doing - the refundable pet fees, welcome box with a card, monthly gift card drawings for residents who pay on time, renewal gifts of $20, and then coming up, a tenant appreciation happy hour with ice cream and booze.
Thanks again for being on the show. I'm grateful you were on the show. I hope you have a best ever day, and we'll talk to you soon.
Michelle Ketchum: You too. Bye!

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JF1024: The 2008 Crash Turned Him Into A Real Estate Investor!

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

With us today, Luis Carrera. How are you doing, Luis?

Luis Carrera: I’m great. Thank you, Joe, for having me on.

Joe Fairless: My pleasure, nice to have you on the show. A little bit about Luis – he is a real estate investor at Innovative Property Group and IP Group. He currently raises capital for larger apartment purchases. He started in real estate in lease options and eventually doing wholesaling and flipping, and he is based in Durham, Raleigh area, North Carolina. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Luis Carrera: Sure. A little bit about my background… Basically, I immigrated with my family from Spain in the ’80s and we moved to New Jersey, primarily Newark, New Jersey, and then to Harrison. I was pretty much raised in that area.

I went through the typical family process… We had to go to college, so I went to college – Rutgers and [unintelligible [00:03:33].01] where I got a civil engineering degree, both a bachelors and a masters. Then I went on to work for a large contractor, and did a couple of skyscrapers and whatnot.

Then the economy hit and I was laid off in 2008. That’s when I started really investing in real estate, with lease options and then eventually wholesaling to some flips until I started getting private investors in 2010 to actually blow up my capital, so to speak.

Joe Fairless: Yeah, so let’s talk about 2010 to today. How are you making money?

Luis Carrera: Basically I’m making money with a combination of things. First and foremost, I’m a big believer of marketing. We do Google AdWords, yellow letters – postcards not so much, because they don’t help out much in this area – and a lot of referrals, basically through door hangers and word of mouth.

We do a lot of wholesaling still, and the [unintelligible [00:04:33].06] we actually keep. And during the same time, I realized that capital is the most important thing in real estate. You could always find capital, but deals are a little harder to come by, but it’s all about networking. So now I raise capital for these smaller projects, for smaller investors, for flips, or maybe turnkey solutions for them, or we raise capital for apartment complex purchases so we could flip them.

Joe Fairless: Alright, let’s talk about the last thing you said – you raise capital for apartment complexes so you can flip them. Are you on the general partnership side on that deal?

Luis Carrera: Yes, that’s correct.

Joe Fairless: Okay. Can you give us a case study of one that you did?

Luis Carrera: We did one in 2010… One of my first flips was an 8-unit. It was pretty interesting, because I had an investor that wanted to invest in real estate but didn’t have time or experience, and he knew I was doing some work, so we hooked up, and he insisted on a multifamily. I had never done a multifamily until that point, so we bought a small 8-unit complex in Kearny, New Jersey, for about 75k, and we used his 401k money; we rolled it over into a self-directed IRA and we worked on that one.

After ten months it sold for about 550k, and we rolled it over into the next project. He wasn’t gonna pay taxes anyway, but the only way to actually use leverage for a self-directed IRA was to 1031 it. So then we moved on to the 28-unit complex, and then eventually we did the same process, sold it after another year, moved on to a bigger complex, an 86-unit in South Carolina.

Rinse and repeat, did it again, and now last year we placed it into a 250-unit in Greenville, South Carolina. So between 2010 and last year, in less than 7 years he went from 240k in his IRA to over 2.25 mil.

Joe Fairless: …worth of value, right? Not actual profit, but value of property that he’s controlling with that original money…?

Luis Carrera: Well no, that is his original money now. What transferred over from that IRA was that amount.

Joe Fairless: So what did he originally put into the 8-unit?

Luis Carrera: 240k.

Joe Fairless: And he now has how much cash?

Luis Carrera: Now he has minimum cash, because we placed that money into another complex. But the transfer was 2.25 mil.

Joe Fairless: Wow, that’s incredible… So clearly we need to dig in here. So you went from an 8-unit – you had that for one year, you said?

Luis Carrera: Less than a year, actually.

