JF2758: 3 Simple Rules To Becoming A General Partner (2,800+ Units!) ft. Maggie Cheung

How do you make the jump from being Limited Partner to General Partner? Maggie Cheung, co-founder of Sage Investing Group, took the same leap and now is GP of over 2,800 units. Maggie reveals how she went from LP to GP, and discusses her business’ strategy for targeting financial experts as investors.

Maggie Cheung | Real Estate Background

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Ash Patel: Hello Best Ever listeners. Welcome to The Best Real Estate Investing Advice Ever Show. I’m Ash Patel and today’s guest, Maggie Cheung. Maggie is joining us from my home state of New Jersey. She is the co-founder of Sage Investing Group, which provides multifamily real estate investment opportunities to investors who are auditors, accountants, or in the finance industry. Her portfolio consists of $227 million of assets under management. Maggie, thank you for joining us and how are you today?

Maggie Cheung: Good. Thank you for the intro, Ash.

Ash Patel: It’s our pleasure. Maggie, before we get started, can you give the Best Ever listeners a little bit more about your background and what you’re focused on now?

Maggie Cheung: Yeah, definitely. As you mentioned in the background, before I joined this three years ago, this real estate investing journey, I was a full-time corporate employee. For almost 13 years I was in the audit field; I audit the banks, and I audit the bank’s investment vehicles such as multifamily commercial business. But there are just a lot more zeros in those terms. Now I do the same thing, but I’m actually acquiring assets with less numbers in the back, but nonetheless, it’s 100 plus units. We try to acquire 100 plus units with good value-add, and those are things that we like to offer to our investors and bring other people like us along to the journey.

Ash Patel: Maggie, I had to reread that intro a couple of times. I didn’t believe somebody actually caters to auditors, accountants, and people in the finance industry. My only thought was you had to have come from that background to be able to relate to those people. Nothing against those industries, but it’s almost like walking into the lion’s den and pitching these savages. Explain to me the challenges of having those people and some of the benefits of having people in that industry.

Maggie Cheung: You actually seem like you have some experience with those people.

Ash Patel: Just no different than any other real estate investor. We should stop calling them “those people”.

Maggie Cheung: Yes, my people.

Ash Patel: Okay, we’ll call them your people. Perfect. I don’t know if that’s any better, but alright.

Maggie Cheung: Yes. You do know [unintelligible [00:05:12]. Originally, I know myself, I’m the worst critic and I’m an auditor and so a skeptic at heart. So we weren’t sure if this is really the way we want to go, this is the identity that we want to do with Sage Investing Group, which is what our company is. But after a few years in, we just started attracting the same people with the same mindset, and then ultimately, we’re like, “Okay, I think we just can’t shy away from ourselves.” I think most of the time it’s just that getting ourselves comfortable around a deal takes a while, because we’re such a skeptic; we question everything under the sun.

So I think we’re in the best position to pitch the deal because we know what others, accounting and finance people, are thinking ahead of time, and we’re trying to get ahead of that, because I feel people like us hold ourselves back from investing. So the more that we can provide, the more education we can provide to our investors, and the more they feel more comfortable, they are more likely to see the opportunity to invest in real estate, which has tremendously changed our lives, change my life personally. So we would like to bring that to our people.

Ash Patel: Yeah, I admire that approach. Auditors especially, their job is to find things that are off. Day in and day out, they’re looking for anomalies. So it’s great that you’re pitching to that level of sophisticated investors. What are the benefits of having these very stringent, analytical, financial background people as investors?

Maggie Cheung: I think I enjoy it because as much as I feel like I think I cover everything, I’m sure there’s always something that I haven’t seen or haven’t uncovered. So I do appreciate it when investors are bringing up these questions. We do take it seriously and we consider it in our own underwriting or any deal, or any future deals that we look at with that critical eye. We do collect that information and also take that into consideration.

Ash Patel:  Maggie, in the past, I’ve had the pleasure of interviewing a number of people that have come from the financial planning field, and asked them, “Why have you never pitched real estate to your clients?” Often, it starts with they never knew the potential returns of real estate. But even when they found out about those returns and other aspects of the investment, there’s no way for them to make money on pitching these deals, there are no kickbacks. So how do you get people in the finance industry to look at real estate, and in your case, multifamily investment options?

Maggie Cheung: That’s a great question, Ash. I usually present it the way… Because I invest in a lot of the deals myself and it’s been a few years now, so I know I started to see the potential growth of it. I think people in my, I guess, former life and people who are my friends now, they’re starting to see a little bit more of the traction and potential long-term benefits of investing in real estate. So I think through my own experience, I’m able to connect with them. Because I am like them, they see a little bit more outside of just stocks, investing in stocks, and investing in just single-family homes around the backyard. I think that element helps a lot in that conversation.

Ash Patel:  I would love to roleplay a cocktail party with you. Imagine your home or somebody else’s home and it’s just a pre-dinner cocktail party full of people from the financial industry. Specifically, I want to say financial planners, let’s make this a challenge. How would you strike up a conversation and how would you lead that into investing in real estate?

Maggie Cheung: Yeah. I typically don’t like to present something if I can’t help them. I would like to have the conversations like — if it’s a financial planner, I definitely like to ask like, “What are your investing? What are your returns like? What type of asset are you investing in?” I would like to see if they have experience in multifamily real estate. If this is something that I can help with, I would definitely like to share that. Not everyone I think will be able to satisfy everybody’s investment profile, investment appetite. Because like you Ash, I know you invest in commercial and also multifamily. So I know in commercial you probably are looking at a higher return, like 30% or more, than multifamily, where it’s more around 20%. So you definitely will have to consider that person’s risk appetite, and risk profile, investment philosophy. I do like to pitch — not pitch, but I like to try and see that they have a diverse investment asset. That might be something that I can help out with on that angle.

Ash Patel:  Got it. Alright, so let’s dive into you. How did you leave that industry and get into multifamily?

Maggie Cheung: As I mentioned, I was working in corporate, I was an auditor for a bank. I was working quite a bit, and I had two young kids, and working 80 hours a week. My husband is also an auditor, so imagine the conversation we’d have at home. So we decided that after having my two kids, one of us had to step back. It doesn’t make sense to have a young family and also continue our corporate careers in both angles. So I decided to take a step back on my side, but I actually thought about going back maybe a year. But during that time, I was thinking it just didn’t make sense. I was pretty much on top of my career, I was a VP. I don’t know if I could dedicate the same amount of effort to corporate life and also to my family.

So I decided that, okay, I have to have something more flexible, and we always wanted to do real estate investing. So I sat down with my husband, “Okay, give me a year to figure this out.” I did exactly that. I tried different types of real estate investing, I became a real estate agent, I joined a lot of meetups, I invested in private lending. I also shadowed a builder, who was also a former accountant, and she showed me the way how to flip the home. In the midst of that, I also invested in limited partnerships and syndication. That’s when I really understood the power as far as syndication. It also is very familiar to me, because I have seen these deals package on the bank side when I was working in the bank.

Now coming as an investor, I looked at the deal, how was it pitched, and how was it put together… The SEC filings – because these are private offerings, have to be filed with the SEC… All that was very familiar to me. So I just thought, “Okay, how can I get from limited partnership to general partnership?” That took me a year to figure it out. Finally, throughout the year, I decided, okay, multifamily makes the most sense in terms of my background. I know the background, and how my corporate life [unintelligible [00:12:22].22] I feel like there are a lot of things that I could offer in multifamily, and also bring our investors along.

Break: [00:12:29][00:14:26]

Ash Patel: How did you make that transition from LP to GP?

Maggie Cheung: I think, like most investors, I recognized that I cannot do it alone, and especially my whole entire life was in corporate audit. A lot of my peers and family members do not have any experience in multifamily real estate, so now I recognize that pain point. I know that I need another circle, another network. So I did join a mastermind group, so that I can come within the same realm as other real estate investors who are also hungry and also excited to take down these larger deals.

Ash Patel: So you grew your network…  And what was the first deal that you were a GP on?

Maggie Cheung: The first deal was a 156-unit property in Kansas City. It was three years ago, and it was owned by a church, so the rents are really, really, really low. I will say that the three-bedroom was like $600l; now the last time I checked, it was $1,100 for three bedrooms. But needless to say, it was one of the best deals that invested in.

Ash Patel: How did you find that deal, or who found that deal?

Maggie Cheung: Yes, I just connected with another real estate investor through the network. She’s amazing, she was almost sort of like a mentor to me. She invited me to the deal, invited me to learn about the deal as a general partner. I was really fortunate that I was able to relate to her and connect with her through this mastermind group. We hit it off right away, we met, she just invited me to the investments.

Ash Patel: Maggie, what was the value that you brought to become a GP?

Maggie Cheung: I think, like all auditors, we point out all the risks. So I think early on when I view the deal, I scrub through it this way that I also did at my previous job. I look at the risks of “Okay, is the property in a flood zone? What is the breakeven point?” So I scrub through the entire deal from beginning to end, I just list out all my questions. But of course, I definitely appreciate that she takes the time to take a look at my questions, but also sharing with her that these are the questions I’m asking, because I wanted to make sure I’m helping her to find all the risks in regards to a deal. I think that’s why she appreciates my honesty.

In terms of that, I’ll also help her with the investor relations side. A lot of the post-acquisition, we helped her on putting investor emails together. So those are the things that I contributed from her angle. Also, because I have a finance background, I look through the financials and ask those questions, making sure the PM is booking the right entries, so we can make sure that we have all the financials in order to help the K-1 deliver timely.

Ash Patel: And on today’s deals, do you still have that same role, or has that expanded?

Maggie Cheung: It did. Last year, we acquired Sage. Sage acquired the first deal where we actually sourced the deal from the beginning to the end. It’s 126 units in Dothan, Alabama. We actually are acquiring another portfolio there right now. We’re under contract for another portfolio deal in Dothan, Alabama.

Ash Patel: Maggie, I forgot to ask you, the deal in Kansas City – why did the church own a multifamily property? Was it just an investment?

Maggie Cheung: I think they looked at it more like a charity and they operated like a charity. The rents are extremely, extremely low. As I mentioned, it was $500 to $600, and there were people there, they were there for a long time. There was a guy there that lived since 1970.

Ash Patel: How do you raise rents on somebody that’s been there for 40 years?

Maggie Cheung: Yeah… I’ll say we don’t go in there and kick everybody out. That’s not really typically what we try to accomplish. On this front, we try to explain there is new ownership. What we try to do is put in place value [unintelligible [00:18:36].07] that people can see. Sprucing up the landscaping, fixing up the roof, fixing up [unintelligible [00:18:42], showing people that we actually care about the property and we’re actually working towards creating a community there. So we spent a lot of money up front, but we did not raise rents, we did it on a gradual basis. Then when the timing comes and the lease is up, it’s an easier discussion. They get a little more buy-in from the tenants; ultimately, they’re our customers as well, so we want to make sure that they feel we’re putting value in their eyes before we raise those rents over time. So it’s three years in the making.

Ash Patel: Got it. Maggie, what advice would you give somebody that wants to become a GP on a deal?

Maggie Cheung: I think first it’s just to surround yourself and see if you can get in close contact with other people who are GPs themselves. Because it might be something, a shiny object, but it might not be a fit for everybody. I think having that conversation – we understand what is involved as a GP, because it is a lot of work. I don’t think being prepared for that before you jump in is really helpful. So connecting with people like yourself or myself and anyone else in that position, and hear them out on their journey… And listen to your podcast, of course, to really understand that that is a role that you want to play.

Ash Patel: If somebody came to you, let’s say at the Best Ever Conference, and said, “Hey, Maggie, I would love to GP with you on a deal.” What would your response be?

Maggie Cheung: I think, like your yourself, Ash, it will be what value that person can provide in the general partnership. Whether their background, or net worth, or something that they will be able to provide in our next deal, that will be helpful. Ultimately, it’s not just that; I also want to assess the person as a character. Are they a man or a woman of their word? It’s really — I don’t know what to say, like hunger or excitement; they’re really putting in all the efforts upfront in order to make the deal happen… Because you have to be dependable.

So it takes time for me to assess that, but I am happy to maintain that relationship to see. The thing is, with auditors, things take time and relationships take time. It takes time for me to assess if that individual is really fit for a partnership, because it is like a four or five-year relationship.

Ash Patel: I got it. So really, if somebody wants to become a GP on a deal, one, they have to identify what kind of value they would bring, two, they’ve got to find somebody that’s got a need that matches those values, and three, there’s got to be a personality fit. Three simple rules to becoming a GP, right?

Maggie Cheung: Yeah.

Ash Patel: Awesome. Maggie, what is your best real estate investing advice ever?

Maggie Cheung: You just have to start somewhere. People like me, my people, I think you can assess all day and get analysis paralysis, but at some point, you have to make a move in order to move somewhere.

Ash Patel: Maggie, I forgot to ask you, did your husband quit his auditing job, or is he still an auditor working 80-hour weeks?

Maggie Cheung: He’s still in his full-time job, but we’re making plans.

Ash Patel: Alright, good. Maggie, are you ready for the Best Ever lightning round?

Maggie Cheung: Yes.

Ash Patel: Alright. Maggie, what’s the Best Ever book you recently read?

Maggie Cheung: It will be Atomic Habits?

Ash Patel: What’s your big takeaway from that?

Maggie Cheung: Just implement something small every day, and focus on that. Just do one thing at a time, but build upon the habit.

Ash Patel: Maggie, what’s the Best Ever way you like to give back?

Maggie Cheung: I like to mentor other people. I like to give back based on what I learned, and hopefully, that will help them get to their goal faster.

Ash Patel: I would imagine you have a lot of people wanting you to be their mentor. How do you qualify who you choose to spend your time with?

Maggie Cheung: I do talk to kind of assess what they’ve done. What action are they doing in order to reach their goal. I do give people the benefit of the doubt. If I connect with somebody who mentioned that they want to reach a goal of acquiring a property for Airbnb and so forth, I would keep in touch with them the next time I talk to them. If they show that, or they visited the market, they actually presented an analysis to me, I see their potential. But if the next time they show me okay, they haven’t moved the needle anywhere, I’m probably going to distance myself a little bit more on that.

Ash Patel: Great advice. Maggie, how can the Best Ever listeners reach out to you?

Maggie Cheung:  It’ll be maggie@sageinvestinggroup.com, or you can reach me at my website, sageinvestinggroup.com

Ash Patel: Maggie, thank you again for being on the show and sharing your story with us. Three years ago, you were working 80-hour weeks and now your GPs on deals. You’ve got a tremendous number of assets under management. Thank you for sharing your story with us.

Maggie Cheung: Thank you.

Ash Patel: Best Ever listeners, thank you for joining us. If you enjoyed this episode, please leave us a five-star review and share this podcast with someone you think can benefit from it. Please also follow, subscribe, and have a Best Ever day.

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JF2685: 5 Worthwhile Benefits to Investing in Affordable Housing with Denis Shapiro

Denis Shapiro has diversified his portfolio ranging from apartment buildings to self-storage to mobile home parks. Now, Denis has branched out into Affordable Housing, a market that few people decide to invest in. In this episode, Denis shares why Affordable Housing can be a lucrative investment, along with five benefits you can gain from this asset type.

Denis Shapiro | Real Estate Background

  • Fund Manager at SIH Capital Group, which has an income fund and allows their investors to invest in specific deals they are GPs on. The income fund mirrors what one would find in a REIT but more consistent and is not publicly traded.
  • Portfolio: LP on multiple syndications in various asset classes such as apartment buildings, mhps, self storage and atm funds. Also has 10 Residential syndications, including Ashcroft deals
  • Has two upcoming GP deals in the works: a 50 unit Affordable Housing community closing in 01/22; and a 9 unit STR community closing in 02/22.
  • Based in: Freehold, NJ
  • Say hi to him at: www.sihcapitalgroup.com | https://www.facebook.com/sihcapitalgroup
  • Best Ever Book: The 5 Love Languages of Children by Gary Chapman

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Ash Patel: Hello Best Ever listeners. Welcome to The Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, Denis Shapiro. Denis is joining us from Freehold, New Jersey. He’s a fund manager at SIH Capital Group and he is an LP on a number of funds, including apartments, mobile home parks, self-storage, and ATM funds. Denis also has two upcoming GP deals in the works, one of which is an affordable housing community and the other is a short-term rental community. Denis, thank you for joining us and how are you today?

Denis Shapiro: Thank you, Ash, for having me on. It’s awesome to be here again.

Ash Patel: Good. It’s our pleasure, man. Before we get started, can you give the Best Ever listeners a little bit more about your background and what you’re focused on now?

Denis Shapiro: Yeah. I gave a more detailed background last time I was on so I’ll keep it really, really short. I’ve been investing in stocks for 20 years, the last 10 years, I’ve transitioned into alternative, but I’ve never pulled the cord on traditional. I feel that traditional and alternative can complement each other really well if you have stocks and bonds, and then you also invest in private securities like real estate. So for the last 10 years, I’ve gone down the rabbit hole… I went from single-family rentals and I quickly didn’t really want to do anything with that. Then I went to note funds, ATM funds, life insurance policy, but then I feel like I had the gateway moment is when I went towards apartment building syndications. Once I went down that rabbit hole, I feel like everything else opened up to me after that.

Ash Patel: You found the Holy Grail, huh?

Denis Shapiro: Yeah, it was definitely — when I first found it, I was like, “Oh, this is too good to be true. You get all the benefits of investing with a multimillion-dollar property, but you can do it for as little as $50,000.” I started crowdfunding so I was doing as little as like $10,000, but that was a disaster in itself. It was hard to believe that you could literally get all the benefits with a fraction of the investment.

Ash Patel: Yeah, the power of leverage. Denis, when you say traditional alternative investments, what does that mean?

Denis Shapiro: For me, traditional is anything that’s publicly traded, and alternative is anything that’s private. I wrote a book on this, The Alternative Investment Almanac, and I was trying to find a pinpointed definition of what exactly is alternative, because some people don’t consider real estate alternative. So the conclusion I came up with from all these different opinions is that it’s just a matter of is it publicly traded or privately traded, and that’s it.

Ash Patel: When you started investing in multifamily, did you start as an LP in other people’s deals?

Denis Shapiro: Absolutely. Besides my own single-family rental and duplexes, when I got into the commercial real estate space, it was strictly as an LP. My goal was just to become the best possible LP investor. Because, truthfully, if that is the only thing you accomplish, you can be an extremely successful investor. You never really need to go the GP route; but if you just really hone in and become the best possible LP investor that you can be, it’s an extremely powerful wealth creating tool.

Ash Patel: Denis, how does one become the best LP investor?

Denis Shapiro: Probably the easiest answer is investing with the best operators. But the journey — it is a journey. It’s something that people need to understand. My first investment wasn’t a good one; my second one was slightly better, and then after I had a dozen or so under my belt, I got the variables down path. I knew which ones I wanted, I knew which markets I wanted to be in, in which markets I did not want to be in, I knew where I was overexposed, underexposed… So it’s just time, knowledge, and experience. It’s not something that you’re going to wake up and you’re going to be like, “Wow, I’m a great LP investor today.” It takes a while to get to that point.

Ash Patel: What made your first investment not a good one?

Denis Shapiro: So much. And you know what? It’s easy to blame the operator, it’s easy to blame the underwriting, but honestly, it was just me and my lack of experience. I did not know how to evaluate a deal, and it doesn’t really matter who the operator was at that point, or anything else. I should never have made that investment, because I was not at the place where I should have been at that point before sending in that $50,000, or whatever the amount was.

So the second part of that answer, I guess, is what were the key variables that I learned that I kind of applied from the mistakes from that deal is not invest in deals where the overwhelming majority are one-bedrooms. So it might look like a big property, like 100 units or 200 units, but if 80% of those are one bedroom, you’re never going to get high 90s occupancy; it’s always going to be transitional. One bedroom – people leave, they move in with a girlfriend, they need to upsize. One bedroom’s are the most transitionary lifestyle unit composition, so you want to stick to the twos or threes. It’s okay to have a couple sprinkled in, but when you’re buying a complex and its majority are one bedroom, then you’re asking for problems.

Ash Patel: Interesting. I’ve never heard that before, but that sounds like great advice; it makes a lot of sense. I think back to all the one bedroom I rented or the studios that I rented; I was there for a year. I moved in with a roommate, moved in with a girlfriend… Yeah, that’s a neat perspective. What else do you look for in GPs?

Denis Shapiro: Okay, so from an operator’s perspective, a lot of things that I look for, is I like to take the word conservative and I scrape it out, because every deal gets labeled conservative. What I really look at is what is the range that they’re projecting.  I don’t invest in deals that project over 20%. I don’t do many developmental deals, so my sweet spot, what I look for in IRRs is between 13 to 15. What I’ve found is the operators that tend to go for that 13 to 15 sweet spot, they tend to actually perform into the high teens and the 20s. And it’s the operators that — like, when I did that crowdfunding, when I started out with crowdfunding, it was littered with a bunch of people who were projecting the 20s and the Moon. Part of my inexperience was I was attracted to that. These days, I scrape that off the plate, unless it’s an operator that I really, really know. If I get any deals from any operators that I don’t have a relationship with and it starts with a two in front, I usually just delete it.

