JF2226: 7 Figure Flipping With Brad Smotherman

Brad Smotherman is a full-time real estate investor with a 7-figure flipping business and 11 years of experience. He started as a realtor at 17 years old after finishing highschool and he saw how the successful realtors started to struggle after the 2008 crash and he quickly decided that he did want to deal with that himself in the future when he was near retirement so he decided to pivot to focus on investments. His long term goal is to become the bank and own all of his properties on paper through owner financing.

 

Brad Smotherman Real Estate Background:

  • Full-time real estate investor who owns a 7-figure flipping business
  • 11 years of real estate investing experience
  • He’s completed 550 transactions focusing on flipping
  • Based in Nashville, TN
  • Say hi to him at: www.bradsmotherman.com 
  • Best Ever Book: 12 Rules of Life 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Focus on your mindset first to make sure you are ready and willing to pay the cost of success” – Brad Smotherman


TRANSCRIPTION

Theo Hicks: Hello, best ever listeners, and welcome to the best real estate investing advice ever show. I’m Theo Hicks and today we’ll be speaking with Brad Smotherman.  Brad, how are you doing today?

Brad Smotherman: Very good, Theo. I appreciate you having me on.

Theo Hicks: Absolutely. And thanks for taking the time to speak with us today. A little bit about Brad. He’s a full-time real estate investor who owns a 7-figure flipping business. He has 11 years of real estate investing experience, and he’s completed 550 transactions, with a focus on flipping. He is based in Nashville, Tennessee, and you can say hi to him at his website, which is https://www.bradsmotherman.com/.

Brad, do you mind telling us a little bit more about your background and what you’re focused on today?

Brad Smotherman: Certainly. I got involved in real estate when I was 17 years old. I woke up one morning and decided to get my real estate license. Now, Theo, I have no idea what made me do that. I didn’t go to bed thinking about real estate, but I woke up and I was like, “Well, I’ll do this.” And I was just finishing high school, so I got my real estate license. I sold real estate through college. That worked out extremely well until the crash happened.

What I saw in middle of the real estate collapse was that the real estate agents that I knew that had done extremely well in 2004, 2005 and 2006, had once again began to struggle. I didn’t want to do that in my 50s and 60s. The people that I saw that weathered the storm the best, were the people that had long term assets with long term cash flow, so I decided, well, I’ve really got to become an investor some way, somehow.

In 2010, I retired my real estate license to do investment. From that point, we went from startup to success to scale, and at this point, we’ve bought in 21 states and we’ve had a lot of fun doing so. That’s kind of a recap of my previous 15 years.

Theo Hicks: What is your focus now?

Brad Smotherman: In terms of the focus, a lot of what we do now is we create owner finance notes. We’re buying creatively, we’re selling with owner financing, we get a down payment, we get a note, and then we get cash flow in the interim.

Theo Hicks: You’re buying properties and then you’re fixing them up, and then you’re selling them to people using owner financing, so you’re basically a lender in that case?

Brad Smotherman: Yeah, we’re becoming the bank. And my long term goal is to own most of my net worth in paper. I have this idea that property equals problems and liability. If I owned everything in a file cabinet, which was my notes and deeds of trust or my notes and mortgages, then I’d be extremely happy. But one caveat there, we don’t really fix the properties. Whenever we’re doing owner financing, one thing that I found is that there’s more money in financing than in fixing. If we look at the tallest building in any major city, I have yet to see the tallest building in a major city be a construction company. But I’ve certainly almost always seen it be a finance company, either a bank or an insurance company. We’re trying to get more into the interest income and the note side of the business versus owning property and fixing property.

Theo Hicks: Okay. Do you buy just straight up notes too or are you just focusing on this right now, where you buy the property and then do owner financing?

Brad Smotherman: Yeah, I’m not really much on buying notes. The reason for that is, it’s really cash-intensive. Whenever we’re creating notes, we’re able to do that with very little cash in the deal, and that just makes it to where our yield is, I hate to say the word obscene, but we have very, very high yields on our notes because we keep cash out of the deal. Whenever we understand negotiation deal structure, then we can do these kinds of things that are pretty high level.

Theo Hicks: Can you walk us through an example of one of these deals?

Brad Smotherman: Sure. Certainly. My first deal ever, and I still remember when the lead came in because this was August of 2010… A very hot day, gas was $4 a gallon, I barely had money to put gas in my truck, I had a Dodge Ram at the time, and for those of you guys that are pickup truck owners, you know what I’m talking about.

I still remember the lead came in and I thought, “Gosh, I just don’t want to deal with this person.” I’d had eight months of failure. I hadn’t bought a house, and I was just really struggling. But then I checked my commitment.  I was like, “Okay, well, Brad, you wanted to do this business, and you quit accounting to do this business. So let’s go do this business.” The voicemail was not unlike any other, just a basic, “Hey, I have a house I need to sell. Call me back.” I called him back, set the appointment, it was a divorce situation.

Here’s kind of the numbers behind it. In first position on this deal, the sellers owed $97,000. And they were 100% fine with me taking over payments on that 97k. What I did before I closed on the deal—and there was no walk away. The purchase price was $97,000, and what was owed was $97,000, so they weren’t getting any cash at closing.

Before I closed it, I turned around and I marketed the houses with owner financing, and I sold the house for $135,000 with $20,000 down. In this scenario, the $20,000 cash went to me as a down payment and then I had roughly an $18,000 note at closing, which was the difference in what the buyers owed and what was in first position. So that $18,000 note threw off about $400 per month. That was my first deal. That’s not really uncommon in terms of deals that we do today.

Theo Hicks: One thing I’m confused—so where did that $18,000 number come from?

Brad Smotherman: $135,000 is what I sold the house for, we got $20,000 down that left 115. The $115,000 that the buyer still owed is all-inclusive of the $97,000 first mortgage. The difference there 115 and 97 is the $18,000 note profit that we had. That was money that was owed to me.

Theo Hicks: I got it. Basically, the person who bought the house gave you 20 grand, and the payments they gave you, most of that went to paying the seller financing that you had. And then the difference between what the person you found was paying and what you owed to the seller was your $400 a month.

Brad Smotherman: Ballparking it, yes, that’s correct.

Theo Hicks: Okay, perfect. This is essentially what you do full-time now – you will find homes, that you’ll buy them at seller financing and then resell that house to someone else.

Brad Smotherman: Correct. 70% of our purchases are still done even today with some kind of built-in financing from our seller. And then at that point, we have options. We can either sell the house with owner financing, but we can retail out if we choose.

Theo Hicks: Okay, so the two things I want to focus on here then is one, how are you finding these deals? And then two, after we answer that question, I want to talk about how you’re finding these buyers.

Brad Smotherman: And that’s a great question. In terms of finding the deals, it’s really market-specific. To put it in perspective in terms of a scale, I bought in Pittsburgh, Pennsylvania, and I bought in Dallas, Fort Worth. What worked in one market really didn’t work in another. That’s why I’m really kind of against this one size fits all kind of marketing strategy, because it really depends on number one, what is someone’s goal? Number two, how much time do they have? How much capital do they have to invest in their marketing machine? And then also, what’s the demographics of that market?

When you look at Pittsburgh versus Dallas, Fort Worth, you see that they’re exceptionally different markets. One is highly appreciating, one is not. One is a different price point than the other. What I found across my career is that marketing is really market-specific.

The short answer on how do we find the deals is it really depends on the market and what we’re doing at the time. In terms of finding the buyers, it’s really interesting. Depending on the month—and it really depends, but depending on the month, between 10 and 25 percent of the buyers in the overall market that are applying for mortgages are denied. That means that roughly between 10 and 25 percent of the overall buyer pool for real estate right now need owner financing. And that’s a big number, guys.

Whenever I looked at the numbers in Nashville—my home market is Nashville, but we bought all over the place. But the last time that I checked in Nashville, there were 2700 houses on the market on the MLS. That’s supposed to service, let’s say, 90% of the buyers. Well, I think you’d be pretty hard-pressed to find five houses that are offered with owner financing that are supposedly supposed to service the other 10% of buyers that need owner financing. As we can see, there’s a big disparity in the supply-demand curve when it comes to these markets.

When we come to finding buyers, we can generally within two or three weeks, sell a house with owner financing just based off of Facebook marketplace, and really, Craigslist.

Theo Hicks: Let us know the messaging you include in those Facebook marketplace and Craigslist ads.

Brad Smotherman: One of the questions that I often get is are we just offering owner financing and just trying to create a buyer’s list, or are we selling the property and offering specifics on the property?

One thing that’s different than wholesaling – in the wholesaling model, you build a buyer’s list and those buyers generally they stay in the market. I’ve been buying and selling real estate for almost 11 years now. Just like me, there are other people that have been doing it for a decade or longer and so they’re constantly in that market, right?

The owner-finance buyer pool is a little bit different, because they’re constantly either in the market or out. What I mean by that is, if someone is at the end of their lease, and they’re thinking about, “Well, do I want to buy a house or do I want to sign up another lease?” then they have maybe a two or three-month window there, where they’re looking at “Well, what are we going to do with this situation?”

So if I’m marketing a house with owner financing today, which is in let’s just say, July, that buyer pool is going to be different than October, because there’s people that were interested in July that have either signed the lease or they bought something. It’s a constantly changing market. It’s a little bit different than the wholesaling model, if that makes sense.

Theo Hicks: If you were listing it right now, what would you say?

Brad Smotherman: In terms of what?

Theo Hicks: On your Craigslist and Facebook marketplace add.

Brad Smotherman: We’re going to market the house. So owner financing, must sell [unintelligible [00:12:50].08], three-bedroom, two baths, has a big yard or needs work or whatever the interesting thing is about that house. You’ll have probably 20 to 30 inquiries a day off of Facebook Marketplace. If you’re doing this, it becomes a little bit difficult to manage the lead flow from the buyers. But we’re going to market the property, the specifics of the property, the terms of the deal. We kind of go through an FAQ, Frequently Asked Questions, based on owner financing, and we want to drive traffic to the house.

Once people are in front of the house, they know that they have to have a down payment, they know the price, they’ve seen the area and they’ve seen the exterior. Then at that point, we’re comfortable in terms of speaking with someone, getting them inside the property. If they want it, then we’ll set an in-person interview to see if they qualify for the loan.

Theo Hicks: Okay. I want to circle back to how you’re finding these deals. I know you said it depends on the goal, the time, the money, the demographic. Can you just maybe give us an example of how you found some of the more recent deals you’ve done?

Brad Smotherman: Yeah, and the thing is that there’s a big difference in push versus pull marketing. There was a point where we were mailing out roughly 70,000 yellow letters a month. It got to where the effectiveness of that medium really collapsed. Most of what we’re doing now is online, so either YouTube, Facebook or Google ads. It’s a big difference whenever someone contacts us for us to buy something, versus we’re contacting someone hoping that they’ll sell something, like direct mail has been in the past few years.

A lot of what we do is PPC, whether it’s Google ads or its Facebook marketing, but we want to be in a position where people are contacting us because they have a problem, versus we’re interrupting their pattern and putting them in a position where maybe they contact us because a lot of the people from the direct mail world in terms of the sellers, they think they’ve hit the lottery, because they just got this handwritten letter that says, “Well, somebody is interested in buying my property all cash, and they haven’t seen it, and I’m probably the only person that they mailed this to.” Right?

We want to be in a position where we have motivated people that have a problem that we can solve, versus being in a position where we’re chasing people… Because that really completely destroys the negotiation frame.

Theo Hicks: What does your team look like? Is it just you or do you have other people on your team who are helping you with this process?

Brad Smotherman: Now, I’ve pretty well delegated myself out of a job. I have a controller, I have an acquisition person, a disposition person, a marketing manager, and assistant, a bookkeeper, a construction manager, and we have a couple of other just VAs and that kind of thing. We have a, I wouldn’t say a big team; I’d say actually, frankly, we’re pretty lean based on what we’re doing, but I do have help. It’s kind of to the point—it’s been a long time that we bought and sold houses that I’ve never personally seen. But now it’s getting to the point where we’re buying and selling houses I don’t know about, and that’s kind of a fun and scary position to be in. But we have a pretty good team in terms of creating what we’re creating.

Theo Hicks: Looking at the first example – you bought the house for 97k, no money down, and then you sold it for 135k with 20k down. How long are these people typically holding on to the house? What happens when they sell? Are you done at that point, once you’ve sold it the first time, or do you have involvement on the backend when they decide to sell the house?

Brad Smotherman: That’s a good question. In terms of our paper that we create, we look at it and say, well, either the people are going to default, or pay us off within five years. And that’s held pretty well across our career. In terms of how are we involved after the sale – we’re not involved when it comes to vacancy and repair like a rental. And that’s a big reason why I want to own notes and not rentals is, I get out of vacancy and repair. So I don’t have tenants and toilets and that kind of thing.

Now, the one thing that we do is we service the paper. We have a payment coming in, we have a payment that goes out to the underlying, and we manage that process. And whenever the buyer that we have in place gets ready to either refinance or pay the loan off, then we have to generate a payoff. So kind of the conversation comes it’s like XYZ title company calls in and says, “Hey, we need to pay off on 123 Main Street, can you get us a payoff?” So we send the payoff in and wiring instructions so that they can wire in the payoff, and that’s kind of how that works.

Theo Hicks: Do you have any prepayment penalties if they pay off before five years?

Brad Smotherman: That’s a great question. We don’t do prepayment penalties and we don’t do balloons in general. We have 30 year amortized notes. On some of those notes, we’re going to have rising interest rates and some of them are going to be fixed.

Theo Hicks: Okay, Brad, what is your best real estate investing advice ever?

Brad Smotherman: It’s a couple of things. I’m going to go from a macro and then a micro perspective. On the macro perspective, we have to focus on our mindset first, to make sure that we’re ready and willing to do this business. It is an amazing business. It can absolutely change your life, but we have to be ready and willing to pay the price that that success entails.

On the micro perspective, marketing is an investment, it’s not a cost. If we can change our mind on that, and focus on our marketing and lead gen – it’s a lead gen business, and if you’re able to effectively lead generate, it makes the rest of the world a lot easier.

Theo Hicks: Okay, Brad,  are ready for the best ever lightning round?

Brad Smotherman: Sounds like fun, man. Let’s do it.

Theo Hicks: Okay.

Break: [00:18:06] to [00:18:56]

Theo Hicks: Okay, Brad, what is the best ever book you’ve recently read?

Brad Smotherman: I think 12 Rules for Life by Jordan Peterson.

Theo Hicks: If your business were to collapse today, what would you do next?

Brad Smotherman: That’s a really great question. Whenever it comes to being proficient in something, once you’re proficient in something, it never really leaves you. Let’s say I was dropped in a market that I’ve never been in before, and all of my assets and everything is taken away – I’m going to continue doing what we’re doing. And that’s three things – we lead generate, we negotiate and we deal-structure, and that creates a lot of profitability.

Theo Hicks: Tell me about a time where you’ve lost money on one of these deals. If so, how much did you lose? What lesson did you learn?

Brad Smotherman: There was a time when I decided I was going to do some land development. I bought a piece of land and I really had an amazing deal. The land was bought well, in a great location. I had it engineered well, we got through planning everything, and then it came down to the county engineer decided he didn’t want this much density, even though the zoning allowed for it.

I went to litigator attorney, and he said, “Brad, you will win this, but it’ll cost you 100k, and three and a half, maybe four years.” I decided that cost really didn’t make sense. We ended up having to go with half the lots that we had been promised on the front end. That makes profitability pretty difficult, because your fixed costs are the same. I was in a situation where we ended up losing money, maybe 30 or so thousand dollars on that.

Theo Hicks: What about the deal you made the most money on?

Brad Smotherman: Oh, man. That’s tough to say. I bought a property for 70,000 one time and we sold it for 245k as is. That’s the first one that comes to mind. We may have something better, I’m not sure, but that’s the one that we were able to catch it at the right time. I would say probably that one in terms of what’s top of mind awareness.

Theo Hicks: What is the best ever way you like to give back?

Brad Smotherman: I get a lot of gratification in helping others do these kinds of transactions. So helping others do these kinds of deals, especially deals that they didn’t know existed before, is really gratifying for me.

Theo Hicks: Lastly, what’s the best ever place to reach you?

Brad Smotherman: Yeah, for those that are interested in me, you can check me out on my podcast Investor Creator, or you can email me directly, brad@bradsmotherman.com.

Theo Hicks: Perfect, Brad Thanks for joining us today and talking about this very creative strategy. I personally had not heard of this before. Basically, you’re buying properties from distressed owners via seller financing, and then you’re reselling them to someone else via seller financing and then you get paid with the difference between those two notes plus whatever downpayment you get from the buyer. Very interesting.

You walked us through a sample deal, your first deal that you did in August 2020, where you bought the property for literally no money down, and then you resold it and you made $20,000 from that downpayment plus a couple hundred dollars per month in interest from that loan.

We talked about how you are able to find the type of seller financing deals, you mentioned it is very market-specific. You don’t believe in the one size fits all marketing approaches. It depends on what the person’s goal is, it depends on how much time they have, how much money they have and how the demographic is.

And you mentioned how you used to send out a bunch of direct mailers, but you don’t really like that; you’d rather have people contacting you that have a problem, as opposed to people thinking that they’ve hit the lottery by you sending this letter. And so now you focus on YouTube, Facebook and Google ads, more specifically, the pay per click type.

And then once you have that deal, you mentioned how you’re finding the buyers. I like the way you mathematically broke it down and said that 10% to 20% of buyers in the market applying for mortgages are denied, which means that their only other option is seller financing. So if you look at the MLS, all those houses are servicing 75% to 90% of the buyers, but not many properties are servicing the other 10% to 25% of people who need seller financing. So you said that supply and demand is way off there. So that’s definitely a need you identified.

You mentioned how to find these buyers is with Facebook Marketplace and Craigslist ads. And again, you walked us through the fact that for these types of deals, the buyer is either in the market or out of the market, so there’s really small window to track these people. So just like on the front end, how you find these buyers is also depend on the time of the year. But you gave us an example of whenever you are creating a marketing piece in say July, you talk about the house, you talked about the term of the deal, you have a FAQ for questions they might have about owner financing. And then you mentioned how you’ve got basically five-year terms when they’re paid off or default. You don’t do any prepayment or balloons. And you kind of broke down that you have different members on your team that allow you to delegate everything.

And then your best ever advice; macro, was to focus on the mindset to make sure you’re ready and willing to pay the price of success, and you’re ready for that. And then on a micro perspective, you want people to realize that marketing is an investment and not a cost.

Again, Brad, I really appreciate you coming on the show. Best ever listeners, as always, thank you for listening. Have a best ever day and I’ll talk to you tomorrow.

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JF2193: How To Go From Navy Pilot to Owner Of Two Businesses With Bill Allen

Bill is a former Navy Pilot and Founder of BlackJack Real Estate and CEO/Owner of 7 Figure Flipping. He initially started flipping one house a year and as he started to gain the confidence he then went full-time. He recently bought a new real estate company called 7 Figure Flipping. Today he shares how he has been able to grow from Full-time Navy Pilot to business owner.

 

Bill Allen Real Estate Background: October 15th air date

  • Navy pilot, Founder of BlackJack Real Estate and CEO/Owner of 7 Figure Flipping
  • He and his team at BlackJack RE currently flip and wholesale 200+ deals per year
  • Based in Nashville, TN
  • Say hi to him at: www.blackjackre.com 
  • Episode JF905 – May 2017
  • Best Ever Book: Extreme ownership

 

 

 

 

Click here for more info on PropStream

Best Ever Tweet:

“Listen to a podcast that is educational, and surround yourself around people who are strong where you are weak” – Bill Allen


TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners and welcome to the best real estate investing advice ever show. I’m Theo Hicks and today, we’ll be speaking with Bill Allen. Bill, how are you doing today?

Bill Allen: I’m doing good, Theo. How are you?

Theo Hicks: I’m well. Thanks for asking and thanks for joining us again. So Bill was a guest all the way back in May of 2017, on Episode 905. So make sure you check that episode out. We’ll be talking about what Bill’s been up to since then. But before we get into that, a little bit about Bill – he’s a Navy pilot as well as the founder of Blackjack Real Estate, and CEO and owner of 7 Figure Flipping. He and his team at Blackjack currently flip and wholesale over 200 deals per year. He is based in Nashville, Tennessee, and his website is blackjackre.com. So Bill, do you mind telling us a little bit more about your background and what you’ve been up to since we last had you on the show?

