Best Real Estate Investing Advice Ever Show Podcast

JF1049: Save TONS of Money by Listening to This Guy – with Shane Moncrief

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Shane is here to help you with your property taxes.  Now more than ever, deals are falling through because of property taxes.  Learn why that is, and why you SHOULD underwrite taxes before taking ownership of an asset. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Best Ever Tweet:

Shane Moncrief Real Estate Background:
-Principal and Practice Leader, Property Tax Commercial at Ryan, LLC
-Specializes in commercial property tax, and currently leads the Commercial Property Tax consulting practice
-Formerly a Senior Consultant for commercial real estate company
-Given over two dozen presentations to professional associations in the real estate and property tax industry.
-Based in Atlanta, Georgia
-Say hi to him at www.ryan.com

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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, Shane Moncrief. How are you doing, my friend?

Shane Moncrief: I’m good, Joe.

Joe Fairless: Nice to have you on the show. Shane is gonna take a different approach from a guest that we usually have. He specializes in commercial property tax and currently leads the Commercial Property Tax consulting practice. He’s a Principal and he is  a Practice Leader at Property Tax Commercial at Ryan LLC. He’s formerly a senior consultant for a commercial real estate company and he is based in Atlanta, Georgia. He’s given tons of presentations to professionals on real estate and the property tax industry.
With that being said, Shane, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Shane Moncrief: Yeah, I’d be happy to do that, Joe. My current focus is I lead our national practice, which is about 370 people operating across the country at 29 different markets; we cover property taxes from start to finish in terms of an asset’s lifecycle. Our clients are owners and users of real estate. [unintelligible [00:03:35].19] most of our clients are owners of real estate, from developers to real estate investment trusts, pension funds, and they include clients that have 2-3 assets and those that have hundreds.

On the user side, we also supply services to tenants who are typically triple-net tenants, where they really control the property tax decision and they’re ultimately on the hook for the tax bill itself. That’s what we do, so my focus is just leading and growing our practice, making sure we deliver quality service and low taxes.

I tell people all the time, Joe, what we do every day is to fight for truth, justice, and lower property tax.

Joe Fairless: [laughs] Well, how do you do that? Explain the process, will you? And you might have to use a specific example, because that might be too broad of a question.

Shane Moncrief: I’ll take you through sort of a typical tax appeal… And I would say for property taxes for most owners really even should start – and this is maybe a piece of advice – before you even buy the asset. I have practices about 28 years in property tax and [unintelligible [00:04:47].29] tax appeals in a lot of different states, but for the first 10 years of my career, we very rarely had purchasers call us to help underwrite taxes on the very front end of a deal. And then call it 15-16 years ago property tax took on a much more important role in underwriting, and I’ll tell you, I’ve seen it more in the last 3-4 years where property taxes actually are killing deals on both development and acquisition. Assessors are more aggressive and property taxes are an ever bigger piece of the operating expense line. It winds up really being important for owners to underwrite those taxes appropriately.

I tell people – that process of property tax begins before you own it. Once you own it, that cycle is generally the same across the country. Some people will use different names and processes, deadlines vary greatly, but it all begins with an assessment notice. The local assessor sends you a notice of value, and it’s at that point an owner has to decide whether that value seems fair to them on sometimes two fronts. One is “Does that assessment notice represent market value of the property or less?” because typically in the property tax world your assessment should be equal to or less than its real market value.

Then in some states it’s important to actually not understand just what the value of your property is, but also to understand the value of your property in the context of its competitive set. Frequently you see this in Texas, in Georgia and in some other states, where the uniformity of the assessment is actually a big piece of the equation. You might have a property that’s worth ten million, and you get an assessment for eight million, and your initial reaction is “Oh, this looks fine. I don’t need to file a tax appeal”, but in fact if the competitive set – your direct competitors, properties that are similar to yours – is assessed at six million, well then you’ve got a basis for tax appeal in some states.

Once you get the assessment notice, you have to make a decision as to whether that value seems fair and equitable to you based on market and based on comparables. If it doesn’t, then that’s when the appeal process starts, and it varies widely across the country. Most states start with an administrative appeal, and often times even a bit of a negotiation in advance of the formal administrative process.

So it’s a function of meeting with the local tax assessor, discussing your property, its uniqueness, its rent roll, its financial statements, its value vis-a-vis your competitive set, and then convincing him that a change needs to be made, the assessment needs to be lowered, which then in turn saves you money on your tax bill.
If you can’t come to an agreement through that informal process with the appraiser or the assessor, then it moves on to a more formal process where you make that presentation of your case to an administrative panel, in most places. It varies widely, and that’s one of the most difficult things about property tax – it’s different in all 50 states: different terminology, different process… But then even within the states, because property tax is a local business, it varies a fair amount, even from one county or assessor to another.

Joe Fairless: What state or county is most like the Wild, Wild West?

Shane Moncrief: Wow… There’s probably a couple of ways to do that. Certainly, in Texas the process moves along very quickly. I hate to call it the Wild West, but it moves along quickly and there’s a lot of negotiations that occur; the process is over from start to finish most of the time inside of about 90 days. But you see, a lot of other places – and I’ll tell you, there are states that your listeners ought to be very wary of, and those are states where you have to use…

Joe Fairless: California. New York.

Shane Moncrief: Well, California and New York, but I’ll tell you, it’s Ohio, Pennsylvania… It’s places that seem a little more subtle than those… And because your battle may not be with the local tax assessor, it may actually be with the school board. This has been pretty common practice in Ohio for a while. Recently, we’re seeing it Pennsylvania, some even in New Jersey, where the local school boards have been given what sort of legally is called “standing”, they’ve been given the right to file tax appeals directly against the taxpayer. So your enemy in that battle, so to speak, is not the local tax assessor, it’s actually the school board. We’re seeing more and more of this, particularly after an acquisition.

Picture this – you bought a property, it’s in Ohio, they’re on a three-year reevaluation cycle; you think you’re good for another two or three years and you underwrite your taxes flat, or maybe growing a couple percentage points to deal with the [unintelligible [00:10:26].08] You buy that property for 15 million dollars and the current assessment is ten. You think everything’s fine for a couple years, and then you get this little nasty notice in the mail that the school board has filed an appeal against you to have your property’s value raised up to its fair market value of 15 million.

You can imagine the local tax assessor simply throws up his hands; he’s got no interest in fighting against the school board… What’s the tax assessor gonna say, “No, no, no, don’t raise the value!”? That’s not gonna happen. So the school boards frequently win those cases, and that turns out to be a nasty little surprise for taxpayers. It’s the reason I say, Joe, that property tax considerations for a property start before you even buy it… Because if you don’t underwrite it appropriately on the entry, you can get some ugly surprises with reassessments in even your first year or within the early, early years of your ownership of that asset.

Joe Fairless: Yeah, I know that in Cincinnati the school system has people who are full-time employees and their primary responsibility is to do what you’ve just described. And clearly, their salaries are being paid in some form or fashion from somewhere, and that is actually from the work that they’re doing… And they have full-time employees who are focused on getting the taxes increased on properties.

Shane Moncrief: That’s exactly right.

Joe Fairless: I interrupted you from what you were talking about from the process, and I was just curious, but I do wanna talk about the process. So if no agreement, then you go through a formal process, and usually it’s to an admin panel, and then what happens?

Shane Moncrief: From that point, you and the assessor are each presenting cases in front of that administrative panel, and they’ll make a decision. I’ll tell you, across the country, the sophistication of that panel, as well-meaning as its members might be, the sophistication of that panel varies greatly from one state to another, from one country or township to another… And not all of them – very few of them, in fact – are commercial real estate people. Occasionally, you’ll get lucky enough to have a residential person participate as part of the panel. But you’ve made your presentation, and then you wait on their decision. Then every state has a judicial forum in which to contest if you’re not happy with the administrative panel’s decision. And again, that varies greatly in terms of that process.

For instance, in New Jersey there is no administrative process. The very first step in your tax appeal is into New Jersey’s tax court. You take sort of the opposite end of the spectrum in California, where you have an administrative level, but by and large you don’t see a lot of valuation issues go beyond that because their court level appeal is only dealing with matters of law, not matters of value.

