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Andrew is a returning guest on the show and has a story to share that we can learn from. We’ll hear about his recent 41 house portfolio purchase, what he learned, and how we can apply those lessons to our businesses. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Andrew Syrios Real Estate Background:
- Real estate investor at Stewardship Properties
- Company owns around 600 units in four states
- Has three branches in four states (Oregon, Missouri, Kansas and Texas)
- Oversees over 100 properties and 170 units in the Kansas City metro area
- Based in Kansas City, Missouri
- Say hi to him at http://stewardshipproperties.com/
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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.
First off, I hope you’re having a best ever weekend, and because today is Saturday, we’ve got a special segment called Situation Saturday, where a returning Best Ever guest talks about a challenging and/or interesting – ideally both – situation and how they overcame it. And it’s not just to hear a story, but it is to learn what we can learn from their experience and apply it towards our stuff that we’re doing as real estate investor and entrepreneurs.
With us today to talk about a portfolio of 41 houses he purchased about a year ago, and how that came about and what the heck is up with it right now, Andrew Syrios. How are you doing, Andrew?
Andrew Syrios: Good, how about yourself?
Joe Fairless: I am doing well, and nice to have you back on the show. If you want to hear Andrew’s best ever advice, then go to episode 571, titled “Did he pay cash or terms for a 97 SFR portfolio?”
A little bit about Andrew – he is a real estate investor (obviously) at Stewardship Properties. His companies owns around 600 units in four states, and oversees around 100 properties and 170 units in the Kansas City Metro Area. Based in Kansas City, Missouri. With that being said, Andrew, tell us about the 41-unit portfolio.
Andrew Syrios: Yeah, first of all, thank you for having me back on. This 41-unit portfolio was an interesting one. I guess the lesson is that sometimes the best deals are the ones you want the least. You always have to be willing to walk away, sort of thing; that’s probably the greatest leverage you can have in a negotiation.
With this particular deal, we got it sent to us from basically a contact of our, a friend of ours… He met a real estate agent who had this deal and sent it to us. It was one of those deals where there’s a handful of stuff that looked interesting, and then there’s some stuff that’s just a big, long sigh… A lot of properties are in rough areas, or areas that we have a few in, but we don’t really want to put much of a presence.
So the first thing I asked him was “Would you be willing to parse out this portfolio?” There were 18 that we liked, and there were 23 that we didn’t, and can we just make an offer on the 18? And they had no interest.
I think it was like a small hedge fund, or a small group of investors who had bought a bunch of foreclosure, or notes — I think they bought some notes and foreclosed on them and they had to just kind of hodgepodge a portfolio with a handful of good properties in decent areas. One of these houses — we call it the Kramer House, from the levels… Do you remember that episode? He was gonna make them at various levels; every room is on a different level. You walk up a step, then you walk down… So there’s goofy houses in there, and there’s also some great houses – beautiful, Victorian houses in one of the best areas of town, and then a bunch of these ranches in this kind of sketchy area called Ruskin that’s good for cashflow, but it’s also pretty tough, you’re gonna have some property management issues.
A lot of people lost their shirts there, a lot of out of staters. They looked okay, and they bought these properties for inflated values; that was happening a couple years ago. But they didn’t want anything to do with that. They were like “It needs to be purchased all or nothing.”
We kind of looked at a few of them… The portfolio was kind of semi-performing; it was like 80% occupied, but it had a lot of turnover, a lot of rehab when these tenants left. It was very under-rented, but at the same time we knew there was a lot of deferred maintenance that was gonna kind of add up.
But one of the things I think about the portfolio – it’s kind of one of those things where you can be right in the middle, right in the weird middle. It’s too big for a lot of smaller investors, but it’s also too small for a lot of the hedge funds, and it’s also in areas that they usually don’t buy in, so there’s not a lot of buyers for this type of deal.
It’s kind of helpful thinking in those terms – what kind of deals can we purchase that most people aren’t interested in? They’re either too big, too small, they have to close too quick, they need to much work… Whatever.
