JF1334: From Commercial Pilot To Syndicator & Property Manager with Ratan Khatri

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Ratan has quite an extensive real estate background. From managing other investor’s deals to buying a portfolio of 50 homes with partners and syndication. Hear what it takes to buy 50 houses in one deal, what to look out for, and how to negotiate the deal. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Ratan Khatri Real Estate Background:

  • Own and run a property management company in Muskegon, own over 30 rentals,
  • Bought my first house at 21, ran a mushroom distribution business and mortgage broker for 20 years
  • Immigrated to USA in 1970
  • Owns over 30 rentals, did his first syndication in 2017 of 50 sfh
  • Finishing up new book on immigrant success in America
  • Based in Muskegon, Michigan
  • Say hi to him at 231.206.1181
  • Best Ever Book: Real Estate Money Machine

Join us and our online investor community: BestEverCommunity.com


Made Possible Because of Our Best Ever Sponsor:

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If so, then go to CoachWithTrevor.com to apply for his coaching program.

Trevor is my real estate, business, and life coach. I’ve been working with him for years. Spots are limited, so be sure to apply 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, Ratan Khatri. How are you doing, Ratan?

Ratan Khatri: I am fabulous, Joe. How are you doing today?

Joe Fairless: I am fabulous as well, nice to have you on the show. A little bit about Ratan… I actually got to meet him in Denver – at the Best Ever conference I met him for the first time, and I really enjoyed talking to him… And I enjoyed talking to him so much that I thought we would get a lot of value from interviewing him as well on the show, and here is why – he immigrated to the U.S. in 1970 and he owns 30 rentals; he did his first syndication in 2017, when he syndicated 50 single-family homes. He owns and runs his own property management company in Muskegon, Michigan. With that being said, Ratan, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Ratan Khatri: Well, as you said, we immigrated here – I moved to a small town not too far outside of Detroit, in Clawson, Michigan, and I understand you grew up in Flint, Michigan, so we were practically neighbors, up the road [unintelligible [00:02:03].16] on I-75.

Joe Fairless: Yup.

Ratan Khatri: I went to Western Michigan University, I went to a flight school there, and was going to be a commercial pilot; I am still a licensed commercial pilot, but I don’t do it professionally. That’s where I met my wife, and we’ve been married for 36 years, and together 40 since college. I always loved real estate, and I bought my first house shortly after graduating from college, and we lived in that for about six and a half years, and then we moved to the West Coast of Michigan, over to Grand Haven, Michigan… I bought a house across the street from Lake Michigan there. My wife and I, we fixed that up and then we flipped that in ten months, and then I bought another house there.

Then down the road I got into the mortgage business, I was a mortgage broker for many years until the crash, and I started buying a lot more property during the crash, because it was cheaper; then it got cheaper again, and I bought some more. Then it got cheaper again and I bought some more, and then I decided to start a property management company. We manage just under 200 units at this time, and as you mentioned earlier, we bought a portfolio of 50 single-family homes/syndication/joint venture. I met two of my good friends that I have in Muskegon, I asked them if they wanted to go in on it with me, and we put the 10% down and seller-financed the difference, and we turned it over to a third-party management company, even though I owned a management company, so there was no conflict of interest.

We’re looking forward to doing more, and this is why I came to your conference, to meet people that are doing apartment buildings and mobile home parks and self-storage units. It was a home run.

Joe Fairless: I love to hear that about the conference, and even more so I’d love to hear your story in how you’ve gotten to where you’re at, so let’s dig in… Let’s see – you said you bought a portfolio of 50 homes, and it was a joint venture/syndication. Can you elaborate on that?

Ratan Khatri: Yes.I didn’t have to go too far and too wide some partners that wanted to make the investment. The offer was actually made — I went to a local Landlord Association meeting… A retiring landlord who was in his seventies – he had his son and daughter manage the portfolio for a while, but that apparently wasn’t working out, so he actually put it on the table, he set the price, and he set the down payment terms and the interest rate. He was gonna hold the note for the difference, and it was kind of a no-brainer.

The last 7-8 months we’ve been improving the portfolio, taking care of any deferred maintenance, improving the properties, and also a little bit of tenant changeover to improve the rent roll and collection rate. It’s very possible that we already have a potential buyer for it. It’s gonna be a surprising — I don’t even wanna call it a home run, I’m gonna say it’s gonna be a grand slam if it happens the way I think it’s gonna happen.

Joe Fairless: Well, let’s talk about the price and the down payment terms. You said 10%, so we got that. What was the price for the 50-unit?

Ratan Khatri: He was asking 1.1 million dollars, and we agreed to that. Then we did our due diligence, where we inspected a handful of properties, made sure they all had the certificates of occupancy. We physically inspected maybe only about 15-20 of the properties. Based on that, we were able to get a small reduction on the price of about 50k. So he financed the difference, and he had set the terms up at 6% on a 15 year note, because he wanted the cashflow for the rest of his life.

The gentleman was a very well respected landlord; he had always taken good care of his properties and had a great reputation, so like I said, it was a no-brainer to jump into it. Since then, I might have actually found another 70-unit portfolio to buy in Jackson, Michigan.

Joe Fairless: Okay, before we get into that 70-unit that you might have found – I’d love to learn more about that; I’m writing it down, so we come back to it… The price originally was 1.1, and then it got lowered about 50k, so $1,050,000(ish)?

Ratan Khatri: Exactly.

Joe Fairless: Okay, so that’s about 22k/door.

Ratan Khatri: A little over 20k, yes.

Joe Fairless: Okay, a little over 20k/door. You only inspected 15-20, so less than 50% of the homes that you purchased, but it’s a million-dollar purchase, so what is your thought process there?

Ratan Khatri: Well, we could have inspected every single property. We inspected what we thought would have been the worst ones after doing an exterior drive-by. We did drive by all of them, and then even though it’s 50 units, it’s actually 55 total occupiable units, because some of them are duplexes.