Bill Allen: Yeah, you told me May 2017, so I can’t believe it’s been that long; over three years now. So I have a Navy background. I was an engineer and went through as a Navy pilot, and I thought that’s what I would be doing my whole career. I bought a couple of houses as rental properties. I moved around 15 times in 18 years that I have been a Navy so far, and just bought a house everywhere I went. I started to expand into doing a flip on the side; made a bunch of money. You make $45,000 in a couple of months, it starts to feel really good, and you figure out how you can do more of that. So I did one a year before I started scaling up a business, and then eventually I was able to leave the Navy full time and I’m a reservist now. So I fly part-time.

Over the past four or five years, we’ve been able to do over 100 deals a year. I have a team of about 15 or 16 people in that company, and it’s pretty nice. I’ve got to the point where — I talk about passive income a lot. I don’t really do a lot in that business anymore in Blackjack Real Estate, so my COO runs the company. He does the day to day ops. I spend two hours a week with him on a call and he does the magic, and the team’s awesome. It’s really incredible to get to that point. So that’s my background.

We primarily wholesale houses in the southeast. So Nashville, Chattanooga, Pensacola. We do some deals in Atlanta, Birmingham. If something pops up, we might do some marketing in some different areas. It’s pretty much all virtual now. COVID pushed us into a virtual world. So we’re closing everything over the phone. We’ve got a system set up where we don’t actually have to go see the house anymore. So it’s been a great journey. I don’t know — last three years, my COO’s got up and running, and I’ve been able to remove myself, and then I bought another business and I’m running that now. So that’s where I spend my world in that 7 Figure Flipping company you’re talking about now. It’s where I spend about sometimes 80 hours a week doing that.

Theo Hicks: Perfect. So the Blackjack is a machine that’s running on its own. Well, not on its own, but you’re not running it, and then your focus now is on 7 Figure Flipping.

Bill Allen: Yeah, I spend all my time in that mastermind company for single-family wholesaling, flipping. Blackjack’s great because I have a phenomenal team. We have a great leadership team. I don’t have to look over their shoulder. They hold each other accountable. We operate off with a system called EOS, so the Traction by Gino Wickman, that system… And everything runs. I can just pop in there, look at the scorecard, see how they’re doing. I show up every month and give them a meeting over some rah-rah, talk about how amazing things are doing. The Inc. 5000 list just came out yesterday and we were number 206 in growth from 2016 to 2019, which is amazing to see that. So I can celebrate those things with them and do something else. My passion moved somewhere else, and to be able to do that and build another company and put the right people in place has been fun.

Theo Hicks: So in my notes here, this is from your first episode, is that in 2016, you had flipped 13 houses and wholesaled 54 while you were working full time, and now you’re telling us that you’re spending a few hours on that business. You’re doing over 200 deals a year. So double, triple what you were doing at the time. What are the two or three things that you’ve done that have allowed you to not only increase the amount of deals you’re doing, but decrease the time investment on your end involved in doing those deals?

Bill Allen: Well, I think the first thing is listen to podcasts like this. Understand that it’s possible. When you hear somebody that you can relate to and realize that they’re just a normal person doing things like this, it’s possible for anybody to figure out how to do it… And then surround yourself with the right people. I brought in staff members and team members that were better in areas that I was bad at.

A lot of people say strengthen your weaknesses, and I really believe in that work on your strengths, know what your strengths are, and then surround yourself with the people who are strong where you’re weak, and that’s what I was able to do. I was able to put this team together that when I’m sitting at the conference table and I’m talking about marketing, I’m not the know it all at marketing. Somebody else knows a lot more than me. So when I started listening to other CEOs, other business owners to figure out how they got to the place that they got, it was mostly about the fact that every decision doesn’t have to go through them.

So putting the right people in the team, and — you guys have that here, right? You guys have a great relationship here with your team, with Joe and you, and it’s really cool to see that. So when you can bring the right people in on your team to do the things that you’re not very good at or don’t want to do, it frees you up to do the other thing. So first of all, a little bit of education and just really honestly, it’s all pretty much mindset. Believing that you can actually do it, that’s the first step. And if somebody else can do it, so can you. Lots of different people have been able to do this. It’s possible. It’s real. There’s a lot of people out there doing it. And then finding the right people. Those are the big things. We talked about systems and automation and process. It’s the people that are involved that are most important. Whether it’s the people in the deal, the people on the team and staff, that’s the important part in business as far as I go.

Theo Hicks: How did you find the team members? Did you just post a job listing? Did you get a recruiter? Are they people that you knew previously? Where did you find them? And then how do you know that they are the right fit? You mentioned that you want to find people who are good at what you aren’t good at or don’t like doing, but I guess tactically, how do you know that this person is actually good at these things?

Bill Allen: I think the first step is knowing yourself. So once you know yourself and what you’re good at — because people ask me all the time, who should I hire first? The answer to that question is it depends. I can tell you who I hired first, but who you hire first might be somebody totally different. It might be a project manager, it might be a bookkeeper, it might be a salesperson.. It’s really where are you weak and what do you not good at; that should be the first person that comes in. So knowing yourself, get to know yourself, your personality, what you’re good at, what you’re not good at and be honest with yourself. And then you interviewed me in 2017; 2016 is when I started hiring people, in early 2016, and it was like a Craigslist posting. We don’t do that style anymore. You can still do that…

The thing that I think you need to do is you need to cast your vision. You need to know where you’re going. Because that first person that comes in when you have no company and you have no track record, why should they leave another job or believe that coming to work for you is a stable way for them to do what they want to do? Casting the vision for them is the most important thing. Getting them on board and getting him to believe and buy into your vision. So what we do now is we hire off Indeed. That’s the only place we post, and we have ads running all the time. We look at the personality profile that we want somebody to have. So you can use a free resource like the DISC test. Kolbe is another one, Myers-Briggs is another one. We use a paid service called Culture Index. They cost anywhere from $6,000 to $10,000 a year depending on the size of company that you have. But I have two companies, we have about 50 people that work for the two companies combined. So it’s a great resource for us. I actually pay two licenses, one for each company. It’s that valuable to me.

So we set the personality profile that we’re looking for, and that’s who we are. What’s in your DNA? From the time that you’re 12 years old, you have these characteristics and traits that are in you. It might not show up, you might be able to work through it sometimes, but when you get stressed out, and things are going wrong and everything happens, you go back to that natural state that you’re in, and we’re constantly under stress as a real estate business. I think it’s safe to say that 70% or 80% of the time, there’s problems and things are blowing up. So I want the people that show up that can naturally go back to being salespeople or naturally going back to being admin people or naturally being good at bookkeeping at that point in time, and they’re not going to miss the details. So we look at that personality profile, and then we look at skillset. So a lot of people do it backwards. They look at skillset and they look at the resume, and then they hire somebody.

So I want to know who you are as a person, what your core values are, what you believe in, and if you can fit in with the team. I have a team member of mine, she’s amazing. She said one time, “They’ve got to pass the beach test. Would you go to the beach and sit on the beach and hang out with them for a little bit, especially as a small company?” I’ve hired some people before, they just don’t really fit the culture and it’s just the wrong fit. They can be great at that position, but they got to fit into the culture, the core values and all that stuff that we believe in, who we are.

So we post on Indeed, we create the personality profile that we’re looking for, and then we write the job ad on Indeed based on attracting that personality profile. So we use adjectives that when somebody reads it, they’re like, “That’s me, that’s me, that’s me.” Instead of talking about what the job is, we talk about who the person is that would be interested in this, and then we look at the resume.

So it’s like a funnel, just like your leads are. If you look at hiring just like you do going out and looking for leads for houses or for buyers or for raising money, whatever that is – same thing with hiring. And then we ask the same questions, we compare apples to apples. We write down the questions that we’re going to ask. We don’t change them, because a lot of times, you’ll go one way with the candidate on an interview and you’ll go another way on a different candidate on an interview, and you can’t compare apples to apples that way. So we ask them the same question. It’s very clear, it’s very obvious that we’re just being systematic about our approach. So that’s a short answer on hiring. There’s a lot involved in this stuff, but if your gut says no, don’t do it.. If your gut says this might not be the right person, but they have the resume… I’ve gone against my gut a couple times, big mistake.

Theo Hicks: That’s something I wanted to ask too, is how do you know when it’s time to fire someone, and then how does that approach work? Is it just one day it’s done? Is there a warning system? How much time do you give them to turn it around? I’m just curious of how that works.

Bill Allen: Yeah. That’s the answer again – it depends. For me, the problem is, I know that I’m an emotional decision maker, so I’ll hold on to people longer than I should. When my confidence runs out in somebody or it’s in question, it’s very hard to climb back up and get back on the good side of me and the company. Once I lose a little bit of trust and confidence in them because of their performance or what they’re saying or it doesn’t line up and my gut starts telling me this is the wrong fit, that’s the time that I should be letting somebody go, or having that first conversation. Usually what I do is I’ll have a basic conversation with them. I’ll give them some time to turn it around, and it’s never worked out for me. So from the HR side, I’ll say yes, we’ll give people a couple chances.

We use EOS. So we use something called the people analyzer as a tool inside of this EOS system that we use, and when they get below the bar on the core values or the Get it, Want it, and the Capacity, that’s when we go to them and say, “Hey, you’re below the bar. This happened, this happened, this happened.” So what I do is I give them three different times of things that they did in the past that highlights this core value being below the bar, and then I say, “You’ve got the opportunity to get back up, but this is what you need to do. You have two weeks or one week or three weeks or whatever we put a plan in place to get above the bar.” Because if it’s one instance, they say, “Oh yeah, but this happened,” or, “Oh, it was because of this.” But if it’s three times, they really can’t defend the fact that three times, they’re not showing up. And for us, it’s extreme ownership, stewardship, hard-working, integrity and personal professional development.

So if they’re not showing up with integrity, for me, you’re pretty much gone. There’s not going to be a warning for integrity. But if there’s some hard-working, maybe they had something going on with their family, they’re just not working as hard as they should be or showing up the way that they should, then that’s something that’s coachable. Personal professional development, if they’re not putting enough time into developing themselves professionally, then we can have a conversation and try to start to talk through some of that stuff.

Ownership, if they show up to that and go, “Yeah, but that was this person’s fault or this person’s fault or this person’s fault,” then they’re not even going to get through that meeting. We’re just gonna fire them right there. So it just depends on who the person is. But when your gut tells you that it’s time for somebody to go, it’s probably too late. Don’t be afraid to fire somebody in the first couple weeks, the first month, the first two months. You pour a lot of time and effort and energy into these folks, but there’s a lot of opportunity cost lost by holding on to the wrong person for too long.

We just had a quarterly meeting. One of our teammates was below the bar, and we had the opportunity to coach her, but she just wasn’t coachable and it was time to go, and we just parted ways on good terms. I’ll tell you, every single person that we let go so far, pretty much every single person, has written me back a year later. Every person I let go, I said, “Look, this is the best thing that I could possibly do for you. You don’t understand that this is not the right fit, you’re not in the right seat, this isn’t for you. You’re going to go find your dream job. Believe me that you’re going to be happier somewhere else. Here’s a couple of recommendations I have based on your personality profile, what I’ve seen; maybe go try this,” and I’ll get an email or a phone call six months, a year later, and somebody will say, “You know what? You were right. I found the incredible job. I love my job. I love what I do now. Thank you. Thank you for firing me. Thank you for letting me go. Thank you for caring about me that I’m actually not doing what fills me up.”

I think it’s pretty rare that employers actually look at their staff to see if they’re happy, if they fit the culture, if they’re enjoying what they do, and looking out for them. That’s the way I look at it is if they’re not happy, we’re not happy; they’re just working for a paycheck. Let me figure out where to put them and move them somewhere else, and if they can’t fit inside of our team, then what can I recommend for them?

Theo Hicks: That’s probably even more rare, is not only looking out for what’s best for them and for you, but also saying, “Hey, here’s what you probably can do based off of your personality profiles. So I wanted to ask a quick question about 7 Figure Flipping, the mastermind group. Is that traditionally an in-person event or is it online?

Bill Allen: Yeah, it’s traditionally in-person. So we have a big event every year in October called Flip Hacking Live, and last year, we had over 600 people there. We were planning on having it in Orlando this October. And then it’s traditionally quarterly meetings in person that we have, mastermind meetings, that we have transitioned to virtual meetings recently. So it’s been quite a challenge. We even just had one here in Nashville. I live in Nashville. We had it scheduled in Chicago. About a month before, we said, “Nashville is opening on July 1st. Let’s move it to Nashville because Chicago’s a no…” and it was in the middle of July. Two weeks before the event, we moved it into Nashville, got the contract in place, and then sure enough, July 3rd, they were just like, “Shut down Nashville, too.” We had to plan three events in a month. It was crazy.

Theo Hicks: Well, I wanna ask you, what are some of the things you’re doing for these virtual events to engage with people through their computer? What are some of the things you’re doing to engage with people?

Bill Allen: Well, you’re looking at some of it right now. So you can’t see, but I have four computer screens here. So when I’m presenting at these events, I’ve got a professional camera, lighting, set up my studio, I’ll move things around, and I can see every single face that’s at the event. I got the standing desk because of this. I got a lot of different new tech and things like that. I invested a ton of money into figuring out how we could deliver an experience to them. We learned a ton of things in Zoom. We do Zoom breakout sessions. We gamify some of the stuff. The biggest thing for me was to be able to see everybody, look at their reactions, and make sure that the content that I’m delivering is strong, and also coach up some of our other team and saying, “Hey, I need you professionally dressed. I need you with a nice background. I need you in a quiet place. Make sure that your internet is strong.”

We’ve put on probably six virtual events that we have learned how to do things. You can do a lot of cool stuff with zoom. You can do breakout sessions where you can send them to breakout sessions and then bring them back into a general session.

We’ve run two simultaneous events in the same weekend with six breakout sessions with different speakers and people running the room. So we’ve had to get lots of different licenses, do things like that. It’s been interesting. This October event that we have, we have the same event planner that does Tony Robbins’ event. He just did this Unleash the Power From Within; it had over 40,000 people. At his event, he had a 360-degree monitor. So what we’re doing for October is we’re building out a studio in Charlotte, where I’m gonna be there, I’m gonna fly the speakers out, and we’re gonna present a live event from stage to everybody and stream it to them.

We’re sending boxes ahead of time, we’re sending all the stuff that you would normally get at an event like that to their house ahead of time. We’re giving them point systems to gamify it, win some prizes and stuff, using private Facebook groups to get them interested and excited and network ahead of time. Networking sessions, breakouts, bringing keynote speakers in that we couldn’t afford before, all that stuff. Just taking it–  elevating it to a point where it’s not just a Zoom call or another webinar, because people are tired of that right now. I’ll tell you – a three-day Zoom call, they’re just not gonna be interested.

Theo Hicks: Okay Bill, what is your best real estate investing advice ever?

Bill Allen: Best real estate advice ever. I would say looking back, build the foundation and the mindset of what you want to do. I usually say take action, but I feel like that’s so played out. I really feel like when I look back, my success is because of what I tell myself in my mind all the time. So your mindset and the way that you show up with failure, with loss, with issues, with problems and the stories that you tell yourself in your head, that’s the most important thing. So if you can start with that and understand that you’re building the foundation on rock instead of sand with your mindset and where you’re going, you’ll be unstoppable.

Theo Hicks: Okay Bill, are you ready for the Best Ever lightning round?

Bill Allen: Ready.

Break [00:19:26]:04] to [00:20:28]:03]

Theo Hicks: Okay Bill, what is the best ever book you’ve recently read?

Bill Allen: Extreme Ownership by Jocko Willink and Leif Babin. Absolutely amazing book. It will change your life. Make sure your entire team, your family, your friends all read that book. It’s amazing.

Theo Hicks: If your business were to collapse today, and we’ll say Blackjack, what would you do next?

Bill Allen: I’d keep doing what I’m doing. I’ll tell you what I would do if Blackjack fell apart. I would probably look at what the marketplace looks like and figure out how to pivot the people that I have inside that business to something else. If it was because of the fact that we’re wholesaling real estate and that started to tighten up or close down, I have phenomenal people that we could have a rockstar donut shop right here in Spring Hill, Tennessee if we needed to. So look at the marketplace and look for opportunity and figure out how to pivot.

Theo Hicks: What is the best ever way you like to give back?

Bill Allen: I’m actually the Tennessee Director for Operation Underground Railroad. So I absolutely love giving my time and money and raising awareness for that. That’s an organization that frees trafficked kids from sex trafficking, sex slavery. In the US, about 500,000 sex slaves here in the US that are kids and almost 2 million total, so over 1.5 million abroad. So it’s a pandemic, it’s an issue. We’re fueling the problem as Americans and that’s it. Operation Underground Railroad, ourrescue.org. You can check it out. It’s absolutely amazing. It’s changed my life, opened my eyes to something I had no idea was a problem.

Theo Hicks: And then lastly, what is the best ever place to reach you?

Bill Allen: Well, that event, Flip Hacking LIVE, absolutely amazing. I recommend anybody to check it out. But 7figureflipping.com, you can reach me there.

Theo Hicks: Alright Bill, thanks for coming on the show again. I really appreciate you catching us up on what you’ve been up to, and congratulations on such massive growth since we launched talk. Again, went from 13 houses flips, 54 wholesales, full-time to working a few hours and having a self-generating machine of 200+ deals a year.

So we talked mostly about team. So we talked about the two main reasons why you’re able to scale – one was education and mindset; the other one was, surround yourself with the right people, complementary skill sets. You mentioned that you’ll post a job on Indeed, and rather than looking at the resume first, you’ll focus on the type of person, the values that you want, the personality you want for that job.

And then as you create the job listing based off of that, they’ll take the personality test, then you’ll look at the resume and then when you interview them, you’ll ask them all the exact same questions so you can compare apples to apples, and then ultimately, it comes down to your gut. If your gut tells you no, well, it’s probably not gonna be a good fit. We talked about the process of firing someone and your three examples of if they weren’t aligned with specific values. But again, if your gut tells you it’s not working out… You said that you’ve never had a time where you’ve lost confidence in someone, and then they’ve been able to turn it around. But I really liked what you said that when you do fire someone, you don’t just say, “Good luck.” You actually will try to give them advice on what might be a good career field based off of their personality test. You gave us a lot of advice on how to effectively do virtual events, whether it’s a meetup group as you’re doing every single month or a one-time yearly conference, and that would be your 7 Figure Flipping.

You talked about investing in a studio and making sure your team also has a nice camera, lighting, background. You said you use Zoom a lot for the breakout sessions. You get point systems, games, private Facebook groups to get people excited. And then something else you said that I thought was interesting was you can get bigger name speakers to talk. So you don’t have to fly them out, pay for their hotel. They don’t have to do an in-person event and spend a full day or full weekend. Now they can spend an hour at their computer doing it. So that was also interesting. And then your best ever advice was to build a foundation and a mindset first before you go out there to start taking action. So Bill, thanks again for joining us. Best Ever listeners, as always, thank you for listening. Have a best ever day and we’ll talk to you tomorrow.

Bill Allen: Thanks, Theo.

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JF2156: Institutions vs Entrepreneurial With William Walker

William has experience from both the institutional side of real estate investing and his personal experience of the entrepreneurial side. This unique perspective allowed William to dive into the differences between the two and some of the lessons he has learned from each to help him be more successful.

William Walker Real Estate Background:

  • Co-owner of 4M Capital Real Estate Investment
  • 5 years of real estate investing experience
  • Portfolio consists of 1650 units, built & sold 10 single-family homes
  • Based in Nashville, TN
  • Say hi to him at: www.4mrei.com 

Click here for more info on PropStream

 

 

Best Ever Tweet:

“Sometimes knowing what not to do is very beneficial” – William Walker


TRANSCRIPTION

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

William Walker: Doing well, Joe. Thanks for having me.

Joe Fairless: Well, I’m glad to hear that; it’s my pleasure. A little bit about William – he’s the co-owner 4M Capital Real Estate Investments, his portfolio consists of 1,650 units, he’s built and sold approximately 10 single-family homes, he’s got five years of real estate investing experience. So how did he get to this point within five years? That’s one question I want to ask. He’s based in Nashville, Tennessee. So with that being said, William, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

William Walker: Sure. I’m originally from Nashville, didn’t come from any real estate family or multi-generational company type deal, but started getting into real estate in 2014, really studying the business and trying to learn as much as I could. Through college, I studied accounting and finance and continued to learn real estate just whenever I could, educating myself, getting involved, going into meetings, that sort of thing.

In about 2016, I had acquired two rental properties, single-family and I positioned myself to get into a group within the organization I was working for at the time, Ernst and Young. I started out as an auditor, CPA route, but moved into their transaction real estate practice in 2017 in Atlanta, Georgia. Got a lot of great experience there and worked on some larger multifamily acquisitions from a consulting standpoint, doing things like commercial appraisal, quality of earnings analysis and due diligence. When Mid-America purchased Post Properties in 2017 – it was about 20,000 units – we were very involved in that acquisition, and that was a great learning experience for me.