Again, every state is different. It ends up being one of the things that you really have to watch all the pitfalls from one state to the next.

Joe Fairless: The admin panel – you’ve given that disclaimer very well… So it depends on the county, the area of who that comprises of, but just generally, what incentive do they have to rule in the owner’s favor? Because I would think they’d have all the incentive in the world to say “Nope, sorry. We wanna hike up the property tax [unintelligible [00:14:09].09]”

Shane Moncrief: That’s a good question, but it’s probably not necessary to be quite so cynical, although I can see it, it’s easy to head in that direction. These panels are in general supposed to be independent, appointed by generally the local county or the local town, and their job is to be somewhat independent. I would tell you, Joe, just like you said, most of them are assessor-leaning, but they take their job pretty seriously most of the time. They’re trying to get the right thing for the taxpayer and for the town.

By the way, not every administrative panel you’ll be in front of is actually independent. There are a few states – Mississippi for me comes to mind – where your presentation is actually to what in Mississippi they call the Board of Supervisors, which is a county commission. So they absolutely are looking at this from a tax and revenue position, not a valuation position. Most of them are trying to do a pretty good job.

We’re actually very successful when properties are overvalued, either in terms of just pure market, or in terms of uniformity. We’re really pretty successful when those situations arise. The boards are generally trying to do the right thing. They hear our evidence, they hear the evidence of the assessor and then they’re making a decision.
Like you would expect, you see a lot of “split the difference; meet you somewhere in the middle”, those sort of things, but I will tell you, we are successful many more times than not when there is a real issue that has to be addressed by the local board.

Joe Fairless: Is the local board compensated?

Shane Moncrief: They are. In some states they’re paid like a jury member, so a fairly nominal amount, like a juror would be paid for jury duty service.

Joe Fairless: When you do that appeal in front of the local board, how much of it is the numbers and how much of it is the owner can’t afford to pay this amount, and you’d be hurting him or her, they might go into bankruptcy, that would hurt the area…? How much of the story is that angle, if at all?

Shane Moncrief: Well, that’s a really good question. I will tell you, Joe, I describe it to my clients like this – it’s just like a baseball game. In a baseball game you’ve got two people that are calling the game, right? You’ve got the play-by-play, and he’s telling you balls and strikes, and he’s giving you that view of the game, what the batting averages are. That’s the numbers, in this case – it’s the rent roll, it’s what my rents are, my expenses, what’s an appropriate cap rate to apply to get a value? That’s the play-by-play.

But in every case, you get the other side of the broadcast – that’s the color commentary. What you describe then is the color commentary. “This is going to [unintelligible [00:17:09].24] This is going to be bad for a neighborhood. This is gonna force the property into bankruptcy…” That color commentary looks like any number of things, but I would tell you it varies property to property… But it’s 85% numbers, 15%-20% color commentary.

Joe Fairless: You already answered the question that I was about to ask… I was about to ask you the percent of which to which. Okay, cool. So once the judicial forum to contest if you’re not happy with the admin panel decision – is there anything else after that judicial forum, or is that pretty much the end of the line?

Shane Moncrief: That’s the end of the road, Joe. You see, very few property taxes – and frankly, I’m not aware of any real commercial property tax appeals that wind up going beyond the judicial level. Now, you will find — maybe I should correct myself… Even within the judicial framework, just like a normal court case, you have the local court – call it a circuit court, a superior court (those titles vary quite a bit) and then you have an appellate court. Very few commercial cases make it to the appellate court, a state Supreme Court, and then you rarely see a federal case, particularly on the commercial real estate side.

Most of the federal cases as it relates to property tax have been sort of interstate commerce type of claims, railroad… Those sort of cases.

Joe Fairless: What stage in the process do you see the most success in with your clients?

Shane Moncrief: Well, it varies again – I hate to keep saying it again, Joe, but it varies a lot by state.

Joe Fairless: No, I get it.

Shane Moncrief: But I would say a fair amount of success in some states at the administrative level. We find that our work Texas you see a lot of that that’s done on the informal basis, because the local assessor – the Appraisal District is what they call them – really need to make their way through the tax appeals pretty expeditiously. I would say it’s 20%-30% resolution there, and then the bulk of it is done at the administrative level. Then a percentage that goes on to court, and very few – this is worth saying… Even if you file an appeal to the judicial level, very few of those cases actually go to a trial. Most of them are settled outside of the court room.

Joe Fairless: If it goes all the way to the end with your team, how are you charging? Because I’m wondering if they’re gonna make money at the end of it?

Shane Moncrief: At every step in the process it really is a cost/benefit analysis. Most of our property tax appeal work is done on a percentage of savings, it’s a performance fee. That process has got obviously an automatic payback through the administrative level, because you don’t pay a fee unless there’s tax savings to go along with it.

When you get to the judicial level you have to be smart, because at that point you’re gonna need an attorney, you need to select the right attorney, and you need to have that attorney being very accountable – accountable to ownership – and we work with our owners in that process to make sure that the attorneys are actually focused in the right direction, to help control the cost of the attorney as well.

So you’ve got an attorney, you may or may not have an appraiser, but at every point in the process you’re evaluating cost/benefit. Even from the initial filing of the case, there are benchmarks through that process where in conjunction with the owner we’re giving advice to the owner, “Okay, we think this is worth taking two more steps in the process. Let’s go to mediation, let’s do an arbitration. Let’s have a sit-down right before we go through the interrogatory, the discovery process.” Again, trying to make sure that our clients wind up with a return on their cost, a return on their investment in this process.

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

Shane Moncrief: The best advice ever… I would tell you, Joe, it’s “Run your property tax like a program.” Take a programmatic approach, from investment underwriting (which is so important) to that annual cycle. Because what I described for you earlier, that’s an annual cycle in most states. Now, there are different cycles – two-year, five-year cycles – every state being a little different, but my best advice is don’t treat this like a piece of machinery is broken and then you need to go fix it; think about this as an annual maintenance sort of contract.

My experience is that the owners who take a very programmatic approach every year – it starts with the analysis on the front; once it’s owned, every year they’re going through this process to make sure it’s fair… You will consistently see those properties are the ones that pay the lowest tax.

The worst year that an owner can do is every year get that assessment notice and then make a decision one year at a time on whether they wanna file a tax [unintelligible [00:22:48].01] test.

Joe Fairless: And last question and then we’ll go into the lightning round… Do investors work with you who only have, say, one single-family house as an investment property?

Shane Moncrief: We don’t do any of the single-family residentials for direct owners. We do have a number of clients… The private equity, as you guys I’m sure have covered in previous podcasts – the private equity firms got big in the single-family homes, and we have several of the largest consolidators of those single-family home portfolios as our clients, but we’re not doing tax appeals on individual homes for homeowners.

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

Shane Moncrief: I guess so, Joe.

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

Break: [[00:23:39].26] to [[00:24:30].09]

Joe Fairless: Best ever book you’ve read?

Shane Moncrief: I don’t read a lot of books… Tough one. I don’t have an answer.

Joe Fairless: Best ever movie you’ve watched?

Shane Moncrief: Oh, wow… The Quiet Man, John Wayne… Anything John Wayne is on my list.

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

Shane Moncrief: I give back financially a lot, it’s just sort of part of who I am. A lot of mission trips that I’ve been a part of, and for the different foreign countries; I enjoy doing it that way. But we do a lot of stuff in our local office as well – food bank, that sort of thing… I really enjoy that.

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

Shane Moncrief: It’s easy to find me – Shane.Moncrief@ryan.com is my e-mail address. Ryan.com is our website; you can find my e-mail address and my bio on that site. It’s the perfect way to get a hold of me.

Joe Fairless: Outstanding… Well, Shane, you made taxes fun, and that is usually an oxymoron, but you really did, you made taxes fun… Talking about how we can lower our taxes in a way that is legal, and plays within the rules.

