JF1504: He Scaled To 121 Units In Just Over 1 Year!! With Josh Welch

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What a treat we have for you today! What investors wouldn’t like to hear the story of someone who went from 0 to 121 units in just over 1 year? Even if you are a high level investor, you can always learn from a story like this. If you’re just starting out then you’ll want to hear Josh’s strategy for scaling, and apply some lessons to your on business. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Do you need debt, equity, or a loan guarantor for your deals?

Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at 212-897-9875 or emailing him mbelsky@easterneq.com


TRANSCRIPTION

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

Josh Welch: Hey, I’m doing good, Joe. How are you doing?

Joe Fairless: I’m doing well, and nice to have you on the show. A little bit about Josh – he is the co-founder and owner of Three Pillars Capital Group. He focuses on the acquisition and management of class B and C properties. He and his team have acquired approximately more than ten million dollars in assets in just over 12 months. He’s based in Houston, Texas. With that being said, Josh, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Josh Welch: Sure. Like you said, we focus on class B and C assets in Houston. I started out my investing career in single-family rentals, like a lot of folks have. At the time I was working a full-time job in engineering, and then I kind of got the real estate bug and I bought a second one, but I quickly realized that I would have to scale; what I wanted to do was not gonna be done with single-families.

I know there’s guy out there who have made it and done that, but I looked at a couple of bills that my property managers were charging me and I realized that “Holy cow, I’m getting charged $200 to fix a toilet handle. It’s insane.” I networked with some other guys that were in the apartment business at the time and I remember thinking “These guys have  made it. They’re scaling, they can bring their expenses down”, and I knew that was the path for me. As soon as that light bulb went off in my head, I knew that multifamily was the way to go, and I’ve never looked back. I’ve been doing it ever since. Now we’re at about 10-11 million in assets and growing.

Joe Fairless: And that light bulb went off in your head approximately 12 months ago?

Josh Welch: No, it took a while to put the pieces in place. Like a lot of folks, I had to do a lot of researching, and digging in and understanding how I really wanted to structure the business, because I knew that if I was gonna do it, I was gonna do 100%; it’s wasn’t gonna be a hobby, it wasn’t gonna be some pastime endeavor. So I really took a lot of time… I would say crafting the idea — the brainchild idea started probably 2-3 years ago.

Joe Fairless: Okay, got it. Were you full-time in engineering during then?

Josh Welch: Yes, I was full-time. I definitely saved up quite a bit, so that I can make the leap. I know a lot of guys that started in this business and they maintained full-time jobs, and they even have been guests on your show; I listened to them and I applaud them, but I knew if I really wanted to get in this in a real way, I had to save up first and then jump at it and just get after it.

Joe Fairless: What type of engineer were you or are you?

Josh Welch: Electrical engineering by trade.

Joe Fairless: Got it. So you were doing single-family homes… By saying you started in single-family rentals, what type of single-family investing were you doing?

Josh Welch: They were mostly just buy and holds. There wasn’t a ton of rehab component to them. At the time I was in Florida. Market conditions were definitely on our side. It was in the 2010-2012 timeframe; the asset prices were pretty low, so I could scale on my own equity pretty easily, and whatnot. But yeah, they were just acquisitions, I would maintain them, fix them up as needed, but there wasn’t any significant rehab.

Joe Fairless: And once you decided, “Okay, I’m gonna focus on multifamily”, what were some of the things that you put in place that you did during those couple years that prepared you to start doing it full-time in the business?

Josh Welch: First of all, I think the biggest thing was setting a plan and a vision. I don’t think you can get anywhere in life in any big way unless you really set a plan and a goal for yourself. So I did that, and that was the first thing – I knew that I wanted to be in this full-time, not having a side-gig, and “I wanna do that by 2017”; I remember at the time thinking that it was gonna take me a year to really understand it and figure it out, network, put the pieces in place so that I would be fully prepared to either do my own deal or partner on somebody else’s deal, to really start to learn things.

Joe Fairless: Having a plan and a vision, knowing what you’re gonna do… So the period of time that you said it took you from light bulb moment to when you started acquiring deals, that’s a couple years. What are some of the tactics that you did to put into motion you being ready to do your first deal?

Josh Welch: I think I really leaned on the fact that I partnered on some other deals. I did a deal with some guys in Boston when I was first starting out… They were more into the high-end condo conversion stuff. They had a few smaller multifamily buildings, and I just really knew that — I’d been analyzing spreadsheets and learning how to underwrite deals for a long time, and I’m like, “Okay, I’ve gotta figure this thing out from the ground”, and that’s why I’m so big with my partners, the people who do my deals; it’s like look, the best way you’re gonna learn about this business and learn how to do deals is to actually do a deal. At some point you have to trade off the knowledge and get your feet wet… So I did that, and that was the biggest thing for me.

That took a while – I took a year really to just invest my own capital in other people’s deals and learn how they do it, so I would then be better prepared to then not only stick to that experience, but then know how to structure my own deals when that time came.

Joe Fairless: It sounds like you were passively investing in deals.

Josh Welch: When I was starting out, yes.

Joe Fairless: I know, when you were starting out. What did you learn from passively investing in deals that now you’ve applied to being a GP on larger deals?

Josh Welch: That’s a really good question. I think the biggest thing is that you can’t take anyone’s method of analyzing a deal at face value. I think understanding the true nuances of how a deal is structured, how money is made on multifamily deals, from all angles, and then making it your own – I think that’s really what separates the people who can jump out on their own and start doing their own deals versus those who don’t.

I would always take a couple deals that I did and I would look at what they were offering, I would first of all figure out what my contribution was going to be, but then I would really make sure the deal made sense, like if I was going to run the deal… Like, “Okay, the numbers that they’re saying here – why is that true?” and “Okay, they’re gonna give us this type of loan. What about this kind of loan?” Really thinking about it from angles to make sure that it made sense to me, that if I were gonna run it, I know I could do the same thing.

Joe Fairless: And when looking at deals based on when you were looking at both as a limited partner, passively investing, and now as a general partner leading the charge, what are some of the nuances of analyzing a deal that perhaps some people who aren’t as experienced might overlook?

Josh Welch: I would say one of the biggest things that I’ve noticed is not really knowing what your competition is doing. I think a lot of people fall into this idea that there’s certain buckets that line items are supposed [unintelligible [00:08:56].08] on a T-12, and if it doesn’t fit that, then “Oh no, this deal is bad. It’s not gonna work”, but maybe for that submarket that expense isn’t too out of line, or maybe it’s bloated, but you’re not gonna know that unless you know what your competitors are doing.

So one thing that we do for every new acquisition – and I do this myself still – is we’ll go and secret shop all the competitors in the area. So if I’m looking at a deal and I’m saying “Hey, I’m gonna pay this much per door. This is the T-12 I have from the seller. Is that really accurate? Is that reality?” The only way we’re gonna know that is by going to competitors and seeing “What are they getting? What rents are they charging? What amenities have they done on their units to get those rents?”, and you can really quickly figure out where you stand.

That’s one of the biggest nuances that I noticed when jumping into my own deal – whether or not you have investors involved in the deal, the  operation of the deal is on you, and it’s your job as a general partner to make sure you know everything that there is to know, and treating it like a business. We’re just treating it like you would treat any other business – you have to know every angle of it.

Joe Fairless: When you secret-shop a deal, to me it totally makes sense from an income standpoint how you could kind of verify certain things… Are you able to pick up on anything from an expense standpoint?

Josh Welch: Yeah, and those are obviously a little bit more tricky to come across that. I lean more on kind of all the vendors, and we interview tons of vendors all the time for all of our work. A lot of stuff we do in-house, but the big ticket items that we can’t, we have contracts in place… But that took a lot of legwork to figure out what those rates were, and comparing those to the T-12 that we see, we can figure out in our market, “Okay, is this guy paying too much for an HVAC replacement, versus what we would pay for it?”

So yeah, I would say the expenses are a little bit more tricky to come by, but if you’re lucky and you’ve got a good rapport, with the property manager you’re secret shopping, they might even tell you what they make. I’m not advocating that your listeners go next door and be like “Hey, how much do you make?”, but sometimes if you have a good rapport and you’re gentlemanly polite with them, they’ll tell you what they make. So that’s kind of one way you can glean some insight.

Joe Fairless: So now we’re up to almost the present, we’ll say 12 months ago, at that point in time. Tell us about the first large deal.

Josh Welch: I totally jumped ahead in the conversation on what we’re doing now about secret shopping and all that stuff… So if I’m going back to the first deal, it was probably where I learned most of my lessons, and there’s always lessons that I’m learning and things that I’m taking away and improving the business… But I would say the biggest lesson that I learned is that the fear of the unknown is always gonna be there, but you’re never gonna know what you don’t know until you get started. I know that sounds a little cliché, but there’s tons of things that I never could have read in a book or listen to on a YouTube video, or whatever. There’s just so many nuances to running your own deal that until you actually get your feet wet and you get started and you partner with somebody, or you’re starting your own deal, you’re never gonna know.

That first deal took a lot of elbow grease, and we were newer in the business; luckily, I had already had the experience of the single-family stuff that I’d done, and the other multifamily deals that I’d partnered on, that it wasn’t as daunting… But sometimes it’s apples and oranges, single-family versus multifamily. There’s a lot of things that you don’t understand until you do one, that you just kind of have to take it in stride, really.

I had a lot of family and friend’s money in that first one, and we still actually own that. We’re actually doing very well on that deal. Since we’ve taken over, 80%-90% rents are higher than where they were, and the NOI is about 2,5x up from that… So we definitely did pretty good on that one, and it’s kind of hard to replicate that same performance on all of our properties, but for that one, even though we were going for [unintelligible [00:12:06].20] home run.

Joe Fairless: How did you find that deal?

Josh Welch: That one was through a broker at the time, but the one thing about brokers is they’re great to work with, but you really have to come to play, to show up… Maybe to speak to your listeners here, if you’re gonna look for multifamily deals, realize that all these brokers, especially if you’re new, they get tons of phone calls every day, and communication, so if you’re really going to get some of their time and have them give you one of their deals, you really have to have your stuff together. That means a business plan, that means a website, that means e-mail… All this stuff is very important. Perception is reality, and I can’t stress that enough… And that’s what we did – we came in with a business plan, we were serious about it, we let them know from day one, “Hey, we really wanna do this. We’re not wasting your time. Give us a deal”, and that was kind of how it played out… And we got one. We got a great one.

Joe Fairless: And how much equity did you bring for that first deal?

Josh Welch: That deal was just over 200k equity.

Joe Fairless: Okay. And how many units?

Josh Welch: It was a 14-unit deal.

Joe Fairless: Okay. So you’ve scaled from there, clearly… You’ve gone up a little bit. So that was a 14-unit; then what was the next one?

Josh Welch: The next one we did was a 25-unit deal, and then basically right now we’re in the camp where we’re looking at stuff that’s 50-100 units and higher. That’s the sweet spot that we’re finding for ourselves right now, and that’s been working pretty well for us.

Joe Fairless: Wow. So what property comprises of the largest valuation, when you mentioned 11-12 million in assets right now? How much is that property worth?

Josh Welch: I would say right around five million. It’s a deal we’re actually closing on this next week. It’s a five million dollar deal. Like I said, our goal as a company is we wanna do bigger and bigger deals each time, so the natural progression, as I just explained, kind of makes sense.

Joe Fairless: Okay. So the next one below that, how many units is that one?

Josh Welch: A 25-unit is the one below that one.

Joe Fairless: Okay, and what’s the business plan with that one?

Josh Welch: Just to kind of get into our business plan – we look at classic value-add. I know a lot of guys — that’s their mantra. So we really look for that. We don’t take anything that’s super distressed, but basically [unintelligible [00:14:04].18] management from the operations. A lot of times there’s owners that it’s a family thing, and it’s been in the family for a long time and they just don’t want it anymore, or maybe there’s like a divorce, and so a lot of times these guys are taking their eyes off the ball, expenses get really bloated, or maybe they’re just really unsophisticated and you see [unintelligible [00:14:21].00] on the back of a piece of paper, which I’ve actually seen quite a bit.

We find these guys because a lot of times there’s a huge opportunity to kind of tighten the ship a little bit and treat it more like a business… So we can come in there and not only upgrade the units that are typically very outdated, but we can also reduce a ton of the overhead and expenses.

One of the properties that we did, we got the operating expense ratio from 54% to 36% since we’ve taken over. We see these things where we can really [unintelligible [00:14:46].14]

Joe Fairless: Wow. Yeah, and with your engineering background, clearly, that’s a skillset that is directly applicable to value-add investing. So you’ve got the five million dollar deal you’re closing next week – early congrats on that – and the next largest you mentioned was a 25-unit… So your 25-unit plus your 14-unit, plus what else equals approximately six million dollars worth of property?

Josh Welch: [unintelligible [00:15:14].06] If you add the property that we have next week, that’ll put us at 121. So 121 units is basically — if you add [unintelligible [00:15:24].25]

Joe Fairless: Wow, 121 units, 11 million dollars… So you’ve got the 25-unit property – when is the projected exit on that one?

Josh Welch: I’m remembering that – it was about 1,8 million, and again, that was on appraised value. We had a lot of renovations we were gonna do. That was an example of a property where not only were the rents super under market, but there was just a ton of bloated expenses. It was a scenario where you had the maintenance person — I’m not sure if you’ve ever run into this before, Joe, but the maintenance guy was also the leasing person and the property manager, all in one, and the owner actually was never on-site; he lives in the country. So there was just a ton of just bloated everything.

We were able to go in there and we’ve gotten rents up from — the average at the time was right around $560, and now we’re getting rents that are like $695 for a one-bedroom. So we’ve definitely hit our targets. Our target was $675-$680, we’re at $695 now, so we’re superseding our targets on that one. The NOI equation is pretty simple – if you increase your top line and you reduce your expenses, you get a higher NOI, so because we were able to turn the knobs on both ends, we were able to get a really high NOI and hence a higher valuation.

Joe Fairless: What year of construction are the properties? What are they ranging?

Josh Welch: It’s usually ’60s and ’70s construction we go for. In Houston every market has a different idea of what class C is, but typically what we see is the ’60s or ’70s.

Joe Fairless: So 121 units, 11 million dollars valuation – that’s 91k/unit. That’s incredible. The units are 91k in valuation; I assume that’s now that you’ve done your value-add, now they’re 91k/unit?

Josh Welch: Yeah, yeah. I’m not trying to confuse anyone here. This is after we’ve done all of the work. Some of these projects take months at a time, I’m sure you’re probably aware. When we do a renovation project, just so everybody is aware, it’s not like you just empty out all the units. You have to do it over time, as the units expire, there’s cashflow you have to maintain, debt service to pay… We like to do it as the units turn.

Our projects will typically take, on the largest timeframe, 24 months before we get all the units turned over. We have a very active, aggressive approach.

Joe Fairless: Do you have a benchmark for what you wanna buy at from a 1960-1970’s product? “I wanna buy at around this amount per unit”, or do you think about it differently?

Josh Welch: We’re very much NOI-focused. A lot of people fall in the trap of “Okay, price per door is this”, and generally speaking, yes, there are ranges, but we look at how it is performing as a business, where is the opportunity, and if all the units are super-updated relative to the other assets in that class, then maybe we’re willing to pay a higher price per door… But again, it all goes back to basics – what is the NOI? Where is the opportunity for growth? Can we increase the top line? Can we decrease the expenses? What do those knobs look like, and are they already turned to max?

Joe Fairless: What’s been the most challenging part of building your company?

Josh Welch: That’s a really good question; there’s been a lot of them. I would say not being patient enough to let things work themselves out in due time. I think jumping from point A to point C, just getting really excited about something and going in — it’s kind of like walking before you can run, and I’m not saying that being super-aggressive isn’t warranted or admirable, but there’s some things that you have to build and scale the right way, and make sure that your operations are fine-tuned, so that you can really have a stable platform to scale a really good, sizeable portfolio… And we’re doing those things. It’s just sometimes I see where I want the company to be, and I wish we could be there tomorrow, but you also have to realize that some of these things take time to build. So I would say just being patient and growing smartly, and with a lot of poise.

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

Josh Welch: I would say don’t take anyone’s method of analyzing a deal at face value. I think it’s very important to understand how a deal is structured, how money is made from all angles of the business… And I said this earlier, but also understanding the true expense in your submarket, because this is what gives you an edge – knowing what your competition is doing… Just treating it like a business, and again, realizing that’s what this is  – these are all businesses; you’re buying many businesses, and you have to understand how to analyze it yourself, and you can’t take it for face value.

Joe Fairless: What’s your least favorite part of the syndication process?

Josh Welch: [laughs] Least favorite part, I would say — obviously, we syndicate all of our deals, but you have some people that really are [unintelligible [00:19:42].13] you wanna sign them as a solid, hard commit the first time you talk to them, but you kind of have to play devil’s advocate at all times, and you have to assume “What if I’ve got commitments for X amount of capital of my raise? What if it doesn’t come through? Do I have a back-up plan?” I think that’s my least favorite part of it, because you can’t just take people’s word for it, to be honest with you.

Joe Fairless: What’s your favorite part?

Josh Welch: My favorite part is when the deal is actually closed, and I build great relationships and chemistry with all of my partners involved, and having them trust me from the first day that we met to the day that they send in the funds, [unintelligible [00:20:13].18] to the day that we close the deal, to then the day that they get their first check… I think that’s my favorite part. So rewarding to send out that first check, knowing that “Hey, here’s what we’re doing – we’re actually killing it, and I wanna thank you for being a part of it.”

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

Josh Welch: Of course.