Another big part of my background was getting involved in a coaching and networking mastermind for multifamily and just getting around operators that weren’t in the institutional level that I was used to seeing from my corporate days, but more boots on the ground, putting deals together. So that was a great experience as well. It was key to some of the relationships that I made in those groups to where I am today.

Joe Fairless: A lot unpacked. First, what coaching group are you referring to?

William Walker: It’s ARI Mentor. It is ARI Mentor.

Joe Fairless: ARI Mentor. Okay, is that Dave Lindell?

William Walker: Yes, that’s correct.

Joe Fairless: Cool, and you mentioned that it was interesting to see the difference between non-institutional, more boots on the ground investors compared to your EY experience where it’s very institutional and working on an acquisition of 20,000 units. I’d like to learn more about some things that you have learned from more boots on the ground that perhaps, institutional players could either implement or it’s just interesting to from your institutional experience.

William Walker: Yeah. The best way I can describe it or how I’ve described in the past, with the institutional side, it’s more of a top-down approach and very future-oriented and projection-based. As you know, there’s all kinds of assumptions that go into a multifamily model, and when you’re dealing with that larger portfolios, I think a lot of the underwriting and decisions are made on data you have and just fine-tuning those models for maybe 100 to 200 basis point yield difference. But in more the boots on the ground, the entrepreneur level, I would say it’s more of a bottom-up approach, and you’re really looking at more of an operational side of things, and what’s this property going to take to run today. If I took over today, where would I deploy troops? Where would I deploy capital? Construction’s a big thing that a lot of people, I think, in the finance world don’t necessarily know well. Maybe they have national averages that they can plug into the model, but I think really getting on-site and understanding construction and understanding where you can save money and where you can be taken advantage of is critical, and that typically, from my experience, wasn’t learned at the institution side. More on the entrepreneurial, boots on the ground side. I’d say more so managing the asset.

Joe Fairless: Thank you for that. It was a poorly worded question and you answered it very well. So I appreciate that.

William Walker: Oh, thank you.

Joe Fairless: So let’s talk about what you just said – knowing construction well, where you can lose money or save money, and you tend to see the entrepreneurs, local owners, just non-institutional groups and guys and gals do that better. What are some specific examples that you can talk about?

William Walker: Specific examples that I could talk about is cap ex. That’s a big thing that– it’s one of the largest assumptions going into an acquisition and I think it’s very rarely talked about. So coming up with a number that you know is going to enable you to execute your value add plan and knowing that you can get those renovations done for that cost and breaking that down on a painful detail is very important. Again, if you’re not really plugged into construction, you’re not communicating with GCs regularly, you’re not involved in projects like roofing or replacing 200 windows or any of the things that go into these value add renovation plans, then it’s difficult to know– okay, can I really execute my plan with this cap ex amount of money, have reserves left over? And I think those are things that are really learned from getting experience on job sites or talking with GCs constantly… And maybe some of the more private equity guys side of the business were doing that, but I just didn’t see that a lot on the institutional side. So not that you can’t still execute a successful acquisition and plan, but I think when you break out and you’re putting together money and raising deals on your own and doing it more on an entrepreneurial scale, and you don’t have quite the budgets that Mid-America has or Cortland has, then it’s very important to one, be able to know your cost, know that you’re not being taken advantage of and they’re doing a lot more work than really needs to be done because contractors want to do more work. Sometimes knowing what not to do is really beneficial.

And then, just working with GCs, it’s difficult to find good general contractors that you can trust. You can give them enough lease to work and not get into trouble or have change orders all over the place. So it’s a dance with the construction side of the business and that’s in the 60s, 70s, 80s built space. That’s one of the biggest components, I would say, to running a successful plan, is executing that construction in a cost-effective way and with minimal overspend.

Joe Fairless: It’s interesting when you mentioned knowing what not to do is as important as knowing what you need to do. Do you have an example of that, that you could just drill down a little bit?

William Walker: Yeah, real specifically, I can think of when we were pricing window replacement on – I think it was 150 units, 160 units – and we were walking the property with the window contractor that we were going to have install on the property, and he was telling us all of these different things, that we got to replace the window seal and redo this and redo that, and my partner at the time was just giving an example of “What if we just did this, as far as not replace the window seal and pop it in from the back?” and it was a dumbfounded look, and I’m not sure if he just didn’t think of that or he wasn’t expecting someone to know… But basically, it cut the work in half on replacing a window, and you extrapolate that over 150 units, call it four windows a unit, it’s a big cost saving. So that’s what I mean when knowing what not to do… Because sometimes a GC will look at a job and they might do more than what’s absolutely necessary.

Another recent example I could provide was we were doing a simple turn at a property we own, and our maintenance supervisor was thinking that we needed to replace the subfloor based on one little area, and instead of ripping up the toilet, ripping up the flooring and the sub-flooring, we cut out a piece of the flooring and replaced that subflooring, and then laid over our floor and it wasn’t brand new, but it probably cut our costs in half, if not more… And just did daily decisions like that, that are hard to catch from afar. Within big projects, there’s decisions made on the ground a lot that are difficult to come up with if-then scenarios to anticipate every time, and just having that construction knowledge to be able to make that right call and say, “No, we don’t need to do this. We can do it a different way and save a lot of money,” is very important… And coming back to that capex budget and maintaining that budget and getting the work you need done.

Joe Fairless: You studied accounting and finance in college and then you were an auditor shortly thereafter, it sounds like, and then you moved into transactions with real estate. How did you get this background in construction and knowing it well? You seem to really go back to hey, this is a part of the business that you’ve got to be an expert on. So how did you get that expertise?

William Walker: That was really developed through my partner who’s stronger in that areas than myself and learning through some of the acquisitions we’ve done over the past several years. Growing up, I started working from an early age for my dad at different types of work like that, doing some work with your hands… So I think it was instilled in me, and something that I wasn’t scared to get involved in and doing it; I was e comfortable doing it, from a labor standpoint, but really just getting involved in some of these transactions… I was also involved with a couple of partners doing some single-family builds, as you mentioned, in Nashville, and on one of those projects, I inserted myself as a project manager. I wasn’t swinging hammers or executing on the labor side, but what I was doing is scheduling and coordinating all of the different trades to come in and build that house, and that gave me a really accelerated understanding of once you start tearing down drywall, okay, what are the components of the house or the apartment unit. Once you start breaking down behind the drywall, it really opens people’s eyes and it becomes a lot easier to visualize “Okay, how is this built?” and take that moving forward. But there’s a gradual stepping stone type deal, just one project after another, getting involved in construction, not necessarily executing, but getting involved, getting on-site, understanding what’s going on, that sort of thing.

Joe Fairless: Five years, almost 1,700 units, and approximately 10 single-family homes being built. How’d you do that in such a short period of time?

William Walker: Well, I definitely didn’t do it by myself. I had some good partners. I had some people that I was lucky not to partner with along the way as well. Going back to– sometimes it’s things you don’t do or knowing what not to do. So surround yourself with the right people being relentless, and I think educating myself when I finally did get opportunities to get deals done and put them together and be a part of that, knowing what I’m talking about and being able to add value in any way that I could.

Joe Fairless: So let’s talk specifics. What’s the largest deal, unit-wise, that you own?

William Walker: That would be the 208 units that we acquired in December. It was 80% occupied, got it from a longtime owner who had built the property, fully paid it off, fully depreciated it and it needed some real good TLC.

Joe Fairless: Where at?

William Walker: That’s in South Georgia. Columbus, Georgia.

Joe Fairless: Okay, and you are not there, you’re based in Nashville. So first off, you said you have a business partner who’s stronger at construction than you are. Who’s on the team and what are their primary roles?

William Walker: Morin Miles is my partner who’s leading the charge, but we have a property management company that manages our internal properties; we don’t do any third party. There’s approximately 49 people working operationally across the properties in management, maintenance, sales, regional managers. We also have a construction company that’s headed up by an individual who is a construction expert, supervisor. He manages all the cap ex projects across our portfolio, and we’re working with two virtual assistants that help us as well, but we’re pretty lean and mean. We work virtually as well, to a certain degree. We have a controller that sits in Nashville and helps us with our financial reporting and tax preparation, and we’re trying to build more of an office in Nashville, but with our current economic and health situation, that put a little bit of a kink in the chain on building a presence in Nashville from an executive standpoint and building out that back-office support, but we’re still communicating and working virtually and able to carry on.

Joe Fairless: The largest is 208. If you can just quickly go through some other large deals that you’ve got. I just want to learn more about your portfolio.

William Walker: Yeah. Starting July 2018, we bought a 160-unit property in Georgia, and then we went on to buy close to a little over 1,400– 1,490, I think, was the final number, by that next year. So I had a really big year in 2019, but I ran through those acquisitions of the 160 units, bought a 58-unit that was at auction, all-cash transaction. The next one was a 108-unit in Atlanta, Georgia. After that, we bought a portfolio with an 88-unit and a 107-unit property that were real close together; 70s built. Closely after that, we closed a four pack of deals. That one was 165 units in Georgia. Another was 172 units in Indiana. Another 88-unit complex, a 50-unit complex that was all purchased together. I’d say we’re opportunistic. We’re not so big that we’re going to scoff at something under 100 units. But in order for us to buy a smaller property, it’s really gonna have to make sense and be a juicy one as we say, and probably have somewhat of a presence in that market already where it’s not a huge burden on management, it can be absorbed in our current management infrastructure in that market. The largest deal that the company has done in the years past has to be 270 units.

Joe Fairless: Okay.

William Walker: 272, I think it was.

Joe Fairless: When did you exit that one?

William Walker: 2019, we sold 1,100 units and picked up about 1,490.

Joe Fairless: So I’d love to learn more about what you’ve learned from buying units between 50 to 100 size properties. Some people stay away from those; you and your business partner do not. So what are some things to keep in mind that we should be aware of when we’re purchasing that size of property?

William Walker: The stereotype, I guess, that the smaller ones can be more difficult than the larger ones; that’s definitely true. In the 50 unit that we purchased – that’s the smallest one we’ve done – there was some HUD issues that we had to jump through all kinds of hoops. It was a mom and pop owner, their records were poor, they weren’t in compliance with HUD, HUD hadn’t been doing inspection… So we had to coach the seller through getting all of this information; we had to deal with HUD. This was back during the government closed down of last year as well. So that’s the latest.

But I would say the smaller properties can be more difficult to run because you don’t have revenue to cover a full-time staff or cover that overhead. So a lot of time is spent on those units. If you don’t have that larger management presence, if you have a couple hundred units in the market, and you have a property a mile down the street, that’s a completely different conversation than saying, “Hey, I want to move into a new market and buy this 50 unit property. By the way, I’m five states away.” That might not be a winning solution. I’m not saying it can’t work, but that would be my best advice.

Joe Fairless: How does it work? If you don’t have that three miles away… You just said, “It’s not a winning solution, but I’m not saying it can’t work.” So how could it work?

William Walker: It would work if you bought it off-market in a distressed situation at a very good price per door, and it didn’t really matter because you had enough room in that deal to execute the plan, hire somebody to manage it and still make money on the back end.

Joe Fairless: Got it. What are some ways that you found effective to find those 50 to 100 unit deals?

William Walker: Working with brokers that aren’t necessarily on the national platform. The guys that are not new to the business necessarily, but maybe have a smaller brokerage shop and aren’t doing the national marketing blast with the CBRE’s and the Cushman & Wakefield to the world. Typically, they’re attacking some of those smaller type units in secondary and tertiary markets.

Joe Fairless: How do you find those local brokers since they’re not on the national stage?

William Walker: It’s a combination, I think, of networking, trying to get our name out there, tracking deals that have been closed and seeing who the brokers were on those deals, and getting in touch with them that way. But I think it’s getting out there. Being in this business is very much to me a long term game, and it takes a little while to build a reputation. I think a lot of people get in it and within six to 12 months, you never hear from them again. So in my eyes, there’s almost a testing period where you’re not really taken serious by any of the brokers until they know you’ve either closed the deal or they’ve seen you come around for more than 6 to 12 months kind of thing… And also with brokers, they go in and out of the business as well. But I just go back to just network as much as you can. I’m more involved in operations and acquisition to the business nowadays, but in the beginning, when I was first getting going and cutting my teeth, I would talk to anybody I could find, go to any event I could find and build those relationships. And over time, when you’re able to look back and say, “They remember meeting you a year to a year and a half ago,” and you can call back on those same people and refer to deals that you’ve done and ask them what they’ve been doing and what have they got coming up kind of thing, it completely changes the conversation from cold calling a broker that you have no prior relationship with, you’ve never met before, and telling them that you want to buy an eight-cap deal in this market and you’ve got the money to do it, kind of thing. So I think it just takes time and diligence and persistence and networking.

Joe Fairless: What software program, if any, do you use to track the deals that have closed and see what brokers were representing the seller?

William Walker: We use ActiveCampaign for CRM management tool; it’s one of the tools we use. And then good old fashioned Excel spreadsheets. I definitely have many spreadsheets and lists tracking different deals that we’re interested in, and try and be selective and instead of taking a shotgun approach; maybe more of a rifle approach and really being targeted about who we’re speaking with, who we’re building relationships, which deals we’re targeting that maximize our game plan, and what we believe is we’re best suited for in our competitive advantage, if you will.

Joe Fairless: So ActiveCampaign, to the best of my knowledge, is a CRM that reminds you to follow up with people and sends out messages. What I was referring to is, how are you getting that information to put into ActiveCampaign? So tracking deals that have closed and seeing the brokers that represent them. Is it just speaking to other people and talking to them, or do you have some software subscription, or what?

William Walker: Yeah. We’ll call brokers that we’re talking to. We see closing announcements that are passed out and going to the Secretary of State website, obviously, where all real property information is saved and stored in public record. A lot of research is done there.

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

William Walker: Hang in there. Sometimes when you’re on the bull, you get the horns, but get back up and time heals all wounds in real estate if you can hold on long enough.

Joe Fairless: Spoken like a person from Nashville. Thank you for that analogy. We’re gonna do a lightning round.

William Walker: Be conservative in your underwriting [unintelligible [00:23:10].23]

Joe Fairless: I want to ask you a follow-up question regarding your bull by the horns thing, but I’m gonna ask it in the lightning round. So first, you ready for the Best Ever lightning round?

William Walker: Yes.

Joe Fairless: Alright.

Break [00:23:24].03] to [00:24:22].13]

Joe Fairless: Alright, William. So on that note, what deal have you lost the most amount of money on?

William Walker: Knock on wood, haven’t lost any money on any deals yet. Looking for some wood to knock on right now.

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

William Walker: I would say, maybe not doing the deal. I was a little conservative on one that I should have pulled the trigger on. I got hung up on a delinquency charge that I thought I might have to pay to an HOA board. But looking back, I should have done that deal.

Joe Fairless: You can’t think of a mistake you’ve made on a deal?

William Walker: Maybe not requesting an updated survey from the attorney when I should have. So we had to do a rush charge on the new survey, [unintelligible [00:25:03].11]; that’s something I can think of.

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

William Walker: Anonymously. I typically look for opportunities that pass me by and do what feels right. An organization that I’ve donated to lately that I think is a great cause is Operation Underground Railroad.

Joe Fairless: How can the Best Ever listeners learn more about you and your company?

William Walker: Through your typical social media platforms. Instagram is my one of choice. And through our website, at 4mrei.com.

Joe Fairless: That will also be in the show notes link, the website URL. William, thank you for being on the show, talking about the importance of knowing construction and capex projections and giving some specific examples; one of them being replacing the subfloor– No, no, no, just a piece of the flooring, and cutting costs in half at least just through that, and you mentioned other examples as well. And then talking about the importance of partnerships, as well as talking a little bit about the 50 to 100 unit transactions and what to look for from a team, and if you don’t have the other properties in those areas, then here’s what you do need in order to make the numbers work off-market, good price per door, and then you’re going in a good basis. So, thanks for being on the show, really appreciate it; I enjoyed our conversation. I hope you have best ever day, and talk to you again soon.

William Walker: Thanks, Joe.

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JF1954: Nashville Broker Describes The Residential Market In Nashville with Josh Anderson

Josh is the owner of a brokerage in Nashville that focuses on residential real estate. He’ll describe the overall state of the Nashville market, and how he built his brokerage to what it is today. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Find the deal, lock it up, and then go find the investors” – Josh Anderson

 

Josh Anderson Real Estate Background:

  • Owner of the Anderson Group, a Nashville based real estate brokerage
  • Combines his 8 years of U.S. Army experience with his education and experience to deliver the most to his clients
  • Based in Nashville, TN
  • Say hi to him at http://joshandersonrealestate.com
  • Best Ever Book: The One Thing

 


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Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.


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 we’ve got Josh Anderson. How are you doing, Josh?

Josh Anderson: I’m doing well, thanks for having me.

Joe Fairless: Well, it’s my pleasure, and I’m looking forward to our conversation. A little bit about Josh – he is the owner of the Anderson Group, which is a Nashville-based real estate brokerage. He combines his eight years of U.S. Army experience – thank you for your service, sir – with his education and experience to deliver the most to his clients. As I mentioned, based in Nashville, Tennessee. With that being said, Josh, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Josh Anderson: Absolutely. I’ve been in the business since April of 2006. I’m in the residential side, but do quite a bit of multifamily as well. So I’ve been in the business for a little over 13 years. Originally from Nashville, grew up in Louisiana, went to LSU, and then came back in 2004 and worked at an investment bank for a couple years, and then decided to get my real estate license.

Joe Fairless: Okay. And you have a brokerage, as you mentioned, and your focus is on the residential side, but you do multifamily… What’s a typical transaction for you?

Josh Anderson: Most of our business is single-family homes, but with that being said, we’re kind of building out our investor division. We’ve had it there for quite a while, bu with Nashville being as popular of a city as it is, and with as much growth and as much building that’s going on, there’s a lot of people in other markets where numbers don’t really make sense in their market… So we’ve got a lot of people moving, or at least buying here for the idea of buying duplexes, triplexes, quadplexes, and even small to medium-sized apartments. So a lot of them are doing 1031s, a lot of them are paying cash, or just putting 20%-25% down… So there’s a pretty active market as far as the multifamily side of things.

Joe Fairless: What are some reasonable expectations if I were to call your brokerage and say “I’d like to buy a fourplex and I wanna make sure it cash-flows”? How would you set my expectations?

Josh Anderson: Sure. So it’s really digging up a lot more questions as far as what somebody’s used to. It’s not out of the realm to get the 1% rule. So if somebody’s buying a million dollar property, they’re getting $10,000 of gross income. In cap rate terms, you can  pretty easily get a 6%, 7%, 8%. It used to be a little bit better than that; with the amount of people that are coming here and buying property, it’s gone down a little bit… But it’s not unrealistic to get a 6%, 7% or 8% in this market still, in the middle Tennessee area.

Joe Fairless: What are the areas of growth that you’ve seen so far in Nashville?

Josh Anderson: With regard to areas?

Joe Fairless: Yeah, what submarkets have growth?

Josh Anderson: Residentially speaking, the suburbs – Brentwood, Franklin, Hendersonville, Mount Juliet… These areas are growing probably a lot faster than Nashville proper… But people still want their investment properties, and there’s a lot of people that wanna be near the trunk of the tree with regard to being close to downtown Nashville. So you’re seeing a lot of these areas that historically have not been great areas, that have  transitioned pretty dramatically, that are close proximity to downtown… So Germantown and East Nashville – they’re all areas that are very walkable. People love the charm and character of the old houses.

We just listed a property – or it’s actually going live tomorrow – in 12 South, which is right by  Vanderbilt, and Belmont [unintelligible [00:04:55].01] universities, and it’s a 130-year-old Victorian. That property will probably get a lot of activity and a lot of traction.

So you’re seeing a lot of areas that historically just weren’t really great, that are really being cleaned up, and investors are coming in and flipping houses, or renovating… And you’ve got more multifamilies also in those areas, that are really getting cleaned up. You know, old, mid-sized apartment complexes, anywhere from 15 to 50 or 60 units that are kind of the sweet spot, that are getting cleaned up quite a bit.

Joe Fairless: You used to work at an investment bank, and then you got your real estate license… What did you learn while working for an investment bank that you applied towards your business today?

Josh Anderson: It takes about two weeks to a month to get your real estate license, which is kind of a joke, in my opinion… And I say that with regard to how big of an investment — it’s not like people are going to Walmart every day and buying a house… But it’s one of those things — I think that the investment background, graduating in finance and economics really helps me on the numbers side of things, and being an investor myself really allows me to talk at a different level with savvy investors… A lot of realtors really don’t understand cap rates, or they don’t understand the 1% rule. These aren’t hard things to understand or learn, but I think that there’s a lot of people that just don’t really get it, and don’t know how to talk in terms of investments, if that makes sense.