So we went into the ones that on the exterior drive-by’s appeared to need the most maintenance, and so forth. All the rest of them looked really sharp, and they had longer-term tenants in them, and we only had a two-week window to do our due diligence… And we were satisfied.

We’ve not had too many surprises. We planned on having to replace a few furnaces and we planned on having to do a few roofs just from the exterior… So so far there haven’t been any surprises, and the management company that we took on to manage them for us is doing an exceptional job. The portfolio just continues to improve in value, in quality of tenants and in quality of the properties.

Joe Fairless: The down payment, (10%) is 105k. Did you three split that equally and get equal ownership?

Ratan Khatri: Yes, we set up an LLC and we had one of our local attorneys who was also a friend of all of us drop an operating agreement. We set up a bank account, and we all three put in one third each, basically. My one third is actually me and my wife, and we did that through our retirement account. That’s one of the reasons we couldn’t touch the property, so we had to have a third-party management also for that reason.

Joe Fairless: Okay. I was gonna get to that question that you mentioned about it, but you just answered… Okay, cool. So you each have 33.33% ownership in the deal, and you have equal say in what takes place, right?

Ratan Khatri: Yeah, we have a meeting about once a month. We get a report from the management company, we review the maintenance costs, the evictions and so forth. Right now I believe of all the occupiable units we only have two that are vacant. The demand is very strong in our market, as it is in most markets, so we’re able to keep them more or less full. It didn’t start out that way, of course, but our cashflow the first month might have been like $15,000 or $17,000 and in the last couple of months it was in the mid-twenties, and at full capacity it should be about 30k/month.

Joe Fairless: Is that income, or the net?

Ratan Khatri: Top-line.

Joe Fairless: Gross income, got it. Cool. It’s basically a partnership, so you did a joint venture with a couple friends, and you each put 33% in… As far as the business plan goes, you said early on it wasn’t as smooth as it is now; how much did you allocate to invest into these properties?

Ratan Khatri: We have put everything that has come in back into the properties. All of us decided that we weren’t gonna take anything out until the portfolio was running satisfactorily and cash-flowing properly. We’ve only had it like seven months and we’ve all put in another 5k-10k/piece in since then for all the maintenance that was unfortunately deferred, and we have taken care of all of that stuff. This spring we’re gonna be putting on half a dozen or so roofs. Our estimation was it would take six months to a year to get the portfolio performing at the projected expectations.

Joe Fairless: Okay. So you’ve put in 105k initially plus up to about 30k, so that’s 135k or so. For these new roofs are you out of pocket, or is that from the cashflow from the property?

Ratan Khatri: Most of it should be from the cashflow from the properties. We don’t anticipate having another cash call, but sometimes you don’t know. Overall, each month the rents roll has increased and the collections have increased, and the quality of the tenants has increased, so the pay performance is getting better each month.

Joe Fairless: Did you anticipate having the first cash call?

Ratan Khatri: Yeah, we kind of expected it and we planned for it. We had a meeting and we said, “Hey, at the end of the month we’re gonna need 10k”, and we were able to take care  of it… So it was not a surprise.

Joe Fairless: With three people who have equal ownership and have put in the same amount, how do you determine who has the additional responsibilities, like overseeing the management company? You got seller financing, that’s pretty easy… But insurance is in place, and property taxes are paid – who deals with all that stuff?

Ratan Khatri: Right. Initially, we found the insurance company, and the management company pays the insurance. The tax bills go to the management company and they actually pay them almost a month early. So the taxes are all current, and they handle the day-to-day issues. Then one of our partners – Steven, who I think you’re actually gonna be interviewing in the future, because he does the sheriff’s sales… He has taken the lead on communicating with the maintenance person at the management company, and when they have issues over — I think it’s either $500 or $1,000, they give Steven a call and Steven approves it.

Joe Fairless: You said you might have not a home run, but a grand slam… What information can you share about that?

Ratan Khatri: We had a broker from Grand Rapids, Michigan that we contacted, that had sold a similar portfolio in Lansing, Michigan, 60 properties for only 3.3 million. We contacted that broker to see if they had any buyers that missed out on that portfolio or maybe couldn’t afford that portfolio and are looking for something similar to that, and they indicated to us that yes, they did. We haven’t listed it yet, but we’ve been communicating with them and they have put a value of about 1.79 on this portfolio if we were to list it today.

Joe Fairless: I’ll round up 1.8 million, and you’re all in about less than 1.2, I guess?

Ratan Khatri: Yes.

Joe Fairless: Yeah, so it’s like $600,000, and then you’ve got miscellaneous fees, and things…

Ratan Khatri: Cash-on-cash it’s like five or six times. I haven’t done the math, because it’s not in our bank account yet.

Joe Fairless: Not a real thing yet, yeah. It’s nice to have those projections, but then whenever it becomes reality — that’s great though, that’s a great sign.

Ratan Khatri: It is, and the funny thing about having the three of us — myself, I was more optimistic about the value; I kind of thought that they were worth 40k/piece, and Steven was more pessimistic; he thought they were about 30k/piece. Then Gary, our third partner – he was in the middle, at 35k, and the real estate broker from Grand Rapids came in at a value of 36.5k average per unit… So Gary was closer, and I was too optimistic.

Joe Fairless: Well, anytime you can take $35,000 and then multiply that by four or five in a span of 24 months, assuming everything pans out – bravo! Right? You take that.

Ratan Khatri: Exactly, exactly. Again, having the three of us – it was kind of a unique situation. We’ve all done joint ventures before, we’ve all had partnerships before, and I kind of took the lead on this one. Steven initially didn’t wanna do it, but I twisted his arm a little bit. Gary was on board in two minutes, and it was a pretty simple deal.

All of us have a lot of experience and we knew what we were getting into, so there’s no surprises in that sense, because we know the marketplace well, they’re all in our own backyard and we all own properties in our backyard.

Joe Fairless: Would you cash out and pay the taxes, or would you do 1031?

Ratan Khatri: Mine is gonna go back into my retirement account, so I won’t be affected. Steven is gonna probably do a 1031 exchange on his share, and Gary I think is gonna end up paying capital gains.

