JF1448: From Single Family Flips To A 40 Unit Syndication with Justin Fraser

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Justin has been an investor for 4 years, but only recently went away from flipping homes. He decided he wanted to move into large apartment communities, and did it! If you want to do the same thing, hear what he did to complete his first syndication, so that you can do the same! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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

With us today, Justin Fraser. How are you doing, Justin?

Justin Fraser: Hey, Joe. I’m doing great; really happy to be here.

Joe Fairless: Well, I am glad to have you on the show, and nice that you are happy to be here. Justin has been a real estate investor since 2014. In May of 2018 he closed on  his first apartment syndication, raising over $600,000 for that deal.

He’s based in Milltown, New Jersey, and with that being said, Justin, will you give the Best Ever listeners a little bit more about your background and your current focus?

Justin Fraser: Sure. I started with a single-family rental, and got the bug of real estate investing from there. I formed a company, flipped  a house, bought on a few more rental properties, and decided that it was too slow, honestly… So I decided that I wanted to elevate my game and my portfolio, and get into syndication. So we closed on this 40-unit this past May, and that’s my sole focus now – looking for the next property.

Joe Fairless: So you’ve got a 40-unit that you closed on… How much did you make on that 40-unit so far?

Justin Fraser: What do you mean?

Joe Fairless: How much have you made? What was your acquisition fee?

Justin Fraser: Oh, the acquisition fee was around 40k or so, 2% of purchase price, and I did have some other team members that I split that with.

Joe Fairless: Got it. And how did you find the other team members and what were their roles?

Justin Fraser: I had a mentor – you know Matt Faircloth; he is my mentor on this project, and really in all things… He guided me through this project, and in exchange gets a piece of the equity and the acquisition fee… But incredible, because he lends us credibility and experience to the project, so… Happy to have him aboard.

Also, another team member who helped to qualify for the loan. He and I negotiated he was gonna help personally guarantee the loan in addition to me, so he took part of the acquisition fee for that as well.

Joe Fairless: Cool. Well, you do what you need to do to get the first couple deals done, right? And then you figure out how to position things in the future… The 40-unit – you raised $600,000 for it… Where did that money come from?

Justin Fraser: That money came from my network. I run a REIA meeting in Princeton, New Jersey. I’m connected with a lot of investors, but not just real estate investors. It came from neighbors, family members, friends… Anyone and everyone that I could speak to about this deal, they heard about it… Probably to the point of annoying them, but that’s okay. I’m happy to annoy you with stories of the property I’m gonna purchase… And I even have my boss involved on this deal.

Joe Fairless: Wow. You are all-in, my friend.

Justin Fraser: Absolutely.

Joe Fairless: Where do you work — or no, we don’t need to know the company, but…

Justin Fraser: I work for a software company; I manage software projects.

Joe Fairless: Alright, you do software.

Justin Fraser: Yeah.

Joe Fairless: What’s your boss say about you doing this thing on the side?

Justin Fraser: He’s so encouraging… It’s really cool. He owns a few properties as well, so he gets it. We have a very great policy where they’re flexible with me at work, and… I take care of my job first; I have to, because that’s the income and that’s how I help qualify for this loan… And then the real estate is a night, weekend, and every minute in between type job.

Joe Fairless: Do you work from home?

Justin Fraser: I work from home about one or two days a week.

Joe Fairless: Okay. So that $600,000 came from any and everyone you came across – from the REIA, the neighbors, the family, the friends… Now, looking at it a bit more closely, the 600k – how much of it was from the REIA?

Justin Fraser: I would say more than half. Over 350k or so.

Joe Fairless: About 350k or so, okay. And how is the remaining 250k or so broken out?

Justin Fraser: I don’t wanna get into specifics with the individual people, but…

Joe Fairless: I’m not asking for people’s names; I’m wondering like family, or friends, or neighbors… Just categories.

Justin Fraser: No, just a little bit — one extended family members, a good chunk from a neighbor, and the rest just personal network, other people that I’ve known in life.

Joe Fairless: Okay, cool. How did you present it at the REIA?

Justin Fraser: Personal connections to people, people that I have already had a relationship with, and just started telling everyone, and re-telling — because a lot of people knew me already, so I had to essentially reintroduce myself to them and say, “Hey, (without standing up in front and advertising, or anything) I’ve got this cool property project going on, this cool property… Let’s talk.” A lot of people showed a lot of interest. But a lot of the investors have their own projects going on, and their funds are tied up in their own flips… So where I thought I might be able to just raise the whole thing through my network there, I didn’t quite get as much, because people have — of course, if you’re an investor, you’ve got money tied up in other projects.

Joe Fairless: And then following up on the last thing that you mentioned, the neighbor – what is their social security number?

Justin Fraser: [laughs]

Joe Fairless: Just kidding. Alright, so the REIA that you started – when did you start the REIA?

Justin Fraser: It’s something that had been in existence for a while, and I took over… So I took over managing this meeting over a year ago.

Joe Fairless: How did you come to take it over?

Justin Fraser: I started volunteering. About three years ago I started volunteering at this REIA. I was getting a lot of value out of it, and so I sat at the front desk and checked people in, and did sort of the grunt work of the organization, and just started making connections with people like Matt. Actually, Matt was running this meeting before I was, so… Making connections with the people that I knew were going to help my business in the future… By taking some grunt work off their plate and doing the things that they didn’t wanna do, like the paperwork and the check-in process.

Then an opportunity came up to help out in a larger role, doing some planning, and then eventually the opportunity came up to take over.

Joe Fairless: How did the opportunity come up to take over?

Justin Fraser: Well, I think that the person that was running it beforehand got really busy and had other priorities… So because I was project manager, as I told you, running an event is not a problem, and so I was there; I was the next person that people thought of, because I was always there helping out.

It’s a bit of work as well, but I volunteered because I see the long-term benefit in being the person at the front of the room, being the person that people see as the person that knows what they’re talking about.

Joe Fairless: Big less there for a lot of investors who are looking to do larger deals or raise private capital for their fix and flips, or whatever type of venture, that’s for sure.

Okay, so that’s how you got to 600k. It’s a 40-unit… What’s the business plan?

Justin Fraser: We are putting about $300,000 into renovating. Right now some of the units are as low as $150 below market, but the property is built in 1986, and most of the units have not been touched since… They are 32 years or older, so they all need kitchens, bathrooms, floors. The previous owner did a little bit of renovation on 10 of the units, so I would say 30 or so need the full renovation. Also, exterior work; we’ve gotta clean up the outside of the property.

It’s a C property in a C area, but it’s in an area that has rent growth, job growth, and you can actually see the path of progress coming down the road, about a quarter mile away, with a bunch of new commercial development.

So we’re able to capitalize on hopefully that, but that’s not in the proforma. The proforma is about getting up to market right now, and if the whole market elevates after that, that’s just a bonus for us.

Joe Fairless: Where is it located?

Justin Fraser: Portsmouth, Virginia.

Joe Fairless: Portsmouth, Virginia… How did you come across the property?

Justin Fraser: I came across this property through a broker… It’s a broker that I had met looking at a property a year ago. I had looked at some things that he had available, I didn’t love them, but told them “This is the type of deal I’m looking for”, I followed up, drove back down anytime he had something that he thought met my criteria. I just stayed in touch with him, and I did this with a lot of brokers in a lot of towns.

Eventually, this guy called me back and said that the seller had just listed with them, they hadn’t done their full marketing package yet, but it was pretty much exactly the type of deal that I was looking for. So he called on Thursday, and I was there on Monday, and just jumped on it right away, because it was exactly what I’d been telling him for 6+ months that I wanted to do.

Joe Fairless: What were you telling him for 6+ months that you wanted to buy?

Justin Fraser: I was looking for a 50-unit or more, so he missed the mark there, but I’m okay with that… [laughs] In the 2-3 million dollar range, where we could add value. I wanted a property that needed work. I didn’t want something that was turnkey, and I also didn’t want something that was in total shambles; I wasn’t doing a new construction, or anything like that.

I wanted it in an area that I thought made sense, in the Portsmouth, Norfolk – that whole area I really like. And we talked about price per unit and everything else, so when this deal came up, it hit pretty much every box.

Joe Fairless: How much did you buy it for?

Justin Fraser: 2,25 million.

Joe Fairless: 2,25 million. Okay, got it. And you’re putting in 300k, you’re looking to get a $150 rent increase… So that’s $7,500 per unit, so that’s a 24% return on your renovations, and you’re looking to exit in what period of time?

Justin Fraser: We have a five-year note right now… So I’d like to refinance; I expect that we should be able to get between 80%-100% of our investors’ money back when we refinance in five years.

Joe Fairless: Is that what you projected to them?

Justin Fraser: That is, yeah.

Joe Fairless: Really? You projected that you’re gonna get 80%-100% of their money back?

Justin Fraser: Absolutely.

Joe Fairless: In how many years?

Justin Fraser: In five.

Joe Fairless: Oh, in five. Sorry, I was thinking in two, on a refinance.

Justin Fraser: It’s a five-year note right now, so we’ll hold for the five years, do our renovations, and then do a refinance in five years.

Joe Fairless: Okay, I’m with you. And the challenge that you’ve come across – that you weren’t expecting, since you’ve closed about three months ago – is what?

Justin Fraser: Every day there’s a challenge, of course. We’ve got a good property management team and contracting team doing their work… We’ve renovated a few units and we are showing  them, but people are not applying.

I don’t think we’re over-priced on the rent, but I think that the exterior of the property — I think I undervalued how quickly we needed to do that renovation. There’s trash, it’s a bit of a mess, there’s trees over-growing… We didn’t have big lighting at night, so it was just dark… I did not expect that, so we’re accelerating the exterior renovation work, so that we can make it a cleaner, better place to live, and then we expect we’ll be able to fill those units.

Joe Fairless: How did you pick your property management company?

Justin Fraser: I started with Bigger Pockets, asking for recommendations from other people… And then back in last July, when I started looking at properties, I brought each property management company out to a different property, and had them walk through the properties with me… It was basically a walking interview, and I would get their feedback and opinion on the property; I wanted their opinion on how they were going to manage it, where they thought we could trim expenses… They would look at the T-12’s and give me feedback on that… Essentially, it’s like an extended interview for each property manager at a different property.

Joe Fairless: How many did you do that with?

Justin Fraser: Three.

Joe Fairless: And what were some answers that you got to your questions with one you didn’t hire?

Justin Fraser: Well, no one really had bad answers. I didn’t find anything that was a total deal-breaker. But the team that I ended up picking, they had 350 units or so, so this 40-unit would be a significant portion, whereas some of the others that I had interviewed had thousands under management, and I wanted to feel like I am important, and I wanted to feel like I could get that personal level of attention, because I know that I’m gonna have a lot of questions and I know I’m gonna require lots of updates because of my first time through… So that’s ultimately why I picked this company.

Joe Fairless: What was the largest property that they managed within the 350 at the time?

Justin Fraser: 24, I believe.

Joe Fairless: What gave you the confidence that they could manage a property almost twice as large as anything they have ever managed before?

Justin Fraser: I spoke to a few of their current owners, and the people that they’re managing for, and a lot of it for me is personal connection and conversation and plans around this, and I feel like they are a company that is set up for growth, and I like their style, and I’ve really felt a strong connection with them. And honestly, like everything, we’ll try it out, and if something doesn’t work out, then we’ll do what’s best for the business and make a change, but… I feel very good about this decision.

Joe Fairless: On the challenge that you’re working through a solution on now – they’re showing, but the residents aren’t applying… How much of a factor of that do you attribute to the property management company?

Justin Fraser: That’s a great question. I think the renovations need to happen first. I think that the property itself is just not there. Maybe another management company could bring some tenants in at a lower rate, or maybe slack on the qualifications, but we’re not giving in on credit scores or income requirements… We’re staying firm to that.

We just have to bring our product up to something [unintelligible [00:14:18].18] will be interested in renting out.

Joe Fairless: Is that something that the management company says “Hey, Justin, we’re showing, but these potential residents aren’t applying, so we recommend XYZ”, or are you seeing the numbers and you’re like “Wait a second everyone, what’s going on? Should we do this or should we do this?”

Justin Fraser: It’s an open dialog. We meet every Friday and talk about everything that’s happening, and we have conversations more frequently if needed. Together we’ve been seeing it, and I’ve been at the property every 3-4 weeks, so we have a good working relationship… So it’s just a natural question, because units have been sitting there for a few weeks, so that’s just something that we’ve been focusing on and talking about together.

Joe Fairless: How do you structure those Friday conversations with your management company?

I actually have the manager and the contractor on at the same time, because there’s so much happening in both aspects… So we talk about the tenants that have not paid, or problem-tenants first. When we closed at the end of may, we had a few tenants that did not pay June’s rent. It’s natural, I guess, to expect. They’re testing us.

So we finally just have gotten through our eviction and got a few of those units back. Two months, not too bad on the timeline there. So we talk about status of tenants, any problems that they’re having, anything that I need to know about. We talk about the current plans for renovation, we talk about anything going on with the area, anything that I’m not seeing… I get news alerts, and weather alerts and anything like that, but they’re keeping me up to date as if I’m there, so I know a full picture about the property.

Joe Fairless: A lot of people want to scale. You started with single-family rentals, you flipped a house, as you mentioned, you got a few more rentals, and then boom, you went to a 40-unit. You raised more than half a million dollars. What do you think is it about your or your personality or your approach that got you to the next level, whereas others don’t get there, they just think about it?

Justin Fraser: I think it comes down to making a plan and taking action. I manage projects every day of my life, for my day job, and this is another massive project, but the difference here is that it is tied to my Why and my reason for wanting to do it; it ties back to my family and my wife and my son… So I just have this drive where I knew that I need to scale up because of the life that I wanna be able to provide for my son and my wife, and that just fuels me.

In those days where you’re stressed and just having a terrible day and you think the deal’s gonna fall apart – we’ve had many of those… That’s what keeps me going and that’s what gets me back on the phone, or following up, or doing that paperwork that I had been putting off… Because I tie it directly – if I do this, then I will get the life that I wanna have for my family, and I just keep that at the top of my mind.

Joe Fairless: It’s beautiful. Absolutely beautiful. You mentioned there were multiple days where the deal was falling apart and you had to remind yourself… What’s a specific instance of a day when that happened? You don’t have to tell me the day obviously, but what specifically happened on a particular day where the deal felt like it was falling apart?

Justin Fraser: I was almost done with my capital raise and almost done with the study period, where the deposit was about to become non-refundable… And I had an investor call me  – he was in for $100,000; he had not wired his money yet, but he had verbally committed, and he had a project that was going sideways and he just was not feeling comfortable putting money into this deal, because he thought he might need it for something else…

So I was 4-5 days away from my deposit becoming non-refundable, and I was like “Am I even gonna be able to raise this money anymore?” Everything was crashing down and I remember just sitting there, my head was in my hands, I’m like “What am I going to do?” It was really tough, because I was at the end of all my extensions. I’d gone through everything, and I knew the seller wasn’t happy about all the extensions I had used, but I went back to him and I said “I need another one that’s not in our contract…”

Joe Fairless: [laughs]

Justin Fraser: …which he did not take very well. I had to negotiate and I gave him an extra percent of the purchase price; we had originally been under contract for less, and I added a percent in exchange for a 30-day window.

Joe Fairless: How much was that?

Justin Fraser: 18k, or something like that.

Joe Fairless: 18k. And how much more time did you have?

Justin Fraser: I got an extra 30 days, and that’s all I needed. I just needed the deposits to not go non-refundable. It was a lot of money that I didn’t wanna put on the line if I wasn’t 100% sure I was going to be able to raise the rest of the raise… It was incredibly stressful, but all I needed was that 30 days. I had other people lined up, they just needed a little more time to get over that finish line.

Joe Fairless: Wow… It’s such a good story. I’m so grateful that you’re on the show… What is your best real estate investing advice ever?

Justin Fraser: Great question… I think my advice is to have the people around you that can answer the questions that you have… Because no one knows everything. If you can establish a network of people who can make connections with you or answer those questions when you’re stressing out late at night or whatever it is, you’ll be able to get through it.

Joe Fairless: I completely agree, especially in this business… With real estate investing even more so, and apartment syndications; there’s so many nuances and it’s so important to have some people in your corner.

Justin Fraser: We’re gonna do a lightning round… Are you ready for the Best Ever Lightning Round? First though, a quick word from our Best Ever partners.

Break: [[00:20:00].10] to [[00:21:04].11]

Joe Fairless: Okay Justin, what’s the best ever book you’ve recently read?

Justin Fraser: The Due Diligence Handbook is something I was reading right before I was doing due diligence, and that really helped me through the process.

Joe Fairless: It’s a great book.

Justin Fraser: It was very helpful as I was going through that process as a first-timer.

Joe Fairless: Best ever business decision you’ve made?

Justin Fraser: Bringing on a mentor that could give me the credibility and guidance through my syndication process.

Joe Fairless: Best ever deal you’ve done that we have not talked about already?

Justin Fraser: My very first deal. It was a single-family property, it was cheap, it was in Trenton… I’ve had a ton of problems with it, but it gave me that taste of cashflow and it gave me the excitement of real estate investing, and I’ve learned so much from it and that’s what set the foundation for everything else.

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

Justin Fraser: I’ve let tenants go way too long without payment, thinking that I could just collect their late fees, and then all of a sudden the late fees don’t come in and you’ve got months without payment, and then you’ve got an eviction, so… You can’t be too lenient with those tenants. You’ve gotta stay on top of them.

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

Justin Fraser: Help out through that REIA. I spent a lot of time helping new investors; I have a few students that I coach and just help them get their first deal. I think that everyone should be a real estate investor, and I just try to help as many people as I can do that.

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

Justin Fraser: My website, 88realestatecapital.com.

Joe Fairless: Justin, thank you so much for being on the show. I loved talking to you about your first syndication, how you raised $600,000… You were volunteering at the REIA three years ago, and  at first you were working the desk, doing some administrative stuff, then you started planning the events, and then when there was an opportunity for you to lead the REIA, you stood up and volunteered your services, and as a result, when you were looking to go larger, you brought $350,000 from that leadership position, or as a result of that leadership position and all the time you had put into it years prior. It’s certainly a lesson for many investors.

I mention all the time, if you have time to attend a meetup, then you have time to create one. In your case, you attended but then you volunteered your time and maximized the amount of value that you’d get from attending… So either way, you either create one or you just volunteer – you maximize while you’re there.

Then some challenges you’ve had with the 40-unit, solutions that you have in place, and challenges you had getting the deal to the finish line with the equity raise, and going back to your reason why… And I can tell when you talk about your reason why, you say it with conviction, that’s for sure, and that’s the type of conviction that you had whenever you were going through the process to get this deal done… Really cool to hear this.

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

Justin Fraser: Thanks a lot, Joe.

JF1432: Need To Raise Private Capital? He’ll Show You How! #SituationSaturday With Matt Faircloth

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Finding money and capital is obviously a big deal as real estate investors. Deals and money are the two big needs that investors have. In today’s economy, if you don’t have a system in place or a team to take care of those for you, good luck beating out the investors that do. Today Matt will tell us why raising private money is important and how we can do it ourselves. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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

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, where we’re gonna talk about a particular situation, so that when you come across it or if you come across it, or perhaps you’re in it right now, you’ll know how to handle it.

This particular situation is if you are needing to raise private capital, our guest Matt Faircloth – you recognize his name, he’s been on the show multiple times before – just released a book called Raising Private Capital, and he’s gonna talk to us about how to do that from start to finish, and some of the nuances of it. How are you doing, Matt?

Matt Faircloth: I am awesome, Joe. It is such an honor to be here, thank you for having me.

Joe Fairless: Grateful that you are on the show again. Just as a refresher, Best Ever listeners, Matt is the co-founder and president of the DeRosa Group. Under Matt’s leadership, DeRosa has completed over 30 million buckaroos in real estate transactions involving private capital. As I mentioned, he’s the co-author of a new book coming that was just released, Raising Private Capital.

He’s been interviewed on this show three times prior: episode 606, episode 616, and episode 1373. Based in Trenton, New Jersey. With that being said, how about you give just a refresher of your background so we have some context for your area of expertise in raising private capital?

Matt Faircloth: Sure, absolutely. I got started in real estate in 2005 when I quit my job. I was working for a company called Ingersoll Rand, which is a heavy equipment manufacturer… I quit my job with them in 2005 and started doing whatever we’d call smaller real estate transactions; I lived in a rental before I quit my job, like a house-hack, and then just did smaller flips and just grew my way up into larger real estate.

I bought a duplex in Philadelphia, sold it, then transitioned into two four-unit apartment buildings in Ewing, New Jersey, and then slowly expanded that portfolio of two four-units and bought several more four-units on the block. I pretty much made it the equivalent of a 20-unit apartment complex. I just really grew up through residential landlording in the small stuff, and then grew into the larger deals.

