JF1637: Sales Skills Helped Him Build A Fun & Lucrative Real Estate Investing Business with Chandler David Smith

In one summer, Chandler signed up 450 homes on pest control contracts, putting about $96k in his pocket. He still leads sales reps, and points out the direct correlation between success in sales and being a successful real estate investor. Most important trait for success in either field? Chandler says hard work will get you there, but he also has tactics to share. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

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

With us today, Chandler David Smith. How are you doing, Chandler?

Chandler David Smith: Doing great, good to be here.

Joe Fairless: Yeah, nice to have you on the show. A little bit about Chandler – he is a real estate investor, and he has been one for the last five years. He has invested in 60 doors that gross $300,000/year. He’s based in Idaho Falls, Idaho, and you can say hi to him at his website, chandlerdavidsmith.com. With that being said, Chandler, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Chandler David Smith: Yeah, I started in sales, actually knocking doors, and I created a great income knocking doors and creating a sales team. Then from there I needed a place to put my money in. I looked around and I had a mentor that helped me get into real estate.

I started with a condo, and really fell in love with the cashflow that was coming in, and so then it turned into another duplex, and then another duplex, and then fourplexes, and an eightplex, and this last year I just purchased a 24plex. It’s been a ton of fun, and I’ve really fallen in love with real estate, and sales, and everything involved.

Joe Fairless: Well, let’s talk about it. That’s some pretty fun stuff. So you started in sales, knocking on doors – what were you selling?

Chandler David Smith: I was actually selling pest control contracts, door-to-door.

Joe Fairless: Of course you were, yes. That would have been my first guess. Okay, pest control contracts. What was the revenue share or how much did you make per contract that you signed up?

Chandler David Smith: My commission increased the more that I sold. My first summer I went out and they said in a four-month period I could probably make 20k if I was average. I ended up selling 459 accounts. Your commission starts at 25%, but because I sold as many as I did, I actually worked all the way up to a 50% commission. Each of those contracts were going for somewhere between $500 and $550 per contract.

After doing that, I came home and after cancellation and everything else I made about $96,000 that first summer.

Joe Fairless: Goodness gracious! How many accounts did you sign up?

Chandler David Smith: 459 accounts, in a little under four months.

Joe Fairless: Okay, well, what’s the secret there? How did you do it?

Chandler David Smith: Honestly, I think people put a lot of sales into your natural skillset you’re born with. I honestly believe a good salesman is someone that works harder than anyone else, and can stay positive through rejection. I think that’s a big reason that real estate has gone so well for me; those are two things you need to have to be successful in real estate – you need to get through a lot of rejection, and you need to have that confidence and that work ethic to find those deals. I think those are the two biggest traits that have helped me in not only sales, but also in real estate.

Joe Fairless: When you say work harder — and thank you for drawing that connection to real estate, because that’s where I was going with it, but you did the work for me, so I appreciate that… On the sales front, because there’s such a direct correlation with what we do as real estate investors, I wanna just learn a little bit more about this. When you say you’re working harder than others, you signed up 459 accounts over a summer – how many homes did you have to visit in order to do that?

Chandler David Smith: I was probably knocking close to 300 doors a day. Now, a lot of those doors aren’t answering… I would say I got to the point where one out of every seven or eight people that I spoke to, I could get them to buy pest control. So a lot of the work is finding the people that are decision-makers and that are home, and it’s a ton of time.

I think one thing that I teach my reps – because I’ve kind of grown into where I manage hundreds of sales reps that are now doing the same thing, but it’s all about consistency, but also working just a little bit harder than everyone else. Everyone thinks that I was ten times the worker, but really it’s that last hour where I was working where other people weren’t, or it’s that extra 30 minutes before bed where I was training where others weren’t… And I think it’s the same with real estate. Again, it’s not these huge things, but it’s that little extra effort at the end, that last 5% to 10% that you put in that really can put you ahead.