Joe Fairless: How can Steven do a 1031 and you two not do it?

Ratan Khatri: Well, we have the LLC, so we’re selling the LLC, and the proceeds that go back into the LLC should revert back to the entities that own the shares in the LLC. In my case, my Roth IRA owns it, so the funds will go back to my Roth IRA, because my share is owned by the Roth IRA.

Joe Fairless: The entity that you currently have would need to be on title for the next deal, right?

Ratan Khatri: Exactly.

Joe Fairless: Got it. So you two would exit… One person would take the money and pay taxes, you would put it back in your account, and then the third individual who would 1031 would need to factor in you two exiting, because when he eventually sells, he’s gonna have to pay the taxes on the gains that would have been paid out for the whole entity right now, correct?

Ratan Khatri: I don’t know all those details, Joe, but my best guess is that I know that I won’t be paying any taxes on it because my Roth IRA owns it, and the 1031 exchange part — because if we had made a profit on the first four months, which we didn’t, at the end of the year we would have received a K-1 for whatever proceeds that our each individual entity received from one third, and we would pay tax on our own one third.

Joe Fairless: I’m guessing that’s what’s gonna happen, but have that person talk to a 1031 person, because basically the entity is gonna have to pay taxes on the whole gain eventually, whenever they stop 1031-ing… So people who exit out in between point A and point Z – there’s gonna have to be some sort of calculation of what those taxes would have been… Otherwise, when the music stops and there’s only one chair, the person with the property at the very end – 20 or 50 years down the road – has got a huge tax bill if they’re not preparing in advance.

Ratan Khatri: I understand and I agree with you. They will have to look at that carefully.

Joe Fairless: The 70-unit deal – how did you come across that?

Ratan Khatri: Well, I was at the Grand Rapids Rental Property Owners Association conference last weekend, and they have what they call a deal room where people enter and talk about deals they want to sell, and deals they want to buy. All three of us were actually there at the conference, and then during two different deal room sessions, I had mentioned that we have this portfolio for sale and that I’m looking for more, and it was a realtor from Jackson, Michigan that said that there had been a landlord that owned 70-something units, and he had passed, and his son was having difficulty managing the properties… So she is going to get me the information, and once I have the information, I’ll evaluate the deal and do the due diligence and see if it makes sense to pursue further.

Joe Fairless: Is this the same meetup that you got the first deal from?

Ratan Khatri: No, the first deal was from the Landlord Association that meets in Muskegon, Michigan; I’m a member of that and I do frequently the seminars that teach [unintelligible [00:17:31].26] different landlords, different things, and as I have a management company, I’m exposed to more experiences and more situations that occur… So I share those monthly at the Muskegon meeting. The Grand Rapids association is a much larger association, and they put on a convention once a year [unintelligible [00:17:51].14] Grand Rapids, Michigan; that’s a very nice conference, and they have national speakers come in… During the breakout sessions, one of them is the deal room session (breakout session) [unintelligible [00:18:02].04] from Grand Rapids.

Joe Fairless: Do you remember how much the ticket was to the Grand Rapids conference?

Ratan Khatri: It’s free.

Joe Fairless: Free. So you went to this Grand Rapids Conference and you might get a deal from it, and then you attended the local landlord association meetup in Muskegon, Michigan, and you did get a deal from that…

Ratan Khatri: Yes…

Joe Fairless: There’s a theme here, clearly… We should all attend our local meetups, first off. But secondly, when the individual – the gentleman who had the portfolio of the 50 homes – stood up and said “Here’s what I’ve got, here are the terms”, how many people went up and talked to him?

Ratan Khatri: Well, he was in Florida actually, and one of his friends had handwritten copies stapled together of the portfolio; it was nothing formal, and the gentleman just put the five or six copies on the table. I grabbed one, Gary (one of my partners) grabbed one, Steven had already heard about it during the day earlier and I already had spoken to the gentleman while he was on the golf course in Florida, and was asking if he could split up to two different cities that the portfolio was in… Both cities are adjacent to each other, but Steven didn’t want 15 of the properties, and the gentleman said “No, it’s all or nothing.” So Steven had originally passed on it, but I twisted his arm in the next day and we ended up doing the deal.

Joe Fairless: So what I heard is someone put five or six copies on the table and you and your crew took all those six copies so no one else could bid on the deal?

Ratan Khatri: No, no…

Joe Fairless: [laughs] I’m kidding, I’m kidding…

Ratan Khatri: [laughter] But the answer to your bigger question is many other people were not interested. We’re in a smaller town, and unfortunately many of those landlords still wanna self-manage, which I’ve always tried to educate people on where that’s not a good idea and why they’re just creating a job for themselves. My management company — the reason I was at the Grand Rapids conference is I had actually a booth there to promote my management company and promote the city of Muskegon as where the deals are, because Grand Rapids (like many other markets) has grown substantially, and price points are higher than ever, rents are higher than ever, and the cap rates are in the fives and the sixes now, and just the deals just aren’t there.

So Muskegon is 30-45 minutes down the road and you can still find exceptional values and exceptional cap rates, and sometimes even you can find terms. Not a lot of people jumped at that portfolio, and for us and for our experience that all three of us partners have, it was kind of a no-brainer.

Joe Fairless: Would someone without the experience in your market be able to pull that off? Because you hired a different third-party management company, so it’s not like you were the one on the ground in this case… So could a New York City investor – if they heard about this deal, could they have pulled it off, too?

Ratan Khatri: Absolutely. I manage for many people from California, and I have a group out of California that I manage 67 of their properties for them inside my management company… So yes, we have a lot of out of state investors that find fabulous value in the city of Muskegon; I think sometimes when you’re too close to the market you kind of have a negative view of it. Cashflow is fabulous, and I saw no reason not to do it. If these two guys hadn’t wanted to do it, I would have found three other guys that would have wanted to do it.

Joe Fairless: Next time give me a  call, please. [laughter]

Ratan Khatri: I certainly will, I’ll take you up on that.