You said it first starts before we buy the property, and then once we buy the property it’s an annual thing that we wanna take a look at – does the value seem fair to use based on the market value and also the context of the competitive set? Looking at the comps and what the comps are being assessed at. If not, then we try and do an informal negotiation with the local assessor. If that doesn’t work – in Texas, it probably will… But if that doesn’t work and you’re in Ohio and the school board’s coming after you, then you’re gonna have to probably go a little bit more and do the more formal process with the admin panel. If that doesn’t work, do the judicial panel. Again, it varies state by state, municipality to municipality, but that’s the high level of review.

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

Shane Moncrief: Great, thank you, Joe.

 

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Best Real Estate Investing Advice Ever Show Podcast

JF1048: Focusing on Lenders to Make MORE MONEY!! #SkillSetSunday With Steve O’Brien

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Today we focus on changing our mindset and not jumping at the first lender that says yes. In today’s marketplace there are a lot of options for lending, so why not shop around before agreeing to financing? Often times we do ourselves a disservice by not shopping around more, find out how to change that today. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Best Ever Tweet:

Steve O’Brien Real Estate Background:
-Co-founder and Chief Investment Officer of Arcan Capital
-Responsible for acquisition of over 20 multifamily assets totaling close to $200 million in the last five years
-Placed nearly $100 million in financing with FMNA, FMAC, HUD, bank and insurance company sources
-Prior to Arcan, Mr. O’Brien was with CBRE
-Based in Atlanta, Georgia
-Say hi to him at www.arcancapital.com
-Best Ever Book: Outliers by Malcolm Gladwell

Click here for a summary of Steve’s Best Ever advice: Pay Attention to These Five Loan Components to Maximize Your Apartment Returns

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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.

I hope you’re having a best ever weekend. Because it is Sunday, we’ve got a special segment for you called Skillset Sunday. You know what this is – we’re going to help you hone an existing skill or adopt a new skill that is valuable for you.

I was talking to today’s best ever guest about this before we started recording, and he said “You know, we focus so much on getting the equity, but then we go with the first loan that we get offered.” So we focus so much on getting equity for our deals, the cash for our deals to close, but then we don’t focus as much on selecting the right lender, when in reality the lending dollars are just as important. I thought that was such a good tip, and that’s what we’re gonna focus on today – the lenders, specifically for multifamily investing. How are you doing, Steve O’Brien?

Steve O’Brien: I’m doing great, thanks for having me.

Joe Fairless: Nice to have you back on the show. A little bit about Steve, just as a refresher. He is the co-founder and chief investment officer or Arcan Capital. He’s responsible for the acquisition of over 20 multifamily assets totaling close to 200 million bucks in the last five years. He’s placed nearly 100 million in financing via different sources, and prior to Arcan Capital he was with CBRE.

With that being said, Steve, do you wanna briefly mention your background and then we’ll focus our conversation on lending?

Steve O’Brien: Absolutely. My background actually plays into that pretty well because the first job I got in real estate was for the debt and equity finance team at CBRE. I came in as a young analyst and got to watch a ton of deals, do a bunch of different underwritings, build a lot of models in Excel… And I think one of the advantages of being at a broker shop like that is to see the number of deals that you get to see. I got a great exposure to those.

Then I also got to watch first-hand as the market crashed, because when I first got into real estate – I don’t wanna say “Nothing’s ever easy”, but for a while everybody was doing really well, and it felt like  pretty simple business. Then you had 2008, 2009 and 2010, so I got to learn a ton; it certainly wasn’t a fun time, but it was definitely one of the biggest learning experiences of my career.

I since have launched Arcan Capital, where we acquire multifamily in secondary and tertiary markets in the Southeast. That includes putting a bunch of loans on multifamily assets and other types of assets, as well.

Joe Fairless: Speaking of those loans, how should we approach our conversation so that we give the Best Ever listeners information that they need to get better at finding the right debt partner for their deals?

Steve O’Brien: Well, I think you have to start off by just changing the mindset a little bit from the beginning. We meet with a lot of people who are struggling to find equity and they’re looking for friends and family or whatever it may be (a partner) to help them, and ultimately you ask about their debt strategy and they say “Oh, a bank”, or “We’re gonna go the agency way.” To me a dollar is a dollar; whether you’re raising on your equity, you’ll spend a ton of time working with an equity partner to make sure it’s the right fit, but you’ll take the first dollar offered from the bank, and the main thing that I hear people complain about is interest rates. That’s like “Oh, I’m gonna get a great interest rate on this” [unintelligible [00:05:49].19] but there are a lot of different parts of a loan, and a lot of different parts of the lender that it’s worth paying attention to, but you also have to weigh that against a lender to give you money, and sometimes you’ve gotta do what you’ve gotta do to get the deal done if you believe in it, but most of the time, especially in a market like we’re in today, there are a lot of options for people, and I think it’s prudent for investors to spend as much time on their loan as they do their equity. I normally don’t see that, and that’s pretty surprising, considering, as I’ve said before to folks – when push comes to shove, the lender’s in control.

Joe Fairless: Yes.

Steve O’Brien: They make sure in any documents that you sign – if you read closely enough, there’s something that allows them to make decisions, from your property manager to the money that you spend. Now, most of the time, if things are going as planned, they won’t enforce their rights to do and make those decisions, but they are often in control, and in the multifamily business you see a lot of loans that are above 50% leverage. So not only are they typically in control, but they’re putting more money in the deal than you are. That gives them a certain level of control.

Joe Fairless: Let’s talk about the different parts of the loan and of a lender, and obviously, we’ll need to start with one or the other. Let’s do the loan first – what are the different components of a loan that we need to be paying attention to?

Steve O’Brien: I think there are probably several basic concepts at the top that all come together to form your loan. One that everybody knows and pays attention to is the interest rate, and the other is the loan-to-value of the proceeds. Those are the two most important that everyone focuses on, because it basically determines what your costs are gonna be, what is the debt service and how much money you’re gonna need from an equity standpoint based on what amount they’re willing to lend you. But particularly with banks – and I think you’ll find most banks these days, given what happened in the crash, they want recourse. What I mean when I say recourse is that they want you to guarantee some or at least a portion of the loan that you’re getting personally.

Now, what the advantage is with a lot of lenders is that they offer nonrecourse loans. I can say that on our entire portfolio that we’ve done of about 100 million in financing, we have not signed any recourse, meaning that if the deals were to go bad, the most the lender could do is come after you for the property itself, so you can only technically lose your equity in the deal.

One of the things that happened during the crash was a ton of people put up recourse and all their loans went bad, and it caused bankruptcies and other issues, because not all the lenders will do all the math on all the recourse you have… So you may have guaranteed 150% of your assets, and if everybody comes calling them at the same time, that can be a real problem. So we pay attention to little items like that.

Term is another. If you’re dealing with banks, a lot of banks will wanna do a 35-month loan, or a 36, or up to five years with extensions, but there are a lot of debt options out there that if you think you’re gonna own something forever, especially with where today’s [unintelligible [00:08:54].01] compared to historically, it may make a lot of sense for you to pay a higher interest rate, but to lock it in for 15 years, if it’s a property that you love.

So there are a lot of little items like that, recourse probably being the most important, because that’s where it can come back to sting you. With nonrecourse loans, you will have to sign something that says you’re not going to commit to fraud – they call them bad boy carve outs – but in general there are a lot of options for multifamily investing in particular that do not require a recourse, and as long as you stay at a reasonable loan-to-value. But you can get a nice, healthy 75% loan and still remain nonrecourse.

In fact, if you go low enough on the loan-to-value on some multifamily deals, you don’t have to sign any recourse at all personally, meaning that the entity is the one who guarantees the loan, or the lender will want to make the loan enough that they’ll basically say “Listen, it’s just worst-case-scenario we can’t even come after you for the bad boy carve outs”, and that’s just like any other business – it’s the competitive nature of the market right now; there’s a lot of money looking to invest, and that includes on the lending side, too. That brings us back to doing the diligence and checking all of the different options that you have available.

Joe Fairless: One thing we’ve done is we’ve kept how high the interest rate can go by purchasing that cap. Have you done anything like that?