Joe Fairless: It does. You said you’re an investor yourself… What are you buying?

Josh Anderson: Everything I own, outside of a couple of commercial lots that I own in downtown Nashville, I own all multifamilies. I kind of started out buying duplexes and triplexes, and I’ve got several duplex, triplex, a couple of quadplexes… Starting in 2018 I got really intentional and purposeful about buying apartments, and kind of digging in and finding the sweet spot.

I think there’s too much competition in that 150+ units. That’s just a different buyer, and I  think that those things are hard to find. A lot of out-of-town investors are building those.

I’m focused on about 10-12 units, up to about 50-60 units. I’ve bought three apartment complexes since 2018, and I just got really purposeful about buying those… I guess it was about 2014-2015 when I started buying investment properties, which in hindsight I wish I’d been buying them all along. My motto to myself now is “I’m always a buyer first, I’m a listing agent second.” That’s kind of how my mind works.

Joe Fairless: Did I hear you correctly you’ve bought three apartment complexes since 2018?

Josh Anderson: Correct.

Joe Fairless: Let’s talk about those three transactions… Let’s talk about each one of them. What was the first one?

Josh Anderson: The first one was a 22-unit apartment complex. It was fully rented. We paid a million seven for that. It was about 60k-65k/door. So I bought that with a business partner.

Then the second one I also bought with a business partner, and it was 30 units. The second one is about seven minutes from downtown Nashville, and the area is predominantly industrial… And it’s transitioning, because industrial just doesn’t make sense to be that close in to downtown Nashville, so a lot of those industrial properties are being sold and transitioned into residential and/or apartment type properties.

Joe Fairless: It sounds like a really good long-term hold.

Josh Anderson: Yeah, I think they are. And then the third one – I actually haven’t bought this one yet, I’m under contract. It’s 17 units, in the Donelson area, which is near the airport.

I think that I was very purposeful in buying them, and I’ve since gotten very purposeful about finding them, if that makes sense. So really going into tax records and reverse-engineering, and really digging into properties that fit my parameters and criteria, and really starting to market to those a lot more.

I think it’s just getting started… A lot of people don’t have the money to do it, and I always tell people “Find the deal. The money is easy to find right now. The money is just too easy to find.” So find the deal, lock it up, and then go find the investors… And if you wanna syndicate it, or however you wanna do it, depending on the size, or go find a business partner… I think finding the deal is the hard part right now.

Joe Fairless: You mentioned going into the tax records and then doing reverse engineering – will you elaborate on that?

Josh Anderson: Yes. Reverse-engineering – before you even do that, I think that you really have to get dialed in on what your criteria is, and I think there’s a lot of investors, maybe novice, starting out, and they don’t really know what their parameters or criteria is or should be, and then I think that they also waiver off of those parameters once they figure out what they are, because they’re so hungry to find a deal that they’re just willing to  do something that doesn’t fit what formula makes sense for them. I think that’s where they mess up.

So for me, reverse-engineering – just really digging into areas, really digging into “How do I wanna go about finding these properties?” There’s different software out there that you can use… For example, I know one of the guys in my office uses Reonomy, and it doesn’t have any different of information, it’s just the way that it pulls information that gets to you. You can find information based on the last time it sold, when it was built, how many units, what MSA you’re in, what city within that MSA, what ZIP code… So you can really dig down deep into what you’re looking for.

For me, it’s more about — when I’m looking at investment properties and finding them, I’m not as worried about the area within Nashville, just because I know the areas so well. For me it’s more about “Do the numbers make sense?” and “Does it cash-flow?” Because I think things will appreciate, but I don’t think that there’s any guarantee of appreciation.

Joe Fairless: When you are looking for properties, what’s your criteria?

Josh Anderson: I try to keep it really simple. My criteria is I kind of look at the 1% rule and I just go “Does it hit the 1% rule?” If I paid two million dollars for it, is it bringing in at least $20,000 a month? And then from there, I dig in a little bit more, and obviously looking at the leases and the rent rolls and all the maintenance and the cost.

On some of these properties, the property taxes are really high, so it’s kind of digging into all of that. But as a general overview, I look at the 1% rule because it’s easy. It’s what works for me, and I know everybody’s got different parameters, but that’s just kind of what I’ve looked at as my initial. And then I really drive the area and determine how well I know it and whether I like it or not.

So that would be my one parameter that I look at the most, to see if I even like it or I send it on to investors.

Joe Fairless: Okay, so the 22-unit, 1.7 was what you paid. You did it with a business partner… How did you structure that with the business partner?

Josh Anderson: On that one we’re just 50/50 business partners. On that particular deal we did a Freddie Mac loan. I’m sure you’re familiar with it. It’s a really great program. It’s gotta be a one million dollar balance, and it goes up to (I think) 7.5 million… But it’s a two-year interest-only, non-recourse, it’s assumable… It’s a really good loan program. You’re putting 20% down. I’ve used that on two of the three deals that we’ve done.

It takes a little bit more time. There’s some more hoops (I guess) to jump through, but it’s been a really good loan program… If people that are listening to this aren’t familiar with it, it’s a great program.

Joe Fairless: You’re doing 50/50 with your business partner… Did each of you bring 50% of the equity, or how do you decide —

Josh Anderson: We did. 50% equity, and we’re 50% owners.

Joe Fairless: I imagine you found the property, yes?

Josh Anderson: I did.

Joe Fairless: Okay. So you brought half the equity, plus you found the property, so what else is your business partner doing, if anything?

Josh Anderson: He’s just a really great business partner. On those particular deals for myself I’m not taking anything as far as me finding the deal, because we’ve done other deals together… But I think if it was a different scenario, I would definitely do some kind of finder’s fee, or management fee, or if I was syndicating it and it was a bigger deal, I would definitely set it up differently. He’s been a business partner of mine on several deals, so we just haven’t structured it differently.

Joe Fairless: Now let’s talk about the 30-unit. Same business partner?

Josh Anderson: Different business partner.

Joe Fairless: Different business partner. How much did you two pay for it?

Josh Anderson: We paid 1.9, and it brings in 23k a month. It’s in pretty good condition overall, actually. We’re doing some updates on it; we’re spending about 5k/door to update it, and we’re gonna bring up the rents about $150 to $200 over the next 6 to 12 months on each one… So it’ll probably be bringing in more like 25k-26k this time next year.

Joe Fairless: And when you say 25-26 you’re saying 2,500-2,600, right?

Josh Anderson: No, 25 or 26 thousand.

Joe Fairless: 26 thousand.

Josh Anderson: Yes.

Joe Fairless: Got it. And the management of these deals, the 22-unit and 30-unit – how does that happen?

Josh Anderson: We have property managers on all of them. Same property manager, and they’re managing it for us at 8%. I think once we get to a tipping point of being at a certain number of doors, then I’ll probably bring the property management piece of it in-house. But right now they’ve just done a great job. They take care of everything, and we literally “Okay, yes or no” on certain things, and they do everything.

Joe Fairless: What’s something that hasn’t gone right on either one of those properties so far?

Josh Anderson: I’ll be honest – I’m gonna knock on wood real quick – they’ve been amazing. We haven’t had to do anything. There’s nothing that hasn’t gone right so far that we’ve anticipated… So maybe it’s beginner’s luck on apartments, but… I’m certain that something will not go right.

Joe Fairless: Agency loan on the 30-unit?

Josh Anderson: Yes.

Joe Fairless: Fannie Mae?

Josh Anderson: Yes.

Joe Fairless: Okay. And with the 17-unit, my guess is it’s not gonna hit that one million dollar threshold, so you’re gonna have to do a small balance loan, or what are you doing there?

Josh Anderson: Yes, the guy that did the Freddie Mac loans – his bank is doing it an in-house portfolio loan, and they’re gonna do a very similar structure. They’re gonna do an 18-month interest-only non-recourse. So it’s gonna be a similar setup, and we’re putting 15% down.

Joe Fairless: How did you meet your business partner who you’re partnering up with on the 30-units?

Josh Anderson: I met him in college, actually. He’s from New Orleans, and he wants to move to Nashville, and he wants to get into apartment syndication. He actually bought your Best Ever Apartment Syndication Book, and I’ve been sending him deals, and he said “Let’s jump on this one. Let’s do it.” He comes up to Nashville five or six times a year, and… Still lives in New Orleans, but we’ve known each other since our freshman year in college.

Joe Fairless: How did you structure it with him?

Josh Anderson: That one’s structured really the exact same. It’s 50/50, we both did 50/50 on down payment equity… So it’s all set up the same with him.

Joe Fairless: Taking a step back – based on your experience, what’s your best real estate investing advice ever?

Josh Anderson: I think the best advice ever is your first deal – you don’t have to hit a home run. Just get started. Just do it. And I think that so many people are in analysis paralysis, and they never really get started.

I’ve got a guy that used to work with me; he’s been talking about buying an investment property for four years, five years, and he still hasn’t bought one. I was talking to him a couple days ago, I said “Man, just buy one. Even if it’s making $200/month. Who cares.”

Get the first one under your belt, and you can go from there.  You can always sell it, you can always fix it up and get a little bit more rents, you can always upgrade and get better properties. And that’s not to say “Go buy a terrible investment”, but if you’re gonna do it, do it; if you’re not, then sit on the sidelines… But you’re gonna look back in hindsight and go “Damn, I wish I’d bought X, Y and Z properties.”

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

Josh Anderson: Let’s do it.

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

Break: [00:17:07].10] to [00:17:49].07]

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

Josh Anderson: I’d have to default and say “The One Thing”, because it’s such an easy book (Gary Keller).

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

Josh Anderson: Best ever deal I’ve done… The 30-unit.

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

Josh Anderson: Let’s see… I lost the earnest money one time. That wasn’t good.

Joe Fairless: Will you elaborate?

Josh Anderson: I actually didn’t lose it. It just got lodged underneath my seat in my car… But I had to tell my client that I lost the earnest money, so they had to cancel it and send a new earnest money check. That was early in my career…

Joe Fairless: That’s not  a big deal. [laughs]

Josh Anderson: No, it didn’t affect the deal. It was just one of those things I had to tuck my tail between my legs and own it.

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

Josh Anderson: I have a nonprofit that every deal that I do, a certain portion of our commission checks go toward. And we go into the community and help fix up houses… On a small scale, similar to Habitat for Humanity.

Joe Fairless: And how can the Best Ever listeners learn more about what you’re doing?

Josh Anderson: They can visit my website, at JoshAndersonRealEstate.com. That’s the best way.

Joe Fairless: Well, Josh, thank you for being on the show and talking about the renewed focus with the apartment complexes. You said since 2018 you’ve been focused on it. 22 units, 30 units… Good luck on the closing, I hope it goes well on the 17 units. Thank you for talking about the structure that you have, why you picked those properties with the 1% rule, how you think about it and how you’ve used your background in financing and economics to further and really build your real estate business, as well as being a successful investor.

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

Josh Anderson: Thanks, Joe.

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JF1935: Six Unit Value-Add Nashville Deal Analysis with Felipe Mejia

Felipe is joining us today to tell us about his real estate investing journey so far. The journey includes buying, adding value, and selling a six unit apartment building. Joe will dig in on that subject, asking about the numbers, how he found it, what he did to add value, and how was the selling process. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Make sure you are earning while you are learning” – Felipe Mejia

 

Felipe Mejia Real Estate Background:

  • Entrepreneur, real estate investor, and small business owner
  • Scaled from a $3,000 mobile home to owning 10 units
  • Based in Nashville, TN
  • Say hi to him at https://www.sideguymovers.com/
  • Best Ever Book: Lifeonaire

 


The Best Ever Conference is approaching quickly and you could earn your ticket for free

Simply visit https://www.bec20.com/affiliates/ and sign up to be an affiliate to start earning 15% of every ticket you sell.

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.


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, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Felipe Mejia. How are you doing, Felipe?

Felipe Mejia: I’m good, brother. How are you doing?

Joe Fairless: I’m great, and looking forward to our conversation. A little bit about Felipe – he’s an entrepreneur, real estate investor and small business owner. He scaled from a $3,000 mobile home to owning ten units. Based in Nashville, Tennessee. With that being said, Felipe, do you wanna give the best ever listeners a little bit more about your background and your current focus?

Felipe Mejia: Yeah, man. Absolutely. Currently right now we run about 14 doors. We just sold our six-unit apartment complex. I own a small moving company here in Nashville. Aside from real estate, I am a father, I have a young son, and I am married here in Nashville, Tennessee. That’s about it.

Joe Fairless: Okay, well you said you’ve just sold a six-unit building?

Felipe Mejia: Yeah, man. We’ve just sold a six-unit apartment complex about an hour outside of Nashville, Tennessee, in a little town called Cookeville, TN.

Joe Fairless: Cool. And you owned that property, and then you decided to sell it?

Felipe Mejia: Yeah, I decided that it was time to get out. We kind of pumped that up as expensive as we could, we added as much added value as I think we could… I couldn’t see any way other to squeeze out anything else, and I was like “Alright, it’s time to sell it.” I think we’re at a good place in the market. I usually actually don’t sell any of my property, so this is just way too good. “You know what – I’m gonna go ahead and do it.”

Joe Fairless: And in addition to the six-unit you sold, you also have ten units that you own, correct?

Felipe Mejia: Correct, in Nashville. All single-families.

Joe Fairless: Okay, cool. So tell us about the six-unit. What did you buy it for, how long ago, what was the business plan?

Felipe Mejia: Sure. That was purchased about two years ago. I think the purchase price was 120k. We ended up selling for 260k. The main reason we got it was “Okay, it’s just good cashflow. It’s doing about $1,000/month, it’s next to the college.” The university was doing really well, so we cash-flowed on that for about a year and a half, almost two. After we reached $100,00 in equity in  a year and a half, we were like “Okay, are we gonna BRRR, are we gonna HELOC? What’s the gameplan with it?” and we decided that that was, believe it or not, the property that was doing the least amount of money and causing the most amount of headache for us… So we said “You know what – let’s sell it. Let’s reinvest that money here in Nashville, and kind of provide more houses here.” We saw the market was growing faster in Nashville than it was in Cookeville, so we decided to bring our money home.

Joe Fairless: How far away is it from where you live?

Felipe Mejia: It’s about an hour out. It’s where I went to college.

Joe Fairless: Okay, cool. And what college is that?

Felipe Mejia: Tennessee Tech University.

Joe Fairless: [laughs] You sound very proud of that, I love it.

Felipe Mejia: Well, I’m the first to go to college in my family, as a first-generation college kid, and I’m really proud that I was able to go there, and I love that I have that degree. It’s funny though, I don’t use that degree as I thought I would. I made a video recently on Instagram where I show my degree and I show the books that I’ve read on real estate, and how my real estate books have brought me way more income than my college degree ever will.

Joe Fairless: Right. If you had to pinpoint a couple benefits of doing the college experience that have gotten you to this point, what would those one or two benefits be?

Felipe Mejia: I think that college more than anything taught me how to – and I know this is gonna sound dumb – read and study. Instead of just taking a test, if you will, college allowed me to learn what I’m gonna get out of the book, versus just trying to “Okay, I know this is gonna be a question on the test.” In college I realized my passion for reading, and then I turned that passion into financial gain as well.

Joe Fairless: And let’s talk about that six-unit – what did you do to add the value?

Felipe Mejia: Sure. That unit, luckily, since it was in a city that I knew, I knew that the college students were looking for; most college students like to live with their friends in two-bedroom/one-bath apartments… One-bed/one-bath apartments weren’t doing well, so in the six-unit complex that I had, two of the units downstairs were one-bedroom/one-bath, and we would rent them out to college students, and in the living room they would set up another room… So we kind of allowed that to be a way to have more tenants come in, as well as making it more accessible to the college, as in we had friends that opened up coffee shops close to there. We partnered with them by giving discounts at our place, more college students were like “Oh, we can just go down to the coffee shop.” We offered them Wi-Fi, obviously…

You have to understand that it was a really small town. No one ever leaves, so we had to make it a very comfortable home living place where we knew that college students didn’t go home for the summer, they didn’t go home  on the weekends. This is a place where you came and you stayed all four years, and then left. So we just added as much value as a comfortable living area for college students; they really liked the space.

One of the other reasons we decided to sell it was there was a huge apartment complex that came to the town, and they raised rents by $100 a unit overnight. It was ridiculous, and everyone was moving. And rents were going up at most of the units around, just because that added value came in… And I said “I’m not gonna wanna compete with them at a later date”, and as of now we’ve been able to raise the rent to keep up with that.

Joe Fairless: So the large apartment community that was brand new was actually a benefit initially to you.

Felipe Mejia: Right, but I could see that maybe in the near future it might hold us back. We might have to  compete in pricing going forward. I don’t know that I would have had to actually drop my prices, but I knew that — they did market research as in there wasn’t enough apartment complexes, there wasn’t enough living spaces, so they knew that there was tons of people renting, so that’s why they brought 100 units to a little town like Cookeville, Tennessee. So I rode the way up, but I knew that eventually I would have to compete with them, so I said “Okay, I rode it up, my rents are up as high as I can, in competition with  them (about $25 off), but I know that their units are brand new, they have a pool – I’m never gonna compete with that”, so I said “Let me sell it tippy top that I can.” That was another reason we did it.

Joe Fairless: It sounds like, if I heard you correctly, the two things that you did was 1) you just allowed another person to live in the living room, which allowed you to increase rent… Did I hear that correctly?

Felipe Mejia: Yeah, a lot of the communities around, if it was a one-bedroom, they would only allow two people in the apartment on the lease etc. But for us, we would allow two people per room, including the living room, so they would be able to have four college students, and then we would charge per college student. If you’ve heard any of the interviews that I’ve done, you know that I focus a lot on per-bedroom, not necessarily per house.

I’ll give you a  quick example… One of the houses that we do in Nashville, for instance – we have a three-bedroom/one-bath house that we’re adding three bedroom downstairs, which literally doubles my rent in cashflow, and that’s kind of our niche in Nashville. We’ve learned a little bit of that at the six-unit apartment complex, and that’s another reason we decided to come  back to Nashville, because I could add more rooms in a single-family home with a two-car garage, versus an apartment. Like I said, I kind of capped out on the apartment complex.

Joe Fairless: Okay. And were there any local ordinances you had to double-check before saying “Yeah, more people can live here, and we’ll just put them in the living room”?

Felipe Mejia: Sure. It was a little easier because it was a college town… So when we went to the fire marshal and asked if it was okay to have 3-4 people living in this space area, the fire marshal just came out and as long as everything was up to code, they were fine. All the college students were doing it at all the other houses as well. They would have had to tear down every single house in that area if they were gonna deny me.

Joe Fairless: So that was one component of the value-add approach… And then you said the second one was just getting in with local businesses and offering discounts to your residents for the local businesses? Did I hear that correctly?

Felipe Mejia: Right. So we would market it as super-close to the local coffee shops that would give our tenants discounts to come in – half price off the coffee on the weekends, and obviously free Wi-Fi… But a lot of the times our college students didn’t wanna stay on the campus to do so, so they would go to the local coffee shops. They were really booming in Cookeville, and we were able to offer some pretty good discounts for them to stay locally close to our apartment complex, which — let’s say we lost a tenant for whatever reason; it was always at the coffee shop where we would get our next tenant, because they would all intermingle. So when people were [unintelligible [00:09:33].02] I’m like “Do you see that coffee shop walking down the road?” Boom.

Joe Fairless: So how does that work, with the discounts? Did you approach the coffee shop owner and talk to him/her about it?

Felipe Mejia: Right. So we went down to the coffee shop and let them know that we were the new owners of this property, and we wanted to build a relationship with them, and how could we add value to them. And obviously, they’d just — I mean, they’re selling coffee, they wanna sling coffee left and right. And we told them “Well, how about if we put your brochure in every one of our welcome packets into our units, and offer whatever discount you want, whether it’s five coffees and one free, or 15% off, however you wanna do that, and we’ll tell our tenants in their welcome packets about your location down the road, and how you’re college kid-friendly, to the tech students if you bring your tech ID you get certain discounts…”

A lot of our college students like that, because the complexes that were in Cookeville now had been there forever, and it was just like “Oh, this is your rent. This is what you’ve gotta pay”, and they were super-stringent with the students. They saw them as [unintelligible [00:10:35].21] So for us, they found more comfort in us, that we were good with the locals… They saw that maybe we didn’t live in Cookeville, but we were pretty local. And then the college students that used to live there, they were like “Oh, you went to tech?” and we were able to build relationships with the local little communities around there, whether it be coffee shops, or breakfast areas… And we would just offer that in their welcome packets.