Ash Patel: Your crowdfunding experience – was that through one of the big platforms out there? We’re you an LP on that deal?

Denis Shapiro: Yeah. I was an LP. The bottom line is it was a technology company disguised as real estate. I feel bad, because I was one of many investors that were basically… I don’t want to use the word defrauded, but it’s pretty close to that, where the advertising — and they were advertising on some of the bigger podcasts, well-established real estate podcasts as well, right before they shut down. As a real estate investor, you never want to hear the company that you invested through, because they didn’t get a VC funding, then they’re shutting down; then there’s a big problem there. It was a huge, huge — honestly, probably the biggest learning experience of my life was investing into crowdfunding where I thought it was better to do 5000, 10,000-dollar investments than to do 150k. Today, that probably cost me 100k to $150k of my net worth, that decision.

So it’s definitely — in the syndication world, in the private securities world, you get what you paid for. Usually when they preach, they advertise, get into these deals that $10,000 or whatever it is, usually it’s kind of a get-what-you-paid-for scenario.

Ash Patel: Yeah. And the way I look at it is if you’re taking on $10,000 investments, that’s a lot of accounting overhead. Why not just market yourself, get the 50k, the 100k investments, right? If you have the track record, it shouldn’t be hard to do.

Denis Shapiro: Yeah. But the problem was a lot of these operators that did get on these platforms didn’t have the track record. They either had a sponsor on the team that had a track record, or whatever the case was. But there’s forums out there where you can clearly see how bad it is. I have a lot of people that reach out to me from an investment perspective and say, “What should I do to get started? Should I go that route?” I say, “Absolutely not.” It’s not that every platform is bad. Yes, my particular experience was really bad, but the bottom line is that when I started taking on that responsibility for myself and doing the vetting, and calling the operators, and learning some underwriting, doing all those skills – that skill and knowledge base transformed my whole career… Versus still being on a platform where I would log in — yeah, I’d have a really nice portal and I would see this beautiful pie chart, but I would have learned nothing in that process. Versus having those calls, having those conversations, building up my network, and having people to actually go to for an opinion that actually means something. All of those things a crowdfunding platform cannot do for you.

Ash Patel: Yeah, and all of those things will help make you the best LP investor.

Denis Shapiro: Exactly.

Break: [00:09:35][00:11:13]

Ash Patel: Denis, how many different deals are you in LP on right now, roughly?

Denis Shapiro: A few just one full circle, but I would probably say high single digits. Probably high single digits, because I have an investment club that I do a lot of deals with; so I would probably say between 10 to 11.

Ash Patel: Do you spread your money out in different asset classes, or is it all multifamily?

Denis Shapiro: No, we do — so my investment club and my fund are two very, very different things. The investment club is a private fund with me and two other individuals, and they have very unique backgrounds. One of them is in crypto and the other one is in startup. So I personally wouldn’t feel too comfortable investing in crypto or startup, because I don’t have that experience. I’m a commercial real estate guy. But when they offer something to the club, I have complete confidence in them. So it allows me to have a more diversified portfolio. But when it comes to the actual fund that I actually administer, all that stuff basically is commercial real estate.

Ash Patel: If you find a really good operator, why not just go all in on that one operator, and keep doing more deals with them?

Denis Shapiro: I think it’s like a lifecycle. At first, when you’re new, I think the first couple of years, it was exciting to get on calls with new operators, and especially well-established operators. I remember the first time I spoke to Joe and some of the other big operators. It was fun, it was an experience, and it was worth those conversations, and it was worth doing a lot of deals with a lot of different operators. Now that the deals went full cycle and now that you have an evolved portfolio, now it does make sense for me to be more selective. And I do go all in on selective operators; like, for our fund that we administer, we only have four operators. But those four operators give us exposure to almost 196 properties out there, so we’re still really well diversified. But if I was earlier on in my career, I wouldn’t advise it. But I feel like after you go to full cycles, then you can kind of apply your 80/20 principles, and then at the end of the day, it becomes okay, as long as those operators are well diversified. If you’re doing a fund to funds or something like that, so you’re not putting all your eggs in one specific property, with one specific operator.

Ash Patel: Got it. Are you doing that now, a fund of funds model?

Denis Shapiro: We do two things. With SIH Capital Group, we have an income fund. The goal is literally just to provide the highest possible income from day one, and for it to be consistent. But those returns are capped. And then for email list, we’ll do the deals that we GP on; those deals we will offer to our investor list and they get access to the full total returns. So I always like to say, if you invest in the fund, you get less potential returns, but you get a well more diversified portfolio to back those returns; and they’re good for those specific goals. Now, if you invest in the individual deals, you will be subject to the performance of that specific deal.

Ash Patel: The deals that you guys’ GP – do you have a team that you work with?

Denis Shapiro: Yeah. I have different partners for the different things. We try to avoid doing the deals everybody else is doing. We’re not doing like value-add deals, we’re not buying in Texas and Florida and the Carolinas. There’s nothing wrong with that model; I’m an LP in many, many of those deals, so this is not me throwing shade at that model. But the GP deals that we’re doing, we’re actually trying to stay local, because we are asset-managing them ourselves.

So we have one deal in Pennsylvania — because I’m in central New Jersey area. We have one deal in Pennsylvania that’s about two hours away. It’s actually an affordable housing community, so this is not what many people associate with when they think of low income. This property looks like a class B, beautiful townhouses, plenty of parking spaces, safe, private area. That’s a 50-unit affordable housing unit, and then we are also doing a short-term rental community on the shore. It’s personally something I really wanted to do with short-term rentals. The shore is one of the only areas in Jersey that I would invest, because it is a blue state. So because it’s a short-term rental, you’re not dealing with the tenant-landlord laws as much, so it’s a little less of a headache. But those are two deals that we’re kind of doing on the general partnership side.

Ash Patel: Affordable housing. What does that mean? Does that mean they get their rent subsidized?

Denis Shapiro: Yes. What happens is — the community was built in 1998 so it was a very fresh property. When it was built, it was mainly built through tax credits. Then it gets into a system where there’s vouchers on it. What I learned in the process is that there’s project-based vouchers and tenant-based vouchers, and then there are just people that are getting utility allowances. So in one shape or form, people are getting assistance, but that assistance varies.

What I’ve learned is there’s a lot of value in the project-based vouchers over tenant-based vouchers, because tenant-based vouchers will go with a tenant, but project-based vouchers actually stay with the property. So what ends up happening is if you get a bad tenant on a project-based voucher, you have a lot of leverage over them… Because if they’re not strictly affirming to the lease, if you evict them, then that voucher still stays behind with the property. So they lose that voucher, and because of that, they usually are some of the best acting tenants that are there. Versus the tenant-based vouchers, usually they feel like the power is in their court, because, “Hey, if I leave, I know people want my voucher.”

So one of our business plans — it’s not the typical value-add, “Hey, we’re going to put granite countertops.” One of the pieces of our business plan is actually to up the amount of project-based vouchers versus the tenant-based vouchers. It’s a very unique business model, where it’s not based on income, it’s about controlling the tenant population there and making sure it’s a safe, great, and affordable community for the tenants.

Ash Patel: How do you up the project-based vouchers?

Denis Shapiro: [unintelligible [00:17:09].10] It’s about relationships with the housing authority. My partner on this deal, he already has affordable housing with this housing agency, so it’s all about relationships. It’s just something we’re going to just apply when we have it. The property also had vouchers that were not being used, and we’re going to be able to go in and use those vouchers right away, because there’s a certain amount allocated to the property. That means the next seven vacancies we could fill in from day one. So there are some cool interesting aspects when you’re dealing with affordable housing that you don’t really see with typical class C and other properties.

Ash Patel: If somebody doesn’t have a voucher and wants to pay full price, can they lease a unit at that property?

Denis Shapiro: They could, but there’s incentives of doing the voucher. It’s a higher market rent, so there’s usually incentive to go to the vouchers. We do have a contract with the housing authority. So we usually would try to stick with the vouchers, but we do have the option to also rent it out.

Ash Patel: You can’t really turn me away though, can you? If I come in and say, “Hey, I’ll pay your full price. I want this unit.”

Denis Shapiro: Actually, there’s already a waiting line. One of the benefits of doing affordable housing is because there are built in waiting lists through the housing agencies. So it’s not like we have to put this on apartments.com to fill it. The average occupancy since we went into contract has hovered between 90% to 100% with a waiting list. That waiting list is the month deep. This is why I really like this space.

‘I think, going forward, SIH Capital Group is going to really try to hone in on the affordable housing space because it’s so much less competitive where it’s not going to get bid by 35 different buyers. Because you need to understand the vouchers, you need to have affordable housing property management background, you also need to have a relationship with the seller where they can feel confident that they will sell this property and will get approved by the state. So there are all these different little nuances where it allows a smaller buyer pool and much more of a relationship transaction than typically what you get when you’re dealing with a commercial broker.

Ash Patel: I grew up about 10 miles from where you are, in Holmdel, Central Jersey, and a lot of my buddies back there are like, “Man, there’s no deals out here. You’re lucky you’re in the Midwest. You can’t find a deal in Jersey.” I don’t buy that; you could find deals anywhere. How did you guys find this deal?

Denis Shapiro: The affordable housing deal – that was directly through… My partner purchased a property from them three years ago. So we’re buying it from one of the largest affordable housing developers in the state and in the country. He has a direct relationship with the disposition manager; that’s how we got that deal. The New Jersey deal that we got, which is the short-term rental community – that deal was also kind of off-market, where the brokers kid goes to school with one of my other partner’s kid. It was a very weird circumstances that we kind of just jumped on. But it was a very unique property. If you’re familiar with the shore, the shore real estate is probably some of the most desirable. It’s almost like the Hamptons situation, but on the Jersey Shore. This is like a mile away from Asbury Park; the location really sells the deal.

It’s a hard business plan to execute because we’re going to be converting these short-term rentals, so there’s going to be heavy renovation. It’s almost the complete opposite of the affordable housing deal, because the affordable housing deal is a very simple, easy to follow business model. The short-term rental community is a little bit more complicated. But that’s kind of what you need to be good at when you’re putting a deal together in New Jersey, because it is a blue state. There are certain complications that don’t allow it to be like a, “Oh, the market rent is $2,500. The rent here $1,700. I’m going to purchase it and bump it up.” When you’re dealing with the state of New Jersey, no, it’s not that simple. Because while there’s no rent control, there’s a term in Jersey where it says if you raise rent over a certain amount, it’s unconscionable. The term unconscionable is completely subjective on how the judge feels that day. So it could be $1 increase or it could be a $600 increase.

So just my point is that it’s not that the deals are not there, it’s just you need to be more creative with the deals to make them work in a blue environment. But you can’t replace a location that’s four blocks away, 40 minutes outside of New York City.

Ash Patel: Yeah. So you got these deals based on your network. It’s that’s simple. All you guys out there that are complaining about no deals – build your network, extend your network; put yourself out there.

Denis Shapiro: Yeah. Both deals were actually offered to me basically day one. My partner, toward the affordable housing community, texted me that day, he said “Are you in?” I was, at the same time, meeting up with the other deal in Jersey. Both deals were presented to me; it’s not like I personally found the deal, but I just jumped on it when I got the opportunity.

Ash Patel: Alright. Let’s dive into the numbers on the affordable housing project. It’s 50 units, is that right?

Denis Shapiro: Yeah. I’ve just got to keep it high level, because we’re closing this month and it’s a 506B, so I’m going to keep it very, very high level for the affordable housing, if you don’t mind.

Ash Patel: Yeah. Tell me what you could tell me.

Denis Shapiro: Okay. It’s 50 units, 100%, occupied, built in 1998. We have five project-based vouchers, but we have up to 12 that we can use; so there’s seven vacancies we could fill, about 18 tenant-based vouchers, the rest have utility allowance. We’re getting Freddie on it. The other big, big advantage when you’re dealing with affordable housing is you get expedited service to the mortgage brokers, so we kind of jumped the line on the mortgage queue.

Ash Patel: Why is that?

Denis Shapiro: Well, we’re going Freddie and they have a mandate for affordable housing. So if two deals go to the brokers at the exact same time, they will expedite the affordable housing over a regular deal every day of the week.

Ash Patel: You’re from Jersey; are you sure you’re not paying off somebody?

Denis Shapiro: No. This was just a benefit that we actually didn’t know about since day one… But when we started finding out about the delays that are going on right now, we definitely were appreciative of this benefit. And we also got a reduction on the mortgage so we got about a half a percent off. We were going to be looking at 3.8, we’re coming down to like 3.3, and potentially a little lower, because the rates kind of dipped down a little bit. We’re going to be locking in about a week or two in that range. We’re getting a nice reduction… but we can’t take any IO. That was a little bit of the downside but we’re going to be paying down principal day one.

Ash Patel:  You can take… What’s IO?

Denis Shapiro: Interest only.

Ash Patel: Okay. And what’s your down payment on this?

Denis Shapiro: I think 25%. I think we’re going to be at 74% LTV on this.

Break: [00:23:54][00:26:51]

Ash Patel: Can you tell us roughly what you’re buying each door for?

Denis Shapiro: Yeah. Total sales price is 5.725, and it’s 50 units, so a little over 100k a door.

Ash Patel: Okay. What are your rents right now?

Denis Shapiro: They’re ranging between $1,100 for the two bedrooms and $1,300 for the threes, and they’re all threes and twos.

Ash Patel: Can you raise these rents over time without the program?

Denis Shapiro: So here’s the interesting place… If you look at 99 out of 100 syndications, the typical business model is geared towards the income. Besides a few little levers that usually operators will use, the focus of every business plan has always been on the income side. Put the nice flooring down, fix up the kitchen, and get an extra 20 bucks a month. Over here, the business plan is so simple because the operating expenses are in the high 70s. So the real opportunity here is to bring it down to a lower level. The industry norm for a 1998 build is probably in the 50s. And just by doing that, we would be successfully execute the business plan.

Ash Patel: How will you cut expenses?

Denis Shapiro: We have a lot of these from day one. We already got the insurance quotes came down, a lot of it is through relationships. One of the GPs on this deal is the property manager on my partner’s other deal. The current property manager is charging the current seller 9%; we’re already at 4%. We’re doing a water conservation program since day one… So we have five or six levers that we’re going in literally day one. We’re going to be getting rid of about $140,000 worth of expenses in year one.

Ash Patel: Denis, is this similar to a section eight deal where if you add a washer and dryer, you get to increase rents, or if you add amenities, rents go up?

Denis Shapiro: You have to be careful… So you got to check on what you could do and what you can’t do. For example, during due diligence, we found out that every single person has a dog, and the lease definitely says you’re not allowed to have a dog. But the good thing is this is five acres, and it’s townhouses, and there’s a lot of families there, so we actually don’t mind the dog situation. But we don’t want to close our eyes and pretend that the dogs are not there, because dogs do cause some damage. So day one, we’re going to put a little pet park there and we’re going to charge pet fees. So we had to check with the housing agency that pet fees are allowed to be charged, because now you’re bringing up their income to a higher amount than normal.

So you can do certain fees, you just have to check with the housing agency that it’s okay. The current seller also has laundry and dryers for every single unit, and that’s not being charged, and they’re also fixing them up when they break. So that’s a really nice amenity; so we just plan on just charging a washer and dryer fee, really just to subsidize when these things start breaking. We’re not really looking to generate much extra revenue from it. But every single one of these things that we’re looking to add, it’s kind of like we’re going to be checking with our property manager who’s checking with the housing authority. So it’s not as simple as other deals where you could just do it and just do it. It’s an extra layer of compliance.

Ash Patel: I’ve got to ask you a question… And this comes from every time I buy a property. When I buy a building, I usually improve the lighting, the landscaping, the signage, to let the tenants know, “Hey, this new landlord is actually going to improve the property.” You guys are going in and you’re going to start charging all these fees; how do you reassure the tenants that they’re in good hands?

Denis Shapiro: We are very fortunate that this place is 100% occupied; this place is already safe, so we don’t have to go in and do a lot neglected — we don’t have to fix a lot of neglected items, I want to say. But we are also going to be fostering a certain culture, where we’re not going to say, “Look, hey, we’re going to pretend that you don’t have pets. But in exchange, we are also going to build a pet park where your dogs can come and run, and there’s going to be places for you to get the dog bags.” So it’s more about explaining to the tenants that we are adding value by doing those kinds of things, and “Now you don’t have to hide your dog anymore.” Because technically, that’s breaking your lease, and you could actually lose your apartment for that. This might not be a day one type situation, this might be when the leases turnover, where we might be doing this as the lease’s turnover for the whole year, we’re going to start implementing it.

So it’s not about we’re going to go in there and just going to be, “Hey, we charging you an extra $200 a month for stuff that you’re already getting.” It’s more about, “Hey, we are going to be providing certain benefits. Here they are.” We expect an open dialogue of communication.

Ash Patel: Got it. You’re an investor with some of Joe Fairless’ deals. You’ve seen that they’ll do ice cream socials, pizza parties… Would you do any of that? And then take it a step further – what if you bring in some financial literacy experts and educate some of these tenants on how to get ahead financially? Is that something you would consider doing?

Denis Shapiro: Yeah. So the first part with Joe and his community – one thing is this town is really cute; it’s like that Hallmark type of downtown.

Ash Patel: What town is it?

Denis Shapiro: Oxford, Pennsylvania. It’s about 20 to 30 minutes south of Lancaster. It’s a smaller town, everybody kind of knows everybody. We went out and we went with a couple of investors to the local downtown, and I had the cheapest meal I had in 33 years of living in New York City/Tri-state area.

Ash Patel: It’s Jersey though, that’s a problem.

Denis Shapiro: [laughs] Yeah. So it’s a very homey thing, but there’s a bunch of these local businesses there on the strip. I went into a comic shop and I got like a bunch of comics for my kids to bring home. They were like literally $1 each. I was like, “How great would it be if we host a comic day?” We’ll literally buy 100 comics and bring it out for the kids. We have a community room in the clubhouse, and we’ll just get the kids to come out, they could pick out one or two comics…

So we already have things like that to do, where we’re going to really try to incorporate as much local businesses as possible to that. Then on the flip side, the financial literacy program – I love that idea. I’ve seen an operator or two — I think the DaRosa group was working to implement something like that. I’ve got to check with them how it actually works, because a problem sometimes with a lot of those free services – a lot of people won’t sign up for them unless they have to pay for them; and you obviously don’t want to charge them. So I think that’s going to be something that we would consider, but I would want to see some feedback on some of the operators that have done that already in the past, see how successful and if it was worth the time.

One thing I will say is that my group SIH Capital Group, one thing we wanted to do is we want to do like a scholarship. We want to do that scholarship where it will be localized to the properties that we are GPs on. For example, for the Oxford Village, because the short-term rental community, obviously, this wouldn’t apply for – for the Oxford Village deal, it won’t be a huge scholarship, but maybe we’ll do something every year that we own the property, and it will just only be for the tenants that are there.

Ash Patel: That’s incredible. I love the comic book idea. Two great ideas, so I commend you on that. Denis, what is your best real estate investing advice ever?

Denis Shapiro: Be 100% okay to fail. I have to say my first mutual fund I ever invested in – complete failure. First individual stock I ever picked – complete failure. First crowdfunding deal I ever did – complete failure. First syndication I did – not a complete failure but not a good deal. Every single time, the second deal was finally better, the second trade was certainly better, and then it was just better and better. That’s the biggest piece of advice. If you’re scared to make that wrong investment, you’re just never going to invest. That’s the biggest mistake you can make… Because 10 years from now, I don’t really remember the $1,000 I lost on that mutual fund; it doesn’t mean anything. But I do remember my whole stock portfolio that I built subsequently because of that mistake. So that my best piece of advice, just be happy to fail.

Ash Patel: Denis, are you ready for the Best Ever lightning round?

Denis Shapiro: Yeah. Let’s do it.

Ash Patel: Alright. Denis, what’s the Best Ever book you’ve recently read?

Denis Shapiro: Oh my god. Okay. I am actually reading The Five Love Languages of Children. I don’t even know if it’s love languages… But it’s a derivative of Gary Chapman’s book. I have a six-year-old, a four-year-old, and a three-year-old, and it’s given me some interesting perspective on parenting. The best book is always one that you could actually take and just relate right away to. I would recommend that, it’s an interesting book for any parents out there.

Ash Patel:  Thank you. I didn’t know there was a challenge edition of that book. I’ll check that out for sure. Denis, what’s the Best Ever way you like to give back?