In the downturn we ended up getting knocked on our heels (there were a lot of people that did) and we were into a lot of flips at the time, so we converted a lot of those into rentals. We did some commercial real estate transactions while the dust was settling, and then started really raising money.

As the markets started to come back in 2011, we started raising private capital, built on the track record we had from the last six years of investing in real estate, we started raising private capital from investors… So from 2011 until now, almost everything that we do involves some sort of private capital because we’ve got a lot of folks that come to us and wanna get involved.

We still do fix and flips, we still do some smaller projects, but we also do larger projects. The most recent large project was a 198-unit apartment complex in North Carolina.

Joe Fairless: Cool. So you’ve been involved in raising private capital on many projects. For a Best Ever listener who has not raised private capital and is not interested in learning about raising private capital – for whatever reason – why is it important in your opinion to know about how to raise private capital?

Matt Faircloth: Well, I think that raising private money, somehow or another, first of all exposes us as investors, as the action-takers on these deals. In the book that I wrote I call it deal-provider, because we go out and we find the deal and we bring it to the folks who put the money into the deal, called the cash-provider… So I talk about the deal-providers and the cash-providers.

Private capital is important to a deal provider because it exposes us to larger deals. It allows us to do bigger projects. I closed on a 198-unit deal with other people’s money and I was able to get ownership for myself and I was able to give them exposure to the profitability of that deal also, which is another reason why private capital is important – because it gives people in my network or that approach me in my circles that wanna invest, it gives them access to a completely different investment, that’s different than what can be found on Wall-Street, it’s different than what can be found through them going out and maybe doing their own deals, or going out and buying smaller assets… They get to benefit from the things that show up on larger assets; so private capital exposes both parties, the deal-provider and the cash-provider to the benefits of larger assets.

Joe Fairless: But why does that matter? Is it that larger deals make you more money? Because otherwise, if it’s a larger deal – okay, bragging rights; that’s cool… But what’s the point of going larger or bring in new investors if it doesn’t make you actually more money to go through that whole process?

Matt Faircloth: It enables us to pound our chests even more, Joe… That’s what it does.

Joe Fairless: [laughs]

Matt Faircloth: [unintelligible [00:05:54].19] absolutely just shout my name from the mountaintop…? Absolutely not. The larger deals have benefits to them, such as – I’ll give just a few examples, and I think a lot of your listeners know that it’s specifically apartment buildings; that’s what we’re talking about, and that’s what I focus on, and I know it’s what your company does as well, and perhaps a lot of your listeners do, too.

Apartment buildings specifically have specific benefits. The deal we bought in North Carolina – I’ll just keep using that as an example, because it’s one that we’ve just finished… That property has a four-person payroll allocation, meaning that building has four employees whose sole purpose in their career is to maintain that building. It’s got two maintenance guys and two office staff… Whereas if we had bought a smaller asset, the property manager may be torn between managing my property, or maybe is over-stretched, it’s managing other assets they may have.

Larger deals allow us to normalize expenses, and also there’s all kinds of other benefits we don’t wanna get into today about forced appreciation, meaning I can make the value of the building go up through making some improvements, I can increase rents to make the value of the building go up and all that… So all those scalabilities that show up on larger assets benefit both parties, so that’s why. It’s because the economies work better on larger deals, for many reasons.

Joe Fairless: You’re doing some small deals on the fix and flip stuff still, and you have in the past, and you’re doing large deals like the one that you just mentioned in North Carolina… What are the differences in raising money on a small deal versus a large deal?

Matt Faircloth: Well, we have people that do self-directed IRA investments in large deals, and a lot of people do that with self-directed IRA money; that said, the self-directed IRA, because of the way it operates, is actually a better short-term vehicle for investing. So we offer short-term investment assets. If you wanna get into a deal that lasts six months, or a deal that lasts a year, you can do that and then take all the proceeds that you make – let’s say somebody puts $100,000 into a fix and flip – I pay them 10% interest, it takes me six months to complete the deal, so they make half of 10%… For six months, they make $5,000. If that was not a self-directed IRA, if that was out of their own cash, they’d have to pay tax on that 5k and then they could do something with it, or allocate for taxes, or whatever.

Because it’s a self-directed IRA, they can take all those proceeds and roll them back into another project and compound the interest. So in the interest of scaling someone’s retirement plan up on an exponential curve very quickly, short-term projects work really well.

So that’s one of the reasons we provide those as an option for those who wanna invest with us. Also, just over the years of being in the business, we’ve never been really a one-trick pony; we’ve always been in a lot of different things. I built up a section of my company that’s dedicated to fix and flips, so we can do fix and flips, and also with people that approach us with IRAs, I explain to them what I’ve just explained to you about what I consider a short-term loan.

On the other side, if somebody has cash, there’s major tax benefits they get from holding a share of an apartment building that they get by just investing in their own name, or just in cash in the property.

Joe Fairless: What you’ve just described is short-term projects, fix and flips, versus long-term projects. Now, separate from that, what are the differences between bringing private investors in a smaller deal, versus a larger deal?

Matt Faircloth: Well, there’s different documents that you have to do, different conversations that you have to have, and it really has to do, Joe, with really seeking to understand — when an investor calls a potential deal provider, or when an investor calls one of your listeners and says “Hey listen, I have some extra money I’d like to put to work in real estate. Can you help me?”

Instead of automatically puking on them and telling them about deals you have, really understanding that investor’s goals, knowing when retirement time looks like for them, and getting to really know where they wanna go financially, are they trying to plan for college, are they trying to buy a vacation home? And everything like that.

I’ve got one guy that invests with me whose goal in the next five years is just to move back to his home country of Argentina, and wants to make enough money investing through his real estate assets that he can live off of his assets when he’s in Argentina. So now that I understand that, I have a better short of helping him get there. It really has to do with understanding their goals… And then the deal, and then the documentation and the legal work to protect them, and everything like that. But first and foremost, understanding where they come from, where they’re going, and then I can offer them a few things that we do that might plug into their goal set.

Joe Fairless: When does it not make sense to do a syndication and instead you do a joint venture?

Matt Faircloth: Well, I had a long talk with my SEC attorney [unintelligible [00:10:29].28] The deal has to qualify as a security, and there’s four things you have to satisfy to be a security; the biggest one is that it has to be invested in a common enterprise… Meaning if Joe Fairless lends Matt Faircloth money, we are not in a common enterprise; you are actually an adversary of mine. We’re not on the same side of the deal. We don’t win together. And believe it or not — you would think that the lender would win if he just gets his interest back, but the lender has certain rights that are not in the borrower’s best interest, such as foreclosure, such as taking the property back, such as putting a lien on the property… All of these things.

So a loan in itself does not meet one of the criteria for the SEC as defining it as a security, so right there, if you loan me money individually, then that’s not a security, that’s not an SEC activity.

There’s other things out there that have to do with passive investments, meaning that the investors actually have involvement in the deal, or they are 100% passive, with their hands off, and not doing anything… But the deal has to meet all four of those of prongs which are described in the book; the biggest one is that it has to be a common enterprise, meaning you’ve gotta be on the same side of the deal.

Joe Fairless: What about a dollar threshold where financially it does or doesn’t make sense to engage a securities attorney because the deal isn’t a certain size? Have you ever come across that?

Matt Faircloth: Yeah… When we first got started, my first equity deal was a guy who put in $50,000. This is something that I talk about further in the book, but I think that some of your listeners could get started with. We had a guy with 50k, and we took that $50,000 and we bought a couple of single-family homes with it.

Now, he was not 100% passive, and I don’t recommend that if people are gonna put that kind of money into your business… If that’s all they’re putting in, if that’s all the money you’re raising, give that investor something to do; get them to be somewhat active.

This guy was just auditing my books on a weekly conference call, just talking briefly about what we’re doing with the deal… But it allowed me to cut my teeth in equity investing, instead of trying to raise a couple of million for a big apartment deal that needed an attorney; I could do a smaller deal. So I grew up through small equity investments, and I was careful just to give those investors some type of an activity to be involved with; it precluded from being a security and an SEC-regulated activity.

To answer your question about how big does the deal need to get before the SEC attorneys get involved – I’ve rarely seen them  involved in anything below about a million bucks. That’s when it makes sense to bring them in, because of the cost of those SEC attorneys.

Joe Fairless: A million-dollar purchase price, or raise?

Matt Faircloth: A million in equity.

Joe Fairless: A million dollars in equity, got it. So the purchase price, unless you’re paying all cash, would be significantly larger than that.

Matt Faircloth: Right.

Joe Fairless: Okay. What does a securities attorney cost per hour?

Matt Faircloth: Well, unfortunately we don’t pay them by the hour; it’s probably a good thing we don’t pay them by the hour… Because anytime I’m paying a lawyer by the hour, I start looking at my watch whenever I’m talking to him on the phone; it’s like “Are you charging me? You sent me this e-mail… Are you charging me right now?”

Every SEC attorney I’ve ever dealt with gives a flat rate, and I recommend to your listeners that they try and get a flat rate out of a lawyer whatever that lawyer is doing for them. Anytime I’ve gotten charged by the hour with a lawyer, all of a sudden I end up having to fall out of my chair when I see their bill.

Joe Fairless: [laughs]

Matt Faircloth: You’re laughing because it’s happened to you, Joe.

Joe Fairless: Absolutely, yeah.

Matt Faircloth: So I’ve found their fees to be in the realm of 10k-15k, give or take…

Joe Fairless: For what?

Matt Faircloth: For syndication, to do a full SEC filing. That includes your operating agreement, your subscription agreements, investor questionnaires, paperwork to the SEC, filing docs with the states, and stuff like that. Because each state that each investor lives in also needs to get notified of your deal, as well. So it’s work, they earn it.

Joe Fairless: Absolutely. They provide a lot of value, that’s for darn sure. Your book is titled Raising Private Capital, and you walk the reader from start to finish through how to raise private capital. From a high level, walk us through the outline of how it’s structured.

Matt Faircloth: The book, you mean.

Joe Fairless: Yeah, the book. Because I assume that’s also how raising private capital would flow, so…

Matt Faircloth: Of course. In the book, I talk in the beginning about why private capital is even important, so “Why should I even think about this stuff?” And second, I talk about the pre-requisites to raising private capital, because I’m not one that subscribes to the mentality that someone should walk into this business with no experience, none of their own money, no track record, no contacts, no deals under their belt, and say “I’m gonna go forth and start raising three million dollars for people to go and invest in my apartment building deal.”

So I developed a list of prerequisites that I feel like people need to have to be successful in raising private money. That’s a whole chapter on that.

Then we talk about, as I said, the lingo of deal-provider, cash-provider. We talk about cash-providers, we talk about where to look in your own network. I firmly believe that people should start looking in their own network – going in front of family, going in front of friends, doing Facebook postings, and stuff like that… Doing whatever they can to broadcast themselves in their immediate circles to find people. You can eventually get there, but I think that people should start with people that like and trust them because they’re them, not because of their gargantuan real estate juggernauts, or anything like that.

They should start with people that just like them, because they’re Joe Smith, or whatever, because they are who they are. So we talk about how to look in your own network for money.

Then we talk about the role of the deal provider, and I present the deal provider to be really a custodian of other people’s money; in a way, you’re responsible for their capital, and I talk about what that role looks like.

We talk about how to structure deals, we talk about many different types of deals that you can get into… Of course, debt and equity, as I’ve mentioned before, but borrowing money or putting money into projects. I give a lot of case studies on small deals that I did, large deals that I did; I turn myself in and talk about deals that I did and didn’t work out too well, and times that I’ve lost money on deals – that’s in the book. So this isn’t just like a Matt Faircloth bragging session, I promise. In some ways, writing the book was therapy.

And then, in the end, we get into what I think a lot of investors don’t think of as much, which is how to unwind the deal. Investors focus a lot on “Let me find the opportunity, let me find the money. Now let me close.” But then once you’re in the deal, there’s a chapter on just maintaining the deal and maintaining communications with investors; that’s something I’ve learned a lot from you, Joe, to put the spotlight on you – on investor relations during the ownership of the deal; that’s a chapter in itself.

Then in the end we talk about, like I said, unwinding the deal, which is getting these folks the money back. I think that those two sections – unwinding the deal and the day-to-day maintenance of the deal and day-to-day maintenance of your investor database is something that many investors forget about. They’re so focused on finding the opportunity, finding the money, but that’s only like a third of the battle. There’s the other two thirds where the real success is and real longevity is created.

Joe Fairless: In terms of the cash providers looking in their own network, any practical tips for the Best Ever listeners who can then go within their own network? Assuming they qualify for raising private capital based on your prerequisites.

Matt Faircloth: Of course. Here’s what I think – too many people are gonna get stuck, like “I don’t know any millionaires” or “I’m not a member of a country club”, or “I don’t know people that are big-time real estate folks that want to pump lots of equity in.” What people don’t realize is there are cash providers that have access to quite a bit of capital that might not even know that they have it.

The biggest source that I think is an untapped source in America is retirement accounts. So if you have a listener right now that has someone that’s in their circle that used to work at a great job and now works at another job, and when they worked at job A, they had some sort of retirement program (a 401K); when they moved over to job B, that 401K is now able to get  rolled into an IRA. Once it’s an IRA, it can then get held with a self-directed IRA custodian. That custodian then allows that potential cash provider to direct that money wherever they want it to go. They can buy gold with it, they can buy stocks, if they want, they can buy mutual funds, just like they were doing with their 401K account… They can also lend money on real estate, and they can invest in partnerships. So they can direct that capital in a lot of different directions.

So what deal providers don’t realize is a lot of people job-hop these days, and the concept of someone working for one company for 30 years is pretty much gone. Most people rotate companies every 5-7 years, so it’s a matter of just looking at your Rolodex and thinking like “Yeah, uncle John and aunt Sally, and that guy I went to high school with (or whatever), they all used to work at this company. Now they’re over at this company, so they may be able to invest their retirement accounts in real estate”, and being able to show them the benefits of such.

The book talks about how to have those conversations once you’ve identified these people.

Joe Fairless: Incredibly valuable. When we talk about private money and raising private money, is there anything as it relates to that topic that we haven’t touched on during this conversation that you think we should?

Matt Faircloth: I can’t stress enough how much of a custodian the deal providers are. There’s a certain level of personal responsibility that you have, so I think that there’s a gut check that your listeners have to have before they go out and start raising money… Like, “Am I really prepared to go and take six figures from somebody and put it to work in my business, and be confident enough that I can return that capital to them safely and with a return to it?”

There’s a certain gut check, look yourself in the mirror that you’ve gotta do, which I go through in the book as well; it’s about the person you have to be to be able to do this. Again, looking at yourself in the mirror – I think everybody can do this, but about looking yourself in the mirror and making sure that you have the tools in yourself to be able to do this and feel like you’ve got the integrity and you’ve got the wherewithal to be a financial custodian for others. Once you feel that way, then you can go out and do it.

Joe Fairless: How can the Best Ever listeners buy your book and get in touch with you?

Matt Faircloth: They can find it on Amazon once it gets released there. It comes out on Bigger Pockets on July 26th. If this is after July 26th, they can go to BiggerPockets.com/store and they can get a copy of the book there. If they pick it up quickly, there is a bunch of bonus material that Bigger Pockets and I put together for the book, including an interview with my SEC attorney, including a roadmap that they can go along with as they’re reading the book to take them through their first deal… And I also wrote another eBook on doing your first apartment building deal. That’s in there, as well. Bigger Pockets even has a webinar too, that’s with just me and the folks who sign up for it if you buy the book and sign up for that, as well.

To participate in all of those things, you have to buy the book fairly soon after it comes out, so let’s say before mid-August, if you’re listening to this, then check it out; go to biggerpockets.com/privatemoneybook, or biggerpockets.com/store and pick it up. But check it out either way.

Joe Fairless: Awesome. I’m very familiar with your book, because you asked me to write the foreword in it, and I was very honored by you asking me. I checked it out, and I wrote the foreword in it…

Matt Faircloth: I’m very grateful you did it, because on a personal note, something we talk about in the book is about being a thought leader, and about being a champion for the industry that you’re in, and being a voice that kind of moves your industry forward in that; that’s something I talk about in the book… But that concept, and the seed that got planted in my head to take my YouTube page to the next level years ago came from you. You planted that seed, and now our YouTube channel has as of today about 11,000 subscribers and it had maybe like a couple hundred when you planted that seed… So I’m very grateful, and that’s the least I could do to get you, who planted a lot of the ideas that are in that book, in my head, so… It just was very fitting for you to write the foreword, so I appreciate you doing that, too.

Joe Fairless: My pleasure, and congrats on the book. Looking forward to the Best Ever listeners checking it out. Thanks again for being on the show, talking about one practical way to find cash providers in our own network – that’s self-directed IRA accounts; think about people who have job-hopped, had a good job and then went to another job… They can roll their 401K into an IRA, and that can be converted into a self-directed IRA.

Clearly, there’s gonna be some education involved there with them, but that is a goldmine for a lot of listeners who know individuals whose scenario that fits.

And then also why it’s important to know about raising private capital – well, you make more money, because you do bigger deals, and bigger deals create scalability; then you can make more money along the way, and so can your investors.

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

Matt Faircloth: Thank you, Joe!

JF1373: Friends Team Up For Real Estate Deals & A Podcast with Liz & Andresa

Listen to the Episode Below (23:01)
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Liz Faircloth and Andresa Guidelli share a mission. They want to help women invest in real estate and live the lives they should be living. Their podcast was created in that light, as well as a mastermind meeting. Today we’ll hear a lot about how to form a successful partnership like theirs, obstacles they have faced, and how they overcome some inherent potential downfalls of partnering with a friend. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Liz Faircloth & Andresa Guidelli Real Estate Backgrounds:

  • Liz
    • Co-founded DeRosa Group with husband, Matt Faircloth in 2005
    • Manages 370 units of residential and commercial assets
    • Based in Trenton, NJ
  • Andresa
    • Began investing in 2012 after reading Rich Dad, Poor Dad
    • Co-founded Corsa Home Solutions, focuses on gut renovation projects and building new construction SFH’s
    • Based in Philadelphia, PA
  • Together they host The Real Estate InvestHER Show
  • Weekly show details the journey of some of the most amazing women real estate investors
  • Say hi to them at www.therealestateinvesther.com
  • Best Ever Book: Think and Grow Rich by Napoleon Hill

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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, Liz Faircloth and Andresa Guidelli. How are you doing, Liz and Andresa?

Liz Faircloth: Great.

Andresa Guidelli: I’m doing great, thank you, Joe.

Joe Fairless: Great, I’m glad to hear that. A little bit about Andresa – she began investing in 2012 after Rich Dad, Poor Dad, co-founded Corsa Home Solutions. They focused on gut renovation projects and building new construction single-family homes. Based in Philadelphia.

And Liz co-founded DeRosa Group with her husband, Matt, in 2005. They manage 370 units of residential and commercial assets. Based in Trenton, New Jersey. With that being said, will each of you tell the Best Ever listeners a little bit more about your background and your current focus? And perhaps, Andresa, you can go first?

Andresa Guidelli: Sure, of course. As you mentioned, I started in 2012. We do full gut rehabs here in Philadelphia. We basically can save much during the rehabs. We started doing new construction a couple years ago, and we usually like to do several at the same time, so we can leverage both supply time and the price itself.

My focus right now is to manage the construction process, since I create systems that can integrate everybody that is working with me, and I can also provide service for other either local or outside state investors that are looking to have a construction manager in place, but either don’t have the time, nor the experience needed to get things done and scale the business.

Liz and I also are working on the Real Estate InvestHER community, and we’re gonna talk more about the podcast later on. We are looking to build a community for women and support and inspire them to create a financially free and balanced life.

Joe Fairless: And Liz?

Liz Faircloth: My husband and I started investing back in 2005. We bought a duplex really after obviously reading Rich Dad, Poor Dad, which many people — I think that’s the number one book that people read to get into this business. But more importantly, taking it one step further, we actually played — Robert Kiyosaki has a game out there called Cashflow. To describe it, it’s like Monopoly on steroids… But anyway, it was a great game to start getting me and my husband (my fiancée at the time) introduced to the idea of passive income, and all the different things… It’s a great board game; I recommend it to people. If they’re looking for something different to do, it’s a great, great game to get your head around the concepts that real estate investing involves.

Anyway, we got inspired by that, we took a lot of courses and got involved in educating ourselves, and then bought our first property. Then we moved to Jersey, got married, and started really investing heavily here. We’ve since extended our reach. We’re doing various projects with Andresa and her company, and we have rental properties in Pennsylvania, and now North Carolina as well.
So we’re definitely expanding our buy and hold strategy in terms of geographical areas, but we’re kind of focused on growing our multifamily portfolio, and as well doing (I call it) capital gains activities – fix and flips, as well as some new construction projects; we always have those going on as well.