Joe Fairless: It reminds me of when Tony Robbins talks about lifting weights and doing reps. When you do ten reps, what rep gets you the strongest, and that really strengthens you, and its rep eleven. It’s so true. You said one out of seven or eight that answered the door would buy… Was there any follow-through that you had with the other six or seven that did not purchase?

Chandler David Smith: I think not necessarily follow-through, because it’s a pretty quick sale. It’s not like a “schedule an appointment, go back”, it’s on their front door… But 100% I think what people don’t realize is each one of those seven or eight that I didn’t sell, there was a good 15 to 20-minute back and forth, and answering questions, and resolving concerns, and pushing through, and doing all of that work and not see the end result of selling them… But you just need to remember, all of that is part of the process to getting to that one sale.

Joe Fairless: Every no leads you closer to a yes, right?

Chandler David Smith: Definitely.

Joe Fairless: Okay. That’s very helpful. So you started out with a condo, then a duplex, then a duplex, then a fourplex, then an eightplex, and recently a 24plex. Were you using new money for each of these properties, or were you doing a different strategy that you rolled one from another to another?

Chandler David Smith: You know, it’s funny that you ask that, because I have since learned lots of strategies, and last year I bought another fourplex by doing a 1031 exchange, using money from a single-family home that I had… So I’ve definitely gotten more creative as time has gone on, but if I’m honest with you, most of my properties have been just because I’ve saved that money that I got from selling pest control door to door, rather than doing something else with it.

I think that’s a big principle that I really try to live by – I love the concept of living within the means of your passive income. Because all my properties have gotten to the point where they’re cash-flowing six figures now, but I didn’t live the lifestyle I have now while I was trying to build that. Even though I had an active income that was creating a ton of money for me, I was living with the minimum that I could to still get by and be happy, while putting all of the rest of it into real estate.

So for me, I’m unique, because I had a job that was paying really well, but I think everyone should kind of view it that way, where you don’t live outside of your means until your passive income can pay for it.

Joe Fairless: So the properties that you own, you’ve got 60 doors – profits every year are $300,000 in your pocket, from your 60 doors?

Chandler David Smith: No, so I’m grossing over $300,000, but I’m cash-flowing right around the $110,000 to $120,000 every year now.

Joe Fairless: Wow, that’s incredible. That’s some good stuff. The type of financing you have on these deals – what are you doing with them?

Chandler David Smith: On all of my four units or less I’ve got 25% down on a 30-year fixed. Obviously, rates have started going up recently, but I jumped in on a lot where rates were great – high fours, to fives on a lot of them. I think I even had some that were in the lower fours, but I got in where there were some great rates to be had on those. On my eightplex I’ve got a commercial loan, and I’ve got a balloon payment at ten years; it’s on a 25-year amortization schedule, and I think my rate was slightly higher on that… But I just got an incredible deal, because it was one of those where I saw it was in an older gentleman’s IRA and he hadn’t raised rents forever… So I bought it where it was a decent deal, but within a year I had all of the rents for each unit raised over $100, so I got back to where it was cash-flowing extremely well.

My last purchase though was that 24-plex. I got really lucky with that one, because it was a seller-financing… So he ended up giving that to me with a much lower down, and did a 20-year fixed at a 5% interest rate. So that one has been a blast just because you don’t find deals like that a lot, but he wanted to have consistent income coming in, because now he’s retired… And the 20-year – I had to push for it, because he told me “I don’t know that I’m gonna be around that long…” We were able to put it together, so that’s been really exciting, because on those bigger properties – I love getting into them; the only thing that makes me a little nervous is when that rate does change every five years, and it’s hard to get a loan on those without a situation like that. So that’s been my situation with all of them.

Joe Fairless: Is that 20-year fixed amortized over 20 years as well, so it will be paid at 20?

Chandler David Smith: It is. I don’t have the rates changing every five years, I don’t have any of that. It’s just a 20-year fixed, so it’s awesome.

Joe Fairless: How did you find the eightplex that had the pretty good value-add?