Denis Shapiro: It’s definitely going to be more scholarships, more stuff in the communities that we are invested in, and it just feels like a natural extension to give back at the same time.

Ash Patel: Denis, how can the Best Ever listeners reach out to you?

Denis Shapiro: The best way is, if you’re interested in a copy of my book, The Alternative Investment Almanac, that can be found on Amazon. But otherwise, the best way to reach out to me is on sihcapitalgroup.com. What I did is I created two abridged versions of my book. If you sign up to my email list, you can get one of each. And then if you like what you see on the email list, please feel free to reach out there.

Ash Patel: Denis, I got to thank you again for being on the show today, sharing your story from starting out investing in stocks, getting into single-family homes, then becoming an LP investor, starting a fund, and being a GP. I appreciate you sharing all your lessons, stay away from entire communities that are one bedroom, and all the other advice, man. So thank you again.

Denis Shapiro: Ash, it was awesome being here. Thank you so much.

Ash Patel: Best Ever listeners. Thank you so much for joining us and have a Best Ever day.

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JF2675: How to Catch Red Flags in Deals as a Passive Investor with Sam Giordano

When Sam Giordano first set out to invest in real estate, he wanted to find a way to minimize risk in any deal he joined as a limited partner. After creating a spreadsheet that helped him perform this risk-analysis, Sam quickly realized this was information other passive investors could use. In this episode, Sam discusses the syndication deal analyzer he created, along with the main red flags passive investors should look out for before closing on a deal.

Sam Giordano | Real Estate Background

  • Co-founder of Passive Advantage, which is a website designed to help passive investors vet real estate syndication deals on the path to financial freedom. They’ve created an LP Deal Analyzer tool that uses specific metrics and questions that limited partner investors can use when analyzing a real estate syndication deal.
  • Portfolio: 10 syndication deals as LP.
  • Full-time job is as a practicing gastroenterologist
  • Based in: New Jersey
  • Say hi to him at: passiveadvantage.com

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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. This is the world’s longest-running daily real estate investing podcast where we only talk about the best advice ever, we don’t get into any fluffy stuff. With us today, Sam Giordano. How are you doing, Sam?

Sam Giordano: I’m doing excellent, Joe. Thank you for having me. I appreciate it.

Joe Fairless: It’s my pleasure. I’m looking forward to our conversation. A little bit about Sam – he’s co-founder of Passive Advantage, which is a website designed to help passive investors vet real estate syndication deals. He and his team have created an LP deal analyzer tool that uses specific metrics and questions that limited partner investors can use when analyzing real estate syndications. I’m very interested in learning more about that during this conversation.

He’s a limited partner so he knows from experience how to vet deals, and he’s in 10 deals right now as a limited partner. He is a full-time gastroenterologist based in New Jersey. With that being said, Sam, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

Sam Giordano: Absolutely, Joe. I just wanted to take the time to thank you and your team, Theo and Travis, over the last couple of years for helping me to edify some of my knowledge points. Some of the variables that we use in vetting, some of the syndication deals we came across, we were introduced to those concepts on your show. I just wanted to thank you and your team. You put out a quality product and you’re sort of one of the leaders in the field. Thank you in advance for that.

My name is Sam Giordano, I’m a physician in New Jersey; my wife is also a physician. I’ve been practicing for about 10 years now, she’s been practicing for about eight years. I started from humble beginnings, my father only finished eighth grade, wound up joining the Police Academy, and then working for the Department of Treasury. He sort of self-made himself and had several different businesses along the way. My mom only graduated 10th grade in a business school. So I’m the first physician in my family, one of the first few people to graduate college. So I came from humble beginnings in New Jersey, went up through college, met my wife in residency, and somehow convinced a California girl to stay here on the East Coast. We now have my beautiful young family. I have a six-year-old, a three-year-old, and a one-year-old here in New Jersey that we’re doing our best to try to keep the sanity in the house.

Basically, when I first graduated from medicine, the first couple years out, we were doing the traditional personal finance things that we’re taught to do, in terms of maxing out our retirement accounts, paying off our student loans, and contributing to our children’s 529 plans… And then several years in, we started contributing to a post-tax or taxable brokerage account. I would say once the loans got paid off, we had a little more disposable income, then I started to try to figure out ways that I could improve the tax situation being someone that lives in New Jersey. In particular, when we lost the ability to state and local income taxes back in 2017, even if I can’t do much about our current tax situation since both my wife and I are W2 employees, but I wanted to try to figure out ways to diversify my taxable income. That’s where I kind of came across real estate.

Joe Fairless: You’re currently in 10 deals as a limited partner. Most people would passively invest in the deals, but not choose to create a website that helps other passive investors look at deals and let alone have that be a focus of theirs in addition to a full-time job, which I imagine is very demanding. I’m grateful for you and your wife and what you do, and the other physicians out there. I think you all put up a lot of stuff from insurance companies and other places. Whatever your compensation, in my opinion, you’re not compensated enough for everything that you do.

Sam Giordano: I appreciate that, Joe. Thank you.

Joe Fairless: …he’s a hospitalist. He just got sued for some frivolous thing and it’s just ridiculous the type of stuff you guys and gals have to go through. But passive advantage…

Sam Giordano: Thank you, Joe. I appreciate that.

Joe Fairless: Yeah, I mean it. Passive advantage – why create that? I’d like to get into some specifics about the metrics and questions that passive investors should look for and ask.

Sam Giordano: I appreciate that. So to be honest with you, I didn’t intend to form a website come up with the tool either. I think all physicians, in a sense, are sort of OCD or have a detail-oriented personality. And as you know, when you get involved in these private placement syndications, generally, they have a pretty significant minimum, outside of sort of the crowdfunding platforms. You can be talking $25,000, $50,000 minimums. When you get into that type of money, the significance of it, I wanted to be sure that before I jumped into this, I had some education and baseline foundation to where at least I kind of had an idea of what to look at, what to look for. I spent the whole first year before I wind up jumping into any syndication deals back at the end of 2016, 2017, sort of learning all I could. That’s where your podcast and a couple other podcasts came in. I read your book and other books, I was active on the BiggerPockets forums and other real estate forums that are geared towards passive investors or limited partners.

I used that first year to come up with an Excel sheet where I was making it for myself, just kind of looking at the metrics that I wanted to look at in a deal, like what did I want to see in terms of the sponsor… It’s not novel, the main categories that we all look at as passive investors in terms of the sponsor, the market, and the deal. But then within those categories, what are things that kind of I wanted to see, what are some standard ranges? These can vary from deal to deal and the type of deal, but I just wanted to make sure there weren’t any obvious red flags that I was going to go into my first deal and make an obvious mistake.

So that’s sort of how it happened. Then I was sharing that information, either on the forum or with other investors that I personally know that are looking into real estate syndications, I saw that there was a demand for having access to this type of tool. And to me, it is really a tool. There are components of it in terms of direct feedback, where it sort of changes cells, red, yellow, and green, depending on where those numbers are. But in my opinion, it’s really a tool for education, so that a limited partner going into the deals and learning about deals at least has an idea of knowing what they don’t know, or some of the things that may be obvious to kind of pay attention to. And once I saw that demand for this type of thing, that’s when I was like I want to make sure that I’m not off base on my metrics, and that’s when I looked to partner in forming an actual commercialized product that we have, the LP deal analyzer, and then subsequently forming the website, and trying to be able to help limited partners that are learning the process, whether they’re early on or further long, maybe avoid some of the mistakes. I don’t like to say it’s used to tell you which deals to invest in; that’s all personal choice. But it’s really just to kind of help people assess risk points and deals, and if there are obvious red flags. That wasn’t there for me, and I kind of created it on my own, and I didn’t realize the demand for it. But then once I did, like maybe I can affect people at a bigger scale as opposed to just the 700 physicians that work in my hospital, that were approaching me. Then I also have a place to refer them to when they come to me and say, “How do I learn about this?” Then instead of having to have the same conversation multiple times, I could just have them go to the website, look up some of the resources, some of the books I recommend, and some of the tools. So that’s sort of how it evolved. But it was by no means intentional, Joe; it was more serendipitous by nature.

Break: [00:08:26][00:10:04]

Joe Fairless: What are some examples of risk points that your analyzer would identify?

Sam Giordano: To me, by far, the most important point is related to the sponsor. There are objective categories that aren’t as amenable to the sponsors. I mean, there are some, like in terms of I look at how many full-cycle deals a sponsor has… It used to be the main criteria when I first started looking into this was, has the sponsor been around prior to 2008 or one of their team members? Because that was the last recession. Now things over the last couple of years have kind of been turned on their head in terms of the number of sponsors out there. There’s really not a ton of groups that were around prior to 2008. There are some, but a lot of them sort of transitioned into the private [unintelligible [00:10:48].13] space or deal with only family offices and stuff like that. So some of the sponsors that are around now, not a lot of them were around prior to 2008. So full-cycle deals, how long have they been around for, how long have they been involved in real estate syndication? Some people say they’ve been involved in real estate for 10 years, but they may have been an agent, or they may have owned their own properties; it’s not like direct dealing with syndications and executing plans. What is the succession plan in relation to the sponsor? God forbid – not to be morbid, but God forbid if something happened to one of the other sponsors, will the deal still be able to be executed? So those are some of the general numbers in particular in relation to the sponsor itself, or some of the metrics that we look at, or that the tool that we use looks at in relation to the sponsor. I can go into more detail if you’d like me to, and some of the other subcategories.

Joe Fairless: Yes, please.

Sam Giordano: Okay. So in terms of the market – and these are sort of readily available data on the internet. There are some more comprehensive sites like CoStar and things like that that you can pay for to get access to the data, but we look at such things as to what markets are in the path of progress. It’s the main hot markets that everyone is looking at these days, across the Sunbelt, whether it’s Phoenix, some of the Texas markets, Denver, Atlanta, some of the Florida markets – these are areas where jobs are growing, people are moving, there’s population growth. There’s hard data that you can look at in terms of what is the population growth in those areas? What is the unemployment rate in those areas? Some of those metrics with working from home have become a little more difficult to analyze because some people are working in places that they don’t live, in terms of unemployment and things like that. But whether or not what’s the standard income in those areas, or the average income, what is the delta between the average income to what you would have to sort of pay for a mortgage on a home in that area, versus what the rent is, and whether it’s desirable… Because these days, if there’s not much delta between buying a home and renting a nice apartment, a lot of people are going to buy a home. But you want to look in a market where people, where there’s a delta between that.

Those are some of the general market metrics that we look at. There are some other ones as well, what is the average rent growth in the area? Some of these things are a little bit tougher to come by. But a lot of the metrics I talked about in relation to the market are readily available on websites like citydata.com, or census.gov, or things like that, that you can kind of look this stuff up.

Joe Fairless: What about the deal?

Sam Giordano: Yeah, so the deal is where you get a little more objective. The deal in our analyzer is sort of broken down until the income and rent projections. “What is the rent growth projections?” is a big one. It was during the heat of COVID, I wanted to see deals that weren’t [unintelligible [00:13:33].25] a lot, weren’t projecting rent growth year one. But obviously now looking back, we realize that that was completely unfounded. The rent growth has been crazy through this market.

But just from a safety or risk standpoint, coming back to that general theme, just because of the uncertainty, I kind of wanted to see deals where they were looking at less rent growth, especially year one. I don’t like to see any particular year that’s projecting over a 5% rent growth. If anything, later on in the deal, I usually like to see that inch up somewhere in the one to 3% range to what the rent growth projections are. What is the breakeven occupancy? What is the current vacancy rate versus the projections?

Then you also look back to if you can get access to the T12 to see sort of what the comparisons are in terms of both the vacancy rate, the expense ratio of the property, how is the sponsor looking at what the expenses will be, versus what they were… So these are some of the metrics in relation to the deal; not speaking about the return, or the fees, or the debt which is also important, but in the subcategory of the deal, that’s one of the things, we look at in terms of what the rent growth is, and what the current dynamics are of the property itself.

Joe Fairless: When putting deals through this analyzer, where have been the most red flags when looking at specific opportunities?

Sam Giordano: I think the biggest thing these days, Joe, is in three categories. One is what the entry versus exit cap rate is. It’s difficult right now because the cap rates are so low. In order to try to make money in these deals, the delta between the interest rate and the cap rate is getting smaller and smaller. There are some groups that are not uncommon. They project the same entry cap versus exit cap. Now, that may be true and it’s the kind of market that’s not unheard of for that to happen. But I just don’t like those projections in the deal. I think, these days, I don’t have to tell you, but there’s so much capital out there that are just chasing yield and it’s a tricky time. The difficulty is that right now – I think people need this kind of deal analyzer more than they need it in a bad market. Because I think in a bad market, it flushes out some of these sponsors and it sort of shows some of the shortcomings that they may be doing in their projections. Whereas right now, everybody’s making money, there’s so much capital, and everybody’s deals are filling up within a couple of days… It’s just a risky time.

So this kind of feel analyzer metric evaluator is important because of the fact that there’s just so much capital that sponsors are able to get away with a lot of things. Even back to 2017, I’m sure you’ve seen it evolve as well. I know you invest in deals as limited partners. The metrics I’m looking at now are very different than what they were.

Now, things that haven’t changed that much – like, the fee structure really hasn’t changed that much. I don’t see people changing that — maybe like a half a point or something like that. But the basic acquisition fees, asset management fees, things like that haven’t changed that much. The return structure hasn’t changed a ton. Maybe you see a little bit lighter preferred return now than what you did in the past, but they’re very similar. But I think, in my opinion, the metrics that are different that you have to really keep an eye on now are some of the exit cap or entry cap, the rent growth projections, the debt evaluation I think is a huge risk point right now. A lot of people are doing bridge debt, which a lot of times makes sense these days. There’s not a lot of people doing traditional debt like they were a couple of years ago, where they were doing like 10-year fixed rate. But you’ve just kind of make sure if they do a bridge that, there are caps, there are ways to kind of mitigate some of the risks of the bridge loan.

I know it’s a long-winded answer, Joe, but that’s kind of some of the big things that I look at these days and the deals that I’m looking at, in particular in relation to the multifamily space.

Joe Fairless: I heard two specific things, and correct me if there’s something else specific. I heard entry versus exit cap, and I heard the type of debt that they have on the property, which might not be a red flag, because there’s certainly, at least in my opinion, a place for bridge loans versus agency debt.

Sam Giordano: I agree with you.

Joe Fairless: What are some other red flags? Sorry if I missed it during your answer.

Sam Giordano: The other one was the rent growth projections. There are some deals right now that are over a 5% rent growth projection year one. Like I said, it’s been that way for a year or so, so it’s not out of the question that that couldn’t happen. But depending on the severity of the value-add, maybe it makes sense in a class A where they’re really not doing anything. But if they’re doing some value-add and you’re going to need some vacancy in there to make these improvements, to project that kind of rank growth year one or income growth is difficult to do. So that’s the other one, the rent growth projections, entry versus exit cap, and nailing down the specifics in the debt.

ANd I agree with you, Joe. I’ve invested in two deals this year that are bridge debt, but they make sense with the business plan. Like, if they’re looking to execute the plan and turnover property in a short period of time, and it seems like they’ve got a track record to do that, then in some cases bridge debt makes more sense than to lock yourself into this huge prepayment penalty where you’re less nimble a year down the road. But if you have the proper caps on that and you mitigate some of the risks that are involved with the bridge debt, then there’s a lot of situations right now that it does make sense. I’m with you.

Joe Fairless: Taking a step back, what’s your best real estate investing advice ever for passive investors?

Sam Giordano: I think the best advice ever would be don’t be afraid to spend time on your education. When you learn about these syndications – and I know when I first learned about it, I’m like, “Man, there’s got to be a catch. Why didn’t I know about this? It seems like some Ponzi scheme or there’s something weird going on with it.” And your initial inclination is to just invest money and sort of start things up. But I think for passive investors in particular, don’t be afraid to take the time, take a step back, educate yourself so that when you do make that move, there’s a lot less risk of having a problem down the road.

Joe Fairless: We’re going to do a lightning round. Are you ready for the Best Ever lightning round?

Sam Giordano: Absolutely.

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

Break: [00:19:45][00:22:37]

Joe Fairless: What deal, if any, have you lost the most amount of money on?

Sam Giordano: Thankfully, Joe, right now I haven’t. Of the 10 deals I’m in, I haven’t lost any money on those deals. Some of that is probably a function of the time… But I think it’s been a learning experience. It’s not that I lost money, and I know you recently switched the fund model, but initially, I invested in several funds, and it’s just more difficult to predict when the capital calls are going to be and when the distributions are going to be, when things are going to start to roll out in terms of the properties, and then you can’t really vet the deal at all. You’re really relying completely on the sponsor… Which is not the end of the world. But at this juncture of my limited partner investments and things like that, I think right now, I’m mostly focusing on single-asset deals. But I wouldn’t be opposed, down the road, say, 7 to 10 years from now, once I’m at my financial independence number, that I would be more likely to invest in fund deals. So it’s not that I lost money, but it was just a learning experience in terms of figuring out the difference between the single asset versus the fund model.

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

Sam Giordano: My wife and I have a donor-advised fund that we’re able to financially support causes that mean the most to us. The second way is I like to get back through education, through coming up with the website, the deal analyzer tool, having countless conversations with my physician colleagues via the Internet, as well as at my personal hospital that I work at, to try to get people involved and to learn more about this type of investing, so that they can put themselves on the path to financial independence.

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

Sam Giordano: They can reach me at passiveadvantage.com. There’s a free eBook to download to get some more information about some of the metrics that we look at, as well as access to the deal analyzer tool that we previously mentioned. If you want to reach me personally, you can reach me at sam@passiveadvantage.com. I’d be happy to help in any way I can.

Joe Fairless: What an enlightening and educational conversation, especially for limited partners, but also for general partners to understand how limited partners should be looking at your deals in the lens that they look through to evaluate if it’s a good opportunity or not. Thank you so much, Sam, for being on the show sharing your insight and what research you’ve done over the years to get to the spot where you’re at now. Much appreciated, I hope you have a Best Ever day, and talk to you again soon.

Sam Giordano: Thank you, Joe, I appreciate it.

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JF2293: Applying Data Analysis To Find Undervalued Market Opportunities With Stefan Tsvetkov #SituationSaturday

Stefan has been a financial engineer for 10 years. Now he uses financial engineering knowledge in the real estate market.

His data analytics company, Envvy, helps real estate investors find market inefficiencies and high margin opportunities. Many investors focus on demographics, taking into account population growth and job growth, yet many seem to overlook the local real estate market’s historical pricing. If the market is overvalued the way many were in 2007, the investments can be susceptible to a dramatic price drop.

Stefan Tsvetkov  Real Estate Background: 

  • Financial Engineer for 10 years 
  • 3 years of multifamily investing experience
  • The portfolio consists of a 3-unit & 4-unit property in NJ and a duplex in NY
  • Based in New Jersey
  • Say hi to him at: https://www.linkedin.com/in/stefantsvetkov/ 

Click here for more info on groundbreaker.co


Best Ever Tweet:

“Markets that are undervalued could perform really well afterward” – Stefan Tsvetkov.


 Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless. This is the world’s longest daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any fluffy stuff. And first off, I hope we’re having a Best Ever weekend. Because today is Saturday, I have a special segment for you called Situation Saturday.

Well, we have a situation, and I think everyone is in this situation in some form or fashion. We are navigating the pandemic as real estate investors and entrepreneurs. And today’s guest is a financial engineer, and he’s going to help us answer the question, “Is the current real estate market overvalued?” So with us today is Stefan Tsvetkov. How are you doing Stefan?

Stefan Tsvetkov: Doing good. Thanks, Joe, for having me.

 Joe Fairless: My pleasure. I’m grateful that you’re on the show. A little bit about Stefan, and then we’ll get right into it. He’s a financial engineer, he’s got three years of multi-family investing experience. He’s got a portfolio in New Jersey, a three-unit and a four-unit, and he’s got a duplex in New York. He’s based in New Jersey. Again, his focus is he’s a financial engineer, he’s based in New Jersey. So first, Stefan, will you give us a brief background about yourself? Tell us about what you’re focused on, and then let’s go right into the real estate market.

Stefan Tsvetkov: Yeah, of course, Joe. As you mentioned,  I’m a financial engineer, and I’ve been doing that for ten years. But in the recent three years, I’ve been investing in multi-family, mostly New York City, basically. So that is my private expense. So I’ve been mainly doing two to four-unit private investments, so not raising capital, not syndications, not things like that; just personal investments on my end.

I have a data analytics company, Envvy Analytics, and that’s some of the work I’m going to talk about here, because basically, we do corporate analytics, we do different markets, market analysis, things like that. So that is some of the focus. Essentially, applying some of my technical, financial, engineering, or data analysis skills to the real estate world.