Maybe you’re really good at investing in a particular area that’s fairly rough; gotten in with Section 8, you know that kind of thing… So if you have that kind of advantage, it really works for you.
So finally I was just talking to my brother, who does our property management [unintelligible [00:06:47].05] “I don’t really want this.” So I said, “Let’s just make a low offer and see what they say.” So we made this offer that we thought was very low. I think it was on at 2 million, and we made an offer about 1.45, or something like that. They came back at like 1.5, so we were just about there. I was shocked they came down so much… Of course, we were like, “We’ll see if we can split the difference…” [laughs] and take a little bit more on it, but we talked to them again… And again, it’s always advantageous to talk to the seller, not just the agent; the seller, if you can.
We kind of skipped over the first part where we talked to the seller, just briefly getting some information about the property; we talked to him again in between then, and what [unintelligible [00:07:34].08] is one of the biggest problems with this – we didn’t do a syndication or a partnership or anything like that, because then we were having to split the equity two ways… And also, because it’s a long, drawn-out turnover rehab situation. It was kind of like “How much money do we have to sit in the escrow, just sitting there waiting for the rehabs, or are we just gonna have to have virtually no cashflow for that first year and a half, or whatever?”
So for those reasons, 1) the weird cashflow situation with a semi-performant group of properties that would need rehab as you went, and the fact that we just don’t want to split any equity… We didn’t wanna do that, but I guess to take a little bit of a step back to explain how we ended up financing this thing, which I think is a fairly creative method… Our normal strategy is the so-called BRRR strategy – Buy, Rehab, Rent, Refinance. So what we do is we buy properties, usually REOs or fixers or absentee owners, or whatever. We fix them up, we rent them out, and then we take a group of them, usually between five and ten, and we bring them to a bank and we refinance it. We get private loans on it upfront, 8% or 9% interest, and then we refinance those out and then we try to put those private lenders onto new properties. It’s just kind of like a wheel that spins around. We get the property with a private lender, rehab it, rent it, refinance it with a bank, put that private lender on a new property.
Well, this is a little bit lucky on our part, but we just happened to have a very large one of these going through… We had 25 properties being refinanced.
Joe Fairless: Okay.
Andrew Syrios: And these were a little bit more expensive too, so it was not quite the same price, but very close. We had a couple other private lenders that we thought we could reach out to. But the advantage here was we could set it where these properties would refinance just before these other properties were set to close, so we could just take these private lenders and move them over to these other properties. Now, one problem with that, since we didn’t wanna cross-collateralize and create this giant mess, nor would these private lenders wanna be cross-collateralized with a bunch of other people that some of them probably didn’t even know… So we wanted to take [unintelligible [00:09:37].11] and move them over to this house, which is an arduous process when you’re trying to put together — I don’t think we ended up financing everyone, but we had something like 30+ trust deeds on 30+ different properties. I think we left a couple free and clear.
So we asked the seller if we could set the closing in four stages; so we closed — there’s 41; 33 of them were in Missouri, and 8 were in Kansas (Kansas City, in both sides, right on the border). So we took that 8 in Kansas and made that one closing, and then the remaining 33 we split into three groups of 11, and we closed each one two weeks apart. We split it up so each portfolio was about the same value, same couple good houses, a couple that are not so good and whatnot… And they approved that.
This allowed us to not try to put together 30+ trust deeds on the same exact day, which would have been just a logistical and accounting — well [unintelligible [00:10:37].10] which would have been just an incredible nightmare. So we were able to split this up over the course of a couple of weeks, and that way it wasn’t such a logistical nightmare and we were able to basically split this package of 41 into four separate, smaller closes.
That also — it wasn’t a big thing, but it gave us a little bit of time to parse out the turnovers and rehabs and the ones that we knew were just vacant and ready to go right away… So we kind of had a double advantage; it was particularly advantageous because we were able to use a form of financing that is predominantly used on just this one-off house, buying it with the trustee from a private lender and then going through the BRRR strategy.