Joe Fairless: So coffee shop was one of them, and then how many other businesses did you do that with?

Felipe Mejia: There were three. There was Poet’s Coffee Shop, there was Grandma’s Pancake, and there was a Mexican restaurant that we used to go to, and we offered their extremely large Burrito at a discounted rate for the college students that were living in our apartment complex, in our six-unit.

Joe Fairless: And were any of those discounts available to other people publicly?

Felipe Mejia: No. They offered tech discounts on Sunday nights, or something. Any college student could come in… But our little six-unit apartment complex had a nicer discount, especially at the coffee shop. Grandma’s Breakfast would do some pretty good discounts on their pancakes to the people that lived in our apartment complex, and then the Mexican restaurant loved to have our people over with the Mexican food.

Usually, Wednesday and Thursday night was tech nights, but our guys could come in and get that discount at any time. And they knew our tenants, because of them came in [unintelligible [00:11:51].25] they would let them know “Hey, we’re living [unintelligible [00:11:55].15] Street with Felipe”, and they would say “Oh, absolutely.” And they would bring their little brochures from their welcome packet, and that would start their relationship. After that it was really up to the restaurant to provide the great service, but we would definitely make that connection. And if college students were coming in from out of town, it automatically introduced them to the best coffee shops, to the best Mexican restaurant there, and where to get breakfast.

Joe Fairless: And they’d show proof of residency by giving them the welcome packet?

Felipe Mejia: There was a card in the welcome packet that said who they were, and they would come in to the restaurant. [unintelligible [00:12:25].16] an Airbnb, there’s like a list of local restaurants… That’s kind of what we offered them upon arrival.

Joe Fairless: Right. But how would the restaurant know that they lived at your house?

Felipe Mejia: In the welcome packet we had a card that kind of specified that, for each restaurant, and the restaurant would give it to us to give it to them.

Joe Fairless: Oh, okay, cool. So they had some special card that the restaurant or Grandma’s Pancakes or the coffee shop – each of those locations had a special card that they gave that to you, and then you put that in the welcome packet, and then the resident showed that to the business whenever they arrived.

Felipe Mejia: Right, exactly. Yeah. Kind of like when you go to  [unintelligible [00:13:03].20] and you get the little punchcard… Kind of the same concept.

Joe Fairless: And each of those three places of business had those cards already?

Felipe Mejia: Right. It wasn’t something super-fancy or something super-laminated. It was something that if I’m not mistaken they just printed out, and they gave to us to put it in their little welcome packet as people went in and out of the unit, or whenever we had new tenants, or whatever the case was.

Joe Fairless: Cool. So you bought it for $20,000/door, you sold it for $43,000/door… Nice work on that one. And that was over a two-year span.

Felipe Mejia: It was [unintelligible [00:13:38].11] We know it.

Joe Fairless: Yeah. Anything else that you did to add value, or were those the three components? You got to add more people in the rooms, putting two people in the living rooms, you have relationships with local businesses, so you constantly have leads coming in, and you’re building a sense of community within the resident base, and you had a brand new apartment community that jacked up the rents in your area, so rising tides lift all boats – anything else other than those three things?

Felipe Mejia: Man, I think that was really it. We hadn’t even gotten to doing an asphalt driveway, or [unintelligible [00:14:17].16] certain parking spaces… We hadn’t even gotten to what we were going to do, before we saw — when that apartment complex came in, we rode their tide up with rents, and then we  knew that eventually, or coming soon in the next six months we were gonna have to compete with those… And that’s what we didn’t wanna do. We saw $100,000 in equity in a year-and-a-half, close to two, and we were like “Man, let’s just pull the trigger on it and move our money closer to home.” And I’m bringing in the same cashflow almost with a single-family in Nashville.

Joe Fairless: Help me understand your thought process for why you’d have to compete with a complex in the future… Because typically, when new construction takes place, they do rent concessions in order to get through the lease-up period. Once they get out of their construction loan, then they put on long-term debt, and then that’s where the lease-ups and the concessions that they did initially then go to the wayside and they start increasing the rents significantly.

Felipe Mejia: Right, and this is what I knew being from that college town – I knew that rents would go up percentage-wise, or just based on what was around, what was growing. I saw the city was growing, and I saw that I would have to continue to pump money into that property to be able to keep up with what was coming in. You have to understand, in Cookeville – it’s a little city, potent town, there’s farms everywhere, and all of a sudden this apartment complex that comes in with the nicest, newest pool, with the best Wi-Fi, right beside the Fairgrounds; if you could see it — it looks like it doesn’t  belong there, it’s so funny. It’s such a nice apartment complex. I knew that rent was gonna keep going up for them, and people were gonna continue to pay… But they were going to be leaving the other apartment complexes. I mean, this was way advanced compared to any of the other apartment complexes there, including my six-unit.

I honestly think that they were either going to buy out the other apartment complexes, or squeeze them out based on rent. Or you had to keep pumping money into your apartment complex to make it that much nicer, to keep up with the rents… Or you were going to have to stay stagnant. You weren’t going to be able to raise your rents. Well, I guess you could, but you weren’t gonna be able to force your rents up by just adding value. You were going to have to compete with that next apartment complex. I would hear it on and on and on, “Well, we got a quote from them for this much, and you’re charging only $50 less.” I would have thought about moving to a nicer apartment complex if that was the difference… And I knew that they were gonna keep on raising it, and they were gonna keep on raising the bar. Was that a negative thing? No. But for me, I saw $100,000 in equity that I could bring closer to home, that I could 1031 into a couple single  families and add value there, easier and quicker than I would be able to in Cookeville.

Joe Fairless: Let’s talk about the 1031 process. What are a couple things you learned?

Felipe Mejia: Sure. So the 1031 process was stressful… Something that I probably wouldn’t advise anybody newer to do, or I would definitely hire a coaching  or mentoring through that process… Luckily, my sister works at a law firm where one of the lawyers also does closings. He has a branch of foundation title, and he was able to walk me through that process… But it’s not easy in that you have to claim the property and you have to do your due diligence quick. And if you don’t know that process already, you really need to have someone walk you through it.

One of the things that I learned right away was it helps to have processes already in place to make that go smoother.

Joe Fairless: For example…

Felipe Mejia: Sure. For me, when I was buying a single-family home, luckily I knew that I was gonna buy in a small sub-city inside of Nashville called [unintelligible [00:17:49].08] Tennessee, and I knew that most of those houses would have a three-bedroom/one-bath up top, and a two-car garage on the bottom. I don’t know one person that has a three-bedroom house that’s only 1,600 sqft. that needs a two-car garage. So I was able to quickly claim the properties that I wanted to purchase, because I knew that in [unintelligible [00:18:09].17] I would be able to add two bedrooms to a single-family house downstairs, because 80% of the properties were like that. So I didn’t have to wait and say “Okay, well I’m gonna go look at that property and spend more time analyzing that property.” I was able to pick 50% out of my analyzing on the property out, because I already knew that area. And if I only had 30 or 45 days to claim one of the properties in a 1031, that would have taken time away from that, where I could have done other due diligence. I was able to do two single-families out of that one, I think… Yeah, I think it was two single-families.

Joe Fairless: And just so I’m tracking correctly, it was a two-car garage and you converted one side of that two-car garage into — I thought I heard you say three bedrooms downstairs…?

Felipe Mejia: Right. So what we do is we convert the full two-car garage into three bedrooms, because also in the downstairs there was always a loft area… Imagine a bonus room on top of a garage, but this was on the downstairs of the house. So the houses in [unintelligible [00:19:08].17] 80% of them are built this way. They have three bedrooms and one bath upstairs. Downstairs they have a small loft area, and that’s about 15×20, and then a two-car garage. So I  blow out the middle wall, and then I create three bedrooms, a small kitchen area, and a shared bath. And then what I do is I rent out each room individually to the construction workers in Nashville because of the boom we’re having in construction.

Joe Fairless: Very cool. Let’s talk about numbers. Just price going into it is — let’s use a specific example, one of the two… It was how much?

Felipe Mejia: Sure, let’s just go with the recent property. The purchase price was 180k.

Joe Fairless: Purchase price 180k, and that gets you a three-bedroom house, two upstairs, with a two-car garage downstairs, with a little loft area, correct?

Felipe Mejia: Correct, yeah.

Joe Fairless: Alright. So 180k is what you buy it for. How much does it cost to do the conversion of the two-car garage into three bedrooms, a little kitchen and a bathroom?

Felipe Mejia: Sure. This is gonna blow your mind, and I want your listeners to get this… This is where I used what I thought was my weakness as my strength. I only knew construction families growing up. So I didn’t know your rich uncle banker, or your friend that his mom works at the bank to get loans, or — I didn’t have those connections; I wasn’t able to borrow money as easily as maybe other people… I don’t know. But what I did know was I wasn’t going to use that as a crutch. I was going to find a way to use that and leverage at its value. So knowing only the construction workers has allowed me to purchase labor at what I know their contractors pay them.

So this is gonna blow  your mind – I can build three bedrooms, a small kitchen and a bathroom for right under $8,000. That’s electrical, plumbing, construction work, drywall, everything. That’s about $8,000, and then maybe $3,000 or $2,000 in material. I’m always under $10,000 by a long shot.

Joe Fairless: That is good. [laughs]

Felipe Mejia: And that is only because I know those people, and they’re friends of the family as well. While I was in college I worked on a construction site, picking up sticks, cleaning construction sites. I didn’t have any specialty, I didn’t know how to frame, or hang drywall, or do plumbing, but I tell you what – I knew every single gentleman on there and I would sit there under the sun and have lunch with them during some of the days, while I was just cleaning up after them. That’s what I knew how to do; I can sweep really well. And even to this day, when they’re building my downstairs, you can ask of my tenants – I go in and I’m sweeping. My construction site is very clean, because that’s all I know how to do, as funny as that sounds. But I know this framer, and I know that this framer makes $200-$300/day, so I can pay him and he’ll frame me three rooms in 1-2 days. That’s $500.

I know the plumber, who’s gonna charge me $1,000 and he’s gonna build me a whole bathroom. He’s gonna drop in piping, he’s gonna drop in everything. And a lot of times they bring in the material from their job site and they give it to me half price, because the owner there is throwing half this stuff away anyways. I remember, I used to throw it away. All the two-by-fours that go in, I’m not kidding. This blows my mind. All the two-by-fours – “You’re throwing this away. Do you mind if I take this with me?”Absolutely. So I just took it with me, and there’s my material. And it goes on and on and on – electricians, drywall guys… I know what their date rate is, and I’ll offer them that, plus $100, or plus $50, and they love to work.

Joe Fairless: So how much was it bringing in before the renovation and how much does it bring in after the renovation?

Felipe Mejia: The if the purchase price is 180k, I’m typically gonna rent each room for probably about $450. So pre-renovations you’re looking at $1,350, if I’m doing $450. That usually covers all my expenses on the property, completely. Let’s say that I add three rooms downstairs, so now you have six rooms renting at $450. That’s $2,700.

Joe Fairless: That’s some good math, especially when you can recoup that investment of $10,000 so quickly.

Felipe Mejia: Yeah, in the first year I’ve made all my money back when it comes to any of that stuff.

Joe Fairless: Yeah. Well, taking a step back, what’s your best real estate investing advice ever?

Felipe Mejia: Learn while you earn. And the reason I say that is because a lot of people want to learn and then start earning. And I say “Look, take the plunge, buy your first rental property. Just do it, and learn as you’re earning.” One of the advice that someone once gave me was “If you buy a rental property and you make $200/month on it, you’re doing great, because you’re also getting equity, you’re also getting tax incentives…” There’s a lot more there than just the $200/month. Plus the loan paydown.

I always tell anybody that I coach or that I mentor, I say “Look, make sure that you’re earning while you’re learning. Because if not, if you’re gonna split the two, you’re gonna learn for a year and then start earning. Or learn for two years and then start earning. No. Learn and earn at the same time.”

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

Felipe Mejia: Let’s do it!

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

Break: [00:24:21].04] to [00:24:57].06]

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

Felipe Mejia: Life on Air.

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

Felipe Mejia: Not reading the fineprint. Read it. The dirt is in the details.

Joe Fairless: What fineprint burned you?

Felipe Mejia: [laughs] Giving up equity where I knew that I probably should have waited on it. I gave up 10% on a deal because — she gave me an option of what I wanted to pay upfront, give 10% at the end of the deal, or just pay a fine for letting me borrow the money, and I decided to do 10%, and I was like “Okay, I’ll pay 10%. That’s fine.” And then we ended up selling the property and having to completely fork over 10%. That one still hurts.

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

Felipe Mejia: What’s *a* deal that I’ve lost money on?

Joe Fairless: Yeah.

Felipe Mejia: No real estate deal. Real estate is really forgiving. Anything I’ve lost money on is in the purchase of  a car.

Joe Fairless: Fair enough.

Felipe Mejia: I’m very picky on my real estate. I’m stingy, whatever you wanna call it, but I try not to make a mistake. The biggest mistake I made was, like I said, buying my sports car when I was 18.

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

Felipe Mejia: Sure. I volunteer at my church in my youth group here in Smyrna, Tennessee, and I do small-time coaching and mentoring on my Instagram as much as I can.

Joe Fairless: And how can the Best Ever listeners learn more about what you’re doing?

Felipe Mejia: Absolutely. @1team_felipe on Instagram.

Joe Fairless: I really enjoyed our conversation, learning about how you’re adding value by adding bedrooms and by building relationships with people to offer them an opportunity to make more money than they typically make, and get you a really good deal as well on that, with the construction.

We talked about the three things that influence increase in value from your six-unit – the adding more tenants approach, two was having discounts to local places and partnering up with them, you also got a lot of leads from there, and then three was just luck, the apartment complex being new… But still, you put yourself in a position to be lucky by purchasing the property…

Felipe Mejia: That’s the key, Joe.

Joe Fairless: And that’s the key, exactly. That’s what a lot of people who are on the sidelines – they don’t necessarily understand as much. But when we put ourselves in a position to be lucky and we’re doing the right things, then good things tend to happen. So thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you again soon.

Felipe Mejia: Thanks, Joe. It was a pleasure to be on. You’re amazing. Continue doing what you’re doing.

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JF1904: Residential Broker & Multifamily Investor Gives Us The Details On Nashville Investing with Josh Anderson

Nashville has been and still is a thriving city, especially for real estate investors. Josh has a background in investment banking which serves himself and his clients well when helping them find a property. We’ll hear some Nashville market details as well as getting a look inside of Josh’s business and investing portfolio. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“I bought three apartment complexes since 2018” – Josh Anderson

 

Josh Anderson Real Estate Background:

  • Owner of the Anderson Group, a Nashville based real estate brokerage
  • Combines his 8 years of U.S. Army experience with his education and experience to deliver the most to his clients
  • Based in Nashville, TN
  • Say hi to him at http://joshandersonrealestate.com
  • Best Ever Book: The One Thing

 


The Best Ever Conference is approaching quickly and you could earn your ticket for free.

Simply visit https://www.bec20.com/affiliates/ and sign up to be an affiliate to start earning 15% of every ticket you sell.

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.


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, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today we’ve got Josh Anderson. How are you doing, Josh?

Josh Anderson: I’m doing well, thanks for having me.

Joe Fairless: It’s my pleasure, and I’m looking forward to our conversation. A little bit about Josh – he is the owner of the Anderson Group, which is a Nashville-based real estate brokerage. He combines his eight years of U.S. Army experience (thank you for your service, sir) with his education and experience to deliver the most to his clients. As I mentioned, based in Nashville, Tennessee. With that being said, Josh, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Josh Anderson: Absolutely. I’ve been in the business since April of 2006. I’m in the residential side, but do quite a bit of multifamily as well. So I’ve been in the business for a little over 13 years. Originally from Nashville, I grew up in Louisiana, I went to LSU, and then came back in 2004 and worked at an investment bank for a couple years, and then decided to get my real estate license.

Joe Fairless: Okay. And you have a brokerage… As you mentioned, your focus is on the residential side, but you do multifamily… What’s a typical transaction for you?

Josh Anderson: Most of our business is single-family homes. With that being said, we’re kind of building out our investor division. We’ve had it there for quite a while, but with Nashville being as popular of a city as it is, and with as much growth and as much building that’s going on, there’s a lot of people in other markets where numbers don’t really make sense in their market… So we’ve got a lot of people moving or at least buying here, for the idea of buying duplexes, triplexes, quadplexes, and even small to medium-sized apartments.

A lot of them are doing 1031s, a lot of them are paying cash, or just putting 20%, 25% down… So there’s a pretty active market as far as the multifamily side of things.

Joe Fairless: What are some reasonable expectations, if I were to call your brokerage and say “I’d like to buy a fourplex and I wanna make sure it cash-flows”? How would you set my expectations.

Josh Anderson: It’s really digging on a lot more questions as far as what somebody is used to. It’s not out of the realm to get the 1% rule. So if somebody’s buying a million-dollar property, they’re getting $10,000 of gross income; in cap rate terms you can pretty easily get a 6%, 7%, 8%… And it used to be a little bit better than that. With the amount of people that are coming here and buying properties, it’s gone down a little bit. But it’s not unrealistic to get a 6%, 7% or 8% in the Middle Tennessee area.

Joe Fairless: What are the areas of growth that you’ve seen so far in Nashville?

Josh Anderson: With regard to areas?

Joe Fairless: Yeah, like what submarkets have growth?

Josh Anderson: Residentially speaking, the suburbs Brentwood, Franklyn, Hendersonville, Mount Juliet – these areas are growing probably a lot faster than Nashville proper… But people still want their investment properties, and there’s a lot of people that wanna be near kind of the trunk of the tree, with regard to being close to downtown Nashville. So you’re seeing a lot of these areas that historically have not been great areas, that have transitioned pretty dramatically, that are close proximity to downtown… So German Town and East Nashville – they’re all areas that are very walkable.

People love the charm and character of the old houses. We just listed a property – it’s actually going live tomorrow – in 12 South, which is right by Vanderbilt and Belmont Universities, and it’s a 130-year-old Victorian… That property will probably get a lot of activity and a lot of traction.

So you’re seeing a lot of areas that historically just weren’t really great, that are really being cleaned up, and investors are coming in and flipping houses or renovating… Multifamily is also in those areas that are really getting cleaned up. Old mid-sized apartment complexes, anywhere from 15 to 50-60 units, that are kind of the sweet spot, that are getting cleaned up quite a bit…

Joe Fairless: You used to work at an investment bank, and then you got your real estate license… What did you learn while working for an investment bank that you apply toward your business today?

Josh Anderson: I think there’s a lot of realtors — it takes about two weeks to a month to get your real estate license, which is kind of a joke, in my opinion… And I say that with regard to how big of an investment — it’s not like people are going to Walmart every day and buying a house… But it’s one of those things — I think that the investment background, graduating in finance and economics really helps me on the numbers side of things, and being an investor myself really allows me to talk at a different level with savvy investors. A lot of realtors don’t really understand cap rates, or they don’t understand the 1% rule… I mean, these aren’t hard things to understand or learn, but I think that there’s a lot of people that just don’t really get it, and don’t know how to talk in terms of investments, if that makes sense.

Joe Fairless: It does. You said you’re an investor yourself… What are you buying?

Josh Anderson: Everything I own, outside of a couple of commercial lots that I own in downtown Nashville, I own all multifamily. I kind of started out buying duplexes and triplexes, and I’ve got several duplex, triplex, a couple of quadplexes… And starting in 2018 I got really intentional and purposeful about buying apartments, and kind of digging in and finding the sweet spot. I think there’s too much competition in that 150+ units. It’s a different buyer, and I think they’re hard to find. A lot of out-of-town investors are building those…

I’m focused on about 10-12 units, up to about 50-60 units. I bought three apartment complexes since 2018, and I just got really purposeful about buying those.

I guess it was about 2014-2015 when I started buying investment properties, which in hindsight I wish I’d been buying them all along… So my motto to myself now is I’m always a buyer first, I’m a listing agent second. That’s kind of how my mind works.

Joe Fairless: Did I hear you correctly you’ve bought three apartment complexes since 2018?

Josh Anderson: Correct.

Joe Fairless: Let’s talk about those three transactions… Let’s talk about each one of them. What was the first one?

Josh Anderson: So the first one was a 22-unit apartment complex, and it was fully-rented. We paid, I believe, a  million seven for that. It was about 60k, 65k a door. I bought that with a business partner. Then the second one I also bought with a business partner and it was 30 units. The second one is about seven minutes from downtown Nashville, and the area is predominantly industrial, and it’s transitioning, because industrial just doesn’t make sense to be that close in to downtown Nashville… So a lot of those industrial properties are being sold and transitioned into residential and/or apartment type properties.