 Joe Fairless: I love it. I am always looking forward to having conversations with people who look at the real estate market from an objective analytical standpoint and learn what they’ve discovered. So please tell us, what have you discovered?

Stefan Tsvetkov: So the one thing I wanted to draw people’s attention to is investors and syndicators really like to look at different demographics trends; you know, where job growth is, population growth, and things like that. But one thing that I feel is overlooked is where do valuation stands.

So if we have a given market, everybody and investors would pick specific properties around the world, and that’s a great strategy, it’s an excellent strategy considering real estate is an inefficient market. But again, do we know where the real estate market is standing in those areas? Is it overvalued, is it fairly valued, etc? We don’t, usually. At least if I was feeling myself, I’ve never had a sense of this. So that is like part of this study.

So it was inspired by finance, for sure. For example, there is a guy, John Hussman – he is a PhD, he runs the Hedge Fund, and he’s got a metric that would predict, sort of would correlate to subsequent drops in the stock market. And some of you know the main index there over there is the S&P500. So he had a metric that would predict a 91% correlation to subsequent drops in the stock market. Now, one would not have the timing right etc. etc, but again, that is a measure of “Is at this point in time the market overvalued?” And that performed better than price-earnings ratios that would be the usual most common metric over there. So that’s one thing that inspired me.

A second thing that inspired me is before 2007, so in 2005, 2006, there was a guy in Massachusetts, his name is Ingo Winzer. He was on CNN at that time. So he was basically speaking that certain markets, not the whole markets, that certain markets are dangerously overvalued. He was speaking about markets in California, in Florida, etc. So, here was doing that in 2005; he was later again on TV in 2006, and it was pretty much the same story – specific cities substantially overpriced.

So one didn’t have to wait until 2007 to know this, one doesn’t have to wait now, and it’s not really overvalued now to this extent… But these are some things that inspired me. So I wanted to share with your listeners some of my findings;  I thought could be interesting and useful to everyone, pretty much, as an investor.

So in 2007, markets that were overvalued, for example California or somewhere in Florida, they were around 50% — let’s say Arizona was 55% overvalued, Nevada was 49% overvalued. And here, when I say overvalued, the measure that seems to work best – it’s really a simple measure; it is [unintelligible [00:07:54].11], price income ratios, takes an average or whichever metric on that, and then a percentage deviation from that at the current point of time, and that gives us a valuation.

For example, if the historical price income ratio in California has been 8, let’s say, the prices [unintelligible [00:08:12].09] or something like that. Supposedly, that’s not the correct number. And that is currently standing at 10 – okay that would be a 25% overvalued market. So this measure is the simplest way to do it.

 Joe Fairless: And just so I’m tracking correctly – when you say the price, I understand income, but income is household income? And price – is that single-family homes?

Stefan Tsvetkov: Right. So again, that’s not going to be a commercial multi-family, correct?

 Joe Fairless: Got it. Alright. So we’re talking single-family home prices, and household incomes.

Stefan Tsvetkov: Correct. Well, that would be FHFA prices. So Federal Housing Finance Agency. I believe they have some small multi-family in there. But it would be more like single, small multi-family.

 Joe Fairless: Okay, so under five units?

Stefan Tsvetkov: Yes, correct.

 Joe Fairless: Okay.

Stefan Tsvetkov: So that’s a different topic. Now, back to the commercial multi-family – that’s always driven by different factors. I did a study on that; there is still high correlation to commercial, so it’s still fundamentally the same asset. It’s not to say that okay, because [unintelligible [00:09:09].11] is priced differently because the appraiser is different – it doesn’t relate matter. It’s still fundamentally the same asse, it’s still driven by similar dynamics, by sort of the household incomes in different areas, etc. So the correlation to that was over 95%, or something; it’s really close.

 Joe Fairless: Just to make sure I just heard you correctly – did you just say that correlation with commercial is 95% to what you’re finding with the single-family residential?

Stefan Tsvetkov: Okay, so if FHFA, that includes single-family, and I believe includes some small multi-family in it – so FHFA home prices versus what I have, I just am looking at the slide right now, versus CoStar commercial sale index, that had 97% returns basis [unintelligible [00:09:54].26] on returns basis would be less. But yeah. So kind of over the long run, the two should be in line. It’s of course a different asset, it’s priced differently, we know the differences of that in terms of commercial versus residential.

 Joe Fairless: Got it. Okay. So, what you’re talking about now is primarily residential, but there’s likely a high degree of correlation with commercial.

Stefan Tsvetkov: Correct. And thanks for clarifying that. But absolutely, it’s primarily residential. So it would impact more listeners who are purchasing one up to four units, I would say, the most.

 Joe Fairless: Got it.

Stefan Tsvetkov: From there, in 2007 the markets like specifically California, Arizona, Nevada, and Florida, those were the four most overvalued markets. Basically, 49% up to 68% they were overvalued. So that was super much.

 Joe Fairless: This is 2007 that you’re talking about, right?

Stefan Tsvetkov: Absolutely, 2007.

 Joe Fairless: Okay.

Stefan Tsvetkov: The metric that is how deviation from price income ratio, historical price income ratio – so this metric showed 83% correlation with the actual drops that happened post-2007. That is the analysis that I did; that for me was super useful finding for my own investment, because I felt “Okay, that’s really really a good way to know what could happen, at least once a peak in the market gets reached.” So markets like the ones I mentioned that are overvalued, they have substantial drops like 45% to 56%. And then markets which were not undervalued, they didn’t. So that was very interesting.

So I would say if one defines an overvalued market with a greater than 10% deviation from its historical price income ratio, in those terms… So what happened is that the median price drop then was 22%, and then the median variation was 26%, so it was like pretty close. And then if we take fairly valued markets that would be let’s say between 0% and 10%, they had a much smaller drop, of 11%.

And the most interesting thing — and I’m going to relate to where I see things today, but the most interesting thing was markets that were undervalued. And when I say markets, that’s at the state level. So markets that were undervalued, for example, at that time – Texas was actually an example. So Texas was 5% undervalued in 2007. So the drop that happened post the peak was only 4% at the state level. So for all states that were undervalued, which I think were about 12 states at that time, the average drop was 4%, but [unintelligible [00:12:19].18] would have the biggest real estate price drop in US recorded price history, and yet if markets were undervalued within this measure in those terms, they dropped only 4%.

Now 4% was also the median income drop in the US at that time. That’s interesting – so actually, in valuation terms they basically didn’t drop. So there was a drop in income, but not pure in valuation terms. So that was for me a very big finding, because that was indicative of if we have markets that are undervalued now. Let’s say we reach the recession – in June was the official declaration for recession.

 Joe Fairless: Yup.

Stefan Tsvetkov: Markets could go [unintelligible [00:12:56].19] and I am not specifically very sure at all, but again just saying in the event we reach the peak a year from now, two years from now, ten years from now, whenever that is… So markets that are undervalued at the state level at the time, I don’t think they are going to drop much.

 Joe Fairless: And then when there is a recovery, they don’t have as far to make up, because they were undervalued during the worst of times.

Stefan Tsvetkov: That is correct. And Texas would be a great example. So it was actually undervalued, and then it was in fact among the very top performers afterwards.

 Joe Fairless: Yeah. I bought a single-family house in Dallas, Duncanville specifically, in 2009 for $76,000, and I sold it in October of 2019 for $175,000, or something like that.

Stefan Tsvetkov: Well, we know the fundamentals for Texas – it’s a great market, it’s population growth, etcetera. It’s absolutely outstanding. But I would say markets that were undervalued – they could perform really well afterwards as well. There could be a reason that they were undervalued because of genuine weakness, so that can be as well, and they can have subsequently — they’re undervalued but they always stay undervalued, they sort of have weak performance. So that’s also possible.

 Joe Fairless: So the big question is, what’s undervalued right now based on this metric. Right?

Stefan Tsvetkov: Yeah, absolutely. Most of the US states are actually undervalued. The only overvalued states right now are the following – Idaho. Idaho is the only super sharply overvalued; I had like 22% overvalued. And there are certain cities that are more overvalued than others. Boise, Idaho is, I believe, like 33% overvalued.

 Joe Fairless: Oh, man. That stinks. I just did a passive investment in Boise.

Stefan Tsvetkov: Oh, really?

 Joe Fairless: I’m not actively buying there. My company isn’t, but I passively invested in — I think it was Boise, or somewhere in Idaho, for sure.

Stefan Tsvetkov: Okay. But look, another thing to look at… Actually,  this only matters once the peak gets reached. So if it takes five or ten years, your investment in Idaho is going to be among the best performing investments, chances are. Because through the peak, real estate has super big momentum.

Another thing that I’ve seen like in real estate markets – there is autocorrelation. So if returns were high last year, they may be high this year. In fact, I think like most states, they have like 70% autocorrelation, and things like that. So you can get the next year return to be high if it was high last year. Stuff like that. So again, if you invested in Idaho, that not really necessarily a mistake just because it’s overvalued. It’s going to be the strongest performer, it’s going to continue being the strongest performer until it reaches a peak in the cycle, and at that point, the subsequent drop would be probably in line with the valuation.

 Joe Fairless: Alright. Idaho… Where else?

Stefan Tsvetkov: So you could exit at the right time, you know?

 Joe Fairless: Well, I’ll just hope that they do. I’ll share this with them and mention this to them. But as a passive investor, I have no control over when the exit happens.

Stefan Tsvetkov: Absolutely. Okay, I understand. This is what I see now. There a few other places now — I would not be too worried, but the strong performing markets are just mildly overvalued. So if we take like Nevada, Colorado, Arizona, I see a 12% to 17% overvalued. And then the states of Washington, Texas and Florida are like 10% to 11% overvalued. Now, Texas or Florida – okay, those are like the big markets, the best markets, I would say. You know, they’re like truly outstanding. With that said, again, if they are 10% or 11% overvalued, is it not the time to invest there? No. They are the best markets, they will grow the most for these years. It’s just sort of a number to keep at the back of one’s mind, that in the end, if this number gets higher – from 11% it may reach 30% at some point, or something like that. We never know. So at the peak of cycle, that would be something to look for, to watch for, because drops tend to correlate the most to that. Now, those are the overvalued states, actually.

 Joe Fairless: So how’s Idaho compared to Texas? What are the numbers? 23% to what percent?

Stefan Tsvetkov: Yeah, Idaho 22%, Texas 11%.

 Joe Fairless: Okay.

Stefan Tsvetkov: And 11% is a normal thing, a normal market; it’s not a big deal. It’s a strong performing market, there is a lot of competition; people who are buying very much there, obviously.

 Joe Fairless: In 2007 what was the most overvalued — we’re saying market, but really it’s state. So what was the most overvalued state in 2007?

Stefan Tsvetkov: Yes. So that was very different. So that was California, 68%.

 Joe Fairless: Wow. What was around 22% in 2007?

Stefan Tsvetkov: Around 22% were many states at that time. For example, New York state was 24%.

 Joe Fairless: What was around 11% in 2007?

Stefan Tsvetkov: Okay, 11%, I see Vermont.

 Joe Fairless: I don’t want investments in Texas to be associated to investments in Vermont. That doesn’t give me the warm and fuzzies. [laughs]

Stefan Tsvetkov: Again, honestly, personally, I think I’m a supporter of big states, big investments, those are the strongest markets. I’m not going to debate that by mere valuations. It’s just at the peak of cycle, that’s the only time that it’s going to matter. Those are the markets that are going to perform the strongest, and that’s it.

 Joe Fairless: And when you say the peak of the cycle, how do you define the peak of a cycle? Because right now, a lot of real estate investors would be saying we’re going through some tough times currently.

Stefan Tsvetkov: Well, that is a good question. I’ll use again 2007 as an example. So that would be the peak of cycle would be a very different date in every single region, in every single state or county would be a different date. So in some places it happened in the second quarter of 2007, in some places it happened in 2005 in fact.

 Joe Fairless: But how is it defined?

Stefan Tsvetkov: It’s just purely prices reaching a peak and having a substantial drop afterwards, or certain drop afterwards that maybe takes two to five years to reach to the bottom.

 Joe Fairless: Got it. So we really don’t know what the peak is until after it’s happened for some time, and then we have to go back and say, “Oh, well that was the peak a year ago, or two years ago.” Right?

Stefan Tsvetkov: Absolutely. Yeah. We would not know. So there’s no timing, prediction at all. For example, if I say Idaho is overvalued, there are no timing predictions to — does it need to drop if it’s overvalued? No. It can stay like that for a while. And in fact, there are different scenarios that overvaluation can even resolve. So one is price correction, but that’s not the only one. We could have a reduced price growth; that would be the second scenario, for example. Of course, it’s  overvalued, so because of that, in the future is going to experience comparatively less growth, just so that incomes catch up.

And let’s  say the third one – prices may even continue to be super super-strong, but income experienced a sort of super growth, so they are even stronger. And then in the end incomes and prices catch up. And even though let’s say Idaho is overvalued, then it gets resolved and it’s normal.

So there are different scenarios, it’s not really that. It’s just what I’ve seen and to my strong senses, if we reach a peak at some point, that’s the thing that I’m going to personally look at in terms of where prices are going to go. And it’s the most predictive metric at points of change in the market cycle, I feel.

Now the metric – this is just price/income ratios, it sounds simple; it can actually improved. I’ve been working on some improvements that reflect housing shortage. That seems particularly useful at the county level or specific cities. Because cities – it’s very interesting, the way that people speak about places like San Francisco for example. San Francisco is really expensive. I can dig deep, and it’s as if [unintelligible [00:20:54].24] drop there because it’s really expensive. But that’s not how it works.

 Joe Fairless: Supply and demand.

Stefan Tsvetkov: Right, it’s supply and demand. And the fact that San Francisco is highly unaffordable does not make it overvalued. So there are places that have experienced certain housing shortage, that have become shifted upwards in their affordability, so to say. That’s what happens in big cities. So they have been previously much more affordable, prices to income have been let’s say five times, and at some point, they’re maybe fifteen times. Now that happened gradually, that happened with insufficient housing, due to population growth, etcetera. But at that point of time, once it’s already at fifteen, the affordability, well that’s a place that’s not affordable. But now it’s going to be gauged on it being overvalued or not, based on how affordability changes. It’s not going to be just because it’s absolutely not affordable that’s going to drive if it’s overvalued. It’s going to be if it’s unaffordable relative to certain historical levels on some, let’s say, like a moving window of time, let’s say something like that. So that’s it.

So that can be improved. I’ve worked [unintelligible [00:22:07].26] it reflects that, I feel that’s even more useful, because then you have pretty much most of the drivers of real estate included in that – you have incomes, you have population, you have housing supply… So it becomes pretty comprehensive. I feel one needs to have a shorter time window to get, I believe a very high 88% correlation when they use like a five-year window, when including housing shortage as well. But I feel it’s not so safe. The simple measure that is here is very powerful. It worked really well then, and I feel it would work at a future point as well.

 Joe Fairless: I’m grateful that you came on the show and talked about this and your findings. We need to wrap up really quick. What’s one thing a listener should do with this information, who is an investor and looking to identify where they’re going to invest next?

Stefan Tsvetkov: One thing they should do — if they are risk-averse, so if they want to be protected from a price drop within the markets they are investing in, they can reach to me or they can do these similar calculations themselves and basically determine markets that are currently undervalued, if they want to be protected from a price drop in the event we reach peak.

So if they do invest in markets that are undervalued, it’s going to be a very slow likelihood that a price drop happens there, let’s say at the state level. Now, within specific small geographies, it is possible that a drop happens, because it’s very difficult to predict how people are moving from one city to another, etc. But I would say people who are risk-averse should invest in well-performing markets, so markets that have good price performance, which is nevertheless currently undervalued, to be protected from a price drop.

 Joe Fairless: We talked about the overvalued states and you said most of your states are undervalued, but I don’t think I asked you what state is the most undervalued? What are the top three?

Stefan Tsvetkov: The top three currently are Illinois, Connecticut, and Arkansas.

 Joe Fairless: Huh. I don’t know about Illinois and Connecticut and people investing there…

Stefan Tsvetkov: I would not suggest one should invest there just because they are undervalued. Those are the markets that always have weaknesses, and that’s obvious, and I know Connecticut clearly has all the demographic weaknesses at its disposal. So I would not suggest that. I would say markets that are undervalued, but they performed well. So if we take for example Indiana, they are 6% undervalued, but they are 27% above the previous peak in 2007, so they have done well in the market cycle. So that would be my focus in that sense, for small investors.

Again for people who are doing big project syndications etc. I do believe the big markets are the best. One would have to kind, of course, be somewhat cautious at some point, if it does become more overvalued. I would say for now it’s still at good levels in terms of overvaluation.

 Joe Fairless: That’s helpful. Thank you, Stefan. How can the Best Ever listeners learn more about you?

Stefan Tsvetkov: Thank you. Well, they can reach to me on LinkedIn, Stefan Tsvetkov on LinkedIn, or they can send me an email at stefan.tsvetkov@yahoo.com. So that’s the best way to reach me. I have a YouTube Channel, I run also a Meetup series, it’s called Finance Meets Real Estate, in New York City. So those are some ways to get to me.

 Joe Fairless: Stefan, thanks for being on the show. I hope you have a Best Ever weekend. Talk to you again soon.

Stefan Tsvetkov: You too.

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JF2273: Generating Revenue & Traffic From Online Stores With Joe & Mike Brusca #SkillsetSunday

Joe and Mike Brusca are brothers who got started in online business selling on amazon and slowly started to grow into more online eCommerce stores, blog sites, publishing fiction books online, and recently investing cash flow into buying and selling land too.

Joe and Mike Brusca  Real Estate Background: 

  • Founders of Build Assets Online
  • Experience building 7-figure revenue generating stores online without a location
  • Based in New Jersey
  • Say hi to them on their www.BuildAssetsOnline.com 

Click here for more info on groundbreaker.co

Best Ever Tweet:

“Have content to build value and trust before offering an opt-in to increase conversions” – Joe & Mike Brusca


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

Joe Brusca: Hi Theo, how are you?

Mike Brusca: Thanks for having us.

Theo Hicks: I’m doing good. And thanks for joining us, looking forward to our conversation. So today is Sunday, which means it’s Skillset Sunday, where we talk about a specific skill that can help you grow your real estate business. And today we’re going to be talking about driving traffic to your website. So before we dive into that conversation let’s go over their background. They are the founders of Build Assets Online. They have experience building 7-figure revenue generating stores online without a location. They’re both based in New Jersey, and you can say hi to them at their website, which is buildassetsonline.com. So do you guys mind telling us a little bit about your background and what you’re focused on today?.

Joe Brusca: Yes. So we got started in online business, just some basic selling on Amazon back in 2014. Then we started doing publishing on Amazon. And basically, what it evolved into is us owning and operating a portfolio of online websites that generate income. So among these websites are e-commerce stores where we have partnerships with brands and dealers around the US, and we’re basically a retailer for their products; we have blog sites where people will google something, they’ll google “how to remove a stain from a carpet” and then they’ll land on our site, and then we’ll show ads and we’ll make money that way. We’ll also make money through showing some affiliate products on sites like that. We also make money publishing fiction books online… So it’s really a whole slew of things.

Recently, we started re-investing a lot of that cashflow that we were generating from these online businesses into buying and selling land, and I would say we are still relatively new at that, but we can speak a lot about to our experiences online driving traffic in so many different ways, and kind of different scenarios in regards to what’s appropriate for what, if that makes sense.

Theo Hicks: Absolutely. I think before we talk about actually driving traffic to websites, we should probably talk about the website itself. So maybe you’ll tell us what are some of the most important components that someone who wants to get people to actually come to the website needs to have first, before they start focusing on the variety of ways to get people there.

Mike Brusca: I would say it would certainly depend on whatever your goal is. So if it is a situation where you would want someone to make a purchase on your website, of course, you’ll want to be using a platform that would be conducive for that – Shopify or WooCommerce – and have certain elements to, say, get a deposit or something of that nature. If you’re just working to generate leads, of course, that’s a different situation. Or if you’re working to just get people in the door to give them information and have that lead to a particular action, that would be separate. But what I’m getting at is you want to think about the end goal first. So whether it’s lead generation, an actual purchase, or just serving them content in order to market to them again later, then those will be 3 very specific goals and what you would do would depend on that.

Theo Hicks: Okay, so from a real estate perspective it’s most likely going to be the first and the last. So, generate leads and then to provide content. So maybe let’s start by talking about the generating leads one first, and then we talk about the provide content. So If I want to generate leads to my website, what do I need to do on my website?

Joe Brusca: Well, most obviously, you need a place for them to input their information, to sign up to become a lead. So when you’re thinking about driving your traffic, say you were driving your traffic to content – which we can get into – say you had a blog post… You’ll want to have a lead form or a link to your lead form, somewhere woven into that blog post.