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

Break: [[00:20:35].09] to [[00:21:20].11]

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

Josh Welch: Organize Your Mind, Organize Your Life by Hammerness.

Joe Fairless: Best ever deal you’ve done?

Josh Welch: The first multifamily property.

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

Josh Welch: Not starting sooner, but in reality, over-analyzing to the point where I didn’t take any action. I did this for a long, long time, but that’s where I realized that I know enough and it’s time to get started… Either partner with somebody, or do it yourself, or don’t do it at all.

Joe Fairless: Well, you get a pass on that because you’re from an engineering background. [laughter] What’s the best ever way you like to give back?

Josh Welch: We actually started a non-profit here in Houston called “World Will Be Better”, and it serves to raise money for an elderly homeless shelter. There’s a movement in Houston where there’s a lot of elderly homeless, and there’s an organization that was created to house these people. However, they’re running out of housing for them, so we started a cause to basically raise about three million dollars to plan and construct a new facility for them, so that they can continue to accept more people, and educate them and house them and clothe them, to reintroduce them back into society. We’re really excited about that.

Joe Fairless: And how can the Best Ever listeners learn more about your company?

Josh Welch: They can go to our website, ThreePillarsCapitalGroup.com, and they can always e-mail me too, at JoshW@threepillarscapitalgroup.com.

Joe Fairless: Josh, thanks so much for being on the show, talking about how you were doing the single-family home route, you had the light bulb moment, you put a vision in place, started investing passively first, learned what you liked, what you didn’t like, and then applied those lessons to now doing syndications.

You said 121 units over approximately 12 months, right?

Josh Welch: Yes.

Joe Fairless: Yes. 121 units in approximately 12 months, just over  a year – congrats on that, and best of luck on the new acquisition. I hope you have a best ever day, and we’ll talk to you soon.

Josh Welch: I appreciate it, Joe. Thank you.

JF1484: From Losing $20k To Successful Real Estate Investor with Justin Grimes

Listen to the Episode Below (27:47)
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Justin went from losing $20,000 on his first deal to being a successful, money making investor and podcast host. He turned the page from the first deal by building a great team and getting better at due diligence. Hear what his strategy is now and how he was able to stay positive and move on from his first deal being a loss. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Justin Grimes Real Estate Background:


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Best Ever Listeners:

Do you need debt, equity, or a loan guarantor for your deals?

Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at 212-897-9875 or emailing him mbelsky@easterneq.com


TRANSCRIPTION

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

With us today, Justin Grimes. How are you doing, Justin?

Justin Grimes: Good, Joe. Thanks a lot. I appreciate you having me on.

Joe Fairless: My pleasure, nice to have you on the show. A little bit about Justin – he is a real estate investor, and it turned into his passion in 2016, but on his first deal he lost $20,000; we’ll talk about that. However, he’s recovered and he’s now an active rehabber, a mortgage note creator and passive commercial real estate investor based in Houston, Texas.

He has a website at TheCashflowHustle.com. It’s also a podcast, you can go check that out. With that being said, Justin, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Justin Grimes: You bet. As far as real estate goes, I dabbled in it a little bit by accident perhaps in 2007 or so. I bought a condo, kind of a bachelor pad, and kept that with the intent of just living life there and hanging it; it had a nice view. But as life goes, I met my wife, and things changed, so we wanted to buy a house.

Not knowing what else to do, I just decided to keep that thing and rent it out. That went on for about 4-5 years; it was pretty simple, but it certainly wasn’t spitting off a lot of cashflow, and when something would break, I’d go in the pocket… It never really made a whole lot of business sense. The cashflow would get wiped out every capital expenditure that you’d have.

In 2016, unfortunately, my family lost my father in an auto accident, and from that a lot of things changed. Ultimately, what I was faced with was trying to figure out how to help my mom create passive income in her retirement years. She’s 63 now. So what I knew to do at the time was stocks and bonds; I’ve got a buddy who does stocks and  bonds, so let’s put it into the bank… But as those things do what they did, the market has been hot certainly for a while, but what we’d find ourselves doing was worrying about the stability of that, and waking up one morning and all that going down significantly without any of our control.

So what I started doing was looking for investment opportunities, predominantly in the real estate space; she’s in a position where she could invest passively, as an accredited investor, and apartment buildings was the first thing we looked at. We started messing around in that in late ’16, early ’17, and then from there we’ve done some self-storage, we’ve done some mobile home parks all passively, and then I figured “Heck, while I’m at it, why not try my hand at some other real estate things to create some income?”

I took a swing at a flip that, as you’ve mentioned, we’ll talk about… I’ve since pivoted and I do that a little bit differently now.

Joe Fairless: The fix and flip that you did – was that the only fix and flip, and then you got burned and took a different direction?

Justin Grimes: It was, yeah. I took a few months, I did some classes, and a lot of reading, and podcasts… I had a fire under me, “I’m ready to do my first deal!” I jumped in head-first, I guess; not feet first, or with a cushion, or anything. I just jumped on in, and looking back on it, there’s so many things that I do differently now. Tough lessons learned, but lessons learned nonetheless.

Joe Fairless: We won’t harp on it by any means, but it’s clearly gonna be valuable for the listeners to hear about what you messed up on, so that you help other people not mess up on it.

Justin Grimes: Sure. The way we buy deals right now is with some fairly strict criteria; most notably, what we’re looking to purchase our properties at is purchase plus rehab at 70% of the ARV. Those are certainly more difficult to find. And that’s not something I’ve come up with, that’s fairly standard out there… But I didn’t do that on my first deal.

I bought the thing for about 70% of the ARV before I ever put  a penny in it, so that put me in a tough position. The total purchase price was right around $220,000, the ARV was around 300k-310k, so it had some room… But when you get into something that size in Houston — that’s a pretty decent size house; it came with some land, it came with 1.1 acres of land when I bought it. And with the repairs, as we opened up walls and found this and that, those expenses multiplied a heck of a lot faster than a thousand square foot house, that is a lot more affordable.

It was an older house, built in the ’50s… Happy to discuss specifics of those lessons learned.

Joe Fairless: Yeah, so it sounds like the repair budget – you came in high, but then the repair budget was the nail in the coffin that you went over.

Justin Grimes: That’s right. That’s where I lost my money. I’m happy to say I was able to pay back any lenders that I borrowed money from and came out of pocket, so I did make good on my debt; however, it certainly hurt.

One of the main things I did not do was just a basic inspection of termites in general. By the time I went to sell this thing, six months and holding cost with hard money – it was eating me up. I go to sell it, the buyer does an inspection, finds active wood-eating termites… So I have to tent the house.

I’m sitting pretty, thinking “Oh man, I’m almost out of this”, and then the next week I’m taking the picture of a tent on the house… That one hurt, additionally… That contract ended up falling through.

The next buyer comes through. It’s kind of  a uniquely-zoned property – it’s commercial and residential.

Joe Fairless: In all of Houston, uniquely zoned? [laughs]

Justin Grimes: Yeah, the zoning here is absolutely ridiculous.

Joe Fairless: It’s the Wild Wild West.

Justin Grimes: Yeah, it makes zero sense. Anyway, in the back of this property became a disputed 5,000 square feet of land… And on 1.1 acres of land, that’s about 10% of what I was trying to sell. I did not do a survey at purchase, and that cost me dearly. I basically had to drop the price to who I exited out to just to get the deal off and move on.

Joe Fairless: What was being disputed?

Justin Grimes: There was 5,000 square feet of land in the back of the property that had been sold in 2015. I purchased this in 2017, and the title company that I used to close the purchase did not find the issue. When I went to sell it, that title company did find the issue, and we had to make it right for the new buyer… A lot of talk and back and forth with lawyers, and things like that. Ultimately, I had to take a bath on it.

The lady I bought it from was rather whacky, it seemed, and had some whacky kids, so I had to drop the price $10,000 or so. We’ve got a young family, and $10,000 versus someone crazy knocking on my door because I sued them for 10k just wasn’t worth it… So I decided to just close the book on that one.

Joe Fairless: The first buyer inspection found active termites, so you had to tent the house… And then you did all that and you got another buyer who then the title company during that transaction found the dispute.

Justin Grimes: That’s right, so a couple lessons learned…

Joe Fairless: Dang…

Justin Grimes: Yeah.

Joe Fairless: Emotional rollercoaster, right?

Justin Grimes: Yeah, I still have some hair, but I’ve lost a ton of hair in the past 12-18 months. [laughter] We’ve got a 2-year old and a 3-month old too, so they’re doing their fair share as well. But yeah, some very simple things –  getting a termite inspection. Those termites didn’t come just at the end of the project; they were certainly active the whole time, and it would have helped me on the front-end to plan better budget-wise and get some things worked out on the front-end on a further discount…

And then obviously, when the land – it was such a large portion potentially of the sale, of the value of the property, and I didn’t do just a very basic survey on that, which would have cost me a few hundred dollars, it caused a lot of problems… And ultimately, those were the kinds of things that caused me to just blow through the budget.

Joe Fairless: We’ll move on now… What are you focused on now?

Justin Grimes: What we do now — one of the things I didn’t really do before I jumped in was build a trusted team, even of advisors, or business partners, and I’ve taken a swipe at a couple different team members. First of all, I brought on a business partner. During that time, she was active in real estate, a licensed real estate agent, and flipper, Airbnb, things like that.

What I was doing – I’m still working a W-2 job, and have access to different private investors, as well as banking relationships. I’ve got access to some capital that allowed us to get into these deals with lines of credit, and things… And what we do is purchase — just simple numbers, we’ll purchase a property for $50,000 here that needs a rehab, we’ll put 20k into it, and we’ll owner-finance that for $100,000. That’s kind of the basic math of it. And ultimately, what we do is wrap a mortgage note around ours, and a private investor is in the first lien, my partner and I hold the second (our business), and we owner-finance that to a buyer and make a spread on the interest monthly, kind of cashflow… And ultimately, what that does is for me it prevents those capital expenditures from wiping out my cashflow year in and year out when A/C needs to be done, and stuff.

So we go in there, we rehab these, we get them inspected by a licensed state inspector, we offer a good property to the buyer, and then we become the bank. And when my A/C goes does or I’ve got some roof repair at my house, I don’t call my bank… So that’s the position that we try and play in now.

Joe Fairless: You’re buying them with investors?

Justin Grimes: We are. For example, on one of the first deals we did, we raised $70,000 from a private investor.

Joe Fairless: How do you know that person?

Justin Grimes: That is just through real estate networking at events, and things like that. My business partner has a fair amount of private investors that will do these, as well as — ultimately, our target audience for investors is someone like my mom, who’s got a self-directed IRA, some money they wanna put to work, they don’t wanna play in the stock market, and they want something tangible that this risk is tied to… So those are the types of people we work with as first lien business partners on these investments.

We borrowed $70,000 at 9%, and what we’ll do is we’ll structure that at five years interest-only and non-recourse. There’s some gurus in Texas that teach this, so again, this is not my original idea; there’s other people that are doing this, just a disclaimer there. Anyway, so that comes out to $525/month that I owe that person in the first lien. They have a deed of trust, and the first lien on that property.

Then what we did is — that property is worth $100,000 ARV. So I bought it for 50k, I put 20k in it; that’s where my investor’s in. I’m all-in 70k, not using my money though.

Rents in the area – I’m trying to explain how we determine where the market can be for an owner financed buyer… It’s basically capped out for us at rent. We’re targeting people who need some help, they’ve got historical credit issues that they’re working on repairing, or they may be heavy commission-based on their income, and things like that, so a bank isn’t likely to lend to them. For that, we do charge a higher interest rate; however, ultimately their alternative is to pay $1,200 in rent in the market, or to pay $1,200 towards the mortgage note that is amortized and building equity for their family, for the next generation.

So what we focus on is pricing these things, so we’re buying things that are ARV $150,000 and under, because that lets us maintain that cap on the consumer can afford in the area. We’re not afraid to structure longer-term debt; a lot of the note guys will do shorter 15-20 year notes. We’ll do a 30-year mortgage note, and I’ll explain the math on that here in a second… We do 10% down, and that depends on their credit score; the lower the credit score, you’re talking down to 550-650 (that’s the common range of poor credit)… The lower that credit score, the higher the down payment we’ll require. But we’ll structure that — let’s use the example of $10,000 down, so they structure a note for $90,000 at 10,5% interest.

Starting out, their interest — the way an amortization schedule works… I know we’ve got some sophisticated investors as Best Ever listeners, but that thing is very heavily favored in the lender’s side. Traditionally, that’s the way the banks made their money, and it’s one of the secret tools to their success and growth and power.

In this example, the interest paid to me is $788 in that month. The principle in the first month is only $36. As you break it down over the course of five years, they pay $46,000 in interest and $2,800 in principal.

Joe Fairless: Wow. Well, it’s also 10,5% interest rate that you said… That’s incredibly high.

Justin Grimes: It is a big interest rate… So again, what we draw it back to is that could either pay $1,200 in rent and not have anything to show for it in five years, or pay $1,200 in a mortgage payment where they have a chance to build equity and ultimately own an asset.

Joe Fairless: I guess in that example you gave though, how much equity did they build over the first five years?

Justin Grimes: First five years  – they still owe $87,000 on a $90,000 note. Obviously, the interest rate is the shiny object in all these scenarios, but for me, I don’t pay more in principle than interest until you’re 17 on my mortgage; that’s a lower percent interest rate, but that’s just the way the banks have it structured. The way that amortization schedule works is until year 17 you’re paying more interest than principle.

Again, at year 10, five years later, they’ve got it down, they’ve paid a total of $90,000 in interest; the balance owed is $82,000, and at this point, my partner and I have cash-flowed that amount; so we’re talking $36,000 and the spread between what I’m borrowing at 9%, and what I’m charging the consumer at 10,5%.

I will say one thing too, that 10,5% is regulated. You can’t charge higher interest rates, and some people do (there are plenty of people that do), but what we do is no more than 6,5 points above prime. When you do that, then it triggers different types of things that the consumer needs to go through as far as education and things like that.

Joe Fairless: The 6,5 is the benchmark? Anything above that triggers a bunch of more paperwork and disclosures?

Justin Grimes: That’s right. How I know that is one of the team members that’s critical for us is a residential mortgage loan originator. To maintain compliance, we’re not licensed (my partner and I) to handle all that paperwork with their personal information and qualification and things like that. This loan originator charges a fee, and on the front-end does all that data gathering and basic collection of information to show that this consumer can, in fact, afford this property based on three years of work history and steady income, and running credit checks and things like that.

After that thing is structured, then we plug in a residential mortgage loan servicer, and again, if the buyer falls behind on payments, I can’t just call them up like a landlord and say “Hey, I need to collect your money here.” There are protections and laws in place for them where that loan servicer needs to step in and follow a sequence of steps. I know you’ve had some of your previous guests on the show who have really walked through and done a nice job on outlining those details.

Joe Fairless: It seems like if you had cheaper private money, then either a) you would have a lower interest rate to the consumer, or b) you keep that same interest rate to the consumer and you’d have a significantly more spread on it.

Justin Grimes: We could. Right now – we’re about 12 months into this, my partner and I, and I think there is probably cheaper private money out there. However, what we know at this point or who we know are usually private money lenders that do house flipping, so what they’re used to is 12% interest and points on the front-end and all kinds of things… So for them this isn’t even attractive at 8%. They’re not our target audience for that.

Ultimately, there’s a lot of meat on the bone on these things when you’re offering that, so our objective is to make a spread on the interest, but not to gouge the consumer. We’re a point and a half above what we’re paying right now, so we’re not doubling our interest rates to anybody or anything, and again, that’s all based off of ultimately what the rent rates in the area will allow the consumer to pay.

Joe Fairless: How did you learn this?

Justin Grimes: A lot of reading, a lot of podcasts, and then a  class from one of the gurus here in Texas. His name is Mitch Stephen…

Joe Fairless: Oh yeah. He’s got two books. One of them is 1000 Houses.

Justin Grimes: That’s right. So he’s got a knack for simplifying this, and he does it a little different than we do (a twist on it), but one of the ways that we’re able to do this in Texas – it’s a little different, I think, in other states, and if you’re interested in getting involved in this, it’s worth (as anything else), contacting your lawyer and some real estate professionals, because one of the things that makes Texas attractive is it’s a non-judicial state, so the foreclosure process in the event that you needed to go through it, it doesn’t last half a year. In some states, you have to sue the buyer, wait a year, things like that. In Texas we haven’t had to do this, but our intention would be to rework the note and make it to where a consumer can stay in. If ultimately it can’t work out, then the foreclosure process through the loan service company can wrap up in Texas in 60 days or so… So it’s a much different ball game than 180, and that kind of stuff.

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

Justin Grimes: From my very first deal, I really think it would have been very simple to just throw my towel in and say “Oh my gosh, this isn’t for me.” I love the stories where people just hit it out of the park on the first one, and they’ve replaced their job income with this new real estate business; it just didn’t work out like that for me.

My advice is to be resourceful and keep moving forward. It’s not always gonna go as you planned, so you have to be able to adjust your course as life and business happens.

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

Justin Grimes: Absolutely. I was born ready.

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

Break: [[00:22:15].17] to [[00:23:02].25]

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

Justin Grimes: It’s The Compound Effect by Darren Hardy. It’s about the power of behavior and mindset, measuring improvement. One of the chapters is called “Elephants don’t bite”. You take one bite at a time and you get through your project or whatever you’re working on.

Joe Fairless: And I’ll also throw in “My life and 1000 Houses” by Mitch Stephen. It’s a very entertaining book, if I remember correctly; it’s been maybe 8 years since I’ve read it, but there’s just so many funny stories about his deals. It’s an entertaining read, I recommend that one too.

