JF1916: How This Investor Grew His Portfolio to over 125,000 Units with Jeff Klotz

Jeff is not only an investor, but also a broker who helps others grow their own portfolio. He struggled in the beginning to grow his business, so he focused on that until he was having some success. Now Jeff shares his knowledge with his clients and with us on today’s episode. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


Best Ever Tweet:

“If you buy right and you have the right business plan and business strategy, you should be able to survive another 2008 crisis” – Jeff Klotz”


Jeff Klotz Real Estate Background:

  • Serial entrepreneur, real estate investor and developer
  • Klotz’s investments have included 125,000 apartment units, 42 developments, and numerous other real estate projects
  • Founder of over 100 companies
  • Based in Jacksonville, FL
  • Say hi to him at http://theklotzcompanies.com/
  • Best Ever Book: 10X Rule


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

Jeff Klotz: I’m doing great.

Joe Fairless: Well, I’m glad to hear that, and looking forward to our talk and our conversation. A little bit about Jeff – he’s a serial entrepreneur real estate investor and developer. Klotz investments have included 125,000 apartment units, 42 developments and a bunch of other real estate projects. He’s the founder of over 100 companies; based in Jacksonville, Florida. With that being said, Jeff, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Jeff Klotz: Okay. Well, my background is interesting – I started out in real estate, literally straight out of high school. I actually bought my first investment property while still in high school. I fell in love with the multifamily business, and I guess the rest is history. For 24 years we’ve been intimately focused on the multifamily industry, and have built a platform called the Klotz Group, which is basically a group of wholly-owned subsidiaries that provide pretty much everything from concept through completion, along the way of both a multifamily value-add strategy, renovation, rehab, modernization, to a ground-up development strategy.

Like you said, that body of work over the last 24 years has been a little over 125,000 units of multifamily throughout the South-East, and just over 40 projects completely full-circle… And then of course the platform itself provides a whole series of services, including brokerage, property management, mortgage banking, construction, development, investment banking, and a handful of other (what we call) ancillary service providers that have probably racked up transaction volume into the billions.

So it’s been an interesting track record and an interesting 24-year stretch in the industry, and I still love it today as much as I loved it when I joined.

Joe Fairless: So you own companies like a mortgage brokerage within your portfolio? Did I hear that right?

Jeff Klotz: That is correct, yes. We are in the mortgage banking business, which is predominantly a commercial mortgage brokerage; I’d say 90% of that body of work is strictly multifamily.

Joe Fairless: So what made you want to be vertically integrated, versus just being focused on development?

Jeff Klotz: Well, for me, early stage I really struggled to grow. As a teenage entrepreneur, my challenge for business and business growth was probably the same as almost everyone else starting out – access to capital, capital constraints. I think experts will tell you the number one reason why most small businesses fail is a lack of capital… So I certainly battled that. As a kid, it’s hard to access capital. I didn’t grow up rich, I didn’t know any rich folks. I was kind of knocking on doors the hard way.

Early on, I really wanted to perfect my portfolio, and I needed to grow my business, and the best way to grow the business was to produce what I’ll call “ancillary revenue” from all these different services. But I started to become more successful, and then later on I began to really understand capital markets, and started to really solve my access to capital problems, it was almost the exact opposite.

We perfected the platform and really broadened the reach and the scope of all the different platform services to really serve our own needs, because that was the best way we found to control the results and to deliver superior results and returns by really controlling your own destiny. We learned along the way that it was next to impossible to rely on third-parties and get the same type of results if you were relying on yourself.

So long story short, I probably don’t desire to be in all these different businesses, but to some extent it’s a necessary evil.

Joe Fairless: Yeah, I get that. So how many companies do you actively oversee right now?

Jeff Klotz: The Klotz Group has as many as 12 subsidiaries that are in the real estate business. I’ve got some other investments, and we’ve got a family office that focuses on some philanthropic efforts and things like that, but probably for the focus of this call there’s 12 wholly-owned subsidiaries under the Klotz Group umbrella that provide all different types of services, pretty much a soup to nuts or an A-to-Z, or a concept through completion strategy in what we’ll call multifamily real estate investment.

Joe Fairless: And the purpose of those businesses is twofold, it sounds like. One is to help you and your team do your deals, but then also you might as well have other customers and clients outside of your company if you’re gonna have a business anyway. Is that the thought process?

Jeff Klotz: That’s exactly correct. The strategy is really a 50/50 strategy. I think that a healthy business is one where you’ve got diversification. About half of our business comes from what we call captive work, which is our own investments, and then the other half comes from the third-party marketplace. So that does a lot for both the industry and the organization. It allows us to have a lot of different touchpoints to the entire industry, and it really helps us grow the business. We meet a lot of really great people, and can help a lot of really great people…

You kind of hinged on the mortgage banking business – a lot of our clients come to us looking for debt, and for whatever reason they’re staking 75% leverage and we might only be able to get them 70%, because that’s what the deal qualifies for, so they might be 5% short on a deal, and we end up stepping in and becoming their partner, owning a piece of the deal and helping them get it across the finish line… And then of course, by that time they’ve figured out they can leverage a lot of our other services and really add value to the deal.

Joe Fairless: What’s the most and what’s the least profitable of those 12?

Jeff Klotz: Oh, boy… I’d say property management is probably the least profitable… And included in those 12 is the investment subsidiary, which is by far — the gain on sale, or the gain on real estate investments is by far the most profitable.

Joe Fairless: Okay.

Jeff Klotz: Many of those businesses are loss-leaders. They really contribute to the overall investment result. I might make X in the construction business, but I’m creating 10x at the property level because of my efforts on the construction side.

Joe Fairless: Yeah, it makes sense. And I imagine over the years you’ve created a business as a result of [unintelligible [00:07:15].09] loss-leader, but even — it wasn’t something that you wanted to be in the  business anymore. So you created one, then shut it down because you thought you needed it, or thought you wanted to be in it, but you didn’t… What’s an example of that? If there is an example of that.

Jeff Klotz: Okay. Well, there’s a couple of times… In 2001 we sold the construction business. We were able to stay out of that for a couple of years. In 2006, if you remember, the market was on fire. You couldn’t help but trip and fall and make money in the real estate business… So we thought we didn’t really need to be in the property management business, so I sold the property management company, only to really be forced back into the business a couple years later by my partners and investors, who said “Look, Jeff, this isn’t working. We’re not seeing the same results or returns from the properties and from the projects like we were when you were running it, so… Get back in the business”, basically. He who has to go makes the rules, right?

Joe Fairless: And with where you see your group of companies headed, do you see a new business coming up that you are gonna be creating, or maybe putting more emphasis in a current area that you have?

Jeff Klotz: Well, our business – we really hit a reset button back in 2015 after building a portfolio of (we’ll call it) C-class housing. We were one of the most active operators and groups focused on (what we’ll call) middle market C-class housing throughout the South-East. We’d built a portfolio close to 40,000 units, and that was the goal; so we accomplished our goal, but we really couldn’t celebrate the accomplishment because it was just a really tough struggle. That’s a tough business to scale, and it’s a really tough portfolio to operate… So we really kind of hit the reset button, spent the next couple years exiting that business, and really focused on a cleaner, more quality body of work. So for us it was testing and proving the concept in a much newer, higher-quality asset class [unintelligible [00:09:00].06] create the same type of results and returns.

Over the last couple of years we spent proving that concept out, so today the real focus is just growing that strategy. So we find ourselves doing a lot more luxury ground-up development today. It’s a different type of development than we’ve done previously. Previously we were just looking to get something built, and it was more workforce housing, and what have you. Today we’re able to develop some of what I’ll call best in class in several different markets.

The strategy today is not necessarily get into new business, but it’s just continue to grow the business both vertically and horizontally, so that we can once again — we were once upon a time the largest residential landlord in about 13-15 cities throughout the South-East, and that’s our goal, to do that again, just with a little different quality of assets.