Joe Fairless: Less than a year. Okay, I wanna get the lay of the land and then I’m gonna go deeper into each of these. So the 8-unit has less than one year, then you went to a – what unit?

Luis Carrera: It was a 28-unit. We had that for two years, actually; with the transfer it was less than two years. We sold it for 2.2 mil and moved it over to an 86-unit.

Joe Fairless: You sold the 28-unit for 2.2 million dollars?

Luis Carrera: Yes, and it was an acquisition of 1.2 mil.

Joe Fairless: Okay. And then you went into an 86-unit?

Luis Carrera: Yes, which was a 4 million dollar purchase price, and then four years later (last year) we sold that for 5.6 mil, and that’s what helped us 1031 that into a 7.9 mil over a 200-unit property in Greenville.

Joe Fairless: You being a civil engineer I knew you’d have the details… The 250-unit in Greenville, purchase price was 7.1?

Luis Carrera: 7.9

Joe Fairless: 7.9… So you went from a purchase price with an 8-unit of 550k, right?

Luis Carrera: Well no, we purchased it for 75k. That’s how we got a great jump. We purchased that for 75k and sold it for 530k.

Joe Fairless: That’s a great start right out of the gate. And then you went 28-unit, bought it for 1.2, sold for 2.2, and then the 86-unit, bought for 4, sold for 5.6, and then the 250-unit you bought for 7.9 and that’s what you’ve got right now.

Luis Carrera: That’s correct.

Joe Fairless: What’s the key to flipping these in such a relatively short amount of time?

Luis Carrera: The smaller units were a lot easier to relatively flip, just because the competition is a lot greater for those units. I think we were a little — I can’t say fortunate, but we bought a property… They weren’t in the best areas; they were in C areas for the most part, but we gave them a good, finished, quality product. And once we rented it all out and leased it all up, they were typically in those areas 100% leased, so after six months it was pretty simple to actually just put it on the market and provide additional investors some meat on the bone.

So that’s what we did – instead of asking for a 6 cap or a 6.5 cap, we went to like a 7, 7.5 typically, and they would go under contract immediately. Some of them were a lot easier. Obviously, the renovations were a lot quicker for the smaller units, but once we got into the 86-unit it took a lot longer… It was almost 4 years, just because we needed to upgrade every single unit.

We had a plan in place, but the very important key that we had was the management side of our team. We needed to get a manager that was experienced in actual repositions. That was key. We had to – not fire, but we had to let go of the original manager, because we wanted to bring that up from a C to like a B- property. So we put a manager in place that had experience so we don’t have to be there every single day. That was an important part of our learning curve, really.

Joe Fairless: For all these properties, are they self-managed, meaning you’re basically overseeing the property manager directly?

Luis Carrera: Yes, that’s correct.

Joe Fairless: How influential has that been, versus hiring a third-party management company to do these for you?

Luis Carrera: Well, just because we don’t have much volume, it’s easier to manage 3-6 properties every year, just by putting the right property manager in place and just making sure the numbers are coming in properly through the P&L and the rents coming in… We just have to make sure that there’s no [unintelligible [00:11:21].23] defects when it comes to the P&L, like why this month we’re down 7k, as opposed to the last month.

We always make a phone call immediately if something goes wrong or there’s any delays in the repositioning. We always have a weekly meeting, even if it’s a conference call or a face-to-face. We go to the asset every single month, and every week we have a meeting with the property managers to make sure that the renovation is up to speed and up to date and there’s no delays.

Joe Fairless: With the 250-unit, how many team members do you have on-site? Can you go through the staff?

Luis Carrera: Yes, we have about four team members on site: the property manager, a leasing agent, a full-time maintenance, and another assistant maintenance guy. They are in charge of running the project. And I think we have a part-time during the summer for the leasing agent, and a part-time as well for the management just in case there are any issues. But obviously, we’re renovating those units as we speak.

Basically, once these units are renovated, they need less maintenance than the other units. We only have about four full-time and two part-time on staff, and we make sure to keep track of all the work orders coming in, and to see if there’s another need to actually force the renovation on a couple of units that are problematic units. That’s what we typically do.