Joe Fairless: The reason why we’re interviewing both of you at the same time versus individual interviews is because, like Andresa mentioned, but didn’t get into the details yet – we’ll get into it now – you two co-host the Real Estate InvestHER Show. It’s a weekly show that details the journey of some of the most amazing women in real estate. That is at therealestateinvesther.com website. You can go check that out, Best Ever listeners. And you two also partner up on rehabs, have been doing so for a couple years, and right now have three new construction deals in progress.

First, how has the partnership evolved to this point where you two decided “Okay, now we want to do a podcast and build a community together?

Liz Faircloth: Sure. I’ll start, Andresa, and you can jump in. We actually started a mastermind group, Joe, about the same time — no, actually we started that first. So we met on Bigger Pockets, Andresa and I; we kind of always supported each other, just like a lot of relationships begin. We kind of became friends first, went to each other’s kid’s birthday parties, things of that sort.

Then we got to talking, because we were just kind of sharing war stories in this business, and we said we really need to create or join into a mastermind group, and “How cool would it be to just have a great group of women to connect with?” We have nothing against men, we love men very much, but we just thought [laughter] — we love you, Joe, of course! But we just thought it would be really neat to have kind of like a women’s circle that you can kind of share not just what’s coming up in real estate investing, in the business, but also just the things that women deal with and that are unique to women, just like men have their own unique things.

So we formed this – what, three years ago, Andresa?

Andresa Guidelli: Yes. We couldn’t find one, so we formed one.

Joe Fairless: I love that.

Liz Faircloth: Yeah, which is still going on, and we really appreciate still… And then through that experience, I think Andresa you had that project that you were either gonna wholesale to us, or partner with us. That was our first project.

Andresa Guidelli: Yes, that was our first one. We had to close very quickly, it was a big project. We [unintelligible [00:06:50].06] the back of the house and the top of the house, and there were only three walls in our property… [laughter] It was cool… Our inspector came the first time, for the first inspection, he took one step in, and he’s like “I think I’m done.” I was like, “Yeah, there’s nothing else for you to see.” That was it. That property sold in 24 hours, above asking price, so it was a great project.

Joe Fairless: Wow, great starting out. With a women’s mastermind group versus a co-ed mastermind group, what specifically is the difference in terms of content?

Liz Faircloth: That’s a great question. The way it’s structured is it’s a pretty classic mastermind. I know mastermind gets thrown out a lot. I googled it and there’s so many versions of it. But this is really kind of the “Think and Grow Rich” kind of origin. In essence, we all kind of share a win in our businesses, and then we really talk about what’s coming up for us in our business, whether it’s a challenge, whether it’s an idea we wanna process, or if it’s just something we wanna share with the group and get some feedback on.

In terms of the actual content, when we look at our meetings month-to-month, I wouldn’t say there’s a huge difference from the content perspective, but I think it’s more of the way of being, Joe… I don’t know, Andresa, how you would answer this, but I would say when I connect with women and women are getting information, they tend to be a) more open, and they tend not to be as stand-off-ish, so to speak, so they’re less shy when it’s just women, in my experience… In general, of course. I’m talking super generalities. I see it in conferences – when it’s more of a women’s group, women are more open up-front about their opinions, and they’ll get more information, and they’re just a little more hesitant when there’s a lot of men, especially if it’s not an area of their expertise.

So I find that women are just a little more open, but in terms of the content itself, I would say it’s just like any other mastermind in terms of brainstorming… But it’s just the comfort level, I think.

Joe Fairless: What would you say, Andresa?

Andresa Guidelli: I tend to agree with Liz. I will add that I’m a big believer that you are the average of the five people – or six, I’m not sure what the number is – that you surround yourself with, so when we were building this mastermind, we hand-selected other ladies around the country that had bigger goals and even bigger values, and we connected with them. It’s an extremely solid group, and I can name the benefits of being in a mastermind group.

The content – we talk about things that are not working; sometimes we don’t wanna talk about it, but that’s exactly why we have to talk about it… Because either somebody went through the same thing, or knows somebody that did, and can give me exactly what I need to do. It’s not a chit-chat. We are not there to chit-chat and just give ourselves opinions. There are a lot of questions… Because sometimes during the questioning process, that answer will emerge from ourselves. We come to the conclusion that we already know the answer or how to get that result.

And there’s also accountability. We are very solid, and we make commitments to each other to take actions, besides an excuse that we might have or a fear that might occur… So it helped us to take our businesses to the next level, definitely.

Joe Fairless: Okay. The mastermind group, based on how you just described – it’s not a local meetup… Or at least I don’t think it is, based on what you’ve just said. It’s national, therefore it sounds like it’s a phone call, versus in-person. Is that correct?

Andresa Guidelli: That’s correct. All the ladies are in different states, so we meet once a month, on a Monday night, for two hours on Skype, and we discuss different subjects.

Joe Fairless: And is everyone on video, or is it just audio?

Andresa Guidelli: No, we are on video, too.

Joe Fairless: Okay. And how many ladies are on the call at once?

Andresa Guidelli: Six, total.

Joe Fairless: Okay. And help me with technology, what that looks like… Are you able to see the other five individuals’ faces?

Andresa Guidelli: Yes, we are. Everybody is — even one of our members, April Crossley, she was traveling in her RV for I think two months, and she was in Arizona, changing states every time that we spoke to her, and she was still able to make it happen. So sometimes they are on their phones, but still, Skype works very well, it’s free, and it’s been working for the past three years, so we’re continuing.

Joe Fairless: So when someone says the following: “I wanna start a podcast/meetup, and I know a friend or I know someone who I met on Bigger Pockets, and I’ve discussed with him/her starting a meetup or a podcast. Do you think that sounds like a good idea?” My response is always no, and the reason is because you don’t want your platform to be dependent on someone else’s priorities, someone else’s schedule, someone else isn’t prioritizing as much as you are… And you want to be able to have the show not be dependent of someone else. What would you two say to that?

Liz Faircloth: It’s a great question. In a lot of ways, when Andresa and I got together and we would be kind of sharing what’s coming up for us – we had a strong relationship… This podcast is not about us, it’s about the women we’re serving. When we talked and we had coffee, I just said “We are dealing with young children, or aging parents, and just the life of balancing it all. Wanting to be financially free, and grow your wealth, but also just be same and not be nutsy all the time in your life.

When we chatted about it, we said, what if we put together a community – and obviously, start with a podcast – of helping other women do the same? So our vision for this became a lot bigger than me and Andresa. So I would say to that person that comes up to you – or even comes up to us – it’s a lot of work, but it’s not about us. I think that’s really big for us – inspiring both of us to carve out… I work part-time, Andresa has got a million things going on… If you looked at both of our lives, how do you get this done?! I get up at 4 AM. Joe, I get up super early, because this is a mission for us. This is not just like a random thing that we have nothing else to do. This is a big thing for us – help other women get what they want out of their lives.

So you wanna inspire people through it, and really not just move your own business along, then don’t do it. But if it’s something that’s meant to really be a mission for you and be something bigger than just a business, or to hear yourself talk, or whatever the reason is people do podcasts, I would say don’t do it then, because it’s not the easiest thing to do.

Joe Fairless: Were you gonna follow you up anything, Andresa?

Andresa Guidelli: Yeah, I was just gonna say that it’s cliché, but you’ve got to know your Why. If my Why was not aligned with Liz’s Why and her values as well, it probably wouldn’t work. Sometimes people get into partnerships very quick, and I would not recommend that. Liz and I had a very strong relationship prior to us doing our first deal; I think it was about two years… So we knew exactly what we were dealing with when we started this project. As Liz was saying, it was beyond us. It’s us looking at our future and bringing that future to now. This is who we want to be for other ladies, inspire other ladies, get inspired by the ladies that we are interviewing, and living life as it should be.

We are very passionate about it. If you don’t have passion, if you already have a lot and you just want to do a podcast or something else to have fun, I would say that’s not your best bet.

Joe Fairless: I’m gonna ask a question here in the second… The reason why I’m gonna ask this question is because as our conversation has been unfolding, it’s gonna be really helpful for listeners who are thinking about taking a potential partnership with someone to a larger level. Because in real estate, we come across potential partnerships all the time. You go to a conference, “Hey, do you wanna partner on a deal?” All the time. So this is great, because you two met 2-3 years ago, and your partnership has evolved into something, so clearly you two saw certain things in each other that made you feel comfortable to go do more and more things together… So the question is you two have partnered on deals before – describe a circumstance on a deal that didn’t go according to plan, and then what did you see in the other partner that made you think “Okay, this could be more of a long-term partnership” versus “Ugh! I don’t like how they just approached that.”

Andresa Guidelli: Oh, many things… So many things…

Liz Faircloth: I would say, Joe, I think so much of a partnership, because like you and Andresa, being in this business for over ten years, we’ve had some amazing partnerships and we’ve had some disastrous partnerships. And I would say what we saw in Andresa and our husband when we partnered together on our first deal, we really said — it was like this “Do whatever it takes” attitude…

Joe Fairless: What was the deal?

Liz Faircloth: It was a gut renovation in Philadelphia.

Joe Fairless: Okay.

Liz Faircloth: One of Andresa’s roles – again, knowing all of our roles was critical, but one of her roles was to really manage the construction. That was something harder for us to do; we don’t live in Philadelphia, we’re 45 minutes away. We visited the project, but it was nowhere near anywhere that was to be managing it on a day-to-day basis… So Andresa was tasked to manage the GC and the team day-to-day. So I would say – and Andresa, jump in if I’m off – we had a couple… You probably know more specifically, because you were there every day, but we had a couple things that just didn’t go down the path that we wanted them to.

Andresa Guidelli: Yes.

Liz Faircloth: I’m sure you can name them better than I even can… Because she just did whatever it took. “Hey guys, this is what’s coming up. This is how I’m gonna handle it. I’ve got it”, or she would say “Guys, this is what’s coming up, and I need some support.” I think what we got from Andresa and what we got from this partnership early on was you were like literally one of those upfront and honest people who have a high level of integrity. So the trust was already there for us. I trusted her, because we were friends, we worked together on the mastermind, I saw how she interacted, I knew who she was as a person, so that was never a question.

But in terms of partnering together on an ongoing basis, [unintelligible [00:17:17].25] and she’s a very forthright person; I’m never worried about “I’m not sure how Andresa feels about this.” [laughs] I’m more like “Let me think about how I feel about this. I don’t know how to say it, I don’t wanna hurt someone’s feelings.” Andresa is just “Bingo-bango”, tells it how it is. I’ve found that to be hugely complementary… Both me and Matt, quite honestly. Neither of us are — I can be like that, but it’s not my strong suit.

So that was huge for us, Joe – in the midst of day-to-day construction things that happen, Andresa was super straight with us, and it was almost like we were there with her, but not with her, because she handled it and did it with such grace, but directness.

Andresa Guidelli: From my point of view, I had the support from my partners. If things were not going as expected and I gave them the feedback, they gave me the support, “I hear you. Do you need any support? Do you need anything from us? Can we do anything to help you on this?” So knowing that I have their back and vice-versa – it just motivates me to just get things done.

When there are other people involved, like a private lender involved, my responsibility kind of like goes even higher, because I want to make sure that everything is just as clear as possible, and we are returning the investment on time, and there is not damage with the relationship. That’s very important to me.

Joe Fairless: As it relates to your experience as real estate investors, Andresa, what is your best real estate investing advice ever?

Andresa Guidelli: Well, in your future if you’re thinking about scaling your business, if you’re thinking about replacing yourself, you must start doing your SOPs – standard operating procedures – right now. I think that’s extremely important.

Liz and I have been working on improving that right now, and I think that everybody that is doing real estate in some shape or form is not looking to do the same thing when we are 65 years old; that’s not the goal. So I think that will be my number one priority right now.

Joe Fairless: That is something that I am focused on in my business right now, so certainly top of mind for me, too. We’re gonna do a lightning round. Are you two ready for the Best Ever Lightning Round?

Liz Faircloth: Yeah.

Andresa Guidelli: Yes.

Joe Fairless: Sweet! Alright, first, a quick word from our Best Ever partners.

Break: [[00:19:44].09] to [[00:20:34].14]

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

Liz Faircloth: Think and Grow Rich.

Joe Fairless: Best ever deal you’ve done?

Liz Faircloth: Probably the deal that Andresa just mentioned. In terms of selling it for over asking within 24 hours – it was probably one of the best wins we’ve had.

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

Liz Faircloth: It’s not so much on a transaction, but a mistake in general I would say was not getting niche-focused early on in our business.

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

Liz Faircloth: I give a lot back to my church, because I feel like I’m getting spiritually-fed.

Joe Fairless: And how can the Best Ever listeners get in touch with you two and listen to the podcast?

Liz Faircloth: Sure. We’d love for people to learn more about what we’re up to – it’s called TheRealEstateInvestHer.com. It’s a weekly show, it comes out Friday morning, and we’ve got some great women we’re interviewing. Also, we’ve just started an InvestHer community on Facebook. I think if you just put in “InvestHer”, you will find it.

Andresa Guidelli: Yes, The InvestHer Community.

Liz Faircloth: And then we’re also rolling out in the future (actually, short future) other ways to do masterminding and groups of women for them to get together across the country. That’s kind of our six-month vision, so stay tuned on all that.

Joe Fairless: Outstanding. Well, thank you you two for being on the show. This is certainly a template for what to look for when we evolve partnerships, and that’s why I’m glad that we got into the evolution of your relationship with each other… What you look for from a resourcefulness standpoint, a communication style standpoint, and shared values. Also, having defined roles at the beginning, and then seeing how that continues to evolve. The podcast certainly I will be excited to listen to some episodes. I know I won’t be interviewed on it for obvious reasons, but I’m excited to be listening to it… [laughter] Congrats on launching it; I’m looking forward to your continued success. Thank you for being on the show, and we’ll talk to you soon.

Andresa Guidelli: Thank you, Joe.

Liz Faircloth: Thank you so much for having us, Joe.

JF1355: Network Marketing Leads To Buying Multifamily Properties with Anthony Palmiotto

Listen to the Episode Below (25:15)
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Anthony read Rich Dad, Poor Dad while in a network marketing company and was hooked on real estate. After more research, he knew he wanted to acquire multifamily properties. In order to learn the business he became an apartment broker and is now purchasing properties with a focus on value-add. Hear what it takes to go from nothing to buying value add multifamily deals. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Anthony Palmiotto Real Estate Background:

  • Managing partner of Odyssey Real Estate Group
  • Acquires value-add multifamily properties throughout New Jersey and surrounding areas
  • Focuses on repositioning assets through better management and property renovations
  • Based in Tom’s River, New Jersey
  • Say hi to him at odysseyrealestategrp.com
  • 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, Anthony Palmiotto. How are you doing, Anthony?

Anthony Palmiotto: Doing great, Joe. Great to be with you.

Joe Fairless: Nice to have you on the show. A little bit about Anthony – he is the managing partner of Odyssey Real Estate Group. His group acquires value-add multifamily properties throughout New Jersey and the surrounding area. He focuses on repositioning the assets through better management and property renovations. Based in Tom’s River, New Jersey. With that being said, Anthony, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Anthony Palmiotto: Sure, absolutely. So I did grow up in central New Jersey, born and raised, went to school in New Jersey – the College of New Jersey, actually. While I was there, I got involved with a network marketing company, and during that time somebody introduced a book to me called Rich Dad, Poor Dad, and probably just like many of your listeners and guests on the show, you read that book, it flips a switch… I realized that everything I had thought about business internally was kind of put into print, and I later read other books and decided I wanna manage apartment buildings.

From there, I kind of had a choice and wanted to figure out what I wanted to do, and I thought “If I’m gonna buy apartments, I need to figure out a) how to do that, and b) how to get the money to do that”, at the time not realizing about syndication. So I looked at it as I can either get a job as a property manager and learn the business that way, or maybe get a job as a multifamily broker, end up learning the business that way as well. I opted for the latter, being that I had an aptitude for sales already.

As a broker, I began listing and selling apartment buildings and learning the business. After a few years, I started buying my own deals, and we’re now up to the three properties, 15 units, but growing pretty quickly, and we’ve just closed on our most recent purchase just a few weeks ago.

Joe Fairless: Great, congrats on that latest purchase. What did you buy?

Anthony Palmiotto: Most recently we bought a 10-unit apartment building in a town called New Egypt, New Jersey. We bought it direct from the seller, and via direct mail is actually how we sourced it.

Joe Fairless: Really? I thought there are no deals at all in such a hot market across the United States, and you just can’t find any deals.

Anthony Palmiotto: If you listen to most people, that’s probably what you would think… And being in New Jersey, everybody says “Oh, the cap rates are so tight”, and as a broker I know that many deals do trade at 5%, 5,5% cap rates, even sub 5% cap rates in certain cases… But if you’re willing to put a little bit of work in – and we just did one direct mail campaign – we were able to buy this 10-unit building. And believe it or not, on real numbers it was a 10% cap rate, so… Fantastic deal.

Joe Fairless: [laughs] Wow, and it’s also a value-add deal?

Anthony Palmiotto: It’s also a value-add deal. The rents on each apartment are probably on average about $200 below market.

Joe Fairless: Wow. And how much do you need to put into the units in order to achieve that $200 premium?

Anthony Palmiotto: As I said, we just purchased the property about two weeks ago, so we haven’t put our plan into place yet, but we’re budgeting probably somewhere between $7,000 and $8,000 per apartment, and $200 is actually pretty conservative; some of the rent pops might be as much as $250 or more.

Joe Fairless: Did you buy this with your own money, or did you bring in partners?

Anthony Palmiotto: We actually were able to purchase this with our own money, as if it wasn’t already a pretty good deal; we actually were able to get the seller on this one to hold the first mortgage, which made the deal much easier and much better, from our perspective.

Joe Fairless: Will you elaborate on what holding the first mortgage means?

Anthony Palmiotto: First of all, we found him through direct mail… And as we expanded dialogue with this seller, we came to an agreement on price, and I basically said to him “Would you be interested in holding the first mortgage?” meaning “You be the bank, I’ll put a down payment, and then make payments to you.” Most people would initially think that there’s really no reason to do this on the seller side, because he wants to get paid now and done with the deal, but there are a few reasons that you would.

Number one is that it makes it much simpler, in that there’s no bank involved. Number two is that you don’t have a particularly big capital gains tax to pay right this second, because you’re getting paid over time, and number three – this seller was an older gentleman who originally built the buildings, so what this was gonna allow for him is to still receive cashflow from the property, but not have to actively manage the property anymore… So when I kind of laid it out for him in those terms, it seemed like a good idea to him and his brother who is his partner, and they agreed to do it.

Joe Fairless: What were the terms?

Anthony Palmiotto: The brother was not really on board for doing this for the long-term, so we ended up doing an 18 months note at 4%, with a 20-year amortization. That worked out just fine for us, because in today’s world with interest rates rising, we decided that we’re gonna go ahead and refinance immediately, and go to a traditional lender and try to pull cash out of this property.

I actually have a terms sheet sitting here on my desk, and we got fantastic terms. While we were able to use the seller financing to acquire the deal and close quickly, we’ll now put some permanent commercial financing on it, get all of our money back and then some more on top of it, which could be great for us to go out and buy the next deal.

Joe Fairless: Any pre-payment penalty on the seller financing?

Anthony Palmiotto: No, we were pretty particular about making sure that was not in there, knowing that we were probably going to refinance rather quickly… So I actually just got terms from the bank for a seven-year note at 4,25%, but they’re valuing the property at $900,000 based on our numbers, and are willing to lend about 75% of that. So all in all, everything just kind of fell into place on this one.

Joe Fairless: That’s great. What did you buy it for?

Anthony Palmiotto: We ended up paying $500,000, which again is amazing, considering its very routine in New Jersey for properties to sell well over $100,000/unit… And if you just scratched the surface and took a closer look at LoopNet, you would probably think that to be true, but if you go the extra step and you do some direct mail, you can find good deals. So not only did we pay 500k, we put about 125k down, which we’ll get back in the refinance, and then we’re looking at maybe another 175k cash-out on top of that… Plus, we still have the value-add component to the deal, which we’ll implement over time.

Joe Fairless: That’s incredible… Let’s dig into how you got the deal. You mentioned direct mail – can you provide some more context around that?

Anthony Palmiotto: Sure. Direct mail is always pretty intriguing to me. I had heard guests on your show and other places talk about the success they’d had with it, but what I’d noticed is that most people doing direct mail are targeting single-family homes, so I just figured “Why not do the same thing to source deals, but just target multifamily homes?”

So I just downloaded the property records of the state website for a  few counties in central New Jersey, and pretty much took the assessed values of properties that would be in the size range I was looking for, and just mailed them yellow letters.