Justin Grimes: Yeah, he’s a character.

Joe Fairless: I bet. I haven’t met him in person, but I’ve talked to him on the phone a couple times, way back when I was focused on single-family stuff. Best ever deal you’ve done?

Justin Grimes: What we’re focused on right now on the note business is hitting singles. I tried to hit a home run out of the first deal, or I thought I was gonna hit a home run, and I tripped running at the batter’s box. So we’re focused on hitting singles; those things cash-flow… And nothing crazy, sorry to disappoint.

We do just day in and day out — we’ve done four deals to this point, we’re looking to do four more by the end of the year, and we’re focused on that same criteria of buying and being very disciplined in that approach at this point.

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

Justin Grimes: I think that first deal had some other things in it… I’d say releasing funds prior to my inspection. I was traveling for work at the time, and asked a buddy to go by and look before we cut a check. He’s an investor as well, but man, he didn’t look at it nearly like I would have, because when I got back in town there were all kinds of things missing. Lights not working… This was right at the end of the project, so this was kind of some final touches and tweaks, and just detail things; and baseboard caulking, and paint touch-up and things, that I ended up having to pay somebody to touch up, because unfortunately the guy I used was nowhere to be found after he got that money.

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

Justin Grimes: My wife and I like to give back to a couple of basketball programs in the area, and I also hop into the high school once a semester and teach financial literacy to the students there through Junior Achievement, which I know you’ve been involved with as well. I think it’s fascinating that so little is really talked about growing up in school, and even in post-education with college and grad school on financial literacy at the very basic elements. You come out of school not knowing how to balance a checkbook or pay taxes. You’ve gotta learn it.

Joe Fairless: It’s eye-opening whenever I teach a junior achievement class, which is usually like fifth graders… I teach them about what you’ve just mentioned, balancing bank accounts, and teaching them the difference between a credit card and a debit card, and having a monthly budget…

I was recently talking to a niece of mine, and she is a senior in high school, and they were going over that. I was impressed that they were going over it in high school, because usually it’s not the case, but it’s incredible what fifth graders are learning through Junior Achievement in this program, compared to perhaps not a lot of students in general learning about it, and then if they do, then they’re learning about it their senior year in high school. It’s just a skill that’s needed.

Justin Grimes: Yup, absolutely.

Joe Fairless: Best ever way the listeners can get in touch with you?

Justin Grimes: You mentioned it earlier – the website is called thecashflowhustle.com. We’ve got some content on there and then various investment niches that I focus on and bring people on to interview and learn a little bit more about. Then the e-mail is jgrimes@thecashflowhustle.com.

Joe Fairless: Justin, thanks for being on the show, talking about the lessons learned on your first fix and flip – the termite inspection, and getting a survey done… What a rollercoaster ride. And then what you’re doing now with the lease options, and the way you structure those deals, and how you make money and some of the intricacies about those. Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Justin Grimes: Thanks a lot, Joe. Y’all take care.

JF1327: Focus On What You’re Good At For Increased Profits with Sam Craven

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Sam realized that he needed to focus on his strengths to have the most success. Him and his partner switched to a wholesaling model, and are now looking to buy other wholesaling companies across the country. His ultimate goal is to be one of the largest privately held home buying companies in the country. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Sam Craven Real Estate Background:

– Co-Founder of Senna House Buyers

-Took his company from $1.5 Million in sales to $10 Million in just 3 Years

-50% wholesale and 50% rehab

-String of big losses from 2016-2017 that added up to $767k in total losses

-Based in Houston, Texas

– Say hi to him at http://www.sennahousebuyers.com  

– Best Ever Book: Never Split the Difference


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TRANSCRIPTION

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

Sam Craven: Doing great today, Joe. I appreciate you having me on the show.

Joe Fairless: My pleasure, nice to have you on the show. A little bit about Sam – he is the co-founder of Senna House Buyers. A couple interesting things about Sam and his company – first, he took his company from $1.5 million in sales to $10 million in just three years. Secondly, he had a string of big losses in 2016-2017 that added up to $767,000 in total losses, and three, his company is buying between 15 to 20 houses a month, and looking to grow by actually buying other wholesaling companies across the country.

Based in Houston, Texas… With that being said, Sam, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Sam Craven: Absolutely. I appreciate that introduction, too. So you kind of hit the nail on the head; I got started in this business just like a lot of us – we weren’t really happy with what we were getting out of life, we weren’t really happy making other people money, we weren’t really happy only getting two weeks of vacation a year, and I jumped in and actually started the company with my dad.

We have since taken on another partner. My dad is kind of a bit more in the background now. The other partner’s name is Matt [unintelligible [00:01:58].16] – we’re growing this company just as quickly as we can. We’ve had some really good luck growing our company in Houston, and also we’ve had some really bad luck, as you kind of alluded to there – ’16 and ’17 were kind of rough months for us as far as the house flipping goes… But what happened at the same time was we were going through these big, big losses, quarters of a million dollars in losses over the 24 months or so – we got focused on exactly what we’re good at.

So while we had all these losses that were coming in and we were losing money on these big rehabs that we were doing, at the same time our wholesaling business was accelerating; it was accelerating in the number of deals that we did, and it was accelerating in the amount of margin we made on every single deal… And we started realizing, “Look, we need to do what we’re good at, and what we’re good at is adding value to sellers and adding value for our end buyers.” We realized as much value as we could add on both sides of that transaction, the larger our margins grew and the faster our business grew.

So that’s exactly what we’ve done, and now we’ve really been lucky, and a little bit of good, and we’ve grown our business in an immense way. Our goal had always been to expand and be one of the largest house-buying companies that’s privately held in the country, and we believe we can reach those expansion goals through acquisition – buying other wholesaling companies in other markets… Because we realized something – a lot of people get into this wholesaling  business and real estate business because they wanna build a lifestyle. They build up the business to the point where they’re doing 75, 100, 200 houses a year, but they realize they don’t have the lifestyle that they want anymore, because they’re working 40, 60, 80 hours a week at the business. So there’s a lot of opportunity for people who want to stop wholesaling, that have built up a good amount of business in that market, and if they just shut the business off, they walk away from potentially a lot of money.

So we’re actively going out in the marketplace right now, finding these people, starting negotiations and looking to expand our company in these new markets.

Joe Fairless: Have you purchased a wholesale company?

Sam Craven: We have not purchased one yet. We’ve had a couple negotiations go pretty far. One we backed out of, because it just wasn’t a good fit for us…

Joe Fairless: What part of it wasn’t a good fit?

Sam Craven: That’s a really good question. When you’re going into business with someone and you’re buying someone’s business like that, you wanna make sure that everyone’s on the same mission. In this particular case, one partner loved us, we loved him, and the other partner was a good guy, but he actually wanted to stick around, which we were okay with – in fact, it certainly helps in the transition – but the missions didn’t align. We knew we could jump into it and make a lot of money; they were making a ton of money already, and we had agreed to terms on everything, but we on the Senna side of it couldn’t quite reconcile just those (I guess you could call them) creative differences in how you wanna grow the company and run the company, so we thought it would be best not to do that particular deal.

Joe Fairless: If someone is working 40-80 hours a week and they have a successful wholesale company – which really I don’t know if it’s a company; it’s more of a job… They have a  successful wholesale job, and you buy their company, and your value proposition to them is “Hey, now you can go do what you want.” Well, if they’re spending 40-80 hours  a week in that company, it sounds like they’re a pretty important part of it, and it’s gonna be some growing pains exiting them out of it.

Sam Craven: Absolutely, and that’s why I kind of mentioned it before – there’s gonna need to be a transition period where when we purchase the company, the owner is gonna stick around. We would like them to stick around as long as they can. But what we were able to do is our wholesaling company in Houston – it can run without me and my partners. We have the management in place, and things like that, and it’s just churning.

So we’ve already mastered all the systems and processes necessary to run a high-level business that’s doing 200, 300, 400 houses a year without the owner being there. So when we’re going in and buying these companies up, they’re in a similar shape that a lot of small business owners are in… Not just wholesalers or real estate investors – they found themselves, like you alluded to, they just have a job. It’s not a business that they own, it’s a job that they go in and do every day, that they have a little bit more control over.

So we’re gonna be able to insert our systems and hiring processes and things like that into that particular business model, which is gonna allow us to manage that business without us being there every single day. Now, you know there’s gonna be growing pains, there’s gonna be things you didn’t think about and all that kind of stuff, but we’re already got a lot of the nuts and bolts of how to run that business figured out, which we’re gonna be able to implement in that new business.

Joe Fairless: Between 2016 and 2017 you had $767,000 in total losses… I heard one thing from a lesson learned, and that is it sounds like you’re moving away from flips to wholesaling. If that is true, please confirm, and also what are some other lessons learned?

Sam Craven: That is true, we’re now a straight wholesale company. I think we spent a long time trying to be both, and we weren’t focused, and we weren’t getting good at all of it. And as soon as we got focused on straight wholesale, it’s grown even faster. But you know, some of the other lessons that we’ve learned through those losses is something I’m happy to share with you guys, and it’s why I bring it up… I think there’s a lot of people in this industry as a whole, we don’t like to talk about the losses or the bad times and things like that, but we learn so much from the times that — we get kicked when we’re down.

So one of the things that we learned is that we’re not good at managing rehabs; we’re just not good at it. We’re not good at picking the winners, we’re not good at managing that big job, and especially because actually all the money that we lost was in the really high, high end of the market; at least for Houston this is high end. So we’re talking projects that were over half a million, a million, 1.5 million or so… And you name it, we had this kind of stuff [unintelligible [00:07:52].20] We missed the ARV on a house, we missed the repair budget on a house, we had contractors screw us over… We had hundreds of thousands in losses; included in that are just some contractors screwing us over.

Now, it’s easy to say that contractors screwed us over, but the reality is we didn’t manage that contractor correctly to keep them from screwing us over. I’m a big believer in looking internally when you have issues like that. Like, “Okay, yeah, that person made a mistake, or that’s not a good person, but what could WE have done differently to keep that from happening?” So yeah, those are some of the lessons that we’ve learned over three quarters of a million dollars in losses.

Joe Fairless: I appreciate you sharing that, and as far as the flipside, the 1.5 million in sales to 10 million in three years – other than the focus that you’ve put towards the business, what are some tactical things that you’d say helped you from the 1.5 to 10 million?

Sam Craven: Ten million – that was just our first three years. We’re actually gross profit running about $300,000 to $400,000 a month in gross profit, just off of the wholesales… But tactically, I would say — I alluded to it a little bit, but value-add. It’s one thing for us to go in there and just try to get a house for as cheap as we can… But I noticed that the more that we focused on the needs of what our sellers wanted, what they need to get out of this, that big reason for them actually giving us a call instead of (say) calling a real estate agent, the more we were able to actually help them and the more margin that we created.

So what we do in our office is we have sales meetings every day, we have sales trainings every week, and then each salesperson is required actually to do – through some sales training that we have – some online sales training every day. And we realized the more that we’re focused on training our people and helping our people become the best that they could absolutely be, the better our margins got, the smoother our business ran, so on and so forth.

I think making that big investment in our people, and our process for negotiation and the way that we add value to our sellers – on the other side of it, adding value to our buyers is huge… Because one thing we do differently in our market than any of our other competitors (at least in Houston) is we actually put a guarantee on our ARV’s. We say “If you have an appraisal on this property within two months, or when you buy this house and you refinance it out to go turn into a rental, if we miss the number by more than 10%, we’ll write you a check.”

We do the same thing on the rent numbers. If we miss the rental target that we give you when we send out our blast, our marketing and things like that, by 10%, we again will [unintelligible [00:10:24].20] a check for $1,000. So we’re putting our money where our mouth is, and we’re making sure that our buyers are gonna hold us accountable to the marketing numbers that we put out, because I don’t wanna just do one job or one deal with someone, have them lose a bunch of money and never do business with me again; we want all of our clients to hit all of their targets and make a lot of money, so they can keep coming back to us and keep helping everyone make money.

Joe Fairless: Yeah, it’s really smart; a guarantee to put in place. I’m guessing only a handful – if that – have taken you up on the 1k where you messed up, am I correct?

Sam Craven: Yeah, it’s actually happened only one time on an ARV so far, and we gladly wrote the check. We missed it by a little bit, and the guys came back and bought from us again. And before we did that too, we’re really big on keeping data in our company, so we went back and looked at 200 different transactions and see how many times we would have had to have written that check for either a rent comp or an ARV comp. Over those 200 transactions, it would only have been one other time.

Because something else that we do too is we are actually gonna follow up in three months. After you buy a house from us, we’re gonna call you three months later and we’re gonna ask you, “Hey, how did you do?” So we’re actively following up and trying to get better every step of the way. We do the same thing with our sellers, “Hey, how did we do internally?”, things like that. Then actually our sales guys are bonused based on whether or not they’re getting good ratings from their sellers.

Joe Fairless: As far as the training that your sales individuals go through daily online, what program is that?

Sam Craven: Actually, it’s Grant Cardone’s sales training. They have to do 30 minutes of his online video training every day, and then every Thursday we come together and I actually put together an hour-long training on a specific topic. And actually for the last month we’ve been reading a book… So we read two chapters, we come in there and then I do a training based on those, and then people talk about feedback, specific deals, things like that, and then it’s just kind of more of a facilitation exercise after that.

Joe Fairless: What book are you reading right now that they’re doing?

Sam Craven: Right now we’re reading Relentless, by Tim Grover, but we’ve just finished Chris Voss, Never Split the Difference, and actually that’s the second time that we’ve read that book in our office. I love Chris Voss, the techniques and things like that that he uses. We implement those when meeting with homeowners, and things like that. I think that Never Split the Difference is one of the best sales books I’ve ever read.

Joe Fairless: What one tip has made you the most money from that book?

Sam Craven: Fantastic question. I think the biggest principle in the entire book, which we carry with us every day, is “Understand what the unknown unknowns are in the negotiation or in that sale.” Someone might call up and say “I wanna sell my house, and price is the absolute most important thing”, and that’s what they tell you. But if price was the most important thing, they would have called an agent and they would have listed the house. So it’s up to us, it’s up to our salespeople, it’s up to our team to find out what is that underlying motivation there. Why are they willing to come to us and take less money for their home? And as soon as we understand what that is, we can set up a win/win scenario for them that gets them exactly what they want at a price where we make our margin.

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

Sam Craven: The best real estate investing advice ever… I would say it’s persistence. I’m talking openly about the losses that we’ve had, the hard times that we’ve had, and we’re all gonna face that. We’re all gonna face a time where we send out a hundred letters and they don’t work. Now I’m sending 80,000 a month. Sometimes we pick a new list and it doesn’t work, but it’s okay; stay persistent, stay on top of it, never give up. This is a game of attrition, and any kind of business is a game of attrition. People are gonna drop out, they’re gonna get distracted by something else, but if you just keep going, if you stay on your path, you work with a purpose and you’re ethical, I think there’s just no telling what you can accomplish.

Joe Fairless: Some Best Ever listeners might take that literally with “Don’t give up”, but in your case, you were doing fix and flipping, and now you’ve — we’ll call it “give up.” Clearly, you’ve evolved, but you don’t do that anymore, you do wholesaling. So can you elaborate a little bit on the “Don’t give up” part?

Sam Craven: Sure, good point. Know your strengths. Understand what it is that you’re good at. You’re gonna have certain things that pop up and they’re gonna kick you in the balls sometimes. Know when to play to your strengths. We didn’t give up on real estate, but we understood what our strengths are. It was pretty clearly laid out as we saw that our margins grow and our business grows in our wholesale side of the company, and at the same time we had these heavy losses that we were taking on the rehab side.

Play to your strengths, understand your strengths. I say “Don’t give up in business.” Don’t overall just say “You know what, this business thing, this going out on my own thing is not for me.” We all thought that when we reached our first bit of adversity; there’d be a lot of people who would just quit way too early. Stick with what you know is right, but at the same time, don’t be afraid to pivot when the numbers and the reality is telling you something different.

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

Sam Craven: Let’s do it.

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

Break: [[00:15:25].14] to [[00:16:10].25]

Joe Fairless: Best ever book you’ve read?

Sam Craven: I wanna go with what I’ve talked about – Chris Voss, Never Split the Difference, though this Relentless book is pretty good.

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

Sam Craven: Best ever deal we’ve done… I did one particular deal — actually, we’ve done a lot of six-figure wholesale deals; we’ve got right now that’s headed to the closing table we’re gonna make $140,000 on.

Joe Fairless: What’s the most you’ve ever made on a wholesale deal?

Sam Craven: $140,000.

Joe Fairless: What’s a mistake you’ve made on a transaction that we haven’t talked about?

Sam Craven: Mistake on a transaction… Negotiating too hard. I did a deal one time – it was actually on a flip – and I negotiated too hard on the first deal that came in. We lost that particular deal, and then wound up selling it three months later for $40,000 less than what that offer was.

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

Sam Craven: I love to give back by giving my time to new entrepreneurs. I’m not a guru, I don’t sell my time or things like that, I don’t do coaching, but if any of your listeners would like to have an hour of my time, go ahead and reach out to me at bestever@sennahousebuyers.com, and I’m gonna pick one person at random; you’ve gotta like our Facebook page (SennaHouseBuyers.com), send an e-mail showing that you actually did it, and we’ll pick one person to give away an hour of my time to coach for you guys.

Joe Fairless: Sam, I appreciate you taking the time to spend with us sharing your lessons learned in your journey. Some things that stood out to me… One is being focused and playing to your strengths. Clearly, at the beginning you’ve got wholesale and fix and flip; one more successful than the other, so you go all in on the one that is more successful and that plays to your team’s strengths more.