Typically, for a 250-unit we only have four people on-site, but for every 50 to 100 units more or less, we just subtract a team member. If it’s 100 units, we’re not gonna have anybody really on-site, maybe just a property manager. But once we go above 100 units, we’ll have a full-time team on-site.

Joe Fairless: With the 8-unit, the $75,000 purchase price – was that paid all cash with your investor’s self-directed IRA?

Luis Carrera: Yes, that’s correct.

Joe Fairless: How did you make money on that 8-unit? How were you involved?

Luis Carrera: Basically, I took the same concept as the flips. I would over-leverage on the front-end, which included repairs, included the purchase price, insurance, holding costs, and my fee. So that’s how I got paid on the front. Then during the course of the renovations, obviously we didn’t have it rented for at least two and a half months, but after that we had a general split. I took 25% of the equity, and my partner took 75%. That’s how we worked the deal out. We gave him an equity split.

Joe Fairless: Okay, so at the 8-unit you got a fee at closing, and then you got 25% equity in the deal.

Luis Carrera: Yes.

Joe Fairless: What percentage of the purchase price, or how much was the fee, just so we have an idea of the structure?

Luis Carrera: Basically, we were all-in for 240k. The fee I took was only like 15k. I was basically the asset manager, so once we closed, I got a check for X amount. I think it was like 160-something. I got a check for that amount, in which I just held 15k-20k as my fee, which was disclosed. Then after that we used everything else to repair.

Joe Fairless: Cool, so it was like  6.25% of total capitalization – that was your fee at closing, and 25% equity. That’s the 8-unit…

Now, let’s fast-forward all of the way to the 250-unit. What’s your structure there? Is it the same?

Luis Carrera: It’s a little different, because I worked with another team that I met over the years, and they had the asset. They’re controlling the asset, so I just take part of the management side, just because I brought the one investor to invest into the entire asset.

So in that case, yes, we did have an acquisition fee. I think it was 3% or 3,5% acquisition fee on the front-end, which I took 0.75% of that, and my equity position is about 11%.

Joe Fairless: Cool. That sounds great. You mentioned there’s another group – how did you all structure it? I thought you said they control it… Will you elaborate?

Luis Carrera: Yes. Just because they have the asset. In order to grow in this business, I felt that “Okay, under 100 units I can handle easily. Over 100 units, I may need somebody else to help me with the loan, with sponsorships and what not”, so that’s what I went about.

I do network a lot, I go to all the [unintelligible [00:16:16].17]

Joe Fairless: Yes, absolutely.

Luis Carrera: That’s where I met other teams. With these networking events I would create teams and I would actually try to work with the ones that are best situation with future connections, and I would tell them “Hey look, I’m pretty good at raising capital. If I were to raise capital now, could I be a part of the management team?” and most of them usually always say yes.

Now I decided to change my position, just similar to what I did with the 250-unit in South Carolina, so I found the people that needed money, money. I said to myself, “Alright, this is a lot easier. I can get deals in my inbox, and all I have to do is raise capital. I prefer just doing that instead of going crazy and finding additional deals and overworking.” My goal now is just raising capital for teams that I feel confident in.

Joe Fairless: And then you get to be on the general partnership side.

Luis Carrera: That’s correct.

Joe Fairless: Have you looked at it from a standpoint of if you raise a dollar, how much projected profit do you want to have returned for being on the general partnership side?

Luis Carrera: It just really depends on the asset. The first couple of times I tried to just network with them; even if the raise is like 5 mil, I’ll try to bring somebody at 1 mil for a certain percentage of it. And if the general partnership is 75/25 split, for example, and I bring half of the capital, I do expect to get half of the acquisition fee that’s not gonna be used for repairs, or renovations. And then the equity position, I don’t mind taking a smaller piece, just because there were more people involved that actually found the deal and actually got it funded through a primary lender. I know it also takes a lot of work on both sides – raising capital, and then the other side, which is making sure to get the loan from the lender. And that’s how I structure it.

I prefer working with five teams a year, doing ten deals a year, instead of just doing one deal and only getting side percents of every deal. I’m fine with that. As long as my investor is happy with the rate of return he’s getting, I’m happy, because they’ll keep on coming back and they’ll keep on referring me to other investors.