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

Ratan Khatri: I think I have a couple different points, if I may. Number one – if you’re a beginning landlord, do not do it yourself; hire the management company. My company – we have a flat fee… We charge $60/month, and it’s well worth every penny, so that the beginning landlord doesn’t have to go and do everything themselves. If the property is a turnkey property, you shouldn’t have to do anything. So that’s one piece of advice – don’t do it yourself, hire a management company.

The overall advice really would be to just jump in and do it. Too many people sit there and analyze things to death, and they miss out on so much opportunity. That’s one of the things we talked about, how immigrants succeed here, and how they think a little bit differently and how they see opportunity, whereas other people just wanna analyze it, analyze it, and have other things that they wanna do with their investments.

Joe Fairless: And you’ve got a book – did you finish your book? I know you were writing a book about what you just talked about – immigrating here and having success.

Ratan Khatri: Yes, the book is written. I’m in the process of editing it and making it more readable and more saleable. I won’t give it a title right now, but I will give it a subtitle: to succeed in America, you have to think and act like an immigrant. The basic things are being frugal, saving, and then turning those savings into investments and assets, and then having those assets produce cash for you to live off of. The more you do of that, the more you’re going to have coming in passively.

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

Ratan Khatri: Absolutely, let’s go for it.

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

Break: [[00:23:25].11] to [[00:24:30].23]

Joe Fairless: Best ever deal you’ve done?

Ratan Khatri: The best deal would be this 50-unit portfolio. The back-end return on that is just gonna be awesome, and I’m gonna parlay that into hopefully more and larger deals.

Joe Fairless: Best ever book you’ve read?

Ratan Khatri: I’ve read many books, I’m an avid reader. One of the first ones that I read about real estate was written by a gentleman named Wade Cook, it was called Real Estate Money Machine. And of course, Rich Dad, Poor Dad, and Lowry’s books… All the old gurus that originally started this business – I’ve read all of their books and I apply many of their principles to this day.

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

Ratan Khatri: The commercial building that I’m presently in – I bought that and had it built at the peak of the real estate business (before the crash), and unfortunately it’s still mostly vacant, and I’m carrying the load… That was probably my biggest mistake in real estate.

Joe Fairless: If you were presented a similar opportunity again, how would you approach it?

Ratan Khatri: I would have either wanted to pass on it completely, or I would have to have it pre-leased before I committed to buy it and have it built.

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

Ratan Khatri: I have a friend of mine in Muskegon – her and I, we put together this house… It’s a 7-bedroom 3-bath house, and it’s called The Patriot House, if anybody wants to do a search on it. I went to a breakfast meeting one day and they said there’s a major homeless veteran’s problem in Muskegon County… So when this house came up, I decided I was [unintelligible [00:25:58].23] for housing some of the homeless veterans. We provide all of the utilities, and laundry, and internet, and cable, and beddings, and furnishings, and they pay a minor amount of rent, because they can’t afford a house on their own or apartment on their own. We provide housekeeping services, laundry on site… I love this country, and my way of giving back is to help some of the veterans that need help.

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

Ratan Khatri: We have our website for our management company, it’s rkpmgt.com. Also, they can call me directly on my cell, which is 231-206-1181. I’m also on LinkedIn.

Joe Fairless: Ratan, thank you so much for being on the show and talking to us about this case study, the 50-home portfolio, which is actually more units than 50 – what did you say, 56?

Ratan Khatri: 55 total.

Joe Fairless: 55 total livable units; 50 homes. The business plan, how you found out about it at the local Landlord Association, the partnership structure that you ended up doing, and how much you’ve put into it, where that’s gone, and the projected value right now, along with those returns, based on selling it at that value… So thank so much for being on the show and talking about that, as well as your overall approach. I’m looking forward to reading the book myself whenever your book comes out.

I hope you have a best ever day, and we’ll talk to you soon.

Ratan Khatri: Thank you very much, Joe. I really appreciate it, and best wishes and success to you.

JF1308: From Small Deals To Over One MILLION Square Feet Of Office Space with John Bogdasarian

Listen to the Episode Below (29:30)
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John is here to tell us how he went from no money down loans (because he had no money) to owning a huge portfolio of commercial and residential real estate. Hear high level money raising, asset management, and investor relations tips in this educational episode. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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John Bogdasarian Real Estate Background:

  • President of the Promanas Group, a real estate investment firm
  • Began with nine initial investors, has strategically guided the firm to serving more than 300 investors today
  • Ownership in multiple entities with more than 2M square ft. of industrial, warehouse and distribution space
  • Has well over one million square feet of office space
  • Obtained his Certified Commercial Investment Member (CCIM) designation in 1999
  • Based in Ann Arbor, Michigan
  • Say hi to him at https://promanas.com/
  • Best Ever Book: Atlas Shrugged

Join us and our online investor community: BestEverCommunity.com


Made Possible Because of Our Best Ever Sponsor:

Are you committed to transforming your life through real estate this year?

If so, then go to CoachWithTrevor.com to apply for his coaching program.

Trevor is my real estate, business, and life coach. I’ve been working with him for years. Spots are limited, so be sure to apply 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, John Bogdasarian. How are you doing, John?

John Bogdasarian: I’m doing great.

Joe Fairless: That’s great to hear, nice to have you on the show. A little bit about John – he is the president of Promanas Group, a real estate investment firm. He began with nine initial investors, and has strategically guided the firm to serving over 300 investors today. They’ve got ownership in multiple entities with more than two million square feet of industrial warehouse and distribution space, and has well over one million square feet of office space.

He’s got a CCIM designation, had it for 1999 to 2018. What is that math? That is about 20 — is that almost 20 years?

John Bogdasarian: I’m that old.

Joe Fairless: Holy moly. That’s crazy, almost 20 years. Based in Ann Arbor, Michigan. With that being said, John, do you wanna give the Best Ever listeners a little bit more about your current background and your current focus?