Joe Fairless: And I’m sure you get this question a lot, but I’m gonna ask it anyway… When a correction takes place, what’s your thought about being in ground-up development luxury?

Jeff Klotz: Well, you’ve probably heard this, and I’m sure every one of your listeners have heard that – you make your money on the buy. That can mean a lot of different things, but it’s kind of an old cliché in real estate. It took me a long time to even really figure out what that meant… But being well-protected by your bases on the way in, so that you have what I’ll call “a lot of screw-up room” or a lot of mistake room, is really one of the founding principles that we operate by. So if you buy right and you have the right business plan and the right business strategy, you should be able to withstand another catastrophic event like in 2008.

Joe Fairless: What’s a quantifiable example of buying right? How do you stress-test that?

Jeff Klotz: Well, I think today this concept of value-add – that’s probably one of the bigger buzzwords in the multifamily industry, and a lot of times it’s a lot more complex than just buying a piece of real estate and raising rents. You’ve really gotta understand the asset, the asset class, the market… And I think you’ve gotta buy right. You’ve gotta buy at — I’ll still call it a discount. I’ll tell you what is not lining up through an internationally-marketed brokerage effort and participating in first, second, third round, best and final, and winning an option – the concept of who pays the most wins, I have always had a hard time understanding that. So almost all of the deals that we do are privately negotiated, they’re off-market, they’re situational acquisitions and they’ve got a good story.

Even in today’s very frothy real estate market, you look at the last 12 acquisitions that we’ve made  – they’ve all been what I consider below market value. I think there’s good deals out there, you’ve just gotta really know where to find them and where to look. Our platform, which has many touchpoints to the industry, helps to contribute to putting us at the right place, at the right time, and being able to have access to those deals that otherwise might not be available to us.

Joe Fairless: And just maybe one or two more follow-up questions on this, and then I’d love to learn more about the 40,000 units and the scaling challenges with the C-class housing. A lot of people will say when a correction takes place, class A is gonna get hit first, because they’re the ones who are gonna lose their jobs, so those residents are gonna then go down to class B… So you don’t wanna be in class A. And then the people will also say that ground-up development is riskier because there’s no income that’s being generated until you get out of the construction loan and you’re completely leased up in your long-term financing. What are your thoughts on those two points?

Jeff Klotz: Well, I agree with those two points, to some extent. In fact, that was the thesis of some of our early real estate funds, and that was the pitch. And again, we were focused on C-class… And I think, for the most part, that’s  a real concern, right? But we always like to shoot for a much shorter strategy. A long-term strategy – you have a greater chance of getting stuck holding the ball, or whenever the music stops, without a seat… So I think the merits of a project are strong. Again, if you buy or build the project plan with a lot of screw-up room, or mistake room, or whatever you wanna call it, it should pass the stress test for a softening in the market, or what have you.

The bottom line is people will always need a place to eat and sleep and call home… But there’s always gonna be a cyclical nature to our business and almost every other business, so I think you have to be afraid of that. You have to plan for that. When we underwrite a deal, when we go to acquire a deal, when we go to build a deal, there’s always a sense of urgency, and we always plan for the worst, but work for the best. So it’s always a concern of ours, which is one of the reasons why we have a short-term strategy.

We were a large multifamily owner going into 2008 in the recession/downturn/crash, and our strategy then was to really just protect the asset; if we were the best operator, with the best service and the best performance in the market, then we were well-protected… So we were fortunate enough to survive the downturn without losing any assets. In fact, we were quickly able to start a growth process.

I think it’s just a quality operator, with a quality project, in a quality location, with a quality credit risk. So the stronger your residents are, the more protected they are from a recession, and things like that. So I think there’s a whole series of merits that you really have to pay close attention to.

Joe Fairless: Let’s talk about the 40,000 units. What were some specific challenges that you had in scaling and executing on that level of collection of units, with that type of classification of property and resident base?

Jeff Klotz: Well, first of all it wasn’t so much the class of asset, but  it was. And what I mean by that is to succeed at C-class multifamily operations – it’s a lot more staff, or manpower, or people-intense. You’ve really gotta check the boxes and  dot the i’s and cross the t’s. You need a lot more people to succeed in that effort. We built a team of over 1,000 employees, and we went from 100 to over 1,000 really quick. So just that type of scale was really difficult. We were consistently chasing the growth.

And then to top it all off, the business strategy that we had – we were buying and selling quite quickly… For about five years in a row we were buying over 8,000 units/year on average. So to have that type of portfolio churn, you’re always moving. It’s hard to build a team, it’s hard to build consistency… And then of course, the assets themselves – yes, they’re challenging. They were in rougher neighborhoods… So it’s harder to find good people, it requires more training, it’s harder to find good residents, it requires a lot better screening and tenant evaluation or qualification. Even the municipalities started to neglect those types of neighborhoods, where there’s lower income. So it’s a tougher, longer, harder grind or battle or fight, and you almost had to fight for every bit of success, every good resident, and what have you. So all in all, the entire effort is more difficult.

On a personal level, I really underestimated or probably was naive in how difficult it really is to build and scale a business. I’ve found building a real estate portfolio easy. In fact, growing is easy. But actually building a business around all that growth, and building the right type of team, and the right types of policies and procedures and structure – that was probably the most challenging part of it all.

Joe Fairless: Thank you for that. I appreciate that insight. That’s very, very helpful. And one thing that I’d love to learn more about is if you were to have a 300-unit class C apartment building, in a class C area, and a 300-unit new development – picture whatever you’re building now, that 300 units – how many people would it take to staff each of those?

Jeff Klotz: There’s an old rule of thumb in the industry – 2 per 100. So in theory you’d need 6 people. Three in the office, and three in the field, on the maintenance team. I think that in a C-class operating property… Was the A-class a new build, new construction?

Joe Fairless: Yeah, it’s one you’ve just completed. We’ll just say one you just completed.

Jeff Klotz: I think on the property itself there’s probably only a slight difference in the amount of manpower needed. But we’ll call it the corporate oversight, or the regional/district oversight – you definitely need a whole heck of a lot more oversight on the C-class asset than you do the A-class asset.

Joe Fairless: Got it. Taking a giant step back, based on your experience in the industry – you’ve bought your first place while you were in high school; that is pretty close to a record, I think, from the 1,800 guests I’ve interviewed… What is your best real estate investing advice ever?

Jeff Klotz: Oh, boy… That’s a hard one. I think the real estate business is not a get-rich-quick plan/strategy. All these late-night advertisements for “You too can be rich like me” – it doesn’t work that way. I’ve been doing this for 24 years, and it took a long time to create success. It is a get-rich-slow business, by the way. It’s a lot of hard work, it’s a long late-night grind…It’s difficult, and it’s tough to think that yo can create success as a hobby or a part-time business. It’s a lot like the gym – there’s no shortcuts. Nothing takes the place of hard work and effort if you wanna get in shape. You can try all the latest, fad this or fad that, but you’ve gotta do the work.

I see way too many people enter this business thinking that they can do it part-time, or in-between a day job, or after a day job… And I think if you’re gonna be a passive investor – sure, that works. There’s a whole other topic of how do you make good passive investments; probably the least successful deals I’ve ever done were called passive investments… But  I think just preparing somebody for the time it takes to learn the business and what have you – it sounds pretty basic, but that’s where I see most people making a mistake; it’s the inability to really truly commit to the time, effort, energy and hard work it takes to be successful in this business.

Joe Fairless: And over the period of time that you’ve done it.

Jeff Klotz: Right.

Joe Fairless: Yeah, it’s a shiny object for some people, and then they find something else… Whereas put in decades – then you can see some results if you do things consistently that are the right thing, right?