Some tactical things that you shared with us that you do with your team… One is you do online sales training; your team goes through that every day. Then also a weekly training, where everyone is reading the same book and talking about a couple chapters from the book.

Then a differentiating point that your company adds relative to other companies is that if you miss your target on the rental comps or the ARV, you write them a check for $1,000. That definitely gives a sense of comfort for those who are buying from you… And even if other are on par or even more accurate, then your team will likely get the lead on that because you’re going to have the perception of being more accurate because you’re willing to put your money where your mouth is.

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

Sam Craven: Thanks you so much.

 

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JF1316: One Decade Of Investing Netted Him over 1,000 Units with Kevin Dhillon

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If you don’t believe that being consistent and doing something towards your goals everyday, can pay off big in the long run, then you haven’t heard this episode. Kevin came to the states and had no investment properties here to start. He and his wife worked consistently on acquiring and managing properties. After 12 years of hard work, they own over 1,000 units all cash flowing. To hear a first hand example of what consistent work can do, hit play on this episode. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Kevin Dhillon Real Estate Background:

  • Australian real estate investor, who has been actively investing in real estate for the past 12 years
  • He and his wife Daniella have acquired 1,015 multifamily units, totaling over $57M
  • Experience in real estate strategies of owner financing, developments, value-add projects, and syndication
  • Currently own 1,015 rentable dwellings spread between SFHs all the way to a 192 unit community
  • Based in Houston, Texas
  • Say hi to him at www.DhillonPartners.com
  • Best Ever Book: The Bible

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TRANSCRIPTION

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

With us today, Kevin Dhillon. How are you doing, Kevin?

Kevin Dhillon: Hi, Joe. Yeah, thank you for having me aboard.

Joe Fairless: My pleasure, nice to have you on the show. A little bit about Kevin – he is an Australian real estate investor who has been actively investing in real estate for the last 12 years. He’s based in Houston, Texas, and currently owns 1,500 rentable dwellings spread out between single-family homes and multifamily apartment communities. With that being said, Kevin, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Kevin Dhillon: Sure. My portfolio at the moment is 1,015 units… [laughs] Not 1,500. In time we’ll get there, but at the moment, 1,015. A little bit about my background – I was actually born in Malaysia, a predominantly Muslim country, to a Chinese mother and Indian father, I grew up in Australia; I did most of my schooling there. I currently now live in the U.S. and I attend a Jewish synagogue. So I’m very lucky to be able to have all the different influences and cultures in my life. I’m very lucky in that way.

My wife, Danielle, and I – she’s usually the brains of the entire operation; I’m just the pretty face. We’ve been doing real estate now for about 12 years, and it’s been awesome. We did it for five years back in Australia, and I’ve been doing it full-time for about seven years here in the United States, between initially Miami, and now Houston.

Joe Fairless: What were you doing in Australia, versus what you’re doing in Miami and Houston?

Kevin Dhillon: I guess our approach to real estate is basically just being able to move where the deals are. I guess we are somewhat young, and at that time we didn’t have a family, although we do have a young family now… So I guess we just move to where the deals are.

We started off in Australia, because that’s where we were, and started doing single-family homes, duplexes, triplexes… Basically, residential property in Australia. Then with the financial crisis it was a good buying opportunity in the U.S., and we ended up in Miami because of a family connection, essentially, and started doing multifamily there.

Joe Fairless: What did you buy in Miami?

Kevin Dhillon: The first deal in Miami was a 27-plex. That was the first deal. It was an REO, which we bought back in 2011.

Joe Fairless: Okay. And what was your role in that transaction?

Kevin Dhillon: I was just investing my own money, so I was the purchaser, basically. With the portfolio I had in Australia – I basically refinanced all that, I came to the U.S. with about $950,000 in liquidity, and bought that and a 24-plex as well in Miami, all cash.

Joe Fairless: You bought a 27-unit and a 24-unit, in total for about how much?

Kevin Dhillon: For just a little over a million dollars… With a shortfall; I financed that using a hard money lender, actually, in Miami. They seemed like a great opportunity, so we pushed ourselves a little bit that way, and just used hard money financing to get these two deals under way.

Joe Fairless: Okay. Tell us about what the business plan was, and I would love to hear about how they went.

Kevin Dhillon: Again, we were doing single-family homes and residential property back in Australia, so my mindset was very much about buying maybe a portfolio of about 20-odd houses here in the U.S. And why we ended up in Miami was because basically I had a long lost uncle, hadn’t spoken to him in about 20 years or so, and I found that — yeah, I’ve got this long lost uncle, he’s based in Boca Raton, Florida, and he’s an investor and  a real estate broker himself. So that’s how we ended up in Miami.

So in my mindset, I guess where I was, I was looking at a portfolio of about 20-odd houses… And going through the REO and the short sale process is just a very time-consuming and a very painful experience, because there’s so little certainty. Because you know, you’re just waiting to hear back from the banks and all that. So I think we gave ourselves a goal of buying these 20 houses in six months; three months went by and we still hadn’t closed on anything yet…

So it was my uncle actually that suggested “Why don’t you consider multifamily?” At the time, I said “What’s multifamily?” Because multifamily is an asset class which doesn’t really exist in Australia. Basically, it’s [unintelligible [00:06:09].23] so “Yeah, sure, let’s check it out.”

With the multifamily, with the first deal, the 27-plex – with that one deal, I used up half my cash, and with the second deal I used up all my cash. So I guess that’s the great thing about multifamily – the economies of scale involved… And instead of getting 20 houses, we got 51 units, and the amount of work in doing two transactions as opposed to 20, it just saved us a whole bunch of time and effort and aggravation. So that’s the story.

Joe Fairless: Were you living in Miami at the time when you bought them?

Kevin Dhillon: Kind of. So the plan was to spend six months in Miami, and six months back in Australia. We invested all our money, and then we came back to Australia, because again, that’s where my friends and family and my contacts were… And I guess we had this third-party property manager. So the idea was to spend six months in Miami and six months back in Australia. By the second or third months, when I was back in Australia, I realized we weren’t getting the results we wanted, so Danielle and I realized, look, to really make the most of our portfolio, we’ve really gotta be there and stabilize this thing properly.

And not only that… Look, Miami was a sexier place to live than Melbourne, Australia.

Joe Fairless: [laughs] Miami is sexier than most places on the face of this Earth.

Kevin Dhillon: Yeah, I know, it’s a very sexy place. So it was an easy decision… We decided to basically move to Miami full-time. We were there for about five, six years or so, with the portfolio there, and had a blast as well. We lived in Briggle, we live in Fort Lauderdale. It was a great time in my life.

Joe Fairless: Okay, I’d love to dig into the management and just your overseeing the project a lot more, because it’s really interesting… You were not in the country, you were spending six months away, six months in the country… So you’re not even from Miami or the United States, but you bought two properties. Were they both REO?

Kevin Dhillon: Yes, correct.

Joe Fairless: Okay, they were both REO… Were they both distressed?

Kevin Dhillon: Yeah, distressed — in terms of occupancy, they weren’t too bad. Both were about 90%-95% occupancy, and dare I say, about half the tenants that I inherited seven years ago are still with me… So a very low turnover. Basically, in those two communities, literally like 80% of the tenants there were all related to each other. So it’s this like family kind of enterprise going on there.

Joe Fairless: So you want them to keep having babies then…

Kevin Dhillon: Exactly, yeah. So I guess it wasn’t distressed from the occupancy point of view… More distressed, I guess, from a cap-ex point of view; the previous owner wasn’t really spending the money to upkeep the place, and also in terms of market rents, they weren’t really up to date… So just in terms of bad debt [unintelligible [00:08:39].02] the occupancy was good, we had a tenancy base that wasn’t going anywhere, so I guess there was good upside to the deals.

Joe Fairless: With the cap-ex project — first off, before I get into specifics… So you were living in Australia, you bought these two properties, pretty much around the same time?

Kevin Dhillon: Yeah, within like two months of each other.

Joe Fairless: Okay, within two months of each other… And what did you have in place initially that you changed whenever you actually lived in Miami?

Kevin Dhillon: We had a third-party property manager; they were okay. Then when I moved there, I basically got an in-house property manager, meaning I kind of started my own property management company/business. I had my own property manager and handymen that were just loyal to me; they worked for me, basically. So I guess it was in-house property management, and we went from there.

Joe Fairless: Was the property able to afford a full-time in-house property manager and a full-time handyman, or were you out of pocket some of those costs.

Kevin Dhillon: We did those numbers, and it actually worked out to be cheaper this way. Once you actually factor in the labor of repairs and maintenance, once you factored in the property manager — I guess the property management company was hiring someone else, so I guess they were charging just the management fees and [unintelligible [00:09:59].05] so it actually ended up saving my money by going in-house, basically.

Joe Fairless: So it saved you money… And just for my own clarification, it was better financially for you to bring in two full-time people, but was the property still able to support that, or were you paying out of pocket?

Kevin Dhillon: Initially, the property was able to support one full-time person, so I had a handyman that collected rents, basically. It was not a sophisticated operation, and I guess it kind of worked for a while; we managed to fix up the property. And because everyone there was related — again, the tenant base there was very good, so once we fixed things up, the property started to cash-flow and all that, so it was good.

It’s when I started growing the portfolio that then I hired on a full property manager, and they looked after the entire portfolio.

Joe Fairless: Okay, I’m with you. What type of challenges did you come across whenever you arrived, and after you hired your handyman (who was also collecting rents) what were some other challenges that you came across?

Kevin Dhillon: Challenges in terms of…?

Joe Fairless: Portfolio. It sounds like you were — maybe ‘fortunate’ is not the right word, but it’s not typical from what I’ve seen to buy REO property and have high-quality residents, so that’s awesome… But what were some challenges that you came across?

Kevin Dhillon: You know, probably the most challenging thing dare I say was actually the management of staff. Again, prior to doing this real estate thing full-time, back in Australia, I was an employee. I was actually a property manager, can you believe that? …which was why I wasn’t afraid to bring the management in-house and manage it myself, as it were. Back in Australia I was in residential property management, and my last full-time job was a commercial property manager in [unintelligible [00:11:39].01] Melbourne, looking after warehouses, and — commercial property, basically.

Joe Fairless: And just one side-question then… You mentioned you had $950,000 in liquidity; unless property managers get paid significantly more in Australia than they do in the United States, how did you get $950,000 in liquidity?

Kevin Dhillon: You know, in my working career I’ve never earned more than $32,000/year; I’ve never been highly paid, or anything like that. It was basically through investments. I started investing in Australia in 2006, and so — I don’t know if you know anything at all about Australian real estate…

Joe Fairless: Not much.

Kevin Dhillon: Australia has had 26 years of uninterrupted economic growth. Within the past 26 years, I think that it maybe had one quarter of negative GDP growth, otherwise it’s just been one huge bull run in the Australian economy. That’s another conversation. So consequently, asset prices in Australia have just taken off… So I guess I was a great beneficiary of that. I was buying houses there at 200k, 300k. Today, the median house price in Australia is [unintelligible [00:12:38].18] $900,000.

So again, I was a great beneficiary in terms of the asset price inflation in Australia… And also, I was [unintelligible [00:12:44].20] because I was involved with one development project back in Australia, myself and two other partners. We bought an old house on a larger block of land, we demolished it and we put up four townhouses and sold them off. A lot of my liquidity came from that project as well.

Joe Fairless: Okay, thanks for the background; that’s helpful. So you were a value-add investor, plus you were able to benefit from what was transpiring with the Australian economy in general. Alright. Now, going back to the original question, challenges you came across with these two properties.

Kevin Dhillon: Probably the biggest thing, dare I say, was actually personnel, in terms of hiring the people in the business. It’s really all about the quality of the staff that you have; my first property manager that I hired – she was a really nice lady, a really great person, but she didn’t have the DNA of a property manager, if you know what I mean. She was still a little bit too nice. So I guess in terms of just upholding a standard or what I wanted in my properties, that wasn’t being met, and I guess me having been an employee as well, I guess I wanted to be the nice boss… And basically, I’d say that I kept her on for one year over when I should have fired her early.

I think the biggest issue was actually kind of managing the staff within the property management business, rather than the assets themselves. And then again, the biggest issue in business is just finding good talent, so finding a good handyman and all that kind of stuff. I think that was probably the biggest issue really, just being the boss. I think for me it was the biggest challenge.

Joe Fairless: I’m gonna ask you this question not to pour salt on the wound, but rather to help the Best Ever listeners gauge the negative consequences that could take place if they were to do something like that… So if you had kept her on one year longer than you should have, what did that cost you from a business standpoint for not firing someone when you knew you should have?

Kevin Dhillon: Yeah… Look, just from the metrics of it, right? For one of the properties our gross potential income was just under $400,000; it was about $380,000. We got a new property manager and got her to do a market survey to see where the rents were at that time, and from them, the recommendations in terms of cap-ex, like where we could improve the property to get higher rents. Within about a year of this property manager coming on board, our gross potential income went from $380,000 to about $460,000. So that’s quantifying it that way.

Joe Fairless: Wow.

Kevin Dhillon: But I guess to qualify it, it was just a lot more easier night sleeps with this new property manager, and a lot more money saved in terms of gas, in terms of me needing to drive to the properties and see what’s going on… So really the biggest problem with any business is just getting the right talent in both a quantifiable and qualifiable way. Everything was better with someone that had the proper talent to look after your assets.

Joe Fairless: So that’s gross potential income, a difference of 80k… Let’s just assume 20% expenses, that’s 40k to the NOI… And what’s the cap rate? Probably like four, or something?

Kevin Dhillon: Yeah.

Joe Fairless: That’s a million dollars right there.

Kevin Dhillon: That’s a million dollars, exactly.

Joe Fairless: I didn’t mean to make it so clean, but there you go, that’s a million dollars worth of value.

Kevin Dhillon: And you know, Joe, we haven’t actually got — I had all this stuff prepared about the best real estate investing advice ever… I guess I’m telling you about my story, but this wasn’t the meat of what I wanted to go through, but–

Joe Fairless: You never know where a conversation goes… I just kind of dig into wherever makes most sense.

Kevin Dhillon: Yeah, that’s totally cool. But I’m thinking that I’ve realized — I guess my biggest expense, dare I say not just in real estate, but in life, is actually opportunity cost. It’s the things that I don’t do or don’t do in a timely way – that’s my biggest expense, really. So that was one of the lessons I learned – one of the expenses I had that gave me this lesson, that I guess my biggest expense really is opportunity cost.

Joe Fairless: Absolutely, and that’s the one million dollars in value right there.

Kevin Dhillon: Just as a little aside, Joe… I love real estate; I think investing in American commercial property is the greatest asset class or investing opportunity on this entire planet. My wife and I were lucky to be able to live in America, live in Australia, live in Malaysia… We could live anywhere, and I really hand on my heart fully believe investing in American commercial real estate is the greatest investing opportunity on this planet.

However, in terms of opportunity cost, I came to America with $950,000 in investable liquidity back in February 2011… About two weeks ago, I decided to just have a look at what would have happened if I invested all that money into Bitcoin, back in February 2011, and — Joe, do you wanna hear this?

Joe Fairless: It’s gonna be more; whether or not you can actually get the money back out, that’s another thing… But it’s gonna be more.

Kevin Dhillon: Yeah, exactly. And my risk profile is such that I wouldn’t have invested the entire thing into Bitcoin. But let’s just say I would have become Australia’s second-richest man. It’s not realistic, it’s not something I would have done, but really, I guess the lesson is — often, I think our biggest expense really is opportunity cost.

Joe Fairless: You know, if you had also taken that $950,000 and just taken one dollar of that and done the Powerball drawing for February 3rd and did numbers 15, 23, 27, 48, 53 and 06, with the Power Play you would have won 165 million dollars. [laughter] That’s what I like in Bitcoin too, but I’m sure there are Best Ever listeners who disagree with me.

Kevin Dhillon: I completely agree, I wouldn’t touch Bitcoin. I guess just the lesson [unintelligible [00:17:45].12] is just opportunity cost. So I completely agree with that, yeah.

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

Kevin Dhillon: I heard this at an Aussie real estate seminar back when I was stating the journey 12-13 years ago, and it was said by an Australia developer called [unintelligible [00:18:03].09] He’s not even really an educator or a teacher, he was just a private developer and he was just invited to speak… So he asked the audience “What business are you in?” Most people said, “We’re in the real estate business.” And he said, “No, I don’t believe that you are. The real business that you’re in is that we’re all in the finance business.” So I guess from that my mindset is being “I’m not so much in the real estate business. Really, my core business is finance.”

Joe Fairless: Interesting. I’ve heard that question before, but I’ve never heard that answer. Sometimes I’ve heard the answer of “We’re in the marketing business” or “We’re in the solutions business”, or “We’re in the relationship business”, but I’ve never heard “We’re in the finance business.” So when you take that finance business approach, what impact does that have on your business?

Kevin Dhillon: I’ve realized the more financially sophisticated I’ve become, the bigger and I guess the better quality of deals I’ve been able to do. What do I mean by that – my very first deal… I got into real estate in kind of an accidental sort of way, in that I needed to buy a house in order to marry my wife. So I decided “Look, I’m gonna go buy a house.” That was my goal. “I’ve gotta buy a house.” So what I do is I go to a bank and I say “I want to buy a house, what can I do?” and they said “You need a tax return. If you wanna take out a residential loan and buy a house, basically we need a tax return”, and they don’t need really anything else. Because I guess banks know that for most owner occupiers looking to buy houses, the height of their financial sophistication in terms of financial statements is really just the tax returns, because you’re forced to have one.