Chandler David Smith: There probably aren’t a lot of people that know about it, but in Rexburg, Idaho there is a university that’s owned by a church. And they had come in, and I saw that they were building, so I felt it was good, but they had come in and said that they were gonna be building a lot, and adding a lot of students, and this property was actually in a gentleman’s IRA, so he really just hadn’t been looking at it… So when I looked at the numbers–

Joe Fairless: How did you find it though?

Chandler David Smith: I was just on the MLS, believe it or not.

Joe Fairless: Okay, got it.

Chandler David Smith: Yeah, and when I looked at the numbers I really wasn’t super-excited, just because it looked like a mediocre deal, but when I called on it, his whole pitch was “Hey, check this out, there’s actually a 40-person waitlist, so you never have to worry about vacancy.” And anytime anyone says something like that to me, my first thing is “Alright, we’ve got tons of room to move rents.”

So I went over to the property, and the bedrooms were just ginormous. This was one of the biggest two-bedroom apartments in the whole town, and I could tell that it really was in good shape and that the rents were just way low. So once I found that, I knew it was good and jumped on it, but then I also got a lot of luck with the next couple years with the school splitting.

In that first year I had them raised over $100, but these units were at $550, and now it’s three, four years down the road, all of my rents are right around $700 to $750. So it’s just blown up the last little bit because of that growth as well.

Joe Fairless: What did you buy it for?

Chandler David Smith: I bought it for $420,000.

Joe Fairless: And what’s it worth now, would you say?

Chandler David Smith: With those rents, I’m guessing I could at least sell it for over a million.

Joe Fairless: Yeah, it’s a significant rent increase.

Chandler David Smith: For sure. And that’s the thing – that has been one of my funnest ones to watch the appreciation on it, just because I bought it smart, but with what that city is doing, not only now have the rents gone up like crazy, but a lot of investors have come in. So when they were buying at 5 to 7 cap, you’ve got investors now that are coming in and they’re happy with a 3 to 4 cap, which to me seems crazy, but if I could sell it at that when it does come time, it’s gonna be awesome.

Joe Fairless: What town in Idaho are people buying at a 3 cap?

Chandler David Smith: In Rexburg, Idaho. There are just tons of new developments and all kinds of stuff going in, and if you look at it, it’s absolutely absurd what people are pouring money in for the return that they’re getting.

Joe Fairless: Rexburg, Idaho – population 25,000.

Chandler David Smith: Yeah. [laughs] And growing fastly.

Joe Fairless: And growing fastly. The 24plex, seller financing – what did you buy that for?

Chandler David Smith: I bought that for 1.2 million.

Joe Fairless: And it’s seller financing, so you didn’t use a bank… What’s the business plan?

Chandler David Smith: For that – it’s kind of a unique situation, because again, it was a chance to add to the rents, but it actually had a commercial building right next to it… So with this one I was doing pretty well cashflow-wise, without the commercial building, but currently we’re renovating the commercial building, so we’re gonna be able to add two two-bedroom apartments and a one-bedroom apartment. And what’s so cool about it is I was cash-flowing before adding that and those extra rents. So that’s where I saw a ton of value. Overall, it was still a pretty good deal, but our gameplan is just to go in, see if we can raise all of the rents over the next year, $50 or so on each of the one-bedroom apartments, and then renovate that commercial building so we can add two two-bedroom apartments and one one-bedroom apartment, that will hopefully be able to get filled and increase the rents with that as well.

Joe Fairless: And you mentioned it’s a commercial building… Did you have to do anything with zoning?

Chandler David Smith: It’s been a little hairy, because we haven’t known all of the permits we should change. The reason for it is it had a dwelling in it. So it was set up as a bigger commercial building, where someone was living in half and using the other half for their commercial space.

Out here in Idaho maybe we’re a little chill than we should be, but we called in and they said “You know what, honestly we think you’re gonna be okay with the changes you’re making without pulling a ton of permits.” So I think we’re still gonna pull some permits when it comes to the electrical and the plumbing, and I’m gonna have good electricians and plumbers in there doing that; they’ve already come in and looked it over, but the transition shouldn’t be super-crazy on it, because they were already having people live in part of it.

