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

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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

 


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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, 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.

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

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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

 


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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, 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.

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

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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!

 

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“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.

Dave Childers and Joe Fairless

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

Listen to the Episode Below (23:26)
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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.

Joe Fairless's real estate podcast

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

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– Active duty Navy pilot who fell into REI due to his constant military moves
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– Based in Nashville, Tennessee
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– Best Ever Book: Traction

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

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