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

Luis Carrera: Just start out small. Go to all the networking events you possibly can, because a lot of these investors are at networking events like [unintelligible [00:18:47].19] or REI groups, and just show your thing – start telling people what you do, and eventually a lot of people will say “Hey, I wanna work with you. Let’s see what you can do.” But I’m still not confident in apartment complexes because thats’ out of my reach at this point. They’re a little [unintelligible [00:19:04].23] So what I do is I work on a flip with them. Once the flip goes well, we’ll continue to do more deals. Once they do more deals, then I can convince them to “Hey, instead of putting 400k into two flips, let’s protect some of that money and put 200k in an apartment complex. You still get the return you wanted for the long haul.” They’ll get an equity position on this property, so you could get even massive benefits. And then I still do flips with them.

I continue to build those relationships in order to eventually put them towards my goal, which is an apartment complex. That’s’ what I do.

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

Luis Carrera: Sure. I’m not sure I’m prepared, but…

Joe Fairless: [laughs] Well, then you’re gonna give the best answers if you’re not prepared. Usually it’s better if you’re not prepared. First though, a quick word from our Best Ever partners.

 

Break: [[00:20:04].23] to [[00:20:58].24]

 

Joe Fairless: Best ever book you’ve read?

Luis Carrera: Best ever book I read? I really like Grant Cardone’s book…

Joe Fairless: 10x? Probably something 10x.

Luis Carrera: Yeah, Be Obsessed Or Be Average. It psyches me up. And M. J. DeMarco’s “Millionaire Fastlane.” It’s just such a quick read that I can just pick it up and read it and just make sure to be on track to be on the fastlane instead of on the sidewalk.

Joe Fairless: Best ever deal you’ve done?

Luis Carrera: Best ever deal I’ve done… Probably the 28-unit flip, because that netted me a pretty good penny. I’m not into many homeruns, but I just like building up to that. Where I am now based on equity it’s pretty good.

I haven’t really done a big home run, where you see some people online that they have these 250k checks now. I’m all about singles and doubles.

Joe Fairless: What’s a mistake you’ve made on a deal that you can think of?

Luis Carrera: When I first started flipping I never paid attention to landscaping, and I realized landscaping is not a big, big deal, but it gets the property sold a lot quicker than if you forget about landscaping. I try to incorporate landscaping budget into all my flips now.

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

Luis Carrera: I give back every week, I am a volunteer for Meals on Wheels. I give some hours of my time to do that. I do a volunteer every month for Salvation Army as well at the food bank. I also just created a non-profit which is Solar For Hope. It’s gonna be providing solar power to low-income housing in the South-East.

Joe Fairless: Very cool. How did you get involved with that last venture?

Luis Carrera: I was doing these Meals on Wheels, and then every time I dropped food off or spoke to these homeowners, they always told me that they have these bills to pay, it’s usually electric, and it’s subsidized housing, but in some of these places in the conditions that they live in – it’s not the best, so I was like “Okay, how could I help them out by lowering some bills and doing something else that’s more creative, and something that’s needed for future generations?” So I decided “Why not do solar power on this low-income housing?” If anybody could do solar power for their 250k home, why can’t we just do a small system for a hundred families a year and help them out with their bills and trying to get them off the grid, or at least creating a neighborhood feel where these individuals feel pride, and actually contributing to a cause which is making this world a better place for everybody?

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

Luis Carrera: Either through Facebook… My business site is IPGroupNC.com, or they could give me a call on my cell phone or text me at 973-902-72-03.

Joe Fairless: Luis, thank you for being on the show. Holy moly, this 8-unit flip that turned into a 250-unit monster… Congratulations to you, your investor and everyone who is associated to the original and the latest; from a $75,000 purchase to a 7.9 million purchase through value-add, selling the 75k property where you were 240k all-in for 530k… You started out strong and then you just kept the momentum building from there. You talked through some practical ways that you have increased the value of the properties and then how you’re getting compensated along the way. That tends to be a question that I receive a lot, “How do I structure deals with partners?”

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

Joe Fairless: Thank you for having and good luck with everything. I hope to speak to you guys soon with our next deal.

 

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