Joe Fairless: And why do three more units with the commercial building, versus renting it out as a commercial building and having a business come in?

Chandler David Smith: The biggest reason we wanted to transition is right now with these units I think out of the two-bedroom apartments I can probably get $700 to $750 out of both of them, and then on the one-bedroom I’m probably gonna be able to push $600, $650, just because it’s much bigger and it’s a good little space, especially after we’re renovating them and making them new… Where if I were to put a commercial tenant in there, I probably would have spent a similar amount, but I think I was probably topping out probably $1,400-$1,500, if that, [unintelligible [00:16:24].16] So if I’m gonna spend the same and I can get three tenants in there that’s gonna up my cashflows even more, we just prefer to do that.

The other thing is I’m really comfortable with that, I know what I need to do, where if I’m honest with you, if I was gonna renovate a commercial space to try and get people in there, I don’t think that I have the knowledge base right now to do it, so it would have been more work; and everyone I talked to said “Even if you did, this is probably where you’re gonna be”, so I figured “Why not do what I know, what I’m comfortable with, and what it looks like it’s gonna end up making more money?”

Joe Fairless: What’s a project that’s made you the least amount of money, or lost money?

Chandler David Smith: I would say early on before I got into it I had a lot of money that I was sitting on, before I got into investing, and I did some hard money deals. And on those, I did decent, and I never lost money on them, but I think looking back, the risk that I took on some of those deals, I probably should have lost money, if that makes sense.

I think it was tempting to get into that because I had a somewhat decent interest rate, but I probably wasn’t doing things properly on that, as I should have. I was just looking to try and make a buck and not doing the research that I should have. So I would say that was probably one of the areas that I messed up, and luckily it didn’t bite me as hard as it probably should have.

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

Chandler David Smith: I think the biggest thing I would say is get in as soon as you can. I see so many people, especially reps that work for me now, that are making huge incomes, even six-figure incomes in their twenties, and they’re blowing the money, or sitting on it, or the nerves get them… I look back at that first condo that I bought – it really wasn’t a great deal. I wasn’t getting a good return, I paid cash for it, I hadn’t leveraged that money… I made all of these mistakes, but because I got into that first property, it really gave me the energy and the enthusiasm to get into more, because I saw “Holy cow, I’m still getting a rent check every month. This is incredible.”

So I would tell people, look, get in as soon as you can, and if you make mistakes, that’s okay. If you buy a deal that’s maybe not as good as what you’ll learn to buy, that’s okay… Because it’s gonna give you that excitement and that enthusiasm to continue to invest, and to see the benefit of saving money and putting it into real estate.

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

Chandler David Smith: Yeah, let’s do it.

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

Break: [00:19:02].06] to [00:20:03].08]

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

Chandler David Smith: Happiness Advantage.

Joe Fairless: What’s the best ever deal you’ve done that we haven’t talked about already?

Chandler David Smith: One of my duplexes that I bought for $95,000, and right now it’s free and $1,400 in rents every month.

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

Chandler David Smith: I did not look at the agreement properly when it came to closing costs, and it was just a stupid thing that I just went through the process, but I got taken pretty good on that when I never should have.

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

Chandler David Smith: Every year I do a Sub for Santa here in the Utah, Idaho area. It’s just been super-fun to go and see a bunch of different families and kind of provide them with Christmas. That’s been one of my favorites.

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

Chandler David Smith: If they hop on my website at chandlerdavidsmight.com, they can check out the jobs that I have in the summer sales, or I’ve done a ton of YouTube videos showing my properties and showing how I’ve gotten the returns that I have; so that would be a great place to look me up and see all that I’m up to.

Joe Fairless: Great stuff. Thank you for talking about your progression, starting in sales, and then now as a real estate investor… And congratulations on the 24plex with the seller financing. I think I asked you how you found the eightplex; how did you find the 24 one?