Steve O’Brien: Yeah, the interest rate caps – they can be a really good idea, too. Some of the lenders on a bridge loan – bridge loan would be typically a three-year type loan and you may have some extensions built into it, but those are typically done on our value-add properties, which is the majority of what we do. You’ll get in and you’ll do a lot of work and you hope you increase the value, so that within the 2-3 year loan term you can refinance after you do the work to the property.

A lot of times, those bridge lenders will require you to buy a cap because of their rate floats; they don’t wanna put you in a situation where the rate goes up by 100 basis points and you don’t have any protection as an owner, so a lot of times they’ll make you buy those caps. It’s like any other investment  – there’s a secondary market for it, so there can be value in owning an interest rate cap, too.

Joe Fairless: Anything else as it relates to what we look for in loans that you wanna mention? We’re gonna switch over to lenders after this, but I just wanted to talk about loans in particular, like the terms or anything else we need to be aware of? Maybe carve outs or clauses to watch out for?

Steve O’Brien: The key thing is there will always be a section with regards to carve outs as far as almost every loan has a nonrecourse on it somewhere, and then they’ll carve out what’s included in that nonrecourse, and you just have to read it really closely. When I say “you”, I really mean your lawyer. You should have someone who is experienced in this do it for you. It is money well spent to have someone take a closer look at these documents and just make sure that there’s nothing unique about it.

Some lenders have very standardized documents and some documents will do just like anyone buying a piece of property with a contract; they’ll try and slip something in and see if they can get it, even if it’s not market. It’s great to have someone with experience review it for you.

I think one of the other things that I missed earlier is probably with regards to pre-payment flexibility. We have some properties where we’ve done I think a seven and a ten-year loan and we created an enormous amount of value, and because we created a lot of value in the property, the loan that was originally a 70% loan is now a 50% loan. Our option is to go get a supplemental, but the supplemental loan from the agency – they’ll add proceeds to your current debt, but that’s at today’s interest rate, not the previous one. So you think about selling the property, but if you sell it, you have a huge pre-payment penalty, yield maintenance or defeasance… Defeasance typically with the CMBS loans, but yield maintenance where they’re basically going to make you buy an instrument to pay them back the interest that you would have owed them over the next few years. So you’re talking, as opposed to paying them a 1% or a 2% fee, it needs to be a 10% fee to get out of your property.

Ultimately, that’s a decent problem to have, because it probably means that you’re doing well, but it just limits your flexibility. So as I mentioned before, you can always go to an equity partner and say “Hey, we’ve created a lot of value, let’s sell” and your equity partner can say “Okay, let me go get approval” or “Okay, that sounds great. Let’s do it”, but you can’t go back to your lender and say “Hey, we created a lot of value. We’re gonna go ahead and sell”, because the lender is gonna point back to the documents and say “You told me this is was a three-year loan; if you pre-pay it, there’s a penalty.”

Now, that’s an advantage of bank debt, but typically you can’t get a loan that does everything. The longer-term loans are gonna have pre-payment penalties. The shorter term loans aren’t going to have that length in term, so you get to the end of three years and you wish you could refinance it at that rate, but the rates have changed, so you’ve gotta pay a different rate. So it’s worth thinking about where you think the market is going.

For the last seven years, everyone has said interest rates are gonna go up, and almost every year they go up just a little bit, but I think everyone would agree that was all the economists and every real estate person talking in 2010 or 2011, the vast majority would agree that we all thought rates would be much higher than they are today. Now, it looks like they’re gonna go up now, but it felt like that 2-3 years ago too, so you never know.

Joe Fairless: How would you prioritize these items when you’re looking at loans?

Steve O’Brien: I think it’s on a deal-by-deal basis. A lot of our equity partners need certain things… Whether that’s a particular return or that’s a particular amount of money that they like to invest, it kind of all balances out. Some people like to have a big chunk of cash in a deal, and they understand that if you’re going to get a 60% loan on a multifamily deal, your return is going to be lower than if you have an 80% loan-to-value on the property. It’s also a lot less risky, so I think you have to work it all out and determine your preferences.

Like I said, if you know you’re gonna own a property forever and you love it, I don’t see any reason to put short-term debt on it, unless the benefits so far outweigh the risk of having to refinance in three years at much higher rates. Now, the other hard part is I know there aren’t many investors that know they wanna own something for 20 years, or even 10 years. Most people are making judgments based on a 3-5, maybe on a 7 year horizon, so locking  you in for 10 years feels like a long time… But I think you’ve gotta pay attention to your goals. Is your goal to buy and improve a property and then flip it? Well, then don’t put long-term debt on it. If your goal is to buy a property and hold it forever, well then you may wanna consider not doing a three-year bank loan with two one-year extensions and going to a longer-term lender that will do a balance sheet loan for you, like a life insurance company or an agency (Fannie Mae, Freddie Mac, something like that) in order to lock your returns in for the long-term… Because it’s a nice, warm blanket to have a low interest rate that you know doesn’t mature for 10 years, unless you wanna sell it, and then you’ve got a pre-payment penalty. So it’s all very determined based on your goals, and I think that’s what the key is – to set your strategy and your goals for the asset and try and find debt and equity that best mirrors your strategy and goals.

Joe Fairless: Let’s talk about lenders. I know this could be an hour long conversation and we have about six minutes, so let’s talk about lenders… What types of lenders are there and how should we think about that?

Steve O’Brien: I think you can silo a lot of them into different groups. You have your banks – typically your local, regional, even national banks are going to do shorter term; they’re gonna prefer floating rate debt, meaning that as interest rates change, your debt will change and your cost to borrow will change, and that’s something that in my opinion has always made me nervous. Even though you did floating rate loans previously (in the last 5-7 years) you flipped really good, because rates have stayed low.

I think banks are a little bit easier to deal with in that they have some very straightforward regulations that they need to achieve, and they can tell you “Hey, here’s what we’re gonna need – we need X and Y and Z”, and they’re similar to agencies in that regard… But there’s going to be a recourse issue with the banks.

Most banks that you talk to, they’re going to want amortization and they’re going to want recourse. They’re always gonna push you towards amortizing a loan instead of having interest-only, and they’re going to push you towards having some level of recourse, even if they just wanna get 25% recourse on the loan. But in general, it’s a little bit more of a relationship lending type environment with the bank. You can form a relationship with a lender that’s in your neighborhood, that’s at a regional bank, and you can talk to them about what you’re doing and develop a good rapport with them so that they understand the type of projects you’re working on and willing to lend.

But that’s also possible with an agency lender. Fannie Mae, Freddie Mac – they are also very standardized; it’s an advantage, like the banks… But they are so standardized that it can sometimes be difficult, because everything’s gotta fit in the box. If you just look all around for multifamily lending, I’d say Fannie Mae and Freddie Mac are the best options as far as the best terms, the most flexibility, and it’s largely because at this point — I guess you can’t even call them quasi-government agencies anymore; they are government agencies and their goal is to create liquidity in the housing markets. They are out there trying to lend money on deals. They’re looking for ways to do deals, and especially in 2010-2012 when people were a little nervous, agencies were very helpful because they got on board early, because it’s part of their directives to make those kinds of loans.

Joe Fairless: I guess the same question that I asked earlier with the loans, but now for the lenders, and you’re probably gonna give the same answer – “It depends on the deal and your source of equity” – but how do you determine which lender to go with, matching up that lender with the project?

Steve O’Brien: Well, I think there are certain deals that certain lenders prefer, and that’s why, like I said, it is deal-by-deal, it is project-by-project, but even your local — you’ll probably find differences between a life insurance company (insurance companies are another lender that I didn’t mention previously)… You will definitely find differences in preference between different life insurance companies. Some may love being in a major urban area, and some may be a little nervous because of all the construction that’s gone on in major urban areas in the last few years. They may like the secondary and tertiary markets.

So a lot of this is spending, like I said, the same amount of time looking at your lenders as you do your equity partners. Frequently, there are a lot of mortgage brokers out there that can really help if you use the mortgage broker a lot, because they know of the hundred different sources of capital out there, and they’re professionals at what they do.