Joe Fairless: Sounds like a really good long-term hold…

Josh Anderson: Yeah, I think they are. And then the third one – I actually haven’t bought this one yet; I’m under contract. It’s 17 units, in the Donelson area, which is near the airport. So I think that I was very purposeful in buying them, and I’ve since gotten really purposeful about finding them. Really going into tax records and reverse-engineering, and really digging into properties that fit my parameters and criteria, and really starting to market to those a lot more… And I think it’s just getting started. A lot of people don’t have the money to do it, and I always tell people “Find the deal. The money is easy to find right now.” The money is just too easy to find. So find the deal, lock it up, and then go find the investors… And if you wanna syndicate it, or however you wanna do it, depending on the size… Or go find a business partner. I think finding the deal is the hard part right now.

Joe Fairless: You mentioned going into the tax records and then doing reverse engineering… Will  you elaborate on that?

Josh Anderson: Yes. Before you even do that, I think that you really have to get dialed in on what your criteria is, and I think there’s a lot of investors – maybe novice, starting out – and they don’t really know what their parameters or criteria is or should be… And then I think that they also waiver off of those parameters once they figure out what they are, because they’re so hungry to find a deal that they’re willing to just do something that doesn’t fit what formula makes sense for them. I think that’s where they mess up.

So for me, reverse-engineering, just really digging into areas, really digging into “How do I wanna go about finding these properties?” There’s different software out there that you can use… For example, one of the guys in my office uses Reonomy… It doesn’t have any different of information, it’s just the way that it pulls the information that gets to you. You can find information based on the last time it sold, when it was built, how many units, what MSA you’re in, what city within that MSA, what zip code… So you can really dig down deep into what you’re looking for.

For me, it’s more about — when I’m looking at investment properties and finding them I’m not as worried about the area within Nashville, just because I know the areas so well. For me it’s more about “Do the numbers make sense, and does it cash-flow?” I think things will appreciate, but I don’t think that there’s any guarantee of appreciation.

Joe Fairless: When you are looking for properties, what’s  your criteria?

Josh Anderson: I try to keep it really simple. My criteria is I kind of look at the 1% rule and I just go “Does it hit the 1% rule?” If I paid two million dollars for it, is it bringing it at least $20,000 a month? And then from there, I dig in a little bit more… I’m obviously looking at the leases and the rent rolls and all the maintenance and the costs. On some of these properties the property taxes are really high, so it’s kind of digging into all of that. But as a general overview, I look at the 1% rule because it’s easy. It’s what works for me, and I know everybody’s got different parameters, but that’s just what I’ve looked at as my initial…

And then I really drive the area and determine how well I know it, and whether I like it or not. So that would be my one parameter that I look at the most, to see if I even like it or I send it on to investors.

Joe Fairless: Okay, so the 22-unit, 1.7 was what you paid. You did it with a business partner… How did you structure that with the business partner?

Josh Anderson: On that one we’re just 50/50 business partners. On that particular deal we did a Freddie Mac loan. I’m sure you’re familiar with it. It’s a really great program. It’s gotta be a one million dollar balance, and it goes up to (I think) 7.5 million… But it’s a two-year interest-only, non-recourse, it’s assumable… It’s a really good loan program. You’re putting 20% down. I’ve used that on two of the three deals that we’ve done, just because it takes a little bit more time; there’s some more hoops, I guess, to jump through… But it’s been a really good loan program; if people that are listening to this aren’t familiar with it, it’s a great program.

Joe Fairless: You’re doing 50/50 with your business partner… Did each of you bring 50% of the equity?

Josh Anderson: Yeah, we did. 50% equity and we’re 50% owners.

Joe Fairless: I imagine you found the property, yes?

Josh Anderson: I did.

Joe Fairless: Okay, so you brought half the equity plus you found the property, so what else is your business partner doing, if anything?

Josh Anderson: He’s just a really great business partner.

Joe Fairless: Okay

Josh Anderson: On those particular deals, for myself, I’m not taking anything as far as me finding the deal, just because we’ve done other deals together. If there was a different scenario, I would definitely do some kind of finder’s fee or management fee, or if I was syndicating it and it was a bigger deal, I would definitely set it up differently. He’s been a business partner of mine for a long time on several deals, so we just haven’t structured it differently.

Joe Fairless: Now let’s talk about the 30-unit. Same business partner?

Josh Anderson: Different business partner.

Joe Fairless: Different business partner. How much did you two pay for it?

Josh Anderson: We paid 1.9. Right now it brings in 23/month. It’s in pretty good condition overall, actually. We’re doing some updates on it. Per-door we’re spending about $5,000, to update it, and we’re gonna bring up the rents about $150 to $200 over the next 6-12 months on each one. So it’ll probably be bringing on more like 25, 26 this time next year.

Joe Fairless: And when you say 25, 26, you’re saying 2,500-2,600, right?

Josh Anderson: No, 26k.

Joe Fairless: 26k.

Josh Anderson: Yes.

Joe Fairless: Got it. The management of these deals, the 22-unit and 30-unit – how does that happen?

Josh Anderson: We have property managers on all of them. The same property manager, but they’re managing it for us at 8%. I think once we get to the tipping point of being at a certain number of doors, then I’ll probably bring the property management piece of it in-house. But right now they’ve just done a great job. They take care of everything, and we literally “Yes” or “No” on certain things, and they do everything.

Joe Fairless: What’s something that hasn’t gone right on either one of those properties so far?

Josh Anderson: I’ll be honest – I’m gonna knock on wood real quick – they’ve been amazing. We haven’t had to do anything. There’s nothing that hasn’t gone right so far that we’ve anticipated. So maybe it’s beginner’s luck on apartments, but I’m certain that something will not go right.

Joe Fairless: Agency loan on the 30-unit? Fannie Mae or Freddie Mac loan?

Josh Anderson: Yes.

Joe Fairless: Okay. And with the 17-unit, my guess is it’s not gonna hit that million-dollar threshold… So you’re gonna have to do a small balance loan, or what are you doing there?

Josh Anderson: Yeah, the guy that did the Freddie Mac loans – his bank is doing an in-house portfolio loan, and they’re gonna do a very similar structure. They’re gonna do an 18-month interest-only, non-recourse. So it’s gonna be a similar setup, and we’re putting 15% down.

Joe Fairless: How did you meet your business partner who you’re partnering up with on the 30 units?

Josh Anderson: I met him in college, actually. He’s from New Orleans, and he wants to move to Nashville and he wants to get into apartment syndication, and he actually bought your Best Ever Apartment Syndication Book. I’ve been sending him deals, and we just said “Let’s jump on this one. Let’s do it.”

He comes up to Nashville 5-6 times a year, and still lives in New Orleans, but we’ve known each other since our freshman year of college.

Joe Fairless: How did you structure it with him?

Josh Anderson: It’s structured really the exact same. It’s 50/50; we both did 50/50 on the down payment equity… So it’s all the same.

Joe Fairless: Taking a step back, based on your experience, what’s your best real estate investing advice ever?

Josh Anderson: I think the best advice ever is your first deal you don’t have to hit a home run. Just get started. Just do it. I think so many people are in analysis paralysis, and they never really get started. I’ve got a guy who used to work with me; he’s been talking about buying an investment property for five years, and he still hasn’t bought. I was talking to him a couple days ago, and I said “Man, just buy one. Even if it’s making $200 a month, who cares?” Get the first one under your belt, and you can go from there. You can always sell it, you can always fix it up and get a little bit more rents, you can always upgrade and get better properties.

And that’s not to say go buy a terrible investment, but if you’re gonna do it, do it; if you’re not, then sit on the sidelines… But you’re gonna look back in hindsight and go “Damn, I wish I had bought X, Y and Z properties.”

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

Josh Anderson: Let’s do it.

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

Break: [00:17:07].28] to [00:17:43].13]

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

Josh Anderson: Best ever book I’ve recently read… I’d have to default and say The One Thing, because it’s such an easy book. Gary Keller.

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

Josh Anderson: Best ever deal I’ve done… The 30-unit.

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

Josh Anderson: I lost earnest money one time. That wasn’t good.

Joe Fairless: Will you elaborate?

Josh Anderson: I actually didn’t lose it, it just got lodged underneath my seat in my car. But I had to tell my client that I lost the earnest money, so they had to cancel it, and send a new earnest money check. [unintelligible [00:18:13].25]

Joe Fairless: That’s not a big deal.

Josh Anderson: Well, it didn’t affect the deal. It was just one of those things I had to tuck my tail between my legs [unintelligible [00:18:23].01]

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

Josh Anderson: I have a nonprofit where every deal that I do, a certain portion of our commission checks goes toward, and we go into the community and help fix up houses. On a small scale, similar to Habitat for Humanity.

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

Josh Anderson: They can visit my website at JoshAndersonRealEstate.com. That’s the best way.

Joe Fairless: Well, Josh, thank you for being on the show and talking about the renewed focus with the apartment complexes. You said since 2018 you’ve been focused on it… 22-units, 30-units… Good luck on the closing; I hope it goes well on the 17 units. Thank you for talking about the structure that you have, why you picked those properties (with the 1% rule), how you think about it, and how you’ve used your background in  financing economics to further and really build your real estate business, as well as being a successful investor.

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

Josh Anderson: Thanks, Joe.

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JF1715: Overcoming A Bad First Deal, Correcting Paths & Succeeding In Real Estate with Alex Brodowski

Alex’s first deal took him 6 months to close, and he only made $1800. After that, he realized he was doing something wrong. He made some changes, continued taking risks, and now succeeds at a high level in real estate investing. Learn how he kept going even after a bad first deal, and what tactics he employs to avoid another bad deal. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“You think you know something, but more than likely you haven’t played all angles of devil’s advocate” – Alex Brodowski

 

Alex Brodowski Real Estate Background:

  • Real Estate Developer and founder of Westmont Capital Group, LLC.
  • Owns multifamily, retail, and light industrial properties
  • Last year they had $30M worth of inventory they moved
  • Based in Nashville, TN
  • Say hi to him at abATwestmontcapgroup.com
  • Best Ever Book: Think and Grow Rich

 


Best Ever Listeners:

We have launched bestevercauses.com

We profile 1 nonprofit or cause every month that is near and dear to our heart. To help get the word out, submit a cause, or donate, visit bestevercauses.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, Alex Brodowski. How are you doing, Alex?

Alex Brodowski: I’m doing great, Joe. How about yourself?

Joe Fairless: I am doing great as well, and looking forward to our conversation. A little bit about Alex – he’s a real estate developer and founder of Westmont Capital Group. Last year they had 30 million dollars worth of inventory they moved. He owns multifamily, retail and light industrial properties. Based in Nashville, Tennessee. With that being said, Alex, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Alex Brodowski: Sure. I’ve done just about everything that you can think of in terms of real estate, in this wild journey of trying to figure out what exactly it is that I’m trying to do. I started off as a realtor, because I knew that I wanted to do deals for myself, so obviously the number one [unintelligible [00:01:48].21] is to sell other people’s stuff. So I did that for maybe a year or so… But about six months into it I realized that I needed to really get something moving, so I hustled hard to try to move the ball to get something going. And then just like I tell people all the time in real estate, it’s two times harder, and it takes three times longer to do a deal. I don’t care what deal it is, that’s just kind of how it goes.

So this story, even though it’s long, I think it impacts a lot of people, just so they understand where people start; and it doesn’t change the bigger the deals get. It took me six months to get my first deal done, and I got $1,800.

Joe Fairless: At least you didn’t lose $1,800. There’s that…

Alex Brodowski: Yeah, that was a positive. I didn’t have any debt on the property, because I was an agent, but… That really was like “What in the world…?” But for some reason, at the same time, the gut punch of the reality of the hard work was also the reward that, well, it does work, it’s not a waste of time… So I probably did that for a year, like I said. And the minute I had enough pennies in the piggy bank to buy something, I was ready to do it, because I can’t stand working with other people when I don’t get to make the decisions.

So I actually bought a house to flip, and it was 40k-something; I put another 40k into it, and then I sold it for 130k, so the profit margin came out pretty good on that. It was like 50%.

Then from there I moved into some multifamily units. There was a deal that I found – they were dilapidated in the ghetto, and the price was just too good; I couldn’t pass it up. I wasn’t even in the market for it, I had no intention of being a multifamily landlord, but I called up a partner and I said “Hey, I think this is something that we should do.” Then he said, “Okay, let’s do it.” So we got into that and we actually ended up getting in with a lot of the other landlords in that neighborhood, and this group effort took place of cleaning up this neighborhood and taking honestly a D neighborhood and bringing it up to a C+.

That was really cool to watch, and it was really cool to be a part of a collaborative effort between property owners and landlords to make this happen… Because so many times we find that regardless of what sector of the business you’re in, everybody’s competing against each other. So the only way it was gonna work for anybody to profit  was for everybody to team up together and work together to make that happen. That was really cool.

After that, the things really got rolling from a flipping standpoint. That’s really what I pride myself on doing; I do it on a lot bigger scale now. After that I got into residential subdivisions, and I still do that. There’s a lot of money in that, and there’s certainly a lot of risk in it, but the profit and the risk versus reward I find makes sense. Same with office buildings and office complexes. You can apply the same theories that are behind flipping a house, or in my case flipping a house and flipping apartments, and whatever else, and taking that to a nice office park where you’ve got a B+ (or maybe a B-). Nothing wrong with it it at all, and the occupancy is probably good too, but you can still go in there and create more value to either take it into an A, or get that cap rate better, so that you can sell it off to one of the net lease guys and take a profit there.

So I’ve gotten into some more creative things in that sense. I try to stay away from the D multifamily neighborhoods and the flipping houses; I certainly just don’t have the personnel or the appetite to do anymore. But stepping stones I think really should be the theme of anything that I have to offer to anyone, and certainly this conversation of how you can take all these different methods and all these different things, and they can be applied upwards; you can upscale them or you can downscale them. There’s a lot of things that the guys on Wall Street that I’ve encountered do, that I kind of downscaled, and I applied to smaller things, because they were missing out on those.

So those are things that I think people need to keep in mind whenever they’re looking at doing deals and trying to do them in a different way.

Joe Fairless: What’s an example of that – things you saw people on Wall Street doing, that you then applied to what you were doing?

Alex Brodowski: There are a lot of guys that are in these triple-net lease groups, and they wanna buy big. One thing that I never understood when I started out – and really years in I still didn’t get it; this is a very recent fact that I’ve discovered, and nobody else really thinks about it either… It’s hard to sell something that is in-between the bottom end of a spread and the top of the spread; but the higher you go, the more difficult it is to find, and the bigger the buyer pool you have.

For instance, if you told me a couple years ago that if I had a portfolio with 600 apartments in it, and it was 25 million dollars, or a portfolio of Walgreens with 40 of them that were 100 million dollars, myself, and I think just about anybody else, would say “Well, the multifamily portfolio would be easier to move.

Joe Fairless: Sure.

Alex Brodowski: It’s a smaller number, there’s more of an appetite for multifamily — I mean, just about everybody talks about it and wants it… And I would never have believed that 100 million dollars and up is probably the most required asset type/class/number/ whatever you wanna call it out of anything, as far as Wall Street is concerned, or as far as Singapore is concerned. It’s probably even higher than that. And if you think about it, it does make logical sense – they can’t find anything, one thing to get, where they can spend that much money… And for us smaller people, and especially somebody that’s starting out, your problem is finding a deal, finding something that’s affordable, something that makes sense that you can tap into… But usually it’s because you need money. You’ve gotta find capital to do the deal, and these guys have so much money and so much capital that they can’t get rid of it quick enough for them to go buy a one, two-million-dollar complex, or buy ten McDonald’s for 20 million.

It’s not even close to the amount of money that they have to move, because the majority of them are real estate investment trusts, or they work hand-in-hand with real estate investment trusts, or institutional investors like insurance companies… And they can’t move this money fast enough. They’ve got people who have money sitting there, ready to spend it; they want a return, and their returns you and I would laugh at… But when you look at it from a gross perspective, it does make sense, because you’ll have a company like Nationwide – everybody knows Nationwide. Well, Nationwide’s collecting all these premiums people pay in to insurance premiums, not really thinking about.

Of course, yeah, some of that money is paid out in claims and collections, but nobody really stops and says “What’s going on with all this extra money?” Surely they’ve got extra money, and they do; they’ve got buckets of it. They all do. And they take that money and they’re funding real estate projects; they fund high rises in New York, they fund certain municipal joint ventures when it comes to construction of roads and streets [unintelligible [00:09:10].02] they do all kinds of crazy stuff with their money. But for them, they’re wanting serious deals, and for those serious deals that are hard to find they’re usually getting around 4% for their money… So it’s kind of like they are the banks, if that makes sense. But that’s where the real estate kind of crosses over into a totally different animal from your mom and pop single-family investor, versus Wall Street.

Joe Fairless: Let’s go back to the residential subdivisions and the office parks that you were talking about, that you mentioned you flip. Let’s talk about one of them – residential subdivisions. We’ll start with that. You said the profits are great, and the risk versus reward makes sense… So how much can you make doing residential subdivisions, and then can you define that more, so we have some context for how large and how you think about it?

Alex Brodowski: I would say — and I’m even doing it on my calculator right now… I would say that on average I’m doing 27% or 28% return on those deals. Now, a lot of guys are not getting those kinds of numbers because they’re having to pay market prices for their land… But when you’re talking about serious investment upfront – maybe it’s a couple million dollars in land, and then you’ve got probably 4-6 million dollars of improvements that are required for streets, water, sewer, you name it; you’re gonna phase it out, so that helps. You’ll be able to do it over several phases, instead of having to come up with all that money at once. However, your carry cost is gonna dig into that margin.

So if you had all the money in the world and you could do these projects with cash, your return would be even stronger than that, but the carry cost really makes it difficult to keep those margins. The other thing that’s kind of  a challenge is that when you’re working with builders – and I work with one of THE top national builders – they have these takedown schedules that have to comply with their corporate financials… So just because you’ve got 100 lots and they have an appetite for 100 lots, and they need them right now, they may wanna hold off and wait to close for two or three more months, so that they can show that inventory and that spread on their financials for the next quarter. That’s something to keep in mind when you’re doing that, and I don’t know if too many people understand that.

Takedown schedules I think are fairly common, but that’s another example of where the corporate world crosses over into simple deal-making. The deal is there, I’ve got something to sell and they wanna buy it, I’ve got my margins, and obviously they’re gonna make their profits, but you have to finagle and work it so that benefits them on their back-ends, so that they can show the financials that they need to.

Joe Fairless: When you busted out your calculator just now, what numbers did you put in? Just walk us through how you came up with the 28%.

Alex Brodowski: I just did one of the last deals, because I can remember what I’ve made… And it was a $62,000 lot sale, and I had $48,000 in it. So I just did 48k divided by 62k, and that’s about it.

Joe Fairless: Okay. So what’s the largest residential sub-division that you flipped? Are you doing single lots? Are you doing 10, or 20, or 50, or 100 at a time?

Alex Brodowski: Well, maybe I should have been more specific… The subdivisions can go both ways. I develop them, and I’ll flip them. I will find the land, I’ll come up with the money to improve it, I’ll find a builder, I’ll put the whole deal together, and then wait for my money in a takedown schedule. Or there are instances where I will go in, where another developer has already developed all of the lots, or they’re about to develop the lots and play middleman essentially, and pull in one of my builder partners or builder clients, and flip them over to them. So there are two different situations. Both of them I do. But I would say that the flipping is probably not as regular as having to actually develop it myself.

The largest flip that I’ve done was 170 lots, and I tacked on $2,000/lot. To be honest with you, I don’t know what that is off the top of my head, 170… I should know this, right? I’m a real estate guy.

Joe Fairless: [laughs] That’s alright.

Alex Brodowski: Like 300k. And that was a subdivision that was developed — it was about finished out; it wasn’t totally finished out, but it was about finished out… And I had a builder partner who was a national guy, and I told him that it was available, I told him “Here’s the price”, I made my deal with the other guy, kind of very similar to wholesaling, but the difference is that I actually closed. A lot of wholesalers assign stuff, and I’ve never done that. Any deal that I’ve ever done, I’ve always had a deed, and then transferred that deed to somebody else. So I always take title at some point in the venture. But I would say that’s probably the biggest flip deal that I’ve done from a residential perspective.

How I came up with that number? I totally just pulled that out of thin air. There was no rhyme or reason or justification for it. It was just I got it as low as I could on the acquisition, and then I thought “How high is it reasonable for me to expect for a builder to pay?” and they did, and so that’s how I made the deal happen.