So me, I was a student at a time, so even just [unintelligible [00:19:41].21] I guess when I moved to commercial real estate and started investing in multifamily, all of a sudden they start asking for balance sheets, and profit and loss statements, and I guess I learned that with commercial financing, they actually care very little about the tax returns. They just wanna see a statement of assets, liabilities, income and expenses – that’s what they care about. So I guess having that financial sophistication where I can produce these documents very easily – it’s allowed me to go do these bigger commercial type deals.

So we did that for a while in Miami, and then I guess when some Aussie investors heard about what I was doing in Miami, they approached me, wanting to invest with me, and I guess that’s what has led me to syndication today, and raising equity. And I guess when you’re raising equity, it’s about being able to keep track of the way money is spent, it’s about being able to account the assets and liabilities… But I guess with raising equity it’s also about more abstract things – it’s about track records, it’s about the service, it’s about your business plan… But I guess if you could kind of boil it all down, I guess with raising equity it’s really all about trust.

So as I’ve become more financially sophisticated, it’s allowed me to do bigger and bigger deals. Really, the heart of this business is finance.

Joe Fairless: I love it. Thank you for walking us through that. We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Kevin Dhillon: Yeah, sure. Go ahead.

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

Break: [[00:21:07].07] to [[00:21:37].06]

Joe Fairless: Best ever book you’ve read?

Kevin Dhillon: The Bible.

Joe Fairless: Best ever deal you’ve done that wasn’t your first and wasn’t your last?

Kevin Dhillon: Probably a 51-unit deal in Lake Worth, Florida… From a financial return point of view, I guess, because we’ve refinanced and got an infinite return for my investors and myself, and also in terms of just turning around a community. It was full of drug dealers and prostitutes, and now it’s just something that’s much more family-friendly.

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

Kevin Dhillon: Probably that same deal… I guess purchasing it with not enough cap-ex budgeted in.

Joe Fairless: What did you do to resolve that?

Kevin Dhillon: We decided to wait for the money to come in through cashflow.

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

Kevin Dhillon: I really do believe that the business itself is my main way of giving back in terms of just turning around communities, but I’m certainly very much involved with my synagogue as well, and I enjoy mentoring people in that place.

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

Kevin Dhillon: Probably our website would be best – www.dhillonpartners.com.

Joe Fairless: Kevin, thank you for being on the show and talking to us about how you got started in the U.S. in Miami, and the lessons that you learned are applicable to any market, and applicable to any investor who is focused on value-add deals… Or quite frankly, any businessperson in general, because one of the lessons is your biggest expense is the opportunity cost, where it was one year later for firing the property manager, and that was a million dollars worth of value that you were then able to capitalize on or realize, once you did the market survey and did a couple things to enhance the gross potential income… As well as just your overall approach with the management side of things and how you handled the handyman who collected rent initially, and then you evolved from there.

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

Kevin Dhillon: Thank you, Joe.

Best Real Estate Investing Advice Ever Show Podcast

JF1065: How to Track Down Vacant Property Owners With Larry Higgins

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If you’re a wholesaler, I’ll bet returned mail is near the top of your list of problems. Larry and his company can help get that returned mail back into a lead! Hear about the houses everyone else is missing, and how to track down contact information for vacant properties. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Larry Higgins Real Estate Background:
-Owner and chief operator of Emprise REI LLC and its series, HomeFront Real Estate Investments
-Began career with Camden, a multifamily housing company, spent three years overseeing construction
-After jumping into real estate full time in 2013, he quickly learned that returned mail was a problem
-Graduated from Texas A&M University in 2003, where he was a member of the Corps of Cadets
-Based in Houston, Texas
-Say hi to him at larryATskipgenie.com or at skipgenie.com/
-Best Ever Book: Winston Churchill: A Life

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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluff. With us today, Larry Higgins. How are you doing, my friend?

Larry Higgins: I’m doing great, Joe. How are you doing?

Joe Fairless: I’m doing great as well. Nice to have you on the show. A little bit about Larry – he is the owner and chief operator at Emprise REI – is that right?

Larry Higgins: Yes, that’s the overall LLC that I’m established under; that’s Emprise, and then we’ve just recently started SkipGenie.com.

Joe Fairless: SkipGenie.com… I think that’s gonna be the focus of our conversations, SkipGenie.com. A little bit more about Larry – he began his career in Camden, a multifamily housing company and spent three years overseeing construction. He’s based in Houston, Texas; we’re gonna talk about skip tracing and exactly what that is, and how he’s using it as a strategy and how others are, as well. With that being said, Larry, before we get into that, do you wanna give the Best Ever listeners a little bit more about your background and your focus?

Larry Higgins: I have a construction management background after the college, I did that for a while, I worked overseas, doing that for a while as well. Then I came home and got myself in a job I really didn’t care for too much. It just bored me; it wasn’t the company or anything like that, it was just very boring. Then I jumped into real estate. I didn’t know anything about it, but I learned really fast. At his point I’m just wholesaling; we do do some deals here and there, we’ll buy enlisted — but as far as my strategy in going after deals, as a new investor I started like a lot of other guys – you do a little bit of bandit signs, a little bit of mail, and things like that… And I learned what a valuable, versatile tool skiptracing was, and I also learned I really liked vacant properties.

Over time I just developed my own process and I got really proficient and really good at filtering lists and taking certain information, and maybe skiptracing entire lists and reaching out — instead of mailing, just directly contacting these people. So that’s kind of my strategy, and I use that just to wholesale deals.

Joe Fairless: Okay. So let’s talk about skiptracing. First, how about you define it for anyone who’s not familiar… I need a refresher on it, because other people have talked about this, but I haven’t talked about it in detail. So what is it and how do you implement it?

Larry Higgins: That’s a great question, because it can mean different things to different people. Most of the time it just means go somewhere and try and find the phone number for somebody or a new address. So if you wanted to do this on a massive scale, you can just pull a bunch of reports; people are fairly easy to find, and you’ve got phone numbers, e-mail addresses and current addresses, things like that, ways to reach out and contact them.

In another context, what I consider when you have to go in-depth is when maybe somebody passed away, or they just fell off the face of the earth, and maybe on the face value it’s a really hot deal. That’s when you have to dive down a little deeper, maybe find relatives, talk to the neighbors… You’re almost like a detective at that point, and you’re putting the pieces of the puzzle together. The ability to do one or both of those is just tremendous, because so many people won’t do it. So many people just do, say, return mail. We’re talking to a lot of people now, even the more experienced guys… A lot of people have heard “You should work your return mail”, or “Skiptrace your return mail”, the reason being nobody else is. There’s a correlation between direct mail and vacant properties.

Say you’re brand new and you’re driving for dollars – there’s a correlation there that if that mail gets returned or that property is vacant, generally those people might be a little bit harder to find. You’re not gonna be able to just dial one phone number and reach them. But there’s also another correlation — everybody loves vacant properties for a reason: a higher probability of getting the deal, a higher probability it’s gonna be a better deal.

Joe Fairless: Yeah.

Larry Higgins: So that’s skiptracing in general. As I said, it could be real broad – you just wanna grab phone numbers; maybe you’ve got a mailing list of 1,000 people and you just wanna start calling them all – no problem, you’re just taking what you get. Or you can do both – take that entire list, you’ve got the numbers… Maybe you wanna dive a little bit deeper in the data. Maybe you see the owner lives in another state now and they’re 90 years old, or maybe they’re even deceased but they don’t show up as an estate or a probate. People die all the time all over the place, and great numbers live out of will; those people don’t show up on probate lists.

So there’s a lot of little pieces that you can look at, little indicators I call them. My bread and butter – if you can get a vacant property, that’s a great indicator overall. If you can get a tax delinquent property, a lot of people love those… That’s a pretty good indicator. Then if you get an owner that has passed away, that’s obviously a lot of people like the probate.

Whatever you can do to filter business data and try and get as many of those boxes checked as you can on one property, that’s a way to prioritize and know when to dig deeper, that kind of thing. I went into too much detail…

Joe Fairless: No, I love it. The more details, the better. Thank you, this is great. So you have a mailing list of 1,000 people; how do you get the phone numbers?

Larry Higgins: One of the things unique to our services is — a lot of people have access to what they consider skiptrace services, but they’re doing a lot of manual searching. You have to go in and search each property, each name…. And you’ll get a report and it shows the phone numbers. I’ve teamed up with a guy a year and a half, two years ago; it was on a specific project – it was vacant properties and calling the owners, rather than mailing. Over time, there was an evolution that we were doing so much we couldn’t keep up doing it manually, so we put the resources into it to develop our own system, to where we can now process an entire list at once. Instead of doing 100 manual searches, we plug in a spreadsheet and we get it spit back out to us. It’s all automated at that point. So now  you can even plug it into the more popular autodialers, your voicemail drops… It’s a different way to reach out to a potential owner, because maybe you don’t wanna call him.

You could literally take a mail list of 10,000, skip trace it; we can provide it in a format the next day, you plug it into your system, and you’ve gone out and done — I think it’s a different name, but I call it a voicemail drop. Some people call it ringless voicemail. But within 24-48 hours you’ve left voicemails with 10,000 people.

Joe Fairless: And what service do you use for that? Is that your service too, or do you partner with someone?

Larry Higgins: Yeah, it’s ours. It’s our internal capability that we developed in the last year or so. We knew there was demand for it, and we thought it would be geared more towards just the higher volume guys, doing 1,000 or more a month, but there’s so much frustration with direct mail right now… It’s amazing. I call it “the yellow letter lottery.” There’s so many people sending mail to the same list… It’s not uncommon to go to an appointment, and there’s two, three, five, six other investors, and you are lucky to even get that, because they might have 50 pieces of mail. All these weekend seminars, all these classes, all these people jumping into wholesaling, and that’s the number one thing you’re told to do probably – drop mail. And everybody’s mailing the same list.

I can’t think of anybody I’ve heard in the last year to say that their response rates from direct mail have gotten better. Everybody’s talking about how the results are actually kind of going down.

It’s an intriguing concept for some people, and they’re looking for alternative ways to try and set themselves apart from everybody else, rather than just being another postcard or yellow letter in the mail type thing.

Joe Fairless: I have a list of 1,000 property addresses; in this case, let’s say I work with your company. So I have a spreadsheet, I give it to you… Do you just put the phone numbers in the cell right next to the address, so now I have the addresses plus the phone number that corresponds to each address?

Larry Higgins: Yes, it’s all in a usable format. It makes sense once you see it. We tell you if that person shows up as deceased, and if the property is not in an estate, that’s something to key in on, because it’s a de facto estate at that point. By that, I mean it’s flying under everybody else’s radar. People are tracing probates, people are tracing estates… Well, say you have a property – John Doe lives on Main Street; the mailing address is line up, and it looks like an owner-occupied house. Let’s say maybe you even know it’s vacant for sure. You run the report, and it shows up John Doe died two years ago. To me, the priority goes way up on that property. He died, it’s vacant, it’s getting run down, so that’s a key indicator to look at.

Joe Fairless: So what do you do when — yeah, sorry, go ahead; I interrupted you, I didn’t mean to. Go ahead.

Larry Higgins: That’s alright, I like talking about skiptracing, so I’ll go on and on and on, and you’ll have to cut me off. [laughter] So if you go down the way our spreadsheet is formatted, that’s one thing you can filter – see who’s deceased. Sometimes the age… Whether you use it in the cheap, low-end stuff [unintelligible [00:11:33].18] or the upper-tier providers (which we are, at this point), we all get our get our death records from the social security death index. But if that death is never reported, nobody has visibility on that death record, so it’s not uncommon to see somebody that’s 100, 110 years old that looks like they’re alive. But I tell people… Based off your list, say it’s tax delinquent or non-owner occupied, something along those lines; if you see anybody who’s 90 or older, go ahead and just do a quick obituary check. It’s worth that extra step.

You need to maximize your list. Don’t overlook these little things. You could turn that over to a VA and just teach him the process; it’s really simple. So there’s the death status, the age, then we give you address history, all the phone numbers associated with that person, and we can also show you the likely and possible relatives, so if that person does show up as deceased, “Hey, here’s some possible people that you’re gonna want to skiptrace to get their phone numbers”, if there are probable errors in that scenario.

Joe Fairless: Yeah, it’s certainly a competitive advantage that you’ve uncovered, because you’ve taken something from the surface of “Hey, you just match up phone numbers with addresses”, and you’ve taken it three levels further than that and thought through the process from an investor standpoint.

Larry Higgins: Our unofficial motto is “Built by, for and used by investors.” So we kind of know what people are looking for… And some people don’t know what they should be looking for.

But that’s not the end of the useful data; the other thing we provide are any possible e-mail addresses. I’ve just learned this from one of our clients last week. He’s using those to go and try and target the people on Facebook, as well… That kind of blew my mind; I was like, “Wow, that’s even more utility out of it.” The versatility in something like this is amazing if you make the effort, and it’s not hard.

Like I said, you could be completely automated, and just — whatever’s easy to get, you get, or you take the time and pay attention to those smaller indicators and know when you might need to put a little more work into certain things.

My general rule is the harder somebody is to find, or their heirs, the more likely it’s gonna be a better deal or a home run type deal. There might be cases where you have to get a genealogist involved. I say that because we’ve done that. I consider that a great opportunity, if I have to reach out to our genealogist and give her some information because we can’t find the heirs.

Joe Fairless: Please tell us more about that particular deal.

Larry Higgins: Okay. So that’s the house, we had a lead… I looked it up, and the owner died; they owed like $30,000 in taxes (this is in Houston). The owner died, I see her son; I look him up, and he had died, too. He didn’t have any siblings, no wives, no children. Her husband had died like 30 years prior. I just couldn’t find anything on the guy. I’m really good at going into our local county clerk, stuff like that, looking for probate records, and there was just a dearth of information on them. So I’m not a genealogist… I can do some basic stuff on ancestry, but that’s definitely not my specialty. I just knew there was a major issue at this house, and there was no close heirs, I could tell that.

So we got a genealogist involved, and I’ll never forget… It was nine in the morning, I called, I left a voicemail with the lady; I didn’t realize where she was. Well, she was in Alaska; she called me right back and she told me “It’s like six in the morning here’, but she was already up and she was really pleasant. She said, “Yeah, the person you mentioned, that’s my cousin. I haven’t seen him in 30 years.” This was a little awkward, but I had to inform her that her cousin died a few years ago, and under our heirship laws in Texas, as a cousin, she was one of the heirs.

Now, the genealogist was the one that gave me her name, and that’s how I knew how to find her… So she’s 1,500-2,000 miles away in Alaska, owns a legal interest in her deceased cousin’s property in Texas, doesn’t have the first clue about how to take care of the heirship and the title issues and things like that… And we’d found out that the house had squatters living in it. So this is getting better and better and better, but that deal alone – it took some work, and we ended up actually paying for the squatters to move, just incentivize them.

Joe Fairless: What did you pay them?

Larry Higgins: I think we ended up spending about $1,500. We wanted a clean deal, we wanted them out by the time we were closing, and not to say it’s right, it’s just the easier thing to do [unintelligible [00:16:22].15] But on that deal we paid each of the heirs $3,000; it was like free money falling out of the sky, and we double-closed on it. We didn’t necessarily want our buyer to see what we were making off of it, but it was a $150,000 deal. We were right under $50,000 all in, and we sold it for 200k.

I’m not saying you can do that once a month or every few weeks or anything like that, but my point is if you’re not looking for that, you’re rarely gonna find it. Or if you had just given up… All the signs were there – huge tax problem, and there’s no close relatives… Okay, spend a few minutes and dig a little deeper. It’s risk/reward. At some point you make a decision, “Should I get a genealogist involved? Well, there’s huge potential payoff, so yeah, let’s spend a couple hundred bucks if I have to.”

Joe Fairless: That was one of my questions – how does a genealogist charge you? What’s the structure?

Larry Higgins: We’ve only used one, and I think she’s in Canada. She’s very good, she’s always gotten results back. Our average bill — we’ve only done it a few times… I think our average bill was maybe $100-$150, and that was with us — we’re impatient, like “This is urgent, we’ll pay the rush charge.” She has a little rush charge, so we’re always like “Hey, we’ll pay the rush charge, whatever it is. As soon as you can get this…” So it’s very, very affordable, and you’re not gonna be doing it all the time. It’s something that depends on how many leads you’re working through. It’s not a common scenario, but if you come across something like that, it’s well worth your time and the risk of $100.

Like I said, in that situation, the heirs… You should be looking forward to the day that you’re notifying somebody that they are the legal owner of a property they didn’t know anything about.

Joe Fairless: We just got the phone numbers back from you; I’m pretending I paid for your services, I got my phone numbers… Now I’ve got the spreadsheet in front of me on my laptop, I’ve got my phone next to my, got my earphones in, ready to make my first call… Walk me through a phone call scenario when you call someone – or, in this hypothetical scenario, when I call someone. What should I say and what should I expect as a response?

Larry Higgins: Some of that is gonna be based off of your criteria, the nature of that list – is it a probate, or an inherited property and you’re suspecting you’re talking to relatives? Is it a free foreclosure home? That’s two different ways of talking to them.

Joe Fairless: Go with both scenarios, if you could do each scenario quickly.

Larry Higgins: Okay. Say it’s an inherited property…

“Hey, can I speak to Jill, please?”

“Yeah, this is Jill.”

“Hey, Jill. This is kind of out of the blue, but my name is Larry Higgins, and I’m not even sure if you can help, but I saw this property over at Main Street, and it looked like it might be vacant, I’m not sure. When I looked up the owner, I saw that he had passed, so now I’m just trying to reach his family or whoever owns or controls the property to see if they have any interest in selling it, because I’d like to buy it”, and then I just shut up. You’d be surprised how open some people are.