I only sent out about 350-400 letters, that matched my parameters… And the really interesting part was that it’s commonly said in the direct mail space if you get a 1% or maybe a 2% response rate, you’re doing a pretty good job. We actually got something like a 5% response rate. I think the reason is we had a nice mail piece, and it looked good and it definitely got people to open it… But these people who own multifamilies, they don’t get direct mail.

If you ask anybody who owns a property that they don’t live at and it’s a single-family home, they probably get these letters all the time, whereas these multifamily owners do not. So I think it definitely caught their attention in that respect, and that’s why we probably got 15 or so calls off this one mailing.

Joe Fairless: That’s incredible. What did the yellow letter say?

Anthony Palmiotto: I don’t pretend to be the smartest person in real estate and there’s no reason to reinvent the wheel a lot of times, so… I literally just googled for examples of yellow letters, and what I actually did was I printed on yellow copy paper, I printed a template in Microsoft Word with lines on it, so it kind of looked like line paper… And more or less it just said that “I’m a local real estate investor looking to expand my apartment portfolio; I’m interested in paying you the highest and best price for your property, we can close quickly, and I look forward to hearing back from you.”
I’m paraphrasing a little bit, but that was really it.

And I did do a couple things that I think helped the letters opened – even though I printed all the letters and didn’t handwrite them, I did write CALL ME in big red letters by hand on each letter, just so there was a personal touch to it. And then as far as the actual envelope itself, this was a pretty good trick, I thought – rather than printing the envelopes and not being personal, or at the other end of that spectrum handwriting 400 envelopes, which is very time-consuming, we printed address label stickers, but we put them on  a little bit crooked and just highlighted the guy’s name or the woman’s name who owned the property in yellow highlighter.

The fact that it was a little crooked and a little off – I think that got a really good response rate, and next thing you know, we found a deal from it, so… I guess it works.

Joe Fairless: The takeaway is when we do direct mail, do something so that it doesn’t look like a robot is sending it to them.

Anthony Palmiotto: Exactly. I think if you use the window envelopes, it looks like a bill or something, so you want to make it look like it came from an actual person.

Joe Fairless: Wow, that was really helpful. Thank you for sharing that. And the deal itself, that’s a 10-unit… Now, you said you have three properties, 15 units, so I imagine this 10 is part of the 15, is that right?

Anthony Palmiotto: That’s correct. Our first property was actually a single-family home that we rented to students, and I’m 50/50 on these properties with my partner… But we didn’t have a lot of cash to get going when we first started, and in New Jersey properties are much more expensive than in other parts of the country, so what we could afford was a single-family home that we rented to students, and we figured that was kind of like managing an apartment building. That was a great deal for us.

Once we did our first deal, that was super important, because it was a proof of concept; we knew we could do it, so we just then went on to a four-family house, and then later the 10-unit.

Joe Fairless: You mentioned it was your first direct mail marketing campaign, but how long were you looking for deals prior to sending out that direct mail campaign?

Anthony Palmiotto: That’s a great question. There’s plenty of deals out there; they’re not necessarily good deals. We had spent — I think May of 2017 we closed on our four-unit property, and again, we thought that was a pretty good deal and we were ready to go bigger… So starting that summer (2017) to spring of 2018, about nine months, we had our eyes out for a good, small multifamily deal, and there really wasn’t anything out there that was gonna generate the type of returns that we were looking for… So really nine months of nothing, and then within two weeks after sending out a direct mail campaign we had a deal.

Joe Fairless: How many direct mail campaigns have you sent out since that first one?

Anthony Palmiotto: Honestly, I got a deal off the first direct mail campaign, so we went through the process to close that deal, and now we’re going through the refi, and I actually have not sent out subsequent direct mail campaigns yet, because now we’re going bigger, and we’re gonna have some cash out, and some more capital, and probably raise money for the next deal… So we’re gonna have to retool the parameters for the next direct mail campaign, and hopefully we’ll be doing that probably within the next few weeks… But one campaign and one deal I think was a pretty good success rate thought.

Joe Fairless: Absolutely. During those nine months between your four-unit and finding the 10-unit, what were you doing to look for properties?

Anthony Palmiotto: We did a couple things. I still am a multifamily broker, it is my day job, so I kept an ear to the ground… I sell buildings in Philadelphia and Southern New Jersey, so I just kept an ear to the ground for properties that were in central New Jersey, which is not where I list buildings, but where I was buying buildings.

I did check out things that were on LoopNet, and just networking events, trying to find out who might have deals or who was selling, or anything like that. I didn’t really come up with much; there were a lot of deals to be looked at, and nothing really that was too appealing, to be honest.

Joe Fairless: In terms of the team that you have in place for this 10-unit property, how are you gonna execute the business plan?

Anthony Palmiotto: That’s a great question. So right now, as I said, my partner and I are 50/50. I’m a very sales-oriented, go-go-go type person, he’s the CPA, he’s a little bit more conservative, so we have very complimentary mindsets and skillsets, I think… So really as the units turn over, we’re gonna implement property renovations. We do have one part-time maintenance worker, and some additional help – family, friends and such – but it’s at a point now (which is kind of exciting) where we can start building out a team, and this is probably a spot where a lot of people who are in our position, who have a few properties, where to scale from here you kind of start needing to have more of a plan in place.

We do have some part-time help, we do have some friends of the family who are contractors and such, and we’ll have to grow that side of the business to be able to efficiently renovate units and bump rents and expand the portfolio.

Joe Fairless: New Jersey is a tenant-friendly state, right?

Anthony Palmiotto: Yeah, I was gonna say, very tenant-friendly, absolutely.

Joe Fairless: [laughs] Yeah. Any unique challenges because it’s a tenant-friendly state when implementing a business plan for a value-add deal?

Anthony Palmiotto: There are certain challenges… The one thing that’s gonna affect all deals, whether it’s a value-add deal or not, is that if you have a tenant who doesn’t pay, it can be a very difficult process to get somebody out. In certain states it’s done in a matter of weeks. In New Jersey, it’s always gonna be months typically, and it’s just something you’re gonna have to factor into your turnover and factor into your numbers when analyzing deals.

On the other end of the spectrum, there’s good and bad, because New Jersey – especially in Central and Northern New Jersey – the vacancy rate is probably as low as it is anywhere in the country… So there is good and bad, but it’s just something you’re gonna have to factor in upfront, knowing that for bad debt and things like that it’s gonna be a longer and tougher process to manage in terms of getting the tenants out.

Joe Fairless: When you’re underwriting, how do you factor that in?

Anthony Palmiotto: Even though vacancy rates in New Jersey might be 2%, 3%, I’m still underwriting deals with vacancy rates maybe double that, because even though there’s ready and able tenants to rent your property, those units are gonna be stuck not producing rent if you have a tenant that stops paying, and it’s gonna be down for 2-3 months where there’s no income generated. So it’s just more conservative underwriting on what your income is actually gonna be from that property, and the additional legal expense required to deal with situations like that. If you do that upfront, you’re pretty well prepared for it when that inevitably does happen.

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

Anthony Palmiotto: I would have to say that you need to have a specific focus. I think a lot of people that I’ve worked with in the past or have talked to wanna chase the shiny object, and first they wanna flip, then they wanna wholesale, then they wanna buy apartments, then they wanna do note investing… It’s my opinion that maybe you should get really good at one particular thing, and then maybe later on if you wanna branch out, do that. But get really good at one thing first, and then branch out.

And I guess the second thing I would say is just take action. Even myself, I could have done this earlier; you’d be surprised what you can do if you just start. Most people analyze things way too much and never actually get around to doing a whole lot of anything.

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

Anthony Palmiotto: Let’s do it!

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

Break: [[00:16:18].18] to [[00:16:58].27]

Joe Fairless: Best ever book you’ve read?

Anthony Palmiotto: Best ever book would be The ABCs of Real Estate by Ken McElroy, or maybe The 10x Rule by Grant Cardone.

Joe Fairless: Best ever deal you’ve done that wasn’t the last one, that 10-unit? Some other deal.

Anthony Palmiotto: I would say probably my first ever deal – it was a single-family home that I rented to students. We bought the property for $180,000 and it’s now generating about $2,850 a month in rent. It’s an absolute cash cow. But more importantly, for us it was a proof of concept that just taking action and getting a deal works, and if you just follow the blueprint of people who have been successful, you can do it yourself too. It’s not too terribly difficult.

Joe Fairless: 2050 – is that $2,050 in rent?

Anthony Palmiotto: I’m sorry, $2,850.

Joe Fairless: Oh, that is a cash cow! [laughs] I did the $2,050 and that was a 1.1%, and then this one is 1.5%. I know you know what I did, Anthony, but Best Ever listeners – and most of you know – is I took the monthly rent and divided it by the all-in price, and you tend to want that to be somewhere between 1% and 5% ideally. They say 2%, but I very rarely interview people who get the 2%.

What’s a mistake you’ve made on a transaction?

Anthony Palmiotto: A mistake I’ve made… Maybe more generally is probably just taking too long to start. I definitely had some deals that came up and passed by; I did not execute on them, just because I felt like I wasn’t ready, but in hindsight I was definitely more than ready. Then maybe when I did start, probably starting too small. I think we’re capable of much more than we realize. You should start where you’re comfortable, but typically you could be more comfortable doing bigger deals if that’s what you’re ready for, right off the bat. I think that 10-unit could have been my first deal, if I was going back to do it all over again.

Joe Fairless: How much did it cost monetarily to send out the direct mail from start to finish?

Anthony Palmiotto: The cost of postage was probably something like $200, and other supplies – let’s just call it $250, and then whatever you value my time at… But actual cash out of pocket – call it $250. And given the fact that the bank is valuing this building now at $900,000, we made $400,000 of equity day one when we closed… So I would say investing $250 to do that, it was a pretty good deal.

Joe Fairless: Just a couple follow-up questions… A 10% cap on — I assume those are the trailing 12 financials?

Anthony Palmiotto: Unfortunately, and this is gonna happen a lot when you’re dealing with smaller apartment buildings and these mom-and-pop type owners – he doesn’t have sophisticated financials, so I was kind of piecing together what he did have, and thinking averages over the past 12 months… But I did have, for the most part, trailing 12 numbers. And yeah, we’re looking at a $51,000-$52,000 net operating income, so just North of a 10% cap.

Joe Fairless: Why did he sell it for $500,000 if a couple weeks later — you said it closed a couple weeks ago, right?

Anthony Palmiotto: Correct.

Joe Fairless: A couple weeks later it’s now valued by a bank at around 900k…

Anthony Palmiotto: Yeah, that’s a great question. The honest truth is this guy built the building about 30 years ago, he’s been managing it ever since, and he wanted to retire. He had a number in mind that he wanted, he named his price, and I found out that price was not really the significant factor for him. What he wanted was somebody who was gonna close quickly, somebody who was not gonna retrade the deal, or in other words ask for money off the deal during due diligence, and somebody he could trust.

Once I got to meet him and build some rapport, he trusted me, he liked me, he wanted to do a deal with us, and he kind of gave us his price, take it or leave it. So I would have to say because of the fact that price was probably the third or fourth most important thing to him, that was the price he was comfortable with and that was the price he was comfortable to execute the deal at.

Joe Fairless: Any tips when having conversations with owners who call us about their properties that you can provide us with?

Anthony Palmiotto: I would say the number one thing that I did accidentally that I would make sure to always do now is never give your price first. If I had to make a blind offer on this property, I probably would have offered him something like $650,000 or $700,000, and in hindsight that would have been a $200,000 mistake… So I just very respectfully told him I did not wanna waste his time; he’s much more familiar with the building than I am, and I’m sure he’s thought about it and given it some thought as to what he wanted for that property, and if he wants to share a number with me, I’m happy to let him know if I can do that price.

So that’s kind of the route I took, and he gave me that number and I was blown away when that’s what he said he wanted.

Joe Fairless: That’s great stuff, and thank you for those additional talking points about he/she being more familiar with the building than we are, and I’m sure that they have a price in mind and you don’t wanna waste their time, so what are they looking for. That’s a great way to reframe that.

What’s the best ever way you like to give back?

Anthony Palmiotto: I’m actually a big fan of St. Jude’s Children’s Hospital. I always try every year, especially during the holidays, to give to that organization. I think they do great work. I’m still in my 20’s, but when you’re in your early 20’s, you can give not that much if you don’t have that much, so as my business continues to grow, I really hope to be able to expand the contributions to St. Jude’s. They just do a fantastic work and I’m proud to support that hospital and that organization.

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

Anthony Palmiotto: We have a website, odysseyrealestategrp.com. If they go on there, our contact and our e-mails are on there, and we’re very easy to get a hold of. I’m happy to help anybody with any questions or anybody who might be in the same shoes as me and trying to grow their portfolio.

Joe Fairless: So helpful, and inspiring, and very practical… Hey, Best Ever listeners, do you want a 10-unit deal, off-market, with seller financing, where you buy it for like 60 cents on the dollar, or something like that? Then do direct mail, and here Anthony (not we) talked about how to do it: just google examples for yellow — I love that! Just google “what should I write in a yellow letter”, you put it in there, you had a CALL ME in big, red letters… That’s in the letter itself, right?

Anthony Palmiotto: Correct.

Joe Fairless: Was that handwritten?

Anthony Palmiotto: Yes.

Joe Fairless: And on the envelope printed the label stickers, and then highlighted the individual’s name and put the label stickers on a little crooked to make it more personal. I’ve heard of investors draw pictures of a house, but in [unintelligible [00:23:34].15] on the letter, and that stands out… Basically, anything to make it more personalized is the way to go. Anthony sent out 350-400 letters, and he got about 10-15 phone calls and one deal, and holy cow, it definitely was worth the time.

I think definitely for 99.99% of the population that is an effective use of time; it’s an effective use of dollars for anyone, no matter what their net worth is, but for the majority of people on Earth, that’s an effective use of their time with this type of return. So there’s the template, there’s an approach for how to get off-market deals.

You and I talked at Dave Van Horn’s conference, right?

Anthony Palmiotto: That’s correct, yes.

Joe Fairless: Yeah, and we talked for a little bit… The first 25% into our conversation, then it triggered, I was like “Oh yeah, we’ve met”, because I actually asked you to be on the show, because you told me about this off-market deal that you bought, and I was like “We’ve gotta share this”, so I’m very grateful that you’ve spent some time with us sharing this, and I know a lot of the Best Ever listeners are grateful, too.

There are ways to get deals, in this market and in any other market; we’ve just gotta roll up our sleeves a little bit and get after it. Thank you so much for being on the show. I hope you have a best ever day, Anthony, and we’ll talk to you soon.

Anthony Palmiotto: Thanks so much, you too.

JF1343: How The New Tax Code Affects Cost Segregation & Accelerated Depreciation with Yonah Weiss

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new jerseyYonah is a cost segregation expert. Loyal Best Ever Listeners have heard about cost segregation on the show before, so today we are diving in deeper. We’re going past the basic nuts & bolts of cost segregation and into the nitty gritty details that we have not covered on the show before, including how the new tax code relates to cost segregation. You’ll be quite surprised at how many different parts of a building can qualify for accelerated depreciation. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

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Yonah Weiss Real Estate Background:

-Business Director at a national cost segregation leader, Madison SPECS

-Has assisted clients in saving tens of millions of dollars on taxes through cost segregation

-Generated over 70M in loans in his first year of work at a small financing company.

-Got his broker’s license and went from agent to partner within 6 months

-Based in Lakewood, New Jersey

– Say hi to him at http://www.madisonspecs.com/

– Best Ever Book: As Long As I Live


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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, Yonah Weiss. How are you doing, Yonah?

Yonah Weiss: I’m doing awesome today, Joe. Thanks for having me

Joe Fairless: My pleasure, and I love that you are doing awesome. A little bit about Yonah – he is the business director at a national cost segregation company called Madison SPECS. He has assisted clients in saving tens of millions of buckaroos on taxes through cost segregation, and we’re going to be talking about that.

Within that conversation, we’ll be talking about how the new tax code has implications with cost segregation. His company is based in Lakewood, New Jersey. With that being said, Yonah, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Yonah Weiss: Absolutely. I have not a long background in cost segregation, however the firm I worked for, which is basically all of my knowledge I have on the subject is from the superstars that work there. They’ve been in business for 12 years, Madison SPECS, and the CEO is a former head of cost segregation at KPMG, as well as Grant Thornton; so two of the biggest accounting firms in the country.

Our executive is awesome, people to work with side by side… I’ve learned from the best. I’ve been in real estate investing for a number of years now. I did a little work with flipping houses; it kind of wore me out… And commercial real estate brokering, hard money loans, and found my way to Madison, which is an amazing commercial real estate company, which they do title agency, 1031 exchange, qualified intermediaries, they do lease abstracting and due diligence – a number of things, but cost segregation is the spec department which I work for, which is incredible. As I’m sure you well know, Joe, it can’t get better than saving taxes, right? Nothing will make you happier.

Joe Fairless: Yes, absolutely. I agree, and we do cost segregation on our properties. We’ve had guests on the show who talk about cost segregation, so we won’t spend a whole lot of time on the nuts and bolts of it; we’ll get more advanced. But just for anyone who’s not familiar with what cost segregation is, what is it and who should use it?

Yonah Weiss: Excellent question, as always. Best Ever listeners, cost segregation, which is the weird name that IRS gave, this wonderful opportunity to save money on taxes, is a way to accelerate depreciation. Depreciation is a normal deduction every investment property owner takes on his taxes, which usually is split up into either a 27-year length for residential properties, or 39-year length process for commercial properties. So Joe, you have apartment buildings, right?

Joe Fairless: Yup.

Yonah Weiss: So you’re depreciating those. If you weren’t doing cost segregation, you’d be depreciating those over 27,5 years. So your normal apartment building that costs ten million dollars, let’s say – that’s small for you, but let’s say you have one that’s 10 million dollars… You’re gonna split that up and take 1.27th and a half, one fraction of that every year on your taxes, which is great, and it’s a great deduction. However, with cost segregation you can go in with an engineer who is well-versed in the tax code and break the assets of the property into three categories, basically. Five-year assets, which means things in the property that actually depreciate over five years instead of 27 years, or 15 years instead of 27 years, so you can actually take those deductions, and that’s called accelerating that, getting it upfront within the first years of the property.

Same holds true with the 39-year, as you said. That’s over 39 years, don’t wait that long! Take it all upfront, so you can have that cashflow. Don’t pay the IRS, rather keep the money in your pocket, and that’s basically what it’s about.

Joe Fairless: And you said three categories – you said 5 and 15 years. What’s the third category?

Yonah Weiss: The third category is really the 27,5 or the 39-year, which is [unintelligible [00:05:20].15]

Joe Fairless: Okay, got it.

Yonah Weiss: There are some things that are 7 years, and there’s some complicated things that someone’s doing in alternative depreciation life, which is totally different numbers, but it’s rare. It’s out there, but if you’re doing that, you’re not listening to this podcast and finding out the basics about cross segregation. [laughs]

Joe Fairless: And what are some of the typical items that would be in each of those three categories? The 5, the 15 and the 27.

Yonah Weiss: So the 5-year property is categorized as personal property, tangible property within the building. The main building structure depreciates over 27.5 or 39 years. Within the property you have stuff like carpeting, light fixtures, shelving, even tiles, wiring, electrical work, plumbings, and there’s really over a dozen categories of these types of things. Within the building, that can be broken out into every little tiny detail with an engineer who’s specialized in it.

All those things appreciate over five years, and it also includes appliances and all kinds of electronic equipment. So when you’re talking about a factory or certain types of industrial properties that have a lot of that stuff, you’re gonna get a whole bunch of extra depreciation deductions through that 5-year property.

This other category we mentioned, the 15-year – that’s the outside of the building. So we’re talking about land improvements, signage, landscaping, pavements, asphalt… Every property has a pavement; you’ve got a sidewalk, you’ve got a driveway, if it’s commercial you’ve got parking spots – all of that can be depreciated over a faster life.

Joe Fairless: And then the 27,5?

Yonah Weiss: That’s the building. That’s stays to the main building structure.

Joe Fairless: I believe you can do it down to the screws, the nails… You can get it to that level. Where would the screws and the nails be?

Yonah Weiss: So screws and nails – depending on how they’re fastened, but a lot of those can be into the 5-year property. It’s not actually part of the building. If you have wall coverings, but it’s fastened to the wall with screws – all those wall coverings and the screws themselves can actually be depreciated over five years, because it’s not actually attached to the building. It’s not part of the building in its essence.

Joe Fairless: So basically, you’re reverse-engineering the entire building to see what components it’s comprised of, and then identifying depreciation (accelerated level) for each of the items that the building and the land comprises of.

Yonah Weiss: Yeah. You’re reverse engineering it – I like the way you say that – when you buy a property… But Joe, when you and the Best Ever listeners build a new property,  or you do major renovations – and this is something a lot of people don’t know – you can double dip with the cost segregation when you do major renovations… Which means you can accelerate depreciation of the property when you buy it, [unintelligible [00:08:10].29] then when you renovate, you write off all that stuff you just accelerated, that falls in that category. When you put in the new stuff, you can go ahead and do it right over again – accelerated depreciation on that new stuff.