Their professionals that when you give them a deal or they send a deal to the lender, they’re gonna tell you “Hey, these are the five guys that probably like this. These are the five underwriters and the five companies that this makes sense for”, but they look at deals very similarly to the way lenders do. The only difference is if we do really well on a deal, the owners can get massive IRRs, but no matter what, the best  a lender can do is get their interest rate. So they’re definitely safer, and they’re gonna check probably more boxes than you are, because their return is capped, and kind of an all-or-nothing for the lender. They’re very specific about what they like, and that’s why I think Fannie Mae, Freddie Mac and the agencies can be a great option, because they are a little bit more flexible and they do have some directive to make sure that there’s liquidity in these markets, whereas an insurance company is only gonna lend you money, and a bank is only gonna lend you money if they think they’re gonna get their interest back, period. I mean, that’s really all they’re looking at.

Now, Fannie Mac and Freddie Mac looks at it the same way, but they also have a job to do, to get money out the door.

Joe Fairless: When do you use a mortgage broker?

Steve O’Brien: We use a mortgage broker most of the time just because on the size of our deals it’s an enormous amount of work, and talking to an equity partner and talking to a lender can be very different experiences. There’s kind of a running joke amongst lenders – if you talk to enough underwriters, you just basically take the person who sent you the numbers and cut everything by 10%, because everybody’s over-aggressive. So when you’re presenting things to a lender, we like to use a mortgage broker frequently, so that they can help us look at things through the lender lens.

At our core we’re entrepreneurs; every deal that I’ve done, I’ve loved… So you wouldn’t do it, you wouldn’t put your own money and put so much work in it if you didn’t love it, but there are gonna be people who disagree with you, and if you present a really myopic view of the deal to your lender without doing the background and without doing the research, and if you could dial the numbers back a little bit and make the lender think you’re conservative and they’ll still give you every nickel that you wanted, that’s a good approach to take.

The mortgage brokers can really help you with that and just gathering all the data; I can’t tell you how many times you’ll be in a conversation or in a room with a lender, discussing a deal, and you say one more thing than you should have said, and the lender takes it the wrong way… Maybe you mentioned something about the demographics where you say “The average income in this area is this” and then you mention the median income is a little bit lower, and they dig in on “Well, why is the median so much lower than the average? What does that mean in the market?” and they were sold until you mentioned the median number.

So it’s great to have someone guiding you and helping you say the correct things and provide the correct numbers, and only what you need and nothing more, because I’ve seen lenders turn down deals for crazy reasons that don’t seem to make sense, from parking — they think it has two parking spaces too few, so they won’t do your deal. And that really hurts, when you get that far down the road and you lose it because of two parking spaces. So getting all that information together and making sure you have someone there to help check all those boxes is very helpful.

Joe Fairless: Anything else — and I know this could be a day-long conversation, but as it relates to the topic of identifying the right loan and the right lender… Anything that we haven’t discussed, within the amount of time that we could discuss, that you wanna mention before we sign off?

Steve O’Brien: No, I think we got to just about everything. I think the big key to take away for the Best Ever listeners is if they’re not viewing loans similar to equity, maybe to kind of turn that a little bit and start spending as much time looking through the loans and understanding exactly where they are with regards to their loan agreements and exactly what they’re trying to accomplish with the deal, and seeing if they can find someone that matches up perfectly with their deal. That’s a great way to look at it, because not all loans are created equal, and there’s a lot of people out there right now interested in lending, particularly to multifamily.

Joe Fairless: Phenomenal conversation. Thank you for being on the show again. Best Ever listeners, if you didn’t hear the first episode with Steve, where he gave his best ever advice, it’s episode 940. You can go listen to episode 940 and you can hear him talk a little bit more about his company and his focus and acquisitions and all that good stuff.

Thanks again, Steve, for being on the show, talking about how to identify the right loan, how do we prioritize those different components within the loan, the players within the lender space and the pros and cons or strengths and weaknesses of those. I hope you have a Best Ever weekend, my friend, and we’ll talk to you soon.

Steve O’Brien: Thank you!

 

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Best Real Estate Investing Advice Ever Show Podcast

JF1002: A Unique Way to Pay Investors Using a Property’s Cash Flow

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When borrowing private capital, some investors may require that after borrowing the funds, they get a preferred return, which is a return that goes to them before you get paid. Listen how these two guests pay that preferred return with a separate cash flowing property.

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Matt Wood and Mike O’Connor Real Estate Background:

– Multi-family Investment Experts who have portfolio of 140+ units in a few years
– Purchased a 100-unit building for $2.8 million with no money out of pocket
– Scaled a 16 unit complex that required a full rehab
– Began investing in real estate in their mid-20s while working full time jobs in 2013
– Based in Atlanta, Georgia
– Say hi to them at www.foundationsrealtygroup.com/
– Best Ever Book: Rich Dad, Poor Dad

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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, Matt Wood and Mike O’Connor. How are you two doing?

Mike O’Connor: Good, Joe. How are you?

Matt Wood: We’re doing well, thanks.

Joe Fairless: I’m doing well, nice to have you both on the show. A little bit about Matt and Mike – they are multifamily investors who have a portfolio of 140+ units and they’ve acquired that in a few years. They purchased a 100-unit building for 2.8 million with no money out of pocket, and began investing in real estate in their mid-twenties while working their full-time jobs. They’re based in Atlanta, Georgia. With that being said, do you two wanna give the Best Ever listeners a little bit more about your background and your current focus?

Mike O’Connor: Yeah, absolutely. You hit on some of the key points there. Matt and I have known each other since college, and we actually happened to join the same consulting firm out of college, where we both realized we had a similar interest in real estate. In about December 2013, after doing a lot of analysis and talking about the real estate market, we co-bought a small $65,000 house in a submarket called Stone Mountain here in Atlanta, Georgia. That really was the beginning of the whole snowball, if you will.

We sat on that for about a year, when we decided that we actually wanted to do a little bit of an up trade, if you will, and we can dive into some of these specifics later, but what that essentially lead to was us purchasing our first multifamily deal, which was 32 units. As you alluded to, we then jump to a 100-unit deal, and then our 16-unit deal, and now we’ve got a couple quads, a sixplex and a duplex under contract. That’s kind of the very high-level background on us and what we’ve done, and I’m sure you’ll have some questions about some specifics.

Joe Fairless: Sure do, yeah. What money did you use to buy the $65,000 house? Your own money?

Matt Wood: Yeah, we used our own money for that one, and we just did a standard 30-year mortgage on that property; I think we still had to put 25% down, but for a $65,000 house, that was reasonable with our day jobs and with our savings. We used our own money on the first multifamily property as well, the 32-unit complex. We got 80% financing from a bank for that property, but after that 32-unit, we were a little bit tapped out, and that’s why we had to get creative with the 100-unit and do some seller financing, pull in some investors… We flipped the house during that process to pay back some money for the investors and things like that. So in order to scale and really grow, we learned pretty quickly that we were gonna have to find ways to leverage other people’s money.

Joe Fairless: That’s gonna be a fun thing to talk about. You’ve just mentioned you flipped a house to pay back investors – can you elaborate?

Matt Wood: When we bought the 100-unit complex, we seller-financed 10%, the bank provided 80%, and then investors provided the remaining 10% of the purchase price, but we were giving them a preferred return and we were paying them that 10% back over a five-year period; so we have investor payments to make on a semi-annual basis. Our goal really has continued to be to have no money out of pocket on that 100-unit complex. We’re both real estate agents, we work with a lot of investors, and we found a property that had potential to flip, it had a good after-repair value, it  had good comps in the area, and we flipped it and made some profit and used that to pay the investors back.

Mike O’Connor: In account to what Matt was saying, the way we structured it is — if we knew what we know now we would have been a little more selfish, if you will, with the equity piece, but we gave up 50% of the equity to the investors for the money that they brought, but we also paid them back 5% on an annual basis. That money comes out to something in the ballpark of $35,000 around 1st July every year or so. At least once a year — flipping isn’t necessarily our main objective, but we found a flip and we were able to make a quick $30,000; we turned it around, pumped it right back into our investors and we continued this whole theme of letting the business fund itself with no money directly out of our pockets.