Chandler David Smith: The 24plex was actually a pocket listing that one of the realtors I work with brought to me. He knew I was looking, and he just thought it would be the perfect fit for me, so I was super-grateful for that connection, and that I was the first one he thought of.

Joe Fairless: Awesome. Well, thanks for being on this show. I hope you have a best ever day, and we’ll talk to you soon.

Chandler David Smith: Hey, thank you so much for your time.

JF1381: What Do Owners Of Billion Dollar Portfolios Look For In A Real Estate Investment? With David Stein

David is the host of the podcast, money for the rest of us, which discusses money at a high level. He leverages his experience of working with billion dollar portfolios to tell us normal folk more about how money works, how the economy works, and how we can leverage that knowledge to benefit us. Joe and David will discuss a lot of these same ideas and thoughts on today’s episode. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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David Stein Real Estate Background:

  • Produces and hosts the investing podcast Money For the Rest of Us
  • He was Chief Investment Strategist and Chief Portfolio Strategist at Fund Evaluation Group, LLC, a $33 billion institutional advisory firm
  • Say hi to him at https://moneyfortherestofus.com
  • Based in Idaho Falls, ID
  • Best Ever Book: Skin in the Game

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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, David Stein. How are you doing, David?

David Stein: I’m great, thanks for having me.

Joe Fairless: My pleasure, nice to have you on the show. A little bit about David – he produces and hosts the investing podcast titled Money For the Rest of Us. Previously, he was the chief investment strategist and chief portfolio strategist at Fund Evaluation Group, which is a 33 billion dollar institutional advisory firm. Based in Idaho Falls, Idaho. With that being said, David, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

David Stein: Sure. I spent 17 years as an institutional investment advisor. I was working mostly with not-for-profits endowments and foundations, essentially investing billion dollar type portfolios. [unintelligible [00:01:54].23] That was primarily in a consulting role… But about ten years of that I also ran a discretionary portfolio; we had the ability to choose which asset classes to invest in, which managers to invest in… So my background is really from an asset allocation background, and real estate is one of those asset classes that I’ve invested in; I’ve placed money with institutional partnerships, I’ve invested individually, and for the last four years I’ve run this podcast, Money For the Rest of Us, just teaching individuals how money works, how the economy works, how it all connects together.

We focus on investing across the board, in many different asset types, but just helping individuals invest essentially their retirement assets, and hopefully they will have enough to live in retirement.

Joe Fairless: Yes, absolutely. When you were working with the billion dollar portfolios and you were consulting in that position, what do you do exactly with a university or a large group that has a bunch of money?

David Stein: Your first step is they typically have some type of investment policy, and you help them structure that policy. A big part of that is what is their target rate of return, what’s their spending rate, and what should their target asset mix spend. You’re typically working with some type of investment committee or board, and once they have agreement on the asset mix and the spending – these strategic decisions – then you work with them to actually implement that. That could be with public markets, it could be private markets, it could be active or passive… It really most depends on the clients.

But within the real estate segment, they might decide that they wanna allocate 10% to private real estate. Your typical endowment is not gonna go out and find an apartment building to buy; they’re gonna hire an institutional real estate manager in some type of limited partnership structure, and then will invest in that manager who is charged with finding apartments, or finding commercial property office buildings, things of that sort. That’s how your typical endowment would invest in real estate.

Joe Fairless: Target rate of return – what’s typical?

David Stein: Well, I left about five years ago, and typical – they wanna make sure these assets last forever. A typical endowment will be spending 4%-5% of their assets, and then on top of that you’ll have an inflation. So if you assume 3% for inflation, then a minimum return was about 8%. So you have 5% spending, plus 3% inflation – that equals 8%, and ideally they would do better than that.

It’s been a much more challenging environment (as you know) investing, just because interest rates are so low. But that’s sort of the minimum, and that’s why many endowments and foundations and pension plans are moving more toward private assets, venture capital leveraged buyouts, private real estate, because they don’t feel like they can get the returns they want in the traditional public stock and bond markets.