So it’s not even reverse engineering. What you can do is you can bring an engineer, like one of ours from Madison SPECS, to actually advise you what types of properties should I use so that I can maximize the depreciation on the building. Should I install this with tacks or should I use glue? It would really make a difference if that’s considered 5-year property or 27,5-year property.

And then just so it doesn’t sound like magical or too good to be true, we’re accelerating depreciation, but what happens whenever we sell the property?

Yonah Weiss: Whenever you sell any property, Joe, what happens?

Joe Fairless: It gets recaptured, doesn’t it?

Yonah Weiss: Anytime you sell a property, when you take depreciation, it gets recaptured. So you’re not really losing out by doing it in the accelerated way, unless you actually sell it right away, immediately after doing accelerated depreciation. Because what happens is after 3-4 years, even if you don’t wait the whole five years, which is your appliances, carpeting and all that stuff, will depreciate over five years; once you wait 3-4 years, when you sell that property, you can say all that stuff has already been depreciated. You don’t take any recapture on that stuff.

Joe Fairless: Oh, yeah, that’s interesting.

Yonah Weiss: You only recapture on the regular depreciation that you would have had had you sold the property without cost segregation.

Joe Fairless: That is a good point, a good distinction. I’m glad you brought that up. So if you hold on to it longer…

Yonah Weiss: A lot of people don’t realize that. They think, “Oh, if I’m taking all these depreciation deductions upfront, I’m gonna get hit really hard when I sell this in 3, 4, 5 years from now”, which is  a normal exit strategy for someone like yourself, right? Five years, six years, seven years. But you’re not gonna get hit, because all that stuff has already been depreciated.

Joe Fairless: Yeah, in that case it truly is free money that you’re saving from the depreciation, because if you sell in six years, then through the depreciation if you didn’t accelerate it, then you wouldn’t have got that upfront, especially because the life of that object is over with, from a depreciation standpoint, after five.

Who is your ideal client? And I ask this because I’d love to know what is the range of lowest – I’m sure the highest is whatever the biggest building is, so maybe just the lowest… What’s the threshold for when you should do cost segregation and when you shouldn’t?

Yonah Weiss: So the highest – that’s easy. The more depreciation you have, the more the property is worth, and we’ve done some properties that are literally billion-dollar properties, some skyscrapers in New York. They’re getting huge, massive depreciation deductions.

The low-end, which I assume a lot of the Best Ever listeners who are thinking of investing in real estate, who are already investing in real estate and have invested in properties, really what I say is if you bought it for less than around $500,000, it’s borderline. More than $500,000 – we’re gonna get benefit out of it and it’s gonna be worthwhile, because even the expense of running this study, which is not a lot on a small property (around a few thousand dollars), the benefits are gonna be upwards of $50,000 to $100,000. It’s still gonna be worth it.

Less than $500,000, it depends on a number of factors – how much the land allocation, which we didn’t mention, but land does not depreciate… So whenever you buy a property, you have to deduct whatever percentage was allocated to land; generally, somewhere between 10% and 20%. In other areas it’s more.

So that’s what I’d like to say, but it actually is a great segue, that question, Joe – I don’t know if you’ve realized it, but it’s a great segue into bonus depreciation, which is something that got a huge bonus or upgrade in the new tax reform just a couple months back.

Joe Fairless: Let’s talk about it. First, a real quick note on the land thing – when I was buying my single-family home starting out, I would only look for homes that ate up the entire lot, so there’s very little backyard because of that, because you can’t depreciate the unimproved land, you can only depreciate the structure… So I wanted to buy a house that had the whole lot, plus on top of that it’s pretty good for maintenance, too. So bonus depreciation, new tax code – hit us with it.

Yonah Weiss: Okay. Everyone loves a bonus, right? Bonus depreciation is not new, but before the new tax reform, if you constructed a new property or you did major renovations of a new property, you could depreciate that as a normal asset over the 27 years, 39 years, or you could accelerate it to 5 and 15 years… But there was something called bonus depreciation, which meant when you built something brand new, in the first year of building that or constructing that, you take 50% of the value of whatever you built, and depreciate 50% of that in the first year, meaning you’d take a huge, big, whopping 50% of the value and deduct that depreciation in year number one. That was what it was before this new tax law.

What happened is they invented a date – September 28th, 2017. What happened on September 28th, 2017 is that if you bought a property, after that point, from 2017, September 28th, and onwards until when it runs out – who knows when that’s gonna be, but they gave a date of 2023; we’ll see what happens until that point… Now you can take something called bonus depreciation on any property that you buy – not just new construction, not just major renovations. If you buy a new building, you can opt for bonus depreciation on that new asset, and I assume Donald Trump or a bunch of the members of Congress bought a bunch of properties after September 28th, because they wanted to get that extra thing, instead of making the law start January 1st, which would be logical. But nevertheless, that’s the law.

Not only 50%, Joe, and Best Ever listeners, 100% bonus depreciation. 100% means if you buy a new house, if you buy a new property, an apartment building, industrial, whatever kind of property you wanna buy, and you go ahead and do accelerated depreciation – we bring an engineer down and get all those five year assets and all those 15 year assets in the property, get all of that and they say “Hey, you know what? We found about 20% of your property’s value can be depreciated at a faster rate – 5 years, 15 years.” That’s great! I’m gonna get those deductions over 5 years, or 15 years; that’s gonna give me a lot more cash in my pocket.

You can say hey, you know what? If you have a ton of taxes you’re being taxed on this  year, you can opt to take 100% of what you would have spread out over those 5 and 15 years, take 100% of that in year number one.

Joe Fairless: That’s incredible.

Yonah Weiss: Unbelievable. So you’ve got people who have a huge tax liability, and the deduction from depreciation or even accelerated depreciation is great, but it’s not enough to knock their tax down to zero. But we wanna knock tax down to zero, Joe, and Best Ever listeners. It’s great to pay taxes and be a good citizen, but there’s a reason why they gave the deductions – because they want you to be investing. They want real estate to be happening. It’s good for the economy, it’s good for everyone… So get a bonus! 100% bonus depreciation.

Joe Fairless: Yeah, I’m glad you talked to us about that, because that’s something that we should certainly be aware of with the new tax code, and it could be a huge difference maker.

Taking a step back, before this you were flipping homes, did some commercial real estate brokering and some private lending, and now you’re focused on the business director for cost segregation at Madison SPECS… What is your best real estate investing advice ever?

Yonah Weiss: The best real estate investing advice is if you are not doing it yet, you have to apprentice; you have to hang around people who have been doing it and know what they’re doing, and learn from people who have experience. Don’t try to reinvent the wheel. You can listen to all the podcasts you want, and they’re amazing, but the experience you’re gonna get is being on the floor, on the ground, in the dirt, with people who know what they’re doing.

That’s what I have been blessed with – incredible people in my life that I have learned from and apprenticed under, and I’m incredibly grateful to them for what they’ve given to me and what they’ve taught me, and I learn more every day, from everyone I speak to. It’s just amazing how much you can learn being on the ground, involved, hands-on. That’s the way to do it.

Joe Fairless: Yeah, that is the best way to do it – to be on the ground, hands-on. I completely agree. We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Yonah Weiss: Let’s do it!

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

Break: [[00:17:39].11] to [[00:18:20].17]

Joe Fairless: Best ever book you’ve read?

Yonah Weiss: Best ever book I’ve read… You’ve had – how many podcasts? Over 1,800? I bet nobody has ever picked this book before; it’s  a book called “As Long as I Live: The Life Story of Ahron Margalit.” It was originally written in Hebrew, translated into English and a number of other languages. Incredible life story, check it out.

Joe Fairless: I will. I definitely will. What is the best ever deal you’ve done, going back to your fix and flip and private lending days?

Yonah Weiss: Oh, you know what? I’m gonna change that up and I’m gonna tell you the best ever deal that we did in cost segregation, just because it blows my mind.

Joe Fairless: I saw that coming.

Yonah Weiss: Can I do that?

Joe Fairless: Of course, yes. [laughter]

Yonah Weiss: And if I have time and I do it lightning fast, I’ll even do two. First of all, the biggest property we ever did – I think it was one of the largest properties in the nation, which is the Rochester Tech Park up in Rochester, New York… Over four million square feet of office, industrial warehouse; it took two engineers over a week, every day going down there and analyzing the entire property, and we got them over 8 or 9 million dollars of extra depreciation from that. It was just miles and miles of asphalt. It was incredible. So that’s something incredible, to know what cost segregation can do.

Another amazing story – just blows my mind. You may not have tax liability, you may not be taxable, and you think “Oh, cost segregation is not for me.” We had someone we were prospecting for 3-4 years, trying to get him not taxable. A lot of the stuff that he got was inheritance. He had a step up in depreciation, which we can talk about that after, if you want… And he just was not taxable. We tried to get him, called him up – this was just recently – and he says “You know what, I have 60 properties that just became taxable. [unintelligible [00:20:01].15] until now. Now I do. I’d love you to come here”, and it’s like a few weeks before the tax deadline, and we’re talking about the extensions… And he wants to get it done. He says, “I have 60 properties, walk-ups in the Bronx and Brooklyn. Can you do it?”

We did it, and we found over 30 million dollars of depreciation. This guy’s tax deferred until 2023, he’s not gonna pay any tax.

Joe Fairless: [laughs] It’s incredible. What is the step up that you mentioned?

Yonah Weiss: When you inherit a property, even though the property was depreciated by someone’s father or grandfather or whoever they inherited from and it’s fully depreciated, when you inherit that property, you actually get, depending on who’s the inheritor, either 50% or 100% step up in depreciation, which means depreciation basically starts over, as if you bought it brand new… Which we didn’t mention – another thing is people think depreciation is “Oh, my building was built in 1947, so there’s no more depreciation on it”, right Joe? No, when you buy a property, depreciation starts over from day one for you. It has nothing to do with the actual life of the building.

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

Yonah Weiss: A mistake I’ve made on a transaction was hiring a contractor who I didn’t really know so well. He came from recommendations, but at the end of the day he ended up screwing us, stealing a bunch of money, and I’m still paying it to this day.

Joe Fairless: When presented a similar scenario again, how would you change your approach?

Yonah Weiss: I think I would do a lot more research on who the contractor was, and gotten to know some work beyond [unintelligible [00:21:35].28] from beginning to end, on other projects, as opposed to just hearing good words from him from people I didn’t 100% know.

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

Yonah Weiss: I actually founded a 501(c)(3) charity about ten years ago for a community in Israel, so we have hundreds of poor families we give during the holiday times food, coupons and clothing coupons, so they can go out and take care of their families, and be proud to have new clothes and food for the holiday times.

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

Yonah Weiss: A great way to get in touch with me is LinkedIn, I’m pretty active on there. You can reach me on my direct line, 732-333-1477, or e-mail yweiss@madisonspecs.com.

Joe Fairless: Thank you so much for being on the show, talking to us about cost segregation; what is it – it’s accelerating the depreciation… Categorizing  things in the three different categories – 1) 5 year, 2) 15 year, and 3) either 27,5 or 39 years… Your entire building and all of the improvements on your land will be in those categories; you depreciate them faster than what you would just a blanket 27,5 or 39, therefore you get advantages on your taxes earlier than what you would normally, and in some cases if it’s 5 years (in that category) and you have the property longer than 5 years, then you’re gonna come out ahead even more so.

Plus, talking about the bonus to depreciation code with the new tax code, and how we can benefit from that… So thank you so much for being on the show. I hope you have a Best Ever day, and we’ll talk to you soon.

Yonah Weiss: Thanks, Joe. Joe, can I add a quick question before we sign off?

Joe Fairless: Absolutely.

Yonah Weiss: Just hearing from you, you’ve had a couple cost segregation guys on, but I’d love to hear from you, who yourself is a property investor – tell the Best Ever listeners why you think cost segregation is good, or what it gives for you and your investors.

Joe Fairless: Well, I just mentioned it… It’s saving on taxes early on; it’s accelerating depreciation, so more money in our pocket early on.

Yonah Weiss: Okay, awesome.

Joe Fairless: Sweet. Alright, have a best ever day, and we’ll talk to you soon.

Yonah Weiss: Thanks, Joe.

Best Real Estate Investing Advice Ever Show Podcast

JF1157: Case Study Of A First Time Apartment Syndication with Jason Yarusi

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As a house mover and flipper Jason was making a nice living. He was feeling like his business was more of a job, and wanted to build some generational wealth for his children and their children. At that time, his team and himself started looking for apartment buildings to syndicate. They found and closed on a 94 unit community in Louisville, Kentucky. Hear his case study of his first ever apartment syndication. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Jason Yarusi Real Estate Background:

  • Managing Partner at Oak Capital Partners
  • Currently owns a 94 unit apartment complex in Kentucky and flips 10 houses a year in New Jersey
  • His family heavy construction business, W A Building Movers, has elevated over 1600 homes to help restore the New Jersey Coastline since Hurricane Sandy
  • His family has moved homes for over 50 years

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TRANSCRIPTION

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

With us today, Jason Yarusi. How are you doing, Jason?

Jason Yarusi: I’m doing great, Joe, thank you so much for having me.

Joe Fairless: Yeah, my pleasure, nice to have you on the show. We have got a treat for all of your multifamily syndicators out there, or any Best Ever listener who wants to be a syndicator. Jason is going to talk to us about a 94-unit apartment community that he recently purchased in Louisville, Kentucky. A little bit more about Jason – he is a managing partner at Oak Capital Partners. He currently owns that 94-unit apartment community and flips ten houses a year in New Jersey.

His family heavy construction business, W A Movers has elevated over 1,600 homes to help restore the New Jersey coastline since Hurricane Sandy. He’s based in Westfield, New Jersey. With that being said, Jason, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Jason Yarusi: Sure. Thanks, Joe. I appreciate you having me on, of course. So yeah, I’m in New Jersey; I come from a heavy construction background. We’re five generations in construction, with our focus being in moving and lifting buildings. So for the last couple decades that’s what we’ve been doing day in and day out. My father really pushed along, and when hurricane Sandy happened, it really became apparent there were a lot of homeowners in need that needed to raise their house to become FEMA-compliant, and mainly just to get homeowners back home. So it’s been very hot and heavy for those last few years, and we’ve been pushing ourselves more into real estate just to better diversify ourselves and create passive income and generational wealth and all those other avenues.

So we have been flipping homes here locally, and then looking at larger apartment complexes out of state, in markets that better met the [unintelligible [00:03:05].10]

Joe Fairless: So you’re moving homes, you’re flipping homes and you’re buying apartment communities. How do you determine where your focus goes?

Jason Yarusi: It’s been a learning curve… It sure has, I’m not gonna lie. I think we both know the term “where focus goes, energy flows”, right? So it’s definitely been a learning curve. Of course, W A Building takes a lot of time, it’s a very unique niche, so I’ve grown the business where we’ve been able to bring in team members that can handle a lot of the components of the business, but there’s still parts of it that I haven’t been able to let go, even if I’ve wanted to, because of this unique nature of the business. But I’ve found ways to block my time in a way that I can put my energy to there at certain times, and then push it to the other avenues – the flipping business, and also now the large apartment business, as allowable.

Joe Fairless: So you’ve got the moving business, you’ve got the flipping business… Those two businesses make you decent money; why move into apartments?

Jason Yarusi: The easiest part is that not everybody is moving their house twice, so I’m currently always having to go out and do a new project, and I’m constantly looking for a new project, and it’s hard work. So I’m always looking to buy properties or move properties or lift properties; it’s basically a job, and what we wanted to do was buy properties that help us — we can improve the value and have them help us grow that wealth factor that can not only help me, hopefully my kids, their kids etc. down the line.

Joe Fairless: Okay, understood. So the first two – the flipping and the moving of homes – don’t have reoccurring income, whereas the apartments, once you buy something, then in theory it will have reocurring income and you don’t have to constantly be eating what you kill.

Jason Yarusi: Correct. Assuming that you buy right and set yourself up correctly, and find the right property that’s able to perform in the way that you hopefully [unintelligible [00:05:06].19] or make the corrections as needed.

Joe Fairless: Okay, alright… So now that’s a segue to 94-unit apartment community in Louisville; you’re in New Jersey – how did you find it? Tell a story about it, please.

Jason Yarusi: Sure. We started focusing on markets that had a number of things. We wanted something that had growth, and the growth was happening. It wasn’t aggressive, there weren’t some huge peaks, but 2%, 3% over the last 10-15 years; has jobs and job diversity. It has UPS, FedEx, Amazon, the University of Louisville, it has a ton of tourism for the Kentucky Derby… So it has a lot of action there and it’s not based on just one different sector; you have Bourbon, you have a million different things pushing that area.

Beyond that, I had seemingly boots on the ground, and that was I had friends that grew up with me in New Jersey, very good friends that their family is from there, they moved back there… And my sister randomly found her way there over ten years ago and works for GE there in the market. So I knew Louisville, even though I’m not there day in and day out, and I just had seen this growth and this transformation that continued to happen there. So that was one of the major reasons that we chose that market and said “Okay, we’re gonna look at this market and we’re gonna go after B and C assets that are 75 to 100 units, that have some kind of inefficiency to it”, whether it be on the management side or the property side, built 1970 or newer, and in certain submarkets where there wasn’t a lot of new apartments coming online within the immediate or the next few years.

Joe Fairless: Okay. 75 to 100 units – how did you pick that window of units?

Jason Yarusi: When we were looking at it, it was a mind barrier at first, because we had just had rentals, and the rentals were duplexes, triplexes, and to make that jump, it seemed so aggressive. But as we got our mind around to that, we realized that when we’re at 75, or really pushing to 100 allowed us for the economies of scale to be able to have a management staff, have an on-site resident manager, hire maintenance staff… Also, leveraging got easier, because at 100 units, if we have 10 units vacant, we’re only 10% vacant. But if I have a fourplex and I have one unit vacant, well now I’m 25% vacant, and the mortgage companies are now looking particularly at the property first and foremost and making sure the property is performing, and then now I can focus on myself. So that was the first avenue there.

Joe Fairless: Why not 400 units, or 200 units?

Jason Yarusi: Good question. We’re open to go bigger now, but I think it was that first hurdle that I made myself into, and also once I get past 200, from what I heard – I didn’t have this experience, but I was competing with a much larger player, maybe a REIT and other institutional funds that were allowed to buy stuff at more aggressive rates than we were able to afford, because we are syndicating the deals, and we’re looking to make certain returns for our investors.

Joe Fairless: Okay. So what types of returns were you looking for when you were searching for properties?

Jason Yarusi: We wanted to be able to get into the point where we were going to have an investor come in, we were looking to offer a preferred return of 8% and cashflow for that, so we were looking at cap rates that we wanted to be at 7% or 8%, and cash-on-cash we wanted to be at 10%. So we were not into the best areas of Louisville, but we were not into the worst areas of Louisville. It’s basically a blue-collar area where you may have some people working on the line… It’s gonna have some crime, just like any area would, but it’s just a moderate crime level; maybe they’ll have some vandalism or other points from time to time… And it has strong population growth and it has very low vacancy for the area, even though there’s 600 different apartments just in our general blocks, that’s at 3% for the market right there.

Joe Fairless: You said 1970 or newer… Why not 1965, 1960 or 1980?

Jason Yarusi: You know, when we were looking at just the construction that was built in that area, that seemed to be like when there was a lot of boom in building for that particular area, so we were searching there for that, and different property types that actually fit the submarket we were in. So we found that a 1980 construction in that submarket it was almost eliminating a lot of the properties there… Just from moving homes and lifting homes, of course, the older the property gets, the more problems we always have, so we put 1970 here as a safeguard, just so we’re not running into a lot of issues that may come up with older properties.

Joe Fairless: Quick example, what would be an example of an older property when you’re lifting a house…? Let’s pretend you’ve got a 1970 build house and a 1960 build house; what would be some potential problems with the ’60 that you might not get with the ’70?

Jason Yarusi: There’s different framing techniques and there’s one that back at the time they used to call it balloon framing. What it means is actually the walls of the house would get built straight onto the foundation, and then the floor would get built straight onto the foundation. SO the floor was almost separate from the walls; so when I go to lift a house like that, if I was just to lift it underneath the floor, the floor would just lift up by itself and the walls would stay down to the foundation… So of course no one would be happy with that model. We had to lift that in a different way where we tie it together.

Well, somewhere down the line someone came up with the idea to move to Western framing or conventional framing, where they actually build on the [unintelligible [00:10:22].02] they’ll put the flooring on top of that and they’ll build the walls, so it’s tied together.

Joe Fairless: And in terms of … Because you’re not picking up and moving the apartment community — God willing, you’re not doing that, so in terms of the ’60 versus ’70, why ’70 versus ’60 there?