Joe Fairless: Interesting. So you’re using an outside investment to pay a preferred return for an investment that the investors invest in.

Mike O’Connor: That’s exactly right.

Joe Fairless: And they’re fine with that?

Mike O’Connor: Yeah, they’re absolutely okay with that. The properties themselves are cash-flowing as well. The main objective for the whole process was for us to do a full cash-out refinance, hopefully within the next year, once we have stronger numbers, with that cash-out pay back both the seller financing and the remaining debt service that we have due to our investors, and hopefully that will bring us even keeled. But they’re okay with that as long as the money is coming back to them, they’re getting their interest, and if the properties run smoothly, they give us the autonomy we need.

Joe Fairless: With the 5% preferred return – because it’s basically a preferred return – when you did the underwriting did you project that the property would be able to pay the 5% preferred return?

Matt Wood: It’s interesting… When we bought this property we knew that it had some immediate upside. All the units were [unintelligible [00:06:59].09] for water, but the owners were paying for water, so we immediately charged that back to the tenant. We made some upgrades in some units and we slowly worked on increasing rents, so there is an element of the property paying back investors over time, but as of now, since we’re only two years in on this property, we knew that we would be making those investor payments either out of pocket, or with returns from our other properties or from flips. I mean, we could make the payments out of pocket if we wanted to, but our mindset and our goal has really been to try (to Mike’s point) to make those payments and to do everything with business returns.

Mike O’Connor: Yeah, and then the big thing that we’re marching for is that we underwrote during the analysis [unintelligible [00:07:37].26] so we have a balloon on that after five years for the pure principle amount; we pay monthly interest payments only for five years on that, and that is one that we’re confident that will absolutely be paid back through the property itself. But the property – we’re also hoping to just cash out, and we’ll handle the remaining investor payments that we have for the next two years.

Joe Fairless: When you had the investor conversations, when you were talking to them about the deal, you mentioned that the 5% will be paid from outside investments in the property instead of the actual property for the first couple years, and that conversation was okay?

Matt Wood: I think we would have had to have a different conversation if we were gonna tell the investors that we were gonna pay them back using money from the property, since they also are equity owners, right? So it was cleaner even to show that we’re building up reserves in the property and we’re leaving that money there, in the property’s account, and that we’re paying them money back from our own pockets. To Mike’s point, they don’t care where the money comes from, as long as they get paid back.

Mike O’Connor: Right, and it’s nicer to have the reserve build up there, and they know that that’s all kind of shared money for the property. It keeps it cleaner.

Joe Fairless: Huh!

Mike O’Connor: You seem surprised by that…

Joe Fairless: I’ve never heard of this; I’ve never heard of paying from another property the preferred return. Usually, my deals – and every deal I’ve heard of, which as long as it’s kosher and there’s no co-mingling of funds or anything, then I assume it’s fine.

Matt Wood: Not at all. I mean, just to simplify it totally, we owe them money to pay them back on the investment, and the way that we structured the promissory note, the money comes in however it comes in.

Joe Fairless: Huh… Okay. And when you do a refinance or when you sell, are you then repaid that 5% that you’ve been paying them from outside sources?

Mike O’Connor: No, the 5% is basically what we’re giving them as kind of a “thank you for you fronting the money”, to account for that. The guys that we brought in are higher net worth individuals who have very diversified investment portfolios, so there’s a certain element of desirability in a 5% return. For me, a 5% return is not as appealing, I’d like to look for something higher, but for these guys, the fact that they could get both equity and 5% on this money made sense. So as far as that 5%, we won’t be taking that back out; that’s just going straight to the investors.

Joe Fairless: How did you two find the deal?

Mike O’Connor: The same guy who brought us the 32-unit deal actually stumbled across this. There’s a couple of [unintelligible [00:10:06].10] in the submarket that we’re in – it’s Albany, Georgia – who picked this property up a few years back for real cheap, and they’re actually builders, so they were looking for some capital to go into a few new building projects. The guy’s name is Erik, he brought it over to our group and said “Hey, I’ve come across a deal… It’s 100 units for 2.8 million dollars. a) Are you guys interested in getting in on this? b) do you know how we’d be able to figure out the financing component?” So aside from that, we have two other day-to-day partners, [unintelligible [00:10:33].26] and we’re really sort of underwriting the deals, seeing if it made sense, looking at the numbers, looking for potential areas for value-add, and it made sense.

Once we identified it, to closing it really was a quick time, probably about a month and a half that it took. But it was Erik, we’ll give him credit for that. He has this wide network of investors and owners throughout the Atlanta and surrounding areas.

Joe Fairless: That was my follow-up question, perfect segue… How many investors do you have in the 100-unit deal and what’s the total equity that they brought?

Mike O’Connor: The investor group – I think they’re like a five-person group; I’ll kind of break down the numbers. 80% of the loan came from the bank, 10% of the loan is seller-financed, and then 10% of the loan came from the investors themselves. Now, again, knowing what we know now, we probably would have diluted ourselves less just because we’re operating the property on a day-to-day basis, it’s a good deal… We really were giving them a good opportunity. When it all shakes out, the investors get 50% and then we on our end get 50%, which comes down to 10% each, which again, in the grand scheme of things isn’t a ton, but the fact that we’re each getting 10 units for an apartment complex for absolutely no money out of pocket… Essentially, if you look at opportunity costs with what we’re doing with our flips, that money could have gone to better use elsewhere etc. but as long as we’re getting in there, getting those 10 units for no costs instead of our own pocket, we’re satisfied with that. So there is some dilution there, but it was the way that it made sense at the time.

Joe Fairless: What have you done differently on the 100-unit that you didn’t do on the 32-unit?

Matt Wood: Good question. The deals were totally different. The 32-unit required some rehab up front, and it required a lot more stabilization because about 12 of the units were vacant when we purchased the property, and we were able to get it leased out pretty quickly. The 100-unit was about 80% leased when we bought it, but we went in and immediately made some upgrades on the flooring of the units, or [unintelligible [00:12:30].23] or things like that, just to improve the quality of the property.

Then we had some additional decisions to make as far as the property management aspect, because the 100-unit complex has a full-time leasing agent and a full-time maintenance technician at the property… So that was a little bit of a different beast than the 32-unit in terms of the operations.

Joe Fairless: What’s a lesson learned or a mistake that you made on the 32-unit that you didn’t make on the 100-unit?

Mike O’Connor: The 32-unit was a great first deal in the sense that the numbers were great from day one; it really was a strong deal. That’s really what catapulted us into quickly over the next six months closing on another 116 units. A big takeaway that I always harp on is the quality of the tenants. When you’ve got a lot of vacancy or you’re working on stabilizing a property, there’s this element of wanting to increase the cashflow as quickly as possible, so you start to loosen your restrictions or your requirements for the tenants that you’re placing.

We were doing 2.5 times income – your income has to be 2.5 times the current prices, and we brought those best practices (or not best practices) over to the 100-unit, but then we started to realize that this is leading to more evictions, it’s leading to a lower class of tenants, so we quickly cut that off when we bought the 100-unit deal. We really just realized we’d rather wait an extra two or three weeks and place a good, quality tenant, than to jump the gun and put in a lower quality tenant off the bat. I think that saved us a lot of money across the road with leasing fees, paying someone to go and show the unit, turn costs, eviction costs, costs of non-payment, things like that.

Joe Fairless: On the 100-unit, what’s been the most challenging aspect of doing the asset management?

Matt Wood: Good question. There are a couple aspects to that – we actually recently transitioned property management companies after just realizing for a number of different reasons that the original company that we were working with wasn’t a good fit. The current company we have has been great… I would say one of the challenges though is that the property is about three hours outside of Atlanta, so we don’t get to that property in person as often. We’re allowing our on-site leasing agent to be the eyes and ears on the ground, but I think there are some elements that we would have been able to manage quicker and more easily if the property were in our backyard.

We’re still happy with the deal, and we would invest the same distance away from Atlanta if the numbers made sense, but that has been a challenge.

