JF1495: 3 Ways To Make Your Deals Pencil For Affordable Housing #SituationSaturday with Eddie Lorin

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Eddie is a returning guest who is back today to tell us about affordable housing. We’ll hear why he chooses to go with affordable housing and why he thinks more deals can be made if you can do affordable housing with your properties of potential deals. He also enjoys it because he likes to be able to help with the housing crisis. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Eddie Lorin Real Estate Background:


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Best Ever Listeners:

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

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

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


TRANSCRIPTION

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

With us today, Eddie Lorin. How are you doing, Eddie?

Eddie Lorin: Great, thanks! And you?

Joe Fairless: I’m doing great as well, and nice to have you back on the show. Best Ever listeners, you can listen to Eddie’s best ever advice, episode 1211; it is called “Good deals are made, not found.”

A little bit about Eddie’s background – he for the past 30 years has purchased and transformed over 3 billion dollars’ worth of multifamily real estate. He’s made it his life’s mission to fix the housing affordability crisis in America. Based in Los Angeles. Website is ImpactHousing.com.

Today, because it is the weekend, we’ve got a special segment called Situation Saturday, and it is the current housing crisis facing the U.S. working class, and steps that we can take to capitalize on it or just be more aware of it. With that being said, Eddie, will you give the Best Ever listeners a little bit more about your background, just as a refresher, and then we’ll get right into the housing crisis?

Eddie Lorin: Sure. I’m a NOAH guy. What’s NOAH? Naturally Occurring Affordable Housing. You can build for $500/door in urban areas, or you can buy at $150-$200/door (or even less) and deem it affordable. That’s what I’m trying to champion. Let all the new product go to the people that can afford it, and let the existing product that’s older, and basically less expensive, go to the working class. That’s what it’s about.

The problem is that a lot of people are still stuck and staying in these rent control departments, and they don’t belong there… As well as they’re just staying put, and we need to push them up, and we need to push in the people that have one foot on a banana peel. I’m a crusader for the fellas that are just hard-working, decent human beings trying to make ends meet.

Joe Fairless: And how does that come to fruition with what you do?

Eddie Lorin: Well, here’s a prime example. I did the first NOAH deal in the city of Los Angeles; I’m very proud, we’ve just closed it yesterday. We took 50 units in Korea Town, and through government-sponsored opportunities i.e. property tax abatement, we were able to cap the rents based on the area median income of what people make. The affordable housing business is based on what’s the area median income and the rent associated with that. No one should pay more than 30% of whatever they make. As a result, the rents are capped at a certain level. And again, the quid pro quo is to have a property tax abatement, and you need the right capital to invest. The returns are still very solid, but it’s a longer-term play and less cashflow, because of course, if you’re gonna cap the rents and make things affordable, it’s more like a 4%-5% return than the normal 8%-10% returns that we get from market rate investments, cash-on-cash, day one.

Joe Fairless: You mentioned a longer-term play, too…

Eddie Lorin: Yeah, 15 years is what we’re gonna be looking at here on this first property. It’s a 1920’s building, it’s studios and ones, it’s ideal for transitional housing and some of the homeless people that are on vouchers… That’s what it’s earmarked for.

So every vacancy will be earmarked for these people, that are through a non-profit which is called People Concern, and they basically provide counseling services and social work and check-up on all their meds, and retraining workforce… They do everything, they package it up, and every time we have a vacancy, they’ll come in.

These are people that are gonna stay for a long period of time, because they’re trying to make their transition back into the workplace. They really can’t afford the rent anymore. In Los Angeles alone it’s estimated by the USC’s Price School, which I’m very involved with, 50% of the homeless are not homeless because they’re talking to themselves and they’re crazy, or whatever you wanna say, or they’re mentally ill – they actually just can’t afford rent anymore.

People think the homeless are all pathetic, and some of them are, and it’s sad, but we don’t deal with those people. We wanna deal with the people who can function, and still have a job, but their job is not enough to pay the rent. You can be paying 50% of your income on rent; let’s say you make $40,000, and you could be paying $20,000 a year in rent, and then if you add in your transportation costs, you’re actually paying 70%. So we’ve gotta make sure that people can live where they work, or somewhere close, and near public transportation… Concepts like transit-oriented development (TODs). These are some of the concepts.

Joe Fairless: Why 15 years?

Eddie Lorin: That’s the California pre-payment penalty on this particular program. But we need to come up with more creative programs, not just the government, to be able to finance this stuff. We need private foundations and individuals and wealthy people to step in where the government really can’t. This is just a pilot program. There’s only so much doe set aside for this, what we can do. It really needs to expand to a multi-faceted level of different colleagues and constituents and stakeholders. It’s a very complicated issue. We need to build our way out of the problem, we need to buy and deem product affordable, and we need to bring in many levels of tranches of different financing and equity to make these things happen.

Joe Fairless: From an investor’s standpoint – you mentioned 4%-5% in general, and like a 15-year project… What’s the exit plan at the end of 15 years?

Eddie Lorin: Well, you’re riding up area median income. It’s a different mentality, different model, it’s a longer-term play, but area median income does go up over time, and rents will go up in conjunction with area median income, rather than market forces.

Look, in New York stuff trades for 600k-700k/door; that’s old product. Here in Los Angeles we’re still at 200k/door for old product. I think there’s a lot of room for opportunities of appreciation… And there’s rent control in New York, so it’s a trade-off, but there’s still plenty of headroom to make money long-term in urban real estate, because it’s supply and demand. Look, we have a huge housing shortage. L.A. alone – 500,000 units short. Across the country is four million units short. You can’t lose, potentially. The SEC will get mad at me for saying that. [laughs]

I mean, how could you lose money if you’re investing in housing? Not A-class, not $3,000-$4,000 rents, but $1,000-$1,500 rents. It’s hard to imagine how you can get hurt, that’s all I’m saying.

Joe Fairless: As a listener who’s listening to this somewhere else other than Los Angeles, and they’re a multifamily investor or aspiring multifamily investor, or just any type of real estate investor, what action can be taken on their behalf?

Eddie Lorin: Well, it’s gotta be a public-private partnership. If you wanna do it yourself, you’ve gotta go to the local jurisdiction and say “Look, I wanna supply affordable housing.” They’re gonna say “I love you. Step up, please. How can we help?” You’re gonna say, “Look, I need a property tax abatement, I need some low-interest financing, I need some supplemental vouchers, because if all I’m gonna get is $800 from the Section 8, I need $1,000 rents to make this deal work. Where do I get the $200/month?” “Oh, well this local foundation is in touch. They wanna help to solve the problem.”

Look, it’s not easy. I’m a crusader. I’m pushing a rock up a hill trying to get these people to step in, and it’s very slow and it’s very hard. If you’re not patient and you’re not passionate about solving this problem, I wouldn’t bother. It is a difficult situation, it is gut-wrenching, but it’s rewarding when you can finally get something done.

It took me two years to get one building done in the city of Los Angeles. But more people have to fight the fight, and it’s not easy. Or you can invest with a guy like me, and that’s the difference. In Maryland we’re buying a deal, and actually the county had the right to purchase it, and in order to keep them from purchasing it, we put on restrictions, and I’m asking them and I’m hoping they come back with low-interest financing as a quid pro quo, because they’re not gonna give a property tax abatement… There’s gotta be some offset for putting on rent restrictions, if you wanna do that.

My theory is that Amazon’s going to the Beltway, but that’s a different story. But I think investing there is an amazing opportunity, and there’s such a need for affordable housing there… And if you bring 50,000 units to wherever Amazon ends up – again, I think they’re gonna end up there – you’re gonna have massive, massive–

Joe Fairless: I agree, by the way. I think it’s going to DC, too.

Eddie Lorin: Yeah, he owns The Post, he has a 23 million dollar house, and the third thing is he’s got a sales tax issue politically, and “Wink-wink, Washington… I’ll bring all these jobs here, and we won’t have to charge sales tax.” Again, my theory. I don’t know.

Joe Fairless: Yeah, my theory, too. Who the heck knows… Speculation, but I agree. I didn’t initially, but then once they announced the second or the finalists, that’s what I thought, too. Well, affordable housing – there are three things you can do to help make the numbers pencil out; one of the three things, or multiple of the three things you HAVE to do to make the numbers pencil out, most likely – one, you said property tax abatement; two, low-interest financing, and three, supplemental vouchers. Where would you go for each of those three?

Eddie Lorin: [laughs] Property tax abatement is purely government, pushing the rock uphill and telling them “You want affordable housing? It’s a hell of a lot cheaper to just give up property tax a year, rather than fund all these new developments, which are so expensive. It’s cheaper to do it this way, and it’s faster”, and it avoids the [unintelligible [00:13:12].13] problem, right? If you buy existing product, there’s no neighbor who can complain “I don’t want the homeless here” or “I don’t want low-income housing here.” It already exists, they can’t stop you. So this is the crusade with the government agencies, and it’s tedious and time-consuming and it will be something that’s a love of your life for years… But again, we all have to fight the fight, and I’m trying to lead the fight. So that’s the government, on the property tax abatement.

Joe Fairless: But specifically, when you say the government – specifically where do you go for–

Eddie Lorin: The town hall, or whoever you pay your property taxes to, the county assessor; you need to start there, and then you need to see what politically needs to happen in order to get this approved for a property tax abatement. Every county is different, I don’t know.

Joe Fairless: What are some examples for what you’ve come across, what needs to be done?

Eddie Lorin: I’m doing this program through CalHFA, which is a financing agency in California, and they’re associated with what’s called the LURA – Land Use Restriction Agreement. And in the state of California, it’s statutory that you can avoid property taxes if you keep your rents at a certain level, based on area median income. So that’s one example.

You have to dig, and dig, and dig, and fight, and put up with a lot of rejection. It’s not easy. Sorry to be so blunt.

Joe Fairless: No, you’ve made that clear, we got that. Okay, so – property tax abatement, that’s how we follow the process. The next one is low-interest financing.

Eddie Lorin: Well, that can come from the government agencies. Again, you network around local foundations and wealthy people who are interested in helping the world, and helping to solve the problem. There’s a certain bucket called “Program-related investment.” Let’s say you’re a billion-dollar foundation. The IRS says you must give away 5% of your money, or 50 million dollars a year. Give away, or you can do a low-interest loan called a program-related investment. It stays evergreen on your balance sheet, rather than being gone, in the form of a grant, as long as it’s not a market rate investment, it’s below market… So you can loan money at 2%-3%, which if you’re buying a 4-cap, you’ve gotta have equity that’s cheaper than a 4-cap if you’re financing [unintelligible [00:15:29].16] So that’s what you need, is that low-interest financing from wealthy people, or a foundation, or a government agency, or whoever it’s gonna do it, and that’s it.

Then the third is also government and foundations, to do a supplemental voucher. Now, it’s illegal as it stands now to put any supplemental vouchers behind a Section 8 voucher. That needs to change. I don’t know how to change it, but it must change, and there must be some way for people to be able to supplement their rent if they’re getting vouchers. Let’s say the rent is $1,000. Someone is making minimum wage. The most they’re supposed to pay is 30%, so the most they should pay in rent is $550. They’re going to get $450 in a voucher from the government to the thousand dollars, right?

Joe Fairless: Yup.

Eddie Lorin: Well, what if you need $1,200 to make the deal pencil, because it’s a competitive environment, and the pricing is too high to make $1,000 rents work? You need to underwrite another $200. You’ve gotta find it somewhere, and it’s gotta be lawful, and I’m trying to figure it out. But you asked me a solution, and I didn’t say it was possible. It needs to be possible, it needs to happen, and I will make it happen, or someone will.

Joe Fairless: What’s the easiest part of the process?

Eddie Lorin: Finding a deal that’s cheap enough to work, or finding the benevolent capital who’s willing to take a lower return short-term for a long-term appreciation, who believes in the market and believes in the demand for affordable housing. Look, it’s all about your cost of capital in any real estate investment, and you have to be able to make money in the process. It’s a lot of work, you can hear it in my voice; I need to make money too, right? I’ve got a staff, it’s a lot of work, and to find the right investor is the key. Someone who really says “You know what, I love what you’re doing. I don’t need to bust your balls and make a 20 IRR. I’m happy with less. Let’s change the world together, one apartment at a time.” That’s what is needed the most, it’s capital.

Joe Fairless: What does the IRR pencil at to the limited partner after 15 years averaging 4%-5%?

Eddie Lorin: Well, including the sale, it’s probably 11%-12%… Which is fine, but they say “Ew, it’s affordable housing. Ew, it’s old product. Ew, it’s this, ew, it’s that. I like shiny product.” One excuse is as good as the next, is the issue. But people need to be willing to roll up their sleeves and believe in the long-term and look at other urban areas, how prices have jumped, and you’ve gotta hold your nose and say “Oh my god, 200k/door for this?” Soon it will be 400k a door, in 15 years, just based on “Buy buildings, buy real estate. They’re not making any more of it.” Basic.

Joe Fairless: Anything else as it relates to affordable housing? You actually talked through how to act on it, which is great for the Best Ever listeners who are looking to do this… The three things, which I’ll summarize in a little bit. Anything as it relates to this topic that we haven’t talked about, that you think we should?

Eddie Lorin: Look, the government needs to be more involved in solving the problem. This administration unfortunately is not doing enough. I’m not gonna get political; I’m just gonna tell you that instead of cutting the budget at HUD, we need to increase the budget at HUD, and there’s nothing any of us can do, other than voting the people who do believe in this.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing and get in touch with you?

Eddie Lorin: It’s ImpactHousing.com. You can find me there, and e-mail me through there. It’s really a complex issue, but its’ pretty simple if everybody would get on the same page and not be afraid. So anybody who wants to be part of the solution, anybody who has capital that they feel they want to invest for a special purpose, please let me know.

Joe Fairless: Three ways that you can approach having affordable housing make sense when you’re running your numbers. One is property tax abatement – you talked about that. Two is low-interest financing, and three – supplemental vouchers. You went into detail with each of those three, as well as just talking about the overall approach and why it’s needed, and the 50 units that you did in Koreatown. Congratulations on that.

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

Eddie Lorin: You too, thanks.

JF1472: From Comedy Writer On Family Guy To Real Estate Investor with Mark Hentemann

Listen to the Episode Below (29:46)
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Mark bought his very first investment in LA while he was working on season 1 of Family Guy. He was hooked after the first deal and knew that he wanted to do it for the rest of his life. Now mark has about 140 units, all multifamily, all in Los Angeles. Hear how he has been able to scale up in a tough market. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Mark Hentemann Real Estate Background:

  • Writer/Producer/Actor in TV & Film – He was part of the team that launched family guy
  • Real Estate Investor for 17 years focused on multifamily
  • Focus on value-add, the niches, and dislocations caused by rent control in a diverse, sometimes challenging metro
  • Based in LA
  • Say hi to him at markhentemann@me.com
  • Best Ever Book: Sapiens by Yuval Harari

Get more real estate investing tips every week by subscribing for our newsletter at BestEverNewsLetter.com


Best Ever Listeners:

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

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

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


TRANSCRIPTION

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

Mark Hentemann: Great! How about yourself?

Joe Fairless: I’m doing great, and nice to have you on the show. A little bit about Mark – he is a writer/producer/actor in TV and film. He was a part of the team that launched The Family Guy, he’s also been a real estate investor for 17 years, focused on multifamily. His focus is on value-add, and we’re gonna talk more about that. Based in Los Angeles. With that being said, Mark, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Mark Hentemann: Sure. I’m originally from Ohio – I think where you’re from, as well… Or you’re living there now. I started as a greeting card writer and illustrator at American Greetings in Cleveland, and then moved into late-night comedy with writing for David Letterman, then moved out to L.A. and got hooked up with a brand new show called Family Guy back in 1999, and was through that after my first couple scripts payments, where I had a little bit of money saved up. I was trying to move out of my one-bedroom apartment and got talked into buying something, and that got me into real estate.

Joe Fairless: Who talked you into it?

Mark Hentemann: It was completely by accident. I’m an accidental real estate investor. I was looking to move into a new apartment, but I think across the street from the apartment building I was looking at was an open house, and the broker there said “Why are you throwing your money away on rent when you could own something?” My knee-jerk response was “I am in the entertainment industry. Do you think I wanna be saddled with the responsibility of a mortgage? My show could be canceled tomorrow, and I could be out of work for a couple of years.” I was on Family Guy and we didn’t even know if it would make it through the first season.

Joe Fairless: So that’s what you said, and then did that broker convince you, or…?

Mark Hentemann: You know, our conversation was — she gave me some good reasons why I should invest and build a nest egg and some passive income, and I said “Alright, look, the only way I’m gonna invest in anything is it would have to be the best investment I’d ever make. Don’t show me any pretty house. Show me something that’s a dump and that is undervalued, and that will provide me with some kind of financial cushion.”

So we parted ways, and I figured I’d never hear from her again… But she called me a couple weeks later and she said “I found the investment property that you need to buy. The trick is you have to become a landlord” My reaction was like “A landlord?! I don’t wanna be a landlord.” But I met her there, and it was kind of a dilapidated duplex in Hollywood, and it had goats and chickens being raised in the backyard. The sellers were moving to Kansas to live off the grid, and they were digging an underground house… So they were kind of eccentric.

Joe Fairless: Oh, yeah.

Mark Hentemann: But I could see the potential in it. It was one of those 1920’s buildings that had great original features to it. Not a ton had been done, but it just needed a ton of cosmetic work. I decided to take the plunge, and I was like “Alright…” I held my breath, jumped in… Of course, it was L.A., so there was 15 other bidders on this thing, and it began this rollercoaster ride of increasing our price almost daily.

I had offered $350,000 as my initial offer, and after two weeks the realtor was like “You are in the top two. If you go to 435k, it’s yours.” It was traumatic, it was nerve-wracking, I couldn’t sleep, but I pulled the trigger and got it. I immediately had huge buyer’s remorse; I thought I’d just made the biggest mistake in my life. But I tried to embrace it and jumped in, and tried to become a landlord.

My first tenant was a guy named Mike Henry, who works on Family Guy. He does the role of Cleveland, and Herbert, and Consuela, if people have watched the show. I got in and tried to learn how to become a landlord. He was a good test of a tenant.

It was fun. I did the fix-up and agonized over it. I owned the duplex for about five years, and sold it – and I attribute this 100% to luck, but I was riding a rising tide in the market in the early 2000’s, and ironically, I thought the market was already too hot when I got in, but I got out in 2005 and made a great profit. I think I sold it for 1.27 million, and I bought it for 435k.

Joe Fairless: That’s a pretty good profit, absolutely. How much did you put into it?

Mark Hentemann: I put in 43k. I did the 10% down as a first-time buyer. Looking back, I would have done one of those FHA loans, where you can get even lower. I like leverage; leverage seems to equate to better returns, as I look back on all my investments.

Joe Fairless: Now fast-forwarding to today – what does your portfolio look like and where is your focus?

Mark Hentemann: Well, after that experience I was hooked. I fell in love with real estate as I was doing this. It was a little trying, and I had to get over the bumps and learn a lot about it, but I had decided that this is something that I wanna do for the rest of my life, and I started to collect buildings.

Right now I have about 140 units, all multifamily, all in Los Angeles.

Joe Fairless: And you’ve been investing in your backyard… Why L.A. versus Kansas, or somewhere else?

Mark Hentemann: Well, I think I want to move outside of L.A. and I have looked at things… I got in a bidding on an 82-unit building in Cleveland a couple months ago, and I was really excited. The fundamentals of that building were so good… But there were eight other buyers and I was second, or something like that. I got outbid.

Joe Fairless: You’ve gotta tell them you’ll write them into an episode of The Family Guy, or something…

Mark Hentemann: Right… [laughs] I’ve gotta use some other angle to get in there. But I’m looking in Salt Lake City… There’s cities that I like, but yes, I’ve gotta get out of my backyard, and I will… But so far, L.A. is an interesting market. It’s a vibrant economy, it’s so diverse… It feels to me like there’s 120 pockets of L.A., and I know them, I drive them, so I know street by street. And in my experience, and even as L.A. gets heated up as it has been, I can see – at least I fancy myself as being able to see – some neighborhoods that I know are inevitably going to improve, just by their proximity to massive development, by their proximity to downtown, which is exploding, and they’re still very affordable.

I have that knowledge of L.A. that I don’t have at any other city, which has allowed me to continue to find deals in a complex market, even with thousands of other investors competing with me.

Joe Fairless: Oh yeah, and I’m looking forward to talking to you about your approach, because I don’t interview a whole lot of investors who live in L.A. and actively acquire a portfolio of multifamily properties in L.A. What was the last property you bought?

Mark Hentemann: The last property I bought was a 36-unit building, and it was in an area called West Lake in L.A., which is an area that I like a lot. Like I said, it’s really close to downtown.

It was an interesting scenario… I do this search — my approach is I get a ton of deals e-mailed to me almost annoyingly on my e-mail every day, and anything that’s interesting, I throw into a folder. But then I’ll just go on searches of my own, and I’ll apply filters. I like cost per square foot; I think it’s a great basic metric. You have a lot of metrics to process and synthesize as you look at a property, and [unintelligible [00:11:09].09] and you never get everything you want. Sometimes you get a great cap rate, but the cost per square foot is really high… And I like cost per square foot. It’s straightforward, it’s honest, it tells you what the asset is worth… So I look for that.

I’ll even go on something like LoopNet and do a filter; there’s 20,000 buildings for sale at any given time in L.A. I’ll put a filter on for really obscenely low cost per square foot, and this is how I found this building in West Lake, this last 36-unit building. I think I put $210/square foot or less. To give you some perspective, in L.A. price per square foot can go up to $700 or $800 per square foot. I think the average is maybe high threes to mid fours… And I found a building.

As usual, my search for cost per square foot resulted in maybe 15-20 buildings. I eliminated 12 of them…

Joe Fairless: How come? Based on what?

Mark Hentemann: I know the neighborhood, I could look at the building and see “Alright, that’s in a rough pocket. That building looks terrible.” Kind of analyze why it’s priced  so low. Often times there’s a good reason why it’s priced so low, but there’s always anomalies where there’s buildings that are priced low, and maybe it’s for some other reason that’s not evident on the setup. Occasionally, some of those are in those early stages, up and coming markets. This one fit that profile, and I happened to know the broker; I had done some deals with him.

I called him and I said “Hey, this looks interesting. What’s the situation?” He said, “As your friend, take my advice: run the other way.” I was like, “What? What do you mean?” He’s like “This is our third escrow, and it’s just about to fall out, and this buyer is gonna back out. There’s three lawsuits against the sellers, and it’s all tenant lawsuits over issues with the buildings.” There are these predator law firms that all they do is look for vulnerable landlords, and they’ve found this team — I think this was a partnership that was running this; it might have even been a syndication… And he said “They’re trying to manage it themselves. It’s 36 units and they’re not addressing things, and this “predatory” law firm has found a gold mine in this building, and they just keep issuing lawsuit after lawsuit, and they’ve won the first couple, so they’re emboldened.”

I was fascinated by this, and I was just thinking “Well, he’s not gonna be able to sell and pass on his legal liability to anyone else.” He was like, “Yeah, you’re right.” I was like, “I’m interested in this. Keep me in mind. Let me know if this seller backs out.” So I went and immediately called my lawyer. I said, “Hey, can I do this?” I told him the situation and my lawyer was like “Yeah, you can absolutely do this.” He’s a multifamily investor as well. He said “You need an indemnification agreement. I’ll look at it and I’ll make sure it’s bulletproof.”

I called my insurance agent, and I said “How can I protect myself?” He said “You’ve already got an umbrella policy, you’ve already got liability… We’ll just boost your amounts on this and we’ll be prepared if you end up in that situation.”

I called my property manager – they’re multifamily investors, too – and I said “Do you think I could do this? This is the situation”, and they said “Yeah, absolutely. We’ve bought these types of buildings.” They’ve been in business for like 50 years. These are good opportunities. They said “This is how you do it. The problem is the current owner is trying to manage it themselves, and they’re exposing themselves to, obviously, the litigation that is happening.” He said “Oh day one we send an e-mail to all tenants saying “All issues have to be submitted by e-mail, in writing, and we’ll address everything.” Once you have a paper trail, that’s your defense against these lawsuits.” He said “There are those law firms out there that smell blood with these buildings, but if you just dot your i’s and cross your t’s, they’re gonna realize that you’re not a good target for them. They’re not gonna get very far, and they’re gonna move on and look for someone else.”

So that’s what I’ve done, and I bought that. That was now five or six months ago, and I’m very happy. We’ve increased the income a lot… I bought it at $178/square foot. It’s probably twice that, I would say, in this area, because this area is getting very hot… So I’m hopeful.

Joe Fairless: How much was it? What was the total purchase price?

Mark Hentemann: The purchase price was listed at 4,5 million. I bought it for 3,95, and it was already well priced at the 4,5 million dollars.

Joe Fairless: I noticed when you were calling your team, the one team member you didn’t mention that you called was your lender. Did you pay all cash, or did you have a loan on it?

Mark Hentemann: No, I did. Sorry, I skipped them.

Joe Fairless: They’re not that important, are they?

Mark Hentemann: [laughs] No, he’s great. I use the same loan broker; that’s what I’ve fallen into. He’s really good, and I’ve used him a lot. I called him and I said “Can I get financing on this?” and he said “Over the years we’ve put you with seven different lenders, and there’s this one lender – they’re good with these types of properties. They don’t have the issues that others do.” He kind of knows all the lenders. He said, “Let me make some calls. I’ll float it by them informally.”

He called me back and he said, “I think we’ve got a great chance of getting them to finance this”, and ultimately, they did.

Joe Fairless: Do you remember the high-level terms of that loan?

Mark Hentemann: The high-level terms? Yes, it was 25% down, 75% LTV. I think it either a 3,75% interest, or 4% even, and it was for a five-year fixed.

Joe Fairless: Were you planning on refinancing it after you get it turned around?

Mark Hentemann: I think so. That’s the pattern that I’ve fallen in with almost all of my buildings – I like five-year fixed. Maybe I’ll fine-tune my process at some point; I’m kind of working on this now. I don’t know if other people have done this, but I now have enough buildings, enough equity – across my primary residence, I have a second home – that I’m looking into getting an equity line that is substantial. I currently have one that goes up to like 1.2 million, but I would love the ability to close with an equity line, do value-add, and then put on longer-term financing.

Thus far, I’ve always bought with long-term financing upfront, done my value-add, and after five years I’ll either refinance and pull cash out to buy a new building, or if it’s a smaller building, I’ll sell, 1031, and get into the larger unit mix.

Joe Fairless: Once you closed on the property, you’ve got all the team members in place, what was your primary focus to make sure that everything was headed in the right direction?

Mark Hentemann: Well, with this specific building I was calling my property management company almost every day, because I know they have a lot of buildings that they’re managing, and I said “Remember, this building has issues.” Through the broker, I said “Hey, do you think I can talk to the seller or his team?” I was able to do that, and I talked to their asset manager and I said “What’s the deal? What was happening there?” She was very helpful and honest, and she’s like “We made some mistakes, but what had happened is that this law firm was using one or two people in the building as their point people, and they were getting them to rally the other tenants and get them to participate in these lawsuits.” She said “If you can buy out these tenants and get them to move out…” Obviously, L.A. has rent control and restrictions, so she said “If you can find a way to get them out of the building, I think you’ll solve 90% of your problem.” So that became a focus.

One of them just stunningly – and pleasantly surprised – move out on their own. Then the other one, it took about five months. I think we bought them out. It wasn’t a huge amount of money, but I was relieved to have that happen. And since then, I monitor that building. I said, if I ever get a notice to comply that comes from the city, I call them immediately and I say “What is this? This needs to get corrected immediately.” And just kind of staying on top of it.

Joe Fairless: This deal seemed like quite a challenging deal, especially for  your team. Has there been another deal that was equally challenging?

Mark Hentemann: If I go through my history, equally challenging — that first duplex I bought felt that challenging, just because I was new. But in 2008 — I thought the market was really heated in 2004. I actually thought it was too heated in 2000, when I bought my duplex, but I was brand new, naive, and didn’t know much. But as the mid-2000’s progressed, in 2004, 2005, 2006, every year we were setting new records for building values, and I was like “Oh god, I don’t know if I should stay in or get out.” I was being very cautious. In 2008 I bought a building, and I convinced some of my co-writers on family guy to go in it with me. I was like, “You guys gotta get into real estate investing!” I’ll tell that to anybody; whatever your job is, start building that passive income. It’s been the most amazing hedge against a career in the entertainment industry, and a way to build wealth that makes you just feel a lot more secure as you’re going through, particularly in my instance of volatile industry.

So I brought these people on in 2008. While we were in escrow right after we removed contingencies, Lehman Brothers crashed and the whole economy collapsed. I was like, “Oh, no…! Right when I bring these smartass friends of mine that I see every day into this thing, after evangelizing to them about real estate, I’m gonna lose their money.” That was trying…

Joe Fairless: Did you close?

Mark Hentemann: I did close. I had removed contingencies. This building was distressed… I had this — not to go up on a sidetrack, but in an early stage of a market boom, I tend to buy more premium assets; that’s the only time I’ll ever go for B+, A- properties. But as a boom market matures and gets late in its stage, I get cheap; I just go for the cheapest buildings, because I just want to be protected. I imagine that the world is gonna collapse. There’s gonna be a collapse; or not a collapse, but any kind of correction.

In the mid-2000’s, when I saw the mortgage issues that were going on, I thought it could be severe, so I bought in a working-class neighborhood a very bread and butter building, that was mismanaged… This is the only other time I bought from sellers that were suing each other; these sellers were suing each other. But there were a lot of things — it was a great value-add opportunity, so I closed. Long story short – I closed, despite the circumstances, and I’m sure that the value declined, but we just kind of rode it out. I did not see a huge fluctuation or drop in rents that we were receiving; I think it was because we were that kind of middle of the road, very working class. Their incomes hadn’t spiked during the boom, and I think the profile of the tenants was they were in industries that weren’t impacted as strongly by the recession. So we rode it out.

Joe Fairless: You held on to it and you still have it today?

Mark Hentemann: I sold it in 2015, and thank god, I gave my partners a triple return of what they had invested. I happily sent them an e-mail with the stock market performance during the dates that we owned it.

Joe Fairless: [laughs] I love it.

Mark Hentemann: I think the stock market returned 48%, and I gave them 199% percent return.

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

Mark Hentemann: From my perspective, I have a job that I like; I love it. I’m still doing what I wanna do, but man, investing in real estate made my job so much more fun, because it took away the anxiety, it took away the stress, the uncertainty of it… It’s been, like I’ve mentioned, the perfect hedge against a career in any volatile or uncertain industry, and it seems like every industry nowadays is uncertain. The economy is changing, technology is changing things so rapidly that I would advise anybody, as early as you can, start investing passively.

If they are not inclined to roll their sleeves up and manage these properties themselves, they could become a passive investor with someone like yourself, as I do. I wanted to participate in the Texas market, so I’m excited about that, to be working with you… Get in the game, but be careful right now; there is going to be some kind of correction, I don’t know when; nobody knows when, but the cycles are pretty predictable.

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

Mark Hentemann: Sure.

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

Break: [[00:24:47].09] to [[00:25:33].27]

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

Mark Hentemann: Best ever book recently – Sapiens, by Yuval Noah Harari. I don’t know if you’ve heard of it, but he’s a scientist and he explores where the human race has come from and where it’s going, and in the process gets into everything, like economics, and religion, and all aspects of society. It’s really fascinating. It’s one of those rare books where it’s relentlessly thought-provoking and mind-blowing. On every couple pages I just had to stop and be like “Wow, I can’t believe that.”

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

Mark Hentemann: A big mistake was the story I just told – don’t go into escrow… I can identify a mistake that I made in that transaction, which might be familiar in this day and age – I had started to pull back from my investing in maybe 2006, and I watched the market continue to set new records in ’07 and ’08. I had some money and I was like “I’ve gotta get back in.” I wished there was a small correction so that I could jump in, buy on a correction, enjoy at a discount and then ride the market as it continues to go upward, which it had been doing for ten years; you’re starting to get numb to it, and thinking it’s gonna go on forever.

So when the market had a little dip in early 2008, I got excited; it dropped 10%, and I’m like “This is the time to get in”, and that’s where I jumped in on this building. However, I think that happened to a lot of people that were waiting and they were trying to be patient, but the market just kept going up year after year after year in the mid-2000’s, and my mistake, to summarize, is I mistook what I thought was a temporary small correction on what would continue to be an upward climb. I was at the tip of the waterfall, and it was gonna go down.

I think that’s a tempting thing to do for a lot of people in a market like there is today, where prices have been going up. I guess the silver lining is I’m thrilled that what I did buy had solid fundamentals, so… Keep that in mind.

Joe Fairless: And how can the Best Ever listeners either get in touch with you or learn more about what you’ve got going on?

Mark Hentemann: They’re welcome to e-mail me, it’s my full name – markhentemann@me.com. If they wanna reach out, I love talking to other investors. If they’re local and I have the time, I’ll meet up with them. I’m in joke-writing comedy world all day, so I love interacting with real estate investors.

Joe Fairless: And adults, having adult conversation?

Mark Hentemann: [laughs] Exactly. People that could talk finances.

Joe Fairless: Right, right. Well, Mark, thank you so much for being on the show. Thanks for talking about how you got started, and I’m glad I asked about the last deal, that 36-unit. Really interesting. A lot of lessons learned on that, as well as the types of team members that you brought in, made sure that they were on the same page prior to you entering into the fray… And the 2008 property – you bought it at the exact wrong time, but you weren’t forced to sell, therefore you did pretty darn well with you and your investors; almost a 200% return to the people who you were partnering with… That’s a good lesson, especially for anyone now who’s buying and they’re anticipating a correction, which I believe they should… Buying the right way, buying for cashflow, buying with debt that is long-term and having adequate cash reserves so that you can ride out any type of storm that might come your way.

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

Mark Hentemann: Thanks, this was great. I really appreciate it.

 

JF1467: Building Your Real Estate Brand Through Books #SituationSaturday with Julie Broad

Listen to the Episode Below (27:02)
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Julie has self published her own books, as well as helped a lot of other people publish theirs. When she published her book More Than Cash Flow, it went to #1 overall on Amazon. Today she’s here to tell us how we can use books to build our brand for us. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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

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

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See how Marc can help you by calling him at 212-897-9875 or emailing him mbelsky@easterneq.com


TRANSCRIPTION

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

First off, I hope you’re having a best ever weekend. Because today is Saturday, I’ve got a special segment for you called “Situation Saturday.” The situation is this – you’ve got a company and you want to build that company’s presence, so that you can make more money, so that you can get more customers, and then in turn make more money. Today’s best ever guest, Julie Broad, has done just that by publishing a book, and she has recently launched a venture called Book Launchers, which helps entrepreneurs and professionals build their business with a brand-boosting book. We’re gonna talk about how to do that if you are looking for more customers and ultimately more money from your business. How are you doing, Julie?

Julie Broad: Hey, I’m good! Thanks for having me.

Joe Fairless: Yeah, my pleasure, nice to have you back on the show. Best Ever listeners, you might recognize — you definitely recognize her name, because you’re loyal and you  remember episode 1084, titled “From living in her parent’s house (sounds like fun) to complete lifestyle freedom through real estate investing, with Julie Broad.” So if you wanna hear her best ever advice, then go listen to episode 1084.

We’re gonna be talking about how to publish a book to build our real estate brand. Julie has published a book that got the distinction of being Amazon’s number one best-selling in one category, which is the book called More Than Cashflow, and she is an entrepreneur and a real estate investor who was awarded a Top 20 Under 40 award.

With that being said, Julie, will you give the best ever listeners just a little bit of background, real quick, about who you are and what you’ve been focused on? Then we’ll jump right into building our brand through books.

Julie Broad: Yeah, you bet. So as they know if they’ve listened to the best episode, I started investing in real estate in 2001. The first book I wrote, I wrote and published in 2013, after Wiley turned me down. There’s a couple parts that are really cool about that story. First, which is kind of funny — it wasn’t cool at the time to be completely rejected; it was really hard on my ego. But looking back, one of the things was they actually told me that this book idea wasn’t very good. Not in those exact words, but they were like “It’s been done before, it’s already out there.” Then they worked with me on another book idea, and in the end they said “You know what, we don’t think that you have a strong enough marketing platform to sell books.” So then it was full stop, like “We’re not gonna work with you.”

So it took me about a year to get over it, because I really felt like I needed that gatekeeper to tell me my idea was good, and they said it wasn’t, so it took me a while to kind of go “You know what, I’m gonna publish it.” And the part that’s really cool is this book went to number one overall. So it wasn’t number one in a category, it was number one in books, period… And that’s pretty epic for a self-published niche real estate book to do. I was ahead of Dan Brown, ahead of the Game of Thrones series as a print book on Amazon.

Joe Fairless: Just so I’m understanding – you were number one in all of the printed books on Amazon?

Julie Broad: Correct, and I was in the top 100 overall for 45 days.

Joe Fairless: Wow. Was your book free at that time?

Julie Broad: No, it was $21,97.

Joe Fairless: Huh. Alright, you’ve got my interest. You’ve piqued my curiosity.

Julie Broad: [laughs] Which is why I wanted to make the distinction, because I don’t wanna say it’s really easy, but there’s so many gimmicks and ways to guarantee that you can be a best seller in a category nowadays… And it messes things up if you do it that way, or you can go free, but then can you really call yourself a best seller if your book was free? It’s kind of one of those things, I’m like “It’s the best freebie.” [laughs]

Joe Fairless: Right, yeah.

Julie Broad: Yeah, so I wanted to make that very important distinction. So after that happened, I had a lot of people who had book deals and were working on self-publishing start asking me questions, and I worked on a ton of different books as a side-hobby; it wasn’t even a side-job, I was doing it for free, just because I loved helping people and loved the book industry. So a little bit by bit, that led me to creating a company where I can hire all the amazing people that helped me when I created my book, as well as hiring even better people now that I’m in Los Angeles, which is kind of the hub of creative and phenomenal talent. I’m able to attract really great people to work on my client’s books, which is what I do now – help people write and self-publish and then sell their books. So yeah, it was a fun journey from real estate to book publishing, but books have been in my blood since I was a kid.

Joe Fairless: Yeah, and I’m really interested to hear how you got to number one, because I’m on Amazon right now, and I’m looking at your book page, and it’s ranked 649,668 in all of books. So it’s now over 500,000 ranking, but before you said it was number one. So how did you get to number one and how come there’s a discrepancy?

Julie Broad: Two distinctions. Number one, this was in Canada, so on Amazon.ca. Definitely a little bit less competition, so a little easier, but not much easier. So that’s discrepancy number one. Discrepancy number two is this was 2013. So this was five years ago that this happened… Which also helps the fact that — there were a couple things that helped, and it’s luck; I would never ever promise anyone that you could get to number one overall, because it just happened nobody else was launching a really big book that week. If I was competing with a big name, like a Tim Ferriss, or even another Harry Potter book or anything like that, there’s no way I would ever hit number one overall… And you can’t control those things. It’s kind of like when a movie hits the box office. You can’t really control what you’re competing with all the time. And you also don’t know what’s going to work out.

So the reason though that my book went to number one was I had a few really key people who jumped on board and supported it… And there was two reasons for that. One was that I had spent years building relationships and had people that were going “You’re writing a book? I’ll help you”, and they had people who had the exact audience that I needed to reach. They had real estate investors and people who wanted to invest in real estate in their audience… And I also wrote a book that, just by what Wiley said, it was not like the other books. I was not teaching you how to be rich in real estate or how to make money, I was actually saying “Hey, listen, there’s a lot of stuff that makes you maybe not want to invest in real estate”, and I was telling the stories of our manslaughter in a crackhouse, or our property manager that got charged with manslaughter, or a property manager who stole money from us, tenants that pulled knives on each other. I was telling all of that stuff, saying “Hey, listen, this is some of the stuff you don’t hear about, and if you still do wanna invest in real estate, here’s how to avoid most of those things from happening.”

So it was a unique spin, plus I had a lot of support from a lot of really influential people in the real estate space in Canada.

Joe Fairless: I love it. So three things I took away from that. One, don’t compete with other book launches, even though we might not be able to control it… Ideally, we don’t compete with other book launches. Two, partnerships, and three, having a unique spin. Are those basically the three things that you just mentioned?

Julie Broad: Yeah, it was perfect. You can’t control the not competing with other books, but I think if you’re unique and you’ve got a lot of support — and by the way, Oprah didn’t call. My book went to number one, and Oprah didn’t call. So if your book doesn’t go to number one, it’s okay, as long as you know why exactly you’re writing your book.

I have some clients who don’t rank on Amazon, but they’ve sold thousands of books, and they’ve sold it through bulk sales, and they sell books to associations, or as part of a speaking package. So it never ranks on Amazon, but they’re actually selling a ton of books and getting in the hands of readers who can become clients, which is their goal. They wanna drive business, so it doesn’t matter to them. The dopamine hit you get by posting on Facebook that you’re a best-seller – that feels good for a day. But getting business for two years as a result of your book – that feels good for a long time.

Joe Fairless: I completely agree, and if we do anything for just the sake of accomplishing a metric, then it’s not sustainable. We’ve gotta really want to be in it for the long haul. So let’s dive into number two and number three, because not competing with other book launches – maybe, maybe not; we’ll just see depending on when we launch. But number two and number three we certainly can control – partnerships and having a unique spin. Let’s dig into partnerships. What specifically did you do to climb to number one in Canada on the best sellers list?

Julie Broad: There was three things. One of the partnerships was finding people who would give me things for my launch week… And one of the powerful reasons that it was so strong of a launch is that I had some very valuable giveaways; stuff people would have otherwise paid for. One of the things that was a little lucky, again  – which is why I say you can’t repeat this – is a former mentor of ours, he had left the real estate space that year, and he had a really great course that used to sell for $299 that he had just taken off of the market, and he said “Hey listen, for a week I’ll let you give this away for anybody who buys three or more books.”

So I had a $300 course that was genuinely off the market, and people really saw value in it. It fit with my book. It was basically “How to invest your retirement funds into a 401K (in the States) or an RST (in Canada).”

And I had a couple other really relevant things that were giveaways…

Joe Fairless: Like what?

Julie Broad: Honestly, I don’t remember one of them. I know it was an eBook. Another one was all about dealing with tenants. So it was like a checklist and a package; it was a tool. It would have only sold for $50 I think, but again, the person who gave it to us did sell it on his website for $50, so it had real, tangible value. So it was about a $500 package that we put together, that was just quality content related to real estate investors or people trying to decide. There was this property evaluation spreadsheet, how to calculate the cashflow and figure out your mortgage and all that kind of stuff… So those kinds of things. So really high value, and that was partnerships; I promoted them as much as I possibly could around the launch, but it was relationships. So that was part of it.

Part of it, of course, was getting people — so I had mortgage brokers and realtors who bought lots of books to give to their clients, and then I had a couple of really key organizations who have thousands and thousands of real estate investors in their audience promote not just my book, but this giveaway package. So they were incenting their members to buy three books to get this package, so you get a thousand people buying three books, you get 3,000 book sales in a day, and that starts to pop you up really high. And all it was was I think three or four different strategic companies that promoted it, but they had 35,000-40,000 real estate investors, so really targeted people in their audiences, and that really was the secondary piece. But the key to that isn’t that I contacted them a month before the book launch and said “Hey listen, this is going on.” The key to that was that I’d been building relationships for years with most of those people.

Joe Fairless: It’s so smart what you’re doing… You’re reaching, one, the packaging of all this content, so that you buy a book for less than $30 and you’re getting a value — whether a $500 value is $500, maybe it’s $50, or maybe it’s $1,000; it depends on if you use it. But $500 worth of content that is valuable… So the value exchange was tremendous, plus you’re reaching the gatekeepers. How did you confirm that the individuals purchased three books in order to receive that $500 package?

Julie Broad: [laughs] This was a pain in the butt. So I hired a VA, so I had a VA from the Philippines on my team at the time, and people had to submit a receipt to prove it, so… [laughs] So that poor woman, for an entire week — actually, I think it took her two weeks to sort through all the orders… But the cool part of that was two things. So we ended up getting a huge database of people that we knew bought my book, which made my second  book launch even better; not better than the first, in that I didn’t hit number one with my second book, but I knew I had book buyers. I also knew I had people that were willing to put out $90 or $70 to buy three books. So we got their names and e-mail addresses. We didn’t market to them unsolicited, just so you know, but it was part of the reply back that she sent.

So she had to process all of them… I don’t actually know if there’s a good automated way to do this to this day, but that’s how we did it. We had people send in the receipt in order to get the package.

Joe Fairless: Did you put that e-mail where they send in the receipt in the book?

Julie Broad: No, because that package was only available for launch week…

Joe Fairless: Oh…

Julie Broad: After that launch week, you could get — there’s like a checklist and a few other things that we still give away… But the book  just directed you to a web page specific for the book, and then you can submit there. And truthfully, on that page we don’t monitor the thing anymore… It asks for the page number where you were told to go there… But really, I scan it every once in a while and I’d say like 4% of the people have the page number wrong, so they just guessed to try to get the freebie… But I really don’t care at this point.

Joe Fairless: Sure, yeah.

Julie Broad: You know, take the freebie and run. I don’t need to pay somebody to monitor… [laughs]

Joe Fairless: Yeah. So now it’s automated… After launch week you then have a call-to-action that is in the book that is automated, where they receive something in exchange for — oh, they just have to list out the page number, and then they get the stuff?

Julie Broad: Correct, yeah.

Joe Fairless: Okay.

Julie Broad: And there’s three different page numbers in the book where they could have got that link.

Joe Fairless: Oh, cool. Very cool. And that’s just automated… And what are you giving them there? I’m just curious.

Julie Broad: This  was five years ago [unintelligible [00:16:15].15] I’ve done a lot of book projects since then. [laughs]

Joe Fairless: Hey, you brought it up…

Julie Broad: I know. I know for certain there’s that spreadsheet I mentioned that evaluates cashflow on a property…

Joe Fairless: Cool, alright.

Julie Broad: I know that’s one of them for sure.

Joe Fairless: Cool. Alright, good stuff. That is so interesting. So one, you’ve built the relationships along the way; it’s not just a month prior, it’s the good karma and the goodwill that you’d done for others, and now you’re cashing in a little bit on that. Two is of all those people you identified some gatekeepers who have large audiences, both organization leaders, as well as people who have a platform, like e-mail (large lists) or a podcast, something like that… And then you promote the heck out of the package, which also is involving those individuals in the first week, so they wanna promote it, because they’re getting their stuff out, too. That’s beautiful. That’s so smart.

Julie Broad: Yeah, it worked wonderfully… And then, of course, they felt great because their audience was so grateful to know about this great deal. So it worked out really well, because it really was high value and relevant to the people. I think that’s really important. I see a lot of book launches where you can get a lot of free stuff with the book launch, but it’s really not that relevant to the person who would want that book. They key to that is stuff they would otherwise pay for happily. So you’ve gotta find that stuff that they would otherwise be paying for and would be forking out money for, because then they’ll see real true value in it.

Joe Fairless: I love it. Anything else as it relates to launching a book that you did or do that you wanna mention?

Julie Broad: Have an endgame plan, know why you’re doing this… Because a lot of our clients think “I’m just gonna help people and it’s gonna grow my business”, and if you’re not strategic about it, you miss opportunities in the book to either build credibility or even let people know what you do… A lot of people write books because they wanna paid speaker, which is smart; it really opens the door and adds a zero to what a lot of people will pay you to speak if you’ve got a good book, but for goodness sake, put it in a book somewhere, talk about a few of your talks; seed the ideas that you want to put out there in the world. People mistake this; they write the book and they think it’s all about them, like it’s their story, it’s their advice, it’s their experience, but the book isn’t for you, the book is for the reader. So really make sure that you’re focusing on what’s in it for the reader.

Don’t ever tell them a story that doesn’t give them a benefit or a lesson. You don’t ever want somebody to go “Well, that was a good story, but why did you make me read it?” And that’s really core to the book and to the success, and to having other people wanna share it. Because other people really wanna look good for sharing it, and if it’s just about you, it doesn’t make them look good for sharing it; but if it’s all about benefitting the reader, then it makes them look good for sharing it.

Joe Fairless: Yes, absolutely. Isn’t that true not only in books, but also in any type of content creation?

Julie Broad: One hundred percent, yeah. One hundred percent.

Joe Fairless: Anything else that we should keep in mind or do best practices for book launches that you can think of?

Julie Broad: For book launches – again, I think it’s really about that ideal reader. When you start writing, know who you’re writing for, and get clear on that, so that when you do go to launch, you know exactly who has the same audience. So again, I was  a real estate investor writing for people who were thinking of investing, or who had started investing and it wasn’t going well… So clearly, not every realtor is my target market, because some realtors only work with homeowners, the people who wanna live in their home, period. But realtors who work specifically with some real estate investors or want to attract more real estate investor clients – they have the same audience.

We have somebody who’s in the fitness industry, she talks about a couple different fitness programs and raves about them in her book. Now, they’re a great potential promotional partner. But think about that in advance, like who would you like to promote your book for launch, and is there a way that you can make it appealing to them, maybe by talking them up in the book, to be strategic that way… To say “Hey listen, I gave you a shout-out and here’s the chapter where I included something about your business, and your audience might wanna know about this.” If you can be strategic, it’ll make your launch so much stronger.

Joe Fairless: Yeah, this is so smart by doing this all through partnerships… I am asking some pointed questions because I am about a month and a half from launching a book, so… [laughs] So believe me, I am taking a lot of notes right now, on my silent keyboard; I’ve gotten a lot of hot water for having a noisy keyboard and I switched up computer keyboards. I got a lot of flak from listeners. So I’ve taken a lot of notes on my silent keyboard and this is incredibly helpful. So… Selfishly, what else should I do?

Julie Broad: Okay, great. I’m glad you asked, because now I have a timeline – so six weeks out is like THE time to start lining up media, podcasts and any kind of external support that you’re hoping for. A lot of people throw their book out, or they’re about to put it out in a week and then they try to do this; we always work with our clients 6-12 weeks out from launch. So you’re at the critical point, and you know this, because you have a podcast, and I don’t wanna spoil anybody’s world, but most podcasts get booked like six weeks to three months in advance, and then they record them, and they don’t always put them out the day they record them. Sometimes it’s the next day, sometimes it’s a month later… So you really wanna plan ahead and talk to the podcasters and say “Hey listen, I’ve got a book coming out this week. I’d love to get the podcast out around that time… What can we do?” So now is the time to be doing all that and being strategic about who is the most important for you to reach out, and putting that launch package together and really trying to create something fantastic…

And try to come up with something unique for a launch event. A lot of people will do a boring — at the local library, or even the local bookstore… What I did for my second book – I did burpees for books, and I did a live-streamed event from my local cross-fit gym, where everybody who bought a book, they got to watch me do three burpees for every book that was purchased during this live stream, and then I gave a whole bunch of money to charity for every single book sold. And I didn’t make money that day from book sales, but I got exposure and I got some media attention from the local media.

So do something fun and unique that people are gonna tune into, whether they wanna buy your book or not, because that will get people paying attention to the fact that you even have a book coming out.

Joe Fairless: Yes… The burpees for books – did that tie into your second book at all, or was that just kind of something that “burpee starts with a B, and book starts with B, and it rhymes, and it’s a little silly, so I’m gonna do it”?

Julie Broad: [laughs] Well, it was unique in that, but inside of my book — my second is the The New Brand You, and it was really about how we built a brand that raised millions of dollars for our real estate investment company, and then also how we built a brand to grow our real estate training and education company, which is what I did before Book Launchers.

The inside of that book though – I actually talk about cross-fit quite a few times, for a variety of different reasons… So it wasn’t a direct tie into the title, but it actually has a tie-in when you read the book – you learned about some of the things, the life lessons and the branding lessons I learned through cross-fit and the people that I surrounded myself with in my cross-fit gym.

Joe Fairless: Beautiful. So if someone works with you or your team at Book Launchers, what do they pay and what do they receive?

Julie Broad: We’re a monthly membership, and our prices are slowly going up on a regular basis. I would say the best thing to know what we’re charging when you’re listening to this is to go to BookLaunchers.com. You can work with us at any point in the process. We like to work with people sooner rather than finished, because then we can help guide some of these things I’ve talked about – making sure you’re putting it in your manuscript, so that it really is gonna be easier to market it and get the strategic partnerships and get it out there.

Then when you work with us, one professional works on your book at a time all the way through to the end, where we have a marketing team that works on your book. I always say we market with you, because some of these things are your relationships, and that’s going to drive the best results… But if it’s cold reach, we have a phenomenal book marketing pro who worked as a literary booking agent for years, and she’ booked authors and many people on speaking engagements, media tours, podcast tours, all that stuff… So she works on your book and pitches ten outlets a month; we even do some pitching to try to get you bulk deals, too. We might sell 200 books to a real estate association, or to a different organization, or sometimes colleges and universities will buy bulk…

So we’re working on all kinds of angles, trying to figure out where your ideal people are, and how we can get your book in front of them.

Joe Fairless: Outstanding. How can the Best Ever listeners get in touch with you and learn more about your company?

Julie Broad: BookLaunchers.com is the best way to learn about the company. If you want  to chat with me and ask questions, I hang out on my YouTube channel all the time, so BookLaunchers.tv takes you straight to my YouTube channel, which has tons of tips, and it’s also like a passion project for me, so I pretty much respond to every comment.

Joe Fairless: Well, Julie, thank you so much for being on the show and educating myself, as well as others, who are launching a book or looking to launch a book. Best Ever listeners, if you’re not launching a book right now, that’s okay, because I’m sure you’re listening closely, and what Julie talked about is applicable to our real estate investing and partnerships, and just in general acquiring customers… And in particular one aspect of what she was talking about, the partnership angle – identifying people who would help you build your business and working with them simultaneously to partner up, and they’ll build their business. So whether it is a real estate deal where you can bring in a partner, and then together you two can go bigger and better, or something like content creation, like we were talking about…

Many, many lessons,  both general and specific, and I’m very grateful that you were on the show, Julie. I hope you have a best ever weekend, and we’ll talk to you soon.

Julie Broad: Thank you.

JF1457: From Renting Bedrooms To Owning 6 Rentals In 6 Months with Bo Kim

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Bo got his start in real estate with the famous “house hack” method. He rented the extra bedrooms of his single family home. After that, he started acquiring income properties and now owns 6 rentals, all acquired in the first 6 months of his investing career. To hear how he’s been able to hit the ground running, tune in to this episode! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

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

With us today, Bo Kim. How are you doing, Bo?

Bo Kim: Doing well, Joe. Thanks for having me. How are you?

Joe Fairless: I am doing well, and it’s my pleasure, and looking forward to our conversation. A little bit about Bo – he started investing by renting his three-bedroom house, then he connected with local investors who invest out of state; he now has six rentals in six months of investing. He’s based in Los Angeles, California. With that being said, Bo, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Bo Kim: Yeah, for sure. My name is Bo, and during the day I work as a consultant for a CPA firm here in L.A. I’ve been in accounting for about five years, and on the side I’ve been slowly learning about real estate investing and getting into rental real estate. Like you mentioned, Joe, the way that I kind of fell into this was about two years ago I bought my primary residence in the suburbs of L.A. It was a modest 3-bedroom 3-bath townhome that I was able to rent out one of the rooms and create that steady cashflow, and it kind of opened the eyes to passive income and wanting to grow that passive income… So ever since then, I’ve been kind of reading books, listening to audio books, going to meetups like a madman, and trying to figure this all out, and it’s been an incredible journey thus far.

Joe Fairless: You’re a consultant for a CPA firm… How do you apply your area of expertise as a consultant role into what you’re doing now as a real estate investor building your own portfolio?

Bo Kim: A great question… I think it fits in perfectly with what I’m trying to do with rental real estate, just because as an accountant I’m a numbers guy, and I’m really into analytics and kind of measuring the different metrics. So there’s hacks in audit, and then there’s a consulting arm, so I’m not the guy to go for tax advice, but I typically work with a lot of companies who need systems and processes built into their company… Anywhere from inventory to revenue, to payments, things like that. I go in there and I look at the current environment and I make recommendations, how to streamline operations and things like that.

So what I did when I started out was immediately I recognized that hey, if I wanna scale this business out and I wanted to really treat this as a business, I needed to come up with systems and processes from day one, so that after each property under my belt, things were just gonna start to get easier. So I think from that perspective it’s really worked out well.

Joe Fairless: What have you implemented?

Bo Kim: Anything from checklists, from what I do from a due  diligence standpoint, I have reminders, there’s different things that I will check cross-reference with county records or with maybe two different brokers or PMs… Things like that I’ve implemented. I always like to call them “controls” to make sure that I mitigate the risk as much as possible, what things could go wrong.

Joe Fairless: So due diligence checklists… What are some other checklists that you have?

Bo Kim: When I study a market or a property, and also when I’m running some of the cashflow numbers, I like to normalize the cashflow expenses by checking different references… Now that I’ve started to do the BRRRR method and tried to flip those properties to myself and create that appreciation, what I’ve been doing is getting different brokers to give me a market analysis, so I can get a better idea of the comps in the area… Little things like that, I’ve tried to implement systems.

Joe Fairless: You’ve got six rentals in six months – is that accurate?

Bo Kim: Yeah. I closed on my first one in late January, and I closed on my sixth one in July, so it’s been six months… But before I closed on my first one, I was reading books and studying for about 2-3 months, I would say.

Joe Fairless: Okay. Where are those six rentals located?

Bo Kim: They’re spread out through Kansas City, Missouri, Indianapolis, Indiana, and Little Rock, Arkansas.

Joe Fairless: Okay. How did you develop the comfort level to purchase that amount of properties in that period of time, across different markets?

Bo Kim: I think that was the biggest struggle for me. Being an out-of-state investor, right from the get-go I’ve talked to people in the local meetups or on Bigger Pockets. There were some mixed reviews; some people who tried it and they were burned, so they weren’t gonna go back to the [unintelligible [00:07:52].23] or other people were like “Why don’t you stay local? It’s much better.” So there was a lot of kind of noise for me to have to navigate through, but the way that I saw comfortable doing all of this was definitely researching and researching… And a couple local investors who invest in Indianapolis and Kansas City really kind of took me under their wing and kind of showed me how they did it, and then sent me to their contacts…

So immediately after I put a property under contract, I took their advice and I flew out to Indianapolis and Kansas City, and I think that was the biggest game changer, because it really helped [unintelligible [00:08:35].20] my expectations of the different markets and how it differs from California, and really helped me build the trust with the local boots on the ground, with the brokers, the wholesalers and the property managers… Because I really took it to hear when they said “You buy a property once, but your team you work with for the long haul”, so I wanted to make sure I have a team that I trust in place, and I think I do today.

Joe Fairless: What type of financing did you use to secure the six properties, if any?

Bo Kim: I definitely used a mix of financing… I’ve used conventional Fannie Mae mortgages, I’ve also used a HELOC, I’ve also used a 401k loan to purchase one all cash, and lastly, I’ve also used a private lender to do the BRRRR method and refinance, so a delayed cash-out refinance Fannie Mae product. But my ultimate goal, at the end of the day, once the properties are stabilized, is to convert them into Fannie Mae loans, fixed 30-year rates, until I hit the ten threshold.

Joe Fairless: You said once they get stabilized, so what condition are they in right now?

Bo Kim: For the “turnkey” products – I don’t know if the Best Ever listeners use turnkey, but these are properties that were distressed, but a provider has fully rehabbed and there’s a tenant in place… For those products, I just typically finance them with 20% for a single-family residence, but if I’m doing the BRRRR method, I will buy them cash with private money, or with a 401k loan, and maybe put in 10k-15k worth of work to spruce up the place, and then I’ll get an appraisal six months later to refi those out.

So when I’m saying stabilized, during that six months making sure it’s nicely rehabbed, it’s got a tenant in there who’s paying, and I’m kind of ready to refi.

Joe Fairless: How are you finding the properties that have the equity going into them where you then renovate and you still have the equity difference than you can refinance and get your money out?

Bo Kim: I would definitely say the guys that I mentioned earlier, who took me under their wing – they’ve been investing in those markets for 2-5 years, and they were telling me both it’s a hot market; it’s definitely different from when they’ve first started, and I kind of like to use the 70% rule, meaning I want to buy a property all-in, purchase price and rehab, 70 cents on the dollar, but I’m realizing that’s really hard to do in this market, so I’ve kind of lowered the bar actually to 75 cents or 78 cents on the dollar.

What this allowed me to do is still get a little bit of equity and pay maybe half the price that I would have paid for a turnkey property, and kind of be in that control… But the caveat to that is I’m taking a little bit more of the risk on my side, to make sure my after repair value is correct, and to make sure that the scope of work and the budget is correct.

Joe Fairless: Is that the primary success metric that you look at when evaluating an opportunity, that 70 or 75-78 cents on the dollar all-in cost?

Bo Kim: That’s not the only one. I would also look at the cash-on-cash. My rule of thumb is I wanna be at 12% or better cash-on-cash when I’m leveraged or financing the property, and also I’m looking at a debt service coverage ratio of about 1.2 or better… And rent-to-value ratios I’m also looking at 1.2 or better.

Joe Fairless: And rent-to-value is the value appraised it appraised at after repairs?

Bo Kim: Yes.

Joe Fairless: Okay, got it. Sorry, what was that ratio that you look for?

Bo Kim: 1.2.

Joe Fairless: Okay, got it. Kansas City, Indianapolis, Little Rock… What (if any) difference have you noticed in those markets as it relates to your bottom line?

Bo Kim: That’s a good question. I think in terms of my bottom line, I think it depends, because I kind of have different strategies for these different markets… Just to put it in perspective, for Indianapolis I’m kind of targeting it because this is where my team focus is on – areas that are pretty closed to downtown, anywhere from 10 to 15-20 minutes from downtown. So I wouldn’t necessarily call it the suburbs… And I think these are good, working-class neighborhoods and I’m not banking on appreciation by any means, but it’s cash-flowing nicely… But there have been signs of gentrification in these areas, so that will be the icing on the cake.

As for Little Rock, I’m kind of focused on more of the B class, and I wouldn’t get into more rougher neighborhoods… But that’s the last market that I entered in, so I’m still learning. The cash-on-cash might be slightly lower than Indianapolis or Kansas City, but that’s a market that I just got into for similar reasons. Each of these markets has its pros and cons, but what I looked at was from a macro perspective, population is steady or growing, and jobs are growing, and it’s very diverse, and it’s also very landlord-friendly.

The last time I looked up landlord laws in Little Rock, I think if they are late on their rent [unintelligible [00:14:24].23] the whole process to have the sheriff escort them was only a couple weeks. I’m not a lawyer so don’t quote me, but that was based on some of the googling that I did… And it made me realize these are very favorable for the landlords, as compared to California, where I live, where it takes forever for an eviction to happen.

Joe Fairless: And what’s your play in Kansas City?

Bo Kim: Very similar to Indianapolis, actually… But for Kansas City I’ll go a little bit further into the suburbs, maybe 30 minutes from downtown. I would consider these still C class neighborhoods. In my opinion, they’re very blue-collar, hardworking people, and they cash-flow pretty well.

Joe Fairless: You have taken many different financing approaches – conventional, HELOC, 401k loan, and the private lender… Let’s talk about the private lender. How did you get to know him/her?

Bo Kim: This one was very interesting, actually… Him and I, we were both part of a Facebook group; it’s a private Facebook group for real estate investors, and we just talked via Facebook messages back and forth for a couple of weeks, just talking about deals, different markets and just getting to know each other. I’d never thought that he would be a private lender of mine for future deals, but I came across an opportunity… It was actually my first BRRRR deal, and I was going to use a hard money lender, but I was looking at all of the fees for hard money lender and I was just talking to this buddy of mine, saying “Hey, these are kind of high fees. The margins just might not be there for me to do a full out refi.”

I was just talking to him, and he was saying “Hey, I have a little bit of cash saved up… Why don’t I be your private lender? I don’t want you to lose this opportunity.” That kind of lit an idea in my head and we got a loan agreement; I had my lawyer friend look at it, it was all good, so we both signed it. He funded the purchase, and I funded the rehab.

We did that deal, and I actually ended up doing a delayed cash-out refi. The terms of the deal were that there will be interest-only payments for six months, with an option to extend for a couple more months, and then there would be a balloon payment for the principle. But within two months the rehab was done, there was a tenant in place and everything was good, so I talked to my conventional lender who said he can do a delayed refinance of 75% of the ARV, not to exceed the purchase price and closing costs. Basically, what that did was it left some of my money in the deal, maybe half of what I would pay for a traditional down payment on a turnkey, but also my leverage was only 60% when everything was said and done, not the 75%.