Jason Yarusi: We came to the point where we may — and it still happens even in the ’70s constructions, some of the wiring may be different, so we may have some upgrades for wiring where we’re running into the point where one of our properties — it was missed during all the inspections, but it had aluminum wiring in there, and that’s made that a little bit difficult. We had to change up our insurance package on the complex, certain things that are now becoming a norm, GFI’s and other points were already installed on the building, where our funding and our financing for it required that, so it was one of the cap-ex items that we had to tackle day one when we got onto the property. We had a timeline of six months that that had to be part of it.

So the older the properties, the more non-conforming they are to today’s standards, especially in fire codes and other safety issues. So the farther we go back, the more we’re gonna run into that. There wasn’t many codes in those days, it was just kind of the Wild West.

Joe Fairless: During the due diligence – I know you were doing a lot of due diligence on the property and the inspection period – who was responsible for the identifying aluminum wiring? It seems like that usually comes with the property condition assessment.

Jason Yarusi: We have five buildings within the 94 units, and one of the five buildings has 14 units; it was actually missed on all points, between the property management inspection and the initial insurance inspection.

Joe Fairless: Wow.

Jason Yarusi: So it was missed three times. Only after the fact was it found.

Joe Fairless: How was it found?

Jason Yarusi: They came back for — this was the pre-inspection, prior to closing, and then it was a post-inspection, post-closing, with a few items that had to be tackled, and they discovered it then.

Joe Fairless: How does that change your projections with insurance costs?

Jason Yarusi: Funny enough, we are now into a different package that is actually running with the same coverage, but we had to split off that building from the other four buildings. So under the same LLC, we now have two insurance packages. One just for that building, and then one for the other four buildings. It’s within the couple hundred dollars. It [unintelligible [00:12:35].15] because that package that we currently had to start the property was canceling at a timeline that we had to get this other program in place.

Joe Fairless: Okay. Now more high-level – you said you were looking for opportunities that had upside, or run inefficiently… What’s the business plan for this property?

Jason Yarusi: Well, we were very patient and we’re continuing to be patient in finding properties. This one – the owner of the property is actually in his 90s and the kids (I’ll call them kids) are in their 60s, and they have 1,000 units in Kentucky, and this was their one large one; a lot of the other portfolio was made up of single-family homes. The kids are not in the business and weren’t in the business, and they thought this would be the easiest one to move off. Maybe it was the most troubled, because it was the largest one.

There were many different elements here. The rents were substantially under market; they were between $75 to $100/unit under market. They weren’t charging application fees. They had a number of pets in the units – they were actually not allowing pets and they still had pets in the units, where all the other apartment complexes around have a $300 non-refundable deposits and pet fees.

They currently have two basements that were just used as storage, or just random items [unintelligible [00:13:49].09] We’ve taken them out and we’re putting in storage units in the basements. We’re gonna be able to get, based on comps in the area, $35/unit for each storage unit. We’re doing that as a test, because we have room to build another 24 down there.

It is an owners-paid property for utilities, so a lot of our play there is that we’re losing a ton of revenue just on our utility purchases, because being based in the ’70s, you have high flush toilets (3.8 gallon toilets); we’re taking those out for all low-flush toilets, we’re changing out showerheads, faucets, looking to reduce our water bill by an estimated 30%. That’s in the process right now.

The boilers – two of the five buildings are on boilers, and they’re rough, to say kindly, so we are replacing those boilers, which are probably running at best about 40% with 82% boilers. And lastly, we’re changing out all of the windows, which are our biggest cap-ex item there, because they’re already old. It’s brick facades, old windows with the aluminum frame right there. Once we do improve our heat, that the heat is not just billowing out the old windows.

Joe Fairless: I normally would question the window changing, but since it’s an all bills paid property and you’re paying the expenses for utilities, that makes a lot of sense.

Jason Yarusi: Yeah. They’re the old guillotine windows too, so for a lot of these it’s just a safety factor as well, and we really wanted to get these out. Our plan is to resell at year five, and this is really gonna help us on the resale, as well.

Joe Fairless: By doing these improvements, will that help your insurance go down at all?

Jason Yarusi: We’ve also put in a few other things in here. We are in an area where we may have some conditional tenants, meaning that their threshold for their application may be on the borderline, where were put other points in like lease lock and some other things to help on the application side that is helping our insurance. There’s a green initiatives program there that has just been implemented. I believe it was trying to be implemented right when Trump came into candidacy, and it kind of got back-burned for that… So it’s just being put in place now; they’re trying to find a way into that program, and we walked in the door and we said “Hey, do you have anything like this?” So we are looking to be the guinea pig in that program, and that could bring us a lot of tax credits back if we do all these points to basically make the property more green.

Joe Fairless: Okay. How much money did you have to raise, and how did you raise it?

Jason Yarusi: It was all hands on deck, that’s how we raised it… But we learned a lot, it was an awesome experience. Our top market was 750k, and we raised 725k, and basically we were able to roll some of the cap-ex items that we were gonna do on the property into the loan we got. It started with all family and friends, and that’s how we really got out there. We had been talking about what we were trying to do for months; we were going out there, telling people that “Hey, we are looking to buy apartment complexes. We don’t have one, but if we do, this is the kind of apartment complex we’re going to be looking for and this is the returns that we are going to be offering when we do find this apartment.”

It was many different layers. We were trying to make people comfortable with the idea that “Oh, here’s Jason who does heavy construction, does some house flipping and now he’s buying apartment complexes.” So “How do we get them comfortable with the model?” and for that we wanted to set them up with a mock deal of how our deal was going to be structured once we did get into that.

So when we did find this property, going back to them for the second time, it wasn’t that hurdle of having to show them what we’re doing; they already knew we were doing this, and now we had a property that was gonna fit that model.

It was interesting, we had 13 people that were in on this first one, which is awesome; we’re really excited for it. We had a lot of people who were super interested, but there were a lot of different barriers for that. We had one gentleman who I believe he had started a business and he didn’t realize his tax burden was gonna be so high; he had committed money to put in for this, and I think he felt bad telling us what had happened. So we were about three weeks out and all of a sudden he told us that, and I think he was putting in a pretty good amount of money, so that of course a surprise. It happens, so we just rolled with it, figured it out and got to the finish line.

Joe Fairless: How did you figure it out?

Jason Yarusi: We just got the word back out there. We had constantly been talking about this, knowing that this isn’t gonna be the only one, so for that, we are looking to do more… So we were telling people that we really wanna continue this growth and this process, so even when we hit our raise mark, we were still talking to people as we were looking for future projects, so we were able to just go to other people that were interested.

Joe Fairless: What’s the least and what’s the most anyone put into it?

Jason Yarusi: 125k and 25k.

Joe Fairless: Okay. And did you invest alongside with them?

Jason Yarusi: I did. I felt like that was really important, especially on the first run here. They need to know that I’m committed to this, too. This wasn’t something I’m trying, this is something I’m committed to doing and I’m committed to accomplishing, and I feel super confident in the property. I know it’s a great property, we’re really excited about the property and how it’s gonna perform.

Joe Fairless: And how much did you put into it?

Jason Yarusi: I put in 100k.

Joe Fairless: Okay. And did they ask that question when you were talking about the deal?

Jason Yarusi: You know, it was a mixed bag. I think the biggest question I got — we’ll say half did and half didn’t, believe it or not. The one question I got throughout was “Who’s gonna run this property?” That was an important question. We use a third-party professional management there; they currently have 5,500 units under management, and that was one of the biggest pieces that we put in place prior to looking for this property, was making sure we have a team on the ground when we got there.

Joe Fairless: For someone who wants to do apartment syndication but has not yet, what advice would you give them?

Jason Yarusi: We set ourselves up in a market that we felt very comfortable with based on the metrics. We wanted to have strong population growth – there was at least people moving in over what was moving out, [unintelligible [00:19:40].24] We wanted there to be jobs, and all the jobs weren’t tied up into one sector. We didn’t have 20% or more tied into one different area, and if that employer left we were gonna have some big dip.

And then the big thing was to put together a team. We’re not there, so we wanted to find, based on referrals and making a lot of calls and making a lot of entryways and meeting people on Bigger Pockets and on different sites, we started finding property management companies that specifically dealt what we were looking for. They don’t manage just 1,000 single-family homes, they were not just into new construction; they were a management company that particularly focused on B and C apartment complexes and they were very comfortable with that niche, and even more importantly, they had over 5,000 units under management, so if I got 94 units, it wasn’t gonna be this big hurdle for them; it was just something they could put right into play with the tools they already had there.

And the next piece is we actually found that deal with the property manager, but we did keep meeting brokers, and that’s really helped us now finding more properties in the area.

Joe Fairless: It sounds like the team, in particular the property management company – you’ve gone back to that a couple of times; that was important stuff to get this deal done.

Jason Yarusi: Yeah, it’s definitely for us the most important part, because they’re your face there, they’re your representation there, they’re putting together the plan that you have in your vision for making this property work, they’re the ones implementing that plan… So if they’re not comfortable with this property or with the program, then you need to move on to the next.

Joe Fairless: Got it. How do you make sure that you’re finding the right management company?

Jason Yarusi: It was mostly trial and error, but we called a lot and we started talking to different management companies, just finding out their contacts, and for this management company in particular, a lot of other management companies were saying that “It’s not our niche”, but this management company did this. Beyond that, we talked to other investors that were there in the market that were using them for their experience for them, and then lastly we went out there and met this management company. We actually were vetting them just based on the other properties we were looking at.

We want them to really give us their honest feedback, and that’s probably the most important thing – maybe you can go in there and improve rents, maybe you can go in there and improve the look of the property, but most likely the property is gonna operate at an efficient cost to run the property, and for them to be honest with us, not tell us that it’s gonna cost us $2,000/unit just to make the property look good.

If it costs $3,700 per unit per year to run the property – great; that’s what we wanna know, because we’re not expecting you’re gonna run it for any less, and we can always factor that in.

Joe Fairless: Okay. Your initial projections versus what the property management company said after they looked at your projections – what changed, if anything?

Jason Yarusi: I would say we were very conservative and we’re still conservative going into the deal, just for most we’re putting in a lot of different [unintelligible [00:22:38].04] because it was our first one. That can be a good and a bad thing, because if you make it so conservative on your point where you’re so outside the box you’re never gonna be able to get into the property, on the same part we were bringing other investors’ money in there; it was our first one we were going into, so we wanted to have that step where we had just a lot of comfort in there.

One of the biggest things, we didn’t anticipate that we would be able to increase rents as much as we’ve actually been able to. We’re actually $19 over where we anticipated even when we bought the property, which is great; we’re really happy with that.

So far – we’re only a couple months in, but so far the changes with procedure out there, we’ve been able to keep our expenses at where we think we should be operating… A little bit over where we should be operating, but definitely not in the top line where this property could run if it was running very poorly like it was before.

Joe Fairless: Based on your experience as a real estate investor in general, what is your best real estate investing advice ever?

Jason Yarusi: You have to get started; you just have to get started. I would say that you’re always afraid of the unknown, but you can’t let it stop you from taking a step, because you’ll realize that you’ll be so scared of something bad that’s gonna happen, but most likely that bad thing never happens, and when it does happen, it’s usually not as bad as you had imagined it. So for us, jumping into this large apartment complex – it was a huge thing, it was a big step for us, but if we hadn’t set up the steps and just kind of jumped off the cliff into it, we would never get there.

Joe Fairless: Your investor or investors who invested 125k – I’m not looking for names, obviously, but how did you meet them? And I ask for Best Ever listeners who are wondering how they can find investors who invest six figures.

Jason Yarusi: Sure. High school. One was from high school. Another one had started looking into doing this himself and was very curious of going out there and buying apartment complexes and was studying as much as he could, but he was just so busy with his job, he had just had two kids, and he saw this as a great avenue where he could also learn a lot about the process, too.

Joe Fairless: Okay. How did you structure it with them? You said 8% preferred return, and then what else?

Jason Yarusi: We did an 8% preferred return, and how we’re looking to go forward with our deals – 8% preferred return with a 70/30 split, and if we hit a market of 30% IRR, it would drop to a 50/50 split in the back-end.

Joe Fairless: Got it. Simple enough. Are you ready for the Best Ever Lightning Round?

Jason Yarusi: I hope so.

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

Break: [[00:25:20].07] to [[00:26:21].18]

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

Jason Yarusi: It’s always the last book, but Rich Dad, Poor Dad of course is the one that really sets your mind into the right motion, so we’ll stick with that.

Joe Fairless: What’s the last book you read?

Jason Yarusi: Actually, Jason Buzi “Smash Your Alarm Clock!” It doesn’t have much actual stuff, but — well, I guess let’s not say it the wrong way… It just shows that it’s the same thing – you’ve gotta take steps and do it, and you’re gonna get kicked and knocked down a hundred different times, but you’re not out there running into a field with bullets; you’re doing something that you hopefully wanna be doing. So take the steps, go after whatever that wants to be – you wanna open a franchise, or you just wanna get a better job. You just have to take steps and take action.

Joe Fairless: What’s the best ever deal you’ve done that we haven’t talked about already?

Jason Yarusi: You know, actually we’re flipping homes and we do marketing, and the marketing brings a lot of deals that just don’t fit our specific model, and we decided that we were gonna start wholesaling deals. We just had a double close on a $111,000 wholesale, which was a pretty large one that we weren’t even marketing specifically to this area, and it just happened to be really one that a lot people really wanted to jump on.

Joe Fairless: That’s great, so $111,000 wholesale – is that your profit, or is that the price that you’re wholesaling it for?

Jason Yarusi: That’s the profit.

Joe Fairless: You made six figures on the wholesale?

Jason Yarusi: We made six figures on the wholesale, and the great story here for this one is the homeowner needed to get out. They’re making a good amount of money, so we were able to buy it at a great price for them. This is a great play for the back-end for the B2C, whoever is buying this transaction, because they are now able to go in there and they have a couple options. It works still as a rental; there is a price for square foot in this market, they’re getting $500/square foot for a renovated unit, so they have a ton of upside onto it, and if I was working that area, man, I would even think to keep it… But it wasn’t the right fit, so you just had to make a quick move.

Joe Fairless: Oh, I’m sorry that that happened to you… [laughter] You had to make the move, I’m so sorry… [laughter] $110,000 profit…

Jason Yarusi: Yeah… I would say that if I ever got anything close to this again I’d be shocked…

Joe Fairless: Yeah. Well hey, you really just need one, and then do something smart with that money. How did you get that lead?

Jason Yarusi: Direct mail. One of our team members actually went out there and met with them, and then came back and talked to me, and I went and met with them again, and we put it under contract… I felt it was a really good number for them and us; it was a win/win.

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

Jason Yarusi: You always make mistakes, so you learn from them. I actually did make a mistake on one of our flips, where — I’ll give you two quick ones. We bought a house, and it was a hoarder house, and I thought a room was a bathroom that I couldn’t get to… There were like Christmas lights that were running in the house together, and piles of trash… It ended up being no bathroom on the first floor, so that was a whole different charge I had to put in there.

And another one was a heavy construction one when we were moving a house that we were working on a part of our flip; just going back to that framing issue, I missed on lining up a foundation based on the framing, just on tying too many projects, so that’s why you had to put more team members and more checks in place.

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

Jason Yarusi: I lost a lot of friends in high school, all from just things that were accidents, and were very unrelated, they happened for a number of different years… It was just a very weird time where you just didn’t know how to handle it. And there’s a group that was started, and one of the friends who passed away, his father is chairman on the board; it’s called Imagine, and they’re a center for basically grief and loss coping. I’m sorry, I’m not giving it the best run there, but it allows children and parents who have been faced with this element of the community to come together and be able to talk about it… Because lots of times, if you’re a kid who’s 13 or 14 and you lost someone very close, or you even lost a parent prematurely, you go back to school and you don’t know how to react, other people don’t know how to react to you.

This community now has 7,000 across New Jersey, and it’s running in about — I don’t wanna say anything incorrectly, but it has two different facilities and carries a bunch of different counties where it allows people to have a base where they can get that support.

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

Jason Yarusi: Sure, you can see more about us for our house lifting at wabuildingmovers.com, or you can e-mail me at info@oakcappartners.com.

Joe Fairless: Cool. Jason, thank you for being on the show. Thanks for talking to us about this first apartment syndication – 94 units in a state that you don’t live in, but you did have familiarity with, and you did qualify it based on predetermined criteria. How you found it and what you look for and how you were able to close the deal – family, friends, a property management partnership, and a bunch of resourcefulness along the way.

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

Jason Yarusi: Thank you so much, Joe. It was great!

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JF938: Ultimate Beginner’s Guide to Buying Property Number One

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Sunny Burns Real Estate Background:

–  26 year old real estate investor
–  First real estate deal a quadplex, was his best ever deal that has allowed his wife to stay-at-home
–  Property is 20 min from NYC, found off the MLS in 2015, cashout refied all $67k of their initial investment
–  Based in Garfield, NJ
–  Say hi to him at http://www.famvestor.com

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

With us today, Sunny Burns. How are you doing, Sunny?

Sunny Burns: Good, how are you guys?

Joe Fairless: I’m doing well, and I’m channeling the Best Ever listeners, and they’re doing really well as well, because we’re gonna be talking to you, and learn more about what you’ve got going on as a 26-year-old real estate investor who’s first real estate deal was a quadplex, and the property is 20 minutes from New York City, where you’re based.

Let’s talk a little bit about that, but maybe before we dig into that deal, do you wanna give the Best Ever listeners a little more about your background and your focus?

Sunny Burns: Sure. I’m a mechanical engineer – that’s my profession, that’s my 9-to-5. I work for the Department of Defense as a prototyping engineer, I do some cool stuff there. I recently printed a 3D grenade launcher.
My wife and I recently got into real estate. We really started diving into it about two years ago, and wanted to create some financial freedom for ourselves, so that’s why dove in and we bought that four-family, to create that passive income. My wife was an art teacher, but she was able to retire (…I like to say) and stay at home with our two sons – we just had another son two weeks ago.

Joe Fairless: Congratulations on the new arrival.

Sunny Burns: Thank you!

Joe Fairless: Alright, let’s talk about the quadplex, because that is your one and only deal, right?

Sunny Burns: That is.

Joe Fairless: Okay, cool, so let’s dive into that, because this is going to be really beneficial for real estate investors who are starting out, and learning how you got your first place. When in New York City do you live?

Sunny Burns: Well, we don’t live in New York City, we live actually in Northern New Jersey, in Garfield, New Jersey. There’s trains right into the city, it’ll take you 35 minutes to get into the city via train or bus – bus two blocks away.

Joe Fairless: Okay, cool. So you’re in Garfield. Are you from the New Jersey area?

Sunny Burns: Yeah, born and raised here, so I’ve been here all my life. That’s why we were looking local.

Joe Fairless: Okay, you looked local… How did you find the property?

Sunny Burns: Basically just off the MLS… We were just looking at realtor.com, and I got regular e-mail from them; one day I just got an e-mail for this 12-bedroom, 4-bath quadplex, and I looked at my e-mail and was like “Wow, this is the property we’ve been looking for.” I showed it to my wife, and I’m like “Let’s buy this thing.”

Joe Fairless: Okay. 12-bed, 4-bath quadplex… What criteria were you looking for on your search?

Sunny Burns: Ideally what we wanted was a property that was gonna cash flow at about $1,000/month. That was our basic, very bare bones criteria, but we were searching for a long time for something to meet that. That was after we kind of left the unit and everything was fully rented out, because right now we’re still owner-occupying.

Joe Fairless: Alright, you’re living in it, you’re renting out the other three units.

Sunny Burns: Yeah.

Joe Fairless: Cool. And you did that because you got an FHA loan, is that correct?

Sunny Burns: No, we actually did conventional financing through a smaller bank; we put 10% down. We went with the smaller bank because they don’t charge you borrower-paid PMI (they take care of the PMI) and we got a great rate at 4%, which we’ve since refinanced to a 3,5%.

Joe Fairless: Cool. They don’t charge you borrower PMI, so you did a smaller bank, 10%… What was the purchase price, how much did you have to put in – if any – to get everyone moved in, and what’s the rent?

Sunny Burns: The purchase price was $430,000. We put down 10%, so $43,000, and then we put about $20,000 in materials. We did all the renovations ourselves. Then for rent – so we live in unit one. Unit two we rent out to my in-laws actually, for $1,000/month, and the other two units we rent out for $1,700 each. So in total it’s about $4,410/month, while we live in one of the units.

Joe Fairless: $1,700 each, $4,410…

Sunny Burns: $1,710 for one of the units, and $1,700 for the other unit.

Joe Fairless: Oh, so don’t forget the $10!

Sunny Burns: Yeah…

Joe Fairless: You are a true engineer. You know your numbers, you get on to me if I miss $10… I love this.