Mike O’Connor: That’s an interesting question, and I’m gonna break that out a bit as well. A benefit of having 100 units is you do have the need for an on-site manager and on-site maintenance tech, and I think that’s been great. Shifting that question a bit and looking at the 32-unit or the 16-unit one, the hardest thing about those (especially at the 32-unit), you’re getting to the point where you need some type of on-site presence; maybe not full-time, but part-time. Figuring out how that model looks, how you pay someone to be there, what they’re doing while they’re there – it’s kind of challenging; it’s that awkward in-between phase where it’s not a single-family home where it obviously doesn’t require on-site staff, and it’s not 100 units where you definitely need someone; it’s definitely in-between. We’ve gone back and forth on models with that, and that’s been a big challenge.

Joe Fairless: How did you find the original property management company and what were the red flags that made you ditch them and pick someone else?

Matt Wood: The 32-unit complex was being managed by that property management company, and since we were scaling from a single-family house to the 32-unit complex, we wanted to try to keep everything as consistent as possible. There was already a lot of change going on in our investing lives, so it made sense to keep them. And they’re nice people, they still do good work, but it just wasn’t a fit for us.

Some of the lessons learned that we have on our end is that we’re all four guys with day jobs who are very type A and we like to know all the details, and we micro-managed them. Granted, you still have to manage the management company, but we probably went overboard on that. It just wasn’t a personality fit, in some ways.

The current company that we have also invests and has their own properties and understands a lot more of the elements that we’re looking for, and we like the personnel and it’s been a great fit.

Joe Fairless: As far as the personality – I imagine the operations or the numbers were suffering, because if that wasn’t the case, the I suspect (maybe I’m wrong) that you wouldn’t have made the change. From an operations standpoint, what specifically does the new property management company do that perhaps the other one was not as efficient or effective at.

Mike O’Connor: They’ve got a lot better oversight on the property. The two models are very different. The new company – and this alludes to my earlier point about on-site versus off-site – is much more remote. We’ve got more senior level people overlooking our property operations, but from a remote perspective; handling the financials, really looking to work orders, making sure that they’re valid work orders, running the accounting, vetting tenants…

The previous company was very big on on-site presence, so we had an on-site manager that we were paying an hourly wage too that was working on a couple of our properties for about three days a week. This individual, for a lack of better terms, was not a more senior person, so a bit more junior, green behind the ears, and they were essentially in charge of running the property, handling the accounting, handling the finances, the tenant placement… So the decisions that they were making just weren’t great. We were placing bad tenants, rent collection was lower, things slipped through the cracks; every work order that came through the door got fixed and it came out of our pockets… There was just a variety of different ways where we weren’t either capitalizing on opportunities or we were bleeding from an expense perspective. That was one of the big drivers of the actual change.

Now things are much more tightened up, we have less oversight and overhead as far as on-site presence, and the properties are performing much better than they were before.

Matt Wood: The only thing that I’d add is we could tell pretty quickly with the new property management company that they took things up a level in terms of their accounting, their reporting, their software portals… You could tell pretty quickly that it was a professionally-run operation and we had some qualifications, some references on the company. That’s a lesson learned – we would ask any new property management company for client references that we could speak to to learn a little bit more about them.

Joe Fairless: Lots of good lessons learned, thank you for sharing that.

Matt Wood: Yeah, absolutely.

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

Mike O’Connor: Matt and I would probably go different ways on this, but I would say don’t hesitate to jump in. You need to understand your markets, you need to understand the numbers on what you’re doing, but you could sit there and you could analyze deals – and this is more for a newer investor – absolutely all day. There’s plenty of deals to run numbers on; actually taking the leap and getting in the game is absolutely critically important. I think the other thing for someone that’s obviously more experienced – really understand and manage your finances and your accounting very well, especially pertinent now that we’re in tax season, it’s never fun trying to go through and figure out what’s going on through all your collections, your expenses, but really at the end of the day we’re doing this to make money, and if you don’t have your finances figured out, then there’s really no point in doing this.

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

Mike O’Connor: Ready!

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

Break: [[00:19:39].07] to [[00:20:31].12]

Joe Fairless: Best ever book you’ve read?

Mike O’Connor: Best ever book I’ve read is the Robert Kiyosaki book, and I’m drawing a blank on–

Joe Fairless: Rich Dad, Poor Dad?

Mike O’Connor: Rich Dad, Poor Dad, yeah. A lot of people give that book, but it honestly got me into real estate investing.

Joe Fairless: Best ever deal you two have done?

Mike O’Connor: Probably our 32-unit deal. We picked it up for $640,000 and it just got appraised for 1.35 million. It brings in roughly $18,000/month.

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

Matt Wood: We’re pretty involved in our church and we like to get involved with the service aspects there. We do different habitat type builds and stuff like that, so it’s just getting your hands dirty and getting involved.

Joe Fairless: Thinking back on your deals, what’s a mistake on a deal that comes to mind?

Mike O’Connor: A mistake on a deal… I would say on 16-unit deal which we didn’t do much discussing here, we basically rehabbed all 16 units; some of them were floor-to-ceiling molds, a good majority of them were. We — I’m not gonna say we cut corners, but we rushed the job in some areas, both with our repairs and with our tenant placement to get the thing up and running quicker than we needed to, and I would say that that probably cost us about six months of being at full stabilization, just because tenants were having to be evicted, repairs that we made weren’t holding up… So really going back and actually doing that right the first time would have saved us a lot of time and a lot of money.

Joe Fairless: You read my mind when you said we haven’t talked about it a whole lot… I do want to touch on it briefly real quick. With that 16-unit what are the numbers?

Mike O’Connor: We actually found that one on the FMLS, which is interesting…

Matt Wood: Aziz found that one…

Mike O’Connor: Yeah, Aziz found that. We picked that one for 471k, we probably put it about 100k, so we’re all-in (our base is) about 570k. It did just get appraised for 1.05 million, so all the work that we did really paid off, but that’s 16 units, it’s 8 duplexes, and each one rents out for about $850/month.

Matt Wood: One other thing we like about that property is that the whole area itself is really improving and we’re getting tenants like teachers and nurses… It’s been a good quality group that we’re getting in as far as that property goes.

Joe Fairless: Did you do a refinance to return your original equity?

Mike O’Connor: We cashed out $100,000 of it. Not all of it, but a portion of it.

Joe Fairless: How did you decide how much to cash out?

Mike O’Connor: Especially with interest rates being so low, leverage is great, it’s allowed us to scale the way that we have, but we’re cautious, too. We’re very conservative in our investments, so we thought $100,000 was a good amount to pay ourselves back, but at the same time not keeping the leverage too far… We love pay these things off, own them outright, and then our view is let’s get lines of credit against the property so we have our assets working for us, but we only pull it out if we need to.

Matt Wood: That’s a good question; that wasn’t an arbitrary number, we did spend a lot of time talking about “Should we take any money back? Should we take more than 100k?” because we did have the equity to make that decision. But we do ultimately wanna have these properties paid down for a better passive income, so it was certainly a discussion.

Joe Fairless: The line of credit that you took – that’s in addition to the 100k you got back out, right?

Mike O’Connor: Correct, so we’ve got a $200,000 line of credit that we have and we pulled out $100,000. The $200,000 is against the 32-unit, the $100,000 is against the 16-unit.

Joe Fairless: What’s the interest rate on that line of credit?

Matt Wood: It has a floor of 4% and then it’s prime plus 2%, so right now it’s probably in the 6% range, if I’m not mistaken. Better than getting hard money for something. Honestly,  we started [unintelligible [00:23:57].02] it for just the reserves and to have that kind of money available, but we’re looking at some deals potentially where we could leverage some of that money (it’s a good interest rate), something that we could get into and get out of quickly.

Joe Fairless: And where did you get that line of credit from?

Matt Wood: Wells Fargo. Wells Fargo actually has a good program that we were able to get into for the refinances. It’s a 15-year term and 15-year amortization on the loan on the property, and then a separate line of credit because we have good equity in the property.

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

Matt Wood: If you go to Foundations Realty, our website – we’ll have those in the show notes as well; you can find us on sites like Bigger Pockets, LinkedIn, places like that.