Jeff Klotz: Right. And I think whether we’re talking real estate or we’re talking anything else in business, I think that part of our culture today is that of things happening quickly, and there’s almost a sense of lack of patience, and I can go on and on… But I just really think that you’ve gotta really be realistic with the goals, and the time it takes, and of course the effort it takes. There’s an old saying, “If it were easy, everybody would be doing it”, right?

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

Jeff Klotz: I’ll give it my best.

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

Break: [00:19:15].10] to [00:20:13].09]

Joe Fairless: Okay, what’s the best ever book you’ve recently read?

Jeff Klotz: Oh, boy… I’m not a big book reader. There’s an interesting story behind it… But I’ve just recently read some of Grant Cardone’s stuff, and I was amazingly shocked with just how relatable it was, and just how great the content was. That was kind of an interesting experience for me.

Joe Fairless: What’s a deal you’ve lost the most money on?

Jeff Klotz: That would have been a passive investment. Once upon a time, prior to really committing to grow the entire platform vertically and horizontally, I thought I could leverage some other operators and other sponsors. I wasn’t in a good pick of a couple different guys. I had no control, and so therefore the outcomes weren’t that good.

Joe Fairless: And knowing what you know now, if you were to passively invest and you were to interview them again about the opportunity, what are some questions you would ask now that you didn’t ask before?

Jeff Klotz: Well, I’d really wanna understand the track record, their true experience in actually controlling outcomes… There’s a lot of sponsors out there that have worked for other folks, or have been alongside other sponsors, or have been on teams with sponsors, but I  really wanna see someone who has a solid track record of doing it themselves, signing on the debt, having real skin in the game, and really a solid commitment to the business.

I think nowadays there’s a lot of folks that think it looks a lot easier than it really is, so I think that might be the tone of what I’m saying here… I’d spent a lot more time getting to know the individual and the organization and understanding what their theories and philosophies and their ideas are for how they operate real estate.

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

Jeff Klotz: Well, the next deal, right? In this business you’re always as good as your last deal, so we continue to get better and better. I think that really my next deal will be the best deal I’ve ever done.

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

Jeff Klotz: Years ago I’ve formed a family office called the Klotz Family Office. We have three main philanthropic efforts, including a faith-based not-for-profit named Save Your Communities, which is focused on creating and preserving, as well as providing sustainable [unintelligible [00:22:10].08] affordable multifamily housing. That’s a big part of our mission. I also have a Central-American-based foundation called [unintelligible [00:22:16].17] which basically serves the needs of those living in poverty, most likely as a result of natural disaster.

Then we have a third effort, which is basically an entrepreneurial scholarship. So once a year we pick a young individual who I think might possess some real serial entrepreneurial traits, and we try to partner with them and mentor with them, and help them get themselves in the door [unintelligible [00:22:35].20]

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

Jeff Klotz: Well, they can visit our website, TheKlotzCompanies.com. They can email me at jklotz@theklotzcompanies.com.

Joe Fairless: Cool. Well, Jeff, thank you so much for being on the show, talking about your experience, talking about your approach, what your focus is now, and the challenges that you came across on the passive investment, as well as when you achieved the goal of 40,000 units… Not really having time to celebrate, and then reconfiguring the structure of your focus. And what you’re doing now, building the luxury ground-up development.

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

Jeff Klotz: Thanks, Joe. I enjoyed it.


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JF1212: Leaving A Comfortable Job To Pursue Investing Full Time with Pat Flynn

With the birth of his daughter, Pat needed a change. He didn’t want to miss out on his daughters life and with an offshore job, he would have missed 8 months per year. After weighing pros and cons, Pat took the leap, quit his job and began investing full time. Tune in to hear an inspiring story of chasing a goal, and succeeding while improving your life. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Patrick Flynn Background:

– Owner of Flynn Homes, a real estate investment company

Launched in late May 2017 2 Beach rental properties, one cashflows $800/month, the other we house hack

-:Total revenue so far is around $750,000 since May 2017

– 5000 direct mail pieces a week along with other marketing campaigns.  

– Based in Jacksonville, Florida

– Say hi to him at: www.flynnhomesjax.com

– Best Ever Book: 4 Hour Work Week


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

With us today, Pat Flynn. How are you doing, Pat?

Pat Flynn: Good, Joe. How are you?

Joe Fairless: I am doing well, and thank you for joining us. Welcome to the show. A little bit about Pat – he is the owner of Flynn Homes, which is a real estate investing company. He launched in late May 2017, and has done some wholesaling – 11, exactly – and a flip, and the total revenue so far is around $305,000. Before he got into that, he also bought some rental property; one is a beach rental property that cashflows, and another that he is house-hacking. So we’re gonna get into the launch of his company, what he’s been up to, what’s worked, what hasn’t worked, and all that good stuff.

Based in Jacksonville, Florida. With that being said, Pat, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Pat Flynn: Sure, absolutely, Joe. I graduated from the United States Maritime Academy in 2009 at King’s Point, and from 2009 to 2017(ish) I was working on merchant ships and/or drilling rigs off-shore, so I’ve spent a lot of time out there. February 27th, 2017 this year I’ve had a big life change when my daughter was born…

Joe Fairless: Congrats!

Pat Flynn: Thank you. Long story short, me and my company couldn’t come to terms with the time I wanted off after that, and I’ve always wanted to have that entrepreneurial lifestyle career, and I figured it was now or never. So that original itch for the entrepreneurial lifestyle came  because Robert Kiyosaki is actually also a King’s Point graduate and rugby alumni too, which I am, and he spoke at my school when I was a senior. So that really planted the seed.

My years of shipping, that was always in the back of my head, and I finally made the decision once my daughter was born to take that jump as a real estate entrepreneur, and it’s just been awesome ever since. The best decision I ever made.

Joe Fairless: What were the reasons or reason holding you back from doing the entrepreneurial stuff prior to the birth of your daughter, and then what did you find out after that, if those were true or not?

Pat Flynn: What happened was I just got comfortable out there. I was single for most of that time period; I’d be gone eight months a year shipping, and I was making pretty good money as far as blue-collar out there working goes, so I was just comfortable. And what happened when my daughter was finally born was everything in my gut was telling me to stay out there. I had health insurance, I was making great money, but something in the back of my head just told me I had to go for it. I’ve always wanted to.

So what I did was took a  page out of Tim Ferriss’ book and I sat down and I did his fear setting exercise; I wrote down everything that scared me the most about making that decision to quit, my worst nightmare, and everything terrible that was gonna happen to me if I left my secure cushy job off-shore. I also wrote down what could go right if everything worked out in the real estate world, and the cost of inaction.

So where would I be 5-10 years from now if I don’t do anything and just continue to do this job? Well, I’ll have missed at least eight months a year of my daughter growing up, so in the end it just wasn’t worth it to me, and I made the jump and I found that everything I was scared of – finding my own private health insurance, doing this and that were not really scary at all. The scary part was me stuck out there and missing my daughter growing up.

Everything has been working out awesome ever since. I actually didn’t mention it yet, but I e-mailed you, Joe, right when I quit my job; I actually e-mailed you the day after I quit my job and I told you my goal was to be on your show in six months, and look at what’s happening now, I’m on your show. It’s amazing when you set your mind to something what can happen, and it’s just been awesome ever since.

Joe Fairless: I forgot about that, and now I remember that; that’s great, congratulations! The fear of missing out on eight months of your daughter growing up, I think that’s pretty much the deal breaker, I imagine… Once you had that in the cons column of staying at your full-time job, it was “Okay, I’ve gotta make things happen.”

Financially, what did you make sure that you had, if anything, in order to float a little bit while you got your affairs in order and got some money coming in?