So I was really happy with the deal, and it really provided a proof of concept for me that I could rinse and repeat this even better.

Joe Fairless: What would be some things that you would optimize if you were to do this similar approach again?

Bo Kim: I think a couple things… I would definitely wanna understand the scope of work a little bit better. When I was initially doing this, I didn’t quite understand [unintelligible [00:17:54].22] I kind of learned as I went. Looking back, it may have been a pretty big risk on my part, but now if I were to do it again, I would fully wanna understand what’s being done to the property in terms of cap-ex items, because a month or two later we ended up replacing the roof… So I would just wanna make sure that hey, if we can do it all at once, maybe we’ll replace the roof at that time. Little things like that, but overall I was really happy with the product and I would gladly do it again.

Joe Fairless: The relationship(s) (I don’t know if it’s one person or multiple people) that you have with your local contacts, local investors, who then told you about what they’re doing in these other markets was critical to your success here, and opening up the door for you… How did you meet them initially?

Bo Kim: It’s funny… I just hit them up either via Bigger Pockets messenger, if they posted on a forum, or I actually just hit them up on Facebook, because they were also in a group that I was in… So if we were on a mutual group or I saw them post on Bigger Pockets, I would just private message them. And what really surprised me was how much these guys — generally speaking, 80%-90% of the people that I message for the first time without knowing them, they were really welcoming and receptive, and they were willing to share what they’ve learned throughout  the years.

One thing I would add to that though was — I wanna share a quick story, if I may… Also I know you’re about the secret of living is giving, and I also believe that. Zig Ziglar said “You can have anything that you want if you help others get what they want, too…” So when I went to Kansas City back in February, what I did was I reached out to the locals here who had properties in Kansas City and I just offered to take pictures for them, or bird-dogged for them, or whatever value that I can bring as a newbie… I asked “Hey, what can I do for you?” without asking for anything in return.

A couple of them actually asked for me to take pictures of their properties in Kansas City, so I snapped a couple pictures for them, and what happened was at one of these properties, the owner of the next-door neighbor came out and asked me what I was doing… So I was telling him, “I’m taking pictures for a friend”, and she asked, “Hey, do you wanna buy my property, too?” I was like, “Sure, let me take pictures and get what’s your purchase price.”

So I took pictures for them, and I got a purchase price, and I passed that along to my friend. And I know if they ended up taking the deal, but I know they were super-thankful that I did that for them, and it just helped me realize that things roll and things began to click for me, and things began to work out really well when I decided to help others without asking for anything in return… So that’s kind of like a motto of mine as well.

Joe Fairless: I love that story, and just so I’m understanding fully, you said on BP messenger you’d message them, or on Facebook you’d message them because you were also in a group… So they’re not necessarily local people, they’re just people who you saw that they posted about investing, and it resonated with you, and then you send a follow-up message to them… Is that correct?

Bo Kim: Yeah, and some of them were in other states, but some of them were also local to me. I live in Southern California, so there are a couple guys in San Diego that I actually ended up meeting face-to-face for dinner; there are a couple of guys in L.A. that I met, and there were a couple of guys in Irvine, Orange County that I ended up meeting as well… So there were some locals, but there were also guys from Virginia, Washington, that are not local to me, but it had the same effect.

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

Bo Kim: My advice to the Best Ever listeners and people who are just starting out is, especially for a guy like myself, who is into the numbers and into the details, I think looking back, if I didn’t take action on the first one, I still may have been under the analysis paralysis up until this point. I kind of like to remember the game Telephone, where one guy passes on information to another, and another… And by the time it gets to the end user, sometimes the information is not 100% there, or sometimes it’s distorted. So when I’d talk to people and they were like “Don’t get into real estate investing, don’t do this, don’t do that”, I’d listen to them, but I also researched more and educated myself to mitigate the risk, but also to take action.

I like to challenge the people who reach out to me and ask “Hey, how did you do this?”, make sure you don’t fall into that analysis paralysis, and educate yourself enough and take that first step, because I think it’s way worth it.

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

Bo Kim: Let’s do it.

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

Break: [[00:23:07].08] to [[00:23:56].10]

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

Bo Kim: It has to be The Millionaire Real Estate Investor.

Joe Fairless: Best ever deal you’ve done?

Bo Kim: It would be my first BRRRR, the one that I mentioned earlier.

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

Bo Kim: Not getting an inspection.

Joe Fairless: Will you elaborate on that, on which deal it was?

Bo Kim: Yeah. I think it was my fourth deal, when I was buying all cash with my 401k. I was buying it from a wholesaler, and I didn’t get an inspection, just because I knew there was gonna be work that was needed to be done, so I ended up not doing an inspection… But there were little things here and there that I know that an inspector would have caught, instead of me just trying to walk the property and kind of see that visually.

At the end of the day, I knew that there was gonna be work needed to be done, and I budgeted for it accordingly, but I don’t know if that may or may not have changed my decision, or maybe I could have negotiated a lower price had I known that these little nuances or exceptions were out there.

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

Bo Kim: I like to respond to all of the different messages in the forums, and also the reason why I created a blog for myself is to kind of document my journey and be very transparent in terms of how I look at things, my thought process when I  approach an investment, and just share that knowledge… Because as I mentioned before, the two guys who really kind of took me under their wing and shared their contact and their knowledge with me – I wanna be able to do that for the people who are just starting out as well.

Joe Fairless: Speaking of your blog, how can the Best Ever listeners learn more about what you’ve got going on?

Bo Kim: I’ve just created this blog, it’s at BiggerCashflow.com. You can also e-mail me at bo@biggercashflow.com. If you have any questions, if you just wanna talk rental real estate, or if you wanna meet up if you’re local… I always love to learn and give back to other people, as well.

Joe Fairless: You bought six rentals in six months, you did it four different ways from a financing standpoint, and you bought in three different markets. Really interesting story, and interesting to hear your thought process for how you mitigate the risk by getting connected with the right people, and then plugging into their teams and their systems and their connections, to then help you get started faster, but then also to help you have a credible team as you get going.

And the story about you traveling to the market, Kansas City in this example, where you asked what can you do to help those people out who connected you to these markets was great… You took pictures of the properties, and you also came back with a lead for them too, whether or not that transpired and happened to be a close later – who knows…? But you gave them a  lead as a result of you being there, and that’s a tremendous value.

Thanks again for being on the show, talking about approach, what you’ve done… Looking forward to continuing to hear and read about what you’ve been up to, and we’ll talk to you soon.

Bo Kim: Okay, thanks, Joe.

JF1419: How To Allocate Equity In A Syndication Based On What The Partner Brings To The Deal #SkillSetSunday with Jeff Greenberg

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If you’re a syndicator of any type, one issue that arises is how to allocate the equity based on what everyone is doing for the deal. If you found the deal and someone else did the underwriting, who gets what? That is just one example of a potential problem. Jeff has figured out a formula for how to make these decisions. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

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

With us today, Jeff Greenberg. How are you doing, Jeff?

Jeff Greenberg: Hey, I’m doing fantastic, Joe.

Joe Fairless: I’m glad to hear it. Best Ever listeners, you know Jeff Greenberg because you’re a loyal Best Ever listener, and you were a loyal Best Ever listener way back to episode 47 (yeah, 47); Jeff was my 47th guest on this podcast. I titled it “Follow the well-worn path to success.” I also interviewed Jeff in episode 424, “How to deal with a falling-apart high stakes situation.” That was a fun story.

Today we’re going to be talking about how to allocate equity based on what your partners bring to a syndicated deal. As apartment syndicators, or as any syndicator really, there are different roles and responsibilities that need to take place, and if you have partners, then how do you determine what is valued over what? Finding a deal, doing the underwriting, doing the due diligence, getting the debt financing secured, signing on the loan – all that stuff.

Well, at my conference in Denver, Jeff approached me and he said “Joe, I’ve actually come up with a formula or a range for different responsibilities, and their weight as it relates to value.” So we’re gonna be talking about that… Jeff, I’m really excited; are you ready, my friend?

Jeff Greenberg: I am ready.

Joe Fairless: Awesome. A little bit about Jeff, really quick – he is the CEO of Synergetic Investment Group, has been investing in multifamily since 2007, has been involved in acquisitions of over 800 units, valued over 30 million dollars. Based on Los Angeles. Jeff, take it away. Tell us what was the inspiration for coming up with a structure.

Jeff Greenberg: Well, I have to admit for the most part it was desperation, but what it was originally is a group had approached me and wanted me to mentor them. This never started out with the thought of becoming a business, but I met with a group and we started doing training sessions, and as it moved along, we had people wanting to learn more and learning hands-on; I was telling them how to talk to brokers, how to get deals coming in. We continued that, and we started to get into some deals.

Once we did our first deal, we started thinking, “Well, how are people going to get compensated?” Well, the first time I said “Well, how much are you gonna be paying me for the mentoring?”, and since I hadn’t charged them for the mentoring, what they received was very limited as far as compensation… But then we went into a second deal and it started becoming more of a company.

We had to figure out how we were gonna fairly distribute this… This was great, because the group was doing a lot of the work of the company, and I felt they should be compensated… So we had to figure out some kind of system.

I wanted a system that emphasized those areas of greatest need, which as most of us know, is finding the deals, finding the equity and signing on the loan. Those I felt were the three highest priorities.

Then some of the minor ones were underwriting, doing research as far as market research, and research on the property… All that stuff was more for a minor role. So I put the emphasis on the major three. Those were the biggest pieces. Then we have the minor ones from there.

Now, we also set the company up where I have a deal lead, where one of my people will take on the role of the lead, and they’re pretty much the orchestrator. They will work with one of our underwriters. The underwriter needs something, they will go back to the broker, get information from the broker, and they go back and forth with the underwriter, or with someone doing research, and basically leading that particular deal.

So as a team lead, they’re also getting a certain percent. And those people doing the underwriting, those people doing the research – all are involved and they’re all getting a piece of whatever the sponsor’s cut is going to be.

I also have a team lead that basically he’s also the orchestrator of all the deal leads, and they go to him for a lot of whatever’s needed. For the most part, it doesn’t come to me until they feel it’s  a deal and I’m the last reviewer that will review it and decide if we’re gonna put in an LOI.

So all of that frees me up to do what I’m doing most of the time, which is networking, and bringing in the money, and meeting people, and sometimes bringing in deals, but for the most part looking for the equity partners.

Joe Fairless: One thing I didn’t hear as far as a major category (or even in the minor category) was asset management… So where do you put that?

Jeff Greenberg: Okay, so all of this was leading up… We do put in an asset management fee in there, which originally on our properties was either myself or my team lead, but as we have some very capable people that I’m progressively bringing up… So now one of the ladies – I’ve put her into position on one of our properties as asset manager; I’ve been training her. We’ve got another lady that’s gonna be taking over an asset management on another deal…

When we’re going through the due diligence and closing process, it’s pretty much all hands on deck, but everybody is working on different pieces. My team lead also happens to be a mortgage broker. He’s pretty much handling looking for the loans and taking care of the debt end of it… So that takes a big piece off of there.

As far as going to the properties, walking the properties, a certain number of us will go and walk the properties and do most of that due diligence.

Joe Fairless: So we’ve got — according to you, the main categories are finding the deals, finding the equity and signing on the loan. Then you have minor categories, and you’ve got a deal lead person — a deal lead and a team lead. That’s how the team’s structured. So with the major categories that you said – finding the deal, finding the equity, singing on the loan – what equity is associated to those?

Jeff Greenberg: Those, I believe, are at 15% of our cut. So we divide whatever the sponsor cut is and I believe they’re somewhere around 15% each on those. The team lead gets a cut no matter what, and I get a cut no matter what in the beginning, but right now both of us are also getting pieces of the other ends of it, because we’re wearing many hats, so we’re also getting some of that as well.

Joe Fairless: Do you make a distinction between — we’ll go with finding the deals… Do you make a distinction between an off-market deal with no brokers, and a fully-marketed deal?

Jeff Greenberg: I make a distinction between somebody that just got a deal from an e-mail blast coming in, or a deal that was brought in through a relationship. That’s the main thing. If it’s off-market or not, if it’s something that we wouldn’t have seen on our own, but because they’ve established a relationship, that’s a higher priority, because that’s what I wanna encourage.

As I said, I wanna reward those things that are most valuable, and building relationships with brokers is one of the most valuable… Or getting off-market, non-broker deals, either way.

Joe Fairless: What would be the range…? So you’ve got the 15% for finding the deal; I imagine the lowest percent would be the e-mail blast, and the highest percent would be if they know an owner directly and there’s no broker fees involved… So what would be the range there?

Jeff Greenberg: Well, we haven’t really dealt with it exactly yet… This is a work in progress. [laughter] But we’ve done two deals under this system so far, so we’re kind of working on it. I can’t give you exact numbers, but like I said, the high end would be 15% of the deal, if it was something through a relationship. If it was something from a blast, it would be something lower than that…

Joe Fairless: Got it.

Jeff Greenberg: Those percentages would be distributed out somewhere else, different parts of the deal.

Joe Fairless: And then on signing on the loan, same thing – if it’s a recourse, maybe a distressed property, versus non-recourse, stabilized value-add deal, 15% is the high end, and then it’d go lower based on more stabilized non-recourse loan?

Jeff Greenberg: Sounds good, but we haven’t gotten that refined yet either.

Joe Fairless: [laughs] Fair enough.

Jeff Greenberg: But the main thing is I wanna encourage members of my team – most of them are accredited investors themselves – to sign on the loan, as opposed to having to go outside of our group, which would probably cost us more as far as what we would have to give up. So I would rather give it to team members, that opportunity to sign on a loan.

Joe Fairless: Did anything change from the structure between deal one and two?

Jeff Greenberg: On deal one I took the entire acquisition fee, mainly because I was spending my time training them. On deal two, my company took half the acquisition fee and then we split the rest of it amongst the group, for all the hard work they’ve been doing.

Joe Fairless: Got it. And with the ownership for deal three and for the foreseeable future, if I have 15% ownership, and say the only thing I did was I found the deal through a relationship, so I’ve got 15% ownership – am I sharing 15% on all the profits from that? So 15% on the acquisition, 15% of cashflow, and any other fees?

Jeff Greenberg: It would be 15% of the sponsor’s cut, and yes, it would be 15% of the cashflow after the pref, if we’re doing a pref. It would be 15% of the sponsor’s cut on the equity end of it, it would be 7,5% on the acquisition fee, because the company is going to hold on to 50% just for future names.

Joe Fairless: Got it. Fair enough. And that’s for funding, for due diligence, or getting new deals, deposits, that sort of thing?

Jeff Greenberg: Yes, as well as company overhead.

Joe Fairless: Right. Yeah, that too. So on the minor stuff, the underwriting, the market research, the property research – how come the underwriting is in the minor category?

Jeff Greenberg: Well, because it’s not as mission-critical. I mean, yes, it needs to be done, but there’s a lot of us that can do that. It’s probably one of the less desirable ones, but we do have a lot of people that are good with spreadsheets and would rather do numbers than talk to people, but  I just didn’t wanna put it up in the ranks of the priority… And so far, we haven’t had a problem as far as encouraging people to do the underwriting. That hasn’t been an issue. But typically, they’re doing other things as well.

Joe Fairless: And the asset management – can you clarify that? Is that in the minor category?

Jeff Greenberg: Well, it’s not that it’s a minor category; that one’s one we’re tossing around right now, because we have put in there a 1%, and unless it’s a large deal, it’s not a lot of money to be an asset manager. That’s pretty much why I’ve been doing it. In fact, for the most part, we haven’t taken asset management fees anyway.

We’ve got a couple of deals that are value-add deals, and initially there’s not money going to the investors, and I don’t like taking an asset management fee until the investors start getting money. And even on that, it’s not gonna be a lot of money, even at 1% or 2%. It’s a very important responsibility, so we might take some money from the property itself as the asset management fee, and then we may also put some other money into it from our side, from the sponsor’s side of it, just to make it more desirable.

For the most part, the people are learning how to be asset managers, and we’re overseeing it. I’m keeping my eye on everything, but a lot of this is people are learning how to do it.

Joe Fairless: And I know that you’ve done it on two deals, so it’s still in evolution, or a fluid process, but I’m wondering if an individual just isn’t working out, after you closed, but you’ve already assigned these ownership percentages, what recourse do you have, if any?

Jeff Greenberg: Well, I have complete control; there’s no signed contract.

Joe Fairless: Okay. So it’s a handshake thing, where “Hey, you get 15%”, “Okay.”

Jeff Greenberg: Yeah. And we’ve actually had someone that we did have to let go, and they do have some ownership in one of the properties, and they’ll still get that ownership. They may not get as much, but they’ll still get some ownership. We left on good terms, and they did the work that got the property. They’re not involved in running the property right now and the work that we’re doing now, so I feel okay with cutting back slightly on it… But the acquisition is the big thing; you and I know that that’s the first part, and then the next part is running the property, but still, that’s something that my time is freed up a lot more for, so I can do a lot more of that. Because they’re doing a lot more of the acquisition part of it, I can have my time available to oversee a lot more of that. I kind of put myself in that spot.

Joe Fairless: And with it being a handshake thing, have you had anyone say “Well, wait a second, Jeff… You’re a great guy, but I wish we’d have something on paper that showed that I own 15% for doing this work.”

Jeff Greenberg: Yeah, once we’ve closed, I have given out a document stating what their percent ownership is on that. So I’ve done that, yes.

Joe Fairless: Cool. What else, if anything, haven’t we talked about as it relates to this structure, that you think we should talk about?

Jeff Greenberg: Well, the important part is who you’re working with. As I said, we did have somebody that had to leave, and I don’t know that this is gonna work for everybody.

This team I have right now – we work as a team, and it’s a beautiful thing. We communicate a lot on Slack, so I have the opportunity to look at the conversations going on and I see people helping somebody out. Somebody has a family issue, “Can you help me out and cover for me while I’m doing this?” We’ve got a new person in that everybody was jumping in and training…

If you don’t have people that are willing to help other people out and help everybody grow and help the team grow, then it would be an issue, and we’ve had that situation, that we’re more into “Me, me, me”, and that just didn’t work for the team, and definitely could be a conflict.

I wanna back up on kind of the premise for this whole thing, and I talked to several other people that I know that have had teams of six people or so, all equals, kind of working on deals, and for the most part I was discouraged. I was very discouraged with the results that they were getting, because this person wasn’t carrying as much weight as somebody else, somebody else had more time, and they were upset that they should get more, and it’s just a can of worms… And that was the biggest hindrance, because I’ve got a couple women that their husbands are working, and they have all kinds of time.

I have other people that are working full-time jobs, and are doing this at night or in the morning, or whenever. So obviously, not everybody has the same amount of time. These are mature adults that have a life. They have kids. Well, most of their kids are grown up, but they have grandkids, so they don’t have the time.

So I can’t expect everybody to put in the same amount of time, and I had to think of a way that would be fair, and that’s why I did it on a task-based system, where based on what task they were performing, they would get compensated. So far, everybody seems to be happy with it.

Joe Fairless: This is great. As I mentioned at the beginning of our conversation, this is a  question that I get fairly frequently, but I guarantee you comes up much more frequently internally amongst team members than what actually comes to the surface… So this will definitely help people think about how to weigh certain things.

Jeff, how can the Best Ever listeners get a hold of you?

Jeff Greenberg: Well, you can get a hold of me at jeff@synergeticig.com. I’m on Bigger Pockets all the time, you can go to my website, synergeticig.com, and you can get a hold of me. Any of those are fine.

Joe Fairless: Outstanding. Well, Jeff, thank you for being on the show. This was really interesting, to hear the different allocation of equity for certain tasks, finding deals, finding equity, signing on the loan, 15% for each, and then some other things like underwriting, market research, or any research in general, plus asset management have a lower percentage. Then you have a deal point person and a team lead point person, and then you’re also involved from a CEO standpoint.

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

Jeff Greenberg: Thank you very much, Joe. Thanks for having me.

JF1409: He Went From 1 Quadplex To Over 7100 Units, So Can You! With Keith Wasserman

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Keith got his start in the real estate investing business with a 4 unit that he bought with his cousin. They had to borrow money from friends, family, and credit cards to make it work. Once that deal was under his belt, Keith recognized the potential that real estate investing offered for his business and life. Hear how he was able to scale from that first property to over $1 Billion in real estate owned and/or controlled. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Keith Wasserman Real Estate Background:

  • Founder of Gelt Inc.
  • Has been involved in the acquisition of several commercial, industrial, and residential properties, now totaling over $1 billion in assets
  • Say hi to him at http://www.geltinc.com/
  • Based in LA, California
  • Best Ever Book: The Snowball: Warren Buffett and the Business of Life
  • Keith on Social Media:LinkedIn: https://www.linkedin.com/in/kewasserman/Twitter: keith_wasserman

    Facebook: Keith Wasserman

    Instagram: kfwasserman


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TRANSCRIPTION

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

With us today, Keith Wasserman. How are you doing, Keith?

Keith Wasserman: I’m doing great, Joe. Thanks for having me.

Joe Fairless: My pleasure, nice to have you on the show. Keith is the founder of Gelt, and they have acquired over one billion dollars in real estate holdings. They since inception have acquired over (another way to think about it) 7,100 units. That’s both commercial, industrial and residential properties.

Based in Los Angeles, California. With that being said, Keith, will you give the Best Ever listeners a little bit more about your background and your current focus?

Keith Wasserman: Yeah, sure. I started this company Gelt in December, 2008, and I graduated from college in ’07. I didn’t have too many resources, but I saw the market was in turmoil, the stock market crashed, the real estate prices were in the toilet, and I said “You know what, this is the best opportunity to get into the game.”

I’m young, I don’t have a family yet, and my cousin and I, we bought a small 4-unit building in Bakersfield, CA, which is in the central valley of California, for around $150,000. We got an FHA loan, so we only had to put 2,5% down. We maxed out, we got a cash advance on our credit card and we borrowed 5k from a friend. That’s what got us into the game. That was the hardest part, just starting.

Once we started, we started buying another one with one family friend, and then another one… We bought 14 of these little REO bank-owned fourplexes, we renovated them, leased them out, and just repeated the process until we realized there’s a real business model here.

We started syndicated larger deals. We started buying a 78-unit building a full year later, in Bakersfield, in 2009, and it just was a very exciting time. Very scary, because people were like “What are you doing in Bakersfield?!”, going out there, two-hour drive North of L.A. It’s a very good economy, based  on oil and agriculture, but most people in L.A. don’t really know where it is even, or don’t really deal with that city, but it was really growing fast and it got hit hard by the housing bust… But we felt like it was gonna be a nice place for recovery, and it did recover very nicely.

Joe Fairless: In total, you’ve acquired over a billion in assets… How many units do you have currently under management?

Keith Wasserman: We currently own and manage — I should take away “manage”, because we actually are outsourcing all of our property management… But we own over 5,000 apartment units and around 1,000 mobile home park sites currently. We’ve acquired now over 8,000, but we sold a couple thousand units over the last few years… But our goal is to really build a portfolio now and reach that 10,000-unit mark of current asset ownership, and really just expand from there.

We really started selling some buildings to create a track record, and it really did wonders, because we made a lot of money for our investors… We did well for ourselves in the process, but they then continued to give that money back to us for new deals, and told their friends and family and it really helped catapult us.

Joe Fairless: Why 10,000 units? What happens then?

Keith Wasserman: It’s just a nice, round number, big number, something to look forward to. We always kept pushing the goal post back further and further. Our first goal was, I’d say, 10 units, and we had our first fourplex. Then later on it was 50 units, then 100 units, and 1,000 units… It’s just a nice goal for where we’re at right now in our company’s formation and lifecycle.

To be honest, I always like feeling that we’re very new and we’re treated like a startup, and keep being very entrepreneurial. We have a pretty small, lean and mean operation; we have 17 people here in the office, we outsource all of our property management to third parties that we’re very heavily involved with, but it allows us to not have to be in the people business of hiring/firing/training. We constantly pay a third-party management fee of between 2% to 3% of gross revenue for the property management, and it really allows us to hone in and make money on the buy, which I’ve learned from early on in my career.

Joe Fairless: Prior to starting this, you were a college student – is that correct?

Keith Wasserman: Yeah, I was a college student. I started the University of Southern California in 2003, and I went until 2007… But all throughout my four years of college I had a different business. We were one of the largest sellers of general merchandise on eBay. I sold around 200,000 items, and I was going from my dorm room, to —  I had a warehouse in the San Fernando Valley here in L.A. I was going back and forth, and we had around 13 employees for that business.

I started that in ’01 or ’02, and I outgrew my parents’ house. I started very small in my house, in the garage, and just outgrew it. My parents sort of kicked me out, made me get a warehouse, and it was a good problem to have… So I learned from a young age how to deal with employees, customers, lenders, and just growing a business.

Joe Fairless: What specifically from learning about how to deal with employees, customers, lenders do you apply to your business now?

Keith Wasserman: A lot of the same principles apply. One of my dad’s clients — my dad’s an attorney, and he had a client in the apparel business. He taught me not to be scared of really negotiating, and you really make money on the buy… And one of the first things I did – in high school, I was 17 years old, I think I was a junior… I went downtown L.A. and I bought 100 leather jackets for only $10 a piece. They were irregulars, meaning they had a little blemish on them… And the  MSRP on these things (the suggested retail price) was over $300. They were Perry Ellis leather jackets. They were still brand new, intact, but they had little blemishes on them.

So I bought them very cheap, I wasn’t afraid to ask a very low price, and I ended up selling them for $80-$100/piece. It was a huge profit margin. I went selling them to students, to parents, to teachers, and to janitors, and to whoever I could sell a leather jacket to. My whole car smelled of leather jackets, but for a young guy, I made 8k-10k – it was a great feeling. I got some spending money, and really to be fearless, and really don’t worry about offending anyone; this is what I offered, and I was able to purchase them for that kind of price. You never know.

Just like in real estate – you’ve gotta make money on the buy. When you find a good opportunity, even if it’s paying market price, you still have to have a vision and gameplan for that asset. There’s no screaming deals, like there were back when I started, but at the same time they’re still out there; you’ve just gotta be more picky and choosy.

Joe Fairless: The deals still being out there, you’ve gotta be more picky and choosy – will you elaborate on that?

Keith Wasserman: Yeah, so when people zig, we zag. I’d say — we started buying in new markets, for example; we bought a great deal in Albuquerque, New Mexico. Albuquerque is historically a market that a lot of the big money has shied away from, they red line it just because it doesn’t as sexy of a story or as much growth. However, the property we bought was in the best part of Albuquerque, the Northeast Heights area – best school district… The property was around 100% occupied, meaning the rents were too low, and the asset was in our ’80s, kind of vintage, older asset that we usually buy. And larger, it was over 400 units.

So we acquired that, and we’re doing very well with it. There’s less competition compared to other markets that we’ve been in historically, like Southern California and Denver. We’re still buying in those markets, but we’re making a lot of offers and we’re getting beat up all the time. So we’re just staying with our guns, sticking to our prices.

That’s why we started buying a lot of mobile home parks as well, because apartments have been very difficult to find good opportunities, and the mobile home park is very fragmented. There’s a ton of mom-and-pop, original developers and the second generation in the business, not a lot of larger institutional kind of players, and we feel like there’s a good opportunity to acquire a lot of these parks, bring some more efficiencies and professional management to them and run them better… So we’ve started buying those as well.

We’ve even expanded to some development sites locally here in L.A. We’re buying land for ground-up development as well locally. So we are very opportunistic, but like I said, when people zig, we try to zag. We have a long-term horizon, which is very different from a lot of our peers that are more in the short-term 3-5-year fix and flip. We have sold some assets in that period of time, however we really aren’t trying to make a quick buck; we wanna really hold for the long-term, and real estate’s best friends are time and inflation, which I’ve learned from one of my very wealthy mentors who just passed a few years ago, named Jona Goldrich.

You can look him up, he was in the business for many decades. He was one of the pioneers of the early condo here in California. Time and inflation are really real estate’s best friends, so if you have that, you have a long-term horizon, you can withstand the market pullbacks, then you’ll be golden.

Joe Fairless: So for the Albuquerque property, for example, what’s the projected hold period?

Keith Wasserman: We bought it with a 12-year fixed rate loan. Most of them are Fannie and Freddie finance with 10-12 year fixed rate, because we’re very conservative. We don’t wanna take any interest rate risk. The rate was in the (I think) high 3% range, and we bought it over a 6,25 cap rate, so the cashflow was tremendous day one, with upside as well.

So we’ve put in our projections that we’re gonna hold it for that 12 years, however there’s a chance that we can hold it longer, and a chance that we can hold it a less period of time. We’re always [unintelligible [00:09:50].10] for our investors, and if someone comes to us with an offer way above market, we’ll definitely consider it, if we can find a suitable 1031 exchange opportunity to roll those dollars over. But for the most part, our gameplan is to hold it for that longer-term period and just refinance it when the loan becomes due and just continue to hold it if the area keeps improving and the asset is being well taken care of.

I always say, why get rid of the golden goose if it’s laying the golden eggs? We are long-term holders, and what does that mean? I’d say just generationally, if possible.

Joe Fairless: And with, say, the 12-year fixed rate loan, and your project is 12 years, and it could be more, it could be less… What are the projected returns to investors in that type of deal?

Keith Wasserman: We’ve pushed that one out at a 7% preferred rate of return to the investors, meaning the first 7% of cashflow annually goes to the investors; that’s paid quarterly. Anything above 7% we split 50/50. Let’s say the first year the property is projected to provide around 9% cashflow – the investors would get the first 7%, and the next 2% will be split 1% and 1%. They’ll get 8% on their money and we’ll get 1%.

If there’s an eventual sale, the investor gets back all of their money in full that they’ve put in, and then there’s a 70/30 split. 70% to the investor, and 30% to the Gelt team, and we call that [unintelligible [00:11:05].16] The other fees involved – there’s a 2% asset management fee; we charge 2% of gross revenues as an asset management fee.

We have weekly conference calls with the property management company, we oversee the entire business plan, we oversee all the major capital expenditures on the property… We’re very involved.

Then the last fee is the acquisition fee for putting the whole deal together, and that’s typically 1%-2% of the purchase price. It depends on the size of the deal.

So our investors are just very happy, because they’re passive, they can go on with their lives, working, or if they’re retired… We have people from all walks of life; we have around 600 high and ultra high net worth investors. As long as someone’s accredited, we’re able to work with them.

We’re just a nice alternative place for people to park money. Our minimum check size for any deal is $100,000, but if someone wants to start with $50,000, that’s suitable; you’ll also feel more comfortable with us.

It’s been a great way to grow, this syndication model.

Joe Fairless: So for that 12-year projected hold to your investors, what is the projected internal rate of return on a deal like that?

Keith Wasserman: A deal like that – I think the IRR at a deal-level was around 14%, like a mid-teen kind of IRR. We’ve always underpromised and overperformed. We’ve never missed any of our IRR hurdles. It is getting tighter and tighter, and investors are just getting more realistic… We just show them, this is what the market is and those are the deals that we’re buying. The ones we’re not buying are like single-digit kind of IRRs… And for certain kinds of investors, that’s okay, like big insurance companies, etc.

We’re talking on a little more risk, because we are buying a little older assets and we’re in secondary markets, and we need to hit at least that mid-teen IRR. But to be honest, we’ve sold around 13 properties and the average IRR has been in the mid-twenties on the deals that we’ve sold, as high as 50, and the lowest one was like a 15. But that’s a product of buying in the recession, ’09, ’10, ’11… We have a lot of unrealized IRRs on deals that we have no plan to sell.

I’d say when we’re buying deals now, if we could make that kind of mid-teen IRR, 12% to 16% range – that’s our conservative estimate, but we’ve always been able to exceed that… But who knows what the cap rates — it’s crazy, I thought they’d rise a little bit with the interest rates rising; they really haven’t. Most of the money — a lot of it has been on the back-end, on the sale of the property, but we buy properties that have good, consistent cashflow, so in case there is some cap rate expansion, the investors are still making a healthy return on capital during the hold period from cashflow.

Joe Fairless: What markets are you in?

Keith Wasserman: Right now we have apartments in eight different states. Colorado and West, so we’re in all the Western states. We’re entering Texas now, so we’re moving a little bit further East. And then on the mobile home park front, the additional states are Alabama and Pennsylvania. We have three parks in Pennsylvania, two in Alabama, one in Bakersfield, California, one in Reno, Nevada, and we’ve just bought an RV park in the Bay Area, in Monterey. But the apartments — the biggest markets for us are Denver, Colorado (1,500 units), Salt Lake City, Utah is a great market for us; we have 1,000 units there. We have apartments in Reno, around 500 units, Portland, Seattle, Southern California… And I’m probably missing one in here.

We were in Phoenix, in a big way. We had 2,000 units in Phoenix, that we acquired from 2010 to 2013. We exited all of those and made some huge profits for the investor. The reason we sold was to create the track record and to take some chips off the table. But anything we sold has gone up tremendously more in value… So if you believe in something and it’s a great location, I always recommend holding it for the long-term.

Joe Fairless: Do you have the same third-party management partner across all of the apartments?

Keith Wasserman: We work with three or four management companies. They are the best in those regions. We’re entering Texas now, San Antonio, and the management company that we were working with didn’t really have a big presence there, so we hired a local management company called UAG; I think they have over 10k-15k units just in that market.

Then our go-to property management company has been AMC or FPI; they’ve managed the  bulk of portfolio, just because we like working with them, we have a good relationship, plus they’re in a lot of these major markets. But if those guys aren’t in one of the markets, we will definitely interview two or three local management companies and try to form that kind of partnership with them.

Joe Fairless: I imagine your management companies that you work with for a lot of your units, when you ask them “Hey, are you in whatever city?” and they say “No, but we’d be happy to enter into that city and manage your portfolio…” – do they usually say that?

Keith Wasserman: It depends. It doesn’t make sense for them just to have one or two assets. If it’s a market where they have a few assets and they’re making a push to grow, they will try to get our business, but if they don’t have a presence — it just costs a lot for them to enter a new market, and they try to do it with some scale… So the companies we’re working with are pretty upfront and honest.

Joe Fairless: Let’s just go with this scenario where they say “We would like to get into that market”, and let’s say you’re buying a portfolio that’s large enough for them to get that scale… How do you determine if you should go with your management company that you have a relationship with, that you’ve worked with, but isn’t yet in that market, versus a new partner, but is in the market?

Keith Wasserman: That’s a tough decision. One is like the devil you know and one is the devil you don’t know, I guess. In the past, we usually have leaned on companies that have actual boots on the ground and they have economies of scale in those markets… I probably think we’d rather go with someone that we haven’t worked with maybe, that has a big presence.

We’re very thorough in talking to other owners like ourselves to get testimonials to see how it is working with these companies. What’s really cool is I’m a partner and a co-founder in a financial technology company called Domuso, and our customers are actually management companies and other self owner operators… So it’s cool, because we know a lot of different management companies, we know how they are working with them, and how they operate; we have good insights into that.

I don’t know how much the listeners know, but not only are we involved in the actual real estate, but the technology behind the real estate. We’ve created this whole company that’s a financial services business to service customers that are like Gelt, property management companies, owner operators, to handle all payments on the properties. We do certified online payments, credit card payments, cash payments… You can now go to any MoneyGram location and pay your rent there. Some really cool, innovative stuff we’re doing, all around the payment of rent. Flexible payments… We’re doing our own point of sale financing, where you could finance any payment due to the landlord… Really cool, innovative stuff. I’m involved with a lot of different things, but I pretty much spearhead real estate, and my cousin, who’s my co-founder, is now spearheading this new adventure, Domuso.

Joe Fairless: Just going back to selecting a management partner, just to bring it back there for a second… So what specific questions do you ask the management companies to determine which one you should go with? …either the one that you know, or the one that you don’t know.

Keith Wasserman: We always like to see the operating statements on some other properties that they manage in that area, to see how well they’re operating them. Usually, they have to get approvals from those owners. We do that.

It’s all about the people… Sometimes we’ve worked with a management company that we like, but the regional hasn’t been that strong in a certain region… And they have reputations, like “This one management company might be better in Denver and Salt Lake, but not as good in Albuquerque” or whatnot. It’s all about the people, and having the right boots on the ground.

We’ve seen it in our properties, in terms of performance. The on-site leasing staff and the manager is crucial to the operation. That’s the first impression that’s given when you walk into a leasing office. It’s all about the people. Even if the market is really strong, you’ve gotta have the right people that are doing the management, doing the leasing, taking care of maintenance requests in a timely fashion, and just really taking ownership of those properties.

We have different bonus structures that we provide the management companies. We have in the past worked with management companies where they’ve reduced their fee, but we gave them a back-end piece of our promote, and that really aligns our interests… They’ve put their best people on the deal.

Some of these apartment communities that are 400-500 units have 8-12 staff members between the leasing office and in the field. The maintenance techs, the maintenance supervisors etc. We really try to form a partnership, even though those aren’t’ our direct employees; we really try to form a strong partnership with them so they work hard for us… And we really empower them. We’re not very over-bearing and micromanaging. We really empower the management companies to do the best job possible, but we have checks and balances where we go in and we do unexpected site visits, we make sure all the unit turns are being done properly, the property is looking up to par… Just stuff like that.

It’s worked for us, and we’re continuing to utilize these third-party management companies.

Joe Fairless: When they have their fee reduced but they receive a back-end fee as part of your promote – is that a separate agreement, or are they in the original documents that are sent out (the PPM and the operating agreement)?

Keith Wasserman: Yes, usually a separate agreement. I think we show it in our underwriting, but it’s just a separate agreement between us and the management company. We’ve done that on multiple occasions, and by reducing their fee, that 1%, they actually made a lot more from the back-end than that extra 1%, and we like it because they really turned around the properties in a good amount of time and really went above and beyond to do a great job.

It was a really creative thing that we’ve done in the past, and we’re always looking to really form these strong partnerships with these management companies.

Joe Fairless: What’s a specific example of what that back-end promote fee would be for a management company?

Keith Wasserman: I don’t remember the exact percentage, but we calculated on a 3-5 year hold on one of the earlier deals how much money they’d be giving up by reducing the fee from let’s say 3% to 2%, or — I forget the exact number. So you calculate what the missed income would be, and then we underwrote the deal and then we said “If you hit these numbers, which we hope you could hit, this extra (I don’t really remember) 1%, 2%, 3% of the promote is gonna be worth let’s say double or triple what that 1% reduction would be.” So reducing their fee – they might be doing it at cost, but there’s gonna be a really big upside for them.

Business is tough, the margins are pretty tight. I incurred anywhere from 20% give or take as the margins on property management. It’s not glamorous, it’s very unrewarding, and we felt like we really wanna treat these management companies right, respectfully, give them these performance bonuses and treat them like gold. They’re our partners.

When we’re looking at analyzing a new deal to buy, we always run it by our management companies who are our eyes and ears. They have more mass in the local markets than we do, and we really lean on them heavily.

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

Keith Wasserman: Man, the best real estate investment advice ever… I’d say, just like Warren Buffet’s advice – when people are fearful, be greedy, and when people  are greedy, be fearful. ’09, ’10 – we started buying in Phoenix, when there was blood on the streets. 100k people left via de immigration bill that passed, and Phoenix is the fifth or sixth largest city in the United States, it’s not going anywhere. I knew the population would continue to grow, and the industries would start firing up again, and it really did. They diversified the economy there, it’s not just based on housing, and… I didn’t think it would turn around so quickly, but I’d say that’s the first one.

And then two is have a long-term horizon always on any investment, maybe in the stock market or real estate… I like real estate because you don’t see the daily fluctuations, as opposed to your stock market account, where you can see the stocks going up and down daily.

I read a report recently that Amazon, for example, had a drawdown of 90% from peak to trough during the early 2000s or something, but if you were to hold it this whole time, you’d be up thousands of percents, or something crazy like that. So I’d say just buy in a good area that is appreciating, and take good care of the asset. We have a saying, “Run it like a Honda.” We don’t over-improve the properties, but we take really good care of them for the long-term. They’re the affordable alternatives for people in these nice areas, to be able to live in these nice areas, but have that affordable housing. That’s been our gameplan.

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

Keith Wasserman: Let’s do it.

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

Break: [[00:23:00].26] to [[00:24:03].10]

Joe Fairless: Okay, best ever book you’ve read?

Keith Wasserman: Best ever book I’ve read… I like Warren Buffet’s The Snowball book. I think that was the title of it. It talks about his career and life, and I really realized, Rome wasn’t built in a day. Every day, as long as you’re pushing the ball forward down the field and making progress, one day you’ll look back and be like “Wow, we really did this.” It’s been around ten years since we started this business, and it’s pretty amazing what we’ve accomplished, but I still feel like it’s day one and really looking to continue to grow.

So I’d say that book from Warren Buffet was a good one.

Joe Fairless: Best ever deal you’ve done?

Keith Wasserman: Best ever deal we did – we bought a 415-unit property in Phoenix, Arizona in 2010 for 16 million, sold it three years later for 27,5 million. However, the next person put 4-5 million into it and sold it for 45 million… So it just shows, never sell.

Joe Fairless: How much did you put into it?

Keith Wasserman: Only a million probably. We were under-capitalized. It took us six months just to raise the money. We had to close with lines of credit and we brought  it from some wealthier family friends, and we raised over six months the equity. It was a 5,5 million dollar equity raise, and for the time, that was huge for us. Now we wouldn’t even look at a deal that’s that small. It’s crazy.

Joe Fairless: What’s a mistake you’ve made on a deal so far?

Keith Wasserman: Under-capitalizing, I’d say. Not coming in with enough equity. I always err on the more cautious side. Over-raise. Raise more money for reserves and for cap-ex. It’s hard, you can’t go back to investors ever (or you don’t want to; at least I don’t want to). So I’d say under-capitalizing for a deal.

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

Keith Wasserman: We’ve just started our own 501(c)(3), the Gelt Foundation. We’re providing rental assistance for tenants that are at risk to eviction due to financial crisis, so I’d say giving back in my own industry has been really rewarding.

Joe Fairless: And how can the Best Ever listeners learn more about what you’ve got going on and get in touch with you?

Keith Wasserman: Go to our website, GeltInc.com, or e-mail me, Keith@GeltInc.com.

Joe Fairless: Keith, I’m really grateful you were on the show… Incredibly impressive what you’ve done from 2008 to today, starting with that 4-unit, and now your company has acquired in total over 7,100 units… And then the management questions and the insight that you provided is gonna be really useful for the Best Ever listener who are looking to hire management companies and looking for some questions that they might not be asking already… For example, “Can I see operating statements of properties you manage in the area, so I can see how you manage them?” Obviously, there’s gonna need to be some approval taking place, but that’s a question that’s in bounds, whereas perhaps some listeners might have thought that was an out-of-bounds question.

Additionally, a way to show alignment of interests that I haven’t heard of, and I’m really grateful that you’ve mentioned this, is having your fee reduced and having the third-party management company participate in the back-end promote, and showing them “Here’s the missed income, but then assuming that you do what we are all projecting you will do, then you will get 2-3 times more on the back-end.” Really interesting stuff.

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

Keith Wasserman: Sounds good. Thank you so much, Joe. Take care.

 

JF1396: Debate 01: Long Term Rentals Vs. Short Term Rentals with Theo Hicks and Sue Hoyuela

Listen to the Episode Below (51:52)
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Welcome to our first debate! Theo is debating an Airbnb expert, Sue Hoyuela. Listen as they go back and forth in this fun debate. The takeaways from this episode are meant to help investors learn more about each strategy, rather than beat the opponent down. That being said, head over to bestevercommunity.com and tell us who you thought won the debate! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

 

Sue Hoyuela Real Estate Background:

  • Creator of the Airbnb Success Formula
  • Teaches how to trade long-term tenants for short-term guests, eliminate evictions and double rental income
  • Author, Speaker, and Real Estate Agent
  • Based in Los Angeles, California
  • Say hi to her at  www.airbnbvacationrentalbusiness.com
  • Best Ever Book: Financial Peace

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TRANSCRIPTION

Joe Fairless: Best Ever listeners, I hope you enjoy this debate series. Theo is going up against Sue; they’re talking about long-term leases versus short-term leases, and not what strategy is superior, but which one is best for you. So enjoy this debate, and let us know your thoughts on who has the best one by going to bestevercommunity.com and sharing your thoughts.

 

Theo Hicks: Hello everyone, and welcome to the first ever Best Ever Debate. We’re streaming live from Facebook right now. I’ll be your host this time, Theo Hicks. Joe is gonna sit this one out. My opponent is going to be Sue Hoyuela of BnB Freedom Formula. Sue, thank you for being on. How are you doing today?

Sue Hoyuela: Great, Theo. Thanks for having me, it’s an honor to be here, and to be the first one to do a debate with you.

Theo Hicks: Fantastic. I wasn’t doing [unintelligible [00:01:52].05] because my outcome for this conversation is to not have a [unintelligible [00:01:59].13] back and forth on what’s the better strategy… My outcome is to help everyone listening learn the different strengths and challenges of these two different investment strategies, that you guys can determine which one fits best for your current situation… Because at the end of the day, as real estate investors, we know that there really isn’t the best strategy; the best strategy is kind of subjective and is based off of your experience, your time commitment, the amount of money you have, where you live, and things like that.

So what we’re gonna do is we’re gonna go through a list of five different factors, and kind of go back and forth and explain how those factors relate to each of our strategies.

Before we get into that, it’s important to have some context… Sue, do you mind giving a quick background on how you got into short-term rentals, as well as what short-term rentals actually are?

Sue Hoyuela: Sure. Let’s see… Back in 2011 I was deep in debt, looking for a way to make extra money, and somebody said the word “Airbnb.” In 2011, mostly people would respond “Air B and what?” So it was a way to make extra money by renting a room or a house to short-term guests, kind of like a hotel in a way. This was a website that allowed you to create a listing. Airbnb markets that to the world, so now travelers have another option for where to stay, and they can come across your listing and say “Sure, I’d love to stay with you.”

Back at that time, we had nothing to lose. We were just trying to find a way to make an extra $100 to put towards our debt and get out of debt faster… Within the first month we made an extra thousand dollars, and that was just by renting a shed in our backyard. We were like “Wow, what else will people rent?”

I’m an entrepreneur, I like ideas, and so I started to get very creative with space. I rented the laundry room in my house, the cupboard under the stairs we turned into the Harry Potter room, we rented by couch, we rented actual rooms, and after nine months I’d created enough income from this little side hustle to quit my full-time job.

Then at that point I started saying “What else can I do with this amazing tool called Airbnb?” So I started renting other people’s property, and time shares… I used four different business models, and that eventually allowed my husband to quit his job, too. We got completely out of debt, and we were making a six-figure income… And we just started saying “This is the best thing since sliced bread; this is the actual door to financial freedom. We have to tell everybody about this.” So I started teaching, and coaching, and created an online course to help people eliminate the learning curve that I had to go through to create a six-figure income with these short-term rentals… And they’re a  wonderful alternative to long-term rentals.

I’m excited to be able to share the ins and outs  and the pros and cons with you here today, and I hope that your audience will benefit from that.

Theo Hicks: Well, I’m sold. I’m converting all my long-term rentals to short-term rentals tomorrow. [laughter] I’m really excited to learn about your four short-term rental strategies, because I think even if you aren’t going to do short-term rentals, I think learning about these strategies can help you make your long-term rental business more effective, or to kind of do it in addition to your long-term rentals.

Quickly, in one sentence, define what short-term rentals are, just for the purposes of this conversation…

Sue Hoyuela: Okay, a short-term rental is anything less than 30 days. So if you’re going to rent out a room, a space or a house on Airbnb, it’s going to be less than a 30-day rental to someone who’s traveling, for any number of reasons… It’s a simple distinction, but actually a very powerful one, and we’ll get into that in a moment.

Theo Hicks: Okay. Really quickly – most of you guys know my background, but I bought my first long-term rental in (I think it was) 2013. I house-hacked a duplex that I bought after just learning about real estate the night before… I had a property under contract within two days, so I got after it… That kind of speaks to I guess you don’t really need a lot of experience… Or maybe you do, based off of how it turned out and some of the problems I went through. But after I bought that, I held that for a year, I sold it, and then a couple of years later, which was actually last August, I bought 12 units of three different fourplexes, at the exact same time, while having a full-time job; I managed those myself for 3-4 months, and then I moved to Tampa for my wife’s job, and ended up putting those under property management.

So I have an understanding of the house-hacking strategy, I’m actually for buying rentals and then managing them yourself, as well as my favorite, which is having someone else manage them for you. So that is my background, and for the purposes of this conversation, I’m going to define long-term rentals as an active strategy – that doesn’t necessarily mean you have to be the property manager, but it’s not a passive investment where all you do is just give money to someone else and they do all the finding and analyzing and managing of the deals for you… So it’s active in the sense that you have to buy it yourself and find the deal yourself.

I’m also defining it as me using my own money; I’m not raising capital for it, because that’s not fair to talk about that, because that’s completely different… And then I’m also just gonna keep it to residential properties, just because I wanna talk about more of someone who has little experience, or is just starting, or is looking to transition… So they’re not gonna be buying a 20-unit as their first long-term rental deal. And then to distinguish it from short-term rentals, I’m talking about 12-month non-furnished units.

The first factor, and I guess the most important factor, and the one that I already know that short-term rentals wins on is the returns. For my long-term rentals, when I’m looking at deals, I want a five-year average of 10%-15% cash-on-cash return. It’s usually buying 25% down, so I want a 10%-15% cash-on-cash return over a five-year period. What are the returns – I’m sure this is a very vague question, but what are the range of returns for short-term rentals?

Sue Hoyuela: Well, that’s one of the things that I discovered early on that just blew my mind. Short answer is double to triple what you’re used to making with long-term rentals. But the way I discovered that was when we started renting a room in our house, I was looking at like “What if I went to rent it on Craigslist?” and it was maybe $500/month to rent a room in someone’s house… And if you break it down, that’s $17/day. So when we put it up on Airbnb, it was $50/night, and that’s gonna be times 30 nights in a month, that’s $1,500/month; triple what you would have gotten from a regular long-term tenant.

When we applied the same strategy to a whole house rental, the same thing happened. We were renting it for $1,200/month, and when we put it up on Airbnb, we made $3,600/month. So that’s super powerful, and I’ve seen it across the board.

The funny thing is when I talk to landlords and I say “How much rent are you getting from your long-term tenants?” and they’re saying “Well, I could probably get more, but I’m afraid to raise my rents, because it’s so hard to find a good tenant… And if I raise it, they might leave and then I don’t know what I’m gonna get.”

So they wind up kind of shooting themselves in the foot almost by not raising the rents as much as they should to keep that income coming in the way it was the original intention, right? Invest in real estate and get that passive income coming from the rentals… But you have to continue to increase it, and a lot of landlords don’t. They could switch to the short-term model, and they’re actually gonna get a bigger boost in their rental income right off the bat.

So I call the difference between renting by the day, by the month to the long-term tenants, compared to renting by the night, to the short-term guests, the difference is night and day.

Theo Hicks: Nice. [laughter]

Sue Hoyuela: [unintelligible [00:10:03].29]

Theo Hicks: Something that I’ve discovered in my research about returns is consistency. People were saying for short-term rentals, since you’re doing it daily or weekly or monthly, the returns are not gonna be consistent month-over-month, whereas for long-term rentals – of course, there’s exceptions to this rule, but usually you’re gonna be collecting the same amount of rent each month… So could you speak on do the month-over-month rents fluctuate a ton? Is there some months where you’ll make no money and other months you’ll make times six times as much as you usually do, or is it consistently that three times number month-over-month?

Sue Hoyuela: Yeah, that’s very true… It speaks to risk tolerance, because the income does fluctuate, and it really depends on a lot of factors: where your property is, if it’s gonna have year-around traffic or if it’s just gonna be seasonal… So it’s gonna vary depending on where the property is and who your niche is, but there’s actually a really cool website that you can check out, if I can just throw it out there for folks…

Theo Hicks: Absolutely.

Sue Hoyuela: It’s AirDNA.co, and it’s got something called The Rentalizer. It’s really cool – you put in your address and it will show you exactly what type of occupancy rate to expect every month, based on seasonal demand and all that good stuff.

So that’s a very difficult question to answer, but I’ve found that for me – we’re in Los Angeles, and it fluctuates; summers are a busy time. We have huge events at times where our income just skyrockets, but it’s always out-performing the long-term.

For me, high turnover is a good thing, because I actually have five income maximization strategies that I incorporate into my short-term rentals, so that every time we have a turnover, I’m actually adding to my bottom line, and adding additional streams of income to my income with that. So it could be very powerful, but you have to have the tolerance for that; it’s not for everyone.

Theo Hicks: Absolutely. A couple things you hit on, I’ll definitely ask you more questions on before we move to other factors, but the last question I have, and I think I know the answer to this… One thing that attracts a lot of people to long-term rentals is the ability to accumulate equity, whether it be just natural appreciation, or renovating it and increasing the rents and increasing the property value that way… And then after a year or two pulling out equity and using that to rinse and repeat and buy some more properties. Is that a strategy that you can use in short-term rentals?

Sue Hoyuela: Absolutely. I know quite a few people that wanna do the buy and hold for a couple of years, because their end strategy is to actually flip it and get that equity out… But why not just rent it on a short-term basis in the meantime, because it actually gives you a lot more flexibility when it comes to exiting that property. If you’re on an annual lease, you’ve gotta wait 12 months for it to expire, but with Airbnb you can stop that calendar at any time you want, so you don’t miss out on opportunities like that.

Theo Hicks: Yeah, I figured… A quick follow-up question – when a bank is looking at a property and looking on whether to refinance or a home equity line of credits, do you show them what your occupancy and what your rents have been? I guess is the process the exact same as it would be for a rental, or are they like “Oh, well this is maybe inconsistent…”, they look at it differently and have a lower LTV, or (I guess) a higher LTV?

Sue Hoyuela: You know, that’s really cool, because I was doing Airbnb since 2011, and I wanted to refinance and see if a bank would accept that income, and they were like, “No, that’s ridiculous…” But now that Airbnb has been around 10 years, they are viable now and they’ve proven their business model, so now yes, banks are accepting your Airbnb income as proof that you’ve got steady income and that you can confidently refinance on right now.

Theo Hicks: That’s a huge recent development for short-term rentals.

Sue Hoyuela: Yeah, very exciting.

Theo Hicks: So that completes the return factor. The next one I wanted to talk about – I call it barrier to entry. I have it broken into subcategories; it means a lot of different things. The first one is about location. We actually had someone who’s watching ask a question… He asks:

“Can you Airbnb anywhere, or are there cities that will not allow it? If so, what do you do then for short-term rentals?”

I’m assuming he means maybe the location or the regulation against Airbnb… Do you wanna speak on that?

Sue Hoyuela: Absolutely. Yes, you have to comply with the local laws and rules, and if they require a permit, or whatever it is, you need to find out what that is and comply. It’s difficult though; there’s no blanket, no standard anywhere, so you do have to do your due diligence and so some research online.

I start with the city and the municipal code to start seeing if they have anything in place for short-term rentals. They use a lot of keywords. If you’re gonna do the research in your city, you can look under short-term rental, vacation rental, sublet… Some really archaic terms they’re using are room and board, boarding house, rooming house… Things like that. Yeah, they have all kinds of different terminologies, so it’s a little tricky to find out what the rules and laws are, but Airbnb does have a Help section for that, as well. For the bigger cities, you can already find the documentation in Airbnb’s Help section, and they link to all the things you need, so it’s really helpful.

Let’s say for example you’re in a city — oh, goodness, so many things came to mind… So I have what I call the Pyramid of Safety, of where I consider doing Airbnb. The top of the pyramid is the “Don’t do it” area, and that’s usually in HOAs, gated communities, condos with CC&R’s, because they have their own little governing boards that any moment they can change the rules, and if you do Airbnb and they decide to say it’s not permitted, you’re out of business. The risk is too high, and I’ve seen that happen to a lot of folks… So I don’t do it in anything that’s got regulations like that.

Apartment buildings are the next most dangerous place to do Airbnb, in the sense of getting shut down. They’re saying that it’s eliminating affordable housing. So do that with caution.

But if you get out into the suburbs, away from the hub, away from the main spot, that’s what’s powerful about Airbnb, too… Because you make more money out in the suburbs. First of all, it costs you less to own a property or rent something out away from the city center, and you still make fantastic returns on Airbnb… So that to me is the sweet spot – staying away from the main place that’s got all the attention on it.

There are some cities that have been completely — it’s just not allowed. I was speaking in Michigan, in Grand Rapids, and the people were like “No, they don’t allow it here in Grand Rapids.” Yeah, but the border, one block away is the next city over, they have no rules or regulations whatsoever. Do whatever you want.

So if you’ve got that flexibility – that’s what I usually say, is just look across the border for the next city over, and everything could be just fine. But if you don’t have that flexibility, you probably shouldn’t do it on that particular property… But there are ways to still get in on the Airbnb game if you still wanna play. I’ll tell you more about that later.

Theo Hicks: Perfect. You’ve basically hit on what I was gonna ask you next, so I’ll explain that, and if you have anything else that you wanna further elaborate on… Obviously, there’s the regulations in these locations, but there’s also the demand on the location, and I know for long-term rentals you can do a rental in the city, you can do it in the suburbs, I guess you could definitely rent out a farmhouse and do it that way… I’m thinking you’ve kind of already hit on this, and it was actually surprising because I figured that it would be ideal in the big cities, but you’re saying that the suburbs are actually better.

The one person that I knew personally that did Airbnb, they actually had theirs next to a hospital, so what they were actually going to do – or they considered doing – was obviously the hospitals have their hospital beds… They were gonna turn their house into like a makeshift hospital, so they could put excess patients in there… I can’t remember exactly what they said, but the amount of money that they would have made by doing that was something insane; it was crazy, because obviously there’s regulations to how many beds you can put per room, and things like that… But they were by a hospital, so… Can you walk us through what are the types of things that you wanna look for in the specific market, that will let you know that there’s gonna be a strong demand for these short-term rentals?

Sue Hoyuela: Oh wow, okay.

Theo Hicks: I’m sure there’s a million things, so…

Sue Hoyuela: Yeah, that’s one of the things that’s in my course, because that’s a real exercise to try and identify who your ideal guest is… But what I’ve learned is no matter where your property is, there is a niche to serve. Somebody’s gonna wanna stay there on a short-term basis…

Theo Hicks: Okay.

Sue Hoyuela: Yeah, and you always discover things kind of like a surprise. We started getting a lot of poker players coming to our house, professional poker players… I’m like, “Nah, you can’t make money as a professional. That’s an oxymoron, come on.” No, really, they actually are professional, and we didn’t realize that we were three miles away from the Commerce Casino, which is the poker capital of the world. Who knew…? So three miles away – poker players love us. They can get there for less than $5 in an Uber, and it’s perfect for them.

So as I’ve traveled, this is what I found – no matter where you go, there is a niche. My brother-in-law, he actually comes to me and goes, “Guess what, Sue?” He does Airbnb on his own house, in his rooms; we’ve kind of shared it with our whole family and now they’re all in Airbnb… And he says “I bought a property out in San Bernadino.” I said “That’s great! What did you buy?” “Two acres.” I go “Yeah? Well, what kind of house is on it?” He’s like “Just dirt. Just two acres.” And I say “Great!” He’s like, “Yeah, it’s already up on Airbnb, I’m already making money.” I’m like, “Wait… Okay, this is two acres of dirt in Lucerne Valley, where you don’t have water, electricity, there’s a road about a mile away… You get cell signal, and that’s it.”

He’s got a niche out there, because people love to go ride their ATV’s, he’s got film crews that are renting it… All kinds of people wanna rent that property and he’s making a killing on a piece of dirt. He didn’t even have to develop it. I was like, “Dude…” [laughs]

Theo Hicks: So this sounds like it depends on how creative you wanna get, and if you’re a super-creative person – someone like you, definitely… I mean, you started off renting  out a shed in your backyard… Then this sounds like an amazing strategy.

For someone like me, who’s a spreadsheet guy… I’m very good with numbers, but whenever my wife asks me to pick out a certain color of couch, I’m just like “I don’t know, they look the exact same to me.” So for me, I really like long-term rentals just because it is so simple and basic…

I know some people get a kick out of that creative aspect of it, but I like just the basic — you find a property in an up-and-coming area, you stick some renters in there, you don’t have to do anything fancy… I personally stick around he C or B-class properties in markets that are ride on the outskirts of A markets, that are renting for just these insane monthly rents, like $1,200 for a one-bedroom per month… Eventually, those people are going to want to start moving somewhere more affordable. That’s what I’m seeing in my rentals right now. Location-wise, I like to pick places that are right next to really nice areas.

Since we’re talking about barrier to entry, and kind of transitioning to expertise and experience – that does take some experience, because every neighborhood is different, every street is different in the neighborhood… So if someone tells you to invest in  Cincinnati, for example, there’s A markets in Cincinnati where houses are over a million dollars, or where you can get, as I said, rents for $2,000 for a 2-bedroom unit, but then literally a mile over there’s fourplexes that rent for $450. It does take a lot of — not necessarily time-consuming activity to understand your market, but you’re gonna have that for everyone.

Something else about the barrier to entry, as I just said, was experience. For me – maybe I’m an anomaly, but the second I learned about long-term rentals, I just went and bought one the next day. The reason I was able to do that was because I was able to do the house-hacking situation, so I was able to put down 3.5%… In hindsight, I wish I would have done the 203K type of loan, because I did renovations to it, I just didn’t know anything, so I paid out of pocket for the renovations… But I was able to get in there and get a crazy return just because your down payment is so low.

So in regards to barrier to entry, from my perspective, I think long-term rentals are great because of the opportunity to do the house-hacking strategy, which is you buy with owner-occupied loan, you live in one unit, and then you rent out the other ones.

It has to be a residential property, of course, but that way you could essentially live for free, so it’s a great strategy for people that are just out of college, that have maybe 10k saved up.

I think my down payment was like $5,500, and I ended up renting the top one for $1,400 and my mortgage was — I can’t remember exactly what my mortgage was, but I was actually making money, and I was like “This is the craziest thing ever. I just can’t believe this is real.” And of course, it’s different for me, because I didn’t know anything about real estate… I thought that you would have some sort of certification to invest in real estate; I was a complete newb.

Also, there’s one other point – I wanted to ask you about the team… I’m not necessarily sure if you are doing all the management yourself, but if you aren’t, or for people that have a full-time job and they don’t have the time to manage it themselves, how do they go about doing that? Is that a challenge that you or any of your clients have?

Sue Hoyuela: Well, that’s interesting that you should say that, because in the beginning I was all about creating systems and streamlining… So I implemented all these systems in my own house, so that I didn’t have to do as much. I trained cleaners, and put in systems for inventory supply… Then at one point I outsourced the communication to a co-host. That pretty much took everything off my plate. It was that simple.

Then, actually, I did have people that had properties asking me to help them, so I started a guest management services business, so that I could do all those things for busy landlords, and help them enjoy the income without the hassles. So if you’re scheduling cleaners and restocking supplies and that’s a hassle, then I was taking care of that for them.

Since then, I’ve been teaching people now how to start guest management services as well, because the need and the demand is so huge across the country and the world that there is enough to go around.

I have to say though, I love your story about the house-hacking. I wasn’t sure what that term meant, but I love that you shared it, because it’s crazy — my daughter right now is buying the house she’s living in, because it happens to be a duplex… It’s like a pocket listing deal, right? The tenants in the back moved out, the landlord came to her and said “I’m thinking about selling it. Do you wanna buy it?” She said, “Sure”, and she’s already got a storage unit full of furniture, so the minute she closes escrow, she’s throwing all that furniture there in the back house and turning it into an Airbnb… So it’s kind of your strategy, but now it’s on steroids; you’ve got the extra income from the short-term rentals to just amp it up.

She’s been doing Airbnb too, in her own house, and now that she’s got this opportunity, she already understands the power of Airbnb, so it’s not even a question of long-term or short-term… She’s going short-term all the way.

Theo Hicks: I think I found a title of a book for you… Instead of house-hack, it’s the Airbnb-hack. I think that’s gonna be the next big thing. We were house-hacking before house-hacking was a thing… I’m not sure when Brandon Turner coined that term, or even if he’s the one that coined that term, but the guys that taught me about real estate – they both house-hacked five years before I was house-hacking, so back in the mid-2000’s; it wasn’t called house-hacking… I didn’t even know how he discovered it. I actually know [unintelligible [00:25:46].07] but I’m glad that he told me about it.

Sue Hoyuela: Good strategy.