We were able to do that because we had a large portfolio being refinanced, and then turned over into this large portfolio that we were purchasing. We were able to do it on a larger scale using what’s usually a smaller type of financing on them.
Joe Fairless: Who did you go to for that? Financing…
Andrew Syrios: A local bank that we have here that we’ve done a lot of work with, called Bank 21. If you’re in the Kansas City area, I highly recommend looking them up… But they’re unfortunately not a national branch.
Joe Fairless: And they did all four?
Andrew Syrios: No, they’ve refinanced a bunch of properties we already owned and we had been renting out. They refinanced that package of 25. Then we had a bunch of private lenders just sort of [unintelligible [00:12:02].07] that had been paid off from that refinance, and we put them onto the various houses within the package of 41. Does that make sense?
Joe Fairless: It does. From a seller standpoint, was there any downside for you structuring it this way?
Andrew Syrios: For them? I’d say the only downside for them – there’s two minor downsides. One – usually sellers prefer cash out versus financing, just because there’s a possibility with financing that the financing doesn’t come through, and they have to put the property back on the market.
The other downside is that because we’ve split it up into four groups, it took a little bit longer for it to close in that respect, and they could have been caught — it’s presumable that we could have… Not presumable – it’s possible that we could have bought the first two and then not been able to close the last two. We were able to pretty much [unintelligible [00:12:50].18] any concerns they had. They were basically saying that none of our earnest money that we’ve put down upfront would go towards anything but the last closing… So they could have gone on where they closed the first two groups, and then if we backed out then, [unintelligible [00:13:04].22] all the earnest money, plus they had already sold half the package… And because we split it up and got their approval on what groups have closed first, they were basically each very similar groups of properties that closed each time.
So I think as far as closing groups like this, you could even do this if you’re on a smaller scale, with a couple of houses, assuming the seller is having some trouble selling the properties. That was our advantage here, is that this was a weird package of properties to sell. It’s too small for the institutions and too big for most investors, but certainly not all.
Joe Fairless: And that was a year and a half ago?
Andrew Syrios: Yeah, about a year and a half ago.
Joe Fairless: What’s the status of the portfolio now?
Andrew Syrios: Well, it took a while to get through them all, because some of the tenants that were there — I think there’s even a couple that are still there from the original… There’s still a few properties that need to be turned over. But we have turned them all over and rehabbed them all to our specifications and brought them up.
We debated for a while whether to sell the properties that were in the rougher areas, because we actually made them two offers. One was on the stuff that we wanted, and the other was on everything; and the one on everything… We’re paying like $20,000/house for the ones we don’t want, or something like that… [laughs] Very little. And eventually, it’s like — we have properties in these areas, we know how to manage them; they’re good cashflow areas if you do it right. So we decided to keep them, and they’ve done well for us.
At this stage, the portfolio is basically humming along. It took a while to get there, it was definitely a project; if you talk about it in terms of apartments, it would certainly have been a repositioning… At least a minor repositioning. But we also were able to increase the rents substantially. I mean, they were renting houses for $700 that we’re renting for $1,000 or more now.
Joe Fairless: Now that you are a year and a half into it, are you glad that you bought the houses that you didn’t initially want?
Andrew Syrios: I would say absolutely at the prices that we offered for them. [laughs] I think it goes back to the point where — the very first point I was making. If you’re not needy for the deal — you don’t want to be a motivated buyer, even you’ve [unintelligible [00:15:11].21] You don’t wanna become a motivated buyer and be like “I’ve gotta close this thing.” If you keep your distance emotionally from this, like “Well, you know, I don’t even want it…” That was the way we approached it at the beginning; we didn’t really want it, and that made our offer extremely [unintelligible [00:15:27].20] in the eye of the beholder, but it was an offer that we were very happy for them to accept or come close to accepting.