Pat Flynn: Of course. I always was pretty good with my money. I didn’t have a ton saved, but my property at the beach was cashflowing, I house-hacked my other house at the beach, so my monthly expenses were not crazy high; I kept them pretty low, and I had a piece of land up in Massachusetts that I sold during that time period… So the profit from that land and my savings was able to float me, and actually it’s still floating me now. The company is doing well, and we’re keeping that money in and reinvesting it, and actually none of my partners have taken distributions yet. So we’re just still building that up, and… Just being smart about your money and keeping your monthly expenses low is the main thing.

I’m one of those people that I have an Excel file and I keep track of every single penny I spend each month, so I knew exactly what I had in the bank, I knew what I needed to survive for six months, and it’s all self-confidence… I had the confidence that I could make this work and get it done, and it turned out great.

Joe Fairless: I can relate to that… Whenever I left, I was waiting on a refinance from a house, which is similar to you selling the piece of land in (I think you said) Massachusetts… I had to do a refi and I got $50,000 from the refinance of the house, and I used that to float me while I was making no income other than some rentals – four properties, which basically were nothing. And then my low monthly expenses were relatively low compared to New York City standards; I lived in the same apartment for nine years and had roommates from Craigslist, and just kept that as low as possible.

So I think there’s a formula there for people who are looking to leave, and that is keep your fixed monthly expenses low, and have a chunk of money or at least have money that you can get access to help keep things upright while you build the business.

On the business front, you’ve mentioned partners – who are your partners? You don’t have to name the names, but you can, I don’t care… But I’m more interested in how did you determine who your partners would be and what is your role compared to theirs?

Pat Flynn: Starting off, when I first left and e-mailed you back in March, I was a lone wolf, and I’ve always had that mentality. I’ve always been very independent, so I thought that I was gonna do everything on my own, and I found out very quickly that that was a huge mistake, so I made a big mental shift in April or so, and I started putting myself out there. I went to every single networking event in the city of Jacksonville, which can be a job in itself, actually.

I talked to everyone, I had lunch with anyone, I had coffee with anyone that would meet with me. Every single property on Craigslist in the Jacksonville area – I called the number, I made them an offer; I talked to them, I asked them what else they had.

Other than the real estate networking events I went to young professional networking events, I was active on Bigger Pockets, I did everything I could to talk to everyone I could. Finally, my fiancée is a realtor who works for a real estate group and one of their clients is an investment company; three guys here in Jacksonville, very successful, and they already have several successful companies, but were looking to ramp up their marketing… So I got through her and through her boss the opportunity to meet with them, and they didn’t really need me, so our conversation at first was — I went into the meeting with the mindset of “How can I help these guys? How can I be valuable to these guys?” and what ended up happening was they said “We’ll see how it goes, we’ll see if you’re a good fit, we’ll see if everything works”, because it’s a sensitive thing, a partnership…

What ended up happening was I worked for them for two months – no compensation, no anything, just trying to do everything I can to help them out and make money for them. I was taking phone calls, I was organizing the marketing, I was driving, knocking on foreclosure doors, doing tax deeds, options, knocking on those doors… I was doing everything I could for them. And we saw a little success, but after two months they decided it was something that was gonna work for them, and I told them my main goal is I want an equity percentage of everything I do; that’s why I did this in the first place, so that’s kind of non-negotiable for me.

So we made an entity, we negotiated the equity percentages, and it’s been awesome ever since. We got a few home runs right off the bet, and that was able to give us some marketing dollars, and we’ve really ramped up the marketing since then, and it’s been great.

Joe Fairless: What is your role, versus their role now?

Pat Flynn: Right now I control everything that happens day to day. I take all the phone calls, I make all the calls as far as what we’re doing for marketing, I write the contracts… I’m actually the one going out to the houses, walking the houses, talking to sellers and getting the contracts.

So I take care of all the acquisitions and the marketing, and they take care of the back-end, which is they have a lot of contacts for good buyers lists for the wholesales, and some huge value in the construction crews that they have available for our flips. So the flips we do – I’m so fortunate to have them, because I get the acquisition, and then it’s almost hands off for me after that.

They have a construction crew that they can pretty much point at the house and say “Go!”, and they have their cookie cutter thing they do with the house, and it looks awesome. Then my fiancée’s real estate crew sells the house after that, so we have a pretty good system in place already, and that’s why I’m so fortunate to have them, because they have added so much value with that flipping system which is already in place.

Joe Fairless: You mentioned a few home runs at the beginning – can you tell us specifics on those deals?

Pat Flynn: Absolutely. Our first very significant one was at the beach. Jacksonville has three beach towns right by [unintelligible [00:12:59].08] Atlantic Beach and Neptune Beach, and the property prices there are just going crazy right now. I got the house under contract, and it ended up being a $45,000 wholesale deal, so I’m super excited about it.

I’m walking in [unintelligible [00:13:14].11] with my partner and he doesn’t really care; his first question to me is “What other leads have come in today?” [laughter] Him asking me that – I think that’s what true mentorship is. He’s pushing what he thinks is possible, pushing what you think is expected of you, and the fact that all capacity is just the mindset. So with him saying that just completely changed my mindset.

When I sat down and recalibrated my goals for the company and what I thought was good as far as profits go, and since I’ve done that, it’s just been unbelievable. I’m always thinking about what’s next rather than focusing on the deal that closed yesterday, and because of that we’re four or five months into the entity and we’re over 700k in profit right now, just focusing on what’s next.

Joe Fairless: $700,000 in profit?

Pat Flynn: Yup.

Joe Fairless: That factors in marketing expenses to get the deals?

Pat Flynn: No, [unintelligible [00:14:12].02] so it doesn’t factor in marketing. We’re at 750k right now in revenue.

Joe Fairless: Okay, I’m with you. So yeah, 750k in revenue in a very short amount of time… And is what I read earlier correct – 11 wholesales and 1 flip?

Pat Flynn: Yes, that was back in May. We did those wholesales right off the bat, just because the cost of money we pay on our hard money here in Jacksonville for the most part, 12% and two points… So towards the beginning I wanted to move everything as quickly as possible; me and my partners were just trying to get in and out. Even if there was more profit in flipping it, we just wanted to build our nest egg so we have some money in the bank to do deals to where we didn’t have to get hard money.

So that’s why we wholesaled most of this stuff right off the bat, but now our focus has shifted to flipping most everything.

Joe Fairless: Okay. And how many flips have you all done?

Pat Flynn: At this point we’ve sold retails two of them. Right now we have three that are in process, under construction, and we have five that are under contract, waiting to close, so we haven’t started the construction or anything on them yet.

Joe Fairless: And as a business, do you make more money on the flips than the wholesales?

Pat Flynn: So far we’ve made more money on the wholesales, but I’ve found that it just all depends on the situation. Like I said, when we hit a few home runs right off the bat… It was an older woman looking to liquidate her rental portfolio, they were all in rough shape, and we made almost 30k on several of her different properties, wholesaling. I’m not sure what we could have made flipping them, but I’ve found that it all depends on how many of our buyers are looking for places at that time, the different comps in that area… If my partner thinks some of the comps are way too high and we wouldn’t be able to sell it for that, but we can sell it to another flipper that goes in and actually picks out the finishes in his house so he can get that high number… A number that we can’t get doing a generic flip. So it all depends on the area, I think.

Joe Fairless: You’re doing some direct mail… What has that resulted in?

Pat Flynn: Direct mail – we started off at about 1,500 a week I wanna say, and now we’re at 5,000 direct mail pieces a week, so 20,000 a month. Each 5,000 that goes out, I probably get about a hundred phone calls from each 5,000 that go out, and I’ve found that we close at least two for each 5,000 that comes out.

The reason we have a pretty good closing percentage on that is because we’re partners with the people that also sell our houses on the back-end, so we’re able to offer them cash for their house, we’re able to offer creative financing, and we also offer them our real estate services. So having three different options allows you to close more deals and convert more leads, which has worked out good for us, too.

We’ve recently started the creative financing thing, and it’s been taking off pretty good, as well.