John Bogdasarian: Yeah, I started out as a residential agent. I was actually just a broker, selling houses, and I started figuring out very quickly that I was always working myself out of a job; you only got to eat what you killed. So I started buying single-family homes, and I built a portfolio of about 20 single-family homes, doing very low down – and even zero down – type deals, because of course, I didn’t have any money. That’s where I really cut my teeth, in that real estate residential arena.

Then after a while the deals got bigger, and I found some things that made sense, but I didn’t, again, have all the money to do it, so that’s when I started syndicating deals. I didn’t really have any idea, I was sort of figuring it out; there’s a lot of information out there today, and it’s really interesting… I’ve been on a few podcasts, and this is a great one; I’ve listened to a number of your episodes, and back then, there was nowhere to learn this process. I just kind of conjured it, and just kept doing deals and figuring it out, and getting a little bigger, and then really started taking on investors in earnest in about 2005.

We really only work with accredited investors, so that’s mostly what I can speak to, is what makes a smart investor and what they should focus on, and things like that. But I did the whole do-it-yourself, start-from-nothing as well, so if that’s of interest to anybody, I can certainly speak to that.

Mostly what we do now is we purely represent accredited investors, we put deals together, fund development deals, acquisitions, we run a major portfolio and we just distribute out cash pro rata. I like to say we make rich people richer.

Joe Fairless: Well, let’s talk about that, because the Best Ever listeners tend to have some deals under their belt; we’ve got a lot of passive accredited investors as listeners, and then have people who are syndicating deals, or wanting to syndicate deals. They have bought those homes similar to what you did starting out, and they wanna go larger. So let’s focus on what you’re doing now, versus how you got started, and some things that might be of interest.

So what’s the most challenging question an accredited investor asks you?

John Bogdasarian: You know, the scary thing about it, to be honest with you, is that I don’t get many questions anymore. Most of our investors are direct referrals, and they hear about it – “Hey, I heard from Bob that you make him money. Can I get a couple shares? Here’s a couple hundred grand.” “Do you have any questions?” “No, I don’t know anything about this stuff.” And that actually is the worst thing I get – no questions.

In terms of tough questions, I would say the toughest questions are easily answered at this point in time. I wouldn’t say there are any difficult questions, but there are good questions, that’s’ for sure.

Joe Fairless: Good distinction. What are some good questions?

John Bogdasarian: Some of the best questions I get – and this is what I’ve discovered about the smartest investors that I have, all of them, hands down, almost all of their questions are about me, the person representing the deal: my background, my track record, my motivation… And not as much about the deal itself.

The good questions are kind of things along the lines of “Why are you doing this project and what do you see the likely outcome of it being? What is the worst-case scenario? What’s the worst deal you’ve ever done? Where did you learn to do what you do, and how?” They’re not focusing on pedigree or what university I attended or anything like that, they’re focusing on experience and where I am in life and what my overall deal philosophy is.

We tend to take very much a preservation of capital strategy first. We wanna know that our worst-case scenario is that potentially our equity gets locked up in a deal for longer than we’d like, and maybe we end up accepting a lower rate of return. This actually has not happened, but we kind of look at it like “That’s what could happen.”

We’re very much into trying to set expectations and temper them and look at the downside of the deal, and those are the best questions I think I get from people, for those types of things… If that makes sense. I’ll tell you some worst questions I get, too.

Joe Fairless: I’m gonna write that down and we’re gonna get to the worst questions, because you’ve piqued my curiosity for sure… But I do wanna ask a follow-up question on the types of deals that you do. How about we take a step back and talk about the types of deals you do, because for other syndicators or aspiring syndicators – and then also for passive investors – it’d be interesting to know how you’re able to have a good return for your investors, but then the worst-case scenario is equity gets locked up, versus you lose it all, then there’s a capital call, then you lose that, and then everyone’s upset.

John Bogdasarian: Sure. Well, to speak to the asset — we don’t really focus on a specific asset class or geographical location. We’re really situationally-driven is what I like to say. What I mean by that is I’ve done single-family homes, obviously; I had a big portfolio of those at one point in time, that I sold actually earlier this year. Apartment complexes, small retail properties that were more service-based businesses, ground lease deals where we owned the ground and leased the land to restaurants like McDonald’s, TGI Fridays, Joe’s Crab Shacks, Applebee’s… We owned a number of Applebee’s at one point in time… Special purpose buildings we’ve done, bowling alleys; I owned a bowling alley in Baton Rouge, Louisiana… Don Carter All Star Lanes – if anybody’s listening from Baton Rouge, they’ll know Don Carter.

Joe Fairless: I know Don Carter from Fort Worth. There’s a Don Carter’s in Fort Worth.

John Bogdasarian: Is there?

Joe Fairless: There used to be, I don’t think there is anymore.

John Bogdasarian: A very famous bowler from back in the day… But I’m not a bowling guy really; only for entertainment, at my kid’s birthday parties now.

We have industrial, we have multi-tenant office, we have single-tenant office, we have hospitality, we’re building a hotel, we do acquisitions of existing properties, we build from the ground up, I’ve done office condominium projects, residential condominium projects, land splits, subdivisions… So really no two deals are anywhere close to being the same to each other from an asset type or whatever, but situationally they’re all the same. Situationally, what we’re doing is we’re structuring a deal whereby we have many layers of protection before our equity is at risk. And what I mean by that – I’ll give you a quick example, on a condo deal we’re doing right now, where a guy… And so you know, we don’t always act as the principal developer. So for the younger people starting out doing deals, we’re a very good source to developers all over the country. We have people we’re working with in Denver, Nashville, Florida, where they have a project teed up, they have it ready to go – or not ready to go; maybe they just have it concept-ready and they need the money to get it through the approval process and get it built and do whatever.

So what we will do is come in and we’ll say like I, John Bogdasarian, am the investor; I negotiate a deal with him and say “I’ll provide all the money, and here’s how we do it.” If they like our proposal, which 99 times out of 100 they do, then boom, we get involved together and we go forward and do this deal, and then I’m accountable to my group of 300-400 investors (that’s about where we are now). We put the package together, syndicate it, put it out, and put the shares out. So we’re between those two groups, essentially.