Theo Hicks: So we’re kind of already touching on it, so we’ll transition into the next factor, which is time commitment, because obviously, if you wanna make money, time is also a very valuable resource… And of course, for any strategy, you can automate the entire process and really have no time in there, but for — I guess I’ll say my side first, because I kind of did all three entry-level models… So for house-hacking – again, this is just me personally, based off of my personality… That one was the most stressful for me. Obviously, when I’m stressed out, that affects my time, because I’m not productive at all… But it was just stressful. That could mean doing parts and not knowing what I was doing before I entered, but whatever I just thought of the house – I thought it was gonna fall to the ground, catch on fire… [laughs] Whenever my phone rang, I thought it was a tenant telling me something was wrong… So that was a mess, which is why I took a two-year break.

Then after those two years, when I bought these 12 units, I did the management of all those myself. I probably spent on average maybe around 10 hours a week doing that full-time management. Once I first took it over and got all of those large duties out of the way, which is sending out all the new letters and letting them know who you are, fixing any ongoing deferred maintenance, which people that are listening to this know all about that – my boiler issue… I’m probably known as “the boiler guy” now… But once I was done with that, most of my time was spent doing landscaping. I’d go in and rake leaves and mow the lawn… Obviously, that’s stuff that’s very easily automated, and it was only 12 units, but the time commitment on that wasn’t very hard.

Now that I have an actual property management company, it’s even less, because whenever something happens, instead of having the tenant call me, I have to go there to look at it and see what’s going on and then find the proper person to solve the problem for them, now the property management company will either do all of that upfront… If it’s a small maintenance issue, they do all of it and I won’t even know about it until the end of the month. Or if it’s larger, they’ll just say “Hey Theo, here’s what’s going on. Here’s what I’ve already done, here’s the quotes. We can do this, this or this. Option a, b or c. What do you wanna do?” and then I just look at my phone, I go “Option a” and then that’s it.

So that’s how it is from my specific situation. Again, I know that it’s different — if you find the wrong property management company, that could be a problem; if you have a bad maintenance person, that could be an issue… But those are kind of just the two different types of strategies for long-term rentals that I did, and the time commitment associated with each.

My question for you – because this is what I would imagine, is that it would take a lot of time to manage a short-term rental because of all the extra variables that are involved… But I’m sure you have a perfect solution for that, so let’s hear it.

Sue Hoyuela: Of course. I have to admit, when you own property, you still have those same issues… You’re a landlord, you still have to make sure the deferred maintenance is kept up, and things can go wrong and you have to fix them… The benefits though, what I’ve heard from my landlords is that when I’ve been managing the properties for them as a guest management services manager – so it’s similar to a property manager, but it eliminates a lot of the headaches for landlords, I’m gonna say in three major areas.

Theo Hicks: Okay.

Sue Hoyuela: First of all, when you’re a landlord and you’re looking for a new tenant, the time it takes — because you wanna make sure that you get a good tenant, so it’s gonna be a long-term thing, and you wanna go through the process of screening, and running their credit, and their background check, and their bank statements… Then it’s like courting them, and you have to meet them, and then you interview them and you show them the property… That time process – I don’t even know how many weeks that takes. If you have a property management company, they’re gonna do that for you, but that process of finding a good tenant takes a long time.

When it comes to short-term rentals, everything boils down to three questions, and in my system it’s actually three questions that when they answer my question, I can give them an answer whether they’re going to stay or not in less than a minute. So we’ve just reduced the whole screening process down to like 30 seconds.

Theo Hicks: And what are the three questions you ask?

Sue Hoyuela: I ask them “Where are you coming from? Who are you traveling with?” and “What will you be doing while you’re in town?” You have no idea… They seem rather innocuous, but those are some extremely loaded questions, and it’s very important that you answer correctly, or that’s it! You’re not staying.

It’s interesting, because I worked backwards… From all of my horrible experiences with bad guests, I started saying “Well, if I had done this, I wouldn’t have had that problem.” And as I started to see patterns, I started to be able to eliminate the things that were going to cause problems, and it just boils down to those three questions.

So when it comes to screening, now we don’t have to pay a management company to run credit, and show the property, and put signs and post signs – none of that; Airbnb handles it all. I just have to screen, three questions, boom. That’s done.

Theo Hicks: I have a quick follow-up question to that before  we move on to the other two… What would be an example of something that would eliminate someone from contention?

Sue Hoyuela: Okay, so when I’m asking the question “Who will you be traveling with?”, it’s very carefully worded, because when the answer comes back, “Oh, I’m not traveling with anybody; I’m booking on behalf of my mom and my sister, who are gonna be visiting you while they’re in town, but I don’t have a room for them to stay in.” That falls under the category of a third-party booking, and that’s a rather extensive explanation of why you don’t wanna do that… But immediately, in the wording, when they answer me, if they are booking for someone else, that’s a decline. I’ve got horror stories to explain why, but we won’t go into all of that right now… It just suffices to learn from experience. That’s one way to weed out a lot of problems.

Theo Hicks: Okay. What was number two? Not the question, but the second thing to reduce the time commitment.

Sue Hoyuela: Right, so the repairs and all that good stuff, and you said if you have a good management company. One of my landlords, he had a property in Whittier, a 5-bedroom 3-bath, and it was super high-end. He was getting $4,500/month for it, renting it to like the dean of Whittier College, or something like that… And the tenant moved out, and he had his management company find him a new tenant. So the management company did, and it was a disaster. It was kids, and they started bringing their friends over, they turned it into some sort of a den of iniquity, I don’t know… But it went downhill fast.

They had to evict everybody, and when they got in there after the eviction process, he discovered this massive hole in the ceiling that was caused by some sort of a leak. He said, “Hey, management company, you were supposed to be checking on this at least every six months. How did that get there?”, because it had been like two years… So things like that don’t happen when you’re doing short-term rentals, because you have such high turnover; every little thing is taken care of, done, and doesn’t blow up into a huge, huge problem… So you save a lot of money on that end.

And then the other thing that is interesting – I don’t know if it’s true in other states, but in California, when you rent to somebody, or lease, the tenants have more rights to the property than you do, and it’s kind of annoying. If you wanna go in and check your property you’ve gotta make an appointment, and if tenants don’t wanna let you in, that’s it; you can’t go in. And it’s weird, because it’s your property. I never understood that… “Wait a minute, who’s making the mortgage payments here…?”, but that’s the law. So when it comes to Airbnb, you can come and go in your own property whenever you want.

One of my landlords, he’s calling me saying “Can you open up a block this weekend? Because my wife wants to have a book party with her girlfriends.” I said, “Sure, it’s your property. You can do whatever you want with it.” It’s a huge benefit for landlords to have that control over their own property; it seems like such a small thing, but wow… [laughs]

Theo Hicks: Yeah, control is definitely big… And as you said, in California – I’m sure it’s statewide – it’s a tenant-friendly state versus a landlord-friendly state. I did a quick Google search, for people listening… I’ve looked into it before, and I can’t remember off the top of my head which states are the best for the landlord… But yeah, it’s things like how much time do you need to give them before you can go onto the property? Can you show up, or do you need to give a 24 hours notice? What is the eviction process? The security deposit return process… Those all vary.

Maybe that will convince some people to invest in an out of state market, as opposed to their own market… But again, as most things we’re talking about, it all depends.

So I guess the last two categories won’t take too long to talk about. One of them was – I kind of already mentioned this – the extra-variables involved with short-term rentals over long-term rentals. Things like furnishing the units… It’s something that I didn’t think about until I was researching, but a review is very important — I guess reviews are important for short-term rentals, as opposed to someone like me, who’s got four units and doesn’t have a company… Again, I guess it would be reviews on Airbnb, not like a Google review, so essentially you’re kind of under a microscope; you have to be on top of your game a little bit, whereas for me – I’m not saying I’m slacking off or anything, but it’s just a whole different thing.

Other examples are — and I guess you could get creative with this, but the amenities, what all you’re gonna offer. Are you just gonna do just the standard toiletries? Are you gonna put some goodies in the fridge for them, or leave them a bottle of wine to make them really enjoy their stay?

And then [unintelligible [00:35:15].09] but also, if you are going to have a property management company, I know for long-term rentals you’re looking around 10% of the collected income for a single-family, and then as you get to four units you’re looking at maybe 8%… I don’t know what a short-term rental rate would be, but I do remember at the Best Ever Conference someone who does short-term corporate housing was there and said that it was like 25% property management fee.

Obviously, I understand that it’s all relative, based on the income you’re bringing in. If you’re bringing in five times as much income, but you’re only paying three times more in expenses, then it’s fine, but do you wanna kind of speak on anything I just said there?

Sue Hoyuela: [laughs]

Theo Hicks: I know it was a lot.

Sue Hoyuela: I’m overwhelmed, yeah. I actually, wanted to go back to the previous conversation and say that evictions are another issue if your state is not landlord-friendly. If you do short-term rentals, under 30 days – usually, 30 days is the limit that if you cross over, now you’re in long-term rental territory and you have to evict clients if they don’t comply. But if you’re under 30 days, now it’s just a matter of trespassing, and it’s so much easier to deal with. None of the headaches. That’s huge. Thank you. Okay, got that off my chest.

Now, onward to the other good stuff that you were talking about… So when it comes to reviews – you know what, that’s so incredible, because before Airbnb, we hosted international students in our house, and all of our family and friends would say “You’re crazy. How do you let strangers stay in your house?” But reviews are what changed the game, because now there’s a certain amount of accountability, and it keeps everybody on their best behavior.

So because that’s built into the system, if you get bad reviews, you’re not part of the community anymore. So it’s actually what has created that trust that allows people to be crazy and stay in stranger’s houses… “What are you doing?”, right?

I’d say the same thing about Uber. When you were a kid, didn’t your parents say “Don’t get in a car with a stranger”? What are we doing now? We’re hopping in cars with strangers like nothing. Why? What changed? Reviews.

So that accountability and that being able to see that other people had a good experience before you, so it’s probably okay – it gives you the confidence to go ahead and enjoy the use of that.

So yeah, reviews are huge… And it’s funny, because when my daughter was looking for an apartment, she had a website that she checked, and there were apartment buildings with reviews for the long-term tenants, so I do know that you are getting reviewed on Yelp, or something…

Theo Hicks: Yeah, I’m pretty sure it’s really for larger ones… If you’re looking at a fourplex — I mean, maybe you could put whatever your LLC or rental company is on there; if you have like a website, a portal for all of your rentals, and tenants can come there and see your rentals on the website, then once you google that website, it’ll get that little thing on the side on Google, where you can do Google reviews… But I think it’s based off of having a website. If you have a website for your company, then you’re most likely gonna have the reviews.

And again, when you are doing anything in your life, whether you’re trying to find a restaurant, or a place to live, or a place to go on vacation, everyone googles “Best restaurants in Tampa FL”, and they’ll just sort based off of the number of stars and the number of reviews. It’s kind of at the point right now where reviews are, as you said, a game-changer… Now it’s so important to have solid reviews.

You need to have some sort of strategy… Or a couple of other things that I was talking about is there are certain amenities that you have, certain techniques, or anything that you do to make sure that you’re always getting that perfect five-star review, or ten-star… I’m not sure what the ratings are.

Sue Hoyuela: Yeah, exactly. It’s the way we live today, everything’s being reviews. It’s just a part of our culture now. So yeah, it’s actually pretty cool, and Airbnb – they give you the playbook, and they say “If you wanna be a super host and maintain that star rating, this is what you’ve gotta do.” So you’re like, “Great, that’s it. All I’ve gotta do is that.”

It revolves around six different areas for a host. I don’t think I can name them all off the top of my head, but the most important ones are accuracy in your listing – so whatever you’re promising, you’d better deliver. That’s common sense; setting expectations, basically, with the guest.

Cleanliness. Cleanliness is so important, because it’s the first impression. A guest coming to the bedroom, and like, dramatically tearing down the sheets off the bed and going “Ah-hah! Oh, it’s clean…” [laughter]

Theo Hicks: Did they expect like a rat under there, or something?

Sue Hoyuela: I know, right? I’m like, “Okay…” [laughs] So they really want that cleanliness, and you’re like “Okay, good.” There’s a lot of ways to ensure cleanliness. I have something called “The quick changeover cleaning system” that I’ve developed, so that we get consistent results every time, because it is critical to keeping your super host status and getting five-star reviews.

Communication is the other one. That can be the biggest deal breaker and make it so hard for guests, especially when they’re coming from other countries or they speak other languages… But Airbnb gives you all the tools, so that you can over-communicate. You can use pictures, so that it’s very clear and it makes everything so smooth. There’s a lot of different things… Location though is the one that has just driven me nuts, and I think other hosts too, because that’s one of the things you get reviewed on, and we’re like “What can we do about the location?” It’s like, “I can’t move the house. I wish I could, but…”

Theo Hicks: Yeah… I’m sure they do that just so people that are selecting where to live, they’re selecting where to go, and they want some amazing view or something, and they’ll look at that and they’ll be like — that’s like their main deciding factor… But there’s nothing you can do about that.

Sue Hoyuela: Right, and we’re aware that we’re not at the beach, with a view of the ocean… Okay, we’re 26 miles away, so our price reflects that. We’re not $300/night, we’re $49/night, so we make up for it, work with me here.

Theo Hicks: The last category I was gonna talk about was competition, but you’ve hit on that, because again, it’s obvious for long-term rentals – there’s plenty of actual properties that you could buy; I’m not saying that they’re being sold or the owners are willing to sell, but there’s gonna be thousands and thousands of single-families, duplexes, triplexes, fourplexes that you can choose from in your market.

Then obviously for short-term rentals, going into this conversation I thought that it wasn’t something that you could do everywhere, but as you explain, as long as you’re super-creative, you can Airbnb out a piece of dirt, so that answers that question…

Something else I wanted to talk about too, just to wrap up here, because it’s a very insightful conversation… Personally, I just moved to Tampa, and we go at the beach all the time now, and it’s still just amazing; I can’t believe I live here, this is insane. I’m used to living in Cincinnati, so… We got here in January, it was snowing there and we came to sunny beaches… But there’s so many cute little beach towns down here, and you can see that there’s obviously vacation rentals down there. If you consider buying a single-family house — not necessarily on the beach, but in one of those beach towns, and then furnishing it, and then when we’re not there, Airbnb-ing it… But then it’s something where, well, what if you just Airbnb it during the week, and then on the weekends we just literally live down there? After work we just drop down there…

I know we’d make more money renting on the weekends, I’m assuming, but still — again, it depends on how creative you get… But that’s something we were considering doing, so coming into this conversation, I was thinking in the back of my head the entire time, it’s like “We could totally do this.” We could have a beach house, but make money if we’re having a beach house.

So there’s that, but then I know there’s one thing that I wanted to hear from you, which is —  what did you call it…? You called it the Ultimate Leverage Strategy. Do you wanna just hit on what your Ultimate Leverage Strategy is?

Sue Hoyuela: Okay, sure. Oh, and by the way, more power to you, because if you decide to go with that beach property, you’ve got the best of both worlds. You can stay it in when you want, and go back to your other house when you don’t want, or rent it on the weekends, or once a year, or whatever; you’ve got all the options open to you, so… I wanna see what happens with that. Keep me posted.

But the Ultimate Leverage Strategy came about because I teach people how to make a six-figure income with Airbnb, renting rooms and spaces in their own house; they can make $1,000 to $10,000/month… I’m showing landlords how to trade their long-term tenants for short-term guests, eliminate eviction headaches, and double or triple the rental income on their rentals. But then, people kept saying “What if I don’t have a property? What if I don’t have enough startup capital to furnish a place?” and I said “Well, there’s an answer to that.” You can actually get in on the Airbnb game and you can start an Airbnb business that you get paid for to start.

When people wanna start a business and they start asking “Well, how much is it gonna take?” and if you’re looking at buying a property, well, 3%, or you’ll have to go out and get a loan, 250k, or maybe it’s zero to start… No, this business model, the Ultimate Leverage Strategy, you actually get paid to start your business, anywhere from $500 to $2,500/property. So it’s a pretty powerful strategy, and it’s providing guest management services to busy property owners and landlords.

In contrast, I guess the newest model I’ve been hearing about lately is “Oh, let’s use other people’s property”, but when they say that, they’re actually going out and renting a property, and then subletting it on Airbnb, which… I’ve actually been approached by pretty smart landlords, and they’re like “Hey, why don’t you just give me a flat fee per  month and you keep whatever else you make on top of that?”, which I do. That works, too.

But the way you can get in on this without having to have that monthly payment, or paying utilities, or have to worry about any expenses – zero cost out of pocket  – is just partner with those busy landlords and property owners by providing the guest management services. So if anybody out there is an Airbnb host right now – little light bulbs are going off like crazy – and if you don’t already have experience doing that, I have a course called the BnB Freedom Formula that teaches you how to become that Airbnb expert, so that you can start to offer those services and create a six-figure income from your own Airbnb business.

The beauty of it, because there’s no cost to you, is it’s unlimited in the scalability. You can grow this as big as you want. I teach you how to outsource all of the different pieces of it, so that it doesn’t depend on you, and I give you the pieces to fill in as your inventory grows, so that you have unlimited capacity.

It’s a very exciting business model, and it’s been blowing it out of the water because so many people haven’t been able to get in the Airbnb game until now, so… Thank you for letting me share that.

Theo Hicks: That’s awesome. From my understanding, you’re like an Airbnb property manager; you’re acting as the property management company for example for people like you – you didn’t want to do anything… Not anything, but didn’t wanna do the day-to-day activities. From my perspective, as a long-term landlord, I’d be like “I need to find a regular property management company”, whereas if I was an Airbnb host and I was sick and tired of dealing of dealing with cleaning toilets, as they always say, you’d get this Airbnb Guest Services, or what did you call it…?

Sue Hoyuela: Guest Management Services. That’s a business model that I’ve developed. It’s not endorsed by Airbnb or anything, but I use Airbnb as the tool to deliver my services. I’ve been training people how to provide those services as well, so that they can actually tap into that additional income and get paid. Actually, all you are asking about how much you make, right? So with the Airbnb management, it’s more 20% to 50%, because you’re right, we increase the income so much, but it’s still a smaller slice that it would have been at 10% on a long-term rental.

Theo Hicks: Yeah, so if you’re a property management company, or if you are either interested in starting a property management company, this is something you should definitely be interested in and pursue further… Because if you’re making 20% to 50% on a revenue that’s five to ten times higher than what it would be otherwise, then you’re gonna be able to scale a lot faster.

Sue Hoyuela: Yeah, absolutely. And I just need to make sure that people understand – if you are a property management company already, this is a beautiful tie-in… Why not just start offering this additional service? …save yourself a lot of time on screening and all that stuff. You can probably reduce your number of employees, and save some money on your overhead, who knows. But in order to do the guest management services, it’s not technically property management, so you don’t need to have all the licenses and permits and everything involved. Because of the way I set it up, you’re not handling any of those things technically, so that you are free to just go out and start your business without any restrictions.

Theo Hicks: Awesome. I think we should end the debate portion with that powerful strategy. Before we wrap up, I want to just quickly look — I’ll ask you some listener questions. We had a question earlier from [unintelligible [00:47:54].29] so we really appreciate that. We’ve got a second question from Grant – it’s something we talked about way at the beginning of the conversation, so I apologize for that, Grant… But he asks “What happens to an existing Airbnb property when a town or city outlaws Airbnb? Do you have to show down existing Airbnb’s, or can you just not create a new one?”

Sue Hoyuela: Good question. Yeah, so it’s happened to folks… They’ve been in a zone where it’s not just like they changed the laws and said “Now you have to get a permit” or “Now you have to comply”, but they’ve actually said “Nope, it’s banned.” So unfortunately you do have to stop doing Airbnb short-term rentals. But short-term rentals, again, mean anything under 30-day rentals, so a landlord, if you own that property, you’ve got so many options open to you, right? That’s the nature of real estate – we’re always looking for higher and better uses for it, and there’s a ton of them.

So you have all the options open to you – you can go back to long-term rentals, or even there’s an in-between… Something that’s really fun is corporate rentals. Business travelers – sometimes they need to stay for 2-3 months; traveling nurses, people who need a short stay, but longer than 30 days – you can still do that no problem, and you will be compliant with the “No Airbnb”, which is actually “Nothing less than 30 days” is what they mean. So you still have a lot of options open to you.

Theo Hicks: It makes sense. Alright, Sue, I really appreciate it. Just to kind of quickly summarize what we’ve talked about… We were doing Airbnb/short-term rentals vs. long-term rentals, and we were comparing them across a variety of different factors. In regards to returns, for short-term rentals you’re looking at approximately three times as much rental income, compared to long-term rentals. The only potential drawback is the fluctuations, but again, with a little creativity, you can fix that. For long-term rentals, you’re not getting as high of returns, but you do have that consistency.

In regards to barrier to entry, which is much of a surprise to me, you can do these anywhere. You can do it in a city, depending on the rules and regulations, you can do it in the suburbs – which, as you said, is one of the main places you can do it – and then, again, my favorite part of this conversation, is the dirt. You can literally Airbnb dirt, so people can ride around on their dirt bikes.

Then obviously for long-term rentals, you can do them anywhere, as well.

We talked about the time commitment, and you gave us three things in particular that you can do to reduce the time commitment, and I went over a couple of stories of my progression through managing the property I lived in, managing properties I didn’t live in, to finally ridding myself of all responsibility and giving it to a property management company who’s doing a great job.

We kind of hit on competition a little bit, and then we wrapped up with the Ultimate Leverage Strategy, which is essentially property management for Airbnb, but with insanely much higher returns.

I really appreciate you being here. Everyone listening, thanks for tuning in. Where is a good place people can learn more about you, learn more about the information you’ve talked about today, and learn more about your short-term rental strategies?

Sue Hoyuela: They can find me at SueHoyuela.com. We might wanna put that in the show notes, because it’s kind of hard to spell… But hey, my name is right there on the screen, so if you can spell it, suehoyuela.com – that’s a great place to learn more.

Theo Hicks: Awesome. Well, thank you again, thanks everyone for listening. I hope you guys enjoyed the first ever Best Ever debate, and we will talk to you guys soon.

JF1363: How To Create Passive/ Residual Income Through Real Estate #SkillSetSunday with Matt Theriault

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Matt has shared his lessons learned quite a bit already through his own podcast, Epic Real Estate Investing. Today he joins Joe on the Best Ever Show and explains how anyone can create residual income through real estate investing. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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TRANSCRIPTION

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

Matt Theriault: Very good, Joe. Good to be here.

Joe Fairless: Yeah, nice to have you back on the show, my friend. Best Ever listeners, you recognize Matt’s name and voice probably because he’s been on the show a couple times. The first time was an episode way, way, way back – episode 86! I have no idea what episode number this is. I know it’s in like the 1,300’s, so it’s been about 1,200 or so days since we last talked, at least initially… We’ve talked I think since then, too. Welcome back to the show, my friend.

Matt Theriault: Thanks, and congratulations on so many episodes.

Joe Fairless: Yeah, thanks a lot. A little bit about Matt, just as a refresher – he was a marine, and he is a Desert Storm vet, so first off, thank you for your service.

Matt Theriault: You bet.

Joe Fairless: And he also enjoyed 15 years in the music industry prior to becoming an accomplished real estate investor. He’s got a podcast, he’s got a website you’ve gotta check out, EpicRealEstate.com (if you haven’t already). That’s also in the show notes link. He’s based in L.A.

Today we’re gonna be talking about how to create passive residual income – that is a skillset that we’re gonna be talking about today, because it is Sunday, and we’re doing a special segment called Skillset Sunday, like we normally do on Sundays.

With that being said, how should we start our conversation?

Matt Theriault: [laughs] Yeah, I get e-mails like that, like “How do you sell a house?”

Joe Fairless: Right, yeah.

Matt Theriault: How should we start the conversation? Well, I guess maybe start with why you would even want to create residual income.

Joe Fairless: Yeah. From your standpoint, I think wanting to create residual income – or for anyone’s standpoint – that’s most people’s goals, but the challenge is most people have a certain amount of money to invest, and we’ve got to do it intelligently so that we maximize the return on time and on our time, so what’s the approach you take us through?

Matt Theriault: Well, I think in any real estate investing strategy, regardless of what it is – apartment buildings, or mobile homes, or storage facilities, or single-family residence – I think every single strategy begins with find the deal. You’ve gotta find a deal, preferably with equity already in place. Secondarily, one that’s gonna meet your own minimum deal standards, that’s gonna get you to your goals the fastest. And if your goals are to create residual income, then you have to set some sort of barometer, I guess, on what type of deal is gonna get you there the fastest.

And then also just shifting the mindset, shifting that mindset from saving piles of cash to creating streams of cash is a big shift, and it’s easier to say and easier to think about and come up with the idea that that’s a good idea, but actually taking action on that on a daily basis can be really difficult.

For example in our office, on a daily basis, we’re faced with the decision – do we flip this property and put $30,000 in our pocket, or do we hold on to it and put $300 a month in our pocket? That’s a really tough decision to make, particularly when you’d actually be staring at that pile of cash… Because most people would wanna flip the property and take the 30k, thinking that they’re progressing and they’re moving forward, and in all reality, when you start doing the math, you’re actually taking a much longer path to get your residual income goal, because you probably have to flip ten of those properties to put that money in the bank somewhere, earning a 4%, 5%, 6% in something very traditional, to generate that $300/month of passive income… Or you can just hold onto that one deal and create $300/month of passive income.

I think once you start getting that math and understanding the seemingly slow route and small cash route is actually the fastest route to get you to your residual income goal, I think that’s a big barrier for a lot of people to overcome.

Joe Fairless: Is there a certain point where we should switch from the piles of cash to then creating a stream, or should we go straight out of the gate creating streams.

Matt Theriault: Yeah, I think with every deal you find, it should be your intent to hold it. That should be the intent. Now, it’s not always going to be feasible or practical to do so, but I think you should look at every deal “How can I hold this?”

If you think back and you go 20 years ago, and compare what your life would be today if one path you chose “I’m gonna flip 20 properties” 20 years ago, or “I’m gonna buy and hold 20 properties” 20 years ago, where would you be today? Even if holding each one of those properties was an extreme struggle to do and you had to play all resources and all ingenuity and everything you could, and even make sacrifices, where you’d be today would be just a significantly different place, a much better place.

Joe Fairless: And with that approach – there’s pros and cons with every approach – the con would be that you won’t get… Well, I’m about to correct myself, so let me just go with the initial thought, and then we’ll say how this could be a solution… But the con could be perceived that you’d go get the streams of cash slower, because you’re not selling the properties, but I imagine your answer is cash-out refinance.

Matt Theriault: That, or the streams of cash – one comes from work, and one comes from management, right? So to create those big streams of cash faster, like that $30,000 flip – once you flip it, you’ve gotta go find the next deal. So you’re constantly working. You’ve got a job, a high-paying job albeit, but it’s still a job; you’re never gonna get to take your foot off the gas. So with residual income, it seems slow – $300/month on that first deal, that’s not gonna make a significant impact on anyone’s life; it’s not gonna change anyone’s lifestyle too much. But if you wanna get to $10,000/month, you have to get the $300 one out of the way, so you can put the next one to create the $600, to do the $900. Then once you’ve got four or five of these things under your belt, now it’s all really starting to make sense.

Joe Fairless: I’m thinking about when I got started, my situation – it took me 2-3 years to save up $20,000, I bought a house, and that got me $150-$200/month in income. And if I would have — instead of buying more of a turnkey property, if I would have bought a value-add deal and successfully increase the value of the property and then did a cash-out refinance and held the property, then I could have gotten farther faster, versus what I did initially… I just bought basically four turnkeys, and it took me about — first one a couple of years, and then the one after that a year to save up money for each of the next ones. So I could have gone faster if I had done more value-add deals and did the cash-out refinances.

Matt Theriault: True. And choosing that path and going turnkey – I actually buy turnkey properties myself these days, just because I don’t feel like doing all the work all the time… But going that route, you’re paying a premium for someone else that has gone out and found the deal and found the equity, and they’ve marked it up and given you something, they’ve given you this finished product.

The way to do that a lot faster when you’re talking about saving money – that’s the mentality of a lot of people… They think they have to make a lot of money and save a lot of money to start buying these properties… But if you go out and get your hands dirty and you get a little bit more involved, and you’re actually sourcing the deals yourself, you’ll find that it’s a difficult thing to do, and because it’s a difficult thing to do, it holds a lot of value in the transaction… Meaning that you might feel like money is the hard part for you – just recognize that for somebody else that’s the easy part for them; find the deal is the hard part for them, where it could be the part that you focus on, where that’s where you bring the value to the table.

So you can really accelerate by just contributing different aspects through the transaction, and there’s a whole lot of value in finding the deal, and it doesn’t take $20,000 to find every single deal. So that’s another approach to do it and really accelerate your progress in that fashion.

Joe Fairless: We’re talking about creating passive, residual income… With your personal portfolio, how would you break out the categories by percentage for where your passive income is coming from?

Matt Theriault: I was just asked this question a little while ago… It’s about 60% of single-family homes, 40% notes on single-family homes.

Joe Fairless: Got it. So no commercial stuff. How come no commercial?

Matt Theriault: I went down that road and I fell on my face miserably, so I came back to what I know, and now I am much smarter and experienced, so we’re getting ready to pull the trigger again on commercial… But I just got started with single-family, I got good at it, and so that’s why it’s there.

Joe Fairless: And what have you done differently as you’ve started, to now where you’re rockin’ and rollin’ with the single-families, that you can share with us, that will help us get better if we are investing in single-families?

Matt Theriault: Really when it comes down to — and to all passive income… A lot of people income passive income with uninvolved income, and that’s a big mistake. You still have to manage it, and I think the secret to cashflow, regardless of what the asset class is, is the management of the asset. Property management – you’ve gotta do as much due diligence on your team, on your property manager, as you do on your properties themselves. So that’s where we’ve made a lot of mistakes, but we’ve been able to pull it all together to where now it works for us.

So people will look at diversifying their asset class, they’ll look at diversifying their location… I’d recommend everybody diversify their teams as well. In every market – this is what’s really made it work for us – we’ve got at least two property managers. We make sure that they know about each other; not in a evil, mean-spirited way, not in a gross, ugly, competition way, but we do make them know that we’re working with somebody else in their market… And what we’ve found is it inadvertently just kind of forces performance to go up, it forces expenses to go down, and you just get better service. That’s probably the biggest thing that we’ve been able to put in place, that has increased and stabilized the performance of our properties or our cashflow.

Joe Fairless: You mentioned diversification of asset class, teams and locations. Clearly, you’ve got the diversification of teams that you’ve just mentioned… It doesn’t sound like you do with asset class, and then what about locations?

Matt Theriault: So the asset class – I’ve got notes and properties, so that’s the diversification there… And we’re looking to go back into commercial. So I’ve got single-family and notes, and we’re gonna be back into commercial, so that’s our diversification of the asset class.

The diversification of the geography – we’re in 12 different markets across the United States, so we’re probably most diversified in the location than anything else.

Joe Fairless: When you look at a market, what are some of the characteristics that you look for?

Matt Theriault: Good question. We look at all the normal stuff that everyone else looks at. We look at what is the job space like, is the industry diversified, the major employers diversified? What’s government contributing? What’s the migration and the population look like? We look for all that stuff that everybody else looks at… But what really determined whether we go into a market or not is the relationship with our team, the property management.

You can find the best market, with all the market indicators that point up and give it a green light, and you go in there with bad management, that’s gonna be a terrible experience for you.

Joe Fairless: So true.

Matt Theriault: You can go into a mediocre market with a great team, and that can be a fantastic experience for you?

Joe Fairless: What type of properties? Can you give us an example of maybe the last deal that you bought? What type of property is it, from a single-family standpoint? Returns, that sort of thing.

Matt Theriault: We’ve just picked up a single-family in Birmingham, Alabama. I like that market. We happen to have our best team there, but I also like the market, because over the years we’ve had a good experience of cashflow and appreciation, which is kind of hard to find in the same market. But it’s like a 13% cash-on-cash return, with leverage in place, in a nice neighborhood; I’d call it like a B-, B neighborhood… Good tenants, good management… It’s been really easy. I think we’ve got a dozen in Birmingham now. I really like that market.

Joe Fairless: With taking a giant step back – our conversation is around creating passive residual income, and we started out by talking about finding a deal that meets your goal, and then you said instead of creating piles of cash, you create streams of cash… So from a Best Ever listener standpoint, what would be some practical steps coming out of this conversation that they can do to create that residual income?

Matt Theriault: Practical steps… I would say the first step is focus on finding the deal, and recognizing that 95% of all real estate transactions that happen are conducted through people that want to sell. No one in their right mind is gonna give you a deal on their real estate unless they need to sell, so you need to look for that 5% that need to sell. There’s some sort of distress in place – there’s financial distress, there’s personal distress, or the property itself is in distress… And just kind of going with the mindset, understanding that people will exchange equity for peace of mind.

So I think the first practical step is identify the type of problem that you want to solve for people… Somebody that just went through a divorce, or somebody that just went through bankruptcy, or someone that’s in foreclosure, or someone that has liens on their property, whether they’re tax liens or [unintelligible [00:14:39].28] or code violations…
So identifying the problem that you’re going to solve, and then promote the solution to that person of what they’re looking for… And come to them as being the white knight on the horse, and they’re gonna give you equity in exchange for being that person. So I think just identifying who’s the person you’re gonna help, and deploy all resources in helping that person, so you can get that deal under contract.

Joe Fairless: What’s been a challenging problem that you and your team have solved for a person?

Matt Theriault: A challenge for a person?

Joe Fairless: Yeah, for a property owner… They had a really challenging problem.

Matt Theriault: One that comes up frequently is someone that inherited a property and they live on the other side of the country, and they don’t feel like flying out to see the property, to try and hire a realtor and sell it. They just want the cash. That’s something that comes up frequently, and that’s pretty easy to do.

Another one is — recently, someone had a job transfer, and they had to get up and go, and they had no time to go and sell their property through conventional channels… And what we were able to do is put that property on the market for them, and find an investor/buyer for them, but in the meantime, while we were looking for them, we were able to pay for their moving expenses and storage of all their belongings that were in their property.

That cost us I think $1,000 for the three months that we were storing their personal property from the house, and then I think we paid like another $2,000 for their first and last month’s rent, to move into their apartment… So we put in $3,000 there, and that probably got us another $20,000 discount on the sale, for the purchase of the property.

So those types of problems, people are like “Just make this go away for me, so I can get on with my life”, and they’ll gladly sell to you at a discount.

Joe Fairless: On the commercial real estate front, what happened?

Matt Theriault: The first thing was I went in buying a 14-unit, thinking that “Hey, how difficult could this be? Just 14 houses underneath one roof.” I just kind of did not understand the nuances of managing an apartment building… And when it seemed like that one was going good at the beginning, I went wide too fast; I went on and bought a 50-unit building, a 44-unit building, and 8 and a 12, all just because they kept coming to me, and they were so cheap.

But [unintelligible [00:17:02].28] way wide before I went deep and figured out how to make it work, and it just caught up to me.

Joe Fairless: And what are some specific things that now that you’re getting back into it you’re gonna do differently for making it work?

Matt Theriault: Definitely do a lot more due diligence on the front end, with regard to expenses and what the actual costs are to owning that property. Be prepared to pay double what the rehab budget is… It doesn’t necessarily means I’m going to, but I need to be prepared for that. And third would be to really vet whoever is going to manage that building for me.

Joe Fairless: And when you really vet them, what will you be doing differently that you weren’t doing before?

Matt Theriault: Giving them small tasks up front. One of the things we do for our property management now is we have a list of questions – I think we just googled it… Questions to ask property managers. It’s really the process of asking the questions, not the questions themselves that we’re looking for. So we’ll ask four of the six questions that we’ve got over the phone, just to kind of get a feel about the personality and the vibe…

They’re always gonna tell you what you wanna hear on that first call, so you never know if you’re getting the truth or not… But then we’ll call back after hours and leave two more questions on their voice mail, and wait to see what their response is. So that’s one of the small things that we do. We’ll do a lot of things — “Hey, if you were in my shoes, what would you do?” type questions.

With our single-family, I don’t know how this is gonna be different or how we’re gonna pull something off equivalent with the multifamily, but with our single-family we just give them one property to start with, and then we just micro-manage the hell out of them, and if they don’t like it, then they’re not gonna be the person for us… But if they do good, then we’ll start giving them more and more, and the more that they prove themselves, the less we’re breathing down their neck.

Joe Fairless: You’ve mentioned throughout our conversation “we” and “us.” Who’s on your team and how do you have it structured?

Matt Theriault: Good. I work with my wife, Mercedes, and she has a full-time assistant and transactional coordinator. I have one person for my marketing, Miguel, and I have one person for my systems and automation and managing the database – William. Then I’ve got a media team that provides Miguel with all the marketing materials.

Joe Fairless: The systems and database that William works on – what types of systems and databases (or database) do you use and find effective?

Matt Theriault: I found a system called REI Solutions. It’s a CRM and marketing machine all underneath one little umbrella. We went out and we tried the Podio thing, and it just kept on breaking on us, and we became more in the IT business than we were in the real estate business, so we just went with something ultra simple. So REI Solutions is what we do… It actually has the whole call rail engine inside of it. It’s got the testing features, it’s got landing pages, it’s got websites, and then it’s got project management… That just all works as one cohesive unit inside of that system.

Joe Fairless: Anything else that we haven’t talked about as it relates to building streams of residual income, that you think we should?

Matt Theriault: Just make it your intent to hold everything. It doesn’t mean you have to, but just make it your intent, and understand your marketing efforts and your deal-finding efforts – it’s not always going to produce stuff that you want to hold or that would be holdable, but there’s still alternatives of where you can make money on that… So don’t be afraid to flip a property or flip a contract. I think every business needs active income as well, while they’re building their passive income. I just wanna make sure that that’s clear – it’s your intent to hold everything, but a lot of times you’re not going to, so you might as well make some money off of it anyway.

Joe Fairless: Yeah, and you sell and then do a 1031 exchange, assuming that the numbers work out.

Matt Theriault: Totally. There’s endless things that you can do once you have the deal. That’s why I place so much emphasis on finding the deal. Because once you’ve got the deal under contract, now you’ve got all kinds of options.

Joe Fairless: Matt, thank you for being on the show. How can the Best Ever listeners get in touch with you or your team?

Matt Theriault: If they’re listening to this podcast, then you can go to Epic Real Estate Investing Podcast. The domain name of the website is epicrealestateinvesting.com. Either one is a great way to get in touch with us.

Joe Fairless: So when we come across an opportunity to make 30k or $300/month or something similar to that choice, we’re now gonna pause and think about this conversation… And think about creating streams of cash instead of piles of cash, because eventually we have to get to the $300 if we’re gonna get to the $10,000 or a million dollars a month, or whatever our goal is… So we’ve gotta start somewhere, and there are ways to access that equity even when we have a hold. Or if we do sell, then 1031 or other ways — so it’s just a thought process that you’re talking about. It should be our intent to hold it, and then we’ll maximize the opportunity as we have the opportunity.

Then also I love that you went into the three updates to your approach on commercial investing, the due diligence on the front-end, being prepared to pay double for what the rehab is, and really vet the management team… I love the example of calling after hours and asking questions to see what their response is from a time standpoint, but then also from a quality response standpoint, so thanks for sharing that.

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

Matt Theriault: Thanks, Joe.

Chris Voss and Joe Fairless

JF1244: FBI Negotiating Strategies For REI Deals #SkillSetSunday with Chris Voss

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Chris was a lead FBI hostage negotiator for 24 years. The amount of negotiating knowledge he has is unprecedented. ANYONE can find value in this episode,  you can never have too many negotiating tips you can use anywhere. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Chris Voss Background:

Founder The Black Swan Group, firm solves business communication problems with hostage negotiation strategies

-Author of the national best-seller Never Split The Difference

-After 24 years as a lead FBI hostage negotiator, he founded The Black Swan Group

-International keynote speaker, negotiation consultant, and award-winning business school professor.

-Say hi to him at http://blackswanltd.com/

-Based in Los Angeles, California

 


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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, Chris Voss. How are you doing, Chris?

Chris Voss: Fantastic, Joe. Thanks for having me on?

Joe Fairless: Well, my pleasure. Nice to have you on. I’ve got a daily podcast, so I interview a bunch of people, and I always ask “What’s the best ever book you’ve read?” and lately I’d say about 20%-25% have been mentioning your book.

Chris Voss: Wow, that’s very cool!

Joe Fairless: They love it, yeah. Real estate investors love your book. The book is Never Split The Difference. It’s a best-selling book, and certainly among the real estate community it’s a very popular one. I have bought it and I didn’t know I was interviewing you today, because if I did, then I would have done some reading on it… It’s still on my shelf, I’ve gotta read it. So I’m really excited to talk to you about it. So many people who we’ve interviewed have read it, and as a result, I bought it and I’m looking forward to reading it.

Chris is also the founder of the Black Swan Group, which is a firm that solves business communication problems. He has a background in hostage negotiating. He was a lead FBI hostage negotiator, and then he founded the Black Swan Group. So let’s talk about first your background… Do you wanna give the Best Ever listeners a little bit more about your background and what you’re focused on?

Chris Voss: Yeah, sure. This is about applying hostage negotiations to business negotiations, and your personal life too, because so many times your family members take you hostage. I’m originally a small town Midwestern guy, son of Richard Joyce Voss from Mount Pleasant, Iowa; a town of about 7,000 people. My father was an entrepreneur, so I grew up in that environment, always thinking like an entrepreneur, as a businessman.

I became an FBI agent, worked in counter-terrorism, counter-kidnapping my whole career, and ended up being responsible for the negotiation strategies of every American kidnapped overseas for about seven years. So in trying to get better at that, I turned back to the business negotiating world first, Harvard Law School, to help us get better. When I went through the course at Harvard Law, they said “Look, you’re doing the same thing we’re doing, you’ve just got better stories.”

Then while I went through there, I just used my hostage negotiation stuff on the Harvard lawyers and did really well, came out with the upper hand most of the time. So I started teaching in business schools when I left the Bureau in 2007. I’ve been doing business negotiation coaching/teaching/training ever since.

Joe Fairless: Let’s talk about the negotiation of a kidnapping overseas that you took the lead on. If an American was kidnapped overseas, you were taking the charge on that negotiating. What’s your approach? And I know we can easily tie this into business too, but I just wanna hear what your approach is in that situation.

Chris Voss: It’s pretty easy, really… Kidnappers are businessmen. The business they happen to be in is kidnapping, but they’re commodities dealers, and they’re like any hard-bargaining negotiator that you will run across anywhere. So they’re remarkably susceptible to deference, as are all people. I like skills that work 360 degrees with everybody; deference is one of those skills. And they wanna be in charge, they’re control freaks; control freak negotiators are really easy to deal with, because all you’ve gotta do is make them feel like they’re in charge, and you drop their guard… Because they wanna be in charge.

Then we’d just call that empathy, now I call it tactical empathy, because we know how to get through people’s reasoning and get at their emotional architecture, if you will… And get them to feel like they’re in charge, and get them to make deals. So we just used weaponized empathy on them. [laughs] Made them feel like they were in charge, made them feel like they were calling all the shots. Then the kidnapper will let a hostage go when they feel like they’ve gotten everything they can, which is what everybody else in business will do – they’ll make the deal when they feel like they’ve gotten everything they can.

Now, there’s a real distinction between whether or not they GOT everything they could and whether or not they FELT like it. So my job was always to make them feel like it, and we’d cut a deal, that they’d stick to – that’s the other important thing. You’ve gotta cut a deal that they’ll stick to and that also, if you run across them again in another environment there, they’re happy to deal with you. So you can’t have bad blood, you can’t lie… It’ll catch up with you. You can’t deceive, you can’t [unintelligible [00:06:32].00] Interestingly enough, you’ve gotta be really genuine.

Joe Fairless: Let’s just play this example out and then we’ll switch into business; I know you’re overlapping the two, so it’s great… But what is a deal that you can stick to that a kidnapper overseas would feel like they got everything they could? What do they receive?

Chris Voss: Well, international kidnapping is about ransom, so they’re gonna get a payment. Now, what you wanna do is you’ve gotta run it like a sting operation. Basically, it’s the same reason why banks have dye packs. You give bank robbers money, so you get people out of harm’s way, so they’ll leave the bank, but most importantly, so that you plant evidence on them. Now, there’s a possibility that the bank robber is gonna get away with the bank robbery money anyway – that’s why you don’t give them all the money in the vault, you just give them enough to make them happy so they’ll go on their way, so that ideally you can follow up afterwards to not only scoop them up, but scoop up everybody that they do business with illegally. But you have to run it as if it’s gonna take a while to catch them, so you don’t wanna put too much money in their hands.

An international kidnapping is about tough as nails, bare-knuckle bargaining, without making the other side mad, and without making them feel out of control. It’s about top bargaining in a really soft fashion, that’s what it’s really about. Then you cut a deal, and then also you’ve gotta pay and then they’ve gotta comply. It will be like any business deal where you pay the other side all the money upfront, and then wait for them to comply. So you have to know what somebody looks like when they’re telling the truth, and you have to know the tiny little emotional/psychological edges that capture every single edge, so that the kidnapper, once they’ve got the money, they’ve got [unintelligible [00:08:21].12] the hostage go, whether or not they let the hostage go, as per their agreement. So it’s cutting any deal where the other side is gonna comply because they feel like they got everything they could. You pay them, and they’re gonna let the person go, as agreed to.

What are you gonna do? Are you gonna sue a hostage taker for not letting somebody go? No. You’ve gotta make implementable deal that the other side is happy with, that they feel like they got the best deal they possibly could.

Joe Fairless: With the tough bargaining in a soft fashion so that you don’t make people mad – is that where the tactical empathy comes into play, or are there other things to accomplish that?

Chris Voss: Yeah, different applications of it. Tactical empathy is a primarily emotional trigger, it’s what makes people feel good; it’s learning how to say no without saying no. The book starts with (in the first five pages) when I first went to Harvard Law School, I sit down with the head of the program on negotiation, Bob [unintelligible [00:09:15].28] and I know what he’s angling for, because I can smell it. He wants to do a role-play with me, he wants to see if I’ve got any game. So he says “If you negotiate with a kidnapper, what kind of strategies do you use?” So I give him an answer that makes me sound weak and innocuous, and I say “You know, we’re just asking open-ended questions, that’s all.” And he goes, “Really!?”, and he kind of laughs. He says, “That’s it?”, I say “Yeah, we’re gonna ask him open-ended questions.” Now, I’ve got some ridiculously powerful open-ended questions, but he doesn’t know that because it sounds like it’s something that’s stupid and simple, and he’s not impressed with it.

It pretty much happens wherever I’m in a new environment. They go, “You’ve gotta be kidding me. That would never work fine.” So he literally calls a couple people in to watch. He gets a tape recorder, and he looks at me and he says, “Alright, Voss, we’ve got your kid. Give me a million dollars by tomorrow morning, or we kill your son. I’ve got your son and I’m gonna kill your son. Give me a million dollars.” And I look at him and I say, “How am I supposed to do that?” Just like that. And he kind of blinks a couple times, and he goes, “No, no, we’ve got your kid! You don’t understand! We need a million dollars, or I’m gonna kill your son.” Now, already I’m listening, and he doesn’t know it. Because his initial intention was to make a demand and get off the phone. I’ve already extended the conversation, he feels in charge; the secret to getting the upper hand in any negotiation is giving the other side the illusion of control, which is the point of that question that I just asked. It triggered something that Daniel Kahneman calls deep thinking, which slows him down, doesn’t make him feel threatened, but he doesn’t know that I’ve already boxed him in.

And then I say, “How do I know that my son’s alive? How am I supposed to agree to pay you if I don’t even know he’s alive? How am I supposed to pay you if I don’t know you’re gonna let him go? How do I know you’re gonna let him go?” Just one, after another, after another.

This goes on for a little while, until finally one of the people watching says “Don’t let him do that to you!”

Joe Fairless: [laughs]

Chris Voss: And he looks at her and he says, “Well, you try it!” And she says, “I have your kid! A million dollars! Tomorrow morning!” I say, “How am I supposed to do that?” We start over again. “How am I supposed to do that?” is the number one way to say no in negotiation. You’ve gotta say it deferentially, because what’s said with deference, you’d be amazed what you can get away with saying. And the other side feels in control, they don’t know you boxed them in.

Joe Fairless: Since we’re real estate investors on this show, let’s say we’re talking about a deal… It’s a house, it’s worth $300,000, and the seller says “I want $400,000.” I say, “Well, how am I supposed to do that?” in a deferential, warm and fuzzy way. Then they’ll say, “Well, you get your checkbook and you write out $400,000, that’s how you’re supposed to do that.”

Chris Voss: Oh, let’s role-play.

Joe Fairless: Cool.

Chris Voss: You think they know what they’re gonna say, let’s role-play.

Joe Fairless: Alright, which one do you want me to be?

Chris Voss: You’ll be the seller.

Joe Fairless: I’ll be the seller. So the house is $400,000.

Chris Voss: Alright, you know what? You’ve got an amazing house. You’ve put your hopes and dreams in that house, you had cherished memories there. Cherished memories of the past, your hopes and dreams of the future… It’s a beautiful house, it’s worth every penny of that. It’s probably worth more than that; I’m really embarrassed, because… But how am I supposed to do that?

Joe Fairless: Well, you write a check for $400,000, and that’s the amount you pay.

Chris Voss: And it’s worth it. I mean, it’s a beautiful house, but how am I supposed to do that?

Joe Fairless: [laughs] I would almost think you’re a little loony, because you keep repeating that. You just write a check, and that’s it! I mean, I don’t know how were you planning on buying it in the first place if you weren’t gonna pay for it?

Chris Voss: Well listen, how long do you want your house to stay on the market? Because no one can do that.

Joe Fairless: I’d like to get it sold pretty quickly.

Chris Voss: Yeah, do you wanna fail?

Joe Fairless: No, I don’t wanna fail. That’s not an option.

Chris Voss: Your house is a fantastic house, and I know that from your perspective it’s worth way more than what you’re asking, but it’s gonna stay there as long as you’re asking that price. How long do you want it to stay there and not sell?

Joe Fairless: Well, I’d like to sell it pretty quickly, that’s for sure. And I also would like the price that makes sense for me, which is the 400k.

Chris Voss: Yeah, I mean… Why me? I mean, you don’t even have to be in this conversation, because I’ve already let you know that I can’t do that and you’re still talking to me, so it sounds like you’ve got some sense that nobody’s gonna pay you that.

Joe Fairless: Well, I don’t know. I guess it’s just something that I’m looking for, and if it’s not a right fit for us, then I guess it’s not a right fit.

Chris Voss: Yeah, you know what? You’ve been enormously generous with your time, enormously generous. I’m surprised that you’ve talked to me for this long at all… And you know what I’d like to do? With your permission, I’d like to have your permission to come back to you and talk if nobody else comes along.

Joe Fairless: Absolutely, yeah. That sounds like a good next step.

Chris Voss: Right. Okay, so a couple things here. First of all, you’re in your holodeck. Do you know what the holodeck is?

Joe Fairless: I have no idea.

Chris Voss: In Star Trek, the holodeck is the room where in our imagination we create whatever we want to have happen. So there’s a little bit of difference between a conversation that you’re imagining might happen, than one you’re in the middle of.

Joe Fairless: Yeah.

Chris Voss: So I didn’t make this “How am I supposed to do that stuff?” up on the spur of the moment. Actually, how you would have answered if in fact you weren’t gonna take anything other than 400k, instead of slowing down and saying it as slowly and gently as you would have, you would have said, “You know what, because if you want the house, you’ll pay it.” Now that’s an actual indicator when people are telling the truth — this is not 1000% correlation, but it’s a really high correlation… They get a lot more direct. It’s a great way when somebody’s testifying in front of Congress, when a congressional witness is being accused of nonsense that they haven’t committed, they look at the congressman and say “Because congressman, because that’s the way it is!” As an FBI agent I’ve learned directness and impatience correlates strongly with truth-telling. So you were role-playing a role that you weren’t feeling, and that’s why you didn’t say it that way. You said, “Well, you know, because…”

Joe Fairless: Yup. I buy that, for sure.

Chris Voss: You were a little slower, so you were a little out of character in a role, but let’s get back… What happens if the other side says what you’ve said, only more directly? That’s your job as a negotiator, actually to push you till you say “Because if you want the house, you’re gonna pay $400,000.” Because my job as a negotiator is not necessarily to make the deal, my job is to find out what the deal is there that could be made, and then decide if I wanna make it, which in that case I didn’t, but now the most important thing for me to do is — the last impression is a lasting impression.
Let’s say that you’re selling a house and the market says it’s worth 300k and you want 400k, and you’re genuinely not gonna budge off 400k, which means your house ain’t gonna sell… Which also means that eventually at some point in time you’ve gotta be willing to go back to somebody. The last impression I left you with was nothing but with respect and deference. The last impression is a lasting impression. I actually intentionally seeded our next interaction by instead of using the last word to say “Look, pal, you’re gonna beg me to buy your house someday when you come to your senses.”

Joe Fairless: Right.

Chris Voss: Which is a mistake that a lot of people make in negotiations. When they know the other side is crazy, they make the worst possible impression at the end, which is like, “Alright, fine, you’re gonna be begging me to buy this someday.” But instead of doing that, which is what people call cheap shots for last… We actually call this the Oprah rule. Oprah is the toughest negotiator on the planet. Is that her reputation? No.

I know someone who’s worked as Oprah Winfrey’s broker for 17 years, and everybody that works with Oprah, their overwhelming goal is everyone they interact with has to feel, especially at the very end, like they were treated exceptionally well, no matter how it went. And the Oprah rule is “the last impression is a lasting impression”, and it sets the scene for my next impression.

Let’s say you really are crazy and not coming off the 400k. I know that house ain’t gonna sell because the market is not for 400k, but I do know that I’m gonna get another crack at it as long as I treat you with respect and deference and empathy throughout — you noticed I used empathy every step of the way before I said anything?

Joe Fairless: Oh, absolutely. Yeah, it was soaked in empathy.

Chris Voss: Yeah, and so what that does is it sets me up for the next interaction, which when I come back around, your memory is gonna be like “Yeah, you know, that guy wasn’t that bad last time. He didn’t give me what I wanted, but he treated me really respectfully.” I don’t like where I’m at, but since I don’t like where I’m at, the only people that I’m gonna deal with are the people that made the least bad impression on me the last time around.

Joe Fairless: It makes sense. The takeaways I’ve gotten from this so far, to summarize this, is to have empathy, and just soak the conversation with empathy, but also do it in a genuine way, versus you trying to apply it when it’s not natural for you.

Chris Voss: Yeah, and there wasn’t anything that I said that wasn’t utterly true. Anyone in the real estate industry, when you’re selling a house — actually, a home seller has the exact same profile as the family member of a kidnap victim… And the real bread and butter of kidnap negotiations is how we handle the family members, because we would have the family members deal with the bad guys… And what does a child represent to their parents? Their cherished memories of the past, their hopes and dreams for the future. What does a house represent to the seller? Cherished memories of the past, hopes and dreams of the future. It’s the same psychological profile. And that’s what I said when we were talking – empathy in the form of utter respect for how you actually feel about this. Not agreeing with any of it, but just recognizing it. That’s cognitive empathy, it’s a recognition… It’s not adopting it, but it’s just recognizing what you feel. It’s not sympathy.

I know what that profile looks like, or I can pick it up really fast in any given industry, because whatever anybody does in any sort of business, their hopes and dreams for the future are on the line at some point. All I’ve gotta do is listen for it and respect it, and it gives me a tremendous advantage.

Joe Fairless: What’s been the most challenging negotiating circumstance you’ve been in, and how did you work through it?

Chris Voss: Well, the other side is negotiating in a fashion that is just not gonna work out for them, they’re not gonna get anything that they want – they’re new to it, they’re bad at it, there’s a deal here, and they’re just not seeing how what they’re doing is gonna screw everything up for them. That rarely happens in kidnapping, but it happens sometimes.

One of the cases I talk about in the book – interestingly enough, it turns out there’s a business term for what happened in that negotiation… I ran across salespeople that call it being single-threaded, where your point of contact is out of touch with their team, and they’re negotiating in a way that the deal is never gonna happen and they’re gonna lose their job over… Interestingly enough, since kidnapping is a business, that’s exactly what happened to the negotiator we were dealing with in the Phillipines. On the second go-around, the [unintelligible [00:21:05].22] and ultimately the hostages died, in a botched rescue attempt about 13 months after the kidnapping happened.

I ended up finding everything out about the kidnapping. The upside to a hostage negotiation is at the end of the day you’re gonna find out everything that happened on the other side through the follow-on investigation. And I felt “What do I do when the point of contact is out of touch with their own team?” And we actually developed some more openended questions, which we now call “calibrated questions”, that are just specifically designed to deal with what we call “deal killers” on the other side – people who won’t come to the table, because all they wanna do is kill the deal once it’s been made.

There’s no shortage — 50% of the business deals that don’t go through, don’t go through because the deal killers on the other side stayed away from the table just so they can torpedo the deal when it came to them… And you learn how to deal with that.

Joe Fairless: What are some calibrated questions?

Chris Voss: Calibrated questions are a version of an open-ended question. What it really is is “I need you to think about implementation”, which is gonna be “How do I know the deal is gonna go through? How do I know that if we make the payment under these terms, that everybody on your side is gonna do what they’ve gotta do?” Now, what your point of contact will say is “It’s gonna be fine, don’t worry about it. I represent everybody”, which is why you repeat the questions three or four times, because then it makes your point of contact nervous and they actually go back to their team and they say “Hey look, this is what they’ve been asking me, and I just wanna make sure I’m on firm ground here.”

What will happen is then the deal killers love the fact that they’re now being consulted, which is what they wanted all along. Now they’ll start to become engaged, and it decreases the chances that they’re gonna torpedo the deal.

Joe Fairless: I’m noticing the word “How” come up frequently, versus “Why” or “When.” Is that intentional?

Chris Voss: Yeah, it’s a good observation on your part, very astute. The open-ended questions are “Who?”, “What?”, “When?”, “Where?”, “How?” and “Why?”, right? Also referred to as interrogatives or “the reporter’s questions.” Now, we’ve pretty much cut them down to — “How?” and “What?” is our bread and butter. We’re really careful with “Why?”, because “Why?” makes people feel accused and defensive; you have to be extremely cautious with it; there’s only one tiny, limited, surgical instance that “Why?” is a good question. Most of the time, instead of asking “Why?”, instead of “Why do you want that?”, you should say “What makes that a choice?” Substitute “What?” for “Why?” and you’ll eliminate the defensiveness.

But they’re very deferential. People love to be asked “How?”, people love to be asked “What?” It’s a great way to gain the upper hand in a negotiation by giving the other side the illusion of control. So those are the two biggest ones that give you the upper hand, but the other side feels in control.

With enough practice, you can turn nearly any question into a “How?” or “What?” question. The other side is gonna love to answer it, because people love to tell you how to do stuff, and they love to tell you what to do… And that’s all part of the deference, giving them the illusion of control that gives you [unintelligible [00:24:15].27] advantages.

Joe Fairless: Anything else that you wanna mention as it relates to negotiating that we haven’t discussed before we wrap up?

Chris Voss: Yeah, the flipside to open-ended questions are labels, and in many cases – probably about in almost half the time, the best way to get somebody to talk is not with an open-ended question. You just switch it to a label, because you’ll open it up more. Instead of saying “What do you think?”, I’ll say “It seems like you’ve got something in mind”, and actually you’ll give me a lot better answer to that second one than the first one, just because it hits the brain in a different way.

So we use those, and then we train on it, how to flip back and forth. Because you’ve gotta gather information, and it doesn’t necessarily mean that the best way to gather information is by asking a question.

Joe Fairless: Got it. Great stuff. How can the Best Ever listeners get in touch with you?

Chris Voss: Our newsletter comes out once a week, it’s called The Edge. It’s free, it’s complementary. A friend of mine loves to say, “If it’s free, I’ll take three.”

Joe Fairless: [laughs] Careful what you take free three times… There could be some scary instances there.

Chris Voss: [laughs] Right, right. It’s worth at least looking at it, right?

Joe Fairless: True, true.

Chris Voss: So send a text to 22828, send a text “fbiempathy”, all in one word; don’t let your spell check put a space in there. It’s gotta be “fbiempathy” all in one word. It’s not case-sensitive, so it can be lower case… To 22828. You’ll get a text message response back, signs you up for the newsletter. It’s a gateway to everything we’ve got.

Our website is blackswanltd.com. The newsletter will take you there. It tells you about the training products we have. If you wanna buy the book, which I strongly encourage, Amazon has the best price. I buy my book on Amazon, but I give it away. But subscribe to the newsletter. We’ll help you get better, we’ll help you learn a lot of stuff.

Joe Fairless: If I go to the website, which I’m on right now, where do I sign up for the newsletter on the website?

Chris Voss: There’s kind of a menu bar towards the top, and you should see it into the right of that. It says “Blog: The Edge.”

Joe Fairless: Yeah, I see it.

Chris Voss: Click on that, and it’ll take you right–

Joe Fairless: Oh, there we go.

Chris Voss: And you can search past stuff. You’ve got a search tool in there that can help you if there’s a specific thing that you’re looking for.

Joe Fairless: Great stuff, yeah. I am officially signed up. Well, this has been informative, and I’m grateful that you were on the show, Chris. As I’ve mentioned at the beginning, I’ve had a large amount of people being interviews, so high-performing real estate investors mentioned your book recently, and it compelled me to buy it… And coincidentally, my team booked you for the interview today too, so that was great. I had you on my list of people to reach out to anyway, so that’s great.

Some of the takeaways from this, as we can apply your lessons learned to real estate investing, and negotiating in particular – ask open-ended questions, in some circumstances… You mentioned at the very end the labels part. I think we’ll need to read the book to learn a little bit more about that. But what we talked about – open-ended questions, and using “How?” and “What?” Those are, as you mentioned, the bread and butter, and people love that. They love to talk about the how and the what; be careful with the why.

Also, be empathetic and use the Oprah rule of treating everyone exceptionally well at the end, because that really sets the stage for the next interaction. And really, one other thing we didn’t talk about when we were doing the role-playing back and forth – your approach put me in a state, it was almost like you were putting a trance on me… [laughter] It’s the way that you talk, and just the sound — you’ve got it down to a certain science, obviously. So that does something else [unintelligible [00:28:08].26]

Thanks for being on the show, I hope you have a best ever day. Oh, and lastly, two things. One is – because I have this in bold – directness and impatience correlates to people telling the truth. That’s really interesting. And then two is that you mentioned your job is not to make deal (and our job is not to make a deal), it is to find out what the deal that could be made is. That’s an important distinction, because we’re not always negotiating to get the deal done, we’re negotiating to identify what is the deal that could be made, and I think that’s an important distinction. So thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Chris Voss: Thanks, man. Thank you very much.

Mobile home syndication

JF1220: He Took His Money Out Of The Stock Market To Syndicate Self Storage & Mobile Home Parks with Hunter Thompson

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Hunter was always an entrepreneur. He started as a high schooler selling parking spots out of his backyard when there was an event going on. His first venture into investing was in the stock market. Hunter didn’t like that some many variables that were out of his control, could determine how much money he made or lost. Enter real estate. Now Hunter and his team syndicate opportunities, most notably self storage and mobile home parks. Today we’ll hear higher level tips and suggestions for investing in those two asset classes. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Hunter Thompson Real Estate Background:

Founder of Cash Flow Connections, a real estate syndication company

– Has helped investors allocate capital to over 100 properties, which have a combined asset value of $350MM.  

– Host of the Cash Flow Connections podcast, which helps investors learn from intricacies of commercial real estate

– Based in Los Angeles, California

– Say hi to him at: https://cashflowconnections.com/

– Best Ever Book: 4 Hour Work Week

 


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TRANSCRIPTION

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

With us today, Hunter Thompson. How are you doing, Hunter?

Hunter Thompson: Joe, it’s an absolute honor to be on here. Thanks again.

Joe Fairless: My pleasure, and nice to hear that, that’s for sure. A little bit about Hunter – he is the founder of Cashflow Connections, which is a real estate syndication company. They have helped allocate investor capital to over 100 properties, which have a combined asset value of over 350 million dollars. He’s also the host of Cashflow Connections Podcast, and he is based in Los Angeles, California. Their website, where you can learn more about Hunter and his team, and their company and what they’ve got going on is CashflowConnections.com. There’s a link to that in the show notes page. With that being said, Hunter, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Hunter Thompson: Absolutely. My grandfather was a successful businessman in the ’70s and ’80s, and I learned a lot from him growing up, really from the legacy of just owning a business, investing in hard assets, and allowing compounding interest to create wealth. I was very much an entrepreneur at a young age.