Joe Fairless: The office park – what’s the largest project you’ve done in terms of dollars or flipping an office park? Because it’s really intriguing when you’re talking about taking a B office park to an A. I’d just love to learn more about a specific deal you’ve done.

Alex Brodowski: I would say that the most impressive – and this is still ongoing; it’s a group of people – was it was an old company… I don’t remember what the trade was, but it was kind of an industrial place. But it had some office to it, too… But you have these big facilities that were barren, that could be used for something else, that were just sitting there vacant. So an office park grew out of that. Structures that were only enclosed on the back and the side, and the front was open, so that trucks could pull in and out – those were enclosed and turned into A- offices… And the office that was already there – that was also turned into an A- office, because it was probably C+ or B- at best, because it was old. It was probably from the late ’70s.

Slowly, land was procured around this office park (if you will); at this point it was still kind of an industrial yard, but the land was procured around it, and then new buildings were put together. So what ended up happening – and we actually have one lot left still that we’ve gotta do something with… But what you have is steel in some of these buildings that’s old, old, old; probably from the ’50s or older. It was used for the coverings of the roofings for these trucks, where these trucks would pull in, or where they’d store stuff like hay, or whatever it is that you could come up with. Those were enclosed, the steel stayed, but everything else changed.

Then you’ve got also got new buildings that came out of nowhere, that are all around it. So at the end of the day you have this hodge-podge of things, but the land value made sense for all of it, and the structures were there for you to build onto it. And because of the way that the ordinances were written, you didn’t have to go through some of the guidelines that you might normally have to when you’re getting plans approved, because technically this was a remodel of existing structures versus brand new plans, brand new footings, and slabs, and all of that. So I would say that’s probably the most interesting project, but it has not been disposed of yet. That’s something that I’m pushing for right now, and if we do, that will probably tie back into my conversation about the Wall Street guys and needing to spend money, because I really think that’s the best route to go with that.

And that park – for you to wrap your mind around – the total gross leasable area would be probably 230,000 square feet. So it’s not a huge thing…

Joe Fairless: But not small either.

Alex Brodowski: …but it’s certainly not tiny.

Joe Fairless: Yeah. What’s your role in that?

Alex Brodowski: My role in that is actually at this point procuring the buyer. But before that it was tenanting, pulling in tenants.

Joe Fairless: And for someone who hasn’t done that – found tenants for an office park that was certainly a non-traditional office park – what are some challenges in that, and then how did you overcome it to get the tenants in there?

Alex Brodowski: The challenge is similar to that of any person who basically is gonna be a leasing agent, because that’s what I did – I was a glorified leasing agent. The biggest issue — people always need somewhere to operate, so I would say that there’s no shortage of leads from people that need a place to operate… But putting them somewhere and stacking them strategically is the hard part, and I still can’t say that I have mastered that one.

Often times – and this goes for a lot of other things. This happened in an inner state development that I worked on up there… Same situation – when you’re in a crunch and you have vacancies and you need to fill them, you’re gonna try to put in the first person that comes along, so that you get some cashflow rolling in. The problem is if you load in the wrong guy – and you’re not gonna know it when you do it – it might ward off other potentials that could have been even better. Or for instance if you’ve got a person that comes in who has a non-compete, or — I can’t remember the name of the clause, but basically they’re the only person of this entire industry that can be in this entire complex; you might not think that that’s that big of a problem.

For instance, a real estate office – this is a great example… A real estate brokerage will say that “We’re gonna be the only real estate office in this office complex”, and you say “That’s fine. I don’t know why we’d need any other real estate companies in here anyways. It’d be kind of weird if the building was just full of brokerages.” So you let them come in, but then you find out that when you wanna load in an attorney who says that they also do real estate closings, in another one of the buildings, the real estate company says “You can’t do that, because they handle real estate-related activities, and in our lease it says that we’re real estate only.” The same thing could go with insurance companies.

So you have to be careful when you’re mixing all these people together, because anybody who cross-connects businesses, even though it’s ridiculous and you and I know that they’re all very separate, they can claim that it somehow impacts their business, and for that reason on a best-case scenario they’d be entitled to leave and not have to pay you for the rest of their lease. Worst-case scenario, if you loaded those people in there, they could sue you.

So those are some challenges that you can’t really overcome until you get to the situation… And usually people are reasonable, but I’d say that when you’re filling a space or you’re trying a land development, which is really my main thing lately, when you’re loading in users, you’ve gotta be careful and you’ve gotta be proactive on thinking “Who needs to go here, who’s the best fit for here, and what could be a problem doing this?” Because you certainly don’t wanna load in somebody that’s gonna ward off any potential, because no one deal is worth losing three over, if they see that this one guy is here and they don’t wanna be around them.

Joe Fairless: Thank your sharing that. That’s something I wouldn’t think about initially, and I’m glad that you brought that up. Let’s take a step back… Based on your experience as a real estate investor and entrepreneur, what is your best real estate investing advice ever?

Alex Brodowski: Never assume. This has been a hot topic in my office, so if you let me get on my soapbox for a minute… We had a deal very recently – within the past month – that taught me a lesson that people have told me over and over again, but you never really listen to it, and that’s the “Never assume” thing.

Four years ago I would drive by this particular site every day on my way to work; it didn’t have a sign in front of it, no one talked about it. The grass was growing up, but not in a fashion that would make you think that it’s an abandoned property. So I drove by it every single day, always having the thought of “I should probably try to buy that” or “I should probably try to make a deal with that.” But like so many people, I didn’t. I even printed out the tax records, and they hung up in my office, every day, next to some other stuff that I had. So I was forced to look at it every day.

I knew who the owner was even at that point, but I just assumed that this property was so prime, off of a major highway, that if it was sitting there vacant, there had to be some reason for that… So I didn’t do anything with it, and I forgot all about it. I moved offices, I stopped having to see it, stopped having to think about it.

And about a month ago, the guy who is in charge of acquisitions at my company said “Hey, I’ve knocked out all these different things, and we’re still working on this, we’re waiting to hear back on that… What do you want me to do at the moment, right now, while we’re waiting on everybody else?” I said, “I don’t know…” I was flustered working on something else, and then I said “I’ll tell you what – take this address, look it up, and try to get in contact with this guy and tell him I wanna buy his stuff”, and I wrote down the address, or at least what I thought was the approximate address of that property, and gave it to him.

A couple days later the guy calls me saying that he wants to sell it. I was blown away just by the fact that he wanted to sell it. I just really didn’t expect that. Because what I do a lot of times, whenever I’m getting ready to buy anything – I don’t know if this is common knowledge or not – I pull up Secretary of State information and I pull up tax records to see what these people have. That way you know when you’re going into a deal whether you’re dealing with a real estate guy or just some guy who happens to have some real estate. It was apparent that he was a real estate guy, so I was shocked when he called us back.

I took his phone call, and I asked him if he’d be interested in selling it, and he said “Absolutely.” He said that up until now, he probably would not have been so interested in selling it, but I just happened to catch him at the right time… So I said, “Well, what do you want for it?” and he said that he really wasn’t sure. So I said, “Well, okay, I’ll try to make an offer by tomorrow.”

I got with the attorney and had a contract drawn up… And I really didn’t know what to offer him. I knew what it was worth, and I still know what it’s worth, but you never know. You don’t wanna go in and offer someone a number that is really close to market value when they would have taken $10,000, or whatever. And just so you can have numbers, we’ll say that this site’s worth $1,000,0008. That’s probably what the land is worth. So when I’m thinking about something that’s worth $1,000,0008, that’s almost 10 acres, I’m gonna offer maybe $600,000-$800,000 normally, hoping to get a deal closer to 600k, but I may have to go closer to 800k. But that would typically satisfy most people if they’re not an investment person who bought it for investment reasons.

So I actually ended up coming up with the number of 350k, because I thought “This deal is so wild… I’m gonna push the envelope on it anyways, and see what happens.” So I offered him 350k and I thought “I’ll probably never hear back from him again.” And sure enough, he calls me back and he says “I got your offer…”, and I’m like “Oh, God…” And then he says “I was wondering if maybe you could do $400,000”, and I said “I’m gonna have to think about it, because that’s really pushing it. We hadn’t anticipated spending that much money.” So we crunched our numbers and then came back up with 375k. I told him 375k was the best that we could do, and then he said “That’s great.” And he was tickled to death, he was thrilled. He was happy. His basis in the property was like $1,800, he’d had it so long.

So that’s where we made the deal at, and we are pending closing on selling that property at the moment for a really good profit. I can’t say what it is yet, because it’s not done, but the numbers that we’re talking about are very impressive… So I would say that the number one thing I even remind myself daily now is to never assume, because  you think you might know something, or you think — even when all the facts point to a certain outcome, more than likely somebody has not played every angle of devil’s advocate to see what can happen.

Joe Fairless: Congratulations, but I will hold the full congratulations until after it closes… But regardless of if it closes right now, you still have that property, and you’ve got a lot of equity in it, so you’ve already won the major battle; now you’ve just gotta close it out. That’s pretty cool, thanks for sharing that.

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

Alex Brodowski: Sure.

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

Break: [00:26:51].23] to [00:27:32].14]

Joe Fairless: Okay, real quick – best ever book you’ve recently read?

Alex Brodowski: Think and Grow Rich, by Napoleon Hill.

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

Alex Brodowski: Getting in too deep, too fast financially, and also bringing people into the deal. So just all across the board, taking on way too much, way too quick.

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

Alex Brodowski: To give back?

Joe Fairless: Yeah, like give back to the community?

Alex Brodowski: Physically volunteering and trying to do things that pertain to housing for the less fortunate is definitely my preferred method of charitable contribution to society.

Joe Fairless: And how can the Best Ever listeners learn more about what you’re doing?

Alex Brodowski: They can shoot me an e-mail at ab@westmontcapgroup.com.

Joe Fairless: I thoroughly enjoyed our conversation, Alex. Thanks for talking about some specific deals, and a couple perhaps paradigm shifts in our minds. One is “Which one’s easier to move – a 20 million dollar apartment portfolio, or a 100 million dollar single-tenant portfolio with a bunch of Walgreens?” Perhaps the 100 million, because of the Wall Street money looking to spend large chunks of cash, and their need for lower returns, because it’s such high dollars that they’re spending… And then also the “never assume” story. I think that’s something that regardless of where we’re at in our journey, we can all take to heart.

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

Alex Brodowski: Hey, thanks for having me. I appreciate it.

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JF1712: Learning About All The Different Types Of IRA’s & Which Is Best For You #SituationSaturday with Eric Satz

Eric saw a problem in the marketplace, created a solution for himself, and is now helping others do the same thing he did. Taking IRA savings and investing in private companies was a complicated process before, now Eric and his team make it easy for their clients. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“That’s what we call a big market opportunity” – Eric Satz

 

Eric Satz Real Estate Background:

  • Founder and CEO of AltoIRA
  • His mission is to make 21st-century investment opportunities available to everyone, not just accredited investors
  • Based in Nashville, TN
  • Say hi to him at https://www.altoira.com/

 


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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.

First off, I hope you’re having a best ever weekend. Because today is Saturday, we’ve got a special segment for you called Situation Saturday. Here’s the situation – you are learning about self-directed IRAs, and alternative IRAs versus normal IRAs, and you don’t know what to do, because you need to have more information. Fortunately, we have the founder and CEO of AltoIRA, Eric Satz, on the show; he’s gonna talk to us about how an alternative IRA is different from a normal IRA. First off, how are you doing, Eric?

Eric Satz: I’m fantastic, Joe. Thank you so much for having me on.

Joe Fairless: My pleasure. A little bit more about Eric – his mission is to make 21st century investment opportunities available to everyone, not just accredited investors. Based in Nashville, Tennessee. Before we get into alternative IRA vs. normal IRAs, Eric, would you mind just telling us a little bit more about yourself and what you’re currently focused on?

Eric Satz: Yeah, absolutely. As you’ve already said, I’m the founder and CEO of AltoIRA, and I got here in what I consider to be a typical entrepreneurial fashion. I had a problem myself, I solved it, I didn’t like the solution that was available in the marketplace, so I went about creating what I hope is a better one for everybody else out there, so that everyone can benefit from it.

Joe Fairless: And what was the problem you had?

Eric Satz: The problem was trying to use my IRA savings to invest in what we call an alternative asset. An alternative asset is a non-publically-traded security. You can’t go to the New York Stock Exchange, you can’t go to NASDAQ to buy it. It’s not a public equity or a public bond. It’s something like real estate, or a private company.

About four years ago I took some IRA savings and I invested in a private company, and the process of doing so was overly burdensome, overly expensive, and a huge time sink… But I really wanted to make that investment, so I did. I then made two more using two other custodians, had the exact same experience, at which point I went about trying to figure out whether or not this was a problem that only I was experiencing, or whether there were more people who had the same issue.

So it turns out you’ve got 30 trillion dollars sitting in retirement savings, less than 1% invested in alternative assets like real estate, and that seemed like a really, really low number to me.

Joe Fairless: Did you say 30 billion, or 30…

Eric Satz: 30 trillion, with a T, in retirement savings.

Joe Fairless: That’s what I thought you said. Huh.

Eric Satz: Yeah, that’s what we call a big market opportunity.

Joe Fairless: [laughs]

Eric Satz: 30 trillion dollars seemed like an opportunity worth addressing with a more elegant solution, and by more elegant I mean technology-centric, customer-centric, user-friendly, scalable and cost-effective.

Joe Fairless: Okay. So what did you create? Let’s talk about that first.

Eric Satz: Sure. AltoIRA is a technology platform that does for alternative IRA investing what you may think of as TurboTax having done for self-filers. Alternative investing using your IRA up until now had been really a people and paper-burdensome process. Too confusing for most people, too expensive for most people… So by employing technology, ripping really the people and paper out of the process, asking one question at a time, and then based on the answer that’s provided, providing another question, we were able to simplify the workflow, move through one step at a time, and help you get to the end of the process in a way that is not time-burdensome, is not too complicated, and is cost-effective for you, the average person, like me, to go ahead and make this type of investment.

Joe Fairless: Okay, so your company is an IRA custodian, and you’re differentiating feature within that realm – and feel free to correct me once I’m done, because I might need to be corrected… your differentiating feature within that realm is that you make it simpler than your competition to go through the process to actually make your retirement account self-directed. Is that accurate?

Eric Satz: It’s close. Let’s talk about the differences actually between an IRA account that you may have at a company like Fidelity, or Schwab, or TD Ameritrade or something like that, and an IRA account that you have at AltoIRA.

Joe Fairless: At the big broker-dealers they give you a basket of goods, let’s call it; public company stocks, bonds, mutual funds, ETFs, index funds. They say “Hey, you can invest in whatever you wanna invest in, as long as it’s on this list.” What we do at AltoIRA is say “You can invest in whatever it is you want, so long as it’s not what’s called a prohibited transaction.” A prohibited transaction actually says what you cannot invest in using your IRA… And it’s actually a fairly limited list. Those prohibited transactions tend to focus on the fact that you can’t invest in a second home, unfortunately… Although you can invest in a commercial property, or residential real estate that you keep for rental income, but not for personal use.

You cannot invest in hobbies, like race cars or antique cars, or show horses, or Persian rugs, things like that… And you cannot invest in companies that are owned or controlled by your direct ancestors and descendants. So nothing that your kids own or control, nothing that your parents, grandparents, great-grandparents own or control. But everything else is pretty much fair game. That’s the difference between an IRA account at Alto and an IRA account at a traditional broker-dealer. The tax implications and consequences are all the same.

Joe Fairless: Yup. But that’s not the differentiating feature for your company, that’s just different for a regular IRA versus a self-directed IRA.

Eric Satz: That’s correct. So getting back to why use Alto versus some other self-directed IRA custodian, the answer is exactly what we were talking about before, which is the technology that we’ve put in place to simplify the process, make it very quick and easy. It’s all online, it’s all digital, and we’re also the least expensive provider in the marketplace.

Joe Fairless: Wow.

Eric Satz: Better, faster, cheaper.

Joe Fairless: Better, faster, cheaper. Yes, please. So walk us through the process. I have a retirement account with fidelity, and I have identified an opportunity that I want to invest in, therefore I need a self-directed IRA or an alternative IRA, from the point of me realizing I wanna invest in something, but I don’t have something set up, all the way to  it’s fully funded, I’ve wiped my hands clean of it, and now I’m set up – what is that process?

Eric Satz: I’m gonna walk you through the example of actually investing in a private company, if that’s okay.

Joe Fairless: Sure. Perfect.

Eric Satz: It’s just cleaner than real estate.

Joe Fairless: Well, can we do real estate? Because this is a real estate podcast, and basically 95% of people who have a retirement account who make it self-directed, they’re gonna be investing in real estate… So that would be more applicable.

Eric Satz: So I’ll disagree with you on the 95%, but I’m happy to walk you through a real estate example.

Joe Fairless: Well, I would say 95% of people who are listening to a real estate podcast are going to be investing in real estate, versus an alternative… I’m talking about my audience.

Eric Satz: Got it, got it. Sure. Now, I have a question for you – is the majority of the audience buying properties outright, or are they just looking for exposure to real estate?

Joe Fairless: Investing passively in a deal.

Eric Satz: Investing passively in a deal, okay. Do you know if often times that deal is wrapped inside, say, an LLC?

Joe Fairless: Sure.

Eric Satz: Okay. So here’s the way it would work then… And we’re going from you don’t yet have an Alto account, to funding and done and collecting the checks.

Joe Fairless: Perfect.

Eric Satz: So you go to AltoIRA.com, you’re gonna sign up as an ambassador, you’re gonna give us some personal information so that we can run what’s called the Know Your Customer and Anti Money Laundering checks; all this happens in the background, and it does not affect your credit score or credit rating.

When you’re approved, we will ask you to go ahead and transfer assets, in this case cash, from an existing IRA account over to Alto. The way you do that is you fill out the transfer of asset form, which is all done online. At Alto, we walk you through it. The one piece of information that we’ll need from you by the time you’ve gone through and created your Alto account is the account number from the account you’re transferring from. In this case we were talking about moving from Fidelity, so we’ll ask you for your Fidelity account. Then the initial amount that you’re asking to have transferred to Alto, and then you’ll sign that document electronically.

We’ll then ask you to upload a couple summary pages from your Fidelity account statement. This is so that Fidelity knows that this is actually you that is asking for the transfer of cash from your Fidelity account to your new Alto account.

Once you have uploaded that document and you’ve already signed the transfer of asset form, our system takes over and it will then execute the transfer of asset process. Along the way you’ll get notifications from the  Alto platform which says “Hey, we’ve initiated your wire. You wire has been confirmed. The money has come back and we’ve received it”, things like that. So you know every step along the way what’s happening.

Once you have the money – although I will tell you, you don’t have to wait for the money to be in the account – you can go forward and in the upper right-hand corner click on the button which says “Make an investment”. In this particular real estate example, where the real estate itself is being held in an LLC, you’re gonna click that you wanna make an investment in a company or a fund. And we say a company or a fund because in this case an LLC (limited liability company) is in fact a company, even though the asset it’s holding is real estate.

So you’ll say “I wanna make an investment in a company”, and we’re gonna assume for a second that somebody else is controlling this limited liability company that’s purchasing the real estate. So we will ask you for that name and e-mail address of the person who is managing the acquiring entity, in this case the LLC. Once we have that, the system will automatically invite that person to the Alto platform to put what we call the offering documents onto the system.

Those offering documents can be made available to everyone who is investing in that LLC. So you’ll then get a notification as the investor that your counterparty has uploaded the offering documents, they’re there for you to review. After you’ve reviewed them, you sign off on them, you provide us with your direction of investment which says that you’ve reviewed the docs, you wanna go ahead and make the investment, and here’s the amount of the investment you’re making. Once you’ve done that, you’re done.

We send the money to the LLC, and then you start collecting, hopefully, big fat checks with distributions related to income from that property.

Joe Fairless: Very detailed, thank you for that. That’s very helpful, to go through the step-by-step process. That’s great.

Eric Satz: My pleasure.

Joe Fairless: You mentioned that you all are the cheapest… Just from a positioning standpoint, as you were building the company – you’re the founder and CEO – why position your company as the cheapest option, versus putting more of a premium on your service?

Eric Satz: Because the real purpose to the company is to make sure that any American who wants to retire is in a position to retire when they reach retirement age. And we’re just not gonna get there if all we’re doing is investing in mutual funds, ETFs and index funds. We have to have exposure to these alternative assets where we can get outsized returns.