When I jump on investor calls and I’m having a conversation with an investor, they don’t even need to tell me what their occupation is, because I will know if they’re an engineer or not based on the type of questions they ask. That is the only profession – not accountants, not lawyers, not doctors, but engineers… Engineers ask the most detailed questions and exhaustive list of questions out of any type of investor.

Sunny Burns: I would definitely agree with that.

Joe Fairless: Alright, so what was that number…? $4,410…

Sunny Burns: Yes.

Joe Fairless: $4,410 divided by, you’ve got 450 into it… Alright, cool, that’s right at the 1%. And then, once you move out…

Sunny Burns: Yeah, we can definitely get $1,500 for our unit easy, and then another $500 for my in-laws unit easy, once they’ve moved out.

Joe Fairless: How long are you gonna be living there?

Sunny Burns: Until we find our next quadplex that we can also house-hack and move into and rent out as well. We’re looking for another triplex or quadplex, that’s what currently I’m searching.

Joe Fairless: Okay, cool. Tell us about the renovations – what did you need to do? Did you have to learn yourself how to do that stuff?

Sunny Burns: Yeah, definitely YouTube really helped a lot in a lot of things, but also my wife is amazing – she grew up in a really old Victorian with her family (I think it was the 1890s), so they had to repair it all the time, and she kind of just grew up really handy. I’m pretty handy myself, but I was more into car mechanics and that side of things. Learning house repair, that was definitely a learning curve, but YouTube, and she had a lot of knowledge, as well…

Joe Fairless: You know, if people asked me what would I have done differently starting out – I wouldn’t have done it differently, so perhaps that’s the wrong way to phrase it, but I was living in New York City and I bought homes in Texas in 2009… It was perfect timing – I didn’t know it at the time, but it was perfect timing. What I also wish I would have done was buy a duplex or fourplex, live in one side, rent out the other. I couldn’t make the numbers work.

It’s a little bit different because you’re from New Jersey, so it’s probably gonna be an easy answer, but I’m just gonna ask you anyway: do you feel like you’re sacrificing a New York City experience, since you’re not living in New York City, you’re 20 minutes away?

Sunny Burns: No, honestly… Personally, I can only be in New York City maybe one day a month, and then I’m tired and I gotta go back to some trees and land. I don’t know, I can’t live in that urban lifestyle too long.

Joe Fairless: Okay, cool, so that’s not how you’re made up anyway.

Sunny Burns: Yeah. But I definitely recommend that house hack – if you buy a single-family house, depending on how much you make, half your income could be going straight into that house (mortgage, taxes, repair costs), so buying that duplex at least can offset some of that money and can get on that track towards financial freedom and you’re not a slave to that house.

Joe Fairless: You mentioned that you did a refinance on it… When did you purchase it?

Sunny Burns: I purchased it in 7th October 2015, and we refinanced 10 months later.

Joe Fairless: How did that work out for you?

Sunny Burns: It worked out great. We purchased it for $430,000, we put that $20,000 into it in repairs, and I think it was under market when we bought it, so it appraised for $550,000, so that was $120,000 over what we purchased it for. We did a cash-out refinance, so we pulled out $67,000, and that was pretty much the $43,000 that we put into it and the $20,000 repair costs, and I think some closing costs wrapped in. So we just wanted to pull out every dollar that we’d put in; we wanted to pull out that money for our next investment, which we’re looking for right now.

Joe Fairless: That’s beautiful. Bravo!

Sunny Burns: Thank you. Yeah, it worked out beautifully. We only put 10% down, but right now, even after taking out that $67,000, we have 20% equity in it, which is a lot more than we initially put down.

Joe Fairless: Are all of your deals throughout your life gonna be like this?

Sunny Burns: I can only wish…

Joe Fairless: What type of luck are you having with your search right now on your next deal?

Sunny Burns: We haven’t found anything… It seems like the prices are just so high. We were looking at another house last week and went to an open house – it was like $600,000 for another quadplex, in the same town of Garfield, with two bedrooms and one bath. We have four 3-bedroom units, so we’re getting good money for a [unintelligible [00:10:44].26] unit, but I don’t know… The numbers don’t work as well, but we haven’t given our hundred percent in the search yet, so I’m still hopeful.

I think we won’t be able to get as great a deal, but we could probably have to settle a little bit.

Joe Fairless: For a Best Ever listener who’s looking to do what you just did – I’m not asking for your best advice, because I’m gonna ask that in a little bit… But just for someone who’s listening and like “Yes, I want that!”, what are some suggestions you would have for them?

Sunny Burns: Prior to us putting an offer on this house, we had put an offer in a week before on another quadplex in the same town of Garfield, and the advertised price was $500,000. Three days after it was listed we put an offer for $525,000. That was an offer $25,000 over asking, and we were quickly outbid by other investors. If the numbers work, other investors want in.
A guy put a cash offer over ours, and we put an offer 25k over asking… So my suggestion, how we got this property I really believe is because it was an REO, and it was owned by Wells Fargo and they have this first-time homebuyer’s program. For the first 12 days, they wouldn’t let any investors bid on it. Only people who were gonna owner-occupy and live in the property were able to put a bid in. So I think we were only competing with two other people. We just put an offer in, $5,000 over asking and we got it. I don’t think we would have gotten it any other way, especially because this is such a cash cow.

Joe Fairless: Okay, that’s similar to a hack – maybe it’s the same thing – the HomePath program…

Sunny Burns: Exactly, I was looking at a lot of that, as well.

Joe Fairless: Does that still exist, the HomePath loan?

Sunny Burns: It did two years ago…

Joe Fairless: Okay, cool. I got my second house through the HomePath program, and I only had to put 10% down. I didn’t, but there was the first-time homebuyers — or actually not even first-time buyers… If you were buying it to live in, you got the first crack at the REO property, and then it was police officers and veterans and firefighters – they got the second. If that passed through, then feeding frenzy with investors takes place, and I got it through that.

Sunny Burns: Sounds like a similar deal. When we visited this property, there’d be investors crawling all over… Every time we came there were three or four people just looking in the windows, looking around… Because it was completely vacant when we got it.

Joe Fairless: Let’s go back to $20,000 – that’s a significant amount of money to put into something and to do your own work on a property when you’re learning on YouTube, even though your wife is handy and you know car mechanics… [laughter] So talk us through that.

Sunny Burns: We redid the whole kitchen; we pulled out all the old cabinets, all the appliances – which I think there was just an old stove at that time… And we actually bought a used kitchen off Craigslist for $1,100 with the stone and sink and everything, and it magically fit exactly in our unit, so that worked out quite well.

Joe Fairless: What would you have done if it didn’t?

Sunny Burns: Well, we only bought it because it fit. We saw three or four of them… But it worked out so well. Anyway, I’m sure we would have cut the stone here or there, trying to make it work. It had an excess of cabinets, so we could kind of tetris it together.

So we did kitchens, we repaired the sidewalk… What else did we do? A lot of little repairs here and there; we painted a lot of walls. In the attic we made some storage space by putting down just plywood. We had to repair the chimney – it was kind of leaning over and falling down.

We pulled up all the rugs and refinished them to hardwood floors, we put in new vanities… Just kind of minor cosmetic tweaks here and there. We put in a centralized coin-operated laundry room… Things like that.

Joe Fairless: What repair was the most challenging to learn how to do?

Sunny Burns: Probably that kitchen. There was an L kitchen, and the sink wasn’t exactly where the hot water and cold water lines were, so we had to finagle some things here and there, but it worked out really well. I learned how to [unintelligible [00:14:41].28] copper pipes, and had to learn a lot of things on that one – hang up and make sure the cabinets were leveled, I had to put travertine backsplash, things like that.

Joe Fairless: When you are looking at these repairs or how to do them on YouTube, was there a particular channel that you were looking at, or you just do the search and whatever video pops up?

Sunny Burns: I did the search, looked for the highly rated, highly viewed ones.

Joe Fairless: Okay, got it. Now the money question – what is your best real estate investing advice ever?

Sunny Burns: Honestly, I’m just gonna give that generalized advice to those beginners in the audience who are looking to make a step towards financial freedom – don’t go and buy that single-family house if you haven’t already. Buy at least a duplex. You don’t wanna become a slave to your house. You don’t want half of your paychecks to go there, because it’s hard to get out of that and grow from there. But if you can buy something like a duplex, a triplex or a quad, you can really start to almost live for free.

We actually live for free, and then make a couple hundred dollars after that. It’s really an awesome thing, and we’re able to grow so much quicker because of that.

Joe Fairless: Was there any convincing needing to be done with your significant other to buy a quadplex versus a single-family?

Sunny Burns: There was at the very beginning because she was really hesitant about working with tenants; she was really scared about tenants – they’re gonna sue you, they’re gonna cause all these headaches… We did credit score checks on every single tenant, we did background checks on every single tenant, we made sure that they had at least two times the rental income coming in, and we did a lot of thorough things.

Through the processes I outlined that we’d do with these tenants, I was kind of able to lower her fears and now she’s a huge fan and tries to tell all our friends to do the same thing.

Joe Fairless: Are you ready for the Best Ever lighting round?

Sunny Burns: Let’s do it!

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

Break: [[00:16:30].06] to [[00:17:12].15]

Joe Fairless: Best ever book you’ve read?

Sunny Burns: I just read this one – I love reading books; I read books all the time, but this is my most recent one and I really loved it… It’s called Outwitting the Devil, by Napoleon Hill.

Joe Fairless: Yeah, that is the one that has recently come out, right?

Sunny Burns: Yeah, he died a long time ago, and he wanted to publish it, but his wife didn’t want to publish it because she thought it was too controversial. Then the family inherited it, they didn’t want to publish it, and then they finally published it. But basically, the synopsis is Napoleon Hill sometimes somehow manages to capture the devil and coerce an interview on him… So he asks the devil how  he uses all these devilish tricks to ensnare humanity and never get them to succeed. It’s really an intriguing book, and I definitely recommend it.

Joe Fairless: That’s interesting. I love reading too, and I really like a lot of Napoleon Hill’s stuff. I did not like that book. I just couldn’t get into the dialogue, it just lost me. That’s interesting… To each his own. What’s your best ever personal growth experience and what did you learn from it?

Sunny Burns: I’m gonna have to say it’s buying this quadplex. It’s been about a year and a half now since we bought it. We had to do so much work to it… We really took ownership of it and we really did a great job, I feel. Our tenants really love their units, we do a good job maintaining that tenant/landlord relationship with them… So just this whole experience of stepping towards financial freedom – this experience has been great for the both of us, as a family.

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

Sunny Burns: My wife are assisting young adult pastors at our local church, so we give back that way. Recently, I’ve been getting very much into mentoring people through breaking habits from pornography – that’s recently what I’ve been diving into.

Joe Fairless: What would you say is a mistake you made on the deal?

Sunny Burns: I’d say a mistake was really doing all that work ourselves. We had a lot of holding costs… It was completely vacant when we bought it, so it took us like three months to do all that work. Honestly, I think we could have probably saved some money if we had hired some contractors to help us out. Because I’m working full-time, my wife was actually on maternity leave with a baby, so it’s hard for her to do a lot of things…
If we had hired contractors, yes, we would have had to pay them a lot of money, but we were also paying the mortgage, the taxes, the insurance – all of that without having any tenants to help us out. That was kind of painful.

If I were to do it again, I’d definitely do some of the work, but I’d hire a lot of it out as well.

Joe Fairless: Well, you definitely have given a lot of the listeners who are looking to buy their first place some inspiration and some tactical advice. Where can the Best Ever listeners get in touch with you if they want to?

Sunny Burns: I have a blog, FamVestor.com where I’m talking about creating passive income for the purpose of investing in your family. You can leave me a message there.

Joe Fairless: Alright. Well, thanks so much for being on the show, talking about your first deal – and your only deal, but boy, it’s an inspirational deal because this is the way to get started, Best Ever listeners. If you are getting started and you’re thinking about house-hacking, get a fourplex – better than a duplex, better than a three, because you’ve got more income coming in. If you can do just a little bit of work, and also even without doing work have equity built in and then do some work with the refinance after you get it all leased up, and be able to pull all your money back out, then you can put that money back into another deal. Holy cow… Do it all over again, rinse and repeat! And especially since you did it through a smaller community bank or credit union at 10% down..

Sunny Burns: Trustco Bank. Actually, they have branches in Florida, Massachusetts, New Jersey, New York… So check them out. 10% down, no PMI – you can’t beat that, especially on a four-family. Even my credit union wanted 25%.

Joe Fairless: Yeah, those are some great terms. Thanks so much for being on the show. I hope you have a best ever day, and we’ll talk to you soon!

Sunny Burns: Thanks!

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

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

JF932: FOX News Anchor Invests in Real Estate

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He learned the good, the bad, and the ugly of real estate. He helps others build a rental portfolio and live financially free. Hear what he’s up to now!

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Clayton Morris Real Estate Background:

– Real estate investor and the President of Morris Invest, helping people build passive income and wealth
– Host of Investing in Real Estate podcast, which has a laser focus on buy and hold rental properties – News anchor on America’s number one morning show FOX & Friends on The FOX news channel
– Co-host for “FOX & Friends First.”; an hour-long expansion of “FOX & Friends”
– Based in New Jersey
– Say hi to him at http://morrisinvest.com/
– Best Ever Book: Four Spiritual Laws of Prosperity

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Complete Transcript

Joe Fairless: Best Ever listeners, 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. We only talk about the best advice ever, we don’t get into any fluffy stuff.

With us today, Clayton Morris. How are you doing, Clayton?

Clayton Morris: I’m doing great, Joe. Thanks for having me.

Joe Fairless: My pleasure, nice to have you on the show. A little about Clayton – he’s a real estate investor and the president of Morris Invest, which helps people build passive income and true legacy wealth. He’s a news anchor on America’s number one morning show, Fox And Friends, on the Fox News channel. He’s the host of Investing In Real Estate Podcast with a laser focus on buy and hold rental properties. With that being said, Clayton, do you wanna give the Best Ever listeners a little bit more about your background and your focus?

Clayton Morris: Sure. It’s funny you say “focus”, because it was never really my thing – discipline, focus… Chasing shiny was always my biggest problem, so it wasn’t until I got focus and zeroed in on a question that my wife had asked me, “What are you chasing?” a number of years ago that really had me sit back. It was like a punch to the gut.

I started out in the broadcast world as a child. I grew up wanting to be David Letterman; I’d sneak downstairs, I would watch Letterman and Carson while my parents thought I was asleep. So I started a career in broadcasting and traveled all around the country as a reporter, living in different cities, and anchor NBC news, CBS news all over the country.

While I was there I was noticing I was renting from a lot of people, and I was dealing with a lot of landlords. I don’t know, I grew up with that Rich Dad, Poor Dad mentality; I grew up with the poor dad mentality – work for the paycheck, and that sort of thing. So it just started to slowly dawn on me that I was somehow missing the boat. Working for a paycheck and making 32,000 dollars a year, and literally my rent exceeded the amount I was making from my paycheck.

Joe Fairless: Been there…

Clayton Morris: Yeah… And something just wasn’t right. I was seeing these landlords I was renting from; they were living many miles away, they weren’t even in the same town, and I was mailing off a rent payment to these people, and I thought “What is going on here?” That’s when the seed started to be planted, my friend.

Joe Fairless: Alright, seeds were planted. What has transpired between then and now, and what year was that when you initially got the a-ha moment?

Clayton Morris: I remember listening to Rich Dad, Poor Dad when I moved to Los Angeles to start working in TV, and I was a producer. That was 1999-2000, right after college. Then I moved to Montana as a political reporter for CBS news, in the capital, renting. I was by myself, renting from this couple who lived in Missoula, about three hours away. I never saw them, I just mailed them a check; absentee landlord. That was that a-ha moment, in 2000, and it took me a few more years to really take action.

I had a lot of debt. I had like 30,000-40,000 worth of credit card debt, I did not have good credit, student loans… God knows. I just bought records and Chinese food on the credit cards. It was brutal times. People have this perception of TV… You’re not making anything in those small markets, living in the middle of nowhere. So I had that a-ha moment, but it just took me a long time to claw out of that debt hole and start taking action.

Joe Fairless: Yeah, the a-ha moment was in 2000. Then it was, “Okay, now I gotta put the pieces in place”, as you said, “claw out of the debt hole.” When did you buy your first property?

Clayton Morris: It was 2004-2005, somewhere in there. The show that I was working on at the time, called The Daily Buzz — I was living in Dayton, Ohio, and they kept promising us that they were gonna get us out of Ohio, they were gonna build a studio and we were gonna move. They said, “Well, be in Ohio for a month or two”, and they moved us to Florida, finally, after two years that I lived in Miamisburg in Dayton, Ohio. Lovely people, I actually miss Ohio a lot.

They moved us to Florida, and I sight unseen found a realtor on the phone, and I just took action. I made a connection with a realtor; he went and looked for me and found a one-bedroom condo on a golf course, not too far from the studio. Fun nightlife nearby… And I bought it for 74,000, sight unseen. It had a 1970’s vibe inside; it needed to be updated. That  was my first purchase.

I moved into it and started doing the upgrades myself, and I would spend the nights… Because I had to work early morning; at 4 in the morning I’d be up to do the show at 6 AM. I’d be home by lunchtime, and I’d be just starting to put drywalling, and speckling and ripping out old light boxes, and toilets… Doing it all myself and learning as I went.

Joe Fairless: The sexy parts of real estate…

Clayton Morris: Right, right. Yeah, pulling off old textured wallpaper, which now, by the way, is back in style. That old wood textured wallpaper… Man, it’s expensive… Holy smokes!

Joe Fairless: [laughs] So you got your first place in Florida. What city was that?

Clayton Morris: Orlando.

Joe Fairless: You got your first place in Orlando in 2005 – did I hear that right?

Clayton Morris: Yeah, right around then.

Joe Fairless: Okay, right around then. You got your first place, 74,000… Do you still have it?

Clayton Morris: No, I ended up flipping it.

Joe Fairless: Okay. What did you sell it for?

Clayton Morris: I ended up selling that bad boy for 110,000. I lived in it for two years, so I was able to avoid the capital gains on it, because I was living in it. This is when the power of off-market real estate became apparent to me, because two doors down – she was an older lady, she had smoked for like 35 years, lived in this place for that long, and her family knew that it needed a lot of work and they didn’t wanna put it out in the open market because it was just not gonna get the price they wanted, and it was gonna be too much of a hassle, and they didn’t want to have contingencies… It was gonna be a pain.
I made an offer on this two-bedroom version of the one that I had already fixed up myself. So I had some awareness of what to do. I bought it – and by the way, I bought it with 100% financing… 110% financing, because you rolled in the closing costs also.

I would have to be up at 4 in the morning, and I’d be in there until one in the morning, working on the place, with music on in the background, putting in new cabinets, hanging dry wall, painting… Everything. Light boxes, ripping out… I had to pain the stuff so many times, because there was an inch layer of tobacco – or whatever it was – from her smoking, and you just couldn’t get it out. Primer, primer, primer…

Joe Fairless: Gotta put KILZ on it…

Clayton Morris: Yeah, gallons of KILZ… And sold that one also. I bought that one for 80,000 and sold it for 120,000, or something like that, right around that same time. Then the market crashed and all hell broke loose.

Joe Fairless: So you didn’t have any property when the market crashed…

Clayton Morris: I did, I had some other properties. I used some of this profit – and this is where you live and learn. I made some huge mistakes. A lot of people say this is like going to graduate school… So I took the profits from this, I was living high on the hog; I was single until my late twenties and early thirties, and bought some speculative land project up in North Carolina with a buddy of mine. It was a Phil Mickelson  golf course project where they were building a club house, and they were gonna be building in multiple phases… Oh, man. I put like 30,000 in that; that went belly up as the market collapsed. The builders pulled out, Phil Mickelson pulled out…

It was total disaster, so I went through foreclosure. I had another property in Fort Myers because of that. It wasn’t just well enough for me to try one North Carolina thing and test the waters; I had to do two in Fort Myers and one in North Carolina, and they all went belly up.

Joe Fairless: And then the dust settled on the market crash… What did you do after that?

Clayton Morris: Well, now my credit was ruined, so I really had to just refocus. I was trying to refocus myself, and I moved to Philadelphia, my home city. I focused on being a news anchor, saving up the money as much as I could.

I couldn’t buy anything because my credit was shut, but it really forced me to learn about real estate off-market, how to be unique, how to be creative about getting money, how to start to think about real estate in a different way, and that’s really when I dove in… I remember taking a Larry Goins course. I think it was called Ultimate Buying And Selling. It was in the mid-to-late-2000s when I started taking that course, and just wrapping my brain around the idea of locking up properties, doing wholesaling to acquire properties etc.