Or if you’re just traffic to a certain page, say you have a product listing on that page, you can have a page to sign up for the newsletter or something like that, some incentive for them to sign up to become an actual lead. That’s really the first thing you need in place if you’re going to collect a lead. So I’m just speaking to this as if someone is a total beginner at online marketing. To do that, you need to have an autoresponder; we use an autoresponder called AWEber and it’s basically just a platform that allows you to collect emails and send emails, and you can collect other information as well, such as phone numbers and things like that. And there are tons of other software that you can use if you’re going to be doing like phone leads and stuff like that. But as our businesses is right now, we would like to focus on emails.

If you do want to do phone leads, you can use things like Google tag manager, where you can actually define actions. So say your goal for someone landing on your website is to get a call. You can use Google tag manager – and this might be a little bit advanced, but you can have your tech guy do it – to where if someone is on your website and say they’re on a mobile device and they tap the phone number, which is going to prompt their phone to call, and that’s something you can track as an action in your google analytics via a Google tag manager. So like Mike said, once you define the goal, there’s usually a pretty easy solution to do it.

Theo Hicks: I’m curious about your thoughts on this… So I see some websites that have a home page and then ten different tabs you can navigate to, and I see some websites where it’s just one page and it’s like the blog page, and there really aren’t other pages on that website besides that main page. And there’s obviously anywhere in between. Which end of the spectrum do you think is better? I’m sure it depends on what your goal is, but as for the purpose of generating leads, what’s the best format? Do you want to have a bunch of tabs, an About Us tab, the blog tab, the podcast tab, Contact tab, or is it better to just have everything on one page?

Mike Brusca: I think sometimes people can do too many things and get almost flustered by trying to do a million things at once. Honestly, if you see a website that is essentially one page with a Contact form, you can be almost positive that they’re driving traffic through some sort of paid means; so whether that is Google ads or Facebook ads or what have you… They’re using those external sources to get the traffic in and onto that page, and that way it’s super simple for someone to sign up. That’s the only action they can take, is to sign up.

But on the other hand, if you have a website and it’s filled with multiple pieces of content, those pieces of content can generate organic traffic just through ranking in google, or getting traffic from social media, what have you… But you can also amplify those pieces of content in order to get people onto your website, sort of nurture them in the sense of building trust so that they understand you know what you’re talking about, and they can learn more about you, and then they can choose to sign up themselves. So each way has their pros and cons. Joe and I specifically prefer to do it the content route, and there are a few different reasons for that we can get into.

Theo Hicks: Okay. [unintelligible [00:10:19].00] having the multiple pages on?

Joe Brusca: Yeah. When you say multiple pages, again, it’s going to come back to the goal of your website. So I’ll just give you an example; on our land site we do have multiple pages, because we sell multiple pieces of land. So if someone is browsing, say they’re looking to buy land in California, we want them to clearly be able to see all of the properties that we’re selling.

Let’s take a step back for a second. What Mike is saying with the content is that having content builds trust in the audience. Say you are trying to drive paid traffic off Facebook, and you just send to a form where they fill in their email address, and their name, and their phone number. Someone might not do that on their first go around. Some people might, but some people might not. But a more sustainable route is to actually target them with content. What do I mean by that? So say you are renting vacation rentals in Ocean City, New Jersey. You can have an article talking about breaking down the different costs of what it costs to rent in Ocean City, New Jersey, and what you can expect to get in a given price range.

Now, if you drive somebody to your website to that article, kind of like “No strings attached, just here’s the information” and then you have a gentle reminder at the bottom of the article “Hey, become a lead. Sign up for my email list to get notified on properties become available”, some people are more receptive to that than just wanting to get the latest updates on “When new vacation rentals become available, sign up here.” Some people are going to far more receptive to seeing the content first and then getting asked to sign up.

And using the different technologies that are available online — so if someone lands on your content page and you have your Facebook pixel installed, I’m sure all your listeners have seen themselves get re-targeted around the web if you’re looking up dog biscuits or something, and then all of a sudden your web browser is filled with ads for dog biscuits; you can actually do the same thing; so you can target people that have read your article on prices for vacation rentals and what you’re going to get. You can target them to become a lead later down the line, and they’re more likely to do that, because it’s not like a cold audience anymore; it’s a much warmer audience, because it’s the second or third time they are engaging with your website.

Theo Hicks: I see. [unintelligible [00:12:33].00] the last part… So if I write an article — let’s say I want to rent in Chicago. I read an article about all the different places you can rent in Chicago, different prices, different amenities around the area. In the bottom, I’ve got my old lead capture form and they don’t sign up – essentially, if I then have paid advertising, then since they looked at my article, then if they’re on Amazon or something, a little ads pops up and it might potentially be an ad to my company?

Mike Brusca: Not necessarily Amazon, but yes.

Theo Hicks: Okay, some other website, I’m sorry. I just used Amazon as an example.

Mike Brusca: Yeah. You can capture that – pixel, it’s called. So they’ll have that as they browse around, going to Facebook, search other things, etc. So you can use that audience to — say you have a thousand people visit your site and they get pixeled, you have this thousand-person audience. And by targeting those people specifically, you can afford to bid more, because you know that they’re interested; they’ve been on your website, they’ve read your content, they may know who you are already… And it’s a lot warmer with an audience, just like Joe was saying. It’s not like you are spending money on getting people on the door and then they leave because they don’t know who you are and you never speak to them again.

Theo Hicks: Something said earlier about your blog site, so that you’ll have something like how to remove a stain from your floor, right? So in a blog post like that, what would be the lead capture at the bottom? Do you sell cleaner products? Is that what that would be for?

Joe Brusca: In a business like that we might not have an end goal. So we might just be driving traffic from organic search on Google, just to show them ads.

Theo Hicks: Oh. Okay.

Joe Brusca: That’s where we get paid showing ads. But that’s just one example of a business model that we do. So on our eCommerce stores, we can serve them similar content, something about different types of kitchen islands you can buy, and then they’ll get a pop up saying “If you want a discount,  make your first purchase with us.” So that’s an example of a more goal-oriented thing. With online marketing, this might not be that relevant to the audience listening, but as I was trying to say before, it is goal-oriented, and sometimes the goal is just as simple enough as showing someone an ad.

And to kind of loop it all back together, if you are doing advertising online, it’s those types of sites, like the stain example – that’s exactly where your ad might show up if you are re-targeting on Google. So if someone landed on your page about rental properties and then you are re-targeting them with the Google display network, your ad could come up on those websites that are just serving ads. And then they can click and then sign up and become a lead for you then.

Theo Hicks: And the actual software that you use is called Google Display Networks? Is that how you re-target people? Even pixels?

Mike Brusca: You would do that within Google Ads. The Display Network, it would be during a display campaign inside of Google ads.

Theo Hicks: Do you guys do Google ads yourself? Or do you have someone do it for you?

Mike Brusca: We do Google Ads ourselves. And for what we do, it’s like one of the most important functions of our business, is driving the traffic. And I would honestly recommend to anyone, if they want some sort of paid traffic presence online, that they should learn some of it, at least starting out… Because no one is going to understand your business as much as you do. And to just let someone in the door, and say “Hey you know what you’re doing, can you just run my ads?” They’re probably not going to produce a good result for you, and you’re going to waste a lot of money.

It’s not that people out there that run agencies and stuff like that, they don’t know what they’re doing; they actually understand ad platforms very well. But it comes down to again, understanding your business, how much things are worth to you… So if you can’t communicate that easily to an agency, then you’re better off learning it yourself.

Theo Hicks: So if someone is coming to that website and I do a Google ad, is there like a filter I can use? Like I want to only target people on, let’s say, the blog website that you use specifically to list ads on, right? So if there’s something like a function in Google ads, where I can say “Okay, well I want anyone who has been to my website to see this ad when they go to your blog about cleaning your floors.” Is that how simple it is? Or is it a little bit more complicated than that?

Mike Brusca: They would see the ads across any website that has Adsense enabled. So it’s not like they would only see those ads if they go to your cleaning site. They would see it basically anywhere on the internet, because the majority of content sites–

Theo Hicks: Yeah. I understand that. I was asking about setting it up in the first place. Is  it as simple aslike just  a button I can click in Google ads that says “I want to target people who have been to my website.”

Joe Brusca: Yeah.

Mike Brusca: So you would set up what’s called the Global Site Tag, and you can just Google that and it will give you instructions on how you do that within your account. So the Global Site Tag is what pixels, the people on the site — so they visit the website, they get pixeled, and then the number will build in your audience. So you can create an audience on Google very easily that just says, “Visitors in the last 180 days”, and that number will grow as people continue to visit the site. So long story short, if you want to target those people, you will just go to audiences inside your campaign and just select an audience to target.

Theo Hicks: Perfect. So it’s called the Global Site Tag.

Joe Brusca: Just to be clear, If you want to do this on Facebook and Instagram as well, it’s a separate tag. It’s actually called the Facebook pixel. And just like the Google Global Site Tag, it’s a little piece of code that you just paste into the backend of your website. And once it’s on your website, your audience will build on Facebook. And then Facebook will track the same way Google can track what pages they have been to, and all that. And it all happens within their browser using cookies.

Theo Hicks: Now let’s talk about the actual content. Let’s start to focus on your land one. So you want to send you people to your land websites, and you’re doing this to your content; what types of blog posts are you writing about to get people to come to your land page eventually?

Mike Brusca: So for that, we don’t necessarily use content, because it’s not going to be the quickest and easiest route to getting customers. For the land situation, we almost treat it as an eCommerce product; so people can go on our website, they can place a deposit, and essentially we’re selling this all online. And then once they deposit, we’ll handle all the logistics of transferring the deed, and stuff like that.

So really the quickest way for us to do it would be we, we’ll list ourselves on the MLS just through any sort of flat rate MLS service. Put it on Craig’s list, Facebook, Marketplace, and we’ve also done YouTube ads for the property. So we’ll get nice pictures, drone footage etc. make a video for it. And then you can target people in that particular radius with that video on Youtube, and you can even narrow down — say if it’s a property on a lake, you can narrow down the people that are interested in lakeside activities, like fishing, kayaking, etc. So they’ll see that ad as they’re on Youtube, and that would funnel them on the website to check out the product, and then they’ll be pixeled, and then you can re-target them.

Theo Hicks: I see. So what type of products do you write the blog post for then usually?

Joe Brusca: It’s not to say that we would never write blog posts for land stuff, but it’s really important to be tactical and think about when you want to do it… Because it’s a long term strategy. Because ranking in Google does take a little bit of a long time. So with the land stuff right now we’re kind of experimenting with multiple different locations, multiple different states… But the time to start producing content, where you want to rank in Google and do the blog thing, is when you know that okay, this is the particular customer I’m serving, I’m serving this particular area, and it’s more like a repeatable fashion.

So again, it comes down to defining your goals and understanding the traffic method and how the traffic method works. Producing content takes a long time, and it takes a long time to rank in Google. So it’s not worth doing just for no reason; you have to know that you have a business in that space and that the content is going to meet the goal of that business.

So yeah, we create content for our eCommerce stores because they’re well established and we know the type of customer we want to bring in, we know what the type of customer is going to be searching, because we know that from our paid advertising. Because when we do paid advertising on Google, we can see someone who lands on our site – they might be searching for “green kitchen island”, and we know, okay if we have an article about 25 different types of green kitchen islands, that’s a good article that would bring us the customer that we are looking for.

So in terms of the land thing for us, we’re not quite at the content stage yet. But that doesn’t mean that any of your listeners won’t be at that stage. It just comes down to do they have an established business in an area that they want to try and increase their market share in.

Theo Hicks: So you’re saying that you can determine the type of content to produce based off of the people who are clicking on your paid advertisement? Is that what you’re saying?

Mike Brusca: Yeah, for sure.

Theo Hicks: Alright, well is there anything else you guys want to mention as it relates to driving traffic to websites or any other call to action you guys have before we wrap up?

Mike Brusca: Well, one last thing for driving traffic to your website… I would say anyone, if they have not done this, they should make a Google My Business listing. That would certainly help them with whatever they are doing that’s real estate related… Because when people search your name and your website, and even whatever you’re offering to some degree, it will give you extra exposure, and it will help you take up extra search engine real estate. Google My Business, very important.

Theo Hicks: Alright. Anything else I failed to mention? Like a call to action, or where people can go and learn more about you?

Mike Brusca: Yeah. If you want to learn more about what we do, how to drive traffic to a website, and all that, you can check us out on buildassetsonline.com

Theo Hicks: Perfect. Joe and Mike, I really appreciate you guys coming on the show. I’m sure it’s probably clear that I don’t know much about driving traffic to websites, or at least not the specifics about it… So I’m going to try my best kind of summarize at least some of my main takeaways.

The pixeling people – I thought it was interesting. So you said that you can create a global site tag to pixel people that have been to your website and then you can re-target them with Google Ads. And there’s something similar but different that you can do for Facebook as well. And what I got is that everything is very dependent on what you’re trying to do, what your goal is, who your customer is, what area are you trying to focus on… So those are all things that you need to determine first before you decide which is going to be the best way to direct traffic to your website – whether it be paid advertising, whether it be doing content.

I thought it was interesting when you guys mentioned how one of your businesses is literally just doing blog posts and then putting ads on there. I knew it existed, but that’s just interesting to me. And then all of the things that you’re doing online.

We also talked about some of the differences, the pros and cons of having a website that’s just one page as opposed to having multiple pages. We talked about if someone just has one page on their website, they’re probably focusing more on Facebook advertising or other external advertising and it’s sending people to that particular page… Whereas multiple pages allow you to generate more traffic organically, plus you can then use that content to target people, it helps you develop trust.

So I think this is going to be an episode that’s going to be worth a re-listen, especially for me. You guys went over a lot, so I appreciate that. Best Ever listeners, as always, thank you for listening. Have a Best Ever Day and we’ll talk to you tomorrow.

Mike Brusca: Thanks.

Joe Brusca: Bye, Theo.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2189: Important Factors When Deciding to Sell Early With Jason Yarusi #SkillsetSunday

Jason is a 3-time great guest who has delivered valuable information to all of our listeners and he is now back with some new information to share. His previous episodes are  JF1157, JF1538, and JF1788. In this episode he will go over his recent 94-unit project and why he ended up selling even though it was doing so well.

Jason Yarusi Real Estate Background: 

  • Founded Yarusi Holdings, a multifamily investment firm with over 800 units under management
  • The host of “The Multifamily Foundation”
  • Has a family construction business focusing on raising and moving structures
  • From Westfield, New Jersey
  • Say hi to him at:https://www.yarusiholdings.com



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“How you lay out your plan to your investors is vital and can either create confidence or uncertainty” – Jason Yarusi


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

Jason Yarusi: Doing great. Hey Joe, thanks for having me back.

Joe Fairless: Well, my pleasure. And I said again, that’s because Jason’s been on the show a couple of episodes – Episode 1538 and Episode 1788, and on a previous episode, Jason talked to us about a 94-unit that him and his team purchased with investors, and it returned a lot of equity. Jason, when you talk about — you can fill in the gaps on how much equity was returned… And you did a refinance on that deal, with the intention of holding on to it for a period of time. But – newsflash, he did not hold on to it for a period of time, or a longer period of time, I should say. Instead, he decided to sell it.

So the purpose of today’s episode is to talk about how do we think about the decision of should we hold on to this longer? What are the pros, what are the cons, versus selling it and exiting out of the deal if the deal is performing? So what are the things to consider? So a little bit about Jason – he founded Yarusi Holdings, which is a multifamily investment firm with over 800 units under management; he’s the host of The Multifamily Foundation, he is based in Westfield, New Jersey, and the website is yarusiholdings.com, which is in the show notes. So Jason, do you want to just give a refresher on the 94-unit, so we’ve got a little bit of context? Best Ever listeners, you can go back, there’ll be links in this show notes for the previous episodes, so you can listen to those episodes if you want to refresher… But can you give us a refresher, and then let’s go right into the thought process?

Jason Yarusi: Absolutely. So we bought this property back in May of 2017. It was our first large acquisition going from a three-unit to this 94-unit. So it was the first property that we brought through syndication with our team. It was a great find. We found it through – we’ll call it a distressed owner; but the owner had passed, his kids were now running the deal, and they really didn’t want to be in this industry; they don’t live in the state. So it was a prime product to really go in there and just improve the efficiencies of the property.

The buildings themselves were in good shape, but we were able to add a lot of value really just through capturing the loss to lease, getting rent bumps up to really a $100 to $125 per unit based on just the properties right across, and we did a number of savings programs on the property that we talked on prior episodes.

After month 13, we had knocked out really a majority of the business plan. It was really month five or six that we had knocked out a big portion of all the cap ex than we had planned on that, taking really conservatively between month 14 and 18… But really just got in there, knocked it out, and by month 13, we were able to refinance the property and pull out about 75% of the capital back to investors.

So our plan and our thought process was great. The property was optimized, we were just turning the units, just capturing really on turning it to classic units going forward. It wasn’t an area that really called for premium units. So that’s what we continued to do, and really just improving on making this a better place for people to live. And we were accomplishing on that and we were building it through.

What came up though, is that there was a large property around us, and that large property has about 284 units, and that really dictated the way the area was going. So one thing is that that submarket couldn’t warrant RUBS, but because that owner had decided against it, he was controlling the narrative. He didn’t want to do it. It wasn’t in his game plan. So other owners who had tried, who had smaller properties around it, were really getting hit back because tenants were saying, “Well, I could just go over to competing property that wasn’t having this with the billing system for the property.”

That property, he started going in there and doing premium upgrades and capturing some of the rent; then pretty quickly, he put the property up for sale, and it took a minute, but he sold it at a pretty astonishing price point; just really the market had grown so much and the path of progress was coming right down the pipe that we caught really just the wind of it moving along with us. So he sold this property at a very high price point, and that price point alone really would serve well for our property.

The biggest difference is he had a lot of two and three-bedrooms, where our property was predominantly one bedroom. So it was about 83 one-bedrooms, 11 two-bedrooms. But looking at the market and looking at where we were, we just had to give it a hard thought here. This was the best comp that was gonna be there for us; and when we took it over, that owner was a lifer owner, he had no intention to sell. So we really said okay, then we can track off that owner. But when he sold, he sold at such an attractive rate that we had to take a really hard look at our property, size down what we thought we could do and where we can go from that.

We had never had it in the business plan to do premium units. We didn’t capitalize for that and we were continuing to roll the property, doing classic units; we had turned about 65 of the units. So with that and with the way the market had grown, where cap rates were compressed and there was still very attractive debt, we decided that we were going to really just soft touch it to the market.

We didn’t list it, we didn’t put out there, but I had a number of connections where I reached out to about ten people and just said, “We’re considering listing this property. We want to give you the first opportunity to have a look.” What we found was because you could get really attractive debt and you had 94 untouched units that can now be turned to premium units, and it was not a lot of heavy lifting on the property, that we had six offers come over. So we knew we were moving in the right direction.

Looking at that, where we would sell at that point, we exceeded our investor expectations over a seven-year hold. So weighing on this cost and looking at the uncertainty that where we are, it makes us look great today, but where our thought process was that in year seven, we wouldn’t have this good comp, and ultimately how attractive things are today that we probably wouldn’t have the best market conditions, so now would be the ideal time to test the market, which we did, and we had a very attractive number.

Joe Fairless: Did you work with a broker?

Jason Yarusi: It ended up that I did work with a broker, but it was never listed. It was actually the same team who represented the seller when we brought it. I’d worked with them on other transactions and I reached out to them and talked to them about the potential of listing this, and he brought a buyer to the table.

Joe Fairless: Sometimes I get a question from our investors whenever we have an opportunity, and they ask, “Well, if the property’s doing so well, why are they selling it? Why don’t they just upgrade the units like you’re going to upgrade the units?” You have explained in your business model, you just didn’t have in the business plan to do those premium units. So you would either have to allocate some money from a refinance or supplemental loan, or you’d have to do a capital call, or you’d have to do a personal loan to the property in order to do that business plan. So you had a performing property, but you just had a different business plan than the buyer, right?

Jason Yarusi: That’s correct, and what I felt is that with this business plan being to simply go classic, that it did lead to a very attractive narrative for us to have a talk track for other buyers. So we could, but then it gets into us going through cash flow or going through reserves or just changing really the landscape of the property. But I also didn’t feel that this area, although two and a half years really could make a big difference in an area, I didn’t feel that the growth of this area could warrant 94 premium units and have all this go on and another 284 units going on where they were hitting all these rent bumps, and that the hard capture here is you have to think, “Okay, so if we do premium units, this is not 100% change of the model. How many tenants are coming in this area that can afford these rent bumps?”, and that would be a pretty big change to our existing tenant base, and we didn’t want to have to go through that hiccup where we’re going to have some delta between the vacancy levels just to get those rent bumps. We felt this was an ideal time that another bullish buyer would come on board, they’d be able to implement this business plan, and we’d be able to get the cash out to our investors at a very attractive rate.