So if you are willing to walk away, that makes a deal all the better if you make that offer. Now, you don’t wanna just say like — you wanna give them some sort of hint that this isn’t something that’s hugely interesting; you don’t wanna just throw out low balls left and right, unless you’re throwing them out to banks… But explain why your offer is going to be low; that makes it a lot easier for people to stomach it, and those who [unintelligible [00:15:54].08] You make a low offer, and then they’ll say no, and then two months later you’ll hear back from them and you’ll get the deal done.
But if you just come up [unintelligible [00:16:05].00] that might offend the person if you can justify the case. In our case, we took the ones we wanted, we made a more competitive offer on them. On the ones we didn’t want, we said we’re not really willing to pay much for these, so we had a low number attached to them. We kind of explained our case to them, and they just wanted them all gone, so they were willing to come down to a number that made it — so it was a very good price for us, even on the properties that we didn’t want.
Joe Fairless: And you said never wanting to be a motivated buyer; from taking that standpoint, what about the thought in your head or in someone’s head of “Yeah, but if I don’t buy it, then I know they’ve got a whole lot of other people who will, so… I do wanna get this deal done.”
Andrew Syrios: I think the key is does the deal make sense on paper? If it’s a deal that works – yeah, go ahead and get it done. But there’s a tendency… It’s like being at the auction; you have your strike price, but once they start jabbering as fast as they normally jabber and whatnot, you kind of get in this sense where you want to “win”… And you don’t win by buying, you win by buying it right. So the key is to keep sort of an emotional distance, I would say, where it doesn’t matter whether — well, it does matter whether you get it, but it only matters whether you get it below your strike price.
If there’s other people willing to buy it above what makes sense for you, let them buy it. There’ll be another one. The key is to do it as dispassionately as possible, I guess.
Joe Fairless: If a Best Ever listener is listening to this, what would be the perfect scenario to implement this approach again? …with the creative financing, and all the stuff that you talked about.
Andrew Syrios: I’d say with regards to small portfolios – small portfolios are often tough… Institutions, the big banks, the big B2R [unintelligible [00:17:46].04] they have no interest in this kind of stuff. A lot of investors who are working around it don’t have really the ability to buy even four houses, five houses, six houses. Or sometimes a seller will be like “I’ll sell all of them, or I’ll sell them in pieces”, but they’d rather sell all of them. So if you can find situations like that, you have an advantage if you can find a way to purchase them all together.
Let’s say you start using the BRRR strategy, or you flip and you have some private lenders… We’ve seen a lot of portfolios, a lot of them are junk, but every once in a while there’s some good ones, and just being able to put together the financing for those gives you a distinct advantage, because often when somebody wants to sell a portfolio of houses, even if they’re willing to sell them in pieces, they’d much rather sell them together. They’re pretty much stating that by listing it as a portfolio.
So if you can find a way to finance them, that gives you a distinct advantage over a lot of investors who can’t. And also, if you can buy some of the junkier ones and justify a lower offer by saying you don’t really want these, that can be an advantage too, because every property has got a value, even if you just wanna sell it. So if you put a very low value on those junky properties and sell it for a little bit over that after you get it – great… Especially if you’re willing to buy bulk, in wholesale, and to sell retail, individually. There’s profit to be made there if you do it right.
This is a deal we’re working on right now, so it’s too early to give any specifics, because I don’t even know if we’re gonna get it done. It’s just an idea… These various situations where it’s an odd deal or it’s a portfolio, and if you do what most people aren’t interested in doing or can’t do, there’s an advantage. We’re looking at a group of condos right now. This guy–
Joe Fairless: And just to clarify… You did this deal a year and a half ago, but you just said that this is a deal that you are trying to get done, so were you referencing the story you are about to tell with the condos?
Andrew Syrios: Yes, the 41 is done.
Joe Fairless: Got it, just to clarify. Okay, cool.
Andrew Syrios: We’ve basically refinanced every house in that portfolio, or all but a couple of them, with banks.
Joe Fairless: Okay.