That’s kind of how things started out for me. I started then managing to save some money and started buying some properties in the Midwest (single families), and that’s how I started building up with cash. I had to use cash. Maybe I didn’t have to… I know there’s a lot of experts out there who are listening right now saying, “Come on, you could have done it in so many different ways with private money, and this and that”… Of course, knowing what I know now… But I started using cash, which is still fine, because now all these properties are free and clear. They were cash flowing, I rehabbed them… They’re still generating great cash flow for me today; I have no repairs on them all these years later because I took care to put in the mechanicals and put in the furnace and water heater, and update the windows and roof… And that set the template for what I do now.

Joe Fairless: So you were physically located in Philadelphia at the time when you started buying these Midwestern properties?

Clayton Morris: Well, I was in Philly for about a year, then moved to New York City. I got the job at the network, and that’s when I started making network money, and started doing really well. So I moved to Fox News Channel in Manhattan, and started then — and still, my credit was screwed up, you know? And I still also had a deficiency judgment come forward in a property that I was still dealing with, because I was going back and forth with this Florida property, and ended up having all my assets frozen. I woke up one morning and I couldn’t even buy a cup of coffee.

So here I am, at this moment in my life… I reached the network, I’m blessed. Not many people get to reach a network news job, after living all over the country… And I come into the studio, and I go downstairs where there’s a cafeteria, a nice restaurant. I go downstairs to buy a cup of coffee and an egg sandwich, or something, and my card is declined. I said, “You’ve gotta be kidding me. What’s going on?” and I just thought I would have an overdraft problem. I go upstairs, and every number on my Bank of America account is all in red. [laughter] I couldn’t do anything, it was like “Your life is over. Click here.”

So I called the bank and they’re like, “Yeah, your assets have been frozen by” – and then gave a name of some law firm, or whatever. I was like, “You’ve gotta be kidding me.” I just took a deep breath, regrouped and realized “This is the worst moment in my life right now.”

Joe Fairless: Hopefully that’s the worst moment in your life…

Clayton Morris: Yeah, up to this point, right? I’m 40, who knows…? So it was brutal, but that still was when I was still having to save up that cash. That’s when I started buying properties. I was in Manhattan; I started really thinking seriously about my approach to buying properties. I’d buy one every few months and rehab it with my team, and I had great contractors, people I could really trust… I just started building it that way, slowly, and slowly, and slowly.

Joe Fairless: The first Midwestern property while living in New York City – how did you find your team for that property to do the rehab?

Clayton Morris: It’s all who you know… A friend of mine was born and raised just outside of Detroit, not too far from the Ford factory and headquarters. I’d become close with him, and he was the head of the Disney cruise line, and we became fast friends in Orlando for many years… When I told him what I was doing, he said “My brother is a fantastic general contractor in…” – and he told me where, because I said “I’m flying into this city, I’m gonna take a look at these properties”… And he said, “Well, my brother lives there.” I said, “What?!” That’s just kind of how it happened, serendipitously, and I just started putting these pieces together.

You and I talked about this before when you were on my show – you’re compelled in certain directions to go in life, and this started for me when I was on an airplane flight to New Zealand; I was going to visit a friend of mine, to take photos, just to shoot for a week of photos in the mountains… And I was half-asleep, and the couple next to me (in their fifties), they were going to New Zealand also, and after 16 hours of sleeping and tossing and turning, we were ready to land, and 30 minutes left until we land and I we just get to talking.

They asked how long I was gonna be there – I said about five days. I said, “What about you?”, and they said, “We’re gonna be there for two months.” I said, “Who gets to go to New Zealand for two months?!” and he said, “I’m a real estate investor.” And he started telling me where he was investing (in the Midwest), he and his partner, and that’s how he’s able to travel the world and do what he does – passive income, cash flow… They told me these towns in Michigan… So I literally booked a flight the moment I got back from New Zealand, right to that town. Then my friend’s brother happens to be the contractor in that town… Stars align, things make sense. When you listen to your intuition, it makes sense.

Joe Fairless: What were the numbers on that, for the first Midwestern deal?

Clayton Morris: I was going back through some of the archives here… It was a short sale; I think I ended up picking it up for like 24-25, roughly… 3-bedroom, one bath; it was a corner property, it had a big backyard, and I was not scared away from people with pets. I thought, “This is a fenced backyard, this is gonna be great. I can even maybe charge a little bit more for someone with a dog, who would love this big yard”, and I just dumped on it.

Joe Fairless: So you were clearly — I don’t wanna jump to assumptions… Are you investing for cash flow with a $24,000 property? This is Detroit, right?

Clayton Morris: Well, it’s actually out of Detroit. If you throw a stone… You’re not in the city of Detroit; it was technically Redford, Michigan. So the zip code is Redford. I bought properties there and in other states in the Midwest, but Redford, Warren, and some in Detroit, because there’s a lot of great properties in Detroit when you get into some of those burned-out zones. you have to know your streets, of course, and you have to know what you’re doing, but some great, solid brick homes that are cash flowing for me for years.

Tenants in those properties signed five-year leases with me. Single mom with a young girl, who wanted to be in the school district (a good school district where my property is located).

Cash flow – I guess I didn’t fully understand it then, because I was thinking I wanted to be all things to all people. I want a huge equity, I want appreciation, I want cash flow… And you realize you can’t do all three. Pick the two that you’re strong with, that speak to you, and go with those. It’s like trying to get fast-food thinking you’re gonna get quality, speed and convenience. You’re not gonna be able to get all of those things.

Joe Fairless: And low-calorie, with no sugar.

Clayton Morris: Right… And you know, certain companies try to do it, and then it comes back to bite them in the butt sometimes (look at Chipotle). You can’t be all things to all people, so for me it’s cash flow. I like to buy below market, so that I’m getting a nice little piece of equity, so that my net worth is going up in addition to being able to buy this great cash flowing property. But appreciation for me – I learned my lesson with what happened with those speculative land deals I ended up going through.

Appreciation for me as an investment vehicle was dead. I don’t care what anyone said, I don’t what any guru wanted to come and tell me, there’s no way I’m investing for appreciation again.

Joe Fairless: So cash flow with some equity going into it, or after the repairs are done?

Clayton Morris: Or instant equity, knowing that if “Okay, that property’s worth about 40-45, but I’m picking it up for 26-27… I have that wiggle room to put in 8,000-10,000 and still have a nice little bit of equity on the backend that I didn’t have to pay for, that was sort of built-in equity.  So my main goal is cash flow. Losing my job, living on the margins, being knee-deep in debt, raised in that philosophy of the Rich Dad, Poor Dad… I watched my dad lose his job when I was 13 and it just destroyed us… Or it destroyed me. We were fine, but I always thought the world was over.

Someone told my dad that he didn’t want him to work there anymore, and our lives were over. I remember crying to my best friend; I was like, “I think we’re gonna have to move and sell our house.” It was all fear-based. I grew up with an intense amount of fear around money, thinking that I’m not worthy of money, money doesn’t grow on trees, we’re not the Rockefellers…

I heard all these negative memes my whole life around money, so I committed myself to changing that, and it’s very important how I speak to my kids now about money. I don’t want them to ever think of lack in their lives; I want them to understand abundance and realize they can’t hold on to money either… That it flows through them, in order to help other people. That’s incredibly important, because when you hold on to it, you’re not only hurting yourself, you’re hurting other people.

Joe Fairless: Yeah, it’s an interesting philosophy. I like that a lot. It’s something maybe I haven’t consciously thought of. Subconsciously perhaps, but not consciously. I heard that, I like that.

Your company now… How are you making money with your company, Morris Invest?

Clayton Morris: Now I’m still using the same principles that when I found my properties in the early days, of buying them for myself – buying them off-market, trying to bring them up to value, where I can put in new furnace, new water heater, update the roof, put in new windows, new Pecks plumbing, new electrical, updating the kitchens and baths and making it a great place for somebody to live, and still making sure I’m still below market value when I’m done with it.

And also rent in great areas where the taxes are low, or in areas where there are stable, blue-collar jobs and those properties cash flow. That’s my main focus. Our clients are paying us for that – a high ROI. We try to hit 10%-12% on every property we do. Then it’s fully managed with our team. We have great third-party property management teams that we work with in our markets, who understand the variations in why that property will rent for 700 and why that one will rent for 725, the streets, and obviously making sure they’re doing all the background checks, employment verification and everything like that with our tenants. That’s our promise.

We try to keep it super simple, because I like to say… My first client was my mom. I was doing this, building up this portfolio of properties with my wife, and my mom came to me and she said, “Hey, I’ve got $40,000 to invest out of my 401k; I can do a loan out of my 401k, can you help me get one? I see what you’re doing, and I could use that cash flow.” I said “Sure!” and she said, “By the way, you’re gonna have to do everything, because I don’t know what I’m doing. I don’t know how to hire contractors, I don’t know how to rehab a home, I don’t know any of that, so can you just take care of me?” I said, “Sure!” She was really our first client, and we’ve kept the same standards in place, as we’ve grown.

Joe Fairless: You’ve attained success as a professional in what you do with your full-time job… What have you learned from that that you apply to real estate investing?

Clayton Morris: Taking action. When I was a young man and ready to move out to California — I’ve just turned 40, but when I was just graduating college from the University of Pittsburgh I came home (summer, 1999) and my best friend, Andy, was there. We were having beers on the front porch, and even though it was stupid of me to move to the number two market in television in the country – I should have moved to the 160th market first to try to get a job in TV, but like an idiot, I just packed up my U-Haul truck and said, “Are you coming with me?” and Andy said, “Yeah, I’m gonna do it. Let’s go together.” We’re gonna move to L.A. and I’m gonna get started in TV. I didn’t have a job, I didn’t know anyone, but I’m just gonna do it. Just take action, and I’ll figure it out when I get there.

My dad looked at me… Even though I grew up under that Rich Dad, Poor Dad and he was the poor dad –with a great upbringing, but he said “If you know you need to go to L.A., you’ve gotta do it! You just gotta go.” It was that little spark that he pushed me to take action, and it’s the same with real estate investing. People wanna hang out on internet forums and just — misery loves company. So many naysayers out there, whether it’s Facebook, or whatever… They all just wanna complain and look for reasons to not take action. So the same thing is true in real estate, as it is me taking a plunge and moving out to California. We all know people like this in our hometowns, who you know when you go back to that restaurant that you used to like when you grew up, you’re gonna see maybe even some of the wait staff is still there, because they didn’t take action and you did.

Joe Fairless: I love that story, thank you for sharing that. Are you ready for the Best Ever Lightning Round? Let’s do it. First though, a quick word from our Best Ever partners.

Break: [[spp-timestamp time="00:22:37"].28] to [[spp-timestamp time="00:23:32"].15]

Joe Fairless: Alright, what’s the best ever book you’re read?

Clayton Morris: The best ever book I’ve read… It’s a book that really changed my life in the past few years, and that is The Four Spiritual Laws Of Prosperity by Edwene Gaines. As I mentioned, I struggled with money, memes about money and wanting to hold on to it, thinking that you can’t donate money because there’s not enough for you. She breaks down in one of the laws in the book – and I don’t care if you’re Christian or whatever; it’s really not about Christianity, it’s not about any kind of religion – tithing, and the historical significance of tithing that 10%, and understanding to give that money to someone in your life who brings you spiritual nourishment (spiritual food, as she says). It could be someone like your waitress, who sees that you’re having a bad day and just spends extra few moments comforting you that day. “Oh, so you’re having a bad day… How about an extra cup of coffee? What’s bothering you today?” That’s the time that you give that person an incredible tip and show how much that person means to you.

So breaking those memes about money for me, in that book… It’s a great little book. She’s an amazing woman, Edwene Gaines. Check it out.

Joe Fairless: Best ever deal you’ve done?

Clayton Morris: It was a wholesaling deal in New Jersey. It proves every point of real estate – systems work, follow-up works. I had done a mailing in New Jersey where I live, and I found a property in a very affluent neighborhood. These houses were being kind of torn down or built out from $400,000 and being sold for $900,000. And I managed to do a mailing, I got these people, stuck to my guns on price, I sent them a purchase agreement when no one else did, and a month or two months later they followed up with “Is your offer still good? We’ve exhausted our going around the circle, we’ll take your offer.” I got it, and it ended up being a wholesale deal. It ended being a $43,000 assignment. Or, actually, I double-closed that one. So a $43,000 double-close. That was a big moment for me. That was my second wholesale deal I ever did.

Joe Fairless: Wow… You got spoiled. [laughter] Best ever way you like to give back, speaking of your best ever book…?

Clayton Morris: Well, you and I talked about this… What I try to do when people ask me, “Why do you give so much away?” I’ll spend 30 minutes on the way with investors, and they have no money — I don’t care, I wanna help people take action. I’ve been blessed with a broadcasting career, so one of the ways that I like to give back is to just share as much as I can… Share everything, be as transparent, open as a book.

I’ll jump on the phone with people, talk for 30 minutes, they’ll tell me about their financial goals, they’re struggling with this, and I’ll kind of just help them over that hurdle. I sort of try to be a mentor to as many people as I can. You and I talked about this, which is try to go in inner cities to help with that financial education, because we’re not taught this stuff. We were never taught this is the way to build wealth. We’re taught, “Go get a job”, and we were taught “This is how you balance a checkbook”, but we’re not talking about real wealth building in this country… So I try to give back in that way to the best of my ability anytime I’m asked. Any speech, going to a public library in the inner city – anything like that is what I love to do.

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

Clayton Morris: That’s a great question… There’s been a bunch, but one sticking out to me is dragging out a deal for too long and making promises that I couldn’t keep to the seller. This would happen to be a wholesaling deal. At the end of the day, I lost my deposit – I wasn’t gonna fight that, of course – and the dragging out of the deal, and thinking that at the last moment I could just bail on the contract… People’s lives are involved in this, right? They’re planning on moving, they’re planning on packing up their stuff, and I thought for sure that I could sell this house; I thought for sure that I could buy this, I could do something with it… But it ended up being a disaster. A sewer condition with the property, with one of those big heaps — not even a septic tank, but the one before that…? The mound of sand… Cesspool.

Joe Fairless: Cesspool, yeah.

Clayton Morris: Yeah, and the New Jersey law – you cannot now sell that without it being upgraded. [unintelligible [spp-timestamp time="00:27:42"].28] all this money, I thought for sure that this house would sell, we could do a great deal. It ended up dragging on and on. She’s packing up, ready to move to Pennsylvania, and I just have to tell her I can’t do it. It was just heartbreaking.
Now I pull the Band-Aid off real fast. Right away, as soon as I can. Not waiting that long, 40 days, before I have to make a decision like that.

Joe Fairless: Clayton, what’s the best place that best ever listeners can get in touch with you?

Clayton Morris: The best place is simple – if they just come to my website… I’ve got a free download for people who are looking to build financial freedom; it’s the thing that I’ve built, that changed my life. It’s a four-page PDF that my wife and I, after a night of tears, brainstormed on our whiteboard, called Our Financial Freedom Number. It changed my life, it changed my business, and I’ve heard from hundreds and hundreds of investors who it has changed their lives. So it’s a free download, and if you’re interested, come to my website, MorrisInvest.com/freedom. You can download it there.

Just hit me up on social media, I’m everywhere, and I’d love to say hi to anyone who has any questions about real estate, or needs any advice, guidance. I’m always willing to help.

Joe Fairless: I really enjoyed our conversation, as I was expecting. I loved – as I’m sure the Best Ever listeners loved – hearing about your progression as a real estate investor, from your first place in Orlando, and the second place, to then some speculation on some golf course stuff that didn’t work out… Then being in a tough spot and identifying the best ways to buy. Your focus is cash flow; not buying for appreciation and crossing our fingers, but forcing appreciation through some renovations, certainly, but not crossing our fingers and hoping that it just appreciates, as well as making sure that you have equity going into the deals.

Then also the underlying foundation that you have of taking action. The U-Haul truck, going to L.A. story certainly exemplifies that. Thanks so much for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Clayton Morris: Thanks, Joe.

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real estate pro advice

JF873: How to Live Life like a WARRIOR! #skillsetsunday

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He has put up really big numbers for his businesses, but he couldn’t do it without this mindset. Hear how he made it possible to muscle through even the most difficult challenges!

Best Ever Tweet:

Mike Agugliaro Real Estate Background:

– Co-owner of Gold Medal Service New Jersey’s largest and respected home services company
– Last 10 years, he’s grown the business from making less than $1 million a year to making more than $28 million
– Host of the CEO Warrior Podcast and CEO Warrior mentoring business
– Author of 4 books
– Based in East Brunswick, New Jersey
– Say hi to him at http://www.ceowarrior.com

Click here for a summary of Mike’s Best Ever Advice: http://bit.ly/2kkY5Vs

Made Possible Because of Our Best Ever Sponsors:

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

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

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Best Ever Show Real Estate Advice from experts

JF719: How to Connect to Influential People #skillsetsunday

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Ready to bump your business to another level? Maybe you need to reach out to an influential icon in today’s society. Today our guest is going to share how he does it and you will be surprised to know it’s persistence, not always who you know. Tune in and get the scoop on how you can reach out to big people like Gary Vaynerchuck.

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Jeremy Ryan Slate Real Estate Background:

–   Founder and Host of the Create Your Own Life Podcast
–   Was History teacher
–   Say hi to him at jeremyryanslate.com

Listen to all episodes and get a FREE crash course on real estate investing at: http://www.joefairless.com

Made Possible Because of Our Best Ever Sponsors:

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

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

Subscribe to Joe’s YouTube Channel here to learn multifamily and raising money tips:
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Best Ever Show Real Estate Advice

JF627: How this Hard Money Lender Will Approve Your Loan and Wire the Funds FAST!

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He has extensive experience in mortgage-backed security’s, Lending, and has now created a company as a hard money lender. His focus is on speed and customer service, ensuring that his clients get all they can receive as quickly as they need it. Hear how he does it!

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Paul Ullman Real Estate Background:

-Founder and Chief Investing Officer of asset based lending
-Closed over 700 transactions totaling over $170MM
-Based in Hoboken, New Jersey
-You can reach him at ek@abl1.net

Listen to all episodes and get a FREE crash course on real estate investing at: http://www.joefairless.com

Do you need more leads for your real estate business and a platform to grab more leads?

Danny Johnson has a solution for you, go to leadpropeller.com set up your website for success and get more leads!

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Best Ever Show Real Estate Advice

JF616: How This Marriage Raised Over $3MM Without Using Any of Their Own Money

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Today’s Best Ever guests are persistent! They struggled in the beginning and started with literally nothing. They first started with a duplex and then slowly built momentum with additional funding from their private circle, hear how how they do it!

Best Ever Tweet:

Matt and Liz Faircloth real estate background:

– Founders of The DeRosa Group and has done more than $10,000,00 of transactions using private money
– Raised over $3,000,000 in private money without investing any of their own money into the deals
– Based in Trenton, New Jersey
– Say hi to them at http://www.derosagroup.com/
– Check out landlord tips on their YouTube channel, Landlord Chronicles

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Do you need more leads for your real estate business and a platform to grab more leads?

Danny Johnson has a solution for you, go to leadpropeller.com set up your website for success and get more leads!

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JF606: Fix and Flip Goes South in MULTIPLE Ways! #situationsaturday

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Today’s story starts off sounding like a homerun deal, a $50,000
purchase on a $350,000 turn around could be exciting, except there
were many roadblocks in the way. Hear how this situation turned
into a hairy one every step of the way, and got worse and worse
until the end.

Matt Faircloth real estate background:

  • Co-Founder of The DeRosa Group and has done more than
    $10,000,00 of transactions using private money
  • Raised over $3,000,000 in private money without investing any
    of their own money into the deals
  • Based in Trenton, New Jersey
  • Say hi to them at http://www.derosagroup.com/
  • Check out landlord tips on their YouTube channel, Landlord
    Chronicles

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Ever Show
 in iTunes. 

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real estate investing at:http://www.joefairless.com

Need financing?

Are you a buy-and-hold investor or doing fix and
flips?

I recommend talking to Lima One Capital. A Best Ever
Guest told me about them after I asked how he financed 10
properties in one year. They are an asset-based lender with unique
programs for long-term hold and fix and flippers.

Click to
learn
more or, better yet, reach out to Cortney Newmans at Lima
One Capital. His cell is 404.824.6121.

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JF 12 : Continually Evolve Your Approach…or Become Extinct

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Ankit Duggal has successfully invested and exited in over $50,000,000 worth of real estate assets since 2008. He focuses on multifamily deals and tax liens in the Northern New Jersey market and discusses with us the importance of maintaining your focus on what you know while evolving how you make the deals happen.

Ankit’s real estate background:

  • A wide variety of experiences from hard money lender to brokering deals to deal syndication
  • His company Real Estate Renaissance Group (www.rernj.com) has deployed over $90,000,000 into investments

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Listen to the show to hear his Best Real Estate Investing Advice Ever!