Joe Fairless: You mentioned spending rate… Will you define that for me what that means?

David Stein: Sure. Let’s say it’s a college endowment – they’ll have a typical spending policy, and they might say, as they set their budget, that “We are gonna spend 5% of our average market value of our asset base over the past three years.” So they’ll do a calculation and they’ll determine, “It’s 20 million dollars that we can spend based on our specific policy”, and that gets pulled out of those endowment assets and they get spent. So that’s what I talk about spending rate.

It’s similar to a retiree, where a retiree decides they wanna spend 4% of their retirement nest egg in a given year. Endowments and foundations do the same thing – they say they wanna spend a certain amount of money each year based on some type of spending policy.

Joe Fairless: Oh, okay. Got it. It’s like their working capital that they’re choosing to allocate towards whatever expenses they have?

David Stein: No, it’s just more their endowment or long-term assets, so into perpetuity. They’re deciding “Okay, of this huge 100 million dollar asset base, how much can I pull out this year to spend this year on our operation?” It’s working capital, but it’s just “What percent of these long-term assets am I gonna spend each year?” Because what an endowment is trying to do is to achieve what’s known as inter-generational equity. They don’t wanna spend too much in any given year, because then there won’t be enough assets for the generations ahead. And they don’t wanna spend too little, because then the students today at a particular college are missing out. There’s a fine balance to spend enough to benefit the current generation, but to make sure those assets are there into perpetuity.

Joe Fairless: Is 5% the typical amount?

David Stein: That was, and in fact, private foundations are mandated by law to spend 5%, which we’re seeing in the university space because expected returns are much lower; they’re creeping down to 4% or so.

Joe Fairless: The effective spending rate, because most of them have used some type of average of the value of the endowment over the previous three years, assuming the market is appreciating, that takes that net spending rate a little less than 5%. But you’re seeing a push to drop the spending rates just because the average college endowment over the past 10 years  – this is from the annual [unintelligible [00:07:24].24] they earned (on a nominal basis) 4.6% over the past decade, on an annualized basis. So if you’re spending 5%…

Joe Fairless: Yeah, that’s not good.

David Stein: …and you’re only earning 4.6%, those assets are gonna be depleted over time unless they find a way to either lower spending or increase the rate of return.

Joe Fairless: How are they only making 4.6%? What are they doing wrong?

David Stein: This is over a decade; I wouldn’t necessarily say they’re doing wrong. That’s the average of about 809 endowments.

Joe Fairless: Was that through 2008? Was that the decade that it covered?

David Stein: Yeah, so this was 10 years ending June 30th, 2017. So it included 2008 – you had the drawdown, you had the recovery… But over that time frame, bond returns were low, stocks returns were low. Some of the bigger endowments did better than that. But that’s just what the markets gave. It’s not so much they did something wrong. Retirees, if they calculated, did a similar thing. They would find their returns were probably in that 5%-6% range.

Joe Fairless: As far as the asset classes, you said later you were helping choose which asset class they should invest in… I believe you said that. Is that correct?

David Stein: Well, our typical relationship – you would always work with a board, and you would make a recommendation, and they would decide they wanted to invest in a certain manager or a certain approach.

When we ran more of a — it’s called an outsourced CIO, or outsourced Chief Investment Officer, the board would set the policy, and then we would decide “Okay, we want so much in U.S. stocks. We wanna go with this manager.” We would often work with them on the private side, but generally speaking, we had more leeway to adjust the allocation based on market conditions, essentially… So if the risk of recession was high, or some asset class was overvalued, we would reduce exposure and not have to always go back to the committee every quarter to get them to buy into the decision.

Joe Fairless: So I’m sure we’ve got a listener – or perhaps multiple Best Ever listeners out there – who is thinking “Man, how can I be that manager where a Texas university [unintelligible [00:09:30].19] in this case, or anyone that had that billion dollars, or the consulting group were to pick me as a manager that they wanna invest a whole bunch of money with?”