Joe Fairless: Were there any discussions about doing one or two rent premiums renovations to prove that that business plan would work at your property?

Jason Yarusi: Actually, no. It moved so quick and I made a quick decision that I didn’t want to go through the process there just for any reasons, because I set my mind that this was the right time, and for whatever reason, I just moved quick on it with the prospect of it happening.

Joe Fairless: From a return standpoint with your investors, how do you think about that? …Because there might be one or two of your investors or a small percentage of them who say, “Well Jason, we’re doing so well. We just killed it on this refinance. Why don’t we just hold on to this puppy for the long run? What’s the rush?”

Jason Yarusi: Funny enough, I actually did not have any feedback in that response from any of the investors. I think because the way I laid it out, I said, “Listen, I feel that this is our best comp and this isn’t going to be available again for us in four years. I also feel that the market conditions are the most favorable we’ve seen them, and just to think that we’re gonna have another four-year runway here would not be a conservative thought process for me. So I’m making this decision that we’re going to move forward to sell the property.” Another point is that, it’s not like when we sold the property we were at a big lag on where the potential returns would be. We actually were right at where our multiplier was going to be on a seven-year hold, and we just crushed the IRR from where we were. So there wasn’t much pushback from any level on the investor side.

Joe Fairless: Anything else that you think we should talk about that we haven’t talked about as it relates to the thought process you had when thinking about this decision to sell early?

Jason Yarusi: Yes, I would definitely talk to legal. I would definitely talk to your accountants. You want to know where it falls from responsibilities here. Also, we had done a cost seg study with the thought process that we were going to hold this for the long run. So you want to see what the effect’s going to be and how that’s going to trickle down, not only to you but your investors overall.

You also want to have a survey with your investors too, because the narrative has to be that if we’re going to give them back a chunk of money, they’re gonna have taxes they’re gonna pay, but ultimately they may not have another opportunity to put it into. Maybe they’re fine with that, maybe they’d like to have money back into their pocket, but ultimately, you want to make sure it’s not putting a large part of your majority base in some difficult position. But the group was very excited about it. They were very opportunistic about what’s going forward next and where we stand today. It put us in a good light that we’ll be ready for future opportunities quickly as they come about.

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

Jason Yarusi: Go over to yarusiholdings.com, like you said. If you want to see me run 100 miles, 37 miles, somewhere in between pretty frequently, go over to @jasonyarusi at Instagram. I run a lot, and we usually track it in some fashion, and we actually encompass The Multifamily Foundation podcast into our parent podcast; we almost called our channel now The Jason and Pili Project, because we were finding we were doing so much fitness, self-development, mental fortitude along with the real estate that we really just wanted to bring that to the masses.

Joe Fairless: Jason, I love following you. I’m not on Instagram, or I personally am not. I think my team on my behalf is on Instagram, but I personally am not, but I see you on Facebook and we were talking before just how much of an inspiration you are for others and myself. I love seeing what you’re doing from a fitness standpoint and just from a mindset standpoint. So thanks for sharing with us the thought process, congrats on this deal and talking to us about the different components of what we should consider prior to moving forward or not moving forward with the sale early. So thanks for being on the show. I hope you have a Best Ever day and talk to you again soon.

Jason Yarusi: Thank you.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

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JF2085: Fake it Till You Make it With Aaron Fragnito

Aaron is the Co-Founder of Peoples Capital Group and the Host of New Jersey Real Estate Network. Aaron is someone who developed a plan to become a real estate investor and went after it right away. He shares his journey from no experience to a realtor, wholesaler, flipper, and now syndicator. He shares some of the mistakes he made with management companies and how he is able to keep his 4 core investors even when he was making mistakes to now 30 investors.


Aaron Fragnito  Real Estate Background:

  • Co-Founder of Peoples Capital Group (PCG)
  • The host of New Jersey Real Estate Network
  • A Licensed NJ Realtor and a Full-time real estate investor.
  • He has Completed over 250 real estate transactions, totaling more than $40M, Fixed & Flipped over 50 houses, wholesale 100+ properties, and Manages an 8 Figure Portfolio of Private Real Estate holdings
  • PCG Works with qualified investors to create passive returns through local commercial real estate.
  • Say hi to him at: https://www.peoplescapitalgroup.com/
  • Best Ever Book: Mel Robbins books


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“I am always educating” – Aaron Fragnito


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

Aaron Fragnito: Very good, Theo. How are you doing today?

Theo Hicks: I’m doing great, thanks for joining us. Looking forward to learning more about what you’ve got going on. Before we get into that, let’s talk about Aaron’s background. So he’s a co-founder of Peoples Capital Group, PCG. He’s the host of New Jersey Real Estate Network and is a licensed realtor in New Jersey as well as a full-time real estate investor. He has completed over 250 real estate transactions totaling more than $40 million. This is included over 50 fix and flips, over 100 wholesales, and he currently manages an eight-figure portfolio of private real estate holdings. PCG also works with qualified investors to create passive returns through local, commercial real estate. You can learn more about his company at peoplescapitalgroup.com. So Aaron, do you mind telling us a little bit more about your background and what you’re focused on today?

Aaron Fragnito: Sure. So I got started in real estate about ten years ago. Initially I was turned on to do it by Rich Dad, Poor Dad, of course. I’m sure everyone says that same story. I hear it all the time. So I read Rich Dad, Poor Dad around senior year of high school. I was an entrepreneur, major at Rowan University, wasn’t exactly sure what I wanted to do with my life, but I figured I did have a passion for real estate, and after reading that book, I recognized that the tax code is actually in favor of people who pay themselves through ownership of real estate. So I figured that out, and then I started reading David Lindell and Trump University, and I think I even looked into some Joe Fairless stuff at the time.

About ten years ago, Joe was getting started, the syndication space was really new then as well. So I knew I want to own a lot of real estate and want to make passive cash flow throughout, but just didn’t know how to get there. So I made a list and I said, “Okay, I want to own $10 million real estate and have a net worth of a million with $100,000 passive cash flow in ten years.” So that was about ten years ago; that was my goal. I wrote it down, and I said, “Okay, well, I’m gonna work backwards from here. I need to make connections, learn the industry, save some money, figure out how real estate syndication is created and run… And to do that – maybe I’ll get my real estate license to start.”

At the time, I actually moved out to Colorado to teach kids how to ski for six months after I graduated college, read a bunch of books on how to start a real estate investment company, they all made it look so easy, moved back to Jersey, got my real estate license and started executing on that plan.

I made a lot of mistakes, teamed up with the wrong people for my first fix and flip, lost a little money, did a lot of the wrong things, didn’t do the right due diligence, hired the wrong contractors – I got tons of stories – hired the wrong management companies getting started, ended up having to develop our own management company… But a couple years into the business, working as a realtor, you learn short sales and start to make some money.

I started working with Seth Martinez who is my business partner today, and we really complement each other’s strengths and weaknesses. So he’s great at operations and management of the real estate and improving our systems and strategies here in our business, and I’m more on the branding and fundraiser investor relationship side. So we work really well together. We bought a six family from a We Buy Houses sign that used to work really well, that I would staple on telephone poles in a suit and tie in the middle of summer. I’d get a bunch of listings and deals with those We Buy Houses signs. So we’ve had a six family back in 2013 or so, I bought it for about $220,000, put $50,000 into it, bought, renovated, refinanced out, it appraised for well over $400,000, got our money back and a little bit on top, and raised some capital and built on to the next level and got up to about 100 units over five years, all while flipping a lot of houses as well, and wholesaling at the same time with our residential division. So pretty busy and engaged so far.

Theo Hicks: That’s great to hear, and we do apartment syndications, so we’ve got a lot in common and I’ve got a lot of questions for you. Let’s talk about your first syndication deal. So did you syndicate that six-unit deal?

Aaron Fragnito: We didn’t actually syndicate it. Our first syndication deal was a 25-unit in South Jersey, and we put together four investors who all brought in $100,000 each, and we bought a 25-unit for below market value. We took the cash flow from it, put it back into the building, hired a few management companies. One was stealing money from us, it was a disaster, we had to take them to court. Another one just really over promised and under delivered. So by doing that 25-unit, we learned that sometimes you want something done right, and if you’re going to build a big portfolio in one central location, it makes sense to actually have your own management company.

So we developed our own management company through necessity with that first 25-unit, because like I said, the two management companies we hired, one was bad, the other one was worse. So we were like, “Well, if we switched to a third management company and they screw us too, we’re going to look really bad to our tenants in this building, and we’ll go downhill.”

So we developed our own management company about seven years ago, and that is our competitive edge now today that allows us to really reposition these buildings like a fine-tooth comb. So many moving pieces when you buy a mismanaged apartment building, and you’ve got to really knock it out of the park for your investors. So relying on other management companies was a risk I found and a flaw in the overall syndication model. So we tried to correct that with developing our own management company here. It does limit where we can buy, but we love this North Jersey market, and we do very well here with this North Jersey market.

Theo Hicks: You’re really good at proactively answering my questions. I was gonna say, “Oh, what are some of the pros and cons of having a management company?” but you answered all those for me. So we’ll talk about the investors instead. So your first 25-unit deal, you said you had four investors. Who were they and how did you get them to invest?

Aaron Fragnito: Well, let’s see. One of our first investors– great story. Well, the first monies I raised in real estate was actually for fix and flips, but those investors, I rolled them into buying the apartment buildings over time… Because in the fix and flips, we weren’t successful. I would like fail at a fix and flip, and be like, “Here’s what I did wrong. Here’s how I corrected and I got rid of that partner etc” They would reinvest me, so I salvaged those relationships. I also wrote checks to the closing table to make sure no one ever lost money as I was learning the business… But what I did is I went to real estate networking event and I made a beeline for the owner of the event, and I said, “Let me talk about what I’m doing. I’m learning short sales, I’m getting into a fix and flip, and my topic is going to be Fake It Till You Make It.” So I literally did a presentation called Fake It Till You Make It, and it was probably not a very good presentation. By the way, my wife today was in the crowd. I met her that night, ended up marrying her few years later. So just a wild story. The first presentation I did in real estate ended up being about how I met my wife, but different story…

So there were some people in the crowd that were intrigued with what I was doing, and I always enjoyed public speaking. They saw my passion for this industry and they decided to invest, and that was how I got one investor around $100,000 and another investor was from Seth’s network, actually. He knew a very wealthy individual in New York City that owns his own real estate, that he had worked with before in the medical building industry. So Seth had sold a medical building company, and he knew this doctor. Yeah, it’s great business to meet doctors. So just because Seth knew him through medical building and that relationship, it didn’t mean he couldn’t convert that trust into investing in us in real estate. Even though it was our first syndication and we, really looking back now, didn’t really know what we’re doing and had a lot of challenges in front of us.

So again, one investor I had messed up with a flip and made good on it, and she decided to reinvest in me. Another guy was a doctor I knew from a whole other industry, and doing business with years earlier, and just cultivated that relationship into investing them, and then one was actually some people on Seth’s family as well, and then just another investor, but I think it was actually one of Seth’s aunts. So luckily, Seth was a little older and had a little more capital and had good resources there. So I think, actually, three out of the four investors were from his network and I brought in one investor as well. That’s why it’s so important to have partners that have great networks and complement what you’re doing so that you can make sure you raise the capital and have those resources of private investors that Seth brings in and I bring in as well.

Theo Hicks: So for your first deal, you had about four investors, you said, and you mentioned how you found them. That was five years ago, you said?

Aaron Fragnito: That was back in 2013.

Theo Hicks: Okay. So six, seven years ago. How many investors do you have now?

Aaron Fragnito: Over 30.

Theo Hicks: Over 30 investors. So do you wanna talk about how you grew from 4 to 30?

Aaron Fragnito: Sure. Well, it was quite a journey; a lot of hard work behind the scenes. Just recently, I have really, in the last two years, made a conscious transition in my business to not only just stop working so much in my business and more on my business, because as any entrepreneur, I get really caught up answering emails, moving deals, and I’ve really got to focus on my systems overall, and what’s my main goal five years down the road… So in the last two years we really redeveloped our branding system into being more of a thought leader, more polished and professional, but also aimed at just high net-worth individuals, people in this area in North Jersey here. There’s a lot of wealth, and we do events in our office.

I have an office here in Berkeley Heights, and I used to throw a lot of money into fundraising. I’d go into the Hyatts, fancy hotels; I’d put down $3,000, get everyone dinner, and I would do a lot of networking events in there, and that was great; we raised a lot of capital that way. So we started a real estate networking event. We went on meetup.com, we started New Jersey Real Estate Network, and this was about eight years ago or so as well, and I started raising capital that way.

So I would do dinners every month at a hotel and people would come, and I don’t think I made any money on the events. I would charge money to get in, I’d have some sponsors, and at certain times, it felt like I was more of an event planner than a real estate investor, but those events really helped us build our brands. I would then go out and speak in other REIAs. Again, I would go to networking events, I’d make a beeline for the owner of that group, and a lot these guys, they need investors, they need people to come in and speak. They want people to speak at the events, they need a new speaker every month. So even if you’re starting, that could be a great story. Talk about your first fix and flip or whatever it is, your first gig you’re doing, and that’s how I would also meet investors. So I’d speak at events, I’d be honest, I’d talk about my starting points and then my struggles there, but how I powered through them and made good to my investors, and I built the brand that way.

I’d get people to come to my event, I’d feed them dinner, I’d tell them about what we’re doing, and I’d raise capital, and quite frankly, it was very easy to raise capital for fix and flips. So I kind of got off track for about three or four years with Seth, and we did about 50 fix and flips. We had some crazy projects going on, and we got off track with that, but it was a great way to bring in a lot of investors, because people love the idea of getting a first lien position, getting a 12% interest rate and getting their money back in a year or they could take the property back. It’s a pretty good position and it’s pretty quick turnover for investors.

So we raised a lot of capital that way and flipped a lot of houses and made some money and lost some money, and around 2016 or so, we started to recognize that scaling up a house flipping business is, in my opinion, really not all that profitable. It’s not the most profitable part of the business. What’s the most profitable part of real estate is being a listing agent or owning apartment buildings, in my opinion. So we realized that and about two to three years we focused on our apartment building syndication business. As we sold that 25-unit, we made a nice profit, our investors were very happy, and we said, “Wait a minute. It’s actually easier to buy and reposition a 25-unit than it is to flip a dozen houses in a year, and we make the same amount.”

So what we figured out was we want to really double down on that, and then I changed our brand a little bit to attract longer-term investors who were looking for a passive investment, and that’s really a different person than the house flipping individuals you meet at REIAs and such. They’re looking to be more hands-on, and they’re looking to really do a quick investment, get in and out, maybe make an interest rate. What works better for us are individuals that are busy working nine to five, maybe they’re a doctor or a banker or just a high net worth earner, or they just have an IRA with $30,000, they can self-direct into a syndication with us, and they’re looking more for a longer-term passive investment. It’s a different type of investor than the ones you might find in a real estate networking event.

So I had to consciously convert my fundraising brand and my fundraising message to attract the right type of investor over the last two years, which has been one of the bigger challenges for me, not only raising capital, but figuring out who I want to get in front of, what’s that ideal investor I want, and then getting in front of them, whatever that means. Facebook ads, marketing ads, whatever it takes to get in front of that person in the right professional manner, and then know what to say when you finally meet with them.

Theo Hicks: So for the fix and flipper investors, you’d find those at the meetup groups like in-person events, and then for these longer-term passive investors, you’re finding them through online ads?

Aaron Fragnito: Correct. Facebook marketing. I do four seminars a month here in my office in Berkeley Heights. I do six webinars a month as well. I teach how to self-direct your IRA, I go over case studies, I go over current offerings we have on buildings, I have realtor events, I have luncheons, I have evening events, we feed you here as well. So I do roughly the same seminar twice a week or so, but I get all new people coming in to see it, I put different spins on it, but I am just always, always educating. Fundraiser in the syndication space is really just an educator. Now we don’t sell education, we don’t sell books or CDs, we focus on just selling one product we have here which is a turnkey investment into New Jersey apartment buildings, but I’m always educating and it’s all free, and that’s how we raise capital. We build relationships with investors, they come to our events, they see us here, they see another 12 or 15 investors here at the luncheons and whatnot, and it’s chance to ask a lot of questions, listen to a 60 minutes seminar, and about half the crowd usually decides to fill out a form to move to the next step, and that’s a great turnaround, I think, as far as sales goes.

Theo Hicks: Yeah, thanks for sharing that. So we focused a lot on the raising money. The other thing I wanted to talk about a little bit more was the property management company. So I’m going to merge that together with the money question. So what is the best ever advice you have for– well, I guess, a little more context. I know a lot of syndicators will do third party, and you mentioned why you don’t do third party, but now I want to talk about the how to start your own management company. So what’s your best ever advice to an apartment syndicator for starting their own in-house property management company?

Aaron Fragnito: That’s tough; there’s so many moving pieces to a management company. I’d say, the first thing is working with good technology. We do work with AppFolio, which is a very helpful technology, and there’s tons of things like that. We feel like AppFolio is one of the best, so we went with that, and that really helped organize our business and it  allows us to scale up to managing 100 units without having to staff up. It’s almost like bringing on a staff member. Secondly, I have a phenomenal property manager. I have a phenomenal employee, A. Delgado, who does all of our property management, and she’s one of those individuals who, I think, was born to be a property manager. She’s so organized, she’s so good with the tenants, she’s so patient. I couldn’t do what she does. It’s really hard to be a property manager, it’s a thankless job, and there’s so much little nitty-gritty detail to it, and of course, tenants are going to lie to you and break your heart and it’s a tough gig. Same like working with contractors; Seth’s really good with that and I’m not.

So a good system overall also, just not only working with AppFolio, but working with our systems here in office. When work orders come in, working with the right contractors – that took years. I used to have a really good contractor, then I’d put him on payroll and started paying him hourly, and all of a sudden, the jobs took twice as long and cost me twice as much. So I realized you’re actually better off having the contractors as independent contractors, get multiple quotes, make sure they understand they’re not always going to have a job here, they’ve got to give us good production, good service and show up on time and get the job done properly. So we have a lot of good boots in the ground, great contractor relationships here. We’ve got the right small handymen, mid-level handymen, plumber, electrician etc, the right people for the right things… And then just the small guys too that bring out the garbage and clean the hallways. When you have enough units in one place, you have economies to scale, so I can have someone do all that, shovel our walkways when there’s snow, for a lower price, because we have a bunch of units in one area, and these individuals will work for us for a better price because of that.

Theo Hicks: Alright, Aaron. Are you ready for the Best Ever lightning round?

Aaron Fragnito: I think so.

Theo Hicks: Let’s do it. First, a quick word from our sponsor.

Break: [00:19:32]:04] to [00:20:18]:04]

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

Aaron Fragnito: That’s a tough one. I get that a lot on podcasts. I never really have a good answer. The book I’m reading right now is by Mel Robbins. My wife actually turned me on to her. She dragged me to a thing in the city that she was doing the other week, and I actually enjoyed it and got the book and I’ve been reading it a little bit. So Mel Robbins is a self-help coach, and her thing is when you’re grounded by anxiety or stress– and there’s a lot of stress and pressure being an operator, being a syndicator, having to raise the money in time, find the right deal and execute on your projection, so it’s a stressful gig; it’s not for everyone. She does this thing where you count down five, four, three, two, one to get yourself moving in the morning or get yourself not thinking about an issue and just move on. So it’s a lot about just motivating yourself to take action.

One thing I loved about what she said, you’ll never feel like doing it. “If it’s the right thing, you’ll love it every day and you’ll always feel like doing it.” Well, no, that’s not it. I love real estate, I love what I do, but there are days that I don’t want to be here. It’s a tough job. I work 60 hours a week, I got a luncheon on Sunday. I don’t want to be here on a Sunday. I want to go be with my family and friends, but I work hard at it, and I have a passion for it. So not every day’s fun, and that’s what she’s saying. You just got to go for it, get yourself moving, and just keep that mental focus, and she’s like just count down from five, four, three, two, one whenever you’re in a spot and you’re stagnant to get going.

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

Aaron Fragnito: Well, first of all, I have a ton of real estate equity. So we do stress tests here. How much can the market drop? What if rents just stopped growing? What if this deal didn’t work out? So I have a good amount of real estate equity. So everyone’s like, well what if the market drops out? Well, we just buckle down the hatches and keep collecting cash flow. Our business is based on actual holdings of real estate, so I could slow down now and still be okay. The North Jersey real estate market is strong, the demand is strong. If there is such an economic collapse or New York City gets nuked or something and disappears, then we have bigger problems than our real estate values.