I remember my parents lived next to a popular concert venue, and when I was about five or so these events were taking place, football games or concerts; parking the area would be just a complete nightmare and was really challenging, so I remember selling parking spaces out of the backyard for $10 or $20 and splitting the profits with my mom. That’ll kind of give you an idea of how I was growing up.

Then 2008 happened, obviously a paradigm shift for a lot of people. I knew that there was going to be an opportunity in financial assets just because price deflation had been taking place over all the sectors of the economy, but particularly financial assets. So my original interest was in stocks, but that later changed just because of the lack of predictable cashflow and the volatility in the market, and I remember — it wasn’t really until 2010 or so, that’s when the European debt crisis was taking place, and I remember watching CNBC, and the anchor was talking about the Greece bond yields; they were saying that if the Greece bond yields remained below 7%, that the S&P 500 was gonna be fine. But if the Greece bond yields went above 7%, the S&P 500 was gonna collapse.

I just remember watching the Dow Jones take 600 point intraday swings and thinking, “How is it the case that something completely complicated, unmitigatable that I just could never conduct due diligence on or control is playing a significant role in my financial well-being or my financial future?” and that’s what really led me into real estate.

In California in particular the market had been completely decimated, so when I started jumping in with two feet and going to 3-4 networking events a week, I was building relationships with probably 5-10 people at each networking event. But when the market recovered, I came to find out that because these were the people that had been able to weather the storm, they ended up being some of the most successful and influential real estate entrepreneurs in the state of California, and this is kind of unknowingly at the time, but that’s really what led me to start Cashflow Connections and leverage those relationships from my business and from my clients, and those relationships still play a huge role in my business today.

Joe Fairless: What is your business model?

Hunter Thompson: We syndicate opportunities for accredited investors. We identify asset classes that are poised to perform in either economic standpoint or demographic standpoint or something similar to that, and identify sponsors who are best in class in those particular asset classes.

Then we syndicate opportunities for our investors to invest alongside of us, and I invest in each opportunity, and basically provide a passive investment on a vetted passive opportunity in a vast amount of asset classes, particularly recession-resistant asset classes, most notably self-storage and mobile home parks.

Joe Fairless: I see on your website you’ve got properties across the country, and I’m looking at Recently Closed, and one’s in Fayetteville, North Carolina – I was thinking Arkansas – and you’ve got things across the country… How do you qualify these deals in all these different markets across the country?

Hunter Thompson: That’s a good question… A couple different things. First of all, from a geographical location standpoint, a market identification standpoint, we’re consistently seeing opportunities in the South-East in self-storage, and the reason for this is the two driving factors of really what makes a good market  – the economics and demographics.

The economics is such that in the South-East the cost of living is low enough to substantiate — if you’re making $50,000/year you have a relatively comfortable life and have the capacity to do the two things you need for self-storage, which is things to store and money to pay for the service. And you kind of compound that with the demographic shifts that are taking place, particularly in markets like Florida, where a lot of baby boomers are retiring and moving to that market. Baby boomers present an interesting data point with self-storage because social security checks are probably around the $1,300/month range, the average two-bedroom apartment is about $1,200/month, so a lot of these baby boomers that are retiring (10,000/day or so), they’re being forced to downsize. And when they’re downsizing, they’re very likely to keep their stuff. When you’re put in that position, you’re very much more likely to be a tenant of self-storage, so it presents an investment opportunity.

In terms of going and doing due diligence across the country, going on-site is probably the last stage of due diligence. We’re very heavily reliant on upfront due diligence in terms of not only markets and demographics and economic third-party verification in terms of verifying those data points, but when you go on-site you learn a lot… Not only in terms of the market – you can get a feel for things that can’t really come across on the spreadsheet, but also in terms of the previous property manager, which kind of paints the picture for where the value-add is gonna be in that particular opportunity.

Joe Fairless: Let’s dig in there. You said you do third-party verification prior to going on-site… What are those data points that you’re specifically looking for?

Hunter Thompson: I’d say with self-storage there’s a couple things you wanna look at. First of all, it’s really good to have 50,000 people within a five-mile radius; that is gonna provide you with a substantial economy, with a diverse employment group. Now, this is typically, right? Some things change, but that’s just a good data point to look at.

We wanna see 20-25 daily traveled vehicles per day, and something else to keep in mind is–

Joe Fairless: Wait, 20 to 25 thousand…?

Hunter Thompson: Thousand, yeah. That’s important. 20 is not gonna cut it. What’s equally as important as that extra times 1,000 there is that the vehicles have visibility to the facility. You can get caught up in that data point and inappropriately assess the value and the visibility by just looking at how many vehicles pass by.

In self-storage in particular, a lot of properties may be tucked away behind something like a Walmart, which makes it completely invisible. That needs to be taken into consideration. A medium household income is also very important, and that’s something you wanna look at in the three and five mile ranges. I like to see 50,000.

One of the things you hear a lot with self-storage is that the asset class is still relatively new, and it experienced a tremendous increase in its overall scale over the last 20 years or so. From about 1993 to about 2010 or so, the number of facilities more than doubled, from about 20,000 to 53,000. So right now there are more self-storage facilities in the U.S. than there are Subways, Starbucks and McDonald’s combined, which is just unbelievable.

Now, that paints an important data point in terms of the desirability of the asset class from an investor’s perspective, but more importantly, they’re easy to build. So you have to identify markets that are under-supplied, and one of the ways to do is to look at the national average, find the number of square foot per person in particular markets on a national basis, and find where that market sits in that space. So we underwrite deals typically to seven square foot per person, and multiply it by the population size and you get a good idea of the supply/demand equilibrium in that market.

Joe Fairless: Seven square feet of self-storage per person?

Hunter Thompson: Correct.

Joe Fairless: Okay. Because I’m slow, will you run that formula by us one more time?

Hunter Thompson: Basically, the number of people times seven in the market, and that will give you a good idea of the demand for square footage in the market. For example, when you create that calculation you will find a number of square feet, and if the number of square feet that’s already available in the market is above that number, the market is over-supplied. If it’s below that number, it’s under-supplied.

And just to add to that, one of the things you wanna look at is a typical self-storage facility is somewhere between 50,000 to 100,000 square feet. Those are the ones we look at, at least. So if you have a market that is 200,000 square feet under-supplied – which is possible – within a five-mile radius, that means that even if one was built next door to your facility that you’re considering buying, you’re still gonna be in an under-supplied situation. That’ll kind of give you an idea of some of the metrics that we look at.

Joe Fairless: And why seven?

Hunter Thompson: That’s just basically what the national average is. The national average is about 7.8, so to be conservative we use 7.

Joe Fairless: 7.8 square feet per person of storage facilities in that market?

Hunter Thompson: Exactly. And you wanna look within, let’s say, a five-mile radius.

Joe Fairless: Okay. That was my next question.

Hunter Thompson: Exactly. So  you wanna look at it on a radius-basis, and you can do this in particular markets, and it’s important to keep in mind that some markets, that supply/demand — that doesn’t paint the entire picture. So there are some markets – lakes, for example, where people are gonna be really likely to use self-storage because they’re using boats and jet skis and stuff like that, or they are more affluent markets etc.  There may not be a lot of population, but there’s gonna be a lot of demand for self-storage.

So it’s something to keep in mind, but it’ll give you a good idea on initial due diligence in terms of that [unintelligible [00:12:48].01]

Joe Fairless: Is it possible to search publicly how many self-storage units there are within a five-mile radius?

Hunter Thompson: To get accurate data you have to use a paid program. It’s possible to estimate it based on looking on Google and estimating the square footage of each property, but to get accurate data you have to use something like Costar or something in that range, $2,500 or $5,000 a month.

Joe Fairless: Is that what you use?

Hunter Thompson: Yeah, and this is in conjunction with our sponsors, as well.

Joe Fairless: Okay. That’s how you identify the opportunity with self-storage. Now, you mentioned — the other thing I’d like to learn more about is you said “going on-site is the last part in the process.” You do a lot of preliminary upfront work… What are some of the things when you attend that walkthrough for the first time that you’re looking for?

Hunter Thompson: There’s a couple of things to take note of. First of all, the real opportunity — and this is just my opinion; people have different opinions about this, but in my opinion, the real opportunity in self-storage is in value-add. The way that value-add is created is two-fold. You have a very sticky tenant base. These facilities are usually highly occupied, but there can be a significant discrepancy between the physical occupancy and the economic occupancy. This is a term that is used in other asset classes, but I’ve never found an asset class where it’s more important in self-storage.

For example, you can have a property that’s 90% occupied, going along, cashflowing, that’s 67% physically occupied. The discrepancy there, the delta is due to things like low rents, mismanagement, or management being overpaid, concessions being too high, prepaid rental rates etc. And you can also look at things like U-Haul. U-Haul is a strategy that we implement in conjunction with our sponsors where we have a relationship with U-Haul, we allow U-Haul to park their trucks on the facility; they park 15-40 trucks, depending on the site of the facility. We rent those trucks out to the tenant base and get compensated from U-Haul for facilitating the transaction.

The reason this is key is that on a risk-adjusted basis this is really favorable because there’s no capital expenditure there. We’re not maintaining the trucks, we’re not buying the trucks; they’re just simply parking the trucks there, and I have personally invested in facilities where this one line item has gone from $0/month to $3,500/month, directly to the bottom line, just from those commissions. So if you’re looking at $3,500/month times 12 divided by 7-cap or so, you’re talking about $600,000 worth of equity, and on a risk-adjusted basis, again, very favorable.

There’s several other strategies similar to that, but that’s the one that’s very simply implemented, and very favorable.

Joe Fairless: What’s number two?

Hunter Thompson: In terms of those strategies?

Joe Fairless: Yeah.

Hunter Thompson: Mandatory tenant insurance is another good one. So you can advertise rates by saying “$120/month for climate-controlled units.” Then when the tenants get on the site, you say “By the way, we have to have mandatory tenant insurance for all of your items, so that in the event that something goes wrong, all of your items are insured, you get paid out.” Very similarly, you facilitate that transaction and get a commission for facilitating it, and this again can add something close to $1,500/month directly to the bottom line, which is $200,000 or $300,000 in equity.

I think the key there is you’re just really padding your equity position so that in the event of a capital market correction, or something like we saw in 2008, your equity position is better solidified and your loan-to-value is more stabilized and secure.

Joe Fairless: That’s the value-add component, and that can help some Best Ever listeners make a whole lot of money in self-storage. I appreciate you sharing that. I wanna go back to the question of what you look for when you’re on-site at the property… So what are some of the things you look for?

Hunter Thompson: First of all, we’re looking for the lack of the implementation of those strategies that I just mentioned. One of the things that we wanna find is signs that it’s run by a mom-and-pop operator. You can see little things — for example, we were on-site a few years ago and the manager was renting scissors. They had one pair of scissors that he was renting out, because people use boxes when they’re moving etc., so he was just renting out these scissors to the tenants, for free. Now, that isn’t really gonna affect the bottom line, right? We’re talking about $7 worth of margin, of maybe 50% or so – it’s not really gonna make a huge deal on the spreadsheet, but the key there is the mindset that this person was going about his business with. It’s thinking of it as a business, as opposed to just thinking of it as a way to make some cashflow, and that’s the key. The business operates much more like a fully-functioning business than a cash-flowing passive investment vehicle… Though it can be profitable both ways.

Joe Fairless: So when you arrive on-site, you’re looking for signs that it’s run by a mom-and-pop operator… But wouldn’t you already know that it is or isn’t run by a mom-and-pop operator, since you’ve done all this due diligence before you get there?

Hunter Thompson: Yeah, absolutely. That would be in late stages, but those things can paint a very good picture, but it’s hard to look [unintelligible [00:18:22].08] So the reason I’ve mentioned that is that when you’re looking on a spreadsheet, people may pass on opportunities that are absolute goldmines.

I mentioned earlier that a facility may be 90% occupied; most investors that are listening to this podcast for sure will probably say, “My money’s better spent in other places, where there can be significant value-add”, but because of that and the combination of the tenant base, which is very sticky – it’s definitely something I should touch on – because there are monthly lease renewals and the gross dollars is relatively low… So if you raise rents by, let’s say, 6%, that may be something like $6 or $9/month to the tenant base. So the question really becomes “Is this tenant gonna take the time off work, move down the street where they’re probably going to do the same thing, just for the $6/month or so?” Overwhelmingly, the answer is no. So those value-add strategies can be implemented very quickly because of the sticky tenant base and the monthly lease renewals and the low gross dollars amount.

Joe Fairless: Now taking a step back, looking at your business, when you put together a deal, how do you make money?

Hunter Thompson: We’re compensated based on performance above a pref. So our sponsors get compensated and we create an LLC, and our accredited investors invest into that LLC, and we get compensated based on the performance above a pref… A share in the proceeds above a preferred return.

Joe Fairless: Okay, and what are the typically fees that are charged?

Hunter Thompson: We kind of looked at a couple different structures out there, and I’m very much aligned with — incentive alignment is like a driving factor in my perspective on investing, as well as a business owner… So the 2 plus 20 is the typical private equity firm… They’re incentivized to raise money, and that’s how they make money; that 2% assets under management fee is gonna be paid regardless of performance. Now, the reason they do this is because it’s scalable and predictable etc., but we have foregone that and will continue to do so as long as possible.

So in replace of an 80/20 plus 2 or something like that, we usually implement something close to a 7% preferred return with a 70/30 split thereafter. This results in something that’s very competitive with the other platforms or private equity groups out there, but the key is that 90% to 100% of the compensation is based on performance. So when you compound that with the fact that I personally invest in each opportunity… We’re not doing a lot of deals; we’re doing deals that I’m personally confident will perform, for my own portfolio, and that’s really the way that I like to set everything up.

If something goes sideways and someone says “Hey, this is going sideways”, trust me, I know; I’m gonna be on top of it more than anyone else… And I like that. So that will give you a good idea of the fee structure there.

Joe Fairless: Okay, great. And do you also have an acquisition fee?

Hunter Thompson: To this day, we have not been paid cash for any acquisition fee. We can be compensated and typically are compensated in shares, again. So it’s performance above a preferred return. That’s something that can be deal-dependent, obviously, but I wanna have as much exposure to these opportunities as possible, so that’s the way that I prefer it.

Joe Fairless: Got it, okay. So there’s something like that, but instead of dollars, it’s additional ownership shares in the deal.

Hunter Thompson: Exactly, and I think that’s important, and it’s a really important question to ask how is the compensation being presented, because earlier I mentioned there’s a co-invest. Well, if I said there was a $100,000 co-invest and I have a $200,000 acquisition fee, there is no co-invest, to say the least, and I’m incentivized to just do deals. So I don’t like that. I like being very picky, and I’d be happy to do four deals a year for the rest of my life. So that’s what I look for.

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

Hunter Thompson: I’d say focus on education. Programs like yours – you’ve had hundreds of millions of dollars or billions of dollars of information from your guests come on your program and talk to your audience for free, and it’s crazy the amount of content which is available, that was not available when I was going to those networking events I mentioned is unbelievable.

When you build relationships with people  that focus on education, they’re always in it for the long-term. That’s why they’re focusing on helping educate their clients, and that is totally the game in real estate. Building relationships for the long-term, building life-long relationships based on aligned incentives is really the key.

I offer a  free podcast as well, I had some very sophisticated individuals… I very well could turn that podcast into a course and charge $1,000 for it, but I just like helping people, so that’s kind of been my motto.

Joe Fairless: How do you qualify deals across multiple asset classes? Because I see on your website that you’re in multifamily… We’ve spent most of our time or all of our time on self-storage, but I see also mobile home parks, performing real estate notes, office space etc.

Hunter Thompson: Yeah, sure, it’s a good question. I’d say that a lot of people that are successful in business say that you have to be laser-focused, and if you try to be too diversified in your focus, you’re not gonna accomplish anything; you certainly won’t be an expert in anything… And people may look at the portfolio, and look at my own personal investment portfolio and say “How do you have an edge?” Well, the reality is I’m hyper-focused in the passive syndication space, and my value-add is identifying asset classes and identifying sponsors that can be complete experts in their particular field.

My expertise is by really conducting a significant amount of due diligence on sponsors, and going through those underwriting assumptions on a line-by-line basis, trying to figure out who I’m dealing with, going on-site (like we mentioned earlier), and that’s really the value-add there.

When you’re able to leverage other people’s expertise, time, access to credit, liability etc., you can build a diverse portfolio without doing what a lot of people may do when they try to spread themselves too thin.

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

Hunter Thompson: Let’s do it!

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

Break: [[00:24:30].25] to [[00:25:19].24]

Joe Fairless: Best ever book you’ve read?

Hunter Thompson: The 4-Hour Workweek.

Joe Fairless: Best ever deal you’ve done?

Hunter Thompson: You know, we mentioned it earlier… That Fayetteville, North Carolina deal is definitely up there. Bought for 6, it’s gonna be sold for 9,6 very soon.

Joe Fairless: Over what period of time and how much did you put into it?

Hunter Thompson: It’s been about three years… As I said that, another one came up – there was another mobile home park deal we bought for 9 and sold for 20, and I think it’s probably gonna outshine that one. That was taking place about four years.

Joe Fairless: On that one example, the Fayetteville one – bought at 6, selling at 9,6, right? Did I hear you correctly?

Hunter Thompson: Yeah, something very close to that.

Joe Fairless: Something close to that. Three years… How much did you all put into it?

Hunter Thompson: We put in a total of about 200k on that one. We obviously partnered with other capital partners to take down the entire equity stack.

Joe Fairless: You mean for improvements — not your equity into it, but in order to get it from six to nine I imagine there was some cap-ex money that was put into it. How much of that was put into it?

Hunter Thompson: About 800k.

Joe Fairless: Okay, so you’re all-in around seven, and you’re selling it at about 2.5 more than that… What would you attribute that to primarily?

Hunter Thompson: Well, it’s not exactly about the return there, it’s about the risk-adjusted basis. So all those strategies I was mentioning earlier – none of them were being implemented. So the way that that was able to happen was just implementing those strategies. Not building a new facility, not expanding units etc., but just implementing those strategies.

Joe Fairless: Cool. And you went through those value-add strategies earlier. I appreciate that. What’s a mistake you’ve made on a transaction?

Hunter Thompson: Well, I made a bet on an operator that didn’t have a lot of experience, in an asset class I don’t think is very scalable, which is single-family houses. Fortunately, the operator was me, so it didn’t cost me very much money, but I learned my lesson.

That was one of the first things I think a lot of people do – invest in houses that are $30,000 or $50,000, thinking that they’re gonna perform as they do on paper. I made that mistake early on in my career.

Joe Fairless: How much did you lose?

Hunter Thompson: About 30k.

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

Hunter Thompson: I am very much a fan and a proponent of capitalism and free markets, so this is an important question, because it’s challenging to answer without tampering with markets… But I think that disaster relief is one of those instances where you can make a significant difference without tampering with the market. Team Rubicon is someone that specializes in those particular situations.

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

Hunter Thompson: Feel free to e-mail me at any time – HunterThompson@cashflowconnections.com. I also have the website, CashflowConnections.com, and we have a podcast — if your podcast listeners out there love to get your perspective on the show, it’s The Cashflow Connections Real Estate Podcast.

Joe Fairless: I think we have a lot of podcast listeners, and I am very grateful, Hunter, that you spent some time with us. You got very specific, which we always love to hear, about how to evaluate the demand for a self-storage facility, talking about the number of people times that by seven, and that gives you the demand, and it’s the number of people within a five-mile radius.

Obviously, there are variables in play, like with any generalization like that, but that is a good rule of thumb for us to get started, and how to evaluate demand. If it’s over that amount, then it might be over-saturated or over-supplied; if it’s under, then it might be under-supplied… That’s the seven mark.

Then also the way that your company makes money, as well as ways to add value for self-storage facilities, and you gave a couple tips there.

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

Hunter Thompson: Awesome, Joe. I really appreciate it.

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JF1215: Lessons from over $2 Billion In Commercial Real Estate with Brian Hennessey

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Wow! Today we have a major commercial real estate investor dropping knowledge. Brian literally wrote the book(s) for commercial real estate investing. Not only will he give us actionable advice for commercial investing, but a lot of the advice applies to any form of real estate investing. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Brian Hennessey Background:

– Senior VP of Avison Young Intelligent Real Estate Solutions

– Portfolio transactions totaling approximately 12 million square feet at values in excess of $2 billion.

– Prior to Avison Young he served as Senior Vice at Colliers International for 5 years

Been in the commercial real estate industry for over 30 years.

– Author of “The Due Diligence Handbook For Commercial Real Estate”  

– His book was written originally as a personal reference tool/checklist, but is a #1 best seller on Amazon

– His latest book is “How to Add Value for Commercial Real Estate”

– Based in Los Angeles, California

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

– Best Ever Book: What Every Real Estate Investor Needs To Know About Cash Flow

 


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TRANSCRIPTION

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

Brian Hennessey: Really good, thanks very much for having me, Joe.

Joe Fairless: My pleasure, nice to have you on the show. I read one of your two books – The Due Diligence Handbook For Commercial Real Estate, and I reached out to my team and I said “Let’s bring Brian on… This is some good stuff.”

A little bit about Brian – he is a senior VP of Avison Young Intelligent Real Estate Solutions… You need an acronym for that, that’s a mouthful. Prior to working there, he served as Senior Vice at Colliers International for five years. He’s been in commercial real estate for over 30, and he’s got a new book that is out – it’s How To Add Value For Commercial Real Estate. Based in Los Angeles – with that being said, Brian, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Brian Hennessey: Absolutely. I am an investment broker with Avison Young, based here in Los Angeles, but over my career I’ve done a number of positions in the commercial real estate industry, including being a syndicator and an acquisition person for an investor where I purchased properties all over the US, over nine million square feet, just with him. That’s where I really got to learn the due diligence into the business, when we were buying so much property so quickly that we really had to be on our A-game because we just had a small group that we worked with when we were purchasing these assets… So it really required me to be very scrutinizing.

Actually, let me tell you a brief story of how it happened. I ended up — the first couple transactions that I did, I made so many mistakes, and even though I had been in the business for 18 years, I thought “Oh, this is a natural slide.” Well, I had never been a buyer of large commercial properties before… And that’s when I decided I’d better start creating a reference manual for myself so I don’t have to reinvent the wheel every time, because there were so many things to remember.

So that’s how my reference manual came about, and then when I decided to get back into the brokerage end of the business again, I said, “Well, what am I gonna do to differentiate myself?” I decided to take my reference manual and create an investor handbook that I could use as a marketing piece. I actually put it up on Amazon, just never thinking it would ever sell one copy. I wouldn’t even spend $150 to format it, because I figured “Why do it if it’s never gonna sell?” and I ended up just handing it out to people as I spoke with them… Much to my surprise, the book started selling, so I decided to take it a little more seriously, create a professional design cover and format it and put it out there, and that’s when it took off, and I’m still shocked today that it’s been a number one bestseller on Amazon for real estate books.

This also tells me, as I’m going out speaking to people, that it’s a very critical component that people are missing when they’re investing in real estate. So I go out there and try to tell people “You really wanna have a proven system to do this, because there’s just way too many things to remember, and things would just slip through the cracks.” Having and adhering to a proven system allows you to conduct due diligence faster, easier, more efficiently, and you’re less likely to miss something.

Joe Fairless: Speaking of missing something, what are some due diligence items that tend to be overlooked if you don’t have a system?

Brian Hennessey: Well, in my talks I talk about the mistakes a lot of investors make, and we can talk about those if you like…

Joe Fairless: Yes, please.

Brian Hennessey: The first mistake I see a lot of investors make is really not valuing the property correctly. What I mean by that is they go out and they will negotiate a deal with a seller, and then find out later “Wow, I’m really over-paying”, or maybe they don’t find that out until they go to put a loan on it. I tell people, you really need to do your homework first. Make sure you’re checking all sale comps and other available properties on the market. We have checked a few things out and everything is working out okay, but that’s not always the case.

Segueing from that is not understanding your lender’s underwriting requirements. What happens is a lot of people will say “Okay, I’ve made this deal on this property”, whether it be some units or a commercial piece or whatever it is, and they’ll go in and the lender will say “Well, we can’t lend this kind of money that you’re looking to get…”

What I tell people is before you spend a lot of time, money and energy on conducting due diligence, you wanna have those preliminary discussions with some lenders about the amount of the loan you’re considering to put on there. Otherwise you could be spinning your wheels out there, which you don’t wanna do.

Joe Fairless: Great point.

Brian Hennessey: Another one I tell people to do is check to see if the property complies with all the current municipal building codes. That’s just a quick trip down to the city building department. But you don’t wanna get into the due diligence of it and overlook that part, because if you’re gonna be doing some work, it could trigger some compliance issues which could cost a lot of money. That’s where I see people getting tripped up, like “I didn’t know it was gonna cost me this much money if I was gonna do this…”, and it’s like “Well, if you would have made a trip down to the city, you might have found out.” So I tell people, just make that part of your routine when you’re conducting due diligence, because there may be some issues coming up where you need to comply in the future that could affect the property you’re looking at.

Joe Fairless: What specific department do you go to and then what questions do you specifically ask?

Brian Hennessey: Usually, the planning department will say “Let’s look up the property on the computer here and see what’s going on with it. Okay…” Sometimes they’ll say “Oh, there is an issue outstanding here that it’s not compliant with this code, so you need to make sure… They’ve been sent a notice”, and I say “Can I get a copy of that notice?”, which I will. Then I’ll say “Are there any future code compliance issues coming up that I need to be concerned about regarding this property?” “Oh, there might be a sprinkler retro-fit” or something of that nature… These are the things that I wanna find out.

Joe Fairless: Yes, that’s great. Great stuff.

Brian Hennessey: Another mistake I see is a lot of people assume there’s no issues with any of the tenants’ leases, and these are tripwires that can be avoided if you’re scrutinizing the leases carefully. What I mean by that specifically is if it’s a commercial building, you wanna look to see if there are any termination provisions, contraction provisions? Are there any caps on operating expenses? Do they have unlimited use of the HVAC (heating, ventilation and air conditioning) or electricity that the landlord is responsible for? Issues that are gonna affect the value of the property.

A perfect example of that might be maybe they have an option, but it’s at a fixed rent, and they get another 5-10 years that they can exercise that option. That’s gonna affect the value of the property.

So make sure you’re scrutinizing the leases carefully. Go through the tenant correspondence files if you’re going to a property management company, or if it’s the owner of the property, “Can I see your correspondence file with your tenants?” Why? Because it’s gonna have valuable information in there. If it’s a multi-tenant property, then you’re gonna see correspondence in there that’s gonna tell you a lot about what the issue have been. Hey, the windows are leaking; hey, the roof is leaking; hey, the air conditioning is not working properly… Or whatever the case may be. Hey, we had another break-in… These are all red flags that are popping up and you’re saying, “Well, I’d better find out more about this.”

Joe Fairless: Do you have a team that does it – a third-party team – usually, or… I know you’re not doing it right now in your role, but would you do it personally if you were in that situation?”

Brian Hennessey: Yes, I would, and you can hire outside third-parties to do it; very expensive. Personally, I like to do it, because I’m looking at it much more subjectively, because I’m the one that’s gonna inherit the problems when I own the property.

As a matter of fact, Joe, I do do it as a broker. I’ll ask my clients, and the ones that know me usually say “That’d be great. I’d love to have your help on this.” The ones that don’t – and for your broker listeners out there, that are in the brokerage end of the business, I’d shoot a quick e-mail off to your clients and say “Since we’re in escrow now, I’d love to help you with your due diligence. Please let me know and we can go through the list of things that we wanna accomplish” and if they turn you down, at least you have documentation that you’ve tried to help them.

That brings me to another point I would have your listeners pay special attention to, and that’s to communicate everything through e-mail. That doesn’t mean to say you can’t talk on the phone, but you have a written paper trail on an e-mail. If somebody say, “Oh, I’m gonna get you the backup information on that request you just made.” “Hey, can I get the paid invoices on that tenant improvement job that you did, or the paid leasing commissions?” and they’ll say “Yeah, I’m gonna get that to you. Let me dig that up and send it over.” Well, if they don’t get it over, now you’ve got a running list of the things you asked for.

What I’ve seen people do is they get involved in these transactions and they’re so busy and they’ve got so many things coming at them that they can’t possibly remember everything they asked. Do it in an e-mail, and you can go back and say “Oh yeah, last Tuesday I asked for this, and I never got it.” You can forward that on, “Hey, as per our conversation last Tuesday, you were supposed to get this to me”, and if they don’t, what’s happened to me before is I’ll get towards the end of my due diligence period, and say “Well, if I’m not gonna get it by tomorrow, then I’m gonna assume I’m gonna a credit for that amount at the close of escrow”, and all of a sudden…

Joe Fairless: [laughs] You start getting the stuff, huh?

Brian Hennessey: Right, you start getting that, and “Well, here’s what’s going on – we’ve got a dispute on this one”, and now all of a sudden you’ve uncovered the real problem. But what happens is if you’re not paying attention to it, guess what? It’s gonna slip through the cracks, and then once you’ve closed escrow, it’s much more difficult.

Joe Fairless: Oh, forget about it.

Brian Hennessey: Yeah, it’s much more difficult. So I tell people, just send off the e-mails; it’s easier to keep track of, and worst-case scenario is if you don’t get it and you forget it but you’ve asked for it, you’ve got something to bring to court, which I hope you don’t have to do, but… Sometimes you do.

Joe Fairless: Have you had to do that?

Brian Hennessey: Yes, as a matter of fact.

Joe Fairless: What happened?

Brian Hennessey: Essentially, we were told that a certain tenant was to have paid a [unintelligible [00:13:42].23] when in fact they didn’t, and we let it slip through the cracks, and then we went back… What happened was with one letter to our attorney and the backup e-mails and what have you, we were able to get a settlement from him. But you try to avoid that as much as possible.

Joe Fairless: Absolutely. Everyone loses.

Brian Hennessey: Yeah, exactly. It’s just more brain damage than it’s worth. So if you do your due diligence properly upfront, you’re gonna minimize this. Warren Buffet said “Risk comes from not knowing what you’re doing.” When you have done proper due diligence, what happens is you’re minimizing that risk and you’re able to make those decisions, whether to move forward on an investment or not, based on your investigation.

Joe Fairless: One item that resonated with me because it recently happened to me is number two, not understanding your lender’s underwriting requirements. Well, we understood the underwriting requirements… Let’s see, this was about three days ago – we got our appraisal back and all of the third-party reports for an apartment community we’re buying, and we’re getting a loan with Fannie Mae, and they have a shorter effective useful life on certain cap-ex items, meaning that those items have to be replaced more frequently over the term of the loan, which increased the replacement reserves from $246/unit to $263/unit. We pushed back as much as we could, but that’s the lowest that they would do the reserves…

So it’s just stuff like that, where you’ll want to — I mean, I’m not sure if we would have asked those questions ahead of time if that would have netted out, [unintelligible [00:15:31].00] underwriting process, but that’s a prime example of asking in advance, just to make sure that everything is coming in where you think it should come in.

Brian Hennessey: Sure. Another thing that you triggered a thought of mine was — another mistake I see people make is letting the appraisal process go on autopilot. That’s a dangerous thing; you’re just basically throwing the dice and hoping it all works out, especially in today’s lending climate.

I’ll give you an example – every time that I am involved with a transaction, I always ask the lender, “I’d like to meet the appraiser at the property”, and when I go there I have all of the sale comps, all the lease comps that’s applicable… Anything that’s gonna positively put the property in a positive light.

I went through an interesting transaction recently where we sold a small building to one of my clients, and they brought it to me and said “Here’s a building we’re really interested in.” I said “It’s very pricey”, and they said “But it’s perfect for us. We don’t care. If we don’t get this building, we’re gonna lose some business, because we don’t have a place to take care of it at.”

So I contacted the broker, he said, “Well, it just fell out of escrow. This is the price”, and I was like, “Wow…!” But they submitted it to the lender, and the lender said, “Well, we’ll get the appraiser out there, but I just want you to know something – this is the fourth time we’ve seen a contract on it going into escrow; it hasn’t appraised out.” So I said, “I can understand why. Well, my clients really want the property. I’m gonna go out there, I wanna meet the appraiser.”

So I went out there… I had a book for this appraiser, and I said, “Here’s all the sale comps; we had to go further out. There’s all the lease comps, so here’s why we believe the property is worth this amount of money.” He was shaking his head and said, “Well, I’m gonna have a tough time with this, but look, this is what’s going on in the area. This area is improving. Here’s what’s going on, here’s who’s moved in, here’s what’s happening here in the near future…”, and I stayed with him. I said, “Is it alright if I call you in the next couple days?” “Yeah.”

I called him a couple days later. “Do you have everything you need?” “I think I’m getting there.” “Okay, I’ll give you a call in a day or so.” I called him back, he said, “You know what, I’m there. I’ve got it. We’ll take care of it.” And we got it appraised Had I not done that though, I can tell you right now it would have never appraised out.

What I’ve done with other properties, I’ll go back and say “By the way, did you know that this lease proposal was just accepted? And they’re going to leases on this, and we’re gonna be reducing the expenses, and this is how it’s gonna work.” When you start giving them the information to help them put that into perspective to get to the number you need to get to, you’re making their job much easier, and the chances of you getting the loan amount that you need to get go way up. So I tell people, “Do not let it go on autopilot. Be proactive with your appraisal process and your odds of getting the loan you need to get are much higher.”

Joe Fairless: Great advice, and thank you for that. Based on your experience as a real estate investor – and you’ve got three decades under your belt in real estate – what is your best real estate investing advice ever?

Brian Hennessey: I’m gonna give you my best real estate investing advice, and that would be assume nothing; if you’re gonna assume anything at all, you need to assume there are multiple problems to discover. The seller is not gonna come to you with a list of issues and problems and say “Hey, you’d better think about these things that could cause you an issue when you’re buying this property.” It’s up to you to discover what those problems are… And you also have the potential of coming up with some hidden value enhancers to increase the property value as well. So I would say if you get nothing else out of this, it’s assume nothing.

Everybody that wants to really do a good job in due diligence needs to assume there’s issues there that they need to uncover.

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

Brian Hennessey: Sure.

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

Break: [[00:19:54].02] to [[00:20:52].27]

Joe Fairless: Best ever book you’ve read?

Brian Hennessey: Best ever book I read as it pertains to real estate, obviously – I think Frank Gallinelli’s book, What Every Real Estate Investor Needs To Know About Cashflow, it’s one of the best ones I’ve ever read.

Joe Fairless: Best ever deal you’ve done?

Brian Hennessey: We did a portfolio sale with Equity Office that was a big one; four big buildings in Dallas. That was about 1.8 million square feet. I thought those were great values and it was exciting to work on because we had to do so much in so little time that I felt like it required so much focus and attention that I really had to be on my A-game for that. Once you get through something like that, it kind of stretches your mind to the point where you think you can pretty much handle anything that’s thrown at you.

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

Brian Hennessey: Oh, gosh, I’ve made a lot of mistakes on transactions.

Joe Fairless: Ditto.

Brian Hennessey: And that’s how the book Due Diligence Handbook For Commercial Real Estate came about, because I was making so many mistakes, I didn’t wanna reinvent the wheel. It’s like a pirate’s checklist – you wanna go through it and make sure that… You can’t possibly remember everything, so you wanna be able to go through and check them off as you’re going.

I guess, would you say — what’s the worst mistake I ever made? Was that the question?

Joe Fairless: Just any mistake you’ve made on a transaction that you can think of…

Brian Hennessey: A mistake – I assumed people were giving me good information when they weren’t, and I assumed that a seller would not ever do a thing that they said they wouldn’t do, and then they did it. So it really — I don’t wanna say it makes you jaded, it just makes you cautious… So I tell people, it’s okay to make mistakes, by the way; that’s how human beings learn, by trial and error, but you try to minimize it as much as possible.

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

Brian Hennessey: The way I like to give back? I love talking to people about my experience, and investing in real estate, and doing due diligence. What I find is very gratifying is that people, when I give a talk, or I get e-mails or talks or calls from people that say “Thank you so much for sharing your information; you really saved me a lot of money and headaches and time… I really appreciate you sharing the information.” That to me is very gratifying and that’s what keeps me going.

Once in a while I get an e-mail from somebody that says “Oh my gosh, I learned so much. Thank you so much. It really saved me”, and I was like, “Wow, that’s great!” I love getting that. That’s probably why you love doing the podcast too, right?

Joe Fairless: Yeah, absolutely. There’s many reasons why I love doing the podcast, and that’s one of them. How can the Best Ever listeners get in touch with you?

Brian Hennessey: They can go to my website, ImpactCoachingSystems.com, or reach me at Brian@ImpactCoachingSystems.com. Also, I would highly recommend they get the due diligence handbook for commercial real estate on Amazon, because they will not just read it once and put it away; every time you do a transaction, you pull it out. The reason I know that is I do that, and a lot of people tell me they do that, and it’s because, like I mentioned before, it’s a checklist, and you wanna be able to go through the checklist. I still use it every time I do a transaction.

Then in the “How To Add Value For Commercial Real Estate” I talk about all the different ways that you can create value with your commercial real estate investments.

Joe Fairless: I really enjoyed our conversation, especially since I’ve read your book, the Due Diligence Handbook For Commercial Real Estate, and that’s why I wanted you to be on the show, because of so much value that’s in the book, so I highly recommend getting that book, number one.

Number two, thanks for taking us through that list of six mistakes a lot of investors make in the due diligence process. Number one, not valuing the property correctly. Two, not understanding your lender’s underwriting requirements; I gave a specific example of that that I’ve recently experienced. Three, going up to the planning department and not confirming the building codes are in compliance, so you should confirm that the building codes are in compliance and anything that you need to be concerned about in the future – for example, you gave the sprinkler example.

Number four – any issues with the tenant leases, make sure that’s resolved. Five, get things in e-mail (sometimes we don’t) so that we can prove if we need to, in a court of law, that that transpired. And six, some people let the appraisal process go on autopilot – don’t do that. I love the story that you provided as evidence.

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

Brian Hennessey: Thanks so much, Joe. I really appreciate you inviting me on. I enjoyed it immensely.

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JF1214: Why Building A Small, Loyal Brokerage Has Worked Better Than A Massive Brokerage with Billy Rose

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Coming from representing high net worth and celebrity clients as a lawyer, representing them as their realtor was a natural transition. Now he is one of the top agents/brokers in the country, and does it by building a small, loyal, and high quality brokerage. Billy only takes in people who are performing at a high level already, rather than trying to get in as many agents as possible and charging them for everything possible. Hear why he prefers to build with quality over quantity. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Billy Rose Background:

-Founder & President of The Agency & Agency Created, a full-service luxury real estate brokerage/lifestyle company

-Been representing high-net-worth and celebrity clients for more than 30 years.  

-Named the #10 real estate agent in U.S. by The Wall Street Journal REAL Trends sales over $197 million in 2015.

-Agency Creates is a stand-alone creative PR agency that services more than $4B in luxury real estate brands

-Commentator on all things “real estate,” featured in Wall Street Journal, NYTimes, LA Times, Forbes, CNN

-Was a former lawyer/agent to realtor before he obtained broker’s license he already developed, designed and sold a

number of “spec” homes.

-Say hi to him at http://www.theagencyre.com/

-Based in Los Angeles, California

-Best Ever Book: Delivering Happiness

 


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TRANSCRIPTION

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

Billy Rose: I’m doing great, thanks for having me.

Joe Fairless: My pleasure, nice to have you on the show. A little bit about Billy – he is the founder and president of The Agency & Agency Created, which is a full-service luxury real estate brokerage/lifestyle company. He’s been named the #10 real estate agent in U.S. by The Wall Street Journal and sales of over $197 million in 2015. Agency Creates is a standalone creative PR agency that services more than four billion dollars in luxury real estate brands. With that being said, Billy, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Billy Rose: Sure. I’m actually an ex-entertainment industryite. I was an entertainment lawyer for 10 years, I was at United Talent Agency (UTA) for another five years, I got into design and development just because I had a passion for it, I started spec’ing some homes… I had some success there, and decided to just get into the real estate industry exclusive, and I quit being a talent agent.

While I was in that space, designing and developing, I saw that there was really a need, a niche within the brokerage industry which I felt was broken. I got in, I had some early success; a lot of people who were in the entertainment industry had seen a lot of the environments in which I had hosted events, parties, things I had designed or sold, and they said “If you can find something for me, you can represent me.”
Things took off quickly. Cut to about 11 years later and Mauricio and I started The Agency. It was with that understanding, that observation that the industry was broken, that we wanted to shake things up, be innovative, be a disruptor and do things differently.

Joe Fairless: What was broken about it and what did you do to solve it?

Billy Rose: Well, I worked at large law firms and large talent agencies, and they were integrated organizations. When I got into the real estate industry, it seemed quite anachronistic, quite counter-intuitive that a brokerage would say to its agents, “Okay, go brand yourself, go be this other entity which appears to be in competition with us.” That to me was very odd, and I look back at the history and it becomes more understandable now, because you had the situation where agents rebelled against the brokerages sometime in the ’80s and said, “Hey, these are MY clients. I’m doing this work. This 50/50 split is just not working!” And the brokerages said, “Fine, we’ll give you a higher split (whether it went to 80 or what) and in return you’re now gonna pay for all the marketing and the advertising.”

I have this vision in my mind’s eye of that [unintelligible [00:04:54].21] or whatever agent who was making their ad and it was all together, and they went “Okay, I’m ready to place my first ad that I’m paying for” and thought “It looks just like every other [unintelligible [00:05:04].22] I ever place, and I’m paying for it, so where’s the value to me?” That’s where this shift towards personal branding eventuated, and what I found from that was that 1) by creating these different personas, these entities which are now in competition with the umbrella brand, we’re diminishing the value of the umbrella brand. It’s no longer a  credit enhancer, it’s no longer bringing you this cache, and it’s fragmenting the brand, because now everyone’s in competition with each other at the brokerage, and it’s encouraging everyone to keep their information, their knowledge, their resources, the database, those spheres of influence to themselves, so they can have that competitive edge over other people at their brokerage.

I had moved from one brokerage to another… Nobody knew that Rose & Chang wasn’t a brokerage (that was my brand) that I was at these other brokerages. They just thought they were dealing with Rose & Chang. To me, when you look at successful, mature industries, whether it’s law or accounting or talent agencies, I would never, while being at my law firm, be Billy at Rose Law; you would have to be Billy [unintelligible [00:06:15].27] or you have to be Billy at UTA. It would never be Billy at Rose Talent. It’s just so different from the way other industries work, and I felt that if we could create an integrated, unified organization where people are all working together towards the same goal and we’re all benefitting from each other’s successes and we’re all trying to help each other so we’re having less failures, it’s that concept of the rising tide raises all boats, and I believe that’s really what’s lead to a lot of the success that The Agency has had in a very short period of time.

Joe Fairless: How do you reward people who are doing exceptionally well, versus not reward people as much who aren’t doing anything and they’re just hanging on but rising with the tide because you’ve got some superstars doing really well?

Billy Rose: Well, there’s a number of ways that we all help one another. There is a financial reward that comes — for example, we really want to encourage the free flow of information, particularly with pockets.

Joe Fairless: With pockets? Pocket listings? Got it, yeah.

Billy Rose: Thank you for clarifying. So if for example Blair Chang learns of a pocket listing from an agent at another brokerage, he can post in our CRM – which we call Agency Connect – the existence of that pocket listing, and if somebody else here can transact off of that information, some of the company share with the agent who shared the information who’s not getting paid on it… So we wanna constantly be encouraging this total sharing of information. You’re only as good as your weakest link.

In the same way that we all benefit when Mauricio sells the Playboy mansion, or I might sell a case study house or whatever it might be, we conversely all are negatively impacted if somebody is doing something in not the best way. So we all become protectors of the brand from which we all derive a lot of benefit. If somebody’s not doing a great job or they’re not understanding the real estate purchase agreement or their marketing is not quite as good or their photography is not quite as good, we’ve got people here who will all feel invested to protect what they feel is their own brand – The Agency – and help these people all succeed.

We don’t have a lot of people. We’re a boutique, we’re not a real estate play where we’re trying to get people on the desks to charge desk fees. We’re not a we work; we’re a place where if you’re carrying the Agency flag, you’re a representative, a reflection of everyone else here, so we really are trying to just bring in best in class, and it’s very rare that we bring in people who are not business, and not doing business with integrity and on a professional level.

Joe Fairless: I wanna switch gears a little bit and talk about some of the stuff that you did previously… But you mentioned “case study house.” What is a case study house?

Billy Rose: Well, back in the ’50s there was a guy named John Entenza who bought this magazine called Arts & Architecture. He wanted to use that magazine as a platform to promote what he felt was the next best style of architecture, what we call now mid-century modernism [unintelligible [00:09:22].06] and really that true modern style exemplified through steel, glass, plywood. And what he did was he created this great marketing scheme where he went to, let’s say, Bethlehem Steel and said “Hey, I want you to donate or give us steel at a lower cost and I’m going to, in our magazine, promote the usage of your steel in this house.”

He then went to the cutting edge architects of the time, whether it was Neutra, Eames, Schindler, Koenig, and he said “If you’ve got a client who wants to have a house built, we will get you product for less or for free, and we will promote the home, and you as an architect in the magazine. The homeowner – all they’ve gotta do is allow us to publish the home and have people come through the house for a 30-day period or so to see it, and they will get the benefit of a lower cost.” So there were something like 30-something homes that were built – case study one, case study two etc. done by incredible architects who were in that pantheon of mid-century modernist architects. They served as this case study of how you could live this incredible life, how architecture influences life.

Joe Fairless: In your bio it says that you’re a former lawyer, agent to realtor before you obtained your license, and you also developed, designed and sold a number of spec homes. How come you don’t develop, design and do spec homes anymore? Or maybe you do and I’m not aware of it.

Billy Rose: Yeah, my focus really with that non-selling time of mine and that non-running of the company time of mine – I love that. To me, spec’ing homes, designing homes – it’s so fun, it’s so great, it’s so rewarding; it’s a great creative expression and it can be incredibly financially rewarding. My creative expression now comes through the design in the offices as we continue to expand; I get to godfather a lot of homes where my clients who are developers will rely on me to give them insight on what are people expecting today.

I think a lot of my success as an agent and a lot of our agents’ success is I came up with this structure in thinking about when you go to sell a house, who is your audience going to be? Who is your consumer? What are they gonna want? How are you gonna communicate to them and how are you gonna reach them? And that kind of really rose out of when I was spec-ing homes, you get a home up in the Bird Streets here in L.A. and that is known for these extraordinary views, their accessibility to nightlife on the Sunset Strip, and they’re kind of the world of the bachelor. What you’re going to build there is gonna be quite different from what you’re going to build, say, in the Huntington Palisades or Brentwood Park, which are big land, no view, family neighborhoods. You need to be mindful of who your client is.

For me, I love that and I think I’m good at it, but right now the focus is on building in terms of the Agency and the office is where that design expression comes. I do look to go back to that one day, and I hope to do so on larger scale with a more public component, whether that’s a hotel and condos, or a restaurant.

Joe Fairless: So you’re able to flex your creative muscle in similar ways that you were before, but it’s just in a different capacity, with your current business. Going back to the root of that question though, why did you change? Because I imagine feast or famine, from what I’ve seen – I’ve never developed before, I’ve never done ground-up development, but you can make a bunch of money (and you can lose a bunch of money), so why did you specifically decide to leave and go do something else?

Billy Rose: My last spec I brought to the market just really as we were starting the Agency. I think my intention at that time was probably to continue doing it. I never really thought of myself, other than when I first left the talent agency business and became a designer/developer, I never really thought of myself after some period of time thereafter as exclusive to either being an agent or being a developer, because I feel that they’re so complementary to one another, that you become better at each. You really have to become a student of the market to be a developer – and a designer – because you’re putting your money where your mouth is.

I think that if you really get to that point where you believe in the market so much that you’re willing to put money out to go do that, that you’re able to benefit your clients who are buying and selling more so, because you understand the market and the rhythms and the values so much more keenly I feel, because you’re really taking a more analytical approach to it. It’s almost like it’s a commercial venture, like in commercial real estate, where it does tend to be more about “Does it pencil out?” than when you’re buying or selling a home, which tends to be more emotional.

I think it allows me to communicate on a more dispassionate level and have them understand at a more dispassionate level what the values are and why a house works for them, for their life, for their family etc.

When we got to the point where we launched the company, there was so much to do that I had to make a choice, and I think at this time it’s — look, real estate is cyclical; when we hit that next cycle, I get more aggressive in buying and spec-ing maybe. We’ll see.

Joe Fairless: I’ve got some questions from some Best Ever listeners. It ranges from more high-level to credibly tactical, so we’ll just go with one in-between, and you touched on it a little bit, so feel free to just reference what you’ve said earlier and elaborate anywhere you wanna elaborate. This is from Genja in Connorsville, Wisconsin. Genja asks “What are some things I can do to attract people to an open house?”

Billy Rose: There’s a number of things you can do, and I think there’s fundamentals that we all have to undertake to really be as successful as we can. Social and digital media today are so prevalent and so useful, so create some compelling imagery and narrative with regard to what it is that you’re selling. And again, it goes back to thinking about who is your consumer, and… You’ve gotta create imagery and you’ve gotta create a narrative that’s gonna resonate with that consumer. Then you’ve gotta be able to reach out to them through channels that will connect to them – certain Instagram, Facebook, Snapchat, or whatever your platforms are; your website… Don’t overlook the neighborhood. Knock on the doors, deliver invitations, send them by mail, make sure that everybody in that neighborhood knows that you’re going to be there and that you’re selling that house. That’s a great way to pick up a new client, and it’s also a great way to potentially pick up a buyer, because I think that a lot of neighbors are invested in who is going to be their neighbor; it’d be great to have their friend there.

To me, if you don’t get people at your open house, it’s a waste of your time. Make sure you have the advertising that’s gonna support it. Get out as many signs as you can. You need to spread the word that you’re gonna be there, so you’re gonna get people there.

Then there’s sort of that event mentality, whether you’re in a family neighborhood –  I don’t know, do you wanna have a lemonade stand? Do you wanna have a corn dog truck there? Think of clever, out of the box ways to get people to attend.

I had an open house once, it was on Easter, and I did an Easter egg hunt. We’ve done wine tasting… Whatever that might be something that will attract — to me, those three hours of an open house, they’re critical, and I don’t wanna feel like I’m wasting my time.

The other thing that you have to keep in mind too is be knowledgeable about a market that is reflective of and comparable to what you’re selling. If this house is not gonna work for them, might you know something else that you can direct them to and maybe take them to?

Joe Fairless: As I mentioned, some are incredibly tactical, so here’s a tactical one – this is from Meethew in Warner Robins, Georgia. Here’s the question:

“I am close to being done with my pre-licensing course. When should I start looking for a broker?”

Billy Rose: I would say start now. It does take time… The thing to me that would be of most interest is “Where am I gonna get the most training? Where is that education gonna come?” We at the Agency are not the best for that; we’re not really a new agent agency. We don’t have a great training program for newbies. There are some companies out there who are great at that. An alternative way would be to find a team that you can get on, somebody who can mentor you.

You’ve really gotta learn those tools, those tricks, those tips, those everyday things that you wake up and have to do as a real estate agent. This job, while being incredibly lucrative and something you can do into your seventies and eighties, and it’s every house you sell, you should be able to sell again… But it’s grind, and you have to wake up every day doing all the things that you need to do; it’s not that hard, but it does take tenacity, patience, focus and discipline.

Joe Fairless: I wanna dig into those aspects in the Lightning Round. Here’s a question I ask all the guests in some form or fashion – based on your experience as an entrepreneur in the real estate industry, plus having success in multiple areas of real estate, what is your best advice ever for real estate investors and entrepreneurs?

Billy Rose: I think that whatever you’re doing, there’s a few traits or things that you need to do. One is don’t undertake anything about which you’re not passionate. I think there’s so many businesses that people try to go lift off the ground because they think it’s a good business and therefore they’re gonna go do it, and most any business is gonna be hard. Nothing comes easy, that’s why it’s work. So if you don’t wake up excited, motivated, passionate about what it is that you’re gonna be doing, then you’re never gonna succeed or you’re not gonna really enjoy it. So I think you need to bring that to it.

You also need to be a student of whatever that field is. When I started as a real estate agent, I saw more properties on the market than any agent out there. We have a caravan, which for us is 11 to 2 on Tuesdays; my record  was 23, and I think that’s still the record. To go see 23 properties in a 3-hour period is kind of extraordinary.

Then I would see properties through the week, I would make sure I would go to open house, I would be really studying what was open, and I had a plan as to what houses I was gonna see, in what order I was gonna see them, and if I got caught up and I wasn’t able to get quite as fast, what were my options if I got over this part? I would be starting on the West side; again, the caravan starts at 11, I’d be there at [10:45], I’d be helping the agent at that first house put in the flags, or turning on the lights, and I could see a house or two without time actually having elapsed.

I think you really need to know the market, and because I knew it so well, people were calling me to help give them pricing advice. I was seeing stuff earlier than anyone. So I was really a student of the market.

And then you really need to be disciplined and focused on what you’re doing. I don’t think that you can really have success on a grand scale if you’re doing it part-time. You need to commit yourself, you need to focus on it and you need to hold yourself accountable; you need to put together a plan for yourself – “Am I gonna door-hunt ten houses a day? Am I going to send out 20 letters? Am I going to have 10 conversations?” Create some structure for yourself so you can really hold yourself accountable to that.

Joe Fairless: That actually ties into what I was gonna ask you some follow-ups earlier, when you mentioned that you have to do certain things every day as an agent… Any other tactical things that you didn’t just mention that you should do as an agent or people should do as an agent, that you didn’t just list off?

Billy Rose: I think that you need to make people aware that you’re available, that you’re open for business. As a real estate agent, you need to be top of mind, you need to be everywhere all the time, and I think one of the ways to do that is take some of that knowledge that you gained — you go out on a caravan and you see an amazing house… Well, you may not have a client for it, but that doesn’t mean that’s the end of that usage of that information. Go an talk to business managers – “Hey, I saw this amazing house” or “I know of this pocket that’s not yet available. It’s 20 million bucks”, or “It’s two million bucks (whatever it might be). Do you have a client that would be great for? Because it’s a great house”, whether that’s to a business manager, a friend, someone you meet at a bar – that gets people thinking about you in ways they may not have thought about you before.

You may be selling routinely 700k or 1.2 million dollar homes, and you come across this ten million dollar home and you’ve never sold a ten million dollar home. You can get people to shift the way they think about you by talking about a ten million dollar home, why it’s so great, how you got to it early and how it’s a great opportunity.

The other thing is as a realtor, you’ve gotta be social. It’s all about engaging and nurturing and broadening your sphere of influence. It’s really about always bringing a positive attitude, being optimistic and creating an energy that people wanna be around, because it’s a very intimate, emotional experience when you’re buying or selling a home, and people wanna feel that you’re in control, that you’re in command, and that you’re a pleasure to be around. I think it’s really reflect that energy, reflect that positivity and try to get that to as many people as possible.

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

Billy Rose: Let’s do it!

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

Break: [[00:23:02].02] to [[00:23:59].16]

Joe Fairless: Okay, best ever book you’ve read?

Billy Rose: Delivering Happiness. It was our Bible. That’s the book that Tony Hsieh wrote about Zappos, and how to not only pursue profits and passion, but also purpose, and it really led to the way we created our culture.

Joe Fairless: Best ever transaction you’ve been a part of?

Billy Rose: We have this proprietary CRM that we’ve created that allows us to engage with our website, and each agent’s contacts go into our CRM. When one of your contacts is conducting searches or extended work on our website, you get alerted that they might be ready to buy or sell, and I had observed that I had a client who I’d sold a house to some ten years ago, who was searching in Brentwood Park – it’s a family neighborhood.

The house I had sold him ten years ago was this bachelor pad, panty dropper home, big views, up in the Bird Streets… And he’s a big entertainment industry guy, and I thought “Why is he looking between 10 and 15 million bucks in Brentwood Park?” I go on Facebook, I see he’s gotten married; the gal he’s married has two kids who were going to Crossroads… Light bulb goes off–

Joe Fairless: A different life circumstance.

Billy Rose: Yes. Light bulb goes off in my head. I’ve got clients who are looking to buy a house just like him. I call him up, “Hey, Bob, I’ve been following you in the trades, you’re killing it. As you probably know, the inventory is super low in the Bird Streets. I don’t know if you’d even consider selling…” “Dude, I can’t believe you’re calling me now! I just got married, my wife’s got these two kids; I’ve gotta find a house in Brentwood Park. If you could help me find a house and if you can help me sell my house, it’d be amazing!”

Well, I showed my two clients his house, ended up selling it to one of them, so I got two sides on that one, and then we found him something in Brentwood Park and I got a side on that.

Joe Fairless: Just paying attention to your client’s life circumstances. You mentioned something earlier – if we allow it to set it, it’s a very powerful thing… You said “Every house you sell, you should be able to sell again”, and it makes it much less daunting — I’m not a real estate agent, but if I were, it would make it much less daunting for me to think, “Oh man, I’ve gotta get all this business.” Well, wait, one success builds on top of other, so how do you stay in touch with your clients after you sell them a house or sell their house?

Billy Rose: That goes back to being everywhere all the time and being top of mind. There’s a number of things. One is cycle through your contacts, maybe keep a list of your clients. Keep a note of when they bought or sold their home. Check in with them on some regular basis. We have a weekly newsletter called The Agency Edited, which goes out to all of our clientele and our contacts [unintelligible [00:26:46].02] which was intended to be sort of like the Agency curated perspective of luxury lifestyle in the same way that [unintelligible [00:26:55].09] or Daily Candy, Urban Daddy, Thrillist, whatever it might be, so that we’re bringing value to everyone (that’s our intention) by letting them know “Where do you charter a yacht this summer in the Mediterranean? Where should you go see fireworks this 4th July? What’s the most popular place to go trick or treating? (as we’re on the day after Halloween) What’s the cool new watch or vehicle?”

By getting that out in front of them every week, it reminds them that I’m here and I’m in this business. I think that relationships are the key to this business, and unless you really mess something up, that house that you sold someone, you should be able to resell it for them again and help them find something again, unless you messed that up in some way.

Joe Fairless: Speaking of that, what’s a mistake you’ve made on a transaction?

Billy Rose: I think one of the biggest mistakes you can make is not treat every transaction as a way to mess it up. So often we hear of agents who say “I’m doing this lease and I’m only making $3,400 on it.” Well, you’re not doing that lease for the money, you’re doing it to maintain that relationship and that trust and that intimacy with your client. If you don’t treat that transaction just like a ten million dollar buy, then you’re doing yourself a disservice; you’re not helping your client, and that’s a huge mistake, because you’re gonna break the chain with that client by not giving them great service.

I think the lesson to learn from that mistake is treat every transaction, treat every client as if they’re your primary client, because you don’t know who they’re gonna refer you to or who they’re gonna speak badly about you to if you don’t handle that relationship and that transaction with the importance which it deserves.

Joe Fairless: And you’ve made that mistake. What’s the best ever way you like to give back?

Billy Rose: The best way to give back… I serve on the board of a nonprofit called Kiss The Ground, which is designed to promote regenerative soil practices. I give financially to organizations, we as an agency give financially and we’re super involved with Giveback Homes and Habitat For Humanity, where we will actually go on site and build a home for a needy family.

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

Billy Rose: They can go to our website, www.theagencyre.com. I’m Billy Rose.

Joe Fairless: Billy, thank you for being on the show and talking about how there was a broken part of the industry that you identified, and then how the business came together so that everyone can benefit within the team, and as you said, a rising tide lifts all boats (or something along those lines). Also, the way that you were talking about every house that you sell you should be able to sell again, and that ties back to being top of mind.

One of the things that you all do is that weekly lifestyle-focused newsletter where you know your clients, you know what they’re interested in; you’re not doing a hard sell during that weekly newsletter or in that weekly newsletter, but rather you’re just adding value to their life and staying top of mind. Then also the three things that you mentioned that we all should be focused on when pursuing business  in real estate (or really in general), and that is make sure we’re passionate about it, number one; two, be a student of whatever we undertake, and three, be disciplined and focused on what we’re doing.

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

Billy Rose: I appreciate it. I enjoyed being here, and I hope your Best Ever listeners enjoyed it, too.

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JF1211: Good Deals Are Made NOT Found with Eddie Lorin

Listen to the Episode Below (26:42)
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Eddie recently launched a brand new crowdfunding REIT, with an emphasis on vision. Eddie and his company take apartment communities and completely overhaul them into super nice communities, from C+ to B+. They want people to wish they could afford living at their communities, only to find out they actually can! We’ll hear a lot of higher level commercial and residential investing tips today, including how to set up a crowdfunding REIT. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Eddie Lorin Real Estate Background:

– Founder of Impact Housing, a new crowdfunding REIT

– 25 years’ experience in investment real estate

– Since 2008, SRC has purchased close to 15,000 units in over 40 transactions

– Handled over $700 million in transactions of Class A office buildings and retail space

– Co-founder of 501c3 HAPI Foundation, was developed to promote health and wellness in apartment communities

– Based in Los Angeles, California

– Say hi to him at http://impacthousing.com/

– Best Ever Book: How to Stop Worrying and Start Living

 


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TRANSCRIPTION

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

With us today, Eddie Lorin. How are you doing, Eddie?

Eddie Lorin: Great. Great to be with your Best Ever listeners.

Joe Fairless: Yeah, nice to have you on the show, and congratulations on the launch of your new crowdfunding REIT called Impact Housing.

Eddie Lorin: Thank you.

Joe Fairless: A little bit more about Eddie – he’s got 25 years of experience in investment real estate. His other company he was at before purchased close to 15,000 units in over 40 transactions. He has handled over 700 million dollars in transactions of class A office buildings and retail, and he is based in sunny Los Angeles, California. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Eddie Lorin: Sure. I’ve been doing value-add real estate – deep value-add – buying neglected and often challenged properties for many years. We take pride in having the vision to see what others don’t see, that’s how we make a good deal. Good deals are made, not found. So we go in and we look at a property and we say “Oh my god, we’ve gotta figure out how to make this thing thrive”, so we start with the sign; when someone looks at the sign of a 200-unit apartment community, we want them to say “I only wish I could afford to live there”, so a really stylish sign, great branding.

Once they get inside, lo and behold they actually CAN afford to live there. So it’s really exciting to be able to make people have good, nice homes. Resort-style pools, state of the art fitness centers, outdoor social areas, beautiful clubhouses, nice paint jobs to attract people… And we give people after-school programming for health and wellness as well to get the kids involved.

So you go into the interior of the units – we are value engineers, we don’t overspend, but we spend enough so we can get a decent 36-month return on that investment. Let’s say we spend $3,500 a unit, we would like to see a $100 bump just to make sure that we get that value over 35 to 48 months, and as a result, we cap that when we sell, and that’s how we make the profit.

So we’re deep value-add guys, and we love to transform and give people a clean, safe, affordable place to live, we treat them with respect and dignity, and the good news is that they stay, they pay, and they refer their friends.

Joe Fairless: The apartment communities that you’re describing, what type of class would they be?

Eddie Lorin: C+,  and we’re bringing them to a B+. We’re in the workforce space, blue-collar; we’re giving good, hardworking people a nice place to live, and you don’t have to give them much, but they do appreciate being respected, and we’re striving to have better retention. Like I said – they stay, they pay and they refer their friends. That’s how you create a sense of community. We want someone to walk into our places and feel like “Oh, the chemistry is right, happy management, happy residents” – that results in happy investors.

Joe Fairless: And just for my own clarification – you are talking about apartments, obviously, but then when I was looking at your bio, it also says… Perhaps this is a typo, but correct me if I’m wrong – 700 million in transactions in class A office buildings and retail. Is that accurate?

Eddie Lorin: That’s accurate, but not in the last 15 years. I’ve started my career in commercial and I’ve realized that the institutional game is really difficult. Often times when you do office and industrial and retail, half of your TI is in leasing commissions; that’s half of your cashflow for a five-year hold. Being in apartments I’ve found is much more nimble, so… I cut my teeth, so to speak, on the commercial side, and I ended up where I feel I’m most needed and most beneficial, in the apartment game, and we take pride in changing people’s lives, because if you change their environment, you can change their lives.

Joe Fairless: So since 2008, that stat where you and your team have purchased close to 15,000 units in 40 transactions – that’s primarily apartments?

Eddie Lorin: Oh, 100% apartments, 100% value-add. And prior to that, we purchased for another company where we all worked; the whole team left in ’08. 25,000 units we did since 2000. So we have extensive experience in apartments. Maybe I should get rid of that in my bio, but that’s how I started the business.