Joe Fairless: You’ve got a solution, no matter which direction they wanna go… Unless they want some crazy price, and even listing it on the MLS wouldn’t generate that, but eventually they would come back down to earth. That’s great, I love that approach.

With your direct mail, where do you buy the list from, and what do you filter it for?

Pat Flynn: The direct mail company that does — I’m not sure exactly what software they use; I was originally using a program called List Source, and if anyone listening is using list source and you’re paying for those lists, make sure you call them and try to negotiate down, because they’ll go down much lower than you think they would on their prices for these lists. But they do a good job making lists, and I’ve found that it took up a lot of my time, so for a pretty low fee the direct mail companies – almost any of them, really – will generate the list for you.

What we do on our list – equity percentages is the main thing. So our lists are generated with people that have 30% to 100% equity in their house. So we’re not looking for people that are underwater. 30% to 80% equity, single-family homes, no corporate [unintelligible [00:18:50].11] is our list, and homeowners only. So if someone’s renting, it’s gonna go to the homeowner.

But I’ll tell you what… What’s been even more effective than direct mail – there’s a local magazine, kind of like a Money Pages, a coupon magazine… We’ve been running ads in that, and it’s pretty cheap for that. You can get in front of more eyes for cheaper, but you don’t have that specific equity looking at it, but you can get in front of more people. We’ve found that that has been very effective for us too, and almost just as effective as direct mail for a lower cost.
Joe Fairless: What do you have in the magazine?

Pat Flynn: It’s an ad, and the magazine also offers for six cents a house to cover that sort of thing. So it’s just a little piece of paper that goes in front of the magazine. So even if you take the magazine and throw it in the garbage, you’re still seeing us. You’re still seeing the logo, you’re still seeing a huge phone number, and it’s been very effective, and for six cents a household, cost-effective also.

Joe Fairless: Yeah, [unintelligible [00:19:59].21] What’s the name of that magazine?

Pat Flynn: It’s called Money Pages. I think they’re all over the states, but it’s pretty big in Jacksonville.

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

Pat Flynn: I think the cookie cutter answer to this is just to be consistent; consistent action and self-discipline. I’m a firm believer that it’s all in your mindset. You paint a picture of the person you wanna be and just don’t give up on it for anybody. I think you’ll find – the listeners and myself have found that coming up there’s just so many haters and negative people out there, especially in the beginning when all you’re doing is making mistakes, and every deal seems to be slipping through your fingers. It’s easy to get caught up in that negative thinking, but just don’t listen to anybody.

It was an eye-opening day in my life when I realized that nothing anybody says matters, so just be true to yourself and work your ass off for whatever goals you’re looking to get at. Now that my eyes are open to this kind of success, I see it in other people every day. I’m a huge sports fan and I’ll just bring up that — remember when Tom Brady was drafted by the Patriots he said to Robert Kraft the day he was drafted that he’s the best decision this franchise ever made. He saw it in his head before it happened, and this stuff happens every day, but once you open your eyes to it and you see that other successful people believe in what they can be… That’s my best advice – get your mindset right.

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

Pat Flynn: I’m ready.

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

Break: [00:21:32].27] to [00:22:30].26]

Joe Fairless: Best ever book you’ve read?

Pat Flynn: The standard one everyone says is Rich Dad, Poor Dad – you need to read that to get your mindset right on what an asset and a liability is. That was a life-changing mindset book to me. I wanna say The 4-Hour Workweek, too. If you don’t read the whole book, read the chapter on fear-setting. It just puts everything in perspective on life… Fear-setting in The 4-Hour Workweek was a life-changing chapter for me.
I wanna say one more – Rebirth: A Fable Of Love, Forgiveness And Following Your Heart by Kamal Ravikant. It was a book I read when I left my job; it’s a fiction book, but it just got me through some tough times right off the bat, when everything seemed like it was at its lowest, trying to start this business. It’s just a great book.

Joe Fairless: And if you’re not a reader, but you wanna learn more about the fear-setting, the Tim Ferriss approach, he did a TED talk recently. Just search “TED talk Tim Ferriss fear-setting” and he will entertain you in about ten minutes and tell you what that’s all about.

What is the best ever deal you’ve done so far?

Pat Flynn: I’d say it was the older woman looking to off-load her rental portfolio. She wasn’t able to get out and take care of these properties anymore, so they were all in terrible shape. There were kids living in some of them, like little babies and little kids and families, and the roofs were leaking, so there was mold in the walls, and it just wasn’t safe for anyone. There were about seven houses, and we bought the entire portfolio from her. We flipped a couple, we’re in the process of flipping a couple, and wholesaled the rest. We’ve probably profited around 100k from that whole deal. It was a good deal.

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

Pat Flynn: I think your mistakes come when you get too desperate. Right off the bat, when things weren’t going well for me, I made some bad decisions on houses just because I was too desperate, just looking at the numbers and not the big picture. Along those same lines I just wanted to mention this, too – I actually purchased a house this morning, and… Joe, your interview was kind of my main focus all day today, so I wasn’t really focused on the house. I went in and I talked to the seller, I finally didn’t really care… It was like, “If they’ll give me a good price, I’ll buy it. If they don’t, they don’t. It doesn’t really matter to me. Our crews are busy now anyway”, and I think they saw that in my mannerisms. She wanted way too much for it right off the bat, but I kind of just said, “You know, this is what I can pay.” I didn’t push her, I wasn’t desperate, and she immediately came right down. I was like, “Okay, let’s get it done”, and that’s gonna be a $30,000 flip right there, just on being calm, not being desperate. I think when you’re desperate you make bad decisions, so just stay calm whenever talking to sellers or in anything you’re doing.

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

Pat Flynn: Right when I quit my job back in March, I obviously did this, but I wanted to volunteer too, because I was spending so much time off-shore doing the drilling thing –I thought it’s be better to give back and take some time with myself. So I volunteered at the animal shelter and at hospice, and I still do it now. It feels great to do that. Flynn Homes – we’re still very new, but I have plans in the future to give back as far as education goes to local high schools in the area, teach kids about the way money works and get them on board to learn about flipping, and learn about the industry and learn that what they’re learning in school just puts you in a job and isn’t the only option. What I was taught in school – that was the only option; go to school, get a job. I’d like to spread the word, once we get a little more established, to the younger generations that there’s so many options out there and real estate is a great way to go about being free and making your own rules in life.

Joe Fairless: You got me curious when you mentioned some mistakes in the early transactions. What was the result of those mistakes monetarily?

Pat Flynn: Well, we still own them now… [laughs] There’s two houses that are sitting in the books that have hard money loans on them, and I overpaid for them. Right now they’re still sitting on the books, and I talked about it just the other day with my partner that he’s gonna be more excited when we lose ten grand selling that house than he will making 45k at the one on the beach.

So it’s currently still sitting… We’re deciding how much of a loss we’re willing to take on it; it won’t be crazy significant, but both of them didn’t turn out well. Like I said, desperation, just trying to get a deal done… That’s what happens.

Joe Fairless: It sounds like you need to find a good wholesaler so you can unload those things.

Pat Flynn: And you know what? People reach out to me all the time – “Can I wholesale your properties?” and for these ones I say “Absolutely! Send it to everyone you’ve got” and it still is sitting there… Like, wow, how did I buy that for that price?

Joe Fairless: Well, you do enough volume like you all have done, as quickly as you’ve done it, and that’s gonna happen. Fortunately, it’s turned out better across the board, generally, than just these couple deals, so that’s great to hear.

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

Pat Flynn: My website, FlynnHomesJacks.com. I was being really active on the blog… Things got a  little busy and I slowed down with the blog, but that’s my main passion – mindset blog posts on that website. I love writing about that stuff, so check out the website. On the website, the phone number is directly to my cell phone, so you can reach me on that. My e-mail is also on the website. We’re not big to this point to where I can’t respond to people, so anyone that’s thinking about this life-change, feel free to call, feel free to e-mail me, tell me your story… I love hearing about them, and I just love talking about mindset, and that’s my real passion – being happy with what you’re doing.