An example of how I would structure something like this is our Kingsley condos we’re building in downtown Ann Arbor right now. A guy comes to me, the land is four million dollars (let’s say) and we wanna build these condos on it and sell it, and everything else. I say “What kind of debt do you have on the property?” Let’s say they have a million and a half of debt on the property; I say “Okay, here’s what we’ll do – we’ll close on the land, we’ll pay you the million and a half, but you’ve gotta contribute the other 2.5 to the deal, and you get that once we get the return of our equity.”

So let’s say we have to put 8-10 million dollars in equity into that project. We go, we build this thing, we have another (let’s say) 20 million dollars of bank debt paired with that. We go, we build it, we sell condos… We first use the condo sales to pay the bank, we then use the condo sales to pay back all of our investor capital first, then he gets the balance of his land – so he’s risking his land against that, and then his profits also come at the end as well.

So essentially, we have multiple layers of what I call protection before we get [unintelligible [00:12:13].23] The only thing that’s ever in front of us is the bank and the lender, and I would say it is possible to go out and put something up and over-leverage and build into a bad market and lose the money. The worst-case scenario is always you lose all your money. My investors don’t sign personal guarantees on our debt or anything, so they could lose all their money. But for that to happen, with us putting 35%-40% down on a project and projecting a pretty massive profit on the back-end, the profit has to erode, and then a lot of things have to go away before we’re losing our money.

Typically, we have a certain number of pre-sales that would pay the bank down to a number that’s good enough so that even if we were stuck with 20 units, we could just refi the bank out of that position, or I have enough cash around myself typically that I can just pay the bank off and charge some nominal 5% interest-only while we rent those units out and wait for the market to come back, to sell those units. Sometimes that can be a long wait.

In 2006 I was selling my single-family home portfolio as fast I could. I could only get rid of so many, and then the market tanked in 2007 and I just sold the rest of them all in the spring of 2017, so that temporary setback lasted 10 years. But the good news is they were rented the whole time, and there was plenty of income behind them, so there was something backing them. I didn’t lose any money, I just lost net worth on paper. So that’s kind of an example of how we would put something together.

Joe Fairless: That’s helpful, I love that you went through a specific case study. And with your deals – and you’ve got how many going on at one time?

John Bogdasarian: That kind of depends on the season and the time of year, but typically about five or six is about where we are right now. It used to be we’d have one at a time, one acquisition; we’d be doing one deal, because it was me and an assistant and one other guy. Now I have a team and an investor relations department and a marketing department, and a lead asset manager, and a chief operating officer and a chief financial officer, with people reporting to all these people.

So as the organization has grown, we’ve been able to do more. Right now we’re kind of at my comfort level. I don’t ever like to get too many cards out of the table – or too many chips, I should say – without seeing some of them coming back in, and seeing things being realized. We started getting into development about three years ago, and I started testing it with small projects. 18 townhomes – it was a small 6-8 million dollar deal we did, total deal size. And then once we saw that worked and we saw how the numbers came in, then we would expand and do 2-3 more in that particular market, higher-level deals.

Right now though, we could handle way more than six. I need 2-3 months to see the sales going and the lease up and so forth. We just don’t like to get over-extended. We wanna be able to back this stuff up if for some reason it’s not working out as we originally projected… Which again, knock on wood, we haven’t had that happen, but it can.

Joe Fairless: With that case study, I was taking notes and trying to get some of the core pieces, but it would be helpful if you can summarize – when you go into a deal, since as you said, no two deals are the same, so you look at risk mitigation and capital preservation… What do you make sure is in place for every deal, so that you have capital preservation at the forefront?

John Bogdasarian: So another example – I can’t remember who it was, but on one of your shows you had a guy who bought apartment complexes, and it kind of blew my mind because he was buying like 50 units and less, and I was like “Wait a minute, that doesn’t work. You’ve gotta have 100 to 200.” But he said something in there that was critical – he said “You know, the fact is the cost to manage these things and maintain these things is way higher, yes, but if you put that number into the deal, it’s okay, because you’ve got enough to do it.”

That’s a mistake I made at one point in time – I bought an 84-unit apartment complex and I realized I’ve gotta pay a full-time manager, I’ve gotta pay a full-time maintenance guy, and the only reason I was able to make that work was because I owned a ton of single-family homes in that same area and I had him run all those as well, so I could diversify their cost… But that was a lesson.

So I would say basically on an acquisition, the layers of protection we put in there – a broker will tell you you need 15 cents a foot per year as a reserve on an industrial building. We put a dollar a foot per year in there as a reserve… And that’s even if we have like a 15-year absolute net lease, we still will let a buck a foot in there to accrue over the life of our hold period. Multi-tenant office buildings – two dollars  a foot as a reserve, because you’ve got buildouts, TI, leasing commissions… It’s expensive.

So we’ll put hefty reserves in there… We have not only a property management fee that pays for really managing the property, but we also have an asset management fee, because we’re running 300 investors, and reporting to them and doing other things. These are things that we could theoretically live without if we had to, without missing projections to investors; we could cut those back. We wouldn’t wanna do that, but they’re layers of protection that we put into the deal.

It’s kind of like the godfather – you wanna sit in a place where you can see the exit. We pretty much wanna see the exit. I know you’re gonna get to some questions about some of the most important lessons or mistakes or things, because you ask good questions on your shows and I’ve heard them… But for the most part, these are the types of projections we put in there — or protections we put in there.

Another one is just having the trust of my investors. We came across a deal, for instance, on a hotel, and we had originally projected that 10 million would be enough equity to get the hotel built, based on the loan quotes we had. And we had a lender basically change the terms of the loan on us the last minute, and they wanted us to put in three more million dollars of equity… So I just created a mezzanine piece. I had plenty of mezzanine lenders that would have loaned that three million, but we don’t do mezzanine loans because they tend to be predatory lenders, and we certainly don’t wanna risk our capital with an extra lender… And they have pretty high fees, and so forth.