Andrew Syrios: So that’s done more or less, and it’s all performing. The condo deal is sort of similar. I don’t know if we’re gonna get it; we’re negotiating. But I can give the broad strokes on why it’s a deal that most aren’t interested in or can’t do, and thereby there’s an opportunity.
So it’s 17 condos in a condominium complex. That’s about twice that size. The guy turned an upscale apartment complex into a bunch of condos ten years ago. He sold off about half of them, and then stopped, and now he wants to move his money elsewhere, so he’s selling the rest of them. But the problem is for him if he sells them individually, it’ll take — you can’t put every condo on the market at the same time, otherwise [unintelligible [00:20:19].22] Then he has also rented them all, so he has all these lease in place that makes it tricky in that respect.
Apartment buyers and institutions and stuff like that – they’re not interested, because it’s not the entire apartment complex. They want an apartment complex, not half of one. We on the other hand mostly focus on single-family houses and small multis, and then we do buy larger multifamily properties…
I think actually our first podcast together we talked about the 32-unit apartment complex we did right, and the 29-unit apartment we did wrong… But normally, we’re buying houses. So we bought some condos too, and this kind of fits in like “Okay, we’re basically buying 17 houses or condos in this complex.” They first listed it at about what the average price would be for each of those condos on the market, based on the few comps that have sold recently in that area… But who’s gonna buy it? Institutions, apartment buyers – they’re not interested in that kind of stuff.
Joe Fairless: Yeah, it’s gotta be a local investor, like you.
Andrew Syrios: Yeah, and homeowners are not interested, and small investors – it’s probably too big for them.
Joe Fairless: Yup.
Andrew Syrios: So there’s not many people that wanna buy that, especially since there’s an HOA there, and HOAs – they make condos tough; they can eat away your cashflow and make it pretty tight. But we think we can actually pull a similar financing “trick” with this property as we did with the 41, moving into private lenders there. It won’t cash-flow great, but it’ll cash-flow [unintelligible [00:21:44].28] brought the price down quite a bit, to the point where we’ll have some built-in equity, assuming we’re willing to hold them… Or (which we might do) hold them slowly selling one at a time and getting cashflow, because we’d be getting a good, solid equity position upfront. But it’s one of those things where there’s definitely equity there at the price they wanna sell them, but you can’t extract it quickly… Because you can’t list them all at the same time, and if you’re gonna put them on the market at the same time, you’re gonna crash that market because there’s just too much inventory, right?
The way I put it – the whole is worth less than the sum of its parts… But there are deals like that in that mid-range; small portfolios of houses, portfolios of condos, things like that that the big players aren’t looking for, they’re not interested, and most normal investors just can’t put it together to finance it. So if you can find a way to do that, because there’s less competition, there’s often plays you can make to get pretty good equity margins right up front.
Joe Fairless: The key besides being savvy enough to identify this as an opportunity and then put the pieces in place – the key really is in the financing, because that’s the big hurdle that most people have who are small or medium… Because if you are typically buying one or two properties at a time, you’re gonna have a hard time getting financing for this Frankenstein project. But if you’re too large, then you wouldn’t want to touch this for scalability reasons, and it just seems messy. So the question – and then we’ll wrap up here – is how can someone who’s listening get their financing prepared, so that if they were to come across a portfolio of, say, 45 single-families scattered throughout, or a condo community offering up, say, 30% of the condos, they can strike and act on it?
Andrew Syrios: I’d say there’s a couple ways. The first one is you wanna constantly be building your financing network on both sides. We have it on two sides, basically – private lenders (or private investors, too; it could be equity, too) on the one side, and then your list of banks or other types of lending [unintelligible [00:23:46].09] that can refinance your property of long-term debt. So I’ll always be talking to banks, taking them out to lunch, figuring out what their criteria are, what they’re willing to offer, what kind of properties they’re interested in, and whether or not they have a seasoning requirement. A seasoning requirement is how long you have to own the property before they’re willing to refinance it at the appraised value, instead of just how much money you have into it, which is critical.