Joe Fairless: It’s good to know where you came from. Now, that’s where you came from… What are you focused on right now?

Eddie Lorin: Right now we’re focused on the opportunity to give investors a triple bottom line. Of course, everybody wants a financial return. We provide a social return by changing the people’s environment, and an environmental return by putting in low float toilets, energy retrofits etc. So that’s the goal – to give investors a great return and make a difference in the world. We’re trying to change this world one apartment at a time, and the fact that we have this opportunity to do crowdfunding is incredible.

Now, anyone and everyone, regardless of whether they’re wealthy or not, can put their IRA money or they can invest as little as $1,000 today. It never was possible for the average investor to be able to invest directly in private real estate offerings, other than through Wall Street and REITs. Of course, there’s a lot of load, and those kinds of REITs, while they’re great, they tend to not play in the arenas we play; we’re trying to do something different than we have been for many years, and go to the masses with this opportunity, and that’s to buy more distressed real estate, and for the Wall Street firms – they kind of turn they nose at that, which is understandable.

Joe Fairless: So talk to us about just putting together a REIT – just the process involved, and anything that you think is relevant.

Eddie Lorin: Well, the SEC is quite scrutinous. It’s been a year and a half since the idea came about, and Reg A+ just passed… So since accrediteds and non-accrediteds alike are allowed to come into these offerings, the SEC is ever more scrutinous to make sure that the consumer is protected. So all of our track record was scanned and rescanned, and it’s all available at ImpactHousing.com. It took about five or six reiterations in order for the SEC to be able to approve the offering, the documents – everything that it’s supposed to… And I can’t say anything without making sure that the SEC is okay with it.

For instance, I can’t project future returns. I can tell you that we have almost always delivered as much as an 8% cash-on-cash return in the past, but I have to tell you that, of course, past performance isn’t indicative of future results. So there’s a lot more protections for the consumer where there should be, but again, our track record is impeccable and you can check it out online. We’ve delivered in the past over 28 buildings that we’ve sold; in the last couple years we’ve delivered mid-twenties IRR. The future is not necessarily predicated by the past, and all investments are risky, but I’ve never had to watch what I say too much, because it’s really a good thing; they protect everybody.

The bottom line is you wanna invest with someone who knows what they’re doing, they see something other people don’t see, and they’ve done it over and over. We’re like a franchise, we’re like McDonald’s. Like I said, we start with the sign, we move through their asset, we transform these properties in the same manner over and over again. It’s quite boring, but cashflow is boring too, and it’s really important that you buy assets to make sure that you can cashflow day one and all the value-add is only an enhancement.

Joe Fairless: The five or six iterations you said that you all went through, what are the main differences between the first and the last?

Eddie Lorin: Oh, just the tables of our track record and how they wanted them lined up, and how we presented it. Just the numbers. You change two people at the SEC — unfortunately we had two people; one was on vacation, and then someone else steps in, and they wanna see something a different way, and the way you disclose your offering, and they change the offering to add more specific examples… It’s just mostly wording and tables and presentations. The facts are the facts, the deal is the deal; fortunately, it’s very well scrutinized, and it just takes a lot of time to get through — like when you go to get a permit to do something… You may have a guy at the government or at the city that goes on vacation or takes a leave of absence, you’ve gotta start all over again… That kind of thing.

Joe Fairless: You’ve mentioned that you can’t project future returns… So how do you show investors what you anticipate the project doing?

Eddie Lorin: We’re gonna be buying the same product that we’ve always bought, and by that track record – that’s what they allow us to show – we’re gonna deliver, we feel, the same thing that we’ve always delivered, so… Past performance is the best way to get an example.

Joe Fairless: Okay. Let’s talk about the last deal you all bought. Will you tell us the details of the last one?

Eddie Lorin: I can pick one, sure. One of my favorite deals – we bought a high rise in Dallas. It was 50k/door and we ended up putting in $10,000/unit, and we sold it for $100,000 a unit. That was a huge value-add. If people can relate to an old dinosaur in the ’60s, a very white, monolithic building, ugly, and we made it into — inspired by a Viceroy type of hotel, or some of these Mondrian, some of these really high-end hotels… We get ideas from hotels and we make a beautiful lobby and clubhouse area, with up lighting, and we up light the outside of the building, and put a really high-end clubhouse at the top floor… We were able to do different things to make it feel very cool, and yet keep the rents in a manner that was still affordable.

Our rent structures – we don’t do a lot of high-end stuff, if at all. We’re on the lower end. By $100, if you’re moving rents from $800 to $900, it’s still pretty much affordable and it’s good value to the resident… But all that sticks to the bottom line because of that $100 difference, because the expenses are primarily the same. So the more you add value in terms of rent, it really does trickle down to the bottom line.

Joe Fairless: And what is your role in the process, in the next acquisition that you do?

Eddie Lorin: Well, I’m the visionary. I go in and I try to look at it based on my 40,000 units of experience. I take a look and say, “Oh, we did this on, let’s say, Shadow Oaks in Tampa. I can do the same thing here.” Your memory bank is there, you know what you’ve done, and you can see most assets… I call myself a visionary – I try to see a way to enhance, and landscaping, and general fitness center improvements, clubhouse, coffee house… All these crazy ideas that have worked, and they’re great, and it’s different from the competition because, let’s face it, when you drive down the row, there’s some markets – like, in Atlanta you’ll see 10, 15 apartment buildings; how do you stand out? You have to do something different, and to me that’s the fun part of this business, that’s what I specialize in, and we’ve done it over and over consistently and very successfully.

Joe Fairless: What are some of the go-to approaches that you take to stand out?

Eddie Lorin: Well, many people don’t have them and now I’m giving away my secrets, right? [laughs] Outdoor fitness is kind of cool, and surrounded by a playground so the adults have a playground to work out and the kids have a playground to play. And we have barbecue pits, and we try to create that sense of community, and a sense of pride of ownership. Even though they’re renters, everybody wants to feel proud of where they live, so to me it’s about creating places for people to thrive.

And we’re on the lower end. Often, they are neglected, or they’re overlooked. Let’s take some of these retail specialty or lifestyle centers. I get ideas from hotels and lifestyle centers and retail in creating a sense of community. To me, that’s more important than necessarily the interiors, although we do a great job on the interiors. I think the exteriors are what sells people – the fitness center, the resort-style pool… A sense of community – people still want to be involved and belong and feel loved. That’s to me the bottom line, that’s what makes me tick.

Joe Fairless: What are some areas that at the beginning when you weren’t as seasoned you or your team might be spending money on, whereas now you don’t put as much money towards them?

Eddie Lorin: Well, we tried granite counters; we thought “Oh my god, we’re gonna take this C and make it an A.” Not realistic, and there’s no return on it. But you try different thing, and you make mistakes, and you learn. So that’s one example.

Also, to take in six-panel doors, although it looks fabulous, it’s not that cost-effective to spend $300, $400 just on new doors. You don’t get a return on that, especially when you rent levels are in the $800 range, $700 range. So these are the decisions you have to make to value engineer.

Joe Fairless: When you do the value engineering, what are some basic things that you’ll always do for every property, tactically speaking?

Eddie Lorin: Signage, resort-style pool, state of the art fitness center, outdoor fitness, new paint job, renovate hard surface floors instead of carpet, because it doesn’t wear as well, we’ll do new fixtures, gooseneck faucet, lighting, ceiling fans… The low-hanging fruit, we always do insist on. It’s the other more expensive upgrades you have to make a decision on.

Joe Fairless: Got it. If a property does not have a pool, do you put a pool in?

Eddie Lorin: That’s a great question. We have one now — we bought it at 27k/unit, and I speak in nomenclature, I assume I’m not talking at a school here, but… That’s the way we talk about – how much per unit; and we’re selling it at 47k/unit. It’s in a Dallas-Fort Worth suburb, and the fact is it has no pool, and it didn’t matter. We made that decision. Almost 95% of every deal has a pool, this one didn’t, and it was a big decision. Can we justify 100k-150k to put a pool in and do all the accoutrements, translating to divided by 100, that’s a lot of money. Is that really worth it? We decided no, and it turned out to be okay.

Joe Fairless: What’s something you would tell a beginning apartment investor based on your experience? What advice would you give him or her?

Eddie Lorin: You’ve gotta look at the current rents today and don’t think about where you hope the rents to be tomorrow. You have to make sure you’re okay buying today what you’re buying, and that’s the most important thing. Everybody got in trouble before the crash in the 2000’s buying on future rents, and over-leveraged based on future rents. That’s the problem. But if you’re happy and satisfied with what the rents are today and you can live with that return because it’s still better than sticking the cash in the bank, then you’re fine, and you can always do other things to enhance that return. But the bottom line is you’ve gotta be satisfied and buy on today’s cashflow, what is real.

Joe Fairless: When you meet with your team and they brief you on a new opportunity, what are some of the questions you always ask?

Eddie Lorin: What’s the price per door, what are the comps, what are the rents? Those are the gut check things, the basics, and that’s only coming from the experience of 40,000 over all the years. Then we immediately thankfully google, we can drive, we don’t have to even go there. Before we can decide, we can go on Google, that little yellow man on Google, and you just drop him on the street, you can drive up and down and all around… You can really get a feel for the neighborhood, see what’s there.

And you do an aerial view, and you can look at the median income, demographics, you can find what are the new employers… Because let’s face it – apartments are all about jobs, and you wanna be in an area that’s got some mojo and there’s new jobs coming in. If you see that Amazon decided to come wherever they decided to go, that’s gonna be something you can make a more aggressive bet on if you know that it’s real. So there’s the art and the science in the business, right? The science is the numbers and all the vital signs, the heartbeat, the pulse, so to speak, but there’s also the art, and that only comes from experience, and your gut, and your wisdom, and most important – common sense. Many people don’t realize that real estate is about common sense. Would you be satisfied living there? Obviously, you may not wanna live there, but would you live there? Would you feel safe there? Do you feel this is a good investment, in your gut? That’s what you have to listen to, because they’re all people; business is not that complicated.

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

Eddie Lorin: I think I just gave it. I’ll repeat it and say “Buy on today’s rents.” Do not get ahead of yourself, and use your common sense. You’re not gonna buy it if you don’t think anything is going anywhere, so obviously you don’t wanna just buy a deal and hope that the rents will move, but you wanna buy it based on what you know you have today, and in your gut you think you can move the needle, because otherwise why would you do it?

Joe Fairless: So if you’re buying severely distressed properties, then I imagine there’s not a whole lot of rent going on…

Eddie Lorin: Well, sometimes — like, we bought a property in Tampa that was 80% occupied because we had a foreign investor who just neglected it and didn’t care about it. Part of it had an affordable component to it, and that kind of complicated it. They were out of compliance — it’s not necessarily distress, it’s neglect, because the distress happened in 2010, 2011, 2012, after the crash. There’s not much distress left, but plenty of people are in neglect, or there are families who’ve owned these properties forever and it’s time for them to take their money off the table, or someone dies, or there’s a divorce… There’s always a reason to do a deal, and you just don’t know until you dig into the facts and try to figure out what’s the motivation of the seller.

Joe Fairless: We’re gonna do a lightning round, are you ready for it?

Eddie Lorin: Sure. I don’t know what it is, but I’ll try to–

Joe Fairless: You’re ready for it, I can tell. First though, a quick word from our Best Ever partners.

Break: [[00:20:58].26] to [[00:21:56].07]

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

Eddie Lorin: Believe it or not, I’m showing a vulnerability here… I’m a worrier – I worry about my investors, I worry about myself, I worry about everything; How To Stop Worrying And Start Living from the ’40s. Some of the references are so old and so funny, but Dale Carnegie is my guru, my bible… I always refer to it, because I’m a worrier. But I guess people wanna invest with a worrier, because that’s why we’re successful.

Joe Fairless: What’s the best ever deal you’ve done that you have not mentioned?

Eddie Lorin: We bought another deal in Dallas that was kind of off the radar, in a great location, we got it off market, and we came up with a branding policy… We put a logo into it, we painted it, the sign itself had a sailboat on it, and the sailboat actually was a cut-out sailboat, so it really attracted attention. We painted it the colors of oranges, and kind of blue, grey, and it just felt like a sea ship. It was 200 units, and we just knocked it out of the park on there.

Again, it was the branding. Like I said, good deals are made, not found. That was one that comes to mind, since it’s a lightning round.

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

Eddie Lorin: Well, prior to the crash we all learned; that’s why I keep harping on you’ve gotta buy on today’s cashflows. If you get ahead of yourself and you think tomorrow’s returns are gonna be there and you lever up based on tomorrow’s returns, that’s a risk [unintelligible [00:23:25].17]

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

Eddie Lorin: We have our non-profit, Happy Healthy Apartment Property Initiative, and a health and wellness program inside the clubhouses of our properties; we have community gardens, and to see some of these lower income kids, their faces to be able to grow in the food dessert – the food dessert is an area where you really can’t find a lot of fruits and vegetables, and there are no whole foods around… When you can see the face of someone come to life if they can eat what they’ve grown, that’s pretty awesome.

So often times programming is in YMCA’s churches etc, but we have a captive audience, we have a clubhouse, so we can do a lot of good for the residents, create a sense of community right where they live. This is the foundation we’ve started, and it’s a non-profit. I’m very excited about having [unintelligible [00:24:19].17] ImpactHousing.com.

Joe Fairless: And speaking of Impact Housing, how can the Best Ever listeners get in touch with you and learn more about what you’re doing?

Eddie Lorin: Well, they can go to the website, see the video… It’s kind of a great culmination of all that we’ve done and all that we do. And of course, they can e-mail me at elorin@impacthousing.com, and we look forward to changing the world one apartment at a time, like we said.

Joe Fairless: Eddie, thank you for sharing your experiences. You gave a lot of really helpful tips for apartment investors, and then just real estate investors in general, but specifically apartment investors for sure… From ways to add value to apartment communities, what your approach is; first it starts with  the sign, you want them to think “I wish I could afford to live there”, and then once they’re inside, they see “Oh, I guess I CAN afford to live here”, once they meet with the staff and hear about the pricing and things.

The approach you take to the ways you add value – new paint, you renovate the interiors, new fixtures, gooseneck faucet, resort-style pool, that sort of thing. Then the lessons learned along the way, making sure that we’re happy with today’s rents; even though we have value-add components to the deal, we can’t buy hoping that today’s rents turn it into a cash-flowing property. It needs to be a property that we’re happy with and then we’ll enhance the NOI once we implement the program.

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

Eddie Lorin: All the best to your Best Ever listeners. That was a great recap, thank you.

Joe Fairless: Thank you, my friend. It’s nice meeting you, and congrats on everything you’re doing and have done. I’m looking forward to staying in touch with you.

Eddie Lorin: All the best.

Richard Schulman and Joe Fairless

JF1203: Richard Schulman Runs The #2 Keller Williams Team In the World

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Richard tells us how he has been able to climb the ranks to becoming the leader of the #2 team in Keller Williams worldwide. Richard is also an active investor as well as helping a lot of other investors find and buy cash flowing properties.  If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Richard Schulman Real Estate Background:
– Real estate broker at Keller Williams, one of their top producing real estate agents
– Sold nearly 1,000 homes valued at over $500,000,000, runs the #2 Keller Williams team Worldwide
– Over 30% of his sales are properties intended for rental or resale, ranks in top 0.1% of all Realtors nationwide
– Based in Los Angeles, California
– Say hi to him at: http://richardschulman.com/
– Best Ever Book: 4 Hour Work Week


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TRANSCRIPTION

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

With us today, Richard Schulman. How are you doing, Richard?

Richard Schulman: Hey, I’m great. Thanks for having me on.

Joe Fairless: My pleasure, nice to have you on the show. I was reading your bio, you are a machine… Sold nearly 1,000 homes valued at over 500 million dollars, and runs the number two Keller Williams team worldwide. Holy cow, that’s impressive!

Richard Schulman: Thank you! Yeah, just a combination of good service and hard work. I look at that and I think, “Man, we could be doing so much better!”

Joe Fairless: [laughs] As a top performer usually does. Over 30% of Richard’s sales are properties intended for rental or resale, and he ranks in the top one-tenth of a percent of  realtors nationwide. Based in Los Angeles, California, and you can say hi to him and check out his company at his company website, which is his name, RichardSchulman.com. A link to that will be in the show notes page.

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

Richard Schulman: Yeah, absolutely. I am from L.A., born and raised. I had a small painting franchise business in college through a student painting company, which was quite an experience, and I learned an incredible amount about business from that. I realized that I learned more doing that than with my economics business degree.

So I did that, and then the painting business got soft — of we thought the painting business was getting soft, because the economy was getting soft; we actually did really well, because that was the first year of the real housing boom in 2003-2004… So I got out of painting and got into real estate, which has been a long haul; I’ve been in real estate basically my whole professional career, and I really quickly early on realized that investors were great because you take the emotion out of it [unintelligible [00:04:10].26] it’s more like “Bedrooms, bathrooms, rent.” And I also realized that most people would just buy one home for themselves to live in. Your average client doesn’t have like three primary residences, but your average client who buys the house could probably buy a rental property, and some of them will buy ten rental properties. So I figured when you say “A third of the business is rental properties”, that’s the easiest business because you’re just trying to find good value for your client, and it’s usually a very small pool of clients who develop good trust with you…

So it’s been a real focus on my business, and then personally, I remember in 2008 I was trying to sell this guy the second foreclosed condo I’d ever been inside of, and he wanted to throw us some low offer, and I was selling him so hard on it, I’m like “This is a great deal, it’s down 45% in 18 months, and the return is 10%” or whatever it was, and he wanted to throw a low offer at them, so I bought it myself, and then I started realizing it’s sometimes easier just to buy the property yourself and to make a commission on it.

Joe Fairless: How many times have you done that?

Richard Schulman: Once I sort of realized that that was a better move, I became more of an active investor myself. Just as [unintelligible [00:05:18].01] agents who listen to this show, in order to protect the integrity of my business, I will always give the property to my client if they’re interested. I won’t sandbag any deals or I won’t try to [unintelligible [00:05:28].16] I’m not gonna outcompete my clients, but there’s always a lot of properties out there that make sense for people, so there’s always value to be had.

Joe Fairless: Got it. How long have you been going at this?

Richard Schulman: 14 years in real estate. I bought my first rental property personally in 2008, I guess around 9-10 years into that.

Joe Fairless: That was the condo?

Richard Schulman: Yeah, I still own it.

Joe Fairless: Okay. That’s in Los Angeles, you said?

Richard Schulman: Yeah, that’s right.

Joe Fairless: And are all of your rentals in L.A.?

Richard Schulman: Yeah, they’re all in the L.A. area, so there’s a lot of smaller cities that are sort of incorporated into Los Angeles, but yeah, they’re all in the L.A. metro area.

Joe Fairless: Okay. What’s your overall approach with your own portfolio? Do you have to make a certain return, is it cashflow, is it appreciation? What is it?

Richard Schulman: That’s a good question. This is where it’s really important when you’re talking to your clients, or even for yourself, trying to analyze what you’re looking for. For me personally, nothing matter besides cashflow, and I know not everyone agrees with me on that, and I’m prepared to defend my claim. If my property is worth a billion dollars — well, I guess if it was a billion dollars [unintelligible [00:06:35].21] but if there was a ton of money, or 30% more than they’re worth now, I really couldn’t do anything else with those properties. If the property values were much higher, it would be hard to sell that and to reinvest the money at a better return. It’s just the nature of how returns work. So for me it’s all about cashflow.

I would say that probably about three-quarters of what I own was purchased strictly for cashflow, with a couple caveats. I have a partner on some of them and we did purchase a couple of things that were sort of hedges… Like, nice properties in more expensive areas that we might wanna redevelop in the future. We also purchased some properties that were larger lots with income, so that we could also redevelop those lots in the future. By doing that, if the land value goes up enough, we can build condos or apartments on that land… But we’re still collecting our minimum return now. We’re not looking to buy anything under 9% cash-on-cash return, so all those properties met that requirement as well.

Joe Fairless: Who’s “we”?

Richard Schulman: I have a partner on some of them, a friend of mine; we’ve purchased some of the properties together. He’s in mortgage, so it’s a good combination.

Joe Fairless: He’s in mortgage, you’re a real estate broker… When you do a redevelopment, who brings the construction management/project management experience?

Richard Schulman: The biggest we’ve done is we’ve done heavy rehab on properties, but we haven’t done any development of new units yet, so… We’re gonna figure it out. I think the best way to do it is just to learn it by trying. We’ll probably make a lot of mistakes, but we’re gonna start with a smaller project, maybe just build a couple of units, and just make sure we know what we’re doing before we build something larger.

Joe Fairless: How much of your focus is on the growing your company as a real estate broker, versus growing your cashflow as a real estate investor?

Richard Schulman: My entire focus is on growing cashflow, I’m all about passive income. It’s really been beaten into my head from people I’ve talked to. I really think that’s the right move to make for my future financial security. That being said, the only way to acquire cashflow is with investment money; you need money to invest, otherwise you’re not an investor. So growing my business and driving my business produces income to invest. The shortage is always money to invest, it’s never properties to buy. I’ve never said “Oh, I have a lot of money sitting there and I can’t find the right properties.” It’s always the other way around. It’s always like scrambling to borrow money to buy a property that came up and I really think it would be a good deal for me.

Joe Fairless: 14 years in the business and you are top one-tenth of a percent of all realtors nationwide. What are some tips for some best ever listeners who are real estate agents and want to climb the ladder of success as an agent.

Richard Schulman: I think there’s a sort of weird thing in real estate where — I’ve learned a  lot of this by observing; I just had this natural instinct to learn and observe from other agents. If I had a new agent, I would quiz the agent on what they were doing, “Are you buying properties?” and what I found, surprisingly, was a lot of agents are really bad at actually their own real estate. There’s very successful brokers who have a nice house and that type of thing, but a lot of your mid-level agents who are making a good living and have or should have investable income are not saving and investing; they’re not really competent or confident in their ability to invest in real estate. I get asked by a lot of brokers doing 20, 30, 40 million a year for investment advice. That’s just not something they’re focused on, so I think the lesson would sort of be like, you have to learn that business. If you’re not brokering investment properties, you do have to learn that business, you have to get comfortable with it, and you have to be a disciplined saver. You have to understand that unless you’re putting away lots of money, especially in a high price point market like ours, it’s gonna be hard to invest.

Joe Fairless: What’s an example of you being a disciplined saver?

Richard Schulman: I did an interview for Keller Williams Realty… We’re broken up into regions, and I did an interview about six months ago for the Northern California region, and they wanted to ask me… They gave me an example if they cut out the fancy copy service, because they thought the market was shifting in that area, and they wanted to trim costs so they would be lean and profitable, and they said “What would you do?” and I said “I would have never had the fancy copy service in the first place.” I’ve just always been a no-nonsense guy as far as expenses. I invest money where it returns for me, so if we’re doing advertising spend, I wanna make sure that advertising money is getting returned to me in multiples. If it’s not, we’re gonna cut it out.
I see a lot of realtors driving really fancy cars. I don’t. I look at every dollar as like, if I can make 10% on this dollar in six months, then I save it up and I put it into a property. And when I say 10%, remember, I’m just looking at cash-on-cash, not appreciation. I don’t think I’ve clarified that before.

Joe Fairless: Right, right. Earlier I think you said 9% cash-on-cash return… So between 9% and 10% is what you’re looking for?

Richard Schulman: Nines are minimum, so we really wouldn’t look at anything below that. I just think that we’re finding enough stuff  there, and… There is some sweat equity, there are all these things, and there is some hassle and effort, so it’s not just like an [unintelligible [00:11:31].01] so I do wanna make sure we’re making enough, and I think in our market it’s a reasonable return to be hitting.

Joe Fairless: Tell us about the last deal that you bought in the Los Angeles area that netted at least 9% cash-on-cash return.

Richard Schulman: Sure. We just bought a triplex in Inglewood, where they have a new stadium going in. We bought it on the market, it’s not like a secret deal – that’s another misconception; most of the stuff that I’ve purchased has been on the market publicly available. So we bought the property, it was in awful condition, and one of the units had some [unintelligible [00:12:08].06] and needed to be cleaned up. So we purchased it, a triplex, 600k, on a 10,000-foot R3 lot, so we could build seven units on it one day.

So we purchased it, and we went in right away, we totally gutted the front house, cleaned up all the problems, got rid of some mold and some other stuff and really made it beautiful. I’m a big believer in my properties. I always have the best properties in the neighborhood, or the second best. Nothing brand new, but when we remodel that house, it’s by far the best thing that those tenants are gonna see. When they’re touring rentals, we have the cleanest — we do the yard, we do the fences, we paint everything… When they move in, it’s spick-and-span perfect for them, because we want those tenants to really appreciate that and value that, and we get an extra bump on the rent for that.

So we created a little yard, the little house in the front with the duplex [unintelligible [00:12:53].16] We try to stay very ethical in our approach; when we buy the property, it’s a non-rent-controlled area, so we don’t want the tenants to have to move out, so we keep the rents below market so they can stay in their homes, but we’re still hitting our targets on return. Even though they’re paying a little bit lower than market, we still take care of their units and everything looks perfect for them, and that’s the best way to keep your tenants happy, paying rent, not causing problems. When you take care of tenants like that, they never call for maintenance. They fix it themselves, they don’t bother you with that stuff. They pay the rent early… So it works out for us overall.

Joe Fairless: You said in that example you paid $600,000 for a triplex in Inglewood, and it was on a 10,000 R3 lot, so you can build seven units additional? Did I hear that correctly?

Richard Schulman: Seven total.

Joe Fairless: Seven total, so four additional units.

Richard Schulman: Yeah. If we developed it, we would scrape it and build over, and build bigger units.

Joe Fairless: Okay, you would just start from scratch – knock down the three and build seven up. And then also you had to gut the front house, and there was mold in I guess one of the other two units, right?

Richard Schulman: The mold was in the front house.

Joe Fairless: Okay, the mold was in the front house… And what else did you have to do? I think I missed something else that was a major part.

Richard Schulman: [unintelligible [00:14:10].06] so we made it like a house. We put a fence around it, had some parking — it’s sort of separated from the back unit. And we’ve done that on a lot of our properties like that, where if there’s like a cottage or a secondary house, we [unintelligible [00:14:22].12] which allows us to get higher rents, because it’s not an apartment, it’s not like a little house on a multifamily lot, it’s like a totally separate unique home. We do the landscaping…

I just see a lot of rentals out there, and the little details really matter to the tenants, because you want the tenants who are gonna really pay a premium for like a really nice place, not the tenants who are gonna come in and look at the cheapest thing on the market. Those tenants are the ones who are gonna be causing problems long-term.

And every market is different. We’ve been doing this over and over again, so we sort of learned what are the right things to do and not to, but I think in any market taking care of your tenants, taking care of your properties, getting the best tenants in the market paying — I don’t say the highest rent, but pretty close, the highest rent… I think that’s always gonna be a winning strategy, and those tenants tend to give you the least hassle. The most hassle comes from the lowest quality units.

Joe Fairless: If I were a new client of yours and I said “Hey, Richard, I’ve got $300,000”, I want to buy something like what you’ve just described, I can hopefully get some financing for the 600k purchase… Would you be able to find me another one of those deals?

Richard Schulman: Yeah, that was a pretty good deal because of the mold that scared off a lot of buyers, and I’ve done a lot of mold properties, so we were able to really analyze the risk and cost of remediating it. I think that probably close to that there’s stuff available, but we’ve been able to acquire less this year than last year. We’ve done two acquisitions this year, and we probably did seven or eight last year.

The prices have gone up a lot, which are squeezing margins, and it’s making it tougher. So that was a pretty good deal, but I think there’s stuff out there generally, in that range, sure.

Joe Fairless: The reason I ask is because California has the second-highest representation of listeners of this podcast, and there’s a lot of people in California who listen who are trying to get at least 9% cash-on-cash return on their deals, while hopefully investing in their backyard, and you’ve just described a case study for how to do so.

Richard Schulman: Yeah, it’s not like you’re just gonna go on the MLS today or call a broker today… If they wanna call me, or you’re gonna call me, I can’t be like “Well, here, I have six things waiting.” That was the best thing we bought all year. So there is some patience involved. There’s also just the aspect that if I brought you into a home that had mold in it and said “There’s an unknown mold problem, but the sellers have priced it accordingly…”, we have a very tight contingency period, so we don’t have the opportunity to go in there, bring a mold tester and do destructive testing and bring in our vendors. We have the opportunity to go in there for five minutes with our handymen and our contractor, check it out and then make a bid.

This requires a certain level of experience and faith, and then you have to go in there and put that sweat equity in there. A lot of times I show people a property and they don’t want a mold property. They don’t want a property that was quite frankly disgusting when we bought it. Well, we did the remodel, of course, and we know there’s gonna be surprises… Like, we went to go retile the bathroom floor, and the floor fell through; it was rotted out. So now we’ve gotta spend thousands of dollars building a new floor in the bathroom. [unintelligible [00:17:24].26] These are all things that are gonna happen that people have to worry about.

I guess the advice piece there would be that if you wanna make money in real estate, you have to get your hands dirty. There’s not brand new apartment buildings in Beverly Hills that are making 9% returns. Those get 2,5% returns. But if you want 9%, you have to go in there and remediate some mold, you have to demo some things, you have to put in a new bathroom subfloor when it falls through, you have to get your rent in cashier’s checks and go to the bank and cash them; you can’t do it by phone. Sometimes those cashier’s checks bounce… You’ve gotta do all those things. I didn’t even know cashier’s checks could bounce.

Joe Fairless: I didn’t either, actually. I’m glad I didn’t know that. [laughs] I’m glad I haven’t experienced that.

Richard Schulman: Pro tip – when you get your rent in cashier’s check, like if I get a deposit, I take it to the bank and have them verify that it’s good. I usually only take Bank of America cashier’s checks, so that I can walk into the branch across the street and have them cash it on the spot for me.

Joe Fairless: Okay. You mentioned that was the best deal that you purchased – was that last year or this year?

Richard Schulman: This year.

Joe Fairless: And what was the worst deal you purchased this year?

Richard Schulman: Well, I’ve only bought one other property, so…

Joe Fairless: Oh, okay. Well, that’s easy then… [laughs] What about last year? What was the worst deal you bought last year?

Richard Schulman: I don’t live in regret. I think that really there’s nothing that I’ve ever purchased that I look back and say “I wish I didn’t purchase that.” I think it’s like a simple business, like we’re just looking at income and expenses, and we’ve never had a huge misfire; we’ve never even had like a moderate misfire.

Joe Fairless: Let me ask the question differently. What is the lowest-performing acquisition you’ve done on a return standpoint?

Richard Schulman: Sorry to be difficult.

Joe Fairless: That’s alright, I get the mentality; I understand it.

Richard Schulman: I don’t think it’s a complicated thing. When we’re buying income, we’re buying income. Actually, I’ll tell you one that’s a little bit of a funny story. I do have one, I forgot…

Joe Fairless: Conveniently blocked it out of your memory… [laughs]

Richard Schulman: Yeah… You can edit this in post, we’ll cut that all out, but… We bought this condo, and [unintelligible [00:19:27].06] Let’s say it was worth $175,000 at the time, and it was on the market and there was a holdover tenant who was not allowing any repairs, and the seller tried to evict, and the seller went out of money and gave up, so she sold it to us for like 110k or 120k, something like that. All cash, no contingencies. They’re taking on this [unintelligible [00:19:46].11] I showed it to an eviction attorney. She said, “No problem, slam dunk. Eviction if he doesn’t cooperate with the repairs.” I’ll tell the condemned story, it got very interesting actually, but… Then we wired the money, we closed the escrow, we were really excited.

I had met the guy, he was very nice. I said, “Listen, I’m sorry about the other owner. You know how I operate – I’m gonna go in there, I’m gonna make everything better, I’m even gonna do extra things. As a show of good faith, we’re gonna keep your rent”, which was like $500/month below market. “We’re gonna give you a one-year lease at that rate, so that you’re happy.” He was like “Great.” The minute we closed escrow I called him up, “Hey, can we come over? We wanna start repairs right away. I don’t want you to have any problems…”, and the problems were all nonsense. There was a brand new HVAC and he had disconnected it, and [unintelligible [00:20:30].19] All it needed was like an hour of a handyman to connect the gas lines.

He’s like, “You’re not coming on my property. I think a judge needs to hear my story”, and this was on and on and on. I sent the handymen over to try to reason with him, I had my partner call and try to reason with him… Finally, I’m getting to my wits’ end because he’s not gonna help me. Now the eviction attorney is like “You know, I’m thinking about it, since you’re an investor a user, it’s a real messy eviction and you might lose”, and I’m like “What are you talking about?” “Oh, it could be $10,000 in legal fees.” I said “If I give you $10,000 you guarantee me an eviction?” “No, there’s no guarantees.”

All these things are adding up, so I finally called the guy and I said “Listen, I’ll give you $25,000 cash to move out”, and he said “I think a judge needs to hear my story.” I said “Okay, well I’m out.” I actually ended up selling it to a friend of mine’s employee, who bought it, did an owner occupied eviction, so [unintelligible [00:21:22].11] I was net zero on it.

That was the messiest deal we’ve bought. We thought we could go in there and handle a difficult tenant, and we totally [unintelligible [00:21:30].03] I was fortunate that that guy was able to buy it off of me. He did the owner occupied eviction, [unintelligible [00:21:35].09] out on the street, unfortunately for him… He could have had $25,000 cash.

Joe Fairless: Oh yeah, yeah.

Richard Schulman: And now the condo is probably worth 275k, so…

Joe Fairless: And the takeaway for the eviction process is to do the owner occupied, because then you’re dealing with someone’s living situation, versus an investment property, right?

Richard Schulman: Right, exactly.

Joe Fairless: The first house I purchased to live in myself was the same thing; it was a holdover tenant with a bank, and he tried to shake me down. We went with an owner occupied eviction and he backed down, and then actually that house we ended up renting to him for eight years. He just moved out after eight years. But because it was an owner occupied eviction, it was a slam dunk. So we kind of misread the situation, but we priced in our risk that we were able to walk away with just a few hours of hassle on it, which was fortunate, I guess.

I guess the lesson [unintelligible [00:22:24].19] but the court system is a little bit tougher. The court system is not friendly to the landlord in Los Angeles (or California, I’m assuming). I’ve never sought to go to court with a tenant, because it’s not a winner.

Joe Fairless: Yeah, everyone in New York and New Jersey are shaking their head in empathy with you. That’s the way there, too. What is your best real estate investing advice ever?

Richard Schulman: I think it’s just to look at income. I think people are too focused on buying pretty properties. When I meet with someone… A lot of times we sell someone a house to live in, and then we say “Hey, you can also buy a rental property. Here’s how that works.” People are always trying to buy a rental property that’s somewhere they wanna live, or looks like something they wanna live in.

I sold this very nice  lady a big apartment building, and I would call her and she’s like “Oh, I’m buying antique light fixtures at the specialty store…” I’m like, “Why are you doing that?”, she’s like, “Well, it looks spectacular.” Like, yeah, but they’re not gonna pay you three dollars a month more in rent because you have this $400 light fixture.

This woman lived in an incredible house, and for her it was like — she couldn’t imagine owning something that wasn’t matching that. So I’m not saying go out there and buy garbage, I’m just saying that you don’t need to buy very expensive properties or very nice properties, or properties in nice neighborhoods.

Find a safe neighborhood, find somewhere you’re comfortable going to, but it doesn’t have to match your quality of living at home. That’s probably not gonna make rental sense. So the best advice – just look for cashflow; what’s gonna give you the highest return, with a little bit of [unintelligible [00:23:51].26] So don’t buy an apartment studio full of studios or single-room occupancy in a really bad neighborhood… But build a [unintelligible [00:23:59].19] three-bedroom into the bad neighborhood with section 8? Great, let’s do it.

Joe Fairless: Your case studies are relevant to not only people living in California, but then also anyone living in a rental area, or a market that tends to have higher price points, like Miami or New York City or some parts of New Jersey, and I’m really glad that you talked about this. Are you ready for the Best Ever Lightning Round?

Richard Schulman: I don’t know. I guess we’ll find out.

Joe Fairless: I think you are. [laughter] First though, a quick word from our Best Ever partners.

Break: [[00:24:30].22] to [[00:25:23].20]

Joe Fairless: Alright, Richard, what’s the best ever book you’ve read?

Richard Schulman: I’m gonna go with The 4-Hour Workweek by Tim Ferriss.

Joe Fairless: Very good book, and Tools of Titans is another one, and he’s got another book coming out that I’ve just pre-ordered. I don’t remember the name of it, but…

Richard Schulman: I didn’t know that. I listen to his podcast, [unintelligible [00:25:39].26] That book really changed how I thought about a lot of things.

Joe Fairless: What’s a best ever deal you’ve done that you have not mentioned.

Richard Schulman: Personally?

Joe Fairless: Yeah.

Richard Schulman: I sold my father-in-law a condo in Inglewood, and we were in escrow for 73k, the bank gave us a 10k discount, and he decided he didn’t like it because the building was pretty shabby, so I took it off his hand for $63,000. It’s probably worth 275k now.

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

Richard Schulman: I’m a little sloppy, but my partners are very detail-oriented, so we’re a good match. I don’t think we’ve made a really big mistake, other than the one that I’ve mentioned. Nothing that was like a critical error. We tend to go in guns blazing on these things, so you’re sort of building in like there’s gonna be some risk and some margin, but no mistakes. We know our business, we know what we’re doing.

Joe Fairless: What type of financing — I know you said your partner has a mortgage background… What type of financing do you do on, say, that triplex in Inglewood?

Richard Schulman: Typically, one of the ways that you’re gonna get a deal or a value, or you’re gonna get to the top of the pile is you pay cash. We use private lines to pay cash for a property, and then we’ll cash-out refinance it right away.

Joe Fairless: Where do you do the cash-out refi?

Richard Schulman: Which bank?

Joe Fairless: Yeah.

Richard Schulman: It’s from different banks every time. It’s not like just from one bank. We’ll shop around for rate and terms; some are commercial, some are triplex, and different banks have pricing if you’re taking cash out, versus if you’re just doing a [unintelligible [00:27:04].09] refi.

Joe Fairless: Okay. A line of credit to buy all-cash, plus you’ve got the money to go in to improve the property, and then you do a cash-out refinance, get your money back out and hold on to the property long-term?

Richard Schulman: Yeah, exactly. For most people, the easiest way to raise capital for an investment property is getting a HELOC on their primary residence. Most major banks will go to 85% loan-to-value with a HELOC, so most people who’ve owned a few years have a lot of equity. They can get a HELOC, which is a great instrument for buying property that’s just sitting there, waiting for you, so that you have some cash on your own, you can write a check for a property, then you cash-out refinance it with an investment property loan and you can pay down the HELOC back.

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

Richard Schulman: As far as charity, or anything?

Joe Fairless: Yeah, just in general.

Richard Schulman: Like I mentioned before, we have a lot of properties with inherited tenants, and we really never — as long as tenants are respectful and they’re polite and they pay their rent on time, we try to do our best to keep them. We have several tenants who are below market and well below market, and we try to keep them in there, because we know that in Los Angeles especially, there’s not a lot of other options for them… So my partner Adam and I improvise; we would never feel comfortable if we dislocated someone, knowing that there’s not really another great option for them. So that’s non-negotiable for us.

Now, we also have people like that who are rude, or pay their rent late, or they damage the property or they don’t take care of it – that’s a different story, but… I’ve got the thank you cards from my tenants, I’ve got Christmas cards from my tenants, at least two that I can think of… Which I didn’t know happens.

Joe Fairless: What’s the best ever way the Best Ever listeners can get in touch with you?

Richard Schulman: My e-mail is SchulmanRD@gmail.com. My website is RichardSchulman.com, and there’s a contact page. My phone is 310-482-0173.

Joe Fairless: You told us how to make at least 9% cash-on-cash return buying properties in a very hot market, in and around Los Angeles, and that can be applied to other places. You get a line of credit to acquire and you do the updates, then you do a cash-out refinance, you make sure that the deal cash-flows at least 9% return, and you gave that specific example in Inglewood on the 600k acquisition.

I guess I didn’t ask you what rents are going for… I just assumed you’re at least making the 9% on that deal, is that correct?

Richard Schulman: Oh, on that one I think we’re like at 17%. It was crazy. We’re at $1,150 each on the back units, and those are probably worth $1,300, but those tenants were there and they pay the rent on time and they’re very nice. They’ve never had a maintenance call in three months, which is pretty good. I’ve actually never been inside those two units, to tell you the truth. Like I said, we have a very short due diligence period.
And the fronts – $2,400, $2,450. So we’re getting $4,400 in rent, something like that, on a  600k purchase, 30% down loan, basically. So I think we’re like at 17% cash-on-cash, including all of our expenses, plus with amortizing… Yeah.

Joe Fairless: Thank you for sharing that case study, your overall approach, how you’re growing your business, and everything in between. I hope you have a best ever day, Richard, and we’ll talk to you soon.

Richard Schulman: Thanks, Joe. I really appreciate it.

Best Real Estate Investing Advice Ever Show Podcast

JF1187: Using An Algorithm To Help Diversify Your Passive Real Estate Portfolio with AdaPia D’Errico

Listen to the Episode Below (23:47)
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AlphaFlow has a new way of doing things vs. your typical crowd funding platform. If you’ve been involved in crowdfunding before, you can relate with having to try to log in and invest in the newest or best loans before other investors beat you to it. AlphaFlow has an algorithm that automatically balances your portfolio for you. Not to worry though, their team of experts are the ones choosing all the loans personally, the algorithm just assists in building a balanced portfolio for every investor. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

 

AdaPia D’Ericco Real Estate Background:

– ‎COO of AlphaFlow

– Previously the Chief Marketing Officer at Patch of Land, one of the first debt-focused real estate crowdfunding platforms and co-founded two businesses with women partners

– She is a real estate investor and is currently doing a complete renovation of her home

-Currently writing a book on Real Wealth Real Health

– Based in Los Angeles, California

– Say hi to her at http://adapiaderrico.com/

– Best Ever Book: Richard Branson

 


Made Possible Because of Our Best Ever Sponsors:

Fund That Flip provides short-term fix and flip loans to experienced investors. If you’re looking for a reliable funding partner, their online platform makes the entire process super easy, and they can get you funded in as few as 7 days.

They’ve also partnered with best-selling author, J Scott to provide Bestever listeners a free chapter from his new book on negotiating real estate. If you’d like to improve your bestever negotiating skills, visit www.fundthatflip.com/bestever to download your free negotiating guide today.


TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluff. We’ve spoken to a whole lot of best ever guests, from Robert Kiyosaki (the author of Rich Dad, Poor Dad), Barbara Corcoran (Shark Tank), and a bunch of others.

With us today, AdaPia d’Errico. How are you doing, AdaPia?

AdaPia d’Errico: I’m very well, thank you, Joe. How are you?

Joe Fairless: I’m doing very well, and nice to have you back on the show. A little bit about AdaPia – she is now the COO of AlphaFlow, and she’s gonna tell us all about what she’s got going on. Previously, she was the CMO at Patch of Land, and she is also a real estate investor and she’s currently doing a complete renovation of her home, as an aside. She’s based in Los Angeles, California. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

AdaPia d’Errico: Yeah, absolutely, and thanks for having me back. It’s really exciting to be back on the show and to have watched the growth of the show over the past couple of years. For everybody, my very first episode was — I don’t even know what number it was, but it was the first episode when we were talking about real estate crowdfunding, because that’s really been my background for the past four years – in the alternative investment space, but specifically real estate, with Patch of Land.

That was a lot of fun, incredible growth in that industry, as everybody knows; the ability for people to access real estate online has just grown exponentially, it’s in the tens of billions of dollars today.

So what’s been going on there and where my career has kind of taken me is I spend a lot of time with Patch of Land, and I’ve now moved on to more of the investor side of the equation, working with AlphaFlow. What I mean by that is that crowdfunding companies like Patch of Land or others that have been on the show – they tend to be originators, where they’re originating the loans, and then they’re also raising investor capital through the crowdfunding mechanisms, whereas AlphaFlow is actually way more on the fintech side. We’re an investment management firm.

What has been happening in this space a lot is a lot of institutional investors, a lot of Wall-Street, a lot of really smart money that’s used to trading in stocks and bonds and private equity and such has really kind of woken up to the asset class of real estate and realized that what some of these companies like Patch of Land have built make it easier also for them to invest in real estate… So that’s also been fueling the boom.

AlphaFlow is a company that is a little bit of both. As an investment manager, we’re actually managing people’s money, the same way that you would go to a fund manager to manage mutual funds. What we actually do is we invest in short-term real estate loans, hard money loans, but we do it as fund managers instead of like a crowdfunding platform where you go pick an individual loan because — and this is even true of me… Like, if I’m investing in an equity deal, I’ll do a lot of due diligence, I’ll talk to really expert people and really dig into an equity project. Generally, on a hard money loan there’s not as much of that digging to do, especially if you’re buying from a trusted source, but it’s still really time-consuming, especially if you’re trying to do it through all of the couple dozen of online sites.

What AlphaFlow does is we basically do all that for you – we build you a portfolio of hard money loans, and we manage that portfolio for you. You basically make an investment and you’re done. You don’t have to do anything again, other than just collect your monthly interest payment. It’s what we like to call truly passive real estate investing. It’s almost like investing in a mutual fund, but we build one for you out of real estate loans.

Joe Fairless: Basically, instead of investing in a specific loan, like you would on a crowdfunding platform, you’re investing in a portfolio of different loans that are selected by AlphaFlow based on AlphaFlow’s algorithm.

AdaPia d’Errico: Yeah, so we do upfront underwriting with portfolio managers, and we build out some pretty impressive analytics to help us make better decisions on the loan-buying side, and then we have an algorithm on the back-side which really does this rebalancing. It doesn’t select loans, because still in real estate – and this is a personal opinion right here – I would not want a computer picking my real estate loans… But I don’t mind an algorithm rebalancing my money so that I have as much diversification as possible, because really, a general principle of investing is diversification, but to get the kind of diversification that really makes sense in hard money lending, you need hundreds of loans to really achieve the kind of diversification that could mitigate risk.

We do that, and that’s really kind of like our special sauce – what we do is using an algorithm on the back-end we’re diversifying your portfolio so that with a $10,000 investment you actually get anywhere between 85 to 100 pieces of notes in your portfolio.

Joe Fairless: 85 to 100 in different loans that you have a part investment in on just a $10,000 investment?

AdaPia d’Errico: Yeah, so it’s kind of like an ETF or a mutual fund, where you put your money in and it really gets spread out so that — let’s say it’s a mutual fund; if any one stock goes down, you have all these other stocks that are moving around, so it kind of balances out.

So it’s similar in its mechanics on the back-end. On the front-end though, it’s portfolio managers, really experienced people. Our lead portfolio manager helps build out lending homes operations, so we have some really experienced people here on the team that are doing the loan selection, and then we have this algorithm on the back-end that does this rebalancing.

Joe Fairless: Okay, got it. So people are selecting the loans, and an algorithm is balancing it for each person’s investment?

AdaPia d’Errico: Exactly.

Joe Fairless: Got it, okay. The returns, historical, net to investor — let’s just use easy math, that $10,000 investment… What’s historically been returned?

AdaPia d’Errico: We’re returning around 9% right now, and that’s after our fee, which is 1%. So we’re different from a hedge fund that takes a 2% and 20%, like 2% upfront fee and then a 20% carry for the year… We take a 1% AUM fee for the portfolio management, which we feel really better aligns our interest with those of investors. So that’s really how the model works. So we’re turning around 9% to investors right now after fees.

Joe Fairless: So I imagine you’ve got a couple areas of need. One is product, and the other is customer, so product being more loans, and the customers obviously being investors who invest through AlphaFlow.

AdaPia d’Errico: Yeah, exactly. So we work with accredited investors. We are operating with a 506(c), and we work with lenders for the loan purchases, because we don’t write our own loans. What we do is we’re selecting partner lenders from across the country to help with that diversification, so that for example we’re not just buying loans in California; we want real diversification by working with expert lenders in different parts of the country who really know their markets, and buying loans from them.

Joe Fairless: And since it’s 506(c), you can take out an ad in the New York Times or on my podcast or wherever, and just talk to as many strangers as possible about it, right?

AdaPia d’Errico: Exactly. The benefit of 506(c) is that we can do general solicitation and advertising. The challenge of a 506(c) if you wanna call it that, we can only take money from accredited investors and they have to pass a verification accreditation. This is a rule from the SEC… Whereas more traditional private placements are 506(b), which doesn’t allow you to advertise, but it does allow you to take up to 35 non-accredited investors per investment, and those investors don’t have to prove anything with documents, like they do in 506(c).

Joe Fairless: Yeah, you’ve gotta have a third-party verify it, whether it’s their accountant, attorney, or a company that you hire to work with them on submitting the documentation. What’s your focus as COO?

AdaPia d’Errico: My focus is on really growing the investor side. I had some really good advice coming into this role as COO, because it’s like “What is a chief operating officer?” and one really good advice was “It’s whatever you and the CEO decide.” So in a way, the really big piece of what we need to do is continue to grow our assets under management. So my focus really is on spreading the word, building the brand and building our investor client base; that’s really what I’m focused on right now, and I’m really excited about the way AlphaFlow is going about this… Especially coming from the background that I come from, it’s just such a different, sophisticated, but also extremely professional approach to this side of real estate investing, and I think it’s fantastic that more companies are coming into this space, to give even more credibility to the underlying asset class. So to these borrowers that are still working with the lenders and they are rebuilding homes, they’re doing the flips, they’re doing the stabilization… You know that a lot of people now are value-add and then holding to rent; I’m sure you’ve seen lots of statistics and reports coming out on the falling home ownerships rates, so there’s still a lot of opportunity in the single-family bridge loan space, which is really what we invest in, and we’re still seeing a lot of that, which is why we’re still really bullish on this space.

Joe Fairless: Growing the investor side is your focus… How long have you been working on AlphaFlow?

AdaPia d’Errico: I’ve been working here since May.

Joe Fairless: Okay, you’re just getting your feet wet; it’s been a few months, and that’s really it, so you might not have an answer to this, and if not, just let me know – what’s been the most effective tactic for growing the investor side that you’ve implemented so far?

AdaPia d’Errico: The most effective tactic — well, in the beginning it was really outreach to my network, letting everybody know where I landed, why I was excited about this, reaching out to people who are familiar with the real estate crowdfunding space, so starting from — if we wanna look at it as concentric circles, starting from the circle closest around me, and building up some awareness from there… So that’s been really effective, because we’ve been able to bring a lot of attention and a lot of people who come over and they say “Wow, you mean I don’t have to pick my loans anymore from other platforms? I don’t have to wait for the e-mail to come out and rush to the site and see if I can get a good loan? You do all of that for me?” “Yeah, we do all that for you”, so it’s been really fun to sort of explain that.

And now, what we’re doing is we’re really embarking on more of a brand-building mission, which is why we’re speaking too, because this is still a young industry, and we’re a new company, so we have to build trust, and that takes some time, and it takes a lot of work. And here’s something for those — some people might be familiar with registered investment advisors and what it means to be a registered investment advisor… So AlphaFlow is a registered investment advisor, so we’re regulated. So here’s a challenge, which may be something that some people are familiar with – when you’re regulated, there’s a lot of things you can’t do on the marketing side. There’s all these rules and laws about especially misrepresentation and fiduciary duty, and we’re the only company in this space really that did get registered as an IRA, which means that we have a fiduciary duty to our investors, to our clients, and it means that we’re regulated… So there’s some things that we cannot do, that other non-regulated companies can, so it makes it a little more difficult.

For example, we can’t send out a testimonial. So if somebody loves us, they might go on Twitter and they might tweet about it and say “Oh, I love AlphaFlow.” We can’t give them any social love back, which as you know, there’s unspoken rules about social love, and we can’t do that. So we have to write to them privately and say “Hey, thank you so much. We love that you love us”, I just can’t express that publicly. I can’t even like it, I can’t forward it, I can’t retweet it, I can’t share it… So it’s a little bit hard to build social proof, which as you know, is so important to building trust.

For example, that’s been a really big challenge, so any fund managers that are thinking about going into the regulated space, that is a very real challenge, especially if you’re like me and you’re very social and you’re very active on social media. So that’s been a little bit of a challenge. We’re trying to find ways where I can raise awareness without breaking any laws, really.

Joe Fairless: Yeah, that’s tricky, especially given your position and what you’re responsible for doing.

AdaPia d’Errico: Yeah.

Joe Fairless: The number one tactic, as you mentioned, is just letting your network know about it… What do you plan on doing? And the reason why I’m asking is for every Best Ever listener who has the same target audience of accredited investors, they wanna know what someone who has expertise in marketing and a successful track record – what are you thinking? How do you reach them? So what do you plan on doing, other than telling everyone in your network about it?

AdaPia d’Errico: Yeah, absolutely. Luckily, I can still advertise; the flipside to that is that it costs money to advertise. So it’s a balancing act between getting really hyper-focused on very strong messaging to go out with advertising, so that’s one thing, because you can advertise. Doing a lot of outreach to influencers – influencers like you… There’s a lot of people who have sort of taken up the baton of becoming spokespeople for an industry. A lot of financial bloggers as well, who play a very important role. Real estate bloggers, financial bloggers who play a really big role in helping to cut through some of the information for their readers, because they’re really trying to promote strategies for wealth building, which I think is really important to focus on in general… Like, how does real estate fit into your portfolio? And not just real estate for the sake of real estate.

If somebody comes to us and says, “Here’s my nest egg. I wanna invest 30% of it with you”, we would really say “That’s probably not a good idea.” We would not do that. This is not prudent.

And that’s one of the benefits of the [unintelligible [00:16:28].24] we can take a holistic view, let’s say, of a client’s portfolio, and let them know “This may not be the best thing for you.”

Aside from that, it’s really reaching influencers, and for those who don’t have limitations like we do on being regulated, I would say use social proof as much as possible. Really build that community around yourself. I can’t tell you – and you know – the relationship building, that quality over quantity will always win out. The reason that I could go out to my network first and foremost is because I’ve built one; it’s your number one… And I may be repeating myself from the episode that we did before, but for those who know the 1,000 true fan model – it really is relevant today as it ever has been for anyone in any industry. Do what you can for your truest, closest fans, and think about them first, and then they will become the army that goes and speaks about you to people that they know, and then you hit an outer circle, and then it just keeps going, like throwing a  rock into a pond and it ripples out, you have this ripple effect. They’re the rock. And you have to give your first inner circle something to talk about, which applies very much to customer service.

There’s no better marketing tactic than a happy, satisfied client. So if you’re always focused on that, you can’t go wrong. Now, if you’re pushed to grow at scale, that’s a little different. That’s when you really have to think about advertising, and you have to think about brand building and the customer journey; you have to think about more technical marketing tactics and strategies. So for those who don’t have big budgets or who are not pushed to scale let’s say by VC capital, then focus on giving your customers the best experience possible, and knowing that especially in real estate trust is so important. We still answer questions about people who — we know there are bad apples, and I say it’s very true, but there are more good apples than bad.

I just think it’s really important for a lot of people to know that yes, there could be some bad apples, absolutely; there are bad apples in every industry. I’ve been a victim of fraud. That doesn’t mean that I stop and I give up, and I don’t paint everybody with the same brush. There’s so many people doing great work in real estate, and just keep pushing that out there, I would say. Just keep being really good to your customers, and it’ll come back.

Joe Fairless: Yeah, I know from my advertising agency days that word of mouth referrals are the number one influencer of purchase intent, and as long as you’re saying “Have happy, satisfied clients”, then you’re gonna do well in the long run; as you mentioned, the tricky part is if you have to grow quickly to scale, then you’re gonna have to do some other stuff, and I’m glad you talked about the influencer marketing and that outreach.

So let’s do the lightning round… We’re got some fun questions for you. Are you ready for the Best Ever Lightning Round?

AdaPia d’Errico: You bet!

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

Break: [[00:19:43].09] to [[00:20:46].12]

Joe Fairless: Alright, best ever book you’ve read?

AdaPia d’Errico: Oh my gosh, Richard Branson’s first autobiography.

Joe Fairless: Okay, that would be a fun read, I imagine… I’m gonna have to check that out. What’s a mistake you’ve made in business?

AdaPia d’Errico: Trusting the wrong people at the expense of my instinct. I knew it was the wrong thing to do, but I rationalized it away. So not trusting my instincts.

Joe Fairless: Is it as clear-cut moving forward that “Hey, I’m just gonna always trust my instincts” or is there a particular question that you ask yourself, now that you’ve gone through that experience?

AdaPia d’Errico: I will pay more attention to it, and then rather than rationalize it away, I’ll go back and either bounce it off of people, because that was the second part of the mistake – trying to make the decision all by myself – so I’ll go speak to somebody, mentors or trusted advisors, and then I’ll write out pros and cons; I’ll spend a little more time with it, but I will at least — if I have that pain, that twinge, I’ll say “Okay, something’s going on here. Let me explore it”, as opposed to just ignoring it.

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

AdaPia d’Errico: Mentoring, coaching… I love it. I really learned how much I love coaching and mentoring others, in their business or even in their personal life, to help them empower them to be their best, truly. I think that’s my calling, and I love it.

Joe Fairless: How can the Best Ever listeners get in touch with you or learn more about AlphaFlow?

AdaPia d’Errico: AlphaFlow is AlphaFlow.com, pretty easy to find. I’m on that website, I’m all over social, I’m AdaPia d’Errico. I have my own website, but if you google my name, I pretty much come up. All my handles are AdaPia, and I’m pretty active on social, so they can definitely find me there. LinkedIn is a great place to find me, as well.

Joe Fairless: Outstanding. Well, AdaPia, thank you for being on the show again. Thanks for talking about your new venture as a COO with AlphaFlow, the business model of AlphaFlow, the way that it is structured, both from an investor standpoint but also from an infrastructure standpoint, and your focus on building the network and growing the investor side, and how you’re doing that by relationship building, quality over quantity, and doing strategic outreach to particular influencers within the financial and the real estate.

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

AdaPia d’Errico: You too, thank you!

Best Real Estate Investing Advice Ever Show Podcast

JF1185: Trading Long Term Tenants For Short Term Guests Through Airbnb with Sue Hoyuela

Listen to the Episode Below (27:56)
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Sue has created a system for landlords to be able to easily switch from having tenants to having Airbnb guests. Many investors are having great success by renting with Airbnb, often times seeing 2-3 times the income they normally see by being a traditional landlord. Sue will break down her system for us and explain how anyone could switch to an Airbnb model, regardless of location. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

 

Sue Hoyuela Background:

  • Creator of the Airbnb Success Formula
  • Teaches how to trade long-term tenants for short-term guests, eliminate evictions and double rental income
  • Author, Speaker, and Real Estate Agent
  • Based in Los Angeles, California
  • Say hi to her at  www.airbnbvacationrentalbusiness.com
  • Best Ever Book: Financial Peace

 


Made Possible Because of Our Best Ever Sponsors:

Fund That Flip provides short-term fix and flip loans to experienced investors. If you’re looking for a reliable funding partner, their online platform makes the entire process super easy, and they can get you funded in as few as 7 days.

They’ve also partnered with best-selling author, J Scott to provide Bestever listeners a free chapter from his new book on negotiating real estate. If you’d like to improve your bestever negotiating skills, visit www.fundthatflip.com/bestever to download your free negotiating guide today.


TRANSCRIPTION

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

With us today, Sue Hoyuela. How are you doing, Sue?

Sue Hoyuela: Great! Thanks, Joe, for having me on today.

Joe Fairless: My pleasure, nice to have you on the show. We’re gonna be doing a bit of a change of pace with today’s episode. We’re going to be talking about Airbnb and how you’ve had success with Airbnb.

A little bit about Sue – she is the creator of the Airbnb Success Formula. She teaches how to trade long-term tenants for short-term guests and eliminate evictions and double the rental revenue. She is based in Los Angeles, California, and you can say hi to her at her website, which is in the show notes page.

With that being said, Sue, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Sue Hoyuela: Sure. Well, let’s see… I started doing Airbnb back in 2011. It was an exercise in trying to find a way to make an extra $100 to pay towards my debt, and since then I’ve used this amazing website to create financial freedom for my family. My passion is to share my success with the world, so I’ve created a system for Airbnb and breaking down short-term rentals into four phases and seven modules to systematize and automate an Airbnb business, so that real estate investors can really maximize their income and dial it in so they can outsource and even generate increased passive rental income from their current properties, or if they wanna build a business to invest in short-term rentals.

Joe Fairless: I’ve recently met with a local investor, and everytime I speak to someone who’s doing Airbnb, it’s like the cat that ate the canary; they almost feel guilty that they’re making so much money from these short-term rentals. They’re like “I can’t believe I’m buying…” — in this case, he bought a $20,000 house near downtown Cincinnati… It’s in Kentucky, but for anyone familiar with Cincinnati, it’s right next to Kentucky. So he bought it really close to downtown Cincinnati, he’s just doing Airbnb and he’s basically paying off the place in 6-8 months, and then it’s just straight cashflow.

I’ve interviewed a handful of people about this, and clearly there’s a lot of money to be made. Let’s approach it this way – maybe give a specific example with numbers of a property that you have, and comparing it for long-term versus short-term, and then maybe we can go into the phases and the modules just from an overview standpoint.

Sue Hoyuela: Okay, sure, I’d love to. Well, here’s an example – a friend of mine, Joelle, he had a two-bedroom two-bath house in Rosemead, California, and he was renting it to long-term tenants for $1,200/month. They were great tenants, paying on time, until one day they just stopped. He went through the eviction process, and then when the sheriff escorted them out, they didn’t go willingly, so they trashed the place.

As he was repairing everything, fixing it up and thinking “Hm, do I really wanna rent this to long-term tenants again?”, he approached me and he says “Hey, do you think this vacation rental thing will work?” Rosemead is not really the hotspot in L.A. for people on vacation, but that’s also the power of Airbnb – it kind of blows out that location-location-location thing, so you have a much wider radius.

So we fixed it up for an Airbnb and furnished it, and as soon as we posted it on Airbnb, we started getting bookings. We couldn’t believe people would flock to Rosemead, California, but his first month he made $3,600, so he tripled his rental income.

I call it the power of renting by the night, because for example, when I rented a room in my house, I could get $500/month for it, and that’s about $16/night. But when you rent it by the night to short-term vacationing guests for just, let’s say, $50/night, now you’re making $1,500 on that same room. So it’s about a 3-to-1 ratio; when you rent short-term you triple your rental income, which is what most people are finding.

Joe Fairless: You said that your friend Joelle fixed up the property for Airbnb and furnished it; can you elaborate on what “fixed it up for Airbnb and furnished it” means?

Sue Hoyuela: Fixing it up is an exercise in identifying who your ideal guest is going to be. You have to ask yourself “Who’s gonna wanna stay here?” Then once you are kind of in their shoes, then you’ll know exactly which amenities to add.

He and his white had a favorite bed and breakfast that they liked to stay in when they went to Big Bear up in the mountains, and they had had a wonderful time there, so they decided to kind of use the same things in this house as far like the type of bedding, the style, the colors… They put some postcards in a little box beside the bed for their guests, a little welcome bottle of wine when they checked in…

It cost them I would say on average about $1,000 per room to fix it up, because you do need to furnish the place… So I found that it averages out to about $1,000 per room, depending on the size of the house, to get it set up. Then you can do the math to figure out when you triple your rental income how quickly that’s gonna pay back, and then you’ll be in profit quite quickly.

Joe Fairless: We talked about tripling the rental income, and I imagine there are also more expenses on the Airbnb — you clearly get this question a lot… So there’s more expenses on the turnover than there would be if you have someone who’s living in the house for four years, because what I’ve noticed is that that’s where you get burned a lot, it’s when people move out, because you’ve gotta fix it up. So you have a 3-to-1 ratio for income increases… What’s the ratio for expense increases?

Sue Hoyuela: Well, you know, that’s what’s kind of mind-blowing. Yes, the landlord does need to put the utilities in their name when they’re gonna do it as a short-term rental, but you don’t have guests in there 30 days out of the month; there’s a lot of turnover. So you’re not really increasing your utility expenses that much. I would say maybe 6%. But one of the cool things too is that you can charge a cleaning fee and it’s separate from the nightly rate, so whatever the cleaning fee is that your maid or your cleaning service charges, you can collect that from the guests, so that expense becomes awash. So the increased costs aren’t really that high.

Also, if there is something that needs to be repaired, you know about it right away, so things don’t become big problems.