Joe Fairless: Awesome. Well, this was a fun conversation, because I loved hearing how your company has progressed and evolved from a $65,000 house to the 100-unit, and the full rehab and how you structured it with investors, the lessons learned along the way… I loved how you two got into the specifics of everything. Thank you so much for being on the show. I hope you have a best ever day, and we’ll talk to you soon!

Mike O’Connor: Thank you.

Matt Wood: Thanks, Joe.

 

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Joe Fairless's real estate podcast

JF929: A MILLENNIAL’S Guide to Buying Your First Home #SkillSetSunday

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Maybe you or someone younger is ready to dive in and make the first home purchase, this interview is for you! Our guest purchases her first home and makes many costly mistakes, her opportunity now is to share with you what not to do. She’s a blogger, so you can catch her website in the notes and follow her.

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Lauren Bowling Real Estate Background:

– Award-winning blogger and editor behind personal finance site Financial Best Life and author of The Millennial Homeowner: A Guide to Successfully Navigating Your First Home Purchase
– Work has been featured on leading online financial news sites including Forbes, The Huffington Post, CNNMoney
– Currently educating millennials on buying homes as their first real estate investment via her recently published book
– Based in Atlanta, Georgia
– Say hi to her at http://financialbestlife.com/

Click here for a summary of Lauren’s Best Ever advice: http://bit.ly/2mNaF1o

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real estate pro advice

JF897: GOLD NUGGET Private Lenders from Title Company Referrals and How to Leverage Other’s Capital

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Private capital is everywhere, but extremely hidden. There’s a reason why as well, not everybody can utilize capital in a way that will profit everyone. Our guest certainly can! He shares how REIA groups and title companies have referred him capital partners. He shares about his mobile home parks he owns and the over 1 million vested capital he has locked into his real estate.

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Michael Hicks Real Estate Background:

– Owner M-TAC Properties; a company that purchases and rehabs residential, multi-family, commercial properties
– Purchased his first property at the age of 19
– In last 15 years he bought, built, or rehabbed over 75 units with over half of those occurring in the last year
– Most deals have been obtained using seller financing and non-traditional loans
– Based in Rossville, Georgia
– Say hi to him at http://www.bigmikebuyshousescash.com/
– Best Ever Book: RIchest Man in Babylon

Made Possible Because of Our Best Ever Sponsors:

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real estate pro advice

JF870: How to Go from $3,000 to 80 Deals in a SHORT Period

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She made a $3000 check and game over! She partnered up with a friend and chased the deals! Hear about the mentality she had when chasing the deals and how you need to think.

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LaShannon White Real Estate Background:

– Full time wholesaling real estate investor & Founder of Wholesaling Real Estate Coaching Program
– Began in real estate in 2004 with no prior experience, leaving her full time job
– Closed over 80 deals
– Heavily involved with the Georgia Real Estate Investors Association
– 1997-2004 was the Owner/Operator of Sunshine Staffing Services
– Based in Atlanta, Georgia
– Say hi to her at dreambiggerwealthbuilder@gmail.com
– Best Ever Book: Think and Grow Rich by Napolean Hill

Made Possible Because of Our Best Ever Sponsors:

You find the deals. We’ll fund them. Yes, it’s that simple. Fund That Flip is an online lender that provides fast and affordable capital to real estate investors. We make funding your projects easy so you can focus on what you do best…rehabilitating homes.

Download your free copy at http://www.fundthatflip.com/bestever

https://www.youtube.com/channel/UCwTzctSEMu4L0tKN2b_esfg

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real estate pro advice

JF827: Stop Thinking One Investment Strategy and Start Being Creative!

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Wholesaling is cool, but it’s only one exit strategy. Today you will hear from our guest who is skilled in most transaction types on the residential level. He advises against doing one thing over and over, but expand your knowledge and surround yourself by pros who are doing what you want to do.

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Stephen Watson Real Estate Background:

– Real estate investor at RGI Companies
– Completed over 200 real estate transactions ranging from Wholesaling, Lease Options, Creative Real Estate
– Seeking to expand into buy and hold multi-family real estate market in Atlanta
– Based in Atlanta, Georgia
– Say hi to him at www.rgicompanies.com
– Best Ever Book: Think and Grow Rich by Napoleon Hill

Click here for a summary of Stephen’s Best Ever Advice: http://bit.ly/2h6YVaj

Made Possible Because of Our Best Ever Sponsors:

You find the deals. We’ll fund them. Yes, it’s that simple. Fund That Flip is an online lender that provides fast and affordable capital to real estate investors. We make funding your projects easy so you can focus on what you do best…rehabilitating homes.

Download your free copy at http://www.fundthatflip.com/bestever

https://www.youtube.com/channel/UCwTzctSEMu4L0tKN2b_esfg

Subscribe in iTunes and Stitcher so you don’t miss an episode!

Best Ever Show Real Estate Advice from experts

JF797: Why You Need to Buy C-Class Buildings and How to Evaluate the Market for a Multiunit Investment

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Don’t underestimate the value of purchasing a value add property in a roaring market. In a place where rents are climbing, it would be a good idea to invest in a cheap C class multi family and improve it for higher rents or disposition to sell, and that’s what you are going to hear today! Pull out a pen and paper and plan your next multi family purchase!

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Adam Whitmire Real Estate Background:

– Director of Acquisitions at The Whitmire Group, LLC
– Over 15 year’s real estate experience in owning single and multifamily portfolios
– Strong focus on investment portfolio management and real estate market development.
– They have 3 residential development projects in Georgia right now
– They have a single family fund buying 30-40 homes
– Teacher of over 500 classes and speaker at 36 industry events across the country
– Based in Atlanta, Georgia
– Say hi to him at www.thewhitmiregroup.com
– Best Ever Book: Rich Dad, Poor Dad by Robert Kiyosaki

Want an inbox full of online leads? Get a FREE strategy session with Dan Barrett who is the only certified Google partner that exclusively works with real estate investors like us.

Go to http://www.adwordsnerds.com strategy to schedule the appointment.
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Best Ever Show Real Estate Advice from experts

JF758: How Making Quick and Accurate Decisions Created an REI Empire in 6 Markets

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He’s an expert in all things real estate. Today’s guest was able to extract gold nuggets from multiple markets and 5 to 10 deals weekly! He got there by delegating, great decision making, and improvising. Hear his Best Ever advice and learn how to work with him.

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Peter Vekselman Real Estate Background:

–       Owner of Real Estate Investing Academy; A one year immersion into real estate investing curriculum
–       Completes 5-10 deals per week
–       Has operations in 6 locations
–       Based in Cumming, Georgia
–       Say hi to him at coachingbypeter.com
–       Best Ever Book: Think and Grow Rich by Napolean Hill

Want an inbox full of online leads?

Get a FREE strategy session with Dan Barrett who is the only certified Google partner that exclusively works with real estate investors like us.

Go to http://www.adwordsnerds.com strategy to schedule the appointment.

Subscribe to Joe’s YouTube Channel here to learn multifamily and raising money tips:
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Best Ever Show Real Estate Advice

JF638: Why this Lender LOVES Newbie Investors

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Atlanta, Georgia is one of the hottest markets in the nation! Today’s guest is a lender that specializes in hard money loans for fix and flip projects, and he loves newcomers! This lender has a heart and will give you the time of day, unlike most lenders. Tune in and hear how you could potentially turn a profit in Atlanta with this guy!

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Dean Tilman Real Estate Background:

– Hard money lending expert
– President of Paces Funding
– Investor since 2004
– Based in Atlanta, Georgia
– You can reach him at dean@pacesfunding.com

Listen to all episodes and get a FREE crash course on real estate investing at: http://www.joefairless.com

Made Possible Because of Our Best Ever Sponsors:

You find the deals. We’ll fund them. Yes, it’s that simple. Fund That Flip is an online lender that provides fast and affordable capital to real estate investors.

We make funding your projects easy so you can focus on what you do best…rehabilitating homes. Learn more at http://www.fundthatflip.com/bestever.

Subscribe to Joe’s YouTube Channel here to learn multifamily and raising money tips:
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