So what we do is create a short-term loan opportunity for our members and say look, we have this loan, let’s say, for 25 million and we really need 28, so we have an opportunity here where the members can loan 3 million dollars temporarily, and once the thing is built and stabilized, the lender will extend that extra three million out and we can pay you back.

In addition to that, I’ve never had to make a capital call. Like I said, I hope I don’t. But if I did and it made sense, it wouldn’t be very difficult for me on any one of our deals to double the money that we’ve got in it in about 24 hours. So that’s why we try and go smaller, gross lower than we can.

I know, for instance, if I put 4 million dollars in a deal and that represents 30% down and the bank gets squirly or we can’t sell units, I can just raise another four million and boom, pay the lender down to some stupid number, or raise a little more and pay him off, and we can own it free and clear. Because again, we’re not building things in farm fields, for special uses. We’re going city infill, where demand is far outweighing supply, and it’s just a matter of time, if there’s any setback at all, for us to hit our numbers.

Joe Fairless: Is the asset management the same across different types of asset classes?

John Bogdasarian: It varies, but it’s similar. I don’t like property management, I’m being honest with you. I’m not a day-to-day operations guy. I like to say I have a lot of RAM, but I don’t have a giant CPU. I can figure things out very quickly and make quick work of stuff, but on a day to day basis, day in and day out, dealing with managerial tasks is very challenging for me… So I initially try to outsource all property management, and was really disappointed, frankly, at the level of service we got, and reviewing the expenses…

One of my best friends came on board years and years ago and is now my business partners. He’s the director of operations and he is an incredible day-to-day eye on the ball management mindset, so we complement each other very well, and we’ve taken all management in-house, and we’ve been able to shave costs substantially… Which doesn’t always make us more money, because a lot of our properties are triple net, and even absolute net leases, but in some cases we’ve been able to save our tenants a dollar or even two dollars a square foot on their pass-throughs. And when it comes time for a lease renewal or negotiation, we can point to that and say “Hey, we need a 50 cent/square foot bump here, but look, we’ve saved you $1,50/foot on your expenses.” So it does eventually pass through to us, and it’s just good business.

Joe Fairless: I guess I was asking that question because I’m just wondering what is an asset management fee? Not property, but an asset management fee for office versus industrial versus apartment community versus hotel.

John Bogdasarian: Oh, okay, I get it… So an asset management fee is very similar across all the assets. The property management fee itself covers property management. If we have an office building, the property management fees are higher because there are salaries that are attributed to those buildings. So the buildings themselves pay the expense of running the buildings, and property management is not really a profit center for us. It’s just basically a breakeven to manage all these properties.

The asset management fee, which theoretically should be a profit for us, is not really a profit for us either. It just covers office overhead, and salaries, and it basically allows us to break even. We might be slightly positive now. I think we crossed over from losing money… When I started out it was like a $50,000/month drain, so everytime we closed a deal, I’d make a commission and pay off a line of credit at the bank, and then start drawing it back out again to get to the next deal. This happened from 2009, all the way to — actually, it started in 2005, I guess, all the way through probably 2015 is when we got to the point where our global asset management fees (property management fees, everything), we started breaking even on that, probably about 2015. And it’s kind of interesting, because the acquisitions market has really dried up. We haven’t really bought anything in the last year, so we haven’t really added asset management fees.

We do now have developer fees on deals. That’s another layer of protection. We have these big developer fees on these projects we’re doing, but we don’t charge those. So far we haven’t charged those as we’ve been building the project; we wanna draw them out, we let them accrue, and we wait until the end to make sure that we’re gonna be able to return 100% of investor capital, pay the bank off and give people their pref return before we draw that money out. Legally, we can take it, but so far we have not, we just accrue it, because again, it’s just a protection mechanism.

Joe Fairless: And just so I know – your asset management fee is or is not the same on a hotel versus an apartment?

John Bogdasarian: It’s the same as a percentage. In our PPM, in our subscription agreement we reserve the right to charge up to (I think it’s) 6% of the net operating income of the property as an asset management fee. And sometimes it’s all of that 6%, sometimes it’s half of that… We kind of look at it and say “Is this thing causing us a bunch of headaches and hassles and so forth?”

What I will say to young syndicators and to investors is that it’s very important that you operate with 100% transparency. All of these things are explained, outlined, they’re part of the prospectus, they’re in the PPM, and all our returns that we project and calculate to investors are net of every fee that can be charged. I just think you have to do that, there’s no reason not to; for deals that bad that you’ve gotta hide stuff, then you don’t wanna be doing it anyway.

Joe Fairless: It makes sense. What is your best real estate investing advice ever?

John Bogdasarian: Focus your questions on the sponsor, do the work once and get paid forever. You find a good sponsor, you do your due diligence on him, they’ll make you money forever, if you’re an accredited investor.

Joe Fairless: What’s a worst question that you receive? Because I mentioned we’d get back to that… What’s a worst question?

John Bogdasarian: The single worst question I get is a statement, and it’d be a statement about a certain market, or somebody not thinking something’s gonna sell, or whatever. It’s someone second-guessing what I know. I’m interested in the input, I’ll listen, but the reality is I kind of feel like I know what I’m doing and that they should be coming to me and not doing it themselves.

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

John Bogdasarian: Sure, let’s go.

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

Break: [[00:25:54].04] to [[00:26:22].17]

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

John Bogdasarian: Atlas Shrugged, by Ayn Rand.

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

John Bogdasarian: By far and away a deal called Crown Point. We bought a billion for 3.6 million dollars. The investors made an 18% return in six months, and then I sold the property two years later for 11.3 million and split the profits 50/50 with the guy who brought me the deal.

Joe Fairless: And the investors made 18% because there was a refi and you cashed them out, or how did that happen?