Joelle had another property that he was renting to long-term tenants and even had a property management company that was contracted to check it every six months, but after the tenants moved out after three years, there was a three-foot square hole in the ceiling that had been caused by a steady leak over the years that no one had told him about. Those types of things can’t happen in a vacation rental, so they don’t become big expenses.

Joe Fairless: Yeah, that’s a huge thing for tax purposes too, because if you repair something, then you can deduct it, but if you improve it, so if you replace it and put something new, then it’s not a deduction, at least from my interpretation of taxes based on what I can remember.

The management fee though, that’s gotta be higher.

Sue Hoyuela: Well, that’s interesting, too. There’s a lot of ways to go about managing it. One of the things that I’ve done in my course, the Airbnb Success Formula is create a system and use automation so that someone can actually manage it themselves in about two hours per week, but there’s other ways to outsource that as well. Airbnb provides something called a co-host, where you can assign someone to assist you with the daily management of the business, and you can set whatever percentage you want with that person you assign as your co-host. So it could be 1%, 2%, 20%, whatever you feel is fair.

Joe Fairless: What’s the industry standard?

Sue Hoyuela: I haven’t really found a standard in that sense. There’s also a lot of services out there now that are offering to manage it. There’s a website called Guesty, that puts the power in your hands if you wanna use more than just Airbnb, and kind of aggregate everything in one spot. They take between one and two percent.

There’s another service out there called Turnkey Vacation Rentals (TurnkeyVR). I believe they charge between 15% and 20%. Nowadays there’s just so many other places around; you can just look in your local Craigslist and find a vacation rental management service. They differ from property management; there are a few different nuances that go into vacation rentals, but if  there’s a property management company set up to manage that, that’s very easy to just plug into their services and outsource that.

Joe Fairless: What’s the process for automating this system so that you spend two hours a week bringing in guests into your property?

Sue Hoyuela: Oh, awesome. Well, first of all, Airbnb has an app. By downloading that onto your cell phone, you basically have a business in your pocket. Then I’ve created standard response templates to the most commonly asked questions, so that it’s a matter of copying and pasting a response; that takes less than 30 seconds. The rest is just staying on top of my team, basically the cleaning, and making sure that they’re covering it and reporting back to me when the work is done. So I’m basically checking my phone from time to time from the beach, Cancun, wherever I’m at, and basically running the business from my cell phone in my pocket.

So I look at it like “Wow, I’m only working two hours a week. This is work, chain me to the wall.” [laughs]

Joe Fairless: So there’s the cleaning crew… And do you have anyone else from the management standpoint, or a logistical standpoint, that is on your team?

Sue Hoyuela: I have a property caretaker. One of my strategies is to have my properties within a five-mile radius, so that one person can easily access them. They’re my boots on the ground person that I can go to in case there’s something that needs to be taken care of. And they can pretty much just go out and handle changing a lightbulb, or unclogging a toilet, all that fun stuff. But a lot of times if you’re smart in hiring, your cleaning crew can also handle those services, so you can pretty much boil it down to just a cleaning team, if you like.

Joe Fairless: How much should we allocate for cleaning and for the property caretaker?

Sue Hoyuela: Well, the cleaning is awash…

Joe Fairless: Right, as you’re charging back to the person who’s renting.

Sue Hoyuela: Right. And you can also create a little cashflow from that, to have multiple streams of income.

Joe Fairless: Yeah, well how much do you pay, and what do you charge for cleaning?

Sue Hoyuela: It really depends on the size of the house and how long it’s going to take. I have individual rooms that I rent, so the cleaning people have to clean one bedroom and one bathroom, and I pay $20 for that. I also have whole house rentals; some are five bedrooms, three-bath, 3,000 square foot houses, so for those we pay $200… So it’s a combination of how long it’s going to take and how many people we’re going to need, always with the emphasis on being able to change over the house the same day, so that you don’t miss out on revenue, you don’t have to block a day to get it cleaned because it’s too big.

Joe Fairless: Oh, okay, got it. So they’re gonna need to know — they’ll have access to your schedule, perhaps even have access to your app, so that they know exactly when people are coming and going?

Sue Hoyuela: Yes, exactly… And it’s just a matter of communication. We set up systems and apps, like you were saying, everything over the internet, and with the cell phones. That’s the key. It’s so wonderful living in this day and age, and it makes everything so easy.

Joe Fairless: How specifically do you communicate the move in, move out dates of these short-term renters to your cleaning crew?

Sue Hoyuela: We have a shared schedule… There’s a website called Cozi, and you can export the Airbnb schedule to it and give access to your cleaning crew so that they can see when the check ins and check outs are going to be, and then we’re able to communicate who’s gonna cover this one and assigning everybody and all that good stuff.

Joe Fairless: Do you have one cleaning crew, or do you have multiple cleaning crews?

Sue Hoyuela: I just have one cleaning crew. I’ve learned to keep things close, so they’re all within range, and I’m being able to maintain them.

Joe Fairless: And was that a hard lesson learned?

Sue Hoyuela: Yes, actually… [laughs]

Joe Fairless: What happened?

Sue Hoyuela: Oh, my goodness… Well, I have to raise my right hand and let everybody know that I bought swamp land in Florida… That’s right, I’m a cliché. I bought into this “Woo-hoo! You don’t have to be near the property, you can buy it sight unseen and make a lot of money with real estate” back in the early days. So we bought a property in Florida, and it had a few problems, and we didn’t even look at the property beforehand, we just had complete trust that the people who vetted it said it was fine. Boy, were those some good hard-learned lessons to never repeat again… [laughter]

Now, if I’m going to do a property, I’m going to see it myself, I’m going to make sure it’s within a distance that I can actually go and see it within reason, so… Yeah.

Joe Fairless: So the property itself wasn’t a good one… But as far as the cleaning crew goes, did you have an issue coordinating that, or just the purchase was bad?

Sue Hoyuela: We were managing it through a property management company who was handling the cleaning… And it was just kind of funny, they would nickel and dime us every month for this and that little expense that all of the wonderful profits you were supposed to be making from rentals were somehow going into the profit manager’s pocket instead. So it’s really nice if you can kind of oversee what people are doing and have them closer to you.

Joe Fairless: Yeah, and you did a Freudian slip, you call him a profit manager… [laughs]

Sue Hoyuela: Oh, did I?

Joe Fairless: That’s exactly what they’re doing… On the cleaning crew examples, you said it depends how much you pay them, depending on one bedroom, one bath, $20; 3,000 square feet, $200… Let’s just go with those two examples. $20 to clean up one bedroom, one bath. How much would you charge the person who’s staying there?

Sue Hoyuela: Well, there’s so many things involved in that… You’re looking at the demographics of the guest who’s coming to stay, because if they’re staying in a private room in a shared house, they’re usually a budget traveler and you don’t want the cleaning fee to be higher than what they’re paying per night. So on that one I would go as high as $25 for the cleaning fee. For the five-bedroom three-bath, which is like a mini-mansion, it’s very high end, people are paying $250-$300/night to stay there, so I’m able to charge more for the cleaning, and it’s not going to deter anybody from booking the place.

Joe Fairless: What would you charge? If you had to pay $200, what would you charge there?

Sue Hoyuela: About $250.

Joe Fairless: Okay.

Sue Hoyuela: You have to keep in mind, Airbnb does take 3% from every booking that they get for you, so that does factor in as well. So you don’t keep $250, you keep $250 minus 3%.

Joe Fairless: How many Airbnb rentals do you have, and where are they located, roughly?

Sue Hoyuela: Well, I’ve been using four different business models to get properties under contract… So I currently have 11 properties under contract, and most of them are within a ten-mile radius of where I am, basically in St. Gabriel Valley, which is on the East Side of Los Angeles County. I’m definitely not in the heart of Hollywood or Santa Monica where the tourists want to be, but I’m finding that I’m still able to make quite a good profit out here in the suburbs.

I also offer reservation management services for busy landlords that want to get in on the lucrative short-term rental game but don’t have the time or inclination to get involved with the management, so I’ll partner with them. Some of those properties are farther out – Coachella Valley, Anaheim and… Where else? Yeah, I’ve got them spread out. [laughs]

Joe Fairless: Yeah, they’re sprinkled all over California. What exactly do you mean you’ve got four different business models to get properties under contract and you have 11 under contract?

Sue Hoyuela: The first business model is the bed and breakfast model. Airbnb is one of the few booking engines that will allow you to rent less than a whole house, and this is where it’s really fun, because you can take one house and break it up into multiple profit centers by renting individual private rooms, and even spaces. So I’ve rented the couch in my living room. I’ve turned the closet under my staircase into the “Harry Potter cupboard under the stairs” room.

Joe Fairless: Oh, my…

Sue Hoyuela: I’ve rented a tent in my backyard… I’ve tested the limits of this, of how creative can you get with space.

Joe Fairless: How much did you charge for a tent in your backyard?

Sue Hoyuela: We were making $700/month for it.

Joe Fairless: And you said “were”, so are you not any longer?

Sue Hoyuela: Right, it’s a seasonal thing, because in California you probably don’t wanna be in a tent in the backyard in the winter time… We’re getting ready to put it back up though as we’re moving into summer.

Joe Fairless: Okay.

Sue Hoyuela: So that was what I call the bed and breakfast model. The concept is the sum of the parts is worth more than the whole, because when I’m renting spaces in my house, I can generate maybe $6,000 to $10,000 per month, just by finding different spaces people will rent… My laundry room, or who knows…? Anywhere  you can let somebody sleep. Give him a pillow and a blanket, and they’re set.

Then the whole house vacation rental model – of course, it’s the standard one, that most people are familiar with… So I’m renting a whole house.
The other two business models… I discovered that – this may blow people’s minds – timeshares are a fantastic investment. I pay $900/year in dues and I rent out my free week for $2,800. That’s like a 200%+ return on my investment, year after year.

Joe Fairless: You get paid to go on vacation.

Sue Hoyuela: Yeah! Timeshares are an amazing investment. I have a product called “Timeshares Goldmine” to help people turn their timeshares into a goldmine, because so many people are frustrated with them and they don’t realize that they’re sitting on a fantastic cashflow that will make other investors jealous.

And then the last one that I also refer to is reservation management – helping other people who wanna get in on the lucrative short-term rental game make that triple-the-rental-income. I refer to them as my “just send me a check” landlords. They don’t’ wanna be bothered, they just want the passive income, so we take care of the management for them and send them a check.

Joe Fairless: So when you said you have 11 properties under contract, does that mean that you have 11 properties that you own and you’re currently using the Airbnb model?

Sue Hoyuela: Well, one of the things that I got into early on was I realized that by purchasing properties I wasn’t going to be able to scale my business very quickly, because it takes a lot of capital… So I really focus on leverage. The only house I own is my own personal home – and the timeshares – and the rest I rent other people’s property, and that’s been a fantastic strategy.

For example, one property that we rented – we were the landlord’s best tenants, because it’s in our best interest and it’s our reputation on the line to maintain the property in pristine condition… And she loved us. We paid our rent early, it was no problem paying her the $2,500/month she wanted because we were cash-flowing $4,500/month. At the end though, she decided she wanted to sell the property, and she gave us a first pick at it. But we were able to say, “You know, we’ve seen a lot living in this property for the last three years, and it’s got some problems, the city’s coming down on it for unpermitted additions… No, thank you.” So we can give it back and move on to the next.

It’s a try-before-you-buy strategy also.

Joe Fairless: But when you say “under contract”, do you have it under a purchase and sale contract, or you are a renter and you’re renting it out via Airbnb, so you’re sub-leasing it and you’re just making the spread off the top?

Sue Hoyuela: Correct. That’s a very broad term, and I say that intentionally, because “under contract” could mean a purchase contract, or it could mean a lease contract, or it could be a sandwich lease, a master lease, it could be a timeshare deed that you own the property as a timeshare, or a reservation management contract… So the idea is to control the property. Once you have it under control, now you’re in business.

Joe Fairless: This is such an interesting business model… I’m really grateful that you’re on the show. Based on your experience, what is your best real estate investing advice ever for real estate investors?

Sue Hoyuela: Well, I just wanted to share with everybody especially the timeshares piece. A lot of people are suffering with the dues for something they’re not even using, and they’re not even realizing they’re sitting on a goldmine, so… To me, timeshares has been the biggest a-ha, and combined with renting it on Airbnb, that’s been an incredible revenue generator for me, so I just wanted to share that with your Best Ever listeners.

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

Sue Hoyuela: Okay…

Joe Fairless: [laughs] Deep breaths, and she’s ready. First though, a quick word from our best ever partners.

Break: [[00:23:24].06] to [[00:23:23].19]

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

Sue Hoyuela: Financial Peace, by Dave Ramsey. His seven baby steps changed my life.

Joe Fairless: Best ever transaction or deal that you’ve done, from a short-term rental standpoint?

Sue Hoyuela: I bought a timeshare for a dollar and made $1,200 a year off of it.

Joe Fairless: What’s a mistake you’ve made on one of these transactions?

Sue Hoyuela: Buying swamp land in Florida. [laughter] Not doing my due diligence, yeah.

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

Sue Hoyuela: Well, I would love to give back to the Best Ever listeners; a lot of people who start doing Airbnb, they wanna know if it’s gonna work on their property, and I have a proforma analysis system that I wanted to give everybody. They can simply go to AirbnbVacationRentalBusiness.com and download it for free.

Joe Fairless: Great, that’s the link the show notes page, Best Ever listeners. In addition to that, what’s the best way the Best Ever listeners can get in touch with you? Or is that it…?

Sue Hoyuela: They can get in touch with me at my e-mail address also. It’s Sue@VacationRentalsInLA.net.

Joe Fairless: Excellent. Sue, thank you for being on the show. Thanks for educating us – or at least me – on the intricacies of vacation rentals, how you make money, the things to look out for, how to make a profit on certain expenses, like the cleaning expense… One thing I think I asked but I don’t remember if we got an answer for, and it’s my bad if we didn’t – property caretaker, how much should we allocate for that person, from an expense standpoint?

Sue Hoyuela: Well, can I kind of blow your mind for a second? [laughs]

Joe Fairless: Yeah, sure.

Sue Hoyuela: One of the things that we’ve set up with our property caretakers is that if they live in our properties, we will either give them a reduced rent or free rent in exchange for their services, so it really doesn’t come out as a cost, but it could actually be an income producer if you charge them a reduced rent… But it’s really up to you to work out whatever works best for each other. We’re always looking for a win/win situation.

Joe Fairless: I think the theme here is how resourceful and just crafty – and crafty in a good way – you’ve become at getting the most out of this process, with the four different business models that you have, how you’re in some cases renting a home from someone, and sub-leasing that out (I assume it’s all disclosed on the frontend) and then making a spread. I have friends in New York City who are doing that in West Village and they were making a killing. And I don’t know if they were properly disclosing what they were doing, but they’d make like four, five, six thousand dollars a month just out of a West Village apartment… So it’s a fascinating business.

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

Sue Hoyuela: My pleasure. Thanks for having me. Have a great day!

Best Real Estate Investing Advice Ever Show Podcast

JF1167: How To Beat Competitors In Any Market #SkillSetSunday With John Crestani

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If you’re a real estate agent and looking for home sellers, John has some tips for you today. His tips are applicable across many areas of business, and can help you get noticed online. These are definitely aggressive tips, not for everyone, but they are proven to work.

 

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John Crestani Background:

  • Self made millionaire, at 29 has unlocked the secret to unshackling yourself from the drone work of a 9-5 job
  • Used Ferriss’s tips to build an affiliate marketing network that generates $250,000 to $500,000 per month
  • Based in Los Angeles, California
  • Say hi to him at http://johncrestani.com/

 


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TRANSCRIPTION

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

I hope you’re having a wonderful Sunday. Because it’s Sunday, we’re doing a special segment called Skillset Sunday where you’re gonna come away with a specific skill at the end of our conversation. Today, we’re gonna be talking about tactics to reach people looking to sell their houses.

With us today to talk through that, John Crestani. How are you doing, John?

John Crestani: Hey, Joe. I’m doing awesome! Just out there in 112-degree weather in Phoenix, Arizona, and burning up, taking a little refuge in the hotel room.

Joe Fairless: Alright, well I’m glad that you’re in a hotel room, because we don’t want the microphone melting during the conversation. A little bit about John – he is the owner and CEO of a private affiliate marketing network, and it’s pronounced Nutryst? Is that correct?

John Crestani: Yeah, I actually sold Nutryst, because I’m really focused on creating my educational platform now. We’re doing virtual reality stuff.

Joe Fairless: Oh, sweet. Even cooler. You’re background though is that you’re a self-made millionaire, and you started following Tim Feriss’s tips… So how about you tell the Best Ever listeners a little bit more about your background and then we’ll roll into the tactics for how to reach people to sell their houses?

John Crestani: Sure. A little bit about my background – I started as an entrepreneur in college; I was basically selling study guides to students, and I was trying to reach more students. I wanted to sell these little PDF files to more students, because the markup was pretty good on a PDF file… So what I did was I started learning how to use the internet to reach people. Because I said “Hey, people are taking this class all over the United States. I can use the internet to reach more people faster, and really at the end of the day make more money for my family and myself.”

Long story short, I just focused on marketing, really learning that skill of direct-response marketing to reach lots of people, and I got really good at it in a nice called affiliate marketing. From there, it’s been a lot of traveling around the world, I recently had my first baby daughter, she’s six months old, and I just really love helping people and talking about entrepreneurship, because I think it’s sorely not talked about enough. The stuff you’re teaching your listeners – it’s great, because you’re teaching actionable skills to help people make money, which is what people wish they had in college. I think it’s awesome what you’re doing here.

Joe Fairless: I appreciate it, and congratulations as a new father, with your daughter. Before we get into the marketing aspect of things, I do wanna follow up with – you’re a self-made millionaire, so how did you make the bulk of your money? What specific product? And then if you could just do a couple sublets underneath that to give us a clear picture.

John Crestani: Sure. I’ll tell you exactly what I did. In college, I actually worked for a couple real estate companies. I could talk about that at a different point, but what I did was right out of college I started working for Glenn Beck, doing a lot of his advertising, and I got to know the market pretty well of kind of the middle American survivalist-type market, and I’ve always been a big proponent of networking with people.

So one day, I got kind of a reputation as an online advertising guru. I was at the Roosevelt Hotel in Hollywood, just kind of out there doing my thing, being a young kid, and I came across this guy… We just shook hands, we were having a drink at the bar, and he said “What do you do?” and I said “What do you do?” and he ran an investment company. The average deal in his company was around $100,000. It was actually $85,000, and he said “I would really like somebody to help do some online advertising for my business”, and he said “We’ll foot all the costs if you can just help us get more leads… But we need people that have a lot of money in their retirement accounts.”

I said “Okay, I’ll take a crack at it.” I told the guy “You’d have to pay me $10,000 minimum a month”, and he said “That’s fine.” He said “But what I’d really like to do is pay you a percentage of each deal.” So I said “Okay, whatever… As long as I’m getting my 10k/month.”

What happened was I ended up doing so well in getting leads for this gold investment company… They were looking for people to invest in gold. I started creating about somewhere in the range of around two million dollars worth of deals every month for them, from doing blogs – I put up blogs, and I put up ads for them.

My income went from — I was making around 10k-15k/month at the time, I was 23 years old, and I started making 60k+ dollars every single month, working with this gold company. It’s called affiliate marketing, where basically I was doing referrals.

That changed my life… Just rocketing up like that changed my life, and ever since then I’ve really gotten good at the art of knowing how, where and when to place ads, and to whom, so that I get the right buyers or the right leads for companies, and they’re willing to pay me large sums of money to do that for them.

Joe Fairless: Thank you for walking through that. So how, when, where and to whom were you placing the ads for the gold investment company? And you realize, when we talk about investing in gold, it sounds on the surface like a scam, at least to me… Maybe that’s my initial thought, like “Come invest in gold!” It just seems so scammy, but clearly it wasn’t a scam, so I guess elaborate on that, and then how, when, where and to whom.

John Crestani: Sure, I’ll let you tell me how much detail you want me to go into. Basically, gold investment is very popular with the conservative audience first of all, because the conservative audience doesn’t trust Wall Street fraudsters. That’s the whole thing – they don’t trust Wall Street. And it’s also popular with some minorities, surprisingly – Indians and Chinese. The Chinese want to invest in real estate, but different minorities don’t trust their money in the stock market. But I didn’t even get into all of that.

Where I target my advertising was literally — there were some very large companies in the gold investment industry, and all I did (it was very simple) was I targeted keywords of their competitors: Goldline, Lear Capital, Rosland Capital. These are really niche companies, but they do tens or hundreds of millions of dollars in transactions per year. So their niche – you may not have heard of them, but they’re large. They do advertising on TV, they do advertising on the radio, they do advertising in Forbes, so lots of people are searching for these large competitors, and it’s very targeted; it’s actually as targeted as you can possibly get.

So instead of creating my blog articles and targeting keywords that were around generic words, such as “gold investment” or “how to roll over my 401k into gold”, which were the typical terms, I said “Screw all that! I’m just gonna literally put up blog articles on these competitors, I’m gonna make it look like an unbiased review”, because nobody wants to be sold; everyone wants to buy, but nobody wants to be solved. So I put up an unbiased article – of course, I put the proper disclaimers and whatever you need in there, like “This is a sponsored post”, but it looked and felt like just a friendly blog. And what I said was “This is a review. I’m reviewing this company called Goldline or Rosland Capital”, and I would review the company and then I’d say “Their fees are too much”, I’d say “They don’t give you access to the gold”, I’d say “They have rip-off reports on them” or whatever… Whatever I could find. And then I’d say “This is the company you wanna go with”, and I’d recommend the company that I had my referral arrangement with.

After people read that review, which was a friendly review – again, it didn’t feel like an advertisement.,, Because the best advertising – you never know that it is an advertising. But after they read that blog article, they were sold on the company that I recommended, because I’d even tell them which sales agent to speak with. I’d say “Ask for Christian.” And it worked. It worked great, because it was natural.

Joe Fairless: How did you get traffic to those blog articles?

John Crestani: I did pay-per-click marketing and SEO. It was mainly pay-per-click.

Joe Fairless: Staying with this example, pay-per-click ads – how do we set ourselves up for success there?

John Crestani: How you set yourself up for success – the simplest thing is the most targeted you can get is targeting your competitors, because if somebody’s searching for “interested in buying real estate in Ohio, or in Houston”, if they type that in Google, they’ve really just started the research process. All you’re gonna do if you target somebody looking to buy real estate in Houston – generally you’re going to waste some money, because it’s very broad.

It depends on — should I cater this for people looking to buy real estate, or people looking to sell it?

Joe Fairless: How about people looking to sell it?

John Crestani: Okay, people looking to sell their house… So it would be the difference between somebody looking up “What are realtors in this Houston area” versus somebody who’s actually looking for background information on “Joe Fairless listings”, or looking up that realtor’s website in their area. Because if somebody’s gonna work with a realtor and whatnot to sell their house, they do a little background searching, because they wanna make sure… “I wanna see what other listings he’s got, I wanna see some information about him, I wanna see his website”, what have you. And all you have to do – this is gonna sound bad, but basically you say “That’s somebody who’s very far along in the buying process. That’s somebody who’s about to sell their real state.” They’ve already done their research, they’ve looked up the people, the brokers or the realtors that can help them sell, and they’re just trying to make sure they made the correct decision, and they’re ready at that point… And all you need to do is basically say “Don’t work with this person, work with this other person.” That’s all you need to do. It’s very simple.

Joe Fairless: With the ads, how would you approach it in your case? Let’s just use your example – you said the most targeted you can get is targeting your competition. So what would that look like?

John Crestani: If somebody searches for Joe Schmoe, who’s a realtor in Houston – let’s say he’s a realtor in the Woodlands, which is a high-income area outside of Houston – you literally target that area, and you say “Don’t work with Joe Schmoe, work with Joe Fairless.” That’s really easy, and you can do that with a blog article, or with you can even have a customer shoot a video about that. That video will rank. If somebody shoots a video and says “Don’t work with Joe Schmoe… I talked to a lot of realtors in the Woodlands area, and Joe Fairless is your man. He sold my house, and it was fantastic. He sold it in less than 30 days, he got 25% above what I wanted to sell it for”, and that will create

leads that will be unbelievably better than if you just put up ads on bus benches.

Joe Fairless: What are your thoughts on the ethics of doing that? I’m not saying it’s unethical, but it starts in my mind raising a red flag, where you’re bashing someone and instead replacing yourself…

John Crestani: It depends on how aggressive you wanna be. In my training programs and stuff, what people do — people come to me because they want to make money, so I always start with “I just want to kind of be upfront with you and show people what is the 100% guaranteed way to get high-quality leads and make money first.” Just so your listeners know, that works unbelievably well. If you do it, it will work. But in terms of if that’s too aggressive for some of your listeners, and they wanna make money, but they wanna kind of comb things down a bit, you can 100% tone it down; instead of saying “Don’t work with this person and work with me”, you could tone it down and you could say something along the lines of “These are the realtors…” – you could have it just be a review of the realtors in the Woodlands area. Say “I talked with Joe Schmoe, I talked with Bob Schmoe, I talked with Tony Schmoe, and they all seemed like nice people. They were all great people, and Joe Schmoe is a family man, and I loved his wife, BUT I would say you should work with Joe Fairless. They’re all great people, you’re gonna make a great decision either way, but I chose to work with Joe Fairless, because he had the best track record, he had the fastest selling, he got the most listings…” – and then you go into your benefits.

The point is it’s that you still need to create that dichotomy. It’s the most surefire way to do things. Now again, you could totally target just people searching for realtors in the Woodlands, Texas. You could totally do that. It’s just not gonna make you as much money. I’m not saying it doesn’t work, I’m just saying there’s a better chance you’ll lose money; you might not make as much money. It’s fine, it’s wherever you fall in terms of how much you really wanna make.

Joe Fairless: You’re going two levels deeper, when they’ve identified someone that they’ve heard about… And excuse my ignorance on this question, but with the targeting let’s say a particular company, how do you target the people who are searching for them?

John Crestani: Let’s say I’m doing a video review on YouTube; I’m just shooting a video with my mobile phone, and I just have a customer with me and I say “Hey, can you shoot a video?” or “I’m shooting a video myself”, I would literally just make sure that person’s name is in the video title. Sorry if I’m using this aggressive example again, but I’d say “Don’t work with Joe Schmoe realtor, work with Joe Fairless, Woodlands, Texas real estate.”
In Google, if you’re doing ads, you would just select your location, you’d say “the Woodlands, Texas”, and you just type that into Google, you’d say “I want my ads to show only in North County of Houston.” So you just target the little location or the zip code in Google, and then you just type in the word “Joe Schmoe.” That’s it.

Joe Fairless: Easy enough. With YouTube, it’s really about putting the keyword in the title of the video – is that the number one thing?

John Crestani: Exactly.

Joe Fairless: Got it. Thank you for getting very specific.

John Crestani: Yeah, no worries.

Joe Fairless: I imagine some Best Ever listeners won’t go to the extreme, but I’m glad that you did go to the extreme, so that you can hold our hand and walk us back to–

John Crestani: [laughs] I didn’t even go to the extreme–

Joe Fairless: Alright, what’s the most aggressive?

John Crestani: [laughs] I got more aggressive than that.

Joe Fairless: Yeah, what is it? What’s an example?

John Crestani: [laughs] Okay… The biggest word that people use — I’m all about emotional language, because I’m a marketer… I just call the company a scam. Yeah, see? You feel that! If you’re looking to work with — let’s say you’re thinking about investing… And by the way, I love Grant Cardone; he’s somebody I follow closely, but let’s say I owned a multifamily real estate investment trust and I wanted to sell against Grant Cardone. I’d just put up an ad that said “Grant Cardone scam”, because in the back of their mind, whenever you’re dealing with large sums of money, you’re worried that that person is a scam.

Joe Fairless: Have you done that against a competitor?

John Crestani: Yeah.

Joe Fairless: That would infuriate me if I was them.

John Crestani: Keep in mind this was when I was 23, and I was hungrier than a bulldog…

Joe Fairless: But still… It doesn’t matter how hungry you are. I mean…

John Crestani: I understand. It came back to bite me in the ass, don’t worry…

Joe Fairless: Good, I’m glad it did. I appreciate the transparency nonetheless.

John Crestani: No worries, no worries. We all make mistakes, [unintelligible [00:18:04].06]

Joe Fairless: Anything else as it relates to helping the Best Ever listeners with any tactics for people who are looking to sell their house that we haven’t talked about that you wanna mention?

John Crestani: Any other tactics for people looking, you said —

Joe Fairless: For any listener who’s looking to find people who are selling their houses. Any other tactics that you wanna mention that we haven’t discussed?

John Crestani: Yeah, there are other ways you could possibly go about things… Facebook ads, obviously. My guess, from my understanding of things, when people go through life transitions like divorce, having a child, sending a child away to college – those are big moments for people from what I recall (some of your listeners might be better schooled than me) that people are looking to sell their houses… Upgrade their house when they have a kid, downgrade their house when their kid goes to college etc, and there are ways to target those sorts of people on Facebook, especially people who are divorced… You can target the relationship status etc. Those are great candidates.

Now, I wanna tell your listeners and I wanna tell you, I’m a good person. [laughter] You asked for aggressive marketing…

Joe Fairless: Yeah, you brought it. I appreciate the transparency.

John Crestani: I just wanna make a side note – there’s boundaries to everything; do what you’re comfortable with, don’t let greed get the best of you. I’m gonna tell you another tactic. I worked for one of the top multifamily realtors in Los Angeles. I’m not gonna name his name here, but he got listings easier than anybody I knew. He found those people looking to buy a place, sell their apartment buildings easier than anybody.

I’m gonna tell the tactic, I’m not gonna name his name…

Joe Fairless: I’m perking up right now, because this is my business too, so I’m very interested in this.

John Crestani: Okay. Again, this tactic is gonna bring up ethical boundaries…

Joe Fairless: [laughs] By now I’ve expected that, so…

John Crestani: I apologize, I really am a good person, I just wanna make that clear; this is not what I did, this is what some other person did, okay?

Joe Fairless: Yeah, very clear. [laughs]

John Crestani: I was just his assistant for a semester in college, and he had me helping him do this. It’s slimy, but it works… It worked too well. I’ll go into it.

This guy – he was young (in his thirties), it was insane. I don’t know his exact numbers, but he was one of the top guys; he had a multi-multi-million-dollar penthouse in L.A., he had a private driver… He had the whole nine yards, and he got leads very easy. What he did — oh, god, I feel so slimy going into this. Okay guys, remember, disclaimer – I’m a good person, I didn’t do this. But what he did was in L.A. a lot of the people who own multifamily real estate — he particularly focused on multifamily in mid-city L.A. and downtown etc. A lot of the people were rich, old Jewish people, and they predominantly live in… Oh, and also Koreans – old Korean families. The Koreans have done extremely well as an immigrant group in America, and they own a lot of multifamily buildings. Not to be demographic here or whatever, but Asians really love real estate; that’s where they wanna put their money, as opposed to the stock market, in general; at least the older families do.

So he would get the newspaper from Beverly Hills and from Korea Town and he would look at the obituary section. And what we did was we would look at people who recently passed away in Beverly Hills and in Korea Town and other expensive zip codes… And it wasn’t ever a long list of people each week. It wasn’t insurmountable. Beverly Hills is a fairly small area, but what we would do is I would run them through some sort of — I think it was called LexisNexis…

Joe Fairless: Yup.

John Crestani: …and basically look up to see if they owned any real estate – he focused on multifamily – and see which property they owned etc. That actually worked fairly well, because what happened is you’d have their family members, who are, let’s say their dad passed away and their family member was 60-something years old, their dad owns this eight million dollar building along Wilshire in mid-city L.A., and guess what they wanna do with that?

Joe Fairless: Sell it.

John Crestani: They wanna sell it, and their family member just passed away… So what he would do is basically he’d have me get all the information and what have you, and he’d basically call them up and he’d be the guy, and he’d say whatever he would say; sometimes he would be slimier than other times, but it worked. It worked very well, obviously, because he was one of the top sellers.

Joe Fairless: Yeah, and that’s a fairly common tactic. Maybe not now, because I don’t know  — I guess there is still an obituary in the newspaper, but I guess I just don’t get one anymore… But there’s estate sales and things where people reach out to the families and have very challenging conversations with them, but that tends to be a way that people get leads, especially with single-family homes and wholesalers. Thanks for sharing that, though.

The thing about our conversation is these are experiences that you’ve had that have had an effective result. Whether or not we choose to partake  in them is one thing, or a certain degree of them…

John Crestani: I’m not advocating any of this stuff, I’m just letting people know everything I’m talking about is legal and it works… But it’s easy. So that’s actually a normal tactic?

Joe Fairless: Normal? I don’t know about normal, but it’s not the first time I’ve heard it. But as far as the real estate, I mean, it is such a small world, and a lot of people know each other, especially when you get into the larger stuff. If I were to do something like the scam thing, holy cow!

John Crestani: You don’t need to use that word; that word is going overboard. You can tone it down a bunch of levels, but the word “scam” is emotional language, in general. Frankly, I hate it too, because I sell educational products, I sell training programs, and the thing I hate the most is – the problem with the internet is everybody has an opinion, and now I’m on the other side of it and people will say “I’m annoyed by all of John’s YouTube ads. He’s a scam!”, it’s like “How do you know me? You saw an ad that annoyed you and now you’re calling me a scam? How does that work out? I’m sorry if I offended you with my advertisement that was talking about freedom and talking about working for yourself, but that doesn’t mean you can go on the internet and say I’m a scam”, but that’s what people do, and unfortunately, that’s what people wanna read.

If somebody sees ten results on a page when they search for my name, and even if the result “John Crestani is a scam” is at the bottom and has no proof or no backing or no credibility to it and the person didn’t even look through my training program or get to know who I am, that’s gonna be the result people click on the most, because it incites the most emotions.

Joe Fairless: John, we’ve gotta wrap this up. How can the Best Ever listeners get in touch with you?

John Crestani: If people wanna learn more about me, they can go to my website, JohnCrestani.com, or add me on YouTube. Again, my name is John Crestani. Great talking with you, Joe.

Joe Fairless: Yeah, and the link to your website will be in the show notes page, so Best Ever listeners, you can go check that out.

Thanks for being on the show, thanks for telling us some stories that have worked with you (or with people you know) in the past, and just being incredibly transparent with what has worked and what hasn’t worked in the approach.

John, thanks so much for being on the show. I hope you have a Best Ever weekend, and we’ll talk to you soon.

John Crestani: See ya, thanks!

JF1165: You’re Never Going To Feel 100% Ready – Just Launch Anyway! With Leeza Gibbons

Listen to the Episode Below (36:55)
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In true entrepreneur fashion, Leeza saw a need for support for family caregivers, and created it. Leeza’s Care Connection was created when she was looking for support, to no avail. Against the advice of her agent – who told her it was a bad idea and it’s too negative, Leeza went through with creating her company, helping caregivers the way she wished someone had been able to help her. Oh yeah, and she fired her agent! Leeza has great advice for anyone wanting to start a venture of any kind, make sure to tune in with a notepad ready! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Leeza Gibbons Background:

-Emmy Award-Winner, Co-host for Entertainment Tonight, & Host of syndicated daytime talk show, Leeza

-Appeared in TV hosting roles since 1984, covering everything from the Golden Globes to Soap Opera Awards

-Winner of Celebrity Apprentice Season 7 in 2015 (in the final season in which Donald Trump was the host)

-Took earnings from Celebrity Apprentice, to build a non-profit Leeza’s Care Connection to support family caregivers

-Has a star on the Hollywood Walk of Fame for her TV work

-Inducted into the Direct Response Hall of Fame and won the icon award for crossing the billion dollar mark in sales.

-Best Selling Author of “Take 2: Your Guide to Happy Endings and New Beginnings,” and “Fierce Optimism; 7 Secrets for Playing Nice and Winning Big.”

-Say hi to her at http://leezagibbons.com/

-Based in Los Angeles, California

 


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TRANSCRIPTION

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

Leeza Gibbons: Hey, I’m doing great! How are you?

Joe Fairless: I’m doing well, and nice to have you on the show. Best Ever listeners, you know who Leeza is – she is… Well, let’s see – a daytime Emmy winner, a New York Times bestselling author, a winner of Celebrity Apprentice, co-host at Entertainment Tonight for 16 years, had an award-winning daytime talk show, and also has a nonprofit called Leeza’s Care Connection, which we’re gonna talk about. Leeza, November is National Caregivers’ Month – what does that mean to you?

Leeza Gibbons: Well, like it does for millions of other people joining us right now, it means a challenge, it means depleting financially, spiritually and emotionally, trying to answer that question “Now what do we do?” when somebody you love gets a diagnosis, and there are lots of people that are dealing with chronic illness, or disease, or some other care giving situation where the family members, the non-paid family members – the husbands and wives and sons and daughters – are showing up for duty every day, really to do a job that they are not prepared for and don’t get enough respect or support for.

So a part of what we do at Leeza’s Care Connection which you mentioned is help educate and energize family caregivers so they can feel more confident and more competent, so that you take better care of those caregivers, you’re gonna get better outcomes from the care receivers. And I’ve gotta tell you, it has never been more crucial than it is now, because the healthcare system is in a little bit of a mess, and caregivers are the backbone of what is an extremely challenging economic situation for us, not to mention the human suffering side.

Joe Fairless: And how did you come to create Leeza’s Care Connection?

Leeza Gibbons: Just like with business opportunities or any other life change, I think that I went kicking and screaming into it when my mother had Alzheimer’s disease, and we really should have been better educated, I suppose, because my mother’s mom – my granny – also died of the same disease. I created in the world what we wish we’d had. They say if you’re an entrepreneur, to create products and services that you want… So this was what we needed and what we wish we’d had for our family when we were going through the journey of dealing with my mother’s Alzheimer’s. It really is a place for people to kind of get you to understand what the challenges were, where you could feel supported, where you could learn the skills and techniques to make your life easier, and where we could really connect you to your own strength.

We always say “Call on your courage and summon your strength”, because nobody wants to be the world’s best caregivers; this is really not anybody’s dream of happy ever after. But when you get there, you can find ways through it.

Joe Fairless: On that related note, one of your books, titled “Take Your Oxygen First. Protecting Your Health And Happiness While Caring For a Loved One With Memory Loss” – I have not read it yet, but based on the title and the research I’ve done, I believe one insight is to take care of yourself first so you can take care of others. If that is correct, then initially is there a guilty feeling that we have to protect against, so that if we’re taking care of ourselves, we don’t feel guilty about not always taking care of the other person?

Leeza Gibbons: Yeah, and you’re so right on… I think all caregivers — it’s the constant companion; everybody has guilt. When I was caring for my mom, and now my dad, who has coronary heart disease and had bypass surgery, I always felt guilty, because I’m on the West Coast, my parents have always been on the East Coast… I agonized about that. When I was with my mom I felt guilty because I wasn’t doing enough; there were so many things I was missing. When I was away from her I was guilty. I felt guilty because I was healthy and she was sick… I even felt guilty when I didn’t feel guilty [unintelligible [00:05:19].19] so to normalize that, to recognize that you’re doing the best you can, showing up with your best intention… I used to come up with mantras to kind of help me with it, and then you kind of get down to the business of getting a grip on how you deal with these feelings of overwhelm.

For me – and I hope this doesn’t sound trivial – it was a very key component to success for me, just like in business, is to really engage your optimism; it is a driver of success. This is a mental competence that is going to tie you to your ability to find answers and solutions. And it’s not just Pollyanna, pie-in-the-sky thinking, it’s being more resilient and being able to bounce back and fight back more quickly than the people who throw in the towel and the people who are pessimistic and negative. The optimistic caregiver will engage the tools that are out there.

One of the things that I’d like to remind our guests at Leeza’s Care Connection is to look at the technology that’s out there. There’s a lot of free apps that can help you, whether you need a care calendar to invite your friends and family to contribute to things they can to help you, whether it’s dropping off food or sitting with mom while you take a break… There’s CareCalendar.org, and Lotsa Helping Hands has a free one… There’s a lot of meditation apps out there to really help you get centered and stay connected to your strengths, and then there’s a lot of really super cool technology that really helped me with my dad, for example.

My dad is now 88, but he thinks he’s John Wayne, and he was like “Nothing’s ever gonna happen to me…” You know the type, right?

Joe Fairless: Yup.

Leeza Gibbons: This is my real hero in life and in business and in reinvention, but when we found out dad had heart disease… He lives by himself and he loves his independence, he’s got a busy life, but I said “I really want you to have a personal emergency response system, like a medic alert.” He was like, “Honey, I don’t need that”, and nobody wants to look vulnerable or feel frail, but this is where I used guilt to my best advantage. I said “You know, daddy, I worry about you”, and I did the old “It’s for me, not you”, so we got him a Philips Lifeline, and sure enough, two years later – my husband and I didn’t even know, we thought “Is he wearing the thing? We’re paying this bill… I know he can’t return it because it’s a gift from me”, but he had a heart attack and had he not been wearing it, the first responders wouldn’t have been there in time to save my dad… So I’m really so grateful, and it’s one of those cool business stories where I called the Philips people. I said “I’m sure you get these calls all the time, but I wanted to thank you for saving my dad”, and that’s really how I got involved with them in educating people about the technology side of things of Philips Lifeline, their personal emergency response service, the medication dispenser which my dad also has… So it’s interesting, life always puts you exactly where you’re supposed to be.

Joe Fairless: You mentioned you had or have mantras… What are some of those mantras that you tell yourself?

Leeza Gibbons: Well, it’s funny, because one I had to employ way back when I was doing Dancing With The Stars, and they get you — this is a horrifying visual for many women… They spray-tan you, they get you naked in front of this [unintelligible [00:08:41].04] and on the day that I was doing it, I’m standing next to — I think it was like Julianne Hough and Cheryl Burke’s perfect [unintelligible [00:08:47].27] and I was like “Oh, my god…!” I could even breathe, so I just started going “My body is strong and healthy… My body is strong and healthy…” [laughter]

But when I’m hiking, I often do mantras and I tell myself repeatedly that my brain is sharp — look,  I’ve got two generations of women that have Alzheimer’s disease… So I never borrow tomorrow’s troubles today, but I’m not naive. I know that mitigating stress is good for anybody, no matter what is going on in your life. So when my mom was sick, my mantra was just “I love my mom. I’m doing the best I can. I love my mom, I’m doing the best I can.” It’s just a nice reminder, because it’s what Tony Robbins always says – you get what you focus on, end of story. And if you focus on how you’re failing and how you’re underwater and how you’re overwhelmed, then you’re just gonna get more of that.

Joe Fairless: It sounds like your mantras — it’s a dynamic process, where it’s based on where you’re at in that period of life, and then you come up with a customized mantra based on that situation. Is that accurate?

Leeza Gibbons: Yeah, it’s true, and I try to have a meditation practice, but I used to tell myself “Oh my gosh, I don’t know how to do it” and “I’m not doing it well”, and “I’m even failing at meditation. What a loser! Who fails at meditation…?!” and I realized that the things that work for me in business, when you’re in the better business of trying to get better yourself or trying to help someone else get better, or just in the philanthropy world of wanting to make someone better, we sometimes stop ourselves because we think we don’t know enough, and that’s probably one of the greatest pieces of advice that I’ve ever received and that I give out, is “Don’t wait until you know and don’t wait until you’re ready!” That business of saying “getting your ducks in a row” is so instructive, but it’s not true, because the mother duck never waits for the ducklings to follow behind her. The mother duck just starts walking, and then the baby ducks fall in line.

So I  think that whatever journey you’re starting out on, it’s never gonna be perfect and you’re never gonna feel 100% ready, but just launch anyway.

Joe Fairless: On the launching part, when you launch anyway, I know there are bumps in the road, and you mentioned earlier you’ve gotta be more resilient than others and bounce back quicker than others… How do you do that?

Leeza Gibbons: Well, I talk about the Tigger factor. In Winnie The Pooh, you look at Tigger – he’s a party to himself; he bounces from everything, and people want to be around Tigger, because Tigger is positive, and when you are in the situation where you need to bounce back from something, that’s when you do really need to edit the toxic people out of your life. They always say “We become like the five people we associate with most”, so if it’s a business plan you’re trying to get off the ground, or if it’s a health plan you’re trying to activate for your family, putting those people in place who are on your team is really important, and it may not be your bio family; it may not be the logical people that are your blood relatives, because they may have their own limits that prevent them from showing up in the way that you want them to. So I think it’s really important to know that this is not a solo sport, and you really do have to get your team, people that can coach you through it, and you’re gonna be playing out of position, because you’ve never been feeling this personally invested in an outcome in quite this way.

Joe Fairless: Can you tell us a story of when you had to implement the Tigger factor and bounce back because something completely and utterly flopped?

Leeza Gibbons: Well yeah, so many come to mind, but as it relates to my mom, when my mom got Alzheimer’s disease, I was hosting my talk show at Paramount, I was doing Entertainment Tonight, I was doing a radio show, and my kids were little… Busy life, like everybody sharing in this conversation right now, busy life. But suddenly, it was like my world just went silent, and the steps to the dance of my life – I was tripping all over myself; it didn’t make sense. So I knew that I needed to listen through the pain and try to figure out “What is this pain trying to teach me?” and my mother in the early stages of the disease said to me “You know, honey…” I was like “Mom, I don’t know what to do. I feel so helpless…” and she said “All your life you’ve been a reporter, you’ve been a storyteller, you’ve told other people’s stories. Now, go tell this story.” And that was great, but I couldn’t figure out exactly how to do that, beyond the outlets that I had.

So I went to my agent at the time and I said “Look, I’m gonna start a foundation, and we’re gonna help people like my family…”, and immediately he’s like “No, no, no. Bad idea. This is not marketable, this Alzheimer’s stuff is negative and it’s old and it’s not sexy. Stick to your kidss charities; people get that, they understand that, but I really can’t recommend that you do this. It’s not gonna help  your career, it’s not gonna help you book gigs…”, and I listened, and I said “Well, thank you for that insight, which tells me how bad this needs to be done… It really needs to be done. And just one other thing, you’re fired.” [laughter] That was my first time of really saying “Okay, it’s not the end of the road here; it’s a bend, a very big bend in the road, but I need people that see the vision of where I need to go.

Joe Fairless: You talked about earlier being very selective with the five people you associate most… Who are those five people for you?

Leeza Gibbons: Well, one is my husband and business partner who runs our company. He’s my best friend and my best gauge for when I’m sort of drifting too far out of my lane, because I tend to be very entrepreneurial in my thinking and I like to have lots of projects going on, and he’s the one that helps them get to fruition.

One of the things that I’ve learned to do when there’s something I don’t know, to reach outside myself and find the people who DO know. With the foundation right now, I’m working with a very passionate woman from the nonprofit world who I’ve engaged as a friend as a business consultant… So I usually have kind of a business voice in my ear.

And then there’s my hiking girlfriends; they’re the stress-relievers and the ones that will just listen and not try to fix. One of the best things to tell caregivers is have somebody on speed dial that you know will answer, that you know will just let you vent… Because we really do have to get that stuff out of us.

Joe Fairless: So you’ve got the personal, professional and social components then.

Leeza Gibbons: [unintelligible [00:15:28].26] inspirational. I really get inspired by other women. I think that girls compete, but women empower, and if you look at the most meaningful women for most of us – and certainly for me – one of my inspirations in my life right now is Olivia Newton-John, who is not only on my vision board before I ever met her as someone that I wanted to be like… I certainly don’t have her talents as an entertainer, but I wanted to have her goodness and her grace, and there’s always a serenity about her, but she’s a very smart businesswoman.

After I met her, we became friends and have remained in each other’s life. She’s a beautiful reminder of resilience, and when cancer came back recently, I always say “Olivia…” She always operates on the notion of “More. More joy, more time for friends, more opening up to let love in”, and when the cancer came back it was “More faith, more hope and more ways to deal with that, and more ways to share it”, and that’s another big thing that I learned from her, and the other person on my list, which is Maria Shriver, who’s such a powerful change agent in the world, and has always been great at sharing what she knows and offering it up.

Joe Fairless: How do you decide how to spend your time?

Leeza Gibbons: Well, I used to chronically chase that thing called balance, and look for the middle of the see-saw, because I thought “Well, my time’s not balanced. I’ve gotta be balanced – I’ve gotta stay fit, I’ve gotta be a great mom, I’ve gotta be a great wife, I wanna be successful at work, I wanna meditate and have a spiritual practice”, and okay, great, but it wasn’t happening. It balanced. And then I shifted that, and it’s one of the best things I ever did from my mental health; I don’t look at balancing my time anymore, I look at investing my time, as you imply… And when you invest, you expect to get dividends, and I do.
When things are out of whack and I’m traveling and I’m away from my family, that’s not balanced, but I know that I’m providing support for them, I’m growing as their mother, I’m setting an example for them – those are great dividends for the being out of balance for that short amount of time.

Joe Fairless: That’s a powerful insight, that’s for sure… Shifting from balance to investing your time. On the investing your time note, if we were at an airport and we’re just sitting there, waiting for the flight, or maybe we have private jets that whisk you all over the country — let’s just assume we’re flying commercial; if we’re at the airport and waiting on the flight, are you on the phone talking to some of these people in your close circle? Are you Facebook on your phone just killing time? Are you doing something else? What are you doing at that moment?

Leeza Gibbons: I’m probably looking to feed my base, which is — I always look at people who empty out, and I can’t pour from an empty vessel. So what feels really nourishing to me and what feeds my ability to do more work and to show up in the world the way I wanna show up, is I’m a little bit of a self-help junkie, and so either I’m reading some articles, or I’ve got a book and I get great inspiration from that. I love books by and about women. I’m reading Sherry Lansing’s book Leading Lady right now, I just finished Shonda Rimes’ Year Of Yes, which I really loved, and next on my list is Sheryl Sandberg’s book Option B, so I’m looking forward to that one. So that’s really how I fill up – by looking at how other people get through and get by, and what keeps them sane.

Joe Fairless: I asked my audience to submit questions, and I hand-picked just a couple for you, and so I’m gonna sprinkle them in as we go through. Here’s the first one – this is from Christine [unintelligible [00:19:26].02] in Flint, Michigan. She asks “What influence (if any) did Barbara Walters have on you and women in the media?”

Leeza Gibbons: Well, Barbara Walters was my head Barbie doll, and here’s what I mean by that. When I was a kid, I played business, and I used my Barbie dolls to play business. My barbies were reporters, and they were owners of all kinds of businesses; they had jet companies, and cruise lines… But the Barbies that were the reporters were named Barbara Walters and Nancy Dickerson, who was one of the coolest, most pioneering newswomen of the day… And my Barbies ruled the world, they really did.

So Barbara was incredibly inspirational for me, and by the time I went to major in broadcast journalism and I was a freshman, it was the year that Barbara Walters was named the first female anchor of the Nightly Network News, and she was making a million dollars; that was a big headline. It’s still a lot of money, and Barbara Walters was making more than the men.

I went to my journalism 101 class and said “Did you read that? Did you see? Barbara Walters. That’s gonna be me. I’m gonna make a million dollars in the broadcast business”, and they said to me “Oh, my gosh, Leeza… (I’m from South Carolina) Listen to yourself. You’re a  South Carolina, girl. You’re not even gonna get out of town!”

My mother, who would always say to me “Just put your blinders on, baby; you just run right past them, don’t look at them. Run right past them.” So years later, when I met Barbara Walters – before I met her, actually, I wrote her… I was watching one of her shows and I was so inspired, and I wrote her basically like a fan letter, and she wrote back. She was very encouraging and very generous with her advice and her support, and I will never forget that. So yeah, Barbara Walters was a big influence.

Joe Fairless: Do you remember what she wrote back in terms of advice or support?

Leeza Gibbons: You know, I had mentioned that on this show that I was watching – it was one of those specials – that I really loved at best, as many people did, when she would get to kind of the personal vulnerabilities of her interview subjects, and she reminded me… At that time I was working on E.T., and that was a great gig at the time, and I’m so grateful for it, and she reminded me that that’s the basis of any good interview, no matter who’s in front of you or on the other end of the mic, that your best approach is to be authentically you, to open up that space where they can be who they are.

Joe Fairless: On a related note, from a business standpoint — we talked about the challenge that you mentioned with your mom, but from a business standpoint, with maybe a venture that didn’t go well… Can you tell us about a venture that didn’t go well and how you approached it during and after?

Leeza Gibbons: Yeah, it’s some that were within my power to change, and then, obviously, things that weren’t. The first time I got fired I was on location in Rio when I got a call, like “Hey look, we packed your stuff up, it’s in a box outside your office door.” I was working at KCBS in New York, and they said “But look, you’re there, so spend an extra day, or whatever, and then come on back, and… Thanks for your effort.”

My friends were like “Great, we’re gonna enjoy Rio!” We were down there covering the carnival, and I’m like “Uh-uh, no.” I was already mentally re-editing my demo reel to send out to news directors and to try to get the next gig, because I think that bold action is always the best action. But what happened was I got so myopic… My desire to kind of move ahead so quickly didn’t give me the best perspective to kind of survey the landscape. So I don’t think I had enough of a 360 view of where I wanted to go next and what I wanted to do next.

It ended up that I ended up leaving New York and going to L.A. to work for Paramount and for ET, which was a great thing in my life. But the better example may be — I think that as a businesswoman and as an entrepreneur that was pioneering in an area that was not my core skillset, and helped advocacy and offering direct services to families, I was so excited to do something innovative and I fell in love with my vision to the extent that I tried to control it and kept other people from contributing and from guiding and from really over-powering what I may have thought was best, so I wasted a lot of time dealing with hospital systems and looking for how I could economically franchise this thing.

In the end, we ended up just kind of going with whoever was throwing money our way, and we had the great gift of not having a perfect plan, and that’s when I learned the value of not waiting for it all to be perfect, but just to get started offering the services.

Gloria Steinem says that “The truth will set you free, but first it’s gonna piss you off”, and the truth about me was I’m a long-standing control enthusiast, and that tends to be in many cases, and tends to be an Achilles’ heel when it comes to wanting to create new things.

Joe Fairless: Based on your experience professionally and personally, what is your best advice ever for entrepreneurs and investors?

Leeza Gibbons: As a general overlay, the best advice I ever got I learned from my partners at Guthy Renker. Bill Guthy and Greg Renker are incredible visionaries that taught me so much about direct-response marketing, and selling products, and the psychology of success… That’s how I got into business with Tony Robbins, so it was just a really great relationship. But the skill that I value — so many skills they taught me, but one of the initial ones was in meeting and with new partners and new relationships to talk less and listen more. And typically, if you look around the room in those committee meetings or those boardrooms, or where those deals are going down, the most powerful person in the room is often not the one talking the most, not taking up all that space on the verbal sidewalk.

I think there’s a lot of strength in silence, and there’s a lot of power in things that we don’t say, and if you listen really intently, you can analyze situations, you can analyze your role in the situation, and you can get to know the players around the table a little bit better. But I also think that in negotiations, what has worked well for me is give something first, and I know that’s antithetical to the way a lot of people find success, but it’s very organic to me, and I think it creates trust, it shows that you’re really willing to be a deal maker, and that’s something that I have found to be just a conversation opener and a deal expander.

Joe Fairless: Can you give a quick example of a negotiation where you gave something first?

Leeza Gibbons: Well, it’s easy to give examples, and I’ll give an example from a talent deal, for instance. If I’m signing on for a contract with a company – and it’s almost never about the money, right? The money situations, in that case, it’s like okay, well there’s money, and you have the money that you need, and you go back and forth with money – it’s the things wrapped around the money, the terms. So we had reached the top of money, and so I was willing to extend the length of the contract because I knew that’s what they had wanted, because they had initially made an offer for longer, and I was willing to extend the length of the contract, and I said “Look, but I would like to have the radio rights.” This was back in the days of working at ET. It was early on, like in the late ’80s, early ’90s, and they’re like “Give her the radio rights. Nobody’s doing anything with that”, and it turned out to be such a great thing that I dined out on the radio — I did Entertainment Minutes, and then I did Hollywood Confidential, and they had given me the rights that I owned a lot of content that was being generated in my daily work.

I don’t know why they gave it to me. Maybe they thought it wasn’t valuable truly, or maybe it was because we were just in a very good, and always were in a very solid give and take.

Joe Fairless: Two last questions from our listeners that were hand-picked, and this is related to what you’re just talking about, the direct response and the insight you got from that. This is from Grant, who lives in Cincinnati, Ohio – “What are the biggest lessons learned from selling over a billion dollars in products through direct response?”

Leeza Gibbons: It’s a relationship, just like any relationship. You have to certainly know your features and benefits of the product, and you have to believe in the product clearly. You have to have integrity and believability, and that doesn’t come from being polished and perfected. In fact, look at what’s going on in government right now – people are suspicious of the status quo and of politicians that have the right words and that are very careful. This has been in part because of the advent of social media, of course, but people are more connected to someone that seems more authentic and is willing to be vulnerable. So whether you’re the head of a company or whether you’re selling a product, I think showing your vulnerability and offering that up is really important.

Before I ever sold a single thing, I was a reported in Dallas and I was sent to cover a Mary Kay convention. This will kind of give you a date stamp. So this was in the ’80s, and Mary Kay – it was the pink Cadillac ladies that were selling. It was one of the first business opportunities for women, and it really created a generation of women who could self-identify beyond the norms of the time and really claim their power by selling something that was authentic to them – they were selling beauty products, they were selling empowerment. Well, I wanted nothing to do with that. I felt like “How do I get this [unintelligible [00:29:17].16] cover these crazy pink Cadillac ladies at this convention?”

I walked into the room with my photographer at the time and I said “You know what? Just spray the room, get some beer or whatever… We’re not gonna be here very long.” And they had to pry me out of there. I listened to Mary Kay Ash, I watched the effect she had on women. She was selling a business opportunity, they would then be selling the products. And she unleashed something in them that made them believe. So getting into the direct response hall of fame and crossing that billion dollar line of selling products come from that same place of helping somebody — yes, they were addressing a need, but the kind of product that I have sold and been most successful with, they open up something that we can believe in about ourselves… Whether we’re selling personal power with Tony Robbins, whether we’re selling Sheer Cover Mineral Makeup and helping you connect with your confidence, whether it’s selling a scrapbook line and helping you connect with how important legacies are in your life… It always comes down to what’s underneath the features and benefits.

Joe Fairless: Last question – my major was advertising at Texas Tech, and this is from the former dean of the college of Media and Communication at Texas Tech, and he said that — you use to work in Beaumont (which obviously I knew that through our research) with a gentleman named Jerry Beaulieu at KFDM TV. Jerry mentioned to ask you, and you can choose whichever story you wanna go with, but he said to ask you about during your time at PM magazine, the alligator story, or the story you did Gilly’s in Houston about the mechanical bull they use in midnight rodeo with John [unintelligible [00:31:04].29]

Leeza Gibbons: [laughs] When I was in Texas it was the height of cowboy chic, and Urban Cowboy and all that had come out, and everybody was doing those mechanical bulls; it was a great time. And being right there, on the [unintelligible [00:31:20].19] and right there in Louisiana… You know, I’m from South Carolina, it wasn’t a culture that was completely foreign to me, but one of our stories we were set out on was called Getting Gators.

We went out, we got a call… I thought “This is like a feature.” I was sleeping with a police scanner [unintelligible [00:31:38].14] 2 AM. “Okay, we’re heading to the swamp now. Meet the crew.” Alright, great. So we go out on this boat, and I look at it now and I go… When the red tally light is on the camera, I think that I either always got incredible courage, or became ridiculously foolish, just thinking like how is that gonna save me, right?

But we were with a team of people that were hunting alligators; I’m sure it was not legal, and it’s certainly not legal now, but we were doing one of these culture stories, and I had these waders on and I ended up getting in that swamp. They said “Now look, to get the gator into the boat, we don’t kill them, we just stun them”, and there was a stun gun as I recall — I don’t know if this is the story exactly… But we had stun this alligator and I had the tail, which was the stupidest place to be, but it was just a mild [unintelligible [00:32:24].18] There might be something else to the story that I’m not remembering. Did he give you a hint?

Joe Fairless: No, no, he just mentioned those two things on the Facebook post that I mentioned.

Leeza Gibbons: Was that Larry Beaulieu?

Joe Fairless: Jerry Hudson, who is…

Leeza Gibbons: Oh, Jerry!

Joe Fairless: Yeah, he’s a former dean of College of Media and Communication at Texas Tech. I’m on the alumni advisory board there.

Leeza Gibbons: So Jerry is giving you the story  — your Jerry is giving you the story about KFDM.

Joe Fairless: Yeah, exactly. Yup.

Leeza Gibbons: Oh, that’s so sweet. Larry Beaulieu was another executive and talent; he was like the news director and the anchor of the news, and he really taught me a lot about collaboration. The world went through a lot of specialization, and now we’re back into this wonderful zone of collaboration that’s partly borne out of necessity and also borne out of our proximity to bring other people in, and I think that people who really can collaborate and who recognize that, as my mother always said, it’s “I will versus IQ”, that success really doesn’t have that much to do with being the smartest person in the room; it’s who can either build consensus, or bring people together, and who can most effectively collaborate towards that end goal, and Larry was a great mentor for that.

Joe Fairless: Leeza, where should the Best Ever listeners go to learn more about your organization, or wherever else you wanna send them?

Leeza Gibbons: Here’s how people can reach me, and I really hope they do, and thank you so much Joe for this time, I’ve really enjoyed it. LeezasCareConnection.org is where we can help you if you have a loved one that has a chronic illness or disease. If we can be of service, we would certainly love to do that. And just connect with me on Instagram or Twitter or Facebook, I’m Jessica Leeza Gibbons. I’d love to keep the conversation going.

Joe Fairless: I’m so grateful that you’re doing what you’re doing… And really, who cares about me? It’s about other people who are being impacted in a positive way through your organization. So my business is I buy apartment communities and I partner with investors, and one of my investors recently had his wife diagnosed with an illness, and he was going through the “What now?” question that your organization addresses and helps other people with, and it is a necessary organization. I’m so grateful, and others are so grateful for it, I know it. So first and foremost, thank you for spending time doing what you’re doing.

And then secondly, lessons I learned from our conversation – there were many. One of them is the resiliency, bounce back factor; you mentioned the Tigger factor, where you bounce back, and you gave a couple of examples… And then the point that really resonated with me from an investing/entrepreneurial standpoint is shifting the focus instead of from balance, but rather on investing in your time, and looking for how to feed your base, as you mentioned. You’re a voracious reader for self-help books and content, in particular of books by and about women…

Then another point is what you mentioned towards the end of our conversation, the gift of not having the perfect plan — it is a gift, of not having the perfect plan. It’s rather just getting started, offering the services, and that certainly is applicable to all real estate investors and entrepreneurs.
So thank you for spending the time with us, thank you for doing what you’re doing, I’m really grateful for that. I hope you have a best ever day, and we’ll talk to you soon.

Leeza Gibbons: Thank you so much. Best ever back to you, too!

Real Estate Broker Duties

JF1161: A Top 10 Broker Does EVERYTHING Possible To Succeed – Do You? With Aaron Kirman

Listen to the Episode Below (33:57)
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Aaron doesn’t box himself into one niche or strategy. He and his team are always working on every avenue they can pursue, something Aaron says is a big contributor to his major success. We’ll also learn other great tips for how we can all be as successful as he is, you might be surprised what he says is the biggest factor for success. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Aaron Kirman Real Estate Background:

– Holds the second highest sale for a residential property in Beverly Hills’ history, at $65 Million US.

-Named the 10th top agent by The Wall Street Journal and part of Variety’s ‘Real Estate Elite,’

-Boasts more than $3.5 billion in residential sales, with $300M dollars last year alone. 

-Sought by many developers to sell multi-unit projects incl. a private island in the Pacific, Turks and Caicos, W Hotels.

-In 2016, he was named an exclusive partner and brand ambassador for China’s top real estate portal Juwai.com.

-Say hi to him at aaronkirman.com

-Based in Los Angeles, California


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They’ve also partnered with best-selling author, J Scott to provide Bestever listeners a free chapter from his new book on negotiating real estate. If you’d like to improve your bestever negotiating skills, visit www.fundthatflip.com/bestever to download your free negotiating guide today.


TRANSCRIPTION

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

Aaron Kirman: I’m doing super well, thanks for having me.

Joe Fairless: My pleasure, nice to have you on the show, and holy cow, we’ve got a lot to talk about! Let’s see, a little bit about Aaron – he was named the tenth top agent by the Wall Street Journal; he holds the second-highest sale for residential property in Beverly Hills history at 65 million, and you can learn more about him and connect with him at his website, Aaron Kirman.com, and that’s in the show notes link. Based in Los Angeles, California.