Now, that script – that’s not totally ad-hoc. That’s come through a lot of trial and error. The goal when you do this — and we actually worked with a sales trainer at one point, he helped us fine-tune it. He actually uses it with his calling center now, for people that are doing this. He has a full-blown call center.

But the goal is, when you call somebody out of the blue like that — if I just said, “Hey, is Jill there?”, she doesn’t know you; the defenses go up. It’s like “Who is this guy? Why is he calling?”, so the goal is to be as personable and just genuinely an easygoing person to talk to, and answer their questions before they have to ask who you are and why you’re calling. Then I’m just straightforward to the message.

Joe Fairless: What about the other scenario?

Larry Higgins: The other — and again, I’m not saying this is THE way, the right way; it’s the way I like. On the foreclosure:

“Hey, can I speak to Jill, please?”

“Yeah, this is Jill.”

“Hey, Jill. I don’t know if there’s a mistake and I’m really not sure, but I just saw this on a county website…” First of all, let me clarify – I don’t mention foreclosure if I’m not positive that I’m talking to the right person.

Joe Fairless: Okay.

Larry Higgins: That’s a good way to kill a deal. So once I know it’s Jill, I say:

“Hey, maybe it’s a mistake, I’m not sure. If it is, I wanted to make sure you knew that the county shows that this house – it looks like you own it – is scheduled for the auction next month (or two months, or whenever).” Sometimes I’ll just shut up right there, to see how they’re gonna tell you what they’re going through. If you’re really lucky, they think it’s already been [unintelligible [00:21:10].00]. That happens.

You’ll call them and they’ll say “Well, I would sell it, but the bank already owns it.” You’d be surprised if that happens. They don’t realize they’re still the legal owners, especially with inherited properties. The good thing there is, mentally, their mindset is they’re getting [unintelligible [00:21:27].05]; there’s no worth, no value to that property. That’s where they are mentally. If they can get anything in their pocket at that point, they’re probably gonna be happy. Probably, but you never know.

These are great questions you’re asking. We’re just a skiptrace service, but it’s hard to explain to people we’re more than just data. We give you these scripts. We will help you go over your strategy. If you’re a brand new guy, you’ve gotta make every dollar count, you can’t go pull 1,000 skiptraces on properties, we’re gonna help you to prioritize. Our goal is to get you a deal as quickly as possible and as cheaply as possible. We know that’s the only way you’re gonna stay with us – you’ve gotta see those results. One of the ways we’re doing that is the next week or two we’re gonna start weekly calls, just Q&A; what issues you’re having, whatever it is.

I like the interaction. I’m on a call like that with a guy here in Texas for something different, and you never know what little nuggets you’re get out of there that help you in whatever you’re doing.

Joe Fairless: Larry, what is your best real estate investing advice ever?

Larry Higgins: Not to beat a dead horse, but even if it’s not skiptracing, to me it pretty much involves skiptracing — but to be more targeted. I saw a guy post in a Facebook group the other day he spent $15,000 in mail since the beginning of this year, and he’s got one deal for $5,000. Obviously, I have issues with mail to begin with, but he probably wasn’t being targeted enough. There’s too much data out there from multiple sources and there’s no reason not to have a pretty tight target in your marketing. He should have got more than one deal, but those were his results.

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

Larry Higgins: Yes.

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

Break: [[00:23:21].00] to [[00:24:21].04]

Joe Fairless: Best ever book you’ve read?

Larry Higgins: Not real estate related, but it’s “Churchill: A Life” by Martin Gilbert.

Joe Fairless: Churchill Life?

Larry Higgins: “Churchill: A Life.” I’ve read multiple biographies on him. He had a fascinating life; he had his highs, he had his lows, but the quote “Never, never, never give up” – that kind of sums him up. He’s just a fascinating historical figure.

Joe Fairless: Best ever deal you’ve done?

Larry Higgins: The house we spoke about earlier, where we had the genealogist involved. That was $150,000 on a wholesale deal — well, we double-closed, but that was it.

Joe Fairless: Over 1,000 episodes, and this is the first episode where we have mentioned bringing in a genealogist to close on a deal, so bravo to you for that!

Larry Higgins: That’s awesome, I get to bring something new to the Best Ever Show listeners; I like that.

Joe Fairless: Yes, you do. What’s a mistake you’ve made on a transaction?

Larry Higgins: It was really a wholesale deal, and it wasn’t that I lost money, it was that I went ahead and did the deal. It took so much time and energy out of me when it was all said and done… It just wasn’t worth it. I look at opportunity cost. Everything, all the time and energy that I’ve put into this thing… It was crazy – having to move people, and the family was an issue to deal with. I realized “This cost me money.” I made $2,000, but I was so distracted and I put so much energy into that, it literally probably cost me a much more profitable deal somewhere else.

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

Larry Higgins: Talking to newer investors that need even basic question, just the back and forth… I’m not that far removed from where they are. Just “Hey, how do you go find who the owner is in a tax record?” It’s something so simple, so easy to give, but they’re at a roadblock… So just whatever I can do to talk to them, whether it’s Facebook groups, on the phone or networking events. It’s a small thing, but it’s just a little way to help a lot of different people.

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

Larry Higgins: They can e-mail me any time at larry@skipgenie.com.

Joe Fairless: And what’s your company’s website?

Larry Higgins: It is SkipGenie.com. And just a little bit of a disclosure – we just started this up recently as far as putting it out there, and we’ve done very little… But it has accelerated; we way underestimated the demand. The website is functional. It looks decent, but it is definitely a work in progress. We’re rapidly expanding our capabilities there. We have a startup mindset at this point, it’s a lot of fun. We’d love to talk to anybody if you have questions about anything. We can even give you a free search, just so you can get an idea for the quality of our content, the format of it and how we operate.

Joe Fairless: Outstanding. Well, Larry, I’ve really enjoyed our conversation, learning about skiptracing, learning about how you as an entrepreneur have developed the company and thought through the different scenarios after the number is received, and what value can you and your company add to investors to help close more deals. As you mentioned, the harder the deals are to uncover or to find, usually the better the deal, and you used the genealogist example where you made $150,000 on one deal, where you bought it for 50k and sold it for 200k. Again, not typical, but it happened; it’s real.

You do this long enough, enough times, you hit some singles, maybe strike out once or twice, but then you hit a grand slam like that, and overall your batting average is around 300-400, and that’s pretty darn good.

Thanks for being on the show, Larry. I hope you have a best ever day. I truly enjoyed this. We’ll talk to you soon!

Larry Higgins: Thanks, Joe. I really appreciate you having me on, it was good talking to you.

 

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Best Real Estate Investing Advice Ever Show Podcast

JF986: How and Why You Would Leverage Other People’s IRA and Cash

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Quincy Long Real Estate Background:

– President and founder of Quest IRA, Inc., the premier self-directed IRA provider in the country.
– Licensed attorney specializing in real estate and an active investor
– Author of “Real Estate Investment Using Self-Directed IRAs and Other Retirement Plans.”
– One of the most sought after keynote speakers in the nation on the Self-Directed retirement industry
– Based in Houston, Texas
– Say hi to him at www.IRAWebAdvisor.com or www.QuestIRA.com
– Best Ever Book: RIch Dad, Poor Dad

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Quincy Long advice

 

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 fluffy stuff.

We’re gonna be talking self-directed IRAs today with Quincy Long – how are you doing?

Quincy Long: I’m doing great, glad to be here.

Joe Fairless: Nice to have you on the show, my friend. A little bit about Quincy – he is the president and founder of Quest IRA, he is the author of “Real Estate Investment: Using Self-Directed IRAs And Other Retirement Plans.” Based in Houston, Texas, and you can say hi to him at his company’s websites, which are in the show notes link. With that being said, Quincy, do you wanna give the Best Ever listeners a little bit more about your background and your focus?

Quincy Long: Sure. Basically, besides what you said, being president and founder of Quest IRA Inc., which was founded back 2002, I’m also an attorney, an active investor. I’ve been a fee attorney for a title company, so I know a whole lot about real estate also, and I’m a certified IRA services professional, which means I have an expertise in IRAs in general, not just self-directed. Other than that, I can go into all kinds of other details, but I suspect most of the rest of it is not all that interesting to your listeners.

Joe Fairless: [laughs] You’d be surprised. I think we like hearing some stuff that we haven’t heard about before, but we will focus our conversation on  self-directed IRAs. What should we know about them? Let’s start broad and then we’ll get more specific, as real estate investors.

Quincy Long: I think the two key elements that you need to understand about self-directed IRA’s is 1) they are incredibly flexible. There’s just all kinds of things you can do to either defer, or in some cases, eliminate your taxes on your real estate profits. That’s the good side.

The downside of self-directed IRAs – and I guess I should confess that when my mother wanted to really know what happened in my family, she just asked me because she knew I’d tell her the truth, the whole truth, and nothing but the truth, whether it’d help me or not… But there is a downside to being in a self-directed IRA, and that it is self-directed in the self – it’s not us, it’s you. You get to make your own choices, but you have to make your own choices, because in a self-directed IRA you don’t have any investment choices approved or provided by the custodian or the managed trader. So that’s kind of the double-edged sword of the self-directed IRA. It’s an incredible tool, I’ve used it extensively and really enjoyed using it personally, besides having the company, but you’re responsible for your own choices.

Joe Fairless: As far as the type of investments that you’ve seen people make – real-life investments, versus just theory-based, what are some interesting real-life investments that you’ve seen people make?

Quincy Long: Interesting… Boy, I get to fill the hour with just the interesting ones, but the most interesting ones are really not necessarily real estate related… Some of them are probably not proper for airing online, but we’ve certainly had some interesting real estate deals; options are always structured in interesting ways, so I like options… Some of the most creative stuff that I’ve seen is actually in the area of notes secured by real estate, and how those notes are purchased, sold, created – that sort of thing.

Obviously, you can buy a piece of real  estate, and I don’t know that there’s anything particularly creative with that, except for where you buy it and when. We certainly had some home runs that people have made buying real estate in their IRA, and I could tell plenty of stories about that… But as far as the most creative and interesting things, I’ve gotta say it’s probably notes.

Joe Fairless: Why do you categorize those as the most creative and interesting?

Quincy Long: Well, maybe it’s just personal choice, because that’s what I like to do… But you can structure real estate notes, and — well, of course, you can buy performing notes that are existing, sometimes from institutional lenders. You can buy non-performing notes, but you can also buy partials from seller-financed deals. But the most fun that I have with them is actually creating them from the beginning, and structuring them in a way that you can basically get the note done and then sell off the first part of the note to recoup all your money invested in creating the note, and then keep the tail end of the note for yourself as a profit. That’s a really good way to build an IRA. It’s not really sexy, I suppose, but it’s an excellent way to build an IRA slowly and securely. That’s what I like about it.

Joe Fairless: What are some things that when you work with your customers they find surprising about the self-directed IRA process?

Quincy Long: I think the biggest surprise – and I don’t know why it would be a surprise – that people find is that we’re not here to teach them how to be an investor, we’re here to provide the vehicle through which they make their investment choices. In other words, we’re like luxury car dealers – we’re gonna sell you the vehicle, but we’re not gonna teach you how to drive that vehicle, and we’re not going to put your gas in it, which is your money, of course, and driving the vehicles, making your investment selections.

I think some people maintain the illusion that somehow we’re investment advisors, and of course, there’s no way with the structure of the company that that can be done. Again, I don’t know why that would be a surprise to anybody, but they just perhaps don’t understand the product. But having said that, it’s an incredibly powerful and flexible tool, and we do provide a whole lot of free education about the things that people have done and can do with self-directed IRAs; perhaps then people say “Okay, great. Can you set that up for me?” Well, the answer is no, but I can allow you to do it once you get it figured out.

Again, other than that, the biggest other surprise would be how genuinely flexible it is, and all the crazy things that people do and can do with them.

Joe Fairless: Once you have an account set up and you’ve identified an investment opportunity – and I imagine usually you’ve already identified the investment opportunity and that’s why you’re setting it up, usually – what type of paperwork is required to invest in it?

Quincy Long: It’s actually pretty easy. The first thing they’ve gotta understand is that the titling has to be done not obviously in their individual name, but in the name of the IRA. For example, if it was your account, it would be something like you would be making the offer on the real estate or creating the note or whatever you’re doing as Quest IRA Inc. FBO (for the benefit of) Joe Fairless IRA number 12345 or whatever it is. So titling is important, but once you’ve got the titling right, the next task is to read and approve all the documents, because as I said, it is a self-directed IRA, so you have to read and approve everything because you are the decision-maker as the client.

And then the third step in the process, of course, is to submit the direction to invest, and there are different direction to invest forms based on what type of an asset you’re purchasing, whether it’s a note or real estate or a private placement, or something like that. Once those steps are followed, then we actually fund within 24 hours of when you submit all the proper paperwork.

Joe Fairless: When you attend a conference and you’re speaking at the conference, what’s the angle of your presentation that you usually talk about.

Quincy Long: Well, my presentations typically are always educational and never salesy, if you know what I mean, because I’m not very good at that. But what we do is we typically will educate on the types of accounts that are available and the types of investments that clients make with those accounts, and then we typically tell just a few investment stories to give them a better idea of the types of transactions that people can and do in a self-directed IRA or other type of account.

Joe Fairless: Can you tell us a story that you typically tell that usually resonates well with the audience?

Quincy Long: Lots of stories… Let me tell you this one, because it’s a pretty simple one. Joe, one of the things is people are not understanding that it doesn’t take a whole lot of money to invest in real estate, so that surprises a lot of people. But I’ll just give you this one example… I wish it was from my own portfolio, but unfortunately it’s not. We had a client that knew somebody, was kind of around the corner from his office in downtown Houston area, and she was being foreclosed on for delinquent taxes.

She was a little old lady, the house was not worth very much at all — in fact, it was probably worth whatever it took to tear it down, but the real estate was in the pass of development, if you kind of get my meaning on that… And he knew that the real estate development was coming, but wouldn’t get there for a couple of years. And she wanted to stay in the house; she knew she was getting [unintelligible [00:11:44].21] would probably have to move in with relatives or into a care facility within a couple years, but she wanted to stay in her house as long as she could.

So she asked him for help, and he arranged to purchase her house for the delinquent taxes of roughly $10,000. Then he also agreed to allow her to live in the house rent-free for two years, and that would give her time to make her transition. And at the end of two years, she moved on and he sold the property that he paid $10,000 in his Roth IRA for $290,000 to a developer who tore it down and put up a townhouse. That’s a pretty good return on investment, I would say… Wouldn’t you?

Joe Fairless: It’s a win/win for everyone, it sounds like.

Quincy Long: So that was a great deal… You just tell me when to stop, I can tell many stories of different types of investments. If you want real estate specific, one from my portfolio that I thought was pretty good – not a home run, but not a bad deal… Because as I said, you can invest in real estate directly or indirectly, and indirectly – I mean you can invest in things like limited partnerships that purchase property for various things. I do invest in a lot of shopping centers myself, for example, through limited partnerships. But the one deal I did that I thought worked out pretty good – and I like this; the story is important because it demonstrates something called the ERR… Do you know what the ERR is?

Joe Fairless: No, what is that?

Quincy Long: That’s the Effort to Return Ration.

Joe Fairless: Okay.

Quincy Long: And by that, I mean that everybody gets hung up on the dollars, but it’s more important to understand how many hours it took you to make those dollars. In other words, a per-hour return on your investment is the best way to really judge an investment, if you see what I’m saying. So in this particular case, I invested in a limited partnership and we paid $500,000 cash for a triangular piece of property with a small house on it that was located North of Dallas, Texas. And basically, we were gonna hold it for up to 5 years, and the rent from the house would pretty much pay the taxes and whatnot on the property, which it did.

The only thing we did to improve the property was we got the liquor license extended to the city limits, which included now our property. Well, that of course increased dramatically the value of the piece of real estate by doing that, and we ended up three years and nine months after we bought it, selling the property for 2,5 million dollars, because the path of development once again was headed North of Dallas into this little town called Melissa, and that’s where the piece of property was.

I think that’s also a great story, and the great is not because we made a good return – which we did – but in my case, all I did was read the private placement memorandum and evaluated the deal. So I spent a sum total of about 4-5 hours on the deal, and made a pretty good return for my dollars invested, in a very short period of time. I thought that was an interesting case.

Joe Fairless: Yeah… And you invested that via a your self-directed IRA?

Quincy Long: I did, indeed. Yes.

Joe Fairless: Based on your experience, Quincy, as both a real estate investor, because you have invested in real estate, clearly, and then also as an expert in self-directed IRAs, what is your best advice ever for real estate investors?

Quincy Long: Well, the best advice ever I would say is to learn how to use OPM and OPI – other people’s money and other people’s IRAs – to boost your own IRA. I think that’s a talent that not enough people have. Among the note deals that I’m talking about, if you can create a note – I purchased one at a 30% discount (a $30,000 note for $21,000)… And then when I sold the — well, I didn’t sell the property; the investor that was borrowing my money sold the property and created $30,000 worth of notes. Well, I sold off the first lien note of $21,000 and kept a $9,000 second lien. That just created that money for free.

So if you know somebody with money, you can partner your IRA with their IRA, and as long as they’re not disqualified people to your IRA, you can do some very creative and innovative things. I think using other people’s money to create wealth – or creating free money, as I like to call it – is the best thing I can think of to do with a self-directed IRA. That’s what I like to do, that’s what I try to do every day.

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

Quincy Long: Sure.