There’s enough of a wealth gap and income gap between the 1% and the rest of us at this point that it’s not my goal to build a system that caters to the high net worth individuals. There are plenty of people that cater to the high net worth individual. We can both serve that person as well as everybody else. That was the goal. That’s why we put technology in place; technology that scales, technology that makes it really simple and easy to use, and technology that streamlines the process such that we can charge less, and still build a sustainable, profitable business. That’s the goal.

Joe Fairless: What else that we haven’t talked about as it relates to this that you think we should talk about before we close out?

Eric Satz: Sure. In the example that we went through, the step-by-step example, I pointed out that the person who controls the LLC receives an invitation to the platform as well. That’s really unique and important to what we do, because nobody else in the industry has a relationship with what we call the issuer or the recipient of funds, the company that’s receiving the money. Nobody else has that. We’re the only ones who do that. And we do that based on our own deal experience, from the past 25 years. It’s not enough to just know the investor, you should also know the person on the other side of the table. And because we do have the relationship with both parties that are transacting, we’re able to serve as a communication hub for all of the deal-closing process. That means we’ve taken the heavy-lifting and the burden off of the shoulders of the investor, and we’ve also removed it from the shoulders of the company, and we’ve carried it with technology, in an automated fashion, that creates a really smooth process for everyone involved.

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

Eric Satz: AltoIRA.com.

Joe Fairless: Eric, thanks so much for being on the show, walking us through the process of how to go about it from A to Z, and talking about how you’ve positioned your company, and the reason why you’ve built it in the first place.

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

Eric Satz: Thank you so much, Joe.

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Dave Childers and Joe Fairless

JF1280: Multifamily Syndications: Pros, Cons, Challenges, and Successes with Dave Childers

Our guest today is a multifamily syndicator, and a residential real estate broker. We hear great tips for apartment investing as well as asset management. Dave tells us what to look out for when a broker sends an offering, and how you can get started in real estate today. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

 

Dave Childers Real Estate Background:

-Owner/Broker of Residential Investment Advisors since 2011

Brokered millions in multifamily properties and provided resources for investors, bankers, and appraisers.

Experience in commercial and residential real estate including brokering, facilitating financing for multifamily

properties, and ownership and management of multifamily and commercial properties

-Say hi to him at http://www.ria-inc.com/ OR dave@ria-inc.com

-Based in Nashville, Tennessee

-Best Ever Book: Rich Dad, Poor Dad

 


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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, Dave Childers. How are you doing, Dave?

Dave Childers: Good, how are you?

Joe Fairless: I’m doing well, nice to have you on the show. A little bit about Dave – he is both a multifamily broker, as well as an owner. He owns approximately 300 doors, and in fact he is a broker-owner of Residential Investment Advisors, so he has experience selling the deals, and then also buying the deals. Based in Nashville, Tennessee. His company’s website is in the show notes, so you can just click that link and check out his company’s website. With that being said, Dave, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Dave Childers: Yeah, how far back do you want me to go? I can go way back, or we can keep it simple. Like you said, I started doing this pretty much right out of dropping out of college, doing real estate investing, and I’ve been doing it about 13 years now. I bought my first rental property with a few financial guys, with a few guys that backed me financially when I was 23-24 years old, and that’s kind of how it all got started, with one simple, small two-unit duplex here in the Nashville area. It has grown now to a pretty good portfolio. Obviously, we’re trying to grow it more right now, but it’s a little hard to find deals. We own 300 doors, and we actually recently purchased an 86-unit down in Pensacola, Florida… So we’re kind of branching out from the middle Tennessee area.

Through that experience, I just kind of came to the realization that there wasn’t a broker that specialized in the smaller multifamily, and talking to a few of my friends that broker large multifamily (100+ units+), he said “You should really start a brokerage firm that specializes in smaller stuff. That’s kind of what we’ve done here in Nashville. We do anything from 2 to 50, 60 units; that’s kind of the bigger side of what we do. It’s a little niche market that we really like and we really enjoy working with individuals and helping them get started in their investing career.

Joe Fairless: And what type of properties do you buy?

Dave Childers: Typically, because I’m raising money, I’m doing syndication, I’m partnering with people, it has to be 55-60 units plus, so larger stuff. I’m not really competing with the people that I’m brokering to.

Joe Fairless: You knew where I was going with that, didn’t you?

Dave Childers: [laughs] Well, it’s a question I get a lot. They say “If it’s such a good deal on this 10-unit, why don’t you buy it?”, and there’s a simple answer – if I’m syndicating them, I get my 15%, 20%, 30% of ownership, it’s really not worth my time to get 20% ownership on a 10-unit deal with the amount of work that goes into it.

After doing this 12 years, I know how involved I am with deals on a daily basis. Everybody’s saying “Oh, you put a deal together and you get it done… It’s pocket money, it’s mailbox money” – it’s not. All my properties I’m looking at budgeting, and numbers, and insurance, and just day-to-day stuff, on a weekly basis; I’m not touching it every day, but I’m pretty involved.

Joe Fairless: Will you talk to us about what you do do from an involvement standpoint with your syndicated deals that you’ve already done?

Dave Childers: Yeah, we can talk about the Pensacola deal. It’s a flight down there to see that property, so I try to get down there quarterly, spend a couple days down there, maybe a day and a half, fly down there… We’re given reports — I’ve got a partner on it that helped me syndicate it, so reporting back to our investors… That property had aluminum wiring, so we’re having to work with the lender and the property management, electrical companies and getting the aluminum wiring fix done, which is a pretty large job in itself.

Joe Fairless: How much did that cost?

Dave Childers: $140,000 for 86 units, so what’s that…? About $1,500/door. Not cheap.

Joe Fairless: Not cheap. You obviously knew that going into it, though.

Dave Childers: I did. The deal still made sense even after that cost. Trying to restructure that deal, trying to take it to another place, so we’re renovating… We renovated 30 of the 86 this year. So just all those daily things that you’re dealing with – vacancy levels, making sure you’re staying out of certain vacancy; do we need to [unintelligible [00:06:14].04]

My big thing that I’ve been doing a lot and I’ve talked about it on other podcasts is using Facebook advertising, mostly in these smaller markets… So I’ll actually sit down with the manager and kind of show her how to do some Facebook advertising to bring people in.

Joe Fairless: When you go down to Pensacola to visit your 86 units and you’re there for a day and a  half, what are you doing there?

Dave Childers: Walking vacants, riding around the property on a golf cart, looking at the things I look at… Let’s stop right there – when I started doing this, my next deal after those couple duplexes I bought, I bought a 114-unit complex here in Nashville area, and that is when the economy tanked… So I pretty much became an owner, daily manager on that property. We were broke; it’s a very long story and I don’t wanna get into it, but I was there every day, so I learned how to manage a property as an owner, and I’d tell people, I did everything from cleaning carpets to paint walls, pick up trash, whatever I had to do. So having that experience and going on-site to a complex – I’ve actually done it, so I kind of know what to look for.

So yeah, when I’m there in Pensacola I’m driving the parking lot, just thinking like a tenant would, looking at just improvements we can make – can we move that dumpster for curb appeal appearance? Do we need to paint that fence? Do we have a model setup, do we have make-readys ready to be rented today? Where are we at in the process of renovating the next set of apartments? Are the front porches clean? Is the curb appeal, paperwork in place? All those kinds of things.

Joe Fairless: And how much of that is the property manager’s responsibility and how much of it do you feel that you really need to take charge in doing?

Dave Childers: I’ve seen this a lot – people buy apartments, and this is kind of back on the broker side… So being a broker makes me a smarter owner, because I see where people fail. So these people will put a group together, they’ll buy this apartment complex and then they’ll call me and say “It’s just not working out, we’re having trouble”, and I’m the problem solver. I’ll go in and say “Well, you’ve got a marketing issue. You don’t have make-readys.”

I see this all the time – they think they’re gonna buy a property, give it over to a property management company, and then they just can walk away and expect this money to come. They never manage their managers correctly. So I think that’s part of it – the accountability, and just building rapport, building a friendship, letting your manager know what direction you wanna take a property. Are you looking to increase rents, or bring the maintenance cost down? What are you trying to do? I think giving that roadmap to your managers and making sure they understand what your expectations are is hugely important.

Joe Fairless: Is that roadmap written down?

Dave Childers: Yeah, and it changes. You might go in with expectations; you know, this is such a fluid business… You can go in with a gameplan day one, and it’s gonna change based on tenants moving out, economic things, switching managers… Managers quit and you’ve gotta find a new one, you might have to reexplain; their skillset versus the skillset of the previous manager might be different… So yeah, those are written down goals, but I think they’re ever-changing as well.

Joe Fairless: Let’s all pretend we closed on this 86-unit in Pensacola. What are your immediate steps? You just got done closing the deal, what are your immediate steps?

Dave Childers: Let’s see… Within the first 30 days I’m probably gonna get down there – maybe even two weeks – and again, make sure everything’s moving forward, in the direction I want it to go. With the property management company there’s gonna be things that you have to flush out – accounts, utility bonds, insurance, all those kinds of things. So a lot of the work on the front-end I think is with the management company, just tedious stuff like that… Switching leases over into whatever software system they’re using. Are they gonna produce a budget immediately for you, which you’ll review…?

Joe Fairless: Prior to acquiring the property, do you share your budget with the management company, so that they know what you’re looking for?

Dave Childers: Maybe not a line by line budget, but an overall “Here’s where we need to be…” An expense/door annually number is definitely gonna be a huge thing, and making sure that we’re all on the same page, that they don’t have $7,000 a year to spend… And also, I think that’s where interviewing [unintelligible [00:10:29].02] property managers and just making sure they understand what kind of owner you’re gonna be. I’m very thrifty, and I hope that comes across with my managers.

Joe Fairless: Does thrifty mean cheap?

Dave Childers: No, thrifty doesn’t mean cheap, but when I get to a property and there’s more marketing material and signage that hasn’t ever come out of a box and I’m paying for it, yeah, I’m gonna make sure that stuff gets returned. There’s so many grassroots type of advertising that you can do today and save yourself money that I don’t think you have to have a huge marketing budget. These are all things that I’ve done in the past with tenant referrals and other marketing ways that you don’t have to be spending thousands and thousands of dollars. So no, thrifty definitely does not mean cheap.

Joe Fairless: Since you call yourself thrifty, it surprises me that you don’t provide them an itemized budget, because then they would know exactly where you’re looking to spend on each item… So how come you choose not to do that?

Dave Childers: Well, the property managers are gonna know more than you do, essentially. I meet a lot of owners that think that they’re gonna know more than myself sometimes, or know more than a property management company on how to run something. Honestly, putting a budget together is a lot of work. I had a preliminary budget, but their numbers are still gonna be what they want it to be.

Joe Fairless: What’s been a challenge on a deal that you’ve done? Can you talk to us about it?

Dave Childers: Yeah, I’ve got one deal that two years into it is still — it just seems like it can’t get over a hump; it’s in a small, rural town here in Tennessee, and it’s a rotating door for people coming and going constantly… And trying to find a good manager when you’re in a town of 15,000-20,000 – which is probably the mistake of buying in a small town… Trying to find a good manager, or trying to even find tenants in some of these small towns, because the population doesn’t grow. You’re just turning over — the tenants are hopping from one complex to another, constantly.

That’s something — I’ve just had a call with a friend and he says “Best advice is never to buy in a town less than 100k.” Okay, I understand that principle now after owning something in a small town… But I tell him what I paid per door, and it’s like “Oh, okay…” $18,000-$19,000 a door. He’s like, “Oh, okay, I understand why you bought it now.”

Joe Fairless: Is the ROI worth the effort? Because it sounds like you’re having to spend a lot more time on it compared to buying something in a larger city in the future, that you might not have much time on, but might make as much?

Dave Childers: Yeah, I think we have three vacant right now out of 56, so we’re to a point now. If we can get six months under our belt on that one, there’s definitely a play to refinance, pull all of our capital back out, get good Freddie Mac financing on it and not have any cash on the deal. So that’s the play on that one, and cross my fingers, we’re six months away from that happening.

Joe Fairless: When you look at a deal, what are some of the things that you look for before you say “Okay, yeah, this is the type of deal I want.”

Dave Childers: Physically, I wanna make sure it’s a property that I would actually want to own and buy, and probably has the physical characteristics. Then, just like anybody else, I’ve got a cap rate that I’m kind of shooting for, but I wanna see an upside to it, I wanna see where I can go in there and add my talent and add value to it and bring the value up.

Joe Fairless: What’s the cap rate that you’re looking for?

Dave Childers: Man, it’s changing these days… [laughs] It used to be if we could find something in that 8, but now I’m saying probably if we could find stuff in the 7-cap. But you know, that’s such a… I get – just like you probably do – packages from brokers all the time, and they tout it as an 8-cap, and then you start digging into it and it’s nowhere near that. The expenses are off, the income is off… They’ve just played around with the numbers to get a cap rate that they’re looking for.

So instantaneously, when I get these packages, I go straight to the expense line and figure out per door what they’re saying it’s running at. If I see a $1,800, $1,200 expense rate [unintelligible [00:14:33].04] impossible and unrealistic.

Joe Fairless: What is possible and more realistic?

Dave Childers: $3,500, $4,000/door annual expense rate, I’d say. It depends… It depends on what kind of amenities you have or don’t have, if it’s an older property versus a newer property… Something I’ve learned in Florida is the insurance down there is probably twice as what it is here in the middle Tennessee area.

Joe Fairless: For good reason.

Dave Childers: …with the wind. Yeah. And good reason — it just jumped up on me quite a bit because of all the hurricanes, so that’s something to think about… When you go into these markets, I think you’ve gotta hedge against those things that you don’t know.

Joe Fairless: How did you have the comfort level to purchase in Pensacola when you live in Nashville?

Dave Childers: I think after doing this for 15 years I’ve just gained that comfort level that I’m confident in my knowledge of what I’m doing to know that — again, back to finding a good management company and a  good manager, that you know is gonna handle it and you don’t have to be there very often… That probably gives you the biggest comfort level.

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

Dave Childers: Oh, man… I think a lot of people I’ve helped through the brokerage firm – they’re so fearful of making a mistake that they never do it, and they look back and kind of shake their head and wish they would have either done it, or done more. I’ve been a part in all these real estate investment clubs, and I talk to the same people all the time, and it’s like “You just need to buy a property.” Even if it fails, you just need to go buy something, because of the experience that you’ll gain just from owning something.

Joe Fairless: When you look at your portfolio, what’s the best performing investment and what’s the worst?

Dave Childers: The one I’ve bought the first time, the 114-unit, it’s the best-performing. I’ve got HUD debt on it, fixed for 35 years, and I’ve got a great property management company. It’s in middle Tennessee, the rents are going up, physically the property is in great condition… HUD makes you put a lot of money away for reserves, so it’s got plenty of capital there to do whatever they want to make the property nicer… That’s probably the best one.

The worst one is probably the one I told you about, the 56-unit… And it’s getting there. If you look at a portfolio, you have some that are right where you want them, some that might be 60 or 90 days, and then you’re just kind of working a system. Then there’s the one that you’re just buying, that you’re just starting the whole process with.

Back to the portfolio, last year I went through and kind of cleaned up — I had some smaller properties, and I looked at them on a time basis… I’m spending an hour a week on this two-unit property that I own a third of. We need to sell that one and get it off, and focus on the bigger stuff. I went through last year and refinanced pretty much everything I own, sold off the things that were taking a lot of my time, moved that capital into bigger projects and just sat back and kind of redid everything that I owned. Some of it I had owned — one of them was the first property I ever bought with my partners 12 or 13 years ago. I didn’t wanna sell it because it was my first property, but then just looking at the time I spend on it, it was a time waste for me by this point.

Joe Fairless: Did you just sell your ownership, or did the whole property sell?

Dave Childers: The whole property sold. We just decided to dissolve the partnership. There was three of us in there, and kind of back to where I started, my job was to manage those properties. The guys put the money up, we all got the loans for the six — they’re just six duplexes, probably a million dollar portfolio… But there was a lot of equity, too. There was a couple hundred thousand dollars worth of equity that we had in those. All of us kind of wanted to go our separate ways and break that up.

For me, I was managing them and spending all this time, and again, back to only owning a third of this $150,000 property, it didn’t make sense for me anymore.

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

Dave Childers: Oh, man… Okay, I guess.

Joe Fairless: I think you’re ready. First though, a quick word from our Best Ever partners.

Break: [00:18:28].00] to [00:19:15].19]

Joe Fairless: Best ever book you’ve read?

Dave Childers: Rich Dad, Poor Dad.

Joe Fairless: Best ever deal you’ve done, not your first, not your last, and that we haven’t already talked about?

Dave Childers: A 14-unit deal I bought in downtown Nashville that was a complete wreck, and I increased the value by like 700k in a year.

Joe Fairless: How did you increase the value?

Dave Childers: Renovated every unit, doubled the rents. I took a big chance on it… The area became hip and trendy, and rents for four, and now they’re $1,000 a month.

Joe Fairless: Wow.

Dave Childers: And I’ve continued to dump money into it. I’ve just reinvested to where it’s now a nice little deal for me.

Joe Fairless: What’s a mistake you’ve made on a transaction that we haven’t talked about already?

Dave Childers: Partnering with the wrong people. Finding the right people to get on the bus with you, depending on who you are and what you need – if you need silent partners, if you need money partners… Making sure you’re finding the right money partners to do deals with you.

Joe Fairless: Knowing what you know now, how would you qualify a new potential partnership?

Dave Childers: Clarify that… What exactly are you asking?

Joe Fairless: You said “finding the right people to get on the bus with you”, so find the right partners. Knowing all that you know now, if you were presented a new partnership opportunity, how would you qualify that individual?

Dave Childers: I buy deals to hold long-term. I’m not one of these fix and flip and get out of it… I wanna be an old man and own lots of doors, and collect doors, and I would wanna make sure that you’re in that same category. I don’t want you calling me in six months needing your $100,000 back. So I’d say I wanna make sure that you’re plenty liquid; you’re not giving me all your liquidity, and you’re in it for the long-term.

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

Dave Childers: Oh, man… So I tell people I’m a redneck on the weekends; we race four-wheelers all over the Eastern United States, from New York to Florida. Two years ago I started a youth summer camp for four-wheeler racing kids. We have 50-60 kids that come and race four-wheelers with us and train with one of the best racers in the entire world for a whole week. I spend a lot of time all year planning for that. I’ve got a farm that we’ve kind of created as a riding facility for youth riders as well.

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

Dave Childers: My e-mail is Dave@RIA-INC.com. I’ve done this on every podcast. And then my cell phone number is 615-479-8737. It’s funny how I’ve done these podcasts and they’re California-based, and I talked to one guy, he’s a postal worker right around the corner from my office, and he heard me on the podcast… So call me. If you’re in the area, if you’ve got deals, you’re a broker, anywhere within a day’s drive of Nashville, I’m looking. I didn’t even talk about that – we’ve got a property management division that’s got about 1,500 doors under management around Nashville. We’d love more management business.

We’re just trying to get in it, and stay in it, and mix it up with people. Any way that we can network with people, we’d love to.

Joe Fairless: Dave, thank you for being on the show and talking about your career, your 86 units in Pensacola, walking us through how you approach that trip when you go down there to go visit, walking the vacants, things you look for from a curb appeal standpoint, and then also some of the expenses – $1,500/unit to convert from aluminum wiring. Then the approach that you take with partners, too – making sure that your long-term visions are aligned.

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

Dave Childers: Thanks, Joe.

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JF905: Flying Planes, Flipping Houses, and Hiring the Right People

Too busy doing what you don’t want to do, or the tedious things that need to be done? Hire someone! Today’s guest did just that and was able to close more transactions and remain an Air Force pilot.

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Bill Allen Real Estate Background:

– Owner of Blackjack Real Estate, LLC
– Active duty Navy pilot who fell into REI due to his constant military moves
– In 2016 he flipped 13 houses and wholesaled 54 in Pensacola, FL with plans to double those numbers in 2017
– While still working full time he has turned to systems and building a business
– He is now expanding to Chattanooga TN
– Based in Nashville, Tennessee
– Say hi to him at http://www.blackjackre.com
– Best Ever Book: Traction

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Best Ever Show Real Estate Advice from experts

JF722: 23-Year-Old Builds 26 Homes and How He Funds Million Dollar Deals

Hold on to your hat, he’s 23 and he is putting together million dollar deals constructing 26 brand new homes. He’s young and highly driven, and he’s rocking the Nashville, Tennessee market. Hear how he found funding for this project and all other deals.

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Devan McClish Real Estate Background:

–  Owner of McClish Properties
–  Completed over 60 deals
–  23 year old currently developing several homes currently
–  Based in Nashville, Tennessee
–  Say hi at Facebook Devan McClish
–  Best Ever Book The Intelligent Investor

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