Joe Fairless: Well, I know that you gave some tips that will help others be prepared for going full-time as a real estate investor, and I’m very grateful for that.

The things that I wrote down – I actually wrote down six items or six steps to set yourself up to go full-time as a real estate investor… As you were talking, I was taking notes – one is have low fixed monthly expenses, so that you’re not having to extend yourself. Two is to have some access to a (relatively) large chunk of money, whether you sell a property, refinance a property, sell a piece of land… Have a line of credit – that would be more of the worst-case scenario, but still if it’s a line of credit then you don’t pay the interest until you actually use the line of credit, so at least there’s that…

Three is that you were incredibly active. As you said, you were making offers on every property in Jacksonville,  you went to every meetup, you were active on Bigger Pockets… So three is just to be active.

Four is to work for free or work with a group that has more experience than you and realize that it’s a long-term investment in yourself, and I know you will appreciate that, and that’s why you did it.

Five is when you make some money, reinvest it back into the company and continue to grow.

Six is to have a mindset help with a mentor, like you had with that $45,000 wholesale deal, and he was like “Great. What else came in today?” It’s like, “Oh… What? Wait!” [laughs]
Thanks for talking through this stuff, and then talking with us about the different approaches you take. You have three different options – one is cash for a house, two is creative financing, and three is to just sell at retail through your real estate services.

I hope you have a best ever day, I’m glad you made it to this show, and I’m honored to have investors like you to be guests on the show, because you’re in there, you’re on the ground, you’re doing it, you’re getting your hands dirty and you’re making it happen, and you’re helping others along the way… So I appreciate it, I hope you have a best ever day, and we’ll talk to you soon.

Pat Flynn: Thanks a lot, Joe. I appreciate everything you’re doing too, honestly. I used to listen to your show on my drive to Alabama to get on the rig every time, and it changed my life. There’s so much great information you put out there with the people you talk to, so thank you so much also.

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JF1208: How To Find The BEST EVER Commercial Loans with Austin Peek

Today we will get a breakdown of commercial loans and lenders. Austin has originated over $60 million in commercial mortgage loans since founding RiverStone RECAP four years ago. He’ll tell us the difference between a bank loan vs. CMBS (commercial mortgage backed security) and CMBS vs. life insurance companies. We also get great advice on vetting your mortgage broker. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Austin Peek Background:

– Founder & Principal of RiverStone RECAP, a CRE mortgage firm

Started RSR 4 years ago and he’s originated over $60MM in commercial mortgage loans across the country

– Recently launched a podcast: Millionaire Interviews

– Based in Jacksonville, Florida

– Say hi to him at: https://millionaire-interviews.com/best-ever to get the FREE quote matrix and CRE Lender List

– Best Ever Book: The Real Estate Game


Made Possible Because of Our Best Ever Sponsors:

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

With us today, Austin Peek. How are you doing, Austin?

Austin Peek: Good, how about yourself, Joe?

Joe Fairless: I’m doing well, and nice to have you on the show. I’m looking forward to diving in. Austin is the founder and principal of RiverStone RECAP, which is a commercial real estate mortgage firm. He’s originated over 60 million dollars in commercial mortgage loans across the country of the last four years, and congratulations, he recently launched a podcast called Millionaire Interviews… So you’ve got a lot of exciting things happening, congrats on that!

Austin Peek: Yeah, thank you very much. Just something different to do other than just real estate, so I figured I’m gonna go ahead and give it a try.

Joe Fairless: Absolutely, and I’m sure that it ties into your business in some form or fashion, at least I hope it does.

Austin Peek: Yeah, it definitely does. I have some real estate guys on, but for me, I talk to people in all different types of industries, so… I just wanna become a popular podcaster like yourself.

Joe Fairless: Cool, good stuff. You’re based in Jacksonville, Florida… Besides that, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Austin Peek: Yeah, I am in the commercial real estate mortgage side, [unintelligible [00:03:19].11] I only work on commercial. I generally deal on loans with one to ten million in origination size, that’s kind of my sweet point, and can do deals all across the country. So even though I’m in Jacksonville, Florida – this is one of the nice things about what I do… If one of your listeners says “Hey, I wanna get into real estate but I don’t wanna just stay in one market”, what I do is I work on deals in South Carolina, California, New York, wherever. I never even have to go see the property, so that’s one of the beautiful things about what I do on the financing industry – it’s really just about the numbers, and not so much about going door-to-door and selling people on buying a home.

Joe Fairless: How do you decide what range of loan space that you wanna be in? You said you’re in the 1 to 10…

Austin Peek: Really, after you do above one million dollars, basically every transaction is almost the same. So I can do up to 200 million dollars, and there’s plenty of guys that say “Yeah, I do the one million dollar range to 200 million”, whatever, but really, once you get above ten million in the loan amount… Again, I can go up to 20, 30, 40 – basically, it’s gonna be the same type of lenders that do a 10 million dollar deal, are normally gonna be closer to a 100 million dollar deal. But a lot of those originations that get above 10 million dollars – there’s usually private companies that are buying office buildings for example, so they don’t normally need a mortgage broker… They don’t even normally come to me, an independent mortgage broker; they already know what guys to go to, and normally they own billions of dollars worth of commercial real estate. So they usually don’t go to any brokerage companies, and they just do it all in-house.

Joe Fairless: Okay, so you have the ability to do above ten, but you don’t have as many potential clients.

Austin Peek: Exactly, yeah. So my niche just happenstance has been one to ten million, because I found out that’s a niche where I can help the most owners, because if you’re going underneath the one million dollar range, usually those are just a local bank; like, if you’re buying a very small single-tenant office building that might be worth 500k, or whatever. So those are usually just small bank loans. I deal on the intermediate where maybe a grandma or a grandpa owns a Walgreens, and they need financing on it. And that Walgreens happens to be in Tennessee, but they live in Florida. Well, what stinks for them is that usually they can’t get financing in Tennessee because they don’t live in Tennessee, so usually that loan range is gonna be in the one to five million range, so they don’t know where to go, so I’m the perfect guy to help them when you’re looking in that loan range… Because they’re obviously smart enough to be able to buy commercial real estate and be able to get a loan amount that high, but they’re not doing commercial real estate day to day; they’re probably only refinancing every five or ten years, so that’s where I help out the most owners.

Joe Fairless: Where are you getting the loans from?

Austin Peek: Most of my lenders are called CMBS lenders (commercial mortgage-backed security) or life insurance companies. So life insurance companies actually lend out just like a bank, but their terms are a little bit different. So those are usually the two types that I go to on a regular basis.

I can go to Fannie and Freddie as well, but some owners like to go to them directly. It just depends on where the property is and what the owner is looking for. Like I said, most people I work with, they usually own probably three to ten commercial properties… And again, this is just general; some of them own one, some of them own 20, 30 or even more. But generally speaking, they own a few, so they’re refinancing all those loans every couple of years, or every five or ten years, and they’re just rolling at different times. So usually they call me, because hey, they don’t need to look at the loan market but every one year or two years or every three years.

Joe Fairless: Let’s talk about the pros and cons for CMBS insurance companies and an agency loan, so Freddie or Fannie.

Austin Peek: What I like to do, if it’s alright with you – we’ll first talk about the difference between let’s say a bank loan and a CMBS or a life insurance company loan. So what I was talking about earlier – I live in Jacksonville. If I own an office building in Jacksonville Florida that’s worth two million bucks, and I want just a one million dollar loan, 50% loan-to-value, some of these people might go to a bank, and what bank usually does is they’ll have a loan term that maxes out at three years, or five years, or sometimes just one year, and they just have different options. So every one, or three, or five years I’m usually refinancing that, or doing the loan again with them. And usually, that amortization schedule is like 20 years, so it’s not very long.