David Stein: Well, first, institutions are very risk-averse, so they’re not picking bees; they’re picking, essentially, asset management firms that have been in business for several decades. It’s hard for an individual – even a small group – that’s done mostly retail to get into the institutional space. Many of the institutional managers broke away from other institutional managers just because of how risk-averse institutions can be… And allocating those assets – they look at what their peers are doing…

So the best way, I guess, if somebody wanted to get involved, is to become an employee – let’s say a private real estate manager; start as an analyst, work your way up and sort of get part of that. Then we’ve seen those that have had 10-15 years experience break off and start their own firm, and they might have those relationships.

And again, it comes down to performance too, in that institutions want a proven performer that has shown the ability to buy assets right, be able to improve the real estate asset, and then liquidate and get it sold.

Joe Fairless: When you said retail earlier, who’s buying retail mostly – can you elaborate on what you mean by that?

David Stein: Yeah, by retail – the end client or individual investors, as opposed to institutions. You’ve probably seen this in the real estate space, where you see deals that are put together where they’re trying to raise capital – often times they’re raising it from individuals in some type of structure; that’s usually called retail money – retail just because it’s individual money… As opposed to institutional money, which would be the opposite of retail money, which is big endowments and foundations.

Not that one is better than the other, just a different market segment. It’s not that one can’t make money investing in real estate in retail type deals, but that’s just the distinction in terms of the playing field that the various operators are operating in.

Joe Fairless: I’m sure I know you learned a lot from that experience working in that position in particular, and then also just throughout your career… When you take those lessons and you apply them towards your own investing, what does that asset mix or allocation look like?

David Stein: Well, my personal approach is to have as many different portfolio drivers as possible. I’m a risk-averse investor by nature, and as a result, I wanna have public equity, but it’s less than 20% of my holdings. I have fixed income, I have gold, I have cryptocurrency, I have real estate, I have venture capital… So as many different pockets, both public and private, outside of the financial system. I own land… And that’s just not knowing what’s gonna happen 10 years from now in terms of markets, inflation, government… You just never know.

Your typical endowment is just as diverse. Maybe they’re not doing Bitcoin, but certainly they’re trying to get the diversification. There are many asset classes out there, and there’s many structures, and I’m always experimenting. But at the end of the day I’m trying to preserve capital, earn a decent return. I target a rate of returns of 5%-6% on my portfolio.

The other thing I learned is just to be patient. The market is what it is. In an environment now for real estate where cap rates are 4%-5%, in my mind that’s not an attractive environment to be, going into equity real estate deals.

Joe Fairless: The target rate of return 5%-6% – what’s inflation?

David Stein: 2%-3%. I’m not trying to earn much; I’ve got 2%-3%. At this point I’m just trying to maintain essentially my nest egg and keep up with inflation. So if I can earn a little bit more above inflation, I’m content. I’m not in the accumulation phase. I sold my investment partnership, and at this point I make enough money to live on through my podcast Money For the Rest of Us. I’m not in a situation where I have to earn enough (7%, 8%, 9%) because I’m still accumulating. I’m fine earning inflation plus a point or two.

Joe Fairless: You mentioned you’re as diverse as possible with your portfolio, and I’m sure you’ve come across some investment approaches that didn’t work or investment classes that didn’t work, and then some that really did. What’s an example of each of those extremes?

David Stein: Well, I mean, let’s focus on real estate, because I think investing in real estate – particularly if you wanna manage your own property – is a lot of work. There was a college town that we were living in Idaho; I’d spent seven or eight years on planning and zoning, so I kind of knew the people, I knew basically what the laws were… So we found a single-family home that was in a zone that could be multifamily, and we went through the process of converting a single-family home into a triplex.