So whenever people say worst-case scenario, what if there’s no demand to live around Manhattan anymore? Then I say, well, honestly, where would your stock market be then? What’s this terrible, terrible scenario where no one has any money anymore and no one can live around Manhattan? So we do think we’re pretty recession-resistant. I’m not sure what will cause our business to fall, but we don’t have to sell any widgets. We have the buildings with the cash flow. We’re not selling coaching, we’re not selling anything else. So really, at the end of the day, we just have to keep raising capital and buying buildings, and if we decided to stop doing that, we could just maintain our holdings and maintain our rent growth there through time.

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

Aaron Fragnito: We give back in a lot of ways. I personally donate about 10% of my income between my church and different things like World Vision and Compassion International, which is great. If you go to their website, you can actually sponsor specific kids in third world countries. It’s really crazy stuff. So I love it. It’s such a great feeling. I have almost a dozen kids I sponsor between those two things. And there’s also in general here at Peoples Capital Group, we give back to Mission Clean Water, which brings clean water to Africa, and we are a member of three different Rotary clubs, donate to all the Rotary clubs and different events they have going on, and we sponsor lots of Rotary events, things like that locally. So big Rotarian here.

Theo Hicks: Then lastly, what is the best place to reach you?

Aaron Fragnito: Our website is peoplescapitalgroup.com, and you can check us out there. I have a podcast myself called The Passive Cashflow Podcast, but our website peoplescapitalgroup.com has information about our business. You can apply to qualify for an upcoming investment opportunity. We actually have buildings people can invest in in the next 30 days. So again, that’s our website, peoplescapitalgroup.com to qualify for that investment.

Theo Hicks: Perfect. Alright, Aaron. You’re [unintelligible [00:24:14].26] full of knowledge. I’m gonna try to summarize it, but I’m not going to look at everything because you said so much, and just a lot of solid advice. Everyone who’s listening should definitely relisten to this podcast. We talked about raising money and we talked about private management companies, but we first talked about how you got to where you are today; started off with Rich Dad, Poor Dad, you had made a list of what your goals were – own $10 million with the real estate, $1 million net worth, $100,000 passive income, and then made your plan of action to get that. You started with your real estate license and fix and flipping, and then moved into syndications. We talked about your first syndication – a 25-unit with the four investors and how you’ve had issues with your management company and eventually started your own.

You found your first investors from your fix and flips. So this is your first syndication – from your fix and flips, and then your business partner had a doctor and then this aunt or someone in the family invested, and then one of them came from your Fake It Till You Make It seminar, which also resulted in your wife. That’s awesome. Then we talked about how you grew from four to 30 investors, and you talked about the differences between raising money for fix and flips and raising money for syndications, and you realized that the type of person who’s interested in investing in fix and flips is different from the kind of person who’s investing in syndications. So you had to redevelop your brand in order to start targeting those people who are interested in longer-term, more passive investments, as opposed to the fix and flip investors who are more interested in higher returns, being active and getting their money back early quickly.

So you said that going to meetup groups, and REIA meetings was good to get fix and flip investors, whereas doing something more personal seminars and webinars and lunch and dinner events, Facebook ads and marketing ads to get the passive investment leads.

One thing you did say that was interesting was that these meetup groups and REIAs are always looking for a new speaker. They need a new speaker every single month or week or however often they’re doing it. So just because you haven’t done a ton of deals doesn’t mean you can’t speak at these events. If you’ve done one fix and flip offer, talk about your fix and flip, and then that will help you get the ball rolling on your brand.

You talked about your management company, which you started six-seven years ago, and your four pieces of advice on starting on time management company was one, make sure you’re focusing on technology. So you use the app Appfolio. AppFolio helps you scale without having to bring in a bunch of team members. Number two is have a great property management company, and the characteristics were organized patient and works well with tenants, and your property management company, you said, was born to be a property manager. You talked about having independent contractors as opposed to having one GC on staff, and then you talked about the advantages of having a scale by having a lot of units in one area. So you could have one handyman apply to all properties, one person shoveling snow and raking leaves and things like that. So again, jam-packed with information, definitely worth a relisten for Best Ever listeners. Aaron, thank you again for joining us today. Best Ever listeners, as always, thanks for listening. Have a best ever day and we’ll talk to you soon.

Aaron Fragnito: Thank you.

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JF1897: 16 Year Real Estate Investor Shares How To Grow An Investing Business By 3500% In 2 Years with Luis Leiva

As a 16 year real estate investor, Luis has seen and been through a lot in his journey. Since 2016, Luis as CEO of Culture Estate, has helped grow the company 3500% in just two years! Joe will ask a lot of mindset questions in this interview so we can hear what it takes to grow to high levels. Tactics and strategies are a big part of it, but the biggest part is our mindset, Luis shares some personal stories with us that give us a peek into the mental toughness required to scale a large business. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


Best Ever Tweet:

“How Can I align myself to be where investors are?” – Luis Leiva


Luis Leiva Real Estate Background:

  • CEO of Culture Estate
  • Grown company 3,500% since Oct 2016, has been involved in over 2,000 transactions and closed over half a billion in sales
  • Based in Scotch Plains, New Jersey
  • Say hi to him at https://www.culture.estate/
  • Best Ever Book: Can’t Hurt Me by David Goggins


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

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

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


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 real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Luis Leva. How are you doing, Luis?

Luis Leva: I’m doing great, brother. Thank you for having me.

Joe Fairless: Well, I’m glad to hear that, and it’s my pleasure. A little bit about Luis – he’s the CEO of culture estate. Grown the company 3,500% since October 2016, and has been involved in over 2,000  transactions and closed over half a billion in sales. Based in Scotch Plains, New Jersey. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Luis Leva: Of course. I’ve been in this business about 16 years now. I started around the age of 22. I was a frustrated entrepreneur at that time; I was running a barbershop business  and I just felt capped for what I was doing at that moment. I didn’t feel challenged. I felt like I needed something more… And I’ve found that real estate was my passion. Since growing up as a kid I’d never had a house to call my own. We always moved from apartment to apartment every single year… So for me, being able to get involved into real estate was not only a progression of my personal development, but it was also something that I felt strongly about, because I knew I could change the lives of other people.

My first year was a very rocky one. I didn’t seem to make much money my first year. It was all about the trials and tribulations, and I was learning as I went. I had no mentor… But then the following year it kind of all clicked, and it came full circle. I became the top producer at my office, and from then it’s kind of been a snowball effect, with an exception of when we hit that 2007-2008 rocky time period… Which I learned a lot from and I’m very grateful for. But fast-forward to today, we have a [unintelligible [00:03:11].20]  real estate companies in New Jersey, and I’m happy to be on the show with you today show some of our growth.

Joe Fairless: What did you learn during the recession as a real estate broker?

Luis Leva: What I learned during the recession is that it’s all a mindset thing. What I used to think back then was that the market was tanking – because it was tanking – but I also felt like my income had to tank as well as a result of the market not doing so well… So I kind of went into survival mode, and instead of expanding, I contracted. I even thought of stupid things to do with my time to make extra money, instead of being more productive in real estate. I started to think about weekends, which would make more money for me.

It was really a weird time for me, but I’m so happy that we experienced it. Especially personally, I can say I’m happy that we experienced it… Because it also taught me what the economy does, whether it’s up, down or sideways; it really matters more what you do.

When I changed my mindset and started thinking about “What can I do to change our work with the current market?”, in the following year I made more money than I ever did, and I stopped listening to what everyone else was telling me to think. I was listening to the news telling me how bad things were, listening to doomsday preppers and what they were doing to survive the coming apocalypse… And I was so wound up in that that I was missing my whole opportunity. I was so far from reality that it was crazy.

Then things started to get better progressively, and I just surrounded myself around positivity and I started becoming a student. To this day, I’m just thinking to myself this morning how obsessed I am with learning. And that’s what I got from it – I learned that anything is possible, no matter what market we’re in.

Joe Fairless: Do you remember the epiphany that took place, where you were watching the news and had the mindset that it was more of a limited resources mindset, versus now you have an abundance mentality? Do you remember what took place?

Luis Leva: I remember clearly one day I had taken up a part-time job cutting hair again on the weekends, just to try to make some extra money during the recession… And granted, I was having years before that when I was easily making over six figures every year… And I went to the point where I was cutting hair on the weekends to try to make ends meet, and I said to myself “I’ve got the idea now. I know what I’m gonna do now to be more successful. Instead of just cutting hair at a barbershop, I’m gonna go cut hair at a luxury barbershop. That’ll be the ticket.”

I went to a salon that was looking for a barber in an affluent town in Jersey – and I’ll be honest with you, through my life I must have cut thousands upon thousands of people’s hair… And when I went to go cut the first person that [unintelligible [00:05:46].01] his hair, I almost felt like I’d never cut anyone’s hair before. I felt so out of place; my hands were shaking, the hair felt like sandpaper… It was just such a bad experience, and I just felt to myself that my body and the universe is telling me “What the hell are you doing? You’re meant for so much better things…” Superman lost his powers when he got hit with kryptonite; I almost felt like that.

So as soon as the gentleman was done with his haircut, he was very grateful and he tried to give me a tip, and I told him it wasn’t necessary… And I immediately left the salon, went across the street to a park bench and just had a conversation with myself; not an audible conversation, but one in my head, telling myself “What the hell was wrong with you? You’re meant for bigger things. You should be ashamed of yourself.” I was just really ripping into myself. But I don’t think it was me, I think it was a higher power.

From that day on, I called the lady who owned the salon and I said “I’m so sorry, I can’t continue doing this. I have to do what I’m meant to do.” She was so bummed out, because she was getting an opportunity to get someone as skilled as me at her place… She even had her husband call and try to convince me and offer me more money. I said “There’s no amount of money in the world you can give me. It’s just not meant for me.”

From that day forward I did a full 180 back into real estate, I started getting more creative with what I was doing and who I was working with, and since that day I have never, never looked back, and I’ve just gone to bigger and bigger things.

Joe Fairless: Can you give some examples of what you mean by “you got more creative”?

Luis Leva: Of course. When I got out of my rut, what I did was at the time the market was tanking, so the only people that were buying and selling really were investors… And I said to myself “How can I align myself with these investors?” These were the guys that were calling me for deals, which I had no deals for them… How can I align myself so I can be where they are? I wanted to figure out what they were doing, and I would surround myself around them.

So I would call up my investors and ask them how much they were planning on selling their properties for. They would give me a rough number, around 250k, 300k, and so what I would do is I would find buyers for these properties before they were even listed. I’d go crazy, I’d go nuts. I’d call everybody I knew and looking for buyers… But eventually I would always sell these properties presale. And as long as they netted their number, they didn’t care what I put on it. So I was wholesaling without even knowing I was wholesaling. I’d make 10k-20k on each one of these properties, and before I knew it, I had some of my own money, which was incredible.

Maybe a year later I bought my first property with my family. I put in the majority of the money, and my parents had a little nest egg that they had put away… I said “Let’s invest this money together and we can buy a house cash.” So we did, and I immediately doubled their money, and they’d never seen that much money in their life. I took a property, a two-family house, and I flipped it within three months and I made them double the investment they had initially put in, and they were ecstatic.

We just kept repeating the process over and over again, until we got to the point where I was juggling multiple properties at once, and then hard money got introduced into the equation, so it really started to go haywire for me…

But then I had another epiphany later on. There was an electrician who was working for me at the time, and he said to me “Luis, you’re great at what you’re doing. Why are you on the job site, swinging hammers and hanging sheetrock? You shouldn’t be here with us. You should be where you belong, and that’s finding more deals. It took an electrician to tell me that to figure out that I’m a great salesperson, and I don’t know why I’m not spending more time getting deals and delegating this work to someone else who can do it better than I can.

From that day on I went full right back into real estate, and I delegated my investment side of my business to contractors, to my brother, to different people… And I’ve grown both businesses to a pretty crazy level. Now I just focus on repeating those lessons that I’ve learned throughout my experiences; I just repeat it with every business venture that I jump into.

Joe Fairless: Some people might have the mentality that if I’m gonna try and help someone find a buyer for their property, I wanna make sure it’s my listing, that way my efforts go rewarded, versus me spending a lot of my time finding buyers, but then what if that buyers fall through – then I’ve done all this work and not got paid. So you did not have that thought process… What would you say to that thought process?

Luis Leva: That’s a great point, and I’m glad you brought that up… Because what happens is at that time I was hungry; I was super-hungry. And if you don’t approach what you’re going after with that level of hunger, you’re not going to succeed in what you’re looking for… Because a lot of people want the easy route. Yeah, of course, it’s a lot easier to work on deals that you already have a commitment from the seller, but it would leave a lasting impression to that seller if you went ahead and going crazy looking for a buyer, without having any type of written agreement.

So I only had to do this  a couple of times before the investors would come to me and say to me “Can you list these properties for me?” Because they knew my work ethic. They knew that I first put out my energy and my money before asking for a single dime. And like you said, the mentality nowadays with most people is like “Pay me first”, instead of me giving whatever I have to give.

Gary Vaynerchuk wrote a great book, “Jab, Jab, Right Hook”, and in that book he explains that you’ve gotta give a lot of value, tremendous value, before you can expect anything back. And I’d done this in my career without knowing it, but after reading the book, I’ve 10x-ed that. With my real estate business I have a ton of knowledge, I have a ton of information, and I give all this information out for free. I have tons of YouTube tutorials for real estate agents, for investors, for everyone… And people would tell me “What, are you crazy? Why are you giving us information? You’re creating competition.” I said “You might be able to look at it that way, but if you look at it with an abundance mentality, I’m creating a loyal following.

People are gonna be quilted into working with me if I give away enough valuable information”, and that’s exactly what’s happened. I’ve grown my company 3,500% since our inception. I started this business with three agents and we’re the largest real estate company in our area. We have over 100 real estate agents in our crew now, and we have almost a staff of ten people. So we’ve grown pretty sizeable in a short amount of time because of that mentality.

Joe Fairless: Let’s talk about a real estate brokerage and growing it. What are some keys to growing it?

Luis Leva: The key to growing anything, especially if you’re gonna be managing people and leading people, is that you have to think about others before you ever think about yourself. There are so many other people that are gonna be depending on you, and there’s gonna be a lot of people who are looking up to you… So during those times, you’ve gotta make sure that you have a loyal following, you have to think about them.

There’s a good book by Simon Sinek that’s entitled “Leaders Eat Last.” When reading that book, I learned that you always have to make sure that others are eating first, that you’re putting money into their pocket first, before you’re successful. Because if all the money is funneling its way to you, and then everyone in your camp is starving, they’re gonna either create a mutiny or they’re all gonna leave you.

So what I did was I made sure that when I created my brokerage that I wasn’t their direct competition. A lot of brokers continue to sell real estate when they become a broker. I became a visionary at that point, I didn’t wanna be the operator. So I made that transition from operator to visionary, and I gave away all my business. Every single client. I just came from an appointment right now upstairs where an old client came to visit me, and I gave it right to one of my agents who was here in the office. So I give away all my business, which is frightening, which could be the end of most people. It was a big what-if for me. But I did it without any worry, and I was rewarded more than I ever expected to be rewarded for doing that.

It was scary for a while. A few months went by that I wasn’t making the income I was used to, and I was making less because I was taking a small piece of every closing… But my agents were able to provide better service, because I can’t be a leader, a broker, and I can’t grow this company if I’m too busy with taking listings and showing houses. That was a big transition, that was a big step that I had to take and get comfortable with.

Joe Fairless: And you were flipping properties in the early days, right? That example with your parents.

Luis Leva: Yeah. Right after the crash I started flipping properties. I did a few with my parents, and that’s what I’d say I’m most proud of – the fact that only after a few properties I was able to retire my parents. My parents are living a really nice life right now. They went to another country, they have a farm, paid off, a house paid off… They’re living very comfortably, and I send them money every month, because without them I wouldn’t have anything. They migrated when I was four years old. They sacrificed tremendously. As a kid I was never hungry; I might not have been the rich kid in school, but I was never hungry and my clothes were always clean. I could imagine what they had to go through to make that possible, so for me taking care of them is the ultimate thing I can do with my success. Gratitude, at the end of the day, is what it is.

Joe Fairless: Do you have any children?

Luis Leva: Two girls. One that’s turning seven this month.

Joe Fairless: So when you were growing up, seeing what your parents did and the sacrifices they made, and how hardworking I imagine they were… You were four years old when they came to the country with you, so you saw it first-hand… And what typically – with families who let’s say they inherit a lot of money, or a generation makes a lot of money, they always say the first generation makes it, the second generation holds it, and the third generation loses it. So with your children and other people who you come across, how do you instill that type of work ethic and hunger in your kids, because you were exposed to it first-hand with your parents? And I’m sure your kids are exposed to it with you, but it’s just a little bit different because they were coming to the country the first time. That was probably life or death for them… Whereas you had it a little bit easier than them, and then your kids will have it a little bit easier than you did… So how do you instill that hunger in your kids?

Luis Leva: Well, to be honest with you, I’m a big believer that the apple doesn’t fall too far from the tree… So we definitely have to be very conscious of what we teach our kids. With my girls, I could spoil them rotten, and at times I do, because they’re girls, and I get them little knick-knacks here and there… But when it comes to the big stuff, when they keep asking for things, we always explain to them that it’s not just about “Hey, can I have this? Can I have that?” We actually give them chores to do throughout the house on a weekly basis, and we have this whiteboard that we check off every time they do what they’re supposed to do. And at the end of the week, when they finish doing their things they’re supposed to do, they get a prize. So they go into this toy chest, and they close their eyes, we put a blindfold on them, and they put their hand in and they pick out a price from the toy chest.

So what we’re doing is teaching them that hard work and responsibility earns you something that you want. We’re starting at an early age with that, but I have every intention that if my daughters want to take the path that I took in real estate, I will make them start at the very bottom. There are gonna be no handouts; they’re gonna have to figure out a lot of things on their own. I want them to get their hands dirty, because I’m glad that I worked in every aspect of what I do now – I’ve worked in real estate, I’ve worked in construction, I’ve worked in everything – because I can never delegate orders to someone if I didn’t do it myself. So I would very much have them do the same thing. If they were to have an interest in media, I’d have them start from the very bottom, learn everything there is about media. If they wanna open up a company, then figure out how to get financing. I’ll be there and I’ll give you advice, but it’s on you.

I really want to instill that hunger in them as well, because whatever is given to you on a silver platter is never appreciated. But what you sweat for, what you stay up late for, and lose sleep on – that’s when you appreciate it, and that’s why I think I’ve been successful, it’s because I work hard at it.

Joe Fairless: You’re the CEO of Culture Estate, and you’ve got over 100 real estate agents at your brokerage… You have grown it from ground up, 2016 to today, and it is primarily – and just fact-check me, please – residential real estate transactions, yes?

Luis Leva: Yes, we do a lot of residential.

Joe Fairless: Okay, so primarily residential. And is this your primary source of income?

Luis Leva: I would say maybe 50/50, because I do have a lot of real estate holdings.

Joe Fairless: Okay, but those are holdings that are passive investments?

Luis Leva: Yes, I’m in passive investor. I flip very little.

Joe Fairless: Okay, you flip very little. And there is the segue to the question. When you started out flipping, you had success; you earned your parents money that they hadn’t seen before; now they’re on a farm in another country, enjoying life… Why did you choose to start and grow a brokerage, versus staying focused on the flipping?

Luis Leva: Okay, so flipping is a business that to me does not make a whole lot of sense. Even though you can make money very fast, the market that we’re in right now and the area that I’m in right now – you don’t see great spreads anymore. The spreads that we used to make are far and few between. So if I’m not going to make a decent spread on a flip, then I’d much rather keep it as a long-term rental… Because if I can cash out the money, even if I don’t put any extra money in my pocket, if I can take an asset, cash out, and keep it on my books, let it pay itself off, and maybe I make $500 to $1,000 a month on a property, that’s a win. For me, that’s the ultimate win. I don’t get hit on the capital gains… I’m in the best scenario possible. So I just love that equation so much…

And I’ll be honest with you, one of the things that really kills me about the flipping game – and I’m not sure how it is in the rest of the country, but here in Jersey the buyers will try to skin you alive when they do a home inspection. They’re never happy. And why I don’t like that is because it’s very regular for there to be 2-3 buyers on your home before it actually sells… So why I don’t like that is because it’s a very unpredictable outcome. You really don’t know how long it’s gonna take you because of that scenario. But with rentals it’s a much more manageable business model, where I know if I bought it today, it will take me 2-3 months to rehab it, and then I’ll have a tenant waiting for me as soon as the paint dries.

I like that scenario much better, because I can’t predict when my home is gonna flip… And because of overhead, sometimes you make less than what you thought you were gonna make.