Then also, the other thing is that most of those banks require a recourse – it was just one episode right before this of your podcast, where… I think a lot of owners find out what the difference is between recourse and non-recourse when you’re signing a loan… So almost every bank requires a recourse. There’s some special exceptions, but I’d say 95% of them require that.

Joe Fairless: And recourse, real quick, is if something goes wrong, the bank can come after you financially, versus non-recourse it can’t, unless you trigger some sort of obscure clauses.

Austin Peek: Exactly. So that’s the number one difference between, say, a local bank – if I wanted to go do a loan with that local bank at one million dollars, or if I went with the life insurance company at one million dollars. Usually, if it’s a lower LTV, the life insurance company is interested in it and they usually do non-recourse loans. So even if something went bad with the property, if it’s a single tenant and they left, they can only go after the loan amount, and not your personal property and everything else.

So that’s one difference between a bank and CMBS/life insurance companies. The other one is usually you’ll get a longer amortization schedule, and also it depends on — there’s gradual differences between all of them, but you can lock in a term, generally speaking, for a life insurance company up to 25 years. So it could be like a 25/25, so at the end of the 25 years you pay zero.

One of the negatives is that there are pre-payment penalties if you’re doing a life insurance company loan or CMBS loan. So you can’t pay it back early; usually, you can only pay it back three months before the maturity date. So if it’s a ten-year loan, usually you can pay it back nine years and nine months right after that you can start paying it back without penalty. So those are the subtle differences between a bank and a life insurance company/CMBS.

Joe Fairless: Just so I’m summarizing it correctly, and these are just generally speaking – local bank, the loan term maxes out between one to three years, whereas with a life insurance company, that would be the opposite end of the spectrum. You could do maybe 25 years on a 25-year amortization.

Austin Peek: Exactly.

Joe Fairless: Most banks require recourse, whereas CMBS and life insurance it can be non-recourse. The disadvantage – one of them that you mentioned with CMBS and life insurance would be the pre-payment penalties tend to be pretty steep, compared to a local bank that might have more flexibility, which really if it’s a 1-3 year term, that doesn’t even factor into it, because it’s such a short period of time.

Austin Peek: Exactly, so that’s part of the reason that they don’t even worry about it, because usually your term is so short anyhow. It’s not worth negotiating.

Joe Fairless: Okay. What about the fees involved for bank versus CMBS? You basically steered us  in the direction of grouping CMBS and life insurance into the same category, versus banks.

Yeah, I can differentiate between those. I know we only have so much time, so… The difference between CMBS [unintelligible [00:10:31].15] life insurance companies, they’re both non-recourse, again, but usually CMBS is gonna cost you a lot more as far as closing costs, because attorney fees can range up to $25,000 for closing a deal, and that’s even when we’re talking a single tenant. We can get it lower to maybe 20, I’ve even seen 15, but the big thing is because they’re using New York lenders, and New York lenders use New York attorneys. So that’s why the fees for closing a CMBS loan are usually higher, but the amortization schedule for them, they can usually go out to 30 years, versus a life insurance company – usually we’re talking about… Depending on the loan size, again, we’re talking about a 1% to 1,5% closing costs; that’s without a broker fee.

A broker fee is generally 1% as well, so I say all-in you’re looking at about 2% on a life insurance company loan. To close that, there is way less closing costs and there’s usually way less headache, because the CMBS, again, it’s just all these lenders that are securitizing a group of loans, so your one loan is usually a package of maybe 50 loans. They basically package all those together and then sell them on Wall Street.

Joe Fairless: I wanna make sure I heard you correctly… Will you repeat the life insurance estimated closing cost and the CMBS? You said 2%, but I wasn’t sure which one you’re talking about, because I think it got mixed up in my head.

Austin Peek: I would say generally speaking that — and again, CMBS, what they can do is they can work it into the rate. So it’s gonna look maybe about the same on the closing costs, but all in I would just say for both of them it’s slightly higher with a CMBS loan, because instead of the $5,000 attorney that you’re using for a life insurance company loan, you’re using usually a $25,000 attorney for a CMBS loan. So you might be adding $15,000 to $20,000 to the closing costs, but in general if you add them all up I’d say it’s 2% for closing these loans.

Again, the smaller the loan — it really doesn’t matter if I’m closing a one million dollar loan versus a ten million dollar loan. It’s not gonna be 2% on the ten million dollar loan. We’re gonna talk less than 1%. So it doesn’t really change much, it’s just the smaller the loan amount the higher the percentage. Because all these are fixed costs – the appraisal, all the third-party reports etc.

What I try to do for my clients, and I don’t think enough brokers do – I put it in what I call a quote matrix where I’ll put three or four of our best lender quotes, put it in Excel, say “Hey, put the terms, the amortization, the differences between each one”, so you can compare apples to apples. Because I know especially talking over a podcast that maybe it gets confusing talking about all these different things, and trust me, I’ve been doing it for almost ten years, so it gets even confusing to me just saying it verbally. But when I put it in a quote matrix so you can actually compare apples to apples, see which guys and what your overall rate is after you pay the closing costs – that’s what I try to do, so they can make the most wise decision for them.

Joe Fairless: What are the components of a quote matrix, what categories?

Austin Peek: You have the term amortization, and then I’ll put in closing costs, because that matters obviously a lot. I’m bringing up one right now, so I make sure I can just read off exactly one. Then I put in the interest rates, so we can see what the actual spread is. Also, for a CMBS loan – here’s the difference between this and a life insurance company… It’s that they’ll usually acquire reserves for tenant improvements and leasing commissions, and also for capital expenditures. So I’ll put that in the quotes matrix saying “Hey, this lender requires 80 cents per square foot of reserves, versus this one only requires $1,15, or this one requires actually zero, because it’s a life insurance company and they don’t care about that part.”

Basically, I’m taking a lot of different calculations where I put it all in one where they can look, “Hey, this is my interest rate if I add in all the closing costs.” So although the interest rate might look higher on, say, a life insurance company, but overall it might be lower because if you factor in the closing costs of the other one, even though the CMBS lender might look a little bit lower, once you add in all those closing costs, you’re like “Oh, my overall rate is actually not as good.”

When you get 15-page documents from these lenders, it gets complicated. I’m there just to try to make it uncomplicated, and try to put it all in a simplified form for them.

Joe Fairless: And do you have pre-payment penalty in there, too?

Austin Peek: Yeah, [unintelligible [00:14:48].10] Some of them are like — what it is for CMBS is there’s defeasance, it’s called the pre-payment penalty, and then the pre-payment penalty for life insurance companies is yield maintenance. They used to have their own calculators; CMBS is pretty complicated as far as defeasance penalty.

So yeah, I’ll put that all in there for them. Again, I’m just trying to simplify it, even though it might not sound like it from me talking right now… But I promise you, I’m a visual person, so that’s why I try to visualize it and put it all in something that they can actually compare it to.

Joe Fairless: And then you’ll probably have the loan-to-value, right?

Austin Peek: Right, and then there’s usually a minimum debt coverage ratio, or there’s also a minimum debt yield. All these lenders use different percentage or terms to make sure that “Hey, I make sure that they get their loans amounts”, so I look at what the actual NOI (net operating income) is of the property, and make sure we’re meeting their loan-to-value. Because it could quote a higher loan amount, that they’re willing to do a higher loan amount, but if it exceeds their loan-to-value the way they calculate it – because each lender is gonna calculate it a little different… And hey, we’re not gonna get the loan amount that they’re quoting. They might be quoting a two million dollar loan, but hey, using my matrix, and if I’m using 75% LTV, and based on their underwriting in the past, I think the maximum amount we’re gonna get is 1.8 million.