We got all the approvals done, we got all the work done, and at the end of the day I couldn’t find anybody to manage the property, and I realized I don’t wanna be a landlord. So from not working out in terms of rental real estate, which was my idea, it’s not something I enjoy doing. And again, we had cap rates falling, so I sold it and we made 10%-15%. It wasn’t a huge deal. So it wasn’t a flat out terrible deal, but like with real estate or anything else, you have to figure out “What’s my spot? Do I like to be disinvolved in a transaction?” I didn’t like the one tenant we had calling me up saying they couldn’t get the internet to work, or call me up on New Year’s Eve and saying that they didn’t have any hot water. That just didn’t fit my lifestyle.

So you contrast that with the same town, this college town… I had a friend that built a 12-plex apartment building, and what you’re seeing is a lot of individuals want to take their individual retirement account, the retirement assets, and buy property with it, in some type of self-directed IRA. Well, it turns out there’s not that many banks willing to lend on that, because you can’t get a personal guarantee if an IRA buys a real estate building.

So in that case, the buyer of this brand new 12-plex student housing put up 50% in equity through his IRA, and I did the debt side of the deal. The debt was 6,5%. So my interest rate on this debt is higher than his cap rate on the building he bought. I like that much better, because I’m just collecting the interest payment and the principal to a 15-year note; so it’s very long-term, but at 6,5% I’m quite happy doing that because of the margin of safety, because he put up half the money.

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

David Stein: I think you need to be aware of valuations. I think we sometimes only focus on the last 3-5 years… And I’ll give you an example. There was another student housing project that I invested in, this time as a limited partner. It was a friend that was putting it together, and he died within six months; he got a brain tumor and passed away… So he didn’t even get the project barely started.

They found another firm to come in and take over this student housing project and get it built, and on the conference call when they were introducing it, they had done all this analysis and their worst-case scenario for cap rate was 7%… That somehow the yield on real estate would never go above 7%, which in my mind 10 years ago you wouldn’t touch a deal unless cap rates were 9% 0r 10%.

I think that inflation can pick up, so worst-case scenarios shouldn’t be only based on the last 3-5 years. I think valuation matters, and when I’ve seen investors – even institutional investors – get in trouble is when they just assume that high valuations would continue. You saw this when commercial properties were over-built, prior to the Great Recession; the institutional managers that lost are the ones that paid premium prices at the top of the market.

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

David Stein: I am.

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

Break: [00:18:09].24] to [00:18:56].17]

Joe Fairless: Best ever book you’ve read?

David Stein: Skin in the Game, by Nassim Nicholas Taleb, is the best I’ve read recently.

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

David Stein: We built a house in Idaho at the top of the market… But at $100/square foot. [laughs] I know it’s a lightning round, but the point is that even if you build something at $100/square foot, houses are used after eight years, and it can fall to $80/square foot.

Joe Fairless: What’s the best ever deal you’ve done?

David Stein: Probably the student loan debt deal on the IRA, where I’m getting 6,5% with very little risk.

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

David Stein: We like to help individuals. We give to charity, but we find it more rewarding to help somebody out that needs help with a down payment for a house, or they just need a plane ticket to go visit family… So just helping individuals like that.

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

David Stein: They can search MoneyForTheRestOfUs.com, Money For the Rest of Us Podcast wherever you hit your podcasts… It’s available all over.

Joe Fairless: Awesome. That link, MoneyForTheRestOfUs.com is in the show notes, so Best Ever listeners, you can just click that and go check out David’s podcast.

David, thank you so much for being on the show, bringing your depth and wealth of expertise in finances certainly from an institutional side. It’s interesting to hear how billion dollar portfolios think about investing, what they look for… And a roundabout way, or a very long, long game approach to perhaps landing one of them, as you said – you’re like “Well, no way. Well, actually, maybe become an employee of a private real estate manager, and then get the 15 years with that group, and then branch off.” It’s interesting to hear that, as well as jus their thought process for the things they look for – the target rate of return, the spending rate, the asset mix, and the conservative nature of the funds, what their annualized basis was for the last 10 years, or at this point 10 years from June 2017, previous to that 4.6%.

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

David Stein: Great, thank you.

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