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

Luis Leva: Best advice ever that I can give somebody for real estate is the best time to get in real estate is today. Don’t think about what someone else paid for it ten years ago, five years ago, because there’s a law that’s called the law of dollar cost average. What that means is that you can never time the market. If you try to only buy when it’s at its lowest, you’re gonna miss a lot of great opportunities. And if you try to sell at its very highest, you’re gonna miss a lot of great opportunities.

What the law of dollar cost average teaches us is that if you invest over time, you’re gonna have the highest success ratio because you’re gonna hit days that are gonna be high, and you’re gonna hit days that are low, but over time you’re gonna win. So if you find a deal and it makes sense, then buy it. Don’t worry about what someone else paid for the same property a year ago.

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

Luis Leva: I’m ready, brother. Shoot!

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

Break: [00:21:21].26] to [00:22:02].14]

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

Luis Leva: David Goggins, that’s the best one I’ve read recently.

Joe Fairless: Alright, let’s see… “Can’t hurt me”? “Extreme Ownership”?

Luis Leva: “Can’t Hurt Me.”

Joe Fairless: “Can’t Hurt Me”, alright. Sweet.

Luis Leva: Yeah, that book was a game changer.

Joe Fairless: Alright, noted. I hadn’t heard of that one. I’ll check it out. What’s the best ever way you like to give back?

Luis Leva: Actually, we’re involved directly with an organization called Project Underground Railroad. What they do is they liberate young children that are being sexually-trafficked. We contribute every month directly from the proceeds of Culture Estate to that organization. We’ve been able to rescue, including this month – we’ve been able to rescue three children. We’ve donated enough money to do that. And my goal is to somehow one day become more active with them.

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

Luis Leva: You could definitely please visit us at culture.estate. No .com there, it’s just www.culture.estate. You can see all the stuff we’ve got going on. Right now we’re doing a charity basketball tournament on 1st June, which is gonna be an awesome, awesome event. We raise money for a local organization through that as well. That will be our second time doing that for that organization.

Joe Fairless: I like that URL, by the way. Props to you on that. That’s smooth.

Luis Leva: I thoroughly enjoyed our conversation, and thank you for sharing the mindset that you have, the mindset that you used to have, the epiphany that took place, and the reason why you’re in the business that you’re in, as well as how you pass down the mindset lessons to future generations, specifically your daughters, but then certainly others who are listening who have children, or just are in a position where they’re looking for that type of information.

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

Luis Leva: Absolutely. And I just wanna thank you; I’m a big fan, and I’ve watched your stuff many times, and I was very shocked when my partner was able to come on your show, and I congratulated him… Luckily, I got on, too. Look at that!

Joe Fairless: Great. Thank you so much.

Luis Leva: Thank you, Joe.

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JF1783: Infinite Banking?! #SkillSetSunday with Gary Pinkerton

Joe has used himself to test this method of investing/storing cash. He went to Gary and has been working with him for a few months now, it has been a good experience and Joe wanted to share with everyone. So tune in to hear about this strategy you may have never heard of before. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


Best Ever Tweet:

“Almost all of the whole life insurance companies that do this, will put the money in a general fund” – Gary Pinkerton


Gary Pinkerton Real Estate Background:

  • Wealth strategist at Paradigm Life
  • Has funded over 100 rental units using OPM with private banking since 2011 and has helped his clients do the same
  • Former captain on nuclear subs in the Navy
  • Based in Jersey Shore, NJ
  • Say hi to him at https://paradigmlife.net/ or gary@garypinkerton.com


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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, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff.

Here’s a concept that we have touched on on this show, and I mentioned during multiple Follow Along Fridays with Theo a while ago that we would go into it in more detail, but first, I would put myself in the ring and I would do it, that way I had some first-hand experience before talking to someone about it… And I have done it. That is the concept of infinite banking.

It’s a concept that requires a smart person – much smarter than me  – to talk about, and talk through. So what we’ve done is I’ve brought on Gary Pinkerton, wealth strategist at Paradigm Life, who I worked with to set up the infinite banking. We’re gonna talk about the concept, and  — by the way, disclaimer, I make no money; if you work with Gary or don’t work with Gary, if you do this or you don’t do this – I don’t make any money from it. I’m just sharing a concept that I found interesting enough where I’ve put my money where my mouth is, and figured we might as well share it with you, Best Ever listeners, so you can decide what the heck you wanna do with it.

I was introduced to Gary from an investor of mine with Ashcroft Capital. He invests with us, he’s actually invested in multiple deals, and is someone who I trust implicitly, so that’s how I got to know Gary. First off, Gary, now I’ll stop talking about you and I’ll actually talk to you – how are you doing?

Gary Pinkerton: I’m doing great, it’s a true honor to be on your show. I’m really looking forward to it, Joe.

Joe Fairless: Yeah, I’m looking forward to our conversation as well. And first off, Best Ever listeners, sorry – this is a Skillset Sunday episode; we’re gonna be talking about a specific skill, and the skill is infinite banking – what it is, how to do it, and questions to ask if you’re working with someone to set it up for you.

Gary is a wealth strategist at Paradigm Life. He has funded over 100 rental units using other people’s money with private banking – this infinite banking – since 2011, and has helped his clients do the same. He’s a former captain on a nuclear sub, so he was in the Navy before. He was a captain on nuclear subs; thank you, sir, for what you did for our country. He is based in Jersey Shore, New Jersey.

With that being said, Gary, first – what is infinite banking?

Gary Pinkerton: Sure. It’s a way to use uniquely designed whole life insurance policies to store and grow your wealth. Everyone has a need to store cash somewhere; that’s really a combination of a lot of things. It’s your emergency savings for your family, it’s property reserves, it’s business reserves, and it’s money you’re setting aside and growing for future investments – your upcoming property purchase, or really whatever. I store just about all of my cash that I absolutely need in the future, that I can’t take a risk of it being lost… Even my kids’ college money.

Basically, we’re all storing and growing that money (if we’re prudent) somewhere, and a lot of times it’s just in the same as our checking account. So this is an opportunity to get both a much faster growth – let’s say 4%-5% – tax-free on your money, while still having full access to it… And you get a lot of life insurance protections. So you’re getting both the foundation of your personal financial wealth, meaning life insurance protection of your future income for the family, as well as a better place to store. It’s simply a different place to store your cash. A lot of people talk about it as an investment; it’s really not. It’s just a much more efficient place to store and grow your wealth.

Joe Fairless: Okay, so let’s unpack those statements that you’ve made. 4%-5% tax-free growth, with full access, plus life insurance protection. That is why I chose to do it, but that sounds way too good to be true. So how about let’s dig into each component of that – the percent growth (4%-5%), then the tax-free part, and then the full access part, and then the life insurance. So those four parts.

Gary Pinkerton: Sure, absolutely. You may have to remind me what part we’re on, but… Let’s start off with the growth —

Joe Fairless: Yeah, 4%-5% tax-free growth.

Gary Pinkerton: Sure. So we work with only whole life insurance companies. You can do this with universal to some levels of success if you know what you’re doing. I don’t believe there’s value there in doing it; there’s not a track record. So we go with whole life. It’s a very simple product. Insurance companies are collecting premiums, growing those premiums, and then handing them back to the beneficiary one day.

Well, starting in the 1930’s they give you access to the value of that cash that’s in there. So if you have $100,000 sitting in your policy that’s growing, you can go to them and borrow $100,000 from them. The borrowing and accessing side of it is not the growth. The growth side for whole life insurance is a combination of guaranteed increase. So if you look at the policy illustration that you got, there’s a table in there, and on the left-hand side there’s  a column for the guaranteed worst-case growth, even if there’s no profits, if the company is not profitable. But since we work with a mutual insurance company, which is a private company – meaning that there’s no shareholders to distribute profits to every year, so those profits are just handed back out to the owner of the company, which in the case of life insurance are just the policyholders. So you kind of get it back on a pro rata basis, based on how big your cash is that given year.

So you have a guaranteed increase, which – I tell people, big-picture, it changes over your life as you age. Essentially, it’s 2% a year guaranteed after covering all of the costs covering the insurance. So about 2% on the guaranteed side, and another 2%-3% today in profits being handed back. But these profits or dividends are completely dependent upon what the lenders out there in the world can get. Banks right now are lending at 5%-6%. Insurance companies are doing the same thing – they put your money to work in the economy, lending out to major corporations. Right now they’re getting 4%-6% returns, which means that after covering expenses, you’re seeing another 2%-3%.

Summarizing that, a couple of percent guaranteed annually, and then 2%-3% in this zero-interest-rate world we’re in. In the 1980’s the dividend was 8%-10%, if that makes sense.

Joe Fairless: Okay. So when you implement this policy or this strategy, do you have to do anything than buy the policy in order to gain that 4%-5% growth? Do we have to manually manage it and do transactions, or just magically because you’ve purchased a policy it achieves that 4%-5% growth?

Gary Pinkerton: Almost all of the whole life insurance companies that do this – there’s probably 25 mutual companies; I work with ten… Generally, I work with 4-5 of the best, most easily designed companies… But all of them will put the money that is being collected and protected – they put it into a general fund, and they put it to work in the economy. Mainly, they’re lending it out to major corporations for decades at a time. They’re also funding as a debt partner in large real estate developments and commercial buildings… So most of the time there’s nothing for you to do to see that type of return.

There is one company that I work with – and actually, Joe, it’s the one you went with – that they give you the ability, from time to time, if you want to, to tie your profits (the dividends) to the performance of the S&P 500, and you can get a little bit of a boost if you want to actively manage it. I don’t have any clients doing that right now, primarily because we’re all kind of foreseeing a little bit of a correction or a pullback… But bottom line, most of the time it’s on autopilot. You’re simply just carrying out the plan that you’ve put in place, and reaping the benefits and using the cash value from time to time when you want to.

Joe Fairless: Okay, that was the percent growth. What about the tax-free statement you said?

Gary Pinkerton: Sure. Your dividends/profits will grow inside the policy without tax being applied. If you physically withdrew them someday – and some people do – then you would be taxed. But there’s  taxation for life insurance – it’s really the only thing out there that enjoys this, and it’s called First-in/First-out taxation. That basically means that if over time you’ve contributed $200,000 in contributions to this, then the first $200,000 you pull out would not be taxed. Beyond that, it would be taxed just like interest you earned in your savings account.

So most people wouldn’t do that; they would maybe withdraw the basis, or the original contributions when they get into retirement and want to do withdrawals… But throughout your life you can borrow against the thing, borrow the insurance company’s money pledging yours as collateral, and access the full value, even that part that is growth/profits, without any taxes being applied. So theoretically, what you do is you borrow against it during your working years, you perhaps withdraw the contributions and borrow against the rest in retirement, and then pass it on, tax-free, as a death benefit.

It’s very similar to real estate, in many aspects. But if you think about a 1031 tax-deferred exchange, that you go from property to property and then eventually it gets a step up in basis at death, that’s what happens with life insurance.

Joe Fairless: The full access part.

Gary Pinkerton: Gaining full access – so if you remember, I was talking about your cash value in the policy is a combination of what you’ve contributed, what the insurance company has boosted by the guaranteed crediting of dollars every year to it, and then the dividends. So for very simple math, let’s say that you’ve contributed $200,000, and you look at your cash value and there’s $300,000. That’s a combination of $50,000 that came from guaranteed increased over the years, and $50,000 that came from the dividends or the profits that got credited. So of that $300,000, $200,000 were your contributions. You can withdraw that to get access to it if you would like, but the full $300,000 you can access by borrowing an equivalent amount of money from the insurance company.

It’s the equivalent of going into a bank, putting $100,000 on deposit, and then going to them and using that as collateral for borrowing money from them. Now, you would never do that at a bank because there’s no advantage to do that. With a life insurance company, because your money is in there growing/compounding without taxes, at equivalent rates of what you’re gonna borrow the money for, it makes a big difference over time.

Joe Fairless: So just for my own clarity, to restate it – I put in $100,000; so with my policy I did $110,000, I think. And I am able to get access to most of it (90-something percent of it) immediately. Let’s call it $95,000. I can borrow that $95,000 and do whatever I want with it. And that initial – $110,000, or whatever I put into it – is still making the 4%-5% growth. So even though I took out 95k, that initial 110k is still making a 4%-5% growth. So there is the difference in doing the bank thing that you said, versus doing this… Not to mention having the benefits of life insurance protection.

Gary Pinkerton: That’s right. I was just doing an example with a client; it’s a pretty common example that single-family investors or people who are investing minimal amounts into larger syndicated deals might do. Say you have $25,000, and for this example it’s a $100,000 house, and your down payment with closing costs is $25,000. So you have a choice – you can either put that into the property, and in 30 years maybe sell it and take it back out, or you could have an insurance company put their money in there, and you just put yours in your policy and allow it to grow and compound there.

So in the house – you have $25,000 sitting in the house; yes, it enables a lot of growth and appreciation, and tax deductions, and the cashflow, but essentially it itself is just kind of parked there. If I could get my next-door neighbor or best friend to put their money into my property instead of me, that would be far better off for me, because I have given up its ability to grow. Whereas the other person who has an identical house, but put their money in their policy, after the 30 years that I used in the example, theirs has grown to $93,000. The $25,000 turned into $93,000. They did have to pay $22,000 to the insurance company in that example for the interest, but they earned well over $70,000. And that’s the power of being able to borrow somebody else’s money and not have the opportunity cost of yours being locked up without earning.

Joe Fairless: And then in terms of paying back that loan, in the example — we’ll go with my example, when I borrowed 95… If I die before I pay it back, then it simply gets deducted on the insurance proceeds my family gets from the life insurance policy, and it’s as simple as that, right?

Gary Pinkerton: That’s correct, yeah. Your insurance amount, your death benefit is always gonna be substantially larger than the cash value. So as a result, you can even max out your cash value and still be comfortable knowing that there’s still a large amount of insurance tax-free, that will pass to your family.

Joe Fairless: The last part that you mentioned initially in our conversation is life insurance protection. We just touched on that, but anything else that you think we should talk about in terms of the life insurance protection?

Gary Pinkerton: From time to time I come across people who are single, they really don’t have anyone that they wanna leave it to, and sometimes they see that as a detraction from using this process, like “I would use it if there wasn’t the life insurance.” However, remember – the performance I talked about, the 4%-5% in this 1%-2% savings account world – the 4%-5% you’re getting here without the impact of taxes is already covering the insurance. So you may today decide you don’t like it or don’t want it, or see it as a detraction, but it’s already factored in. That’s one comment. But that’s a very minor number of people that I ever meet with.

Most people, as they get older and get nostalgic, they will either have grandkids or they will have a little neighbor kid that they’ve mentored, or they have a favorite charity or church that they really have valued receiving benefit from and wanna give back to… So I’ve really actually never, in the end, seen anyone who didn’t have a place that they wanted to give that money to… And it will come out  tax-free. There’s wonderful things you can do by owning it, or having the beneficiary be a trust, a family trust, for multi-generational planning, for legacy.

For me, early on, and for a lot of my clients – and I think, Joe, you’d probably agree – it is really comforting knowing that I have personally taken on five or so million dollars of (I call it) good debt; fixed-rate, long-term debt. And my wife was a bit uncomfortable with it when we first started, but she was greatly comforted by the fact that there was early on three million dollars of life insurance – and considerably more now – totally there, just because it was the vehicle in which I’m storing and growing cash from my real estate portfolio.

Joe Fairless: Yeah. So when you pass away, then  the debt will be paid out from the life insurance — what is called, a premium…?

Gary Pinkerton: The death benefit, yeah.

Joe Fairless: Thank you. So your debt will be paid off by the death benefit, and then there’ll be more on top of that for her and any other loved ones.

Gary Pinkerton: Right. Or she can walk away from the real estate properties if she wanted, but if she paid off the debts with the — you were saying the amount that I borrowed against. That’s true. But with that level of insurance, she could have easily paid off the properties as well, and have a bunch of cash-flowing, unencumbered properties if she wanted to do that, and it would immediately replace her concern for not having my income coming in anymore.

Joe Fairless: So let’s close this out with a specific example of maybe just a single-family home.

Gary Pinkerton: Sure.

Joe Fairless: Now that we’ve gone through the concept, how have you done this just on one single-family home?

Gary Pinkerton: Sure. So what I do is I go get conventional financing – or just commercial, but so far I’ve used conventional 30-year fixed-rate mortgages, and I will get those at 75% to 80%, depending on the interest rates at the time… Let’s say 80%. So a $100,000 property, 80% loan from a bank, and then I’ve got the 20% down, plus maybe $5,000 in closing costs, so $25,000.

Then I would pre-stage my money in my personal banking system, and then go to the insurance company and borrow their money. I know that, Joe, you’ve gone through this process, but it should be a very quick 2-3 day process where the money shows back up in your personal bank account, whatever traditional bank that you’re doing your banking at… And then you just treat it as cash from there. When you go to the closing table, the lender recognizes that your money in the life insurance is your cash, and they see this money that you’ve borrowed as your cash.

There’s some Fannie Mae guidelines that came out in 2008 that this works just fine. It’s really the only way you can borrow other people’s money to fund a down payment on a property.

So I borrow the $25,000, I close as if it’s cash, and then as I receive cashflow back, I make a personal choice to just send that back and pay down my loan. Because the moment I pay $1,000 back to the insurance company on their loan, it frees up $1,000 of cash in my bank, that I can – again – either withdraw or borrow against again. So pushing my money back in there – it reduces my loan and it causes my cash to be available again for the next one… So really it’s a much higher velocity than I experienced before I started doing it this way.

Joe Fairless: And when you said earlier you would pre-stage your money, what do you mean by that?

Gary Pinkerton: I just meant that — sometimes people will say “Well, I don’t have $25,000 yet in my cash value. Can I still get the loan?” So rather than leaving my money in my checking account to use as cash as a down payment, I contribute it to my life insurance policy. I’ve built the cash value, and now it’s available pre-stage there as money that I can use to go and pledge as collateral to borrow from the insurance company.

Joe Fairless: Got it. So when you identify a property, you make sure that you have the amount that you need to close with the loan as cash value on your life insurance policy, so you can borrow against it, get that cash out and use it for the property.

Gary Pinkerton: Exactly. And as I mentioned at the beginning, I’m storing other money there, so I never go up against my actual cap. I’ve got a ledger – or actually I use Quicken – and I keep track of how much money that’s staged in my policy (cash value) is actually dedicated as family emergency money, as property reserves and as business reserves. So I don’t touch that money; I kind of make it off-limits, and then whatever is available as the remainder is my investment capital.

Joe Fairless: What’s a good rule of thumb, in your opinion, for what that percentage should be with available cash, versus cash that — well, it’s available, but you just don’t wanna touch?

Gary Pinkerton: It’s really not a percentage thing for me, it’s just an actual dollar amount. For me – I’m pretty conservative, so I actually use six months’ worth of my personal after-tax income. And then for properties – I used to use four months principal interest tax and insurance; I’ve reduced that down to two months as I got over ten properties. I just think it’s unreasonable that they’re all gonna have the same problem at once. So I use two months there.

And then for business reserves – it’s highly dependent on what your business is like. I have about $5,000 marketing expenses every month or so, so I kind of hold that back in reserves to have it available.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing, and Paradigm Life, and infinite banking?

Gary Pinkerton: I would love for the Best Ever listeners to go to gary@garypinkerton.com, and then they can also check out Paradigm Life specifically by sending me an email to gpinkerton@paradigmlife.net, and there’s a tremendous amount of resources directly at ParadigmLife.net for them.

Joe Fairless: Cool. So the first one that you gave was your email address, right?

Gary Pinkerton: My email address, gary@garypinkerton.com, and the website garypinkerton.com has a lot about me as well.

Joe Fairless: Cool. Well, Gary, thank you for talking about a concept that I have read books on, I have interviewed people, and you explained it very thoroughly and in a straightforward fashion, which is necessary for something in my mind that’s so damn confusing as this… But once I started understanding it, it made a whole lot of sense, so that’s why I did it. Plus, as I mentioned at the beginning of our conversation, you were referred to me from a mutual friend who I great respect, and I know he’s financially savvy and connected. He knows what he’s doing, too.

Thank you for being on the show. I enjoyed getting a refresher for why I did this… [laughter] And looking forward to continuing our friendship. I enjoyed our conversation. Thanks for being on the show, and talk to you again soon.

Gary Pinkerton: Absolutely. Thanks so much, Joe. Best Ever listeners, go get it!

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

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.

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

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!

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

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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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.

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

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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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.

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

 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 www.yonahweiss.com

– Best Ever Book: As Long As I Live

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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, 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.

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Best Real Estate Investing Advice Ever Show Podcast

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

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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They’ve also partnered with best-selling author, J Scott to provide Bestever listeners a free chapter from his new book on negotiating real estate. If you’d like to improve your bestever negotiating skills, visit www.fundthatflip.com/bestever to download your free negotiating guide today.


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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