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

Break: [[00:16:51].17] to [[00:17:34].28]

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

Quincy Long: Best ever book I’ve read is Rich Dad, Poor Dad, because it gives such an interesting twist on how money is handled and treated.

Joe Fairless: Best ever deal you’ve done? You might have already mentioned it.

Quincy Long: Well, I hope the best deal I’ve ever done is participated in a different real estate transaction, where we bought 196 acres on Maui for $900,000 cash from a bankruptcy estate, which we got a 2,5 million dollar offer before we closed on the property, and turned it down because we think we may be able to sell if for maybe 10 million or more. So that isn’t completed yet, but I believe it’s gonna be one of my biggest investments with the dollar return for effort hour.

Joe Fairless: Wow.

Quincy Long: I hope that’s the best.

Joe Fairless: How long ago did your group buy it for 900k?

Quincy Long: They bought that 3-4 months ago now.

Joe Fairless: Oh, very recent.

Quincy Long: Yes.

Joe Fairless: What’s the hold period?

Quincy Long: Up to five years for that kind of property. We’re gonna market it to the ultra-wealthy. There’s a lot of Chinese and other Asians that visit Hawaii, so that’s the target. There’s some movie stars and what not that have property in the same area, but it’s also a good property for eco-tourism. Just fantastic waterfalls and caves… Probably for the holding period we’ll do some eco-tourism to pay the costs of the property until we can find the correct ultra-wealthy buyer that can write a check between 10-20 million dollars. That’s the plan at this point.

Joe Fairless: Wow. That’s a completely different business model, that’s fascinating. Quick follow-up question on that – how do they approach finding potential buyers?

Quincy Long: Great question, actually… And of course, this is through a limited partnership, so again, I’m not doing any of the work, because I have 4-letter words like W.O.R.K. Some other 4-letter words I’m okay with, but not that one. So basically, we’re at the end of this month or in the month of April sending a professional film crew out to document and film the property, because it’s kind of a rugged piece of property, you can imagine that of course. And then there are sites that are catering to the ultra-wealthy type properties, the trophy properties, if you will. So there’ll be a large internet marketing campaign specifically to target the ultra-wealthy individuals that might be able to afford such a property.

Joe Fairless: Interesting stuff. What is the best ever way you like to give back?

Quincy Long: What I do every day… Somebody asked me a question recently – if I was rich enough to retire, what would I do? I said I’d educate people about self-directed IRAs, of course, because I actually enjoy doing that and I think it’s important. I’ve just finished my estimated taxes before I’m going to Europe – tomorrow, actually – for three weeks… And I’ve finished my estimated taxes and looked at the dollar amount that I’m gonna have to pay as an estimate, and I just got sick to my stomach and I thought “I need to do everything I can…” I’m all for paying your taxes that you owe, but no more than that. I don’t want people to be a tax donator, as I call them. When you do a deal that you could do tax-free, you’re a tax donator, and I just have a real problem with that, because I don’t think the government uses the money as wisely as I would if I had that money.

So again, I believe in paying my share of taxes, but not a single dollar more. I believe in that so much in fact, that teaching other people how to avoid paying taxes by using the government’s own rules that they laid out for us is almost like a mission to me. So that’s what I like to do to help people – teach them how to get out of paying taxes using the government’s own rules and following those rules.

Joe Fairless: Do you have a book on that? Or somewhere else that you have that info?

Quincy Long: Yes. Our website does have a whole lot of information and pre-recorded webinars. We do classes every Tuesday at [9:30] in the morning central time, and at [6:30] in the evening central time, and then also on Wednesday evenings we also do another class out of our Dallas office; the other two are in our Houston office. Those are done by Facebook live. Also, we have pre-recorded webinars that we have done that people can access from our website, and we do all the social media stuff. We’re not quite as adept at podcasting as you are yet, but we’ll no doubt get to that at some point this year, we hope. So we use various techniques to spread the word. I am working on a book, but it’s not completed yet.

Joe Fairless: We’re looking forward to that one. And if you think about your real estate investments, what’s a mistake you’ve made on a deal?

Quincy Long: Oh, that’s easy… I’ve made lots of mistakes. And yes, I’ve been very successful, but anybody that tells you that they’ve never made a mistake has either never done a deal or they’re lying. I would have to say, again, because I do a lot of note deals, my biggest mistake was doing a deal where I did plenty of due diligence on the property, but not enough due diligence on the person that was borrowing the money in that case. I always make the strong suggestion that anything you’re doing, you do due diligence on the deal itself, but most importantly you do due diligence on the people.

I failed to do that, frankly… So I had a great and perfectly valid hard money loan out of my account from the perspective of the property, and we ended up foreclosing on it and it’s been a great rental, and we’re getting ready to sell it after a couple of years of renting it. But four days after the buy borrowed my $200,000, he turned around and went to a different title company and borrowed another $215,000 on a property worth about 270k. Then he also sold it at a third title company ten days later for — I don’t remember the number, but he took a $45,000 down payment… And I found out later he had partners at the foreclosure sale where he bought the property for $100,000, so he took like half a million dollars from people on a property that he had a net of $100,000 in. Basically, after all of this broke and I ended up foreclosing on the property and did due diligence on the individual, I found pretty strong evidence that he’s a crook.

Joe Fairless: Yeah, that’s jail time right there.

Quincy Long: Had I known that, of course I would not have made the deal in the first place. I think that’s my biggest mistake and my biggest learn – you have to do due diligence both ways: people involved, as well as the property or the deal itself. And that’s true for real estate, it’s true for notes, it’s true for private types of investments like limited partnerships, stuff like that as well.

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

Quincy Long: There’s several ways, but the best way to get a hold of me is simply to go to our website, which is www.questira.com. They can, of course, call our center here in Houston, Texas at 855 FUN IRAs. If they wanna submit a question, we do answer basic questions on my blog site: www.irawebadvisor.com. There’s some interesting blog posts there of questions that people have asked me that I’ve answered. You can scroll through those and get some information there. Ask a question if you want to, and it will come to my e-mail.

Joe Fairless: Quincy, thank you for being on the show, talking about a whole range of topics, from self-directed IRAs and some interesting investments, and then some success stories as well as some interesting stuff that you’re investing in on a limited partnership side. The land flip – I would have sold at 2.5 million; I buy it for $900,000, got an offer right before we close for 2.5 – done! Write me the check, I’ll give you the [unintelligible [00:26:28].26]

Quincy Long: To be honest with you, I voted to sell, but you know, when you’re in a partnership it doesn’t work that way.

Joe Fairless: Yeah, I’ve realized through all these interviews – I’ve interviewed about 1,000 people – that when you have money on the table like that and you can double your money before you blink an eye, then you need to do it and then maybe put it in something more long-term and take the chips off the table. But who knows? It could work out, and I hope it does, as well as the other opportunities that you mentioned that you’re doing. And doing due diligence on the operator just as much, if not more so than the deal itself. I know a lot of people look at the operator first before they even look at the deal.

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

Quincy Long: Thank you very much. Have a great day!

 

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JF977: Commercial Loans 101!

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He wrote a book all about it, so today get your notes ready for commercial loans. From being approved to closing the deal you will understand what lenders are looking for in this niche.

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Michael Reinhard Real Estate Background:

– Commercial Mortgage Banker at Texas Commercial Mortgage, LLC
– Author of successful book Commercial Mortgages 101: Everything You Need to Know to Create a Winning Loan Request Package
– Masters Degree in Land Economics & Real Estate from Texas A&M
– Based in Houston, Texas
– Say hi to him at www.texascommercialmortgage.com
– Best Ever Book: Hamilton

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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, Michael Reinhard. How are you doing, Michael?

Michael Reinhard: I’m good, thanks.

Joe Fairless: Nice to have you on the show. A little bit about Michael – he is a commercial mortgage banker at Texas Commercial Mortgage. He is the author of the book Commercial Mortgages 10Joe Fairless: Everything You Need To Know To Create a Winning Loan Request Package.

He’s got his masters degree in land economics and real estate, and he is based in Houston, Texas. With that being said, Michael, do you wanna give the Best Ever listeners a little bit more about your background and your focus?

Michael Reinhard: Yes, Joe. As you mentioned, I received my masters degree in 1989, and I immediately began my career working for savings and loans in the REO department. At that time the savings and loans crisis was at its pinnacle, and basically there’s no lending on real estate in Texas for the most part. I kind of cut my teeth on commercial real estate by analyzing the cash flow, the assets of the bank that were basically in the [unintelligible [00:03:34].20]  to get sold. It was the mandate by the Resolution Trust Corporation – the RTC acronym that most people are familiar with that are probably in their 40s and 50s.

That’s where I really learned the analysis of cash flow for all types of properties, so it was a good, well-rounded, quick education in all types of commercial properties. It was from multifamily, to office, to warehouse, industrial, self-storage and even MUD receivables.

Joe Fairless: What are MUD receivables?

Michael Reinhard: MUD is an acronym for Municipal Utility District. For example, if you’re outside a subdivision and a growing community is outside the reach of the main city’s water facilities… It’s almost like a privately-run organization to provide water lines to the community. Usually the taxes are a lot higher. There’s like a board — it’s kind of like a quasi-government agency that’s privately run and provides the utilities to that area because the city hasn’t been able to get out that far.

I don’t know exactly how they were set up or the history of them, but when the developer would develop a subdivision for single-family homes (or even a multifamily property), you’ve gotta go to the MUD board to get a approval for the capacity you’ve got, to determine if there’s enough capacity to build  a 200-unit apartment complex. You’d have to get the board to vote on it. There were some politics involved… But when you do that — and let’s say… Because I mentioned that at the bank, when the savings and loans crisis hit, and the recession, a lot of these subdivisions were abandoned, and there was a lot of money spent on these water utility — I don’t know if they were just water taps, or sometimes water plants or water pumps that were just sitting out there… They had value; the bank owned those, and we were just trying to determine what the value of those was at the time. That was kind of interesting.

With that said, in the early ’90s there were a lot of ex bankers, a lot of ex real estate people in the late ’80s or the ’90s that were working these different failed savings and loans; they were all being propped up by the selfless bailout government financial rescue… So when all the assets were sold, everybody was kind of losing their jobs, worked themselves out of the job, so there’s just a lot of real estate, analyst people in 1993-1994, and then we had another recession in ’94… That’s when I transitioned into working as an analyst on the mortgage banking side, because around ’94, ’95 this new conduit lending – it’s called the CMBS Loan… CMBS is a commercial mortgage-backed security; it’s the same thing as a residential MBS… That was kind of a new vehicle to provide commercial real estate loans to commercial property investors.

I started off as an analyst at a large commercial real estate firm called [unintelligible [00:06:33].15] which is a national firm… That’s where I had to shift a little bit my real estate career from just more of an analyst and selling assets to now getting on the mortgage side.

It was a good move, and I learned the conduit lending along with Fannie Mac and Freddie Mac agency lending… I spent years as an analyst, an underwriter, working for various banks like Bank of America, John Hancock Life, and some other smaller Texas banks… Then I finally decided in 2009 when the great financial crisis hit – of course, so many people got laid off, there just wasn’t any lending – to take all the expertise I had, venture out as an independent commercial mortgage banker. That’s when I wrote the book.

That’s kind of the genesis of my current position as a commercial mortgage banker, because I’ve spent years and years as an analyst, underwriter, and I felt at that point there’s no place to go at the bank. I was never really an executive or a major stockholder of a bank, so I thought there’s really not much more for me to do or contribute at a bank, and I would prefer to be able to help investors with all types of financing.

As a broker, if one bank says no, then I just go to the next bank or the next type of lender… So it’s more exciting, it’s more challenging. Every deal is different, there’s not one commercial real estate loan that’s alike, unless you’re doing the same old cookie-cutter Fannie Mae loan. That’s how I came about working for myself; I’ve got clients in California, in Florida, in Texas, I’m doing some loans in Indianapolis… I can do loans nation-wide.

I normally don’t do anything in California, because there’s just an inordinate number of brokers there, and I don’t really know the market in California. It’s a different market, and there are some licensing requirements. Texas is big enough, there’s plenty of real estate here.

Joe Fairless: Yes, there is, that’s for sure. I have purchased your book right before we got on the call… I bought your book “Commercial Mortgages 101: Everything You Need To Know To Create a Winning Loan Request Package.” I’m very intrigued by this, and I’d like to spend some time talking about the content of your book.

For a Best Ever Listener who has some single-family home properties and maybe a small multifamily property, but now they wanna go a little bit larger, and for the sake of simplicity, let’s say it’s multifamily… They wanna go a little bit larger to, say, a 20-30 unit property. What do they need to know about commercial loans, in particular as it relates to getting a package together for the lender?

Michael Reinhard: The first thing I’d like to emphasize is that a commercial real estate loan is an entirely different industry than a residential loan… A residential loan meaning either a homeowner loan or even a 1-4 family, whether it’s a duplex, triplex or fourplex. Everything you know about and any experience you have with that type of loan – forget about it. Don’t even try to make a comparison. It’s a different industry. So when you’re attempting to buy a 5-unit, or a 10-unit, or a 20-unit, as you’ve suggested, often times you have to deal with a local bank or maybe a national apartment lender.

Credit scores, for example, would be the first place to start. It’s always good to have a good credit score. It’s not all that critical, where residential mortgages it’s almost like it literally hinges on your credit score only, and of course income, but with commercial real estate loans credit score is not the top consideration, it’s not the most important. Then the next thing that a lender would like to see in an investor is net worth and liquidity. Net worth is, obviously, the difference between your assets and liabilities, and they like to see a net worth equal to or greater than the loan amount.

If you’re wanting to buy a $1,250,000 apartment building – I always like to use that number – in an 80% loan, to be a million dollar loan, they would like to see your net worth equal to a million or more. It is not always the rule that you have to have a million dollar net worth; you could have $800,000, $600,000… Because if you have a lot of income, if you have a good income, if you have a high salary or a W2 salary, or you’re self-employed and you make a lot of money, net worth is not all that important. There’s some mitigation for the net worth.

Then the liquidity is really important. Yes, you have to have enough money to put down; in that situation you’d need $250,000 to put down… But if that’s gonna use up all your cash, just to get into that deal, the lenders will look upon that as a little weary, because you have no cash left. They don’t like to see someone use up all their cash after a closing and then not have anything for an emergency such as a $10,000-$20,000 deductible for an insurance claim; let’s say you have a fire immediately after you purchase the apartment building – which has happened to one of my clients; within 3-4 weeks he had  a fire after just closing on a 44-unit apartment complex. He had to make a claim, and the lender wants to know that you have enough cash to make the claim and get the property fixed, and get it re-leased, or re-tenanted and cash-flowing, sufficient enough so it doesn’t put your payments in jeopardy and putting any hardship on you.

Joe Fairless: What type of liquidity do they look for?

Michael Reinhard: It varies between lenders. The general rule is 10%-20% of the loan amount. If you’re wanting to borrow a million dollars, you have to have at least $100,000 after closing; $150,000 or $200,000 is even better. Sometimes they use 6-12 months’ worth of principal and interest payment. If your mortgage payment was, say, $10,000 a month, they’d like to see $120,000 or so in liquidity. Those are the general rules.

Then the next would be ownership experience. Owning a duplex, or three or four single-family rentals, or maybe 10 or 12 (you could even have 30 of them) – that’s even better if you have a large portfolio of single-family rentals. But if you’ve only had one or two, and maybe a couple of duplexes, that’s not the same as a multifamily, because it’s a little bit different animal.

Anywhere between 5 up to maybe 50 units – they pretty much allow you to self-manage the property because there’s not a lot of third-party management companies that would want to take on a management of that size; it’s just too small and they don’t make enough money to do it.

Because the lender knows that it’s difficult to find a third-party management company and they know that the investor will be attempting to manage the properties themselves, they want to see “Hey, what do you know about leasing, and doing the credit checking, verifying employment and background, the criminal background?” and just qualifying tenants and management of the property. They’re gonna wanna know if you have some experience in managing the property. You could have owned properties and had some third-party management – that’s fine, too.

So ownership experience and management experience. Ownership experience is a little bit more important than management because they know not everybody manages their own property and it’s not that important.

So those are the five: net worth, liquidity, ownership experience and management experience, credit score  – that’s six. Income, in terms of whatever you are – a W2 employee or self-employed… They also wanna know if you have a portfolio of properties; they wanna look at your global cash flow, how much cash you earn after debt service… Because any excess cash flow after debt service meaning you’ve got your net operating income, then you have a principal and interest payment to the lender, and the rest is taxable income. That’s pre-cashflow — not necessarily pre-cashflow, but that’s taxable income that you have left over that if you’re experiencing some hardship on one property, you can then move that cash around to keep all your debt service intact.

A lender likes to see your global cash flow, and that would be your income in whatever profession you’re in, or if you’re in real estate full-time, they wanna just see your overall cash flow. There’s really no ratio on that. People ask me about your debt-to-income, what is the residential ratio…? It’s your income-to-debt, or is it debt-to-income…? They don’t really use that in commercial real estate. They just look at the property’s loan-to-value and the debt coverage ratio, meaning how much does the net operating income exceed the monthly principle and interest payment.

And the PITI is not applicable. So when I say debt service, it’s not principal, interest, taxes and insurance. In commercial real estate it’s just PI – principal and interest. Because in multifamily investing, as part of your operating expenses, it includes property taxes and insurance. It’s always an operating expense, it’s not a part of your payment to the lender, because those may be ESCROWs in those 1-4-family… It’s still an operating expense, but they collect them. And it’s not to say that the commercial lender doesn’t ESCROW for taxes and insurance – they do, but when they’re calculating all their ratios, your debt coverage ratio, that’s only principal and interest.