With that being said, Aaron, how about you tell the Best Ever listeners a little bit more about your background and your current focus?

Aaron Kirman: I’ve been in real estate ever since I was a little kid, at 17 I started in real estate. It was always something I just knew I love to do, and I had some challenges growing up as a child, so I knew I was somewhat limited in certain elements, so sales was always something that was just one of my super strong points, and I always loved houses.

I got in the business super young, and from there I just stuck with it, worked super hard, and now I’m ranked one of the top in L.A., pretty much the top in L.A., top 10 in the world, and we sell the most expensive houses in the world, and now I’m really focusing on growing what is hopefully gonna be the most successful real estate team in the country.

Joe Fairless: So let’s dig into some of these things… I was reading a little bit about you before our conversation, and I read that you got fired from your first job at a real estate firm… What happened?

Aaron Kirman: I got fired from every job I have ever had, until I was the boss. It was a very real lesson; from 13 on I could not hold a job, and it just made me realize from a very young age that I need to be a boss, and I really can’t be an employee.

When I finally decided to get into real estate — in fact, I saw the guy that fired me…

Joe Fairless: Why did they fire you?

Aaron Kirman: Some stupid reason, I dropped some mail… Some ridiculous thing. But when I saw the guy that fired me a couple days ago, he goes “That was the biggest mistake I ever made”, because he owned a real estate company, and a couple years into the business I was already doing really well. But yeah, I really couldn’t hold down a job, and it was at that point that I knew I need to be a boss, I needed to be a leader, and that was when I started to do really well.

Joe Fairless: You needed to be a boss, you needed to be a leader… How do you become an effective boss and leader?

Aaron Kirman: Years of practice. Leadership was always something very natural to me, but I still work on a day in and day out. I think for me effective leadership is always being honest, always being sincere, always making the right decisions, and actually really honing in on what’s right for other people and what’s right for the team.

I interviewed a top agent that actually would have been really profitable for my firm, and I would have loved to have had her, but at the end of the day she told me who she was interviewing with, and I told her straight up – I thought she was better with this person, and I told her why. She specialized in an area that I do, but I’m not necessarily the market leader of that area, and she interviewed with the market leader. I said “You know what, if I was you and that’s the area you wanna do, go with this guy.”

So I always try to really think what’s right for my team, and I call them “kids”, no matter what age they are; I always call them my kids, because I really look out for what they’re doing. I try to teach them the lessons that I learned the hard way, early on. That makes me feel good.

Joe Fairless: When you were starting out, it would be I suspect more challenging to turn down business like you essentially did with a potential kid of yours, and not work with someone even if it wasn’t the best fit, because when you’re starting out you need to make money… So have you always had that mentality, or at the beginning did you try and just make things happen and then that mentality has evolved?

Aaron Kirman: It’s really hard to fire clients when you need the money, when you’re so desperate for that deal… You have to be in a real power position to be able to do that and to have that ability. When I was younger, I never fired clients, and actually I worked for people that for whatever reason internally I knew I would never make money off of, but I spent a lot of time, energy and money doing so. It wasn’t until probably 2012 where I had maybe 700 million dollars in active inventory and I was having a horrible year… For whatever reason – I was unhappy, I was miserable; I was fine financially, but everything else wasn’t great, and I went on vacation, I came back, and I literally tried to figure out what was gonna make me happy, and I fired 70% of my active clients the day I got back.

I freaked out about it, because I had lost 500 million dollars in active inventory, and I’m like “What am I gonna do now?”, and no joke, within three months, I had it back and then more. So my lesson was get rid of the ones that aren’t working for you and keep what’s working for you, because the universe will reward you.

Today, I fire clients; when it’s not gonna work, I let them know. I really wanna be on the same page as my clients, because if we’re not, it’s a waste of their time, it’s a waste of my time, and  ultimately it’s not gonna work.

Joe Fairless: What’s that communication look or sound like when you fire a client?

Aaron Kirman: I believe in always being super kind, super sweet and super sincere; if it’s not gonna work, I tell them why, and sometimes I even offer my competitor that same client, because maybe they’ll work better. A lot of times too in real estate I notice it’s timing more than anything else. Agents from all over the world come to me to help them sell houses, and they’re like “I can’t get the seller to price this right, or listen to my…” whatever it is that they’re trying to do. Sometimes it just takes a second person to back that up, or a position of power, or the right time, and all of a sudden that seller was gonna listen.

So there’s a lot to what we do.

Joe Fairless: You mentioned around the world, and that triggered something for me. I was reading an article – you fly over 300,000 miles a year… Is that right?

Aaron Kirman: Probably more.

Joe Fairless: Probably more. What are you doing?

Aaron Kirman: We’re flying all over the world. I represent some of the most wealthy people in the world, and so wealth is everywhere. At the end of the day, real estate is a relationship-based business, and sometimes I am going to dinners, to hang out, sometimes I’m going to conferences, sometimes I’m going to meet a buyer and seller, sometimes it’s a combination of everything, and sometimes I’m just on vacation, living my life, and I’m still making money. So it really kind of depends on the moment.

In the next three days I’m actually gonna be going to Paris to meet a client that has two homes between 50 and 100 million, then I’m gonna be speaking at a conference over there, and from there I’m gonna have a little fun along the way.

Joe Fairless: Are these homes in Beverly Hills?

Aaron Kirman: I specialize in pretty much any estate home all over the world, but the majority of my marketplace is Beverly Hills, Bel Air, Hollywood Hills… But again, we’re a relationship-based business, so I represent a lot of like the Saudi [unintelligible [00:07:55].26], and they have homes all over the world, so we view ourselves not just as like a broker, but more or less as a representative, and here to help them determining how we can best accomplish our goals.

Joe Fairless: How do you effectively market and sell a house in a different country from [unintelligible [00:08:14].17]?

Aaron Kirman: Multiple ways… It’s really funny, the most wealthy people often have multiple homes all over the world. Most of my clients have 3-7 homes. They have a house in the home country, London, New York, Los Angeles, and wherever else. So a lot of these buyers you’ll see, when you run in that circle, you kind of know who’s looking, who wants what, so it’s fairly easy for us to cross-connect, but other than that, there’s a lot of different ways to do it. It’s always one degree of separation. If I have a home somewhere, usually we try to put some dots together and figure out who we know in that area, who knows who, and work that way.

Then you have mainstream things – TV, press, media, marketing… All those things can also help. The world is so global, the internet is phenomenal at doing that. I have guys on my team that are tech junkies and they know the internet more than anybody, and honestly, they can manipulate it and work with it in such a way that we’re targeting everyone, from billionaires, multi-millionaires, to whatever it may be. Even it’s a focus on beach, island, horse property, equestrian, whatever it is.

Joe Fairless: Thinking back if you can on maybe the last handful of listings of yours that have sold, if you know, how did the buyer originally hear about it?

Aaron Kirman: Probably the last ten, there’s no specific one trait that we see. In general, there’s a multiple listing service which people use… I always say international buyers become local buyers the day they get to Los Angeles or wherever it is they’re looking.

We reach out to people all over the world, and I think we start to set the tone. We’re like, “Hey, we have a house. You should check this out.” At that point they’re gonna do their own research, their own due diligence, their own study. Our goal is to reach them first, work with them, and then kind of educate them along the way. But we’re not recreating the wheel; most of it is online, most of it is technology, most of it is the computer, at the end of the day.

Sometimes it’s neighbors, sometimes it’s friends, sometimes it’s family, sometimes it’s connections. Sometimes it’s even TV. I’ve sold a lot of houses off TV recently.

Joe Fairless: When you go on trips and you meet with clients… I read that in some cases you spend between $20,000 and $50,000 per trip to meet up with clients; how do you measure that from a return on investment standpoint?

Aaron Kirman: I wish I could say that I’m studying my return on investment in that way… Some trips are a loss and some trips are a win; the budget for my overall office is tremendously expensive. We’re spending hundreds of thousands a month in technology, media, press, infrastructure, travel. So it’s just a part of what we do.

I have traveled to China, and Hong Kong, and Europe, and pretty much everywhere else in the world, and a lot of times there’s not an immediate return. Sometimes it’s just about building a relationship, and at the end of the day this business is a relationship-based business. Maybe I’ll fly to China to meet a billionaire out of Hong Kong and have a dinner. That may not equate to immediate revenue, but a year later his aunt, uncle, or him/her may be ready to buy that 50-60 – whatever it is, even five million dollar house, and we see a return.

So sometimes it happens quick, and sometimes we go, we list the house… I flew to Paris, I listed a 70 million dollar house and they sold it. Super great return, right? An amazing client. Sometimes it takes time and energy. But again, it’s really hard to pinpoint what does work and what doesn’t, which is why I just do everything, and I spend a ton of money, time and energy expanding, expanding, expanding, and that’s the beauty of what we do, I think.

What drives me crazy about real estate in general is a lot of people think in the box, and they don’t think out of the box; I think from an investment standpoint and from a broker standpoint, the ones that are gonna succeed are the ones that are thinking out of the box. I study companies, and corporations and business, and anything that a multi-billion dollar company does, if I can afford to do it and I can maintain it, I try to do that, even on a smaller scale.

Joe Fairless: What are some examples of that?

Aaron Kirman: I have two people full-time press teams that work on our behalf, and we say the best way to advertise is editorial. Rich people read, and so if we can get those great editorial articles, then we’re gonna be in a great position. Press, media, TV… I’m one of the headliners on CNBC’s Secret Lives of the Super Rich, that sells homes. Technology – hugely important. There’s multiple facets to technology – there’s internet, there’s rebranding… There’s a hundred different ways to do it; there’s YouTube channels. These are all really important elements, and as we move further, we’re gonna see that that’s gonna be even more important.

When I started in the business, it was who you know a hundred percent. Who you know and who you have access to, that was the business. I think in today’s world, because we’re so technology-based, everyone’s kind of going online and are figuring out what’s right for them, who’s right for them, what’s wrong for them, and then making their decisions from there.

Joe Fairless: Got it. So the online brand is paramount.

Aaron Kirman: Huge. That said, it’s still easier who you know. If you’re one phone call away, they have a history with you, it’s still the easier format.

Joe Fairless: You mentioned “that’s why I do everything, going to all sorts of places” – I imagine that you are pulled in a lot of different directions and some directions you choose to pursue, and some directions you’re like “Hey, I just got back from China. I can make it to India, I just landed in L.A.” So how do you determine which opportunities to go spend 20k-50k on for a trip, and which one is like “It sounds okay, but it just doesn’t make sense for me right now.”

Aaron Kirman: A lot of it is timing and a lot of it is energy. When I’m gone, I still have an office that has about a billion dollars worth of inventory every day, so we’re still working and we’re still doing our daily moves. A lot of it is just kind of figuring out what the opportunity, who it is… I’m certainly open to every opportunity, and you have to pick and choose.

Sometimes great opportunities I have to miss, because there’s a better opportunity local. So it’s all about time management and kind of using your gut and intuition. It’s gotten me this far and I believe in my gut basically 100%.

Joe Fairless: Tell us a story where you followed your gut and it worked out.

Aaron Kirman: I feel like my life is a gut, that’s what I’m good at. I don’t know if I’m the most intelligent person, but I’m super intuitive. In today’s place, I feel super blessed because I meet people and I could tell if they’re good or bad, I could tell if I’m gonna make money with them. I got a call from some guy I never heard of. I knew the address of the house he had, and he’s like “Why don’t you fly to Paris to meet me?” and I did, and it was a very expensive, 70+ million dollar home, and I sold it. And I went there within one day.

Joe Fairless: How did he hear about you, do you know?

Aaron Kirman: That was a referral.

Joe Fairless: Referral.

Aaron Kirman: Yeah. Every day I walk away from listings. I tell people my gut, and then even when it comes to pricing, when it comes to selling, when it comes to strategy – that’s how I work, and I’m wrong about a lot of things. You talk to me about politics, marriage, dating – I’m probably off, but when it comes to real estate, for some reason, I’m usually pretty close to accurate. Not to say that I haven’t made a lot of mistakes along the way.

Joe Fairless: We’ll get to that in a second, but you mentioned you study companies and corporations and you implement some of the best practices that the large ones have that make sense to you… What’s something that you have seen but you haven’t implemented yet, but it’s on your radar?

Aaron Kirman: There’s so many things that I wanna do. At the end of the day, even though we have a billion dollars of inventory and I sold 3.5 billion dollars, I’m still not at that level of a huge corporation. We’re still a very successful real estate practice. Events. I think events are super important. It’s not something that we’ve gone down that path yet, but it’s something that I really wanna do. I think sponsors to some major events are super important.

I always teach people that the best way to sell is to be yourself and to be comfortable with whatever it is – whether it’s going to church, whether it’s doing the opposite and drinking… Whatever it is that drives you, that makes you happy, you should do.

I think those events are super important for people’s businesses, because it connects you with like-minded people, and when you’re connected with like for like, it’s easy to make money because you’re just gonna get each other. So that’s something that I would also like to do in the future. But I’d like to amplify everything times a hundred, because the more money you spend, the more time you do, the more money you’re gonna make, and the more fun you’re gonna have. So it’s really just about figuring out what is working and what isn’t working, and sometimes that’s very difficult in my world, because it’s hard to pinpoint one.

No matter how hard I’ve tried, we haven’t been able to say “Okay, we’re gaining a 30% return from this investment.” It just doesn’t happen. Sometimes it’s all full circle. When I started as a young guy in this business, I’ve spent a lot of money in print advertising. People say it’s a waste of time, but at a fairly young age people knew my name, and they knew that I was selling houses. Did I ever get a phone call saying “I want to buy one of those houses”? Never, not once. And we’re talking about hundreds of thousands of dollars of marketing and advertising… But it did something; it got my name out there. It may be passive, but that’s important, too. Sometimes passive advertising is super important.

Joe Fairless: What type of event would you do?

Aaron Kirman: I have so many interests, from charities, to aviation, to golf, to concerts, to interior design…

Joe Fairless: So it’d be more of a sponsorship, it wouldn’t be one that you put together from scratch.

Aaron Kirman: It could be, I love doing that, too. They’re things that we just haven’t done yet, that I would like to do. But you know, it takes a lot of time and energy and money, as well. We have to allocate…

Joe Fairless: Just skip one trip. There’s your event. [laughs]

Aaron Kirman: [unintelligible [00:17:45].26] a sponsorship good, it’s probably more than one of those trips.

Joe Fairless: Yeah, that’s true. Well, you could do an event somewhere in Wyoming, and I bet you could pull it off for 50k.

Aaron Kirman: Let’s see, let’s see… Time will tell. I’ll let you know if I ever do something over there.

Joe Fairless: There you go. Based on your experience as a successful entrepreneur in real estate, what is your best advice ever for someone who wants to follow in your footsteps in terms of building a company to the degree that you’ve built one?

Aaron Kirman: At the root of it, love what you do, and be super interested in it, and follow your passion. Life is too short to just take a job to make money. I think a lot of people fall into the pattern of that, and I understand money is a necessity of life, but if there’s ever a time to take risk, take that risk, follow your passion; know what you’re good at, know what you’re not good at. Do I think I’m the smartest person in the world? Absolutely not. Did I know that I couldn’t hold a job and that I needed to basically do something where I could be my own boss? And did I love houses? Yes. And I put those two things together and they were really simple, and I made a multibillion dollar business for myself.

I think that if you follow your passion, if you follow your desires, you know your talents, there’s no reason why you can’t be successful.

Joe Fairless: Tell us maybe a story of a mistake, and what happened.

Aaron Kirman: God, I have so many mistakes… Hundreds and hundreds. You know, from every mistake there has been a lesson, and I feel like I started in my business so young that I made a hundred mistakes. Not calling people back, giving the wrong prices, not taking the right strategy. One of my biggest mistakes was I was moving so quick that I wasn’t strategizing on how to get to where I wanna be, and it wasn’t until I slowed down and I took an overall vision…

You know, we get bogged down in the details. Details, details, details. Problems, problems, problems. But it wasn’t until I took some time to go “Okay, that’s just a deal. Let’s not worry about one deal. Let’s not worry about two deals. Let’s figure out how to do 40.”

At the beginning of my career, all I worried about was getting those deals done. So I didn’t have time to figure out how to get bigger, how to grow, how to live the life I wanted to live…

One of my actually biggest regrets was moving too fast, too soon, and not really taking a global picture to what I do. Today, that’s all I do. I take a global picture to what I do. I would rather lose a deal, not get a deal, even ten deals, to lose that opportunity cost of running my global organization in the right way.

Joe Fairless: What triggered the moment where you were able to get that perspective that you didn’t have before? Was it relationship with someone, or was it just a light flipped on, or what?

Aaron Kirman: I hate to say this, but I think it was general unhappiness. Maybe five years ago I was not that happy with my industry, I was not that happy with my business; I had already done it for like 16 years. I was super successful and I felt — what was my next move? I didn’t know what my next move was, and I didn’t feel like I could do this for another 30 years.
That was the year that I fired all my clients, that was the year that I cleaned house, and that was the year that I also thought to myself “Where do I wanna go? What do I really wanna do? Do I just wanna be an independent broker and do this?” and the answer was no. So then it lead me to becoming president of an organization. I became an  estates director of a company, I worked to build that division and we did a great job doing that.

Then I found I love leadership and I love teaching and I liked inspiring, and so that [unintelligible [00:21:23].02] to build my own team, plus the presidency of that division. And then from there, I’m always kind of figuring out “Well, what’s my next move?”

My next move is to continue to grow my team, and I like to talk to the media and I like to talk to the press, and these are all things that I enjoy, because at the end of the day I feel like I’m really good at sales, and I’d like to teach that. I think that no matter what you sell, if you have the basics and you are comfortable with yourself, people will be successful.

I think a lot of times people go into business with impressions of what people think that they think they should be. I realized that in order to be really successful, you have to be super authentic, and being authentic gets you really, really far. I walk into these expensive houses, and I’m a little corky and I’m a little bit crazy, and sometimes things come out of my mouth and I’m like “I can’t believe I just said that to these people that own 80 and 100 million dollar houses!”, but I’ve realized the more that I’m myself, the more that I go into my clients like they’re my friends, the more they’re gonna like me and respect me and we could just have a really authentic, real relationship, based on truth. That was when I started to get super successful. When I realized I don’t need to be somebody, I don’t need to pretend to be somebody, and I don’t need to lie about anything. A price is a price, and if they don’t like it, they could go somewhere else and try, and if it doesn’t work, they know my opinion.

Joe Fairless: Would you say that is the key to sales, or there are other bullet points that are just as important as being your authentic self?

Aaron Kirman: I think being your authentic self is honestly the most important. Other agents in my industry wear suits and ties, and I’m wearing a T-shirt. It’s just what I feel comfortable in. But there are other things. Knowledge is so important. You can’t hide expertise, you can’t hide experience, and you can’t pretend to have it if you don’t, because it’s gonna come across unauthentic.

So for everyone there’s a learning curve. It takes time, it takes energy, it takes study, it takes practice, it takes mistakes. These are all the things that keep people where they are. If I didn’t make those mistakes along the way – and I made so many of them – then I don’t think I would be as educated as I am today to know not to make those mistakes, not to react to an e-mail you don’t like… You get an e-mail that pisses you off, don’t respond; it’s okay, they’ll wait.

When I was younger, I used to shoot out an e-mail, and a relationship would deteriorate. 90% of the time I don’t respond they forget they sent me the e-mail to begin with. And if they didn’t and I respond and we work it out, it usually works out just fine. But again, these are all things that take time, and you really have to be super confident in yourself in your decision-making.

Joe Fairless: Without the expertise and the experience when you’re starting out, how do you become confident?

Aaron Kirman: I don’t think you do. I think it starts with knowledge and education, and being comfortable with that decision. If you don’t know what you’re doing and you don’t know the product that you’re selling, then you’re not gonna be good, no matter how confident you are. And if you are confident, eventually you’re gonna make a mistake, and that’s gonna backfire, too.

Listen, when I was younger, I was confident; I’ve always been confident in what I’ve done, and I’ve always been able to walk the talk and talk the talk, but the more knowledgeable you are, the more comfortable people will feel with you and the more comfortable you’ll feel with yourself.

I legitimately go into interviews and I think I am the best at what I do, and I couldn’t say that five years ago. But today, I can say it, because I have a team that supports me in such a way we’re doing everything we can in terms of marketing and advertising, we know all the right people and we work our asses off. And based on all those things, I could literally say I think I am better than my competition. Now, maybe my competition can say the same thing as well, and that’s why it’s such a competitive world, but that level of confidence really takes you very far.

Joe Fairless: Do you have any daily habits?

Aaron Kirman: Yes. I try to start my day slow. I try to wake up and have a cup of coffee, I meditate every single morning; I find meditation keeps me really in the zone and clear. I try to go to the gym every morning, and I try to start my day in a way that’s gonna set the tone for a very happy, energetic day.

I feel like when I jump in to work, and I jump into my phone and I jump into those e-mails, by the end of the day I get a little irritated and I get to a point where exhaustion sets in, but if I could start slow and easy, then my day goes longer, it goes better, I’m more likeable, I enjoy people more, they enjoy me more, and it all seems to come full circle.

I also take time off. I really believe people should live the life they wanna live, and that doesn’t mean building empires; it’s great to build empires, right? But it’s not the only thing. When I feel like I’ve worked too hard, I go on a vacation. I get out, I go see the world, and I meet my friends, and I travel, and I spend time with my family and friends, and these are all the things that I do to keep me centered, so that I can continue to keep focus and not do what we call burnout.

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

Aaron Kirman: Sounds kind of scary, but let’s go!

Joe Fairless: [laughs] I know you can handle it! Alright. First, a quick word from our Best Ever sponsors.

Break: [[00:26:32].25] to [[00:27:30].22]

Joe Fairless: Okay, best ever book you’ve read?

Aaron Kirman: I wish I didn’t have this answer… I read magazines, news publications, newspapers, internet… I haven’t read a book in a very long time.

Joe Fairless: Best ever news source or just entertainment source that you use that helps you with your business?

Aaron Kirman: Wall Street Journal, I read it every day.

Joe Fairless: Why that publication?

Aaron Kirman: It really focuses on business, it gives me an interesting perspective, and it has the very version of the most important news on the left. [unintelligible [00:27:57].08] I can scan it on a conference call, I can read it at the office… It just works really well for me.

Joe Fairless: Okay, this is a listener question – we asked our audience to submit some questions when we said that we were gonna be interviewing you, and we handpicked some questions… This is from Josh. He’s in California and he asks “How do you think home selling and buying will change over the next 5-7 years and how will that affect investors and agents?

Aaron Kirman: I think technology has continued to change our industry, and I think we’ve just begun to see the beginning of that. I think that in many respects, the thing about real estate that is important is it’s a people business and there’s so many technicalities to it, at the end of the day there will always be a lot of details that agents need to handle… So I think agents are here to stay, but technology is always moving forward, and there is a technology that’s gonna make it easier for both buyers and sellers to find homes; I think it will be interesting to see, adn we need to study every day, because none of us wanna be left behind.
But today, buyers and sellers are more knowledgeable than they have ever been. They know more than a lot of agents know, they have information and I think where we can provide our value (as an agent anyway) is from giving them information that they may not be able to have online. That comes through pocket listings, that comes through sales that are not public, that comes through understanding buyer and seller needs, and really being a real advisor.

Joe Fairless: Here’s another question from another listener – what are your top revenue-producing tasks and how are you tracking those in your performance?

Aaron Kirman: It’s really hard to track revenue in our business. It’s such a big, global world out there. We try. Whenever anybody calls us, we’re like “Did you see us on TV, have you found us on the internet, or who referred you?” To date though, the best way that I make revenue is referrals and ex-clients. I have — I call it an army of people behind me, because I have four billion dollars in sales, and if I get my job right and those four billion dollars worth of sales, those people behind it liked me, they’re gonna refer me to their friends and family. Quite honestly, that is our number one revenue source, and in order to keep that going, we need to be bigger and better than ever. We need to give better customer service. There’s no better way to sell a house than to sell a house. Once somebody gets told, a neighbor will call you. Just having that house doesn’t make it happen. So we’ve gotta make sure that we’re successful and make sure that our clients are happy with us, and that we treat people well. I think it’s a really small world.

One thing I also do is I work with the broker community and I don’t think other people do that a lot. Going back to the years I was unhappy, I was very competitive and I was all about me. I shifted that, and I started splitting everything with clients and agents. If a seller called me and said “Hey, I’m unhappy with my agent. Meet me”, often times I would say “Let’s keep your agent and add me. Let’s not take it away, because I don’t wanna take away from people.” And I noticed that that energetic level gave me more business, because all of a sudden agents are a huge sphere of my business. They’re like “Look, I’m having a hard time with a house. Can you help?”

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

Aaron Kirman: I think giving back is the most important energy to continue moving forward, and I do a lot. I give a lot of money to charity, I give a lot of my time to charity. I give a lot of my time to my team and to people, and I always try to give the best advice to everyone, and I think that that is ultimately how I give back, because I always try to take myself out of the equation and making money out of the equation and I always try to go “What’s right for this person?” A lot of times what’s right for me and what’s right for them don’t align, and I have to be aware of that, and I have to say “Look, I can only treat you like I would want somebody to treat me, or like I would treat my mom and my dad, who are my life. So I’m gonna tell you, don’t sell your house, because it’s not the right move for you today.”

Joe Fairless: Closing out, what’s the best place the Best Ever listeners can learn more about your company and get in touch with you or your colleagues?

Aaron Kirman: The best way is AaronKirman.com, our website. I’ve been super lucky to have a lot of articles written on me, so I’m googleable. If anybody has any questions, I’m always happy to help as well. Feel free to e-mail or get in touch.

Joe Fairless: Lots of lessons, thank you. I’m so grateful that you spent some time with us, Aaron. Some of the things that stood out to me… One is studying the companies and corporations that are best in class – not just in real estate, but just in general, and then implementing some of those procedures or departments. A specific example is you having two full-time press people on staff, and you listed some other things. Also, clearly the overarching here is being authentic and connecting with people maybe at an event, or hosting an event or sponsoring an event, but that event should be aligned with you and your interests, because as you said, when you connect with like-minded people, then the money will follow, because you’re gonna be in your natural setting and you’re gonna just be more magnetic.

Also, the other tips that you have on sales – one is you’ve gotta have the expertise and you’ve gotta have the experience; you can’t hide it, you must have it. So getting that, learning from the mistakes and being in the right environment to do so, and as you said, just always being honest and sincere and honing in on what’s right for other people…

Aaron Kirman: And yourself, too.

Joe Fairless: And yourself, in an authentic way, yeah.

Aaron Kirman: Look, I don’t know how to do math, I had a hard time reading as a child… These are things that I knew that I had problems with, so I was real with myself, and I said “Look, some things are not gonna work for me. I can’t be a scientist, I can’t do math.” You need to hone in on what’s good for you, but yeah, all those things are super important.

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

Aaron Kirman: Thank you so much for having me! Take care!

Best Ever Real Estate Show Banner

JF1141: How RealtyMogul.com Consistently Delivers Great Returns to Their Investors with Jilliene Helman

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As Co-Founder and CEO of RealtyMogul.com Jilliene has been working hard daily to make the company what it is today.  With over $300 million invested from investors and $1 billion of financed properties, Jilliene has done an amazing job, with the help of a great team, building a company that puts their investors first. Hear what she says separates her company from the many other passive investment opportunities out there. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Jilliene Helman:
– CEO and Co-Founder of RealtyMogul.com and is responsible for the company’s strategic direction and operations
– Has underwritten over $5 billion of real estate and was previously a Vice President at Union Bank, where she spent time in Wealth Management, Finance and Risk Management.
– Since launching, the company has funded more than $260 million in real estate transactions and raised more than $45 million from notable investors
– Certified Wealth Strategist®, holds Series 7, Series 63, and Series 24 licenses
– Based in Los Angeles, California
– Say hi to her at: https://www.realtymogul.com
– Best Ever Book: The Everything Store


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TRANSCRIPTION

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

With us today, Jilliene Helman. How are you doing, Jilliene?

Jilliene Helman: Doing fine, thanks!

Joe Fairless: Nice to have you on the show. A little bit more about you – she is the CEO and co-founder of Realty Mogul and is responsible for the company’s strategy direction and operations. Their company has been busy, and here are some stats that are quite staggering – over 140,000 investors have joined her company as a website and platform; over 300 million dollars invested through her platform, 65 million dollars paid out to their investors and 0 dollars of principal loss by their investors. Holy cow, that’s impressive! Tell us a little bit more about your background and your current focus.

Jilliene Helman: Absolutely. I grew up in a real estate family, so at the benefit of talking about real estate at the dinner table, and really learning real estate from the ground up, which I feel very blessed to have been able to do. I went to work in banking coming out of business school; I spent about five years in banking and then realized that I really wanted to do something where I could help people. I wanted to build a company where I could help people get access to commercial real estate, help people make money through commercial real estate, generate income and passive wealth through commercial real estate to launch Realty Mogul.

Today, Realty Mogul is an online marketplace for individual investors to come to our website and invest in a whole variety of different types of commercial real estate: apartment buildings, office buildings, storage facilities, industrial facilities… We partner with real estate companies all over the country to bring their investment opportunities to investors all over the country.

Joe Fairless: Okay. How do you differentiate your company from other platforms out there?

Jilliene Helman: I think there’s a couple ways. One is track record. We’re one of the larger real estate investing platforms, and that’s really beneficial because it allows us to work with our clients and build a really stellar team. We’ve got 80 professionals at the company.

I think one of the other big differentiators is how we think about real estate investing. We are boots on the ground on every single piece of real estate. There are some platforms where they’re not actually going out and kicking the tires (if you will) on the real estate. We’re doing site visits on every piece of real estate that we invest in.

I’ll interlude with a funny story – one of our guys in our underwriting team has just come back from a site visit, and one of the things we were concerned about with this specific property was the parking ratio; was there enough parking for this multifamily apartment building to support all of the tenants? So he comes back and he knew that that was one of our concerns, and he says “We woke up at [2:30] in the morning, we drove the parking lot, we counted 22 open spaces. I think we’re good on parking.” That’s one of those things in real estate that you can’t figure out unless you really go boots on the ground.

We’re really proud of our underwriting process, we’re really proud of the fact that we step foot on every property. Yes, we’re this digital marketplace, yes, you can invest with us on the internet, but we’re a real estate company as well.

I think we really differentiate in our underwriting, I think we differentiate in our track record, I think we differentiate in our team, and also kind of white glove service. We build long-term relationships with our investors. We stay involved in the life of every investment, we have an asset management team that is monitoring all of our investments on a monthly and quarterly basis, so we really wanna be that white glove provider, as opposed to having an investor invest online and then never hearing from us again.

Joe Fairless: You said your team does site visits for every piece of real estate you invest in. Am I hearing that right that you all invest alongside the investors?

Jilliene Helman: In most instances we’re not investing alongside the investors, unless it’s coming [unintelligible [00:04:49].08] We have two ways that investors can invest. One way is through a public, non-traded real estate investment trust; we have two real estate investment trusts – one is focused on income, and one is focused on growth. We have investments in those entities. The majority of that capital is still investors.

The other way that investors can invest with us is via private placement. A private placement – that’s where they’re investing in a specific property… A specific apartment building, a specific office building. The REITs are diversified pools of investments, while the private placements are specific transactions.

Joe Fairless: And in which one of the scenarios are you investing alongside the investors?

Jilliene Helman: In the REITs we have a co-investment from our parent company.

Joe Fairless: But on the property-specific, the private placement ones, you’re not co-investing; you’re gathering everyone and connecting the dots. Cool. With your growth – I mentioned briefly before we jumped on the call, I was just watching an interview on YouTube with you on Fox TV, the woman interviewing you; this was published in June 2014. When she interviewed you, she said that she met you a year and a half prior, so was that like maybe 2012… And she said that you had six employees, and now you’ve just said you have 80 professionals. So six to eighty people – what would your attribute your growth to, if that is a different answer than what differentiates you?

Jilliene Helman: Yeah, I think we would attribute our growth to investor demand. You’ve got all of these investors all over the country that are struggling to find good investment opportunities, and there’s real risk in every type of investing – in our company, in real estate, in all types of different investments, whether it’s stocks, bonds, private/public etc. But I think that you’ve got investors who are really hungry for investment product that makes sense, and real estate, in my opinion, makes a lot of sense. It’s tangible, you can touch it, you can feel it, people are living in it, people are working in it. So we have a lot of demand from investors who have raised their hands and said “Hey, we wanna invest. We want exposure to that apartment building or that office building”, or otherwise… Without that, we wouldn’t have a company. We’re in business to serve our investors every single day.

Joe Fairless: With some of the stats that I see on your website and that I was repeating to introduce you, one of them – the $0 in principle lost certainly stands out, especially given the amount of volume that you all have done; over 300 million dollars invested on your platform. Surely there has been a deal that has gone sideways, and maybe it’s a wrong assumption, but if so, then how was that handled?

Jilliene Helman: We absolutely have deals that have not met the mark. I’m a very transparent CEO; we don’t try and hide any of that. In real estate there’s real risk. So what we do when we have challenges with deals is we step in to the extent that we can. When we’re looking to invest in commercial real estate transactions, we’re gonna negotiate rights, what are our rights.

One of the beauties of investing collectively is that you have bargaining power. If we have 100 investors that collectively all want to invest in an apartment building, we’re gonna get collective bargaining power on behalf of those 100 investors. That gives us power on teh asset management side.

I’ll give an example of a transaction that didn’t work out well. It’s actually related to probably one of the biggest mistakes that I’ve made in real estate in my career. We ended up investing with two real estate companies that had never done a transaction together, and that was a big mistake; we don’t do that anymore. You’ve gotta have partners who have done business together, who know the rules of the road of working together… But these two operating partners – we invested in a transaction alongside them, and they were at war. They were threatening to sue each other, one wouldn’t let the other spend money to fix the parking lot, one would let the other spend money to actually execute on the business plan… This thing was a nightmare.

We had some rights because we were a large investor in the transaction, so we went in and we said — there was no ability to reconcile this. First we asked one partner if they wanted to leave; no, they’re not leaving. We asked the other partner if they wanted to leave – no, they’re not leaving. So we had to sell the asset. And we didn’t sell that asset because it was a bad asset. We actually bought very well on that asset. The investors ended up making money on that transaction, but the moral of the story was we had to sell the asset because we had bad partners.

The outcome of that was directly related to our asset management efforts. So it’s not to say that we can solve every transaction – again, there’s real risk in real estate – but we pride ourselves on doing everything we can, and having a dedicated team of asset management professionals, having a dedicated team of real estate professionals to step in and sort of muscle around a little bit to try and get to a great outcome.

Joe Fairless: As the CEO and co-founder of a company that has had just phenomenal growth, tell us the story of a very challenging time within this growth period.

Jilliene Helman: We go all the way back to the beginning. We’ve had investors invest over 300 million dollars via RealtyMogul.com, and we’ve also raised 45 million dollars in venture capital for the company. So an aggregate since starting the company, I’ve been involved in raising (let’s say) 350 million dollars. I cannot tell you how hard raising the first million dollars was for the company. We didn’t have a website, we didn’t have a business; it was my co-founder and I… We were the small, teenie company that really doesn’t have much to show for themselves. I had 100 coffee meetings to raise our first million dollars. And I don’t drink coffee, okay? No caffeine.

Joe Fairless: I don’t, either.

Jilliene Helman: And it was just wild. I think back to the perseverance that you need to be an entrepreneur, and the perseverance you need to be a real estate investor. Real estate operating companies – they’re entrepreneurs, too. And that was really, really challenging. There was a lot of times in the early days at the company where we could have just thrown our hands up and just said “This is too hard, we’re not gonna do this. We’re not gonna keep moving forward”, but I’m grateful that we did.

Joe Fairless: As far as the 100 coffee meetings and eventually the first million appeared – was it from one group or person, or was it cobbled together?

Jilliene Helman: No, it was cobbled together. 25k here, 50k there, 15k there… It was absolutely cobbled together. Anyone who had an inkling of believing in us we wanted money from, because we wanted to get the company off the ground.

Joe Fairless: Thinking back to the people who did invest, what was your relationship with them? Because I imagine they were more investing in your and your business partner, as much as the business plan.

Jilliene Helman: I think that that’s absolutely true. The interesting thing that I’ve found – and this is kind of angel investing now, where they’re investing in the company, not in real estate transactions unless they were angel investors in the parent company. I didn’t know them very well, frankly. I mean, there were folks that I would meet one or two times and they’d invest $25,000 or $30,000 because they were interested in the business.

I didn’t really have a big network of angel investors when I left banking. I left banking to start this company, so that wasn’t my network, that wasn’t my environment or the kinds of people that I kept company with. For many of them, I met them one or two times and they have high risk tolerances; you have to have a really high risk tolerance if you’re doing angel investing… And one thing lead to another.

Joe Fairless: What would you say is important for a Best Ever listener who’s listening to this and has a company, they’re looking to raise money for their company – what are some important talking points, or having a certain mindset that you can give tips about?

Jilliene Helman: I’d share a couple of things… One is perseverance. The key trait to entrepreneurs is perseverance and resiliency. And don’t be discouraged when you hear no. I heard no a hundred times. That can be very discouraging, and you’ve just gotta keep going. You’ve got a mission and you’re on that mission, and you’ve gotta keep going.

The other thing that I would recommend is forcing an answer. I used to sort of force an answer out of these angel investors, and the best investors are the ones who say no quickly. That’s a gift, because they’re giving you your time back to be able to go raise capital. But I would say ask for the answer; don’t be afraid to say “Hey, are you in or are you out? I need to know by Friday.” And it’s not like there’s something happening on Friday, if they gave you a check on Monday you wouldn’t take it, but you need for your own sanity and your own peace of mind “Do I spend more time with this person or do I not spend more time with this person?”

So I’d say persevere, be resilient and ask for the answer.

Joe Fairless: Let’s talk about your focus now as CEO and co-founder… What do you do during the day?

Jilliene Helman: The beauty of being a CEO is every day is different. I spend a lot of time with our team. I’m spending time with our real estate team, I sit on the investment committee, I’m working one-on-one with folks that are bringing in real estate transactions, I’m working with our underwriting team, I’m working with our asset management team… Then maybe the next day I’ll flip over and I’ll work with our technology team, and go through what the core priorities are for technology for the next quarter.

From there I might spend the next day working with our marketing team, and thinking through how do we best present ourselves, how do we ensure that we have consistency across the brand, how do we make sure that our messaging is effective for investors to know what we do and how we do it.

So every day is really different, and that’s the exciting part. I travel quite a bit as well, so I’m usually out of the office at least a couple of days every other week or so. We have offices around the country. Because we’re investing in real estate around the country, we wanna have a presence in a lot of different markets. We have folks in New York, Atlanta, Utah, San Francisco, Texas… That’s an important part of our strategy, so I’m also traveling quite a bit. But every day is different, and there are times when I spend really concentrated time with our real estate team, and there are times when I spend really concentrated time with technology, or accounting, or finance, or budgeting.

I also spend a lot of time communicating. It’s really important to me that all of our team members know the strategy of the organization, know why we’re making decisions the way we’re making those decisions. And then also the board level, too – the board understanding our strategy… And our investors, too – our investors being aware of how are their investments performing, how is the company doing. Communication is a big part of the CEO role, too.

Joe Fairless: Yeah, that’s a lot of different areas to dive into on a regular basis. What would you say is the area that you’re strongest in, and what is the area that you have the most opportunity for improvement in, of those you’ve just mentioned?

Jilliene Helman: I’d say I spend probably — if I was gonna break it out of “Where do I spend the most time?”, it’s probably with the real estate team. I came out of a real estate family, kind of came off the ranks in a bank and got a lot of exposure to real estate there as well, and… We’re diving into every transaction. We’re holding investment community meetings three times a week, talking through deals, talking through structuring… I still approve every legal document, every operating agreement that governs, that controls on the real estate side, so that takes up a bit of my time. We’ve got attorneys obviously as well, but I’m helping to manage the attorneys and approve those transactions.
So I’d say real estate is where I spend a significant amount of my time. Opportunity for improvement – it’s probably in engineering, just because I’m not a classically trained engineer. I spend a lot of time with our product folks who are translating between the business and the tech team, but can I sit down with an engineer and look at a line of code and know that that’s a well-written line of code? I can’t. Can our CTO? He absolutely can, so I rely obviously on my executive team to be able to do those types of things. But it’d be fun if I could write more code, I guess.

Joe Fairless: [laughs] With your overall focus, when you come across a challenge, [unintelligible [00:16:00].14] what’s the challenge where you or your team had to come up with a solution? And can you walk us through how that was handled?

Jilliene Helman: Yeah, I feel like you have challenges every day as an entrepreneur. Sometimes they’re small challenges and sometimes they’re big challenges. I’ll share kind of a silly one – right now we’re running out of space…

Joe Fairless: For people?

Jilliene Helman: Yeah, for people. And we’re hiring, and we’re growing the team, and we want more people to help us come and run the business, and expand the business, and physically we need more space.

Joe Fairless: If only you had some real estate connections…

Jilliene Helman: I know, seriously… The problem is I’m locked into a long-term lease, so shame on me. But [unintelligible [00:16:40].13] new chairs, we need new desks, and there’s no one — in a small company there’s no one assigned to facilities, if you will; it’s no one’s responsibility to buy new chairs when the chairs break. That’s a simple example, but you’re fighting those little micro-challenges all the time. We need parking; we don’t have enough parking in our building for all these new people that we need to hire, and we also don’t have any space to put them… So how do you figure that out? Do you break the lease and go rent something sooner? Do you get a new suite in the building? Just simple stuff like that, but it’s a challenge, and it’s inhibiting our ability to grow, so that will land of my desk, of “What do we do? Do we break the lease? Do we go find a new space? Do we take a new suite? What do we do and what’s the right move forward there?”

Joe Fairless: Is there a thought when you come across those questions and someone’s like “Hey, we need new chairs, we need a new desk. We’ve ran out of space”, is there a thought where it’s like “Why the hell am I having to deal with these chairs? I should be talking to investors or board members, I should be coming up with a strategy…” – is that a thought?

Jilliene Helman: Well, the chair is really not landing on my plate. It’s the “Do we lease new spaces?”, but the chairs I’m not having a say in. But it’s interesting, I used to make a lot more decisions at the company, and my emo now is someone will walk in my office and say “Here’s the issue, here’s the situation, here’s the data – what do you think?” I try not to answer. I turn it back and I say “Well, what’s your recommendation?” So the team is now trained that if they walk into my office, they walk in with a recommendation; they’ve thought through it, I haven’t thought through the scenario, whatever the challenge may be… Whether it’s a real estate challenge, or something comes up in due diligence that we didn’t expect, or a technology challenge where somebody’s gonna take a month longer to deliver than we expected… Whatever the challenge is; these always pop up, so I turn it back on the team – “What’s your recommendation?” and it shortens the conversation pretty dramatically.

Instead of having a two-hour conversation, it might be a 15-minute conversation where whoever is in my office is gonna say “These are the five options. This is why I didn’t choose option A, B and C. This is why I think we should choose option D and we shouldn’t choose option E.” And that makes it a lot faster and it also takes the pressure off of me.

I’ve got people who are empowered, an executive team that’s empowered, a VP level that’s empowered to help make those decisions and make those calls.

Joe Fairless: Is the goal to be purchased?

Jilliene Helman: The goal is to build a great company, whether that means that we’re purchased, whether that means that we look to take the company public – who knows? But really, the goal is to build a great company, help investors grow wealth. And again, there’s always risk in real estate investing, there’s always risk in any type of investing, but the goal honestly is to build a great company, and an exit will come. Or we take the company public, or there’s some other opportunity for the business and the company… But it’s really to just build a great business.

Joe Fairless: Based on your experience building a business, what is your best advice ever for real estate investors or entrepreneurs who are wanting to successfully build something?

Jilliene Helman: I think on the real estate investing side, figure out how to invest passively. Figure out how to invest in real estate without the hassles of tenants and toilets and trash. Part of that probably sounds self-serving, because we offer passive investing, but whether you do it with us or you do it with another firm or a friend or otherwise… I started managing an apartment building when I was 16 years old; a family apartment building that my grandpa had built and it’s been in the family forever. I live in Los Angeles; I would remember phone calls at 2 in the morning that the sewage is backing up, and the gate was broken, and the parking garage got stuck… All these sort of horror stories around real estate where if you are not a real estate entrepreneur, if that’s not your passion, if that’s not where you wanna spend 100% of your time, and you’ve got a great job in an unrelated field and you can make money there and focus there, I’d say on the real estate side figure out how to invest passively.

I started investing passively. That’s kind of what helped kick off Realty Mogul – this idea that I could hire operating partners around the country to invest passively and to not have to deal with the day to day management.

On the entrepreneur side, hire great people. At the end of the day, your company is a combination of all the people that you hire. So hire great people, don’t be afraid to spend a little more for great people; they’re worth their weight in gold. One person who’s making one-and-a-half times the salary of another person who can do three times the work, that math works out all day long.

Joe Fairless: Absolutely. I wholeheartedly agree with both approaches. On the passive investment front, you all do only commercial real estate, right?

Jilliene Helman: Correct. We do multifamily as part of commercial, but we don’t do any single-family residential.

Joe Fairless: Okay. Have you noticed that there’s more participation with multifamily than others? I have a follow-up if you have noticed that, and I don’t have a follow-up if you haven’t noticed that.

Jilliene Helman: Meaning investors are more interested in investing in multifamily?

Joe Fairless: Yeah.

Jilliene Helman: Probably 50%-60% of what we do is multifamily, and I think that I would agree, because investors seem to really understand it – you need a place to live, you have the roof over your head, you have short-term leases, you have good diversification… So I would say yeah, there’s definitely a concentration of multifamily across our investment books.

Joe Fairless: Okay. So the follow-up question, and you kind of already alluded to the answer – it’s more easily understood, so I’m gonna revise my question, too… Do you all proactively educate your investors on the other types of asset classes, like storage, office, industrial, that sort of thing?

Jilliene Helman: We absolutely do, and that’s really important to us, because we want investors to really understand the risks of the transactions that they’re investing in.

Joe Fairless: Got it. And how do you do that?

Jilliene Helman: We do a lot of blog posts, a lot of content about different transaction sizes, transaction types; we do webinars – for every investment that we’re doing via private placement, if an investor is investing in a specific transaction, we’ll do a webinar to talk about the strength of the deal, the risks in the deal and other aspects of the transaction.

Then we’ve also got a team of registered representatives through a broker-dealer that are  on the phones with our investors; kind of like that white glove service that I was talking about. We love talking to investors, we love walking them through transactions and really getting to understand the pros and cons of specific deals.

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

Jilliene Helman: Let’s do it!

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

Break: [[00:22:50].16] to [[00:23:54].15]

Joe Fairless: Best ever book you’ve read?

Jilliene Helman: Everything Store, which is the story of Amazon.

Joe Fairless: Everything Store?

Jilliene Helman: The Everything Store, yeah.

Joe Fairless: The Everything Store. Best ever deal you’ve personally invested in?

Jilliene Helman: The best deal that we’ve invested in at Realty Mogul is a deal called Metro Quest; it was a 150-odd units in Dallas, super interesting strategy. They did cultural updates to tailor to the Hispanic client base. They turned the basketball field into a soccer field, they built these beautiful laundry rooms so that people could socialize in them… We ended up selling that deal and it was just a home run.

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

Jilliene Helman: I talked about this one earlier, but investing with real estate companies that had never done a deal together. New partnership, didn’t know the rules of the road of working together.

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

Jilliene Helman: I love cooking and I love food, so I love working in soup kitchens, and actually sitting down with people and having a one-on-one conversation. I find that people really wanna share their story, they many times just don’t have someone to listen.

Joe Fairless: How can the Best Ever listeners either get in touch with you or learn more about your company?

Jilliene Helman: They can visit us online at RealtyMogul.com. If you wanna reach me, it’s ceo@realtymogul.com, because my name is long and spelled funny, so that makes it easier.

Joe Fairless: [laughs] Well, thank you for being on the show. Thanks for talking about how the first million of your 45 million dollar in venture capital that was raised was the most challenging, and perseverance being first and foremost of most importance, and then also forcing an answer, at least in that environment. I’m not sure if it would work if you were raising money from passive investors – I think it is more of a softer play – but for angel investors and more Wall-Street types I think that’s the perfect fit.
Then just the overall approach that you take as the co-founder and CEO, where you spend your time, how you focus it and then the overall evolution of the company.

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

Jilliene Helman: Thanks for having me.

Best Real Estate Investing Advice Ever Show Podcast

JF1121: How To Invest In A Tough State Like California with Anthony Walker

Listen to the Episode Below (28:10)
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Anthony has about 110 multifamily units in the Los Angeles area, and has learned a lot since 2011 when he only had about 5 units. It’s refreshing to hear about someone who can find deals in California, a lot of natives in California will look in other states. Hear how he is able to find deals in his backyard. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Anthony Walker Real Estate Background:
-CEO and managing broker of Buckingham Investments, an investment property brokerage firm
-Helps clients learn, plan, and invest in multi-family properties since 1963, teaches seminars on investing
-Owns a portfolio of multi-family properties in the LA area of about 110 units
-Based in Los Angeles, California
-Say hi to him at www.buckinghaminvestments.com
-Best Ever Book: Think and Grow Rich

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

With us today, Anthony Walker. How are you doing, Anthony?

Anthony Walker: I’m great. Thanks for having me, Joe.

Joe Fairless: My pleasure, nice to have you on the show. A little bit about Anthony – he owns a portfolio of multifamily properties in the Los Angeles area of around 110 units. He helps clients learn, plan and invest in multifamily properties since 1963. He is the CEO and managing broker of Buckingham Investments. With that being said, Anthony, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Anthony Walker: Absolutely. Just to clarify real quick – I haven’t been doing it since 1963, the company has.

Joe Fairless: Oh, got it.

Anthony Walker: My background is I was actually in the corporate world for almost ten years, got up into middle management, and realized pretty early on that that wasn’t really gonna deliver on what I wanted to get out of my life financially, as well as just the time that I have for myself, so I decided to go back to school. I went and got my MBA at night, with the specific purpose of trying to figure out what I wanted to do, what kind of business I wanted to start.

I took a real estate investment class there, and it just struck me that there’s no need to invent some crazy new business model and code an app, or something like that; I would be a real estate investor.
My professor actually recommended that I look into getting into brokerage as a way to help me get acquainted with the market, as well as grow my portfolio. At that time – this was about 2010 – I was introduced to Buckingham Investments, which is a local apartment building investment brokerage here in LA. I started the relationship with them first as a client; I bought my first duplex in 2011, and I really loved their model, so I decided to double down, become a salesperson and get aggressive with building my brokerage business, as well as my apartment building portfolio. So I became a broker, I opened up an office here in Torrance… And we’ve actually just restructured the company, so now I am the CEO, and we’re growing and looking to open new offices in the area.

Joe Fairless: Well, congrats on the new appointment and congrats on the growth with the company. You were introduced to Buckingham in 2010, in 2011 you bought a duplex, and now you’ve got around 110 units, is that correct?

Anthony Walker: Yeah, so all of that isn’t owned 100% by myself; I was fortunate to be introduced to some people that were already in the business and was able to partner up with them and kind of learn as I went along. So a lot of the investments that I have, I’m partnered with a group of seven other guys that are actually professionals in the industry as well, in different functions. That was a huge benefit to me to get started, but now seven years down the line we still own a lot of the buildings we purchase, but I rolled a lot of that into buildings that I own myself at least 50% of, so I’m doing more of it on my own.

Joe Fairless: Okay. When you partnered with seven other guys on deals, how do you structure that?

Anthony Walker: Great question. We’re all friends, but we definitely need to have the right documentation and structure together. Our investments are just in an LLC, and we divide up the equity on a pro rata basis for each person’s investment and the operating agreement kind of spells everything out. We’re fortunate in that everybody in our partnership has a different professional expertise within the industry, so we kind of each do our professional expertise, we charge the group a market rate for what we do, and that seems to work really well for everybody.

Joe Fairless: Wow, that’s incredible. What are some of the other areas of expertise that the other people are bringing?

Anthony Walker: We have a great team. There’s another real estate agent in the group, there’s a general contractor, there is a professional property manager who I use for all of my other properties as well, and he’s a fantastic partner to have… There’s sort of our money guy, who leads the group and has a lot of the relationships with the banks and the financing, and then we have a developer as well…

Joe Fairless: Have you got a lawyer or an accountant in there?

Anthony Walker: We don’t have a lawyer or an accountant actually, unfortunately. But a pretty good team.

Joe Fairless: Yeah. So I get what you said, where everyone charges a market rate for what they’re doing. I would think though that I just feel like some of them are doing a lot more work than others, but I guess if they’re just charging whatever the market rate is, then they’re getting compensated for it, so… Maybe I’m answering my own question.

Anthony Walker: Yeah, and you know, we have to figure things out as we go along. It’s pretty easy with the property manager – he charges a percentage on the collected rent, like he would with any other client. The agents that list the properties or represent us get their commission… People with the more detailed roles, that have to do with putting the deal together – that’s something we handle on a deal-by-deal basis and it’s worked out for us also because some of those guys have a higher percentage ownership in some of these deals, so it makes more sense for them.

Joe Fairless: How did you meet them?

Anthony Walker: I was introduced through my network at business school… Great testament to the power of being in the right place in education.

Joe Fairless: Someone who is also getting their MBA at night is in this group, and then he introduced you to the rest of the people, or…?

Anthony Walker: Yeah, one of my friends was in the program with me at the same time and we had discussed my desire to get into the business, and he happened to know another student that was in the program, so we were introduced. He had existing relationships with some of these other people because he had been doing real estate deals for a few years already, so they kind of brought me in and we started doing stuff together.

Joe Fairless: What are some lessons learned or what would be your advice for a Best Ever listener who has an opportunity to partner with five, six other people in a similar way?

Anthony Walker: My advice would be it’s a great opportunity as long as you’re able to get involved and have some sort of responsibility in the group, and as long as the roles are clearly defined… It was a huge benefit to me, because I got to learn how these deals are done, how they’re underwritten, how to get through an escrow, how to manage the property and all these things. But I don’t think it would have been a great opportunity for me had I just come on as a limited investor and just put up some money – like you see with the syndications – and kind of just read the updates as they come along. What was really beneficial for me was being involved in the management of the whole process and the buildings as we acquired them.

Joe Fairless: What was your latest acquisition?

Anthony Walker: My latest acquisition was a ten-unit property. On this one it was just myself and one other partner, so we have a 50/50 stake in it. We had refinanced out of another project that was successful for us last year in 2016, and we netted about $400,000 from that refi. We really liked the area that we were investing in, which is sort of a transition area in the city of Long Beach, which is in Southern LA county. We’re only a few blocks away from the ocean. Long Beaches really changes a lot as you go in from the beach… So we had an opportunity to buy a 10-unit apartment building built in the 1920 – almost 100 years old at this point – that needed a lot of work; every major system needed updating, so we had to do seismic retrofitting to the foundation, which is an issue here in California. New roof, new electrical, we replaced a significant portion of the plumbing.

What made the deal really attractive is the building has 40% [unintelligible [00:08:52].26] at the time we bought. We bought this in December 2016, and we’ve brought rents about halfway up to markets so far. We’ve done our major capital expenditures on those systems, so now we’re kind of getting into the units, upgrading them as we get vacancies, and we expect to be done with the project and refinanced probably by the end of 2017 and hope to rinse and repeat.

Joe Fairless: Are you doing 1031, or are you just refinancing out and then–

Anthony Walker: Yeah, we’ll probably just refinance out and buy another. We were able to do a bridge to perm loan, as they call it, on this one. We had a lender that gave us pretty good terms on a 24-month bridge loan that allows some renovation budget and capital draws to get the work done during the term of the loan, and also some ability for them to pay some of the debt service for us while we stabilize the building. Then they will take us into our permanent financing, which we expect to be a Freddie Mac loan on the takeout.

Joe Fairless: Will you elaborate for anyone – myself included – who has not done seismic retrofitting, what that is and what are the cost implications and timing?

Anthony Walker: Yeah. It’s obviously an issue here in California and anywhere else where you have earthquakes. These older buildings in general have got [unintelligible [00:10:17].16] foundation, so there’s a perimeter with posts… And most of them – at least in our area – are now what we call “anchor-bolted.” So the structure is not bolted to the foundation. In the event of an earthquake, it’s possible that they entire building could just slide off the foundation, which would obviously be extremely expensive to–

Joe Fairless: That’s a problem, yeah.

Anthony Walker: It’d be a big problem. So you see a lot of lenders out there especially, when we identify that in the building, that will require that as either a post-closing condition, or something which you need to do in your renovation plan. In this case, that’s what was going on with this building. The foundation itself wasn’t damaged, it was fine, but it was not retrofitted; it wasn’t anchor-bolted. So we had to do some additional shoring up in there. I think our total cost for this was about $18,000 with our seismic engineering company.

They basically go under the building and they put these huge clips to bolt the structure to the foundation. This building has two different structures – kind of an old 1920s row house with a courtyard in the middle, so there’s basically two foundations that we had to work on. So it’s pretty expensive, but once it’s done, you can get better pricing on insurance, and of course, you don’t have to worry about the big one when it hits, hopefully.

Joe Fairless: You’ve grown from a duplex in 2011 to partnering on — what’s the largest deal that you’ve done, from a unit standpoint?

Anthony Walker: Yeah, the largest deal I’ve been a part of was a 40-unit building, locally, here in our market. We actually had a larger equity partner on this, so that was a really interesting experience to kind of get exposed to this, from some people that do this at a very high level. In our market, real estate is really expensive, so 40 units may not sound like a huge building somewhere else in the country… Here we purchased for around four million dollars, put about $600,000 worth of work into the building, and sold for – I believe it was about 6,5; this was about a couple years ago now. So it was a large project, multiple structures… It was a big plot.

Joe Fairless: Yeah, you’re buying at $100,000 a door, and then you’re putting in $600,000 more on top of that… And you said you sold for six-something?

Anthony Walker: Yeah, we sold for 6,5.

Joe Fairless: And then why sell versus just continuing to hold on to it and do the refi? It was the large equity partner?

Anthony Walker: If it were up to me and I was buying a building like that, I would probably hold on to it and do the refi. The deal structure of that deal was such that our large equity partner had limited investors that were expecting to get distributions and get their money out, so that’s their strategy, and that’s what everybody’s expecting out of them. So that was the plan from the beginning on that deal. But if I were to buy a deal like that myself, I’d probably try to hold on to it and refinance.

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

Anthony Walker: I have to say specialize. That’s what’s been most effective for me. We’re here in a pretty small local market, one city of many cities in the L.A. area, and just knowing it block by block, knowing what market rents are gonna be in our units, what renovation costs are in our market, what going cap rates are – that’s been a huge point of differentiation for us. I would have years’ worth of work to catch up on if I were to enter another market that I’m not as familiar with as I am here.

We know it at a level of detail where being one side of one street or one block over can make a huge difference and really help us with our decision-making. Being able to collect that data over time and track how the market goes has really set apart the success that we’ve had.

Joe Fairless: Are you specializing in Los Angeles, or is there a particular submarket of Los Angeles?

Anthony Walker: Los Angeles is a huge area. I do almost all of my deals in Long Beach, which is really its own metro area; it’s got a dense downtown with a really diverse economy. It’s a dense area, so it’s near impossible for builders to add a significant amount of additional supply, and it’s so expensive to build here that they’re building high-end luxury apartments only, which is what I know we’re seeing in a lot of the rest of the countries.

So for people like us that buy existing stock, it’s a great place to be involved. And limiting it to just one city – just the city of Long Beach – really helps. It’s not as large of an area to digest. At the same time, we have neighborhoods in this city that range from 2,5 cap rate up to 5,5 or 6. So you’ve got the whole range of A neighborhoods to C neighborhoods, which makes it nice for investors too, because you can kind of decide what kind of projects you wanna take on.

Joe Fairless: I’m gonna pretend I’m a California investor and I heard what you’ve just said. I tell you “Anthony, the returns are much better in Oklahoma and Texas and in the Midwest… I can’t find any deals in Los Angeles in my backyard, so we can’t make it work” – what do you say to that?

Anthony Walker: I hear that all the time.

Joe Fairless: I know you do. You must.

Anthony Walker: Yeah, of course. [laughs]

Joe Fairless: I do, too. I hear that all the time too from people I know in California.

Anthony Walker: Right, and they are interested in investing elsewhere in the country. Lots of people here do, and I get that. There’s multiple sides to every deal and multiple ways to make money on a real estate deal. There’s a direct tradeoff between the cap rate or really the yield that you’re gonna get on an investment which is gonna be way higher anywhere in the middle of the country or in lots of these popular markets that people are going to than it will be here. There’s a direct tradeoff between that cap rate and usually the rate of appreciation or the rate of value that you’re able to add to the property.

We’re definitely not making our money from cashflow out here. Cashflow is good if we buy properties with under market rents and we’re able to raise them, and then we’re cash-flowing on a purchase price that was a lot less after we’ve increased the rents… But when you can buy at a 10-cap somewhere else, that’s not the way you’re gonna make your money.

On the flipside, because rents are so high and because cap rates are so low, for every dollar we increase the income, we make a lot of money in increased value on equity in the property, which allows us to do this kind of purchase, add value, refinance, keep buying, keep adding units, and it’s allowed me to go from having one small property at the beginning in 2011 to what I consider quite a few units now, just by trading, refinancing, adding value.

We definitely had good timing as well, but to elaborate a little bit there, but to elaborate a little bit there, a concrete example – I bought an eight-unit building in January 2016. The units were rented at that time let’s say around $1,300 each for a two-bedroom unit; they have about a $400/month upside in the rents that we were able to capture, and that neighborhood is about a 15-times gross neighborhood; so it’s a low cap rate neighborhood, and at 15-times gross, for every dollar that you increase the rent, you earn $15 in value on the property. At $400/month times 12 months of the year times 15 times gross, I make $72,000 in increased value just by bringing that one unit up to market rent, and we had eight of them that were averaging about $1,300 or so and we were able to raise them to $1,700 by the time the project was finished.

We spent probably around $100,000 total to do that, and we made a fantastic return on our money because we’re in an expensive low cap rate neighborhood.

Joe Fairless: Are you speculating at all? So if a downturn happens, then everything goes away?

Anthony Walker: I don’t consider what we do speculation. We’ll buy at a competitive cap rate or gross rent multiplier on actual rents, and I’m not gonna assume that rents are gonna go higher during the times that I’m stabilizing this project and refinancing out of it. I’m only doing my math assuming that I can get today’s market rents after completing the renovation on these buildings.

The good thing about the way that I’ve structured a lot of our deals is when you do that – assuming you can get a refi, of course, and we don’t have some catastrophic crash during the stabilization period, which for me has been 6-12 months on these buildings – the advantage is I’ve got now much higher rents and the building has no problem operating on an ongoing basis, and my cash-on-cash return from my initial investment plus my rehab costs looks more like it might in some of these other markets in the middle of the country. So I feel that I’m pretty well insulated against a market downturn if it were to happen. If it did, I would probably just sit back, let these buildings do their thing, try and get some cash together and hopefully use it as an opportunity to buy some more.

Joe Fairless: What’s the best type of financing that helps you be as conservative as possible, but still do that business plan?

Anthony Walker: Well, with the commercial loans on these apartment buildings for five units and up, the lender is actually gonna force you in most cases to be as conservative as they’re comfortable with, which is really in most cases more conservative than I’m even wanting to go… Because they do that debt coverage ratio underwriting, so they require that you have a pad on top of your net operating income necessary to pay all of the debt service. It’s hard to make a mistake when the lender is being so careful with you. At the same time, the valuation on these buildings are based off of the rents that they are producing, so I think it allows you to get a real valuation the appraisers use, the income approach to valuation, so you have great control over the value of the building, by either raising rents or knowing what you’re purchasing at, so that you can stay grounded, conservative, you can know where it’s gonna be.

We have done some of these bridge loans, like I’ve just mentioned, in this last project. They’re a little more risky, they’re designed to be short-term, so I wouldn’t wanna have too many of those going at one time. I’m pretty confident we can refinance out of those into a commercial loan and still have enough of a pad in the equity we’ve created to get long-term financing going. But I view that financing on these deals has a huge benefit to playing in the space that I’ve been playing.

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

Anthony Walker: I sure am!

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

Break: [[00:20:57].15] to [[00:21:57].09]

Joe Fairless: Best ever book you’ve read?

Anthony Walker: I’ve gotta say Think And Grow Rich, Napoleon Hill. It’s a common choice, I’m sure.

Joe Fairless: Best ever deal you’ve done that you haven’t mentioned?