So those little calculations, those really make the difference to make sure the owner picks the right lender. And then also  I tell them which ones are the easiest to close with. Because some of them are very difficult. It might take three times longer with one lender versus another, so I’ll just tell them my past experiences on who’s been the easiest to close with.

If you send me your quote matrix and just black out or erase whatever private information you have, can we share it with the Best Ever listeners?

Austin Peek: Definitely. Actually, I’ve put something else together, too… I’ve put a list together of  150 commercial real estate lenders. I put a link on my website, and I can put another one where it directs to both of them.

Joe Fairless: Oh, let’s just do that. So how can they get that, where do they go?

Austin Peek: It’s Millionaire-Interviews.com, and then if you do /bestever, I already have it set up so you can see what it looks like. All you’ve gotta do is put in your e-mail address and you’ll be sent a list of lenders that has 150 of them that… Basically, I put “Hey, this guy likes to do this type of deal” – retail, office, or multifamily, and what their general loan ranges are. I try to be as transparent as I can, because I thought that would be the most useful. But I can also put a [unintelligible [00:17:12].17]

Joe Fairless: It’s be good. I’ve obviously gotten a bunch of quote matrix for our deals, and it’s fascinating to look at, and look at all the different ways you can analyze it, and since you’ve mentioned you’ve got one that you’ve put together, I think the Best Ever listeners would enjoy that. Your URL, what is it again?

Austin Peek: It’s millionaire-interviews.com, and then if you just do /bestever, then it redirects you right there.

Joe Fairless: So how about you just e-mail my assistant afterwards, and then we’ll make sure we have that link in there, because it might get misconstrued… That’s kind of a long, ugly URL, so we’ll get it so they can easily get there.

Alright, cool. So that’s that. Based on your experience as a lender, what is your best real estate investing advice ever?

Austin Peek: Make sure you read the loan docs and understand what you’re really getting yourself into. With Google out there, you can kind of google all the ups and downs, and I would just make sure you do your research.

Joe Fairless: What are some things that a client of yours who hasn’t worked with you a lot, but is working with you on the first couple deals, they tend to overlook?

Austin Peek: The ease of the transaction. So again, just because one lender is quoting maybe 100k or 200k in the loan amount, if their metrics are not being met, then they’re gonna cut the loan proceeds right before we close, and then my owner is gonna be ticked off. So the main thing – that’s what I try to get over and tell them, I’m like “Hey, these guys give us the best interest rate and they’re giving us the best loan amount, but I want you to know that these guys can be difficult to deal with.” Over a two-month, three-month closing, sometimes they’ll say “Hey, we need to cut the loan term”, or whatever. So that’s the main thing, trying to get over that hurdle with the owner.

Joe Fairless: Yeah, and that has happened before… I’ve interviewed guests on the show for who that unfortunately took place, and they weren’t able to close on their loan, because the lender said on the closing day that they weren’t getting approved. Episode 599 is titled “Big Money Raised, Investor Partners Set, And On The Closing Day The Lender Says…” Mark Mascia, he’s a billion-dollar real estate developer and a friend of mine; he is the interview guest and he talks about that disaster situation where just that happened.

Austin Peek: I know which ones do that, because I’ve had one or two do that to me before where they do it a day or two beforehand, where they’ll try to cut the loan amount or raise the interest rate 0.5%, and being a real estate owner, these guys — it’s not even about the extra percent, it’s that they to screw them at the end and they’re gonna remember that, and then they’re like “Hey, I’m not gonna do the loan with you.” Those are the lenders that you’ve gotta watch out for; they might have the best terms, but if a broker hasn’t closed with them before, it gets a little iffy.

Joe Fairless: Absolutely. It is not just about black and white, it’s the grey space in between, and knowing who’s an ally of yours and what type of relationship you have with them.

Austin Peek: Exactly.

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

Austin Peek: Let’s go!

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

Break: [00:20:28].16] to [00:21:21].17]

Joe Fairless: Best ever book you’ve read?

Austin Peek: I’ve got two of them right here. One is called The Real Estate Game, by William Poorvu, and he’s Harvard Business School, and if you wanna get into commercial real estate, he has all these different stories about different property types and how to look at it. I love that, I’ve read it six or seven times and highlighted and underlined things.

The second one is if you’re trying to get into brokering, even though I’m on the commercial side, Your 1st Year In Real Estate; I think it’s like a $15 book, but it gave me a lot of ideas on how to grow my own mortgage brokerage business. Little tips that you don’t think of, maybe one you want to start a business, they’re in there. So I recommend those two books.

Joe Fairless: Do you invest in deals?

Austin Peek: No, not investing. I’ve done some residential flips, but I’m not getting in the commercial end yet. But best ever deal that I’ve done personally – it’s probably my first one, because that gave me the confidence to go ahead and do other deals. It was called the Austin Laurel Building, which is funny because that is my first name, and there was a girl in high school who used to hate me, and her name was Laurel. So the Austin Laurel building in Tampa, Florida. That was my first deal.

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

Austin Peek: Probably not supporting the owners the whole way as far as checking in or hand-holding. To me, what I’m really good at is doing all the upfront stuff, throwing in quote matrices, making sure I can compare them and give them apples to apples comparisons… But I’m not the best at “Hey, I wanted to let you know where you’re at”, every week checking in, letting him know. Even though I’m doing that on the backend to make sure the deal is getting done… Just communication I think is always key, so that’s probably always one thing that I need to work with as far as just letting the owners know where we’re at all the time.

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

Austin Peek: Really, it’s been now through my podcast. I wanted to do something new and I felt like it was a way to get back to the people who wanna start their own businesses. I was making a lot of old rich guys more rich, is what I like to say with the commercial real estate and mortgage brokering, and I wanna do something a little different. So I’ve been doing that and that’s been my best of giving back I think so far… Just trying to interview entrepreneurs and inspire people who wanna start their own businesses.

Joe Fairless: How can the best ever listeners get in touch with you?

Austin Peek: The best way is Austin@Millionaire-Interviews.com.

Joe Fairless: Cool, and I have since discovered the link, and I guess what was throwing me off was that dash… Millionare-Interviews.com/bestever. You don’t have to remember it, it’s in the show notes link, and I am officially subscribed to your newsletter, I’m going to get that guide for the lenders and their contact info and looking forward to seeing that matrix too, once you have that up and running.

Thank you for being on the show. This was jam-packed, full of practical and specific insight into the lending world and how to think about it, pros and cons of bank loans, and CMBS and insurance companies, what to think about, what to compare against, and the overall approach that we should take in terms of it’s not just about the numbers, it’s also about your relationship with the lender to make sure that even though the numbers look good, the relationship is ever better, so that everyone delivers on what they say they’re gonna deliver on.

Austin Peek: Yeah, absolutely. One last word of wisdom is with financing there are a lot of sketchy guys. I’ve got my CCIM, which is the top 1% of commercial real estate, and I’ve got my masters in real estate, so… Make sure that there’s people that you’re dealing with on the financing that have some credentials, because I will tell you, time and again I feel bad for the owners that get screwed by it, because there’s a lot of sketchy finance guys with hard money out there that are trying to screw the owners out there.

Joe Fairless: I agree, there are a lot of people who are not of integrity, especially in that space; I’ve come across it. So thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Austin Peek: Thanks again, Joe.

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Best Ever Show Real Estate Advice

JF170: How to Buy and Sell Homes on Terms

Today’s Best Ever guest talks about how he buys homes on terms and is able to make $10,000 a pop on each deal while minimizing the risk on the deal.

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Ron LeGrand’s real estate background:

–        Over 35 years of experience as a real estate investor and based in Jacksonville, Florida

–        Visit him at http://www.Ronsfreebook.com

–        Personally bought and sold over 3,000 homes and made millions of dollars in commercial real estate deals

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Joe Fairless