Joe Fairless: What are some immediate disqualifiers that a commercial lender will have?

Michael Reinhard: Generally, the first thing I like to ask is — an extremely low credit score is… I would say below 600 will raise some eyebrows or will require further explanation. When you get into the 500, that’s difficult.

The next would be any bankruptcies, and usually anything older than 10 years is okay. So any bankruptcies less than 10 years may disqualify you. And then foreclosures – any type of foreclosure and any summary judgments, and that could be for any reason. Any summary judgment, which is basically a court order settlement in which somebody has won a claim against you for any reason, any business, lawsuit, any real estate, and which you’ve obviously not been able to settle or pay, and therefore it lines up on your credit report… Because often there’s no real explanation of that on the credit report, there’s not much detail, so you then have to ask the credit applicant “What is this? What was it for?”

And usually, another thing is self-employed people who are living off the cash flow of some real estate investment. If you have one or two or three single-family rentals and that’s all you have, but that income is what’s supporting your family, that doesn’t bode too well for the lender… They see that you’re generating enough income obviously to support your family or your house (even if you’re single), but it doesn’t leave anything to service the debt of another loan or to give you any cushion in the events of some financial hardship. It’s just too tight. They like to see people who don’t have to depend on their commercial real estate investments or even their single-family real estate investments, they don’t have to depend on it to pay their bills.

Now, if you have a huge portfolio and you’re making 200k/year off your real estate, that’s fine. But if you’re just barely getting by and you’re trying to buy your next deal, that’s a little bit of risk to the lender. So self-employed people have to be pretty well established.

Joe Fairless: What type of loan-to-value ratios should we project when we’re initially running numbers on a stabilized multi-family property of about 30 units?

Michael Reinhard: 80% is the standard loan-to-value for a multifamily apartment building. Anything commercial-wise – an office building, a retail center, industrial warehouse, a medical office – is 75%. But there are some exceptions on the 80% for multifamily, and that would be depending on the debt coverage ratio – how much the debt coverage ratio is, how high it is, the income of the borrower and the strength of credit worthiness and financial strength of the borrower.

If you don’t have much net worth and you’re trying to do your first deal or your second deal, they may say “Well, we’re not gonna provide that much leverage. We’d rather limit out exposure to 75% and not 80%.” So if all looks good – good income, decent net worth – you can always pretty much get an 80% loan. But there are extenuating circumstances that may limit to 75%. In each deal, all of the information has to be considered: the borrower information and the property information… And the age – it could be an older property in a rougher neighborhood. It’s really subjective, so it’s up to the chief credit officer, chief lending officer to determine whether they can go that high.

Joe Fairless: Michael, what is your best real estate investing advice ever?

Michael Reinhard: I know this sounds simple, but not to overpay for properties based on when cap rates are trending down. Right now, and what’s gonna happen to my clients that have five-year money with banks – interest rates are gonna go up, and cap rates that are now in the 6%-7%, if they don’t go up with interest rates, a lot of borrowers are gonna be stuck trying to refinance a property five years from now at a much higher interest rate, and I’m talking about 7%, where now the lender is making more money than the investor is.

So it has to do with buying at the right cap rate. Don’t buy into this notion “Where else are you gonna put your money?” 6% is a good return, but you can get burned in real estate using that logic. So no matter how badly you wanna buy a property and how you wanna get into this market and get in the game, patience pays off to make sure you start off with a good at least 7,5%-8% cap rate. Because interest rates are gonna go up, and a lot of people are going to be in shock three and four years from now.

If you don’t have rental rates that are  increasing to increase the value of the property, it’s gonna be a little bit more difficult to refinance. And what’s gonna happen, your return on your equity is going to plummet if you had paid too low of a cap rate in a rising interest rate market.

Joe Fairless: Good cautionary advice, that’s for sure. Thanks for sharing that. Are you ready for the Best Ever Lightning Round?

Michael Reinhard: Absolutely!

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

Break: [[00:21:52].16] to [[00:22:34].14]

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

Michael Reinhard: Hamilton, I just finished it… Alexander Hamilton.

Joe Fairless: Oh, yeah…

Michael Reinhard: I just finished reading it, and I was like “This guy is a genius!” He’s a financier; this guy was a genius. He created our financial system.

Joe Fairless: There’s a couple books out about him… I’ve got a gigantic one that I’m about 20% of the way through; I’ve been working on it for about six months. [laughs]

Michael Reinhard: Yeah, Alexander Hamilton is the name of the book… Ron Chernow is the actual book that inspired that musical Hamilton.

Joe Fairless: Okay, got it.

Michael Reinhard: It’s 800 pages long. He created our financial system, he created basically our mortgage system… It’s amazing. This guy was [unintelligible [00:23:15].24] He died at the young age of 49. He just wasn’t given the credit that he deserves.

Joe Fairless: Best ever transaction you’ve done?

Michael Reinhard: I placed some preferred equity for a group that was buying a multifamily property in San Antonio. They had the deal under contract for a long time, and the investors were just coming up short — well, they weren’t just coming up short; they were about 3-4 million short of raising their equity, and they had literally three weeks to close. I was able to bring in that preferred equity lender that provided 3.2 million dollars in equity that was able to salvage the deal; earnest money was hard at risk, and I made a handsome fee on 3.2 million dollars.

Joe Fairless: What type of rate would that preferred equity partner charge?

Michael Reinhard: It was 15%, but there was no carried interest, or what they call “No promotion”, meaning that they had a superior position of preferred equity versus the common equity, but it was priced like mezzanine financing, which is like a second loan. That means they’re just saying, “Look, all we want is the 15% annual return. We don’t get any of the upside, we don’t get any of the profit. You sell it, you finance it… We don’t get any more. We’re not going to increase our return”, where a joint venture equity investor would say, “Okay, I’m going to get a 8% preferred return every year, and then I’m going to get 50% of the cash flow when they sell it.”

Well, then if you do an internal rate of return calculation over that three, four, five-year period, you could have wound up making a 20% internal rate of return. Well, it was simple; it’s just a plain, non-compounding 15% return on the investment. If they invested three million, they’re gonna make $450,000, and that’s all they get. After the another three years, they just get their 15% for over three years. They don’t get anything more and nothing less.

Joe Fairless: That was a three-year term…

Michael Reinhard: Yeah, it was to be a three-year term and they had an option to extend, so if they needed more time, they would have given them another year.

Joe Fairless: That’s interesting.

Michael Reinhard: Yeah, so they wouldn’t have made any more or less; they would have gotten their $450,000 for those three years, and no matter how much the sponsor — if they made a two million dollar profit, the preferred equity lender would not get any of that.

Joe Fairless: Did they buy this property all cash?

Michael Reinhard: No, that’s why it was the best deal ever, because there was an existing HUD loan that they were assuming. And there were some complications under any kind of a Fannie Mae, Freddie Mac or even an FHA HUD loan, because they don’t allow hard second liens, they don’t allow a pledge of the partnership interest that mezzanine financing usually involves. This lender is familiar with all of those loan covenants and requirements, so they’re able to structure the partnership agreement, basically amend the partnership agreement to secure their investment right… Because they weren’t taking an ownership interest, but they have certain rights and remedies, and if they didn’t pay back that 15%, then they could essentially take over — really, they actually provided credit enhancement to the transaction, because the company is well capitalized and actually is probably worth more than the investor sponsorship. So those first lien lenders – they’re fine with that.

So time was running out, the approval of that assuming that loan was running out… This group was able to work through the terms of the partnership agreement and within three weeks analyze the transaction and make a decision and fund it in three weeks. It was actually less than that, because the borrower was really becoming a little difficult to deal with because they were making some demands, and I said, “Don’t look [unintelligible [00:27:22].21] I said “This is a good deal, quit pushing back.”

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

Michael Reinhard: Education. I’m always helping people. I do my own tax returns, so I have a lot of people that have nothing to do with real estate, but just sharing information, networking and sharing… I believe that sharing and helping people in areas that you have a specialty and knowledge in — I always find it rewarding to share my experiences and help people. I believe that if I can help you make money or help you achieve your goals, some day you can reciprocate. When someone calls me and asks me for advice, I don’t hurry them off the phone. I’m glad to help someone or refer them to somebody else that could help them… Because I know how frustrating it can be.

I had some accounting questions and tax questions; I was so frustrated with the actual CPAs that I felt like they didn’t know what they were talking about. I actually called the IRS and did all the research and I figured out how to solve this problem of mine. Now, anytime that you spend that much time and effort, then at that point you’ve become an expert, because now you can share that and save somebody else the grief, or getting wrong information. There’s plenty of wrong information out there.

Joe Fairless: That’s a perfect segue into — not the wrong information part, but the reaching out and talking to people… That’s a perfect segue into the last question – where can the Best Ever listeners get in touch with you?

Michael Reinhard: They can reach me at my website at www. texascommercialmortgage.com. I also have a website for my book – www.commercialmortgages101.com. So you can go to my website, texascommercialmortgage.com and I have a link to the book’s website, and I have a phone number on my website. They can call me, or you can send me a message from my website, or give me a call.

The book is available also on Amazon and Barnes & Noble, but I do have a website, and if you order the book from my website, I’ll actually mail you a signed copy. If you order it from Amazon or Barnes & Noble, I’m unable to sign it.

Joe Fairless: Michael, thank you for being on this show, sharing your best advice ever, talking about the differences between commercial and residential loans, as well as the things we need to make sure we have taken care of prior to applying for a loan. One is credit score 600+, two is net worth of equal the amount of the loan, three is liquidity 10%-20% of loan amount after closing, four is experience of the owner (our experience), and five is our global cash flow. Thanks so much for laying that out there so clearly, as well as talking about the things that would dissuade a lender from lending to you… You mentioned a list of those as well. And then the interesting story about the 15% interest equity partner for that three million dollars in a very short amount of time.

So thanks so much for being on the show… I hope you have a best ever day, Michael, and we’ll talk to you soon!

Michael Reinhard: Thank you, Joe!

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real estate pro advice

JF839: $30,000 Wholesale Deal All from Sitting Behind the Computer and Phone

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He is well-versed in SEO and owns some pretty sweet domains that wholesalers would drool over! Hear how he makes pretty big checks behind a computer and the phone and how easy it is for anybody to get started.

Best Ever Tweet:

Raymond Campbell Real Estate Background:

– Owner of Raymond D. Campbell Enterprises, Inc.
– Chief Profit Engineer at Plum Creek Assets LLC
– Focuses on the purchase of real estate mortgage loans / liens / notes at 50% to 80% discounts
– Owner of multiple real estate websites that are designed to homeowners who want to sell quickly
– Based in Houston, Texas
– Say hi to him at www.plumcreekassets.com
– Best Ever Book: More Than a Carpenter by Josh McDowell

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JF833: How Artificial Intelligence is Used to Filter and Delivers HOT Leads

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Lead generation has now become computerized, so creating an artificial intelligence atmosphere on social media streams is cutting edge. Hear how our guest has a leg up on the competition by filtering and delivering the best leads online. Hear it now!

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Ron Sasson Real Estate Background:

– Founder Skyler360
– an ecosystem startup to engage customer, clients, partners, and organizations
– Currently focused on real estate residential and commercial vertical
– Active real estate broker and former financial consultant
– 13 years experience in property management for commercial and residential properties
– Based in Houston, Texas
– Say hi to him at http://skyler360.com
– Best Ever Book: Start with Why by Simon Sinek

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JF555: How This Investor/Biz Owner Retains and capitalizes on AMAZING Clients Through REALTORS

Today’s guest has a program all property management business owners needs, and it’s all about quality retention. He shares what he has learned over the years in regards to marketing and business development. He is not new, and has some advice for the small apartment owners to the heavy hitter community investors. Listen in!

Best Ever Tweet:

Pete Neubig Real Estate Background:

  • Co-founder and CEO of Empire Industries and president for the National Association of Residential Property Managers (NARPM) Houston Chapter
  • Has grown Empire from 0 to 500 doors under management in three years and is based in Houston, Texas
  • Say hi to him at http://www.empireindustriesllc.com/
  • His Best Ever book: Think and Grow Rich by Napoleon Hill

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Are you committed to transforming your life through Real Estate this year? If so, then go to http://www.CoachWithTrevor.Com and claim your FREE Coaching Session.  Trevor is my personal real estate coach and I’ve been working with him for years. Spots are limited, so be sure to do it now before all the spots are gone.

Subscribe to Joe’s YouTube Channel here to learn multifamily and raising money tips:https://www.youtube.com/channel/UCwTzctSEMu4L0tKN2b_esfg

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JF479: Be Grateful Always #followalongfriday

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Update on Joe’s new acquisition in, drumroll, HOUSTON! Joe shares the complexity of his Cincinnati apartment community and the attorneys involved. Listen in and follow along with Joe!

Best Ever Tweet:

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

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Made Possible Because of Our Best Ever Sponsors:

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JF452: Losing Rental Income Epidemic and How to Turn it Around #situationsaturday

Losing money on a rental portfolio is a drag…and our Best Ever guest knew he had to turn it around. He slowly began the work to gut one of his properties where he needed to evict and came to the realization that he shouldn’t be the one cleaning…5 hours later and a wakeup call from his partner, he vowed never to waste valuable time again. Property management and more…tune in now!

Best Ever Tweet:

Steve Rozenberg’s real estate background:

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What’s the Best Ever health plan for YOU?

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JF398: College Dropout Taking the LEAP of Faith to Six Figures

So you are half way through college and suddenly loath the idea of six years of school to end up working for “the man”…ready to dropout? Our Best Ever guest did! He left his job for a seminar on REI 100% committed, Today he shares is goals, REIA networking tips, and his Best Ever advice that you cannot miss!

 

Best Ever Tweet:

 

 

Ross Alex’s real estate background:

  • 25 years old and based in Houston, Texas
  • After 1.5 years he started flipping
  • He is flipping 3 – 5 houses a month
  • Say hi to him at flippinginaction@gmail.com

 

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JF 382: How She Saved a BILLION Gallons of a Vital Resource! #situationsaturday

Wondering why dollars are leaking from you bank account every month? A drip here and there will impact your net operating income MASSIVELY; we are talking hundreds of thousands, even millions, down the drain! Today’s Best Ever guest is a water conservation expert, and she has saved billions of gallons of water for countless property managers across the map. You will hear a couple water saving tips that will crank your multi-family investment’s cap rate up a notch, don’t miss out!  

 

Best Ever Tweet:

 

 

 

 

Katie Anderson’s background: 

 

  • Founded Save Water Co and was named Forbes Magazine’s 30 Under 30 in 2015 for her water conservation work

  • Focusing on the apartment industry, she has performed water audits in over 150,000 apartment units nationwide conserving just under 1 billion gallons of water and providing big savings towards owners’ and residents’ bottom lines

  • Say hi to her at http://savewaterco.com/ 

     

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JF377: How He Bought 8 Rentals in 4 Months!

Starting at age 27, our Best Ever guest made an easy $8,000 return on his first fix and flip! His tenacious 30 offers a day with the help of a determined virtual assistant gathered big returns. One of his most noteworthy investments was a single family residence he was inches away from selling…but before he completed the wholesale transaction, his mentor gave him a better idea…you’ll be on the edge of your seat once you hear how it turned out!

 

Best Ever Tweet:

 

 

 

 

Ehab Shoukry’s real estate background:

 

  • Two-time air hockey world champion who has worked in corporate America for the last 15 years

  • Dabbled in real estate at 27 but got serious this year and has purchased 8 rentals in four months

  • Target price range is $55,000 with monthly rent around $1,100 to maximize cash-on-cash return

  • Based in Houston, Texas and say hi to him at http://www.rockethousebuyers.com 

     

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JF186: Pros and Cons of Using Hard Money

Ever wanted to use hard money but wanted to know more about it? Well, listen up my friend. Today’s Best Ever guest shares with you the pros and cons of using hard money.

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Darel Daik’s real estate background:

–        Founder of Noble Mortgage and Investments

–        Hard money lender and also offers conventional financing in the major Texas markets

–        Been in business over 19 years and is based in Houston, Texas

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JF172: Pros and Cons of Investing in Low Income Properties

Today’s Best Ever guest shares why he went back to buying single family homes after dabbling in wholesaling and apartment investing. He also talks about low income housing and how to effectively manage low income properties.

Best Ever Tweet:

Steve Rozenberg’s real estate background:

–        Property Manager at Empire Industries based in Houston, Texas

–        Licensed real estate agent with over 13 years of owning and operating properties

–        Has flipped and negotiated hundreds of transactions

–        Currently focused on single family home properties

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JF 153: How to Make Money from Small Apartments

There are ways to get economies of scale with small apartment buildings and our Best Ever guest shares how you can create that economy of scale and make money with them.

We also talk about creative financing to do deals with no money of your own.

Best Ever Tweet:

Lance Edwards’s real estate background:

–        Author of How to Make Big Money in Small Apartments

–        Multifamily investor who has done deals ranging from 3 to nearly 300 units

–        Active investor since 2002 and is based in Houston, Texas

–        Say hi to him at http://www.bigmoneyinsmallapartments.com

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JF 90: Realistic Blueprint to Financial Independence in 3 Years

Want to hear how to create enough cash flow to replace your full-time job? Today’s Best Ever guest talks about how he and his wife created enough cash flow to replace their full-time job incomes in just 3 short years.

Tweetable quote:

Cuong Le’s real estate background:

–        Husband/wife team investing since 2011

–        Control over 1.2MM in real estate

–        Just rehabbed and rented out 8th property which now allows him to replace his income from his full-time job

–        Control over $1.2M in real estate

–        Say hi to him at http://www.newrenthome.com

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