Anthony Walker: I bought a six-unit building – this was about a year ago now – for 900k, five blocks to the beach, and was able to add probably $500,000 in value by only replacing some sighting, raising rents, upgrading one unit and a roof. So my total cost there was $40,000 or $50,000.

Joe Fairless: How much of that $500,000 of value was the market rising – what you did was great, but was it necessarily your craftsmanship?

Anthony Walker: That’s a great question. I think it was some of each. I got a great deal on the building to begin with. It was priced extremely well… I think as it sat it could have gone for probably $1,050,000 easily, and the rents were just way below market. So you could argue that on one hand, with the rents where they were, it was a fair price and it was a good deal, but they were so low that by the time I had raised them it was really easy to capture that upside. It was just such a popular area really none of the tenants left when I raised the rents. So I have some luck involved there certainly, and of course we had a good year; we had about probably 7% appreciation during the last year in this market, so at least that much of it I could attribute to the market alone and some luck.

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

Anthony Walker: Not doing enough due diligence. Actually, that first duplex I bought turned into a mess. I’m kind of surprised that I continued with this, but it was a duplex that had a bootleg, non-conforming unit in the bag… And I just kind of thought “Oh, it will be fine, no big deal.” I didn’t really know much about the industry or what I should be doing as far as due diligence or figuring out what the ramifications of that bootleg unit were gonna be for me as an owner.

After I bought that building, the city somehow was tipped off to the existence of the bootleg units and I had to deal with a code violation not just to convert that back to storage space, which was what it was supposed to be, but the city sharpened their pencil and then threw the book at me because I was operating that unit, and they told me that the duplex should only be permanent as a single-family residence, never mind that it had been a legal duplex going back to the 1950s. So I had to convert the whole property back to a single-family residence and lease it out that way.

The tenant, of course, leased it out like a duplex and made some money off of their lease, which hats off to them… [laughs] At the end of the day it worked out just fine because the timing was fantastic on that deal and I was able to improve the property a little bit. I still did very well on the deal, but it would have been a lot better had I been able to continue at least operating it as a duplex with a storage space. So I learned my lesson on due diligence on that one.

Joe Fairless: And when presented a similar opportunity again, what specifically would you do?

Anthony Walker: I would probably go to the city and talk to them in person. That’s always a tricky one, because you have to be careful… If you don’t end up buying the property, you don’t wanna open a whole can of worms on the current owner, and you have to try and get a reasonable expectation of what’s gonna happen.

I think at the end of the day it’s impossible to get a true sense of exactly how it’s gonna go. But I didn’t even go and talk to the city about how they handle those sorts of situations, even without saying address or something like that; I think that would have been a prudent move. Turn up all the records that you can on any property and understand the worst-case scenario. It came out of left field that I had to convert this property back to a single-family. I kind of knew that at some point it maybe was just gonna be a duplex, which was okay with me, but I learned all about the zoning, and density, and dwelling units per acre in that process, which is a lesson I would have rather learned in the due diligence…

Joe Fairless: Yeah, or just in your textbooks during your MBA at night program.

Anthony Walker: Yeah, exactly.

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

Anthony Walker: I love to help people learn how to do this stuff. Every day I’m meeting new investors that are just getting started, and I love sharing the lessons that I have learned – like the one we’ve just talked about – with people, so that they can start investing and getting financial independence for themselves.

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

Anthony Walker: They can check out our website at BuckinghamInvestments.com. You’ve got my contact information on there, and of course, we’re on Facebook as well.

Joe Fairless: Anthony, thanks for sharing your story. This is an episode especially for everyone living in California, because there’s a way you can make money investing in your backyard. You’re a living, breathing proof of it, and you talked about the approach… You purchased, you add value, you refinance and you keep buying additional units. You’re intelligent about the financing you use during that period, there is some risk there certainly… Well, there’s risk in everything, but there’s additional risk there during the add value stage when you’re doing your thing. But ultimately, when you are in a market that is as strong as the one that you’re in, then you’ve got some mitigated risks.
Thanks for talking about your business model, how you partner with six other guys on deals, and how that’s structured and who does what. I hope you have a best ever day, Anthony, and we’ll talk to you soon.

Anthony Walker: Absolutely. Thanks for having me.

Best Real Estate Investing Advice Ever Show Podcast

JF1108: How to do Over $200,000,000 in Transactions in a Year as a Brokerage with Anthony Marguleas

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As one of the top 60 agents in the country and over 24 years of experience, Anthony has a ton of real life education to share with us. Some of his insights that he gives us are extremely valuable, and I highly recommend you are ready to take notes on this one! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Anthony Marguleas Real Estate Background:
-Founded Amalfi Estates, a philanthropic residential real estate firm 24 years ago
-Donates 10% of the commission to charity, having given $464,000 since 2014
-Personally sold close to $1 Billion in properties
-Selected by The Wall Street Journal as one of the top 60 agents in the country out of one million agents.
-Based in Los Angeles, California
-Say hi to him at amalfiestates.com
-Best Ever Book: Blue Ocean Strategy


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TRANSCRIPTION

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

Anthony Marguleas: Good, Joe. Doing great.

Joe Fairless: I’m glad to hear that. A little bit more about Anthony – he founded Amalfi Estates, a philanthropic residential real estate firm 22 years ago. He donates 10% of his commission to charity, and has given $464,000 since 2014. He has personally sold close to one billion dollars in properties — yes, that’s with a “b”. He was selected by the Wall-Street Journal as one of the top 60 agents in the country. There’s over a million agents in the country, and he’s one of the top 60. Based in Los Angeles, California… With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Anthony Marguleas: Sure. I started my company — it’s going on 24 years now, so it’s been a couple more years on there. It’s been great. We deal with the luxury market in Los Angeles, we’ve been very active and we’ve had a great time. We cover a lot of Los Angeles, Santa Monica, Pacific Palisades, Brentwood, Bel Air… We work with a lot of developers; we’ve made a lot of developers millions of dollars with some of our negotiating and some of our real estate advice, and I’m happy to share some of that on the show today.

Joe Fairless: Perfect. With the developer angle – you said you’ve made developers a lot of money with how you approach things. Can you elaborate on that?

Anthony Marguleas: Sure. We’ve been able to find them a lot of off-market properties. It’s a very competitive marketplace right now, so for any of your listeners looking at different neighborhoods, the quick and easy way to check a neighborhood is the unsold inventory index. Basically, you take the existing inventory, you divide it by the number of homes that have sold the previous month; anything over five months is considered a buyers’ market, under five months it’s a sellers’ market. You can get the health of a market if something’s one or two months, it’s pretty active as a sellers’ market, and 10 or 15 months it’s pretty active as a buyers’ market.

We’ve been able to find a lot of off-market properties for a lot of our developers by just really hitting the pavement. I used to own a development company – so I have a development background – about 30 years ago, and I also owned a mortgage company for about 10 years. So with the mortgage background and the development background, we’re a little bit different than a typical residential real estate agent. We know how to crunch the numbers and make sure that it’s gonna work out. We’re very conservative with our estimates, so we’ve been very helpful to a lot of developers and making a lot of money with their investments.

Joe Fairless: With developers that you find off-market properties, how long is the development process usually for you to then — because I assume… I mean, you’re finding him a property, so then you will list it whenever they sell, right? That’s part of the process, I imagine… So how long is that turnaround typically for you?

Anthony Marguleas: How long does it take for them to build the house?

Joe Fairless: Yeah.

Anthony Marguleas: It varies. The properties they’re building can range anywhere from 3,000 square feet upwards to 12,000 square feet. The builders – they do it on a pretty regular basis, Joe – usually get their plans and permits in place while their acquisition, the teardown is in Escrow. So the minute it closes Escrow, within a couple weeks they have the demo permits. If everything’s lined up and it’s a very experienced developer, and it’s not in Coastal Commission or in an area that’s very restrictive against building, they typically can build anywhere from 9 months to a year after they have the property purchased.

Joe Fairless: Okay. Help me understand your business model by helping developers. Obviously, I understand the potential profits when you sell them the property, and then when they sell the property. But waiting 9 months to 12 months, assuming that everything goes right – is that a long time to wait for the work that you put into it to get it together?

Anthony Marguleas: Myself as a residential broker, or for the developer?

Joe Fairless: For you, I’m just talking about your business model.

Anthony Marguleas: For my business model it’s fine, we make the commission when we sell on the teardowns. Land where we are trades for about $365/land foot, so a 6,500 square foot lot will trade for about 2.4 million. So the numbers are a little bit higher. And then the finished product on those lots will be anywhere from 5 to 6 million dollars.

So we’re fine waiting. We do a lot of transactions. This year I’m on track – myself and my team, we’re on track to do over 200 million dollars in sales. We do a lot of business.

Joe Fairless: How do you prioritize that in terms of overall business — and maybe it’s not you, maybe it’s some team members of yours that you talk to… But it’s like “I wanna spend this percentage of my time focused on helping developers, I wanna spend this amount of my time helping people who wanna move into their dream house etc.”

Anthony Marguleas: On my team I represent all the sellers, and then I have six sales partners and they represent all the buyers. So any buyers that we have looking for properties, whether it’s the developer or not, they’ll look for the teardowns or the off-market properties for them, and then we have a full-time marketing person, we have a social media expert, I have a listing partner, and then I have two admin team members to help run our team.

Joe Fairless: Okay. So you’ve been in the market for now going on 24 years, you’ve seen the ebb and flow of the market for sure… What are some lessons that you’ve taken away from that in terms of just staying afloat in the bad times and thriving in the good?

Anthony Marguleas: I think getting very conservative on the numbers and not leveraging yourself too much… I see a lot of developers leveraging themselves, getting hard money loans… I think it’s really important to just not be leveraged, because the market will turn, and they need to be really conservative and have some liquidity. If the construction lender starts calling a note, or won’t give them an extension, it’s like a house of cards; then suddenly all their non-liquid assets have to be liquidated.

So I think just being a little more conservative is a smart thing to do.

Joe Fairless: So you’ve got around 10 or so team members; 6 team members who represent buyers, one marketing person, one listing and one social media person? Did I get that right?

Anthony Marguleas: Yeah, pretty close. We’ve got 10 on our team.

Joe Fairless: Cool, alright. How do you go about identifying when is the next role that you need to fill that currently isn’t filled?

Anthony Marguleas: Well, we pride ourselves on our customer service… I never worked for a real estate — it’s a little unique about my background in real estate; even though I had a real estate development company and a real estate mortgage company, I started my residential brokerage firm never having worked for a residential brokerage company. So everything we do is more analytical-based. A lot of our clients are investment bankers, venture capital attorneys, and they really like the fact that we crunch the numbers.

For a lot of our clients – our owner/user clients – when they’re buying a property, on average we do between 10 and 12 specialty inspections of the property. The average agent typically will do one or two. So it’s just more of an analytical analysis of the property. The more knowledge we have about the property, the better we can negotiate credits or even a reduction in price.

Even bank-owned properties, we’ve gotten up to $100,000 back in negotiating just by doing our due diligence on that property.

Joe Fairless: Will you walk us through how you do the due diligence when you’re crunching those numbers?

Anthony Marguleas: It’s really important – we tell all of our buyers, when they go into an open house, never ask any probing questions. Too often a lot of buyers, who are even experienced buyers (bought several properties) they go in and they wanna impress the listing agent and show them how much they know, and say “Oh, that roof looks older” or “There are some drainage problems.” You never wanna ask any probing questions, because it hurts your chances of getting a credit if you find out beforehand if there’s a roof leak, for example.

So our recommendation is don’t go in and ask a lot of questions. The goal is to tie up the property as quickly as possible, and then do you inspections. If there are legitimate issues based on what our inspectors find, anything from [unintelligible [00:09:30].13] gas testing, to foundation issues, to having a survey done on some of the larger properties, geological inspections… Even if it’s a brand new house, we still do 10-12 inspections, and you’d be shocked when we’re representing a buyer on a new construction house, how much we find problems and how many credits we get back on a new construction house.

Joe Fairless: 10-12 inspections… You said a couple – you don’t have to do all 10-12, but just maybe some that are surprising.

Anthony Marguleas: I don’t know if it’s surprising, but we’ll do chimney inspections, which are getting more common; we’ll have a videoscope of the chimney. We’ll do videoscopes of the main sewer line, we’ll get termite inspections done to make sure — California is very prone for termites; it’s number two in the nation for termite damage. Then we’ll do mold inspections. If there’s a lower level, a basement, we typically do [unintelligible [00:10:24].28] which I mentioned earlier.

We’ll always check the HVAC system, the [unintelligible [00:10:29].26] the electrical, the roof, and then depending on the property, if it’s — in all the properties we may do [unintelligible [00:10:36].00] There’s a list that we have based on the property.

Joe Fairless: Are all of those different inspectors, or do you have one house inspector who does the majority of it and then you’ve got some special specialists coming in?

Anthony Marguleas: We have a general home inspector, but all the ones I mentioned are specialty inspectors. And those are all one that the buyer pays for. What we found on average, Joe, is that the cost of the inspection for all of them is between $5,000-$6,000. Sometimes it can be upwards of $7,000 or $8,000, depending on the size of the house, and we typically get anywhere from a six to ten times return on that investment, because those reports become a material fact that have to be given to the listing agent and the seller, and they have to give those to any future buyers if for some reason we are not able to close Escrow or the seller’s not willing to give us those credits.

Joe Fairless: Let’s talk about how you’ve gotten to the point now where you and your team are doing 200 million dollars in sales this year. About how many properties does that make up?

Anthony Marguleas: Our average price is about four million, so we’ll do about 50 sale transactions and we’ll do about another 30 residential luxury lease transactions.

Joe Fairless: Okay. What are some tips for people who have not rubbed elbows with affluent high net worth individuals as frequently as you have, but want to get to know how to approach them?

Anthony Marguleas: The interesting thing is most high net worth individuals are very specialized in their knowledge. SO they may be an expert in the entertainment industry, in banking, in finance, in starting their own company as an attorney, but they typically know very little about real estate. We rebranded our firm approximately 12 years ago to a luxury firm; we rebranded the name, and just really focused more on the high-end properties, and really what it comes down to is knowledge. We wanna make sure that we have more knowledge than anyone else that we’re talking to, whether it’s the client or whether it’s another agent, and it’s just doing the hard work. There’s no secret shortcut, it’s really just studying, and the knowledge…

I’ve been teaching real estate as a lecturer at UCLA for about 13 years, and I teach negotiating and contracts, and that helps a lot as well. What we recommend to our buyers, Joe — if they can get at least two of these three things, we recommend they buy the property. Typically, we recommend they buy the least expensive property in the best neighborhood, we recommend creative ways they can add value, and certain ways we’ve done that — for example, we recommend even changing the address on the property if it’s on a busier street but it’s on a corner lot… In our neighborhood, it can add upwards of $200,000 of value for a $1,000 investment, by changing the address from a busy street to a non-busy street, if it’s a corner lot. These are very creative ways to add value to a property.

Third thing is finding a motivated seller, and what we’ve done with that is any out of area brokers — so if you’re in a certain area code and you see a broker from out of that area code, or you see a probate sell, or someone’s passed away, or a shortsale, or a foreclosure, or a 1031 exchange, or if it’s an overpriced property and it’s just been on the market a long time – if we can get two of those three things, we’ll recommend our buyers purchase those properties.

Joe Fairless: Let’s pretend that you have not met a new potential — well, okay, so you represent all the sellers…

Anthony Marguleas: I represent sellers, but my background — I mean, the first ten years of my business we represented primarily buyers.

Joe Fairless: Alright, then we’ll go with the first scenario… Hypothetically, you’re representing a buyer. You know that she is a high net worth individual who maybe works at Google, or something… So she knows tech, doesn’t know real estate as well, but clearly savvy online. So what do you do to prepare for your conversation with her?

Anthony Marguleas: I find out as much information about the property. If they’ve narrowed down a property or if they’ve narrowed down a certain area — usually, if it’s a property, we’ll go through the whole listing history, we’ll go through what they paid for the property, we’ll go through any other real estate that that owner owns, we’ll found out the owner’s motivations, where their families live… Anything that we can find out about that owner. We already know a lot of the agents, because we work with them on such a regular basis, but if it’s an out-of-area broker, if they’re selling a two-million dollar property and their average price range in the last 10 years was 500k, I print out all the sales of that broker, so I know going into it if that’s going to be the property that’s 100% or 200% more expensive, I already know that that agent’s gonna be on our side to try and get that sale, and they’re gonna give us sometimes information that may be beneficial to us in our negotiating.

Joe Fairless: Based on your experience in real estate, what is your best real estate investing advice ever for the Best Ever listeners?

Anthony Marguleas: Buy real estate as young as you can, as early as you can. My biggest mistake – I didn’t buy real estate when I was younger, and I really regret not purchasing real estate at a younger age. I tell everybody – get your real estate license as early as you can (in certain states I think it’s 18 years old) and buy real estate as soon as you can, and hold on to it, don’t sell it. Those are the two things that I think are invaluable advice, that I wish I was given.

Joe Fairless: You used to have a development company, you used to have a mortgage company – why don’t you have them anymore?

Anthony Marguleas: The mortgage industry has changed tremendously in the last ten years, so it wasn’t fun anymore. A mortgage broker is like the last line of defense. The analogy into sports – it’s like a defensive person; let’s say you’re playing soccer, and the mortgage broker is that defense person. If someone gets by them and they score a goal, everyone’s upset at them. But if you’re the forward, which is the residential real estate agent, and you shoot on the goal and you miss, it’s not a  problem. It’s like writing an offer and not getting that offer accepted in a very active market.

So it was a lot more restrictive with a lot of the federal requirements, a lot of the reporting… It just wasn’t as fun anymore, so that’s why I sold my mortgage company. The development company was more of a personal thing. Some of the partners I had — we had a differing of opinion on things. But I enjoyed it, development was fun.

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

Anthony Marguleas: Yeah, let’s do it.

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

Break: [[00:17:19].11] to [[00:18:20].12]

Joe Fairless: Okay, Anthony… I know you studied the Lightning Round questions, you’ve told me that before, but based on our conversation I’m gonna throw a couple extra ones in here, I might substitute some, so bear with me… But I’ll start with one that you have prepared for – best ever book you’ve read?

Anthony Marguleas: Blue Ocean Strategy.

Joe Fairless: I have not read it. Do I need to read it in order to get the concept?

Anthony Marguleas: You know, there’s actually a great website your listeners will probably love – I think it’s called Blinkist. Basically, if you’re in a real hurry and you just want an abridged version of four, five pages of any book, you can go on there and read it. It’s almost like a cliff note version. So if you haven’t read it and you wanna read it, Blue Ocean Strategy – great book. It’s basically — you’re creating a market that didn’t exist before, and I thought that was just a really outside the box thinking. I really thought it was a great book.

Joe Fairless: Best ever negotiating tip that you tell your students at UCLA?

Anthony Marguleas: Know your inventory. Go to as many open houses as possible and know your inventory. That’s what I tell my students.

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

Anthony Marguleas: [unintelligible [00:19:24].07] Let’s see, biggest mistake on a transaction… I think some of the deals were maybe a business manager, a real estate attorney for the buyer involved – I’ll sometimes expect them to catch and read some of the underlying documents. So maybe not thoroughly reading them when other attorneys or business managers are involved, and I need to do that on every transaction.

Joe Fairless: I have been guilty of that also. What’s the best ever deal you’ve done?

Anthony Marguleas: I did a deal last year… It was for a developer, and what was nice about that is every other broker in town said there’s no way we’re gonna get this price for the finished product… And what we did is we rebranded the entire neighborhood. There was a neighborhood and it was called Norman, and I rebranded the whole neighborhood as Norman Estates, and everyone’s like “I’ve never heard of Norman Estates.” I’m like, “What do you mean you haven’t heard of Norman Estates?”

So I rebranded the entire neighborhood and we got a 13 million dollar price tag for this property when the most expensive property before then was 7 million dollars, and it was just by rebranding the neighborhood.

Joe Fairless: Other than changing the name, does anything else come with the rebranding?

Anthony Marguleas: What I did is there was a lot of large lots around there, so it’s just pointing out to people that they’re [unintelligible [00:20:36].17] estate properties, and just educating even the local brokers who weren’t even aware of this little pocket, and having the data there to back it up.

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

Anthony Marguleas: Our charity component has been huge. We have our clients pick from one of five charities. We have one for health (American Cancer Society), one for kids (make a wish), one for pets (SPCA), one for homelessness [unintelligible [00:21:04].21] and then Homeboy Industries (to get the gangs off the street). And it’s such a rewarding experience… We really believe we make a living by what we get, but we make a life by what we give. It’s really about having a relationship with our client, honoring that relationship with a charitable donation, and to see the client light up when they can pick the charity, and to know that we’ve given almost $500,000… This year we’re on track for $150,000, next year we’re on track for $250,000. It’s a fantastic thing.

My hope is in 2019 we’ll be on track to give $500,000/year away. For a small team, I think that’s fantastic. My goal is to get every other residential brokerage house to give 10% to charity as well. We’ve started a giving pledge that we’re challenging every real estate firm and real estate agent in the country to give 10% back to charity.

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

Anthony Marguleas: My website is amalfiestates.com. I’d love to connect with them. If they have any questions, I’m happy to help out in any way I can.

Joe Fairless: Anthony, thank you for being on the show. Thanks for talking about how you have grown your company to where it’s at now, for giving us some tips on negotiating, as well as your focus, and that is when you are visiting a potential property, which is don’t go in there asking probing questions; instead, the goal is to tie up the property, then do inspections, because you don’t wanna hurt your chances to get credit later, as well as your overarching approach with the philanthropic angle.

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

Anthony Marguleas: Thank you, Joe. Have a great day!

Best Real Estate Investing Advice Ever Show Podcast

JF1104: How to Start a Real Estate Crowdfunding Platform #SkillSetSunday with Amy Wan

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Amy is one of the best real estate, crowdfunding, and syndication lawyers there is. Today she is here to explain different crowdfunding platform types, and how you can start one.  If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Amy Wan Background:
-Founder & CEO of Bootstrap Legal and former partner at Crowdfunding Lawyers
-In 2014, named one of 10 women to watch in the legal tech by the American Bar Association Journal
-Formerly was General Counsel at Patch of Land, advised the company on its $23.6M Series A funding round
-Holds an LL.M. in Public International Law from the London School of Economics and Political Science
-Based in Los Angeles, California
-Say hi to her at www.bootstraplegal.com

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

With us today, Amy Wan. How are you doing, Amy?

Amy Wan: I’m good, how are you, Joe?

Joe Fairless: I’m doing well, nice to have you back on the show. A little bit about Amy – she is a partner at Crowdfunding Lawyers, where she advises on syndication and crowdfunding law. She’s also the founder of Syndication Bot. She is a former general counsel at Patch Of Land, and has been named one of the top 10 legal tech females to watch by American Bar Association Journal. Based in Los Angeles, California… With that being said, Amy, do you wanna give the Best Ever listeners a little bit more about your background and your focus?

Amy Wan: Sure. Like you said, I pretty much focus in real estate crowdfunding and syndication law. What that really means is for anyone who wants to go raise money and they’re offering investors a return on investment, that requires some legal docs… So I’m an attorney and that’s what I do all day long.
How I got into this industry was I actually used to work for the Federal Government; I did international trade policy, and when I moved back to L.A. I found this little tiny startup at the time which was called Patch Of Land; they’re still around, they do real estate crowdfunding on the debt side. I helped them pioneer some really new and interesting products… There we came out with the first payment structure that was a trustee and a security element to it.

Most recently I helped Alpha Flow put together their managed portfolio product, which basically allows for dynamic rebalancing. It’s basically like a real estate [unintelligible [00:02:54].12]  advisor, and today I just help everyone who’s trying to go out and raise money for their deal.

Joe Fairless: And on that note, what caught my attention – we’re friends and we’re connected on LinkedIn – I saw that you had written an article on how to start a real estate crowdfunding platform, and I immediately replied and I said “This has to be an interview on this show”, because I had never thought about actually starting my own real estate crowdfunding platform [unintelligible [00:03:27].14] so I’d love to hear how to do that, and we’ll talk through it, for the Best Ever listeners who would be interested in starting one, or just the components and things we need to be aware of that exist in crowdfunding platforms I’ve already come across.

How should we approach our conversation so that at the end of it we know how to start a real estate crowdfunding platform?

Amy Wan: I think the important thing to remember here is that there are different types of real estate crowdfunding platforms. Obviously, when we say real estate crowdfunding platforms, a lot of people think about the big venture-backed ones. Patch Of Land, Realty Shares, Fundrise, Realty Mogul – all of them have gone out and raised a lot of money. Now, that in and of itself is a huge full-time job. The type of real estate crowdfunding platform I’m talking about is today probably maybe at least a couple times a week I’m getting calls from people who are saying, “Hey, actually this is not that hard. I would like to be able to put my own deals online for people to have a better investment experience.”

So I think in approaching this conversation what you have to keep in mind first is what is your goal? Are you trying to start this huge behemoth, or are you simply putting your offerings online to allow people a better user experience, to allow the automation of payments, things like that? So there’s definitely a couple questions I think people need to think about when they’re beginning in this whole endeavor, and those are — like I said, is this going to be your own personal platform for your own deals, or is this platform going to help other people raise funds for their deals?

The reason why that’s an important distinction is because there’s a very big difference in the level of legal and compliance… If you’re just raising money for yourself, then it’s fairly simple; people raise money for their own projects all the time, but when you start raising money for other people, then you’re starting to get into what we call brokering and dealing, and for that you have to have a license or some sort of registration, and there’s definitely a lot more compliance involved. So I think people have to really understand what they’re approaching this idea for.

Joe Fairless: And I’m sure there’s gonna be a lot to go along with that, a lot of financial ramifications too for startup costs when you do the raising money for other people and bringing through your crowdfunding platform that you’re creating, versus your own. So let’s just assume that it is for your own deals, because I think the majority of the Best Ever listeners are gonna wanna do their own deals and create a platform so that people can review the information and have a better (as you say) investment experience. So how about we go with that example?

Amy Wan: Perfect. I think then you have to think about “How much do I really wanna invest into this project?” Let me frame the conversation… I think 10-20 years ago when everyone started putting up web pages, real estate companies thought “Well, why do I need to put up a web page?” Today if you don’t have a web page, you are not credible. So it’s a matter of presence and credibility, letting people know who you are; having that LinkedIn profile, so on and so forth. From what I’ve been seeing over the past year, I’m getting so many calls about people trying to create their own personal platforms…

I think the way we’re trending now is that you’ve got your own website, and hey, we’re just gonna add an additional tab called ‘Browse Investments’ or ‘Invest With Us’, or whatever your take on it is. That basically allows people to see your offerings. Now, obviously, you’ve got to do it in a compliant matter, but I think that’s what we’re gonna start seeing over the next ten years – just being able to attract and take investors who just happen to find you; maybe they’re looking at your LinkedIn profile or something, but they can invest right then and there.

Joe Fairless: It’s interesting, because I’m thinking about this… I would be a prime candidate for this, but I initially am not interested in starting my own — and I know you’re not advocating to start one… We’re just talking about how to do it if you choose to do it, but just for some context for the Best Ever listeners as well… I wouldn’t start my own platform at this point, because what helps me maintain conversation with my investors about a deal is we’ll have additional marketing stuff in conversations; I need to have a reason to reach out to them.

For example, when I have an opportunity, I initially e-mail it out to my private investor network, and then I set up a call and we have a call; then I send another e-mail after the call is done, with the call recording, and then once that’s done, usually about three or four days (sometimes a week later) we’ll have a video that we finally complete with… Just a video walkthrough of the actual property and the deal. If I were to upload all this stuff at once on this platform, then I wouldn’t be able to have a reason – although I’m sure I can make one up… But I wouldn’t be able to have a reason to follow up with them, not asking “Hey, are you in?”, but rather “Here’s something else that will be useful for you as you evaluate the deal.”

Amy Wan: Right. So the point of creating that whole “Browse Investments” tab is not so someone comes across your web page and drops maybe $10,000 or $20,000, because that doesn’t happen. There’s an element of trust that needs to be had. You have to create that relationship.

What we’re starting to see a lot of people approach us for is that they’re simply using it as a way to catalyze their funnel, if you will. Basically, someone goes, they see your website, they see maybe past deals that you’ve done – anyone can put those up – and even if these people for most of their deals they’ll use a traditional 506(b) private placement, everything is done with their private investor network, but once in a while they’re now starting to put up a 506(c) offering… And 506(c) is basically a credited crowdfunding; you’re allowed to advertise and generally solicit.

So they’ll once in a while do one of these deals. They will tweet it out, post it on LinkedIn, do Facebook advertising – just lots of digital marketing, and it brings a lot of eyes. Now, those people aren’t gonna invest right then and there. They might come back for a couple times if you have one of those boxes that’s like “Hey, are you interested?” or even if they try to invest, it’s mostly capturing your e-mail. And they can invest if they want, but there’s still that element of forming that relationship, because what you really wanna do is get them into your long-term investor base. One day you want them to be able to invest in your 506(b) deals.

Joe Fairless: And that’s a strategy that you mentioned to me when we met in person about a year and a half ago, and you said “Continue to do – if you wanna do – 506(b)”, which is just the people that I know in my networks and I already have a pre-existing relationship with, “…but then if you want to cast a wider net, then sprinkle in a 506(c) and bring in people who you don’t know, but you can publically advertise to, and that will allow you to grow your investor network even more so than where you’re at now.”

Amy Wan: Right. And we’re starting to see a lot more traditional syndicators do that today. Now, at the end of the day all this is just marketing strategy – do you have to do this? No. If you have a huge private investor database and you haven’t come close to tapping out that capital, then you may not need to. But there’s a lot of people who are continually searching for capital, continually searching for people with money, and this might be a strategy that they might think about adopting.

Joe Fairless: With the content on the website, what can and can’t we put up there?

Amy Wan: It depends on what you’re doing, because everyone’s doing something different. If you have a 506(b), what you can put up there is different from if you’re doing 506(c), which is different from whether you’re doing a [unintelligible [00:12:11].25] which is something where you’re not raising from accredited investors, you’re raising from the crowd, and you can raise up to 50 million.

Then the newest one of course if regulation crowdfunding. Right now under that you can raise from the crowd up to one million dollars, which is not so appetizing for really sophisticated real estate investors, but it’s an additional option.

Joe Fairless: Let’s go with the scenario 506(b), where we’re only doing the deal with people we have a pre-existing relationship with. What can we put up there so it’s publically available

Amy Wan: [laughs] Well, don’t hold me to this, because it’s not legal advice, we cannot rely on this. There is “What should you put” and “What might you put.” I think there’s a little bit of lack of certainty or clarity in the law today. If you wanna be super safe, I would say you can put up past deals that you’ve done, where fundraising is done, you’ve completely closed it out. You can put your previous results on there; past things are the best. You never want to make any sort of statement or proclamation of “Guaranteed returns, no risk.” I know that sounds dumb, but I’ve seen a lot of really interesting things over the past couple years.

If you wanna put a current offering up, that becomes a little bit trickier. What definitely needs to happen is it has to be password-protected, it has to be someone that you have that pre-existing relationship with. You’ve grabbed a coffee with them, you’ve touched them three times through telephone or e-mail or whatever it is, and you’ve really interacted with them. That is a strategy that some of the real estate crowdfunding platforms adopt today if they’re gonna do 506(b) deals online… But they make sure that they have a very good record or documentation that they have these pre-existing relationships. Otherwise, if it’s new people, then you have to set up certain best practices about how you’re gonna develop that pre-existing relationship and document it before they can invest in you that first time.

Joe Fairless: What are some ways to do that? What are some best practices for developing the pre-existing relationships before they invest with you?

Amy Wan: Just like you were talking about earlier, maybe they come to the web page and they enter in their e-mail address or they try to invest and it kind of blocks them; they can’t really see any 506(b) deals. What you’re gonna do then is you’re gonna reach out to them and be like “Hey, let’s grab a coffee, let’s jump on the phone.” You’re gonna ask them “How sophisticated are you? How much money do you have to invest? What do you like investing in? Have you invested in real estate before?”

There is an educational and informational component, and if it sounds like they’re going to be the type of investors who might be interested into your deals, then you want to take that relationship a little bit further. There’s no black and white “Here’s a pre-existing relationship, here’s not.” It’s more of a fluid thing.

Some of my clients, for example, they’re very good about documenting every single time they have a call with this person. They’ll try and get maybe two or three calls in over the course of two or three weeks, and after that, then they will allow that investor to see any new investment that is coming out in the future, not anything that was currently open for funding when that investor first tried to sign up.

Joe Fairless: Okay. You mentioned earlier the process for showing your deals, and we talked about a 506(b) scenario – basically, you don’t show your current deal on a 506(b) scenario, you show your past deals. With 506(c) do you still need that password-protection online if you verify they’re accredited after the fact?

Amy Wan: This point is actually a little unclear. It is recommended that they actually register on the website and create a password, but there’s no restriction now on “Hey, it’s password-protected, but they can see the deal immediately, not maybe a month later.” What we always say to clients is “What the SEC giveth, the SEC taketh away.” The more the SEC allows you freedom and flexibility in going and raising funds, they’re gonna ask for something in return. So here they’re allowing you to tell the entire world about your deal freely; you can, like I said, go on LinkedIn, go on Twitter, go on all those things. You can tell it to people that you’ve never met on your podcast. The price that you pay is at the back-end when they are trying to actually invest in the deal, you do have to actually verify they’re accredited status. And you can do that yourself, there are third-party companies where you pay like $30 or $50 and they’ll verify it for you, but at the end of the day you do wanna make sure you do that so that your protecting yourself in case the SEC ever comes hunting for an audit.

Joe Fairless: Do you know how the third-party company verifies accreditation?

Amy Wan: There’s a few third-party companies out there, but mostly what they do is — there’s only a couple ways, actually, that the SEC has specifically talked about, to verify someone’s accredited status. One is you can have a letter from your attorney, your CPA, your broker-dealer. Another one is you just show, for example, [unintelligible [00:18:02].00] if you’re trying to verify under your income. So you [unintelligible [00:18:06].17] or W2 for the past few calendar years. Then for your net worth, you basically don’t have to share your entire net worth, you just have to show enough that it qualifies you. Basically, a million dollars in net worth excluding your primary residence.

Joe Fairless: Well, a letter from your CPA, attorney or broker-dealer seems like the path of least resistance… Just reach out to him or her and ask them to write a letter, and then that’s that.

Amy Wan: You would think that… [laughs] But actually, what we’ve found from practical experience is that these people – except for broker-dealers – a lot of attorneys, a lot of CPAs actually don’t like doing this. They will actually charge their client a huge amount of money for it, because they fear at the end of the day that it’s them making some sort of representation, that it’s their liability that they’ve made this representation… So actually a lot of people use the other two methods.

Joe Fairless: Wow… That’s surprising.

Amy Wan: Yeah. I’ve heard of one CPA who wanted to charge their client $5,000 for this letter. We gave them the template, too… It’s just ridiculous.

Joe Fairless: I would immediately move on to another CPA. [laughter] That’s criminal, almost. Alright… Amy, this has been education and very practical for all of the Best Ever listeners who are out there bringing investors into their deals. Is there anything else that we haven’t talked about that we should talk about as it relates to starting a real estate crowdfunding platform for our deals?

Amy Wan: Yes. Please, please, please, don’t go out and hire a developer or a team of developers. That’s gonna be very costly. I don’t think it’s gonna be a good return on investment. What I usually tell people to do, depending on what their goal is, is they can either go and license a white label from an existing provider, or there’s a couple companies out there who have something called “Invest Now” button, and you basically copy and paste the code, you put it on your website, and whenever someone wants to invest on your website, all your compliance automatically gets handled through a broker-dealer.

Joe Fairless: Thank you for mentioning that. That saves a lot money, and time (more importantly). Best Ever listeners, I forgot to mention this is a Skillset Sunday episode… So I hope you’re having a best ever weekend, by the way. Today is Sunday, and this was the skill, clearly, how to start a real estate crowdfunding platform for your own deals. Where can the Best Ever listeners get in touch with you, Amy?

Amy Wan: They can find me on LinkedIn… It’s LinkedIn.com/in/amyywan, or they can go to our website, crowdfundinglawyers.net. My Syndication Bot website is SyndicationBot.com, and then of course I’m on Twitter and Instagram.

Joe Fairless: Excellent. Well, from the initial clarification of scope, which was important, where we were talking about big venture-backed platforms who were bringing other people’s deals, or are we talking about our own deals exclusively, and we decided to focus the conversation around our own deals, just for the [unintelligible [00:21:22].27] of time, and I think it’s most practical or relevant to the listeners.

Then we talked about 1) how much do we want to invest in this project, and fortunately at the very end you gave the advice of “Don’t go out and hire a developer team. Look at the Invest Now button or white label from an existing provider” – I’m sure that’s a quick Google search.

Then the approach for the 506(b) versus 506(c) – not legal advice, but some things that we talked about was having the current offering, if it’s 506(b), not be shown at all, but rather have the past deals being shown, and previous results from past deals as long as you’re not raising money. Obviously, we never want to write or communicate in any form or fashion “No risk” or “Guaranteed returns”, because there is risk and the returns are not guaranteed, even if it’s a preferred return.

Then we talked about the difference between 506(b) and 506(c) just as a refresher for the Best Ever listeners.

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

Amy Wan: Awesome. Thanks, Joe!

Best Real Estate Investing Advice Ever Show Podcast

JF1100: Flipping for 3 Years, Before Going Bigger With Syndications with Pete Halm

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Pete and his wife were house flippers in LA from 2011 to 2014. One day, they decided they wanted to do more bigger deals. When they met a mobile home park investor, they partnered together to syndicate their first mobile home park! Pete has tons of great advice for every level of investor. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Pete Halm Real Estate Background:
-Partner at Vineyard Investment Partners
-He founded The Deal Hunta and started flipping houses in LA
-Keen eye for value-add opportunities and is dedicated to optimizing investor returns
-Degree in City Planning from the University of N.S.W. Sydney, Australia
-Based in Los Angeles, California
-Say hi to him at www.vip-assets.com
-Best Ever Book: Rich Dad, Poor Dad

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

With us today, Pete Halm. How are you doing, Pete?

Pete Halm: Good day, Joe. How are you doing?

Joe Fairless: I’m doing well, and I’m guessing that you’re not from Los Angeles, California, even though you’re based in Los Angeles, California. I’m guessing you’re from Australia, am I right?

Pete Halm: I’ll tell you what, you’re pretty. I’m from [unintelligible [00:01:31].19] down under, but I’ve been up here for quite a while, a couple of decades.

Joe Fairless: Okay. Well, you still have the Australian charm, that’s for sure. I also have a cheat sheet in front of me that says you’re from Australia too, so I think I’ve got an advantage there.

A little bit about Pete – he is a partner at the Vineyard Investment Partners. He founded The Deal Hunta and started flipping houses in Los Angeles. He has a degree in City Planning from the University of New South Wales. With that being said, Pete, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Pete Halm: Yeah, absolutely. I came over to this country basically looking for cash-flow, because it doesn’t really exist in Australia. My wife and I started out flipping homes; we watched those shows on TV and we thought “You know what? We could do that, too.”

We actually started, and we were pretty successful for a couple years, probably 2011 to 2014. That was working pretty well, but as prices rose, profits were shrinking, and we figured there had to be a better way. We decided to go full-time into real estate and just learn everything we could. We started getting a lot of education, and getting mentors, and we learned that you can actually go a lot bigger that we thought we could go, and we learned about using other people’s money.

Joe Fairless: And what did you buy once you got those insights?

Pete Halm: We started out buying a mobile home park, a very small deal in North Carolina. It was a value-add opportunity where there were a lot of vacant lots and a lot of the park-owned homes were in a lot of disrepair, so it was a big turnaround in that, and it’s actually starting to work now. That was about a year ago.

We’ve only been doing this probably for about a year, so we’re relative newbies in syndication and in getting into bigger deals. Then we actually syndicated a couple of apartment buildings in New Mexico, and our whole thing is value-add, just finding properties that we can actually turn around.

Joe Fairless: Well, let’s talk about this, that’s some interesting stuff. You can call yourself rather new to the syndication stuff, but you and your wife were flipping homes from 2011 to 2014, right?

Pete Halm: Right. But we were using our own money, and we did a couple of deals using hard money. But we had money for one deal, and we’d have to wait until we got the payoff for that to move on to the next, so we kind of felt like we had our hands tied; we didn’t know how to go bigger.

Joe Fairless: And that’s when you were introduced to syndication. Was the mobile home park a syndicated deal?

Pete Halm: Yes, it was.

Joe Fairless: How many lots in the mobile home?

Pete Halm: 109 lots, and we only have two other investors in that deal. It was a pretty small one, but that was our test to see if we could do it, and if we could get the message across to investors to let them know that there’s more out there than putting your money in the stock market.

Joe Fairless: From single-family homes, where you were doing fix and flip, the natural evolution or progression is multi-family, which you said you did two of them, and we’ll get to that in a second… But you went to mobile home parks – how did you come across that and why mobile homes?

Pete Halm: Well, I guess we started from single-family homes and we started looking at duplexes, fourplexes, eightplexes, and then we figured we’ve gotta someone go bigger, and we soon realized that in this business you can’t do it alone and you need to partner with people. We had to start networking, and we met someone who was doing mobile home parks and managing them. He came to us and said “Are you interested in syndicating a deal?” We did, and it was a very small deal; he basically held our hand through it, and we learned as we went. We probably made some mistakes along the way, but we learned.

Joe Fairless: So did he have the deal?

Pete Halm: Yeah, he had the deal.

Joe Fairless: What value did he need you to bring?

Pete Halm: Well, he was in this situation of getting a lot of deals under contract and not having the funds to see them through, so it was like “Well, I’ve got this deal here. Can you help me close this deal?” So that’s what we did. It allowed him to move on to what he was good at, which was actually finding the deals and building out his property management company across the country to run the properties.

Joe Fairless: So he’s managing the mobile home park?

Pete Halm: Yes.

Joe Fairless: Okay. Basically, he found the deal, he didn’t have the money, but he had the management in place, so he needed the money. Is he on the general partnership side with you all?

Pete Halm: He is, yes.

Joe Fairless: Okay, cool. What lessons did you learn on this one in particular?

Pete Halm: On this one in particular? Number one, get out there and talk to people on the ground. We found — being in Los Angeles, it was kind of daunting to get out to different parts of the country and find deals, but we went into this deal initially without visiting the property, and we’ve learned from that that every single deal, get out there, visit the place, day time, night time, talk to everyone you can, and make sure you have the right team in place.

Joe Fairless: As far as visiting the property, what would be some things that you would have uncovered and perhaps approached differently if you had visited before getting into the deal?

Pete Halm: When a seller or an owner says that the property is 90% occupied, you wanna know who’s occupying the place. We’ve had this experience going forward with our multifamily properties, of finding a lot of tenants who are not really desirable, and just getting the monthly rent out of people can be really, really difficult. Just finding out who your tenants are is probably the biggest thing.

Joe Fairless: Yeah, I’ve experienced that first-hand on my first syndication… The difference between physical and economic occupancy, physical being the percentage of people who are living there, but then economic – people who are actually paying to live there… Which is a big difference sometimes.

Pete Halm: It certainly is.

Joe Fairless: So you would talk to people on the ground and you would do a little bit more due diligence on the economic versus physical occupancy…

Pete Halm: Yeah.

Joe Fairless: Would you do another mobile home park?

Pete Halm: Well, as a matter of fact, we are doing a deal at the moment in Louisiana. We’re attracted to the area because we’re just seeing all these economic indicators, a lot of jobs coming and a lot of construction, so we’re actually doing an RV park, and we’re looking right now at getting mobile homes onto the property. So we’re working on that at the moment.

Joe Fairless: How did you structure the deal with your general partnership and your investors on the mobile home park, your first one?

Pete Halm: Well, we actually created an LLC for the entity, and the investors are passive investors. Our LLC is in partnership with the other general partner who is running the property.

Joe Fairless: And are you on the general partnership side?

Pete Halm: Yeah.

Joe Fairless: Okay. And what’s the structure with the limited partner versus the general partnership? Do you have a preferred return? Is it 50/50, 70/30, 60/40?

Pete Halm: It’s 25/75.

Joe Fairless: Okay, cool. And is there a preferred return?

Pete Halm: No.

Joe Fairless: How long do you plan on having that property?

Pete Halm: That’s a really good question… I have no idea.

Joe Fairless: What’s the business plan? I guess that’s a better question.

Pete Halm: Well, if we look at 3-5 years, we may do a refi in a couple years if interest rates are still low, and pay all the investors back. We’ll see what happens. But it’s a very small deal. Maybe once the initial capital is all paid back, we’ll just hang on to the thing and it’ll just keep cash-flowing forever. Who knows?

Joe Fairless: You’ve mentioned it’s a small deal, but I think 109 lots is not a small deal. I think that’s pretty large. But everyone has different contexts for what a small and large deal is. What about your apartments? You said you’ve syndicated two apartment buildings… What city?

Pete Halm: Albuquerque.

Joe Fairless: In Albuquerque… And the mobile home park was in North Carolina?

Pete Halm: North Carolina.

Joe Fairless: What city?

Pete Halm: It’s near Jacksonville, North Carolina. There are a bunch of Jacksonvilles around.

Joe Fairless: Yeah, I’m not familiar with that, but okay, so one’s in North Carolina, and you’re in Los Angeles. You’ve got a mobile home park in North Carolina and two apartment buildings in Albuquerque. How the heck did you come across those two apartment buildings?

Pete Halm: Well, we were looking in Texas, Oklahoma, Kansas City, Florida, and it seemed like everyone was looking in these areas, and I just said “You know what? I’ve created a persona, “the Deal Hunta.” And I just figured I’m like this Aussie, like a crocodile hunter, so I’m just gonna get out there and, beside wrestling with crocs, I’m just gonna find markets that are kind of off the radar, off the beaten track, and I thought I’m gonna stop looking at the places everyone else is looking, that have this huge growth, and I’m gonna start looking for places that maybe are fairly stable, and looking to the reasons why they’re stable, and how they got through the downturn in 2008.

So we looked at New Mexico and found that there was a high percentage of government jobs and military jobs there, and there’s a lot of government research facilities, and during the big downturn they didn’t shed a lot of jobs. What’s happening is that the government tends to be slow to add jobs and slow to reduce jobs, so we looked at the market and we figured it’s fairly stable, it doesn’t have the growth that you’re seeing in a lot of other areas, but we figured we could make it work if we find the right properties.

So I jumped in there, I spent a couple of days just talking to brokers, property managers, a couple of real estate attorneys…

Joe Fairless: Were you there physically, or did you just call? Physically, you flew there and you met with people. Okay.

Pete Halm: Just things kind of fell in place, and I’m kind of relying on my gut more and more these days. I just had a good vibe about the place and how everything was falling together, and within a month we had two properties under contract. How do you get all these happening so fast? I think one of the things was I was looking at properties that a lotof people had seen before and kind of overlooked… I actually found these properties on LoopNet, and I looked at the asking price, and I said “Well, you know what? The asking prices are meaningless to me. I just have to do the numbers and see what works for me.” So I did the numbers, I came up with a number that worked for me on both properties that was probably about 20% under asking, and we had the offers accepted.

Then the next question was whether to actually do a syndication as a portfolio, or keep the deals separate. Well, we actually kept the deals separate, but in hindsight I think it would have been a lot easier to put them into one portfolio.

Joe Fairless: Why is that?

Pete Halm: Well, one property might be doing better than the other, and you can average out the returns. The other thing is — I guess in dealing with investors it would have been easier to have a portfolio. Initially, we thought it’s probably gonna be easier for investors to understand a simple deal, which is just one property, and that might have been the case; that may have been why we were able to raise the money for both of these deals… But the raises happened sort of one after the other, and that was last September, October (the deals are fairly recent). We only actually closed on them in November.

Joe Fairless: Congratulations on the closing for both of them.

Pete Halm: Yeah, so one was a 77-unit building, the other was a 51-unit.

Joe Fairless: And they were different sellers?

Pete Halm: Yes.

Joe Fairless: What was being overlooked? What aspects did you find areas of opportunity where others overlooked them?

Pete Halm: One of them was in a nicer area, and the interiors hadn’t been touched in probably 30 years, so we figured we could get in there and upgrade them to the level of the submarket. The other property was in a worse part of town, but we were seeing other properties around there being rehabbed, and we were seeing rents jumping up. I think the second property, there were people scared off by the way that that submarket was perceived before, as being like a really bad area.

Both properties have actually been a lot of work, but we’re seeing the turnarounds now, we’re seeing that the rehabbed units are getting above the proforma prices… And in the second property, where it’s in the area that’s not as desirable, we did a really nice paint job and just fixed up a bunch of things on the exterior, and now we get a lot more drive-by traffic.

Joe Fairless: Yeah, congratulations on the strong start to both of those.

Pete Halm: Thank you.

Joe Fairless: For people familiar with Albuquerque, what submarket is the nicer one in, and what submarket is the one that people might be less inclined to invest in?

Pete Halm: The nicer market is called Uptown.

Joe Fairless: Of course it is! [laughs]

Pete Halm: Exactly. It’s called Uptown, and it’s walking distance to some really nice malls. Actually, what we’re doing there – we wanna turn that building into a cultural and art icon. We’ve commissioned a mural by a fairly well-known Native-American artist. That’s all happening in the next month, and we’ve invited the community to come along and actually create the background for the mural. We kind of hooked up with this organization called “We Are The City” in Albuquerque, and they’re gonna be giving the public balloons filled with paint and fire extinguishers filled with paint, to basically [unintelligible [00:16:45].19] this big 60×25 wall. They create the background and create some excitement about the property and the project, and then the artist comes in and does his mural on top of that. Hopefully, we’ll also elevate the whole area. It will get onto the art tour map of the city.

Joe Fairless: How much does that cost, to commission the well-known Native-American artist?

Pete Halm: That’s 10k.

Joe Fairless: And a mural – is it just on one side of the building, or is it at the front monument sign? Where is it?

Pete Halm: It’s on a side of the wall that has a lot of visibility from the major streets around there, and even from one of the more upscale shopping centers, you could probably see it from there.

We’re all about uplifting a community and creating a place where the tenants are proud to live.

Joe Fairless: And the other submarket?

Pete Halm: The other one is in an area called South-East. I don’t think it’s a bad area, but in the past it had this reputation. It’s right near the VA Hospital, and it’s near a military base… It’s actually near the main airport. We’re actually targeting veterans for that property. We’re actually putting up a big banner there saying — actually, one of our partners in this project is a vet, and the on-site property manager is a vet, so we’re saying “Veteran-owned, veteran-managed, veterans welcome!” That’s the target there.

Joe Fairless: Bravo on being very specific on who your target audience is and then catering to them. That’s something that you don’t hear frequently when you talk about these deals, and it’s pretty impressive that you’re very narrowly-focused.

Pete Halm: Thank you. I guess that’s a personal thing, where I always found I was taking on too many things, not focused… So I’m learning that build a niche, focus on that niche, and do the best you can in it.

Joe Fairless: And with that last part that you said, “Build a niche and focus on it”, how would you reconcile that approach with you buying mobile home parks and then also apartment buildings? You know I had to call you out on it, right? [laughter]

Pete Halm: Exactly, yeah. It started out with the mobile home parks — we didn’t know where to go, we were just trying something, and I think at this point in time we’re finding it harder to get multifamily deals under contract where the numbers work. I think we have two niches that we are looking at: one is the multifamily, and the other is we’re gonna keep on in that mobile home park/RV park area, and we’ll see which area wins ultimately.

I don’t know, we may end up focusing more on one in the future, but at the moment I guess this second deal came out of the fact that something fell into our laps, and also there was a frustration of not being able to find the multifamily deals that we need to find, and we’ve built up quite an investor database, and I get calls and e-mails from people saying “What do you have? Have you got anything?” So it’s kind of like, well, we wanna be able to have something that we can provide and just help people out, because we see what goes on with people’s retirement funds, and they’re totally tied into Wall-Street… And the market might be up now, but I don’t believe it’s gonna be up for a long time, up for much longer, and now’s a great time, I think, to get into real estate, even if the real estate prices are high.

I think there are submarkets that are on different parts of the cycle, and we’ve just gotta keep looking and finding those areas and finding the deal.

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

Pete Halm: The best real estate investing advice is get a mentor or mentors. Don’t go alone. Get help, education, and build teams, teamwork.

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

Pete Halm: Sure.

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

Break: [[00:21:00].15] to [[00:22:03].10]

Joe Fairless: Best ever book you’ve read?

Pete Halm: Rich Dad, Poor Dad.

Joe Fairless: Best ever deal you’ve done?

Pete Halm: It probably was the first single-family flip.

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

Pete Halm: Not reading all the fine print.

Joe Fairless: What fine print did you not read?

Pete Halm: All the fine print.

Joe Fairless: [laughs] “Just what I said, Joe – all the fine print.” Fair enough. Was there a monetary loss as a result of not reading a certain aspect of the fine print?

Pete Halm: Not really… I’ve learned now, if you can’t read it, get somebody to read it with you. Get a lawyer.

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

Pete Halm: Just helping kids.

Joe Fairless: And where can the Best Ever listeners get in touch with you, Pete?

Pete Halm: On Facebook I’m “The Deal Hunta.” The website is vip-assets.com.

Joe Fairless: Pete, thank you for being on the show, talking about your syndication deals, from the 109 lots mobile home park in North Carolina to the two Albuquerque apartment buildings – the 77 and the 51-unit… How you went there – you traveled from L.A. to Albuquerque, and how you sniffed out Albuquerque because you were looking for a market that other people weren’t talking about, but still in your opinion is stable, and the reasons why it’s stable: the high percentage of government and military jobs, and how they don’t usually get added quickly or removed quickly, based on your research. And your very specific focus on who the properties are targeting primarily – clearly, you rent to everyone, but primarily you have a target audience.

Then also commissioning a mural by a well-known Native-American artist for one of the properties, and getting into the specifics of that.

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

Pete Halm: You’re welcome. Thanks so much, Joe!

Best Real Estate Investing Advice Ever Show Podcast

JF1094: Flipping Houses, Developing, Buy and Hold, Syndicating, How to be Successful in Multiple Areas with Monick Halm

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Monick and her husband Pete, have successfully partnered together in their real estate business. They tackle all avenues of investing and do it successfully. Rarely do we get to talk from someone who does it all successfully, lots of lessons from Monick today! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Monick Halm Real Estate Background:
-Founder of Real Estate Investor Goddesses, an online community for women investors
-Real estate investor, developer and syndicator
-Over 12 years of experience in single family, multi-family, and RV/mobile home parks
-Author of The Real Estate Investor Goddess Handbook
-Prior to real estate she practiced corporate litigation for 9 years at top law firms in Los Angeles
-Based in Los Angeles, California
-Say hi to her at http://realestateinvestorgoddesses.com/
-Best Ever Book: Rich Dad, Poor Dad

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

With us today, Monick Halm. How are you doing, Monick?

Monick Halm: I’m doing great. How are you, Joe?

Joe Fairless: I’m doing well, nice to have you on the show and looking forward to diving in. A little bit about Monick – she is the founder of Real Estate Investor Goddesses, an online community for women investor. You’ve gotta check out her new book, she is the author of The Real Estate Investor Goddess Handbook – consistent branding theme I see throughout…

She is a real estate investor, a developer and a syndicator, has been doing it for 12 years, investing in single-families, multifamilies and mobile home parks. Prior to this, she was practicing corporate litigation for nine years at law firms in Los Angeles. She’s currently based in Los Angeles, California.

With that being said, Monick, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Monick Halm: Sure. My personal real estate investing business – I invest with my husband; we syndicate, we bring groups of investors together to purchase properties. Currently, we have syndicated some apartment buildings in New Mexico, and we have a mobile home part that we syndicated in North Carolina, and we’re currently working on a project in Lake Charles, Louisiana. We also have passively invested in quite a few properties in Dallas, Atlanta, and have a couple duplexes in Los Angeles. That’s where we’re at with our real estate investing.

We started syndicating maybe 18 months ago, so that’s a newer thing for us. Before, we just had the duplexes in L.A. and we were flipping homes. Then after a while we realized, “Hey, this is like a short-term job, and we’d like to be able to cash-flow”, and we also wanted to be able to leverage… So we got into syndication and have been loving it.

Joe Fairless: Let’s talk about the last deal that you closed on – which one was it?

Monick Halm: The last one we closed on were two buildings in Albuquerque, New Mexico. There were two separated deals, but we got them at the same time, closed on them within a few days of one another, and we’re managing them together.

Joe Fairless: Two buildings – are they apartment buildings?

Monick Halm: Yeah, one is a 77-unit, the other one is a 51-unit building.

Joe Fairless: Okay, and how did you come across these two buildings?

Monick Halm: We were led to Albuquerque almost by accident. At a networking event we met this woman who had recently moved from Albuquerque to Southern California, and we’d been looking at other markets that were much more on the radar… We were looking at Dallas, Atlanta, Kansas City, and she said “Well, have you thought of Albuquerque?” “No, we haven’t. Tell us about it!” So she told us a little bit about it and then we went home, did some research, and it’s a very stable market. It didn’t have the booms and busts of other markets… We like that.

We went in, found a couple properties that had been on the market for a while. We were able to get them under asking; we liked that we could get good returns and it wasn’t as crazy competitive as some other markets. It has since gotten more competitive over there, but at that time – it was about six months ago that we closed on those – there weren’t that many people looking there.

Joe Fairless: When  you said 77-unit, it triggered something — I was like “Wait a second…”, and then I remember I interviewed someone, Pete Holm…

Monick Halm: You interviewed my husband. [laughs]

Joe Fairless: Oh, was that your husband? Oh my god, you have the same last name… [laughter] I’m connecting the dots.

Monick Halm: You’re like, “This sounds familiar…” [laughs]

Joe Fairless: Yeah, yeah. Okay, cool… Let’s take a different approach then, because Best Ever listeners, you can just listen to Pete’s interview, where I asked him more specifics about the 77 and the 51-unit.

How did you and your husband partner up? Who does what?

Monick Halm: I guess I’m more the person that does investor relations, so I’m more of the person who has the conversations with investor, and does the relationship part of it. He does some, but I’m more of the one that has those conversations. When we have a property, I do more of the design work… I’m a certified interior designer; I’m more in charge of the rehab and overseeing that part, and he’s the numbers guy. He’s the one that does the underwriting, he’s the one that takes care of all of the other details… Makes sure that we have good insurance, and all of those other moving parts. I’m more of the people and the design, and he’s the numbers guy.

Joe Fairless: You’ve got the 77 and 51-unit – how many people are on the general partnership on that deal?

Monick Halm: So how many of us were on the sponsorship team?

Joe Fairless: Yeah.

Monick Halm: Three of us.

Joe Fairless: So it’s you, your husband, and…

Monick Halm: And our partner, Chris Rush.

Joe Fairless: And what’s Chris’ role, versus your husband’s and your role?

Monick Halm: There is a lot of overlap in terms of the work we do. He also did quite a bit of the fundraising… He had his own set of investors; he also really helps to keep our property managers doing what they’re doing. He really makes sure that they’re meeting the goals that we set. We all meet on the phone with our property managers every week, but he’s more on top of doing that bit of it.

Joe Fairless: Okay. How much did you and your husband bring in equity from investors in the deal?

Monick Halm: In that particular deal? Probably we contributed about 40% of the equity, and Chris and his investors about 60%.

Joe Fairless: And what was the total equity raise for that one?

Monick Halm: Combined they were about a little over 2.2 million.

Joe Fairless: So you brought a little under a million bucks. From those investors where you brought about a little under a million dollars, if you can just think of one or two of them in your mind, how did you initially get to know them? And I ask this question for Best Ever listeners who also want to bring in investors in their deals and they are wondering “How do I find investors?”

Monick Halm: Okay. A lot of the investors came from an investment group where we met Chris, our partner, initially. It’s Brad Sumrok’s group; he’s based out of Dallas, so this is a wonderful group of people who are looking to invest in apartment buildings… And if you can bring apartment deals that meet the requirements there – you need generally a minimum of 10%, double digit cash-on-cash returns, and an investment that will double the investors’ money within 3-5 years, there are lots of willing investors within that group.

A lot of our investors came from there. I would say maybe a little over half came from that group. Then the other investors, they were people that we’d worked with; I was an attorney, so some of the attorney friends. Chris is a pilot, and a lot of the pilot friends invested. So they’re just people that we have known throughout our lives that had money that they want working better for them. We were able to provide an opportunity, and they were happy to invest.

Joe Fairless: How did you feel the question of “This looks great, Monick, but you haven’t done this size of deal before?”

Monick Halm: Right, partly that’s why we brought Chris in. Peter and I found the properties, but we knew that we didn’t have the experience by ourselves to handle this, so we brought in a partner who had had experience. He had a 180-unit in Dallas that he had managed, so doing these properties was a natural fit for him. So we were able to bring in the experience. We didn’t have it, but we could partner with the experience. We also got the largest property management company in New Mexico, based in Albuquerque, so we had a very knowledgeable, reputable property management company that we partnered with, and we just had a really good team. So how we were able to answer that question is as a team we had this experience… And they were investing in the whole team.

Joe Fairless: And you said you are focused on investor relations and communication – remind me again when did this deal close?

Monick Halm: It closed end of October, beginning of November.

Joe Fairless: 6-7 months. By the time this airs, probably like 7-8 months. Since then, what process or cadence do you have with communicating to investors?

Monick Halm: We send out a newsletter update every month with financials and what’s been going on.

Joe Fairless: Walk us through — what does that newsletter look like, as far as is it attachments, or is just an actual e-mail, or do you send it out via MailChimp, or some other service?

Monick Halm: MailChimp, and with links to the actual documents. It will have pictures of where we are with the rehab… “Here’s the new apartment” or “This is the new paint job on the outside of the building”, “This is what we’re doing right now, here’s where we’re at”, and then “Here are the financials.” That’s generally what the communications were like.

Joe Fairless: Now I’m gonna completely switch gears, I’m gonna go to that mobile home park in North Carolina… When did you close on that?

Monick Halm: It’s all a blur… [laughter]

Joe Fairless: I’ve recently come across a term called [deal merge [00:12:25].06] [laughter]

Monick Halm: Exactly.

Joe Fairless: I think you’re experiencing it right now.

Monick Halm: [laughs] I was like “What?! That was so long ago!” That was a year ago, right? That was last June.

Joe Fairless: Okay, last June, so about a year ago. What can you tell us about that deal?

Monick Halm: Well, that was a deal where — we didn’t find it, we’re not running it, we just brought some money to that deal. A friend of ours, Andrew Lanoie, who has a lot of mobile home parks — at that point he had maybe 12, and I think now he has over 20… And he had one big investor who was bringing money in from [unintelligible [00:13:04].00] able to bring that money in. He wanted to close, he had a shortfall, and we were able to raise money to close the deal.

Joe Fairless: Did you invest in that deal or not?

Monick Halm: We invested a little bit of our money in that deal, and we’ve got some equity from bringing in…

Joe Fairless: How do you determine if it’s a good ROI for your time and effort to bring investors or invest your own money in the deal?

Monick Halm: We look at the deal as a whole, what are the returns going to be like… For that one – it was our first deal, so it was actually a nice way to be able to syndicate without having to take on the whole process of managing the asset, and everything. It was pretty simple, and we liked that. It was helpful for us to get our teeth wet. Now I think we would look at what are we getting in terms of just the whole package – what we get upfront, what kind of equity deal is it, is it something that would be interesting to our investors? Certain deals are an easier sell than others, so it’d have to be something that’s a fit for the people that we have.

And not just that, but we wanna have lifetime relationships with people, and what is the lifetime opportunity in this deal? Is this somebody we’d want to continue to work with? All of those factors go into our decision, and it’s really on a case-by-case basis.

Joe Fairless: What’s a lesson that you learned flipping houses in L.A. that you’ve applied to what you’re doing now?

Monick Halm: That’s a good question…

Joe Fairless: Well, it was about time I finally asked a good one… It’s only been 16 minutes… [laughter]

Monick Halm: They’ve all been good questions… [laughs] What’s a lesson that I learned…? Well, one big lesson, which is so much is about your team. We had one great construction team that was really quick, did really amazing work and was super reasonably priced, and at one point they were busy, so we went with another team that was just not as good. It took them a lot longer, and time is money when you’re flipping, especially.

The team really made a difference, and the same holds true with everything else. We’ve had unfortunately to let go of some people in the property management team that were not doing the job, and switching them out has been 180 in terms of our results… Because when you have a weak team member, you’re gonna have weak results. I think that’s a big lesson that has applied across everything we&#