John Bogdasarian: We bought it all cash, closed in seven days; the investors got all their money back, plus 18% in six months, and then they were out of the deal. We don’t typically do that. We would like to keep the investors in the deal. But the guy who brought me the deal, that was a condition of the deal – the investors got their 18% and they were out, and then he and I owned the deal together. He didn’t want a lot of investors. But the investors made 18% in six months, so everybody was happy… But we took a 3,5 million dollar cap gain on it.

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

John Bogdasarian: The biggest I’ve ever made is… Two of them. One is not doing enough due diligence up-front, and the other one is being too creative and too tricky in getting something done and closed that other people cannot get done and closed, and then I was trapped in it. A quick example – I bought a six-unit, nobody could get commercial financing; once you go over four units, you might as well go to 400. So I got a six-unit done because I have the credit and I could just get it done with a bank on a line of credit. Then when I went to sell it, I couldn’t get it sold because nobody could buy it.

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

John Bogdasarian: My favorite is my wife’s charity, called The Generosity Project. We also like the 2|42 Community Center here in Michigan; they’ve opened multiple church/community centers throughout Michigan and the country… But thegenerosityproject.org.

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

John Bogdasarian: The best place is ir@promanas.com. Or lisa@promanas.com.

Joe Fairless: Your website is promanas.com, right? And that will be in the show notes. Best Ever listeners, you can click on that and go check out John’s group.

John, thank you for being on the show, talking to us about your career and what deals you’ve done, how you approach your potential deals – you’re situationally-driven, not focused on an asset class or a location, and how you apply that so that you are mitigating the risk and being focused on capital preservation with your deals, regardless of the type of asset class it’s in, or location.

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

John Bogdasarian: I appreciate it, thank you very much.

JF907: How to Transform an SFR into a Duplex #SituationSaturday

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Abracadabra! Transforming a single family home into a duplex could bring in some magical returns! Hear how our guest saw a need in Michigan for housing and doubled his cash flow.

Best Ever Tweet:

Charlie Kao Real Estate Background:

– Owner of iBuyHousesMichigan
– Began real estate investing after moving to California and worked with clients who were investors
– Has purchased 19 homes since moving to Michigan in 2008
– Invests in variety of homes but his niche is non certified condos and homes off busy roads or next to graveyards
– Currently working on building wholesaling business and expanding network
– Based in Grand Rapids, Michigan
– Say hi to him at http://ibuyhousesmichigan.com/

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JF888: LOSING $60k, Graveyard Flip and Converting an SFR into a DUPLEX!

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Strange and dreary, yet there is always certainly a buyer at the right price. Our guest also converted a single-family house into a duplex for greater cash flow! Hear how he analyzes a deal and why he takes extreme caution before purchasing another investment.

Best Ever Tweet:

Charlie Kao Real Estate Background:

– Owner of iBuyHousesMichigan
– Began real estate investing after moving to California and worked with clients who were investors
– Has purchased 19 homes since moving to Michigan in 2008
– Invests in variety of homes but his niche is non certified condos and homes off busy roads or next to graveyards
– Currently working on building wholesaling business and expanding network
– Based in Grand Rapids, Michigan
– Say hi to him at http://ibuyhousesmichigan.com/

Made Possible Because of Our Best Ever Sponsors:

You find the deals. We’ll fund them. Yes, it’s that simple. Fund That Flip is an online lender that provides fast and affordable capital to real estate investors. We make funding your projects easy so you can focus on what you do best…rehabilitating homes.

Download your free copy at http://www.fundthatflip.com/bestever

Subscribe in iTunes and Stitcher so you don’t miss an episode!

https://www.youtube.com/channel/UCwTzctSEMu4L0tKN2b_esfg 

JF793: How He Bought a Rent Ready DUPLEX for $12,000!

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One man’s trash is another man’s treasure and that’s certainly what happened in this episode. Our guest picked up a $12,000 duplex because the previous owner was not as diligent with his systems of buying and holding. Hear how he provided quick solution for everyone in the transaction.

Best Ever Tweet:

Jim Sakalis Real Estate Background:

– Partner at Vash Investment Group
– Involved in more than 12,600 real estate transactions generating over 300 million in sales
– Over 20 years’ experience in real estate
– Based in Flint, Michigan
– Say hi to him at http://www.jimsakalis.com
– Best Ever Book: How to Win Friends and Influence People by Dale Carnegie

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JF709: How He Bought 16 Units with $5000 Down!

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He’s 23 years old and is living the dream! His family has hustled in real estate to help his brother make it to the NHL, now he’s a young real estate entrepreneur in the multi family niche. Yes he did only use $5000 of his own money to purchase 16 units, hear how he did it!

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Joel Florek Real Estate Background:

– JF Holdings
– Goal to acquire 150 doors by age 26
– Based in Iron Mountain, Michigan
– Say hi at joelflorek@gmail.com
– Best Ever Book Start Something That Matters

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You find the deals. We’ll fund them. Yes, it’s that simple. Fund That Flip is an online lender that provides fast and affordable capital to real estate investors.

We make funding your projects easy so you can focus on what you do best…rehabilitating homes. Learn more at http://www.fundthatflip.com/bestever.

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JF629: How She Negotiated Over $1,000,000 in Concessions for Shortsales

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You can call her the Short Sale Queen! She has been able to negotiate over $1 million in short sale concessions, as she was adding value to those that needed out. Hear this episode with a most talented and skilled guest who has helped many people!

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Lola Audu Real Estate Background:

 

  • Real estate broker and educator and one of the first brokers to do short sales aggressively
  • Negotiated over $1M of concessions for her clients on short sales
  • Been in real estate for about 20 years
  • Based in Grand Rapids, Michigan
  • Say to her at laspeaking.com
  • Best Ever book: The Autobiography of George Mueller

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Made Possible Because of Our Best Ever Sponsors:

You find the deals. We’ll fund them. Yes, it’s that simple. Fund That Flip is an online lender that provides fast and affordable capital to real estate investors.

We make funding your projects easy so you can focus on what you do best…rehabilitating homes. Learn more at http://www.fundthatflip.com/bestever.

 

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