Often times these days banks are willing to do it as soon as you have the property rehabbed and rented, they’ll refinance at whatever it appraises at, and the amount of money you have into it doesn’t matter. But we’ve had banks that have been great lenders for us, and all of a sudden they just fall off and get really conservative, or we hit their lending limit and we can’t do anymore… So we have to constantly be finding new banks.
We also always constantly wanna be looking for potential private lenders or private equity investors. That way you’re just talking to people, networking, going to various events… Always be telling people what you do. One way that my dad recommended which I think is great is just sit down with a pen and pad and see “Can I put down ten names of people that might have money sitting in the CD that’s doing nothing, that’s making 0.1% of whatever?” If you put down ten names, see if you can put down 20, see if you can put down 30, and then start talking to these people.
Put together a perspective or a business plan, or if you have done some deals in the past, [unintelligible [00:25:01].24] Give your resume – both your resume in terms of your actual resume, but also your resume in terms of what you’ve done and your business plan, too. Take them out, mention it, see if they’re interested, take them out for lunch…
We’re just constantly trying to grow this list. Once you have a couple people – maybe you have a couple private lenders – you might be in a position for that. If you have four private lenders and you’re looking at a portfolio of five, then all of a sudden that might be something that you can transition over.
Or maybe you have a private lender who’s lent you 100k, but you know they have a million, and then they could lend on more… And also, I’m sure you’ve talked to some people about syndications or partnerships and things like that… If we didn’t have the private lenders to do that portfolio – or this upcoming one with the condos that, again, we might not get, but we’re trying to – you might be able to get a bank to loan 75%, get a partner to bring in either all or most of the down payment, and then you split the equity with them or maybe you give them a preferred return or an interest rate. So maybe you give like 4% interest plus half of the profits, or whatever; there’s a million different ways you can arrange it.
So the more contacts you have, the more people that would be interested in lending to you, the more people that have already lent to you, the more opportunities and possibilities you have to make a deal like this work. If you don’t have very many people that you built these networks with, that you built these relationships with, your options are fewer. And that’s fine, that’s how everybody starts. But as you work, you wanna build that up, and that presents more and more opportunities for these types of creative deals.
Joe Fairless: Andrew, how can the Best Ever listeners get in touch with you?
Andrew Syrios: The best way to get in touch with me is probably on my weekly column for Bigger Pockets. They can also go to my website, which is AndrewSyrios.com, which is pretty small right now; maybe someday I’ll do something more with it. And then again, I have a column on Bigger Pockets.
Joe Fairless: Well, thank you for talking to us about the creative solution and the closing of the 41 single-family home portfolio, and some takeaways… One is if you don’t need to do the deal, then good things can happen from the deal, because you won’t be a motivated buyer. Two – this is I think more important than one, in my opinion – is that as we’re acquiring properties, we’ve got to think about the end at the beginning… Because then if we are doing a good job of buying some single-family homes and then we’re amassing a portfolio, and then “Oh, I need to liquidate!”, if we’re in that in-between stage, then it’s gonna be tough for us to get maximum value for our portfolio, because it’s gonna be a non-traditional buyer who is creative and who is savvy enough to put a deal like this together, like you… But also you and others like you, Andrew, aren’t gonna do it at a premium, because you’re providing a solution to a challenge that others have not been able to solve.
Andrew Syrios: If you’re selling, you don’t wanna be selling to a small market. If you’re selling in that in-between area, or a weird deal, or something like that, you are selling to a small market.
Joe Fairless: And then on the flipside, as active investors we should position ourselves to be able to capitalize on those types of opportunities, and how we do that is we need to 1) find those opportunities, but before that we should focus on the financing network, both debt and equity partners, and you walked through ways to do that… And in particular, I like some of those questions that you ask the banks, with seasoning requirements and if they can refinance at the appraised value, or what their limit is, things like that.
Thanks for being on the show, again. I hope you have a best ever weekend, and we’ll talk to you soon.
Andrew Syrios: Thank you.